[Federal Register Volume 64, Number 245 (Wednesday, December 22, 1999)]
[Rules and Regulations]
[Pages 71673-71678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32939]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
42 CFR Part 422
[HCFA-1011-F]
RIN 0938-AI83
Medicare Program; Solvency Standards for Provider-Sponsored
Organizations
AGENCY: Health Care Financing Administration (HCFA), HHS.
ACTION: Final rule.
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SUMMARY: The Balanced Budget Act of 1997 established a new
Medicare+Choice (M+C) program that offers eligible individuals Medicare
benefits through enrollment in one of an array of private health plans
that contract with us. Among the new options available to Medicare
beneficiaries is enrollment in a provider-sponsored organization (PSO).
This final rule revises and responds to comments on solvency standards
that certain entities must meet to contract as PSOs under the new M+C
program. These standards, originally established in an interim final
rule published on May 7, 1998, apply to PSOs that have received a
waiver of the requirement that M+C organizations must be licensed by a
State as risk-bearing entities.
DATES: Effective date: These regulations are effective on January 21,
2000.
FOR FURTHER INFORMATION CONTACT: Marty Abeln, (410) 786-1032.
SUPPLEMENTARY INFORMATION:
I. Background--Balanced Budget Act of 1997 and the Medicare+Choice
Program
Section 4001 of the Balanced Budget Act (BBA) (Public Law 105-33),
enacted August 5, 1997, added a new Part C (sections 1851 through 1859)
to title XVIII of the Social Security Act (the Act), establishing the
``Medicare+Choice'' (M+C) program. Under Part C, M+C eligible
individuals (generally individuals with both Part A and Part B coverage
who do not have End Stage Renal Disease (ESRD) may elect to receive
their Medicare benefits through private health plans (M+C
organizations) that choose to contract with HCFA. M+C organizations may
offer one or more M+C plans of one of three types. Under ``coordinated
care plans,'' beneficiaries receive benefits through a network of
providers, as in the case of an health maintenance organization (HMO)
or preferred provider organization (P.O.). A ``provider sponsored
organization'' (PSO), which is owned by providers through which it
provides benefits, and which is the subject of this final rule,
necessarily offers a coordinated care plan. (See section 1851(a)(2)(A)
of the Act). Other M+C plan options provided for in Part C, but not yet
offered by any M+C organization, are private-fee-for service plans and
medical savings account (MSA) plans (that is, a combination of a high
deductible, catastrophic insurance plan with a contribution to an M+C
MSA account). Interim final regulations for the overall implementation
of the M+C program were published in the Federal Register on June 26,
1998 (63 FR 34968) and are set forth in part 422 of title 42 of the
Code of Federal Regulations (CFR). Provisions enacted by the BBA and
implemented in the interim final M+C regulations establish broad and
comprehensive requirements for contracting as an M+C organization,
including basic benefits, payment, access to service, quality
assurance, beneficiary hold harmless, continuation of benefits, appeals
mechanisms, marketing, and enrollment processes. These overall M+C
regulations apply to M+C organizations that are PSOs.
A PSO is described in section 1855(d) of the Act as a public or
private entity--
That is established or organized, and operated, by a
health care provider or group of affiliated health care providers;
That provides a substantial proportion of the health care
items and services directly through the provider or affiliated group of
providers; and
With respect to which the affiliated providers share,
directly or indirectly, substantial financial risk for the provision of
these items and services and have at least a majority financial
interest in the entity.
On April 14, 1998, we published an interim final rule in the
Federal Register at 63 FR 18124, titled ``Definition of Provider-
Sponsored Organization and Related Requirements'' with an opportunity
for public comment setting out the PSO definition, clarifying certain
terms, and establishing related requirements. This PSO definitions rule
established 42 CFR part 422 and subpart H of that part, dealing with
PSOs. The terms and requirements related to the definition of a PSO are
now found at Secs. 422.350 through 422.356. On May 7, 1998, we
published an interim final rule in the Federal Register at 63 FR 25360
titled ``Waiver Requirements and Solvency Standards for Provider
Sponsored Organizations,'' establishing solvency requirements that
apply to PSOs that obtain a waiver of the M+C State licensure
requirement and setting forth procedures and standards that apply to
requests for the waivers. The solvency portion of the interim final PSO
regulation was based on the work of the PSO negotiated rulemaking
committee, as required at section 1856(a) of the Act, which provides
that the Secretary establish through a negotiated rulemaking process
the solvency standards that entities will be required to meet if they
obtain a waiver of the otherwise applicable requirement that
[[Page 71674]]
they be licensed by a State. The results of the PSO solvency negotiated
rulemaking committee are described in the preamble to the interim final
regulation published on May 7, 1998 (63 FR 25360).
In this final rule, we focus solely on the solvency standards that
will apply to PSOs that have obtained a waiver. Other PSO provisions
will be addressed in the upcoming overall final M+C regulation. We note
that based on Secs. 422.352(a) and 422.380, State-licensed
organizations that meet the PSO definition (see Secs. 422.350 through
422.356) may qualify for the minimum enrollment standards established
under section 1857(b) of the Act but are not subject to these solvency
standards.
II. Response to Comments
The PSO solvency standards are the result of a negotiated
rulemaking process. The participants in the negotiated rulemaking
described their agreement on the PSO solvency standards in a Committee
Statement titled ``Negotiated Rulemaking Committee on PSO Solvency
Standards'' dated March 5, 1998. Based on these agreed upon PSO
solvency standards, we published an interim final PSO solvency
regulation on May 7, 1998 (63 FR 25360). The participants in the
negotiated rulemaking process agreed not to submit negative comments on
the interim final rule unless they determined that any provision of the
interim rule incorrectly reflects the Committee solvency agreement.
Section 1856(a)(9) of the Act, as amended by the BBA, requires that we
publish final solvency standards within 1 year of the interim final
regulations. Accordingly, this final regulation will address only the
solvency standards for PSOs. Other comments on PSOs (for example, on
the waiver process and definitions) will be addressed in the final M+C
regulation due to be published in the fall of 1999.
We received eight public comments. Seven of the letters were from
major organizations, and one letter was from a State. The comments we
received are summarized below along with our responses.
Comment: We received several comments regarding whether unique
solvency standards should be established for PSOs operating in rural
areas. Several commenters discouraged establishing separate solvency
standards for rural PSOs. One commenter noted that no State has
separate solvency standards for entities that operate in distinct
geographic areas. Another commenter stated that developing a successful
Medicare managed care program is more difficult in a rural area than in
an urban area in part because enrollment growth is smaller in rural
areas, making it more difficult to cover fixed administrative costs.
The commenter was also concerned that it would be difficult to track
``rural'' and ``nonrural'' PSOs within a State. According to the
commenter, regulators would have the additional burden of monitoring
the rural PSOs to determine whether, through growth or other reasons,
it no longer met the definition of a rural PSO. If the PSO was no
longer considered rural, there could be a possible disruption of
services since the PSO would have to recapitalize in order to meet the
higher solvency requirements for non-rural PSOs. The commenters also
pointed out that rural PSOs, given less stringent solvency standards,
would have a more difficult time making the transition from meeting the
standards required for a Federal waiver to meeting the solvency
requirements of a State once the 36-month waiver period expires.
Two commenters suggested that we consider allowing rural PSOs to
``aggregate'' specifically for purposes of meeting solvency standards
(Regional PSOs). For example, we could permit rural providers or local
rural PSOs that band into a regional PSO or rural PSOs that link to
nonrural PSOs to be considered as one entity for the purpose of
satisfying the PSO solvency standards. The commenter contended that
such a regional approach to PSOs is likely to produce greater financial
stability and greater access to care and would reduce unnecessary
redundancy of solvency requirements as applied to individual entities
that comprise the regional plan.
Another commenter recommended that solvency adjustments for rural
PSOs be allowed in circumstances under which the commenter believes the
solvency rules require more financial resources than might be necessary
for smaller rural PSOs. The commenter suggested that certain solvency
requirements could be reduced for rural PSOs without placing the PSO in
financial jeopardy. Specifically, this commenter recommended that we
have discretion to--(1) selectively allow for reductions in the minimum
cash and liquidity requirements for rural PSOs; (2) allow for a
reduction in the insolvency deposit for small and rural PSOs; (3) allow
the use of irrevocable letters of credit for the insolvency deposit;
and (4) allow for a reduction in the minimum cash portion of a rural
PSO's net worth requirement.
Response: At this time, we will not establish separate solvency
standards for rural PSOs. We believe that the lack of current rural PSO
activity makes it difficult to realistically evaluate under what
circumstances it would be feasible for us to reduce certain solvency
standards for rural PSOs. We note that the States do not have different
solvency requirements depending on whether an entity is operating in a
rural area compared to an urban area. As a commenter noted, PSOs will
be subject to State standards at the end of the 36-month waiver period.
In addition, we are concerned about lessening solvency requirements and
thereby putting beneficiaries at increased risk if the rural PSO
becomes insolvent.
With respect to the proposal to allow rural PSOs to band together
for the purpose of collectively meeting the solvency requirements, we
are concerned that if more than one of these PSOs becomes insolvent,
there will not be adequate funds available to protect beneficiaries. We
believe the possibility of two PSOs becoming insolvent at the same time
is significant because the PSOs will be operating in the same region.
Accountability questions would also be raised if we allow organizations
to combine for the purpose of meeting certain requirements in
regulations. If several PSOs combine to meet the solvency standards, it
is not clear whether these combined PSOs would be in noncompliance if
one of the PSOs experienced financial difficulty. In regard to
recommendations that we reduce or modify various solvency reserves, we
believe these changes would be a significant departure from the
solvency standards carefully worked out during the negotiated
rulemaking process. For that reason and those cited above, we will not
selectively reduce the solvency requirements for rural PSOs.
Comment: A commenter noted that with respect to affiliate
guarantees, the Solvency Committee agreed that it was up to us to
determine which entities could provide guarantees. Because of this
agreement, the commenter believed that it is appropriate to comment on
this part of the interim final regulation. The commenter recommended
that the independently audited financial statement provided by a
guarantor can only be acceptable to us if it consists of unqualified
opinions from the auditor.
Response: We will not require that guarantee opinions in audited
independent financial statements always be unqualified. There may be
circumstances where a qualification of a financial opinion does not
significantly affect the conclusions regarding the entity's ability to
meet the financial solvency standards. Accordingly, we reserve the
right to accept or reject a
[[Page 71675]]
financial statement depending on the nature and significance of the
qualification of the opinion.
Comment: Several commenters requested that we clarify in this
regulation whether Federal bankruptcy or State receivership law should
take precedence if a PSO goes bankrupt.
Response: We recognize the importance of this question.
Accordingly, we are researching the alternatives regarding the
appropriate jurisdiction and venue in which to administer a financially
insolvent PSO. However, resolving the precedence of Federal bankruptcy
law versus State receivership law is beyond the scope of this
regulation.
Comment: Several commenters stated that a current ratio of 1:1
should be a factor we will use in evaluating the ongoing solvency of a
PSO but not an absolute requirement as indicated at Sec. 422.386 of the
interim final rule. Section 422.386(d) of the interim final regulations
states that if a PSO fails to maintain a current ratio requirement of
1:1, we will require the PSO to initiate corrective action. The
commenters pointed out that the Liquidity section of the PSO Solvency
Committee Statement states that we may require a PSO to initiate
corrective action if either of the following is evident--(1) the
current ratio declines significantly, or (2) there is a continued
downward trend in the current ratio.
The corrective action may include change in the distribution of
assets, a reduction of liabilities, or alternative arrangements to
secure additional funding requirements to restore the current ratio to
1:1.
Response: We agree that the Committee Statement indicates that a
PSO current ratio of 1:1 should be a factor we will use in evaluating
the solvency of a PSO but not an absolute requirement that will always
result in corrective action when violated. Accordingly, we will change
Sec. 422.386(d) in the final regulation to read as follows:
(d) If HCFA determines that a PSO fails to meet the requirement
of paragraph (b)(2) of this section, HCFA may require the PSO to
initiate corrective action to* * *
Comment: A commenter noted that Sec. 422.382(a) requires that the
initial net worth requirement be met at ``* * * the time an
organization applies to contract with us as a PSO.'' The commenter
recommended that this requirement be changed to require that the
initial net worth requirement be met at the time the application is
approved or the contract entered into, rather than on the date the
application is first submitted. The commenter expressed concern that
since the application process can take a number of months, the PSO
might have drawn down its net worth in the intervening months after the
initial application and may have an inadequate net worth by the time
the PSO actually enters into the contract with us.
Response: The Committee Statement on the PSO solvency standards
specifies that the PSO minimum net worth amount must be met when the
PSO submits the initial application. The interim final PSO regulations
at Sec. 422.382 reflect this Committee Statement. We believe it is
necessary that the net worth requirement be met at the start of the
application process to ensure that the applicant is financially able to
enter into a contract with us. We also believe that the ongoing net
worth requirement will ensure that PSOs have adequate net worth on the
effective date of the contract.
Comment: Section 422.382(b) describes the ongoing net worth
requirement as the greater of four amounts. The fourth amount, set
forth in Sec. 422.382(b)(4), begins with the statement ``Using the most
recent annual financial statement filed with HCFA, an amount equal to
the sum of * * *'' A commenter contended that this language was
intended to be an adaptation of a similar provision set forth in
Section 13.A.(2)(d) of the National Association of Insurance
Commissioners (NAIC) HMO Model Act, requiring that the calculation be
based ``* * * on the most recent financial statement filed with the
commissioner * * *'' rather than the most recent annual financial
statement.
The commenter noted that while the calculation results in an
annualized number, the calculation should be based on the most recent
HCFA filing, which could be a quarterly statement, not an annual
statement. Accordingly, the commenter requested that the word
``annual'' be deleted from Sec. 422.382(b)(4) in order to conform to
the NAIC structure.
Response: We agree with the commenter that the word ``annual''
should be removed from Sec. 422.382(b)(4). This is also consistent with
the PSO Committee Agreement in which the ongoing minimum net worth
requirements are specified and verification is through ``* * * the most
recent financial statement filed with us.'' Accordingly, we will revise
Sec. 422.382(b)(4) to read as follows:
Using the most recent financial statement filed with us, an
amount equal to the sum of * * *
Comment: A commenter noted that Sec. 422.384(b)(5) requires
certification of reserves and actuarial liabilities by a ``qualified
HMO actuary,'' which is not defined (the regulation does define
``qualified actuary''). The commenter requested clarification of what
is meant by ``qualified HMO actuary.''
Response: We agree that the use of the phrase ``qualified HMO
actuary'' at Sec. 422.384(b)(5) is confusing. Accordingly, we will
change the reference at Sec. 422.384(b)(5) to read ``qualified
actuary.'' We are not imposing any requirements on the qualifications
of an actuary employed by a PSO beyond what is stated in the definition
of qualified actuary under Sec. 422.350(b).
Comment: Section 422.382(b)(4) describes the four-tiered minimum
net worth test that will be applied to a PSO after the effective date
of its M+C contract. Section 422.382(b)(4)(iii) states that the annual
health care expenditures that are paid on a capitated basis to
affiliated providers must not be included in the calculation of net
worth under paragraphs (a) and (b)(4) of Sec. 422.382. A commenter
noted that the negotiated rulemaking committee specifically addressed
this issue and was careful to note that the exclusion set forth in
paragraph (b)(4)(iii) of Sec. 422.382 would apply regardless of the
downstream risk arrangements among providers. The commenter recommended
that this nuance be noted in the text of the regulations.
Response: We agree as referenced in the Committee Statement that
the exclusion from the net worth requirement calculation at
Sec. 422.382(b)(4)(iii) applies regardless of the downstream risk
arrangements among providers. Accordingly, we will change the
regulation at Sec. 422.382(b)(4)(iii) by adding the following
parenthetical clarification:
Annual health care expenditures that are paid on a capitated
basis to affiliated providers are not included in the calculation of
the net worth requirement (regardless of downstream arrangements
from the affiliated provider) under paragraphs (a) and (b)(4) of
this section.
Comment: A commenter recommended that a statement be added to the
preamble of the final solvency regulation clarifying (1) that funds
accumulated by a PSO as subordinated liabilities may be disbursed to
the affiliated providers if they are not needed to satisfy net worth
requirements during the period for which the funds were held and (2)
that the PSO has the flexibility to convert those funds to equity or
debt to benefit the providers.
[[Page 71676]]
Response: As long as the minimum net worth requirement is
maintained, any assets including those associated with subordinated
liabilities may be disbursed as the PSO deems appropriate on the basis
of sound business judgment. We do not believe any additional
clarification in the preamble is necessary.
Comment: Under Sec. 422.386(b)(3), in determining liquidity, we
evaluate the level of outside financial resources to the PSO. A
commenter recommended that we change Sec. 422.386(e) to clarify that we
will require a PSO to obtain funding from alternative financial
resources under this provision only if there has been a change in the
availability of outside financial resources available to the PSO. In
support of its recommendation, the commenter pointed out that the
language of the Solvency Standards Agreement (under the Part C
Liquidity requirements) reads, ``If there is a change in the
availability of the outside resources, we will require the PSO to
obtain funding from alternative financial resources.''
Response: We agree with this comment. Section 422.386(b)(3)
provides that, in monitoring liquidity, we will examine the
``availability of outside financial resources to the PSO.'' We will
change Sec. 422.386(e) to read as follows:
If HCFA determines that there has been a change in the
availability of outside financial resources as required by paragraph
(b)(3) of this section, HCFA requires the PSO to obtain funding from
alternative financial resources.
Comment: Under Sec. 422.390(d)(2)(ii), a guarantor must agree to
not subordinate the PSO guarantee to any other claim on its resources.
A commenter contended that in a typical PSO scenario, a tax-exempt
hospital or health system may provide the guarantee to the PSO. In this
case, the commenter believes it is likely that the hospital or health
system has tax-exempt bonds in place that contain certain covenants
with respect to the use and disposition of assets, including a pledge
of revenues. Under most circumstances and bond documents, it would not
be problematic in the commenter's view to satisfy the requirements at
Sec. 422.390(d)(2)(ii). However, the commenter believes that if a PSO
were able to demonstrate that this requirement was unduly and
substantially burdensome to the guarantor, we should have the authority
to consider the specific facts and circumstances and sufficient
discretion to modify this requirement.
Response: Section 422.390(a) of the Medicare+Choice regulations
explicitly states that we have the discretion to approve or deny
approval of the use of a guarantor. We believe this authority generally
allows us to exercise discretion in the approval or modification of a
guarantor agreement. We do not believe further clarification of this
authority in the regulations is necessary.
Comment: One commenter expressed concerns that the requirement that
the guarantor have a net worth of three times the amount of the
guarantee may not always be adequate. The commenter noted that this
amount may be adequate for some companies, but it may be a very slender
margin. As an alternative approach, the commenter suggested that
perhaps the net worth of a guarantor be determined as a percentage of
assets or related to total liabilities in some fashion.
Response: While we agree with the commenter's concern that the
guarantor having a net worth of three times the amount of the guarantee
may not always be adequate, we do not believe it is necessary to change
the regulation to address this concern. Section 422.390(a) explicitly
states that we have the discretion to approve or deny approval of the
use of a guarantor. We believe this authority generally allows us to
exercise discretion in determining the net worth to be required of a
particular guarantor that could be based on alternative approaches like
those suggested by the commenter.
Comment: Section 422.384(e)(i) provides that guarantees will be an
acceptable resource to fund projected losses of a PSO provided that,
before the effective date of the PSO's M+C contract, the PSO obtains
from the guarantor cash or cash equivalents to fund the amount of
projected losses for the first two quarters. A commenter noted that the
preamble to the interim final rule stated that funding for the first
two quarters will need to be in the PSO ``at least (45) days before the
effective date of the contract''. The commenter recommended that,
rather than enforcing a uniform 45-day requirement, we exercise
discretion consistent with the current language of Sec. 422.384(e)(i).
The commenter maintained that under certain circumstances the 45-day
requirement could prove to be unduly burdensome and we have sufficient
discretion to ensure that the guarantee amounts are sufficiently
prefunded for the first quarter of operation under the contract.
Response: The preamble of the May 7, 1998 interim final rule (63 FR
25370) calls for organizations to have assets to fund the first two
quarters of projected losses on their balance sheets 45 days before the
effective date of the contract. However, this 45-day time period is a
guideline to ensure that there is adequate time before the contract
date for us to update necessary data systems. If a PSO is unable to
have this funding in place 45 days before the contract effective date,
this may result in a delay in the implementation of the contract.
III. Provisions of the Final Rule
We have agreed to the following changes in regulations text in
response to comments on the interim final rule: Each change is based on
a commenter establishing that the interim final regulation was not
consistent with the agreement developed through the solvency negotiated
rulemaking process.
We have revised Sec. 422.382(b)(4), which states that the
ongoing net worth requirement be evaluated based on the most recent
financial statement filed with us and not restricted to the most recent
``annual'' financial statement.
We have accepted a comment to clarify in the final
regulation that the exclusion from the net worth requirement
calculation at Sec. 422.382(b)(4)(iii) applies regardless of the
downstream risk arrangements among providers.
We have clarified that we are not imposing any requirement
on the qualification of an actuary employed by a PSO beyond what is
stated in the definition of a qualified actuary at Sec. 422.384.
We have changed Sec. 422.386(d) to state that the PSO
current ratio will be a factor we will use in evaluating the solvency
of a PSO but not an absolute requirement that will always result in
corrective action being imposed by us when violated.
We have accepted a comment to change Sec. 422.386(e) to
make it clear that we will require a PSO to obtain funding from
alternative financial resources if there is a change in the
availability of outside financial resources available to the PSO.
IV. Regulatory Impact Analysis
A. Introduction
We have examined the impact of this final rule as required by
Executive Order 12866, the Unfunded Mandates Reform Act of 1995 (Public
Law 104-4), and the Regulatory Flexibility Act (RFA) (Public Law 96-
354). Executive Order 12866 directs agencies to assess all costs and
benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
[[Page 71677]]
effects, distributive impacts, and equity). A regulatory impact
analysis (RIA) must be prepared for major rules with economically
significant effects ($100 million or more annually). The Regulatory
Flexibility Act (RFA) requires agencies to analyze options for
regulatory relief for small businesses, unless we certify that the
regulation will not have a significant economic impact on a substantial
number of small entities. Most hospitals, and most other providers,
physicians, and health care suppliers, are small entities either by
nonprofit status or by having revenues of less than $5 million
annually. The impact of this regulation will be to create a new
business opportunity for these small entities to form provider-
sponsored organizations to contract with the Medicare program.
Section 1102(b) of the Act requires us to prepare a regulatory
impact analysis if a final rule may have a significant impact on the
operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 604 of the RFA. For
purposes of section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside a Metropolitan
Statistical Area and has fewer than 50 beds. We are not preparing an
analysis for section 1102(b) of the Act because we have determined, and
we certify, that this final rule will not have a significant impact on
the operations of a substantial number of small rural hospitals.
Section 202 of the Unfunded Mandates Reform Act of 1995 also
requires that agencies assess anticipated costs and benefits before
issuing any rule that may result in an expenditure in any one year by
State, local, or tribal governments, in the aggregate, or by the
private sector, of $100 million. This final rule does not mandate any
requirements for State, local, or tribal governments. Therefore, we
have not prepared an assessment of anticipated costs and benefits of
this final rule.
Because of the probability that these solvency standards may have
an impact on certain hospitals, physicians, health plans, and other
providers we prepared the following analysis which constitutes both a
regulatory impact analysis and a regulatory flexibility analysis.
B. Background
While the term ``provider-sponsored organization'' has been used
generally in reference to health care delivery systems that providers
own or control and operate, the term has a more specific meaning for
purposes of the M+C program. Accordingly, we defined, by regulation,
the fundamental organizational requirements for entities seeking to be
PSOs. These definitions are set forth at Sec. 422.350. Organizations
that meet these definitional requirements can apply for a Federal
waiver and an M+C contract. Having defined the term PSO and the waiver
process in earlier regulations, the purpose of this final rule is to
finalize the interim standards for financial solvency to which these
Federally waived organizations must adhere.
The solvency standards only affect organizations that have received
a Federal waiver and are either applying for or actually have received
an M+C contract. It is likely that waiver activity will be greater in
States that have solvency standards that differ significantly from the
standards developed in this regulation. Below we consider the
anticipated impact of this rule.
C. Anticipated Effects
1. Effects on Providers
This final regulation establishes solvency standards for PSOs that
have an approved waiver and are applying for a Medicare PSO contract.
These solvency requirements are designed to ensure that provider groups
have the necessary financial resources to participate in the M+C
program. In addition, the regulations are intended to ensure the
ongoing solvency of PSOs and to protect enrolled beneficiaries if an
insolvency occurs. Through the negotiated rulemaking process and our
own deliberations, we have carefully balanced the PSO solvency
requirements to ensure that we are not imposing unreasonable financial
barriers to the participation of provider groups in the M+C program. We
believe that these solvency requirements will make it easier for
provider groups to participate in the M+C program.
2. Effects on the Market Place
Since solvency standards vary by State, and State standards are
evolving, it is difficult to assess the relative effect of these
solvency standards. However, with several key exceptions (for example,
a different initial minimum net worth requirement and a lower
insolvency deposit), these solvency standards track the HMO Model Act.
Therefore, we do not believe there will be a significant impact due to
the existence of an unlevel playing field between PSOs and other
entities. We believe that establishing standards of financial solvency
is necessary to ensure that PSOs have the financial resources to
provide adequate quality care and to reduce the possibility of
disrupting beneficiary care.
3. Effects on States
For PSOs that obtain a Federal waiver, responsibility for
monitoring their financial solvency will be transferred from the States
to us. This a temporary reduction, since waivers last only 36 months
and the Secretary's authority to grant waivers ends on November 1,
2002. By the end of a PSO's waiver, it will need a State license in
order to continue its M+C contract. Therefore, to ease the transition
from a Federal waiver to a State license, we encourage PSOs to
establish a relationship with regulators in their respective States
soon after receiving a waiver.
4. Effects on Beneficiaries
We expect that the advent of PSOs and M+C in general will have the
effect of further mainstreaming managed care plans among Medicare
enrollees. We do not anticipate an increase in the potential for
service interruptions because these new PSOs will be subject to the
same beneficiary hold-harmless provisions and continuation of benefits
requirements as all M+C organizations. Lastly, section 1855(a)(2)(G) of
the Act requires PSOs to comply with all existing State consumer
protection and quality standards as if the PSO were licensed under
State law.
D. Effects on the Medicare Program
We assume that PSOs will be more prone to favorable selection than
other coordinated care plans since the providers in the PSO will, in
many cases, know their patients. This may increase the level of
favorable selection for the M+C program and could result in increased
costs for the Medicare program. However, since PSOs are expected to
make up a very small part of the M+C program, for the foreseeable
future any PSO favorable selection will have a minimal dollar impact on
the Medicare program.
We expect a greater insolvency rate from the PSOs than from the
current coordinated care plans because PSOs generally have less
business experience and they are smaller. Despite the insolvency rules
including hold harmless, Medicare can lose money when there is an
insolvency. This is particularly true when insolvency is imminent and
providers therefore defer nonemergency procedures to the next month.
Medicare may have to pick up the costs, especially if the beneficiary
elects fee-or-service. However, as noted above, given the small number
of PSOs participating in the M+C program, the
[[Page 71678]]
expected cost of insolvencies for the Medicare program is low.
E. Alternatives Considered
As previously discussed, the PSO solvency standards were developed
through a formal negotiated rulemaking process. During the negotiated
rulemaking, a number of alternatives were considered in the process of
developing a consensus regarding the PSO solvency regulations. Please
refer to the interim final PSO solvency regulation published in the
Federal Register on May 7, 1998 for details on the negotiated
rulemaking process including the solvency alternatives considered.
F. Conclusion
We conclude that this regulation will have an indeterminable impact
on small health service providers. The provisions of this final rule
are expected to be favorable for the managed care community as a whole,
as well as for the beneficiaries that they serve. We have also
determined, and the Secretary certifies, that this final rule will not
result in a significant economic impact on a substantial number of
small entities and will not have a significant impact on the operations
of a substantial number of rural hospitals.
In accordance with the provisions of Executive order 12866, this
regulation was reviewed by the Office of Management and Budget.
G. Federalism
Executive Order 13132, Federalism, establishes certain requirements
that an agency must meet when it promulgates regulations that impose
substantial direct compliance costs on State and local governments,
preempt State law, or otherwise have Federalism implications.
In this final rule, we focus solely on the solvency standards that
apply to PSOs that have obtained a waiver from State licensure
requirements. The PSO waiver provisions that describe the process by
which a PSO obtains a waiver from HCFA of State licensure requirements
will be addressed in the final M+C regulation expected to be published
in the first quarter of 2000.
The solvency portion of the PSO regulation in this final regulation
is based on the work of the PSO negotiated rulemaking committee, as
required at section 1856(a) of the Act, which provides that we
establish through a negotiated rulemaking the solvency standards that
entities will be required to meet if they obtain a waiver of the
otherwise applicable requirement that they be licensed by a State. The
negotiated rulemaking process and participants are discussed in the
preamble to the interim final waiver and solvency regulations published
in the Federal Register on May 7, 1998 (63 FR 25364). Among the
participants in the negotiated rulemaking were the National Association
of Insurance Commissioners, which is the organization of the chief
insurance regulators from the 50 States, the District of Columbia, and
four U.S. territories. This final solvency regulation is consistent
with the solvency standards agreed upon by all participants in the
negotiated rulemaking process, which, as noted, included the NAIC. We
received no comments on the interim final waiver and solvency
regulation and made no determinations that materially altered the PSO
solvency standards agreed upon in the negotiated rulemaking. It is also
notable that with limited exceptions these solvency standards track
those in the HMO model act which are the model solvency standards
developed by all of the States through the NAIC. Accordingly, we
believe this final regulation meets Federalism requirements because we
have consulted with the appropriate State officials who are in
agreement with these solvency standards.
List of Subjects in 42 CFR Part 422
Health maintenance organizations (HMO), Medicare+Choice, Provider
sponsored organizations (PSO).
For the reasons set forth in the preamble, 42 CFR Chapter IV, part
422, is amended as follows:
PART 422--MEDICARE--CHOICE PROGRAM
1. The authority citation for part 422 continues to read as
follows:
Authority: Secs. 1851 and 1855 of the Social Security Act.
Subpart H--Provider-Sponsored Organization
2. In Sec. 422.382, the introductory text to paragraph (b) is
republished, and the introductory text to paragraph (b)(4) and
paragraph (b)(4)(iii) are revised to read as follows:
Sec. 422.382 Minimum net worth amount.
* * * * *
(b) After the effective date of a PSO's M+C contract, a PSO must
maintain a minimum net worth amount equal to the greater of--
* * * * *
(4) Using the most recent financial statement filed with HCFA, an
amount equal to the sum of--
* * * * *
(iii) Annual health care expenditures that are paid on a capitated
basis to affiliated providers are not included in the calculation of
the net worth requirement (regardless of downstream arrangements from
the affiliated provider) under paragraphs (a) and (b)(4) of this
section.
* * * * *
Sec. 422.384 [Amended]
3. In Sec. 422.384, in paragraph (b)(5), the phrase ``qualified
health maintenance organization actuary'' is removed and the phrase
``qualified actuary'' is added in its place.
4. In Sec. 422.386, the introductory text to paragraph (d) and
paragraph (e) are revised to read as follows:
Sec. 422.386 Liquidity.
* * * * *
(d) If HCFA determines that a PSO fails to meet the requirement of
paragraph (b)(2) of this section, HCFA may require the PSO to initiate
corrective action to--
* * * * *
(e) If HCFA determines that there has been a change in the
availability of outside financial resources as required by paragraph
(b)(3) of this section, HCFA requires the PSO to obtain funding from
alternative financial resources.
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)
Dated: August 3, 1999.
Michael M. Hash,
Deputy Administrator, Health Care Financing Administration.
Approved: August 16, 1999.
Donna E. Shalala,
Secretary.
[FR Doc. 99-32939 Filed 12-21-99; 8:45 am]
BILLING CODE 4120-01-P
