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[Federal Register: January 28, 2005 (Volume 70, Number 18)]
[Rules and Regulations]
[Page 4193-4585]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28ja05-21]


[[Page 4193]]

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Part II


Department of Health and Human Services

-----------------------------------------------------------------------

Centers for Medicare & Medicaid Services

-----------------------------------------------------------------------

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

Medicare Program; Medicare Prescription Drug Benefit; Final Rule


[[Page 4194]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

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

[CMS-4068-F]
RIN 0938-AN08


Medicare Program; Medicare Prescription Drug Benefit

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule implements the provisions of the Social
Security Act (the Act) establishing and regulating the Medicare
Prescription Drug Benefit. The new voluntary prescription drug benefit
program was enacted into law on December 8, 2003 in section 101 of
Title I of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) (Pub. L. 108-173). Although this final
rule specifies most of the requirements for implementing the new
prescription drug program, readers should note that we are also issuing
a closely related rule that concerns Medicare Advantage organizations,
which, if they offer coordinated care plans, must offer at least one
plan that combines medical coverage under Parts A and B with
prescription drug coverage. Readers should also note that separate CMS
guidance on many operational details appears or will soon appear on the
CMS website, such as materials on formulary review criteria, risk plan
and fallback plan solicitations, bid instructions, solvency standards
and pricing tools, plan benefit packages.
    The addition of a prescription drug benefit to Medicare represents
a landmark change to the Medicare program that will significantly
improve the health care coverage available to millions of Medicare
beneficiaries. The MMA specifies that the prescription drug benefit
program will become available to beneficiaries beginning on January 1,
2006.
    Generally, coverage for the prescription drug benefit will be
provided under private prescription drug plans (PDPs), which will offer
only prescription drug coverage, or through Medicare Advantage
prescription drug plans (MA PDs), which will offer prescription drug
coverage that is integrated with the health care coverage they provide
to Medicare beneficiaries under Part C of Medicare. PDPs must offer a
basic prescription drug benefit. MA-PDs must offer either a basic
benefit or broader coverage for no additional cost. If this required
level of coverage is offered, MA-PDs or PDPs, but not fallback PDPs may
also offer supplemental benefits through enhanced alternative coverage
for an additional premium. All organizations offering drug plans will
have flexibility in the design of the prescription drug benefit.
Consistent with the MMA, this final rule also provides for subsidy
payments to sponsors of qualified retiree prescription drug plans to
encourage retention of employer-sponsored benefits.
    We are implementing the drug benefit in a way that permits and
encourages a range of options for Medicare beneficiaries to augment the
standard Medicare coverage. These options include facilitating
additional coverage through employer plans, MA-PD plans and high-option
PDPs, and through charity organizations and State pharmaceutical
assistance programs. See sections II.C, II.J, and II.P, and II.R of
this preamble for further details on these issues.
    The proposed rule identified options and alternatives to the
provisions we proposed and we strongly encouraged comments and ideas on
our approach and on alternatives to help us design the Medicare
Prescription Drug Benefit Program to operate as effectively and
efficiently as possible in meeting the needs of Medicare beneficiaries.

DATES:  These regulations are effective on March 22, 2005.

FOR FURTHER INFORMATION CONTACT: Lynn Orlosky (410) 786-9064 or Randy
Brauer (410)786-1618 (for issues related to eligibility, elections,
enrollment, including auto-enrollment of dual eligible beneficiaries,
and creditable coverage).
    Melvin Sanders (410) 786-8355 (for issues related to marketing and
user fees).
    Vanessa Duran (214) 767-6435 (for issues related to benefits and
beneficiary protections, including Part D benefit packages, Part D
covered drugs, coordination of benefits in claims processing and
tracking of true-out-of-pocket costs, pharmacy network access
standards, plan information dissemination requirements, and privacy of
records).
    Craig Miner, RPh. (410) 786-1889 for issues of pharmacy benefit
cost and utilization management, formulary development, quality
assurance, medication therapy management, and electronic prescribing).
    Mark Newsom (410) 786-3198 (for issues of submission, review,
negotiation, and approval of risk and limited risk bids for PDPs and
MA-PD plans; the calculation of the national average bid amount;
determination and collection of enrollee premiums; calculation and
payment of direct and reinsurance subsidies and risk-sharing; and
retroactive adjustments and reconciliations.)
    Jim Owens (410) 786-1582 (for issues of licensing and waiver of
licensure, the assumption of financial risk for unsubsidized coverage,
and solvency requirements for unlicensed sponsors or sponsors who are
not licensed in all States in the region in which it wants to offer a
PDP.)
    Jim Slade (410) 786-1073 (for issues related to pre-emption of
State law) and (for issues related to solicitation, review and approval
of fallback prescription drug plan proposals; fallback contract
requirements; and enrollee premiums and plan payments specific to
fallback plans.)
    Christine Hinds (410) 786-4578 (for issues of coordination of Part
D plans with providers of other prescription drug coverage including
Medicare Advantage plans, State pharmaceutical assistance programs
(SPAPs), Medicaid, and other retiree prescription drug plans; also for
issues related to eligibility for and payment of subsidies for
assistance with premium and cost-sharing amounts for Part D eligible
individuals with lower income and resources; for rules for States on
eligibility determinations for low-income subsidies and general State
payment provisions including the phased-down State contribution to drug
benefit costs assumed by Medicare).
    Mark Smith (410) 786-8015 (for issues related to conditions
necessary to contract with Medicare as a PDP sponsor, as well as
contract requirements, intermediate sanctions, termination procedures
and change of ownership requirements.)
    Jean LeMasurier (410) 786-1091 (for issues related to employer
group waivers and options).
    Frank Szeflinski (303) 844-7119 (for issues related to cost-based
HMOs and CMPS offering Part D coverage.)
    John Scott (410) 786-3636 (for issues related to the procedures PDP
sponsors must follow with regard to grievances, coverage
determinations, and appeals.)
    Mark Smith (410) 786-8015 (for issues related to solicitation,
review and approval of fallback prescription drug plan proposals;
fallback contract requirements; and enrollee premiums and plan payments
specific to fallback plans.)
    Jim Mayhew (410) 786-9244 (for issues related to the alternative
retiree

[[Page 4195]]

drug subsidy and other employer-based sponsor options.)
    Joanne Sinsheimer (410) 786-4620 (for issues related to physician
self-referral prohibitions.)
    Brenda Hudson (410) 786-4085 (for issues related to PACE
organizations offering Part D coverage.)
    Julie Walton (410) 786-4622 or Kathryn McCann (410) 786-7623 (for
issues related to provisions on Medicare supplemental (Medigap)
policies.)

SUPPLEMENTARY INFORMATION: Copies: To order copies of the Federal
Register containing this document, send your request to: New Orders,
Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-
7954. Specify the date of the issue requested and enclose a check or
money order payable to the Superintendent of Documents, or enclose your
Visa or Master Card number and expiration date. Credit card orders can
also be placed by calling the order desk at (202) 512-1800 (or toll-
free at 1-888-293-6498) or by faxing to (202) 512-2250. The cost for
each copy is $10. As an alternative, you can view and photocopy the
Federal Register document at most libraries designated as Federal
Depository Libraries and at many other public and academic libraries
throughout the country that receive the Federal Register.
    This Federal Register document is also available from the Federal
Register online database through GPO Access, a service of the U.S.
Government Printing Office. The web site address is: http://www.access.gpo.gov/fr/index.html
.


Table of Contents

I. Background
    A. Medicare Prescription Drug, Improvement, and Modernization Act
of 2003
    B. Codification of Regulations
    C. Organizational Overview of Part 423
II. Discussion of the Provisions of the Final Rule
    A. General Provisions
    1. Overview
    2. Discussion of Important Concepts and Key Definitions
    B. Eligibility and Enrollment
    1. Eligibility and Enrollment
    2. Enrollment Process
    3. Enrollment of Full Benefit Dual Eligible Individuals
    4. Disenrollment process
    5. Enrollment Periods
    6. Effective Dates
    7. Involuntary Disenrollment by the PDP
    8. Late Enrollment Penalty
    9. Information about Part D
    10. Approval of Marketing Materials and Enrollment Forms
    11. Information Provided to PDP sponsors and MA Organizations
    12. Procedures to Determine and Document Creditable Status of
Prescription Drug Coverage
    C. Voluntary Prescription Benefits and Beneficiary Protections
    1. Overview and Definitions
    2. Plan Formularies
    3. Establishment of Prescription Drug Plan Service Areas
    4. Access to Covered Part D Drugs
    5. Special Rules for Out-of-Network Access to Covered Part D Drugs
at Pharmacies
    6. Dissemination of Plan Information
    7. Public Disclosure of Pharmaceutical Prices for Equivalent Drugs
    8. Privacy, Confidentiality, and Accuracy of Enrollee Records
    D. Cost Control and Quality Improvement Requirements for Part D
Plans
    1. Overview (Scope)
    2. Drug Utilization Management, Quality Assurance, and Medication
Therapy Management Programs (MTMPs)
    3. Consumer Satisfaction Surveys
    4. Electronic Prescription Program
    5. Quality Improvement Organizations (QIO) Activities
    6. Treatment of Accreditation
    E. RESERVED
    F. Submission of Bids and Monthly Beneficiary Premiums: Plan
Approval
    1. Overview
    2. Requirements for Submission of Bids and Related Information
    3. General CMS Guidelines for Actuarial Valuation of Prescription
Drug Coverage
    4. Determining Actuarial Equivalency for Variants of Standard
Coverage and for Alternative Coverage.
    5. Test for Assuring the Same Protection against High Out-of-Pocket
Costs
    6. Review and Negotiation of Bid and Approval of Plans
    7. National Average Monthly Bid Amount
    8. Rules Regarding Premiums
    9. Collection of Monthly Beneficiary Premiums
    G. Payments to Part D Plan Sponsors for Qualified Prescription Drug
Coverage
    1. Overview
    2. Definitions
    3. General Payment Provisions
    4. Requirement for Disclosure of Information
    5. Determination of Payment
    6. Low-Income Cost-Sharing Subsidy Interim Payments
    7. Risk Sharing Arrangements
    8. Retroactive Adjustments and Reconciliation
    9. Reopening
    10. Payment Appeals
    H. RESERVED
    I. Organization Compliance with State Law and Preemption by Federal
Law.
    1. Overview
    2. Waiver of Certain Requirements in Order to Expand Choice
    3. Temporary Waiver for Entities Seeking to Offer a Prescription
Drug Plan in more than One State in a Region
    4. Solvency Standards for Non-Licensed Entities
    5. Preemption of State Laws and Prohibition of Premium Taxes
    J. Coordination Under Part D Plans with Other Prescription Drug
Coverage
    1. Overview and Terminology
    2. Application of Part D Rules to Certain Part D Plans on and after
January 1, 2006
    3. Application to PACE Plans
    4. Application to Employer Groups
    5. Medicare Secondary Payer Procedures
    6. Coordination of Benefits with Other Providers of Prescription
Drug Coverage.
    K. Application Procedures and Contracts with PDP Sponsors
    1. Overview
    2. Definitions
    3. Application Requirements
    4. Evaluation and Determination Procedures for Applications to Be
Determined Qualified to Act as a Sponsor
    5. General Provisions
    6. Contract Provisions
    7. Effective Date and Term of Contract
    8. Nonrenewal of Contract
    9. Modification or termination of contract by mutual consent
    10. Termination of Contracts by CMS
    11. Termination of Contract by the Part D Plan Sponsor
    12. Minimum Enrollment Requirements
    13. Reporting Requirements
    14. Prohibition of Midyear Implementation of Significant New
Regulatory Requirements
    15. Fraud, Waste and Abuse
    L. Effect of Change of Ownership or Leasing of Facilities during
the Term of Contract
    1. General Provisions
    2. Change of Ownership
    3. Novation Agreement Requirements
    M. Grievances, Coverage Determinations, and Appeals
    1. Introduction
    2. General Provisions
    3. Grievance Procedures

[[Page 4196]]

    4. Coverage Determinations
    5. Formulary Exceptions Procedures
    6. Appeals
    7. Effectuation of Reconsideration Determinations
    8. Federal Preemption of Grievances and Appeals
    9. Employer Sponsored Prescription Drug Programs and Appeals
    10. Miscellaneous
    N. Medicare Contract Determinations and Appeals
    1. Overview
    2. Provisions of the Final Rule
    O. Intermediate Sanctions
    1. Kinds of Sanctions
    2. Basis for Imposing Sanctions
    3. Procedures for Imposing Sanctions
    P. Premiums and Cost-Sharing Subsidies for Low-Income Individuals
    1. Definitions
    2. Eligibility for the Low-Income Subsidy
    3. Eligibility Determinations, Redeterminations and Applications
    4. Premium Subsidy and Cost-Sharing Subsidy
    5. Administration of Subsidy Program
    Q. Guaranteeing Access to a Choice of Coverage (Fallback
Prescription Drug Plans)
    1. Overview
    2. Terminology
    3. Assuring Access to a Choice of Coverage
    4. Submission and Approval of Bids
    5. Rules Regarding Premiums
    6. Contract Terms and Conditions
    7. Payment to Fallback Plans
    R. Payments to Sponsors of Retiree Prescription Drug Plans
    1. Introduction
    2. Options for Sponsors of Retiree Prescription Drug Programs
    3. Definitions
    4. Requirements for qualified retiree prescription drug plans
    5. Retiree drug subsidy amounts
    6. Appeals
    7. Change of Ownership
    8. Construction
    S. Special Rules for States-Eligibility Determinations for Low-
Income Subsidies, and General Payment Provisions
    1. Eligibility Determinations
    2. General Payment Provisions
    3. Treatment of Territories
    4. State Contribution to Drug Benefit Costs Assumed by Medicare
    T. Part D Provisions Affecting Physician Self-Referral, Cost-Based
HMO, PACE, and Medigap Requirements
    1. Definition of Outpatient Prescription Drugs for Purposes of
Physician Self-Referral Prohibition
    2. Cost-Based HMOs and CMPS offering Part D coverage
    3. PACE Organizations Offering Part D Coverage
    4. Medicare Supplemental Policies
III. Provisions of the Final Rule
IV. Collection of Information Requirements
V. Regulatory Impact Analysis
    In addition, because of the many organizations and terms to which
we refer by acronym in this final rule, we are listing these acronyms
and their corresponding terms in alphabetical order below:

ABN                               Advanced beneficiary notice
ADAP                              AIDS Drug Assistance Program
AEP                               Annual coordinated election period
AHRQ                              Agency for Healthcare Research and
                                   Quality
AI/AN                             American Indians and Alaska Natives
AIC                               Amount in controversy
ALJ                               Administrative Law Judge
AMA                               American Medical Association
AMCP                              Academy of Managed Care Pharmacy
ANCI                              American National Standards Institute
AO                                Accreditation organization
ASAP                              American Society of Automation in
                                   Pharmacy
ASHP                              American Society of Health Systems
                                   Pharmacists
AWP                               Average wholesale price
BBA                               Balanced Budget Act
BLS                               Bureau of Labor Statistics
CAHP                              Consumer Assessment of Health Plan
CBI                               Confidential business information
CBO                               Congressional Budget Office
CCIP                              Chronic care improvement programs
CCP                               Comprehensive Compliance Program
CFR                               Code of Federal Regulations
CHOW                              Change of ownership
CMP                               competitive medical plan
CMS                               Centers for Medicare & Medicaid
                                   Services
COB                               Coordination of benefit
COBRA                             Consolidated Omnibus Budget
                                   Reconciliation Act (of 1985)
CPI-PD                            Consumer Price Index for Prescription
                                   Drugs and Medical Supplies
CPT                               Current Procedural Terminology
CY                                Calendar year
DAB                               Departmental Appeals Board
DHS                               Designated health services
DME                               Durable medical equipment
DoD                               Department of Defense
DOL                               Department of Labor
DUR                               Drug utilization review
EOB                               explanation of benefits
ERISA                             Employee Retirement Income Security
                                   Act of 1974
ESRD                              End stage renal disease
FAR                               Federal Acquisition Regulation
FDA                               Food and Drug Administration
FEHBP                             Federal Employee Health Benefits
                                   Program
FFP                               Federal financial participation
FOIA                              Freedom of Information Act
FQHCs                             Federally qualified health centers
FPL                               Federal poverty level
FR                                Federal Register
FSA                               Flexible savings account
FY                                Fiscal year
HEDIS                             Health plan Employer Data and
                                   Information Set
HHS                               Department of Health and Human
                                   Services
HIC                               Health insurance claim
HIPAA                             Health Insurance Portability and
                                   Accountability Act of 1996
HMO                               Health maintenance organization
HPMS                              Health Plan Management System
HRA                               Health reimbursement account
HRSA                              Health Resources and Services
                                   Administration
HSA                               Health savings account
ICFs/MR                           Intermediate care facilities for the
                                   mentally retarded
IDIQ                              Indefinite duration, indefinite
                                   quantity
IEP                               Initial enrollment period
IHS                               Indian Health Service
IRE                               Independent review entity
I/T/U                             Indian Tribes and Tribal
                                   organizations, and urban Indian
                                   organizations
JCHACO                            Joint Commission on Accreditation of
                                   Health Care Organizations
LIS                               Low-income subsidy
LTC                               Long term care
MA                                Medicare Advantage (formerly
                                   Medicare+Choice)
MA-PD                             Medicare Advantage prescription drug
                                   plans
MAC                               Medicare Appeals Council
MAX                               Medicaid Analytic extract
MCBS                              Medicare Current Beneficiary Survey
MMA                               Medicare Prescription Drug,
                                   Improvement, and Modernization Act of
                                   2003
MSA                               Medicare savings account
MSIS                              Medicaid Statistical Information
                                   System
MSP                               Medicare Secondary Payor
MTMP                              Medication Therapy Management Program
NAIC                              National Association of Insurance
                                   Commissioners
NCQA                              National Committee for Quality
                                   Assurance
NCPDP                             National Council for Prescription Drug
                                   Programs
NCVHS                             National Center for Vital and Health
                                   Statistics
NDC                               National Drug Code
NHE                               National Health Expenditure
NPA                               National PACE Association
NPI                               National Provider Identifier
OACT                              Office of the Actuary (CMS)
OBRA                              Omnibus Budget Reconciliation Act
OCR                               Office for Civil Rights
OEPI                              Open enrollment period for
                                   institutionalized individuals
OIG                               Office of the Inspector General
OPM                               Office of Personnel Management
P&T                               Pharmaceutical and therapeutic
PBA                               Pharmacy benefit administrator
PBMs                              Pharmacy benefit managers
PBP                               Plan Benefit Package
PDP                               Private prescription drug plan

[[Page 4197]]


PDSC                              Phased-down State contribution
PFFS                              Private fee-for-service plan
PHI                               Protected health information
PhRMA                             Pharmaceutical Manufacturers and
                                   Researchers of America
PPO                               Preferred provider organization
PPV                               Pharmaceutical Prime Vendor
PSO                               Provider-sponsored organization
QDWIs                             Qualified disabled and working
                                   individuals
QIl                               Qualified individuals
QIO                               Quality Improvement Organization
QMB                               Qualified Medicare beneficiaries
REACH                             Regional Education About Choices in
                                   Health
RHC                               Rural Health Center
SCHIP                             State Children's Health Insurance
                                   Program
SEP                               Special enrollment period
SHIP                              State health insurance assistance
                                   program
SLMB                              Special Low-Income Beneficiaries
SOW                               Scope of work
SPAP                              State Pharmaceutical Assistance
                                   Program
SPD                               Summary Plan Description
SPOC                              Single point of contact
SSA                               Social Security Administration
SSI                               Supplemental Security Income
SSRI                              Selective serotonin reuptake inhibitor
SSSGs                             Similarly Sized Subscriber Groups
TANF                              Temporary assistance for needy
                                   families
TrOOP                             True out-of-pocket
U&C                               Usual and customary
URAC                              Utilization Review Accreditation
                                   Commission
USP                               U.S. Pharmacopoeia
VA                                Department of Veterans Affairs
VDSA                              Voluntary data sharing agreement


I. Background

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

    Section 101 of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) (Pub. L. 108-173) amended Title XVIII
of the Social Security Act (the Act) by establishing a new Part D: the
Voluntary Prescription Drug Benefit Program. (For ease of reference, we
will refer to the new prescription drug benefit program as Part D of
Medicare and we will refer to the Medicare Advantage Program described
in Part C of title XVIII of the Act -as Part C of Medicare.)
    We believe that the new Part D benefit constitutes the most
significant change to the Medicare program since its inception in 1965.
The addition of outpatient prescription drugs to the Medicare program
reflects the Congress' recognition of the fundamental change in recent
years in how medical care is delivered in the U.S. It recognizes the
vital role of prescription drugs in our health care delivery system,
and the need to modernize Medicare to assure their availability to
Medicare beneficiaries. This final rule is designed to broaden
participation in the new benefit both by organizations that offer
prescription drug coverage and by eligible beneficiaries. In
conjunction with complementary improvements to the Medicare Advantage
program, these changes should significantly increase the coverage and
choices available to Medicare beneficiaries.
    Effective January 1, 2006, the new program establishes an optional
prescription drug benefit for individuals who are entitled to or
enrolled in Medicare benefits under Part A and Part B. Beneficiaries
who qualify for both Medicare and Medicaid (full-benefit dual
eligibles) will automatically receive the Medicare drug benefit unless
Medicare has identified the individual as having other creditable
coverage through an employer-based prescription drug plan. The statute
also provides for assistance with premiums and cost sharing to eligible
low-income beneficiaries.
    In general, coverage for the new prescription drug benefit will be
provided through private prescription drug plans (PDPs) that offer
drug-only coverage, or through Medicare Advantage (MA) (formerly known
as Medicare+Choice) plans that offer integrated prescription drug and
health care coverage (MA-PD plans). PDPs must offer a basic drug
benefit. MA-PDs must offer either a basic benefit, or a benefit with
broader coverage than the basic benefit, but at no additional cost to
the beneficiary. If this required level of coverage is offered, MA-PDs
or PDPs, but not fallback plans, may also offer supplemental benefits,
called ``enhanced alternative coverage,'' for an additional premium.
    All organizations offering drug plans will have flexibility in
terms of benefit design, including the authority to establish a
formulary to designate specific drugs that will be available, and the
ability to have a cost-sharing structure other than the statutorily-
defined structure, subject to certain actuarial tests. Most Part D
plans also may include supplemental drug coverage such that the total
value of the coverage offered exceeds the value of basic prescription
drug coverage. The specific sections of the Act that address the
prescription drug benefit program are the following:

1860D-1                           Eligibility, enrollment, and
                                   information.
1860D-2                           Prescription drug benefits.
1860D-3                           Access to a choice of qualified
                                   prescription drug coverage.
1860D-4                           Beneficiary protections for qualified
                                   prescription drug coverage.
1860D-11                          PDP regions; submission of bids; plan
                                   approval.
1860D-12                          Requirements for and contracts with
                                   prescription drug plan (PDP)
                                   sponsors.
1860D-13                          Premiums; late enrollment penalty.
1860D-14                          Premium and cost-sharing subsidies for
                                   low-income individuals.
1860D-15                          Subsidies for Part D eligible
                                   individuals for qualified
                                   prescription drug coverage.
1860D-16                          Medicare Prescription Drug Account in
                                   the Federal Supplementary Medical
                                   Insurance Trust Fund.
1860D-21                          Application to Medicare Advantage
                                   program and related managed care
                                   programs.
1860D-22                          Special rules for employer-sponsored
                                   programs.
1860D-23                          State pharmaceutical assistance
                                   programs.
1860D-24                          Coordination requirements for plans
                                   providing prescription drug coverage.
1860D-41                          Definitions; treatment of references
                                   to provisions in Part C.
1860D-42                          Miscellaneous provisions.
                                  Specific sections of the MMA that also
                                   relate to the prescription drug
                                   benefit program are the following:
Sec. 102                          Medicare Advantage Conforming
                                   Amendments
Sec. 103                          Medicaid Amendments
Sec. 104                          Medigap
Sec. 109                          Expanding the work of Medicare Quality
                                   Improvement Organizations to include
                                   Parts C and D.


B. Codification of Regulations

    The final provisions set forth here are codified in 42 CFR Part
423-Voluntary Medicare Prescription Drug Benefit. Note that the
regulations--
    * for Medicare supplemental policies (Medigap) will continue
to be located in 42 CFR part 403 (subpart B);
    * for exclusions from Medicare and limitations on Medicare
payment (the physician self-referral rules) will continue to be located
in 42 CFR part 411;
    * for managed care organizations that contract with us under
cost contracts will continue to be located in 42 CFR part 417, Health
Maintenance Organizations, Competitive Medical Plans, and Health Care
Prepayment Plans;
    * for PACE organizations will continue to be located in 42
CFR part 460.

[[Page 4198]]

C. Organizational Overview of Part 423

    The regulations set forth in this final rule are codified in the
new 42 CFR Part 423-Voluntary Medicare Prescription Drug Benefit. There
are a number of places in which statutory provisions in Part D
incorporate by reference specific sections in Part C of Medicare (the
MA program). The MA regulations appear at 42 CFR Part 422. Since the
same organizations that offer MA coordinated care plans will also be
required to offer MA-PD plans, we believed it was appropriate to adopt
the same organizational structure as part 422. Wherever possible, we
modeled the prescription drug regulations on the parallel provisions of
the part 422 regulations.
    The major subjects covered in each subpart of part 423 are as
follows:
    Subpart A, General Provisions: Basis and scope of the new part 423,
Definitions and discussion of important concepts used throughout part
423, and sponsor cost-sharing in beneficiary education and enrollment-
related costs (user fees).
    Subpart B, Eligibility, Election, and Enrollment: Eligibility for
enrollment in the Part D benefit, enrollment periods, disenrollment,
application of the late enrollment penalty, approval of marketing
materials and enrollment forms, and the meaning and documentation of
creditable coverage. (Please note that other, related topics, are
discussed in the following subparts: Subpart P, eligibility and
enrollment for low-income individuals; Subpart S, provisions relating
to the phase-down of State contributions for dual-eligible drug
expenditures; Subpart F, calculation and collection of late enrollment
fees; Subpart C, plan disclosure; Subpart Q, eligibility and enrollment
for fallback plans; and Subpart T, the definition of a Medicare
supplemental (Medigap) policy.)
    Subpart C, Benefits and Beneficiary Protections: Prescription drug
benefit coverage, service areas, network and out-of-network access,
formulary requirements, dissemination of plan information to
beneficiaries, and confidentiality of enrollee records. (Please note
that actuarial valuation of the coverage offered by plans, as well as
the submission of the bid, is discussed in subpart F. Access to
negotiated prices is discussed in subpart C, while the reporting of
negotiated prices is discussed in subpart G. Formularies are discussed
in subpart C, while appeals related to formularies are discussed in
subpart M. Incurred costs toward true out-of-pocket (TrOOP
expenditures) are discussed in subpart C, while the procedures for
determining whether a beneficiary's Part D out-of-pocket costs are
actually reimbursed by insurance or another third-party arrangement are
discussed in subpart J. Information that plans must disseminate to
beneficiaries is discussed in subpart C, while Part D information that
CMS must disseminate to beneficiaries is discussed in subpart B.)
    Subpart D, Cost Control and Quality Improvement Requirements for
Part D Plans: Utilization controls, quality assurance, and medication
therapy management, as well as rules related to identifying enrollees
for whom medication therapy management is appropriate, consumer
satisfaction surveys, and accreditation as a basis for deeming
compliance.
    Subpart E, Reserved.
    Subpart F, Submission of Bids and Monthly Beneficiary Premiums;
Plan Approval: Bid submission, the actuarial value of bid components,
review and approval of plans, and the calculation and collection of
Part D premiums.
    Subpart G, Payments to Part D plans for Qualified Prescription Drug
Coverage: Data submission, payments and reconciliations for direct
subsidies, risk adjustment, reinsurance, and risk-sharing arrangements.
    Subpart H, Reserved.
    Subpart I, Organization Compliance with State Law and Preemption by
Federal Law: Licensure, assumption of financial risk, solvency, and
State premium taxes.
    Subpart J, Coordination Under Part D With Other Prescription Drug
Coverage: Applicability of Part D rules to the Medicare Advantage
program, waivers available to facilitate the offering of employer group
plans, waivers of part D provisions for PACE plans and 1876 cost plans
offering qualified prescription drug coverage, and procedures to
facilitate calculation of true out-of-pocket (TrOOP) expenses and
coordination of benefits with State pharmaceutical assistance programs
and other entities that provide prescription drug coverage. (Please
note that subpart C discusses, in more detail, coordination of benefits
from the perspective of which prescription drug benefits are covered by
Part D and the determination of which incurred beneficiary costs will
be counted as TrOOP expenditures. Provisions relating to disenrollment
for material misrepresentation by a beneficiary are discussed in
subpart B.)
    Subpart K, Application Procedures and Contracts with PDP Sponsors:
Application procedures and requirements; contract terms; procedures for
termination of contracts; reporting by PDP sponsors.
    Subpart L, Effect of Change of Ownership or Leasing of Facilities
during Term of Contract: Change of ownership of a PDP sponsor; novation
agreements; leasing of a PDP sponsor's facilities.
    Subpart M, Grievances, Coverage Determinations and Appeals:
Coverage determinations by sponsors, exceptions procedures, and all
levels of appeals by beneficiaries.
    Subpart N, Medicare Contract Determinations and Appeals:
Notification by CMS about unfavorable contracting decisions, such as
nonrenewals or terminations; reconsiderations; appeals.
    Subpart O, Sanctions: Provisions concerning available sanctions for
participating organizations.
    Subpart P, Premiums and Cost-Sharing Subsidies for Low-Income
Individuals: Eligibility determinations and payment calculations for
low-income subsidies.
    Subpart Q, Guaranteeing Access to a Choice of Coverage (Fallback
Plans): Definitions, access requirements, bidding process, and contract
requirements for fallback PDPs.
    Subpart R, Payments to Sponsors of Retiree Prescription Drug Plans:
Provisions for making retiree drug subsidy payments to sponsors of
qualified retiree prescription drug plans.
    Subpart S, Special Rules for States--Eligibility Determinations for
Subsidies and General Payment Provisions: State/Medicaid program's role
in determining eligibility for low-income subsidy and other issues
related to the Part D benefit.
    In addition, in subpart T, this final rule also makes changes to:
part 400 relating to definitions of Parts C & D, part 403 relating to
Medicare supplemental policies (Medigap), part 411 relating to
exclusions from Medicare and limitations on Medicare payment (the
physician self-referral rules), part 417 relating to cost-based health
maintenance organizations (HMOs), and part 460 relating to PACE
organizations.

II. Provisions of the Proposed Rule

    We received 7,696 items of correspondence containing comments on
the August 2004 proposed rule. Commenters included managed care
organizations and other insurance industry representatives, pharmacy
benefit management firms, pharmacies and pharmacy education and
practice-related organizations, pharmaceutical manufacturers,
representatives of physicians and other health care professionals,
beneficiary advocacy

[[Page 4199]]

groups, representatives of hospitals and other healthcare providers,
States, employers and benefits consulting firms, members of the
Congress, Indian Health Service, Tribal and Urban Health Programs,
American Indians and Alaska Natives, beneficiaries, and others. We also
received many comments expressing concerns unrelated to the proposed
rule. Some commenters expressed concerns about Medicare unrelated to
the Prescription Drug Benefit, while others addressed concerns about
health care and health insurance coverage unrelated to Medicare.
Because of the volume of comments we received in response to the
proposed rule, we will be unable to address comments and concerns that
are unrelated to the proposed rule.
    Most of the comments addressed multiple issues, often in great
detail. Listed below are the areas of the regulation that received the
most comments:
    * Transition of Coverage for Dual Eligibles from Medicaid to
Medicare
    * Access to Drugs in Long Term Care Facilities
    * Formulary Policies
    * Medication Therapy Management Requirements
    * Network Access Standards
    * Part B/Part D Drug Identification and Coordination
    * Dispensing Fees
    In this final rule, we address comments received on the proposed
rule. For the most part, we will address issues according to the
numerical order of the related regulation sections.

A. General Provisions

1. Overview
    Section 423.1 of subpart A specified the general statutory
authority for the ensuing regulations and indicated that the scope of
part 423 is to establish requirements for the Medicare prescription
drug benefit program. We proposed key definitions at Sec.  423.4 for
terms that appear in multiple sections of part 423.
    Consistent with the MMA statute, in many cases we proposed
procedures that parallel those in effect under the MA program. Our goal
was to maintain consistency between these two programs wherever
possible; thus we evaluated the need for parallel changes in the MA
final rule when we received comments on provisions that affect both
programs.
    Comment: Many commenters urged us to finalize regulations by early
January--and detailed business requirements soon thereafter. Some also
recommended that we make public certain key decisions and data sooner
than January in order to promote planning.
    Response: We agree that the earliest possible release of program
requirements and final rules will facilitate planning and
implementation of new business processes required to offer and
administer this new program. Consequently we have made numerous draft
documents, such as the risk plan solicitation, PDP solvency
requirements, formulary review policies, and the actuarial bidding
instructions, available for public comment in November and December of
2004 and have expedited the rulemaking process to meet these goals. In
response to the lack of specificity regarding the PDP regions in our
proposed rule, we conducted extensive outreach in order to obtain
public input prior to the publication of our final rule. On December 6,
2004, we announced the establishment of 26 MA regions and 34 PDP
regions.
2. Discussion of Important Concepts and Key Definitions (Sec.  423.4)
a. Introduction
    For the most part, the proposed definitions were taken directly
from section 1860D-41 of the Act. The definitions set forth in subpart
A apply to all of part 423 unless otherwise indicated, and are
applicable only for the purposes of part 423. For example, ``insurance
risk'' applies only to pharmacies that contract with PDP sponsors under
part 423.
    Definitions that have a more limited application have not been
included in subpart A, but instead are set forth within the relevant
subpart of the regulations. For example, in subpart F, we have included
all the definitions related to bids and premiums. The detailed
definitions and requirements related to prescription drug coverage are
included in subpart C, but because of their direct relevance to the
bidding process they are also referenced in subpart F.
    Following our discussion of important concepts, we provide brief
definitions of terms that occur in multiple sections of this preamble
and part 423. We believe that it is helpful to define these frequently
occurring terms to aid the reader, but that these terms do not require
the extended discussion necessary in our section on important concepts.
b. Discussion of Actuarial Equivalence, Creditable Prescription Drug
Coverage, PDP Plan Regions, Service Area, and User Fees
    * Discussion of the Meaning of Actuarial Equivalence
    The concept of actuarial equivalence is applied in several
different contexts in Title I of the MMA. In very general terms,
actuarial equivalence refers to a determination that, in the aggregate,
the dollar value of drug coverage for a set of beneficiaries under one
plan can be shown to be equal to the dollar value for those same
beneficiaries under another plan. Given the various uses for this term
in the Part D provisions, we proposed the following relatively general
definition: ``Actuarial equivalence'' means a state of equivalent
values demonstrated through the use of generally accepted actuarial
principles and in accordance with section 1860D-11(c) of the Act and
Sec.  423.265(c)(3) of this part. This concept is discussed in further
detail in those sections of this preamble, such as section II.F, where
actuarial equivalence comes into play. We will provide further detailed
guidance on methods required to demonstrate actuarial equivalence.
    Comment: One commenter requested that the definition of actuarial
equivalence be refined through examples or more descriptive language.
    Response: We agree that it is critical to disclose our requirements
for calculation of actuarial values under Part D requirements as fully
and as expeditiously as possible to reduce uncertainty on the part of
potential plan sponsors. To that end we made available our draft bid
preparation rules and processes early in December 2004 for public
comment, and we will continue to refine our guidance to bidders through
vehicles such as the annual 45-day notice and the CMS website. We have
modified our definition to refer to this separate guidance.
* Discussion of the Meaning of Creditable Prescription Drug
Coverage
    Comments on creditable coverage are addressed in the preamble for
subparts B and T.
* Prescription Drug Plan Regions
    Prescription drug plan regions are areas in which a contracting PDP
sponsor must provide access to covered Part D drugs. Although we
included specifications for regions in Sec.  423.112, the regions
themselves were not set forth in the proposed rule. To the extent
feasible, we tried to establish PDP regions that were consistent with
MA regions. The MMA specifically required no fewer than 10 regions and
no more than 50 regions, not including the territories. For a further
discussion of the PDP regions, see section II.C of this preamble.
    Comment: Many commenters expressed concerns about the MA and PDP
region decisions. Many argued that

[[Page 4200]]

regions should closely mirror existing State insurance markets to
maximize participation. Others representing rural constituencies argued
for larger regions to encourage offering of coverage in rural areas.
    Response: We conducted a market survey and analysis, including an
examination of current insurance markets as required in the MMA. Key
factors in the survey and analysis included payment rates; eligible
population size per region; preferred provider organization (PPO)
market penetration; current existence of PPOs, MA plans, or other
commercial plans; and presence of PPO providers and primary care
providers. Additional factors were also considered, including solvency
and licensing requirements, as well as capacity issues. Recognizing the
lack of specificity regarding the PDP regions in our proposed rule, we
conducted extensive outreach in order to obtain public input prior to
the publication of our final decision. On December 6, 2004, we
announced the establishment of 26 MA regions and 34 PDP regions. For
maps and fact sheets on the regions, please see http://www.cms.hhs.gov/medicarereform/mmaregions/
.

* Service Area
    In the proposed rule we proposed that Medicare beneficiaries would
be eligible to enroll in a PDP or an MA-PD plan only if they reside in
the PDP's or MA-PD plan's ``Service Area.'' For PDPs the service area
is defined as the region or regions for which they must provide access.
This is the Region established by CMS either pursuant to proposed Sec.
423.112, or, in the case of fallback plans, the fallback service area
pursuant to Sec.  423.859, within which the PDP is responsible for
providing access to the Part D drug benefit in accordance with the
access standards in proposed Sec.  423.120. Under the MA program, an MA
plan's service area is defined in Sec.  422.2. For coordinated care
plans, the definition of ``service area'' expressly includes the
condition that the service area is an area in which access is provided
in accordance with access standards in Sec.  422.112.
    We also proposed that for purposes of enrolling in Part D with a
PDP, or under an MA-PD plan, the definition of Service Area that
governs eligibility to enroll is the area within which the Part D
access standards under Sec.  423.120 are met. Beneficiaries in jail or
prison do not have access to pharmacies available as required under
Sec.  423.120. Therefore, such beneficiaries would not be considered to
be in a PDP or MA-PD plan's Service Area for purposes of enrolling in
Part D. Incarcerated individuals accordingly would not be assessed a
late penalty when they enroll in Part D (either with a PDP or MA-PD
plan) upon being released. The same analysis applies with regard to a
beneficiary who lives abroad, and does not reside within the boundaries
of any PDP Region or MA-PD Service Area. We have modified our
definition of service area to clarify our intent as proposed.
    Comment: Several commenters asked that we waive the service area
requirement for employer group PDP plans.
    Response: We agree that we have the authority to waive the service
area requirement for employer-sponsored group prescription drug plans,
and we plan to do so in appropriate cases. We will provide further
details on waivers in separate CMS guidance.
* Sponsor Cost-Sharing in Beneficiary Education and Enrollment
Related Costs-User Fees (Sec.  423.6)
    The last section of subpart A proposed regulations implementing the
user fees provided for in section 1857(e)(2) of the Act, as
incorporated by section 1860D-12(b)(3)(D) of the Act. These fees are
currently required of MA plans for the purpose of defraying part of the
ongoing costs of the national beneficiary education campaign that
includes developing and disseminating print materials, the 1-800-
MEDICARE telephone line, community based outreach to support State
health insurance assistance programs (SHIPs), and other enrollment and
information activities required under section 1851 of the Act and
counseling assistance under section 4360 of the Omnibus Budget
Reconciliation Act of 1990 (Pub. L. 103-66).
    The MMA expands the user fee to apply to PDP sponsors as well as MA
plans. The expansion of the application of user fees recognizes the
increased Medicare beneficiary education activities that we would
require as part of the new prescription drug benefit. In 2006 and
beyond, user fees will help to offset the costs of educating over 41
million beneficiaries about the drug benefit through written materials
such as a publication describing the drug benefit, internet sites, and
other media. The user fee provisions establish the applicable aggregate
contribution portions for PDP sponsors and MA organizations through two
calculations.
    Comment: Several commenters supported the extension of user fees to
PDP sponsors in addition to MA plans. One commenter emphasized the need
for Medicare to provide national beneficiary educational materials in
accessible formats (including Braille and other languages commonly used
by beneficiaries), as well as telecommunications equipment to support
beneficiaries with hearing impairments, in order to meet the various
needs of Medicare beneficiaries with disabilities. Another commenter
urged us to focus beneficiary education efforts on helping
beneficiaries make a choice, as opposed to simply describing the array
of choices. This commenter also urged us not to overlook the M+C
population in its outreach campaign.
    Response: We have a long-standing tradition of making our
beneficiary education materials accessible in a variety of formats to
meet the needs of people with disabilities and special communications
barriers. Beneficiary publications on a variety of topics are available
in Braille, large print, and audiotape versions, in addition to
conventional formats. We expect to continue these practices when
educating beneficiaries about MMA topics. In addition, we are
finalizing a partnership with the Social Security Administration (SSA)
that will allow some of our educational products to be translated into
14 languages (other than English and Spanish) and reach a broader
audience.
    We are currently planning the development of a range of tools and
strategies that will help beneficiaries make a choice that meets their
needs. We agree that this action is an essential part of our education
process, in addition to building general awareness and understanding.
We will address the needs of multiple audiences through our outreach
and education efforts, including those with M+C (MA) plans.
c. Definitions of Frequently Occurring Terms
    The following definitions were discussed in the preamble to our
proposed rule:
    Full-benefit dual eligible beneficiary means an individual who
meets the criteria established in Sec.  423.772 (Subpart P), regarding
coverage under both Part D and Medicaid.
    Comment: One commenter asked us to clarify whether individuals
eligible for Medicaid at the special income level for long term care
qualify as full benefit dual eligibles for a full subsidy.
    Response: Yes, all individuals who qualify for Medicaid, including
expansion populations and persons eligible for Medicaid in long term
care facilities under a State's special income standard which does not
exceed 300 percent of the supplemental security income (SSI) payment
standard will qualify as full benefit dual eligible beneficiaries
eligible for a full subsidy.
    Insurance risk means, for a participating pharmacy, risk of the
type

[[Page 4201]]

commonly assumed only by insurers licensed by a State and does not
include payment variations designed to reflect performance-based
measures of activities within the control of the pharmacy, such as
formulary compliance and generic drug substitutions, nor does it
include elements potentially in the control of the pharmacy (for
example, labor costs or productivity).
    Comment: Several commenters supported our definition of `insurance
risk', including the exclusion of performance-based compensation as
this is not commonly viewed as insurance risk.
    Response: We will adopt the definition as proposed.
    MA means Medicare Advantage, which refers to the program authorized
under Part C of Title XVIII of the Act.
    MA-PD plan means an MA plan that provides qualified prescription
drug coverage.
    Medicare prescription drug account means the account created within
the Federal Supplementary Medical Insurance Trust Fund for purposes of
Medicare Part D.
    Part D eligible individual means an individual who is entitled to
Medicare benefits under Part A or enrolled in Medicare Part B. For
purposes of this part, enrolled under Part B means ``entitled to
receive benefits'' under Part B.
    Prescription drug plan or PDP means prescription drug coverage that
is offered under a policy, contract, or plan that has been approved as
specified in Sec.  423.272 and that is offered by a PDP sponsor that
has a contract with CMS that meets the contract requirements under
subpart K or in the case of fallback PDPs also under subpart Q.
    PDP region means a prescription drug plan region as determined by
CMS under Sec.  423.112.
    PDP sponsor means a nongovernmental entity that is certified under
this part as meeting the requirements and standards of this part for
that sponsor.
    Comment: Several commenters noted that the terms PDP sponsor and MA
organization offering an MA-PD plan were not consistently used in the
proposed rule to represent distinct and mutually exclusive entities. As
a result the proposed rule was not always clear regarding when
requirements or options applied only to one or the other entity, or
both.
    Response: We acknowledge that the terminology regarding sponsors
and plans was inconsistently applied. We have revised the language in
the final rule accordingly and have also standardized the terms `Part D
plan' and `Part D plan sponsor' when referring to all plans and
sponsors in general. Consequently we have relocated these terms from
subpart C to this subpart and clarified that references to ``Part D
plans'' in the final rule refer to any or all of MA-PD plans, PDPs,
PACE plans and cost plans. Likewise, the term ``Part D plan sponsor''
refers to MA organizations offering MA-PD plans, PDP sponsors, and
sponsors of PACE plans and cost plans.
    Comment: Several commenters asked that we be flexible in its
definition of a non-governmental entity to allow either the creation of
State-sponsored entities as PDPs or the selection of a preferred PDP
entity for Medicaid dual eligible and SPAP populations.
    Response: While we understand and support the goals of minimizing
client confusion and facilitating continuity of care, we believe the
requirements imposed by sections 1860D-41(13) and 1860D-23(b)(2) of the
Act do not allow us to approve State-sponsored PDPs or the selection of
preferred PDPs for State populations. We would note, however, that we
believe we can waive the non-governmental requirement in section 1860D-
41(23) of the Act under the employer waiver authority for States that
seek to sponsor Part D plans on behalf of their employees. This is
discussed in more detail in subpart J of this rule.
d. Financial Relationships between PDP Sponsors, Health Care
Professionals and Pharmaceutical Manufacturers
    The financial relationships that exist between or among PDP
sponsors, health care professionals (including physicians and
pharmacists), or pharmaceutical manufacturers may be subject to the
anti-kickback statute and, if the relationship involves a physician,
the physician self-referral statute. Nothing in this regulation should
be construed as implying that financial relationships described in this
final rule meet the requirements of the anti-kickback statute or
physician self-referral statute or any other applicable Federal or
State law or regulation. All such relationships must comply with
applicable laws.
    In addition to the provisions in these regulation, under section
6(a)(1) of the Inspector General Act of 1978, as amended, OIG has
access to all records, reports, audits, reviews, documents, papers and
other materials to which the Department has access that relate to
programs and operations for which the Inspector General has
responsibilities under the Inspector General Act. The provisions in
these regulations do not limit the Office of the Inspector General's
(OIG) authority to fulfill the Inspector General's responsibilities
under Federal law.''
e. ERISA application and requirements
    The rules contained in this rulemaking apply for purposes of Title
I of the MMA and no inference should be drawn from anything in this
rule regarding the applicability of title I of ERISA. In addition,
nothing in this rulemaking should be construed as relieving a plan
administrator or other fiduciary of obligations under title I of ERISA.

B. Eligibility and Enrollment

    We outlined the eligibility and enrollment requirements for Part D
plans in subpart B of the August 2004 proposed rule. We received over
100 comments on this subpart. Below we summarize the provisions of the
proposed rule and our final rule and respond to public comments.
(Please refer to the proposed rule (69 FR 46637) for a detailed
discussion of our proposals.)
1. Eligibility for Part D (Sec.  423.30)
    Section 101 of the MMA established section 1860D-1 of the Act,
which includes the eligibility criteria an individual must meet in
order to obtain prescription drug coverage and enroll in a Part D plan.
Section 1860D-1(a)(3)(A) of the Act defines a ``Part D eligible
individual'' as an individual who is entitled to Medicare benefits
under Part A or enrolled in Part B. Further, in order to be eligible to
enroll in a PDP plan, Sec.  423.30(a) of the proposed rule provided
that the individual must reside in the plan's service area, and cannot
be enrolled in an MA plan, other than a Medicare savings account (MSA)
plan or private fee-for-service (PFFS) plan that does not provide
qualified prescription drug coverage. In addition, Sec.  423.4 of the
proposed rule provided the definition of service area, which describes
that for purposes of eligibility to enroll to receive Part D benefits,
certain access standards must be met, hence, making certain individuals
ineligible to enroll.
    Generally, a Part D eligible individual enrolled in an MA plan that
does not provide qualified prescription drug coverage (that is, an MA
plan) may not enroll in a PDP. There are, however, exceptions under
sections 1860D-1(a)(1)(B)(iii) and (iv) of the Act for individuals who
are enrolled in either an MA private fee-for-service plan (as defined
in section 1859(b)(2) of the Act) that does not provide qualified
prescription drug coverage or an MSA plan (as defined in section
1859(b)(3) of the Act). We provided for these

[[Page 4202]]

exceptions in Sec.  423.30(b) of the proposed rule.
    Except as provided above, in accordance with section 1860D-
1(a)(1)(B)(i) of the Act, and as provided in Sec.  423.30(c) of the
proposed rule, a Part D eligible individual who is enrolled in an MA-PD
plan must obtain prescription drug coverage through that plan. In order
to enroll in an MA-PD plan, a Part D eligible individual must also meet
the eligibility and enrollment requirements of the MA-PD plan as
provided in Sec.  422.50 through Sec.  422.68 of the proposed rule
establishing and regulating the MA program (CMS-4069-P) which was also
published August 2004.
    Except as otherwise provided below, the final rule adopts the
eligibility criteria set forth in Sec.  423.30 of the proposed rule.
    Comment: Several commenters requested clarification of the
definition of a Part D eligible individual. One commenter stated than a
literal reading of the proposed definition appears to say that any
individual who is eligible for Medicare but not enrolled could get the
Part D benefit, and asks if an individual must enroll in Part A or Part
B in order to be eligible for Part D. One commenter indicated that it
was unclear how CMS would coordinate Part D eligibility with any
retroactive eligibility determinations made by SSA.
    Response: Section 1860D-1(a)(3)(A) of the Act defines a ``Part D
eligible individual'' as ``an individual who is entitled to benefits
under Part A or enrolled under Part B.''
    In other context, we generally have interpreted the concept of
``entitled'' to benefits to mean that an individual has met all of the
necessary requirements for a benefit (that is, is eligible for the
benefit), and has actually applied for and been granted coverage. We
believe for purposes of applying the definition of ``Part D eligible
individual'' under section 1860D-1(a)(3) of the Act, we believe this
interpretation of ``entitlement'' is the appropriate interpretation.
Accordingly, we will deem an individual ``entitled'' to Part A, and
thus a Part D eligible individual, if the individual is eligible for
benefits under Part A, and has actually applied for and been granted
coverage under Part A. On the other hand, under our Medicare Part B
regulations at part 407, an individual is considered to be ``enrolled''
in Part B when he or she has applied for Part B coverage (or is deemed
to have applied). Nevertheless, we do not believe this interpretation
of ``enrolled'' in Part B is the correct interpretation of section
1860D-1(a)(3)(A) of the Act, and instead interpret ``enrolled under
Part B'' to mean that the individual is entitled to receive benefits
under Part B.
    When establishing eligibility and enrollment rules for the MA
program upon its inception, we adopted a similar interpretation of
section 1851(a) (3) of the Act. Section 1851(a) (3) of the Act defined
the term ``Medicare+Choice eligible individual'' to mean an individual
who is entitled to benefits under part A ``and enrolled under part B.''
As we explained in our proposed rule for the Medicare+Choice program
(see 63 FR 34979), we believe that the Congress intended that we
provide an individual the opportunity to enroll in the Medicare+Choice
program only if entitled to actually receive benefits under Part B in
addition to Part A. As we explained, under some situations, an
individual may apply for or be deemed to have applied for Part B before
he or she is actually entitled to receive coverage. For example, if an
individual applies for Part B coverage after he or she reaches age 65,
the individual may not actually be entitled to Part B coverage under
section 1837 of the Act until one or several months after the month of
application and enrollment. If we had interpreted section 1851(a) (3)
of the Act to permit individuals to enroll in a Medicare+Choice plan
when an individual has only been enrolled in Part B, but is not yet
entitled to Part B, he or she could be entitled to the benefits under a
Medicare+Choice plan before actually being entitled to Medicare Part B
coverage. In order to avoid such a result, we interpreted the language
``enrolled'' in Part B in section 1851(a) (3) of the Act to mean
``entitled'' to Part B.
    We similarly will interpret section 1860D-1(a)(3)(A) of the Act as
providing that an individuals is eligible for Part D only if the
individual is entitled to receive benefits under Part A or Part B.
Section 1860D-1(b)(1)(B) of the Act requires us to use rules similar to
and coordinated with certain rules for enrollment that govern
eligibility for the MA program. Hence, we believe that the Congress
intended that we provide an individual the opportunity to enroll in
part D only if entitled to actually receive benefits under Part B (or
Part A); otherwise an individual would be entitled to receive coverage
of Part D drugs under PDP before being entitled to receive benefits
under original fee-for-service Medicare.
    Our regulations at Sec.  422.2 define an MA eligible individual as
someone who meets the requirements of Sec.  422.50, which outlines the
various criteria that an individual must meet to be eligible to elect
an MA plan, including: entitlement to Parts A and B, residency in a
plan's service area, making an enrollment election and agreeing to
abide by the rules of the MA plan. We intend to apply a parallel
approach to the Part D program. We will amend Sec.  423.4 to define a
Part D eligible individual as an individual who meets the requirements
at Sec.  423.30, that is, the individual is entitled to Medicare
benefits under Part A or enrolled in Part B and lives in the service
area of the Part D plan. We clarify, however, that ``enrolled'' in Part
B means that the individual not only has applied for and enrolled in
Part B, but is also receiving coverage for Part B services, in
accordance with part 407.
    We have included in Sec.  423.30 to be eligible to enroll in a Part
D plan, the individual must also reside in the Part D plan's service
area and not be enrolled in another Part D plan.
    We have clarified Part D eligibility for those individuals for whom
eligibility determinations for Medicare Part A or B have been made
retroactively, which results in retroactive entitlement to these
programs. The MA statute at section 1851(f) of the Act provides that
initial elections shall take effect upon the date the individual
becomes entitled to Part A or B, except as the Secretary may provide
``in order to prevent retroactive coverage.'' Under the MA program, an
individual who has received a retroactive eligibility determination for
Medicare Part A or B is not permitted to enroll in an MA plan
retroactively. Again, using section 1860D-1(b)(1)(B) of the Act that
directs us to establish rules similar to those in MA, we envision
individuals enrolling in a Part D plan prospectively and have revised
Sec.  423.30 so that individuals who become entitled to Medicare Part A
or Part B benefits for a retroactive effective date are deemed Part D
eligible as of the month in which notice of Medicare Part A or Part B
entitlement is provided.
    Such revisions at Sec.  423.4 and Sec.  423.30 will clarify that an
individual is eligible for Part D at the same time an individual is
eligible to enroll in Part D.
    Comment: Commenters requested clarification on the eligibility of
incarcerated individuals. One commenter did not believe that we had the
authority to create such exclusion. Another requested clarification of
the ability of individuals released from incarceration on probation or
parole to enroll in Part D.
    Response: In the preamble of the proposed rule, we explained that
individuals who are incarcerated likely do not have access to Part D
services, as they cannot obtain their prescription drugs from network
pharmacies, yet

[[Page 4203]]

technically the jail or prison may be located within the larger
geographic area encompassing a PDP's service area. As a result, the
individual would be subject to a late enrollment penalty for not
enrolling in a Part D plan. As a result, we believe that it is
appropriate to provide in Sec.  423.4 that a PDP's service area would
exclude areas in which incarcerated individuals reside (that is, a
correctional facility) and as a result, incarcerated individuals would
be ineligible to enroll in a PDP and we have revised the definition to
clarify this point. Upon release from incarceration, such as for
probation or parole, individuals will be considered eligible for Part D
by living in a PDP service area, if they meet other Part D eligibility
requirements.
    Comment: One commenter suggested that we consider individuals who
are residents of a State mental institution to be out of the service
area and therefore ineligible for enrollment in a Part D plan.
    Response: We would not consider individuals who are residing in a
State mental institution to be out of the service area. Medicare
beneficiaries residing in such institutions have access to Medicare
benefits under Parts A and B and therefore would be entitled to enroll
in a Part D plan. However, we do recognize that individuals in a State
mental institution may be limited to the pharmacy network contracted
with the facility. Therefore, we will provide such individuals a
Special Enrollment Period (SEP) to enable them to join the appropriate
Part D plan based upon their situation. We will clarify this in
guidance following publication of this rule.
    Comment: One commenter asked that we clarify Sec.  423.30(c) in the
final rule to indicate when an individual in an MA-PD plan can change
plans.
    Response: The provisions explaining the opportunities for
individuals to make PDP enrollment choices are fully set forth at Sec.
423.38 of the final rule. The requirements for MA plans are outlined
under Sec.  422.50 through Sec.  422.80.
    Comment: One commenter suggested that we permit beneficiaries
enrolled in an MA plan to enroll in a PDP or disenroll from the MA plan
and enroll in an MA-PD plan.
    Response: Section 1860D-1(a)(1) of the Act specifically prohibits
an MA plan enrollee from enrolling in a PDP except in the case of
enrollees of a MA PFFS plan that does not provide qualified
prescription drug coverage or enrollees of an MSA plan. All
individuals, including enrollees of MA plans, can enroll in a Part D
plan during the established enrollment periods, as described at Sec.
423.38 of the final rule.
2. Enrollment Process (Sec.  423.32)
    Section 1860D-1(b)(1) of the Act requires that we establish a
process for the enrollment, disenrollment, termination, and change of
enrollment of Part D eligible individuals in prescription drug plans.
The statute further requires that this process use rules similar to,
and coordinated with, the enrollment, disenrollment, termination, and
change of enrollment rules for MA plans under certain provisions of
section 1851 of the Act. Thus, we proposed, where possible, to adopt
the MA enrollment requirements provided under Sec.  422.50 through
Sec.  422.80.
    Generally, a Part D eligible individual who wishes to make, change,
or discontinue an enrollment during applicable enrollment periods must
file an enrollment with the PDP directly. However, we will allow PDPs
to use other enrollment mechanisms, as approved by us. In addition,
Sec.  423.32 of the final rule provides that beneficiaries will remain
enrolled in their PDP without having to actively re-enroll in that PDP
at the beginning of each calendar year. Except as otherwise provided
below, the final rule adopts the enrollment rules set forth in Sec.
423.34 of the proposed rule.
    Comment: Several commenters submitted identical comments on various
aspects of the coordination of the enrollment process reflected at both
Sec.  423.34(b) and Sec.  423.42(a).
    Response: Commenters provided similar comments about the enrollment
process at Sec.  423.34(b)(1) of the proposed rule and the coordination
of enrollment and disenrollment process at Sec.  423.42(a) of the
proposed rule. After reviewing these comments, we recognized that these
sections were duplicative and could cause confusion. To address this
problem, we have reorganized the following subjects in subpart B into a
more logical order: the enrollment process at Sec.  423.32 (previously
proposed Sec.  423.34); auto-enrollment process for dual eligible
individuals at Sec.  423.34 (previously proposed Sec.  423.34(d); the
disenrollment process at Sec.  423.36; the enrollment periods in Sec.
423.38; and the effective dates at Sec.  423.40. We believe that this
will simplify and clarify these provisions.
    Comment: Several commenters supported the inclusion of regulatory
provisions that would permit enrollment through means other than the
submission of signed, hard-copy enrollment forms in order to facilitate
flexibility for future enrollments. These commenters supported allowing
alternative mechanisms for enrollment, particularly electronic
enrollments, to enable beneficiaries with access to computers to enroll
or disenroll through secure websites established by PDP sponsors.
Another commented that we should make the same enrollment mechanisms
that are available to Medicare Advantage plans available to PDP
sponsors. A few commenters requested clarification as to the ``other
mechanisms'' referenced by us in the proposed rule, specifically what
types of enrollment are envisioned and the populations to which these
``other mechanisms'' would be applied. One commenter recommended we
allow electronic enrollments through a CMS-hosted web site, and that we
develop a standard registration process to authenticate the
enrollments. Another stated that processing applications via the
Internet would require significant systems changes and that the
regulation appeared to lack requirements necessary to process
applications in such a manner.
    Response: We were pleased by the general support for flexibility
and creativity in this important part of the enrollment process, and we
anticipate working in collaboration with all of our partners to develop
enrollment processes that will be convenient, reliable and secure for
all beneficiaries. We will adopt this provision as proposed at Sec.
423.32(b), rather than specify or limit the types of alternative
enrollment processes that may be used. We will continue to assess the
technology available and provide additional operational guidance in the
future, including specific systems requirements and other information
necessary to implement these processes.
    Comment: We received several comments requesting clarification of
what parties are authorized to act on behalf of a beneficiary for
enrollment purposes. One commenter noted that the regulation does not
appear to recognize a beneficiary's ``authorized'' or ``personal''
representative who could be designated to make decisions for
individuals and refers to the personal representative definition that
we created in subpart P of the proposed rule. Another commenter was
concerned that individuals in long-term care facilities do not have a
designated surrogate decision maker in place to make such a decision
and lack the cognitive capacity to select a PDP. While some commenters
stated that we should allow an individual's personal representative to
enroll a person into a PDP, others requested that we recognize specific
representatives who could effectuate

[[Page 4204]]

such an enrollment within the regulatory text (for example, SPAP).
    Response: In the regulation, we refer to a Part D eligible
``individual'' who wishes to enroll. An individual who has been
appointed as the legal representative to execute such an enrollment on
behalf of the beneficiary, in accord with State law, would constitute
the ``individual'' for purposes of making the enrollment or
disenrollment. As with the Medicare Advantage provisions, we will
recognize State laws that authorize persons to effect an enrollment for
Medicare beneficiaries. We will include more information on this
clarification in future operational guidance.
    Comment: Several commenters asked that we clarify that nothing
would prevent a person or entity from assisting a beneficiary in
completing and submitting his or her application to the PDP, as the MA
program allows at Sec.  422.60(c).
    Response: We agree and have revised the regulatory language at
Sec.  423.32(b) to allow for such assistance, consistent with the MA
regulations.
    Comment: One commenter suggested that we set forth an appeals
process for beneficiaries who are denied enrollment.
    Response: Although we agree with the commenter that we should
establish a procedure for beneficiaries to dispute enrollment denials,
we do not believe that a formal appeals process is necessary. Instead,
we intend to address beneficiary complaints regarding enrollment in a
similar manner as we have done under the MA program. Under the MA
program, individuals are advised through their notice of denial of
enrollment that if they disagree with the decision to deny enrollment,
they may contact the MA organization. We monitor MA organizations
periodically to ensure that they are providing this notification. We
also respond to specific inquiries from beneficiaries and investigate
possible situations where MA organizations have failed to notify
beneficiaries of the process or where an organization may have
incorrectly denied a beneficiary's enrollment. If we discover a
beneficiary was incorrectly denied enrollment we can require the MA
organization to enroll that individual, as provided in our manual
instructions. We believe our current process provides adequate remedies
to beneficiaries and will therefore establish a similar process for
PDPs. We decline to establish a separate appeals process for these
denials at this time.
    Comment: One commenter requested that we specify in the final rule
that PDPs must provide written notice of enrollment decisions to each
consumer.
    Response: In Sec.  423.32(d) we require PDPs to provide all
individuals prompt notice of acceptance or denial of enrollment in the
PDP in a format and manner specified by CMS. We will provide specific
instructions on the format and manner of these required notices in
operational guidance and intend to provide model language and materials
for PDPs to use as well. Looking ahead, we believe that beneficiaries
may want to receive documents (such as notices) in a variety of
formats, rather than just in writing. To that end, we decline to
require a specific format in regulation, thereby preserving the
flexibility to foster innovation and creativity to satisfy beneficiary
and industry expectations in the future.
    Comment: One commenter suggested that individuals enrolled in PACE
should remain enrolled in the PACE organization for purposes of Part D
coverage effective January 1, 2006. Another commenter suggested a
similar process be established for cost plans.
    Response: Section 1860D-21(f) of the Act provides that a PACE plan
may elect to provide qualified prescription drug coverage to its Part D
eligible enrollees. Section 1860D-21(e) of the Act establishes a
similar directive to cost-based HMO or competitive medical plan (CMP)
plans. Discussion of the application of the Part D benefit to both PACE
and cost-based HMO or CMP plans can be found under subpart T of the
proposed rule. For PACE plans, we stated that PACE plans generally will
be treated similar to MA local plans. Applying the appropriate MA rules
from Sec.  422.66, PACE enrollees will receive their Part D benefits
through the PACE plan if the PACE plan has elected to provide such
coverage. Beneficiaries who are enrolled in PACE plans that provide
such coverage as of December 31, 2005 will remain enrolled in that plan
on January 1, 2006. For cost-based HMO or CMP plans, we state that cost
contracts may offer Part D coverage only to individuals also enrolled
for Medicare in the cost contract. As a result of the provisions for
PACE and cost-based HMO or CMP plans, we revised Sec.  423.32(f) to
provide that individuals who are in PACE or cost-based HMO or CMP plans
that provide prescription drug coverage on December 31, 2005 will
remain enrolled in that plan and be enrolled in the Part D benefit
offered through that plan as of January 1, 2006.
3. Enroll Full-Benefit Dual Eligible Individuals (Sec.  423.34)
    In the proposed rule, Sec.  423.34(d) required that full benefit
dual eligible individuals who fail to enroll in a PDP or MA-PD during
their initial enrollment period would be automatically enrolled into an
appropriate Part D plan, specifically a PDP with a Part D premium that
does not exceed the low-income premium subsidy amount. When there is
more than one available PDP in a region, full benefit dual eligible
individuals would be auto-enrolled on a random basis.
    All beneficiaries in an MA plan with any prescription drug coverage
on December 31, 2005 will be deemed enrolled on January 1, 2006 in an
MA-PD plan offered by the same MA organization in accordance with Sec.
422.66(e)(2) and (e)(3) of Title II of the final regulation even if the
monthly beneficiary premium exceeds the low-income premium subsidy
amount. For full-benefit dual eligible individuals only, the proposed
rule provided that those already enrolled in an MA plan without any
prescription drug coverage would be auto-enrolled into an MA-PD plan
offered by the same organization, and that has a monthly Part D premium
that does not exceed the low-income premium subsidy amount. The
proposed rule clarified that those auto-enrolled into a Part D plan may
affirmatively decline Part D coverage or change Part D plans.
    In a related area, Sec.  423.36(c) of the proposed rule provided a
SEP for full-benefit dual eligible individuals that permits them to
change Part D plans at any time. Separately, there already exists a SEP
for full-benefit dual eligible individuals to enroll in or disenroll
from a Medicare Advantage plan at any time, and this will be expanded
to include MA-PD plans. This SEP is provided in operational guidance
(see section 30.4.4-5 of Chapter 2 of the Medicare Managed Care
Manual), in accordance with section 1851(e)(4)(D) of the Act, which
gives us the authority to provide Special Enrollment Periods for
exceptional circumstances. Taken together, the PDP and MA-PD plan SEPs
mean a full-benefit dual eligible individual may switch from Original
Medicare and a PDP into an MA-PD plan and vice versa; from one PDP to
another; and from one MA-PD plan to another MA-PD plan at any time.
    We requested comment on two areas: whether we or States should
conduct auto-enrollment, and how to address an inherent conflict in the
statute, whereby the statute requires auto-enrollment of full-benefit
dual eligible individuals

[[Page 4205]]

into a Part D plan with a premium that does not exceed the low-income
premium subsidy amount, but does not speak to those instances in which
an individual is enrolled in an MA organization whose premium for the
available MA-PD plan(s) exceeds the low-income premium subsidy amount.
    Except as otherwise provided below, the final rule adopts the
enrollment rules for full-benefit dual eligible individuals set forth
in Sec.  423.34(d) of the propose rule.
    Comment: Several commenters supported CMS performing the auto-
enrollment function. They viewed it as the most appropriate entity
because it is in the best position to randomly assign beneficiaries to
MA-PD plans or PDPs in the region, and to establish links with each MA-
PD plan or PDP in each region, thereby more efficiently auto-enrolling
individuals. Some commenters also suggested that we consider adding an
enrollment broker to the process for populations with special health
care needs.
    A number of other commenters recommended that States either be
required or have the option to perform the auto-enrollment function, as
they view the States as having more readily available data identifying
dual eligible individuals and a vested interest in ensuring these
individuals are enrolled in appropriate Part D plans. This option was
also viewed as advancing care coordination and ensuring continuity of
care. It was noted that these options also present a disincentive for
States to maximize enrollment, since the phased-down State contribution
payments are tied to the number of Part D eligible individuals enrolled
in Part D plans. Commenters also acknowledged that, if we were to
afford States the option of conducting the auto-enrollment function, we
would have to develop its own systems for auto-enrollment in States
that lack the capacity to develop such systems. Commenters supporting
this option felt strongly that we should reimburse States for all of
their costs related to enrollment activities they are required to
perform.
    Some commenters recommended that an independent third party
coordinate the enrollment process. Those parties could include State
and local officials and representatives of nonprofit organizations
specializing in care for seniors. One also suggested that the
contracted agent would need to be compliant with the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) privacy rule and
should have no financial incentives regarding a full-benefit dual
eligible individual's assignment beyond the contract between it and
CMS.
    Response: We agree with those who commented that we, or a
contractor on our behalf, should perform the auto-enrollment function
because we can better ensure consistent, timely implementation. In
addition, we would not have to develop and implement a separate
administrative structure to oversee auto-enrollment being performed by
some or all of the States. Finally, it would likely be more cost
effective for us to have a single entity perform auto-enrollment,
rather than pay 51 separate entities. For these reasons, we will modify
the final regulation to specify that we will conduct the auto-
enrollment process.
    At this time, we do not envision contracting with an enrollment
broker to provide more intensive choice counseling for beneficiaries
subject to auto-enrollment. Because the statute makes us ultimately
responsible for the auto-enrollment process, we will, at least
initially, conduct it ourselves. Instead of hiring a new third party,
we believe it would be more effective to partner with existing
stakeholders to conduct broad-based outreach and education; provide
clear and comprehensive information to beneficiaries; and refer
individuals to either the 1-800-MEDICARE toll-free line or to Part D
plans for additional information. However, if we decide in the future
to contract with an independent enrollment broker, we agree with the
commenter that the entity would need to be free of conflicts of
interest and comply with HIPAA privacy rules. We note that any
delegation to a third party would make the third party a business
associate of ours for HIPAA purposes, since the entity would be
performing a function on behalf of us.
    Comment: Many commenters recommended that we define ``random'' to
include auto-enrollment based on beneficiaries' particular drug needs,
pharmacy affiliation, or on their classification as a special needs
population. Many commenters expressed concerns about how random
assignment will impact individuals who are on drug regimens on which
they have been previously stabilized. They were concerned that these
individuals would be auto-enrolled in a ``low-cost'' plan that may not
cover the drugs they need. Without direct access to the coverage they
need, this population would have no real choice but to switch
medications, even though changing medications can be difficult and lead
to adverse health outcomes, reactions, and so on.
    Several other commenters expressed similar concerns about
individuals who reside in long-term care facilities. In addition, some
long-term care facilities require residents to use a pharmacy selected
and contracted by the facility. One commenter requested that we define
``random,'' specifically detail how we envision the random process
would work, and seek further public comment.
    Response: We share the commenters' concerns with ensuring access to
necessary prescription drug coverage for vulnerable populations. For
ensuring continued access to existing drugs prescribed for an
individual, please refer to comments on Sec.  423.120(b) of the final
regulation. For ensuring access to long-term care facilities'
contracted pharmacies, please refer to comments on Sec.  423.120(a) of
the final regulation.
    The systems challenges associated with anything other than a random
process would be significant, and possibly result in inappropriate
assignment or delayed implementation. For example, we have drug
utilization data for Medicaid beneficiaries, but there is a time lag in
receiving those data. Furthermore, we do not currently have access to
information about the pharmacies that contract with long-term care
facilities. Finally, we realize that pharmacy affiliation and
particular drug needs are only two of the variables that impact a
beneficiary's choice of a Part D plan. For example, a beneficiary may
also consider cost-sharing, formulary structure, customer service and,
in the case of MA-PD plans, whether she or he would want to receive all
of her or his Medicare benefits from one organization.
    Given these data limitations, and the many and varied reasons for
choosing a Part D plan, we do not believe we are in a position to make
a judgment about what is best for individual beneficiaries, and decline
to change the proposed regulations. However, we will make every effort
to ensure that beneficiaries and community organizations receive enough
information in time for them to determine the appropriate plan for the
beneficiary. The SEP provided for full-benefit dual eligible
individuals in the statute and in our final rule at Sec.  423.38(c)(4)
also ensures that they can change plans to better accommodate their
pharmaceutical needs and pharmacy affiliations.
    Comment: One commenter recommended that we establish a bid process
whereby PDPs with an expected enrollment by full-benefit dual eligible
individuals that is higher than the proportion in the total Medicare
eligible population in the relevant PDP region

[[Page 4206]]

automatically qualify for inclusion in the auto-enrollment process. The
commenter further recommended that, if such a plan has a monthly
beneficiary premium above the low-income premium subsidy amount, we
should permit a ``waiver'' based on a subsidy or payment of that excess
premium by CMS or another entity in order to reduce the premium to an
amount equal to or below the low-income premium subsidy amount.
    Response: Those plans available for purposes of auto-enrollment are
ones that have premiums at or below the low-income premium subsidy
amount. This includes fallback plans in areas where they exist. It is
our intent to implement the Part D program and adhere to the statute as
closely as possible, assuming tenable options are available to do so.
In the case of PDPs that serve a disproportionate share of full-benefit
dual eligible individuals, and whose premium exceeds the low-income
premium subsidy amount, we believe there are tenable options, that is,
other PDPs with premiums at or below the low-income premium subsidy
amount. However, we note that risk-adjustment should correct for the
higher costs incurred by plans with larger proportions of full-benefit
dual eligible individuals.
    Comment: A few commenters recommended that we not limit the Part D
plans available for auto-enrollment to just those plans with premiums
below the low-income premium subsidy amount, as this limits full-
benefit dual eligible individuals to the ``lowest cost'' plans, which
may offer a less generous benefit. The commenters suggested that,
regardless of whether these individuals enroll on their own or are
auto-enrolled, they should be permitted to enroll in any plan and not
be charged any additional premium. At a minimum, a beneficiary's
medical provider could attest that a higher premium plan will better
meet his or her medical needs and therefore be allowed to enroll in a
higher premium plan without the added premium.
    Response: We appreciate the commenters' concern that full-benefit
dual eligible individuals be able to enroll in the plan best suited for
them, not just ``low cost'' plans. We note that a full-benefit dual
eligible individual is free to enroll in any Part D plan during the
initial enrollment period or annual coordinated election period.
    For auto-enrollment, however, section 1860D-1(b)(1)(C) of the Act
only permit us to, auto-enroll full-benefit dual eligible individuals
into those plans with premiums at or below the low-income premium
subsidy amount. In addition, those full-benefit dual eligible
individuals randomly auto-enrolled in a particular plan may still
choose another plan pursuant to a special enrollment period.
    In addition, as we do not have the authority under section 1860D-
14(a)(1)(A) of the Act to increase the low-income premium subsidy
amount (as defined under section 1860D-14(b)(2)(B) of the Act), full-
benefit dual eligible individuals who elect to enroll in a plan with a
premium exceeding the low-income premium subsidy amount must pay the
difference in premium. We are also precluded under sections 1860D-
13(a)(1)(F) and 1854(c) of the Act from requiring or even permitting
Part D plans from waiving any premium in excess of the premium subsidy
amount, including allowing MA-PD plans to use rebate dollars to reduce
the premium only for this portion of their enrolled population.
    Comment: We received numerous comments related to the timing of the
auto-enrollment process for full-benefit dual eligible individuals.
Commenters identified the possibility of a gap in coverage for some of
those individuals if the auto-enrollment did not occur until the close
of the Initial Enrollment Period on May 15, 2006, since Medicaid
coverage of Part D drugs ends several months earlier, on January 1,
2006. They proposed that we require auto-enrollment of these
individuals to be completed prior to Medicaid coverage ending on
December 31, 2005. Some commenters recommended that the process be
completed as early as November 15, 2005, and one commenter suggested
starting the 2005 Initial Enrollment Period for full-benefit dual
eligible individuals prior to November 15, 2005. Another commenter
recommended that auto-enrollment precede Part D eligibility by 6
months, and that Medicaid coverage of Part D drugs be continued until
auto-enrollment can be done.
    Response: We did not intend to implement a process that would
create a gap in drug coverage for full-benefit dual eligible
individuals. We do not believe that the Congress intended for such a
gap to occur. Therefore, we will modify the final rule so that the
auto-enrollment of these individuals will begin as soon as Part D plans
with premiums at or below the low-income premium subsidy amount are
known prior to January 1, 2006. We will also modify the final rule to
provide that those full-benefit Medicaid individuals who become
eligible for Medicare after January 1, 2006, will be enrolled as soon
as their Medicare Part D eligibility is determined. For the suggestion
to start the 2005 Initial Enrollment Period for full-benefit dual
eligible individuals before November 15, 2005, we are precluded from
doing so, as this date is explicitly identified in section 1860D-
1(b)(2)(A) of the Act as the date upon which enrollment in Part D may
commence.
    Comment: Many other commenters suggested that we delay
implementation of the Part D program for full-benefit dual eligible
individuals by at least five or six months, and some recommended a
year's delay, although the commenters recognized that such a delay
would require a legislative change. The commenters' concern was based
on the limited time to transition drug coverage for these full-benefit
dual eligible individuals from Medicaid to Medicare. The commenters
expressed concern about the feasibility of identifying, educating, and
enrolling the population of full-benefit dual eligible individuals in
time for a smooth transition of drug coverage. Some commenters
highlighted the need to ensure adequate time for physicians and
patients to navigate administrative barriers and change medications to
comply with formularies. One commenter suggested Medicare beneficiaries
who currently participate in Medicaid buy-in programs (that is,
qualified Medicare beneficiaries (QMB), special low-income
beneficiaries (SLMB), and qualified individuals (QI1)) be permitted to
keep Medicaid drug coverage after Part D starts.
    A few commenters recommended that, assuming Part D coverage begins
for full-benefit dual eligible individuals on January 1, 2006, Medicaid
coverage of Part D drugs be extended past December 31, 2005, and
continued until such time as full-benefit dual eligible individuals are
enrolled in Part D.
    One commenter recommended that full-benefit dual eligible
individuals who are American Indians or Alaska Natives (AI/AN) be
exempt from Part D and continue to be eligible for Medicaid drug
coverage after January 1, 2006. The commenter argued that this would
prevent loss of revenues to pharmacies operated by Indian Health
Services (IHS), Tribal Clinics, and Urban Indian Clinics, who may
receive lower payments from Part D plans than they currently receive
from Medicaid, and eliminate barriers for this population.
    Response: As the commenters correctly point out, a delay in the
implementation of the Part D program, including auto-enrollment for
full-benefit dual eligible individuals would require a change to the
statute. Similarly, extending Medicaid coverage of prescription drugs
covered under Part D would also require a legislative

[[Page 4207]]

change. Absent such changes, we cannot delay implementation, extend
Medicaid coverage of Part D drugs, nor can we exclude full-benefit dual
eligible individuals who are AI/AN, or participants in Medicaid buy-in
programs from Part D.
    Comment: A couple of commenters requested clarification about the
circumstances under which a beneficiary may affirmatively decline
participation in Part D. They expressed concern that individuals with
diminished mental faculties may not fully understand the impact of
their decision, and that States would likely bear additional costs
associated with full-benefit dual eligible individuals whose health
deteriorates due to their failure to take necessary medications. One
commenter urged that States be able to obtain FFP to provide
prescription drug coverage in these instances. Another commenter
asserted that permitting a full-benefit dual eligible individual to
affirmatively decline enrollment in Part D contradicts numerous
statutory and regulatory provisions that require this population's
enrollment in Part D. One commenter urged CMS to make disenrollment
contingent upon selection of another Part D plan to ensure there is no
lapse in coverage. Finally, one commenter suggested expanding the
ability to affirmatively decline enrollment in Part D to Medicare
beneficiaries who are not auto-enrolled.
    Response: The Congress specified that prescription drug coverage
under this program is voluntary, and section 1860D-1(b)(1)(C) of the
Act specifically stipulates that auto-enrollment does not prevent a
full-benefit dual eligible individual from declining or changing such
enrollment. Absent any legislative change, we cannot intervene with an
individual's right to decline coverage. Nor can we adopt the suggestion
to permit Federal financial participation (FFP) for State Medicaid
agencies that choose to provide drug coverage for full-benefit dual
eligible individuals who affirmatively decline auto-enrollment. Section
1935(d)(1) of the Act stipulates that no FFP is available for any Part
D drugs or cost-sharing for Part D drugs for full-benefit dual eligible
individuals who are eligible for Part D, even if they are not enrolled
in a Part D plan. However, we will be making every effort to ensure
that beneficiaries and community organizations have sufficient
information to assist individuals in making the most appropriate
choices about participating in Part D.
    Concerning the comment that we should make disenrollment from a
Part D plan contingent upon enrolling in another Part D plan to prevent
a coverage gap for full-benefit dual eligibles, we decline to do so in
regulation, but will continue to work develop strategies to prevent a
coverage gap in this instance.
    We decline to expand the ability to affirmatively decline Part D
enrollment to individuals who are not auto-enrolled or for whom we do
not facilitate enrollment into a Part D plan. This population is
comprised of those who are not deemed or determined eligible for the
low-income subsidy. If these individuals do not want Part D coverage,
they can simply choose not to enroll in a Part D plan.
    Comment: One commenter suggested that there should be flexibility
for CMS to change the plan into which a beneficiary has been auto-
enrolled should the plan no longer meet the needs of the enrollee.
    Response: We agree that it would be prudent to retain the
flexibility to enroll an individual in subsequent years in a different
plan from the one into which we originally enrolled the individual, and
have modified the final rule to provide for this. We note that this
will require an exception to the maintenance of enrollment provision in
Sec.  423.32(e), so we have modified the final rule to provide for one.
    We envision this may only be necessary in certain limited
circumstances. For example, we may want to consider doing this if the
plan's premium in a subsequent year exceeded the low-income premium
subsidy amount. We will ensure that beneficiaries are fully notified,
and have the option to remain in their original plan. We will examine
the need for this as the program evolves and provide operational
guidance should we implement it.
    Comment: A number of commenters responded to our request in the
preamble for solutions to an inherent conflict in the statute. In this
instance, the statute requires auto-enrollment of full-benefit dual
eligible individuals into a Part D plan with a premium at or below the
low-income premium subsidy amount. Section 423.34(d) of the proposed
rule stipulated that those in an MA-only plan would be auto-enrolled
into an MA-PD plan in the same organization that has a premium that
does not exceed the low-income premium subsidy amount. However, there
may be instances in which an individual is enrolled in an MA-only plan
offered by an MA organization, and all the MA-PD plans in that
organizations have premiums that exceed the low-income premium subsidy
amount.
    We note that most MA enrollees will be deemed to be enrolled into
an MA-PD plan in accordance with Sec.  422.66(e)(2) and (e)(3).
However, deeming does not address those who elect an MA-only plan that
does not offer any drug coverage in 2005, nor qualified prescription
drug coverage thereafter.
    Several commenters supported auto-enrolling these full-benefit dual
eligible individuals into an MA-PD plan offered by the same
organization with the lowest Part D premium, even if it was higher than
the low-income premium subsidy amount. This would provide seamless
continuation of their Medicare benefits through the same organization.
Commenters noted that these individuals retain the right to decline
Part D coverage, and have a SEP that permits them to change PDPs or MA-
PD plans at any time.
    One commenter noted that excluding full-benefit duals from auto-
enrollment in an MA-PD plan with a premium higher than the low-income
premium subsidy amount would give those MA plans an unfair advantage by
removing from their risk pool full-benefit dual eligible individuals,
who tend to have higher drug utilization.
    Response: We agree with commenters' concerns about ensuring
continuity of care through the same MA organization, if possible.
However, as we discussed in the preamble to the proposed regulation,
there is an inherent statutory conflict that would seem to preclude
using auto-enrollment authority to accomplish this. Section 1860D-
1(b)(1)(C) of the Act directs the Secretary to auto-enroll full-benefit
dual eligible individuals who do not enroll in a PDP or MA-PD plan on a
random basis into a PDP with a premium at or below the low-income
premium subsidy amount; it does not identify an MA-PD plan as an entity
into which an individual could be auto-enrolled.
    General principles of statutory interpretation requires us to
reconcile two seemingly conflicting statutory provisions rather than
allowing one provision to effectively nullify the other provision. We
had proposed to resolve this by interpreting the reference to
``prescription drug plans'' in section 1860D-1(b)(1)(C) of the Act as
including both PDPs and MA-PD plans, thereby allowing auto-enrollment
of an MA full-benefit dual eligible individual into an MA-PD offered by
the same organization offering his or her MA plan if the premium for
such plan did not exceed the low-income premium subsidy amount.

[[Page 4208]]

    Upon further consideration, we believe there continue to be legal
concerns as to whether we have the authority to auto-enroll full-
benefit dual eligible individuals into an MA-PD plan. Rather than rely
on auto-enrollment authority under section 1860D-1(b)(1)(C) of the Act
to ensure continuity of Part D coverage for full-benefit dual eligible
individuals enrolled in MA-only plans, we instead will rely on our
general authority to establish enrollment procedures under section
1860D-1(b)(1)(A) of the Act to establish a facilitated enrollment
process that substantially fulfills the intent of ensuring no
prescription drug coverage gap for these individuals.
    We will therefore facilitate enrollment into Part D for full-
benefit dual eligible individuals enrolled in a MA plan that does not
offer qualified prescription drug coverage by assigning them to an MA-
PD plan with the lowest premium offered by the same MA organization,
even if the plan's MA monthly prescription drug beneficiary premium
exceeds the low income premium subsidy amount. We will inform them in
advance of this assignment. If the beneficiary fails to affirmatively
elect an alternative plan or declines enrollment in Part D, she or he
will be enrolled into the plan into which she or he has been assigned.
In this instance, a beneficiary's silence would be deemed consent to
the enrollment choice we are making on their behalf. We note that the
right to affirmatively decline in Sec.  423.34(e), on affirmatively
declining Part D enrollment, and the Special Enrollment Period in Sec.
423.38(c)(4), apply equally to all full-benefit dual eligibles, whether
they are auto-enrolled or have their enrollment facilitated.
    In the case of a full-benefit dual eligible for whom we facilitate
enrollment into an MA-PD plan with a premium higher than the low-income
premium subsidy amount, we acknowledge that this creates a new
financial obligation for the enrollee to pay the balance of the monthly
MA monthly prescription drug beneficiary premium not covered by the
low-income premium subsidy amount. However, this option best preserves
informed enrollee choice, is consistent with statutory intent, respects
the beneficiary's initial choice to enroll in an MA plan, and ensures
continuity of prescription drug coverage. These individuals will have
information about other plan choices available and retain their right
to a Special Enrollment Period to choose another plan at any time, as
provided by section 1861D-1(b)(3) of the Act for PDPs, and section
1851(e)(4)(D) of the Act and section 30.4.4-5 of Chapter 2 of the
Medicare Managed Care Manual for MA-PD plans.
    Comment: A few commenters generally supported auto-enrolling full-
benefit dual eligible individuals into an MA-PD plan, but urged CMS to
find a solution that would ensure no additional costs were imposed on
beneficiaries. Some of the commenters that supported auto-enrollment
into the MA-PD plan with the lowest Part D premium provided suggestions
as to how to minimize the financial impact on beneficiaries. A few
suggested that for those who are institutionalized, the excess premium
should be considered an incurred medical expense and deducted from
their monthly share of cost to the facility. For non-institutionalized
beneficiaries, in States with State Pharmacy Assistance Programs
(SPAPs), SPAPs should be allowed to pay the balance. For full-benefit
dual eligible individuals who are medically needy, the balance should
be considered an incurred medical expense contributing towards their
spend-down. Otherwise, individuals should be counseled about the
premium discrepancy and about the right to disenroll from an MA plan
and enroll in Original Medicare with a PDP.
    Response: We appreciate these suggestions for minimizing the
financial impact on beneficiaries. We intend to highlight the impact of
our facilitating enrollment into an MA-PD plan with a premium higher
than the low-income premium subsidy amount to these beneficiaries and
advise them of their ability to switch plans. We note that under
Medicaid, whatever portion of the premium the individual pays would be
an incurred medical expense, including any portion of the premium that
is paid by the SPAP. Since incurred medical expenses are deducted from
income when determining patient liability for an institutionalized
individual, and are deducted from income for medically needy spend-down
purposes, the commenter's suggestions correctly characterize how
Medicaid would treat any premium difference paid by the individual. The
commenter is also correct in noting that SPAPs will be allowed to pay
the balance for their enrollees, but we note this is an option for all
enrollees of an SPAP, not just non-institutionalized enrollees. Since
these options are already permitted under the regulatory language in
the proposed rule, we will not modify the regulation further to specify
them.
    Comment: One commenter suggested that we permit MA-PD plans to
waive the portion of their premium above the low-income premium subsidy
amount. The commenter suggested that explicit authorization by CMS
would be a contract amendment, not an inducement to a beneficiary to
enroll, which would ensure that the waiver of the excess premium does
not implicate the Federal anti-kickback rules or be considered
disparate treatment.
    Response: We appreciate the intent of the commenter's suggestion.
However, we are precluded from permitting MA-PD plans to waive a
portion of the Part D premium for a subset of their enrollees by
section 1854(c) of the Act, which requires uniform premiums for all
enrollees of an MA plan.
    Comment: A few commenters urged CMS to prohibit auto-enrollment of
full-benefit dual eligible individuals into MA-PD plans. Instead, these
MA enrollees should be auto-enrolled into a PDP for their Part D
benefit. The commenters note that these beneficiaries could always
switch to an MA-PD plan.
    Response: Section 1861D-1(a)(1)(B)(ii) of the Act specifies that,
with limited exceptions, individuals in an MA plan may not also enroll
in a PDP. The only exceptions are those enrolled in a MSA plan, or in a
MA private fee-for-service plan or cost-based HMO or CMP that does not
offer qualified prescription drug coverage, may enroll in a PDP. Thus,
auto-enrolling these individuals into a PDP would require us to also
disenroll them from their MA plan, which could be inconsistent with our
current MA requirements Sec.  422.66(e), which provide that an
individual who elects an MA plan is considered to have continued to
have made that election until he or she voluntarily changes that
election, or the plan is discontinued or no longer serves the service
area.
    Comment: Finally, one commenter suggested that if no MA-PD plan is
available, or if the Part D premium of the available MA-PD plan exceeds
the low-income premium subsidy amount, CMS should auto-enroll these
beneficiaries into another organization's MA-PD plan whose premium does
not exceed the low-income premium subsidy amount.
    Response: For the concern that no MA-PD plan would be available, we
note that section 1860D-21(a) of the Act requires all MA organizations
to offer at least one MA-PD plan.
    Involuntarily disenrolling the individual from his or her MA plan,
and auto-enrolling him or her into another MA-PD plan offered by
another MA organization, is inconsistent with MA requirements at Sec.
422.66(e) described above.
    Comment: A few commenters urged expanding Part D auto-enrollment in
the

[[Page 4209]]

case of full-benefit dual eligible individuals who are in an
organization's Medicaid managed care product, but currently receive
Part A and B benefits through Original Medicare. Specifically, the
commenters recommended that these beneficiaries be auto-enrolled into
an MA-PD plan that is offered under common ownership and control of the
organization offering the Medicaid managed care plan.
    Response: Please refer to responses to comments on Sec.  422.66(d)
in Title II of the final regulation for a discussion on this issue.
    Comment: A few commenters proposed that, where a full-benefit dual
eligible individual in Original Medicare will be auto-enrolled into a
PDP that is affiliated with an MA Special Needs Plan, CMS auto-enroll
the individual into the MA Special Needs Plan for their Part A and B
benefits, as a way to promote better overall coordination of care. To
preserve the beneficiary choice, the commenter suggested the regulation
provide an opportunity for the individual to ``opt out'' within some
specified period of time (for example, 90 days).
    Response: The statute prohibits beneficiaries who have Part D
coverage through a PDP from getting their Medicare A and B coverage
through an MA-only plan. As a result, we decline to make the suggested
change.
    Comment: One commenter asked CMS to clarify that, if a full-benefit
dual eligible individual is auto-enrolled into an MA-PD plan with a
premium higher than the low-income premium subsidy amount, that the
State Medicaid program would not be obliged to pay the balance on
behalf of the beneficiary.
    Response: We confirm that the State Medicaid agency has no
obligation to pay any Part D premium in excess of the low-income
premium subsidy amount. Further, section 1905(a) of the Act, which
provides Federal medical assistance for Medicare cost-sharing (as
defined in section 1905(p)(3)(A) of the Act), does not include Part D
premiums.
    Comment: A few commenters recommended that we consider establishing
a process for automatically enrolling or at least facilitating the
enrollment into Part D plans all individuals deemed eligible for the
full low-income subsidy. In effect, this would expand auto-enrollment
to individuals in Medicare Savings Programs. These are individuals for
whom State Medicaid agencies pay for Medicare cost sharing, but who are
not eligible for comprehensive Medicaid benefits and thus are not
considered full-benefit dual eligible individuals. They include QMB,
SLMB, and QI1. To the extent that we accept this recommendation, the
commenters suggested we also broaden the SEP provision to cover any
full subsidy eligible individual who is auto-enrolled in a Part D Plan.
    A few commenters advocated expanding auto-enrollment even further
to all those who receive the low-income subsidy. This would include not
only those deemed eligible for the subsidy, but also those who have to
apply and be determined eligible. Auto-enrollment would ensure that
these individuals are not subject to a late enrollment penalty.
    Response: We agree that there are compelling reasons to promote
Part D enrollment of all individuals deemed or determined eligible for
the low-income subsidy. These individuals typically are less healthy
and often face barriers to care. Effective medication management and
prescription drug coverage can lead to reduced inpatient hospital
expenditures, making it more cost-effective to provide drug coverage.
    Facilitating enrollment into Part D would promote access to drug
coverage for these beneficiaries by ensuring that they have drug
coverage starting in 2006, while also preserving the voluntary nature
of enrollment in Part D. Doing so would also ensure that beneficiaries
with limited means would not be liable for a late enrollment penalty
for failing to enroll in Part D when first eligible.
    We intend to pursue many steps to assist beneficiaries,
particularly low-income beneficiaries, in taking advantage of the new
Medicare drug coverage. Such steps could include facilitating
enrollment into Part D for those beneficiaries. We will provide details
in operational guidance to be issued shortly after the publication of
the final regulation, including details on the population for whom we
will facilitate enrollment. By facilitating enrollment, we mean giving
beneficiaries an opportunity to choose a Part D plan first; if they do
not choose, we would notify them that we intend to facilitate their
enrollment into a specific plan prospectively. If the beneficiary fails
to affirmatively elect an alternative plan or declines enrollment in
Part D by a given date, she or he would be enrolled into the plan into
which she or he has been assigned. In this instance, a beneficiary's
silence would be deemed consent to the enrollment choice we are making
on their behalf. If we facilitate enrollment in this manner, we would
likely follow rules for assigning beneficiaries to Part D plans similar
to those for the auto-enrollment and facilitated enrollment process for
full-benefit dual eligibles: MA enrollees would be enrolled into an MA-
PD plan with the lowest Part D premium; Original Medicare beneficiaries
would be enrolled in a PDP with a Part D premium that does not exceed
the low-income premium subsidy amount, and, if there is more than one
such PDP available, the individual would be randomly enrolled into one
of the plans available. In establishing a process for this facilitated
enrollment, we would rely upon discretion afforded the Secretary under
section 1860D-1(b)(1)(A) of the Act to establish enrollment processes
for Part D eligible individuals. Similarly, we would extend some of the
same protections afforded the full-benefit dual eligible population who
are auto-enrolled to those whose enrollment we facilitate. These
protections would include a Special Enrollment Period, the right to
affirmatively decline Part D enrollment, and where possible,
facilitating enrollment into plans whose premiums do not exceed the
low-income premium subsidy amount.
    Comment: One commenter suggested expanding auto-enrollment to PACE
enrollees, that is, CMS auto-enroll them into their PACE organization
for purposes of Part D coverage effective January 1, 2006, unless the
PACE enrollee makes another enrollment choice. PACE organizations would
provide their enrollees an opportunity to opt out of enrollment in Part
D (and, as a result, out of the PACE organization).
    Response: We agree that PACE enrollees should not be required to
take any additional steps to obtain their Part D benefit through their
PACE organization. Individuals who enroll in a PACE organization elect
to get all their Medicaid (if eligible for Medicaid) and Medicare
benefits through the PACE organization. As noted in response to a
similar comment on Sec.  423.32 of the final regulation, we will modify
the final regulation to deem individuals enrolled in a PACE
organization as of December 31, 2005 to be enrolled with that PACE
organization for their Part D benefit as of January 1, 2006. This
precludes the need to expand auto-enrollment to PACE enrollees, so we
decline to make that change.
    Comment: One commenter noted that no provision was made for auto-
enrollment of full-benefit dual eligible individuals enrolled in
Medicare cost-based HMO or CMPs. The commenter suggested that for full-
benefit dual eligible individuals enrolled in a cost-based HMO or CMP,
CMS auto-enroll these individuals into the cost-based HMO or CMP for
Part D benefits if the cost-based HMO or CMP offers Part D,

[[Page 4210]]

even if the Part D premium is higher than the low-income premium
subsidy amount. If the cost-based HMO or CMP does not offer Part D
benefits, the commenter recommends auto-enrolling the beneficiary into
a PDP.
    Response: We agree that we should ensure that full-benefit dual
eligible individuals, and potentially others eligible for the low-
income subsidy who are enrollees of a cost-based HMO or CMP obtain Part
D benefits. As noted in response to a similar comment on Sec.  423.32
of the final regulation, we will modify the final regulation to specify
that all individuals enrolled in a cost-based HMO or CMP that offers
any prescription drug coverage as of December 31, 2005, will be deemed
to be enrolled in the cost-based HMO or CMP for Part D benefits as of
January 1, 2006, if the cost-based HMO or CMP opts to provide Part D
benefits, and regardless of whether the Part D premium exceeds the low-
income subsidy amount.
    We believe the same legal concerns noted above for auto-enrolling
full-benefit dual eligible individuals into MA-PD plans arise for auto-
enrolling them into a cost plan HMO or CMP. As a result, we decline to
expand auto-enrollment a suggested by this commenter. Instead, we will
use a facilitated enrollment process discussed above to accomplish
substantially the same end. We will facilitate the enrollment of full-
benefit dual eligible individuals enrolled in a cost plan HMO or CMP
that offers Part D benefits and who fail to enroll in a Part D plan
into the Part D benefits offered by their cost plan HMO or CMP. If the
cost plan HMO or CMP does not offer Part D benefits, the individual
will be enrolled in a PDP. We may similarly facilitate the enrollment
of other cost plan enrollees eligible for the low-income subsidy who
fail to elect a Part D plan into the Part D benefit offered by their
cost plans.
    Comment: One commenter requested clarification as to whether auto-
enrollment into a PDP will only occur for Medicare beneficiaries who
receive comprehensive health care benefits (full hospital and physician
services) from both Medicare and Medicaid, or whether auto-enrollment
also applies to Medicare beneficiaries that receive pharmacy-only
benefits through Medicaid.
    Response: The final rule will limit auto-enrollment to only those
dual eligible individuals who receive comprehensive health benefits
from both Medicare and Medicaid. As noted above, we may facilitate
enrollment of all others deemed or determined eligible for the low-
income subsidy into Part D plans. To the extent that a Medicare
beneficiary with pharmacy-only Medicaid benefits is in the population
whose enrollment we facilitate, we would facilitate that individual's
enrollment into a Part D plan.
    Comment: One commenter recommended that we explore auto-enrolling
residents of long term care facilities who are not full-benefit dual
eligible individuals, and permitting these beneficiaries to disenroll
or choose another Part D plan. The commenter was especially concerned
about residents who lack the cognitive capacity to select a PDP and who
do not have a designated surrogate decision-maker in place.
    Response: Generally, enrollment in Part D is voluntary. Section
1860D-1(b)(1)(C) of the Act provides for auto-enrollment of full-
benefit dual eligible individuals. As noted above, we may facilitate
enrollment of others deemed or otherwise determined eligible for the
low-income subsidy into Part D plans. To the extent that a resident of
a long term care facility is in the population whose enrollment we
facilitate, we would facilitate that individual's enrollment into a
Part D plan.
    Since the Act limits auto-enrollment to full-benefit dual eligible
individuals, we decline to auto-enroll long-term care residents who do
not receive the low-income subsidy. While we acknowledge that access to
prescription drug coverage is critical for this population, we believe
they generally have the resources and support to make timely enrollment
decisions. We will, however, continue to explore options regarding
enrollment for all individuals in long-term care facilities.
    Comment: A number of commenters urged CMS to permit SPAPs to act as
authorized representatives and enroll some or all of the beneficiaries
they serve into the SPAP's preferred PDP. These beneficiaries should be
permitted to decline enrollment in the SPAP's preferred PDP or to
change to another Part D plan.
    Response: With regard to the issue of authorized representatives,
we defer to State law, as discussed in response to comments on Sec.
423.32. However, it is important to note that SPAPs that act as the
authorized representative for the individual must also comply with the
nondiscrimination provisions at Sec.  423.464(e). Please see responses
to related comments in subpart J.
    Comment: One commenter noted that it appears that a full-benefit
dual eligible individual cannot enroll in an MA-PD plan if the
individual is not already an MA enrollee. The commenter urged that MA-
PD plans that bid at or below the low-income premium subsidy amount
should be an enrollment option for all full-benefit dual eligible
individuals.
    Response: During the Part D initial enrollment period that starts
November 15, 2005, full-benefit dual eligible individuals who are in
Original Medicare are free to change to an MA-PD plan. Further, we have
established in our operational guidance a Special Enrollment Period
(SEP) that permits full-benefit dual eligible individuals to enroll in
and disenroll from an MA plan at any time, and will extend this SEP to
MA-PD plans. This will ensure that MA-PD plans are an option for all
full-benefit dual eligible individuals.
    As indicated previously, any individual enrolled in a PACE
organization as of December 31, 2005 will be deemed to be enrolled with
that organization for their Part D benefit as of January 1, 2006.
    The chart below provides a summary of the enrollment rules for all
beneficiaries, including those with and without the low-income subsidy,
in accordance with Sec.  423.32, Sec.  423.34, and Sec.  422.66.

------------------------------------------------------------------------
             Population                        Enrollment Rules
------------------------------------------------------------------------
General Medicare Population          (1) A beneficiary who chooses to
                                      enroll a Part D plan must do so as
                                      follows:
                                     Original Medicare [rtarr2] Original
                                      Medicare with separate PDP
                                     MA Plan without drug coverage
                                      [rtarr2] MA-PD plan
                                     Medical Savings Account (MSA) Plan
                                      [rtarr2] MSA with separate PDP
                                     PFFS with Part D [rtarr2] PFFS with
                                      Part D
                                     Private Fee-For-Service Plan (PFFS)
                                      without Part D [rtarr2] PFFS with
                                      separate PDP
                                     Cost Plan with Part D [rtarr2] Cost
                                      plan Part D or cost plan with
                                      separate PDP

[[Page 4211]]


                                     Cost Plan without Part D [rtarr2]
                                      Cost Plan with separate PDP
                                     (2) A beneficiary enrolled in an
                                      entity that offers any drug
                                      coverage in 2005, CMS deems him or
                                      her enrolled as follows* :
                                     MA Plan [rtarr2] MA-PD Plan
                                     Cost Plan [rtarr2] Cost Plan with
                                      Part D
                                     PACE Organization [rtarr2] PACE
                                      Organization
                                     (3) On a case-by-case basis, CMS
                                      may allow an MA organization to
                                      process ``seamless'' enrollments
                                      into the organization's MA-PD plan
                                      if individuals are enrolled in a
                                      health plan offered by that MA
                                      organization that includes
                                      prescription drug coverage upon
                                      their entitlement to Medicare.
------------------------------------------------------------------------
Full-Benefit Dual Eligible           (1) A beneficiary who chooses to
 Beneficiaries                        enroll in a Part D Plan follows
                                      the same rules as above; otherwise
                                      CMS auto-enrolls or facilitates
                                      enrollment for him or her as
                                      follows:
                                     Original Medicare [rtarr2] PDP
                                     MSA Plan [rtarr2] PDP
                                     PFFS Plan without Part D [rtarr2]
                                      PDP
                                     Cost Plan with Part D [rtarr2] Cost
                                      plan with Part D
                                     Cost Plan without Part D [rtarr2]
                                      PDP
                                     MA-Only Plan [rtarr2] MA-PD Plan
                                     (2) For a beneficiary enrolled in
                                      an entity that offers any drug
                                      coverage in 2005, CMS deems him or
                                      her enrolled as follows:
                                     MA Plan [rtarr2] MA-PD Plan
                                     Cost Plan [rtarr2] Cost Plan with
                                      Part D
                                     PACE Organization [rtarr2] PACE
                                      Organization
                                     (3) On a case-by-case basis, CMS
                                      may allow an MA organization to
                                      process ``seamless'' enrollments
                                      into the organization's MA-PD plan
                                      if individuals are enrolled in a
                                      health plan offered by that MA
                                      organization that includes
                                      prescription drug coverage upon
                                      their entitlement to Medicare.
------------------------------------------------------------------------
* Those in an MA Plan without any drug coverage in 2005 will not be
 deemed into an MA-PD plan, but instead must actively choose one if they
 want Part D benefits.
** We may facilitate enrollment for other beneficiaries eligible for the
 low income subsidy; if so, we would likely follow these same rules.
For additional detail, please see discussion on:
 Sec.   423.32--Beneficiary's choice
 Sec.   422.66(d)(5)--``Seamless'' enrollment on case-by-case basis
 Sec.   422.66(e)(2)-(3)--Deemed enrollment in 2005
 Sec.   423.34--Auto-enrollment and facilitated enrollment
------------------------------------------------------------------------

4. Disenrollment process (Sec.  423.36)
    Section 1860D-1(b)(1)(A) of the Act authorizes us to establish a
process to allow disenrollment from prescription drug plans. In the
proposed rule, we outlined the rules for a Part D eligible individual
who wishes to change or discontinue an enrollment during applicable
enrollment periods, including filing a disenrollment with the PDP
directly or enrolling in another PDP.
    While we initially envision a paper disenrollment process, we
retain the flexibility for other secure and convenient mechanisms that
we may approve in the future. Any such mechanism will be available at
the option of each PDP sponsor. We believe it is important to clarify
that, as other mechanisms are approved and implemented, we will require
all PDPs offer a minimum standard process, which at this time would be
a paper process, along with any optional election mechanism available
to prospective enrollees and plan members in conjunction with the paper
process. In the future, as technology evolves, another process may be a
more appropriate minimum standard. Except as provided below, the final
rule adopts the disenrollment rules set forth at Sec.  423.42 of the
proposed rule.
    Comment: One commenter asked that we clarify whether an enrollment
in a different PDP would automatically disenroll the beneficiary from
his or her previous PDP effective the first day of enrollment in a new
PDP and asked who is responsible for that notification.
    Response: We envision creating a process similar to that created
for the MA program, under which an individual who is eligible to enroll
in another PDP will automatically be disenrolled from the previous PDP
upon enrollment in the new PDP. The PDP to which the individual submits
an enrollment is required to provide a notice of acceptance or denial,
as provided in Sec.  423.32(d). We will notify the previous PDP of the
disenrollment and that PDP will inform the individual that he or she
has been disenrolled. As for the specifics of the notice requirements,
we will issue guidance to PDPs following the publication of this rule.
    Comment: One commenter requested that we clarify in the regulations
that proper beneficiary protections for retroactive disenrollments are
in place for beneficiary requests that are made but not properly acted
upon.
    Response: We will treat an individual's request for disenrollment
that was made but not properly acted upon as if the disenrollment had
properly occurred. We will provide guidance to PDPs as to how to handle
the processing of such requests, including proper notification to the
beneficiary.
    Comment: One commenter asked CMS to address the issue for those
retirees who enroll in both a PDP and the employer sponsored plan due
to their confusion over the variety of new coverage options. The
commenter indicated that this not only results in duplicative coverage
and unnecessary premium costs. In addition, the commenter was concerned
because

[[Page 4212]]

many retirees may not be aware that a consequence of enrolling in Part
D may be the discontinuation of their employer group benefits, often
permanently prevented from ever being able to rejoin the group once he
or she enrolls in other coverage, such as Part D. One commenter
requested that we allow for retroactive disenrollment from Part D and
refund of the Part D premiums for these retirees who enrolled by
mistake into a PDP.
    Response: We recognize that during the initial enrollment period
that some retirees may be confused about how their employer-based
coverage may coordinate with Part D coverage. While we feel that
establishing a retroactive disenrollment process specifically for this
reason would generally be inappropriate, we can establish a process in
which we would work with employer group sponsors, PDPs and MA-PDs to
educate beneficiaries prior to open enrollment and at the time of
enrollment. In addition, we intend to establish a process for the PDPs
and MA-PDs to verify an enrollment request for those individuals who
have been identified to CMS as having been claimed by an employer group
sponsor to receive the employer based subsidy. We will also include
information in beneficiary education and enrollment materials targeted
to those individuals who already have other prescription drug coverage
to provide assistance in determining whether enrollment in Part D would
be appropriate for that individual. We will issue operational guidance
on this process shortly following publication of the final rule.
5. Part D Enrollment Periods (Sec.  423.38)
    In the proposed rule, as directed by the MMA, we established three
coverage enrollment periods: (1) the initial enrollment period (IEP);
(2) the annual coordinated election period (AEP); and (3) SEPs.
Generally, in accordance with section 1860D-1(b)(2)(B) of the Act, the
IEP for Part D is the same as the initial enrollment period established
for Part B. In addition, as part of the implementation of the Part D
program, and in accordance with section 1860D-1(b)(2)(A) of the Act, we
have established an initial enrollment period for Part D from November
15, 2005 until May 15, 2006 for those individuals who are already
eligible to enroll in a Part D plan as of November 15, 2005.
    In accordance with section 1860D-1(b)(1)(B)(iii) of the Act, the
AEP for Part D is concurrent with the annual coordinated election
period for the MA program under section 1851(e)(3) of the Act. It is
during this annual period in which all PDP plans must open enrollment
to Medicare beneficiaries. For coverage beginning in 2006, the annual
coordinated election period begins on November 15, 2005 and ends on May
15, 2006. As a result, the initial enrollment period for individuals
who are eligible to enroll in a Part D plan as of November 15, 2005 and
the annual coordinated election period will run concurrently during
this time frame. In accordance with section 1851(e)(3)(B)(iv) of the
Act, Sec.  423.36(b)(2) of our proposed rule provides that, for 2007
and subsequent years, the annual coordinated election period will be
November 15 through December 31 for coverage beginning on January 1 of
the following year.
    The MMA also establishes SEPs. SEPs allow an individual to
disenroll from one PDP and enroll in another PDP. Similarly, the SEP
rules that will apply for individuals in an MA-PD plan will be provided
under Sec.  422.62(b). We will include in regulation those SEPs that
have been specifically named in the statute. Those SEPs established for
exceptional circumstances for PDPs and MA-PDs, as authorized by section
1860D-1(b)(3)(C) of the Act and section 1851(e)(4) for MA-PDs of the
Act, respectively, will be provided in our manual instructions. The
final rule adopts the enrollment periods as proposed.
    Comment: We received several comments regarding SEPs. Several
commenters supported the SEPs for exceptional conditions we proposed to
provide through manual guidance. Specifically, these include certain
SEPs already established in the MA program for circumstances where a
plan terminates its contract or the individual changes his or her
permanent residence. These commenters also supported an SEP to enroll
in a PDP for individuals disenrolling from an MA-PD plan during the MA
Open Enrollment Period, and for institutionalized individuals. Other
commenters suggested we establish various other SEPs, including the
following:
    * A subsidy-eligible individual who leaves private
prescription drug coverage for any reason, including his or her
inability to pay;
    * A change in a person's health status that makes a current
plan choice no longer suitable to his or her needs;
    * Individuals eligible for the low-income subsidy, other
than full benefit dual eligible individuals;
    * If there are substantial changes to the plan's formulary;
    * Individuals with ``life-threatening situations;''
    * Individuals whose situations are pharmacologically
complex;
    * All individuals for the first 18 months of the program as
it may be a confusing time;
    * All beneficiaries leaving MA plans throughout the year so
that they can enroll in a PDP;
    * Medicare-eligible retirees whose plan sponsor changes
their retiree drug coverage so that it no longer meets the criteria for
creditable coverage;
    * Individuals enrolled in, or desiring to enroll in PACE, as
the PACE program has continuous enrollment and disenrollment; and
    * Full benefit dual eligibles at any time, including every
time a PDP changes its plan in a way that directly effects these
individuals, such as removing a drug from its formulary, changing the
co-payment tier for a drug, or denying their appeal concerning a non-
formulary drug or an effort to change the co-payment tier.
    Response: We appreciate this feedback. As previously mentioned, we
have historically included in regulation only those SEPs that have been
specifically named in the statute. The SEPs explicitly provided for in
statute include an SEP for full-benefit dual eligible individuals,
individuals who permanently change their residence so that they no
longer reside in their PDP's service area, and individuals enrolled in
a PDP whose contract is terminated.
    We will issue guidance regarding the above SEPs and other
additional SEPs that we choose to establish following publication of
the regulation. We intend to establish in this guidance an SEP for
those individuals eligible for the low-income subsidy whose enrollment
into a Part D plan will be facilitated, individuals in long-term care
facilities, individuals enrolled in, or desiring to enroll, in PACE and
individuals enrolled in employer group health plans. However, we
decline to establish SEPs for other reasons included in the comments
described above, because we do not view these circumstances as
exceptional. However, we retain the right to establish additional SEPs
in the future and will do so in our operational guidance. Furthermore,
we may establish SEPs on a case-by-case basis, where warranted by an
immediate exceptional circumstance, such as an individual with a life-
threatening condition or illness. For the commenter's request that we
provide an SEP for the first 18 months of the program, we do not
believe that such an SEP is warranted in the circumstances. First, we
are committed to ensuring all beneficiaries have adequate information
to make informed choices about participating in the Part D program.
Second, the statute provides for an

[[Page 4213]]

extended AEP and provides a concurrent IEP at the beginning of this
program. These extended enrollment periods, in conjunction with the
planned education and information campaigns, will provide all
beneficiaries with adequate time and information to make an enrollment
decision. Therefore, we do not believe that such an SEP is warranted.
    Comment: A few commenters recommended that we should provide a SEP
to permit those individuals who will receive the low-income subsidy
under subpart P but who are not full-benefit dual eligible individuals
to change to a plan of their choosing.
    Response: We strongly agree that we should permit those individuals
who are enrolled or whose enrollment is facilitated by CMS the
opportunity to change to a plan of their choosing. Since we are
generally limiting in regulation those SEPs specified in statute, we
will provide for this SEP in operational guidance.
    Comment: One commenter recommends that we change the provision of
an SEP for the involuntary loss of creditable coverage to include
individuals who lose such coverage due to failure to pay premiums. The
commenter believes the provision as proposed is too restrictive and
should be modified.
    Response: Section 1860D-1(b)(3)(A)(iii) of the Act is clear that
disenrollments for failure to pay premiums will be considered a
voluntary disenrollment action. We therefore do not believe it
appropriate to treat this disenrollment as an exceptional circumstance
justifying an SEP.
    Comment: One commenter asked if MA-PD plans are required to
participate in the AEP.
    Response: The MA enrollment periods are discussed in the MA
regulations at Sec.  422.62. The AEP applies to both PDP and MA-PD
plans.
    Comment: One commenter requested clarification of how many times an
individual may use an SEP to enroll in a PDP and encouraged CMS to
limit the number of times an SEP may be used to enroll.
    Response: The duration and applicability of an SEP is specific to
each SEP and may vary from one specific circumstance to another. For
example, an SEP in the MA program for individuals affected by a plan
termination is specific to the circumstances surrounding that specific
action and limited in duration. Other SEPs apply more generally to
individuals, for example, full-benefit dual eligible dual individuals.
We will provide detailed guidance concerning each SEP following the
publication of this rule.
    Comment: One commenter requested clarification of proposed Sec.
423.36(c)(3) regarding the SEP for individuals whose enrollment or
nonenrollment in Part D is caused by an error of a Federal employee or
any person authorized by the Federal government to act on its behalf.
The commenter suggests that we include all sponsors of Part D plans as
``persons authorized by the Federal Government to act on its behalf.''
    Response: We have interpreted this statutorily required SEP to
apply to Federal government employees, staff, and contractors hired by
the Federal government to perform government duties. We would not
consider Part D plans to be performing enrollment functions as a
subcontractor on the behalf of CMS; rather, Part D plans must perform
certain enrollment functions as requirement of their direct contract
with CMS. While it is unlikely that an SEP would be necessary, we will
correct any errors made by the plan and not hold the individual liable
for the plan's mistake. Thus, we may allow an SEP in individual
situations, if appropriate.
    Comment: One commenter asked if SEP enrollment in a PDP could be
retroactive in order to maintain continuity of care.
    Response: An SEP enrollment in a PDP will generally be prospective.
We establish the effective date for SEPs and can accommodate unusual
circumstances on a case-by-case basis.
    Comment: One commenter suggested that we establish an SEP with no
late enrollment penalty if a Medigap issuer or other entity fails to
provide adequate or accurate notice of whether such coverage is
creditable.
    Response: Section 423.38(c)(2) of the final rule establishes an SEP
for all individuals who are not adequately informed when their
creditable prescription drug coverage is lost or changes so that it is
no longer creditable prescription drug coverage or that the individual
never had such creditable coverage. We believe that these provisions
adequately protect an individual who does not receive the required
notice from a Medigap issuer or other entity. Regarding the late
enrollment penalty, the provision of an SEP is not directly related to,
nor does it have a direct effect upon, the imposition of applicable
late enrollment penalties. The late enrollment penalty is discussed in
more detail at Sec.  423.46 and its relationship to creditable
prescription drug coverage is discussed at Sec.  423.56. Specifically,
at Sec.  423.56(g) of the final rule we describe the available remedy
for an individual who was not adequately informed that their
prescription drug coverage is not creditable.
    Comment: One commenter believed the enrollment process should
ensure that residents of a long-term care facility are enrolled in a
PDP that provides access to the pharmacy located in the long-term care
facility.
    Response: We understand the issue raised by the commenter.
Individuals who are in a long-term care facility will be given an SEP
to ensure they can choose the PDP that is appropriate for their
situation. This will be clarified in guidance following publication of
this rule.
6. Effective Dates of Coverage and Change of Coverage (Sec.  423.40)
    Section 1860D-1(b)(1)(B)(iv) of the Act directs us to apply the
effective date requirements provided under the MA program at section
1851(f) of the Act. As described above, the three enrollment periods
provided under Part D are the IEP, the AEP, and SEP. In the proposed
rule, we established the following effective dates for these enrollment
periods:
a. Initial Enrollment Period
    In accordance with section 1851(f)(1) of the Act, as incorporated
into Part D under section 1860D-1(b)(1)(B)(iv) of the Act, an
enrollment made during the initial enrollment period will generally be
effective the first day of the calendar month following the month in
which the individual enrolled in Part D. An enrollment made prior to
the month of entitlement to Part A or enrollment in Part B is effective
the first day of the month the individual is entitled to Part A or
enrolled in Part B. Since the Part D provisions are not effective until
January 1, 2006, we clarified that in no case may enrollment in Part D
be effective prior to this date. We also clarified that initial
enrollments made between November 15 and December 31, 2005 will be
effective January 1, 2006. An enrollment made during or after the month
of entitlement to Part A or enrollment in Part B is effective the first
day of the calendar month following the month in which the enrollment
in Part D is made.
b. Annual Coordinated Election Period
    In accordance with section 1851(f)(3) of the Act, as incorporated
into Part D under section 1860D-1(b)(1)(B)(iv) of the Act, an
enrollment made during the annual coordinated election period is
effective as of the first day of the following calendar year, that is,
January 1\st\. One exception to this rule occurs during 2006 in the
special annual coordinated election period in 2006, in

[[Page 4214]]

which elections made between January 1, 2006 though May 15, 2006 will
be effective the first day of the calendar month following the month in
which the enrollment in Part D is made.
c. Special Enrollment Period
    A SEP is effective in a manner that we determine to ensure
continuity of health benefits coverage.
    The final rule adopts the effective dates as proposed.
    Comment: Three commenters suggested that we specify a distinct
effective date for the SEPs in the final rule (as described in Sec.
423.38(c) of the proposed rule) to ensure adequate consumer protection.
Two commenters suggested adding: ``but no later than the first day of
the second calendar month following the month of the request for the
enrollment change'' to the end of this section. The third commenter
suggested we add: ``changes made before the 20\th\ of the month are
effective the first day of the second month following'' the change.
    Response: We have outlined the specific effective date requirements
for SEPs granted in the MA program in operational guidance and will
follow the same process for the Part D program. We believe that in so
doing, we retain our ability to react quickly to changes or unforeseen
circumstances.

7. Involuntary Disenrollment by the PDP (Sec.  423.44)

    Section 1860D-1(b)(1)(B) of the Act generally directs us to use
disenrollment rules similar to those established under section 1851 of
the Act. The proposed disenrollment provisions for PDPs were outlined
in Sec.  423.44 of our proposed rule, including the basis for
disenrollment--both optional and required--and guidance for notice
requirements.
    Specifically, we proposed at Sec.  423.44(b)(2) that a PDP is
required to disenroll an individual who dies, no longer resides in the
PDP's service area, loses entitlement or enrollment to Medicare
benefits under Part A and is no longer enrolled in Part B, or knowingly
misrepresents to the PDP that he or she has received or expects to
receive reimbursement for covered Part D drugs through other third-
party coverage. The proposed rule also required a PDP to disenroll an
individual if the PDP sponsor's contract is terminating.
    In addition to providing requirements for mandatory disenrollments,
we also provided under Sec.  423.44(d) of our proposed rule that PDPs
may disenroll individuals who do not pay monthly premiums or whose
behavior is disruptive, consistent with section 1860D-1(b)(1)(B)(v) of
the Act.
    As with the MA program, PDP sponsors will be required in the final
rule to provide proper notice to the beneficiary, as outlined at
proposed Sec.  423.44(c), and afford him or her due process in
accordance with the procedures outlined in our operational instructions
prior to disenrolling the individual. For example, a PDP that wishes to
disenroll a beneficiary for disruptive behavior must receive our prior
approval and demonstrate to our satisfaction that it has made a good
faith effort to resolve the issue prior to requesting the
disenrollment. We will review these requests on a case-by-case basis,
taking into account all of the facts and circumstances of a particular
case, prior to making its decision. PDP sponsors must apply their
policies for optional disenrollment for failure to pay premiums and
disruptive behavior consistently among individuals enrolled in their
plans, unless we permit otherwise, and must do so consistent with
applicable laws regarding discrimination on the basis of disability.
    Except as otherwise provided below, the final rule adopts the
involuntary disenrollment rules set forth in Sec.  423.44 of the
proposed rule.
    Comment: Several commenters urged CMS to establish a process for
individuals to appeal disenrollment decisions. Several commenters
believed that individuals should have access to an outside independent
review process, especially if these individuals are disenrolled without
an SEP. Another commenter stated that involuntary disenrollments must
be heavily scrutinized and an appeal right be available on an expedited
basis.
    Response: As we discussed under a previous comment regarding
appeals for enrollment denials, we do not believe that a formal appeals
process is necessary. Instead, we intend to address beneficiary
complaints regarding disenrollment in a manner addressed under the MA
program. Under the MA program, MA plans are required to follow a
specific process, which includes notice of potential disenrollment if
the individual does not address situation. We currently provide
assistance to MA organizations to handle beneficiary inquiries and
complaints regarding disenrollment through staff assigned to each MA
organization. We envision a similar process being established under the
PDP program.
    Comment: Several commenters pointed out an error in the numbering
of the regulatory text for disruptive behavior at proposed Sec.
423.44(b)(1).
    Response: We concur and have corrected the numbering.
    Comment: A commenter requested that we clearly define how long an
individual would need to reside out of the PDP service area before we
would consider the individual as no longer residing in the service
area. One commenter did not think that it was reasonable to apply a 6-
month time limit to PDPs; PDPs should not be required to disenroll
individuals if the PDP can provide individuals access to benefits out
of the service area through a PDP in another region, or the PDP's
network of pharmacies in other regions, or mail order pharmacies. One
commenter believed the decision should be left to the individual as to
when he or she has permanently moved out of the PDP service area. A few
commenters did not believe that a person's residency should be a factor
in a plan's basis for disenrollment. Another commenter stated that a
PDP should not be required to disenroll an individual if the PDP meets
licensure requirements in the State where the individual has moved and
the PDP has a national pharmacy network in place. Another commenter
suggested that PDP maintain members if they are an established sponsor
and meet certain network adequacy requirements in the region in which
the beneficiary moves.
    Response: We agree that disenrolling a beneficiary after being
temporarily out of the service area for a certain period of time may be
less appropriate for PDPs than in the MA program. The MMA directs us to
use rules similar to (and coordinated with) the MA residency
requirements at section 1851(b)(1)(A) of the Act, which provides that
an individual may elect an MA plan only if the plan serves the
geographic area in which the individual resides, except as the
Secretary may otherwise provide. However, the MA regulation at Sec.
422.74(d)(4) generally provides for disenrollment of an individual if
that individual is out of the service area, even temporarily, for 6
months, unless the MA organization offers visitor or traveler benefits
that provide for benefits while outside of the service area. We believe
that the nature of the prescription drug benefit and the ability for
many individuals to access the benefit through mail order or chain drug
stores provide greater flexibility in accessing the prescription drug
benefit while temporarily being out of the PDP's service area. However,
while an individual has greater flexibility to be temporarily outside
the service area and still access the PDP benefit, we maintain that the
individual must maintain his or her permanent residence within the

[[Page 4215]]

PDP's service area to be a member of the PDP. If the PDP learns of a
change in the individual's permanent address, the PDP would initiate
the disenrollment process. It is, however, an individual's
responsibility to notify the PDP if the individual permanently moves
out of the service area. We will provide further guidance to PDPs on
the process of disenrollment when an individual permanently moves out
of the service area following publication of this rule.
    Comment: One commenter asked how a PDP will learn of loss of
entitlement to Part A or Part B.
    Response: We will notify the PDPs of the loss of Part A or B
benefits. We will issue detailed operational guidance for PDPs prior to
2006.
    Comment: A few commenters requested that we further clarify the
provision that an individual who ``knowingly misrepresents to the PDP
that he or she has received or expects to receive reimbursement for
covered Part D drugs through other third party coverage'' (that is,
whether his or her costs are expected to be reimbursed through
insurance or otherwise, such as a group health plan) must be
disenrolled. These commenters also asked how ``knowingly'' will be
determined and what entity would be responsible for investigating such
a case. One commenter indicated that a beneficiary should not be
penalized for unintended errors or inadvertent omissions, and that many
beneficiaries will be confused at the outset about their PDP coverage
and how it may coordinate with other insurance.
    Response: Section 1860D-2(b)(4)(D)(ii) of the Act provides that
``material misrepresentation'' by an individual as to whether his or
her costs are expected to be reimbursed through insurance or otherwise
(through a group health plan or other third party payment arrangement)
shall be grounds for termination by the PDP. Since section 1860D-
2(b)(4)(D)(ii) of the Act also provides that a PDP sponsor may
periodically ask Part D eligible individuals about such reimbursement,
the statute establishes a penalty for an individual who ``materially''
misrepresents such information. This provision is not intended to
disenroll individuals who simply make an error, but instead apply to
those individuals who knowingly provide such false information. We
would be responsible for reviewing and issuing the final decision on
such a case. We plan to issue further guidance on this for PDPs prior
to 2006.
    Comment: We received several comments on the disenrollment for
nonpayment of premium provision, both supporting and opposing inclusion
of such a process. Several commenters requested that we clarify the
details of disenrollment for nonpayment of premium, including what we
view as ``reasonable efforts'' to collect the premium. Several
commenters recommended providing a minimum grace period for repayment
before permitting disenrollment. One commenter requested that we waive
payment of past premiums for full-benefit dual eligible individuals or
low-income subsidy individuals. Some commenters believe that it is
inappropriate for us to disenroll any individual from Part D for
nonpayment of premium. One commenter stated that individuals enrolled
in a PACE plan should not be subject to the disenrollment requirements
under Sec.  423.44 of the proposed rule.
    Response: Section 1860D-1(b)(1)(B)(v) of the Act specifically
directs us to apply rules to PDPs that are similar to (and coordinated
with) the MA provisions at section 1851(g) of the Act related to
disenrollment for nonpayment of premium. While some commenters objected
to disenrollment by the PDP on those grounds, we note that such
disenrollment is at the PDP sponsor's option and PDP sponsors therefore
have the ability to apply this rule to their plan enrollees. In
contrast, under Part B, individuals who fail to pay their Part B
supplementary medical insurance premiums must be disenrolled from Part
B. While we do not review and approve such disenrollments, we maintain
that if a PDP chooses the option to disenroll a beneficiary for
nonpayment of the premium, we would require that the PDP apply this
policy consistently, as we direct, amongst all its members and could
not ``waive'' the premium for a certain group of its members. As
indicated in the preamble of subpart T of this rule, we will issue
additional guidelines that will include a comprehensive listing of Part
D waivers applicable to PACE organizations. However, we agree that PACE
organizations should not be subject to the disenrollment requirements
of Sec.  423.44 as they are duplicative of the PACE disenrollment
requirements associated with Sec.  460.164 of the PACE regulation.
    Comment: Several commenters recommended that we permit plans to
deny reinstatement following disenrollment for failure to pay premiums
unless the enrollee pays the outstanding amount that is due. Other
commenters stated that PDP should not be required, under any
circumstance, to re-enroll individuals who are disenrolled for
nonpayment of the premium.
    Response: We have provided in the final regulation at Sec.
423.44(d)(1)(iii) that a PDP may decline future enrollment to
individuals who have been disenrolled for failure to pay premiums until
past due premiums are paid to the PDP. However, we would not allow a
PDP to prohibit an individual from enrolling in its plan if the
individual has paid all past due premiums to the PDP.
    Comment: We received a substantial number of comments on proposed
Sec.  423.44(d)(2) to allow PDP sponsors to disenroll individuals who
exhibit disruptive behavior.
    One commenter supported the definition established in the proposed
rule, while several commenters supported the due process safeguards
afforded by our approval of disenrollment requests. Two commenters
suggested that we provide guidance to PDP sponsors on the symptoms of
mental illness and dementia and other personality disorders to
distinguish between disruptive behavior and behavior resulting from a
medical condition. There were other commenters who asked us to clearly
define the terms and requirements for disenrolling a beneficiary for
disruptive behavior. These commenters recommended that we include in
the final rule such requirements as documentation of a PDP sponsor's
effort to provide a reasonable accommodation for individuals with
disabilities and sufficient notice of the sponsor's actions during the
course of the disenrollment process.
    Numerous commenters expressed concern that the proposed definition
of disruptive behavior does not adequately protect individuals whose
behavior is induced by disability, mental illness, cognitive
impairment, or certain prescribed drugs and who rely on prescription
drug therapy to stabilize their behavior. Some commenters recommended
that we prohibit PDP sponsors from disenrolling certain populations for
disruptive behavior, explaining that State Medicaid programs will not
be able to claim Federal matching funds for prescription drugs spending
on behalf of full-benefit dual eligibles who have been disenrolled by a
PDP sponsor. Other commenters suggested that we develop more stringent
criteria for PDP sponsors requesting to disenroll a full-benefit dual
eligible individual. Several commenters stated that, in cases where an
individual is unstable, disruptive behavior could be related to
unsuccessful attempts to find the proper medication. There were also a
number

[[Page 4216]]

of commenters who asserted that we lacked statutory authority to permit
PDPs sponsors to disenroll individuals for disruptive behavior. Two
commenters questioned the appropriateness of applying a policy of
involuntary disenrollment for disruptive behavior to PDPs. One
commenter suggested that we allow an individual who is disruptive to
designate an authorized representative to access services on his or her
behalf.
    Response: In the final rule, we aim to strike a balance between
allowing PDP sponsors to disenroll individuals who exhibit disruptive
behavior and creating adequate protections for individuals who face
involuntary disenrollment from a PDP. In accordance with the statute
(at section 1860D-1(b)(1)(B)(v) of the Act), we must establish a
process that is similar to and coordinated with the process under the
MA program that permits MA organizations to disenroll an individual for
disruptive behavior. At the same time, we recognize the impact of such
a disenrollment on an individual's ability to access prescription drug
coverage under the Medicare program, and the need for adequate
safeguards for individuals whose disruptive behavior is due to mental
illness or a medical condition. Continuity of care for these
individuals is essential, especially if they are taking prescription
medications that can minimize the debilitating impact of their illness
and restore their functioning.
    Therefore, in revising our proposed definition of disruptive
behavior in Sec.  423.44(d)(2)(i) of the final rule, we focus on
behavior that substantially impairs a PDP sponsor's ability to arrange
or provide care for the individual or other plan members. Behavior that
is related to the use of medical services or compliance (or non-
compliance) with medical advice is not disruptive behavior.
    We also agree with commenters that arranging or providing care for
individuals with mental illness, cognitive impairments such as
Alzheimer's disease or other dementias, and medical conditions and
treatments that may cause disruptive behavior warrant special
consideration, and therefore revise Sec.  423.44(d)(2)(v) to require
PDP sponsors to provide a reasonable accommodation to individuals in
such exceptional circumstances that we deem necessary. Such
accommodation is intended to ensure that the individual can maintain
Medicare prescription drug coverage and may include granting an
individual a SEP to choose another plan, or requiring the plan to
continue the individual's enrollment until the Annual Coordinated
Election Period, when the individual has an opportunity to enroll in
another plan. We will determine the type of accommodation necessary
after a case-by-case review of the needs of all parties involved. This
review will be conducted as part of our review and approval of the PDP
sponsor's request, as required in regulations at Sec.  423.44(d)(2)(v),
and will include expert opinion from our staff with appropriate
clinical or medical background.
    In addition, we recognize that circumstances may arise where an
individual is only able to obtain qualified prescription drug coverage
from a fallback prescription drug plan operating in his or her service
area. In such instances, allowing a fallback entity to disenroll an
individual may create substantial barriers to accessing prescription
medications under the Medicare program. Section 1860D-11(g)(4)(B) of
the Act grants us authority to establish additional requirements
specifically for fallback prescription plans. Under this authority, we
reserve the right at Sec.  423.44(d)(2)(vi) to deny a fallback
prescription drug plan's request to disenroll an individual for
disruptive behavior.
    In the proposed rule, we established procedures that PDP sponsors
must follow prior to requesting to disenroll a member for disruptive
behavior. Under proposed Sec.  423.44(c), a PDP sponsor must give an
individual timely notice of the disenrollment, which includes an
explanation of the individual's right to a hearing under the PDP's
grievance procedures. We further required at proposed Sec.
423.44(d)(2)(ii) a sponsor to make a serious effort to resolve the
problems presented by the individual, including the use or attempted
use of the organization's grievance procedures. Finally, we established
under proposed Sec.  423.44(d)(2)(iii) that a PDP sponsor must document
the individual's behavior, its own efforts to resolve the problem, and
the use or attempted use of its internal grievance procedures. We are
preserving all of these requirements in the final rule at Sec.
423.44(c) and Sec.  423.44(d)(2)(iii) and (d)(2)(iv).
    We believe that the final rule achieves the twin goals of
permitting involuntary disenrollment based on an individual's
disruptive behavior, while also establishing necessary protections for
individuals who are subject to our disenrollment rules.
    Comment: Several commenters contended that allowing a PDP sponsor
to disenroll an individual for disruptive behavior provides an
opportunity for PDP sponsors to discriminate against individuals with
disabilities, mental illness, Alzheimer's, and other cognitive
conditions.
    Response: We appreciate the commenters concern about the need to
ensure that individuals are not discriminated against on the basis of
their disability. However, the Part D plans are not provided the
authority to make the decision on such a disenrollment. In addition to
establishing safeguards in the final rule for individuals with special
needs by requiring PDP sponsors to make reasonable accommodations where
we deem necessary, it is CMS who reviews the request for disenrollment
and makes the decision to approve or deny the request. In our review,
we will include our staff with the appropriate clinical or medical
expertise review the case before a final decision is made.
    Comment: Several commenters noted that the proposed rule denies
protection to individuals who comply with medical advice by trying an
on-formulary drug instead of the drug originally prescribed and
subsequently experience an adverse reaction that triggers the
disruptive behavior. A few commenters asked us to prohibit PDPs from
disenrolling an individual because of his or her refusal or inability
to adhere to a treatment plan developed by the PDP or other health care
professionals associated with the plan.
    Response: We agree with the commenters and clarify in the final
rule at Sec.  423.44(d)(2)(i) that an individual cannot be considered
disruptive if such behavior is related to the use of medical services
or compliance (or non-compliance) with medical advice or treatment.
    Comment: Two commenters supported the flexibility afforded PDP
sponsors by our allowing PDP sponsors to limit re-enrollment for
individuals who are disenrolled for disruptive behavior, and one of
these commenters specifically asked us to establish criteria for re-
enrolling an individual such as a minimum waiting period and a
commitment by the individual to discontinue such behavior. On the other
hand, there were many commenters who opposed the ability of a PDP
sponsor to decline re-enrollment of an individual. These commenters
contended that prohibiting an individual from re-enrolling in a PDP for
a specified period could cause undue harm and lapses in coverage,
especially if the individual is not able to enroll in another PDP. One
commenter requested that we specify the maximum period of time that a
PDP sponsor may prohibit re-enrollment of

[[Page 4217]]

an individual who has been disenrolled for disruptive behavior.
    Response: In the proposed rule, we enabled PDP sponsors to request,
at their option, the ability to decline future enrollment by an
individual who had been disenrolled for disruptive behavior. While we
retain this option for PDPs in the final rule, we require these
sponsors to request future conditions on re-enrollment as part of their
disenrollment request. At the same time, we reserve the right in
accordance with Sec.  423.44(d)(2)(v) to review each request on a case-
by-case basis. In the review process, we will give due consideration to
exceptional circumstances that may warrant reasonable accommodations in
addition to the appropriateness of conditions on re-enrollment.
    Comment: There were several commenters who objected to the
expedited disenrollment process. The commenters noted that the
expedited process lacks even the minimal standards and requirements
that are in place to protect beneficiaries in these circumstances.
    Response: It is our intent to ensure that all individuals facing
involuntary disenrollment for disruptive behavior have sufficient
opportunity, as provided by the notice requirements, to change their
behavior or grieve the PDP sponsor's decision to request involuntary
disenrollment from us. We have therefore removed this provision from
the final regulation.
    Comment: One commenter asked us to clarify whether a full-benefit
dual eligible individual who is disenrolled for disruptive behavior is
entitled to a SEP.
    Response: In accordance with the Sec.  423.38(c)(4), a full-benefit
dual eligible individual as defined under section 1935(c)(6) of the Act
is entitled to a SEP. A full benefit dual eligible individual who is
involuntarily disenrolled for disruptive behavior remains entitled to a
Special Enrollment Period.
    Comment: We received two comments asking us to adopt an
interpretation of nonpayment of cost sharing as disruptive behavior as
we had discussed in the preamble of the proposed rule for MA
organizations.
    Response: We appreciate the feedback provided on the consideration
to include nonpayment of cost-sharing as disruptive for the purposes of
applying the provisions under disruptive behavior. We will consider
these comments in developing guidance for the disruptive behavior
provisions.
8. Late Enrollment Penalty (Sec.  423.46)
    Section 1860D-13(b) of the Act establishes late enrollment
penalties for beneficiaries who fail to maintain creditable
prescription drug coverage for a period of 63 days following the last
day of an individual's initial enrollment period and ending on the
effective date of enrollment in a Part D plan. We outlined this process
for imposing the penalty in the proposed rule. We also proposed that an
uncovered month is any month in which an individual does not have
creditable coverage at any time during that month. We also reference
the calculation of the amount of the penalty, which was described at
Sec.  423.286(d)(3) of the proposed rule.
The final rule adopts the rules for late enrollment penalties as
proposed.
    Comment: Several commenters requested that we waive the late
enrollment penalty for certain individuals, such as full-benefit dual
eligible individuals, subsidy eligible individuals, individuals who are
eligible for a special enrollment period and individuals who are
involuntarily disenrolled. One commenter asked that State Medicaid
programs be allowed to request and obtain such a waiver. Other
commenters urged CMS to delay the implementation of the late enrollment
penalty for one to two years, or be flexible with the application of
the penalty, stating the Part D program was new and complex. Another
commenter asked if we would provide any exception to the penalties for
exceptional circumstances, such as natural disaster, family death, or
clinical justification. A few commenters did not see a late penalty
appeals process in the regulation and requested that we add an
opportunity to appeal the late penalty.
    Response: There is nothing in the statute that would provide us
with the authority to waive or delay the late enrollment penalty at any
time unless an individual was not adequately informed that his or her
prescription drug coverage as described at Sec.  423.56 was not
creditable. Only in this limited situation will we be able to deem the
individual's prescription drug coverage as creditable, regardless of
whether it actually is creditable, so as not to impose the late
penalty. Further, it is clear that the statute intended this provision
to apply to full-benefit dual eligible individuals since the
application of the penalty is specifically referenced in the definition
of the full premium subsidy under section 1860D-14(a)(1)(A) of the Act,
for which full-benefit dual eligible individuals are eligible.
Specifically, section 1860D-14(a)(1)(A) of the Act provides that full
subsidy eligible individuals, including full-benefit dual eligible
individuals, are responsible for 20 percent of any late enrollment
penalty for the first 60 months during which such penalty is imposed.
As discussed in the proposed rule, we will develop a process for
individuals to apply to CMS for reconsideration of the penalty. We
appreciated the feedback that organizations provided on setting up such
a process.
    Comment: Several commenters asked CMS to clarify that those who do
not receive a notice that their prescription drug coverage was not
creditable (or received the wrong notice) are not subject to the late
enrollment penalty.
    Response: As provided in Sec.  423.56(g) of the final rule, an
individual who is not adequately informed that his or her prescription
drug coverage was not creditable may apply for our review and make a
determination if this occurred. If we determine that the individual did
not receive adequate notice or received incorrect information, we may
deem the individual to have had creditable coverage so that the late
enrollment penalty will not be imposed.
    Comment: One commenter asked CMS to clarify how the 63-day period
would be counted. The commenter recommended from the end of the IEP to
the date of the application for the low-income subsidy since
individuals may delay a decision until he or she knows whether there
will be a subsidy.
    Response: The count of the 63-day period will commence the day
following the end of the individual's IEP or, once the IEP has passed,
the day following the last day of creditable coverage or Part D
enrollment (in a PDP or MA-PD plan). The application of the 63-day
period will be consistently applied to all individuals, regardless of
when an individual may or may not apply for the low-income subsidy.
    Comment: One commenter asked how the late enrollment penalty will
be coordinated with the late enrollment penalty for Part B.
    Response: We are currently developing operational and system
requirements to implement the late enrollment penalty process.
Additional guidance will be provided to PDPs and individuals with
specific information as to how this will occur.
9. Part D Information That CMS Provides to Beneficiaries (Sec.  423.48)
    As provided under section 1860D-1(c)(1) of the Act, we will conduct
activities designed to broadly disseminate information about Part D
coverage to individuals who are either eligible or prospectively
eligible for Part

[[Page 4218]]

D benefits. In the proposed rule, we indicated that this information
will be made available to beneficiaries at least 30 days prior to their
initial enrollment period.
    Each organization offering a PDP or MA-PD plan must provide us
annually with the information to disseminate to individuals who are
currently or prospectively eligible for Part D benefits. The
information dissemination activities for Part D will be similar to, and
coordinated with, the information dissemination activities that we
currently perform for Medicare beneficiaries under sections 1851(d) and
1804 of the Act.
    As required under section 1860D-1(c)(3) of the Act, we proposed to
include the following comparative information for qualified
prescription drug coverage provided by PDPs and MA-PD plans as part of
our dissemination of Part D information and our efforts to promote
informed beneficiary decisions:
    * Benefits and prescription drug formularies;
    * Monthly beneficiary premium;
    * Quality and performance;
    * Beneficiary cost-sharing; and
    * Results of consumer satisfaction surveys.
    We also proposed to provide information to beneficiaries regarding
the methodology we will use for determining late enrollment penalties,
as provided in Sec.  423.286(d) of our proposed rule.
    In carrying out the annual dissemination of Part D information, we
will conduct a significant public information campaign to educate
beneficiaries about the new Medicare drug benefit and to ensure the
broad dissemination of accurate and timely information. We will work
with SSA and the States to ensure that low-income individuals eligible
for or currently enrolled in Part D benefits are aware of the
additional benefits available to them and how to receive those
benefits. In order to maximize the enrollment of Part D eligible
individuals, this public information campaign would include outreach,
information, mailings, and enrollment assistance with and through
appropriate State and Federal agencies, including SHIPs, and will
coordinate with other Federal programs providing assistance to low-
income individuals. In addition, we will undertake special outreach
efforts to disadvantaged and hard-to-reach populations, including
targeted efforts among historically underserved populations, and
coordinate with a broad array of public, voluntary, private community
organizations, plan sponsors and stakeholders serving Medicare
beneficiaries to explain the options available under this program.
Materials and information will be made available in languages other
than English where appropriate.
    This information will enable beneficiaries to make informed
decisions regarding their Part D coverage options. Organizations
offering a PDP or MA-PD plan will be required to provide this
information in a format and to use standard terminology that we will
specify in further operational guidance.
    In the interest of broadly disseminating information that promotes
informed decision-making among Part D enrollees and prospective Part D
enrollees, as required under Section 1860D-1(c) of the Act, we would
extend the price comparison requirements to PDP sponsors and MA
organizations offering MA-PD plans and making comparative information
about Part D plans' negotiated prices available to beneficiaries
through http://www.medicare.gov.

    Since the introduction of http://www.medicare.gov in 1998, we have

substantially increased the amount of personalized information
available to Medicare beneficiaries, making it one of the government's
most comprehensive and customer-oriented sites available to the public.
The web site hosts twelve separate database applications to help
individuals make their own health care decisions. The most significant
ones are: the Medicare Personal Plan Finder (which contains costs,
benefits, quality, satisfaction and disenrollment measures), Nursing
Home Compare (which contains basic characteristics, staffing
information and inspection results), the Prescription Drug and Other
Assistance Programs application (which contains the most extensive,
nationally complete listing of the Medicare-approved discount drug
cards, including price comparisons, as well as other government and
private programs designed to help with prescription drug costs), and
the Medicare Eligibility Tool (which assists users in determining when
they are eligible, how to enroll and what they need to consider when
joining Medicare). Other tools providing customized results include:
the Participating Physician and Supplier Directories, Home Health and
Dialysis Facility Compare, Your Medicare Coverage, Helpful Contacts,
Publications, and Frequently Asked Questions. By updating all
information on the web site at least once a month, the information
provided to Medicare beneficiaries via http://www.medicare.gov is the most

reliable and consistent information available.
    Much of the information available through http://www.medicare.gov is also

available via the 1-800-MEDICARE helpline. 1-800-MEDICARE is a major
information channel for providing the most personalized and reliable
information to people with Medicare. The beneficiary can call 1-800-
MEDICARE to find out the most reliable information on public and
private programs that offer discounted or free medication, programs
that provide help with other health care costs, and Medicare health
plans that include prescription drug coverage. The caller can always
talk to a live person at 1-800-MEDICARE to get the facts they need. We
can also give the beneficiary personalized brochures containing
information on their health plan choices, nursing homes and Medicare
participating physicians in their area. 1-800-MEDICARE is available 24
hours a day, 7 days a week, to provide the one-on-one service that our
Medicare beneficiaries need to make appropriate health care decisions.
    The final rule adopts the information requirements set forth in the
proposed rule.
    Comment: Several commenters were concerned that the web site should
reflect accurate information that is presented in an appropriate
context and in a way that is useful for beneficiaries to use. Many
commenters noted that the web site should provide beneficiaries with
the ability to compare plans on the basis of estimating their out-of-
pocket spending, including premiums and applicable cost sharing.
Several commenters encouraged CMS to rely not only on price as the
factor in determining which Part D plan fits beneficiary needs. Another
commenter urged CMS to include specific information regarding which
drugs are covered by each plan. Other commenters indicated that other
information that the beneficiaries would need to consider would be the
level of coinsurance, the amount a beneficiary would pay during any
period he or she is liable for 100 percent of the cost sharing, whether
the drug is on or off the formulary, and other cost management
techniques that may apply, such as step therapy and prior
authorization. Another commenter stated that we must post prices on its
website of retail pharmacies that offer maintenance supplies of
medications. One commenter stated that beneficiaries need to know
whether the pharmacy is included in the plan's network.
    Response: We appreciate this feedback and will consider this when

[[Page 4219]]

developing the requirements for the Part D price comparison web tool.
    Comment: Another commenter stated that we need to ensure that any
website includes price comparisons about generic drugs compared to
their innovator brands, as well as generics compared to other brand
name drugs in a similar therapeutic class.
    Response: This comment will be considered when developing the
requirements for the Part D price comparison web tool. As with the
current price comparison tool for the Medicare-approved drug discount
card program, we include pricing information for both brand and generic
drugs.
    Comment: One commenter noted that correct information may not be
provided to seniors if we require plans to post the maximum price that
could be charged, since the maximum price is typically the pharmacy's
usual and customary cash price.
    Response: It is our understanding that usual and customary pricing
data is not readily accessible; therefore, we anticipate posting the
maximum negotiated prices for prescription drugs on the website with
the understanding that beneficiaries will pay the lower of the
negotiated or usual and customary price at the point of sale. It is
anticipated that the prices displayed on the website would reflect what
enrollees would expect to pay at the point of sale for their
prescriptions under the respective plans.
    Comment: One commenter asked that we define the process for the
information sharing exchange between PDPs and CMS.
    Response: The process has not been defined at this time. Once we
have developed the data requirements and process for submission of
data, we will share this information with all prospective Part D plans.
    Comment: Several commenters believe that the price comparison tool
should not be a requirement for PDP sponsors or MA organizations
offering MA-PD plans.
    Response: It is important for beneficiaries to have access to all
information in order to make informed choices. We are committed to
providing Medicare beneficiaries with information about both PDPs and
MA-PD plans through the price comparison tool. Therefore, we will keep
this requirement.
    Comment: One commenter expressed a general concern with the
disclosure of negotiated prices and the negative impact that disclosure
of such information could have on competition. The commenter further
noted that negotiated prices may be subject to confidentiality
agreements. The commenter suggested that we disclose only estimated or
average prices and that this information only be posted on the specific
website of the Part D plan.
    Response: As mentioned previously, it is anticipated that the
prices displayed on the website will reflect what enrollees would
expect to pay at the point of sale for their prescriptions under the
respective plans.
    Comment: A commenter stated it was unacceptable for CMS not to
provide quality and performance information in the first year or second
year of the Part D program.
    Response: Quality data will not be available for the first year
since this is a new program and historical data will not be available
for reporting. For year two, the regulation simply states that if it is
impractical to obtain data or if it is not available, it will not be
reported; this is not the same as stating that it will not be available
for the second plan year. From the perspective of many beneficiaries,
cost and availability are the most important quality issues. Hence, we
will be able to report timely in response to these issues.
    Comment: One commenter urged the agency to work closely with
pharmacies to ensure that any price comparison website is
understandable and free of errors before it is made public.
    Response: Historically, we have worked closely with beneficiaries,
stakeholders, partners, and advocacy groups to ensure the information
disseminated meets the needs of the Medicare population we serve. We
will continue this practice in the development of the website for Part
D plan information.
    Comment: One commenter stated that we are silent on the
notification timeframe for beneficiaries. CMS simply refers to the 30-
day notice period. The commenter thinks that beneficiaries will need
much more than 30 days to digest all of the information they will
receive from CMS to enable them to make informed choices about their
Part D coverage. The commenter urges information to be disseminated as
soon as possible and urges CMS to plan numerous information campaigns
now and involve numerous organizations in developing education
activities and materials. Another commenter suggests dissemination
activities occur at least 60 days prior to the initial enrollment
period for Part D, which begins November 15, 2005.
    Response: We are planning outreach and education activities that
will occur throughout 2005 and 2006. Detailed information about drug
plans and their individual benefit structures will be released as soon
as possible after this information is approved. It is impossible to
send out plan data any sooner due to submission dates for plan
information and the process steps needed to translate the raw data into
consumer-friendly information, as well as the print production steps
for the publication that will house this comparative information.
    Comment: One commenter asked what information we will provide to
SSA, SHIPs, and other groups to educate beneficiaries about the late
enrollment penalty.
    Response: We will provide important details about the penalty
associated with late enrollment in the information provided to SSA and
SHIPs, as well as in SHIP training materials. In addition, we will
develop materials that can be used by employers, unions, partners,
advocacy groups and other stakeholders to educate beneficiaries about
the late enrollment penalty.
    Comment: One commenter stated that we must give greater attention
to developing materials and education campaigns focused on informing
beneficiaries, especially those with special needs, about the new drug
benefit and to help them to enroll in the best plan available.
    Response: We are planning a multi-tiered education program to
repeatedly reach all beneficiaries. This program will include plans for
specific important target audiences, including those with special
needs. Mailings and outreach activities to dual eligibles are currently
being planned. Education and outreach materials developed for
beneficiaries will be thoroughly tested with the target audience.
    Comment: Another commenter stated that we should mail, no later
than October 15, 2005, standardized, easy-to-understand notices to
full-benefit dual eligible individuals that, among other things: inform
them of their eligibility to receive the low-income subsidy if they
enroll in a PDP; list of choices of health plans, clearly denoting
those that meet the benefit premium assistance limit, and contact
information for each plan; explain that full-benefit dual eligible
individuals will be randomly enrolled in a prescription drug plan at a
specified date if they fail to opt out or enroll in a plan themselves;
explain how they may change their drug plans if they wish at any time;
and inform them of where in their community they can go to get help
with enrollment. The commenter also recommended that these notices
should be tested for readability by focus groups and experts.

[[Page 4220]]

    Response: We plan to consumer test beneficiary notices and send out
the information noted by the commenter above by October 15, 2005. We
are considering using the mailing to inform the full-benefit dual
eligible individuals about what plan they will be auto-enrolled in if
they fail to elect a Part D plan by December 31, 2005 or affirmatively
opt of Part D, and that they have a right to choose to enroll in a
different plan.
    Comment: One commenter stated that the website should be provided
in languages other than English to reflect the language spoken in a PDP
service area.
    Response: We appreciate this feedback and will consider this when
developing the requirements for the website.
    Comment: CMS should include in the final rule binding and
enforceable standards defining information plans must provide to
beneficiaries with various types of disabilities. For example, this
information must be available to individuals who are blind or have low-
vision. Further, CMS must require PDP internet websites to be
accessible for individuals with vision impairments.
    Response: Our websites are accessible to people with various
disabilities, including those who are blind or have low-vision. Under
our marketing requirements in Sec.  423.50, we require Part D plans to
demonstrate that marketing resources are allocated to marketing to the
vulnerable populations, as well as beneficiaries age 65 and over. It is
also important to note that Section 508 of the Rehabilitation Act of
1973 allows individuals with disabilities to access electronic
information.
    Comment: Commenters stated that the proposed rule focused largely
on support through Internet sources and the 1-800 Medicare number, and
argued that both are necessary and helpful but insufficient to meet the
needs of many duals, as well as those eligible for the low-income
subsidy.
    Response: Although the basis for information dissemination is
through publications, http://www.medicare.gov and 1-800-MEDICARE, we do not

plan to solely rely on these resources to reach the population as a
whole. We will work closely with SSA, SHIPs, Area Associations on Aging
as well as other national stakeholders and partners, to provide
assistance to those who may qualify for the low-income subsidy. Through
a broad network of support from community based organizations, we will
make considerable efforts to reach those beneficiaries who do not have
access to the Internet or are uncomfortable calling 1-800-MEDICARE.
    Comment: CMS should also make detailed information about PDPs
available electronically to others in accessible formats that would
enable them to conduct independent analyses about what plan would be
best for a particular individual.
    Response: Because the actual plan data underlying the price
comparison tool is considered proprietary, we do not anticipate making
the underlying data available electronically to outside organizations.
Since nothing in the MMA addresses disclosure of plan data, the Freedom
of Information Act (FOIA) rules apply. FOIA Exemption 4 protects
certain confidential commercial information that is submitted to a
Federal agency. Determinations about the applicability of FOIA
Exemption 4 to plans' pricing data would be made on a case-by-case
basis depending on whether the submitter of the data could demonstrate
that disclosure of this information would likely cause substantial
competitive harm to the submitter's competitive position. If FOIA
Exemption 4 is found to protect submitted price information, we cannot
disclose this information because to do so would violate the Trade
Secrets Act (18 U.S.C. 1905).
    Comment: Several commenters stated that we should develop specific
outreach and education strategies for vulnerable populations, including
disabled Medicare beneficiaries and dual eligibles. Another commenter
stated that PDPs should be required to include specific plans for
encouraging enrollment of hard-to-reach populations, including
individuals with mental illness. Another commenter indicated that
outreach efforts must involve community-based groups on a collaborative
basis and not just use these groups as conduits for distributing
written materials produced by CMS regarding the new benefit. Resources
must be provided to enable these groups to educate beneficiaries about
their choices and help enroll them. This collaboration with community
groups must begin as soon as possible to establish the infrastructure
needed once Part D goes into effect.
    Response: We are developing an extensive outreach campaign for
these individuals and are working closely with U.S. Department of
Health and Human Services' Office of Disability to ensure that this
important audience is reached.
    Comment: One commenter strongly urged CMS to develop a specific
plan for facilitating enrollment of beneficiaries with disabilities
that incorporates collaborative partnerships with State and local
agencies and disability advocacy organizations.
    Response: In addition to working closely with the HHS Office of
Disability to ensure we reach this group of individuals, we plan to
broaden local partner networks though the Regional Education About
Choices in Health (REACH) campaign to provide training, information and
planning support to provide outreach and assistance to these
populations. REACH is a national education and publicity campaign
implemented at the local level by our Regional Offices and their
partners. The REACH campaign works through partnerships to increase
awareness of the Medicare program and resources among hard to reach
populations.
    Comment: A commenter suggested that we should develop and implement
effective outreach strategies utilizing the Medicare Beneficiary
Ombudsman authorized under section 923 of the MMA.
    Response: Section 923 of the MMA states that, to the extent
possible, the Ombudsman shall work with SHIPs to facilitate the
provision of information to individuals entitled to benefits under Part
A or enrolled under Part B, or both regarding MA plans and changes to
those plans. We will ensure that SHIPs receive sufficient training in
all aforementioned subjects so that SHIPs can provide information and
assistance to beneficiaries referred to them by the Ombudsman. The
Ombudsman operational design assumes that 1-800-MEDICARE will refer
callers to appropriate sources, including SHIPs, for resolution of
complaints and appeals and, when necessary, refer them directly to the
Ombudsman as a last resort.
    Comment: We received two comments that strongly recommended that we
clarify the SHIPs mandate to ensure that they address the needs of
individuals with disabilities, including non-elderly individuals.
    Response: Section 4360 of the Omnibus Budget Reconciliation Act
(OBRA) 1990, which created SHIP, requires that SHIPs provide
information, counseling and assistance to Medicare eligible
beneficiaries, including beneficiaries with disabilities. All CMS SHIP
grant announcements expressly reference beneficiaries with disabilities
as intended recipients of SHIP services. In addition, we provide
training and information on the special needs and issues related to
this population. We agree with the commenters and will clarify the SHIP
mandate through the methods described here to address this need.

[[Page 4221]]

    Comment: One commenter suggested that we partner with and fund
community-based disability organizations to conduct outreach,
information, and referral activities on the new Part D benefit.
    Response: While we agree to partner with these organizations in
these activities, funding these groups are subject to available funds
in our budget.
    Comment: One commenter was concerned about beneficiaries being
inundated with marketing and outreach materials. Since many
beneficiaries will need counseling on plan selection, this commenter
asked for clarification regarding whether counseling will be available,
what the States' role will be, and whether there will be Federal
financial participation available for such costs.
    Response: States that had SPAPs on October 1, 2003 will have
Federal assistance available to them through the transitional grant
program authorized under section 1860D-23(d) of the Act. These States
will use the transitional grant funds to educate SPAP enrollees about
the plans that are available to them under part D, as well as provide
technical assistance, phone support, counseling, and other activities
the SPAP believes will promote the effective coordination of enrollment
in Part D. States that do not have a SPAP operational as of October 1,
2003 will not have these transitional funds available to them.
    In addition, we will continue to provide grants to the States
through the SHIP. SHIP is a national program that offers one-on-one
counseling and assistance to people with Medicare and their families.
Through grants directed to States, SHIPs provide free counseling and
assistance via telephone and face-to-face interactive sessions, public
education presentations and programs, and media activities. We expect
SHIP counseling to be an important source of information for
beneficiaries about Part D.
    Comment: One commenter was concerned that the targeted and hands-on
outreach, education and decision support and enrollment services,
particularly outreach to lower income, rural and disabled beneficiaries
is not adequate.
    Response: Through the REACH campaign, we plan to broaden local
partner networks in order to provide training, information and planning
support to provide outreach and assistance to these populations.
Through a broad network of support from community-based organizations
as well as national stakeholders and partners, considerable effort will
be made to reach those beneficiaries who do not have access to the
Internet or who are uncomfortable calling 1-800-MEDICARE.
    Comment: One commenter stated that we should consider preparing
educational materials that would help pharmacists understand the
benefits and other material that they can use to educate beneficiaries.
    Response: We are working with our provider education staff to
develop materials for all providers, including pharmacists, for
educational use.
10. Approval of Marketing Materials and Enrollment Forms (Sec.  423.50)
    Section 1860D-1(b)(1)(B)(vi) of the Act directs us to use rules
similar to those established under section 1851 of the Act to review
PDPs' marketing materials and application forms.
    In the proposed rule, we generally replicated the marketing
provisions established under Sec.  422.80 for MA plans as appropriate
for PDPs. Therefore, we proposed at Sec.  423.50(a) guidance for our
review of marketing materials, definition of marketing materials,
deemed approval, and standards for PDP marketing. We do recognize that
the differences between PDPs and MA plans will require different
marketing requirements and we requested comments on this issue. We have
drafted the final rule to apply the marketing requirements to all Part
D sponsors, although we may waive the Part D provisions in deference to
similar MA, PACE and cost plan requirements.
    We also proposed to add Sec.  423.50(a)(3) in order to streamline
the marketing review process for all PDP sponsors for those materials
which pose the lowest risk of confusing or misleading beneficiaries.
This aspect of the File and Use program allows the PDP sponsor, prior
to distribution, to submit and certify that for certain types of
marketing materials it followed all applicable marketing guidelines, or
for certain other marketing materials that it used, without
modification, proposed model language as specified by CMS.
    Except as otherwise provided below, the final rule adopts the
marketing rules set forth in Sec.  423.50 of the proposed rule.
Although the following area generally applies to Fallback plans,
subpart Q specifically addresses issues related Fallback plans.
    In addition to marketing materials and enrollment forms, comments
provided the opportunity to respond to enrollment issues related to
SPAPs, pharmacist and physician marketing to beneficiaries, and
organizations marketing additional products in conjunction with PDP
services.
    Comment: We received several comments on types and quantity of
information that should be disseminated to beneficiaries. Many
commenters suggested that specific formulary information needs to be
provided including specific drugs (top 25-50), pricing and premium
information, benefit structure, pharmacy networks, plan availability by
region, medication management services offered (and who is eligible for
them), appeals and exception process and information on plan
performance. Most agreed that this information should be mailed, as
well as provided on the Internet and that comparison tables with this
information for all plans in a geographic region should be provided so
that beneficiaries can compare plans side-by-side. One commenter was
concerned that beneficiaries would be overwhelmed with materials and
expressed concern about the potential for adverse selection. It was
suggested that strict and detailed regulations on marketing be issued
to protect beneficiaries. One commenter suggested that we need more
detail in the final rule around patient education.
    Response: We agree with the commenters that beneficiaries will need
information on the Part D plans available in their areas. Our goals in
providing information has always been to ensure that beneficiaries have
access to timely, accurate and reliable information that helps them
make informed health care decisions. Our education and outreach efforts
related to Part D are no exception. We will employ multiple tactics,
including publications, direct mailings, the Internet
(http://www.medicare.gov), toll-free telephone numbers, and localized

grassroots partnerships to help beneficiaries access the level of
detailed information that they want and need to make their best choice
among Part D plans. Our tiered communications approach recognizes that
different beneficiaries have varying information needs and what might
be an overwhelming level of detail to some individuals may only meet
the baseline needs of another. By using multiple, integrated education
and outreach approaches and thoroughly market testing our products and
messages during development, we are working to strike the best balance
of providing the right information at the right time. In addition, we
are committed to making sure plans provide clear, accurate information
on covered benefits, including formulary, pharmacy networks, and costs.
We intend to require such information in guidance rather than
specifying the full range of materials in the regulations so that we

[[Page 4222]]

can modify our requirements in a timely manner to meet beneficiary
needs.
    Comment: We received several comments regarding the use of various
marketing vehicles to promote PDPs. Several of the commenters supported
the distribution of information through websites, 800 numbers, written
communications and telemarketing. One commenter stated that marketing
should be limited to mail contacts only due to concerns regarding
fraud. One commenter stated that the restrictions on marketing need to
be expanded due to the potential for fraud. Many commenters opposed
telemarketing and one was explicitly against email as well.
    Response: Section Sec.  1860(D)(1)(b) of the Act allows for similar
marketing rules for the drug benefit as those for MA. We intend to
follow this guidance and promote marketing guidelines that are in line
with those under the MA program. The MA program supports the use of
websites, 800 numbers, mailings, email and telemarketing for plan
marketing. By allowing plans multiple routes for marketing, we believe
that greater numbers of beneficiaries will be reached and thus enrolled
in drug benefit plans. We believe this is an important goal given the
penalty for late enrollment in Part D. We understand that this is
contrary to what we allowed in the drug discount programs. We did not
allow the drug discount card programs to participate in telemarketing
practices because many of the drug card sponsors were stand alone
start-up companies that did not have a previous history of doing
business. We expect that the PDP sponsors will have previous experience
administering drug plans, insurance or other lines of similar business,
with established reputations, much like MA plans.
    Marketing guidelines are in the process of being established, and
these will set forth in greater detail what will be expected of the
plans. PDP sponsors may be barred from engaging in certain practices if
abuses occur. In addition, PDPs will be prohibited from requesting
beneficiary identification numbers over the telephone or via email as
related to marketing activities.
    Comment: One commenter stated that the States should be able to
steer its SPAP enrollees toward the most appropriate plan.
    Response: Section 1860D-23(b)(2) of the Act defines an SPAP as a
State program which, in determining eligibility and the amount of
assistance to a Part D eligible individual under the program, provides
assistance to such individuals in all Part D plans and does not
discriminate based upon the Part D plan in which the individual is
enrolled. We further interpreted that provision in the preamble of the
proposed regulation such that a SPAP may not designate a preferred PDP,
even if the State allows beneficiaries to choose a non-preferred plan
and provides for benefits equivalent to that which it also provides for
the preferred plan (referred to as wrap-around benefits). We believe
that, regardless of whether the SPAP is authorized under State law to
make enrollment decisions on behalf of the beneficiary, we interpret
using that authority to steer beneficiaries to a preferred PDP or MA-PD
plan would be interpreted to violate the non-discrimination provision
under section 1860D-23(b)(2) of the Act.
    Section 1860D-23(d) of the Act provides for grants to SPAPs, in
existence as of October 1, 2003, which were awarded in September of
2004 for fiscal year 2005, for the purpose of educating their members
about options to access Medicare drug benefit coverage and about
comparing options so they can choose the best value to them. We will
reach out to SPAPs with information to help people with Medicare
understand their drug plan options. We will also assist SPAPs in
adapting this information to ensure that their members understand the
way that the new Part D plans coordinate with their SPAP benefit and
supporting their members in making informed decisions about drug
benefit plan options. Outreach to SPAPs would also include instruction
on the educational/outreach/assistance activities SPAPs could pursue
while not discriminating against Part D plans.
    SPAPs cannot discriminate amongst plans; however, they may provide
beneficiaries with comparable education on all of the available Part D
plans (PDPs, MA-PD plans, and PACE and cost-based HMO or CMPs offering
qualified prescription drug coverage) in terms of the following: which
plans have lower premiums after application of any uniform SPAP premium
subsidy; which plans offer formularies that cover the drugs utilized by
the beneficiaries so that beneficiaries can continue to use the same
drugs; which plans offer the drugs used by the beneficiary at the most
favorable combination of deductibles, coinsurance/co-pays, and
negotiated prices; which plans use the same network pharmacies as the
SPAP so that beneficiaries can continue to use the same pharmacy; and
which plans (if any) have ID cards that include an emblem or symbol
indicating its coordination with the SPAP to facilitate secondary
payment at the point of service.
    In addition, SPAPs are prohibited from recommending Part D plans
based on their financial interest in minimizing their cost of providing
coverage that supplements (wraps-around) their members Part D benefits.
They are required to mirror our process auto-enrolling full-benefit
dual eligible individuals among PDPs on a random basis in the event
that members do not actively select a Part D plan during their IEP or
after enroll in the SPAP.
    Part D plans benefit coordination requirements include establishing
procedures to share information with SPAPs on enrollment files, the
processing and payment of claims, claims reconciliation reports and
whether the beneficiary has satisfied the out-of-pocked limit. Part D
plans are encouraged to work with all SPAPs to co-brand the Part D
benefits by providing (in its electronic claim response to the
pharmacy) information on payment of premiums and coverage, and whether
claims should be sent to an SPAP for processing. Plans should also
consider including the SPAPs' benefits in marketing and educational
materials to beneficiaries, which includes SPAP benefit information,
eligibility criteria, order of party payment, and a phone number for
SPAP enrollment and claims payment information.
    Comment: Two commenters were concerned that SPAP beneficiaries will
be confused by materials and decline enrollment if premiums,
deductibles and coverage gaps are discussed since SPAP participants
were never required to pay these amounts. It was also stated that
marketing materials for this population should include coordination of
benefit (COB) information.
    Response: We expect that SPAPS will provide information to
beneficiaries on their drug plan choices in their States. We expect
that plans will work cooperatively with SPAPs to co-brand materials,
when appropriate, to ensure that beneficiaries are provided with
comprehensive, appropriate, coordinated information that will
facilitate education and understanding of their benefits. Requirements
for coordination of benefits with other providers of prescription drug
coverage are described under Sec.  423.464 (e). We expect Part D plans
to work with SPAPs on coordination of benefit activities to ensure that
beneficiaries are provided seamless care that is easily understandable.
    Comment: We received multiple comments regarding the specific
requirements for marketing materials. Many commenters agreed that
marketing materials should be available in Spanish and in other
languages that

[[Page 4223]]

are in the plan's service area. Two commenters stated that marketing
materials should be developed at an appropriate health literacy level.
Two commenters stated that the information will need to be adapted for
the blind/low vision, those with cognitive disabilities, in Braille,
large print and on audio or computer disks. It was also stated that
there should be a requirement that the Internet site be accessible for
the visually impaired and that interpreters and alternative
communication methods should be mandated. Another commenter stated that
a subpart should be devoted to notice requirements.
    Response: We agree that there are special needs of beneficiaries
that will need to be provided for. The regulation currently dictates
that marketing materials need to be available in low-literacy formats.
While we do not require materials to be available in other languages,
it is highly encouraged. In addition, basic enrollee information should
be developed to accommodate the visually impaired. Call centers must be
able to accommodate non-English speaking/reading beneficiaries. Plan
sponsors should have appropriate individuals or translation services
available to call center personnel to answer questions that
beneficiaries may have concerning aspects of the drug benefit. We are
working on developing guidance shortly following publication of the
final rule that is similar to the MA requirements to ensure appropriate
information is available to beneficiaries.
    Comment: Several commenters stated that marketing materials should
be consistent with other Medicare programs.
    Response: We are currently developing additional marketing
guidelines and expect them to be similar to other Medicare programs
(for example, the MA and the Medicare-approved prescription drug
discount card programs), to the extent possible, in order to reduce the
administrative burden for plans that participate in these programs.
    Comment: We received many conflicting comments regarding whether
providers (pharmacists and physicians) should be allowed to market to
beneficiaries. This includes the display of materials from Part D
sponsors as well as verbally steering beneficiaries to particular
plans. Several commenters were in support of pharmacies marketing MA/PD
and PDPs; some of these commenters stated that equal attention should
be provided to all plans in the particular area. In addition, some
commenters specifically mentioned that they were in support of
physicians marketing Part D plans.
    Other commenters were against marketing of Part D plans in the
pharmacy setting; three specifically mentioned the prohibition of
physicians from marketing to beneficiaries. Most stated that the
reasons for their positions were that physicians or pharmacists could
steer a beneficiary to inappropriate Part D plans.
    Response: Both the MA and the Medicare-approved prescription drug
discount card programs allow some provider marketing to occur. Our
position is that it is appropriate to allow providers and pharmacies to
market to beneficiaries. This marketing provides beneficiaries with
access to information about the options available to them under Part D
that they may not have received through other sources because
beneficiaries often look to their health care professionals to provide
them with complete information regarding their health care choices.
Therefore, we believe that providers and pharmacies should provide
prospective enrollees with information on the full range of options
available to them under Part D. This process is similar to the process
followed for the discount drug card program, where pharmacies may
provide information on where beneficiaries may get complete information
regarding all the Medicare-approved discount cards available in the
region in their service area. We would require Part D sponsors that
want their network pharmacies to provide marketing materials to
prospective enrollees to include in their contracts language requiring
the pharmacies Part D eligible individuals with information on all Part
D options available in the service area. This requirement would be
specified in the further guidance issued by CMS. Any remuneration
offered to providers in exchange for providing to patients information
about particular Part D plans must comply with applicable Federal and
State laws on fraud and abuse.
    Comment: Two commenters stated that Part D sponsors should be
prohibited from using Medicare discount card enrollee and applicant
information to provide leads for marketing their Part D plans.
    Response: We acknowledge the importance of beneficiary privacy, and
the marketing limitations that drug cards operate in accordance with
section 1860D-31(h)(7) of the Act. The drug card provisions under
section 1860D-31 of the Act contemplate a transition from the drug card
program to Part D, and we are considering what will be the specific
drug card responsibilities of drug card sponsors during transition.
From that understanding we will assess whether PDP sponsors currently
offering a drug card may use of beneficiary drug card information to
market their Part D plans and we will provide further guidance to the
drug card sponsors and Part D sponsors at a later time. We note,
however, that the HIPAA Privacy Rules may limit the ability of drug
card sponsors to disclose their enrollees' information to un-affiliated
Part D sponsors.
    Comment: One commenter suggested that the File & Use program should
be delayed one year until we have more experience with evaluating the
practice of the PDPs, and that the term ``performance requirements''
needs to be defined.
    Response: We will define the eligibility and performance
requirements associated with the File & Use program in further
guidance.
    Comment: There was concern over the amount of time that was stated
was necessary for a review of PDP and MA-PD marketing materials. Some
suggestions included decreasing the time of this review from 45 days to
30 days, and instituting a 10-day review period for resubmitted
materials. In addition, if unaltered model materials were used, the
review should be limited to 10 days.
    Response: We agree that that timelines for reviewing marketing
materials should be shortened. However, we intend on maintaining the
proposed timelines for Part D marketing materials as defined in the
statute. We will work to develop a review process that is as efficient
as possible. We will develop a range of model materials for Part D
sponsors.
    Comment: We also received a comment that the amount of materials
that must be individually approved should be limited. There was also
concern that we may not have enough staff to review the materials and
that the process needs to be open, fair and constructive.
    Response: We will develop a range of model materials for Part D
sponsors to choose from to improve efficiency of the marketing review
process. Materials that utilize ``model language'', without
modification, are subject to a streamlined review process. We will work
to develop a review process that is as efficient and effective as
possible utilizing standardized criteria to review the materials.
    Comment: Two commenters stated that it is unacceptable that
marketing materials are deemed approved if we fail to approve them
within the time

[[Page 4224]]

period and materials should be reviewed multiple times for multiple
regions.
    Response: It is a statutory requirement that we approve marketing
materials within 45 days or that they are then deemed approved. In
developing sub regulatory marketing guidance and processes, we will
work to ensure that our reviews are completed within the statutory
timeframe.
    Comment: Commenters stated that guidelines for CMS review under
Sec.  423.5(c)(i),(ii), and (iii) of the proposed rule need to be more
specific. These sections lay out the information that Part D plans need
to provide to beneficiaries.
    Response: We will provide greater detail in the sub regulatory
guidance in order to facilitate any necessary future changes that would
need to be made.
    Comment: Many commenters gave input as to whether additional
products, such as financial services, should be marketed to Medicare
beneficiaries in conjunction with the Part D benefit. Several of the
organizations expressed their concerns over the fact that beneficiaries
may be confused with receiving additional information for other
products and services in conjunction with information about the Part D
benefit. The major concern is that beneficiaries would choose not to
participate in Part D because they did not like some of the other
products or that they may mistakenly believe that we have approved
these products. One commenter suggested that individuals must actively
agree to receive marketing materials other than enrollment materials.
Some commenters suggested that financial institutions should not be
encouraged to participate as PDPs, since the potential for abuse, as in
selection of healthier beneficiaries into plans and avoidance of
financial services to less healthy individuals, is enormous.
    Some health plans commented that they are in favor of allowing PDP
sponsors to market additional health-related and non-health-related
products to beneficiaries. These products could be provided for an
additional fee or at no additional cost to the beneficiary. The belief
is that the additional tools could help beneficiaries manage their
expenses and financial securities. One organization also stated that if
PDP sponsors are permitted to provide these additional products, than
MA-PD plans should be allowed to similarly provide these additional
products.
    Response: We do not want to restrict beneficiaries from receiving
materials about of health-related and non-health-related services that
may be of benefit to them in managing their health or payments for
health care. All organizations that are qualified to be a Part D
sponsor are encouraged to participate in providing services under Part
D. In situations where plans want to use or disclose protected health
information (PHI), for purposes of marketing these other products or
services, for example beneficiary enrollment information, Part D plans
must comply with the HIPAA Privacy Rule and obtain a written
authorization from the beneficiary prior to using the beneficiary's PHI
to market non-health-related products and services. In other cases
where Part D plans implement general marketing mailings that do not use
beneficiary PHI, we would not object to plans providing such
information to beneficiaries as long as the information is not
contingent upon PHI to do so. For example, a plan may obtain a general
mailing list from a non-related marketing vendor to mail materials to
all individuals over age 65 in a geographic area to promote its
products. The use of beneficiary names and addresses obtained from a
plan and used for mailings to beneficiaries only, would presumably use
PHI. Consequently, plans could not market non-health-related products
through mailings using beneficiary information absent authorization.
    Comment: One commenter recommended that any Part D sponsor offering
other health coverage to its Part D plan enrollees be required to
provide anti-duplication notices like those that are required under the
National Association of Insurance Commissioners (NAIC) model regulation
for Medigap policies. The purpose of these anti-duplication notices is
to advise Medicare beneficiaries as to whether other non-Medigap types
of coverage being offered to them might duplicate coverage they already
have under Medicare.
    Response: The disclosure statements that are required under the
NAIC model regulation for Medigap policies were adopted by the NAIC
pursuant to anti-duplication provisions contained in section 171(d) of
the Social Security Act Amendments of 1994 (SSAA'94-Pub. L. 103-432)
that amended section 1882(d)(3)(A) of the Act. These statements apply
to all issuers of health insurance coverage that is offered to Medicare
beneficiaries that is neither a Medigap policy nor a type of coverage
that is listed as exempt from this requirement in a Federal Register
notice that CMS [then HCFA] published on June 12, 1995. Section 171(d)
required CMS to either publish the disclosure statements developed by
the NAIC or publish its own. The FR notice through which CMS accepted
the 10 separate disclosure statements developed by the NAIC for the
various types of coverage commonly offered to Medicare beneficiaries
contained a list of types of policies not requiring disclosure
statements (See 60 FR 30880).
    Among the types of coverage not requiring the use of a disclosure
statement were managed care organizations with Medicare contracts under
section 1876 of the Act. The notice went on to explain that these types
of policies are exempt because ``these plans do not `duplicate'
Medicare benefits; rather their purpose is to actually provide all
covered Medicare benefits directly to enrolled beneficiaries.'' In
1995, cost and risk managed care organizations with contracts under
section 1876 of the Act were the primary alternative to fee-for-service
Medicare. Medicare+Choice plans were authorized by the Balanced Budget
Act (BBA) in 1997, and the program has now been renamed Medicare
Advantage by MMA. MMA also provided for private prescription drug plans
(PDPs) to contract to deliver Medicare prescription drug benefits under
Medicare Part D. Because Part D plans will actually provide all covered
Medicare drug benefits directly to enrolled beneficiaries, we wish to
clarify that these entities will not have to provide anti-duplication
notices for their provision of coverage pursuant to their Medicare Part
D contracts. However, if Part D plans choose to market to their
enrollees other (non-Medigap) health insurance products that are not
part of their contracts under Part D, these other types of health
insurance products will have to bear the disclosure statements required
by section 1882(d)(3)(A) (vi) of the Act and the NAIC model regulation
unless the other coverage comes within one of the specified exemptions.
11. Information Provided to PDP sponsors and MA Organizations
    Section 1860D-1(b)(4)(A) of the Act authorizes us to provide
information about Part D eligible individuals to PDP sponsors and MA
organizations to facilitate the marketing and enrollment of
beneficiaries in their PDP and MA-PD plans. This information is
intended to ensure participation in the Part D program, as well as to
reduce costs to those plans.
    In the final rule, it is not necessary to provide regulatory text
implementing this provision; however, we intend to provide additional
guidance shortly following publication of this rule, as explained
below.

[[Page 4225]]

    Comment: We received several comments on this MMA provision.
Several of the commenters supported the provision of such information
to organizations, with a few offering to work with CMS to develop
guidance and ensure that the appropriate beneficiary protections are in
place. Many who supported this initiative believed that, at a minimum,
the name, address, and telephone number of the individual should be
provided. Another commenter believed that the statute permits
organizations to contact beneficiaries through written, electronic, or
phone communication. Another commenter stated that the individual's
dual eligible or low-income subsidy status should also be provided. The
commenter also noted that we should provide the information to
organizations upon request, as opposed to being limited to only
receiving such information at certain times of the year. The commenter
also believed that the statute would permit PDP sponsors to obtain
marketing information on low-income and dual eligible individuals
directly from States and SPAPs.
    Several commenters also opposed such information being provided to
organizations. One commenter believed that providing such information
to Part D competitors would generate more problems and ``incite'' more
negative beneficiary reaction that would outweigh any value in
enhancing beneficiary outreach. Other commenters were concerned that
such information would be used to ``cherry pick'' healthier and less
expensive beneficiaries. Several commenters noted that if we were to
provide such information to organizations, such information should be
limited to the minimum amount necessary. They stated that certain
information, such as health or financial information or telephone
numbers should not be provided. Further, beneficiaries should be given
the option to request that we not share their information with plans.
Several commenters did not believe that PDPs or MA-PD plans should be
able to use the information for telemarketing purposes. Another
commenter indicated that we should only disclose information to the
plan if the plan's marketing material contains formulary and drug
pricing information and is accompanied by an application form.
    Response: We decline to provide specifics on the provision of this
information at this time but reserves the right to provide this
information to plans in the future. We will develop further guidance on
this issue shortly after publication of this rule.
12. Procedures to Determine and Document Creditable Status of
Prescription Drug Coverage (Sec.  423.56)
    Section 1860D-13(b)(6) of the Act identifies certain entities,
which we describe in our proposed rule that must disclose whether the
prescription drug coverage that they provide to their members who are
Part D eligible is creditable prescription drug coverage.
    Sections 1860D-13(b)(4) (A) through (G) of the Act lists seven
forms of potential creditable prescription drug coverage: Coverage
under a PDP or under an MA-PD plan; Medicaid; a group health plan
(including coverage provided by a Federal or a nonfederal government
plan and by a church plan for its employees); a State pharmaceutical
assistance program; veterans' coverage of prescription drugs,
prescription drug coverage under a Medigap policy; and military
coverage (including Tricare). Many of these terms are defined elsewhere
in Federal regulations; some of them are under the jurisdiction of
other Federal agencies.
    In addition to the forms of creditable coverage identified in
sections 1860D-13(b)(4) (A)-(G) of the Act, section 1860D-13(b)(4)(H)
of the Act provides the Secretary with the flexibility to identify
``other coverage'' that could be considered to be creditable
prescription drug coverage. We proposed, at Sec.  423.56, to expand the
list of types of creditable prescription drug coverage.
    As discussed in Sec.  423.46 of the proposed rule, upon becoming
eligible for Part D, beneficiaries must decide whether to enroll in
Part D, or forego that opportunity and face a possible financial
penalty should they later decide to enroll. Beneficiaries who decide
not to enroll in Part D because they have creditable prescription drug
coverage will not face such a penalty if they later decide to enroll in
Part D.
    According to section 1860D-13(b)(5) of the Act, an enrollee who
would otherwise be subject to a late enrollment penalty may avoid the
penalty if his or her previous coverage met the standards of
``creditable prescription drug coverage''. Under section 1860D-13(b)(5)
of the Act, previous coverage will only meet those standards ``if the
coverage is determined (in a manner specified by the Secretary) to
provide coverage of the cost of prescription drugs the actuarial value
of which (as defined by the Secretary) to the individual equals or
exceeds the actuarial value of standard prescription drug coverage.''
    In the proposed rule, we interpreted ``to the individual'' in this
case as being to the average individual under the plan, as opposed to
the sponsor of the plan. For purposes of determining creditable
coverage, we proposed a ``gross'' test: will the expected plan payout
on average be at least equal to the expected plan payout under the
standard benefit? We also proposed at Sec.  423.56(c) that any entity
seeking to offer coverage of the type described in Sec.  423.56 must
attest to the actuarial equivalence (or non-equivalence) of its
prescription drug coverage in their notice to Medicare beneficiaries
and in a submission to CMS, and must maintain documentation of the
actuarial analysis and assumptions supporting the attestation.
    In coordination with the provisions regarding the late enrollment
penalty, we proposed at Sec.  423.56 to establish a process under which
these entities will disclose the creditable status of their
prescription drug coverage to us and to each part D eligible
beneficiary enrolled in such coverage.
    Section 1860D-13(b)(6)(C) of the Act, implemented at Sec.
423.56(g) of the proposed rule, provides that an individual who was not
adequately informed that his or her prescription drug coverage was not
creditable prescription drug coverage may apply to CMS to have such
coverage treated as creditable prescription drug coverage for purposes
of not having the late penalty imposed.
    Comment: One commenter stated that Medicaid should not be
considered creditable prescription drug coverage, for the purposes of
Part D, because no Medicaid benefit for Part D covered prescription
drugs is available to Part D eligible beneficiaries.
    Response: All entities listed under Sec.  423.56(b), except PDPs
and MA-PDs under (b)(1) and PACE plans and cost-based HMOs and CMPs
offering qualified prescription drug coverage, must provide notice to
both CMS and its members whether the prescription drug coverage
provided is or is not creditable. The purpose of the notice of
creditable coverage is to ensure that individuals are aware of whether
such coverage is creditable prescription drug coverage and its
implication to the late enrollment penalty.
    Medicaid is prohibited from providing Part D drugs to full-benefit
dual eligible individuals. However, since there may be other
individuals who are not receiving the full range of benefits from
Medicaid but who will continue to receive some drug coverage from the
State, these individuals must also receive this notice providing status
of the coverage.
    Comment: One commenter requested that we include SPAP in the
definition

[[Page 4226]]

of types of coverage that may be creditable.
    Response: The proposed rule at Sec.  423.56(b)(4) includes SPAPs as
potentially creditable. Section 1860D-13(b)(4)(D) of the Act specifies
these programs, as described in section 1860D-23(b) of the Act, as
such. To ensure this concept is clear, we will revise Sec.
423.56(b)(4) to include the acronym ``SPAP.''
    Comment: We received a comment indicating that the value of
prescription drug coverage under PACE will likely equal or exceed the
actuarial value of Part D standard prescription drug coverage as a
result of existing requirements in sections Sec.  460.90 and Sec.
460.92 of the PACE regulation. The commenter recommended incorporating
PACE into the CMS definition of creditable prescription drug coverage
found in Sec.  423.56(a).
    Response: We agree with the commenter and have incorporated PACE
into the definition of potentially creditable prescription drug
coverage found in Sec.  423.56(b). Additional discussion of the
applicability to Part D benefits and requirements to PACE are outlined
in subpart T of the final rule.
    Comment: A few commenters inquired about the actuarial equivalence
test that the entities listed will be required to meet, since the
actuarial equivalence reference in Sec.  423.265 refers to bid
submissions. Commenters supported both the concept of ``gross'' test
and an ``aggregate test'' for calculation of the actuarial equivalence
for plans, including group health plans which offer several benefit
packages to determine if the prescription drug coverage is creditable.
    Response: The basic actuarial equivalence value test for the
determination of creditable coverage of alternative coverage is
determined by calculating whether the expected plan payout on average
will be at least equal to the expected plan payout under defined
prescription drug coverage (gross test). We believe Section 1860D-
22(a)(2) of the Act is subject to two reasonable interpretations of
calculating the creditable coverage test (gross test). Under the first
interpretation, the actuarial equivalence standard for determining
creditable coverage would be applied to the alternative coverage as a
whole, and under the second interpretation the actuarial standard would
be applied for each benefit option (including separate cost-sharing
arrangements) within a single group health plan. Whereas our proposed
rule required plans to apply the actuarial equivalence standard at the
aggregate level, for the final rule we instead require plans to apply
the actuarial equivalence standard to each benefit option within its
plan.
    Our rationale for revising the actuarial equivalence test is to
ensure that beneficiaries are adequately informed that their coverage
is or is not creditable prescription drug coverage. A sponsor may offer
many different benefit options to beneficiaries. One of those benefit
options may not pass the gross test but be included in an overall (or
``aggregate'') text. As a result, this would leave beneficiaries in
certain benefit options with a determination that their coverage is
creditable, when in actuality it is not. For example, a sponsor has a
group in which richer benefits are offered, compared to another group
that has more limited benefits. If the sponsor would aggregate the two
benefits together, the lower benefit will end up as ``creditable'' when
the benefit packages are averaged together.
    We will issue guidance on the aspects of actuarial equivalence
shortly following publication of the final rule.
    Comment: One commenter asked if any coverage that is less than full
pharmacy benefits could be considered creditable prescription drug
coverage, such as coverage for maintenance or coverage of specific
disease-only drugs.
    Response: We believe that the definition of creditable prescription
drug coverage would prohibit us from concluding that such coverage is
creditable. To be creditable prescription drug coverage, the coverage
must equal or exceed the actuarial value of defined standard
prescription drug coverage, as we will define in guidance referenced in
the previous response. It is likely that coverage of a very limited
scope such as the commenter refers will not likely meet our actuarial
equivalence test.
    Comment: In response to our request for comments on other forms of
coverage that may potentially be considered creditable, two commenters
requested that we cost-based HMOs and CMPs authorized under section
1876 of the Act as potential providers of creditable prescription drug
coverage. Both commenters also suggest that we include a provision
allowing CMS to designate other types of coverage as potentially
creditable prescription drug coverage in the future without requiring
such an addition be accomplished through the rule making process.
Another commenter suggested that coverage provided by State high risk
insurance pools also be included in the types of coverage that may be
creditable.
    Response: We agree with these suggestions and have revised Sec.
423.56(b) to include cost-based HMOs and CMPs and coverage offered by
State high risk pools, as defined under the HIPAA regulations at Sec.
146.113(a)(1)(vii), as well as a provision permitting CMS to recognize
other types of coverage as potentially creditable prescription drug
coverage, which we would do so in separate guidance as determined
necessary.
    Comment: Several commenters supported permitting the disclosure of
the creditable prescription drug status of coverage through the
inclusion of this information in already existing beneficiary
materials, such as Summary Plan Descriptions (SPDs), or annual notices.
One commenter suggested that because beneficiaries are already familiar
with these documents, they provide a more recognizable and familiar
avenue for this important information. On the other hand, several
commenters supported requiring all notices of the creditable status of
coverage to ``stand alone;'' that is; to be provided separately in a
specific notice to each individual. Some commenters expressed concern
that if this disclosure were not highlighted in a separate notice, the
important message could go unnoticed and inadvertently subject an
individual to the late enrollment penalty. Another commenter suggested
that all notices be linked to ERISA disclosure documents (that is,
SPDs), and to HIPAA or COBRA required notices. One commenter suggested
that notice of creditable status could be incorporated into already
existing beneficiary information materials, while notice of non-
creditable status should stand alone. Lastly, a commenter requested
that we specify the elements that would be required to be included in
these notices.
    Response: We specifically requested comment on the disclosure of
creditable prescription drug notice requirements and appreciate the
feedback received. Based on the comments we received we believe that
linking the notice of creditable status to other required documents is
an acceptable vehicle provided it is conspicuous and includes standard
information elements. This approach appropriately recognizes the
importance and familiarity of materials that beneficiaries currently
receive regarding coverage they have. Further, we believe that it is
important to encourage compliance with the provision of these notices
by eliminating duplication and the undue burden associated with it. To
that end, we have revised Sec.  423.56(c) to allow notices of
creditable and non-creditable status to be provided in the same manner,
and will provide specific guidance following the publication of the
rule. This guidance will require that

[[Page 4227]]

a notice of creditable and non-creditable status be provided, at
minimum, prominently with other beneficiary information materials, and
will include model language for both types of notices.
    We may specify different requirements for those entities identified
at Sec.  423.56(b) that are required to provide these notices, where
appropriate, to reduce beneficiary confusion and minimize
administrative burden. For example, as explained in our discussion of
Sec.  423.34 above, we intend to notify full benefit dual eligible
individuals that they are eligible for the low-income subsidy. This
notice will also inform individuals that Medicaid will no longer cover
those prescription drugs covered under Part D and that any additional
prescription drug coverage provided by Medicaid would not be creditable
coverage under Part D. Including this information in the same notice
will avoid duplication of effort and possible beneficiary confusion.
    Comment: Several commenters felt that requiring an attestation by
group health plans of actuarial equivalence for creditable coverage
when the sponsor of such coverage elects not to enroll in the retiree
drug subsidy program under subpart R was an unnecessary cost and an
administrative burden. The commenters believed that for those employer
groups that offer prescription drug coverage to active employees who
might be Part D eligible individuals, such coverage should be assumed
to be ``creditable'' and should only have to provide notices to those
qualified retirees and dependents who are Part D eligible individuals.
The commenters also suggested that notices could be published in
summary plan descriptions, on employer website and via e-mail.
    Response: Section 1860D-13(b)(6)(B) of the Act requires specific
entities that offer prescription drug coverage to provide notices to
all Part D eligible individuals enrolled in their plans regarding
whether such prescription drug coverage is creditable. This would
include sponsors (as defined under Sec.  423.880) not electing the
Retiree Drug Subsidy, as described in subpart R. A notice of creditable
or non-creditable coverage must be provided to active Medicare eligible
employees and Medicare eligible dependents so that a late enrollment
penalty will not be imposed when the beneficiary enrolls in Part D
coverage.
     We will provide further guidance on a simplified method of
determining creditable coverage for those sponsors not electing the
retiree drug subsidy.
    We will also provide guidance to sponsors on the form, manner, and
timing of such notice requirements, following publication of this final
rule. Notices may be provided, at minimum, prominently with other plan
participant information materials (for example, summary plan
descriptions, or HIPAA notices) that the sponsor is required to provide
as long as it is conspicuous and includes standard information elements
as determined in our guidance. This approach appropriately recognizes
the importance and familiarity of materials that beneficiaries
currently receive regarding coverage they have.
    Comment: Many commenters responded to our request for comments on
the timing of the delivery of creditable coverage status notices to
Part D eligible individuals. Several of these commenters suggested that
the initial notice should be required to be delivered prior to the
commencement of the AEP which begins on November 15, 2005. One
commenter suggested that notices also be issued at least 60 days prior
to the effective date of any change to current coverage. Another
commenter suggested that entities required to deliver these notices
should do so within 30 to 45 days of the end of Part D enrollment
periods.
    Response: We appreciate the feedback we received regarding the
timing of notices to disclose creditable prescription drug coverage. We
agree that, in order to ensure beneficiaries are making informed
choices regarding enrollment in Part D, notice must be provided to all
Part D eligible individuals each year prior to the commencement of the
AEP, which begins on November 15\th\. We also believe there are three
other key times when notice must be provided: (1) prior to the
commencement of the individual's initial enrollment period in Part D;
(2) prior to the effective date of enrollment in such coverage or any
change in creditable status of that coverage; and, (3) upon request by
the beneficiary. We will revise Sec.  423.56(f) to require that notice
be provided, at minimum, at these 4 times.
    Comment: One commenter requested that we clarify the meaning of the
words in Sec.  423.56(b) of the proposed rule ``with the exception of
PDPs and MA-PD plans.'' for the duty to furnish notices of creditable
coverage to beneficiaries. The commenter also requested clarification
of the duty of Cost plans offered under section 1876 of the Act that
provide qualified prescription drug coverage to furnish such notice.
Lastly, the commenter asked us to clarify if the provision at Sec.
423.56(d) of the proposed rule regarding the disclosure of creditable
status to CMS applies to any entity that is exempted from notice
requirements according to Sec.  423.56(b).
    Response: It is our view that the practical need for disclosure of
creditable status notices is directly related to a beneficiary's
understanding of their options related to enrolling in Part D and any
consequences should they choose not to, such as the late enrollment
penalty. It also provides the beneficiary with information about how
their coverage compares to what is available under a Part D plan.
Beneficiaries enrolled in a PDP, MA-PD plan, PACE plan or cost plan
that provides qualified prescription drug coverage are enrolled in Part
D, and therefore not subject to any consequence of choosing not to
enroll. Including these types of coverage in the list of coverage that
may be considered creditable ensures that at no time could a
beneficiary who has maintained enrollment in a legitimate Part D plan
be subject to the late enrollment penalty for the same time period.
However, sending notice of creditable status seems superfluous since,
as these plans are Part D plans, the creditable status is automatic.
    The statute at 1860D-13(b)(6)(B) of the Act exempts PDP sponsors
and MA organizations from providing notice of creditable coverage to
its members. Since sections 1860D-21(e) and (f) of the Act provide that
we treat cost-based HMO and CMPs and PACE organizations that elect to
provide qualified prescription drug coverage similar to MA-PD local
plans, such cost-based HMO and CMP and PACE organizations offering
qualified prescription drug coverage will also be excepted from this
notice requirement. We will revise the notice requirements under Sec.
423.56(c) to reflect that PACE plans and 1876 Cost plans offering
qualified prescription drug coverage as excepted entities from the
notice requirements under Sec.  423.56(c). We also note that PACE plans
and section 1876 of the Act cost plans that do not offer qualified
prescription drug coverage must provide notices, as required. To ensure
that Part D plan members understand their options, we will ensure that
an explanation of the late enrollment penalty and the concept of
creditable coverage are included in plan documents.
    Similarly, a requirement for organizations that provide Part D
benefits to submit separate notice would be duplicative by their nature
as CMS approved Part D plans, they are creditable. We will revise Sec.
423.56(e) to clarify that all entities providing CMS-approved Part D
coverage do not have

[[Page 4228]]

to disclose creditable status of Part D coverage to us under this
paragraph.
    Comment: One commenter suggests that we consider ways that entities
could provide the required notice of creditable status to beneficiaries
and CMS via electronic means.
    Response: We recognize that most plan documents have been
historically provided to beneficiaries in hard-copy (that is, paper)
but know from the comments received from plan sponsors and business
advocates that participants are receiving plan information through
other electronic means, such as websites and e-mail. Most beneficiaries
are probably accustomed to receiving materials in one of these manners.
We feel that paper documents have better ensured that the beneficiary
receives and understands the information. In addition, paper documents
will provide beneficiaries a hard copy that they can present whenever
needed to show proof of creditable coverage. Since beneficiaries may
already be choosing to receive information electronically, we will
explore this option as we develop operational guidance for creditable
notice requirements.
    As for entities notifying us of the creditable status of their
coverage, we will describe the form and manner in which entities
disclose this information to us in operational guidance and will
consider various options for entities to do so.

C. Voluntary Prescription Benefits and Beneficiary Protections

1. Overview and Definitions (Sec.  423.100)
    Proposed subpart C of part 423 implemented sections 1860D-2, 1860D-
4(a), 1860D-4(b), 1860D-4(i), 1860D-4(k), 1860D 11(a), 1860D-21(a),
1860D-21(c)(3), and 1860D 21(d)(2) of the Act. This subpart set forth
requirements regarding--
    * Definitions for terms that are frequently used in this
subpart.
    * The benefits offered by Part D sponsors.
    * The establishment of prescription drug plan service areas.
    * Access standards with regard to covered Part D drugs.
    * Part D sponsor formularies.
    * Information dissemination by Part D sponsors.
    * Disclosure to beneficiaries of pricing information for
generic versions of covered Part D drugs.
    * Privacy, confidentiality, and accuracy of PDP sponsors'
beneficiary records.
    Below we summarize the provisions of subpart C and respond to
public comments. (Please refer to the proposed rule (69 FR 46646) for a
detailed discussion of our proposals.)
a. Part D Drug
    The definition of a covered Part D drug in Sec.  423.100 of our
proposed rule closely followed the statutory definition in section
1860D-2(e) of the Act. According to this definition, a covered Part D
drug was available only by prescription, approved by the Food and Drug
Administration (FDA), used and sold in the United States, and used for
a medically accepted indication (as defined in section 1927(k)(6) of
the Act). A covered Part D drug included prescription drugs, biological
products, insulin as described in specified paragraphs of section
1927(k) of the Act, and vaccines licensed under section 351 of the
Public Health Service Act. The definition also included ``medical
supplies associated with the injection of insulin (as defined in
regulations of the Secretary).'' We proposed to define those medical
supplies to include syringes, needles, alcohol swabs, and gauze.
    In accordance with section 1860D-2(e)(2) of the Act, the definition
of a covered Part D drug specifically excluded drugs or classes of
drugs, or their medical uses, which may be excluded from coverage or
otherwise restricted under Medicaid under section 1927(d)(2) of the
Act, with the exception of smoking cessation agents. In accordance with
section 1927(d)(2) of the Act, the drugs or classes of drugs that may
currently be excluded or otherwise restricted under Medicaid include:
(1) agents when used for anorexia, weight loss, or weight gain; (2)
agents when used to promote fertility; (3) agents when used for
cosmetic purposes or hair growth; (4) agents when used for the
symptomatic relief of cough and colds; (5) prescription vitamins and
mineral products, except prenatal vitamins and fluoride preparations;
(6) nonprescription drugs; (7) outpatient drugs for which the
manufacturer seeks to require that associated tests or monitoring
services be purchased exclusively from the manufacturer or its designee
as a condition of sale; (8) barbiturates; and (9) benzodiazepines.
    The definition of a covered Part D drug also excluded any drug for
which, as prescribed and dispensed or administered to an individual,
payment would be available under Parts A or B of Medicare for that
individual (even though a deductible may apply).
    Except as otherwise provided below, the final rule adopts the
definition of ``covered Part D drug'' set forth in Sec.  423.100 of the
proposed rule.
    Comment: Several commenters were confused about the distinction
between drugs that may be covered under Part D given the definition of
the term ``covered Part D drug'' in section 1860D-2(e) of the Act and
those drugs that are actually included on a Part D plan's formulary.
    Response: In order to clarify when we are referring to a drug that
may be covered under Part D and one that not only is covered by Part D
but is also included on a particular Part D plan's formulary, we refer
to drugs that may be covered under Part D, consistent with the
definition of the term ``covered Part D drug'' in section 1860d-2(e) of
the Act, simply as ``Part D drugs.'' We use the term ``covered Part D
drug'' to refer to a drug that not only is a Part D drug, but that is
included in a Part D plan's formulary or treated (through a coverage
determination or appeal described in subpart M of this preamble) as
being included in a Part D plan's formulary, and is obtained at a
network pharmacy or at an out-of-network pharmacy in accordance with
Sec.  423.124 of our final rule. Both terms are defined in Sec.
423.100 of our final rule.
    Comment: One commenter recommended that we consider expanding the
definition of ``medically accepted indication'' beyond the FDA-approved
indications to include uses in official compendia or research. Another
commenter was concerned that the definition of ``medically accepted
indication'' may allow Part D sponsors to limit their payments for use
of Part D drugs solely to FDA-approved indications even though clinical
standards allow for alternative uses. Another commenter was concerned
that pharmacists will be penalized for dispensing prescriptions that
are prescribed for an indication that is not a medically accepted
indication. This commenter indicated that pharmacists cannot be
expected to contact each physician for each prescription in question to
determine if the drug is being prescribed for a medically-accepted
indication.
    Response: To qualify as a Part D drug, a drug or biological must be
used for a medically accepted indication, as defined under section
1927(k)(6) of the Act. This definition states that a medically accepted
indication means not only any use for a covered outpatient drug which
is FDA-approved, but also a use which is supported by one or more
citations included or approved for inclusion in any of the compendia
listed in section 1927(g)(1)(B)(i) of the Act-the American Hospital
Formulary Service Drug Information, United States

[[Page 4229]]

Pharmacopoeia-Drug Information, the DRUGDEX Information System, and
American Medical Association Drug Evaluations. We cannot extend the
meaning of ``medically accepted indication'' to cover uses in research,
as one commenter notes, since the definition of ``medically accepted
indication'' in section 1927(k)(6) of the Act does not include the
reference in section 1927(g)(1)(B)(ii) of the Act to peer-reviewed
medical literature. Thus, a ``medically accepted indication'' is
limited by statute to a use for a covered outpatient drug which is
approved by the FDA, or the use of which is supported by one or more
citations in the compendia listed above. It will be Part D plans'
responsibility to ensure that covered Part D drugs are prescribed for a
medically accepted indication; plans may, for example, rely on
utilization management policies and procedures (which we will review as
part of our comprehensive review of Part D plan benefits) to ensure
that drugs are prescribed and used for medically accepted indications.
We clarify that pharmacists will not be required to contact each
physician to verify whether a prescription is being used for other than
a medically accepted indication.
    Comment: Some commenters recommended including coverage for all
EPA-recommended disposal methods and disposal solutions as part of the
definition of ``medical supplies associated with injection of
insulin''. The commenters noted that proper disposal of needles and
lancets are necessary to patient safety and important to public health.
Some commenters requested that the definition include lancets, blood
glucose test strips, glucometers, syringes, and needles. One commenter
suggested that gauze not be included.
    Response: We are interpreting the term ``medical supplies
associated with the injection of insulin'' in section 1860D-2(e)(1)(B)
of the Act as comprising syringes, needles, alcohol swabs, gauze, and
insulin delivery devices not otherwise covered by Part B, such as
insulin pens, pen supplies, and needle-free syringes. Given that
section 1860D-2(e)(2)(B) of the Act excludes products covered by Part B
from the definition of a Part D drug, test strips and lancets, which
are covered under Part B, cannot be covered under Part D. While we
recognize the importance of needle disposal systems, we also do not
consider the systems to be directly associated with injection. Thus,
these devices fall outside of our interpretation of medical supplies
associated with the injection of insulin.
    We note that it is our intention to narrowly construe further Part
D plan determinations of what constitutes ``medical supplies associated
with the injection of insulin'' in order to ensure that such
determinations are consistent with the examples we have provided, and
that they do not lead to an inappropriate expansion of the Part D
benefit.
    Comment: Some commenters asked for clarification on coverage of
smoking cessation products, specifically regarding whether over-the-
counter products will be covered under Part D. Another commenter
suggested that in order to cover smoking cessation products, Part D
plans should require proof of smoking cessation classes.
    Response: Section 1860D-2(e)(1)(A) of the Act specifies that a Part
D drug is a drug that may be dispensed only upon a prescription.
Although section 1860D-2(e)(1)(B) of the Act specifically allows
smoking cessation agents to be covered under Part D, such agents must
not otherwise be excluded from coverage under Part D. Over-the-counter
smoking cessation products (for example, gum and most patches), by
virtue of being not being drugs that may be dispensed only upon a
prescription, therefore cannot be considered Part D drugs, even though
they are smoking cessation products. Smoking cessation products that
may be dispensed only upon a prescription, however (for example, some
patches, oral inhalants, nasal sprays, and Zyban), may be considered
Part D drugs provided they meet all other applicable requirements under
the definition of a Part D drug in Sec.  423.100 of the final rule. We
do not have the authority to require Part D plans to condition coverage
of permissible smoking cessation agents on proof of smoking cessation
classes.
    Comment: One commenter requested clarification in the final rule
that Part D plans are not prohibited from providing drugs on the
exclusion list (under section 1927(d)(2) of the Act, other than smoking
cessation drugs) if they are provided through an enhanced benefit.
    Response: As provided in Sec.  423.104(f)(1)(ii)(A) of our final
rule and in accordance with section 1860D-2(a)(2)(A)(ii) of the Act,
Part D plans may only provide coverage of drugs that are specifically
excluded as Part D drugs under section 1860D-2(e)(2)(A) of the Act,
that is, drugs or classes of drugs, or their medical uses, which may be
excluded from coverage or otherwise restricted under Medicaid under
section 1927(d)(2) of the Act, with the exception of smoking cessation
agents--if they do so as supplemental benefits through enhanced
alternative coverage and if they would otherwise meet the definition of
a Part D drug under section 1860D-2(e)(1) of the Act, but for the
application of section 1860D-2(e)(2)(A) of the Act.
    Comment: Many commenters urged us to remove benzodiazepines from
the exclusion list indicating the multiple therapeutic uses of this
drug. One commenter was concerned that excluding drugs such as these
from the Part D benefit would force health care providers to alter how
they treat patients based on which medications are Part D drugs. Many
commenters noted that benzodiazepines serve as valuable therapy for
anxiety disorders, bipolar disorder, Parkinson's disease, seizures, and
other conditions. Some commenters noted that excluding drugs such as
benzodiazepines that are inexpensive, first-line therapies would
require more expensive drugs to be prescribed simply because they are
covered. Some commenters were concerned about the dangers of
beneficiary withdrawal from benzodiazepines if these drugs are not
covered under Part D. Some commenters were concerned about loss of drug
coverage for benzodiazepines for dual eligibles, especially because
benzodiazepines are covered in many States. Many commenters also urged
us to remove barbiturates from the exclusion list, citing similar
reasons as those listed for benzodiazepines.
    Some commenters urged us to make an exception for vitamins used
under special circumstances, specifically with ESRD patients. Another
commenter was concerned about the exclusion of renal vitamins under
Part D and requested that we allow the coverage of water-soluble
vitamins lost during dialysis to be covered under Part D. Another
commenter noted that prescription vitamins are relatively inexpensive.
    Some commenters requested coverage of over-the-counter medications
for beneficiaries with certain conditions. One commenter asked us to
reconsider excluding over-the-counter drugs that were formerly
prescription-only drugs and now have over-the-counter status. Another
commenter recommended including a provision allowing over-the-counter
drugs to be covered if prescribed in the same manner as a prescription
item. Another commenter asked us to consider over-the-counter drugs and
medications for unintended weight loss as a covered drug under Part D.
One commenter suggested that we amend the exclusion for ``agents used
for symptomatic relief of cough or cold'' to ``non-prescription agents
used for symptomatic relief of cough or cold''.

[[Page 4230]]

    Response: Section 1860D-2(e)(2) of the Act clearly requires us to
exclude certain drugs from the definition of a Part D drug. According
to the statute, the definition of a Part D drug specifically excludes
certain drugs or classes of drugs that may be excluded from Medicaid
coverage under section 1927(d)(2) of the Act, including agents when
used for anorexia, weight loss, or gain; agents when used for cosmetic
purposes or hair growth; agents when used for symptomatic relief of
cough and colds; prescription vitamins and mineral products, except
prenatal vitamins and fluoride preparations; outpatient drugs for which
the manufacturer seeks to require that associated tests or monitoring
services be purchased exclusively from the manufacturer or its designee
as a condition of sale; nonprescription drugs; barbiturates; and
benzodiazepines. We have no flexibility to allow Part D coverage of any
of these drugs, including over-the-counter drugs used to treat certain
medical conditions, except as provided in Sec.  423.104(f)(1)(ii)(A) of
the final rule, which permits Part D plans to provide coverage of drugs
that otherwise meet the definition of a Part D drug under section
1860D-2(e)(1) of the Act and are not otherwise excluded under section
1860D-2(e)(2)(B) of the Act, if they do so as supplemental benefits
through enhanced alternative coverage. We also note that insurance or
otherwise, group health plans, or third party payment arrangements
(including States under Medicaid and State Pharmaceutical Assistance
Programs) may, at their discretion, provide Part D enrollees with
supplemental coverage for drugs excluded from coverage under Part D.
    Comment: One commenter said that many of the categories of
excludable drugs in section 1927(d)(2) of the Act refer to drugs when
used for a specific purpose and that it is inappropriate to simply
exclude these drugs when they may be covered depending on the specific
clinical use. This commenter recommended that that we provide coverage
for potentially excludable drugs when they are prescribed for a
clinical use not covered by section 1927(d)(2) of the Act. Two examples
provided were ``weight loss agents'' when used not for cosmetic
purposes, but for the treatment of morbid obesity, and decongestant
combination products, which while commonly prescribed to treat coughs
and colds, could be used for the treatment of allergic conditions.
    Response: Drugs that are excluded from coverage under Part D when
used as agents for certain conditions may be considered covered when
used to treat other conditions not specifically excluded by section
1927(d)(2) of the Act, provided they otherwise meet the requirements of
section 1860D-2(e)(1) of the Act and are not otherwise excluded under
section 1860D-2(e)(2)(B) of the Act. To the extent this is the case,
and a drug is dispensed for a ``medically accepted indication'' as
described in the statute, weight loss agents may be covered for the
treatment of morbid obesity, and decongestant products for example, may
be covered when used to treat allergies. However, we clarify that Part
D plans may establish utilization management processes in order to
ensure that such drugs are being prescribed for medically accepted
indications that are not excluded under section 1927(d)(2) of the Act
(for example, decongestant products when used for ``symptomatic relief
of coughs and colds'').
    Comment: One commenter suggested excluding drugs that have non-
prescription drug alternatives available as Part D drugs. Two
commenters supported excluding drugs that are ``lifestyle'' drugs such
as Viagra, Levitra, and Cialis.
    Response: We do not have the authority to exclude the drugs if they
meet all the criteria of a Part D drug as provided under section 1860D-
2(e)(1) of the of the Act and are not otherwise excluded under section
1860D-2(e)(2) of the Act. However, we clarify that Part D plans may
subject these drugs to utilization management processes provided we do
not find such processes to discourage enrollment by certain Part D
enrollees as part of the benefits package review we will conduct (and
which is discussed in detail elsewhere in this preamble).
    Comment: One commenter supports the current statutory language
regarding the manufacturer tying arrangements exclusion, whereas
another commenter supports expanding this prohibition but does not
specify how we should expand it. One commenter opposes any CMS effort
to mandate the interactions between Part D plans and pharmaceutical
manufacturers, and another asks us to affirm that this exclusion will
not interfere with Part D plan decisions to cover drugs/diagnostic test
combinations if manufacturers do not require the purchase of the
combinations. Yet another commenter points out that the tying
arrangement exclusion would exclude drugs from Part D coverage that are
tied to one pharmacy system because of requirements for patient
monitoring.
    Response: We appreciate the clarification provided by the various
commenters. We are not expanding the manufacturer tying arrangement
exclusion of coverage under Part D in our final rule. We believe that
existing Federal fraud and abuse laws, including the anti-kickback
statute at section 1128B(b) of the Act, as well as the civil monetary
penalty provision at Section 1128A(a)(5) of the Act, provide clear
guidance regarding what are and are not inappropriate manufacturer
tying arrangements. Manufacturers remain responsible for ensuring that
they do not engage in any tying arrangements that violate the anti-
kickback statute or, where applicable, the civil monetary penalty
provision prohibiting inducements to beneficiaries.
    Comment: Some commenters asked for clarification on which vaccines
are covered under the Part D benefit and suggested that we provide
additional guidance on how non-Part B vaccines are to be covered under
Part D, including administrative fees. Another commenter requested that
we strongly encourage Part D plans to include all vaccines that are not
covered under Part B on their formularies.
    Response: The definition of a Part D drug in section 1860D-2(e) of
the Act clarifies that Part D may cover a biological product described
in sections 1927(k)(2)(B)(i) to (k)(2)(B)(iii) of the Act--to include a
vaccine licensed under section 351 of the Public Health Service Act.
Since section 1860D-2(e)(2)(B) of the Act excludes an otherwise covered
Part D drug from coverage under Part D ``if payment for such drug as so
prescribed and dispensed or administered with respect to that
individual is available (or would be available but for the application
of a deductible) under Part A or B for that individual,'' certain drugs
and vaccines would be covered under Part D only to the extent they are
not covered under Part B.
    In addition to excluding Part B vaccines from coverage under Part
D, section 1860D-2(e)(3) of the Act provides that a Part D plan may
exclude from coverage covered Part D drugs for which payment may not be
made under section 1862(a) of the Act if applied to Part D. Section
1862(a)(1)(A) generally excludes from payment items and services that
are not reasonable and necessary for the diagnosis or treatment of
illness or injury or to improve the functioning of a malformed body
member, except those vaccines identified in section 1862(a)(1)(B) of
the Act as covered Part B vaccines. Section 1862(a)(1)(A) of the Act,
however, excepts from this rule vaccines covered under Part B.
Therefore, if these provisions are read literally, Part D plans would
be permitted to exclude

[[Page 4231]]

from coverage preventative vaccines that are covered Part D drugs
because they are not ``reasonable and necessary for the diagnosis or
treatment of an illness or injury.''
    However, we argue that whereas section 1862(a)(1)(B) of the Act
requires coverage under Part B of covered Part B vaccines, by analogy,
section 1862(a)(1)(B) of the Act as applied to Part D should be read as
requiring coverage under Part D of vaccines that are covered Part D
drugs. This argument is buttressed by the fact that the Congress
specifically defined Part D drugs under section 1860D-2(e)(1) of the
Act to include vaccines. Moreover, section 1860D-2(e)(3) of the Act
references all of section 1862(a) of the Act, and the only way to give
meaning to the reference to section 1862(a)(1)(B) of the Act is to
extend the provision to permit coverage of Part D vaccines. In other
words, if section 1862(a)(1)(B) of the Act as applied to Part D were
read literally as only permitting coverage of Part B vaccines, the
reference in section 1860D-2(e)(3)(A) of the Act to section
1862(a)(1)(B) of the Act would be rendered meaningless.
    Building on the argument that by analogy section 1862(a)(1)(B) of
the Act should be extended to Part D so as to require coverage of non-
Part B vaccines under Part D, the standard under Part D should reflect
a standard similar to section 1862(a)(1)(b) of the Act but adapted to
apply to preventative vaccines. Therefore, we believe such standard
should be vaccines that are ``reasonable and necessary for the
prevention of illness.'' Plans will need to develop explicit criteria
that can be applied on a case-by-case basis to determine that the
administration of Part D vaccine is ``reasonable and necessary'' and
that the Part D vaccine is therefore a covered Part D drug. Presumably
these will comply with any widely accepted practice guidelines. If
widely accepted practice guidelines are not available for certain
vaccines, Part D plans will need to develop criteria that they can
support with sound clinical reasoning.
    Currently, most vaccines of interest to the Medicare population are
covered under Part B. Although Part B makes only three exceptions
(influenza, pneumococcal, and hepatitis B vaccines for high risk
patients) to its rule requiring injury or direct exposure, these three
exceptions probably account for the majority of vaccinations needed by
an elderly population. Since many of the remaining vaccines on the
market are administered during childhood, we do not expect that Part D
will cover a large number of vaccines. However, as more vaccines are
developed and practice guidelines develop, Part D plans might face a
growing burden with supplying vaccinations to significant numbers of
their Part D patient populations. Therefore, the ability of Part D
plans to limit payment to those situations that are ``reasonable and
necessary for the prevention of illness'' will become more and more
important.
    Given the definition of dispensing fees we have incorporated in the
final rule, the costs of Part D-covered vaccine administration could
not be covered as part of a dispensing fee. Neither could those costs
be covered as separate administrative fees, since as discussed
elsewhere in this preamble, other than medication therapy management
programs (described in subpart D), we do not expect medical or clinical
services to be included in administrative fees.
    As discussed in subpart J, Part D-covered vaccines administered in
a physician's office will be covered under the out-of-network access
rules at Sec.  423.124 of our final rule. The costs of vaccine
administration may be included in physician fees under Part B since
Part B pays for the medically necessary administration of non-covered
drugs and biologicals. However, there is currently no ready mechanism
for physicians to bill Part D plans for Part D-covered vaccine costs.
In the short-term, we will require that a Part D enrollee self-pay the
physician for the Part D-covered vaccine cost and submit a paper claim
for reimbursement by his or her Part D plan. This approach is
consistent with how beneficiaries accessing covered Part D drugs at an
out-of-network pharmacy will be reimbursed by Part D plans for costs
associated with those drugs. Once Part D is implemented, we will get a
better sense for the actual volume of Part D-covered vaccines (and
other covered Part D drugs appropriately dispensed and administered in
a physician's office) and the need and most appropriate mechanisms for
any automatic cross-over procedures such that physicians could submit
claims for reimbursement of Part D-covered vaccine ingredient costs
directly to the appropriate Part B carrier. Any such automatic cross-
over procedures would mean that beneficiaries would not have to submit
paper claims and, instead, physicians could submit a single claim for
reimbursement of both the Part D-covered vaccine ingredient costs and
the administration fee directly to the appropriate Part B carrier,
which would forward the Part D charge to the appropriate Part D plan.
    Comment: One commenter asked that we cover individually compounded
medications or combinations of medications. Another commenter stated
that we should not consider compounded drugs as meeting the definition
of a Part D drug, as it is contrary to the definition in the MMA and
would put patients at risk.
    Response: Historically, extemporaneous compounding has filled an
important role in pharmacy practice and continues to be an important
part of contemporary pharmacy practice. While less than one percent of
prescriptions are compounded, these compounded prescriptions often
provide medically necessary drug therapies that would otherwise be
unavailable to patients. Compounding also provides many independent
pharmacies with the opportunity to offer services that competitively
differentiate them from the chain industry. In addition, compounded
prescription drug products are frequently reimbursed under commercial
prescription drug benefit plans. Therefore, excluding compounded
prescription drug products from Medicare Part D would be a significant
change from current pharmacy practice.
    Section 1860D-2(e)(1)(A) of the Act defines a Part D drug as
including a drug that may be dispensed only upon a prescription and
that is described in section 1927(k)(2)(A)(i), (A)(ii) or (A)(iii) of
the Act. As a matter of simplification, we refer to these products as
``FDA approved prescription drug products,'' and note that, as used in
this part of the preamble, that term incorporates the non-FDA approved
drug products specifically described under sections 1927(k)(2)(A)(ii)
and (A)(iii) of the Act.
    Compounded prescription drug products may contain: (1) all FDA
approved prescription drug products; (2) some FDA approved prescription
drug products; or (3) all non-FDA approved drug products. While the
strictest reading of section 1927(k)(2) of the Act appears to indicate
that non-FDA approved compounded prescription drug products are not
Part D drugs, we believe that FDA-approved prescription drug product
components of a non-FDA approved compounded prescription drug product
could be considered to be Part D drugs. The definition of a Part D drug
is not based on the final form of the drug as dispensed to the
beneficiary; rather, section 1860D-2(e)(1)(A) of the Act speaks to a
drug ``that may be dispensed'' only upon a prescription and that meets
the requirements of section 1927(k)(2) of the Act. Therefore,

[[Page 4232]]

the FDA approved component can satisfy section 1860D-2(e)(1)(A) of the
Act even if the finished product does not. Although reimbursement must
be limited to the FDA approved prescription drug components (that is,
no reimbursement is available for compounded products containing only
products that are not approved by the FDA, or otherwise described under
sections 1927(k)(2)(A)(ii) and (A)(iii) of the Act, or only over-the-
counter products), these usually account for the most significant drug
costs and, accordingly, current commercial practice often limits
reimbursement to the most expensive component only. In addition, the
labor costs associated with mixing a compounded drug product that
contains at least one FDA approved prescription drug component can be
included in dispensing fees (as defined in Sec.  423.100 of our final
rule).
    Comment: Two commenters suggested covering medical foods under the
Part D benefit because medical foods contain vitamins and nutrition
that are beneficial to beneficiaries with certain diseases such as End
Stage Renal Disease (ESRD). Another commenter asked that we cover
parenteral nutrition therapy.
    Response: It is not clear what the commenter meant by ``medical
foods.'' If ``medical foods'' refers to products that are vitamins and
mineral products, these are excluded from the definition of Part D
drugs and are not a covered Part D benefit. In addition, enteral
nutrients are not regulated as drugs by the FDA and are therefore not
covered under Part D.
    On the other hand, parenteral nutrition frequently contains primary
components such as amino acids, nitrogen products, and dextrose
mixtures that are regulated by the FDA as drugs and therefore meets the
definition of a Part D drug if prescribed for a medically accepted
indication and not otherwise excluded under section 1860D-2(e)(2) of
the Act. Vitamins and minerals added to parenteral nutrition are not be
considered Part D drugs, and costs associated with these vitamins or
minerals cannot be paid for under Part D.
    Part D plans would only need to include parenteral nutrition
coverage for reasonable and necessary medically accepted indications
that are not covered under Parts A or B. These situations would likely
involve long-term care facility or home infusion patients who do not
qualify for Part B coverage under the prosthetic benefit provision for
permanent dysfunction of the alimentary tract. This could include
temporary situations in which patients are unable to swallow or absorb
nutrients from the alimentary tract, either for physical or cognitive
reasons. We are currently unable to estimate the potential impact of
such coverage on Part D expenditures. However, Part D plans will need
to establish appropriate policies and procedures in order to limit Part
D coverage of parenteral nutrition to patients with medically accepted
indications that are not otherwise covered by Parts A or B. In
addition, we note that Part D plans are not responsible for the costs
of supplies and equipment related to parenteral nutrition therapy.
    Comment: One commenter suggested additional supplies to consider
for Part D coverage: spacers and aerochambers for administration of
inhalation products, devices for administration of eye drops, and
flushing supplies (for example, saline and heparin for home infusion
therapy).
    Response: Section 1860D-2(e)(1) of the Act provides us with
authority to deem medical supplies to be Part D drugs to the extent
they are associated with the injection of insulin. Thus, the supplies
mentioned by this commenter cannot be covered under Part D, as they are
not associated with the injection of insulin. We clarify that although
heparin is a Part D drug, a heparin flush is not used to treat a
patient for a medically accepted indication, but rather to dissolve
possible blood clots around an infusion line. Therefore, heparin's use
in this instance is not therapeutic but is, instead, necessary to make
durable medical equipment work. It would therefore not be a Part D drug
when used in a heparin flush.
    Comment: One commenter recommended that Part D drugs should include
liquid, chewable, transdermal and other special dosage forms and
delivery mechanisms to accommodate swallowing limitations and
intravenous medications, such as antibiotics.
    Response: The definition of a Part D drug at section 1860D-2(e) of
the Act places no limitations on drug dosage forms and delivery
mechanisms provided that a drug or biological product is not otherwise
excluded by the statute. We expect Part D plans to provide an adequate
benefit that includes coverage of special dosage forms and delivery
mechanisms to fit the needs of all their enrollees.
    Comment: Several commenters supported our proposed framework for
Part D coverage wrapping around Part B coverage at the individual
level. However, other commenters recommended that drugs currently
covered under Part B be excluded from coverage under Part D until the
mandated study on the transitioning of Part B prescription drug
coverage into Part D is released. Another commenter recommended that
individual drugs be paid by either Part B or Part D in all
circumstances.
    Response: The statutory definition of the term ``covered Part D
drug'' would, under section 1860D-2(e)(2)(B) of the Act, exclude any
drug for which, as dispensed and administered to an individual, payment
would be available under Parts A or B of Medicare for that individual
(even though a deductible may apply). By including the language ``as so
prescribed and dispensed or administered,'' section 1860D-2(e)(2)(B) of
the Act makes a distinction between what would be paid for under Part D
as opposed to Part B. This language indicates that the Congress was
aware that some drugs could qualify for payment under Part B in some
circumstances and Part D in others, depending on the way those drugs
are dispensed or administered. Given the statutory definition of the
term ``covered Part D drug'', we cannot preclude drugs that may be
covered under Part B under some circumstances (for example, when they
are furnished ``incident to'' a physician's service), but that are not
covered under Part B under other circumstances, from being covered
under Part D under such other circumstances (for example, because they
are self-administered by the patient at home). Such a policy would
require statutory changes by the Congress. The various issues raised by
the drugs covered under Part B for the administration of the Part D
drug benefit will be addressed in our report mandated by section 1860D-
42(c) of the Act.
    Comment: We solicited comments concerning any drugs that may
require special guidance with regard to their coverage under Part D,
and any gaps that may exist in the combined ``Part D & B'' coverage
package. A number of commenters requested that we further clarify the
relationship between drugs covered under Medicare Part B and drugs that
will be covered under Part D. These commenters would like us to clarify
how Part D plans can recognize Part B covered drugs since no universal
list exists, Part B coverage differs by patient and situation, and Part
B coverage policies differ regionally. They raise concerns about
appropriately limiting coverage of drugs under Part D while achieving
our goal of wrapping around Medicare Part B to the greatest extent
possible.
    Response: We acknowledge that there are numerous complexities
involved in the distinction between drugs covered

[[Page 4233]]

under Parts B and D, as well as with wrapping around existing drug
coverage under Part B. Nevertheless, section 1860D-2(e)(2)(B) of the
Act states that Part D plans must exclude any drug that would otherwise
be considered a Part D drug for which, as so prescribed and dispensed
or administered to that individual, payment would be available under
Parts A or B (even though a deductible may apply). Furthermore, we
believe that the language ``as so prescribed and dispensed or
administered'' indicates the Congress's awareness that the
determination regarding whether a particular drug is covered under Part
B or Part D could differ on a case-by-case basis.
    Despite the complexities, we believe Part D plans can best wrap
around existing Part B coverage under Part D by understanding the scope
of the definition of covered Part D drug, becoming familiar with the
general categories of Part B covered drugs, and planning for potential
Part B interactions that are likely to be encountered in specific
settings with regard to some of these categories.
    Part D drugs are not limited to typical outpatient prescription
drugs. The definition includes injectable prescription drugs (for
example, intramuscular, intravenous, and infusible drugs, as well as
vaccines). Some Part D plans may lack experience with covering the
drugs under an outpatient prescription drug benefit program because
they are more commonly covered under commercial medical benefits, as
opposed to commercial prescription drug benefits.
    The implementation of the Part D benefit does not alter coverage or
associated rules for drugs currently covered under Part B. Part B
covers drugs in a variety of settings. In almost all of these settings
the question of whether coverage should be provided under Part D will
not arise since the drugs are being provided in the context of a
service or procedure. For a limited number of categories, however,
pharmacists and infusion providers will have to determine whether to
bill Part B or Part D, and Part D sponsors will need to confirm whether
Part D is being billed correctly. In some cases, this determination can
be made on the basis of the drug. For example, in the case of oral
anti-cancer drugs, there is a list of drugs covered under Part B based
on certain statutory criteria. All other oral anti-cancer drugs will be
covered under Part D, provided they otherwise meet the definition of a
Part D drug. In other cases, the pharmacist or infusion provider would
need information about the member in order to bill appropriately. For
example, in the case of drugs used in immunosuppressive therapy, Part B
should be billed in the case of a beneficiary whose transplant has been
covered by Medicare. Part D should make payment in all other instances.
We will provide more information and guidance on the relation between
Part B and Part D coverage in separate guidance to Part D plans.
    Based upon the definition of the term ``Part D drug'' and the
general categories of coverage under Part B, we believe that Part D
plans could implement utilization management strategies to identify
potential Part B drug coverage overlap for individuals and verify
appropriate coverage accordingly. For example, if a Part D beneficiary
were filling a retail prescription for an antiemetic, prior
authorization could be used to ensure that the drug is not covered by
Part B. Similarly, prior authorization could be used to flag drugs
dispensed via home infusion that are covered under the Part B durable
medical equipment policy. Plans will need to ensure that they do not
cover any drugs which, as prescribed and dispensed or administered, are
covered under Part B in a specific region under its local medical
review policy (LMRP).
    We clarify that MA organizations must follow fee-for-service
coverage rules as provided in section 1852(a)(1) of the Act in
determining whether to pay for a drug under its Part A/Part B or Part D
benefits. Payment for injectable drugs that Medicare considers to be
usually not self-administered should be paid under the Part A or Part B
benefits if provided in a physician's office, and under Part D if
dispensed by a network pharmacy. Even if an MA plan offers coverage
under Part D of an injectable drug that Medicare considers to be
usually not self-administered (for example, Avonex) the plan cannot
deny coverage of this drug under its Part A or Part B benefits when
furnished in a physician's office.
    Comment: Several commenters noted that excluding Part B drugs from
coverage under Part D regardless of whether the consumer is enrolled in
Part B is seriously detrimental to consumers who enroll in Part B but
who cannot effectuate their enrollment for many months due to the Part
B enrollment timeframes. Consumers without Part B coverage, but who
intend to enroll, could enroll in Part D in April of 2006 but would not
be able to gain coverage for Part B drugs until 15 months later
(enrollment in January effective in July). These commenters argue that
we should make an exception for beneficiaries in this predicament such
that their Part D plans could cover Part B drugs. This is especially
important for full-benefit dual eligible individuals in this situation,
since they would be unable to fall back on Medicaid to obtain coverage
for Part B-covered medications. They recommend that Part D plans be
required to cover Part B medications for a consumer for up to 15 months
(the maximum amount of time it could take to effectuate an enrollment
under Part B).
    Response: Section 1860D-2(e)(2)(B) of the Act specifies that a drug
prescribed to a Part D eligible individual that would otherwise qualify
as a Part D drug cannot be considered a covered Part D drug if payment
for such drug ``... is available (or would be available but for the
application of a deductible) under part A or B for that individual.''
We interpreted this to mean that if payment could be available under
Part A or Part B to the individual for such drug, then it will not be
covered under Part D. Thus, for all Part D eligible individuals, drugs
covered under Parts A and B are available if they choose to pay the
appropriate premiums.
    This will be the case even if a beneficiary has Part A, but not
Part B, or vice versa, since, as we explain in subpart F of this
preamble and at Sec.  423.265(c) of the Act, Part D sponsors must offer
a uniform benefit package in order to carry out the Congress's intent
in section 1860D-13(a)(1)(F) of the Act. If Part B covered drugs were
included in the Part D benefit package only for those enrollees without
Part B, but not for others, it would not be possible for Part D
sponsors to offer uniform benefit packages for a uniform premium to all
enrollees. In addition, we believe that payment for a drug under Part A
or B is available to any individual who could sign up for Parts A or B,
regardless of whether they actually enrolled or are waiting to be
enrolled, as these commenters describe. All individuals who are
entitled to premium-free Part A are eligible to enroll in Part B. This
includes individuals who are entitled to Part A based on age,
disability, and ESRD. All individuals who are entitled to Part B only
are age 65 or older and, in almost all instances, not eligible for
premium-free Part A. However, they are eligible to buy into Part A for
a premium.
    Comment: Some commenters recommended that we introduce more
consistent coverage rules by adopting national standards rather than
relying on local carriers for coverage and payment decisions.
    Response: Policies with regard to coverage of infusible drugs
covered as DME supplies are uniform across the

[[Page 4234]]

country. Some differences do exist between carriers with regard to
which injectable drugs will be covered under Part B ``incident to'' a
physician service. These differences in coverage in a physician's
office setting, however, should not impact whether a Part D plan will
cover a prescription for an injectable drug presented at a
participating pharmacy. The statute does not exclude ``all drugs''
covered under Medicare, but rather, drugs when Medicare coverage under
Part B is available ``as so prescribed and dispensed or administered.''
    Comment: One commenter asked about the interface between the
hospice benefit and Part D, specifically whether we anticipated that
Part D would account for or impact the delivery of hospice drugs.
    Response: As provided in section 1861(dd)(1) of the Act, the
hospice benefit covers all medications related to a beneficiary's
terminal illness. There is no change in Medicare coverage of these
drugs. However, all other medications provided to the beneficiary are
currently paid for either out-of-pocket or by private insurance. These
drugs could now be covered by Part D plans on either a primary or
secondary basis depending on the presence or nature of other insurance.
Given the life expectancy of beneficiaries receiving hospice benefits,
we do not expect this to be a large expense for Part D plans.
b. Dispensing Fees
    The MMA does not define the term ``dispensing fee,'' although the
terms ``dispensing fee'' and ``dispense'' appear several times
throughout the MMA. Because the statute is ambiguous on the meaning of
``dispensing fee,'' in the proposed rule we did not propose a specific
definition of ``dispensing fee,'' but instead offered three different
options we believed would be reasonable, permissible definitions of the
term and invited comments on which option would be most appropriate
under Part D.
    * Option 1: The dispensing fee will include only those
activities related to the transfer of possession of the covered Part D
drug from the pharmacy to the beneficiary, including charges associated
with mixing drugs, delivery, and overhead. The dispensing fee will not
include any activities beyond the point of sale (that is, pharmacy
follow-up phone calls) or any activities for entities other than the
pharmacy.
    * Option 2: The dispensing fee will include the activities
included in Option 1, but in addition will include amounts for the
supplies and equipment necessary for the drugs to be provided in a
State in which they can be effectively administered.
    * Option 3: The dispensing fee will include the activities
in Option 2, but in addition will include activities associated with
ensuring proper ongoing administration of the drugs, such as the
professional services of skilled nursing visits and ongoing monitoring
by a clinical pharmacist.
    We also requested comments regarding any implications for our
proposed options for defining dispensing fees vis-[agrave]-vis the
administration of other drugs (for example, vaccines and injectable
long-acting antipsychotic drugs).
    Comment: The majority of commenters favored Option 1 claiming that
this definition is consistent with current industry practice regarding
dispensing fees. Several said that professional services involved in
providing medications should more appropriately be covered under Parts
A and B, and another commenter opined that Options 2 and 3 were
burdensome for Part D sponsors. Another commenter expressed concern
that what is currently covered under Part B should not be shifted to
Part D through the dispensing fees. Other commenters stated that,
although they supported Option 1, they believed that the definition
proposed for Option 1 was too narrow. One commenter suggested that
pharmacists are required to provide patient counseling for Medicaid
patients under OBRA 1990 and that they should be reimbursed for those
efforts. They also felt that the definition of what it means to
dispense a drug should be clarified. One commenter argued that
supplies, equipment and professional services needed to deliver a drug
should be covered under ancillary fees negotiated between pharmacies
and Part D plans and should not be included in dispensing fees. Another
commenter pointed out that requiring PBMs to pay for professional
services, as contemplated under Option 3, would require them to
renegotiate tens of thousands of contracts with the pharmacies in their
networks.
    Several commenters supported Option 2. One commenter focused on
medication packaging and the need to cover packaging specifically
designed for the cognitively impaired or those with physical
impairments.
    Other commenters favored adoption of Option 3. Some of these
commenters argued that the Congress meant for home infusion to be
covered and that failure to pay for the supplies, equipment and
services involved in delivering home infusion drugs was tantamount to
failure to cover the drug itself. Since Part D specifically covers
those drugs, (antibiotics, pain management, chemotherapy, parenteral
nutrition, immune globulin and other infused drugs) they argued that we
must require that dispensing fees cover the resources needed to deliver
them. Other commenters argued that new treatment modalities were
allowing patients to remain at home, a cost-effective setting, to
receive their medications, and that some patients might not be able to
receive their medications at home should the definition of dispensing
fee fail to cover the service, equipment, and supplies needed to
deliver the medications in the home setting. One commenter specifically
noted the need to cover supplies and services surrounding infusion of
long-term anti-psychotic medications in community mental health
centers. Two commenters focused on the need to pay for physician
services involved in home infusion of certain drugs given that many
infections and adverse events take place in this setting. Direct
physician supervision of these services is required to mitigate these
potential problems.
    Other commenters argued for Part D plan flexibility in establishing
dispensing fees that would be appropriate for the setting and
medication at issue, allowing each Part D plan to define dispensing
fee. One commenter thought that Part D plans should be allowed to use
tiered dispensing fees to encourage the use of generic drugs. One
commenter indicated that point of sale systems in place today already
support multiple variations of dispensing fees based on drug or amount
of effort required to prepare or administer medication and such systems
could handle the multiple variations for the drug benefit. Another
commenter specified that the transmission standard should be the
National Council of Prescription Drug Program's Telecommunication
Standard Version 5.1.
    Response: We agree with the majority of commenters that Option 1--
including only those activities related to the transfer of possession
of the covered Part D drug from the pharmacy to the beneficiary,
including charges associated with mixing drugs, delivery, and overhead
is the most appropriate definition of the term ``dispensing fees'' for
Part D, and we have included a definition of dispensing fees in Sec.
423.100 of our final rule consistent with Option 1.
    Although we recognize that Options 2 or 3 would eliminate current
gaps in coverage relative to home infused drugs, such approaches would
also extend the definition of dispensing fee beyond the

[[Page 4235]]

mere transfer of possession of the drug, and certainly beyond what we
believe to have been Congressional intent regarding the scope of an
outpatient drug benefit. The inclusion of professional services in the
definition of dispensing fees is also problematic given the potential
for double billing with regard to some of the skilled nursing costs
associated with home infusion. In many cases, these skilled nursing
costs are separately billable to Part A, Medicaid, or supplemental
insurance, and we are concerned about Part D supplanting these other
sources of payment.
    We believe Option 1 represents the best reading of the statute,
since it will limit dispensing fees to a transfer of possession of the
drug and will not include any fees associated with administering the
drug. We also note that where the Congress wished for us to include the
cost of supplies under Part D, it specifically directed us to do so
(for example, by requiring that the supplies associated with the
injection of insulin be included in the definition of the term Part D
drug).
    Even though some commenters suggest that the supplies, equipment,
and services associated with Options 2 and 3 could be paid for through
a separate fee or additional compensation to home infusion and other
providers, we caution that such separate administrative fees would not
be allowed under Part D. Other than medication therapy management
programs, as described in section 1860D-4(c)(2) of the Act, we do not
expect medical or clinical services to be included in administrative
fees. Please refer to the subpart G preamble discussion of the types of
costs that Part D plans may include as administrative costs in their
bids. Thus, the costs for professional services associated with home
infusion could not be included in the premium bid. In addition,
professional services, including those associated with home infusion,
may not be included in Part D plan supplemental coverage, given that
section 1860D-2(a)(2) of the Act defines supplemental coverage as
consisting of: (1) a reduction in the deductible, coinsurance
percentage, initial coverage limit, or any combination thereof; or (2)
coverage of drugs that are excluded from the definition of a ``Part D
drug'' because of the application of section 1927(d)(2) or (3) of the
Act.
    Provided that Part D plans include only those activities allowed
under our definition of dispensing fees in the dispensing fees
negotiated with network pharmacies and offer standard contracting terms
and conditions to all pharmacies, we note that Part D plans have the
flexibility to vary the actual dispensing fee paid to pharmacies. For
example, Part D plans may need to increase the dispensing fees paid to
rural or long-term care pharmacies in order to obtain their
participation in networks and meet the pharmacy access standards.
    As detailed elsewhere in this preamble, Part D plans will be
required to ensure adequate access to home infusion services as part of
their pharmacy network access standards. Thus, enrollees will have
access to home infusion services, though they may have to pay for
supplies, equipment, and professional services out-of-pocket
particularly if they are enrolled in a Part D plan and have no source
of supplemental coverage.
    As we noted in the proposed rule, our definition of dispensing fees
under Part D will not carry over to Part B of the Medicare program.
Section 1842(o)(2) of the Act gives the Secretary discretionary
authority to pay a dispensing fee to a licensed pharmacy that furnishes
certain covered Part B drugs and biologicals to Medicare beneficiaries.
While the term ``dispensing fee'' is not defined in section 1842(o)(2)
of the Act, the considerations under Medicare Part B, a more
comprehensive health insurance product that has separate payment
mechanisms for durable medical equipment and professional services, are
different from those under Part D.
    Comment: Some commenters did not support a particular option for
defining the term ``dispensing fees,'' but were more concerned about
including certain activities in the definition of dispensing fees (for
example, staff, equipment, automation, facilities overhead, time
inputting information into a computer, resolving problems with PBMs and
prescribing practitioners, counseling the patient, waste disposal,
turning the medication over to the patient, particularly when it
involved home delivery, and actually packaging the medications). Many
of these commenters noted that pharmacists merit a small profit and
that dispensing fees should not be specifically designed simply to meet
costs. Others felt that terms used in the proposed options were too
vague. Specifically, they wanted the meaning of dispensing to be
defined to include the costs they outlined. They also wanted to account
for the level of complexity and include clear definitions of
reconstituting, mixing and compounding drugs, which they believe
involve very different equipment, skill and time resources.
    Response: We have defined the term ``dispensing fees'' in Sec.
423.100 of our final rule to include reasonable pharmacy costs
associated with ensuring that possession of the appropriate covered
Part D drug is transferred to a Part D enrollee. We specify that
reasonable pharmacy costs may include costs associated with a
pharmacist's time in checking the computer for information about an
individual's coverage, performing quality assurance activities
consistent with Sec.  423.153(c)(2) of our final rule, measurement or
mixing of the covered Part D drug, filling the container, physically
providing the completed prescription to the Part D enrollee, delivery
costs, special packaging costs, and overhead costs associated with
maintaining the facility and equipment necessary to operate the
pharmacy. We clarify that in using the term ``reasonable'' pharmacy
costs, our intent is to convey that such costs be appropriate for the
typical beneficiary in that pharmacy setting. We believe that our
definition clarifies commenters' concerns about the inclusion of some
overhead costs, time spent inputting information into a computer and
resolving problems with PBMs and prescribing practitioners,
transferring the medication to the patient, and special packaging
costs.
    We clarify that reasonable delivery costs include only those costs
appropriate for the typical beneficiary in a particular pharmacy
setting. Thus, while it would be appropriate for Part D plans to
reimburse long-term care, mail-order, and home infusion pharmacies for
home delivery costs via the dispensing fee, this would not be the case
for retail pharmacies (where the term ``delivery'' would be limited to
the transfer of a covered Part D drug from the pharmacist to the
patient at the point of sale) because the typical retail customer does
not require home delivery. While retail pharmacies may offer home
delivery services, Part D plans may not reimburse those pharmacies for
these costs, and the delivery cost must be borne by the beneficiary.
    As concerns patient counseling, dispensing fees for covered Part D
drugs may include pharmacy costs associated with quality assurance
activities consistent with Sec.  423.153(c)(2) of our final rule.
Section 423.153(c)(1) of our final rule requires Part D plans to
represent that pharmacists in their network pharmacies comply with
minimum standards for pharmacy practice established by the States.
Since almost all States have established requirements for pharmacy
practice

[[Page 4236]]

related to counseling, we believe that the offer of counseling that
pharmacists currently provide their customers will continue consistent
with current pharmacy practice in compliance with State requirements.
.Any pharmacist counseling activities in addition to those established
by the States will have to be negotiated and paid for separately under
Part D plans' medication therapy management programs (discussed in
greater detail elsewhere in this preamble).
    As provided in section 1860D-11(i) of the Act, we cannot intervene
in negotiations between pharmacies and Part D plans. Thus, the extent
to which Part D plans reimburse pharmacies for their entire dispensing
costs (or even in excess of their dispensing costs) will depend on the
outcome of those negotiations. In addition, we clarify that we expect
Part D plans and pharmacies to account for pharmacy profit as part of
negotiated prices--either as part of overhead costs accounted for in
dispensing fees or in the reimbursement rates for ingredient costs
negotiated with pharmacies.
    We clarify that we interpret the term ``mixing'' as used in our
definition of the term ``dispensing fees'' to encompass reconstituting
and compounding of covered Part D drugs. Further, we note that Part D
plans have the flexibility to pay differential dispensing fees to
pharmacies based on higher labor costs--for example, for a compounded
product relative to a non-compounded covered Part D drug. Plans could
also used differential dispensing fees to encourage the use of generics
over brand-name drugs as appropriate.
    Comment: Another commenter wanted dispensing fees for non-profit
entities to reflect their preferred acquisition costs, arguing that
without this, Part D would be assisting tax-exempt non-profit
competitors of small business pharmacies.
    Response: As mentioned previously, we have defined the term
``dispensing fees'' in Sec.  423.100 of our final rule to include
pharmacy costs associated with ensuring that possession of the
appropriate covered Part D drug is transferred to a Part D enrollee.
Plans may wish to consider non-profit entities' preferred acquisition
costs in the ingredient cost reimbursement negotiated with those
entities as part of negotiated prices on covered Part D drugs. However,
it is unclear to us why dispensing fees should vary among non-profit
and for-profit pharmacies based on differences in acquisition costs.
    Comment: Several commenters emphasized the need to provide
dispensing fees tailored to long term care pharmacies. They focused on
the need to reimburse long-term care pharmacists for 24-hour care, the
specialized packaging that is required, emergency preparation and
delivery of medications, and the distinct type of medications typically
prepared and delivered.
    Response: The definition of dispensing fee in Sec.  423.100 of our
final rule encompasses some of the services--for example, specialized
packaging, delivery, and preparation of medications (not including the
actual administration of those medications)--typically provided by
long-term care pharmacies. Additional long-term care pharmacy services
could be reimbursed via medication therapy management programs
established by Part D plans for institutionalized Part D enrollees.
    Comment: Some commenters emphasized the need for the dispensing fee
to cover all of the costs involved in providing a medication.
    Response: As provided in section 1860D-11(i) of the Act, we cannot
intervene in negotiations between pharmacies and Part D plans. Thus,
the extent to which Part D plans reimburse pharmacies for their entire
dispensing costs will depend on the outcome of those negotiations.
Given Part D plans' need to secure a network of providers that meets
our access standards, we believe that Part D plans will have every
incentive to adequately reimburse pharmacies via dispensing fees for
the costs involved with providing covered Part D drugs to Part D
enrollees.
c. Long-Term Care Facility
    We requested comments regarding the definition of the term long-
term care facility in Sec.  423.100 of our proposed rule, which we
interpreted to mean a skilled nursing facility (as defined in section
1819(a) of the Act), or a nursing facility (as defined in section
1919(a) of the Act). We were particularly interested to explore whether
we should include in the definition facilities other than skilled
nursing and nursing facilities--particularly intermediate care
facilities for the mentally retarded (ICFs/MR), described in Sec.
440.150, and other types of facilities in which full-benefit dual
eligible individuals may reside and which may exclusively contract with
long-term care pharmacies in a manner similar to current practice in
skilled nursing and nursing facilities.
    Comment: We received a number of comments urging us to expand the
definition of the term ``long-term care facility'' in the proposed
rule. Some of the suggested additions include ICFs/MR; assisted living
facilities; other facilities recognized by State law as eligible for
payment under Sections 1915(c) (Home and Community Based waivers),
1616(e), and 1115 of the Act; group homes for the developmentally
disabled; and other forms of congregate living arrangements regulated
by the States. Some commenters suggested that many of these facilities
operate under exclusive contracts with long-term care pharmacies. Other
commenters urged us not to make the presence of exclusive contracts
with long-term care pharmacies the only criterion for defining
congregate living arrangements as long-term care facilities, as these
beneficiaries could benefit significantly from subsidies for low-income
institutionalized Part D enrollees.
    Response: We have expanded the definition of the term ``long-term
care facility'' in Sec.  423.100 of our final rule to encompass not
only skilled nursing facilities, as defined in section 1819(a) of the
Act, but also any medical institution or nursing facility for which
payment is made for institutionalized individuals under Medicaid, as
defined in section 1902(q)(1)(B) of the Act. We note that we have
eliminated the reference to nursing facilities as defined in section
1919(a) of the Act, as such facilities are captured as nursing
facilities for which payment is made for institutionalized individuals
under Medicaid. Such an expansion would include ICFs/MR and inpatient
psychiatric hospitals along with skilled nursing and nursing facilities
in the definition of a long-term care facility, provided those
facilities meet the requirements of a medical institution that receives
Medicaid payments for institutionalized individuals under section
1902(q)(1)(B) of the Act. We do not believe that the definition of term
long-term care facility should be expanded to include other facilities
recognized by State law but not by Medicare or Medicaid, regardless of
whether some of these facilities contract on an exclusive basis with
long-term care pharmacies. Furthermore, we do not believe that our
definitions of terms associated with institutionalized Part D enrollees
should conflict. Our revised definition of the term ``long-term care
facility'' is consistent with the definition of ``institutionalized''
in subpart P of this rule and will allow for residents of a number of
institutional settings to benefit from the special rules for access to
covered Part D drugs established for residents of long-term care
facilities. 2. Requirements Related to Qualified Prescription Drug
Coverage (Sec.  423.104)
    Under section 1860D-11(e)(2)(A) of the Act, we may approve as Part
D sponsors only those entities proposing to offer qualified
prescription drug

[[Page 4237]]

coverage in accordance with our requirements. As provided in section
1860D-2(a)(1) of the Act, qualified prescription drug coverage may
consist of either standard prescription drug coverage or alternative
prescription drug coverage.
a. Standard Prescription Drug Coverage
    As provided under section 1860D-2(b) of the Act, ``standard
prescription drug coverage'' consists of coverage of covered Part D
drugs subject to an annual deductible; 25 percent coinsurance (or an
actuarially equivalent structure) up to an initial coverage limit; and
catastrophic coverage after an individual incurs out-of-pocket expenses
above a certain threshold. In 2006, the annual deductible will be $250,
the initial coverage limit will be $2,250, and the out-of-pocket
threshold will be $3,600.
    Once a Part D enrollee reached the annual out-of-pocket threshold,
in 2006, his or her nominal cost-sharing will be equal to the greater
of: (1) 5 percent coinsurance; or (2) a copayment of $2 for a generic
drug or a preferred multiple source drug and $5 for any other drug, or
an actuarially equivalent structure. (See Table C-1 for a summary
version of standard prescription drug coverage benefits for 2006.)
    Section 1860D-2(b) of the Act provides that, beginning in 2007, the
annual deductible, initial coverage limit, out-of-pocket threshold, and
beneficiary cost-sharing after the out-of-pocket threshold is met are
to be adjusted annually. In accordance with section 1860D-2(b)(6) of
the Act, these amounts will be increased over the previous year's
amounts by the annual percentage increase in average per capita
aggregate expenditures for Part D drugs for the 12-month period ending
in July of the previous year. We requested comments regarding the
methods and data sources we might use to determine the annual
percentage increase in the first several years of the Part D program.

                                                    Table C-1
                              Standard Prescription Drug Coverage Benefits for 2006
----------------------------------------------------------------------------------------------------------------
                                         Cost-Sharing     Beneficiary Out-     Plan Payment
                                          Percentage      of-Pocket Costs       Percentage        Plan Payment
----------------------------------------------------------------------------------------------------------------
Annual Deductible ($0-$250 in               100 percent               $250          0 percent                 $0
 spending on covered Part D drugs)
----------------------------------------------------------------------------------------------------------------
Initial Benefit ($250.01-$2,250 in        25 percent\1\            $500\2\      75 percent\1\             $1,500
 spending on covered Part D drugs)
----------------------------------------------------------------------------------------------------------------
No coverage of costs ($2,250.01-            100 percent          $2,850\3\          0 percent                 $0
 $5,100\3\ in spending on covered
 Part D drugs)
----------------------------------------------------------------------------------------------------------------
Catastrophic Coverage (after the        The greater of:                 --         95 percent                 --
 enrollee has incurred out-of-pocket  (1) 5 percent; or
 costs on covered Part D drugs             (2) $2 for a
 greater than $3,600; this is                generic or
 generally equivalent to $5100\3\ in          preferred
 covered Part D drug spending)          multiple source
                                      drug/$5 for other
                                              drugs.\1\
----------------------------------------------------------------------------------------------------------------
\1\ Entities have the option of substituting a cost-sharing structure that is actuarially equivalent.
\2\ $500 is the maximum out-of-pocket costs if coverage is based on 25 percent coinsurance. Under an actuarially
  equivalent cost-sharing structure, the maximum out-of-pocket costs and the maximum plan payment for any Part D
  enrollee could be higher or lower.
\3\ This figure may, in fact, be higher to the extent that a Part D enrollee is reimbursed for out-of-pocket
  costs for covered Part D drugs covered under his or her plan by a group health plan, insurance or otherwise,
  or other third party arrangement.

    In our proposed rule, we interpreted the provisions of section
1860D 2(b) of the Act to provide for two distinct types of standard
prescription drug coverage-``defined standard coverage'' and
``actuarially equivalent standard coverage.'' Section 1860D-
2(b)(2)(A)(ii) of the Act provides that Part D sponsors offering
actuarially equivalent standard prescription drug coverage will be
permitted to substitute cost-sharing requirements (including tiered
structures tied to Part D plan formularies and particular pharmacies in
a Part D plan's network) for costs above the annual deductible and up
to the initial coverage limit, provided that those alternative cost-
sharing requirements are actuarially equivalent to an average expected
coinsurance of 25 percent for costs above the annual deductible and up
to the initial coverage limit. Alternative cost-sharing arrangements
under actuarially equivalent standard coverage could include reducing
cost-sharing to $0 for generic or preferred covered Part D drugs, as
provided under section 1860D-2(b)(5) of the Act, as long as the cost-
sharing structure is actuarially equivalent to an average expected
coinsurance of 25 percent for costs above the annual deductible and up
to the initial coverage limit.
    Based on our interpretation of section 1860D-2(b)(5) of the Act, we
also proposed allowing Part D plans offering actuarially equivalent
standard coverage to establish cost-sharing of an amount that is
actuarially equivalent to the expected cost-sharing above the out-of-
pocket threshold. We proposed requiring that any alternative cost-
sharing structure for costs in the catastrophic range (whether under
actuarially equivalent standard coverage or enhanced alternative
coverage) be actuarially equivalent to standard prescription drug
coverage's structure of the greater of 5 percent coinsurance or $2/$5
copayments. We noted that any such alternative cost-sharing
arrangements would be reviewed, along with the rest of a Part D plan's
benefit design, to ensure that they do not discourage enrollment by
certain Part D eligible individuals.
    Except as otherwise provided below, the final rule adopts the
criteria for standard prescription drug coverage set

[[Page 4238]]

forth in Sec.  423.104(e) of the proposed rule.
    Comment: Several commenters felt that the benefit structure
established in our proposed regulations was too complex and should be
simplified to minimize beneficiary confusion.
    Response: We do not have the statutory authority to simplify the
benefit further, as suggested by this commenter. The MMA provides
private plans with a great deal of flexibility to vary their benefit
structures consistent with Congressional intent to ensure that Medicare
beneficiaries have choices regarding outpatient prescription drug
coverage under Part D that fit their particular needs and minimize
beneficiary and Medicare costs.
    Comment: One commenter asked how cross-licensed drugs will be
classified as generics or as brands for the purpose of cost-sharing.
The commenter also asks what the co-payments would be for multiple
source drugs that are ordered ``dispensed as written.''
    Response: The amount of cost-sharing, and any variations in cost-
sharing based on brands, generics, or other classifications will be
determined by Part D plans.
    Comment: Two commenters suggested alternative data sources to use
in determining the annual percentage increase in the first several
years of the Part D program. The first commenter recommended two data
sources to use for years 2007 and 2008--the annual estimates of
prescription drug expenditures in the CMS National Health Accounts data
(based on census data and sample surveys of private retail pharmacy
sales) and employer retiree health plan data (released by Pharmacy
Benefit Managers and benefit consulting firms). Either of these sources
of data could be used as a starting point, but should be adjusted to
account for any difference in trend for Medicare-eligible individuals
compared to the overall prescription trend. In addition, the trend in
Part D will likely differ from the overall prescription drug trend due
to the large volume negotiating power which could control the trend or
allow manufacturers leeway to raise drug prices. FEHBP experience may
be useful in accounting for such large volume influences in Part D.
This commenter also suggested using our Office of the Actuary (OACT)
procedure in place for Medicare Advantage to make coverage limit
adjustments the following year for over- or under-stated trends. The
commenter also noted that the Medicare Current Beneficiary Survey
(MCBS) and the Medicare 5 percent sample are not available in a timely
enough fashion to be useful data sources.
    Another commenter recommended that we use the OACT spending growth
projections that will underlie the Fiscal Year (FY) 2007 President's
Budget Medicare baseline that will be published in February 2006. We
could use the March 2006 OACT Medicare baseline estimates as a
reference check on the OACT projections. OACT and the Congressional
Budget Office (CBO) are preferred because they use the latest available
empirical data based on MCBS, these data are the basis for the Medicare
Trustees' Reports, and the data are widely accepted. In addition, this
commenter recommended that OACT use the Consumer Price Index for
Prescription Drugs and Medical Supplies (CPI-PD), issued in a timely
fashion by the Bureau of Labor Statistics (BLS), as the basis for
projecting the price inflation component of per capita Part D spending
growth. This commenter thought that utilization growth should be based
primarily on the analysis of the latest available MCBS data.
    Response: We appreciate the ideas suggested by the commenters and
will take these recommendations into consideration as we develop our
strategy for determining the annual percentage increase in the first
several years of the Part D drug benefit program. We will provide
further detail regarding the sources of data to be used and how the
annual percentage increase will be determined via operational guidance
to Part D sponsors prior to the deadline for bid submissions.
b. Incurred Costs/TrOOP Limit
    According to section 1860D-2(b)(4)(C) of the Act, beneficiary costs
for Part D drugs are only considered incurred (for purposes of
applicability toward beneficiary spending against the annual out-of-
pocket limit) if they are incurred--
    (1) Against any annual deductible, any applicable cost-sharing for
costs above the annual deductible and up to the initial coverage limit,
and any applicable cost-sharing for costs above the initial coverage
limit and up to the out-of-pocket threshold;
    (2) By the Part D enrollee (or by another person on behalf of that
individual); paid on behalf of a low-income individual under the Part D
subsidy provisions described in Sec.  423.782 of the proposed rule; or
paid on behalf of the enrollee under a SPAP defined in Sec.  423.454 of
the proposed rule; and
    (3) On covered Part D drugs (in other words, Part D drugs that are
either included in a Part D plan's formulary or treated as being
included in a Part D plan's formulary as a result of a coverage
determination, redetermination, or appeal under Sec.  423.566, Sec.
423.580, Sec.  423.600, Sec.  423.610, Sec.  423.620, and Sec.  423.630
of our final rule).
    We also proposed that beneficiary costs incurred under the
following circumstances count as incurred costs (with Part D plans
explicitly accounting for such price differentials in the actuarial
valuation of their coinsurance in their bids): (1) any differential
between a network retail pharmacy's negotiated price and a network
mail-order pharmacy's negotiated price for an extended (for example,
90-day) supply of a covered Part D drug purchased at a retail pharmacy;
and (2) any differential between an out-of-network pharmacy's usual and
customary price for a covered Part D drug purchased in accordance with
the out-of-network access rules and the plan allowance for that covered
Part D drug. As further explained below, because we have clarified that
the differential for a 90-day supply dispensed at a retail network
pharmacy will generally be a differential in cost-sharing and not
negotiated price (in other words, the difference in cost sharing for
the 90-day supply between the retail and mail-order network
pharmacies), we have modified the definition of incurred costs in Sec.
423.100.
    Section 1860D-2(b)(4)(C)(ii) of the Act provides that any costs for
which a Part D individual is reimbursed by insurance or otherwise, a
group health plan, or another third-party payment arrangement do not
count toward incurred costs; only costs paid by a Part D enrollee, or
on behalf of a Part D enrollee by another person, will count as
incurred, or TrOOP costs. This provision thus creates a distinction
between all enrollee out-of-pocket expenditures and those that are
counted as TrOOP expenditures.
    Except as otherwise provided below, the final rule adopts the rules
applicable to incurred costs set forth in Sec.  423.100 of our proposed
rule.
    Comment: Several commenters urged us to count all beneficiary
spending on Part D drugs whether on a Part D plan's formulary or not
toward TrOOP.
    Response: Section 1860D-2(b)(4)(C)(i) of the Act specifically
excludes from the definition of the term ``incurred costs'' those costs
incurred for Part D drugs that are not included (or treated as being
included on a formulary as a result of a coverage determination,
redetermination, appeal, or exception) on a Part D plan's formulary.
Therefore, we do not have the statutory authority to permit the
payments to count toward a Part D enrollees' TrOOP limit.

[[Page 4239]]

    Comment: Many commenters supported our proposal that beneficiary
costs incurred as a result of any differential between a network retail
pharmacy's negotiated price and a network mail-order pharmacy's
negotiated price for an extended (for example, 90-day) supply of a
covered Part D drug purchased at a retail pharmacy count as an incurred
costs for the purposes of TrOOP. Only one commenter opposed allowing
such differentials to count toward TrOOP.
    Many commenters supported our proposal that beneficiary costs
incurred as a result of any differential between an out-of-network
pharmacy's usual and customary price for a covered Part D drug
purchased in accordance with the out-of-network access rules and the
plan allowance for that covered Part D drug count as an incurred costs
for the purposes of TrOOP. Only one commenter specifically opposed our
proposal, stating that if the differential were allowed to count toward
TrOOP, the use of retail pharmacies would not be cost-neutral to Part D
plans because individuals who use retail pharmacies would reach the
out-of-pocket limit sooner.
    Response: We agree with the majority of commenters that it is
appropriate to allow beneficiary payment differentials to count toward
TrOOP in cases in which a beneficiary accesses a covered Part D drug
consistent with the out-of-network policy in Sec.  423.124(a) of our
final rule.
    Section 423.120(a)(6) of our proposed rule provided that a Part D
enrollee who obtained a 90-day supply of a covered Part D drug at a
network pharmacy that is a retail pharmacy rather than a network mail-
order pharmacy would be required to pay for any differential in the
negotiated price for the covered Part D drug. However, consistent with
section 1860D-4(b)(1)(D) of the Act, which requires that the Part D
enrollee pay for ``any differential in charge'' when accessing a 90-day
supply of a covered Part D drug at a network retail pharmacy instead of
a network mail-order pharmacy, we have clarified in Sec.
423.120(b)(10) of our final rule that the beneficiary is not
responsible for the difference in negotiated price but, rather, for any
higher cost-sharing associated with purchasing the drug at a retail
pharmacy rather that a mail-order pharmacy. Any such difference in
cost-sharing would therefore automatically count toward a beneficiary's
TrOOP expenditures, since the covered Part D drug in question is being
purchased at a network pharmacy.
    Comment: Several commenters asked us to define the term ``person''
such that a family member can pay for enrollees' cost-sharing on their
behalf.
    Response: Section 1860D-2(B)(4)(C)(ii) of the Act specifically
mentions a family member as an example of a person who may pay cost-
sharing on behalf of a beneficiary. We clarify that our proposed rule
defined the term ``person'' to include a ``natural person.'' Such a
definition of the term ``person'' thus permits other individuals, such
as family members, to pay for covered Part D drug cost-sharing on
behalf of Part D enrollees. We have therefore retained this definition
of the term ``person'' in Sec.  423.100 of our final rule.
    Comments: Several commenters supported our proposed definition of
the term ``person,'' which would allow financial assistance for
beneficiary cost-sharing rendered by ``bona fide'' charities to count
toward enrollee's out-of-pocket threshold. Some commenters requested
that we clarify what constitutes a ``bona fide'' charity. Another
commenter objected to Part D plan member financial assistance programs
being treated differently from third-party charities for purposes of
TrOOP.
    Response: Our broad definition of the term ``person'' captures not
only ``bona fide'' charities, but other charitable organizations as
well. We note that any arrangement in accordance to which a charitable
organization pays a Medicare beneficiary's cost-sharing obligations
must comply with all applicable fraud and abuse laws, including, where
applicable, the anti-kickback statute at section 1128B(b) of the Act,
as well as the civil monetary penalty provision prohibiting inducements
to beneficiaries at section 1128A(a)(5) of the Act. Thus, even if a
charity is not a bona fide charity for purposes of Federal fraud and
abuse law, any drug payments it makes on behalf of Part D enrollees
would count toward TrOOP unless otherwise excluded as payments by a
group health plan, insurance or otherwise, or similar third party
arrangement. Charities that are established, maintained, or otherwise
controlled by an employer or union will likely fall under our
definition of ``group health plan,'' and any benefits supplementing
Part D benefits that they provide will therefore be excluded from TrOOP
on this basis.
    Comment: We noted in the proposed rule that we were considering
whether assistance in paying enrollees' out-of-pocket cost-sharing
obligations provided through prescription drug patient assistance
programs sponsored by pharmaceutical manufacturers would be allowed
under Federal fraud and abuse laws, including the anti-kickback
statute, section 1128B(b) of the Act, as well as the civil monetary
penalty provision at Section 1128A(a)(5) of the Act.
    We received a number of comments requesting clarification regarding
whether assistance in paying enrollees' out-of-pocket cost-sharing
obligations provided through pharmaceutical manufacturer-sponsored
patient assistance programs (PAPs) would be permissible under Federal
fraud and abuse laws and request that we work with the OIG to develop
guidelines. Some commenters believe that financial assistance and
product donations provided by PAPs should be allowed to count toward
beneficiaries' TrOOP expenditures. Some of these commenters recommended
that product donations be counted as incurred costs and valued at the
price beneficiaries would have paid at a network pharmacy (the
negotiated price). One commenter recommended that we allow
manufacturers to provide funds to Part D plans so that Part D plans can
apply appropriate criteria and make payments on behalf of
manufacturers. Another commenter cautions us that without a change in
the current interpretation of Federal fraud and abuse laws preventing
PAPs from providing cost-sharing assistance, many low-income
beneficiaries may avoid filling scripts, resort to splitting pills, and
interrupt critical drug therapy.
    Response: Regardless of whether a manufacturer patient assistance
program is a bona fide charity for the purpose of Federal fraud and
abuse laws, any drug payments it makes on behalf of Part D enrollees
would count toward TrOOP unless these organizations qualify as group
health plans, insurance or otherwise, or similar third-party payment
arrangements. However, any arrangements pursuant to which a charitable
organization pays a Medicare beneficiary's cost-sharing obligations
must comply with Federal fraud and abuse laws, where applicable,
including the anti-kickback statute at section 1128(b) of the Act, as
well as the civil monetary penalty provision prohibiting inducements to
beneficiaries at section 1128A(a)(5) of the Act.
    A related issue although it is not mentioned in the proposed rule
is whether pharmacies can waive or reduce Part D cost-sharing
obligations given Federal fraud and abuse laws and, if they can,
whether such waived or reduced cost-sharing should count toward a
beneficiary's TrOOP limit. Although we did not receive comments on this
matter, we would like to clarify our policy. Under the new exception to

[[Page 4240]]

the anti-kickback statute added by section 101(e) of the MMA,
pharmacies are permitted to waive or reduce cost-sharing amounts
provided they do so in an unadvertised, non-routine manner after
determining that the beneficiary is financially needy or after failing
to collect the cost-sharing amount despite reasonable efforts, as set
forth in section 1128A(i)(6)(a) of the Act. In addition, a pharmacy may
waive or reduce a beneficiary's Part D cost-sharing without regard to
these standards for beneficiaries enrolled in a Part D plan eligible
for the low-income subsidy under section 1860D-14 of the Act, provided
the pharmacy has not advertised that the waivers or reductions of cost-
sharing are available. Depending on the circumstances, pharmacies that
waive or reduce cost-sharing amounts for covered Part D drugs without
following the requirements of the pharmacy waiver safe harbor could be
subject to civil monetary penalties and exclusion from participating in
Federal health care programs, as well as criminal fines and
imprisonment under the anti-kickback statute.
    We will allow waivers or reductions of Part D cost-sharing by
pharmacies to count toward TrOOP. Not allowing such waived or reduced
cost-sharing to count toward TrOOP would make it more burdensome for
Part D plans given the need to track down whether cost-sharing was
actually incurred by a beneficiary rather than a pharmacy. Moreover, we
believe this option is consistent both with the definition of
``person'' in the proposed rule (making waiver or reduction of cost-
sharing applicable toward an enrollee's incurred costs), and with
Congressional intent in amending the anti-kickback statute to provide
for a pharmacy waiver safe harbor.
    Comment: Several commenters asked that coverage supplementing the
benefits available under Part D coverage provided by various government
programs be allowed to count as incurred costs for purposes of TrOOP.
These government insurers and programs included Medicaid (using State-
only funds), Medicaid Section 1115 ``Pharmacy Plus'' waiver programs,
Federally qualified health centers (FQHCs), the Department of Veterans
Affairs health care program, and local or State indigent drug programs.
    In addition, a substantial number of commenters urged us to allow
coverage that supplements the benefits available under Part D coverage
that is provided by AIDS Drug Assistance Programs (ADAPs) funded under
the Ryan White CARE Act to count as incurred costs. These commenters
argued that ADAPs are an integral component of the safety net for HIV/
AIDS patients because they fill coverage gaps in public and private
insurance for critical HIV/AIDS drug treatments. They argue that if
ADAP supplemental coverage payments do not count as incurred costs,
ADAPs will have little incentive to coordinate coverage with Part D
plans, particularly if Part D plans impose user fees on ADAPs. Many of
these commenters also urged us to define ADAPs as SPAPs so that their
supplemental coverage will be considered incurred costs for the
purposes of TrOOP.
    Several commenters also objected to the inclusion of IHS and Indian
Tribes and Tribal organizations, and urban Indian organizations
(collectively I/T/U) facilities in the definition of ``insurance or
otherwise'' in Sec.  423.100 of our proposed rule. Since IHS
beneficiaries--by custom and regulation--may not be charged any cost-
sharing, I/T/U facilities must provide supplemental coverage for all
cost-sharing that would have been assessed by a Part D plan. For this
reason, the commenters argue, our proposed regulations essentially
ensure that most IHS beneficiaries will never incur costs above the
out-of-pocket threshold and thus subject AI/AN enrollees and the I/T/U
pharmacies that serve them to severe financial penalties in comparison
to non-AI/ANs and non-I/T/U pharmacies. I/T/U facilities will have to
continue to use their limited appropriated funds to pay the
prescription drug costs of AI/AN beneficiaries. Commenters further
argue that the proposed exclusion of financial assistance for cost-
sharing provided by I/T/U facilities is not required by the statute and
is simply an interpretation of the term ``insurance or otherwise.''
Given the Federal government's obligation to provide health services to
AI-ANs based on the government-to-government relationship between the
United States and Tribes, these commenters argue that IHS and tribal
health programs are not ``insurance or otherwise,'' but instead
``persons'' given that I/T/U facilities are the functional equivalent
of ``family members.'' We were also asked to clarify why supplemental
coverage of deductible costs counts toward a beneficiary's deductible
limit, but supplemental coverage of cost sharing above the deductible
and initial coverage limit, does not count toward TrOOP.
    Response: Section 1860D-24(a)(1) of the Act extends the
coordination of benefits provisions required for SPAPs to entities
providing other prescription drug coverage--including Medicaid
programs, Section 1115 waiver demonstrations, group health plans,
Federal Employee Health Benefits Program (FEHBP), military coverage
(including TRICARE), and ``such other health benefit plans or programs
that provide coverage or financial assistance for the purchase or
provision of prescription drug coverage on behalf of Part D eligible
individuals as the Secretary may specify.'' Section 1860D-24(b) of the
Act defines includes among these entities providing other prescription
drug coverage some government payers, which when coupled with section
1860D-24(a)(2) of the Act, which specifically applies the TrOOP
provisions at 1860D-2(b)(4)(D) of the Act to Rx plans suggests that the
Congress intended for the term ``insurance or otherwise'' to include
government benefit plans or programs that provide health care or pay
the cost of covered Part D drugs. Although section 1860D-24(b) of the
Act does not list all the government health care programs we consider
to be ``insurance or otherwise,'' in the absence of a meaningful
distinction between those entities specifically listed in section
1860D-24(b)--Medicaid, SPAPs, TRICARE, and FEHBP--and other government
health care programs, allowing payments from such other programs to
count toward TrOOP would be arbitrary. Further, in giving the Secretary
the authority to identify other entities providing other prescription
drug coverage under section 1860D-24(b)(5) of the Act, the Congress
contemplated that its list of entities providing other prescription
drug coverage was not exhaustive.
    For additional clarification of this issue, we have split the
definition of ``insurance or otherwise,'' in our proposed rule into two
separate definitions--``insurance'' and ``or otherwise''--in our final
rule. The term insurance (at Sec.  423.100 of our final rule) refers to
a health plan that provides, or pays the cost of covered Part D drugs,
including, but not limited to health insurance coverage, a MA plan, and
a PACE organization. We note that our definition of ``insurance'' does
not modify the definition of ``health plan'' at 45 CFR 160.103 of the
HIPAA Administrative Simplification Regulations, or any interpretation
thereof issued by the Department of Health and Human Services.
    We believe that the phrase ``or otherwise'' refers to government-
funded health programs. We have defined the term ``government-funded
health programs'' at Sec.  423.100 of our final rule to mean any
program established, maintained, or funded--in whole or in part--by the
Federal government, the

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governments of States or political subdivisions of States, or any
agency or instrumentality of these governments which uses public funds
in whole or in part to provide to, or pay on behalf of, an individual
the cost of Part D drugs. Thus, insurance or otherwise encompasses not
just traditional health insurance coverage that is not considered a
group health plan, but also government programs and entities (including
the Department of Veterans Affairs (VA), IHS, Federally Qualified
Health Centers (FQHCs), Department of Labor (DOL) Federal Workers'
Compensation Program), government insurers (including Medicaid,
Medicaid 1115 demonstrations, and the State Children's Health Insurance
Program (SCHIP)), and government-sponsored funds (including black lung
benefits, Ryan White CARE Act funds, and State special funds that
assist certain individuals with their medical costs, such as a special
fund for AIDS patients).
    We believe we have defined these terms consistent with the
Congress's intent of reducing incentives for current employers, other
insurers, and government programs to reduce their current levels of
coverage. Because costs for covered Part D drugs paid by insurance or
otherwise on behalf of a Part D enrollee do not, as previously
discussed, count as incurred costs, any coverage that supplements the
benefits available under Part D coverage that are provided to
beneficiaries by Medicaid, Medicaid Section 1115 ``Pharmacy Plus''
waiver programs, the VA health care program, the IHS, ADAP programs,
and local or State indigent drug programs would not count as an
incurred cost for purposes of TrOOP. We note, however, that to the
extent that a State provides assistance with covered Part D costs to
Part D enrollees with State-only funds and meets the requirements of a
State Pharmaceutical Assistance Program as specified in Sec.
423.464(e)(1), such assistance does count as an incurred cost as
provided by section 1860D-2(b)(4)(C)(ii) of the Act. However, if an
entity providing for or paying the cost of drugs receives a government
grant none of which is used to pay for drugs (for example, a low-income
housing grant)--such an entity is not considered a government-funded
program. On the other hand, if an entity pays for drugs using a mix of
private and public funds, the entity is considered a government-funded
health program, and all of its drug spending is excluded from TrOOP.
    As mentioned above, Pharmacy Plus program costs, including State
spending, cannot be counted towards TrOOP because Pharmacy Plus
programs are funded under Medicaid and therefore do not qualify as
SPAPs. For this reason, we believe that, generally, States will be
better off and will realize savings if they restructure their
prescription drug programs as SPAPs, rather than continuing their
Pharmacy Plus programs. Their savings could be used in a variety of
ways, such as directly paying for their enrollees' Part D premiums,
wrapping around the Part D benefit by paying for the required cost-
sharing, or paying Part D plans for supplemental benefits.
    According to IHS estimates, we anticipate that a large proportion
of AI/ANs will be eligible for low-income subsidies under Part D, which
should significantly limit the financial impact on I/T/U facilities.
For those AI/ANs not eligible for the low-income subsidies and enrolled
in a Part D plan, the IHS will still obtain some benefit from Part D
coverage because I/T/U facilities participating in Part D plan networks
will be reimbursed for 75 percent of spending (on average) between the
deductible and the initial coverage limit. Moreover, AI/AN enrollees
will experience no difference in the way they obtain their prescription
drugs to the extent that they use I/T/U pharmacies or IHS-contracted
pharmacies.
    ADAPs cannot be considered SPAPs because these programs receive
Federal funding. As discussed in subpart J, we have interpreted section
1860D-23(b) of the Act, which requires SPAPs to be State programs that
provide financial assistance for the purchase of provision of
prescription drugs, to mean that an SPAP must provide such assistance
with State funds. Therefore, the definition of the term SPAP excludes
any program in which program funding is from Federal grants, awards,
contracts, entitlement programs, or other Federal sources of funding
(though we clarify that this does not exclude some Federal
administrative funding or incidental Federal monies). Since ADAPs
receive Federal funding, they cannot be defined as SPAPs under Sec.
423.454 of our final rule. However, according to HRSA estimates, we
anticipate that a substantial majority of ADAP enrollees will qualify
for low-income subsidies. For those ADAP enrollees who do not receive a
full or partial subsidy, we estimate that the Part D benefit would pay
75 percent, on average, of an enrollee's covered Part D drug
expenditures between the deductible and initial coverage limit. To
ensure coordination of benefits for the HIV/AIDS and population, as
well as to eliminate any barriers to enrolling in Part D benefits, the
ADAP program may wish to pay for their beneficiaries' premiums to
eliminate any barriers to Part D benefits.
    Per several commenters' request, we also wish to clarify that
section 1860D-2(b)(4)(C) of the Act defines the term ``incurred costs''
only for the out-of-pocket threshold. Thus, the fact that coverage that
supplements the benefits available under Part D coverage that is
provided by certain entities is excluded from the definition of
incurred costs for purposes of TrOOP has no bearing on counting that
supplemental coverage against the deductible. In other words, ADAPs,
IHS, and other programs providing coverage that supplements the
benefits provided under Part D may subsidize costs incurred against a
Part D enrollee's deductible for those patients unable to afford these
costs. The provision of the supplemental coverage will not affect an
enrollee's ability to satisfy the deductible and therefore qualify for
reduced cost-sharing between the deductible and the initial coverage
limit. In addition, these entities are not precluded from paying for a
Part D enrollee's cost-sharing above the out-of-pocket threshold once a
beneficiary has accumulated incurred costs in excess of the out-of-
pocket threshold.
    Comment: We requested comments regarding the treatment of health
savings account (HSAs), flexible savings arrangements (FSAs), health
reimbursement arrangements (HRAs), and medical savings accounts (MSAs)
vis-[agrave]-vis our definitions of ``group health plan,'' ``insurance
or otherwise,'' and ``third party payment arrangements.'' Many
commenters suggested that HSAs, FSAs, MSAs, and HRAs be excluded from
our proposed definition of ``group health plan'' such that any
distributions used by Part D enrollees to pay out-of-pocket costs
associated with cost-sharing for covered Part D drugs are allowed to
count as incurred costs. These commenters agreed that these funds are
analogous to beneficiaries' bank accounts. Some of these commenters
asked that we specify that payment of out-of-pocket expenses via these
accounts count toward TrOOP only when such accounts are bona fide
arrangements set up in accordance with IRS rules and guidance, such
funds are not limited to paying prescription drug expenses, and
individuals have control over how the funds from these accounts are
utilized. One commenter notes that any exemption of HSAs, FSAs, MSAs,
and HRAs from our definition of ``group health plan'' should be written
carefully to avoid circumvention of Medicare Secondary Payer (MSP)
laws. Another

[[Page 4242]]

commenter noted that from Part D plans' perspective, it makes the most
sense administratively and operationally to allow funds from these
accounts to count toward incurred costs because it will be difficult
for them to identify and differentiate between different sources of
enrollee funds and carve out the payments from TrOOP calculations. One
commenter noted that HRAs present a more difficult case, since they are
by definition employer-funded only. However, this commenter noted that,
from an administrative perspective, it may be difficult to distinguish
between HRAs and other types of personal health savings vehicles.
    In contrast, several commenters disagreed that HSAs and similar
accounts should be exempted from our definition of ``group health
plan.'' Some of these commenters believed that contributions from one
type of employer-sponsored benefit should not receive differential
treatment than other types, particularly when contributions from
employer-sponsored group health coverage are not being counted as
incurred costs. One commenter thought that we had no statutory
authority to create a special rule to exempt HSAs from our definition
of ``group health plan.'' This commenter was concerned about non-
employer sponsored HSAs, that these funds are not like bank accounts
given the tax breaks associated with them, that allowing these funds to
count toward TrOOP discriminates against retirees with employer-
sponsored drug coverage, and that we would create a substantial
windfall and unjustified double taxpayer subsidy.
    Response: We agree with the majority of the commenters that HSAs,
FSAs, and MSAs are essentially analogous to a beneficiary's bank
account, and that distributions from these personal health savings
vehicles should count as incurred costs for the purposes of the out-of-
pocket threshold. However, as one commenter noted, we believe that HRAs
are fundamentally different from these personal health saving vehicles
because they are required to be solely employer-funded. Although
employers are permitted to contribute funds to HSAs, FSA, and MSAs and
may administer the benefits associated with these accounts, employees
are not foreclosed from contributing to these vehicles as they are
under HRAs. Excluding FSAs, MSAs, and HSAs from the definitions of
``insurance'' and ``group health plan'' for purposes of calculation of
TrOOP expenditures will further our objective of encouraging
beneficiaries to set aside their own money for drug expenses by
allowing those funds to count toward enrollees' TrOOP expenditures. In
order to clarify that distributions from HSAs, FSAs, and MSAs can be
counted toward a Part D enrollee's incurred costs, we have revised the
definitions in Sec.  423.100 of our final rule accordingly and added a
definition of ``personal health savings vehicles'' that is limited to
HSAs, FSAs, and Archer MSAs.
    We note that the term ``group health plan'' is used in reference to
TrOOP, creditable coverage, and the retiree subsidy in our final rule,
but that we do not define the term uniformly in our final rule. Section
1860D-22(c) of the Act explicitly defines ``group health plan'' to
include ERISA plans, which may include an FSA, MSA, and, in limited
circumstances, an HSA. The reference to ``group health plan'' under the
creditable coverage provisions in section 1860D-13(b)(4)(C) of the Act
states that a group health plan includes a qualified retiree
prescription drug plan as defined under section 1860D-22 of the Act,
which is in turn based on the definition of ``group health plan'' under
section 1860D-22(C) of the Act and thus may include an MSA or, in
limited circumstances, an FSA or HSA. In contrast, the TrOOP provisions
simply refer to a ``group health plan,'' without specifying what this
term may include. Given that the statutory references to ``group health
plan'' under the TrOOP and creditable coverage provisions use different
language, and that the policies underlying these issues are different,
we have adopted two different definitions of the term ``group health
plan'': one with regard to the TrOOP provisions, and another with
regard to the remaining provisions of Part D, including the creditable
coverage and the retiree subsidy provisions. While the Congress
specifically enumerated two types of coverage to be considered group
health plans with regard to creditable coverage, the TrOOP provisions
do not.
    We also note that the definition of a ``group health plan'' used to
implement the Part D drug benefit will differ from the definition of
``group health plan'' used by the Medicare Secondary Payer (MSP)
program for recovery of Medicare payments. While both of our Part D
definitions of ``group health plan'' are based on the ``ERISA''
definition set forth at 29 U.S.C. 1167(1), the MSP definition is taken
from the Internal Revenue Service (IRS) definition of ``group health
plan'' at 26 U.S.C. 5000(b)(1). Therefore, the definitions of ``group
health plan'' in Sec.  423.100 and Sec.  423.4 of our final rule do not
permit circumvention of the MSP laws since they will not apply in the
MSP context.
b. Alternative Prescription Drug Coverage
    Section 1860D-2(c) of the Act provides that a Part D sponsor may
offer an alternative prescription drug benefit design, provided that
the Part D sponsor applies for and receives our approval for the
proposed alternative. In order to receive approval to offer an
alternative prescription drug benefit design, a Part D sponsor will
have to meet the requirements related to actuarial equivalence
described in section 1860D-2(c)(1) of the Act, and must use defined
standard coverage (and not actuarially equivalent standard coverage) as
a fixed point of comparison.
* Basic Alternative Coverage
    Beyond the required parameters for alternative coverage discussed
above, we interpreted the provisions of section 1860D-2(c) of the Act,
together with section 1860D-2(a)(1) of the Act, as providing for two
forms of alternative coverage--either ``basic alternative coverage'' or
``enhanced alternative coverage.'' Basic alternative coverage refers to
alternative coverage that is actuarially equivalent to defined standard
prescription drug coverage. Enhanced alternative coverage refers to
alternative coverage that exceeds defined standard coverage by offering
supplemental benefits.
    Within the parameters for alternative prescription drug coverage
described above, a Part D sponsor with a basic alternative prescription
drug benefit design can theoretically--by combining features such as a
reduction in the deductible, changes in cost-sharing, and a
modification of the initial coverage limit--still maintain an actuarial
value of coverage equal to defined standard prescription drug coverage.
* Enhanced Alternative Coverage
    Section 423.104(f) of our proposed rule permitted Part D sponsors
to provide qualified prescription drug coverage that includes
supplemental benefits. We referred to any Part D benefit package that
includes supplemental benefits as ``enhanced alternative coverage.''
    Enhanced alternative coverage includes basic prescription drug
coverage and supplemental benefits. The requirements for the
supplemental benefits that may be included in enhanced alternative
coverage are found in section 1860D-2(a)(2) of the Act. These
supplemental benefits will supplement basic prescription drug coverage,
providing for a package of benefits that exceeds the actuarial value of
defined standard coverage. Supplemental benefits can consist of:


[[Continued on page 4243]]


From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]

[[pp. 4243-4292]] Medicare Program; Medicare Prescription Drug Benefit

[[Continued from page 4242]]

[[Page 4243]]

    + Reductions in cost-sharing that increase the actuarial value of
the coverage beyond that of defined standard coverage; or
    + Coverage of drugs that are specifically excluded from the
definition of Part D drugs under section 1860D-2(e)(2)(A) of the Act
and Sec.  423.100 of our proposed rule.
    Under section 1860D-2(a)(2)(B) of the Act, a PDP sponsor would not
be permitted to offer a prescription drug plan that provided enhanced
alternative coverage in a particular service area unless it also offers
a prescription drug plan that provides only basic prescription drug
coverage (which we defined as either standard prescription drug
coverage or basic alternative coverage, with access to negotiated
prices) in that same area.
    Similarly, as provided under section 1860D-21(a)(1)(A) of the Act,
beginning on January 1, 2006, an MA organization cannot offer an MA
coordinated care plan in a service area unless that plan, or another MA
plan offered by the same organization in the same service area,
includes required prescription drug coverage. As defined in Sec.
423.100 of our proposed rule, required prescription drug coverage, for
the purposes of an MA organization offering an MA-PD plan, included
either: (1) basic prescription drug coverage; or (2) enhanced
alternative coverage, provided there is no MA monthly supplemental
beneficiary premium applied under the MA-PD plan. The enhanced
alternative coverage could be provided without a monthly supplemental
beneficiary premium only if a MA-PD plan applied a credit against the
otherwise applicable premium of rebate dollars available under section
1854(b)(1)(C) of the Act.
    Rebate dollars represent the dollars available for supplemental
(and other) benefits when an MA plan's risk-adjusted non-drug bid is
under the risk-adjusted non-drug monthly benchmark amount. In other
words, to the extent that an MA-PD plan chooses to provide enhanced
alternative coverage for no additional premium through the application
of rebate dollars, the enhanced alternative coverage would constitute
required coverage for the purposes of meeting the requirement in
section 1860D-21(a)(1)(A) of the Act.
    As provided under section 1860D-21(a)(1)(B)(i) of the Act, an MA
organization could not offer prescription drug coverage (other than
that required under Parts A and B of Medicare) to enrollees of a
medical savings account (MSA) plan. Under section 1860D-21(a)(1)(B)(ii)
of the Act, an MA organization also could not offer prescription drug
coverage (other than that required under Parts A and B of Medicare)
under another type of MA plan--including a private fee-for-service
plan--unless the drug coverage it provided under that MA plan consisted
of qualified prescription drug coverage and met our requirements
regarding required prescription drug coverage.
    Given changes in Sec.  417.440(b) of our final rule (described in
subpart T), we clarify in our final rule the requirements associated
with the offering of enhanced alternative coverage by cost plans. As
provided in Sec.  423.104(f)(4)(i) of our final rule, a cost plan that
elects to offer qualified prescription drug coverage under Part D may
offer enhanced alternative coverage only as an optional supplemental
benefit (under Sec.  417.440(b)(2)(ii)), and only if the cost plan also
offers basic prescription drug coverage.
    As provided in Sec.  423.104(f)(4)(ii) of our final rule, a cost
plan that elects to offer Part D coverage as an optional supplemental
benefit (under Sec.  417.440(b)(2)(ii)) may only do so if the coverage
it offers consists of qualified prescription drug coverage. However, a
cost plan that does not offer qualified prescription drug coverage may
provide prescription drug coverage that is not qualified prescription
drug coverage, and the requirements of Part D do not apply to the
coverage.
    Except as otherwise provided below, the final rule adopts the rules
of alternative coverage set forth in Sec.  423.104(f) and Sec.
423.104(g) of our proposed rule.
    Comment: One commenter recommended that we issue regulations
encouraging basic alternative coverage including optional drugs because
it will offer beneficiaries a more comprehensive benefit package.
    Response: We do not have the statutory authority to allow basic
alternative coverage to include drugs that are statutorily excluded
from the definition of Part D drugs. Coverage of drugs otherwise
excluded from the definition of Part D drug under section 1860D-
2(e)(2)(A) of the Act is considered a supplemental benefit as provided
under section 1860D-2(a)(2) of the Act. As specified in Sec.  423.100
of our proposed and final rules, basic alternative coverage must be
actuarially equivalent to defined standard coverage and cannot include
any supplemental benefits. The only way that Part D plans may provide
supplemental benefits, to include coverage of drugs excluded from the
definition of Part D drugs under section 1860-D(2)(e)(2)(A) of the Act,
is by providing enhanced alternative coverage.
    Comment: One commenter sought clarification as to whether
alternative coverage would be subject to the same kind of out-of-pocket
cost limits and coverage thresholds instituted under standard
prescription drug coverage.
    Response: In accordance with section 1860D-2(b)(A)(i)(I) of the
Act, Part D plans offering enhanced alternative coverage may only
reduce certain cost-sharing specifically, a reduction in the
deductible, a reduction in the coinsurance percentage or copayments
applicable to covered Part D drugs obtained between the annual
deductible, and the initial coverage limit, or an increase in the
initial coverage limit. Section 1860D-2(A)(i) does not permit Part D
plans to offer enhanced alternative drug coverage consisting of a
reduction of the out-of-pocket threshold under Sec.  423.104(d)(5)(iii)
of our final rule. Section 1860D-2(c)(3) of the Act also requires that
Part D plans offering alternative prescription drug coverage provide
the same protection against high out-of-pocket expenditures as defined
standard coverage. Thus, enhanced alternative coverage may fill in some
of the coverage gaps in defined standard coverage, but it cannot affect
the true out-of-pocket threshold described in Sec.
423.104(d)(5)(B)(iii) of our final rule, which will be $3,600 in 2006.
In other words, beneficiaries must still incur $3,600 (in 2006) in true
out-of-pocket expenses before they can benefit from the Medicare
catastrophic coverage cost-sharing amounts (the greater of 5 percent
coinsurance or $2/$5 copayments), and before Part D plans are eligible
to receive reinsurance subsidies from Medicare. As with actuarially
equivalent standard coverage, Part D plans can provide an actuarially
equivalent version of the coverage provided after the true out-of-
pocket threshold is met. In addition, enhanced alternative coverage can
improve this coverage.
    Comment: Several commenters opposed the provisions of Sec.
423.104(f) of our proposed rule and recommended that the final rule
exclude provisions for enhanced alternative coverage. These commenters
argue that this section exceeds the statutory authority supplied to the
Secretary under the MMA and that allowing such Part D plans to be
offered would make it impossible to make a valid comparison between
Part D plans, thus making it more difficult for beneficiaries to choose
a Part D plan.
    Response: We disagree with these commenters. Section 1860D-2(a)(2)
of the Act provides that qualified prescription drug coverage may
include supplemental prescription drug

[[Page 4244]]

coverage consisting of: (1) reductions in cost-sharing (for example, a
reduction in the deductible, a reduction in the coinsurance percentage
or copayments applicable to covered Part D drugs obtained between the
annual deductible and the initial coverage limit, or an increase in the
initial coverage limit), provided these reductions in cost-sharing
increase the actuarial value of the benefits provided above the
actuarial value of basic prescription drug coverage; or (2) coverage of
drugs that are specifically excluded as Part D drugs under section
1860D-2(e)(2)(A) of the Act. ``Enhanced alternative coverage'' is
simply our term for qualified prescription drug coverage that includes
these supplemental benefits specifically permitted by the statute. We
understand commenters' concerns about beneficiaries' ability to compare
Part D plan features given the benefit flexibility design accorded to
Part D plans under the MMA and will work to ensure that our comparative
information is as standardized and user friendly as possible.
c. Negotiated Prices
    Section 1860D-2(d)(1) of the Act requires that a Part D sponsor
provide beneficiaries with access to negotiated prices for covered Part
D drugs. As required by section 1860D-2(d)(1)(B) of the Act, negotiated
prices will have to take into account negotiated price concessions for
covered Part D drugs such as discounts, direct or indirect subsidies,
rebates, and direct or indirect remunerations, and would include any
applicable dispensing fees. Access to negotiated prices will be
provided even when no benefits would otherwise be payable on behalf of
an enrollee due to the application of a deductible, the initial
coverage limit, or other cost-sharing.
    As required under section 1860D-2(d)(1)(C) of the Act, prices
negotiated with manufacturers for covered Part D drugs by either (1) a
Part D plan, or (2) a qualified retiree prescription drug plan for
covered Part D drugs provided on behalf of Part D eligible individuals
will not be taken into account in making best price determinations
under the Medicaid program.
    Section Sec.  423.104(h)(3) of our proposed rule required that Part
D sponsors disclose to us all aggregate negotiated price concessions
including discounts, direct or indirect subsidies, and direct or
indirect remunerations, they obtain from each pharmaceutical
manufacturer that are passed through to the Medicare program in the
form of lower subsidies or to beneficiaries in the form of: (1) lower
monthly beneficiary premiums; or (2) lower covered Part D drug prices
at the point of sale.
    As provided under section 1860D-2(d)(2) of the Act, information on
negotiated prices reported to us for the purposes of ascertaining the
level of pass-through will be protected under the confidentiality
provisions applicable to Medicaid pricing data under section
1927(b)(3)(D) of the Act. However, that these confidentiality
protections did not preclude audit and evaluation of negotiated price
concession information by the HHS OIG.
    As provided under section 1860D-2(d)(3) of the Act and codified in
Sec.  423.104(h)(4) of our proposed rule, we are authorized to conduct
periodic audits either directly or through contracts with other
organizations of the financial statements and records of Part D
sponsors pertaining to the Part D plans they offer. As required in
section 1860D-2(d)(3) of the Act, this auditing will be performed with
the ultimate goal of protecting the Medicare program against fraud and
abuse, as well as ensuring proper disclosures and accounting under Part
D.
    Except as otherwise provided below, the final rule adopts the rules
for negotiated prices set forth in Sec.  423.104(h) of our proposed
rule.
    Comment: Some commenters believed that the phrase ``take into
account'' in our definition of negotiated prices is not strong enough,
and that we should establish minimum requirements for the proportion of
total negotiated price concessions passed through to beneficiaries.
Suggestions ranged from a majority (75 to 80 percent) to 100 percent of
negotiated price concessions.
    Response: Section 1860D-2(d)(1)(B) of the Act specifically requires
that negotiated prices ``shall take into account negotiated price
concessions, such as discounts, direct or indirect subsidies, rebates,
and direct or indirect remunerations.'' Had the Congress intended that
all negotiated price concessions be passed through to beneficiaries,
they would have used a phrase other than ``take into account'' in the
definition of the term ``negotiated prices.''
    In addition, section 1860D-2(d)(2) of the Act specifically requires
that Part D plans disclose to us aggregate negotiated price concessions
that are passed through to enrollees and to us through lower subsidies,
lower monthly premiums, and lower prices through pharmacies and other
dispensers. In requiring Part D plans to disclose to us the extent to
which they pass through negotiated price concessions to enrollees and
to us, section 1860D-2(d)(2) of the Act anticipates that Part D plans
might not pass through all negotiated price concessions. Therefore, we
interpret the definition of the term negotiated prices in section
1860D-2(d)(1)(B) of the Act as requiring Part D plans to pass on to
enrollees some, but not necessarily all, of these price concessions and
have clarified this interpretation in our definition of the term
``negotiated prices'' in Sec.  423.100 of our final rule. We believe
that market competition will encourage Part D plans to pass through to
enrollees a high percentage of the negotiated price concessions they
obtain in the form of negotiated prices at the point of sale.
Establishing minimum threshold levels for the pass-through of
negotiated price concessions would have the effect of undercutting
market competition, as Part D plans might cluster their negotiated
prices around that threshold.
    Comment: Some commenters recommended that we clarify how price
concessions will be passed through to the pharmacy and to the
beneficiaries. Some of these commenters specifically asked us to ensure
that Part D plans, not pharmacists, bear the costs of discounts.
    Response: The Part D benefit was established by the MMA as a
market-based model under which marketplace competition ensures that
enrollees receive low prices for prescription drugs. Given this market-
based approach envisioned by the Congress, we are wary of regulating
negotiations between private parties particularly regarding the
specifics of price negotiations so as to ensure that enrollees receive
competitive prices on their covered Part D drugs. We note, as well,
that pharmacies are not required to contract with Part D plans. To the
extent that pharmacies believe that the discounts they are being asked
to offer are too high, they can refuse to participate in Part D plan
pharmacy networks. Given our pharmacy access standards at Sec.
423.120(a)(1), we expect that pharmacies will have some leverage vis-
[agrave]-vis the payment provisions in Part D plan contracts.
    Comment: Two commenters stated that they considered our requirement
that pharmacies pass through negotiated prices during coverage gaps and
for non-covered formulary drugs to be price controls.
    Response: Section 1860D-2(d)(1) of the Act requires, as implemented
under Sec.  423.104(g)(1) of our final rule, that a Part D sponsor
provide enrollees with access to negotiated prices for covered Part D
drugs even when no benefits would otherwise be payable on behalf of an
enrollee due to the application of a deductible, the initial coverage
limit, or other cost-sharing. We interpret the

[[Page 4245]]

reference to the lack of payable benefits due to the application of the
initial coverage limit as referring to that portion of covered Part D
drug expenditures between the initial coverage limit and the threshold
for catastrophic coverage. In that expenditure range, a beneficiary
enrolled in standard prescription drug coverage would be responsible
for 100 percent cost-sharing. These are still covered Part D drugs, and
enrollees should be able to benefit from negotiated prices during the
coverage gap.
    We clarify that negotiated prices do not have to be made available
for non-covered Part D drugs. However, as we stated in the preamble to
our proposed rule, we are interpreting the phrase ``or other cost-
sharing'' as a reference to Part D plan designs that include, as part
of their formulary design, access to negotiated prices on certain drugs
but at a tier within their formulary in which the Part D plan would pay
no benefits and the enrollee would be responsible for 100 percent cost-
sharing (in other words, a negotiated price would be available and the
drug would be on the Part D plan's formulary, but the beneficiary would
always be responsible for 100 percent of the drug's negotiated price).
These drugs would therefore be formulary drugs and would have to be
offered at negotiated prices. As stated elsewhere in this preamble,
however, we note that we will review formulary design as part of our
benefit package review to ensure that Part D plans do not establish
formulary structures (including tiered cost-sharing) that substantially
discourage enrollment by certain beneficiaries. To the extent that Part
D plans propose using certain cost-sharing tiers (including, but not
limited to, 100 percent cost-sharing tiers) in a discriminatory
fashion, they would not be allowed.
    In addition, we clarify that we interpret the requirement that
negotiated prices always be provided to mean that uniform negotiated
prices must be available to beneficiaries for a particular drug when
purchased from the same pharmacy. In other words, the negotiated price
for a particular drug will be the same, at a particular pharmacy,
regardless of whether a beneficiary's drug spending is between $0 and
the deductible, between the deductible and initial coverage limit,
between the initial coverage limit and the out-of-pocket threshold, or
in excess of the out-of-pocket threshold. We believe that non-uniform
negotiated prices would discourage enrollment by certain Part D
eligible individuals in violation of section 1860D-11(e)(2)(D)(i) of
the Act and, therefore, plans will not be able to apply differential
negotiated prices to any drug purchased from a given pharmacy.
    Comment: Other commenters recommended that the definition of the
term ``negotiated price'' reflect the price to the Part D plan net of
any rebates, discounts, or other price concessions paid to the Part D
plan for a covered Part D drug prescription obtained from either a
retail or mail-order pharmacy. Some commenters asked that price
concessions not be allowed to artificially lower the cost of mail order
prescriptions.
    Response: Part D sponsors will negotiate prices with pharmacies and
manufacturers, and we assume based on current market practices that
negotiated prices will vary within a retail pharmacy network, as well
as between retail and mail-order pharmacies. How a Part D sponsor nets
out negotiated price concessions in its negotiated prices is at the
discretion of the Part D sponsor, but we expect that competition will
create incentives for Part D sponsors to offer reasonable negotiated
prices. Ultimately, however, these pricing issues are between a Part D
sponsor and the network pharmacies and manufacturers with whom the Part
D plan negotiates price concessions.
    Comment: Some commenters recommended that Part D plans be required
to reimburse pharmacies to recover costs of purchasing, handling, and
dispensing products to beneficiaries.
    Response: As provided elsewhere in this preamble, negotiated prices
will include any dispensing fees for covered Part D drugs related to
the transfer of possession of the covered Part D drug from the pharmacy
to the beneficiary, including charges associated with mixing drugs,
delivery, and overhead. As provided in section 1860D-11(i) of the Act,
we cannot intervene in negotiations between pharmacies and Part D
plans. Thus, the extent to which Part D plans reimburse pharmacies for
their entire dispensing costs will depend on the outcome of those
negotiations.
    Comment: Two commenters noted that our definition of the term
``negotiated prices'' appears to envision network model Part D plans,
but that MA organizations and cost plans that own and operate their own
pharmacies do not negotiate reimbursement rates with contract
pharmacies. One commenter recommended that negotiated prices for such
MA organizations and cost plans be defined as the prescription charge
established by the organization, and that such charge include the
acquisition cost of the drug, dispensing, operational, capital,
overhead, and margin costs. The commenter suggested that, in
determining whether Part D plans' negotiated prices meet the standard
of section 1860D-2(d)(1)(B) of the Act, we could either compare an MA
organization's negotiated prices to negotiated prices of network model
Part D plans in the same market or, alternatively, require the MA
organization to demonstrate how it takes price discounts it receives
from manufacturers into account in its pricing methodology or formula.
Another commenter suggested that we permit such MA organizations to
establish a pricing methodology that reflects a good faith effort to
reflect prices analogous to those that would be negotiated by an MA
organization with third party pharmacy providers, and that we consult
with affected MA organizations in establishing this policy.
    Response: We clarify that our definition of the term ``negotiated
prices'' in Sec.  423.100 of the final rule requires that ``discounts,
direct or indirect subsidies, rebates, other price concessions, and
direct or indirect remunerations'' be taken into account in
establishing covered Part D drug negotiated prices. Plans do not have
to take into account pharmacy discounts to the extent that no such
discounts exist. Moreover, we note that our definition of the term
``dispensing fees'' in Sec.  423.100 of the final rule indicates that,
in the case of pharmacies owned and operated by a health plan,
dispensing fees are understood to be the equivalent of all reasonable
pharmacy costs included in the definition (those related to the
transfer of possession of a covered Part D drug to a Part D plan
enrollee), including the salaries of pharmacists and other pharmacy
workers as well of the costs associated with maintaining the pharmacy
facility and equipment necessary to operate the pharmacy. For purposes
of evaluating the validity of a Part D plan's bid, including its
negotiated prices for covered Part D drugs, we will request and
evaluate disaggregated negotiated price concession data only to the
extent that such detail is necessary in order to justify actuarial
assumptions or as part of an audit.
    Comment: One commenter asked that we define the meaning of the
terms ``direct or indirect subsidies'' and ``direct or indirect
remunerations.'' Another commenter suggested that negotiated price
concessions reported to us should include formulary placement
incentives, market share movement incentives, administrative fees paid
to

[[Page 4246]]

Part D plans, and direct and indirect forms of remuneration. One
commenter asked that we provide clarification on how rebates will be
calculated, reflected in negotiated prices, and reported to us.
    Response: We note that Part D plans may fulfill the requirements of
section 1860D-2(d)(2) of the Act through the data submission
requirements discussed in further detail in subpart G. In other words,
we should be able to determine the proportion of total aggregate price
concessions passed through to either the Medicare program or to
enrollees based on the cost data Part D plans will be required to
submit to us. Although all negotiated price concessions be they direct
or indirect subsidies, direct or indirect remunerations, rebates, or
discounts must be reported to us, as provided in Sec.  423.104(g)(3) of
our final rule, we will require that Part D plans break out any fair
market value administrative fees pharmaceutical manufacturers may pay
Part D sponsors. The use of the term indirect with direct is meant to
be all-inclusive. In other words, we clarify that this means any and
all subsidies or remunerations. We will specify in operational guidance
the format and frequency of these reports, as well as what constitutes
direct or direct subsidies, direct or indirect remunerations, rebates,
and discounts.
    Comment: We received a number of comments regarding our aggregate
negotiated price concession disclosure requirements. Several commenters
asked us to clarify that only aggregate price concessions passed
through to us and to enrollees will be reported to us, rather than the
amount or proportion of total price concessions obtained by a Part D
plan. Other commenters thought that Part D plans should be required to
disclose all price concessions, not just the proportion passed through
to Part D enrollees. A number of other commenters asked that we require
the disclosure of negotiated price concession by drug.
    Response: We clarify that, as provided under section 1860D-2(d)(2)
of the Act, and specified in Sec.  423.104(g)(3) of our final rule, we
will require that all aggregate negotiated price concession data and
not just the proportion passed through to beneficiaries be reported to
us for purposes of Part D plan bids. However, as explained in subpart
G, it may be necessary for us to receive disaggregated negotiated price
concession data from Part D plans in order to ensure accurate payment
to Part D plans. We will provide further information regarding
negotiated price concession reporting in separate guidance.
    Comment: Several commenters recommended that Part D plans share all
negotiated price concession data reporting with SPAPs.
    Response: Since nothing in the MMA addresses disclosure of
negotiated price information to SPAPs, FOIA rules apply. FOIA applies
to requests for data from States. FOIA Exemption 4 protects certain
confidential commercial information that is submitted to a Federal
agency. Determinations about the applicability of FOIA Exemption 4 to a
Part D plan's pricing data would be made on a case-by-case basis
depending on whether the submitter of the data could demonstrate that
disclosure of this information would likely cause substantial
competitive harm to the submitter's competitive position. If FOIA
Exemption 4 is found to protect submitted price information, we cannot
disclose this information to States because to do so would violate the
Trade Secrets Act (18 U.S.C. 1905).
    Comment: One commenter stated the ``best price'' provision
undermined the original intent of section 1927 (c)(1)(C) of the Act and
would have a negative financial impact on the Medicaid prescription
drug program.
    Response: We believe the Congress intended that there be no Federal
barriers to Part D sponsors negotiating the lowest prices possible for
their plan members. If negotiated prices counted towards ``best
price,'' this could create a disincentive for manufacturers to offer
discounts. Further, the purpose of ``best price'' exemptions in section
1927(c)(1)(C) of the Act is to ensure that manufacturers offer Medicaid
programs strong rebates that are market-driven, without penalizing the
manufacturers indirectly for the discounts they offer by law under
other Federal drug programs. Exempting negotiated prices under the new
Medicare prescription drug benefit is consistent with that purpose. The
issue of effects on Medicaid best price is discussed in the impact
analysis.
    Comment: One commenter asked for further guidance regarding the
``best price'' exemption, stating that Part D providers should be able
to negotiate simultaneously for commercial prices, which would count
toward ``best price,'' and for Medicare/qualified retiree prices, which
would not count toward ``Best Price.''
    Response: Under section 1860D-11(i) of the Act, we have no
authority to regulate price concessions between manufacturers and Part
D plans. Consequently, we cannot prohibit or require Part D plans from
negotiating simultaneously for commercial prices, which would be
included in the calculation of the Medicaid drug rebate best price, and
Medicare prices, which would not be included in the calculation of the
Medicaid drug rebate best price. If Part D plans wish to simultaneously
negotiate their commercial and Medicare prices, they are free to do so.
    Comment: One commenter suggested that we recommend to the Congress
alternatives to the existing ``best price'' rebate formula. The
commenter recommended a flat rebate formula to generate savings for
State Medicaid programs, while eliminating the negative impact of the
``best price'' formula on the prescription drug market generally.
    Response: This regulation does not address the best price
provisions of the Medicaid drug rebate statute as we do not have the
statutory authority under Title I of the MMA to modify the Medicaid
rebate program.
3. Establishment of Prescription Drug Plan Service Areas (Sec.
423.112)
    Section 1860D-11(a)(2) of the Act provides us with the authority to
establish PDP regions, and such PDP regions must be established in a
manner that is consistent with the establishment of MA regions. Section
1860D-11(a)(2)(B) of the Act stipulates that PDP regions must be, to
the extent practicable, consistent with MA regions as established under
section 1858(a)(2) the Act. However, we may establish PDP regions that
vary from MA regions if we determine that access to Part D benefits
would be improved by establishing different regions. Section 1860D-
11(a)(2)(C) of the Act stipulates that we designate a separate PDP
region (or regions) for the U.S. territories.
    Except as otherwise provided below, the final rule adopts the
requirements related to the establishment of prescription drug plan
service areas set forth in Sec.  423.112 of the proposed rule.
    Comment: We received a number of comments on the establishment of
PDP regions both in response to the provisions of our proposed rule and
as follow-up to a public meeting held in Chicago on July 21, 2004. The
majority of commenters favored establishing 50 State-based regions or,
more generally, a larger number of smaller regions--close to that of
State-level regions. Issues identified in support of 50 State-based
regions included the large assumption of risk associated with the
establishment of larger regions; insufficient time for Part D plans to
negotiate and develop networks, or to renegotiate providers' contracts
and form partnerships; potential difficulties in meeting State
licensure and solvency requirements; and greater ease in terms of

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coordination between Part D plans and SPAPs in providing coverage that
supplements the benefits available under Part D coverage. Several
commenters recommended an intermediate number of regions between the 10
and 50 regions authorized by the MMA. One commenter cautioned us to
develop an appropriate number of regions in order to ensure that
beneficiaries particularly those in rural areas have meaningful access
to Part D choices. Yet another commenter recommended that we align PDP
and MA regions in order to preclude beneficiary confusion by MA
enrollees as they try to understand their options during the initial
enrollment period for Part D coverage.
    Several other commenters specifically recommended that a standalone
region be created for Puerto Rico separate from the 50 States and any
of the other U.S. territories. These commenters believe it is necessary
for Puerto Rico to be placed in its own PDP region because a multi-
state PDP region for Puerto Rico would compromise the viability of Part
D on the island. They argue that Puerto Rico-based plans have years of
experience working with the local Medicare population and its distinct
linguistic and cultural traditions and will be disadvantaged when
competing with U.S. companies to build provider networks outside Puerto
Rico. Some commenters also thought that combining Puerto Rico and
another State or States (for example, Florida or New York) will drive
up premiums for Puerto Rican enrollees. On the other hand, one
commenter argued that a standalone region for Puerto Rico would isolate
it, and preferred to stay in the New York region under the MA and PDP
programs.
    Response: We conducted a market survey and analysis, including an
examination of current insurance markets as required in the MMA. Key
factors in the survey and analysis included payment rates; eligible
population size per region; PPO market penetration; current existence
of PPOs, MA plans, or other commercial plans; and presence of PPO
providers and primary care providers. Additional factors were also
considered, including solvency and licensing requirements, as well as
capacity issues. In response to the lack of specificity regarding the
PDP regions in our proposed rule, we conducted extensive outreach in
order to obtain public input prior to the publication of our final
rule. On December 6, 2004, we announced the establishment of 26 MA
regions and 34 PDP regions. For maps and fact sheets on the on the
regions, please see http://www.cms.hhs.gov/medicarereform/mmaregions/.

4. Access to Covered Part D Drugs (Sec.  423.120)
a. Pharmacy Access Standards
    As required by section 1860D-4(b)(1)(C) of the Act, Part D plans
must secure the participation in their pharmacy networks of a
sufficient number of pharmacies that dispense drugs directly to
patients (other than by mail order) to ensure convenient access to
covered Part D drugs by Part D plan enrollees. To achieve that goal, we
are authorized to establish access rules that are no less favorable to
enrollees than rules for convenient access established in the statement
of work solicitation (MDA906-03-R-0002) by the Department of
Defense (DOD) on March 13, 2003, for purposes of the TRICARE Retail
Pharmacy program. Consistent with the TRICARE standards, our proposed
rule required that Part D plans establish pharmacy networks in which:
    * In urban areas, at least 90 percent of Medicare
beneficiaries in the Part D plan's service area, on average, live
within 2 miles of a retail pharmacy participating in the plan's
network;
    * In suburban areas, at least 90 percent of Medicare
beneficiaries in the Part D plan's service areas, on average, live
within 5 miles of a retail pharmacy participating in the prescription
drug plan's or MA-PD plan's network; and
    * In rural areas, at least 70 percent of Medicare
beneficiaries in the Part D plan's service area, on average, live
within 15 miles of a retail pharmacy participating in the plan's
network.
    As provided under section 1860D-21(c)(3) of the Act and codified in
Sec.  423.120(a)(3)(i) of our proposed rule, we are authorized to waive
the pharmacy access standards in Sec.  423.120(a)(1) in the case of an
MA-PD plan or cost plan that provides access (other than via mail
order) to qualified prescription drug coverage through pharmacies owned
and operated by the MA organization that offers the plan or the cost
plan. However, in order for the pharmacy access standards to be waived,
the MA-PD plan or cost plan in question is required to have a pharmacy
network that, per our determination, provides comparable pharmacy
access to its enrollees as provided under Sec.  422.112.
    Similarly, section 1860D 21(d)(2) of the Act provides that if a
private fee-for-service MA plan offering qualified prescription drug
coverage provides coverage for drugs, including covered Part D drugs,
purchased from all pharmacies regardless of whether they are network
pharmacies under contract with the MA plan, and provided that
beneficiaries are not charged any cost-sharing above and beyond what
they will be charged under standard prescription drug coverage--the
pharmacy access requirements will also be waived.
    As provided under section 1860D-4(b)(1)(A) of the Act, Part D
sponsors will be required to permit the participation in their Part D
plan networks of any pharmacy that was willing to accept the plan's
terms and conditions. Based on section 1860D-4(b)(1)(B) of the Act, our
proposed rule clarified that a Part D sponsor will have the option of
reducing cost-sharing for its enrolled beneficiaries below the level
that would otherwise apply for covered Part D drugs dispensed through
network pharmacies. We interpreted this provision as permitting Part D
sponsors from varying cost-sharing not only based on type of drug or
formulary tier, but also on a particular pharmacy's status within the
Part D plan's pharmacy network-in essence authorizing distinctions
between ``preferred'' and ``non-preferred'' pharmacies.
    As stipulated under section 1860D-4(b)(1)(E) of the Act and Sec.
423.120(a)(4)(ii) of our proposed rule, pharmacies could not be
required to accept insurance risk as a condition of participation in a
Part D sponsor's pharmacy network. We defined ``insurance risk'' in
relation to a network pharmacy as referring to risk of the type
commonly assumed only by insurers licensed by a State, but not
including payment variations designed to reflect performance-based
measures of activities within the control of a pharmacy, such as
formulary compliance and generic drug substitutions, or elements
potentially in the control of the pharmacy (for example, labor costs,
and productivity).
    Section 1860D-4(b)(1)(D) of the Act requires Part D sponsors to
allow their enrollees to receive benefits at a network retail pharmacy
instead of a network mail-order pharmacy, if they so choose. Consistent
with the statute, our proposed rule allowed Part D plan enrollees who
choose to obtain an extended supply of a covered Part D drug through a
network retail pharmacy to be responsible for any differential between
the network retail pharmacy's and the network mail-order pharmacy's
negotiated price for that covered Part D drug. We sought comments on
our proposal that this price differential be counted as an incurred
cost against the annual out-of-pocket threshold and note that, as
discussed elsewhere in this preamble, we have modified the level

[[Page 4248]]

playing field provision at Sec.  423.120(b)(10) of our final rule to
clarify that an enrollee will be responsible for any higher cost-
sharing (and not a differential in negotiated price) associated with
purchasing a 90-day supply of a covered Part D drug at a network retail
pharmacy, as well as our definition of incurred costs at Sec.  423.100
of the final rule.
    Except as otherwise provided below, the final rule adopts the
access standards set forth in Sec.  423.120(a) of the proposed rule.
    Comment: In our proposed rule, we interpreted the TRICARE access
standards such that a prescription drug plan or regional MA-PD plan
would have been required to meet or exceed the access standards across
each region in which it operates, and a local MA-PD plan would have to
meet or exceed the access standards in its local service area.
    Some commenters supported this application of the TRICARE access
standards in our proposed rules (regional for prescription drug plans
and MA-PD plans). A number of commenters expressed concerns about the
adequacy of our proposed application of the access standards and urged
us to apply the standards at the local (zip-code) level. A number of
other commenters urged us to apply the TRICARE standards at the State
level. Several other commenters recommended that Part D plans meet the
access standards at the broadest geographic area served by the plan
(for example, regional, multi-regional, or national).
    Response: Although section 1860D-4(b)(1)(C)(ii) of the Act directs
us to adopt access standards no less favorable to enrollees than those
set forth in the March 13, 2003, statement of work solicitation
(MDA906-03-R-0002) of the Department of Defense under the
TRICARE Retail Pharmacy Program, we note that the statement of work
does not specify the geographic level at which to apply the TRICARE
standard. We therefore believe that we have discretion to apply the
TRICARE standards at the geographic level we believe to be most
appropriate.
    Although we considered applying the TRICARE standard at the local
(zip code or county) level for Part D plans, we believe such
application would make it impossible for Part D plans to meet the
standards particularly the rural standard--in some parts of the
country. On the other hand, we believe that application of the access
standards at the broader, regional level would not adequately ensure
convenient access for beneficiaries given the potential for Part D
plans to ``average out'' the access standards across many urban,
suburban, and rural areas in a region--thus meeting the access
standards in the aggregate but potentially leaving certain parts of a
region without convenient access to retail pharmacies.
    We agree with commenters who proposed a State-level application of
the TRICARE pharmacy access standards for regional MA-PD plans and
prescription drug plans, and have made changes to Sec.  423.120(a)(1)
accordingly such that a prescription drug plan or regional MA-PD plan
will have to meet or exceed the access standards across urban,
suburban, and rural areas, respectively, in each State in which it
operates, a local-MA-PD plan would have to meet or exceed the access
standards across urban, suburban, and rural areas, respectively, in
each service area (including multi-county service areas) in which it
operates, and a cost plan would have to meet or exceed the access
standards across urban, suburban, and rural areas, respectively, in
each geographic area in which it operates. In other words, a
prescription drug plan or regional MA-PD that operates in a multi-
region or national service area could not meet the access standards
proposed in Sec.  423.120(a)(1) by applying them across the entire
geographic area serviced by the plan; instead, it would have to meet
the standards in each State of its multi-region or national service
area. We believe that such an interpretation is a reasonable compromise
between application at the local level and application at the regional
or national level, and maximizes Part D plan flexibility while ensuring
convenient access to network pharmacies for Part D enrollees.
    Comment: Some commenters expressed concern that TRICARE's rural
access standard was insufficient to provide convenient access to
network pharmacies in rural areas and urged us to adopt a more adequate
definition of rural. Others argued for an exceptions process for
remote, isolated areas in which it is simply not feasible to establish
pharmacy networks that comply with our requirements.
    Response: We are aware of the difficulties faced by rural
beneficiaries in accessing medical care. We believe that TRICARE's
definition of ``rural'' is adequate and have not modified it in our
final rule (though we will monitor the access standards over time to
ensure they continue to provide convenient access to all
beneficiaries). Furthermore, we believe access in rural areas will be
improved given our revised interpretation of the access standards,
whereby we will evaluate access at the State (and not the regional)
level. However, we are aware--based on our experience implementing the
Medicare Prescription Drug Discount Card and Transitional Assistance
Program--that there are likely to be several States in which meeting
the rural access standard will be impossible or impracticable given the
lack of infrastructure. We expect to establish an exceptions process,
which we will outline in operational guidance to Part D plans that will
account for any problem areas and mitigate any disincentives plans may
have to avoid doing business in parts of the country in which meeting
the pharmacy access standards would be a challenge.
    In addition, and as explained elsewhere in this preamble, and
codified in Sec.  423.120(a)(2) of our final rule, we will allow Part D
plans to count certain non-retail pharmacies--specifically, I/T/U,
Federally Qualified Health Center (FQHC), and Rural Health Center (RHC)
pharmacies--toward the pharmacy access requirements in Sec.
423.120(a)(1) of our final rule. We believe this policy will help
ensure convenient access in rural areas.
    Comment: Several commenters asked that we ensure that national Part
D plans are created. These commenters thought that national Part D
plans would be of benefit to beneficiaries who travel regularly or who
reside in more than one State in a given year (for example,
``snowbirds''), and urged that the ramifications of choosing a local
MA-PD plan or a regional Part D plan be made clear to beneficiaries who
may not realize the implications of such limited geographic access when
they select Part D plan coverage.
    Response: Although a Part D sponsor may offer a Part D plan in more
than one PDP or MA region, it is not required to do so. Therefore, we
cannot require national Part D plans, though we certainly recognize the
benefits of such plans for some beneficiaries given the limited
applicability of our out-of-network access policy. We note that our
pharmacy access standards would not in any way preclude Part D sponsors
from contracting with pharmacies outside their Part D plans' service
areas, provided that the plans meet the pharmacy access requirements
within their service areas. Such a feature would be of particular use
to beneficiaries who spend significant amounts of time outside their
Part D plan's service area (for example, snowbirds) and could make a
particular Part D plan that offered such benefits more attractive to
beneficiaries who travel regularly. National Part D plans are also of
interest to employers who have retirees living throughout the country,
and the

[[Page 4249]]

employer group waiver authority discussed in subpart J could facilitate
these employer-only national Part D plans. We also note that, as part
of our information dissemination requirements in Sec.  423.128(b) of
the final rule, Part D plans will be required to inform beneficiaries
about the plan's service area, as well as the locations of network
pharmacies.
    Comment: Several commenters asked us to make allowances for
``snowbirds,'' stating that our regulations should allow Part D
sponsors to offer ``visitor/traveler'' benefits available under the MA
program. One commenter specifically suggested the application of the MA
requirements, which allow an organization to provide such benefits to
an individual who is temporarily out of the area for up to 12 months. A
few commenters stated that we should require prescription drug Part D
plans to offer visitor/traveler benefits. One commenter suggested,
however, that we allow exceptions for regional Part D plans and those
with out-of-network services. One commenter suggested that we consider
allowing Part D plans to offer ``travel'' networks without requiring
them to contract in those regions, suggesting that this could be an
interim approach pending evaluation of the cost/payment experience for
both Part D plans and us.
    Response: We appreciate the feedback provided by the commenters on
applying a visitor/traveler benefit to prescription drug plans as has
been provided to the MA program. We do not have the authority to
establish a visitor/traveler benefit. However, as noted above, our
pharmacy access standards would not in any way preclude Part D sponsors
from contracting with pharmacies outside their plans' service areas,
provided that plans meet the pharmacy access requirements within their
service areas, and such access is not provided outside the United
States.
    Comment: We interpreted the access requirements in section 1860D-
4(b)(1)(C) of the Act as requiring Part D plans to count only retail
pharmacies as part of their networks for the purpose of meeting the
access standards, and we proposed defining a retail pharmacy as any
licensed pharmacy from which covered Part D enrollees could purchase a
covered Part D drug without being required to receive medical services
from a provider or institution affiliated with that pharmacy. We also
requested comment regarding whether we should allow Part D plans to
count pharmacies that are operated by the Indian Health Service, Indian
tribes and tribal organizations, and urban Indian organizations (I/T/U
pharmacies) toward their network access requirements when the
pharmacies are under contract with the Part D plan, and it would be
impossible or impracticable for the plan to meet the access standard in
rural areas of its service area without the inclusion of some or all of
these pharmacies. In addition, we solicited comments on permissible
ways to ensure enrollee access to FQHC and rural pharmacies, since
these pharmacies could potentially provide access to covered Part D
drugs in remote, rural areas.
    Several commenters support counting only retail pharmacies towards
Part D plans' access requirements. Other commenters supported allowing
I/T/U pharmacies to count toward Part D plans' pharmacy access
requirements to the extent that we do not require Part D plans to offer
I/T/U pharmacies a standard contract, at a minimum.
    Response: We agree that, in most cases, only retail pharmacies,
which we define in Sec.  423.100 of our final rule as any licensed
pharmacy from which covered Part D enrollees could purchase a covered
Part D drug without being required to receive medical services from a
provider or institution affiliated with that pharmacy, should count
toward our pharmacy access standards. Examples of non-retail pharmacies
include I/T/U, FQHC, Rural Health Center (RHC), and hospital and other
provider-based pharmacies, as well as Part D-owned and operated
pharmacies that serve only plan members.
    However, as explained elsewhere in this preamble, we are concerned
about access to pharmacies in rural and underserved areas. As one way
of addressing this concern, Sec.  423.120(a)(2) of our final rule
allows Part D plans to count certain non-retail pharmacies--
specifically, I/T/U, FQHC, and RHC pharmacies toward the pharmacy
access requirements in Sec.  423.120(a)(1) of our final rule.
    FQHCs and RHCs face many of the same barriers to inclusion in
commercial plan networks as do I/T/U pharmacies, which we discuss in
greater detail elsewhere in this preamble. Beneficiaries served by
FQHCs and RHCs are often served in those settings because of their
financial and geographic circumstances. We believe that allowing Part D
plans to count these pharmacies toward their access requirements will
incentivize plans to make an extra effort to solicit and include these
pharmacies in their networks. As the number of these pharmacies is
limited and, with the exception of I/T/U pharmacies, can generally
offer services to a broad-based population, we do not believe that this
exception will have a significant impact on convenient access to
pharmacies in rural areas for the general population. However, we
intend to review Part D plans' proposed pharmacy networks to ensure
that their inclusion of I/T/U, FQHC, and RHC pharmacies does not
substitute for the inclusion in Part D plan networks of retail
pharmacies. We also note that this policy should not be interpreted as
requiring broader access to I/T/U, FQHC, and RHC pharmacies than is
currently permissible.
    Comment: Several commenters expressed concern about the inclusion
of rural and FQHC pharmacies in Part D plan networks, with some
advocating for requiring plans to contract in some cases, under
preferential contracting terms and conditions with these pharmacies.
Other commenters opposed requiring Part D plans to contract with
specific kinds of pharmacies, asserting that the any willing pharmacy
and pharmacy network access requirements are sufficient to ensure an
adequate pharmacy network for all beneficiaries. One commenter asked
that, to the extent we require Part D plans to contract with certain
pharmacies, plans would only be required to offer standard terms and
conditions.
    Response: With the exception of I/T/U pharmacies, we will not
require Part D plans to contract with non-retail pharmacies including
FQHC or rural pharmacies. We believe our access standards for rural
areas and the Statewide application of access rules generally will
ensure adequate access in rural areas. However, as discussed elsewhere
in this preamble, we will allow Part D plans to count I/T/U, FQHC, and
RHC pharmacies toward their access requirements as an incentive for
Part D plans to contract with these pharmacies, which are critical
providers in underserved areas.
    Comment: One commenter believes we should mandate that Part D plans
solicit inner city and rural pharmacies that meet the Small Business
Administration's small business standard for participation in their
pharmacy networks and should give them access to any terms that the
Part D plan offers to a subset of pharmacies.
    Response: We believe the pharmacy access standards, as well as
their application at the State level, in Sec.  423.120(a)(1) of our
final rule, will ensure adequate access to covered Part D drugs for all
Part D enrollees in urban, suburban, and rural areas. Given the
standards, pharmacies' bargaining power will be strengthened in
underserved areas. Ultimately, however, it is at Part D plans'
discretion how they will establish pharmacy networks--

[[Page 4250]]

including the offering of contracting terms and conditions that are
different than standard contracting terms and conditions and the
establishment of preferred pharmacies provided they meet our pharmacy
access standards, non-discrimination provisions, and other applicable
requirements under Part D. We believe that the type of market
intervention requested by the commenter is contrary to the Congress's
intent that we not interfere in the private negotiations between Part D
plans and pharmacies. We will therefore not mandate that Part D plans
solicit inner city and rural retail pharmacies or that they
automatically deem them preferred pharmacies within their networks.
    Comment: We sought public comments regarding whether we should
consider using the authority in section 1860D-4(b)(1)(C) of the Act to
require that Part D plans contract with a sufficient number of home
infusion pharmacies in their service area to provide reasonable access
for Part D enrollees.
    Several commenters supported requiring Part D plans to contract
with a sufficient number of home infusion pharmacies in their service
areas to ensure adequate access for beneficiaries. One commenter noted
that this requirement would result in savings for the Medicare program
by reducing expenditures under Parts A and B. In addition, these
pharmacies allow beneficiaries to safely receive their medications at
home by providing training and skilled support so beneficiaries can
avoid the inconvenience of hospitals, clinics, and doctor visits. One
commenter urged us to expand our proposed requirement to include all
specialty pharmacies, not just home infusion pharmacies.
    Other commenters recommended not mandating Part D plans to contract
with these non-retail pharmacies but rather encourage participation
because it would reduce negotiating leverage of plans with these
pharmacies.
    One commenter urged that home infusion pharmacies should not be
counted toward network TRICARE standards.
    Response: We agree with commenters who believe that we should use
our authority under section 1860D-4(b)(1)(C) of the Act to require Part
D plans to provide adequate access to home infusion pharmacies. Given
coverage of home infusion drugs under Part D, we do not believe it is
an option for Part D plans not to include at least some home infusion
pharmacies in their networks in order to provide enrollees with
meaningful access to those drugs. This is particularly a concern with
regard to prescription drug plans which, unlike other Part D plans, do
not benefit from reduced medical costs associated with home infusion
and may therefore have little incentive to contract with home infusion
pharmacies. Therefore, we have added a new provision to our final
regulations at Sec.  423.120(a)(4) which requires Part D plans to
demonstrate to us that they provide adequate access to home infusion
pharmacies consistent with CMS operational guidance to Part D plans. We
expect that Part D plans will demonstrate adequate access based in part
on the number of enrollees in their service areas and the geographic
distribution and capacity of home infusion pharmacies in those service
areas. We have not included specialty pharmacies that do not provide
home infusion services in this requirement however, as it is unclear
whether beneficiaries will need routine access to such pharmacies or
would not be adequately served through our out-of-network access rules.
We clarify, that we have made a distinction between specialty
pharmacies and long-term care pharmacies. We note that home infusion
pharmacies will not count toward Part D plans' pharmacy access
requirements because they are not retail pharmacies.
    Comment: We requested comments regarding the advantages and
disadvantages of using the authority provided under section 1860D-
4(b)(1)(C)(iv) of the Act to require Part D plans to approach some or
all long-term care pharmacies in their service areas with at least the
same terms available under their standard pharmacy contracts, or,
alternatively, to not require (but strongly encourage) Part D sponsors
to negotiate with and include long-term care pharmacies in their Part D
plans' pharmacy networks. In addition, we requested comments regarding
how to balance convenient access to long-term care pharmacies with
appropriate payment to long-term care pharmacies under the provisions
of the MMA.
    Some commenters were adamant that the current one-to-one
relationship between the long-term care pharmacies and nursing homes be
preserved, as it is critical to ensuring safety and convenient access
to drugs for Medicare beneficiaries residing in nursing homes. One
commenter suggested that Part D plans should also provide standardized
long-term care pharmacy contracts that recognize long-term care
pharmacies' essential role.
    Some commenters recommended that the final regulation require Part
D plans to contract with any willing long-term care pharmacy. A number
of commenters would prefer that we do not require Part D plans to
contract with any particular non-retail pharmacies (including long-term
care pharmacies) because both our access standards and the any willing
pharmacy requirement adequately address our objective of ensuring
access to Part D drugs for all enrollees. One commenter notes that Part
D plans will need to include long-term care pharmacies in their
networks to meet access standards, and that this will encourage Part D
plans to contract with long-term care pharmacies. Another believes that
we struck a balance with the option for long-term care pharmacies to
provide benefits in- or out-of-network because it gives long-term care
pharmacies and Part D plans the appropriate negotiating flexibility to
reach mutually satisfactory arrangements for providing services to
long-term care residents. Also, one commenter points out that some
long-term care pharmacies would not be able to meet all the operational
standards necessary to participate in Part D, and Part D plans would
have to negotiate special reimbursement rates with these pharmacies.
Some commenters believe that we should promote appropriate payment
methodologies (for example, via dispensing fees or separate fee
schedules to pay for specialized services) that would enable all long-
term care pharmacies to join networks and provide a meaningful benefit.
Another variation suggested was that a Part D plan should be required
to include at least one long-term care pharmacy in its network and to
contract with any long-term care pharmacy that agrees to the Part D
plan's standard contract.
    One commenter reasoned that there should be a balance in the
contracting requirement; for example, long-term care pharmacies that
service X percent of beneficiaries should also be required to contract
with at least one Part D plan. But, without this balance, the commenter
felt the Part D plans and long-term care pharmacies should be strongly
encouraged to contract with each other. A few commenters believed that
we should encourage, but not require, Part D plans to contract with
long-term care pharmacies and that we should explicitly state in
regulation that long-term care residents can access long-term care
pharmacies as out-of-network providers when those pharmacies do not
contract with particular Part D plans. Other commenters believe that it
is sufficient to require that long-term care pharmacies be offered
standard

[[Page 4251]]

contracting terms and conditions by Part D plans.
    Response: Section 1860D-4(b)(1)(C)(iv) of the Act provides that, in
establishing rules for convenient access to network pharmacies, we may
include standards with respect to access to long-term care pharmacies
for Part D enrollees who reside in long-term care facilities. For a
variety of reasons, including the quality aspects of Federal nursing
home regulations, it is generally the case that long-term care
facilities have chosen to contract with a single long-term care
pharmacy. Given this state of affairs, our proposed rule assumed that
Part D enrollees residing in a long-term care facility could not
reasonably be expected to access their Part D drugs at another pharmacy
if their facility's long-term care pharmacy is not part of their Part D
plan's network. In the proposed rule, we proposed that enrollees
residing in long-term care facilities whose contracted long-term care
pharmacies did not participate in their Part D plans' networks could
continue to use those long-term care pharmacies consistent with our
proposed out-of-network access policy. However, given the narrow
statutory authority to establish out-of-network access rules provided
by section 1860D-4(b)(1)(C)(iii) of the Act, we do not believe as
discussed in greater detail elsewhere in this preamble that access to
out-of-network pharmacies on a routine basis can be justified. Thus,
beneficiaries residing in long-term care facilities that do not
contract with a pharmacy included in their Part D plan network will not
be able to access covered Part D drugs at the out-of-network long-term
care pharmacy through the out-of-network access rules in Sec.  423.124
of our final rule.
    However, it is important to note that we will provide a SEP for
prescription drug plan enrollment and disenrollment for beneficiaries
entering in, living in, or leaving an institution. In addition,
individuals enrolled in an MA-PD plan have an unlimited open enrollment
period for institutionalized individuals (OEPI). While MA organizations
may choose individually, at the plan level, whether or not to be open
for enrollments during this period, they must always accept
disenrollments.
    Given the risk associated with institutionalized beneficiaries,
relying on the market alone to ensure that Part D plans include a
sufficient number of long-term care pharmacies in their networks may
not be sufficient. We note that relying on the pharmacy access
standards in Sec.  423.120(a)(1) of our final rule will also not ensure
sufficient access to long-term care pharmacies, since many of these
pharmacies are not retail pharmacies and therefore would not count
toward those requirements. Absent a contracting mandate, Part D plans
may view contracting with long-term care pharmacies given the risk
associated with institutionalized beneficiaries as too risky. To the
extent that we require Part D plans to solicit long-term care
pharmacies in their service areas to join their networks, plans may be
forced to negotiate preferential contracting terms and conditions
(relative to the terms they would offer any other pharmacy willing to
participate in its network) for long-term care pharmacy-specific
specialized packaging and services with a number of long-term care
pharmacies in order to meet our requirement. In addition, although the
statute includes an ``any willing pharmacy'' requirement, even if we
require Part D plans to contract with any long-term care pharmacy in a
service area, we cannot compel long-term care pharmacies to accept the
plans' terms and conditions.
    We believe it is essential to inject competition into the long-term
care pharmacy market while preserving the relationships and levels of
service that long-term care facilities now enjoy vis-[agrave]-vis their
contracted long-term care pharmacies. To that end, we have used our
authority under section 1860D-4(b)(1)(C)(iv) of the Act to require, in
Sec.  423.120(a)(5) of our final rule, that Part D plans offer standard
contracting terms and conditions, including performance and service
criteria for long-term care pharmacies that we will specify in
operational guidance to all long-term care pharmacies in their service
areas. In other words, we are establishing an ``any willing pharmacy''
requirement specifically for long-term care pharmacies, coupled with a
requirement that Part D plans develop standard contracting terms and
conditions for long-term care pharmacies, such that any pharmacy in a
service area could become an eligible long-term care pharmacy by
certifying that it meets certain performance and service criteria for
providing pharmacy services to long-term care facilities. These
criteria would be incorporated into a Part D plan's standard
contracting terms and conditions for long-term care pharmacies. We will
provide further detail regarding these criteria in operational
guidance, but we expect that they will address access to urgent and
emergency medications on a 24/7 basis, standardized prescribing
systems, and the availability of one of several standard delivery
packaging and delivery systems for routine medications. We expect to
review the reasonableness of Part D plans' standard contracting terms
and conditions for long-term care pharmacies. We note that entities
other than current long-term care pharmacies (for example, retail
pharmacies) could become an eligible long-term care pharmacy by meeting
these standards of practice, so long as they also meet specific State
law requirements, if any, for such entities. Plans in a region would be
required to contract with any willing long-term care pharmacy in that
region, provided those pharmacies were able to reach agreement with
Part D plans on all standard contract terms and conditions including
payment rates.
    As provided in Sec.  423.120(a)(5) of our final rule, we will
require Part D plans to demonstrate that they have contracts with a
sufficient number of long-term care pharmacies to ensure convenient
access to prescription drugs for institutionalized beneficiaries within
the service area. We will provide more detailed information in CMS
guidance regarding what constitutes convenient access, but we expect
that Part D plans will demonstrate convenient access based in part on
the number of enrollees in their service areas and the geographic
distribution, capacity, and contracting relationships with long-term
care facilities of long-term care pharmacies in those service areas.
    We expect that each long-term care facility will select one or more
eligible network pharmacies to provide a Part D plan's long-term care
drug benefits to all of its residents enrolled in a Part D plan. In
order to minimize the number of pharmacy suppliers and maintain patient
safety, long-term care facilities will likely select long-term care
pharmacies that meet Part D standards and participate in the largest
number of Part D plan long-term care networks. To maintain convenient
access and minimize out-of-pocket expenses, Part D plan enrollees would
obtain Part D benefits from the eligible long-term care pharmacy
selected by the facility. The SEP and OEPI available to
institutionalized beneficiaries, which will provide beneficiaries with
the ability to change Part D plans to the extent that their current
Part D plan does not include their facility's long-term care pharmacy
in its network, will further incentivize long-term care pharmacies to
participate in as many Part D plan long-term care networks as possible.
    All long-term care pharmacies in a region will have to negotiate
terms and conditions with as many Part D plans as possible or risk
losing this business to

[[Page 4252]]

another more competitive long-term care pharmacy. This competition will
preserve the one-to-one long-term care pharmacy long-term care facility
relationship favored by so many commenters, but will require a
negotiation between the long-term care pharmacy and the Part D plan to
maintain that relationship. Given our rules for access to Part D drugs
for institutionalized Part D enrollees, all Part D products and
services would be removed from existing long-term care pharmacy
contracts because payments for drugs for dual eligible individuals
under Medicaid will become obsolete. This will likely necessitate the
renegotiation of existing long-term care facility/long-term care
pharmacy contracts. Separating the cost of the drug and dispensing fee
from other long-term care pharmacy specialized services (for example,
drug administration) may provide for more appropriate negotiation of
these services and costs between long-term care facilities and
pharmacies. We note that Part D plan payments under medication therapy
management programs, described in further detail elsewhere in this
preamble, may represent an additional revenue stream to long-term care
pharmacy services for some of the special services provided by these
pharmacies but not reimbursed through dispensing fees.
    We believe that our long-term care pharmacy access rules will align
incentives to accomplish several goals, including ensuring that long-
term care pharmacies come to the table in good faith; negotiation of
more competitive pricing than currently exists in the long-term care
pharmacy market; and allowing for the one long-term care facility-one
long-term care pharmacy relationship to remain intact, to the extent
that long-term care facilities would like to keep it that way.
    Comment: Two commenters favored the carve-out of beneficiaries in
long-term care facilities through the establishment of a separate PDP
region in which plans could bid, at risk, to serve this population.
    Response: We understand that, given the institutionalized
population's special needs, a carve-out of this population may seem
logical. However, given the risk associated with institutionalized
beneficiaries, we believe that carving out such a high-risk population
would result in significant adverse selection and could result in
unsustainable beneficiary premiums for the institutionalized
population. In addition, our research related to risk adjustment is
still in progress, and until that research is completed, we cannot be
certain as to whether our risk adjustment model could adequately
mitigate the risk inherent in this population under the highly unique
circumstances of a plan serving only a carved-out institutionalized
population. Consequently, particularly in the first few years after the
implementation of the Part D program, we wonder whether potential Part
D sponsors would be willing to serve a carved-out institutionalized
population and therefore ensure access to Part D drugs for Part D
enrollees residing in long-term care facilities. We are also concerned
that beneficiaries entering and leaving long-term care facilities will
be forced to change Part D plans to the extent that institutionalized
beneficiaries are carved out into a separate PDP region. For these
reasons, we will not create a separate PDP region for institutionalized
beneficiaries and, as discussed above, will ensure convenient access to
covered Part D drug in long-term care facilities as provided in Sec.
423.120(a)(5) of our final rule.
    Comment: We requested comments regarding whether we should use our
authority under section 1860D-4(b)(1)(C)(iv) of the Act to require-or,
instead, strongly encourage-that Part D sponsors approach any I/T/U
pharmacies in their Part D plan service areas with at least the same
terms available under the plan's standard pharmacy contracting terms
and conditions.
    Some commenters believe that we must use our authority under
section 1860D-4(b)(1)(iv) of the Act to require Part D plans to
contract with I/T/U pharmacies because, without this requirement,
private plans will have little or no financial incentive to contract
given the uniqueness of both the AI/AN population and I/T/U pharmacies.
Simply encouraging contracts will not work because of the uniqueness
and remoteness of I/T/U facilities and the perceived cost and time to
contract with these pharmacies. These commenters urge us to require, in
regulation, that Part D plans contract with I/T/U pharmacies using
specific contract provisions. They urge us to consider one of several
approaches to ensuring that I/T/U pharmacies experience no reduction in
revenue as a result of the transition from Medicaid to Medicare Part D:
supplemental payments from Part D plans or the Federal government to
supplement the difference between the amount paid by the Part D plan
and the amount the I/T/U pharmacy would have received under Medicaid, a
carve-out of AI/AN enrollees for Part D plans willing to serve only
those beneficiaries through I/T/U pharmacies, and an exemption of dual
eligibles from Part D (with continued prescription drug coverage under
Medicaid).
    Response: There are currently 235 I/T/U pharmacies serving 107,000
senior and disabled AI/ANs in 27 States. In some areas, I/T/U
pharmacies may be the only facilities capable of providing medication
therapy management services to certain AI/AN beneficiaries due to
language and cultural barriers. It is our understanding that I/T/U
pharmacies are not currently well integrated in commercial pharmacy
networks. We agree with the commenters who believe that--in the absence
of a contracting requirement--Part D plans may make assumptions
regarding the administrative costs (whether real or perceived) of
contracting with I/T/U pharmacies and may not actively solicit the
inclusion of these pharmacies in their networks. The lack of I/T/U
pharmacies in Part D plan networks would render enrollment in Part D of
little use to AI/AN beneficiaries who rely primarily on I/T/U
facilities for their health care. For this reason, we have added a
provision to our final regulations, at Sec.  423.120(a)(6), requiring
that Part D plans offer contracts to all I/T/U pharmacies in their
service areas.
    However, we recognize that contracting with I/T/U pharmacies is
potentially more complex than contracting with retail pharmacies given
that there are a number of provisions in the standard contracts of
commercial health plans that would likely need to be modified or
deleted given statutory or regulatory restrictions to which I/T/U
pharmacies are subject, as well as the particular circumstances of I/T/
U pharmacies (for example, I/T/U pharmacies purchase drugs off the
Federal Supply Schedule (FSS) or through the 340B program; can only
serve AI/ANs; may have less experience than retail pharmacies, or none
at all, with point-of-sale technology; are not typically well
integrated into commercial pharmacy networks; generally stock a more
limited range of drugs than would be required under a Part D formulary;
and always waive co-pays). Thus, standard contracting terms and
conditions will not be sufficient for Part D plans to obtain the
participation of I/T/U pharmacies in their networks. We are therefore
requiring Part D plans to include a special addendum to their standard
contracting terms and conditions in order to account for these
differences. We will work with major stakeholders to develop a model
special addendum that will take the special

[[Page 4253]]

circumstances of I/T/U pharmacies into account. As provided in Sec.
423.120(a)(6) of our final rule, we will require Part D plans to
demonstrate that they have contracts with a sufficient number of I/T/U
pharmacies to ensure convenient access to prescription drugs for AI/AN
enrollees within the service area. We expect to review the
reasonableness of Part D plans' standard contracting terms and
conditions for I/T/U pharmacies.
    While we understand the Indian Health Service's concerns regarding
reductions in revenue resulting from the transition of drug coverage
from Medicaid to Medicare, we clarify that we do not have the statutory
authority to require supplemental payments from Part D plans or the
Federal government to supplement the difference between the amount paid
by the Part D plan and the amount the I/T/U pharmacy would have
received under Medicaid; a carve-out of AI/AN enrollees for Part D
plans willing to serve only those beneficiaries through I/T/U
pharmacies; or an exemption of dual eligibles from Part D (with
continued prescription drug coverage under Medicaid). As we develop the
model special addendum for I/T/U contracts, we will consider how,
within our statutory authority, we might ensure that I/T/U pharmacies
do not experience significant revenue losses as a result of the
transitioning of drug coverage from Medicaid to Part D for dual
eligible AI/ANs.
    Comment: Several commenters noted that many small I/T/U pharmacies
and dispensaries carry a limited stock of drugs, and that an exemption
from formulary requirements (and the ability to use permissible
substitutes) is necessary in order to accommodate the fact. In
addition, these commenters note that another factor in whether I/T/U
pharmacies will stock a particular drug is whether it is available from
the Federal Supply Schedule or 340B program, which are the principal
sources of drugs purchased by I/T/U pharmacies. Thus, a Part D plan may
choose one particular cholesterol-lowering agent on its formulary
because it is able to negotiate a greater discount for that particular
Part D drug. However, I/T/U pharmacies may be able to access a
different medication for a similar, or perhaps lower, price and
therefore include that drug on its formulary.
    Response: We are aware that most Tribes and Tribal Organizations
(operating under health programs pursuant to contracts under the Indian
Self-Determination Education and Assistance Act, Public Law 93-638) and
all IHS facilities use the Department of Veterans Affairs
Pharmaceutical Prime Vendor (PPV) for purchasing their pharmaceuticals.
By ordering through the PPV, IHS and Tribes (but not Urban programs)
are able to access FSS Contract, National Standardization Contract, and
Blanket Purchasing Agreement pricing for pharmaceuticals. In addition
to FSS pricing, Tribes and Urban programs that have been designated as
Federally Qualified Health Centers (FQHCs) and have been approved by
the Health Resources and Services Administration (HRSA) are eligible
for HRSA 340B drug pricing. Since I/T/U facilities have access to
different pricing than commercial health plans, their formulary
selections reflect the drugs for which this pricing is available. As
previously mentioned, we are requiring Part D plans to include a
special addendum to their standard contracting terms and conditions in
order to account for the differences between retail and I/T/U
pharmacies and therefore facilitate contracting with these pharmacies.
We will work with major stakeholders to develop a model special
addendum that will take the special circumstances of I/T/U pharmacies
into account, including the limited stocking of drugs at these
facilities.
    Comment: Several commenters said that the any willing pharmacy rule
should apply to mail order as well as retail pharmacies, and that Part
D plans should not be able to exclusively use a plan-owned mail order
facility.
    Response: We agree that the any willing pharmacy requirement at
section 1860D-4(b)(1)(A) of the Act applies to all pharmacies--
including non-retail pharmacies such as mail-order pharmacies--
notwithstanding a Part D plan's ability to designate certain of its
network pharmacies as preferred pharmacies with lower cost-sharing, or
to negotiate terms better than those in its standard terms and
conditions with certain pharmacies. We clarify that a Part D plan could
have standard terms and conditions for retail pharmacies and a second,
separate set of standard terms and conditions for mail order pharmacies
in light of those pharmacies' different characteristics. For example, a
plan's contracting terms and conditions for mail-order pharmacies could
reflect the full cost of adding another mail-order vendor, as well as
the differential costs of strong data controls involved with having
multiple network mail-order pharmacies.
    Comment: One commenter said it was not clear how the any willing
pharmacy rule applies to facilities that are owned and operated by a
Part D plan. The commenter said such plans should be permitted to
maintain a limited network of contract pharmacies for purposes of
meeting the access standard in order to maximize cost savings.
    Response: We agree with this commenter that the any willing
pharmacy requirement makes little sense in the context of Part D plans
that own and operate their own pharmacies particularly since the
pharmacy access rules in Sec.  423.120(a)(1) of our final rule will be
waived for MA-PD plans and cost plans that can demonstrate comparable
pharmacy access under Sec.  422.112. As provided in Sec.  423.458(b) of
our final rule, we may waive any Part D provision as applied to an MA-
PD plan if it duplicates, or is in conflict with, provisions otherwise
applicable to the MA organization or MA-PD plan under Part C of
Medicare, or if waiver of a Part D provision is necessary in order to
improve coordination of benefits under Part D with those offered under
Part C. Similarly, Sec.  423.458(d) provides that we may waive any Part
D provision as applied to a cost plan if it duplicates, or is in
conflict with, provisions otherwise applicable to the cost plan under
section 1876 of the Act, or if waiver of a Part D provision is
necessary in order to improve coordination of benefits under Part D
with those offered by the cost plans. We will consider waiving this
requirement for Part D plans that own and operate their own pharmacies
to the extent that they request such waiver as provided in Sec.
423.458(b)(2) and Sec.  423.458(d) of our final rule.
    Comment: We sought comment on whether, in order to guarantee that
any pharmacy willing to meet a Part D sponsor's contracting terms and
conditions could participate in a Part D plan's pharmacy network, we
should require that a Part D sponsor make available to all pharmacies a
standard contract for participation in their Part D plans' networks.
    A number of commenters thought that Part D plans should be required
to have a standard or model contract for use with all pharmacies. Other
comments said that we should not require a standard contract.
Alternatively, several commenters said that even with a standard
contract, Part D plans should have maximum flexibility to vary their
contracting terms and conditions in order to reflect local conditions.
Some questioned whether we should try to evaluate whether pharmacy
contract terms are ``reasonable and relevant,'' as proposed in subpart
K of our proposed rule.
    Response: We concur with the majority of commenters on this issue
and will require, under Sec.  423.505(b)(18) of our final rule that
Part D plans offer pharmacies reasonable and relevant

[[Page 4254]]

standard terms and conditions for network participation. We do not
intend to define ``reasonable and relevant'' in order to provide Part D
plans with maximum flexibility to structure their standard terms and
conditions.
    However, it is unreasonable to assume--the any willing pharmacist
requirement notwithstanding--that a Part D plan could establish a
network using a uniform set of terms and conditions throughout a
service area because it will likely need to modify contracting terms
and conditions to ensure access to certain pharmacies (for example,
rural and long-term care pharmacies). We clarify that standard terms
and conditions particularly for payment terms may vary to accommodate
geographic areas or types of pharmacies) and that this is acceptable,
provided that all similarly situated pharmacies are offered the same
standard terms and conditions. Thus, for example, provided Part D plans
offer all mail-order pharmacies in a particular area with the same
standard terms and conditions, they may offer separate standard terms
and conditions to mail-order pharmacies. With standard terms and
conditions as a ``floor'' of minimum requirements that all similarly
situated pharmacies must abide by, Part D plans may modify some of
their standard terms and conditions to encourage participation by
particular pharmacies.
    Comment: Many commenters disagreed with our interpretation of the
``any willing pharmacy'' provision, specifically with allowing Part D
plans to construct networks of preferred and non-preferred pharmacies
that have different requirements for beneficiary cost sharing. These
commenters argued that allowing preferred networks undermines the any
willing pharmacy rule and runs counter to Congressional intent. Many
said that allowing Part D plans to steer beneficiaries to preferred
pharmacies would impede pharmacy access and disrupt existing
relationships between pharmacists and patients. Some argued that our
interpretation would disadvantage small, independent, and rural
pharmacies. Others said that a designation of ``non-preferred'' would
carry a negative connotation about the pharmacy's quality of service.
    Several other commenters concurred with the any willing pharmacy
policy in our proposed rule. One commenter said that State any willing
pharmacy laws should be expressly preempted, while another commenter
said we should clarify that State any willing provider laws continue to
apply to Part D plans' non-Medicare business. One commenter asked us to
clarify the extent to which we will allow Part D plans to vary their
cost sharing for preferred networks.
    Response: We believe that we have correctly interpreted the two
related provisions in sections 1860D-4(b)(1)(A) and (B) of the Act,
which require Part D plans to allow any willing pharmacy to participate
in their pharmacy networks, while also allowing Part D plans to reduce
cost-sharing differentially for network pharmacies. General principles
of statutory interpretation require us to reconcile two seemingly
conflicting statutory provisions whenever possible, rather than
allowing one provision to effectively nullify the other provision.
Consequently, when a statutory provision may reasonably be interpreted
in two ways, we have an obligation to adopt the interpretation that
gives full effect to competing provisions of the statute. We believe
that our policy of permitting cost-sharing discounts for preferred
pharmacies, as codified in Sec.  423.120(a)(9), strikes an appropriate
balance between the need for broad pharmacy access and the need for
Part D plans to have appropriate contracting tools to lower costs.
    We note, however, that while these within network distinctions are
allowed, the statute also requires that such tiered cost-sharing
arrangements in no way increase our payments to Part D sponsors.
Therefore, tiered cost-sharing arrangements based on within-network
distinctions could be included in Part D plans' benefits subject to the
same actuarial tests that apply to formulary-based tiered cost-sharing
structures. Thus, a reduction in cost sharing for preferred pharmacies
in a Part D plan network could be offered through higher cost sharing
for non-preferred pharmacies (or as alternative prescription drug
coverage). We also note that differential cost-sharing in the context
of preferred and non-preferred pharmacies does not raise the cost-
sharing obligation of low-income subsidy eligible enrollees above the
levels specified in sections 1860D-14(a)(1) and (2) of the Act.
    We recognize the possibility that Part D plans could effectively
limit access in portions of their service areas by using the
flexibility provided in Sec.  423.120(a)(9) of our final rule to create
a within-network subset of preferred pharmacies. In other words, in
designing its network, a Part D plan could establish a differential
between cost-sharing at preferred versus non-preferred pharmacies--
while still meeting the access standards in Sec.  423.120(a)(1) of our
proposed rule--that is so significant as to discourage enrollees in
certain areas (rural areas or inner cities, for example) from enrolling
in that Part D plan. We emphasize that such a network design has the
potential to substantially discourage enrollment by certain Part D
enrollees, and that we have the authority under section 1860D-
11(e)(2)(D) of the Act to disallow benefit designs that are
discriminatory. We clarify that State any willing pharmacist laws would
be preempted as applicable to plans' Part D business. This is
consistent with section 1860D-12(g) of the Act, which extends the State
preemption provisions under section 1856(b)(3) of the Act to Part D
plans.
    Comment: Several commenters thought that Part D plans should only
be allowed to have differential cost sharing for preferred pharmacies
if they exceed the TRICARE access standard.
    Response: We see no statutory basis for such a rule. Moreover, it
would be difficult to construct and operationalize such a policy.
    Comment: Several commenters wrote that special needs enrollees
should be exempted from higher cost sharing at non-preferred
pharmacies.
    Response: We see no statutory basis for such a rule, and we believe
that Part D plans will provide sufficient access for all Part D
enrollees under our access standards in Sec.  423.120(a)(1). As noted
in our proposed rule, we will use the authority provided under section
1860D-11(e)(2)(D) of the Act to review, as part of the bid negotiation
process, how Part D plan networks make preferred and non-preferred
distinctions among their network pharmacies and disallow them if such
proposed network designs would substantially discourage enrollment by
certain beneficiaries in any part of a Part D plan's service area. We
believe that special needs enrollees will be sufficiently protected by
this review. To the extent that special needs enrollees are also
eligible for low-income subsidies, as indicated above, differential
cost-sharing based on preferred pharmacy status does not raise the
cost-sharing obligation of low-income subsidy eligible enrollees above
the levels specified in the Act.
    Comment: Several commenters suggested that the TRICARE access
standards be applied to Part D plans' ``preferred'' networks rather
than its general network. Several other commenters concurred with the
regulation as drafted in the proposed rule.
    Response: Section 1860D-4(b)(1)(B) of the Act clarifies that a Part
D sponsor has the option of reducing cost-sharing for covered Part D
drugs dispensed through network pharmacies below the level that would
have otherwise applied. Because the statute provides

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that such distinctions can be made within a network, we do not believe
that only preferred pharmacies constitute a Part D plan's network for
the purposes of meeting the access standards in Sec.  423.120(a)(1) of
our final rule. Rather, both preferred and non-preferred pharmacies
form part of a Part D plan network, and plans may count both of these
types of network pharmacies toward their access standards.
    Comment: Several commenters recommended that beneficiaries be able
to get an extended supply of drugs, greater than a 30-day supply, from
network retail pharmacies and mail-order pharmacies.
    Response: We clarify that section 1860D-4(b)(1)(D) of the Act, and
Sec.  423.120(a)(10) of our final rule, require Part D plans to permit
enrollees to receive extended supplies (for example, 90-day supplies)
of covered Part D drugs through a network retail pharmacy.
    Comment: Some commenters noted that our proposed regulations would
unfairly allow Part D plans to charge beneficiaries more when they
obtain their prescriptions at a community pharmacy than when they use
mail order. One commenter notes that seniors benefit from face-to-face
interaction with a pharmacist more than other age groups, which would
be precluded under mail order and would limit enrollees' ability to use
the pharmacy and pharmacist of their choice.
    Many commenters recommended that we specifically prohibit Part D
plans from using economic incentives for beneficiaries to use mail
order that could create significant differences in cost sharing for
mail order versus retail pharmacy prescription, or that plans make such
difference minimal. One commenter recommended that Part D plans use the
same average wholesale price (AWP) basis to determine the reimbursement
rate for mail order and retail pharmacies. Another commenter noted that
there is substantial evidence that seniors, particularly low-income
seniors, are victims of theft from their mailboxes, undermining the
financial incentive of mail order. This commenter recommended that we
allow beneficiaries to pay the mail order price at a retail pharmacy
when they can demonstrate their mailbox is not secure.
    Response: As provided in section 1860D-11(i) of the Act, we have no
authority to interfere with the negotiations between Part D plans and
pharmacies and therefore cannot mandate that Part D plans negotiate the
same, or similar, reimbursement rates with all pharmacies. Provided
Part D plans offer all pharmacies standard terms and conditions, they
may modify their contracting terms--including payment provisions as
necessary, as long as all similarly situated pharmacies are subject to
the same minimum terms and conditions. Moreover, section 1860D-
4(b)(1)(B) of the Act provides Part D plans with the authority to
designate some network pharmacies, including mail-order pharmacies, as
preferred pharmacies offering plan enrollees lower cost sharing.
    Comment: One commenter noted that MA organizations that own and
operate their own pharmacies usually have internal systems for
providing prescription services by mail that are fully integrated with
the overall pharmacy operation. As a result, it is difficult to provide
an incentive to beneficiaries to use less costly mail services. The
commenter said we should permit these organizations to establish
differential benefit levels for mail delivery as opposed to in-facility
pickup.
    Response: As noted above, Part D plans have the flexibility to
establish different cost-sharing requirements for the pharmacies in
their networks consistent with section 1860D-4(b)(1)(B) of the Act.
Accordingly, Part D plans have the flexibility to establish
differential cost-sharing requirements for mail delivery and in-
facility pickup.
    Comment: One commenter recommended that we require Part D plans to
contract with pharmacies that offer home delivery service, noting that
same-day or next day need for medications makes mail-order an
impracticable option.
    Response: We do not believe there is a compelling rationale to
require Part D plans to contract with pharmacies that offer home
delivery service. As discussed elsewhere in this preamble, we have
defined the term ``dispensing fees'' in Sec.  423.100 of our final rule
to include reasonable pharmacy costs, including delivery costs,
associated with ensuring that possession of the appropriate covered
Part D drug is transferred to a Part D enrollee. We clarify that
reasonable delivery costs include only those costs appropriate for the
typical beneficiary in a particular pharmacy setting. Thus, while it
would be appropriate for Part D plans to reimburse long-term care,
mail-order, and home infusion pharmacies for home delivery costs via
the dispensing fee, this would not be the case for retail pharmacies
(where the term ``delivery'' would be limited to the transfer of a
covered Part D drug from the pharmacist to the patient at the point of
sale) because the typical retail customer does not require home
delivery. While retail pharmacies may offer home delivery services,
Part D plans may not reimburse those pharmacies for these costs, and
the delivery cost must be borne by the beneficiary.
    Comment: Two commenters expressed their support for our
interpretation of the term ``insurance risk'' and asked that we include
in our regulations a statement that the prohibition against the
assumption of risk by Part D plans' network pharmacies not preclude
performance-based measures of activities within the control of a
pharmacy (for example, formulary compliance and generic drug
substitution).
    Response: We clarify that our definition of the term ``insurance
risk'' in Sec.  423.4 of the final rule specifically excludes ``payment
variations designed to reflect performance-based measures of activities
within the control of a pharmacy, such as formulary compliance and
generic drug substitutions.''
b. Formulary Requirements
1. P&T Committee Requirements
    To the extent that a Part D sponsor uses a formulary to provide
qualified prescription drug coverage to Part D enrollees, it will be
required to meet the requirements of section 1860D-4(b)(3)(A) of the
Act to use a pharmaceutical and therapeutic (P&T) committee to develop
and review that formulary.
    The majority of members comprising the P&T committee will be
required to be practicing physicians or practicing pharmacists. In
addition, at least one practicing pharmacist and one practicing
physician member will have to be experts in the care of elderly and
disabled individuals. Section Sec.  423.120(b)(1)(ii) of the proposed
rule also provided that at least one practicing pharmacist and one
practicing physician members on a Part D plan's P&T committee be
independent experts.
    When developing and reviewing the formulary, the P&T committee will
be required, in accordance with section 1860D-4(b)(3)(B) of the Act, to
base clinical decisions on the strength of scientific evidence and
standards of practice, including assessing peer-reviewed medical
literature. Section Sec.  423.120(b)(1)(viii) of our proposed rule
required that any decisions made by the P&T committee regarding
development or revision of a Part D plan's formulary be documented in
writing.
    Except as otherwise provided below, the final rule adopts the
requirements related to P&T committees set forth in Sec.  423.120(b)(1)
of our proposed rule.
    Comment: Many commenters thought that P&T committee decisions
regarding

[[Page 4256]]

a Part D plan's formulary should be binding on a plan. Other commenters
thought that P&T committee recommendations should be advisory, and not
binding. Several others believed that only clinical decisions should be
binding on the Part D plan and that the ultimate responsibility for
overall formulary design should reside with the plan and ultimately
involved business leaders and technical experts. One commenter stated
that it was not likely that a P&T committee comprised of non-employee
clinicians would be able to make coverage determination in the Part D
plan's and enrollees' best interests, particularly since many benefit
design decisions have a financial, as well as a clinical, component.
    Response: We agree with commenters who sought to draw a distinction
between clinical and overall formulary design issues. We believe that
the function of a P&T committee is to provide expertise on clinical
issues, and not financial or benefit design issues. We interpret the
requirement in section 1860D-4(b)(3)(A) of the Act and Sec.
423.120(b)(1) of our final rule that Part D plan formularies be
developed and reviewed by a P&T committee to mean that committee
recommendations regarding which drugs are placed on a plan's formulary
be binding on the Part D plan. Although Sec.  423.120(b)(vi) and
(b)(vii) of our final rule envision a role for the P&T committee in
reviewing policies that guide exceptions and other utilization
management processes including drug utilization review, generic
substitution, quantity limits, and therapeutic interchange and in
evaluating and analyzing treatment protocols and procedures related to
the Part D plan's formulary at least annually, P&T committee
recommendations in these areas should be considered advisory and not
binding. We clarify, for example, that while the P&T committee may be
involved in providing clinical recommendations regarding the placement
of a particular Part D drug on a formulary cost-sharing tier, the
ultimate decision on such formulary design issues is the Part D plan's,
and that decision weighs both clinical and non-clinical factors. Thus,
a P&T committee's role in formulary cost-sharing tiers, while
important, would be advisory and not binding.
    Comment: Many commenters recommended that we strengthen the
statutory requirement in section 1860D-4(b)(3)(A)(ii) of the Act and
require that more than just one practicing physician and one practicing
pharmacist are independent and free of conflict. Suggestions for new
requirements included that all, a majority, two-thirds, one-half, 40
percent, and at least four (at least two practicing physicians and two
practicing pharmacists) members of a Part D plan's P&T committee be
independent and free of conflict in order to ensure that formulary
development is in line with beneficiary and not plan or pharmaceutical
manufacturer interests. One commenter supported our current requirement
requiring that at least one practicing physician and one practicing
pharmacist on the committee be independent and free of conflict
    Response: We appreciate commenters' suggestions and agree that
maintaining the impartiality and objectivity of P&T committee members
is an important goal. We have retained the proposed rule requirement
that at least one practicing pharmacist and one practicing physician on
the P&T committee be independent and free of conflict--in Sec.
423.120(b)(1)(ii) of our final rule, though Part D plans should view
this requirement as a floor which we encourage them to exceed. To
balance concerns about conflicts of interest with regard to P&T
committee members, and as proposed in the draft benefit design review
criteria we recently issued for public comment, we would require all
P&T committee members to sign a conflict of interest statement
revealing economic or other relationships with entities that could
influence pharmaceutical decisions, and to disclose such conflicts to
other committee members. If P&T committee discussions center around a
drug that presents a conflict of interest issue for a particular
committee member, he or she would recuse himself or herself from any
discussions or votes associated with that drug. We believe this
requirement is necessary to ensure that the P&T committee's clinical
decisions regarding development and review of the formulary are based
on the strength of scientific evidence and standards of practice,
safety and efficacy considerations, and other such appropriate
information and considerations in accordance with section 1860D-
4(b)(3)(B) of the Act. In addition, this requirement is consistent with
best practices in pharmacy benefit management, and we expect that Part
D plans will implement disclosure of conflicts and recusal procedures
consistent with standard industry practice.
    Comment: Many commenters requested clarification regarding our
definition of the term ``independent and free of conflict'' with
respect to a Part D sponsor and a Part D plan. Several commenters asked
to clarify that our regulations regarding independence and freedom from
conflict not preclude individuals from serving on a P&T committee
simply because they are members of a Part D plan's provider network.
    Response: In our proposed rule, we interpreted the language at
section 1860D-4(b)(3)(A)(ii) of the Act requiring certain members of
the P&T committee to be ``independent and free of conflict'' to mean
that such P&T committee members could have no stake, financial or
otherwise, in formulary determinations. We believe this interpretation
is still appropriate, but clarify that we believe a P&T committee
member not to be free of conflict of interest if he or she has any
direct or indirect financial interest in any entity--including Part D
plans and pharmaceutical manufacturers--that would benefit from
decisions regarding plan formularies.
    Thus, Part D plan network providers may be considered to be
independent and free of conflict, provided they are not plan employees
or contract workers and do not otherwise have any conflicts of
interests that would compromise their independence. In cases of staff
model HMOs, panel providers may be determined to be independent and
free of conflict to the extent that any remuneration received from a
Part D plan is limited to his or her clinical responsibilities for the
care of plan enrollees.
    Comment: In our proposed rule, we interpreted the language at
section 1860D-4(b)(3)(A)(ii) of the Act requiring certain members of
the P&T committee to be ``independent and free of conflict'' to mean
that such P&T committee members would be required to be independent and
free of conflict not only with respect to a Part D sponsor and its Part
D plan, but also for pharmaceutical manufacturers. Some commenters
supported such a requirement. A few commenters opposed such a
requirement, however, claiming that our interpretation imposes a more
stringent requirement than is permitted under the MMA. A number of
other commenters cautioned us that our interpretation could exclude a
significant number of individuals who are engaged in pharmaceutical and
clinical research funded by pharmaceutical manufacturers.
    Response: Section 1860D-4(b)(3)(A)(ii)(I) of the Act requires that
at least one practicing physician and at least one practicing
pharmacist on a Part D plan's P&T committee be independent and free of
conflict only with respect to a Part D sponsor and its Part D plan.
However, given the requirement in section 1860D-4(b)(3)(B) of the Act
that

[[Page 4257]]

the P&T committee base clinical decisions on the strength of scientific
evidence and standards of practice, and taking into account therapeutic
advantages in terms of safety and efficacy, we believe it is necessary
for those committee members who are ``independent and free of
conflict'' to be so with respect to pharmaceutical manufacturers as
well. We agree that P&T committee members could have certain non-
employee relationships with pharmaceutical manufacturers (for example,
consulting, advisory, or research relationships) and still be
considered independent and free of conflict, provided those
relationships do not constitute significant sources of their income and
they do not otherwise have any conflicts of interests that would
compromise their independence. As already mentioned, our draft benefit
review criteria (recently issued for public comment) would require all
P&T committee members to sign a conflict of interest statement
revealing economic or other relationships with entities that could
influence pharmaceutical decisions. This requirement is consistent with
best practices in pharmacy benefit management, and we expect that it
will be met consistent with industry standards for conflict of interest
disclosures.
    Comment: Several commenters supported requiring that a plurality of
P&T committee members be experts in the care of elderly and disabled
patients. Some commenters recommended that use of the certified
geriatric pharmacist credential would be an appropriate way to ensure
that at least one pharmacist on the P&T committee has expertise in care
of the elderly. One commenter opposed requiring that at least one
practicing physician and one practicing pharmacist be experts in the
care of elderly and disabled patients. Another commenter thought that
at least one member of Part D plans' P&T committees should be a State
Medicaid representative.
    Response: As provided in Sec.  423.120(b)(1)(iii) of our final
rule, we are retaining the requirement that at least one practicing
physician and one practicing pharmacist on a P&T committee have
expertise in the care of elderly or disabled persons, though plans
should view this requirement as a floor which they can certainly
exceed. As proposed in the draft benefit design review criteria we
recently issued for public comment, we would require P&T committee
members to represent various clinical specialties. This requirement is
consistent with best practices in pharmacy benefit management and will
ensure that appropriate expertise--including in the areas of care of
disabled and elderly populations--is included on Part D plans' P&T
committees and that their clinical decisions are based on the strength
of scientific evidence and standards of practice, and safety and
efficacy considerations. We expect that P&T committee members will
represent a mix of clinical specialties in order to ensure that P&T
committees have the breadth of expertise necessary to adequately
evaluate scientific evidence, standards of practice, and other
information.
    Comment: A number of commenters suggested that we should require
that P&T committees include experts in certain clinical specialties
(for example, nephrology, oncology, rheumatology, dermatology, mental
health, long-term care, and many others) or, at the very least, that
such experts serve as consultants to P&T committees.
    Response: We agree that P&T committee members should represent
various clinical specialties in order to provide the depth of expertise
needed to develop an adequate formulary and utilization management
processes for the Medicare population. As proposed in the draft benefit
design review criteria we recently issued for public comment, we would
require P&T committee members to represent various clinical
specialties. This requirement is consistent with best practices in
pharmacy benefit management. In addition, we note that, since committee
members must base clinical decisions on the strength of scientific
evidence and standards of practice, it is not essential that every
specialty be represented--either as a P&T committee member or as a
consultant. For some issues, the use of peer-reviewed medical
literature--including randomized clinical trials, pharmacoeconomic
studies, outcomes research data, and other such information--may be
sufficient.
    Comment: We received a number of comments regarding our
requirements for the basis of clinical decisions by Part D plan P&T
committees. One commenter supported our characterization of the
appropriate role of quality and cost considerations in Part D plan
formulary development. Some commenters emphasized that cost
considerations should be secondary to clinical issues in formulary
development and review. One commenter suggested segregating cost and
clinical reviews to preserve objectivity. Several commenters
specifically suggested that we require Part D plan P&T committees to
use classes of data that are included in the Academy of Managed Care
Pharmacy (AMCP) format for Formulary Submissions--including clinical
trials, health outcomes studies, and economic and budget impact
models--as well as clinical guidelines issued by medical specialty
societies. Several other commenters encouraged us to require Part D
plans to consider data addressing total health care costs, if
available, rather than pharmacy costs, in any cost considerations used
for clinical decision-making.
    Response: As required in section 1860D-4(b)(3)(B) of the Act, P&T
committees will be required to base clinical decisions on the strength
of scientific evidence and standards of practice, including assessing
peer-reviewed medical literature (for example, randomized clinical
trials, pharmacoeconomic studies, outcomes research data, and other
such information as the committee determines appropriate). In addition,
a P&T committee must take into account whether including a particular
Part D drug on the Part D plan's formulary (or on a particular
formulary tier) has any therapeutic advantages in terms of safety and
efficacy. Where applicable, therapeutic advantage should be considered
in relation to the interaction of a drug therapy regimen and the use of
other health care services.
    We agree with commenters who urged that Part D plans consider data
addressing total health care costs, if available, rather than pharmacy
costs, in any cost considerations used for clinical decision-making.
Since Part D sponsors have discretion with regard to the actual
information their P&T committees use, we cannot mandate that all Part D
plans use pharmacoeconomic studies, for example. However, in our
subsequent guidance we intend to make clear that to the extent that the
Part D plan considers costs in making its decision, it will take into
account total health care costs rather than just drug costs. For
example, to the extent that a particular drug has been shown to be more
effective in preventing the need for hospital care or better at
controlling acute flare-ups requiring the use of other services, we
expect P&T committees to take these things into account in their
determinations of drug efficacy. Given these requirements for evidence-
based decision-making, it is our expectation that committee members
will balance any relevant cost considerations with clinical
considerations.
    Comment: Some commenters supported a role for P&T committees in
designing formulary tiers and any other clinical program implemented to
encourage the use of preferred drugs. One commenter supported such a
role,

[[Page 4258]]

provided that P&T committees are not required to be engaged in other
benefit design issues.
    However, several commenters believed that P&T committees should
have no involvement in the development of utilization management
programs including development of cost-containment tools, medication
therapy management programs, and quality assurance programs, as well as
more specific benefit design issues such as the development of cost-
sharing tiers and should instead be limited to providing Part D plans
with clinical recommendations on formularies. Other commenters thought
that we should provide Part D plans with flexibility to determine how
utilization management programs are designed and administered.
    Response: We believe that the requirement in section 1860D-3(c)(1)
of the Act that Part D sponsors establish an appropriate cost-effective
drug utilization management program supports a role for P&T committees
in the development of formulary management practices and policies--
including prior authorization, step therapy, generic substitution,
quantity limits, and other drug utilization management activities that
affect access to covered Part D drugs. Furthermore, section 1860D-
4(b)(3)(F) of the Act and Sec.  423.120(b)(1)(vii) of our final rule
require Part D plans to periodically evaluate and analyze treatment
protocols and procedures. Clinical input is critical in the development
of these policies in order to ensure that formulary management
decisions balance economic and clinical factors to achieve appropriate,
safe, and cost-effective policies. The review by P&T committees of Part
D plan policies that guide exceptions and other utilization management
processes is not only an important component in ensuring that plans
adopt appropriate utilization management activities consistent with the
statutory requirements, but also is consistent with best practices in
pharmacy management policy. However, as previously stated, we believe
that the primary function of a P&T committee is to provide clinical and
not financial or benefit design--expertise.
    Comment: Some commenters suggested that P&T committees review
formularies regularly, with some suggesting a quarterly review and
others an annual review
    Response: As proposed in the draft benefit design review criteria
we recently issued for public comment, we expect that P&T committees
will meet on a regular basis, but not less frequently than on a
quarterly basis. This standard is consistent with best practices in
pharmacy management policy.
    Comment: One commenter urged us to specify minimum timeframes for
periodic evaluation of Part D plan treatment protocols and formulary-
related procedures under Sec.  423.120(b)(4) of our proposed rule. A
number of commenters recommended that protocol reviews be conducted on
an ongoing basis at least quarterly, whereas some specified that such
reviews be conducted at least annually.
    Response: As specified in Sec.  423.120(b)(1)(vii) of our final
rule, Part D plan P&T committees will be required to evaluate and
analyze treatment protocols and procedures related to the plan's
formulary at least annually.
    Comment: A number of commenters also asked us to require that P&T
committees have processes for making formulary revisions between
regularly scheduled meetings when new clinical information becomes
available or the FDA approves new medications.
    Response: As proposed in the draft benefit design review criteria
we recently issued for public comment, we expect that P&T committees
will review new Part D drugs, or drugs for which new clinical
information is made available by the Food and Drug Administration,
within 90 days of the availability of new information. This will allow
for appropriate formulary changes to be made with all due speed and
ensure that a Part D plan's formulary is based on the most recently
available scientific evidence, standards of practice, and drugs'
relative therapeutic advantages in terms of safety and efficacy.
However, we expect that drugs pulled from the market by the FDA or
manufacturers will be removed from Part D plan formularies immediately.
    Comment: Many commenters suggested additional requirements for
ensuring P&T committee accountability, including requiring Part D plans
to have a P&T committee regardless of whether they have a formulary or
not; including a patient advocate on the committee to represent
interests of patients; developing an oversight mechanism similar to
local Medicare carrier advisory committees; requiring P&T committee
meetings to be held publicly in order for consumers and stakeholders to
have an opportunity to hear committee deliberations; requiring Part D
plans to include a charge ensuring that the interests of beneficiaries
are protected by their benefit design decisions; requiring thorough
documentation of the rationale for P&T committee decisions; and
requiring P&T committee decisions to be issued to the public upon
request within a reasonable period of time.
    Response: These requirements are not consistent with standard
practice in pharmacy benefit management. We believe that our
requirements in Sec.  423.120(b)(1) of the final rule, as well as our
formulary review which will consider the structure and utilization of
an organizations P&T committee will sufficiently ensure that P&T
committees function as a forum for evidence-based formulary review. As
an added safeguard, and as provided in Sec.  423.120(b)(1)(viii) of our
final rule, we will require Part D plan P&T committees to document in
writing the basis of their decisions regarding formulary development
and revision and utilization management activities.
2. Plan Formularies
    As provided under section 1860D-4(b)(3)(C)(ii) of the Act, we
requested that the U.S. Pharmacopoeia (USP) develop a model set of
guidelines that consists of a list of drug categories and classes that
may be used by Part D sponsors to develop formularies for their
qualified prescription drug coverage, including their therapeutic
categories and classes. For more information about the USP model
guidelines and the model guidelines themselves, please consult http://www.usp.org/drugInformation/mmg/
.

    Section 1860D-4(b)(3)(C) of the Act provides, and Sec.
423.120(b)(2) of our proposed rule required, the inclusion of drugs in
each therapeutic category and class of Part D drugs in a Part D plan's
formulary, although not necessarily all drugs within such categories
and classes. As discussed in the proposed rule, we interpreted this
provision to require coverage of at least two Part D drugs within each
therapeutic category and class of Part D drugs, unless only one Part D
drug existed in a particular therapeutic category and class of Part D
drugs.
    We sought comments on ways to balance Part D plans' flexibility to
use utilization management mechanisms to maximize covered Part D drug
discounts and lower enrollee premiums with the needs of certain special
populations of Part D enrollees, including Part D enrollees residing in
long-term care facilities.
    In accordance with section 1860D-4(b)(3)(C)(iii) of the Act, Part D
sponsors cannot change therapeutic categories and classes in a
formulary other than at the beginning of a Part D plan year, except as
we would permit to take into account new therapeutic uses and

[[Page 4259]]

newly approved Part D drugs. Section 423.120(b)(4) of our proposed rule
specified that, in accordance with section 1860D-4(b)(3)(F) of the Act,
Part D sponsors will periodically be required to evaluate and analyze
treatment protocols and procedures related to their formularies to
ensure that their Part D plan members were receiving the best possible
care for conditions related to their use of covered Part D drugs.
    In addition, section 1860D-4(b)(3)(E) of the Act requires that Part
D sponsors provide ``appropriate notice'' to us, affected enrollees,
authorized prescribers, pharmacists, and pharmacies regarding any
decision to either: (1) remove a drug from its formulary; or (2) make
any change in the preferred or tiered cost-sharing status of a drug.
Section 423.120(b)(5) of our proposed rule implemented this requirement
by defining appropriate notice as at least 30 days prior to such change
taking effect during a given contract year.
    As provided under Sec.  423.120(b)(6) of our proposed rule, we
proposed that Part D sponsors be prohibited from removing a covered
Part D drug or from changing the preferred or tiered cost-sharing
status of a covered Part D drug between the beginning of the annual
coordinated election period described in Sec.  423.38(b) and 30 days
subsequent to the beginning of the contract year associated with that
annual coordinated election period.
    Each Part D sponsor will also be required to establish policies and
procedures to educate and inform health care providers and enrollees
about its formulary, according to the provisions of section 1860D-
4(b)(3)(D) of the Act. As required under section 1860D-4(b)(3) of the
Act, the requirements regarding the development and application of
formularies discussed in this preamble section may be met by a Part D
sponsor directly, or through contracts or other arrangements between a
Part D sponsor and another entity or entities.
    Except as otherwise provided below, the final rule adopts the rules
for Part D plan formularies set forth in Sec.  423.120(b) of the
proposed rule.
    Comment: We received a significant number of comments that directly
and indirectly relate to the USP draft model guidelines issued for
public comment in August 2004. In general, the USP related comments can
be grouped into two categories. On one side, many comments claim that
the current draft model guidelines lack the necessary detail to ensure
that beneficiaries will have access to a comprehensive drug benefit,
often citing specific examples of medications that are necessary for
the treatment of the most frail and vulnerable populations and could be
excluded from Part D plan formularies that comply with the model
guidelines.
    On the other hand, many comments recommended that the USP model
guidelines allow Part D plans the flexibility they need to develop
clinically sound formularies that offer a prescription drug benefit at
the lowest possible cost. Most of these commenters believe that the
draft model guidelines, while in need of some specific modifications,
are closer to reasonable than unreasonable. However, these commenters
claim that the minimum ``drugs'' requirements for each category and
class could significantly increase benefit costs if the categories and
classes increase to a level of detail that interferes with Part D
plans' ability to negotiate with manufacturers.
    Response: We believe that the USP model guidelines identify a
reasonable number of categories and classes that balance the need for a
comprehensive Part D benefit with the need to allow Part D plans
flexibility to develop their own formularies and manage costs. These
model guidelines will provide us with a useful, standard format as a
starting point for our review of Part D plan benefit packages, since we
expect many plans will adopt the model guidelines as the basis for
their formulary classifications and submissions.
    The model guidelines, while important in creating a template for a
formulary classification system, are not the only determinant of an
adequate formulary. Plans will be required to include the types of
drugs most commonly needed by Part D enrollees, as recognized in
national treatment guidelines, in their formularies. Regardless of
whether a Part D plan chooses to use the model guidelines or not, we
will review the drugs chosen to populate plan formularies under our
authority in section 1860D-11(e)(2)(D) of the Act to ensure that plan
benefit design does not discourage enrollment by certain classes of
Part D eligible individuals. However, formulary structure--including
tiered cost-sharing structures -utilization management processes, P&T
committee utilization and structure, and exceptions and appeals
processes are just as important in ensuring a comprehensive benefit,
and we intend to review these benefit design features as part of our
comprehensive benefit package review. We discuss our benefit design
review criteria in greater detail elsewhere in this preamble.
    Comment: Several commenters disagreed with our interpretation of
the statutory term ``drugs'' as requiring coverage of at least two Part
D drugs within each therapeutic category and class of Part D drugs
(unless only one Part D drug existed in a particular therapeutic
category and class of Part D drugs), arguing that such an
interpretation was too expansive, and requiring coverage of too many
drugs in too many categories would diminish Part D plans' negotiating
leverage. These commenters provided examples of drug categories for
which a blanket requirement of two drugs is not appropriate, and an
exception should be granted. One commenter recommended that we should
allow an exception from this rule for categories and classes that only
include two drugs, and allow enrollees to obtain the non-formulary drug
in such categories via the exceptions process only.
    In contrast, several commenters believed that requiring Part D
plans to include two drugs in each therapeutic category and class of
Part D drugs was not sufficient to ensure enrollee access to necessary
medications. They were concerned that for some categories--including
cancer treatments, rare diseases, mental illness, chronic pain, and
other conditions--requiring only two drugs per drug category and class
would be inadequate for Part D plans in terms of the statutory
requirement that plan design not discourage enrollment.
    Several commenters urged us to clarify that this minimum two-drug
requirement must be met through drugs or biologicals offered on an
unrestricted basis (for example, not subject to utilization management
processes, such as prior authorization or step therapy, non-preferred
cost-sharing tiers, or other such restrictions on access to necessary
therapies), with some specifically urging us to impose restrictions on
step therapy by Part D plans. Some asked us to specify that the two
drugs must be distinct chemical entities. One commenter recommended
that we do not allow any Part B-covered drugs to count toward the two-
drug-per-category requirement.
    Response: Section 1860D-4(b)(3)(C) of the Act requires that Part D
plans' formularies include ``drugs within each therapeutic category and
class of Part D drugs, although not necessarily all drugs within such
categories and classes.'' We believe that our interpretation of
``drugs'' as ``at least two drugs'' is consistent with Congressional
intent, and that it strikes an appropriate balance between providing
Part D plans with the necessary leverage to negotiate with
manufacturers for significant

[[Page 4260]]

discounts on covered Part D drugs and ensuring sufficient drug choice
for beneficiaries. We have therefore retained the two-drug minimum
requirement in Sec.  423.120(b)(2)(i) of our final rule.
    However, we recognize that Part D categories and classes may exist
for which there are only two Part D drugs, and that including both of
those drugs on a formulary may be problematic if the two drugs are
vastly different in their clinical effectiveness. Given that section
1860D-4(b)(3)(C) of the Act requires that Part D plan formularies
include ``drugs within each therapeutic category and class of Part D
drugs, although not necessarily all drugs within such categories and
classes,'' we will allow plans to request exceptions to the requirement
in Sec.  423.120(b)(2)(i) of our final rule to the extent they can
demonstrate that there are only two Part D drugs available for a
particular Part D drug category or class and that one of those drugs is
clinically superior to the other. We have incorporated this provision
at Sec.  423.120(b)(2)(ii) of our final rule.
    In response to comments that our proposed requirement is
insufficient to provide adequate access to medically necessary
treatments for Part D enrollees, we clarify that we will require Part D
plans to adopt policies that ensure that beneficiaries have reasonable
access to medically necessary drugs. Although Part D plans will not be
required to include every Part D drug on their formularies, we will--as
codified in Sec.  423.120(b)(2)(iii) of our final rule--require that
plans include adequate access to the types of drugs most commonly
needed by Part D enrollees, as recognized in national treatment
guidelines, on plan formularies. We are establishing this requirement
consistent with section 1860D-11(d)(2)(B) of the Act, which provides us
with authority similar to that provided to the Director of the Office
of Personnel Management for setting ``reasonable minimum standards''
for health benefits plans. We are looking to existing national
standards to inform our review at the drug level, and Part D plans will
be expected to accommodate national guidelines and offer complete
treatment options for a variety of medical conditions, including (but
not limited to) asthma, diabetes, depression, lipid disorders,
hypertension, and HIV. This is necessary in order to ensure that Part D
plans do not substantially discourage enrollment by certain Part D
eligible individuals based on exclusions of certain classes of drugs
from their formularies. In addition to examining specific drugs on Part
D plan formularies, and as discussed in greater detail elsewhere in
this preamble, we will review other aspects of plan benefit designs--
including tiered cost-sharing formulary structures, P&T committee
structure and utilization, utilization management policies and
processes, and exceptions and appeals processes--to ensure that Part D
plans generally meet the requirements under Part D, including the
provision of an adequate benefit.
    We do not agree with comments asking that the two-drug requirement
be met through drugs offered on an unrestricted basis. We recognize
that Part D plans may establish utilization management processes in
such a way as to substantially discourage enrollment by certain
beneficiaries. On the other hand, utilization management restrictions
may be entirely appropriate for specific drugs or categories of drugs.
Furthermore, the statute specifically allows plans to utilize tiered
cost-sharing structures provided they meet certain actuarial
equivalence tests. As previously mentioned, part of our benefit design
review will focus not only on the specific drugs included on a Part D
plan's formulary, but also on a plan's utilization management policies
and procedures, to ensure that plans do not discriminate against
certain enrollees.
    In addition, while drugs covered under Part B cannot be covered
under Part D, as provided in section 1860D-2(e)(2)(B) of the Act, this
exception to Part D coverage is limited to the drugs ``as so prescribed
and administered'' under Part B. Thus, the fact that a beneficiary can
have a particular drug covered under Part B ``incident to'' a physician
service or as part of a hospital outpatient procedure does not mean
that a prescription for the same drug should be denied by a Part D
plan. We will provide more guidance on this issue, but we clarify that
the number of drugs that may be denied coverage under Part D on the
basis of the drug itself is limited. One category of drugs that can
clearly never be covered under Part D is the list of oral cancer drugs
covered under Part B. Such drugs and limited number of others may not
be counted toward the two-drug minimum.
    Finally, we clarify that our two-drug minimum requirement must be
met through the provision of two chemically distinct drugs. In other
words, Part D plans may not include two dosage forms or strengths of
the same drug, or a brand-name drug and a generic equivalent, in a
particular category or class and meet the requirement in Sec.
423.120(b)(2)(i) of our final rule.
    Comment: One commenter recommended that Part D plans' formularies
include a wide variety of available dosage forms to the extent that was
feasible. Another commenter asked us to clarify that we would not allow
Part D plans to count different dosages of the same active ingredient
as two separate drugs for the purposes of our two drug requirement. A
third commenter asked us to clarify that it is acceptable for Part D
plans to favor some dosages over others on their formularies.
    Response: We stated in our proposed rule that it was our
expectation that the drugs included in each therapeutic category or
class would include a variety of strengths and dosage forms, and we
stand by that expectation in our final rule. However, we clarify that
Part D plans will not have to provide equal access to all strengths and
dosage forms of a particular Part D drug, although beneficiaries will
have the right to pursue coverage of additional strengths and dosage
forms through the appeals process. We have clarified in Sec.
423.120(b)(2)(i) of our final rule that Part D plans must include two
chemically distinct Part D drugs in each therapeutic category and class
of drugs, with different strengths and doses available for each of
those drugs. Thus, Part D plans may not meet this requirement by only
including two or more different dosages of the same Part D drug in a
particular drug category or class.
    Comment: Many commenters were concerned that our regulations will
create barriers to physicians prescribing the best medication for their
patients, including off-label uses of medications, which are common for
many conditions and are the norm for some conditions. In actuality,
off-label use is critically important and may be the mainstay of
medical practice for successfully managing certain conditions, such as
mental illnesses, chronic pain, chronic heart failure, arthritis,
Parkinson's, HIV/AIDS and dementia. The FDA recognizes that ``off-label
use of drugs by prescribers is often appropriate and may represent the
standard of practice.'' A number of commenters opposed our position
that the USP model guidelines should not be required to include classes
of drugs if there is no FDA approved drug with an on-label indication
for each class, even though there are FDA-approved drugs with commonly
accepted off-label uses that would fall within a class. One commenter
noted that any action taken by us regarding off-label use of
medications would have a ripple effect on other public and private
programs.

[[Page 4261]]

    Some commenters requested that we clarify the formulary
requirements in our final rule to require Part D plans to cover
medically accepted off-label use of prescription drugs. They believe
this is consistent with Congressional intent and past practice under
the Medicare and Medicaid programs. In addition, one commenter is
concerned that by assigning a drug to a specific class for formulary
purposes, a Part D plan may not cover it for other medically accepted
indications. One commenter suggested formularies should be required to
include off-label uses for drugs for the prevention and treatment
recommended in clinical guidelines issued by government agencies and
medical societies, whether on-label or off-label. Another commenter
said that off-label use must be accessible through a Part D plan's
exceptions process for non-formulary drugs.
    Response: We recognize the value of off label prescribing,
particularly with regard to certain medical conditions. As mentioned in
the proposed rule, we expect that the model categories and classes
developed by USP will be defined so that each includes at least one
drug that is approved by the FDA for the indication(s) in the category
or class. That is, no category or class will be created for which there
is no FDA approved drug and which would therefore have to include a
drug based on its ``off label'' indication. We expect Part D plans
using alternative drug classification systems to include at least one
drug that is approved by the FDA for the indication(s) in each drug
category or class. However, this would not preclude physicians and
other prescribers from prescribing drugs for off label indications,
provided the drug is prescribed for a ``medically accepted
indication,'' as defined in section 1927(k)(6) of the Act. Further, we
clarify that the USP model guidelines would not preclude Part D
sponsors from assigning an FDA approved drug to a category or class
based on an off label use for that drug, provided the FDA has not made
a determination that the drug is unsafe for that use.
    We do not have the authority to require that Part D plans cover the
off-label use of certain Part D drugs. However, as discussed in greater
detail elsewhere in this preamble, we will thoroughly evaluate plan
benefit design to ensure that Part D plans provide an adequate benefit
and do not discriminate against certain classes of Part D enrollees--
including a review of plan utilization management policies and
processes, formulary structure, and plan exceptions and appeals
processes. We believe that these safeguards will ensure Part D enrollee
access to Part D drugs dispensed for medically appropriate off label
indications.
    Comment: Multiple commenters were concerned that it is
inappropriate for physicians to be given the new burden to ``document
and justify'' off-label use in their Part D enrollees' clinical records
due to the administrative burden and the interference with the practice
of medicine by physicians. Many commenters mentioned that the FDA has
recognized the right of physicians to use approved drugs and devices as
they believe appropriate and never suggested there is a need to
document such use. One commenter noted this documentation requirement
is unprecedented and steps beyond well-established boundaries by
inserting us into an individual physician's professional decision-
making. If documentation is required, one commenter asked us to clarify
what constitutes sufficient documentation.
    One commenter, however, noted the need for documentation on
prescriptions for off label use to enable pharmacists to conduct drug
utilization review. Another commenter recommended regular reviews by us
and by P&T committees through drug utilization and provider interviews
as is customary in commercial plans.
    Many commenters urged us to mandate that Part D plans give
deference and flexibility to physicians when making coverage
determinations since a patient's physician has clinical expertise and
intimate knowledge of patients' medical needs. One commenter suggested
that we specify that Part D plans may not prohibit providers from
prescribing drugs for discretionary use if such use is supported by one
or more standard reference compendia or by one or more scientific
studies published in peer-reviewed medical journals or by generally
accepted standards of clinical care. One commenter suggested that MMA
regulations should restrict the ability of Part D plans to limit
physician prescribing for off-label purposes unless there is objective
medical evidence that such prescribing is inefficacious or harmful to
the individual patient.
    Commenters noted that onerous administrative hurdles associated
with medically necessary off-label use could result in barriers to
patient access to essential therapies. Without specific guidance, Part
D plans could simply minimize financial risk through delay tactics
disguised as Federal documentation requirements. One commenter
recommended that at a minimum, we should clarify that there is nothing
to prevent a Part D plan from covering an off-label use that does not
meet the statutory definition of ``medically accepted indication'' if,
based on expert advice, the plan determines that such use is
appropriate. Multiple commenters suggested that the final rule guidance
for Part D drugs should be at least as flexible as the current coverage
policies for drugs covered under Medicare Part B. Under Part B, the
definition of a ``medically accepted indication'' includes indications
published in peer-reviewed literature; current Part B coverage policy
regarding off-label drug use is also consistent with these norms.
    Response: By stating in the proposed rule preamble that we strongly
encouraged physicians and other prescribers to clearly document and
justify off-label use in their Part D enrollees' clinical records, we
did not intend to establish a new documentation requirement for
prescribers. We agree with commenters that physicians must have
sufficient latitude to prescribe drugs as necessary based on their
patients' particular medical needs and consistent with medical
standards of practice, and our statement should not be interpreted as
imposing new and onerous reporting requirements on prescribers. As
previously mentioned, we will thoroughly review plan benefit designs to
ensure that Part D plans meet all applicable requirements under Part D
including the provision of an adequate benefit. We expect that onerous
documentation requirements for off-label prescribing could potentially
be cause for finding that a Part D plan's proposed benefit structure
does not meet Part D requirements.
    We note that a drug is considered to be a Part D drug only if
prescribed for a ``medically accepted indication'' as defined under
section 1927(k)(6) of the Act. Drugs may not be covered under Part D
even if they are not prescribed for a medically accepted indication.
Coverage for other than a medically accepted indication is not
permitted under the statute, since such drugs would not be considered
Part D drugs. Plans have the flexibility to decide how to monitor
whether a drug is prescribed for a medically accepted indication, as
well as to determine whether the statutory definition of ``medically
accepted indication'' is met with regard to the particular use of a
drug.
    Comment: We received numerous comments regarding our authority
under section 1860D-11(e)(2)(D)(i) of the Act to review Part D plan
benefit designs including any formulary or tiered formulary structure
to ensure that plans do not discriminate against certain Part

[[Page 4262]]

D eligible individuals. Many commenters urged us to use this authority
to thoroughly, comprehensively, and judiciously review Part D plan
design and benefits including formulary structure to prevent
discriminatory practices. Some of these commenters were adamant that
such a review not be limited only to the particular drugs included on a
formulary list, but also to tiered cost-sharing (including the use of
100 percent cost-sharing tiers), and utilization management
requirements (for example, appeals, prior authorization, and step
therapy requirements).
    Several other comments cautioned us not to be overly prescriptive
in our formulary review criteria and avoid unintentionally limiting the
ability of Part D plans to manage the costs of the Part D benefit. One
commenter suggested that our formulary review standards should provide
substantial deference to P&T committees including on cost-sharing,
step-therapy, and prior authorization processes, and that we should not
establish our own requirements in these areas.
    Other commenters asked that greater specificity regarding our
criteria for formulary review, as well as practices that would be
considered discriminatory, be provided either in regulation or in
separate guidance, or both. Several commenters urged us to use defined
performance metrics to make formulary discrimination assessments.
Several commenters encouraged us to establish a flexible and readily
accessible process for dialogue with a variety of stakeholders to
create appropriate formulary review criteria, and one commenter urged
us to actually involve States in the review process.
    Several commenters thought our formulary review process should be
performed annually and that contract renewal should be contingent upon
passing our review. Others thought that Part D plan formularies should
be reviewed more often given plans' ability to make formulary changes
mid-year.
    Response: We will comprehensively review Part D plans' proposed
benefit structure to ensure that they generally comply with all
applicable standards under Part D. We intend to conduct a reasonable
review, providing guidelines that Part D plans can use in building
formularies and structuring their bids. We recently shared with the
public a first draft of our benefit package review criteria and, based
on public comments received on that document, will finalize and make
available publicly our final review criteria in early 2005.
    Consistent with the authority provided under section 1860D-
11(e)(2)(D)(i) of the Act, we will review Part D plan formularies to
ensure that plans do not discriminate against certain classes of Part D
eligible individuals by adopting a benefit design (including any
formulary or tiered formulary structure) that would substantially
discourage enrollment by certain beneficiaries. Nothing in the statute
would foreclose us from concluding that a Part D plan's formulary
substantially discourages enrollment even if the plan's classes and
categories are considered non-discriminatory (for example, because the
plan uses the USP model guidelines to structure its formulary).
Although Part D plans will not be required to include every Part D drug
on their formularies, we will require Part D plans to offer an adequate
benefit. For example, we have the discretion to find that failure to
include a specific drug would substantially discourage enrollment by
beneficiaries with a condition that may only be treated by that drug.
We are looking to existing national standards to inform our review at
the drug level, and Part D plans will be expected to accommodate these
national guidelines.
    We believe that other aspects of Part D plan benefit design
including formulary structure (including tiered cost-sharing
structures), the structure and utilization of a plan's P&T committee, a
plan's utilization management policies and procedures (for example,
prior authorization, step therapy, and generic substitution), and a
plan's exceptions and appeals processes are as important as a plan's
formulary list of drugs in ensuring that beneficiaries are offered an
adequate benefit that generally complies with all applicable standards
under Part D. Therefore, we intend to review these plan features as
part of our comprehensive review of Part D plan benefit designs.
    We will review tiered cost-sharing arrangements to ascertain that
the cost sharing associated with certain drugs or classes of drugs does
not discourage enrollment by certain beneficiaries for example, those
with certain diseases or medical conditions. We will also review a Part
D plan's P&T committee structure and processes to ensure that plans
comply with the requirements of section 1860D-4(b)(3)(B) of the Act,
which creates standards designed to ensure impartial, clinically-based
decision-making by P&T committees.
    A Part D plan's utilization management policies and processes must
ensure that beneficiaries have continuous, timely, and appropriate
access to Part D drugs, and that such policies are structured on
evidence-based criteria that are reviewed by a Part D plan's P&T
committee. Section 1860D-4(c)(1)(A) of the Act requires Part D plans to
establish cost-effective drug utilization management programs
(including incentives to reduce costs when medically appropriate). Our
review of plan utilization management policies and processes will
ensure that those policies and processes are medically appropriate and
do not discriminate against certain beneficiaries.
    We clarify that a non-formulary drug is not necessarily a non-
covered Part D drug. The MMA provides for an exceptions process whereby
enrollees and prescribers can request Part D coverage at more favorable
cost sharing than for non-preferred drugs, as well as access to non-
formulary drugs at formulary cost-sharing levels. As discussed
elsewhere in this preamble, we interpret section 1860D-4(h)(2) of the
Act as requiring Part D plans to cover a non-formulary drug on appeal
when, upon review, a physician determination of medical necessity is
upheld. Thus, while Part D plans are not required to approve a non-
formulary Part D drug in the first instance at the point of sale, plans
are required to provide access to Part D drugs, both formulary and non-
formulary, on appeal, where there is a legitimate medical need. We will
review Part D plans' exceptions and appeals processes to ensure that
evidence-based criteria are used to ensure medically appropriate access
to all Part D drugs, including those drugs that are not favorably
placed on a plan's formulary or not on the formulary at all.
    Section 1860D-11(d)(2)(B) of the Act provides us with authority
similar to that provided to the Director of the Office of Personnel
Management with respect to health benefits plans; this includes setting
``reasonable minimum standards'' for plans. As we finalize our
guidelines, we will look to existing national standards and guidelines,
such as those established by the Utilization Review Accreditation
Commission (URAC), the National Committee for Quality Assurance (NCQA),
the American Society of Health Systems Pharmacists (ASHP), and the
Academy of Managed Care Pharmacy (AMCP) to develop a framework for
formulary management. The principles embodied in these standards and
guidelines represent commercial best practice, and we believe Part D
enrollees should be granted the same rights and protections under their
Part D plan as generally

[[Page 4263]]

available to those enrolled in commercial plans.
    Comment: Many commenters supported establishing rules for special
treatment, to include alternative or open formularies and other special
provisions and exemptions, for certain classes of enrollees. Commenters
suggested a number of classes of beneficiaries that we may want to
consider ``special populations'' for the purpose of offering such
special rules, including dual eligibles, institutionalized
beneficiaries, individuals with certain diseases or medical conditions,
and minority populations. Other commenters opposed any requirement that
special populations be subject to special rules. Instead, they argued
that we should provide Part D plans the flexibility to manage and
design benefits consistent with their enrollees' needs. They felt that
prescriptive guidance was not necessary and that our review for
discrimination should be sufficient to ensure adequate access to all
medically necessary drugs.
    Response: We share commenters' concerns about access to all
medically necessary Part D drugs by vulnerable Part D enrollees.
However, after much consideration, we disagree with commenters who
advocated for specific requirements in regulation that would create
special rules applicable only to certain classes of Part D enrollees.
We believe commenters' concerns regarding access to Part D drugs for
vulnerable populations will be addressed via our review of Part D plan
benefit packages.
    As discussed in great detail elsewhere in this preamble, we will
comprehensively review Part D plans' proposed benefit structure to
ensure that they generally comply with all applicable standards under
Part D--including the provision of a benefit that provides for adequate
coverage of the types of drugs most commonly needed by Part D
enrollees, as recognized in national treatment guidelines. We intend to
conduct a reasonable review, providing guidelines that Part D plans can
use in building formularies and structuring their bids. We recently
shared with the public a first draft of our benefit package review
criteria and, based on public comments received on that document, will
finalize and make available publicly our final review criteria in early
2005.
    Comment: A number of commenters urged us to place strict limits on
Part D plans' ability to remove drugs or increase the cost sharing
associated with certain formulary drugs mid-year. One commenter
suggested we allow for changes only at the beginning of a contract year
so that changes are announced to current and prospective enrollees
prior to the open enrollment period and Part D plans are able to market
their new formulary for the upcoming plan year. Another commenter
recommended that we allow formulary changes only from October 1\st\ to
November 14\th\ of a given year.
    Several commenters suggested that Part D plans be required to
provide justification for any decision to remove a drug from the
formulary. Another commenter stated that Part D plans should be
required to document any decision to remove a drug from the formulary
based on detailed scientific and clinical evidence. This commenter
noted that reasons for discontinuing coverage could include new
clinical evidence that a drug is unsafe, contraindicated for particular
indications, or a manufacturer's withdrawal from the market. Other
commenters noted that Part D plans should only be allowed to remove
drugs from their formulary when new information about a drug's safety
becomes available.
    Response: The goal of the MMA was to encourage private sector
organizations who meet the law's requirements to offer a range of Part
D plan options for Medicare beneficiaries by providing flexibility in
plan design and management. This flexibility is modeled after the way
consumers in the private sector receive drug benefits. Although the
statute requires us to limit changes in the therapeutic categories and
classes of a Part D plan's formulary to the beginning of each plan year
(except as we permit to take into account new therapeutic uses and
newly approved Part D drugs), it does not give us similar authority to
preclude mid-year changes to a Part D plan's formulary list. However,
as provided in section 1860D-4(b)(3)(E) of the Act, codified in Sec.
423.120(b)(5) of our final rule, and discussed in greater detail
elsewhere in this preamble, Part D plans must provide appropriate
notice to affected enrollees, among others, prior to removing a drug
from their formulary or changing the preferred or tier status of a
formulary drug. Such notice will provide beneficiaries with ample time
to transition to a covered Part D drug that meets the enrollee's needs,
or to request a coverage exception.
    Comment: We received a number of comments urging us to consider
requirements related to the ``grandfathering,'' on the same terms as
previously available, of covered Part D drugs that are either removed
from Part D plan formularies, or whose cost-sharing tier or preferred
status changes, mid-year. One commenter stated that patients with
chronic diseases who are stabilized by a plan-covered drug at the
beginning of the year should not experience a higher copayment or be
denied coverage of a drug based on a formulary change.
    Other commenters thought the grandfathering should apply more
broadly. Some commenters said that Part D plans should be required to
grandfather a drug for anyone taking the medication prior to its
removal from their formulary (unless removed due to FDA safety
concerns). One commenter recommended that we require Part D plans to
grandfather coverage of chronic medications until the next open
enrollment period. Other commenters noted that, if we do not include
rules placing strict limits on formulary changes during the year, Part
D plans should be required to continue coverage of the discontinued
drug for the remainder of year, at the same price, for all individuals
taking the drug as part of an ongoing treatment regimen. One commenter
suggested that Part D plans be required to provide patients with a 72-
hour supply of a drug if it has been removed from the formulary.
However, some commenters also clarified that such a requirement should
not be meant to prohibit a Part D plan from asking physicians to
voluntarily switch patients to less costly drugs through a therapeutic
substitution initiative.
    Response: Although the MMA does not preclude mid-year formulary
changes by Part D plans, it does require that plans provide appropriate
advance notice to affected enrollees of any removal of a covered Part D
drug from a formulary, or any change in the preferred or tiered cost-
sharing status of a covered Part D drug. As detailed elsewhere in this
preamble, we have interpreted ``appropriate notice'' to mean at least
60 days prior to such change taking effect. We believe that 60 days,
which is consistent with National Association of Insurance
Commissioners (NAIC) model guidelines, provides affected enrollees with
ample time to either switch to a therapeutically appropriate
alternative medication, or obtain a redetermination by the Part D plan,
reconsideration by the independent review entity, and request an
administrative law judge hearing before the change becomes effective.
To the extent that Part D plans do not provide such 60-day advance
notice, they will be required to provide such notice and a 60-day
supply of the drug at the same terms covered previously when affected
enrollees request refills of their prescriptions. Once notice is
provided, enrollees will have a 60-day window to either switch to a

[[Page 4264]]

therapeutically appropriate alternative medication, or obtain a
redetermination by the Part D plan, reconsideration by the independent
review entity, and request an administrative law judge hearing before
the 60-day supply is exhausted.
    Comment: A number of commenters voiced support for some kind of
transition period for beneficiaries, particularly full-benefit dual
eligibles, transitioning to Medicare Part D from other drug coverage.
These commenters argue that, under Medicaid, many beneficiaries--
especially those with certain conditions (HIV/AIDS and mental illness,
for example, as well as those residing in long-term care facilities)--
may experience relatively unfettered access to medically necessary
drugs. This may not be the case when these enrollees transition their
drug coverage from Medicaid to Part D, since different Part D plans
will have different formularies, cost-sharing tiers, and utilization
management requirements. Commenters are concerned that vulnerable
beneficiaries may elect, or may be auto-enrolled in, a Part D plan that
does not cover the drugs these beneficiaries need. More generally,
several commenters noted that many beneficiaries--and not just those
who are considered vulnerable or special populations--could face a
significant loss of continuity of care if Part D plans' formularies are
substantively different from each other or from commercial plans. They
advocate for an additional coverage clause for patients transitioning
into or changing Part D plans in order to avoid disruptions in care.
    Response: We agree with commenters that Part D plans should have
processes in place to transition current enrollees from their old
coverage to their new Part D plan coverage, particularly in cases where
new enrollees are currently taking Part D drugs that are not included
on the Part D plan's formulary at the time of enrollment. However, we
envision that the need for such a transition period will be limited for
several reasons.
    In reviewing a Part D plan's benefit package, we have the
discretion to find that failure to include a specific drug on the
formulary would substantially discourage enrollment by beneficiaries
with a condition that may only be treated with that drug. For example,
we expect that ensuring that beneficiaries with certain conditions,
such as HIV/AIDS, are not as a group substantially discouraged from
enrolling in a Part D plan will require that all or substantially all
drugs in a particular therapeutic class be covered. In addition, in our
review of plan benefit packages and our general oversight to ensure
that Part D plans comply with all applicable requirements, we will
examine not only the inclusion of particular drugs on a formulary, but
also the structure and utilization of a plan's P&T committee, formulary
structure (including tiered cost-sharing structures), a plan's
utilization management policies and procedures (for example, prior
authorization, step therapy, and generic substitution), and exceptions
and appeals processes and how such processes guide access to both
formulary and non-formulary drugs. Given such a review of the overall
benefit package, we would expect that the majority of transition
concerns vis-[agrave]-vis special populations will be obviated prior to
beneficiary enrollment, as Part D plans will know our benefit package
review criteria in advance of the bidding process. In addition, and as
described in detail elsewhere in the section of this preamble
discussing exceptions and appeals, we are adopting a substantive rule
requiring coverage of non-formulary drugs on appeal provided that a
medical necessity determination is upheld upon review.
    To address the needs of new Part D plan enrollees who are
transitioning to Part D from other prescription drug coverage, and
whose current drug therapies may not be included in their Part D plan's
formulary despite the safeguards noted above, we are requiring--in
Sec.  423.120(b)(3) of our final rule--that Part D plans establish an
appropriate transition process for new enrollees which we would review
as part of our benefit package review process. Section 1860D-
11(d)(2)(B) of the Act provides us with authority similar to that
provided to the Director of the Office of Personnel Management (OPM)
with respect to health benefits plans; as provided in 5 U.S.C. 8902(e),
this includes the authority to ``prescribe reasonable minimum standards
for health benefits plans.'' It is our understanding that OPM, in its
contract negotiations with FEHBP plans, requires a transition policy.
Furthermore, many commercial plans include transition processes for new
enrollees. Failure to appropriately transition certain beneficiaries
could result in aggravation of certain medical conditions including, in
some cases, hospitalization which could ultimately increase costs to
Medicare under Parts A and B. Thus, requiring Part D plans to establish
appropriate transition policies for new enrollees appears to be
consistent with our authority to prescribe reasonable minimum standards
for Part D plans.
    We believe that a requirement for an appropriate transition process
for new enrollees prescribed Part D drugs that are not on the Part D
plan's formulary appropriately balances the protection of certain
vulnerable populations with flexibility for Part D plans to develop a
transition process that dovetails with plans' specific benefit designs.
We will provide additional guidance regarding transition process
requirements as part of our benefit package review criteria. However,
we expect that a Part D plan's transition process would address
procedures for medical review of non-formulary drug requests and, when
appropriate, a process for switching new Part D plan enrollees to
therapeutically appropriate formulary alternatives failing an
affirmative medical necessity determination. Such a policy should also
focus on particularly vulnerable populations, including dual eligibles
and individuals with certain medical conditions (for example, enrollees
with HIV/AIDS, mental illness, and those with other cognitive
disorders).
    Comment: Some commenters requested that we establish a standard
process for making formulary changes that Part D plans are required to
follow, including standard policies and procedures for communicating
changes to beneficiaries, pharmacists, and physicians. Another
commenter suggested that we develop a standard formulary change form.
    Response: As provided in section 1860D-4(b)(3)(E) of the Act, and
codified in Sec.  423.120(b)(5)(i) of our final rule, we will require
that Part D plans provide appropriate notice regarding any removal of a
covered Part D drug from their formulary or any change in the preferred
or tiered cost-sharing status of a drug to affected enrollees and other
parties. We believe that Part D plans should have the flexibility to
develop formulary change notices that meet their particular needs,
provided they include the information elements we specify at Sec.
423.120(b)(5)(ii) of our final rule and discussed in greater detail
elsewhere in this preamble.
    Comment: One commenter suggested that notice not be required when
the enrollees' cost sharing is being reduced. This commenter also
suggested that notice not be required when generic competitors have
dropped out of the market, leaving only one supplier, and the generic
drug as a result becomes effectively treated as a single-source ``brand
name'' drug. Another commenter noted that the requirement for written
notice should extend beyond changes in covered medication and should
also be sent when the Part D plan changes procedures for accessing a

[[Page 4265]]

particular medicine. Some commenters suggested we define ``appropriate
notice'' differently for the expansion of a formulary versus the
removal of a drug from the formulary to be consistent with the private
market.
    Response: Section 1860D-4(b)(3)(E) of the Act requires Part D plans
to provide notice before making ``any change in the preferred or tiered
cost-sharing status of a drug.'' Plans must therefore provide notice
regarding any cost-sharing changes be they increases or reductions,
consistent with the requirements of Sec.  423.120(b)(5) of our final
rule. The previously cited statutory language limits the provision of
notice of formulary changes to the removal of a drug from a formulary
or any change in the preferred or tier status of a drug, meaning that
Part D plans will not be required to provide notice regarding a change
in utilization management processes associated with a particular drug.
However, we encourage Part D plans to do so to the extent practicable.
We agree with the commenter who asks that we make a distinction between
drugs added to and removed from a formulary. As provided in Sec.
423.120(b)(5)(i) of our final rule, Part D plans will only be required
to provide advance notice of formulary changes to affected
beneficiaries when drugs are removed from a formulary; at their option,
Part D plans may also wish to notify enrollees of new additions to
their formularies.
    Comment: Some commenters support the 30-day notice provision in our
proposed regulation. Other comments specifically noted that there
should be exceptions to the 30-day requirement in cases where there has
been an FDA directive to remove a drug from the market.
    However, many commenters were concerned that the 30-day notice
provision in the proposed regulation would not provide the adequate
time frame for enrollees to make the necessary changes in their drug
treatment and ensure continuity of care particularly for enrollees with
chronic conditions. Many commenters suggested a 90-day notice
requirement. Several commenters suggested that beneficiaries be
notified directly in writing at least 60 days before any change, and
one commenter noted that NAIC model regulations for drug benefit
changes require a 60-day notice.
    Response: We appreciate the feedback on our interpretation of
``appropriate notice'' in the proposed rule as consisting of advance
notice of at least 30 days. To ensure that Part D enrollees are
provided with sufficient time either to switch to a therapeutically
appropriate alternative medication, or obtain a redetermination by the
Part D plan, reconsideration by the independent review entity, and
request an administrative law judge hearing, we have defined
appropriate notice as at least 60 days in Sec.  423.120(b)(5)(i)(A) of
our final rule. In addition to affording enrollees more time to manage
the consequences of mid-year formulary changes, a 60-day requirement is
consistent with the NAIC model guidelines for drug benefit changes. As
provided in Sec.  423.120(b)(5)(i)(B) of our final rule, Part D plans
also have the option to the extent that they are not able to provide a
60-day advance notice to provide the notice and provide 60 days'
coverage of the Part D drug, under the same terms as previously
available under the Part D plan, at the time the enrollee fills his or
her prescription. Once notice is provided, enrollees will have a 60-day
window to either switch to a therapeutically appropriate alternative
medication, or obtain a redetermination by the Part D plan,
reconsideration by the independent review entity, and request an
administrative law judge hearing before the 60-day supply is exhausted.
    We note that, in order for the requirement regarding plan changes
during the beginning of a contract year in Sec.  423.120(b)(6) of our
final rule to be consistent with the 60-day advance notice requirement
in Sec.  423.120(b)(5)(i)(A) of the final rule, we have changed the
requirement in the proposed rule such that a Part D sponsor may not
remove a covered Part D drug from its Part D plan's formulary, or make
any change in the preferred or tiered cost-sharing status of a covered
Part D drug on its plan's formulary, between the beginning of the
annual coordinated election period and 60 days after the beginning of
the contract year associated with that AEP. As previously mentioned, we
had proposed a period of 30 days in Sec.  423.120(b)(6) of our proposed
rule.
    We note that, in cases in which the FDA requires the removal of a
covered Part D drugs from the market or a manufacturer pulls the drug
from the market for safety reasons, 60-day advance notice will not be
required, as provided in Sec.  423.120(b)(5)(iii) of our final rule.
However, Part D plans will be required to provide notice to affected
enrollees (as well as to SPAPs, entities providing other prescription
drug coverage, authorized prescribers, network pharmacies, pharmacists,
and us) about the removal of a such a covered Part D drug from their
formularies as quickly as possible after the drug is actually removed
from the formulary. This notification must comply with our notification
requirements in Sec.  423.120(b)(5)(ii)(A) through (b)(5)(ii)(D).
    Comment: Some commenters asked for clarification on what is
considered as ``appropriate notice''. Many commenters urged us to
require Part D plans provide notice in writing and mail directly to
each enrollee who is affected by the change. The commenters noted that
without specifying that the notice must be provided in writing, Part D
plans may believe they satisfy requirement by posting this information
on their plan websites. Several commenters noted that website
notification is inadequate. One commenter asked that Part D plans be
allowed to give notice electronically if the enrollee opts for that
communication method.
    Another commenter asked that Part D plans, primarily MA plans,
receive more flexibility in giving notice to enrollees. One commenter
noted that Part D plans should be allowed to convey certain types of
formulary changes through pre- and post-enrollment materials such as
sales brochures, enrollment forms, evidence of coverage, or summaries
of benefits.
    Response: We agree that Part D plans must provide any formulary
change notice in writing, and deliver it directly to affected
enrollees. This requirement is reflected in Sec.  423.120(b)(5)(i)(A)
of our final rule. As provided in Sec.  423.128(d)(2)(iii) of the final
rule, Part D sponsors must also provide this notice to all current and
prospective Part D enrollees via their plan websites. However, we agree
with commenters who assert that website notification, on its own, is an
inadequate means of providing specific information to the enrollees who
most need it. Website notification will simply be an additional way in
which Part D plans may provide notice of formulary changes to affected
enrollees. We therefore require Part D plans to provide this notice
directly to affected beneficiaries. As an alternative to providing this
notice to affected beneficiaries via U.S. mail, to the extent that plan
enrollees affirmatively elect to receive such notice electronically
rather than in writing, via U.S. mail, Part D plans may provide notice
electronically only.
    We do not believe that the formulary change notice requirements
should apply any differently to MA-PD plans (or to cost plans offering
qualified prescription drug coverage) than they do to prescription drug
plans. In order to ensure that enrollees receive and process
information about formulary changes in a timely way, we believe that

[[Page 4266]]

a notice of formulary changes is the most efficient way to do so, and
that other materials (including pre- and post-enrollment materials such
as sales brochures, enrollment forms, evidence of coverage, or
summaries of benefits) are not the most appropriate mechanisms to
convey such information.
    Comment: Many commenters recommended requiring Part D plans to
include information about enrollees' rights to request an appeal or
exception with their formulary change notification. One commenter urged
that if the notice of the change in formulary involves the addition of
a medication, the notice should also explain how the medication will be
classed, if the Part D plan uses a tiered co-pay system or step therapy
system. The notice should also indicate expected cost to the
beneficiary. If a medication is being removed from the formulary, the
notice should indicate what medication is available for individuals who
were prescribed the medication being removed.
    Response: In response to the helpful public comments received on
what ``appropriate notice'' of formulary changes should comprise, Sec.
423.120(b)(5)(ii) of our final rule requires that Part D plans include
the following information on their formulary changes notices: (1) the
name of the affected covered Part D drug; (2) whether the plan is
removing such covered Part D drug from the formulary, or changing its
preferred or tiered cost-sharing status; (3) the reason why the plan is
removing such covered Part D drug from the formulary, or changing its
preferred or tiered cost-sharing status; (4) alternative drugs in the
same therapeutic category or class or cost-sharing tier and expected
cost-sharing for those drugs; and (5) the means by which enrollees may
obtain a coverage determination under Sec.  423.566 or exception under
Sec.  423.578 of our final rule. These required information elements
will provide enrollees with the information they need to request an
independent review or to switch to an alternative formulary drug.
    Comment: Several commenters noted that advance notice of formulary
changes should only be required for enrollees currently using a
particular drug, per our proposal in our notice of proposed rulemaking.
One commenter asked that our interpretation of the term ``affected
enrollee'' be further expanded to include an enrollee who has been
dispensed a drug that has been removed, or whose status has changed,
within the last 90 days. Other commenters urged us to require Part D
plans to provide all enrollees (not just those taking the affected
drug) with advance notice of formulary changes.
    Response: We interpret the statutory term ``affected enrollee'' as
referring to a Part D enrollee who is currently taking a covered Part D
drug that is either being removed from a Part D plan's formulary, or
whose preferred or tiered cost-sharing status is changing. In other
words, Part D plans will not be required to notify all enrollees
regarding formulary changes during a contract year only those directly
affected by changes with respect to a particular covered Part D drug.
This will minimize Part D plan administrative costs while getting
information to those individuals who need it. We have incorporated this
definition of the term ``affected enrollee'' in Sec.  423.100 of our
final rule.
    Comment: Several commenters recommended that Part D plans notify
prescribers, pharmacists and pharmacies through information posted on
plans' websites or through routine communication to prescribers and
pharmacists rather than contacting all prescribers and pharmacies
directly. More than one commenter stated that sending a mailed
notification to all beneficiaries, affected physicians, and pharmacists
would be an enormous undertaking and expense. This commenter believes
that it is appropriate to mail notifications to those taking the
medication and provide it electronically to physicians, pharmacists,
and other beneficiaries via the Part D plan website and upon request.
    Response: We agree with commenters that we should provide greater
flexibility in terms of the mechanism by which they provide notice to
parties other than affected enrollees to whom they are required to
provide advance notice of formulary changes (including authorized
prescribers, pharmacists, pharmacies, and us). As provided in Sec.
423.120(b)(5)(i) of our final rule, we do not specify that written
notice is required to be provided to these parties. Thus, Part D plans
can determine the most effective means by which to communicate
formulary change information to these parties, including electronic
means.
    Comment: Several commenters suggested Part D plans also notify
SPAPs, State retiree plans, and State Medicaid programs of formulary
changes, and another commenter suggested State Medicaid offices as
well.
    Response: Section 1860D-4(b)(3)(E) of the Act requires that
``appropriate notice'' of formulary changes be made specifically to the
Secretary, affected enrollees, physicians, pharmacies, and pharmacists.
However, we expect Part D plans to coordinate with SPAPs and other
plans providing benefits that supplement the benefits available under
Part D coverage to Part D enrollees. Provision of formulary change
information to these health plans and programs will be important in
ensuring effective coordination. Given that section 1860D-24(a)(2)(F)
of the Act provides us with flexibility to establish coordination of
benefits requirements regarding other administrative processes not
specified in section 1860D-24(a)(2) of the Act, we believe it is
reasonable to require Part D plans to notify SPAPs and other health
plans and programs (as defined in Sec.  423.454(f)(1) of our final
rule) regarding formulary deletions or changes to the tiered cost-
sharing status of a drug. We have incorporated this requirement into
Sec.  423.120(b)(5) of our final rule.
    Comment: One commenter recommended that Part D sponsors should
include in their formulary notice to us a certification that they are
still meeting the statutory formulary requirements.
    Response: We note that, notwithstanding any formulary changes Part
D plans make mid-year, plans will still be required to meet all the
formulary requirements in Sec.  423.120(b) of our final rule, and we
will review all formulary changes to ensure that this is the case.
c. Use of Standardized Technology
    In accordance with the requirements of section 1860D 4(b)(2)(A) of
the Act, Part D sponsors must issue (and reissue, as appropriate) a
card or other technology that enrollees could use to access negotiated
prices for covered part D drugs. Section 1860D-4(b)(2)(B)(i) of the Act
mandates that we develop, adopt, or recognize standards relating to a
standardized format for a card or other technology for accessing
negotiated prices to covered Part D drugs. Section 1860D 4(b)(2)(B)(ii)
of the Act requires us to consult with the National Council for
Prescription Drug Programs (NCPDP) and other standard setting
organizations, as appropriate, to develop these standards.
    Except as otherwise provided below, the final rule adopts the rules
regarding use of standardized technology set forth in Sec.  423.120(c)
of the proposed rule.
    Comment: A number of commenters support our using a standardized
identification card using NCPDP standards. These commenters note that a
standardized card using the NCPDP format will create increased
efficiencies such as reduced waiting times for dispensing medications
that will benefit pharmacy providers and beneficiaries. A

[[Page 4267]]

few commenters suggested that we provide MA organizations with the
flexibility to integrate their drug card with their medical benefits
card rather than issuing a separate card if the MA organization chooses
to do so and others requested clarification that MA organizations could
issue a single card for both their medical and drug benefits. One
commenter expressed concern about using an identification number other
than the beneficiaries' Medicare Identification Number because this
number is familiar and known by the beneficiaries. In certain
situations, if the card were lost or stolen, beneficiaries could easily
remember their drug card number.
    Response: As provided under section 1860D 4(b)(2)(B)(ii) of the
Act, we will consult with the National Council for Prescription Drug
Programs (NCPDP) and other standard setting organizations, as
appropriate, to develop these standards. Given that NCPDP is recognized
as the industry standard for current prescription drug programs, and we
relied on its standards in developing requirements for discount card
sponsors' cards under the Medicare Prescription Drug Discount Card and
Transitional Assistance Program, we expect to base our card standards
on NCPDP's ``Pharmacy ID Card Standard.'' This standard is based on the
American National Standards Institute ANSI INCITS 284-1997 standard
titled Identification Card--Health Care Identification Cards, which may
be ordered through the Internet at http://www.ansi.org. We will provide

further operational guidance regarding our standards for a card (or
other technology) to entities wishing to become Part D sponsors in time
for these entities to use the standards (and have their cards approved
for use by us) beginning January 1, 2006. We understand that Part D
sponsors would like flexibility to integrate their medical and drug
benefit cards and will provide Part D sponsors with that flexibility
consistent with our approach under the Medicare Prescription Drug
Discount Card and Transitional Assistance Program. It is our intent,
however, that these standards require that Part D plans use something
other than an enrollee's social security number (SSN) as an identifier
on their cards given rising concern over the increasing number of cases
regarding identity fraud using an individual SSNs and privacy concerns.
We understand that this number is the most familiar and known to the
beneficiaries but we will work to make the drug card identification
number and process easy and convenient for beneficiaries.
5. Special Rules for Out-of-Network Access to Covered Part D Drugs at
Pharmacies (Sec.  423.124)
    Section 1860D-4(b)(1)(C)(iii) of the Act requires us to establish
pharmacy access standards that include rules for adequate emergency
access to covered Part D drugs by Part D enrollees. Given the inherent
difficulties in establishing emergency access standards for covered
Part D drugs, we proposed to meet the requirements of section 1860D
4(b)(1)(C)(iii) of the Act by establishing a broader out-of-network
access requirement. We proposed requiring that Part D sponsors ensure
that their enrollees had adequate access to drugs dispensed at out-of-
network pharmacies when they could not reasonably be expected to obtain
covered Part D drugs at a network pharmacy. In the proposed rule, we
stated that we expected out-of-network access to be guaranteed under at
least the following four scenarios:
    * In cases in which a Part D enrollee meets all of the
following: is traveling outside his or her Part D plan's service area;
runs out of or loses his or her covered Part D drug(s) or becomes ill
and needs a covered Part D drug; and cannot access a network pharmacy;
    * In cases in which a Part D enrollee cannot obtain a
covered Part D drug in a timely manner within his or her service area
because, for example, there is no network pharmacy within a reasonable
driving distance that provides 24-hour-a-day/7-day-per-week service;
    * In cases in which a Part D enrollee resides in a long-term
care facility and the contracted long-term care pharmacy does not
participate in his or her Part D plan's pharmacy network; and
    * In cases in which a Part D enrollee must fill a
prescription for a covered Part D drug, and that particular covered
Part D drug (for example, an orphan drug or other specialty
pharmaceutical typically shipped directly from manufacturers or special
vendors) is not regularly stocked at accessible network retail or mail-
order pharmacies. Both the enrollee and his or her Part D plan would
have been financially responsible for covered Part D drugs obtained at
an out-of-network pharmacy as described. In the proposed rule, we
specified that such cost-sharing would have been applied relative to
the plan allowance for that covered Part D drug. We requested comments
on how to further define the term ``plan allowance.''
    In addition to this cost-sharing, and as provided under proposed
Sec.  423.124(b)(2), the enrollee would have been responsible for any
difference in price between the out-of-network pharmacy's usual and
customary (U&C) price and the plan allowance for that covered Part D
drug. We requested public comments regarding our definition of usual
and customary price. We also sought comments regarding our proposal
that the price differential between out-of-network pharmacies' U&C
costs and the plan allowance be counted as an incurred cost against the
out-of-pocket threshold consistent with the definition of ``incurred
cost'' in Sec.  423.100 of the proposed rule. Finally, we requested
general comments regarding our proposed payment rules for covered Part
D drugs obtained at out-of-network pharmacies when enrollees cannot
reasonably obtain those drugs at a network pharmacy.
    Except as otherwise provided below, the final rule adopts the out-
of-network access rules set forth in Sec.  423.124 of the proposed
rule.
    Comment: Many commenters generally supported our proposed out-of-
network pharmacy proposal and said beneficiaries--particularly those in
rural areas--should not be penalized for going out-of-network when
necessary. However, some commenters felt the proposal's list of
situations in which access to out-of-network pharmacies would be
allowed was overly broad and recommended limiting such access to
emergency situations only. Some commenters expressed support for plans
having the discretion to establish out-of-network access requirements,
but not being given a specific list of requirements. Some expressed
concern that the message to beneficiaries might be that they can go to
out-of-network pharmacies at will, resulting in increased costs.
    A number of commenters stated that as proposed, allowing access to
out-of-network pharmacies is impractical because these pharmacies
cannot determine if beneficiaries have met their deductibles, are in
the coverage gap, or the amount their Part D plan would pay had they
gone to a participating pharmacy. Out-of-network pharmacies do not have
access to data needed to calculate payment rates other than their own
usual and customary price. These commenters asked that we clarify that
out-of-network pharmacies may charge beneficiaries their usual and
customary price that beneficiaries must be responsible for submitting
claims for out-of-network medications they purchase to their Part D
plans, and that plans must accept claims submitted to them by
beneficiaries once such a purchase is made. One commenter recommended
Part D plans be given

[[Page 4268]]

time to retroactively modify claims databases to accommodate paper
claims tracking, suggesting that we minimize these requirements and be
specific in the timeline under which these modifications are required
(for example, 60 days).
    Some commenters stated that the proposal is inadequate for
emergency situations and should require Part D plans to cover a
temporary supply of drugs. One commenter recommended that we require
Part D plans to establish a mechanism to guarantee payment for at least
a 72-hour supply of any medically necessary, covered Part D drug
obtained out-of-network. One commenter disagreed with the proposal
entirely, stating that if the TRICARE access standards were met by a
Part D plan, this should be a sufficient guarantee of adequate network
access.
    Response: We expect that, given our pharmacy access standards, Part
D enrollees will have adequate access to network pharmacies. However,
section 1860D-4(b)(1)(C)(iii) of the Act requires us to establish
pharmacy access standards that include rules for adequate emergency
access to covered Part D drugs by Part D enrollees. Given the inherent
difficulties in establishing what constitutes an ``emergency,'' we
believe it is most appropriate to establish a broader out-of-network
access requirement. Section 423.124(a)(1) of our final rule clarifies
that Part D plans are required to ensure that their enrollees have
adequate access to drugs dispensed at out-of-network pharmacies when
they cannot reasonably be expected to obtain covered Part D drugs at a
network pharmacy. Provided that such access to out-of-network
pharmacies is not routine, we expect that Part D plans would guarantee
out-of-network access in cases in which an enrollee: (1) is traveling
outside his or her plan's service area, runs out of or loses his or her
covered Part D drugs or becomes ill and needs a covered Part D drug,
and cannot access a network pharmacy; (2) cannot obtain a covered Part
D drug in a timely manner within his or her service area because, for
example, there is no network pharmacy within a reasonable driving
distance that provides 24/7 service; (3) must fill a prescription for a
covered Part D drug, and that particular drug (for example, an orphan
drug or other specialty pharmaceutical) is not regularly stocked at
accessible network retail or mail-order pharmacies;; and (4) is
provided covered Part D drugs dispensed by an out-of-network
institution-based pharmacy while a patient is in an emergency
department, provider-based clinic, outpatient surgery, or other
outpatient setting. We are not incorporating these scenarios into our
final regulations but will closely monitor out-of-network access to
ensure that Part D plans are adequately meeting beneficiaries' out-of-
network access needs. In addition, plans must provide coverage of drugs
in physician's offices in cases in which a beneficiary is administered
a vaccine covered by Part D (or another covered Part D drug that is
appropriately dispensed and administered in a physician's office).
    We understand commenters' concerns that routine access to out-of-
network pharmacies could undermine a Part D plan's ability to achieve
cost-savings for both beneficiaries and the Medicare program. For this
reason, we would like to clarify that Sec.  423.124(c) of our final
rules requires Part D plans to establish reasonable rules to ensure
that enrollees use out-of-network pharmacies in an appropriate manner--
provided they ensure adequate access to out-of-network pharmacies on a
non-routine basis when enrollees cannot reasonably access network
pharmacies. For example, Part D plans may wish to limit the amount of
covered Part D drugs dispensed at an out-of-network pharmacy, require
that a beneficiary purchase maintenance medications via mail-order for
extended out-of-area travel, or require a plan notification or
authorization process for individuals who fill their prescriptions at
out-of-network pharmacies. Plans will be required to disseminate
information to enrollees about their out-of-network access policies as
provided in Sec.  423.128(b)(6) of our final rule.
    We wish to clarify that enrollees obtaining covered Part D drugs at
out-of-network pharmacies, which by virtue of not being under contract
with an enrollee's Part D plan will not have access to the data needed
to calculate Part D plan payment rates, will have to pay the pharmacy's
U&C price at the point-of-sale, submit a paper claim to their Part D
plan, and wait for reimbursement from the plan. Out-of-network
pharmacies will therefore be made whole, relative to their U&C price
for a covered Part D drug, at the point of sale.
    Comment: One commenter stated that patients in emergency
departments, provider-based clinics, outpatient surgery, or under
observation are often administered drugs (self-administered drugs or
insulin, for example) under physician order for medically necessary
conditions. These drugs are not covered under Part A or Part B and are
billed to patients as a patient liability. For safety and quality of
care reasons, patients often cannot bring their own medications into
hospitals or outpatient settings when they are being treated for other
conditions. This commenter asked for clarification regarding whether
Part D plans will cover self-administered prescription drugs dispensed
by hospital pharmacies; if so, how beneficiaries will avail themselves
of their Part D benefits; and, if not, whether hospitals will have to
provide drug coding and other detail on billing statements for
beneficiaries so they can submit those statements to their Part D plans
for reimbursement.
    Response: As provided elsewhere in this preamble, Part D plans may
include institutional pharmacies, including hospital-based pharmacies,
in their networks, although these pharmacies will not count toward the
access requirements Part D plans must meet under Sec.  423.120(a)(1) of
our final rule. To the extent hospital pharmacies are included in Part
D plan networks, Part D enrollees who are furnished covered Part D
drugs by those pharmacies, the situations noted by the commenter will
not be an issue. However, we recognize that enrollees who are provided
covered Part D drugs by hospital and other institution--based
pharmacies under the circumstances described by this commenter cannot
reasonably be expected to obtain needed covered Part D drugs at a
network pharmacy. We therefore clarify that we expect that Part D plans
guarantee out-of-network access to covered Part D drugs in cases in
which an enrollee is provided covered Part D drugs dispensed by an out-
of-network institution-based pharmacy while a patient in an emergency
department, provider-based clinic, outpatient surgery, or other
outpatient setting.
    Comment: Two commenters recommended that Part D plan enrollees who
live in different States during the year should be allowed access to
out-of-network pharmacies, as with the other four instances we
proposed. One commenter further argued that restricting pharmacy access
to mail order during long absences from or trips out of a Part D plan's
service area violates the prohibition on exclusive use of mail order
pharmacies.
    Response: The statutory authority for our proposed out-of-network
access policy derives from the requirement, in section 1860D-
4(b)(1)(C)(iii) of the Act, that our network access rules include
provisions for adequate emergency access for Part D enrollees. Given
that narrow statutory authority, we do not believe that access to out-
of-network pharmacies on a routine basis can be justified under our
out-of-network

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access rules. Through our educational efforts, we will encourage
enrollees who live in different States during a year (snowbirds, for
example) to enroll in national or regional Part D plans that will
provide coverage in multiple areas, or in Part D plans that include
out-of-area pharmacies in their networks. However, to the extent that a
beneficiary is enrolled in a Part D plan that does not provide such
access, plans may not allow routine out-of-network access consistent
with Sec.  423.124(a)(2) of our final rule.
    Comment: Two commenters emphasized the need to allow out-of-network
access for specialty medications, such as orphan drugs, that are not
typically stocked in a retail pharmacy. Their argument was echoed by
commenters who emphasized the need to allow for out-of-network access
to home infusion therapy.
    Response: We expect that Part D plans will provide out-of-network
access to specialty pharmacies in cases in which specialty medications,
such as orphan drugs, are not available at a network pharmacy, as this
is a case in which enrollees could not reasonably be expected to access
their medications at a network pharmacy. However, given that out-of-
network access to covered Part D drugs may not be provided routinely,
consistent with Sec.  423.124(a)(2) of our final rule, Part D cannot
not provide access to out-of-network access to a specialty pharmacy on
an ongoing basis. As discussed elsewhere in this preamble, our final
rule requires that Part D plans provide adequate access to home
infusion pharmacies. We established this access requirement to mitigate
the need for routine out-of-network access to home infusion drugs.
However, in cases in which an enrollee cannot reasonably access a home
infusion pharmacy in his or her Part D plan's network, we expect that
plans will provide access to an out-of-network home infusion pharmacy
consistent with Sec.  423.124(a) of our final rule.
    Comment: Some commenters stated that the final rule should clarify
that beneficiaries residing in a long-term care facility should be
allowed access to long term care pharmacies as out-of-network
pharmacies, should the pharmacy contracting with the long-term care
facility in which they reside not participate with their chosen Part D
plan. Another commenter thought that our proposed policy vis-[agrave]-
vis beneficiaries residing in long-term care facilities is
inappropriate given that our authority for establishing such
requirements is based on emergency access only.
    Response: As noted previously, we agree with the commenter who
questioned our authority for allowing access to out-of-network long-
term care pharmacies on a routine basis. The statutory authority for
our proposed out-of-network access policy derives from the requirement,
in section 1860D-4(b)(1)(C)(iii) of the Act, that our network access
rules include provisions for adequate emergency access for Part D
enrollees. Given that narrow statutory authority, we do not believe
that access to out-of-network pharmacies on a routine basis including
in cases where a beneficiary resides in a long-term care facility whose
contracted long-term care pharmacy is not in his or her Part D plan's
network can be justified under our out-of-network access rules.
    Comment: One commenter said that physician offices should be
considered out-of-network pharmacies insofar as they supply covered
Part D drugs.
    Response: We note that vaccines (and other covered Part D drugs
that are appropriately dispensed and administered in a physician's
office) administered in a physician's office will be covered under our
out-of-network access rules at Sec.  423.124(a)(2) of our final rule,
since Part D plan networks are defined as pharmacy networks only. A
scenario under which a Part D enrollee must obtain a Part D-covered
vaccine in a physician's office constitutes a situation in which out-
of-network access would be permitted because a beneficiary could not
reasonably be expected to obtain that vaccine at a network pharmacy. We
expect that the application of this requirement will be limited to
vaccines and a handful of drugs (for example, some injectable long-
acting anti-psychotics) that are appropriately dispensed and
administered in a physician's office and are not covered under Part B,
and that plans may establish utilization management policies and
procedures to ensure that out-of-network coverage is limited to such
covered Part D drugs. Enrollees will be required to self-pay the
physician for the cost of the vaccine (or other covered Part D drug
appropriately dispensed and administered in a physician's office) and
submit a paper claim for reimbursement by their Part D plan.
    Comment: Commenters generally recommended the beneficiary pay the
difference between the network price applicable to that beneficiary and
the maximum price charged to any Part D plan with which the pharmacy
participates. However, they argue, determining that amount would be
difficult because out-of-network pharmacies do not have access to the
data necessary to calculate that amount. Some commenters specified that
beneficiaries purchasing drugs from an out-of-network pharmacy in an
emergency situation should not be charged anything more than the
network amount. Several commenters urged us to exempt low-income
beneficiaries from any differential costs incurred for visiting an out-
of-network pharmacy. One noted that we should monitor usage of out-of-
network pharmacies by low-income beneficiaries.
    Response: As provided in Sec.  423.124(b) of our final rule, if a
Part D plan offers coverage other than defined standard coverage, it
may require enrollees to not only be responsible for any cost-sharing,
including a deductible, that would have otherwise applied had the
covered Part D drug been purchased at a network pharmacy, but also any
differential between the out-of-network pharmacy's (or provider's)
usual and customary (U&C) price and the enrollee's cost-sharing.
However, given the cost-sharing requirements for defined standard
coverage in Sec.  423.104(d)(2)(A) of our final rule, under which the
cost-sharing between the deductible and initial coverage limit must be
25 percent of the actual cost of a drug at the point of sale, Part D
plans offering defined standard coverage may not offer such an out-of-
network differential. Instead, a Part D plan offering defined standard
coverage must simply require its enrollees to pay any deductible or
cost-sharing, relative to the out-of-network pharmacy's (or provider's)
usual and customary price. The Part D plan will pay the difference
between the out-of-network pharmacy's (or provider's) U&C price and the
enrollee's cost-sharing.
    In either case, enrollees will likely be required to pay more for a
covered Part D drug purchased out-of-network than one purchased at a
network pharmacy, though, as explained below, any such differential
will count toward an enrollee's TrOOP limit. In order to curb
unnecessary out-of-network use and preserve Part D plans' ability to
achieve cost-savings based on network pharmacy use, we believe it is
appropriate that beneficiaries pay more for out-of-network access to
covered Part D drugs.
    As explained below, we will pay any out-of-network differential for
appropriate non-routine use of out-of-network pharmacies (or providers)
for full and other subsidy-eligible individuals as part of our low-
income subsidy under subpart P of the final rule.
    Comment: Some commenters asked us to clarify whether subsidy
eligible

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individuals who reside in long-term care facilities will have to pay
any out-of-network differentials when obtaining drugs from an out-of-
network long-term care pharmacy. Many recommended that we pay the out-
of-network differential for institutionalized enrollees who are subsidy
eligible.
    Response: We agree that for full and other subsidy-eligible
individuals--whether they are institutionalized or not--we should pay
any out-of-network differential for appropriate non-routine use of out-
of-network pharmacies. As provided in Sec.  423.104(d)(2) of our final
rule, we define enrollee cost sharing in relation to the total cost of
the drug to the Part D plan and the beneficiary (actual costs).
Therefore, in cases where the total payment is not limited by the plan
allowable because a drug is obtained out-of-network, the cost sharing
can be defined as the total paid by beneficiary, or in the case of a
subsidy eligible individual, as the total cost sharing paid by both the
beneficiary and by us. This approach reconciles the need to charge the
OON differential and to hold the subsidy eligible individual liable for
only the statutorily allowed copayment amounts ($1/$3, $2/$5, or $0 in
the case of institutionalized full subsidy individuals who are full-
benefit dual eligible individuals).
    Comment: A few commenters argued that enrollees accessing covered
Part D drugs at out-of-network FQHC, rural and I/T/U pharmacies should
also be exempt from any out-of-network differentials.
    Response: We do not believe there exists a compelling rationale to
exempt beneficiaries who access their drugs at FQHC, rural, or I/T/U
pharmacies. However, to the extent such individuals qualify as full or
partial subsidy eligible individuals, they will be responsible only for
the cost-sharing amounts required in subpart P.
    Comment: Comments on the definition of ``U&C price'' fell into
three groups. Some commenters felt that the U&C price should be defined
as that amount charged to cash paying customers, excluding sales tax.
Others argued that the U&C price should be the amount typically charged
to senior groups or other cash customers who are directly given some
sort of discount as an inducement to make a purchase from a given
supplier. A third group of commenters felt that the U&C price should be
the maximum the pharmacy charges any customer covered by a Part D plan.
Several commenters noted that we should not allow pharmacies to
manipulate their U&C prices and should check them periodically to be
sure they were less than or equal to the average wholesale price.
    Response: We appreciate commenters' suggestions. We believe our
proposed definition of the term ``usual and customary price'' the price
that a pharmacy (or provider) charges a customer who does not have any
form of prescription drug coverage is adequate and are retaining it in
Sec.  423.100 of our final rule. We note, in response to several
commenters' suggestions, that we do not have the authority to require
out-of-network pharmacies to accept a particular price (for example,
the maximum price a pharmacy charges any of its customers enrolled in
Part D plans) as their U&C price. We believe that Part D plans, not
CMS, should be responsible for monitoring of U&C prices for covered
Part D drugs at out-of-network pharmacies, since, given that any price
differential paid by a beneficiary would count toward the TrOOP
threshold, they ultimately have a vested interest in limiting the costs
associated with out-of-network use.
    Comment: With regard to the definition of ``plan allowance,''
several commenters recommended that it be defined as ``the lowest of
contractual discounts offered in a standard contract or U&C price.''
One commenter recommended defining the term in CMS guidance to permit
consultation with affected parties. One commenter pressed for Part D
plan flexibility so that they could ensure the lowest prices for their
members.
    Response: We have retained our proposed definition of ``plan
allowance'' in Sec.  423.100 of our final rule in order to provide Part
D plans with maximum flexibility to establish the most appropriate plan
allowance for drugs obtained out-of-network.
    Comment: One commenter asked for clarification of the appeals
process relating to adverse coverage decisions for out-of-network
drugs.
    Response: As provided under Sec.  423.566(b)(1) of our final rule,
a Part D plan's failure to pay for a covered Part D drug furnished by
an out-of-network pharmacy is an action that is a coverage
determination.
    Comment: Another commenter wanted to be sure that out-of-network
pharmacies did not advertise their services as Medicare covered so that
beneficiaries would not be confused.
    Response: We believe that beneficiaries should always receive
accurate and clear information about their pharmacy benefits, and we
believe pharmacies must ensure that out-of-network beneficiaries are
not misled. However, we have no authority under the MMA to regulate
pharmacies' marketing activities. Marketing activities of pharmacies
may implicate other Federal or State laws, however, including, but not
limited to, consumer protection laws. Pharmacies may also be subject to
sanction under section 1140 of the Social Security Act if they
misrepresent an affiliation with, or endorsement by the Medicare
program.
6. Dissemination of Plan Information (Sec.  423.128)
    Our proposed rule established beneficiary protection requirements
concerning the dissemination of Part D information by Part D sponsors
to enrollees in, and individuals eligible to enroll in, a Part D plan.
Part D information disseminated by Part D sponsors to current or
prospective Part D enrollees will constitute marketing materials and
must be approved by us.
    With the exception of the drug-specific information dissemination
requirements, many of the proposed requirements duplicated information
dissemination requirements contained in Sec.  422.111 of our proposed
MA rule that are applicable to all MA plans, including MA-PD plans. We
proposed applying the requirements of section 1860D-4(a) of the Act to
other Part D plans to ensure that all Part D eligible enrollees have
access to comparable drug-specific information about Part D plans.
a. Content of Plan Description
    Proposed Sec.  423.128(a) and (b) complied with the stipulation in
section 1860D-4(a)(1) of the Act that requirements for the
dissemination of Part D information be similar to the information
dissemination requirements for MA organizations under section
1852(c)(1) of the Act and as interpreted in Sec.  422.111(b).
    In order to ensure that individuals who are either eligible for, or
enrolled in, a Part D plan receive the information they need to make
informed choices about their Part D coverage options, Part D sponsors
would be required to disclose, to each enrollee in a Part D plan
offering qualified prescription drug coverage, a detailed description
of that plan. This description must be provided in a clear, accurate,
and standardized form at the time of enrollment and annually, at a
minimum, after enrollment. The information provided will be similar to
the information MA plans must disclose to their enrollees.
    Except as otherwise provided below, the final rule adopts the
requirements pertaining to plan content description set forth in Sec.
423.128(b) of the proposed rule.
    Comment: One commenter sought clarification regarding what we mean
by ``standardized'' in our requirement that

[[Page 4271]]

Part D plans provide information to enrollees in a ``clear, accurate,
and standardized form.''
    Response: We expect Part D plans to provide information about their
benefit packages in a manner that is consistent with marketing
guidelines that we will make available to plans.
    Comment: Several commenters requested that we allow Part D plans
the flexibility to make plan information available through the
Internet. For the convenience of beneficiaries as well as to control
costs, these commenters recommend that we encourage the use of more
efficient information distribution channels (for example, Internet and
email) to disseminate detailed Part D plan information and thus limit
the distribution of paper materials to situations in which that makes
sense. Another commenter recommended that we clarify that, with the
express consent of the enrollee, Part D plans may waive enrollees'
right to request and receive any required information in writing and
allow for the enrollee to obtain that information via a plan website or
email.
    Response: We agree that some beneficiaries may prefer to receive
Part D plan information electronically and that the provision of plan
information through electronic means has the potential to significantly
reduce Part D plans' costs. However, a number of Medicare beneficiaries
still do not have access to the Internet or prefer to receive their
information in written formats. We have modified Sec.  423.128(a) of
our final rule to note that we may specify the manner in which plan
information must be disseminated to beneficiaries. We clarify that
information disseminated by Part D plans as part of a plan description
under Sec.  423.128(b), as well as information disclosed upon enrollee
request under Sec.  423.128(c), must be provided in a written format
and delivered to beneficiaries via U.S. mail unless a beneficiary
explicitly consents--by actively opting in--to receive information
electronically or via telephone rather than by mail. The electronic
provision of Part D plan information should simply be one additional
mechanism for Part D plans to communicate with enrollees and potential
enrollees.
    Comment: One commenter recommended that Part D plans provide
information regarding any prior authorization processes required for
certain drugs as part of their information dissemination efforts
regarding formularies.
    Response: We agree with this commenter and have modified that
language at Sec.  423.128(b)(4) to clarify that Part D plans must
disclose information about any utilization management procedures they
may use as part of the formulary information they must disseminate to
beneficiaries.
    Comment: One commenter recommended that Part D plans be required to
provide a list of pharmacies in their networks since the proposed rule
requires information only about the types of pharmacies in plans'
networks.
    Response: We believe the commenter misinterpreted the provision at
Sec.  423.128(b)(5) of our proposed rule. This provision, which we have
retained in our final rule, requires Part D sponsors to disseminate
information about ``the number, mix, and distribution (addresses) of
network pharmacies.'' We believe that requiring Part D plans to
disseminate information about the addresses of network pharmacy at
which an enrollee may reasonably be expected to obtain covered Part D
drugs is, in fact, tantamount to requiring plans to provide a list of
network pharmacies serving enrollees' service areas. We therefore
clarify that Part D plans will be expected to provide enrollees with a
list of network pharmacies, including addresses, as well as information
about the number and mix of network pharmacies available.
    Comment: One commenter requested greater detail regarding the
contents of the description of quality assurance policies and
procedures that Part D plans must provide under Sec.  423.128(b)(8) of
our proposed rule. Another commenter states that, as written, the
provision requiring Part D plans to describe their quality assurance
policies and procedures did not indicate a clear CMS-directed oversight
and enforcement structure. This commenter argues that compliance
monitoring and enforcement would at best be indirect, leaving us
reliant on the results of deemed status arrangements as set forth in
our proposed Sec.  423.165.
    Response: We expect plans to provide descriptions of their policies
and procedures for concurrent drug utilization review, retrospective
drug utilization review, and internal medication error identification
and reduction systems. We also expect plans to provide descriptions of
their medication therapy management programs, including information
describing which enrollees are eligible for such services. With respect
to CMS-directed oversight and enforcement, we have added reporting
requirements to Sec.  423.153(c) and Sec.  423.153(d) of our final
rule, and we will specify the details of these reporting requirements
in separate guidance.
    Comment: One commenter was concerned that the transition of full-
benefit dual eligible individuals from Medicaid to Medicare Part D on
January 1, 2006 will likely lead full-benefit dual eligible individuals
to contact Medicaid agencies for more information regarding their new
pharmacy benefits. This commenter recommended that we require Part D
plans to include information in their enrollee materials that clarifies
that State Medicaid agencies are no longer the primary providers of
pharmacy benefits and cannot answer questions about the Medicare
benefit, except as pertains to limited supplemental coverage that
Medicaid may provide.
    Response: Our education and outreach efforts will ensure that
beneficiaries receive detailed information regarding their transition
from Medicaid to Medicare for prescription drug coverage. Therefore, we
do not believe it is necessary to require Part D plans to include this
information in their materials.
b. Disclosure of Information upon Request
    In addition, in accordance with section 1860D-4(a)(2) of the Act,
the proposed rule at Sec.  423.128(c) provided that a beneficiary who
is eligible to enroll in a Part D sponsor's Part D plan will have the
right to obtain, upon request, more detailed plan information. Except
as otherwise provided below, the final rule adopts the standards set
forth in Sec.  423.128(c) of the proposed rule.
    Comment: A number of commenters are supportive of the provision in
the proposed rule that required Part D plans to make available
information about how to obtain information about the formulary, but
thought that this requirement was insufficient given that beneficiaries
will need precise and detailed formulary information to make informed
choices about enrollment. These commenters recommend requiring Part D
plan descriptions to include a detailed formulary listing not only the
drugs on the formulary, but also any formulary tiers and corresponding
copayment amounts.
    Response: We agree that it will be critically important for Part D
enrollees and prospective enrollees to have access to complete
formulary information in order to make the best possible Part D plan
selection for their particular medical and prescription drug needs. For
this reason, we have modified the formulary information requirements
under Sec.  423.128(b)(4) such that Part D plans will be required to
include not only information about the manner in which the formulary
functions (including tiering structures and any

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utilization management procedures used), a process for obtaining an
exception to a Part D plan's tiered cost-sharing structure or
formulary, and a description of how an enrollee may obtain additional
information on the formulary, but also an actual list of drugs included
on the Part D plan's formulary. For each drug, this list must indicate
any cost-sharing tier information applicable to that drug and whether
utilization management programs apply.
    Comment: Several commenters urged us to expand the requirement that
Part D plans disclose, upon request, information about the number of
disputes and their disposition in the aggregate to include exceptions.
Another commenter noted that we appeared to have made a mistake in
terms of our references to the provisions on grievances and
reconsiderations in Sec.  423.128(c)(3) of our proposed rule.
    Response: We agree with these commenters. We have corrected the
reference errors in Sec.  423.128(c)(3) of our final rule and have
expanded this requirement such that Part D plans must disclose, upon
request, information about the number of exceptions and their
disposition in the aggregate. We did not originally include a reference
to exceptions in our proposed because section 1852(C)(2) of the Act, on
which the requirements in our proposed Sec.  423.128 were based, did
not envision an exceptions process for the MA program.
    Comment: Several commenters noted that Sec.  423.128(c)(1)(iii) of
our proposed rule required Part D plans to inform enrollees about the
potential for contract termination, but only upon request. However,
these commenters felt strongly that this information needed to be
included in all plan descriptions and marketing materials, and not just
if requested by an enrollee or prospective enrollee, particularly in
light of previous experience with volatility in the Medicare+Choice
market.
    Response: We agree with these commenters and have moved the
requirement that Part D plans disclose information about the potential
for contract termination upon request only, to Sec.  423.128(b)(10),
under which plans will be required to disclose this information as part
of the plan description provided at the time of enrollment and at least
annually thereafter.
c. Provision of Specific Information
    As required under section 1860D-4(a)(3) of the Act and proposed at
Sec.  423.128(d) of our proposed rule, Part D sponsors will be required
to have in place a mechanism for providing, on a timely basis, specific
information to current and prospective enrollees upon request. Such
mechanisms will include:
    * A toll-free customer call center;
    * An Internet website; and
    * Responses in writing upon beneficiary request.
    As proposed at Sec.  423.128(d)(1)(i) and (d)(1)(ii), Part D plans'
customer call centers will be required to be open during usual business
hours and provide customer telephone service, including to pharmacists,
in accordance with standard business practices. We strongly
recommended, however, that Part D plans provide some sort of 24-hour-a-
day/7 day-a-week access to their toll-free customer call centers in
order to provide timely responses to time-sensitive questions. In
addition, we proposed requiring that Part D plans maintain websites as
one means of disseminating information to current and prospective Part
D enrollees that would include the detailed plan description
information described in Sec.  423.128(b) of our proposed rule.
Finally, Part D plans would be required to respond to beneficiary
requests for specific information in writing, upon request. This
requirement was codified in Sec.  423.128(d)(3) of our proposed rule.
    Except as otherwise provided below, the final rule adopts the
specific information disclosure standards set forth in Sec.  423.128(d)
of the proposed rule.
    Comment: Several commenters recommended against requiring a 24-
hour/7-day-a-week call center because of the high costs associated with
operating a call center during off-hours. These commenters support
operating a call center during normal business hours as required in the
proposed regulations. One commenter suggested Part D plans consider
developing a website and IVR system that allows beneficiaries to access
their accounts to determine their TrOOP balance.
    Other commenters recommended requiring Part D plans to operate 24/7
call centers, stating that the need for prescription drugs may arise
outside of normal business hours and would necessitate timely
assistance and resolution of coverage issues. These commenters noted
that the implications of delayed access are potentially very serious.
One commenter stated that advice hotlines should be available 24-hour/
7-days a week to assist enrollees and pharmacies in understanding Part
D plan formularies. Another commenter urged requiring extended service
hours especially during the initial enrollment period and also ensuring
that language specialists are available.
    Response: We have retained our proposed requirement (in Sec.
423.128(d)(1) of our final rule) that Part D plans maintain a toll-free
customer call center that is open during usual business hours and
provides customer telephone service, including to pharmacists, in
accordance with standard business practices. However, Part D plans
should view this requirement as a floor which they can exceed--
particularly at times such as annual open enrollment periods. Access to
bilingual customer service representatives may also be appropriate in
certain parts of the country. Given the need for Part D plans to
provide timely information on certain time-sensitive issues, however,
we strongly recommend that Part D plans also provide access to 24/7
clinical advice hotlines as is customary for many health plans.
    Comment: One commenter recommended that we require formulary
updates to plans' websites only when actual changes are made, but no
more than once per month.
    Response: We agree with this commenter. We recognize the need for
formulary information to be kept as current as possible to allow
enrollees and prospective enrollees to make the best possible decisions
regarding coverage of their particular Part D drugs. However, P&T
committees typically meet quarterly, and we expect that most formulary
changes recommended by a P&T committee will be implemented following
regular committee meetings. We have therefore changed the requirement
in Sec.  423.128(d)(2)(ii) of our proposed rule, which required weekly
updates of formulary information on Part D plan websites, to require
monthly updates instead. This requirement is codified at Sec.
423.128(d)(2)(ii) of our final rule.
    Comment: One commenter asked us to clarify that formulary
information will be made available through means other than plan
websites.
    Response: As previously stated, enrollees and prospective enrollees
will be able to obtain specific Part D plan information, including
formulary information, upon request via telephone and in writing. In
addition, we have revised our final rule at Sec.  423.128(b)(4) to
require Part D plans to provide enrollees with an actual list of drugs
included on the plan's formulary.
    Comment: One commenter requested clarification that our requirement
that formulary information be posted on a Part D plan website be
limited to including only a list of formulary drugs and not the full
range of clinical information associated with those drugs.

[[Page 4273]]

    Response: Plans will only be required to include a list of drugs
included on their formularies--and not the clinical information
associated with those drugs--under our information dissemination
requirements.
d. Claims Information
    In accordance with the requirements of section 1860D-(4)(a)(4) of
the Act, Sec.  423.128(e) of the proposed rule required Part D sponsors
to furnish to enrollees who receive covered Part D drugs an explanation
of benefits (EOB). EOBs will be required to be written in a form easily
understandable to beneficiaries. In Sec.  423.128(e)(6) of our proposed
rule, we proposed that an EOB be provided at least monthly for those
utilizing their prescription drug benefits in a given month.
    We also proposed in Sec.  423.128(e)(1)-(5) that Part D plans' EOBs
include:
    * A listing of the item or service for which payment was
made, as well as the amount of such payment for each item or service;
    * A notice of the individual's right to request an itemized
statement;
    * Information regarding the cumulative, year-to-date amount
of benefits provided relative to the deductible, the initial coverage
limit, and the annual out-of-pocket threshold for that year;
    * A beneficiary's cumulative, year-to-date total of incurred
costs (to the extent practicable); and
    * Information about any applicable formulary changes.
    Except as otherwise provided below, the final rule adopts the EOB
standards set forth in Sec.  423.128(e) of the proposed rule.
    Comment: Some commenters supported the requirement to mail
enrollees an EOB each month that the drug benefits are provided, as
stated in the proposed regulations. Some commenters recommended
dissemination of the EOBs quarterly and upon request of the enrollees
rather than monthly when prescription drug benefits are provided.
    Several commenters urged us to allow Part D plans the flexibility
to provide an EOB to enrollees through means other than mail, such via
a plan website, electronically through email, or by telephone inquiry.
One commenter noted that it is not current practice for health plans to
mail enrollees an EOB monthly and that this would raise administrative
costs. Some commenters expressed their objection to providing an EOB at
pharmacies, stating this would be far beyond pharmacies' technological
capabilities, and that provision of the EOB via mail or electronically
should be plans' responsibility.
    Some commenters expressed that the EOBs should also include
information about appeals right and processes, information about
formulary information and plan terminations, and information regarding
whether the deductible and out-of-pocket thresholds have been met.
Another commenter stated that the EOB should be modified to be
applicable to beneficiaries who are subsidy eligible individuals due to
the differences in the deductibles and cumulative spending limits for
these individuals.
    Response: We appreciate commenters' feedback regarding our proposed
EOB requirements. As provided in Sec.  423.128(e)(6) of our final rule,
we are retaining our proposed requirement that an EOB be provided at
least monthly for those enrollees utilizing their prescription drug
benefits in a given month. This requirement is consistent with our
policy regarding the Medicare Summary Notice, which is provided monthly
for beneficiaries with Part A or Part B utilization.
    We believe it is most appropriate for enrollees to receive a
written EOB, via U.S. mail, and have provided for this under Sec.
423.128(e) of our final rule. Plans may offer additional mechanisms for
the provision of such information--for example, via a website or call
center. Plans may provide the EOB through alternative means
electronically via email, for example only to the extent that enrollees
affirmatively elect to receive their EOBs in such a manner. In the
preamble, we suggested that Part D plans might explore provision of
EOBs at the point-of-sale, but that statement was in no way intended to
impose a requirement on pharmacies to provide Part D plan information
in the absence of the technological capacity to do so.
    We do not believe that the EOB is the most appropriate mechanism
for provision of information about appeals rights and processes or
information about plan terminations; this information will be provided
through other mechanisms. We clarify, however, that EOBs will be
required to include information regarding the cumulative, year-to-date
amount of benefits provided relative to the deductible, the initial
coverage limit, and the annual out-of-pocket threshold for that year,
as well as information about any upcoming formulary changes. For low-
income beneficiaries, the information about the cumulative, year-to-
date total of incurred costs provided by the Part D plan in the EOB
will include CMS subsidy amounts that count toward incurred costs.
7. Public Disclosure of Pharmaceutical Prices for Equivalent Drugs
(Sec.  423.132)
    Under section 1860D-4(k)(1) of the Act, Part D sponsors will be
required to ensure that pharmacies inform enrollees of any differential
between the price of a covered Part D drug to an enrollee and the price
of the lowest priced generic version of that drug and available under
the Part D plan at that pharmacy. As stipulated in our proposed rule,
this information will have to be provided at the time the plan enrollee
purchases the drug, or in the case of drugs purchased by mail order, at
the time of delivery of that drug. Disclosure of this information will
not be necessary, however, if the particular covered Part D drug
purchased by an enrollee was the lowest-priced generic version of that
drug available at a particular pharmacy.
    As provided under section 1860D-4(k)(2)(B) of the Act, we are
permitted to waive the requirement that information on differential
prices between a covered Part D drug and generic equivalent covered
Part D drugs be made available to Part D plan enrollees at the point of
sale (or at the time of delivery of a drug purchased through a mail-
order pharmacy). Accordingly, we proposed waiving the requirement that
information on lowest-priced generic drug equivalents be provided to
enrollees for covered Part D drugs purchased by Part D plan enrollees
when those covered Part D drugs are purchased at:
    * Any pharmacy, when the individual is enrolled in an MA
private fee-for-service plan that offers qualified prescription drug
coverage and provides plan enrollees with access to covered Part D
drugs dispensed at all pharmacies, without regard to whether they are
contracted network pharmacies, and does not charge additional cost-
sharing for access to covered Part D drugs dispensed at all pharmacies;
    * Out-of-network pharmacies;
    * I/T/U network pharmacies; and
    * Network pharmacies located in any of the U.S. territories
(American Samoa, the Commonwealth of the Northern Mariana Islands,
Guam, Puerto Rico, and the Virgin Islands). We requested comments on
the appropriateness of the circumstances we proposed for waiver of the
requirements in Sec.  423.132(c) of our proposed rule, as well as any
additional circumstances we may wish to consider.
    We also proposed waiving the requirement that information on
differential prices between a covered Part D drug and generic
equivalent covered Part D drugs be made available to Part D plan
enrollees at the point of

[[Page 4274]]

sale when Part D plan enrollees obtain covered Part D drugs in long-
term care pharmacies. We requested comments regarding appropriate
standards with regard to the timing of disclosure of generic price
differentials to institutionalized Part D enrollees.
    Except as otherwise provided below, the final rule adopts the
standards for public disclosure of pharmaceutical prices for equivalent
drugs set forth in Sec.  423.132 of the proposed rule.
    Comment: One commenter was concerned about the administrative
burden the disclosure requirement would impose at the community
pharmacy level and believed it was essential for us to develop
appropriate guidance to minimize potential problems. The commenter
noted that the administrative burden required to calculate cost-sharing
differences should cause us to consider compliance with the
requirements to be impracticable in all pharmacy settings because while
many community pharmacies' prescription processing systems currently
compare retail prices for brand-name and generic medications, the
systems are not equipped to compare the discount price calculated by a
Part D plan with the potential discount price by a plan for a generic
drug. According to this commenter, obtaining this discounted generic
price would require the pharmacy to process and submit a second
prescription transaction for the generic, and then require the pharmacy
to calculate the difference between the two prescriptions; the need to
compare the enrollee's cost-sharing under the two scenarios would add
more challenges. Other commenters assured us that this requirement is
not burdensome for retail pharmacies.
    Response: As provided in section 1860D-4(k) of the Act, Part D
plans must provide that each pharmacy in their networks with the
exceptions that we note in Sec.  423.132(c) of our final rule complies
with the requirement to disclose to beneficiaries information about
less expensive therapeutically equivalent and bioequivalent covered
Part D drugs. Given this statutory requirement, we cannot waive it
wholesale for all community pharmacies. We do not expect this
requirement will be burdensome for community pharmacists since, given
that, under Sec.  423.132(b) of our final rule, we are requiring
disclosure of generic differential information after a claim has been
adjudicated and for informational purposes only. We clarify that we do
not expect pharmacies to become involved in substituting a generic
equivalent in order for Part D plans to comply with the disclosure
requirement in Sec.  423.132(a) of our final rule. We expect that Part
D plans will work with their network pharmacies to operationalize this
requirement, but we do not expect that it will be burdensome to the
pharmacy industry given the prevalence of generic substitution and
information programs established by private plans in the market today.
    Comment: One commenter asked that we define ``lowest price'' as
determined by the Part D plan at the point of sale. Another commenter
asked that we clarify that ``price'' is defined as what the enrollee
would pay at the pharmacy subject to the applicable cost sharing. Two
commenters recommended that pricing comparison should be between the
brand name drug and the Maximum Allowable Cost (MAC) established by the
Part D plan for the generic equivalent to the branded drug. Another
commenter suggested allowing an estimated price differential between
brand and non-MAC generics to be made available to enrollees rather
than the exact cost differential between the price of a covered Part D
drug and the lowest priced generic version because of the technical
limitations of plans (for example, plans do not have a record of
generics in stock at all network pharmacies). This commenter claims
that, otherwise, this requirement would involve enormous administrative
efforts and costs for Part D plans. This commenter suggested a
reasonable alternative would be allowing plans to utilize historical
dispensing patterns and costs to have available relative price
information in the form of an estimate of the price differential
transmitted to pharmacies in the electronic claim response when a
prescription is filled, and that Part D plans would contractually
require pharmacies to share this information at the point-of-sale.
    Response: Under section 1860D-4(k) of the Act, Part D plans must
provide that each pharmacy in their networks complies with the
requirement to disclose to beneficiaries information about less
expensive therapeutically equivalent and bioequivalent covered Part D
drugs. Specifically, Part D plans must provide information about the
differential between the price of the covered Part D drug to the
enrollee (factoring in any applicable cost-sharing) and the price of
the lowest-priced therapeutically equivalent and bioequivalent drug
available at that pharmacy. We expect that Part D plans will work with
their network pharmacies to operationalize this requirement in the most
efficient way possible, and in a manner that complies with our
requirements under Sec.  423.132 of our final rule.
    Comment: One commenter recommended that disclosure of the generic
drug price be the lowest priced generic available at that pharmacy
because most pharmacies do not carry multiple generic drug options for
the same generic entity.
    Response: We agree with the commenter and clarify that Sec.
423.132(a) requires pharmacies to disclose the differential between the
price of a covered Part D drug and the price of the lowest-priced
generic version of that drug available at that pharmacy, consistent
with section 1860D-4(k)(1) of the Act.
    Comment: One commenter recommended only requiring pharmacists to
inform patients of price differentials if they are dispensing a high
cost version of a ``multiple source'' drug that is available at that
pharmacy. This commenter noted that in many cases these off-patent
innovator brands, also known as ``multiple source'' drugs, are less
costly than their generic counterparts (for example, some brand name
version antibiotics are often equal or lower in price than their
generic counterparts). Without this technical correction, these drugs
may not be considered by some Part D plans as generics and the
pharmacists would not inform the beneficiary that these lower cost
``multiple source'' drugs are available. Another commenter stated that
generics should be further defined to include ``multiple source'' brand
name drugs.
    Response: Section 1860D-4(k) of the Act requires that each pharmacy
that ``dispenses a covered Part D drug shall inform an enrollee of any
differential between the price of the drug to the enrollee and the
price of the lowest priced generic covered part D drug under the plan
that is therapeutically equivalent and bioequivalent and available at
such pharmacy.'' While we appreciate the commenter's point that off-
patent innovator drugs may also be available to enrollees at low
prices, and that this information should be disclosed at the point of
sale, the statute very specifically applies the requirement to the
lowest priced generic covered Part D drug available at that pharmacy.
Our definition of ``generic drug'' at Sec.  423.4 of the final rule
does not encompass an off-patent innovator drug, however. In addition,
given that section 1860D-2(b)(4)(A)(i)(I) of the Act specifically
distinguishes between a ``generic drug'' and a ``preferred drug that is
a multiple source drug,'' we do not believe it is appropriate to define
a generic drug to include a ``multiple

[[Page 4275]]

source'' brand-name version of a drug. However, nothing in the statute
would prohibit Part D plans from requiring their network pharmacies to
provide pricing information about lower priced off-patent innovator
drugs, and we encourage Part D plans to do so in the interest of
ensuring Part D enrollees get the best prices available for their
covered Part D drugs.
    Comment: One commenter concerned with the burden on pharmacies to
disclose pricing information stated that the disclosure requirement
should be limited to cases in which an enrollee asks for this
information at the pharmacy.
    Response: As provided in section 1860D-4(k) of the Act, Part D
plans must require network pharmacies, except for those which we have
specifically exempted from the requirement, to disclose information
about price differentials. We cannot limit this requirement to
circumstances in which an enrollee specifically asks for the
information. Furthermore, we believe such disclosure will provide
enrollees--many of whom may not know that less expensive generic
equivalents are available--with valuable information that will save
money for beneficiaries, Part D plans, and Medicare.
    Comment: One commenter recommended disclosure only when a brand
name drug is prescribed and the prescriber has not stated ``Do Not
Substitute.''
    Response: As provided in section 1860D-4(k) of the Act, Part D
plans must require network pharmacies, except for those which we have
specifically exempted from the requirement, to disclose information
about price differentials. We cannot limit this requirement to
circumstances in which a prescriber has written a prescription for a
brand name drug and has not specifically stated that the pharmacy must
not substitute the brand name drug for a generic drug. We believe such
disclosure will provide enrollees many of whom may not know that less
expensive generic equivalents are available with valuable information
that will save money for beneficiaries, Part D plans, and Medicare.
    Comment: Two commenters suggested that we clarify that the lowest
price generic version that is ``therapeutically equivalent and
bioequivalent'' is an AB-rated generic equivalent, as AB rated drugs
have been proved to be bioequivalent (rather than presumed to be
bioequivalent). Another commenter suggested that we limit disclosure
requirements to products with ``A'' code, as specified in the FDA
Orange Book.
    Response: We agree with these commenters and clarify that the
disclosure requirement in Sec.  423.132(a) of our final rule applies
only with respect to AB-rated alternatives that are therapeutically
equivalent and bioequivalent to the covered Part D drug in question.
    Comment: A number of commenters recommended requiring mail-order
pharmacies to provide price differentials before the prescription is
filled and delivered rather than at the time of delivery. The
commenters noted that notification by the time of delivery may be too
late for beneficiaries to receive possible savings, especially since
mail-order pharmacies provide a 90-day supply and generally have lower
dispensing rates than retail pharmacies.
    Response: We do not believe it is practicable to require a mail-
order pharmacy to contact an enrollee with price differential
information prior to filling and delivering their prescription. We
believe such a requirement will delay the delivery of needed drugs and
could potentially compromise beneficiaries' privacy given attempts by
mail-order pharmacies to contact plan enrollees. In addition, such a
requirement would be inconsistent with the requirement for retail
pharmacies in Sec.  423.132(b) of our final rule, which does not
require that Part D plans provide price differential information before
the drug is purchased. We have therefore retained our requirement, in
Sec.  423.132(b) of our final rule, that disclosure must occur at the
time of delivery of the drug when a drug is dispensed by a mail-order
pharmacy.
    Comment: One commenter recommended that we not waive the public
disclosure requirement for private fee-for-service plans offering
qualified prescription drug coverage because there are many
opportunities for generic savings that might not be realized in the
absence of this requirement.
    Response: Section 1860D-12(d)(2) of the Act specifically requires
us to waive the public disclosure requirement for private fee-for-
service MA plans that offer qualified prescription drug coverage and
provide plan enrollees with access without charging additional cost-
sharing for covered Part D drugs dispensed at all pharmacies.
    Commenter: One commenter strongly urged that we waive the public
disclosure requirement for I/T/U pharmacies because these pharmacies
bear beneficiaries' out-of-pocket costs for covered Part D drugs,
obviating the need for AI/AN Part D enrollees obtaining covered Part D
drugs at these pharmacies to have this price comparison information.
    Response: As provided both in our proposed rule and in our final
rule at Sec.  423.132(c)(3), we will waive the public disclosure
requirement for I/T/U pharmacies.
    Comment: One commenter requested that MA-PD plans be allowed to
request a waiver of the public disclosure requirement.
    Response: As provided in Sec.  423.132(c)(5), we will consider
waiving the public disclosure requirement under circumstances other
than those specified in Sec.  423.132(c)(1)-(4) to the extent that we
deem such compliance to be impossible or impracticable. MA-PD plans
seeking a waiver of the public disclosure requirement for any of their
network pharmacies will therefore have to demonstrate to us that
compliance with the public disclosure requirement in Sec.  423.132(a)
is impossible or impracticable. In addition we note that, as provided
in section 1860D-21(c), we will waive any Part D requirement for an MA-
PD plan that conflicts with or duplicates a requirement under Part C,
or the waiver of which is necessary to promote coordination between
benefits provided under Parts C and D.
    Comment: Another commenter suggested that we specifically waive the
disclosure requirement for MA-PD plans that own and operate their own
pharmacies because these pharmacies may carry only one version of any
particular generic drug at any one time (except when transitioning from
one manufacturer's product to another).
    Response: We do not believe the commenter has provided us with
sufficient information to determine that the public disclosure
requirement is impossible or impracticable for Part D plans that own
and operate their own pharmacies and should therefore be waived in
regulation. However, we note that MA-PD plans may also wish to consider
seeking a waiver of the public disclosure requirement if, as provided
in section 1860D-21(c) of the Act, they can demonstrate that this
requirement conflicts with or duplicates a requirement under Part C, or
that such waiver is necessary to promote coordination between benefits
provided under Parts C and D.
    Comment: Several commenters supported the applicability of
disclosure requirements to long-term care pharmacies because many long-
term care facility residents and their families would be interested to
know if additional savings are possible. Two commenters opposed
requiring price

[[Page 4276]]

disclosure at long-term care pharmacies because most long-term care
beneficiaries do not have a choice regarding long-term care pharmacies
and will likely qualify for low-income subsidies for institutionalized
Part D enrollees who are full-benefit dual eligible individuals (which
means they will have no out-of-pocket costs for covered Part D drugs).
Thus, this information will have little effect on the drugs used by
this population and will increase administrative burden for long-term
care pharmacies.
    Response: We agree with commenters who thought long-term care
residents and their families would be interested to know if additional
covered Part D drug savings are possible through the use of generic
drugs, particularly since not all long-term care patients will qualify
as full subsidy eligible individuals. We are therefore retaining the
requirement we proposed at Sec.  423.132(d)(1) of our proposed rule,
but clarify--in Sec.  423.132(d)(1) of our final rule--that long-term
care pharmacies will have to provide information about differential
price information required under Sec.  423.132(a) of our final rule to
Part D plans, which will, in turn, provide that information to their
institutionalized enrollees via the explanation of benefits required
under Sec.  423.128(e) of our final rule.
8. Privacy, Confidentiality, and Accuracy of Enrollee Records (Sec.
423.136)
    To the extent that the prescription drug plan offered by a PDP
sponsor maintains medical records or other health information regarding
Part D enrollees, Sec.  423.136 of our proposed rule required the PDP
sponsor to meet the same requirements regarding confidentiality and
accuracy of enrollee records as MA organizations offering MA plans must
currently meet under 42 CFR 422.118, according to the stipulations of
section 1860D 4(i) of the Act. We clarify that the requirements of
Sec.  423.136 do not apply to PACE organizations and cost plans
offering qualified prescription drug coverage, since these plans are
subject to similar requirements under Sec.  460.200(e) and Sec.
460.210, and Sec.  417.486, respectively.
    PDP sponsors will be required to--
    * Abide by all Federal and State laws regarding
confidentiality and disclosure of medical records or other health and
enrollment information, including the Health Insurance Portability and
Accountability Act (HIPAA) of 1996 and the privacy rule promulgated
under HIPAA;
    * Ensure that medical information is released only in
accordance with applicable Federal or State law;
    * Maintain the records and information in an accurate and
timely manner; and
    * Ensure timely access by enrollees to records and
information pertaining to them.
    Prescription drug plans will be covered entities under the HIPAA
Privacy Rule because they meet the definition of ``health plan,'' as
defined in 45 CFR 160.103. The HHS Office for Civil Rights (OCR) is
responsible for implementing and enforcing the HIPAA Privacy Rule. OCR
has authority to investigate complaints, to conduct compliance reviews,
and to impose civil money penalties for HIPAA Privacy Rule violations.
Thus, any violations by PDP sponsor for its obligations under the
Privacy Rule as a covered entity are subject to such enforcement by
OCR. OCR maintains a website with frequently asked questions and other
compliance guidance at http://hhs.gov/ocr/hipaa.

    Comment: One commenter thought that we should detail the
confidentiality and disclosure requirements set forth in Sec.  423.136
of our proposed rule in the final rule, instead of simply referencing
the requirements in Sec.  422.118. This commenter believes that because
of the importance of privacy protections, it is necessary that required
protections are reiterated in our final rule and that PDP sponsors
adequately understand their responsibilities to safeguard the health
information of Medicare beneficiaries. Without privacy safeguards built
directly in the regulation, beneficiaries could be vulnerable to
another amendment.
    Response: We agree with this commenter and have incorporated the
provisions of Sec.  422.118 directly into Sec.  423.136 of our final
rule rather than only referencing the provisions of Sec.  422.118.
    Comment: One commenter recommends that we make privacy provisions
stronger for PDP sponsors, not only reiterating the protections under
Sec.  422.118, but also including specific rules regarding uses and
disclosures of beneficiary information that both incorporate the
provisions of important laws (such as the notice and authorization
provisions of the HIPAA privacy rule) and strengthen the provisions of
those laws to better protect the health information of Medicare
beneficiaries.
    Response: The requirements in Sec.  423.136 of our final rule make
clear that PDP sponsors must abide by all Federal and State laws
regarding confidentiality and disclosure of medical records, or other
health and enrollment information. This obligation includes compliance
with the provisions of the HIPAA privacy rule and its specific rules
regarding uses and disclosures of beneficiary information. Because
section 1860d-4(i) of the Act stipulates that the privacy provisions
under section 1852(h) apply to prescription drug plans in the ``same''
manner as they apply to MA plans under Medicare Part C, we do not have
the statutory authority to expand upon those provisions as the
commenter suggests.
    Comment: One commenter recommends that we permit MA organizations
and PDP sponsors to prevent pharmacies in their networks and out-of-
network pharmacies from releasing prescriber data to third parties.
Some MA organizations are concerned that providing data to drug
manufacturers will have the negative effect of assisting manufacturers
in targeting their marketing of unnecessary, expensive drugs in a more
effective manner.
    Response: Pharmacies that engage in electronic transactions are
covered entities under HIPAA and are thus required to comply with the
HIPAA Privacy Rule. As provided in 45 CFR 164.508, such pharmacies, as
covered entities, would be prohibited from releasing individually
identifiable health information to drug manufacturers for the purpose
of the manufacturers' marketing unless a patient specifically
authorizes the disclosure of his or her information for this purpose.
However, the Privacy Rule protects patient information only, and is
therefore not implicated regarding the sharing of information about
prescribers.

D. Cost Control and Quality Improvement Requirements for Part D Plans

1. Overview (Scope) (Sec.  423.150)
    Subpart D of part 423 implements provisions included in sections
1860D 4(c), 1860D-4(d), 1860D-4(e), 1860D-4(j), and 1860D-21(d)(3) of
the Act and sections 102(b) and 109 of Title I of the MMA. This subpart
sets forth the requirements related to the following:
    * Drug utilization management programs, Quality assurance
measures and systems, and Medication Therapy Management programs (MTMP)
for Part D sponsors;
    * Consumer satisfaction surveys of Part D plans;
    * Electronic prescription program;

[[Page 4277]]

    * Quality Improvement Organization (QIO) activities;
    * Compliance deemed on the basis of accreditation;
    * Accreditation organizations;
    * Procedures for the approval of accreditation as a basis
for deeming compliance.
    Below we summarize the proposed provisions and respond to comments.
(For a detailed discussion of our proposals, please refer to the
proposed rule (69 FR 46666)).
2. Drug Utilization Management, Quality Assurance, and Medication
Therapy Management Programs (MTMPs) (Sec.  423.153)
    Proposed Sec.  423.153(a) required each Part D sponsor to establish
a drug utilization management program, quality assurance measures and
systems, and a MTMP.
    We combined these requirements into one section of the regulation
because each of these requirements will impact the quality and cost of
care provided to beneficiaries. We stated that our intent was to ensure
that the prescription drug benefit was provided using state of the art
cost management and quality assurance systems. We stated that we also
understood the overlapping nature of these requirements and that
provisions under one requirement might complement another requirement.
    We also explained in the proposed rule that although these
requirements were similar in their underlying goals, they could also be
quite different, and that while we understood that some members of the
industry use various quality assurance measures and systems for
controlling utilization and reducing medication errors, less
information was available regarding MTMPs.
    After receiving many comments on our proposals, our final policy,
generally stated, is that cost control and quality improvement
requirements describe minimum standards for drug utilization
management, quality assurance, and MTMP so as to provide plans with
flexibility to develop, implement, and update their programs and
systems to reflect changing best practices and to continue to provide
beneficiaries with the best quality prescription drug benefit at the
lowest possible cost. We expect plans to continuously monitor their
programs and processes, identify opportunities for improvement, and
develop improvement plans and strategies.
    As we stated in the proposed rule, we believe that the different
program and system requirements in this subpart frequently overlap and
therefore, plans need flexibility to coordinate among the different
requirements. Moreover, flexibility is required to ensure that plans
can support forthcoming electronic prescribing standards that we
envision will dramatically affect the utilization management and
quality assurance landscape. Nevertheless, despite the lack of
specificity in our requirements, we expect plans to continually pursue
innovative improvements for their programs and systems, and maximize
technological advances when appropriate.
    Ultimately, the evaluation of these programs and systems needs to
be based upon their impact on therapeutic outcomes. As part of our
commitment to improving therapeutic outcomes through the Medicare
Prescription Drug Benefit, we intend to work with industry and other
stakeholders to develop a comprehensive strategy for evaluating plan
performance that collectively considers multiple standards and services
affecting the cost and quality of drug therapy. As industry practices
evolve, including the expected expansion of electronic prescribing, we
believe meaningful performance measures can be identified that will
validate best practices and provide benchmarks that will spur further
program and system improvements. Accordingly, we will work with
industry to identify new standards for quality and performance that
could eventually become plan requirements. Our goal is to ensure that
the Medicare Prescription Drug Benefit will always provide
beneficiaries with the highest quality prescription drug benefits at
the lowest possible cost.
    In addition to our efforts to work with industry and stakeholders
to develop future performance measures and standards for Part D plans,
we also intend to implement a plan for utilizing Medicare prescription
drug data to improve the evidence on risks, benefits, and overall costs
of drug therapies for the chronically ill and other Medicare
beneficiaries. This plan will be developed through a public process and
implemented in a manner that preserves the confidentiality of
beneficiary information.
a. Drug Utilization Management
    Proposed Sec.  423.153(b) provided flexibility to Part D sponsors
in their design of drug utilization management, and included minimum
requirements for drug utilization management programs. These
requirements were: (1) that plans maintain a program that includes
incentives to reduce costs where medically appropriate; and (2) that
plans maintain policies and systems to assist in preventing over-
utilization and under-utilization of prescribed medications. The
proposed rule also stated that Part D sponsors must inform enrollees of
program requirements, such as those involving allowable refill
timeframes, in order to prevent unintended interruption in drug
therapy.
    In addition, the proposed rule contained a discussion about whether
drug utilization management techniques should be under the direction
and oversight of a P&T Committee to ensure an appropriate balance
between clinical efficacy and cost effectiveness. The discussion on P&T
Committees and their oversight of drug utilization management is
contained in subpart C of this final rule.
    We invited comments on whether there are industry standards for
drug utilization management and whether we should adopt any of these
standards.
    Comment: We received numerous comments on our proposed standards,
with several commenters supporting the flexibility we proposed and
stating that there are no current, widely-accepted standards in the
area of drug utilization management. Others supported additional detail
in the regulations and suggested that we should further specify drug
utilization management program standards. Some expressed concern that
plans could use drug utilization management programs to restrict
utilization inappropriately. In addition, several commenters
recommended that we require plans to focus equally on over-utilization
and under-utilization to ensure appropriate utilization by enrollees
and to monitor plan performance in these areas.
    Response: Based on a literature review by Booz-Allen-Hamilton\3\,
and the public comments received on this topic, we are not adopting
further specifications for drug utilization management requirements in
the final rule. While drug utilization management is common practice,
plans appropriately employ a number of different approaches (for
example, formularies, step therapy, tiered cost sharing, prior
authorization) and different combinations of those approaches, and
therefore, while we will consider additional standards in the future,
we are adopting the flexibility we proposed in the proposed rule. As we
stated in the proposed rule, we believe the competitive bidding and
premium setting processes, combined with the requirements for
transparency and information availability, will provide powerful
incentives for plans to

[[Page 4278]]

innovate and adopt the best techniques available.
---------------------------------------------------------------------------

    \3\ Booz-Allen-Hamilton. Final Report for Technical Support for
the Implementation of Part D. September 15, 2004.
---------------------------------------------------------------------------

    Nevertheless, our requirement for inclusion of incentives to reduce
costs when medically appropriate must be interpreted broadly to mean
that all drug utilization management techniques must be medically
appropriate, and Sec.  423.153(b) requires the utilization management
program established by plans to be ``reasonable and appropriate.'' As
outlined in the formulary guidance that will follow this final rule, we
will review plans' drug utilization management requirements to ensure
that beneficiaries are given appropriate access to medically necessary
drugs in a timely manner. In order to ensure that plans appropriately
employ drug utilization management techniques, and to develop or adopt
further drug utilization management performance measures, we agree with
commenters who recommended we track plan performance in this area.
Therefore, we are adding a reporting requirement at Sec.  423.153(b)(3)
and we will specify the information that we will require in separate
guidance.
    Comment: One commenter stated that there are no standard measures
for drug utilization management and recommended that we investigate
using HEDIS (Health plan Employer Data and Information Set) measures as
well as a number of other specific measures. Another commenter
suggested that we use total health care costs as a measure.
    Response: As discussed in the previous response, we intend to
develop or adopt further drug utilization management performance
measures in the future. While we agree that no universally accepted
performance measures currently exist, and are therefore not prepared to
specify further requirements in regulation, we also understand that
there are some performance measures being utilized today and that these
could provide valuable information. We intend to evaluate existing
measures, such as HEDIS, and could include these or similar performance
measures in our formulary guidance or drug utilization management
reporting guidelines that will follow publication of this rule. In
general, we expect drug utilization management programs to ensure that
beneficiaries have appropriate access to medically necessary drugs in a
timely manner.
b. Quality Assurance
    As with the proposed regulations for drug utilization management
programs, the proposed rule for quality assurance measures and systems
provided minimum standards for quality assurance measures and systems,
while for the most part giving plans flexibility to design such
measures and systems. Proposed Sec.  423.153(c) required Part D
sponsors to include quality assurance measures and systems for: (1)
reducing medication errors; (2) reducing adverse drug interactions;
and, (3) improving medication use. It also proposed to require plans to
establish requirements for: (1) drug utilization review (DUR); (2)
patient counseling; and, (3) patient information record-keeping.
    In the proposed rule, we stated that the DUR, patient counseling
and patient information record-keeping requirements would generally
need to comply with section 4401 of the Omnibus Reconciliation Act of
1990 as codified in Sec.  456.705 and section 1927(g)(2)(A) of the Act,
and we stated that we were considering such specific requirements for
the final rule. Although those regulations were written specifically
for the Medicaid population, we stated that we understood that they
describe currently accepted standards for contemporary pharmacy
practice, and our intent was to require plans to continue to comply
with contemporary standards. We solicited comment on whether the
Medicaid standards were in fact industry standards, whether they are
appropriate standards for part D, and if they are, how they should be
adapted for use in Part D. We also stated our understanding that some
members of industry use additional quality assurance measures and
systems. We invited comments on whether there were additional industry
standards that we might adopt. Furthermore, we proposed that Part D
sponsors will be required to have systems and measures established to
ensure that network pharmacy providers are complying with the plans'
quality assurance requirements. We requested comments on the costs and
challenges associated with these systems and measures.
    Comment: Most commenters agreed that the relevant parts of OBRA 90
for DUR, patient counseling and patient information record-keeping
describe widely accepted standards for pharmacy practice. While no
other suggestions for widely accepted standards of pharmacy practice
were offered, one commenter indicated that these requirements will not
adequately cover appropriate standards for home infusion pharmacies,
which the commenter recommended should also require patient interviews
and clinical assessments. Alternatively, several commenters recommended
that we defer to State laws and State board of pharmacy regulations
regarding pharmacy practice standards instead of creating a redundant
Federal standard for pharmacy practice.
    Response: The overwhelming majority of comments confirmed our
understanding that the relevant parts of OBRA90 for DUR, patient
counseling, and patient information record-keeping generally describe
widely accepted standards of pharmacy practice for both Medicaid and
Non-Medicaid patients. We find that almost all of the State boards of
pharmacy have adopted regulations for pharmacy practice that, at a
minimum, generally reflect these relevant parts of the OBRA 90
requirements. However, upon reconsideration, since our intent was to
ensure that plans provided access to network providers that are
required to comply with contemporary pharmacy practice standards, and
not to create a new Federal standard for pharmacy practice, we agree
with commenters that recommended that we defer to existing authority
for regulating pharmacy practice. In fact, this is consistent with the
Department of Health and Human Service's (HHS) general position of
deferring to States for regulating the practice of pharmacy. Therefore,
our requirement at Sec.  423.153(c)(1) in the final rule states that
plans must provide us with representation that their network providers
are required to comply with minimum standards for pharmacy practice
established by the States.
    While we understand that additional quality standards might apply
to specific pharmacy practice-settings such as home infusion pharmacy,
specialty pharmacy and long-term care pharmacy practice, we are not
prepared to adopt additional, practice-setting specific Federal
standards at this time. We believe that current pharmacy practice
standards established by the States, whether or not a State has
additional standards for specific pharmacy practice-settings, still
provide applicable minimum standards for all pharmacy practice-
settings. Nevertheless, we encourage plans and their network pharmacy
providers to establish and agree upon additional quality assurance
standards as necessary, including those required for accreditation by
recognized accrediting organizations.
    Comment: Several commenters stated that concurrent and
retrospective drug utilization review (DUR) systems illustrate
successful examples of industry practices that help prevent
inappropriate drug therapy. Concurrent DUR systems are used to identify
potential inappropriate drug therapy before a patient receives a
prescription while retrospective DUR systems can

[[Page 4279]]

often identify patterns of potential inappropriate prescribing and drug
utilization based upon drug claim history.
    Response: Based upon these comments as well as similar information
provided in the Booz-Allen-Hamilton report, we agree that concurrent
and retrospective DUR must be components of the quality assurance
systems and measures to be implemented by Part D plans. Accordingly, we
have specified requirements for concurrent and retrospective DUR
systems, policies, and procedures at Sec.  423.153(c)(2) and Sec.
423.153(c)(3), respectively.
    In the proposed rule, we stated that elements we viewed as
desirable for quality assurance systems were: (1) electronic
prescribing; (2) clinical decision support systems; (3) educational
interventions; (4) bar codes; (5) adverse event reporting systems; and,
(6) provider and patient education.
    While we did not expect Part D plans to adopt all of these
elements, we stated that we expected substantial innovation and rapid
development of improved quality assurance systems in the new
competitive and transparent market being created by the new Part D
benefit.
    We invited comments on which, if any, elements of a quality
assurance system should be contained in our program requirements. We
were particularly interested in best practices in quality assurance,
costs and benefits associated with each element, the challenges
involved in implementing quality assurance measures and systems, types
of data useful for reducing medication errors, associated costs and
challenges with collecting this data, and how these data could best be
communicated to providers and beneficiaries to improve medication use.
    We noted that the MMA does not define or explain the term
``medication error.'' Nevertheless, we stated that we believe a common
definition was important. Therefore, we cited the following definition
as one that we might use initially in interpretive guidance, which was
previously adopted by the FDA in its proposed rule requiring bar codes
on human drug products:
    ``Any preventable event that may cause or lead to inappropriate
medication use or patient harm while the medication is in the
control of the healthcare professional, patient, or consumer. Such
events may be related to professional practice; healthcare products,
procedures, and systems, including prescribing; order communication;
product labeling, packaging, and nomenclature; compounding;
dispensing; distribution; administration; education; monitoring; and
use.'' (See 68 FR 12500 (March 14, 2003)).
    We indicated that in the future we may require quality measures
that include error reports and stated that we could use this
information to evaluate plans. In addition, we indicated that we may
publish this information for enrollees to use when comparing and
choosing their individual plans. Therefore, we invited specific
comments on how we could evaluate Part D plans based on the types of
quality assurance measures and systems they have in place, on this
proposed definition of ``medication error'', on how error rates can be
used to compare and evaluate plans, and on how such information could
best be provided to beneficiaries to assist them in making their
choices among plans.
    Comment: A number of commenters recommended we include all elements
discussed in the proposed rule including decision support, electronic
prescribing, bar codes, adverse event reports, and provider and patient
education. Most of them recommended that we require adverse event and
medication error tracking systems. However, many commenters recommended
that these tracking systems be used internally and that reports not be
sent to CMS or made public. These commenters argued that there is too
much inconsistency in the definitions used in the field and that an
external reporting requirement would actually be counter productive for
quality improvement. While several commenters generally thought our
proposed definition for ``medication error'' was accurate, these same
commenters stated that such a definition would need to be narrowed to
prove useful for consistent reporting among the plans.
    Response: As to all the elements that we listed in the preamble, we
agree with the many industry organizations that there are no well
accepted industry standards to make these mandatory requirements. The
Booz-Allen-Hamilton report\4\ supports this finding. We continue to
believe that these are desirable goals and have found that many
organizations are already using them. We expect that electronic
prescribing will greatly increase the availability of clinical decision
support. We intend to work with various stakeholders to further develop
these and other quality assurance systems enhancements.
---------------------------------------------------------------------------

    \4\Ibid.
---------------------------------------------------------------------------

    We agree with commenters that there are inconsistencies associated
with the reporting of adverse events and medication errors. Moreover,
we are not convinced, based upon many of the comments received, that an
external reporting requirement for medication errors, even if we
provided a more specific and narrow definition of ``medication error'',
will lead to improved quality of care. Therefore, instead of requiring
plans to report medication errors to us, we require plans to implement
internal medication error identification and reduction systems, and we
have added this requirement at Sec.  423.153(c)(4). We are also
requiring plans to provide us with information concerning their quality
assurance measures and systems, in accordance with guidelines published
by us. In addition, we encourage plans to utilize the FDA Medwatch form
for reporting adverse events, as well as educating prescribers and
pharmacy providers about its availability. Finally, although we will
not require external medication error reporting at this time, we
maintain that our proposed definition of ``medication error'' can still
serve as appropriate guidance for internal medication error
identification and reduction systems.
c. Medication Therapy Management Programs (MTMPs)
    Proposed Sec.  423.153(d) required Part D sponsors to establish an
MTMP described in section 1860D-4(c)(2) of the Act that is designed to
optimize therapeutic outcomes for targeted beneficiaries by improving
medication use and reducing adverse drug events, including adverse drug
interactions, that may be furnished by a pharmacist, and that may
distinguish between services in ambulatory and institutional settings.
We stated that MTMPs may include elements designed to promote (for
targeted beneficiaries):
    * Enhanced enrollee understanding--through beneficiary
education counseling, and other means that promotes the appropriate use
of medications and reduces the risk of potentially adverse events
associated with the use of medications.
    * Increased enrollee adherence to prescription medication
regimens (for example, through medication refill reminders, special
packaging, compliance programs, and other appropriate means).
    * Detection of adverse drug events and patterns of over-use
and under-use of prescription drugs.
    We proposed that in order to promote these elements and optimize
therapeutic outcomes for targeted beneficiaries, we envision MTMPs
potentially spanning a range of services, from simple to complex. In
addition to those mentioned in the statute, services could include, but
may not be limited to, performing patient health status

[[Page 4280]]

assessments, formulating prescription drug treatment plans, managing
high cost specialty medications, evaluating and monitoring patient
response to drug therapy, providing education and training,
coordinating medication therapy with other care management services,
and participating in State-permitted collaborative drug therapy
management.
    We specifically sought comment on MTMP best practices, essential
components of successful MTMPs, appropriate MTMP providers, service
level requirements, quality assurance requirements for MTMPs,
information on effective MTMP services that could be publicized and
used by beneficiaries, and other effective steps to make valuable,
proven MTMP services available to beneficiaries.
    Comment: Numerous commenters recommended that we specifically
define a minimum package of services that all plans must offer for
MTMPs, because plans will not have the economic incentives to offer
adequate MTMP services otherwise, or because different plans will offer
such different services that the quality of services provided will vary
significantly. Although comments suggested a wide variety of possible
MTMP services, common elements identified in several best practice
examples provided in the comments included: (1) Initial assessment/
patient interview; (2) Development of a drug plan identifying goals for
therapy; and, (3) Monitoring and evaluation of therapy. Nevertheless, a
number of commenters recommended that we maintain the level of
specificity contained in the proposed rule. These commenters stated
that no widely accepted MTMP standards exist and plans need flexibility
to develop and implement MTMPs that can best meet the needs of their
specific patient populations and therefore, achieve the best outcomes.
    Response: After reviewing extensive comments and conducting
additional research, we believe that insufficient standards and
performance measures exist to support further specification for MTMP
services and service level requirements, and therefore we are adopting
the flexibility proposed in the proposed rule. Although best practice
examples identified some common elements, neither the Booz-Allen-
Hamilton report, nor any comments submitted to us, showed that these
MTMPs reflected widely accepted standards of practice. In fact, until
the Pharmacist Provider Coalition's recent publication of their
definition of MTMP, no widely agreed upon definition of MTMP existed,
let alone standards and measures. While we understand the concern with
potential disincentives for part D plans to develop robust MTMPs, we
are not adopting additional regulatory requirements at this time
because it us unclear which specific, additional requirements would
enhance MTMPs, and ultimately improve therapeutic outcomes for part D
beneficiaries.
    We continue to believe that MTMPs can and must offer appropriate
services for targeted beneficiaries. However, we are concerned that
further premature regulatory requirements at this time might not only
fail to improve MTMPs, but could negatively impact their development.
Requiring a universal set of minimum services and service levels,
without fully understanding how they could effectively be implemented
on a much larger platform than illustrated in best practice examples,
could result in MTMPs becoming perfunctory services offered just to
satisfy regulatory requirements as opposed to patient focused services
aimed at improving therapeutic outcomes. For example, several of the
best practice examples stressed the importance of collaboration with
prescribers to ensure that MTMP is successful. However, simply
requiring specific services and service delivery mechanisms will not do
anything to ensure successful collaboration. Therefore, we believe that
at the outset of the Medicare Prescription Drug Benefit, plans must
have maximum flexibility to develop MTMPs that can achieve the
statutory goal of improving therapeutic outcomes.
    Notwithstanding the lack of current MTMP standards and performance
measures, we believe that MTMP must evolve and become a cornerstone of
the Medicare Prescription Drug Benefit. With an understanding that the
introduction of MTMP requirements can significantly impact the current
practice of pharmacy, we intend to utilize the Medicare Prescription
Drug Benefit as a platform for driving the quality improvement of
prescription drug therapy. We require plans to report details on their
respective MTMPs, and we intend to collaborate further with industry to
develop measures that can be used to evaluate programs and establish
appropriate standards. Our goal is to evaluate MTMPs within the context
of an overall strategy that evaluates not only MTMP, but also other
quality of care programs, standards, and services, such as drug
utilization management, drug utilization review, chronic care
improvement programs, and the role of QIOs. In so doing, we believe
that we will identify best practices that will evolve into industry
practice standards and could eventually be adopted as our standards.
    Comment: Several commenters recommended that we require plans to
allow beneficiaries to receive MTMP services from their network/non-
network provider of choice. In addition, several commenters recommend
that we require plans to offer MTMPs that favor face-to-face
consultations over other forms of intervention.
    Response: Consistent with our overall approach to MTMPs, at this
time we believe plans need the discretion to decide on which methods
and which providers are best for providing MTMP services available
under their specific MTMP. We assume that such providers will include
some network pharmacy providers, but plans are not obligated to use any
specific providers as long as those providing services for the plan are
qualified to provide such services. Furthermore, although we indicated
in the proposed rule that we believe pharmacists will be the primary
providers of these services, and that we believe beneficiary choice and
on-going beneficiary-provider relationships should play a role in
determining the appropriate providers, we recognize that such
determinations must be made in the context of the specific, overall
program design. Moreover, while we understand that face-to-face
consultations can offer advantages over other methods of service
delivery, it is still but one component of a successful MTMP.
Successful MTMPs will need to consider and coordinate not only the
method of communication and the providers of services, but also other
components such as the content of the service, the qualifications of
the providers, the identification of targeted beneficiaries, and the
documentation requirements associated with services performed. Because
plans are responsible for designing the programs to improve therapeutic
outcomes, plans will be in position to make the determinations that
will maximize overall MTMP effectiveness, taking into account all
factors that influence successful MTMP.
    In addition, while section1860D-4(b)(1)(C)(iii) of the Act requires
us to establish pharmacy access standards that include rules for
adequate emergency access to covered part D drugs, we do not believe
the same authority applies to out of network access for MTMP services.
Unlike situations when patients face an urgent need for covered Part D
drugs but do not have access to a network provider, we do not believe
this urgent need rationale reasonably applies to MTMP. In addition, the
Congress clearly knows

[[Page 4281]]

how to require out-of-network access and did so specifically for Part D
drugs in emergency situations. Accordingly, we can not require plans to
offer MTMP services through out-of-network pharmacies.
    Comment: One commenter noted that MTMP services will fall under the
consideration of State boards of pharmacy and how States have defined
the practice of pharmacy and scope of services which pharmacists are
legally able to provide to patients. Therefore, this commenter
requested that we work with States and their boards of pharmacy to
prevent conflicts between MTMP under the Medicare Prescription Drug
Benefit and State definitions of pharmacy practice and scope of
allowable pharmacist activities.
    Response: Generally, unless there is a conflict with Federal law,
we will defer to State laws and regulations pertaining to the practice
of pharmacy. We do not believe our current MTMP requirements pose any
conflicts with State laws and therefore, plans need to develop MTMPs
that comply with State laws and regulations.
    Comment: Several commenters recommended that we clarify that
providers can offer MTMP to non-targeted beneficiaries and bill the
beneficiaries for these services.
    Response: We agree that providers can offer MTMP services to non-
targeted beneficiaries because MTMP in these circumstances is not part
of the Medicare Prescription Drug Benefit. Providers need to notify
beneficiaries receiving these services that the services are not
offered as part of the Medicare Prescription Drug Benefit and
therefore, the beneficiary is responsible for all of the cost of the
MTMP.
    Similarly, if plans choose to offer MTMP to non-targeted
beneficiaries, beneficiaries must be notified that they are responsible
for 100 percent of the cost. Moreover, the costs for these services
fall entirely outside the Part D cost sharing structure and do not
count for purposes of tracking beneficiaries' total costs, out-of-
pocket costs, or for purposes of reinsurance and risk sharing with
Medicare.
    Comment: Several commenters recommended that we prohibit plans from
implementing MTMPs as a utilization management tool geared towards
shifting market share as opposed to improving therapeutic outcomes.
    Response: We agree that MTMPs are more than utilization management
programs focused on shifting market-share. Part D plans must implement
MTMPs designed to optimize therapeutic outcomes by improving medication
use and reducing the risk of adverse drug events, including adverse
drug interactions. Plan sponsors will need to coordinate their MTMPs
and utilization management strategies to improve therapeutic outcomes
at the lowest possible costs.
    In the proposed rule, we proposed that MTMP fees be treated as
administrative fees and incorporated into the premium, rather than
being billed to the beneficiary on a case-by-case basis. We noted that
while section 1860D-4(c)(2)(E) of the Act specifies that the time and
resources necessary to implement the MTMPs must be taken into account
when establishing fees, it does not specify how these fees should be
paid. We stated our belief that fees associated with provision of MTMP
services are separate and distinct from dispensing fees discussed in
Sec.  423.100. Although section 1860D-4(c)(2)(E) of the Act states that
Part D sponsors must disclose to the Secretary the amount of ``any such
management or dispensing fees'', it merely governs disclosure and does
not require that MTMP be included in the dispensing fee (indeed the Act
distinguishes management fees from dispensing fees that are part of
individual prescriptions).
    Comment: Most commenters agreed with our interpretation that MTMP
should be considered an administrative cost as opposed to a benefit,
thereby preventing direct beneficiary cost sharing for MTMP services.
    Response: We agree that direct beneficiary cost sharing for MTMP
services could negatively impact targeted beneficiary participation and
therefore, our final policy is to consider MTMP as an administrative
cost (included in the plan bid), incident to appropriate drug therapy,
and not an additional benefit.
    Comment: Many commenters recommended that we include reporting
requirements in the final regulation, specifying, for example, that
plans provide detailed policies and procedures for implementing their
MTMPs and associated performance measures for evaluating the impact on
therapeutic outcomes.
    Response: We agree with these commenters that we must include a
reporting requirement for MTMPs. As we work with industry and other
stakeholders to improve the therapeutic outcomes by optimizing
prescription drug therapy, we will need detailed information about each
MTMP. Therefore, we are adding a reporting requirement at Sec.
423.153(d)(6) and we will specify the information that we will require
in separate guidance.
    Comment: Several commenters suggested that we specifically involve
QIOs with the collecting and analyzing of data from MTMPs and establish
a mechanism for QIOs to secure information from medical claims to
identify targets.
    Response: We believe that QIOs could play a significant role with
MTMPs and this will be reflected in our contracts with the QIOs.
Specific technical assistance could include collecting and analyzing
MTMP data.
    Comment: Several commenters responded to our request for incentives
that would help drive the creation and evolution of significant MTMPs
by suggesting pay-for-performance incentives and minimum renewal
criteria, both based upon mutually agreed upon thresholds of patient
care.
    Response: We have a more complete discussion of pay-for-performance
in the quality improvement section of the preamble to the final Title
II rule. We are conducting several demonstrations to test this approach
and we are very interested in studying this direction for plans. Plans
are free to develop such arrangements with their providers, and we
encourage them to do so. Such arrangements have existed for a number of
years in the Medicare Advantage program. Plans will need to be mindful
of any restrictions imposed by the anti-kickback statute, and those
needing further clarification may want to use the OIG's advisory
opinion process to obtain guidance relating to specific transactions
and arrangements.
    Comment: CMS should clarify that MTMP services are voluntary and
that targeted beneficiaries are under no obligation to participate with
programs in order to receive prescription drug benefits.
    Response: We agree that beneficiaries must not be obligated to
participate in MTMPs. While we hope that beneficiaries will participate
to improve their therapeutic outcomes, beneficiaries must not be denied
access to prescription drugs based upon failure to participate in
MTMPs.
    Comment: One commenter recommended that we require Part D plans to
separate MTMP services agreements with providers from standard network
provider contracts to reduce potential conflict of interest.
    Response: Since we do not know who will be providing MTMP services,
it is premature for us to require specific terms and conditions for
such contracts. While MTMP service providers will likely include some
network pharmacy providers, Part D plans will need to specify, in their
applications, their approach to determining MTMP fees

[[Page 4282]]

which accounts for the time and resources necessary to perform the
services. In addition, plans need to comply with any restrictions
imposed by the anti-kickback statute.
    Comment: One commenter recommended that we change the language at
Sec.  423.153(d)(1)(i) from ``must assure'' to ``must have processes in
place so that.''
    Response: Upon review of the proposed language, we agree that Sec.
423.153(d)(1)(i) must be changed. We have changed ``must assure'' to
``is designed to ensure.'' We believe this language does not impact the
intent but better reflects what is required of MTMPs.
    Section 1860D-4(c)(2)(A)(ii) of the Act describes targeted
beneficiaries as Part D individuals who: (1) have multiple chronic
diseases (such as diabetes, asthma, hypertension, hyperlipidemia, and
congestive heart failure); (2) are taking multiple covered part D
drugs; and (3) are identified as likely to incur annual costs for
covered Part D drugs that exceed a level specified by the Secretary,
and we codified this requirement at proposed Sec.  423.153(d)(2).
    We invited comment on further defining ``multiple chronic
diseases'' and ``multiple covered Part D drugs,'' and whether we should
add further specifications or leave such determinations to the plans.
Furthermore, we invited comment on whether we should set the cost
threshold for determining targeted beneficiaries or if this
determination could also be left up to the plans. Generally, we invited
comment on disease, drug and cost issues that we should consider in
further refining the definition of targeted beneficiary.
    Comment: Many commenters recommended that we specify which chronic
diseases, the number of chronic diseases, and the number of covered
part D drugs that will qualify a beneficiary for MTMP services.
Moreover, several commenters suggested that specific patient
populations, such as beneficiaries in long term care, should
automatically be considered eligible for MTMP services in all plans.
Alternatively, many commenters suggested that such determinations are
best left to the individual plans for designing their plan specific
MTMPs.
    Response: At this time, we believe these determinations must be
left to the plans. Although we are not adding further specific
requirements for chronic disease and multiple drugs, we do recommend
that plans take notice of the statutory examples of chronic diseases
when developing MTMPs. We plan to monitor the programs developed by the
plans to learn from them as to whether or not further guidance is
desirable.
    Comment: Many commenters provided recommendations on the level of
annual costs for Part D drugs likely to be incurred by a beneficiary
that should be used as a threshold for MTMP eligibility. Some
commenters argued that any cost threshold is inappropriate because it
does not indicate those that could benefit from MTMP and in fact, could
exclude beneficiaries that would benefit most. Others recommended
various cost thresholds including specific dollar amounts and
percentage based thresholds (for example, top 5 percent). Most comments
suggested that we should make this determination and not delegate it to
the plans.
    Response: Despite our discussion in the proposed rule about leaving
this determination to the plans, we do not believe we have the
authority to delegate the cost threshold determination to plans and
therefore, we will set a cost threshold. While cost might not the be
best proxy for identifying patients that could benefit most from MTMP,
the statute requires us to set a threshold and our goal is to identify
a manageable target population so that plans offer truly valuable
services to beneficiaries that will benefit from such services. Factors
we will consider include typical costs associated with the most common
chronic diseases and co-morbidities for Medicare beneficiaries, the
relationship between cost and the number of medications a beneficiary
is taking, the impact specific cost thresholds have on the size of the
target population, and the alignment of incentives for providing MTMP
services within the standard part D benefit structure. We intend to
provide the specific cost threshold in separate guidance.
    Comment: Several commenters recommended that we should require
plans to allow providers and beneficiaries (self-referral) to identify
appropriate MTMP targets in addition to plans utilizing system edits to
identify eligible MTMP targets.
    Response: The identification of targeted beneficiaries will be
determined by individual plan policies. Therefore, plans will decide if
and how providers and beneficiaries can participate with identifying
targets. Once again, we believe that successful MTMPs must be
coordinated and that plans need to develop appropriate mechanisms for
notifying and identifying targeted beneficiaries that are eligible for
MTMP services.
    Section 1860D-4(c)(2)(C) of the Act requires Part D sponsors to
develop their MTMPs in cooperation with licensed and practicing
pharmacists and physicians, and we codified this requirement at Sec.
423.153(d)(3).
    Comment: Several commenters recommended that we specify that
practicing pharmacists and physicians must be licensed in the United
States.
    Response: Part D sponsors must comply with State licensure
requirements for pharmacy practice, and therefore, we believe further
specific licensure requirements are not warranted.
    Section 1860D-4(c)(2)(D) of the Act requires us to establish
guidelines for the coordination of MTMPs with chronic care improvement
programs established under section 1807 of the Act for targeted
beneficiaries, and we codified this requirement at Sec.  423.153(d)(4).
    The Chronic Care Improvement Program (CCIP) is a new program
established by section 721 of the MMA, which added a new section,
section 1807, to the Act. The new section 1807 creates a method for us
to assist beneficiaries with multiple chronic conditions in managing
their care. The program is targeted only to beneficiaries in original
fee-for-service Medicare not beneficiaries enrolled in MA plans.
    We invited comment on how services provided through CCIP could be
effectively coordinated with MTMP services provided by PDPs. We also
sought comment on how to integrate MTMP services and financial
incentives into the CCIP under section 721 of the Act.
    Comment: Several commenters recommended that we share CCIP
enrollment information with PDPs so that these individuals will be
excluded from MTMP services. In addition, several other commenters
recommended that we require PDPs to share their drug data with CCIPs.
    Response: We agree that Part D plans need to share drug data with
CCIPs and have specified this requirement in our regulation text at
Sec.  423.153(d)(4). CCIPs need this valuable data in order to provide
the comprehensive care management that is intended under the CCIP.
However, plans must determine, in conjunction with CCIPs, whether or
not it is desirable to offer MTMP services to persons participating in
CCIPs. We note that in sharing the data, both the CCIP and the Part D
sponsor will need to abide by the HIPAA privacy rules including
transmitting only the minimum data necessary. We strongly encourage
Part D plans to consult with their privacy counsel to ensure that the

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transmission of data complied with all aspects of the HIPAA privacy
rules.
    In the proposed rule we also discussed the requirement in section
1860D-4(c)(2)(E) of the Act specifying that the time and resources
necessary to implement MTMP be taken into account when establishing
fees for pharmacists or others providing MTMP services under the plan.
We stated that to implement this section, in evaluating the
administrative component of a Part D plan's bid, we will ask a Part D
sponsor to disclose the fees it pays to pharmacists or others,
including an explanation of those fees attributable to MTMP services.
The fee information provided to us under this authority will be
protected under the confidentiality provisions of section 1927(b)(3)(D)
of the Act. Under those provisions, we are prohibited from disclosing
the specific fees in a manner that links the fees to the particular
pharmacy or other provider providing the MTMP services except to the
extent necessary to administer the Part D program, to permit the
Comptroller General to review the information, or to permit the
Director of the CBO to review the information. If we were to discover
situations in which plans systematically did not pay the fees described
in their applications-and, if those errors were not corrected upon
notification, we might, at our discretion, employ the broad ranges of
intermediate sanctions or termination provisions available under
subparts K and O of the regulations.
    We stated, however, that while we expected to perform the due
diligence described above through application review and potentially
following up on any complaints, we did not believe we have the
authority to mandate that Part D sponsors pay pharmacists or other
providers a certain amount for MTMP services. We also stated that we
will not adjudicate any specific disputes between Part D and
pharmacists or other providers regarding the specific fees due for MTMP
services.
    Comment: Many commenters recommended that we provide further
requirements for MTMP fees, including establishing a fee schedule,
identifying a particular documentation and billing mechanism, and
requiring plans to reimburse for MTMP services provided by out of
network providers.
    Response: These details are up to the plans and their arrangements
with pharmacists and other providers. We do not believe the MMA
provides us with the authority to establish fee schedules or interfere
with the contracts between plans and providers. While we are familiar
with the recommendation and accompanying efforts to pursue a CPT coding
mechanism for MTMP services, which would provide for common billing and
documentation procedures, the American Medical Association's (AMA)
Current Procedural Terminology (CPT) Editorial Panel will make that
determination and it does not directly involve us. Therefore, in the
final rule, we are adopting our proposed policy to require sponsors to
discuss their MTMP fees in their applications, but neither to mandate
any specific MTMP fees nor become involved in payment disputes
regarding MTMP between pharmacies and sponsors.
    Section 423.153(e) in the proposed rule discussed fraud, waste and
abuse programs required by section 1860D-4(c)(1)(D) of the Act. In an
effort to consolidate, the requirements and preamble discussion
pertaining to fraud, waste and abuse programs, we moved Sec.
423.504(b)(4)(vi)(H) to subpart K, and included as a component of a
Part D sponsor's general compliance plan.
d. Exception for Private Fee for Service Plans
    Proposed Sec.  423.153(f) implemented section 1860D-21(d)(3) of the
Act by exempting private fee for-service MA plans that offer qualified
prescription drug coverage from the requirement to establish a drug
utilization management program and a MTMP; however, these private fee-
for-service MA plans are still required to establish quality assurance
measures and systems and a program to control fraud, waste and abuse as
described in Sec.  423.153(c) and Sec.  423.504(b)(4)(vi)(H),
respectively.
    We did not receive any comments on these provisions and they have
been adopted in the final rule at Sec.  423.153(e).
3. Consumer Satisfaction Surveys (Sec.  423.156)
    As proposed under Sec.  423.156, we will conduct consumer
satisfaction surveys of enrollees of Part D plans in order to provide
comparative information about qualified prescription drug coverage to
enrollees as part of our information dissemination efforts. Section
1860D 4(d) of the Act specifies that these surveys be conducted in a
manner similar to how they are conducted under Sec.  422.152(b) for MA
plans by using the Consumer Assessment of Health Plans (CAHPs).
    In the proposed rule, we stated that we believed a CAHPs-like
instrument (or perhaps a modification of CAHPs for MA organizations
offering MA-PD plans) will most likely be the vehicle used to collect
this information. In addition, we stated that we anticipated working
with the Agency for Healthcare Research and Quality (AHRQ) to develop a
survey measuring the experience of beneficiaries with their qualified
prescription drug coverage, a sampling strategy, and an implementation
strategy. We also indicated that we will provide further information
regarding this survey as it is developed.
    Comment: Commenters had several suggestions and questions regarding
the design and implementation of the survey, including the following:
CMS and CAHPs should provide draft models of the survey instruments to
the Part D plans for input prior to final draft and distribution;
CAHPs/AHRQ should differentiate satisfaction with the benefit versus
the service provided by the network pharmacy; if all plans are
actuarially equivalent as approved by CMS, how will we differentiate
consumer satisfaction; the first surveys should be conducted starting
in 2006 with the results available before the fall open season;
consumers must be included in the survey design process; and, surveys
should be sent and the results analyzed by CMS, prior to the annual May
notification to plans about whether or not their contracts will be
renewed.
    Response: We plan to have a public comment process in the
development of the survey, and solicit input from key stakeholders. We
expect that consumers will be included in the design process through
focus groups, cognitive interviews and testing of the instrument. The
purpose of the satisfaction survey is to provide information in a
timely manner for purposes of beneficiary plan choice which occurs
during the fall of the year. We are still determining the timing for
survey administration. One major constraint is pilot testing of the
survey cannot begin until early in 2006.
    Since the purpose of the survey is to help consumers choose among
the plan options, during the development process we will try our best
to focus on things that may vary across plans versus satisfaction with
the overall benefit. Although the plans are actuarially equivalent,
there will be differences in formularies, customer service,
informational materials, etc.
    Comment: Additional comments focused on the fact that fully
integrated MA organizations, unlike other MA organizations and PDP
sponsors, own and operate their own pharmacies. As a result, survey
instruments may be confusing to beneficiaries enrolled in these
organizations if the instrument is designed only for network model
plans. In addition, to the extent that survey instruments do not
reflect satisfaction ratings with retail pharmacies under contract to
network model plans, comparisons between network plans

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and integrated organizations will be unlikely to result in apples-to-
apples comparisons. In addition, consumer satisfaction ratings in
health care are notoriously suspect to regional variation. In reporting
satisfaction levels, we should attempt to adjust for these variations.
    Response: We agree that making appropriate comparisons and
adjustments will be essential to take into account certain factors that
may impact satisfaction but are not under the control of the Part D
plans. In the development work, we will be exploring what are the
appropriate adjusters for this survey.
4. Electronic Prescription Program (Sec.  423.159)
    Section 1860D-4(e) of the Act contains provisions for electronic
prescription programs. The statute contains specific provisions on when
voluntary initial standards may be adopted (not later than September 1,
2005), and when final standards must be published (not later than April
1, 2008) and then effective (not later than 1 year after the date of
promulgation of final standards).
    While we included a fairly long discussion of electronic
prescribing in the proposed rule, shortly we will issue another
proposed rule devoted to the standards that will be used for electronic
prescribing and have reserved Sec.  423.159(a) and Sec.  423.159(b) of
this final rule for such electronic prescribing standards. Therefore,
the proposals we made for such standards are not being addressed in
this final rule. Moreover, comments received in response to such
proposals may be considered in the electronic prescribing-specific
proposed rule. In addition, commenters who wish to provide additional
comments on electronic prescribing will be permitted to do so after
publication of the electronic prescribing proposed rule.
    One standard we are finalizing is the requirement that Part D
sponsors have the capacity to support electronic prescribing, once
final standards are in effect, including any standards that are
established before the drug benefit begins in 2006. We proposed such
language at Sec.  423.159(a) of the proposed rule. Since Part D
sponsors will in fact have to support electronic prescribing, once
standards are in place, we have modified the language in Sec.
423.159(c) to make clear that Part D sponsors must not just have the
capacity to support electronic prescribing but will actually have to
support it. We received no comments on this proposal and are adopting
it at Sec.  423.159(c).
    We also proposed at Sec.  423.159(b) to allow an MA-PD plan to
provide a separate or differential payment to a participating physician
who prescribes covered Part D drugs in accordance with electronic
prescription standards. (Note that this provision only applies to MA-PD
plans and not to PDPs) Section 102(b) of the MMA makes it clear that
this differential payment may occur when a participating physician
prescribes drugs in accordance with an electronic prescription program
that meets standards established under section 1860D-4(e) of the Act.
We solicited comments on the differential payments provision described
in Sec.  423.159(b) of the proposed rule as it relates to the
application of various legal authorities including ``the physician
self-referral prohibition at Sec.  1877 of the Act'' and the Federal
anti-kickback provisions at section 1128B(b) of the Act. In order to
facilitate electronic prescribing by a Part D sponsor, we also invited
public comment on additional steps to spur adoption of electronic
prescribing, overcome implementation challenges, and improve Medicare
operations.
    Comment: Many commenters supported the provision of a separate or
differential payment to a participating physician that prescribes
covered Part D drugs in accordance with electronic prescription
standards.
    Response: We agree that participating physicians have a substantial
role in electronic prescribing and will have upfront and on-going costs
of implementation. For this reason, the regulation permits an MA
organization offering an MA-PD to provide a separate or differential
payment to a participating physician that prescribes covered Part D
drugs in accordance with electronic prescription standards, including
both voluntary standards promulgated by HHS and final standards
established by HHS once final standards are effective.
    Comment: Many commenters also encouraged us to allow MA-PD plans to
make similar incentive payments to participating pharmacies and
pharmacists.
    Response: We agree that pharmacies and pharmacists have a
substantial role in electronic prescribing and will have upfront and
on-going costs of implementation. The MMA statute provided for such
incentives directly to physicians; however MA plans could in compliance
with the Federal anti-kickback and Stark self-referral statutes offer
incentives to pharmacies and pharmacists through individual plan
contract agreements. HHS may consider this issue when developing the
pilot programs.
    Comment: One comment stated that differential payments should also
be permissible by PDPs. While ``PDPs sponsors will not have network
contracts with physicians in the way that MA organizations will, PDPs
may have service contracts with physicians to provide MTMP services.''
The commenter noted that we have the authority to permit such payments
under section 1860D-4(c)(1)(B) of the Act as part of a quality
assurance program.
    Response: We disagree. The MMA statute was specific in the use of
incentives by MA-PD plans to participating physicians that prescribe
covered Part D drugs in accordance with an electronic prescription
program that meet the standards established under section 1860D-4(e) of
the Act.
    Comment: Many commenters expressed concern that separate or
differential payments should not inappropriately influence physician
prescribing behavior or restrict provider choice or decision making.
Many also suggested that we provide guidance to plans to guarantee that
such incentives do not impact prescribing judgment and that any
incentives utilized in e-prescribing programs focus on rewarding
improvements in patient safety and quality.
    Response: We agree with the commenters that incentives must not
inappropriately influence physician prescribing patterns. We will be
providing guidance to plans on physician incentives.
    Comment: Many commenters agreed that any differential payments
provision must be in compliance with other Federal and State laws
including the physician self-referral prohibition at section 1877 of
the Act and the Federal anti-kickback provisions at section 1128B(b) of
the Act. They urged the Secretary to consider extending the
applicability of the safe harbor provisions beyond Part D programs and
to include monetary and non-monetary remuneration.
    Response: As outlined in the preamble in the proposed rule, we are
sharing any comments regarding the anti-kickback statute with the OIG.
Additionally, in response to comments we have added language at Sec.
423.159(d) that such payments be subject to compliance with applicable
Federal and State laws and regulations related to fraud and abuse.
     In the proposed rule, we also sought comment on measures of MA-PD
plan quality related to the use of electronic prescribing and other MA-
PD quality

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measures that reflect effective electronic prescribing systems.
    We invited comments on the challenges and on possible Federal
activities that will promote the effective use of electronic
prescribing by providers, including publishing best practices, and
making technical information on electronic prescribing products
available. In addition, receptivity to the use of electronic
prescribing by consumers is not well understood especially among the
elderly and disadvantaged populations. We requested additional
information on how those populations may view electronic prescribing
and what steps may be taken to get them to use this modality and, thus,
take advantage of the safety and quality benefits it offers.
    We also invited comments on how to promote the use of electronic
prescribing by providers, health plans and pharmacies and other
entities involved in the provision and payment of health care to
Medicare beneficiaries. Beyond the differential payments authorized in
Sec.  423.159, we invited comments on what incentives could be used to
spur more widespread adoption, especially for early implementers. We
also invited comments on what educational efforts or data analyses
might be undertaken to help health practitioners understand, or
empirically confirm, and ultimately realize, the benefits of electronic
prescribing. Lastly, we sought public input on the ways electronic
prescribing can further reduce costs to the Medicare program and
promote quality of care to beneficiaries.
    We received numerous comments in response to our requests.
    Comment: HHS received universal support from all those who
commented on Sec.  423.159 regarding the establishment of electronic
prescribing standards and its potential for improved quality of care
through reduced medication errors, better therapeutic compliance and
better process and cost efficiencies.
    Response: We agree with the commenters that electronic prescribing
has great potential to improve the health of Medicare beneficiaries and
reduce medication errors.
    Comment: Many commenters suggested that HHS should evaluate how
electronic prescribing may improve patient compliance, clinical
outcomes and patient safety and facilitate other electronic prescribing
processes. Additionally commenters provided a variety of areas to focus
educational efforts and data analyses.
    Response: We agree with the commenters that MA-PD plan quality,
related to electronic prescribing, must be evaluated to further promote
quality of care for beneficiaries. We will take these suggested areas
under consideration as we develop quality measures for MA-PD plans.
Furthermore, for quality improvement purposes, we will make any plan
information on electronic prescribing available to our QIOs either
directly from the Part D plans or through us.
    Comment: Many commenters stated that HHS should publish best
practices and make technical information on electronic prescribing
products available so that providers can make informed comparisons.
Many agreed that these efforts will also spur effective adoption and
use of electronic prescribing.
    Response: HHS appreciates these thoughtful comments and will take
them into consideration as we implement electronic prescribing.
    Comment: A few commenters responded that electronic prescribing
will result in procedural and behavioral changes by beneficiaries. They
suggested that HHS work to ensure patients are aware of and comfortable
with the new prescribing method and should disseminate information and
educate enrollees on the changes resulting from electronic prescribing.
    Response: We agree that electronic prescribing will result in
procedural and behavioral changes in our beneficiaries. We will
consider these suggestions as we work with the Part D sponsors on
information dissemination and outreach.
    Comment: One commenter stated that HHS should work with National
Center for Vital and Health Statistics (NCVHS) to study the use of
reduced malpractice insurance premiums as a financial incentive to
promote the adoption of electronic prescribing.
    Response: HHS will share this comment with the NCVHS.
    Comment: Many commenters provided a variety of areas to focus
educational efforts and data analyses to spur more widespread adoption.
    Response: We will take these suggested areas for data analyses
under consideration as we develop our educational efforts and quality
improvement strategies by making such information on electronic
prescribing available to our QIOs either directly from the Part D plans
or through us.
    Comment: Many commenters stated that developing standards for
electronic prescribing will reduce costs to the Medicare program. Many
commenters stated that the primary benefits of electronic prescribing
are increased quality of care, reductions in the use of medical
resources, and improved patient safety, specifically in the areas of
reduced adverse events. Additionally, many stated that electronic
prescribing improves the efficiency of processing prescriptions.
    Response: We agree with the commenters that these electronic
prescribing areas have great potential to reduce costs to the Medicare
program.
5. Quality Improvement Organizations (QIO) Activities (Sec.  423.162)
    Section 109 of the MMA expands the work of QIOs to include Part C
and Part D. This provision explicitly covers the full range of Part C
organizations. QIOs are required to offer providers, practitioners, and
Part D sponsors quality improvement assistance pertaining to health
care services, including those related to prescription drug therapy.
    In the proposed rule, we stated the QIOs will need access to data
from transactions between pharmacies and Part D plans. We offered
examples of the types of data that would likely be required by QIOs and
also discussed our role in potentially aggregating and distributing the
data. Finally, we proposed that any information collected by the QIOs
will be subject to confidentiality requirements in part 480 of our
regulations. For purposes of applying these confidentiality
regulations, we also proposed that Part D sponsors fall within the
definition of health care facilities and that part 480 would apply in
the same manner as that Part applies to institutions.
    As the QIOs activities under Part D are developed within the 8\th\
Scope of Work, and basic decisions are made about the collection,
storage and use of Part D claims data, CMS will work with QIOs and Part
D plans to develop a strategy to provide QIOs with data necessary to
accomplish their task and safeguard patient confidentiality.
    Comment: One commenter believes that PDPs may need additional data
to identify enrollees to be targeted for MTMP services. They believe
QIOs could provide that data to plans using information from medical
claims submissions.
    Response: QIOs cannot share with Part D plans beneficiary-specific
identifiable data that it has acquired as part of its function as a
QIO, but we could provide the data necessary to identify enrollees to
be targeted for MTMP services to the Part D plans if appropriate. QIOs
can provide other types of technical assistance to Part D plans.
    Comment: One commenter recommends that serious evaluations be

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designed to compare the effectiveness of different MTMP services,
delivery, and payment methodologies. Another commenter wrote that QIOs
could potentially perform a valuable role in collecting and analyzing
the data to be made available to plans for use in establishing or
revising their MTMP services.
    Response: Once Title I has been implemented, we expect that outcome
measures will be developed to allow the QIOs to assess the
effectiveness of the MTMP services. We expect that both plans and
pharmacies will be able to request technical assistance from QIOs to
improve their MTMPs.
    Comment: One commenter recommended that the last sentence of Sec.
423.162(b) be deleted. [``PDP sponsors and MA plans offering MA-PD
plans are required to provide specified information to CMS for
distribution to the QIOs as well as directly to QIOs''] They support
the voluntary nature in terms of whether a Part D plan must contract
with a QIO. They are concerned about the submission of undefined
information to CMS for passing through to QIOs as well as directly to
QIOs regardless as to whether a Part D plan works with a QIO. In
addition, it is unclear to which QIO such information will be provided,
particularly since some drug plans may serve more than one State.
Another commenter stated QIOs must have access to pharmacy and medical
claims for quality improvement projects and oversight of the PDPs.
    Response: We do not believe that the last sentence of Sec.
423.162(b) must be deleted. QIOs need, and have the authority under
section 1154 of the Act and section 109 of the MMA, to access specified
data from the transactions between pharmacies and Part D plans
providing the Part D benefit. However, the determination of what actual
data, if any, that will be made available to QIOs will be made in
subsequent guidance after QIOs activities under Part D are developed
within the 8\th\ Scope of Work, and basic decisions are made about the
collection, storage and use of Part D claims data. We could provide
specific data to QIOs to use for quality monitoring and extract these
data from data already required by us for other administrative
functions of the Title I program, thus not increasing the Part D plans'
burden. We could also make data available to a QIO from plans that do
not contract with the QIO but are directly related to the QIO's
responsibilities as negotiated with us under its 8\th\ scope of work.
QIOs may also have access to additional data provided by plans working
directly with a QIO.
Other QIO Activities
    Comment: While PBMs have processes in place to monitor pharmacy
dispensing and alert a pharmacy in cases where dispensing a medication
may not be safe for a particular patient, it is critical the PBM or
drug plan not be held accountable or responsible for activities that
are beyond its control. Drug plans can be evaluated for having such
process measures in place but should not be held accountable for
problems outside their control, such as physician, pharmacist or
manufacturer errors.
    Response: We expect that the QIOs will work with physicians,
pharmacists, and plans to improve the quality of beneficiaries'
medication therapies. The QIOs' goal is to improve quality of care, not
to assign blame. They can assist each of these players to design
systems to facilitate the delivery of quality of care.
    Comment: One commenter stated that QIOs should establish
educational programs to assist drug plans and prescribers in the
implementation of best practice guidelines through treatment
algorithms.
    Response: The QIOs' scope of work is being described in their
contracts rather than in the regulation. The contracting mechanism
allows flexibility to adjust the QIOs' tasks to be responsive for the
need for quality improvement. The QIOs' activities will address quality
improvement for both prescribers and plans.
    Comment: The confidentiality of information collected by QIOs
should be protected, as CMS has proposed.
    Response: The QIOs will protect the confidentiality of the
collected information, as specified in part 480. We have clarified
Sec.  423.162(c) in this final rule to make clear that the provisions
of part 480 apply in the same manner as they apply to institutions.
    Comment: There were several commenters who expressed concern
regarding how QIOs will handle beneficiaries' complaints about the
quality of care in Part D. The final rule in Sec.  423.153(c) needs to
state clearly that the QIOs will review quality of care complaints and
lack of access complaints to requested services, as well as to clarify
how this traditional QIO function will be carried out in the unique
environment of Part D plans.
    Response: Section 423.564(c), not Sec.  423.153(c), states that
QIOs must review enrollees' written complaints about the quality of
services they have received under the Medicare program, as specified in
section 1154(a)(14) of the Act. For any complaint submitted to a QIO,
the Part D sponsor must cooperate with the QIO in resolving the
complaint. For further discussion, please refer to the preamble to
subpart M.
    Comment: The final regulation should reflect the information
contained in the summary of the 8\th\ scope of work (SOW) for QIOs. The
commenter added the regulation should specify that quality improvement
projects will be performed by the QIO or by a third party (independent
of the Part D plan) contracted by the QIO.
    Response: This information is typically conveyed in the SOW of the
contract between each QIO and us rather than in the regulation because
a contract allows us the flexibility to modify the QIOs' activities
without modifying the regulation. The contract is an effective way to
ensure that these important tasks are accomplished.
    Comment: Educational interventions are best done by QIOs or a third
party independent of the Part D plan contracted by the QIO.
    Response: QIOs will likely do educational interventions either with
their own staff or with subcontractors, but we do not want to exclude
other entities from also providing objective, evidence-based
educational interventions.
    Comment: Oversight of formulary decisions and subsequent review of
Part D sponsors' formulary decisions could be key components necessary
for QIO's to assess quality, especially in the dual-eligible long term
care patients.
    Response: We believe that decisions concerning which medications
are on a plan's formulary are administrative decisions of the plan.
These do not fall within the quality review functions of the QIO. The
QIO will review beneficiary complaints that the plan's rules were not
executed correctly. We will conduct reviews of plans' applications to
ensure that formularies are not discriminatory, as well as review
through program monitoring.
    Comment: MA organizations delivering benefits through their owned
and operated pharmacies are likely to rely on specialized pharmacy
information systems that differ from the systems designed for PDP
sponsors to communicate with their contract network pharmacies. As a
result, it is possible that pharmacy data may be misinterpreted by a
QIO. If QIOs will be using data from integrated MA organizations to
assess quality, it will be important to work closely with the
organizations to understand the data, or to develop more efficient
methods to achieve the same result-an appropriate assessment of quality
performance.
    Response: We expect that QIOs will work cooperatively with plans.
Because

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QIOs work with identified organizations, they will have the opportunity
to understand the context of the data they are analyzing.
    Comment: One commenter suggests that QIOs examine the prescription
drug claims submitted to the plan, specifically looking at the number
of claims that are rejected and appealed.
    Response: QIOs' activities focus on quality improvement. The number
of claims rejected is an administrative function, and we do not expect
the QIOs to be active in this area. It is likely the administrative
performance of plans will be assessed by our program monitoring.
6. Treatment of Accreditation (Sec.  423.165, Sec.  423.168, and Sec.
423.171)
    Section 1860D-4(j) of the Act requires that the provisions of
section 1852(e)(4) of the Act relating to the treatment of
accreditation will apply to Part D sponsors for:
    * Access to covered Part D drugs including the pharmacy
access requirements and the use of standardized technology and
formulary requirements;
    * Drug utilization management, Quality assurance, Medication
Therapy Management, and a program to control fraud, waste and abuse as
described in subpart K Sec.  423.504(b)(4)(vi)(H);
    * Confidentiality and accuracy of enrollee records.
Thus, the requirements in Sec.  423.165, Sec.  423.168, and Sec.
423.171 are similar to the requirements found in Sec.  422.156, Sec.
422.157, and Sec.  422.158 for the MA program, except for subject areas
that are deemed.
    Proposed Sec.  423.165 provided the conditions under which a Part D
sponsor may be deemed to meet our requirements permitted under
paragraph (b) of that section. We stated that the first condition will
be that the plan be fully accredited (and periodically reaccredited) by
a private, national accreditation organization (AO) that we approve.
The second condition will be that the plan be accredited using the
standards that we approved for the purposes of assessing compliance
with Medicare requirements.
    Consistent with our approach in the MA program, in the proposed
rule we proposed that we will analyze on a standard-by-standard basis
whether an AO applies and enforces requirements that are no less
stringent than those in part 423 for the standard at issue. We proposed
that we will determine the scope of the AO's approval (and, thus, the
extent to which Part D plans accredited by the organization are deemed
to meet our requirements) based on a comparison of the AO's standards
and its procedures for assessing compliance with our deemable
requirements and our own decision-making standards. We stated that we
will make those determinations on the basis of the application
materials submitted by AOs seeking our approval in accordance with
Sec.  423.168. We also proposed to conduct surveys to validate the AO's
enforcement on a standard-by-standard basis.
    Proposed Sec.  423.165(d) established the obligations of deemed
Part D sponsors. A Part D sponsor will be required to submit to our
surveys. We stated that the proposed surveys were intended to validate
an AO's process and authorize the AO to release to us a copy of its
most current accreditation survey, together with any information
related to the survey that we may require (including corrective action
plans and summaries of our unmet requirements). We stated that such
activities will be part of our ongoing oversight strategy for ensuring
that the AO applies and enforces its accreditation standards in a
manner comparable to ours.
    Proposed Sec.  423.165(e) addressed removal of deemed status and
proposed Sec.  423.165(f) explained that we retain the authority to
initiate enforcement action against any Part D sponsor that we
determine, on the basis of our own survey or the results of the
accreditation survey, no longer meets the Medicare requirements for
which deemed status was granted. We stated that we expected the AO to
have a system in place for enforcing compliance with our standards
(such as sanctions for motivating correction of deficiencies), but we
also stated that we could not delegate to the AO the authority to
impose the intermediate sanctions established by section 1860D-12 of
the Act or termination of the contract.
    In the proposed rule, we acknowledged that deeming applies only to
our enforcement of this regulation, and neither our enforcement of this
regulation nor accreditation by an accrediting body undercuts the
Office for Civil Rights enforcement of the HIPAA privacy rule.
    Proposed Sec.  423.168 discussed the three conditions for our
approval of an AO if the organization applies and enforces standards
for Part D sponsors that are at least as stringent as Medicare
requirements and, if the organization complies with the application and
reapplication procedures proposed in Sec.  423.171.
    Proposed Sec.  423.168(c) established ongoing AO responsibilities.
These responsibilities largely parallel those currently imposed upon
accreditors under original Medicare. One exception was the proposed
requirement that an AO notify us in writing within three days of
identifying, for an accredited Part D sponsor, a deficiency that poses
immediate jeopardy to the Part D sponsor's enrollees or to the general
public.
    Proposed Sec.  423.168(d) established specific criteria and
procedures for continuing oversight and for withdrawing approval of an
AO. Oversight consists of equivalency review, validation review, and
onsite observation.
    In the proposed rule, we stated that we could withdraw our approval
of an AO at any time if we determine that deeming based on
accreditation no longer guarantees that the Part D plan meets the
Medicare requirements, that failure to meet those requirements could
jeopardize the health or safety of Medicare enrollees or constitute a
significant hazard to the public health, or that the AO has failed to
meet its obligations under Sec.  423.165 through Sec.  423.171.
    Proposed Sec.  423.171 addressed the procedures for approval of
accreditation as a basis for deeming compliance. As mentioned, the
process that we stated will be used to deem compliance with Part D
requirements is virtually identical to the process that is being used
for deeming compliance with fee-for-service requirements. One
requirement proposed in Sec.  423.171, and which also appeared in
regulations governing MA plans at Sec.  422.158(a)(11), but did not
appear in regulations governing original Medicare, is the requirement
that an AO applying for approval of deeming authority submit the name
and address of each person with an ownership or control interest in the
AO. We proposed that we will use this information to determine whether
the AO is controlled by the organizations it accredits for the purposes
of Sec.  423.168. Section 423.171 further provided for reconsideration
of adverse determinations of accreditation applications.
    Comment: Several consumer groups oppose deeming because they
believe it will diminish beneficiary protections. Several different
types of organizations, such as pharmacy organizations, and others want
to have input into the process, and asked who will be the AOs, how will
they operate, and what standards will be used. They also commented that
AOs will not be in place prior to the initiation of the program.
    Response: Section 1860D-4(j) of Act provides for accreditation. We
have

[[Page 4288]]

successfully administered accreditation programs in:
    * Hospital settings, for example, JCAHCO;
    * Home health, for example, JCAHCO, NLN; and
    * Nursing homes and managed care, for example, NCQA, JCAHCO.
    The advantages of AOs is that they eliminate duplication of efforts
between us and AOs, since many private purchasers require AOs.
Furthermore, it reduces the burden on government oversight.
    AOs must demonstrate that their standards are at least as stringent
as those in part 423 of our final regulations. Given that the
regulations can only be finalized upon publication of this final rule,
we agree with the commenters that AOs cannot be in place before the
bids and contract applications for 2006 are due. Thus, at least in the
first year of the program, applicants will have to determine on their
own that they meet all of our standards. Once these rules are in
effect, we can begin to consider applications for AOs; however, other
program priorities will influence when we will be able to issue a
public notice requesting applications. Currently, we do not believe
that any AOs can meet our standards. Furthermore, it must be noted that
in the Medicare Advantage program, it was several years before any AOs
were accredited.
    As to giving stakeholders a chance to comment, our regulation at
Sec.  423.168(b) provides that we publish a notice in the Federal
Register whenever we are considering an AO's application. The public
then has 30 days to comment.
    We will be glad to meet with stakeholders to discuss these issues.
The AOs must meet or exceed each of our standards. They can pass one or
all standards, but will only be allowed to administer those standards
for which they are approved.
    The final rule has adopted the proposed rules on accreditation.

F. Submission of Bids and Monthly Beneficiary Premiums: Plan Approved

1. Overview
    Subpart F will implement most of the provisions in sections 1860D-
11 and 1860D-13 of the Act, as well as sections 1860D-12(b)(2)(on
limitation on entities offering fallback plans), 1860D-15(c)(2)(on
geographic adjustment of the national average monthly bid amount),
1860D-21(d) (on special rules for private fee-for-service (PFFS)
plans), 1860D-21 (e)(3) (on cost contractors), and 1860D-21 (f)(3)(on
PACE) of the Act. In this section we address submission, review,
negotiation, and approval of bids for prescription drug plans and MA-PD
plans; the calculation of the national average bid amount; and
determination and collection of enrollee premiums. References to 42 CFR
part 422 of our regulations are to the new MA rules. See Subpart T for
additional information on PACE. Bidding is to be distinguished from the
application process discussed in subpart K.
    Although in this preamble we use the terminology, prescription drug
plans and MA-PD plans, the regulations extend to all Part D sponsors
(including PACE organizations and cost-based HMOs and CMPs) as these
entities--just like PDP sponsors--will be required to submit bids for
the prescription drug coverage they plan to offer. Therefore, we have
changed the accompanying regulation text to use the terminology, ``Part
D sponsor,'' throughout. We have also indicated in the regulation where
separate rules would apply to fallback entities.
    As discussed in subpart C, the statute provides a framework for the
provision of subsidized prescription drug coverage. Within this
framework, PDP sponsors and MA organizations have some flexibility to
design coverage that is different from defined standard coverage to
meet the needs of Part D-eligible Medicare beneficiaries. This
framework plays a critical role in bid submissions, and the actuarial
evaluation and approval of bids.
    As part of our discussion we specify the actuarial equivalency
tests plan sponsors will have to meet when offering coverage other than
defined standard coverage. Please note that the coverage definitions
are discussed in detail in subpart C of the preamble. In order to
determine actuarial equivalency, plan sponsors will compare their plans
to the defined standard coverage baseline to assess the various tests
of actuarial equivalency that we discuss in detail in the sections
below.
2. Requirements for Submission of Bids and Related Information
    As provided under section 1860D-11(b) of the Act, each applicant to
become a PDP sponsor or MA organization will be required to submit a
bid for prescription drug coverage for each plan it intends to offer.
Most bids will be expected to represent full risk plans, meaning that
the prescription drug plan is not a limited risk plan or a fallback
prescription drug plan, and is not asking for any modification of the
statutory risk sharing arrangements. A bid from a full risk plan may be
referred to as a full risk bid. PDP sponsors may choose to participate
as limited risk plans, meaning that they provide basic prescription
drug coverage and request a modification of risk level (as described in
Sec.  423.265(d)) in its bid submitted for the plan. A bid with a
modified level of risk is referred to as a limited risk bid. This term
does not include a fallback prescription drug plan. Bids will be due to
us no later than the first Monday in June for each plan to be offered
in the subsequent calendar year. This date stems from the requirement
in section 1860D-11(b) of the Act that bid data from potential PDP
sponsors be submitted at the same time and in a similar manner as the
information described in section 1854(a)(6) of the Act for MA plans.
Since section 1854(a)(1) of the Act requires initial data to be
submitted on the first Monday of June of each year after 2004, we have
also incorporated this date into our regulations. In the case of MA-PD
plans, the prescription drug bid will be a component of the unified MA
bid described in Sec.  422.254(b)(1) with benefits beyond basic
coverage (if any) incorporated into the supplemental benefits portion
of the prescription drug benefit bid.
    We are clarifying that this bid will represent the expected monthly
average cost (including reasonable administrative costs) to be incurred
by the plan applicant for qualified prescription drug coverage in the
applicable area for a Part D eligible individual with a national
average risk profile for the factors described in section 1860D
15(c)(1)(A) of the Act and in Sec.  423.329(b)(1) of this rule. We plan
to develop and publish the risk adjustment factors and identify the
characteristics of an average individual no later than the date of the
45-day notice for the announcement of 2006 rates, which is February 18,
2005. Any modifications to these characteristics for subsequent years
will be announced by the date of the annual 45-day notice. (For further
discussion of prescription drug risk adjustment, see subpart G of this
preamble.) In the August 2004 proposed rule we solicited comment on the
nature of any additional information needed to prepare bids and
suggestions for any other methods that the bid submission process could
be structured to provide for later pricing data submission.
    The costs represented in each plan bid must be those for which the
plan will actually be responsible. Given the structure of qualified
prescription drug coverage, these costs will not include payments made
by the enrollee for deductible, coinsurance (including 100 percent
coinsurance between the initial

[[Page 4289]]

coverage limit and the out of-pocket threshold), copayments, or
payments for the difference between a plan's allowance and an out-of-
network pharmacy's usual and customary charge (as discussed in Sec.
423.124(b). It also does not include costs reimbursed by us through the
reinsurance subsidy. However, we require the separate identification,
calculation, and reporting of costs assumed to be reimbursed by us
through reinsurance. For standard coverage, defined or actuarial
equivalent, these costs will include the plan's share of costs above
the deductible and up to the initial coverage limit, as well as the
plan's share of costs above the annual out of pocket limit. If enhanced
alternative coverage is provided, the plan costs for supplemental
benefits will be distinguished from those for basic coverage. The costs
attributable only to basic coverage, once approved, are known as the
standardized bid amount.
    In Sec.  423.265(c) we will require that, with the exception of
potential employer group waivers under section 1860D-22(b) of the Act
and section 1857(i) of the Act, late enrollment penalties and low-
income premium and cost sharing subsidies, the bid represents a uniform
benefit package based upon a uniform level of premium and cost sharing
among all beneficiaries enrolled in the plan. This means that all
enrollees in a given PDP or MA-PD plan will be subject to the same cost
sharing structure and will be charged the same premium for benefits the
PDP sponsor or MA organization chose to offer.
    We note that while benefits are required to be uniform for all
enrollees under the drug benefit, this is not the case for enrollees
under a prescription drug discount card program. To avoid any confusion
between these related programs, we would like to make this distinction
clear. Because of the limited low-income assistance under the card
program, card sponsors have been permitted to negotiate lower prices
for low-income members. Also, in some cases there may be reduced cost
sharing sponsored by manufacturers for low-income members after the
$600 in transitional assistance is used that does not apply to other
card members. Under the Part D prescription drug program, however, both
the negotiated prices and the benefit structure will be the same for
all enrollees in a given PDP or MA PD plan. While the low-income
subsidies will result in low-income beneficiaries' actual out of pocket
costs being lower than for beneficiaries who do not qualify for this
assistance, the benefit structure to which the subsidies apply is the
same for all enrollees in a plan.
    Comment: Two commenters suggested that we assist bidders by making
accessible relevant drug utilization data from sources such as Tricare,
PBMs, the National Association of Chain Drug Stores and current
Medicare Advantage plans with drug benefits.
    Response: We either does not have access to such data or does not
have the authority for public release. Most of the data suggested by
the commenters would be considered proprietary. There are other data
sets that are being used to meet industry's requests that we share
information from public data sets that could help potential drug plan
bidders to better understand or estimate the eligible Medicare
beneficiary population's utilization of prescription drugs. They
include: 1) data for Federal retirees 65+, enrolled in the Federal
Employee Health Benefit national Blue Cross Blue Shield plan; 2) data
from the Medicare Current Beneficiary Survey; and 3) Medicaid Pharmacy
Benefit Use and Reimbursement in 1999 Statistical Compendium. The
latter is prepared from Medicaid Analytic eXtract (MAX) files for
calendar year 1999. For more information, or to download these data see
http://www.cms.hhs.gov/pdps/default.asp.

    Comment: Several comments urged that bids be rejected from PDPs
that are owned or financially controlled by a drug manufacturer or
group of manufactures.
    Response: We note the concern that many stakeholders have had over
manufacturer acquisition of PBMs in the 1990's. However, the Federal
Trade Commission's response by imposing restrictions on manufacturers
acquiring PBMs (for example, offer open formularies, include drugs that
compete with the parent company's products, etc) has generally led
manufacturers to divest from PBMs, or to alter their behaviors in order
to prevent antitrust enforcement actions (see Christopher Sroka's
November, 2000 report ``Pharmacy benefit managers'' for the
Congressional Research Service and Regina Johnson's 2002 piece ``PBMs:
Ripe for regulation'' in Volume 57, Issue 2 of the Food and Drug Law
Journal). Regardless of future industry activity in this area, the
statute does not give us the authority to implement a ban as suggested
by the commenters.
    Comment: One commenter indicated that Part D plans are required to
submit bids no later than the first Monday in June to be offered in the
subsequent calendar year. This is not sufficient time for SPAPs that
need to coordinate benefits. SPAPs will need to know by June of 2005
what plans will be qualified sponsors and operating in their States.
    Response: Section 1854 of the Act amended by the MMA sets the bid
submission date as no later than the first Monday of June. PDP sponsors
and MA organizations with MA-PDs need the maximum amount of time to put
together a bid. PDPs and MA-PDs will need to keep SPAPs informed in
order to complete the bid process, so communication between these
entities should not be an issue.
    Comment: One commenter suggested that plans should be required to
provide for coverage of services to residents of Long Term Care
facilities that are required by OBRA 1987 and under OBRA 1990. They
recommended that this be added to the included costs in Sec.
423.265(b)(1) under submission of bids. The commenter went on to state
that Part D plans should not be exempt from providing the same services
required under Medicare Part A or Medicaid to nursing facility
residents and recommended that we require plans to incorporate the
costs of paying for such services into their bid submissions, and that
plans state clearly how they intend to pay qualified pharmacists for
providing such services.
    Response: Part D plans are only obligated to pay the negotiated
price for covered part D drugs, which consists of the ingredient cost
of the drug and a ``dispensing fee'' and that take into account any
discounts, direct or indirect subsidies, rebates or other price
concessions received by the Part D plan). The fee will include only
those activities related to the transfer of possession of the covered
Part D drug from the pharmacy to the beneficiary, including charges
associated with mixing drugs, delivery, and overhead. The dispensing
fee will not include any activities beyond the point of sale (that is,
pharmacy follow-up phone calls) or any activities for entities other
than the pharmacy. The dispensing fee does not include any charges
associated with administering the drug once the drug has already been
transferred to the beneficiary. This means that the pharmaceutical
services listed under 1819(b)(4)(A)(iii) are included within the
negotiated prices for covered part D drugs only if the term
``dispensing fee'' as defined in Sec.  423.100 captures such services.
    Comment: Several commenters asked for guidance regarding the costs
that we view as administrative.
    Response: Administrative costs are not clinical services unless
part of a Medication Therapy Management Program. Administrative costs
include such costs as: 1) crossover fees paid to

[[Page 4290]]

obtain information from other payors in order to calculate TROOP (True
Out-of-Pocket); 2) Medication Therapy Management Program expenses; 3)
Marketing & Sales; 4) Direct Administration (for example, customer
service, billing and claims administration); 5) Indirect Administration
(for example, corporate services, such as accounting operations,
actuarial, legal and human resources); 6) Net Cost of Private
Reinsurance (that is, reinsurance premium less projected reinsurance
recoveries); 7) Medicare User Fees; 8)Uncollected Enrollee Premium; and
9) return on investment. Additional guidance on administrative costs
will be given with the release of the bid submission tool. Instructions
for the tool will include more detail defining administrative costs and
guidance on how they are to be indicated in the bid submission.
    Comment: One comment urged us to modify the timeline to permit
bidders to submit a bid for approval before June 6, 2005.
    Response: While bids can be submitted before the first Monday in
June (June 6 in 2005), they cannot be approved before that date because
they are reviewed collectively.
    Comment: Several commenters urged that the bid submission process
use electronic methods and be parsimonious for data requirements.
    Response: We agree with the commenters that electronic methods are
preferable. Accordingly, bid submitters will upload an electronic Plan
Benefit Package (PBP) and bid submission pricing tool to the Health
Plan Management System (HPMS). The bid is to represent the expected
monthly average cost to be incurred by a plan applicant providing
qualified prescription drug coverage in an applicable area for a Part D
eligible beneficiary with a national average risk profile. We are
cognizant of plan burden and therefore required submission data will be
limited to what is absolutely necessary for us to fulfill its bid
review, payment, and negotiation obligations.
    Comment: One commenter asked if plans will get the rebates from
manufacturers for drugs covered by SPAP wrap around.
    Response: CMS does not have the authority to dictate how
manufacturers pay rebates to plans. However, we would expect that drugs
covered by secondary payers would still be subject to rebates.
3. General CMS Guidelines for Actuarial Valuation of Prescription Drug
Coverage
    As directed by section 1860D-11(c) of the Act, we will develop
processes and methods using generally accepted actuarial principles and
methodologies for determining the actuarial valuation of prescription
drug coverage. Although we plan to provide additional information in
the future in the form of interpretive guidance on these processes, we
intend on using the following processes and methods for calculating
``actuarial valuation'' and ``actuarial equivalence'' in the context of
risk bids:
    * Sponsors offering standard coverage with cost-sharing
variants either to the 25 percent coinsurance (before the initial
coverage limit) or the greater of 5 percent coinsurance or $2 generic/
preferred/$5 any other drug (after the out-of-pocket threshold is met)
will be required to demonstrate the actuarial equivalence of their
variations.
    * Sponsors offering basic or enhanced alternative
prescription drug coverage will be required to demonstrate that--
     + The actuarial value of total or gross plan coverage of their
alternative is at least equal to the actuarial value of total or gross
coverage of the defined standard benefit.
     + The actuarial value of unsubsidized coverage of their
alternative is at least equal to the actuarial value of the
unsubsidized portion of defined standard coverage; and
     + The plan payout at the dollar value of the initial coverage
limit under standard coverage, for individuals whose total spending
exceeds that limit, is at least equal to that provided under defined
standard coverage.
    * All sponsors will determine the actuarial value of the
defined standard benefit, either because it is--
     + Offered to the beneficiaries;
     + Used as a comparison for either of the following:
     * Standard coverage with actuarially equivalent cost-
sharing variants.
     * Alternative coverage; or
     + Used to determine the basic component in enhanced alternative
coverage.
    * Sponsors that offer enhanced alternative coverage will
also be required to determine the actuarial value of coverage beyond
basic coverage.
    * We will further specify in additional guidelines the data
sources, methodologies, assumptions, and other techniques in accordance
with generally accepted actuarial principles as either recommended or
required in further guidance. We will also specify the data elements
(including format) to be sent to us for evaluation. We will then
evaluate the analysis and assumptions for compliance and
reasonableness. For example, we will evaluate the source, size, and
timeframe of data on which assumptions are based, the demographic
characteristics of enrollees, the distribution of risk levels, the
average costs in each cost-sharing tier, and the update factors used,
among other considerations.
    * We will also require the separate identification of
administrative costs. Since the level of the bid will directly affect
the premium paid by the beneficiary and the attractiveness of the plan,
we expect that plans will have a strong incentive to keep
administrative costs and return on investment at reasonable levels. Any
review of administrative costs will likely focus primarily on outliers
from the competitive range identified in the bids received. All
proposals will contain a description of how certain costs are included
in the calculations. Processes and methods for determining actuarial
valuation will take into account the effect that providing actuarially
equivalent standard coverage or alternative prescription drug coverage
(rather than defined standard coverage) has on drug utilization. This
includes utilization effects attributable to different benefit
structures, such as from tiered cost sharing, as well as those
attributable to supplemental benefits. The utilization effect of
supplemental benefits on basic benefits will have to be loaded into the
supplemental portion of the bid. In other words, since the existence of
supplemental coverage will increase total average per capita spending,
that increase over the average spending (if coverage were limited to
basic coverage) will be included in the portion of the bid attributable
to supplemental coverage. Section 1860D-11(c)(1)(D) of the Act
specifies ``the use of generally accepted actuarial principles and
methodologies.'' We are interpreting this to require that a qualified
actuary certify the plan's actuarial valuation (which may be prepared
by others under his or her direction or review). Actuarial
certification will give better assurance that the actuarial values in
the bid were prepared in conformance with actuarial standards and
methodologies.
    * Section 1860D-11(c)(3)(B) of the Act specifies that PDP
sponsors or MA organizations offering MA-PD plans may use qualified
independent actuaries in certifying the actuarial values in their bids.
(The actuarial valuation may be prepared by others under the direction
or review of a qualified actuary). We interpret this provision as
requiring PDP sponsors and MA organizations that do

[[Page 4291]]

not employ qualified actuaries, to use outside actuaries in their
processes. We proposed in the August proposed rule to specify that a
qualified actuary is an individual who is a member of the American
Academy of Actuaries because members of the Academy must meet not only
educational and experience requirements, but also a code of
professional conduct and standards of practice. These standards create
a common ground for actuarial analysis. Furthermore, a member of the
Academy is subject to its disciplinary action for violations of the
code and standards. This same requirement is specified in the SCHIP
legislation at section 2103(c)(4)(A) of the Act. Moreover, the National
Association of Insurance Commissioners (NAIC) imposes significantly
stricter requirements on actuaries preparing the financial statements
of insurance companies.
    Comment: Several commenters asked for flexibility in the actuarial
standards. One commenter specifically asked for flexibility in the use
of methods and actuarial assumptions by permitting the use of internal
data or normative claims databases.
    Response: Section 1860D-11(c)(1) of the Act instructs the Secretary
to ``establish processes and methods for determining the actuarial
valuation of prescription drug coverage including.the use of generally
accepted actuarial principles and methodologies''. To the extent it is
possible under this paradigm to be flexible, we will be. Use of
internal data or normative claims databases is not only acceptable, but
encouraged. We will however, review the assumptions and results of your
analysis for reasonableness and appropriateness.
    Comment: One commenter asserted that being a member of the American
Academy of Actuaries should be a requirement, but should not be
sufficient by itself.
    Response: Our policy position is to require that an actuary have
the skills and experience to perform the actuarial certification
required. Accordingly, in Sec.  423.265(c)(3) we state that a
``qualified actuary must certify the plan's actuarial valuation, and
must be a member of the American Academy of Actuaries to be deemed
qualified.'' By requiring membership in the American Academy of
Actuaries we are both requiring a minimal standard, and providing an
additional assurance that the actuary will be qualified. For the latter
comment, the Code of Professional Conduct for Actuaries states ``an
Actuary shall perform Actuarial Services only when the Actuary is
qualified to do so on the basis of basic and continuing education and
experience.''
    Comment: Two commenters expressed that there could be problems with
the proposal that the costs associated with any increased utilization
in the Part D basic benefit arising from enhanced alternative coverage
would be included in the supplemental benefit portion of the bid. They
assert that the application of this policy as it applies to the Part D
program could be problematic because in many instances an enrollee will
have supplemental coverage arising from another source that would not
be part of enhanced alternative coverage of the sponsor or
organization. One commenter gave the example of a beneficiary who may
elect basic prescription drug coverage under a PDP or MA-PD plan and
may also receive coverage under an employer/union group plan that wraps
around the Part D benefit. They argue that in this case, if no
supplemental benefits were included in the MA-PD plan or PDP, there
would be no way to take into account in the bid the impact of any
increased utilization unless it can be reflected in the bid for the
basic benefit. This problem could be greater for special needs plans
serving dually eligible beneficiaries who are eligible for substantial
subsidies under the Part D program. In this instance, if no
supplemental benefits are included in the MA-PD or PDP plan, the only
avenue for taking increased utilization the may result from the subsidy
into account would be the bid for the basic benefit. However, this
could result in a bid above the benchmark that would produce a premium
higher than the low-income premium subsidy resulting in an increase in
the premium obligation for dual eligible enrollees. This situation
could threaten the viability of a special needs plan.
    Response: Plan bids will take into account the anticipated impact
of induced utilization due to the structure of the plan benefit, other
insurance coverage, and the low income subsidy. The impact of induced
utilization will be addressed directly in the bid for enhanced
alternative coverage. Note that this is for Part D only and is
different from what is discussed for Part C in the Title II regulation.
There are three major mechanisms for adjusting payment to account for
the utilization of the actual enrolled population in any given plan,
these are risk adjustment, reinsurance, and risk corridors. One
intention of risk adjustment is to take into account the utilization of
dual eligibles and adjust payment appropriately for the level of
utilization in this population. For all bids, the anticipated impact of
other insurance coverage on the bid and its effect on reinsurance will
be taken into account. Risk corridors will serve to decrease the
exposure of plans where allowed costs exceed plan payments for the
basic Part D benefit.
4. Determining Actuarial Equivalency for Variants of Standard Coverage
and for Alternative Coverage.
    When considering the specific requirements for actuarial
equivalence and valuation in the Act, we are aware that there is no
official definition of actuarial equivalence. Moreover, the concept of
actuarial equivalence is applied in multiple contexts. We must address
actuarial equivalence requirements regarding cost sharing, expected
benefits, and bid submissions. Thus, we are using interpretive guidance
to further explain the process and methodology for determining
actuarial equivalence and valuation. The processes and methods for
determining actuarial equivalence and valuation would be in keeping
with generally accepted actuarial principles. We would require
prospective PDP sponsors and MA organizations wishing to offer MA-PD
plans to include all of the requirements discussed in the following
sections in the information submitted with the bid, when applicable.
The MMA contains some specific requirements for actuarial equivalence
or valuation. These actuarial equivalence tests are discussed below.
a. Actuarial Equivalence as Applied to Actuarially Equivalent Standard
Coverage-Cost-Sharing
    As required in section 1860D-2(b)(2)(A) of the Act, standard
prescription drug coverage must have ``coinsurance for costs above the
annual deductible . . . and up to the initial coverage limit that is
equal to 25 percent; or is actuarially equivalent . . . to an average
expected payment of 25 percent of such costs.'' We interpret this to
mean that sponsors would be required to demonstrate that the actuarial
value of their alternative cost-sharing as a percent of the actuarial
value of both cost-sharing and plan payments for claims up to the
initial coverage limit is the same percentage as for 25 percent
coinsurance under defined standard coverage. In calculating these
percentages, sponsors would reflect the utilization impacts of the two
structures, but hold constant formulary (drug list), drug pricing
(except to the extent that the plan incorporated differential pricing
and cost sharing based on participation

[[Page 4292]]

status within the plan's network), and the group whose utilization is
modeled. This would allow plans to have variable co-payments or
coinsurance, including tiered structures for preferred and non-
preferred drugs, in the initial coverage interval as long as the
actuarial equivalence test is met. As a simple example, a plan could
have a tiered coinsurance benefit with coinsurance higher than 25
percent for brand name drugs and lower than 25 percent for generics.
Some beneficiaries with expenses between the deductible and the initial
coverage limit would be expected to pay more than 25 percent, and
others to pay less, depending on their usage of brand versus generic
drugs. Overall, however, the total coinsurance would have to be
actuarially equivalent to an average of 25 percent for all
beneficiaries with expenses in this interval, even if the total
expenditures beneath the initial coverage limit ($2,250 in 2006) are
lower than would be expected under defined standard coverage (due to
increased use of generics, for example).
    If sponsors wanted to provide a variant on defined standard cost
sharing after the out-of-pocket threshold is met, an actuarial test
similar to that described above for variants on the 25 percent
coinsurance would apply. In this case, based on the group of
individuals projected to exceed the out-of-pocket threshold, the
sponsor would compute total cost sharing once the true out-of-pocket
(TROOP) threshold has been met as a percentage of the sum of that cost
sharing plus the comparable plan payout. This percentage would have to
equal the percentage computed in the same manner using the defined
standard benefit (that is, the greater of $2/$5 or 5 percent). We note
that any variant in cost sharing could not lead to discrimination
against certain beneficiaries, for example, by increasing the cost
sharing of a drug used for a particular illness well above the cost
sharing for other drugs.
b. Tests for Alternative Coverage
    As required by section 1860D-2(c) of the Act, sponsors offering
alternative coverage, that is, benefit structures different from
standard coverage, must satisfy five tests (three of the five are
actuarial equivalency tests). As discussed in subpart C, alternative
coverage would include coverage actuarially equivalent to defined
standard coverage (basic alternative coverage) or coverage that would
include supplemental coverage (enhanced alternative coverage). All
alternative coverage would have to meet all five of the coverage
standards or tests discussed in section b.1-5 of this preamble. Tests
one through three were established by the Congress to ensure that
alternative coverage would be at least actuarially equivalent to
standard coverage. Tests four and five are additional tests imposed by
the Congress through section 1860D-2(c) of the Act.
(1) Test for Assuring at Least Equivalent Value of Total Coverage
    As required in section 1860D-2(c)(1)(A) of the Act, a plan could
offer alternative prescription drug coverage as long as the actuarial
value of total or gross coverage is at least equal to total or gross
coverage provided under standard coverage. Based on a typical
distribution of enrollee utilization, the average plan payout
(including costs reimbursed by Medicare through the reinsurance
subsidy) would have to be at least equal to the sponsor's estimate of
the payout under defined standard coverage (holding various factors
constant as described above under section 4.a.).
    Alternative benefit structures, such as a decrease in the
deductible with an increase in coinsurance below the initial coverage
limit, or a lower initial coverage limit with a corresponding decrease
in coinsurance, or a lower initial coverage limit with a corresponding
decrease in deductible, could be accommodated as basic alternative
coverage as long as the actuarial value of this coverage equaled that
of defined standard coverage. Alternative structures could not increase
the deductible or provide less than the protection offered against high
out-of-pocket expenditures described in section 1860D-2(b)(4) of the
Act. To the extent that the alternative coverage exceeds the value of
defined standard coverage, the plan would be offering enhanced
alternative coverage, that is, alternative coverage that includes
supplemental benefits (as discussed in subpart C).
(2) Test for Assuring Equivalent Unsubsidized Value of Coverage
    In section 1860D-2(c)(1)(B) of Act, a plan could offer alternative
coverage as long as the unsubsidized value of coverage (the value of
the coverage exceeding subsidy payments) is at least equal to the
sponsor's estimate of unsubsidized value under defined standard
coverage (holding various factors constant as described above section
4.a.). We interpret the unsubsidized value of coverage to mean the
value of the benefit attributable to the beneficiary share of the
premium.
    There is a basic question about how this test could be applied
during the plan review and approval process. In order to determine the
unsubsidized value of coverage, one would have to know the projected
reinsurance payments, and the value of the direct subsidy. While the
projected reinsurance payments would be known at the time of the
submission (since the actuarial value of the benefit is reduced by
projected reinsurance payments to produce the bid), the value of the
direct subsidy would not be known (since it would require computing the
national weighted average bid and bids have not yet been approved). In
the face of this problem, one approach could be to remove reinsurance
payments as estimated by the sponsor and to use an estimate of the
direct subsidy that we would provide. For instance, in the first year
we might provide the estimate used for budgeting purposes, and in
subsequent years, an estimate based on prior years' actual experience
updated for trend. Additional guidance will be released concerning this
matter.
    Comment: Two commenters suggested that we should waive the second
test of actuarial equivalence because if a plan meets all of the other
tests the second test would be redundant, and without knowing the true
value of direct subsidy the second test would be difficult to conduct.
    Response: The second actuarial equivalence test for alternative
coverage ensures the equivalent unsubsidized value of coverage. As we
are defining this test, the beneficiary premium for alternative
coverage must be greater than or equal to the beneficiary premium for
standard coverage. Since beneficiary premiums will not be determinable
until after all bids have submitted and applied against the national
average bid, we interpret the application of this provision to be that
the total Part D bid for alternative coverage must be greater than or
equal to the sponsor's bid for defined standard coverage. We note that
the first test of actuarial equivalence guarantees that the total value
(including reinsurance) of coverage for the basic alternative benefit
must be equal to the total value of coverage of the standard benefit.
The second test then precludes a basic alternative benefit structure
that increases government reinsurance costs relative to define standard
coverage. We note that the test imposes no additional burden beyond the
first test (that is, if you constructed a bid and shown that you meet
test 1, you would already have all the information available
to show whether you meet test 2). Given that the program is
just beginning and we have no practical experience to show that the
second test adds no value beyond the first test, we see no basis for
waiving this test at this time.


[[Continued on page 4293]]


From the Federal Register Online via GPO Access [wais.access.gpo.gov]
]

[[pp. 4293-4342]] Medicare Program; Medicare Prescription Drug Benefit

[[Continued from page 4292]]

[[Page 4293]]

(3) Test for Assuring Standard Payment for Costs at Initial Coverage
Limit
    Under section 1860D-2(c)(1)(C) of the Act, sponsors are to
determine the average payout ``for costs incurred that are equal to the
initial coverage limit'' for ``an actuarially representative pattern of
utilization.'' This projected payout is compared to a dollar amount
that is equal to what defined standard coverage would pay for someone
with costs equal to the initial coverage limit. Given the comparison,
this raises the question of what represents ``an actuarially
representative pattern of utilization.'' As with the other tests, we
believe that it would be reasonable for plans to use either anticipated
plan utilization or a typical utilization pattern based on the Medicare
population. However, given the implicit comparison to payout under
defined standard for someone with costs equal to the initial coverage
limit, it would not be valid to include individuals with expenses below
the value of the initial coverage limit. After excluding individuals
with total expenses below the value of the initial coverage limit, the
plan would compute the actuarial value of plan payout at the point
where total expenses are equal to the initial coverage limit under
standard coverage. Under this interpretation, a plan could offer
alternative coverage as long as the coverage is designed to provide an
actuarial value of plan payout that is equal to at least 75 percent of
costs between the standard deductible and initial coverage limit
($1,500 in 2006). In other words, considering only plan enrollees with
expected expenses greater than or equal to the dollar value of the
standard initial coverage limit, the plan would have to demonstrate
that the expected plan payout associated with expenses equal to that
dollar value would be at least 75 percent of benefit costs between the
deductible and initial coverage limit (75 percent of $2,000 per
beneficiary in CY 2006) including taking into account their expected
behavioral response to the different benefit structure. This test,
combined with the prohibition on increasing the deductible under
alternative coverage (described below), would ensure that the benefit
below the dollar level of the standard initial coverage limit is always
actuarially equivalent to standard coverage. As a result, it is not
permissible to trade off benefits above the initial coverage limit for
benefits below.
(4) Test for Assuring the Deductible Does not Exceed the Standard
Deductible
    In keeping with the requirements of section 1860D 2(c)(2) of the
Act, alternative coverage could not be structured so that the
deductible is any higher than what it is in standard coverage ($250 in
2006).
(5) Test for Assuring the Same Protection Against High Out of-Pocket
Costs
    As specified by section 1860D-2(c)(3) of the Act, any alternative
coverage must provide ``the coverage'' specified for costs above the
catastrophic limit in standard coverage. We interpret this to mean that
both enhanced and basic alternative coverage would have to offer at
least the coverage available above the catastrophic limit through
defined standard coverage. We would apply this test in the same way
that we do for standard coverage with a variant of cost sharing above
the catastrophic limit. That is, examining the group of individuals the
sponsor projects would exceed the out-of-pocket threshold, total cost
sharing once TROOP has been met, as a percentage of the sum of such
cost sharing plus comparable plan payout, must be less than or equal to
the percentage computed using the defined standard benefit (that is,
the greater of $2/$5 or 5 percent). Again, we note that any variant in
cost sharing could not lead to discrimination against certain
beneficiaries, for example, by increasing the cost sharing of a drug
used for a particular illness well above the cost sharing for other
drugs.
c. Value of Qualified Coverage
    In accordance with section 1860D-11(b)(2)(B) of the Act, with the
bid, each PDP sponsor and MA organization offering an MA-PD plan must
submit the actuarial value of qualified coverage in the region for the
Part D eligible individual with a national average risk profile for the
factors described in section 1860D-15(c)(1)(A) of the Act. We interpret
this to mean that the weighted average of the plan's expected risk-
standardized costs will represent the plan's cost for the theoretical
national average-risk Part D individual. Any increase in costs
attributable to increased utilization as the result of enhanced
alternative coverage must be excluded from this calculation. Any
alternative coverage that does not include supplemental coverage would
be, by definition, actuarially equivalent to standard coverage. Any
utilization effect that supplemental coverage has on the basic benefit
should be priced into the supplemental portion of the bid.
    Comment: One commenter wants to ensure that they have the ability
to establish flat copayments rather than the 25 percent coinsurance of
the standard design. We should permit Part D providers to round flat
copayments to the nearest $5 dollar level, as these are the benefit
designs commonly offered in the market place.
    Response: Any copayment structure must meet the test for either
actuarially equivalent standard coverage or for alternative coverage.
These tests are available to allow for flexibility in benefit design
including use of copays rather than coinsurance. While we would
anticipate that some rounding would be consistent with these tests,
rounding to the nearest $5 dollar level may create too great a
difference between rounded and unrounded values.
    Comment: One commenter stated that the regulation text should allow
for the value of any enhanced benefit design to reflect both the
potential impact of utilization changes and mix shifts to less
expensive drugs. Any test of benefit value should also take into
account the impact of utilization management, which may increase
utilization, but have a favorable impact on total costs.
    Response: To the extent that a benefit design other than that of
defined standard coverage will have a projected impact on the mix of
drugs, this impact will be included in the pricing of that proposed
design. We anticipate that utilization management will be held constant
in the pricing of defined standard and the proposed design, as well as
the population modeled; drug formulary; and drug pricing (except to the
extent that the proposed design incorporates differential pricing and
cost sharing based on participation status within the plan's network).
These issues will be fully discussed in our guidance on ``processes and
methods using generally accepted actuarial principles and
methodologies''.
5. Information Included with the Bid
a. Bid Format
    The exact format for the bid submission is detailed in separate CMS
guidelines with the bid submission tool. Section 1860D-11(c)(1)(D) of
the Act specifies ``the use of generally accepted actuarial principles
and methodologies.'' We require that an actuary (a member of the
American Academy of Actuaries) certify the actuarial valuation, which
may be prepared by others under his or her direction or review.
Actuarial certification would give better assurance that the actuarial
values in the bid were prepared in conformance with actuarial standards
and methodologies. Section 1860D 11(c)(3)(B) of the Act permits use of
outside qualified independent actuaries. We expect that plans would use
outside actuaries, especially if they did not have qualified in-house
actuaries.

[[Page 4294]]

    As provided in section 1860D 11(b)(3) of the Act, we have developed
(see Draft PDP Bid Instructions and Pricing Tool http://www.cms.hhs.gov/pdps/
) the bid submission format to facilitate the

submission of bids for multiple regions and in all regions, and we have
taken this into account in process development. This approach would
need to ensure that separate bids were provided for each region in
order to calculate the national average monthly bid amount and any
geographic adjustment required. Our overall approach would be to
increase our flexibility to develop appropriate methodologies in
response to program changes, while minimizing burden, rather than
codifying these processes in regulation. We believe that we would have
the authority to develop these methodologies through interpretive
guidance because our regulations state that sponsors provide the
actuarial value of their plans in accordance with generally accepted
actuarial principles and methodologies.
    In most cases the information included with the bid would be
sufficient for our review of the acceptability of a proposed plan based
on actuarial principles and for negotiation of terms and conditions of
an entity's participation in the provision of Part D benefits. However,
we may require additional information during the review to support the
assumptions and methods accompanying the bid. As provided in section
1860D-11(b)(2) of Act and Sec.  423.265(d) of this rule, the
information that would accompany the bid submission would, at a
minimum, include the following:
    * Information on the prescription drug coverage to be
provided, including the structure of the benefit, including
deductibles, coinsurance (including any tiers), initial (or subsequent)
coverage limits at which coinsurance levels change, and out-of-pocket
thresholds. This would also include the plan's formulary, utilization
management techniques, and any drugs, or types of drugs, excluded from
coverage, and all documents provided to beneficiaries explaining the
benefit, including the Evidence of Coverage, and would be certified by
an officer of the plan. We solicit comments on the best way to obtain
clear information on what drugs are included in the formulary.
    * The actuarial value of the qualified prescription drug
coverage in the region for a beneficiary with a national average risk
profile certified by a qualified actuary.
    * The portion of the bid attributable to basic benefits.
    * The portion of the bid attributable to supplemental
benefits, if applicable.
    * The actuarial basis for the portion of the bid
attributable to basic coverage and to supplemental benefits, if
applicable, certified by a qualified actuary.
    * The assumptions regarding reinsurance subsidy payments.
    * The assumptions regarding administrative expenses.
    * The plan's service area and the plan's network of
pharmacies serving that service area.
    * (For PDP sponsors only) the level of risk assumed in the
bid, including whether the sponsor requires a modification of risk
level (see discussion below) and, if so, the extent of the
modification. Although our procedures may subsequently seek this
information, we may only review it to the extent that the initial
submission of bids does not yield the statutory minimum number of full
risk bidders in each region and area. Our goal in designing the bidding
process will be to maximize the level of risk borne by contracting
plans and to minimize the need for fallback plans; and
    * Any other information that we would require.
Response to public comment
    Comment: Several comments were received concerning privacy
protections for information submitted during the bidding process. Two
manufacturers urged adoption of the ``restriction on use of
information'' standard in Sec.  423.322(b) for bidding information.
Moreover, they believe that the Trade Secrets Act (18 USC Sec.  1905)
should apply and be inserted into the regulation to cover manufacturer
pricing information. Three additional comments were received suggesting
that we should limit our requests concerning specific pricing and cost
information. These commenters while not referring to the Trade Secrets
Act, did seek protection of any information submitted. Additionally,
one pharmacy benefits manager and one health insurer expressed concern
that bidding information will not be protected from disclosure under
the Freedom of Information Act (FOIA).
    Response: We believe that information submitted with the bid that
is used to pay plans (such as estimations of reinsurance or
administrative costs) would be protected under Sec.  423.322(b) and
sections 1860D-15(d)(2)(B) and 1860D-15(f)(2) of the Act. These
sections protect information that is submitted to us for the purposes
of carrying out section 1860D-15 of the Act. Because the direct subsidy
in section 1860D-15(a) of the Act is based upon the plan's standardized
bid amount, we believe that the portion of the standardized bid which
is used in calculating that subsidy would be protected. On the other
hand, information submitted with the bid that is not used in
calculating the direct subsidy (such as the structure of the formulary
or the utilization management techniques to be used by the applicant)
would not be protected under sections 1860D-15(d)(2)(B) and 1860D-
15(f)(2) of the Act. However, bidders can always seek to protect their
information under the Freedom of Information Act and label truly
proprietary information ``confidential'' or ``proprietary.'' When
information is so labeled, the bidder is required to explain the
applicability of the FOIA exemption they are claiming. When there is a
request for information that is designated by the submitter as
confidential or that could reasonably be considered exempt under
Exemption 4, the Department is required by its FOIA regulation at 45
C.F.R. Sec.  5.65(d) and by Executive Order 12,600 to give the
submitter notice before the information is disclosed. To determine
whether the submitter's information is protected by Exemption 4, the
submitter must show that- (1) disclosure of the information is likely
to impair the government's ability to obtain necessary information in
the future; (2) disclosure of the information is likely to cause
substantial harm to the competitive position of the submitter; or (3)
the records are considered valuable commodities in the marketplace
which, once released through the FOIA, would result in a substantial
loss of their market value. Consistent with our approach under the Part
C program, we would not release information under the Part D program
that would be considered proprietary in nature or that would tend to
stifle the availability of discounts or rebates from pharmaceutical
manufacturers negotiated by Part D plans.
    Bidders may identify trade secrets and confidential business
information (CBI) with their submission. However, if they have not we
will give them another chance when a FOIA request has been made on
their records. In this case we will notify the business submitters that
we are in receipt of FOIA requests for their records. We will then
provide the business submitters with instructions and ask them to
identify any trade secret or CBI in order to justify our application of
Exemption 4. We will then review their justifications and highlighted
information against FOIA case law to see if we can support their
requested redactions. Under Executive Order 12600, if the business
submitters

[[Page 4295]]

disagree with our Exemption 4 analysis (which includes their
justification) of their identified trade secret or CBI, they are
provided the opportunity to seek a restraining order or injunction in
Federal court prohibiting us from releasing their records under FOIA.
    Comment: One commenter suggested that Pharmacy Benefit Managers be
required to disclose all rebate arrangements with manufacturers.
    Response: It is unclear to whom the commenter wants rebate
disclosed to and in what context. The comment was made in reference to
bidding and in this case information on rebates will generally be
limited to the aggregate level. However, per Sec.  423.272 more
detailed information may be reviewed if necessary to ensure the
reasonableness and appropriateness of the bid. Uniform requirements for
detailed rebate information would unnecessarily increase the burden of
the bidder. Detailed rebate information will be collected for reasons
other than the bid.
b. Risk Adjustment of Supplemental Premium
    The portion of the bid attributable to supplemental benefits (part
of enhanced alternative coverage defined in Sec.  423.104(g))
represents the supplemental premium for a beneficiary with a national
average risk profile. The payment process provided in section 1860D-15
of the Act will only address risk adjustment of the basic portion of
the bid, and there are no other provisions for risk adjusting the
supplemental benefit portion of the bid. If not addressed, this would
result in plans with average risk scores above 1.0 being under-
compensated by enrollees for supplemental benefits, and plans with
average risk scores below 1.0 being over-compensated, as illustrated
below.

                                                    Table F-1
                                      Supplemental Premium Risk Adjustment
----------------------------------------------------------------------------------------------------------------
                                                               Plan A             Plan B             Plan C
----------------------------------------------------------------------------------------------------------------
                                                         .................  .................  .................
----------------------------------------------------------------------------------------------------------------
Plan Average Risk Profile                                             0.80               1.00               1.10
----------------------------------------------------------------------------------------------------------------
                                                         .................  .................  .................
----------------------------------------------------------------------------------------------------------------
1.0 Supplemental Premium                                               100                100                100
----------------------------------------------------------------------------------------------------------------
Supplemental Premium if Risk-Adjusted                                   80                100                110
----------------------------------------------------------------------------------------------------------------
                                                         .................  .................  .................
----------------------------------------------------------------------------------------------------------------
Over or (under) compensation                                        $20.00              $0.00           $(10.00)
----------------------------------------------------------------------------------------------------------------

    Table F-1 illustrates the case of three equally efficient plans
that each estimate the cost of the same supplemental benefits at $100.
Plan B has an average risk profile, that is, the arithmetic average of
the risk scores of all of its enrollees is equal to 1.0. Plan A and
Plan C, however, have healthier and sicker than average risk pools,
with enrollee risk scores averaging .80 and 1.10, respectively. Plan A
only needs an average risk-adjusted premium of $80 to meet the revenue
requirements of providing those supplemental benefits to its healthier
enrollees, but would receive $20 more on average from enrollees if it
collects the whole $100 unadjusted premium. In contrast, Plan C needs
to collect $10 more than it would receive from the unadjusted (1.0)
premium to fully fund the expected needs of its sicker enrollees.
Consequently, we will require additional information on the projected
risk profiles of projected enrollees for accurate valuation of the
supplemental portion of the bid with the bid submission. We intend,
through the negotiation process, to reach agreement on a supplemental
premium based on the bid submission that would account for the risk
profile of enrollees and, thus, meet the plan's revenue requirements.
Our goal is to maintain a level playing field that would facilitate the
fair competition envisioned in the MMA. Review and approval of this
information is discussed in section F.3. of this preamble.
c. Modification of Risk in PDP Bids
    As provided under section 1860D-11(b)(2)(E) of Act and in Sec.
423.265(d)(4), PDP sponsors may request a modification of certain risk
sharing arrangements provided under section 1860D-15(e) of the Act,
thus, becoming a limited risk plan. Modification of risk could include
an increase in the Federal percentage assumed in the risk corridors or
a decrease in the size of the risk corridors. Any modification of risk
will have to apply to all PDP plans offered by a PDP sponsor in a
region.
    Section 1860D-11(b)(2)(E)(i) of the Act states that modification of
risk will not be available to MA-PD plans. Therefore, in discussing the
possibility of including in the bid a request for a modification of
risk, we include only PDP sponsors. Limited risk plans will only be
accepted if the access requirements in section 1860D-3(a) of the Act
could not otherwise be met through the approval of a sufficient number
of full risk plans. These requirements call for at least two qualifying
plans offered by different entities, one of which must be a stand-alone
prescription drug plan. If other bidders meet these requirements, a bid
from a limited risk plan could not be approved and might not be
reviewed.
    Comment: The proposed rule offers no guidance as to what we view as
``minimal risk.''
    Response: While the statute allows ``limited risk'' arrangements to
be accepted in order to ensure that the access requirements are met,
such arrangements must provide for more than a ``de minimis'' level of
risk. We would generally consider anything below 10 percent risk as
``de minimis''. Any proposal for a level of risk above the ``de
minimis'' but less than the standard full risk contract will be
considered if there was a need to accept a ``limited risk''
arrangement.''
    Comment: One commenter suggested that we should allow PDPs who wish
to enroll low income subsidy beneficiaries to apply for limited risk,
but be treated as a full risk plan.
    Response: While it is unclear what the commenter meant by being
``treated as a full risk plan,'' while being limited risk, full risk
plans get priority and we will only approve limited risk plans when
there are not a sufficient number

[[Page 4296]]

of full risk plans to meet the access requirements of section 1860D-
3(a). Also, per section 1860D-11(f)(1), approval of a limited risk plan
is conditioned on not being able to meet the access requirements but
for the approval of such a limited risk plan. Thus, if there are
sufficient full risk plans, we will not approve limited risk plans
regardless of whether the PDP wishes to specifically enroll low income
subsidy beneficiaries.
    Comment: One commenter expressed confusion over how the low-income
cost sharing amounts enter into the bid ``calculation'' since these
amounts help to satisfy revenue needs already identified by the plans
as part of the bid. The commenter went on to state that during the
early years of the program it will be difficult for plans to estimate
the number of low-income beneficiaries expected to enroll and the
amounts that would be paid on their behalf. They requested that we
recognize that these estimates are likely to be subject to error and
include statement in the preamble to the final rules that a good faith
standard will apply to these estimates.
    Response: The commenter is correct that the low-income subsidy is
not part of the bid since it represents a subsidy for enrollee cost-
sharing liability rather than plan liability. We ask for PDP sponsors'
or MA-PD plans' estimate of their low-income subsidy to assist us in
determining an interim payment for this subsidy, which is separate from
the direct and reinsurance subsidies. Their actual low-income subsidy
payment will be based on the actual experience for this group.
Estimates will be reviewed for reasonableness and appropriateness using
``generally accepted actuarial principles and methodologies'' as
instructed by 1860D-11(c)(1)(D) of the Act.
    Comment: One commenter urged that bids include information on how
plans will coordinate with SPAPs for Part D wraparounds at the point of
sale.
    Response: Specific information elements included in the bid
submission tool are not part of the regulatory text and will be
released in separate additional guidance on the bidding process.
    Comment: One commenter urged us to specify that bids must include
information on specific drugs in each formulary tier and their
corresponding co-pays, in addition to any prior authorization
requirements.
    Response: Specific details concerning the response fields will be
released with the guidance materials accompanying the bid pricing tool
and the Plan Benefit Package; however, formulary tiering structures and
prior authorizations requirements will be information that we will
review.
    Comment: One comment stated that we should provide a sample
actuarial pricing form that illustrates the type of information
desired.
    Response: Additional guidance on actuarial pricing will be made
available in a timely manner.
6. Review and Negotiation of Bid and Approval of Plans
a. Authority to Review Bids
    We will review the information filed by the PDP sponsor or MA
organization in order to conduct negotiations on the terms and
conditions proposed in the bid. In addition to general authority to
negotiate terms and conditions of the proposed bid submitted and other
terms and conditions of a proposed plan, the MMA grants use of the
authority to negotiate bids and benefits ``similar to'' the statutory
authority given the Office of Personnel Management (OPM) in negotiating
health benefits plans under the FEHBP program. We believe that the
Congress used ``similar to'' in the statute because of the differences
between the two programs. For example, while the OPM authority applies
to level of benefits, standard Part D drug coverage is defined. With
regard to rates, in some cases the context for FEHBP negotiations is
not applicable to Part D. For example, the rates for community-rated
plans under FEHBP are related to the rate the entity provides to
similarly sized groups, and there is no comparable concept in Part D.
Arguably the degree of competition among plans, and price signaling
through premium and benefits, might be significantly greater in Part D
than in FEHBP. Although these differences do exist there are also
similarities. OPM is concerned about trend factors used to establish
the premium for experience-rated plans, and we will have similar
concerns about the reasonableness of a sponsor's trend assumptions. OPM
is concerned about cost-sharing changes proposed by plans, and we will
have similar concerns with regard to supplemental benefits. OPM wants
to maintain high member satisfaction and ensure top quality service by
plans, and we will have similar interests.
    Chapter 89 of title 5 USC gives OPM broad discretion to negotiate
prices and levels of benefits. For example, 5 USC 8902(i) states that
OPM may negotiate with carriers if it believes the rates charged do not
``reasonably and equitably'' reflect the cost of the benefits provided.
In addition, OPM has broad authority to negotiate the level of
benefits, including the ability to prescribe ``reasonable minimum
standards for health benefits plans.'' (See 5 USC 8902(e).)
Notwithstanding our broad negotiating authority and our negotiating
authority ``similar to'' that of OPM, to the maximum extent feasible
and consistent with the appropriate discharge of our responsibilities,
we prefer to rely on competition rather than negotiation.
    We note that the bid requirements will be negotiated and a denial
of a contract based on a failure to come to an agreement on the bid
will not be appealable under the administrative procedures for
appealing a contract denial beginning with reconsideration in Sec.
423.645. Only the application requirements, which are separate and
distinct from bid negotiation, can be appealed as detailed in subpart
N.
    Comment: One commenter urged that we conduct a thorough review of
Part D providers' estimates of reinsurance to ensure a ``level playing
field.''
    Response: We will review estimates of reinsurance. Per section
1860D-11(c)(1) of the Act ``an actuarial valuation of the reinsurance
subsidy payments'' will be conducted. Moreover, section 1860D-11(d) and
(e) require a review of the entire bid including the estimates of
reinsurance. Additional detail for this review will be released in
documentation supporting the bid submission process.
b. Bid and Benefit Package Review
    We have the authority to negotiate in four broad areas: (1)
administrative costs; (2) aggregate costs; (3) benefit structure; and,
(4) plan management, if dissatisfied with some or all aspects of bid
submissions. We will evaluate administrative costs for reasonableness
in comparison to other bidders and in comparison to a PDP sponsor's
other lines of business. We will examine aggregate costs to determine
whether the revenue requirements for qualified prescription drug
coverage are reasonable and equitable. We will be interested in steps
that the sponsor is taking to control costs, such as through various
programs to encourage use of generic drugs. We will examine and discuss
any proposed benefit changes. Finally, we will discuss indicators and
any identified issues with regard to plan management, such as customer
service.
    In addition to the negotiation process, we will ensure that bids
and plan designs meet statutory and regulatory requirements. In
general, we will examine bids to determine whether the bid meets the
standard of providing qualified prescription drug coverage, as
described in Sec.  423.104(b) of this rule and in subpart C of this
preamble. We will examine the actuarial analysis accompanying the bid
to ensure that it

[[Page 4297]]

has been prepared in accordance with our actuarial guidelines and
properly certified. We will examine bids to determine whether the
revenue requirements for qualified prescription drug coverage are
accurate and reasonable, and that the requirements relating to
actuarial determinations are met. We note that section 1860D-
11(e)(2)(c) of the Act requires that the portion of the bid
attributable to basic prescription drug coverage must be supported by
the actuarial basis and reasonably and equitably reflect revenue
requirements for benefits provided under the plan, less the sum of the
actuarial value of reinsurance payments. We will also review the
structure of premiums, deductibles, copayments, and coinsurance charged
to beneficiaries and other features of the benefit plan design to
ensure that it is not discriminatory. We will review cost sharing both
above and below the out-of-pocket threshold with regard to its impact
on groups of beneficiaries. We will also look to see that there is no
differential impact on groups of beneficiaries by geographical location
within the plan's region or service area attributable to different
levels of cost sharing between preferred and non-preferred network
providers.
    As required under section 1860D-11(e)(2)(D)(i) of the Act and in
Sec.  423.272(b)(2), the structure of the benefit design (including
cost sharing provisions and formulary design) must not be
discriminatory; that is, it must not discourage enrollment by any Part
D eligible enrollee on the basis of health status, including medical
condition (related to mental as well as physical illness), claims
experience, receipt of health care, medical history, genetic
information, evidence of insurability, and disability. In general, this
means that we will review benefit plans for features that, when
applied, have differential impacts on beneficiaries with particular
medical conditions. Factors we will consider in determining whether a
benefit structure is discriminatory include, but are not limited to:
(1) the benefit design--including the initial coverage limit, the
tiered cost-sharing, the use of categories and classes in a formulary,
and the choice of drugs provided in each category. (For example, if the
tiered cost-sharing for drugs used to treat HIV is much higher than the
cost-sharing for other types of drugs, we will view this benefit
structure to be discriminatory); (2) the use of any discriminatory
limits such as 90-day limits or requirements for pre authorization; and
(3) supplemental benefits such as supplemental coverage of drugs that
will encourage a healthier population to join the PDP. As provided in
section 1860D-11(e)(2)(D)(ii) of the Act, plans using formulary designs
based on categories and classes that are consistent with the guidelines
established by the U.S.P. as discussed in subpart C, will be recognized
as satisfying the non-discrimination design related to formulary
structure as it pertains to categories and classes. However, adopting
the USP model categories and classes will not prohibit us from
reviewing other aspects, including the use of any limits or tiers, as
discussed above.
c. Approval of the Supplemental Premium
    As provided under section 1860D-11(e)(2)(C)(ii) of the Act, we will
determine that the portion of the bid attributable to supplemental
benefits reasonably and equitably reflects the revenue requirements for
that coverage under the plan. Unless the supplemental portion of the
bid (which is paid by the enrollee in the form of the supplemental
premium) is risk adjusted for the average level of risk among
enrollees, plans with average risk scores above or below 1.0 will be
over compensated or under compensated by enrollees for supplemental
benefits. Therefore, on the basis of this authority, we will require
additional information, consisting of estimates of the projected risk
scores of the plan's enrollees in the subsequent year, to be submitted
by each plan for purposes of negotiating the appropriate risk
adjustment of the supplemental portion of the bid. We will review and
negotiate that information, and will approve a uniform supplemental
premium reflecting the average risk factor for the plan's expected
enrollment.
d. Rebate Reallocation for MA-PD plans
    The negotiation process for MA-PD plans could include the
resubmission of modified benefit structures (other than changes in that
portion of their supplemental benefits related to drugs) once we know
the outcome of the national average monthly bid calculation and its
impact on beneficiary premiums. Part D drug benefits, including
benefits offered through supplemental Part D coverage) could not be
changed during this process because any changes will have an impact on
government reinsurance payments and, therefore, on the portion of the
bid related to basic drug benefits. The MMA requires that all MA bid
and benefit package submissions be provided to us no later than the
first Monday in June. In the prescription drug program enrollee
premiums must be based on a percentage of the national average monthly
bid amount that can only be calculated once all bids have been
received, if not actually approved. (While the enrollment weights are
determined from the previous year's reference month, the bid amounts
are not.) Therefore, the prescription drug portion of benefit packages
submitted by MA-PD plans will be based on estimates of monthly
beneficiary premiums. Some of these MA-PD plans will have allocated
portions of their Part C rebates to buy-down of the Part D premium.
Once the final national average monthly bid amount and the base
beneficiary premium have been calculated, some of these rebate
allocations in the bids could be either excessive or insufficient to
achieve the desired premium level.
    Excessive rebate allocation will result in a portion of the rebate
that is not provided to the beneficiary as required by law, since a
premium of less than zero is not permitted. Compliance with the statute
will require a reallocation of the excessive portion of the rebate
credit back to other allowed uses of the Part C rebate, that is, to
supplemental benefits (including reduced cost sharing other than cost
sharing for Part D drugs) or to credits to the Part B or supplemental
premiums. On the other hand, insufficient rebate allocation may result
in minimal premiums that may be seen as burdensome by plans, enrollees,
and the financial institutions managing electronic funds transfer.
    The statute does not address this situation, but section 1860D-11
of the Act does grant us broad authority to negotiate the terms and
conditions of the proposed bids and benefit plans. Our regulatory
approach will be to allow the negotiation process for MA-PD plans to
include the resubmission of modified benefit structures once the
outcome of the premium finalization process is known. MA PD plans will
be able to redistribute their Part C rebates to correct for the
difference between the projected and final national average monthly bid
amounts and to achieve the previously proposed level of Part D
premiums. Under no circumstances could plans submit modified bids.
    For example, an MA-PD organization submitted its bid and benefit
package based on the assumption that the levels of the national average
monthly bid amount and its prescription drug standardized bid will
result in a $35.00 monthly beneficiary premium for basic coverage, and
that it will use $35.00 of its Part C rebate to completely buy down the
Part D premium. If the national average monthly bid amount is
determined to be higher than expected, the plan's bid will end up below
the

[[Page 4298]]

benchmark and its base beneficiary premium will be adjusted by
subtracting the difference between the bid and national average monthly
bid amount. Therefore, the plan's monthly beneficiary premium will be
less than the projected premium, for instance, $34.00, and the $35.00
amount allocated from the Part C rebate for Part D premium buy-down
will be excessive. In that case, we will require the MA organization to
amend its benefit package to reallocate the excessive $1.00 of the Part
C rebate credit to additional supplemental benefits (other than for
Part D drugs) or to Part B or supplemental premium credits. These
adjustments will be mandatory in order to ensure that the entire amount
of the rebate was provided to the beneficiary in some form.
    Under an alternative scenario, the national average monthly bid
amount is determined to be lower than expected and the plan's bid ends
up above the benchmark. In this case, the plan's base beneficiary
premium will be adjusted by adding the difference between the bid and
national average monthly bid amount. Therefore, the plan's monthly
beneficiary premium will be higher than projected, for instance $36.00,
and the $35.00 amount allocated from the Part C rebate for Part D
premium buy-down will no longer be sufficient to eliminate the Part D
premium as planned. In that case, we will allow the MA organization to
amend its benefit package to reallocate an additional $1.00 of the Part
C rebate credit from additional supplemental benefits (other than for
Part D drugs) or from Part B or supplemental premium credits to
eliminate the Part D premium. These adjustments will be optional since
the Part C rebate has already been provided to the enrollee. We will
not permit an MA organization to simply eliminate a minimal premium
instead of reallocating the rebate because doing so will mean that the
cost of providing the prescription drug benefit had been overstated.
However, the MA organization could elect to charge the new increased
premium and to amend its benefit package submission accordingly.
    Comment: One comment suggested that we should also allow
reallocation of rebate dollars to round off premiums and to support to
support the availability of MA-PD plans to dual eligibles.
    Response: Title II MA-PD rebate dollars (note this is to be
distinguished from manufacturer rebates) could certainly be used to
round off premiums (Sec.  422.266(b)(2)), and as stated our regulatory
approach will be to have a negotiation process for MA-PD plans to
include the resubmission of modified benefit structures once the
outcome of the premium finalization process is known. Such a reduction
in the Part D premium will, however, have to be uniform for all plan
enrollees.
e. Private Sector Price Negotiation and Formulary Design
    The Act envisions that most price negotiation including discounts,
rebates, or other direct or indirect subsidies or remunerations will
take place between PDP sponsors or MA organizations (or their
subcontractors) and pharmacies and pharmaceutical manufacturers. We
believe the Congress used the terms direct and indirect to be all
inclusive in defining subsidies. Section 1860D-11(i) of the Act
precludes us from interfering with negotiations between drug
manufacturers and pharmacies, or PDP sponsors, or requiring a
particular formulary or pricing structure. In other words, price
negotiation with manufacturers will be conducted by the private drug
benefit managers and plans that are already familiar with negotiating
prices of prescription drugs on a local, regional or national basis.
Moreover, we expect that providing information on discounted drug
prices to beneficiaries will encourage further competition on lower
prices. Because beneficiaries will choose a drug plan based on drug
prices and formulary coverage, the plans have strong incentives to
negotiate lower prices on drugs that beneficiaries use just as private
benefit managers currently do on behalf of the Federal government,
State governments, and employer and retiree plans. We expect that in
addition to price levels for drugs, these negotiations will also
include such terms as prohibitions on substitutions of drugs if the net
result will be higher costs for patients or the plans. The nature of
the negotiations that we will conduct with bidders is discussed later
for full-risk and limited-risk bids, and in subpart Q of this preamble
for fallback plans.
    We expect that the private negotiations between PDP sponsors and
drug manufacturers will achieve comparable or better savings than
direct negotiation between the government and manufacturers, as well as
coverage options that better reflect beneficiary preferences. This
expectation reflects the strong incentives to obtain low prices and
pass on the savings to beneficiaries resulting from competition,
relevant price and quality information, Medicare oversight, and
beneficiary assistance in choosing a drug plan that meets their needs.
This is similar to the conclusion of other analyses, for example, CBO's
recent statement that ``Most single-source drugs face competition from
other drugs that are therapeutic alternatives. CBO believes that there
is little, if any, potential savings from negotiations involving those
single-source drugs. We expect that risk-bearing private plans will
have strong incentives to negotiate price discounts for such drugs and
that the Secretary would not be able to negotiate prices that further
reduce Federal spending to a significant degree. ``In accordance with
the Medicaid best price exemption provided under section 1860D-
2(d)(1)(c) of the Act and codified in Sec.  423.104(h)(2) of our rule,
drug plans may even be able to negotiate better prices than those paid
under Medicaid. It also reflects Medicare's recent experience with drug
price regulation for currently-covered drugs, in which regulated prices
for many drugs have significantly exceeded market averages.
    By not allowing us to require any particular formulary, the statute
ensures that the Pharmacy and Therapeutics committees of prescription
drug plans and MA PD plans have the flexibility to make changes in
their classifications and lists of preferred drugs based on the most
current evidence-based information (subject to the limitations of Sec.
423.120(b)). Additional CMS guidelines on formulary review will be made
available. However, in summary we will evaluate plan formulary
categories and classes in comparison to the model guidelines developed
by U.S.P. In addition to evaluating any discriminatory features, as
discussed above, we have the authority to develop minimum standards and
to negotiate the terms and conditions of the bid under section 1860D-
11(d) of the Act. We also have the authority to promulgate additional
contract terms (section 1860D-12(b)(3)(D) of the Act). Finally, we
believe the structure of the Part D benefit, as laid out in section
1860D-2 of the Act, with a requirement for catastrophic coverage,
anticipates a structure where beneficiaries receive coverage for
medically necessary drugs. Therefore, we will evaluate the number of
categories in formularies that do not meet the model guidelines and the
choice of drugs available in those categories for meeting the needs of
the Medicare population. After the initial year of the program, we will
also review the history of plan formulary appeals to identify issues
with the plan's formulary. We will conduct additional research on
evaluating formularies and drug benefit designs and we would welcome
comments on evaluation. As noted previously, we may also review plan
cost sharing (that is, tiers). Our

[[Page 4299]]

formulary review will follow four important principles:
    1. Rely On Existing Best Practices: Our review will rely on widely
recognized best practices for existing drug benefits serving millions
of seniors and people with disabilities to ensure non-discriminating,
appropriate access;
    2. Provide Access to Medically Necessary Drugs: We will require
that drug plans provide access to medically necessary treatments for
all and do not discriminate against any particular types of
beneficiaries based on their expected drug costs;
    3. Flexibility: We will allow plans to be flexible in their benefit
designs to promote real beneficiary choice while protecting
beneficiaries from discrimination; and
    4. Administrative Efficiency: We will set up a process to conduct
effective reviews of plan offerings within a compressed period of time.
    Comment: Several comments were made regarding formulary structures
that are likely to substantially discourage enrollment, with the
majority merely expressing support for our regulatory text. Ten
comments were received expressing concern over the definition of
``substantially discourage'', three of which called for dropping the
word ``substantially'' from the regulation. One commenter specifically
argued that step therapy for psychopharmacology should be considered as
substantially discouraging. Another commenter simply stated that step
therapy should be reviewed for discriminatory impact.
    Response: The term ``substantially'' comes directly from the
statute in section 1860D-11(e)(2)(D)(i) of the Act and therefore we do
not believe it should be eliminated as some commenters recommended.
According to research conducted for the Agency by Booz Allen Hamilton
(``Drug Utilization Management and Quality Assurance Best Practices and
Standards''), step therapy is one method of benefit design currently
used by industry for the purpose of managing costs by requiring more
cost effective drugs to be used before more expensive options are
prescribed. Other research indicated the widespread use of this
technique. For example, in its June 2004 ``Drug Trend Report,'' Express
Scripts, a large pharmacy benefits manager, stated that the use of step
therapy had risen from 4.5 million to 9.8 million lives between 2002
and 2004 for their members. Moreover, they report that step therapy
with psychotropics, in particular antidepressants, is common among
these members. Step therapy is also common among State Medicaid
programs. Indeed, a 2003 report by the Georgetown University Health
Policy Institute on behalf of the Kaiser Commission on Medicaid and the
Uninsured found that 28 Medicaid agencies in 2003 used step therapy in
their drug programs. The review process will examine the use of step
therapy as a utilization control, but a categorical ban would be
inconsistent with Congressional intent in Section 1860D-4(c)(1(A) of
the Act, which calls on PDPs to have ``a cost-effective drug
utilization management program, including incentives to reduce costs
when medically appropriate.'' As we have outlined, step therapy is one
common method of drug utilization management. The Congress was aware
that utilization management included step therapy, and they were also
aware of that some stakeholders have objections to it as evidenced by
the testimony given during the Subcommittee on Health of the Committee
on Energy and Commerce hearing ``Designing a Twenty-First Century
Medicare Prescription Drug Benefit'' on April 8, 2003. We will review
step therapy and other formulary structures to ensure that they are not
substantially discouraging. Accordingly, we will rigorously review
formularies in a number of ways as part of the bid negotiation process.
This review will include, but not be limited to: (1) reviewing the
classes and categories in relation to the USP model; (2) reviewing the
formulary to make sure that all appropriate treatments are available
for certain complex diseases such as HIV; (3) where possible and
appropriate, comparing the formularies and utilization management
programs (including step therapies) to applicable treatment guidelines
to make sure they support current treatment standards; and (4)
comparing formularies between plans to identify outlier practices,
which will include comparing plans for amount and specific drugs that
they are including in step therapy, quantity limits and prior
authorization.
    Comment: One commenter indicated concern that SPAPs will incur
significant costs if PDP sponsors' formularies are inadequate. We
should establish a formulary evaluation criterion that would trigger a
detailed evaluation of the adequacy for the formulary.
    Response: Formularies will be evaluated according to the provisions
of the statute. Regardless of the impact of specific plan formularies,
we have estimated that Part D will save SPAPs approximately $3 billion
between 2006--2010 (see the regulatory impact statement for more
detail).
f. Bid Level Negotiation
    The FEHBP standard in 5 USC 8902(i) requires us to ascertain that
the bid ``reasonably and equitably reflects the costs of benefits
provided.'' In addition, we note that section 1860D-11(e)(2)(c) of the
Act requires that the portion of the bid attributable to basic
prescription drug coverage must ``reasonably and equitably'' reflect
revenue requirements . . . for benefits provided under that plan, less
the sum ... of the actuarial value of reinsurance payments.'' Analogous
to the manner in which FEHBP views its management responsibilities, we
see this requirement as imposing the fiduciary responsibility to
evaluate the appropriateness of the overall bid amount.
    In general, we will evaluate the reasonableness of bids submitted
by at-risk plans by means of the actuarial valuation analysis. This
would require evaluating the plan's assumptions regarding the expected
distribution of costs, including average utilization and cost by drug
coverage tier, for example, in the case of standard coverage: (1) those
with no claims; (2) those with claims up to deductible; (3) those with
claims between the deductible and the initial coverage limit; (4) those
with claims between the initial coverage limit and the catastrophic
limit; and (5) those with claims in excess of the catastrophic limit.
We could test these assumptions for reasonableness through actuarial
analysis and comparison to industry standards and other comparable
bids. Bid negotiation could take the form of negotiating changes upward
or downward in the utilization and cost per script assumptions
underlying the bid's actuarial basis.
    Arguably, appropriate assurance that plan bids reasonably and
equitably reflect the revenue requirements associated with providing
the Part D benefit requires knowing the final drug price levels the
plans are paying that are implicit in their bids. Consequently, in
addition to looking at final aggregate prices, if we found that a
plan's data differed significantly from its peers without any
indication as to the factors accounting for this result, we could also
ask bidders to provide information about rebates and discounts they are
receiving from manufacturers and others, in order to ensure that they
are negotiating as vigorously as possible. Section 1860D 11(b)(1)(C) of
the Act allows us to ask for necessary ``information on the bid''. In
other words, we will be able to inquire as to the ``net cost'' of drugs
since this is the key dollar value we will need to make accurate
``apples to apples'' comparisons on drug prices between

[[Page 4300]]

PDPs. Under this approach, if the particular bids appear to be
unusually high (or low), we could go back to the bidders and request
that they explain their pricing structure, the nature of their
arrangements with manufacturers, and we might ask further questions and
take further action to perform due diligence to ensure that there is no
conflict of interest leading to higher bids. For instance, we will look
at certain indicators, such as unit costs or growth rates in the bid
amounts to see if they are in keeping with private market experience to
the extent feasible for a comparable population (for example,
retirees). (In this case, we will be using the authority in 5 USC
section 8902(i) to negotiate bids that are ``consistent with the group
health benefit plans issued to large employers''.) If the overall bids
were unjustifiably high, we will have the authority to negotiate the
bids down to a level that is more in keeping with bids from other
sponsors. We could exercise our authority to deny a bid if we do not
believe that the bid and its underlying drug prices reflect market
rates. Our strong expectation, however, is that we will be able to rely
on the incentives provided by competitive bidding, and we will use our
authority under this part only on the rare occasion we find that a
plan's data differs significantly from its peers without any indication
as to the factors accounting for this result.
    Comment: Several comments were received on the MMA provision of
``authority similar to the authority of the Director of the Office of
Personnel Management'' for the Federal Employee Health Benefits Program
(FEHBP) when negotiating bids for Part D. One commenter referenced that
in the preamble of the proposed rule, we stated that we were
considering regulations similar to those used by Office of Personnel
Management (OPM) in 48 CFR Chapter 16, which they note is comprised of
24 distinct parts and due to the lack of clarity with regard to the
provisions of the OPM regulations were referring to they would be
unable to comment. One health insurer asked that we clarify how our
intended oversight would differ from the Similarly Sized Subscriber
Groups (SSSGs) requirements in the FEHBP. Another commenter asserted
that OPM negotiates an annual dollar cap on administrative expenditures
that can be funded through premiums and that similar negotiations with
MA plans would not be appropriate given that the MMA works on a
competitive model. Two commenters suggested that broad use of the OPM
authority would violate the noninterference clause in the MMA and that
we should not review every plan during the bidding process in detail on
pricing structure and the nature of arrangements with manufacturers.
One commenter agreed with the Agency's interpretation of this authority
in the proposed rule noting that nothing in our interpretation would
``set the price for any individual drug or even plans if aggregate
price levels for groups of drugs were higher than prices observed among
peer plans''.
    Response: The section 1860D-11(d)(2)(B) of the Act authority will
be used to review bids and negotiate changes consistent with the
statute and regulation. Specifically, we intend to evaluate the
reasonableness and appropriateness of the actuarial assumptions made in
the bid. We will examine bids to determine whether the revenue
requirements for qualified prescription drug coverage are accurate and
reasonable. We also will examine administrative costs for
reasonableness. We will review profit for reasonableness and
appropriateness. We also will review the structure of the benefit plan
design in terms of such features as premiums, deductibles, co-payments,
and coinsurance charged to beneficiaries to ensure that it is not
discriminatory.
    There appears to have been confusion caused by our request for
comments on 48 CFR Chapter 16. These OPM regulations assume
applicability of the Federal Acquisition Regulation, which is not
applicable to at-risk or limited risk Part D plans. Therefore we are
not adopting any of the OPM regulations at this time. We will note
however that our negotiating authority ``similar to the authority...of
the Office of Personnel Management'' (section 1860D-11(d)(2)(B) of the
Act) is in addition to our general authority to ``negotiate the terms
and conditions of the proposed bid submitted and other terms and
conditions of a proposed plan'' (Section 1860D-11(d)(2)A) of the Act).
We have clarified the regulations to reflect these two separate
authorities.
     With regard to the application of a SSSG concept to Part D, we
will note that the Part D program generally relies on competition to
ensure reasonable bids. There is no authority to tie a sponsor's rate
methodology to that used for a SSSG as applied under FEHBP with regard
to community-rated plans. Therefore, we do not believe that this type
of cross product line comparison will be appropriate at this time.
    One comment correctly pointed out that there is no cap on
administrative costs under Part C or Part D similar to the cap in
effect in FEHBP experience rated plans. It is assumed that competition
among plans will generally ensure reasonable bids. The Congress,
however, did not leave the determination of rates entirely to market
forces. We are required to determine that the reasonable and equitable
test is met and is given negotiating authority to ensure this result.
The initial review will focus in part on low and high cost outliers,
and on bids in areas with little competition. It must be noted however,
that bid outliers are not necessarily inappropriate, nor are bids
within the measure of central tendency automatically correct. Indeed,
an outlier bid may be reasonable and appropriate after additional
review and explanation while an ``average'' bid could be based on
incorrect actuarial assumptions. In summary, all bids will be reviewed
for their reasonableness whether an outlier or not.
    Two commenters seemed to suggest that they believe that the bid
review authority will be used as a back door price control mechanism in
direct violation of the non-interference provision of section 1860D-
11(i) of the Act, which directs the Secretary to not interfere with the
negotiations between drug manufacturers and pharmacies and PDP
sponsors; and to not require a particular formulary or institute a
price structure for the reimbursement of covered part D drugs. In the
proposed rule we interpreted the non-interference provision as
prohibiting us from setting the price of any particular drug or from
requiring an average discount in the aggregate on any group of drugs
(such as single-source brand-name drugs, multiple-source brand name
drugs, or generic drugs), but allowing us to require justification of
aggregate price levels. In addition, although we are prohibited from
negotiating the price levels of drugs, it is authorized to negotiate
the level of the overall bid. We will evaluate the reasonableness of
costs submitted by at-risk plans bids through actuarial valuation
analysis, and noted that this might require information regarding the
plan's assumptions about expected distribution of costs, including
average utilization and price by drug coverage tier, for: (1) those
with no claims; (2) those with claims up to deductible; (3) those with
claims between the deductible and the initial coverage limit; (4) those
with claims between the initial coverage limit and the catastrophic
limit and 5) those with claims in excess of the catastrophic limit.
Through actuarial analysis, these assumptions will be tested for
reasonableness, and compared to industry standards and other

[[Page 4301]]

comparable bids. We also want to clarify that we do not intend on
universally requiring plans to submit detailed information on pricing
structure and the nature of arrangements with manufacturers. Requests
for additional and more detailed information will only be triggered
questions involving the initial bid submission. We are confident that
additional bid submission guidance will limit such occurrences from
happening. We believe that this interpretation ensures that we fulfill
our duty to review bids for reasonableness while avoiding any direct
interference in the negotiations between manufacturers, pharmacies, and
PDP sponsors.
    Under the previous Medicare+Choice program, we permitted
Medicare+Choice organizations to waive premiums or to offer mid-year
benefit enhancements to their benefit packages. However, in order to
maintain the integrity of the bidding process, we believe that it is no
longer appropriate to allow either MA organizations or PDP sponsors to
waive premiums or offer mid-year enhancements as they will be de facto
adjustments to benefit packages for which bids were submitted earlier
in the year.
    These adjustments would be de facto acknowledgement that the
revenue requirements submitted by the plan were overstated. Allowing
premium waivers or mid year benefit enhancements would render the bid
meaningless. Excessive amounts included in the bid will be subject to
recovery by the government in the risk corridor calculations following
the coverage year.
    Consequently, we interpret the statutory provisions on competitive
price negotiation as prohibiting us from setting a regulated price of
any particular drug or imposing by regulation an average discount in
the aggregate on any group of drugs (such as single-source brand-name
drugs, multiple-source brand name drugs, or generic drugs), but as
allowing justification of aggregate price levels for groups of drugs.
In addition, we could, under the specific circumstances previously
discussed, negotiate regarding the level of the overall risk bid. This
approach will allow us to exercise the authority similar to FEHBP as
visualized in the MMA to ensure that per capita rates charged
reasonably and equitably reflect the cost of the benefits provided, and
that beneficiaries receive the full benefits of vigorous price
negotiation by their drug plans.
g. Approval of Plans
    After negotiations on the terms and conditions of the bid, we must
approve or disapprove the bid. After negotiations, we will approve a
plan only if--
    * The plan is found to be in compliance with requirements
specified in this regulation;
    * The plan meets the actuarial valuation requirements; and
    * The plan design does not discourage enrollment by certain
eligible beneficiaries.
    In Sec.  423.272(c), we approve limited risk plans only if fewer
than two qualifying prescription drug plans offered by different
entities, one of which must be offered by a stand-alone PDP sponsor,
were submitted and approved in a region. We will approve only the
minimum number of limited risk plans needed to meet these access
requirements and will give priority to plans bearing the highest levels
of risk; however, we may take into account the level of the bids
submitted by these plans. Except as authorized under section 1860D-
11(g) of the Act and in Sec.  423.863 with regard to fallback plans, we
will not, under any circumstances, approve a plan that elected to bear
no risk or a de minimis level of risk.
    Comment: One comment urged that we should reject bids that result
in only one PBM operating as a subcontractor to all the plans in a
given region.
    Response: The statute does not give us the authority to do this.
The statute mandates that beneficiaries have the choice of at least one
PDP in an area in addition to whatever MA-PD options are available. The
number of PBMs that contract with the PDP sponsors and MA organizations
has no bearing on the access requirements.
h. Special Rules for PFFS Plans
    As provided in section 1860D-21(d) of the Act, and codified in
Sec.  423.272(d), PFFS plans that offer prescription drug coverage are
exempt from review and negotiation (under sections 1860D-11(d) and
(e)(2)(C) of the Act) of their prescription drug bids and premium
amounts but are otherwise subject to all other requirements under this
part, with the following exceptions. While we will not negotiate PFFS
bids, those bids must meet the actuarial valuation requirements
applicable to all risk bids. These plans are not required to negotiate
discounted prices for prescription drugs. If they do negotiate, the
requirements under Sec.  423.104(h) related to negotiated prices will
apply. If the plan provides coverage for drugs purchased from all
pharmacies, without charging additional cost sharing, and without
regard to whether they are participating pharmacies, Sec.  423.120(a)
and Sec.  423.132 of this rule (requiring certain network access
standards and the disclosure of the availability of lower cost
bioequivalent generic drugs) will not apply to the plan. PFFS plans are
also exempt from drug utilization management program and medication
therapy management program requirements.
    Finally, we note that section 1860D-21(d)(7) of the Act provides
that costs incurred for off-formulary drugs will not be excluded in
determining whether a beneficiary has reached the out-of-pocket
threshold if a PFFS plan does not use a formulary. We believe that
section 1860D 21(d)(7) of the Act is a tautology and simply states that
PFFS plans without formularies, by definition, cannot have non
formulary drugs to exclude from the out-of-pocket threshold
calculation.
7. National Average Monthly Bid Amount
    In Sec.  423.279, we outline the calculation of the national
average monthly bid amount. For each year, beginning in 2006, we will
compute a national average bid based on approved bids in order to
calculate the national base beneficiary premium. As a practical matter,
we realize that we might need to calculate and announce the national
average monthly bid amount before negotiations on all bids were
completed in order to allow time for finalization of premiums and
benefit packages. Therefore, we anticipate that we will identify a date
by which the national average monthly bid amount will be published, and
we will use the bids that had passed a certain level of approval as of
that date as the basis for the calculation.
    As provided in section 1860D 13(a)(4)(A) of the Act, in computing
the national average monthly bid amount, we will exclude bids submitted
for MA private fee-for-service (PFFS) plans, specialized MA plans for
special needs individuals, PACE programs under section 1894 of the Act
(pursuant to section 1860D-21(f) of the Act) and reasonable cost
reimbursement contracts under section 1876(h) of the Act (according to
section 1860D-21(e) of the Act). The exclusion from the calculation of
bids of PFFS, cost plans, specialized MA plans, and PACE suggests that
they are different from, and not comparable to, the average bid in some
way. We interpret this difference to be based solely on price levels
because the legislation--
    * Does not define any other basis for determining these
bids;
    * Continues to compare these bids to the national average
bid amount to determine adjustments to enrollee premiums; and

[[Page 4302]]

    * Generally, provides for payments to such plans (including
risk adjustment) in the same manner as to non-excluded plan types--
except that PFFS plans receive reinsurance payments according to
estimates--and not actual costs and are not eligible for risk corridor
payments.
    Therefore, these excluded plan types will still submit bids on the
same basis as all other plans, that is, the 1.0 risk prescription drug
plan beneficiary, even though these bids are not included in the
national average bid amount at this time.
    The national average bid amount will be equal to the weighted
average of the standardized bid amounts for each PDP and for each MA-PD
plan described in section 1851(a)(2)(A)(1) of the Act. The national
average monthly bid amount will be a weighted average, with the weights
being equal to the proportion of Part D eligible individuals enrolled
in each respective plan in the reference month (as defined in Sec.
422.258(c)(1)). For calendar year (CY) 2006, we will determine the
enrollment weights on the basis of assumptions that we will develop. In
the August 2004 proposed rule we outlined that one possible approach
would be to use the following procedure to assign weights to individual
bids for PDPs and MA-PD plans for CY 2006:
    * Obtain total Medicare enrollment by region, and enrollment
in each (local) MA plan that offers a drug benefit by region. These
enrollments will be as of a specific date, for example, March 31, 2005.
    * Assign each (local) MA-PD plan in each region a weight
equal to its MA enrollment.
    * Subtract the MA enrollment from the total Medicare
enrollment for each region to arrive at the PDP-eligible enrollment.
    * Divide the PDP-eligible enrollment for each region by the
number of companies offering PDPs in each region to arrive at the
weight for each company in each region.
    * For each company in a region, divide the company weight by
the number of plans offered by that company to arrive at the PDP
weight.
    * The regional average monthly bid amount will be calculated
by weighting each plan's bid by its assigned weight.
    * The national average monthly bid amount will be calculated
by weighting each regional average monthly bid amount by the region's
proportion of Part D eligible individuals (Medicare enrollment) and
summing these products.
    Using this methodology, after subtracting MA enrollments, each
company offering PDP(s) in a region gets equal weight. An exception
might occur based on capacity limits indicated by MA-PD plans. This
assumes that beneficiaries will select a company, and then select a
plan from that company. It also dilutes the effect of any potential
artificially high bids designed solely to increase the national average
monthly bid amount. If a company offers multiple plans in a region,
each plan gets an equal allocated share of its company's assigned
weight.
    New MA-PDs will get a zero weight. This treatment is consistent
with the weight assignment specified in the statute for subsequent
years. Starting with the second year, all new plans will get zero
weight because they have no prior year enrollment. We request comments
on the ``unequal'' inclusion of plans in the calculation of the
national average monthly bid. We note that many MA PDs will operate in
small geographic areas with small potential enrollment, and so we
believe that the impact of this approach for new local MA-PDs is likely
limited. We recognize, however, that this approach is perhaps more
problematic related to the treatment of the new regional MA-PD plans,
as these plans in a given region are likely to have larger enrollment
than local MA-PD plans. This particular approach implicitly assigns
persons in new MA PD plans (both local and regional) to the PDP
weights, hence giving potentially too much weight to the PDPs.
    Alternatively, assigning equal weights to PDPs and new MA PD plans
(even if limited to just the regional MA-PDs) could likely assign too
much weight to the new regional MA PD plans, which at least in 2006 are
expected to have lower enrollment. Another possible alternative would
be to base weights on regional MA-PD plan projections of enrollment,
subject to our assessment of reasonableness of the estimates. In this
approach we would use the proportion of projected enrollment for each
plan as weights. However, particularly in the first year or so,
projections may be quite inaccurate, leading to a distorted and
unrepresentative benchmark. In the proposed rule we requested comments
on these and other alternative approaches for how to weight bids in
2006.
    Note that in this methodology the assigned weights are price
inelastic, that is, the recommended weight assignment methodology
implies that price is not a factor in plan selection. We recognize that
in reality this is not the case, but in the absence of data on which to
base the relationship between price and plan choice in this population
for this benefit we cannot model the effect of price variations on
demand. We believe that the fairest method that is feasible for 2006 is
simply to assume an equal weight for each plan.
    In subsequent years, the weights for the weighted average would be
calculated as a percentage with the numerator equal to the number of
Part D eligible individuals enrolled in the plan in the reference month
and the denominator equal to the total number of Part D eligible
individuals enrolled in all plans (except for those plans whose bids
are not include in the national average bid amount, as described above)
in the reference month. It represents the proportion of the Part D
eligible enrolled individuals in the plan. We would multiply the
portion of each plan bid attributable to basic benefits by its
proportion of total Part D enrolled individuals and sum each product to
arrive at the national average monthly bid. In Sec.  423.279(c), we
would also establish an appropriate methodology for adjusting the
national average monthly bid amount to take into account any
significant differences in prices for covered Part D drugs among PDP
regions. As part of carrying out the Congress' requirement that our
geographic adjustment methodology be ``appropriate,'' we believe the
method would first require gathering data from PDPs and MA-PDs on
regional drug prices. Therefore, we may not implement a geographic
adjuster for the first few years of the program unless we have acquired
sufficient information on pricing to accurately characterize that
variation. If we were to determine that there is significant geographic
variation in prices, we anticipate that we would announce the
adjustment factors in advance of the bidding process for any year in
which geographic adjustment would be applied to bids in the
calculation. This would be subject to notice and comment like any other
change in payment methodology and therefore would be announced in the
45-day notice in advance of the bidding process for that year. If we
were to determine that there is only minimal price variation, we would
not implement a geographic adjuster for the national average monthly
bid calculation. Additionally, we would implement any geographic
adjuster in a budget neutral manner to avoid a change in aggregate
payments from the total amount that would have been paid if we had not
applied an adjustment.
    Comment: We received five comments on the proposed weighting
methodology for the first year. One health insurer suggested that any
of the CMS proposals would be acceptable. Another

[[Page 4303]]

commenter focused on the PDP portion of the first approach, supporting
the equal weighting of PDP sponsors. Another health insurer urged that
all MA plans be counted, reasoning that virtually all MA plans would
offer Part D. They also stated their support for giving no weight to
new MA-PDs. An industry association suggested that new MA plans,
including regional PPOs and PDPs, should be weighted based on their
projected enrollment as suggested in the final alternative proposed in
the proposed rule. Another health insurer urged that we assign MA-PD
weights based on projected enrollment, but they did not comment on
weighting for PDPs.
    Response: Although none of the approaches outlined in the proposed
rule, or by commenters, are perfect we have decided that using MA
enrollment from a reference month for MA-PDs (new MA-PDs are assigned a
zero weight) and assigning equal weighting to each sponsor (other than
fallback entities) for the PDP-eligible enrollment in the region is the
superior choice. This option most closely mimics how the enrollment
weighting will be calculated in the future given that it uses reference
month data for MA-PDs and assigns new MA-PDs a zero weight. The PDP
portion of the method is the fairest method for 2006, given that we
cannot know enrollment prior to the launch of the drug benefit program.
Alternative weighting methodologies using projected enrollment are
fraught with problems. How would the validity of such projections be
assessed? What if the aggregate plan projections exceeded the total
number of Part D eligibles in the region? No commenter offered any
suggestions for dealing with such dilemmas. We note these comments
suggested the need to clarify that the weighted average does not work
unless restricted to Part D plans that submit bids and are included in
the national average bid amount. Accordingly, we modified Sec.  423.279
to clarify that the denominator does not include Part D eligible
individuals enrolled in fallbacks, MA private fee-for-service plans,
specialized MA plans for special needs individuals, PACE programs under
section 1894 of the Act, and contracts under reasonable cost
reimbursement contracts under section 1876(h) of the Act.
    Comment: One commenter believes that MA-PDs would consistently have
lower bids and including them in the benchmark would disadvantage PDPs.
They suggest that MA-PDs and PDPs have separate benchmarks.
    Response: Section 1860D-13(a)(4)(A) of the Act instructs the
Secretary to ``compute a national average monthly bid amount equal to
the average of the standardized bid amounts (as defined in paragraph
(5)) for each prescription drug plan and for each MA-PD plan described
in section 1851(a)(2)(A)(i) of the Act.'' Therefore we cannot have
separate benchmarks for MA-PDs and PDPs.
    Comment: One commenter stated that we should calculate a unique
benchmark for Specialized Needs Plans in recognition of the higher
prescription drug costs these plans will have in providing coverage to
the high-risk population that they serve.
    Response: In Sec.  423.279(a) we state that bids from specialized
MA plans for special needs individuals will not be included in the
national average monthly bid amount or benchmark. However, the payments
to the special needs plans as with all plans will be risk adjusted to
take into account the differences in enrolled populations.
    Comment: Several comments were received concerning geographic
adjustment. Three health insurers urged that geographic adjustment be
implemented immediately. Another health insurer suggested that
geographic adjustment not be implemented until we have acquired
sufficient information on pricing to accurately characterize any
variation. One commenter urged us to explore other unit price data
beyond the Federal Employee Health Benefits Program data from Blue
Cross Blue Shield because using a single data source may misstate
actual regional variations. One health insurer urged that adjustments
be made both within and between regions. Another health insurer asked
that regional variations in prescription drug costs be examined based
on utilization, not price.
    Response: Section 1860D-15(c)(2)(A) of the Act directs the
Secretary to establish an appropriate methodology for adjusting the
national average monthly bid amount (computed under section 1860D-
13(a)(4) of the Act) to take into account differences in prices for
covered Part D drugs among PDP regions.'' To meet the appropriateness
standard we will not implement a geographic adjustment until we have
acquired sufficient information on pricing to accurately characterize
any variation. We reiterate that we will announce the adjustment
factors in advance of the bidding process for any year in which
geographic adjustment would be applied to bids in the calculation. We
would also note that our authority for geographic adjustment is based
on differences in price not utilization. Section 107(a) of the MMA
requires a report and recommendations on adjusting for geographic
differences in both price and utilization (not explained by the risk-
adjuster). This report is due not later than January 1, 2009.
8. Rules Regarding Premiums
    In Sec.  423.286, the monthly beneficiary premium will be the
result of the calculation of a national base beneficiary premium
subject to certain adjustments. Congressional intent was to arrive at
an average monthly beneficiary premium in CY 2006 representing a
certain percentage of the average total estimated benefit provided by
the drug plans on a national basis (including benefits subject to
Federal reinsurance subsidies). Taking into account that projected
reinsurance subsidies are excluded from plan bids, the applicable
percentage becomes approximately 34 percent, which is applied to the
national average monthly bid amount.
    To determine the uniform plan premium, in Sec.  423.286(d), we will
adjust the base beneficiary premium for certain plan characteristics
including whether the plan's bid will be above or below the national
average bid, and whether the plan offers supplemental benefits. (Since
the bid has to be approved and premiums established for the entire
year, we are interpreting the phrase ``if for a month'' in section
1860D-13(a)(1)(B)(i) of the Act and 1860D-13(a)(1)(B) (ii) of the Act
as referring to the beneficiary premium as a monthly amount.) The base
premium is adjusted to reflect the full difference between the plan's
standardized bid amount and the national average monthly bid amount
(which may be adjusted for regional price differences if evidence for
such differences exists as determined in Sec.  423.279(c)). To the
extent that the plan's standardized bid amount is below the national
average monthly bid amount, the base premium is adjusted downward by
the difference. To the extent that the plan's standardized bid amount
is above the national average monthly bid amount, the base premium is
adjusted upward by the difference. The base premium will also be
adjusted by adding the premium amount approved after negotiations for
risk adjustment of the supplemental benefits, if any (as discussed
above). Table F-2 illustrates a calculation of the base beneficiary
premium and the adjustment for the difference between the bid and the
national average monthly bid amount.

[[Page 4304]]



                                                                        Table F-2
                                                                  Premium Illustration
--------------------------------------------------------------------------------------------------------------------------------------------------------
                       Benchmark                         Plans in Region          Bids                            Beneficiary Premium
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                           Applicable
                                                                                                Amount by which   Amount by which Bid   Percent of Nat'l
        National Average Monthly Bid Amount\1\                Plans        Approved Plan Bid      Bid Exceeds      is Below Benchmark     Premium +/-
                                                                                                   Benchmark                               Difference
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        .................  .................  ..................  ...................  .................
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Plan 1                123             14.00                  0.00                 $51
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        .................  .................  ..................  ...................  .................
--------------------------------------------------------------------------------------------------------------------------------------------------------
109                                                                Plan 2                109              0.00                  0.00                 $37
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        .................  .................  ..................  ...................  .................
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Plan 3                 99              0.00                (10.00)                $27
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        .................  .................  ..................  ...................  .................
--------------------------------------------------------------------------------------------------------------------------------------------------------
Est. Reinsurance Percentage                                                                              25.80                  ( Assumed )
------------------------------------------------------------------------------------------------------------------
Applicable Percent =                                                                                      0.3437            (25.5 /(100-25.80)
------------------------------------------------------------------------------------------------------------------
Base Beneficiary Premium =                                                                               37.00              ( 109 * .3437 )\2\
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Assumes no geographic adjustment
\2\ Rounded to nearest dollar

    The sum of the base beneficiary premium, the adjustment for
difference between the bid and the national average bid, and the
supplemental benefit premium will be the monthly beneficiary premium.
The monthly beneficiary premium (except for any supplemental premium)
will be eliminated or reduced for low-income subsidy-eligible
individuals, as described in section 1860D-14 of the Act and Sec.
423.780. (This adjustment reflects the fact that the government will
pay all or a portion of the monthly beneficiary premium for subsidy-
eligible individuals.)
    In Sec.  423.286(d)(3), the monthly beneficiary premium will be
increased for enrollees subject to the late enrollment penalty. The
penalty amount for a Part D eligible individual for a continuous period
of eligibility (as described in Sec.  423.46) will be the greater of an
amount that we determine is actuarially sound for each uncovered month
in the same continuous period of eligibility; or 1 percent of the base
beneficiary premium for each uncovered month in that period. The
beneficiary premium amount is cumulative which means that each month
the beneficiary is subject to a penalty, the penalty accumulates. Once
the beneficiary enrolls in Part D, that accumulated penalty will be
added to their premium amount each month. So for example, if the
penalty amount is 1 percent of the estimated base beneficiary premium
above, or $0.37 per month in 2004, and is subject to 12 months of this
penalty, the beneficiary would pay an additional $0.37 * 12 or $4.44
per month for as long as they are enrolled in Part D. During the first
several years of the program, we currently expect that we would specify
the penalty amount would be 1 percent of the base beneficiary premium
per month. Once we have sufficient data on experience under the program
for individuals who enroll after their Initial Enrollment Periods, we
would be able to determine the appropriate penalty amount, that is,
either one percent or a greater amount to be adopted.
    We note that achieving very high (indeed, virtually universal)
access to prescription drug coverage for beneficiaries who participate
in Part D was a key Congressional consideration in enacting MMA.
    Except as provided with regard to any enrollment penalty, low-
income assistance, or employer group waivers under section 1857(i) of
the Act and section 1860D-22(b) of the Act and Sec.  423.458(c) (as
discussed in subpart J of the preamble to our rule), the monthly
beneficiary premium for a prescription drug plan or MA-PD in a PDP
region must be the same for all Part D eligible individuals enrolled in
the plan. The monthly beneficiary premium charged under a fallback plan
is discussed in Sec.  423.867 of our rules and in subpart Q of this
preamble.
    Comment: Section 1860D-13(a)(1) of the Act establishes that the
monthly beneficiary premium is the base beneficiary premium adjusted to
reflect the differences between the plan's bid and the national average
bid. Two commenters argued that the statute anticipated that Part D
providers may bid so far below the national average bid as to have a
negative premium. Both commenters assert that we were wrong to
interpret in the August 2004 proposed rule that negative premiums were
not allowable by statute. Both proposed that it would be a greater
benefit to beneficiaries if CMS were to require a Part D provider with
such a low bid ``to return the value of the savings'' to the
beneficiary in the form of an enhanced benefit that would be covered by
the enhanced direct subsidy.
    Response: We agree with the commenters' textual interpretation of
the formula in the statute. Factoring out the impact of risk
adjustment, the direct subsidy in absolute dollars is uniform to all
plans. For the negative premium plans, the proposed rule would have
offered such plans less than everyone else. We agree with the
commenters that highly efficient plans that bid below the benchmark
should not receive less. However, it is clear that the statute did not
necessarily envisage negative premiums for there are no clear
directives on how the negative premium dollars should be treated. We
believe that direct rebates to beneficiaries might run into Federal
anti-kickback law issues, although a definitive opinion from the Office
of Inspector General has not been issued. There are other

[[Page 4305]]

potential issues with a direct rebate. For example, it is likely that
some significant portion of the plan enrollees will lose the rebate
check or never cash it, thus resulting in an overpayment to the plan
sponsor. Direct deposit of the rebate in the enrollee's bank would
address this problem, but would generate significant administrative
costs. Nevertheless, neither of the commenters argued for beneficiary
remuneration. Indeed, both expressed a desire for the negative premium
dollars to be allocated to supplemental benefits, a position we agree
with. This would require allowing a ``renegotiation'' of the benefit
package once the national average bid (and the negative premium) are
known, to incorporate the negative premium as supplemental benefits for
which there would be no additional enrollee premium. Any marginal
effects in the basic bid would be negotiated at the same time. As
supplemental benefits, the dollars must be accounted for in the benefit
package, and there will be no risk sharing on the amount. The review
and negotiation of bid and approval of plans submitted by potential PDP
sponsors or MA organizations planning to offer MA-PD plans (Sec.
423.272) and the rules regarding premiums (Sec.  423.286) in this
subpart have been amended to reflect this change.
9. Collection of Monthly Beneficiary Premiums
a. Means of Collection
    In Sec.  423.293(a), the beneficiary will have the same options on
the method for premium payments as under Part C. Section 1860D-13(c)(1)
of the Act applies the provisions of section 1854(d) of the Act (as
amended by the MMA) to Part D premium collection. The beneficiary will
have the option of having the amount withheld from his or her Social
Security benefit check similar to the way Part B premiums are withheld.
Beneficiary premium payments could also be paid directly to the PDP
sponsor or MA organization through an electronic funds transfer
mechanism (for example, an automatic charge of an account at a
financial institution or a credit or debit card account). We could
specify other means of payment, including payment by an employer or
under employer-based retiree health coverage (as defined in section
1860D 22(c)(1) of the Act) on behalf of an employee or former employee
(or dependent). All premium payments withheld from Social Security
checks will be credited to the appropriate Trust Fund (or Account) and
will be paid by us to the PDP sponsor or MA organization involved.
Premiums from beneficiaries enrolled in fallback plans will not be
collected by the plan. Instead, these premiums will be withheld from
Social Security checks (or from other benefits as permitted under
section 1840 of the Act). Beneficiaries who do not receive Social
Security checks or otherwise have premiums deducted from other benefits
or annuities will pay us directly. Failure to make premium payments
could result in disenrollment as provided under section 1854(d)(1) of
the Act and Sec.  423.44(d) of our regulations.
b. Collection of Late Enrollment Penalties
    Concerning collection of the late enrollment penalty calculated
under Sec.  423.286(d)(3), after the early years of the program we will
estimate and specify the portion of the penalty that will be
attributable to increased actuarial costs assumed by the PDP sponsor or
MA organization (and not taken into account through risk adjustment
provided under Sec.  423.329(b)(1) or through reinsurance payments
under Sec.  423.329(c)) as a result of that late enrollment. When the
premium is withheld from social security benefits, we will pay only the
portion of the late enrollment penalty attributable to the increased
actuarial costs to the PDP sponsor or MA organization. When the premium
is paid directly to the plan, we will reduce payments otherwise made to
the PDP sponsor or MA organization by an amount equal to the amount of
the enrollment penalty not attributable to increased actuarial cost.
(Fallback plans will not receive any enrollment penalties applicable to
their enrollees because they are not at risk.)
    At least in the initial years of the program we do not anticipate
paying plans additional funds related to late enrollment individuals.
In the initial years there will not be a significant number of people
who can have delayed enrollment for a significant period of time.
Moreover, in the initial years of the program the risk corridors are
more generous and afford more protection. Consequently we do not think
it is necessary to provide a portion of the enrollment penalty to plans
until experience indicates that actual risk has increased.
    Comment: Several States urged that Sec.  423.293(a) include State
Pharmacy Assistance Programs (SPAPs) as a payment option for premiums.
    Response: Section 423.293(a) references paragraph (c) of the
section, which in turn references Sec.  422.262(f)(1). Beneficiary
premiums in Sec.  422.262(f)(1) allow premiums to be paid by the
beneficiary through Social Security withholding, electronic funds
transfer; or by an employer, employment-based retiree health coverage
or by other third parties such as a State, which will include SPAPs.
This rule is being adopted as final in the MA final rule, and will
therefore have final effect for the Part D rule as well. Therefore,
SPAPs will be able to pay premiums on behalf of enrollees.
    Comment: One advocacy group asked that credit cards not be allowed
to pay Part D premiums. It is their position that funds transfer
mechanisms are error prone.
    Response: Section 1860D-13(c)(1) of the Act states that the
provisions of section 1854(d) of the Act apply to PDP sponsors in the
same manner as they apply to MA organizations and beneficiary premiums
under Part C. Section 1854(d)(2)(B) of the Act states that an MA
organization ``shall permit each enrollee ... to make payment of
premiums ... through an electronic funds transfer mechanism (such as
automatic charges of an account at a financial institution or a credit
or debit card account).'' Given that the Congress specifically stated
electronic funds transfer will include credit or debit card accounts,
we cannot prohibit their use.
    Comment: One commenter asked if cost plans could be allowed to have
their premiums deducted from SSA checks.
    Response: An enrollee of a cost plan with Part D may pay their Part
D premiums through reduction of their SSA check. The statute however,
does not give us the authority to mandate an SSA check payment option
on the Part C side, but we are capable of permitting withholding if
acceptable to concerned parties.
    Comment: We received several comments concerning the late
enrollment penalty. While there was universal support for having a late
enrollment penalty, there were disagreements regarding the amount of
the penalty. Four commenters suggested that 1 percent of the base
beneficiary premium may not be sufficient to control for adverse
selection, but none had a recommendation for a higher amount. By
contrast, another commenter suggested that beneficiaries will likely
enroll late due to confusion. They therefore concluded that the late
enrollment penalty should be less than 1 percent of the base
beneficiary premium. One commenter urged us to collect data as quickly
as possible to calculate a penalty amount that fairly reflects any
higher costs associated with beneficiaries who delay their enrollment.

[[Page 4306]]

    Response: Although, Part D enrollment is voluntary it is sound
policy to try limiting adverse selection, or the tendency for persons
with high utilization or risk to enroll in health insurance while
healthy persons with no or low utilization do not, thus creating an
unbalanced or biased population. To provide an incentive to enroll, the
Congress created a late enrollment penalty in Section 1860D-13(b) of
the Act, which is the greater of ``an amount that the Secretary
determines is actuarially sound for each uncovered month'' or is ``1
percent of the base beneficiary premium''.
    There is a paucity of relevant research in this area. Our only
potentially relevant experience comes from the Part B late enrollment
penalty, which is 10 percent per 12-month period. On average about 5 to
6 percent of Medicare Part A enrollees are not enrolled in Part B. It
should be noted however, that a significant proportion of eligibles not
enrolled in Part B are either working aged or are living overseas.
Additionally, the utilization patterns and risks for Part B services
and Part D drugs are different. Therefore, the Part B experience may
not predict beneficiary behavior for Part D. Accordingly, we will set
the late enrollment penalty at 1 percent of the base beneficiary
premium and revisit the issue when appropriate data are available.

G. Payments to Part D Plan Sponsors For Qualified Prescription Drug
Coverage

1. Overview (Sec.  423.301)
    Subpart G of part 423 implements section 1860D-15 of the Act and
the deductible and cost sharing provisions of section 1860D-14(a) of
the Act. This section sets forth rules for the calculation and payment
of our direct and reinsurance subsidies for Part D plans; the
application of risk corridors and risk-sharing adjustments to payments;
and retroactive adjustments and reconciliations to actual enrollment
and interim payments. References to Sec.  422 of our regulations are to
the new MA rules. In general, the payment rules in this subpart do not
apply to fallback plans--which are discussed in subpart Q
2. Definitions
    We proposed definitions of a number of terms used in the
computation of payments under this subpart, such as ``allowable
reinsurance costs'', ``actually paid'' and ``coverage year'' in Sec.
423.308 of our regulations, but discussed these separately in the
appropriate sections of this preamble. We did this because these terms
are complex and are best clarified in the context of the discussion of
the pertinent provisions. We wish to clarify that a covered Part D drug
for gross prescription drug costs means a Part D drug, as defined in
Sec.  423.100, that is included in a prescription drug plan's or MA-PD
plan's formulary, or treated as being included in a plan's formulary as
a result of a coverage determination or appeal under Sec.  423.566,
Sec.  423.580, and Sec.  423.600 of our rule.
3. General Payment Provisions (Sec.  423.315)
    The payment provisions required by section 1860D-15 of the Act
include the following four different payment mechanisms: 1) the direct
subsidy; 2) reinsurance subsidies; 3) risk corridor payment
adjustments; and 4) payments to cover certain premium, cost-sharing,
and extended coverage subsidies for low-income subsidy eligible
individuals.
    The first payment mechanism involves monthly payments that (along
with reinsurance subsidies) subsidize on average 74.5 percent of the
value of the basic prescription drug benefit, thereby maintaining
beneficiary premiums for basic coverage on average at 25.5 percent. The
direct subsidy is determined based on a national bidding process.
Sponsors who wish to offer plans submit bids on a standardized basis.
After our review and approval, these bids become the basis for the
direct subsidy that is equal to the plan's standardized bid, risk
adjusted for health status as provided in Sec.  423.329(b), minus the
base beneficiary premium (as determined in Sec.  423.286(c) and as
adjusted for any difference between the standardized plan bid and the
national average monthly bid amount (as described under Sec.
423.286(d)(1))). The risk adjustment applied to the bid compensates the
plan for individual enrollee differences in health status from the
average beneficiary and thus reduces the impact from any adverse risk
selection. Further adjustments to the direct subsidy payments will be
made to account for actual enrollment and updated health status
information.
    The second and third payment mechanisms will substantially reduce
the uncertainty and risk of participating in this new program. Since
the Medicare prescription drug benefit is new, there is uncertainty
surrounding the utilization, costs, and risk profiles (participation
rates and characteristics) of potential enrollees. Federal reinsurance
subsidies and risk corridor payment adjustments work along with the
risk adjustment included in the direct subsidy to substantially reduce
the uncertainty and risk of participating in this new program. Through
reinsurance subsidies, in which we act as the re insurer, we will
subsidize a large portion of any catastrophic expenses (defined as
expenses over an individual's out-of-pocket limit) through a
reinsurance subsidy. Through risk corridor arrangements, exposure to
unexpected non-catastrophic expenses will be limited. These risk
sharing arrangements are structured by the statute as symmetrical risk
corridors, that is, agreements to share a portion of the losses or
profits resulting from expenses above or below expected levels,
respectively.
    Finally, according to section 1860D-14 of the Act, PDP sponsors and
MA organizations will receive payments to cover certain premium, cost-
sharing, and extended coverage subsidies for low-income subsidy
eligible individuals. With the exception of interim estimated payments
of cost-sharing subsidies, these payments are discussed separately in
subpart P of this preamble and in Sec.  423.780 of our regulations.
    Certain payments will be exceptions to these general payment
provisions. Under private fee-for-service (PFFS) plans, reinsurance
will be calculated differently and risk sharing will not be available.
Reinsurance subsidies and risk sharing will not be available for
fallback plans, which are paid in accordance with contractual terms
related to actual costs and management fees tied to performance
measures.
    Comment: One commenter responded with support for immediate
implementation of a reinsurance demonstration that would increase
opportunities to fill in the donut hole in the Part D benefit and allow
for a more predictable revenue flow that would support enhanced
benefits for beneficiaries.
    Response: The Conference Committee noted, ``the conditions under
which the government provides reinsurance subsidies may create
significant disincentives for private sector plans to provide
supplemental prescription drug coverage. To address this concern, the
conference agreement suggested use of the Secretary's current Medicare
demonstration to ``allow private sector plans maximum flexibility to
design alternative prescription drug coverage.'' CMS's authority to
conduct Medicare demonstrations is provided in section 402 of the
Social Security Amendments of 1967 (42 U.S.C. Sec.  1395b-1). Under
section 402(b), the Secretary is authorized to waive requirements in
title XVIII that relate to reimbursement

[[Page 4307]]

and payment. The conferees specifically stated that CMS should
demonstrate the effect of filling in the gap in coverage by reimbursing
participating plans a capitated payment that is actuarially equivalent
to the amount that plans would otherwise receive from the government in
the form of specific reinsurance when an individual plan enrollee
reaches the catastrophic attachment point ($3,600). They clarified that
CMS would not be permitted to waive the minimum benefits provided by
the plans. In the August proposed rule we stated in the executive
summary that we were considering establishing a demonstration to
evaluate possible ways of achieving extended coverage.
    We intend to conduct a reinsurance demonstration that represents an
alternative payment approach. We are working on the design of the
budget neutral demonstration and issue separate guidance in the near
future.
4. Requirement for Disclosure of Information (Sec.  423.322)
a. Data Submission.
    As provided under sections 1860D 15(c)(1)(C), 1860D-15(d)(2) and
1860D-15(f) of the Act and in Sec.  423.322 of our regulations, we will
condition program participation and payment upon the disclosure and
provision of information needed to carry out the payment provisions.
Such information will encompass the quantity, type, and costs of
pharmaceutical prescriptions filled by enrollees that can be linked to
individual enrollee data in our systems; that is, linked to the
Medicare beneficiary identification number (HIC). In the
August proposed rule we asked for comments on the content, format and
optimal frequency of data feeds. We stated that more frequent feeds
(that is monthly or quarterly) would allow us to identify and resolve
data issues and assist the various payment processes.
    We have evaluated our minimum data requirements with regard to
prescription drug claims. Our goal is to have the least burdensome data
submission requirements necessary to acquire the data needed for
purposes of accurate payment and appropriate program oversight. Our
view is that we will need at least the following data categories for
100 percent of prescription drug claims for the processes discussed
below:
    * Beneficiary identification (for example, HIC,
date of birth, gender, name)
    * Prescription identification information (for example, RX
identification number, NDC, quantity dispensed, fill number, date of
service)
    * Cost information (for example, ingredient cost, dispensing
fee, sales tax, total gross cost)
    * Payment information (beneficiary amount paid, low income
cost sharing subsidy amount, secondary/other payer amount, supplemental
amount)
    We assume that ingredient cost and dispensing fee reflect point of
sale price concessions in accordance with purchase contracts between
plans (or their agents, such as PBMs) and pharmacies, but do not
reflect subsequent price concessions from manufacturers, such as
rebates. We will need these data on prescription drug claims for
appropriate risk adjustment, reconciliation of reinsurance and low-
income subsidies, calculation of risk sharing payments or savings, and
program auditing. Data will also be required for assessing and
improving quality of care. We asked for comments on the nature and
format of data submission requirements based on the following
requirements:
    * The risk adjustment process will require 100 percent of
drug claims in order to develop and calibrate the weights for the model
for this new benefit. Consequently, PDP sponsors and MA organizations
offering MA-PD plans will be required to submit 100 percent of
prescription drug claims for Part D enrollees for the coverage year.
Risk adjustment will require the submission of prescription drug agent
identifying information, such as NDC codes and quantity, in order to
allow the standardized pricing of benefits in the model. Because we
will use standardized pricing in the model, cost data on each
prescription is not a requirement for risk adjustment, although it is
needed for other purposes.
    * The reinsurance subsidy payment process will require 100
percent of claims for each enrollee for whom the plan claimed allowable
reinsurance costs. (Although reconciliation of the reinsurance subsidy
does not require NDC codes or quantities, it does require member, cost
and date of service data.) All claims for enrollees with expenses in
excess of the out-of-pocket limit will be necessary to verify that the
costs are allowable because the totality and order in which the claims
are incurred will define which claims will be eligible for reinsurance
payments. While the start of reinsurance payments begins with claims
after the out-of-pocket threshold has been reached, which is $5,100 in
total spending (2006) for defined standard coverage, it may be
associated with a higher dollar total spending amount under alternative
coverage. Whatever the level, we will need to receive all claims by
date of service including the amount of beneficiary cost sharing in
order to determine the occurrence of the out-of-pocket threshold. Any
plan-incurred costs for claims for supplemental benefits cannot be
included in determining whether the out-of-pocket threshold has been
met.
    * The risk sharing process will require 100 percent of
claims for all enrollees for the calculation of total allowable risk
corridor costs. The plan will need to segregate costs attributable to
supplemental benefits from those attributable to basic benefits since
supplemental benefit costs are not subject to the risk corridor
provisions. Again, all claims will be necessary to verify that the
costs are allowable because the order in which the claims were incurred
will help determine whether the claims were solely for basic coverage.
For instance, a claim processed between a beneficiary's deductible and
initial coverage limit (in standard coverage) will count towards risk
sharing, but another claim (processed identically but immediately after
the initial coverage limit has been reached) will not. Unlike the
reinsurance subsidy, which is limited to individuals with expenses in
excess of the out-of-pocket threshold, risk sharing involves costs (net
of discounts, chargebacks and rebates, and administrative costs) for
all enrollees for basic coverage, but only those costs that are
actually paid by the sponsor or organization. Because all plans
participate in risk sharing, potentially all claims for all Part D
enrollees in all plans must be reviewed. Like the reinsurance
reconciliation, risk sharing does not require NDC codes or quantities,
but does require member, cost, and date of service data.
    * The program audit process will require at least a
statistically valid random sample of all Part D drug claims. We believe
that several points of reference including HIC, cost, date of
service, and NDC code will be required for unique identification of
individual claims in any random sample drawn from the population. If we
receive 100 percent claims to support the payment processes, this
sample could be drawn from our records. We believe it will be useful to
obtain the prescribing physician's National Provider Identifier (NPI)
number, as required by the administrative simplification provisions of
HIPAA, in the elements of collected data for purposes of fraud control
once it is available. (Nothing in this data collection discussion
should be construed as limiting OIG authority to conduct any audits and
evaluations necessary for carrying out our regulations.)

[[Page 4308]]

    Comment: One commenter urged us to ensure that prescription
transaction data, be made available to the QIOs. Without this
information the commenter contends, it will be extremely difficult for
QIOs to execute the direction of the Congress in section 109 of the
MMA, to offer assistance to practitioners and plans for the purpose of
improving the quality of pharmacotherapy received by older and disabled
Americans enrolled in the Medicare outpatient drug benefit.
    Response: Additional guidelines will be released dealing with QIO
access to Part D data. QIOs do, however, have their own independent
authority to collect claims data. Therefore, as we stated in the
proposed rule, we believe we would have the authority to share claims
data with QIOs if necessary.
    Comment: One commenter stated that claims creation and submission
for the pharmacy claims as proposed would probably be even more
expensive, given the volume of data and the number of data elements.
They encouraged us to be parsimonious in collecting data, with the
understanding that plans would retain full data for audits.
    Response: We will endeavor to reduce burden to the maximum extent
possible. We will require only the data elements necessary to carry out
the operations of the Part D program.
    Comment: For the timeframe for data submissions, one commenter
stated that unless all plans can provide information electronically,
weekly data cycles would be too burdensome. Monthly or quarterly data
cycles are more in line with other plan financial processes. Another
commenter suggested that annual submission would be adequate with
additional data submitted on a quarterly basis. A PBM commented that
they have the capability of submitting drug utilization data to us on a
monthly basis in any format required. They also noted that all of the
data elements listed as proposed requirements in the proposed rule are
available in their point-of-sale system. Two commenters recommended
that data transmission use either the NCPDP or the American Society of
Automation in Pharmacy (ASAP) standard formats. They reasoned that such
standards are commonly used today and would have minimal impact on
existing software applications.
    Response: We agree that data submissions should be based on an
established standardized format, and will be requiring data submissions
in the NCPDP format. The data required will be from both incoming
claims and the remittances to those claims. Some of the paid amounts
that need to be reported are not on the NCPDP format (for example, the
low income cost-sharing subsidy). Therefore, plans will be responsible
for calculating and retaining these amounts while calculating
appropriate payments and cost-sharing for each claim. We will require
that the data related to drug claims be submitted no less frequently
than monthly. Further details on data submission will be issued in
separate guidance.
b. Allowable Costs
    Section 1860D-15(b)(2) and 1860D-15(e)(1)(B) of the Act and Sec.
423.308 of our regulations, specify that to determine ``allowable
costs'' for purposes of both the reinsurance and risk corridor
payments, only the net costs actually paid after discounts,
chargebacks, and average percentage rebates, as well as administrative
costs, are to be counted. In the proposed rule we discussed requiring
average percentage rebates, which upon reflection would represent only
a rough estimate on the part of a Part D plan. We wish to clarify that
in order to carry out our responsibilities we will require reporting of
aggregate (as opposed to at the beneficiary or claim level) rebates at
the product level on a quarterly basis. Adequate lead time will be
provided. Additional information will be provided through our payment
guidelines.
    In the proposed rule we noted, also for rebates, that we understand
that much of the rebate accounting is not applied in the context of
point of sale claims data, but rather in periodic accounting
adjustments, and that rebates are frequently reported along with
administrative fees paid by the manufacturer. We wish to clarify that
we will expect reporting of all rebate dollars with no allowance for
separate administration fees in order to prevent inaccuracies in
reporting. We note that plans must require and keep accurate records on
all price concessions. All cost reporting will be subject to inspection
and audit (including periodic audits) by us and the OIG. Part D plans
sponsors seeking to limit access to rebate information under this
provision to Part D business only are advised to seek out separate
contracts with manufacturers for their Part D and other lines of
business. To the extent either we or the OIG discover that a sponsor
has been overpaid for reinsurance or risk sharing (that is, the records
do not support the payments made, or there is insufficient
documentation to determine whether the payments are correct), we may
recoup the overpayments. The reopening and overpayment provisions are
discussed at the end of this part G.
    We also wish to clarify our interpretation of allowable costs in
the context of repackaged drugs. AWP is commonly used as the basis
through which a plan sponsor or fallback plan calculates payments to
pharmacies, and is used to when sponsors provide competitive bids for
the Medicare Part D prescription program. AWP is typically published
based on the NDC for a particular product, and is specific to the drug,
strength, distributor and package size. However, AWP can vary between
differing packages sizes of a drug and strength from a single
distributor, as well as between multiple distributors that product a
common drug, as in the case of generic products. AWP may not be
published for some products that are repacked for a specific buyer,
such as a mail-order pharmacy or a pharmacy chain. Furthermore, if a
pharmacy benefit manager or managed care organization owns a pharmacy
(including a mail-order, specialty, or clinic facility) and refers
members to that facility, it essentially purchases product from itself.
In these cases, special care must be taken to ensure that payment is
made for a prescription ingredient cost that is an accurate reflection
of the product that the facility purchases in terms of manufacturer,
strength, and acquisition price.
    The Department of Health and Human Services' Office of Inspector
General issued the April 2003 report ``Compliance Program Guidance for
Pharmaceutical Manufacturers'' that addresses AWP. The guidance report
states that: ``... it is illegal for a manufacturer knowingly to
establish or inappropriately maintain a particular AWP if one purpose
is to manipulate the ``spread'' to induce customers to purchase its
product.'' We believe that the same principle of non-manipulation of
AWP applies to sponsors of the Part D benefit. Any repricing or
restatement of price of a pharmaceutical product is subject to audit,
and potentially constitutes fraudulent behavior if the repricing or
price restatement is done with the intent of increasing the profits of
that sponsor or mail order facility by increasing the reimbursement due
by the Federal government.
    Comment: One commenter believes that administrative fees for
administering rebates should not be included in the assessment of
rebate fees.
    Response: We disagree with the commenter. As stated in the proposed
rule such accounting will be incompatible with the need to report all
price concessions for purposes of determining allowable reinsurance and
risk corridor costs. In the preamble to the proposed rule, we said that
to the extent the administrative fees paid to

[[Page 4309]]

Part D plans (or their subcontractors, such as PBMs) are above the fair
market value of the services rendered, this differential will be
considered a price concession. Similarly, to the extent a Part D plans
pays manufacturers or others administrative fees, and these fees are
below fair market value, this would also be considered a price
concession. In sum, as fiduciaries of the Medicare trust fund, we have
a responsibility to ensure that price concessions are not masked as
administrative fees, and therefore, we continue to believe that
administrative fees are important in determining the reinsurance and
risk-sharing payments.
    Comment: One comment urged clarification of definition of
``allowable costs'' so to exclude manufacturer-sponsored compliance and
appropriate use programs.
    Response: Allowable costs are prescription drug costs excluding
administrative costs, but including dispensing fees costs related to
the dispensing of covered Part D drugs that are actually paid by the
PDP sponsor. Thus any service, such as a compliance program, that is
paid for in conjunction with drug costs as an administrative component
of managing the drug benefit is not be considered an allowable cost for
the PDP sponsor.
    Comment: One commenter asked for clarification on how fair market
value is to be determined.
    Response: The fair market value of administrative fees paid to a
Part D plan will typically be evaluated in relation to the values
reported by other Part D plans. In other words, the fair market value
will be the average or normal value of administrative fees within this
market. However, this may not be an exclusive methodology. For example,
if administrative fees paid to all plans were found to be improperly
inflated they would not reflect fair market value and we would devise
an alternative methodology.
    Comment: One commenter requested that we require plans to attest to
the accuracy of information submitted to manufacturers in order to
ensure that rebates and discounts are based on accurate claims.
    Response: We strongly encourage plans to attest to the accuracy of
information submitted to manufacturers. However, we do not have the
authority to require an attestation as the commenter suggests.
    Comment: One commenter recommended the second approach to rebate
accounting in the proposed rule whereby a plan would calculate a ratio
of total rebate amounts to total spending and reinsurance-related
spending to total spending to derive the share of rebates to be
allocated to reinsurance. The commenter believes this option is
administratively straightforward and would result in a reasonably
accurate estimate of these discounts, chargebacks, and rebates.
    Response: We will require reporting of actual rebates requested and
paid down to the product level on a quarterly basis. Additional
guidance will be released subsequent to publication of the final rule
that specifically deals with rebate accounting rules.
c. Coverage Year
    In Sec.  423.308 the term ``coverage year'' is defined as a
calendar year in which covered Part D drugs are dispensed if the claim
for such drugs (and payment on such claim) is made not later than 3
months after the end of the year. In other words, drug claims paid past
the close of the 3-month period will not be considered part of that
coverage year (or the next), and will not be used to calculate that
year's payments or in reconciling risk adjustment payments for the
year.
    This limit will be imposed in order to provide timely closure for
payment determination processes such as reinsurance, risk corridors and
employer subsidies. While the period of 3 months will be significantly
less than the fee-for-service Medicare medical claims standard of 18
months, we believe that a shorter period is warranted due to the highly
automated and point of sale nature of prescription drug claim
processing. We understand that the vast majority of prescriptions are
not filled without the claim being simultaneously processed and
therefore, there is a much shorter claims lag to be considered. We
believe that the number and value of drug claims that will potentially
be missed will be immaterial, consisting primarily of paper claims. The
3-month close-out window will not limit the liability of the plan or
its claims processing contractor for reimbursing any lagging claims,
but will simply establish a timely cut-off for finalizing payments. We
note that rebates for the coverage year must be credited against that
coverage year's costs. Although we are closing the year for claims
purposes after 3 months, the plan must account for and report to us all
rebates that occur throughout the coverage year and send us all the
data within 6 months after the end of the coverage year.
    A shorter period for claims will allow for payment processes that
are dependent on the knowledge of total allowable costs for each
coverage year to be concluded on approximately the same schedule as
other reconciliations involving enrollment or risk adjustment data. On
this schedule, calculations of risk sharing could begin as soon as six
months after the close of the payment year. If the claims submission
standard were a longer period, final reconciliations will be
significantly delayed. We requested comments on this timetable,
specifically whether we should adopt a shorter or longer period than 3
months, and including data with which to estimate the proportion and
value of drug claims that could be excluded with a 3-month close-out
window.
    Comment: Two commenters argued that the definition of the coverage
year in Sec.  423.308, being three months after the end of the year,
would not be enough time for certain drug claims, such as those from
out-of-network providers or those submitted by paper. They went on to
say that claims made after the 3-month closeout should be appropriately
accounted for. Another commenter stated that the majority of claims are
submitted and paid within the 90 day window described in the rule. They
went on to say that from a processor standpoint no more time is needed
and based on observed claims patterns at least 98 percent of the drug
claims are paid within 3 months. One industry association expressed
support for the proposal to define coverage year to encompass drugs
dispensed within a calendar year and for which claims have been paid no
later than three months after the end of the calendar year. The
commenter believes establishing finality in this manner is absolutely
essential to promote financial stability by allowing timely
determination of risk sharing amounts.
    Response: According to Booz Allen Hamilton's August 2004 report
``Determination of Allowable Costs'' the industry standard is for
claims to typically be submitted within a three month window period. We
agree with the two latter comments that the definition of the coverage
year is both logistically feasible and promotes timely payment. We also
note that the coverage year is 3 months for claims run-out (Sec.
423.308), but plans have 6 months to submit data (Sec.  423.343). This
gives plans the extra time necessary to compile the data necessary for
retroactive reconciliation. We will adopt the definition of coverage
year as proposed.
5. Determination of Payment (Sec.  423.329)
a. Direct Subsidies
    As directed in section 1860D-15(a)(1) of the Act and codified in
Sec.  423.329(a), we will provide direct subsidies to PDP sponsors and
MA organizations offering MA-PD plans. These subsidies will be in

[[Page 4310]]

the form of advance monthly payments. Payments will be equal to the
plan's standardized bid, risk adjusted for health status as provided in
Sec.  423.329(b), minus the base beneficiary premium (as determined in
Sec.  423.286(c) and adjusted for any difference between the
standardized plan bid and the national average monthly bid amount (as
described under Sec.  423.286(d)(1))). The standardized bid will be the
portion of the plan's bid attributable to basic coverage. This portion
will be risk adjusted by multiplying by our prescription drug risk
score attributable to each enrollee. Between the government direct
subsidy and the adjusted base beneficiary premium, the plan will
receive its entire risk-adjusted standardized bid in advance each
month. Payment for supplemental benefits will come from enrollees in
the form of additional premium. By statute, the sponsor must bear all
risk for such supplemental benefits. In the proposed rule we said ``We
would note that a plan's total per capita payment could never exceed
its bid, risk-adjusted for the beneficiary's health status. This would
be the case even if the difference between the plan's bid and the
national average monthly bid amount were greater than the beneficiary
monthly premium, mathematically resulting in a ``negative premium''
amount. We do not believe that the statute envisions plan payments in
excess of negotiated costs, since this would violate the revenue
requirements provisions discussed in the subpart F of this preamble''.
As outlined in detail in subpart F of this final rule, we have changed
our policy. We now state that if the standardized bid amount is less
than the national average monthly bid by an amount so great that it is
in excess of the base beneficiary premium, the direct subsidy payment
calculated above will be increased by the amount of the negative
premium. We, therefore, have modified Sec.  423.329(a)(1) to indicate
that the direct subsidy payment may be increased by the excess amount
of a negative premium as described in Sec.  423.286(d)(1), if
applicable.
b. Risk Adjustment
    In section 1860D-15(c)(1) of the Act, we are directed to develop
and publish a prescription drug risk adjustment methodology taking into
account the similar methodologies under Sec.  422.308(c)(1) to adjust
payments to MA organizations for benefits under Part C on the basis of
costs incurred under original Medicare. In Sec.  423.329(c) we
establish this risk adjustment methodology. We will develop and publish
this risk adjustment methodology in the 45-day notice for the
announcement of 2006 Medicare Advantage rates. Section 1860D-
15(c)(1)(D) of the Act requires us to publish the risk adjustment for
Part D at the same time we publish risk adjustment factors under
section 1853(b)(1)(B)(i)(II) of the Act. Because these risk adjustment
factors under subpart C can only be published after 45-day advance
notice under section 1853(b)(2) of the Act, in general we will use the
same notice procedures we use under Part C for risk adjustment. We
believe this will promote consistency and uniformity in the process,
and, especially for MA-PD plans, allow entities to review notices
published on the same day for purposes of commenting on or learning
about risk adjustment. As usual, the 45-day notice will solicit public
comment on any change in proposed payment methodologies. We are
expecting that this new prescription drug risk adjustment methodology
will initially be based on the relationship of prescription drug
utilization within the entire Medicare population to medical diagnoses,
and that it will be applied at the individual beneficiary level. Our
longer-term plan would be to refine the risk adjustment model to
account for predictable risk based on both medical and drug claim data.
    Section 1860D-15(c)(1)(C) of the Act and Sec.  423.329(b)(3) of
this rule authorize us to specify and require the submission of data
from PDP sponsors regarding drug claims that can be linked at the
individual level to part A and part B data in a form and manner similar
to the Medicare Advantage process provided in Sec.  422.310 and such
other information as we determine necessary. Similarly, MA
organizations that offer MA-PD plans must submit data regarding drug
claims that can be linked at the individual level to other data that
these organizations are required to submit to us. A primary
requirement, therefore, is receiving claims linked to the Medicare
beneficiary HIC. Other data submission elements are discussed
in section 4(a) of this part of the preamble. We expect to link these
data at the plan level and will then require the inclusion of the PDP
or Medicare Advantage contract identifier (H) as well as the
plan benefit package identifier. We will use this data to further
refine our prescription drug risk adjustment factors and methodology in
order to make payments that accurately reflect plan risk.
    As we noted in the August proposed rule, any risk adjustment
methodology we adopt must adequately account for low-income subsidy
(LIS) individuals (and whether such individuals incur higher or lower-
than average drug costs). We stated that our risk adjustment
methodology should provide neither an incentive nor a disincentive to
enrolling LIS individuals, and we requested comments on this concern
and suggestions on how we might address this issue. Our particular
concern has been that a risk adjustment methodology, coupled with the
statutory limitation restricting LIS payments for premiums to amounts
at or below the average, could systematically underpay plans with many
LIS enrollees (assuming LIS enrollees have higher costs than average
enrollees). As noted in the proposed rule, the initial risk adjustment
system, which will be budget neutral across all Part D enrollees, must
not under compensate plans for enrolling LIS beneficiaries. In fact, to
the extent that an initial risk adjustor might at the margin tend to
overcompensate for LIS beneficiaries, plans would have a strong
incentive to disproportionately attract such beneficiaries. Plans could
attract LIS beneficiaries both by designing features that are
attractive to such beneficiaries and also by bidding low.
    Comment: We received several comments generically expressing
concern over the risk of insuring the low-income subsidy population
exacerbated by the induced demand likely to be created by the low
income subsidy itself. Several commenters specifically agreed with our
proposal to deal with this issue via risk adjustment. No commenters
rejected the proposal. All the commenters noted that it is critical for
the risk adjustment methodology to pay fairly and appropriately for all
enrollees, including income subsidy individuals. Commenters requested
additional details about the risk adjustment methodology.
    Response: We agree that the Part D risk adjuster must accurately
predict the drug expenditures for various population subgroups,
including low income beneficiaries. The best way to achieve this goal
is to calibrate the risk adjustment model on a sample of beneficiaries
that includes low income beneficiaries, which we intend on doing. We
have experience in dealing with an analogous situation with the Part C
risk adjustment model, where beneficiaries in long term care
institutions are known to have significantly higher expenditures than
community enrollees before health status is accounted for. In order to
accurately risk adjust for this population, we have generated a version
of the risk adjustment model that explicitly accounts both for these
higher expenditures and for the different

[[Page 4311]]

relative costs of diseases for the long term institutionalized
population compared to the community population. For induced demand, we
have Federal Employee Health Benefit Program and State Medicaid program
data that will permit us to model this effect. One commenter familiar
with these data noted that ``it seems reasonable that the risk
adjustment process be used to correct any underpayments due to LIS
induced demand.'' Additional details will be provided with the guidance
accompanying the release of the risk adjustment factors.
    Comment: We also received comments concerning specific elements of
the risk adjustment model. One health insurer asserted that medical
diagnoses may not adequately predict drug utilization. A PBM commented
that some drugs are a very good marker of disease, while other drugs
can be used to treat a variety of conditions. A manufacturer suggested
that we should use data on prior medication expenditures and include
demographics and diagnoses.
    Response: Work by Wrobel and colleagues (Health Care Financing
Review Winter 2003-2004) using data from the Medicare Current
Beneficiary Survey and Medicare claims data found a diagnostic based
risk adjustment model was a powerful predictor of drug expenditures.
Our current risk adjustment model does not use drugs as a marker of
disease but use diseases to predict drug spending (see http://www.cms.hhs.gov/pdps/riskad.zip
). A more detailed description of the elements of the

Part D risk adjustment model will be provided in the Advance Notice of
Payment Methodology. However, anyone interested in understanding how
risk adjustment works can read ``Risk Adjustment of Medicare Capitation
Payments Using the CMS-HCC Model'' in the Health Care Financing Review,
Volume 25, Number 4 (Summer 2004). These articles are publicly
available online at http://www.cms.hhs.gov/review/default.asp.

    The Part D risk adjustment model will use demographics and
diagnoses. As Part D program data becomes available we will incorporate
other indicators to enhance the predictive power of the model. This may
include, if appropriate, indicators of prior use of medication. We will
provide the usual opportunities for public comment on subsequent
iterations.
c. Risk Adjustment Budget Neutrality
    In accordance with section 1860D-15(c)(1)(A) of the Act and Sec.
423.329(b)(1), our risk adjustment methodology will be implemented in a
budget-neutral manner. A requirement for budget neutrality assumes that
there is a known budget. We interpret the statute to require that the
risk adjustment methodology must not result in a change in aggregate
amounts payable in section 1860D-15(a)(1) of the Act, that is, the risk
adjustment methodology must be ``budget neutral'' to some aggregate of
direct subsidy payments made before risk adjustment. (Since direct
subsidy payments are made only to full-risk or limited risk plans, this
budget by definition will not include payments to fallback plans.)
    For comparison, in the current MA program the budget for risk-
adjustment budget neutrality is defined to be the aggregate government
payments made to plans under the 100 percent demographic payment
system. Since the health-status-risk-adjustment methodology currently
results in lower aggregate payments than the demographic methodology,
MA budget neutrality distributes among participating plans the
difference between total payments under the 2 methodologies via a
factor that allocated the difference in the same proportion as the
allocation of risk-adjusted payments. However, there is no
corresponding predetermined limit to aggregate payments in Title I,
that is, to the aggregate government direct subsidy payments made
before risk adjustment, so there is no amount to use as a basis for
comparison in determining budget neutrality.
    In the MA program, the reason for the difference between the total
payments under the demographic methodology and total payments under
health status risk adjustment is that the average health status of
enrollees in MA is different than the average health status for the
program as a whole (that is, MA plus original Medicare). In Part D,
there is no equivalent to original Medicare since beneficiary access
subsidized coverage through enrollment in private plans. The Part D
risk adjustment system will be based on these enrollees. Since there is
no group of beneficiaries outside the system like there is under Part
C, total payments with and without risk adjustment are always equal or
budget neutral. Therefore, we believe that risk adjustment as applied
to Part D benefits must be budget neutral to the risk of the
individuals who actually enroll without any additional adjustment. We
did not receive any specific comments on this, and therefore will adopt
as proposed.
d. Reinsurance Subsidies
* Allowable Reinsurance Costs
    As provided in section 1860D-15(e) of the Act and Sec.  423.329(c),
we will reduce the risk of participating in this new program by
providing reinsurance subsidies. Subsidies will be limited to 80
percent of allowable reinsurance costs for drug costs incurred after an
enrollee has reached the annual out-of-pocket threshold. The annual
out-of-pocket threshold will be $3,600 in 2006. Under standard coverage
this corresponds to total gross covered prescription drug costs of
$5,100, and will be increased annually as provided in section 1860D-
2(b)(4)(B)(i)(II) of the Act and 1860D-2(b)(4)(B)(ii) (with regard to
rounding).
    In meeting the various actuarial tests required of alternative
coverage, there could be instances where a sponsor wanting to provide
basic alternative coverage will have to enhance plan benefits in order
to meet the test of equal total actuarial value relative to defined
standard coverage. This could occur with the use of a tiered co-pay
benefit structure that could shift utilization to a cheaper set of
drugs, thus allowing plans to lower cost sharing to achieve the same
total dollar value as defined standard coverage. In these instances,
since cost sharing is reduced relative to defined standard coverage,
the out of pocket threshold will be associated with a higher total drug
costs than the $5,100 under standard coverage in 2006. For sponsors
offering enhanced alternative coverage, the out-of-pocket threshold
will also be associated with higher total drug spending. In this
instance, however, it will be due to fact that the plan's supplemental
benefits will be displacing part of the cost sharing that enrollees
will otherwise have incurred.
    Allowable reinsurance costs are a subset of gross covered
prescription drug costs. Gross covered prescription drug costs are
those costs incurred under the plan, excluding administrative costs,
but including costs related to the dispensing of covered Part D drugs
during the year and costs relating to the deductible. These costs are
determined whether paid by the individual or under the plan, and
regardless of whether the coverage under the plan exceeds basic
prescription drug coverage. Allowable reinsurance costs, on the other
hand, are the subset of these costs that are attributable solely to
basic or standard benefits and that are actually paid by the sponsor or
organization or by (or on behalf of) an enrollee under the plan.
Actually paid means that these costs must be net of any discounts,
chargebacks, and average percentage rebates, and will exclude any
amounts not actually incurred by the sponsor. The reinsurance payments
are then calculated by determining the portion of

[[Page 4312]]

allowable reinsurance costs that are incurred after the enrollee has
reached the out-of-pocket threshold ($3,600 out of pocket in 2006). The
reinsurance subsidy will provide 80 percent of such excess amount.
* Payment of Reinsurance Subsidy
Since allowable reinsurance costs (the subset of gross covered drug
costs that are attributable to basic coverage only and are actually
paid by the sponsor or plan) can only be fully known after all costs
have been incurred for the payment year, we proposed to make payments
on an incurred basis to assist PDP sponsors and MA organizations with
cash flow. We also proposed that we would consider payments of
reinsurance amounts on a monthly prospective basis based on the
reinsurance assumptions submitted and negotiated with each plan's
approved bid. In the August proposed rule we also stated that
regardless of which process we used for making reinsurance payments, as
discussed below, if, at the end of the year, the data demonstrates the
sponsor was overpaid through the interim payments--or if there is
insufficient evidence to support the reinsurance payments claimed--we
would recover the overpayments either through a lump sum recovery or by
reducing future payments during the coverage year. Similarly, if the
data demonstrates that the sponsor was underpaid, we would pay the
sponsor.
    Comment: Numerous comments were received on the methodology of
reinsurance payments. There was a general consensus supporting
prospective monthly payments, with some commenters suggesting that the
payment be at 1/12th of the net present value of estimated allowable
reinsurance costs in each month of the coverage year. One commenter
urged that plans should be able to choose between incurred and
prospective payment. One commenter suggested that plans should invoice
daily for reinsurance costs rather than have prospective monthly
retrospective payments. Another commenter supported claims payments on
an incurred rather than prospective or retrospective basis, and
reimbursement on a monthly basis as proposed. Only one comment was
received supporting determining payment with either a plan-specific or
averaging approach
    Response: Based on public comment, as well as on considerations of
our current systems capabilities, our initial methodology will entail
making monthly prospective payments of estimated allowable reinsurance
costs submitted with the bid. We will establish and calculate these
payments at the plan level so that reinsurance estimates reflect
individual plan risk and the impact of plan supplemental benefits (if
any) on when catastrophic benefits and reinsurance payments are
triggered. At the end of each calendar year, we will reconcile plans'
allowable incurred reinsurance costs for the year with the year's
prospective plan payments; we will then reimburse plans for any
underestimation of costs or recover any agency overpayments. More
details will be made available in CMS additional guidelines on the
payment methodology. We have modified Sec.  423.343(d)(1) to clarify
that CMS data requirements for reconciliation will be specified in
separate guidance. We note that two commenters suggested that payments
should be made on an incurred basis. We believe that advancements in
information systems could make this logistically feasible. We wish to
clarify that we reserve the right to alter the payment methodology. Any
future changes would be announced through the Advance Notice of
Methodological Changes and be subject to public comment.
* Adjustments to Reflect the True Out-of-Pocket Threshold
    The statute provides that the reinsurance subsidy would be paid
only for the plan's share of individual expenses in excess of an
enrollee's TrOOP threshold. As indicated above, if the PDP sponsor
offers enhanced alternative coverage or an MA-PD plan offers benefits
beyond basic coverage as part of its supplemental benefits, the plan's
spending for these benefits would not count toward the TrOOP threshold.
Since benefits beyond basic coverage reduce cost sharing that would
otherwise be incurred, they shift the effective prescription drug
catastrophic limit beyond the associated total spending under the
standard benefit ($5,100 in 2006) and raise the effective reinsurance
attachment point at the same time.
    In addition, to the extent that plan cost sharing is paid or
reimbursed by secondary insurance coverage or otherwise, that cost
sharing does not count toward the out-of-pocket threshold.
Beneficiaries are required to report the existence of secondary
coverage or other types of coverage we identify and plans must identify
these payments and ensure that true out-of-pocket spending is accounted
for accurately in claims processing. This is more fully discussed in
subpart C and subpart J of this preamble.
    Comment: One commenter noted that claims covered under supplemental
coverage do not count towards TrOOP. The commenter believes that
reinsurance should be triggered at the point that each enrollee hits
$5,100 rather than $3,600 in out-of-pocket because there will otherwise
be a strong disincentive to offer plans with enhanced coverage.
    Response: We agree that the delayed reinsurance attachment point
that results from the provision of supplemental benefits is one issue
that must be considered by Part D plan sponsors. However, section
1860D-15(b)(2) of the Act defines allowable reinsurance costs to be
``no more than the part of such costs that would have been paid under
the plan if the prescription drug coverage under the plan were basic
prescription drug coverage, or, in the case of a plan providing
supplemental prescription drug coverage, if such coverage were standard
prescription drug coverage.'' Therefore, by statute, claims for
supplemental benefits cannot be counted toward allowable reinsurance
costs and we have no discretionary authority in this area.
* Adjustments for the Insurance Effect of Supplemental Coverage
    In the proposed rule we stated that supplemental benefits increase
the level of total drug spending after which reinsurance payments begin
(reinsurance attachment point). Assuming 2 identical groups of
enrollees for utilization, one enrolled in enhanced alternative
coverage and one in defined standard coverage, the total allowable
reinsurance costs for the group with standard coverage would be greater
than for the group with enhanced alternative coverage. Thus, one might
hold that the differences in benefit packages are accounted for without
the need for further adjustment. If one would examine average total
spending for both groups, however, one would find that the average
spending under enhanced alternative coverage would be greater than the
average under defined standard coverage because of the impact of the
insurance effect (or ``moral hazard'', that is, the tendency of
increased coverage resulting in increased utilization due to decreased
financial stake in the costs associated with utilization). All other
things being equal, this higher total spending would result in higher
allowable reinsurance costs than would otherwise occur if the total
spending under enhanced alternative coverage were comparable to that
under standard coverage. We therefore proposed requiring (in the
definition of allowable reinsurance costs) that allowable reinsurance
costs be adjusted to reflect the impact of this induced utilization. We
would make this adjustment to comply with the

[[Page 4313]]

requirement in section 1860D-15(b)(2) of the Act that in no case shall
the allowable reinsurance costs exceed the costs ``that would have been
paid under the plan if the ... coverage ... were standard prescription
drug coverage''.
    Comment: One commenter responded that they were not clear that an
adjustment for the insurance effect of supplemental coverage would be
needed. They recommended that we consider allowing time to study this
issue, both to determine if an adjustment is appropriate at all and if
it is what the adjustment should be. Another commenter stated that this
issue is very complex and offered to discuss it further with us.
Another health insurer noted that if a health plan develops rates for a
commercial group, the rate for supplemental benefits developed for that
group will include the revenue needs for the supplemental benefits as
well as the plan's increased revenue needs to the extent that the
expected costs of providing the basic benefit are expected to increase
as a result of the supplemental coverage. They inquired as to how this
practice would be applied to Part D.
    Response: We continue to believe that an adjustment for the
insurance effect of supplemental coverage is necessary. The effect of
reduced cost sharing resulting in increased demand for medical services
(including drugs) is firmly established in the economics literature and
has been discussed for decades (see Charles Phelps and Joseph
Newhouse's seminal review in the August 1974 issue of The Review of
Economics and Statistics and more recently Phelps' 1997 text ``Health
Economics''). Specific to the Medicare population, Margaret Artz and
colleagues report in the August 2002 issue of the American Journal of
Public Health that regardless of insurance type per capita prescription
drug expenditures increased as generosity of coverage increased in
their analysis of data from the Medicare Current Beneficiary Survey.
Accordingly, plans that offer supplemental benefits will be required to
provide an induced utilization estimate with their bid, and we have
adopted this provision without modification. Additional CMS guidelines
will be provided on estimating the induced utilization.
* Reinsurance Subsidies to Private Fee-For-Service Plans
    As provided under section 1860D-21(d)(4) of the Act and in Sec.
423.329(c)(3), we will base reinsurance payments for PFFS plans on an
alternative methodology. Rather than negotiating reinsurance
assumptions submitted with the PFFS plan bid or otherwise adjusting for
potential price level differences between PFFS and other MA
organization bids, we will estimate the amount of reinsurance payments
that will be payable if the plan were an MA-PD plan described in
section 1851(a)(2)(A)(i) of the Act. In doing so we will take into
account the average reinsurance payments made under Sec.  423.329(c)(2)
for basic benefits for populations of similar risk under such MA-PD
plans. Estimated payments will not be subject to any reconciliation
process to compare the amounts paid to the actual allowable reinsurance
expenses, and will not allow for payment recoveries in the event that
actual allowable reinsurance costs exceed payments.
6. Low-Income Cost-Sharing Subsidy Interim Payments
    As provided under section 1860D-14 of the Act and in Sec.  423.780
of the regulations, we will provide additional assistance for certain
low-income beneficiaries in the form of premium, deductible and cost-
sharing subsidies. Since actual expenses incurred by these low income
beneficiaries can only be fully known after all costs have been
incurred for the payment year, we proposed to make estimated payments
on an interim basis to assist PDP sponsors and MA organizations with
cash flow. Under Sec.  423.329(d)(2)(i), we proposed to provide for
interim payments of low-income deductible and cost-sharing amounts on a
monthly prospective basis based on estimates of low-income cost sharing
submitted and negotiated with each plan's approved bid.
    We also noted in the August proposed rule that low-income cost
sharing would not necessarily be incurred evenly throughout the
coverage year and that we were considering the most appropriate
methodology for distributing interim payments. Since equal payments
would be most compatible with our systems, in the first two years of
the program (and for the first two years of new plans thereafter) we
said in the proposed rule that we were considering an approach paying
1/12th of the net present value of estimated low-income cost sharing in
each month of the coverage year. This net present value would be
calculated on the basis of all estimated costs due at the end of the
year and discounted by the most recently available rate for one-year
Treasury bills. An alternative approach outlined in the proposed rule
would have required the submission of a schedule of the estimated
timing of incurred low-income cost sharing along with the plan bid. For
example, we might take schedules from each plan or we could propose an
incremental schedule (X percent of the total in January, Y percent in
February, etc.). We also noted that the prospective payment of
estimated costs might create an incentive to overstate low-income cost
sharing, and that we are interested in ensuring that our interim
payments are not excessive. We stated in the proposed rule that we
would welcome comments on these approaches and on the appropriate
treatment of interest in any methodology.
    Again, we proposed that any reconciliation at the end of the year
would need to be based on the sponsor providing adequate information in
order to determine the subsidy amounts for the year. If the sponsor
could not provide such information, interim payments would be
recovered. In addition, the low-income payments would be subject to the
same inspection and audit provisions applying to the other payments
made under section 1860D 15 of the Act.
    Comment: Several commenters supported prospective monthly payments
for the low-income subsidy based on estimates provided in the accepted
bid submissions. Two commenters suggested that low-income subsidies
should be paid to plan sponsors on an incurred basis.
    Response: We will make low-income cost sharing subsidy payments on
a prospective basis using estimates submitted and negotiated with the
approved bid and will reconcile these payments after the end of the
coverage year with claims data. We agree with the majority of
commenters that this method best protects plans from cash flow
problems. More information will be provided with CMS guidelines on
payment methodology. We have modified Sec.  423.343(d)(1) to clarify
that our data requirements for reconciliation will be specified in
separate guidance.
    Comment: One PBM urged that PDPs should be compensated for premium
underpayment if the low-income subsidy amount does not meet or exceed
their premium.
    Response: The PDP will get paid its full premium. In cases where
the low-income subsidy amount is less that the plan's premium, any low-
income beneficiary enrolling in the plan is responsible for making up
the difference between the low-income premium subsidy and the plan's
premium.
    Comment: Two commenters stated that some SPAPs would want to
supplement the premium subsidy so that their beneficiaries do not have
to pay first and be reimbursed by the SPAP. They suggested that Section

[[Page 4314]]

423.329 should include a requirement for plans to implement a process,
similar to the Medicare Part B buy-in process, which will allow States
to pay Medicare Part D premiums on behalf of SPAP beneficiaries.
    Response: Such authority already exists. Collection of monthly
premiums are covered in Sec.  423.292. Section 1860D-13(c) of the Act
instructs that the provisions of 1854(d) shall apply to PDP sponsors
and premiums under this part be paid in the same manner as they apply
to MA under part C. Payment options under Sec.  422.262(f)(3) include
any ``other third parties such as a State''. Moreover, we are required
to establish standards for effective coordination between Part D plans
and SPAPs for payment of premiums and coverage, as well as payment for
supplemental prescription drug benefits. Further information on these
standards will be issued in separate guidance.
    Comment: One commenter urged us to share all low-income subsidy
payment data under Sec.  423.315(d) directly with the SPAPs.
    Response: Since nothing in the MMA addresses disclosure of data to
SPAPs, we believe that FOIA rules apply to these data. Therefore, it is
possible that we cannot disclose this data under exception 4 of FOIA,
but such a determination would be done on a case-by-case basis
following standard FOIA procedure.
7. Risk Sharing Arrangements
a. Risk Sharing Methodology and the Target Amount
    As provided under section 1860D-15(e) of the Act and in Sec.
423.336, we would establish risk corridors. Risk-sharing payments would
limit exposure to unexpected expenses not already included in the
reinsurance subsidy or taken into account through risk adjustment.
These would be structured as symmetrical risk corridors that are
agreements to share a portion of the losses or profits resulting from
expenses for basic benefits either above or below expected levels,
respectively. However, plans would always be at full financial risk for
all spending on supplemental drug coverage. In addition, in accordance
with section 1860D-21(d)(5) of the Act and section 1860D 15(g) of the
Act, the risk sharing provisions are not available to PFFS and fallback
plans.
    The expected level of expenses for basic benefits included in the
standardized bid is known as the ``target amount''. The target amount
for any plan would be equal to the total amount of direct subsidy
payments from us, and premium payments from enrollees to that plan for
the year based upon the risk-adjusted standardized bid amount, less the
administrative expenses and return on investment assumed in the
standardized bid. Since the standardized bid is the portion of the
accepted bid amount attributable to basic prescription drug coverage,
the target amount can be thought of as ``prepayments'' of prescription
drug expense for basic benefits. The standardized bid has also taken
into account (and excludes) any utilization effects of offering
supplemental coverage. The objective of risk sharing would be to
compare total actual incurred prescription drug expenses to the
prepayments, to compute the difference, and to reimburse or recover a
portion of the difference.
    In Sec.  423.336(a)(2)(A), we establish risk corridors, defined as
specified risk percentages above and below the target amount. For
instance, in Sec.  423.336(a)(2)(ii), for 2006 and 2007, the first risk
corridor is defined as 2.5 percent above the target amount and the
second as 5 percent above the target amount. This means that, for 2006
and 2007, the first risk corridor is between 100 percent and 102.5
percent of the target amount and the second risk corridor is between
102.5 percent and 105 percent of the target amount. A third risk
corridor is above 105 percent of the target amount.
    The term, symmetrical risk corridors--means that the same size
corridors exist below the target amount as above it. The actual upper
or lower limits of each corridor equal the target amount plus or minus
the product of the risk percentage times the target amount.
b. Allowable Risk Corridor Costs
    The costs applicable to the computation of risk sharing are known
as allowable risk corridor costs. These costs are defined in section
1860D-15(e)(1)(B) of the Act and in Sec.  423.308 as the part of costs
for covered Part D drugs that are only attributable to basic benefits.
Allowable risk corridor costs cannot include costs attributable to
benefits outside the basic benefit. We interpret this as both the
actual differences in benefits structure and the insurance effect of
supplemental coverage on basic coverage. In section 1860D-15(e)(1)(B)
of the Act, reference is made to section 1860D-11(c)(2) of the Act that
provides for a utilization adjustment using as its reference point
standard prescription drug coverage. We are interpreting this to mean
the statutorily defined standard prescription drug coverage described
in subpart C. Also, allowable risk corridor costs must actually be paid
by the sponsor or organization under the plan and must be net of any
chargebacks, discounts or average percentage rebates. The allowable
risk corridor costs also do not include any administrative expenses
(including return on investment) of the sponsor or organization.
(Administrative expenses would not include costs directly related to
dispensing of Part D drugs during the year.) Note that unlike allowable
reinsurance costs, allowable risk corridor costs do not include any
amount paid by the enrollee. In Sec.  423.336(a)(1), we state that
allowable risk corridor costs must be adjusted in accordance with
section 1860D-15(e)(1)(A) of the Act, by subtracting expenses
reimbursed through other separate payments. Thus, reinsurance payments
made under Sec.  423.329(c)(2) and the non-premium low-income subsidy
payments made under Sec.  423.782 in subpart P of these regulations to
the sponsor of the plan for the year must be subtracted. The PDP
sponsor or MA organization would already have received compensation for
these costs, and thus they do not fall within the construct of risk
corridors that are directed at limiting exposure to unexpected
expenses.
    If adjusted allowable risk corridor costs exceed the prepayments by
a certain amount, we would reimburse a percentage of the difference to
help plans with a portion of the unanticipated expenses associated with
their drug coverage. On the other hand, if prepayments exceed adjusted
allowable risk corridor costs, we would reduce future payments or
otherwise recover a percentage of the difference to reduce the impact
on the Trust Fund of excessive bids.
* In order to arrive at a value for actual risk corridor costs
that can be appropriately compared to the target amount, allowable risk
corridor costs would be adjusted to remove expenses reimbursed through
total reinsurance payments and non-premium low income subsidy payments.
The statute indicates that allowable risk corridor costs must be
reduced by reinsurance payments and by the subsidy payments for low
income individuals. The subsidy payments for low-income individuals
under section 1860D-14 of the Act include subsidies for both premium
and for cost sharing. We interpret ``the total subsidy payments made
under section 1860D-14'' under section 1860D15(e)(1)(A)(ii)(II) of the
Act in the context of ``costs incurred by the sponsor or organization''
in the definition of allowable risk corridor costs. Since premiums are
not a cost, we limit our interpretation of ``the total subsidy
payments'' to payments related to cost sharing.

[[Page 4315]]

    We note that when adjusted allowable risk corridor costs are
calculated by subtracting only non-premium subsidies the results are
the same as for an identical plan without any subsidy-eligible
individuals. However, if the adjusted allowable risk corridor costs are
calculated by subtracting total low-income subsidies (that is, for
premiums, cost sharing and coverage above the initial coverage limit),
the risk sharing calculation results in lower recouped costs on the
part of the plan and a different outcome from that in a plan without
subsidy eligible individuals. Since there must be no difference in
these amounts, the calculation subtracting only non-premium subsidies
must be the appropriate one. We believe that to do otherwise would
result in a major disincentive for PDP and MA-PD plans to enroll
individuals eligible for the low-income subsidies, and we do not
believe that this would be the logical outcome that was intended by the
statute. We are adopting this provision as proposed.
c. Changes in Risk Corridor Limits and Percentages (Sec.  423.336(a)
and (Sec.  423.336(b))
    The risk corridors and the percentage of risk to be shared would be
set at certain levels for 2006 and 2007 with flexibility for us to
increase the risk sharing percentage if bids, and therefore target
amounts, are off during the early years of the program by a certain
percentage set by the statute in section 1860D 15(e)(2)(B)(iii) of the
Act. During 2006 and 2007, plans would be at full risk for adjusted
allowable risk corridor costs within 2.5 percent above or below the
target. Plans with adjusted allowable costs above 102.5 percent of the
target would receive increased payments. If their costs were between
102.5 percent of the target (1\st\ threshold upper limit) and at or
below 105 percent of the target (2\nd\ threshold upper limit), they
would be at risk for 25 percent of the increased amount; that is, their
additional payments would equal 75 percent of adjusted allowable costs
for spending in this range. If their costs were above 105 percent of
the target they would be at risk for 25 percent of the costs between
the first and second threshold upper limits and 20 percent of the costs
above that amount. That is, their additional payments would equal 75
percent of the difference between the first and second threshold upper
limits and 80 percent of the adjusted allowable costs over the second
threshold upper limit. Conversely, if plan spending fell below the 97.5
percent of target, plans would share the savings with the government.
They would have to refund 75 percent of the savings for any costs less
than 97.5 percent of the target amount but at or above 95 percent of
the target level, and 80 percent of any savings below 95 percent of the
target.
    In Sec.  423.336(b)(2)(iii) the program will cover a higher
percentage of the risk for costs between the 1\st\ and 2\nd\ upper
threshold limits would apply in 2006 and 2007 if we were to determine
that: (1) 60 percent of Part D plans have adjusted allowable costs that
are more than the first threshold upper limit for the year; and (2)
these plans represent at least 60 percent of beneficiaries enrolled in
such plans. In this case, additional payments to plans would increase
from 75 percent to 90 percent of adjusted allowable costs between the
first and second upper threshold limits. Conversely, there would be no
change in savings shared with the government if costs fell below 97.5
percent of the target level.
    For 2008 to 2011, the risk corridors and the percentage of risk to
be shared would be modified so that PDP and MA PD sponsors would assume
an increased level of risk. Plans would be at full risk for drug
spending within 5 percent above or below the target level. Plans would
be at risk for 50 percent of spending exceeding 105 percent and at or
below 110 percent of the target level. Additionally, they would be at
risk for 20 percent of any spending exceeding 110 percent of the target
level. Payments would be increased by 50 percent of adjusted allowable
costs exceeding the first threshold upper limit and up to the second
threshold upper limit and 80 percent for any additional costs exceeding
the second threshold upper limit. Conversely, if plan spending fell
below the target, plans would share the savings with the government.
They would have to refund 50 percent of the savings if costs fell
between 95 percent and 90 percent of the target level, and 80 percent
of any amounts below 90 percent of the target.
    For years after 2011, we would establish the risk threshold
percentage as deemed necessary to create incentives for plans to enter
the market. The only required parameters would be that the first
threshold risk percentage could not be less than 5 percent and the
second threshold risk percentage could not be less than 10 percent of
the target amount.
d. Risk Sharing Payments or Recoveries
    In Sec.  423.336(c), we will make payments or recover savings after
a coverage year after obtaining all of the information necessary to
determine the amount of payment. In Sec.  423.336(c)(1), the PDP
sponsor or MA organization offering a MA-PD plan would provide us with
the information necessary to calculate the risk sharing as discussed in
section 3(a) of this part of the preamble within six months. This would
include prior final reconciliation of reinsurance and low-income
subsidies since allowable risk corridor costs must be reduced by the
total reinsurance payments and non-premium low-income subsidies for the
year. Once this information has been received, under Sec.
423.336(c)(2) we would either make lump-sum payments or adjust monthly
payments in the following payment year based on the relationship of the
plan's adjusted allowable risk corridor costs to the predetermined risk
corridor thresholds in the coverage year. We would not make payment if
we did not receive the necessary information from the PDP sponsor or MA
organization. In addition, as stated, below, we are considering certain
corrective actions to recoup risk-sharing payments, in the event of
lack of information.
    Comment: One State suggested that any savings accrued to the
government via risk sharing should be shared with the States.
    Response: Risk sharing is symmetrical, meaning that if it were
permissible to share cost savings, the States would also have to assume
responsibility for the portion of the cost for specified risk
percentages above the target amount. Nevertheless, the Congress
intended for risk sharing to be between the Federal Government and the
plans with no State involvement whatsoever.
8. Retroactive Adjustments and Reconciliation (Sec.  423.343)
    In Sec.  423.343(a) and Sec.  423.343(b) retroactive adjustments
are made to the aggregate monthly payments to a PDP or MA-PD for any
difference between the actual number and characteristics, including
health status, of enrollees and the number and characteristics on which
we had based the organization's advance monthly payments.
Reconciliation of actual payments made would be done as needed. In
order for total payments to be properly accounted for in all steps, the
order of reconciliation processes would be first, enrollment; second,
risk adjustment; third, low-income cost sharing; fourth, reinsurance;
and finally, risk sharing.
    Under Sec.  423.343(c) and (d), we provide for a final
reconciliation process to compare the payments for reinsurance
subsidies and low-income cost-sharing subsidies made during the
coverage year to actual allowable reinsurance expenses and low-income
cost sharing and to make additional payments or payment recoveries

[[Page 4316]]

accordingly. The form and manner in which actual allowable reinsurance
costs would be submitted for reconciliation will be discussed in
additional CMS guidelines on payment methodology. PDP sponsors and MA
organizations offering a MA-PD plan would provide us with the
information necessary to finalize reinsurance payments as discussed in
section 3(a) of this part of the preamble within six months of the end
of a coverage year. Once complete data were received for a coverage
year, we would compare 80 percent of the allowable reinsurance costs
attributable to that portion of gross covered prescription drug costs
incurred in the coverage year after an individual has incurred costs
that exceed the annual out-of-pocket threshold to the monthly
reinsurance payments and compute the difference. We would then either
make lump-sum payments or adjust monthly payments throughout the
remainder of the payment year following the coverage year to pay out or
recover this difference.
    If an entity did not provide us with sufficient documentation for
us to reconcile payments, we would reconcile by recovering payments for
which the entity lacked documentation. For example, if we make interim
payments during the year for the low-income subsidy, but at the end of
the year, the PDP sponsor or MA organization cannot provide
documentation demonstrating the amounts of beneficiary cost-sharing,
the reconciliation process would involve recouping the interim payments
for such subsidy. The need to provide sufficient documentation to
support final payment determinations applies even in the event of a
change of ownership. Thus, new owners of a PDP sponsor or MA
organization would be responsible for obtaining the documentation
necessary to support payment, and the reconciliation process would be
used to recover any payments for which the new owner lacked
documentation. We believe this authority stems from the direction of
the Congress that each PDP sponsor and MA-PD organization ``provide the
Secretary with such information as the Secretary determines is
necessary to carry out this section,'' (section 1860D-15(f)(1)(A) of
the Act) and that ``payments under this section . . . are conditioned
upon the furnishing to the Secretary in a form and manner specified by
the Secretary, of such information as may be required to carry out this
section,'' (section 1860D-15(d)(2)(A) of the Act)).
    In the proposed rule we discussed potential remedies that should be
imposed in the event a PDP sponsor or MA organization offering an MA-PD
plan fails to provide us with adequate information regarding risk-
sharing arrangements. In the case of risk corridor costs, the
organization or sponsor may owe the government money if, for example,
prepayments exceed adjusted allowable risk corridor costs. In this
case, failure to provide information could result in a shortfall to the
government, since the entity would not have the information necessary
for the Secretary to establish the proper amount owed. Therefore, we
will assume that the sponsor's or organization's adjusted allowable
risk corridor costs are 50 percent of the target amount. We will use a
50 percent threshold because we believe this threshold would constitute
a lower limit; and it would be unlikely for any organization or sponsor
to have costs lower than 50 percent of their total payments. Additional
guidelines will detail our methodology for reconciliation for these
payments.
9. Reopening (423.346)
    We believe that the provision in 1860D 15(f)(1) of the Act
providing the Secretary with the right to inspect and audit any books
and records of a PDP sponsor or MA organization regarding costs
provided to the Secretary would not be meaningful, if upon finding
mistakes pursuant to such audits, the Secretary were not able to reopen
final determinations made on payment. In addition, we believe that
sections 1870 and 1871 of the Act provide us with the authority to
reopen final determinations of payment to PDP sponsors and MA
organizations. Therefore, our reopening provisions patterned after
those used in Medicare claims reopening, found in Part 405 of the
regulations, subparts G and H. Including reopening provisions will
allow us to ensure that the discovery of any overpayments or
underpayments could be rectified. Under our provisions, reopening could
occur for any reason within one year of the final determination of
payment, within four years for good cause, or at any time when there is
fraud or similar fault. We could initiate a reopening on its own, or a
sponsor or organization could request reopening, but such reopenings
will be at our discretion. The Supreme Court has determined that in the
context of reopening cost reports, a fiscal intermediary's decision not
to reopen a final determination is not subject to judicial review, see
Your Home Visiting Nurse Services, Inc. v. Shalala, 525 U.S. 449, 456
(1999), and we believe the same reasoning would apply in the context of
Part D.
    Good cause will be interpreted in the same manner as in Part 405
(see Medicare Carriers Manual section 12100). Thus, good cause will
exist, if (a) new and material evidence, not readily available at the
time of the determination, is furnished; (b) There is an error on the
face of the evidence on which such determination or decision is based;
or, (c) There is a clerical error in determination. In order to meet
the standard under (a) the evidence could not have been available at
the time the determination was made. A clerical error constitutes such
errors as computational mistakes or inaccurate coding. An error on the
face of the evidence exists if it is clear based upon the evidence that
was before us when it reached its initial determination that the
initial determination is erroneous. Thus, for example, good cause would
exist in cases where it is clear from the files that rebates or
administrative costs were not appropriately accounted for, where
computation errors had been made, where a sponsor or organization
included non-Part D drugs in their calculations, where individuals not
enrolled in the plan were included in calculating payment, and in
similar situations. Reopening could occur at any time in cases of fraud
or similar fault, such as in cases where the sponsor or organization
knew or should have known that they were claiming erroneous Medicare
payment amounts.
    Comment: One commenter asked for clarification on the criteria that
we intend to follow in evaluating whether to reopen a determination
during the first year under Sec.  423.346.
    Response: The criteria for reopening under Sec.  423.346 is no
different in the first year. Reopening could occur for any reason
within one year of the final determination of payment, within four
years for good cause, or at any time when there is fraud or similar
fault. We could initiate a reopening on its own, or a sponsor or
organization could request reopening, but such reopenings will be at
our discretion. Good cause will exist, if: (1) new and material
evidence, not readily available at the time of the determination, is
furnished; (2) there is an error on the face of the evidence on which
such determination or decision is based; or, (c) there is a clerical
error in determination.
10. Payment appeals (Sec.  423.350)
    Several commenters were concerned with resolving payment accuracy
issues. Section 1860D-15(d)(1) of the Act gives broad authority to the
Secretary to develop payment methods and we intend on using this
authority to establish a payment appeals process to

[[Page 4317]]

help allay the aforementioned concerns. Accordingly, we have added
Sec.  423.350 to establish a payment appeals process whereby payment
determinations involving the following may be subject to appeals:
    * the reconciled health status risk adjustment of the direct
subsidy as provided in Sec.  423.343(b);
    * the reconciled reinsurance payments under Sec.
423.343(c);
    * the reconciled final payments made for low-income cost
sharing subsidies provided in Sec.  423.343(d); or
    * the final risk-sharing payments made under Sec.  423.336.
    We wish to clarify that the payment appeals process only applies to
perceived errors in the application of the payment methodology
described in this subpart and subsequent CMS guidelines. Under no
circumstances may this process be used to submit new payment
information after the established deadline. Part D plans are expected
to submit payment information correctly and within the timelines we
established.

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

1. Overview
    In our proposed regulation at Sec.  423.401 we implemented the
requirements of section 1860D-12(a) of the Act that address licensing,
the assumption of financial risk for unsubsidized coverage, and
solvency and capital adequacy requirements for unlicensed sponsors or
sponsors who are not licensed in all States in the region in which it
wants to offer a PDP.
    The provisions of this section specified the following:
    * A sponsor must be organized and licensed under State law
as a risk bearing entity eligible to offer health insurance or health
benefits coverage in each State that it offers a PDP.
    * There can be a waiver of the State licensure requirement
for the reasons and under the conditions set forth under section 1860D
12(c) of the Act.
    * To the extent an entity is at risk, it must assume
financial risk on a prospective basis for covered benefits that are not
covered by reinsurance. The PDP sponsor could obtain insurance or make
other arrangements for the cost of coverage provided to enrollees to
the extent that the sponsor is at risk for providing the coverage.
    Below we summarize some of the proposals outlined in the August
2004 proposed rule, respond to public comment, and indicate any changes
we have made to the final rule. For a full explanation of the proposals
we refer readers to the August 2004 proposed rule.
a. Overview
    We proposed at Sec.  423.410 to implement the provisions of section
1860D-12(c) of the Act that address waiver of certain requirements to
expand choice. Generally, section 1860D-12(c) of the Act specifies that
in order to expand access to prescription drug plans, we may waive the
State licensure requirement using many of the same standards that are
permitted under Part C for provider-sponsored organizations (PSOs). The
MMA also added some special rules for PDPs that are in addition to the
PSO waivers available under Part C. Finally, the MMA allows for
regional plan waivers under circumstances similar to those permitted
under Part C for regional plans. We proposed requirements for regional
plan waivers in Sec.  423.115.
b. Waivers Incorporated from 1855(a)(2)
    Section 1860D-12(c) of the Act provides that a prospective PDP
sponsor may request a waiver from State licensure requirements from us
under the waiver provisions at sections 1855(a)(2)(B), 1855(a)(2)(C)
and 1855(a)(2)(D) of the Act. Because the Congress directed us to use
many of the same grounds for approving waivers used in accordance to
sections 1855(a)(2)(B), 1855(a)(2)(C), and 1855(a)(2)(D), we proposed
adopting the regulatory provisions in Sec.  422.372. These provisions
allow a waiver when the State has failed to complete action on a
licensing application within 90 days of receipt of a substantially
complete application. This rule was adopted in proposed Sec.
423.410(c)(1).
    Proposed Sec.  423.410(c)(2) included the standard of Sec.
422.372(b)(2) (Denial based on discriminatory treatment). Under this
proposed regulation, a waiver could be granted if a determination by
CMS were made that: (1) the State denied an application based on
requirements that are not generally applicable to PDP sponsors or other
entities engaged in a similar business; or (2) the State required as a
condition of licensure that the PDP sponsor offer any product or plan
other than a prescription drug plan.
    Proposed Sec.  423.410(c)(3) incorporated the standard of Sec.
422.372(b)(3) and stated that a waiver may be granted if the State
denied an application on the basis of procedures or standards relating
to solvency that are different from the solvency requirements
established by us. In Sec.  423.420, we proposed that we would use an
application process in which the waiver applicant would be required to
submit certain documents that indicate that the State is imposing
procedures or standards relating to solvency that are different from
CMS standards.
c. Additional Waivers Available under 1860D-12 of the Act.
    In addition to the waivers available to PSOs under 1855(a)(2)(B),
(C) and (D) of the Act, the MMA also created additional waiver
opportunities for PDPs. The first of these was included in proposed
Sec.  423.410(c)(4) (implementing section 1860D-12(c)(2)(A)(ii) of the
Act), which provides that we may grant a waiver when a State imposes
requirements other than those required under Federal law.
    The second and third of these (implementing section 1860D-
12(c)(2)(B) of the Act) were included in proposed Sec.  423.410(d) and
(e). We proposed granting a waiver in the following scenarios:
    * When a State does not have any licensing process for PDP
sponsors.
    * If a State does have a licensing process for years
beginning before January 1, 2008, a waiver will be granted if the PDP
sponsor merely submits its completed application for licensure to the
State.
    * We also proposed regional plan waivers at Sec.
423.410(b).
d. Other Sections of the Proposed Rule.
    The proposed rule also included Sec.  423.420 (solvency standards
for all entities receiving a waiver of State licensure); Sec.  423.425
which proposed that an approved waiver does not deem the sponsor to
meet other requirements for a sponsor under Part 423 of the
regulations, and Sec.  423.440, which proposed prohibiting State
imposition of premium taxes and included the rules for Federal
preemption of State law.
2. Waiver of Certain Requirements in Order to Expand Clhoice
    The statute requires, at section 1860D-12(c)(3) of the Act, that
the waivers granted under the provisions of section 1855 of the Act, as
well as under section 1860D-12(c)(2)(B) of the Act, must also meet the
conditions of approval established at section 1855(a)(2)(E),
1855(a)(2)(F) and 1855(a)(2)(G) of the Act. Accordingly, we implemented
the procedures for approving a waiver in regulations at Sec.
423.410(f). Please see our final regulations at Sec.  423.415 and our
discussion in section 2b of this preamble for requirements specific to
entities wishing to offer a prescription drug plan in more than one
State.
    In proposed Sec.  423.410(f)(1), we established that except in
States without a licensing process for PDP sponsors and in the case of
regional plan waivers described in proposed Sec.  423.410(b)

[[Page 4318]]

(Sec.  423.415 in the final rule), a waiver applies only to a specific
State and is effective for 36 months and cannot be renewed. In the
final regulation we have made clarifying changes by adding new Sec.
423.415 which is specific to regional plan waivers. As was proposed in
Sec.  423.410., in Sec.  423.415(d) of the final rule we indicated that
regional waivers are valid until the State has completed processing the
application, but in no case can a regional plan waiver extend beyond
the end of the calendar year for which it is received. We proposed
implementing section 1855(a)(2)(F) of the Act at Sec.  423.410(f)(2) by
specifying that (except for regional plan waivers) we would grant or
deny a waiver application under this section within 60 days after we
determine that a substantially complete waiver application has been
filed. We proposed that a substantially complete application would have
to clearly demonstrate and document an applicant's eligibility for
waiver. We also proposed, at Sec.  423.410(f)(3) to implement 1860D-
12(c)(3) by establishing that if we determine that a State does not
have a licensing process for PDP sponsors, we will approve a waiver for
a PDP sponsor that meets our solvency and capital adequacy standards
and that this waiver would not be time limited
Comments and our responses to these waiver requirements follow.
    We received several comments questioning, in general, the
requirement allowing State licensure to be waived when the State
applies grounds for licensure other than those required by Federal law.
Below, in the comment and responses section we discuss the specific
bases of these comments concerning preemption by Federal law, as well
as other comments we received on the proposed requirements.
    Comments: Several commenters supported limiting our interpretation
of the preemption authority under State licensure requirements. One of
these, from a State insurance department, stated that only non-profit
organizations were eligible to apply under its State HMO licensure law.
The commenter expressed concern that State licensure waivers could
interfere with this State licensure requirement, since for-profit
entities might be able to receive licensure waivers from CMS. Another
commenter from a State insurance department expressed its hope that
Federal waiver authority of State licensure would not stop a State from
devising its own State approach to funding and financial management of
PDPs within its jurisdiction.
    Response: In the issues raised by these commenters concerning
general licensing requirements we would need to evaluate a licensure
waiver request using the standards specified in Sec.  423.410 and Sec.
423.415 of the regulations. If an applicant met one of these standards
for waiver, we would grant the waiver, as the Congress required. This
could mean, for example, that a for-profit entity, operating under a
Federal waiver, does business in a State that offer HMO licenses only
to non-profit entities. We believe allowing qualified plans to
participate in a State or States is essential for establishing the new
program and, among other things, ensuring access for beneficiaries to
benefits and other requirements central to the prescription drug
benefit.
    Concerning the comment about State solvency standards, our
regulations at Sec.  423.410(b)(3)(i) and (b)(3)(ii) allow a waiver of
State solvency and information requirements if the State requirements
concerning these go beyond those specified by Federal law. We are
finalizing our language from the proposed rule concerning these
requirements as we believe that the intent of the statute is to ensure
that entities wishing to offer prescription drug program in a State or
States not be subjected to requirements beyond those required by
Federal law.
    Comment: Another organization requested that we specifically
identify those PDP sponsors which are State licensed and those which
have received a Federal waiver.
    Response: We concur with the comment in principle that an
organization that is not State licensed but under a Federal waiver be
identified as such. As we develop additional guidance for the
requirements of Part D, we will consider how best to convey such an
identification. We do not believe, however, that it is necessary to
include the identification in the requirements of this final rule.
    Comment: A PBM requested that we clarify the rules for States
without PDP licensure processes. The PBM proposed that if a State does
not have a specific insurance license for prescription drug-only
insurance plans, then this should be sufficient grounds for approval of
the waiver by us.
    Response: The approach that we have in adopted in Sec.
422.372(b)(4) requires that the State licensing authority give the
organization written notice that it will not accept its licensure
application. Following this standard, we would require an organization
to approach the State licensing authority for review and receive their
decision prior to filing a request for waiver of State licensure under
the provisions of this section.
    Comment: A managed care organization and an alliance of cost
contractors requested that we apply the licensure waiver rules to
Medicare cost plans as well as to PDPs.
    Response: Section 1860D-12(c) of the Act specifically addresses the
waivers for prescription drug plans. We believe it would exceed our
authority to extend these waivers to cost plans, which are not
mentioned in section 1860D-12(c) of the Act. In addition, cost plans
are governed by the licensure requirements in Part C and in part 422 of
the regulations. This final rule is primarily addressed to the
regulations in the new part 423 of 42 CFR. Therefore, we do not believe
this final rule would be an appropriate place to adopt rules that
affect part 422 and not part 423 of the regulations.
    Comment: A Native American council requested that State licensure
not be imposed upon a PDP that might be sponsored by the Indian Health
Service or a tribal health program.
    Response: We do not have the authority to add to the waivers
included in section 1860D-12(c) of the Act. If a PDP sponsored by an
Indian Health Service or tribal health program meets one of the waiver
requirements in Sec.  423.410, the PDP applicant should receive a
waiver.
    With the clarifying language noted we are, then, adopting our
regulations concerning eligibility for waivers largely as proposed for
Sec.  423.401 and Sec.  423.410.
3. Temporary Waiver for Entities Seeking to Offer a Prescription Drug
Plan in more than One State in a Region Sec.  423.115.
    We implemented the regional plan waiver rule provided at section
1860D-12(c)(1)(B) of the Act in the regulations at proposed Sec.
423.410. (In this final rule, we have created a new Sec.  423.415 to
clarify that the regional plan waivers are distinct from the single-
State waivers, and often subject to different standards (for example,
they endure only until the end of the contract period and not for 36
months). As we stated, this would allow us to use the proposed waiver
authority at section 1858(d) of the Act and the temporary waiver would
be available in the event a prospective PDP sponsor proposed that its
prescription drug plan would cover a multi-State region, but was not
yet licensed in all of the States. (Under those circumstances, we
stated we could waive the State licensure requirement until the State
had completed processing of the application.) In the interim, the PDP
sponsor would be

[[Page 4319]]

required to comply with the solvency standards established by us. In
the event the State ultimately denied the application, we stated that
we could extend the waiver through the contract year as we deemed
appropriate to provide for transition.
    In the final rule we have clarified, with the addition the
distinctions between the temporary waiver (for regional plans) and the
waiver for entities seeking to offer a plan in a single State, the
timeline for processing the application for the waiver and the length
of the waiver itself. Thus in new Sec.  423.415(c) we clarify that
Secretary will determine the time period appropriate for the processing
of the application and in new Sec.  423.415(d), we repeat the policy of
the proposed rule that in no case will the temporary waiver extend
beyond the end of the calendar year.
4. Solvency Standards for Non-Licensed Entities (Sec.  423.420)
    In proposed Sec.  423.420, we specified that sponsors that have
been granted a waiver by us must maintain reasonable financial solvency
and capital adequacy.
    Solvency standards have been developed after statutorily required
consultation with the National Association of Insurance Commissioners.
These standards are undergoing internal CMS review. We anticipate that
these standards, which are required to be published by January 1, 2005
will be published on the CMS website in the near future in conjunction
with the initial application forms for PDP organizations. These
solvency standards will include such items as required minimum net
worth and liquidity requirements as well as reporting requirements for
future PDPs who have received waiver of State licensure. We are
adopting the policy we proposed for reasonable financial solvency and
capital adequacy in this final rule.
5. Preemption of State Laws and Prohibition of Premium Taxes (Sec.
423.440)
    In the August 4, 2004 proposed rule, we stated that we would
implement section 1860D-12(g) of the Act at proposed Sec.  423.440(a),
by specifying that to the extent there are Federal standards, those
standards supersede any State Law.
    We proposed that for purposes of Part D, with the exceptions of
State licensing laws or State laws related to plan solvency, State laws
would not apply to prescription drug plans and PDP sponsors.
    The proposed rule for the Medicare Advantage program also discussed
preemption of State laws, and because Part D and Part C incorporate the
same preemption laws at section 1856(b)(3) of the Act, we believe it is
necessary to summarize those discussions in this final rule.
    In the Medicare Advantage proposed rule, we noted that prior to
enactment of the MMA, section 1856(b)(3) of the Act provided for two
types of preemption: general and specific. The presumption was that a
State law was not preempted if it did not conflict with an M+C
requirement, and did not fall into one of the four specified categories
where preemption was presumed. (These four categories were: benefit
requirements, including cost-sharing rules; requirements relating to
the inclusion or treatment of providers; requirements concerning
coverage determinations and related appeals and grievance processes;
and requirements relating to marketing materials and summaries and
schedules of benefits concerning M+C plans.)
    We concluded that the MMA reversed this presumption and provided
that State laws are presumed to be preempted unless they relate to
licensure or solvency. We also referenced the Congress' intent that the
MA program, as a Federal program, operate under Federal rules, and
referred to the Conference Report of the MMA as making clear the
Congress' intent to broaden the scope of preemption through its change
to section 1856(b)(3) of the Act. See 69 FR 46866, 46904. We believe
that because the Congress incorporated the same preemption standard
into the Part D program, and because the Congress required the
preemption rules to apply consistently in Parts C and D, this same
reasoning would apply to Part D.
    In addition, in the proposed rule for Part D, we stated that
although the Congress included broad preemption rules in section
1856(b)(3) of the Act, we did not believe that the Congress intended
for each and every State requirement applying to PDP sponsors to become
null and void. Specifically, we stated:
    In areas where we have neither the expertise nor the authority
to regulate, we do not believe that State laws would be superseded
or preempted. For example, State environmental laws, laws governing
private contracting relationships, tort law, labor law, civil rights
laws, and similar areas of law would, we believe, continue in effect
and PDP sponsors in such States would continue to be subject to such
State laws. Rather, our Federal standards would merely preempt the
State laws in the areas where the Congress intended us to regulate--
such as the rules governing pharmacy access, formulary requirements
for prescription drug plans, and marketing standards governing the
information disseminated to beneficiaries by PDP sponsors. We
believe this interpretation of our preemption authority is in
keeping with principles of Federalism, and Executive Order 13132 on
Federalism, which requires us to construe preemption statutes
narrowly. (69 FR 46696.)
    We also recognized that while the Congress specifically stated that
State licensure and solvency laws would not be preempted, this did not
mean that States could condition licensure on a sponsor meeting
requirements unrelated to what we would consider licensure
requirements. We also addressed this issue in the Medicare Advantage
proposed rule, explaining:
    We believe that the exception for State laws that relate to
``State licensing'' must be limited to State requirements for
becoming State licensed, and would not extend to any requirement
that the State might impose on licensed health plans that-absent
Federal preemption-must be met as a condition for keeping a State
license. If a State requirement could be considered to relate to
State licensing simply because the State could revoke a health
plan's license for a failure to meet the requirement, this would
mean that States could impose virtually any requirement they wished
to impose without the requirement being preempted. ... Because we
believe that it is clear that the Congress intended to broaden the
scope of Federal preemption, not to narrow it, we also believe that
the exception for laws relating to State licensing must be limited
to requirements for becoming State licensed (such as filing articles
of incorporation with the appropriate State agency, or satisfying
State governance requirements), and not extended to rules that apply
to State licensed health plans. (69 FR 46904.)
    We are adopting these preemption interpretations as our final
policy. We also note that in the accompanying regulation text we have
replaced PDP sponsor with Part D sponsor, as we believe that the
preemption of State law and the prohibition against imposition of
premium taxes should operate uniformly for all Part D sponsors. We note
that licensure requirements in this Part continue to apply only to PDP
sponsors, as other Part D sponsors (such as MA organizations and cost-
based HMOs and CMPs) are subject to their own licensing laws.
    Comment: One large insurer felt that our narrow interpretation of
the statutory preemption authority was contrary to the language of
section 1856(b)(3) of the Act. This insurer requested that CMS consider
making clear that all State laws and regulations (with the exception of
State licensing and solvency laws) are preempted with respect to MA and
Part D plans.
    Response: As noted in the proposed rule, we do not believe that
either the

[[Page 4320]]

principles of Federalism or the statute justify such a broad preemption
interpretation. We do not believe, for example, we could preempt all
State environmental or civil rights laws, nor do we believe it was the
Congress' intent to do so. The preemption in section 1860D-12(g) of the
Act is a preemption that operates only when CMS actually creates
standards in the area regulated. To the extent we do not create any
standards whatsoever in a particular area, we do not believe preemption
would be warranted.
    Comment: A pharmaceutical manufacturer and a pharmaceutical
manufacturing association requested clarification from us that it is
not our intent to preempt any State pharmacy laws dealing with the
practice of therapeutic substitution.
    Response: In general, we do not think we have the authority to
preempt State pharmacy licensing laws dealing with the practice of
therapeutic substitution and we do not intend to establish standards in
this area. However, it should be noted that the forthcoming electronic
prescription standards do have the potential to impact State pharmacy
practices and such standards could preempt State pharmacy practice laws
and regulations that conflict with them.
    We are adopting the requirements of the proposed rule with the
technical and clarifying changes noted throughout this preamble. We are
also adopting the premium tax prohibition included in the proposed
without modification. Both rules are found at Sec.  423.440

J. Coordination Under Part D Plans with Other Prescription Drug
Coverage

    Proposed subpart J set forth the application of Medicare Part D
rules to Medicare Part C plans; established waivers for employer-
sponsored group prescription drug plans, MA-PD plans, cost plans, and
PACE organizations; and established requirements for coordination of
benefits with State Pharmaceutical Assistance Programs (SPAPs) and
other providers of prescription drug coverage.
    Below we summarize the proposed provisions of subpart J and respond
to public comments. (Please refer to the August 2004 proposed rule (69
FR 46696) for a detailed discussion of our proposals.)
1. Overview and Terminology (Sec.  423.454)
    Subpart J implemented sections 1860D-2(a)(4), 1860D-2(b)(4)(D),
1860D-11(j), 1860D-21(c), 1860D-22(b), 1860D-23(a), 1860D 3(b), 1860D-
23(c), 1860D-24(a), 1860D-24(b), and 1860D-24(c) of the Act, as added
to the Act by section 101(a) of the MMA. We proposed that, in general,
the requirements of Part D generally apply under Part C for
prescription drug coverage offered by MA-PD plans, although certain
waivers are available. In addition, we implemented section 1860D-22(b)
of the Act at proposed Sec.  423.458(c) providing us the authority to
waive the requirements of this part for employer-sponsored group
prescription drug plans.
a. Part D Plans
    Unless otherwise indicated, references to ``Part D plans'' in the
proposed rule referred to any or all of MA-PD plans, prescription drug
plans (PDPs) and fallback prescription drug plans. Likewise, the term
``Part D plan sponsor'' referred to MA organizations offering MA-PD
plans, PDP sponsors, and eligible fallback entities offering fallback
plans. We have moved the definition of ``Part D plan'' to Sec.  423.4
of our final rule and expanded the definition such that it includes
cost plans and PACE organizations offering qualified prescription drug
coverage. Similarly, we have revised the definition of ``Part D
sponsor'' under Sec.  423.4 of our final rule to include cost plans and
PACE organizations offering qualified prescription drug coverage.
b. Employer-sponsored Group Prescription Drug Plan
    We used the term ``employer-sponsored group prescription drug
plan'' to mean a prescription drug plan under a contract between a PDP
sponsor or MA organization offering an MA-PD plan and employers, labor
organizations, or the trustees of funds established by one or more
employers or labor organizations (or combination thereof) to furnish
prescription drug benefits under employment-based retiree health
coverage.
c. State Pharmaceutical Assistance Program (SPAP)
    We defined an SPAP, for purposes of this part, as a program
operated by or under contract with a State if it:
    (1) Provides financial assistance for the purchase or provision of
supplemental prescription drug coverage or benefits on behalf of Part D
eligible individuals;
    (2) Provides assistance to Part D eligible individuals in all Part
D plans without discriminating based upon the Part D plan in which an
individual enrolls;
    (3) Meets the benefit coordination requirements specified in this
part; and
    (4) Does not change or affect the primary payer status of a Part D
plan.
    Comment: Although one commenter supported our proposed definition
of the term ``SPAP,'' several commenters urged us to allow SPAPs to
endorse one or more Part D plans for SPAP enrollees. They believe that
the non-discrimination criteria contained in the definition of the term
SPAP should be designed to maximize the efficiency and effectiveness of
offering benefits that supplement the benefits available under Part D
coverage to enrollees. Some of these commenters believe that a
preferred plan approach, if accomplished via a competitive bid process,
supports the competitive, market-based model that the Congress
envisioned. One commenter stated that such an approach would help it to
``ratchet down'' administrative costs. Another commenter asserted that
the statute does not prohibit a State from providing consumer advice to
its SPAP enrollees regarding which Part D plan might work best with an
SPAP or offer the best value.
    Commenters believe that this interpretation is consistent with the
intent to establish an effective coordination mechanism between SPAPs
and Part D plans. Defining non-discrimination in a way that prohibits
SPAPs from designating preferred Part D plans and prohibiting auto-
enrollment of SPAP beneficiaries into preferred plans would not
facilitate enrollment in Part D plans and would further complicate,
rather than promote, coordination between Part D plans and SPAPs.
    Response: Section 1860D-23(b)(2) of the Act defines an SPAP, in
part, as a program that ``in determining eligibility and the amount of
assistance to Part D enrollees, provides assistance to such individuals
in all Part D plans and does not discriminate based upon the Part D
plan in which the individual is enrolled.'' We are interpreting the
non-discrimination language in section 1860D-23(b)(2) of the Act and
Sec.  423.464(e)(1)(ii) of our final rule to mean that SPAPs, if they
offer premium assistance or supplemental assistance for Part D cost
sharing, must not only offer equal assistance to beneficiaries enrolled
in all Part D plans available in the State, but also may not steer
beneficiaries to one plan or another through benefit design or
otherwise. We believe that the law intends that all Part D plans in a
State be given comparable opportunities. Requiring States to coordinate
with all Part D plans, without discrimination, levels the playing field
for Part D plans that want to provide benefits in a particular State.
    We further interpret section 1860D-23(b)(2) of the Act as
prohibiting SPAPs from automatically enrolling (``auto-enrolling'')
beneficiaries into a preferred

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plan because this would, in effect, allow the SPAP to choose a Part D
plan for the beneficiary. The non-discrimination provision is part of
the definition of an SPAP. Thus, even if under State law a State is the
authorized representative of its SPAP enrollees for purposes of
enrolling them in a Part D plan elected by the State, if it auto-
enrolls beneficiaries into a select plan, the State program will no
longer meet the statutory definition of SPAP under section 1860D-23(b)
of the Act.
    This will jeopardize the program's special status with respect to
true out-of-pocket (TrOOP) costs. That is, if a State does not meet the
definition of an SPAP, its contributions to beneficiary cost sharing
under a Part D plan do not count toward the TrOOP limit, after which a
beneficiary is eligible for catastrophic coverage.
    Section 1860D-23(d) of the Act provides for grants to SPAPs for the
purpose of educating their members who are Part D eligible individuals
about the options available to them under the Medicare drug benefit,
including information comparing Part D plans in the State so that SPAP
enrollees they can choose the Part D plan that provides them with the
best value. We will reach out to SPAPs and provide them with
information they can use to help their enrollees who are Part D
eligible individuals better understand their Part D plan options. We
will also assist SPAPs in their efforts to ensure that their members
understand the manner in which the Part D plans in their State
coordinate with their SPAP benefit. Our outreach to SPAPs will also
include guidance on the various educational, outreach, and assistance
activities SPAPs may undertake in a manner that will not discriminate
among Part D plans, for example: (1) SPAPs can provide beneficiaries
with objective and comparative education on all available Part D plans
offered in the State; and (2) SPAPs can advise members on:
    * which plans have lower beneficiary premiums than others
(after application of any low-income premium subsidy under 423.782 of
our final rule or premium subsidy offered by the SPAP, which must be
applied uniformly without respect to which Part D plan an individual
enrolls in),
    * which plan formularies include the drugs currently
utilized by the beneficiary,
    * which plans offer the beneficiary the most favorable
combination of deductibles, coinsurance, and negotiated prices for the
drugs currently utilized by the beneficiary, and
    * which plans' network pharmacies include the same
pharmacies participating in the SPAP, and which plans (if any) include
an emblem or symbol on their ID cards indicating their coordination
with the SPAP to facilitate secondary payment at the point of service.
    The nondiscrimination requirement also bars SPAPs from recommending
Part D plans based on the SPAP's financial interest in minimizing the
cost of providing benefits under the SPAP that supplement the benefits
available under Part D coverage. In addition, to the extent an SPAP
assists the enrollment into Part D of its members who fail to elect a
Part D plan during their initial enrollment period or upon joining the
SPAP, we encourage SPAPs to mirror our procedures for auto-enrollment
of full-benefit dual eligible individuals into Part D plans, which will
be done on a random basis.
    Comment: One commenter asked us to clarify whether a hybrid SPAP
with multiple components, some of which meet our definition of SPAP,
and some of which do not, would render an entire SPAP ``unqualified''
under our definition.
    Response: We agree that components of State programs that provide
pharmaceutical assistance, provided they meet the definition of the
term ``SPAP'' in Sec.  423.454(e)(1) of our final rule, may provide
benefits that supplement the benefits available under Part D coverage,
and that such supplemental assistance for covered Part D drugs will
count toward Part D enrollees' TrOOP limit (as defined in Sec.
423.104(d)(5)(iii) of our final rule). Thus, for example, if an SPAP
receives Federal program funding for certain enrollees (for example,
HIV/AIDS patients) or for certain drugs (for example, vaccines or HIV/
AIDS drugs), while the State covers drug costs for other SPAP enrollees
or for other drugs, only those components of the SPAP program that
receive no Federal program funds may be considered an SPAP. We do not
see any reason why the existence of both qualified and non-qualified
components of a SPAP would interfere with our ability to count the
spending of the qualified SPAP toward TrOOP, as long as operations and
funding are appropriately segregated.
    Comment: Several commenters asked for clarification regarding
whether State Kidney Programs, which are structurally similar to SPAPs,
can be defined as SPAPs so that their benefits supplementing the
benefits available under Part D coverage count toward their enrollees'
TrOOP limit.
    Response: Section 1860D-23(b) of the Act provides that an SPAP is a
State program that provides financial assistance for the purchase or
provision of prescription drugs, and we interpret this to mean that it
provides assistance with State funds. Therefore, to the extent that all
sources of program funding for a State Kidney Program's financial
assistance for the purchase or provision of supplemental prescription
drug coverage or benefits on behalf of Part D enrollees are 100 percent
non-Federal and provided a program that meets the other criteria
included in the description of an SPAP in Sec.  423.464(e)(1) of our
final rule, the program will be considered an SPAP. Any benefits
provided by such a program that supplement the benefits available under
Part D coverage would therefore count as an incurred cost toward the
calculation of a beneficiary's TrOOP threshold.
    Comment: One commenter asked us to clarify that a State can use any
source of funds available to it (other than Federal funds) to finance
any form of assistance to SPAP enrollees.
    Response: We have clarified in Sec.  423.464(e)(1) of our final
rule that the term ``SPAP'' excludes any program under which program
funding is from Federal grants, awards, contracts, entitlement
programs, or other Federal sources of funding. However, the statutory
definition of the term SPAP does not address program funding sources.
We believe that a State program may still be considered an SPAP if some
or all of its program funding is from private sources (for example,
from charities or independent foundations). We also clarify that the
exclusion of Federal program funding does not exclude some Federal
administrative funding or incidental Federal monies (for example, the
Federal grants to SPAPs provided for in section 1860D-23(d) of the
Act).
    In addition, to ensure SPAPs are funded in a manner consistent with
the Congress' intent in the statute, we clarify that a ``State
program'' under Sec.  423.454 of our final rule must provide assistance
based on financial need, age, or medical condition, and cannot do so
based on current or former employment status. Under section 1860D-23(b)
of the MMA, an ``SPAP'' is defined as a State program which provides
financial ``assistance'' for supplemental drug coverage or benefits.
The term ``assistance'' is defined in Webster's II dictionary as
``help'' or ``aid.'' We therefore interpret the word ``assistance'' to
mean financial help or aid provided to any individual in need of such
support--specifically,

[[Page 4322]]

individuals in financial need, the aged, or those with certain medical
conditions. Thus, as provided in Sec.  423.454 of our final rule, a
``State program'' is one that provides financial assistance for
supplemental drug coverage to individuals based on financial need, age,
or medical condition, but not based on current or former employment
status.
    Comment: One commenter suggested that our interpretation of the MMA
should allow for the continuation and renewal at State discretion of
the Pharmacy Plus waivers.
    Response: Pharmacy Plus programs can continue with Federal match
after January 1, 2006, under certain circumstances. Any State that
operates a Pharmacy Plus demonstration program must determine whether
it is feasible to continue that Pharmacy Plus program by submitting a
revised budget neutrality calculation for the demonstration. As
required in section III (10) of the terms and conditions of approval
for Pharmacy Plus programs, this calculation must account for the
reduction in Medicaid drug costs and a lesser diversion of dual
eligible beneficiaries into the Medicaid program due to the
implementation of Part D. We will review the revised budget neutrality
calculation and approve or disapprove the continuation of the
demonstration for the period after Part D is implemented.
2. Application of Part D Rules to Certain Part D Plans on and after
January 1, 2006 (Sec.  423.458)
    In accordance with section 1860D-21(c)(1) of the Act, and proposed
at Sec.  423.458(a) of our notice of proposed rulemaking, the
provisions of Part D pertaining to the provision of qualified
prescription drug coverage apply under Part C to prescription drug
coverage provided by an MA-PD plan in lieu of other Part C provisions
that would apply to such coverage, unless otherwise provided. Thus,
Part D requirements not related to the provision of drug coverage (for
example, licensing requirements) do not apply to MA-PD plans.
    We indicated that we would waive Part D provisions to the extent
that we determine that they duplicate, or conflict with, provisions
under Part C, or as necessary in order to improve coordination of Part
D benefits with the Part C program. In addition, we indicated that we
would apply our waiver authority to cost plans and PACE organizations
as proposed at Sec.  423.458(d).
    Except as otherwise provided below, the final rule adopts the
provisions related to the application of Part D rules to MA-PD plans,
as well as waivers of Part D requirements for MA-PD plans and cost
plans, set forth in Sec.  423.458(a), (b), and (d) of the proposed
rule.
    Comment: Two commenters suggested that waivers of Part D rules
related to formulary requirements and pharmacy and therapeutic (P&T)
committee requirements should not be allowed for MA-PD plans under the
waiver authority provided in section 1860D-21(c)(2) of the Act, since
there are no comparable provisions under Part C with which the Part D
rules could conflict. Another commenter believed that waivers of Part D
rules regarding coverage determinations and appeals should not be
allowed under the waiver authority provided in section 1860D-21(c)(2)
of the Act. Another commenter said that Part D appeals and grievances
requirements should be waived for MA-PD plans to the extent they are
not identical with Part C appeals and grievances requirements.
    Response: Section 1860D-21(c)(2) of the Act requires the Secretary
to waive requirements under Part D to the extent the Secretary
determines they duplicate or are in conflict with provisions otherwise
applicable under Part C, or they are necessary to waive in order to
promote coordination of Part C and Part D benefits. In our proposed
rule, we proposed implementing this authority in Sec.  423.458(b). The
clear intent of this provision was to recognize that the delivery of
health care services covered under the original Medicare program under
Part C takes precedence over the delivery of a drug benefit under Part
D. Although the Part D drug benefit will become a vital part of the
health care services offered by an MA-PD plan, to the extent that the
Part D rules make it impossible for an MA-PD plan to effectively
deliver Part C benefits, we will exercise Part D waiver authority to
ensure that Part C benefits continue to be effectively delivered under
Sec.  423.458(b) of the final rule. We agree with the commenter that
the three waivers specifically mentioned related to formulary
requirements, P&T committee requirements, and the Part D appeals
process will not be waived for MA-PD plans insofar as there are no
conflicting provisions or rules under Part C that will make these Part
D requirements impossible for an MA-PD plan to implement.
    Comment: One commenter requested two specific waivers related to
the Part D benefit offered by MA-PD plans. Specifically, the commenter
requested a waiver of the pharmacy access standards in Sec.
423.120(a)(1) of our proposed rule under similar conditions to the
waivers we have permitted for MA plans related to the Medicare
Prescription Drug Discount Card and Transitional Assistance Program.
The commenter also requested a waiver of the requirement that MA
organizations post their negotiated prices on our website, again saying
that we had approved a similar waiver for MA plans that are exclusive
card sponsors under the drug discount card program.
    Response: In our proposed rule, we signaled our intention to waive
pharmacy network access requirements described at Sec.  423.120(a)(3)
in the case of an MA-PD plan that provides access (other than through
mail order pharmacies) to qualified prescription drug coverage through
pharmacies owned and operated by the MA organization to the extent we
determine that the network is sufficient to provide comparable access
for enrollees of the MA-PD plan. In the subpart B preamble of our
proposed rule, we discussed the information resources available through
the Internet at http://www.medicare.gov. Although we discussed information

available to Medicare-approved discount drug cards in that section of
the preamble, we did not specifically signal our intention to provide
identical information related to Part D plans. Therefore, it remains
unclear that the second waiver would be necessary. More importantly, to
the extent we discuss the required written waiver process in Sec.
423.458(b)(2), (c)(1) and (d)(2) of our final rule, it is more
appropriate at this time to direct the commenter to those sections of
the rule than it is to speculate as to what waivers would, and would
not, theoretically be allowed, if they were requested by an appropriate
party.
3. Application to PACE Organizations
    Section 1860D-21(f) of the Act indicates that Part D provisions
shall apply to PACE organizations electing to offer qualified
prescription drug coverage in a manner that is similar to those of an
MA-PD local plan and that a PACE organization may be deemed to be an
MA-PD local plan. As discussed in detail in subpart T, PACE
organizations will not be deemed as MA-PD local plans, but will be
treated in a manner that is similar to MA-PD local plans for Part D
requirements applicable to the offering of qualified prescription drug
coverage. Proposed Sec.  423.458(d) established regulatory authority
for us to waive Part D provisions for PACE organizations to the extent
the provisions duplicate or conflict with a requirement under PACE, or
the waiver is necessary to promote coordination of benefits under

[[Page 4323]]

PACE and Part D, and indicates that PACE organizations may request
waivers from us.
    The final rule adopts the rules regarding waivers of Part D
requirements for PACE organizations set forth in Sec.  423.458(d) of
the proposed rule.
    Comment: We received various comments regarding waivers of Part D
requirements for PACE organizations.
    Response: Please refer to subpart T of this preamble for a detailed
discussion of these comments and our responses to them.
4. Application to Employer Groups
    Section 1860D-22(b) of the Act extends the waiver authority that is
provided for MA organizations related to Part C under section 1857(i)
of the Act and implemented at Sec.  422.106(c) of our proposed MA rule
to prescription drug plans. This waiver authority is intended to
provide employment-based retiree health coverage an opportunity to
furnish prescription drug benefits to its participants or beneficiaries
through Part D in the most efficient and effective manner possible.
    We invited comment on the process we proposed for authorizing
waivers for employer-sponsored group prescription drug plans. We also
asked for comment on the manner in which additional waivers should be
permitted and what additional waivers, if any, we should not allow.
    Except as otherwise provided below, the final rule adopts the
provisions related waivers of Part D requirements for employer-
sponsored group prescription drug plans set forth in Sec.  423.458(c)
of the proposed rule.
    Comment: Most commenters indicated a strong desir