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Vol. 79

Friday,

No. 7

January 10, 2014

Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services
42 CFR Parts 409, 417, 422, et al.
Medicare Program; Contract Year 2015 Policy and Technical Changes to
the Medicare Advantage and the Medicare Prescription Drug Benefit
Programs; Proposed Rule

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Federal Register / Vol. 79, No. 7 / Friday, January 10, 2014 / Proposed Rules

DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Centers for Medicare & Medicaid
Services
42 CFR Parts 409, 417, 422, 423, and
424
[CMS–4159–P]
RIN 0938–AR37

Medicare Program; Contract Year 2015
Policy and Technical Changes to the
Medicare Advantage and the Medicare
Prescription Drug Benefit Programs
Centers for Medicare &
Medicaid Services (CMS), HHS.
ACTION: Proposed rule.
AGENCY:

The proposed rule would
revise the Medicare Advantage (MA)
program (Part C) regulations and
prescription drug benefit program (Part
D) regulations to implement statutory
requirements; strengthen beneficiary
protections; exclude plans that perform
poorly; improve program efficiencies;
and clarify program requirements. The
proposed rule also includes several
provisions designed to improve
payment accuracy.
DATES: To be assured consideration,
comments must be received at one of
the addresses provided below, no later
than 5 p.m. on March 7, 2014.
ADDRESSES: In commenting, please refer
to file code CMS–4159–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 ‘‘Submit a comment’’ instructions.
2. By regular mail. You may mail
written comments to the following
address ONLY: Centers for Medicare &
Medicaid Services, Department of
Health and Human Services, Attention:
CMS–4159–P, P.O. Box 8013, Baltimore,
MD 21244–8013.
Please allow sufficient time for mailed
comments to be received before the
close of the comment period.
3. By express or overnight mail. You
may send written comments to the
following address ONLY: Centers for
Medicare & Medicaid Services,
Department of Health and Human
Services, Attention: CMS–4159–P, Mail
Stop C4–26–05, 7500 Security
Boulevard, Baltimore, MD 21244–1850.
4. By hand or courier. Alternatively,
you may deliver (by hand or courier)

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SUMMARY:

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your written comments ONLY to the
following addresses prior to the close of
the comment period: a. For delivery in
Washington, DC—Centers for Medicare
& Medicaid Services, Department of
Health and Human Services, Room 445–
G, Hubert H. Humphrey Building, 200
Independence Avenue SW.,
Washington, DC 20201.
(Because access to the interior of the
Hubert H. Humphrey 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. For delivery in Baltimore, MD—
Centers for Medicare & Medicaid
Services, Department of Health and
Human Services, 7500 Security
Boulevard, Baltimore, MD 21244–1850.
If you intend to deliver your
comments to the Baltimore address, call
telephone number (410) 786–9994 in
advance to schedule your arrival with
one of our staff members.
Comments erroneously mailed to the
addresses indicated as appropriate for
hand or courier delivery may be delayed
and received after the comment period.
For information on viewing public
comments, see the beginning of the
SUPPLEMENTARY INFORMATION section.
FOR FURTHER INFORMATION CONTACT:
Christopher McClintick, (410) 786–
4682, Part C issues. Marie Manteuffel,
(410) 786–3447, Part D issues. Kristy
Nishimoto, (206) 615–2367, Part C and
D enrollment and appeals issues.
Whitney Johnson, (410) 786–0490, Part
C and D payment issues. Clarisse
Owens, (410) 786–0880, Part C and D
compliance issues. Frank Whelan, (410)
786–1302, Part D improper prescribing
issues.
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

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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.
Table of Contents
I. Executive Summary
A. Purpose
B. Summary of the Major Provisions
1. Eligibility of Enrollment for Individuals
Not Lawfully Present in the United
States
2. Modifying the Agent/Broker
Requirements, Specifically Agent/Broker
Compensation
3. Drug Categories or Classes of Clinical
Concern
4. Improving Payment Accuracy
5. Risk Adjustment Data Requirements
(§ 422.310)
C. Summary of Costs and Benefits
II. Background
III. Provisions of the Proposed Regulations
A. Clarifying Various Program
Participation Requirements
1. Closing Cost Contract Plans to New
Enrollment (§ 422.2 and § 422.503)
2. Two-Year Limitation on Submitting a
New Bid in an Area Where an MA has
been Required To Terminate a LowEnrollment MA Plan (§ 422.504(a)(19))
3. Authority To Impose Intermediate
Sanctions and Civil Money Penalties
(§ 422.752, § 423.752, § 422.760 and
§ 423.760)
4. Contract Termination Notification
Requirements and Contract Termination
Basis (§ 422.510 and § 423.509)
5. Reducing the Burden of the Compliance
Program Training Requirements
(§ 422.503(b)(4)(vi)(C) and
§ 423.504(b)(4)(vi)(C))
6. Changes To Audit and Inspection
Authority (§ 422.503(d)(2) and
§ 423.504(d)(2))
7. Procedures for Imposing Intermediate
Sanctions and Civil Money Penalties
Under Parts C and D (§ 422.756 and
§ 423.756)
8. Timely Access to Mail Order Services
(§ 423.120)
9. Collections of Premiums and Cost
Sharing (§ 423.294)
10. Enrollment Eligibility for Individuals
Not Lawfully Present in the United
States (§§ 417.2, 417.420, 417.422,
417.460, 422.1, 422.50, 422.74, 423.1,
423.30, and 423.44)
a. Basic Enrollment Requirements
b. Medicare Eligibility and Lawful
Presence
c. Alignment of MA, PDP, and Cost Plan
Eligibility With FFS Payment Exclusion
Policy
11. Part D Notice of Changes (§ 423.128(g))
12. Separating the Annual Notice of
Change (ANOC) From the Evidence of
Coverage (EOC) (§ 422.111(a)(3) and
§ 423.128(a)(3))

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13. Agent/Broker Requirements,
Particularly Compensation (§ 422.2274
and § 423.2274).
14. Drug Categories or Classes of Clinical
Concern and Exceptions
(§ 423.120(b)(2)(v) and (vi))
a Categories or Classes of Clinical Concern
b. Criteria Necessary To Identify Categories
and Classes of Clinical Concern
c. Exceptions
d. Analysis and Identification of the
Categories or Classes of Clinical Concern
15. Medication Therapy Management
Program (MTMP) Under Part D
(§ 423.153(d))
a. Multiple Chronic Diseases
b. Multiple Part D Drugs
c. Annual Cost Threshold
16. Business Continuity for MA
Organizations and PDP Sponsors
(§ 422.504(o) and § 423.505(p))
17. Requirement for Applicants or Their
Contracted First Tier, Downstream, or
Related Entities To Have Experience in
the Part D Program Providing Key Part D
Functions
18. Requirement for Applicants for Stand
Alone Part D Plan Sponsor Contracts to
Be Actively Engaged in the Business of
the Administration of Health Insurance
Benefits (§ 423.504(b)(9))
19. Limit Parent Organizations to One
Prescription Drug Plan (PDP) Sponsor
Contract Per PDP Region
20. Limit Stand-Alone Prescription Drug
Plan Sponsors to Offering No More Than
Two Plans Per PDP Region
21. Efficient Dispensing in Long Term Care
Facilities and Other Changes (§ 423.154)
a. Prohibition on Payment Arrangements
That Penalize the Offering and Adoption
of More Efficient LTC Dispensing
Techniques (§ 423.154)
b. Misinterpretation of Language as
Requiring the Proration of Dispensing
Fees (§ 423.154)
c. Additional Waiver for LTC Pharmacies
Using Restock and Reuse Dispensing
Methodologies Under Certain Conditions
(§ 423.154)
d. Technical Change To Eliminate
Requirement That PDP Sponsors Report
on the Nature and Quantity of Unused
Brand and Generic Drugs (§ 423.154)
22. Applicable Cost-Sharing for Transition
Supplies: Transition Process Under Part
D § 423.120(b)(3)
23. Medicare Coverage Gap Discount
Program and Employer Group Waiver
Plans (§ 423.2325)
24. Interpreting Non Interference Provision
(§ 423.10)
25. Pharmacy Price Concessions in
Negotiated Prices (§ 423.100)
26. Payments to PDP Plan Sponsors For
Qualified Prescription Drug Coverage
(§ 423.308) and Payments to Sponsors of
Retiree Prescription Drug Plans
(§ 423.882)
27. Preferred Cost Sharing (§ 423.100 and
§ 423.120)
28. Prescription Drug Pricing Standards
and Maximum Allowable Cost
(§ 423.505(b)(21))
29. Any Willing Pharmacy Standard Terms
& Conditions (§ 423.120(a)(8))

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a. Preferred Cost Sharing
b. Extended Days’ Supply
c. Mail Order Cost Sharing
30. Enrollment Requirements for the
Prescribers of Part D Covered Drugs
(§ 423.120(c)(5) and (6))
31. Improper Prescribing Practices and
Patterns
a. Background and Program Integrity
Concerns
b. Drug Enforcement Administration (DEA)
Certification of Registration
c. Proposed Provisions
(1) DEA Certificate and State Authority
(2) Patterns or Practices of Prescribing
(a) Grounds for Revocation
(b) Criteria To Be Considered
32. Transfer of TrOOP Between PDP
Sponsors Due to Enrollment Changes
During the Coverage Year (§ 423.464)
a. Exclusion From TrOOP of Increased Cost
Sharing Amounts Incurred Due to
Secondary COB (§ 423.100)
b. Transfer of TrOOP Between PDP
Sponsors Due to Enrollment Changes
During the Coverage Year (§ 423.464)
33. Broadening the Release of Part D Data
34. Establish Authority to Directly Request
Information From First Tier,
Downstream, and Related Entities
(§ 422.504(i)(2)(i) and § 423.505(i)(2)(i))
35. Eligibility of Enrollment for
Incarcerated Individuals (§ 417.422,
§ 417.460, § 422.74, and § 423.44)
a. Changes in Definition of Service Area for
Cost Plans (§ 417.422(b))
b. Involuntary Disenrollment for
Incarcerated Individuals Enrolled in MA,
PDP and Cost Plans (§ 417.460, § 422.74,
and § 423.44)
36. Rewards and Incentives Program
Regulations for Part C Enrollees
(§ 422.134)
37. Expand Quality Improvement Program
Regulations (§ 422.152)
38. Authorization of Expansion of
Automatic or Passive Enrollment NonRenewing Dual Eligible SNPs (D–SNPs)
to Another D–SNP to Support Alignment
Procedures (§ 422.60)
B. Improving Payment Accuracy
1. Implementing Overpayment Provisions
of Section 1128J(d) of the Social Security
Act (§ 422.326 and § 423.360)
a. Terminology (§ 422.326(a) and
§ 423.360(a))
b. General Rules for Overpayments
(§ 422.326(a) Through (c) and
§ 423.360(a) Through (c))
c. Look-Back Period for Reporting and
Returning Overpayments
2. Determination of Payments (§ 423.329)
3. Reopening (§ 423.346)
a. Part D Plan Payments Reopening
b. Coverage Gap Discount Reconciliation
Reopening
4. Payment Appeals (§ 423.350)
5. Payment Processes for Part D Sponsors
(§ 423.2320)
6. Risk Adjustment Data Requirements
(§ 422.310)
7. RADV Appeals
a. Background
b. RADV Definitions
c. Publication of RADV Methodology
d. Proposal To Update RADV Appeals
Terminology (§ 422.311)

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e. Proposal To Simplify the RADV Appeals
Process
(1) Issues Eligible for RADV Appeal
(2) Issues Not Eligible for RADV Appeals
(3) Manner and Timing of a Request for
RADV Appeal
(4) Reconsideration Stage
(5) Hearing Stage
(6) CMS Administrator Review Stage
f. Proposal To Expand Scope of RADV
Audits
g. Proposal To Clarify the RADV Medical
Record Review Determination Appeal
Burden of Proof Standard
h. Proposal To Change RADV Audit
Compliance Date
8. Recovery Audit Contractor (RAC)
Determination Appeals (Proposed Part
422 Subpart Z and Part 423 Subpart Z)
a. Background
b. Proposed RAC Appeals Process
(1) Reconsiderations (§ 422.2605 and
§ 423.2605)
(2) Hearing Official Determinations
(§ 422.2610 and § 423.2610)
(3) Administrator Review (§ 422.2615 and
§ 423.2615)
C. Strengthening Beneficiary Protections
1. Providing High Quality Health Care
(§ 422.504(a)(3) and § 423.505(b)(27))
2. MA–PD Coordination Requirements for
Drugs Covered Under Parts A, B, and D
(§ 422.112)
3. Good Cause Processes (§ 417.460,
§ 422.74 and § 423.44)
4. Definition of Organization
Determination (§ 422.566)
5. MA Organizations May Extend
Adjudication Timeframes for
Organization Determinations and
Reconsiderations (§ 422.568, § 422.572,
§ 422.590, § 422.618, and § 422.619)
D. Strengthening Our Ability To
Distinguish Stronger Applicants for Part
C and D Program Participation and To
Remove Consistently Poor Performers
1. Two-Year Prohibition When
Organizations Terminate Their Contracts
(§ 422.502, § 422.503, § 422.506,
§ 422.508, and § 422.512)
2. Withdrawal of Stand-Alone Prescription
Drug Plan Bid Prior to Contract
Execution (§ 423.503)
3. Essential Operations Test Requirement
for Part D (§ 423.503(a) and (c),
§ 423.504(b)(10), § 423.505(b)(28), and
§ 423.509)
a. Failing Essential Operations Test as
Cause for Immediate Termination
b. Failing Essential Operations Test as
Failure of a Qualification to Contract and
Grounds for Nullification of Approval
4. Termination of the Contracts of
Medicare Advantage Organizations
Offering Part D for Failure for Three
Consecutive Years To Achieve Three
Stars on Both Part C and Part D
Summary Star Ratings in the Same
Contract Year (§ 422.510)
E. Implementing Other Technical Changes
1. Requirements for Urgently Needed
Services (§ 422.113)
2. Skilled Nursing Facility Stays (§ 422.101
and § 422.102)
3. Agent and Broker Training and Testing
Requirements (§ 422.2274 and
§ 423.2274)

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4. Deemed Approval of Marketing
Materials (§ 422.2266 and § 423.2266)
5. Cross-Reference Change in the Part C
Disclosure Requirements (§ 422.111)
6. Managing Disclosure and Recusal in P&T
Conflicts of Interest: [Formulary]
Development and Revision by a
Pharmacy and Therapeutics Committee
Under PDP (§ 423.120(b)(1))
7. Definition of a Part D Drug (§ 423.100)
a. Combination Products
b. Barbiturates and Benzodiazepines
c. Medical Foods
8. Thirty-Six-Month Coordination of
Benefits (COB) Limit (§ 423.466(b))
9. Application and Calculation of Daily
Cost-Sharing Rates (§ 423.153)
10. Technical Change To Align Regulatory
Requirements for Delivery of the
Standardized Pharmacy Notice
(§ 423.562)
11. Special Part D Access Rules During
Disasters or Emergencies (§ 423.126)
12. MA Organization Responsibilities in
Disasters and Emergencies (§ 422.100)
13. Termination of a Contract Under Parts
C and D (§ 422.510 and § 423.509)
a. Cross-reference Change (§ 423.509(d))
b. Terminology Changes (§ 422.510 and
§ 423.509)
c. Technical Change To Align Paragraph
Headings (§ 422.510(b)(2))
d. Terminology Change
(§ 423.509(b)(2)(C)(ii))
14. Technical Changes To Align Part C and
Part D Contract Determination Appeal
Provisions (§ 422.641 and § 422.644)
a. Technical Changes (§ 422.641)
b. Technical Changes (§ 422.644(a) and (b))
15. Technical Changes To Align Parts C
and D Appeal Provisions (§ 422.660 and
§ 423.650)
16. Technical Changes Regarding
Intermediate Sanctions and Civil Money
Penalties (§ 422.756 and § 423.756)
a. Technical Changes to Intermediate
Sanctions Notice Receipt Provisions
(§ 422.756(a)(2) and § 423.756(a)(2))
b. Cross-reference Changes (§ 422.756(b)(4)
and § 423.756(b)(4))
c. Technical Changes (§ 422.756(d) and
§ 423.756(d))
d. Technical Changes To Align the Civil
Money Penalty Provision With the
Authorizing Statute (§ 422.760(a)(3) and
§ 423.760(a)(3))
e. Technical Changes To Align the Civil
Money Penalty Notice Receipt Provisions
(§ 422.1020(a)(2), § 423.1020(a)(2),
§ 422.1016(b)(1), and § 423.1016(b)(1))
17. Technical Change to the Restrictions on
use of Information Under Part D
(§ 423.322)
IV. Collection of Information Requirements
A. ICRs Related to Eligibility of Enrollment
for Individuals Not Lawfully Present in
the United States (§ 417.2, § 417.420,
§ 417.422, § 417.460, § 422.1, § 422.50,
§ 422.74, § 423.1, § 423.30, and § 423.44)
B. ICRs Related to Improper Prescribing
Practices and Patterns (§ 424.535(a)(13)
and (14))
C. ICRs Related to Applicants or Their
Contracted First Tier, Downstream, or
Related Entities To Have Experience in
the Part D Program Providing Key Part D

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Functions (§ 423.504(b)(8)(i) through
(iii))
D. ICRs Related to Eligibility of Enrollment
for Incarcerated Individuals
E. ICRs Related to Rewards and Incentives
Program Regulations for Part C Enrollees
(§ 422.134)
F. ICRs Related to Expanding Quality
Improvement Program Regulations
(§ 422.152)
G. ICRs Related to Good Cause Processes
(§ 417.460, § 422.74 and § 423.44)
H. ICRs Related to the Definition of
Organization Determination (§ 422.566)
I. ICRs Related to Skilled Nursing Facility
Stays (§ 422.101 and § 422.102)
J. ICRs Related to MA Organization
Responsibilities in Disasters and
Emergencies (§ 422.100)
K. ICR Related to Recovery Audit
Contractor Determinations (Part 422,
Subpart Z and Part 423, Subpart Z)
V. Response to Comments
VI. Regulatory Impact Analysis
A. Statement of Need
B. Overall Impact
C. Anticipated Effects
1. Effects of Closing Cost Contract Plans to
New Enrollment
2. Effects of the Two-Year Limitation on
Submitting a New Bid in an Area Where
an MA Has Been Required To Terminate
a Low-Enrollment MA Plan
3. Effects of the Authority To Impose
Intermediate Sanctions and Civil Money
Penalties
4. Effects of Contract Termination
Notification Requirements and Contract
Termination Basis
5. Effects of Reducing the Burden of the
Compliance Program Training
Requirements
6. Effects of Audit and Inspection
Authority
7. Effects of the Procedures for Imposing
Intermediate Sanctions and Civil Money
Penalties Under Parts C and D
8. Effects of Timely Access to Mail Order
Services
9. Effects of the Collections of Premiums
and Cost Sharing
10. Effects of Enrollment Eligibility for
Individuals Not Lawfully Present in the
United States
11. Effects of Part D Notice of Changes
12. Effects of Separating the Annual Notice
of Change (ANOC) From the Evidence of
Coverage (EOC)
13. Effects of the Modification of the
Agent/Broker Compensation
Requirements
14. Effects of Drug Categories or Classes of
Clinical Concern and Exceptions
15. Effects of the Medication Therapy
Management Program (MTMP) Under
Part D
16. Effects of the Business Continuity for
MA Organizations and Part D Sponsors
17. Effects of the Requirement for
Applicants or Their Contracted First
Tier, Downstream, or Related Entities To
Have Experience in the Part D Program
Providing Key Part D Functions
18. Effects of Requirement for Applicants
for Stand Alone Part D Plan Sponsor
Contracts To Be Actively Engaged in the

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Business of the Administration of Health
Insurance Benefits
19. Effects of Limit Parent Organizations to
One Prescription Drug Plan (PDP)
Sponsor Contract per PDP Region
20. Effects of Limit Stand-Alone
Prescription Drug Plan Sponsors to
Offering No More Than Two Plans per
PDP Region
21. Effects of Efficient Dispensing and in
Long Term Care Facilities and Other
Changes
22. Effects of Applicable Cost-Sharing for
Transition Supplies: Transition Process
Under Part D
23. Effects of Medicare Coverage Gap
Discount Program and Employer Group
Waiver Plans
24. Effects of Interpreting the NonInterference Provision
25. Effects of Pharmacy Price Concessions
in Negotiated Prices
26. Effects of Payments to PDP Plan
Sponsors for Qualified Prescription Drug
Coverage and Payments to Sponsors of
Retiree Prescription Drug Plans
27. Effects of Preferred Cost Sharing
28. Effects of Maximum Allowable Cost
Pricing Standard
29. Effects of Any Willing Pharmacy
Standard Terms & Conditions
30. Effects of Enrollment Requirements for
the Prescribers of Part D Covered Drugs
31. Effects of Improper Prescribing
Practices and Patterns
32. Effects of the Transfer of TrOOP
Between Part D Sponsors Due to
Enrollment Changes During the Coverage
Year
33. Effects of Broadening the Release of
Part D Data
35. Effects of Eligibility of Enrollment for
Incarcerated Individuals
36. Effects of Rewards and Incentives
Program Regulations for Part C Enrollees
37. Effects of Expand Quality Improvement
Program Regulations
38. Effects of Authorization of Expansion
of Automatic or Passive Enrollment NonRenewing Dual-Eligible SNPs (D–SNPs)
to Another D–SNP To Support
Alignment Procedures
39. Effects of Improving Payment
Accuracy: Reporting Overpayments,
RADV Appeals, Part D Payment
Reopening, LIS Cost Sharing, and
Coverage Gap Discount Program
40. Effects of Part C and Part D RAC
Determination Appeals
41. Effects of Requirement To Provide High
Quality Health Care
42. Effects of MA–PD Coordination
Requirements for Drugs Covered Under
Part D
43. Effects of Revisions to Good Cause
Processes
44. Effects of the Definition of Organization
Determination
45. Effects of MA Organization Extension
of Adjudication Timeframes for
Organization Determinations and
Reconsiderations
46. Effects of the Two-Year Prohibition
When Organizations Terminate Their
Contracts

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47. Effects of the Withdrawal of Stand
Alone Prescription Drug Plan Bid Prior
to Contract Execution
48. Effects of Essential Operations Test
Requirement for Part D
50. Effects of the Requirements for
Urgently Needed Services
51. Effects of Skilled Nursing Facility Stays
52. Effects of Agent and Broker Training
and Testing Requirements
53. Effects of Deemed Approval of
Marketing Materials
54. Effects of Part C Disclosure
Requirements
55. Effects of Managing Disclosure and
Recusal in P&T Conflicts of Interest:
Formulary Development and Revision by
a Pharmacy and Therapeutics Committee
Under Part D
56. Effects of the Technical Changes to the
Definition of a Part D Drug
57. Effects of the Thirty-Sixth Month
Coordination of Benefits (COB) Limit
58. Effects of Application and Calculation
of Daily Cost-Sharing Rates
59. Effects of the Technical Change To
Align Regulatory Requirements for
Delivery of the Standardized Pharmacy
Notice
60. Effects of the Special Part D Access
Rules During Disasters
61. Effects of the MA Organization
Responsibilities in Disasters and
Emergencies
62. Effects of the Technical Changes
Regarding the Termination of a Contract,
Contract Determination and Other
Appeals, and Intermediate Sanctions and
Civil Money Penalties Under Parts C
and D
63. Effects of the Technical Change to the
Restrictions on Use of Information Under
Part D
D. Expected Benefits
1. Drug Categories or Classes of Clinical
Concerns and Exceptions
2. Medication Therapy Management
Program Under Part D
E. Alternatives Considered
1. Separating the Annual Notice of Change
From the Evidence of Coverage
2. Modifying the Agent/Broker
Compensation Requirements
3. Medicare Coverage Gap Discount
Program and Employer Group Waiver
Plans
4. Prescription Drug Pricing Standards and
Maximum Allowable Cost
5. Access to Covered Part D Drugs: Use of
Standardized Technology
6. Any Willing Pharmacy Standard Terms
and Conditions
7. Negotiated Prices
8. Preferred Cost Sharing
9. Transfer of TrOOP Between Part D
Sponsors Due to Enrollment Changes
During the Coverage Year
10. Part D Notice of Changes
11. Special Part D Access Rules During
Disasters or Emergencies
12. Business Continuity for MAOs and Part
D Sponsors
13. Drug Categories or Classes of Clinical
Concerns and Exceptions
14. Medication Therapy Management
Program (MTM) Under Part D

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15. Requirement for Applicants or Their
Contracted First Tier, Downstream, or
Related Entities to Have Experience in
the Part D Program Providing Key Part D
Functions
F. Accounting Statement and Table
G. Conclusion
H pages
Regulations Text

Acronyms
ADS Automatic Dispensing System
AEP Annual Enrollment Period
AHFS American Hospital Formulary
Service
AHFS–DI American Hospital Formulary
Service-Drug Information
AHRQ Agency for Health Care Research
and Quality
ALJ Administrative Law Judge
ANOC Annual Notice of Change
AO Accrediting Organization
AOR Appointment of Representative
BBA Balanced Budget Act of 1997 (Pub. L.
105–33)
BBRA [Medicare, Medicaid and State Child
Health Insurance Program] Balanced
Budget Refinement Act of 1999 (Pub. L.
106–113)
BIPA [Medicare, Medicaid, and SCHIP]
Benefits Improvement Protection Act of
2000 (Pub. L. 106–554)
BLA Biologics License Application
CAHPS Consumer Assessment Health
Providers Survey
CAP Corrective Action Plan
CCIP Chronic Care Improvement Program
CC/MCC Complication/Comorbidity and
Major Complication/Comorbidity
CCS Certified Coding Specialist
CDC Centers for Disease Control
CHIP Children’s Health Insurance Programs
CMP Civil Money Penalty
CMR Comprehensive Medical Review
CMS Centers for Medicare & Medicaid
Services
CMS–HCC CMS Hierarchal Condition
Category
CTM Complaints Tracking Module
COB Coordination of Benefits
CORF Comprehensive Outpatient
Rehabilitation Facility
CPC Certified Professional Coder
CY Calendar year
DAB Departmental Appeals Board
DEA Drug Enforcement Administration
DIR Direct and Indirect Remuneration
DME Durable Medical Equipment
DMEPOS Durable Medical Equipment,
Prosthetic, Orthotics, and Supplies
D–SNPs Dual Eligible SNPs
DOL U.S. Department of Labor
DUM Drug Utilization Management
EAJR Expedited Access to Judicial Review
EGWP Employer Group/Union-Sponsored
Waiver Plan
EOB Explanation of Benefits
EOC Evidence of Coverage
ESRD End-Stage Renal Disease
FACA Federal Advisory Committee Act
FDA Food and Drug Administration
FEHBP Federal Employees Health Benefits
Plan
FFS Fee-For-Service
FIDE Fully-integrated Dual Eligible

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1921

FIDE SNPs Fully-integrated Dual Eligible
Special Needs Plans
FMV Fair Market Value
FY Fiscal year
GAO Government Accountability Office
HAC Hospital-Acquired Conditions
HCPP Health Care Prepayment Plans
HEDIS HealthCare Effectiveness Data and
Information Set
HHS [U.S. Department of] Health and
Human Services
HIPAA Health Insurance Portability and
Accountability Act of 1996 (Pub. L. 104–
191)
HMO Health Maintenance Organization
HOS Health Outcome Survey
HPMS Health Plan Management System
ICEP Initial Coverage Enrollment Period
ICL Initial Coverage Limit
ICR Information Collection Requirement
ID Identification
IRE Independent Review Entity
IRMAA Income-Related Monthly
Adjustment Amount
IVC Initial Validation Contractor
LCD Local Coverage Determination
LEP Late Enrollment Penalty
LIS Low Income Subsidy
LPPO Local Preferred Provider
Organization
LTC Long Term Care
MA Medicare Advantage
MAAA Member of the American Academy
of Actuaries
MA–PD Medicare Advantage-Prescription
Drug Plan
MAC Medicare Appeals Council
MIPPA Medicare Improvements for Patients
and Providers Act of 2008 (Pub. L. 110–
275)
MOC Medicare Options Compare
MOOP Maximum Out-of-Pocket
MPDPF Medicare Prescription Drug Plan
Finder
MMA Medicare Prescription Drug,
Improvement, and Modernization Act of
2003 (Pub. L. 108–173)
MS–DRG Medicare Severity Diagnosis
Related Group
MSA Metropolitan Statistical Area
MSAs Medical Savings Accounts
MSP Medicare Secondary Payer
MTM Medication Therapy Management
MTMP Medication Therapy Management
Program
NAIC National Association Insurance
Commissioners
NCD National Coverage Determination
NCPDP National Council for Prescription
Drug Programs
NCQA National Committee for Quality
Assurance
NDA New Drug Application
NDC National Drug Code
NGC National Guideline Clearinghouse
NIH National Institutes of Health
NOMNC Notice of Medicare Non-Coverage
NPI National Provider Identifier
OIG Office of Inspector General
OMB Office of Management and Budget
OPM Office of Personnel Management
OTC Over the Counter
Part C Medicare Advantage
Part D Medicare Prescription Drug Benefit
Program
PBM Pharmacy Benefit Manager

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PDE Prescription Drug Event
PDP Prescription Drug Plan
PFFS Private Fee For Service Plan
POA Present on Admission (Indicator)
POS Point-of-Sale
PPO Preferred Provider Organization
PPS Prospective Payment System
P&T Pharmacy & Therapeutics
QIC Qualified Independent Contractor
QIO Quality Improvement Organization
QRS Quality Review Study
PACE Programs of All Inclusive Care for the
Elderly
RADV Risk Adjustment Data Validation
RAPS Risk Adjustment Payment System
RPPO Regional Preferred Provider
Organization
SEP Special Enrollment Period
SHIP State Health Insurance Assistance
Programs
SNF Skilled Nursing Facility
SNP Special Needs Plan
SPAP State Pharmaceutical Assistance
Programs
SSA Social Security Administration
SSI Supplemental Security Income
T&C Terms and Conditions
TPA Third Party Administrator
TrOOP True Out-Of-Pocket
U&C Usual and Customary
UPIN Uniform Provider Identification
Number
USP U.S. Pharmacopoeia

I. Executive Summary
A. Purpose
The purpose of this proposed rule is
to make revisions to the Medicare
Advantage (MA) program (Part C) and
Prescription Drug Benefit Program (Part
D) regulations based on our continued
experience in the administration of the
Part C and Part D programs and to
implement certain provisions of the
Affordable Care Act. The proposed
changes are necessary to—(1) clarify
various program participation
requirements; (2) make changes to
strengthen beneficiary protections; (3)
strengthen our ability to identify strong
applicants for Part C and Part D program
participation and remove consistently
poor performers; and (4) make other
clarifications and technical changes.

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B. Summary of the Major Provisions
1. Eligibility of Enrollment for
Individuals Not Lawfully Present in the
United States
The Personal Responsibility and Work
Opportunity Reconciliation Act of 1996
makes individuals not lawfully present
in the United States ineligible to receive

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federal benefits (such as Medicare), even
if they are otherwise entitled to benefits.
While we would not pay FFS claims for
unlawfully present beneficiaries, MA,
and Part D enrollment rules currently do
not prevent the payment of capitation
rates for these individuals. We are
proposing to establish U.S. citizenship
and lawful presence as an eligibility
requirement for enrollment in MA and
Part D plans.
2. Modifying the Agent/Broker
Requirements, Specifically Agent/
Broker Compensation
The current compensation structure is
comprised of a 6-year cycle and is
scheduled to end December 31, 2013.
MA organizations and PDP sponsors
provide an initial compensation
payment to independent agents for new
enrollees (Year 1), and pay a renewal
rate (equal to 50 percent of the initial
year compensation) for Years 2 through
6. This structure has proved to be
complicated to implement and monitor,
and the current structure creates an
incentive for agents to move
beneficiaries as long as the fair market
value (FMV) continues to increase each
year. To simplify the administration of
these payments and reduce incentives
for agents and brokers to encourage
beneficiaries to enroll in plans without
regard to ensuring plan benefits would
meet the beneficiaries’ health care
needs, we are proposing to revise the
existing compensation structure. Under
our proposal, MA organizations and
PDP sponsors would continue to have
the discretion to decide, on an annual
basis, whether to pay initial and/or
renewal compensation payments to
their independent agents. Also, for new
enrollments, MA organizations and
sponsors could make an initial payment
that is no greater than the FMV amount,
which we would set annually in our
guidance that interprets these
regulations. For renewals in Year 2 and
subsequent years, the MA organization
or sponsor could pay up to 35 percent
of the FMV amount for that year. We
believe that revising the existing
compensation structure to allow MA
organizations or Part D sponsors to pay
up to 35 percent of the FMV for year 2
and subsequent years is appropriate
based on a couple of factors. First, we
believe that a 2 tiered payment system

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(that is, initial and renewal) would be
significantly less complicated than a 3tiered system (that is, initial, 50 percent
renewal for years 2 through 6, and 25
percent residual for years 7 and
subsequent years), and would reduce
administrative burden and confusion for
plan sponsors. Second, our analysis
determined that 35 percent is the
renewal compensation level at which
the present value of overall payments
under a 2-tiered system would be
relatively equal to the present value of
overall payments under a 3-tiered
system (taking into account the
estimated life expectancy for several
beneficiary age cohorts). In addition to
revising the agent and broker
compensation structures, we propose to
amend the training and testing
requirements as well as setting limits on
referral fees for agents and brokers.
3. Drug Categories or Classes of Clinical
Concern
This proposed provision would
interpret the Affordable Care Act
authority to limit protected classes to
those for which access to all drugs in a
category or class for a typical individual
with a disease or condition treated by
the drugs in the class is required within
7 days and more specific formulary
requirements would not suffice to meet
multitude of specific applications of the
drugs within the category or class.
Instead of mandating coverage of all
drug products in a particular class on all
Part D formularies, we can save costs by
identifying more efficient formulary
requirements or other beneficiary
protections in most cases.
4. Improving Payment Accuracy
The proposed regulatory provisions
would implement the Affordable Care
Act requirement that MA organizations
and Part D sponsors report and return
identified Medicare overpayments. We
would adopt the statutory definition of
overpayment for both Part C and Part D.
5. Risk Adjustment Data Requirements
The proposed rule would strengthen
existing regulations at § 422.310 on MA
plan sponsors’ accountability for valid
risk adjustment data prior to
submission.
C. Summary of Costs and Benefits

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TABLE 1—SUMMARY OF COSTS AND BENEFITS
Provision description

Total costs

Changes to Audit and Inspection .......................

We estimate that this change would require
an annual cost of $7.95 million (total cost of
$39.75 million) for the time and effort for all
auditing organizations to perform the program audit. Additionally, we estimate an annual cost of $950,000 (total cost of 4.75
million) for MA organizations or Part D
sponsors with audit results that reveal
non-compliance to hire an independent
auditor to validate that correction has occurred.
N/A ...................................................................

Eligibility of enrollment for individuals not lawfully present in the U.S.

Modifying the agent/broker requirements, specifically agent/broker compensation.
Drug Categories or Classes of Clinical Concern

N/A.

Improving Payment Accuracy .............................
Risk Adjustment Data Requirements .................
Transfer of TrOOP Between Part D Sponsors
Due to Enrollment Changes during the Coverage Year.
Eligibility of Enrollment for Incarcerated Individuals.

N/A.
N/A.
N/A.

Transfers

N/A ...................................................................

..........................................................................

We estimate that this change could save the
MA program up to $5 million in 2015, increasing to $8 million in 2019 (total of $32
million over this period), and could save the
Part D program (includes the Part D portion
of MA-PD plans) up to $5 million in 2015,
increasing to $9 million in 2019 (total of $35
million over this period).
We estimate that this change could save the
Part D program (includes the Part D portion
of MA–PD plans) approximately $30 million
in 2016, increasing to $420 million in 2019
(total of $720* million over this period).

We estimate that this change could save the
MA program up to $27 million in 2015, increasing to $62 million in 2019 (total of
$219 million over this period), and could
save the Part D program (includes the Part
D portion of MA-PD plans) up to $46 million
in 2015, increasing to $90 million in 2019
(total of $333 million over this period).

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* Projected savings are based upon full implementation of the criteria and do not reflect that changes for the antipsychotic class of drugs are
deferred at this time.

II. Background
The Balanced Budget Act of 1997
(BBA) (Pub. L. 105–33) created a new
‘‘Part C’’ in the Medicare statute
(sections 1851 through 1859 of the
Social Security Act (the Act)) which
established what is now known as the
Medicare Advantage (MA) program. The
Medicare Prescription Drug,
Improvement, and Modernization Act of
2003 (MMA) (Pub. L. 108–173), enacted
on December 8, 2003, added a new ‘‘Part
D’’ to the Medicare statute (sections
1860D–1 through 42 of the Act) entitled
the Medicare Prescription Drug Benefit
Program (PDP), and made significant
changes to the existing Part C program,
which it named the Medicare Advantage
(MA) Program. The MMA directed that
important aspects of the Part D program
be similar to, and coordinated with,
regulations for the MA program.
Generally, the provisions enacted in the
MMA took effect January 1, 2006. The
final rules implementing the MMA for

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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).
Since the inception of both Parts C
and D, we have periodically revised our
regulations either to implement
statutory directives or to incorporate
knowledge obtained through experience
with both programs. For instance, on the
September 18, 2008 and January 12,
2009 Federal Register (73 FR 54226 and
74 FR 1494, respectively), we issued
Part C and D regulations to implement
provisions in the Medicare
Improvement for Patients and Providers
Act (MIPPA) (Pub. L. 110–275). We
promulgated a separate interim final
rule in January 16, 2009 (74 FR 2881) to
address MIPPA provisions related to
Part D plan formularies. In the final rule
that appeared in the April 15, 2010
Federal Register (75 FR 19678), we
made changes to the Part C and D

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regulations which strengthened various
program participation and exit
requirements; strengthened beneficiary
protections; ensured that plan offerings
to beneficiaries included meaningful
differences; improved plan payment
rules and processes; improved data
collection for oversight and quality
assessment; implemented new policies;
and clarified existing program policy.
In a final rule that appeared in the
April 15, 2011 Federal Register (76 FR
21432), we continued our process of
implementing improvements in policy
consistent with those included in the
April 2010 final rule, and also
implemented changes to the Part C and
Part D programs made by recent
legislative changes. The Patient
Protection and Affordable Care Act
(Pub. L. 111–148) was enacted on March
23, 2010, as passed by the Senate on
December 24, 2009, and the House on
March 21, 2010. The Health Care and
Education Reconciliation Act (Pub. L.

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111–152), which was enacted on March
30, 2010, modified a number of
Medicare provisions in Pub. L. 111–148
and added several new provisions. The
Patient Protection and Affordable Care
Act (Pub. L. 111–148) and the Health
Care and Education Reconciliation Act
(Pub. L. 111–152) are collectively
referred to as the Affordable Care Act.
The Affordable Care Act included
significant reforms to both the private
health insurance industry and the
Medicare and Medicaid programs.
Provisions in the Affordable Care Act
concerning the Part C and D programs
largely focused on beneficiary
protections, MA payments, and
simplification of MA and Part D
program processes. These provisions
affected implementation of our policies
regarding beneficiary cost-sharing,
assessing bids for meaningful
differences, and ensuring that costsharing structures in a plan are
transparent to beneficiaries and not
excessive. In the April 2011 final rule,
we revised regulations on a variety of
issues based on the Affordable Care Act
and our experience in administering the
MA and Part D programs. The rule
covered areas such as marketing,
including agent/broker training;
payments to MA organizations based on
quality ratings; standards for
determining if organizations are fiscally
sound; low income subsidy policy
under the Part D program; payment
rules for non-contract health care
providers; extending current network
adequacy standards to Medicare
medical savings account (MSA) plans
that employ a network of providers;
establishing limits on out-of-pocket
expenses for MA enrollees; and several
revisions to the special needs plan
requirements, including changes
concerning SNP approvals.
In a final rule that appeared in the
April 12, 2012 Federal Register (77 FR
22072 through 22175), we made several
changes to the Part C and Part D
programs required by statute, including
the Affordable Care Act, as well as made
improvements to both programs through
modifications reflecting experience we
have obtained administering the Part C
and Part D programs. Key provisions of
that final rule implemented changes
closing the Part D coverage gap, or
‘‘donut hole,’’ for Medicare beneficiaries
who do not already receive low-income
subsidies from us by establishing the
Medicare Coverage Gap Discount
Program. We also included provisions
providing new benefit flexibility for
fully-integrated dual eligible special
needs plans, clarifying coverage of
durable medical equipment, and

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combatting possible fraudulent activity
by requiring Part D sponsors to include
an active and valid prescriber National
Provider Identifier on prescription drug
event records.
III. Provisions of the Proposed
Regulations
A. Clarifying Various Program
Participation Requirements
1. Closing Cost Contract Plans to New
Enrollment (§ 422.2 and § 422.503(b)(5))
In implementing the original Part C
requirements in our June 26, 1998 final
rule, entitled, ‘‘Medicare Program;
Establishment of the Medicare+Choice
Program’’ (63 FR 34968 through 35116),
we established a requirement in 42 CFR
422.501(b)(4) that an ‘‘entity seeking to
contract as [an Medicare Advantage
(MA)] organization must not accept new
enrollees under a section 1876
reasonable cost contract in any area in
which it seeks to offer [an MA] plan.’’
We stated our reasons for the policy,
specifying in the preamble of the
interim final rule that, ‘‘[o]ur reason for
establishing this rule is to eliminate the
potential for an organization to
encourage higher-cost enrollees to enroll
under its cost contract while healthy
enrollees are enrolled in its risk-based
[MA] plan. This [final] rule is consistent
with our long-standing policy that
entities not have both a risk and cost
contract under section 1876 [of the Act]
in the same area.’’ (63 FR 35014 through
35015).
This provision was recodified at 42
CFR 422.503(b)(5) in regulations
implementing the Medicare Prescription
Drug, Improvement, and Modernization
Act of 2003, but the requirement, as
well as the rationale for the
requirement, remained intact.
Since this requirement only precludes
‘‘the entity’’ contracting as an MA
organization from having a cost contract
open to new enrollment, the prohibition
does not apply to another separate legal
entity owned by the same parent
organization, such that two legal entities
owned by the same parent could offer a
competing cost contract and MA plan.
We do not believe that this result is
consistent with the original intent of the
prohibition because it permits legal
entities that are related to each other
under a common parent organization to
offer a cost contract and MA plan in the
same service area, creating the same
potential for the entities to move higher
risk enrollees from one plan to another
in order to take advantage of the
differing Medicare payment rules for the
two plan types or for other reasons that
are not related to the enrollees’ best
interests.

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To ensure that our original intent is
realized and to eliminate the potential
for organizations to move enrollees from
one of their plans to another based on
financial or some other interest, we
propose to revise paragraph
§ 422.503(b)(5) so that an, ‘‘entity
seeking to contract as an MA
organization must [n]ot accept, or share
a corporate parent organization with an
entity that accepts, new enrollees under
a section 1876 reasonable cost contract
in any area in which it seeks to offer an
MA plan.’’
In making the proposed revision to
paragraph § 422.503(b), we also propose
to add the definition of ‘‘parent
organization’’ to § 422.2 of the MA
program definitions. We would specify
that, ‘‘Parent organization means a legal
entity that owns one or more other
subsidiary legal entities.’’ We are
requesting comments on whether a
parent organization with less than a
100-percent interest in a subsidiary legal
entity should trigger the prohibition we
propose with the amendment at
§ 422.503(b)(5). Although the MA
program regulations do not currently
define the term ‘‘parent organization,’’
our proposed definition is consistent
with the way the term is currently used
in the context of the MA program, for
example, when assessing an
organization’s business structure.
2. Two Year Limitation on Submitting a
New Bid in an Area Where an MA Has
Been Required To Terminate a Low
Enrollment MA Plan (§ 422.504(a)(19))
Under § 422.506(b)(1)(iv), we must
non-renew an MA plan that does not
have a sufficient number of enrollees to
establish that it is a viable independent
plan option. We have currently
interpreted the standard of whether the
MA plan has a ‘‘sufficient number of
enrollees to establish that it is a viable
independent plan option’’ as meaning
that the MA plan has fewer than 500
enrollees for non-SNPs and fewer than
100 enrollees for SNPs over a specified
time period of 3 years. As we determine
adjustments are appropriate, we will
revisit this interpretation as part of
annual plan guidance. In cases in which
an MA plan has been non-renewed on
this basis, it would defeat the intent and
purpose of this rule if the MA
organization could simply submit a new
bid for the next year in the same area
for the same type of plan that failed to
attract enrollment over a number of
years. Indeed, the problem addressed in
§ 422.506(b)(1)(iv) would be
exacerbated, as the new plan would
start out with no MA enrollees.
In section 3209 of the Affordable Care
Act, the Congress added a new section

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1854(a)(5)(C)(1) of the Act that clarified
that CMS is not ‘‘require[d] . . . to
accept any or every bid submitted by an
MA organization. . . .’’ Section
1856(b)(1) of the Act further provides
authority for CMS to establish MA
standards by regulation, and section
1857(e)(1) of the Act also provides
authority to impose contract
requirements that CMS finds ‘‘necessary
and appropriate.’’ Under the foregoing
authority, we propose to revise
§ 422.504(a) to add a new contract
requirement that stipulates that the
Medicare Advantage Organization (MA
organization) agrees not to submit a new
bid of the same type of plan that has
been non-renewed under
§ 422.506(b)(1)(iv) in the same service
area as the non-renewed plan for 2 years
after such a non-renewal.
We believe this requirement will
enhance our ongoing efforts to ensure
that MA organization offerings in a
service area present beneficiaries with
viable plans that are responsive to their
needs.
3. Authority To Impose Intermediate
Sanctions and Civil Money Penalties
(§ 422.752, § 423.752, § 422.760 and
§ 423.760)
Section 1857(a) of the Social Security
Act (the Act) provides the Secretary
with the authority to enter into contracts
with MA organizations, and section
1860D–12(b)(1) of the Act provides the
Secretary with the authority to enter
into contracts with Part D sponsors.
Section 1857(g)(1) of the Act provides a
list of contract violations for which the
potential enforcement response under
section 1857(g)(2) of the Act is the
imposition of intermediate sanctions
(sanctions) and/or civil money penalties
(CMPs). Section 1860D–12(b)(3)(E) of
the Act applies these provisions to Part
D contracts. We codified this authority
in the June 28, 2000 final rule with
comment period entitled, ‘‘Medicare
Program; Medicare+Choice Program (65
FR 40170) for Part C, and the January
28, 2005 final rule entitled, ‘‘Medicare
Program; Medicare Prescription Drug
Benefit’’ (70 FR 4194) for Part D. The
authority was codified at § 422.752 (Part
C) and § 423.752 (Part D). We are
proposing two changes to our existing
authority to impose sanctions and
CMPs.
First, section 6408 of the Affordable
Care Act (Pub. L. 111–148) provided the
Secretary with new authorities to
impose sanctions or CMPs for violations
of the Part C and D marketing and
enrollment requirements. Section 6408
amended 1857(g)(1) of the Act by
adding new sections (H) through (K).
These provisions provide CMS with the

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authority to impose intermediate
sanctions on an organization that enrolls
an individual without prior consent
(except in certain limited
circumstances) or transfers an
individual to a new plan without prior
consent. They also specifically make it
a contract violation to violate the Part C
and D marketing requirements, and
specify that it is a violation of the
sponsor’s Part C or D agreement with
CMS for the sponsoring organization to
employ or contract with any individual
or entity who engages in the conduct
described in paragraphs (A) through (J)
of 1857(g)(1) of the Act.
We are proposing to revise our
regulations to codify the aforementioned
authorities at § 422.752 (Part C) and
§ 423.752 (Part D), following the
statutory language with little
modification.
Second, we are proposing changes to
the regulations intended to clarify CMS’
authority to impose CMPs for the
violations contained in section
1857(g)(1) of the Act and corresponding
regulations at § 422.752 (Part C) and
§ 423.752 (Part D). Existing regulations
provide the government with authority
to impose CMPs for the listed violations.
The existing regulations, however,
designate the Office of Inspector General
(OIG) as the sole government agency
with the authority to impose CMPs for
the violations contained in § 422.752
and § 423.752. We are proposing to
revise the language of these provisions
to clarify that either CMS or the OIG
may impose CMPs for the violations
listed at § 422.752(a) and § 423.752(a),
except § 422.752(a)(5) and
§ 423.752(a)(5). Only the OIG will
continue to have the authority to impose
CMPs for the violations at
§ 422.752(a)(5) and § 423.752(a)(5),
regarding the misrepresentation and/or
falsification of information furnished to
CMS, an individual or other entity. CMS
or the OIG will impose the CMPs in
accordance with the amounts specified
in section 1857(g)(2) of the Act and
§ 422.760 and § 423.760 of the
corresponding regulations.
We are proposing to revise the
existing regulations at § 422.752,
§ 423.752, § 422.760, and § 423.760 to
effectuate this change.
4. Contract Termination Notification
Requirements and Contract Termination
Basis (§ 422.510 and § 423.509)
Sections 1857(c) and 1860D–
12(b)(3)(B) of the Act provide us with
the authority to terminate a Part C or D
sponsoring organization’s contract at
any time if we make a determination
that the contracting organization is
substantially failing to meet contract

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1925

requirements and expectations. Sections
1857(h)(1)(B) and 1860D–12(b)(3)(F) of
the Act provide us with the procedures
necessary to facilitate the termination of
contracts held between CMS and MA
organizations and Part D sponsors,
respectively. The Part C contract
termination authorities and procedures
were codified into regulations in the
June 29, 2000 final rule entitled,
‘‘Medicare Program; Medicare+Choice
Program’’ (65 FR 40170) at § 422.510.
Likewise, the Part D authorities and
procedures were codified into
regulations in the January 28, 2005 final
rule entitled, ‘‘Medicare Program;
Medicare Prescription Drug Benefit’’ (70
FR 4194) at § 423.509.
We are proposing three revisions to
our existing regulations that relate to
contract termination. First, we are
proposing clarification of the scope of
our authority to terminate Part C and D
contracts under § 422.510(a) and
§ 423.509(a). Section 1857(c)(2) of the
Act provides us with authority to
terminate a Part C or D contract if we
make a determination that the
organization—
• Has failed substantially to carry out
the contract;
• Is carrying out the contract in a
manner inconsistent with the efficient
and effective administration of this part;
or
• No longer substantially meets the
applicable conditions of this part.
Existing regulations at § 422.510 and
§ 423.509 reiterate the three bases for
termination set forth in the statute,
however, over time CMS has also
included in regulation a number of
specific violations within the scope of
our statutory authority, that is,
violations which meet the standard
established by the statute. In the June
26, 1998 proposed rule (63 FR 34968, at
35018), we stated that ‘‘[i]n addition to
repeating the above statutory language,
we are implementing this language by
identifying specific circumstances that
we believe constitute examples of [an
MA] organization substantially failing to
carry out either its contract, or carrying
out its contract in a manner that is
inconsistent with the effective and
efficient administration.’’
However, we have come to believe
over time that the inclusion of our broad
statutory authorities in the regulations,
along with the more specific violations,
has the potential to lead to confusion
regarding the scope of our termination
authority. Terminating a contract is the
strongest action that CMS may take in
response to an MA organization or Part
D sponsor’s noncompliance. It is
imperative that both CMS and affected
organization understand the standard

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we apply when CMS has made a
determination to end the contractual
relationship. Therefore, we are
proposing to modify the language at
§ 422.510(a) and § 423.509(a) to clarify
our contract termination authority by
separating the statutory bases from the
examples. To effectuate this change we
will need to renumber the lists of bases
contained in § 422.510(a) and § 423.509.
Because there are cross references using
the current numbering scheme, we are
also proposing to make several
corresponding reference changes to
reflect the renumbering of this section
throughout parts 422 and 423. We
believe that by making these changes,
we will improve the clarity of this
regulation.
Second, we are proposing revisions to
our contract termination notification
procedures contained at § 422.510(b)(1)
and § 423.509(b)(1). Current regulations
state that if CMS decides to terminate a
Part C or D sponsoring organization’s
contract, we must notify the MA
organization/Part D sponsor in writing
90 days before the intended date of the
termination. We believe that the 90-day
timeframe is not in the best interest of
Medicare beneficiaries, in light of the
fact that CMS terminates contracts in
circumstances where an organization is
significantly out of compliance with
Part C and D requirements. We also
think that the 90-day timeframe is
unnecessarily long given the existing
procedural protections and appeal rights
provided for MA organizations and Part
D sponsors.
The authorizing statute for Part C, at
section 1857(h)(1)(B) of the Act
(applicable to Part D pursuant to section
1860D–12(b)(3)(F) of the Act), states that
the Secretary must provide reasonable
notice and opportunity for hearing
regarding the termination (including the
right to appeal the initial
determination); during this hearing
process, the termination is effectively
stayed pursuant to § 422.664 and
§ 423.652. Therefore, we believe that a
45-day timeframe better balances the
need to provide contracting
organizations with reasonable notice of
the impending contract termination
with the interests of the Medicare
beneficiaries who are enrolled in a plan
that is deficient enough in its adherence
to Part C and/or D requirements that
contract termination is necessary. We
also propose to make necessary crossreference changes in parts 422 and 423
at § 422.644(c)(1) and § 423.642(c)(1).
Additionally, in an effort to respond
to changes in the media and information
technology landscape, we are proposing
a slight modification to the termination
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public at § 422.510(b)(1)(iii) and
§ 423.509(b)(1)(iii) by proposing that
contracting organizations now release a
press statement to news media serving
the affected community or county and
posting the press statement prominently
on the organization’s Web site instead of
publishing the notice in applicable
newspapers.
Third, we are proposing minor
revisions to the wording of our
regulations at § 422.510 and § 423.509 to
reflect the authorizing language
contained in sections 1857(c)(2) and
1860D–12 of the Act. Specifically, we
are proposing to replace the word
‘‘fails’’ with ‘‘failed’’ in the applicable
provisions of § 422.510 and § 423.509.
In current regulations both of the terms
failed and fails are used when
describing contract violations that may
be the basis for a contract termination.
We would like for this list to read
consistently, therefore, we are proposing
to revise the language as such. The
purpose of this change is merely to
ensure that consistent language is used
throughout § 422.510 and § 423.509 and
in no way changes the meaning or
policy encompassed in these provisions.
5. Reducing the Burden of the
Compliance Program Training
Requirements (§ 422.503(b)(4)(vi)(C) and
§ 423.504(b)(4)(vi)(C))
Section 1857(a) of the Act provides
the Secretary with the authority to enter
into contracts with MA Organizations,
and section 1860D–12(b)(1) of the Act
provides the Secretary with the
authority to enter into contracts with
Part D sponsors. Sections 1860D–
12(b)(3)(D)(i) and 1857(e)(1) of the Act,
specify that these contracts shall contain
other terms and conditions that the
Secretary may find necessary and
appropriate. When we implemented the
Part C program, we determined that all
Part C contracts (and subsequently Part
D contracts) would require that the Part
C or D organization has the necessary
administrative and management
arrangements to have an effective
compliance program, as reflected in
§ 422.503(b)(4)(vi) and
§ 423.504(b)(4)(iv).
In the December 5, 2007 Federal
Register, we published the ‘‘Medicare
Program; Revisions to the Medicare
Advantage and Part D Prescription Drug
Contract Determinations, Appeals and
Intermediate Sanctions Process’’ final
rule (72 FR 68700). In that final rule, we
established that compliance plans for
sponsoring organizations must include
training and education and effective
lines of communication between the
compliance officer and the sponsoring
organization’s employees, managers,

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and directors as well as their first-tier,
downstream and related entities (FDRs).
We reiterated the importance of this
requirement in the October 22, 2009
proposed rule entitled, ‘‘Medicare
Program; Policy and Technical Changes
to the Medicare Advantage and the
Medicare Prescription Drug Benefit
Programs’’ (74 FR 53634).
In the 2009 proposed rule, entitled,
‘‘Medicare Program; Policy and
Technical Changes to the Medicare
Advantage and the Medicare
Prescription Drug Benefit Programs,’’ we
addressed concerns about the burden on
FDRs such as pharmacies, hospitals and
physicians as a result of this
requirement, given the likelihood that
many of these entities and individuals
contract with multiple contracting
organizations. We were concerned that
these FDRs would potentially have to
participate in (largely duplicative)
training for each organization with
whom they contract. We requested
public comments on how best to ensure
that the training requirement continues
to be met while not overly burdening
the contracting organization or its FDRs.
In response, we received numerous
comments suggesting that CMS develop
its own web-based trainings to lessen
this burden on sponsors and FDRs (75
FR 19678 at 19688).
In response to these requests, we have
created the CMS Standardized General
Compliance Program Training and
Education Module. Until now, we have
offered this as an optional training. In
this rule, we propose to require that all
contracting organizations accept a
certificate of completion of the CMS
training as satisfaction of this general
compliance program training
requirement. We anticipate that this
proposal will greatly reduce the burden
on various sectors of the industry,
including, but not limited to, insurance
providers, hospitals, suppliers,
pharmacists, and physicians.
Under this proposed change, Part D
sponsors and Part C organizations
would not be permitted to develop or
implement sponsor specific training or
provide supplemental training materials
to fulfill the general compliance
program training requirement; only
CMS training would suffice.
We understand that sponsors often
include sponsor specific information
(such as compliance officer’s contact
information, compliance reporting
processes and expectations, hotline
number or email address for compliance
questions, Web site information for
accessing the sponsor’s compliance
policies and procedures) in the training
materials provided to the FDRs and will
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conveying this information given that
the training vehicle will no longer be
available. To address this issue, a
sponsor may choose to include such
information in the contract held
between the sponsor and the FDR.
Alternatively, we would allow each
sponsor to develop a one page
information sheet containing this
material, to be distributed by the
sponsor to each of its FDRs. We seek
comments concerning this portion of
our proposal and suggestions on other
options we could implement to
accomplish the desired outcome.
We are proposing to modify the
regulation text by adding a new
§ 422.503(b)(vi)(C)(3) and
§ 423.504(b)(vi)(C)(4) to permit only this
CMS training for satisfaction of the
requirement to train FDRs.
6. Changes to Audit and Inspection
Authority (§ 422.503(d)(2) and
§ 423.504(d)(2))
Sections 1857(d)(2)(A) and 1860D–
12(b)(3)(C) of the Act specify that each
contract under these sections must state
that CMS has the right to audit and
inspect the facilities and records of each
organization. We are proposing three
changes to our audit and inspection
authority. First, under section 6408 of
the Affordable Care Act new authority
was provided to the Secretary that now
requires that each contract provide the
right to ‘‘timely’’: (1) Inspect or
otherwise evaluate the quality,
appropriateness, and timeliness of
services performed under the contract;
(2) inspect or otherwise evaluate the
facilities of the organization when there
is reasonable evidence of some need for
such inspection; and (3) audit and
inspect any books, contracts, and
records of the organization that pertain
to (a) the ability of the organization or
its first tier or downstream providers to
bear the risk of potential financial
losses; or (b) services performed or
determinations of amounts payable
under the contract.
Therefore, we are proposing to revise
both § 422.503(d)(2) and § 423.504(d)(2)
to reflect this change. Specifically, we
are proposing to insert the word
‘‘timely’’ at the end of both of the
introductory paragraphs for
§ 422.503(d)(2) and § 423.504(d)(2).
Second, we are proposing to add
authority that will allow CMS to require
MA organizations and Part D sponsors
to hire an independent auditor to
perform full or partial program audits to
determine compliance with CMS
requirements.
MA organizations and Part D sponsors
must adhere to CMS requirements to
properly administer Part C and Part D

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benefits. These requirements are
contained in statute, regulations and in
the Part C and Part D sponsor
agreements themselves. CMS needs
assurance that MA organizations and
Part D sponsors are substantially
adhering to Part C and/or D
requirements, and that Medicare
beneficiaries are receiving the benefits
to which they are entitled. To determine
the extent of MA organization and Part
D sponsor compliance with program
requirements, CMS uses a variety of
oversight and monitoring tools
including CMS-conducted program
audits.
CMS conducts a program audit by
examining core operational areas and
functions and determining the sponsors’
level of compliance with these Part C
and Part D program requirements. CMS
may audit any program requirement, but
in recent years we have focused on Part
C and Part D coverage decisions,
appeals, grievances, compliance
program effectiveness, and formulary
administration. CMS reviews a number
of targeted samples to evaluate MA
organizations and Part D sponsors’
processes and systems. Targeting
samples is an efficient way to highlight
deficiencies and ensure that they are
quickly and successfully remediated.
The process is primarily designed to be
educational for the MA organization
and/or Part D sponsor as it expands the
sponsor’s understanding of CMS’
expectations, and how program
requirements are to be applied. It also
identifies areas of risk or actual noncompliance so sponsors can quickly
correct the deficiency. This
understanding allows the MA
organization and/or Part D sponsor to
develop and implement a robust
internal auditing and monitoring
program to identify deficiencies before
they reach a level of substantial noncompliance in the future. An effective
monitoring program should result in
early detection of system and process
failures and should lead to problems
being fixed quickly and steps being
implemented to prevent future failures.
Organizations that are chosen for
audit fall into at least one of the five
following categories: High Star rated
plans; sponsors with a Low Performing
Icon (LPI); high risk plans (based on a
data driven risk assessment); sponsors
not audited in last 3 years, and CMS
Regional or Central Office referrals.
Annually, CMS conducts a risk
assessment to determine which highrisk organizations to audit. Many of the
program audits currently being
conducted are with organizations whose
contract performance or data indicators
demonstrate the potential risk of failing

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1927

to perform core program functions that,
if not complied with, may result in
potential beneficiary harm. These audits
are a useful tool to help identify
systemic deficiencies and failures in
meeting CMS requirements and they
help to promote compliance with those
requirements. While these types of
audits are necessary because these
organizations pose the most risk, not all
organizations are receiving the benefit of
having an independent audit of their
organization on a regular basis.
CMS is constrained in the number of
program audits we can conduct each
year, due to limited resources.
Currently, CMS has close to 300 parent
organizations that perform MA and/or
Part D functions. CMS is only able to
audit approximately 30 parent
organizations per year; or roughly 10
percent of all MA organizations and/or
Part D sponsors. CMS believes that MA
organizations and/or Part D sponsors,
their enrollees, and the Medicare
program all benefit from a regular cycle
of independent auditing. Therefore, we
are proposing to revise our regulations
to allow CMS to require MA
organizations and/or Part D sponsors to
hire an independent auditor to conduct
regularly scheduled program audits in
accordance with CMS specifications.
We currently make all of our program
audit protocols available to MA
organizations and/or Part D sponsors
through our Web site. Pursuant to the
proposed new regulatory provision,
CMS would notify the MA organization
and/or Part D sponsor that it has been
selected to perform a full or partial
program audit. The MA organization
and/or Part D sponsor would then be
required to engage an independent
auditor to perform a full or partial
program audit as directed by CMS using
the CMS published protocols,
methodologies, and methods of
evaluation. At the conclusion of the
audit, at the direction of the MA
organization and/or Part D sponsor, the
independent auditor will provide a draft
copy of its findings to CMS and the MA
organization and/or Part D sponsor.
Once the MA organization and/or Part D
sponsor has had an opportunity to rebut
any findings, the independent auditor
will provide its final report of findings
to CMS and the MA organization and/
or Part D sponsor. CMS anticipates that
additional instruction will be necessary
to interpret and implement this audit
requirement of a complete and full
independent review. Therefore, we
intend to develop and release sub
regulatory guidance to address, among
other things, language and
specifications which should be included
in the contract between the sponsoring

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organization and the independent
auditor conducting the audit. The
proposed authority will allow CMS to
better evaluate MA organizations’ and
Part D plan sponsor’s performance. With
the proposed approach, each MA
organization and/or Part D sponsor will
be required to undergo an independent
program audit at least every 3 years.
Under this proposal, more organizations
will be audited each year, which will
provide CMS with substantially more
data to evaluate program-wide
performance, improve industry
performance and protect beneficiaries
enrolled in the Medicare Advantage and
Prescription Drug Benefit programs.
This will enhance CMS’s oversight and
provide us with information that
enables us to focus our time and
resources in the areas most needed to
ensure compliance with Part C and Part
D program requirements.
CMS will continue to perform
program audits in limited scenarios,
such as when indicated by a risk
analysis; and will perform limited ‘‘look
back’’ audits to ensure the integrity of
the independent audit process proposed
here. The latter audits will focus on
reviewing the program audit findings
that we receive from the independent
auditors engaged by the Part C and Part
D organizations, to ensure that the
independent auditor conducted the
audit in accordance with CMS
specifications. We think that this
additional authority will significantly
strengthen the Medicare Parts C and D
audit and oversight program.
Therefore, we are proposing to add
language to § 422.503(d)(2) and
§ 423.504(d)(2) that will allow us to
require a MA organization or Part D
sponsor to hire an independent auditor,
working in accordance with CMS
specifications, to perform program
audits to determine compliance with
CMS requirements and provide to CMS
an attestation affirming that the audit
has been completed as required.
Third and finally, we are proposing to
revise our regulations to specifically
permit CMS to require MA
organizations or Part D sponsors with
audit results that reveal non-compliance
with CMS requirements to hire an
independent auditor to validate that
correction has occurred. We may invoke
this authority regardless of whether an
independent auditor or CMS conducted
the program audit that identified the
programmatic deficiencies.
When program audits are conducted,
non-compliance with CMS requirements
is often found. When CMS finds these
deficiencies, it notifies the MA
organization or Part D sponsor of its
non-compliance and requires correction.

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We do not close out audits until we
have validated that correction has
occurred. While we firmly believe in the
value of such validation, these efforts
are also limited by resources. In order to
assist us in making the determination
that the deficiencies found during the
audit have been corrected and are not
likely to recur, we need to have greater
flexibilities in performing validation
activities. Therefore, we are proposing
that we may require a MA organization
or Part D sponsor to hire an
independent auditor to provide us with
additional information to determine if
the deficiencies found during the course
of the audit have actually been corrected
and are not likely to recur. The
independent auditor would be hired by
the MA organization and/or Part D
sponsor and work in accordance with
our specifications in order to provide
accurate and reliable information to
CMS.
CMS often relies on self-disclosed
information from the MA organization
or Part D sponsor, CMS and plan data;
in the alternative, we must attempt to
engage in a process to independently
verify that deficiencies have been
corrected. Given the nature and extent
of some compliance deficiencies and the
level of skill and experience required to
conduct an exhaustive verification of
correction, we have concluded that an
independent auditor hired by the MA
organization or Part D sponsor would be
beneficial for both the organization and
CMS.
This proposal is also consistent with
our regulatory authority at 42 CFR
422.756 and 423.756 which permits us
to require a sanctioned organization to
hire an independent auditor to help us
determine if a sanction should be lifted.
Program experience has demonstrated
other situations when the expertise of
an independent auditor would be
helpful in determining correction. For
example, an independent auditor who
specializes in complex information
technology systems and who has
specialized knowledge of how those
systems interact with each other, in
order to be compliant with our
requirements, may be helpful in
ensuring timely and successful
correction of complex claims processing
deficiencies. This is one example of a
situation where we may require the MA
organization or Part D sponsor to hire an
independent auditor in order to assist in
making the determination that the
deficiencies found during the program
audit have been corrected.
Therefore, we are proposing to add
language to § 422.503(d)(2) and
§ 423.504(d)(2) that will allow us to
require that a sponsoring organization

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hire an independent auditor, working in
accordance with CMS specifications, to
provide us with additional information
to determine if the deficiencies that
were found during a program audit have
been corrected.
7. Procedures for Imposing Intermediate
Sanctions and Civil Money Penalties
Under Parts C and D (§ 422.756 and
§ 423.756)
Sections 1857(g) and 1860D–
12(b)(3)(E) of the Act provide the
Secretary the ability to impose
intermediate sanctions on MA
organizations and PDP sponsors.
Intermediate sanctions consist of
suspension of enrollment, suspension of
marketing and suspension of payment.
Current regulations governing
intermediate sanctions are contained in
subparts O of part 422 and part 423.
Sections 422.756 and 423.756 provide
specific procedures for imposing
intermediate sanctions, and include
provisions which address the duration
of the sanction and the standard that we
apply when determining if a sanction
should be lifted. As specified in the Act
and regulations, when intermediate
sanctions are imposed on sponsoring
organizations, the sanctions remain in
place until we are satisfied that the basis
for the sanction determination has been
corrected and is not likely to recur.
Because sanctions remain in place
until the deficiencies have been
corrected and we are assured that they
are not likely to recur, we are unable to
fully test the contracting organization’s
compliance with certain requirements
until the sanction is lifted. Therefore, in
the October 2009 proposed rule, entitled
‘‘Medicare Program; Policy and
Technical Changes to the Medicare
Advantage and the Medicare
Prescription Drug Benefit Programs’’ (74
FR 54634), we proposed a rule, later
finalized in the April 15, 2010
‘‘Medicare Program; Policy and
Technical Changes to the Medicare
Advantage and the Medicare
Prescription Drug Benefit Programs’’ (75
FR 19678), that allows us to require a
plan under a marketing and/or
enrollment sanction to engage in a test
period of marketing or accepting
enrollments or both for a limited period
of time. As we explained in that
proposed rule, the purpose of the test
period is to assist us in making a
determination as to whether the
deficiencies that are the bases for the
intermediate sanctions have been
corrected and are not likely to recur.
The test period provides us with the
opportunity to observe a sanctioned
plan’s ability to enroll or market to
Medicare beneficiaries prior to lifting

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the sanction. Since finalizing that rule
in April 2010 (75 FR 19678), we have
further considered its utility as a result
of compliance issues that we have
encountered over the past 2 years. We
are proposing two modifications to this
existing rule. First, we are proposing to
expand the potential applicability of the
test period requirement to all types of
all intermediate sanctions. The existing
regulation would only allow CMS to
require this test period in instances
where CMS has imposed a marketing
and/or enrollment sanction. However,
the type of intermediate sanction
imposed is not necessarily related to the
particular violations that form the basis
for the sanction. Therefore, we are
proposing to modify the existing rule to
clarify that CMS may require a test
period for a sponsoring organization
that has had any of the three types of
intermediate sanctions imposed:
marketing, enrollment and/or payment.
We also want to clarify that our ability
to require this test period is not limited
to sanctions stemming from marketing
or enrollment violations. In the
preamble language for the October 2009
proposed rule, (74 FR 54634), we stated
that ‘‘[t]he basis for this proposal is that
we have found that there is often not a
satisfactory way to determine if
marketing and/or enrollment problems
have been corrected while a sanction is
in place and no such activities are
permitted.’’ Upon reflection, we are
concerned that this statement may have
given the impression that the test period
would only be used in instances where
the underlying bases for the sanction are
marketing and/or enrollment
deficiencies. Therefore, we are
clarifying here that the purpose of the
test period is to assist us in making a
determination as to whether the
deficiencies that are the bases for the
intermediate sanction have been
corrected and are not likely to recur.
The aforementioned deficiencies may be
in any operational area, and are not
limited or restricted to enrollment and/
or marketing deficiencies.
Second, we are proposing to clarify
the enrollment parameters for Part D
contracting organizations that are under
the benchmark and would normally
participate in the annual and monthly
auto enrollment process for
beneficiaries who receive a low income
subsidy (LIS) during a test period.
During a test period, sanctioned Part D
plans may not be allowed to receive or
process these types of enrollments.
LIS beneficiaries are a vulnerable
population who are particularly
sensitive to financial instability. It is
critical that Part D sponsors correctly
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goal when enrolling this particular
population is to ensure that these
vulnerable beneficiaries are best able to
access their drugs and services in the
manner to which they are entitled under
the Part D program. We believe that if
we allow auto-enrollments into a plan
that has recently demonstrated
substantial non-compliance with our
regulations as evidenced by the
imposition of an intermediate sanction,
these vulnerable beneficiaries may
experience difficulties in accessing
prescription drugs. Therefore, we are
proposing to make clear that we may
determine that a sanctioned plan is not
available to receive automatically
assigned beneficiaries for the entire
duration or a portion of the testing
period.
We are proposing to modify the
regulation text at § 422.756 and
§ 423.756 to reflect these changes.
8. Timely Access to Mail Order Services
(§ 423.120)
Section 1860D 12(b)(3) of the Act
authorizes the Secretary to include
contract terms for Part D sponsors, not
inconsistent with the Part C and D
statutes, as necessary and appropriate.
Section 423.120(a)(3) specifies that a
Part D sponsor’s contracted network
may include non-retail pharmacies,
including mail order pharmacies, so
long as the network access requirements
are met. Part D plans are increasingly
entering into contracts with mail order
pharmacies to offer beneficiaries an
alternative way to fill prescriptions
under the Part D benefit, often at much
lower cost sharing than is available at
network retail pharmacies. While mail
order pharmacies make up a relatively
small percentage of total prescriptions
filled under the Part D program, we are
committed to ensuring consistent and
reliable beneficiary access to
medications, regardless of what type of
pharmacy fills the prescriptions.
Section 1860D–4 of the Act describes
the various beneficiary protections in
place in the Part D program. It is the
industry standard in retail and
institutional pharmacies to fill almost
all prescriptions on the same day the
prescription is presented. We have
established a 24 hour fulfillment
standard for home infusion drugs
covered under Part D
(§ 423.120(a)(4)(iv)). For mail order
pharmacies, the industry standard for
delivery times appears to range from 7
to 10 business days from the date the
prescription was received, and Part D
sponsors’ marketing materials often
specify this time frame to beneficiaries.
Beneficiaries generally choose to fill
prescriptions through a mail order

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1929

pharmacy, for lower cost sharing, when
it is feasible to wait 7 to 10 days to
receive their medications. However, if
this time frame is disrupted,
beneficiaries may experience gaps in
therapy.
We are aware of a specific instance in
which significant incentives (for
example, zero cost sharing) caused
increased demand for mail order
prescriptions sufficient to disrupt the
delivery time frame, and we are
concerned about the adverse effect such
incentives might have on beneficiaries.
When issues with filling a prescription
arise in a retail setting, the beneficiary
often is notified of the problem in real
time, or within hours of discovery.
When issues arise in a mail order
setting, the delays in finding,
communicating, and making the
appropriate contacts to resolve the
problem may add days onto the ultimate
delivery date, resulting in a potentially
more significant concern for mail order
beneficiaries if these delays result in
gaps in therapy. For this reason, we
believe it is necessary and appropriate
to establish fulfillment requirements for
mail order pharmacies as well as home
delivery services offered by retail
pharmacies, to set consistent
expectations for beneficiary access to
drugs in this growing segment. Many
beneficiaries may be very well served by
this type of pharmacy access, but only
if they can rely upon efficient
processing and turnaround times. Mail
order pharmacies contracted by Part D
sponsors can reasonably be expected to
meet minimum performance standards
for order fulfillment, including
convenient order turnaround times, as a
beneficiary protection and as a
component of providing good customer
service. Clearly stating in beneficiary
materials the expected turnaround time
for delivery allows the beneficiary to
better control when they need to reorder
to ensure no gaps in medication supply.
Clarity in expected turnaround times
also can prevent needing to address
customer inquiries into the status of a
pending order, setting parameters for
when an order is or is not delayed and
what options become available at that
point. We believe that established
companies that have been providing
these services for years have generally
been meeting these standards in practice
already, and that the proposed
turnaround times are in line with
current practices followed by mail order
pharmacies today. Establishing mail
order fulfillment requirements as a
contract term would require plan
sponsors to require that all pharmacies
in its network meet the same minimum

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level of service. This would underscore
the importance of consistent and
reliable access to medications,
protecting beneficiaries from
inconsistent or unreliable practices that
may otherwise jeopardize timely access
to prescriptions.
Therefore, we are proposing to amend
§ 423.120(a)(3) to specify mail order
fulfillment requirements in line with
what we have observed in other
markets: 5 business days (from when the
pharmacy receives the prescription
order to when it is shipped) for those
prescriptions requiring intervention
beyond filling (such as clarifying
illegible orders, resolving third party
rejections, and coordinating with
multiple providers as part of drug
utilization management); and 3 business
days (from when the pharmacy receives
the prescription order to when it is
shipped) for those prescriptions not
requiring intervention. We recognize
that some prescription orders may
require clarification or additional steps
to be taken by the provider or
beneficiary that will extend beyond the
proposed period of 5 days. We believe
that such cases represent a minority of
mail order prescriptions, and as such we
would anticipate that more than 99
percent of all mail order prescriptions
processed are filled in compliance with
either the 3- or 5-day standard. We
believe our proposed standards are in
alignment with fulfillment requirements
already in place in the market and as
such do not create a new burden or new
standard for mail order pharmacies to
meet. We are soliciting comments not
only on the proposed time frames, but
also on whether there are instances (in
addition to those discussed previously)
in which the proposed 5-day time frame
should apply.
We additionally are soliciting
comments on whether we should
establish additional requirements for
beneficiary materials relating to mail
order services, such as: clear definitions
of processing time and delivery time;
how to access customer support; how to
submit a complaint via 1 800
MEDICARE; and beneficiary options for
accessing medications when a delivery
is lost or delayed.
We also welcome comments on any
other requirements we should consider
for mail order or other home delivery
options. For example, also potentially
affecting consistent access to medication
is the use of mail order to fill initial
prescriptions of new drugs or to fill 30day supplies of chronically used
medications. The need to order a refill
early, allowing sufficient time for
processing and delivery, can result in
refill too soon edits based upon retail 30

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day standards. Resolving inappropriate
or inapplicable edits increases burden
on the beneficiary and the mail order
pharmacy and essentially creates a
disincentive for beneficiaries who are
planning ahead and attempting to order
early enough to ensure un-interrupted
supplies of chronic medications. In
general, we believe that filling initial
prescriptions or routine 30-day supplies
at mail order is not good practice. We
recognize that there may be a small
minority of beneficiaries who
successfully depend solely upon mail
order or other home delivery options for
access to prescription drugs due to
particular circumstances of geography
or mobility. We have no reason to
discourage their continued use of these
services. However, due to the
difficulties reported to CMS with
consistently and effectively filling short
time frame supplies through mail order,
we do not believe that Medicare
beneficiaries in general should be
incentivized through lower cost sharing
to utilize mail order pharmacies for
initial prescriptions or 30-day supplies.
9. Collections of Premiums and Cost
Sharing (§ 423.294)
Since the beginning of the Part D
program, when asked whether Part D
sponsors could waive premiums and
cost sharing we have responded that
reducing or waiving either of these
amounts would be inconsistent with the
approved bid. The bid requirements,
specified in section 1860D–11(e)(2)((C)
of the Act, state the bid must reasonably
and equitably reflect the revenue
requirements of the expected population
for the benefits provided under the plan.
Waiving or reducing the cost sharing
and/or premiums that are reflected in
the approved bid would indicate that
the plan bid was overstated and the
amounts were not necessary for the
provision of coverage. However,
recently we have received reports of
sponsors reducing or waiving costsharing and/or premiums. As a result,
we propose to codify requirements for
sponsor collection of cost sharing and
premiums in regulation.
In addition to violating the bid
requirements, as we noted in the
preamble of the October 22, 2009
proposed rule entitled, ‘‘Medicare
Program; Policy and Technical Changes
to the Medicare Advantage and the
Medicare Prescription Drug Benefit
Programs’’ (74 FR 54690), waiving cost
sharing or premiums also violates the
uniform benefit requirements because
doing so results in the plan’s not
providing the same coverage to all
eligible beneficiaries within its service
area. Section 1860D–2(a) of the Act

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defines qualified prescription drug
coverage to mean access to standard or
actuarially equivalent prescription drug
coverage and access to negotiated prices
(in accordance with section 1860D–2(d)
of the Act). Thus, a Part D sponsor must
offer its plan to all eligible beneficiaries
residing in the plan’s service area. We
further interpret section 1860D–2(a) of
the Act as requiring the provision of
uniform premium and benefits and have
codified these requirements in our
regulations at § 423.104(b).
Once CMS has approved a sponsor’s
Part D benefit package, it cannot be
varied for some or all of the plan’s Part
D enrollees. Thus, sponsors must
commit to providing the level of
benefits described in the sponsor’s
benefit package and cannot waive or
reduce cost sharing, as that would
violate the uniform benefit provisions
set forth in § 423.104(b). This is true
regardless of whether the Part D sponsor
waives the copayment directly or
indirectly through an affiliate, and
regardless of whether such a waiver is
prohibited by other laws. Some Part D
sponsors are related to pharmacies
through common ownership or control,
and we note that an exception to the
anti-kickback statute, set forth in section
1128B(b)(3)(G) of the Act, permits a
pharmacy to waive cost sharing (that is,
coinsurance and deductibles) imposed
under Part D, if the conditions described
in clauses (i) through (iii) of section
1128A(i)(6)(A) of the Act are met. These
conditions include that the waiver is not
advertised (through media outlets,
telemarketing or otherwise) and is not
routine, and the cost sharing is waived
after a good faith determination that the
individual is in financial need 1 or
reasonable efforts to collect the cost
sharing have failed. This exception may
protect from sanctions under the antikickback statute the waiver of cost
sharing by pharmacies owned by Part D
sponsors. However, as noted in the
proposed rule, entitled ‘‘Medicare
Program; Policy and Technical Changes
to the Medicare Advantage and the
Medicare Prescription Drug Benefit
Programs’’ (74 FR 54690), sponsor
failure to collect or attempt to collect
cost sharing at the time the service is
provided or to bill cost sharing to the
appropriate party (either a beneficiary or
another payer) after the fact, is a
violation of the uniform benefit
provisions set forth in the current
regulation at § 423.104(b). The fact that
cost sharing is waived by a pharmacy
1 Under section 1128B(b)(3)(G) of the Act, an
individual determination of financial need is not
required for Part D beneficiaries eligible for the lowincome subsidy under section 1860D–14 of the Act.

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Federal Register / Vol. 79, No. 7 / Friday, January 10, 2014 / Proposed Rules
that is related to a Part D sponsor by
common ownership, rather than the Part
D sponsor itself, and that it may be
protected from sanctions under the antikickback statute, does not relieve the
Part D sponsor of responsibility for this
violation of the uniform benefit
provisions. If a pharmacy is unrelated to
a Part D sponsor and waives cost
sharing under the conditions previously
described, the pharmacy is making an
independent business decision to which
the Part D sponsor is indifferent.
However, if an affiliated pharmacy
waives cost sharing for a beneficiary
enrolled in the sponsor’s Part D plan,
the sponsor is not indifferent because
the cost-sharing waiver is more likely to
be a strategic decision by the sponsoring
organization to move market share to
the related-party pharmacy and increase
profits to the sponsor. Thus, the sponsor
is altering the level of cost sharing in the
approved bid in violation of the uniform
benefit provisions in § 423.104(b). To
clarify this for all parties, we propose to
codify the prohibition of the waiver or
reduction of premiums and cost sharing
by adding a new section at § 423.294.
We propose to specify that Part D
sponsors either directly, or indirectly
through related party pharmacies, as
defined in regulation at § 423.501, are
prohibited from reducing or waiving
collection of premiums and cost
sharing. In contrast, a pharmacy
affiliated with one Part D sponsor may
waive Part D cost sharing for
beneficiaries enrolled Part D plans
offered by other sponsors without
violating the uniform benefit provisions.
Additionally, we have become aware
that the regulations in Part 423 do not
address Part D sponsor requirements for
refunding incorrect collections of
premiums and cost sharing or for
retroactively collecting underpayments
of cost sharing. Therefore, we also
propose to codify requirements at
§ 423.294 that mirror the language at
§ 422.270. We propose to apply the
timeframe in § 423.466(a) to these
refunds and recoveries. In other words,
whenever a sponsor receives
information that necessitates a
retroactive refund of incorrect
collections of premiums and/or cost
sharing or collection of underpayments
of cost sharing, the sponsor would be
required to issue refunds or recovery
notices within 45 days. For incorrect
collections, we propose to duplicate the
language at § 422.270 with one
exception. That is, in the absence of
authority to do so, we are not proposing
to reduce Part D sponsor premiums for
failure to refund amounts incorrectly
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we propose that sponsors that fail to
meet these requirements may receive
compliance notices from CMS or,
depending on the significance of the
non-compliance, be the subject of an
intermediate sanction (for example,
suspension of marketing and enrollment
activities) pursuant to Part 423,
Subpart O.
10. Enrollment Eligibility for
Individuals Not Lawfully Present in the
United States (§ 417.2, § 417.420,
§ 417.422, § 417.460, § 422.1, § 422.50,
§ 422.74, § 423.1, § 423.30, and § 423.44)
a. Basic Enrollment Requirements
Sections 226 and 226A of the Act
establish the conditions for Medicare
Part A entitlement for individuals who
have attained age 65, are disabled or
have end-stage renal disease (ESRD),
and are entitled to monthly Social
Security benefits under section 202 of
the Act. Individuals entitled to Part A
under these sections do not have to pay
premiums for such coverage, and they
may, but are not required to, enroll in
Medicare Part B. Section 1818 of the Act
establishes the conditions for Medicare
enrollment for individuals who are not
entitled to monthly Social Security
benefits under section 202 of the Act.
Individuals covered under section 1818
of the Act must meet citizenship or
alien status requirements, in addition to
other requirements, in order to enroll in
Part B. Individuals must have Part B in
order to purchase Part A hospital
insurance.
Sections 1851(a)(3)(B), 1860D–
1(a)(3)(A), and 1876(a)(1)(A) of the Act
outline the eligibility requirements to
enroll in MA (Part C), Medicare
prescription drug coverage (Part D), and
Medicare cost plans. Under all options,
individuals must have active Medicare
coverage. Specifically, to enroll in MA,
an individual must be entitled to
benefits under Part A and be enrolled in
Part B; to enroll in Part D, an individual
must be entitled to Part A and/or
enrolled in Part B; to enroll in a
Medicare cost plan, an individual must
be enrolled in Part B (Part A entitlement
is not required).
b. Medicare Eligibility and Lawful
Presence
Section 401 of the Personal
Responsibility and Work Opportunity
Reconciliation Act of 1996 (PRWORA),
amended by section 5561 of the BBA,
mandates that qualified aliens not
lawfully present in the United States are
not eligible to receive any federal
benefit. This is outlined in 8 U.S.C.
1611 (Aliens who are not qualified
aliens ineligible for federal public

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1931

benefits) and 8 U.S.C. 1641
(Definitions). The definition of qualified
alien is codified in 8 CFR 1.3 (Lawfully
present aliens for purposes of applying
for Social Security benefits).
The aforementioned provisions affect
eligibility to receive benefits that would
otherwise be payable under provisions
in the Act. For example, aliens meeting
certain criteria are able to earn qualified
credits towards Social Security
retirement benefits as outlined in 8
U.S.C. 1631 (Federal attribution of
sponsor’s income and resources to alien)
and 8 U.S.C. 1645 (Qualifying quarters).
Such individuals may earn the total
number of qualified credits to be eligible
under the Act to receive retirement
benefits under sections 226 and 226A of
the Act. However, should such
individuals be unlawfully present in the
United States under the previously
mentioned PRWORA provisions, they
are not eligible to receive the Social
Security benefits they have earned for as
long as they remain unlawfully present.
At such time as they are lawfully
present in the United States, or live
outside the United States, they would
again become eligible to receive Social
Security payments.
Similarly, when aliens become
eligible for Medicare based on age or
disability under the terms of the Act,
they would also automatically be
entitled to premium free Part A benefits
and be eligible to enroll in Part B during
a valid enrollment period. Furthermore,
aliens receiving Social Security
retirement benefits 4 months prior to
turning 65, or are in their 21st month of
receiving Social Security disability
benefits, would, under the terms of the
Act, also automatically be enrolled into
both Part A and Part B consistent with
section 1837 of the Act and the
enrollment process outlined in § 407.17.
Again, however, under PRWORA, these
individuals are not eligible to receive
payment of Medicare benefits for so
long as they are unlawfully present in
the United States. Only upon becoming
lawfully present would they become
eligible to receive the Medicare benefits
to which they would otherwise be
entitled by paying into Social Security
for the requisite number of quarters or
paying premiums.
We note that current regulations at
§ 406.28 and § 407.27 outline the
reasons for loss of premium Part A and
Part B enrollment, and do not include
the absence of lawful presence or
citizenship as a reason for loss of
entitlement. Individuals who are
entitled to Part A and enrolled in Part
B based on eligibility of Social Security
benefits currently may be enrolled in

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Medicare even if they are not lawfully
present in the United States.
When PRWORA was enacted, the Act
was not amended to include the
additional eligibility criteria for
entitlement to either Social Security
benefits or for Medicare Part A
entitlement, nor were new provisions
put into place regarding termination of
entitlement or establishment of a special
enrollment period to account for
situations in which individuals
reestablished lawful presence. As a
result, individuals who meet the current
statutory eligibility criteria have been
reflected in CMS records as entitled to
both Social Security benefits and
Medicare coverage.
c. Alignment of MA, Part D, and Cost
Plan Eligibility With Fee-For-Service
(FFS) Payment Exclusion Policy
In order to implement 8 U.S.C. 1611
and ensure that individuals who are
present in the United States unlawfully
do not receive benefits, the Social
Security Administration (SSA)
established internal policies and
procedures to suspend Social Security
benefits during periods for which
individuals are unlawfully present in
the United States. Because Medicare
entitlement flows from entitlement to
Social Security retirement and disability
benefits, Medicare also has
implemented this provision through a
payment exclusion process.
Under Medicare’s payment exclusion
process, data on lawful presence is
transmitted to CMS from the
Department of Homeland Security via
regular data exchanges from SSA. Once
the data is received by us, the lawful
presence status is noted on an
individual’s record and is retained in
the FFS claims processing systems. As
a result, we deny payment of both Part
A and Part B claims for non-citizens
where lawful presence is not established
on their record, and do so until
individuals regain their lawful presence
status. Although payment is being
denied for claims, individuals who are
‘‘fully insured’’ per section 226 of the
Act, maintain Part A entitlement and
remain enrolled in Part B on CMS
records as long as premiums are paid.
Similarly, individuals who are enrolled
in premium Part A and/or Part B,
maintain their enrollment status as long
as premiums are paid.
Although CMS implementation of the
lawful presence criteria in the FFS
program achieved the intent of
PRWORA by preventing FFS payments
for services rendered to individuals who
are not lawfully present, this policy was
not adopted in regulations for Part A
and Part B eligibility in 42 CFR parts

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406 and 407 or addressed in regulations
or subregulatory guidance for MA, Part
D, and Medicare cost plans. Thus,
individuals who are not lawfully
present, but are nevertheless shown on
CMS records to be entitled to Medicare
Part A and/or enrolled in Part B, have
been able to enroll in MA, Part D, and
Medicare cost plans and obtain
Medicare coverage for which they
should not be eligible under 8 U.S.C.
1611. By permitting these MA, Part D
and cost plan enrollments to remain in
place, we are allowing improper
payments to be made to plans on behalf
of these individuals, which in turn
impacts the Medicare Trust Funds. In
addition, MA organizations, PDP
sponsors and cost plans are making
benefit payments under the Medicare
program on behalf of these enrollees
that are similarly prohibited under
PRWORA.
Therefore, we are proposing to align
eligibility for enrollment in MA, Part D,
and cost plans (and resulting Medicare
payments to plans and by plans that
violate PRWORA) with the FFS
payment exclusion policy to ensure that
Medicare is only paying for services
rendered to individuals who are eligible
to receive them. These steps are
consistent with recommendations made
by the Office of Inspector General in its
January 2013 report (A–07–12–01116)
regarding the need for CMS to maintain
adequate controls to prevent and detect
improper payments for Medicare
services rendered to unlawfully present
beneficiaries. Accordingly, we are
proposing to revise the regulations to
establish U.S. citizenship and lawful
presence as eligibility requirements for
enrollment in MA, Part D, and cost
plans. Further, we propose that
individuals who are not lawfully
present in the United States would be
involuntarily disenrolled from MA, Part
D, and cost plans, based on the date on
which they lose their lawful presence
status. Disenrollments would be
effective the first of the month following
the loss of eligibility, and the
disenrollment process would follow that
currently set forth in the regulations
when an individual is no longer eligible
to be enrolled in a plan.
These regulatory changes would
prevent an individual from enrolling in
a plan and/or remaining enrolled in a
plan if they are not lawfully present in
the United States. Affected individuals
will retain their Medicare entitlement
and remain enrolled in FFS, as long as
premiums continue to be paid, but MA,
Part D and cost plan payments would be
denied for time periods during which
the individuals are not lawfully present
in the United States. We must ensure

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that in administering the Medicare
program, all programs are compliant
with 8 U.S.C. 161l. Specifically, we are
proposing the following to address the
eligibility and disenrollment of
individuals not lawfully present in the
United States:
• Sections 417.420, 417.422, 422.50,
and 423.30 would be amended to add
lawful presence or United States
citizenship as eligibility criteria for
enrollment in a cost, MA, or Part D plan,
respectively.
• Sections 417.460, 422.74, and
423.44 would be amended to require the
involuntarily disenrollment of
individuals from cost, MA or Part D
plans when they lose lawful presence
status.
Conforming changes would be made
to § 417.2, § 422.1, and § 423.1 to outline
the authority for the aforementioned
requirements, in 8 U.S.C. 1611 (Aliens
who are not qualified aliens ineligible
for Federal public benefits).
11. Part D Notice of Changes
(§ 423.128(g))
Section 1860D 4(a) of the Act requires
Part D sponsors to disclose to
beneficiaries information about their
Part D drug plans in standardized form.
The Act further directs Part D sponsors
to include, as appropriate, information
that MA organizations must disclose
under section 1852(c)(1) of the Act,
which includes a detailed description of
benefits. (In guidance, we refer to the
document containing this information
and delivered to beneficiaries as the
Evidence of Coverage (EOC).) To make
informed decisions, enrollees need to
understand how their benefits,
including premiums and cost sharing,
would change from one year to the next,
should they reenroll in the same plan.
(In guidance, we refer to the documents
containing this information and
delivered to beneficiaries as the Annual
Notice of Change (ANOC).) And
enrollees also need to be aware of
changes that may take place during the
course of the year as well. Part D
regulations currently do not include
language found in the Part C regulations
at § 422.111(d) requiring notice of
changes to the plan to be provided to
CMS for review pursuant to procedures
for marketing material review and to all
enrollees at least 15 days prior to the
annual coordinated election period.
Given that guidance applicable to both
programs discusses notice of changes,
we propose to require, for Part D,
delivery of an ANOC.
Specifically, we propose to adopt in
Part D, with modifications, the language
contained in § 422.111(d). As is the case
with the Medicare Advantage

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regulation, proposed § 423.128(g) would
require that Part D sponsors submit their
changes to us under the procedures
contained in subpart V of part 423, and,
for those changes taking effect on
January 1, provide a notice of changes
to all enrollees 15 days before the
beginning of the annual election period.
While part 422 requires a minimum of
30 days’ notice before the effective date
for all other changes, proposed
§ 423.128 would not impose that
standard, but rather would state that
Part D sponsors remain subject to all
other notice requirements specified
elsewhere in the Part D regulations. Our
proposal reflects a programmatic
difference between Parts C and D: Under
Part D it is not unusual for access to
drugs listed on a plan’s formulary to
change during the course of a year.
Changes can include changes to
formulary status, tier placement, and
utilization management or other
restrictions. It is vital that beneficiaries
currently taking a drug receive timely
notice before such changes take place in
order that they can decide whether to,
for instance, change drugs or request an
exception to cover the drug.
Accordingly, our regulations currently
specify when sponsors must provide
notice of these kinds of changes. Our
proposal to require the delivery of an
ANOC is not intended to disrupt or
change those existing notice
requirements.
We would also like to take this
opportunity to comment on the
particular importance for Part D
sponsors to provide notice in the ANOC
of any changes they are making that will
affect the amount of cost sharing which
enrollees must pay for each drug
belonging to a specific tier. As has been
articulated in guidance, we continue to
expect that sponsors will provide notice
of such changes to all enrollees,
including enrollees moved to a
consolidated plan. Generally, sponsors
compare numbers for the same plan
from one year to the next in the ANOC.
However, comparing numbers for the
same plan would not benefit individuals
moved from one plan to another. For
instance, when a sponsor crosswalks
members from a non-renewing plan to a
consolidated renewal plan from one
year to the next, cost sharing may
change at the drug-tier level. For
example, an enrollee who previously
had zero cost sharing for all covered
Part D drugs within the preferred
generic tier may find that the
consolidated plan now requires copays
for drugs in that tier depending on how
many months’ supplies he or she orders,
and whether he or she obtains those

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drugs at a retail level pharmacy or
through mail order. We continue to
expect that enrollees will receive
ANOCs that clearly compare the nonrenewed and consolidated plans’
copayments or coinsurance for all drugs
within each tier.
12. Separating the Evidence of Coverage
(EOC) From the Annual Notice of
Change (ANOC) (§ 422.111(a)(3) and
§ 423.128(a)(3))
As provided in sections 1852(c)(1)
and 1860D–4(a) of the Act, MA
organizations and Part D sponsors must
disclose detailed information about the
plans they offer to their enrollees. This
detailed information is specified in
section 1852(c)(1) of the Act and
§ 422.111(b) and § 423.128(b) of the Part
C and Part D program regulations,
respectively.
Under § 422.111(a)(3), we require MA
plans to disclose a detailed plan
description to each enrollee ‘‘at the time
of enrollment and at least annually
thereafter, 15 days before the annual
coordinated election period.’’ A similar
rule for Part D sponsors is found at
§ 423.128(a)(3). The content of the
annual plan description is provided in
paragraph (b) of the respective
regulations. This is commonly referred
to as the EOC. In addition, under
§ 422.111(d), we require MA
organizations to notify all enrollees ‘‘at
least 15 days before the beginning of the
Annual Coordinated Election Period’’ of
any changes that will take effect on
January 1 of the next plan year. This
notification is commonly referred to as
the ANOC. Although our Part D
guidance calls for Part D sponsors to
provide an ANOC, there currently is not
a regulatory requirement that they do so.
Therefore, in the previous section of this
proposed rule, we have proposed to
codify such a requirement.
Prior to the 2009 contract year, these
regulations required the provision of the
EOC at the time of enrollment and at
least annually thereafter but did not
specify a deadline for the annual
provision of the EOC. We permitted MA
organizations and Part D sponsors to
provide the EOC as late as January 31
of the applicable contract year.
Therefore, prior to the annual
coordinated election period (AEP) for
the 2009 contract year, MA
organizations and Part D sponsors may
have provided the EOC and ANOC at
different times. In the final rule entitled,
‘‘Medicare Program, Medicare
Advantage and Prescription Drug
Programs; Final Marketing Provisions’’
(73 FR 54220 and 54222), we required
MA organizations to send the EOC at the
same time as the ANOC (that is, 15 days

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1933

before the AEP), with the result that the
EOC was sent about 4 months earlier.
Our rationale for this requirement was
to provide beneficiaries with
comprehensive information prior to the
AEP. In addition, the consolidated
mailing reduced the number of mailings
to enrollees and eliminated duplicative
information. However, we have found
through consumer testing that
beneficiaries receive multiple
documents from their plans and CMS
during the AEP that address similar
topics, which at times beneficiaries find
confusing or overwhelming. The ANOC,
which is much shorter than the EOC, is
intended to convey all of the
information essential to a beneficiary’s
decision to remain enrolled in the plan
or choose another plan during the AEP.
Research based on the consumer testing
suggests that participants were more
likely to review the ANOC if it was not
included with the EOC. For example,
when asked about the utility of each
document, many participants stated that
they would read the ANOC as soon as
they received it, and use it more often
than a combined ANOC/EOC because
the combined document is too much to
worry about, too wordy, and/or too
difficult to find information in
compared to just the ANOC.
We have also found that sending the
EOC months earlier has led to some
unintended consequences. Specifically,
the earlier deadline shortens the
production time and affects the MA
organization’s or Part D sponsor’s ability
to produce an EOC that provides
accurate benefit information in
accordance with CMS required
timeframes, which results in plans
sending and beneficiaries receiving
additional mailings containing errata
sheets. We have reviewed plan ANOC/
EOC documents for errors and found
that, of the total number errors found,
EOCs contain significantly more errors
(86 percent) than the ANOCs (14
percent), which leads us to believe that
allowing plans to have additional time
to prepare EOCs would allow them to
produce EOCs with fewer errors.
Additionally, resources are wasted
when beneficiaries are sent a combined
ANOC and EOC, but ultimately decide
to enroll in a different plan, and have no
need for the EOC.
In order to help current members
make timely and informed decisions
about plan choices for the next year
while ensuring that they continue to
receive all the post-enrollment
information necessary in a timely
manner, we believe it would be more
effective for them to receive an ANOC
before the AEP, and then receive the
EOC from the plan he or she chooses for

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the next year after enrollment is
effective. Therefore, we propose to
require MA organizations and Part D
sponsors to ensure that their current
members receive the ANOC 15 days
prior to the AEP, and receive the EOC
no later than December 31st, for the
contract year taking effect the following
January 1st. To accomplish this, we
propose to amend § 422.111(a)(3) and
§ 423.128(c)(3) to remove the current
deadline and insert ‘‘by December 31 for
the following contract year.’’ The
deadline established by § 422.111(d)(2)
for provision of the ANOC would
continue to be 15 days prior to the
beginning of the AEP. In addition, as
mentioned previously, we are proposing
to amend § 423.128 to require Part D
sponsors to provide a separate ANOC
and to adjust the time frames for
delivery accordingly.
13. Agent/Broker Compensation
Requirements (§ 422.2274 and
§ 423.2274)
Section 103(b)(1)(B) of MIPPA revised
the Act to charge the Secretary with
establishing guidelines to ’’ensure that
the use of compensation creates
incentives for agents and brokers to
enroll individuals in the MA plan that
is intended to best meet their health
care needs.’’ Section 103(b)(2) of MIPPA
revised the Act to apply these same
guidelines to Part D sponsors. Our
program experience indicates that some
agents may encourage beneficiaries to
enroll in plans that offer higher
commissions without regard to whether
plan benefits meet the beneficiaries’
health needs. In recognition that agents
and brokers play a significant role in
providing guidance and advice to
beneficiaries and are in a unique
position to influence beneficiary choice,
we had proposed, prior to the enactment
of MIPPA, a rule to regulate agent and
broker compensation. To implement the
MIPAA provisions and relying in part
on comments in response to our
previously proposed rule, we adopted
an interim final rule on September 18,
2008, entitled ‘‘Medicare Program;
Medicare Advantage and Prescription
Drug Benefit Programs: Final Marketing
Provisions’’ (73 FR 54208, at 54226),
which, among other things, established
the current compensation structure for
agents and brokers in connection with
Parts C and D. That rule remains
significantly in place at § 422.2274 and
§ 423.2274, and our experience since
then indicates that revision of the
compensation requirements is
appropriate to ensure that we continue
to meet our statutory mandate.
The current compensation structure is
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cycle that began in contract year 2009.
MA organizations and Part D sponsors
were to provide an initial compensation
payment to independent agents for new
enrollees (year 1) and pay a renewal rate
(equal to 50 percent of the initial year
compensation) to independent agents
for years 2 through 6. These rates were
to be adjusted annually based on
changes to the MA payment rates or Part
D parameters as established by CMS. We
later amended the regulations to allow
MA organizations and Part D sponsors
to compensate independent agents and
brokers annually using an amount at or
below the fair market value. (See the
final rule with comment period entitled,
‘‘Medicare Program; Changes to the
Medicare Advantage and the Medicare
Prescription Drug Benefit Programs for
Contract Year 2013 and Other Changes’’
(77 FR 22072) published in the April 12,
2012 Federal Register.)
The 6-year cycle is scheduled to end
at the end of CY 2013, on December 31,
2013. The first year, 2009, was
considered to be the first renewal year,
effectively making 2009 the second full
year of compensation. Because our
regulations were silent regarding
compensation amounts for Year 7 and
beyond, we stated in our Final Call
Letter for Contract Year 2014, issued on
April 1, 2013, that MA organizations
and Part D sponsors could, at their
discretion, pay agents and brokers the
renewal amount for Year 7 and beyond.
However, this subregulatory guidance
was intended to be a temporary
measure, pending changes to our
regulations.
Under the current structure MA
organizations and Part D sponsors pay
an initial rate for the first year, and then
a renewal payment of 50 percent of the
initial compensation paid to the agent
for years 2 through 6. This structure has
proven to be complicated to implement
and monitor as it requires the MA
organization or Part D sponsor to track
the compensation paid for every
enrollee’s initial enrollment, and
calculate the renewal rate based on that
initial payment. For example, assume
that the same agent enrolls three
beneficiaries; one in each of the 2012,
2013, and 2014 contract years.
Beneficiary A is a new, initial enrollee
in MA plan XYZ for CY2012. Assume
that the fair market value (FMV) cut-off
amount for agent services for CY 2012
is $400. Plan XYZ has decided that its
initial compensation will be equal to the
full FMV, resulting in a payment to the
agent of $400. Beneficiary B is a new,
initial enrollee in MA plan XYZ for
CY2013. In CY2013, assume the FMV
has increased to $420. Plan XYZ has
again decided that its initial

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compensation will be equal to the full
FMV for Beneficiary B, resulting in a
payment to the agent of $420. Also in
CY2013, Plan XYZ is required to pay a
renewal amount of 50 percent of initial
enrollment to the agent for Beneficiary
A. Since the initial payment for
Beneficiary A was $400, Plan XYZ will
pay a renewal amount of $200.
Beneficiary C is a new, initial enrollee
in MA plan XYZ for CY2014. In
CY2014, assume the FMV value has
again increased to $430. The Plan’s
initial compensation is, again, equal to
the full FMV. Plan XYZ’s payments to
the agent would be as follows: $430 for
Beneficiary C (new, initial), $210 for
Beneficiary B (renewal, 50 percent of
the initial payment of the CY2013 FMV
of $420), and $200 for Beneficiary A (50
percent of the initial payment of the
CY2012 FMV of $400). Thus, Plan XYZ
has to know, at any given time, the
amount of the initial compensation for
each plan year—going back as far as
2009—in which the member enrolled in
order to pay the correct compensation
amount to the agent. Moreover, MA
organizations and Part D sponsors must
first review CMS’ reports to determine
whether an initial or renewal payment
should be made, and then combine that
information with the FMV, or, if
applicable, the plan’s compensation set
at less than the FMV, for each plan year
to ensure the correct payments are made
to agents. When these simple examples
are multiplied by tens or thousands of
members, the complexity and
challenges associated with
implementing the current compensation
requirements becomes clear.
In addition to its complexity, we are
concerned that the current structure
creates an incentive for agents and
brokers to move enrollees from a plan of
one parent organization to a plan of
another parent organization, even for
like plan type changes. Currently, in
these cases, the new parent organization
would pay the agent 50 percent of the
current initial rate of the new parent
organization; not 50 percent of the
original initial rate paid by the other
parent organization. Thus, in cases
where the FMV has increased, or the
other parent organization pays a higher
commission, the incentive exists for the
agent to move beneficiaries from one
parent organization to another. (See
§ 422.2274(a)(3) and § 423.2274(a)(3)).
So, in the example provided previously,
if Beneficiary A switched to Plan ABC
for CY2014, Plan ABC would pay the
same agent $215 (50 percent of the 2014
initial rate of $430), instead of the $200
renewal payment the agent would have
received if Beneficiary A remained in

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Plan XYZ. Although the mere $15
increase in the payment to the agent
may not appear to be much of an
incentive to move one enrollee, an agent
would receive considerably more
income by moving tens of enrollees to
another plan.
Since 2008, we have received
inquiries from MA organizations and
Part D sponsors regarding the correct
calculation of agent/broker
compensation, and found it necessary to
take compliance actions against MA
organizations and Part D sponsors for
failure to comply with the
compensation requirements. To the
extent that there is confusion about the
exact levels or timing of compensation
required, there could be an un-level
playing field for MA organizations and
Part D sponsors operating in the same
geographic area. In addition, CMS’ audit
findings and monitoring efforts have
shown that MA organizations and Part
D sponsors are having difficulty
correctly administering the
compensation requirements. Therefore,
we believe that simpler agent/broker
compensation regulations that are easier
to understand will better ensure that
plan payments are correct and establish
a level playing field that will further
limit incentives for agents and brokers
to move enrollees for financial gain.
We are proposing to revise the
existing compensation structure for
agents and brokers so that, for new
enrollments, MA organizations and Part
D sponsors could make an initial
payment that is no greater than the FMV
amount for renewals in Year 2 and
beyond, the MA organization or Part D
sponsor could pay up to 35 percent of
the FMV amount for the renewal year,
resulting in the renewal year payment
changing each year if the MA
organization or Part D sponsor chooses
to pay 35 percent of the current FMV
(that is, the renewal year FMV
threshold). As we do now, we would
interpret the FMV threshold in our
annual guidance to MA organizations
and Part D sponsors. This flexibility
would enable MA organizations and
Part D sponsors to better react to
changes in the marketplace and adjust
their compensation structures
accordingly.
Under the proposed compensation
structure, the calculations would be
simpler than those required under the
current rule, as shown in the following
example:
Assume again that Beneficiary A is a
new, initial enrollee in MA plan XYZ
for CY2015. Assume the FMV for CY
2015 is $400. Plan XYZ has decided to
pay the full FMV, resulting in a
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CY2016, assume the FMV is $420.
Again, Plan XYZ has decided to pay the
maximum FMV for initial enrollments,
so it pays the agent $420 for Beneficiary
B, who is an initial enrollee. Plan XYZ
has also decided to pay the maximum
renewal payment (35 percent of the
FMV), resulting in a payment of $147
($420 x .35) to the agent for Beneficiary
A. Thus, Plan XYZ’s payments to its
agents are based on the FMV for the
contract year in question, regardless of
when the beneficiary enrolled in the
plan. That is, when making the renewal
payment, Plan XYZ doesn’t have to
determine what the FMV was in the
initial year, but only looks to the FMV
for the current year and pays the chosen
percentage up to the maximum 35
percent of the FMV established by CMS.
In order to implement these changes
in the identical Part C and Part D
regulations at, § 422.2274 and
§ 423.2274, we first propose to designate
the definition of ‘‘compensation’’ as
paragraph (a)(1) and to restate the fair
market value limit on compensation for
the initial year as paragraph (b)(1)(i).
Second, we propose to combine the
current (a)(1)(i)(B), which addresses
payments for renewals, and (a)(1)(iii),
which addresses the length of time that
renewals should be paid, and designate
the revisions as a new (b)(1)(ii). Thus,
the new paragraph (b)(1)(ii) would state
that plans may pay up to 35 percent of
the current FMV and that renewal
payments may be made for the second
year of enrollment and beyond.
In addition, we propose to modify
paragraph (a)(3) to remove the 6-year
cap on the compensation cycle.
Currently, paragraph (a)(3) refers to
policies that are replaced with a like
plan during the first year or the
subsequent 5 renewal years. Since we
are proposing to eliminate the 6-year
cycle, our revised paragraph (b)(2)
deletes the reference to the initial year
and the 5 renewal years. By tying
renewal compensation to the FMV for
the renewal year, rather than the initial
year of enrollment, our proposal reduces
the financial incentives for an agent or
broker to encourage Medicare
beneficiaries to change plans, especially
from one parent organization to another
parent organization. As with the current
regulation, we propose in paragraph
(b)(2)(iii) that a change in enrollment to
a new plan type be payable under the
same rules that apply to an initial
enrollment, regardless of whether the
change is to an unlike plan type in the
same parent organization or an unlike
plan type in another parent
organization. Note that, as with the
current rule, our proposal only
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1935

independent agents and does not
address compensation payable by an
MA organization or Part D sponsor to its
employees that perform services similar
to agents and brokers.
For our proposed regulations, we
considered several different alternatives,
including prohibiting compensation
payments entirely beyond year 6,
permitting MA organizations and Part D
sponsors to pay a residual payment for
year 7 and subsequent years, and
permitting existing renewal payments to
continue. We also evaluated different
renewal amounts, including a 50
percent renewal payment for years 2
through 6 with a continuing 25 percent
residual payment for years 7 and
beyond. The evaluation took into
account different ages for an initial
enrollment, as well as the life
expectancy of beneficiaries. In the
analysis, a continual renewal payment
of 35 percent was similar in payout to
the combination of a 50 percent
payment for years 2 through 6 and a
residual payment of 25 percent for year
7 and beyond. We believe that revising
the existing compensation structure to
allow MA organizations or Part D
sponsors to pay up to 35 percent of the
FMV for year 2 and beyond is
appropriate based on a couple of factors.
First, we believe that a two-tiered
payment system (that is, initial and
renewal) would be significantly less
complicated than a three-tiered system
(that is, initial, 50 percent renewal for
years 2 through 6, and 25 percent
residual for years 7 and beyond), and
would reduce administrative burden
and confusion for plan sponsors.
Second, our analysis determined that 35
percent is the renewal compensation
level at which the present value of
overall payments under a two-tiered
system would be relatively equal to the
present value of overall payments under
a three-tiered system (taking into
account the estimated mortality rates for
several beneficiary age cohorts). This
analysis is based on the existing
commission structure basing renewal
commissions on the starting year initial
commission amount and not the current
year FMV amount. We welcome
comments on both the amount of the
renewal payment as well as the
proposed indefinite time frame.
Current regulations at § 422.2274(a)(4)
and § 423.2274(a)(4) address the timing
of plan payments, as well as recovery of
payments when a beneficiary disenrolls
from a plan. Specifically, (a)(4) states
that compensation may only be paid for
the beneficiary’s months of enrollment
during the year (January through
December). We propose to revise (a)(4)
to define more clearly a plan year for

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purposes of compensation. The annual
compensation amount covers January 1
through December 31 of each year. We
have learned that some plans have been
paying compensation based on an
annual cycle, rather than a calendar year
cycle. We have taken appropriate
compliance actions in those instances
where we have evidence that an MA
organization or Part D sponsor is paying
compensation incorrectly, and issued
sub-regulatory guidance on August 14,
2013 reminding organizations and
sponsors that compensation is to be
paid based on a calendar year cycle.
Along the same lines, we propose to
revise the language at § 422.2274(a)(4) to
clarify that the payment made to an
agent must be for January 1 through
December 31 of the year and may not
cross calendar years. For example, a
renewal payment cannot be made for
the period of November 1, 2013 through
October 31, 2014. Rather, the renewal
payment must cover January 1,
2013through December 31, 2013.
Currently, the regulation text at
§ 422.2274(a)(4) (i) permit payments to
be made at one time or in installments
and at any time. CMS proposes to
change the timing of payments to
require that payments may not be made
until January 1 of the compensation
year, and must be paid in full by
December 31 of the compensation year.
CMS believes this proposal is
appropriate given the ability of
beneficiaries to change plans during the
annual coordinated election period
(AEP), which runs from October 15
through December 7. That is,
beneficiaries can choose a new plan
during the AEP, and then revise that
choice as many times as they desire
during the AEP; the last enrollment
choice made is the one that becomes
effective on January 1 of the following
year. Under CMS’ current requirements,
each MA organization or Part D sponsor
would have to recoup compensation, if
already paid, for every beneficiary that
initially enrolled in their plan but later
decided to enroll in a different parent
organization prior to January 1. Under
the proposed rule, MA organizations
and Part D sponsors would not be
allowed to pay compensation until the
beginning of the calendar year, when
the final AEP enrollment becomes
effective. Thus, the proposed rule would
simplify MA organizations’ and
sponsors’ compensation processes and
enable them to make more accurate
payments. We welcome comments on
this proposal.
Current regulations at
§ 422.2274(4)(ii)(A) and
§ 423.2274(4)(ii)(A) require MA
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recover compensation paid to agents
when a beneficiary disenrolls from a
plan within the first three months of
enrollment. However, in sub-regulatory
guidance, we have recognized several
circumstances (for example, death of the
beneficiary, the beneficiary moves out of
the service area, the beneficiary
becomes eligible to receive LIS, or the
beneficiary loses Medicaid benefits) in
which plans should not recover
compensation even though the
beneficiary was enrolled in the plan for
less than 3 months. In circumstances
such as these, since the disenrollment
decision could not be based on agent or
broker behavior, we believe it to be
appropriate for the agent to receive the
compensation associated with the
months that beneficiary was a member
of the plan. While the plan would not
recover the compensation for those
months, it would recover any
compensation paid for the months after
the disenrollment. Therefore, CMS is
proposing to combine paragraphs
(a)(4)(ii)(A) and (a)(4)(ii)(B) into a
revised paragraph (b)(3)(iii),which
would include new text to clarify that
plans should recover compensation for
only the months that the beneficiary is
not enrolled, unless the disenrollment
took place within the first 3 months.
Under our proposal, we would require
disenrollments that are the result of
agent or broker behavior to trigger
recoupment of any compensation that
has been paid for that period. In cases
where disenrollment took place within
the first 3 months and the disenrollment
did not result from or could not have
resulted from an agent’s behavior, we
would not require that compensation be
recovered under our proposal. We
would provide more specific
information in sub-regulatory guidance,
and welcome comments regarding
possible examples to include in that
guidance.
CMS also proposes here, in
§ 422.2274(h) and § 423.2274(h) to
codify existing sub-regulatory guidance
regarding referral (finder’s) fees. CMS
released a memorandum on October 19,
2011 addressing excessive referral fees,
noting that referral fees should not
exceed $100. CMS has long been
concerned that some MA organizations
or Part D sponsors can offer the entire
amount of compensation an agent or
broker receives through only a referral,
while others must combine any
compensation for referrals with other
agent marketing activities while meeting
the same total cap on compensation,
thereby creating an un-level playing
field within the marketplace and a clear
financial incentive for the referring

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agent to steer beneficiaries to MA
organizations or Part D sponsors that
offer the higher amount, without regard
to whether plan benefits meet the
beneficiaries’ health care needs.
Therefore, we are proposing to limit the
amount that can be paid as a referral fee
to independent, captive, and employed
agents and brokers, regardless of who
completes the enrollment, to a
reasonable amount specified by CMS,
which is currently, for CY 2013, and CY
2014, $100. Furthermore, note that,
under § 422.2274(a) and § 423.2274(a),
CMS requires that referral fees paid to
independent agents and brokers must be
part of total compensation not to exceed
the FMV for that calendar year.
14. Drug Categories or Classes of
Clinical Concern and Exceptions
(§ 423.120(b)(2)(v) and (vi))
Section 3307 of the Affordable Care
Act amended section 1860D–4(b)(3)(G)
of the Act by replacing the specific
criteria established under MIPPA in
2008 to identify categories or classes of
Part D drugs for which all Part D drugs
therein shall be included on Part D
sponsor formularies. The specified
criteria were replaced with the
requirement that the Secretary establish
criteria through notice and comment
rulemaking to identify drug categories
or classes of clinical concern. In
addition, section 3307 of the Affordable
Care Act requires the Secretary to
engage in rulemaking to establish any
exceptions that permit a Part D sponsor
to exclude from its formulary a
particular Part D drug (or otherwise
limit access to such drug through
utilization management or prior
authorization restrictions) within the
drug categories or classes that meet the
criteria established by the Secretary.
The Affordable Care Act amendments to
section 1860D–4(b)(3)(G) of the Act
specified that until such time as the
Secretary establishes the criteria to
identify drug categories or classes of
clinical concern through rulemaking,
the following categories or classes shall
be identified as categories or classes of
clinical concern: anticonvulsants,
antidepressants, antineoplastics,
antipsychotics, antiretrovirals, and
immunosuppressants for the treatment
of transplant rejection. We now propose
to implement the Affordable Care Act
requirements set forth in section 1860D–
4(b)(3)(G) of the Act by revising
§ 423.120(b)(2)(v) and (vi) as follows: (1)
the criteria the Secretary will use to
identify drug categories or classes of
clinical concern; and (2) the exceptions
that permit Part D sponsors to exclude
certain Part D drugs from within an
identified drug category or class from

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their formularies (or otherwise limit
access to such drugs, including through
utilization management or prior
authorization restrictions). We also
propose to specify drug categories or
classes that would meet the proposed
criteria and explain the process we used
for making these determinations.
a. Categories or Classes of Clinical
Concern
In 2005, well before the passage of
MIPPA, and before the start date of the
Part D program, we directed Part D
sponsors through guidance to include
on their formularies all or substantially
all drugs in six categories or classes
(antidepressants; antipsychotics;
anticonvulsants; immunosuppressants
for transplant rejection; antiretrovirals;
and antineoplastics). Our authority for
this policy arises from section 1860D–
11(e)(2)(D)(i) of the Act, which requires
that in order to approve a plan, we must
not find that the design of the plan and
its benefits (including any formulary
and tiered formulary structure) are
likely to substantially discourage
enrollment by certain Part D eligible
individuals. We refer to this as our
‘‘non-discrimination’’ policy. This
statutory directive helped to ensure a
smooth transition of the approximately
6 million Medicare-Medicaid
beneficiaries who were converting from
Medicaid drug coverage to Medicare
drug coverage at the start of the Part D
program. Under the existing
circumstances, any formularies that did
not have all or substantially all drugs in
these categories or classes potentially
would have been discriminatory for the
Medicare-Medicaid beneficiary
population because state Medicaid
program formularies were generally
open compared to the Part D formularies
that we were anticipating prior to the
beginning of the Part D program. Thus,
it stood to reason that MedicareMedicaid beneficiaries and many of
their providers were largely
unaccustomed to drug utilization
management techniques. That is, for the
most part they had little experience
dealing with the rejection of a drug
claim at the point of sale because the
drug was either not on formulary, or
another drug needed to be tried first, or
because more information was required
to determine whether the drug could be
covered under the plan. Moreover, since
the majority of the Medicare-Medicaid
beneficiaries did not make a decision to
elect their new plan, but were instead
auto-enrolled, these individuals may not
have understood whether their current
medications would continue to be
covered under their new Medicare plan.
Since the Part D program would be

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administered by private plans with
extensive experience managing
prescription drug costs through tighter
formularies and a variety of utilization
management techniques, we anticipated
the need for a learning curve and delays
in negotiating appeals processes that
might endanger the beneficiaries who
needed access to drugs in these
particular categories or classes. In order
to mitigate the risks and complications
associated with an interruption of
therapy for vulnerable beneficiaries,
who would be trying to navigate a new
drug benefit when they attempted to fill
or refill their first prescriptions under
the Part D program on or after January
1, 2006, we created the special
requirements for coverage of the six
drug classes. However, the
circumstances that existed when this
policy was originally implemented have
changed dramatically in the more than
seven years the program has been in
operation. CMS, Part D sponsors, our
partners who assist beneficiaries with
making enrollment choices, and
particularly our Medicare-Medicaid
beneficiaries and their advocates have
had a great deal of experience working
with Part D plans since 2005.
Section 176 of MIPPA added a new
section 1860D–4(b)(3)(G)(i) to the Act
requiring, effective with plan year 2010,
that the Secretary identify certain
categories or classes of drugs that meet
two statutory specifications: (1)
Restricted access to the drugs in the
category or class would have major or
life-threatening clinical consequences
for individuals who have a disease or
condition treated by drugs in such
category or class; and (2) There is a
significant need for such individuals to
have access to multiple drugs within a
category or class due to unique chemical
actions and pharmacological effects of
the drugs within a category or class,
such as drugs used in the treatment of
cancer. In addition, MIPPA provided the
Secretary with the discretion to
establish exceptions permitting Part D
sponsors to exclude from their
formularies, or to otherwise limit access
to (including utilization management or
prior authorization restrictions), certain
Part D drugs in the protected categories
or classes.
In the January 16, 2009 Federal
Register (74 FR 2881), we published an
interim final rule with comment period
(IFC) entitled, ‘‘MIPPA Drug Formulary
and Protected Classes Policies.’’ This
rule revised the regulations governing
the Medicare Part D formularies to
reflect the MIPPA requirements. We
codified at § 423.120(b)(2)(v) the MIPPA
provision requiring the inclusion of all
Part D drugs in categories or classes that

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we identified as meeting the two
conditions set forth in section 1860D–
4(b)(3)(G)(i) of the Act. Given the
limited timeframe then available for
establishing and implementing a
process to identify such drug categories
or classes due to formulary submission
deadlines, we maintained the existing
six drug categories and classes of
clinical concern for 2010 with the
intention to propose and finalize a new
process through rulemaking that would
be used to identify drug categories or
classes that met the MIPPA criteria for
CY2011. After receiving comments in
response to the January 16, 2009 IFC,
entitled, ‘‘Medicare Advantage and
Prescription Drug Programs MIPPA
Drug Formulary Protected Classes
Policies’’ that persuaded us that the
further interpretative rulemaking was
necessary, we published a notice of
proposed rulemaking (NPRM) on
October 22, 2009, entitled, ‘‘Policy and
Technical Changes to the Medicare
Advantage and the Medicare
Prescription Drug Benefit Programs’’ (74
FR 54634) to further refine the MIPPA
criteria and establish a process that met
MIPPA requirements. However, between
the issuance of the October 22, 2009
proposed rule and the April 15, 2010
final rule (75 FR 19766), the Affordable
Care Act was enacted. Section 3307 of
the Affordable Care Act amended
section 1860D–4(b)(3)(G) of the Act to
specify that the existing drug categories
or classes of clinical concern would
remain so until such time as the
Secretary establishes new criteria to
identify drug categories or classes of
clinical concern under section 1860D–
4(b)(3)(G) of the Act through notice and
comment rulemaking.
We are concerned that requiring
essentially open coverage of certain
categories and classes of drugs presents
both financial disadvantages and patient
welfare concerns for the Part D program
as a result of increased drug prices and
overutilization. The principal
disadvantage is that an open coverage
policy substantially limits Part D
sponsors’ ability to negotiate price
concessions in exchange for formulary
placement of drugs in these categories
or classes. Since the beginning of the
Part D program we have heard from
stakeholders that this policy—
frequently referred to as the ‘‘protected
classes’’ policy—significantly reduces
any leverage the sponsor has in price
negotiations and results in higher Part D
costs. A report by the OIG in March
2011 documented similar assertions
from selected Part D sponsors, including
assertions that ‘‘they received either no
or minimal rebates for the drugs in these

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six classes,’’ that ‘‘there is little
incentive for drug manufacturers to offer
rebates for these six classes of drugs
because they do not need to compete for
formulary placement,’’ and that ‘‘if [a
rebate] is provided, it’s probably at a
lower percentage than [the rebate for the
drugs] that had some competition.’’
(HHS Office of Inspector General,
‘‘Concerns with Rebates in the Medicare
Part D Program’’, March 2011, OEI–02–
08–00050)
We are aware of other analyses that
support these findings. A 2008 study
conducted by the actuarial and
consulting firm Milliman found that the
six protected drug classes
disproportionately accounted for
between 16.8 percent and 33.2 percent
of total drug spend among sponsors
surveyed (Kipp RA, Ko C). (See
‘‘Potential cost impacts resulting from
CMS guidance on ‘Special Protections
for Six Protected Drug Classifications’
and Section 176 of the Medicare
Improvements for Patients and
Providers Act of 2008 (MIPPA) (PL 110–
275)’’ available at: http://amcp.org/
WorkArea/
DownloadAsset.aspx?id=9279).
Milliman reported that the Part D
program administrators (plan sponsors
and PBMs) commented that the
protected status of these drug classes
limited plan sponsors’ ability to
effectively negotiate lower costs with
manufacturers since it is known that
these drugs must be included on the
formulary. The Milliman report
estimated that affected drug costs were
on average 10 percent higher than they
would be in the absence of the protected
class policy and that this represented
$511 million per year in excess costs to
beneficiaries and the Part D program.
We note that numerous brand drug
patents expire between now and 2015
which might reduce future cost
projections. Another 2008 study from
the National Bureau of Economic
Research (NBER) suggested that while
Medicare Part D led to a substantial
decline in average pharmaceutical
prices, Medicare-intensive drugs in
protected classes did not experience
price declines as did their counterparts
not in protected classes and may have
actually experienced price increases
(Duggan M, Morton FS. 2010. ‘‘The
Effect of Medicare Part D on
Pharmaceutical Prices and Utilization,’’
American Economic Review, American
Economic Association, vol. 100(1),
pages 590–607). Plan sponsors can still
negotiate with manufacturers for
preferred or non-preferred tier
placement of protected class drugs, but
CMS does not have any information on

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the justification for the relative
magnitude of these rebates. However, it
can reasonably be anticipated that such
rebates would vary widely for
individual manufacturers and sponsors,
and anecdotal evidence would suggest
the leverage these options provide
sponsors may be minimal when
compared to leverage available in
connection with an initial decision
regarding formulary inclusion,
especially since tier placement has no
impact on statutory LIS cost sharing
levels. Consequently, we would predict
future savings for both beneficiaries and
the Part D program from both increased
price competition as newly approved
drugs come onto the market and more
immediate savings if plans were able to
remove some currently covered agents
from their formularies.
In addition to our concerns about
increased Part D costs resulting from
higher drug prices, we are also
concerned that the policy potentially
facilitates the overutilization of drugs
within the protected classes. By limiting
the ability of Part D sponsors to
implement utilization management tools
(for example, prior authorization or step
therapy requirements) for an entire
category or class, we also limit their
ability to prevent the misuse or abuse of
drugs that are not medically necessary.
Not only can this increase Part D costs,
but inappropriate use can also lead to
adverse effects that can harm the
beneficiary and require medical
treatment that would otherwise not have
been necessary. We believe the
profitability of products not subject to
normal price negotiations as the result
of protected class status is a strong
incentive for the promotion of
overutilization, particularly off-label
overutilization, of some of these drugs.
Given the findings in these reports
and our expertise with the Part D
program, we believe it is appropriate to
revisit our original policy for the six
drug categories and classes of clinical
concern—particularly to assess whether
it remains appropriate to require this
additional level of protection for these
categories or classes of drugs in order to
ensure that Part D plans offer
nondiscriminatory benefit designs and
sufficient beneficiary access to
medically necessary therapies. In
considering the balance among
beneficiary access, quality assurance,
cost containment, and patient welfare in
light of our existing beneficiary
protections, we believe that drug
categories and classes should be subject
to normal formulary and price
competition unless we cannot ensure
clinically appropriate access (and thus
non-discriminatory benefit design) to

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our Medicare beneficiaries in any less
anticompetitive way than requiring the
inclusion on all Part D formularies of all
drugs in that category or class.
Moreover, we believe that our
consideration of how to implement
section 3307 of the Affordable Care Act
must take into account both the purpose
of the Part D benefit and the context in
which it is offered. Part D does not
typically involve access to medications
on an emergency basis. In cases where
an emergency may arise, the Part D
program has some protections to
address this—for example, our long
term care emergency first fill
requirement requires plans to cover an
emergency supply of non-formulary Part
D drugs for long term care residents as
part of their transition process.
Moreover, the Part D benefit must be
considered in light of the fact that
urgently needed and emergency care is
generally covered by Medicare Parts A
and B.
To that end, we believe that criteria
for identifying drug categories and
classes of clinical concern should
identify only those drug categories or
classes for which access cannot be
adequately ensured by beneficiary
protections that otherwise apply.
Consequently, as we take this
opportunity to propose to codify criteria
for identifying categories or classes of
drugs that are of clinical concern, we
believe that the requirements of section
3307 of the Affordable Care Act should
be implemented taking into
consideration the other protections
available to beneficiaries. Otherwise,
section 3307 of the Affordable Care Act
would establish duplicative, and thus
unnecessary, protections that would
serve only to increase Part D costs—
without any added benefit and with the
possibility of added harm from misuse.
Therefore, in considering whether
additional protections continue to be
needed under this section, we need to
take the other beneficiary access
protections into account. There are five
such protections and these are
formulary transparency, formulary
requirements, reassignment formulary
coverage notices, transition supplies
and notices, and the coverage
determination and appeals processes.
The first protection is our requirement
for full transparency to beneficiaries.
Sponsors are required to provide
comprehensive formulary drug listings
to the public through their own Web
sites and printed materials, as well as to
CMS for access through the online
automated drug plan comparison tool,
the Medicare Plan Finder (Plan Finder).
Beneficiaries or their representatives
can complete a personalized search on

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Plan Finder to locate and select a Part
D plan that covers their drugs. With our
more than 7 years of experience with
the Part D program, we are not aware of
any Part D drug that is not included on
at least one Part D formulary. Thus,
beneficiaries who review plan
formularies can select plans that cover
all of their current medications.
The second type of protection is the
Part D formulary requirements. Our
annual formulary review and approval
process includes extensive checks to
ensure adequate representation of all
necessary Part D drug categories or
classes for the Medicare population and
includes the following:
• Discrimination Review
(§ 423.272(b)(2)). Formularies are
reviewed to ensure inclusion of drug
categories and classes that are used to
treat all disease states. CMS evaluates
the sufficiency of a Part D sponsor’s
formulary drug categories and classes in
conjunction with the plan’s formulary
drug list to ensure that the formulary
provides access to an acceptable range
of Part D drug choices.
• Two Drugs Requirement
(§ 423.120(b)(2)(i)). Each submitted
formulary is reviewed for the inclusion
of at least two distinct drugs from each
of the submitted categories and classes,
except as provided in § 423.120(b)(2)(ii).
• Formulary Tier Review (Medicare
Prescription Drug Benefit Manual,
Chapter 6, 30.2.7). The tiering structure
of each formulary is reviewed to ensure
that each category and class has at least
one drug in a preferred tier.
• Common Medicare Drugs Review
(§ 423.120(b)(2)(iii)). Formularies are
reviewed for inclusion of the drugs or
drug classes that are most commonly
utilized by the Medicare population. We
use prior years’ data to identify the
drugs or drug classes with the highest
utilization in Medicare Part D, and use
these drugs and drug classes as the basis
for our review in this area. We also
review formularies for the alternative
dosage forms of the drugs that are most
commonly utilized by the long-term
care (LTC) population.
• Treatment Guidelines Review
(§ 423.120(b)(2)(iii)). The World Health
Organization (WHO) defines a standard
treatment guideline as a systematically
developed statement designed to assist
practitioners and patients in making
decisions about appropriate health care
for specific clinical circumstances
(available at http://www.who.int/
medicines/technical_briefing/tbs/10PG_Standard-Treatment-Guidelines_
final-08.pdf). We analyze formularies to
determine whether appropriate access is
afforded to drugs or drug classes
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guidelines. In general, although
sponsors have some flexibility in
determining the classification system
they will use to identify categories or
classes of drugs, if a treatment guideline
speaks to a specific category or class of
drugs, we look for representation from
that drug category or class of drugs on
the formulary. Moreover, if the
treatment guidelines address specific
drugs, we would expand this
requirement to review formularies for
those specific drugs, and not just the
drug category or class to which they
belong.
• Common Home Infusion Drugs
(§ 423.120(a)(4)). We review formularies
for the drugs most commonly utilized in
the home infusion setting in order to
help facilitate rapid access to these
drugs for beneficiaries.
• Vaccines Review (§ 423.100). Each
formulary submission is reviewed to
ensure the formulary includes Part D
vaccines.
• Insulin Supplies Review
(§ 423.100). Formularies are reviewed
for the supplies associated with the
administration of insulin: insulin
syringes, alcohol swabs, and gauze pads.
• Specialty Tier Review
(§ 423.578(a)(7)). For formularies using a
specialty tier, we perform an extensive
review of the composition of each tier.
We apply a standard outlined in the
annual Call Letter to determine whether
drugs placed in specialty tiers meet the
relevant cost criteria.
• Quantity Limits Outlier Review
(§ 423.153(b)). All formulary
submissions are compared to analyze
the use of quantity limit (QL) edits.
Formularies that are outliers with
respect to the application of QL edits are
asked to remove edits or provide a
reasonable justification for the
applicable QL.
• Quantity Limits Amount Review
(§ 423.153(b)). QL restrictions are
reviewed for appropriateness. The
standard for the review is generally
based on the Food and Drug
Administration (FDA)-approved
maximum doses, when such dose limits
are identified in the label.
• Restricted Access Review
(§ 423.153(b)). Formularies are reviewed
for use of Prior Authorization (PA) and
Step Therapy (ST) edits across drug
categories and classes. We decline to
approve utilization management (UM)
for entire drug classes, other than those
considered to be best practices, for
example, for erythropoietin stimulating
agents (ESAs).
• Step Therapy Criteria Review
(§ 423.153(b)). The ST requirements are
reviewed to ensure that the algorithms
are consistent with best practices.

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• Prior Authorization Outlier Review
(§ 423.153(b)). All formulary
submissions are compared to analyze
the use of PA edits. Formularies that are
outliers with respect to the application
of PA edits are asked to remove edits or
provide a reasonable justification for
such PA edits.
• Prior Authorization Criteria Review
(§ 423.153(b)). We then review the
criteria for focused drugs requiring PA
on the initial formulary submissions.
We look to existing best practices,
including prerequisite drugs, current
industry standards and appropriate
treatment guidelines, to check that the
Part D plans’ use of PA is consistent
with such practices. Submitted criteria
are also compared to compendia and
FDA-approved label indications.
• Mid-year formulary change
restrictions (§ 423.120(b)(5)); Chapter 6
of the Medicare Prescription Drug
Benefit Manual, 30.3.3). Except when
the Food and Drug Administration
deems a Part D drug unsafe or a
manufacturer removes a Part D drug
from the market, a Part D sponsor may
not remove a covered Part D drug from
its formulary, or make any adverse
change in preferred or tiered costsharing status of a covered Part D drug,
between the beginning of the annual
coordinated election period described in
section § 423.38(b) and 60 days after the
beginning of the contract year associated
with the annual coordinated election
period. However, prescription drug
therapies are constantly evolving, and
new drug availability, medical
knowledge, and opportunities for
improving safety and quality in
prescription drug use at a lower cost
will inevitably occur over the course of
the year. As recognized in regulation,
these new developments may require
formulary changes during the year in
order to provide high-quality, affordable
prescription drug coverage. To address
such developments our negative
formulary change policy requires that
beneficiaries retain ‘‘grandfathered’’
coverage for the remainder of the
coverage year if we permit an adverse
change in the formulary status of any
drug without a generic equivalent. Thus,
in summary, our formulary rules both
ensure that all Part D formularies
contain sufficient drugs to treat all
disease states in the Medicare
population and protect beneficiaries
from significant changes in formularies
during the course of a coverage year.
The third type of beneficiary
protection is the annual notice to
reassigned enrollees required under
section 3305 of the Affordable Care Act.
Effective January 1, 2011, we provide
LIS individuals who are reassigned to

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another Part D plan with information on
the differences under the new plan
formulary, as well as information on the
beneficiary’s grievance and appeal
rights in the new plan. Thus, any
individual who has his or her plan
selection decision made through our
reassignment process (in order to
maintain access to a $0 premium)
receives detailed coverage status
information for each drug for which he
or she filled a prescription between
January and August of the previous
year. With regard to the new plan, this
notice describes for each drug whether
it is on the formulary, whether the
brand or generic version is covered, and
whether or not utilization management
tools may be applied. Moreover, the
notice also provides a list of other plans
that are available to the beneficiary to
enroll in with no premium if they
would prefer not to remain in the plan
where they were reassigned. We send
notices after the individual’s
reassignment and in time to allow for
another voluntary plan selection
effective January 1. Thus, any
reassigned LIS individual receives
advance notice of any change in
formulary coverage of their medications
in plenty of time to work with their
prescribers if they wish to remain in the
new plan, or to select a different Part D
plan.
The fourth type of beneficiary
protection is our unique transition
supply and notice requirements. A Part
D sponsor must provide for an
appropriate transition process for Part D
drugs that are not on its formulary with
respect to: (1) The transition of new
enrollees into prescription drug plans
following the annual coordinated
election period; (2) the transition of
newly eligible Medicare beneficiaries
from other coverage; (3) the transition of
individuals who switch from one plan
to another after the start of the contract
year; and (4) in some cases, current
enrollees affected by formulary changes
from one contract year to the next (see
§ 423.120(b)(3); Chapter 6 of the
Medicare Prescription Drug Benefit
Manual, 30.4). Within the first 90 days
of a beneficiary’s enrollment in a new
plan, plans must provide a temporary
fill when the beneficiary requests a refill
of a non-formulary drug (including Part
D drugs that are on a plan’s formulary
but require prior authorization or step
therapy under a plan’s utilization
management rules). Since certain
enrollees may join a plan at any time
during the year, this requirement
applies beginning on an enrollee’s first
effective date of coverage, regardless of

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whether this is within the first 90 days
of the contract year.
A successful transition process is
contingent not only upon providing the
transitional drug supply, but also upon
informing affected enrollees, their
caregivers, and their providers about the
beneficiary’s options for ensuring that
his or her medical needs are safely
accommodated within a Part D
sponsor’s formulary. For this reason,
when providing a temporary supply of
non-formulary Part D drugs (including
Part D drugs that are on a sponsor’s
formulary but require prior
authorization or step therapy under a
sponsor’s utilization management rules),
sponsors must provide enrollees and
their providers with written notice
within 3 business days after
adjudication of the temporary fill that
they are receiving a transition supply of
a non-formulary Part D drug and that
they must take action. The temporary
fill and notice provides beneficiaries
with a reasonable amount of time during
which they and their providers can
address the issue (by requesting a
formulary exception or transitioning to
a formulary drug) and prevents them
from having to abruptly change or go
without their medication (see Transition
notice requirements (to beneficiaries
and providers) [§ 423.120(b)(3)(iv and
v); Chapter 6 of the Medicare
Prescription Drug Benefit Manual,
30.4.10]). Thus all beneficiaries and
their prescribers have advance notice of
any issue with continued coverage of a
previously initiated therapy and
sufficient time to resolve those issues
without any lapse in appropriate
therapy. The preceding formulary
review and transition requirements are
described in Chapter 6 of the Medicare
Prescription Drug Benefit Manual
(located at http://www.cms.gov/
Medicare/Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/
Chapter6.pdf).
The fifth beneficiary protection we
take into account is the requirement for
a robust coverage determination and
appeal process, including the right of an
enrollee or his or her prescriber to
request an exception to the plan’s
utilization management criteria, tiered
cost-sharing structure, or formulary. Part
D plan sponsors are required to issue a
coverage decision and notify the
enrollee (and the prescriber, as
appropriate) in writing in accordance
with strict regulatory timeframes. A
plan must grant a tiering or formulary
exception (for example, provide
coverage for a non-formulary drug or an
exception to the UM criteria) when it
determines that the requested drug is
medically necessary, consistent with the

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prescriber’s supporting statement
indicating that preferred alternatives(s)
would not be as effective and/or would
have adverse effects. We have
established by regulation both an
expedited adjudication timeframe if the
plan or prescriber believes that applying
the standard timeframe may jeopardize
the enrollee’s health, and a requirement
that plans must issue all coverage
decisions as expeditiously as the
enrollee’s health condition requires.
Any initial coverage request that the
plan expects to deny based on a lack of
medical necessity must be reviewed by
a physician. If the Part D sponsor makes
an adverse coverage determination, the
required written notice must explain the
specific reason(s) for the denial and
include a description of the enrollee’s
right to a standard or expedited
redetermination by the plan, and the
rest of the five-level appeals process,
including the right to request
independent review. We require plans
to conduct all redeterminations (first
level appeals) using a physician or other
appropriate health care professional
with sufficient medical and other
expertise, including knowledge of
Medicare criteria, if the initial denial
was based on a lack of medical
necessity. If a plan fails to make a
coverage decision and notify the
enrollee within the required timeframe,
the request must be forwarded to the
independent review entity to be
adjudicated.
Moreover, while we do not treat a
claim transaction as a coverage
determination, we do require Part D
sponsors to arrange with network
pharmacies to provide enrollees with a
written copy of the Office of
Management and Budget (OMB)approved standardized pharmacy notice
(‘‘Notice of Denial of Medicare
Prescription Drug Coverage,’’ CMS–
10146) when the enrollee’s prescription
cannot be filled under the Part D benefit
and the issue cannot be resolved at the
POS. The notice instructs the enrollee
on how to contact his or her plan and
explains the enrollee’s right to request a
coverage determination. Thus, all
beneficiaries immediately receive clear
concise instructions on how to pursue
their appeal rights whenever a
prescription cannot be filled. For
additional information on the coverage
determination, appeals and grievance
process, including information about
the pharmacy notice, see 42 CFR Part
423, subparts M and U, and Chapter 18
of the Medicare Prescription Drug
Benefit Manual.
As the preceding discussion
demonstrates, we have implemented
extensive beneficiary protections in the

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form of formulary review checks,
reassignment formulary coverage
notices, drug therapy transition policies
and notices for both new enrollees and
continuously enrolled members
experiencing changes in formulary
benefits between coverage years, and
robust exceptions and appeals processes
that generally will assure appropriate
access without having to guarantee
formulary placement. Additionally, the
formulary exceptions and appeals
requirements facilitate obtaining any
medically necessary Part D drug that is
not on the formulary or that is otherwise
subject to utilization management
requirements. Taken together, we
believe these requirements are
comprehensive enough that additional
access safeguards are needed only in
those situations where a Part D
beneficiary’s clinical needs cannot be
more efficiently met.
b. Criteria Necessary To Identify
Categories and Classes of Clinical
Concern
In developing our proposed criteria to
identify drug classes of clinical concern,
we considered all of the existing
beneficiary protections described
previously in section III.A.14.a. of this
proposed rule, particularly our coverage
determination and appeals process,
which requires plans and other
adjudicators to make all coverage
decisions as expeditiously as the
enrollee’s health condition requires.
Given our existing protections, we
believe clinical concern would arise
only if access to drugs within a category
or class for the typical individual who
is initiating therapy must be obtained in
less than 7 days because the coverage
determination and appeals process
generally does not provide for
independent review and determination,
when necessary, within such timeframe.
We believe this would be the case only
when failure to initiate the therapy
within that time period would be likely
to lead to hospitalization, incapacity,
disability or death as a result of the
exacerbation of the disease or condition
to be treated. We do not believe it is
necessary to require all Part D drugs
within a drug category or class to be
included on the formulary if access
within 7 days is likely sufficient to
allow for initiation of therapy without
putting beneficiaries at risk of
hospitalization, incapacity, disability, or
death. In other words, we believe that
inconvenience associated with a delay
that is unlikely to pose these serious
consequences for the typical individual
initiating a new therapy does not
warrant requiring all Part D drugs from
within the category or class to be

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included on the formulary because in
such an instance, the beneficiary would
have other protections to ensure that he
or she has appropriate access to the
drug. Moreover, we do not believe it is
necessary to require all Part D drugs
within a drug category or class to be
included on the formulary when, for a
typical individual who already is taking
the drug, interruption in existing drug
therapy might have adverse health
consequences. Specifically, we believe
that existing protections such as the Part
D formulary change restrictions (for
example, prohibition on midyear
implementation of new PA, ST, or QL
restrictions on existing therapies) and
the transition requirements under
§ 423.120, which provide for temporary
fills and require beneficiary notification
of the need to request a coverage
determination (including an exception
or prior authorization approval) for
future fills ensure sufficient protection
for beneficiaries who may face an
interruption in their ongoing therapies
as a result of a change in their plan or
formulary. Thus, our transition and
negative formulary change requirements
afford strong protections to individuals
with ongoing therapy. However, this is
in contrast to individuals who are
initiating therapy. These individuals do
not get an initial fill to try a medication
while they petition for an exception,
and thus the transition protections do
not apply. Finally, we note that when
we refer to a beneficiary’s having
‘‘access’’ to a drug within 7 days, we
mean that the beneficiary must need to
ingest or otherwise use or consume the
drug within that time period in order to
avoid the adverse consequences. Thus,
‘‘access’’ means administration, which
may include self-administration, of
drugs. To illustrate this last point,
initiation of therapy with drugs used to
treat HIV/AIDS generally should not be
delayed because initiation of therapy
has rapid effects on viral load.
Conversely, a minor delay with the
initiation of therapy with HMG-CoA
reductase inhibitors (also known as
‘‘statins’’) for patients with
hyperlipidemia, even when
transitioning among medications in the
category or class in response to lipid
profiles, liver or kidney function, or
adverse events, is not as critical because
it usually takes several weeks to detect
measurable effects on serum lipid
concentrations.
Thus, for all of these reasons, we
propose to specify at
§ 423.120(b)(2)(v)(A) a first criterion
under section 1860D–4(b)(1)(G)(ii)(II) of
the Act as follows: In the case of a
typical beneficiary who has a disease or

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condition treated by drugs in the
following category or class,
hospitalization, persistent or significant
incapacity or disability, or death likely
will result if initial administration
(including self-administration) of a drug
in the category or class does not occur
within 7 days of the date the
prescription for the drug was presented
to the pharmacy to be filled. By typical
beneficiary, we mean, for a given
disease or condition, an individual who
has the average clinical presentation of
the relevant disease or condition.
While this first criterion would
establish the critical need to promptly
initiate drug therapy with a drug from
an identified drug category or class, we
believe that, standing alone, it may be
overly inclusive and, as such, would fail
to appropriately balance the need for
beneficiary protection with the need to
allow plans to take appropriate steps to
control costs and overutilization. If the
drug category or class consists of many
similar drugs that are often considered
to be therapeutically interchangeable
with one another when initiating drug
therapy, a requirement to include on the
formulary all drugs in that category or
class would undermine the important
place that formularies, due to their
ability to control costs, hold within the
Part D program without providing any
additional beneficiary protection.
According to the Academy of Managed
Care Pharmacy (AMCP), therapeutic
interchange is the practice of replacing,
with the prescribing provider’s
approval, a prescription medication
originally prescribed for a patient with
a chemically different medication;
medications used in therapeutic
interchange programs are expected to
produce similar levels of clinical
effectiveness and sound medical
outcomes, based on available scientific
evidence. Moreover, in the absence of
any specific treatment guidelines to the
contrary, inclusion of all drugs in that
category or class would be unnecessary.
For example, some drugs in the nitrate
class of drugs likely would meet our
first proposed criterion, but because
there are many therapeutically
interchangeable options among nitrates,
it is not necessary to require that all
nitrate products be included on every
Part D formulary. Indeed, under our
current formulary treatment guideline
reviews, while we require that
sublingual nitroglycerin be included on
all formularies because beneficiaries
often need it on an urgent basis, we do
not require inclusion of all other nitrates
(for example, isosorbide dinitrate,
isosorbide mononitrate, and transdermal
nitroglycerin) because these dosage

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forms are long-acting and typically are
not needed on an urgent basis.
(However, current treatment guidelines
require the inclusion of isosorbide
dinitrate for congestive heart failure.)
Similarly, the typical diabetic patient
who needs insulin could reasonably be
anticipated to require two insulin
products as part of his or her treatment
regimen: Specifically, one shorteracting, and one longer-acting insulin.
Among the insulins, there are four subclasses: Rapid acting, short acting,
intermediate acting, and long acting.
Within each of the sub-classes, there are
alternatives from which to choose. In
accordance with treatment guidelines,
in most cases a patient’s regimen is
comprised of one selection from either
the rapid acting or short acting subclasses, and one selection from either
the intermediate acting or long acting
sub-classes. While the beneficiary
would require access to multiple drugs
within the class (insulins), which at
times could certainly be considered
urgent enough to risk dire consequences
as discussed in the first criterion, they
would not need access to all of the
options within that class because there
are many alternative products on the
market within those sub-classes that are
largely therapeutically interchangeable,
and any one of these products will
generally meet the patient’s needs.
Thus, our formulary checks for insulin
require some products in each sub-class
to ensure that access through each plan
is clinically appropriate.
These examples illustrate the
principle that it is both feasible and
appropriate to permit plan sponsors to
develop formularies that exclude certain
products when adequate access to an
appropriate alternative is assured by
way of our existing formulary
requirements and review process.
Moreover, the transition and coverage
determination and appeal processes are
available in those situations when a
non-formulary drug is medically
necessary for a specific individual.
For these reasons, we believe it is
important to include a second criterion
that must be met in order for us to
consider a drug category or class to be
one of clinical concern for the purposes
of section 3307 of the Affordable Care
Act. Specifically, we believe a drug
category or class would be of clinical
concern if CMS cannot establish that a
formulary that includes fewer than all
Part D drugs from within that category
or class would include sufficient drugs
needed to treat the diseases or
conditions generally treated by such
drugs. In other words, CMS cannot
reasonably establish more specific CMS
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are too many potential drug-anddisease-specific scenarios that require
specific drugs from within a category or
class, even within sub-classes. This
would be the case when the different
drugs within a category or class are
uniquely associated with specific
clinical applications because of the
unique effects of such drugs or the
variable nature of the disease or
condition treated by such drugs. For
example, a cancer patient whose clinical
picture is rapidly changing must
immediately initiate very specific
changes in antineoplastic therapy when
the new disease target is identified.
While perhaps possible, it would not be
practical to establish a multitude of
more class-specific formulary
requirements for every current or future
combination or sequence of such drugs
simply to possibly exclude a few drugs.
Thus, we propose to add
§ 423.120(b)(2)(v)(B) specifying a second
criterion to identify a clinical concern as
follows: More specific CMS formulary
requirements will not suffice to meet the
universe of clinical drug-and-diseasespecific applications due to the
diversity of disease or condition
manifestations and associated
specificity or variability of drug
therapies necessary to treat such
manifestations.
In summary, we propose to modify
§ 423.120(b)(2)(v) to require that (unless
an exception applies) all Part D drugs
within a drug category or class be
included on the formulary if a the drug
category or class of drugs for a typical
individual with a disease or condition
treated by the drugs in the category or
class meets both of the following criteria
(as determined by CMS):
• Hospitalization, persistent or
significant disability or incapacity, or
death likely will result if initial
administration (including selfadministration) of a drug in the category
or class does not occur within 7 days of
the date the prescription for the drug
was presented to the pharmacy to be
filled; and
• More specific CMS formulary
requirements will not suffice to meet the
universe of clinical drug-and-diseasespecific applications due to the
diversity of disease or condition
manifestations and associated
specificity or variability of drug
therapies necessary to treat such
manifestations.
c. Exceptions
Section 1860D–4(b)(3)(G)(i)(II) of the
Act provides us with the authority to
establish exceptions to the requirement
that a Part D sponsor must include all
Part D drugs on its formulary in the drug

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categories or classes identified by us as
drug categories or classes of clinical
concern under section1860D–
4(b)(3)(G)(ii)(I) of the Act. Despite the
narrow scope of applicability defined by
the proposed criteria, we believe it is
necessary to identify exceptions to help
ensure Part D coverage is limited to Part
D drugs, minimize duplicative
protections within a drug category or
class of clinical concern, and assure
beneficiary safety while curbing
potential abuse and misuse as a result
of the added protection.
First, we propose to retain
§ 423.120(b)(2)(vi)(A) as currently
codified. This provision makes an
exception for drug products that are
rated as therapeutically equivalent
(under the Food and Drug
Administration’s most recent
publication of ‘‘Approved Drug
Products with Therapeutic Equivalence
Evaluations,’’ also known as the Orange
Book). Thus, two drug products that are
determined to be therapeutic
equivalents by the FDA and identified
in the FDA’s Orange Book are
considered to be the same Part D ‘‘drug’’
solely for purposes of this requirement,
and sponsors would not be required to
include all therapeutic equivalents on
their formularies. Rather, the inclusion
of one such drug product would satisfy
the formulary requirement with respect
to all therapeutically equivalent
products.
We also propose to amend and
renumber (as paragraph (F)) existing
§ 423.120(b)(2)(vi)(B) to make an
exception for point-of-sale utilization
management safety edits that are based
on maximum daily doses and black-box
warnings specified on the FDAapproved label, potential drug
interactions, or duplication of therapy.
In fact, we believe that this exception is
consistent with the requirement under
section 1860D–4(c)(1)(B) of the Act that
requires Part D sponsors to have in
place quality assurance measures and
systems to reduce medication errors and
adverse drug interactions and improve
medication use. As noted previously,
although we believe that section 3307 of
the Affordable Care Act is intended to
provide additional beneficiary
protections, we also believe that it
would be imprudent to interpret these
protections in such a way that they
interfere with existing protections
intended to promote safety and efficacy.
We believe that it is appropriate for Part
D sponsors to establish edits for safety
and that our policies should not
interfere with basic drug utilization
management edits that sponsors apply
at point of sale to ensure that adverse
events do not occur. For example, we

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would expect that a claim for a 90 days
supply of Atripla® for 180 tablets, when
the drug is only approved for use once
a day, would trigger a point-of-sale
safety edit. Such edits must be
consistent with FDA labeling to ensure
that they are based on scientific
evidence and medical standards of
practice. However, the use of safety
edits should not create a significant
opening for plans to establish restrictive
policies, because safety edits need to
conform to FDA labeling.
Next, we propose to add new
language at § 423.120(b)(2)(vi)(B) to
make an exception for drug products
that are almost always covered under
Medicare Parts A or B. In order to
minimize confusion about the scope of
the protections under section 3307 of
the Affordable Care Act, we specify that
the formulary requirements set forth in
section 1860D–4(b)(3)(G)(i) of the Act do
not apply to drugs almost always
covered by Medicare Part A or B. We do
not currently require, and would not
require under the authority of section
3307 of the Affordable Care Act, the
inclusion of drugs that have been
historically paid for under Part B (for
example, ‘‘incident to’’ drugs supplied
and administered by physicians during
a patient visit and paid for under Part
B). Given the fact that these drugs are
generally covered under Medicare Part
B and are not required under our
existing policy, we believe their absence
from plan formularies would not disrupt
access. We further believe that requiring
the inclusion of these drugs on the
formulary would lead to beneficiary
confusion. For these reasons, we are
proposing to exclude drug products
almost always covered under Medicare
Part A or B.
We also propose to add an exception
at § 423.120(b)(2)(vi)(G) to permit prior
authorization for purposes of
determining whether a drug is a Part D
drug being used for a medicallyaccepted indication as defined in
section 1860D–2(e)(4) of the Act or to
verify a drug is not covered under
Medicare Parts A or B as prescribed and
dispensed or administered. Coverage
under Part D is not available for drugs
that are not used for a medicallyaccepted indication, and section 3307 of
the Affordable Care Act does not change
any Part D coverage rules. Moreover, we
believe that this exception, like the
exception for Medicare Part A or B
drugs described in proposed paragraph
(B), would not cause disruption because
it merely reflects existing limits on Part
D coverage.
Thus, we also propose that prior
authorization in the drug categories or
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when used to confirm the presence of a
medically-accepted indication or that
coverage is not available under
Medicare Parts A or B as prescribed and
dispensed or administered. Prior
authorization requirements to determine
medically-accepted indications should
be limited to those drugs for which it is
reasonably foreseeable that use for nonmedically-accepted indications are
likely to occur. For example, when only
narrow indications are supported (for
example, pain medications indicated
only for cancer pain, supported by the
FDA label or compendia), we would
expect Part D sponsors to use prior
authorizations to ensure that such
agents are being used for the narrowlysupported indications only. Similarly,
sponsors must apply prior
authorizations for Medicare Parts A/B
versus D determinations in a manner
consistent how those determinations are
made in all other categories or classes
(that is, based upon likelihood of
coverage under Medicare Part A or B),
and thus, we would not expect to see a
disproportionate amount of prior
authorization requirements for the
categories or classes of clinical concern
compared to other formulary categories
or classes. We expect that the plan
sponsor’s medical director is involved
in establishment and oversight of plan
policies related to prior authorization
requirements. As with all PA
requirements, these would require CMS
review and approval. Consistent with
current guidance, in Parts A or B versus
D situations, CMS expects Part D
sponsors will work aggressively to
eliminate any interruptions of current
therapy.
In addition, we propose to amend
§ 423.120(b)(2)(vi)(C) to make an
exception for Part D compounds. As
noted in previous rulemaking, Part D
only covers those ingredients in a
compound that independently meet the
definition of a Part D drug (see
§ 423.120(d)). Since the Part D
compound as a whole is not FDA
approved, we do not believe that such
compounded products reasonably can
be classified as being included in a
specific category or class that meets the
criteria proposed in new
§ 423.120(2)(v)(A). Currently, Part D
compounds that include ingredients
that fall within a protected category or
class are not required to be included on
formularies, and we do not interpret
section 3307 of the Affordable Care Act
as requiring their inclusion now. Thus,
we believe their continued absence from
plan formularies would not disrupt
access.
We also propose to add
§ 423.120(b)(2)(vi)(D) to make an

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exception for drugs (other than
antiretrovirals) that are FDA approved
and that are fixed-combination dosage
form prescription drug products as
defined in 21 CFR 300.50, that contain
at least one Part D drug in the category
or class of clinical concern. Because all
drugs in the category or class of clinical
concern would be on the formulary as
single entity products, we do not believe
it is necessary, in most cases, to require
inclusion of the fixed dose combination
or co-packaged products. However, we
would propose to carve out from this
exception fixed dose combinations and
co-packaged antiretrovirals, as
discussed in FDA guidance found here:
http://www.fda.gov/downloads/Drugs/
GuidanceCompliance
RegulatoryInformation/Guidances/
ucm079742.pdf) because avoiding
excessive pill burden and simplifying
dosage regimens is of utmost
importance with this class of drugs.
This is because the risk associated with
non-adherence when beneficiaries have
to take the single-entity products has far
more severe consequences, such as viral
resistance, than in most other instances,
where occasional non-adherence does
not present such dire complications.
Consequently, although we believe this
exception is generally appropriate for
the categories and classes of clinical
concern that receive added protections
under section 3307 of the Affordable
Care Act, we propose that it not be
available for antiretrovirals. This means
that, under our proposed criteria,
which, as discussed further in the
following paragraphs, apply to
antiretrovirals, all Part D formularies
would need to include not only all
single-entity antiretrovirals, but also all
FDA-approved fixed-dose combination
and co-packaged antiretrovirals.
Additionally, consistent with current
guidance, we propose an exception at
§ 423.120(b)(2)(vi)(E) for certain types of
Part D drugs, including multi-source
brands of the identical molecular
structure, extended-release products
when the immediate-release product is
included, products that have the same
active ingredient or moiety, and dosage
forms that do not provide a unique route
of administration (for example, tablets
and capsules versus tablets and
transdermal products). Although such
products may contribute to
improvements in beneficiary adherence
to their medication regimens, other
interventions such as Medication
Therapy Management Programs and
special compliance packaging can also
improve adherence. Therefore, the
added costs of required formulary
inclusion of such products may not

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provide added value since they do not
provide a clinically different therapeutic
alternative. Such products currently are
not required to be included on
formularies, and we do not interpret
section 3307 of the Affordable Care Act
as requiring their inclusion now. Thus,
we do not believe this exception would
disrupt access.
Finally, we considered proposing an
exception at § 423.120(b)(2)(vi)(H), to
allow Part D sponsors to implement
prior authorization, including PA used
to implement step therapy
requirements, to convert beneficiaries to
preferred alternatives within these drug
categories or classes for enrollees who
are initiating therapy (new starts). This
is consistent with current guidance that
Part D sponsors may not implement
prior authorization, including PA used
to implement step therapy requirements
that are intended to steer beneficiaries
to preferred alternatives within these
drug categories or classes for enrollees
who are currently taking a drug, unless
they are trying to establish appropriate
coverage under Parts A, B, or D. This
prohibition applies to those
beneficiaries already enrolled in the
plan, as well as to new enrollees who
were actively taking drugs in any of the
drug categories or classes of clinical
concern prior to enrollment in the plan.
If a sponsor cannot determine at the
point of sale that an enrollee is not
currently taking a drug (for example,
new enrollee filling a prescription for
the first time), the sponsor treats such
enrollee as currently taking the drug.
Additionally, step therapy and prior
authorization for HIV/AIDS drugs are
generally not employed in widely-used
best-practice formulary models and are
not permitted under the current policy.
Although this has been our policy since
the start of the Part D program, and we
are not aware of any problems with it
to date, we recognize that this raises the
potential for a delay in access to initial
therapy to occur and could be in
conflict with our first proposed
criterion. However, we must balance
this with incentives for efficient
formularies and do not want to
eliminate a tool that may be useful for
Part D sponsors. Consequently, we
solicit comment on the continued need
and utility of this policy and whether it
should be included in the exceptions at
423.120(b)(2)(vi). These exceptions
would supersede any previous guidance
relative to PAs and UM for the
categories and classes of clinical
concern.

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d. Analysis and Identification of the
Categories or Classes of Clinical
Concern
We convened a consensus panel of
CMS pharmacists and the Chief Medical
Officer for the Center for Medicare to
identify which drug categories or classes
met our proposed criteria for clinical
concern. The panel was supported by a
contractor that performed background
research and provided specific
information on Part D utilization by
drug category or class and associated
widely-accepted treatment guidelines
for each drug category or class, when
available. The panel reviewed all Part D
drugs with utilization in 2012 using the
American Hospital Formulary Service
(AHFS)–6 classification system. We
chose the AHFS–6 classification system
as a framework because it provided us
with a tool to logically, and in stepwise
fashion, apply the criteria to all Part D
drugs. A detailed synopsis of the panel’s
findings is posted at http://
www.cms.gov/Medicare/PrescriptionDrug-Coverage/PrescriptionDrug
CovContra/RxContracting_Formulary
Guidance.html. The consensus panel
determined that of the current six drug
categories or classes of clinical concern,
three (anticonvulsants, antineoplastics,
and antiretrovirals) meet both of the
proposed criteria, and three do not
(antidepressants, antipsychotics,
immunosuppressants). The panel also
determined that while other drug
categories and classes met one of the
criteria, no other drug categories or
classes met both criteria.
With respect to the first criterion, the
panel concluded that initiation of
therapy with drugs from the
antiretroviral, antineoplastic, and
anticonvulsant categories and classes for
the typical individual prescribed these
drugs in a Part D setting generally
cannot be delayed for 7 days because of
the risk of hospitalization, incapacity,
disability, or death. For antiretrovirals,
the risk associated with the failure to
immediately initiate recommended
concurrent therapies could significantly
increase the risk of developing drug
resistance and the potential for reexacerbation of the disease. For
antineoplastics, prompt initiation of
therapy is also critical. Given that the
antineoplastic drug therapy often is but
one part of a complex cancer treatment
protocol that includes non-drug
therapies, such as radiation or surgery,
initiation of the antineoplastic drug
therapy is usually integrated with the
entire treatment protocol. Thus,
delaying initiation of antineoplastic
drugs can delay a beneficiary’s entire
course of treatment. For

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anticonvulsants, the risk of seizure
associated with a delay in drug therapy
for 7 days can lead to hospitalization
and significant incapacity.
With respect to the second criterion,
the panel concluded that the
antiretroviral, antineoplastic and
anticonvulsant categories and classes
meet the criterion because different
drugs within those categories and
classes are used in so many patient-,
drug-, or disease-specific clinical
applications that an alternative
formulary requirement is not feasible.
For antiretrovirals, the panel based this
conclusion on the number of multiple
drug combinations and adjunctive
therapies involved, frequency with
which recommended drug protocols
change, and the role that changing drug
resistance plays in determining the
selection of among the different
antiretroviral drugs. The need to adjust
specific combination antiretroviral
therapy in real time is complex and
must consider, among other things, viral
sensitivity to the drugs, drug
interactions, pregnancy status (if
applicable), and potentially the patient’s
pharmacogenomic profile of the
cytochrome P450 system. Similarly, for
antineoplastic drug therapies, the panel
based its conclusion on the diversity of
treatment protocols, the specificity of
such treatment protocols, including the
role that specific genetic variations can
play in the selection of the appropriate
drug therapy, and the frequency with
which disease-specific treatment
protocols recognized in the official Part
D compendia change and get updated. A
cancer patient whose clinical picture is
rapidly changing must immediately
initiate very specific changes in
antineoplastic therapy when the new
disease target is identified. Finally, for
anticonvulsants the panel concluded
that the class met the criterion based on
the number of unique types of seizures,
the multiple drug combinations
indicated for them, and the potential for
altered drug effects based on drug-drug
interactions that occur via the
cytochrome P450 system. For all three
of the classes (anticonvulsants,
antineoplastics, and antiretrovirals), the
panel concluded that CMS would be
unable to address them more efficiently
through formulary requirements that
would allow for some restrictions at this
time based upon the number and
specificity of the different treatment
protocols.
After a detailed analysis of existing
therapies and widely-accepted
treatment guidelines, the panel
concluded that immunosuppressants for
transplant rejection, antidepressants,
and antipsychotics do not meet both of

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the proposed criteria and thus would
not be eligible for the additional
protections intended by section 3307 of
the Affordable Care Act.
With respect to immunosuppressants
for transplant rejection, the panel
concluded that the first criterion was
met. Due to the immune system’s ability
to mount progressively faster and
stronger attacks against a beneficiary’s
new organ, and to maintain a memory
relative to those attacks, initiation of
therapy in a Part D setting generally
cannot be delayed for up to 7 days
because of the risk of hospitalization,
incapacity, disability, or death, and thus
meets the first criterion. Because
widely-accepted treatment guidelines
recommend sub-classes of drugs rather
than specific, individual drugs, the
panel did not believe that every drug
product should be required for
inclusion on Part D sponsors’
formularies. Moreover, relative to the
reasonably small number of transplant
options available to beneficiaries (for
example, stem cell, liver, lung, kidney,
pancreas, heart and intestine), the
consistency and specificity of treatment
guidelines, and the amount of
therapeutic drug monitoring required
for these drugs, provide us with
sufficient clinical information necessary
to establish additional, specific
formulary requirements without
needing to continue to identify it as a
drug category or class of clinical
concern.
For antidepressants, the panel
concluded that a 7-day delay in
initiation of therapy would generally
not put the typical individual at risk of
hospitalization, incapacity, disability or
death, and thus did not meet the first
criterion. The panel also concluded that
antidepressants did not meet the second
criterion. This determination was based
upon the similarities of drugs within
sub-classes and the lack of unique
effects for distinguishing individual
drug products when initiating drug
therapy for the typical individual in a
Part D setting. For example, for a patient
initiating antidepressant therapy for
depression, when the treatment
guidelines indicate that a drug within
the selective serotonin reuptake
inhibitor (SSRI) sub-class of
antidepressants should be used, there
are multiple options from which to
choose, such as fluoxetine, paroxetine,
sertraline, citalopram, and escitalopram.
While treatment guidelines may
indicate the choice of an SSRI over the
tri-cyclic antidepressant (TCA) or
serotonin-norepinephrine reuptake
inhibitor (SNRI) sub-classes, assuming a
patient is dosed correctly, they generally
do not advocate a preference of one

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SSRI drug over another for initiation of
therapy, nor do they provide a
hierarchical inventory for these drugs’
place in therapy relative to each other.
In fact, the American Psychiatric
Association’s 2010 treatment guideline
(available at http://www.guideline.gov/
content.aspx?id=24158) states that ‘‘the
effectiveness of antidepressant
medications is generally comparable
between classes and within classes of
medications.’’
With respect to antipsychotics, many
of these take weeks to reach their full
effect (steady state). In addition, with
regard to the Medicare population,
particularly in long term care settings,
current treatment guidelines indicate
that the use of antipsychotics in the
elderly is, in many cases, unwarranted
and in others, possibly dangerous.
However, due to the potential that,
untreated, beneficiaries with active
psychotic symptoms may be dangerous
to themselves or others, the panel
concluded that a 7-day delay in
initiation of therapy met the threshold
to put a typical individual with
psychotic symptoms at risk of
hospitalization, incapacity, disability or
death, and thus met the first criterion.
However, the panel concluded that
antipsychotics did not have unique
effects that distinguished one drug from
another for the purposes of choosing the
appropriate drug to initiate therapy. For
example, for a patient initiating
antipsychotic therapy for schizophrenia
or schizoaffective, or schizophreniform
disorder, when the treatment guidelines
may indicate that a drug within the
second generation (atypical)
antipsychotic sub-class should be used,
there are multiple options from which
to choose such as aripiprazole,
risperidone, olanzapine, quetiapine,
ziprasidone, and clozapine. While the
treatment guidelines may indicate the
choice of a second generation
antipsychotic over the neuroleptics or
first generation antipsychotic subclasses, assuming a patient is dosed
correctly, they generally do not advocate
a preference of one atypical
antipsychotic over another for initiation
of therapy, nor do they provide a
hierarchical inventory for these drugs’
place in therapy relative to each other.
Moreover, the 2009 update to the
American Psychiatric Association’s
treatment guideline for the management
of patients with schizophrenia
(available at http://psychiatryonline.org/
data/Books/prac/Schizophrenia_
Guideline%20Watch.pdf) states ‘‘the
distinction between first- and secondgeneration antipsychotics appears to
have limited clinical utility.’’ Thus the
panel concluded that these agents are

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considered to be generally
therapeutically interchangeable when
initiating therapy, and based on
treatment guidelines, our formulary
requirements could efficiently ensure
appropriate access to antipsychotics
without requiring inclusion on the
formulary of every drug in the class.
In addition to any cost savings that
would result from the proposed change
for the antipsychotic drug class, it is
important to emphasize that the change
also would provide Part D sponsors
with an improved capability to address
widespread inappropriate overuse of
antipsychotic drugs through better
utilization management. A recent study
published in Psychiatric Services
analyzing 2009 claims data from private
insurance claims found that 58 percent
of individuals prescribed psychotropic
medication in 2009 had no psychiatric
diagnosis during the year (Psychiatric
Services 2013; doi: 10.1176/
appi.ps.201200557). Moreover, on
September 20, 2013, the American
Psychiatric Association released a ‘‘list
of specific uses of antipsychotic
medications that are common, but
potentially unnecessary and sometimes
harmful’’, including a recommendation
not to prescribe these drugs ‘‘as a firstline intervention to treat behavioral and
psychological symptoms of dementia’’
(http://www.psychiatry.org/
choosingwisely). CMS has been
particularly concerned with
unnecessary use of antipsychotic drugs
in nursing homes, which might be
exacerbated by our current policy,
which significantly limits Part D
sponsors’ options for ensuring
appropriate use of these drugs. While
this change in formulary requirements
generally would not impede appropriate
access to antipsychotic drug therapy for
the mentally ill given the other
formulary protections discussed
previously, it would allow Part D
sponsors to better align utilization
management with CMS efforts to
prevent inappropriate use of these drugs
and the potential harmful effects
associated with such inappropriate use.
While proposing to remove the
previous level of formulary coverage
from these particular classes, it is worth
noting that the requirement to include
on plan formularies all drugs in certain
categories and classes is unique to the
Part D program. We are not aware of any
other U.S. government programs (such
as the Veteran’s Administration (VA),
Tricare, the Federal Employees Health
Benefits Program (FEBHP), and, most
recently, the Affordable Care Act
Essential Health Benefits (EHB)
Benchmark Plans), or commercial
private health plans having a similar

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requirement. Similar to the Part D
program, these plans also operate in the
outpatient setting where access to
medications is not typically needed on
an emergency basis. Even though Part D
formularies are more restrictive than
Federal Employees Health Benefits
Plans (FEHBP) and EHB plans, when
CMS compared Part D formulary
requirements with those of the VA
National and Department of Defense
(DoD) Basic Core formularies, out of 26
distinct antidepressant drugs required
on all Part D formularies, the VA
included 17, and the DoD included 10.
Similarly, out of 19 distinct
antipsychotic drugs required on all Part
D formularies, the VA included 15, and
the DoD included 2.
Supporting this analysis that our
formulary checks could efficiently
require adequate access to the
antidepressant and antipsychotic drug
categories and classes without requiring
that every drug be included on all Part
D formularies, we compared a Part D
formulary to other formularies. We took
an approved CY 2014 formulary
containing the average number of
RxNorm Concept Unique Identifiers
(RxCUIs). This formulary includes the
following: 23 generic (ANDA)
antidepressant drugs, 7 brand (NDA)
antidepressant drugs, 18 generic
antipsychotic drugs, and 9 brand
antipsychotic drugs. We then reviewed
the drugs comprising the
aforementioned list against our
formulary review requirements
standards for treatment guidelines,
common Medicare drugs, and the
discrimination review. We found that
the formulary could have passed these
checks with 9 generic antidepressant
drugs, and 6 generic antipsychotic
drugs. No brands were necessary to
meet the formulary review
requirements. Thus, this formulary
includes an excess of 16 brand drugs
and 26 generic drugs within these two
classes of medications.
While the immunosuppressant,
antidepressant and antipsychotic classes
all fail to meet the second criterion, we
are deferring any change in formulary
requirements for the antipsychotic class
at this time and will continue to require
all drugs from within this class to be on
Part D formularies in 2015, subject to
the exceptions that get finalized in
§ 423.120(b)(2)(vi). Section 1860D–
4(b)(3)(G)(I) of the Act requires that the
Secretary identify classes and categories
of clinical concern ‘‘as appropriate,’’
using criteria specified in notice and
comment rulemaking. We interpret this
provision as permitting us to postpone
applying our proposed criteria to
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are not applying the criteria to
antipsychotics at this time, we believe it
is appropriate to continue to treat
antipsychotics as a class of clinical
concern, in light of section 1860D–
4(b)(3)(G)(iv) of the Act, because we
wish to make certain we have not
overlooked a need for any transitional
considerations. This is because the risks
associated with untreated psychotic
illness, as differentiated from the broad
category of mental illness, have the
potential to be so severe. Therefore,
although we previously explained why
we do not believe the antipsychotic
drug class would meet the new
proposed criteria, at this time, we are
proposing not to subject the
antipsychotic class to the new criteria
and therefore are proposing not to
change the current requirement that all
drugs from within this class must be
included on all formularies, except as
permitted under our proposed
exceptions.
In general, our existing beneficiary
protections should suffice to ensure
appropriate access to antipsychotic drug
therapies. However, we are not changing
the requirement for antipsychotics at
this time because we need to determine
if additional transitional consideration
is necessary for any individuals taking
these medications. While we are not
convinced that our existing transition
requirements are insufficient, we seek
comment on whether there are
additional considerations for
transitioning some patients taking these
drugs to alternative drug therapies and
if so, why our current requirements are
not adequate. In addition, we seek
comments on what specific patient
population(s) or individual patient
characteristics would require such
additional transition protections and
how such population(s) can be
consistently identified. Conversely, we
also seek comments on whether it might
be in the best interest of beneficiaries to
have their existing antipsychotic
therapies reevaluated through
utilization management, given our
concern with the inappropriate use of
these drugs especially in nursing homes
and the limited clinical utility of
distinctions among agents in this class
of drugs. If so, we would also appreciate
comments on whether the benefits of
such a periodic reevaluation that would
arise from routine utilization
management might outweigh other
transitional risks. While we do not
believe the risks associated with
illnesses treated by antidepressants are
as severe as those treated by
antipsychotics, we are also seeking
comment on whether any transitional

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policies specific to antidepressants
would be appropriate.
We are concerned about
overutilization and inappropriate
prescribing of antipsychotic
medications in individuals with
dementia for whom these medications
may be prescribed as a mechanism for
behavioral control; persons for whom
antipsychotics are being used as
sleeping aids or anxiolytics; and
children who have not been diagnosed
with a disorder for which an
antipsychotic medication has been FDAapproved. Our concerns about
overutilization are not aimed at
individuals with a current mental
illness or those who are or have recently
or previously been stabilized on
antipsychotic medications. We do not
want to limit access to effective
medications, or to limit a return to those
effective medications for adults with a
psychotic illness who need them.
Finally, we seek comment on the timing
necessary to address any additional
transitional considerations, and remove
the temporary protections for
antipsychotics, if necessary.
Therefore, the initial drug categories
and classes of clinical concern that meet
the proposed criteria for coverage year
2015 are anticonvulsants,
antiretrovirals, and antineoplastics. In
addition, the antipsychotic drug class
will continue to be treated as a class of
clinical concern in 2015 and until CMS
determines that it is appropriate to
apply the criteria with respect to the
antipsychotics. These categories and
classes will be read narrowly and are
not inclusive of every related drug
product that an individual who has a
disease treated by one of these
categories or classes of drugs would
need to take. For example, conjugated or
esterified estrogens used for the
palliative treatment of carcinoma of the
prostate or metastatic breast cancer are
not considered antineoplastics and
would not be included in the
antineoplastic class of clinical concern.
We will provide more detailed guidance
on the specific formulary checks that
will be in place relative to
antidepressant and immunosuppressant
categories and classes of drugs at a later
date. Additionally, we plan to work
with stakeholders to provide outreach to
beneficiaries around the proposed
modification of the categories and
classes of drugs of clinical concern that
receive additional protections under
section 3307 of the Affordable Care Act
so that beneficiaries can select the most
appropriate drug plan for their needs
based on drug choice as well as cost.
Finally, CMS plans to periodically
review the drug categories and classes

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as the clinical landscape changes to
determine whether these classes
continue to meet both criteria and/or if
other categories/classes meet both
criteria. We would propose any changes
to the categories and classes of clinical
concern through a public notice and
comment process such as the annual
Call Letter.
15. Medication Therapy Management
Program (MTM) Under Part D
(§ 423.153(d))
Section 1860D–4(c)(2) of the Act,
provides that Part D sponsors, in
offering Medication Therapy
Management (MTM) programs, must
target individuals who: (1) Have
multiple chronic diseases (such as
diabetes, asthma, hypertension,
hyperlipidemia, and congestive heart
failure); (2) are taking multiple covered
Part D drugs; and (3) are identified as
likely to incur annual costs for covered
Part D drugs that exceed a level
specified by the Secretary. At the start
of the Part D program, we believed that
25 percent of enrollees would qualify
for MTM services. However, analysis
revealed that MTM program enrollment
was well below that level. In the 2010
Call Letter and subsequent regulation,
we modified the criteria to reduce the
variability in eligibility and level of
service and to improve access to MTM
services, again targeting 25 percent of
enrollees. Despite these changes, MTM
program participation remains very low.
Moreover, additional evidence that the
program improves quality and generates
medical savings supports the idea that
more than 25 percent of enrollees will
benefit from MTM services.
Section 1860D–4(c)(2)(C) of the Act,
as implemented in § 423.153(d)(vii),
specifies that sponsors shall offer a
minimum level of MTM services to
targeted beneficiaries to increase
adherence to prescription medications
or other goals deemed necessary by the
Secretary. Additionally, section 1860D–
4(c)(2)(E 2) of the Act, as implemented
in § 423.153(d)(1)(v), provides that Part
D sponsors must automatically enroll
targeted beneficiaries in the MTM
program, allowing beneficiaries the
option to opt out. Under that authority,
we also issued sub-regulatory guidance
(found at http://www.cms.gov/Medicare/
Prescription-Drug-Coverage/
PrescriptionDrugCovContra/Downloads/
Chapter7.pdf) and an annual memo
with MTM Program Guidance and
Submission instructions notifying Part
D sponsors that we expect them to
promote continuity of care by
2 Two subparts (E) have been enacted in section
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performing an end-of-year analysis that
identifies current MTM program
participants who will continue to meet
the eligibility criteria for the next
program year for the same plan. We
indicated that this targeting could be
done to auto-enroll beneficiaries in the
plan’s MTM program early in the next
program year in order to provide MTM
interventions with less interruption.
Although beneficiaries who are new to
Part D or who may have changed plans
may be captured during the quarterly, or
more frequent, targeting throughout the
year, there is a time lag at the start of
the year before these beneficiaries can
be enrolled in MTM. This concern is
particularly relevant for LIS enrollees
who may have been reassigned to a new
Part D plan if their existing plan
terminated or no longer qualified as a
benchmark plan. Moreover, we believe
that there are other special populations
of beneficiaries for whom simply
increasing the frequency of targeting
will not adequately address barriers
they face to receiving MTM services.
There are also situations in which a
beneficiary is unable to accept the offer
to participate in a CMR, but offering to
perform the CMR with the beneficiary’s
prescriber, caregiver, or other
authorized individual, as provided at
§ 423.153(d)(1)(vii)(B)(2), may not be
effectively addressed by the sponsor.
For example, sponsors may not
effectively take steps to identify the
beneficiary’s authorized representative
or coordinate with the beneficiary’s LTC
facility when appropriate.
Consequently, to improve access to this
beneficial service, we are exploring new
ways to improve access to MTM
services for Part D enrollees.
Although we initially estimated that
25 percent of the Part D eligible
population would meet the three criteria
for MTM services at the start of the Part
D program, we provided minimal detail
on how sponsors should implement the
criteria. For example, we did not
initially provide in regulation any detail
on the number of chronic diseases or
covered Part D drugs, or an annual cost
threshold that would be required to
establish a beneficiary’s eligibility for
MTM services, although we established
an annual cost threshold of $4,000 in
subregulatory guidance. We did this to
allow maximum flexibility for the
industry to develop best practices in the
provision of MTM services.
After an analysis of common practices
revealed wide ranges in eligibility and
the levels of services provided, we
announced in the 2010 Call Letter
(available at http://www.cms.gov/
PrescriptionDrugCovContra/Downloads/
2010CallLetter.pdf) that the MTM

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requirements would be revised
beginning in 2010 to provide greater
consistency among the MTM programs
and to raise the level of MTM
interventions offered to positively
impact medication use by Medicare Part
D beneficiaries. We clarified that in
defining multiple chronic diseases,
sponsors could not require more than
three chronic diseases as the minimum
number of chronic diseases and that
sponsors must target at least four of
seven core chronic diseases
(hypertension, heart failure, diabetes,
dyslipidemia, respiratory disease (such
as asthma, chronic obstructive
pulmonary disease (COPD), or chronic
lung disorders), bone disease—arthritis
(such as osteoporosis, osteoarthritis, or
rheumatoid arthritis), and mental health
(such as depression, schizophrenia,
bipolar disorder, or chronic and
disabling disorders)). We further
clarified that in defining multiple Part D
drugs, sponsors could not require more
than eight Part D drugs as the minimum
number of multiple covered Part D
drugs. We also lowered the cost
threshold to $3,000 and instructed
sponsors to adjust their targeting criteria
accordingly. These requirements were
subsequently codified in the regulations
at § 423.153(d)(1) and (2).
Despite the expanded criteria, we
continue to see restrictive criteria, such
as plan sponsors specifying a narrow list
of chronic diseases or Part D drugs
coupled with requiring a higher
minimum number of covered drugs (for
example, eight drugs versus two) for
eligibility. As a result, access to MTM
services remains very low with MTM
program eligibility rates at less than 8
percent in 2011. Even more concerning,
there may be racial disparities in
meeting the eligibility criteria. In the
2012 Call Letter (available at http://
www.cms.gov/Medicare/Health-Plans/
MedicareAdvtgSpecRateStats/
Downloads/Announcement2012.pdf),
we reviewed a 2010 study published in
Health Services Research (HSR) by
Wang and colleagues (Wang, et al. 2010.
‘‘Disparity Implications of Medicare
Eligibility Criteria for Medication
Therapy Management Services.’’ Health
Services Research. 45 (4): 1061–1082.).
This study was based on data from the
Medical Expenditure Panel Survey
(MEPS) collected prior to the
implementation of the Part D program
and used the original 2006 and the
revised 2010 MTM eligibility
thresholds. The study suggested that
Hispanic and African American
beneficiaries could be less likely to meet
MTM eligibility criteria where
utilization was a criterion for program

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participation. The study findings had
important implications for the Part D
program because utilization based upon
drug costs is a critical part of MTM
eligibility. In 2012, Wang and colleagues
repeated the study (Wang, et al. 2012.
‘‘Historical trend of disparity
implications of Medicare MTM
eligibility criteria.’’ Research in Social
and Administrative Pharmacy (2012): 1–
12) using 2007–2008 data along with
both the 2006 and 2010 MTM eligibility
thresholds. They found that disparity
patterns did not change from the first
study. Their findings that ‘‘racial and
ethnic disparities in meeting the MTM
eligibility criteria may not decrease over
time unless the eligibility criteria are
changed’’ have led us to conclude that
the current MTM eligibility criteria are
overly restrictive.
A 2011 report from the United States
Public Health Service (PHS) Pharmacist
Professional Advisory Committee
(PharmPAC report) (available at http://
www.usphs.gov/corpslinks/pharmacy/
sc_comms_sg_report.aspx) supports the
conclusion that the current eligibility
criteria are restricting access to MTM
services. The PharmPAC report, which
was based on the experiences of PHS
clinical pharmacists who attempted to
provide services to Part D beneficiaries,
indicated that the Part D MTM
eligibility criteria, and variability in the
application of these criteria among Part
D sponsors, constituted a policy
constraint which limited patient
participation in the program, despite the
2010 enhancements. The authors of the
PharmPAC report expressed concern
that, at the time, the criteria permitted
sponsors to define eligibility
parameters. The PharmPAC report went
on to say that as a result of the overly
restrictive targeting criteria, patients
who may need MTM services but did
not meet the plan’s criteria were not
able to participate, unless the plan
offered MTM services to a wider group
than the targeted population.
Further supporting this conclusion, a
recent study conducted in conjunction
with the Center for Medicare and
Medicaid Innovation called Medication
Therapy Management in Chronically Ill
Population: Final Report (August 2013)
(‘‘CMMI MTM study’’) (available at
http://innovation.cms.gov/Data-andReports/index.html) explored the
variations in MTM eligibility criteria.
This CMMI MTM study identified
patients with equivalent MTM
eligibility characteristics who were in
different plans with different eligibility
criteria. The enrollees were ineligible
for MTM in their own plan, but would
have been eligible for MTM if they were
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a particular chronic disease that is not
targeted for MTM services by their own
plan or which targets beneficiaries for
MTM services based on a lower number
of chronic diseases or Part D drugs for
eligibility. We are concerned with such
variability, especially in cases where a
beneficiary meets the minimum number
of chronic diseases for eligibility, but
may not qualify for MTM because his or
her chronic condition is not targeted by
the plan, he or she does not take enough
medications for the plan’s program
(even though medication management
issues are present), or because high
utilization of lower cost generics places
prescription drug costs for the
beneficiary below the cost threshold.
Restrictive application of MTM
eligibility criteria may limit MTM
enrollment to beneficiaries with
spending well above the $3,000
threshold, and the CMMI MTM study
indicates that drug spending for MTM
enrollees varied from $4,452 to $7,477.
The CMMI MTM study’s final report
was published in August, 2013 and is
available at: http://innovation.cms.gov/
Files/reports/MTM-FINAL-Report.pdf.
As discussed in the 2014 Call Letter
(available at http://www.cms.gov/
Medicare/Health-Plans/
MedicareAdvtgSpecRateStats/
Downloads/Announcements2014.pdf),
the CMMI MTM study found that MTM
programs effectively targeted high risk
individuals who had problems with
their drug-therapy regimens and had
high rates of hospital and emergency
room visits before enrollment as well as
those that experienced a recent visit to
the hospital or emergency room. The
study also found that individuals with
diabetes, CHF, and COPD who were
enrolled in MTM programs—
particularly those who received annual
comprehensive medication reviews
(CMRs)—experienced significant
improvements in drug therapy outcomes
when compared to beneficiaries who
did not receive any MTM services, thus
supporting the hypothesis that the
annual CMR may be one of the more
crucial elements of MTM. Significant
cost savings associated with all-cause
hospitalizations at the overall PDP and
MA–PD levels were found, which may
be due to MTM’s comprehensive, rather
than disease specific approach. This
research supports statements in a recent
Congressional Budget Office report that
programs and services that manage the
prescription drug benefit well or
improve prescription drug use might
result in medical savings (Congressional
Budget Office, Offsetting Effects of
Prescription Drug Use on Medicare’s
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November 2012, available at http://
www.cbo.gov/publication/43741).
Consistent with the findings of this
research, we believe that the CMSestablished eligibility criteria should be
considered as the threshold for MTM
eligibility, but not the driver of
interventions by the plan. However,
because plans target beneficiaries with
specific diseases for MTM services,
some plans, in turn, have designed
interventions only focused on these
diseases, in contrast to a more
comprehensive approach to improving
medication management and adherence.
For example, one plan targeted
beneficiaries with CHF and diabetes and
designed interventions for these
conditions. Beneficiaries who also had
COPD qualified for MTM services, but
the plan did not address their COPD
medication issues, a practice that is
inconsistent with the intent of
comprehensive MTM. Nonetheless, the
best-performing plans were able to
improve medication adherence and
quality of prescribing while maintaining
or reducing overall health care costs
(including drug costs), despite the costs
associated with delivering a high
number of CMRs. Moreover, the study’s
findings suggested that other conditions
associated with cardiovascular disease,
such as acute myocardial infarction
(AMI), stroke, and vascular disorders, in
addition to those already targeted under
the eligibility criteria adopted in 2010,
disproportionately appeared among the
top cost savers.
Overall, the CMMI MTM study
identified practices that typified highperforming MTM programs, including
three that concern beneficiary targeting.
They are:
• Establishing proactive and
persistent CMR recruitment efforts;
• Targeting and aggressively
recruiting patients to complete a CMR
based on information on medical events
such as a recent hospital discharge in
addition to scanning for the usual MTM
eligibility criteria; and
• Coordinating care by utilizing
trusted community relationships,
including networks of community
pharmacists, to recruit MTM eligible
candidates, and utilizing existing
working relationships between MTM
providers (pharmacists) and prescribers
to make recommendations and discuss
identified problems for patients.
Potential additional requirements,
related to the first and third practices,
are discussed elsewhere in this
proposed rule. However, the second
practice leads us to reconsider our
current MTM targeting requirements.
We believe that the results of the
aforementioned studies indicate the

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necessity to reduce variability in
eligibility criteria among plans and as a
result improve access to MTM services.
a. Multiple Chronic Diseases
The statute identifies targeted
beneficiaries as those Part D
beneficiaries who have multiple chronic
diseases such as diabetes, asthma,
hypertension, hyperlipidemia, and
congestive heart failure. We previously
interpreted this language to allow
sponsors to define ‘‘multiple chronic
diseases’’ with three chronic diseases
being the maximum number a plan
sponsor may require for targeted
enrollment. Further, sponsors are
allowed to target beneficiaries with
select chronic diseases, but must
include at least five of the nine core
chronic diseases in their criteria. This
list of core chronic diseases, as updated
in the 2013 Call Letter (available at
http://www.cms.gov/Medicare/HealthPlans/MedicareAdvtgSpecRateStats/
downloads//Announcement2013.pdf),
includes hypertension, congestive heart
failure, diabetes, dyslipidemia,
respiratory disease, bone disease—
arthritis, mental health, Alzheimer’s
disease, and end stage renal disease. We
propose to revise our interpretation of
‘‘multiple chronic diseases’’ to require
that sponsors must target enrollees
having two or more chronic diseases for
MTM services. We believe this is a
reasonable interpretation of the statute
because ‘‘multiple’’ is commonly
understood to mean more than one.
In addition, we believe that the statute
specifically named the diseases that are
most prevalent within the Medicare Part
D beneficiary population and that
present a likelihood of having
medication use issues that impact
therapeutic outcomes. Therefore, we
propose to require that at least one of
the chronic diseases that a beneficiary
has in order to satisfy the eligibility
criteria must be one of the list of core
chronic diseases. This list has been
updated since 2010 to encompass
common targeting practices among plan
sponsors and diseases prevalent among
beneficiaries. We also believe that this
interpretation is consistent with other
literature concerning the relative risk of
the combination of multiple disease
states and medications and ensures that
Medicare Part D beneficiaries with
prevalent health conditions receive
access to MTM. In addition, to be more
consistent with the findings of the
CMMI MTM study and the current drug
hierarchical condition categories
(RxHCCs) used in the Part D risk
adjuster, we propose to redefine the core
diseases by combining hypertension and
congestive heart failure under the

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umbrella of ‘‘cardiovascular disease,’’
which would also encompass congestive
heart failure, acute myocardial
infarction, cerebral hemorrhage and
effects of stroke, vascular disease,
specified heart arrhythmias, and
hypertensive heart disease. The list of
core chronic diseases would thus
become cardiovascular disease,
diabetes, dyslipidemia, respiratory
disease, bone disease—arthritis, mental
health, Alzheimer’s disease, and end
stage renal disease. However, in future
rulemaking, we may consider further
revising the regulation to establish
standards by which these core chronic
diseases are selected, and therefore
establish the list of core chronic
diseases annually in subregulatory
guidance based on those factors. We
solicit comment on what specific
patient population(s) or individual
patient characteristics should be
considered in establishing such
standards.
b. Multiple Part D Drugs
The statute identifies targeted
beneficiaries as those Part D
beneficiaries who are taking multiple
covered Part D drugs. Although we
initially had no requirements in this
area, as early as contract year 2006, we
asked plan sponsors to report to us the
number of covered Part D drugs that a
beneficiary must have filled to meet
their targeting criteria for MTM, and if
applicable, to list the type of Part D
drugs that would apply. While still
allowing a great deal of flexibility in the
design of MTM programs, for contract
year 2007 forward, we requested more
detailed information in this area in
MTM Program Submission materials for
a March 15, 2006 User Group Call
which were distributed through HPMS.
We asked plan sponsors to identify the
number of covered Part D drugs that a
beneficiary must have filled to meet
their criteria for MTM programs, and to
provide information on the type of
covered Part D drugs that would apply.
Specifically, we asked if any Part D drug
would apply, only chronic/maintenance
drugs, only disease-specific drugs
related to chronic diseases, or if specific
Part D drug classes would apply (and
what those drug classes were), or what
other types of categories the plan
sponsor intended to use. For coverage
year 2013, we consolidated this list of
types of covered Part D drugs that could
apply and no longer specifically
collected information on diseasespecific drugs related to chronic
diseases. (MTM Program Submission
Process Guidance for CY 2013 is
available at: http://www.cms.gov/
Medicare/Prescription-Drug-Coverage/

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PrescriptionDrugCovGenIn/Downloads/
Memo-Contract-Year-2013-MedicationTherapy-Management-MTM-ProgramSubmission-v041012.pdf)
Because our analyses continued to
reveal such wide ranges in eligibility
under this criterion, we issued guidance
in 2009, which we subsequently
codified in our April 2010 final rule
entitled, ‘‘Policy and Technical Changes
to the Medicare Advantage and the
Medicare Prescription Drug Benefit
Programs’’ (75 FR 19678), to establish
specific requirements regarding the
minimum number of covered Part D
drugs that plan sponsors should
consider in order to satisfy the statutory
requirement. Specifically, we instructed
that Part D sponsors should define
‘‘multiple’’ for purposes of satisfying
this requirement as no more than eight
Part D covered drugs. (75 FR 19772)
Although we tried to maintain
maximum flexibility for plan sponsors
by permitting this broad range, the
authors of the PharmPAC report
specifically cite the options available to
plan sponsors in determining enrollee
eligibility criteria for multiple Part D
drugs as a limitation of the MTM
programs required under Part D. We
now believe that allowing plans this
flexibility has contributed to beneficiary
confusion, decreased access to MTM
services, and even led to racial
disparities in access to services.
We propose to revise our
interpretation of ‘‘multiple Part D
drugs’’ to require that sponsors must
target enrollees taking two or more Part
D covered drugs for MTM services.
While we are expanding this criterion,
we are also proposing to restrict the
flexibility previously available to
sponsors by requiring that they consider
any Part D covered drug. Literature
supports the idea that patients with
multiple diseases and taking at least two
drugs are more likely to have drug
therapy problems.
The importance of MTM services for
patients taking two or more medications
was demonstrated in a 2007 evaluation
which validated the Risk Based Relative
Value Scale (RBRVS) for MTM Services
by Isetts and colleagues on behalf of the
state of Minnesota (available at http://
www.dhs.state.mn.us/main/groups/
business_partners/documents/pub/
dhs16_140283.pdf). This study shows
that when a patient has a single
indication treated by at least two
medications, there is likely to be at least
one drug therapy problem. When the
patient moves to two indications, he or
she is more likely to be treated by at
least three to five medications, and will
likely have at least two drug therapy
problems. It should be noted that this

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evaluation considered not only
prescription drugs, but also over the

counter medications and dietary
supplements.

TABLE 2—PHARMACEUTICAL CARE RBRVS *—AT A GLIMPSE
Level **
Level
Level
Level
Level
Level

1
1
2
3
4

...................................................
...................................................
...................................................
...................................................
...................................................

Number of medical indications

Number of medications

At least 1 ...............................................
At least 1 ...............................................
At least 2 ...............................................
At least 3 ...............................................
4 or more ..............................................

At least 1 ...............................................
At least 2 ...............................................
At least 3–5 ...........................................
At least 6–8 ...........................................
9 or more ..............................................

Number of drug
therapy problems
(DTP)
None observed.
1 DTP.
2 DTPs.
3 DTPs.
4 or more DTPs.

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* Summarized from the Minnesota DHS Web site Program Guide for Delivery of Medication Therapy Management Services (MTMS).
** The level of care reported is the lowest of patient needs met by all criteria in each level.

Section 3503 of the Affordable Care
Act establishes a program under the
Public Health Service Act under which
the Secretary is authorized to provide
grants or contracts to eligible entities to
implement MTM services and provides
that MTM programs shall target
individuals who take four or more
prescribed medications, including overthe-counter (OTC) medications and
dietary supplements, and take any highrisk medications. Although this
provision does not directly pertain to
the Part D program, we believe that an
examination of the criteria used to target
individuals under that provision is
helpful in considering what changes
could be made to improve the
effectiveness of MTM programs offered
under Part D. Unlike section 3503 of the
Affordable Care Act, which expressly
requires that services be targeted based
on the use of either prescription or nonprescription drugs, the Part D statute
expressly requires that Part D plans
target beneficiaries taking multiple
covered Part D drugs for MTM services.
OTC medications or dietary
supplements are not covered Part D
drugs, and we cannot require Part D
sponsors to consider them in targeting
beneficiaries for MTM services.
Nevertheless, as evidenced by the
RBRVS approach discussed previously,
we believe that these OTC medications
and supplements may contribute to drug
therapy problems. Therefore, we believe
that it is reasonable to propose that
‘‘multiple Part D drugs’’ should be
construed to mean two or more Part D
drugs in order to ensure that
beneficiaries that are at risk of drug
therapy problems, including problems
associated with taking multiple
prescription medications in conjunction
with over-the-counter medications, are
appropriately targeted for MTM
services. A literature review (Hajjar ER,
Cafiero AC, Hanlon JT. Polypharmacy in
elderly patients. Am J Geriatric
Pharmacother. 2007; 5:345–351) cited a
study that found that almost 90 percent

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of elderly, rural community-dwelling
patients took one or more OTC products
and almost 50 percent took two to four.
Another study of noninstitutionalized
patients found that 47 to 59 percent of
older patients took a vitamin or mineral
and 11 to 14 percent took herbal
supplements. The review found that
polypharmacy among the elderly may
be increasing. (Stoehr GP, Ganguli M,
Seaberg EC, et al. Over the counter
medication use in an older rural
community: The MOVIES Project. J Am
Geriatr Soc. 1997; 45:158–165).
Therefore, it is reasonable to conclude
that the Part D MTM population with
multiple chronic diseases would also be
taking OTC medications. Furthermore,
we expect that sponsors will perform
outreach to beneficiaries to acquire
additional information regarding OTC
medication use by their enrollees,
consistent with our current guidance for
CMRs, which explains that the
medication review as part of the CMR
should include prescriptions, OTC
medications, herbal therapies, and
dietary supplements (available at http://
www.cms.gov/Medicare/PrescriptionDrug-Coverage/
PrescriptionDrugCovGenIn/Downloads/
Memo-Contract-Year-2013-MedicationTherapy-Management-MTM-ProgramSubmission-v041012.pdf).
Although we are proposing this
option, we also considered alternatives
such as duplication of the section 3503
of the Affordable Care Act criteria for
four or more prescribed medications
which could include OTC medications
and dietary supplements, provided the
beneficiary was taking at least 2 covered
Part D drugs. However, we recognized
that Part D sponsors would not have the
ability to assess an enrollee’s use of OTC
medications or dietary supplements in
order to determine MTM eligibility
despite the RBRVS approach which
suggests that beneficiaries may still
experience drug therapy problems when
they have only one chronic disease but
take at least two medications, which

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could include OTC medications or
dietary supplements. As a result, we
solicit comments on alternative
definitions for ‘‘multiple Part D drugs,’’
including what minimum number of
medications is appropriate for MTM
targeting.
c. Annual Cost Threshold
The Congress did not impose any
specific requirements with respect to
the cost threshold at the time the MTM
criteria were passed in to law, nor has
it addressed this threshold in any of the
subsequent amendments to section
1860D–4(c)(2) of the Act. When we first
established the requirements regarding
MTM programs, we recognized that cost
alone was not the best indicator of those
that could benefit most from MTM.
Indeed, in our January 2005 final rule
entitled, ‘‘Medicare Prescription Drug
Benefit’’ (70 FR 4282), we stated that
cost might not be the best proxy for
identifying patients that could benefit
most from MTM. Nevertheless, in an
attempt to identify a manageable
population at the start of the program,
we believed that individuals with the
highest costs were more likely to be
suffering from more chronic conditions
and taking more Part D medications.
Therefore, we believed that setting a
cost threshold that would limit MTM
programs to the individuals with the
highest costs would increase the
likelihood that MTM services would be
provided to those individuals that could
benefit most (because those individuals
were likely to be at greater risk for
improper medication use and adverse
drug events). Thus, although it was set
in subregulatory guidance, we
established the initial $4000 cost
threshold at the inception of the Part D
program.
As discussed in our April 2010 final
rule entitled, ‘‘Policy and Technical
Changes to the Medicare Advantage and
Medicare Prescription Drug Benefit
Programs’’ (75 FR 19776), following an
analysis of plan reported data, we found

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that only 10 percent of beneficiaries
enrolled in a Part D plan with an
approved MTM program were eligible
for MTM services in 2006 and only 13.1
percent were eligible for MTM services
in 2007. In 2008, we conducted an
analysis of beneficiary drug costs using
Prescription Drug Event (PDE) data from
contract years 2006 and 2007 obtained
from the Integrated Data Repository
(IDR) system. As part of this analysis,
the total gross drug cost and number of
beneficiaries that incurred annual drug
costs (below) or (greater or equal to) the
$4000 cost threshold was determined.
The average number of PDEs and
average costs per beneficiary were also
calculated. Further analysis examined
cost breakouts in $500 increments to
determine the distribution of
beneficiaries, as well as the number of
fills, and gross drug cost for
beneficiaries with annual drug costs in
each of these categories. We determined
that close to 25 percent of Part D
enrolled beneficiaries with drug
utilization (beneficiaries with at least
one PDE during the study period)
during 2006 and 2007 had annual gross
drug costs of at least $3,000. Therefore,
we lowered the cost threshold to $3,000
in the 2010 Call Letter. Based upon our
analysis of the more recent data in 2010,
we concluded that this threshold would
ensure that approximately 25 percent of
the beneficiaries using the Part D benefit
would receive MTM services, and we
codified the $3,000 threshold, as
updated annually by the annual
percentage increase in the average per
capita aggregate expenditures for Part D
drugs for Part D eligible individuals
under § 423.104(d)(5)(iv) in the April
2010 final rule entitled, ‘‘Policy and
Technical Changes to the Medicare
Advantage and Medicare Prescription
Drug Benefit Programs’’ (75 FR 19818).
The threshold is currently $3,144 in
2013.
However, the use of lower cost
generics has been increasing since the
Part D program began, so the application
of this threshold may exclude many
beneficiaries who are in need of MTM
services. We believe this increase in the
use of lower cost generics may
contribute to low MTM program
enrollment rates which currently hover
around 8 percent, and may also be a
driver in racial disparity in MTM
program enrollment. Additionally, prior
work, including the RBRVS approach
described previously, assigns relative
risk of needing MTM services using the
number of indications that an
individual has and the number of
medications that he or she is taking, but
does not address a cost threshold.

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Consequently, we are concerned that
there are a number of beneficiaries who
need MTM, but are not currently
eligible because they do not meet the
current cost threshold of $3,144, despite
the increased likelihood of having drug
therapy problems as a result of having
multiple chronic diseases and taking
multiple medications. Moreover, the
current cost threshold may have the
unintended consequence of causing
beneficiaries to no longer qualify for
MTM services in the next plan year
(whether remaining in the same plan or
enrolling into a new plan) if they fall
below the cost threshold as a result of
their enrollment in plans that employ
cost avoidant strategies, such as
aggressive use of generics, or in MTM
programs that center on therapeutic
interchange.
Consistent with our proposal that
sponsors must target enrollees taking
two or more Part D covered drugs for
MTM services and taking into account
that one or more of these Part D drugs
are likely to be generics, we propose
setting the annual amount in Part D
drug costs at an amount that represents
the intersection of multiple conditions
and multiple drugs. Based on an
analysis of PDE data, the average cost of
a generic prescription is $25.85. Because
a very small percentage of prescriptions
are for more than 30 days, we assume
that this amount is the average cost for
a 30-day generic prescription. Thus, the
annual total drug cost for a beneficiary
filling two generic prescriptions is
$620.40. Accordingly, consistent with
our proposal to determine a cost
threshold that is commensurate with the
drug spending of beneficiaries that meet
the first two criteria regarding multiple
conditions and use of multiple covered
Part D drugs, we would set the cost
threshold at $620, which is the
approximate cost of filling two generic
prescriptions. We propose to revise this
number periodically to reflect more upto-date information regarding the drug
spending of beneficiaries that have two
or more chronic conditions and use two
covered Part D drugs. We remind
sponsors that the drug costs used to
determine if the total annual cost of a
beneficiary’s covered Part D drugs is
likely to equal or exceed the specified
annual cost threshold for MTM program
eligibility includes the ingredient cost,
dispensing fee, sales tax, and vaccine
administration fee, if applicable.
Because the statute requires that plans
target beneficiaries who ‘‘are identified
as likely to incur annual costs for
covered Part D drugs that exceed a level
specified by the Secretary,’’ we
encourage sponsors, as most do now, to

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project annual costs for a beneficiary
based on costs from the preceding
month or quarter.
We took a number of factors into
consideration in deciding to propose
lowering the annual threshold to a level
commensurate with the drug spending
of beneficiaries with multiple chronic
diseases taking two covered Part D
drugs. Doing so promotes consistency
among Part D plans relative to the three
eligibility criteria set forth in the statute
by factoring multiple conditions and
multiple Part D drugs into how the cost
threshold is set. We know now that
patients with multiple conditions and
taking multiple drugs have a higher
probability of having at least two drug
therapy problems and could benefit
from MTM. More beneficiaries are using
lower cost generic alternatives and no
longer meet the current cost threshold,
which is over $3,000, and studies have
found that the current cost threshold
may promote racial disparities in MTM
eligibility.
Based on an analysis of 2011 PDE data
and 2011 RxHCCs from the Risk
Adjustment system, approximately 60
percent of Part D enrollees have two or
more chronic diseases were taking two
or more Part D drugs and incurred drug
costs greater than or equal to $500. We
found that 50 percent of Part D enrollees
have two or more chronic diseases, were
taking two or more Part D drugs, and
had drug costs of greater than or equal
to $1000. Therefore, we estimate that
approximately 55 percent of Part D
beneficiaries will be eligible for MTM
based on the proposed criteria (two or
more chronic diseases, two or more Part
D drugs, and likely to incur $620 in
annual Part D drug costs).
The CMMI MTM study found that
high-performing MTM programs not
only improved drug therapy outcomes
but also maintained or lowered rates of
hospitalizations, ER visits, and
associated costs. Therefore, more of the
Part D population can benefit from
MTM services and these programs can
potentially positively impact the
Medicare program as a whole through
improved medication use and lower
healthcare costs. As a result of this, we
no longer believe that it is appropriate
to target only 25 percent of the Part D
populations, and only those
beneficiaries with high drug costs. This
is consistent with our view in our
January 2005 final rule where we stated
that we believe that MTM must evolve
and become a cornerstone of the
Medicare Prescription Drug Benefit. We
also intend that the Medicare
Prescription Drug Benefit will serve as
a model for achieving quality

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improvement in prescription drug
therapy.
Although we are proposing to set the
annual threshold at a level that is
commensurate with the drug spending
of beneficiaries with two or more
chronic diseases that use two covered
Part D drugs, we considered other
alternatives. For example, we
considered setting the threshold at $900
or $1200, which roughly coincide with
cost thresholds achieved by taking three
or four generic drugs. We solicit
comment, based on industry and MTM
provider experience, on where this
threshold might be alternatively set.
Although we are proposing to broaden
MTM eligibility, we also believe there
are special populations of beneficiaries
for whom broader targeting criteria will
not adequately address barriers they
may face to receiving MTM services.
The CMMI MTM study found that
effective MTM programs establish
proactive and persistent CMR
recruitment efforts. These programs also
utilize trusted community relationships,
including networks of community
pharmacists, to recruit MTM eligible
candidates as well as existing working
relationships between MTM providers
(pharmacists) and prescribers to make
recommendations and discuss identified
problems for patients. Trusted
community relationships are an
important tool that can be leveraged to
reduce disparities in access to MTM
services, and other health disparities in
general, faced by some special
populations of beneficiaries.
For example, LIS-enrollees are a
diverse group and are more likely than
other Medicare enrollees to have a high
burden of disability and chronic
disease, to have limited English
proficiency, and to belong to a racial or
ethnic minority group. Although LISeligibility is not a perfect indicator for
the social determinants of health faced
by those with limited English
proficiency or belonging to racial or
ethnic minorities, it is true that those
with limited English proficiency, and
those belonging to racial and ethnic
minorities are more likely than other
Medicare enrollees to be poor. Because
this financial status is frequently
compounded by a variety of barriers to
accessing health insurance and care,
these beneficiaries generally have a
higher burden of disability and chronic
disease. As discussed previously, the
use of utilization-based criteria to target
at-risk individuals who may not, as a
result of cultural norms or preferences,
be high utilizers of health care services
is particularly troubling. This comes in
spite of evidence in treatment
guidelines which suggests that they may

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need targeted outreach. Such criteria
may also miss other high-risk
individuals who use multiple low-cost
generic drugs that present a safety risk
without reaching a cost threshold. More
of these beneficiaries will be eligible for
MTM services due to the revised criteria
that we are proposing in this rule.
However, there are currently no
requirements under our regulations that
Part D plans ensure that beneficiaries in
these special populations receive
focused outreach or engagement to
increase their participation in MTM.
Chronic disease and disability are
common in the LIS population. More
than 80 percent of Part D enrollees who
had spending high enough to reach
catastrophic coverage were LIS
enrollees. Additionally, the
reassignment process can present
additional challenges for LIS enrollees
such as new formularies, requirements
for prior authorizations, step therapy, or
quantity limits, processes for
exceptions, appeals, and grievances, and
contacting their plan. This makes it
more challenging for LIS enrollees to
maintain access to their drugs. Further,
pharmacists at the point of sale
frequently spend a great deal of time
with and on behalf of these enrollees as
they face formulary changes. This, in
turn often generates high levels of
frustration for the enrollee, as he or she
waits for the pharmacist to resolve the
issues, as well as for the pharmacist, as
the effort required to assist the customer
approaches the level of service
furnished in MTM, but remains
uncompensated.
Challenges faced by LIS enrollees in
the Part D program are exacerbated for
those with limited English proficiency
or who belong to a racial or ethnic
minority. For example, translators and
multi-language inserts currently
required may not be adequate to address
the cumulative effects of race and
ethnicity, lower levels of education, and
poverty that are frequently associated
with individuals with limited English
proficiency. Moreover, messages
conveyed by such approaches may not
be consistent with an individual’s
underlying cultural beliefs and attitudes
about medicine and therapy.
Another example involves the Indian
Health Service, which is staffed by
many health care providers in the
United States Public Health Service and
bears primary responsibility for caring
for American Indians and Alaska
Natives. The Indian Health Service is
comprised of facilities operated by the
Indian Health Service, tribes or tribal
organizations pursuant to the Indian
Self-Determination and Education
Assistance Act, and urban Indian

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organizations pursuant to title V of the
Indian Health Care Improvement Act.
When the majority of American Indians
and Alaska Natives live outside
reservation land, where most IHS/tribal
facilities are located, barriers in access
to care are seen in both rural and urban
landscapes, where there is limited
availability of providers or limited
offering of services, respectively.
Transportation to IHS/tribal facilities
may be a barrier and, the PharmPAC
report also indicates that the patientperceived benefit of paying monthly
premiums, in light of 100 percent
coverage of health care expenses for
eligible patients, may also reduce
participation in MTM services. The
PharmPAC report goes on to state that
the Public Health Service Pharmacy
program has apprehension about
contracting with Part D plans offering
MTM programs because limited
compensation by Part D plans for MTM
services is not cost-effective to
implement on a national scale.
We believe that the difficulties faced
by special populations of beneficiaries
represent important opportunities for
robust MTM services that, when
associated with early completion of
CMRs, will help beneficiaries navigate
the reassignment process, better reward
pharmacists for the level of effort
needed to serve these beneficiaries, and
provide another option for sponsors to
manage high cost beneficiaries. We have
previously discussed the impact of oneto-one counseling by State Health
Insurance Assistance Programs, and a
growing body of evidence indicates that
the person-to-person aspect of MTM
(including through the use of telehealth
technologies) has the potential to yield
multiple benefits that warrant more
effective outreach by sponsors to LIS
beneficiaries and those with limited
English proficiency or who belong to a
racial or ethnic minority. As we see
with the proportion of LIS-eligible-butunenrolled beneficiaries who have to
apply to qualify for subsidies,
generalized attempts at outreach are not
sufficient to increase enrollment.
Because of the wide variety in social
determinants that contribute to barriers
in access to coverage and care,
individualized approaches to target
populations such as LIS-eligible, limited
English proficiency, racial and ethnic
minorities, including American Indians
and Alaska Natives, within the larger
MTM-eligible population will likely
require a multi-faceted approach. Thus,
the opt-out method of enrolling targeted
beneficiaries into MTM at
§ 423.153(d)(1)(v) may only partly

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address the increased barriers to care
faced by this group.
We are concerned that such social
determinants contribute to persistently
low MTM enrollment and participation
despite attempts to broaden the criteria.
As we have gained more experience
with the MTM programs, we have
become concerned with the number of
simplistic, generalized strategies that
have been implemented for delivering
MTM services. We believe that Part D
sponsors’ strategies for outreach and
service provision cannot be ‘‘one size
fits all’’ and must be appropriately
geared to social and demographic
subpopulations within the overall
targeted population in order to be
effective. As discussed previously, the
CMMI MTM study identified that highperforming MTM programs engage in
multi-pronged, persistent efforts to
recruit Medicare beneficiaries to CMRs
and often use effective and diverse
communication modalities such as
person-to-person interactions, phone
calls, or community contacts (through
networks of trusted community
pharmacists), if needed. Moreover, as
illustrated in the example of the Indian
Health Service, this may also include
negotiating rates more acceptable to
MTM providers that beneficiaries
perceive as more accessible and
trustworthy.
Consequently, we are interpreting
section 1860D–4(c)(2)(D) of the Act,
which requires plans to have in place a
process to assess medication use of
individuals who are at-risk but not
enrolled in MTM, to require Part D
sponsors to establish effective strategies
that ensure access to MTM services for
all eligible beneficiaries. The statutory
requirement to assess the medication
use of at risk beneficiaries should
encompass the requirement that plan
sponsors better address barriers in
access to MTM services and improve
participation rates, particularly at the
start of enrollment in the plan, faced by
those with limited English proficiency,
those who belong to racial and ethnic
minorities, or who are LIS enrollees.
Without being prescriptive about what
strategies must be employed, we are
proposing that sponsors develop an
effective strategy to ensure access to
services for all MTM-eligible
beneficiaries, including those who have
disabilities or who have limited English
proficiency. Specifically, we propose to
revise § 423.153(d)(1)(v) to include the
requirement that a Part D sponsor must
‘‘have an outreach strategy designed to
effectively engage all at-risk
beneficiaries enrolled in the plan.’’
Sponsors have previously commented
to us that they have difficulty reaching

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many individuals in these special
populations because of inconsistent or
incorrect contact information. While
this certainly presents an added
challenge, plan sponsors could, for
example, analyze fill data, and partner
with pharmacies they know that a
particular beneficiary or populations of
beneficiaries frequent. Incorporating the
pharmacies that targeted individuals
utilize into the MTM program may be a
particularly effective strategy for
successful outreach that will lead to
enrollment in MTM programs that is
more broadly representative of the
breadth of demographic segments in the
targeted population. We believe that
current plan reporting requirements,
along with other CMS data sources, will
be sufficient for us to evaluate the
impact of such strategies. We solicit
stakeholder comment on other
important strategies that might prove
successful in improving access to MTM
services which could be considered at a
later time. This proposed rule may be of
interest to, and affect, American
Indians/Alaska Natives. Therefore, we
plan to consult with Tribes during the
comment period and prior to publishing
a final rule. We also intend to monitor
best practices as sponsors implement
more effective strategies and may
consider imposing additional
requirements in future rulemaking.
In summary, we are proposing
revisions to the MTM eligibility criteria
to target beneficiaries who have two or
more chronic conditions, with at least
one being a core chronic disease, who
are taking two or more covered Part D
drugs, and who have annual Part D drug
costs commensurate with the drug
spending of beneficiaries with two or
more chronic diseases that use two
covered Part D drugs. By decreasing the
number of chronic diseases and
medications and lowering the cost
threshold for MTM eligibility, we
anticipate that more beneficiaries will
have access to MTM services which
have been shown to improve drug
therapy outcomes and decrease
healthcare costs. We believe that these
changes will simplify the MTM criteria
and minimize beneficiary confusion
when choosing or transitioning between
plans. We believe these changes will
also reduce disparities within the Part D
beneficiary population and allow more
beneficiaries with drug therapy
problems to receive MTM. Additionally,
broadened criteria, when paired with
more effective strategies for outreach
and access to MTM services, will more
appropriately reach those individuals in
need of these services. We remind
sponsors that these proposed changes

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represent the minimum requirements,
and that they may target additional
beneficiaries. Effective MTM programs
strengthen the Part D program and
improve its overall value and, we note,
our 5-star plans have consistently made
significant investments in MTM.
16. Business Continuity for MA
Organizations and Part D Sponsors
(§ 422.504(o) and § 423.505(p))
A variety of events ranging from
power outages to disasters and warnings
of disasters can disrupt normal business
operations, and when these events occur
it is important to ensure beneficiary
access to health care services and drugs.
Sections 1852(d) and 1860D–4(b) of the
Act, respectively applicable to Parts C
and D, establish access to services and
covered Part D drugs as a core
beneficiary protection. After Hurricane
Sandy it became apparent that a few
entities, particularly those with
operational centers and/or information
technology (IT) resources physically
located in the affected areas, did not
have consistent continuity plans or
back-up systems and processes to
ensure ongoing coordinated deployment
of critical staff to alternate locations.
Sections 1857(e)(1) and 1860D–
12(b)(3)(D) of the Act authorize the
Secretary to adopt additional contract
terms for, respectively, MA
organizations and Part D sponsors,
including section 1876 cost contracts
and Program for the All-Inclusive Care
for the Elderly (PACE) organizations
that provide qualified prescription drug
coverage, that are not inconsistent with
Parts C and D, respectively, of Title
XVIII of the Act, when the Secretary
finds it necessary and appropriate.
Hereafter, all proposed requirements
described in this section as applicable to
Part D sponsors, also apply to section
1876 cost contract and PACE
organizations that provide qualified
prescription drug coverage. While a
limited number of beneficiaries were
affected by problems on the part of a
small number of entities as a result of
Hurricane Sandy, the goal of consistent
disaster response remains: All MA
organizations and Part D sponsors must
limit the beneficiary impact of
unavoidable disruptions and must
ensure rapid restoration of operations.
Accordingly, we propose to add contract
provisions to require that MA
organizations and Part D sponsors
develop and maintain business
continuity plans in order to better
anticipate the types of disruptions that
could occur and then implement
policies and procedures to reduce
interference with business operations.
We believe this is appropriate to ensure

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that Medicare beneficiaries have access
to the care and coverage contemplated
by the statute.
The proposed provision would, in
§ 422.504(o)(1) and § 423.505(p)(1),
require that every MA organization and
Part D sponsor develop, maintain, and
implement a business continuity plan
that meets certain minimum standards.
In § 422.504(o)(1)(i) and
§ 423.505(p)(1)(i), we propose that the
business continuity plan must assess
risks posed to critical business
operations by disasters and other
disruptions to business as usual, be they
natural, human, or environmental.
Proposed § 422.504(o)(1)(ii) and
§ 423.505(p)(1)(ii) would impose a
requirement that the business continuity
plan contain a mitigation strategy to
lessen hazards, identify essential
functions, and prioritize the order in
which functions are restored to normal
operations; proposed paragraphs (1)(iii)
through (v) contain other minimum
requirements for the business continuity
plan, discussed in more detail in the
following paragraphs. In paragraphs
(o)(2) of § 422.504 and (p)(2) of
§ 423.505, we propose essential
functions that must be restored within
24 hours of a failure, disaster,
emergency, or other disruption.
In paragraph (1)(ii) of § 422.504(o) and
§ 423.505(p), we would require MA
organizations and Part D sponsors to
mitigate those risks through a variety of
strategies, specifically, by: (A)
Identifying events (triggers) that would
activate the business continuity plan;
(B) developing plans to maintain the
availability and, as applicable, the
confidentiality of hard copy and
electronic essential records, including a
disaster recovery plan for IT and
beneficiary communication systems; (C)
establishing a chain of command, which
would ensure that employees know the
rules of succession; (D) creating a
communications plan that includes
emergency capabilities and means to
communicate with employees and third
parties; (E) establishing procedures to
address management of space and
transfer of employee functions; and (F)
establishing a restoration plan with
procedures to transition back to normal
operations. Finally, we also propose, at
(1)(ii)(G) in § 422.504(o) and
§ 423.505(p), that the business
continuity plan comply with all
applicable federal, state, and local laws.
In light of the nature of the records an
MA organization and Part D sponsor
would have in its possession, we
propose to emphasize continuing
compliance with the contingency plan
requirements of the Health Insurance
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1996 (HIPAA) Security Rule (45 CFR
Parts 160 and 164, Subparts A and C) by
including a cross-reference to those
requirements in paragraph (1)(ii)(B)(2).
These areas of responsibility are
essential to continuing the business
operations that allow beneficiaries to
access health care services and covered
Part D drugs.
To better ensure that a business
continuity plan works as a practical
matter, we next propose in
§ 422.504(o)(1)(iii) and (iv) and
§ 423.505(p)(1)(iii) and (iv) to require
that on an annual basis, each MA
organization and Part D sponsor test and
revise the plan as necessary, and train
employees on their responsibilities
under the plan. Sections
422.504(o)(1)(v) and 423.505(p)(1)(v)
would require that MA organizations
and Part D sponsors keep records of
their business continuity plans that
would be available to CMS upon
request.
We do not believe the broad list of
areas that we propose be covered by
business continuity plans are new to
MA organizations and Part D sponsors.
Rather, these topics typically appear in
standard business continuity plans. And
we are also building on some
requirements that already exist under
federal and state laws. For instance,
with respect to electronic protected
health information, health plans have
long had to comply with the
contingency plan requirements found in
the HIPAA Security Rule. Indeed, our
goal is to provide a list broad enough to
align with the business contingency
plans that we believe most, if not the
vast majority, of MA organizations and
Part D sponsors already have in place.
In contrast to the aforementioned list
of broad content requirements, we
believe the need to protect beneficiary
access requires a prescriptive approach
for some functions. In paragraphs (o)(2)
and (p)(2), as part of the proposal that
essential functions must be restored
within 24 hours of failure (whether due
to disaster, emergency, or other
disruption), we identify what we believe
are the minimum essential functions for
each MA plan and Part D plan: Benefit
authorization, if authorization
requirements have not been waived, and
claims adjudication and processing; an
exceptions and appeals process; and call
center operations. Given the mandate of
the Act to ensure beneficiary access to
health care and covered Part D drugs
and the inability of many beneficiaries
to pay for services or drugs without the
Medicare benefit, we believe that the
operations listed in the proposed
regulations are the most essential
operations because they directly support

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the provision of Part C and D benefits.
They ensure immediate electronic
communication on the availability and
extent of Part C and D benefits and also
provide support that makes it more
likely that Medicare benefits will be
appropriately and timely provided (for
example, by providing telephone
assistance to beneficiaries with
questions on how to obtain benefits and
maintaining a forum in which
beneficiaries can challenge benefit
denials). Without real time provision of
Medicare benefits, beneficiaries might
not pay for the entire cost of the services
or drugs and therefore go without
necessary treatment.
We believe the operations listed here
are the essential operations which must
be restored in a rapid time frame. We
intend our proposed deadline of 24
hours to be the outside limit and would
expect MA organizations and Part D
sponsors to restore operation of
essential functions as soon as possible
but not later than 24 hours after they fail
or otherwise stop functioning as usual.
The clock would begin running in cases
of total failure (for example, a computer
or telecommunications system crashes
or stops working after disruption of the
power supply) and also when
significant problems occur (for example,
a central database is corrupted).
The need to ensure correct claims
adjudication and benefit administration
of health care services and drugs is no
less acute during emergencies. A
disaster or other disruption in one part
of the country may disable computer
systems that service areas across the
country that have not otherwise been
disrupted. Beneficiaries in those
unaffected areas who were denied
health care or drug benefits (that is,
access to drugs or reimbursement for
claims paid out of pocket) before the
disruption took place should not be
denied the right to immediately
challenge those denials or to learn
timely the resolution of earlier
challenges. As proposed,
§ 422.504(o)(2)(i) and § 423.505(p)(2)(i)
identify benefit authorization (if
authorization requirements have not
been waived) and claim adjudication
and processing as essential functions
which must be operational within 24
hours. We intend that this proposed
regulation would require restoration of
those operations for services rendered at
a hospital, clinic or provider office or at
the point of sale for Part D covered
drugs. This function is essential for both
Medicare Advantage and Part D plans.
In addition, we also propose
standards specific to Part D sponsors in
§ 423.505(p)(2)(ii) and (iii) to ensure that
a beneficiary who presents at a

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pharmacy with an appropriate
prescription for a covered Part D drug
during a disruption will be more likely
to walk away with the drug in hand.
The first three prongs under proposed
§ 423.505(p)(2) would classify as
essential the following functions: (i)
Authorization, adjudication and
processing of pharmacy claims at the
point of sale; (ii) administration and
tracking of enrollee’s drug benefits in
real time, including automated
coordination of benefits with other
payers; and (iii) provision of pharmacy
technical assistance. These essential
tasks entail numerous sub-functions.
For instance, Part D sponsors would
need to restore within the 24 hour
return to operations (RTO) all computer
and other systems that meet all privacy
and security requirements in order to
communicate to pharmacies information
about topics including: Coverage under
Part D and the specific plan; costsharing and deductibles; any restrictions
such as prior authorization, step
therapy, or quantity limit edits; and
coordination of benefits from other
insurers and any low income subsidies.
Additionally, the sponsor would need to
undertake a concurrent drug utilization
review (DUR) to address, for instance,
safety issues, as well as restore its
pharmacy help desk to provide prompt
answers to any questions pharmacies
might have. (For more detail on some of
these functions and sub-functions, as
related to Part D, please see the
preamble to section III. A. 17 of this
proposed rule entitled, ‘‘Requirement
for Applicants or their Contracted First
Tier, Downstream, or Related Entities to
Have Experience in the Part D Program
Providing Key Part D Functions’’.)
Proposed § 422.504(o)(2)(ii) and
§ 423.505(p)(2)(iv) would classify as an
essential operation an enrollee
exceptions and appeals process
including coverage determinations.
Under this provision, within 24 hours of
failure, MA organizations and Part D
sponsors would need to restore all IT
and workforce support necessary to
maintain the ‘‘safety net’’ that ensures
beneficiaries the right to appeal or to
seek a formulary exception.
Finally, for both MA organizations
and Part D sponsors, we propose that
the operation of the call center be an
essential function which must be
restored within 24 hours. By classifying
operation of the call center as essential,
proposed § 422.504(o)(2)(iii) and
§ 423.505(p)(2)(v) would ensure that
beneficiaries can receive the
information necessary to find out where
they need to go to access benefits and
learn about any special rules that might
apply (for example, whether pre-

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authorization requirements are waived
or beneficiaries can obtain benefits at
out-of-network providers or pharmacies)
by requiring MA organizations and Part
D sponsors to restore operation of call
center services within 24 hours.
Enabling a beneficiary who has just
been denied Part D coverage at his or
her usual pharmacy to call immediately
and speak to a customer service
representative while still standing in
that pharmacy can ensure that he or she
obtains drugs appropriately covered by
his or her Part D plan before returning
home or moving to a safer area.
Furthermore, because it may be
difficult during a disaster to get to a
provider’s office or a pharmacy, we
believe it is also important that benefit
authorization, claims adjudication, and
call center operations be restored within
24 hours after failure. While our
proposed provision would require MA
organizations and Part D sponsors to
coordinate their workforce, facilities,
and IT and other systems support to
meet the 24 hour RTO, we believe that
the vast majority of MA organizations
and Part D sponsors already meet, or if
not, would be able to meet this
requirement with their current
resources, based upon our knowledge of
the industry and as evidenced by the
lack of widespread problems with MAO
and Part D operations that resulted after
recent natural disasters in different parts
of the country. MA organizations and
Part D sponsors would not be required
to take any prescribed actions (for
example, there is no requirement for
redundant systems located at certain
distances apart). Rather, the 24 hour
RTO would allow MA organizations and
Part D sponsors the flexibility to
continue to seek their own disaster
preparedness solutions (for instance,
vendor sites or functions spread across
facilities).
Our goal in proposing a contractual
requirement for business continuity
plans is to ensure beneficiary access to
health care services and Part D drugs
during disasters and other interruptions
to regular business operations. We view
prior planning as essential to achieving
this goal. We specifically solicit
comments regarding which functions
should be identified as essential
operations and the 24-hour timeframe
for RTO and would appreciate any
information unique to the role of MA
organizations and Part D sponsors.

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17. Requirement for Applicants or Their
Contracted First Tier, Downstream, or
Related Entities To Have Experience in
the Part D Program Providing Key Part
D Functions (§ 423.504(b))
Since its establishment in 2006, the
Medicare Part D program has matured
into a generally stable, well functioning
program, and the Part D sponsors (as
well as their first tier, downstream, and
related entities (FDRs)) with which CMS
contracts have developed vast expertise
in the operational complexities of the
program. While we will continue to fine
tune the program through rulemaking,
guidance, and additional oversight
procedures, we believe the program has
largely entered a mature stage. Despite
this progress, we still find ourselves
spending a disproportionate amount of
resources and attention on the
operations of new Part D sponsors
where neither the new sponsor nor its
supporting FDRs have experience with
Part D. In an environment where there
is an abundance of Part D industry
expertise, we are committed to
establishing an approach to contracting
with new Part D sponsors that ensures
that they take advantage of that
expertise and experience in the
development of their Part D program
operations.
To address this problem, pursuant to
our authority at section 1860D
12(b)(3)(D) of the Act to adopt
additional contract terms, not
inconsistent with the Part C and D
statutes, that are necessary and
appropriate to administer the Part D
program, we are proposing to adopt
provisions that would require any entity
seeking to contract as a Part D plan
sponsor (as a stand alone prescription
drug plan sponsor or as a Medicare
Advantage organization offering Part D
benefits) to have arrangements in place
such that either the applicant or one of
its contracted FDRs has one full benefit
year serving as a Part D plan sponsor, or
at least one full benefit year of
experience performing key Part D
functions for another Part D plan
sponsor. The applicant or a contracted
FDR will be required to have obtained
that experience within the two years
preceding the Part D sponsor
qualification application submission.
Under this proposal, the experience
requirement would be met by an entity
seeking to contract as a Part D plan
sponsor if its parent or another
subsidiary of that parent already holds
a Part D sponsor contract that has been
in effect for at least one year at the time
of the application submission.
Of course, all applicants and their
FDRs were new to the Part D program

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in 2006, so we necessarily went forward
with partners that may have had
significant drug benefit administration
experience, but no experience with the
unique features of Part D. In 2014, there
will be approximately 310 parent
organizations that own 578 legal entities
offering 881 contracts for Part D. In
addition, more than 300 organizations
(including Part D sponsors and their
FDRs) perform key Part D functions on
behalf of the Part D sponsors. Given this
large number of organizations with Part
D experience available to serve
beneficiaries, we believe it is in the Part
D program’s best interest to be more
discriminating about the entities with
which we partner to deliver the Part D
benefit.
New, inexperienced entities may be
more likely to fail in all or some key
Part D functions, causing harm to
beneficiaries and requiring us to devote
significant resources providing
technical support to the new Part D
sponsor in order to protect the Medicare
beneficiaries enrolled in the sponsor’s
plan(s). Given the wealth of available
Part D expertise that now exists, it is
justifiable for us to require that new
applicants to the program bring with
them Part D experience so that we can
better protect Part D enrollees and
minimize unnecessary expenditures of
resources by us in correcting avoidable
problems.
We have determined that prior
experience offering drug benefits in the
commercial insurance or Medicaid
markets is no longer a sufficient
substitute for experience operating the
Part D benefit. The Medicare drug
benefit is fundamentally different from
other drug benefits, with unique and
operationally complex provisions,
including transition fill requirements,
protected class medication formulary
requirements, low income subsidy
administration, Part A and B versus Part
D coverage determinations,
requirements related to the tracking of
true out of pocket costs, and
requirements related to the coordination
of benefits with other payers in real
time. When neither a Part D sponsor,
nor its FDRs providing key Part D
functions, has any experience delivering
Part D benefits, the consequences can be
disastrous for beneficiaries and highly
disruptive for the program and CMS. In
a recent plan year, we placed a new PDP
sponsor, where neither it nor its FDR
had PDP experience, under an
immediate enrollment and marketing
sanction just months after the
organization began its PDP operations.
The sponsor had experienced
widespread failures across all of the
most important PDP operational areas

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and was unable to fix its problems
without hiring additional staff and
contractors with PDP experience. In this
case, among other deficiencies, this
sponsor had inappropriately rejected
drug claims at the point of sale; failed
to properly process coverage
determinations (that is, requests for drug
coverage or payment and
reimbursement); denied enrollees the
chance to appeal rejected claims and
failed to ensure that denied coverage
determinations were reviewed by an
independent third party; and failed to
process enrollment and disenrollment
requests, or failed to properly process
enrollment transactions. In short, the
PDP sponsor was not providing the PDP
benefit to its members. This became
obvious when the rate at which we
received beneficiary complaints about
the sponsor for the first 4 months of
operation was more than 225 percent
higher than the average rate at which we
received complaints about all other PDP
sponsors for the same period. We were
forced to dedicate significant resources
and personnel to addressing the
sponsor’s systemic failures.
We believe that these failures would
not occur, or would be less catastrophic,
if either the Part D sponsor or its
supporting FDRs have had experience
actually performing key Part D
functions. When both the new sponsor
and its FDRs lack experience in Part D,
there is no source of Part D expertise
associated with the operation of a
Medicare contract that could be counted
on not only to establish and maintain
systems that would ensure the effective
delivery of the drug benefit, but also to
identify emerging operational problems
and promptly develop and implement
necessary corrective action plans. Thus,
we have found that the marriage of Part
D novices under a single contract has
proven to be a particularly risky and
disruptive combination.
At the heart of the Part D benefit is the
sponsor’s ability to process claims for
prescription drugs in real time because,
unlike health benefits, where claims
payment normally follows the delivery
of services, pharmacies require
confirmation of claims payment at point
of sale either from an insurer or
payment from the individual. While
there are many operational functions
that must run smoothly for a Part D plan
to be successful (for example, pharmacy
network development/maintenance,
enrollment processing, prescription
drug discount negotiation, and
provision of customer service), we are
proposing to require Part D experience
in only three critical areas in which
beneficiaries are particularly vulnerable
should the sponsor demonstrate

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significant non compliance. We believe
limiting our new requirement proposal
to just three targeted areas offers a
balanced approach which protects
beneficiaries while at the same time
provides needed flexibility to new
sponsors to structure their business
arrangements to address the dozens of
other Part D functions. The three areas
for which we are proposing to require
prior experience in Part D at the time of
application to become a new Part D
sponsor are
• (1) Authorization, adjudication and
processing of pharmacy claims at the
point of sale;
• (2) Administration and tracking of
enrollees’ drug benefits in real time,
including automated coordination of
benefits with other payers; and
• (3) Operation of an enrollee appeals
and grievance process.
It is in these three areas where—in
our view, based on our experience with
Part D enrollee health is placed at the
most significant risk by Part D sponsor
compliance failures. Further, our audit
work has indicated that these are the
operational areas where sponsors are
most likely to have significant failures
that require immediate corrective
action. While other areas, like
enrollment processing, also present
risks of direct beneficiary harm, our
experience has shown that organizations
usually can overcome enrollment
problems in a manner that minimizes
direct beneficiary harm fairly quickly.
Also, our audit findings have shown far
fewer serious problems in the
enrollment area compared to the three
selected areas (see http://www.cms.gov/
Medicare/ComplianceandAudits/PartC
andPartDComplianceandAudits/
Downloads/2012PartCPartDProgram
AuditAnnualReport.pdf).
Authorization, adjudication and
processing of pharmacy claims at the
point of sale are the most basic features
of the Part D program, allowing Part D
plan enrollees to have their
prescriptions filled at the pharmacy
counter. When presented with a
prescription by a beneficiary, the
pharmacy communicates electronically
with the Part D sponsor to determine
eligibility, coverage, and cost sharing for
the item according to the formulary and
benefit structure of the plan in which
the beneficiary is enrolled. Aspects of
eligibility and coverage unique to Part D
include eligibility for the Low Income
Subsidy and transition benefits.
Assuming that the sponsor informs the
pharmacy that the prescribed drug is
covered under the beneficiary’s plan,
the pharmacy charges the beneficiary
the appropriate cost share or deductible
amount, as determined by the plan

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sponsor. The Part D sponsor also uses
the online, real time system to conduct
concurrent drug utilization review
(DUR), a process through which
pharmacists receive a message warning
of potential safety issues given the drug
requested and the patient’s drug history.
If any of the cost sharing information is
incorrect, or if the claim fails to
adjudicate electronically for any reason,
the beneficiary may be forced to pay out
of his own pocket costs that are not his
responsibility or leave the pharmacy
without his prescription drugs. If
concurrent DUR is not performed
correctly, the beneficiary’s health and
safety is at risk.
Administration and tracking of
enrollees’ drug benefits in real time
refers to a Part D sponsor correctly
adjudicating the formulary it had
submitted to CMS and that had been
approved by CMS, along with accurately
tracking an enrollee’s drug spend within
the Part D benefit, and coordinating
benefits in real time with other payers.
Sponsors must insure that the drug
dispensed meets the definition of a
covered Part D drug, including a
medically accepted indication that is
not otherwise covered under Part A or
B of Medicare. Sponsors must also
insure that any approved prior
authorization, step therapy, and
quantity limit edits are processed
consistent with those approved by us, so
that drugs are not denied
inappropriately at the point of sale.
Sponsors are also required to insure that
enrollees are charged correct cost
sharing, as amounts vary depending on
the drug’s tier placement, the enrollee’s
drug spend to date, contributions from
other payers, and other factors such as
whether the beneficiary receives a low
income subsidy. Critically, compliance
also includes correct application of our
transition requirements, which is a
beneficiary protection that is unique to
Part D, and ensures beneficiaries facing
a situation where their drugs are not on
the plan’s formulary have access to a
temporary fill of the prescription, giving
beneficiaries time to switch to another
drug or seek a formulary exception.
Failures in this area can have significant
negative health consequences for
enrollees because they are likely to be
denied access to Part D drugs or face
incorrect charges at the point of sale.
The third key function we selected as
part of the experience requirement is
operation of an enrollee appeals process
(including coverage determinations). A
sponsor’s appeals operations serve as a
‘‘safety net’’ for improper benefits
administration. Medicare enrollees have
the right to contact their sponsor to
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coverage for drugs or services to which
the enrollee believes he or she is
entitled. Generally, sponsors are
required to classify and process
complaints about coverage for drugs or
payment as a request for a coverage
determination or appeal. Improper
processing of a coverage determination
denies an enrollee their due process and
appeal rights and may delay an
enrollee’s access to medically necessary,
even life sustaining services or drugs.
There are different decision making
timeframes for the review of coverage
determinations and appeals. We have a
beneficiary protection in place that
requires plans to forward coverage
determinations and redeterminations to
an Independent Review Entity (IRE)
when the plan has missed the
applicable adjudication timeframe. If
the plan sponsor reverses its initial
adverse coverage determination or the
IRE reverses the plan sponsor’s adverse
decision, the plan sponsor must
correctly authorize or provide the
benefit under dispute within the
timeframes set forth in regulation. If the
plan sponsor does not effectuate the
decision timely and correctly, this can
result in delays to an enrollee’s access
to medically necessary or even life
sustaining drugs. Thus, the appeals
process is a vital beneficiary protection
that serves as the beneficiary’s safety net
when something goes wrong with
claims adjudication or benefit
administration, and once again, directly
affects a beneficiary’s access to
prescription drugs.
Under our proposal, multiple separate
organizations could together combine
their experience to meet the prior
qualification requirements for the three
key Part D functions. That is, no one
single entity would need to have prior
experience in all three areas. Rather, the
requirement would be for the Part D
applicant in combination with its FDRs,
if any, to have Part D experience
covering the three key functions.
We believe there will be minimal
impact on the prescription drug benefit
administration market stemming from
our proposal, particularly since large
numbers of experienced organizations
currently perform this Part D work. Fifty
nine entities currently perform
authorization, adjudication and
processing of pharmacy claims at the
point of sale; 66 entities perform
administration and tracking of enrollees’
drug benefits in real time; and 203
entities operate an enrollee appeals and
grievance process. The ready
availability of entities that would meet
the criteria we establish here is
demonstrated by the fact that the vast
majority of new Part D sponsors each

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1957

year choose to contract with
experienced Part D FDRs. For example,
as of late May 2013, there are 21 new
organizations (at the parent level) with
active Part D contract qualification
applications for 2014, and each
applicant has contracted with an FDR
having at least one year of recent Part D
experience. Some of the applicants for
2014 that attempted to apply with
inexperienced entities performing the
selected key functions withdrew their
applications upon learning that they
contained significant deficiencies.
Our proposal also does not prohibit
additional organizations from gaining
Part D experience in the selected key
functional areas. Should an organization
wish to become a new Part D FDR for
one or more of the key functions, this
‘‘novice’’ entity could provide the
service for just one of the hundreds of
existing Part D sponsors. After a period
of one year, the novice entity would
then be qualified to provide its services
to existing Part D sponsors as well as
partner with new Part D applicants. We
are comfortable with this scenario
because during the novice entity’s first
year gaining Part D experience the
existing Part D sponsor would apply its
knowledge of how to oversee its FDRs,
have institutional knowledge of the
functional area, understand the
complexity of the program, and know
the risks of failing to implement the
program successfully.
In the somewhat the opposite
scenario, a new Part D sponsor
contracting with experienced FDRs will
have the opportunity to gain its
experience in the key Part D functions
by working closely with its FDRs,
developing in house expertise, and
providing oversight. After a period of
one or more years, if desired, the Part
D sponsor itself could conceivably take
responsibility for carrying out one or
more of the key Part D functions. We
fully believe that our proposed
approach allows for new organizations
to develop Part D expertise, yet
minimizes the significant risk to
beneficiaries that would be caused by
the types of widespread failures we
have seen in the selected key Part D
functions performed by inexperienced
entities.
While our proposal does not require
the Part D experience to be current at
the time of an application to become a
Part D sponsor, we are proposing that
the experience be recent (that is, within
the past 2 years) and have lasted for at
least one full benefit year. As stated
previously, the Part D program is
complex, and program policies evolve
each year, requiring organizations
working in Part D to adapt and adjust

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their operations. We believe that any
experience older than 2 years would be
out of date and would not represent
experience with the current state of the
Part D program. As for our proposed
requirement that the experience be for at
least a term of one full benefit year, this
approach is appropriate because
operating the benefit involves cyclical
activities, some of which take place only
one time per year, and thus an
organization can only gain full
experience by operating its Part D
functional area for an entire benefit
year.
We intend to implement this proposal
through our existing Part D contract
qualification application process, and
we have proposed to amend
§ 423.504(b) accordingly. Today, at the
time of application, an entity seeking a
Part D sponsor contract must provide
evidence that it has contractual
arrangements in place for any key Part
D function that the applicant itself will
not be performing. For the three key
functions identified under this proposal,
new application procedures will require
the applicant to submit evidence that
the entity to perform such functions
(whether itself or an FDR) has provided
the same function for another Part D
sponsor within the past 2 years, for at
least one full benefit year. Applicants
with existing Part D contracts or whose
parents or other subsidiaries of the same
parent hold Part D contracts will not be
required to submit evidence of their Part
D experience.
18. Requirement for Applicants for
Stand-Alone Part D Plan Sponsor
Contracts To Be Actively Engaged in the
Business of the Administration of
Health Insurance Benefits
(§ 423.504(b)(9))
The Medicare prescription drug
benefit program has matured into a
generally stable, well-functioning
program, and the Part D sponsors with
which CMS contracts have developed
vast expertise in the operational
complexities of the program. The market
for stand-alone Part D Prescription Drug
Plans (PDPs) has also matured
significantly since the program’s
inception and what was once a novel
product is now available to residents of
every state from multiple sponsors who
offer several plan options. Over the
same period, we have noticed that the
Part D program has in some cases
attracted sponsors wishing to offer
stand-alone PDPs who have no prior
experience in the delivery of health or
prescription drug insurance benefits,
often to the detriment of the Part D
program and the Medicare beneficiaries
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sponsors. We are committed to
establishing an approach to contracting
with organizations new to the standalone PDP program that ensures that
their first experience in the health
insurance and health benefits market is
not as the sponsor of a stand-alone PDP.
To address this problem, we are
proposing, pursuant to our authority at
section 1860D–12(b)(3)(D) of the Act to
adopt additional contract terms that are
necessary and appropriate to administer
the Part D program, regulatory
provisions that would require any entity
seeking to contract as a stand-alone PDP
sponsor, to have either actively
provided health insurance or health
benefits coverage for 2 continuous years
immediately prior to submitting a
contract qualification application, or
provided certain prescription drug
benefit management services to a
company providing health insurance or
health benefits coverage for 5
continuous years immediately prior to
submitting an application. This
requirement would not apply to an
entity seeking to contract as the sponsor
of a stand-alone PDP if its parent or
another subsidiary of itself or its parent
possesses the requisite experience.
This proposal may appear similar to
the immediately-preceding proposal
(section III.A.17) of this proposed rule
requiring, at § 423.504(b)(8), that new
Part D sponsors engage first tier,
downstream, and related entities with
prior Part D experience. However, the
proposed change we are discussing in
this section, which we propose to codify
at § 423.504(b)(8), would apply only to
entities seeking to contract as a Part D
sponsor of a stand-alone PDP, whereas
the proposed requirement at
§ 423.504(b)(8) would apply to all new
Part D sponsors, including those seeking
to contract as Medicare Advantage
organizations offering Part D through an
MA–PD plan. We are proposing both
requirements because the problems
encountered by new PDP sponsors with
no experience in the health insurance
market are distinct from those
encountered by new PDP sponsors and
MA organizations who use PBMs with
no experience in the Part D market. New
PDPs with no prior health insurance or
health benefits experience have
demonstrated significant problems even
when using experienced PBMs.
The Part D program has matured to
the point where beneficiaries in every
state now have access to several options
for basic and enhanced stand-alone Part
D coverage. In 2013, there is an average
of 15 enhanced stand-alone plans and
16 basic plans per PDP Region and no
region had fewer than 23 plans from
which beneficiaries may choose. These

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numbers are consistent with the
quantity of available PDPs in recent
benefit years and are well above the
minimum of two plans per region
required by section 1860D–(a)(1) of the
Act. Also, a total of 57 parent
organizations that own 72 legal entities
hold 75 Part D contracts for stand-alone
PDPs, numbers that indicate that CMS
has kept the PDP marketplace open to
a significant number of entities that
compete to serve beneficiaries.
Among the patterns we have
identified during our implementation
and administration of the Part D
program is the extent to which the
program has attracted organizations
with no experience in the delivery of
health or prescription drug benefits
prior to their entry into the Part D
program. These organizations often have
experience in other lines of business,
such as information technology, or are
formed by investment groups with no
other health care business for the sole or
primary purpose of entering the Part D
market. The Part D program is
effectively used by these organizations
as a means to finance their first (and
often only) foray into the health
insurance or health benefits industry. It
appears to CMS that these sponsors
view the Part D program as simply
another line of business to which they
can profitably apply their information
management expertise, especially if they
believe they can sell these new contracts
to a larger participant at a substantial
profit after several years. While
relatively few sponsors fit this profile
each year, they have caused
disproportionate problems for
beneficiaries and CMS, as described in
the following paragraphs. The proper
administration of the Part D benefit
involves much more than claims
adjudication. Our interaction with these
novice sponsors leads us to believe that
they underestimate the value of clinical
expertise in administering Part D
benefits, particularly in conducting
effective coverage determination and
appeals processes. Also, we believe they
often do not recognize the critical role
that relationships, particularly those
among beneficiaries, physicians,
pharmacists, other health care
professionals, and insurers, play in the
successful delivery of a healthcare or
prescription drug benefit. Yet, the stakes
involved in administering a Part D plan
are likely higher than those associated
with any other line of business in the
novice sponsor’s portfolio. Operational
failures in Part D can cause improper
denials at the pharmacy counter of
beneficiaries’ valid claims for
prescriptions or improper denial of

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appeals, leading to interruptions in their
therapies, which can have lifethreatening implications. In short, we
have found that these types of
applicants have been unable to
administer a Part D benefit.
The compliance record of PDP
sponsors with no healthcare-related
experience confirms our assessment of
the risks they pose to the Part D
program. Time and again, these
sponsors fail our past Medicare contract
performance and audit tests or receive
low quality scores (that is, star ratings)
because they lack the ability to
administer even the most basic elements
of a health or drug benefit program, let
alone one as complex as Medicare Part
D. For example, we recently sanctioned
a new stand-alone PDP sponsor (a
situation we describe in section III.A.17
of this rulemaking where we propose to
establish the requirement that all new
Part D sponsors engage subcontractors
with Part D experience). The sponsor
had no recent experience providing or
administering health benefits. It only
began offering healthcare-related
benefits when it became a Part D plan
sponsor. We believe the sponsor’s
inexperience administering health
insurance and health benefits, as well as
its apparent reliance on Medicare as its
sole source of revenue, compounded the
problems it experienced, as the sponsor
was unable to independently and
expeditiously identify and resolve
problems with benefits administration.
Another, more dramatic case,
involved a CMS decision in 2010 to
immediately terminate a PDP sponsor’s
contract under urgent circumstances in
which beneficiaries were being
significantly harmed. Prior to
contracting with CMS, the PDP sponsor
involved had no experience providing
or administering health insurance or
health benefits coverage. We terminated
the sponsor’s contract when an audit
(prompted by urgent complaints from
providers) revealed that the sponsor’s
compliance failures resulted in
improperly denied access to Part D
drugs and put the health of enrollees in
the sponsor’s PDP at imminent and
serious risk. Numerous compliance
failures resulted in beneficiaries being
denied drugs that they were entitled to,
including those needed to treat HIV,
cancer, and seizures, or receiving
delayed access to these drugs,
sometimes after being required to
undergo medically unnecessary and
invasive procedures. The problems were
so egregious and widespread that we
were compelled to terminate the
contract less than a month after we were
first alerted to the problems and less
than a week after an onsite audit of the

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sponsor. This termination created
massive disruption for beneficiaries and
to the program and required significant
resources from CMS to resolve. As
discussed previously, we believe that
these failures would not have occurred,
or would not have been as catastrophic,
if the sponsors had prior, recent
experience providing health insurance,
health benefits coverage, or key services
related to health benefits coverage.
When the sponsor is a novice not only
to Medicare Part D, but also to virtually
every aspect of health benefits
administration, there is no assurance
that the entity will be able to administer
or oversee the most basic elements of
health benefits coverage, such as
processing claims, administering a
coverage determination and appeals
process, enrolling beneficiaries, or
administering the benefit as approved.
Its systems and procedures for doing so
are by definition new and unproven. We
do not believe that health care is a
commodity that can be reduced to a
programmable data set, or that
administering the Part D benefit
involves little more than having the
right software package. To entrust
inexperienced applicants with
responsibility for correctly operating a
program for which even experienced
health insurers have had to develop new
expertise has proven to be unacceptably
risky. Part D sponsors are charged with
both ensuring that beneficiaries get the
drugs they need and applying clinically
appropriate utilization management
protocols to control costs and protect
beneficiary safety. In this capacity, they
have a role in clinical decision making
that is usually reserved for physicians
and health care providers with years of
academic training and clinical practice.
Permitting an organization with prior
experience limited to, for example,
developing payroll software, to design
and broker individuals’ access to
prescription drugs for potentially lifethreatening conditions is an
unacceptable mismatch between a set of
tasks and the expertise applied to it.
We propose that new applicants have
two years of experience providing
health insurance or health benefits
coverage (that is, operating as riskbearing entities licensed in the states
where they offer benefits) prior to
applying as stand-alone Part D Sponsors
because we believe that this provides
sufficient time to demonstrate the
applicant’s ability to operate a health
plan. A risk-bearing entity with
significant problems administering
health benefits would be unlikely to
remain in good standing with its
licensing authority for two years. While
a longer record of successful operations

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would likely provide better evidence of
the organization’s competence, we are
also sensitive to the need to promote
innovation and competition that can
come from new PDP sponsors. We
believe that requiring two years of
experience as a risk bearing entity
offering health insurance or health
benefits coverage ensures that new
sponsors of stand-alone PDPs have
minimal experience operating a health
benefits program without unduly
limiting new entrants to the
marketplace.
We recognize that a number of PBMs
and Third Party Administrators with
experience administering prescription
drug benefits have entered the standalone PDP market and have adapted to
providing the Part D benefit despite
their lack of previous experience as
health insurers. We believe this success
is the result, at least in part, of their
substantial experience operating key
functions that form the core of PDP
benefits on behalf of insurers. This
experience is not sufficient in and of
itself to administering a Part D plan, but
it is certainly necessary. Therefore, we
are proposing elsewhere in this
proposed rule that organizations
applying to contract as stand-alone PDP
sponsors that do not have experience as
a risk-bearing entity providing health
insurance or health benefits coverage
would, in the alternative, be eligible to
hold a PDP contract if they had
experience performing services on
behalf of an insurer in the delivery of
benefits in any health insurance market
in the three key areas indicated in this
section III.A.17 of this proposed rule.
The three areas that we are proposing as
meeting the experience requirements
are: (1) Adjudication and processing of
pharmacy claims at the point of sale; (2)
administration and tracking of enrollees’
drug benefits in real time, including
automated coordination of benefits with
other payers; and (3) operation of an
enrollee appeals and grievance process.
Our reasons for selecting these three
areas as meeting the experience
requirements are described in more
detail in the section of this rulemaking
notice relating to the proposed
requirement at § 423.504(b)(8) that new
Part D sponsors employ experienced
FDRs for these functions.
We are proposing that entities without
two years of experience as a risk bearing
entity offering health insurance or
health benefits coverage have five
continuous years’ experience providing
services in the three key areas listed
previously. We are proposing a longer
experience requirement for these
entities because entities offering these
services face fewer barriers to entry in

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the marketplace and are not as tightly
regulated as risk bearing entities. An
entity seeking to become a risk bearing
entity must qualify for a state license,
which requires the entity to demonstrate
on a continuous basis that it meets
extensive financial, capitalization, and
administrative requirements. By
contrast, an entity seeking to become a
PBM or Third Party administrator faces
little or no regulatory oversight for the
services it offers. The investment
required to start a PBM or Third Party
Administrator may be significantly
lower than that required of risk bearing
entities operating health insurance
programs. While a PBM that performs
poorly may lose contracts, it is unlikely
to be subject to regulatory action that
would become part of the publicly
available record that CMS could use to
evaluate its application to operate a
stand-alone PDP. However, we do
believe that over a longer period of time,
a PBM or Third Party Administrator’s
poor reputation would become known
among participants in the health and
prescription drug insurance markets,
making it difficult for that organization
to retain current contracts or obtain new
ones with insurers and remain in
business. We therefore believe that
entities that seek to qualify on the basis
of their experience as PBMs or Third
Party Administrators should be required
to have provided services in these key
areas for five continuous years, rather
than merely two.
We believe our proposal will not have
significant impact on the availability of
stand-alone PDP plans in the
marketplace, but that it will simply
function to keep out a small number of
inexperienced organizations who are
likely to perform poorly as stand-alone
PDPs. Fortunately, the vast majority of
new sponsors of stand-alone PDPs each
year have the requisite experience. For
example, eight organizations filed initial
applications during 2013 to qualify to
offer stand-alone PDPs in 2014 and 6 of
them had at least two years’ experience
as a health insurer or 5 years’
experience managing prescription drug
benefits for health insurers. Of the six
new stand-alone Part D plans in 2013,
five had the level of experience we are
proposing to require. Thousands of
entities nationally possess the requisite
experience providing health insurance,
health benefits coverage, or PBM
services.
If this proposed change is finalized,
we intend to incorporate it into our
existing Part D application process. At
the time of application, an entity
seeking a Part D sponsor contract must
provide evidence that it is currently
licensed or is in the process of being

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licensed in a state and provide certain
information about its organizational
experience and history. New application
procedures would require an applicant
for a stand-alone PDP contract to submit
evidence that the entity, its parent, or a
subsidiary of the same parent has
actively provided health insurance or
health benefits coverage for the prior 2
years, or has engaged in the three key
functions identified here continuously
for the prior 5 years.
19. Limit Parent Organizations to One
Prescription Drug Plan (PDP) Sponsor
Contract per PDP Region (§ 423.503)
Each year, we accept and review
applications from organizations seeking
to qualify to offer stand-alone
prescription drug plans in one or more
PDP regions. With limited exceptions
(for example, poor past contract
performance, limited Part D experience),
we approve all applications submitted
by organizations that demonstrate that
they meet all Part D application
requirements. CMS proposes, under our
authority at section 1860D–12(b)(3)(D)
of the Act to adopt additional contract
terms, not inconsistent with the Part C
and D statutes, that are necessary and
appropriate to administer the Part D
program, to add as a basis upon which
we may deny a PDP sponsor application
the fact that the applicant is applying
for qualification in a PDP Region where
another subsidiary of the applicant’s
parent organization already holds a PDP
sponsor contract. In our description of
this proposal, the term ‘‘parent
organization’’ refers to an entity that
controls a subsidiary through ownership
of more than 50 percent of the
subsidiary’s shares.
During the 2013 contract year, there
are 72 unique contracting entities (that
is, entities licensed as risk bearing
entities) holding 75 PDP sponsor
contracts. There are 57 parent
organizations that hold more than one
PDP sponsor contract through a
subsidiary contracting organization over
which they maintain a controlling
interest.
To promote the effective
administration of a Part D program that
involves so many parent organizations
and contracting entities, we have
consistently taken steps to ensure that
the numbers of PDP sponsors, PDP
sponsor contracts, and plan offerings are
kept at a level that allows sponsors to
fully exercise their rights as PDP
sponsors but avoids the duplication and
confusion that can result when
reasonable limits are not placed on
sponsors’ requests for contracting
arrangements that serve only their
internal business operations. During the

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initial Part D contracting conducted
during 2005, we approved a handful of
contracts that were held by subsidiaries
of a common parent organization. Since
then, we have worked with the affected
parent organizations to consolidate
almost all of those ‘‘duplicate’’ contracts
down to one PDP contract per
participating parent organization per
PDP region. The remaining duplicate
contracts accommodate parent
organizations that made binding
business arrangements while acting in
reliance on our previous allowance of
multiple PDP sponsor contracts in the
same PDP region. We expect to continue
to work with those parent organizations
to explore options for discontinuing
their reliance on the second PDP
sponsor contract in the immediate
future.
Section 1860D–12(b)(1) of the Act
provides that PDP sponsors may offer
multiple plan benefit packages (referred
to as PBPs or plans) under one PDP
sponsor contract. Therefore, parent
organizations need only one PDP
sponsor contract to offer the full range
of the possible plan options in a
particular PDP Region. We recognize
that many parent organizations that
offer plans in multiple PDP regions
must use more than one subsidiary to
administer their full array of plans
throughout the United States and the
territories. For example, parent
organizations may adopt these
arrangements to accommodate unique
state licensure requirements or the
terms of trademark licensing
agreements. However, none of these
justifications, which are based on a
parent organization’s need to serve more
than one PDP Region, would support a
request, like several we have received
during the CY 2014 contract
qualification application cycle, by a
parent organization to be granted a
second PDP sponsor contract in a PDP
Region it already serves. As discussed
more fully in the following paragraphs,
there are significant inefficiencies to the
program of having duplicate contracts
that do not provide more benefit plan
options than could be offered under a
single contract. Additionally, informal
communications made by past
requestors of duplicate contracts
indicated that the purpose has been to
either (a) segregate low income
beneficiaries into their own contract, or
(b) corral the experience of a particular
low-performing plan into its own CMS
contract so as not to taint the
performance rating of the better
performing plan offering, as
performance ratings are calculated at the
contract level. CMS opposes the

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inefficiencies of duplicate contracts and
the gaming duplicate contracts can
support. That said, we welcome
comments from industry, advocates, and
others as to circumstances for our
consideration under which duplicate
contracts may be beneficial.
One of the fundamental principles of
the Part D program is that the selection
of plans made available to beneficiaries
is the product of true competition
among PDP sponsors. Two subsidiaries
of the same parent organizations
offering plans in the same PDP region
are not truly competitors as decisions
concerning their operations are
ultimately controlled by a single entity,
or parent organization. Also, we only
approve those PDP offerings that meet
the meaningful differences test stated at
§ 423.265(b)(2), and we apply that test at
the parent organization level. A parent
organization would not gain an
opportunity to offer more plan benefit
packages under two or more contracts it
controlled through its subsidiaries than
it would under one contract because we
would, as part of our bid review,
evaluate whether all the plans proposed
by the same parent organization met the
meaningful differences test.
The proposed limitation on the
number of PDP sponsor contracts a
parent may control in a PDP Region is
also necessary to preserve the integrity
of CMS’ star ratings. CMS assigns star
ratings at the contract level, and they are
intended to reflect all aspects of the PDP
operations controlled by a unique
contracting entity. However, that
principle is compromised when a parent
organization to one of the contracting
entities is permitted to control, through
other subsidiaries, more than one PDP
contract. While the contracting entities
(that is, PDP sponsors) are legally
accountable for the delivery of benefits
under a PDP sponsor contract, when
those sponsors are subsidiaries to a
parent organization, it is the parent that,
in reality, controls the quality of the
sponsor’s contract performance. The
parent does this by using its controlling
interest in the subsidiaries to establish
the budget priorities and operational
policies of those entities. As a result,
allowing a parent organization to
effectively administer two or more PDP
sponsor contracts would allow it
potentially to artificially inflate the star
ratings on one contract by excluding the
poor performance under its other
contract from the rating calculation. In
that instance, some beneficiaries could
make a plan election without complete
information about the performance of
the organization ultimately responsible
for the quality of services they would
receive by enrolling in that plan. A

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beneficiary for whom quality ratings are
an important factor in choosing a plan
is best served by contracting
arrangements and rating systems that
provide the most transparency about the
performance of all the PDP products
offered under the authority of the single
parent organization. This goal is best
served by limiting parent organizations
to one PDP sponsor contract per PDP
Region.
Based on our experience in
administering the Part D prescription
drug benefit program we do not believe
that there is a compelling justification
for parent organizations to administer
two PDP sponsor contracts in the same
PDP region. Moreover, such
arrangements impede our ability to
efficiently administer the PDP and
provide a means by which the integrity
and reliability of our star ratings system
can be compromised. Therefore, we
propose to amend § 423.503(a) by
adding a paragraph (3) stating that CMS
will not approve an application when it
would result in the applicant’s parent
organization holding more than one PDP
sponsor contract in the PDP region for
which the applicant is seeking
qualification as a PDP sponsor. We
anticipate that we would most
frequently use this authority to deny an
application in instances where the
applicant’s parent organization already
controls a PDP sponsor contract, either
directly by acting as a PDP sponsor itself
(in instances when the parent is
licensed as a risk-bearing entity) or
through its ownership of a subsidiary
that qualifies as a PDP sponsor and is a
party to a stand-alone PDP sponsor
contract. In the less likely situation
where two or more subsidiaries of the
same parent organization each submit
applications in the same year for PDP
regions where the parent organization
controls no PDP sponsor contracts, we
would request that the parent withdraw
all but one of the applications. In the
absence of a withdrawal election, CMS
will deny all of the parent organization’s
applications.
20. Limit Stand-Alone Prescription Drug
Plan Sponsors To Offering No More
Than Two Plans per PDP Region
(§ 423.265)
Under our authority at section 1860D–
11(d) of the Act, we conduct
negotiations with stand-alone
prescription drug plan (PDP) sponsors
concerning our approval of the bids they
submit each year. As the Part D program
has evolved, we have adopted
regulations designed to authorize us to
use that negotiating authority to ensure
that the number of plans offered in a
given PDP region reflects a balance

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1961

between sponsors’ interest in providing
options tailored to meet the needs of a
diverse Medicare population and the
need to avoid creating undue confusion
for beneficiaries as they consider
various plan offerings. We continue here
our process of updating our bid review
authority to reflect the evolution of the
Part D program by proposing to limit to
two the number of plans stand-alone
PDP sponsors may offer in each PDP
region.
PDP sponsors must offer throughout a
PDP region at least one basic plan that
consists of: Standard deductible and
cost sharing amounts (or actuarial
equivalents); an initial coverage limit
based on a set dollar amount of claims
paid on the beneficiary’s behalf during
the plan year; a coverage gap during
which a beneficiary pays more of his
drug costs; and finally, catastrophic
coverage that applies once a
beneficiary’s out-of-pocket expenditures
for the year have reached a certain
threshold. Prior to our adopting
regulations requiring meaningful
differences among each PDP sponsor’s
plan offerings in a PDP Region, CMS
guidance allowed sponsors that offered
a basic plan to offer in the same region
additional basic plans, as long as they
were actuarially equivalent to the basic
plan structure described in the statute.
These sponsors could also offer
enhanced alternative plans which
provide additional value to beneficiaries
in the form of reduced deductibles,
reduced copays, coverage of some or all
drugs while the beneficiary is in the gap
portion of the benefit, or some
combination of those features.
As we have gained experience with
the Part D program, we have made
consistent efforts to ensure that the
number and type of plan benefit
packages PDP sponsors may market to
beneficiaries are no more numerous
than necessary to afford beneficiaries
choices from among meaningfully
different plan options. In addition to
setting differential out-of-pocket-cost
(OOPC) targets each year to ensure
contracting organizations submit bids
that clearly offer differences in value to
beneficiaries, we issued regulations in
2010 that established at § 423.265(b)(2)
our authority to deny bids that are not
meaningfully different from other bids
submitted by the same organization in
the same service area. Our application
of this authority has effectively
eliminated PDP sponsors’ ability to offer
more than one basic plan in a PDP
region since all basic plan benefit
packages must be actuarially equivalent
to the standard benefit structure
discussed in the statute. That regulation
also effectively limited to two the

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number of enhanced alternative plans
that we can approve for a single PDP
sponsor in a PDP region. As part of the
same 2010 rulemaking, we also
established at § 423.507(b)(1)(iii) our
authority to terminate existing plan
benefit packages that do not attract a
number of enrollees sufficient to
demonstrate their value in the Medicare
marketplace. Both of these authorities
have been effective tools in encouraging
the development of a variety of plan
offerings that provide meaningful
choices to beneficiaries without creating
undue confusion for beneficiaries.
We believe that the progressive
closure of the coverage gap provided for
in the Affordable Care Act affords us
another opportunity to promote even
greater clarity in the set of stand-alone
PDP plan options from which
beneficiaries may make an election.
Under the statute, beginning in 2011,
applicable beneficiaries enjoy discounts
of 50 percent off negotiated prices on
brand name drugs when purchased
while in the coverage gap portion of the
benefit. Also, since 2011, the required
coverage in the gap has increased and
will continue to do so gradually until
2020, when the combination of required
coverage and manufacturer discounts
covers 75 percent on average for both
brand-name and generic drugs. This
‘‘closing’’ of the coverage gap effectively
will leave the beneficiary with only a 25
percent cost share on average across the
entire benefit (or its actuarial
equivalent) before the catastrophic
threshold.
Our experience in applying the
meaningful differences standard
indicates that, as the Part D coverage
gap is closed, it will become
increasingly difficult for a PDP sponsor
to qualify to offer more than two plans
in the same service area and still meet
the meaningful differences test. Since
we began applying the meaningful
differences standard to our bid reviews,
we have generally approved two types
of enhanced alternative plans. The first
type of plan offers beneficiaries, in
exchange for a higher premium than
that charged for basic plan coverage,
significant reductions in the cost
sharing and deductible amounts
associated with the basic Part D benefit.
The second type offers even greater cost
sharing and deductible reductions as
well as coverage for many drugs in the
gap. Since coverage of Part D drugs in
the gap is the distinguishing feature
between the two types of enhanced
alternative plans currently available,
closing the coverage gap also means that
sponsors can no longer rely on it to
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enhanced alternative plan is
meaningfully different than their first.
Our enrollment data indicate that
beneficiaries are already making plan
choices based on their recognition of the
shrinking significance of the coverage
gap and with it, the value of PDP
sponsors’ second enhanced plans. Since
the start of the coverage gap discount
program in 2011, enrollment levels in
the second enhanced alternative plans
offered by PDP sponsors that offer two
enhanced alternative plans have
declined from approximately 12 percent
of those sponsors’ total enhanced
alternative plan enrollment in 2010 to
between 7 percent and 8 percent in the
2011, 2012, and 2013 benefit years. This
finding suggests that the proportion of
beneficiaries for whom the additional
supplemental coverage offered by these
plans is worth the supplemental
premium continues to decline, and we
expect this trend to continue as the
coverage gap closes.
Despite these developments, many
sponsors continue to submit three bids
per region each year, at least in part, we
believe (based on conversations with
various stakeholders), to ensure that
they are not perceived as a weaker
participant in the Part D market by
offering a smaller set of plans than their
PDP competitors. CMS believes that
plan sponsors and beneficiaries, as well
as the taxpayers, would be better served
by a more streamlined bid submission
process that limited sponsors to
submitting two PDP bids (one basic and
one enhanced) per PDP region each
year. This limitation would provide a
consistent bidding framework for all
sponsors, allowing them to focus on
quality, rather than quantity, in
development of their bids. It would also
reduce some of the sponsors’
administrative costs associated with
preparing, marketing, and administering
a third benefit package. It may also help
ensure that beneficiaries can choose
from a less confusing number of plans
that represent the best value each
sponsor can offer.
For CY 2013, there are seven parent
organizations that offer two enhanced
plans (that is, three plans total, one
basic and two enhanced alternative)
within a given PDP region. This
amounts to 264 enhanced alternative
plans in total (two for each affected PDP
region) among the seven parent
organizations. The application of this
proposed regulation, if finalized, would
result in the elimination of 132
enhanced alternative plans, representing
13 percent of the total number of standalone PDP plans, and 25 percent of all
enhanced alternative plans in 2013. If
implemented today, these proposed

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reductions would affect a combined
522,742 beneficiaries, approximately 2
percent of the overall stand-alone PDP
enrollment of 22,529,197 (based on
April 2013 enrollment data). We expect
that most sponsors would attempt to
consolidate their current beneficiaries in
one of their two remaining plan options,
so we believe adoption of this proposal
would result in minimal disruption to
beneficiaries currently enrolled in a
sponsor’s second enhanced plan.
While the incremental closure of the
coverage gap continues until 2020, CMS
believes that the observed enrollment
trends in these plans demonstrate the
reduction in beneficiaries’ coverage gap
costs that has occurred already has
moved the stand alone PDP plan market
in a way that warrants the imposition of
the two plan limit as soon as possible.
The list of plan options today is
cluttered with those that the record
shows appeal to only approximately 2
percent of the overall stand alone PDPplan-enrolled beneficiaries of which
522,742 are enrolled in second
enhanced plans). In addition, in many
cases one of the two enhanced plans
offers the minimum level of
supplemental coverage required to meet
our meaningful differences tests. We
refer to these as ‘‘low value enhanced
plans’’ to distinguish them from second
enhanced plans with substantially more
supplemental coverage. In some cases,
the premiums for these low value
enhanced plans have been less than the
premiums for the sponsors’ basic plans
due to favorable risk selection. This
occurs because many of the
beneficiaries with more serious health
issues and higher utilization of
prescription drugs are in the lowincome subsidy (LIS) eligible
population which will not receive the
full LIS subsidies in plans with
supplemental coverage. For this reason
we neither auto-assign the LIS eligible
population into such plans, nor will this
population generally voluntarily enroll
in such plans. Thus, continuing to
permit multiple enhanced plans,
particularly low value enhanced plans,
facilitates risk segmentation. This can
increase costs for the Part D program
and the taxpayers overall. During the
most recently completed CY 2014 bid
review cycle, we continued to encounter
bids submitted by sponsors for low
value enhanced plans with premiums
lower than the premiums for their basic
plans. We believe it is urgent that we
adopt this proposed policy as soon as
possible so that we can bring an end to
this bidding practice. However, because
such a change would entail substantial
changes to bidding processes for both

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Part D sponsors and CMS that could not
realistically be undertaken until the
proposal was final, we propose to adopt
this policy for the 2016 Part D
contracting cycle. We believe that
beneficiaries and the Part D program
would be better served by sponsors that
are focused on developing plans with
broad beneficiary appeal rather than
those intended to enable the sponsor to
either pursue a diminishing niche in the
Part D market or segment favorable risk
into low value enhanced plans. We
solicit comments on whether there is
any real need for more than two
standalone plan options per PDP
sponsor.
Therefore, we propose to amend the
Part D regulations at § 423.265 to add a
revised subsection (b)(3), which states
that ‘‘CMS shall not accept more than
one basic bid and one enhanced bid for
a coverage year from a single PDP
sponsor in the same PDP region.’’ We
would adopt this provision under our
authority at section 1860D–11(d) of the
Act. In instances where a parent
organization owns a controlling interest
in more than one subsidiary that
operates as a PDP sponsor in a single
PDP region, we would apply subsection
(b)(3) at the parent organization level.
That is, in the same way that we
currently apply the meaningful
differences test, a parent organization
with two subsidiary PDP sponsors could
offer no more than one plan under each
sponsors’ contract. We anticipate that
the need to use this interpretation will
be infrequent as existing multi-contract
arrangements are phased out through
plan consolidation and the creation of
new ones would be prohibited by the
implementation of the provision
described elsewhere in this proposal (if
finalized) authorizing CMS to deny
applications from organizations owned
by a parent that already has a subsidiary
operating a PDP sponsor contract in the
same PDP region.
In a proposed rule we published in
October 10, 2010, announcing our intent
to codify the Affordable Care Act
provision in the Part D regulations, we
solicited comments on whether we
should use the Affordable Care Act
authority to impose limits on the
number of plans in a PDP region. In the
preamble to the final rule that followed
on April 15, 2011, we noted that among
the comments we received were those
stating that we should not consider
imposing limits on plan offerings until
the impact of previous statutory and
regulatory changes governing our bid
review process could be fully evaluated.
At the time we declined to codify such
limits. Now, we believe that the record
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limit has had time to fully develop,
including, as discussed previously, the
dwindling popularity of the second
enhanced option, the shrinking
differences between the first and second
enhanced options, and the role the
second enhanced option plays in
enabling risk segmentation, and
therefore we make the proposal
described here and seek comment from
the public.
In addition to proposing to limit PDP
sponsors to submitting one basic and
one enhanced bid per coverage year, we
are also considering several regulatory
proposals for limiting the type of
coverage offered in those two plans to
reduce or eliminate the risk
segmentation described previously. We
believe that risk segmentation is not
consistent with the Congressional
design for the Part D program, or with
the policy goal of obtaining the best
value for the government and the
taxpayer. We believe the Congress
intended sponsors to compete in the
Part D market by offering their best bids
for basic plans, in order to attract the
greatest enrollment through the lowest
premiums, and that this competition
would maintain downward pressure on
Part D bids and government subsidies.
We do not believe that the Congress
intended that instead sponsors would
offer their best bids for a segment of the
market that represents individuals who
are low utilizers of prescription drugs
due to better health and who can afford
unsubsidized supplemental premiums
due to better socioeconomic status.
When many healthy individuals are not
included in the basic plans, the cost of
the basic plans is increased, and this in
turn increases low-income premium
subsidies. Therefore, permitting risk
segmentation does not generate the best
value for the Part D program as a whole.
To reduce or eliminate risk
segmentation, we are considering three
options. We solicit comments on our
conclusions with respect to risk
segmentation and on the effectiveness of
the following options.
The first option we are considering
would be to continue to allow separate
basic and enhanced plans, but require
that enhanced plans offer a substantial
minimum level of supplemental
coverage defined in regulation. This
would differ from current practice in
that we currently set meaningful
differences requirements by observing
the distribution of benefits submitted
independently by sponsors and using
statistical techniques to identify outlier
thresholds. The problem with the
current approach is that, when all or
most sponsors reduce their
supplemental coverage over time—the

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trend that we have observed—the
outlier thresholds will decline as well.
When this occurs the supplemental
coverage will again tend to converge on
the value of basic coverage. Instead, for
instance, we could require that the
enhanced plan offering had to cover a
minimum of 50 percent (or another
higher percentage) of the remaining
actuarial value of the Part D benefit not
included in the standard benefit for any
coverage year. The additional coverage
would be in the form of reduced
deductibles and cost sharing and the
inclusion of excluded drugs, consistent
with the statutory definition of
supplemental coverage. We solicit
comment on whether such an approach
would be sufficient to accomplish our
goal of eliminating risk segmentation.
In the second option we are
considering, instead of setting minimum
supplemental coverage requirements for
a sponsor’s enhanced plan offering, we
would propose to use the authority
provided in section 3209 of the
Affordable Care Act which amends
section 1860D–11(d)(3) of the Act to
deny any enhanced plan bid with a
premium equal to or lower than the
sponsor’s basic plan premium.
Alternatively we might require the
enhanced premium to be no less than a
specified multiple of the basic premium,
such as 115 percent or another multiple.
Again, the additional coverage in the
enhanced plan would be in the form of
reduced deductibles and cost sharing
and the inclusion of excluded drugs. We
solicit comments on this approach, and
on the appropriate multiple of the basic
premium necessary to eliminate risk
segmentation. We also solicit comment
on whether there is a possibility that
this approach might effectively
eliminate the offering of supplemental
coverage if favorable risk selection were
to continue and the actuarial value of
such coverage could not generate
sufficient premiums to pass these sorts
of tests.
The third option we are considering
would be to reinterpret the provisions of
section 1860D–11(b) and (c) of the Act
governing the submission of bids that
include supplemental benefits. We
would propose that enhanced
alternative coverage would be redefined
to consist of supplemental coverage
added to the sponsor’s one basic
benefits offering (for an additional
premium). This could be thought of as
basic benefits plus a supplemental
benefit rider. This would mean that all
Part D enrollees in a sponsor’s Part D
plans would be enrolled in the
sponsor’s one basic plan with the same
formulary and pharmacy network, and
some portion of those enrollees would

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also elect the optional supplemental
coverage in the form of the second plan
that would be the combination of the
basic plan and the supplemental
benefits. Thus, the risk of the basic
benefits would be estimated at the PDP
Regional level and the risk of the
supplemental benefits would be
estimated in accordance with that of the
projected enrollees in the second plans.
This means that the supplemental
benefits would have to constitute actual
enhancements to the basic benefit and
that the notion of actuarial equivalence
would not apply to the combination of
the basic and supplemental benefits.
This change would bring standalone
PDP coverage more in line with both
commercial coverage designs and with
the offering of Part C optional
supplemental benefits. We believe this
option would eliminate the possibility
of risk segmentation because every
enrollee participating in a sponsor’s Part
D line of business would be enrolled in
the one basic plan and beneficiaries that
elect supplemental benefits will be
charged the additional premium for the
extra coverage. The sponsor’s Part D
offerings would consist of two plan
benefit packages, one comprised solely
of basic coverage and the other (if
offered) consisting of the combination of
the basic coverage with the
supplemental coverage.
We solicit comments on this approach
and on our belief that this approach
would be the most effective strategy for
eliminating risk segmentation and
providing the best value for the
government and the taxpayer.
21. Efficient Dispensing in Long-Term
Care Facilities and Other Changes
(§ 423.154)
We are proposing changes to the rule
requiring efficient dispensing to
Medicare Part D enrollees in Long Term
Care (LTC) facilities. For background,
section 3310 of the Affordable Care Act
amended the Act to add a new
paragraph (3) to section 1860D–4(c) of
the Act. Section 1860D–4(c)(3) of the
Act provides that the Secretary shall
require Medicare Part D sponsors of
prescription drug plans to utilize
specific, uniform dispensing techniques,
such as weekly, daily, or automated
dose dispensing, when dispensing
covered Part D drugs to enrollees who
reside in a LTC facility in order to
reduce waste associated with 30-day
fills. The section states that the
techniques shall be determined by the
Secretary in consultation with relevant
stakeholders.
After extensive consultation with
stakeholders, in the April 15, 2011
Federal Register entitled ‘‘Medicare

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Program; Changes to the Medicare
Advantage and the Medicare
Prescription Drug Benefit Programs for
Contract Year 2012 and Other Changes’’
(‘‘April 15, 2011 Final Rule’’), we
published a final rule at 76 FR 21432
which governs the appropriate
dispensing of prescription drugs in LTC
facilities under Part D plans. Pursuant to
this regulation, Part D sponsors
generally must require their network
pharmacies to dispense certain solid
oral brand covered Part D drugs in
quantities of 14 days or less, unless an
exemption applies. The regulation is
found at § 423.154.
We are proposing the following
specific changes to the LTC short cycle
dispensing requirements:
• Add a prohibition on payment
arrangements that penalize the offering
and adoption of more efficient LTC
dispensing techniques.
• Eliminate language that has been
misinterpreted as requiring the
proration of dispensing fees.
• Incorporate an additional waiver for
LTC pharmacies using restock and reuse
dispensing methodologies under certain
conditions.
• Make a technical change to
eliminate the requirement that Part D
sponsors report on the nature and
quantity of unused brand and generic
drugs.
After providing a summary of the
current LTC short cycle dispensing rule,
we will address each proposed change
in more detail.
Section 423.154 requires that all Part
D sponsors require all pharmacies
servicing LTC facilities to dispense solid
oral doses of covered Part D brand name
drugs to enrollees in such facilities in
no greater than 14 day increments at a
time. Part D sponsors must also require
such pharmacies to permit the use of
uniform dispensing techniques, as
defined by the LTC facility. The
regulation refers to definitions in
existence at the time of its
promulgation. Brand name and generic
drugs are defined in § 423.4, and the
definition specifically refers to a brand
name drug as being one approved under
an NDA.
In order to quantify waste more
precisely, the regulation requires Part D
sponsors to collect and report
information to CMS on the dispensing
methodology used for each dispensing
event, and on the nature and quantity of
unused brand and generic drugs
dispensed to enrollees in LTC facilities.
Reporting on unused drugs is waived for
Part D sponsors when both brand and
generic drugs are dispensed in no
greater than 7-day increments.

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The regulation excludes: (1) Solid oral
doses of antibiotics; and (2) solid oral
doses that are dispensed in their
original container as indicated in the
Food and Drug Administration (FDA)
prescribing information or that are
customarily dispensed in their original
packaging to assist patients with
compliance. Thus, the regulation does
not apply to drugs that are not typically
dispensed in greater than 14-day
supplies (for example: inhalers, eye
drops, ear drops, steroid dose packs).
LTC facilities are defined in
§ 423.100, which definition excludes
assisted living facilities. Intermediate
care facilities for the mentally retarded
and institutes for mental disease are
specifically waived from the
requirement in the regulation, as are I/
T/U pharmacies, due to specific
problems with delivery and dispensing
to closed (often locked) facilities.
With respect to copayments, the
regulation states that regardless of the
number of incremental dispensing
events, the total cost sharing must be no
greater than the total cost sharing that
would be imposed if the regulation did
not apply.
When permitted under applicable
law, the regulation requires Part D
sponsors to include provisions that
address the disposal of drugs that have
been dispensed to an enrollee in an LTC
but not used, and then returned to the
pharmacy, in the terms and conditions
that they must offer to pharmacies,
including whether return for credit and
reuse is authorized.
a. Prohibition on Payment
Arrangements That Penalize the
Offering and Adoption of More Efficient
LTC Dispensing Techniques (§ 423.154)
Our first proposed change is to add a
clause to § 423.154 prohibiting payment
arrangements that penalize the offering
and adoption of more efficient LTC
dispensing techniques. It is our
understanding that for 2013, some of the
largest PBMs have prorated LTC
pharmacy dispensing fees for
medications subject to the LTC short
cycle requirements. Under such
dispensing fee payment arrangements, if
a medication is discontinued before a
month’s supply has been dispensed, a
pharmacy that dispenses the maximum
amount of medication at a time
permitted under § 423.154 collects more
in dispensing fees than a pharmacy that
utilizes dispensing techniques that
result in less than maximum quantities
being dispensed at a time.
We provide the following example of
two pharmacies—one more efficient at
dispensing than the other— to illustrate
our concern: A $4.00 dispensing fee for

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a 30-days’ supply is prorated, and a
medication is discontinued after 21
days. The first pharmacy dispenses 14days’ supply at a time and receives
approximately $3.73 in total dispensing
fees for a 28-days’ supply, which results
in 7 days’ worth of medication waste.
The second pharmacy dispenses 3-days’
supply at a time and receives
approximately $2.80 in dispensing fees
for a 21-days’ supply in total, which
results no medication waste.
We believe this example is contrary to
the Congress’ intent in enacting section
3310 of the Affordable Care Act. In this
example, the second pharmacy’s more
efficient dispensing techniques save
facility, sponsor, and Part D program
costs associated with reducing the
amount of medication waste, but the
pharmacy itself receives less in
dispensing fees than it would if it had
dispensed in 14-day increments. This
approach creates a perverse incentive
for LTC pharmacies to adopt less
efficient dispensing techniques, if
available. Rational self- interest on the
part of any LTC pharmacy with the
flexibility to dispense greater quantities
encourages wasteful dispensing and
additional costs to the Part D program,
in direct opposition to the intent of the
law.
During the extensive industry
consultation conducted prior to the
rulemaking required to implement
section 3310 of the Affordable Care Act,
CMS was repeatedly informed by
multiple stakeholders that dispensing
costs did not vary on the basis of the
quantity of medication dispensed, but
only by the number of dispensing events
and the type of dispensing technique
utilized. Therefore, there is no
justifiable rationale for proration, since
the cost of dispensing is not directly
related to the quantity dispensed. In
order to align incentives, we encouraged
Part D sponsors to do quite the opposite
to prorating dispensing fees, and offer
differentially higher dispensing fees to
promote the adoption of the most
efficient dispensing methodologies.
Starting in the fall of 2012, we have
received numerous complaints about
proration of dispensing fees from
multiple LTC pharmacy organizations,
LTC pharmacies, and LTC facilities that
represent, offer, or have contracted to
utilize more efficient dispensing
methodologies. Some smaller LTC
pharmacies, which rely upon their
relative greater efficiency in reducing
waste from unused drugs for
competitive advantage, have
complained that they were unable to
negotiate appropriate terms through
their intermediary group purchasing
and contracting organizations and could

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not negotiate directly with Part D
sponsors. Small LTC pharmacies have
also reported that they risked losing
their LTC facility contracts to larger LTC
pharmacies if they did not accept the
payment terms that, in effect, penalize
their efficiency. These pharmacies have
indicated that prorated dispensing fees
are not mutually agreeable terms, and
that this fee structure threatens the
survivability of the most efficient
dispensing techniques.
It is unclear why Part D sponsors and
their agents would choose to reimburse
LTC pharmacies in a manner that does
not promote more efficient dispensing
methodologies. One possibility is that
the smaller LTC pharmacies lack the
leverage to negotiate differential fees
due to the market power of the largest
LTC pharmacies, which control more
than 60 percent of the market. This
would be the case only if the largest
LTC pharmacies had the market power
over the largest PBMs to not only set
their own dispensing fees, but also the
dispensing fees of their competitors.
However, we have not heard any
evidence or testimony that would
support that conclusion.
Another possibility is that Part D
sponsors are not motivated to promote
efficiencies in long-term care
prescription drug utilization. This could
be the case because their liability for
these costs is substantially less than that
of the federal government. Since most
LTC residents are LIS-entitled
individuals or likely to incur costs
subject to catastrophic coverage, or both,
sponsor liabilities are actually
minimized when the LTC resident
beneficiary reaches the TrOOP
threshold as quickly as possible. Thus,
sponsors’ interests may actually be
aligned with those LTC pharmacies with
the least efficient dispensing
methodologies, since both parties’
interests may be served by higher costs.
A final possibility is that Part D
sponsors believe the § 423.154 and/or
the upcoming daily cost-sharing rate
requirement at § 423.153(b)(4)(i) (which
becomes effective January 1, 2014)
mandate the proration of dispensing
fees when less than 30 days is
dispensed. This is not accurate, and we
discuss this misunderstanding both
further in this section and in the section
entitled, ‘‘Application and Calculation
of Daily Cost-Sharing Rates’’ of this
proposed rule.
Given the clear intent of the
Affordable Care Act to reduce wasteful
dispensing in the LTC setting, CMS is
proposing to prohibit payment
arrangements that penalize the offering
and adoption of more efficient LTC
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accomplished by adding a new clause (f)
in § 423.154 that would state that a Part
D sponsor must not, or must require its
intermediary contracting organizations
not to, penalize long-term care facilities’
choice of more efficient uniform
dispensing techniques by prorating
dispensing fees based on days’ supply
or quantity dispensed. This clause
would also state that a sponsor or its
intermediary contracting organizations
must ensure that any difference in
payment methodology among LTC
pharmacies incentivizes more efficient
dispensing techniques.
b. Misinterpretation of Language as
Requiring the Proration of Dispensing
Fees (§ 423.154)
Our second proposed change to
§ 423.154 is to eliminate paragraph (e),
which we believe has caused confusion.
Section 423.154(e) currently states:
‘‘Regardless of the number of
incremental dispensing events, the total
cost sharing for a Part D drug to which
the dispensing requirements, under this
paragraph (a) apply must be no greater
than the total cost sharing that would be
imposed for such Part D drug if the
requirements under paragraph (a) of this
section did not apply.’’ The purpose of
this language was to ensure that
sponsors did not assess multiple
monthly copayments for each
incremental dispensing event. We
believe misinterpretation of paragraph
(e) may have prompted some sponsors
to prorate dispensing fees, even though
the regulation does not address
dispensing fees.
Moreover, effective January 1, 2014,
the daily cost-sharing rate requirement
will apply whenever a prescription is
dispensed by a network pharmacy for
less than a 30 days’ supply, unless the
drug is excepted pursuant to
§ 423.153(b)(4)(i), regardless of the
setting in which the applicable drugs
are dispensed. In other words, the daily
cost-sharing rate requirement will apply
to brand drugs dispensed in LTC
facilities to the extent they must be
dispensed in supplies less than 30 days
pursuant to § 423.154, and to generic
drugs, to the extent a sponsor
voluntarily dispenses generic drugs in
LTC facilities in supplies less than 30
days. Consequently, the requirement of
§ 423.153(b)(4)(i) will make § 423.154(e)
unnecessary, and we believe retaining
both provisions could cause further
confusion. (Note that we propose some
technical changes to the daily costsharing rate requirement in the section,
entitled ‘‘Application and Calculation of
Daily Cost-Sharing Rates’’ of this
proposed rule) For these reasons, we
propose to delete § 423.154(e).

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c. Additional Waiver for LTC
Pharmacies Using Restock and Reuse
Dispensing Methodologies Under
Certain Conditions (§ 423.154)
Our third proposed change to
§ 423.154 is to waive the short-cycle
dispensing requirements for LTC
pharmacies meeting certain conditions.
Currently, § 423.154(c) waives the
requirements for pharmacies when they
dispense brand name Part D drugs to
enrollees residing in intermediate care
facilities for the mentally retarded and
institutes for mental disease, as well as
for I/T/U pharmacies. We have learned
that some institutional pharmacies
maintain custody of medications within
the LTC facilities through operating a
closed pharmacy within the facility, and
as a result can ensure sufficient quality
control over these medications to return
all unused medications to stock for
reuse that are eligible for return and
reuse under applicable law. This has led
us to believe there is another category of
pharmacies, such as some on site
pharmacies in veterans’ homes, for
which a waiver from the LTC short
cycle dispensing requirement may be
appropriate, if they meet certain
conditions that demonstrate that
applying the 14-day dispensing
requirements in these instances would
not serve to reduce waste.
We are proposing to waive the
requirements of § 423.154(a) for an LTC
pharmacy that exclusively uses the
dispensing technique of returning all
unused medications to stock that can be
restocked under applicable law for reuse
and rebating full credit for the
ingredient costs of the unused
medication to the PDP sponsor. The
proposed waiver would also require that
for those drugs that cannot be returned
for full credit and reuse under
applicable law, such as controlled
substances, the pharmacy uses a
dispensing methodology that results in
the delivery of no more than 14 days of
a drug at a time. We would propose that
the waiver would apply on a uniform
basis to all similarly situated LTC
pharmacies, but not to a pharmacy
organization that is contracted to use
this technique at some, but not all, of its
pharmacies. Rather, the waiver would
only apply to the qualifying pharmacies
themselves. We would not require the
pharmacy to credit back any amount of
the dispensing fee when drugs are
returned for reuse, since the level of
effort for the pharmacies would not be
expected to be decreased in any way. If
anything, the level of effort would be
increased to implement the appropriate
internal controls for inspection and

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return to inventory of the unused
medication.
We solicit comments on whether
there are any variations in operations
that may exist among LTC pharmacies
that we need to consider in determining
whether to implement this waiver. We
also solicit comments on how such
pharmacies could be identified in
industry standard transaction coding, as
well as in network contracting and
auditing protocols. We believe that such
pharmacies would be expected to have
documentation of relevant protocols
approved by Pharmacy and
Therapeutics (P&T) committees of the
LTC facility, as well as records
supporting the returns to inventory that
could be compared with billing credits.
We solicit comments on this
understanding as well.
We further solicit comments on our
proposal that to qualify for the waiver,
a pharmacy would have to dispense any
drugs that cannot be restocked under
applicable law, such as controlled
substances, in no greater than 14-day
supply increments. Our rationale in
proposing this condition to the waiver
is that we do not want the waiver to
inadvertently result in large quantities
of medications being dispensed to Part
D enrollees serviced by the pharmacies
that would qualify for the waiver
because they cannot be restocked under
applicable law. Therefore, we are
proposing that such drugs should still
effectively be subject to the short-cycle
dispensing requirement. In this regard
we wish to understand the extent of
waste in pharmacies that would qualify
for the waiver we are proposing, if we
did not impose the requirement that
drugs that cannot be restocked would be
subject to a dispensing increment of 14day supply or less if they cannot be
restocked under applicable law. If
persuaded that the waste would be
insignificant, we may be persuaded to
eliminate this condition to the waiver.
We acknowledge that in the
aforementioned April 15, 2011 Final
Rule, we responded to some comments
requesting that we exempt from the
short-cycle dispensing requirement
those pharmacies that already utilize
low waste practices or ‘‘return for credit
and reuse.’’ In response, we stated that
although ‘‘return for credit and reuse’’
could reduce unused drugs in LTC
facilities, there are limitations to this
approach, especially because not all
states allow ‘‘return for credit and
reuse,’’ and reuse of controlled
substances is limited by the Drug
Enforcement Administration. Because of
these limitations, we stated that we
believe financial waste is more
effectively reduced by preventing the

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accumulation of unused drugs in the
first place, rather than addressing
handling of unused drugs after they
have accumulated in the LTC facilities.
This proposal means that we have
reconsidered our decision not to waive
the short-cycle dispensing requirement
for LTC pharmacies that use ‘‘return for
credit and reuse’’ dispensing practices,
because we did not fully consider such
a waiver previously in the context of
comments received about return and
reuse being a universal alternative
approach to short-cycle dispensing. In
addition, we continue to receive
persuasive arguments that such
pharmacies should be exempt; for
example, from some veterans’ homes
with on-site pharmacies. However, as
we explained previously, we are still
concerned about waste associated with
drugs that are not permitted to be
returned for reuse and credit under
applicable law in such LTC pharmacies
in considering this additional
exemption, and for this reason have
specifically solicited comments on the
extent of waste in such pharmacies that
would qualify for the proposed
additional waiver.
d. Technical Change To Eliminate the
Requirement That PDP Sponsors Report
on the Nature and Quantity of Unused
Brand and Generic Drugs (§ 423.154)
Finally, we are proposing to make a
technical change to § 423.154(a)(2),
which requires Part D sponsors to
collect and report information, in a form
and manner specified by CMS, on the
dispensing methodology used for each
dispensing event described by
paragraph (a)(1) of this section, as well
as on the nature and quantity of unused
brand and generic drugs dispensed by
the pharmacy to enrollees residing in a
LTC facility. This latter reporting
requirement is waived for sponsors for
drugs dispensed by pharmacies that
dispense both brand and generic drugs
in no greater than 7-day increments.
In a memorandum titled,
‘‘Modifications to the Drug Data
Processing System (DDPS) in Relation to
Appropriate Dispensing of Prescription
Drugs in Long Term Care Facilities,’’
issued by CMS on August 3, 2012, we
explained that we planned to use the
PDE data in conjunction with other
CMS data (such as MDS) to determine
the extent to which 14 day or less
dispensing to enrollees in LTC facilities
reduces the amount of unused drugs in
LTC. We did this to lessen the burden
on sponsors that would be created by a
separate reporting requirement.
Therefore, it is no longer necessary to
waive the reporting requirement for any
Part D sponsor, because Part D sponsors

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comply with the requirement (in the
form and manner we specified in the
previously-referenced memorandum)
via PDE submission. Thus, we are
deleting the first sentence of
§ 423.154(a)(2) to eliminate any
confusion that there is a separate
reporting requirement. 22. Applicable
Cost-Sharing for Transition Supplies.
Transition Process Under Part D
§ 423.120(b)(3)
We established transition
requirements under § 423.120(b)(3) for
Part D sponsors to address the needs of
new Part D plan enrollees who are
transitioning from other prescription
drug coverage (Part D or otherwise), and
whose current drug therapies may not
be included on their Part D plan’s
formulary (including Part D drugs that
are on a plan’s formulary but require
prior authorization or step therapy
under the plan’s utilization management
requirements). While § 423.120(b)(3)(iii)
specifies that PDP plans must provide a
temporary fill when an enrollee requests
a fill of a non-formulary drug during the

transition time period (including Part D
drugs that are on a plan’s formulary but
require prior authorization or step
therapy under a plan’s utilization
management rules), it does not currently
specify the cost sharing that should
apply to such fills. Current guidance (at
§ 30.4.9 of Chapter 6 of the Medicare
Drug Benefit Manual, found at http://
www.cms.gov/Medicare/PrescriptionDrug-Coverage/
PrescriptionDrugCovContra/Downloads/
Chapter6.pdf) states that a Part D
sponsor may charge cost sharing for a
temporary supply of drugs provided
under its transition process. Further,
cost sharing for transition supplies for
low-income subsidy (LIS) eligible
beneficiaries cannot exceed the
statutory maximum copayment
amounts. However, for non-LIS
enrollees, we stated that a sponsor must
charge cost sharing based on one of its
approved drug cost sharing tiers (if the
sponsor has a tiered benefit design), and
this cost sharing must be consistent
with cost sharing that the sponsor

1967

would charge for non-formulary drugs
approved under a coverage exception.
This guidance created a great deal of
confusion on the part of sponsors and
beneficiaries. Charging the same cost
sharing for non-formulary drugs, which
are approved during transition, as for
formulary drugs subject to utilization
management edits (such as prior
authorization or step therapy), that are
overridden during transition while
waiting for the utilization management
requirement to be satisfied, is likely to
be inconsistent with a tiered benefit
design. It is possible that beneficiaries
may pay more during transition than for
his or her drug’s normal designated
formulary tier. Conversely, it is also
possible that the beneficiary may pay
more once the utilization management
edit had been satisfied than he or she
did under the transition fill. The
following examples will illustrate these
scenarios, assuming that the beneficiary
is eligible for a transition fill, using the
following hypothetical formulary
structure:

TABLE 3—HYPOTHETICAL FORMULARY STRUCTURE
Tier

Tier description

Beneficiary cost sharing

1 ..................................................
2 ..................................................
3 * ................................................
4 ..................................................

Generics .........................................................................................
Preferred Brands ............................................................................
Non-preferred Brands .....................................................................
Specialty drugs (includes both generics & brands) .......................

$5 copay/30-days’ supply.
$10 copay/30-days’ supply.
$15 copay/30-days’ supply.
25% coinsurance/30-days’ supply.

* Tier 3 is the designated formulary exception tier.

Each of the following examples shows
the fill date, quantity filled, the
associated days’ supply, whether a

transition fill was applied, and as a
result, if either formulary tiering or
exception tiering was applied to the

enrollee’s cost sharing. In all cases, if a
transition fill was applied, the enrollee’s
cost sharing used exception tiering.

TABLE 4—EXAMPLE 1—THE BENEFICIARY’S DRUG IS ON TIER 2 WITH A PRIOR AUTHORIZATION REQUIREMENT
Date of fill

Quantity

1/1/13 .....................................................

Transition fill
applied

Days’ supply
30

30

Cost share used formulary tiering (FT)
or exception tiering (ET)
Y

$15.00—ET.

The beneficiary obtains the PA, and the drug is no long considered a transition fill.
2/1/13 .....................................................

30

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In this example, if the exception tier
is used on the transition fill, the
beneficiary’s cost sharing amount is
reduced once he or she obtains the prior

30

N

authorization approval. However, if the
drug’s designated formulary cost sharing
amount had been used, the cost sharing
amount would have stayed the same,

$10.00—FT.

and would have been the same cost as
the cost sharing amount shown on the
formulary.

TABLE 5—EXAMPLE 2—THE BENEFICIARY’S DRUG IS ON TIER 4 WITH A PRIOR AUTHORIZATION
Date of fill

Quantity

1/1/13 .....................................................

Transition fill
applied

Days’ supply
30

30

Cost share used formulary tiering (FT)
or exception tiering (ET)
Y

$15.00—ET.

The beneficiary obtains the PA, and the drug is no long considered a transition fill.
2/1/13 .....................................................

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In this example, if the exception tier
is used on the transition fill, the
beneficiary’s cost sharing amount will
increase once he or she obtains the PA
since the designated formulary tier has

a higher cost sharing amount than the
exception tier. If instead, the drug’s
designated formulary cost sharing had
been used, the cost sharing amount
would have remained the same for both

fills. This scenario is particularly
confusing for enrollees, since they pay
more after receiving the required
approval than they did under transition.

TABLE 6—EXAMPLE 3—THE BENEFICIARY’S DRUG IS NOT ON FORMULARY WITH A FORMULARY EXCEPTION
Date of fill

Quantity

1/1/13 .....................................................

Transition fill
applied

Days’ supply
30

30

Cost share used formulary tiering (FT)
or exception tiering (ET)
Y

$15.00—ET.

The beneficiary obtains the FE, and the sponsor continues to treat the drug as non-formulary.

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2/1/13 .....................................................

30

Plan sponsors are currently required
to designate to which tier a nonformulary drug will apply once a
formulary exception is granted.
Sponsors can continue to treat the drug
as non-formulary and continue the
exception for the remainder of the
coverage year, in which case, cost
sharing at the exception tiering
continues.
We believe that more consistent
treatment of formulary and nonformulary drugs, respectively, will
simplify the benefit and reduce sponsor
and beneficiary confusion.
Consequently, we propose to add a
paragraph at § 423.120(b)(3)(vi)
clarifying that when providing a
transition supply, the cost sharing is
determined as follows: A Part D sponsor
must charge cost sharing for a temporary
supply of drugs provided under its
transition process such that the
following conditions are met:
• For low-income subsidy (LIS)
enrollees, a sponsor must not
charge higher cost sharing for
transition supplies than the
statutory maximum copayment
amounts.
• For non-LIS enrollees, a sponsor must
charge—
++ The same cost sharing for nonformulary Part D drugs provided
during the transition that would
apply for non-formulary drugs
approved through a formulary
exception in accordance with
§ 423.578(b); and
++ The same cost sharing for
formulary drugs subject to
utilization management edits
provided during the transition that
would apply once the utilization
management criteria are met.
23. Medicare Coverage Gap Discount
Program and Employer Group Waiver
Plans (§ 423.2325)
Section 3301 of the Affordable Care
Act, codified in section 1860D–43 and
1860D–14A of the Act, established the

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N

Medicare Coverage Gap Discount
Program (Discount Program), beginning
in 2011. Under the Discount Program,
manufacturer discounts are made
available to applicable Medicare
beneficiaries receiving applicable
covered Part D drugs while in the
coverage gap. Section 1860D–
14A(c)(1)(A)(ii) of the Act requires the
manufacturer discount to be provided to
beneficiaries at the point-of-sale.
Employer Group Waiver Plans
(EGWPs) are customized employeroffered plans available exclusively to
employer/union health plan Part D
eligible retirees and/or their Part D
eligible spouse and dependents. Section
423.458(c)(4) requires sponsors offering
EGWPs to comply with all Part D
requirements unless those requirements
have been specifically waived or
modified by us using our authority
under section 1860D–22(b) of the Act.
We do not regulate any supplemental
benefits that EGWPs offer outside of Part
D prescription coverage. Employers/
Unions offering EGWPs must ensure
that any supplemental benefits comply
with any applicable requirements for
issuance under state insurance laws
and/or ERISA rules (see January 25,
2013 Insurance Bulletin from the Center
for Consumer Information and
Insurance Oversight: http://
www.cms.gov/cciio/resources/
Regulations-and-Guidance/
index.html#Health Market Reforms).
EGWP benefits are generally
structured to provide additional
coverage so that their enrollees do not
actually experience a coverage gap.
However, the Affordable Care Act did
not exclude EGWP enrollees from the
Discount Program. Therefore, in order
for an applicable drug to be covered by
EGWPs, it must be covered under a
manufacturer agreement, and the
manufacturer must pay applicable
discounts as invoiced. Beginning in
2014, all EGWP benefits beyond the
parameters of the defined standard

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$15.00—ET.

benefit will be treated as non-Medicare
Other Health Insurance (OHI) that wraps
around Part D. We specifically excluded
supplemental coverage offered through
EGWPs from the definition of Part D
supplemental benefits in § 423.100. We
made this a requirement with respect to
EGWPs so that the discount amount
could be consistently and reliably
determined. This was necessary to
ensure that we can determine that the
discount is always calculated accurately
since we do not collect information on
all EGWP retiree benefit arrangements to
determine actual supplemental benefits.
Not only would collecting such
information be impractical, but we also
believe instituting a requirement to
collect the specific information on all
such benefits would be so burdensome
as to hinder the design of, the offering
of, or the enrollment in employer plans.
Consequently, the discount calculation
will be based upon the Part D Defined
Standard benefit for all EGWPs
beginning in 2014. While we believed
that our justification for excluding any
supplemental benefits offered through
EGWPs from Part D benefits clearly
indicated that the basic EGWP Part D
benefits would be limited to Defined
Standard benefit because that is the only
way we can determine that the discount
is calculated accurately, we are taking
the opportunity now to propose this
specific requirement in § 423.2325(h)(1)
to remove any ambiguity.
Treating EGWP supplemental benefits
as OHI and always calculating the
manufacturer discount based on the
Defined Standard benefit means that
discount payments likely will increase
for some applicable beneficiaries
enrolled in EGWPs over the amounts
that would have been calculated when
these benefits were considered as
supplemental benefits for purposes of
the coverage gap discount program. As
noted previously, EGWPs’ benefits are
generally structured to provide
additional coverage so that their

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enrollees do not actually experience a
coverage gap. Now that the Part D
portion of the EGWP plan is based on
the Defined Standard benefit, the
coverage gap discount pays before the
EGWP supplemental benefits (that is,
OHI) are applied. Consequently, Part D
sponsors that administer EGWP plans
will receive discount amounts that may
not offset the enrollees’ final out-ofpocket cost-sharing, as the discounts do
in individual market Part D plans when
it is applied after Part D supplemental
benefits. Nevertheless, we think it is
important that these discounts that are
calculated and paid prior to the
application of OHI are apparent to the
employer and union group clients of our
Part D sponsors. This transparency
ensures that the parties who are
ultimately responsible for the both the
EGWPs’ plan design and the financial
integrity of the plans are aware of the
discount amounts received. We
anticipate that the employer and union
group administrators will take the
additional funds into account when
negotiating and designing retiree
prescription drug benefits. We believe
that his will ultimately benefit the
beneficiaries enrolled in these plans.
We considered several approaches for
ensuring that all manufacturer payments
accrue to the benefit of beneficiaries
enrolled in EGWPs. The most obvious
approach would have been to require
EGWPs to use manufacturer payments
to reduce beneficiary premiums or costsharing in the non-Part D portion of
benefit. While this approach would
have offered the most straightforward
benefit for beneficiaries, it has several
serious obstacles. First, we do not
believe that we have the authority to
require any specific application of the
coverage gap discount payments to OHI
benefits that are by definition nonMedicare private market benefits
outside our regulatory purview. In
addition, since we do not collect
premium or benefit information for
EGWPs, monitoring compliance with
such requirements would not be
feasible. Moreover, establishing an
affirmative requirement would
necessitate establishing standards for
how the discount amounts should be
applied to the retiree benefits. We
frankly do not have the depth of
knowledge of private and public sector
retiree benefits necessary to establish
such standards. We can envision that
more prescriptive requirements about
how discount amounts can be used
might interfere with critical utilization
management and cost control features of
these benefits, conflict with
employment or bargaining agreements

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particulars, or have other unintended
consequences. We also considered not
taking any action since anecdotal
evidence suggests that some employer
groups are already using the discounts
to reduce premiums, and we have no
reason to believe that this is not
generally the case. However, we cannot
be sure that all employer groups are
aware of how Discount Program
payments are calculated or the value of
the payments attributable to their
enrollees. After consideration, we
believe that our best course is to pursue
full disclosure and transparency so that
employer groups have the information
they need to take full advantage of these
discounts to strengthen and safeguard
their enrollees’ retiree benefits. Through
the proposed regulation we are seeking
to ensure that employer groups are fully
aware of Discount Program payments
attributable to their enrollees so that the
payments can be accurately anticipated
and incorporated into EGWP benefit
designs. Equipped with projected and
actual payments received, each
employer group can design a benefit
package that best meets the needs of its
retirees.
To ensure that Discount Program
payments are communicated to
employer groups in a uniform fashion,
we propose to codify notification
requirements by amending § 423.2325 to
add a new paragraph (h) requiring Part
D sponsors of EGWPs to disclose to each
employer group the projected and actual
manufacturer discount payments under
the Discount Program attributable to the
employer group’s enrollees. We further
propose that such disclosures happen at
least annually or upon request. Part D
sponsors must also be prepared to
demonstrate to CMS that such
notifications have been made upon
request.
24. Interpreting the Non-Interference
Provision (§ 423.10)
Since the MMA created the Part D
benefit in 2003, we have never formally
interpreted section 1860D–11(i) of the
Act, which is known as the
noninterference provision. In practice
we have generally invoked the spirit of
this provision in declining to intervene
in negotiations or disputes involving
payment-related contractual terms
between participants in the drug
distribution channel. However, it is
increasingly clear from the many
questions that continue to arise when
working with stakeholders on matters
ranging from lawsuits to policy
clearance to complaint resolution that
the agency and all Part D stakeholders
would benefit from a clear, formal
interpretation of these limits on our

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1969

authority. Some stakeholders appear to
believe the prohibition on interference
in negotiations extends far beyond the
boundaries that we consider relevant,
while others insist our authority extends
into arbitrating matters that seem to us
to clearly fall within the intended
prohibition. Therefore, we are proposing
an interpretation through rulemaking in
order to clarify and codify the extent of
these limits on our authority.
The noninterference provision at
section 1860D–11(i) of the Act provides
that, ‘‘In order to promote competition
under this part and in carrying out this
part, the Secretary: (1) May not interfere
with the negotiations between drug
manufacturers and pharmacies and PDP
sponsors; and (2) may not require a
particular formulary or institute a price
structure for the reimbursement of
covered Part D drugs.’’ In beginning
with the words ‘‘In order to promote
competition under this part and in
carrying out this part . . .’’ we believe
that the Congress intended that the
activities addressed in the rest of the
provision should take place through
private market competition. We
interpret this to mean two separate but
related goals. The first goal is that the
Secretary through CMS should promote
private market competition in the
selection of Part D drugs for Part D
sponsor formularies. The second goal is
that CMS should not create any policies
that would be expected to interfere with
competitive market negotiations leading
to the selection of drug products to be
covered under Part D formularies.
Therefore, in light of these two goals we
believe there is both a duty to act—to
promote competition in the private
market for Part D drugs—and a duty to
refrain from acting—to avoid
intervention in private market
negotiations that take place in the
context of that competitive market.
Economic theory on competitive
markets suggests that the duty to ensure
a competitive market means that within
the limits of our authority we should
seek to encourage certain features of the
market that promote more perfect
competition. This would include such
goals as decreasing the transaction cost
of acquiring information on products
offered in the market, increasing the
transparency of prices, ensuring a large
number of buyers and sellers, and
minimizing barriers to entry to the
extent possible while still ensuring
quality. We have pursued these types of
goals since the start of Part D program
implementation through such efforts as
the Medicare Prescription Drug Plan
Finder, the development of the
Medicare star ratings, our extensive
efforts to provide technical assistance to

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new and existing sponsors, and our
meaningful differences policies that
improve the comparability of Part D
formularies and benefit packages. We
will continue to seek opportunities to
improve competition. As an initial
matter, in light of our interpretation of
the general purpose of section 1860D–
11(i) of the Act, we propose a general
rule at § 423.10(a) that CMS promotes
fair private market competition in the
market for Part D drugs.
There is also a duty to avoid
intervention in private market
negotiations that take place in the
context of that competitive market. We
believe the intent of 1860D–11(i) is to
ensure that we do not create any
policies or become a participant in any
discussions that could be expected to
interfere with negotiations leading to
the selection of drug products to be
covered under Part D formularies. By
this we mean selection by Part D
sponsors (or other intermediary
contracting organizations) of specific
manufacturers’ products for inclusion
on formularies, formulary tier
placement, and negotiations of
acquisition costs, rebates, and any other
price concessions. We believe this
interpretation is consistent with a
textual reading of 1860D–11(i) and with
how private market transactions
determine which prescription drug
products are covered under Part D
plans.
Private market competition for
prescription drugs is a complex process
that has been described in detail
elsewhere, such as in the 2007 CBO
report entitled ‘‘Prescription Drug
Pricing in the Private Sector’’ at: http://
www.cbo.gov/publication/18275. This
process involves specific transactions
between manufacturers and distribution
channel participants (generally
wholesale distributors and dispensing
pharmacies) that are different than the
transactions that take place between
manufacturers and ultimate purchasers
(primarily health plans or self-insured
employers and/or their intermediate
contracting organizations, such as
pharmacy benefit managers (PBMs)).
Pharmacies will stock most commonly
used brand medications but will
selectively stock generic products to
leverage volume in return for the best
prices from competing generic
manufacturers. Thus, generally
speaking, the price negotiations between
manufacturers and pharmacies
differentially determine which generic
products are stocked and dispensed by
pharmacies. These price negotiations
are generally based on discounts off
manufacturer list prices. Health plans
and PBMs, in contrast, will base

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decisions on which multiple-source or
therapeutically equivalent brand drug
products will be covered under a plan
in part on the evaluation of the relative
cost effectiveness of the competing drug
products. This will be determined by
comparing both the list prices of the
drug products and the level of rebates
negotiated between the sponsor and the
manufacturers of the brand products.
Thus the price negotiations between
manufacturers and health plans
determine which brand products are
placed on the plan’s formulary and
available to enrollees. These additional
price negotiations are generally around
the level of rebates for both formulary
and tier placement. These distinct sets
of negotiations in the private market
between manufacturers and pharmacies
on the one hand, and between
manufacturers and plan sponsors on the
other hand, support our textual reading
of section 1860D–11(i)(1) of the Act to
prohibit CMS involvement in
negotiations between manufacturers and
pharmacies, and between manufacturers
and plan sponsors. There are also
separate price negotiations between
plan sponsors (or their intermediary
contracting organizations) and
pharmacies around the negotiated prices
required for network participation.
However, as will be discussed in more
detail in this section, since the statute
establishes numerous requirements that
CMS must regulate concerning access to
network pharmacies and negotiated
prices, we believe that a CMS role in
negotiations between plan sponsors and
pharmacies is not prohibited under
section 1860D–11(i)(1) of the Act.
We note that in The Medicare
Prescription Drug, Improvement, and
Modernization Act of 2003 Conference
Agreement (Conference Agreement), in
addition to the statutory language, MMA
drafters included the following
sentence: ‘‘Conferees expect PDPs to
negotiate price concessions directly
with manufacturers.’’ We believe this
statement supports our understanding
that the primary focus of section 1860D–
11(i) of the Act is on the negotiations
between plan sponsors (or their
intermediary contracting organizations)
and manufacturers for rebates and other
price concessions that ultimately
determine which multiple source
products will be placed on a sponsor’s
formulary. The outcome of these
negotiations also determine tier
placement, or the level of cost sharing
that will be charged for the drug,
whether the drug will be subject to
certain utilization management controls,
and may even influence the list prices
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commercial databases and that form the
basis of most purchasing contracts in
the drug distribution channel.
Section 1860D–11(i)(1) of the Act
states that we ‘‘may not interfere with
the negotiations between drug
manufacturers and pharmacies and PDP
sponsors’’. We believe that the term
‘‘interference’’ in this context should be
interpreted as prohibiting our
involvement in discussions between
manufacturers and their distribution
channel customers (such as wholesalers
and pharmacies) or the ultimate
purchasers of prescription drugs (such
as plan sponsors and PBMs) leading to
signed contracts. We believe that the
negotiations addressed by the first
clause should be read to apply to
discussions manufacturers have with
their customers because, as discussed
previously, this textual reading
comports with the nature of the
transactions that occur in the private
market that determine which drug
products will be covered under Part D
plans. We also believe section 1860D–
11(i)(1) of the Act should be interpreted
as prohibiting our involvement in
arbitration of agreements already
executed between any of these parties.
It would not make sense to prohibit
CMS involvement in discussions
leading up to an executed agreement
only to allow involvement in arbitrating
the terms of the agreement afterwards.
Thus we interpret the word
‘‘negotiations’’ to mean not only the
initial discussions leading to executed
agreements, but also any subsequent
discussions between the parties as to
what those agreements require. We are
periodically asked to become involved
in both initial negotiations and in
disputes and renegotiations by parties
trying to get CMS to weigh in on one
side or another on the premise that
failure to do so will lead to access issues
for Medicare beneficiaries. We also
periodically are asked to address terms
and conditions of executed agreements
that one of the parties believes is unfair.
We believe that our involvement in
these sorts of issues is precisely what
the statute prohibits in section 1860D–
11(i)(1) of the Act—our weighing in on
a contract negotiation or dispute could
influence the outcome. In other words,
government involvement could affect
market forces around prescription drugs
in ways that change the value that
would otherwise be assigned to these
products in a competitive market. We
believe we should not pick winners and
losers in formulary selection
negotiations, and that the remedies for
disputes should be determined in
accordance with the terms of the

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contracts or in the courts having
jurisdiction over the contracts.
Therefore we interpret the prohibition
in section 1860D–11(i)(1) of the Act on
interference in negotiations to pertain to
discussions either between prescription
drug manufacturers and pharmacies, or
between prescription drug
manufacturers and Part D sponsors (or
their intermediary contracting
organizations, hereafter included by
association whenever we refer to Part D
sponsors). Our interpretation is based
on the sequential phrasing of the clause
‘‘negotiations between drug
manufacturers and pharmacies and PDP
sponsors.’’ Because in general these
negotiations are not among all three
parties at once, and because
manufacturers separately contract with
pharmacies for the purchase of
inventory and with sponsors for
formulary placement, we believe the
quoted phrase can be interpreted as
recognizing these distinct types of
negotiations. Under such a reading, the
prohibition on interference in
negotiations, as described in section
1860D–11(i)(1) of the Act, would not
pertain to negotiations between Part D
sponsors and pharmacies.
This does not mean, however, that we
would be free to interfere in sponsorpharmacy negotiations. Indeed, we
believe section 1860D–11(i)(2) of the
Act sets forth specific limits on our
ability to involve ourselves in Part D
sponsors’ arrangements with their
network pharmacies, as discussed in
more detail later in this section.
However, we believe that our proposed
interpretation of section 1860D–11(i)(1)
of the Act as not applying to the
sponsor-pharmacy negotiations is
supported by the provision’s context.
There are numerous statutory provisions
that require us to directly intervene in
the contractual relationship between
Part D sponsors and network
pharmacies, and these provisions
clearly signal that the Congress expected
CMS involvement in at least some of
these negotiations. The Congress has
provided many contractual
requirements for CMS to enforce
between sponsors and pharmacies; just
the drug-cost-related of these include:
Interpretation of what ‘‘access to
negotiated prices’’ means, any-willingpharmacy standard terms and
conditions, prohibition on any
requirement to accept insurance risk,
prompt payment, and payment standard
update requirements. So it is clear that
Part D sponsors and pharmacies do not
have sole discretion to interpret these
specific matters. We would be obligated
to intervene in disputes over whether
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arrangements violated our rules in any
area where our oversight is directed
under the statute. Therefore, it is clear
that such involvement could not be
what the Congress intended to prohibit.
Moreover, we observe a growth in
related-party relationships between Part
D sponsors and network pharmacies,
where the distinction between the
sponsor and the pharmacy is
increasingly unclear, and there is no
reason to believe that the Congress
intended that we are prohibited from
oversight of the sponsor’s dealings with
itself. In addition, we believe the goals
of the non-interference provision
generally support CMS avoidance of
being an arbiter of private disputes.
Thus, we would also decline to
intervene in contractual disputes
between sponsors and network
pharmacies except in matters
implicating CMS requirements, because
to do so might distort private market
outcomes in unpredictable ways.
Therefore, we propose at § 423.10(b)
that CMS may not be a party to
discussions between prescription drug
manufacturers and pharmacies, or
between drug manufacturers and Part D
sponsors, and may not arbitrate the
meaning of or compliance with the
terms and conditions of agreements
reached between these parties, except as
necessary to enforce CMS requirements
applicable to those agreements. Thus,
we could only be involved in such
discussions in order to explain CMS
requirements and to ensure compliance
with Part D rules and regulations. We
also add that nothing in this prohibition
limits our authority to require
documentation of and access to all such
agreements, or to require the inclusion
of terms and conditions in agreements
when necessary to implement
requirements under the Act.
The first part of the section 1860D–
11(i)(2) of the Act states that CMS ‘‘may
not require a particular formulary’’. The
noninterference clause must be read in
context of the other provisions that give
CMS authority with respect to
formularies, so we propose to interpret
the term ‘‘particular formulary’’ to mean
the selection of specific manufacturer
licensed drug products to be on
formulary, or on any particular tier of a
formulary, assuming the product meets
the definition of a Part D drug. We
interpret the first part of section 1860D–
11(i)(2) of the Act to prohibit us from
developing formulary guidelines that
prefer one manufacturer’s product over
another’s in Part D formularies, leading
to more limited formularies such as
provided by the Department of Defense
and the Veteran’s Administration. The

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most efficient formularies will make
formulary selections and then exclude
all or most competing multi-source and
therapeutically equivalent brand
products in order to concentrate volume
and maximize rebates. Given the size of
the Part D market, if CMS were able to
similarly limit access to Part D
formularies to certain products, this
would bestow significant competitive
advantage on the manufacturers of
selected products and significant
competitive disadvantage on
manufacturers of competing products.
Such limits would be expected to
fundamentally alter supply and demand
in the marketplace. This prohibited sort
of selection would be distinguished
from CMS formulary requirements that
may require particular types of drug
entities to be on all formularies, or on
preferred tiers, in order to provide nondiscriminatory access to drugs necessary
to treat conditions in all Medicare
beneficiaries, or to address drug classes
of clinical concern (see section III.A.14
of this proposed rule). Therefore, we
propose a provision prohibiting
establishment of formulary drug product
selection at § 423.10(c) that specifies
that CMS does not determine the
specific drug products to be included on
Part D sponsor formularies or any tier
placement of such products, except as
required to comply with
§ 423.120(b)(1)(v) or § 423.272(b)(2).
The second part of section 1860D–
11(i)(2) of the Act states that CMS ‘‘may
not institute a price structure for the
reimbursement of covered Part D
drugs’’. Again, the noninterference
clause must be read in context of the
other provisions that give CMS
responsibilities in a number of areas
that pertain to pricing, so we interpret
the phrase ‘‘price structure’’ to refer to
establishing either absolute or relative
indices of price for Part D drugs.
Specifically, we believe the intent of
this provision is to prohibit two types of
intervention by CMS. The first
prohibited activity is that CMS may not
require Part D drug acquisition costs or
sales prices to be a function of (be
defined relative to) any particular
published or unpublished pricing
standard, either existing or future. Thus,
we could not require that Part D prices
be based on, or be any particular
mathematical function (such as a
percentage or multiple) of established
pricing standards such as Average
Wholesale Price, Wholesale Average
Cost, Average Manufacturer Price,
Average Sales Price, Federal Supply
Schedule, 340b pricing, etc. The second
prohibited activity is that CMS cannot
require price concessions (from any

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standard or basis) to be at any specific
(absolute) dollar amount or equal to a
level specified in other legislative
requirements for other federal programs.
Thus, we could not, for example, set
minimum or maximum dollar prices for
a drug product or require that Part D
prices be offered at acquisition cost, or
at the ‘best price’ applicable under the
Medicaid program. However, since the
statute requires us to regulate many
aspects of how drug costs are made
available and displayed to beneficiaries
and treated in Part D bidding and
payment processes, it is clear that we
have an important role to play in
establishing rules for consistent
treatment of drug costs in the program.
Consequently, we may establish
definitions of what constitutes a pricing
standard, a price concession, a cost, etc.
We may also establish rules concerning
how drug costs are treated under Part D,
including, but not limited to, how such
amounts are disclosed in the
marketplace, projected in Part D bids,
made available to beneficiaries at point
of sale, reported in Explanation of
Benefits (EOBs), submitted to CMS, and
treated in CMS payments to Part D
sponsors. Therefore, we propose a
provision prohibiting establishment of
drug price reimbursement
methodologies at § 423.10(d) that
specifies that CMS does not establish
drug product pricing standards or the
dollar level of price concessions at any
stage in the drug distribution channel
for Part D drugs. Nothing in this
prohibition limits our authority to
require full disclosure or uniform
treatment and reporting of drug costs
and prices.
25. Pharmacy Price Concessions in
Negotiated Prices (§ 423.100)
We have learned that some Part D
sponsors have been reporting costs and
price concessions to CMS in different
ways. This reporting differential matters
because this variation in the treatment
of costs and price concessions affects
beneficiary cost sharing, CMS payments
to plans, federal reinsurance and lowincome cost-sharing (LICS) subsidies,
and manufacturer coverage gap discount
payments. Differential treatment of costs
would also be expected to affect plan
bids. We do not collect sufficient detail
in price concession data reported to
CMS to quantify this impact, but this
conclusion follows from the admitted
reporting of some pharmacy price
concessions in the annual aggregate
price concession reporting (that is, the
DIR reporting) during the coverage year
payment reconciliation process, rather
than as part of the negotiated price.
(This issue, and its financial effect, have

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been discussed in the Announcement of
Calendar Year (CY) 2014 Medicare
Advantage Capitation Rates and
Medicare Advantage and Part D
Payment Policies and Final Call Letter
(2014 Call Letter), [at http://
www.cms.gov/Medicare/Health-Plans/
MedicareAdvtgSpecRateStats/
Downloads/Announcement2014.pdf]
and will be discussed in more detail in
the discussion which follows.) If the
projected net costs a sponsor is liable for
in its bid are understated because the
sponsor has been reporting certain types
of price concessions as direct or indirect
remuneration (DIR) rather than as price
concessions that affect the negotiated
price, it follows that the sponsor may be
able to offer a lower bid than its
competitors and may achieve a
competitive advantage stemming not
from greater efficiency, but rather from
a technical difference in how costs are
reported to CMS. When this happens,
such differential reporting could result
in bids that are no longer comparable,
and in premiums that are no longer
valid indicators of relative plan
efficiency. We are therefore proposing
changes to rectify this concern.
The MMA established Part D as a
voluntary, private-market-based
program that would rely on private
plans to provide coverage and to bear
some of the financial risk for drug costs.
These private plans would determine
premiums through a bid process and
would compete with other plans based
on premiums and negotiated prices.
[The Medicare Prescription Drug,
Improvement, and Modernization Act of
2003 Conference Agreement
(Conference Agreement), page 4]
Premiums are set through a statutory
formula that ensures that premium
levels are commensurate with bid
levels. Therefore, all other things being
equal, the lowest premium for a given
level of benefits should signal the most
efficient plan. Premiums are established
through a prospective bidding process
in which costs are projected and
evaluated in accordance with actuarial
guidelines set by the CMS Office of the
Actuary.
Negotiated prices are the payment
amounts pharmacies receive from plans
for covered Part D drugs dispensed to
plan enrollees. CMS payments to plans
are based on the reporting of negotiated
prices (through PDE reporting) that are
actually paid and are then offset by any
other price concessions (submitted in
aggregate through the separate annual
DIR reporting process). CMS establishes
rules for cost and price concession
reporting through both PDE and DIR
guidance and other payment
reconciliation rules, and has regulated

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the definition of negotiated price and
how it is to be treated in Part D benefit
administration and in payment
reconciliation. Since 2010, the
regulatory definition has been:
‘‘Negotiated prices means prices for
covered Part D drugs that: (1) The Part
D sponsor (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; (2) Are reduced by
those discounts, direct or indirect
subsidies, rebates, other price
concessions, and DIR that the Part D
sponsor has elected to pass through to
Part D enrollees at the point of sale; and
(3) Include any dispensing fees.’’
We intended clause 2 to primarily
refer to price concessions from parties
other than pharmacies, since these
would be price concessions that were
not based on the sale of the drug by the
pharmacy and calculated when the
claim adjudicated and, in fact, could not
be calculated until a later date. In
particular, we expected these other nonclaim-based price concessions to be in
the form of rebates offered by
prescription drug manufacturers. Since
prescription drugs are dispensed by
pharmacies and purchased through
transactions between Part D sponsors (or
their intermediary contracting
organizations) and pharmacies,
manufacturers are never in a position to
apply price concessions to negotiated
prices at point of sale. We now
understand that clause 2 is ambiguous
and permits sponsors and their
intermediaries to elect to take some
price concessions from pharmacies in
forms other than the negotiated price
and report them outside the PDE. When
this occurs, the increased negotiated
prices generally shift costs to the
beneficiary, the government and
taxpayer, and when applicable to
certain brand name drugs, to
prescription drug manufacturers. (The
mechanism of this sort of cost shift was
discussed at length in the analogous
context of lock-in pricing in our 2008
proposed rule entitled ‘‘Medicare
Program; Revisions to the Medicare
Advantage and Prescription Drug
Benefit Programs’’ which as published
on May 16, 2008 in the Federal
Register,—FR 28563 through 28566.)
In addition, when price concessions
from pharmacies are reflected in forms
other than the negotiated price, the
degree of price concession that the
pharmacy has agreed to is no longer
reflected in the negotiated prices
available at point of sale or reflected on
the Medicare Prescription Drug Plan

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Finder (Plan Finder) tool. Thus, the true
price of drugs at individual pharmacies
is no longer transparent to the market.
Consequently, consumers cannot
efficiently minimize both their costs
(cost sharing) and costs to the taxpayers
by seeking and finding the lowest-cost
drug/pharmacy combination. Moreover,
as the coverage gap closes, there are
fewer and fewer beneficiaries who are
exposed to the full cost of drug
products, either at the point of sale or
as reflected in Plan Finder estimates.
When this occurs, the basis of
competition shifts from prices to cost
sharing, and the pricing signals
available to the market can be distorted
when lower cost sharing is not aligned
with lower prices. Thus, we believe the
exclusion of pharmacy price
concessions from the negotiated price
thwarts the very price competition that
the Congress intended when it said that
private plans would compete with other
plans on both premiums and negotiated
prices.
We are aware that certain pharmacy
price concessions are being excluded
from the determination of the negotiated
price because they are being
characterized as ‘‘network access fees’’,
‘‘administrative fees,’’ ‘‘technical fees’’
or ‘‘service fees’’ that are frequently
imposed through PBM-issued manuals
rather than explicit contractual terms.
Pharmacies and pharmacy organizations
report that they do not receive anything
of value for those fees other than the
ability to participate in the Part D
network. The itemized types of services
for which their payments are offset
reportedly include things such as
transaction fees for submission of
claims, help desk support, information
technology and telecommunication
systems connectivity, electronic funds
transfers, and other expenses associated
with credentialing, maintaining, and
auditing pharmacy networks. These fees
take the form of deductions from
payments to pharmacies for drugs
dispensed, but in our view clearly
represent charges that offset sponsor/
PBM operating costs. We believe that if
the sponsor or its intermediary
contracting organization wishes to be
compensated for these services and have
those costs treated as administrative
costs, such costs should be accounted
for in the administrative costs of the
Part D bid. If instead these costs are
deducted from payments made to
pharmacies for purchases of Part D
drugs, such costs are price concessions
and must be treated as such in Part D
cost reporting. This is the case
regardless of whether the deductions are
calculated on a per-claim basis or not.

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In our view, the decision on how such
network management costs are funded
between the PBM and the sponsor is not
governed by our rules, but our rules do
require that price concessions be fully
disclosed and net against drug costs in
reconciliation.
We have also heard from pharmacies
that some sponsors apply dispensing
fees to claims when they are adjudicated
at point of sale, but require that these
fees later be rebated back to the sponsor
and deducted from payment
remittances. Such practices again
misstate the negotiated price. Our
proposal would require that dispensing
fees could only be applied at point of
sale if they are received and retained by
the pharmacy in the negotiated price.
In comments on our related
discussion in the 2014 Call Letter, one
commenter argued that these other
amounts charged to pharmacies are
actually valid administrative costs. In
contrast, all other sponsors and PBMs
that commented on that section
acknowledged these amounts to be price
concessions. More significantly, all
pharmacies and pharmacy organizations
we have heard from assert that these are
price concessions. When reported as
DIR, these price concessions have the
effect of offsetting price concessions
disproportionally against just the costs
the plan is most liable for, as discussed
in the 2014 Call Letter. If not reported
at all, these amounts would result in
another form of so-called PBM spread in
which inflated prices contain a portion
of costs that should be treated as
administrative costs. That is, even if
these costs did represent services
rendered by the PBM or other
intermediary organization for the
sponsor, then these costs would be
administrative service costs, not drug
costs, and should be treated as such.
Failure to report these costs as
administrative costs in the bid would
allow a sponsor to misrepresent the
actual costs necessary to provide the
benefit and thus to submit a lower bid
than necessary to reflect its revenue
requirements (as required at section
1860D–11(e)(2)(C) of the Act and at
§ 423.272(b)(1)) relative to another
sponsor that accurately reported
administrative costs consistent with
CMS instructions. Therefore, we agree
with the pharmacy position that an
amount deducted from the negotiated
price otherwise payable to the pharmacy
for these sorts of administrative fees is
a price concession that should be
reflected in the negotiated price.
Consequently, we believe that the best
interpretation of statutory intent is that
all pharmacy price concessions must be
reflected in the negotiated price. This

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would preclude the differential
reporting that is taking place today, and
put all plans on a level playing field in
reporting drug costs and price
concessions from network pharmacies.
Consistent and transparent pricing
would also promote increased price
competition among network pharmacies
and will align beneficiary and taxpayer
interests in minimizing costs. Therefore,
we do not believe that other pricing
arrangements that cannot be calculated
at the point of sale, such as risk sharing
or conditional payments based on
volume, are compatible with the price
competition envisioned under the
statute. Such arrangements will tend to
overstate negotiated prices at point of
sale, and require the subsequent
adjustments through DIR reporting that
may increase beneficiary and
government costs if specified targets are
met. We believe that the advantages of
any such incentive arrangement could
be achieved without the cost shifting by
adjusting future negotiated prices. For
instance, if specified volume targets
were met in one quarter, rather than
retroactively adjusting that quarter’s
prices down through DIR reporting, the
negotiated prices for the next quarter
could be reduced, and so on. Therefore
we propose to reinterpret section
1860D–2(d)(1)(B) of the Act such that
negotiated prices are the amounts that a
network pharmacy receives in total for
covered Part D drugs, and that these
prices must reflect all price concessions
from network pharmacies. Therefore,
any other negotiated price concessions,
such as discounts, direct or indirect
subsidies, rebates, and (DIR) referenced
in the statute would be those price
concessions offered by sources other
than network pharmacies (or their
intermediary contracting organizations).
In practice, this means prescription drug
manufacturers.
Some stakeholders have
recommended that certain incentive
payments to pharmacies, such as
generic dispensing incentive fees,
should not be included in negotiated
prices. If these payments are included,
they explain, the negotiated prices
appear higher at the more efficient
pharmacy as the result of the additional
incentive payment. This higher price
then proportionally increases costs
borne by beneficiaries, the government,
and manufacturers. These incentives
really represent amounts that the
sponsor is willing to bear in order to
encourage the most efficient drug
choices, which will drive down total
costs overall, and thus the sponsor is
willing to bear a disproportionate share
of such expense. We agree with this

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argument and we believe that this sort
of arrangement would not conflict with
our proposed requirement that all price
concessions be reflected in the
negotiated price since such additional
payments are the opposite of price
concessions. Instead such incentive fees
represent contingent price increases that
cannot be predicted in advance, and
cannot therefore be programmed to be
applied at point of sale or reflected in
the price posted on Plan Finder. We
believe it would be appropriate to treat
this particular sort of price increase
differently than price decreases because
including such amounts in the
negotiated price (incentive fee
component) at point of sale could
disguise the relative competitiveness of
the underlying pharmacy prices.
Incentive fees also primarily benefit the
plan sponsor who benefits from the
lower costs associated with the
incentivized behavior, rather than the
beneficiary. Therefore, in this case, we
agree that it would be more appropriate
for such incentive payments to be
excluded from the negotiated price, and
reported later in reconciliation as
negative DIR. When reported as negative
DIR, these amounts disproportionately
affect (increase) the amounts the
sponsor is liable for in risk sharing,
which is appropriate given the intent of
the incentives to promote least-cost drug
product selection at point of sale. Leastcost drug product selection will directly
reduce the sponsor’s allowable risk
corridor costs, so any incentive paid to
encourage this behavior would be
expected to be more than offset by the
ingredient costs savings achieved
through avoidance of higher-cost drug
selection. This is so because, as we
learned from numerous commenters to
the 2014 draft Call Letter, the incentive
payments are generally in the range of
a dollar or two and the difference
between preferred and non-preferred
drug products is generally much greater.
Therefore, we propose to revise the
definition of negotiated prices at
§ 423.100 to require that all price
concessions from pharmacies are
reflected in these prices. Specifically we
propose to redefine negotiated prices to
mean prices for covered Part D drugs
that: (1) The Part D sponsor (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; and (2) are inclusive
of all price concessions and any other
fees charged to network pharmacies;
and (3) include any dispensing fees; but
(4) exclude additional contingent

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amounts, such as incentive fees, only if
these amounts increase prices and
cannot be predicted in advance; and (5)
may not be rebated back to the Part D
sponsor (or other intermediary
contracting organization) in whole or in
part.
26. Payments to PDP Plan Sponsors for
Qualified Prescription Drug Coverage
(§ 423.308)) and Payments to Sponsors
of Retiree Prescription Drug Plans
(§ 423.882)
We propose to revise the definition of
the term actually paid at both § 423.308
for the Part D program and § 423.882 for
the Retiree Drug Subsidy program in
order to reconcile this definition with
the changes proposed to the definition
of negotiated prices in this regulation.
Since our proposal would require that
all price concessions from network
pharmacies must be reflected in the
negotiated price, it would no longer be
correct to include pharmacies in the list
of sources from which price concessions
could be received without qualification.
Therefore, we propose to revise the
definition of actually paid at § 423.308
to include references to incentive
payments, and to clarify that DIR may
include additional payments to
pharmacies, such as for incentive
payments, but may not include any
other price concessions from
pharmacies as these must be in the form
of the negotiated price as proposed in
§ 423.100. We similarly propose to
change the reference to ‘‘from any
source’’ in the definition of actually
paid at § 423.882 to ‘‘from any
manufacturer or similar entity’’ to align
these definitions.
We also propose to remove any
reference to coupons in the list of price
concession types. The definition of
‘‘actually paid’’ relates to costs incurred
by Part D sponsors, and coupons would
not affect those costs. Similarly, we are
considering whether any or all of the
surrounding terms ‘‘cash discounts, free
goods contingent on a purchase
agreement, up-front payments . . .
goods in kind, free or reduced-price
services, [or] grants’’ in both of those
paragraphs would affect costs paid by
Part D sponsors. We solicit comments
on this question. We similarly propose
to remove any reference to coupons in
the definition of actually paid at
§ 423.882 to align these definitions. We
also solicit comments on whether the
surrounding terms ‘‘cash discounts, free
goods contingent on a purchase
agreement, up-front payments . . .
goods in kind, free or reduced-price
services, [or] grants’’ in both of those
paragraphs would affect costs paid by

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sponsors of qualified retiree
prescription drug plans.
Our reason for striking any such term
is that we are not aware of any form of
coupons (or the other forms of
remuneration listed previously) that
would affect the amount a Part D
sponsor pays to the pharmacy on a
claim. Therefore, the terms should be
deleted to accurately reflect the types of
price concessions a Part D sponsor
might receive that would affect its
financial obligation to pharmacies.
Moreover, we do not want to signal any
ambivalence with regard to the
permissibility of copayment coupons to
eliminate or reduce the cost-sharing
obligations of Part D beneficiaries. The
anti-kickback statute prohibits the
knowing and willful payment of
remuneration, directly or indirectly, in
cash or in kind, to induce the recipient
to purchase any item for which payment
may be made in whole or in part under
a federal health care program. (42 U.S.C.
1320a–7b(b)(2)). The statute also
prohibits the knowing and willful
receipt of remuneration in return for
such a purchase. (42 U.S.C. 1320a–
7b(b)(1)). Because copayment coupons
are provided to consumers for the
purpose of inducing them to purchase
specific prescription drugs, knowing
and willful use of such coupons to
reduce the cost-sharing obligations of
federal health care program
beneficiaries is prohibited by the antikickback statute. Pharmaceutical
manufacturers are aware of this
prohibition and typically include
language on copayment coupons stating
that persons whose prescriptions are
paid for by federal programs are not
eligible to use them.
27. Preferred Cost Sharing (§ 423.100
and § 423.120)
In our original rule implementing the
Part D Program, we codified an
interpretation of section 1860D–
4(b)(1)(B) of the Act at § 423.120(a)(9)
that permitted Part D sponsors to offer
lower cost sharing at a subset of network
pharmacies, dubbed ‘‘preferred
pharmacies,’’ than at other in-network
pharmacies. This lower cost sharing was
subject to certain conditions that
seemed straightforward to us at the
time, but which have proven to need
clarification. We have recently
discussed this concern in the
Announcement of Calendar Year (CY)
2014 Medicare Advantage Capitation
Rates and Medicare Advantage and Part
D Payment Policies and Final Call Letter
(2014 Call Letter) on pages 175–176 [at
http://www.cms.gov/Medicare/HealthPlans/MedicareAdvtgSpecRateStats/
Downloads/Announcement2014.pdf]

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Section 1860D–4(b)(1)(B) of the Act
contemplates the possibility of sponsors
offering lower cost sharing at some
network pharmacies than is offered in
conjunction with the any willing
pharmacy terms and conditions
mandated in the immediately preceding
paragraph (A). However, a plan’s ability
to reduce cost sharing is contingent
upon one condition: ‘‘In no case shall
such a reduction result in an increase in
payments made by the Secretary under
section 1860D–15 of the Act to a plan.’’
In our original proposed rule entitled
‘‘Medicare Program; Medicare
Prescription Drug Benefit; Proposed
Rule,’’ published on August 3, 2004 in
the Federal Register, 69 FR 46658
through 46659, we did not offer an
interpretation of this language but
implied that any assessment of whether
the condition was met would be a
matter of actuarial equivalence analysis.
We proposed to codify the requirements
in regulation with the following two
conditions: ‘‘. . . the plan must still
meet the requirements under
§ 423.104(e)(2) and (5); and [a]ny cost
sharing reduction must not increase
CMS payments under § 423.329.’’ In the
final regulation entitled ‘‘Medicare
Program; Medicare Prescription Drug
Benefit; Final Rule’’, published on
January 28, 2005 in the Federal
Register, 70 FR 4247 through 4255, we
reiterated the language from the
aforementioned proposed rule (69 FR
46658). ‘‘However, we note that while
these within-network distinctions are
allowed, the statute also requires that
such tiered cost-sharing arrangements in
no way increase our payments to Part D
sponsors. Therefore, tiered cost-sharing
arrangements based on within-network
distinctions could be included in Part D
plans’ benefits subject to the same
actuarial tests that apply to formularybased tiered cost-sharing structures.
Thus, a reduction in cost sharing for
preferred pharmacies in a Part D plan
network could be offered through higher
cost sharing for non-preferred
pharmacies (or as alternative
prescription drug coverage).’’ (70 FR
4254, January 28, 2005). This statement
was immediately followed by an
expression of our intent to ensure that
such network benefit designs were nondiscriminatory: ‘‘We recognize the
possibility that Part D plans could
effectively limit access in portions of
their service areas by using the
flexibility provided in § 423.120(a)(9) of
our final rule to create a within-network
subset of preferred pharmacies. In other
words, in designing its network, a Part
D plan could establish a differential
between cost-sharing at preferred versus

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non-preferred pharmacies—while still
meeting the access standards in
§ 423.120(a)(1) of our proposed rule—
that is so significant as to discourage
enrollees in certain areas (rural areas or
inner cities, for example) from enrolling
in that Part D plan. We emphasize that
such a network design has the potential
to substantially discourage enrollment
by certain Part D enrollees, and that we
have the authority under section
1860D–11(e)(2)(D) of the Act to disallow
benefit designs that are discriminatory.’’
And in fact, once sponsors began to
submit preferred cost sharing benefit
designs, we imposed limits on nonpreferred cost sharing in such plans
(through plan benefit package (PBP) bid
review) to ensure that non-preferred
cost sharing in these designs did not
represent a cost sharing outlier in
comparison to Part D plans without
preferred cost sharing. If we were to
allow cost sharing in pharmacies not
offering preferred cost sharing to rise
above this outlier level, beneficiaries
with significant utilization due to severe
or chronic illness would clearly see that
such plans were disadvantageous, and
would avoid them. Thus, we would find
any such designs to be discriminatory
and would not approve the plan benefit
package. However, what we failed to
sufficiently explain in 2005 was that if
cost sharing cannot rise beyond a
certain level, then in return for lower
cost sharing, preferred networks must
reduce drug costs paid by the plan in
order to prevent an increase in CMS
payments to the plan. In part this
omission may have been because we
presumed that Part D sponsors would
motivate enrollees to go to a subset of
pharmacies through lower cost sharing
only if those pharmacies offered
significantly lower negotiated prices,
and thus would provide a competitive
advantage for the sponsor in lowering
costs. As the concerns expressed in the
2014 Call Letter indicate, this does not
seem to have been the case for some
sponsors. However, if drug costs
(negotiated prices) are not lower in
return for lower cost sharing, and the
lower cost sharing cannot be completely
offset by higher cost sharing on other
beneficiaries due to our cost-sharingoutlier limits, then the amount that
must be subsidized by the government
and the taxpayer will increase.
As noted in the Call Letter, we
conducted an analysis of 2011 Part D
drug costs in standalone PDPs with
preferred networks, and compared these
to costs in their non-preferred networks,
as well as to costs in other PDPs without
preferred networks. (The April 2013
analysis by CMS, ‘‘Negotiated Pricing
between Preferred and Non-Preferred

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Pharmacy Networks’’, is posted at:
http://www.cms.gov/Medicare/
Prescription-Drug-Coverage/
PrescriptionDrugCovGenIn/Downloads/
PharmacyNetwork.pdf). We expected to
find that costs were consistently lower,
although we had no preconceived
estimate of how much lower. Instead we
found that aggregate unit costs weighted
by utilization (for the top 25 brand and
top 25 generic drugs) were slightly
higher in a few preferred networks than
in non-preferred networks in some
plans. The majority of sponsors offering
preferred networks did not have these
higher costs, although the range of cost
savings in their preferred networks
ranged from a high of 24.2 percent to as
little as 0.1 percent when measured in
this particular way. Surprisingly, the
most significant driver of excess costs in
the outlier sponsor preferred networks
appeared in mail-order claims. In these
cases the retail pharmacies in the nonpreferred network were actually offering
savings through discounted generics at
prices below those offered by
pharmacies with preferred cost sharing.
This is a primary reason we have
proposed to interpret the any willing
pharmacy requirements (see section
III.A.29 of this proposed rule) to require
plan sponsors to offer preferred cost
sharing for any pharmacy that can offer
sufficient discounts to qualify. Even
assuming that preferred pharmacies
were to offer lower negotiated prices
than those available in the rest of the
network, failure to allow access to any
pharmacy willing to meet the pricing
terms necessary to be included in the
preferred network could mean that
fewer beneficiaries would have
convenient access to both lower cost
sharing and lower negotiated prices
than would otherwise obtain. We seek
to not only ensure that preferred cost
sharing is aligned with lower drug costs,
but also to maximize the number of
beneficiaries who can take advantage of
such savings. We note that most PBMs
own their mail order pharmacies, and
we believe their business strategy is to
move as much volume as possible to
these related-party pharmacies to
maximize profits from their ability to
buy low and sell as high as the market
will bear.
Our findings—that a few sponsors
have actually offered little or no savings
in aggregate in their preferred pharmacy
pricing, particularly in mail-order
claims for generic drugs—are troubling.
Instead of passing through lower costs
available through economies of scale or
steeper discounts, a few sponsors are
actually charging the program higher
negotiated prices. When these higher

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prices are combined with significantly
lower cost sharing offered in preferred
pharmacy pricing, such pricing
increases the proportion of costs borne
by the plan and the government. All
other things being equal, this increases
payments to plans in violation of
section 1860D–4(b)(1)(B) of the Act.
Moreover, the lower cost sharing
provides a defective price signal that
distorts market behavior. As the
coverage gap closes, there are fewer and
fewer beneficiaries who are exposed to
the full cost of drug products, either at
the point of sale or in Medicare Plan
Finder estimates. When sponsors
compete on cost sharing unrelated to the
underlying negotiated prices of drugs,
beneficiaries may make choices that are
rational and aligned with plan interests,
but not in the best interests of the
Medicare program and the taxpayer. In
these cases, the lower cost sharing does
not motivate enrollees to select
pharmacies with lower prices and thus
make more efficient choices in the
market, but rather, motivates enrollees
to do the opposite. This results in higher
costs to the Part D program overall.
Therefore, we propose to clarify that
preferred cost sharing should signal
consistently lower costs. When lower
cost sharing correctly signals the best
prices on drugs, then choosing
pharmacies on the basis of that lower
cost sharing lowers not only beneficiary
out-of-pocket costs, but also Part D plan
and other government subsidy costs.
Lower plan and government subsidies
translate into lower CMS payments to
plans, consistent with the statutory
requirements at section 1860D–
4(b)(1)(B) of the Act. Therefore, we
propose to revise § 423.120(a)(9) to state:
‘‘Preferred cost-sharing in network
pharmacies. A Part D sponsor offering a
Part D plan that provides coverage other
than defined standard coverage may
reduce copayments or coinsurance for
covered Part D drugs obtained through
a subset of network pharmacies, as long
as such preferred cost sharing is offered
in accordance with the requirements of
§ 423.120(a)(8) and for Part D drugs with
consistently lower negotiated prices
than the same drugs when obtained in
the rest of the pharmacy network.’’ We
propose that by ‘consistently lower’ we
mean that sponsors must offer
beneficiaries and the Part D program
better (lower) negotiated prices on all
drugs in return for the lower cost
sharing. In practice we believe this
would mean that whatever pricing
standard is used to reimburse drugs
purchased from network pharmacies in
general, a lower pricing standard must
be applied to drugs offered at the

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preferred level of cost sharing. For
instance, if drugs offered at the standard
retail level of cost sharing were
reimbursed at 20 percent off the average
wholesale price (AWP) pricing standard,
then any drugs offered at the preferred
level of cost sharing must be reimbursed
at deeper discount than AWP minus 20
percent. If generic drugs offered at the
standard retail level of cost sharing were
reimbursed according to a sponsor’s
proprietary maximum allowable cost
(MAC) pricing standard, then generic
drugs offered at the preferred level of
cost sharing must be reimbursed at
deeper discount than the MAC pricing
rates. We believe this is not only
consistent with the statutory intent, but
also reasonable since the mail-order
operations and other large pharmacies
where preferred cost sharing is currently
offered have significantly more
purchasing leverage with manufacturers
and wholesalers than do smaller
pharmacies. Our analysis shows that
some sponsors are already achieving
these levels of savings, and our
proposed policy would apply a
consistent standard across all sponsors
to compete on negotiated prices,
including in related-party pharmacy
operations. We would welcome
comments on alternative approaches to
ensuring that the offering of preferred
cost sharing does not increase our
payments. We believe that any
alternative methodology must be based
solely on the level of negotiated prices
and thus consistent with our proposal to
amend that definition (section III.A.25
of this proposed rule). As discussed in
that section, we proposed to revise the
definition to specify that all price
concessions from pharmacies must be
reflected in the negotiated price in order
to promote transparent price
competition, as well as to eliminate
differential cost reporting and cost
shifting that interfere with a fair and
transparent competitive bidding
process. We request that any alternative
methodology suggestions be
accompanied by specific proposals for
how we could objectively validate
compliance through data we already
collect.
In addition, we solicit comments on
whether we should also establish
standards on how much lower drug
costs should be in return for preferred
cost sharing. We are aware that there is
a wide range of savings projections
associated with the use of limited
networks. For instance, a January 2013
study prepared for the Pharmaceutical
Care Management Association (PCMA)
provides various estimates ranging from
5 percent to 18 percent [at http://

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www.pcmanet.org/images/stories/
uploads/2013/visantepcma%20pharmacy%20networks
%20study%201-24-13%20final.pdf]. We
solicit comment on whether Medicare
should require a minimum level of
savings, such as 10 percent or 15
percent, over the costs available at retail
cost-sharing rates. We believe that
substantial discounts in this range
would be necessary to balance the
extremely low preferred cost sharing
rates offered by many sponsors in 2013.
We also solicit comments on how
broadly preferred cost sharing should be
applied to drugs on a sponsor’s
formulary. For instance, is it reasonable
to offer cost sharing as low as $0 for
only the least expensive generics on
formulary? Or should preferred cost
sharing have to apply to a minimum
percentage of formulary products to be
a meaningful benefit instead? Or should
preferred cost sharing have to apply to
all drugs available at pharmacies
offering preferred cost sharing? This
would require that the prices of all
drugs at those pharmacies could be no
higher than the prices at the other
network pharmacies. Such a policy
would prevent sponsors from offering
lower prices on drugs with preferred
cost sharing while offering higher prices
on other drugs not subject to preferred
cost sharing. Our concern is that
without such rules, it is possible that
the beneficiary is motivated to change
pharmacies in order to pay very low
copays on some drugs, but the program
may end up paying higher costs on
other drugs the beneficiary purchases at
the same pharmacy out of convenience.
We also propose a clarification in
terminology to better describe the
application of the policy to a sponsor’s
approved Part D pharmacy network. As
illustrated in the proposed revision to
§ 423.120(a)(9), we would like to change
the point of reference in our guidance
away from ‘‘preferred pharmacies’’ to
‘‘preferred cost sharing’’. This is not
only a more accurate interpretation of
the statute, but it also avoids the use of
the corollary term ‘‘non-preferred’’. We
regret the unintended connotation that
some network pharmacies are ‘‘nonpreferred pharmacies’’ when, in most
cases, these pharmacies have had no
opportunity to meet the terms and
conditions for qualifying for preferred
cost sharing. The use of the term nonpreferred also has caused confusion for
some stakeholders since non-preferred
is also a term of art referring to noncontracted and, therefore, non-network
pharmacies. In addition, we believe it is
generally misleading for our sponsors to
refer to preferred pharmacies, when

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only a limited number of tiers (for
instance, generics) may be available at
the lower preferred cost sharing rates at
these pharmacies. Consequently, we are
proposing to delete the definitions of
‘‘preferred pharmacy’’ and ‘‘nonpreferred pharmacy’’ from § 423.100 and
to add a new definition of preferred cost
sharing. ‘‘Preferred cost sharing’’ would
mean lower cost sharing for certain
covered Part D drugs at certain network
pharmacies offered in accordance with
the requirements of § 423.120(a)(9). We
would then require that Part D sponsors
would revise any marketing materials to
reflect the revised nomenclature, and
eliminate any references to preferred or
non-preferred network pharmacies. We
solicit comment on whether any further
clarifications of terminology are needed
for this policy proposal.
28. Prescription Drug Pricing Standards
and Maximum Allowable Cost
(§ 423.505(b)(21))
We are proposing a change to the
regulations governing the disclosure and
updating of prescription drug pricing
standards used by Part D sponsors to
reimburse network pharmacies to make
clear that drug pricing based on
maximum allowable cost (MAC) is
subject to these regulations. Section 173
of MIPPA amended sections 1860D–
12(b) and 1857(f)(3) of the Act to add a
provision requiring the regular updating
of prescription drug pricing standards.
Thus, for plan years beginning on or
after January 1, 2009, CMS’s contracts
with Part D sponsors must include a
provision requiring sponsors to update
any standard they use to reimburse
network pharmacies based on the cost of
the drug to accurately reflect the market
price of acquiring the drug. These
updates must occur not less frequently
than once every 7 days, beginning with
an initial update on January 1 of each
year.
We codified this requirement in
§ 423.505(b)(21). We also amended
§ 423.505(i)(3) with respect to contracts
or written arrangements between Part D
sponsors and pharmacies or other
providers, first tier, downstream and
related entities, to ensure that Part D
sponsors’ contracts with these entities
include provisions for regularly
updating any prescription drug pricing
standard used by sponsors to reimburse
their network pharmacies, as provided
in § 423.505(b)(21). Specifically,
§ 423.505(i)(3)(viii)(A) requires that
sponsors’ pharmacy contracts include a
provision establishing regular updates
of any prescription drug pricing
standard used by the Part D sponsor,
consistent with § 423.505(b)(21), and
§ 423.505(i)(3)(viii)(B) requires that a

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Part D sponsor’s pharmacy contract
indicate the source used by the Part D
sponsor for making any such pricing
updates. We finalized these regulations
in a final rule entitled, ‘‘Medicare
Program; Medicare Advantage Program
and Prescription Drug Benefit
Programs’’ at 76 FR 54600 (September 1,
2011) (‘‘September 2011 final rule’’).
When we finalized these regulations,
we did not provide a specific definition
for ‘‘prescription drug pricing
standard,’’ because we believed that it
was unnecessary at that time. Instead,
we provided the following examples of
prescription drug pricing standards:
ones that are based on ’’wholesale
average cost, average manufacturer
price, and average sales price.’’ At the
time, we believed these examples
sufficiently illustrated what is meant by
a prescription drug pricing standard,
which we described as ‘‘an accepted
methodology based on published drug
pricing.’’ We also stated that defining
the standard beyond this may be overly
prescriptive and might not be flexible
enough to evolve with industry changes.
Since publication of the September
2011 final rule, we have concluded that
our description of ‘‘prescription drug
pricing standard’’ in the preamble to the
final rule was unintentionally too
restrictive. Pharmacy representatives
have noted that many contracts between
Part D sponsors/PBMs and their
network pharmacies set reimbursement
through the application of MAC prices.
It is our understanding that MAC prices
generally refer to lists of drugs that
include the maximum amount that a
plan will pay for multi-source drugs,
whether generics or multi-source
brands. Based on numerous
conversations with pharmacy
representatives, we further understand
that there is no standardization in the
pharmacy benefits industry as to the
criteria used to determine inclusion of
drugs on MAC lists or as to the
methodology used to determine the
MAC prices, but that the latter is based
in part on the costs of the drugs and
fluctuate, sometimes frequently. We also
understand that MAC prices seem to be
set in some relation to a lowest cost
generic product alternative available on
the market at a given time. Additionally,
we understand that MAC prices are not
typically based exclusively on
published drug pricing, but are based at
least in part on internal Part D sponsor/
PBM methodologies. Finally, we
understand that many Part D sponsors
and PBMs have asserted that because
MAC prices are not based solely on
published drug pricing, MAC prices are
not a ‘‘prescription drug pricing

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standard,’’ and thus, not subject to the
updating requirements.
Pharmacy representatives further
report to us that pharmacies are forced
to sign contracts that reimburse based
on MAC prices that change without
notice. These representatives state that
pharmacies consequently do not know
exactly what price they will be paid for
which drugs, and thus the pharmacies
cannot confirm that their
reimbursements are correct nor engage
in proper business planning.
As noted previously, we stated in the
preamble to the final regulation that a
‘‘prescription drug pricing standard’’ is
an accepted methodology based on
published drug pricing. This is because
we were unaware at the time that there
is at least one standard based on costs
of the drugs that is not based strictly on
published drug pricing. Now that we
have become aware of these types of
pricing standards, we wish to clarify our
regulatory requirement. We believe that
the updating requirement should apply
to pricing standards based on the cost of
a drug, even when the standard is not
based on published drug pricing, an
approach consistent with the intent of
the statute. The text of MIPPA section
173 itself indicates the provision’s
purpose—Part D sponsors must update
their prescription drug pricing
standards regularly ‘‘to accurately
reflect the market price of the drug.’’ We
believe that this statement of purpose
indicates that the Congress intended to
provide pharmacies with a means of
ensuring that they have current data on
the amount of reimbursement that they
can expect.
When the source of a prescription
drug pricing standard is published
publicly, such as with AWP or WAC,
pharmacies can determine their
reimbursement for all drugs at any given
time and can monitor these sources to
ensure they are being reimbursed
correctly. However, when a prescription
drug pricing standard is not published
publicly, network pharmacies are
unable to promptly determine whether
their reimbursement is consistent with
their contractual arrangements. This, in
turn, presents risks to the Medicare Part
D program in a number of ways. For
example, disclosure of the source used
to determine drug prices is necessary for
pharmacies to ensure accurate payment
of their claims, which is necessary for
accuracy in the costs submitted to CMS
by Part D sponsors on PDEs without
unnecessary later adjustments that are
disruptive to the operation of the Part D
program.
In addition, when network
pharmacies are unable to determine
whether their reimbursement is

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consistent with their contractual
arrangements, the accuracy of the prices
displayed in the Medicare Prescription
Drug Plan Finder (‘‘MPDPF’’) is
questionable. While these prices only
provide an estimate of Part D drugs
costs at particular pharmacies,
beneficiaries do use the MPDPF to make
drug purchasing choices. If a pharmacy
does not know what it will be paid for
drugs on any given day, it cannot test
the MPDPF and validate the prices.
Thus, there is no assurance that the
posted prices are accurate, and
pharmacies are deprived of the
opportunity to compete based on more
accurate prices, and beneficiaries may
make choices based on erroneous
estimated drug costs. This is contrary to
the public policy goal of facilitating
competition in the health care system
and supporting consumers to be
informed purchasers of health care.
Also, when CMS compares posted
prices to prices submitted on PDEs to
evaluate the estimates provided in the
MPDPF, there can be no assurance that
those values correspond to the
payments pharmacies actually receive.
For these reasons, we now believe it
is necessary to define ‘‘prescription drug
pricing standard’’ in regulation.
Therefore, we propose to add a
definition to § 423.501 that would state
that a ‘‘prescription drug pricing
standard’’ means ‘‘any methodology or
formula for varying the pricing of a drug
or drugs during the term of a pharmacy
reimbursement contract that is based on
the cost of a drug, which includes, but
is not limited to, drug pricing references
and amounts that are based upon
average wholesale price, wholesale
average cost, average manufacturer
price, average sales price, maximum
allowable cost (MAC), or other cost,
whether publicly available or not.’’ We
propose to include the phrase,
‘‘includes, but is not limited to,’’ to
signify that the examples specified in
the regulation text are not exhaustive.
We expect some commenters may ask
what pharmacy reimbursement method
would not be considered a ‘‘prescription
drug pricing standard,’’ since the
regulations apply only ‘‘if’’ a Part D
sponsor uses a standard for
reimbursement that is based on the cost
of the drug. In our view, a fixed fee drug
price schedule that is not expected by
the parties to vary during the term of the
contract between the Part D sponsor/
PBM would be not be a ‘‘prescription
drug pricing standard,’’ as there would
be no reason to update the list at least
every 7 days.
In addition, in order to make the
regulations regarding prescription drug
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are proposing the following technical
changes for consolidation purposes: (1)
To combine the current requirements
contained in § 423.505(b)(21) (i) and (ii)
into (i) and eliminate the reference to
the effective contract year 2009 as no
longer necessary. These requirements
generally state that Part D sponsors
agree to update any prescription drug
pricing standard (as would be defined in
§ 423.501) on January 1 of each contract
year and not less frequently than once
every 7 days thereafter. We also propose
to move the current requirement to
indicate the source used for making any
such updates to (b)(21)(ii) from
§ 423.505(i)(3)(viii)(B). We propose this
latter move of regulation text, so that it
is clearer by its placement in the
regulation that this requirement is on
Part D sponsors.
For new paragraph
§ 423.505(b)(21)(iii), to be clear, we are
proposing a new requirement and not a
technical change. We are proposing that
Part D sponsors agree in their contracts
with CMS to disclose all individual
drug prices to be updated to the
applicable pharmacies in advance of
their use for reimbursement of claims, if
the source for any prescription drug
pricing standard is not publicly
available. This means, in conjunction
with the proposed definition of a
‘‘prescription drug pricing standard’’
discussed previously, that Part D
sponsors would have to convey to
network pharmacies in advance the
actual MAC prices to be changed. We
are requiring that the actual MAC prices
be disclosed in advance because, if the
pharmacies are not able to use the
updates as a reference against which
they can check their reimbursements,
there would be no point to the statutory
requirement.
As a final technical change, we are
proposing to eliminate language in
§ 423.505(i)(3)(viii)(A) about
establishing regular updates of any
prescription drug pricing standard used
by the Part D sponsor which is and
would be duplicative to language in
423.505(b)(21). As a result of the
changes described previously, there
would be no paragraphs (A) and (B) to
§ 423.505(i)(3)(viii), and this provision
would simply require that, if applicable,
each and every contract governing Part
D sponsors and first tier, downstream,
and related entities, must contain
provisions addressing the prescription
drug pricing standard requirements of
§ 423.505(b)(21). We believe these
proposed technical changes will make
the regulation text easier to reference
and understand.

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29. Any Willing Pharmacy Standard
Terms & Conditions (§ 423.120(a)(8))
Section 1860D–4(b)(1)(A) of the Act
requires Part D plans to permit any
pharmacy meeting the standard Terms
and Conditions (T&C) to participate in
the plan’s network. We used this
authority to establish requirements
under § 423.120(a)(8) and
§ 423.505(b)(18) that plan sponsors have
reasonable and relevant T&C for
network participation in their standard
contract, and allow any pharmacy
meeting the T&C to participate as a
network pharmacy for that plan. Section
1860D–4(b)(1)(B) of the Act permits
sponsors to reduce cost sharing ‘‘below
the level otherwise required,’’
notwithstanding paragraph (A). Thus,
the statute permits a ‘‘preferred’’ cost
sharing level (using the definition
specified in section III.A.27 of this
proposed rule) to be offered at some
network pharmacies. Since the
beginning of the program, we have
required sponsors to offer standard
T&Cs to any willing pharmacy in order
to achieve broad network access, but
have permitted sponsors to offer
different T&Cs in return for preferred
cost sharing to a smaller subset of its
network. We have previously stated that
we believed our interpretation of these
two seemingly conflicting statutory
provisions struck an appropriate
balance between the need for broad
pharmacy access and the need for Part
D plans to have appropriate contracting
tools to lower costs. In this section we
are proposing that in place of sponsors
having one contract with standard terms
for any willing pharmacy and a second
preferred cost sharing contract for a
limited subset of pharmacies, that
sponsors instead have standard T&C for
network participation that list all
combinations of cost sharing and
negotiated prices possible for retail
settings under the plan, allowing any
willing pharmacy the opportunity to
offer preferred cost sharing if the
pharmacy can offer the requisite level of
negotiated prices.
When discussing cost sharing,
distinctions are made in this section
between plans offering a preferred cost
sharing level and plans that do not. For
the purposes of this section, the cost
sharing levels offered at retail
pharmacies not contracted to offer
preferred cost sharing (previously
referred to as ‘‘non-preferred
pharmacies’’) are referred to as standard
cost sharing levels. Cost sharing levels
offered at retail pharmacies at the
preferred T&C (previously referred to as
‘‘preferred pharmacies’’), are referred to
as preferred cost sharing levels.

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Because under our proposal for
preferred cost sharing, pricing terms for
pharmacies offering preferred cost
sharing could not exceed the pricing
terms for pharmacies offering standard
cost sharing (see discussion in section
III.A.27 of this proposed rule), we will
use the terms ‘‘ceiling price’’ and ‘‘floor
price’’ to refer to the upper and lower
limits put on pricing terms. As
proposed, the negotiated prices charged
by pharmacies offering preferred cost
sharing must be at or below the agreed
upon ceiling price (determined by using
the defined preferred cost sharing T&C
pricing), which must be less than the
floor price, or lowest negotiated price,
charged at network pharmacies offering
standard cost sharing.
We heard from many pharmacies,
many of them small independent
community pharmacies, that plans do
not offer any willing pharmacy the
opportunity to offer preferred cost
sharing. Instead, some pharmacies are
being offered only the plan’s standard
T&C, at the highest level of beneficiary
cost sharing. We received more than 200
comments in response to our discussion
of this topic in the Announcement of
Calendar Year (CY) 2014 Medicare
Advantage Capitation Rates and
Medicare Advantage and PDP Payment
Policies and Final Call Letter (2014 Call
Letter) pp. 175–176 at http://
www.cms.gov/Medicare/Health-Plans/
MedicareAdvtgSpecRateStats/
Downloads/Announcement2014.pdf.
Most of these comments were from
pharmacies concerned about barriers to
entry for participation in preferred
networks, and many of these argued that
such limited networks violate the
statutory intent of the network access
provisions at section 1860D–4(b)(1) of
the Act. In particular, these commenters
disagreed that such barriers were
consistent with the any willing
pharmacy requirement as stated in
1860D–4(b)(1)(A) of the Act.
Consequently, we have reviewed our
original regulatory interpretation of
these provisions, not only in light of
these complaints, but also in light of our
experience in the Part D program. We
believe that an alternative reading of
sections 1860D–4(b)(1)(A) of the Act
and (B) of the Act to reduce barriers is
not only permissible, it would have the
following key policy benefits, which we
describe as follows:
• Increased access for beneficiaries to
preferred level cost sharing with any
willing pharmacy able to agree to the
T&C that include preferred cost sharing.
• Improved opportunity for
competition among pharmacies
contracting with the sponsor to charge
no more than the ceiling price stated in

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the contract for preferred cost sharing,
reducing costs charged to the program.
• Improved clarity for beneficiaries
surrounding cost sharing levels
available at retail and mail order
pharmacies.
Elsewhere in this proposed regulation
we discuss clarifications to the
requirements for offering preferred cost
sharing within a sponsor’s network (see
section III.A.27 of this proposed rule). In
III.A.27 we discuss our analysis of 2011
benefit designs incorporating preferred
cost sharing. We found that some retail
pharmacies are actually offering to sell
Part D drugs (particularly generic
versions) at prices below those offered
by the network pharmacies eligible for
preferred cost sharing. In such cases, the
lower negotiated prices offering the
program superior savings are offered to
enrollees at the higher standard cost
sharing levels, while the same drugs
being offered to enrollees at lower
preferred cost sharing levels may be
costing the program as much or more.
The lower cost sharing ‘‘price’’ signal is
not aligned with either the true price of
the drug or better overall value to the
program, and therefore the defective
signal incentivizes inefficient
purchasing decisions from the
perspective of the Part D program. If
some retail pharmacies are willing to
provide deeper discounts than those
that sponsors are currently negotiating
with pharmacies in return for offering
preferred cost sharing, we can conclude
that, all other things being equal,
competition will be increased and
aggregate negotiated prices will be
reduced if these more competitive retail
pharmacies have the opportunity to
qualify for preferred cost sharing.
Therefore, we now believe that this
opportunity for pharmacies to gain entry
into previously limited networks should
be a component of the any willing
pharmacy requirements for retail
pharmacies, allowing more pharmacies
the option to offer preferred level cost
sharing if they are willing to charge no
more than the ceiling price stated in the
contract.
We have heard the assertion that
limited networks achieve greater savings
than broader networks, and that
moreover, allowing more participants
into a limited network than those handpicked by the sponsor will necessarily
lead to increased prices. However, we
have been running a natural experiment
of sorts relative to this assertion in the
Part D program. If limited networks per
se led to significantly lower costs, we
would see consistently significant
savings in those network segments
relative to the rest of the sponsors’
networks. However, an April 2013

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analysis by CMS, ‘‘Negotiated Pricing
Between Preferred and Non-Preferred
Pharmacy Networks’’, reviewed actual
program experience and indicated that
this is not the case across the board (see
http://www.cms.gov/Medicare/
Prescription-Drug-Coverage/
PrescriptionDrugCovGenIn/Downloads/
PharmacyNetwork.pdf). As the 2012
claims show, there is wide variation in
discounting across sponsors. Consistent
savings are not seen uniformly. In some
cases, pharmacies extending high
discounts are ones that have been
excluded from limited networks offering
preferred cost sharing, while some
pharmacies within the limited networks
offer effectively no discounts compared
to the rest of the network. Therefore, we
believe that opening up these limited
networks to any pharmacy willing to
charge no more than the contract’s
ceiling price to qualify for offering the
lower preferred cost sharing is necessary
to restore price competition in these
networks. Consequently, for any
sponsor that offers both standard and
preferred cost sharing under any of its
benefit packages, we propose that the
sponsor’s contracts for network retail
pharmacies include not only the T&C
for standard cost sharing, but also the
T&C for offering preferred cost sharing,
stating negotiated pricing levels that
must be agreed upon to qualify for
offering preferred cost sharing. As
discussed previously, the ceiling price
that a pharmacy can charge for a drug
filled at a preferred cost sharing level,
must be less than the floor price, or
minimum price, charged by network
pharmacies under that plan offering
standard cost sharing levels. Retail
pharmacies would elect to participate
according to one set of terms or the
other, but not both.
We have also heard the argument that
the pharmacies in currently limited
networks are offering deeper discounts
solely in return for increased market
share and that they will withdraw such
offers if the limited network is opened
up to other pharmacies that can meet
those T&C. We are skeptical that such
participants in the highly competitive
retail market will abandon their market
share by returning to the broader
network T&C. As some network
pharmacies offering standard cost
sharing have been able to extend
discounts in pricing even deeper than
what is seen in some pharmacies
offering preferred cost sharing, it is not
obvious that negotiated prices would
necessarily increase in the aggregate in
the event that a limited number of
pharmacies consider changing from
preferred to standard cost sharing. We

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have also been informally told by one
sponsor with preferred cost sharing in a
limited network that its preferred cost
sharing T&C already are offered to any
willing pharmacy. For these reasons, we
do not believe that our proposal would
result in increased prices. We note that
our proposed alternative statutory
interpretation still would permit
sponsors to limit preferred cost sharing
to those pharmacies accepting T&C with
stated ceiling prices. Aggressive price
concessions to fall below the stated
ceiling price (solely in the form of lower
negotiated price, in accordance with our
proposed change to that definition at
§ 423.100 discussed at section III.A.25 of
this proposed rule) would have to be
met by all pharmacies offering preferred
cost sharing, including pharmacies that
are related parties of the Part D sponsor
or its PBM. Sponsors could not offer
preferred cost sharing for higher
negotiated prices than the ceiling price
listed in the T&C, but would be free to
negotiate even deeper discounts from
individual pharmacies in the limited
network. Publicly posted pricing
standards would effectively set a pricing
floor for all pharmacies accepting a
plan’s standard T&C and set a pricing
ceiling for pharmacies accepting the
preferred cost sharing T&C. These
benchmarks better align price with
value, while maintaining sponsor
flexibility to negotiate with all
pharmacies in its network. Therefore,
we are confident that requiring that a
Part D plan sponsor offer T&C for every
level of cost sharing approved in its
benefit packages to any willing
pharmacy would not limit competitive
negotiations, nor would it in and of
itself lead to increased negotiated
prices.
We also believe that there is a limit to
the number of cost sharing levels offered
under a benefit plan that can be well
understood by beneficiaries. When
establishing its network, a Part D
sponsor does not offer identical T&C for
network participation to every
pharmacy. Certain terms will
necessarily differ among contracts with
the different types of pharmacies
needed to provide all Part D drugs, if for
no other reason than to address the
different access and service standards
established by CMS. These various
types include at a minimum: Retail,
mail-order, long-term care institutional,
limited-distribution-drug specialty, and
home infusion therapy pharmacies.
Terms will also differ with respect to
negotiated prices and the level of cost
sharing that a pharmacy’s claims will be
subject to. For instance, long-term care
institutional, specialty, and infusion

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pharmacies are generally offered at the
standard level of cost sharing (for the
applicable formulary tier) for a month’s
supply of a covered drug. Retail and
mail-order pharmacies, in contrast,
currently may contract with plans to be
offered at more than one cost sharing
level.
Cost sharing at retail and mail-order
pharmacies currently vary on three
dimensions: Whether the cost sharing is
standard or preferred, on the quantity
dispensed (or ‘‘days’ supply’’), and on
dispensing location.
a. Preferred Cost Sharing
Under § 423.120(a)(9), sponsors can
offer lower preferred cost sharing levels
to some retail and mail order
pharmacies in their network who agree
to offer superior price concessions.
While beneficiaries may actively seek
out preferred cost sharing among retail
and mail order pharmacies, this is less
common among long term care,
specialty, and infusion pharmacy
settings. Any preferred cost sharing
structure would be required to meet
certain conditions as previously
proposed and would be required to be
submitted to CMS for approval as part
of a sponsor’s plan benefit package.
Plans are not currently required to offer
a preferred cost sharing level, nor would
they be required to if this proposal is
implemented. However, for pharmacies
that do contract to offer preferred cost
sharing, our proposal means that
preferred cost sharing must be available
to all enrollees covered by that plan’s
contract and electing to use that
pharmacy. This would include
consistently charging preferred cost
sharing and consistently billing no more
than the ceiling price for all
prescriptions, whether a one month or
extended days’ supply is dispensed.
b. Extended Days’ Supply
Additionally, different cost sharing
levels may be offered for extended days’
(generally greater than 34 and no more
than 102) supplies, at both retail and
mail order pharmacies. To avoid
unnecessarily complicated benefit
designs, plans should create no more
than two cost sharing distinctions based
on days’ supply: One month supply (not
to exceed 34 days) or extended days’
supply (greater than 34-days’ supply). In
manual guidance (see section 50.10 of
Chapter 5 of the Medicare Prescription
Drug Benefit Manual) we have further
interpreted the ‘‘level playing field’’
provision to mean that sponsors electing
to offer extended days’ supplies of
covered Part D drugs need to make
available to retail pharmacies, upon
request, an ‘‘Extended Supply

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Addendum’’ to their standard
contracting terms and conditions for
retail pharmacies. This Addendum
provides one of two extended-days’supply contracting options: (1) To be
offered at the same cost sharing rate as
mail order if a retailer can match the
mail-order T&C, or (2) to be offered at
another higher cost-sharing level, but in
no case higher than three times the
amount enrollee would have paid at the
same retail pharmacy had the enrollee
had his or her prescription filled in
multiple 1-month supply increments at
the applicable retail pharmacy cost
sharing (standard or preferred) cost
sharing rate. The nature of long term
care, specialty, and infusion pharmacy
dispensing makes a price differential
based on days’ supplies largely
unnecessary.
c. Mail Order Cost Sharing
Section 1860D–4(b)(1)(D) of the Act
(and § 423.120(a)(10)) require sponsors
to provide for extended days’ supplies
at retail when extended days’ supplies
are available at mail, but explicitly
permits differential cost sharing
between the two settings. For plans
offering both preferred cost sharing and
mail order options, the mail order cost
sharing for an extended days’ supply
can be less than the preferred cost
sharing for an extended days’ supply
filled at retail. However, for 1-month
supplies, we propose that the cost
sharing at mail order (for prescriptions
for 34 days or less) cannot be less than
the standard cost sharing at retail (for
prescriptions for 34 days or less),
regardless of whether a preferred cost
sharing level is available. In general, we
believe that filling initial prescriptions
or routine 30-day supplies at mail-order
is not good practice. Given the need to
order or re-order mail order
prescriptions well in advance of when
the medication runs out (to allow time
for shipping), the opportunity for gaps
in therapy caused by delayed orders
rises. When using mail order for one
month supplies, a beneficiary would
have to order the next month’s supply
shortly after receiving a new order, and
complaints received by CMS indicate
that billing errors and delayed
shipments occur. It is our understanding
that mail order is most efficient when
processing extended days supplies,
when all billing and processing can be
addressed well in advance of needing to
ship the next supply. However, we
recognize that for some populations,
monthly mail order supplies are an
acceptable option, so we are not seeking
to disincentivize this option. Rather, we
are proposing that 1-month supplies
filled by mail order pharmacies cannot

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have cost sharing lower than a
comparable one month supply filled at
retail, so as not to provide an incentive
to fill short supplies of chronic
medications through mail order.
We believe that a more simplified
benefit design, incorporating these three
variables and accommodating a more
clearly defined set of cost sharing levels,
would promote better understanding of
Part D plan benefits, both in terms of
beneficiary cost sharing and prices
charged to the program, as well as
streamlined contracting options. We
also find it important to expressly state
the total number of possible cost-sharing
levels, to clarify expectations and to
preempt the introduction of additional
or unauthorized cost-sharing levels in
the future.
For prescriptions not subject to Long
Term Care, specialty pharmacy, or home
infusion pricing, the interaction of the
following four provisions of section
1860D–4(b)(1) of the Act point to three
authorized levels of cost sharing:
Standard, preferred, and extended days’
supplies for retail and mail order
pharmacies.
• Section 1860D–4(b)(1)(A) of the Act
details the participation of Any Willing
Pharmacy in a plan’s network, provided
that they meet T&C offered by the plan,
authorizing a standard cost sharing
level. This proposal offers retail and
mail order pharmacies a chance to not
just participate in the plan’s network,
but to select among a plan’s various T&C
for participation. By listing the T&C
required for offering preferred cost
sharing on the contract offered to any
willing pharmacy, instead of only
offering these T&C to select pharmacies,
a greater percentage of network
pharmacies can offer beneficiaries the
lower cost sharing, while also offering
reduced negotiated prices and savings to
the Part D program.
• Section 1860D–4(b)(1)(B) of the Act
permits discounting for some network
pharmacies, authorizing a preferred cost
sharing level. This proposal continues
to permit both a standard and preferred
cost sharing level within a plan’s
network.
• Section 1860D–4(b)(1)(C) of the Act
defines the authority to establish rules
defining convenient access, permitting a
mail order cost sharing level. Expanding
requirements for any willing pharmacy
contracts, with any pharmacy (and
presumably a greater number of
pharmacies) now offered the
opportunity to compete for preferred
cost sharing if the pharmacy can offer
the requisite level of negotiated prices,
would expand beneficiary access to
lower cost sharing options within the
network.

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• Section 1860D–4(b)(1)(D) of the Act
creates a level playing field by ensuring
that if extended days’ supply benefits
are available at mail order, beneficiaries
can get the same benefit at retail
pharmacies. Extended days’ supply cost
sharing at mail order does not have to
equal extended days’ supply cost
sharing at retail, however, we propose to
require that it cannot be less than the
standard cost sharing offered at retail
pharmacies for extended days’ supply.
As previously discussed, it is our
understanding that mail order is most
efficient when processing extended days
supplies, when all billing and
processing can be addressed well in
advance of needing to ship the next
supply. While we are not proposing to
disincentivize mail order for supplies of
less than 90 days, nor do we believe it
is appropriate to incentivize through
lower cost sharing the use of mail order
in situations where gaps in therapy may
be more likely to occur.
When assessed together, we believe
these four sections direct Part D plans
to create a network offering convenient
access not only to various types of
pharmacies but also to various types of
cost sharing. Permitting three retail cost
sharing levels, as the statute implies,
reflects the levels of cost sharing also
observed in the commercial market.
However, unique to Part D, the available
cost sharing levels must also meet the
Medicare requirements assuring
pharmacy access for Medicare
beneficiaries.
We would like to minimize the
number of variations on these three
levels to the following options and to
ensure that standard T&C for network
participation offer every level available
for each respective pharmacy type. First,
we propose to limit long term care,
specialty, and infusion pharmacy cost
sharing to the standard monthly rate, as
is industry practice today. Second, we
propose to limit retail pharmacies to the
three authorized levels; either the
standard or preferred monthly rate (for
supplies up to 34 days), and one
extended days’ supply cost sharing rate
not exceeding three times the monthly
retail rate (either three times the
standard monthly retail rate or three
times the preferred monthly retail rate,
depending upon the T&C of the
pharmacy’s contract). Third, we propose
to limit the levels of cost sharing at
mail-order pharmacies to one monthly
rate and one extended day mail order
cost sharing rate (for any supplies
greater than 34 days) for reasons
discussed previously. We additionally
solicit comments on the frequency of
mail order being used to fill
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We note that these proposals would not
alter our requirements around the
dispensing of any days’ supplies less
than 30 days, which is still subject to
the ‘‘daily cost sharing’’ provision at
§ 423.153(b)(4) (which we propose to
further clarify in section III.E.9 of this
proposed rule).
In summary, we propose to use the
authority in section 1860D–4(b)(1)(C)(i)
of the Act to establish rules defining
convenient access within a Part D
pharmacy network, combined with the
authority in section 1860D–4(b)(1)(A) of
the Act to revise the any willing
pharmacy requirements, to ensure that
any pharmacy that can meet the
applicable T&C for offering standard or
preferred cost sharing can join the
network on those terms. We believe the
network access provisions in section
1860D–4(b)(1) of the Act support
expanding § 423.120(a)(8) to all levels of
cost sharing offered under a sponsor’s
benefit plans. We believe that doing so
supports the Congressional intent to
have plans compete on negotiated prices
by making this price competition more
open and accessible to pharmacies.
Specifically, we propose to revise
§ 423.120(a)(8) to require that, in
establishing its contracted pharmacy
network, a Part D sponsor offering
qualified prescription drug coverage
must comply with all of the following
requirements:
• Must offer and publicly post
standard terms and conditions for
network participation for each type of
pharmacy in the network subject to the
following:
++ May not require a pharmacy to
accept insurance risk as a condition of
participation in the PDP sponsor’s
contracted pharmacy network.
++ Must offer payment terms for
every level of cost sharing offered under
the sponsor’s plans consistent with CMS
limitations on the number and type of
cost sharing levels, and for every type of
similarly situated pharmacy.
• Must contract with any willing
pharmacy able to meet one set of the
terms and conditions offered by that
plan for that type of pharmacy.
We also propose to make conforming
changes to the contracting provisions at
§ 423.505(b)(18) to require Part D
sponsors to agree to have standard T&C
for network participation that meet the
requirements described in
§ 423.120(a)(8), with reasonable and
relevant T&C of participation for each
type of pharmacy in its network. We
believe these proposed requirements
would better ensure that each Part D
plan: (1) Provides convenient access to
Part D drugs in all Part D settings and
to the extent practical, at all cost sharing

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levels; and (2) offers cost sharing levels
that encourage beneficiaries to make
choices that minimize costs not only for
themselves, but also to the Medicare
Part D program as a whole.
We solicit comments on these
proposals to expand the any willing
pharmacy T&C and to streamline the
levels of cost sharing offered under
those standard T&C. Based on the
current level of negotiated prices in the
Part D program, we conclude that if a
greater number of pharmacies were
given the option to compete for each
cost-sharing level offered under the
plan, that beneficiaries would have
more pharmacy options offering the
lowest cost-sharing level for reduced
prices. We cannot compel sponsors to
negotiate lower negotiated prices, nor
can we compel pharmacies to accept
plan sponsors’ T&C for participation,
but we can create benefit specifications
and network access standards that
promote streamlined benefit
comparisons and that maximize
opportunities for price competition. We
believe these proposals will increase
beneficiary understanding of and access
to cost sharing that is better aligned
with the lowest negotiated prices,
improve market competition, and
increase downward pressure on total
program costs.
30. Enrollment Requirements for the
Prescribers of Part D Covered Drugs
(§ 423.120(c)(5) and (6))
To improve our ability to oversee the
Medicare Part D program, we are
proposing to implement section 6405(c)
of the Affordable Care Act effective
January 1, 2015. This section provides
the Secretary with authority to require
that prescriptions for covered Part D
drugs must be prescribed by a physician
enrolled under section 1866(j) of the Act
(42 U.S.C. 1395cc(j)) or an eligible
professional as defined at section
1848(k)(3)(B) of the Act (42 U.S.C.
1395w–4(k)(3)(B)). We are proposing in
revised 42 CFR 423.120(c)(5) and new
(6) that a prescriber of Part D drugs must
have: (1) An approved enrollment
record in the Medicare FFS program
(that is, original Medicare); or (2) a valid
opt-out affidavit on file with a Part A/
Part B Medicare Administrative
Contractor (A/B MAC) for a prescription
to be eligible for coverage under the Part
D program.
Our long-standing Part D policy has
been that drugs cannot be eligible for
Part D coverage unless they are
dispensed upon prescriptions that are
valid under applicable state law. We
incorporated this policy (§ 423.100 and
§ 423.104) in the April 12, 2012 final
rule (77 FR 22072) entitled, ‘‘Medicare

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Program: Changes to the Medicare
Advantage and the Medicare
Prescription Drug Benefit Programs for
Contract Year 2013 and Other Changes.’’
Inherent in this policy is the notion
that valid prescriptions of covered Part
D drugs are written by qualified
prescribers, meaning prescribers who
have an active professional health care
license that conveys prescribing
privileges to them under applicable
state law. A prescription is not valid
under any state law if it is not written
by a qualified prescriber. Indeed, we
note that not all of the eligible
professional types under section
1848(k)(3)(B) of the Act can necessarily
prescribe drugs under state law.
To help ensure that Part D drugs are
prescribed only by qualified prescribers,
we are proposing that physicians and
eligible professionals enroll in the
Medicare program in order to prescribe
covered Part D drugs. We are proposing
an enrollment deadline of January 1,
2015, which would provide physicians
and eligible professionals with at least
6 months after the publication of a final
rule to initiate and complete the
Medicare enrollment process for the
purposes of prescribing covered Part D
drugs. We are soliciting comments
regarding the effective date of this
provision and the reason(s) why we
should consider an earlier or later
implementation date for this provision.
Our proposal to implement section
6405(c) of the Affordable Care Act with
respect to Part D prescribers
complements our recent steps to help
ensure that prescriptions covered by the
Part D program are written by qualified
health care practitioners. In 2012, we
provided sponsors with guidance in an
October 1, 2012 HPMS memorandum
titled, ‘‘Revised Reporting Requirements
for Prescriber Identifiers and Other
Prescription Drug Event Fields.’’ We
also required every PDE record
submitted by a Part D sponsor to CMS
to contain an active and valid
individual prescriber national provider
identifier (NPI) beginning January 1,
2013. PDE records are summary records
of every prescription filled under the
Part D program and contain prescription
drug cost and payment data that enables
CMS to make payments to plans and
otherwise administer the Part D benefit.
Thus, the PDE NPI requirement ensures
that we have a record of the prescriber’s
active and valid individual NPI for
every prescription covered under the
program.
In the final rule implementing the NPI
PDE requirement, we explained that the
consistent use of a single validated
identifier would enable us to provide
better oversight over possible fraudulent

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activities in the Part D program. When
promulgating § 423.120(c)(5) (77 FR
22143, April 12, 2012), we stated that
CMS, the National Benefit Integrity
Medicare Drug Integrity Contractor, and
oversight agencies would be able to
more efficiently, and therefore more
effectively, identify patterns of unusual
prescribing that may be associated with
improper and/or fraudulent activities.
While requiring NPIs on every PDE
record was an important first step in
identifying and monitoring prescribers
in the Part D program, the system that
assigns and maintains NPI data—the
National Plan and Provider
Enumeration System (NPPES)—is not a
practitioner credentialing system. The
information stored in NPPES is selfreported by the applicant and is not
required to be independently verified by
HHS or CMS. This has left open some
program vulnerabilities as described in
recent OIG reports on this issue. For
instance, in a June 2013 report, the OIG
found that the Part D program
inappropriately paid for drugs ordered
by individuals who clearly did not
appear to have the authority to
prescribe. (See ‘‘Medicare
Inappropriately Paid for Drugs Ordered
by Individuals Without Prescribing
Authority’’ (OEI–02–09–00608). This
raises concerns about patient safety and
the appropriateness of Part D payments.
In addition, there have been reports that
the prescriptions of physicians with
suspended licenses have been covered
by the Part D program. This should not
happen, and we believe we can better
address this type of vulnerability by
verifying the credentials of prescribers
as physicians or eligible professionals
through either their enrollment in the
Medicare FFS program with an
approved enrollment record or their
submission of a valid opt-out affidavit
on file with a NPI at an A/B MAC.
The Medicare FFS enrollment process
requires that an A/B MAC screen and
validate each enrollment application
submitted by a physician or eligible
professional prior to the decision to
approve or deny enrollment in the
Medicare program. Thus, when a
physician, including an intern or
resident, or eligible professional submits
an enrollment application (for example,
the CMS–855I or CMS–855O or the
Internet-based Provider Enrollment,
Chain and Ownership System (PECOS)
version of these enrollment forms) to an
A/B MAC, the A/B MAC approves or
denies the application to enroll into the
Medicare FFS program based on
whether the practitioner meets the
program requirements for his/her for
medical specialty. The Medicare FFS
enrollment application collects and

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verifies identifying information about
the applicant, and his or her credentials,
such as the license number. For
example, an A/B MAC verifies each
applicant’s social security number and
NPI at the time of enrollment, when
changes or updates are submitted, and
during the 5-year revalidation process.
The A/B MAC also verifies state
licensing board information prior to
enrolling an individual practitioner, and
monthly thereafter, to determine if the
state suspended or revoked a physician
or eligible professional’s medical
license. In addition, A/B MACs verify
that physician and eligible professionals
are not excluded from receiving
payments under any federal health
program by checking the System for
Award Management (SAM), a process
similar to that which Part D sponsors
currently use to ensure that physicians
and eligible professionals are not
excluded by the OIG). Thus, by
leveraging the state licensing and OIG
exclusion information maintained
within PECOS, CMS’ national fee-forservice enrollment database, we believe
that we can help ensure that physicians
and eligible professionals are State
licensed to prescribe covered Part D
drugs.
As an alternative to submitting an
enrollment application for Medicare
billing privileges, physicians and
certain eligible professionals may enroll
in Medicare for the sole purpose of
ordering and certifying services in the
Medicare program by completing the
Medicare enrollment application—
Registration for Eligible Ordering and
Referring Physicians and Non-Physician
Practitioners (CMS–855–O). Once an A/
B MAC determines that a physician or
eligible professional meets all program
requirements to solely order services,
they are enrolled in the Medicare
program and are placed into an
approved status in PECOS. A physician
or eligible professional may submit a
CMS–855O application as a means of
complying with our proposed
requirement, if he or she is enrolling
solely to order or certify Medicare items
or services.
Section 1861(r) of the Act, defines a
physician as a doctor of medicine,
doctor of osteopathy, doctor of dental
surgery or dental medicine, doctor of
podiatric medicine, doctor of optometry,
or a chiropractor who is acting within
the scope of his license when he/she
prescribes a drug within Part D of
Medicare. We note that physicians and
eligible professionals may enroll in the
Medicare program, but whether these
individuals can prescribe is a matter of
state law where the physician specialty
or eligible professionals practices. For

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instance, a doctor of optometry may
enroll in Medicare, but only be able to
prescribe certain drugs within a state,
and a clinical psychologist may enroll
in Medicare, but may or may not be able
to prescribe medications under state
law. Our proposal to require physicians
and eligible professionals to enroll in
the Medicare program to prescribe
covered Part D drugs does not solicit
comment on the types of health care
physicians and eligible professionals
who can write a valid prescription
under state law. We will continue to
defer to state law regarding the
physicians and eligible professionals
that can prescribe covered Part D drugs.
As such, a Part D sponsor would remain
responsible for ensuring that a
prescriber has the authority to prescribe
under state law.
Depending on state law, interns and
residents may enroll in the Medicare
FFS program to receive Medicare billing
privileges or to solely order/certify
services in Part A and Part B of the
Medicare program. Under our proposal,
interns and residents with an approved
enrollment record in PECOS would also
be allowed to prescribe covered Part D
drugs in the Medicare program as long
as the state permits this practice. We
believe that this approach is consistent
with the policy that we previously
established in the April 27, 2012 final
rule (77 FR 25284) entitled, ‘‘Medicare
and Medicaid Programs: Changes in
Provider and Supplier Enrollment,
Ordering and Referring, and
Documentation Requirements; and
Changes in Provider Agreements.
A small number of physicians and
eligible professionals elect to opt out of
enrolling in the Medicare program for a
2-year period by submitting an affidavit
to the A/B MAC and only bill the
Medicare program for covered
emergency or urgent care furnished to a
Medicare beneficiary. Under section
1802(b) of the Act and the implementing
regulations at 42 CFR 405.400 et seq.,
certain physicians and eligible
professionals can opt out of the
Medicare program and enter into private
contracts with Medicare beneficiaries.
By entering into these types of contracts,
these individuals do not bill the
Medicare program for non-emergency
services that they furnish to Medicare
beneficiaries. In addition, § 422.220
states, ‘‘An MA organization may not
pay, directly or indirectly, on any basis,
for services (other than emergency or
urgently needed services as defined in
§ 422.2) furnished to a Medicare
enrollee by a physician (as defined in
section 1861(r)(1) of the Act) or other
practitioner (as defined in section
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with the Medicare carrier an affidavit
promising to furnish Medicare-covered
services to Medicare beneficiaries only
through private contracts under section
1802(b) of the Act with the
beneficiaries. An MA organization must
pay for emergency or urgently needed
services furnished by a physician or
practitioner who has not signed a
private contract with the beneficiary.’’
Generally, a physician or eligible
professional makes the decision to opt
out of the Medicare program because
they have decided to furnish services on
a private contracting basis. Therefore,
we are proposing a similar opt-out
policy as the Medicare FFS program
uses for ordering services within Part B
of the Medicare program and certifying
services within Part A of the Medicare
program. We believe that allowing optout physicians and eligible
professionals to continue to prescribe
covered Part D drugs to a Medicare
enrollee would ensure consistency with
the Part B program in this regard. In
addition, an A/B MAC verifies medical
licensure for opt-out physicians and
eligible professionals on a monthly
basis. Accordingly, we are soliciting
comments on whether a prescription of
opted-out physicians and eligible
professionals should be considered
covered under the Part D program as
long as the opt-out physician or eligible
professional furnishes their NPI to an
A/B MAC.
Under our proposal, the prescriptions
of physicians or eligible professionals
who are not enrolled in the Medicare
FFS program or who are not enrolled in
Medicare in an approved status would
not be coverable under the Part D
program. Specifically, in revised
§ 423.120(c)(5), we are proposing that
beginning January 1, 2015, a Part D
sponsor must deny or must require its
PBM to deny a claim for a Part D drug
from a pharmacy, including at the point
of sale, if the claim does not contain an
active and valid physician or eligible
professional NPI. Also, the Part D
sponsor must deny or must require its
PBM to deny a pharmacy claim for a
Part D drug if: (1) The physician or
eligible professional is not enrolled in
Medicare in an approved status and (2)
the physician or eligible professional
does not have a valid opt-out affidavit
on file with an A/B MAC. We believe
that the implementation of this policy
will promote quality health care and
prevent fraud by ensuring that
prescribers of Part D drugs are
physicians and eligible professionals
who have a valid state license. We note
that a prescriber NPI is essential on the
pharmacy claim for Part D sponsors and
PBMs to determine whether the

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prescriber is enrolled in Medicare in an
approved status or has a valid opt-out
affidavit on file with the Medicare FFS
program.
We also note this provision, if
adopted, would preclude almost all
prescribers located outside of the United
States, Puerto Rico, Guam, the Virgin
Islands, and the Northern Mariana
Islands from prescribing covered Part D
drugs to a Medicare beneficiaries, since
these physicians and eligible
professionals may not be eligible to
enroll in the Medicare program. In the
April 12, 2012 final rule entitled,
‘‘Medicare Program; Changes to the
Medicare Advantage and Medicare
Prescription Drug Benefit Programs for
Contract Year 2013 and Other Changes’’
(77 FR 22144), we stated that it was our
understanding that seven states
(Arizona, Florida, Maine, North Dakota,
Texas, Vermont and Washington)
currently permit pharmacies to fill
prescriptions from foreign prescribers,
to varying degrees. Under our current
requirements (see Publication 100–18,
Chapter 5 (Medicare Prescription Drug
Benefit Manual), section 90.2.1 (Foreign
Prescribers) of the Internet-Only
Manual), Part D sponsors must pay a
claim with an active and valid NPI of a
foreign prescriber. If there is not one at
point of sale, sponsors do not have to
cover the claim and research the NPI, as
they do with domestic prescribers under
current 423.120(c). Our proposed policy
would change this, as no prescription
would be covered if the prescriber is not
enrolled in Medicare and does not have
a valid opt-out affidavit on file with an
A/B MAC.
We are also proposing that beginning
January 1, 2015, a beneficiary’s request
for reimbursement from a Part D
sponsor must be for a Part D drug that
was dispensed in accordance with a
prescription written by a physician or
eligible professional who—
• Is identified by his or her legal
name in the request; and
• Is enrolled in Medicare in an
approved status; or
• Has a valid opt-out affidavit on file
with an A/B MAC.
Finally, we are also proposing to add
provisions to 42 CFR 423.120(c)(6) that
a Part D sponsor would not be able to
submit a PDE to CMS, unless it pertains
to a claim for a Part D drug that was
dispensed pursuant to a prescription
written by a physician or, when
permitted by applicable law, an eligible
professional who: (1) Is enrolled in
Medicare in an approved status; or (2)
has a valid opt-out affidavit on file with
the A/B MAC. Proposed § 423.120(c)(6)
would also provide that a Part D
sponsor must submit to CMS only a PDE

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that contains an active and valid
prescriber NPI.
Under our proposal, CMS would
furnish or make available to Part D
sponsors a list of physicians and eligible
professionals that have an approved
enrollment record within the Medicare
FFS program or who have a valid optout affidavit on file with the A/B MAC.
Part D sponsors would no longer be
required to check the NPPES database to
determine whether a prescriber has an
active and valid individual prescriber
NPI. For these reasons, the language of
423.120(c)(5) would be revised, as Part
D sponsors would have to determine
from the list whether the prescriber is
enrolled in the Medicare FFS program
in an approved status or has a valid optout affidavit on file with an A/B MAC
before allowing coverage of a prescribed
Part D drug. We believe that verifying
whether a prescriber is enrolled in
Medicare with an approved enrollment
record (or valid opt-out affidavit) would
involve an effort similar to the one
sponsors use now to determine if a
prescriber has an active and valid
individual NPI. If the prescriber were
not listed as enrolled in Medicare in an
approved status or on file with the A/
B MAC with a valid opt-out affidavit,
the drug would not be covered under
the Part D program and a claim,
including a non-standard claim from a
Medicare enrollee, would be denied by
a pharmacy or the sponsor. Our
proposal to require a prescriber to be
enrolled in the Medicare FFS program
or have an opt-out affidavit on file with
an A/B MAC, would allow a sponsor to
confirm that a prescriber’s license had
been previously verified to ensure that
the prescriber is a physician or eligible
professional and has an active health
care license under applicable state law.
With more than 1 million physicians
and eligible professionals enrolled in
the Medicare FFS program and more
than 9,000 valid opt-out affidavits on
file with an A/B MAC, we do not
believe that there are a large number of
physicians or eligible professionals who
prescribe covered drugs for Part D
enrollees who are not enrolled in an
approved status in Medicare. Our
proposed revisions to § 423.120 reflect
the existing usage of the CMS–855I,
Medicare Enrollment Application—
Physicians and Non-Physician
Practitioners (OMB Approval Number
0938–0685) and the CMS–855O (OMB
Approval number 0938–1135), and, as
such, we do not believe that it is
necessary to change our existing
paperwork burden estimates associated
with completing the CMS–855I or the
CMS–855O.

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We are also soliciting comments on
whether we should consider requiring
all pharmacies (for example, network,
non-preferred, home infusion, non-retail
or mail order, and out-of-network) to
enroll or maintain enrollment in the
Medicare FFS program in order to
dispense covered Part D drugs. In a May
2013 OIG report titled, ‘‘Retail
Pharmacies with Questionable Part D
Billing, (OEI–02–09–00600),’’ the OIG
found that 2,637 or approximately 4.4
percent of pharmacies, had questionable
billing in 2009. The report also
highlighted several cities (Miami,
Florida, Los Angeles, California, and
Detroit, Michigan) with significantly
high levels of questionable billing than
the national average.
We believe that requiring Medicare
FFS enrollment for network pharmacies
would leverage the credentialing,
identity verification and other
safeguards that are part of the FFS
enrollment process, allowing Part D
sponsors to leverage an important
program integrity tool for their
networks. Alternatively, we seek
comment on whether requiring FFS
enrollment for network pharmacies is a
‘‘best practice’’ in pharmacy contracting
by plan sponsors, and should be an
integral part of sponsors’ required fraud,
waste and abuse programs.
Finally, we are soliciting public
comments from doctors of dental
surgery or dental medicine, including
family dentists, regarding our proposal
that doctors of dental surgery or dental
medicine enroll in the Medicare
program in order to prescribe covered
Part D drugs. While many dentists have
enrolled in Medicare program within
the last 2 years to order bill the
Medicare program or order services
within the Medicare program, we will
continue to conduct outreach to
professional organizations/associations
to increase the likelihood that all
dentists have sufficient notice and
therefore time to enroll in the Medicare
program in order to prescribe covered
Part D drugs.
31. Improper Prescribing Practices
(§ 424.535)
a. Background and Program Integrity
Concerns
Notwithstanding our proposal
discussed in the previous section, we
believe that additional program
safeguard enhancements are necessary
to protect the Medicare Trust Funds
from fraud, waste and abuse while
ensuring that Part D enrollees and Part
B Medicare beneficiaries maintain
access to quality health care.

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As alluded to earlier, the OIG has
conducted several studies addressing
program integrity issues related to the
Medicare Part D program. Two such
reports are of particular relevance to the
provisions we are proposing in this
section.
The first, which we have already
referenced, is titled, ‘‘Medicare
Inappropriately Paid for Drugs Ordered
by Individuals Without Prescribing
Authority’’ (OEI–02–09–00608), issued
on June 21, 2013. The report found that
Medicare paid $26.2 million for drugs
prescribed by individuals with National
Plan & Provider Enumeration System
(NPPES) taxonomy codes indicating that
they did not have the authority to
prescribe these drugs. Such persons
included counselors, chiropractors,
social workers, physical therapists,
registered nurses, occupational
therapists, and speech-language
pathologists. Some of these
individuals—specifically, chiropractors,
physical therapists, occupational
therapists, and speech language
pathologists—are eligible to enroll in
the Medicare program to furnish Part B
services.
The second study is titled,
‘‘Prescribers with Questionable Patterns
in Medicare Part D’’ (OEI–02–09–
00603), also issued in June 2013. This
report highlighted a number of instances
in which physicians and eligible
professionals prescribed inordinate
amounts of drugs to Part D beneficiaries
in 2009. For example—
• Medicare paid a total of $9.7
million—151 times more than the
average—for one California physician’s
prescriptions; most of this physician’s
prescriptions were filled by two
independent pharmacies, both of which
the OIG had identified as having
questionable billing;
• One hundred and eight general-care
physicians each ordered an average of
71 or more prescriptions per
beneficiary, more than 5 times generalcare physicians’ national average of 13;
and
• An Ohio physician ordered more
than 400 drugs each for 13 of his 665
beneficiaries.
• A Texas physician ordered more
than 400 prescriptions each for 16
beneficiaries and prescribed 700 or
more drugs for 3 of these beneficiaries.
The OIG also noted examples of
physicians prescribing a high
percentage of Schedule II and III drugs
in 2009. In one case, 78 percent of the
prescriptions a Florida physician
ordered were for Schedule II drugs even
though the OIG found that 4 percent of
the prescriptions ordered by prescribers
nationwide were for Schedule II drugs.

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For one beneficiary, the physician
prescribed a 605-day supply of
morphine sulfate, a 524-day supply of
oxycodone HCl, a 460-day supply of
fentanyl, and a 347-day supply of
hydromophone HCl.
In both reports, as well as in other
Part D studies, the OIG recommended
that CMS exercise greater oversight of
the Part D program, not only to curb the
specific practices outlined previously
but also to stem the overall risk of fraud
and abuse that the program presents.
The OIG has expressed particular
concern over the potential for
beneficiaries to become addicted to or
otherwise be seriously harmed by
certain drugs if they were
inappropriately prescribed in
dangerously excessive amounts. We
share this concern.
Although we have recently taken
steps to tighten and strengthen our
supervision of the Part D program,
problems remain. We continue to
receive reports of questionable
prescribing practices. Some of these
prescribers have been referred to our
Medicare Drug Integrity Contractor
(MEDIC) for investigation. Yet even if
we find improper practices, such as a
particular physician’s unreasonably
high volume or unsafe amounts of
Schedule III controlled substance
prescriptions, CMS does not possess the
legal authority to take administrative
action against the prescriber. This
means, in many cases, that the
prescriber can continue prescribing
drugs that will be covered under Part D
and, if he or she is enrolled in Medicare
FFS, remain so enrolled to furnish
medical services. We believe this is
inconsistent with the OIG’s
recommendations in its various Part D
reports, and with our goal of protecting
and promoting the health and safety of
Medicare beneficiaries and safeguarding
the Medicare Trust Funds.
b. Drug Enforcement Administration
(DEA) Certification of Registration
The DEA implements and enforces
Titles II and III of the Comprehensive
Drug Abuse Prevention and Control Act
of 1970, and the Controlled Substances
Import and Export Act, as amended, and
collectively referred to as the Controlled
Substances Act (CSA) (21 U.S.C. 801–
971); the implementing regulations for
these statutes are in 21 CFR Parts 1300
through 1321. The CSA makes
possession of authority under state law
to dispense controlled substances a
requirement for both obtaining and
maintaining a DEA Certificate of
Registration. Consistent with 21 U.S.C.
822(e), 21 CFR 1301.12(a) states: ‘‘A
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principal place of business or
professional practice at one general
physical location where controlled
substances are manufactured,
distributed, imported, exported, or
dispensed by a person.’’ The term
‘‘dispense’’ under 21 U.S C. 802(10)
means ‘‘to deliver a controlled
substance to an ultimate user or
research subject by, or pursuant to the
lawful order of, a practitioner, including
the prescribing and administering of a
controlled substance . . .’’
We view a DEA Certificate of
Registration to prescribe controlled
substances as similar to a state’s
requirement that a physician or eligible
professional be licensed or certified by
the state to furnish health care services.
We have required that physicians and
eligible professionals meet state
licensure or certification requirements
in order to enroll in the Medicare FFS
program to furnish health care services.
In fact, certain suppliers, such as air
ambulance suppliers, must also meet
national certification standards by a
federal agency (the Federal Aviation
Administration (FAA)) to enroll or
remain enrolled in the Medicare
program. Failure to obtain or maintain
appropriate licensure or certification
can result in the denial or revocation of
the provider or supplier’s Medicare
under § 424.530 and § 424.535,
respectively.
We believe there is a similarity
between the need to obtain and
maintain DEA registration to dispense
controlled substances, and the need for
an air ambulance supplier to meet FAA
certification requirements, and for a
physician or eligible professional to
meet state licensure or certification
requirements in order to enroll in and
maintain enrollment in Medicare FFS.
The Medicare FFS licensure and
certification requirements are designed
to ensure that physicians, eligible
professionals, and other suppliers are
qualified to furnish health care services
within the Medicare program. In a
similar way, the DEA Certificate of
Registration is designed to ensure that
physicians and eligible professionals
meet the statutory criteria established by
the CSA to dispense controlled
substances.
Physicians, eligible professionals, and
pharmacies with a valid DEA Certificate
of Registration are allowed to dispense
controlled substances. A DEA Certificate
of Registration is not required to
dispense non-controlled substances,
including covered Part D drugs that are
not considered to be controlled
substances. Thus, under our current
regulations, a physician or eligible
professional may prescribe covered Part

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D non-controlled drugs to a Part D
enrollee even though his or her DEA
Certificate of Registration has been
suspended or revoked. As the agency
that administers the Part D drug
program, we believe it is both
appropriate and necessary to expand
our Medicare FFS provider enrollment
requirements to ensure that only
physicians and eligible professionals
who are in good standing with state
licensing boards and, as applicable the
DEA, are writing prescriptions for
covered Part D drugs in the Medicare
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c. Proposed Provisions
In light of the foregoing discussion,
we are proposing several changes to 42
CFR Part 424, subpart P, in order to
enhance our Medicare Part D and Part
B program integrity efforts.
(1) DEA Certificate and State Authority
We propose to add a new
§ 424.530(a)(11) granting CMS the
authority to deny a physician or eligible
professional’s Medicare enrollment
application if: (1) His or her DEA
Certificate is currently suspended or
revoked; or (2) the applicable licensing
or administrative body for any state in
which the physician or eligible
professional practices has suspended or
revoked the physician or eligible
professional’s ability to prescribe drugs;
and (3) such suspension or revocation is
in effect on the date he or she submits
his or her enrollment application to the
Medicare contractor. We believe this
approach is consistent with our policy
under § 424.530(a)(1) of denying
enrollment to providers and suppliers
that do not meet applicable licensure
and certification requirements.
Similarly, we propose to add a new
§ 424.535(a)(13) granting CMS the
authority to revoke a physician or
eligible professional ’s Medicare
enrollment if (1) his or her DEA
Certificate is suspended or revoked, or
(2) the applicable licensing or
administrative body for any state in
which the physician or eligible
professional practices suspends or
revokes the physician or eligible
professional’s ability to prescribe drugs.
Again, this approach is consistent with
our requirement that providers and
suppliers maintain compliance with all
applicable licensure and certification
requirements.
We believe that the loss of the ability
to prescribe drugs via a suspension or
revocation of a DEA Certificate or by
state action is a clear indicator that a
physician or eligible professional may
be misusing or abusing his or her
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This raises concerns that the physician
or eligible professional’s improper
practices may be duplicated in the
Medicare program. We must therefore
take steps to ensure that Medicare
beneficiaries are protected and the
Medicare Trust Funds.
(2) Patterns or Practices of Prescribing
(a) Grounds for Revocation
We also propose to add a new
§ 424.535(a)(14) that would permit CMS
to revoke a physician or eligible
professional’s Medicare enrollment if
CMS determines that he or she has a
pattern or practice of prescribing Part D
drugs that—
• Is abusive and represents a threat to
the health and safety of Medicare
beneficiaries, or
• Fails to meet Medicare
requirements.
We believe we have several bases for
the legal authority for this proposal.
First, sections 1102 and 1871 of the Act
give the Secretary the authority to
establish requirements for the efficient
administration of the Medicare program.
Second, section 1866(j) of the Act states
that the Secretary shall establish by
regulation a process for the enrollment
of providers of services and suppliers.
We also note that on April 29, 2013,
we published in the Federal Register a
proposed rule entitled, ‘‘Medicare
Program: Requirements for the Medicare
Incentive Reward Program and Provider
Enrollment’’ (78 FR 25013). We
proposed therein to add a new
§ 424.535(a)(8)(ii) that would give CMS
the discretion to revoke a provider or
supplier’s Medicare enrollment if the
provider or supplier has a pattern or
practice of submitting claims for
services that fail to meet Medicare
requirements. Our purpose was to place
providers and suppliers on notice that
they were under a legal obligation to
always submit correct and accurate
claims and that failure to do so may
result in the revocation of Medicare
enrollment if such failures establish a
pattern of incorrect or inaccurate claims.
We believe that this concept should also
extend to revoking Medicare enrollment
for Part D prescribers who engage in
abusive prescribing practices. In our
view, if a physician or eligible
professional repeatedly and consistently
fails to exercise reasonable judgment in
his or her prescribing practices, we
should have the ability to remove such
individuals from the Medicare program
to protect beneficiaries’ safety and
health as well as Medicare Trust Funds.
(b) Criteria To Be Considered
Many patterns and practices of
prescribing, though perhaps

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questionable on their face, do not upon
investigation involve abusive or
fraudulent behavior nor involve
substandard medical care. Therefore, we
are proposing to base any revocation
under proposed § 424.535(a)(14) on
situations that fall outside the norm of
appropriate prescribing, and only after
carefully considering the factors
outlined later in this section. A
thorough, detailed investigation by CMS
of the physician or eligible
professional’s prescribing practices
would be a prerequisite for the use of
§ 424.535(a)(14). Honest physicians and
eligible professionals who engage in
reasonable prescribing activities would
not be impacted by our proposal. We
note further that CMS, rather than the
Part D plans, would make all
determinations under our proposed
provisions, though information
contained in referrals from Part D Plan
sponsors may be used as part of CMS’
analysis to make revocation decisions.
We choose not to define ‘‘abusive’’
and ‘‘threat to the health and safety of
Medicare beneficiaries’’ in this
proposed rule, primarily because the
myriad of questionable situations that
warrant the possible application of
§ 424.535(a)(14) requires that CMS have
the flexibility to address each case on its
own merits. We believe that the sounder
approach would be to propose a list of
criteria that CMS would use in
determining whether a prescriber is
engaging in prescribing practices
sufficient to warrant a revocation.
In determining instances of a pattern
or practice of prescribing that is abusive
and a threat to the health and safety of
Medicare beneficiaries, CMS proposes
to consider several factors, including—
• Whether there are diagnoses to
support the indications for which the
drugs were prescribed;
• Whether there are instances where
the necessary evaluation of the patient
for whom the drug was prescribed could
not have occurred (for example, the
patient was deceased or out of state at
the time of the alleged office visit);
• Whether the physician or eligible
professional has prescribed controlled
substances in excessive dosages that are
linked to patient overdoses;
• The number and type(s) of
disciplinary actions taken against the
physician or eligible professional by the
licensing body or medical board for the
state or states in which he or she
practices, and the reason(s) for the
action(s);
• Whether the physician or eligible
professional has any history of ‘‘final
adverse actions’’ (as that term is defined
under § 424.502);

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• The number and type(s) of
malpractice suits that have been filed
against the physician or eligible
professional related to prescribing that
have resulted in a final judgment against
the physician or eligible professional or
in which the physician or eligible
professional has paid a settlement to the
plaintiff(s) (to the extent this can be
determined);
• Whether any State Medicaid
program or any other public or private
health insurance program has restricted,
suspended, revoked, or terminated the
physician or eligible professional’s
ability to prescribe medications, and the
reason(s) for any such restriction,
suspension, revocation, or termination;
and
• Any other relevant information
provided to CMS.
In determining whether a physician or
eligible professional has a pattern or
practice of prescribing that fails to meet
Medicare requirements, CMS would
consider the following factors, including
whether the physician or eligible
professional—
• Has a pattern or practice of
prescribing without valid prescribing
authority;
• Has a pattern or practice of
prescribing for controlled substances
outside the scope of the prescriber’s
DEA Certificate of Registration;
• Has a pattern or practice of
prescribing drugs for indications that
were not medically accepted—that is,
for indications neither approved by the
Food and Drug Administration (FDA)
nor medically accepted under 1860D–
2(e)(4) of the Act—and whether there is
evidence that the physician or eligible
professional acted in reckless disregard
for the health and safety of the patient.
To be covered under Part D, Medicare
requires that a drug be dispensed upon
a prescription that is valid under state
law, that the drug meets the definition
of a Part D drug, and that it be
prescribed by a valid prescriber for a
medically accepted indication.
Therefore, a physician or eligible
professional evidencing a pattern or
practice of prescribing without valid
prescribing authority, or for controlled
substances outside the scope of the
prescriber’s DEA Certificate of
Registration, would face potential
revocation of Medicare enrollment. In
addition, a physician or eligible
professional with a consistent pattern or
practice of prescribing drugs for
indications that were not medically
accepted—that is, for indications
neither approved by the FDA nor
medically accepted under 1860D–2(e)(4)
of the Act—could potentially face
revocation. In the latter example, we

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would anticipate revoking enrollment
only in cases where there is evidence of
reckless disregard for the health and
safety of the patient, not when the
prescribing is based on peer reviewed
literature or community standards of
medical practice.
We reiterate our earlier statement that
all criteria would be carefully examined
before determining whether a revocation
under § 424.535(a)(14) is warranted. In
the vast majority of cases, no single
factor would or could be dispositive.
Nonetheless, there are certain criteria
that, if met, would weigh very heavily
and perhaps decisively towards a
finding that a revocation is justified. A
primary example would be that the
physician or eligible professional is
prescribing drugs without legal
authorization. Even if a review of the
other criteria did not indicate a pattern
of improper activity, unauthorized
prescribing is so serious a matter that
the practitioner’s continued retention of
his or her Medicare enrollment would
be unacceptable.
We stated in section III.A.30, of this
proposed rule that prescriptions ordered
by physicians and eligible professionals
who are not enrolled in Medicare in an
approved status would not be coverable
under the Part D program.
We welcome and indeed encourage
comments on our proposed additions of
§ 424.530(a)(11) and of § 424.535(a)(13)
and (14). We are especially interested in
receiving comments on the following
issues:
• Whether certain proposed criteria
should not be used.
• Whether criteria that we did not
propose should be used.
• Whether certain criteria should be
given more or less weight than others.
• Whether our proposed additions of
§ 424.530(a)(11) and of § 424.535(a)(13)
and (14) should be expanded to include
pharmacy activities.
32. Transfer of TrOOP Between PDP
Sponsors Due to Enrollment Changes
During the Coverage Year (§ 423.464)
Sections 1860D–23 and 1860D–24 of
the Act specify that requirements for
Part D sponsor coordination of benefits
with State Pharmaceutical Assistance
Programs and other plans providing
prescription drug coverage, including
treatment of expenses incurred by these
payers toward a beneficiary’s out-ofpocket (TrOOP) threshold. Part D
coordination of benefit requirements are
codified at § 423.464 which define
‘‘other prescription drug coverage’’ for
COB purposes to include, among other
entities, other Part D plans and specify
Part D plan requirements for

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determining when an enrollee has
satisfied the out-of-pocket threshold.
Related regulations at § 423.104(d),
codifying the requirements in section
1860D–2(b) of the Act, require sponsors
to track beneficiary TrOOP and gross
covered drug costs and correctly apply
these costs to the benefit limits to
correctly position the beneficiary in the
benefit and provide the catastrophic
level of coverage at the appropriate
time. When a beneficiary transfers
enrollment between Part D plans during
the coverage year, the enrollee’s gross
covered drug costs and TrOOP must be
transferred between plans and applied
by the subsequent plan in its
administration of the Part D benefit. The
procedures for a prior plan to report
these TrOOP-related data and for the
plan of record to receive, upload, and
use the data position the beneficiary in
the correct phase of the benefit was
expressed in guidance outlining sponsor
responsibilities related to the 2006
Enrollment Reconciliation process. CMS
April 2006 guidance detailing
instructions for the Enrollment
Reconciliation-related data transfer
noted the process would be applicable
on an on-going basis when a
beneficiary’s enrollment in a plan
terminated due to enrollment in another
plan.
This initial manual data transfer
process was replaced in 2009 by an
automated process for TrOOP-related
data transfer developed by CMS and the
industry in collaboration with National
Council for Prescription Drug Programs
(NCPDP). Our guidance released in 2008
describing sponsor implementation of
the automated TrOOP balance transfer
process reiterated sponsor requirements
for data reporting by the prior plan and
use of the data for proper positioning of
the beneficiary in the benefit by the
current plan. We have continued to
specify these requirements in
subsequent updated versions of the
guidance.
Automated TrOOP balance transfer is
supported by the NCPDP Financial
Information Reporting (FIR) transaction
standard, which is used to electronically
transfer TrOOP-related data between
plans. When a beneficiary transfers
enrollment to another plan during the
coverage year, transactions are sent
sequentially by the CMS Part D
Transaction Facilitator to all Part D
plans in which the beneficiary was
enrolled during the coverage year or that
paid claims on the beneficiary’s behalf.
Sponsors must receive and respond to
each transaction, accept the data
reported by the enrollee’s prior plan,
and use these data in the administration
of the Part D benefit.

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To ensure Part D benefits are correctly
administered when a beneficiary
transfers enrollment during the coverage
year, we propose to codify these
requirements in federal regulations.
Specifically, we propose to amend
§ 423.464(f)(2) by adding a new
paragraph (C) requiring Part D sponsors
to—
• Report benefit accumulator data in
real-time in accordance with the
procedures established by CMS;
• Accept in real-time data reported in
accordance with CMS-established
procedures by any prior plans in which
the beneficiary was enrolled, or that
paid claims on the beneficiary’s behalf,
during the coverage year; and
• Apply these costs promptly.
In our guidance on automated TrOOP
balance transfer, we express our
expectation that sponsors successfully
transfer accumulator data for
beneficiaries making enrollment
changes during the coverage year in a
timely manner 100 percent of the time.
Although sponsors may be reporting
and accepting these data in accordance
with our expectations, we have been
informed that some sponsors may not be
promptly loading the data received into
their systems so it is available for claims
processing. As a result, the beneficiary’s
previously incurred costs and gross
covered drug costs are not considered in
the processing of claims received by the
new plan sponsor soon after the
enrollment change. With this change we
seek to clarify that, since the automated
TrOOP transfer process enables the
accumulators to available to the new
plan within a day or 2 of the new
enrollment effective date or, if later, the
date CMS processes the enrollment
change, we expect the new plan sponsor
to apply the data promptly after receipt
and use it in benefit administration.
33. Broadening the Release of Part D
Data (§ 423.505)
We are proposing to revise our
regulations governing the release of Part
D data to expand the release of
unencrypted prescriber, pharmacy, and
plan identifiers contained in
prescription drug event (PDE) records,
as well as to make other changes to our
policies regarding release of Part D PDE
data. In the May 28, 2008 Federal
Register (76 FR 30664) we published a
final rule entitled ‘‘Medicare Program;
Medicare Part D Claims Data,’’
(hereinafter referred to as the Part D data
final rule) to implement regulations that
govern the collection of PDE data under
the authority of section 1860D–
12(b)(3)(D) of the Act and the disclosure
of this data in accordance with section
1106 of the Act. The provisions

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governing the collection and disclosure
of PDE data are codified at
§ 423.505(b)(8), (f)(3) and (l).
PDE data are summary records of
individual claim transactions at the
pharmacy containing CMS-defined
standard fields submitted by Part D
sponsors that document the final
adjudication of a Part D dispensing
event. The Part D data final rule
governed the collection and disclosure
of the original 37 elements of PDE data,
but was updated to apply to any
additional elements that were added to
the PDE record. This update was in a
final rule issued in April 2010 (75 FR
19678) entitled, ‘‘Medicare Program;
Policy and Technical Changes to the
Medicare Advantage and the Medicare
Prescription Drug Benefit Programs’’
(hereinafter referred to as the April 2010
final rule).
In the preamble to the Part D data
final rule (73 FR 30671), we stated, ‘‘we
[ ] believe that it is in the interest of
public health to share the information
collected under [the authority of 1860D–
12(b)(3)(D)] with entities outside of
CMS.’’ We explained that the release of
PDE data assists CMS in evaluating the
Medicare Part D program and assessing
related policies. We further stated such
release was in the interest of public
health and would improve the clinical
care of beneficiaries.
In addition to setting forth the
significant public policy reasons for
disclosure of PDE data, we made clear
in the preambles of both the Part D data
final rule and the April 2010 rule that
our primary concerns in releasing PDE
data are protecting the confidentiality of
beneficiary identifiable information and
commercially sensitive data of Part D
sponsors. Part D sponsors are private
organizations that contract with the
federal government to administer the
Part D benefit by offering prescription
drug plans to Medicare beneficiaries
who may voluntarily enroll in one.
Therefore, as described in the Part D
data final rule and the April 2010 rule,
the release of PDE data is subject to
certain protections, described here
generally, such as encryption of
beneficiary information and aggregation
of commercially sensitive data of Part D
sponsors. In addition, whenever PDE
data is released, we only release the
minimum data necessary for a given
purpose, as determined in the sole
discretion of CMS after review of the
requestor’s detailed request for data. If
releasing data to an external entity, in
the Part D data final rule, CMS indicated
that the requestor must be a legitimate
researcher, meaning the requestor has
the requisite experience and is working
for, or on behalf of, a reputable

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institution. (In the preamble to the Part
D data final rule (73 FR 30674 citing 45
CFR 164.501), we used the definition of
‘‘research’’ contained in the HIPAA
Privacy Rule, which defines the term as
‘‘a systematic investigation, including
research development, testing, and
evaluation, designed to develop or
contribute to generalizable knowledge.’’
In the Part D data final rule (73 FR
30674), we also indicated that,
consistent with our current policies for
Part A and B data, identifiable Part D
data would not be disclosed for
commercial purposes.
The following describes the current
policy for the release of Part D data
more specifically by PDE element:
Beneficiary, prescriber, pharmacy, and
plan identifiers are generally encrypted
when released. We only release
unencrypted beneficiary, prescriber,
pharmacy, or plan identifiers to other
government agencies or states, if these
identifiers are necessary for the project,
and we only release unencrypted
beneficiary, prescriber, and pharmacy
identifiers to external entities if needed
to link to another dataset. We do not
release unencrypted plan identifiers to
external entities, except to HHS
grantees, as permitted under the criteria
described in the April 2010 rule and
codified in the regulations at 42 CFR
423.505(m)(1)(iii)(C).
Under the Part D data final rule, drug
cost data in PDE records are generally
aggregated when released. Drug cost
data are available in disaggregated
format only to other HHS entities and
congressional oversight agencies. Drug
costs data in PDE records consist of the
drug ingredient cost, applicable
dispensing fee and any required state
sales tax. However, upon request we
would exclude sales tax from the
aggregation at the individual claim level
if necessary for a project.
As this is a time of unprecedented
change for CMS and the health care
system in general, we believe the
current regulations governing the
release of PDE data need to be reconsidered. The agency has an
important role to play in supporting
opportunities to accelerate the transition
to a data-driven and information-based
health care delivery system in this
country. CMS itself is transforming from
a passive payer of claims towards a
value-based purchaser of health care,
while at the same time, other health care
payer and provider incentives have
shifted toward broader coverage and
coordinated care. These trends are all a
positive and expected outgrowth of the
passage and implementation of the
Affordable Care Act.

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Concurrent with the changes to CMS’
role and the health care system in
general is the fact that we now have
several years of experience with release
of PDE data from the Medicare Part D
program. We believe the current
limitations on the release of certain data
elements hinder the use of PDE data in
this new health care environment, and
inhibit accompanying insights into
prescription drug benefit plans that
could result from broader release of the
data. Our experience has led us to
conclude that broader release of PDE
data to external entities can increase the
positive contributions researchers make
to the evaluation and function of the
Part D program, and improve the
efficiency of the program and the
clinical care of its beneficiaries, which
is in the interest of public health.
Expanded access to PDE data by
external entities will allow the
researchers to study additional aspects
of the Medicare program and health
care, and their findings will be released
publicly. Such contributions are in the
interest of the Medicare Part D program
and public health now more than ever
as the Affordable Care Act transforms
CMS’s role and the nation’s health care
system.
For these reasons, we believe
increased access to prescriber,
pharmacy, and plan identifiers by all
categories of requestors is of utmost
importance. This new policy would
facilitate research by entities outside
CMS that involves identifiable plans,
prescribers, and pharmacies.
Furthermore, we believe we can relax
the current policies on the release of
this PDE data, while still protecting
beneficiary confidentiality and
commercially sensitive data of Part D
sponsors.
Accordingly, we are proposing to
permit the release of unencrypted
prescriber, pharmacy, and plan
identifiers contained in PDE records to
all current categories of requestors
(including, other HHS entities and the
Congressional oversight agencies, nonHHS executive branch agencies and
states, and external entities). We note
that because the minimum necessary
policy will still apply to all such
releases, this proposed policy change
with respect to HHS entities/
Congressional oversight agencies and
non-HHS executive branch agencies/
states is more a formality, since this data
is available in unencrypted format to
these same entities under the current
Part D data regulations ‘‘if needed.’’ For
this reason, we focus on the release of
unencrypted prescriber, pharmacy, and
plan identifiers to external entities as
discussed later in this section.

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We emphasize that we are not
proposing any changes to our release
policies with respect to beneficiary
identifiable data and the drug cost data
of Part D sponsors. In addition, other
data that is still viewed by some at this
time to be commercially-sensitive data
of Part D sponsors, for example, data on
bids, rebates and other price
concessions, are outside the scope of the
changes to current PDE data release
policies that we are proposing here. We
note that bid data is not collected
through PDE records, and while rebates
and other price concessions may be
reflected in PDE records, we are not
proposing to make any changes to the
policies governing release of such data.
We understand that there may be
concerns about releasing unencrypted
prescriber, plan, and pharmacy
identifiers to external entities, as they
have been raised in the past, and we
would like to address them upfront. In
the preamble to the Part D data final
rule (73 FR 30675), we addressed
specific concerns about expanding
access to prescriber information by
external entities, particularly for
pharmaceutical companies and others
who may want to influence physicians’
prescribing patterns and interfere with a
physicians’ professional judgment. We
stated that an encrypted version of the
prescriber identifier, which allows for
the linkage of all of a prescriber’s claims
without divulging the prescriber’s
identity, would meet the needs of most
researchers.
However, in our view today, the vast
majority of physicians have prescribed
and do prescribe what they believe are
the appropriate medications for their
patients, and they should have no
concerns with transparency in their
prescribing patterns. Moreover, there are
other measures in place to prevent
inappropriate influence by external
entities on prescribers. For example,
section 6002 of Affordable Care Act
requires applicable manufacturers of
drugs covered under the Part D program
to report annually to the Secretary
certain payments or other transfers of
value to physicians. This requirement
was implemented through a final rule
that appeared in the February 8, 2013
Federal Register (78 FR 9458) entitled,
‘‘Medicare, Medicaid, Children’s Health
Insurance Programs; Transparency
Reports and Reporting of Physician
Ownership of Investment Interests’’. In
addition, the federal Anti-Kickback Law
(section 1128B(b) of the Act) provides
that anyone who knowingly and
willfully solicits, receives, offers, or
pays anything of value to influence the
referral of federal health care program
business, including Medicare and

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Medicaid, can be held accountable for a
felony. Finally, we would point out that
when data are completely transparent, it
is easier for the attempts of some to use
the data for purposes of inappropriate
manipulation to be countered by others
who have access to the same data. We
note that it appears that prescriber data
are already available commercially from
pharmacy data aggregators. For these
reasons, we believe that our earlier
concerns about the release of
unencrypted prescriber identifiers in
PDE data to external entities are no
longer warranted.
Our proposal to release unencrypted
prescriber identifiers means that
legitimate external researchers will be
able to conduct research that involves
identifiable prescribers using PDE data.
In the Part D data final rule (73 FR
30676), a commenter argued that
providing access to linked physician
identifiable claims in order to pool them
with employer data would allow
analysis to reduce cost of care delivery
and improve the quality of care. In
response, we did not disagree with the
commenter, but referenced a variety of
pay for performance and value-based
health care initiatives being undertaken
by CMS in an effort to encourage health
care providers to furnish high quality
health care and to provide cost and
quality information to consumers. We
noted that we intended to use PDE data
in those activities. We declined,
however, to adopt a policy that would
include making unencrypted prescriber
identifiers available for release to
external entities (except when needed to
link to another data set).
However, in light of the goals of the
Affordable Care Act to improve the
quality of health care, including through
better access to information, we now
acknowledge our agreement with the
commenter regarding the importance of
providing access to prescriberidentifiable claims. As we noted
previously in this section, now more
than ever, it is vital that researchers
have more data to investigate ways to
reduce the cost of care and improve its
quality. Studying the prescribing trends
of identifiable prescribers can assist all
stakeholders in the health care system,
from both public and private health care
payers, to patients, and even to
physicians themselves, by identifying
prescribing benchmarks and
determining the reasons for variations.
With respect to the release of plan
identifiers, we recognized that it might
be asserted that in the Part D data final
rule and April 2010 rule we included
this data when discussing commercially
sensitive data of Part D sponsors that
would generally be encrypted when

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released to external entities. However,
we point out that we focused on the
separate costs paid by Part D sponsors
for ingredient costs or dispensing fees as
being the confidential data on the claim
(73 FR 30668), and we are not proposing
any changes to our policies with respect
to the release of ingredient costs or
dispensing fees. However, we are
proposing to release unencrypted plan
identifiers to all categories of requestors.
In comments in response to the Part
D data proposed rule, commenters
requested clarification that the planspecific information we were proposing
to disclose related only to Part D claims
data and would not include
competitively sensitive financial data
regarding rebates, discounts, or other
negotiated price concessions. The
commenters expressed concerns that
release of competitively sensitive data
could undermine the competitive bid
process, asserting that plans would be
able to adjust their bids on the basis of
knowledge of each other’s data,
resulting in higher drug costs for all. In
response to these concerns, we replied
in the preamble to the Part D data final
rule that we shared the commenters’
concerns about the need to protect
sensitive data under the Part D program.
We stated that because the Medicare
drug benefit is based on a competitive
business model, we believe releasing
commercially or financially sensitive
data to the public could negatively
impact Part D sponsors’ ability to
negotiate for better prices, and
ultimately could affect the ability of
sponsors to hold down prices for
beneficiaries and taxpayers. Therefore,
we explained (73 FR 30668) that we
were adopting a number of protections
to mitigate these concerns, which
include our minimum necessary,
legitimate researcher, and aggregation
policies described previously.
These policies would also not change
under our current proposal, except that
plan identifiers (including internal
plan/pharmacy identification numbers
on the claim that represent reference
numbers assigned by the plan at the
time a drug is dispensed), would be
available for release to all categories of
requestors without encryption. In other
words, our current policy on release of
ingredient cost and dispensing fee data
would not change under our proposal,
meaning the minimum necessary data
regarding ingredient costs and
dispensing fees would continue to be
available for release in disaggregated
form only to other HHS entities and
congressional oversight agencies. NonHHS executive branch agencies and
external entities could still only obtain
the minimum necessary ingredient cost

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and dispensing fee data, only in
aggregated form, and only if it is
released to a legitimate researcher.
We are proposing this change to our
regulations governing the release of plan
identifiers, because we no longer believe
plan identifiers in PDE data are
commercially sensitive data of Part D
sponsors that should not be available for
release (unless encrypted). Indeed in the
April 2010 rule (75 FR 19675 through
19676), in which we expanded access to
unencrypted plan identifiers to include
HHS grantees under certain conditions
on the basis that it would allow for the
study of beneficiary plan choices, which
would assist CMS in better
understanding and improving the
Medicare program, we responded to
opposing comments that we believed
allowing broader access by grantees of
non-HHS entities and external
researchers could also further assist
CMS, even though we declined to adopt
such broader access at the time, because
we believed that additional time was
needed to evaluate the issue.
Moreover, an analysis of Part D plans,
their network pharmacies, and average
drug costs, can already be accomplished
through data posted on CMS’ Web site
and/or purchased in public use files.
Additionally, the MPDPF allows users
to view and compare all available
prescription drug plan choices,
including plan and pharmacy specific
estimates of the costs of individual
drugs. These data can be manipulated
by researchers to reveal information
about specific plans and pharmacies
that contributes to the evaluation and
functioning of the Part D program and
can be used to improve the public
health. Therefore, in light of the public
policy rationale for increasing access to
PDE data by all categories of requestors,
we believe that plan identifiers should
be available in unencrypted format.
We did not respond to any comments
specifically addressing pharmacy
identifiers in our Part D data final rule
and April 2010 rule. However, for the
same reasons that we are proposing to
make prescriber and plan identifiers
available for release in an unencrypted
format, we no longer see a reason that
pharmacy identifiers should not be
available for release in unencrypted
format. Accordingly, we also propose to
release unencrypted pharmacy
identifiers to all categories of requestors,
which would also be a change in the
current regulations governing the
release of PDE data.
We would like to address one final
aspect of our policies governing the
release of Part D data. As discussed
previously, in the preamble to the Part
D data final rule, we explained that

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consistent with CMS’s existing policies
with respect to Parts A and B data, CMS
would not release PDE data for
commercial purposes (but external
researchers may be funded by
commercial firms if the researchers are
free to publish their results regardless of
the findings). However, given reasons
that we have highlighted previously
which provide the impetus for the
changes that we are proposing to make
to our rules governing the release of PDE
data, we are also soliciting comment on
the current restriction on the release of
PDE data for commercial purposes. We
are not making a specific proposal in
this regard, but rather wish to receive
comments for consideration in light of
the proposed changes to the
requirements governing the release of
Part D data that are included in this
proposed rule.
In addition to the proposed changes
with respect to prescriber, pharmacy,
and plan identifiers described
previously, and our request for
comment on the restriction on the
release of Part D PDE data for
commercial purposes, we are proposing
a few other changes to our regulations
governing the release of PDE data and
also wish to clarify our existing policies
with respect to several issues related to
the PDE data. First, we are proposing to
add supporting program integrity
purposes, including coordination with
states, as an additional purpose deemed
necessary and appropriate by the
Secretary for which a Part D sponsor
must agree to submit all data elements
included in all its drug claims under
section 1860D–12(b)(3)(D) of the Act.
The regulation at § 423.505(f)(3)
currently contains a non-exclusive list
of purposes deemed necessary and
appropriate. We believe that the use of
these data for supporting program
integrity purposes has always been
included, even though not explicitly
listed. However, given the importance of
our ability to release PDE data for
program integrity purposes, including
for coordination with states on program
integrity, we are proposing to add this
purpose explicitly to the non-exclusive
list in § 423.505(f)(3).
Second, we are clarifying that nonfinal action data (for example,
information on claims subject to
subsequent adjustment) are available to
entities outside of CMS. Non-final
action data are captured through the
data element, ‘‘Original versus Adjusted
PDE (Adjustment/Deletion code).’’ This
is a PDE field which distinguishes
original from adjusted or deleted PDE
records, so CMS can adjust claims and
make accurate payment for revised PDE
records, and is thus not point-of-sale

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data. With the increasing focus on
coordination of care, requests for access
to non-final action PDE data have also
increased. Such data are also routinely
requested for evaluation and research
projects. The Part D data final rule (73
FR 30683) included an appendix that
explained in more specific detail the
restrictions relative to the available PDE
elements for the different categories of
requestors. This appendix stated (73 FR
30685) that the data element ‘‘Original
versus Adjusted PDE (Adjustment/
Deletion code)’’ was available to other
(that is, non-CMS) HHS entities and the
congressional oversight agencies, while
for non-HHS executive branch agencies,
states, and external entities, it stated
that ‘‘Final Action claims would be
provided, so this element should not be
needed.’’ Thus, this appendix did not
explicitly address the question of
whether non-final action data would be
available for release to these entities,
because such data were not expected to
be needed. However, since it is clear
that these entities do need access to
non-final data, we are clarifying that
non-final action data are also available
for release to non-HHS executive branch
agencies, states, and external entities
under the Part D data final rule.
Finally, we believe these proposed
changes to the Part D regulations
governing PDE data release do not raise
any new issues under the Privacy Act
and that the changes are consistent with
the System of Records that currently
applies to the relevant data. Thus, we
are not proposing any changes to the
System of Records, ‘‘Medicare Drug Data
Processing System (DDPS),’’ System No.
09–70–0553, as we are not proposing
any changes to the data we are
collecting, to how the data may be used,
to the entities that may receive the data,
or to the manner of transmission of the
data. Rather we are proposing a change
in the format in which the data may be
provided when released to certain
categories of requesters.
In light of the proposed changes to
our policies governing the release of
PDE data described previously, we are
proposing changes to the current
applicable regulatory text as described
later in this section. We are also
proposing to eliminate the appendix
that accompanied the Part D data final
rule (73 FR 30683) that explained in
more specific detail which PDE
elements would be available to different
categories of requestors, and any
restrictions that applied. We believe this
appendix is no longer necessary, as our
proposals would eliminate most of the
distinctions with respect to the PDE
data available for release to the different
categories of requesters, with the

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exception of Total Drug Costs, which
will continue to be available in
disaggregated form only to other (that is,
non-CMS) HHS entities and the
congressional oversight agencies, and
we propose to revise the regulation at
§ 423.505(m)(1)(iii)(B) to account for
this distinction. We also clarify that we
will exclude sales tax from the
aggregation, if necessary for the project.
We also propose changes to the
regulatory text to incorporate notes from
the current Appendix that are not
addressed by the existing reference to
CMS data sharing procedures in
§ 423.505(m)(1)(ii).
Therefore, consistent with the
foregoing, we propose the following
revisions to the applicable regulatory
text:
• Section 423.505(f)(3) would be
revised to add supporting program
integrity purposes, including
coordination with states, as an
additional purpose.
• Section 423.505(m)(1)(iii) would be
revised to remove references to
encrypting certain identifiers since
prescriber, plan, and pharmacy
identifiers would no longer be subject to
encryption when released.
• Section 423.505(m)(1)(iii)(A) would
be revised to clarify that, subject to the
restrictions contained in paragraph
(m)(1), all elements on the claim are
available not only to HHS, but also to
other executive branch agencies and
states, since there is no longer any
distinction between the two categories.
• Section 423.505(m)(1)(iii)(B) would
be revised to incorporate a note from the
appendix, which states: ‘‘Upon request,
CMS excludes sales tax from the
aggregation at the individual level, if
necessary for the project’’ at the end of
the provision.
• Section 423.505(m)(1)(iii)(C) would
be deleted as no longer necessary since
unencrypted plan identifiers, including
the internal plan/pharmacy
identification numbers, would be
available for release.
• Section 423.505(m)(1)(iii)(D) would
be re-lettered as (C) and references to
encryption of pharmacy and prescriber
identifiers would be deleted, since these
identifiers would be available for release
in unencrypted format. Additional
language regarding beneficiary
identifiers would be added to the
existing provision to reflect the current
policy on release of this identifier as
reflected in the appendix that would be
eliminated.
• Section 423.505(m)(3) would be
revised to incorporate a note from the
appendix that would be eliminated
about the status of the Congressional
Research Service as an external entity

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when it is not acting on behalf of a
Congressional committee in accordance
with 2 U.S.C. 166(d)(1).
34. Establish Authority To Directly
Request Information From First Tier,
Downstream, and Related Entities
(§ 422.504(i)(2)(i), and § 423.505(i)(2)(i))
Pursuant to section 1857(d)(2) and
1860D–12(b)(3)(c) of the Act, existing
regulations at 42 CFR 422.504(i) and 42
CFR 423.505(i) establish various
conditions that entities contracting as a
first tier, downstream, or related entity
(FDR) to an MA organization or Part D
sponsor must agree to in order to
participate in the MA or Part D program.
One such condition at § 422.504(i)(2)(i)
and § 423.505(i)(2)(i) is that HHS, the
Comptroller General, or their designees
have the right to audit, evaluate, and
inspect any books, contracts, computer
or other electronic systems, including
medical records and documentation of
the first tier, downstream, and related
(FDR) entities related to CMS’ contract
with the Part C and D sponsor.
CMS (or its designee(s)) conduct
routine audits of Part D sponsors and
MA organizations, as well as conduct
audits to investigate allegations of
noncompliance with Part C and/or Part
D rules and requirements. While
§ 422.504(d) and § 423.505(d) address
Part D and MA organizations’ own
maintenance of records and the rights of
CMS to inspect those records,
§ 422.504(i)(2)(i) and § 423.505(i)(2)(i)
also require plan sponsors require that
their FDRs agree to this CMS right to
inspection. Plan sponsors regularly
contract with FDRs to perform critical
Part C and D operating functions. For
example, many (if not most) Part D
sponsors delegate critical Part D
functions to their PBMs. As a result,
many of the records that we or our
designees would need to review and
evaluate when we audit a Part D
sponsor or MA organization reside with
its FDRs.
Our existing regulation at § 423.505
(i)(3)(iv) states that the contracts
between the Part D sponsor and its FDRs
must indicate whether records held by
the FDR pertaining to the Part D
contract will be provided to the sponsor
to provide to CMS (upon request), or
will be provided directly to CMS or its
designees by the FDR (the Part C
regulation is silent on this matter). As
such, we have not previously required
Part C or Part D FDRs to provide
information directly to CMS.
Two separate reports by the OIG
(OEI–03–08–00420, dated October 2009
and OEI 03–11–00310, dated January
2013), have highlighted barriers
experienced by the Medicare Drug

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Integrity Contractor (MEDIC), the entity
contracted by CMS to be responsible for
detecting and preventing fraud, waste,
and abuse in the Medicare Parts C and
D programs nationwide, in obtaining
requested information in an expeditious
manner. The 2009 OIG report discussed
that CMS’ and its designees’ (in this
case, the MEDIC) lack of authority to
directly obtain information from
pharmacies, PBMs, and physicians has
hindered the MEDIC’s ability to
investigate potential fraud and abuse
and the OIG recommended that CMS
change its regulations to establish its
authority to obtain necessary
information directly from FDRs. The
OIG’s 2013 report reiterated the
recommendation that CMS have a more
direct route to obtain records held by
FDRs so that CMS would be able to
obtain necessary records in a timely
fashion. While the 2013 report pointed
out that sponsors and their FDRs
generally cooperate in providing the
information requested by the MEDIC, it
often takes months for it to reach the
MEDIC because the MA organization or
Part D sponsor acts as a gatekeeper.
In the past, we chose not to be
prescriptive regarding whether a first
tier, downstream, or related entity must
make its books and records available to
us directly or through the Part C or D
sponsor. As a consequence of what we
have learned through the OIG
investigations and the seriousness with
which we approach our fraud, waste,
and abuse oversight obligations, we are
now proposing to specify at
§ 422.504(i)(2)(ii) and § 423.505(i)(2)(ii)
that HHS, the Comptroller General, or
their designees have the right to audit,
evaluate, collect, and inspect any
records by obtaining them directly from
any first tier, downstream, or related
entity. This proposed regulatory change
would not grant CMS any investigative
or audit authority that we do not already
possess. It would merely guarantee us a
direct and expeditious route to the
information we need to obtain for
purposes of program oversight. This
regulatory change would also reduce the
burden on the plan sponsor. The plan
sponsor would no longer need to act as
the gatekeeper between CMS and its
first tier, downstream, or related entity.
Upon making contact with the first tier,
downstream, or related entity, we would
simultaneously notify the plan sponsor
concerning the nature of the request.
This will ensure that the plan sponsor
will have notice that we are contacting
one of its subcontractors.
We are proposing to revise the
regulation at § 422.504(i)(2)(i) and
§ 423.505(i)(2)(i) to make clear that CMS
and its designees may ‘‘collect’’ records,

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in addition to our existing authority to
‘‘audit, evaluate, and inspect’’
information. The addition of ‘‘collect’’
removes any doubt that, in addition to
our other options for obtaining records,
we have the authority to request
information to be reviewed in some
location other than onsite at a sponsor’s
or FDR’s facility. Furthermore, the
proposed provision is intended to
clarify only that CMS may contact FDRs
directly and request that they provide
Part C or D-related information directly
to CMS. The question as to whether
CMS has the authority to enter the
premises of FDRs, is to be determined
by interpreting other applicable
statutory and regulatory authority.
We also propose to delete the existing
provision at § 423.505(i)(3)(iv) which
gives Part D sponsors the choice as to
how information sought from their FDRs
will be provided to CMS. Section
423.505 would be renumbered so that
paragraphs (v)–(viii) would become
paragraphs (iv)–(vii).
35. Eligibility of Enrollment for
Incarcerated Individuals (§ 417.1,
§ 417.460, § 422.74, and § 423.44)
Entitlement and enrollment in the
Medicare program (Part A and Part B) is
contingent on entitlement to Social
Security retirement and disability
benefits as outlined in sections 226 and
226A of the Act, and enrollment in the
Medicare program for individuals not
receiving retirement or disability
benefits is outlined in sections 1818 and
1818A of the Act. These sections do not
preclude entitlement to or enrollment in
the Medicare program for individuals
who are incarcerated in prisons or other
penal facilities. However, section
1862(a)(3) of the Act excludes Medicare
payment for services which are paid
directly or indirectly by another
government entity, including federal,
state and local prisons, and penal
facilities. Given that Medicare
entitlement flows from entitlement to
Social Security retirement and disability
benefits, we established regulations at
§ 411.4(b) and implemented section
1862(a)(3) of the Act through a payment
exclusion process in the FFS program,
outlined in section 50 of Chapter 16 of
the Medicare Benefit Policy Manual and
section 10.4 of the Medicare Claims
Payment Manual.
The Medicare payment exclusion
process includes the receipt of
incarceration status for individuals via
regular data exchanges from the SSA to
CMS. Once we receive the data, the
incarceration status is noted on the
individual’s record and is retained in
the FFS claims processing systems.
Upon receipt of submitted FFS claims,

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CMS denies payment of both Part A and
Part B claims for individuals with
records on which incarceration is
denoted. The denial of claims continues
until the individual is no longer
considered incarcerated and that
information is reported by SSA to CMS.
Individuals who are entitled to
premium-free Part A will maintain their
entitlement and will remain enrolled in
Part B as long as premiums are paid.
Similarly, individuals who are enrolled
in premium Part A and/or Part B
maintain their enrollment as long as
premiums are paid. Sections
1851(a)(3)(B), 1860D–1(a)(3)(A), and
1876(a)(1)(A) of the Act outline the
eligibility requirements to enroll in MA,
Part D, and Medicare Health
Maintenance Organization/Competitive
Medical Plans (cost plans). In all
options, individuals must have active
Medicare coverage. Specifically, to
enroll in MA, an individual must be
entitled to Part A and enrolled in Part
B; to enroll in a PDP, an individual must
be eligible for Part D by either being
entitled to Part A and/or enrolled in Part
B; to enroll in a Medicare cost plan, an
individual must be enrolled in Part B
but Part A is not required.
In addition, sections 1851(b)(1)(A),
1860D–1(b)(1)(B)(i), and 1876(d) of the
Act provide that Medicare beneficiaries
are eligible to enroll in an MA plan,
PDP, or cost plan only if they reside in
the geographic area served by the plan,
known as the plan’s ‘‘service area.’’ As
noted earlier, an individual who is
incarcerated still meets the eligibility
requirements for Part A and Part B and
is eligible generally to enroll in an MA
plan, PDP, or cost plan. However,
residence in a plan’s service area is also
a condition for eligibility to enroll in an
MA plan, PDP or cost plan. See
§ 422.50(a)(3)(i) for MA plans,
§ 423.30(a)(1)(ii) for PDPs, and
§ 417.422(b) for cost plans. If a member
no longer resides in the service area,
plans must disenroll that individual per
rules at § 422.74(a)(2)(i) and § 422.74
(d)(4) for MA plans, § 423.44(b)(2)(i) for
PDPs, and § 417.460(b)(2)(i) for cost
plans.
a. Changes in Definition of Service Area
for Cost Plans (§ 417.1)
In order to implement the exclusion
from Medicare coverage for incarcerated
individuals under section 1862(a)(3) of
the Act in the case of MA plans and
PDPs, we explicitly excluded facilities
in which individuals are incarcerated
from an MA plan’s service area by
including this exclusion in the
definition of ‘‘service area’’ (54 FR
41734 and 72 FR 47410). Specifically,
‘‘service area’’ is defined in § 422.2 for

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MA plans and § 423.4 for PDPs and both
definitions indicate that facilities in
which individuals are incarcerated are
considered outside of the service area.
We did not include a similar service
area exclusion in the case of cost plans.
To the extent that cost plans do not
incur costs for incarcerated enrollees
because their health care costs are
covered by the facility, there would be
no costs claimed on the cost report, and
no Medicare payment. Nonetheless, to
ensure that no cost payments are made,
we propose to revise the definition of
service area in § 417.1 to specifically
note that facilities in which individuals
are incarcerated are not a part of the
service area. This adjustment will
ensure parity among the various
Medicare plan coverage options and be
the basis for ensuring that services are
not paid for by the Medicare Trust
Funds for those who are not eligible for
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b. Involuntary Disenrollment for
Incarcerated Individuals Enrolled in
MA, PDP and Cost Plans (§ 417.460,
§ 422.74, and § 423.44)
Sections 1860D–1(b)(1)(B)(i),
1851(b)(1)(A), and 1876(a)(1)(A) of the
Act provide that individuals whose
permanent residence is outside the
plan’s service area are ineligible to
enroll in or to remain enrolled in the
MA, Part D, or cost plan. Based on the
definition of service area established in
§ 422.2 and § 423.4, this applied to
individuals who were incarcerated as
well. As such, individuals who became
incarcerated while enrolled were
ineligible to remain enrolled because
they did not meet the eligibility
criterion of residing in the MA plan or
PDP’s service area. As noted previously,
the regulations for cost plans currently
do not exclude incarcerated individuals
from enrolling or remaining enrolled in
these plans.
At the time of the implementation of
Part D, the data regarding incarceration
were not as robust as they are at the
present time. To compensate, we
provided instructions in sub-regulatory
guidance that required MA plans and
PDPs to investigate a notification from
CMS of an individual’s incarcerated
status. If a plan could not confirm the
status, the plan would then apply the
policy for investigation of a possible
out-of-area status which would allow an
incarcerated individual to remain
enrolled in the plan for up to 6 or 12
months for MA plans or PDPs,
respectively. Cost plans, on the other
hand, are not currently subject to
similar instructions and therefore
individuals are not disenrolled solely

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because they are determined to be
incarcerated.
Today we believe that the data that
CMS receives from SSA regarding the
incarceration status of Medicare
beneficiaries are reliable enough for the
purpose of involuntary disenrollment
from MA, Part D, and cost plans. Thus,
we propose to amend § 417.460(b)(2)(i),
§ 417.460(f)(1)(i), § 422.74(d)(4)(i),
§ 422.74(d)(4)(v) and add
§ 423.44(d)(5)(iii) and § 423.44(d)(5)(iv)
to establish that MA organizations,
PDPs, and cost plan organizations must
disenroll individuals incarcerated for 30
days or more upon notification of such
status from CMS. As a part of this
change, CMS will review the
incarceration data provided by SSA.
Where possible, CMS will involuntarily
disenroll individuals who are
incarcerated based on the data provided
by SSA, and will notify the plan in
which the individual is enrolled of this
action. For all such disenrollments, the
effective date of disenrollment will be
the first of the month after the start of
incarceration date as reported by SSA.
We believe these proposed changes will
prevent months of improper payments
to MA, Part D, and cost plans and
significantly lessen the burden for MA
plans and PDPs by not requiring
investigation to verify residence as
outlined in section 50.2.1 in Chapter 2
of the Medicare Managed care Manual
and Chapter 3 of the Medicare
Prescription Drug Benefit Manual.
In connection with this change, we
would also propose to deny enrollment
requests for individuals if CMS data
indicates an active incarceration status
of at least 30 days. Based on the data
received from SSA, if incarceration is
denoted, we will deny that enrollment
based on the data provided by SSA and
will notify the plan of the denial. This
would replace the current process
requiring plans to accept the enrollment
and immediately begin the process to
verify that the individual was out of the
plan’s service area. We will provide
operational instructions in
subregulatory guidance.
In addition, we will clarify that in
instances where a plan receives
information about an individual’s
possible incarceration from a source
other than CMS or learns of some other
permanent residence change, the
existing requirements to research a
possible change in address would still
apply. Finally, we note that the
exceptions to involuntary disenrollment
for not residing in the plan’s service
area (§ 417.460(f)(2) and
§ 422.74(d)(4)(iii)) would not apply to
members who are determined to be
incarcerated. However, individuals

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involuntarily disenrolled will be able to
enroll in a plan following their release
from incarceration using an existing
special enrollment period outlined in
section 30.4.1 in Chapter 2 of the
Medicare Managed Care Manual and
section 30.3.1 in Chapter 3 of the
Medicare Prescription Drug Benefit
Manual (Special Enrollment Periods
(SEP) for Changes in Residence).
Individuals wanting to enroll in an open
cost plan may do so as long as the cost
plan is accepting applications for
enrollment, following section 30.1 of
Chapter 17–D of the Medicare Managed
Care Manual.
36. Rewards and Incentives Program
Regulations for Part C Enrollees
(§ 422.134)
CMS has provided subregulatory
guidance regarding the types of rewards
and incentives that may be offered to
current Medicare Advantage (MA) plan
enrollees. (See Section 70.2, Chapter 3
of the Medicare Managed Care Manual).
Generally, such activities are limited to
a set monetary cap, and cannot be
offered in the form of cash or other
monetary rebates or considered a health
benefit. This guidance generally flows
from our authority to regulate marketing
by MA organizations and our
recognition that certain marketing
efforts may be targeted to current
enrollees to encourage continued
enrollment and reenrollment in a
particular plan.
Every year, CMS receives inquiries
from MA organizations that wish to
expand the scope of the rewards and
incentives that currently may be offered
to beneficiaries enrolled in their MA
plans. In some cases, MA organizations
wish to extend rewards and incentives
already offered to their commercial
members to their Medicare enrollees
and there is some evidence to suggest
that health-driven reward and incentive
programs for currently enrolled
members of health plans may lead to
meaningful and sustained improvement
to their health behaviors and health
outcomes.
CMS would like to enable MA
organizations to offer health-driven
rewards and incentives programs that
may be applied to more health-related
services and activities than are allowed
under current guidance. We are
concerned about the possibility that
such programs would be targeted only
to healthier enrollees, and discourage
sicker enrollees from participating in
such incentives and in remaining
enrolled in the plan. Furthermore, we
would like to strengthen our existing
subregulatory guidance and offer the
opportunity for public review and

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comment on our requirements for
rewards and incentives programs. We
propose to amend our regulations to
establish parameters for rewards and
incentives programs offered to enrollees
of MA plans. We also propose to
include specific requirements regarding
rewards and incentives so as to ensure
that such programs do not discriminate
against beneficiaries, including those
who are sick or disabled.
Section 1856(b)(1) of the Act provides
authority for the establishment of MA
standards by regulation, and section
1857(e)(1) of the Act provides authority
to impose contract requirements that
CMS finds ‘‘necessary and appropriate.’’
Section 1852(b)(1)(a) of the Act states
that MA organizations may not
discriminate against beneficiaries on the
basis of health status and that CMS may
not approve an MA plan if that offering
is susceptible to discrimination based
on an individual’s health status.
Further, section 1857(g)(1)(D) of the Act
provides authority for taking
intermediate sanction action against an
MA organization which ‘‘engages in any
practice that would reasonably be
expected to have the effect of denying
or discouraging enrollment by eligible
individuals’’ as a result of their health
status or history. We propose to rely
upon the aformentioned rulemaking and
substantive authority to establish
requirements for rewards and incentives
programs offered by MA organizations
to Medicare beneficiaries enrolled in
their MA plans.
Specifically, we propose adding a
new provision at § 422.134 that would
allow MA organizations to offer reward
and incentive programs to their current
Medicare enrollees to encourage their
participation in activities that focus on
promoting improved health, preventing
injuries and illness, and promoting
efficient use of health care resources.
We would require that reward-eligible
activities be designed so that all
enrollees are able to earn rewards
without discrimination based on race,
gender, chronic disease,
institutionalization, frailty, health
status, and other impairments. Any
rewards and incentives program
implemented by an MA organization
under our proposal must accommodate
enrolled beneficiaries who are
institutionalized or who need a
modified approach to enable effective
participation.
To meet the proposed CMS
requirements, a reward or incentive
would have to be earned by completing
the entire health-related service or
activity and may not be offered for
completion of less than all required
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activity. Under this proposal, rewards
and incentives would be subject to a
monetary cap in an amount CMS
determines could reasonably be
expected to affect enrollee behavior
while not exceeding the value of the
health-related service or activity itself.
We intend to provide guidance on this
qualitative standard on a regular basis.
In addition, our proposal would
require MA organizations that offer
rewards and incentives programs to
provide information about the
effectiveness of such programs to CMS
upon request. If we determine that the
rewards and incentives programs are not
compliant with our regulatory standard,
we may require that the MA
organization modify the basic
parameters of the program.
37. Expand Quality Improvement
Program Regulations (§ 422.152)
Section 1852(e) of the Act requires
MA organizations to have an ongoing
quality improvement program for the
purpose of improving the quality of care
provided to enrollees. Our current
regulations at § 422.152 require an MA
organization to have a quality
improvement program that measures,
records, and reports on the quality of
care it is providing to enrollees and to
develop criteria for a chronic care
improvement program. We have
recently expanded our quality
improvement program to include more
specific and structured chronic care
improvement program requirements that
are outcomes based and health driven as
well as require each MA organization to
have a written quality improvement
program plan (approved form CMS–
10209). Currently, chronic care
improvement programs must be
measurable, reported on annually, and
has a clinical focus (as determined by
CMS).
We propose revising paragraph (a) of
§ 422.152 in order to codify our recent
expansion of the quality improvement
program policies and revising paragraph
(c) of § 422.152 to codify our recently
expanded chronic care improvement
program policies. These revised
paragraphs will more accurately reflect
current quality care improvement
program policies and requirements.
Additionally, paragraph (g) of
§ 422.152 lists quality improvement
program requirements that are specific
to special needs plans (SNPs). We
propose revising paragraph (g) to clarify
that the requirements listed there are in
addition to program requirements listed
in paragraphs (a) and (f) of § 422.152
and are not instead of the regular quality
improvement program requirements.

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Finally, we propose to delete
paragraph (h)(2) of § 422.152 as it
pertains to plan year 2010 and is no
longer relevant.
38. Authorization of Expansion of
Automatic or Passive Enrollment NonRenewing Dual Eligible SNPs (D–SNPs)
to Another D–SNP To Support
Alignment Procedures (§ 422.60)
At this time, SNPs are only authorized
through 2014. This proposed provision,
which would take effect in 2015, is
contingent upon, and would only apply,
if SNPs continue to be authorized after
2014.
Since D–SNPs were implemented in
2006, expectations for them to serve as
a vehicle for aligning Medicare and
Medicaid benefits for dually eligible
individuals have been articulated. In
2007, the Congress passed the Medicare
Improvements for Patients and
Providers Act (MIPPA), which set 2013
as the deadline for all D–SNPs to have
contracts with states to coordinate their
enrollees’ Medicaid coverage. In 2010,
the Congress passed the Affordable Care
Act, section 2602 of which established
a new CMS office charged with
implementing goals to improve the
coordination between the federal
government and states for individuals
eligible for benefits under both
Medicare and Medicaid programs in
order to ensure that such individuals get
full access to the items and services to
which they are entitled. Specifically
listed in sections 2602(c)(2) and (6) of
the Affordable Care Act, we are tasked
with simplifying the processes for
Medicare-Medicaid enrollee to access
the items and services they are entitled
to under the Medicare and Medicaid
programs, and improving care
continuity and ensuring safe and
effective care transitions for MedicareMedicaid enrollees.
Our current authority does not allow
us to limit involvement in the D–SNP
program to fully integrated D–SNPs;
thus, the majority of Medicare-Medicaid
enrollees enrolled in D–SNPs continue
to receive their Medicare and Medicaid
benefits and services from two different
organizations. At the same time, some
states are approaching this problem
from a slightly different angle, and are
attempting to align care for MedicareMedicaid enrollees under the same
organization by requiring that the same
organization that provides Medicaid
benefits also provide Medicare benefits.
However, states’ efforts stall when the
Medicare-Medicaid enrollee is enrolled
with one organization for his/her
Medicaid coverage, but in a D–SNP
offered by another MA organization.
The statute generally requires that

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Medicare beneficiaries make an active
choice of their health plan, so neither
plans nor states can choose where the
beneficiary enrolls.
The resulting fragmentation of care
can generally be addressed through
existing mechanisms. For example,
State Medicaid Agencies may pursue
waiver authority from CMS to require
Medicare-Medicaid enrollees to enroll
in Medicaid Managed Care
Organizations (MCO) that also offer a D–
SNP. Likewise, anMA organization
offering a D–SNP could novate its
contract with CMS to the organization
offering the Medicaid MCO, so that the
entire contract, including the D–SNP,
and its enrollees, is now held by the
same organization that offers the
enrollees’ Medicaid managed care plan.
However, while we can approve
novations, we cannot mandate that the
parties enter into such arrangements.
Moreover, when an MA organization
elects to non-renew its Medicare
contract, rather than novate the contract,
we do not have the authority to move
enrollees under that contract to another
MA organization offering a D–SNP.
Another possible solution to the
problem of fragmented care lies in
section 1851(c)(1) of the Act, which we
have interpreted to provide flexibility in
developing mechanisms by which
beneficiaries may complete voluntary
MA enrollment elections (per section
1851(a)(1) of the Act). These flexibilities
include a process described as ‘‘passive
enrollment,’’ whereby beneficiaries are
notified of the enrollment opportunity
and provided sufficient advance
information to determine if they will
accept this option. A beneficiary who is
offered a passive enrollment completes
the request to enroll by not declining
the offer. However, we have limited
passive enrollment to situations in
which enrollees in MA plans that are
terminating immediately have little or
no time to choose another MA plan
option or stand-alone PDP, and are at
risk for losing their prescription drug
coverage (see 42 CFR 422.60(g)).
Generally, we have declined to afford
ourselves such discretion to provide
passive enrollment in more situations,
in part, because of concerns raised by
beneficiary advocates about the
challenges beneficiaries face in
navigating a new provider network and
understanding information about new
benefits. In addition, we have also been
concerned that, were we to widen the
scope of our authority to allow passive
enrollment in other situations not
involving an immediate termination, we
would be faced with the seemingly
impossible task of sorting through
requests by MA organizations to

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passively enroll members to other plans
within their organization, or across
organizations, and granting or denying
such requests without appearing to act
in an arbitrary and capricious manner,
or unintentionally interfering with the
voluntary nature of the MA program.
Thus, we have limited our use of our
passive enrollment authority by
regulation to those situations in which
beneficiaries faced an immediate plan
termination or potential harm, and
where we could, through passive
enrollment, ensure that beneficiaries
maintained access to affordable
coverage, including prescription drug
coverage.
To date, we have not considered D–
SNP non-renewals to fall under either
category, because, by definition, nonrenewals occur with appropriate, 90
days’ notice to affected enrollees, just
prior to the start of the annual
enrollment period, when enrollees have
access to the Medicare & You handbook
and other materials, as well as ample
time to consider their health care
choices.
However, it is worth noting that
returning to Original Medicare, whether
due to an immediate contract
termination or non-renewal, poses
potential disadvantages for the
beneficiary as well, that is, the loss of
supplemental benefits such as dental or
vision benefits, and beneficiary
confusion as he or she attempts to
navigate the health care system (and two
sets of benefits) without case
management or other support that may
have been provided by the MA plan. We
have the authority to widen the scope of
the regulation slightly to allow for
passive enrollment when a MedicareMedicaid enrollee is enrolled in a D–
SNP that is non-renewing its contract
with Medicare, and is enrolled in a
Medicaid MCO (Managed Care
Organization) that also offers a D–SNP,
and the networks and benefits of the
non-renewing D–SNP and the future D–
SNP are substantially similar. By
exercising passive enrollment in this
additional limited circumstance, we
could better ensure better continuity of
care, particularly prescription drug
coverage, but also possibly
supplemental benefits, and ensure
beneficiaries enjoy use of the same
providers, with little or no change in the
benefits offered. Our use of passive
enrollment in this case would also
further promote alignment of Medicare
and Medicaid benefits offered by the
same organization. Through subregulatory guidance, we would interpret
the ‘‘substantially similar’’ standard as it
relates to the networks, benefit
packages, formularies, and out of pocket

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costs of the non-renewing and gaining
D–SNP. As already required by
§ 422.60(g)(2), we would ensure
beneficiaries are notified of the costs
and benefits of the plan, and of their
ability to decline enrollment or choose
another plan. As part of our proposal to
add this additional basis for passive
enrollment, we propose to restructure
paragraph (g).
B. Improving Payment Accuracy
1. Implementing Overpayment
Provisions of Section 1128J(d) of the
Social Security Act (§ 422.326 and
§ 423.360)
This section of the proposed rule
would implement section 6402 of the
Affordable Care Act, which established
new section 1128J(d) of the Act entitled
Reporting and Returning of
Overpayments. Section 1128J(d)(4)(B) of
the Act defines the term overpayment as
any funds that a person receives or
retains under title XVIII or XIX to which
the person, after applicable
reconciliation, is not entitled under
such title. The definition of person at
section 1128J(d)(4)(C) of the Act
includes a Medicare Advantage
organization (as defined in section
1859(a)(1) of the Act) and a Part D
sponsor (as defined in section 1860D–
41(a)(13) of the Act). The definition
does not include a beneficiary.
Section 1128J(d)(1) of the Act requires
a person who has received an
overpayment to report and return the
overpayment to the Secretary, the state,
an intermediary, a carrier, or a
contractor, as appropriate, at the correct
address, and to notify the Secretary,
state, intermediary, carrier or contractor
to whom the overpayment was returned
in writing of the reason for the
overpayment. Section 1128J(d)(2) of the
Act requires that an overpayment be
reported and returned by the later of: (1)
The date which is 60 days after the date
on which the overpayment was
identified; or (2) the date any
corresponding cost report is due, if
applicable. Section 1128J(d)(3) of the
Act specifies that any overpayment
retained by a person after the deadline
for reporting and returning an
overpayment is an obligation (as defined
in 31 U.S.C. 3729(b)(3)) for purposes of
31 U.S.C. 3729.
Finally, section 1128J(d)(4)(A) of the
Act defines ‘‘knowing’’ and
‘‘knowingly’’ as those terms are defined
in 31 U.S.C. 3729(b). Specifically, the
terms ‘‘knowing’’ and ‘‘knowingly’’
mean that ‘‘a person with respect to
information: (1) Has actual knowledge
of the information; (2) acts in deliberate
ignorance of the truth or falsity of the

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information; or (3) acts in reckless
disregard of the truth or falsity of the
information.’’ There need not be ‘‘proof
of specific intent to defraud.’’
To implement section 1128J(d) of the
Act for the Part C Medicare Advantage
program and the Part D Prescription
Drug program, we are proposing two
new sections, § 422.326 and § 423.360,
respectively, both titled, ‘‘Reporting and
Returning of Overpayments.’’ These
sections propose rules for MA
organizations and Part D sponsors to
report and return an identified
overpayment to the Medicare program.
We are using the term Part D sponsor,
as defined at § 423.4, to refer to the
entities that offer prescription drug
plans (PDPs) under part 423 and thus
are subject to section 1128J(d) of the
Act.
We propose conforming amendments
to § 422.1, § 422.300, and § 423.1 that
add a reference to section 1128J(d) of
the Act to the existing list of statutory
authorities for the regulations governing
the MA organizations and Part D
sponsors. We also propose to amend
§ 422.504(l) and § 423.505(k) to
incorporate a reference to the proposed
§ 422.326 and § 423.360, respectively, in
order to extend the existing data
certification requirement to data that
MA organizations and Part D sponsors
submit to CMS as part of fulfilling their
obligation to return an overpayment
under section 1128J(d) of the Act.
Section 422.504(l) refers to certification
of data ‘‘as a condition for receiving a
monthly payment’’ and § 423.505(k)
refers to certification of data for
enrollees ‘‘for whom the organization is
requesting payment.’’ Our proposal to
implement section 1128J of the Act
contains requirements that apply after
CMS has completed prospective
monthly payments for a year, and
organizations are no longer ‘‘requesting
payment’’ because applicable
reconciliation has occurred. Applicable
reconciliation is the point when
organizations submit their final data for
the previous payment year.
Accordingly, if an MA organization or
Part D sponsor has identified an
overpayment, there clearly is a different
state of ‘‘best knowledge, information,
and belief’’ than the state of knowledge,
information, and belief that existed
prior to applicable reconciliation. Thus,
we propose to require that the CEO,
CFO, or COO must certify (based on best
knowledge, information, and belief) that
information the MA organization or Part
D sponsor submits to CMS for purposes
of reporting and returning of
overpayments under § 422.326 and
§ 423.360 is accurate, complete, and
truthful.

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We remind all stakeholders that even
in the absence of a final regulation on
these statutory provisions, MA
organizations and Part D sponsors are
subject to the statutory requirements
found in section 1128J (d) of the Act and
could face potential False Claims Act
liability, Civil Monetary Penalties (CMP)
Law liability, and exclusion from
Federal health care programs for failure
to report and return an overpayment.
Additionally, MA organizations and
Part D sponsors continue to be obliged
to comply with our current procedures
for handling inaccurate payments.
a. Terminology (§ 422.326(a) and
§ 423.360(a))
We propose to adopt the statutory
definition of overpayment, where an
overpayment exists when—after
‘‘applicable reconciliation’’—an MA
organization or Part D sponsor is not
entitled to funds it has received and/or
retained. In order to clarify the statutory
definition of overpayment, we propose
definitions of two key terms at
§ 422.326(a) and § 423.360(a): ‘‘funds’’
and ‘‘applicable reconciliation.’’
We propose to define ‘‘funds’’ as
payments an MA organization or Part D
sponsor has received that are based on
data that these organizations submitted
to CMS for payment purposes and for
which they have responsibility for the
accuracy, completeness, and
truthfulness of such data under existing
§ 422.504(l) and § 423.505(k). For Part C,
the data submitted by the MA
organization to CMS includes
§ 422.308(f) (enrollment data) and
§ 422.310 (risk adjustment data). For
Part D, data submitted by the Part D
sponsor to CMS includes data submitted
under § 423.329(b)(3), § 423.336(c)(1),
§ 423.343, and data provided for
purposes of supporting allowable costs
as defined in § 423.308 of this part
which includes data submitted to CMS
regarding direct or indirect
remuneration (DIR).
There are additional payment-related
data CMS uses to calculate Part C and
Part D payments that are submitted
directly to CMS by other entities, such
as the Social Security Administration
(SSA), which is the authoritative source
for data they submit to CMS. We believe
that MA organizations and Part D
sponsors cannot be held accountable for
the accuracy of data controlled and
submitted to us by other entities.
For example, the SSA is the
authoritative source for date of death.
An MA organization or Part D sponsor
generally do not submit a date of death
directly to CMS’ systems; it comes from
the SSA data feed. When the SSA
submits to CMS corrected data regarding

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a beneficiary’s date of death, CMS’
systems recalculate the payments made
to the plan for that beneficiary and
recoup the incorrect payment in a
routine retroactive payment adjustment
process.
When CMS recoups an incorrect
payment from an MA organization or
Part D sponsor based on data corrections
submitted by authoritative sources such
as the SSA, CMS would not consider
this recoupment to be the return of an
overpayment by an MA organization or
Part D sponsor under proposed
§ 422.326 and § 423.360. Therefore, the
proposed meaning of ‘‘funds’’ refers to
a payment amount that an MA
organization or Part D sponsor received
from CMS that is based on data that the
MA organization or Part D sponsor
controls and submits to CMS.
The term ‘‘applicable reconciliation’’
refers to an event or events after which
an overpayment can exist under section
1128J(d) of the Act. We propose
definitions of the term applicable
reconciliation that are specific to the
Part C and Part D.
For Part C, we propose that applicable
reconciliation occurs on the date that
CMS announces as the final deadline for
risk adjustment data submission. (See
section II.B.6 of this proposed rule for
a discussion of the final deadline for
risk adjustment data submission
established at § 422.310(g).) For each
payment year, we apply three sets of
risk scores to adjust payments: Initial
and midyear risk scores during the
payment year (both sets are based on
incomplete diagnosis data from the data
collection year); and final risk scores
after the payment year using data MA
organizations submit on or before the
final deadline for risk adjustment data
(which reflects complete data for the
data collection year). Currently, the final
deadline for risk adjustment data
submission is a month after the end of
the payment year. In future years, we
expect to announce a date that will be
about 6 to 8 weeks after the end of the
payment year to accommodate the
current subregulatory requirement that
MA organizations review the monthly
enrollment and payment reports they
receive from CMS within 45 days of the
availability of the reports. Moving this
deadline means that the risk adjustment
data submission deadline would also
function as the Part C applicable
reconciliation date. We would announce
a final risk adjustment data submission
deadline that falls on or just after the
conclusion of this 45-day period for the
January payment.
For Part D sponsors, we propose that
applicable reconciliation is the later of
either: The annual deadline for

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submitting prescription drug event
(PDE) data for the annual Part D
payment reconciliations referred to in
§ 423.343 (c) and (d) or the annual
deadline for submitting DIR data. The
annual deadline for submitting PDE data
is the last federal business day prior to
June 30th of the year following the
benefit year being reconciled. The
annual deadline for submitting DIR data
is announced annually through
subregulatory guidance and generally
occurs around the last business day in
June the year following the benefit year
being reconciled. We select these events
to define the Part D applicable
reconciliation because these data are
used for the purposes of determining
final Part D payment reconciliation.
Note that MA organizations would still
have to submit all final risk adjustment
diagnoses for Part D on the final
deadline for risk adjustment data
submission.
The proposed approach to defining
applicable reconciliation establishes
dates that differ for Part C and Part D.
One effect of this approach is that risk
adjustment and enrollment data for Part
D are subject to the § 423.360
overpayment requirements at a later
date than risk adjustment and
enrollment data for Part C. The final risk
adjustment data submission deadline for
Parts C and D data would continue to be
earlier than the deadline for final
submission of PDE and DIR data. For
this reason, we considered an
alternative approach to defining
applicable reconciliation, where there is
one date for applicable reconciliation
for both Parts C and D risk adjustment
data and enrollment data (which would
be about 6 to 8 weeks after the end of
the payment year, going forward), and
then the Part D program would be
subject to a second applicable
reconciliation date the date for final
submission of PDE data or DIR data,
whichever is later. We are proposing a
single date for each program, and we
seek comment on these two approaches.
Note that payment errors identified as
a result of any corrections to risk
adjustment data submitted by MA
organizations (and other organizations
required to submit risk adjustment data
to CMS) on or before the annual final
risk adjustment data submission
deadline are handled as part of the
current annual process of risk
adjustment payment reconciliation.
Because these payment errors are prior
to the date defined in this proposed rule
as ‘‘applicable reconciliation,’’ we do
not consider these errors to be
overpayments for the purpose of
§ 422.326 and § 423.360. That is, any
deletions of risk adjustment data in the

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file submitted on or before the final risk
adjustment data submission deadline for
a payment year, would result in
payment errors that are addressed with
processes that have been in place prior
to our codification of section 1128J(d) of
the Act in proposed § 422.326 and
§ 423.360.
Likewise, for Part D, any payment
errors identified as a result of any
corrections to PDE or DIR data
submitted on or before the later of the
annual deadline for submitted PDE and
DIR data are handled as part of the
current Part D reconciliation process.
It is our expectation that MA
organizations and Part D sponsors must
be continuously diligent regarding the
accuracy and completeness of paymentrelated data they submit to CMS for a
payment year, whether during or after
that payment year, and whether before
or after applicable reconciliation dates.
This expectation is based on existing
requirements at § 422.310, § 422.504(l),
§ 423.329(b)(3)(ii), and § 423.505(k), and
our proposed amendments that clarify
and strengthen these requirements.
b. General Rules for Overpayments
(§ 422.326(a) Through (c); § 423.360(a)
Through (c))
We propose at § 422.326(b) and
§ 423.360(b) that if an MA organization
or Part D sponsor has identified that it
has received an overpayment, the MA
organization or Part D sponsor must
report and return that overpayment in
the form and manner set forth in the
section. In paragraphs § 422.326(c) and
§ 423.360(c), we propose that the MA
organization or Part D sponsor has
identified an overpayment if it has
actual knowledge of the existence of the
overpayment or acts in reckless
disregard or deliberate ignorance of the
existence of the overpayment. The terms
‘‘reckless disregard’’ and ‘‘deliberate
ignorance’’ are part of the definitions of
the ‘‘knowing’’ and ‘‘knowingly’’ in
section 1128J of the Act, which provides
that the terms ‘‘knowing’’ and
‘‘knowingly’’ have the meaning given
those terms in the False Claims Act (31
U.S.C. 3729(b)(3)). Without such a
proposal to include ‘‘reckless disregard’’
and ‘‘deliberate ignorance’’, some MA
organizations and Part D sponsors might
avoid performing activities to determine
whether an overpayment exists. We also
provide that if an MA organization or
Part D sponsor has received information
that an overpayment may exist, the
organization must exercise reasonable
diligence to determine the accuracy of
this information, that is, to determine if
there is an identified overpayment.
Finally, in paragraphs § 422.326(d)
and § 423.360(d), we propose the

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requirements for reporting and returning
an identified overpayment. An MA
organization or Part D sponsor must
report and return any overpayment it
received no later than 60 days after the
date on which it identified it received
an overpayment. The statute provides
an alternative deadline: the date any
corresponding cost report is due, if
applicable. We propose that this
alternative deadline is not applicable to
the Parts C or D programs because, in
general, MA organizations and Part D
sponsors are paid based on their bids,
and not based on their actual incurred
costs.
The MA organization or Part D
sponsor must notify CMS, using a
notification process determined by
CMS, of the amount and reason for the
overpayment. Also within this 60-day
time period, the organization must
return identified overpayments to CMS
in a manner specified by CMS,
including the amount and reason for the
overpayment. We codify at paragraph
(3) the statutory requirement that any
overpayment retained by an MA
organization or Part D sponsor after the
60-day deadline for reporting and
returning is an obligation under 31
U.S.C. 3729(b)(3).
It also is important to note that the
MA organization and Part D sponsor are
deemed to have returned the
overpayment when they have taken the
actions that we will specify, in
forthcoming operational guidance, to
submit the corrected data that is the
source of the overpayment. We will
recover the returned overpayment
through routine processing according to
the systems schedule established in the
annual operations budget. That is,
payments are recovered through the
established payment adjustment
process, not on the 60-day schedule that
applies to each MA organization or Part
D sponsor that has identified an
overpayment. Rerunning reconciliation
each time an entity identifies an
overpayment that triggers its 60-day
clock is simply not feasible for CMS.
Further, there will be circumstances
when we may ask the MA organization
or Part D sponsor to provide an
auditable estimate of the overpayment
amount, reason for overpayment, and
make a payment to CMS. This may
occur, for example, when the Part D
reopening occurs prior to the end of the
look-back period or if an MA
organization or Part D sponsor had a
thoroughly-documented catastrophic
loss of stored data. Information about
the nature of such a request would be
detailed in forthcoming operational
guidance.

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c. Look-Back Period for Reporting and
Returning Overpayments
We propose at § 422.326(e) and
§ 423.360(e) to codify a look-back period
for MA organizations and Part D
sponsors. MA organizations and Part D
sponsors would be required to report
and return any overpayment that they
identify within the 6 most recent
completed payment years. The statute of
limitations related to the False Claims
Act is 6 years from the date of the
violation or 3 years from the date the
relevant government official learns of
the situation, but in no case more than
10 years from the date of the violation.
CMS proposes 6 years as the look-back
period because we believe this best
balances government’s interest in
having overpayments returned with
entities’ interest in finality. Six years
also is consistent with the CMP
provisions, and maintenance of records
requirements under the contracts. Note
that overpayments resulting from fraud
would not be subject to this limitation
of a look-back period.

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2. Determination of Payments
(§ 423.329)
Section 423.329 (d) describes the lowincome cost-sharing subsidy payment
amount. Currently, that amount is
defined as the amount described in
§ 423.782. However, § 423.782 refers to
the cost-sharing paid by the beneficiary,
not the cost-sharing subsidy paid on
behalf of the low-income subsidy
eligible individual. As such, we propose
a technical change to § 423.329(d) to
correctly describe the low-income costsharing subsidy payment amount as it is
intended by statute and has been
implemented and described in
interpretive guidance by CMS.
The low-income cost-sharing subsidy
amount is correctly described in
Chapter 13 of our Medicare Prescription
Drug Benefit Manual, Premium and
Cost-Sharing Subsidies for Low-Income
Individuals (Rev. 13, July 29, 2011).
Under the basic benefit defined at
§ 423.100, the low-income cost-sharing
subsidy payment amount is the
difference between the cost sharing for
a non-LIS beneficiary under the Part D
plan and the statutory cost-sharing for
the LIS eligible beneficiary. Under an
enhanced alternative plan described at
§ 423.104(f), the cost-sharing subsidy
applies to the beneficiary liability after
the plan’s supplemental benefit is
applied. We propose to amend
§ 423.329(d) consistent with this
guidance.
Pursuant to § 423.2305, any coverage
or financial assistance other than basic
prescription drug coverage, as defined

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in § 423.100, offered by an employer
group health or waiver plans is
considered ‘‘other health or prescription
drug coverage.’’ This definition applied
to all of Medicare Part D. (See 77 FR
22071 and 22082; April 12, 2012).
Therefore, the subsidy amount received
by an employer group health or waiver
plan is the subsidy amount received by
a Part D plan offering defined standard
coverage, as defined in § 423.100.
Based on the preceding, we propose
to amend § 423.329(d) by deleting the
reference to § 423.782 and amending
§ 423.329(d) to define the low-income
cost-sharing subsidy payment amount
on behalf of a low-income subsidy
eligible individual enrolled in a Part D
plan for a coverage year as the
difference between the Part D costsharing for a non-low-income subsidy
eligible beneficiary under the Part D
plan and the statutory cost-sharing for a
low-income subsidy eligible beneficiary.
3. Reopening (§ 423.346)
a. Part D Plan Payments Reopening
As stated in our final rule entitled,
‘‘Medicare Program; Medicare
Prescription Drug Benefit’’ published on
January 28, 2005 (70 FR 4194, 4316), the
Secretary’s right to inspect and audit
any books and records of a Part D
sponsor or MA organization regarding
costs provided to the Secretary would
not be meaningful, if upon finding
mistakes pursuant to such audits, the
Secretary were not able to reopen final
determinations made on payment.
Therefore, we established reopening
provisions that would allow us to
ensure that the discovery of any
overpayment or underpayment could be
rectified. In the rule, we established that
a reopening was at our discretion and
could occur for any reason within 1 year
of the final determination of payment,
within 4 years for good cause, or at any
time when there is fraud or similar fault.
We now propose to amend the
reopening provisions such that we may
perform one reopening within 5 years
after the date of the notice of the initial
determination to the Part D sponsors.
We also propose to amend the provision
to accommodate reopening the Coverage
Gap Discount Reconciliation described
at § 423.2320(b).
At the time the proposed regulations
for reopening were published in our
proposed rule entitled, ‘‘Medicare
Program; Medicare Prescription Drug
Benefit’’ in the Federal Register on
August 3, 2004 (69 FR 46694), we had
no experience in Medicare Part D to be
able to gauge the need for a reopening
of an initial payment determination. We
patterned the provisions after the

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Medicare claims reopening regulations
found in part 405. The proposed
reopening provisions were subsequently
adopted in our final rule published on
January 28, 2005 (70 FR 4316) entitled,
‘‘Medicare Program; Medicare
Prescription Drug Benefit.
Under the current regulation at
§ 423.346 (a), CMS may reopen for any
reason within 1 year of the final
determination of payment, within 4
years for good cause, or any time for
fraud or similar fault. ‘‘Good cause’’ is
defined in the regulation at § 423.346 (b)
as: new and material evidence that was
not readily available at the time the final
determination was made; a clerical error
in the computation of payments; or
when evidence that was considered in
making the determination clearly shows
on its face that an error was made. We
now better understand the need for
reopening a payment determination and
modify our regulation at § 423.346 to
align with our experience.
We have generally performed global
reopenings as a result of plan sponsor
requests, and substantial revisions of
PDE and DIR data due to plan
corrections, CMS corrections of systems
error, post reconciliation claims activity,
and audit and other post reconciliation
oversight activity. To date, contract
years 2006, 2007, and 2008 have been
reopened, and we have already released
guidance stating that we intended to
eventually perform a global reopening of
2011 once there is stability in the data
for that year. This experience indicates
to us that we will likely have to perform
a reopening of the initial payment
determination for every contract year.
Therefore, we propose to remove the
current timeframes for a reopening
described in § 423.346 (a)(1) through
(a)(3), remove paragraphs (b) describing
good cause referred to in paragraph
(a)(2), modify paragraph (c) to eliminate
the reference to ‘‘good cause,’’ and
amend paragraph (a) such that CMS may
reopen one time within 5 years of notice
of the initial payment determination.
Based upon our experience, we
believe that 5 years is adequate time to
allow for data stability. By 5 years after
the initial payment determination,
additional PDEs or PDE adjustments
associated with coordination of benefits
will be submitted by Part D sponsors
consistent with the timeframe described
at § 423.466(b). We know that audits
and other post reconciliation oversight
activity often take place more than 5
years from notice of the initial payment
determination. However, in light of the
overpayment provision at section
6402(a) of the Affordable Care Act,
which established section 1128J(d) of
the Act and that we propose to codify

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at § 423.360, we do not believe that it is
necessary to reopen a payment
reconciliation after that 5-year period,
nor do we believe it is necessary to
reopen a reconsidered payment
determination. Therefore, we propose to
amend § 423.346 (a) such that CMS will
only reopen the initial payment
determination and will not reopen a
reconsidered payment determination.
As stated in our final rule entitled,
‘‘Medicare Program; Medicare
Prescription Drug Benefit’’ published in
the Federal Register on January 28,
2005 (70 FR 4194), CMS can initiate a
reopening on its own or an organization
could request a reopening, but such
reopenings are at CMS’ discretion. In
determining whether to reopen, we will
consider a number of issues, including,
but not limited to, whether the contract
has terminated and received a final
settlement. We will not approve a
request to reopen for a contract that has
terminated and received a final
settlement. In addition, when we
perform a reopening on its own
initiative, contracts that have been
terminated and settled will not be
included in the reopening.
b. Coverage Gap Discount
Reconciliation Reopening
Under § 423.2320(b), CMS performs a
Coverage Gap Discount Reconciliation
in which CMS reconciles interim
payments with invoiced manufacturer
discount amounts made available to
each Part D plan’s enrollee under the
Discount Program. Since the interim
coverage gap payments are estimates (76
FR 63017, 63027 (October 11, 2011)), a
cost-based reconciliation is performed
to ensure that Part D sponsors are paid
dollar for dollar for all manufacturer
discount amounts as reported on
invoiced PDE data submitted for Part D
payment reconciliation. Manufacturer
discount amounts reported on PDE
records submitted after the PDE
submission deadline for reconciliation
continue to be invoiced to
manufacturers within a maximum of 3
years of the date of dispensing, and
manufacturers remit payments for
invoiced coverage gap discount amounts
to Part D sponsors.
We propose to establish a reopening
provision for the Coverage Gap Discount
Reconciliation for the same reasons and
under the same authority that we
established a reopening provision for
the Part D payment reconciliation
process described in our final rule,
‘‘Medicare Program; Medicare
Prescription Drug Benefit’’ published on
January 28, 2005 (70 FR 4194, 4316). In
a Health Plan Management System
(HPMS) memorandum dated April 30,

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2010, we stated that the final reconciled
discount program payments are subject
to the reopening provision in § 423.346.
We anticipate rarely needing to reopen
the Coverage Gap Discount
Reconciliation as a result of the
invoicing process that continues to
occur after the reconciliation process.
However, we want to leave open the
option to reopen if unforeseen events
result in underpayments or
overpayments to Part D sponsors.
Therefore, we propose to amend
§ 423.346 to accommodate reopening a
Coverage Gap Discount Reconciliation.
Based on the preceding, we propose
to revise § 423.346 by removing the
phrase ‘‘or reconsidered’’ from
paragraph (a), amending paragraph (a) to
account for the proposed timing of the
Part D reopening, removing paragraphs
(a)(1) through (3) and (b)(1) through (3);
adding a new paragraph (b) to
accommodate a Coverage Gap Discount
Reconciliation reopening; and revising
paragraph (c) to eliminate the reference
to ‘‘good cause.’’
4. Payment Appeals (§ 423.350)
Pursuant to § 423.2320 (b), we
perform a Coverage Gap Discount
Reconciliation in which we reconcile
interim payments with invoiced
manufacturer discount amounts made
available to each Part D plan’s enrollee
under the Discount Program. Current
regulations do not describe the appeals
process for a Coverage Gap Discount
Reconciliation. We propose to establish
an appeals provision for the Coverage
Gap Discount Reconciliation for the
same reasons and under the same
authority that was used to establish the
Part D payment reconciliation appeals
process described in our final rule,
‘‘Medicare Program; Medicare
Prescription Drug Benefit’’ published on
January 28, 2005 (70 FR 4194, 4317). In
an HPMS memorandum dated April 30,
2010, CMS stated that the final
reconciled discount program payments
are subject the appeals provisions in
§ 423.350, and we now propose to revise
§ 423.350 to accommodate a Coverage
Gap Discount Reconciliation appeals
process.
Consistent with the Part D payment
appeals process currently described at
§ 423.350, the proposed changes
establish an appeals process whereby
the final reconciliation of the interim
Coverage Gap Discount Program
payments may be subject to appeal. As
stated in our final rule describing the
Part D payment appeals process (70 FR
4317 (January 28, 2005)), the Part D
payment appeals process only applies to
perceived errors in the application of
the payment methodology and the

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payment information submitted by the
Part D sponsor cannot be appealed
through this process. In the January 28,
2005 final rule (70 FR 4317), Part D
plans are expected to submit payment
information correctly and within the
established timelines. We codified at
§ 423.350(a)(2) that payment
information submitted to CMS under
§ 423.322 and reconciled under
§ 423.343 is final and may not be
appealed nor may the appeals process
be used to submit new information after
the submission of information necessary
to determine retroactive adjustments
and reconciliations. We propose to
amend § 423.350(a)(2) to include
information that is submitted and
reconciled under § 423.2320(b) is final
and may not be appealed nor may the
appeals process be used to submit new
information after the submission of
information necessary to determine
retroactive adjustments and
reconciliations.
Also consistent with the Part D
payment appeals process, we propose
that the request for a reconsideration of
the Coverage Gap Discount
Reconciliation must be filed within 15
days from the date of the final payment,
which is the date of the final reconciled
payment made under § 423.2320 (b).
Therefore, we propose to amend
§ 423.350(b)(1) by adding a new
paragraph (iv) to define the timeframe
for filing a reconsideration of the
Coverage Gap Discount Reconciliation.
Based on the preceding, we propose
to revise § 423.350 by adding a new
paragraph (a)(1)(v) to allow for an
appeal of a reconciled coverage gap
payment under § 423.2320 (b), by
revising paragraph (a)(2) to indicate that
the payment information submitted to
CMS and reconciled under
§ 423.2320(b) is final and may not be
appealed, and by adding a new
paragraph (b)(1)(iv) to define the
timeframe for appealing the final
reconciled payment under
§ 423.2320(b).
5. Payment Processes for Part D
Sponsors (§ 423.2320)
In our final rule entitled, ‘‘Medicare
Program; Changes to the Medicare
Advantage and the Medicare
Prescription Drug Benefit Programs for
Contract Year 2013 and Other Changes’’
(77 FR 22071, 22086; April 12, 2012),
CMS described the payment process for
Part D sponsors under the Coverage Gap
Discount Program. Under § 423.2320(a),
CMS provides monthly interim
Coverage Gap Discount Program
payments as necessary for Part D
sponsors to advance coverage gap
discounts to beneficiaries. Part D

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sponsors report the gap discount
amounts to CMS, and through a
contractor, CMS invoices the
manufacturers on a quarterly basis for
the applicable discount amounts. The
manufacturers repay each Part D
sponsor directly for the invoiced
amounts under the Medicare Coverage
Gap Discount Program Agreement
(Agreement) described at § 423.2315.
Under § 423.2320(b), CMS reconciles
the interim payments with amounts
invoiced to manufacturers.
In the event that a manufacturer fails
to the provide the applicable discounts
in accordance with the Agreement, we
must impose civil money penalties
(CMPs) equal to the sum of the
applicable discount the manufacturer
would have paid under the Agreement
and 25 percent of that amount. The CMP
that is equal to the sum of the applicable
discount the manufacturer would have
paid under the agreement is used to pay
the applicable discount that the
manufacturer had failed to provide.
In our final rule describing the
payment process for Part D sponsors
under the Coverage Gap Discount
Program, we did not contemplate a
payment process in the event that a
manufacturer becomes bankrupt and
does not pay the Part D sponsors for
quarterly invoiced amounts under the
Agreement. Even though we will impose
a CMP on a bankrupt manufacturer in
an effort to collect the unpaid invoiced
amounts, the bankruptcy settlements
will likely result in the CMP being
modified or reduced. In order to ensure
that the Part D sponsors have the funds
available to advance the gap discounts
at the point-of-sale, as required under
section 1860D–14A(c)(1)(A)(ii) of the
Act, we now propose to amend
§ 423.2320 such that we will assume
financial liability for the applicable
discount by covering the costs of the
quarterly invoices that go unpaid by a
bankrupt manufacturer at the time of the
Coverage Gap Discount Reconciliation
described at § 423.2320(b). We would
then file a proof of claim with the
bankruptcy court to recover those costs
from the bankrupt manufacturer.
The proposed policy that CMS
assume financial liability for the
applicable discounts in the event of a
manufacturer bankruptcy is consistent
with CMS’ payment processes for Part D
sponsors under the Medicare Coverage
Gap Discount Program. Under
§ 423.2320 (a), CMS provides interim
payments to ensure that Part D sponsors
have the funds available to advance the
coverage gap discount to beneficiaries at
point of sale. Under § 423.2320 (b), CMS
reconciles the interim payments with
the invoiced manufacturer discount

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amounts in order make the PDP sponsor
whole for the gap discount amount
provided to the beneficiaries at point of
sale. (For more information on these
provisions, see October 11, 2011 final
rule (76 FR 63017, 63027).) In order to
remain consistent with the intent of the
Coverage Gap Discount Reconciliation
to make the Part D sponsor whole for
the gap discounts amounts advanced at
point of sale, CMS must provide
payments to the Part D sponsor to cover
the cost of the applicable discount in
the event that the manufacturer cannot
pay the quarterly invoices due to a
bankruptcy. We propose to cover the
costs of unpaid quarterly invoices only
in the event that a manufacturer
becomes bankrupt. We would not cover
the cost of unpaid quarterly invoices for
any other reasons because, in the event
that a manufacturer fails to pay the
quarterly invoices, we will impose
CMPs that will cover the cost of the
unpaid invoices. In the event that a
manufacturer becomes bankrupt, we are
concerned that the court will either
modify or reduce the amount of the
CMP, making the CMP process
ineffective for covering the cost of the
invoices and leaving the Part D sponsor
in the position of having to cover the
costs of the gap discount.
We propose to implement this policy
by adjusting the Coverage Gap Discount
Reconciliation to account for quarterly
invoices that go unpaid as a result of a
manufacturer becoming bankrupt. This
adjustment will only occur for
manufacturer discount amounts as they
are reported on PDEs submitted by the
submission deadline for the Part D
reconciliation.
Based on the preceding, we propose
to add a new paragraph (c) to § 423.2320
to describe a process for accounting for
quarterly invoiced amounts that go
unpaid by a bankrupt manufacturer.
6. Risk Adjustment Data Requirements
(§ 422.310)
We propose to strengthen existing
regulations related to the accuracy of
risk adjustment data by amending
§ 422.310 on risk adjustment data
validation. First, we propose to
renumber existing paragraph
§ 422.310(e) as paragraph (e)(2) and add
new paragraph (e)(1), which would
require that any medical record reviews
conducted by an MA organization must
be designed to determine the accuracy
of diagnoses submitted under
§ 422.308(c)(1) and § 422.310(g)(2).
(Paragraph § 422.308(c)(1) addresses
adjustments to payments for health
status, and paragraph § 422.310(g)(2)
addresses deadlines for risk adjustment
data submission, including the final risk

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adjustment data submission deadline
prior to CMS’ calculation of the final
risk factors for a payment year.) Under
our proposal, medical record reviews
conducted by an MA organization
cannot be designed only to identify
diagnoses that would trigger additional
payments by CMS to the MA
organization; and medical record review
methodologies must be designed to
identify errors in diagnoses submitted to
CMS as risk adjustment data, regardless
of whether the data errors would result
in positive or negative payment
adjustments. This proposed amendment
furthers our goals of improving payment
accuracy and reducing payment errors.
We also propose to amend
§ 422.310(g) regarding deadlines for
submission of risk adjustment data. Our
current procedures generally permit
submission of risk adjustment data after
the final risk adjustment submission
deadline only to correct overpayments.
We propose to revise the regulation to
explicitly permit late submissions only
to correct overpayments but not to
submit diagnoses for additional
payment.
Finally, we propose to align this
regulation with proposed § 422.326 by
making two additional changes in
paragraph (g). First, we propose the
deletion of the January 31 deadline in
subparagraph (2) and replacing it with
the statement that CMS will announce
the deadline by which final risk
adjustment data must be submitted to
CMS or its contractor. This means that
the risk adjustment data submission
deadline would also function as the Part
C applicable reconciliation date for
purposes of proposed § 422.326 on
overpayment rules, as discussed in
section II.B.1.b. of this proposed rule.
Second, we propose to add
subparagraph (3) to § 422.310(g).
Proposed paragraph (3) cites § 422.326
as the source of rules for submission of
corrected risk adjustment data after the
final risk adjustment data submission
deadline, that is, after applicable
reconciliation as defined at § 422.326(a).
7. RADV Appeals
a. Background
We published Risk Adjustment Data
Validation (RADV) appeals regulations
in the April 15, 2010 Federal Register.
These rules were proposed and finalized
under CMS’s authority to establish
Medicare Advantage (MA) program
standards by regulation at section
1856(b)(1) of the Act and are found at
§ 422.311 et seq.
As explained in the preamble of that
final rule, Subpart G of the MA
regulations at part 422 describes how

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payment is made to MA organizations.
These payment principles are based on
sections 1853, 1854, and 1858 of the
Act. Subpart G also sets forth the
requirements for making payments to
MA organizations offering local and
regional MA plans, including
calculation of MA capitation rates.
Section 1853(a)(3) of the Act requires
that we risk adjust our payments to MA
organizations. Risk adjustment
strengthens the Medicare program by
ensuring that accurate payments are
made to MA organizations based on the
health status plus demographic
characteristics of their enrolled
beneficiaries and ensures that MA
organizations are paid appropriately for
their plan enrollees (that is, less for
healthier enrollees expected to incur
lower health care costs and more for less
healthy enrollees expected to incur
higher health care costs). Accurate
payments to MA organizations also help
ensure that providers are paid
appropriately for the services they
provide to MA beneficiaries. In general,
the current risk adjustment
methodology relies on enrollee
diagnoses, as specified by the
International Classification of Disease,
currently the Ninth Revision Clinical
Modification guidelines (ICD–9–CM) to
prospectively adjust capitation
payments for a given enrollee based on
the health status of the enrollee.
Diagnosis codes determine the risk
scores, which in turn determine the risk
adjusted reimbursement. As a result,
physicians and providers must focus
attention on complete and accurate
diagnosis reporting according to the
official ICD–9–CM coding guidelines
(that is, coding diagnoses accurately and
to the highest level of specificity).
MA enrollee Hierarchical Condition
Categories (HCCs) are assigned based on
risk adjustment diagnoses from FFS
claims and from risk adjustment data
submitted to us by MA organizations via
the Risk Adjustment Payment System
(RAPS). The CMS–HCCs contribute to
an enrollee’s risk score, which is used
to adjust a base payment rate.
Essentially, the higher the risk score for
an enrollee, the higher the expected
health care cost for the enrollee. The
HCC data that MA organizations submit
to CMS via the RAPS system is selfreported by the MA organization and
does not go through a validation review
before being incorporated into a given
beneficiary’s risk-profile. Since there is
an incentive for MA organizations to
potentially over-report diagnoses so that
they can increase their payment, the
Agency audits plan-submitted diagnosis
data a few years later to ensure they are

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supported by medical record
documentation.
Verifiable medical record
documentation is the key to accurate
payment and successful data validation.
We annually select contracts for RADV
audits. RADV audits are intended to
confirm the presence of risk adjustment
conditions (that is, diagnoses that map
to HCCs) as reported by MA
organizations for their enrollees and
confirmed via medical record
documentation. RADV audits occur after
the final risk adjustment data
submission deadline for the MA
contract year. We validate the HCC data
submitted by MA organizations by
reviewing hospital inpatient, hospital
outpatient, and physician/practitioner
provider medical records. The focus of
this medical record review activity is on
diagnoses related to the enrollee’s HCC
profile. Risk adjustment discrepancies
are identified when the enrollee’s HCCs
used for payment (based upon MA
organization-submitted data) differ from
the HCCs assigned based on the medical
record, under the RADV audit process.
Risk adjustment discrepancies can be
aggregated to determine an overall level
payment error. In turn, payment error
for a sample of contract enrollees can be
extrapolated to calculate a contract-level
payment error estimate.
Since finalizing these rules in 2010,
we have conducted additional RADV
audits and believe that some of the
appeals provisions finalized in the 2010
RADV Appeals final rule should now be
modified to prevent confusion, and to
strengthen the RADV appeals process.
We therefore, propose revisions to the
RADV appeals regulations finalized in
the April 15, 2010 Federal Register.
These proposed revisions clarify
program requirements and simplify the
RADV appeals process. These proposed
RADV provisions will apply to any
RADV determinations issued on or after
the effective date of this regulation.
b. RADV Definitions
We propose to amend the RADV
definitions at § 422.2 as follows:
• Removing the following definitions:
++ ‘‘Initial Validation Contractor
(IVC)’’ means the first level of
medical record review under the
RADV audit process.
++ ‘‘RADV payment error calculation
appeal process’’ means an
administrative process that enables
MA organizations that have
undergone RADV audit to appeal
the CMS calculation of an MA
organization’s RADV payment error.
++ ‘‘The one best medical record for
the purposes of Medicare
Advantage Risk Adjustment

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Validation (RADV)’’ means the
clinical documentation for a single
encounter for care (that is, a
physician office visit, an inpatient
hospital stay, or an outpatient
hospital visit) that occurred for one
patient during the data collection
period. The single encounter for
care must be based on a face-to-face
encounter with a provider deemed
acceptable for risk adjustment and
documentation of this encounter
must be reflected in the medical
record.
• Adding the following definition:
++ ‘‘RADV appeal process’’ means an
administrative process that enables
MA organizations that have
undergone RADV audit to appeal
the Secretary’s medical record
review determinations and the
Secretary’s calculation of an MA
organization’s RADV payment error.
• Revising the following definitions:
++ Risk adjustment data validation
(RADV) audit means a payment
audit of a Medicare Advantage
(MA) organization administered by
CMS or the Secretary that ensures
the integrity and accuracy of risk
adjustment payment data.
++ ‘‘Attestation process’’ means a
CMS-developed RADV process that
enables MA organizations
undergoing RADV audit to submit
CMS-generated attestations for
eligible medical records with
missing or illegible signatures or
credentials. The purpose of the
CMS-generated attestations is to
cure signature and credential issues
for eligible medical records. CMSgenerated attestations do not
provide an opportunity for a
provider or supplier to replace a
medical record or for a provider or
supplier to attest that a beneficiary
has the medical condition.
c. Publication of RADV Methodology
In the October 22, 2009 Notice of
Proposed Rule Making (NPRM), and as
reinforced in the April 15, 2010 Final
Regulation, CMS indicated that we
would, ‘‘publish its RADV methodology
in some type of public document—most
likely, a Medicare Manual, so that the
public can review and provide comment
as it deems necessary’’. We also
indicated that we would provide an
annual notice of RADV audit
methodology. Our last RADV-related
notice of methodology was published in
February, 2012. We will continue to
publish a notice of the methodology
employed, but will do so only if there
is a change in the RADV methodology
that would require publication. We note
that these notices of RADV audit

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methodology updated information
provided on RADV audit methodology
provided in the October 22, 2009
proposed rule and April 15, 2010 final
rule.
In addition, we provided in the
October 22, 2009 proposed rule
preamble that we would provide an
expanded explanation of methodology
and payment error calculation factors as
a part of each audit report of findings
that we send to MA organizations that
undergo RADV audit. Such explanation
and factors have been and will continue
to be part of the RADV audit report(s)
that CMS provides health plans that
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d. Proposal To Update RADV Appeals
Terminology (§ 422.311)
Current RADV regulations utilize the
following terms for the CMS-issued
RADV audit report: Audit report post
medical record review; RADV audit
report; IVC-level RADV audit report;
and RADV audit report of finding. This
use of multiple terms to refer to what is
the same audit report (the RADV audit
report that CMS issues following
conclusion of the medical record review
portion of the audit) is potentially
confusing. Therefore, we propose
amending the RADV regulations
throughout to adopt one common term
to refer to RADV audit reports: ‘‘RADV
Audit Report’’. By standardizing
terminology throughout the RADV
regulations, the proposed amendment
provides clarity which may lead to
increased efficiency. We welcome
comment on this proposal.
As mentioned earlier in the
description of RADV-related definitions
that have changed, we have revised
certain RADV-related definitions to
accommodate changes to both the RADV
audit process and the RADV appeals
process. One definition that we have
removed from the RADV regulations is
Initial Validation Contractor, or IVC.
The RADV medical record review
process no longer utilizes ‘‘initial’’ and
‘‘secondary’’ validation contractors to
conduct medical record review under
RADV. Instead we now utilize medical
record reviewers to code medical
records undergoing RADV review.
These reviewers may be employed by
the same or different medical record
review contractors. Therefore, the term
‘‘IVC’’ is no longer relevant to the RADV
audit process. We therefore propose to
remove this term from the RADV
regulations at the following citations:
§ 422.311(c)(2)(i)(B) through (D);
§ 422.311(c)(2)(ii)(B),
§ 422.311(c)(2)(iii)(A), § 422.111(c)(2)(v),
(vi), § 422.311(c)(3)(ii)(A), and

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§ 422.311(c)(3)(iii)(A) and (B). We invite
comment on this proposal.
e. Proposal To Simplify the RADV
Appeals Process
Currently, there are two types of
RADV-related appeals processes
described in Federal regulations at
§ 422.311 et seq.: Medical record
review-determination appeals and
RADV payment error calculation
appeals. RADV medical record reviewdetermination appeal requirements and
procedures are discussed at
§ 422.311(b)(3) and § 422.311(c)(2).
Medical record review determination
appeal is a two-stage administrative
appeal process: The first step is a
hearing by a hearing officer, followed by
a CMS Administrator-level review. This
appeal procedure provides MA
organizations with an opportunity to
appeal RADV medical record review
determinations that are made by coders
reviewing the medical record
documentation submitted by MA
organizations undergoing RADV audit.
The second type of RADV appeal,
payment error calculation appeal, is
discussed at § 422.311(c)(3). Payment
error calculation appeal is a threepronged appeal process:
Reconsideration, followed by a hearing
officer review, followed by CMS
Administrator-level review. This appeal
process was specifically designed to
afford MA organizations the opportunity
to appeal CMS’s contract-level RADV
payment error calculation.
We propose that the administrative
appeals language described at
§ 422.311(b)(3) and § 422.311(c)(2) for
RADV medical record review
determination appeals and
§ 422.311(c)(3) for RADV payment error
calculation appeals be replaced with
new regulatory language proposed
§ 422.311(c)(1) et seq., that combines the
two existing RADV appeal policies and
procedures into one set of requirements
and one process. We propose to
combine the two RADV appeals
processes into one combined RADV
appeals process that is comprised of
three administrative steps:
Reconsideration, hearing officer review,
and CMS Administrator-level review. A
three-step administrative appeals
process comprising reconsideration,
hearing officer review, and
Administrator-levels of review is a
common administrative appeals model
used elsewhere within the Medicare
managed care program, such as in
appealing contract award
determinations and intermediate
sanctions. The combined RADV appeal
process that we are proposing at new
§ 422.311(c)(1) et seq., also has the

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benefit of simplifying what is today a
complex two-track appeal process into
one process. While both CMS and the
MA industry will benefit from
simplifying this process, MA
organizations also obtain an additional
level of review under the combined
approach since MA organizations will
be afforded a reconsideration appeal
step for medical record review
determinations that is today—not part of
the existing RADV appeal process.
Shortening the existing two-track appeal
process should also reduce the
resources and level of effort needed
from both MA organizations and CMS in
participating in a RADV appeal
proceeding. Under this proposal, MA
organizations can simply request to
appeal their RADV audit findings one
time and specify whether they want to
appeal either their medical record
review determination(s), payment error
calculation, or both. The specific details
regarding this proposed process follow.
We propose these changes based upon
our experience with RADV appeals and
because we hope to reduce the burden
associated with undertaking RADV
appeals on both MA organizations and
CMS. The details of this proposed
policy and procedure follows.
(1) Issues Eligible for RADV Appeal
Current regulations at § 422.311(c)(2)
et seq., and § 422.311(c)(3) et seq.,
specify RADV-related medical record
review and payment error calculation
documents and issues eligible for the
medical record review determination
and payment error calculation appeal
processes. We propose to amend the
policies and procedures around issues
eligible for RADV appeals at
§ 422.311(c)(2) and § 422.311(c)(3) by
combining proposed policies and
procedures for the existing two-pronged
appeal approach into one set of policies
and procedures for RADV appeals at the
new § part 422.311(c)(2)(iv). At
§ 422.311(c)(2)(i), we propose that as a
general rule, MA organizations may
appeal RADV medical record review
determinations and RADV payment
error calculation, though in order to be
eligible to pursue these appeals, we
specify at proposed § 422.311(c)(2)(i)(A)
and (B) that MA organizations must
adhere to established RADV audit
procedures and requirements and
adhere to RADV appeals procedures and
requirements. At § 422.311(c)(2)(ii) we
propose that failure to follow RADV
audit procedures and requirements and
RADV appeals procedures and
requirements will render the MA
organization’s request for RADV appeal
invalid. Furthermore, at proposed
§ 422.311(c)(2)(iii) we stipulate that the

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MA organization’s written request for
medical record review determination
appeal must specify the audited HCC(s)
that have been identified pursuant to
RADV audit as being in error, and
further specify that MA organizations
must provide a justification in support
of the audited HCC(s) that the MA
organization elects to appeal. At
§ 422.311(c)(2)(i) (iv) we propose that
for each audited HCC, MA organizations
may appeal one medical record that has
undergone RADV medical record review
and that if an attestation was submitted
to cure a signature or credential issue,
that attestation may likewise be
included in the HCC appeal. For
example, if an MA organization
submitted a medical record that did not
contain a signature and/or credential—
and the MA organization submitted an
attestation to cure the error that CMS
subsequently failed to accept—the MA
organization could choose to appeal
CMS’s determination to not accept the
submitted attestation. We reiterate that
the purpose of CMS-generated
attestations is to cure signature and
credential errors associated with an
eligible submitted medical record and
not to provide an opportunity for a
provider or supplier to attest that a
beneficiary has a certain medical
condition. Evidence for the existence of
the medical condition is found in a
medical record.
We are proposing to modify our
language at § 422.311(c)(2)(i)(v) to
clarify existing RADV appeals
provisions which stipulate that MA
organizations must adhere to the ‘‘one
best medical record’’ policy. Under
changes to the RADV audit methodology
announced by CMS in February 2012,
we now allow MA organizations to
submit more than one medical record
(that is, more than the ‘‘one best medical
record’’) during the RADV audit process
to validate an audited CMS–HCC.
However, for purposes of appealing a
CMS medical record review
determination, we will not permit
organizations to appeal multiple
medical records but will instead—
require that MA organizations identify a
record from amongst those records
submitted, and to submit that record for
appeal. For each audited HCC, MA
organizations may appeal only one
medical record that has undergone
RADV review. This policy was
published in the February 2012 White
Paper and is not included in this
proposed rule.
At § 422.311(c)(2)(vi) we propose that
a written request for RADV payment
error calculation appeal must clearly
specify the MA organization’s own
RADV payment error calculation and

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must also specify where the payment
error calculation was erroneous.
(2) Issues Not Eligible for RADV
Appeals
At § 422.311(c)(3) we propose
documents and issues that are ineligible
for RADV appeals. Consistent with the
overall approach of combining into one
RADV appeals process what was
heretofore two separate RADV appeals
processes—by way of this new proposed
section, we propose to amend existing
regulations at § 422.311(c)(3). At new
§ 422.311(c)(3), we propose that MA
organizations’ request for appeal may
not include HCCs, medical records or
other documents beyond the audited
HCC, selected medical record and any
accompanying attestation that the MA
organization chooses to appeal. We
specify at § 422.311(c)(3)(ii) that the MA
organizations may not appeal CMS’s
medical record review determination
methodology or CMS’s payment error
calculation methodology. This is a
clarification to existing RADV
regulations at § 422.311(c)(3)(D) which
specifies that MA organizations may not
appeal CMS’s payment error calculation
methodology. At § 422.311(c)(3)(iii) we
specify that MA organizations may not
appeal RADV medical record reviewrelated errors when appealing RADV
error-calculation issues since medical
record review determination issues
must be resolved before we can
calculate RADV payment errors. And at
§ 422.311(c)(3)(iv) we specify that RADV
errors that result from an MA
organization’s failure to submit a
medical record are not eligible for
appeal.
(3) Manner and Timing of a Request for
RADV Appeal
We propose to replace existing RADV
regulations at § 422.311(c)(2)(iii) et seq.,
and § 422.311(c)(3)(iii) et seq., regarding
the manner and timing of a request for
RADV appeals. Again, at § 422.311(c)(5),
we propose to combine the formerly two
separate sets of requirements and
procedures into one RADV appeals
process addressing the request for
RADV appeal. At § 422.311(c)(5)(i) we
propose that at the time the Secretary
issues her RADV audit report, the
Secretary notifies audited MA
organizations that they may appeal
RADV HCC errors that are eligible for
medical record review determination
appeal and may appeal the Secretary’s
RADV payment error calculation. At
§ 422.311(c)(5)(ii) we specify that MA
organizations have 30 days from the
date of CMS’s issuance of the RADV
audit report to file a written request
with CMS for RADV appeal. This

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request for RADV appeal must specify
whether the MA organization requests
medical record review determination
appeal, whether the MA organization
requests RADV payment error
calculation appeal, or whether the MA
organization requests both medical
record review determination appeal and
RADV payment error calculation
appeal— and in each instance— the
issues with which the MA organization
disagrees, and the reasons for the
disagreements. See proposed regulations
at § 422.311(c)(6) et seq.
At new § 422.311(c)(5)(ii) we specify
that while MA organizations may now
elect to appeal either medical record
review determination, payment error
calculation, or both—they must notify
CMS which issues they will appeal at
the same time. This new provision
replaces existing RADV appeals
requirements regarding notification at
§ 422.311(c)(2)(iii) and
§ 422.311(c)(3)(iii)(C).
For MA organizations that elect both
medical record review determination
appeal and RADV payment error
calculation appeal, we specify at
§ 422.311(c)(5)(iii)(A) and (B) that the
Secretary will adjudicate the request for
RADV payment error calculation
following conclusion of reconsideration
of the MA organization’s request for
medical record review determination
appeal. This is necessary because RADV
payment error calculations are based
upon the outcomes of medical record
review determinations. For example, for
an MA organization that appeals both
medical record review determinations
and payment error calculations, the
reconsideration official would first
adjudicate and rule on the medical
record review determinations and then
proceed to recalculate the RADV
payment error.
(4) Reconsideration Stage
Under current RADV appeals
procedures, only the RADV payment
error calculation appeal process
contains a reconsideration step. We
propose to amend existing regulations at
§ 422.311(c)(3)(iii)(C) and
§ 422.311(c)(3)(v), (vi), and (vii) by
proposing a new reconsideration stage
for RADV appeals at § 422.311(c)(6) et
seq. Reconsideration is the first stage of
the new RADV appeals process and will
apply to both medical record review
determinations and error calculation
issues being appealed. Therefore, MA
organizations that elect to appeal RADV
audit findings de facto begin the appeal
process with the reconsideration step.
At proposed § 422.311(c)(6)(i) we
specify that a MA organization’s written
request for medical record review

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determination reconsideration must
specify the audited HCC identified as
being in error that the MA organization
wishes to appeal; and to provide a
justification in support of the audited
HCC chosen for appeal. At proposed
§ 422.311(c)(6)(ii) we specify that the
MA organizations’ written request for
payment error calculation
reconsideration must include the MA
organization’s own RADV payment error
calculation that clearly indicates where
the RADV payment error calculation
was erroneous. The request for payment
error calculation reconsideration may
also include additional documentary
evidence pertaining to the calculation of
the error that the MA organization
wishes the reconsideration official to
consider.
At proposed § 422.311(c)(6)(iii) we
describe the conduct of the
reconsideration process that is being
proposed. We specify that for medical
record review determination
reconsideration, a medical record
review professional who was not
involved in the initial medical record
review determination of the disputed
HCC reviews the medical record and
accompanying dispute justification; and
reconsiders the initial audited HCC
medical record review determination.
For payment error calculation
reconsideration, CMS ensures that a
third party not involved in the initial
RADV payment error calculation
reviews the RADV payment error
calculation, reviews the MA
organization’s own RADV payment error
calculation, and recalculates the
payment error in accordance with
CMS’s RADV payment error calculation
procedures.
At proposed § 422.311(c)(6)(iv), we
specify that the reconsideration official
issues a written reconsideration
decision to the MA organization, and
that the reconsideration official’s
decision is final unless the MA
organization disagrees with the
reconsideration official’s decision. If the
MA organization disagrees with the
reconsideration official’s decision, it
may request a hearing.
(5) Hearing Stage
Existing regulations at
§ 422.311(c)(2)(iv) through (ix) and
§ 422.311(C)(4) et seq., specify the
procedures under which CMS conducts
hearings under the RADV appeals
process for medical record review and
payment error calculation. We propose
to replace these provisions with new
hearing requirements and procedures at
§ 422.311(c)(7)(iv).
At § 422.311(c)(7)(i), we propose that
at the time the RADV appeals

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reconsideration official issues his/her
reconsideration determination to the
MA organization, the reconsideration
official notifies the MA organization of
any RADV audited HCC errors and or
payment error calculations that are
eligible for RADV hearing. At
§ 422.311(c)(7)(ii), we specify that a MA
organization that requests a hearing
officer review must do so in writing in
accordance with procedures established
by CMS. At § 422.311(c)(7)(iii), we
specify that a written request for a
hearing must be filed with the Hearing
Officer within 30 days of the date the
MA organization receives the
reconsideration officer’s written
reconsideration decision. If the MA
organization appeals the medical record
review reconsideration determination,
the written request for RADV hearing
must include a copy of the written
decision of the reconsideration official;
must specify the audited HCCs that the
reconsideration official confirmed as
being in error; and must specify a
justification as to why the MA
organization disputes the
reconsideration official’s determination.
If the MA organization appeals the
RADV payment error calculation, the
written request for RADV hearing must
include a copy of the written decision
of the reconsideration official and must
include the MA organization’s own
RADV payment error calculation that
clearly specifies where the CMS’s
payment error calculation was
erroneous.
At § 422.311(c)(7)(iv), we propose that
a CMS hearing officer conduct the
RADV hearing. At § 422.311(c)(7)(v), we
specify terms and conditions under
which a hearing officer may be
disqualified. A hearing officer may not
conduct a hearing in a case in which he
or she is prejudiced or partial to any
party or has any interest in the matter
pending for decision. A party to the
hearing who objects to the assigned
hearing officer must notify that officer
in writing at the earliest opportunity.
The hearing officer must consider the
objections, and may, at his or her
discretion, either proceed with the
hearing or withdraw. If the hearing
officer withdraws, another hearing
officer will conduct the hearing. If the
hearing officer does not withdraw, the
objecting party may, after the hearing,
present objections and request that the
officer’s decision be revised or a new
hearing be held before another hearing
officer. The objections must be
submitted in writing to CMS.
At § 422.311(c)(7)(vi) we propose that
the hearing officer reviews the medical
record and any accompanying
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selected for review, the reconsideration
official’s payment error calculation (if
appealed), the reconsideration official’s
written determination, and the written
justification submitted by the MA
organization and CMS in response to the
reconsideration official’s determination.
At § 422.311(c)(7)(vii) we propose
RADV appeal hearing procedures. We
propose that the hearing officer has full
power to make rules and establish
procedures, consistent with the law,
regulations, and rulings. These powers
include the authority to dismiss the
appeal with prejudice and take any
other action which the hearing officer
considers appropriate, including for
failure to comply with RADV audit and
appeals rules and procedures. We
propose that the hearing be altogether
on the record unless the hearing officer,
at his or her full discretion, approves a
parties request for a live or telephonic
hearing regarding some or all of the
medical records in dispute, or if the
hearing office schedules a live or
telephonic hearing on its own motion.
The hearing officer’s review will be
solely limited to the record. The record
is comprised of the RADV reviewed
medical record and any accompanying
attestation that the MA organization
selected for review, the reconsideration
official’s payment error calculation (if
appealed), the reconsideration official’s
written determination, the written
justification submitted by the MA
organization in response to the
reconsideration official’s determination,
and written briefs from the MA
organization explaining why they
believe the reconsideration official’s
determination was incorrect. In
addition, the record will be comprised
of a brief from CMS that responds to the
MA organization’s brief.
In terms of specifying the conduct of
the hearing, we propose at
§ 422.311(c)(7)(vii)(B) that the hearing
officer neither receives testimony nor
accepts any new evidence that is not
part of the record. At § 422.311(c)(7)(vii)
we propose that the hearing officer be
given the authority to decide whether to
uphold or overturn the reconsideration
official’s decision, and pursuant to this
decision—to send a written
determination to CMS and the MA
organization, explaining the basis for
the decision.
At § 422.311(c)(7)(ix), we propose that
in accordance with the hearing officer’s
decision, a third party not involved in
the initial RADV payment error
calculation recalculate the MA
organization’s RADV payment error and
issue a new RADV audit report to the
appellant MA organization and CMS.
For MA organizations appealing the

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RADV payment error calculation only,
we propose that a third party not
involved in the initial RADV payment
error calculation recalculate the MA
organization’s RADV payment error and
issue a new RADV audit report to the
appellant MA organization and CMS. At
§ 422.311(c)(7)(x) we propose that the
hearing officer’s decision be final unless
the decision is reversed or modified by
the CMS Administrator.
(6) CMS Administrator Review Stage
Existing regulations at
§ 422.311(c)(2)(x) et seq., and
§ 422.311(C)(4)(vi) et seq., specify the
CMS Administrator-level review
procedures that CMS adheres to under
the current RADV appeals process for
medical record review determinations
and payment error calculation. We
propose to replace these regulations
with new RADV appeal-related CMS
Administrator review requirements and
procedures at § 422.311(c)(8).
At § 422.311(c)(8)(i) and (ii), we
propose that a request for CMS
Administrator review must be made in
writing within 30 days of receipt of the
hearing officer’s decision; and must be
filed with the CMS Administrator by
CMS or an MA organization. At
§ 422.311(c)(8)(iii), we propose that after
receiving a request for review, the CMS
Administrator has the discretion to elect
to review the hearing officer’s decision
or to decline to review the hearing
officer’s decision. At § 422.311(c)(8)(iv)
we propose that if the CMS
Administrator elects to review the
hearing decision—the Administrator
acknowledges the decision to review the
hearing decision in writing and notifies
CMS and the MA organization of their
right to submit comments within 15
days of the date of the notification. At
§ 422.311(c)(8)(iv)(B), we propose that
the CMS Administrator be limited to the
review of the record and that the record
be comprised of the hearing record, and
written arguments from the MA
organization and/or CMS explaining
why either or both parties believe the
hearing officer’s determination was
correct or incorrect.
Regarding Administrator-level review
procedures at § 422.311(c)(8)(vi), we
propose that the Administrator reviews
the record and determines whether the
hearing officer’s determination should
be upheld, reversed, or modified. At
§ 422.311(c)(8)(v), we propose that the
Administrator render his or her final
decision in writing to the parties within
60 days of acknowledging his or her
decision to review the hearing officer’s
decision. At § 422.311(c)(8)(vi), we
propose that the decision of the hearing
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declines to review the hearing officer’s
decision or does not make a decision
within 60 days.
Combining these existing RADV
medical record review determination
and payment error calculation appeals
policies and processes improves the
overall appeals process by strengthening
the depth and integrity of these
procedures. We also believe that doing
so improves overall RADV appeals
procedures by providing clarity that
leads to greater efficiencies in
adjudicating RADV appeals. We
welcome comments on these proposals.
f. Proposal To Expand Scope of RADV
Audits
Federal regulations at § 422.311(a)
specify that RADV audits are conducted
by CMS. We propose to amend this
regulation at § 422.311(a) by specifying
that the Secretary of the Department of
Health and Human Services, along with
CMS, may conduct RADV audits
beginning with the effective date of this
regulation. We also propose to amend
RADV definitions at § 422.2 to specify
that The Secretary of the Department of
Health and Human Services, along with
CMS, may conduct RADV audits. We
welcome comment on this proposal.
g. Proposal To Clarify the RADV
Medical Record Review Determination
Appeal Burden of Proof Standard
Our regulations at § 422.311(c)(3)(iv)
specify that for RADV payment error
calculation appeals, MA organizations
bear the burden to prove that CMS
failed to follow its stated RADV
payment error calculation methodology.
However, RADV regulations do not
specify a burden of proof standard for
the RADV medical record review
determination appeal process. The
absence of a clearly-defined burden of
proof standard for RADV medical record
review determination appeals creates an
appeal environment where MA
organizations, CMS and RADV appellate
officials are free to interpret and apply
different burden of proof standards
when arguing or reviewing appeals
cases. We propose to amend the rule
with new § 422.311(c)(4) which
specifies that the burden of proof for all
RADV determinations—be they
payment error calculation or RADV
medical record review determinations—
is on MA organizations to prove, based
on a preponderance of the evidence,
that CMS’s determination was
erroneous.
This approach would stand in
contrast to a burden of proof standard in
which the MA organization were to
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audited HCC has been validated. This
proposed amendment to the rule
provides the medical record review
determination process a clear burden of
proof standard which more aligns with
the existing RADV payment error
calculation appeals burden of proof
standard. Doing so also improves the
overall RADV appeals procedures by
providing clarity that leads to greater
efficiencies in adjudicating RADV
appeals. We invite comment on this
proposal.
h. Proposal To Change RADV Audit
Compliance Date
Currently, the compliance date for
RADV audits is the due date when MA
organizations selected for RADV audit
must submit medical records to CMS or
its contractors. We are proposing to
change the compliance date for meeting
RADV audit requirements for the
validation of risk adjustment data to the
due date when MA organizations
selected for RADV audit must submit
medical records to the Secretary—and
not only CMS. See proposed regulation
language at § 422.311(b)(2).
B. Improving Payment Accuracy
8. Recovery Audit Contractor (RAC)
Determination Appeals (Proposed Part
422 Subpart Z and Part 423 Subpart Z)
a. Background
Section 306 of the Medicare
Prescription Drug, Improvement and
Modernization Act of 2003 (MMA)
required the Secretary to conduct a
demonstration to determine whether
recovery auditors could be used
effectively to identify improper
payments paid under Medicare Part A
and Part B claims. We conducted the
demonstration from March 2005 to
March 2008 in six states. The Recovery
Audit demonstration established
recovery auditors as a successful tool in
the identification and prevention of
improper Medicare payments.
In December 2006, the Tax Relief and
Health Care Act of 2006 (TRHCA) (Pub.
L. 109–432) was enacted. Section 302(a)
of the TRHCA created a permanent
Medicare Recovery Audit Contractor
(RAC) program and added a new
paragraph (h) to section 1893 of the
Social Security Act (the Act) that
required us to establish a national
recovery audit program for Medicare
Part A and Part B. The national
Medicare Fee-For-Service (FFS)
Recovery Audit program was
established on January 1, 2010.
Section 6411(b) of the Affordable Care
Act amended section 1893(h)(1) of the
Act by requiring the establishment of
recovery audit programs for Medicare

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Parts C and D, in addition to the RAC
program already in place for Medicare A
and B.
On December 27, 2010, we published
a notice in the Federal Register (75 FR
81278) requesting comments on how to
best implement the RAC program for
Parts C and D. Analysis of the comments
received assisted us with
implementation of the Part C and D
RACs.
In January 2011, we entered into a
recovery audit contract for Part D. The
Part D RAC began recouping identified
overpayments in 2012. On December 7,
2012, we published a Request for
Quotation (RFQ) via the General
Services Administration’s (GSA) eBuy
seeking quotations on the
implementation of a Medicare Part C
RAC. We anticipate the award of a Part
C RAC contract in FY 2014.
Given that we began recouping
overpayments determined by the Part D
RAC in 2012, and we anticipate
recouping overpayments in Part C after
awarding a Part C RAC contract in FY
2014, it is appropriate to provide a
codified administrative appeals process
to allow for plans to challenge the
overpayment findings generated by the
RACs just as we provide for challenges
to overpayment determinations
elsewhere in the Medicare program. In
crafting our proposed appeals process
for Parts C and D RAC determinations,
we reviewed existing appeals processes
in other areas, including Parts A and B
RAC determinations, Part C RADV
Audits, Part D payments, etc.
b. Proposed RAC Appeals Process
After reviewing the agency’s existing
appeal processes, we determined that
the general mechanisms set forth in
§ 422.311 and § 423.350 offered the most
appropriate models for the Part C and D
RAC appeals process.
The Part D RAC currently reviews
PDE data to identify overpayments and
underpayments that are paid back to the
plans. When overpayments are
identified, Part D plans are notified and
funds are recovered. If plans disagree
with the calculated overpayment
amounts or whether the overpayments
are proper, they may appeal the Part D
RAC’s determination directly to the
CMS Center for Program Integrity.
A multilevel independent appeals
process is an important component of
the Part C and Part D RAC program as
it allows plans to appeal determinations
they contend are made in error. The
administrative appeals mechanisms in
this proposed rule would apply to all
Part C and Part D RAC determinations.
As CMS implements the Part C RAC, we
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to the proposed appeals process are
necessary.
Based on the foregoing, we propose to
add a new subpart Z in Parts 422 and
423, respectively that would include the
proposed provisions discussed in this
section. In accordance with CMS
direction and criteria, the Part C or Part
D RAC would conduct an issue specific
audit of CMS’ payment(s) to plans. An
independent validation of all Part C and
Part D RAC-identified improper
payments would be conducted. If both
the Part C or Part D RAC and the
independent validation determine that
an improper payment was made, the
Part C or Part D RAC would send a
notice of improper payment to the plan.
If the Part C or Part D RAC determines
an overpayment was made to the plan,
it would send a demand letter
requesting repayment. The demand
letter would: (1) Explain the reason for
the overpayment determination; (2)
explain our recoupment process; and (3)
contain instructions on how the plan
may appeal the Part C or Part D RAC’s
finding. There would be no minimum
monetary threshold for an appeal at any
level.
The following three level process sets
forth our proposed administrative
appeals process for overpayment
determinations by the Part C and Part D
RACs. Please note that the appeals
process set forth applies to both
§ 422.2600 and § 423.2600. Because the
sections largely mirror one another,
discussions in this preamble would
apply to both programs, unless
otherwise noted.
(1) Reconsiderations (§ 422.2605 and
§ 423.2605)
At § 422.2605 and § 423.2605, we
propose that if the plan believes the part
C or Part D RAC did not apply CMS’
stated payment methodology correctly, a
plan may appeal the determination to an
independent reviewer. CMS’ payment
methodology itself, however, is not
subject to appeal. That is, while
miscalculations and factual or data
errors may be appealed, the plan may
not appeal the substantive basis for the
overpayment determination. This is
consistent with the approach to Part D
reconciliation appeals at § 423.350(a)(1),
which states that the Part D plan may
appeal ‘‘if CMS did not apply its stated
payment methodology correctly.’’ The
Part D reconciliation appeals process
does not permit the underlying payment
methodology to be appealed.
Examples of appealable issues would
include, but are not be limited to: (1) A
Part C or Part D RAC determination that
a plan provider/pharmacy was excluded
from Medicare when the service was

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furnished; (2) a Part C or Part D RAC
determination that a payment was a
duplicate payment; or (3) whether the
Part C or Part D RAC miscalculated an
overpayment.
In paragraph (a), we propose that the
plan’s request for reconsideration must
be filed with the independent reviewer
within 60 calendar days from the date
of the demand letter. In paragraph (b)(1),
we propose that the request for
reconsideration must be in writing and
must provide evidence or reasons or
both to substantiate the request. In
paragraph (b)(2), we propose that the
plan must include with its request all
supporting documentation, evidence,
and substantiation it wants the
independent reviewer to consider. This
material must be submitted in the
format requested by CMS.
Documentation, evidence, or
substantiation submitted after the filing
of the reconsideration request would not
be considered.
In paragraph (c), we propose that CMS
may file a rebuttal to the plan’s
reconsideration request. The rebuttal
must be submitted to the independent
reviewer within 30 calendar days of the
independent reviewer’s notification to
CMS that it has received the plan’s
reconsideration request. CMS would
notify and send its rebuttal to the plan
at the same time it is submitted to the
independent reviewer. In paragraph (d),
we propose that the independent
reviewer would conduct the
reconsideration. Specifically, the
independent reviewer would review the
notification of improper payment, the
evidence, and findings upon which it
was based, and any evidence that the
plan or CMS submitted in accordance
with regulations. In paragraph (e), we
propose that the independent reviewer
would inform CMS and the plan of its
decision in writing. In paragraph (f), we
propose that a reconsideration decision
would be final and binding unless the
plan requests a hearing in accordance
with § 422.2605 and § 423.2605. Finally,
in paragraph (g), we propose that a plan
that is dissatisfied with the independent
reviewer’s reconsideration decision
would be entitled to a review by a
hearing official as provided in
§ 422.2610 and § 423.2610.
(2) Hearing Official Determinations
(§ 422.2610 and § 423.2610)
In proposed § 422.2610 and
§ 423.2610, we outline the process for
requesting review of the record by a
CMS hearing official. In paragraph (a),
we propose that a request for review
must be filed with CMS within 15 days
from the date of the independent
reviewer’s issuance of a determination.

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The request must be in writing and must
provide a basis for the request. In
paragraph (b), we propose that the plan
must submit with its request all
supporting documentation, evidence,
and substantiation that it wants to be
considered. Documentation, evidence,
or substantiation submitted after the
filing of the request would not be
considered.
In paragraph (c), we propose that a
CMS-designated hearing official would
conduct the review. A hearing would
not be conducted, either live or via
telephone, unless the hearing official, in
his or her sole discretion, chooses such
a mechanism. In all cases, the hearing
official’s review would be limited to
information that: (1) The Part C or Part
D RAC used in making its
determinations; (2) the independent
reviewer used in making its
determinations; (3) the plan submits
with its hearing request; and (4) CMS
submits per paragraph (d). Neither the
plan nor CMS would be allowed to
submit new evidence.
In paragraph (d), we propose that
CMS may file a rebuttal to the plan’s
hearing request. The rebuttal must be
submitted within 30 calendar days of
the plan’s submission of its hearing
request. CMS would send its rebuttal to
the plan at the same time it is submitted
to the hearing official. In paragraph (e),
we propose that the CMS hearing
official would decide the case within 60
days and send a written decision to the
plan and CMS, explaining the basis for
the decision. In paragraph (f), we
propose that the hearing official’s
decision would be final and binding,
unless the decision was reversed or
modified by the CMS Administrator in
accordance with § 422.2615 and
§ 423.2615.
(3) Administrator Review (§ 422.2615
and § 423.2615)
In proposed § 422.2615 and
§ 423.2615, we discuss the
Administrator review process. In
paragraph (a), we propose that if a plan
is dissatisfied with the hearing official’s
decision, the plan may request that the
CMS Administrator review the decision.
The request must be filed with the CMS
Administrator within 15 calendar days
of the date of the hearing official’s
decision. The request must provide
evidence or reasons or both to
substantiate the request. In paragraph
(b), we propose that the plan must
submit with its request all supporting
documentation, evidence, and
substantiation that it wants to be
considered. Neither the plan nor CMS
would be allowed to submit new
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substantiation submitted after the filing
of the request would not be considered.
In paragraph (c), we propose that after
receiving a request for review, the
Administrator would have the
discretion to review the hearing
official’s decision in accordance with
paragraph (e) or to decline to review
said decision.
In paragraph (d), we propose that the
Administrator would notify the plan of
whether he or she intends to review the
hearing official’s decision. If the
Administrator declines to review the
hearing official’s decision, the hearing
official’s decision is final and binding.
If the Administrator agrees to review the
hearing official’s decision, CMS may file
a rebuttal statement within 30 days of
the Administrator’s notice to the plan
that the request for review has been
accepted. CMS would send its rebuttal
statement to the plan at the same time
it is submitted to the Administrator. In
paragraph (e), we propose that if the
Administrator agrees to review the
hearing official’s decision, the
Administrator would determine, based
upon this decision, the hearing official
record, and any arguments submitted by
the plan or CMS in accordance with this
section, whether the determination
should be upheld, reversed, or
modified. The Administrator would
furnish a written decision to the plan
and to CMS. The Administrator’s
decision would be final and binding.
C. Strengthening Beneficiary Protections
1. Providing Good Quality Health Care
(§ 422.504(a)(3) and § 423.505(b)(27))
Section 1857(e)(1) of the Act, together
with section 1860D–12(b)(3) of the Act,
which incorporates its terms for Part D,
authorizes CMS to include terms and
conditions in our contracts with MA
organizations and PDP sponsors that are
consistent with Part C and Part D
requirements, respectively, and that the
Secretary finds are ‘‘necessary and
appropriate.’’ Furthermore, the
requirements set forth in section 1860D–
4(b), (c), and (d) of the Act include
specifications for a Part D sponsor to
administer a benefit that not only
accurately and efficiently process claims
but also meets beneficiary healthcare
needs, and to take affirmative action to
improve outcomes and achieve patient
satisfaction. Under this authority, we
propose to add a requirement to CMS
contracts with MA organizations and
Part D sponsors that explicitly requires
that Part C and Part D plans demonstrate
that they are providing good quality
health care by achieving good or
improving scores on CMS performance
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2007

outcomes, process, patient experience,
and patient access to care. We believe
that adding this requirement would help
ensure our beneficiaries receive the
right care at the right time.
While we believe that we have
conveyed this expectation in other
ways, such as through our performance
and quality measurement and rating
methodologies, we have never explicitly
articulated this requirement in
regulation. In short, we are proposing
here that it is not enough to simply
administer a benefit plan, but that Part
C and Part D sponsors should constantly
seek out ways to actively promote and
advance the health of its enrollees.
In order to create a requirement that
helps ensure that Medicare beneficiaries
are receiving consistently good quality
care, and to have the ability to enforce
such a requirement, we sought existing
guidance to shape the meaning of ‘‘good
quality health care.’’ The Affordable
Care Act required HHS to develop the
National Strategy for Quality
Improvement in Health Care (the
National Quality Strategy), which, like
our Three-Part Aim, combines the three
broad objectives of better health for the
population, better care for individuals,
and affordable care. In addition, our Star
Ratings program was developed to
include quality and performance
measures to increase the level of
accountability for MA organizations and
PDP sponsors to administer a good
quality benefit to Medicare
beneficiaries. By linking a concept as
subjective in nature as good quality
health care to objective metrics and
measures in the Star Ratings program,
we believe plans and sponsors can
reasonably employ tangible strategies
that improve the quality of services and
benefits provided to Medicare
beneficiaries.
To give concrete and verifiable
meaning to this requirement, we
propose to specify that good quality
health care refers to MA organizations
and Part D sponsor performance in the
five categories identified in CMS’s Star
Ratings program—patient outcomes,
intermediate outcomes, patient
experience, patient access to care, and
process. Achievement of this type of
performance is based on organizational
capability and implementation by the
MA organizations and Part D sponsor.
Articulating and codifying this
requirement underscores for the public
and our plans and sponsors the critical
importance we place on aligning the
administration of Part C and Part D
benefits with the achievement of good
quality health care as illustrated by, but
not limited to, these specific
performance standards. Leveraging what

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plans have already put into practice
with regard to these five categories
means that plans should not encounter
any additional burden in complying
with this proposed regulation. Instead,
the proposed change gives plans an
opportunity to demonstrate the value
they offer their enrollees, while
providing a means for us to enforce or
take corrective action when a Part C or
Part D plan fails to provide good quality
health care.
There are several reasons we propose
including in regulation a contract
requirement that plans administer a
benefit promoting good quality health
care. We reward MA organizations with
quality bonus payments when they
achieve high scores within the Star
Ratings. At the same time, we believe
that it is appropriate that we react
correspondingly if an MA organization
does not provide good quality care. In
addition, our existing requirements that
MA organizations have a quality
improvement (QI) program (§ 422.152)
and Part D sponsors have a Medication
Therapy Management Program
(§ 423.153(d)) further reinforce our
belief that MA organizations and Part D
sponsors are already striving to
administer a good quality benefit.
Moreover, we examined our authority at
§ 422.502(b) and § 423.503(b), which
allows us to ensure that plan
performance is routinely evaluated.
Based on the methodology we use to
calculate plan performance for both MA
organizations and Part D sponsors, we
are able to determine which plans are
outliers—that is, those organizations
whose performance is consistently poor.
With regard to the particular proposed
contractual requirement to administer a
good quality benefit, we can evaluate a
plan’s scores in Performance Metrics
category within the plan performance
review. Plans are held accountable for
achieving good scores on the review,
and this evaluation allows us to
appropriately deny an organization’s
application to operate if it is determined
that they are an outlier.
Therefore, we propose adding
paragraph (b)(27) to § 423.505,
Requirements for contracts, to state, ‘‘A
PDP sponsor is required to administer a
PDP benefit that provides good quality
health care demonstrated by scores of 3
or higher on CMS performance
standards for patient outcomes,
intermediate outcomes, process, patient
experience, and patient access to care.’’
Similarly, we propose adding
paragraph (a)(3)(iv) to § 422.504,
Contract Provisions, to state that MA
organizations agree to provide benefits,
‘‘in a manner that provides good quality
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or higher on CMS performance
standards for patient outcomes,
intermediate outcomes, process, patient
experience, and patient access to care.’’
2. MA–PD Coordination Requirements
for Drugs Covered Under Parts A, B, and
D (§ 422.112)
Under § 422.112(b) of the MA
program regulations, coordinated care
plans must ensure continuity of care
and integration of services through
arrangements with contracted providers.
We believe that an important aspect of
this coordination is ensuring that all
needed services, including drug
therapies, are provided in a timely
manner. We have become aware of
situations in which enrollees’ access to
needed Medicare-covered drugs has
been delayed or denied due to the MA
organization’s failure to effectively
coordinate Part B and Part D benefits for
certain drugs, both at the point-of-sale
(POS) and during the coverage
determination process.
As defined in § 423.100, ‘‘Part D’’
drugs do not include drugs for which
payment as so prescribed and dispensed
or administered to an enrollee is
available for that enrollee under Part A
or Part B. In other circumstances, these
drugs are covered under the Part D
benefit, but coverage generally cannot
be determined based solely on the drug
itself. These drugs include certain
infusion agents, oral anti-cancer
therapies, oral anti-emetics,
immunosuppressants, and injectables.
We do not believe MA–PD plans are
adopting or administering uniform
policies that allow them to
expeditiously determine whether a drug
is covered under Part A/Part B or Part
D at the POS. The resulting POS
rejection of coverage under the Part D
benefit does not uniformly include
messaging that a Part B prior
authorization determination is required,
nor consistently result in a
corresponding authorization under Part
B. This can result in lengthy drug
treatment delays while the enrollee or
his or her provider attempts to
determine why the drug was not
covered and then pursues a coverage
determination from the MA–PD plan.
For example, an MA–PD enrollee may
present a prescription for a covered
chemotherapy drug at his or her
pharmacy only to be told that the claim
has been rejected under the Medicare
Part D benefit, resulting in the enrollee
leaving the pharmacy counter without
his/her drug. The enrollee may not
know that the drug is covered under
Part B. In some cases, the enrollee must
take steps on his or her own to find out
why coverage for a prescription was

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rejected at the POS and then contact the
plan to obtain the Part B-covered
medication. Unless the MA–PD plan has
a robust process in place to make a
timely and appropriate payment
determination at the POS, there may be
unnecessary delays, during which the
enrollee is denied access to the needed
medication.
We have issued guidance in section
20.2.2. Chapter 6 of the Medicare
Prescription Drug Benefit Manual
related to how Part D plan sponsors
should make determinations whether a
drugs is covered under Part B or Part D.
We have also outlined in Appendix C of
Chapter 6 considerations for Part D plan
sponsors—and by extension, MA
organizations that offer MA–PD plans—
to take into account when making
determinations as to whether a drug is
covered under Part B or Part D. We
expect plans to work with network
pharmacies and providers to determine
coverage and payment for these drugs
with the goal of limiting disruptions to
beneficiaries and pharmacies and
ensuring access to medically necessary
prescription drugs. For example, we
have stated in subregulatory guidance
that, when adjudicating claims for these
drugs, Part D plan sponsors are
permitted to rely on information
submitted on the prescription (for
example, to determine whether the
prescription is related to a Medicare
covered organ transplant) and may
require their network pharmacies to
obtain documentation to determine
whether payment should be made under
Part B or Part D.
During recent MA–PD plan audits, we
also have seen that some plans are not
adequately coordinating the respective
Part D and Part B drug benefits when an
enrollee or his or her provider requests
a drug coverage determination from the
plan. For example, in response to a POS
claim rejection for an
immunosuppressant drug that cannot be
resolved at the POS, an enrollee’s
provider may submit a coverage
determination request to the MA
organization offering an MA–PD, which
is generally processed under the Part D
benefit. In some cases, MA–PD plans
deny coverage and issue a denial notice
under the Part D benefit on the basis
that the drug is, or may be, covered by
Part B, but the plan either fails to make
a determination regarding Part B
coverage or does not authorize payment
under the Part B benefit.
Occurrences like these cause
inappropriate and avoidable delays, or,
even worse, result in situations in
which the enrollee fails to receive
needed medication altogether. In the
case of chemotherapy or

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immunosuppressive drugs, such delays
could have rapid and serious medical
consequences for the beneficiary.
Part D drug benefits and drug benefits
under Parts A and B should be
coordinated by MA organizations
offering MA–PDs so that enrollees
receive needed medications on a timely
basis. We are proposing to add a new
paragraph (b)(7) to § 422.112 to require
MA–PDs to establish adequate
messaging and processing requirements
with network pharmacies (that is, Part D
contracted providers) to ensure that
appropriate payment is assigned at the
POS, and to ensure that, when coverage
is denied under Part D due to available
coverage under Part A or Part B, such
Part A or Part B coverage is authorized
or provided to the enrollee as
expeditiously as the enrollee’s health
condition requires. Our proposed
regulation would require that MA PDs
have systems in place to accurately and
timely adjudicate claims at the POS.
In addition, we would like to ensure
that MA–PD plans are coordinating their
drug benefits appropriately during the
coverage determination process. If an
MA organization offering Part D denies
Part D coverage due to the availability
of Part A or Part B coverage, we expect
the MA organization to ensure the
decision results in authorization or
provision of the drug under Part A or
Part B pursuant to the requirements in
parts 422 and 423, subpart M under our
proposed regulation. We do not expect
MA–PD enrollees to have to request an
initial coverage determination more
than once.
To avoid unnecessary delays and
inappropriate denials of critical
medications, we have considered
requiring MA–PD plans to authorize
coverage of all Part A, Part B and D
medications at the POS so that the
enrollee can receive covered medication
without delay. The determination as to
whether the drug is covered under Part
A, Part B or Part D and the amount of
the appropriate cost sharing would
occur later if necessary. However, we
recognize that such a requirement may
interfere with medically appropriate
pre-authorization requirements, and
may trigger retrospective enrollee
liability depending on the difference in
enrollee cost sharing for coverage under
Part A, Part B and Part D and
retrospective TROOP adjustments and
Part D reconciliation.
We solicit comments on our proposal,
as well as other possible approaches to
minimizing delays in beneficiary access
to needed medications caused by
inadequate coordination of the Part A,
Part B and Part D drug benefits at the
POS and during the coverage

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determination process. In particular, we
would appreciate organizations sharing
their expertise regarding best practices
for this benefit coordination at the POS
and plan processes that enhance those
coverage determinations. We also are
soliciting comments on challenges MA
organizations offering Part D currently
encounter in their efforts to integrate
these benefits.
3. Good Cause Processes (§ 417.460,
§ 422.74 and § 423.44)
Section 1851(g)(3)(B)(i) of the Act
provides that MA organizations may
terminate the enrollment of individuals
who fail to pay basic and supplemental
premiums after a grace period
established by the plan. Section 1860D–
1(b)(1)(B) of the Act generally directs us
to use rules related to enrollment,
disenrollment, and termination for Part
D plan sponsors that are similar to those
established for MA organizations under
section 1851 of the Act. In addition,
section 1860D–13(a)(7) of the Act
mandates that the premiums paid by
individuals with higher incomes be
increased by the applicable Part D
Income Related Monthly Adjustment
Amount (Part D IRMAA), for the months
in which they are enrolled in Part D
coverage.
Consistent with these sections of the
Act, subpart B in both the Part C and
Part D regulations sets forth our
requirements with respect to
involuntary disenrollment procedures at
§ 422.74 and § 423.44, respectively. An
MA or Part D plan that chooses to
disenroll beneficiaries for failure to pay
premiums must be able to demonstrate
to us that it made a reasonable effort to
collect the unpaid amounts by notifying
the beneficiary of the delinquency,
providing the beneficiary a period of no
less than 2 months in which to resolve
the delinquency, and advising the
beneficiary of the termination of
coverage if the amounts owed are not
paid by the end of the grace period.
In addition, current regulations at
§ 417.460(c) specify that a Health
Maintenance Organization (HMO) or
competitive medical plan (cost plan)
may disenroll a member who fails to
pay premiums or other charges imposed
by the plan for deductible and
coinsurance amounts. While there is not
a grace period parallel to MA and Part
D, the other procedural requirements for
cost plans to disenroll a member on this
basis are similar to those for MA and
Part D plans. The cost plan must
demonstrate that it made reasonable
efforts to collect the unpaid amount and
send the enrollee written notice of the
pending disenrollment at least 20 days
before the disenrollment effective date.

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In the April 2011 final rule (76 FR
21432) we amended both the Parts C
and D regulations at § 422.74(d)(1)(v),
§ 423.44(d)(1), and § 423.44(e)(3)
regarding involuntary disenrollment for
non-payment of premiums or Part D–
IRMAA to allow for reinstatement of the
beneficiary’s enrollment into the plan
for good cause. In the April 2012 final
rule (77 FR 22071), we extended the
policy of reinstatement for good cause to
include beneficiaries enrolled in cost
plans in § 417.460(c)(3); thus aligning
the cost plan reinstatement provision
with the MA and PDP plan provisions.
These good cause provisions
authorize CMS to reinstate a disenrolled
individual’s enrollment without an
interruption in coverage in certain
circumstances where the non-payment
was due to circumstances that the
individual could not reasonably foresee
and could not control, such as
unexpected hospitalization. Since the
inception of these provisions, we have
received feedback from plans on ways to
improve the good cause process and
make it more efficient for both the plans
and us. Over the past year, we have
already used this feedback to improve
the operational aspects of the policy by
updating Chapter 2 of the Medicare
Managed Care Manual and Chapter 3 of
the Medicare Prescription Drug Benefit
Manual to clarify notice language and
the process and timing of receiving
payments during the extended grace
period, as outlined in § 417.460(c)(3),
§ 422.74(d)(1)(v), and § 423.44(d)(1)(vi).
In addition, we updated the Complaints
Tracking Module (CTM) Standard
Operating Procedures (SOP) to permit
plans to transfer requests for
reinstatement for good cause to CMS.
We are now proposing to make
additional revisions to § 417.460,
§ 422.74, and § 423.44 to make changes
to the good cause review process.
The ability for individuals to be
reinstated during the extended grace
period for good cause is outlined in
§ 417.460, § 422.74 and § 423.44. Since
its inception, the process of accepting,
reviewing, and processing beneficiary
requests for reinstatement for good
cause has been carried out exclusively
by CMS. In multiple cases, individual
MA organizations and Part D plans have
indicated that they wanted to be the
point of contact for their current and
past members. In addition, several plans
have raised concerns regarding
complaints by their members who are
seeking reinstatement and who have to
contact CMS instead of the plan to make
this request.
In light of this feedback, the
experience we have gained since the
initial implementation of the good cause

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process, and in the interest of making
the process more efficient, we solicited
public input on improving the process
in the draft 2014 Call Letter issued on
February 15, 2013. In the Call Letter, we
indicated that we were considering
making changes to the good cause
process. Specifically, we stated that we
were exploring expanding the plans’
role in the process to include accepting
the initial requests for reinstatement by
former plan members and gathering
information prior to submitting the
requests to us. We requested comments
from MA organizations and Part D plan
sponsors on our proposal to expand the
plans’ role and any other ways we might
improve the process to receive and
review good cause requests for
reinstatement.
The vast majority of the comments we
received from stakeholders in response
to the Call Letter were in favor of
expanding the plans’ role, given the fact
that plans can readily access a former
enrollee’s premium billing and payment
history and, as such, are in a position to
identify and efficiently resolve other
disenrollment disputes that are
erroneously being received as good
cause requests. A number of plans
indicated a preference to independently
implement the good cause process
through enhanced subregulatory
guidance. A few commenters indicated
that CMS should retain responsibility
over all aspects of the good cause
process to ensure objectivity.
In response to this feedback we are
proposing to amend § 417.460(c)(3),
§ 422.74(d)(1)(v), and § 423.44(d)(1)(vi)
to permit an entity acting on behalf of
CMS to effectuate reinstatements when
good cause criteria are met. This
regulatory change would allow us to
designate another entity, including the
plans or an independent contractor, to
complete portions or all of the good
cause process. It is our intent to expand
the role of plans to include accepting
incoming requests for reinstatement
directly from former enrollees and
making the good cause determinations
using the existing regulatory standard.
This proposed change would enable
plans to be more responsive to their
current and former members, and lessen
the burden the plans have in
coordinating with us regarding the good
cause and reinstatement process. It
further aims to lessen the number of
complaints generated due to
miscategorization of the reinstatement
requests as an allegation of plan error,
which the plans must then resolve and
refer back to us for a good cause
determination.
Ensuring objectivity in the review of
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beneficiaries regarding the
determination of good cause for cases is
critically important. Thus, we would
establish operational policy and
processes in subregulatory guidance to
set parameters for the application of the
good cause standard, including the
submission to CMS of certain cases for
review to ensure that plans remain
impartial and equitable in their
assessment and treatment of former
members who have been disenrolled for
nonpayment of premiums. These
changes would be accompanied by the
development of an oversight protocol
for any activities currently carried out
by us for which we name the plans or
an independent contractor our designee
to carry out.
In addition to our proposal here to
permit a CMS designee to determine
reinstatements for good cause, we are
taking this opportunity to propose a
technical change to the language in
§ 417.460 to clarify that good cause
protections for enrollees in cost plans
apply to instances where there was a
failure to pay either plan premiums or
cost sharing. In extending the good
cause provision to cost plans in the
April 2012 final rule, we correctly
referenced failure to pay premiums as a
basis for disenrollment from a cost plan,
but in two instances we neglected to
include a reference to ‘‘other charges’’ as
a basis for disenrollment. We propose to
make a technical change to
§ 417.460(c)(3) and (c)(4) to clarify that
the good cause provisions are applicable
to individuals who have been
disenrolled for non-payment of other
charges (for example, deductible or
coinsurance amounts), in addition to
non-payment of premiums.
4. Definition of Organization
Determination (§ 422.566)
Based on our updated guidance,
program experience, and information
collected during audits of MA
organizations, we are proposing to
revise the current regulatory definition
of ‘‘organization determination’’ set
forth at § 422.566(b) to create a single,
uniform definition. As described later in
this proposed rule, the definition of
organization determination referenced
in our manual guidance (Chapter 13 of
the Medicare Managed Care Manual,
section 30), required plan marketing
documents (such as the EOC), and Part
C data requirements (Medicare Part C
Plan Reporting Requirements, Technical
Specifications Document—Measure 6) is
more inclusive than the definition
currently reflected in this regulation.
Section 1852(g) of the Act requires
MA organizations to have a procedure
for making determinations regarding

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whether an enrollee is entitled to
receive a health service and the amount
(if any) that the individual is required
to pay for such service. Our regulations
at 42 CFR part 422, subpart M codify the
procedures MA organizations must
follow when processing organization
determinations. Section 422.566(b)
defines which actions are considered
organization determinations, but does
not currently include all types of
coverage decisions made by a provider
under contract with an MA
organization.
Our current manual guidance,
required model EOC documents, and
Part C plan reporting requirements
clarify that organization determinations
include fully favorable, partially
favorable, and unfavorable decisions
made by an MA organization concerning
payment or provision of an item or a
service. Additionally, requirements
elsewhere in Part 422 provide certain
beneficiary protections in the MA
program, including a requirement that
MA organizations provide or make
payment for all services covered by
Medicare Parts A and B (see
§ 422.101(a)), and contract requirements
that limit beneficiary financial liability
for fees that the MA organization is
legally obligated to pay for services
provided by contract and non-contract
providers (see § 422.504(g)). Our
proposed changes would clarify what
actions are included and therefore
ensure that enrollees receive required
Medicare notices (for example, notice of
termination in certain healthcare
settings) and due process rights.
We are proposing to make minor
modifications to regulatory language at
§ 422.566(b)(1) through (b)(3) to improve
the uniformity of our guidance on what
actions are considered organization
determinations. We are restating these
provisions for consistency within this
section and to further underscore an
‘‘organization determination’’ includes
any coverage decision—fully favorable,
partially favorable, and unfavorable—
made by an MA organization concerning
payment or provision of an item or a
service. At § 422.566(b)(1) and (b)(2), we
refer to an organization determination as
‘‘any determination’’ by an MA
organization (that is, fully favorable,
partially favorable, and unfavorable). At
422.566(b)(3), we are proposing to
replace the reference to the MA
organization’s ‘‘refusal to provide or
pay’’ with reference to ‘‘any
determination not to provide or pay for’’
items or services made by the MA
organization to improve consistency of
the regulatory language.
Chapter 13, section 30 of the Medicare
Managed Care Manual states that

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approval for an item or service by the
plan or its delegated entity (that is,
provision of an item or service by a
contract provider, such as inpatient
admission to a contract hospital) is an
organization determination. We are also
proposing to add new language to the
regulation text at § 422.566(b)(6) that
clarifies that a provider under contract
with an MA organization that furnishes
an item or service to an enrollee has
made a favorable organization
determination on behalf of the MA
organization. We believe this
clarification to the regulatory definition
is necessary to clearly distinguish when
a contract provider is making an
organization determination on behalf of
the MA organization from instances
where a contract provider is not making
an organization determination on behalf
of the MA organization. We have
repeatedly stated that a contract
provider’s refusal to furnish an item or
service is a treatment decision, not an
adverse organization determination
made on behalf of the MA organization.
In a case where a contract provider
refuses to furnish an item or service, the
enrollee has the right to request an
organization determination from the MA
organization. In addition, the provider
may request the organization
determination on the enrollee’s behalf.
The proposed revision to the
regulation text at § 422.566(b)(6) would
also clarify that a service or item
provided by a noncontract provider due
to a referral from a contract provider
constitutes a favorable organization
determination, and therefore ensures
that enrollees would be protected by
limitations on their financial liability.
(For more information, see § 422.504(g)
of the regulations and Chapter 4, section
170 of the Medicare Managed Care
Manual). We stated in the January 28,
2005 final rule (70 FR 4618) that if a
network physician performs a service or
directs an MA beneficiary to another
provider to receive a plan covered
service (regardless of whether the
provider is following the plan’s internal
procedures, such as obtaining the
appropriate plan pre-authorization), the
enrollee cannot be held liable for more
than applicable plan cost sharing for
those services. When a contract provider
refers an enrollee out of the network, the
enrollee has a reasonable expectation
that the items or services provided by
the non-contract provider will be
covered by the plan. Enrollees cannot be
held to a higher standard than plan
contracting providers to adhere to plan
rules.
Proposed new paragraph
§ 422.566(b)(6) would also clarify that a
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has been made if: (1) The MA
organization decides to provide or pay
for an item or service, including a
decision to continue providing or
paying for an item or service; or (2) a
contract provider or facility, acting on
behalf of the MA organization, furnishes
(or continues to furnish) an item or
service.
Together, our proposed revisions to
§ 422.566(b) are intended to codify our
current guidance, creating a single,
uniform definition of organization
determination.
5. MA Organization Extension of
Adjudication Timeframes for
Organization Determinations and
Reconsiderations (§ 422.568, § 422.572,
§ 422.590, § 422.618, and § 422.619)
Section 1852(g)(2) of the Act requires
MA organizations to provide for
reconsideration, or review, of
organization determinations within a
timeframe specified by the Secretary,
but generally no later than 60 days from
the date of receipt of the request for
reconsideration. Section 1852(g)(3)(B) of
the Act requires MA organizations to
maintain procedures for expediting
organization determinations and
reconsiderations when a physician’s
request indicates that applying the
standard timeframe could seriously
jeopardize the life or health of the
enrollee or the enrollee’s ability to
regain maximum function or when, in
the case of an enrollee’s request, the MA
organization makes such a
determination on its own. In expedited
cases, the MA organization generally
must issue its decision no later than
within 72 hours of receipt of the
request. Section 1852(g)(3)(B)(iii) of the
Act permits the Secretary to extend this
72-hour decision making timeframe in
certain cases.
Our regulations at 42 CFR part 422,
subpart M codify the procedures MA
organizations must follow in issuing
standard and expedited organization
determinations and reconsiderations.
Specifically, the current regulations at
§ 422.568(b), § 422.572(b), and
§ 422.590(a)(1) and (d)(1) set forth the
standard and expedited timeframes
within which plans are required to
process such decisions and describe the
circumstances under which plans are
permitted to extend decision making
timeframes by up to 14 calendar days.
Based on information ascertained
during recent MA program audits, we
have found that some MA organizations
are routinely and inappropriately
invoking extensions of the adjudication
timeframes for organization
determinations and reconsiderations.
We have identified circumstances in

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which MA organizations are routinely
invoking the 14 day extension: (1) In
cases where the plan lacks adequate
internal controls to ensure coverage
requests are reviewed and adjudicated
within the required regulatory
timeframe; and (2) in cases where the
plan is awaiting receipt of supporting
clinical documentation from one of its
contract providers. We believe the
current language that permits extension
of the adjudication timeframes set forth
in § 422.568(b), § 422.572(b),
§ 422.590(a)(1) and § 422.590(d)(2) is
being interpreted more broadly than our
intent in adopting these rules.
Therefore, we propose to revise these
regulatory provisions to more clearly
define our intended standard for when
it is appropriate for an MA organization
to extend an adjudication timeframe.
Routinely invoking an extension of
the applicable adjudication timeframe is
counter to the intent of the statutory and
regulatory requirements for timely
determinations that emphasize the
health needs of the beneficiary in
determining the appropriate
adjudication timeframe. Extensions
should be permitted only in limited
circumstances, and only if the extension
is in the enrollee’s interest. MA
organizations are required by regulation
to render all coverage decisions as
expeditiously as the enrollee’s health
condition requires. When plans choose
to subject an item or service to a prior
authorization requirement, we expect
them to have the resources to process
those requests in a timely manner.
We believe MA organizations have
interpreted existing regulations to mean
that there is a broader set of
circumstances in which it would be
appropriate to invoke an extension than
we intended, such as the need for
medical evidence from a contract
provider. We are proposing to amend
the regulation text to clarify our original
intent that an extension should not be
routinely invoked for any category of
coverage request, but in particular not
for purposes of obtaining additional
medical evidence from contract
providers. Thus, we propose to revise
the extension language in § 422.568(b),
§ 422.572(b), and § 422.590(a)(1), and to
add new § 422.590(e), which would
incorporate and clarify existing text at
§ 422.590(a)(1) and (d)(2) in order to
more clearly identify when it is
appropriate for an MA organization to
invoke an extension of the adjudication
timeframe. We also propose revisions to
§ 422.590(d) and redesignation of
existing subparagraphs § 422.590(e)
through (g) as part these changes.
First, we propose to retain the current
provisions in these various regulations

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that permit an extension at the request
of the enrollee. Additionally, we
propose to modify the current regulatory
provisions that permit an extension ‘‘if
the organization justifies a need for
additional information and how the
delay is in the interest of the enrollee
(for example, the receipt of additional
medical evidence from noncontract
providers may change an MA
organization’s decision to deny).’’ Our
proposed revised language would result
in two more specific provisions
permitting an extension, which we
believe clarifies the intent of our
existing requirements.
Additionally, we propose language to
clarify at § 422.568(b)(1)(ii),
§ 422.572(b)(1)(ii), and
§ 422.590(e)(1)(ii) that an extension may
be justified and in the enrollee’s interest
due to the need to obtain additional
medical information that may result in
changing the MA organization’s denial
of coverage of an item or service only
from a non-contract provider. We
believe the arrangement between an MA
organization and its contract providers
is such that clinical documentation
should generally be readily available
and that there are mechanisms for an
MA organizations to ensure that
contract providers produce necessary
documentation in a timely manner (for
example, via their contract). We believe
that any delay in decision-making
caused by an extension to obtain
additional medical evidence from a
contract provider would be in the plan’s
interest but not generally in the interest
of the enrollee. Therefore, we are
proposing to specify at
§ 422.568(b)(1)(ii), § 422.572(b)(1)(ii),
and § 422.590(e)(1)(ii) that one
circumstance in which it may be
appropriate for an MA organization to
invoke an extension is when the
extension is in the enrollee’s interest
due to the need for additional medical
evidence from a non-contract provider
only.
When the MA organization needs
additional information that may change
a decision to deny coverage, it is our
expectation that the MA organization
promptly solicit necessary clinical
documentation in all cases and that
extension of the timeframe not be
routinely invoked. It is also our
expectation that the full 14 days not be
routinely taken, even if an extension is
warranted, and that all coverage
requests be reviewed, and decisions
issued, as expeditiously as the enrollee’s
health condition requires within that
period, as required by regulation.
In addition, we propose to include a
provision (new language to be codified
at § 422.568(b)(1)(iii),

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§ 422.572(b)(1)(iii), and
§ 422.590(e)(1)(iii)) to clarify that an
extension of the adjudication timeframe
may be permitted when the extension is
justified due to extraordinary, exigent or
other non-routine circumstances, and it
is in the enrollee’s interest. We
recognize that there may be limited,
non-routine circumstances in which the
adjudication timeframe may need to be
extended even if the enrollee does not
request the extension and no additional
documentation must be obtained from a
non-contract provider. We emphasize
that the extension must be both: (1) Due
to extraordinary, exigent or other nonroutine circumstances; and (2) in the
enrollee’s interest. For example, a
natural or man-made disaster may
impede a contract provider’s ability to
provide the MA organization with
timely clinical information, and
invoking an extension may be in the
enrollee’s interest if that information is
necessary to approve coverage. It is our
expectation that these exceptions would
be rare. MA organizations that overuse
or misuse the authority to invoke an
extension may be subject to corrective
action.
In all cases where an extension is
invoked, the MA organization is
responsible for documenting the
justification for the extension in the case
file, complying with the requirement to
notify the enrollee in writing of the
reasons for the delay, and informing the
enrollee of the right to file an expedited
grievance if he or she disagrees with the
MA organization’s decision to grant an
extension.
In an effort to improve clarity in our
guidance related to extensions and to
remove duplicative language, we have
made corresponding, technical edits to
subpart M. Specifically, we are
proposing in § 422.590 to remove
paragraph (d)(2) and add a new
paragraph (e). To correspond with this
proposed change, we propose to update
related cross-references and language
accordingly. Specifically, at
§ 422.618(a)(1), we propose to replace
the reference to § 422.590(a)(1) with a
reference to § 422.590(e). In
§ 422.619(a), we propose to replace the
reference to § 422.590(d)(2) with a
reference to § 422.590(e). Also, we
propose to make corresponding changes
within § 422.568(b), § 422.572(b), and
§ 422.590(d) to ensure consistency in
the structure and language of these
provisions.

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D. Strengthening Our Ability To
Distinguish Stronger Applicants for Part
C and D Program Participation and To
Remove Consistently Poor Performers
1. Two-Year Prohibition When
Organizations Terminate Their
Contracts (§ 422.502, § 422.503,
§ 422.506, § 422.508, and § 422.512)
Section 1857(c)(4)(A) of the Act
prohibits organizations from re-entering
the MA program in the event that a
previous contract with the organization
was terminated at the request of the
organization within the preceding 2year period, except in circumstances
that warrant special consideration.
Furthermore, section 1857(e) of the Act
permits us to add contract provisions
that are not inconsistent with Part C of
the Act and that we find necessary and
appropriate for the administration of
Medicare Part C. We propose to amend
the text and application of regulations
implementing these provisions of the
Act. In the April 15, 2010 final rule (75
FR 19678), we characterized our current
policy on the 2-year ban applicable to
voluntary non-renewals and mutual
terminations as applying the ban based
on plan type and service area. We
provided the following example to
illustrate application of the rule: an MA
organization’s non-renewal of a Private
Fee-for-Service MA plan would not
prohibit the MA organization from
immediately applying for an MA HMO
contract for the same service area.
Similarly, our current policy, absent this
proposal, would not apply the 2-year
ban on an MA organization that nonrenewed a contract in one region from
applying immediately for the same type
of MA product in a different region.
This current policy unnecessarily
narrows the scope of the 2-year
prohibition and precludes us from
preventing poor performing MA
organizations from reentering the MA
program. We have reconsidered the
wisdom of this policy and believe that
the MA program would be better served
if we applied the 2-year ban flowing
from non-renewals and mutual
terminations to new contracts or service
area expansions regardless of the
product type or service area of the nonrenewed or terminated contract. We
note that we are retaining our ability to
exercise discretion in applying the 2year ban when there are special
circumstances that warrant special
consideration, as provided in the
current regulations text at
§ 422.503(b)(6)(ii), § 422.506(a)(4), and
§ 422.512(e).
First, we propose to address how a
non-renewal or mutual termination of
an MA contract would be treated.

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Specifically, we propose to amend the
regulation text at § 422.506(a)(4) and
§ 422.512(e) to explicitly apply the 2year prohibition to applications for
service area expansions in addition to
applications for new contracts. These
changes to § 422.506 and § 422.512
would make the text of these regulations
consistent with the text at
§ 422.503(b)(7) and § 422.508(c) with
regard to the 2-year prohibition imposed
as a condition of a mutual termination
of an MA contract. We read the current
text at § 422.503(b)(7) to permit us to
deny a contract to a MA organization
that has participated in a mutual
contract termination, regardless of
contract type, product type, or service
area, within the past 2 years. We also
note that the current text of
§ 422.503(b)(6) is not explicit on this
point but may be read to permit contract
denials for new contracts and service
area expansions, consistent with our
proposal; we intend to apply this
interpretation to the existing text at
§ 422.503(b)(6). We also propose to add
the following sentence to paragraphs (c)
and (d) of § 422.508 to make it clear that
a mutual termination of a MA contract
would result in a ban of all contract
types and service area expansions:
‘‘This prohibition may apply regardless
of the product type, contract type or
service area of the previous contract.’’
These proposed amendments are in
harmony with our policy, as articulated
in the preamble to the April 15, 2010
final rule (75 FR 19703) to apply the 2year ban consistently in the context of
voluntary non-renewals and mutual
terminations.
2. Withdrawal of Stand-Alone
Prescription Drug Plan Bid Prior to
Contract Execution (§ 423.503)
Occasionally, organizations new to
Part D that have qualified for a Medicare
PDP sponsor contract withdraw their
bids after we have announced the lowincome subsidy (LIS) benchmark but
prior to executing the contract for the
coming plan year. These withdrawals
interfere with our administration of the
Part D program, in particular the auto
assignment of LIS beneficiaries. To
address this problem, we are proposing
to adopt regulatory provisions that
would impose a 2-year application ban
on organizations not yet under contract
with us as PDP sponsors that withdraw
their applications and bids after we
have issued our approvals. We are
making this proposal under our
authority at section 1860D–12(b)(3)(D)
of the Act to adopt additional contract
terms, including the conditions under
which we would enter into contracts,
not inconsistent with the Part D statute.

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In February of each year, we solicit
applications from organizations seeking
to qualify to enter into a contract to offer
stand-alone PDPs in the upcoming plan
year. These organizations, along with
current PDP sponsors who wish to
continue participating in the Part D
program, submit bids in June for our
review and approval. We review these
applications and bids with the
expectation that, upon approval, the
organizations would enter into PDP
sponsor contracts with us in September
to provide the Part D benefit for the plan
year starting the following January.
As part of the annual bid review, we
calculate the LIS benchmark for each
PDP Region based on the bids for basic
PDPs submitted annually by current
PDP sponsors that will operate in that
region in the coming year. Sponsors
whose monthly premiums fall at or
below the benchmark in a region receive
auto-enrollments from us of LIS-eligible
beneficiaries in those regions. We
normally announce the LIS benchmark
in late July or early August.
In recent years, some organizations
have withdrawn their applications and
bids following the announcement of the
LIS benchmark. Because these
organizations withdrew prior to
executing a contract, and we cannot
compel them to sign the contract, they
are not subject to our compliance or
oversight authority, and nothing in our
current regulations prevents these
applicants from withdrawing their
applications late enough in the process
to cause significant disruption. In
contrast, when an existing PDP sponsor
withdraws its bid, we treat such an
action as an election by the PDP sponsor
to non-renew its contract in that PDP
Region, which renders the sponsor
ineligible to submit another application
for 2 years, under our regulations at
§ 423.507(a)(3). We propose to make a
regulatory change to ensure equal
treatment between new applicants and
existing PDP plan sponsors, which
would allow us to maintain an accurate
depiction of the contracting landscape.
Specifically, we propose to amend
§ 423.503 by adding paragraph (d)
which would impose a 2-year Part D
application ban on organizations
approved by CMS as qualified to enter
into stand-alone PDP sponsor contracts
but which elect, after our announcement
of the LIS benchmark, not to enter into
such contract and withdraw their PDP
bids. This proposed regulatory change,
in effect, would subject a withdrawing
applicant to the same penalty we may
apply to an organization already under
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It is critical that we have an accurate
portrayal of the number and type of plan
benefit packages that would be available
to beneficiaries in every PDP Region,
especially during the end of the summer
when much of the bid review, both the
formulary and actuarial components,
has been completed. During this period,
we need to confirm that there are the
required minimum number of plans
available in each PDP region. We also
need accurate plan information at the
end of the summer so that we can meet
the production deadlines associated
with the annual election period,
including publication of the Medicare &
You handbook as well as updating the
Medicare Plan Finder Web site and our
payment and enrollment systems. An
applicant that withdraws its application
late in the process alters the contracting
landscape, potentially disrupting
preparations we have already made,
including those related to the auto
assignment of LIS beneficiaries, for the
upcoming plan year.
We acknowledge that PDP plan
applicants may need to withdraw their
pending contracts for a variety of
legitimate business reasons. For this
reason, we afford applicants several
months to withdraw their applications,
without penalty, following the
application due date in February and
the bid submission deadline of the first
Monday in June. However, in adopting
the proposed regulatory authority, we
would place a reasonable limit on
prospective PDP sponsors’ option to
withdraw bids and applications without
penalty. By imposing consequences on
applicants that withdraw their bids
following the announcement of the LIS
benchmark, we also would discourage
any ‘‘gaming’’ of the bid review and
auto assignment processes (for example,
by participating in the bid review
process until it learns that it will not
qualify for auto assignments) that can
occur when applicants opt out of
participation in the PDP at the last
minute.
3. Essential Operations Test
Requirement for Part D (§ 423.503(a) and
(c), § 423.504(b)(10), § 423.505(b)(28),
and § 423.509)
We propose to create, through
regulation, a new step in the application
and contracting process with newly
contracted entities operating as standalone PDP sponsors or MA
organizations offering Part D plans
(MA–PDs). This step will be an
‘‘essential operations’’ test which we
would administer to ‘‘newly contracted
entities.’’ We use the term ‘‘newly
contracted entity’’ in this preamble to
describe an organization that has

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entered or applied to enter into a Part
D contract with us for the first time for
the upcoming plan year, and neither it,
nor another subsidiary of the
organization’s parent organization, is
offering Part D benefits during the
current benefit year. This would include
organizations that are offering EGWPs
for the first time.
Currently, with the exception of the
LIS readiness audits, we have no test for
assessing the effectiveness of the
arrangements organizations represent to
us in their applications and bids prior
to the actual start of delivery of benefits
on January 1. An essential operations
test would allow us to test whether an
organization’s arrangements appear
likely to allow the organization to
effectively administer its contract. We
are proposing to require organizations to
pass an essential operations test either—
(1) as a qualification to contract, with
failure to pass the test nullifying our
approval of the application; or (2) after
contract execution as a contract
requirement but prior to the start of the
benefit year, with a failure to pass the
test triggering an immediate contract
termination under § 423.509.
Pursuant to section 1860D–12(b)(3)(D)
of the Act, which incorporates by
reference section 1857(e)(1) of the Act,
we have the authority to add contract
provisions that are necessary and
appropriate to carry out the Part D
program; section 1860D–11(b) provides
authority for the collection of additional
information as part of the bid as we may
require to carry out the Part D program.
Based on this authority we propose
adding § 423.504(b)(10) and
§ 423.505(b)(28) to include passing the
essential operations test as a condition
to enter into and a term of the Part D
contract. Additionally, pursuant to our
authority at section 1860D–12(b)(3)(B)
and (b)(3)(F) of the Act (which
incorporate by reference section
1857(c)(2) and (h) of the Act,
respectively, to apply to the Part D
program), the current regulations at
§ 423.509(a) and (b)(2)(i), authorize
immediate termination of contracts with
Medicare Part D plan sponsors in
certain circumstances. We believe that
immediate termination would be
authorized under the standard of section
1857(h)(2) of the Act because the
inability of a plan sponsor to ensure
future members’ access their drug
benefit, as evidenced by failure to pass
the essential operations test, would
constitute an imminent and serious risk
to beneficiary health and safety. We
propose adding § 423.509(a)(4)(xii) and
(b)(2)(i)(D) to subpart K to reflect this
new cause for immediate termination.
(Of note, we are reorganizing

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§ 423.509(a) to group the statutory basis
for termination together followed by
examples of violations that would meet
the statutory basis. This new regulation
is an example of a violation.)
Additionally, we propose to explicitly
include the essential operations test as
a means to evaluate Part D applicants in
§ 423.503(a)(1) and to add
§ 423.503(c)(4) to subpart K to establish
failure of an essential operations test as
grounds for nullifying a CMS approval
of application notice.
The heart of the Part D benefit is the
sponsor’s ability to process claims for
prescription drugs in real-time because,
unlike health benefits, where claims
payment normally follows the delivery
of services, pharmacies require
confirmation of claims payment at the
point-of-sale either from an insurer or
the covered individual. Success in Part
D claims processing depends largely on
the sponsor’s ability to perform
enrollment, benefit administration, and
claims adjudication operations
seamlessly at the point-of-sale. That is,
the sponsor must be able to do all of the
following essential operations in real
time and at the point-of-sale to a
satisfactory level: Identify a beneficiary
as a member of one of its Part D plans;
determine whether the drug requested
is, in fact, appropriately covered under
Part D (for example, that the drug is not
covered: (a) Under Part B, (b) as part of
end-stage renal disease (ESRD)
treatment, or (c) as a hospice benefit);
determine the phase of the benefit the
beneficiary is currently in; and provide
the pharmacy with instructions so that
the beneficiary can be charged
appropriate copays/coinsurance and
deductibles.
We are proposing the essential
operations test and associated regulatory
changes because of our experience with
certain newly contracted entities in the
Part D program that experienced
significant operational difficulties at the
start of the benefit year as a result of
their inexperience administering Part D
benefits. To prevent the recurrence of
this problem and ensure that new
sponsors are prepared to and actually
can deliver Part D benefits at an
acceptable level, starting with the 2015
contract year application cycle, we
propose that we may require newly
contracted entities to pass an essential
operations test conducted by us
beginning in the fall of 2014.
Often these newly contracted entities
have little or no prior experience in
administering health and drug benefit
plans. Unfortunately, by the time
deficiencies in the sponsor’s operations
and ability to provide the Part D benefit
become apparent (typically when we

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receive complaints about significant
numbers of inappropriately rejected
claims at the pharmacy), the sponsor
has already executed an agreement with
us, which has prevented us from
moving quickly to remove the sponsor
from the program and prevent further
beneficiary harm. In these instances, we
have found it necessary to provide
inordinate amounts of resourceintensive technical assistance to
sponsors that were not prepared to
effectively administer Part D benefits
when they signed their contract. The
essential operations test would help to
prevent the recurrence of problems of
this nature.
The essential operations test for
newly contracted entities would entail
testing of sponsors’ command of Part D
benefit administration rules and systems
related to these areas. Initially, the
testing would consist of scenario testing
with sponsors’ key staff to show us that
they have a firm grasp of the Part D
policies and essential operations. The
test would be able to verify whether an
applicant’s administrative and
management arrangements, as attested
to in its application, are sufficient for
the applicant to carry out functions
listed in § 423.504(b)(4)(ii) such as
furnishing prescription drug services
and implementing utilization
management programs.
Provided we have the resources, in
the future, the test would likely become
significantly more sophisticated and
involve live testing of sponsors’ systems
with test data. The more involved test
would also likely include testing the
processes related to enrollment such as
MARx communication and processing;
LIS processing and determinations;
coverage determinations, appeals, and
grievances (CDAG) processing; and realtime coordination of benefits data
exchange and processing. For instance,
the sponsor would need to demonstrate
the ability to pay test claims correctly in
real-time consistent with its CMSapproved benefit packages (including
formulary) and the Part D transition fill
policy.
The timing of the essential operations
test must fit within the timeline of the
annual Part D contracting process,
which is driven largely by the bid
deadline and plan election period
dictated by statute. In preparation for an
upcoming benefit year beginning on
January 1, we must solicit and review
applications from organizations seeking
a MA–PD or PDP sponsor contract in
February of the preceding year. We
issue application determinations (that
is, approval or denial) in May. All
existing Part D sponsors and new
applicants must submit their plan

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benefit package (PBP) bids (including
formularies) in June. Then, we complete
the bid review approval and negotiation
processes at the end of August. Once we
have approved the submitted bids,
sponsors can then execute their
contracts with us. Historically, we have
executed all contracts by midSeptember so we can finalize
preparations for the marketing season,
which begins on October 1, and the
annual election period (AEP), which
begins on October 15. These
preparations include publishing the
Medicare & You handbook in
September, which lists approved plans;
releasing the Medicare Plan Finder Web
site using plan-specific data; reviewing
and approving sponsors’ marketing
materials; and granting sponsors access
to our enrollment systems.
In contrast to an audit, the application
process currently only requires that
sponsors demonstrate to us that they
have the necessary legal arrangements
in place (for example, a risk-bearing
license, executed contracts with firsttier and downstream entities, pharmacy
network descriptions, etc.). Likewise,
bid and formulary approvals indicate
that the plans to be offered by the new
sponsor are acceptable to us, not that
the sponsor will necessarily be
successful in implementing those plans.
Under our current schedule, the
essential operations test we propose to
require as part of the application and
contracting process would occur after
contracts are signed in September but
before the start of the benefit year on
January 1. We would most likely
complete the tests by November 15. In
the future, we aim to conduct the
essential operations tests prior to
signing contracts with applicants which
is why we are also proposing to add
passing the test as a qualification to
contract. Ultimately, in the event of an
organization failing the test, we would
apply the appropriate proposed
regulatory provision based on the timing
of the test administration.
a. Failing Essential Operations Test as
Cause for Immediate Termination
Once a sponsor signs its contract, it is
obligated to perform all of the required
functions to support the benefits
described in the contract even though
the sponsor does not start offering
benefits until January 1. Given the
volume of preparations and tight
resource constraints between our
approving bids in late August and the
start of the AEP in October, the first
opportunity we currently have to devote
resources to the essential operations test
is most likely in late September to
November. We are currently not likely

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to be in the position to conduct essential
operations tests prior to contracting
because it would be challenging to
conduct the test prior to approving the
benefit structure against which we
would test a sponsor’s ability to process
claims accurately. If we find that a
sponsor does not have the requisite
systems and processes in place to offer
Part D benefits in real-time, we would
consider this cause for immediate
termination of the sponsor’s Part D
contract in order to protect beneficiaries
from harm at the start of the contract
year.
Pursuant to section 1857(h)(2) of the
Act (incorporated by reference into PDP
by section 1860D–12(b)(3)(F) of the Act),
we have the authority to immediately
terminate a contract with a sponsor
(without notice and opportunity for a
hearing) when a delay in termination
would pose an imminent and serious
risk to the health of beneficiaries
enrolled in the sponsor’s plans. Also,
under § 423.509(b)(2)(i) and
§ 423.652(b)(2), unlike standard CMS
terminations, the effective date of an
immediate termination is not stayed
when the sponsor requests a hearing
under § 423.650(a)(2). Because
enrollment and accurate benefit
administration through real-time claims
processing are so fundamental to the
delivery of the Part D benefit, if a
sponsor fails to demonstrate to us that
it can perform these essential
operations, we would view this as a
substantial failure to meet the Part D
contract requirements on the following
grounds: (1) Evidence that the sponsor
was carrying out the contract in a
manner that was inconsistent with the
effective and efficient administration of
the plan; and (2) evidence that the
sponsor did not substantially meet the
applicable conditions set out in the Part
D regulations which would ultimately
justify, depending upon timing of the
test, our termination of a contract
consistent with § 423.509(a)(1) through
(3) based on the sponsor’s failure to
meet our proposed contract terms at
§ 423.504(b)(10) and § 423.505(b)(28).
We believe that a newly contracted
entity’s failure to demonstrate certain
critical capabilities and failing the
essential operations test represents a
substantial failure to carry out its Part D
contract and is evidence that the
sponsor is not prepared to carry out the
contract in a manner that is consistent
with the efficient and effective
administration of the Part D program.
Such a failure poses an unacceptable
risk to the new sponsor’s future
members’ access to Part D drugs, which
would constitute an imminent and

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serious risk to beneficiary health and
safety, justifying our immediate
termination of the sponsor’s contract.
For MA organizations that must offer
Part D benefits pursuant to
§ 423.104(f)(3)(i), failing the test would
support the termination of the
organization’s Part D addendum as well
as its MA contract under § 422.510(a)(3)
because the inability to offer Part D
benefits means that the organization no
longer meets the applicable conditions
associated with offering Part C benefits.
Given our experience with sponsors’
abilities to resolve systemic systems
problems in a timely manner, we
believe that sponsors that fail the test
would most likely not have sufficient
time before the start of the benefit year
to remedy the breadth and magnitude of
the failures we would have identified
during the test. Even if the sponsor
attested that it had corrected problems
we identified, we would not have time
to conduct a second test to validate the
sponsor’s corrections prior to the start of
the new benefit year. Simply put, we
believe the risk of harm to enrollees’
health and safety is too great to move
forward with a sponsor that has such
significant and critical problems so
close to the start of the plan year. Thus,
an immediate termination of the
contract before the start of the year
would be the only way to protect
beneficiaries and ensure successful
operation of the Part D program by
absolving the sponsor and us of the
responsibilities in the contract.
b. Failing Essential Operations Test as
Failure of a Qualification to Contract
and Grounds for Nullification of
Approval
If an organization fails an essential
operations test we conducted prior to
contract signature, no termination
would be necessary as we would simply
nullify our previous conditional
approval of the organization’s Part D
contract qualification application.
Section 423.503(a) describes the
mechanisms we use to evaluate an
applicant and determine whether the
applicant is qualified to contract. These
mechanisms currently include
application review and on-site visits.
The general term ‘‘on-site visit’’ is used
to describe interactions with applicants
that include our visiting the applicant’s
facility and vice versa, either in person
or virtually. We are proposing to
explicitly include the essential
operations test as a qualification to
contract at § 423.503(a)(1) to authorize
our use of the test and any information
learned in the course of the essential
operations test in making the contract
determination. Our experience over the

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past few years with newly contracted
entities that have passed the paperbased application, but failed to have
fully-functional administrative and
management arrangements in place to
effectively offer benefits in January, has
demonstrated to us that implementing
an essential operations test is key to the
successful administration of the Part D
program for all beneficiaries.
We would view failure of the essential
operations test as a determination that
the applicant would not be qualified to
contract with us. As a result, we would
nullify our approval on that basis.
Successful applicants receive a
conditional approval at the end of May
of their Part D application pursuant to
§ 423.503(c)(1). The letter informs
applicants that the conditional approval
is based on the information contained in
their application, and if we
subsequently determined that any of the
information was inaccurate or that
qualification requirements are not met,
we would withdraw the approval of the
application. Through that notice, we
preserve the right to nullify our
approval. If that occurs, we would not
provide appeal rights described in
subpart N to applicants that have their
approval nullified based on failing the
essential operations test.
We are proposing to not afford
applicants appeal rights because CMS
would not be able to conduct the
appeals process provided for in Part
423, Subpart N, within the timeframe
imposed by § 423.650(c), which requires
CMS to have all contract application
appeals decided by September 1 for
contracts to be effective on January 1 of
the following year. We could not
conduct a test in late August, find that
the applicant failed the test, and move
through a fair appeal process for both
parties in less than 2 weeks. Therefore,
we would not afford appeal rights to
applicants that fail the test prior to
contracting under our proposal.
4. Termination of the Contracts of
Medicare Advantage Organizations
Offering PDP for Failure for 3
Consecutive Years To Achieve 3 Stars
on Both Part C and Part D Summary Star
Ratings in the Same Contract Year
(§ 422.510)
In the final rule adopted April 12,
2012 (77 FR 22168), we set forth at
§ 422.510(a)(14) and § 423.509(a)(13)
that a Medicare contracting
organization’s consistent failure to
achieve at least a 3-star summary star
rating for 3 consecutive years provides
a sufficient basis for us to make a
decision to terminate our contract with
a MA organization or stand-alone PDP
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based on the criteria we used then to
mark low-rated contracting
organizations with a ‘‘low performing
icon (LPI)’’ on the Medicare Plan Finder
Web site. Recently, we revised our LPI
assignment criteria for MA
organizations that offer PDP benefits
(MA–PDs) to more accurately reflect
their contract performance. We propose
here to revise the contract termination
regulation related to consistent low star
ratings to reflect the new LPI assignment
methodology announced in the contract
year 2014 Call Letter. Specifically, we
are proposing to modify our existing
authority at § 422.510(a) 3 by clarifying
that MA–PD organizations that do not
achieve at least 3 stars in both their Part
C and D ratings in the same year for 3
consecutive years may be subject to
termination.
In the April 12, 2012 final rule (77 FR
22072), we finalized the contractual
requirement at § 422.504(a)(18) and
§ 423.505(b)(25) that MA organizations
and PDP plan sponsors attain each year
summary ratings of at least 3 stars (the
‘‘average’’ performance rating). We
explained that, because the star rating
calculations are based on an
organization’s performance across a
wide array of operational measures, the
summary star ratings are an accurate
indicator of the extent to which the
organization has in place effective
administrative and management
arrangements necessary to administer
Part C and Part D benefit plans, as
required under § 422.504(a)(17) and
§ 423.505(b)(24).
We further established, as part of the
same rulemaking, our authority at
§ 422.510(a)(14) and § 423.509(a)(13) to
terminate the contracts of organizations
offering MA and stand-alone PDPs when
those organizations fail to achieve at
least 3 stars on either their Part C or Part
D summary rating for at least 3
consecutive years. At the time, we
stated that since the measures that make
up the star ratings provide evidence of
the sufficiency of a contracting
organization’s administrative and
management capability, it was
reasonable for us to conclude that an
organization receiving a summary rating
below 3 stars for 3 consecutive years
had substantially failed to meet that
requirement, providing us justification
for terminating the contract of that
organization. We also explained that 3
consecutive years was sufficient time for
sponsors to analyze the underlying
causes of their low ratings and take
3 Elsewhere in this proposed rule, we proposed to
reorganize and renumber § 422.510(a). The
discussed provision is current codified at
§ 422.510(a)(14) but we are proposing to redesignate
it as § 422.510(a)(4)(xi).

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corrective action that would result in at
least a 3-star summary rating. The
rulemaking also called for an MA–PD
organization’s Part C summary rating to
be tracked separately from its Part D
summary rating. That is, we could
terminate an MA–PD organization
contract if it failed for 3 straight years
to achieve at least a 3-star Part C
summary rating, regardless of its Part D
summary ratings. Similarly, we could
terminate the same organization if it
failed to achieve at least a 3-star Part D
summary rating for 3 straight years,
regardless of its Part C performance.
Since in most instances an MA
organization must also offer Part D
benefits, consistently low Part D
summary ratings justify a termination of
the entire MA–PD contract since the
organization could no longer meet its
obligation to offer Part D benefits. We
stated that we would allow a 3-year
transition period before we would begin
using the star rating-based termination
authority to issue termination notices to
any sponsors whose performance met
the criteria in late 2014 with an effective
date of January 1, 2015.
At the time we adopted this
regulation, we identified certain
organizations on the Medicare Plan
Finder (MPF) Web site as consistently
low performing organizations with the
display of the LPI next to the
organization’s other plan information. In
the contract year 2014 Call Letter
released in April 2013, we announced a
change in the methodology for assigning
the LPI mark to plan sponsors. On page
105 of the notice, we noted that some
stakeholders had raised concerns that
MA–PD contractors could switch back
and forth from poor performance on Part
C to poor performance on Part D from
year to year without ever being
identified as a poor performer and
marked with the LPI. We noted that
such a situation was potentially
misleading to beneficiaries, and we
decided to address the matter by
revising, effective in 2014, the criteria
for the assignment of the LPI indicator
to those organizations that fail for 3
consecutive years to achieve both Part C
and Part D summary ratings of at least
3 stars in the same year for 3
consecutive years. We concluded this
announcement by observing that MA–
PD organizations are responsible for
providing adequate care and services
across both Part C and Part D and that
the LPI methodology change encourages
consistent improvement in the quality
of care by MA–PD organizations across
all of the Part C and Part D measures.
We believe that the justification for
the change in the LPI methodology also
requires a change in the way we would

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apply the standard for MA–PD contract
termination based on star rating
performance. The performance of an
MA–PD organization must be assessed
across the totality of its obligations
under its Medicare contract.
Organizations should not be permitted
to target their compliance efforts from
year to year on alternating sets of
contract requirements, just barely
meeting our minimum requirements in
order to stay one step ahead of our
enforcement authorities. Beneficiaries
rightly expect quality in the delivery of
all of their Medicare benefits, covering
both health care and prescription drugs.
MA–PD organizations that alternate
their low star ratings from year-to-year
between Part C and Part D are in fact
subjecting their members to substandard
performance every year. This is an
unacceptable outcome that does not
promote the best interests of Medicare
beneficiaries.
If an MA–PD organization is not able
to achieve at least an ‘‘average’’ star
rating across all of its Part C and Part D
operations in at least 1 year out of 3, it
would become clear that the
organization had both substantially
failed to meet the administrative and
management requirements of a Medicare
contractor and could not take effective
corrective action over the same 3-year
period.
The artificiality of the division
between Part C and Part D star rating
performance becomes apparent when
one notes the extent to which the
measures for each part assess the
MA–PD organization’s performance of
similar functions or responsibilities.
According to the most recent
methodology we used to calculate star
ratings, ‘‘The Medicare Health & Drug
Plan Quality and Performance Ratings—
2013 Part C & Part D Technical Notes,’’
(http://www.cms.gov/Medicare/
Prescription-Drug-Coverage/
PrescriptionDrugCovGenIn/
PerformanceData.html) the Part C
measures are divided into 5 domains
and the Part D measures into 4. Three
of the Part C domains are virtually
identical to those of Part D, with
variations where necessary to reflect
differences in terminology and features
between health and drug plans. For
example, Domain 1 for Part D, ‘‘Drug
Plan Customer Service,’’ consists of
measures that largely correspond to
those of Part C’s Domain 5, ‘‘Health Plan
Customer Service.’’ Both contain
measures that reflect call center
performance (including foreign language
availability) and processing of appeals.
The Part D Domain 2, ‘‘Member
Complaints, Problems Getting Services,
and Improvement in the Drug Plan’s

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Performance,’’ measures an
organization’s performance in largely
the same categories as Part C’s Domain
4, ‘‘Member Complaints, Problems
Getting Services, and Improvement in
the Health Plan’s Performance.’’ Both
domains consist of measures that reflect
beneficiaries’ complaints about the plan,
their access to benefits, their decision to
leave the plan, and the plan’s quality
improvement. Domain 3 of both the Part
C and Part D measures are entitled
‘‘Member Experience with the Health/
Drug Plan’’ and reflect plan members’
experience with their plans such as
assessment of their ability to access
covered services (needed prescription
drugs in the case of Part D, physician
appointments, and coordination of care
in the case of Part C). Domain 4 for Part
D, ‘‘Patient Safety and Accuracy of Drug
Pricing,’’ corresponds to Part C’s
Domain 1, ‘‘Staying Healthy:
Screenings, Tests and Vaccines,’’ and
Domain 2, ‘‘Managing Chronic (Long
Term) Conditions,’’ in that they all
capture an MA–PD organization’s
attention to the clinical impact of the
Medicare services they provide to their
members. The Part D measures in
Domain 4 reflect the extent to which
plan members maintain adherence to
their medication regimens and receive
prescriptions for high risk medications.
The Part C Domains 1 and 2 address
clinical performance as it is carried out
by a health plan, including the extent to
which it has conducted screenings of its
members for breast cancer, colorectal
cancer, and high cholesterol and
manages long term conditions such as
diabetes, high blood pressure, and
rheumatoid arthritis.
The similarity in the Part C and Part
D measures means that the operations
associated with these 2 programs are not
so different as to justify separate Part C
and Part D analyses of MA–PD
organization’s delivery of Medicare
benefits to the same set of beneficiaries
in the same service area. MA–PD
organizations do not contract with us to
provide separate Part C and Part D
benefits. Rather, it is more correct to say
that their contract obligates them to
provide effective customer service,
access to care, and promote clinical
outcomes across the entire range of
Medicare benefits. Therefore, the better
way to assess an MA–PD organization’s
administrative and management
compliance is not to see whether it can
meet Part C or Part D requirements, but
whether it can meet the customer
service, access to care, and clinical
performance requirements in the
delivery of all types of Medicare
benefits. The only way to accurately

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measure the performance of such
functions is to examine the
organization’s ratings in the Part C and
Part D measures in the related domains.
For example, an MA–PD organization
cannot be said to be providing
satisfactory customer service to its
members if it achieves a 3-star rating in
only its Part C operations.
Therefore, we propose to revise
§ 422.510(a) 4 to clarify that MA-only
contracts are subject to CMS termination
when they fail for 3 consecutive years
to achieve a Part C star rating of at least
3 stars. Additionally, we propose to add
a subparagraph to § 422.510(a) to
establish as a basis for termination of
MA–PD contracts the failure for 3
consecutive years of the contract to
achieve at least 3 stars in both its Part
C and D ratings in the same year. When
we first adopted the star rating-based
contract termination authority in April
2012, we stated that we would afford
organizations a 3-year transition period
before we would use that authority to
make contract termination decisions.
This period was necessary to allow
organizations to make adjustments to
their operations to reflect the dramatic
increase in the consequences associated
with low star rating performance created
by our new termination authority.
Accordingly, the regulation states that
we may use only those star ratings
issued after September 1, 2012, to make
a decision to terminate a contract based
on consistently low star ratings. Thus,
organizations that fail to achieve at least
a 3-star rating upon the release in
September 2014 of the 2015 ratings
would be the first group of Medicare
contractors eligible for termination
under our new authority. We are not
proposing to extend this grace period as
part of this proposed adjustment to the
current policy, because there is no
reason why failures under the current
regulations (which contain the
‘‘loophole’’ we are closing here) should
not count towards the 3-year mark along
with failures under the revised standard
once in place.

4 Elsewhere in this proposed rule, we would
reorganize and renumber § 422.510(a) and
§ 423.509(a) to better reflect the bases for contract
termination in connection with our statutory
authority to terminate. Using the current
numbering, this proposal would be codified as
§ 422.510(a)(14) but under our proposal here, it
would be codified as § 422.510(a)(4)(xi).

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area (or provided when the enrollee is
in the service or continuation area but
the organization’s provider network is
temporarily unavailable or inaccessible)
when the services are medically
necessary and immediately required—

III. Provisions of the Proposed
Regulation
E. Implementing Other Technical
Changes

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1. Requirements for Urgently Needed
Services (§ 422.113)
Our regulations at § 422.113(b) require
MA organizations to cover urgently
needed services furnished outside a
plan’s service area or contracted
network of providers when the enrollee
is in need of such services but is outside
of the service area or is in the service
area but the plan network is temporarily
unavailable due to extraordinary and
unusual circumstances. Further
requirements built in to the definition of
‘‘urgently needed services’’ specify
additional criteria for out-of-network
coverage of these services: (1) The need
for services was a result of unforeseen
illness, injury or condition; and (2) it is
not reasonable, given the circumstances,
for the enrollees to obtain the services
through the organization offering the
MA plan.
In the preamble to our June 29, 2000
final rule implementing the current
requirements (65 FR 40199), we
clarified the intended meaning of
‘‘extraordinary and unusual
circumstances’’ as ‘‘an earthquake or
strike.’’ However, it is our experience in
administering the MA program that
there are other much less severe
circumstances in which the plan
network may be unavailable or
inaccessible to an enrollee who is in the
authorized service area and needs
immediate care due to an unforeseen
illness, injury or condition. Examples of
such circumstances include the need for
urgent care outside of the network’s
business hours, (for example, during the
weekend or at night).
Many MA plans have responded to
the need for urgently needed services by
contracting with clinics that have hours
of operation well beyond those of
traditional physicians’ offices to furnish
services to their enrollees when the plan
network is not available.
To better align the regulations with
current practices regarding access to
urgently needed care services, we are
proposing to revise the regulation by
removing the phrase ‘‘under
extraordinary and unusual
circumstances’’ at § 422.113(b)(1)(iii).
The proposed regulatory language
would read as follows:
(iii) Urgently needed services means
covered services that are not emergency
services as defined in this section,
provided when an enrollee is
temporarily absent from the MA plan’s
service (or, if applicable, continuation)

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2. Skilled Nursing Facility Stays
(§ 422.101 and § 422.102)
Under section 1814(a)(2)(B) of the
Act, Medicare Part A generally only
covers skilled nursing facility services
(SNF) following a qualifying 3-day
hospital stay. However, under section
1812(f) of the Act, we may authorize
Part A coverage of SNF care without a
prior hospital stay if two conditions are
met. First, the coverage of these services
must not result in any increase in
Medicare program payments, and
second, the coverage must not alter the
acute care nature of the benefit. For
reasons discussed later in this proposed
rule, in an August 22, 2003 final rule (68
FR 50847), we exercised this authority
under section 1812(f) of the Act with
respect to SNF services covered under
MA plans.
The reason that we took this step is
that, in the absence of this exercise of
this authority, MA organizations could
only cover SNF services without a 3-day
prior hospital stay as a supplemental
benefit. In such a case, if an MA
enrollee is in a SNF pursuant to such
coverage in the middle of a 100-day
covered stay, and disenrolls from the
MA plan, or the MA plan is terminated
or non-renewed during such a stay, the
beneficiary would lose SNF coverage, as
it would not be covered under Medicare
Part A because it would not have met
the condition for coverage of a 3-day
prior hospital stay. By exercising the
authority under section 1812(f) of the
Act to make the stay a Part A covered
benefit, the stay would remain covered
even if the individual is no longer
enrolled in the MA plan.
Our determination that SNF services
provided by MA organizations without
a 3-day prior hospital stay met the two
tests in section 1812(f) of the Act was
based on the fact that MA organizations
are paid a monthly per-Medicare
enrollee payment to provide all
contracted services. Thus, Medicare
costs would not be affected by
permitting SNF services to be covered
by Medicare without the prior 3-day
hospital stay for so long as the
beneficiary was enrolled in the MA plan
because the plan is paid a fixed amount
without regard to services received. We
determined that this would provide
incentives for the MA organizations to
provide care more cost effectively. Some
evidence at the time indicated that MA
organizations, particularly coordinated

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care plans, could shorten hospital stays
and shift patients to post-acute or
subacute settings, such as SNFs, more
quickly than under the original
Medicare program. If SNF care is the
appropriate level of care, MA
organizations are then able to use SNF
care rather than more expensive
hospital care for similar patients
requiring posthospital care. For some
patients and diagnoses, the MA
organization is able to bypass the
hospital stay and admit the beneficiary
directly to a SNF.
Because the previously discussed
rulemaking exercised authority under
section 1812(f) of the Act to authorize
Part A coverage in the absence of an
otherwise-required 3-day prior hospital
stay, the regulations addressing ‘‘basic
benefits’’ (which include benefits under
Part A) at § 422.101 were revised to
include provision for this Part A
coverage at § 422.101(c).
Notwithstanding the fact that, when
the option under § 422.101(c) is elected
by an MA organization, the services are
covered under Part A, at least some MA
organizations did not include the costs
of such stays in the Part A portion of
their adjusted community rate (ACR)
submissions, and in later years, in their
bids. Rather, they continued to treat
these Part A-covered services as
‘‘supplemental benefits.’’ We
understand why MA organizations did
this, as the services (other than in the
case described previously when an MA
enrollee receiving such services is no
longer enrolled in an MA plan covering
them) would not be covered under Part
A if the enrollee were not enrolled in
the MA plan. However, because of the
section 1812(f) of the Act waiver, these
services technically were services
‘‘covered under Part A,’’ included under
§ 422.101(a), not supplemental benefits
under § 422.102.
We had determined in promulgating
the August 2003 final rule that the
services in this situation had to be
treated as covered under Part A in order
to protect coverage for a beneficiary who
changes from MA coverage to original
Medicare coverage mid-stay. However,
in light of the fact that MA organizations
have, over a period of years, been
treating these benefits as supplemental
benefits, we have determined that we
can protect a beneficiary in the situation
described without requiring an MA
organization to include a SNF stay
without a 3-day prior hospitalization as
a Part A benefit under its MA plan by
modifying our exercise of section
1812(f) of the Act authority to waive the
3-day prior hospitalization requirement
only in cases in which an MA enrollee
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prior hospital stay changes from
coverage under the MA plan to
Medicare coverage under Original
Medicare (or another MA plan that does
not cover such stays as a supplemental
benefit). This addresses the concern we
were addressing in our August 2003
final rule without requiring MA
organizations to change their treatment
of this MA plan benefit.
In order to effectuate this proposed
change in the scope of our section
1812(f) waiver, we are proposing to
move the provision describing an MA
organizations’ authority to furnish
covered SNF stays without the
qualifying inpatient hospital stay
required under original Medicare to a
new § 422.102(f) in the section of the
regulations governing supplemental
benefits.
We also propose to make a
conforming revision in the crossreference to this provision that currently
appears at § 409.30(b)(2)(ii), to—(1)
reflect this provision’s relocation from
§ 422.101 to § 422.102; and (2) reflect
the fact that the Part A coverage
provided for thereunder is not for the
entire ‘‘duration of the SNF stay’’, but
only for the period after the individual
is no longer enrolled in the MA plan
offering the coverage of the SNF stay as
a supplemental benefit.
3. Agent and Broker Training and
Testing Requirements (§ 422.2274 and
§ 423.2274)
Pursuant to our authority under
sections 1851(h)(2), 1860D–
1(b)(1)(B)(vi), 1851(j)(2)(E), and 1860D–
4(l)(2) of the Act, we previously codified
agent and broker training and testing
requirements at § 422.2274(b) and (c)
and § 423.2274(b) and (c) to require all
agents and brokers selling Medicare
products be trained and tested annually
through a CMS endorsed or approved
training program, or as specified by us,
on Medicare rules and regulations
specific to the plan products they intend
to sell.
Since the training and testing
requirements were implemented, we
have embarked on various activities to
improve and ensure the efficacy of
training and testing. Specifically, we
launched an online training and testing
pilot in 2009 to increase understanding
of the standardized Medicare program
requirements. Although the pilot was
successful, our ability to accommodate
all agents and brokers nationally is
limited and maintaining the training
and testing module requirements creates
a significant financial burden.
Additionally, endorsing other entities
limits our oversight of training and
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consistency among program
requirements. Moreover, through our
monitoring efforts, we have found that
MA organizations and Part D sponsors
are complying with the annual guidance
released by us. Specifically, we found
that plans provided adequate detail on
the level of information that must be
covered in agent and broker training and
testing materials. As a result, we
propose to revise § 422.2274(b) and (c)
and § 423.2274(b) and (c) to accomplish
several things (i) remove CMS endorsed
or approved training and testing as an
option; (ii) require that agents and
brokers be trained annually on Medicare
rules and regulations; and details
specific to the plan products they intend
to sell: And (iii) require agents and
brokers to be tested annually to ensure
appropriate knowledge and
understanding of the training topics. We
believe this proposed change continues
to ensure that all agents and brokers
selling Medicare products have a
comprehensive understanding of
Medicare program rules. We previously
proposed (see the provisions for
‘‘Reducing the Burden of the
Compliance Program Training
Requirements (§ 422.503(b)(4)(vi)(C) and
§ 423.504(b)(4)(vi)(C)’’) to require a
standardized compliance training
program. Under those provisions, MA
organizations and Part D sponsors will
not be permitted to develop and
implement plan specific training
materials or supplemental materials.
The proposed change in this section is
exclusive to the requirements for
conducting marketing activities under
the MA and Part D program.
4. Deemed Approval of Marketing
Materials (§ 422.2266 and § 423.2266)
Sections 1851(h) and 1860D–
1(b)(1)(B)(vi) of the Act establish the
requirements regarding the review and
approval of marketing materials created
by MA organizations and Part D
sponsors. Sections § 422.2266 and
§ 423.2266 provide the regulatory
requirements for materials that are
deemed approved. If we have not
disapproved the distribution of
marketing materials and forms
submitted by an MA organization or
Part D sponsor with respect to the plan
in the area, we are deemed not to have
disapproved in all other areas covered
by the MA organization or Part D
sponsor except with regard to any
portion of the material or form that is
specific to the particular area. Sections
§ 422.2262 and § 423.2262 also provide
the requirements for the review and
distribution of marketing materials. The
provisions stated in § 422.2266 and
§ 423.2266 are also part of the review

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2019

and distribution process of marketing
materials, and therefore should be
moved to align with the requirements in
§ 422.2262 and § 423.2262. Therefore,
we propose moving the substance of the
current requirements in § 422.2266 and
§ 423.2266 to § 422.2262 (a)(2) and
§ 423.2262(a)(2), respectively. We
propose reserving § 422.2266 and
§ 423.2266.
In addition, we also believe that the
current regulatory requirements in
§ 422.2266 and § 423.2266 do not clearly
state when and to what extent marketing
materials are considered deemed
approved. Therefore, we propose to
simplify the language presently
contained in § 422.2266 and § 423.2266
by stating, ‘‘if CMS does not approve or
disapprove marketing materials within
the specified review timeframe, the
materials will be deemed approved.
Deemed approved means that an MA
organization or Part D sponsor may use
the material.’’ We believe this change
clarifies the present regulatory
requirement for deemed marketing
materials.
5. Cross-Reference Change in the Part C
Disclosure Requirements (§ 422.111)
Prior to the publication of subpart V,
Medicare Marketing Requirements,
marketing-related rules were found in
subpart B, Eligibility, Election, and
Enrollment. These rules (codified in
§ 422.80) included review of marketing
materials and election forms. With the
publication of our September 18, 2008
final rule (73 FR 54208), the marketingrelated requirements were moved into
the new subpart V and § 422.80 was
removed. Since that time, we have
discovered an incorrect cross-reference
to § 422.80 at § 422.111(d)(1) for
procedures MA organizations must
follow when submitting its rules
changes to us for review. The correct
reference should be subpart V, Medicare
Advantage Marketing Requirements. We
are proposing in these regulations to
correct the reference contained in
§ 422.111(d)(1).
6. Managing Disclosure and Recusal in
P&T Conflicts of Interest: Formulary
Development and Revision by a
Pharmacy and Therapeutics Committee
Under Part D (423.120(b)(1))
Section 1860D–4(b)(3)(A)(ii) of the
Act requires Part D sponsors who use
formularies to include on their P&T
committees at least one practicing
physician and at least one practicing
pharmacist, each of whom is
independent and free of conflict with
respect to the sponsor and the plan and
who has expertise in the care of elderly
or disabled persons. In our August 3,

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2004 proposed rule (69 FR 46659), we
proposed to interpret ‘‘independent and
free of conflict’’ to mean that such P&T
committee members could have no
stake, financial or otherwise, in
formulary determinations. In our
January 28, 2005 final rule (70 FR 4256),
we adopted this interpretation, and
clarified that we would consider a P&T
committee member not to be free of
conflict of interest if he or she had any
direct or indirect financial interest in
any entity—including Part D plans and
pharmaceutical manufacturers—that
would benefit from decisions regarding
plan formularies.
In a recent report (‘‘Gaps in Oversight
of Conflicts of Interest in Medicare
Prescription Drug Decisions,’’ OEI–05–
10–00450), the HHS OIG recommended
improvements in our requirements for
Part D plan P&T committees.
Specifically, the OIG report
recommended that we establish
minimum standards to ensure that these
committees have clearly articulated and
objective processes to determine
whether disclosed financial interests are
conflicts and to manage recusals due to
conflicts of interests. The OIG report
also suggested that we tell sponsors that
they need to designate an objective
party, such as a compliance officer, to
flag and enforce the necessary recusals.
In other words, the identification and
evaluation of whether a disclosed
financial interest represents a conflict of
interest should be made by a
knowledgeable and accountable
representative of the sponsor’s
organization, such as the compliance
officer, and not solely by the P&T
committee members themselves. We
concurred that P&T committees should
have clearly articulated and objective
processes to determine whether
disclosed financial interests are
conflicts, and to manage recusals arising
from any such conflicts. Therefore, to
address these recommendations, we
propose to revise our formulary
requirements pertaining to development
and revision by a P&T committee at
§ 423.120(b)(1) to make it clear that the
sponsor must establish such processes.
Moreover, we propose that these
processes must be clearly articulated
and documented, and enforced by an
objective party.
In our response to the OIG report, we
noted that statutory and regulatory
provisions (section 1860D–4(b)(3) of the
Act and 42 CFR § 423.120(b)) indicate
that it is the plan sponsor’s
responsibility to meet the formulary
requirements, which include
development of these processes. We also
noted that we believe the agency’s
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provides appropriate protections to
beneficiaries from any adverse effects
resulting from potential conflicts of
interest. The agency thoroughly reviews
Part D formularies to prevent
discrimination against Medicare
beneficiaries based on age, disease, or
setting in which they receive care. The
review process ensures inclusion of a
broad distribution of therapeutic
categories and classes by using
reasonable benchmarks to ensure drug
lists are robust. Further, we ensure that
cost-sharing levels and utilization
management strategies are appropriate
and non-discriminatory. We identify
potential outliers at each review step for
further investigation and require
reasonable clinical justification when
outliers appear to create beneficiary
access problems. We devote extensive
resources to plan formulary oversight—
and reserve the right to reject any
formulary—to ensure compliance with
industry best practices for formulary
development and to ensure
beneficiaries’ access to clinically
appropriate therapies.
Therefore, if a P&T committee, while
operating under a potential conflict of
interest were to create a formulary
representative of such conflicts, the
formulary would likely be
discriminatory. Because a
discriminatory formulary would not be
approved, the only potential impact we
can envision would be that the bid
could be more expensive and, therefore,
less competitive. However, in this case,
beneficiaries could easily evaluate these
higher premiums in the marketplace
and choose a more efficient plan to meet
their needs. As a result, we would
expect that, given our level of formulary
review, a conflict of interest in the P&T
committee would disadvantage the
sponsor rather than the beneficiary or
the Medicare program.
We have also been asked to consider
whether the practicing physician and
the practicing pharmacist on the P&T
committee who must be free of conflict
of interest from Part D plans and
pharmaceutical manufacturers should
also be free of conflict of interest from
Pharmacy Benefit Managers (PBMs). As
discussed previously, we believe that
our current formulary review process
confers appropriate protections to
beneficiaries from any potential adverse
effects of conflicts of interest.
Additionally, we have devoted
extensive resources to the oversight of
plan formularies and audit of P&T
committee proceedings to ensure that
they comply with industry best
practices for development and
management, and ensure beneficiaries’

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access to clinically appropriate
therapies.
P&T committees must first base their
clinical decisions on the strength of
scientific evidence and standards of
practice, including assessing peerreviewed medical literature,
pharmacoeconomic studies, outcomes
research data, and other such
information as it determines
appropriate, consistent with the
program goal of maintaining a
competitive market. Therefore, given
that sponsors must balance both quality
and costs in developing formularies,
and that PBMs are the entities that
negotiate for price concessions on behalf
of sponsors, we believe that it is
appropriate that PBMs have an interest
in formulary decisions. However, we
solicit comment on the pros and cons of
defining PBMs as entities that could
benefit from formulary decisions from
which one practicing and one practicing
pharmacy on the P&T committee must
be free of conflict of interest.
As discussed previously, we believe
the potential effects of conflicts of
interest would theoretically result in
either discriminatory or inefficiently
priced plans. However, our formulary
review process prevents discrimination,
and higher priced plans will be subject
to competition on premiums in the
marketplace. Nonetheless there may be
risks to formularies that we have not
anticipated. In addition, we believe that
sponsors should be accountable for
objectively managing potential conflicts
of interest as directed by the statute.
Therefore, we propose revising our
regulations at § 423.120(b)(1) to
renumber the existing provisions and
add a new paragraph (b)(1)(iv) to require
that the sponsor’s P&T committee
clearly articulates and documents
processes to determine that the
requirements under paragraphs (b)(1)(i),
through (iii) have been met, including
the determination by an objective party
of whether disclosed financial interests
are conflicts of interest and the
management of any recusals due to such
conflicts.
7. Definition of a Part D Drug (§ 423.100)
Section 1860D–2(e) of the Act defines
a covered Part D drug as a drug that may
be dispensed only upon a prescription
and that is described in subparagraph
(A)(i), (A)(ii), or (A)(iii) of section
1927(k)(2) of the Act; or a biological
product described in clauses (i) through
(iii) of subparagraph (B) of such section,
or insulin described in subparagraph (C)
of such section and medical supplies
associated with the injection of insulin
(as defined in regulations of the
Secretary), and such term includes a

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vaccine licensed under section 351 of
the Public Health Service Act (and, for
vaccinations administered on or after
January 1, 2008), its administration, and
any use of a covered Part D drug for a
medically accepted indication (as
defined in paragraph (4)). We codified
this definition in § 423.100.
a. Combination Products
The FDA approves and regulates
many products that include drug-drug
and drug-device combinations.
However, for the purposes of the Part D
program, only combination products
approved and regulated by the FDA as
drugs, vaccines, or biologics (or any
approved combinations of these) are
potentially eligible for Part D coverage,
in line with the Part D drug definition.
We have previously addressed the status
of combination products through
guidance, including initially a
published Q&A response and later in
Section 10.3 of Chapter 6 of the
Medicare Prescription Drug Benefit
Manual (Part D Manual). This guidance
has specified that combination products
that contain at least one Part D drug
component are Part D drugs when used
for a medically accepted indication,
unless such product, as a whole,
belongs in one of the categories of drugs
excluded from coverage under the Part
D program. We now propose to address
this issue in regulation to codify and
clarify our policy.
We propose to add paragraph (vii)
under the definition of a Part D drug to
further clarify that only those
combination products approved and
regulated in its combination form by the
FDA as a drug, vaccine, insulin, or
biologic, as described in paragraph (i),
(ii), (iii), or (v) of the Part D drug
definition, may be eligible for Part D
coverage. Our proposal would make it
clear that the definition of a Part D drug
excludes products where a combination
of items are bundled or packaged
together for convenience (such as one
box packaging together multiple
products, each in separate bottles),
where the bundle has not been
evaluated and approved by the FDA.
This proposal would not affect products
where multiple active ingredients
(including at least one Part D eligible
prescription-only ingredient) are
incorporated into a single pill or single
injection, as such products would have
had to go through FDA approval in this
combined form, meeting the Part D
requirement. Combination products that
are FDA approved would then be
treated like other Part D drugs, eligible
for coverage only when being used for
a medically accepted indication and not
otherwise excluded from Part D

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coverage (for example, because it is
covered as prescribed and dispensed or
administered under Medicare Part B).
This proposed policy is intended to
clarify that a combination product
containing at least one constituent
ingredient that would, if dispensed
separately, meet the definition of a Part
D drug is eligible for Part D coverage
only if it has received FDA approval in
its combined form. Combination
products not FDA approved as drugs
under the Federal Food, Drug, and
Cosmetics Act would not satisfy section
1927(k)(2)(A)(i) of the Act, defining
covered outpatient drugs as those
approved for safety and effectiveness as
a prescription drug. Combination
vaccines not licensed as a vaccine under
section 351 of the Public Health Service
Act similarly would not satisfy the
definition of a Part D drug as defined in
section 1927(k)(6).
Our proposal would not require that
all constituent ingredients of a
combination product be FDA-approved
prescription drugs. An example would
be an FDA-approved prescription drug
that combines a Part D drug with a nonPart D covered vitamin. Conversely, a
product combining a Part D drug with
a medical food, dietary supplement, or
another Part D drug, where the
combined product has not received FDA
approval as a prescription drug, vaccine,
or biologic would not be eligible for Part
D coverage.
b. Barbiturates and Benzodiazepines
We also propose to amend the
definition of a Part D drug to address
certain exclusions by revising paragraph
(2)(ii). When the Part D benefit started
in 2006, all uses of barbiturates and
benzodiazepines were excluded from
coverage by statute. In 2008, section 175
of the MIPPA amended section 1860D–
2(e)(2)(A) of the Act to include coverage
for barbiturates when used in the
treatment of epilepsy, cancer, or a
chronic mental health disorder and for
benzodiazepines when used for any
medically accepted indication, effective
January 1, 2013. In 2010, section 2502
of the Affordable Care Act amended
section 1927(d) of the Act, to remove
barbiturates and benzodiazepines from
the list of drugs subject to exclusion
from coverage, effective for services
provided on or after January 1, 2014.
Thus, this subsequent statutory change
effectively includes barbiturates as a
Part D drug for all medically accepted
indications. The proposed revision to
§ 423.100 would conform our definition
of Part D drug to the new statutory
requirement.

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c. Medical Foods
We propose to add paragraph (2)(iii)
to the list of exclusions from the
definition of Part D drug to specify that
medical foods, as defined in 21 U.S.C.
360ee, are not Part D drugs. Medical
foods are not described in
subparagraphs A(i), A(ii) or A(iii) of
section 1927(k)(2) of the Act, and
therefore do not meet the statutory
definition of a covered Part D drug, nor
do they fall under other categories
eligible for Part D coverage listed in the
Part D drug definition, such as biologics,
vaccines, and insulin.
Moreover, as described previously in
the section on combination products, a
product with relevant components
including some or all ingredients
meeting the definition of a Part D drug
would not be eligible for Part D coverage
unless the combined product has also
been approved by the FDA as a drug,
vaccine, or biologic.
The proposed clarifications involving
coverage for approved combination
products and non-coverage of medical
foods would not affect current policies
surrounding Part D coverage of
parenteral nutrition. (See the Part D
manual guidance, Chapter 30.7
regarding the payment for parenteral
and enteral nutrition items and
services.) Extemporaneously
compounded prescription drug products
(addressed separately in Chapter 6 of
the Part D manual and in § 423.120) also
would not be affected by the proposed
changes. Part D coverage for
extemporaneously compounded
prescriptions is available for the
ingredients that independently meet the
definition of a Part D drug when the
product needed is one requested by the
provider to meet a specific medical
need, where there is no commercially
available alternative. The convenience
packaging of unapproved combination
products for broad distribution does not
meet the criteria set out specifically for
extemporaneously compounded
prescriptions.
8. Thirty-Six Month Coordination of
Benefits (COB) Limit (§ 423.466(b))
In our April 15, 2010 final rule (75 FR
19819), we exercised our authority
under sections 1860D–23 and 1860D–24
of the Act to impose a timeframe on the
coordination of benefits between PDP
sponsors and other payers including
State Pharmaceutical Assistance
Programs (SPAPs), other providers of
prescription drug coverage, or other
payers. In the preamble of the final rule,
we explained our approach to
determining the 3-year timeframe,

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including the benefits derived from its
establishment.
We stated, ‘‘PDP sponsors must
coordinate benefits with SPAPs, other
entities providing prescription drug
coverage, beneficiaries, and others
paying on the beneficiaries’ behalf for a
period not to exceed 3 years from the
date on which the prescription for a
covered PDP drug was filled.’’ The
phrase ‘‘a period not to exceed 3 years’’
has caused confusion among some
sponsors, who interpreted this to mean
that the coordination of benefits period
could be shorter than 3 years, and have
consequently imposed tighter
timeframes for coordination of benefits.
To clarify the requirement and avoid
further confusion, we are proposing to
remove from the regulation the phrase
‘‘not to exceed,’’ and adding the word
‘‘of.’’ This would clarify that sponsors
must employ a coordination of benefits
period of 3 years, and would remove
any uncertainty about whether they may
impose a shorter coordination of
benefits period.
We also propose to revise the heading
of § 423.466 to reference claims
adjustments, which are addressed in
§ 423.466(a).
9. Application and Calculation of Daily
Cost-Sharing Rates (§ 423.153)
We are proposing technical changes to
the daily cost-sharing rate rule to clarify
the application and calculation of daily
cost-sharing rates and cost-sharing
under the rule. We reminded Part D
sponsors in the contract year 2014 Final
Call Letter that, beginning January 1,
2014, in accordance with
§ 423.153(b)(4)(i), they must establish
and apply a daily cost-sharing rate
whenever a prescription is dispensed by
a network pharmacy for less than a 30
days’ supply, unless the drug is
excepted in the regulation. These
provisions were finalized in a rule
entitled ‘‘Medicare Program; Changes to
the Medicare Advantage and the
Medicare Prescription Drug Benefit
Programs for Contract Year 2013 and
Other Changes’’ (77 FR 22072) (‘‘April
12, 2012 final rule’’). We provided
information in the contract year 2014
Final Call Letter about changes to the
PBP to accommodate a mandatory Daily
Copayment field for any tier where the
plan enters a Copayment Field to assist
sponsors that have been confused about
how to calculate daily cost-sharing
rates. We also noted in the contract year
2014 Final Call Letter that the daily
cost-sharing rate rule does not address
how pharmacy dispensing fees are to be
negotiated, calculated, or paid. We did
so because we had heard that some
sponsors are prorating dispensing fees

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as part of implementing the LTC shortcycle dispensing requirement of
§ 423.154 effective beginning January 1,
2013 and may be incorrectly referencing
the upcoming daily cost-sharing rate
rule as the reason. We made clear that
there is no necessary connection
between daily cost-sharing rates charged
to beneficiaries and how dispensing fees
are paid to pharmacies. Nothing in the
daily cost-sharing rate rule at
§ 423.153(b)(4) requires the proration of
dispensing fees, and we proposed a
prohibition on the proration of
dispensing fees in the LTC setting in
another section of this proposed rule,
because we believe it encourages
inefficient dispensing in LTC facilities.
In light of continuing confusion among
some Part D sponsors about the daily
cost-sharing rate rule, we believe
technical changes to the rule are
warranted.
Currently, under § 423.100, in cases
when a copayment is applicable, ‘‘daily
cost-sharing rate’’ is defined as the
‘‘monthly copayment under the
enrollee’s Part D plan, divided by 30 or
31 and rounded to the nearest lower
dollar amount, if any, or to another
amount, but in no event to an amount
that would require the enrollee to pay
more for a month’s supply of the
prescription than would otherwise be
the case.’’ When we drafted this
definition, we used the numbers ‘‘30’’
and ‘‘31,’’ as these are the numbers of
days that are typically in a month’s
supply in Medicare Part D prescription
drug benefit plans. However, we
clarified in the Call Letter that the
maximum amount that can be entered
for the Daily Copayment field in the
PBP will be based on the 1-month
copayment amount divided by the
actual number of days entered for the
1-month supply for that specific tier.
Therefore, we are proposing to replace
these numbers with the phrase ‘‘the
number of days in the approved month’s
supply for the drug dispensed’’ to
address how Part D sponsors that have
other days’ supplies as their month’s
supplies are to calculate daily costsharing rates.
Also, under our existing definition of
‘‘daily cost sharing rate’’ in § 423.100, as
noted above, and with respect to
copayments, the daily copayment
cannot be an amount that would require
the enrollee to pay more for a month’s
supply of the prescription than would
otherwise be the case. For example: If a
plan uses a 31-day supply as its 1month supply and establishes a onemonth copayment of $70 for Tier 3, then
the Daily Copayment field entry for that
tier could not be higher than $2.25 ($70/
31 = $2.258). Thus, if a plan must round

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the daily cost-sharing rate to a dollar
and cents figure, the highest amount the
plan could round to would be the
nearest lower dollar and cents amount,
as shown in the example. If a plan
rounded the daily cost-sharing rate up,
then if an enrollee eventually received
a month’s supply of a medication, the
enrollee would pay more than ‘‘would
otherwise be the case,’’ meaning more
than the 1-month cost sharing specified
in the approved benefit package. In the
example, if a plan were to round the
daily cost-sharing rate up to $2.26, an
enrollee who eventually receives a
month’s supply of the medication
would pay $70.06, which is higher than
the approved $70 copay for that tier. In
other words, rounding up is not
permitted under the current definition
of ‘‘daily cost-sharing rate’’ and this has
been another cause of confusion for
some Part D sponsors.
While our original intention was to
prohibit significant increases in cost
sharing, such as charging the full 30-day
copay for both the trial supply and any
subsequent refill of a medication, the
current limitation on any increase in
cost sharing over the 30-day supply
amount has reportedly led to
unnecessarily complicated
programming, as well as proration of
other amounts on the claim, such as the
dispensing fees, as discussed
previously. Therefore, we are proposing
to replace the language ‘‘lower dollar
amount, if any, or to another amount,’’
with ‘‘the nearest cent.’’ We believe this
language would be the simplest way to
convey the concept of rounding, while
realizing this language would allow Part
D sponsors to round daily cost-sharing
rates up or down to the nearest 2
decimal places. For instance, in the
example provided previously, the daily
cost-sharing rate would actually be
rounded to $2.26, as this amount would
be the nearest cent. For the reasons we
describe in the following paragraph, we
believe this slight change in policy is
not significant and that the proposed
revised regulation text would address
current confusion about the daily costsharing rate rule. The revised definition
of ‘‘daily cost-sharing rate’’, if adopted,
would read with respect to copayments:
‘‘as applicable, the established monthly
copayment under the enrollee’s Part D
plan, divided by the number of days in
the approved month’s supply for the
drug dispensed and rounded to the
nearest cent.’’
As noted previously, the daily costsharing rate rule applies whenever a
prescription is dispensed by a network
pharmacy for less than a 30 days’
supply, unless the drug is excepted in
the regulation. However, as detailed in

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the preamble to the April 12, 2012 final
rule (77 FR 22072), it is primarily
expected to incentivize Part D enrollees
to talk with their prescribers about trial
supplies, when they are prescribed an
expensive chronic medication for the
first time. By obtaining a less-than-30days’ supply, beneficiaries reduce their
cost sharing when the medication is
discontinued in the first month due to
poor tolerance or side effects, which
also benefits the Part D program by
reducing costs of unused medications.
In addition, as noted in the April 12,
2012 final rule (77 FR 22072), we
believe some enrollees will be
encouraged to request that their
pharmacists assist them with
synchronizing the refill dates of
multiple medications, because they
could do so without having to pay a full
month’s cost sharing for the shortened
days’ supplies necessary to synchronize
refill dates. Although permitted under
the rule, we do not foresee enrollees
choosing to continue to receive chronic
medications incrementally on a
sequential basis. We anticipate that
enrollees who tolerate a chronic
medication would obtain months’
supplies after the first incremental fill,
and enrollees who are synchronizing
medications are expected to do so
through one incremental fill of all
medications except one. Therefore, even
though the proposed revised definition
of ‘‘daily cost-sharing rate’’ could result
in an enrollee who receives the
remainder of month’s supply after
receiving an incremental fill paying
slightly more than he or she otherwise
would have for a month’s supply, we
believe such cases would be rare, if any,
and the amounts involved are nominal
anyway. We are more concerned that
the regulation text with respect to
rounding is clearer, and in this regard,
we solicit comments on whether
sponsors need any additional rounding
guidance.
We are also proposing other technical
changes to the daily cost-sharing rate
rule at § 423.153(b)(4)(i) to improve the
regulation’s clarity. First, we are
proposing to consolidate the language of
§ 423.153(b)(4)(i)(A) into
§ 423.153(b)(4)(i) and to consolidate
§ 423.153(b)(4)(i)(B)(1) and (2) into a
new paragraph § 423.153(b)(4)(ii).
Second, we are proposing that the
language in § 423.153(b)(4)(i) that
addresses the application of the daily
cost-sharing rate in the case of a
monthly copayment be revised for
clarity, and moved to a new paragraph
(b)(4)(iii)(A). This paragraph would state
that in the case of a drug that would
incur a copayment, the Part D sponsor

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must apply cost-sharing as calculated by
multiplying the applicable daily costsharing rate by the days’ supply actually
dispensed when the beneficiary receives
less than a 30 days’ supply. Again, this
is not a change in policy but is merely
a technical change to the regulation text
for better clarity. Third, we are
proposing that § 423.153(b)(4)(iii)(B)
would state that, in the case of a drug
that would incur a coinsurance
percentage, the Part D sponsor shall
apply the coinsurance percentage for the
drug to the days’ supply actually
dispensed. We note that this means,
with respect to dispensing fees, that the
enrollee’s portion of additional
dispensing fees for the incremental
supply would be calculated by
application of this percentage. We
believe all the foregoing technical
clarifications will assist sponsors in
correctly setting, calculating, and
applying daily cost-sharing rates in the
retail and LTC settings beginning
January 1, 2014 whenever a prescription
is dispensed by a network pharmacy for
less than a 30 days’ supply, unless the
drug is excepted in the regulation.
10. Technical Change To Align
Regulatory Requirements for Delivery of
the Standardized Pharmacy Notice
(§ 423.562)
The current regulations at
§ 423.562(a)(3) require Part D plan
sponsors to make arrangements with
their network pharmacies to distribute
notices instructing enrollees how to
contact their plans to obtain a coverage
determination or request an exception.
This is accomplished through delivery
of a standardized notice, CMS–10147—
‘‘Medicare Prescription Drug Coverage
and Your Rights’’ (‘‘pharmacy notice’’).
Section 423.562(a)(3) cross-references
§ 423.128(b)(7)(iii), added in our April
2011 final rule (76 FR 21432), which
requires plans to have a system in place
that transmits codes to network
pharmacies so the pharmacy is notified
to deliver the pharmacy notice at the
point of sale (POS) in designated
circumstances where the prescription
cannot be filled as written.
Pursuant to the 2011 regulatory
change, we issued subsequent guidance
(HPMS memoranda dated October 14,
2011 (‘‘Revised Standardized Pharmacy
Notice’’) and December 27, 2012
(‘‘Revised Guidance for Distribution of
Standardized Pharmacy Notice’’) which
clarifies that distribution of the
pharmacy notice is required upon
receipt of certain transaction responses
indicating that the claim is not covered
by Part D, as well as revised manual
guidance in Chapter 18, section 40.3.1
of the Medicare Prescription Drug

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2023

Benefit Manual related to
operationalization of this requirement
specific to a variety of specialty
pharmacy settings.
In practice, we have never based
distribution of or referral to the
pharmacy notice on whether or not the
enrollee disagrees with information
provided by the pharmacist, but rather
on whether the drug in question can be
provided under Part D and whether the
enrollee is able to obtain the covered
drug at the pharmacy counter. Because
the existing regulation text at
§ 423.562(a)(3) ties delivery of the
pharmacy notice to the enrollee’s
disagreement with information provided
by the pharmacist, we are proposing to
remove this reference.
This proposed technical change
would not alter the circumstances under
which the pharmacy notice must be
delivered to an enrollee and will align
the regulation and the operational
requirements for distribution of the
pharmacy notice. In addition, this
proposed change would be consistent
with both the current OMB-approved
instructions regarding the pharmacy
notice and current CMS manual
guidance.
We do not prohibit distribution of the
pharmacy notice in any circumstance,
so pharmacies may choose to also
provide a copy of the notice in
circumstances where the enrollee
disagrees with the information provided
(for example, if the enrollee believes
they are being charged an incorrect costsharing amount), but the notice is not
required under the standards
established in § 423.128(b)(7)(iii).
Provision of the pharmacy notice is not
a prerequisite for an enrollee to request
a coverage determination or access the
appeals process. Similarly, a plan
sponsor’s failure to comply with the
requirements of § 423.128(b)(7)(iii) or
§ 423.562(a)(3) does not in any way
limit an enrollee’s right to request a
coverage determination or appeal.
11. Special Part D Access Rules During
Disasters or Emergencies (§ 423.126)
Section 1860D–4(b) of the Act
requires us to ensure beneficiaries have
access to covered Part D drugs. When a
disaster strikes or is imminent,
beneficiaries may find they have trouble
accessing drugs through normal
channels or must move to safer
locations far away from their regular
pharmacies. In order to ensure that
beneficiaries do not run out of their
medications during or as a result of a
disaster or emergency, we issued
guidance on December 18, 2009
identifying when, in the course of a
disaster, Part D sponsors would be

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expected to relax ‘‘refill-too-soon’’ (RTS)
edits. We now propose to codify a
revised version of that policy. Proposed
§ 423.126(a)(1)(i) would require Part D
sponsors to relax RTS edits in the event
of any imminent or occurring disaster or
emergency that would hinder an
enrollee’s access to covered Part D
drugs. By this we mean that there is an
anticipated or actual disaster or
emergency, as evidenced by a
declaration of a disaster or emergency
issued by an appropriate federal, state,
or local official, and it is reasonable to
conclude that such disaster or
emergency or preparation therefore
would make it difficult for beneficiaries
to obtain refills of their medications
because the disaster or emergency or
anticipation thereof has affected, or will
affect, their ability to have timely access
to their usual pharmacies. For example,
if federal, state or local authorities issue
mandatory evacuation orders to
populations or segments of the
population in a geographic area, it
would be reasonable to conclude that
the evacuation would hinder an LTC
resident’s ability to get a refill after he
or she is evacuated from the facility. In
such an instance, then, Part D sponsors
with enrollees in the affected area
would be required to relax RTS edits so
that the LTC pharmacies could provide
beneficiaries with refills to take with
them to the location to which they are
being evacuated. Our proposed
requirement would apply to one refill
for each drug the beneficiary is taking
for refills sought within 30 days of the
date the plan sponsor began relaxing
RTS edits. We believe this timeframe
would be sufficient to ensure that
beneficiaries who are unable to obtain
refills during the emergency or disaster
will be able to do so as soon as they can
safely access a network pharmacy. We
solicit comment as to whether 30 days
after the date of the triggering
declaration provides an appropriate
amount of time to ensure that
beneficiaries do not run out of their
medications. In particular, we would be
interested in learning about any
situations in which a beneficiary
affected by an actual or impending
disaster or emergency would be likely to
go to a pharmacy more than 30 days
after the triggering declaration such that
the resumption of RTS edits after 30
days would be problematic. We also
solicit comment as to how it would be
feasible for Part D sponsors to identify
pharmacies or beneficiaries located in
affected areas for which they would be
required to relax edits and, how long it
might then take to program the
necessary changes.

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Although we believe our proposal
provides a general framework for when
RTS edits must be relaxed, we solicit
comment on whether we should impose
more particular requirements in cases
where a disaster or emergency could
result in a voluntary or mandatory
evacuation of an LTC facility. We are
also concerned that if a disaster strikes
the area in which an LTC facility is
located but not the area in which its
servicing LTC pharmacy is located, the
appropriate edits may not be relaxed.
Accordingly, we solicit comment as to
whether it would be more feasible to
establish beneficiary specific edits
limited to residents of LTC facilities in
affected areas given that evacuation
decision-making is rarely a
straightforward, linear process (for
example, not just based on the
declaration of a disaster or emergency),
but rather, often involves a myriad of
facility-specific factors. In particular, we
solicit comment on the practicality of
requiring Part D sponsors to relax RTS
edits for residents of a particular LTC
facility after that facility decides on its
own initiative to evacuate through use
of National Council on Prescription
Drug Programs (NCPDP) Submission
Clarification Code (SCC) code 13, which
conveys that there is an emergency. We
solicit comment as to whether use of
this code number, 13, is specific enough
to signal that sponsors need to loosen
RTS edits and whether it would be
practical for LTC facilities to request
that their LTC pharmacies enter the SCC
code 13. Lastly, we would be interested
in any other ideas on how to structure
workable edits or institute manual
procedures to best target only enrollees
who live in LTC facilities located in
areas affected by a disaster.
We would also be interested in
hearing from any commenters who
would recommend any other triggering
events that would require Part D
sponsors to relax RTS edits. In
particular, we solicit comment as to
whether it would be feasible to require
sponsors to relax edits after the issuance
by the National Weather Service (NWS)
of a Hurricane or Tropical Storm watch
or warning. The NWS typically issues
watches 36 hours in advance of adverse
weather conditions possibly hitting an
area, while the NWS issues watches 48
hours (2 days) in advance of those
conditions possibly hitting an area. All
watches/warnings are posted on the
NWS Web site immediately after their
issuance. We solicit comment as to
whether watch/warnings would require
RTS overrides in the whole state, or just
areas under the watch or warning. We
are also interested in comments

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regarding the time generally needed to
move residents of LTC facilities with
their medication supplies to safety.
Lastly, we believe that sponsors are in
the best position to determine how to
relax the specific RTS edits when
required under our proposal. However,
we also wish to ensure that all sponsors
relax RTS edits in a consistent manner
in order that enrollees have the same
critical access to drugs when disasters
and emergencies are imminent or have
occurred—regardless of the specific
plan in which they are enrolled.
Accordingly, we solicit comments on
the types of situations that might arise
and the extent to which sponsors should
be allowed to exercise some discretion
in complying with this proposed
requirement.
And, as has been the case under our
current guidance, Part D sponsors may
consider extending the implementation
of the RTS edits but are not required to
do so. However, if sponsors choose to
reinstate the RTS edits, they need to
work closely with enrollees who
indicate that they are still displaced or
otherwise impacted by the disaster or
emergency.
12. MA Organization Responsibilities in
Disasters and Emergencies (§ 422.100)
Section 1852(d) of the Act requires
MA organizations to provide proper and
continued access to services, including
making medically necessary benefits
available and accessible 24 hours a day
and 7 days a week. When a disaster
occurs or is imminent, beneficiaries may
find they have trouble accessing
services through normal channels or
must move to safer locations that are
outside of their service areas. To date,
we have relied on issuing subregulatory
guidance for MA organizations through
the HPMS system and have included
that guidance in Chapter 4 of the
Medicare Managed Care Manual. During
a disaster, we expect MA organizations
to continue to follow applicable
standing regulations, including ensuring
continuing access to care in addition to
complying with our subregulatory
guidance.
We are proposing to add paragraph
(m) to § 422.100 to codify and further
clarify an MA organization’s
responsibilities when health plan
services are affected by public health
emergencies or disasters. This provision
is intended to ensure that beneficiaries
continue to have access to care in
situations where normal business
operations are disrupted due to public
health emergencies, disasters and
warnings of imminent disasters. The
proposed new paragraph (m) requires
MA organizations to ensure access to

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covered services that are furnished at
non-contracted facilities and to charge
no more cost sharing for services
obtained by enrolled beneficiaries outof-network than they would pay innetwork. These requirements provide
protections for enrolled beneficiaries,
including those who move to safer
locations that are outside of their service
areas, who have trouble accessing
services through normal channels due to
the unusual circumstances created by
the disaster or emergency. Additionally,
the proposed new paragraph (m)
provides MA organizations with
guidance on the bases for determining
the beginning and end of a disaster or
emergency and requires that the
organization post on its Web site and
convey to enrollees and contracted
providers at least annually, the disaster
and emergency policies in order to
facilitate enrollee access to needed
services while normal care delivery is
unavailable. In addition, this enables
out-of-network providers to be informed
of the terms of payment for furnishing
services to affected enrollees.
13. Termination of a Contract Under
Parts C and D (§ 422.510 and § 423.509)

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a. Cross-Reference Change (§ 423.509(d))
Section 1857(h)(1)(B) and 1860D–
12(b)(3)(F) of the Act describes the
procedures for termination for both Part
C and Part D plan sponsors respectively.
These statutory provisions give an
organization an opportunity for a
hearing before its contract is terminated.
We codified organizations’ appeal
rights under subpart N of parts 422 and
423. Under the Part C § 422.510(d), a
reference to the appeal rights ‘‘in
accordance with subpart N’’ is made.
However, in the corresponding section
for Part D Plan sponsors at § 423.509(d),
the reference to the appeal rights reads
‘‘in accordance with § 423.642.’’ The
Part C and Part D references should be
the same. We are proposing to align the
Part C and Part D appeal rights language
under § 422.510(d) and § 423.509(d) by
replacing the inconsistent language at
§ 423.509(d) to now read ‘‘in accordance
with subpart N of this part.’’ This
change is proposed only to ensure
consistent wording is used in both
regulatory sections and in no way
changes the meaning or policy
encompassed in this provision.
b. Terminology Changes (§ 422.510 and
§ 423.509)
Sections 1857(c) and 1860D–
12(b)(3)(B) of the Act authorize contract
terminations for Part C MA
organizations and Part D plan sponsors
respectively. In the current termination

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regulations at § 422.510 and § 423.509,
there is inconsistent use of the terms
‘‘days’’ and ‘‘calendar days’’. Calendar
days are the appropriate term that
should be used consistently throughout
these sections. Therefore, we are
proposing to replace the word ‘‘days’’
with ‘‘calendar days’’ in both § 422.510
and § 423.509. This change is proposed
only to ensure consistent wording is
used in § 422.510 and § 423.509 and in
no way changes the meaning or policy
encompassed in these provisions.
c. Technical Change To Align Paragraph
Headings (§ 422.510(b)(2))
Sections 1857(c)(2) and 1860D–
12(b)(3)(B) of the Act provide us with
the authority to terminate contracts, for
Part C and Part D sponsors respectively.
The Part C paragraph heading at
§ 422.510(b)(2) incorrectly reads
‘‘Expedited termination of contract by
CMS.’’ The Part D corresponding
paragraph heading at § 423.509(b)(2)
correctly reads ‘‘Immediate termination
of contract by CMS’’. The Part C and
Part D paragraph headings should be the
same. Therefore, we are proposing to
revise the paragraph of § 422.510(b)(2)
to read ‘‘Immediate termination of
contract by CMS’’. This change is
proposed only to ensure consistent
wording is used in both regulatory
sections and in no way changes the
meaning or policy encompassed in this
provision.
d. Terminology Change
(§ 423.509(b)(2)(C)(ii))
Sections 1857(c)(2) and 1860D–
12(d)(3)(B) of the Act provide us with
the authority to terminate contracts, for
Part C and Part D sponsors respectively.
In § 423.509(b)(2)(C)(ii) the regulation
incorrectly references ‘‘MA
organization.’’ This section concerns
Part D, so the correct reference is ‘‘Part
D Plan Sponsor’’. Therefore, we are
proposing to change
§ 423.509(b)(2)(C)(ii) to appropriately
reference Part D plan sponsor; not MA
organization (Part C), as it currently
states. This change is proposed only to
ensure accurate wording is used in both
regulatory sections and in no way
changes the meaning or policy
encompassed in this provision.
14. Technical Changes To Align Part C
and Part D Contract Determination
Appeal Provisions (§ 422.641 and
§ 422.644)
Sections 1857(h) and 1860D–
12(b)(3)(F) of the Act describe the
procedures for termination for both Part
C MA organizations and Part D Plan
sponsors, respectively. These statutory
provisions provide an organization with

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an opportunity for a hearing before its
contract is terminated. Appeal
procedures were established under
sections 1856(b)(2) and 1860D–12(b)(3)
of the Act for both Part C and Part D
sponsors, respectively. Sections 422.641
and 423.641, list the types of Part C and
Part D contract determinations that may
be appealed.
(a) Technical Change (§ 422.641)
Currently in § 422.641, the contract
termination is discussed in paragraph
(b) and contract non-renewal is
discussed in (c). Conversely, in
§ 423.641 the contract terminations are
discussed in (c) and contract nonrenewal is discussed in (b). Therefore,
we are proposing to align the Part C list
order for (b) and (c) in the contract
determinations section at § 422.641 with
its Part D corresponding section at
§ 423.641. This change is proposed only
to ensure consistency between the two
parts and in no way changes the
meaning or policy encompassed in this
provision.
(b) Technical Changes (§ 422.644(a) and
(b))
Sections 1857(h)(1)(B) and 1860D–
12(b)(3)(F) of the Act describe the
procedures for termination for both Part
C and Part D sponsors, respectively.
These statutory provisions provide an
organization with an opportunity for a
hearing before its contract is terminated.
Appeal procedures were established
under § 1856(b)(2) of the Act for both
Part C and Part D sponsors. In § 423.642
we specify that the notice is based upon
a contract determination made ‘‘under
§ 423.641.’’ Therefore, since Part C and
Part D language should be consistent the
same reference should be made in the
Part C corresponding § 422.644. To
remedy this error, we are proposing to
insert ‘‘under § 422.641’’ into
§ 422.644(a) for Part C contract
determinations. This change is proposed
only to ensure consistent wording is
used in both regulatory sections and in
no way changes the meaning or policy
encompassed in this provision.
In addition, the Part D Plan sponsor
language in § 423.642(b) states that ‘‘(b)
The notice specifies the—(1) Reasons for
the determination; and’’. The Part C
language in § 422.644(b) states that ‘‘(b)
The notice specifies—(1) The reasons
for the determination; and’’. Part C and
Part D language should be consistent,
therefore, the same reference should be
made in the Part C corresponding
section § 422.644. To remedy this error,
we are proposing to align the Part C
language at § 422.644(b) with that of the
Part D language at § 423.642(b) for
consistency between both the Part C and

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Part D termination regulations.
Specifically, we propose to change
§ 422.644(b) by deleting the word ‘‘the’’
and revising it to read ‘‘(b) The notice
specifies the—(1) Reasons for the
determination; and’’. This change is
proposed only to ensure consistent
wording is used in both regulatory
sections and in no way changes the
meaning or policy encompassed in this
provision.
15. Technical Changes To Align Parts C
and D Appeal Provisions (§ 422.660 and
§ 423.650)
Sections 1857(h)(1)(B) and 1860D–
12(b)(3)(F) of the Act describe the
procedures for termination for both Part
C and Part D, respectively. These
statutory provisions provide
organizations with an opportunity for a
hearing before its contract is terminated.
Appeal procedures were established
under § 1856(b)(2) of the Act for both
Part C and Part D sponsors. We propose
to make technical changes in our
regulations at § 422.660(a)(2),
§ 422.660(a)(3), and § 423.650(a)(2) to
ensure consistency. Specifically, we are
proposing to replace the term ‘‘under’’
with the phrase ‘‘in accordance with’’ in
§ 422.660(a)(2), § 422.660(a)(3), and
§ 423.650(a)(2). This change is proposed
only to ensure consistent wording is
used in § 422.660 and § 423.650 and in
no way changes the meaning or policy
encompassed in these provisions.
In addition, we are proposing to make
a technical change in our regulations at
§ 423.650(a)(4) to ensure consistency
with the authorizing language contained
in sections 1856(b)(2), 1857(h), and
1860D–12(d)(3)(F) of the Act which
gives us the authority to terminate
contracts for both Part C and Part D
sponsors. Under the Part C
§ 422.660(a)(4), a reference to imposing
intermediate sanctions and civil money
penalties ‘‘in accordance with
§ 422.752(a) through (b) of this part’’ is
made. The corresponding section for
Part D is at § 423.650(a)(4). However, the
reference to imposing intermediate
sanctions and civil money penalties
reads ‘‘in accordance with § 423.752(a)
and (b)’’. The Part C and Part D
references should be the same and both
state ‘‘(a) through (b)’’. Specifically, we
are proposing to replace the word ‘‘and’’
with ‘‘through’’ in § 423.650(a)(4). This
change is proposed only to ensure
consistent wording is used in both
regulatory sections and in no way
changes the meaning or policy
encompassed in this provision.
Sections 422.660(b)(4) and
423.650(b)(4) give a general reference to
§ 422.752 and § 423.752, but do not refer
the reader to the applicable paragraphs

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contained in those sections. Therefore,
we are proposing to modify
§ 422.660(b)(4) and § 423.650(b)(4) to
add the language ‘‘§ 422.752(a) through
(b)’’ and ‘‘§ 423.752(a) through (b)’’,
respectively, to refer the reader to the
applicable regulations for intermediate
sanctions. This change is proposed only
to accurately reflect applicable
regulatory requirements and in no way
changes the meaning or policy
encompassed in this provision.
16. Technical Changes Regarding
Intermediate Sanctions and Civil Money
Penalties
Sections 1857(g) and 1860D–
12(b)(3)(E) of the Act provides us with
the authority to impose intermediate
sanctions (sanctions) and CMPs on Part
C and Part D sponsors, respectively.
a. Technical Changes to Intermediate
Sanctions Notice Receipt Provisions
(§ 422.756(a)(2) and § 423.756(a)(2))
Under § 422.756(a)(2) and
§ 423.756(a)(2) the current language
states that written requests for rebuttal
by the MA organization or Part D plan
sponsor must be received within ‘‘10
calendar days from the receipt of
notice’’. This language is inconsistent
with other the language that appears in
other sections within subpart O, the
appeals section in subpart N and the
termination sections in subpart K. In
those sections we state that written
requests must be received within ‘‘10
calendar days after receipt of the
notice’’. The language in all sections
should be consistent. Therefore, we are
proposing to modify the language at
§ 422.756(a)(2) and § 423.756(a)(2) to
state ‘‘10 calendar days after receipt of
the notice’’. This change is proposed
only to ensure consistent wording is
used in all sections and in no way
changes the meaning or policy
encompassed in this provision.
In addition, we are proposing to
correct the grammatical error that exists
in current § 422.756(a)(2) and
§ 423.756(a)(2). The Part C and Part D
language currently reads, ‘‘CMS
considers receipt of notice as the day
after notice is sent by fax, email, or
submitted for overnight mail’’. To fix
the grammatical errors we are proposing
to revise the language in both
§ 422.756(a)(2) and § 423.756(a)(2) to
read ‘‘CMS considers receipt of the
notice as the day after the notice is sent
by fax, email, or submitted for overnight
mail.’’ This change is proposed only to
make a grammatical correction and in
no way changes the meaning or policy
encompassed in this provision.

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b. Cross-Reference Changes
(§ 422.756(b)(4) and § 423.756(b)(4))
Under § 422.756(b)(4) and
§ 423.756(b)(4), we furnish our
procedures for imposing intermediate
sanctions and civil money penalties on
MA organizations and Part D sponsors,
respectively. The current language at
§ 422.756(b)(4) states that MA
organizations, if sanctioned, must
follow the right to a hearing procedure
as specified at § 422.660 and § 422.684.
The current language at § 423.756(b)(4)
states that Part D sponsors, if
sanctioned, must follow the right to a
hearing procedure as specified at
§ 423.650 and § 423.662. However, MA
organizations and Part D sponsors must
adhere to procedures promulgated
within subpart N of the regulations, not
just § 422.660 and § 422.684; and
§ 423.650 and § 423.662, respectively.
Therefore, we are proposing to modify
the language at § 422.756(b)(4) and
§ 423.756(b)(4) to state that MA
organizations and Part D sponsors
‘‘must follow the right to a hearing
procedures as specified in subpart N’’.
This change is proposed only to
accurately reflect applicable regulatory
requirements and in no way changes the
meaning or policy encompassed in this
provision.
c. Technical Changes (§ 422.756(d) and
§ 423.756(d))
In § 422.756(d) and § 423.756(d) we
provide alternatives to sanctions,
including non-renewal or termination of
the organizations contract. However, the
paragraph heading of both § 422.756(d)
and § 423.756(d) only refers to
terminations by CMS. Therefore, we are
proposing to revise the paragraph
heading to ‘‘Non-renewal or termination
by CMS’’ in both sections to reflect the
content specified within the provision.
This change is proposed only to
accurately reflect applicable regulatory
requirements and in no way changes the
meaning or policy encompassed in this
provision.
Within § 422.756(d) and § 423.756(d)
we state that we may decline to
authorize the renewal of an
organization’s contract in accordance
with § 422.506(b)(2) and (b)(3) for MA
organizations and in accordance with
§ 423.507(b)(2) and (b)(3) for Part D
sponsors. However, in both § 422.756(d)
and § 423.756(d), all of paragraph (b)
applies to the provisions. Therefore, we
are proposing to change both provisions
§ 422.756(d) and § 423.756(d) to read
‘‘§ 422.506(b)’’ and ‘‘§ 423.507(b)’’,
respectively. This change would
accurately reflect that all of paragraph
(b) applies in both provisions. This

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change is proposed only to accurately
reflect applicable regulatory
requirements and in no way changes the
meaning or policy encompassed in this
provision.
Within § 422.756(d) and § 423.756(d),
we refer to the sanctions described in
paragraph (c) of each section but in each
section, paragraph (c) refers to the
effective date and duration of sanctions,
rather than sanctions which are
described in § 422.750 and § 423.750,
respectively. Therefore, we are
proposing to change the current
language at § 422.756(d) to read ‘‘In
addition to or as an alternative to the
sanctions described in § 422.750 . . .’’
and change the language at § 423.756(d)
to read ‘‘In addition to or as an
alternative to the sanctions described in
§ 423.750.’’ This change would
accurately reflect the applicable
provision referenced in both
§ 422.756(d) and § 423.756(d). This
change is proposed only to accurately
reflect applicable regulatory
requirements and in no way changes the
meaning or policy encompassed in this
provision.

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d. Technical Changes To Align the Civil
Money Penalty Provision With the
Authorizing Statute (§ 422.760(a)(3) and
§ 423.760(a)(3))
The provisions at § 422.760(a)(3) and
§ 423.760(a)(3) state, ‘‘the harm which
resulted or could have resulted from
conduct of an MA organization’’ and
‘‘the harm which resulted or could have
resulted from conduct of a Part D plan
sponsor’’, respectively. However, this
language is not consistent with the
authorizing statutory provisions, nor is
it consistent with other provisions in
the corresponding sections. Therefore,
we are proposing to align the language
with paragraph (b) in both
§ 422.760(a)(3) and § 423.760(a)(3). The
language would be revised to state ‘‘The
adverse effect to enrollees which
resulted or could have resulted . . .’’ in
both § 422.760(a)(3) and § 423.760(a)(3).
This change is proposed only to
accurately reflect applicable statutory
requirements and in no way changes the
meaning or policy encompassed in this
provision.
e. Technical Changes To Align the Civil
Money Penalty Hearing Notice Receipt
Provisions (§ 422.1020(a)(2),
§ 423.1020(a)(2), § 422.1016(b)(1), and
§ 423.1016(b)(1))
Sections 1857(g)(4) and 1860D–
12(b)(3)(E) of the Act provides us with
the authority to impose civil money
penalties on Part C and Part D sponsors,
respectively. Under § 422.1020(a)(2) and
§ 423.1020(a)(2), we discuss our

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procedures for appealing CMPs. The
current language in both sections state
written requests for appeal by the MA
organization or legal representative or
authorized official must be filed within
60 calendar days from the receipt of
notice of initial determination, to
request a hearing before the
Administrative Law Judge to appeal any
CMS decision. However, this language
does not align with the appeal language
in subpart N. Therefore, we are
proposing to change the language at
§ 422.1020(a)(2) and § 423.1020(a)(2) to
align it with the language within
subpart N for appeals. Specifically, we
are changing both § 422.1020(a)(2) and
§ 423.1020(a)(2) to state ‘‘within 60
calendar days after receipt of the notice
of initial determination’’. This change is
only to ensure consistent wording is
used in all sections and in no way
changes the meaning or policy
encompassed in this provision.
In addition, under § 422.1016 and
§ 423.1016, we furnish our procedures
for filing briefs with the Administrative
Law Judge or Departmental Appeals
Board, and opportunity for rebuttal. The
provisions at § 422.1016(b)(1) and
§ 423.1016(b)(1) state, ‘‘the other party
will have 20 days from the date of
mailing or personal service to submit
any rebuttal statement or additional
evidence’’. However, this language is
not consistent with provisions in other
corresponding sections. Therefore, we
are proposing to revise the language at
§ 422.1016(b)(1) and § 423.1016(b)(1) to
state ‘‘The other party will have 20 days
from the date of mailing or in person
filing’’. This change is proposed only to
ensure consistent wording is used in all
sections and in no way changes the
meaning or policy encompassed in this
provision.

section 1860D–15 of the Act contains
provisions that limit the use of
information disclosed or obtained under
its authority.
Section 6402(b)(1) of the Affordable
Care Act amended section 1860D–
15(f)(2) of the Act to relax the limitation
on the use of information that is
disclosed or obtained under section
1860D–15 of the Act. Specifically, the
Affordable Care Act removed the word
‘‘only’’ from subsection (f)(2)(A) and
added a new subsection (ii) which states
that information disclosed or obtained
under section 1860D–15 of the Act may
be used by officers, employees, and
contractors of HHS for the purposes of,
and to the extent necessary, in
‘‘conducting oversight, evaluation, and
enforcement under this title.’’ Section
6402(b)(1) also added a new subsection
(B) which states that information
disclosed or obtained pursuant to
section 1860D–15 of the Act may be
used ‘‘by the Attorney General and the
Comptroller General of the United
States for the purposes of, and to the
extent necessary in, carrying out health
oversight activities.’’ Thus, the
Affordable Care Act considerably
broadened the purposes for which HHS,
its contractors, and the Attorney General
and Comptroller General may use the
information disclosed or obtained
pursuant to section 1860D–15 of the Act
by removing the word ‘‘only’’ in
subsection (A) and adding a new clause
(ii) and a new subsection (B). However,
we note, that the Affordable Care Act
did not change the existing restriction
on the use of information under
subsection (d).
In light of the Affordable Care Act
amendment to section 1860D–15(f) of
the Act, we are proposing to make
conforming changes to § 423.322.

17. Technical Change to the Restrictions
on Use of Information Under Part D
(§ 423.322)
We are proposing a technical change
to § 423.322 due to section 6402(b)(1) of
the Affordable Care Act which amended
section 1860D–15(f)(2) of the Act. For
background, most of the payment
provisions for the Part D program are
found in section 1860D–15 of the Act.
Subsections (d) and (f) of section
1860D–15 of the Act authorize the
Secretary to collect any information
needed to carry out this section.
However those subsections, as originally
enacted, also stated that ‘‘information
disclosed or obtained under [section
1860D–15 of the Act] may be used by
officers, employees, and contractors of
[HHS] only for the purpose of, and to
the extent necessary, in carrying out
[section 1860D–15 of the Act].’’ Thus,

IV. Collection of Information
Requirements
Under the Paperwork Reduction Act
of 1995, we are required to provide 60day notice in the Federal Register and
solicit public comment before a
collection of information requirement is
submitted to the Office of Management
and Budget (OMB) for review and
approval. In order to fairly evaluate
whether an information collection
should be approved by OMB, section
3506(c)(2)(A) of the Paperwork
Reduction Act of 1995 requires that we
solicit comment on the following issues:
• The need for the information
collection and its usefulness in carrying
out the proper functions of our agency.
• The accuracy of our estimate of the
information collection burden.
• The quality, utility, and clarity of
the information to be collected.

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• Recommendations to minimize the
information collection burden on the
affected public, including automated
collection techniques.
We are soliciting public comment on
each of these issues for the following
sections of this document that contain
information collection requirements
(ICRs).
A. ICRs Related to Eligibility of
Enrollment for Individuals Not Lawfully
Present in the United States (§ 417.2,
§ 417.420, § 417.422, § 417.460, § 422.1,
§ 422.50, § 422.74, § 423.1, § 423.30, and
§ 423.44)
We are proposing to amend § 417.2,
§ 417.420, § 417.422, § 417.460, § 422.1,
§ 422.50, § 422.74, § 423.1, § 423.30, and
§ 423.44 to include the eligibility
requirement of citizenship or lawful
presence to enroll in MA, Part D, or cost
plans. To implement these regulations,
we would relay data regarding an
individual’s lawful presence status to
plans through the MARx system so that
the plans will be aware of an
individual’s eligibility when requesting
enrollment and notify plans when
current members lose lawful presence
status. This data is already available to
us; thus no new data will be collected,
and there is no new information
collection or burden on organizations.

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B. ICRs Related to Improper Prescribing
Practices and Patterns (§ 424.535(a)(13)
and (14))
Our proposed additions of
§ 424.535(a)(13) and (14) would result in
an increase in revocations and
associated appeals. However, we are
unable to estimate the number of
revocations and appeals. We do not
have data available that can be used to
make such a projection, as each
situation would have to be carefully
reviewed and addressed on a case by
case basis. Since we would invoke
§ 424.535(a)(8)(iii) only in the most
egregious of circumstances, we believe
that the number of revocations under
this provision would be small. The
concomitant increase in the ICR burden
would therefore be minimal.
C. ICRs Related to Applicants or Their
Contracted First Tier, Downstream, or
Related Entities To Have Experience in
the Part D Program Providing Key Part
D Functions (§ 423.504(b)(8)(i) Through
(iii))
Proposed § 423.504(b)(8)(i) through
(iii) would require that Part D
organizations seeking a new Medicare
contract must have arrangements in
place such that either the applicant or
a contracted entity that will be
performing certain key Part D functions

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has at least 1 full benefit year of
experience providing the function or
providing the function for another Part
D plan sponsor. The burden associated
with this requirement is the time and
effort put forth by Part D applicants to
answer questions about such experience
as part of the Part D application process.
For entities that hold an existing Part D
contract, or whose parent or another
subsidiary of that parent has already
held a Part D sponsor contract for at
least a year, it is estimated that it will
take each Part D applicant for a new
contract 2 minutes to provide 1 or 2 new
sentences in the organizational history
section of the application, and 1 minute
to respond to yes-no questions about
experience with the 3 functions for
which experience is required, for a total
of 3 minutes per applicant. For entities
new to Part D, it is estimated that it will
take each Part D applicant for a new
contract 2 minutes to provide 1 or 2 new
sentences in the organizational history
section of the application, 1 minute to
respond to yes-no questions about
experience with the 3 functions for
which experience is required, and 1
additional minute to provide at least 1
contract number of an existing or recent
Part D sponsor under which the entity
to provide the key function obtained its
experience, for a total of 4 minutes.
Based on the number of Part D
applications we receive each year, we
would anticipate no more than 60 Part
D applications for a new contract, of
which no more than 15 would be
entities new to Part D. Thus, the burden
for the 45 existing entities at 3 minutes
each, plus the burden for the 15 new
entities at 4 minutes each, brings the
total burden hours to approximately
3.25 hours. If approved, the new
application questions would be
addressed under currently approved
OMB control number (OCN) 0938–0936.
D. ICRs Related to Eligibility of
Enrollment for Incarcerated Individuals
(§ 417.460, § 422.734, and § 423.44)
We are proposing to amend
§ 417.460(b)(2)(i), § 417.460(f)(1)(i),
§ 422.74(d)(4)(i)(A), § 422.74(d)(4)(v),
and § 423.44(d)(5) to clarify the
eligibility requirement for residing in
the plan’s service area related to
incarceration for the purposes of
enrolling into and remaining enrolled in
MA, Part D, and Medicare cost plans. To
implement these regulations, we would
relay data to plans regarding an
individual’s incarceration through the
MARx system so that the plans would
be aware of the individual’s eligibility
when requesting enrollment and notify
the plans of loss of eligibility for current
members. This data is already available

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to us. Thus no new data would be
collected, and there is no new
information collection or burden on
organizations.
E. ICRs Related to Rewards and
Incentives Program Regulations for Part
C Enrollees (§ 422.134)
This requirement does not impose any
new information collection
requirements. This is an existing
recordkeeping requirement in which
MA organizations must retain
information pertaining to any rewards
and incentives programs in accordance
with our regulations at 42 CFR 422.118.
We believe the burden associated with
this requirement is exempt from the
PRA under 5 CFR 1320.3(b)(2) as we
believe this is a usual and customary
business practice. Furthermore, any
requests to furnish the information in a
form and manner we designate are
unique, that is, non-standardized and
specific to each individual MA
organization.
F. ICRs Related to Expanding Quality
Improvement Program Regulations
(§ 422.152)
This requirement does not impose any
new information collection
requirements. PRA approval is current
under OCN 0938–1023.
G. ICRs Related to Revisions to Good
Cause Processes (§ 417.460, § 422.74,
and § 423.44)
We are proposing to amend § 417.460,
§ 422.74, and § 423.44 to establish the
ability for us to designate an entity other
than CMS to implement the good cause
process. To implement these
regulations, the plan will already have
the enrollment data necessary to make
the good cause determinations within
the process. Thus no new data would be
collected. However, there would be
additional burden to the plan in terms
of completing the operational process,
such as responding to requests for
reinstatement from former members,
gathering the attestation from the
individual regarding his or her reason
for not paying the plan premiums
within the grace period, making the
determination as to whether the
individual meets the good cause criteria
and maintaining the case notes and
documentation to support its
determination should it need to be
reviewed. As plans already provide
customer service to their current and
past members, we estimate that this
burden would be approximately 30
minutes for each reinstatement request.
According to the most recent wage data
provided by the Bureau of Labor
Statistics (BLS) for May 2012, the mean

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hourly wage for the category of
‘‘Customer Service Representatives’’—
which we believe, considering the
common point of entry for all issues at
the plan, is the most appropriate
category—is $15.92. With fringe benefits
and overhead, the per hour rate is
$24.03. It is calculated that the cost for
30 minutes would be $12.01. Not all
plans disenroll for non-payment of
premiums. However, for those who do
implement this voluntary policy, it
results in an average of 20,000
disenrollments each month. In response,
we receive an average of 698 requests
for reinstatement per month. The plan
representative cost of $12.01 for each
case is multiplied by 698 cases.
Therefore, based on the proposed
change, handling of these requests
would result in a total monthly cost of
$8,383 for all plans in the MA, Part D,
and cost plan programs.
H. ICRs Related to the Definition of
Organization Determination (§ 422.566)
The burden associated with this
proposal is the time necessary for MA
organizations to process organization
determination requests, issue a decision
and, where appropriate, effectuate any
approved coverage decision. When an
MA organization issues an adverse
organization determination, it must give
the enrollee written notice pursuant to
the requirements in § 422.568(d) and (e)
and § 422.572(e). This requirement is
subject to the PRA, and the burden
associated with it is currently approved
under OCN 0938–0829. The information
collection requirements are not
expected to change because the
proposed revisions to the definition of
organization determination would not
alter the frequency with which the
current OMB-approved notice is
required, nor the time required to issue
the notice. The proposed change to
§ 422.566(b)(3) would codify certain
adverse decisions which MA
organizations already treat operationally
as adverse organization determinations
subject to the standardized denial
notice. The proposed addition of
§ 422.566(b)(6) applies only to favorable

organization determinations which do
not require written notice.
I. ICRs Related to Skilled Nursing
Facility Stays (§ 422.101 and § 422.102)
We propose to relocate the MA
regulation language currently located at
§ 422.101(c), ‘‘Requirements Related to
Basic Benefits’’ to § 422.102(a)(5),
‘‘Supplemental Benefits.’’ We are
proposing to move the provision
because it describes MA organizations’
authority to furnish covered SNF stays
without the qualifying inpatient
hospital stay required under original
Medicare. For the past 10 years, MA
organizations have offered the waiver of
the 3-day inpatient hospital stay as a
supplemental benefit. Thus, placing the
provision in the section related to
supplemental benefits is appropriate.
We also propose to make a
conforming revision in the crossreference to this provision that currently
appears at § 409.30(b)(2)(ii), in order to
reflect this provision’s relocation from
§ 422.101 to § 422.102. This is a simple
relocation of current regulation. There
are no new PRA requirements.
J. ICRs Related to Changes to Audit and
Inspection Authority (§ 422.503(d)(2)
and § 423.504(d)(2))
We are proposing a change to
§ 422.503(d)(2) and § 423.504(d)(2) to
include authority that will permit CMS
to require MA organizations and Part D
sponsors to hire an independent auditor
to conduct full or partial program audits
and/or perform validation exercises to
confirm correction of deficiencies found
during an audit. We currently conduct
these audits and validation exercises,
and collect data associated with these
activities under OCN 0938–1000. We do
not believe that requiring MA
organizations and Part D sponsors to
hire an independent auditor to conduct
these audits or validation exercises will
impose any additional burden on MA
organizations and Part D sponsors.

K. ICR Related to Recovery Audit
Contractor Determinations (Part 422,
Subpart Z and Part 423, Subpart Z)
The information collection burden
associated with our proposed
requirements consists of the submission
of requests for: (1) Reconsiderations; (2)
CMS hearing official determinations;
and (3) CMS Administrator reviews.
Based on existing Part D appeals data,
we estimate that plans will file the
following numbers of requests on an
annual basis:

TABLE 7— ESTIMATED NUMBER OF
PART C & D RAC APPEAL REQUESTS
Type of request

Number of
requests per
year

Reconsideration ....................
CMS Hearing Official ............
Administrator Review ............

104
10
2

Total ..................................

116

The reasons for the decrease in
requests at higher appeal levels are that:
(1) The plan may succeed in its appeal
and thus have no need to appeal to the
next level; and (2) the plan may simply
wish to forgo further appeals. We stress
that the figures in Table 7 are mere
projections, though, again, they are
based on the number of Part D appeals
that have been submitted to date.
We estimate that it would take a plan
5 hours to prepare and file an appeal
request. In terms of cost, it has been our
experience that most appeals have been
prepared by high-level officials of the
plan. According to the most recent wage
data provided by the Bureau of Labor
Statistics (BLS) for May 2012, the mean
hourly wage for the category of ‘‘General
and Operations Managers’’—which we
believe, considering the variety of
officials who have submitted appeals, is
the most appropriate category—is
$55.22. With fringe benefits and
overhead, the per hour rate is $83.35.
Multiplying this figure by 580 hours (or
116 submissions × 5 hours) results in a
projected annual cost burden of
$48,343, as outlined in Table 8.

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TABLE 8—ESTIMATED ANNUAL REPORTING/RECORDKEEPING BURDEN
OMB
Control
No.

Regulation
section(s)

§ 422.2605
§ 422.2610
§ 422.2615
§ 423.2605
§ 423.2610

............
............
............
............
............

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Respondents

Responses

Burden per
response
(hours)

52
5
1
52
5

52
5
1
52
5

5
5
5
5
5

N/A
N/A
N/A
N/A
N/A

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Total
annual
burden
(hours)
260
25
5
260
25

Sfmt 4702

Hourly labor
cost
of reporting
($)
83.35
83.35
83.35
83.35
83.35

E:\FR\FM\10JAP2.SGM

Total labor
cost of
reporting
($)

Total
capital/
maintenance
costs
($)

Total cost
($)

83.35
83.35
83.35
83.35
83.35

0
0
0
0
0

21,671.00
2083.75
416.75
21,671.00
2083.75

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TABLE 8—ESTIMATED ANNUAL REPORTING/RECORDKEEPING BURDEN—Continued
OMB
Control
No.

Regulation
section(s)

Respondents

Responses

Burden per
response
(hours)

Hourly labor
cost
of reporting
($)

Total labor
cost of
reporting
($)

Total
capital/
maintenance
costs
($)

Total cost
($)

§ 423.2615 ............

N/A

1

1

5

5

83.35

83.35

0

416.75

Total ..............

N/A

116

116

N/A

580

......................

..................

0

48,343

If you comment on these information
collection and recordkeeping
requirements, please do either of the
following:
1. Submit your comments
electronically as specified in the
ADDRESSES section of this proposed rule;
or
2. Submit your comments to the
Office of Information and Regulatory
Affairs, Office of Management and
Budget,
Attention: CMS Desk Officer, CMS–
4159–P
Fax: (202) 395–6974; or
Email: OIRA_submission@omb.eop.gov
V. Response to Comments
Because of the large number of public
comments we normally receive on
Federal Register documents, we are not
able to acknowledge or respond to them
individually. We will consider all
comments we receive by the date and
time specified in the DATES section of
this preamble, and, when we proceed
with a subsequent document, we will
respond to the comments in the
preamble to that document.
VI. Regulatory Impact Analysis
A. Statement of Need

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Total
annual
burden
(hours)

The purpose of this proposed rule is
to make revisions to the MA program
(Part C) and Prescription Drug Benefit
Program (Part D), implement provisions
specified in the Affordable Care Act,
and make other changes to the
regulations based on our continued
experience in the administration of the
Part C and Part D programs. These latter
revisions are necessary to: (1) Clarify
various program participation
requirements; (2) make changes to
strengthen beneficiary protections; (3)
strengthen our ability to identify strong
applicants for Part C and Part D program
participation and remove consistently
poor performers; and (4) make other
clarifications and technical changes.
B. Overall Impact
We have examined the impacts of this
rule as required by Executive Order
12866 on Regulatory Planning and
Review (September 30, 1993), Executive

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Order 13563 on Improving Regulation
and Regulatory Review (January 18,
2011), the Regulatory Flexibility Act
(RFA) (September 19, 1980, Pub. L. 96–
354), section 1102(b) of the Social
Security Act, section 202 of the
Unfunded Mandates Reform Act of 1995
(March 22, 1995, Pub. L. 104–4),
Executive Order 13132 on Federalism
(August 4, 1999), and the Congressional
Review Act (5 U.S.C. 804(2)).
Executive Orders 12866 and 13563
direct agencies to assess all costs and
benefits of available regulatory
alternatives and, if regulation is
necessary, to select regulatory
approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). Executive Order 13563
emphasizes the importance of
quantifying both costs and benefits, of
reducing costs, of harmonizing rules,
and of promoting flexibility. A
regulatory impact analysis (RIA) must
be prepared for major rules with
economically significant effects ($100
million or more in any 1 year). This
proposed rule has been designated an
’’economically significant’’ rule under
section 3(f)(1) of Executive Order 12866.
Accordingly, we have prepared a
regulatory impact analysis that details
the anticipated effects (costs, savings,
and expected benefits), and alternatives
considered by proposed requirement.
Finally, in accordance with the
provision of the Executive Order 12866,
this proposed rule was reviewed by the
Office of Management and Budget.
Two provisions result in a total of
4,768 annual burden hours and a total
annualized monetized impact of
$148,939. See sections IV.G. and IV.K.
of this proposed rule for details
regarding the burden associated with
the requirements of this proposed rule.
The RFA requires agencies to analyze
options for regulatory relief of small
entities, if a rule has a significant impact
on a substantial number of small
entities. For purposes of the RFA, small
entities include small businesses,
nonprofit organizations, and small
governmental jurisdictions. The great

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majority of hospitals and most other
health care providers and suppliers are
small entities, either by being nonprofit
organizations or by meeting the SBA
definition of a small business (having
revenues of less than $7.0 million to
$34.5 million in any 1 year). Individuals
and states are not included in the
definition of a small entity. This
proposed rule primarily affects the
Federal government, Medicare
Advantage plans, and Part D Sponsors.
Part D sponsors and MA plans,
entities that will be affected by the
provisions of this rule, are not generally
considered small business entities. MA
plans and Part D sponsors must meet
minimum enrollment requirements
(5,000 in urban areas and 1,500 in
nonurban areas) and because of the
revenue from such enrollments, these
entities are generally above the revenue
threshold required for analysis under
the RFA. We determined that there were
very few MA plans and Part D sponsors
that fell below the size thresholds for
’’small’’ businesses established by the
Small Business Administration (SBA).
Currently, the SBA size threshold is $7
million in total annual receipts for
health insurers (North American
Industry Classification System, or
NAICS, Code 524114) and we have
confirmed that most Part D sponsors
have Part D receipts above the $7
million threshold.
While a very small rural plan could
fall below the threshold, we do not
believe that there are more than a
handful of such plans. A fraction of MA
organizations and sponsors are
considered small businesses because of
their non-profit status. HHS uses as its
measure of significant economic impact
on a substantial number of small
entities, a change in revenue of more
than 3 to 5 percent. Consequently, we
do not believe that this threshold would
be reached by the proposed
requirements in this proposed rule
because this proposed rule would have
minimal impact on small entities.
Therefore, an analysis for the RFA will
not be prepared because the Secretary
has determined that this proposed rule

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would not have a significant impact on
a substantial number of small entities.
In addition, section 1102(b) of the Act
requires us to prepare an analysis if a
rule may have a significant impact on
the operations of a substantial number
of small rural hospitals. This analysis
must conform to the provisions of
section 603 of the RFA. For purposes of
section 1102(b) of the Act, we define a
small rural hospital as a hospital that is
located outside of a metropolitan
statistical area and has fewer than 100
beds. We are not preparing an analysis
for section 1102(b) of the Act because
the Secretary has determined that this
proposed rule would not have a
significant impact on the operations of
a substantial number of small rural
hospitals.
Section 202 of the Unfunded
Mandates Reform Act of 1995 (UMRA)
also requires that agencies assess
anticipated costs and benefits before
issuing any rule whose mandates
require spending in any 1 year by state,
local, or tribal governments, in the
aggregate, or by the private sector of
$100 million in 1995 dollars, updated
annually for inflation. In 2013, that
threshold is approximately $141
million. This proposed rule is not
expected to reach this spending
threshold.
Executive Order 13132 establishes
certain requirements that an agency
must meet when it promulgates a
proposed rule (and subsequent final
rule) that imposes substantial direct
requirement costs on state and local
governments, preempts state law, or
otherwise has Federalism implications.
Based on CMS Office of the Actuary
estimates, we do not believe that this
proposed rule imposes substantial direct
requirement costs on state and local
governments, preempts state law, or
otherwise has Federalism implications.
Table 14 details the proposed rule’s
impacts by entity, including the federal
government and MA organizations and
Part D sponsors. We note that the
estimated savings do not represent net
social benefits because they consist of
transfers of value from drug
manufacturers, pharmacies, incarcerated
individuals and individuals not
lawfully present in the United States to
the federal government, MA
organizations, Part D sponsors and
beneficiaries who continue in the
programs.
C. Anticipated Effects
1. Effects of Closing Cost Contract Plans
to New Enrollment
In our proposal to ensure that
organizations do not move enrollees

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from one of their cost or MA plan types
to another based on financial or some
other interest, we propose to revise
§ 422.503(b)(5) so that an entity seeking
to contract as an MA organization must
‘‘not accept new enrollees under a
section 1876 reasonable cost contract in
any area in which it seeks to offer an
MA plan if the MA organization and
reasonable cost contract are offered by
the same parent organization.’’ We
believe this provision will have minimal
or no financial impact as only a handful
of parent organizations currently offer
MA and cost plans in the same service
area. In addition, as the regulation
requires that affected cost plans close to
new enrollment, not that they terminate
operations, we believe that there will be
little or no impact to beneficiaries.
2. Effects of Two-year Limitation on
Submitting a New Bid in an Area Where
an MA Has Been Required To Terminate
a Low-Enrollment MA Plan
Under § 422.506(b)(1)(iv), we must
non-renew a MA plan that does not
have a sufficient number of enrollees to
establish that it is a viable independent
plan option. We have established the
threshold for termination due to
insufficient number of enrollees at fewer
than 500 enrollees for non SNPs and
fewer than 100 enrollees for SNPs over
a specified time period of 3 years. If we
did not implement this, an MA
organization required to terminate or
consolidate one of its MA plans due to
sustained low enrollment could avoid
the consequences of such a requirement
by submitting a bid for a new plan in
the same service area.
We are proposing to amend the MA
regulations at § 422. 504(a)(19) to
impose a contractual requirements that
when CMS non renews, or asks the MA
organization to terminate an MA plan
due to sustained low enrollment
pursuant to § 422.506(b)(1)(iv), the MA
organization may not introduce any new
MA plan in that service area for 2
contract years. We believe this
requirement will enhance our ongoing
efforts to ensure that MA organization
offerings in a service area present
beneficiaries with viable plans that are
responsive to their needs. We see no
financial impact on MA organizations as
this requirement has very limited
application and imposes no
independent financial burden.
3. Effects of Authority To Impose
Intermediate Sanctions and Civil Money
Penalties
We are proposing to make two
changes to existing authority for the
imposition of intermediate sanctions
and civil money penalties (CMPs). First,

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2031

under the Affordable Care Act, new
authority was provided to the Secretary,
which now permits CMS to impose
intermediate sanctions for additional
contract violations in the areas of
marketing and enrollment. This new
authority further permits CMS to
impose intermediate sanctions on
contracting organizations’ that employ
or contract with organizations, agents,
and suppliers who commit any of the
contract violations contained in
§ 422.752 and § 423.752.
Second, we are clarifying our
authority to impose CMPs for the
aforementioned contract violations.
Current regulations designate the OIG as
the sole government agency with the
authority to impose CMPs for the
contract violations contained in
§ 422.752 and/or § 423.752. We are
modifying the language of these
provisions to clarify that CMS or the
OIG may impose CMPs for these
contract violations except the provision
that relates to the misrepresentation of
falsification of information furnished to
CMS, an individual or entity.
We believe these provisions would
not result in additional burden to
sponsors nor would they have a
financial impact on sponsors.
4. Effects of Contract Termination
Notification Requirements and Contract
Termination Basis
In current regulations, we are required
to provide 90-day notice to
organizations whose contracts are being
terminated by CMS. The authorizing
statute at section 1857(h)(1)(B) and
1860D–12(b)(3)(F) of the Act states that
the Secretary must provide reasonable
notice and opportunity for hearing
(including the right to appeal the initial
determination) before terminating a
contract (except under certain
circumstances). We are proposing to
modify the notice timeframe from 90
days to 45 days. We believe these
provisions would not result in
additional burden to sponsors nor
would it have a financial impact on
sponsors.
5. Effects of Reducing the Burden of the
Compliance Program Training
Requirements
We are proposing to lessen the burden
placed on contracting organizations and
their first tier, downstream and related
entities (FDRs). Current regulations
specify that contracting organizations
are required to provide general
compliance program training for their
FDRs upon initial contracting and
annually thereafter. To lessen this
burden, we would require all
contracting organizations to accept a

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certificate of completion of the CMS
Standardized General Compliance
Program Training and Education
Module as evidence of satisfaction of
this program requirement. Under this
program change, contracting
organizations would not be permitted
(or required) to develop or implement
organization specific training for FDRs.
We anticipate that this would greatly
reduce the burden on various sectors of
the industry including, but not limited
to, insurance providers, hospitals,
suppliers, pharmacists and physicians.
We anticipate that this change would
actually provide savings for sponsors
and the FDRs since FDRs would only
have to take one training as opposed to
the possible numerous trainings they
may take under current requirements.
Additionally, sponsors would save
because they would not be required to
provide training materials to each FDR
with which they contract.
We believe these provisions would
not result in additional burden to
sponsors nor would they have a
financial impact on sponsors.
6. Effects of Audit and Inspection
Authority
We are proposing two changes to
§ 422.503(d)(2) and § 423.504(d)(2) that
would allow CMS to require sponsors
(MA organizations and Part D sponsors)
to hire an independent auditor to
conduct full or partial program audits of
the sponsors’ operational areas and/or
correction validation exercises. We
currently conduct program audits of
approximately 30 sponsors per year.
Under this proposal, each MA
organization and/or Part D sponsor
would be required to hire an
independent auditor to perform a full or
partial program audit at least every 3
years. There are currently 298 sponsors
in the Parts C & D programs. Under this
new authority, approximately 99, or
one-third of these organizations would
be required to hire an independent
auditor to perform a program audit,
beginning in contract year 2015. Once
the sponsor’s audit is concluded in the
year in which it was chosen, the
sponsor would not be subject to another
audit until its third year occurs (that is,
plans selected for audit in contract year
2015, would not be selected for audit
again until contract year 2018); unless
the sponsor demonstrates behavior that
we believe poses a risk to Medicare
beneficiaries, the Trust Fund or both.
Sponsors demonstrating this type of
noncompliance may be subjected to a
CMS program audit at any time in order
to identify and mitigate any risk of
potential harm to our beneficiaries. This
proposal ensures that all sponsors will

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be audited on at least a 3-year cycle
while continuing to maintain the
integrity of the program by allowing
CMS to continue to conduct audits
when it believes beneficiaries are at risk.
Each independent auditor would
work within CMS’ specifications and
guidelines. We would make available to
the sponsors all of the methods of
evaluations, methodologies and
protocols to be used by the independent
auditor when conducting the audit. We
would also provide technical assistance
to auditors as necessary.
We currently conduct program audits
that examine the following operational
areas:
• Formulary and Benefits
Administration (Part D)
• Coverage Determinations, Appeals &
Grievances (Part D)
• Organization Determinations, Appeals
& Grievances (Parts C)
• Compliance Program effectiveness
(Parts C & D)
• Outbound Enrollment Verification
(OEV) (Parts C & D)
• Special Needs Plan Model of Care
(SNP MOC) implementation (Parts C
& D)
We estimate that the independent
auditor hired will need to have a team
consisting of the following
professionals:
• Formulary and Benefits
Administration—pharmacist, a senior
claims analyst, and a senior auditor.
• Coverage Determinations, Part D
Appeals, Part D Grievances—
pharmacist, senior auditor.
• Organization Determinations, Part C
Appeals, Part C Grievances—nurse
practitioner, senior auditor, auditor.
• Compliance Program
effectiveness—two auditors (at least one
senior).
• Outbound Enrollment Verification
(OEV)—two auditors (at least one
senior).
• Special Needs Plan Model of Care
(SNP MOC) implementation—two
auditors (at least one senior).
We used the most recent (2010) wage
statistics supplied by the Department of
Labor, Bureau of Labor Statistics to
develop estimates of direct wages. We
also added fringe benefits, overhead
costs, and general and administrative
expenses using percentages that are
consistent with CMS contracts. Based
on our experience and in consultation
with program experts, we developed an
estimate of the hourly burden. The
estimated mean cost per hour for each
sponsor is $35.80 (wages, fringe
benefits, and overhead). The team of 14
professionals (listed previously) is
necessary for the performance of each

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program audit. The estimated mean
number of hours the team will need to
perform the audit per sponsor is 160.
The mean cost per sponsor to procure
and support the auditor is therefore: 14
× 160 × $35.80 = $80,192. The auditing
costs will be allowable costs in the
plan’s bid. Since, sponsors will only be
subjected to these audits every 3 years;
it is our expectation that sponsors will
include one-third of this cost in its bid
each year. Therefore, each plan year, the
total cost included in a sponsors bid is:
$80,192 ÷ 3 = $26,731.
The total annual estimated burden
hours related to the time and effort for
all sponsors being audited is estimated
to be 298 sponsors × $26, 731 per
sponsor, per year = $7,965,838.
Therefore, the estimated annual cost for
this requirement is $7,965,838.
We are also proposing to revise our
regulations to permit CMS to require
MA organizations or Part D sponsors
with audit results that reveal noncompliance with CMS requirements to
hire an independent auditor to validate
that correction has occurred. As
mentioned previously, under our
existing authority we currently conduct
approximately 30 audits per year. Based
on our experience, the number of
deficiencies identified and requiring
corrective action can vary widely from
sponsor to sponsor, which therefore
affects the time and effort required for
subsequent correction validation.
Therefore, we have decided to provide
an estimate that assumes that each
sponsor audited has failed 50 percent of
all elements audited; thereby requiring
correction validation. We recognize that
some sponsors may have far fewer
elements that require validation and
some sponsors may have more elements
that require validation, but we believe
that this is the most accurate estimate
we can provide of the number of
sponsors that will undergo validation
and the associated effort required with
that validation.
Under these circumstances we
estimate that the independent auditor
hired will need to have a team
consisting of the following
professionals:
• Formulary and Benefits
Administration—pharmacist, a senior
claims analyst, and a senior auditor.
• Coverage Determinations, Part D
Appeals, Part D Grievances—
pharmacist, senior auditor.
• Organization Determinations, Part C
Appeals, Part C Grievances—nurse
practitioner, senior auditor.
• Compliance Program
effectiveness—one senior auditor.
• Outbound Enrollment Verification
(OEV)—one senior auditor.

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• Special Needs Plan Model of Care
(SNP MOC) implementation—one
senior auditor.
We used the same wage statistics
provided previously to develop an
estimate of the hourly burden (which
includes fringe benefits, overhead costs,
and general and administrative
expenses that use percentages that are
consistent with CMS contracts). The
estimated mean cost per hour for these
sponsors is $35.80. A team of 10
professionals (listed previously) is
necessary for the performance of each
correction validation. The average
hourly cost for a validation with a team
of 10 professionals is the same as the
average hourly cost of an initial audit
with a team of 14 professionals because
in both scenarios, the mix of auditors to
specialists (or non-auditors) is roughly
70 percent auditors and 30 percent
specialists. Since the need for
specialists can vary widely (that is, in
some validations they may not be
needed at all, and in other cases, all of
the specialists from the original audit
may be needed), we determined that the
average breakdown of the team is the
same for initial audit and validation.
Therefore, the average hourly cost has
not changed, despite the change in the
number of team members. The
estimated mean number of hours the
team will need to perform the correction
validation per sponsor is 80. The mean
cost per sponsor to procure and support
the independent auditor is therefore: 10
× 80 × $35.80 = $28,640. The validation
costs will be allowable costs in the
plan’s bid. Under existing regulations
the total annual estimated burden hours
related to the time and effort for
sponsors to perform the correction
validation is estimated to be 30 sponsors
× $28,640 per sponsor, per year =
$859,200. Therefore, the estimated
annual cost for this requirement under
existing regulations is $859,200.
If the provision proposing that we
acquire the authority to require sponsors
to hire an independent auditor to
conduct program audits is finalized, the
number of sponsors being audited per
year will increase from 30 (current) to
99 (proposed). Using the same weighted
data assuming that each sponsor audited
has failed at least 50 percent of audited
elements, the estimated mean cost per
sponsor to procure and support the
independent auditor is: 10 × 80 × $35.80
= $28,640. The correction validation
costs will be allowable costs in the
plan’s bid. Since, sponsors will only be
subjected to these audits/validations
every 3 years; it is our expectation that
sponsors will include one-third of this
cost in its bid each year. Therefore, each
plan year, the total cost included in a

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sponsors bid is: $28,640 ÷ 3 = $9,547.
The total annual estimated burden
hours related to the time and effort for
all sponsors being audited to perform
the correction validation is estimated to
be 99 sponsors × $9,547 per sponsor, per
year = $945,120. Therefore, the potential
estimated annual cost for this
requirement is $945,120.
7. Effects of Procedures for Imposing
Intermediate Sanctions and Civil Money
Penalties Under Parts C and D
We are proposing to make changes to
our authority for imposing intermediate
sanctions and for determining when
such sanctions will be lifted. Sections
1857(g) and 1860D–12(b)(3)(E) of the
Act provide the Secretary the ability to
impose intermediate sanctions on MA
organizations and PDP sponsors.
Intermediate sanctions consist of
suspension of enrollment, suspension of
marketing and suspension of payment.
Current regulations governing
intermediate sanctions are contained in
subparts O of part 422 and part 423.
Sections 422.756 and § 423.756 provide
specific procedures for imposing
intermediate sanctions, and include
provisions which address the duration
of the sanction and the standard that we
apply when determining if a sanction
should be lifted. As specified in the Act
and regulations, when intermediate
sanctions are imposed on contracting
organizations, the sanctions remain in
place until the Secretary/CMS is
satisfied that the basis for the sanction
determination has been corrected and is
not likely to recur.
In the October 2009 proposed rule (74
FR 54634), we proposed a change that
included a rule that allows us to require
a plan under a marketing and/or
enrollment sanction to market or accept
enrollments or both for a limited period
of time. As we explained in that
proposed rule, the purpose of the test
period is to assist us in making a
determination as to whether the
deficiencies that are the bases for the
intermediate sanctions have been
corrected and are not likely to recur.
The test period provides us with the
opportunity to observe a sanctioned
plans ability to enroll or market to
Medicare beneficiaries prior to lifting
the sanction.
We are proposing to extend the
applicability of such a test period to
include all intermediate sanctions and
to clarify that while we may require a
sponsor to receive enrollments during
this test period, the sponsor would not
receive any LIS annual or auto
facilitated reassignments.
We believe these provisions would
not result in additional burden to

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2033

sponsors nor would they have a
financial impact on sponsors.
8. Effects on Timely Access to Mail
Order Services
We believe it is necessary and
appropriate to establish mail order
fulfillment requirements defining
maximum turnaround times from when
the pharmacy receives the prescription
order to when it is shipped. This would
underscore the importance of consistent
and reliable access to medications,
protecting beneficiaries from
inconsistent or unreliable practices that
may otherwise jeopardize timely access
to prescriptions. The proposed
standards are in alignment with
requirements already in place in the
market, and as such we do not expect
significant financial impacts to
implement.
9. Effects of Collections of Premiums
and Cost Sharing
In the proposed provision, ‘‘Waivers
and Incorrect Collections of Premiums
and Cost Sharing,’’ we propose to codify
our existing guidance pertaining to the
waiver of premiums and cost sharing by
Part D sponsors and to specifically
require sponsors to refund incorrect
collections of premiums and cost
sharing or retroactively collect
underpayments of cost sharing. Since
our policy on waivers of premiums and
cost sharing has been specified in
informal guidance since the beginning
of the Part D program and the timeframe
for sponsor refunds and recoveries is
codified in regulations at § 423.466(a)
indicating that such refunds and
collections are required, we do not
believe the proposed changes would
result in any additional costs.
10. Effects of Enrollment Eligibility for
Individuals Not Lawfully Present in the
United States
In section III.A.10. of this proposed
rule, we discuss our proposals to add
’citizenship or lawful presence’ as an
eligibility requirement to enroll and
remain enrolled in MA, Part D, and
section 1876 cost contracts to align with
section 401 of the PRWORA mandating
that aliens not lawfully present in the
United States are not eligible to receive
any federal benefit. In CY 2012, there
were close to 50 million Medicare
beneficiaries. Approximately 34.4
million beneficiaries were enrolled in
MA plans, PDPs or cost plans, which
accounted for 68.8 percent of the total
Medicare population. In the same year,
an average of 4,285 Medicare
beneficiaries enrolled in MA or Part D
plans were identified by SSA as being
unlawfully present. By directing MA

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plans, PDPs, and cost plans to disenroll
individuals who, at the time of
notification from CMS, are not lawfully
present, we intend to prevent improper
payment for these individuals to MA
plans, PDPs, and cost plans for periods
when these individuals were ineligible
to receive such services. Based on data
for capitation payments for MA and
PDPs, as well as the prepayments
provided to cost plans, we estimate that

the disenrollment of individuals who
are unlawfully present would result in
a decrease in payments made by CMS
and would result in a cost savings of
$10 million in 2015. We estimate, based
on the numbers previously mentioned,
that this change could save the MA
program approximately $5 million in
2015, increasing to $8 million in 2019,
and could save the Part D program
(includes the Part D portion of MA–PD

plans) approximately $5 million in
2015, increasing to $9 million in 2019.
As cost plans are paid based on the
reasonable costs delivering Medicarecovered services to their enrollees,
instead of the fixed capitation amounts
paid to MA plans and PDPs, we believe
the impact to cost plans associated with
this provision to be negligible.

TABLE 9—PROJECTED NUMBER OF INDIVIDUALS DISENROLLED DUE TO LOSS OF LAWFUL PRESENCE AND ESTIMATED
SAVINGS TO THE MEDICARE ADVANTAGE PROGRAM BY PROVISION FOR CALENDAR YEARS 2015 THROUGH 2019
2015
Projected number of unlawfully present
beneficiaries enrolled in MA plans .......
Projected federal impact due to unlawfully-present individuals disenrolled 6
months sooner ......................................

2016

2017

2018

2019

Totals
(CYs 2105–
2019)

1,118

1,247

1,375

1,503

1,632

6,875

1 ¥$5

1 ¥$6

1 ¥$6

1 ¥$7

1 ¥$8

¥$32

Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 lawful presence data provided by the SSA.
1 Million.

TABLE 10—PROJECTED NUMBER OF INDIVIDUALS DISENROLLED DUE TO LOSS OF LAWFUL PRESENCE AND ESTIMATED
SAVINGS TO THE MEDICARE PART D PROGRAM BY PROVISION FOR CALENDAR YEARS 2015 THROUGH 2019
2015
Projected number of unlawfully present
beneficiaries enrolled in Part D plans
(including MA–PDs) ..............................
Projected federal impact due to unlawfully-present individuals disenrolled 6
months sooner ......................................

2016

2017

2018

2019

Totals
(CYs 2015–
2019)

5,780

6,276

6,771

7,267

7,762

33,856

1 ¥$5

1 ¥$6

1 ¥$7

1 ¥$8

1 ¥$9

1 ¥$35

Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 lawful presence data provided by the SSA.
1 Million.

11. Effects of Part D Notice of Changes
This section would codify current
guidance for Part D sponsors to inform
beneficiaries about changes to plan
benefits from year to year and also
correct an oversight whereby such a
regulation currently exists for Part C but
not for Part D. We anticipate that this
proposal would result in no additional
costs because Part D sponsors already
typically provide this information.

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12. Effects of Separating the Annual
Notice of Change (ANOC) From the
Evidence of Coverage (EOC)
Currently, members must receive the
plan’s combined ANOC/EOC prior to
the Annual Election Period (AEP). We
propose to separate the distribution and
dissemination requirements, such that,
the ANOC is received by beneficiaries
before the AEP and the EOC is received
closer to the enrollment effective date.
This way, beneficiaries who choose to
leave their current plans and enroll in
other plans will only receive an EOC

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from the plan in which they have
enrolled. We believe that this will
reduce confusion among beneficiaries
about which EOC is for the plan in
which they have enrolled. It eliminates
the unnecessary waste from the
production of EOCs that end up being
discarded. It also allows MA
organizations and Part D sponsors
additional time to develop better quality
documents.
We propose to revise the language in
§ 422.111(a)(3) and § 423.128(a)(3) to
allow the EOC to be sent to members a
few months after the ANOC. We believe
this provision will have minimal or no
financial impact as the proposal would
merely change the timing of notices that
MA organizations and Part D sponsors
already provide. Further, the delay in
providing the EOC could result in
savings as MA organizations and Part D
sponsors have additional time to ensure
that these documents are accurate, thus
eliminating the need for updates and
correction notices.

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13. Effects of the Modification of the
Agent/Broker Compensation
Requirements
The current independent agent
compensation structure (as originally
published as CMS–4138–IFC2 in
November 2008) is comprised of a 6year cycle and is scheduled to end
December 31, 2013. MA organizations
and Part D sponsors provide an initial
compensation payment to independent
agents for new enrollees or unlike plan
changes (Year 1), and pay a renewal rate
(equal to 50 percent of the initial year
compensation) for Years 2 through 6.
CMS is proposing to revise this existing
compensation structure. MA
Organizations and PDP sponsors would
have the discretion to decide, on an
annual basis, whether to pay initial and/
or renewal compensation payments to
their independent agents. For new or
unlike plan change enrollments, MA
Organizations and PDP sponsors could
make an initial payment that is no
greater than the fair market value (FMV)

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amount for such services, set annually
by CMS in guidance interpreting these
regulations. For renewals in Year 2 and
subsequent years, the MA organization
or PDP sponsor could pay up to 35
percent of the FMV amount for that
year. We are proposing that recovery of
compensation payments not happen
when the disenrollment does not result
from the agent’s behavior. In addition to
the agent and broker compensation
structures, we are amending the training
and testing requirements and setting
limits on referral fees for agents and
brokers.
We do not believe that any of these
revisions will add additional burden or
have financial impact. We are simply
revising the existing compensation
structure under which MA
organizations may pay independent
agents and believe that the total
compensation amounts will generally
remain unaffected. Furthermore, we
believe these proposed changes would
actually lessen the burden and impact
on MA organizations by simplifying the
compensation structure for independent
agent brokers.
14. Effects of Drug Categories or Classes
of Clinical Concern and Exceptions
We believe that this proposed
provision to establish new criteria for
identifying Part D drug categories or
classes of clinical concern would
generate significant Part D savings. This
provision would require that Part D
sponsors include all Part D drugs on
their formularies in categories or classes
of clinical concern that CMS specifies
for a typical individual with a disease
or condition treated by the drugs in the
category or class meet the following
proposed criteria: (1) hospitalization,
persistent or significant disability or
incapacity, or death likely will result if
initial administration (including selfadministration) of a drug in the category
or class does not occur within 7 days of
the date the prescription for the drug
was presented to the pharmacy to be
filled; and (2) more specific CMS
formulary requirements will not suffice
to meet the universe of clinical drugand-disease-specific applications due to
the diversity of disease or condition
manifestations and associated
specificity or variability of drug
therapies necessary to treat such
manifestations.
The expected savings to the Part D
program would result from reducing the
number of categories or classes of drugs
for which Part D sponsors currently
must include all Part D drugs on their
formularies, as compared to existing
requirements. Specifically, in applying
the proposed criteria to all categories

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and classes of Part D drugs, CMS has
determined that three existing categories
and classes of Part D drugs would meet
the new criteria and that no additional
categories or classes of drugs would
meet the criteria. Specifically, we
determined that only the antineoplastic,
antiretroviral and anticonvulsant
categories and classes would meet the
new criteria. This means that Part D
sponsors would no longer be required to
include all Part D drugs from within the
antidepressant and immunosuppressant
(used for transplants rejection) classes
on their formularies. Relative to the
antipsychotic class, however, we are
deferring any change in formulary
requirements for the antipsychotic class
at this time and will continue to require
that all drugs within the antipsychotic
class be included on all Part D
formularies, subject to the exceptions
that get finalized in § 423.120(b)(2)(vi).
Based upon this determination, we
estimated that full implementation
(including the antipsychotic class) of
this provision would result in federal
savings to the Medicare Part D program
of $720 million for the period CY 2015
through CY 2019, with most of these
savings generated from the
antipsychotic class (see table 14). We
note this estimate is based upon the
information that is available. Projected
savings are based upon full
implementation of the criteria and do
not reflect that changes for the
antipsychotic class of drugs are deferred
at this time. However, there could be
additional savings when new drugs
enter the market and compete with each
other by providing higher rebates.
A consensus panel applied our
proposed criteria to determine the
categories or classes of clinical concern.
Our consensus panel determined that of
the current six categories or classes of
clinical concern, three met both of the
proposed criteria, three did not, and no
new drug categories or classes met both
criteria. Finally, we estimated the
impact on drug expenditures for those
drugs that ultimately met the criteria, as
well as those drug categories or classes
that no longer qualify as categories or
classes of clinical concern.
To arrive at the cost estimate for the
implementation of the categories or
classes of clinical concern, we began by
putting drug spending into three
groupings: (1) Drugs that were already
included in the six categories or classes
of clinical concern; (2) drugs with a
greater likelihood of being affected by
this change because formularies without
them would be acceptable under our
formulary review process; (3) drugs with
a lesser likelihood of being affected by
this statutory change because

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formularies without them would not be
acceptable under our formulary review
process; and (4) drugs in the research
and development pipeline in the six
categories or classes of clinical concern
that would be affected by this statutory
change. Because we reduced the number
of categories or classes of clinical
concern relative to the six for which we
currently require formulary inclusion of
all Part D drugs, we expect Part D
sponsors’ negotiating power to increase.
As a result, Part D sponsors could incur
lower drug costs and could lower their
bids, which could result in lower
premiums and co-pays. We also believe
that direct savings would be generated
by the increasing generic utilization by
removing brand products from
formularies. Although, based on other
categories and classes of drugs that
exhibit generic saturation, we have
reason to believe that some plans would
still cover the brand products.
Moreover, we believe that the program
would avoid future costs because some
drugs in the research and development
pipeline would not be required on
formularies as a result of this change.
To support the panel’s conclusion
that our formulary checks could
efficiently require adequate access to
these categories and classes without
requiring that every drug in them be
included on Part D formularies, we
compared a Part D formulary to other
formularies. To accomplish this, we
took an approved CY 2014 formulary
containing the average number of
RxNorm Concept Unique Identifiers
(RxCUIs). This formulary includes the
following: 23 Generic (ANDA)
antidepressant drug entities, 7 brand
(NDA) antidepressant drug entities, 18
generic antipsychotic drug entities, and
9 brand antipsychotic drug entities. We
then reviewed the drugs comprising the
previously mentioned list against our
formulary review requirements
standards for treatment guidelines,
common Medicare drugs, and the
discrimination review. We found that
the formulary could have passed these
checks with 9 generic antidepressant
drug entities, and 6 generic
antipsychotic drug entities. No brands
were necessary to meet the formulary
review requirements. Thus, this
formulary includes an excess of 16
brand drug entities and 26 generic drug
entities within these two classes of
medications. Because all these products
are currently required on all Part D
formularies, there is significantly less
need for manufacturers to restrain list
prices or offer rebates to sponsors for
formulary placement. In contrast, under
our proposal, 100 percent of the brands

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(16/16) and 63 percent of the generics
(26/41) would be expected to meet or
exceed the price concessions applicable
to the least expensive products in those
classes to remain competitive. If
manufacturers increased price
concessions in response, sponsors might
elect to keep the products on the
formulary. Otherwise, we would expect
sponsors to take those products off
formulary. Thus, individuals on brand
versions of these drugs or on the 63
percent of generic versions would in
most cases either stay on the drug at that
more competitive price, or switch to an
even cheaper alternative that remains on
formulary. Either way, the beneficiary’s
drug costs and costs to the program
would decrease. Moreover, to evaluate
whether plans would continue to offer
brand drugs (because new generic drugs
would be available), and therefore
whether any rebates would be available,
we evaluated CY 2014 formularies for
three classes of drugs that face
saturation by generics. We found that
even though the majority of drugs in
those classes were generic, some plans
continued to offer brand drugs. We also
propose to establish exceptions that we
believe permit Part D sponsors to apply
meaningful utilization management to
these drugs without compromising
access. Although these exceptions are
generally similar to existing policy, we
propose to permit prior authorizations
for drugs in the categories and classes of
clinical concern to verify medically
accepted indications or in Part A/B
versus D situations. These lower costs
could be reflected in bids submitted to
CMS by Part D sponsors and could
result in decreased premiums for
Medicare beneficiaries.
Although Part D sponsors would be
required to include all Part D drugs on
their formularies in fewer categories or
classes than are currently required, we
believe that our formulary review
processes are sufficient to ensure that
the implementation of this provision
would not negatively impact beneficiary
access to drugs or enrollment in Part D
plans. Moreover, robust transition,
exceptions and coverage determination,
appeals and grievances processes ensure
beneficiary access in the event that they
have enrolled, either self-enrolled or
auto-enrolled, in a plan where their
drugs are not on formulary. We also do
not believe that the proposed provisions
would lead to greater beneficiary
confusion or any increased difficulty in
making enrollment decisions. We
continue to believe that overall
enrollment would increase given
demographic trends and the increasing
cash prices for drugs paid by

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beneficiaries who must pay cash
because they do not enroll. Accordingly,
we believe Medicare beneficiaries
would continue to find Part D to be a
cost efficient method of obtaining robust
drug coverage at a range of acceptable
costs.
We plan on working closely with Part
D sponsors as our guidance in this area
develops to ensure that they continue to
provide high quality prescription drug
coverage at the most economical price.
It is not clear to us whether PBMs
would experience a decrease in
administrative costs. On one hand, the
provisions in this rule may decrease
formulary maintenance expenses, such
as managing a small formulary. This
may result in PBMs decreasing their fees
to Part D sponsors. On the other hand,
these provisions may increase exception
requests, appeals, prior authorizations,
and outreach to Part D sponsors, thereby
increasing PBMs’ administrative costs.
However, because these types of
administrative costs exist for PBMs
today, it is unclear how much of an
increase we would see specifically as a
result of these provisions. Similar to our
ongoing communications with our Part
D sponsors, we intend to work closely
with the industry to minimize the
likelihood of any unanticipated
increases in beneficiary costs.
15. Effects of Medication Therapy
Management Program (MTMP) Under
Part D
Current regulations require that Part D
sponsors must have established a
Medication Therapy Management
Program that targets beneficiaries who:
(1) Have multiple chronic diseases with
three chronic diseases being the
maximum number a Part D plan sponsor
may require for targeted enrollment; (2)
are taking multiple Part D drugs, with
eight Part D drugs being the maximum
number of drugs a Part D plan sponsor
may require for targeted enrollment; and
(3) are likely to incur costs for covered
Part D drugs in an amount greater than
or equal to $3000, as increased by an
annual percentage. We specified in
guidance that while Part D sponsors are
permitted to target beneficiaries with
select chronic diseases, they must
include at least five of nine core chronic
diseases in their criteria. These
provisions have generated wide
variability in MTM programs. Moreover,
despite opt-out enrollment, completion
rates for comprehensive medication
reviews (CMR) remain very low.
We propose to broaden the MTM
criteria to require that Part D sponsors
now target beneficiaries who have two
or more chronic diseases and are taking
two or more covered Part D drugs. We

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propose to set the annual cost threshold
at an amount commensurate with the
annual amount of Part D costs incurred
by individuals that meet the first two
criteria regarding multiple chronic
conditions and use of multiple covered
Part D drugs. Applying this
methodology, we would set the cost
threshold at $620, which is the
approximate cost of filling two generic
prescriptions. We propose to revise this
number periodically to reflect more upto-date information regarding the drug
spending of beneficiaries that have two
or more chronic conditions and use two
covered Part D drugs. We estimate that
2.5 million beneficiaries are currently
eligible for MTM services, 13 percent
opt-out of the MTM program, and 10
percent of participating beneficiaries
will receive an annual CMR. We also
estimate that an average CMR requires
35 minutes to complete and the average
hourly compensation (including fringe
benefits, overhead, general, and
administrative expenses and fee) of the
MTM provider is $120 (labor cost per
CMR is $70), and that it costs $0.91 to
print and mail a CMR summary in CMS’
standardized format. Therefore, the
estimated total annual cost of providing
CMRs in all settings is $15,422,925
($70.91/CMR × 217,500 CMRs).
Previously, prior to the availability of
more precise opt-out and CMR rates, we
estimated that the total burden
associated with conducting CMRs and
delivering the CMR written summary in
CMS’ standardized format was
1,192,429 hours with a cost of
$143,363,555, including delivery of
1,896,500 CMRs in all settings under the
current eligibility criteria, and
implementation and mailing costs for
the CMR summary in standardized
format (see OMB Control No. 0938–
1154). We do not currently have data or
estimates to determine the costs
associated with quarterly targeted
medication reviews and follow-up
interventions, if necessary.
We estimate that 18 million
beneficiaries would be eligible for MTM
services based on the proposed criteria.
Using the same opt-out, CMR, and
expense rates as before, the estimated
total annual cost of providing CMRs in
all settings is $111,045,060 ($70.91/
CMR × 1,566,000 CMRs). This is below
previous estimates.
Additionally, there is currently no
requirement to ensure that beneficiaries
in special populations receive focused
targeting, outreach, or engagement for
enrollment or participation in MTM.
Moreover, the opt-out method of
enrolling targeted beneficiaries into
MTM at 42 CFR 423.153(d)(1)(v) may
only partly address the increased

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barriers to care faced by some
beneficiaries. Without being
prescriptive about what strategies must
be employed, we are proposing that
sponsors develop an effective strategy to
ensure access to services for all MTMeligible beneficiaries. We would expect
to see details concerning sponsors’
specialized strategies regarding outreach
and service provisions in their bids. We
believe that current plan reporting
requirements, along with other CMS
data sources, will be sufficient for us to
evaluate the impact of such strategies.
We cannot definitively score this
proposal because the portion of the
administrative costs attributable to
MTM is not a specific line item that can
be easily extracted from the bid.
Although the increase in the number of
CMRs is estimated to cost $111 million,
mounting evidence shows that MTM
services may generate overall medical
savings.
Supporting this conclusion, a recent
study conducted in conjunction with
the Center for Medicare and Medicaid
Innovation (‘‘CMMI MTM study’’)
(available at http://innovation.cms.gov/
Files/reports/MTM-Interim-Report-012013.pdf) found that MTM programs
effectively targeted high risk individuals
who had problems with their drugtherapy regimens and had high rates of
hospital and emergency room visits
before enrollment as well as those that
experienced a recent visit to the hospital
or emergency room. The study also
found that individuals enrolled in MTM
programs—particularly those who
received annual CMRs—experienced
significant improvements in drug
therapy outcomes when compared to
beneficiaries who did not receive any
MTM services, thus supporting the
hypothesis that the annual CMR may be
one of the more crucial elements of
MTM. Significant cost savings
associated with all-cause
hospitalizations at the overall PDP and
MA–PD levels were found, which may
be due to MTM’s comprehensive rather
than disease-specific approach. This
research supports statements in a recent
Congressional Budget Office report that
programs and services that manage the
benefit well or improve prescription
drug use might result in medical savings
(Congressional Budget Office,
‘‘Offsetting Effects of Prescription Drug
Use on Medicare’s Spending for Medical
Services’’, November 2012, available at
http://www.cbo.gov/sites/default/files/
cbofiles/attachments/43741MedicalOffsets-11-29-12.pdf).
We anticipate that many more
beneficiaries will have access to MTM
services under the proposed revisions to
the eligibility criteria, and believe that

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these changes will simplify the MTM
criteria and minimize beneficiary
confusion when choosing or
transitioning between plans. Moreover,
we believe these changes will reduce
disparity and allow more beneficiaries
with drug therapy problems to receive
MTM services. Similarly, we expect the
proposed requirement that sponsors
develop an effective strategy to ensure
access to services for all MTM-eligible
beneficiaries will help to ensure that
beneficiaries in special populations
receive focused targeting, outreach, or
engagement for enrollment or
participation in MTM.
16. Effects of Business Continuity for
MA Organizations and Part D Sponsors
Proposed § 422.504(o) and
§ 423.505(p) would, respectively,
require MA organizations and Part D
sponsors to develop and maintain
business continuity plans which assess
risks posed by disasters and contain
strategies to mitigate those risks. We
also would require that essential
functions—including at a minimum
benefit authorization, claim
adjudication, call center and supporting
operations—be restored within 24 hours
after such functions fail or are
disrupted.
Business continuity plans are well
established in the business community,
and we believe that most MA
organizations and Part D sponsors
already have business continuity plans
in place which cover the basic proposed
subject areas. We estimate that 5 percent
of the contracting entities (532 MA
organizations and Part D sponsors in
2013), or about 27 entities, will be
affected by this requirement, resulting
in an initial burden of 2,080 hours.
We estimate the first year burden of
an emergency management director to
help design the plan would be a burden
of 56,160 hours (27 × 2,080). The
estimated cost associated with such
expert is the estimated number of hours
multiplied by the estimated hourly rate
of $36.50 (hourly rate for an emergency
management director, General Medical
and Surgical Hospitals, according to
May 2012 wage data from Bureau of
Labor Statistics Occupational
Employment Statistics) plus 48 percent
for fringe benefits and overhead, which
equals a first year cost of $3,033,763.
In subsequent years, the burden
associated with this proposed
requirement would be the costs of an
emergency management director
working on a part time basis for an
ongoing burden of 28,080 (27 × 1,040).
The estimated cost associated with such
expert is the estimated number of hours
multiplied by the estimated hourly rate

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of $36.50 plus 48 percent for fringe
benefits and overhead, which equals an
annual cost of $1,516,882 for
subsequent years.
We do expect that the burden would,
should a disaster or other disruption of
business occur, ultimately result in
savings from planning that would avoid
even more losses, but such offsets
cannot be calculated here.
Requiring business continuity plans
would benefit Medicare beneficiaries in
these Part C and Part D plans because
planning helps to negate problems: The
more prepared that MA organizations
and Part D sponsors are for disasters and
other disruptions to business, the more
likely it would be that these
organizations would address timely any
problems encountered and ultimately
return to regular operations and the less
likely it would be that individuals
would lose access to benefits as a result
of disruptions. Requiring the restoration
of essential functions within 24 hours
after failure would help by providing a
clear deadline by which priority
operations must be available to
beneficiaries. Our proposal to deem as
essential benefit authorization certain
minimum functions, including claim
adjudications, and all supporting
operations would benefit individuals by
providing the means to ensure
beneficiaries access to their Medicare
benefits—and therefore health care and
drugs. Designating operation of the call
center as essential would provide
beneficiaries real time customer support
which could be critical to ensuring
access to benefits in times of disaster or
other disruption. For instance, if
beneficiaries could not get to their
regular places of business or found their
claims were rejected at point of sale,
customer service representatives could
then send them to providers and
pharmacies that could provide them
with benefits or resolve questions in real
time such that they would be more
likely to leave pharmacies with any
appropriate drugs in hand.
17. Effects of Requirement for
Applicants or Their Contracted First
Tier, Downstream, or Related Entities to
Have Experience in the Part D Program
Providing Key Part D Functions
Based on CMS’ authority at section
1860D–12(b)(3)(D) of the Act to adopt
additional contract terms, not
inconsistent with the Part C and D
statutes, that are necessary and
appropriate to administer the Part D
program, we are proposing at
§ 423.504(b)(8)(i) through (iii) that Part
D organizations seeking a new Medicare
contract must have arrangements in
place such that either the applicant, or

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a contracted entity that will be
performing certain key Part D functions,
has at least one full benefit year of
experience providing key Part D
functions. This proposal ensures that
applicants take advantage of the
abundant Part D industry expertise and
experience that exists today in the
development of their Part D program
operations, rather than relying on
technical assistance from CMS and
having their inexperience place
beneficiaries’ access to prescription
drugs at risk. We believe this provision
will have a very minor savings impact
on the federal budget, based on savings
of time and effort (staff time and
contracted auditor time and resources)
that the government would spend on
overseeing the disproportionate level of
problems experienced by organizations
operating Part D plans without prior
Part D experience. For each
inexperienced organization allowed into
the program in the absence of this
proposal, we would anticipate a savings
of 1,000 staff hours at an average rate of
$50 per hour, for a total of $50,000 in
employee time, plus an additional
savings of $200,000 in contractor dollars
to conduct an emergency audit, for a
total of $250,000. In the absence of this
proposal, we would anticipate no more
than two such inexperienced entities
beginning Part D operations per year, for
a total annual savings of $500,000.
The burden associated with this
proposal on industry would be minimal,
with a total estimated number of labor
hours of 3.25 to submit information
during the Part D application process.
Using the same average hourly salary as
previously mentioned, the total cost to
Part D applicants would be $162.50. We
do not believe there are any nonadministrative costs to industry
associated with this proposal, as Part D
applicants are already required to have
arrangements in place to perform the
key Part D functions discussed in our
proposal.
The main anticipated effect from this
proposal is ensuring that only entities
with some experience with Part D in
critically important functional areas are
permitted to offer new Part D contracts,
thus strengthening the Part D program
by enhancing the qualification criteria.
We considered the alternate proposal of
requiring the prior Part D experience to
be tied to specific quality outcomes. We
rejected the alternative because we
believed it added unnecessary
complexity and burden to the process,
and we believe a simple experience
requirement is currently sufficient.

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18. Effects of Requirement for
Applicants for Stand Alone Part D Plan
Sponsor Contracts To Be Actively
Engaged in the Business of the
Administration of Health Insurance
Benefits
Based on CMS’ authority at section
1860D–12(b)(3)(D) of the Act to adopt
additional contract terms, not
inconsistent with the Part C and D
statutes, that are necessary and
appropriate to administer the Part D
program, we proposed at
§ 423.504(b)(9)(i) through (ii) that
organizations seeking to offer a standalone prescription drug plans (PDP) for
the first time must have either: (i)
Actively offered health insurance or
health benefits coverage for 2
continuous years immediately prior to
submitting an application, or (ii)
actively managed prescription drug
benefits for a company offering health
insurance or health benefits coverage for
5 continuous years immediately prior to
submitting an application. This
proposal would ensure that applicants
have substantial experience in
administering health insurance benefits
prior to becoming a Part D sponsor. We
believe this provision will have a very
minor savings impact on the federal
budget, based on savings of time and
effort (staff time and contracted auditor
time and resources) that the government
would spend on overseeing the
disproportionate level of problems
experienced by organizations operating
stand-alone PDPs without prior health
insurance administration experience.
For each inexperienced organization not
allowed into the program in the absence
of this proposal, we would anticipate a
savings of 1,000 staff hours at an average
rate of $50 per hour, for a total of
$50,000 in employee time, plus an
additional savings of $200,000 in
contractor dollars to conduct an
emergency audit, for a total of $250,000.
In the absence of this proposal, we
would anticipate no more than two such
inexperienced entities beginning Part D
operations per year, for a total annual
savings of $500,000.
The burden associated with this
proposal on industry would be minimal,
with a total estimated number of labor
hours of 3.25 to submit information
during the Part D application process.
Using the same average hourly salary as
previously mentioned, the total cost to
Part D applicants would be $162.50. We
do not believe there are any nonadministrative costs to industry
associated with this proposal, as Part D
applicants are already required to be
licensed in at least one state prior to
offering Part D benefits.

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The main anticipated effect from this
proposal is ensuring that only entities
with some experience administering
health insurance benefits will be
permitted to offer new stand-alone
PDPs, thus strengthening the Part D
program by enhancing the qualification
criteria. CMS considered the alternate
proposal of requiring the prior health
insurance benefit administration
experience to be tied to specific quality
outcomes. We rejected this alternative
because we believed it added
unnecessary complexity and burden to
the process, and we believe a simple
experience requirement is currently
sufficient.
19. Effects of Limit Parent Organizations
to One Prescription Drug Plan (PDP)
Sponsor Contract per PDP Region
This provision has no quantifiable
impact because the savings that might
be achieved likely will be offset by the
burden necessary with the consolidation
activities and legal work necessary to
implement these changes.
20. Effects of Limit Stand-Alone
Prescription Drug Plan Sponsors To
Offering No More Than Two Plans per
PDP Region
This provision has no quantifiable
impact because the savings that might
be achieved likely will be offset by the
burden necessary with the consolidation
activities and legal work necessary to
implement these changes.
21. Effects of Efficient Dispensing and in
Long Term Care Facilities and Other
Changes
We are proposing the following
specific changes to the LTC short-cycle
dispensing requirements at § 423.154:
(1) Add a prohibition on payment
arrangements that penalize the offering
and adoption of more efficient LTC
dispensing techniques; (2) eliminate
language that has been misinterpreted as
requiring the proration of dispensing
fees; (3) incorporate an additional
waiver for LTC pharmacies using
restock and reuse dispensing
methodologies under certain conditions;
and (4) make a technical correction to
eliminate the requirement that Part D
sponsors report on the nature and
quantity of unused brand and generic
drugs. Medicare Part D plan sponsors
are already required to comply with the
LTC short-cycle dispensing
requirements.
The prohibition on payment
arrangements that penalize the offering
and adoption of more efficient LTC
dispensing techniques is a clarification
of the Congress’ intent in enacting
section 1860D–4(c)(3) of the Act, and we

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do not believe it will impose any new
costs on stakeholders. Indeed, this
proposal should reduce Part D sponsors’
costs by preventing Part D sponsors
from penalizing the most efficient LTC
dispensing techniques. The resulting
reduction in brand drug costs should
offset or surpass increases in dispensing
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22. Effects of Applicable Cost-Sharing
for Transition Supplies: Transition
Process Under Part D
We propose to add at
§ 423.120(b)(3)(vi) a paragraph clarifying
that a Part D sponsor must charge cost
sharing as follows: (a) For low-income
subsidy (LIS) enrollees, a sponsor must
not charge higher cost sharing for
transition supplies than the statutory
maximum copayment amounts; (b) for
non-LIS enrollees, a sponsor must
charge: (1) The same cost sharing for
non-formulary Part D drugs provided
during the transition that would apply
for non-formulary drugs approved under
a coverage exception; and (2) the same
cost sharing for formulary drugs subject
to utilization management edits
provided (for example, prior
authorization and step therapy) during
the transition that would apply once the
utilization management criteria are met.
Because increases or decreases in cost
sharing during transition supplies under
the various circumstances are likely to
offset one another, we anticipate that
there would be no cost impact on plans.
23. Effects of Medicare Coverage Gap
Discount Program and Employer Group
Waiver Plans
The regulation amends § 423.2325 by
adding a new paragraph (h), ‘‘Medicare
Coverage Gap Discount Program and
Employer Group Waiver Plans’’. This
new provision requires Part D sponsors
to fully disclose to each employer group
the projected and actual manufacturer
discount payments under the Discount
Program attributable to the employer
group’s enrollees.
We believe that the provision will
have negligible regulatory impact
because, in the interest of Full
Disclosure requirements, the great
majority of sponsors with employer
group clients have likely already
integrated Discount Program data into
their existing client reporting. This
additional reporting has enabled
employer groups to begin to incorporate
the manufacturer payments into their
benefit packages. Also, for those few
Part D sponsors that have not already
incorporated the discounts into client
reports, the provision creates a minimal
financial burden. The requirement does
not entail development or gathering of

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any new data as currently, Part D
sponsors report beneficiary-level
discounts to CMS on Prescription Drug
Event (PDE) data, and report aggregated
enrollee utilization to employer group
clients. The new provision requires only
that sponsors who have not yet
modified their existing reports provide
the aggregated discount amounts to each
employer group, and use the existing
processes for report dissemination.
In estimating the associated regulatory
costs we assumed that 80 percent of the
sponsors were already supplying
employer group clients with Discount
Program information and that 20
percent of the plans would need to
modify the reports as a result of this
provision. We used 2013 data to
determine the number of sponsors that
would be affected by this new
requirement. In 2013, 131 Part D
sponsors operated one or more EGWP
plans. If 20 percent of these Part D
sponsors were required to change their
client reporting, approximately 26
sponsors would be affected. Our
research indicates that it would take
each sponsor employing a mid-level
analyst about 2-business days to
aggregate the manufacturer discounts for
each client and modify the existing
reports to include the discount
payments. Assuming an average hourly
wage and benefits of $50,5 the cost of
these 16 hours would be $50 × 16 =
$800 for each Part D sponsor or a total
of $800 × 26 = $20,800 for all 26
sponsors combined. In subsequent years
we do not believe that there will be any
incremental costs associated with the
regulation as sponsors will update the
discount data per their existing
processes.
There is no quantifiable monetary
value to CMS. Rather, requiring Part D
sponsors to report amounts they receive
on behalf of employer group enrollees
will enable the employer group to use
the payments in a way that best serves
retirees.
24. Effects of Interpreting the NonInterference Provision
We are proposing to formally interpret
section 1860D–11(i) of the Act, referred
to as the non-interference provision.
This provision prohibits CMS from
interfering with the negotiations
between drug manufacturers and
5 Depart of Labor quarterly census of Employment
and Wages indicates that the average 2011 wage for
private health insurance plans was $74,431. To
project a 2015 wage this figure was increased 3
percent per year to $83,772 in 2015. This lead to
an hourly wage projection of $40.27 or with 20
percent benefits an hourly rate of $48.33, which
was in turn rounded upward to derive an hourly
rate of $50.

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pharmacies and Part D sponsors, and
requiring a particular formulary or
instituting a price structure for the
reimbursement of covered part D drugs.
We have not previously interpreted the
statutory provision, which has resulted
in different stakeholders having
different views about its scope.
Consequently, we believe that a clear
interpretation of the statutory provision
will remove ambiguity. We do not
believe there is any regulatory impact
because we are codifying an existing
requirement that currently prohibits
CMS from interfering in certain
activities between Part D sponsors,
pharmacies and manufacturers without
adding any new requirements.
25. Effects of Pharmacy Price
Concessions in Negotiated Prices
We propose to revise the definition of
negotiated prices at § 423.100 to specify
that all pharmacy price concessions
must be included in the negotiated
price. This would preclude the
differential reporting that is taking place
today in the realm of reporting drug
costs and price concessions from
network pharmacies. This proposal
would change current policy that
permits sponsors to elect to take some
price concessions from pharmacies in
forms other than the negotiated price
and report them outside the PDE. This
practice currently allows price
concessions to be applied
disproportionately to costs that plans
are liable for, and thus may shift more
low-income cost-sharing subsidy and
reinsurance costs to the government, as
well as to manufacturers in the
calculation of coverage gap discount
payments. A sponsor that engages in
this practice can reduce its bid and
achieve a competitive advantage relative
to a sponsor that applies all price
concessions to the negotiated price—a
competitive advantage stemming not
from greater efficiency, but from a
technical difference in how costs are
reported to CMS. Meanwhile, the higher
the negotiated price, the higher
beneficiary coinsurance will be, the
faster the beneficiary is moved through
the benefit, and the higher government
subsidies for low-income cost sharing
(LICS) and reinsurance subsidies will
be. Our proposal would impose
consistent treatment of drug price
reporting.
Our proposal to require all price
concessions to be reflected in the
negotiated price received by the
pharmacy would not necessarily change
the level of price concessions received
from network pharmacies, but would
impose a single consistent price
concession reporting process on all Part

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D sponsors. Therefore, it is not clear that
any contractual arrangements between a
subset of sponsors and network
pharmacies would require renegotiation,
since only the form of the price
concession, rather than its level, would
be affected by this proposal.
In addition, when price concessions
from pharmacies are in forms other than
the negotiated price, the degree of price
concession that the pharmacy has
agreed is no longer reflected in the
negotiated prices available at point of
sale or reflected on the Medicare
Prescription Drug Plan Finder (Plan
Finder) tool. Thus, the true price of
drugs at individual pharmacies is no
longer transparent to the market.
Consequently, consumers cannot
efficiently minimize both their costs
(cost sharing) and costs to the taxpayers
by seeking and finding the lowest-cost
drug/pharmacy combination. This
proposal would ensure that the actual
level of price competition is transparent
to the Part D market.
Under current policy, a sponsor may
be able to offer a lower bid than its
competitors and may achieve a
competitive advantage stemming not
from greater efficiency, but from a
technical difference in how costs are
reported to CMS. When this happens,
such differential reporting may result in
bids that are no longer comparable, and
in premiums that are no longer valid
indicators of relative plan efficiency.
The changes we are proposing would
lead to Part D bids being more
accurately comparable and premiums
more accurately reflecting relative plan
efficiencies. The lowest premiums
would more accurately direct
beneficiaries to the plans that have the
lowest costs to the program overall.
We do not collect sufficient detail in
price concession data reported to CMS
to quantify the impact of this proposed
change to standardize price concession
reporting. We believe that only certain
sponsors are engaging in the differential
reporting practices today, and these
sponsors face close competition from
larger competitors that do not appear to
be employing the same strategies.
Consequently, if the sponsors
employing these tactics increase their
bids to maintain margin, they could
likely risk losing market share.
Therefore, we would expect these
sponsors to carefully consider the risk of
losing market share before raising their
bids in response to our regulatory
proposals, particularly those that are
committed to the LIS market.
We expect that the effect of our
proposal to require consistent and
transparent pricing would not only
provide higher-quality information to

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the Part D market, but also promote
increased price competition among
network pharmacies. This expectation is
consistent with economic theory that
holds that increased price transparency
will increase price competition. We
believe pharmacies will support
including the full price concession in
the point-of-sale price, and fully
transparent price competition will align
beneficiary and taxpayer interests in
minimizing costs. Our proposal would
not change the level of price
concessions and therefore costs under
the program as a whole, but would
apply consistency to how these are
reported to CMS and treated in bidding
and payment processes. Therefore, we
anticipate that there would be no cost
impact on plans.
26. Effects of Payments to PDP Plan
Sponsors for Qualified Prescription
Drug Coverage and Payments to
Sponsors of Retiree Prescription Drug
Plans
This section is not anticipated to have
any significant impact since it is only a
conforming change, necessary to align
with the proposed definition change in
another section of the regulation.
27. Effects of Preferred Cost Sharing
We propose to require that sponsors
may offer reduced copayments or
coinsurance for covered Part D drugs
obtained through a subset of network
pharmacies, as long as such preferred
cost sharing is in return for consistently
lower negotiated prices relative to the
same drugs when obtained in the rest of
the pharmacy network. Therefore, we
intend to clarify that preferred cost
sharing should consistently be aligned
with and accurately signal lower costs.
We propose that by ‘‘consistently
lower’’ we mean that sponsors must
offer better prices on all drugs in return
for the lower cost sharing. In practice
we believe this would mean that
whatever pricing standard is used to
reimburse drugs purchased from
network pharmacies in general, a lower
pricing standard must be applied to
drugs offered at the preferred level of
cost sharing. Our analysis shows that
most sponsors offering preferred cost
sharing are currently achieving these
levels of savings, and therefore our
proposed policy would only require a
change in price concession levels or
reporting for a limited number of
sponsors. Our proposal would apply a
consistent expectation across all
sponsors to compete on the same basis
on negotiated prices, including in
related-party pharmacy operations.
Instead of consistently passing
through lower costs available through

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economies of scale or steeper discounts,
some (but not the majority of) sponsors
are actually charging the program higher
negotiated prices in some cases. In other
cases, the negotiated prices offered for
preferred cost sharing are only slightly
lower than the prices in the rest of the
network. When either higher prices or
very nearly the same prices are
combined with significantly lower cost
sharing, such pricing increases the
proportion of costs borne by the plan
and the government. Moreover, the
lower cost sharing provides a defective
price signal that distorts market
behavior. In these cases, the lower cost
sharing does not incent enrollees to
select pharmacies with lower prices and
thus make more efficient choices in the
market, but the exact opposite. This
would be expected to result in higher
costs to the Part D program overall.
Therefore, we believe our proposed
policy change to require consistently
lower negotiated prices in return for
preferred cost sharing may not only
decrease overall price levels in certain
sponsor’s networks, but would also
encourage beneficiaries to make drug
purchase decisions that are better
aligned with lower costs to the program
overall. However, we do not have
enough information on how negotiated
prices might change—particularly in
combination with the requirements for
all price concessions from pharmacies
to be reflected in negotiated prices, and
for any-willing-pharmacy terms and
conditions to include minimum price
concession terms for preferred cost
sharing—to predict the overall change
in Part D costs.
28. Effects of Maximum Allowable Cost
Pricing Standard
We are proposing a change to the
regulations at § 423.505(b)(21) and
§ 423.505(i)(3) governing the disclosure
and updating of prescription drug
pricing standards used by Part D
sponsors to reimburse network
pharmacies to make clear that drug
pricing based on maximum allowable
cost (MAC) is subject to these
regulations. In the final rule at 76 FR
54600 (September 1, 2011), we did not
estimate a regulatory impact for Part D
sponsors to comply with the
prescription drug pricing standard
requirements, and we do not believe
these proposed changes would result in
any regulatory impact. Read together,
the new provisions in § 423.501,
§ 423.505(b)(21), and § 423.505(i)(3)(viii)
require sponsors, when applicable, to
include provisions in network
pharmacy contracts, to address the
disclosure of MAC prices themselves to
be updated to the applicable pharmacies

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in advance of their use for
reimbursement of claims, because the
source of the MAC prices is not publicly
available. Addressing prices that will be
paid to a subcontractor is an activity
undertaken in the normal course of
business. Also, whether to use MAC
prices is voluntary for Part D sponsors.
Finally, sponsors must have procedures,
systems, and technology currently in
place to use these prices for
reimbursement of pharmacy claims in
the normal course of business. These
systems would have to be adapted to
also disclose the prices to pharmacies in
advance of their use, which we believe
would involve negligible effort for Part
D sponsors’ existing employees and/or
subcontractors. Therefore, we estimate
the impact of these provisions to be
negligible.
29. Effects of Any Willing Pharmacy
Standard Terms & Conditions
Proposed changes to § 423.120(a)(8)
would require Part D sponsors to offer
the contract terms and conditions (T&C)
for every level of cost sharing offered
under a Part D plan (preferred, standard
retail, mail order, etc.) to any willing
pharmacy. We expect the burden for
Part D sponsors to amend contracts,
where necessary, to offer every level of
cost sharing would be negligible.
Sponsors already must meet any willing
pharmacy requirements for retail and
mail order cost sharing. In 2013, nearly
half of non-employer group Part D
sponsors were designing and marketing
plans with T&C for preferred cost
sharing levels. For these sponsors, the
only change associated with this
proposal will be to ensure that now T&C
for all levels of cost sharing, including
preferred, are being offered (if they are
not already) to all interested
pharmacies. For the other half of Part D
sponsors not currently offering preferred
cost sharing options, this proposal does
not require them to start.
Part D sponsors already negotiate
contracts regularly with pharmacies in
order to meet network access
requirements. We estimate that for
sponsors who currently offer benefit
packages with a preferred cost sharing
level (approximately 500 plans), an
estimated new burden of 5,000 legal
hours (500 plans × 10 hours) for revising
contract language and 2,000 hours (500
plans × 4 hours) for additional contract
support staff time negotiating with and
assisting pharmacies contracting at the
preferred cost sharing level for the first
time. The estimated cost associated with
this change is the estimated number of
hours multiplied by available average
hourly rates ($62.93 per hour for a
lawyer, $32.22 per hour for a financial

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specialist [May 2012 wage data from
Bureau of Labor Statistics Occupational
Employment Statistics]), plus 48 percent
for fringe benefits and overhead, which
equals a first year cost of $561,053.20.
Once a sponsor has revised contracts to
meet the proposed requirement, no
extraordinary additional expenses are
anticipated for subsequent years. For a
plan not currently offering preferred
cost sharing levels, it is expected that
preferred cost sharing terms and
conditions would be offered to any
willing pharmacy if they ever decide to
offer them.
Any new burden on pharmacies is
similarly expected to be negligible, as
they are already reviewing and
implementing terms from contracts,
often annually. Pharmacies are not
being directed to choose one set of T&C
over another, but rather are gaining the
option to review and implement terms
for preferred cost sharing, if they so
choose to accept the applicable
negotiated pricing terms.
Beneficiaries are expected to benefit
from an increased number of
pharmacies offering preferred cost
sharing levels.
30. Effects of Enrollment Requirements
for the Prescribers of Part D Covered
Our proposal is that prescribers must
be enrolled in Medicare in order for
their prescriptions to be coverable under
the Part D program. This will entail Part
D sponsors or their designated PBMs
checking the prescriber’s individual NPI
to determine whether the prescriber’s is
validly enrolled in Medicare before
paying a claim from a network
pharmacy or request for reimbursement
from a beneficiary.
When we promulgated the NPI PDE
requirement in a final regulation
published on April 12, 2012 (77 FR
22072), we estimated the impact for
PBMs and plan organizations to contract
for or build prescriber ID validation
services. Thus, while this proposal
entails a new requirement for Part D
sponsors, we do not believe it would
have any new or additional impact
because Part D sponsors must already
have prescriber validation capabilities
to meet the NPI PDE requirement.
Additionally, under our proposal, we
do not estimate any savings. We
presume that if a beneficiary’s
prescriber is not enrolled or does not
enroll in Medicare, the beneficiary will
find a new prescriber who is enrolled,
rather than go without needed
medications. Therefore, we do not
estimate any savings from this proposal.

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31. Effects of Improper Prescribing
Practices and Patterns
Our proposed revisions in
§ 424.530(a)(11) and § 424.535(a)(13)
would likely result in additional
application denials and revocations.
The DEA Web site found at http://
www.deadiversion.usdoj.gov/crim_
admin_actions/index.html contains a
list of physicians, eligible professionals,
and pharmacies that have had their DEA
Certificate of Registration suspended or
revoked since 2000. Based on our
review of this data, we believe that
approximately 200 Medicare-enrolled
physicians and eligible professionals
would be affected by proposed
§ 424.535(a)(13). However, we do not
have data available to assist us in
calculating the potential costs to
physicians and eligible professionals in
lost potential billings or the potential
costs or savings to the government
arising from this provision; nor are we
able to estimate the number of denials
per year that would result from
proposed § 424.530(a)(11).
Our proposed § 424.535(a)(14) would
result in an increase in the total number
of revocations under § 424.535(a). We
are unable, though, to project the
number of providers and suppliers that
would be revoked under
§ 424.535(a)(14) because we do not have
data available that can be used to make
such an estimate. Thus, we cannot
project: (1) The potential costs to
providers and suppliers in lost billings,
or (2) the potential costs or savings to
the government arising from our
proposed provision.
32. Effects of the Transfer of TrOOP
Between Part D Sponsors Due to
Enrollment Changes During the
Coverage Year
We do not expect that codifying the
requirement for Part D sponsors to
report TrOOP-related data to a
subsequent plan in which a beneficiary
enrolls during the coverage year, and for
the new plan to accept that data and use
it to position the beneficiary in their
benefit would generate savings or
increase costs.
We expect the requirement to report
TrOOP-related data and to accept and
use the data to position a beneficiary in
a new plan benefit when the member
changes plans during the coverage year
would ensure the Part D benefit is
correctly administered by the new plan
and prevent a beneficiary who has
already moved through the initial
phase(s) of the Part D benefit from
starting the benefit anew as a result of
the enrollment change.

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33. Effects of Broadening the Release of
Part D Data
We are proposing to revise our
regulations governing the release of Part
D data to expand the release of
unencrypted prescriber, plan and
pharmacy identifiers contained in
prescription drug event (PDE) records to
external researchers, as well as to make
other changes to our policies regarding
release of PDE data, as currently
codified at § 423.505(f)(3) and (m). This
proposal does not impose any new costs
on any stakeholders. Medicare Part D
plan sponsors are already required to,
and do, submit the information that may
be released in accordance with this
proposal. Therefore, we are not
including any assessment of this
proposal for the regulatory impact
statement.

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34. Effects of Establish Authority to
Directly Request Information From First
Tier, Downstream, and Related Entities
Pursuant to sections 1857(d)(2) and
1860D 12(b)(3)(c) of the Act, we are now
proposing to specify at § 422.504(i)(2)(ii)
and § 423.505(i)(2)(ii) that HHS, the
Comptroller General, or their designees
have the right to audit, evaluate, collect,
and inspect any records directly from
any first tier, downstream, or related
entity. This proposed regulatory change
would not grant CMS (or the MEDIC, the
contractor that conducts fraud
investigations on our behalf) any
oversight authority beyond what we
already possess.
In enabling CMS or its designee(s) to
directly request information from a first
tier, downstream, or related entity, we
would provide a more efficient avenue
to obtain necessary information. This
proposal would change the current
policy, which requires going through
the plan sponsor in order to collect
information. Our proposal would save
money and time for CMS as well as the
plan sponsor.
We anticipate that adoption of this
proposal would result in cost savings for
plan sponsors. Under the current
regulatory structure, assuming that the
MEDIC (the CMS contractor that
typically would put forth such requests)
puts forth 1000 requests per year to Part
C and D sponsors, each request requires
the plan sponsor to spend 5 hours

developing and making the request for
information from its first tier,
downstream, or related entity, and
communicating the results of that
request back to CMS. At a rate of $55
per hour, plan sponsors may save a total
of $275,000 in employee costs in the
aggregate. Additionally, we believe this
provision will have a very minor
savings impact on the federal budget.
This calculation is based on the savings
in time and effort the MEDIC will
experience (2 hours per information
request) resulting from the ability to
request information directly from first
tier, downstream, and related entities.
The 2 hours reflects the time the MEDIC
currently spends resolving ambiguities
in the request or in the information
provided in response that are created by
the presence of an intermediary (that is,
the plan sponsor) between the requestor
(MEDIC) and the custodian of the
information (that is; first tier,
downstream, or related entity).
In addition to cost savings, this
proposed regulatory change will reduce
the administrative burden on plan
sponsors. The plan sponsor will no
longer have to act as the gatekeeper
between the MEDIC and its first tier,
downstream, or related entity.
We do not anticipate any additional
burden relating to the proposed
requirement that we alert the plan
sponsor that we are contacting its first
tier, downstream or related entity since
CMS will be merely copying the plan
sponsor on the request.
35. Effects of Eligibility of Enrollment
for Incarcerated Individuals
We are proposing to amend
§ 417.460(b)(2)(i), § 417.460(f)(1)(i),
§ 422.2, § 422.74(d)(4)(i)(A),
§ 422.74(d)(4)(v), § 423.4, and
§ 423.44(d)(5) to clarify the eligibility
requirement for residing in the plan’s
service area related to incarceration for
the purposes of enrolling into and
remaining enrolled in MA, Part D, and
Medicare cost plans. We expect the
impact of this change to be primarily
that of savings to the MA and Part D
programs. In CY 2012, there were close
to 50 million Medicare beneficiaries.
Approximately 34.4 million of those
beneficiaries were enrolled in MA
plans, PDPs, or cost plans which

accounts for 68.8 percent of the total
Medicare population. In the same year,
an average of 21,329 Medicare
beneficiaries enrolled in MA or Part D
plans were identified by SSA as being
incarcerated.
We issued guidance to MA plans and
PDPs to investigate each individual’s
incarcerated status and disenroll the
individual for no longer residing in the
plan’s service area if the plan confirmed
incarcerated status. If the MA plan or
PDP could not confirm the incarcerated
status, those plans were to continue to
investigate each instance of
incarceration for up to 6/12 months and
disenroll the individuals at the end of
that time following § 422.74(b)(4)(ii)/
§ 423.44(b)(5)(ii) if they couldn’t verify
the incarcerated status sooner. As a
result, the plan received capitated
payments when the individual was
ineligible to receive payment of
Medicare benefits. Section 1876 Cost
contracts had no such instructions to
disenroll individuals who are
incarcerated. By directing MA plans,
PDPs, and cost plans to disenroll
incarcerated individuals at the time of
notification from CMS, we intend to
prevent improper payment for these
individuals to MA plans, PDPs, and cost
plans for periods when they were
ineligible to receive such services.
Based on the data for capitation
payments for MA and PDPs, as well as
the prepayments provided to cost plans,
we estimate that the disenrollment of
incarcerated individuals would result in
a decrease in payments made by CMS
and would result in a cost savings of
$70 million in 2015.
We estimate, based on the numbers
mentioned previously, that this change
could save the MA program
approximately $27 million in 2015,
increasing to $62 million in 2019, and
could save the Part D program (includes
the Part D portion of MA–PD plans)
approximately $46 million in 2015,
increasing to $90 million in 2019. As
cost plans are paid based on the
reasonable costs delivering Medicarecovered services to their enrollees,
instead of the fixed capitation amounts
paid to MA and PDPs, we believe the
impact to cost plans associated with this
provision to be negligible.

TABLE 11—PROJECTED NUMBER OF INDIVIDUALS DISENROLLED DUE TO INCARCERATION AND ESTIMATED SAVINGS TO THE
MEDICARE ADVANTAGE PROGRAM BY PROVISION FOR CALENDAR YEARS 2015 THROUGH 2019
2015
Projected number of incarcerated beneficiaries enrolled in MA plans ...............

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6,280

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2016

2017

7,750

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2018

9,221

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10,691

10JAP2

2019

12,162

Totals (CYs
2105–2019)
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2043

TABLE 11—PROJECTED NUMBER OF INDIVIDUALS DISENROLLED DUE TO INCARCERATION AND ESTIMATED SAVINGS TO THE
MEDICARE ADVANTAGE PROGRAM BY PROVISION FOR CALENDAR YEARS 2015 THROUGH 2019—Continued
2015
Projected federal impact due to incarcerated individuals disenrolled 6 months
sooner ...................................................

1¥$27

2016

2017

1¥$35

2018

1¥$43

2019

1¥$52

1¥$62

Totals (CYs
2105–2019)

1¥$219

Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 incarceration data provided by the SSA.
1 Million.

TABLE 12—PROJECTED NUMBER OF INDIVIDUALS DISENROLLED DUE TO INCARCERATION AND ESTIMATED SAVINGS TO THE
MEDICARE PART D PROGRAM BY PROVISION FOR CALENDAR YEARS 2015 THROUGH 2019
2015
Projected number of incarcerated beneficiaries enrolled in Part D plans (including MA–PDs) ..................................
Projected federal impact due to incarcerated individuals disenrolled 12 months
sooner ...................................................

2016

2017

2018

2019

Totals (CYs
2015–2019)

49,275

55,970

62,666

69,362

76,058

1 313,331

2¥$46

2¥$55

2¥$65

2¥$77

2¥$90

2¥$333

Note: Estimates reflect scoring by the CMS, Office of the Actuary, and 2012 incarceration data provided by the SSA.
1 Accumulated; not unique individuals.
2 Million.

36. Effects of Rewards and Incentives
Program Regulations for Part C Enrollees
This proposal would permit plans to
provide limited rewards and incentives
to enrollees who participate in activities
that focus on promoting improved
health, preventing injuries and illness,
and promoting efficient use of health
care resources. While there would be a
cost associated with providing rewards
and incentives, we anticipate that there
may be savings as a result of healthier
beneficiary behavior. Because plans are
not required to provide rewards and
incentives and CMS does not have a
means of calculating the costs and
benefits of rewards/incentives at this
time, we are not providing an impact
analysis for this provision.
37. Effects of Expand Quality
Improvement Program Regulations
The proposed regulation changes are
only technical changes for the
established quality improvement
program requirements. These changes
would clarify how MA organizations
report quality improvement program
information to CMS. As MA

organizations are already reporting this
information to CMS and the changes are
only to codify the process, the changes
will not increase costs for MA
organizations.

39. Effects of Improving Payment
Accuracy: Reporting Overpayments,
RADV Appeals, Part D Payment
Reopening, LIS Cost Sharing, and
Coverage Gap Discount Program

38. Effects of Authorization of
Expansion of Automatic or Passive
Enrollment Non-Renewing Dual Eligible
SNPs (D–SNPs) to Another D–SNP To
Support Alignment Procedures
We propose to modify the situations
in which CMS may passively enroll
beneficiaries to include the situation
when a Medicare Advantage Dual
Eligible SNP (D–SNP) is non-renewing.
More specifically, passive enrollment
would be permitted for full-benefit dual
eligible beneficiaries in the nonrenewing D–SNP when there is another
D–SNP in the service area that offers
substantially similar benefits, network,
and cost-sharing as the non-renewing
D–SNP, and that also offers the
Medicaid managed care organization in
which the beneficiary is enrolled.
SNPs are due to sunset in 2014.
Consequently, we are not scoring this
provision for contract years 2015
through 2019.

This proposed section proposes only
technical changes for overpayment
reporting, RADV appeals, Part D
payment reopening, LIS cost sharing,
and the Coverage Gap Discount
Program. These technical changes will
not result in costs to MA organizations
and Part D sponsors, nor do we expect
the impact of these technical changes to
result in savings.
40. Effects of Part C and Part D RAC
Determination Appeals
In section III.B.x of this proposed rule,
to establish an administrative appeals
process for overpayment determinations
by the Part C and Part D RACs. The cost
associated with these provisions
involves the preparation and
submission of appeal requests by plans.
We estimate this cost to be $48,343 as
summarized in the following Table 13.

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TABLE 13—SUMMARY OF RAC DETERMINATION APPEALS COSTS AND BENEFITS
Costs
(in $millions)

Provision description
Submission of MA plans’ first level Request for Reconsideration.
Submission of Part D plans’ first level Request for Reconsideration.
Submission of MA plans’ second level Request for Review ....

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Benefits
Administrative appeal rights and accuracy in recovery demands.
Administrative appeal rights and accuracy in recovery demands.
Administrative appeal rights and accuracy in recovery demands.

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TABLE 13—SUMMARY OF RAC DETERMINATION APPEALS COSTS AND BENEFITS—Continued
Costs
(in $millions)

Provision description
Submission of Part D plans’ second level Request for Review

0.00208

Submission of MA plans’ third level Request for Review by
the CMS Administrator.
Submission of Part D plans’ third level Request for Review by
the CMS Administrator.

0.0004

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41. Effects of Requirement To Provide
High Quality Health Care
The proposal to add contractual
requirements for MA plans and Part D
plans to provide high quality health care
proposes to include in the terms and
conditions in our contracts with Part D
sponsors and explicit requirement that
Part D plans administer a benefit that
promotes and supports high quality
care. We believe that we have conveyed
this expectation in other ways, such as
through our performance and quality
measurements and methodologies. This
proposal provides a basis for
enforcement or corrective action for
low-performing plans. Therefore, we do
not believe there is an impact associated
with this proposal.
42. Effects of MA–PD Coordination
Requirements for Drugs Covered Under
Part D
To ensure that Part A, Part B and Part
D drug benefits are coordinated by MA–
PDs so that enrollees receive needed
medications on a timely basis, we are
proposing to add a new section (b)(7) to
§ 422.112 to require MA–PDs to
establish adequate messaging and
processing requirements with network
pharmacies to ensure that appropriate
payment is assigned at the point of sale
(POS) and to ensure that when coverage
is denied under Part D due to available
coverage under Part A or Part B, that
such coverage is authorized
expeditiously so that the drug may be
provided to the enrollee as his or her
health condition requires. Our proposed
regulation requires that MA–PDs have
systems in place to accurately and
timely adjudicate claims at the POS.
In addition, we would like to ensure
that MA–PD plans are coordinating their
benefits appropriately during the
coverage determination process. If an
MA–PD denies PDP coverage due to the
availability of Part A or Part B coverage,
we expect the MA organization to
ensure that the decision results in
authorization or provision of the drug
under Part B pursuant to the
requirements in parts 422 and 423,
subpart M. We do not expect MA–PD
enrollees to have to request an initial

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0.0004

Benefits
Administrative appeal rights and accuracy in recovery demands.
Administrative appeal rights and accuracy in recovery demands.
Administrative appeal rights and accuracy in recovery demands.

Part A or B versus Part D coverage
determination more than once. We are
soliciting comments about our proposal,
as well as other possible approaches to
minimizing delays in beneficiary access
to needed medications caused by
inadequate coordination of Part A, Part
B and Part D benefits at the POS and
during the coverage determination
process. In particular, we would
appreciate organizations sharing their
expertise regarding best practices for
benefit coordination at the POS and
plan processes that enhance those
coverage determinations. We also are
soliciting comments on challenges MA–
PDs currently encounter in their efforts
to integrate these benefits. Under
Medicare regulations MA–PD plans are
already required to coordinate member
coverage for both Part A and B and Part
D covered drugs. It is our understanding
that the majority of MA–PDs are
effectively performing this activity.
However, we are aware that some MA–
PDs have been less successful. With this
regulation we propose to identify drug
coverage standards that all MA–PDs can
follow that have proven to be both cost
effective and efficient. This proposed
regulation does impose any new
requirements or costs but rather will
assist low performing MA–PDs in
clarifying the necessary actions to meet
existing regulatory requirements for the
effective coordination of Part A, Part B
and Part D covered drugs.
43. Effects of Revisions to Good Cause
Processes
We are proposing to revise § 417.460,
§ 422.74, and § 423.44 to allow an entity
acting on behalf of CMS to conduct good
cause reviews. Shifting responsibility
for this activity from CMS to entities
such as MA, Part D and cost plans
would not change the number of
individuals requesting reinstatement for
good cause nor the number of those
individuals who meet the criteria for
reinstatement. While some plans may
increase their bids to cover the costs to
complete this work, the administrative
burden to plans is negligible. Therefore,
we do not expect this change to have a
monetary impact to the Medicare Trust

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Funds or affect enrollment, as the
policies permitting involuntary
disenrollment for non payment of
premiums and allowing beneficiaries to
request reinstatement for good cause
have been in existence for some time.
44. Effects of the Definition of
Organization Determination
The proposed revisions at § 422.566
are intended to clarify the meaning of
organization determination and to
maintain consistency between the
regulatory definition of organization
determination and the definition used
elsewhere in CMS documents and
subregulatory guidance. Specifically, we
are seeking to include additional types
of coverage decisions that are subject to
Medicare appeals processing
requirements set forth in subpart M. In
other words, cases where a provider
under contract with an MA organization
provides a service directly to an enrollee
and when a contract provider refers an
enrollee to a non-contract provider for
an item or service. Because this
proposed change codifies the existing
definition of organization
determination, this proposal does not
represent any new burden on MA
organizations or burden for small
businesses, rural hospitals, states or the
private sector.
45. Effects of MA Organization
Extension of Adjudication Timeframes
for Organization Determinations and
Reconsiderations
The proposed changes to § 422.568(b),
§ 422.572(b), and § 422.590 would
clarify the limited circumstances in
which MA organizations are permitted
to extend the adjudication timeframe for
organization determinations and
reconsiderations. We believe these
proposed changes would have a
minimal impact on MA organizations,
because they are not likely to alter the
number of coverage requests plans
would receive or the required clinical
resources to process each request.
During audits of MA organizations, we
identified cases where plans are
improperly extending the applicable
adjudication timeframe (for example,

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where clinical documentation is needed
from a contract provider or where the
plan has failed to develop and review
the case during the required timeframe)
but we do not have data on the overall
frequency with which extensions are
being invoked and what percentage of
those cases involve the scenarios
described.
46. Effects of Two-Year Prohibition
When Organizations Terminate Their
Contracts
As part of a group of proposals
intended to strengthen our ability to
distinguish stronger applicants for Part
C participation we propose to revise the
regulation text at § 422.506 and
§ 422.512 to explicitly apply the 2-year
prohibition on re-application after an
organization has terminated its contract
to applications for service area
expansions in addition to applications
for new contracts. These changes to
§ 422.506 and § 422.512would make the
text of these regulations consistent with
the language of a similar provision at
§ 422.503 and § 422.508 (which bans reapplication for 2 years after we have
terminated an organization’s contract).
We believe this provision will have
minimal financial impact as it only
affects those organizations that choose
to non-renew or mutually terminate a
contract with CMS. This provision will
not affect current beneficiaries as it only
applies when an organization is
applying for a new contract or to expand
the service area of its existing contract;
beneficiaries who are currently enrolled
in an organization’s existing contracts
are therefore not affected.

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47. Effects of Withdrawal of Stand
Alone Prescription Drug Plan Bid Prior
to Contract Execution
This provision is not anticipated to
have any significant impacts, as the
withdrawn bids that this provision
would not relate to any existing
enrollees.
48. Effects of Essential Operations Test
Requirement for Part D
This provision has no quantifiable
impact because the requirement affects
unknown individuals/entities in the
future. Nevertheless, we believe this
proposal to require new Part D sponsors
to pass an essential operations test prior
to being permitted to accept enrollments
will enhance our ability to ensure that
beneficiaries are permitted to choose
only from among those Part D plans
offered by sponsors truly qualified to
administer the full range of benefits to
which beneficiaries are entitled. This
approach will reduce both the
likelihood of disruptions in

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beneficiaries’ access to outpatient
prescription drugs and the resources
CMS has to dedicate to addressing such
disruptions.
49. Effects of Termination of the
Contracts of Medicare Advantage
Organizations Offering Part D for Failure
for Three Consecutive Years To Achieve
Three Stars on Both Part C and Part D
Summary Star Ratings in the Same
Contract Year
This provision has no quantifiable
impact because this affects unknown
individuals/entities in the future. We
believe the proposal to authorize the
termination of contracts that fail to
achieve three-star ratings for both Part C
and D within three years is consistent
with our overall emphasis on ensuring
that beneficiaries receive quality
services from their plan sponsors.
Eliminating poor performing contracts
will promote beneficiary satisfaction
with the Part C and D programs and
reduce the amount of effort we must
apply to overseeing and correcting the
performance of organizations that
consistently fail to demonstrate a
commitment to quality.
50. Effects of Requirements for Urgently
Needed Services
The proposed revisions of
§ 422.113(b)(1)(iii) removes the
requirement of ‘‘extraordinary and
unusual’’ for in-service-area, out-ofnetwork coverage for urgent needed
services. Typically, this will mean that
enrollees with non-emergent weekend
medical problems will now be covered
for services furnished out of network
thus eliminating the need for
beneficiaries to seek out-of-network
care. Many plans already contract with
24/7 walk-in clinics providing innetwork coverage. Historically, the
alternative to plan coverage has been
emergency-room care. We therefore
expect minimal cost and possible
savings as a result of this change.
51. Effects of Skilled Nursing Facility
Stays
Our proposal that would relocate the
MA regulation language currently
located at § 422.101(c), ‘‘Requirements
Related to Basic Benefits’’ to
§ 422.102(a)(5), ‘‘Supplemental
Benefits’’ is a technical change only and
would have no financial impact.
52. Effects of Agent and Broker Training
and Testing Requirements
At § 422.2274 and § 423.2274, we are
proposing to revise § 422.2274(b) and (c)
and § 423.2274(b) and (c) to remove the
concept of a CMS endorsed or approved
training and testing, and require instead

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2045

that agents be trained and tested
annually, as specified by CMS. We
believe this proposed change continues
to ensure that all agents/brokers selling
Medicare products have a
comprehensive understanding of
Medicare program rules. The changes
made to this regulation will not result
in any additional costs for MA plans or
Part D plans, or a new collection of
information. We are simply revising the
existing language to remove an
obligation for CMS to endorse or
approve a training program in favor of
CMS providing such training directly.
53. Effects of Deemed Approval of
Marketing Materials
At § 422.2266 and § 423.2266, CMS
provides the regulatory requirements for
materials that are deemed approved. It
also provides the requirements for the
review and distribution of marketing
materials. We are proposing to move the
current requirements in §§ 422.2266 and
423.2266 to §§ 422.2262(a)(2) and
423.2262(a)(2), respectively. We also
propose to simplify the language in
§§ 422.2266 and 423.2266 by stating if
CMS does not approve or disapprove
marketing materials within the specified
review timeframe, the materials will be
deemed approved. Deemed approved
means that a MA organization or Part D
sponsor may use the material. Changes
to this regulation will not result in
additional. We are simply revising the
existing language to clarify the existing
requirements for deemed approved
materials.
54. Effects of Part C Disclosure
Requirements
This provision would simply replace
the current, incorrect, reference in
§ 422.111 to the marketing materials and
elections form requirements at § 422.80,
with the correct reference to subpart V,
Medicare Advantage Marketing
Requirements. This is a technical
change and represents no costs or
impact.
55. Effects of Managing Disclosure and
Recusal in P&T Conflicts of Interest:
Formulary Development and Revision
by a Pharmacy and Therapeutics
Committee Under Part D
We propose to revise our regulations
at § 423.120(b)(1) to reorder the existing
provisions and add a new paragraph
(b)(1)(iv) to require that a Part D
sponsor’s P&T committee clearly
articulates and documents processes to
determine that the requirements under
paragraphs (b)(1)(i), (ii), and (iii) have
been met, including the determination
by an objective party of whether
disclosed financial interests are

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conflicts of interest and that
management of any recusals due to such
conflicts of interest.
Because plans were previously
required to have these processes in
place, and we are only asking that they
document them, we anticipate that there
would be no cost impact on plans.
56. Effects of the Technical Changes to
the Definition of Part D Drug
There is no impact associated with
this provision as it is a technical change
to regulation language.
57. Effects of Thirty Sixth Month
Coordination of Benefits (COB) Limit
There is no impact associated with
this provision as it is a technical change
to regulation language.
58. Effects of Application and
Calculation of Daily Cost-Sharing Rates
There is no impact associated with
this provision, as it is a technical change
to regulation language.
59. Effects of Technical Change To
Align Regulatory Requirements for
Delivery of the Standardized Pharmacy
Notice
Our proposed revision to
§ 423.562(a)(3) is a technical change and
does not represent a burden for small
businesses, rural hospitals, states, or the
private sector.
60. Effects of Special Part D Access
Rules During Disasters
In proposed § 423.126(a), we would
codify requirements similar to existing
guidance that pertains to relaxing
‘‘refill-too-soon’’ (RTS) edits to permit
one refill in the event of any imminent
or occurring disaster or emergency that

would hinder an enrollee’s access to
covered Part D drugs.
The proposed changes would not
result in any additional costs. For one,
we currently expect through guidance
that sponsors will relax edits after the
issuance of certain federal declarations.
We also do not anticipate that providing
a general framework for when sponsors
must relax RTS edits would necessitate
an increase in resources because it is
currently not uncommon for Part D
sponsors to relax edits for particular
individuals under certain
circumstances.
The proposed provisions would
require Part D sponsors to relax ‘‘refilltoo-soon’’ (RTS) edits when, as
evidenced by a declaration of a disaster
or emergency or its imminence by an
appropriate federal, state, or local
official, it is reasonable to conclude that
an occurring or imminent disaster or
emergency would make it difficult for
beneficiaries to obtain refills of their
medications. Relaxing RTS edits in
these circumstances would benefit
beneficiaries by better ensuring that
they do not run out of their medications
when a disaster is imminent or after it
strikes.
61. Effects of MA Organization
Responsibilities in Disasters and
Emergencies
The proposed addition of section
§ 422.100(m) requires plan activities
during disasters that are currently
recommended in our guidance. Since
plans are already cooperating with our
recommendations we expect no impact
as a result of this requirement.
Additionally, we are requiring a
dedicated Web page for disasters on

plan Web sites. Since plans already
have Web sites and technical staff
supporting them, we expect minimal
cost, if any, for the additional page. We
are also requiring plans to annually
notify enrollees about disaster
preparation. Since plans, as required at
§ 422.111, already annually notify
beneficiaries using the Evidence of
Coverage template, we expect minimal
cost, if any, for the additional
notification about disasters.
62. Effects of the Technical Changes
Regarding the Termination of a
Contract, Contract Determination and
Other Appeals, and Intermediate
Sanctions and Civil Money Penalties
Under Parts C and D
Sections III.E.13. and 14 this proposed
rule include provisions making minor
technical and clarifying changes. These
changes include making language
consistent, aligning titles and correcting
references. These technical and
clarifying changes will not result in
additional burden to sponsors nor will
they have a financial impact on
sponsors.
63. Effects of Technical Change to the
Restrictions on use of Information
Under Part D
There is no impact associated with
this provision as it is a technical change
to regulation language to reflect the
expansion, pursuant to section
6402(b)(1) of the Affordable Care Act, in
the purposes for which HHS, its
contractors, and the Attorney General,
and Comptroller General may use
information disclosed or obtained
pursuant to section 1860D–15 of the
Act.

TABLE 14—ESTIMATED 1 AGGREGATE COSTS AND SAVINGS TO THE HEALTH CARE SECTOR BY PROVISION FOR CALENDAR
YEARS 2015 THROUGH 2019
Calendar year ($ in millions)
Provision

Regulation section(s)
2015

2016

2017

2018

2019

Total
($ in millions)
CYs
2015–2019

Impacts to MA Organizations and Part D Sponsors
A.6. Changes to Audit and Inspection

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Total ($ in millions) ........................

§ 422.503(d)(2),
§ 423.504(d)(2).

8.9

8.9

8.9

8.9

8.9

44.5

.................................................

8.9

8.9

8.9

8.9

8.9

44.5

Federal Government (Medicare) Impacts
¥10

¥12

¥13

¥15

¥17

¥67

§ 423.102(b)(2)(v)–(vi) ............

0

¥30

¥50

¥220

¥420

¥720

§ 422.74 ..................................

¥73

¥90

¥108

¥129

¥152

¥552

A.10. Enrollment Eligibility for Individuals Not Lawfully Present in the
United States 2.

§ 422.1, § 422.50, AND
§ 422.74; § 423.1, § 423.30,
and § 423.44.

A.14. Drug Categories or Classes of
Clinical Concern and Exceptions 3.
A.35. Eligibility of Enrollment for Incarcerated Individuals 4.

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TABLE 14—ESTIMATED 1 AGGREGATE COSTS AND SAVINGS TO THE HEALTH CARE SECTOR BY PROVISION FOR CALENDAR
YEARS 2015 THROUGH 2019—Continued
Calendar year ($ in millions)
Provision

Regulation section(s)
2015

Total ($ in millions) ........................

.................................................

2016

¥83

¥132

2017

2018

¥171

¥364

2019

Total
($ in millions)
CYs
2015–2019

¥589

¥1,339

Notes:
1 Estimates of costs and savings reflect scoring by the CMS, Office of the Actuary. Also, only provisions with savings or cost exceeding
$1,000,000 are listed. Other provisions either have no expected savings or cost, or, have a savings or cost under $1,000,000. Details on these
savings and cost may be found in the RIA narrative.
2 Supporting 2012 lawful presence data provided by SSA.
3 Projected savings are based upon full implementation of the criteria and do not reflect that changes for the antipsychotic class of drugs are
deferred at this time.
4 Supporting 2012 incarceration data provided by the SSA.

D. Expected Benefits
1. Drug Categories or Classes of Clinical
Concerns and Exceptions
(§ 423.102(b)(2)(v)–(vi)
Proposed codification of the
categories or classes of clinical concern
provisions would assist PBMs in
applying the Part D plans and managing
the Part D sponsor’s benefit packages
more efficiently.
2. Medication Therapy Management
Program under Part D
We anticipate that many more
beneficiaries will have access to MTM
services and believe that the proposed
changes will simplify the MTM criteria
and minimize beneficiary confusion
when choosing or transitioning between
plans. Moreover, we believe the
proposed changes would reduce
disparity and allow more beneficiaries
with drug therapy problems to receive
MTM services. Similarly, we expect the
proposed requirement that sponsors
develop an effective strategy to ensure
access to services for all MTM-eligible
beneficiaries will help to ensure that
beneficiaries in special populations
receive focused targeting, outreach, or
engagement for enrollment or
participation in MTM.
E. Alternatives Considered

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1. Separating the Annual Notice of
Change from the Evidence of Coverage
We considered reverting back to
requirements in place prior to the 2009
contract year, which allowed issuing
EOCs as late as January 31 of the
applicable contract year. We determined
the EOC should be received by members
before the effective date of their
coverage for that contract year,
beginning on January 1, in order for
members to have full disclosure of plan
rules prior to the beginning of the
contract year.

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2. Modifying the Agent/Broker
Compensation Requirements
In the preamble we outlined a few
alternative compensation schedules.
Ultimately we determined that the best
approach was a two tier payment
schedule, incorporating an initial
payment and a continuous renewal
payment.
3. Medicare Coverage Gap Discount
Program and Employer Group Waiver
Plans
In the preamble we outlined the
alternative approaches we considered in
our efforts to make sure that the
discounts were used to benefit
enrollees. Ultimately we determined
that the best approach would be to make
sure that employer groups have the
information needed to incorporate the
payments into their benefit packages.
4. Prescription Drug Pricing Standards
and Maximum Allowable Cost
No alternatives were considered.
5. Access to Covered Part D drugs (c)
Use of Standardized Technology
No alternatives were considered.
6. Any Willing Pharmacy Standard
Terms & Conditions
We considered the alternative of
maintaining the current process where
Part D plans can limit pharmacy access
to preferred cost-sharing contracts. We
have observed this in practice to be
limiting market competition, creating a
barrier to entry, and further, not
producing the savings to the program
that were initially anticipated.
7. Negotiated Prices
We did not identify any alternatives
that both maintained consistent
reporting among sponsors leading to
comparable bids, and maximized price
competition.

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8. Preferred Cost Sharing
We considered whether a
methodology that was based on lower
average costs (or any other function of
costs in the rest of the network) in
return for preferred cost sharing would
suffice to meet the statutory
requirement. While such a methodology
might technically meet the requirement
not to increase CMS payments to plans,
whether it did so or not would be
dependent on the actual negotiated
prices paid and could be determined
only long after a coverage year had
ended and complete the PDE data was
available. We believe that to promote
price competition, the relative levels of
negotiated prices offered for preferred
cost sharing and in the rest of the
network should be transparent and
verifiable at the point of sale, as well as
to CMS oversight at any point prior to
and during a coverage year. We were
unable to identify any methodology
other than our proposal to accomplish
these goals. We solicit comments on
alternative approaches to ensuring that
the offering of preferred cost sharing
does not increase CMS payments. We
believe that any alternative
methodology must be based solely on
the level of negotiated prices and thus
consistent with our proposal to amend
that definition. We also solicit
comments on whether we should also
establish standards on how much lower
drug costs should be in return for
preferred cost sharing.
9. Transfer of TrOOP Between Part D
Sponsors Due to Enrollment Changes
During the Coverage Year
No alternative proposals were
considered.
10. Part D Notice of Changes
We did not consider any alternatives
for the proposed provision because it
proposes to codify a longstanding
policy.

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11. Special Part D Access Rules During
Disasters or Emergencies
We did not consider alternatives to
requiring Part D sponsors to lift ‘‘refill
too soon’’ (RTS) edits in the event of any
imminent or occurring disaster or
emergency that would hinder an
enrollee’s access to covered Part D
drugs. It is important for the well-being
and health of beneficiaries that they be
able to obtain their medications after
disasters strike. Furthermore, given the
complexities of moving large numbers
of people with different health
conditions to safer locations, we also
believed we had no alternative but to
require Part D sponsors to relax RTS
edits when a disaster is imminent and
access to services might be jeopardized
rather than waiting for it to strike.

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12. Business Continuity for MA
Organizations and Part D Sponsors
We did not consider any alternatives
for the initial part of the provision
found in §§ 422.504(o)(1) and
423.505(p)(1) that would, respectively,
require MA organizations and Part D
sponsors to develop and maintain
business continuity plans. Creating such
a plan is an accepted business practice
and we would require MA organizations
and Part D sponsors to address a
standard list of areas; in short, we know
of no other options.
In contrast, we considered other
options when drafting proposed
§§ 422.504(o)(2) and 423.505(p)(2),
which would require the restoration of
essential functions within 24 hours after
failure. We considered requiring MA
organizations and Part D sponsors to
restore even more functions, but
decided disruptions to business would
presumably limit resources and that it
was important to focus on only the most
vital functions. We also considered
paring down the list of essential
functions, but found that we could not
do so without jeopardizing the mandate
of the Act—to ensure access to health
care and covered Part D drugs through
the provision of appropriate Medicare
benefits. Benefit authorization, claim
adjudications, and call center operations
are all essential to providing appropriate
Medicare coverage for beneficiaries both
living inside and outside of areas hit by
disasters and other disruptions.
Lastly, we considered the option of
requiring restoration of essential
functions to occur for a shorter or longer
time period than 24 hours after failure
proposed. We decided that 12 hours
might present operational challenges for
MA organizations and Part D sponsors;
conversely, requiring beneficiaries to
wait more than 24 hours to access their

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coverage and therefore health care and
drug benefits, seemed to pose an undue
risk to both their present and possibly
future health and well-being.
13. Drug Categories or Classes of
Clinical Concerns and Exceptions
The critical policy decision was how
broadly or narrowly to establish criteria
and exceptions to those criteria
pursuant to Affordable Care Act
provisions. Broad criteria might easily
encompass many classes of drugs and
significantly increase costs to the Part D
program by eliminating the need for
manufacturers to aggressively rebate
their products for formulary placement.
Only narrow criteria would limit the
number of categories or classes of
clinical concern receiving additional
protections under the Affordable Care
Act. Similarly, broad exceptions further
limit the products within those
categories or classes of clinical concern
that would receive additional protection
under the Affordable Care Act.
14. Medication Therapy Management
Program (MTM) Under Part D
We considered leaving the maximum
number of multiple chronic diseases a
plan may require for targeted enrollment
at three, but believed this threshold
significantly limited the number of
beneficiaries who qualified for MTM
services and was inconsistent with
literature concerning the relative risk of
the combination of multiple disease
states and the need for access to MTM
interventions. Similarly, we considered
other numbers of Part D drugs less than
eight, but again believed these
thresholds decreased access to MTM
services, contributed to beneficiary
confusion, and led to racial disparities
in access to MTM services. We also
considered other cost thresholds less
than $3,000, for example, $900 or
$1,200, which roughly coincide with
cost thresholds achieved by taking 3 or
4 generic drugs, and we solicit
stakeholder comment on where the
threshold might alternatively be set.
Relative to the requirement for
sponsors to establish effective strategies
for reaching all MTM-eligible
beneficiaries, we do not believe it is
appropriate at this time to prescribe
outreach activities for Part D sponsors to
effectively reach diverse, special
populations of their enrolled
beneficiaries. Rather, we propose that
sponsors develop an effective strategy to
ensure access to MTM services for all
MTM-eligible beneficiaries. We will
continue to monitor the efficacy of such
programs and the impact of any change
to the requirements and will consider
other options as may be necessary.

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15. Requirement for Applicants or Their
Contracted First Tier, Downstream, or
Related Entities To Have Experience in
the Part D Program Providing Key Part
D Functions
Based on CMS’ authority at section
1860D–12(b)(3)(D) of the SSA to adopt
additional contract terms that are
necessary and appropriate to administer
the Part D program, we proposed at
§ 423.504(b)(8)(i) through (iii) that Part
D organizations seeking a new Medicare
contract must have arrangements in
place such that either the applicant or
a contracted entity that will be
performing certain key Part D functions
has at least one full benefit year of
experience providing the function for
another Part D plan sponsor. This
proposal ensures that applicants take
advantage of the abundant Part D
industry expertise and experience that
exists today in the development of their
Part D program operations, rather than
relying on technical assistance from
CMS and having their inexperience
place beneficiaries’ access to
prescription drugs at risk. We believe
this provision will have a very minor
savings impact on the federal budget,
based on savings of time and effort (staff
time and contracted auditor time and
resources) that the government would
spend on overseeing the
disproportionate level of problems
experienced by organizations operating
Part D plans without prior Part D
experience. For each inexperienced
organization allowed into the program
in the absence of this proposal, we
would anticipate a savings of 1,000 staff
hours at an average rate of $50 per hour,
for a total of $50,000 in employee time,
plus an additional savings of $200,000
in contractor dollars to conduct an
emergency audit, for a total of $250,000.
In the absence of this proposal, we
would anticipate no more than two such
inexperienced entities beginning Part D
operations per year, for a total annual
savings of $500,000.
The burden associated with this
proposal on industry would be minimal,
with a total estimated number of labor
hours of 3.25 to submit information
during the Part D application process.
Using the same average hourly salary as
previously mentioned, the total cost to
Part D applicants would be $162.50. We
do not believe there are any nonadministrative costs to industry
associated with this proposal, as Part D
applicants are already required to have
arrangements in place to perform the
key Part D functions discussed in our
proposal.
The main anticipated effect from this
proposal is ensuring that only entities

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with some experience with Part D in
critically important functional areas are
permitted to offer new Part D contracts,
thus strengthening the Part D program
by enhancing the qualification criteria.
CMS considered the alternate proposal
of requiring the prior Part D experience
to be tied to specific quality outcomes.

CMS rejected the alternative because we
believed it added unnecessary
complexity and burden to the process,
and we believe a simple experience
requirement is currently sufficient.
F. Accounting Statement and Table
As required by OMB Circular A–4
(available at http://

www.whitehouse.gov/omb/circulars/
a0004/a-4/pdf), in Table 15, we have
prepared an accounting statement
showing the classification of the
expenditures, costs, and savings
associated with the provisions of this
proposed rule for CYs 2015 through
2019.

TABLE 15—ACCOUNTING STATEMENT: CLASSIFICATIONS OF ESTIMATED COSTS AND TRANSFERS FROM CALENDAR YEARS
2015 TO 2019
[$ in millions]
Transfers
Category

Discount rate
7%
¥$251.23

Annualized Monetized Transfers (Federal) ......................................................................................
Whom to Whom?

Period
covered

3%
¥$260.49

CYs 2015–2019.

Federal Government, MA Organizations and
Part D Sponsors
Costs
(all other provisions)
Discount rate
7%

Annualized Costs to MA Organizations and Part D Sponsors ........................................................

Period
covered

3%
$8.9

$8.9

CYs 2015–2019.

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Note: Monetized Figures in 2014 Dollars.

G. Conclusion
We estimate the savings to the federal
government from implementing these
provisions will be $83 million in CY
2015. The savings will increase
annually. In CY 2019, the federal
government savings from implementing
these provisions will be $589 million.
For the entire estimated period, CYs
2015 through 2019, we estimate the total
federal government (Medicare) impact
to result in savings of approximately
$1.34 billion in 2014 dollars. The cost
impact to MA organizations and Part D
sponsors is estimated at $8.9 million
annually during CYs 2015 through 2019.
We note that these savings do not
represent net social benefits because
they consist of transfers of value from
drug manufacturers, pharmacies,
incarcerated individuals and
individuals not lawfully present in the
United States to the federal government,
MA organizations, Part D sponsors and
beneficiaries who continue in the
programs.
List of Subjects
42 CFR Part 409
Health facilities and Medicare.
42 CFR Part 417
Administrative practice and
procedure, Grant programs-health,
Health care, Health insurance, Health

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maintenance organizations (HMO), Loan
programs-health, Medicare, and
Reporting and recordkeeping
requirements.
42 CFR Part 422
Administrative practice and
procedure, Health facilities, Health
maintenance organizations (HMO),
Medicare, Penalties, Privacy, and
Reporting and recordkeeping
requirements.
42 CFR Part 423
Administrative practice and
procedure, Emergency medical services,
Health facilities, Health maintenance
organizations (HMO), Health
professionals, Medicare, Penalties,
Privacy, Reporting and record keeping
requirements.
42 CFR Part 424
Administrative practice and
procedure, Emergency medical services,
Health facilities, Health maintenance
organizations (HMO), Health
professionals, Medicare, Penalties,
Privacy, Reporting and record keeping
requirements.
For the reasons set forth in the
preamble, the Centers for Medicare &
Medicaid Services proposes to amend
42 CFR Chapter IV as follows:

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PART 409—HOSPITAL INSURANCE
BENEFITS
1. The authority citation for part 409
continues to read as follows:

■

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

2. Section 409.30 is amended by
revising paragraph (b)(2)(ii) to read as
follows:

■

§ 409.30

Basic requirements.

(b) * * *
(2) * * *
(ii) If, upon admission to the SNF, the
beneficiary was enrolled in an M+C
plan, as defined in § 422.4 of this
chapter, offering the benefits described
in § 422.102(a)(5) of this chapter, the
beneficiary will be considered to have
met the requirements described in
paragraphs (a) and (b) of this section,
and also in § 409.31(b)(2), for the
duration of the SNF stay.
PART 417—HEALTH MAINTENANCE
ORGANIZATION, COMPETITIVE
MEDICAL PLANS, AND HEALTH CARE
PREPAYMENT PLANS
3. The authority citation for part 417
continues to read as follows:

■

Authority: Secs. 1102 and 1871 of the
Social Security Act (42 U.S.C. 1302 and
1395hh), secs. 1301, 1306, and 1310 of the

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Public Health Service Act (42 U.S.C. 300e,
300e–5, and 300e–9), and 31 U.S.C. 9701.

4. Section 417.1 is amended by
revising the definition of ‘‘service area’’
to read as follows:

■

§ 417.1

Definitions.

*

*
*
*
*
Service area means a geographic area,
defined through zip codes, census
tracts, or other geographic
measurements, that is the area, as
determined by CMS, within which the
HMO furnishes basic and supplemental
health services and makes them
available and accessible to all its
enrollees in accordance with
§ 417.106(b). Facilities in which
individuals are incarcerated are not
included in the geographic service area
of an HMO or CMP plan.
*
*
*
*
*
■ 5. Section 417.2 is amended by
revising paragraph (b) to read as follows:
§ 417.2

Basis and scope.

*

*
*
*
*
(b) Subparts G through R of this part
set forth the rules for Medicare contracts
with, and payment to, HMOs and
competitive medical plans (CMPs)
under section 1876 of the Act and 8
U.S.C. 1611.
*
*
*
*
*
§ 417.420

[Amended].

6. In § 417.420, paragraph (a) is
amended by removing the phrase
‘‘Individuals who are entitled to’’ and
adding in its place the phrase ‘‘Eligible
individuals who are entitled to’’.
■ 7. Section 417.422 is amended—
■ A. In the introductory text, by
removing the phrase ‘‘any individual
who—’’ and adding in its place the
phrase ‘‘any individual who meets all of
the following:’’
■ B. In paragraphs (a) through (e), by
removing the ‘‘;’’ and adding in its place
‘‘.’’.
■ C. In paragraph (f), by removing the ‘‘;
and’’ and adding in its place ‘‘.’’.
■ D. Adding paragraph (h).
The addition reads as follows:
■

§ 417.422
CMP.

Eligibility to enroll in an HMO or

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*

*
*
*
*
(h) Is a United States citizen or
qualified alien who is lawfully present
in the United States as determined in 8
CFR 1.3.
■ 8. Section 417.460 is amended—
■ A. Revising paragraph (b)(2)(i).
■ B. In paragraph (b)(2)(iii), by removing
‘‘; or’’ and adding in its place ‘‘;’’.
■ C. By removing the period at the end
of (b)(2)(iv) and adding ‘‘; or’’ in its
place.

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D. By adding paragraph (b)(2)(v).
E. In paragraph (b)(3), by removing the
cross-reference ‘‘paragraphs (c) through
(i)’’ and adding in its place the crossreference ‘‘paragraphs (c) through (j)’’.
■ F. By revising paragraph (c)(3).
■ G. In paragraph (c)(4), by removing the
phrase ‘‘non-payment of premiums.’’
and adding in its place the phrase ‘‘nonpayment of premiums or other
charges.’’.
■ H. By adding new paragraphs
(f)(1)(i)(A) through (C).
■ I. By adding paragraph (j).
The revisions and the additions read
as follows:
■
■

§ 417.460 Disenrollment of beneficiaries
by an HMO or CMP.

*

*
*
*
*
(b) * * *
(2) * * *
(i) Moves out of the HMO’s or CMP’s
geographic area or is incarcerated.
*
*
*
*
*
(v) Loses qualified alien status or
lawful presence in the United States.
*
*
*
*
*
(c) * * *
(3) Good cause and reinstatement.
When an individual is disenrolled for
failure to pay premiums or other charges
imposed by the HMO or CMP for
deductible and coinsurance amounts for
which the enrollee is liable, CMS (or its
designee) may reinstate enrollment in
the plan, without interruption of
coverage, if the individual shows good
cause for failure to pay and pays all
overdue premiums or other charges
within 3 calendar months after the
disenrollment date. The individual must
establish by a credible statement that
failure to pay premiums or other charges
was due to circumstances for which the
individual had no control, or which the
individual could not reasonably have
been expected to foresee.
*
*
*
*
*
(f) * * *
(1) * * *
(i) * * *
(A) Incarceration. The HMO or CMP
must disenroll an individual if the HMO
or CMP establishes, on the basis of
evidence acceptable to CMS, that the
individual is incarcerated per § 417.1.
(B) Notification by CMS of
incarceration. When CMS notifies an
HMO or CMP of disenrollment due to an
incarceration as per § 417.1,
disenrollment is effective the first of the
month following the start of
incarceration, unless otherwise
specified by CMS.
(C) Exception. The exception in
paragraph (f)(2) of this section does not

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apply to individuals who are
incarcerated.
*
*
*
*
*
(j) Loss of qualified alien status.
Disenrollment is effective the first day
of the month following the last month
of lawful presence or qualified alien
status in the United States.
PART 422—MEDICARE ADVANTAGE
PROGRAM
9. The authority citation for part 422
continues to read as follows:

■

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

10. Section 422.1 is amended by
revising paragraph (a) to read as follows:

■

§ 422.1

Basis and scope.

(a) Basis. This part is based on the
indicated provisions of the following:
(1) The following provisions of the
Act:
1128J(d)—Reporting and Returning of
Overpayments.
1851—Eligibility, election, and
enrollment.
1852—Benefits and beneficiary
protections.
1853—Payments to Medicare Advantage
(MA) organizations.
1854—Premiums.
1855—Organization, licensure, and
solvency of MA organizations.
1856—Standards.
1857—Contract requirements.
1858—Special rules for MA Regional
Plans.
1859—Definitions; enrollment
restriction for certain MA plans.
(2) 8 U.S.C. 1611—Aliens who are not
qualified aliens ineligible for Federal
public benefits
*
*
*
*
*
■ 11. Section 422.2 is amended by—
■ A. Revising the definition of
‘‘Attestation process’’.
■ B. Removing the definition of ‘‘Initial
Validation Contractor (IVC)’’.
■ C. Adding the definitions of ‘‘Parent
organization’’ and ‘‘RADV appeal
process’’.
■ D. Removing the definition of ‘‘RADV
payment error calculation appeal
process’’.
■ E. Revising the definition of ‘‘Risk
adjustment data validation (RADV)
audit’’.
■ F. Revising introductory text of the
definition of ‘‘Service area’’.
■ G. Removing the definition of ‘‘The
one best medical record for the purposes
of Medicare Advantage Risk Adjustment
Validation (RADV)’’.
The revisions and additions read as
follows:

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§ 422.2

Definitions.

The addition reads as follows:

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*

*
*
*
*
Attestation process means a CMSdeveloped RADV audit-related process
that is part of the medical record review
process that enables MA organizations
undergoing RADV audit to submit CMSgenerated attestations for eligible
medical records with missing or
illegible signatures or credentials. The
purpose of the CMS-generated
attestations is to cure signature and
credential issues. CMS-generated
attestations do not provide an
opportunity for a provider or supplier to
replace a medical record or for a
provider or supplier to attest that a
beneficiary has the medical condition.
*
*
*
*
*
Parent organization means a legal
entity that owns one or more other
subsidiary legal entities.
*
*
*
*
*
RADV appeal process means an
administrative process that enables MA
organizations that have undergone
RADV audit to appeal the Secretary’s
medical record review determinations
and the Secretary’s calculation of an MA
organization’s RADV payment error.
*
*
*
*
*
Risk adjustment data validation
(RADV) audit means a payment audit of
a MA organization administered by the
Secretary that ensures the integrity and
accuracy of risk adjustment payment
data.
*
*
*
*
*
Service area means a geographic area
that for local MA plans is a county or
multiple counties, and for MA regional
plans is a region approved by CMS
within which an MA-eligible individual
may enroll in a particular MA plan
offered by an MA organization.
Facilities in which individuals are
incarcerated, with the exclusion of
Institutions for Mental Disease, are not
included in the service area of an MA
plan. Each MA plan must be available
to all MA-eligible individuals within the
plan’s service area. In deciding whether
to approve an MA plan’s proposed
service area, CMS considers the
following criteria:
*
*
*
*
*
■ 12. Section 422.50 is amended—
■ A. In paragraph (a) introductory text,
by removing the phrase ‘‘if he or
she—’’ and adding in its place the
phrase ‘‘if he or she meets all of the
following:’’
■ B. In paragraphs (a)(1) and (4), by
removing ‘‘;’’ and adding in its place
‘‘.’’.
■ C. In paragraph (a)(5), by removing ‘‘;
and’’ and adding in its place ‘‘.’’.
■ D. By adding paragraph (a)(7).

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§ 422.50

Eligibility to elect an MA plan.

*

*
*
*
*
(a) * * *
(7) Is a United States citizen or
qualified alien who is lawfully present
in the United States as determined in 8
CFR 1.3.
*
*
*
*
*
■ 13. Section 422.60 is amended by
redesignating paragraphs (g)
introductory text through (g)(3) as
paragraphs (g)(1) through (4), and by
revising newly redesignated paragraph
(g)(1) to read as follows:
§ 422.60

Election process.

*

*
*
*
*
(g) * * *
(1) Passive enrollment by CMS. CMS
may implement passive enrollment
procedures (as described in paragraph
(g)(2) of this section) in any of the
following situations:
(i) Immediate terminations as
provided in § 422.510(a)(5).
(ii) Other situations in which CMS
determines that remaining enrolled in a
plan poses potential harm to the
members.
(iii) Situations which meet all of the
following criteria:
(A) A specialized MA plan for special
needs individuals in which the
individual is enrolled will no longer be
offered following the end of the current
calendar year,
(B) The individual is a—
(1) Special needs individual entitled
to medical assistance under a Medicaid
State plan, as defined in section
1859(b)(6)(B)(ii) of the Act and § 422.2;
and
(2) Full-benefit dual eligible
beneficiary, as defined in section
1935(c) of the Act.
(C) The passive enrollment is into a
specialized MA plan for special needs
individuals with a network and benefits
that are substantially similar, as
determined by CMS, to the nonrenewing plan, and where the
sponsoring organization also offers the
Medicaid managed care organization in
which the individual is also enrolled.
*
*
*
*
*
■ 14. Section 422.74 is amended by—
■ A. Adding paragraph (b)(2)(v).
■ B. Revising paragraphs (d)(1)(v) and
(d)(4)(i)(A).
■ C. Adding paragraphs (d)(4)(v)and
(d)(8).
The additions and revisions read as
follows:
§ 422.74 Disenrollment by the MA
organization.

*

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*

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(b) * * *
(2) * * *
(v) The individual loses qualified
alien status or is no longer lawfully
present in the United States.
*
*
*
*
*
(d) * * *
(1) * * *
(v) Extension of grace period for good
cause and reinstatement. When an
individual is disenrolled for failure to
pay the plan premium, CMS (or its
designee) may reinstate enrollment in
the MA plan, without interruption of
coverage, if the individual shows good
cause for failure to pay within the initial
grace period, and pays all overdue
premiums within 3 calendar months
after the disenrollment date. The
individual must establish by a credible
statement that failure to pay premiums
within the initial grace period was due
to circumstances for which the
individual had no control, or which the
individual could not reasonably have
been expected to foresee.
*
*
*
*
*
(4) * * *
(i) * * *
(A) Out of the MA plan’s service area
or is incarcerated as specified in
paragraph (d)(4)(v) of this section.
*
*
*
*
*
(v) Incarceration. (A) The MA
organization must disenroll an
individual if the MA organization
establishes, on the basis of evidence
acceptable to CMS, that the individual
is incarcerated as specified § 422.2 or
when notified of the incarceration by
CMS as specified paragraph (d)(4)(v)(B)
of this section.
(B) Notification by CMS of
incarceration. When CMS notifies the
MA organization of the disenrollment
due to an incarceration as specified in
§ 422.2, disenrollment is effective the
first of the month following the start of
incarceration, unless otherwise
specified by CMS.
*
*
*
*
*
(8) Loss of qualified alien status.
Disenrollment is effective with the
month following the last month of
lawful presence or qualified alien status
in the United States.
*
*
*
*
*
■ 15. Section 422.100 is amended by
adding paragraph (m) to read as follows:
§ 422.100

General requirements.

*

*
*
*
*
(m) Special requirements during a
disaster or emergency. (1) When a state
of disaster is declared as described in
paragraph (m)(2) of this section, an MA
organization offering an MA plan must,
until one of the conditions described in

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paragraph (m)(3) of this section occurs,
ensure access to benefits in the
following manner:
(i) Cover Medicare Parts A and B
services and supplemental Part C plan
benefits furnished at non-contracted
facilities subject to § 422.204(b)(3).
(ii) Waive, in full, requirements for
gatekeeper referrals where applicable.
(iii) Provide the same cost-sharing for
the enrollee had the service or benefit
been furnished at a plan-contracted
facility.
(iv) Make changes that benefit the
enrollee effective immediately without
the 30-day notification requirement at
§ 422.111(d)(3).
(2) Declarations of disasters. A
declaration of disaster will identify the
geographic area affected by the event
and may be made as one of the
following:
(i) Presidential declaration of a
disaster or emergency under the either
of the following:
(A) Stafford Act.
(B) National Emergencies Act.
(ii)(A) Secretarial declaration of a
public health emergency under section
319 of the Public Health Service Act.
(B) If the President has declared a
disaster as described in paragraph
(m)(2)(i) or (2)(ii) of this section, then
the Secretary may also authorize
waivers or modifications under section
1135 of the Act.
(iii) Declaration by the Governor of a
State or Protectorate.
(3) End of the disaster. The public
health emergency or state of disaster
ends when any of the following occur:
(i) The source that declared the public
health emergency or state of disaster
declares an end.
(ii) The CMS declares an end of the
public health emergency or state of
disaster.
(iii) Thirty days have elapsed since
the declaration of the public health
emergency or state of disaster and no
end date was identified in paragraph
(m)(3)(i) or (3)(ii) of this section.
(4) MA plans unable to operate. An
MA plan that cannot resume normal
operations by the end of the public
health emergency or state of disaster
must notify CMS.
(5) Disclosure. In addition to other
requirements of annual disclosure under
§ 422.111, an organization must do all of
the following:
(i) Indicate the terms and conditions
of payment during the public health
emergency or disaster for noncontracted providers furnishing benefits
to plan enrollees residing in the state-ofdisaster area.
(ii) Annually notify enrollees of the
information listed in paragraphs (m)(1)
through (3) and (m)(5) of this section.

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(iii) Provide the information described
in paragraphs (m)(1) through (3) and
(m)(4)(i) of this section on its Web site.

§ 422.113 Special rules for ambulance
services, emergency and urgently needed
services, and maintenance and poststabilization care services.

§ 422.101

*

[Amended]

16. Section 422.101 is amended by
removing and reserving paragraph (c).
■ 17. Section 422.102 is amended by
adding paragraph (a)(5) to read as
follows:
■

§ 422.102

Supplemental benefits.

(a) * * *
(5) MA organizations may elect to
furnish, as part of their Medicare
covered benefits, coverage of post
hospital SNF care as described in
subparts C and D of this part, in the
absence of the prior qualifying hospital
stay that would otherwise be required
for coverage of this care.
*
*
*
*
*
■ 18. Section 422.111 is amended by
revising paragraphs (a)(3) and (d)(1) to
read as follows:
§ 422.111

Disclosure requirements.

(a) * * *
(3) At the time of enrollment and at
least annually thereafter by December
31 for the following contract year.
*
*
*
*
*
(d) * * *
(1) Submit the changes for CMS
review under procedures of Subpart V
of this part.
*
*
*
*
*
■ 19. Section 422.112 is amended by
adding paragraph (b)(7) to read as
follows:
§ 422.112

Access to services.

*

*
*
*
*
(b) * * *
(7) With respect to drugs for which
payment as so prescribed and dispensed
or administered to an individual may be
available under Part A or Part B, or
under Part D, MA–PD plans must
coordinate all benefits administered by
the plan and—
(i) Establish and maintain a process to
ensure timely and accurate claims
adjudication at the point-of-sale; and
(ii) Issue the determination and
authorize or provide the benefit under
Part A or Part B or as a benefit under
Part D as expeditiously as the enrollee’s
health condition requires, in accordance
with the requirements of part 422,
subpart M and Part 423, subpart M, as
appropriate, when a party requests a
coverage determination.
*
*
*
*
*
■ 20. Section 422.113 is amended by
revising paragraph (b)(1)(iii)
introductory text to read as follows:

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*
*
*
*
(b) * * *
(1) * * *
(iii) Urgently needed services means
covered services that are not emergency
services as defined in this section,
provided when an enrollee is
temporarily absent from the MA plan’s
service (or, if applicable, continuation)
area (or provided when the enrollee is
in the service or continuation area but
the organization’s provider network is
temporarily unavailable or inaccessible)
when the services are medically
necessary and immediately required—
*
*
*
*
*
■ 21. Section 422.134 is added to
subpart C to read as follows:
§ 422.134

Reward and incentive programs.

(a) General rule. The MA organization
may create one or more programs
consistent with the standards of this
section that provide rewards and
incentives to enrollees in connection
with participation in activities that
focus on promoting improved health,
preventing injuries and illness, and
promoting efficient use of health care
resources.
(b) Non-discrimination. Reward and
incentive programs—
(1) Must not discriminate against
enrollees based on race, gender, chronic
disease, institutionalization, frailty,
health status or other impairments;
(2) Must be designed so that all
enrollees are able to earn rewards; and
(3) Are subject to sanctions at
§ 422.752(a)(4).
(c) Requirements. (1) A rewards and
incentives program must meet all of the
following:
(i) Be offered in connection with
completion of the entire service or
activity.
(ii) Be offered to all eligible members
without discrimination.
(iii) Have a monetary cap, as
determined by CMS, of a value that may
be expected to impact enrollee behavior
but not exceed the value of the health
related service or activity itself.
(iv) Otherwise comply with all
relevant fraud and abuse laws,
including, when applicable, the antikickback statute and civil money
penalty prohibiting inducements to
beneficiaries.
(2) Reward and incentive items may
not—
(i) Be offered in the form of cash or
other monetary rebates; or
(ii) Be used to target potential
enrollees.

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(3) The MA organization must make
information available to CMS upon
request about the form and manner of
any rewards and incentives programs it
offers and any evaluations of the
effectiveness of such programs.
■ 22. Section 422.152 is amended as
follows:
■ A. Paragraph (a) introductory text is
amended by:
■ i. Removing the phrase ‘‘for each of
those plans’’ and adding in its place the
phrase ‘‘for each plan’’.
■ .ii. Removing the phrase ‘‘a plan
must—’’ and adding in its place the
phrase ‘‘a plan must do all of the
following:’’
■ B. By redesignating paragraphs (a)(1)
through (3) as (a)(2) through (4),
respectively.
■ C. By adding a new paragraph (a)(1).
■ D. In newly redesignated paragraph
(a)(2), by removing the ‘‘;’’ and adding
in its place ‘‘.’’.
■ E. In newly redesignated paragraph
(a)(3), by removing the ‘‘; and’’ and
adding in its place ‘‘.’’.
■ F. By revising paragraphs (c), (g)
introductory text, and (h).
The addition and revisions read as
follows:

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§ 422.152

Quality improvement program.

(a) * * *
(1) Create a quality improvement
program plan that sufficiently outlines
the elements of the plan’s quality
improvement program.
*
*
*
*
*
(c) Chronic care improvement
program requirements. (1) Develop
criteria for a chronic care improvement
program. These criteria must include all
of the following:
(i) Methods for identifying MA
enrollees with multiple or sufficiently
severe chronic conditions that would
benefit from participating in a chronic
care improvement program.
(ii) Mechanisms for monitoring MA
enrollees that are participating in the
chronic improvement program and
evaluating participant outcomes such as
changes in health status.
(iii) Performance assessments that use
quality indicators that are objective,
clearly and unambiguously defined, and
based on current clinical knowledge or
research.
(iv) Systematic and ongoing follow-up
on the effect of the program.
(2) The organization must report the
status and results of each program to
CMS as requested.
*
*
*
*
*
(g) Special requirements for
specialized MA plans for special needs
individuals. All special needs plans

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(SNPs) must be approved by the
National Committee for Quality
Assurance (NCQA) effective January 1,
2012 and subsequent years. SNPs must
submit their model of care (MOC), as
defined under § 422.101(f), to CMS for
NCQA evaluation and approval, in
accordance with CMS guidance. In
addition to the requirements under
paragraphs (a) and (f) of this section, a
SNP must conduct a quality
improvement program that meets all of
the following:
*
*
*
*
*
(h) Requirements for MA private-feefor-service plans and Medicare medical
savings account plans. MA PFFS and
MSA plans are subject to the
requirement that may not exceed the
requirement specified in § 422.152(e).
§ 422.300

[Amended]

23. Section 422.300 is amended by
removing the phrase ‘‘and 1858 of the
Act.’’ and adding in its place the phrase
‘‘1858, and 1128J(d) of the Act.’’
■ 24. Section 422.310 is amended by:
■ A. Redesignating the text of paragraph
(e) as paragraph (e)(2) and adding new
paragraph (e)(1) following current
paragraph (e) subject heading.
■ B. Adding new paragraph (e)(1).
■ C. Revising paragraph (g)(2).
■ D. Adding paragraph (g)(3).
The additions and revision read as
follows:
■

§ 422.310

Risk adjustment data.

*

*
*
*
*
(e) * * *
(1) Any medical record reviews
conducted by an MA organization must
be designed to determine the accuracy
of diagnoses submitted under
§ 422.308(c) and § 422.310(g).
*
*
*
*
*
(g) * * *.
(2) After the payment year is
completed, CMS recalculates the risk
factors for affected individuals to
determine if adjustments to payments
are necessary.
(i) Prior to calculation of final risk
factors for a payment year, CMS allows
a reconciliation process to account for
risk adjustment data submitted after the
March deadline until the final risk
adjustment data submission deadline in
the year following the payment year.
(ii) After the final risk adjustment data
submission deadline, which is
announced by CMS, an MA organization
can submit data to correct overpayments
but cannot submit diagnoses for
additional payment.
(3) Submission of corrected risk
adjustment data in accordance with
overpayments after the final risk
adjustment data submission deadline, as

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described in paragraph (g)(2) of this
section, must be made as provided in
§ 422.326.
■ 25. Section 422.311 is amended as
follows:
■ A. In paragraph (a), by removing the
phrase ‘‘CMS annually’’ and adding in
its place the phrase ‘‘the Secretary
annually’’.
■ B. In paragraph (b)(2), by removing the
phrase ‘‘to CMS or its contractors’’ and
adding in its place the phrase ‘‘to the
Secretary’’.
■ C. By removing paragraph (b)(3).
■ D. By revising paragraph (c).
The revision read as follows:
§ 422.311 RADV audit dispute and appeal
processes.

*

*
*
*
*
(c) RADV audit appeals. (1) Appeal
rights. MA organizations that do not
agree with their RADV audit results may
appeal.
(2) Issues eligible for RADV appeals.
(i) General rules. MA organizations may
appeal RADV medical record review
determinations and the Secretary’s
RADV payment error calculation. In
order to be eligible for RADV appeal,
MA organizations must adhere to the
following:
(A) Established RADV audit
procedures and requirements.
(B) RADV appeals procedures and
requirements.
(ii) Failure to follow RADV rules.
Failure to follow the Secretary’s RADV
audit procedures and requirements and
the Secretary’s RADV appeals
procedures and requirements will
render the MA organization’s request for
appeal invalid.
(iii) RADV appeal rules. The MA
organization’s written request for
medical record review determination
appeal must specify the following:
(A) The audited HCC(s) that the
Secretary identified as being in error.
(B) A justification in support of the
audited HCC selected for appeal.
(iv) Number of medical records
eligible for appeal. For each audited
HCC, MA organizations may appeal one
medical record that has undergone
RADV review. If an attestation was
submitted to cure a signature or
credential-related error, the attestation
may be included in the HCC appeal.
(v) Selection of medical record for
appeal. The MA organization must
select the medical record that undergoes
appeal.
(vi) Written request for RADV
payment error calculation appeal. The
written request for RADV payment error
calculation appeal must clearly specify
the following:
(A) The MA organization’s own RADV
payment error calculation.

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(B) Where the Secretary’s RADV
payment error calculation was
erroneous.
(3) Issues ineligible for RADV appeals.
(i) MA organizations’ request for appeal
may not include HCCs, medical records
or other documents beyond the audited
HCC, RADV-reviewed medical record,
and any accompanying attestation that
the MA organization chooses for appeal.
(ii) MA organizations may not appeal
the Secretary’s medical record review
determination methodology or RADV
payment error calculation methodology.
(iii) As part of the RADV payment
error calculation appeal—MA
organizations may not appeal RADV
medical record review-related errors.
(iv) MA organizations may not appeal
RADV errors that result from an MA
organization’s failure to submit a
medical record.
(4) Burden of proof. The MA
organization bears the burden of proof
by a preponderance of the evidence in
demonstrating that the Secretary’s
medical record review determination(s)
or payment error calculation was
incorrect.
(5) Manner and timing of a request for
RADV appeal. (i) At the time the
Secretary issues its RADV audit report,
the Secretary notifies audited MA
organizations of the following:
(A) That they may appeal RADV HCC
errors that are eligible for medical
record review determination appeal.
(B) That they may appeal the
Secretary’s RADV payment error
calculation.
(ii) MA organizations have 30 days
from date of issuance of the RADV audit
report to file a written request with CMS
for RADV appeal. This request for
RADV appeal must specify one of the
following:
(A) Whether the MA organization
requests medical record review
determination appeal, the issues with
which the MA organization disagrees,
and the reasons for the disagreements.
(B) Whether the MA organization
requests RADV payment error
calculation appeal, the issues with
which the MA organization disagrees,
and the reasons for the disagreements.
(C) Whether the MA organization
requests both medical record review
determination appeal and RADV
payment error calculation appeal, the
issues with which the MA organization
disagrees, and the reasons for the
disagreements.
(iii) For MA organizations that appeal
both medical record review
determination appeal and RADV
payment error calculation appeal:
(A) The Secretary adjudicates the
request for RADV payment error

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calculation following conclusion of
reconsideration of the MA
organization’s request for medical
record review determination appeal.
(B) MA organizations may not appeal
their RADV payment error calculation
until appeals of RADV medical record
review determinations filed by the MA
organization have been completed and
the decisions are final.
(6) Reconsideration stage. (i) Written
request for medical record review
reconsideration. A MA organization’s
written request for medical record
review determination reconsideration
must specify the following:
(A) The audited HCC that the
Secretary identified as being in error
that the MA organization wishes to
appeal.
(B) A justification in support of the
audited HCC chosen for appeal.
(ii) Written request for payment error
calculation. The MA organization’s
written request for payment error
calculation reconsideration—
(A) Must include the MA
organization’s own RADV payment error
calculation that clearly specifies where
the Secretary’s RADV payment error
calculation was erroneous; and
(B) May include additional
documentary evidence pertaining to the
calculation of the payment error that the
MA organization wishes the
reconsideration official to consider.
(iii) Conduct of the reconsideration.
(A) For medical record review
determination reconsideration, a
medical record review professional who
was not involved in the initial medical
record review determination of the
disputed audited HCCs does the
following:
(1) Reviews the medical record and
accompanying dispute justification.
(2) Reconsiders the initial audited
medical record review determination.
(B) For payment error calculation
reconsideration, CMS ensures that a
third party not involved in the initial
RADV payment error calculation does
the following:
(1) Reviews the Secretary’s RADV
payment error calculation.
(2) Reviews the MA organization’s
RADV payment error calculation;
(3) Recalculates the payment error in
accordance with CMS’s RADV payment
error calculation procedures.
(iv) Effect of the reconsideration
official’s decision. (A) The
reconsideration official issues a written
reconsideration decision to the MA
organization.
(B) The reconsideration official’s
decision is final unless the MA
organization disagrees with the
reconsideration official’s decision.

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(C) If the MA organization disagrees
with the reconsideration official’s
decision, they may request a hearing in
accordance with paragraph (c)(8) of this
section.
(7) Hearing stage. (i) Errors eligible for
hearing. At the time the reconsideration
official issues his or her reconsideration
determination to the MA organization,
the reconsideration official notifies the
MA organization of any RADV HCC
errors or payment error-calculations that
are eligible for RADV hearing.
(ii) General hearing rules. A MA
organization that requests a RADV
hearing must do so in writing in
accordance with procedures established
by CMS.
(iii) Written request for hearing. The
written request for a hearing must be
filed with the Hearing Officer within 30
days of the date the MA organization
receives the reconsideration officer’s
written reconsideration decision.
(A) If the MA organization appeals
medical record review reconsideration
determination, the written request for
RADV hearing must—
(1) Include a copy of the written
decision of the reconsideration official;
(2) Specify the audited HCCs that the
reconsideration official confirmed as
being in error; and
(3) Specify a justification why the MA
organization disputes the
reconsideration official’s determination.
(B) If the MA organization appeals the
RADV payment error calculation, the
written request for RADV hearing must
include the following:
(1) A copy of the written decision of
the reconsideration official.
(2) The MA organization’s own RADV
payment error calculation that clearly
specifies where the Secretary’s payment
error calculation was erroneous.
(iv) Designation of hearing officer. A
hearing officer will conduct the RADV
hearing.
(v) Disqualification of the hearing
officer. (A) A hearing officer may not
conduct a hearing in a case in which he
or she is prejudiced or partial to any
party or has any interest in the matter
pending for decision.
(B) A party to the hearing who objects
to the designated hearing officer must
notify that officer in writing at the
earliest opportunity.
(C) The hearing officer must consider
the objections, and may, at his or her
discretion, either proceed with the
hearing or withdraw.
(D) If the hearing officer withdraws,
another hearing officer conducts the
hearing.
(E) If the hearing officer does not
withdraw, the objecting party may, after
the hearing, present objections and

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request that the officer’s decision be
revised or a new hearing be held before
another hearing officer. The objections
must be submitted in writing to the
Secretary.
(vi) Hearing Officer review. The
hearing officer reviews the following:
(A) For medical record review
determination appeal all of the
following:
(1) The RADV-reviewed medical
record and any accompanying
attestation that the MA organization
selected for review.
(2) The reconsideration official’s
written determination.
(3) The written brief submitted by the
MA organization or the Secretary in
response to the reconsideration official’s
determination.
(B) For payment error calculation
appeal all of the following:
(1) A copy of the written decision of
the reconsideration official that clearly
specifies whether the Secretary’s
payment error calculation was
erroneous.
(2) Briefs addressing the
reconsideration decision.
(vii) Hearing procedures. (A)
Authority of the Hearing Officer. The
hearing officer has full power to make
rules and establish procedures,
consistent with the law, regulations, and
the Secretary rulings. These powers
include the authority to dismiss the
appeal with prejudice and take any
other action which the hearing officer
considers appropriate, including for
failure to comply with such rules and
procedures.
(B) The hearing is on the record. (1)
Except as specified in paragraph
(c)(viii)(B)(2), the hearing officer is
limited to the review of the record.
(2)(i) Subject to the hearing officer’s
full discretion, the parties may request
a live or telephonic hearing regarding
some or all of the disputed medical
records.
(ii) The hearing officer may, on his or
her own-motion, schedule a live or
telephonic hearing.
(3) The record is comprised of the
following:
(i) Documents described at paragraphs
(c)(6)(iv) and (7)(vi) of this section.
(ii) Written briefs from the MA
organization explaining why they
believe the reconsideration official’s
determination was incorrect.
(iii) The Secretary’s optional brief that
responds to the MA organization’s
brief—
(4) The hearing officer neither
receives testimony nor accepts any new
evidence that is not part of the record.
(5) Either the MA organization or the
Secretary may ask the hearing officer to
rule on a motion for summary judgment.

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(viii) Hearing Officer decision. The
hearing officer decides whether to
uphold or overturn the reconsideration
official’s decision, and sends a written
determination to CMS and the MA
organization, explaining the basis for
the decision.
(ix) Computations based on hearing
decision. (A) Once the hearing officer’s
decision is considered final pursuant to
subsection (x), a third party not
involved in the initial RADV payment
error calculation recalculates the MA
organization’s RADV payment error and
issues a new RADV audit report to the
appellant MA organization and CMS.
(B) For MA organizations appealing
the RADV error calculation only, a third
party not involved in the initial RADV
payment error calculation recalculates
the MA organization’s RADV payment
error and issues a new RADV audit
report to the appellant MA organization
and CMS.
(x) Effect of the Hearing Officer’s
decision. The hearing officer’s decision
is final unless the decision is reversed
or modified by the CMS Administrator.
(8) CMS Administrator review stage.
(i) A request for CMS Administrator
review must be made in writing and
filed with the CMS Administrator.
(ii) CMS or a MA organization that
has received a hearing officer’s decision
and requests review by the CMS
Administrator must do so within 30
days of receipt of the hearing officer’s
decision.
(iii) After receiving a request for
review, the CMS Administrator has the
discretion to elect to review the hearing
officer’s decision or to decline to review
the hearing officer’s decision.
(iv) If the CMS Administrator elects to
review the hearing decision—
(A) The CMS Administrator
acknowledges the decision to review the
hearing decision in writing and notifies
CMS and the MA organization of their
right to submit comments within 15
days of the date of the notification; and
(B) The CMS Administrator is limited
to the review of the record. The record
is comprised of the following:
(1) The record is comprised of
documents described at paragraphs
(c)(6)(iv), (7)(vii), and (7)(ix) of this
section.
(2) The hearing record.
(3) Written arguments from the MA
organization or CMS explaining why
either or both parties believe the hearing
officer’s determination was correct or
incorrect.
(C) The CMS Administrator reviews
the record and determines whether the
hearing officer’s determination should
be upheld, reversed, or modified.

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(v) The CMS Administrator renders
his or her final decision in writing to the
parties within 60 days of acknowledging
his or her decision to review the hearing
officer’s decision.
(vi) The decision of the hearing officer
is final if the CMS Administrator—
(A) Declines to review the hearing
officer’s decision; or
(B) Does not make a decision within
60 days.
■ 26. Section 422.326 is added to
subpart G to read as follows:
§ 422.326 Reporting and returning of
overpayments.

(a) Terminology. For purposes of this
section—
Applicable reconciliation occurs on
the date of the annual final deadline for
risk adjustment data submission
described at § 422.310(g), which is
announced by CMS each year.
Funds means any payment that an
MA organization has received that is
based on data submitted by the MA
organization to CMS for payment
purposes, including § 422.308(f) and
§ 422.310.
Overpayment means any funds that
an MA organization has received or
retained under title XVIII of the Act to
which the MA organization, after
applicable reconciliation, is not entitled
under such title.
(b) General rule. If an MA
organization has identified that it has
received an overpayment, the MA
organization must report and return that
overpayment in the form and manner
set forth in this section.
(c) Identified overpayment. The MA
organization has identified an
overpayment if it has actual knowledge
of the existence of the overpayment or
acts in reckless disregard or deliberate
ignorance of the existence of the
overpayment. An MA organization must
exercise reasonable diligence to
determine the accuracy of information it
receives that an overpayment may exist.
(d) Reporting and returning of an
overpayment. An MA organization must
report and return any overpayment it
received no later than 60 days after the
date on which it identified it received
an overpayment.
(1) Reporting. An MA organization
must notify CMS, of the amount and
reason for the overpayment, using a
notification process determined by
CMS.
(2) Returning. An MA organization
must return identified overpayments in
a manner specified by CMS.
(3) Enforcement. Any overpayment
retained by an MA organization after the
60-day deadline for reporting and
returning is an obligation under 31
U.S.C. 3729(b)(3).

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(e) Look-back period. An MA
organization must report and return any
overpayment identified for the 6 most
recent completed payment years.
Overpayments resulting from fraud are
not subject to this limitation of the lookback period.
§ 422.502

[Amended]

27. Section 422.502(b)(3) is amended
by removing the phrase ‘‘CMS may deny
an application based on the applicant’s’’
and adding in its place the phrase ‘‘CMS
may deny an application for a new
contract or service are expansion based
on the applicant’s’’.
■ 28. Section 422.503 is amended by—
■ A. Adding paragraph (b)(4)(vi)(C)(3).
■ B. Adding and reserving paragraph
(b)(4)(vi)(G)(4).
■ C. Revising paragraph (b)(4)(vi)(G)(5).
■ D. In paragraph (d)(2) introductory
text, removing the phrase ‘‘has the right
to:’’ and adding in its place the phrase
‘‘has the right to timely do all of the
following:’’.
■ E. In paragraph (d)(2)(i), removing the
‘‘;’’ and adding in its place a ‘‘.’’.
■ F. In paragraph (d)(2)(ii), removing the
‘‘; and’’ and adding in its place a ‘‘.’’.
■ G. Adding paragraph (d)(2)(iv).
The revisions and additions are as
follows:
■

§ 422.503

General provisions.

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*

*
*
*
*
(b) * * *
(4) * * *
(vi) * * *
(C) * * *
(3) An MA organization must require
all of its first tier, downstream and
related entities to take the CMS training
and accept the certificate of completion
of the CMS training as satisfaction of
this requirement. MA organizations are
prohibited from developing and
implementing their own training or
providing supplemental training
materials to fulfill this requirement.
*
*
*
*
*
(G) * * *
(5) Not accept, or share a corporate
parent organization with an entity that
accepts, new enrollees under a section
1876 reasonable cost contract in any
area in which it seeks to offer an MA
plan.
(d) * * *
(2) * * *
(iv) CMS may require that the MA
organization hire an independent
auditor to conduct full or partial
program audits or to provide CMS with
information to determine if deficiencies
found during an audit or inspection
have been corrected and are not likely
to recur. The independent auditor must
work in accordance with CMS

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specifications and must be willing to
attest that a complete and full
independent review has been
performed.
*
*
*
*
*
■ 29. Amend § 422.504 by:
■ A. Adding paragraphs (a)(3)(iv) and
(a)(19).
■ B. Redesignating paragraph (i)(2)(ii) as
(i)(2)(iii).
■ C. Adding new paragraph (i)(2)(ii) and
paragraphs (1)(5) and (o).
§ 422.504

Contract provisions.

*

*
*
*
*
(a) * * *
(3) * * *
(iv) Such benefits and access in a
manner that provides good quality
health care demonstrated by scores of
three or higher on CMS performance
standards for patient outcomes,
intermediate outcomes, process, patient
experience, and patient access to care.
*
*
*
*
*
(19) That it will not submit a bid for
the same type of MA plan that is nonrenewed under § 522.506(b)(1)(iv) in the
service area of the non-renewed plan for
2 years.
*
*
*
*
*
(i) * * *
(2) * * *
(ii) HHS, the Comptroller General, or
their designees have the right to audit,
evaluate, collect, and inspect any
records under (i)(2)(i) of this section
directly from any first tier, downstream,
or related entity.
*
*
*
*
*
(l) * * *
(5) Certification of accuracy of data
for overpayments. The CEO, CFO, or
COO must certify (based on best
knowledge, information, and belief) that
the information provided for purposes
of reporting and returning of
overpayments under § 422.326 is
accurate, complete, and truthful.
*
*
*
*
*
(o) Business continuity. (1) The MA
organization agrees to develop,
maintain, and implement a business
continuity plan containing policies and
procedures to ensure the continuation of
business operations during disruptions
to business operations which would
include natural or man-made disasters,
system failures, emergencies, and other
similar circumstances and the threat of
such occurrences. To meet the
requirement, the business continuity
plan must, at a minimum, include the
following:
(i) Risk assessment. Identify threats
and vulnerabilities that might affect
business operations.
(ii) Mitigation strategy. Design
strategies to mitigate hazards. Identify

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essential functions in addition to those
specified in paragraph (o)(2) of this
section and prioritize the order in which
to restore all other functions to normal
operations. At a minimum, each MA
organization must do the following:
(A) Identify specific events that will
activate the business continuity plan.
(B) Develop a contingency plan to
maintain, during any business
disruption, the availability and, as
applicable, confidentiality of
communication systems and essential
records in all forms (including
electronic and paper copies). The
contingency plan must do the following:
(1) Ensure that during any business
disruption the following systems will
operate continuously or, should they
fail, be restored to operational capacity
on a timely basis:
(i) Information technology (IT)
systems including those supporting
claims processing at point of service.
(ii) Provider and enrollee
communication systems including
telephone, Web site, and email.
(2) With respect to electronic
protected health information, comply
with the contingency plan requirements
of the Health Insurance Portability and
Accountability Act of 1996 Security
Regulations at 45 CFR 160 and 164,
Subparts A and C.
(C) Establish a chain of command.
(D) Establish a business
communication plan that includes
emergency capabilities and procedures
to contact and communicate with the
following:
(1) Employees.
(2) First tier, downstream, and related
entities.
(3) Other third parties (including
pharmacies, providers, suppliers, and
government and emergency
management officials).
(E) Establish employee and facility
management plans to ensure that
essential operations and job
responsibilities can be assumed by other
employees or moved to alternate sites as
necessary.
(F) Establish a restoration plan
including procedures to transition to
normal operations.
(G) Comply with all applicable
Federal, State, and local laws.
(iii) Testing and revision. On at least
an annual basis, test and update the
business operations continuity plan to
ensure the following:
(A) That it can be implemented in
emergency situations.
(B) That employees understand how it
is to be executed.
(iv) Training. On at least an annual
basis, educate all employees, including
contract staff about the business

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continuity plan and their own
respective roles.
(v) Records. (A) Develop and maintain
records documenting the elements of
the business continuity plan described
in paragraphs (o)(1)(i) through (iv) of
this section.
(B) Make the information specified in
paragraph (o)(1)(v)(A) of this section
available to CMS upon request.
(2) Restoration of essential functions.
Every MA organization must restore
essential functions within 24 hours after
any of the essential functions fail or
otherwise stop functioning as usual. In
addition to any essential functions that
the MA organization identifies under
paragraph (o)(1)(ii) of this section, for
purposes of this paragraph (o)(2) of the
section essential functions include, at a
minimum, the following:
(i) Benefit authorization (if not
waived), adjudication, and processing of
health care claims for services furnished
at a hospital, clinic, provider office or
other place of service.
(ii) Operation of an enrollee
exceptions and appeals process
including coverage determinations.
(iii) Operation of call center customer
services.
■ 30. Section 422.506 by revising
paragraphs (a)(4) and (b)(1)(iv) to read as
follows:

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§ 422.506

Nonrenewal of contract.

(a) * * *
(4) If an MA organization does not
renew a contract under this paragraph
(a) of this section, CMS may deny an
application for a new contract or a
service area expansion from the MA
organization for 2 years unless there are
special circumstances that warrant
special consideration, as determined by
CMS. This prohibition may apply
regardless of the product type, contract
type or service area of the previous
contract.
*
*
*
*
*
(b) * * *
(1) * * *
(iv) The contract must be nonrenewed as to an individual MA plan if
that plan does not have a sufficient
number of enrollees to establish that it
is a viable independent plan option.
*
*
*
*
*
■ 31. Section 422.508 is amended by
revising paragraphs (c) and (d)
introductory text to read as follows:
§ 422.508 Modification or termination of
contract by mutual consent.

*

*
*
*
*
(c) Agreement to limit new MA
applications. As a condition of the
consent to a mutual termination CMS
requires, as a provision of the

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termination agreement, language
prohibiting the MA organization from
applying for new contracts or service
area expansions for a period of 2 years,
absent circumstances warranting special
consideration. This prohibition may
apply regardless of the product type,
contract type or service area of the
previous contract.
(d) Prohibition against Part C program
participation by organizations whose
owners, directors, or management
employees served in a similar capacity
with another organization that mutually
terminated its Medicare contract within
the previous 2 years. During the same 2year period, CMS does not contract with
an organization whose covered persons
also served as covered persons for the
mutually terminating sponsor. This
prohibition may apply regardless of the
product type, contract type or service
area of the previous contract. A
‘‘covered person’’ as used in this
paragraph means one of the following:
*
*
*
*
*
■ 32. Amend § 422.510 as follows;
■ A. By redesigating paragraphs (a)(4)
through (15) as paragraphs (a)(4)(i)
through (xii).
■ B. By adding new paragraph (a)(4)
introductory text.
■ C. In newly redesignated paragraphs
(a)(4)(ii), (v), (vi), and (viii) by removing
the term ‘‘fails’’ and adding in its place
the term ‘‘failed’’.
■ D. In newly redesignated paragraphs
(a)(4)(iii), (iv), (vii), (ix), and (x), by
removing the term ‘‘Fails’’ and adding
in its place the term ‘‘Failed’’.
■ E. By revising newly redesignated
paragraphs (a)(4)(xi) and (xii).
■ F. In paragraph (b)(1)(i), by removing
the phrase ‘‘90 days’’ and adding in its
place the phrase ‘‘at least 45 calendar
days’’.
■ G. By revising paragraph (b)(1)(iii) and
the heading for paragraph (b)(2).
■ H. In paragraph (b)(2)(i)(C), by
removing the cross-reference ‘‘(a)(4) of
this section’’ and adding in its place the
cross reference ‘‘(a)(4)(i) of this section’’.
■ I. In paragraph (c)(2)(iii), by removing
the cross reference ‘‘(a)(4) of this
section’’ and adding in its place the
cross reference ‘‘(a)(4)(i) of this section’’.
The additions and revisions read as
follows:
§ 422.510

Termination of Contract by CMS.

*

*
*
*
*
(a) * * *
(3) * * *
(4) CMS may make a determination
under paragraph (a)(1), (2), or (3) of this
section if the MA organization has had
one or more of the following occur:
*
*
*
*
*

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(xi) Achieves a Part C summary plan
rating of less than 3 stars for 3
consecutive contract years. Plan ratings
issued by CMS before September 1,
2012, are not included in the calculation
of the 3–year period.
(A) Holds a MA contract that does not
include a Part D addendum and
achieves a Part C summary plan rating
of less than 3 stars for 3 consecutive
contract years.
(B) Holds a MA contract that includes
a Part D addendum and fails for three
consecutive years to achieve both Part C
and D summary ratings of 3 or more
stars in the same year.
(xii) Has failed to report MLR data in
a timely and accurate manner in
accordance with § 422.2460 or that any
MLR data required by this subpart is
found to be materially incorrect or
fraudulent.
*
*
*
*
*
(b) * * *
(1) * * *
(i) CMS notifies the MA organization
in writing at least 45 calendar days
before the intended date of the
termination.
(ii) The MA organization notifies its
Medicare enrollees of the termination by
mail at least 30 calendar days before the
effective date of the termination.
(iii) The MA organization notifies the
general public of the termination at least
30 calendar days before the effective
date of the termination by releasing a
press statement to news media serving
the affected community or county and
posting the press statement prominently
on the organization’s Web site.
(2) Immediate termination of contract
by CMS.
*
*
*
*
*
■ 33. Section 422.512 is amended by
revising paragraph (e)(1) to read as
follows:
§ 422.512 Termination of contract by the
MA organization.

*

*
*
*
*
(e) * * *
(1) CMS may deny an application for
a new contract or a service area
expansion from an MA organization that
has terminated its contract within the
preceding 2 years unless there are
circumstances that warrant special
consideration, as determined by CMS.
This prohibition may apply regardless
of the contract type, product type, or
service area of the previous contract.
*
*
*
*
*
■ 34. Amend § 422.566 by revising
paragraphs (b) introductory text, and
(b)(1) through (3) and adding paragraph
(b)(6) to read as follows:

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Organization determinations.

*

*
*
*
*
(b) Actions that are organization
determinations. The following actions
by an MA organization are organization
determinations:
(1) Any determination with respect to
payment for temporarily out of the area
renal dialysis services, emergency
services, post-stabilization care, or
urgently needed services.
(2) Any determination with respect to
payment for any other health services
furnished by a provider other than the
MA organization that the enrollee
believes—
(i) Are covered under Medicare; or
(ii) If not covered under Medicare,
should have been furnished, arranged
for, or reimbursed by the MA
organization.
(3) Any determination by the MA
organization not to provide or pay for
services, in whole or in part, including
the type, level or duration of services,
that the enrollee believes should be
furnished or arranged for by the MA
organization.
*
*
*
*
*
(6) Any determination by the MA
organization to provide or pay for an
item or service, including the initial or
continued provision of an item or
service by a contract provider of the MA
organization.
*
*
*
*
*
■ 35. Section 422.568 is amended by
revising paragraph (b) to read as follows:
§ 422.568 Standard timeframes and notice
requirements for organization
determinations.

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*

*
*
*
*
(b) Timeframe for requests for service.
Except as provided in paragraph (b)(1)
of this section, when a party has made
a request for a service, the MA
organization must notify the enrollee of
its determination as expeditiously as the
enrollee’s health condition requires, but
no later than 14 calendar days after the
date the organization receives the
request for a standard organization
determination.
(1) Extensions. The MA organization
may extend the timeframe by up to 14
calendar days if—
(i) The enrollee requests the
extension;
(ii) The extension is justified and in
the enrollee’s interest due to the need
for additional medical evidence from a
noncontract provider that may change
an MA organization’s decision to deny
an item or service; or
(iii) The extension is justified due to
extraordinary, exigent, or other nonroutine circumstances and is in the
enrollee’s interest.

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(2) Notice of extension. When the MA
organization extends the timeframe, it
must notify the enrollee in writing of
the reasons for the delay, and inform the
enrollee of the right to file an expedited
grievance if he or she disagrees with the
MA organization’s decision to grant an
extension. The MA organization must
notify the enrollee of its determination
as expeditiously as the enrollee’s health
condition requires, but no later than
upon expiration of the extension.
*
*
*
*
*
■ 36. Section 422.572 is amended by
revising paragraph (b) to read as follows:
§ 422.572 Timeframes and notice
requirements for expedited organization
determinations.

*

*
*
*
*
(b) Extensions. (1) The MA
organization may extend the 72-hour
deadline by up to 14 calendar days if—
(i) The enrollee requests the
extension;
(ii) The extension is justified and in
the enrollee’s interest due to the need
for additional medical evidence from a
noncontract provider that may change
an MA organization’s decision to deny
an item or service; or
(iii) The extension is justified due to
extraordinary, exigent, or other nonroutine circumstances and is in the
enrollee’s interest.
(2) Notice of extension. When the MA
organization extends the deadline, it
must notify the enrollee in writing of
the reasons for the delay and inform the
enrollee of the right to file an expedited
grievance if he or she disagrees with the
MA organization’s decision to grant an
extension. The MA organization must
notify the enrollee of its determination
as expeditiously as the enrollee’s health
condition requires, but no later than
upon expiration of the extension.
*
*
*
*
*
■ 37. Section 422.590 is amended as
follows:
■ A. By revising paragraph (a)(1).
■ B. In paragraph (d)(1), by removing
the cross reference ‘‘(d)(2)’’ and adding
in its place the cross-reference ‘‘(e)’’.
■ C. By removing paragraph (d)(2).
■ D. By redesignating paragraphs (d)(3)
through (5) as paragraphs (d)(2) through
(4), respectively.
■ E. By redesignating paragraphs (e)
through (g) as paragraphs (f) through (h),
respectively;
■ F. By adding new paragraph (e).
The additions and revisions read as
follows:
§ 422.590 Timeframes and responsibility
for reconsiderations.

(a) * * *
(1) Except as provided in paragraph
(e) of this section, if the MA

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organization makes a reconsidered
determination that is completely
favorable to the enrollee, the MA
organization must issue the
determination (and effectuate it in
accordance with § 422.618(a)) as
expeditiously as the enrollee’s health
condition requires, but no later than 30
calendar days from the date it receives
the request for a standard
reconsideration.
*
*
*
*
*
(e) Extensions. (1) As described in
paragraphs (e)(1)(i) through (e)(1)(iii) of
this section, the MA organization may
extend the standard or expedited
reconsideration deadline by up to 14
calendar days if—
(i) The enrollee requests the
extension; or
(ii) The extension is justified and in
the enrollee’s interest due to the need
for additional medical evidence from a
noncontract provider that may change
an MA organization’s decision to deny
an item or service; or
(iii) The extension is justified due to
extraordinary, exigent or other nonroutine circumstances and is in the
enrollee’s interest.
(2) Notice of extension. When the MA
organization extends the deadline, it
must notify the enrollee in writing of
the reasons for the delay and inform the
enrollee of the right to file an expedited
grievance if he or she disagrees with the
MA organization’s decision to grant an
extension. The MA organization must
notify the enrollee of its determination
as expeditiously as the enrollee’s health
condition requires, but no later than
upon expiration of the extension.
*
*
*
*
*
§ 422.618

[Amended]

38. In paragraph (a), removing the
cross-reference ‘‘§ 422.590(a)(1)’’ and
adding in its place the cross-reference
‘‘§ 422.590(e)’’.

■

§ 422.619

[Amended]

39. In paragraph (a), removing the
cross-reference ‘‘§ 422.590(d)(2)’’ and
adding in its place the cross-reference
‘‘§ 422.590(e)’’.
■ 40. Amend § 422.641 by revising
paragraphs (b) and (c) to read as follows:
■

§ 422.641

Contract determinations.

*

*
*
*
*
(b) A determination not to authorize
a renewal of a contract with an MA
organization in accordance with
§ 422.506(b).
(c) A determination to terminate a
contract with an MA organization in
accordance with § 422.510(a).
*
*
*
*
*

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41. Amend § 422.644 by revising
paragraphs (a), (b)(1), and (c)(1) to read
as follows:

■

§ 422.644

Notice of contract determination.

*

*
*
*
*
(a) When CMS makes a contract
determination under § 422.641, it gives
the MA organization written notice.
(b) * * *
(1) Reasons for the determination; and
*
*
*
*
*
(c) * * *
(1) General rule. Except as provided
in (c)(2) of this section, CMS mails
notice to the MA organization 45
calendar days before the anticipated
effective date of the termination.
*
*
*
*
*
■ 42. Amend § 422.660 by revising
paragraphs (a)(2), (a)(3), and (b)(4) to
read as follows:
§ 422.660 Right to a hearing, burden of
proof, standard of proof, and standards of
review.

*

*
*
*
*
(a) * * *
(2) An MA organization whose
contract has been terminated in
accordance with § 422.510.
(3) An MA organization whose
contract has not been renewed in
accordance with § 422.506.
(b) * * *
(4) During a hearing to review the
imposition of an intermediate sanction
as described at § 422.750, the MA
organization has the burden of proving
by a preponderance of the evidence that
CMS’ determination was inconsistent
with the requirements of § 422.752(a)
and (b).
*
*
*
*
*
■ 43. Amend § 422.752 by adding
paragraphs (a)(9) through (12) and
revising paragraphs (c)(1) and (c)(2)(ii)
to read as follows:

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§ 422.752 Basis for imposing intermediate
sanctions and civil money penalties

(a) * * *
(9) Except as provided under § 423.34
of this chapter, enrolls an individual in
any plan under this part without the
prior consent of the individual or the
designee of the individual.
(10) Transfers an individual enrolled
under this part from one plan to another
without the prior consent of the
individual or the designee of the
individual or solely for the purpose of
earning a commission.
(11) Fails to comply with marketing
restrictions described in subpart V or
applicable implementing guidance.
(12) Employs or contracts with any
individual, agent, provider, supplier or
entity who engages in the conduct

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described in paragraphs (a)(1) through
(11) of this section.
*
*
*
*
*
(c) * * *
(1) CMS. In addition to, or in place of,
any intermediate sanctions, CMS may
impose civil money penalties in the
amounts specified in the following:
(i) Section 422.760(b) for any of the
determinations at § 422.510(a), except
§ 422.510(a)(4)(i).
(ii) Section 422.760(c) for any of the
determinations at § 422.752(a) except
§ 422.752(a)(5).
(2) * * *
(ii) Determinations made under
§ 422.510(a)(4)(i).
■ 44. Amend § 422.756 by revising
paragraphs (a)(2), (b)(4), and (d) to read
as follows:
§ 422.756 Procedures for imposing
intermediate sanctions and civil money
penalties.

(a) * * *
(2) Opportunity to respond. CMS
allows the MA organization 10 calendar
days after receipt of the notice to
provide a written rebuttal. CMS
considers receipt of the notice as the
day after the notice is sent by fax, email,
or submitted for overnight mail.
(b) * * *
(4) The MA organization must follow
the right to a hearing procedure as
specified in subpart N of this part.
*
*
*
*
*
(d) Non-renewal or termination by
CMS. In addition to or as an alternative
to the sanctions described in § 422.750,
CMS may—
(1) Decline to authorize the renewal of
an organization’s contract in accordance
with § 422.506(b); or
(2) Terminate the contract in
accordance with § 422.510.
*
*
*
*
*
■ 45. Amend 422.760 by revising
paragraph (a)(3) and the heading of
paragraph (b) and adding paragraph (c)
to read as follows:
§ 422.760 Determinations regarding the
amount of civil money penalties and
assessment imposed by CMS.

(a) * * *
(3) The adverse effect to enrollees
which resulted or could have resulted
from the conduct of MA organization;
(b) Amount of penalty imposed by
CMS. * * *
*
*
*
*
*
(c) Amount of penalty imposed by
CMS or OIG. CMS or the OIG may
impose civil money penalties in the
following amounts for a determination
made under § 422.752(a):
(1) Civil money penalties of not more
than $25,000 for each determination
made.

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(2) With respect to a determination
made under § 422.752(a)(4) or (a)(5)(i),
not more than $100,000 for each such
determination, except with respect to a
determination made under
§ 422.752(a)(5), an assessment of not
more than the amount claimed by such
plan or MA organization based upon the
misrepresentation or falsified
information involved.
(3) Plus with respect to a
determination made under
§ 422.752(a)(2), double the excess
amount charged in violation of such
paragraph (and the excess amount
charged must be deducted from the
penalty and returned to the individual
concerned).
(4) Plus with respect to a
determination made under
§ 422.752(a)(4), $15,000 for each
individual not enrolled as a result of the
practice involved.
■ 46. Amend § 422.1016 by revising the
first sentence of paragraph (b)(1) to read
as follows:
§ 422.1016 Filing of briefs with the
Administrative Law Judge or Departmental
Appeals Board, and opportunity for
rebuttal.

*

*
*
*
*
(b) * * *
(1) The other party will have 20
calendar days from the date of mailing
or in person filing to submit any rebuttal
statement or additional evidence. * * *
*
*
*
*
*
■ 47. Amend § 422.1020 by revising
paragraph (a)(2) to read as follows:
§ 422.1020

Request for hearing.

(a) * * *
(2) The MA organization or its legal
representative or other authorized
official must file the request, in writing,
to the appropriate Departmental
Appeals Board office, with a copy to
CMS, within 60 calendar days after
receipt of the notice of initial
determination, to request a hearing
before an ALJ to appeal any
determination by CMS to impose a civil
money penalty.
*
*
*
*
*
■ 48. Amend § 422.2262 by adding
paragraph (a)(2) to read as follows:
§ 422.2262 Review and Distribution of
marketing materials.

(a) * * *
(2) If CMS does not approve or
disapprove marketing materials within
the specified review timeframe, the
materials will be deemed approved.
Deemed approved means that the MA
organization may use the material.
*
*
*
*
*

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§ 422.2266

Federal Register / Vol. 79, No. 7 / Friday, January 10, 2014 / Proposed Rules
[Removed and Reserved]

49. Section 422.2266 is removed and
reserved.
■ 50. Amend § 422.2274 by:
■ A. Revising the introductory text.
■ B. Redesignating paragraphs (a)
through (f) as (b) through (g).
■ C. Adding new paragraph (a).
■ D. Revising newly redesignated
paragraphs (b) through (d).
■ E. Adding paragraph (h).
The revisions and addition read as
follows:
■

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§ 422.2274

Broker and agent requirements.

If an MA organization uses agents and
brokers to sell its Medicare plans, the
following requirements in this section
are applicable:
(a) Definitions. For purposes of this
section, the following definitions are
applicable:
Compensation (1) Includes monetary
or non-monetary remuneration of any
kind relating to the sale or renewal of a
policy including, but not limited to—
(i) Commissions;
(ii) Bonuses;
(iii) Gifts;
(iv) Prizes or Awards; or
(v) Referral or Finder fees.
(2) Does not include—
(i) Payment of fees to comply with
State appointment laws, training,
certification, and testing costs;
(ii) Reimbursement for mileage to, and
from, appointments with beneficiaries;
or
(iii) Reimbursement for actual costs
associated with beneficiary sales
appointments such as venue rent,
snacks, and materials.
Like plan type means one of the
following:
(1) PDP replaced with another PDP.
(2) MA or MA–PD replaced with
another MA or MA–PD.
(3) Cost plan replaced with another
cost plan.
Unlike plan type means one of the
following:
(1) PDP replaced with a MA–PD or a
MA–PD replaced with a PDP.
(2) PDP replaced with a cost plan or
a cost plan replaced with a PDP.
(3) MA–PD replaced with a cost plan
or a cost plan replaced with a MA–PD.
Plan year means the year beginning
January 1 and ending December 31.
Renewal year means all years
following the initial enrollment year in
a like plan type.
(b) Compensation rules. A MA
organization must compensate
independent brokers and agents, if
compensation is paid, only according to
the following rules in this section.
(1) Compensation amounts. (i) For an
initial year enrollment of a Medicare

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beneficiary into an MA plan, the
compensation must be at or below the
fair market value of such services,
published annually as a cut-off amount
by CMS.
(ii) For renewal years, compensation
may be up to 35 percent of the current
fair market value cut-off amounts
published annually by CMS.
(2) Aggregate compensation. (i) An
entity must not provide aggregate
compensation to its agents or brokers
greater than the renewal compensation
payable by the replacing plan on
renewal policies if an existing policy is
replaced with a like plan at any time.
(ii) An agent or broker must not
receive aggregate compensation greater
than the renewal compensation payable
by the replacing plan on renewal
policies if an existing policy is replaced
with a like plan type at any time.
(iii) The initial compensation is paid
for replacements between unlike plan
types.
(3) Compensation payment and
payment recovery. (i) Compensation
may only be paid for the enrollee’s
months of enrollment during a plan
year.
(ii)(A) Subject to paragraph (b)(3)(iii)
of this section, compensation payments
may be made at one time for the entire
current plan year or in installments
throughout the year.
(B) Compensation may not be paid
until January 1 of the compensation year
and, if paid at all, must be paid in full
by December 31 of the compensation
year.
(iii) When a beneficiary disenrolls
from an MA plan, compensation paid to
agents and brokers must be recovered
for those months of the plan year for
which the beneficiary is not enrolled.
For disenrollments occurring within the
first 3 months, the entire compensation
must be recovered when the
disenrollment was the result of agent or
broker behavior.
(4) Compensation structure. (i) The
MA organization must establish a
compensation structure for new and
replacement enrollments and renewals
effective in a given plan year.
Compensation structures must be in
place by the beginning of the plan
marketing period, October 1.
(ii) Compensation structures must be
available upon CMS request including
for audits, investigations, and to resolve
complaints.
(c) Annual training. The MA
organization must ensure that all agents
and brokers selling Medicare products
are trained annually on the following:
(1) Medicare rules and regulations.
(2) Details specific to the plan
products they intend to sell.

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(d) Annual testing. It must ensure that
all agents and brokers selling Medicare
products are tested annually, to ensure
the following:
(1) Appropriate knowledge and
understanding of Medicare rules and
regulations.
(2) Details specific to the plan
products they intend to sell.
*
*
*
*
*
(h) Finder’s (referral) fees. Finder’s
(referral) fees paid to all agents and
brokers—
(1) May not exceed an amount CMS
determines could reasonably be
expected to affect enrollee behavior
while not exceeding the value of the
health-related service or activity itself;
and
(2) Must be included in the total
compensation not to exceed the fair
market value for that calendar year.
Subpart Y—[Reserved]
51. Part 422 is amended by adding
reserved subpart Y.
■ 52. Part 422 is amended by adding
subpart Z to read as follows:
■

Subpart Z—Part C Recovery Audit
Contractor Appeals Process
Sec.
422.2600 Payment appeals.
422.2605 Request for reconsideration.
422.2610 Hearing official review.
422.2615 Review by the Administrator.

Subpart Z—Part C Recovery Audit
Contractor Appeals Process
§ 422.2600

Payment appeals.

If the Part C RAC did not apply its
stated payment methodology correctly,
an MA organization may appeal the
findings of the applied methodology.
The payment methodology itself is not
subject to appeal.
§ 422.2605

Request for reconsideration.

(a) Time for filing a request. The
request for reconsideration must be filed
with the designated independent
reviewer within 60 calendar days from
the date of the demand letter received
by the MA organization.
(b) Content of request. (1) The request
for reconsideration must be in writing
and specify the findings or issues with
which the MA organization disagrees.
(2) The MA organization must include
with its request all supporting
documentary evidence it wishes the
independent reviewer to consider.
(i) This material must be submitted in
the format requested by CMS.
(ii) Documentation, evidence, or
substantiation submitted after the filing
of the reconsideration request will not
be considered.

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Federal Register / Vol. 79, No. 7 / Friday, January 10, 2014 / Proposed Rules
(c) CMS rebuttal. CMS may file a
rebuttal to the MA organization’s
reconsideration request.
(1) The rebuttal must be submitted
within 30 calendar days of the review
entity’s notification to CMS that it has
received the MA organization’s
reconsideration request.
(2) CMS sends its rebuttal to the MA
organization at the same time it is
submitted to the independent reviewer.
(d) Review entity. An independent
reviewer conducts the reconsideration.
The independent reviewer reviews the
demand for repayment, the evidence
and findings upon which it was based
and any supporting documentation that
the MA organization or CMS submitted
in accordance with this section.
(e) Notification of decision. The
independent reviewer informs the CMS
and the MA organization of its decision
in writing.
(f) Effect of decision. A
reconsideration decision is final and
binding unless the MA organization
requests a hearing official review in
accordance with § 422.2610.
(g) Right to hearing official review. An
MA organization that is dissatisfied
with the independent reviewer’s
reconsideration decision is entitled to a
hearing official review as provided in
§ 422.2610.

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§ 422.2610

Hearing official review.

(a) Time for filing a request. A MA
organization must file with CMS a
request for a hearing official review
within 15 calendar days from the date
of the independent reviewer’s issuance
of a reconsideration determination.
(b) Content of the request. (1) The
request must be in writing and must
specify the findings or issues in the
reconsideration decision with which the
MA organization disagrees and the
reasons for the disagreements.
(2) The MA organization must submit
with its request all supporting
documentation, evidence, and
substantiation that it wants to be
considered.
(3) No new evidence may be
submitted.
(4) Documentation, evidence, or
substantiation submitted after the filing
of the request will not be considered.
(c) CMS rebuttal. CMS may file a
rebuttal to the MA organization’s
hearing official review request.
(1) The rebuttal must be submitted
within 30 calendar days of the MA
organization’s submission of its hearing
official review request.
(2) CMS sends its rebuttal to the MA
organization at the same time it is
submitted to the hearing official.

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(d) Conducting a review. A CMSdesignated hearing official conducts the
hearing on the record.
(1) The hearing is not to be conducted
live or via telephone unless the hearing
official, in his or her sole discretion,
requests a live or telephonic hearing.
(2) In all cases, the hearing official’s
review is limited to information that
meets one or more of the following:
(i) The Part C RAC used in making its
determinations.
(ii) The independent reviewer used in
making its determinations.
(iii) The MA organization submits
with its hearing request.
(iv) CMS submits in accordance with
paragraph (c) of this section.
(3) Neither the MA organization nor
CMS may submit new evidence.
(e) Hearing official decision. The CMS
hearing official decides the case within
60 days and sends a written decision to
the MA organization and CMS,
explaining the basis for the decision.
(f) Effect of hearing official decision.
The hearing official’s decision is final
and binding, unless the decision is
reversed or modified by the CMS
Administrator in accordance with
§ 422.2615.
§ 422.2615

Review by the Administrator.

(a) Request for review by
Administrator. If an MA organization is
dissatisfied with the hearing official’s
decision, it may request that the CMS
Administrator review the decision.
(1) The request must be filed with the
CMS Administrator within 15 calendar
days of the date of the hearing official’s
decision.
(2) The request must provide evidence
or reasons to substantiate the request.
(b) Content of request. The MA
organization must submit with its
request all supporting documentation,
evidence, and substantiation that it
wants to be considered.
(1) Documentation, evidence, or
substantiation submitted after the filing
of the request will not be considered.
(2) Neither the MA organization, nor
CMS may submit new evidence.
(c) Discretionary review. After
receiving a request for review, the CMS
Administrator has the discretion to
review the hearing official’s decision in
accordance with paragraph (e) of this
section or to decline to review said
decision.
(d) Notification of decision whether to
review. The Administrator notifies the
MA organization within 45 days of
receiving the MA organization’s hearing
request of whether he or she intends to
review the hearing official’s decision.
(1) If the Administrator agrees to
review the hearing official’s decision,

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CMS may file a rebuttal statement
within 30 days of the Administrator’s
notice to the plan that the request for
review has been accepted. CMS sends
its rebuttal statement to the plan at the
same time it is submitted to the
Administrator.
(2) If the CMS Administrator declines
to review the hearing official’s decision,
the hearing official’s decision is final
and binding.
(e) CMS Administrator’s review. If the
CMS Administrator agrees to review the
hearing official’s decision, he or she
determines, based upon this decision,
the hearing record, and any arguments
submitted by the MA organization or
CMS in accordance with this section,
whether the determination should be
upheld, reversed, or modified. The
Administrator furnishes a written
decision, which is final and binding, to
the MA organization and to CMS.
PART 423—MEDICARE PROGRAM;
MEDICARE PRESCRIPTION DRUG
PROGRAM
53. The authority citation for part 423
continues to read as follows:

■

Authority: Secs. 1102, 1860D–1 through
1860D–42, and 1871 of the Social Security
Act (42 U.S.C. 1302, 1395w–101 through
1395w–152, and 1395hh).

54. Amend § 423.1 by adding new
references in numerical order to
paragraph (a)(1) and by adding
paragraph (a)(3) to read as follows:

■

§ 423.1

Basis and scope.

(a) * * *
(1) * * *
1128J(d). Reporting and Returning of
Overpayments.
*
*
*
*
*
1860D–14A. Medicare coverage gap
discount program.
*
*
*
*
*
1860D–43. Condition for coverage of
drugs under this part.
*
*
*
*
*
(3) Section 8 of the United States
Code regarding aliens who are not
qualified aliens ineligible for Federal
public benefits.
*
*
*
*
*
■ 55. Section 423.10 is added to subpart
A to read as follows:
§ 423.10 Prohibition on intervention in
negotiations with manufacturers.

(a) General rule. CMS promotes fair
private market competition in the
market for Part D drugs.
(b) No interference in negotiations. (1)
Except as necessary to enforce CMS
requirements, CMS is not—
(i) A party to discussions between
drug manufacturers and pharmacies or

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Federal Register / Vol. 79, No. 7 / Friday, January 10, 2014 / Proposed Rules

between prescription drug
manufacturers and Part D sponsors; nor
(ii) An arbiter of the meaning of or
compliance with the terms and
conditions of agreements reached
between these parties.
(2) Nothing in paragraph (b)(1) of this
section limits CMS’s authority to—
(i) Require documentation of and
access to all agreements referenced in
paragraph (b)(1)(ii) of this section; or
(ii) Require inclusion of terms and
conditions in such agreements when
necessary to implement requirements
under the Act.
(c) No establishment of formulary
drug product selection. CMS does not
determine the specific drug products to
be included on Part D sponsor
formularies or any tier placement of
such products, except as necessary to
comply with § 423.120(b)(1)(v) or
§ 423.272(b)(2).
(d) No establishment of Part D drug
price reimbursement methodologies. (1)
CMS does not establish specific drug
product pricing standards (as defined in
§ 423.505(b)(21)) or the dollar amount of
price concessions at any stage in the
drug distribution channel for Part D
drugs.
(2) Nothing in this section limits CMS
authority to require full disclosure or
uniform treatment and reporting of drug
costs, prices, or price concessions
consistent with rules established by
CMS.
■ 56. Amend § 423.30 as follows:
■ A. In paragraph (a)(1) introductory
text, by removing the phrase ‘‘if he or
she:’’ and adding in its place the phrase
‘‘if he or she does all of the following:’’.
■ B. In paragraph (a)(1)(i), by removing
‘‘; and’’ and adding in its place ‘‘.’’.
■ C. By adding paragraph (a)(1)(iii).
The addition reads as follows:
§ 423.30

Eligibility and enrollment.

(a) * * *
(1) * * *
(iii) Is a United States citizen or
qualified alien who is lawfully present
in the United States as determined in 8
CFR 1.3.
*
*
*
*
*

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§ 423.44

[Amended]

57. Amend § 423.44 as follows:
A. By adding paragraph (b)(2)(vi).
B. In paragraph (d)(1)(vi), by removing
the phrase ‘‘CMS may reinstate’’ and
adding in its place the phrase ‘‘CMS (or
its designee) may reinstate’’.
■ C. By adding paragraph (d)(8).
The additions read as follows:
■
■
■

§ 423.44 Involuntary disenrollment from
Part D coverage.

*

*

*

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*

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(b) * * *
(2) * * *
(vi) The individual loses qualified
alien status or is no longer lawfully
present in the United States.
*
*
*
*
*
(d) * * *
(8) Loss of qualified alien status.
Disenrollment is effective with the
month following the last month of
lawful presence or qualified alien status
in the United States.
*
*
*
*
*
§ 423.100

[Amended]

58. Amend § 423.100 as follows:
A. By revising the definition of ‘‘Daily
cost-sharing rate’’.
■ B. By revising the definition of
‘‘Negotiated prices’’.
■ C. By removing the definition of
‘‘Non-preferred pharmacy’’.
■ D. In the definition of ‘‘Part D drug’’—
■ i. By revising paragraph (1)
introductory text.
■ ii. By adding paragraph (1)(vii).
■ iii. In paragraph (2) introductory text,
by removing the phrase ‘‘Does not
include—’’ and adding in its place the
phrase ‘‘Does not include any of the
following:’’
■ iv. In paragraph (2)(i), by removing ‘‘;
and’’ and adding in its place ‘‘.’’.
■ vi. By adding paragraph (2)(iii).
■ E. By adding the definition of
‘‘Preferred cost sharing’’.
■ F. By removing the definition of
‘‘Preferred pharmacy’’.
The additions and revisions read as
follows:
■
■

§ 423.100

Definitions.

*

*
*
*
*
Daily cost-sharing rate means, as
applicable, the established—
(1) Monthly copayment under the
enrollee’s Part D plan, divided by the
number of days in the approved month’s
supply for the drug dispensed and
rounded to the nearest cent; or
(2) Coinsurance percentage under the
enrollee’s Part D plan.
*
*
*
*
*
Negotiated prices means prices for
covered Part D drugs that meet all of the
following:
(1) The Part D sponsor (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.
(2) Are inclusive of all price
concessions and any other fees charged
to network pharmacies; and
(3) Include any dispensing fees; but
(4) May exclude additional contingent
amounts, such as incentive fees, only if

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these amounts increase prices and
cannot be predicted in advance.
(5) May not be rebated back to the Part
D sponsor (or other intermediary
contracting organization) in full or in
part.
*
*
*
*
*
Part D drug * * *
(1) Unless excluded under paragraph
(2) of this definition, any of the
following, or any FDA-approved
combinations of the following, if used
for a medically accepted indication (as
defined in section 1860D–2(e)(4) of the
Act).
*
*
*
*
*
(vii) A combination product approved
and regulated by the FDA as a drug,
vaccine, or biologic (or any approved
combinations of these) described in
paragraphs (i), (ii), (iii), or (v) of the Part
D drug definition.
(2) Does not include any of the
following:
*
*
*
*
*
(iii) Medical foods, defined as a food
that is formulated to be consumed or
administered enterally under the
supervision of a physician and which is
intended for the specific dietary
management of a disease or condition
for which distinctive nutritional
requirements, based on recognized
scientific principles, are established by
medical evaluation, and that are not
regulated as drugs under section 505 of
the Federal Food, Drug, and Cosmetic
Act.
*
*
*
*
*
Preferred cost sharing means lower
cost sharing for certain covered Part D
drugs at certain network pharmacies
offered in accordance with the
requirements of § 423.120(a)(9).
*
*
*
*
*
■ 59. Amend 423.120 by:
■ A. Revising paragraphs (a)(3), (8), and
(9).
■ B. Redesignating paragraphs (b)(1)(iv)
through (x) as (b)(1)(v) through (xi),
respectively.
■ C. Adding a new paragraph (b)(1)(iv).
■ D. Revising paragraphs (b)(2)(v),
(vi)(B), and (C).
■ E. Adding new paragraphs
(b)(2)(vi)(D) through (G) and (3)(vi).
■ F. Redesignating paragraphs (c)(5)(i)
through (v) as paragraphs (c)(5)(i)(A)
through (E), respectively.
■ G. Adding paragraph (c)(5)(i)
introductory text.
■ H. In newly resdesignated paragraphs
(c)(5)(i)(A) and (B), removing the crossreference ‘‘(c)(5)(iii) of this section’’ and
adding in its place the cross-reference
‘‘(c)(5)(i)(C) of this section’’
■ I. In newly redesignated paragraph
(c)(5)(i)(D), removing the cross-reference

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‘‘(c)(5)(ii) and (iii) of this section’’ and
adding in its place the cross-reference
‘‘(c)(5)(i)(B) and (C) of this section’’.
■ J. Adding a new paragraph (c)(5)(ii).
■ K. Adding paragraph (c)(6).
The revisions and additions read as
follows:
§ 423.120

Access to covered Part D drugs.

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*

*
*
*
*
(a) * * *
(3) Access to non-retail pharmacies. A
part D sponsor’s contracted pharmacy
network may be supplemented by nonretail pharmacies, including pharmacies
offering home delivery via mail order
and institutional pharmacies, provided
the requirements of paragraph (a)(1) of
this section are met. Sponsors that
contract with mail order pharmacies,
and pharmacies offering home delivery
via mail order, must ensure that the
pharmacies meet the following
fulfillment standards:
(i) For prescriptions adjudicated and
filled without requiring additional
review, the time of shipment must not
be more than 3 business days from order
receipt by the mail order pharmacy.
(ii) For prescriptions requiring
additional review before shipping, the
time of shipment must not be more than
5 business days from order receipt by
the mail order pharmacy.
*
*
*
*
*
(8) Pharmacy network contracting
requirements. In establishing its
contracted pharmacy network, a Part D
sponsor offering qualified prescription
drug coverage must comply with all of
the following requirements:
(i) Must offer and publicly post
standard terms and conditions for
network participation for each type of
pharmacy in the network, subject to
paragraphs (a)(8)(ii) and (iii) of this
section.
(ii) May not require a pharmacy to
accept insurance risk as a condition of
participation in the Part D sponsor’s
contracted pharmacy network.
(iii) Must offer payment terms for
every level of cost sharing offered under
the sponsor’s plans consistent with CMS
limitations on the number and type of
cost sharing levels (preferred, standard,
extended day), and for every type of
similarly situated retail pharmacy.
(iv) Must contract with any willing
pharmacy able to meet one set of the
terms and conditions offered by that
plan for that type of pharmacy.
(9) Preferred cost-sharing in network
pharmacies. A Part D sponsor offering a
Part D plan that provides coverage other
than defined standard coverage may
reduce copayments or coinsurance for
covered Part D drugs obtained through
a subset of network pharmacies, as long

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as such preferred cost sharing is offered
in accordance with the requirements of
§ 423.120(a)(8) and for Part D drugs with
consistently lower negotiated prices
than the same Part D drugs when
obtained in the rest of the pharmacy
network.
*
*
*
*
*
(b) * * *
(1) * * *
(iv) Clearly articulates and documents
processes to determine that the
requirements under paragraphs (b)(1)(i)
through (iii) of this section have been
met, including the determination by an
objective party of whether disclosed
financial interests are conflicts of
interest and the management of any
recusals due to such conflicts.
*
*
*
*
*
(2) * * *
(v) Effective contract year 2015,
except as provided in paragraph
(b)(2)(vi) of this section, a Part D
sponsor’s formulary must include
without restriction at point of sale all
Part D drugs in a category or class that
CMS has determined for a typical
individual with a disease or condition
treated by the drugs in the category or
class meets the all of the following
criteria:
(A) Hospitalization, persistent or
significant disability or incapacity, or
death will likely result if initial
administration (including selfadministration) of a drug in the category
or class does not occur within 7 days of
the date the prescription for the drug
was presented to the pharmacy to be
filled.
(B) More specific CMS formulary
requirements will not suffice to meet the
universe of clinical drug-and-diseasespecific applications due to the
diversity of disease or condition
manifestations and associated
specificity or variability of drug
therapies necessary to treat such
manifestations.
(vi) * * *
(B) Drug products that are primarily
covered under Medicare Part A or B.
(C) Part D Compounds as described in
§ 423.120(d).
(D) Fixed combination dosage form
prescription drugs other than
antiretrovirals, including co-packaged
drug products, as defined by 21 CFR
300.50.
(E) Certain types of Part D drugs,
including the following:
(1) Multisource brands of the identical
molecular structure.
(2) Extended-release products when
the immediate-release product is
included.
(3) Products that have the same active
ingredient or moiety.

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2063

(4) Dosage forms that do not provide
a unique route of administration (for
example, tablets and capsules versus
tablets and transdermals).
(F) Point-of-sale utilization
management safety edits consistent with
the FDA approved label.
(G) Prior authorization requirements
used to verify a drug is being used for
a medically accepted indication (as
defined in § 423.100) or to verify a drug
is not covered under Medicare Parts A
or B as prescribed and dispensed or
administered.
(3) * * *
(vi) A Part D sponsor must charge cost
sharing for a temporary supply of drugs
provided under its transition process
such that the following conditions are
met:
(A) For low-income subsidy (LIS)
enrollees, a sponsor must not charge
higher cost sharing for transition
supplies than the statutory maximum
copayment amounts.
(B) For non-LIS enrollees, a sponsor
must charge—
(1) The same cost sharing for nonformulary Part D drugs provided during
the transition that would apply for nonformulary drugs approved through a
formulary exception in accordance with
§ 423.578(b); and
(2) The same cost sharing for
formulary drugs subject to utilization
management edits provided during the
transition that would apply once the
utilization management criteria are met.
*
*
*
*
*
(c) * * *
(5)(i) Before January 1, 2015—
*
*
*
*
*
(ii) Beginning January 1, 2015—
(A) A Part D sponsor must deny or
must require its PBM to deny a
pharmacy claim for a Part D drug if an
active and valid physician or eligible
professional (as defined in section
1848(k)(3)(B)(i) or (ii) of the Act)
National Provider Identifier is not
contained on the claim.
(B) A Part D sponsor must deny or
require its PBM to deny a pharmacy
claim for a Part D drug if the physician
or eligible professional—
(1) Is not enrolled in the Medicare
program in an approved status; and
(2) Does not have a valid opt-out
affidavit on file with an A/B MAC.
(C) To receive payment for a drug, a
beneficiary’s request for reimbursement
from a Part D sponsor must be for a Part
D drug that was dispensed in
accordance with a prescription written
by a physician or, when permitted
under applicable State law, other
eligible professional (as defined in
section 1848(k)(3)(B)(i) or (ii) of the Act)
who—

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(1) Is identified by his or her legal
name in the request; and
(2)(i) Is enrolled in Medicare in an
approved status; or
(ii) Has a valid opt-out affidavit on file
with an A/B MAC.
*
*
*
*
*
(6)(i) In order for a Part D sponsor to
submit to CMS a prescription drug event
record, the PDE must pertain to a claim
for a Part D drug that was dispensed in
accordance with a prescription written
by a physician or, when permitted
under applicable State law, an eligible
professional (as defined in section
1848(k)(3)(B)(i) or (ii) of the Act) who is
either of the following:
(A) Is enrolled in Medicare in an
approved status.
(B) Has a valid opt-out affidavit on file
with an A/B MAC.
(ii) To receive payment for a drug, a
beneficiary’s request for reimbursement
from a Part D sponsor must be for a Part
D drug that was dispensed in
accordance with a prescription written
by a physician or, when permitted,
other eligible professional (as defined in
section 1848(k)(3)(B)(i) or (ii) of the Act)
who—
(A)(1) Is identified by his or her legal
name in the request; and
(2) Is enrolled in Medicare in an
approved status; or
(B) Has a valid opt-out affidavit on file
with an A/B MAC.
(iii) A Part D sponsor must deny or
must require its PBM to deny the
following:
(A) A pharmacy claim for a drug, if
the claim does not meet the
requirements of paragraph (c)(6)(i) of
this section.
(B) A request for reimbursement from
a Medicare beneficiary for a drug, if the
request does not meet the requirements
of paragraph (c)(6)(ii) of this section.
*
*
*
*
*
■ 60. Section 423.126 is added to read
as follows:

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§ 423.126 Special access rules during
disasters or emergencies.

(a) Special access rules during
disasters or emergencies. A Part D
sponsor must relax ‘‘refill-too-soon’’
(RTS) edits to allow an enrollee to
obtain one early refill of each covered
Part D drug he or she is taking in the
event of an anticipated or actual disaster
or emergency, as evidenced by a
declaration of a disaster or emergency
issued by an appropriate Federal, State,
or local official, and it is reasonable to
conclude that such disaster or
emergency or preparation therefore
would make it difficult for beneficiaries
to obtain refills of their medications
because the disaster or emergency or

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anticipation thereof has affected, or will
affect, their ability to have timely access
to their usual pharmacies.
(b) Duration of relaxed edits. A Part
D sponsor must continue to relax the
RTS edits as described in paragraph (a)
of this section until the 30 days after the
date of the triggering emergency or
disaster declaration.
■ 61. Amend § 423.128 by revising
paragraph (a)(3) and adding paragraph
(g) to read as follows:
§ 423.128 Dissemination of Part D
information.

*

*
*
*
*
(a) * * *
(3) At the time of enrollment, and at
least annually thereafter by December
31 for the following contract year.
*
*
*
*
*
(g) Changes in rules. If a Part D
sponsor intends to change its rules for
a Part D plan, it must do all of the
following:
(1) Submit the changes for CMS
review under the procedures of Subpart
V of this part.
(2) For changes that take effect on
January 1, notify all enrollees at least 15
days before the beginning of the Annual
Coordinated Election Period as defined
in section 1860D–1(b)(1)(B) of the Act.
(3) Provide notice of all other changes
in accordance with notice requirements
as specified in Part 423.
■ 62. Amend § 423.153 by revising
paragraphs (b)(4), (d)(1)(v), and (d)(2)(i)
through (iii) to read as follows:
§ 423.153 Drug utilization management,
quality assurance, and medication therapy
management programs (MTMPs)

*

*
*
*
*
(b) * * *
(4)(i) Daily cost sharing rate. Subject
to paragraph (b)(4)(ii) of this section,
establishes a daily cost-sharing rate (as
defined in § 423.100) and applies it to
a prescription presented to a network
pharmacy for a covered Part D drug that
is dispensed for a supply less than 30
days, if the drug is in the form of a solid
oral dose and may be dispensed for a
supply less than 30 days under
applicable law.
(ii) Exceptions. The requirements of
paragraph (b)(4)(i) of this section do not
apply to either of the following:
(A) Solid oral doses of antibiotics.
(B) Solid oral doses that are dispensed
in their original container as indicated
in the Food and Drug Administration
Prescribing Information or are
customarily dispensed in their original
packaging to assist patients with
compliance.
(iii) Cost-sharing—(A) Copayments. In
the case of a drug that would incur a

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copayment, the Part D sponsor must
apply cost-sharing as calculated by
multiplying the applicable daily costsharing rate by the days’ supply actually
dispensed when the beneficiary receives
less than a 30 days’ supply.
(B) Coinsurance. In the case of a drug
that would incur a coinsurance
percentage, the Part D sponsor must
apply the coinsurance percentage for the
drug to the days’ supply actually
dispensed.
*
*
*
*
*
(d) * * *
(1) * * *
(v) Must do both of the following:
(A) Have an outreach strategy
designed to effectively engage at-risk
beneficiaries enrolled in the plan.
(B) Enroll targeted beneficiaries using
an opt-out method of enrollment only.
*
*
*
*
*
(2) * * *
(i) Have two or more chronic diseases.
At least one of the chronic diseases
must be one from the following list of
core chronic diseases:
(A) Cardiovascular disease
(B) Diabetes.
(C) Dyslipidemia.
(D) Respiratory disease.
(E) Bone disease-arthritis.
(F) Mental health.
(G) Alzheimer’s disease.
(H) End-stage renal disease.
(ii) Are taking two or more covered
Part D drugs.
(iii) Are likely to incur annual costs
for covered Part D drugs that are
commensurate with the drug spending
of beneficiaries with two or more
chronic diseases that take two covered
Part D drugs.
*
*
*
*
*
■ 62. Amend § 423.154 by:
■ A. Revising paragraphs (a)(2) and (c).
■ B. Removing paragraph (e).
■ D. Redesignating paragraph (f) as (e).
■ E. Adding a new paragraph (f).
The revisions and addition read as
follows:
§ 423.154 Appropriate dispensing of
prescription drugs in long-term care
facilities under PDPs and MA–PD plans.

(a) * * *
(2) Collect and report information, in
a form and manner specified by CMS,
on the dispensing methodology used for
each dispensing event described by
paragraph (a)(1) of this section.
*
*
*
*
*
(c) Waivers. CMS waives the
requirements under paragraph (a) of this
section for any of the following:
(1) Pharmacies when they service
intermediate care facilities for the
mentally retarded (ICFs/IID) and

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institutes for mental disease (IMDs) as
defined in § 435.1010 of this chapter.
(2) I/T/U pharmacies (as defined in
§ 423.100).
(3)(i) Institutional pharmacies that—
(A) Subject to paragraph (c)(3)(iii) of
this section, exclusively use a
dispensing technique that returns all
unused medications to stock for reuse;
(B) Issues full credit of the ingredient
costs of unused medication to the Part
D sponsor; and
(C) For drugs that cannot be returned
to stock for reuse under applicable law
use a dispensing methodology that
results in the delivery of no more than
a 14 days’ supply of a drug at a time.
(ii) The waiver in paragraph (c)(3)(i)
of this section does not apply to a
pharmacy organization that is
contracted to use this dispensing
technique at some of its pharmacies, but
only to the qualifying pharmacies
themselves.
*
*
*
*
*
(f) Prohibition on proration of
dispensing fees. A Part D sponsor must
not, or must require its intermediary
contracting organization not to, do the
following:
(1) Not penalize long-term care
facilities’ choice of more efficient
uniform dispensing techniques
described in paragraph (a)(1)(ii) of this
section by prorating dispensing fees
based on days’ supply or quantity
dispensed.
(2) Ensure that any difference in
payment methodology among long-term
care pharmacies incentivizes more
efficient dispensing techniques.
■ 64. Amend § 423.265 as follows:
■ A. By redesignating paragraph (b)(3)
as (b)(4).
■ B. By adding a new paragraph (b)(3).
■ C. In newly redesignated paragraph
(b)(4), by adding a paragraph heading.
The additions read as follows:
§ 423.265 Submission of bids and related
information.

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*

*
*
*
*
(b) * * *
(3) Number of bids. Starting with bids
submitted during 2015 for plans to be
offered during coverage year 2016, CMS
will not accept more than two bids for
a coverage year from a stand-alone PDP
sponsor in each PDP region.
(4) Declining a bid. * * *
*
*
*
*
*
■ 65. Section 423.294 is added to
subpart F to read as follows:
§ 423.294 Collections of premiums and
cost sharing.

(a) Refunds of incorrect collections—
(1) Definitions. As used in this section
the following definitions are applicable:

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Amounts incorrectly collected. (i)
Means amounts that exceed the monthly
beneficiary Part D premium limits under
§ 423.286 or exceed permissible costsharing amounts as specified
§ 423.104(d) through (f); and
(ii) Includes amounts collected from
an enrollee who was believed to be
entitled to Medicare benefits but was
later found not to be entitled.
Other amounts due means amounts
due for covered Part D drugs that were—
(i) Accessed at an out-of-network
pharmacy in accordance with the
requirements at § 423.124; or
(ii) Initially denied but, upon appeal,
found to be covered Part D drugs the
enrollee was entitled to have provided
by the Part D plan.
(2) General rule. A Part D plan must
refund all amounts incorrectly collected
from its Medicare enrollees, or from
others on behalf of the enrollees, and to
pay any other amounts due the enrollees
or others on their behalf within the
timeframe specified at § 423.466(a).
(3) Refund methods—(i) Lump-sum
payment. The Part D plan must use
lump-sum payments for the following:
(A) Amounts incorrectly collected
that were not collected as premiums.
(B) Other amounts due.
(C) All amounts due if the Part D plan
is going out of business or terminating
its Part D contract for a prescription
drug plan(s).
(ii) Premium adjustment, lump-sum
payment, or both. If the amounts
incorrectly collected were in the form of
premiums, or included premiums as
well as other charges, the Part D plan
may refund by adjustment of future
premiums or by a combination of
premium adjustment and lump-sum
payments.
(iii) Refund when enrollee has died or
cannot be located. If an enrollee has
died or cannot be located after
reasonable effort, the Part D plan must
make the refund in accordance with
State law.
(4) If the Part D plan does not make
the refund required under this section
within the timeframe specified at
§ 423.466(a), the Part D plan may
receive compliance notices from CMS
or, depending on the significance of the
non-compliance, be the subject of an
intermediate sanction (for example,
suspension of marketing and enrollment
activities) in accordance with part 423,
subpart O.
(b) Retroactive collection of costsharing amounts—(1) General rule. A
Part D plan must make a reasonable
effort to collect cost sharing from a
beneficiary or to bill cost sharing to
another appropriate party.

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(2) Timeframe. Recovery efforts must
be initiated in accordance with the
timeframe specified at § 423.466(a).
(c) Reduction or waiver of premiums
and cost sharing—(1) General rule. Part
D plans, directly, or indirectly through
related entities as defined at § 423.501,
are prohibited from reducing or waiving
the collection of enrollee premiums or
cost sharing or both.
(2) Failure to collect premiums and
cost sharing. Failure to collect
premiums, collect cost sharing at the
time the service is provided, or attempt
to collect cost sharing from a beneficiary
or to bill cost sharing to another
appropriate party after the fact, is in
violation of the uniform benefit
provisions set forth in § 423.104(b).
■ 66. Amend § 423.308 by revising the
definition of ‘‘Actually paid’’ to read as
follows:
§ 423.308

Definitions and terminology.

*

*
*
*
*
Actually paid means that the costs
must be actually incurred by the Part D
sponsor and must be net of any direct
or indirect remuneration (including
discounts, incentive payments, charge
backs or rebates, cash discounts, free
goods contingent on a purchase
agreement, up-front payments, goods in
kind, free or reduced-price services,
grants, or other price concessions or
similar benefits offered to some or all
purchasers) from any source other than
pharmacies (including manufacturers,
enrollees, or any other person) that
would serve to decrease (or increase) the
costs incurred under the Part D plan.
(1) Direct and indirect remuneration
includes discounts, incentive payments,
chargebacks or rebates, cash discounts,
free goods contingent on a purchase
agreement, up-front payments, goods in
kind, free or reduced-price services,
grants, or other price concessions or
similar benefits from manufacturers or
similar entities obtained by an
intermediary contracting organization
with which the Part D plan sponsor has
contracted, regardless of whether the
intermediary contracting organization
retains all or a portion of the direct and
indirect remuneration or passes the
entire direct and indirect remuneration
to the Part D plan sponsor and
regardless of the terms of the contract
between the plan sponsor and the
intermediary contracting organization.
(2) Direct and indirect remuneration
may include additional payments to
pharmacies, such as for incentive
payments, but may not include any
other price concessions from
pharmacies.
*
*
*
*
*

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67. Amend § 423.322 by revising
paragraph (b) to read as follows:

■

§ 423.322 Requirement for disclosure of
information.

*

*
*
*
*
(b) Restrictions on use of information.
(1) Officers, employees, and contractors
of the Department of Health and Human
Services may use the information
disclosed or obtained in accordance
with the provisions of this subpart for
the purposes of, and to the extent
necessary—
(i) In carrying out this subpart,
including, but not limited to,
determination of payments, and
payment-related oversight and program
integrity activities.
(ii) In conducting oversight,
evaluation, and enforcement under Title
XVIII of the Act.
(2) The United States Attorney
General and the Comptroller General of
the United States may use the
information disclosed or obtained in
accordance with the provisions of this
subpart for purposes of, and to the
extent necessary in, carrying out health
oversight activities.
(3) The restrictions described in
paragraphs (b)(1) and (2) of this section
do not limit either of the following:
(i) OIG’s authority to fulfill the
Inspector General’s responsibilities in
accordance with applicable Federal law.
(ii) CMS’ ability to use data regarding
drug claims in accordance with section
1848(m) of the Act.

§ 423.329

[Amended]

68. Amend § 423.329 (d)(1), by
removing the phrase ‘‘the amount
described in § 423.782.’’ and adding in
its place the phrase ‘‘the difference
between the Part D cost-sharing for a
non-low-income subsidy eligible
beneficiary under the Part D plan and
the statutory cost-sharing for a lowincome subsidy eligible beneficiary.’’
■ 69. Section 423.346 is amended by
revising paragraphs (a) through (c) to
read as follows:
■

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§ 423.346

Reopening.

(a) CMS may reopen an initial final
payment determination (including a
determination on the final amount of
direct subsidy described in
§ 423.329(a)(1), final reinsurance
payments described in § 423.329(c), the
final amount of the low income subsidy
described in § 423.329(d), or final risk
corridor payments as described in
§ 423.336) one time within 5 years after
the date of the notice of the initial
determination to the Part D sponsors.
(b) CMS may reopen the Coverage Gap
Discount Reconciliation (as described at

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§ 423.2320 (b), one time within 5 years
after the date of the notice of the
Coverage Gap Discount Reconciliation
to the Part D sponsors.
(c) CMS does not reopen as a result of
a change in legal interpretation or
administrative ruling upon which the
final determination was made.
*
*
*
*
*
■ 70. Amend § 423.350 as follows:
■ A. In paragraph (a)(1)(iii), by
removing ‘‘; or’’ and adding in its place
‘‘.’’.
■ B. In paragraph (a)(1)(iv), by removing
’’).’’ adding in its place ‘‘.’’.
■ C. By adding paragraph (a)(1)(v).
■ D. By revising paragraph (a)(2).
■ E. By adding paragraph (b)(1)(iv).
§ 423.350

Payment appeals.

(a) * * *
(1) * * *
(v) The reconciled coverage gap
discount payment under § 423.2320(b).
(2) Payment information not subject
to appeal. Payment information
submitted to CMS under § 423.322 and
reconciled under § 423.343 or submitted
and reconciled under § 423.2320(b) is
final and may not be appealed nor may
the appeals process be used to submit
new information after the submission of
information necessary to determine
retroactive adjustments and
reconciliations.
(b) * * *
(1) * * *
(iv) For the Coverage Gap Discount
Program, the date of the final reconciled
payment under § 423.2320(b).
*
*
*
*
*
■ 71. Section 423.360 is added to
subpart G to read as follows:
§ 423.360 Reporting and returning of
overpayments.

(a) Definitions. For the purposes of
this section the following definitions are
applicable:
Applicable reconciliation means the
later of either the annual deadline for
submitting—
(i) PDE data for the annual Part D
payment reconciliations referred to in
§ 423.343(c) and (d); or
(ii) Direct and indirect remuneration
data.
Funds for purposes of this section,
means any payment that a Part D
sponsor has received that is based on
data submitted by the Part D sponsor to
CMS for payment purposes, including
data submitted under § 423.329(b)(3),
§ 423.336(c)(1), § 423.343, and data
provided for purposes of supporting
allowable costs as defined in § 423.308
which includes data submitted to CMS
regarding direct or indirect
remuneration.

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Overpayment means funds that a Part
D sponsor has received or retained
under title XVIII of the Act to which the
Part D sponsor, after applicable
reconciliation, is not entitled under
such title.
(b) General rule. If a Part D sponsor
has identified that it has received an
overpayment, the Part D sponsor must
report and return that overpayment in
the form and manner set forth in this
section.
(c) Identified overpayment. A Part D
sponsor has identified an overpayment
if it has actual knowledge of the
existence of the overpayment or acts in
reckless disregard or deliberate
ignorance of the existence of the
overpayment. A Part D sponsor must
exercise reasonable diligence to
determine the accuracy of information it
receives that an overpayment may exist.
(d) Reporting and returning of an
overpayment. A Part D sponsor must
report and return any overpayment it
received no later than 60 days after the
date on which it identified it received
an overpayment.
(1) Reporting. A Part D sponsor must
notify CMS of the amount and reason
for the overpayment, using the
notification process determined by
CMS.
(2) Returning. A Part D sponsor must
return identified overpayments in a
manner specified by CMS.
(3) Enforcement. Any overpayment
retained by a Part D sponsor after the
60-day deadline for reporting and
returning is an obligation under 31
U.S.C. 3729(b)(3).
(e) Look-back period. A Part D
sponsor must report and return any
overpayment identified within the 6
most recent completed payment years.
Overpayments resulting from fraud
would not be subject to this limitation.
■ 72. Amend § 423.464 as follows:
■ A. In paragraph (f)(2)(i) introductory
text, by removing the phrase ‘‘a Part D
plan must—’’ and adding in its place ‘‘a
Part D plan must do all of the
following:’’.
■ B. In paragraph (f)(2)(i)(A), by
removing ‘‘; and’’ and adding in its
place ‘‘.’’.
■ C. By adding paragraph (f)(2)(i)(C).
The addition reads as follows:
§ 423.464 Coordination of benefits with
other providers of prescription drug
coverage.

*

*
*
*
*
(f) * * *
(2) * * *
(i) * * *
(C) Report, accept and apply benefit
accumulator data in a timeframe and
manner determined by CMS.
*
*
*
*
*

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§ 423.466

[Amended]

73. Amend § 423.466(b) by removing
the phrase ‘‘a period not to exceed 3
years’’ and adding in its place the
phrase ‘‘a period of 3 years’’.
■ 74. Amend § 423.501 by a adding a
definition for ‘‘prescription drug pricing
standard’’ to read as follows:
■

§ 423.501

Definitions.

*

*
*
*
*
Prescription drug pricing standard
means any methodology or formula for
varying the pricing of a drug or drugs
during the term of a pharmacy
reimbursement contract that is based on
the cost of a drug, which includes, but
is not limited to, drug pricing references
and amounts based on any of the
following:
(1) Average wholesale price.
(2) Wholesale average cost.
(3) Average manufacturer price.
(4) Average sales price.
(5) Maximum allowable cost.
(6) Other cost, whether publicly
available or not.
*
*
*
*
*
■ 75. Amend § 423.503 by revising
paragraph (a)(1) and adding paragraphs
(a)(3), (c)(4), and (d) to read as follows:

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§ 423.503 Evaluation and determination
procedures for applications to be
determined qualified to act as a sponsor.

(a) * * *
(1) With the exception of evaluations
conducted under paragraph (b) of this
section, CMS evaluates an entity’s
application solely on the basis of
information contained in the
application itself and any additional
information that CMS obtains through
on-site visits and an essential operations
test.
*
*
*
*
*
(3) CMS may not approve an
application when it would result in the
applicant’s parent organization, directly
or through its subsidiaries, holding
more than one PDP sponsor contract in
the PDP Region for which the applicant
is seeking qualification as a PDP
sponsor. A parent organization is an
entity that exercises a controlling
interest in the applicant.
*
*
*
*
*
(c) * * *
(4) Nullification of approval of
application. If CMS discovers through
any means that an applicant is not
qualified to contract based on
information gained subsequent to
application approval (for example,
failure of an essential operations test,
absence of required employees), CMS
gives the applicant written notice
indicating that the approval issued
under § 423.503(c)(1) is nullified and

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the applicant no longer qualifies to
contract as a Part D plan sponsor.
(i) This determination is not subject to
the appeals provisions in subpart N of
this part.
(ii) This provision only applies to
applicants that have not previously
entered into a Part D contract with CMS
and neither it, nor another subsidiary of
the applicant’s parent organization, is
offering Part D benefits during the
current year.
(d) Withdrawal of application and bid
in a previous year. An applicant that
withdraws its application and
corresponding bid after the release of
the low income subsidy benchmark is
not eligible to be approved as a Part D
plan sponsor for the 2 succeeding
annual contracting cycles.
■ 76. Amend § 423.504 as follows:
■ A. By adding paragraphs
(b)(4)(vi)(C)(4) and (b)(8) through (10).
■ B. In paragraph (d)(2) introductory
text, by removing the phrase ‘‘has the
right to—’’ and adding in its place the
phrase ‘‘has the right to timely do all of
the following:’’.
■ C. In paragraph (d)(2)(i), by removing
‘‘;’’ and adding in its place a ‘‘.’’.
■ D. In paragraph (d)(2)(ii), by removing
‘‘; and’’ and adding in its place a ‘‘.’’.
■ E. By adding paragraph (d)(2)(iv).
The additions read as follows:
§ 423.504

General provisions.

*

*
*
*
*
(b) * * *
(4) * * *
(vi) * * *
(C) * * *
(4) A Part D plan sponsor must
require all of its first tier, downstream
and related entities to take the CMS
training and accept the certificate of
completion of the CMS training as
satisfaction of this requirement. Part D
plan sponsors are prohibited from
developing and implementing their own
training or providing supplemental
training materials to fulfill this
requirement.
*
*
*
*
*
(8) If neither the applicant, nor its
parent or another subsidiary of the same
parent, holds a Part D sponsor contract
that has been in effect for at least 1 year
at the time it submits an application, the
applicant must have arrangements in
place such that the applicant and its
contracted first tier, downstream, or
related entities, in combination, have at
least 1 full-benefit year of experience
within the 2 years preceding the
application submission performing at a
minimum all of the following functions
in support of the operation of another
Part D contract:

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(i) Authorization, adjudication, and
processing of prescription drug claims
at the point of sale.
(ii) Administration and tracking of
enrollees’ drug benefits in real time,
including automated coordination of
benefits with other payers.
(iii) Operation of an enrollee appeals
and grievance process.
(9) For organizations applying to offer
stand-alone prescription drug plans, the
organization, its parent, or a subsidiary
of the organization or its parent, must
have either of the following:
(i) For 2 continuous years
immediately prior to submitting an
application, actively offered health
insurance or health benefits coverage,
including prescription drug coverage, as
a risk-bearing entity in at least one State.
(ii) For 5 continuous years
immediately prior to submitting an
application, actively managed
prescription drug benefits for an
organization that offers health insurance
or health benefits coverage, including at
a minimum, all of the services listed in
paragraph (b)(8) of this section.
(10) Effective contract year 2015, pass
an essential operations test prior to the
start of the benefit year. This provision
only applies to new sponsors that have
not previously entered into a Part D
contract with CMS when neither it, nor
another subsidiary of the applicant’s
parent organization, is offering Part D
benefits during the current year.
*
*
*
*
*
(d) * * *
(2) * * *
(iv) CMS may require that the Part D
Plan sponsor hire an independent
auditor to conduct full or partial
program audits or to provide CMS with
information to determine if deficiencies
found during an audit or inspection
have been corrected and are not likely
to recur. The independent auditor must
work in accordance with CMS
specifications and must be willing to
attest that a complete and full
independent review has been
performed.
*
*
*
*
*
■ 77. Amend § 423.505 as follows:
■ A. By revising paragraphs (b)(18) and
(21).
■ B. By adding paragraphs (b)(27) and
(28).
■ C. In paragraph (f)(3)(v), by removing
‘‘,’’ and adding in its place ‘‘.’’.
■ D. In paragraph (f)(3)(vi), by removing
‘‘; and’’ and adding in its place ‘‘.’’.
■ E. By adding paragraph (f)(3)(viii).
■ F. In paragraph (i)(2)(i), by removing
the phrase ‘‘audit, evaluate and inspect’’
and adding in its place ‘‘audit, evaluate,
collect, and inspect’’.

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G. By redesignating paragraph (i)(2)(ii)
as paragraph (i)(2)(iii).
■ H. By adding a new paragraph
(i)(2)(ii).
■ I. By revising paragraph (i)(3)(viii).
■ J. By adding paragraph (k)(7).
■ K. By adding a paragraph (m) subject
heading.
■ L. By revising paragraphs (m)(1)(iii)
introductory text, (m)(1)(iii)(A) and
(B).
■ M. By removing paragraph
(m)(1)(iii)(C).
■ N. By redesignating (m)(1)(iii)(D) as
paragraph (m)(1)(iii)(C).
■ O. By revising newly redesignated
(m)(1)(iii)(C)(1) and (3).
■ P. By revising paragraph (m)(3).
■ Q. By adding paragraph (p).
The revisions and additions read as
follows:
■

§ 423.505

Contract provisions.

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*

*
*
*
*
(b) * * *
(18) To agree to have standard
contracts that meet the requirements
described in § 423.120(a)(8) with
reasonable and relevant terms and
conditions of participation for each type
of pharmacy in its network whereby any
willing pharmacy may access all
relevant contract(s) to participate as a
network pharmacy.
* * *
(21)(i) Update any prescription drug
pricing standard (as defined in
§ 423.501) based on the cost of the drug
used for reimbursement of network
pharmacies by the Part D sponsor on
January 1 of each contract year and not
less frequently than once every 7 days
thereafter;
(ii) Indicate the source used for
making any such updates; and
(iii) Disclose all individual drug
prices to be updated to the applicable
pharmacies in advance of their use for
reimbursement of claims, if the source
for any prescription drug pricing
standard is not publicly available.
*
*
*
*
*
(27) A Part D sponsor is required to
administer a Part D Benefit that
provides good quality health care
demonstrated by scores of three or
higher on CMS performance standards
for patient outcomes, intermediate
outcomes, process, patient experience,
and patient access to care.
(28) Effective contract year 2015, pass
an essential operations test prior to the
start of the benefit year. This provision
only applies to new sponsors that have
not previously entered into a Part D
contract with CMS and neither it, nor
another subsidiary of the applicant’s
parent organization, is offering Part D
benefits during the current year.
*
*
*
*
*

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(f) * * *
(3) * * *
(viii) Supporting program integrity
purposes, including coordination with
the States.
*
*
*
*
*
(i) * * *
(2) * * *
(ii) HHS, the Comptroller General or
their designees have the right to audit,
evaluate, collect, and inspect any
records under (i)(2)(i) directly from any
first tier, downstream, or related entity.
*
*
*
*
*
(3) * * *
(viii) If applicable, provisions
addressing the drug pricing standard
requirements of § 423.505(b)(21).
*
*
*
*
*
(k) * * *
(7) Certification of accuracy of data
for overpayments. The CEO, CFO, or
COO must certify (based on best
knowledge, information, and belief) that
the information provided for purposes
of reporting and returning of
overpayments under § 423.360 is
accurate, complete, and truthful.
*
*
*
*
*
(m) Release of data.
(1) * * *
(iii) Subject, in certain cases, to
encryption of beneficiary identifiers and
aggregation of cost data to protect
beneficiary confidentiality and
commercially sensitive data of Part D
sponsors, in accordance with all of the
following principles:
(A) Subject to the restrictions in this
paragraph, all elements on the claim are
available to HHS, other executive
branch agencies, and the States.
(B) Cost data elements on the claim
generally are aggregated for releases to
other executive branch agencies, States,
and external entities. Upon request,
CMS excludes sales tax from the
aggregation at the individual level if
necessary for the project.
(C) * * *
(1) Beneficiary identifier elements on
the claim generally are encrypted for
release, except in limited circumstances,
such as the following:
(i) If needed, in the case of release to
other HHS entities, Congressional
oversight agencies, non-HHS executive
agencies and the States.
(ii) If needed to link to another
dataset, in the case of release to external
entities. Public disclosure of research
results will not include beneficiary
identifying information.
*
*
*
*
*
(3)(i) CMS must make available to
Congressional support agencies (the
Congressional Budget Office, the
Government Accountability Office, the

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Medicare Payment Advisory
Commission, and the Congressional
Research Service when it is acting on
behalf of a Congressional committee in
accordance with 2 U.S.C. 166(d)(1)), all
information collected under paragraph
(f)(3) of this section for the purposes of
conducting congressional oversight,
monitoring, making recommendations,
and analysis of the Medicare program.
(ii) The Congressional Research
Service is considered an external entity
when it is not acting on behalf of a
Congressional committee in accordance
with 2 U.S.C. 166(d)(1) for the purposes
of paragraph (m)(1) of this section.
*
*
*
*
*
(p) Business continuity. (1) The Part D
sponsor agrees to develop, maintain,
and implement a business continuity
plan containing policies and procedures
to ensure the continuation of business
operations during disruptions to
business operations which would
include natural or man-made disasters,
system failures, emergencies, and other
similar circumstances and the threat of
such occurrences. To meet the
requirement, the business continuity
plan must, at a minimum, include the
following:
(i) Risk assessment. Identify threats
and vulnerabilities that might affect
business operations.
(ii) Mitigation strategy. Design
strategies to mitigate hazards. Identify
essential functions in addition to those
specified in paragraph (p)(2) of this
section and prioritize the order in which
to restore all other functions to normal
operations. At a minimum, each Part D
sponsor must do the following:
(A) Identify specific events that will
activate the business continuity plan.
(B) Develop a contingency plan to
maintain, during any business
disruption, the availability and, as
applicable, confidentiality of
communication systems and essential
records in all forms (including
electronic and paper copies). The
contingency plan must do the following:
(1) Ensure that during any business
disruption the following systems will
operate continuously or, should they
fail, be restored to operational capacity
on a timely basis:
(i) Information technology IT systems
including those supporting claims
processing at point of service.
(ii) Provider and enrollee
communication systems including
telephone, Web site, and email.
(2) With respect to electronic
protected health information, comply
with the contingency plan requirements
of the Health Insurance Portability and
Accountability Act of 1996 Security

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Federal Register / Vol. 79, No. 7 / Friday, January 10, 2014 / Proposed Rules
Regulations at 45 CFR 160 and 164,
Subparts A and C.
(C) Establish a chain of command.
(D) Establish a business
communication plan that includes
emergency capabilities and procedures
to contact and communicate with the
following:
(1) Employees.
(2) First tier, downstream, and related
entities.
(3) Other third parties (including
pharmacies, providers, suppliers, and
government and emergency
management officials).
(E) Establish employee and facility
management plans to ensure that
essential operations and job
responsibilities can be assumed by other
employees or moved to alternate sites as
necessary or both.
(F) Establish a restoration plan
including procedures to transition to
normal operations.
(G) Comply with all applicable
Federal, State, and local laws.
(iii) Testing and revision. On at least
an annual basis, test and update the
business operations continuity plan to
ensure the following:
(A) That it can be implemented in
emergency situations.
(B) That employees understand how it
is to be executed.
(iv) Training. On at least an annual
basis, educate all new and existing
employees about the business
continuity plan and their own
respective roles.
(v) Records. (A) Develop and maintain
records documenting the elements of
the business continuity plan described
in paragraph (p)(1)(i) through (p)(1)(iv)
of this section.
(B) Make the information specified in
paragraph (p)(1)(v)(A) of this section
available to CMS upon request.
(2) Restoration of essential functions.
Every Part D sponsor must restore
essential functions within 24 hours after
any of the essential functions fail or
otherwise stop functioning as usual. In
addition to any essential functions that
the Part D sponsor identifies under
paragraph (p)(1)(ii) of this section, for
purposes of this paragraph (p)(2) of this
section essential functions include at a
minimum, the following:
(i) Benefit authorization (if not
waived), adjudication, and processing of
prescription drug claims at the point of
sale.
(ii) Administration and tracking of
enrollees’ drug benefits in real time,
including automated coordination of
benefits with other payers.
(iii) Provision of pharmacy technical
assistance.

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(iv) Operation of an enrollee
exceptions and appeals process
including coverage determinations.
(v) Operation of call center customer
services.
■ 78. Amend § 423.509 as follows:
■ A. By redesignating paragraphs (a)(4)
through (a)(14) as paragraphs (a)(4)(i)
through (a)(4)(xi).
■ B. By adding paragraph (a)(4)
introductory text.
■ C. In newly redesignated paragraphs
(a)(4)(ii), (iv), (v) introductory text, (vi),
and (vii), by removing the term ‘‘fails’’
and adding in its place the term
‘‘failed’’.
■ D. In newly redesignated paragraphs
(a)(4)(iii), (viii), and (ix), by removing
the term ‘‘fails’’ and adding in its place
the term ‘‘failed’’.
■ E. By revising newly redesignated
paragraphs (a)(4)(x) and (xi).
■ F. By adding paragraph (a)(4)(xii).
■ G. By revising paragraphs (b)(1)(i)
through (iv) and (b)(2)(i)(C).
■ H. In paragraph (b)(2)(ii), by removing
the phrase ‘‘MA organization’’ and
adding in its place the phrase ‘‘Part D
plan sponsor’’.
■ I. In paragraph (c)(2)(iii), by removing
the cross-reference ‘‘(a)(4) of this
section’’ and adding in its place the
cross-reference ‘‘(a)(4)(i) of this section’’.
■ J. In paragraph (d), by removing the
cross-reference ‘‘§ 423.642’’ and adding
in its place the cross-reference ‘‘subpart
N of this part’’.
The additions and revisions read as
follows:
§ 423.509
CMS.

Termination of a contract by

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[Amended]

79. Amend § 423.562(a)(3) by
removing the phrase ‘‘request an
exception if they disagree with the
information provided by the
pharmacist.’’ and adding in its place the
phrase ‘‘request an exception.’’.

■

§ 423.642

(a) * * *
(4) CMS may make a determination
under paragraph (a)(1), (2) or (3) of this
section if the Part D Plan sponsor has
had one or more of the following occur:
*
*
*
*
*
(x) Achieves a Part D summary plan
rating of less than 3 stars for 3
consecutive contract years. Plan ratings
issued by CMS before September 1,
2012 are not included in the calculation
of the 3-year period.
(xi)(A) Has failed to report MLR data
in a timely and accurate manner in
accordance with § 423.2460; or
(B) That any MLR data required by
this subpart is found to be materially
incorrect or fraudulent.
(xii) Failure of an essential operations
test before the start of the benefit year
by an organization that has entered into
a Part D contract with CMS when
neither it, nor another subsidiary of the
organization’s parent organization, is
offering Part D benefits during the
current year.
*
*
*
*
*

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(b) * * *
(1) * * *
(i) CMS notifies the Part D plan
sponsor in writing at least 45 calendar
days before the intended date of the
termination.
(ii) The Part D plan sponsor notifies
its Medicare enrollees of the termination
by mail at least 30 calendar days before
the effective date of the termination.
(iii) The Part D plan sponsor notifies
the general public of the termination at
least 30 calendar days before the
effective date of the termination by
releasing a press statement to news
media serving the affected community
or county and posting the press
statement prominently on the
organization’s Web site.
(iv) CMS notifies the general public of
the termination no later than 30
calendar days after notifying the plan of
CMS’s decision to terminate the Part D
plan sponsor’s contract by releasing a
press statement.
(2) * * *
(i) * * *
(C) The contract is being terminated
based on the grounds specified in
paragraphs (a)(4)(i) and (xii) of this
section.
*
*
*
*
*

[Amended]

80. Amend § 423.642(c)(1) by
removing the phrase ‘‘90 calendar days’’
and adding in its place ‘‘45 calendar
days’’.

■

§ 423.650

[Amended]

81. Amend § 423.650 as follows:
A. In paragraph (a)(2), by removing
the term ‘‘under’’ and adding in its
place the phrase ‘‘in accordance with’’.
■ B. In paragraph (a)(4), by removing the
cross-reference ‘‘§ 423.752(a) and (b)’’
and adding in its place the crossreference ‘‘§ 423.752(a) and (b)’’.
■ 82. Amend § 423.752 as follows:
■ A. By adding paragraphs (a)(7)
through (10).
■ B. By revising paragraph (c)(1).
■ C. In paragraph (c)(2)(ii), by removing
the phrase ‘‘pursuant to 423.509(a)(4)’’
and adding in its place the phrase
‘‘pursuant to § 422.510(a)(4)(i)’’.
The additions and revision read as
follows:
■
■

§ 423.752 Basis for imposing intermediate
sanctions and civil money penalties

*

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(a) * * *
(7) Except as provided under § 423.34,
enrolls an individual in any plan under
this part without the prior consent of
the individual or the designee of the
individual.
(8) Transfers an individual enrolled
under this part from one plan to another
without the prior consent of the
individual or the designee of the
individual or solely for the purpose of
earning a commission.
(9) Fails to comply with marketing
restrictions described in subpart V or
applicable implementing guidance.
(10) Employs or contracts with any
individual, agent, provider, supplier or
entity who engages in the conduct
described in paragraphs (a)(1) through
(9) of this section.
*
*
*
*
*
(c) * * *
(1) CMS. In addition to, or in place of,
any intermediate sanctions, CMS may
impose civil money penalties in the
amounts specified in either of the
following:
(i) Section 423.760(b) for any of the
determinations at § 423.509(a), except
§ 423.509(a)(4)(i).
(ii) Section 423.760(c) for any of the
determinations in paragraph (a) of this
section except § 422.752(a)(5).
*
*
*
*
*
■ 83. Amend § 423.756 as follows:
■ A. In paragraph (a)(2), by removing
the phrase ‘‘days from receipt’’ and
adding in its place ‘‘days after receipt’’.
■ B. In paragraph (b)(4), by removing the
cross-reference ‘‘§ 423.650 through
§ 423.662 of this part.’’ and adding in its
place ‘‘Subpart N of this part.’’.
■ C. In paragraph (c)(3)(ii) introductory
text, by removing the phrase ‘‘In
instances where marketing or
enrollment or both intermediate
sanctions have been imposed,’’ and
adding in its place the phrase ‘‘In
instances where intermediate sanctions
have been imposed,’’.
■ D. Adding paragraph (c)(3)(ii)(C).
■ E. Revising paragraph (d).
The addition and revision read as
follows:
§ 423.756 Procedures for imposing
intermediate sanctions and civil money
penalties.

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*

*
*
*
*
(c) * * *
(3) * * *
(ii) * * *
(C) During the limited time period,
sanctioned Part D plan sponsors under
the benchmark that would normally
participate in the annual and monthly
auto enrollment process for enrollees
receiving the low income subsidy will
not be allowed to receive or process
these types of enrollments.

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(d) Non-renewal or termination by
CMS. In addition to or as an alternative
to the sanctions described in § 423.750,
CMS may decline to authorize the
renewal of an organization’s contract in
accordance with § 423.507(b), or
terminate the contract in accordance
with § 423.509.
*
*
*
*
*
■ 84. Amend § 423.760 as follows:
■ A. In paragraph (a) introductory text,
by removing the phrase ‘‘under
423.752(c)(1), CMS will consider as
appropriate:’’ and adding in its place the
phrase ‘‘under § 423.752(c)(1), CMS
considers the following as
appropriate:’’.
■ B. In paragraphs (a)(1) and (2), by
removing ‘‘;’’ and adding in its place
‘‘.’’.
■ C. Revising paragraph (a)(3).
■ D. In paragraph (a)(4) by removing ‘‘;’’
and adding in its place ‘‘.’’.
■ E. In paragraph (a)(5), by removing ‘‘;
and’’ and adding in its place ‘‘.’’.
■ F. Adding paragraph (c).
The revision and addition read as
follows:

■

§ 423.760 Determinations regarding the
amount of civil money penalties and
assessment imposed by CMS.

*

(a) * * *
(3) The adverse effect to enrollees
which resulted or could have resulted
from the conduct of the Part D sponsor.
*
*
*
*
*
(c) Amount of penalty imposed by
CMS or OIG. CMS or the OIG may
impose civil money penalties in the
following amounts for a determination
made under § 423.752(a):
(1) Civil money penalties of not more
than $25,000 for each determination
made.
(2) With respect to a determination
made under § 423.752(a)(4) or
423.752(a)(5)(i), not more than $100,000
for each such determination except with
respect to a determination made under
§ 423.752(a)(5), an assessment of not
more than the amount claimed by such
plan or PDP sponsor based upon the
misrepresentation or falsified
information involved.
(3) Plus with respect to a
determination made under
§ 423.752(a)(2), double the excess
amount charged in violation of such
paragraph (and the excess amount
charged must be deducted from the
penalty and returned to the individual
concerned).
(4) Plus with respect to a
determination made under
§ 423.752(a)(4), $15,000 for each
individual not enrolled as a result of the
practice involved.

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85. Amend § 423.882 by revising the
definition of ‘‘Actually paid’’ to read as
follows:

§ 423.882

Definitions.

*

*
*
*
*
Actually paid means that the costs
must be actually incurred by the
qualified retiree prescription drug plan
and must be net of any direct or indirect
remuneration (including discounts,
charge backs or rebates, cash discounts,
free goods contingent on a purchase
agreement, up-front payments, goods in
kind, free or reduced-price services,
grants, or other price concessions or
similar benefits offered to some or all
purchasers) from any manufacturer or
similar entity that would serve to
decrease the costs incurred under the
qualified retiree prescription drug plan.
*
*
*
*
*
■ 86. Amend § 423.1016 by revising the
first sentence in paragraph (b)(1) to read
as follows:
§ 423.1016 Filing of briefs with the
Administrative Law Judge or Departmental
Appeals Board, and opportunity for
rebuttal.

*
*
*
*
(b) * * *
(1) The other party will have 20
calendar days from the date of mailing
or in person filing to submit any rebuttal
statement or additional evidence. * * *
*
*
*
*
*
■ 87. Amend § 423.1020 by revising
paragraph (a)(2) to read as follows:
§ 423.1020

Request for hearing.

(a) * * *
(2) The Part D sponsor or its legal
representative or other authorized
official must file the request, in writing,
to the appropriate Departmental
Appeals Board office, with a copy to
CMS, within 60 calendar days after
receipt of the notice of initial
determination, to request a hearing
before an ALJ to appeal any
determination by CMS to impose a civil
money penalty.
*
*
*
*
*
■ 88. Amend § 423.2262 by adding
paragraph (a)(2) to read as follows:
§ 423.2262 Review and distribution of
marketing materials.

(a) * * *
(2) If CMS does not approve or does
not disapprove marketing materials
within the specified review timeframe,
the materials are deemed approved and
the Part D sponsor may use the material.
*
*
*
*
*
§ 423.2266

[Removed and Reserved]

89. Section 423.2266 is removed and
reserved.

■

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Federal Register / Vol. 79, No. 7 / Friday, January 10, 2014 / Proposed Rules
90. Amend § 423.2274 by:
A. Revising the introductory text.
B. Redesignating paragraphs (a)
through (f) as (b) through (g).
■ C. Adding new paragraph (a).
■ D. Revising newly redesignated
paragraphs (b) through (d).
■ E. Adding paragraph (h).
The revisions and additions read as
follows:
■
■
■

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§ 423.2274

Broker and agent requirements.

If a Part D sponsor uses agents and
brokers to sell its Part D plans, the
following requirements in this section
are applicable.
(a) Definitions. For purposes of this
section, the following definitions are
applicable:
Compensation (1) Includes monetary
or non-monetary remuneration of any
kind relating to the sale or renewal of a
policy including, but not limited to—
(i) Commissions;
(ii) Bonuses;
(iii) Gifts;
(iv) Prizes or Awards; or
(v) Referral or Finder fees.
(2) Does not include—
(i) Payment of fees to comply with
State appointment laws, training,
certification, and testing costs;
(ii) Reimbursement for mileage to, and
from, appointments with beneficiaries;
or
(iii) Reimbursement for actual costs
associated with beneficiary sales
appointments such as venue rent,
snacks, and materials.
Like plan type means one of the
following:
(1) PDP replaced with another PDP.
(2) MA or MA–PD replaced with
another MA or MA–PD.
(3) Cost plan replaced with another
cost plan.
Unlike plan type means one of the
following:
(1) PDP replaced with a MA–PD or a
MA–PD replaced with a PDP
(2) PDP replaced with a cost plan or
a cost plan replaced with a PDP
(3) MA–PD replaced with a cost plan
or a cost plan replaced with a MA–PD
Plan year means the year beginning
January 1 and ending December 31.
Renewal year means all years
following the initial enrollment year in
a like plan type.
(b) Compensation rules. An Part D
sponsor must compensate independent
brokers and agents, if compensation is
paid, only according to the following
rules in this section.
(1) Compensation amounts. (i) For an
initial year enrollment of a Medicare
beneficiary into a Part D plan, the
compensation must be at or below the
fair market value of such services,

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published annually as a cut-off amount
by CMS.
(ii) For renewal years, compensation
may be up to 35 percent of the current
fair market value cut-off amounts
published annually by CMS.
(2) Aggregate compensation. (i) An
entity must not provide aggregate
compensation to its agents or brokers
greater than the renewal compensation
payable by the replacing plan on
renewal policies if an existing policy is
replaced with a like plan at any time.
(ii) An agent or broker must not
receive aggregate compensation greater
than the renewal compensation payable
by the replacing plan on renewal
policies if an existing policy is replaced
with a like plan type at any time.
(iii) The initial compensation is paid
for replacements between unlike plan
types.
(3) Compensation payment and
payment recovery. (i) Compensation
may only be paid for the enrollee’s
months of enrollment during a plan
year.
(ii)(A) Subject to paragraph (b)(3)(iii)
of this section, compensation payments
may be made at one time for the entire
current plan year or in installments
throughout the year.
(B) Compensation may not be paid
until January 1 of the compensation year
and, if paid at all, must be paid in full
by December 31 of the compensation
year.
(iii) When a beneficiary disenrolls
from an MA plan, compensation paid to
agents and brokers must be recovered
for those months of the plan year for
which the beneficiary is not enrolled.
For disenrollments occurring within the
first 3 months, the entire compensation
must be recovered when the
disenrollment was the result of agent or
broker behavior.
(4) Compensation structure. (i) A Part
D sponsor must establish a
compensation structure for new and
replacement enrollments and renewals
effective in a given plan year.
Compensation structures must be in
place by the beginning of the plan
marketing period, October 1.
(ii) Compensation structures must be
available upon CMS request including
for audits, investigations, and to resolve
complaints.
(c) Annual training. The Part D
sponsor must ensure that all agents and
brokers selling Medicare products are
trained annually on the following:
(1) Medicare rules and regulations.
(2) Details specific to the plan
products they intend to sell.
(d) Annual testing. The Part D sponsor
must ensure that all agents and brokers

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2071

selling Medicare products are tested
annually, to ensure the following:
(1) Appropriate knowledge and
understanding of Medicare rules and
regulations.
(2) Details specific to the plan
products they intend to sell.
*
*
*
*
*
(h) Finder’s (referral) fees. Finder’s
(referral) fees paid to all agents and
brokers—
(1) May not exceed an amount CMS
determines could reasonably be
expected to affect enrollee behavior
while not exceeding the value of the
health-related service or activity itself;
and
(2) Must be included in the total
compensation not to exceed the fair
market value for that calendar year.
■ 91. Amend § 423.2320 by adding
paragraph (c) to read as follows:
§ 423.2320
sponsors.

Payment processes for Part D

*

*
*
*
*
(c) In the event that a manufacturer
declares bankruptcy, as described in
Title 11 of the United States Code and,
as a result of the bankruptcy, does not
pay the quarterly invoices described in
§ 423.2315(b)(10) by the time of the
Coverage Gap Discount Reconciliation
described in paragraph (b) of this
section, CMS adjusts the Coverage Gap
Discount Reconciliation amount of each
of the affected Part D sponsors to
account for the total unpaid quarterly
invoiced amount owed to each of the
Part D sponsors in the contract year
being reconciled.
■ 92. Amend § 423.2325 by adding
paragraph (h) to read as follows:
§ 423.2325 Provision of applicable
discounts.

*

*
*
*
*
(h) Treatment of employer group
waiver plans. (1) Beginning 2014, Part D
sponsors offering employer group
waiver plans must provide applicable
discounts to employer group waiver
plan enrollees as determined consistent
with the defined standard benefit.
(2)(i) Part D sponsors offering
employer group waiver plans must
report to each employer or union group
client projected and actual aggregate
manufacturer payments attributable to
the EGWPs enrollees, at least annually
or upon request.
(ii) CMS may request documentation
that notice as described in paragraph
(h)(2)(i) of this section has been
provided by the Part D sponsor and
received by the employer or union
group.

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2072

Federal Register / Vol. 79, No. 7 / Friday, January 10, 2014 / Proposed Rules

Subpart Y [Reserved]
93. Part 423 is amended by adding
reserved subpart Y.
■ 94. Part 423 is amended by adding
subpart Z to read as follows:
■

Subpart Z—Recovery Audit Contractor Part
C Appeals Process
Sec.
423.2600 Payment appeals.
423.2605 Request for reconsideration.
423.2610 Hearing official review.
423.2615 Review by the Administrator.

Subpart Z—Recovery Audit Contractor
Part C Appeals Process
§ 423.2600

Payment appeals.

If the Part D RAC did not apply its
stated payment methodology correctly, a
Part D plan sponsor may appeal the
findings of the applied methodology.
The payment methodology itself is not
subject to appeal.

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§ 423.2605

Request for reconsideration.

(a) Time for filing a request. The
request for reconsideration must be filed
with the designated independent
reviewer within 60 calendar days from
the date of the demand letter received
by the Part D plan sponsor.
(b) Content of request. (1) The request
for reconsideration must be in writing
and specify the findings or issues with
which the Part D plan sponsor
disagrees.
(2) The Part D plan sponsor must
include with its request all supporting
documentary evidence it wishes the
independent reviewer to consider.
(i) This material must be submitted in
the format requested by CMS.
(ii) Documentation, evidence, or
substantiation submitted after the filing
of the reconsideration request will not
be considered.
(c) CMS Rebuttal. CMS may file a
rebuttal to the Part D plan sponsor’s
reconsideration request.
(1) The rebuttal must be submitted
within 30 calendar days of the review
entity’s notification to CMS that it has
received the Part D plan sponsor’s
reconsideration request.
(2) CMS sends its rebuttal to the Part
D plan sponsor at the same time it is
submitted to the independent reviewer.
(d) Review entity. An independent
reviewer conducts the reconsideration.
The independent reviewer reviews the
demand for repayment, the evidence
and findings upon which it was based,
and any evidence that the Part D plan
sponsor or CMS submitted in
accordance with this section.
(e) Notification of decision. The
independent reviewer informs CMS and
the Part D plan sponsor of its decision
in writing.

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(f) Effect of decision. A
reconsideration decision is final and
binding unless the Part D plan sponsor
requests a hearing official review in
accordance with § 423.2610.
(g) Right to hearing official review. A
Part D plan sponsor that is dissatisfied
with the independent reviewer’s
reconsideration decision is entitled to a
hearing official review as provided in
§ 423.2610.
§ 423.2610

Hearing official review.

(a) Time for filing a request. A Part D
plan sponsor must file with CMS a
request for a hearing official review
within 15 calendar days from the date
of the independent reviewer’s issuance
of a determination.
(b) Content of the request. (1) The
request must be in writing and must
provide evidence or reasons or both to
substantiate the request.
(2) The Part D plan sponsor must
submit with its request all supporting
documentation, evidence, and
substantiation that it wants to be
considered.
(3) No new evidence may be
submitted.
(4) Documentation, evidence, or
substantiation submitted after the filing
of the request will not be considered.
(c) CMS rebuttal. CMS may file a
rebuttal to the Part D plan sponsor’s
hearing official review request.
(1) The rebuttal must be submitted
within 30 calendar days of the Part D
plan sponsor’s submission of its hearing
official review request.
(2) CMS sends its rebuttal to the Part
D plan sponsor at the same time it is
submitted to the hearing official.
(d) Conducting a review. A CMSdesignated hearing official conducts the
hearing on the record.
(1) The hearing is not to be conducted
live or via telephone unless the hearing
official, in his or her sole discretion,
requests a live or telephonic hearing.
(2) In all cases, the hearing official’s
review is limited to information that
meets one or more of the following:
(i) The Part D RAC used in making its
determinations.
(ii) The independent reviewer used in
making its determinations.
(iii) The Part D plan sponsor submits
with its hearing request.
(iv) CMS submits in accordance with
paragraph (c) of this section.
(3) Neither the Part D plan sponsor
nor CMS may submit new evidence.
(e) Hearing official decision. The CMS
hearing official decides the case within
60 days and sends a written decision to
the Part D plan sponsor and CMS,
explaining the basis for the decision.
(f) Effect of hearing official decision.
The hearing official’s decision is final

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and binding, unless the decision is
reversed or modified by the CMS
Administrator in accordance with
§ 423.2610.
§ 423.2615

Review by the Administrator.

(a) Request for review by
Administrator. If a Part D plan sponsor
is dissatisfied with the hearing official’s
decision, it may request that the CMS
Administrator review the decision.
(1) The request must be filed with the
CMS Administrator within 15 calendar
days of the date of the hearing official’s
decision.
(2) The request must provide evidence
or reasons to substantiate the request.
(b) Content of request. The Part D plan
sponsor must submit with its request all
supporting documentation, evidence,
and substantiation that it wants to be
considered.
(1) Documentation, evidence, or
substantiation submitted after the filing
of the request will not be considered.
(2) Neither the Part D plan sponsor
nor CMS may submit new evidence.
(c) Discretionary review. After
receiving a request for review, the CMS
Administrator has the discretion to
review the hearing official’s decision in
accordance with paragraph (e) of this
section or to decline to review said
decision.
(d) Notification of decision whether to
review. The CMS Administrator notifies
the Part D plan sponsor within 45 days
of receiving the Part D plan sponsor’s
hearing request of whether he or she
intends to review the hearing official’s
decision. If the Administrator agrees to
review the hearing official’s decision,
CMS may file a rebuttal statement
within 30 days of the Administrator’s
notice to the plan sponsor that the
request for review has been accepted.
CMS sends its rebuttal statement to the
plan sponsor at the same time it is
submitted to the Administrator. If the
CMS Administrator declines to review
the hearing official’s decision, the
hearing official’s decision is final and
binding.
(e) Administrator review. If the CMS
Administrator agrees to review the
hearing official’s decision, he or she
determines, based upon this decision,
the hearing record, and any arguments
submitted by the Part D plan sponsor or
CMS in accordance with this section,
whether the determination should be
upheld, reversed, or modified. The CMS
Administrator furnishes a written
decision, which is final and binding, to
the Part D plan sponsor and to CMS.

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Federal Register / Vol. 79, No. 7 / Friday, January 10, 2014 / Proposed Rules
PART 424—CONDITIONS FOR
MEDICARE PAYMENT
95. The authority citation for part 424
continues to read as follows:

■

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

96. Amend § 424.530 by adding
paragraph (a)(11) to read as follows:

■

§ 424.530 Denial of enrollment in the
Medicare program.

(a) * * *
(11) Prescribing authority. (i) A
physician or eligible professional’s Drug
Enforcement Administration (DEA)
Certificate of Registration to dispense a
controlled substance is currently
suspended or revoked; or
(ii) The applicable licensing or
administrative body for any State in
which a physician or eligible
professional practices has suspended or
revoked the physician or eligible
professional’s ability to prescribe drugs,
and such suspension or revocation is in
effect on the date physician or eligible
professional submits his or her
enrollment application to the Medicare
contractor.
*
*
*
*
*
■ 97. Amend § 424.535 by revising the
section heading and adding paragraphs
(a)(13) and (14) to read as follows:
§ 424.535 Revocation of enrollment in the
Medicare program.

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(a) * * *
(13) Prescribing authority. (i) The
physician or eligible professional’s Drug
Enforcement Administration (DEA)
Certificate of Registration is suspended
or revoked; or
(ii) The applicable licensing or
administrative body for any state in
which the physician or eligible
professional practices suspends or

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revokes the physician or eligible
professional’s ability to prescribe drugs.
(14) Improper prescribing practices.
CMS determines that the physician or
eligible professional has a pattern or
practice of prescribing Part D drugs that
falls into one of the following categories:
(i) The pattern or practice is abusive
and represents a threat to the health and
safety of Medicare beneficiaries. In
making this determination, CMS
considers the following factors:
(A) Whether there are diagnoses to
support the indications for which the
drugs were prescribed.
(B) Whether there are instances when
the necessary evaluation of the patient
for whom the drug was prescribed could
not have occurred (for example, the
patient was deceased or out of state at
the time of the alleged office visit).
(C) Whether the physician or eligible
professional has prescribed controlled
substances in excessive dosages that are
linked to patient overdoses.
(D) The number and type(s) of
disciplinary actions taken against the
physician or eligible professional by the
licensing body or medical board for the
State or States in which he or she
practices, and the reason(s) for the
action(s).
(E) Whether the physician or eligible
professional has any history of ‘‘final
adverse actions’’ (as that term is defined
in § 424.502).
(F) The number and type(s) of
malpractice suits that have been filed
against the physician or eligible
professional related to prescribing that
have resulted in a final judgment against
the physician or eligible professional or
in which the physician or nonphysician practitioner has paid a
settlement to the plaintiff(s) (to the
extent this can be determined).
(G) Whether any State Medicaid
program or any other public or private
health insurance program has restricted,

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2073

suspended, revoked, or terminated the
physician or eligible professional’s
ability to prescribe medications, and the
reason(s) for any such restriction,
suspension, revocation, or termination.
(H) Any other relevant information
provided to CMS.
(ii) The pattern or practice of
prescribing fails to meet Medicare
requirements. In making this
determination, CMS considers the
following factors:
(A) Whether the physician or eligible
professional has a pattern or practice of
prescribing without valid prescribing
authority.
(B) Whether the physician or eligible
professional has a pattern or practice of
prescribing for controlled substances
outside the scope of the prescriber’s
DEA registration.
(C) Whether the physician or eligible
professional has a pattern or practice of
prescribing drugs for indications that
were not medically accepted—that is,
for indications neither approved by the
FDA nor medically accepted under
section 1860D–2(e)(4) of the Act— and
whether there is evidence that the
physician or eligible professional acted
in reckless disregard for the health and
safety of the patient.
*
*
*
*
*
(Catalog of Federal Domestic Assistance
Program No. 93.773, Medicare—Hospital
Insurance; and Program No. 93.774,
Medicare—Supplementary Medical
Insurance Program)
Dated: October 21, 2013.
Marilyn Tavenner,
Administrator, Centers for Medicare &
Medicaid Services.
Dated: December 11, 2013.
Kathleen Sebelius,
Secretary, Department of Health and Human
Services.
[FR Doc. 2013–31497 Filed 1–6–14; 4:15 pm]
BILLING CODE 4120–01–P

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