M+C Preamble 2

Health Hippo: M+C Preamble

E. Relationships With Providers

Subpart E focuses on requirements for relationships between M+C
organizations and health care professionals with whom they contract
or enter agreements to provide services to Medicare beneficiaries
enrolled in an M+C plan. These requirements encourage communication,
coordination, and cooperation between organizations and health care
professionals on plan rules and policies. This subpart also includes
other new provider protections enacted as part of the BBA;
incorporates provisions affecting health professionals that are
consistent with the recommendations contained in the Consumer Bill of
Rights and Responsibilities, as recommended by the President’s
Advisory Commission on Consumer Protection and Quality in the Health
Care Industry, the model act adopted by the National Association of
Insurance Commissioners, credentialing standards of nationally
accepted accrediting bodies, and QISMC standards; and incorporates
policies already applicable to provider and plan relationships
included in the current part 417 or other policy issuances. In
February 1998, an executive order was issued directing the Secretary
to comply to the extent possible through administrative activities
with the standards contained within the Consumer Bill of Rights
presented to the President in November 1997. Many of the issues were
addressed in the BBA and implementation of the regulations will
expand compliance with the directive.

1. Participation Procedures (Sec. 422.202)(a))

Section 1852(j)(1) requires an M+C organization that offers
benefits under an M+C plan through agreements with physicians to
establish reasonable procedures relating to their participation under
the plan. This is a new federal requirement for Medicare contracting
managed care organizations. Current rules in part 417 do not mandate
that HMOs/CMPs adopt provider participation rules. However, some
Medicare contractors have adopted provider participation policies in
response to state laws or plan policies.

We are interpreting this provision to apply to all M+C
organizations that operate M+C plans providing benefits through a
limited network of contracting health care professionals or groups of
health care professionals, that is, all types of M+C coordinated care
plans, such as HMOs, PPOs, etc., as well as network M+C MSA plans. In
the case of M+C private fee-for-service plans and non-network M+C MSA
plans, there are no limits on the number of health professionals who
may provide services covered under the M+C plan, as long as they
accept the plan’s terms and conditions for payment. These plans in
essence operate on an “any willing provider” approach to which the
procedures in section 1852(j)(1) would not be relevant. Since any
provider has the right to participate, rules requiring a notice of
adverse participation decisions, and appeals from such decisions
could have no applicability. It also would not be feasible to provide
the notices required under section 1852(j)(1) and Sec. 422.202(a)
(discussed below) to the virtually unlimited number of providers who
would be entitled to provide services to a M+C private
fee-for-service or non-network M+C MSA plan enrollees.

The statutory requirements in section 1852(j)(1) focus on three
procedural aspects–ensuring that providers are aware of the plan
participation rules; requiring written notice when participation
decisions are adverse; and affording the provider an opportunity to
appeal adverse plan participation decisions. The statute specifies
that these procedures apply to plan relationships with physicians. In
reviewing the model act of the National Association of Insurance
Commissioners (NAIC), QISMC standards, and many state laws and
regulations, we found that these procedural protections generally
have been applied to all health care professionals who are
responsible for delivering services to beneficiaries of the plan, not
just physicians. Since Medicare-payments can be made to practitioners
other than physicians and since M+C organizations may furnish
services utilizing a range of licensed health care professionals, we
believe it is appropriate to apply these requirements to all health
care professionals if coverage for their services is provided under
the M+C plan. For purposes of Sec. 422.202 and Sec. 422.204, these
include, but are not limited to, a physician, podiatrist,
optometrist, chiropractor, psychologist, dentist, physician
assistant, physical or occupational therapist, speech-language
pathologist, audiologist, nurse practitioner, clinical nurse
specialist, certified nurse anesthetist, and certified nurse-midwife
and licensed certified social worker. Thus, under our authority under
section 1856(b)(1) to establish standards for M+C organizations, Sec.
422.202 requires that all professionals as listed above should be
provided with rules of participation, written notices of
participation decisions and an appeal process.

With regard to types of procedures that are subject to disclosure,
written notification and appeal requirements, we are adopting a broad
definition of procedures that might affect participation in the plan
or network. In Sec. 422.202 we specify that procedural requirements
should include any rules that affect the process of direct delivery
of services by a health professional to a Medicare beneficiary. The
examples include terms of payment, utilization review, quality
improvement programs, credentialing, data reporting, confidentiality,
guidelines or criteria for furnishing services, and other rules
related to administrative policy. All of these procedures affect how
a health care professional would participate in a plan and should
therefore be divulged up front prior to a health care professional’s
agreement to participate in the plan. In addition, we believe that
full disclosure in advance, to potential participating health care
professionals, of the broad range of procedures relating to
participation should reduce subsequent challenges or appeals. While
the disclosure requirement in Sec. 422.202(a)(1) does not apply
directly to M+C private fee-for- service plans, as discussed below,
M+C organizations offering such plans will be required to make the
information described in Sec. 422.202(a)(1) available to providers
treating enrollees of the plan.

Section 1852(j) requires the provision of written notice of the
participation rules. We are requiring in Sec. 422.202 that any
material changes in rules must be provided in writing in advance of
implementation. Such advance communication would enable health care
professionals to evaluate their continued participation prior to
instituting a formal appeal process regarding any rules they believe
are adverse. This benefits M+C organizations and providers in
allowing the health care professional to judge what is adverse as
this can vary among [[Page 35001]] individual health care
professionals; what is adverse to one physician or health care
professional may not be adverse to another.

2. Consultation (Sec. 422.202(b))

Consistent with section 1852(j)(2), Sec. 422.202(b) requires an
M+C organization to consult with physicians or relevant health care
professionals who have entered into participation
agreements/contracts with the organization regarding the
organization’s medical policy, quality and medical management
procedures. Pursuant to our authority in section 1856(b)(1) to
establish standards under the M+C program, in addition to requiring
consultation on any aspect of clinical policy, we have included three
specific standards relating to the development of practice
guidelines–(1) practice guidelines and utilization management
guidelines must be based on reasonable medical evidence or consensus
of relevant practitioners, developed in consultation with
participating practitioners, and reviewed and updated periodically;
(2) the guidelines must be communicated to practitioners and, as
appropriate, enrollees; and (3) decision making in utilization
management, enrollee education, interpretation of covered benefits,
and other areas to which the guidelines are applicable must be
consistent with the guidelines. These three standards are taken from
QISMC discussed in section II.D. of this preamble. These national
standards also are consistent with the NAIC model act and language
adopted for state laws regarding managed care. We believe these
standards ensure that practitioners are fully consulted in all
aspects of the use of practice guidelines from development to

3. Treatment of Subcontracted Networks (Sec. 422.202 (c))

In today’s business environment, managed care organizations
delegate not only the provision of services to subcontracted
networks, but also a variety of policy making and implementation
responsibilities. Each health care professional is an integral part
of the organization’s health care delivery system, whether he
contracts directly with the organization or through an intermediary
entity, such as an Independent Practice Association (IPA). Therefore,
under our authority in section 1856(b)(1) to establish M+C standards,
in Sec. 422.202(c) we require provider protections not only for
direct contracting physicians and health care professionals but also
for all subcontracted arrangements. Extension of the BBA provisions
to subcontracts means that providers within subnetworks (e.g. an IPA)
receive the rules of participation, written notices, and have an
opportunity to appeal. Thus, health care professionals within the
subcontracted groups should be included in the procedures established
for participation appeals and in the formulation of medical policy
for the organization. In cases where subnetworks maintain most of the
medical records for the Medicare beneficiaries they serve, it is
essential that the formulation of policy includes all of the
resources that contribute to fair and equitable treatment for
beneficiaries. We also believe that subnetworks should have the
ability to grieve or appeal decisions for the providers within their

4. Provider Credentialing and Provider Rights (Sec. 422.204)

Section 422.204(a), “Basic Requirements,” states that the M+C
organization must have a system for credentialing physicians and
other health care professionals. The M+C organization must ensure
that providers meet applicable State and Federal requirements. Basic
benefits must be provided through, or payments must be made to,
providers that meet applicable requirements of title XVIII and part A
of title XI of the Act. Also, in the case of providers meeting the
definition of “provider of services” in section 1861(u), basic
benefits may only be provided through such providers if they have a
provider agreement with HCFA permitting them to provide services
under original Medicare. An M+C organization may not employ or
contract with providers excluded from participation in Medicare. M+C
organizations, at a minimum, should check the OIG website at progorg/oig for the listing of excluded
providers and entities. These requirements are promulgated pursuant
to our authority under section 1856(b)(1) to establish M+C standards
by regulation, and are based on (1) the requirement in section
1852(a)(1) of the Act that Medicare covered services be furnished
through Medicare qualified providers, (2) existing requirements in
Sec. 417.416, and (3) detailed standards developed under QISMC,
discussed in section D. above.

Section 422.204(b), “Discrimination Prohibited,” prohibits M+C
organizations from discriminating with respect to provider
participation, provider reimbursement, or provider indemnification to
any provider acting within the scope of his license or certification
under applicable State law, solely on the basis of such license or
certification. These requirements are based on section 1852(b)(2).
This does not prohibit plans from including providers only to the
extent necessary to meet the needs of the plan’s enrollees, ensure
quality and control costs, and does not prohibit an organization from
reimbursing different specialty providers differing fees for their
services. It is however, the responsibility of the organization to
adopt policies related to participation, reimbursement, and
indemnification based on reasonable criteria. Organizations may want
to consider such measures as health outcomes, satisfaction surveys,
market saturation of the provider type or other legitimate reasons.

Under Sec. 422.204(c), “Denial, suspension, or termination of a
contract,” organizations offering coordinated care or network MSA
plans are required to provide information on their plan participation
criteria and an appeals process for participation decisions,
including decisions involving denial, suspension or termination of
contracts. We have incorporated the timeframes for contract
termination notification between the M+C organization and its
providers contained within the NAIC model act. As discussed in
section C. above, we have incorporated similar timeframes for notice
to enrollees about changes in the provider network, including changes
that result from a termination covered under Sec. 422.204(c).

The notice and appeals requirements in this part are based on the
requirement in section 1852(j)(1)(C), requiring a process for
appealing adverse participation decisions, and, as noted above, on
the NAIC model act, and our authority under section 1856(b)(1) to
establish standards under Part C.

5. Interference With Health Care Professionals’ Advice to
Enrollees Prohibited (Sec. 422.206)

Section 422.206 (a) incorporates the requirements set forth in
section 1852(j)(3)(A). This section prohibits an M+C organization
from interfering with the advice of a health care professional to an
enrollee who is his or her patient. Thus the health professional may
act within his or her scope of practice in advising the enrollee
about their health status, all relevant medical or treatment options
available regardless of whether care or treatment is provided under
the plan. For purposes of Sec. 422.206, the term health care
professional includes those listed in section 1852(j)(3)(D) of the
Act. Pursuant to our authority in section 1852(b)(1) to establish
standards [[Page 35002]] under the M+C program, Sec. 422.206(a)
includes standards from the Consumer Bill of Rights that further
delineate the types and mode of communication between patients and
health care providers regarding health care treatment options within
which interference is prohibited. While the scope of this section
governs communication regarding care or treatment advice, we
recognize that patients seek advice from physicians regarding
insurance coverage choices as well as treatment option choices.
Physicians can disclose their participation in M+C organizations,
however, we are concerned about any inappropriate steerage based on
knowledge of a beneficiary’s health status or the physician’s
financial interest. Program instructions will be issued as HCFA
continues to clarify policy in the area of provider marketing and the
role of physicians and other health care professionals in
disseminating M+C information to beneficiaries.

6. Conscience Protection (Sec. 422.206)

Section 422.206(b) incorporates the requirements of section
1852(j)(3)(B). The regulations state that the prohibition against
interference with the content of advice a health care provider gives
to enrollees regarding medical treatment should not be construed as
requiring counseling by a professional or a referral to a service by
that professional, if there is an objection based on moral or
religious grounds, and the M+C organization fulfills certain
notification requirements to prospective and current enrollees. The
regulation incorporates the notification process and time frames
included in the law and clarifies that the plan must also notify HCFA
at the time of application and within 10 days of submitting its ACR
proposal. With respect to current enrollees, the organization is
eligible for the exception to the rule in Sec. 422.206(a)(1) if it
provides notice within 90 days after adopting the policy at issue;
however, under Sec. 422.111(d), notice of such a change must be
provided in advance.

7. Physician Incentive Plans (Secs. 422.208 and 422.210)

Consistent with section 1852(j)(4), regulations at Secs. 422.208
and 422.210 outline the limitations on the operation of physician
incentive plans. The provisions in this section are the same as those
previously included in Sec. 417.479 with some reduction in the amount
of data that must be disclosed by the organization. HCFA has
determined that the capitated data is no longer required because
other sources of data, such as encounter data required by the Act and
the National Data Reporting Requirements (NDRR) are available. The
provisions are consistent with the provisions under section
1852(j)(4) which prohibit specific payments as a disincentive to
provide services to an individual enrollee and which place limits on
the transfer of substantial financial risk for referral services to
physicians or physician groups contracting with the M+C organization.
The provisions in these sections apply to all coordinated care and
network MSA plans. M+C private fee-for-service plans are prohibited
from having a physician incentive plan because they may not place
their providers at financial risk. The physician incentive plans
regulations require that M+C organizations conduct customer
satisfaction surveys of both enrollees and disenrollees if any
physician or physician group in an M+C organization’s network is
placed at substantial risk for referral services as defined in Sec.
422.208. (Please note that there are at least two other uses of the
term “substantial financial risk” contained in legislation or
regulation. Specifically, section 216 of the Health Insurance
Portability and Accountability Act of 1996 addressing safe harbors
from the anti-kickback statute and the determination of substantial
financial risk related to PSOs (63 FR 18124, April 14, 1998)) M+C
organizations may satisfy their requirement for enrollee surveys
either by their mandated inclusion in HCFA’s national administration
of the Consumer Assessments of Health Plans Study (CAHPS) or, if the
organization is excluded from CAHPS due to not having contracted with
us for at least one year, by conducting their own surveys.

8. Limitation on Provider Indemnification (Sec. 422.212)

Section 422.212 prohibits an M+C organization from having a
provider, or group of providers, indemnify the organization against
any liability arising from the organization’s denial of medically
necessary care. This prohibition is a very narrow exception for a
civil action brought by, or on behalf of, an enrollee where the
damage is due to a determination by the M+C organization to deny
medically necessary care. The regulation includes the statutory
language from section 1852(j)(5) without elaboration.

9. Special Rules for Services Provided by Noncontract Providers
(Sec. 422.214)

Consistent with section 1852(k) and section 4002(e), the
regulations in Sec. 422.214 require any health care provider that
does not have a contract establishing payment amounts for services
furnished to a beneficiary enrolled in an M+C coordinated care plan
to accept as payment in full, the amounts that could have been
collected if the beneficiary were enrolled in original Medicare. An
M+C organization (other than an M+C MSA plan) satisfies its liability
for Medicare covered services if the provider receives the total
amount that would have been received if the beneficiary were enrolled
in original Medicare. This amount equals the total of Medicare’s
payment (including any applicable deductible and coinsurance amounts)
and any balance billing amount that would have been allowed by
original Medicare. In the case of a participating physician or
supplier, this amount would equal the Medicare fee schedule amount
for the service. For a nonparticipating physician, this amount would
equal 115 percent of the fee schedule amount for nonparticipating
physicians (which is 95 percent of the fee schedule amount applicable
to participating physicians). Of these amounts, the provider could
collect from the M+C plan enrollee the cost sharing amount required
under the M+C plan, as approved by HCFA under subpart G of part 422
and the remainder from the M+C organization.

Section 1866(a)(1)(O) places a limitation on what a provider of
services (as defined in section 1861(u)) must accept as payment in
full for services furnished to an M+C plan enrollee. The limit is
applicable to those institutional type providers of service that do
not have in effect a contract with the M+C organization establishing
payment amounts for services furnished to an enrollee. The limitation
equals the amount that would have been payable for a beneficiary
enrolled in original Medicare less any payments that could be
collected directly from Medicare representing graduate medical
education (both direct and indirect).

10. Special Rules for M+C Private Fee-for-Service Plans.

Special rules for M+C private fee-for-service plans are discussed
in section IV of this preamble.

11. Exclusion of Services Furnished Under a Private Contract (Sec.

Section 422.220 prohibits an M+C organization offering an M+C plan
from paying for services furnished to an [[Page 35003]] enrollee by a
physician or other health care professional who has signed a private
contract as described in section 1802(b). Section 4507 of the BBA
specifies that nothing in title XVIII of the Act shall prohibit a
physician or practitioner from privately contracting with a
beneficiary to furnish services for which no claim shall be submitted
to Medicare and no Medicare payment shall be made directly or
indirectly or by any organization paid by Medicare where the
physician or practitioner has opted out of Medicare for 2 years.
Therefore, no payment may be made by an M+C organization for services
furnished to Medicare enrollees by a physician or practitioner who
opts out of Medicare where he or she has signed a private contract
with an enrollee. There is one exception: the physician or
practitioner who has opted out of Medicare may not ask a beneficiary
who requires emergency or urgent care to sign a private contract.
Therefore, where a physician or practitioner who has opted out of
Medicare provides emergency or urgent care to an enrollee of an M+C
organization, the organization must pay for the emergency or urgent
care the enrollee required. For purposes of this provision, we
consider “urgent care” to mean urgently needed services as defined in
Sec. 422.2. 12. M+C Plans and the Physician Referral Prohibition

One other item that relates to M+C organizations but is not
contained within the part 422 regulations is the physician referral

a. The prepaid health plan exception: Under section 1877, if a
physician or a member of a physician’s immediate family has a
financial relationship with a health care entity (through an
ownership interest or a compensation relationship), the physician may
not refer Medicare patients to that entity for any of 11 designated
health services, unless an exception applies. Under an exception in
section 1877(b)(3), the prohibition on referrals does not apply to
services furnished by certain prepaid health plans. To qualify for
the exception, the services must be furnished by one of the following
organizations to its enrollees:

  • Organizations with a contract under section 1876, which
    authorizes us to enter into contracts with HMOs and competitive
    medical plans (CMPs) to furnish covered items and services on a
    risk-sharing or reasonable cost basis.

  • Organizations with health care prepayment plans, as described
    in section 1833(a)(1)(A), which authorizes payment for Medicare
    Part B services to prepaid health plans on a reasonable cost

  • Organizations receiving payments on a prepaid basis under a
    demonstration project under section 402(a) of the Social Security
    Amendments of 1967 or section 222(a) of the Social Security
    Amendments of 1972.

  • Qualified health maintenance organizations, within the meaning
    of section 1310(d) of the Public Health Service Act.

As discussed in section I. of this preamble, beginning in January
1999, the new M+C program replaces the HMO and CMP risk contracting
program provided for in section 1876.

In enacting the BBA, Congress failed to revise section 1877(b)(3)
to except the services furnished under M+C coordinated care plans. We
believe that this must have been an oversight, since Congress
expressed no intention in the legislative history for the BBA of
subjecting existing managed care entities to the self-referral law.
In addition, subjecting physicians who have an ownership interest in
an M+C organization offering a coordinated care plan in which the
physicians participate, to the self-referral rules would be
contradictory to Congress’ purposes in establishing PSOs as
coordinated care plans. PSOs are defined in the BBA provisions as
entities that must be organized and operated by a provider (which may
be a physician) or a group of affiliated health care providers (which
may include physicians). These providers must share a substantial
financial risk for the provision of items and services and have at
least a majority financial interest in the entity. The self-referral
provisions, on the other hand, are specifically designed to
discourage physician ownership of entities that provide a broad range
of services to Medicare beneficiaries.

b. No risk of program or patient abuse exception–Coordinated Care
Plans: Although there is no statutory exception for services
furnished under coordinated care plans, section 1877(b)(4) allows us
to create an exception to the referral prohibition for a financial
relationship which the Secretary determines, and specifies in
regulations, does not pose a risk of program or patient abuse. An
example of program abuse is Medicare payment for unnecessary
services. We will pay M+C organizations for enrollees in coordinated
care plans on a capitated basis and beneficiaries will be responsible
for premiums and cost sharing. Section 1854 limits HCFA’s capitation
amount and the total amount of beneficiary premiums and cost-sharing.
Because M+C organizations offering coordinated care plans will not be
paid for each additional service they provide, we believe that there
is no risk of over-utilization of services. Because HCFA’s capitation
amount and the total amount of beneficiary premiums and cost sharing
is limited, we believe that there is no risk of program or patient

Therefore, we are excluding from the physician referral
prohibition services furnished under a coordinated care plan to an
enrollee. This exception applies in all cases in which a physician
has an ownership interest in or a compensation relationship with the
M+C organization offering the coordinated care plan. We are making a
change in the regulation text at Sec. 411.355(c)(5).

c. No risk of program or patient abuse exception–M+C MSA Plans:
M+C organizations offering an M+C MSA plan are paid a fixed
capitation amount for beneficiaries enrolled in the plan, and section
1853(a) limits HCFA’s capitation amount and section 1859(a)(3)(A)
limits the amount that M+C organizations under M+C MSA plans will pay
entities for furnishing covered services. Section 1859(a)(3)(B)
limits the annual deductible amount. However, the Act does not
similarly limit the amount that a beneficiary will have to pay as
premiums and costsharing; that is, there is no limit on beneficiary
balance billing by the entities that furnish health care services.
See section IV. below. Thus, although there is no risk of program
abuse, there is a risk of patient abuse. Therefore, we are not
excluding from the physician referral prohibition services furnished
under an M+C MSA.

d. No risk of program or patient abuse exception–Private fee-for-
service plans: Section 1853(a) also limits HCFA’s capitation amount
to be paid to M+C organizations under private fee-for-service-plans.
Because there will not be excessive payments by the Medicare program,
there is no risk of program abuse. However, section 1859(b)(2)(A)
provides that the plans will pay an individual or entity furnishing
services on a fee-for-service basis. Since beneficiaries are
responsible for coinsurance amounts, copayments, and balance billing
amounts under private fee-for-service plans (see section IV. of this
preamble), beneficiaries are subject to added out-of-pocket liability
if physicians providing services under a fee-for-service plan order
additional unneeded services in order to obtain additional fee-for-
service payments from the M+C organization offering the private fee-
for-service plan. Thus, [[Page 35004]] although there is no risk of
program abuse in this case, excessive Medicare payment, there is a
risk of patient abuse. Therefore, we are not excluding from the
physician referral prohibition services furnished under a private
fee-for-service plan.

F. Payments to M+C Organizations

1. General Provisions (Sec. 422.250)

Subpart F of part 422 sets forth rules that govern Medicare
payment to M+C organizations, including the methodology used to
calculate M+C capitation rates. These rules also apply for 1998 under
section 1876 risk contracts.

Payments and Adjustments: We provide in Sec. 422.250(a)(1) that,
with the exception of payments under M+C MSA plans and payments for
ESRD enrollees in all other plans, which we discuss below, we will
pay M+C organizations for each enrollee in an M+C plan they offer, a
monthly payment that is equal to 1/12th of the county-wide (or, in
the case of ESRD enrollees, 1/12th of the State rate) “capitation
rate” under Sec. 422.252 that applies for the county in which the
enrollee lives, adjusted by demographic factors applicable to that
enrollee. Effective January 1, 2000, however, section 1853(a)(3)(C)
directs us to implement a risk adjustment methodology that accounts
for variation in per capita cost based on health status and
demographic factors. Implementation of health status risk adjusters
has implications for M+C plan data submissions, and we discuss this
issue further below.

In addition to health status and demographic risk adjustments, we
make an adjustment, under Sec. 422.250(a)(2)(i)(A), to the payment
rate for M+C enrollees with end-stage renal disease (ESRD). Under
Sec. 422.250(a)(2)(i)(B), we make an adjustment that is the
equivalent to a 50 cent reduction for each renal dialysis treatment
that we will use to help pay for the ESRD network program in the same
manner as other reductions are used in original Medicare. Finally,
under Sec. 422.250(b), we provide for making retroactive adjustments
to the aggregate monthly payment to an M+C organization to reflect
any difference between the actual number of enrollees and the number
upon which we had based the organization’s advance monthly payment.

Under Sec. 422.250(a)(2)(ii) for M+C MSA plan enrollees, we make a
monthly payment to the M+C organization as described above less the
amount (if any) identified in Sec. 422.262(c)(1)(ii) to be deposited
in the M+C MSA. In addition, we deposit in the M+C MSA the lump sum
amounts (if any) determined in accordance with Sec. 422.262(c). See
section III. below for a more complete discussion of payments under
M+C MSA plans.

In Sec. 422.250(a)(2)(iii), we provide for adjustments to be made
to payments under RFB plans (which are limited to members of a
religious and fraternal benefit plan) to ensure that the payment
level is appropriate for the actuarial characteristics and experience
of [RFB plan] enrollees.

Payment Areas: In Sec. 422.250(c)(1), we reflect the general rule,
under section 1853(d) of the Act, that the M+C payment area is a
county or equivalent area specified by HCFA. Under Sec.
422.250(c)(2), in the case of beneficiaries with ESRD, the payment
area is the State or equivalent area we specify. Additionally, in a
significant change to payment area policy from the section 1876
program, section 1853(d)(3) permits Governors of States to request
that we approve alternative geographic areas for payment rates. These
alternatives are either a single State-wide M+C payment area or a
metropolitan-based system in which all nonmetropolitan areas within
the State constitute a single payment area, and any of the following
constitutes a separate M+C payment area:

  • All portions of each single metropolitan statistical area
    within the State.

  • All portions of each primary metropolitan statistical area
    within each consolidated metropolitan statistical area within the

  • A consolidation of noncontiguous counties.

Section 1853(d)(3) directs us to approve a Governor’s request;
however, this section of the Act also directs us to subject these
requests to a budget neutrality requirement, and any payment for
alternative geographic areas cannot exceed the aggregate payments for
that State absent the adjustment. Additionally, the Governor’s
request must be submitted to us no later than February 1 of the year
preceding the contract year. This provision is implemented in Sec.

2. Annual Capitation Rates (Sec. 422.252)

Among the more significant payment changes in section 1853 is the
incremental separation of capitated Medicare payments from local fee-
for-service rates. Previously, Medicare had paid risk contractors
according to the Adjusted Average Per Capita Cost (AAPCC) payment
methodology. The AAPCC was based on Medicare fee-for-service
expenditures by county and was used to pay risk contractors through
December 31, 1997. These fee-for-service expenditures were adjusted
for demographic factors (that is, age; sex; institutional, welfare,
and employment status).

The AAPCC had been legitimately criticized for its wide range of
payment rates among geographic regions–in some cases it varied by
over 20 percent between adjacent counties. It was also criticized for
its poor risk adjustment capabilities and inappropriate provision of
graduate medical education funds to some Medicare risk plans.
Moreover, the AAPCC was criticized for setting erratic annual payment
updates, which often made it difficult for contracting health plans
to engage in long-term business planning. The BBA introduces a new
payment methodology that addresses these and other concerns, and we
discuss them in detail below.

“Greater of” Payment Rate: Since January 1, 1998, Medicare
capitation rates paid to section 1876 risk contractors for each
calendar year have been the greater of a blended capitation rate, a
minimum amount rate, or a minimum percentage increase. This same
methodology will apply to payments under M+C contracts.

  • The blended capitation rate is a blend of the area- specific
    (local) rate and the national rate, with the latter adjusted for
    input prices. The blended capitation rate is then adjusted by a
    budget neutrality factor.

  • The minimum amount rate will equal $367 per month per enrollee
    in 1998 for all areas in the 50 States and the District of
    Columbia. Outside the 50 States and the District of Columbia, the
    rate is not to exceed 150 percent of the 1997 AAPCC for those
    areas. The minimum amount rate will be adjusted each year using
    the update factors described below. (On an individual basis, our
    monthly payment may be more or less than the minimum amount due to
    the demographic or other risk factors applicable to that
    individual used to adjust the minimum amount rate.)

  • The minimum percentage increase is 2 percent. The minimum
    percentage increase rate for 1998 is 102 percent of the 1997
    AAPCC. Thereafter, it is 102 percent of the prior year’s rate.

3. Calculation and Adjustment Factors (Sec. 422.254)

Blend of Area-Specific and National Percentages: The 1997 AAPCC
capitation rates serve as the base for both the area-specific rates
in the blend and the minimum percentage increase rates. Section
1853(c)(2) stipulates that the blended area-specific/national rate
[[Page 35005]] (discussed further below) will be implemented over a 6
year transition period from 1998 through 2002 according to the
following schedule:

90 percent area-specific/10 percent national in 1998

82 percent area-specific/18 percent national in 1999

74 percent area-specific/26 percent national in 2000

66 percent area-specific/34 percent national in 2001

58 percent area-specific/42 percent national in 2002

50 percent area-specific/50 percent national in 2003 and

Section 1853(c)(6) also provides for a “national per capita M+C
growth percentage.” Each year, from 1998 through 2002, this national
growth percentage is applied to the national and local components of
the blended rate and to the floor rate (discussed below). The
national per capita growth percentage is HCFA’s projection of per
capita expenses, reduced by the following amounts established in
section 1853(c)(6): 0.8 percentage points in 1998 and 0.5 percentage
points each year from 1999 through 2002. After 2002, the reduction
amount is zero. This provision is implemented in Sec. 422.254(d).

As indicated above, the blended rates are adjusted by a budget
neutrality factor. Section 1853(c)(5) provides for a “budget
neutrality” adjustment to the blended capitation rate under Sec.
422.252(a), designed to ensure that the aggregate amount paid under
the M+C payment methodology equals the amount that would have been
paid if payments were based entirely on area-specific rates (as they
were under section 1876(a)). The statute requires that this budget
neutrality adjustment apply only to the blended capitation rate under
Sec. 422.252(a), rather than to the final capitation rate under Sec.
422.252. Since the capitation rate is based upon the highest of the
blended capitation rate, the minimum payment, and the prior year’s
payment plus 2 percent, the budget neutrality adjustment cannot
produce any further savings once the blended capitation rate is
reduced to the point where it is lower than the other two amounts in
every county. This is what happened for 1998 and 1999. For these
years, the budget neutrality adjustment reduced the blended rate to
the point where no county’s payment rate is based upon the blended
rate, since one of the two other rates is higher in every county.
Yet, even with this reduction, the goal of the budget neutrality
provision in section 1853(c)(5) was not met for 1998 and 1999. We are
considering seeking a statutory change to address this problem.

Area-Specific Component of the Blended Capitation Rate: Above we
discussed the relationship between area-specific and national rates
and how they are intended to develop into a 50/50 balance by the year
2003. Here we discuss features of the area-specific (local) rate and,
directly below, features of the national rate.

In 1998, the base for the area-specific rate is the 1997 AAPCC,
adjusted for 20 percent of the indirect medical education/direct
graduate medical education (GME) carve-out. This is a significant
change to payment policy under section 1876 Medicare “risk”
contracts. In accordance with section 1853(c)(3)(B), under Sec.
422.254(e)(2), we will remove all graduate medical education payments
in the base rate between 1998 and 2002 on the following schedule: 20
percent in 1998; 40 percent in 1999; 60 percent in 2000; 80 percent
in 2001; and 100 percent in 2002 and thereafter. These GME funds will
be removed from the area-specific portion of the blended rate. Since
the national portion of the blend is computed based on the adjusted
local rates, it also reflects removal of these GME funds. Teaching
hospitals will be paid directly for the GME costs associated with
Medicare managed care enrollees under Sec. 412.322.

Additionally, pursuant to section 1853(c)(3)(C)(ii), in Sec.
422.254(e)(3), to the extent we estimate that the 1997 per capita
base rate reflects payments to State hospitals under section
1814(b)(3), we will make appropriate adjustments to the M+C payment
rate. Payments are made to hospitals located in Maryland under this

Finally, pursuant to section 1853(c)(3)(D), in Sec. 422.254(e)(4),
we provide that HCFA may substitute a rate for the 1997 capitation
rate a rate that is more representative of the costs of the enrollees
in the area if the 1997 rate varied by more than 20 percent from the
1996 rate.

National Component of the Blended Capitation Rate: The national
component of the blended capitation rate has two major features: (1)
the national standardized annual capitation rate; and (2) the
national input-price-adjusted capitation rate.

The national standardized annual capitation rate is a weighted
average of all area-specific rates adjusted for risk factor weights
used to calculate payments as though all eligible individuals were
members of an M+C plan. The calculation for the national standardized
annual capitation rate is described at Sec. 422.254(f).

The input-price-adjusted annual national capitation rate is
adjusted for geographic variation in the prices of goods and services
used to produce medical services and is the sum of the products of
three amounts:

  • The national standardized annual capitation rate for the year,
    which consists of the weighted average of all area-specific
    capitation rates.

  • The proportion of the rate that is attributable to each type
    of service.

  • An index that reflects (for that year and that type of
    service) the relative input price of services in the area, as
    compared to the national average input price for these services.

The input-price-adjusted annual national capitation rate is
described in Sec. 422.254(g).

4. Adjustments to Capitation Rates and Aggregate Payments (Sec.

Beginning with 1999 payment rates, we will adjust all
area-specific and national capitation rates (and beginning with the
2000 payment rates, the minimum amount rate) for the previous year to
reflect any differences between the projected national per capita
growth percentages and the current estimates of those percentages.

We will also adjust for national coverage determinations (NCD)
that were significant cost as defined in Sec. 422.109 and defined
above. An NCD is a national policy statement regarding the coverage
status of a specified service that we make under administrative
authority and publish in the Federal Register as a notice of HCFA
Ruling. (The term does not include coverage changes mandated by

If we determine that the cost of furnishing a service subject to
an NCD is “significant,” we will adjust capitation rates for the next
calendar year to take into account the cost of that service. Until
the new capitation rates are in effect, the M+C organization would be
paid through original Medicare for the provision of such services.

Risk Adjustment: Section 1853(a)(3) requires us to develop and
submit to the Congress, by March 1, 1999, a report on a proposed
method of risk adjustment of M+C payment rates. We are also required
to implement a risk-adjustment methodology for payment periods
beginning on or after January 1, 2000. We provide for such risk
adjustment in Sec. 422.256(d). Under the previous payment
methodology, the AAPCC, we used a demographic risk adjuster that has
been criticized as an inadequate predictor of health care costs.
[[Page 35006]]

Nonetheless, until the new risk adjustment methodology is
implemented in 2000, we will be using the same demographic adjusters
used under the AAPCC method to make demographic adjustments under
Sec. 422.256(c) to the capitation rate determined under Sec. 422.252.
Section 1853(a)(3)(C) specifically directs HCFA to implement
health-status based risk adjusters, as well as “other demographic
factors.” Section 1853(a)(3)(D) requires that, with the exception of
enrollees in M+C RFB plans, the same risk adjustment methodology be
used for all enrollees in M+C plans, regardless of plan type. The
implementation of health- status based risk adjusters has major
implications for M+C organizations’ data requirements, as discussed
directly below.

5. Encounter Data (Sec. 422.257)

Section 1853(a)(3)(B) addresses the collection of encounter data
from M+C organizations needed to implement the risk adjustment
methodology. The Act requires that the collection of inpatient
hospital data for discharges beginning on or after July 1, 1997 and
allows the collection of other data no earlier than July 1, 1998. The
statutory language is tied to the creation of risk-adjusted payment
rates, as defined at Sec. 422.256(c) and (d) of this rule.
Requirements concerning collection of encounter data apply to M+C
organizations with respect to all their M+C plans, including and
private fee-for-service plans.

There are two different ways encounter data are used for risk-
adjustment purposes. To calculate payment rates, encounter data are
necessary to tie payment to expected patient resource use using
diagnosis codes. The initial risk-adjusted payment will be based on
inpatient hospital encounter data. However, use of an inpatient-based
system in the long run has two major weaknesses: (1) It provides M+C
organizations with an incentive to hospitalize their enrollees in
order to receive additional payment; and (2) a risk-adjustor system
based only on inpatient hospital diagnosis codes will not allow more
accurate payment for the chronically-ill-but-not-hospitalized. For
both of these reasons, we have developed a more comprehensive
risk-adjustment methodology that uses diagnosis data from physician
services and hospital outpatient department encounters. In addition,
physician services data include data from limited license
practitioners, such as clinical psychologists and nurse midwives who
provide services independently, but do not include nonprofessional
services ordered by physicians as a result of the initial physician
services furnished, such as laboratory services and durable medical

Encounter data are also necessary to “recalibrate” any risk-
adjusted payment model. Recalibration is necessary to adjust the
payment models for improved coding. For example, upcoding may occur
if plans improve coding of beneficiary diagnoses and, as a result,
the average use of resources for enrollees in a particular category
may be less than when the relative payment rates were determined.
When this happens, the average actual expenditures per enrollee for
these diagnoses are less than the average expenditures used to assign
the original payment weights. The result is overpayment for some
diagnoses in the risk adjustment model. To account for possible
coding changes, all risk adjustor payment model diagnosis weights
would be recalculated, or “recalibrated” based on encounter data
gathered after implementation of risk adjustment. A preferred method
for full recalibration requires that all services provided to each
M+C plan enrollee be priced and the total cost of care determined for
each enrollee. This approach would require that organizations submit
encounter data for all services provided to each enrollee. An
alternative approach would require the organizations to submit to
HCFA the cost of providing medical care for each Medicare enrollee,
but organizations might oppose such a requirement as too intrusive.

While the purpose of collecting the encounter data will be to
calculate risk-adjusted payments, there are a wide variety of other
uses of whatever data we collect. Quality improvement targets can be
identified using encounter data. Our ability to monitor the care
received by M+C enrollees through targeted special studies (such as
an examination of post-acute care utilization patterns) will be
greatly enhanced by the availability of encounter data. Encounter
data will also be useful for program integrity functions, both by
providing additional utilization norms for original Medicare billing
and by providing additional information regarding M+C organizations’

Timing of Encounter Data Collection: The first issue to address
with regard to data collection is the ability of the organizations to
generate the necessary data and to ensure accurate transmission.
While some organizations will be able to transmit encounter data
quickly and with little difficulty, others will be further behind in
their internal information systems development. To the extent that
organizations have capitated arrangements with their providers, they
may not currently require encounter-type data from those providers.
The ability to generate encounter data may well vary by type of
service provided as well as by type of organization submitting the
data. All organizations will have to conform to the HIPAA information
system standards regarding encounter data formats by 24 months (36
months for small organizations) after the effective date of the final
rule (currently estimated to be published in the fall of 1998), so
the main issues with regard to the organizations should be transition
issues rather than long run implementation issues.

HCFA has issued instructions delineating a specific timetable for
M+C organizations to submit inpatient hospital data. M+C
organizations will be required to select a fiscal intermediary
designated by HCFA to transmit data.

Given any start date, comprehensive risk-adjusted payments will be
made about 3 years after the year of the initial collection of
outpatient hospital and physician encounter data. Similarly,
recalibration of the risk-adjusted payments to reflect managed care
practice patterns could occur about 3 years after the complete data
are collected. In order to minimize the period for which payments are
determined based on inpatient hospital data only, we will provide
advance notice to M+C organizations to collect and submit physician,
outpatient hospital, SNF, and HHA data beginning no earlier than
October 1, 1999; and all other data HCFA deems necessary beginning no
earlier than October 1, 2000.

Because M+C organization payments will depend on the data
transmitted and because M+C organizations are the entities with which
HCFA contracts, we will hold the M+C organization responsible for
transmission of the data. If the M+C organization is held
responsible, it follows that they should transmit the data directly,
rather than monitoring the transmission by their providers. We will
allow organizations to hire third party data transmitters, but the
M+C organization will be responsible for the accuracy and
completeness of the data transmitted.

Data Format: The format of the data we will require will be
identical to the data we require of original Medicare providers of
similar services, because pricing of the data using original
Medicare’s methods is necessary for recalibration. The data will be
processed using designated HCFA contractors. Providers are familiar
with the HCFA [[Page 35007]] 1500 (or its electronic equivalent) and
the electronic UB-92 (or other electronic equivalent) through their
original Medicare billings. In addition, organizations will have
mechanisms in place to receive UB-92 data from hospitals and send it
to fiscal intermediaries by July 1, 1998, because of the requirements
for submission of inpatient encounter data. It would clearly be
beneficial to all parties to use the UB-92 and this transmission
format for any other required data that is currently submitted on the
UB-92 in original Medicare. There are no current
organization-to-carrier links for data HCFA currently processes on
the electronic version of the HCFA 1500. From the provider,
contractor, and HCFA point of view, it is clear that use of the
electronic version of the HCFA 1500 would minimize any data
collection burden.

Data Accuracy: Audit of the data will be necessary to ensure
accuracy; any audit efforts will include medical record review for a
portion of the submitted data. Statistical analysis (for example,
examination of hospitalization rates for various organizations and
inquiry into outliers) will be combined with traditional audit
methods in order to maximize our examination of the data while
managing the amount of contractor resources used for audit.

6. Announcement of Annual Capitation Rates and Methodology Changes
(Sec. 422.258)

Previously, under section 1876, we were required to announce
Medicare risk contractor payment rates by the first week in
September, no later than 45 days after publishing for comment our
mid-July announcement of payment methodology changes. This schedule
was designed to allow HMOs and CMPs time to consider the coming
year’s payment rates, decide about their continued participation in
the Medicare program, calculate their Adjusted Community Rate (ACR)
proposal, and, finally, afford us the time to approve or disapprove
the ACR proposal prior to the January 1 contract effective date.

Under section 1853(b)(1), starting in 1998, we must announce rates
by March 1 of the year prior to the year the rates apply. We must
include in this announcement a description of the risk and other
factors and explain the methodology in sufficient detail to enable
M+C organizations to compute monthly adjusted capitation rates for
individuals in each of their payment areas.

The March 1 announcement will ensure that subsequent events can
occur to meet the November annual coordinated election period
stipulated in section 1851(e)(3). As under prior law, 45 days prior
to announcing payment rates on March 1, section 1853(b)(2) requires
us to provide notice of changes in the methodology and assumptions
used in the previous year.

7. Special Rules for Beneficiaries Enrolled in M+C MSA Plans (Sec.

The BBA establishes special rules for beneficiaries enrolled in
M+C MSA plans, and we discuss them in detail under section III.

8. Special Rules for Coverage That Begins or Ends During an
Inpatient Hospital Stay (Sec. 422.264)

The BBA contains special payment rules for situations where an M+C
enrollee’s coverage begins or ends while the Medicare beneficiary is
a hospital inpatient. Section 1853(g) provides that, where a
beneficiary is receiving inpatient hospital services from a hospital
covered under original Medicare’s prospective payment system (PPS) or
another M+C organization on the effective date his or her M+C
election of a new M+C plan, payment for inpatient services (up until
the date of discharge) would continue to be the responsibility of the
original Medicare program or previous M+C organization. The M+C
organization offering the newly elected M+C plan would not be
responsible for inpatient hospital service payment until the date of
discharge, and original Medicare or the previous M+C organization
would pay the full amount for that beneficiary for that inpatient
episode, even if it extends beyond the effective date of a
beneficiary’s M+C election.

In the case of a beneficiary’s M+C plan election ending while he
or she is a hospital inpatient, the M+C organization remains
responsible for payment for inpatient hospital services furnished by
a hospital after expiration of enrollment up until the date of
discharge. Payment for these services would not be made under
Medicare’s PPS system, and the responsible M+C organization would not
receive any payment from us for the hospitalized individual during
the period the individual was not enrolled.

9. Special Rules for Hospice Care (Sec. 422.266)

Section 1853(h) of the BBA contains special provisions for
Medicare beneficiaries who elect hospice care concurrent with their
enrollment in an M+C organization. Specifically, an M+C organization
must inform each Medicare enrollee eligible to elect hospice care
under section 1812(d)(1) about Medicare hospice programs within the
M+C plan’s service area. If it is common practice to refer patients
to hospice areas outside the service area, the organization must
inform the M+C enrollee of that as well. This information must be
provided to beneficiaries in a manner that objectively presents all
available hospice providers, including a statement of any ownership
interest held by the M+C organization or a related entity. If the M+C
organization has an ownership or other financial interest in one or
more of the available hospice providers, M+C plan enrollees cannot be
required to use that hospice provider.

BBA payment provisions for hospice care state that our monthly
payment to the M+C organization will be reduced to an amount equal to
the adjusted excess amount in the M+C plan’s approved ACR. Beyond the
adjusted excess amount, we pay through original Medicare for hospice
care furnished to the M+C plan enrollee. We also pay through original
Medicare (to the M+C organization), for other Medicare-covered
services furnished to the hospice patient.

Unless the individual disenrolls from the M+C plan, an M+C
enrollee electing hospice continues his or her enrollment in the plan
and is entitled to receive through the plan any benefits, other than
those that are the responsibility of the Medicare hospice.

10. Source of Payment (Sec. 422.268)

As under the section 1876 risk program, we will determine which
proportion of payments to M+C organizations comes from the Hospital
Insurance Trust Fund (Part A) and which proportion of payments comes
from the Supplementary Medical Insurance Trust Fund (Part B). We
determine these proportions based on the actuarial value of total
benefits under both parts.

G. Premiums and Cost-Sharing

Subpart G of part 422 details provisions found in section 1854 for
the M+C program. In this subpart we discuss how limits on M+C plan
enrollee premiums and other cost sharing are established through the
ACR approval process. The ACR process is applicable to all M+C plans
except M+C MSA plans. M+C MSA plans are not required to submit an
ACR, but other information must be submitted for HCFA’s review (see
discussion below). We discuss limitations that the process imposes on
other cost-sharing that M+C organizations may impose on Medicare
enrollees for the M+C plan they elect. [[Page 35008]]

Note that there are a number of terms pertinent to the following
discussion, and they are defined in Sec. 422.302 of this rule. ACR
and APR are terms that were used under section 1876 risk program.
Section 1854(b) discusses the definition of the terms relating to
beneficiary premiums. The term additional revenues is discussed in
detail in section 5 below.

As under the section 1876 risk program, the ACR process under the
BBA serves three important purposes. First, HCFA examines an M+C
organization’s ACR proposal for each M+C plan to determine whether
Medicare payments in excess of the amount the organization would
charge commercially for Medicare-covered benefits are passed on to
beneficiaries in the form of added additional benefits. Second, we
review ACR proposals to determine whether the structure of premiums,
deductibles, copayment, and coinsurance charged to beneficiaries are
within the limits established by law as required under section
1854(f)(1)(A). Third, benefit package information is reviewed to
determine whether the benefit package is in compliance with the
principles contained in subpart C.

We have taken into account that the M+C program is a significant
departure from the section 1876 risk contracting program it replaces.
Therefore, we are allowing a special period during which
organizations will be able to add benefits (at no additional cost to
the M+C plan enrollee) or lower premiums or cost-sharing mid-year. We
also are providing for the submission of ACRs on a date other than
May 1 if a contract will begin on a date other than January 1. The
transition rules for this period are found in Sec. 422.300(b). This
special period will end on December 31, 2001.

1. Rules Governing Premiums (Sec. 422.304)

This section of the regulation implements provisions of the BBA
relating to premiums paid by (or behalf of) beneficiaries. Each
Medicare enrollee must be afforded the opportunity to pay the M+C
plan premium on a monthly basis and, as under the section 1876 risk
program, pursuant to Section 1128B(b) of the Act, the M+C
organization may not provide for cash or other financial rebate as an
inducement for enrollment (or for any other reason).

As discussed in above, section 1852(a)(1) requires an M+C
organization to include in its M+C plan all services covered under
original Medicare (except hospice care) that are available to
Medicare beneficiaries in the area in which services are covered
under the M+C plan. In addition, additional benefits must be provided
to all enrollees electing the M+C plan (see section 1854(f)(1)).
Section 1852(a)(3) allows an M+C organization to add supplemental
benefits to the M+C plan either at the M+C organization’s discretion
(with our approval) or at the enrollee’s election. For these benefits
offered through a coordinated care plan, section 1854(e) does not
allow the M+C organization in total, for the year, to impose a total
average cost to the beneficiary, with an actuarial value greater than
the actuarial value of original Medicare’s deductibles and
coinsurance for items and services covered by original Medicare plus
the actuarial value approved through the ACR process for supplemental
services. For M+C PFFS and M+C MSA plans, see discussion below.

Section 1854(c) provides that M+C basic and supplemental
beneficiary premiums and M+C MSA premiums may not vary among
individuals enrolled in the plan. This means that all enrollees in a
given M+C plan must be charged the same premium amount for basic
benefits and for any supplemental benefits the M+C organization may
choose to offer. In the case of coordinated care plans, this uniform
premium counts toward an overall limit on the actuarial value of
beneficiary liability in section 1854(e) (discussed further below).
Thus, in the case of coordinated care plans, the actuarial value of
any cost-sharing imposed under the plan would also be uniform, since
a uniform premium would be subtracted from a uniform overall limit to
determine the amount that can be charged in cost-sharing.

We believe that section 1854(c) reflects congressional intent that
all beneficiaries enrolled under a particular M+C plan pay the same
amount. While cost-sharing amounts are not expressly mentioned, in
the case of coordinated care plans, there is a uniform limit on the
actuarial value of cost-sharing. Accordingly, pursuant to our
authority in section 1856(b)(1) to establish M+C standards, we are
providing in Sec. 422.304(b) that M+C organizations may not vary the
level of copayments, coinsurance, or deductibles charged for basic
benefits or supplemental benefits among individuals enrolled in an
M+C plan.

2. Submission of Proposed Premiums and Related Information (Sec.

Section 1854(a) requires each M+C organization to submit no later
than May 1 information about the M+C plan the organization wants to
offer in the subsequent year. As under the Medicare section 1876 risk
program, except in the case of M+C MSA plans, such information
includes a complete description of the services included in the M+C
plan, ACR and service area information, premium amounts, and
descriptions of enrollee cost sharing. For M+C MSA plans,
organizations have to submit the MSA premium that is used to
determine the MSA deposit. No ACRs are required for M+C MSA plans.
Pursuant to our authority in section 1856(b)(1), we have added a new
requirement that M+C organizations also submit information on amounts
collected in the previous contract period for basic benefits. We have
done this to assure Medicare enrollees are not being charged
cost-sharing that exceeds the limits in section 1854(e)(see Sec.

Section 422.306(a) reflects the requirement in section 1854(a)(1)
that the information in paragraphs (b), (c), and (d) of Sec. 422.306
be submitted by May 1 of the year prior to the year for which the
information is submitted. This information is needed timely in order
for HCFA to comply with the requirement in subpart B that comparative
information on M+C plans be provided to Medicare enrollees. As noted
above, during the transition period prior to 2002 provided for in
Sec. 422.300(b), M+C organizations may be permitted, at HCFA’s
discretion, to submit applications and ACR information on a flow
basis and as discussed in section K below, under Sec. 422.504(d)
contracts could begin on a date other than January 1. In such a case,
benefit package and pricing structures must be approved before the
contract can take effect. Beginning with the 2002 calendar year,
however, anyone wishing to offer an M+C plan in that year must submit
an ACR by May 1 of the previous year (May 1, 2001 in the case of

If the information submitted is not complete, accurate, or timely,
HCFA has the authority to impose sanctions under subpart O or may
choose not to renew the contract.

We will review and approve all information submitted except for
any amounts submitted by M+C MSA plans and premiums submitted by M+C
private fee-for-service plans. Premiums and cost sharing will be
reviewed in accordance with the rules established in Sec. 422.310.
Benefits offered under the M+C plan will reviewed in accordance with
the rules established in Subpart C.

3. Limits on Premiums and Cost-Sharing Amounts (Sec. 422.308)

The rules in this section set the limits on the amount an M+C
organization may charge a Medicare enrollee of an M+C plan. Section
1854(b) specifies that [[Page 35009]] the premium that a beneficiary
is charged under an M+C plan other than an M+C MSA plan is the M+C
monthly basic premium, plus any M+C supplemental premium. In the case
of an M+C MSA plan, the beneficiary is charged only any M+C
supplemental premium that may apply. The limits of Medicare enrollee
liability are:

  • For M+C basic benefits (Medicare covered services and
    additional benefits) offered by coordinated care plans: 12 times
    the basic monthly premium, plus the actuarial value of plan
    cost-sharing (copayments, coinsurance, and deductibles) for the
    year, cannot exceed the actuarial value of original Medicare’s
    deductibles and coinsurance for the year or, if less, the amount
    authorized to be charged in the ACR (see Sec. 422.310).

  • For M+C basic benefits (Medicare covered services and
    additional benefits) offered by M+C private fee-for-service plans:
    the actuarial value of plan cost sharing (copayments, coinsurance,
    and deductibles) for the year, cannot exceed the actuarial value
    of original Medicare’s deductibles and coinsurance for the year
    or, if less, the amount authorized to be charged in the ACR (see
    Sec. 422.310).

  • For supplemental benefits offered by a coordinated care plan:
    12 times the M+C monthly supplemental premium plus the actuarial
    value of plan cost sharing (copayments, coinsurance, and
    deductibles) cannot exceed the ACR for such benefit or, if less,
    the amount authorized to be charged in the ACR (see Sec. 422.310).

It is possible for an M+C organization to have M+C plan enrollees
that are entitled to Medicare Part B benefits only. Section
1876(k)(2) specifies that existing Part B enrollees under section
1876 risk contracts on December 31, 1998 may remain as enrollees of
the organization in accordance with regulations under section
1856(b)(1) if the organization enters into an M+C contract on January
1, 1999. Pursuant to sections 1876(k)(2) and 1856(b)(1), this final
rule provides for such continued Part B-only enrollment, and Sec.
422.308 provides that the limit on enrollee charges is the same as
the limit that applies to other enrollees, except that the limit is
based only on the actuarial value of cost sharing paid under Part B
of original Medicare.

Also pursuant to our authority in sections 1876(k)(2) and
1856(b)(1), in Sec. 422.308(a)(3), we impose a limit on the liability
of Part B-only enrollees for an M+C organization’s coverage of
services that would be covered by Medicare Part A if the enrollee had
Part A coverage. Specifically, we provide that the premium and cost
sharing charged for such coverage may not exceed the lesser of what
Medicare would pay an M+C plan in capitation for the services, plus
the actuarial value of Medicare Part A deductibles and coinsurance,
or the ACR for such services.

The above-described limits on enrollee liability apply to enrollee
costs incurred for services furnished by noncontracting providers as
well as providers that contract with the M+C organization offering
the M+C plan in which the beneficiary is enrolled. In the case of
contracting providers, limits on enrollee liability would generally
be delineated in the contract between the provider and the M+C
organization. Also, in the case of most coordinated care plans (for
example, HMOs), it could be assumed that most nonemergency services
will be obtained through contract providers.

Thus, to the extent an M+C coordinated care plan provides for
different cost sharing in the case of noncontracting providers, it is
not difficult to estimate the percentage of services that will be
obtained at that level of cost sharing, when making the overall
projection of the actuarial value of the cost sharing structure. In
the case of M+C private fee-for-service plans, it is less clear to
what extent noncontracting providers will be used, and the
information on actual cost sharing from the prior year will be
particularly valuable in assessing the accuracy of actuarial
projections by the M+C organization. We note that in all cases,
beneficiary liability is limited to the cost sharing provided for
under the plan in the case of noncontract provider services. While
sections 1852(k) and 1866(a)(1)(O) require noncontracting providers
to accept as payment in full the amounts that they would be required
to accept under original Medicare, balance billing to the beneficiary
may be permitted under original Medicare but it is not permitted
under the M+C plan in question. The M+C organization must hold
beneficiaries harmless against any such balance billing. See section
IV. below for a discussion of this issue in connection with M+C
private fee-for-service plans and section III in connection with M+C
MSA plans.

4. Incorrect Collections of Premiums and Other Cost Sharing (Sec.

This section contains procedures to be used in situations where an
M+C organization collects more than the amount that is allowed to be
charged to the Medicare enrollee. These procedures were developed
using the rules previously applied under section 1876 and promulgated
under our authority in section 1856(b)(1) to establish standards
under Part C.

Section 1857(d) requires that at least \1/3\ of the M+C
organizations be audited for, among other things, data used in the
submitted ACR and all charges to the M+C plan enrollee for benefits
covered under the M+C plan. These audits may reveal that the M+C
organization has been overcharging the M+C plan enrollees. Section
422.309 requires the M+C organization to refund these over
collections through an adjustment to current and future premiums
allowed to be charged across all M+C plan enrollees.

We note that in addition to the above requirements for refunding
amounts incorrectly collected, an M+C organization that collects
amounts in excess of those permitted is subject to intermediate
sanctions and civil money penalties under subpart O. See section
422.752(a)(2) and discussion below in section II. O. of the preamble.
Refunding amounts improperly collected, at a minimum, would be a
prerequisite to the lifting of such sanctions.

5. ACR Approval Process (Sec. 422.310)

Section 1854 requires that an ACR proposal be submitted each year
for each M+C coordinated care plan or M+C private fee-for-service
plan, and that premiums be filed for MSA plans. Section 422.310 of
this rule sets forth the rules M+C organizations must follow to
determine the limits placed on an M+C plan’s price structure
(premiums, copayments, coinsurance, deductibles, etc.). Since this
regulation was not published until after May 1, 1998, new
requirements under this rule discussed below will apply to contract
periods beginning on or after January 1, 2000. For contract periods
beginning before January 1, 2000, M+C organizations shall use the
rules promulgated in accordance with section 1876 for risk
contractors to determine the limits placed on M+C plan’s price

Under the existing ACR process, a M+C organization must establish
an initial rate for non-Medicare enrollees for each M+C plan offered.
This rate is determined through a community rating method (defined in
section 1308 of the Public Health Service Act) or an aggregate
premium method. The initial rate is then modified by the relative
difference in utilization characteristics of the Medicare population
compared to the non-Medicare population included in the initial rate.
Additional adjustments may be made with our agreement. Those M+C
organizations that do not have a non-Medicare [[Page 35010]]
population cannot establish an initial rate. These M+C organizations
will be allowed to use an estimate of the ACR value for a service or
services offered using generally accepted accounting principles.
These estimated values will be treated as additional adjustments for
our review.

The ACR computation places a limit on the beneficiary premiums and
cost-sharing amounts of an M+C plan, and we will only approve the
beneficiary premiums and cost-sharing amounts proposed by an M+C
organization for a specific M+C plan if they do not exceed the ACR

As noted above, Sec. 422.310 contains new requirements for
calculating ACRs that will require existing section 1876 contractors
to change the methodology they have used to calculate their ACRs
under section 1876. We recognize that section 1856(b)(2) provides
that consistent with the requirements of Part C, standards
established under Part C should be based on standards established
under section 1876 to carry our analogous provisions of that section.
The requirements in Sec. 422.310 are based on, and fully consistent
with, the existing section 1876 requirements in Sec. 417.594. An M+C
organization following the methodology set forth in Sec. 422.310
would fully comply with the existing ACR provisions in Sec. 417.594.

However, based upon our years of experience under the section 1876
program, we have determined that the language in Sec. 417.594
permitted HMOs and CMPs to use methods for calculating their ACRs
that produced ACRs that we do not believe accurately reflected the
statutory standard implemented in that section. Indeed, the existing
methodology has been criticized by the General Accounting Office and
the Office of the Inspector General as inaccurate, and subject to
modification by organizations. The existing methodology also did not
provide for necessary adjustments (for example, based upon changes in
utilization assumptions in anticipation of changes in cost sharing
structures, or changes in Medicare coverage) that we provide for in
Sec. 422.310. Also, as discussed below, some of these changes
accommodate the fact that some organizations do not maintain data
used under the old methodology (service statistics) but do maintain
data (cost data) used under the new methodology in Sec. 422.310.
Finally, the existing ACR form necessarily has to be changed to adapt
to the new options under the M+C program.

For all of the above reasons and others discussed below, pursuant
to our authority in section 1856(b)(1) to establish standards for M+C
organizations, and consistent with the provision in section
1865(b)(2) that such standards be based on section 1876 standards, we
have built on the existing ACR methodology in Sec. 417.594 but
refined this methodology in order to ensure the accuracy of ACRs
under the M+C program.

Specifically, we have added the following new requirements to the
provisions in Sec. 417.594:

1. Revision of data requirements used to develop differences in
utilization characteristics of the Medicare population from a
relative service ratio to a relative cost ratio (for additional
revenue, a relative excess revenue ratio) experienced in a prior

2. Separation of the administrative component into two parts–an
administrative cost component and a component that reflects revenues
collected in excess of costs.

3. Provision for an M+C organization to adjust for relative
differences that the organization expects to encounter in the period
covered by the ACR that were not reflected in the prior period. Below
we discuss each in turn, including where the new process diverges
from the former ACR methodology.

Revision of Data Requirements Used to Develop Differences in
Utilization Characteristics of the Medicare Population from a Service
Ratio to a Cost Ratio Experienced in a Prior Period: Currently, risk
contracting plans (HMOs) under section 1876 of the Act use a relative
volume/complexity (V/C) factor to modify commercial premiums for each
health care component (e.g. inpatient hospital, physician) to account
for differences in utilization characteristics between commercial
members and Medicare members. The modified commercial premium is the
ACR value for that health care component applicable to the Medicare

Currently, HMOs are directed to develop the V/C factors using
comparative service statistic ratios on a health care component
basis. Service ratios require HMOs to supply a large amount of
service statistics.

Risk contractors assert that they, as a rule, do not keep service
statistics in the same manner, format, and/or detail needed to
compute these ratios. Some HMOs have resorted to using statistics
gathered from one commercial package to be compared to all Medicare
enrollee statistics. Others have used estimations of service
statistics (especially for those services not offered by the HMO in
the past).

Managed care organizations keep detailed records on the cost of
care included in the benefit packages sold. Since the cost of
providing medical care is a function of both volume (number of
services) and complexity (price of the service), M+C organizations
could compare the direct cost of medical care (incurred in a previous
period) between the organization’s commercial and Medicare
populations on an average per enrollee basis to account for
differences in utilization characteristics of the respective
populations. For those services not offered in the past, the M+C
organization could use an estimate of the cost to establish an ACR
value for the new service.

We believe this modification of data requirements will make the
ACR more accurate, easier to process, and ultimately, easier to
verify. Costs could be compared from year to year to establish the
reasonableness of the data provided. In addition, cost data as
reported could be compared to other required reports and the
organization’s financial statements. Later, during monitoring visits,
costs could be compared to the organization’s financial records.

This approach is justified in view of the expanded participation
of different types of M+C plans authorized in the BBA. BBA provisions
include organizations offering new types of M+C plans that may not
have an enrolled commercial population and, without an enrolled
commercial population, these organizations would be unable to
complete the current ACR. Under the new method, these M+C
organizations would be allowed to develop a cost estimate for the
purpose of establishing an ACR value for the Medicare population.

Separation of Administrative Component into Two Components–an
Administrative Cost Component and a Component that Reflects Revenues
Collected in Excess of Costs: Currently, HMOs are directed to bundle
that part of the commercial premium that represents any excess
revenue over expenses with administration into one component. In Sec.
422.302, we refer to the component of the premium that represents
revenue in excess of costs incurred as “additional revenues.”
Specifically, we define “additional revenues” to mean revenues
collected or expected to be collected from charges for M+C plans
offered by an M+C organization in excess of costs actually incurred
or expected to be incurred. Additional revenues would include such
things as revenues in excess of expenses of an M+C plan, profits,
contribution to surplus, risk margins, contributions to risk
reserves, assessments by a related entity that do [[Page 35011]] not
represent a direct medical or related administrative cost, and any
other premium component not reflected in direct medical care costs
and administrative costs.) The combined component representing
administrative and excess revenues was then converted to a Medicare
value using the same method the HMO used to compute the amount for
commercial enrollees. HMOs have consistently claimed they use a
percentage method (For example, administration is calculated as a
specific percentage of health care components). In effect, this
increases the administration and additional revenues anywhere from
300 percent to 500 percent for Medicare. In addition, this bundling
assumes that both administration and additional revenues are similar
in nature and should be treated the same.

Under the new ACR, we are requiring M+C organizations to divide
the administrative component into two parts and modify each part with
a factor that is consistent with each part. We believe this will
provide HCFA with data that is both more accurate and more useful.

Administrative costs will be included in the ACR computation in
the same manner as they are incurred in commercial premiums. M+C
organizations will be required to reveal projected amounts of
additional revenues to HCFA for each population group (commercial and
Medicare). M+C organizations would be required to justify larger
additional revenues projected for the Medicare population in relation
to their commercial population.

Construction of a Method for an Organization to Adjust for
Relative Differences the Organization Expects to Encounter in the
Period Covered by the ACR that Were not Reflected in the Prior
Period: Section 1876 allowed for modification of the initial rate by
a relative factor of services furnished in a prior period.
Implementing regulations did not allow for any other modifications to
the initial rate in establishing the ACR for a service or services,
and we have since recognized that additional modifications to the
initial rate may be necessary. For example, Medicare coverage may be
increased from one year to the next. If the organization did not
provide the service in the past and no additional modifications to
the initial rate were allowed, the organization could not adjust for
the new service in its ACR. Organizations also had no method for
making adjustments to take into account projected changes in
utilization patterns that would result from changes in cost sharing
amounts. We have included a provision in this rule to allow for such

M+C organizations will be allowed to further reduce the ACR values
so that the ACR values equal the actuarial value of the charge
structure of the M+C plan.

6. Requirement for Additional Benefits (Sec. 422.312)

If the ACR calculation for an M+C plan produces an excess amount
(the difference between the average of the M+C per capita rates of
payment (APR) and the ACR value (less the actuarial value of original
Medicare’s deductibles and coinsurance)) for Medicare covered
services, the M+C organization is required to use that amount as


  • First, the M+C organization may elect to contribute part or
    all of the excess amount to a stabilization fund;

  • Second, the M+C organization may use the remainder to fund
    additional services not covered by Medicare; and

  • Third, the M+C organization must use any remainder to reduce
    the premium and/or cost sharing allowed for services covered by
    original Medicare.

A number of rules contained in this section were developed using
the rules under section 1876, though certain changes to those rules
were made to comply with new provisions in the BBA. For example, the
rules for the stabilization fund under section 1876 were largely
incorporated in this section. However, section 1854(f)(2) revised the
time period and disposition of those funds at the end of that time
period. We have incorporated these changes in Sec.

H. Provider-Sponsored Organizations

This interim final rule makes certain technical and conforming
changes to existing subpart H of part 422. These changes are
discussed in section II.R. of this preamble.

I. Organization Compliance With State Law and Preemption by
Federal Law

1. State Licensure (Sec. 422.500)

Among the organizational and financial requirements for M+C
organizations, section 1855 of the Act requires that an organization
shall be organized and licensed under State law as a risk-bearing
entity eligible to offer health insurance or health benefits coverage
in each State in which it offers an M+C plan. (An exception to the
licensure requirement is made for PSOs, as provided for in part 422
subpart H.) Section 1855(b) specifies the level of risk that an
organization assumes under an M+C contract (i.e., full risk for the
M+C benefit package), and the extent to which the organization may
insure against such risk or may pass off all or part of the risk to
subcontracting providers. The requirements of the statute result in a
two-pronged test of appropriate licensure, consisting of the
licensure requirement itself and a scope of licensure requirement.

Licensure and Scope of Licensure: With regard to the licensure
requirement, although the BBA uses the term “licensure,” we have
interpreted the provision as requiring a license or some other type
of certification (such as a certificate of authority) that represents
permission granted by the appropriate State authority for the
organization to operate within the State as a risk-bearing entity
offering health insurance or health benefits. Having met the State
licensure requirement, an organization must also show that the
ability to offer an M+C plan of the type they wish to offer is within
the scope of its State licensure or State authorization. For example,
an organization that offers only a prepaid dental plan in a State
could be licensed as a risk-bearing entity, but its licensure status
may not permit the organization to offer a health benefits plan that
includes a comprehensive range of services, as would be necessary
under an M+C contract. Similarly, a State may require an organization
that is a licensed HMO to obtain separate licensure as an indemnity
insurer in order to offer an M+C point-of-service (POS) plan, on the
basis that the HMO scope of licensure does not include the ability to
offer what is considered an indemnity product. (A State’s requirement
that an organization have an indemnity license in order to offer a
POS product is not superseded by the Federal preemption provisions
discussed below.)

In some States, a Medicaid HMO may operate without a license from
the department of insurance or other State agency that licenses
organizations offering health benefits or health insurance in the
commercial and Medicare markets. The Medicaid plans operate under the
authority of the State Medicaid agency, which may be the agency
establishing solvency standards for such organizations, as required
by section 1903(m)(1)(A)(ii). The State authorization for these plans
may be viewed as a limited scope licensure, enabling plans to operate
as Medicaid contractors only, and not in other segments of the health
insurance market.

To establish the licensure status of organizations, and in
particular to determine compliance with scope of licensure
requirements, we will require, as part of the application process for
[[Page 35012]] new applicants, documentation that both the licensure
and scope of licensure requirements are met. Organizations must
provide verification from the appropriate State regulatory body
authorized to license Medicare risk products demonstrating that the
licensure status of the organization enables it to offer the M+C
plan, or plans, it intends to offer. This would ensure that, in the
case of an organization only authorized to offer a Medicaid plan, for
example, solvency standards appropriate to an M+C product are met. In
the case of non-commercially licensed entities, we are requiring that
they obtain a special certification from the State that they meet
appropriate solvency standards.

As noted in the BBA, “The fact that an organization is licensed in
accordance with paragraph [1855(a)](1) does not deem the organization
to meet other requirements imposed under this part” (1855(a)(3)).
That is, while the State licensure requirement is imposed on all
plans as a prerequisite for contracting as an M+C organization,
licensure in and of itself does not guarantee that an organization
will be able to obtain an M+C contract. The organization must meet
other applicable requirements of this part in order for us to grant
an M+C contract.

2. Federal Preemption of State Law (Sec. 422.502)

Section 1856(b)(3)(A) of the Act provides for a Federal preemption
of State laws, regulations, and standards affecting any M+C standard
if the State provisions are inconsistent with Federal standards (a
preemption policy we refer to below as a general preemption). There
is also a specific preemption of State laws (1856(b)(3)(B)) in three
areas where Federal standards “preempt the field”; that is,
regardless of whether State laws are inconsistent or not, Federal
standards preempt State law, regulations, and standards. The general
and specific preemption of State law applies to “Medicare benefits
and Medicare beneficiaries,” as stated in the conference report that
accompanied the BBA. The BBA preemption provisions do not extend to
non-Medicare enrollees or activities or non-Medicare “lines of
business” of organizations that have M+C contracts.

Prior to the BBA, section 1876 of the Act (governing Medicare risk
and cost contracts with HMOs and competitive medical plans) did not
contain any specific preemption provisions. However, section 1876
requirements could preempt a State law or standard based on general
constitutional Federal preemption principles, consistent with the
provisions of Executive Order 12612 on Federalism. Under the
guidelines of the Executive Order, section 1876 requirements did not
preempt a State law or standard unless the law or standard was in
direct conflict with the Federal law, or it prevented the
organization from complying with the Federal law. Put another way, if
Federal law permitted the HMO to do what State law required, there
was no preemption. In practice, rarely, if ever, did Federal law
preempt State laws affecting Medicare prepaid plans. For example,
Medicare risk plans operating in States with mandated benefit laws
were generally required to comply with such State laws. Compliance
with the State mandated benefit law was not viewed as interfering
with the ability of plans to function as Medicare risk contractors
under Federal standards. (Because the BBA preemption applies only to
M+C plans, this approach to preemption issues will continue to apply
to cost contracts governed by section 1876 rules.)

General Preemption: The general preemption provision of the BBA
will be applied in the same way that the Executive Order has been
applied, in that State laws or standards will be preempted only when
they are inconsistent with M+C standards, as clearly indicated in the
statute. Because the BBA requires that PSOs operating under a waiver
of the State licensure requirement must comply with State quality and
consumer protection standards, it seems clear that the Congress
expected States, in some cases, to have more rigorous or more
comprehensive standards for quality and consumer protection which
would enhance, rather than duplicate or be subsumed under, the M+C
standards for quality and consumer protection. Thus, unless one of
the specific preemptions discussed below applies, State laws or
standards that are more strict than the M+C standards would not be
preempted unless they prevented compliance with the M+C requirements.
This is consistent with the BBA conference report language that notes
that State laws apply if they provide “consumer protections in
addition to, or more stringent than” the BBA. The BBA also provides
that the quality and consumer protection standards with which PSOs
must comply include only those requirements “generally applicable to
M+C organizations and plans in the State” which are “consistent with
the standards” of the BBA. That is, there are likely to be quality
and consumer protection standards imposed by States that all M+C
plans must comply with, and for which there is no Federal preemption.

Specific Preemption: Though the general preemption provision will
be applied in the same way that the Executive Order has been applied,
for the three areas in which the Congress provided for a specific
preemption of State laws, the M+C standards supersede any State laws
and standards. These three areas are:

  • Benefit requirements:
  • Requirements relating to inclusion or treatment of providers;

  • Coverage determinations (“including related appeals and
    grievance processes”).

We are adopting a narrow interpretation of the applicability of
the three areas of specific preemption, which we believe is justified
by the conference report language and the overall structure of the
BBA in its delineation of the relative roles of the State and Federal
governments. Under the BBA, States have exclusive authority (other
than in the case of PSOs) to make the determination of whether
organizations are eligible to enter into M+C contracts, while under
section 1876 of the Act, it was the Federal Government that
designated “eligible organizations” (HMOs under title XIII of the
Public Health Service Act (a Federal designation) or competitive
medical plans (also a Federal designation)). Under section 1876, the
Federal Government also determined solvency standards for
organizations, while under the BBA this becomes a State
responsibility (other than for PSOs). The conference report (p. 638)
also clarifies the intended scope of preemption in the three specific
areas. The report indicates the conferees seek to put M+C on a par
with “original fee-for-service,” where the “Federal government alone
set legislative requirements regarding reimbursement, covered
providers, covered benefits and services, and mechanisms for
resolving coverage disputes.” The conferees wish to “[extend] the
same treatment to private M+C plans providing Medicare benefits to
Medicare beneficiaries.”

Using the analogy of original Medicare, Federal law preempts State
laws and standards in certain specific areas. Under original
Medicare: States cannot specify what must be included as a Medicare
benefit; States do not specify the conditions of participation of
Medicare providers (though they license providers and practitioners
and determine their scope of practice); States may not specify how a
coverage determination is to be made with respect to whether or not
the Medicare program covers a benefit; and a State [[Page 35013]]
does not determine the type of appeal mechanism that is to be used to
appeal a coverage decision made by a Medicare carrier or intermediary
with respect to a Medicare benefit. For M+C plans, the specific
preemption of State laws in the three areas would prevent, for
example, the application of mandated benefits laws; “any willing
provider” laws and other laws mandating the inclusion of specific
types of providers or practitioners; or laws that supplant or
duplicate the Medicare coverage determination and appeal process as
it relates to coverage of benefits under the M+C contract. However,
States may have various laws and requirements that could still apply

  • Benefits (for example, a plan could be required to have a toll
    free number to answer benefit questions),

  • Providers and practitioners generally in the State (e.g., they
    must all be licensed by the State and comply with scope of
    practice laws), and

  • Laws and standards which could apply to disputes between
    members and health plans, as discussed below.

Under our narrow construction of the specific preemptions, and
consistent with our definition of the term “benefits” at Sec. 422.2,
the specific preemption of benefit laws does not extend to State laws
and standards relating to cost sharing or other financial liability
standards for enrollees of health plans, though we are inviting
comments on our position, outlined below, that cost sharing should
not fall under the benefits preemption, as well as comments on
whether there are types of cost sharing that should or should not be
included in the benefits preemption.

Thus, a State law prescribing limits on cost sharing generally, or
limits on cost sharing that can be imposed for specific benefits,
would not be preempted. If the benefit to which the State cost
sharing limits apply is not a Medicare covered benefit, however, the
limits on cost sharing would only apply if the M+C organization
chooses to offer the benefit in question. Thus, to the extent that
limits on cost sharing are linked to a benefit mandate, the cost
sharing limits could be seen to be indirectly “preempted” in that the
obligation to provide the benefit to which they apply is preempted.
If the M+C organization chooses not to provide the benefit that would
otherwise be mandated under a preempted benefit mandate, the cost
sharing limits that apply to that benefit would never come into play.
We note that while cost sharing limits are not specifically preempted
under the benefits preemption in section 1856(b)(3)(B)(i) and Sec.
422.402(b)(1), cost sharing limits are still subject to the general
preemption in section 1856(b)(3)(A) and Sec. 422.402(a). Thus, to the
extent the cost sharing limit would be inconsistent with M+C
provisions, it would be preempted. An example of State cost-sharing
requirements being preempted because they are inconsistent with M+C
provisions would be a State requirement that requires all insurers
and health plans to pay 100 percent of the cost of a particular
service (e.g., mammography screening or other preventive care). In
the case of an M+C MSA plan, we would argue that the general
preemption provision applies, because the State requirement is
inconsistent with the basis structure of a high-deductible plan under
which covered services are not payable under the plan until the
deductible is met.

To address a specific question that has arisen, State laws
requiring direct access to particular providers (either contracted by
the M+C organization or not under contract), and State laws
requiring, for example, a second opinion from non-contracted
physicians, would be superseded by the benefit and provider
participation preemptions (though M+C standards in these regulations
dealing with access to particular providers may have an effect that
is similar to that of State laws that are superseded). This is
because these requirements in essence mandate the “benefit” of access
to a particular provider’s services even where the services of that
provider would not otherwise be a covered benefit.

We are also adopting a narrow interpretation of the scope of
preemption of coverage determinations. Coverage determinations are
made initially by M+C organizations and may be appealed as provided
for under subpart M of these regulations. Our view is that the types
of decisions related to coverage included in this specific preemption
are only those determinations that can be subject to the appeal
process of subpart M. These are decisions about whether an item or
service is covered under the M+C contract and the extent of financial
liability beneficiaries have for the cost of covered services under
their M+C plan. The Medicare appeal process applies to basic
benefits, mandatory supplemental benefits, and optional supplemental
benefits offered under an M+C contract. The specific preemption makes
the Medicare appeal process the exclusive remedy for disputes over
coverage determinations, displacing any State grievance or appeal
process that might otherwise be available in such cases. However, the
specific preemption does not preempt State remedies for issues other
than coverage under the Medicare contract (i.e. tort claims or
contract claims under State law are not preempted). The same claim or
circumstance that gave rise to a Medicare appeal may have elements
that are subject to State remedies that are not superseded. For
example, an M+C organization’s denial of care that a beneficiary
believes to be covered care is subject to the Medicare appeals
process, but under our interpretation of the scope of the specific
preemption on coverage decisions, the matter may also be the subject
of a tort case under State law if medical malpractice is alleged, or
of a state contract law claim if an enrollee alleges that the M+C
organization has obligated itself to provide a particular service
under State law without regard to whether it is covered under its M+C

We are seeking public comments on our interpretation of the
applicability of the three areas of pre-emption specifically the
exclusion of cost sharing and financial liability standards from the
federal pre-emption and the exclusion of direct access to particular

As noted above, where the BBA preempts State laws and standards,
any Federal preemption based on the BBA applies only to the Medicare
“line(s) of business” of an M+C organization (i.e., Medicare
enrollees). As such, there would be no Federal preemption of State
laws which are applicable to other enrollees of the organization.
Additionally, there would be no Federal preemption of State laws
which are applicable to arrangements outside the scope of the BBA,
such as arrangements between employers and M+C plans for the
provision of negotiated employer group benefits discussed at Sec.
422.106 of these regulations. Neither the specific nor the general
preemption would apply to any aspect of such arrangements.

3. Prohibition on State Premium Taxes (Sec. 422.404)

Section 1854(g) of the Act, introduced in the BBA, provides that
“No State may impose a premium tax or similar tax with respect to
payments to M+C organizations under section 1853.” Section 4002(b)(4)
of the BBA makes the prohibition on premium taxes applicable to risk-
sharing contracts operating under section 1876 effective the date of
enactment of the BBA. This prohibition does not apply to enrollee
premium payments made to M+C plans, which are authorized under
section 1854.

The regulations provide clarification on the applicability of the
prohibition of State premium taxes. The BBA does not [[Page 35014]]
define the term “State,” but elsewhere in the Medicare statute
(1861(x), referring to 210(h) of the Act), the term “State” is
defined to include the District of Columbia, the Commonwealth of
Puerto Rico, the Virgin Islands, Guam, and American Samoa. The
regulations include this definition of State for purposes of the
scope of the premium tax prohibition.

The BBA is also silent as to whether the prohibition of premium
taxes includes county taxes or taxes by other governmental entities
within a State. The Federal Employees Health Benefits Program (FEHBP)
statute, on the other hand, has more specific language on the
applicability of the exemption from premium taxes. The FEHBP statute
specifically extends the prohibition to “any political subdivision or
other governmental authority” of a State (5 U.S.C. 8909(f)(1)).

The BBA conference report does not provide any clarification on
this issue. However, a July 31, 1997 summary of the provisions of the
BBA prepared by the Senate Finance Committee (“Summary: Health and
Welfare Provisions in the Balanced Budget Act of 1997”), stated that
“[t]he current law on federal preemption of state premium taxes or
fees on Federal payments from the FEHBP to health plans will be
extended to Federal payments to M+C plans and other health plans
receiving capitated payments from the Medicare Trust Funds.” Although
the language of the BBA prohibition is not as specific as the FEHBP
language, we are clarifying in these regulations that the prohibition
does apply to any political subdivision or other governmental
authority within a State. We believe such an interpretation is
necessary because counties and other State authorities derive their
powers from the State. Thus, any prohibition of State actions
contained in a Federal statute should be interpreted as prohibitions
on actions at any level of State government or any State or local
governmental body within a State.

The BBA does not define the phrase “premium tax or other similar
tax,” other than by reference to the applicability of such a tax to
revenue received from the Federal Government for health plan
enrollees. Relying again on the FEHBP statute, we have included a
provision in the regulations (Sec. 422.404(b) that serves to clarify
the scope of what constitutes a prohibited premium tax. The FEHBP
statute expressly permits States to impose taxes on the profits
arising from participation as an FEHBP plan, to the extent that the
tax on profits, or other taxes or fees, are general business taxes.
We have included a similar exception because such taxes are not taxes
applied directly and exclusively to premium revenues, and therefore
should not be prohibited under section 1854(g).

The BBA premium tax prohibition does not provide for any exception
to the prohibition based on the purpose of the tax. For example, some
States are using a broadly applicable premium tax to fund health care
coverage for individual State residents who might otherwise be
uninsured (e.g., financing a State high-risk pool), or to fund a
State guaranty fund that could potentially benefit enrollees of an
M+C plan in the event of insolvency. Although such premium taxes do
provide a social good, and may yield a direct benefit to M+C
organizations and their enrollees, there are no exceptions to the
premium tax prohibition included in the BBA or in these regulations.
By not having allowed any exceptions, we would note that, to the
extent participation in a State guaranty fund is used as means of
satisfying State (or Federal) requirements for protections in the
event of insolvency, M+C organizations that would otherwise have
participated in the guaranty fund by paying the premium tax are
likely to be required to meet alternative insolvency requirements. An
M+C organization may also choose to voluntarily pay premium taxes in
order to participate in such a fund.

J. Subpart J of Part 422

Subpart J of part 422 is being reserved.

K. Contracts with M+C Organizations

1. Definitions (Sec. 422.500)

Section 422.500 of subpart K contains definitions germane to
subpart K that address provisions pertaining to contracts with M+C
organizations. These definitions, for the most part, have been
imported from part 417 under our authority from section 1856(b)(2).
The lone exception, Party of Interest has been clarified in paragraph
(3) to include non-profit entities.

2. General Provisions (Sec. 422.501)

Section 1857(a) provides that the Secretary will not permit an
organization to operate as an M+C organization unless it has entered
into a contract with HCFA. The statute also provides that the
contract may cover more than one M+C plan.

An applicant, however, must meet certain requirements before HCFA
can consider entering into a contract with it. First, in accordance
with section 1855(a)(1), the applicant must be licensed (or if the
state does not license such entities, hold a certificate of
authority/ operation) as a risk-bearing entity in the State in which
it wishes to operate as an M+C organization; section 1855(a)(2),
however, allows for a waiver of this requirement for
Federally-waivered PSOs under certain circumstances. Second, the
applicant must meet the minimum enrollment requirements specified at
section 1857(b). These requirements provide that the organization
must have at least 5,000 (or 1,500 if it is a Federally-waivered PSO)
individuals receiving health benefits from the organization or at
least 1,500 (or 500 if it is a PSO) individuals receiving benefits in
a rural area. Section 1857(b)(3) gives the Secretary the authority to
waive the minimum enrollment requirements for the first 3 contract

Third, an M+C organization must demonstrate certain administrative
and managerial capabilities that we believe are essential for HCFA to
examine prior to agreeing to contract with any applicant as an M+C
organization. For this reason, pursuant to section 1856(b)(2) which
provides for the adoption of regulations implementing section 1876,
we have adopted the administration and management requirements from
Secs. 417.120 and 417.124 and have applied them to M+C organizations.
In addition, pursuant to our authority in section 1856(b)(1) to
establish standards under Part C by regulation, we will require that
all M+C organizations establish a plan for complying with all
applicable Federal and State standards. The compliance plan must
include written policies, procedures, and standards of conduct, the
designation of a compliance officer accountable to senior management
of the organization, provisions for internal monitoring, auditing,
accountability, and an adhered to process for reporting violations of
law by the organization or their subcontractors.

Further, pursuant to our authority in section 1856(b)(1) to
establish standards for M+C organizations by regulation, we are in
this rule establishing an additional condition for entering into an
M+C contract. Under this rule, an entity that is accepting new
enrollees under a section 1876 cost contract will be ineligible to
enter into an M+C contract covering the area it serves under its cost
contract. Our 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 M+C plan. This rule is consistent with our
longstanding policy that entities not [[Page 35015]] have both a risk
and cost contract under section 1876 in the same area.

Further, we provide at Sec. 422.501(b) that in order to be
eligible to contract as an M+C organization, an applicant
organization that held a prior contract terminated by HCFA under Sec.
422.510 within the past five years.

Section 1857(c)(5) authorizes the Secretary to enter into
contracts with organizations without regard to provisions of law or
regulations that the Secretary determines to be inconsistent with the
furtherance of the purpose of Title XVIII of the Act. Based on this
authority, we provide in Sec. 422.501(c) that HCFA may enter into
contracts under part 422 without regard to the Federal and
Departmental acquisition regulations set forth in title 48 of the

Further, section 1857(d)(1) and (2) provide for the auditing of
the financial records of at least one third of M+C organizations
annually, and the inclusion of specified inspection and auditing
rights in M+C contracts. We have incorporated these requirements in
Sec. 422.501(d). We likewise specify related requirements that enable
HCFA to do so.

Since section 1857(a) allows that an M+C contract may cover more
than one M+C plan, we have added paragraph (e), “Severability of
contracts,” through our authority in section 1856(b)(1). The contract
provides that upon HCFA’s request (1) the contract will be amended to
exclude any M+C plan or State-licensed entity specified by HCFA, and
(2) a separate contract for any such excluded plan or entity would be
deemed to be in place when such a request is made.

National Contracting

The BBA does not specifically define or otherwise address the
issue of national contracting. While we are interested in national
contracting, we have not specified it in the regulations and welcome
comment on this concept. One option we are considering would allow an
M+C applicant to request that HCFA enter into a national contract
with the applicant if the applicant holds license as a risk-bearing
entity in each state where it operates or has a waiver as provided in
Sec. 422.370. The applicant M+C organization would have the option of
having a uniform premium and benefit plan across the country, with
one service area and a national ACR proposal.

We are considering a different concept of a national agreement
with national chain organizations. This concept would apply to those
chain organizations that enter into separate contracts in multiple
States. The agreement would allow for the chain organization to
establish a uniform policy across all of its states as to marketing,
quality assurance, utilization review, claims processing, etc. HCFA
would have to approve the national policy procedures. HCFA would
continue to contract separately with individual, albeit related, M+C
organizations affiliated through common ownership or control. We
would continue to monitor operational activities for each
organization in each State, but having approved national policy, our
review at the State and local level would be reduced.

3. Contract Provisions (Sec. 422.502)

Section 422.502 of this rule sets forth the provisions and related
requirements for contracts between HCFA and M+C organizations. In
general, Medicare beneficiaries may not elect to enroll in an M+C
plan offered by an M+C organization, and no payment will be made to
the M+C organization, unless the Secretary enters into a contract
with the organization. The provisions that describe this relationship
between the Secretary and the M+C organization are based on Part C of
title XVIII of the Act and on Medicare contract requirements derived
from subparts C and L of part 417.

The provisions of the Act as added by the BBA are generally silent
with regard to the specific provisions that must be included in the
contract between the M+C organization and HCFA. The Act does,
however, specify at section 1857(a) that the contract must provide
that the organization agrees to comply with the applicable
requirements, standards, and terms and conditions of payment of Part
C of title XVIII of the Act. In addition, section 1857(e) provides
that the contract shall contain such other terms and conditions not
inconsistent with Part C of title XVIII of the Act that the Secretary
may find necessary and appropriate. Included in Sec. 422.502(a),
“Agreement to comply with regulations and instructions,” are the
following contract conditions:

  • The M+C organization must agree to accept new enrollments,
    make enrollments effective, process voluntary disenrollments, and
    limit involuntary disenrollments. The M+C organization agrees that
    it will comply with the prohibition in Sec. 422.108 on
    discrimination in beneficiary enrollment.

  • The M+C organization must agree to provide the basic benefits
    as required under Sec. 422.101 and to the extent applicable,
    supplemental benefits under Sec. 422.102.

  • The M+C organization must agree to provide access to benefits
    as required under subpart C of part 422. All benefits covered by
    Medicare must be provided in a manner consistent with
    professionally recognized standards of health care.

  • The M+C organization agrees to disclose information to
    beneficiaries as required under Sec. 422.110.

  • The M+C organization must agree to operate a quality assurance
    and performance improvement program, and to have an agreement for
    external quality review as required under subpart D of part 422.

  • The M+C organization must agree to comply with all applicable
    provider requirements in subpart E of part 422, including provider
    certification requirements, anti-discrimination requirements,
    provider participation and consultation requirements, the
    prohibition on interference with provider advice, limits on
    provider indemnification, rules governing payments to providers,
    and limits on physician incentive plans.

  • The M+C organization will agree to comply with all
    requirements in subpart M governing coverage determinations,
    grievances, and appeals.

  • The M+C organization will comply with the reporting
    requirements in Sec. 422.516 and the requirements for submitting
    encounter data to HCFA in Sec. 422.257.

  • The M+C organization agrees that it will be paid under the
    contract in accordance with the payment rules under subpart F of
    part 422.

  • The M+C organization will develop annual adjusted community
    rate proposals and submit all required information on premiums,
    benefits, cost sharing by May 1, as provided in subpart G of part

  • The M+C organization agree that its contract may be terminated
    or not renewed in accordance with subparts K and N of part 422.

  • The M+C organization will agree to comply with all
    requirements that are specific to a particular type of M+C plan,
    such as the special rules for private fee-for-service plans in
    Secs. 422.114 and 422.216 and the M+C MSA requirements in Secs.
    422.56, 422.103, and 422.262.

  • The M+C organization will agree to comply with the
    confidentiality and enrollee accuracy requirement in Sec. 422.118.

  • The M+C organization agrees that complying with the
    aforementioned contract conditions is material to performance of
    the contract.

Contract requirements that were either not required of HMOs and
CMPs [[Page 35016]] under section 1876, or have been modified to
implement the M+C program follow:

  • The M+C organization must possess the capabilities to
    communicate with HCFA electronically.

  • The M+C organization is required to provide prompt payment of
    covered services if these services are not furnished by a provider
    under contract or agreement in an M+C plan’s health services
    delivery network. Under section 1876, the prompt payment
    requirement was limited to noncontracting providers. Section
    1857(f) duplicates this requirement and adds to it the requirement
    that if the Secretary determines that an M+C organization fails to
    pay claims promptly, the Secretary may provide for direct payment
    of the amounts owed providers. When this occurs, the Secretary
    reduces the amount of the M+C organization’s monthly payment to
    account for payments to these providers. We explain the full
    implications of this requirement in the discussion below
    pertaining to Sec. 422.520.

  • Pursuant to our authority in section 1856(b)(1) to establish
    standards under Part C, we are requiring that M+C organizations
    maintain records for 6 years. The standard for retention of
    records for HMO and CMPs was 3 years. We are changing the
    retention period from 3 years to 6 years so as not to prematurely
    foreclose our ability to address fraudulent or other abusive

  • Pursuant to our authority at section 1856(b)(1) to establish
    standards under Part C, we specify requirements relating to M+C
    organizations providing access to facilities and records at Sec.
    422.502(e). In this section we assert that M+C organizations allow
    HHS, the Comptroller General, or their designees to evaluate,
    through inspection or other means, all aspects of medical services
    furnished to Medicare beneficiary enrollees, the facilities of M+C
    organizations, and enrollment and disenrollment records of M+C
    organizations. We further provide that HHS, the Comptroller
    General, or their designees may audit, evaluate, or inspect all
    facilities and records as the Secretary may deem necessary to
    enforce an M+C contract. HHS’s, the Comptroller General’s, and
    designee’s right to inspect such facilities and records extends
    through 6 years from the date of the contract period or completion
    of any inspection or audit activity, whichever is later.
    Exceptions to this 6-year inspection timeframe can occur in
    instances when: (1) HCFA determines there is a special need to
    retain particular records or a group of records for a longer
    period and notifies the M+C organization at least 30 days before
    the normal disposition date, (2) there has been a termination,
    dispute, or fraud or similar fault by the M+C organization, in
    which case the retention may be extended to 6 years from the date
    of any resulting final solution of the termination, dispute, or
    fraud or similar fault, or (3) HCFA determines that there is a
    reasonable possibility of fraud, in which case it may inspect,
    evaluate, and audit the M+C organization at any time.

  • Pursuant to our authority in section 1856(b)(1) to establish
    standards under Part C, and the provision in section 1856(b)(2)
    for adopting section 1876 standards, we have included certain
    disclosure requirements from Sec. 417.486 in Sec. 422.502(f). We
    have also included additional disclosure requirements to reflect
    new reporting requirements in Sec. 422.516.

  • At Sec. 422.502(f)(2), we add the requirement that M+C plans
    submit to HCFA specific information necessary to evaluate and
    administer the program and to enable beneficiaries to exercise
    informed choice in obtaining Medicare services. Section 1851(d)
    authorizes the Secretary to obtain this information to enable HCFA
    to fulfill its responsibility to develop activities to disseminate
    broadly information to current and prospective Medicare
    beneficiaries in order to promote an active, informed selection
    among such options.

  • Pursuant to section 1851(b)(4)(B), we have specified
    requirements at Sec. 422.502(b)(2)(vii) that M+C organizations
    offering MSA plans disclose to HCFA information that will enable
    HCFA to evaluate the impact of permitting enrollment in MSA plans.

  • Enrollee financial protection provisions are addressed at Sec.
    422.502(g). The first item protects beneficiary enrollees from
    incurring liability for payment of any fee that M+C organizations
    are legally obligated to bear. Section 422.502(g) contains the
    enrollee financial protection that has applied to HMO and CMP
    enrollees under Sec. 417.122 (a)(1), which was made applicable to
    all section 1876 contractors under Sec. 417.407(f). The
    beneficiary protection at 422.502(g)(1) is designed to protect
    beneficiary enrollees from being held financially responsible for
    fees for which the M+C organization is legally liable. Under the
    provision, we assert that M+C organizations protect beneficiary
    enrollees in two ways. First, through inclusion, hold harmless
    language in its written agreements with the providers that
    comprised the M+C plan’s Medicare provider network. And pursuant
    to our rulemaking authority at section 1856(b)(1), we also specify
    that M+C organizations must indemnify beneficiary enrollees for
    the organization’s legal obligations that are derived from health
    care services provided to enrollee beneficiaries by providers that
    have not entered into a written agreement to participate in the
    M+C organization’s Medicare provider network. The beneficiary
    protection at 422.502(g)(2) afford beneficiaries protection
    against loss of benefits for which the M+C organization is legally
    obligated to pay. Except in the case of PSOs that have been
    awarded Federal waivers (see subpart H), States have the primary
    responsibility under Part C for determining whether an M+C
    organization has sufficient reserves to assume the risk it takes
    on under an M+C contract. The State that licenses the entity under
    applicable State law determines whether an entity has sufficient
    financial reserves to enter into an M+C contract.

Congress has given HCFA some ongoing responsibility concerning
solvency, however. In section 1857(d)(4)(A)(i), M+C organizations are
required to provide the Secretary with such information “as the
Secretary may require demonstrating that the organization has a
fiscally sound operation.” Accordingly, we believe that it is
appropriate, under our authority in section 1856(b)(1) to establish
standards under Part C to require (in Sec. 422.502(g)) that an entity
that already has an M+C contract demonstrate to HCFA that it has
protections in place ensuring that beneficiaries will not be held
liable for the entity’s debts. We believe that this can be seen as
part of having a fiscally sound operation as provided for in section

  • The subsection entitled “Requirements of Other Laws and
    Regulations” at Sec. 422.502(h) requires that contracts reflect
    the M+C organization’s obligations under other laws, specifically,
    the Civil Rights Act of 1964, the Age Discrimination Act of 1975,
    the Americans with Disabilities Act, other laws applicable to
    recipients of Federal funds, and all other applicable laws and

  • Pursuant to our authority under section 1856(b)(1) to
    establish standards under Part C, paragraph (i) of Sec. 422.502
    contains requirements that apply to related entities, contractors,
    and subcontractors of an M+C organization. These requirements
    promote an M+C organization’s accountability and program

The requirements in paragraph (i) recognize that organizations
that are likely to apply for M+C contracts commonly enter into
business [[Page 35017]] relationships with entities that they placed
under contract to perform certain functions that otherwise would be
the responsibility of the organization to perform including
management and provision of services. This section therefore
addresses these relationships and establishes requirements that the
M+C organizations must adhere to in order to provide HCFA assurances
that the M+C organization will be accountable for all contract

Specifically, this section gives HHS, the Comptroller General or
their designee, the authority to audit, evaluate and/or inspect
documents, papers, records of all of the organizations mentioned in
Sec. 422.502(i); and to obtain information from the M+C organization
and other entities described here, six years following the close of a
contract or audit. Paragraph (i)(3) of Sec. 422.502 describes
provisions that must be included in contracts and other written
arrangements between M+C organizations and other entities described
in this section.

  • Section 422.502(j), which is derived from section 1857(e),
    states that the contract will contain other terms and conditions
    consistent with this part as HCFA may find necessary and

  • Under Sec. 422.502(k), we require that all M+C contracts be
    severable as discussed previously.

Finally, pursuant to our authority in section 1856(b)(1) to
establish standards under Part C by regulation, we are requiring in
paragraphs (l) and (m) that an M+C organization request payment on
document that certify the accuracy and completeness of relevant data
as a condition for receiving its capitation payment and, in the case
of the ACR, for retaining the portion of capitation payment
associated with the ACR amount (rather than providing additional
benefits). Section 422.502(b) also states that the M+C organization’s
CEO or CFO certify the accuracy of encounter data, and, in instances
when encounter data are generated by a related entity, contractor, or
subcontractor, such entity likewise certifies the accuracy of the
encounter data.

In all of these cases, when an M+C organization submits the data
in question to HCFA, we believe that it is making a “claim” for
capitation payment in the amount dictated by the data submitted, or
in the case of the ACR submission, a “claim” to retain the portion
of the capitation payment that is under the ACR amount, rather than
providing additional benefits. We believe it is important that when
an M+C organization is claiming payment (or the right to retain
payment) in a particular amount based upon information it is
submitting to HCFA, it should be willing to certify the accuracy of
this information. We believe that these certifications will help
ensure accurate data submissions, and assist HCFA and the Office of
Inspector General in anti-fraud activities.

Health Hippo ©1996-2015

Contact Information