This document is the final rule implementing the Medicare Prescription Drug Benefit established by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. It provides details on eligibility, enrollment, plan benefits and requirements, payments to drug plans, grievance and appeals processes, and other operational aspects of the new prescription drug program. The benefit will be available beginning January 1, 2006 through private prescription drug plans and Medicare Advantage plans. This landmark change will significantly improve prescription drug coverage for millions of Medicare beneficiaries.

1. Friday,
January 28, 2005
Book 2 of 2 Books
Pages 4193–4742
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
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2. 4194 Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
DEPARTMENT OF HEALTH AND offer a basic prescription drug benefit. negotiation, and approval of risk and
HUMAN SERVICES MA-PDs must offer either a basic benefit limited risk bids for PDPs and MA-PD
or broader coverage for no additional plans; the calculation of the national
Centers for Medicare & Medicaid cost. If this required level of coverage is average bid amount; determination and
Services offered, MA-PDs or PDPs, but not collection of enrollee premiums;
fallback PDPs may also offer calculation and payment of direct and
42 CFR Parts 400, 403, 411, 417, and supplemental benefits through reinsurance subsidies and risk-sharing;
423 enhanced alternative coverage for an and retroactive adjustments and
additional premium. All organizations reconciliations.)
[CMS–4068–F]
offering drug plans will have flexibility Jim Owens (410) 786–1582 (for issues
RIN 0938–AN08 in the design of the prescription drug of licensing and waiver of licensure, the
benefit. Consistent with the MMA, this assumption of financial risk for
Medicare Program; Medicare final rule also provides for subsidy unsubsidized coverage, and solvency
Prescription Drug Benefit payments to sponsors of qualified requirements for unlicensed sponsors or
AGENCY: Centers for Medicare & retiree prescription drug plans to sponsors who are not licensed in all
Medicaid Services (CMS), HHS. encourage retention of employer- States in the region in which it wants to
sponsored benefits. offer a PDP.)
ACTION: Final rule. We are implementing the drug benefit Jim Slade (410) 786–1073 (for issues
in a way that permits and encourages a related to pre-emption of State law) and
SUMMARY: This final rule implements
range of options for Medicare (for issues related to solicitation, review
the provisions of the Social Security Act
beneficiaries to augment the standard and approval of fallback prescription
(the Act) establishing and regulating the
Medicare coverage. These options drug plan proposals; fallback contract
Medicare Prescription Drug Benefit. The
include facilitating additional coverage requirements; and enrollee premiums
new voluntary prescription drug benefit
through employer plans, MA-PD plans and plan payments specific to fallback
program was enacted into law on
and high-option PDPs, and through plans.)
December 8, 2003 in section 101 of Title
charity organizations and State Christine Hinds (410) 786–4578 (for
I of the Medicare Prescription Drug,
pharmaceutical assistance programs. issues of coordination of Part D plans
Improvement, and Modernization Act of
See sections II.C, II.J, and II.P, and II.R with providers of other prescription
2003 (MMA) (Pub. L. 108–173). of this preamble for further details on drug coverage including Medicare
Although this final rule specifies most these issues. Advantage plans, State pharmaceutical
of the requirements for implementing The proposed rule identified options assistance programs (SPAPs), Medicaid,
the new prescription drug program, and alternatives to the provisions we and other retiree prescription drug
readers should note that we are also proposed and we strongly encouraged plans; also for issues related to
issuing a closely related rule that comments and ideas on our approach eligibility for and payment of subsidies
concerns Medicare Advantage and on alternatives to help us design the for assistance with premium and cost-
organizations, which, if they offer Medicare Prescription Drug Benefit sharing amounts for Part D eligible
coordinated care plans, must offer at Program to operate as effectively and individuals with lower income and
least one plan that combines medical efficiently as possible in meeting the resources; for rules for States on
coverage under Parts A and B with needs of Medicare beneficiaries. eligibility determinations for low-
prescription drug coverage. Readers DATES: These regulations are effective income subsidies and general State
should also note that separate CMS on March 22, 2005. payment provisions including the
guidance on many operational details
FOR FURTHER INFORMATION CONTACT: phased-down State contribution to drug
appears or will soon appear on the CMS
Lynn Orlosky (410) 786–9064 or Randy benefit costs assumed by Medicare).
website, such as materials on formulary Mark Smith (410) 786–8015 (for
Brauer (410)786–1618 (for issues related
review criteria, risk plan and fallback issues related to conditions necessary to
to eligibility, elections, enrollment,
plan solicitations, bid instructions, contract with Medicare as a PDP
including auto-enrollment of dual
solvency standards and pricing tools, sponsor, as well as contract
eligible beneficiaries, and creditable
plan benefit packages. requirements, intermediate sanctions,
coverage).
The addition of a prescription drug Melvin Sanders (410) 786–8355 (for termination procedures and change of
benefit to Medicare represents a issues related to marketing and user ownership requirements.)
landmark change to the Medicare fees). Jean LeMasurier (410) 786–1091 (for
program that will significantly improve Vanessa Duran (214) 767–6435 (for issues related to employer group
the health care coverage available to issues related to benefits and beneficiary waivers and options).
millions of Medicare beneficiaries. The protections, including Part D benefit Frank Szeflinski (303) 844–7119 (for
MMA specifies that the prescription packages, Part D covered drugs, issues related to cost-based HMOs and
drug benefit program will become coordination of benefits in claims CMPS offering Part D coverage.)
available to beneficiaries beginning on processing and tracking of true-out-of- John Scott (410) 786–3636 (for issues
January 1, 2006. pocket costs, pharmacy network access related to the procedures PDP sponsors
Generally, coverage for the standards, plan information must follow with regard to grievances,
prescription drug benefit will be dissemination requirements, and coverage determinations, and appeals.)
provided under private prescription privacy of records). Mark Smith (410) 786–8015 (for
drug plans (PDPs), which will offer only Craig Miner, RPh. (410) 786–1889 for issues related to solicitation, review and
prescription drug coverage, or through issues of pharmacy benefit cost and approval of fallback prescription drug
Medicare Advantage prescription drug utilization management, formulary plan proposals; fallback contract
plans (MA PDs), which will offer development, quality assurance, requirements; and enrollee premiums
prescription drug coverage that is medication therapy management, and and plan payments specific to fallback
integrated with the health care coverage electronic prescribing). plans.)
they provide to Medicare beneficiaries Mark Newsom (410) 786–3198 (for Jim Mayhew (410) 786–9244 (for
under Part C of Medicare. PDPs must issues of submission, review, issues related to the alternative retiree
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3. Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations 4195
drug subsidy and other employer-based 11. Information Provided to PDP 8. Retroactive Adjustments and
sponsor options.) sponsors and MA Organizations Reconciliation
Joanne Sinsheimer (410) 786–4620 12. Procedures to Determine and 9. Reopening
(for issues related to physician self- Document Creditable Status of 10. Payment Appeals
referral prohibitions.) Prescription Drug Coverage H. RESERVED
Brenda Hudson (410) 786–4085 (for C. Voluntary Prescription Benefits I. Organization Compliance with State
issues related to PACE organizations and Beneficiary Protections Law and Preemption by Federal
offering Part D coverage.) 1. Overview and Definitions Law.
Julie Walton (410) 786–4622 or 2. Plan Formularies 1. Overview
Kathryn McCann (410) 786–7623 (for 3. Establishment of Prescription Drug 2. Waiver of Certain Requirements in
issues related to provisions on Medicare Plan Service Areas Order to Expand Choice
supplemental (Medigap) policies.) 4. Access to Covered Part D Drugs 3. Temporary Waiver for Entities
SUPPLEMENTARY INFORMATION: Copies: To 5. Special Rules for Out-of-Network Seeking to Offer a Prescription Drug
order copies of the Federal Register Access to Covered Part D Drugs at Plan in more than One State in a
containing this document, send your Pharmacies Region
request to: New Orders, Superintendent 6. Dissemination of Plan Information 4. Solvency Standards for Non-
of Documents, P.O. Box 371954, 7. Public Disclosure of Licensed Entities
Pittsburgh, PA 15250–7954. Specify the Pharmaceutical Prices for 5. Preemption of State Laws and
date of the issue requested and enclose Equivalent Drugs Prohibition of Premium Taxes
a check or money order payable to the 8. Privacy, Confidentiality, and J. Coordination Under Part D Plans
Superintendent of Documents, or Accuracy of Enrollee Records with Other Prescription Drug
enclose your Visa or Master Card D. Cost Control and Quality Coverage
number and expiration date. Credit card Improvement Requirements for Part 1. Overview and Terminology
orders can also be placed by calling the D Plans 2. Application of Part D Rules to
order desk at (202) 512–1800 (or toll- 1. Overview (Scope) Certain Part D Plans on and after
free at 1–888–293–6498) or by faxing to 2. Drug Utilization Management, January 1, 2006
(202) 512–2250. The cost for each copy Quality Assurance, and Medication 3. Application to PACE Plans
is $10. As an alternative, you can view Therapy Management Programs 4. Application to Employer Groups
and photocopy the Federal Register (MTMPs) 5. Medicare Secondary Payer
document at most libraries designated 3. Consumer Satisfaction Surveys Procedures
as Federal Depository Libraries and at 4. Electronic Prescription Program 6. Coordination of Benefits with Other
many other public and academic 5. Quality Improvement Organizations Providers of Prescription Drug
libraries throughout the country that (QIO) Activities Coverage.
6. Treatment of Accreditation K. Application Procedures and
receive the Federal Register.
This Federal Register document is E. RESERVED Contracts with PDP Sponsors
F. Submission of Bids and Monthly 1. Overview
also available from the Federal Register
Beneficiary Premiums: Plan 2. Definitions
online database through GPO Access, a
Approval 3. Application Requirements
service of the U.S. Government Printing
1. Overview 4. Evaluation and Determination
Office. The web site address is: http://
2. Requirements for Submission of Procedures for Applications to Be
www.access.gpo.gov/fr/index.html.
Bids and Related Information Determined Qualified to Act as a
Table of Contents 3. General CMS Guidelines for Sponsor
I. Background Actuarial Valuation of Prescription 5. General Provisions
A. Medicare Prescription Drug, Drug Coverage 6. Contract Provisions
Improvement, and Modernization 4. Determining Actuarial Equivalency 7. Effective Date and Term of Contract
Act of 2003 for Variants of Standard Coverage 8. Nonrenewal of Contract
B. Codification of Regulations and for Alternative Coverage. 9. Modification or termination of
C. Organizational Overview of Part 5. Test for Assuring the Same contract by mutual consent
423 Protection against High Out-of- 10. Termination of Contracts by CMS
II. Discussion of the Provisions of the Pocket Costs 11. Termination of Contract by the
Final Rule 6. Review and Negotiation of Bid and Part D Plan Sponsor
A. General Provisions Approval of Plans 12. Minimum Enrollment
1. Overview 7. National Average Monthly Bid Requirements
2. Discussion of Important Concepts Amount 13. Reporting Requirements
and Key Definitions 8. Rules Regarding Premiums 14. Prohibition of Midyear
B. Eligibility and Enrollment 9. Collection of Monthly Beneficiary Implementation of Significant New
1. Eligibility and Enrollment Premiums Regulatory Requirements
2. Enrollment Process G. Payments to Part D Plan Sponsors 15. Fraud, Waste and Abuse
3. Enrollment of Full Benefit Dual for Qualified Prescription Drug L. Effect of Change of Ownership or
Eligible Individuals Coverage Leasing of Facilities during the
4. Disenrollment process 1. Overview Term of Contract
5. Enrollment Periods 2. Definitions 1. General Provisions
6. Effective Dates 3. General Payment Provisions 2. Change of Ownership
7. Involuntary Disenrollment by the 4. Requirement for Disclosure of 3. Novation Agreement Requirements
PDP Information M. Grievances, Coverage
8. Late Enrollment Penalty 5. Determination of Payment Determinations, and Appeals
9. Information about Part D 6. Low-Income Cost-Sharing Subsidy 1. Introduction
10. Approval of Marketing Materials Interim Payments 2. General Provisions
and Enrollment Forms 7. Risk Sharing Arrangements 3. Grievance Procedures
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4. 4196 Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
4. Coverage Determinations offering Part D coverage FQHCs Federally qualified health centers
5. Formulary Exceptions Procedures 3. PACE Organizations Offering Part D FPL Federal poverty level
6. Appeals Coverage FR FEDERAL REGISTER
7. Effectuation of Reconsideration 4. Medicare Supplemental Policies FSA Flexible savings account
Determinations FY Fiscal year
III. Provisions of the Final Rule
HEDIS Health plan Employer Data and
8. Federal Preemption of Grievances IV. Collection of Information Information Set
and Appeals Requirements HHS Department of Health and
9. Employer Sponsored Prescription V. Regulatory Impact Analysis Human Services
Drug Programs and Appeals In addition, because of the many HIC Health insurance claim
10. Miscellaneous organizations and terms to which we HIPAA Health Insurance Portability and
N. Medicare Contract Determinations refer by acronym in this final rule, we Accountability Act of 1996
and Appeals are listing these acronyms and their HMO Health maintenance organization
1. Overview corresponding terms in alphabetical HPMS Health Plan Management Sys-
2. Provisions of the Final Rule tem
order below: HRA Health reimbursement account
O. Intermediate Sanctions ABN Advanced beneficiary notice HRSA Health Resources and Services
1. Kinds of Sanctions ADAP AIDS Drug Assistance Program Administration
2. Basis for Imposing Sanctions AEP Annual coordinated election pe- HSA Health savings account
3. Procedures for Imposing Sanctions riod ICFs/MR Intermediate care facilities for
P. Premiums and Cost-Sharing AHRQ Agency for Healthcare Research the mentally retarded
Subsidies for Low-Income and Quality IDIQ Indefinite duration, indefinite
Individuals AI/AN American Indians and Alaska quantity
1. Definitions Natives IEP Initial enrollment period
2. Eligibility for the Low-Income AIC Amount in controversy IHS Indian Health Service
ALJ Administrative Law Judge IRE Independent review entity
Subsidy AMA American Medical Association I/T/U Indian Tribes and Tribal organi-
3. Eligibility Determinations, AMCP Academy of Managed Care zations, and urban Indian or-
Redeterminations and Applications Pharmacy ganizations
4. Premium Subsidy and Cost-Sharing ANCI American National Standards In- JCHACO Joint Commission on Accredita-
Subsidy stitute tion of Health Care Organiza-
5. Administration of Subsidy Program AO Accreditation organization tions
Q. Guaranteeing Access to a Choice of ASAP American Society of Automation LIS Low-income subsidy
Coverage (Fallback Prescription in Pharmacy LTC Long term care
Drug Plans) ASHP American Society of Health Sys- MA Medicare Advantage (formerly
1. Overview tems Pharmacists Medicare+Choice)
AWP Average wholesale price MA-PD Medicare Advantage prescription
2. Terminology BBA Balanced Budget Act drug plans
3. Assuring Access to a Choice of BLS Bureau of Labor Statistics MAC Medicare Appeals Council
Coverage CAHP Consumer Assessment of Health MAX Medicaid Analytic extract
4. Submission and Approval of Bids Plan MCBS Medicare Current Beneficiary
5. Rules Regarding Premiums CBI Confidential business information Survey
6. Contract Terms and Conditions CBO Congressional Budget Office MMA Medicare Prescription Drug, Im-
7. Payment to Fallback Plans CCIP Chronic care improvement pro- provement, and Modernization
R. Payments to Sponsors of Retiree grams Act of 2003
Prescription Drug Plans CCP Comprehensive Compliance Pro- MSA Medicare savings account
1. Introduction gram MSIS Medicaid Statistical Information
CFR Code of Federal Regulations System
2. Options for Sponsors of Retiree
CHOW Change of ownership MSP Medicare Secondary Payor
Prescription Drug Programs CMP competitive medical plan MTMP Medication Therapy Manage-
3. Definitions CMS Centers for Medicare & Medicaid ment Program
4. Requirements for qualified retiree Services NAIC National Association of Insur-
prescription drug plans COB Coordination of benefit ance Commissioners
5. Retiree drug subsidy amounts COBRA Consolidated Omnibus Budget NCQA National Committee for Quality
6. Appeals Reconciliation Act (of 1985) Assurance
7. Change of Ownership CPI-PD Consumer Price Index for Pre- NCPDP National Council for Prescription
8. Construction scription Drugs and Medical Drug Programs
S. Special Rules for States-Eligibility Supplies NCVHS National Center for Vital and
Determinations for Low-Income CPT Current Procedural Terminology Health Statistics
CY Calendar year NDC National Drug Code
Subsidies, and General Payment DAB Departmental Appeals Board NHE National Health Expenditure
Provisions DHS Designated health services NPA National PACE Association
1. Eligibility Determinations DME Durable medical equipment NPI National Provider Identifier
2. General Payment Provisions DoD Department of Defense OACT Office of the Actuary (CMS)
3. Treatment of Territories DOL Department of Labor OBRA Omnibus Budget Reconciliation
4. State Contribution to Drug Benefit DUR Drug utilization review Act
Costs Assumed by Medicare EOB explanation of benefits OCR Office for Civil Rights
T. Part D Provisions Affecting ERISA Employee Retirement Income OEPI Open enrollment period for insti-
Physician Self-Referral, Cost-Based Security Act of 1974 tutionalized individuals
ESRD End stage renal disease OIG Office of the Inspector General
HMO, PACE, and Medigap
FAR Federal Acquisition Regulation OPM Office of Personnel Management
Requirements FDA Food and Drug Administration P&T Pharmaceutical and therapeutic
1. Definition of Outpatient FEHBP Federal Employee Health Bene- PBA Pharmacy benefit administrator
Prescription Drugs for Purposes of fits Program PBMs Pharmacy benefit managers
Physician Self-Referral Prohibition FFP Federal financial participation PBP Plan Benefit Package
2. Cost-Based HMOs and CMPS FOIA Freedom of Information Act PDP Private prescription drug plan
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5. Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations 4197
PDSC Phased-down State contribution health care delivery system, and the 1860D–3 Access to a choice of quali-
PFFS Private fee-for-service plan need to modernize Medicare to assure fied prescription drug cov-
PHI Protected health information their availability to Medicare erage.
PhRMA Pharmaceutical Manufacturers 1860D–4 Beneficiary protections for
beneficiaries. This final rule is designed
and Researchers of America qualified prescription drug
PPO Preferred provider organization to broaden participation in the new coverage.
PPV Pharmaceutical Prime Vendor benefit both by organizations that offer 1860D–11 PDP regions; submission of
PSO Provider-sponsored organization prescription drug coverage and by bids; plan approval.
QDWIs Qualified disabled and working eligible beneficiaries. In conjunction 1860D–12 Requirements for and con-
individuals with complementary improvements to tracts with prescription drug
QIl Qualified individuals the Medicare Advantage program, these plan (PDP) sponsors.
QIO Quality Improvement Organiza- changes should significantly increase 1860D–13 Premiums; late enrollment
tion penalty.
QMB Qualified Medicare beneficiaries the coverage and choices available to
1860D–14 Premium and cost-sharing
REACH Regional Education About Medicare beneficiaries. subsidies for low-income in-
Choices in Health Effective January 1, 2006, the new dividuals.
RHC Rural Health Center program establishes an optional 1860D–15 Subsidies for Part D eligible
SCHIP State Children’s Health Insur- individuals for qualified pre-
prescription drug benefit for individuals
ance Program scription drug coverage.
SEP Special enrollment period who are entitled to or enrolled in
1860D–16 Medicare Prescription Drug
SHIP State health insurance assist- Medicare benefits under Part A and Part Account in the Federal
ance program B. Beneficiaries who qualify for both Supplementary Medical In-
SLMB Special Low-Income Bene- Medicare and Medicaid (full-benefit surance Trust Fund.
ficiaries dual eligibles) will automatically 1860D–21 Application to Medicare Ad-
SOW Scope of work receive the Medicare drug benefit unless vantage program and re-
SPAP State Pharmaceutical Assistance Medicare has identified the individual lated managed care pro-
Program grams.
SPD Summary Plan Description
as having other creditable coverage
through an employer-based prescription 1860D–22 Special rules for employer-
SPOC Single point of contact sponsored programs.
SSA Social Security Administration drug plan. The statute also provides for 1860D–23 State pharmaceutical assist-
SSI Supplemental Security Income assistance with premiums and cost ance programs.
SSRI Selective serotonin reuptake in- sharing to eligible low-income 1860D–24 Coordination requirements for
hibitor beneficiaries. plans providing prescription
SSSGs Similarly Sized Subscriber drug coverage.
Groups In general, coverage for the new
1860D–41 Definitions; treatment of ref-
TANF Temporary assistance for needy prescription drug benefit will be
erences to provisions in
families provided through private prescription Part C.
TrOOP True out-of-pocket drug plans (PDPs) that offer drug-only 1860D–42 Miscellaneous provisions.
U&C Usual and customary coverage, or through Medicare Specific sections of the MMA
URAC Utilization Review Accreditation Advantage (MA) (formerly known as that also relate to the pre-
Commission Medicare+Choice) plans that offer scription drug benefit pro-
USP U.S. Pharmacopoeia integrated prescription drug and health gram are the following:
VA Department of Veterans Affairs Sec. 102 Medicare Advantage Con-
VDSA Voluntary data sharing agree- care coverage (MA-PD plans). PDPs
must offer a basic drug benefit. MA-PDs forming Amendments
ment Sec. 103 Medicaid Amendments
must offer either a basic benefit, or a Sec. 104 Medigap
I. Background benefit with broader coverage than the Sec. 109 Expanding the work of Medi-
A. Medicare Prescription Drug, basic benefit, but at no additional cost care Quality Improvement
Improvement, and Modernization Act of to the beneficiary. If this required level Organizations to include
2003 of coverage is offered, MA-PDs or PDPs, Parts C and D.
but not fallback plans, may also offer
Section 101 of the Medicare B. Codification of Regulations
supplemental benefits, called
Prescription Drug, Improvement, and ‘‘enhanced alternative coverage,’’ for an The final provisions set forth here are
Modernization Act of 2003 (MMA) (Pub. additional premium. codified in 42 CFR Part 423–Voluntary
L. 108–173) amended Title XVIII of the Medicare Prescription Drug Benefit.
Social Security Act (the Act) by All organizations offering drug plans
Note that the regulations—
establishing a new Part D: the Voluntary will have flexibility in terms of benefit • for Medicare supplemental
Prescription Drug Benefit Program. (For design, including the authority to policies (Medigap) will continue to be
ease of reference, we will refer to the establish a formulary to designate located in 42 CFR part 403 (subpart B);
new prescription drug benefit program specific drugs that will be available, and • for exclusions from Medicare and
as Part D of Medicare and we will refer the ability to have a cost-sharing limitations on Medicare payment (the
to the Medicare Advantage Program structure other than the statutorily- physician self-referral rules) will
described in Part C of title XVIII of the defined structure, subject to certain continue to be located in 42 CFR part
Act -as Part C of Medicare.) actuarial tests. Most Part D plans also 411;
We believe that the new Part D benefit may include supplemental drug • for managed care organizations
constitutes the most significant change coverage such that the total value of the that contract with us under cost
to the Medicare program since its coverage offered exceeds the value of contracts will continue to be located in
inception in 1965. The addition of basic prescription drug coverage. The 42 CFR part 417, Health Maintenance
outpatient prescription drugs to the specific sections of the Act that address Organizations, Competitive Medical
Medicare program reflects the Congress’ the prescription drug benefit program Plans, and Health Care Prepayment
recognition of the fundamental change are the following: Plans;
in recent years in how medical care is 1860D–1 Eligibility, enrollment, and in- • for PACE organizations will
delivered in the U.S. It recognizes the formation. continue to be located in 42 CFR part
vital role of prescription drugs in our 1860D–2 Prescription drug benefits. 460.
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6. 4198 Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
C. Organizational Overview of Part 423 procedures for determining whether a procedures for termination of contracts;
The regulations set forth in this final beneficiary’s Part D out-of-pocket costs reporting by PDP sponsors.
rule are codified in the new 42 CFR Part are actually reimbursed by insurance or Subpart L, Effect of Change of
423–Voluntary Medicare Prescription another third-party arrangement are Ownership or Leasing of Facilities
Drug Benefit. There are a number of discussed in subpart J. Information that during Term of Contract: Change of
places in which statutory provisions in plans must disseminate to beneficiaries ownership of a PDP sponsor; novation
Part D incorporate by reference specific is discussed in subpart C, while Part D agreements; leasing of a PDP sponsor’s
sections in Part C of Medicare (the MA information that CMS must disseminate facilities.
to beneficiaries is discussed in subpart Subpart M, Grievances, Coverage
program). The MA regulations appear at
B.) Determinations and Appeals: Coverage
42 CFR Part 422. Since the same
Subpart D, Cost Control and Quality determinations by sponsors, exceptions
organizations that offer MA coordinated
Improvement Requirements for Part D procedures, and all levels of appeals by
care plans will also be required to offer
Plans: Utilization controls, quality beneficiaries.
MA-PD plans, we believed it was Subpart N, Medicare Contract
appropriate to adopt the same assurance, and medication therapy
management, as well as rules related to Determinations and Appeals:
organizational structure as part 422. Notification by CMS about unfavorable
Wherever possible, we modeled the identifying enrollees for whom
medication therapy management is contracting decisions, such as
prescription drug regulations on the nonrenewals or terminations;
parallel provisions of the part 422 appropriate, consumer satisfaction
surveys, and accreditation as a basis for reconsiderations; appeals.
regulations. Subpart O, Sanctions: Provisions
The major subjects covered in each deeming compliance.
Subpart E, Reserved. concerning available sanctions for
subpart of part 423 are as follows: participating organizations.
Subpart A, General Provisions: Basis Subpart F, Submission of Bids and
Monthly Beneficiary Premiums; Plan Subpart P, Premiums and Cost-
and scope of the new part 423, Sharing Subsidies for Low-Income
Definitions and discussion of important Approval: Bid submission, the actuarial
value of bid components, review and Individuals: Eligibility determinations
concepts used throughout part 423, and and payment calculations for low-
sponsor cost-sharing in beneficiary approval of plans, and the calculation
and collection of Part D premiums. income subsidies.
education and enrollment-related costs Subpart Q, Guaranteeing Access to a
(user fees). Subpart G, Payments to Part D plans
Choice of Coverage (Fallback Plans):
Subpart B, Eligibility, Election, and for Qualified Prescription Drug
Definitions, access requirements,
Enrollment: Eligibility for enrollment in Coverage: Data submission, payments
bidding process, and contract
the Part D benefit, enrollment periods, and reconciliations for direct subsidies,
requirements for fallback PDPs.
disenrollment, application of the late risk adjustment, reinsurance, and risk- Subpart R, Payments to Sponsors of
enrollment penalty, approval of sharing arrangements. Retiree Prescription Drug Plans:
marketing materials and enrollment Subpart H, Reserved. Provisions for making retiree drug
forms, and the meaning and Subpart I, Organization Compliance subsidy payments to sponsors of
documentation of creditable coverage. with State Law and Preemption by qualified retiree prescription drug plans.
(Please note that other, related topics, Federal Law: Licensure, assumption of Subpart S, Special Rules for States—
are discussed in the following subparts: financial risk, solvency, and State Eligibility Determinations for Subsidies
Subpart P, eligibility and enrollment for premium taxes. and General Payment Provisions: State/
low-income individuals; Subpart S, Subpart J, Coordination Under Part D Medicaid program’s role in determining
provisions relating to the phase-down of With Other Prescription Drug Coverage: eligibility for low-income subsidy and
State contributions for dual-eligible Applicability of Part D rules to the other issues related to the Part D benefit.
drug expenditures; Subpart F, Medicare Advantage program, waivers In addition, in subpart T, this final
calculation and collection of late available to facilitate the offering of rule also makes changes to: part 400
enrollment fees; Subpart C, plan employer group plans, waivers of part D relating to definitions of Parts C & D,
disclosure; Subpart Q, eligibility and provisions for PACE plans and 1876 part 403 relating to Medicare
enrollment for fallback plans; and cost plans offering qualified supplemental policies (Medigap), part
Subpart T, the definition of a Medicare prescription drug coverage, and 411 relating to exclusions from
supplemental (Medigap) policy.) procedures to facilitate calculation of Medicare and limitations on Medicare
Subpart C, Benefits and Beneficiary true out-of-pocket (TrOOP) expenses payment (the physician self-referral
Protections: Prescription drug benefit and coordination of benefits with State rules), part 417 relating to cost-based
coverage, service areas, network and pharmaceutical assistance programs and health maintenance organizations
out-of-network access, formulary other entities that provide prescription (HMOs), and part 460 relating to PACE
requirements, dissemination of plan drug coverage. (Please note that subpart organizations.
information to beneficiaries, and C discusses, in more detail,
confidentiality of enrollee records. coordination of benefits from the II. Provisions of the Proposed Rule
(Please note that actuarial valuation of perspective of which prescription drug We received 7,696 items of
the coverage offered by plans, as well as benefits are covered by Part D and the correspondence containing comments
the submission of the bid, is discussed determination of which incurred on the August 2004 proposed rule.
in subpart F. Access to negotiated prices beneficiary costs will be counted as Commenters included managed care
is discussed in subpart C, while the TrOOP expenditures. Provisions relating organizations and other insurance
reporting of negotiated prices is to disenrollment for material industry representatives, pharmacy
discussed in subpart G. Formularies are misrepresentation by a beneficiary are benefit management firms, pharmacies
discussed in subpart C, while appeals discussed in subpart B.) and pharmacy education and practice-
related to formularies are discussed in Subpart K, Application Procedures related organizations, pharmaceutical
subpart M. Incurred costs toward true and Contracts with PDP Sponsors: manufacturers, representatives of
out-of-pocket (TrOOP expenditures) are Application procedures and physicians and other health care
discussed in subpart C, while the requirements; contract terms; professionals, beneficiary advocacy
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7. Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations 4199
groups, representatives of hospitals and certain key decisions and data sooner The concept of actuarial equivalence
other healthcare providers, States, than January in order to promote is applied in several different contexts
employers and benefits consulting planning. in Title I of the MMA. In very general
firms, members of the Congress, Indian Response: We agree that the earliest terms, actuarial equivalence refers to a
Health Service, Tribal and Urban Health possible release of program determination that, in the aggregate, the
Programs, American Indians and Alaska requirements and final rules will dollar value of drug coverage for a set
Natives, beneficiaries, and others. We facilitate planning and implementation of beneficiaries under one plan can be
also received many comments of new business processes required to shown to be equal to the dollar value for
expressing concerns unrelated to the offer and administer this new program. those same beneficiaries under another
proposed rule. Some commenters Consequently we have made numerous plan. Given the various uses for this
expressed concerns about Medicare draft documents, such as the risk plan term in the Part D provisions, we
unrelated to the Prescription Drug solicitation, PDP solvency requirements, proposed the following relatively
Benefit, while others addressed formulary review policies, and the general definition: ‘‘Actuarial
concerns about health care and health actuarial bidding instructions, available equivalence’’ means a state of
insurance coverage unrelated to for public comment in November and equivalent values demonstrated through
Medicare. Because of the volume of December of 2004 and have expedited the use of generally accepted actuarial
comments we received in response to the rulemaking process to meet these principles and in accordance with
the proposed rule, we will be unable to goals. In response to the lack of section 1860D–11(c) of the Act and
address comments and concerns that are specificity regarding the PDP regions in § 423.265(c)(3) of this part. This concept
unrelated to the proposed rule. our proposed rule, we conducted is discussed in further detail in those
Most of the comments addressed extensive outreach in order to obtain sections of this preamble, such as
multiple issues, often in great detail. public input prior to the publication of section II.F, where actuarial equivalence
Listed below are the areas of the our final rule. On December 6, 2004, we comes into play. We will provide
regulation that received the most announced the establishment of 26 MA further detailed guidance on methods
comments: regions and 34 PDP regions. required to demonstrate actuarial
• Transition of Coverage for Dual equivalence.
Eligibles from Medicaid to Medicare 2. Discussion of Important Concepts and Comment: One commenter requested
• Access to Drugs in Long Term Care Key Definitions (§ 423.4) that the definition of actuarial
Facilities a. Introduction equivalence be refined through
• Formulary Policies For the most part, the proposed examples or more descriptive language.
• Medication Therapy Management definitions were taken directly from Response: We agree that it is critical
Requirements section 1860D–41 of the Act. The to disclose our requirements for
• Network Access Standards definitions set forth in subpart A apply calculation of actuarial values under
• Part B/Part D Drug Identification to all of part 423 unless otherwise Part D requirements as fully and as
and Coordination indicated, and are applicable only for expeditiously as possible to reduce
• Dispensing Fees the purposes of part 423. For example, uncertainty on the part of potential plan
In this final rule, we address ‘‘insurance risk’’ applies only to sponsors. To that end we made available
comments received on the proposed pharmacies that contract with PDP our draft bid preparation rules and
rule. For the most part, we will address sponsors under part 423. processes early in December 2004 for
issues according to the numerical order public comment, and we will continue
Definitions that have a more limited
of the related regulation sections. to refine our guidance to bidders
application have not been included in
through vehicles such as the annual 45-
A. General Provisions subpart A, but instead are set forth
day notice and the CMS website. We
within the relevant subpart of the
1. Overview have modified our definition to refer to
regulations. For example, in subpart F,
this separate guidance.
Section 423.1 of subpart A specified we have included all the definitions • Discussion of the Meaning of
the general statutory authority for the related to bids and premiums. The Creditable Prescription Drug Coverage
ensuing regulations and indicated that detailed definitions and requirements Comments on creditable coverage are
the scope of part 423 is to establish related to prescription drug coverage are addressed in the preamble for subparts
requirements for the Medicare included in subpart C, but because of B and T.
prescription drug benefit program. We their direct relevance to the bidding • Prescription Drug Plan Regions
proposed key definitions at § 423.4 for process they are also referenced in Prescription drug plan regions are
terms that appear in multiple sections of subpart F. areas in which a contracting PDP
part 423. Following our discussion of important sponsor must provide access to covered
Consistent with the MMA statute, in concepts, we provide brief definitions of Part D drugs. Although we included
many cases we proposed procedures terms that occur in multiple sections of specifications for regions in § 423.112,
that parallel those in effect under the this preamble and part 423. We believe the regions themselves were not set
MA program. Our goal was to maintain that it is helpful to define these forth in the proposed rule. To the extent
consistency between these two frequently occurring terms to aid the feasible, we tried to establish PDP
programs wherever possible; thus we reader, but that these terms do not regions that were consistent with MA
evaluated the need for parallel changes require the extended discussion regions. The MMA specifically required
in the MA final rule when we received necessary in our section on important no fewer than 10 regions and no more
comments on provisions that affect both concepts. than 50 regions, not including the
programs. b. Discussion of Actuarial Equivalence, territories. For a further discussion of
Comment: Many commenters urged Creditable Prescription Drug Coverage, the PDP regions, see section II.C of this
us to finalize regulations by early PDP Plan Regions, Service Area, and preamble.
January—and detailed business User Fees Comment: Many commenters
requirements soon thereafter. Some also • Discussion of the Meaning of expressed concerns about the MA and
recommended that we make public Actuarial Equivalence PDP region decisions. Many argued that
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8. 4200 Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations
regions should closely mirror existing individuals accordingly would not be beneficiaries), as well as
State insurance markets to maximize assessed a late penalty when they enroll telecommunications equipment to
participation. Others representing rural in Part D (either with a PDP or MA-PD support beneficiaries with hearing
constituencies argued for larger regions plan) upon being released. The same impairments, in order to meet the
to encourage offering of coverage in analysis applies with regard to a various needs of Medicare beneficiaries
rural areas. beneficiary who lives abroad, and does with disabilities. Another commenter
Response: We conducted a market not reside within the boundaries of any urged us to focus beneficiary education
survey and analysis, including an PDP Region or MA-PD Service Area. We efforts on helping beneficiaries make a
examination of current insurance have modified our definition of service choice, as opposed to simply describing
markets as required in the MMA. Key area to clarify our intent as proposed. the array of choices. This commenter
factors in the survey and analysis Comment: Several commenters asked also urged us not to overlook the M+C
included payment rates; eligible that we waive the service area population in its outreach campaign.
population size per region; preferred requirement for employer group PDP Response: We have a long-standing
provider organization (PPO) market plans. tradition of making our beneficiary
penetration; current existence of PPOs, Response: We agree that we have the education materials accessible in a
MA plans, or other commercial plans; authority to waive the service area variety of formats to meet the needs of
and presence of PPO providers and requirement for employer-sponsored people with disabilities and special
primary care providers. Additional group prescription drug plans, and we communications barriers. Beneficiary
factors were also considered, including plan to do so in appropriate cases. We publications on a variety of topics are
solvency and licensing requirements, as will provide further details on waivers available in Braille, large print, and
well as capacity issues. Recognizing the in separate CMS guidance. audiotape versions, in addition to
lack of specificity regarding the PDP • Sponsor Cost-Sharing in Beneficiary conventional formats. We expect to
regions in our proposed rule, we Education and Enrollment Related continue these practices when
conducted extensive outreach in order Costs-User Fees (§ 423.6) educating beneficiaries about MMA
to obtain public input prior to the The last section of subpart A topics. In addition, we are finalizing a
publication of our final decision. On proposed regulations implementing the partnership with the Social Security
December 6, 2004, we announced the user fees provided for in section Administration (SSA) that will allow
establishment of 26 MA regions and 34 1857(e)(2) of the Act, as incorporated by some of our educational products to be
PDP regions. For maps and fact sheets section 1860D–12(b)(3)(D) of the Act. translated into 14 languages (other than
on the regions, please see http:// These fees are currently required of MA English and Spanish) and reach a
www.cms.hhs.gov/medicarereform/ plans for the purpose of defraying part broader audience.
mmaregions/. of the ongoing costs of the national We are currently planning the
• Service Area beneficiary education campaign that development of a range of tools and
In the proposed rule we proposed that includes developing and disseminating strategies that will help beneficiaries
Medicare beneficiaries would be eligible print materials, the 1–800–MEDICARE make a choice that meets their needs.
to enroll in a PDP or an MA-PD plan telephone line, community based We agree that this action is an essential
only if they reside in the PDP’s or MA- outreach to support State health part of our education process, in
PD plan’s ‘‘Service Area.’’ For PDPs the insurance assistance programs (SHIPs), addition to building general awareness
service area is defined as the region or and other enrollment and information and understanding. We will address the
regions for which they must provide activities required under section 1851 of needs of multiple audiences through our
access. This is the Region established by the Act and counseling assistance under outreach and education efforts,
CMS either pursuant to proposed section 4360 of the Omnibus Budget including those with M+C (MA) plans.
§ 423.112, or, in the case of fallback Reconciliation Act of 1990 (Pub. L. 103– c. Definitions of Frequently Occurring
plans, the fallback service area pursuant 66). Terms
to § 423.859, within which the PDP is The MMA expands the user fee to The following definitions were
responsible for providing access to the apply to PDP sponsors as well as MA discussed in the preamble to our
Part D drug benefit in accordance with plans. The expansion of the application proposed rule:
the access standards in proposed of user fees recognizes the increased Full-benefit dual eligible beneficiary
§ 423.120. Under the MA program, an Medicare beneficiary education means an individual who meets the
MA plan’s service area is defined in activities that we would require as part criteria established in § 423.772
§ 422.2. For coordinated care plans, the of the new prescription drug benefit. In (Subpart P), regarding coverage under
definition of ‘‘service area’’ expressly 2006 and beyond, user fees will help to both Part D and Medicaid.
includes the condition that the service offset the costs of educating over 41 Comment: One commenter asked us
area is an area in which access is million beneficiaries about the drug to clarify whether individuals eligible
provided in accordance with access benefit through written materials such for Medicaid at the special income level
standards in § 422.112. as a publication describing the drug for long term care qualify as full benefit
We also proposed that for purposes of benefit, internet sites, and other media. dual eligibles for a full subsidy.
enrolling in Part D with a PDP, or under The user fee provisions establish the Response: Yes, all individuals who
an MA-PD plan, the definition of applicable aggregate contribution qualify for Medicaid, including
Service Area that governs eligibility to portions for PDP sponsors and MA expansion populations and persons
enroll is the area within which the Part organizations through two calculations. eligible for Medicaid in long term care
D access standards under § 423.120 are Comment: Several commenters facilities under a State’s special income
met. Beneficiaries in jail or prison do supported the extension of user fees to standard which does not exceed 300
not have access to pharmacies available PDP sponsors in addition to MA plans. percent of the supplemental security
as required under § 423.120. Therefore, One commenter emphasized the need income (SSI) payment standard will
such beneficiaries would not be for Medicare to provide national qualify as full benefit dual eligible
considered to be in a PDP or MA-PD beneficiary educational materials in beneficiaries eligible for a full subsidy.
plan’s Service Area for purposes of accessible formats (including Braille Insurance risk means, for a
enrolling in Part D. Incarcerated and other languages commonly used by participating pharmacy, risk of the type
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9. Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules and Regulations 4201
commonly assumed only by insurers standardized the terms ‘Part D plan’ and Inspector General’s responsibilities
licensed by a State and does not include ‘Part D plan sponsor’ when referring to under Federal law.’’
payment variations designed to reflect all plans and sponsors in general. e. ERISA application and requirements
performance-based measures of Consequently we have relocated these The rules contained in this
activities within the control of the terms from subpart C to this subpart and rulemaking apply for purposes of Title
pharmacy, such as formulary clarified that references to ‘‘Part D I of the MMA and no inference should
compliance and generic drug plans’’ in the final rule refer to any or be drawn from anything in this rule
substitutions, nor does it include all of MA-PD plans, PDPs, PACE plans regarding the applicability of title I of
elements potentially in the control of and cost plans. Likewise, the term ‘‘Part ERISA. In addition, nothing in this
the pharmacy (for example, labor costs D plan sponsor’’ refers to MA rulemaking should be construed as
or productivity). organizations offering MA-PD plans, relieving a plan administrator or other
Comment: Several commenters PDP sponsors, and sponsors of PACE fiduciary of obligations under title I of
supported our definition of ‘insurance plans and cost plans. ERISA.
risk’, including the exclusion of Comment: Several commenters asked
performance-based compensation as this that we be flexible in its definition of a B. Eligibility and Enrollment
is not commonly viewed as insurance non-governmental entity to allow either We outlined the eligibility and
risk. the creation of State-sponsored entities enrollment requirements for Part D
Response: We will adopt the as PDPs or the selection of a preferred plans in subpart B of the August 2004
definition as proposed. PDP entity for Medicaid dual eligible proposed rule. We received over 100
MA means Medicare Advantage, and SPAP populations. comments on this subpart. Below we
which refers to the program authorized Response: While we understand and
summarize the provisions of the
under Part C of Title XVIII of the Act. support the goals of minimizing client
proposed rule and our final rule and
MA-PD plan means an MA plan that confusion and facilitating continuity of
respond to public comments. (Please
provides qualified prescription drug care, we believe the requirements
refer to the proposed rule (69 FR 46637)
coverage. imposed by sections 1860D–41(13) and
for a detailed discussion of our
Medicare prescription drug account 1860D–23(b)(2) of the Act do not allow
proposals.)
means the account created within the us to approve State-sponsored PDPs or
Federal Supplementary Medical the selection of preferred PDPs for State 1. Eligibility for Part D (§ 423.30)
Insurance Trust Fund for purposes of populations. We would note, however,
Section 101 of the MMA established
Medicare Part D. that we believe we can waive the non-
Part D eligible individual means an governmental requirement in section section 1860D–1 of the Act, which
individual who is entitled to Medicare 1860D–41(23) of the Act under the includes the eligibility criteria an
benefits under Part A or enrolled in employer waiver authority for States individual must meet in order to obtain
Medicare Part B. For purposes of this that seek to sponsor Part D plans on prescription drug coverage and enroll in
part, enrolled under Part B means behalf of their employees. This is a Part D plan. Section 1860D–1(a)(3)(A)
‘‘entitled to receive benefits’’ under Part discussed in more detail in subpart J of of the Act defines a ‘‘Part D eligible
B. this rule. individual’’ as an individual who is
Prescription drug plan or PDP means d. Financial Relationships between PDP entitled to Medicare benefits under Part
prescription drug coverage that is Sponsors, Health Care Professionals and A or enrolled in Part B. Further, in order
offered under a policy, contract, or plan Pharmaceutical Manufacturers to be eligible to enroll in a PDP plan,
that has been approved as specified in The financial relationships that exist § 423.30(a) of the proposed rule
§ 423.272 and that is offered by a PDP between or among PDP sponsors, health provided that the individual must reside
sponsor that has a contract with CMS care professionals (including physicians in the plan’s service area, and cannot be
that meets the contract requirements and pharmacists), or pharmaceutical enrolled in an MA plan, other than a
under subpart K or in the case of manufacturers may be subject to the Medicare savings account (MSA) plan or
fallback PDPs also under subpart Q. anti-kickback statute and, if the private fee-for-service (PFFS) plan that
PDP region means a prescription drug relationship involves a physician, the does not provide qualified prescription
plan region as determined by CMS physician self-referral statute. Nothing drug coverage. In addition, § 423.4 of
under § 423.112. in this regulation should be construed the proposed rule provided the
PDP sponsor means a as implying that financial relationships definition of service area, which
nongovernmental entity that is certified described in this final rule meet the describes that for purposes of eligibility
under this part as meeting the requirements of the anti-kickback to enroll to receive Part D benefits,
requirements and standards of this part statute or physician self-referral statute certain access standards must be met,
for that sponsor. or any other applicable Federal or State hence, making certain individuals
Comment: Several commenters noted law or regulation. All such relationships ineligible to enroll.
that the terms PDP sponsor and MA must comply with applicable laws. Generally, a Part D eligible individual
organization offering an MA-PD plan In addition to the provisions in these enrolled in an MA plan that does not
were not consistently used in the regulation, under section 6(a)(1) of the provide qualified prescription drug
proposed rule to represent distinct and Inspector General Act of 1978, as coverage (that is, an MA plan) may not
mutually exclusive entities. As a result amended, OIG has access to all records, enroll in a PDP. There are, however,
the proposed rule was not always clear reports, audits, reviews, documents, exceptions under sections 1860D–
regarding when requirements or options papers and other materials to which the 1(a)(1)(B)(iii) and (iv) of the Act for
applied only to one or the other entity, Department has access that relate to individuals who are enrolled in either
or both. programs and operations for which the an MA private fee-for-service plan (as
Response: We acknowledge that the Inspector General has responsibilities defined in section 1859(b)(2) of the Act)
terminology regarding sponsors and under the Inspector General Act. The that does not provide qualified
plans was inconsistently applied. We provisions in these regulations do not prescription drug coverage or an MSA
have revised the language in the final limit the Office of the Inspector plan (as defined in section 1859(b)(3) of
rule accordingly and have also General’s (OIG) authority to fulfill the the Act). We provided for these
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