[Federal Register Volume 59, Number 35 (Tuesday, February 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3610]
[[Page Unknown]]
[Federal Register: February 22, 1994]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
42 CFR Part 417
[OCC-018-P]
RIN 0938-AF16
Medicare Program; Limits on Payment to Health Maintenance
Organizations (HMOs), Competitive Medical Plans (CMPs), and Health Care
Prepayment Plans (HCPPs)
AGENCY: Health Care Financing Administration (HCFA), HHS.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would remove the provision (never
implemented) that would have made the adjusted average per capita cost
(AAPCC) the absolute limit on payment for services furnished to
Medicare enrollees by an HMO or CMP with a cost contract.
This change is necessary to conform our rules to the interpretation
of the statute as set forth in court decisions relating to payment of
reasonable costs.
This rule would also provide for using the AAPCC as a presumptive
limit, subject to exceptions, for HMOs and CMPs with cost contracts,
and for health care prepayment plans (HCPPs) that furnish inpatient
hospital care as well as part B services;
Eliminate the effective incentives exception that is currently
available to HCPPs;
Require HCPPs that do not furnish inpatient hospital services to
document that their costs do not exceed what Medicare's cost would have
been if the Medicare beneficiaries who received the services had not
enrolled in the HCPP; and revise the rules for reporting costs.
DATES: Comment date: We will consider comments received no later than 5
p.m. on April 25, 1994.
ADDRESSES: Mail written comments (1 original and 3 copies) to the
following address:
Health Care Financing Administration, Department of Health and Human
Services, Attention: OCC-018-P, P.O. Box 26688, Baltimore, MD 21207.
If you prefer, you may deliver your written comments (1 original
and 3 copies) to one of the following addresses:
Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue,
SW., Washington, DC 20201, or
Room 132, East High Rise Building, 6325 Security Boulevard,
Baltimore, MD 21207.
Because of staffing and resource limitations, we cannot accept
comments by facsimile (FAX) transmission. In commenting, please refer
to file code OCC-18-P. Comments received timely will be available for
public inspection as they are received, generally beginning
approximately 3 weeks after publication of a document, in room 309-G of
the Department's offices at 200 Independence Avenue, SW., Washington,
DC, on Monday through Friday of each week from 8:30 a.m. to 5 p.m.
(phone: (202) 690-7890).
COPIES: To order copies of the Federal Register containing this
document, send your request to: New Orders, Superintendent of
Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date
of the issue requested and enclose a check or money order payable to
the Superintendent of Documents, or enclose your Visa or Master Card
number and expiration date. Credit card orders can also be placed by
calling the order desk at (202) 783-3238 or by faxing to (202) 275-
6802. The cost for each copy is $4.50. As an alternative, you can view
and photocopy the Federal Register document at most libraries
designated as U.S. Government Depository Libraries and at many other
public and academic libraries throughout the country that receive the
Federal Register.
FOR FURTHER INFORMATION CONTACT: Jennifer Messersmith, (202) 401-2325;
Alfred D'Alberto, (410) 966-7610 (For full reporting of costs).
SUPPLEMENTARY INFORMATION:
I. Introduction
Under the Medicare program (title XVIII of the Social Security Act
(the Act)), HCFA helps pay for health services furnished to eligible
beneficiaries. Under ``part A'' (Hospital Insurance), HCFA pays
hospitals and other providers of services for inpatient hospital
services, and some skilled nursing facility services, home health care,
and hospice care. Under ``part B'' (Supplementary Medical Insurance),
HCFA helps pay for physicians' services, as well as hospital outpatient
and certain other medical services.
In general, HCFA pays for Medicare part A and part B services under
a fee-for-service system that includes a variety of payment methods
such as--
Fee schedules for physician and laboratory services and
durable medical equipment;
Diagnosis-related groups for most hospital services
under the prospective payment system (PPS);
Reasonable costs for skilled nursing care, home health
services and the services of certain hospitals not subject to the
PPS; and
Reasonable charges for some supplier services.
For part A services, HCFA usually pays the provider and, for part B
services, the supplier who has accepted assignment or, if assignment
has not been made, the beneficiary. Payment is on the basis of claims
submitted by the provider, supplier, or beneficiary after the service
has been furnished.
Title XVIII of the Act also permits beneficiaries to enroll in, and
receive their Medicare benefits through, prepaid health care
organizations. These include health maintenance organizations (HMOs),
and competitive medical plans (CMPs), with contracts under section 1876
of the Act, and health care prepayment plans (HCPPs) with agreements
under section 1833 of the Act. HMOs and CMPs are required to furnish
the full range of Medicare benefits, and do not bill on a fee-for-
service basis for covered services furnished to their Medicare
enrollees. Rather, HCFA pays the organization in advance a monthly
amount for each enrolled beneficiary. If the HMO or CMP contracts to be
paid on a reasonable cost basis, there is a cost reconciliation at the
end of the year. HCFA also pays HCPPs on a reasonable cost basis,
following procedures similar to those used for HMOs and CMPs, but only
for part B services. If an HCPP arranges for part A services for its
enrollees, the Medicare intermediary pays the provider for these
services on a fee-for-service basis.
As of March 1993, about 2.4 million of the 33 million Medicare
beneficiaries had chosen to enroll in an HMO, CMP, or HCPP.
This proposed rule would impose presumptive limits on reasonable
costs--
For HMOs and CMPs that choose to contract with HCFA on
a reasonable cost basis; and
For HCPPs that furnish (to Medicare enrollees) services
in general acute-care hospitals.
These presumptive limits replace absolute limits that were
promulgated in 1985 but were never put into effect for reasons given in
HCFA Ruling No. 89-2, and explained below under section II.B.2. This
rule would establish bases for exceptions to the presumptive limit and
would also establish limits on reasonable costs for HCPPs that do not
furnish inpatient hospital services.
II. Background
A. HMOs, CMPs, and HCPPs
1. HMOs and CMPs
Under section 1876 of the Act we are authorized to contract with
HMOs and CMPs to pay them either on a risk basis or on a cost basis for
services they furnish to Medicare enrollees. HMOs and CMPs must provide
all part A and part B services to Medicare enrollees entitled to both
part A and part B, but HCPPs may limit the services they provide. Risk
HMOs and CMPs receive monthly capitation payments equivalent to 95
percent of the adjusted average per capita cost (AAPCC).
The AAPCC is an estimate of the average per capita cost, under the
fee-for-service system, for Medicare-covered services furnished to
Medicare beneficiaries who are not enrolled in HMOs, CMPs, or HCPPs.
HCFA's Office of the Actuary prepares an AAPCC for both aged and
disabled beneficiaries for each county in the United States and adjusts
the AAPCC rates demographically by age, sex, Medicaid status, and
institutional status. For example, a 65-69 year old female, who is not
eligible for Medicaid and not in an institution, might have a monthly
AAPCC rate of $300 in a given county. An 80-84 year old female,
institutionalized in the same county, might have an AAPCC rate of $680.
These rate differences reflect the lower average Medicare costs for the
younger, non-institutionalized beneficiary. There are 30 demographic
groups for the aged Medicare population and 30 for the disabled
Medicare population.
Cost HMOs and CMPs receive monthly interim payments based on the
annual operating budget they submit before the beginning of their
contract year. At the end of the contract year, they must submit a cost
report to document their actual costs, as a basis for a final
settlement.
As of March 1993, there were 93 risk HMOs and CMPs with 1,603,178
Medicare enrollees and 22 cost HMOs and CMPs with 140,415 enrollees.
2. HCPPs
HCPPs are prepaid health care organizations that have agreements
with HCFA to be paid in accordance with section 1833(a)(1)(A) of the
Act. Under such an agreement, HCFA pays the HCPP only for part B
services. Payment is based on ``reasonable costs'' and those costs are
generally determined following the methods used for cost HMOs and CMPs,
as described under section II.A.1. of this preamble. Some HCPPs provide
the full range of part B services, while others offer a much more
limited scope.
HCPPs are not required to provide part A services and cannot be
paid for those services under the HCPP agreement. Some HCPPs are
organized to furnish comprehensive health care services to their
Medicare enrollees and to their commercial enrollees. Those HCPPs,
which could elect to contract as HMOs or CMPs, furnish or arrange for
all or most part A services. The providers of those part A services
submit their claims to, and are paid by, Medicare intermediaries.
In March 1993, there were 57 HCPPs with 640,633 Medicare enrollees.
B. History of Cost Limits
1. Statutory basis for setting cost limits
Section 1861(v)(1)(A) of the Act authorizes us to establish limits
on reasonable costs for entities that are paid on a reasonable cost
basis. The limits must be based on estimates of the costs necessary in
the efficient delivery of health care services. Our basic goal in
establishing limits on costs for HMOs, CMPs, and HCPPs is to ensure
that the Medicare program pays no more for care furnished to
beneficiaries enrolled in these organizations than it would pay for
services for beneficiaries not enrolled in an HMO, CMP, or HCPP. We
consider that to pay more than we would have paid under the fee-for-
service system would be inefficient and, thus, an inappropriate use of
Medicare funds.
2. Provisions of the Regulations
Before 1986, the regulations provided that, for HMOs and CMPs
paying physicians on a salaried basis, costs were reasonable if they
did not exceed the costs for comparable services in the HMO's or CMP's
geographic area. Those costs, however, were not subject to the
reasonable charge levels of the Medicare fee-for-service payment
system, and HMOs and CMPs were not required to document the
comparability of their costs to the costs allowed under that system.
Costs incurred for payment to groups of physicians (organized
either on a group practice or an individual practice basis) and for
payment for other part B services could not exceed the Medicare
reasonable charge levels. However, with respect to physicians'
services, most HMOs and CMPs were exempted from this limit, under the
``effective incentives'' policy. Under this policy, the exemption was
available if the members of the group of physicians accepted effective
incentives, such as risk-sharing, designed to discourage unnecessary or
unduly costly utilization of health services. In connection with these
rules, the AAPCC was used as a guideline, but not as a limit, in
assessing the reasonableness of the total costs incurred by HMOs and
CMPs.
The rules for HCPPs were similar and are still in effect. For HCPPs
that pay physicians on a basis other than fee-for-service, such as
capitation, costs are not measured against the reasonable charge or
other fee-for-service rate. Rather, costs are measured against what a
``prudent buyer'' would pay for comparable services in the geographic
area. Payments based on fee-for-service are generally subject to
Medicare reasonable charge levels. However, if the payments are to a
medical group whose members accept ``effective incentives'' to control
utilization, the payments are subject to the ``prudent buyer'' standard
rather than reasonable charge levels.
On January 10, 1985, at 50 FR 1314, we published a final rule that
established a new part 417 containing the rules applicable to prepaid
health care. Section 417.532 provided that, beginning in 1986, 100
percent of the weighted average of the AAPCCs of each class of a cost
HMO's or CMP's Medicare enrollees would be applied as an absolute limit
on the total amount payable to that HMO or CMP. There would be no
exceptions and no possibility of payments in excess of that limit. The
provisions relating to effective incentives were removed from the rules
for HMOs and CMPs as no longer necessary, but retained for HCPPs, to
which the new absolute limit would not apply. Although the new absolute
limit never went into effect, the effective incentives policy was not
restored for HMOs and CMPs, and the inoperative rule
(Sec. 417.532(a)(3)) was not removed from the CFR.
In October 1989, HCFA issued HCFA Ruling (HCFAR) No. 89-2, which
stated that: ``Since the time that Sec. 417.532 of the regulations was
promulgated, the courts have construed the authority to set cost limits
under section 1861(v)(1)(A) [of the Act] to support generalized cost
limits applied on a presumptive basis, but not absolute cost limits
applied on a final or conclusive basis * * *.'' The courts have
interpreted section 1861(v)(1)(A) of the Act as requiring that a
Medicare provider be afforded an opportunity under the regulations to
show that in its particular case, costs in excess of the applicable
cost limits were reasonable and therefore reimbursable. Thus, the court
decisions support application of presumptive limits, that is, limits
with an exception process that affords the cost-contracting entity the
opportunity to qualify for additional payments if it can show that its
excess costs are justified as ``reasonable.''
As a result of the policies discussed above, we have not
accumulated data that would show whether the furnishing of health care
services by cost HMOs and CMPs, and HCPPs is cost-effective as compared
to the furnishing of those services under the Medicare fee-for-service
system.
III. Provisions of the Proposed Rule
A. Provisions Applicable to HMOs and CMPs, and to HCPPs That Furnish
Inpatient Hospital Services
1. Background
Since HCPP agreements pertain only to part B services, HCFA makes
payment directly to the providers for part A services furnished to HCPP
enrollees. However, some HCPPs ``furnish inpatient services'' in the
sense that they make the arrangements for enrollees to receive those
services, and pay applicable Medicare coinsurance and deductibles in
return for a premium from the enrollee. Like HMOs, HCPPs that furnish
both part A and part B services would generally have an incentive to
use more cost-effective part B services when possible, rather than more
expensive part A services.
However, if we imposed a cost limit only on the services we
reimburse through the HCPP agreement (that is, part B services), it
would create an incentive for the HCPP to shift costs by authorizing
more expensive part A services (which will be reimbursed directly to
the provider), rather than part B services that would be subject to the
limit. Accordingly, to avoid potentially inappropriate increases in
part A utilization, we propose to apply the aggregate part A and part B
presumptive limit to all costs incurred for Medicare beneficiaries
enrolled in HCPPs that furnish inpatient hospital services. If the
aggregate costs exceed the limit, the HCPP would be considered to have
an overclaim for its part B services. (The limit would apply to HCPPs
that furnish inpatient care in hospitals commonly referred to as
``general acute-care'' or ``short-stay'' hospitals, as distinguished
from psychiatric or rehabilitation hospitals or other chronic or long-
term hospitals.)
2. Presumptive Limit
The presumptive limit on costs would be 100 percent of the weighted
average of the AAPCCs of each class of Medicare enrollees. Since the
AAPCC is based on the costs of all Medicare services received by
beneficiaries, as a presumptive limit it must be applied to the total
cost of all Medicare-covered services received by the Medicare
enrollees, including all part A and part B services, whether furnished
by the prepaid health care organization or obtained from other sources.
In other words, all costs attributable to Medicare enrollees, whether
paid by the organization or paid by Medicare's intermediaries and
carriers, would be totaled and compared to the presumptive limit.
We note that we plan to consider adjustment to, or a replacement
for, the AAPCC as the basis for payment to risk HMOs and CMPs. If we
make any such changes, we might also need to modify using the AAPCC as
the basis for the presumptive limit. This would involve additional
rulemaking activity.
3. Exception Process
If costs exceed the presumptive limit, there would be an exceptions
process that would permit payments in excess of the limit, for either
of the following reasons:
a. Special needs. The Medicare enrollees have special needs that
require a volume and intensity of services that exceeds the average for
Medicare beneficiaries of the same age and sex living in the same
service area.
For exceptions based on special needs, we are proposing
the methodology discussed under section IV of this preamble.
If, after application of that methodology, the
organization wished further review, it could present additional
documentation for HCFA's consideration. The organization could seek
such further review if HCFA found that the organization did not meet
HCFA's standards for special needs or the HMO or CMP believed that
not enough money was being allowed for its special needs enrollees.
b. Extraordinary circumstances. There were extraordinary
circumstances beyond the control of the organization. The circumstances
include, but are not limited to, strikes, fire, earthquake, flood or
similar unusual occurrences with substantial cost effects.
For exceptions based on extraordinary circumstances, the HMO or CMP
would be required to submit to HCFA information documenting the
particular extraordinary circumstances that it believes constitute
justification for additional payments and the amount of additional
payments justified by the extraordinary circumstances.
4. Decision Not to Restore the Effective Incentives Exception
We would not restore the effective incentives exception that was
deleted from the regulations when we promulgated the absolute
limitation on payment to cost HMOs and CMPs in 1985.
The existence of ``effective incentives'' was used by HCFA as a
proxy for efficiency. We are now using the presumptive limit as a proxy
for efficiency, and we believe this is a more appropriate standard.
5. Exemption Based on Number of Medicare Enrollees
Under the proposed rule, HCFA could exempt organizations with fewer
than 500 Medicare enrollees from the cost limits for up to 2
consecutive years. HCFA could specify additional criteria that these
organizations must meet in order to qualify for this exemption.
6. Effect of Having a Final Overclaim for 2 Consecutive Years
HCFA could terminate contracts with organizations that have a final
overclaim for at least 2 consecutive years. Final overclaim means that,
after application of the exception process, the organization still has
excess claims that it cannot justify as ``reasonable.'' The rationale
for termination is that organizations with final overclaims are
inefficient as compared to the fee-for-service system, and it is not
prudent for HCFA to continue to contract with inefficient
organizations.
B. Provisions Applicable to HCPPs That do not Furnish Inpatient
Hospital Services
1. Criteria for Reasonableness
The costs incurred by the HCPP for physicians' services and other
part B supplier services would be considered reasonable if they did not
exceed, in the aggregate, the amount that HCFA would pay, in the
aggregate, for those services if they were furnished to beneficiaries
not enrolled in the HCPP or any other prepaid health care plan. HCPP
costs would be compared to costs under the usual fee-for-service
payment methods, based on fee schedules, reasonable charge limits, or
reasonable cost limits, whichever is appropriate for the particular
services. The aggregate amount would include an amount equivalent to
the costs of claims processing.
2. Documentation of Services
Participating HCPPs would be required to include in
their cost reports documentation of each service furnished to their
Medicare enrollees, using the Medicare billing codes.
Organizations seeking an agreement for participation as
an HCPP would be required to demonstrate that they have in place a
system that enables them to comply with the documentation
requirement.
Failure to comply with the documentation requirement
would be a basis for termination or nonrenewal of the agreement.
We would amend Sec. 417.800(b), to include the documentation
requirement.
3. Removal of ``Effective Incentives'' Provision
We would remove the effective incentives provisions that appear in
Sec. 417.802(2)(ii)(B) and (b)(3)(ii) of the current HCFA rules. We
believe that all HCPPs should be subject to the requirement that
payment for services furnished to their Medicare enrollees not exceed
the estimate of what HCFA would have paid for those services under the
fee-for-service system. We believe that a more effective way to ensure
that outcome is to use the presumptive limit for HCPPs that furnish
inpatient hospital services, and to use reasonable charges to define
reasonable costs for other HCPPs.
IV. Methodology for Calculating Payments in Excess of the Presumptive
Limit (Additional Payments)
Note: We believe that HMOs, CMPs, and HCPPs will be particularly
interested in this methodology, and we are receptive to suggestions
for alternative methodologies. Any proposed alternatives must
specifically address how that methodology would ensure that HCFA
pays no more for care to beneficiaries enrolled in these
organizations than it would pay for their care if the beneficiaries
were not so enrolled.
The methodology discussed below applies only to HMOs and CMPs, and
to HCPPs that furnish inpatient hospital services. It pertains only to
determining whether we can make additional payments based on special
needs of Medicare enrollees. We use the term ``sicker than average
enrollment'' to mean enrollees who require a volume and intensity of
services that exceeds the average for Medicare beneficiaries of the
same age and sex, living in the same geographic area.
A. Background
1. The Act
Section 1861(v)(1)(A) of the Act authorizes us to establish limits
on costs for entities paid on a reasonable cost basis so that the
Medicare payment does not exceed the ``estimates of the costs necessary
in the efficient delivery of needed health services''. Section
1861(v)(1)(A) also gives us flexibility for setting those limits.
2. The Courts
The courts have indicated that absolute limits on costs are not
acceptable, but, to date, appear to approve of presumptive limits. A
presumptive limit means that the organization may obtain additional
payments, that is, payments above that limit, if it can document that
such payments are justified, using reasonable criteria to estimate
payable amounts in excess of the limits.
3. Proposal
We are proposing to establish 100 percent of the weighted average
of the AAPCC as the presumptive limit for HMOs and CMPs, and for HCPPs
that furnish inpatient hospital services. We consider the presumptive
limit to be a proxy for whether or not the HMO, CMP, or HCPP is
delivering needed health services efficiently. In other words, we
consider an organization with total costs below the presumptive limit
to be operating more efficiently than Medicare operates under the fee-
for-service system. Conversely, we consider organization with costs
above the presumptive limit to be operating less efficiently.
B. Methodology
The methodology discussed below is based on the fact that,
generally in health care financing, a small number of high-cost cases,
called ``outliers,'' account for a large percentage of outlays. For
example, in 1989, in the Medicare program, about 90 percent of persons
served accounted for only 37 percent of the outlays, while the
remaining 10 percent of persons served required 63 percent of the
outlays.
In order to estimate what percentage, if any, of an organization's
costs is attributable to inefficiency, we would compare the average
annual per capita cost for the organization's non-outliers with the
average annual per capita cost for non-outliers under the fee-for-
service system. If the organization's average for non-outliers were
less than the fee-for-service average, we would consider the
organization to be operating more efficiently than Medicare operates
under the fee-for-service system. We would make the assumption that,
since the organization operates efficiently for its non-outliers (who
constitute the majority of its enrollment) its costs in excess of the
presumptive limit are attributable to a sicker than average enrollment.
We would pay any excess costs that are otherwise allowable.
However, if the organization's average for non-outliers exceeded
the fee-for-service average, we would consider it to be operating less
efficiently than Medicare operates under the fee-for-service system.
If, for example, the organization's average exceeded the fee-for-
service average by 3 percent, we would consider that the organization's
services cost 3 percent more than Medicare would have paid for those
services under the fee-for-service system. We would assess a
presumptive overpayment of 3 percent on the organization's total costs
for services to Medicare enrollees, that is, costs for both outliers
and non-outliers.
C. Application and Example
The methodology consists of 3 stages:
Stage 1. Determine whether the organization's total costs exceed
the presumptive limit.
Example of Stage 1: (a) Determine the presumptive limit on the
organization's costs for Medicare enrollees, which is 100 percent of
the weighted average of the AAPCC's of each class of Medicare
beneficiaries.
Presumptive limit: $4,230,000.
b. Determine the organization's total costs for its Medicare
enrollees, that is, part A and part B costs, both in-plan and out-
of-plan, and administrative costs.
Audited Cost Report Costs\1\............................... $1,500,000
In-plan hospital & SNF costs............................... 2,700,000
Out-of-plan costs, parts A & B............................. 800,000
------------
Total Costs.............................................. 5,000,000
\1\Costs on the cost report currently include costs for in-plan part B
services (except hospital outpatient department services), costs for
part A services other than hospital and SNF, and administrative costs.
c. Determine whether the organization's total costs exceed the
presumptive limit.
Total costs................................................ $5,000,000
Presumptive limit.......................................... (4,230,000)
------------
Presumptive overpayment.................................. 770,000
If the costs were equal to, or less than, the presumptive
limit, HCFA would pay the total allowable costs for the organization's
Medicare enrollees.
Since there is a presumptive overpayment, the process
would continue to Stage 2. (HCFA would give the organization written
notice and opportunity to respond in accordance with Sec. 417.532(a)(6)
of the proposed rules.)
To carry out Stage 2, we need the annual outlier cost threshold,
which HCFA establishes on a national or regional basis, to distinguish
``outlier costs'' from ``non-outlier costs.'' For example, if the
threshold is $39,000, the costs for all beneficiaries whose costs
exceed $39,000 would be outlier costs, and the costs for all
beneficiaries whose annual costs are equal to, or less than, $39,000
would be considered ``non-outlier costs.'' HCFA's determination of the
outlier threshold is discussed under section VI of this preamble. The
organization would determine its costs for outliers using HCFA's
payment methods such as fee schedules, reasonable charge limits, and
reasonable cost limits, as appropriate.
Stage 2. Determine whether the average annual per capita non-
outlier cost for the organization's Medicare enrollees exceeds the
average non-outlier costs for the fee-for-service beneficiaries in the
organization's service area.
a. If the average for the organization's enrollees is equal to, or
less than, the average for the fee-for-service beneficiaries, there is
no final overpayment. As noted above, the presumption is that the
organization is also efficient in furnishing services to outlier
enrollees.
b. If the average cost for the organization's non-outlier enrollees
exceeds the average cost for the fee-for-service beneficiaries, the
process continues to stage 3.
Stage 3. Determine how much of the organization's presumptive
overpayment is attributable to sicker than average enrollment, and how
much to inefficiency.
Examples of stages 2 and 3.
Stage 2:
------------------------------------------------------------------------
Fee-for-service
beneficiaries Plan enrollees
------------------------------------------------------------------------
Total costs....................... $100,000,000 $5,000,000
Outlier costs..................... (25,000,000) (1,500,000)
-------------------------------------
Non-outlier costs................. 75,000,000 3,500,000
Number of non-outliers............ 30,000 1,375
Average annual cost for non-
outliers, weighted by the AAPCC
factors: age, sex, institutional
status, Medicaid status, and
geographic area.................. 2,500 2,545
------------------------------------------------------------------------
The average non-outlier cost for the organization's Medicare
enrollees exceeds the average non-outlier costs for fee-for-service
beneficiaries by $45.
Stage 3: Divide the excess average cost by the average claimed
costs to determine the inefficiency factor:
TP22FE94.000
The inefficiency factor represents HCFA's estimate of the
percentage by which the organization's costs exceeded HCFA's
estimate of the costs for all the organization's Medicare enrollees
if HCFA had paid for their care under the fee-for-service system.
Determine the final overclaim amount by applying the 1.77 percent
``inefficiency factor'' to the total costs attributable to the
organization's Medicare enrollees, as follows:
Total Costs............................................. $5,000,000
Inefficiency Factor..................................... x .0177
---------------
Final Overclaim......................................... $88,500
If the organization chooses to submit additional documentation
in support of higher additional payments after application of this
methodology, the final overclaim amount may be adjusted.
In this example of a presumptive overpayment of $770,000, the
final overclaim or disallowance is $88,500. The organization would
receive $681,500 ($770,000 minus $88,500) in additional payments
because of the exceptions process. In other words, HCFA would
estimate that $681,500 of the presumptive overpayment is
attributable to a sicker than average enrollment and $88,500 is
attributable to inefficiency. HCFA would pay the amount attributable
to a sicker than average enrollment.
V. Options Considered
A. Options Considered for the Presumptive Limit
Our primary goal in setting limits for coordinated care
organizations is to ensure that we do not pay more for Medicare
beneficiaries enrolled in these organizations than we would pay if the
beneficiaries were not so enrolled. The AAPCC is an estimate of the
average per capita cost for Medicare beneficiaries who receive their
Medicare-covered services in the fee-for-service sector, that is,
Medicare beneficiaries who are not enrolled in HMOs, CMPs, or HCPPs.
Because it is a per capita estimate based on 100% of the costs for
these beneficiaries in a geographic area, we consider it to be an
excellent basis for estimating the aggregate amount that HCFA would
have paid for HMO, CMP, and HCPP enrollees if they had not been so
enrolled.
HCFA has used the AAPCC in connection with cost limits or other
controls for prepaid health care organizations as follows:
1. Before 1985, under a demonstration, as the basis for payment
to risk HMOs.
2. Beginning in 1985, as the basis for payment to risk HMOs and
CMPs.
3. As the basis for calculating payments for an earlier model of
risk HMO that was repealed when the current HMO and CMP risk program
was enacted.
4. Before 1986, as a guideline for cost HMOs.
5. As the basis for a proposed absolute cost limit for cost HMOs
and CMPs promulgated to be effective in 1986, but never implemented.
In HCFA Ruling 89-2, we indicated that the courts ``have construed
the authority to set cost limits under section 1861(v)(1)(A) [of the
Act] to support generalized cost limits applied on a presumptive
basis.''
We considered two options. First, we considered using 100 percent
of the AAPCC as a guideline, as we had done before promulgation of the
1985 regulation establishing the AAPCC as an absolute limit. Second, we
considered using 100% of the AAPCC as a presumptive limit.
Application of a guideline simply triggers a closer scrutiny of the
claimed costs. Use of a presumptive limit with an exceptions process
provides a clearer standard for determining the amount of payment. We
expect that a presumptive limit will provide incentives for more
efficient operation, because overpayments will be determined unless the
organization can document that additional payments are appropriate
either (1) because of a sicker than average enrollment or (2) because
of extraordinary circumstances. For this reason, we believe the use of
a presumptive limit better serves the intent, articulated in section
1861(v)(1)(A) of the Act, of using Medicare monies only to pay for the
efficient delivery of needed health services.
B. Options Considered for Methodology for Calculating Exceptions for a
Sicker Than Average Enrollment
We considered four options for a methodology to use in estimating
what portion, if any, of an organization's presumptive overpayment was
attributable to inefficiency. Two of the options addressed only part B
costs, and administrative costs. The other two approaches addressed the
full range of costs for Medicare enrollees.
First, we considered setting absolute limits for the organization's
administrative and part B costs based on fee-for-service payments. The
final overpayment or disallowance would have been the amount by which
(1) the organization's aggregate payments for part B services exceeded
Medicare's aggregate payments for the same services and (2) the
organization's relative administrative costs exceeded Medicare's
relative administrative costs. This approach did not address our
concerns about the inappropriate utilization of part A services and
would not have recognized the efficiencies that can be achieved by
using outpatient services rather than inpatient services, as most
prepaid health care organizations do.
Second, we considered calculating averages of volume and price for
part B services, comparing the organization's average price and volume
with the Medicare fee-for-service average. The final overpayment or
disallowance would have been based on whether the organization exceeded
Medicare averages for price, or volume, or both. The disallowance for
overpayments on the price side would have been the amount by which the
organization's average price exceeded Medicare's fee-for-service
average. The disallowance for overpayments on the volume side would
have been in the form of reductions to allowable administrative costs,
using the rationale that we should not pay 100% of administrative costs
to an organization that is not managing care, as evidenced by its
higher volume.
Both of these options would have required organizations to document
all services on an individual basis. However, they focused only on part
B and administrative costs. They did not take into consideration the
entire range of services. We believe that HMOs and CMPs and HCPPs that
furnish inpatient hospital services should be held accountable for all
of the Medicare-covered services received by their Medicare enrollees,
whether furnished by the plan or obtained from other sources. For this
reason, we considered the two following options, both of which use an
outlier-based approach. The first option looked only at the
organization's outlier costs in relation to outlier costs in the
comparable fee-for-service area. We realized that we could not limit
our review to outlier costs because outliers are, by definition, not
representative of the relevant costs by which HCFA may judge whether a
prepaid health care organization is efficient or inefficient in
comparison with the fee-for-service sector overall.
The second option was the one described in this preamble. We
concluded it was the best approach for three reasons.
When compared to the other outlier approach, it was
more in consonance with the statutory directive to make estimates of
the costs for the efficient provision of needed health services.
A calculation based on outliers imposes manageable
administrative requirements on the organization because outliers
comprise a small percentage of enrollees and because most
coordinated care organizations must track costs for outliers in
order to receive payments from their reinsurers.
Unlike the first two options, this approach examines
all of the Medicare services and costs and thus holds the
organization accountable for all the Medicare-covered services
received by its enrollees.
C. Options Considered for HCPPs That do not Furnish Inpatient Hospital
Services
Our primary goal in setting limits for prepaid health care
organizations is to ensure that we do not pay more for Medicare
beneficiaries enrolled in these organizations than we would pay if the
beneficiaries were not so enrolled. We consider Medicare fee-for-
service payment amounts for individual services to be the most
appropriate proxy for the amount that Medicare would have paid for a
group of HCPP enrollees if those beneficiaries were not so enrolled. As
discussed above, we also consider the AAPCC, which is derived from
Medicare fee-for-service payment amounts, to be an appropriate estimate
of total Medicare fee-for-service costs for a group of Medicare
beneficiaries. In addressing changes to the regulations governing
allowable payments to these HCPPs, we considered three options.
First, we considered making only technical changes to the current
regulations by updating them to reflect the movement in fee-for-service
Medicare away from reasonable charge-based payment to fee schedules for
physician and lab services and durable medical equipment. Under this
option, we would have retained the effective incentives provisions.
This approach was not consistent with our primary goal.
Second, we considered using the part B AAPCC plus an appropriate
amount for administrative costs. We discarded this option because it
might constitute an incentive for these HCPPs to allow or encourage
their Medicare enrollees to seek part A services for medical conditions
for which part B services would be equally or even more appropriate,
but might bring the HCPPs' incurred costs above the part B AAPCC.
Third, we considered using aggregate Medicare payment levels for
individual part B services to define ``reasonable cost'' for these
HCPPs. We selected this approach because we believe it is consistent
with our primary goal. We also considered whether it would be feasible
to specify an appropriate volume of services. We concluded that, at
this time, we do not have sufficient data to determine appropriate
volume for part B services for HCPP enrollees, so a volume formula is
not included in this proposed rule.
VI. Outlier Threshold
In setting the amount of the outlier threshold, we are concerned
that it include an adequate number of high cost beneficiaries, without
including such a substantial proportion of costs that its utility as a
measure of efficient behavior is limited. Because in general in health
care financing a small number of individuals account for a large
percentage of outlays, finding an appropriate balance between the
percentage of total costs represented by the outlier threshold and the
percentage of beneficiaries represented is difficult. There is a range
of reasonable choices.
Using 1989 data summarized in the table below, we examined the
relationship between the cumulative percentage of persons served and
the cumulative percentage of program payments to determine a reasonable
outlier threshold. At the low end for a potential outlier threshold, we
believe a figure that accounts for about 2 percent of beneficiaries and
about 25 percent of outlays is reasonable. At the high end, we believe
a figure that accounts for about 0.3 percent of beneficiaries and about
7 percent of total outlays is reasonable. The approximate mid-point
between these two ends is the 1 percent of beneficiaries who account
for about 16 percent of total payments.
We are proposing to set the outlier threshold at the lowest annual
per capita amount that we project to account for the 1 percent of
Medicare beneficiaries with the highest annual per capita outlays. In
1989, that amount was about $39,000.
For 1993, the annual per capita amount that we project to account
for the 1 percent of Medicare beneficiaries with the highest annual per
capita outlays is $55,000. Outlays on behalf of this group of Medicare
beneficiaries would account for about 16 percent of total outlays.
1989 Data
------------------------------------------------------------------------
Cumulative Cumulative
percent percent
Part A and Part B payments per person served person program
served payments
------------------------------------------------------------------------
$5,000........................................ 82.4 21.6
10,000........................................ 90.4 37.9
20,000........................................ 96.2 61.7
30,000........................................ 98.2 76.2
39,000........................................ 99.0 84.0
40,000........................................ 99.1 84.9
50,000........................................ 99.5 90.0
60,000........................................ 99.7 93.0
70,000........................................ 99.8 94.7
100,000....................................... 99.9 97.6
------------------------------------------------------------------------
Using a set percentage of beneficiaries, for example, 1 percent as
we are proposing here, instead of a set dollar figure eliminates the
need to determine an inflation factor. The amount of the outlier
threshold would increase by the change in the annual per capita amount
that we project to account for the 1 percent of Medicare beneficiaries
with the highest annual per capita outlays.
VII. Other Proposed Changes
A. Full Reporting
1. Background
Most HMOs and CMPs paid on a cost basis have elected under section
1876(h)(2) of the Act (as implemented by Sec. 417.532(c) of the
regulations) to allow HCFA to process all bills for hospital and
skilled nursing facility services furnished to their Medicare
enrollees. Under this election, HCFA simply performs a service (bill
processing and payment) for the HMO or CMP. The HMO or CMP authorizes
the services and retains responsibility for coordination of those
services with other services it furnishes to its Medicare enrollees.
Section 417.576(b)(2)(i) implements the requirement of section
1876(h)(4)(A) of the Act that the HMO or CMP report its ``per capita
incurred cost''. However, cost HMOs and CMPs have not been reporting
the part A costs paid by the Medicare intermediaries. For those
services, they currently report only the deductibles and coinsurance.
When the regulations that would have imposed an absolute limit were
developed, the cost report was revised to include the part A costs paid
by Medicare intermediaries. However, because the absolute limit policy
was never implemented, the revised cost report instructions were not
implemented either.
We propose to amend Sec. 417.576 to make clear that the incurred
per capita costs in the cost report must include the costs of hospital
and skilled nursing facility services paid by Medicare intermediaries
at the election of the HMO or CMP.
B. Technical Amendments
1. In Sec. 417.1, we would add a definition of ``furnished'', to
make clear that in part 417, the term means made available by the HMO,
CMP, or HCPP either directly or under arrangements it makes with other
entities.
2. In Sec. 417.800, we would revise paragraph (c)(2)(ii) to conform
to the statutory provision and long-standing practice, under which the
following are deducted from the reasonable cost incurred by the HCPP:
An amount equal to 20 percent of that cost,
representing the Medicare coinsurance.
The actuarial equivalent of the Medicare part B
deductible.
3. We also propose to remove, as outdated, the following sections
and paragraphs that were applicable to contract periods that began
before January 1, 1986, and to realign the designation schemes as
necessary:
(b) Paragraph (b) of Sec. 417.546 (Physicians' services
and other part B supplier services furnished under arrangements) and
the Editorial note at the end of the section.
Paragraph (d)(2) of Sec. 417.560 (Apportionment: part B
physician and supplier services).
All of Sec. 417.562 (Weighing of direct services
furnished by physicians and other practitioners).
VIII. Other Required Information
A. Paperwork Reduction Act
Section 417.532(b) (with respect to HMOs and CMPs) and
Sec. 417.800(c) (with respect to HCPPs) require those organizations to
submit the information necessary for HCFA to determine whether payment
in excess of the presumptive limit is appropriate, because of the
health condition of the organization's Medicare enrollees, or because
of extraordinary occurrences. The time needed to prepare the
information would depend on the particular circumstances but would not,
we believe, exceed 8 hours per organization. Section 417.576 requires
HMOs and CMPs to submit certified cost reports as a basis for final
settlement. We estimate that preparation of the full cost report will
require 100 hours.
If you comment on the information collection requirements, please
send a copy of those comments directly to:
Office of Information and Regulatory Affairs, Office of Management
and Budget, room 3002, New Executive Office Bldg., Washington, DC
20503, Attention: Allison Herron Eydt, Desk Officer for HCFA.
B. Response to Comments
Because of the large number of items of correspondence we normally
receive on a proposed rule, we are not able to acknowledge or respond
to them individually. However, we will consider all comments that we
receive by the date and time specified in the ``DATES'' section of this
preamble, and if we proceed with the final rule, we will respond to the
comments in the preamble to the final rule.
IX. Regulatory Impact Statement and Flexibility Analysis
This proposed rule would establish a presumptive limit on payment
to HMOs, CMPs, and HCPPs. We anticipate the following savings in
Medicare expenditures for the next 5 fiscal years as a result of this
proposed policy:
Medicare Program Savings
[In millions of dollars]
Fiscal year:
1994............................................................. 14
1995............................................................. 15
1996............................................................. 17
1997............................................................. 19
1998............................................................. 21
This rule would also require HMOs and CMPs to include in their cost
reports the costs of inpatient hospital services and SNF care furnished
to their Medicare enrollees, for which payment is made by Medicare
intermediaries directly to the providers.
We generally prepare a regulatory flexibility analysis that is
consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601
through 612) unless the Secretary certifies that a rule would not have
a significant economic impact on a substantial number of small
entities. For purposes of the RFA, all HMOs, CMPs, and HCPPs are
considered to be small entities. Individuals are not considered small
entities under the RFA.
Since this proposed rule represents a significant change in the
application of cost limits for cost of HMOs, CMPs, and HCPPs, and would
also require HMOs and CMPs to make minor changes in the reporting of
their per capita costs, we are providing the following voluntary
regulatory flexibility analysis.
1. Effect of the Presumptive Limit on Cost HMOs and CMPs and on HCPPs
That Provide Inpatient Hospital Services
We believe that the costs of services furnished by these prepaid
health care organizations should not exceed the costs for services
furnished to an actuarially similar group of Medicare beneficiaries
whose services are paid for under the Medicare fee-for-service payment
systems. Excess cost can often be avoided by reducing unnecessary
utilization and by electing effective but less expensive treatment
modalities.
There are approximately 55 plans (22 HMOs and CMPs, and an
estimated 33 HCPPs) that would be subject to the proposed presumptive
limit. Program data from 1989, the most recent year for which we have
audited cost report data, indicate that, in 1989, 38 percent of these
organizations would have exceeded a presumptive limit of 100 percent of
the AAPCC, half of them by 0 to 10 percent. These organizations had, at
that time, little incentive to monitor costs. This proposed rule makes
two changes that should encourage them to pay more attention to costs
incurred on behalf of Medicare enrollees:
The imposition of the presumptive limit on all these
organizations; and
The elimination of the effective incentives policy that
had remained in effect for HCPPs.
We believe that many of these organizations would respond promptly
to these incentives and reduce expenditures. Consequently, we
anticipate that, in the first year of implementation of these proposed
rules, only 25 percent of the HMOs, CMPs, and HCPPs would exceed the
presumptive limit, that is, for only 25 percent would all the costs
incurred on behalf of their Medicare enrollees exceed 100 percent of
the AAPCC. In subsequent years, we expect that this percentage would
decline, as more of these organizations modify their practices in
response to the incentives.
There are two basic methods for reducing costs. First, the
organizations can implement utilization controls, particularly for
inpatient hospital care. Currently these organizations are not
reporting inpatient hospital and SNF costs and hence have no reason to
opt for lower-cost alternatives. However, the proposed full reporting
requirement would change this. HMOs and CMPs would be required to
report all services furnished to Medicare beneficiaries. (See section
B.3. of this voluntary regulatory flexibility analysis.)
Second, the organizations can review claims more aggressively to
identify and remove duplicate claims that result in payment both from
the organizations and the Medicare carrier to a physician or other
supplier for the same service. Although organizations are currently
required to identify duplicate claims, they have no incentive to do a
thorough job. Although we do not have data on what percentage of total
costs is represented by duplicate payments, we believe that the
elimination of those payments could, in many cases, bring costs below
the presumptive limit.
The proposed presumptive limit rules would provide exceptions of
two kinds. In the first place, HCFA could exempt small organizations
(those with fewer than 500 Medicare enrollees) from the presumptive
cost limit for up to two consecutive years. The rationale is that a
small enrollment is less likely (than a large enrollment) to be
representative of the general Medicare population in the area served by
the organization. The small enrollment could be more healthy or less
healthy, and if less healthy, could lead to costs in excess of the
limit.
In the second place, organizations that exceed the presumptive
limit have the opportunity to document that their Medicare enrollees
have health care needs that exceed those of the average mix of Medicare
beneficiaries who reside in their service areas but, since they are not
enrollees, have their services paid for under the Medicare fee-for-
service payment systems. An HMO, CMP, or HCPP that exceeded the
presumptive limit would have the option of providing to HCFA data to
document that its costs in excess of the limit are justified because of
the greater health care needs of its Medicare enrollees. The full
reporting requirement would assist HMOs and CMPs in this endeavor.
The organizations could also document unusual circumstances beyond
their control (such as fire, flood, earthquake, strike) that had
significant impact on their costs.
Upon documentation and verification by HCFA, the organization would
receive payment for costs in excess of the limit if it could show that
the excess costs were ``reasonable.''
Some organizations may feel disadvantaged because they are located
in areas where there is a relatively low AAPCC. However, in all
geographic areas, the basis for the AAPCC is precise data on Medicare
costs for Medicare beneficiaries who are not enrolled in HMOs, CMPs, or
HCPPs. In areas where the AAPCC is relatively low because the delivery
of services under the fee-for-services systems is very efficient,
prepaid health care organizations are still expected to be at least as
efficient as the fee-for-service payment system. Only if the group of
Medicare enrollees is less healthy than the Medicare average in the
area could costs in excess of the presumptive limit be justified. In
other words, a managed care system, as represented by prepaid health
care organizations, is expected to be at least as efficient as the fee-
for-service system.
This proposed rule could have a positive effect on the revenues of
organizations that meet the criteria for payments in excess of the
presumptive limit; organizations that do not meet those criteria may
face reduced revenues. We estimate that the loss of revenue for HMOs,
CMPs, and HCPPs that exceed the presumptive limit would be
approximately 5 percent on the average. However, we believe that many
of these organizations will change their practices in ways that will
reduce their costs to correspond to the reduction in revenues. This
would achieve the purpose of the proposed rule, which is to protect the
Medicare program against excessive payments by giving the affected
organizations an incentive to hold their costs to reasonable levels.
HCPPs that furnish hospital services are subject to the presumptive
limit, which applies to all services, part B as well as part A. For
these HCPPs, therefore, the removal of the ``effective incentives''
exception (under which these HCPPs were exempt from reasonable charge
limits for physicians' services) does not have any additional impact.
2. Effect of Cost-Reporting Changes on HMOs, CMPs, and HCPPs
The change in reporting per capita costs (referred to as full
reporting) would affect all 26 cost HMOs and CMPs. HCPPs that furnish
inpatient hospital care would also have to monitor part A costs. As
explained earlier in this regulatory flexibility analysis, inpatient
hospital and SNF costs are not being reported. This may constitute an
incentive to use more costly inpatient (part A) services, when
outpatient (part B) services may be as, or even more appropriate. Under
this proposed rule, HMOs and CMPs and the specified HCPPs would be
required to report or monitor these costs. Although full reporting may
cause a slight decrease in Medicare payments to HMOs and CMPs,
accounting for these costs should be the first step in establishing
utilization controls and determining the most appropriate use of
resources for the least cost.
The time needed for compliance with this requirement would depend
on what systems the plan already has in place, how much modification,
if any, they require, and, for an HCPP, the number of particular part B
services the HCPP furnishes to its Medicare enrollees.
3. Effect of Increased Reporting Requirements on HCPPs that do not
Furnish Inpatient Hospital Services
For HCPPs that do not furnish inpatient hospital services, the
elimination of the effective incentives policy requires major changes.
As noted above, under this policy, HCPPs were in some cases exempt from
reasonable charge limits and therefore were not required to document
what they paid for individual services. Under the proposed rule, these
HCPPs would be required to document what they paid for services using
the Medicare coding systems and to determine the Medicare payment level
for all services. This would require changed procedures for these
HCPPs, most of which are currently exempt from such documentation
either because they provide services on other than a fee-for-service
basis, or because they contract with physician groups that use
effective incentives and thus are subject to the prudent buyer standard
of current Sec. 417.802(b) of the rules. Since the information is
readily available from the Medicare contractor, we estimate that not
more than 40 hours would be required to include it in the annual cost
report. However, for a staff or group plan that does not pay its
physicians on a fee-for-service basis, the conversion may be more time-
consuming.
4. Effect on Physicians
Physicians would be affected by the presumptive limit, if an HMO,
CMP, or HCPP--
Terminates its contract with HCFA; or
In order to keep costs within the presumptive limit--
Reduces its payments to physicians;
Controls utilization so that the fewer services are
furnished; or
Reduces the number of physicians on staff or under
contract.
5. Effect on Medicare Enrollees
Medicare enrollees could be affected if the organization in which
they are enrolled decides, because its costs exceed the presumptive
limit, not to contract with Medicare. However, many HMOs and CMPs
entered into contracts or retained contracts when the AAPCC was to be
applied as an absolute limit, so it does not seem likely this proposed
regulation alone would lead them to drop their cost contracts.
6. Effect on Medicare Intermediaries and Carriers
If an organization exceeds the presumptive limit and seeks payment
under the special circumstances exception, intermediaries and carriers
might be required to provide information necessary to verify a plan's
documentation of special circumstances. However, this would not
significantly affect intermediary or carrier workload and would not
require renegotiation of their contracts. If organizations terminate
their cost contracts, carriers (and intermediaries for home health
claims) would have to process claims for those Medicare enrollees who
do not enroll in another prepaid health care organization.
7. Conclusion
The chief objective of the presumptive limit is to ensure that
HMOs, CMPs, and HCPPs are paid no more for services than would have
been paid under the Medicare fee-for-service payment systems. We
believe that this proposed rule would move the Medicare program toward
this objective by encouraging HMOs, CMPs, and HCPPs to operate more
efficiently without impeding reasonable and necessary service to
Medicare enrollees.
Section 1102(b) of the Act requires the Secretary to prepare a
regulatory impact analysis for any rule that may have a significant
impact on the operations of a substantial number of small rural
hospitals. This analysis must conform to the provisions of section 603
of the RFA. For purposes of section 1102(b) of the Act, we define a
small rural hospital as a hospital that is located outside of a
Metropolitan Statistical Area and has fewer than 50 beds.
We are not preparing a rural impact statement since we have
determined, and the Secretary certifies, that this proposed rule would
not have a significant impact on the operations of a substantial number
of small rural hospitals.
In accordance with the provisions of Executive Order 12866 this
proposed rule was reviewed by the Office of Management and Budget.
List of Subjects in 42 CFR Part 417
Administrative practice and procedure, Health maintenance
organizations (HMOs), Medicare, and Reporting and record keeping
requirements.
42 CFR part 417 would be amended as set forth below:
1. The authority citation for part 417 continues to read as
follows:
Authority: Secs. 1102, 1833(a)(1)(A), 1861(s)(2)(H), 1866(a),
1871, 1874, and 1876 of the Social Security Act (42 U.S.C. 1302,
1395l(a)(1)(A), 1395x(s)(2)(H), 1395cc(a), 1395hh, 1395kk, and
1395mm); sec. 114(c) of Pub. L. 97-248 (42 U.S.C. 1395mm note); 31
U.S.C. 9701; and secs. 215 and 1301 through 1318 of the Public
Health Service Act (42 U.S.C. 216 and 300e through 300e-17), unless
otherwise noted.
2. In Sec. 417.1, the following definition is added in alphabetical
order:
Sec. 417.1 Definitions.
* * * * *
Furnished, when used in connection with prepaid health care
services, means services that are made available to an enrollee either
directly by, or under arrangements made by, the HMO, CMP, or HCPP.
* * * * *
3. In Sec. 417.494, revise paragraph (b)(1) introductory text,
revise paragraph (b)(1)(iv), and add a new paragraph (b)(1)(v), to read
as follows:
Sec. 417.494 Modification or termination of contract.
* * * * *
(b) Termination by HCFA. (1) HCFA may terminate a Medicare contract
with an HMO or CMP for any of the following reasons: * * *
(iv) HCFA determines that the HMO or CMP no longer meets the
requirements of section 1876 of the Act for entering into a Medicare
contract.
(v) The HMO or CMP has had, for two consecutive years, a final
overclaim as determined under Sec. 417.532.
* * * * *
4. Throughout subpart O, except in Sec. 417.532(a)(2), all forms of
the verb ``reimburse'' are changed to the corresponding forms of the
verb ``pay'', ``reimbursement'' is changed to ``payment'', and
``reimbursable'' is changed to ``payable''.
5. In Sec. 417.532, paragraphs (a) through (d) and paragraph (e)
introductory text are revised to read as follows:
Sec. 417.532 General considerations.
(a) Conditions and criteria for payment--(1) Basic criteria. The
costs incurred by an HMO or CMP to furnish services covered by Medicare
are payable if they are--
(i) Proper and necessary;
(ii) Reasonable in amount; and
(iii) Except as provided in Sec. 417.550, appropriately apportioned
among the Medicare enrollees, other enrollees, and nonenrolled patients
of the HMO or CMP.
(2) Cost reimbursement principles. In determining fair and
equitable payment to the HMO or CMP, HCFA generally applies the cost
reimbursement principles set forth in Sec. 413.5 of this chapter.
(b) Presumptive limit--(1) Applicability. The provisions of this
paragraph apply to cost HMOs and CMPs and to HCPPs that furnish any
inpatient services in general, acute care, short stay hospitals (as
distinguished from psychiatric, chronic, or rehabilitation hospitals
that are long-stay hospitals). In this paragraph, references to HMOs
and CMPs must be read as applicable also to HCPPs that furnish
inpatient services in acute care hospitals.
(2) Criteria for reasonableness. In judging whether costs are
reasonable, HCFA applies, as a presumptive limit on the total amount
payable on behalf of Medicare enrollees, the weighted average of the
AAPCCs for those enrollees.
(3) Terminology. As used in this paragraph--(i) Overclaim means a
claim for costs in excess of the presumptive limit; and
(ii) Final overclaim means that portion of an overclaim that the
HMO or CMP cannot document as ``reasonable'' under paragraph (b)(4) of
this section.
(4) Exceptions to presumptive limit. HCFA may accept and pay claims
for costs that exceed the presumptive limit if the HMO or CMP documents
that those excess costs are reasonable because of either of the
following circumstances:
(i) The Medicare enrollees of the HMO or CMP have special needs and
require a volume and intensity of services that exceed the average for
Medicare beneficiaries of the same age and sex living in the same
geographical area.
(ii) There were extraordinary occurrences beyond the control of the
HMO or CMP including, but not limited to, strikes, fire, earthquake,
flood, or similar unusual happenings that had substantial cost effects.
(5) Conditions for additional payments. If an HMO or CMP seeks
additional payments as an exception to the presumptive limit, it must
comply with HCFA instructions for the exception process described in
paragraphs (a)(6) through (a)(10) of this section.
(6) Response to first notice--(i) Timing of response. Within 60
days after receipt of a first notice indicating that its costs exceed
the presumptive limit, the HMO or CMP must submit the required
information to HCFA.
(ii) Required information. The required information is any
information that HCFA identifies as necessary for it to evaluate
whether the HMO or CMP qualifies for an exception to the presumptive
limit. It may include, but is not limited to, data on costs of services
furnished to individual enrollees, documenting the volume and intensity
of services required by the Medicare enrollees.
(iii) Consequences of failure to provide required information. If
the HMO or CMP fails to submit the information requested by HCFA, the
HMO or CMP forgoes the option of seeking additional payments, and is
subject to the final adjustment procedures of Sec. 417.576(c).
(7) Determination and notice of determination. If the HMO or CMP
submits the information requested by HCFA, HCFA considers that
information, determines whether the HMO or CMP meets the conditions for
additional payments, and gives the HMO or CMP notice of that
determination.
(8) Response to notice of adverse determination. (i) If HCFA's
determination under paragraph (a)(7) of this section does not provide
for additional payments, or provides for them in amounts that the HMO
or CMP considers to be less than the special needs of its Medicare
enrollees justify, the HMO or CMP may submit additional materials to
support its position that its costs in excess of the presumptive limit
are the result of one of the circumstances specified in paragraph
(b)(4) of this section, or that the special needs specified in that
paragraph justify larger additional payments.
(ii) The HMO or CMP must submit the additional materials within 60
days of receipt of the notice of adverse determination.
(9) Verification. All information submitted by HMOs and CMPs
seeking additional payments is subject to verification by HCFA or its
authorized representatives. HCFA may seek verification from sources
such as Medicare intermediaries or carriers and State and local
agencies. For example, the local chapter of the American Red Cross
might be able to confirm the impact of a natural disaster.
(10) Determination and notice of final overclaim. HCFA determines
whether there is a final overclaim and gives the HMO or CMP written
notice of that determination as follows:
(i) After the notice of presumptive overclaim, if the HMO or CMP
does not timely submit required information under paragraph (b)(6) of
this section.
(ii) After a notice of adverse determination under paragraph (b)(7)
of this section, if the HMO or CMP does not submit additional
justification under paragraph (b)(8) of this section.
(iii) After consideration of any additional material submitted by
the HMO or CMP under paragraph (b)(8) of this section.
(11) Adjustment for final overclaim. (i) If the HMO or CMP has a
contract with HCFA under subpart L of this part, the rules of
Sec. 417.576(c) apply.
(ii) If the HMO or CMP no longer has any contract under subpart L
of this part, it must, unless other arrangements are mutually agreed
upon, reimburse within 30 days after receipt of the notice, any amounts
due HCFA under the final overclaim determination.
(12) Exemptions based on size. HCFA may exempt an HMO or CMP from
the presumptive limit requirements for up to 2 consecutive years if the
HMO or CMP has 500 or fewer Medicare enrollees at the beginning of its
contract period. HCFA may establish additional criteria that these HMOs
or CMPs must meet in order to qualify for this exception.
(13) Termination of contact. As provided in Sec. 417.494(b)(1)(v),
HCFA may terminate its Medicare contact with an HMO or CMP that has a
final overclaim for 2 consecutive years, on the grounds that the HMO or
CMP is inefficient and that it is not prudent for HCFA to contract with
inefficient entities.
(c) Method and amount of payment to the HMO or CMP. (1) HCFA makes
interim per capita payments each month for each Medicare enrollee,
equivalent to the interim per capita cost rate determined in accordance
with Sec. 417.570.
(2) HCFA adjusts the interim per capita rate as necessary during
the contract period and makes final adjustments at the end of the
contract period.
(3) In determining the amount due the HMO or CMP, HCFA deducts from
the reasonable cost that the HMO or CMP actually incurs for covered
services furnished to its Medicare enrollees, an amount equal to the
actuarial value of the applicable Medicare part A and part B deductible
and coinsurance amounts that would have applied to the covered services
for which payment is being made if these enrollees had not enrolled in
this or another HMO or CMP.
(d) Payment for hospital and SNF services--(1) Election by the HMO
or CMP. An HMO or CMP must elect, for each provider that furnishes
hospital or SNF services to the HMO's or CMP's Medicare enrollees,
either direct payment or payment by HCFA.
(2) Timing, notice, and effect of election. (i) The HMO or CMP must
make the election and notify HCFA in writing before the beginning of
its contract period.
(ii) The election is binding for the full contract period.
(e) Reimbursement by organization. If the HMO or CMP elects to pay
providers directly, as provided in paragraph (d) of this section, it
must--
* * * * *
6. In Sec. 417.576, paragraph (b)(2)(i) is revised to read as
follows:
Sec. 417.576 Final settlement.
* * * * *
(b) * * *
(2) * * *
(i) The per capita costs incurred in furnishing covered services to
its Medicare enrollees, determined in accordance with Sec. 417.532
through 417.568, and including--
(A) The costs incurred by entities related to the HMO or CMP by
common ownership or control; and
(B) The costs of hospital and skilled nursing facility services
paid by HCFA's intermediaries under the option provided in
Sec. 417.532(d).
* * * * *
7. In Sec. 417.800, the section heading is revised, the definition
of reporting period is added, and paragraphs (b), (c), and (d) are
revised to read as follows:
Sec. 417.800 Payment to HCPPs: Definitions and basic rules.
(a) Definitions.
* * * * *
Reporting period means a period specified by HCFA, for which the
HCPP must report its cost and utilization data.
(b) Qualifying conditions. An organization wishing to participate
as an HCPP must--
(1) Enter into a written agreement with HCFA as specified in
Sec. 417.801;
(2) Furnish physicians' services through its employees or under a
formal arrangement with a medical group, individual practice
association, or individual physicians;
(3) Furnish covered part B services to its Medicare enrollees
through institutions, entities, and persons that have qualified under
the applicable requirements of title XVIII of the Social Security Act;
and
(4) If it does not furnish inpatient hospital services as specified
in paragraph (c)(1) of this section, demonstrate to HCFA's satisfaction
that it has in place systems that will enable it to use the Medicare
billing codes to document on its cost reports the cost of each part B
service furnished to its Medicare enrollees.
(c) Payment of reasonable costs--(1) Applicability. This paragraph
applies to HCPPs that do not furnish inpatient services in general
acute-care, short-term hospitals. For HCPPs that furnish inpatient
services in those hospitals, the rules of Sec. 417.532(b) apply.
(2) Payment for part B services: Basic rules--(i) Cost basis
payment. Except as provided in paragraph (d) of this section, HCFA pays
an HCPP on the basis of the reasonable cost it incurs, as specified in
subpart O of this part, for the covered part B services furnished to
its Medicare enrollees.
(ii) Deductions. In determining the amount due an HCPP for covered
part B services furnished to its Medicare enrollees, HCFA deducts, from
the reasonable cost actually incurred by the HCPP--
(A) An amount equal to 20 percent of the incurred cost,
representing the Medicare coinsurance; and
(B) The actuarial value of the part B deductible.
(3) Criteria for reasonableness. The costs incurred by the HCPP in
furnishing physicians' services and other part B supplier services may
be considered reasonable if they--
(i) Are comparable to costs incurred for similar services furnished
by similar physicians and other suppliers in the same or a similar
location; and
(ii) Do not exceed what HCFA would pay, in the aggregate (as
determined under subpart E of part 405 or part 415 of this chapter, as
appropriate), for the same services under the fee-for service system.
(4) An HCPP must use the Medicare billing codes to document, on its
cost reports, the cost of each part B service furnished to its Medicare
enrollees.
(5) Verification by HCFA. All information furnished by the HCPP is
subject to verification by HCFA or its authorized representatives.
Methods of verification may include but are not limited to on-site
visits and audits.
(d) Payment for services furnished by providers. For part A or part
B services furnished to the HCPP's Medicare enrollees by a provider,
HCFA pays the provider through the provider's Medicare intermediary.
* * * * *
8. In Sec. 417.801, paragraphs (a), (b)(4) and (b)(5) are revised
and paragraph (b)(7) is added; and revise paragraphs (d)(1)(ii) and
(d)(1)(iii) and add a paragraph (d)(1)(iv), to read as follows:
Sec. 417.801 Agreements between HCFA and health care prepayment plans.
(a) Basic requirement. In order to participate and receive payment
under the Medicare program as an HCPP, an organization must enter into
a written agreement with HCFA.
(b) * * *
(4) Not impose any limitations on the acceptance of Medicare
enrollees or beneficiaries for care and treatment that it does not
impose on all other individuals;
(5) Consider any additional requirements that HCFA finds necessary
or desirable for efficient and effective program administration; and
* * * * *
(7) Document the cost of part B services as required by
Sec. 417.800(c)(4).
* * * * *
(d) * * *
(1) * * *
(ii) The HCPP is not in substantial compliance with the provisions
of the agreement, applicable HCFA regulations, or applicable provisions
of the Medicare law;
(iii) The HCPP undergoes a change of ownership as specified in
subpart M of this part; or
(iv) An HCPP that furnishes inpatient hospital care has had a final
overclaim, as determined under Sec. 417.532(b), for 2 consecutive
years.
* * * * *
9. Section 417.802 is revised to read as follows:
Sec. 417.802 Other applicable regulations.
(a) General rule. The payment rules set forth in Secs. 417.530
through 417.550 for cost HMOs and CMPs also apply to HCPPs except as
specified in paragraph (b) of this section.
(b) Exceptions--(1) Sec. 417.532(d). HCPPs do not have the option
of paying providers that furnish inpatient hospital services, SNF
services, or part B services to the HCPP's Medicare enrollees. HCFA
pays the providers, as indicated in Sec. 417.800(d).
(2) Sec. 417.536(1). Return on equity capital of proprietary
providers owned by the HCPP is not an allowable cost.
(3) Sec. 417.536(m). These limitations on payment do not apply to
HCPPs. The limitations that do apply are set forth in this subpart.
(4) Sec. 417.548. The rules governing payment for provider services
furnished through arrangements do not apply because HCPPs do not pay
providers.
(5) Sec. 417.550(b)(2). Payment of reasonable cost for independent
certification of cost reports does not apply because HCPPs are not
required to have their cost reports independently certified.
Sec. 417.546 [Amended]
10. In Sec. 417.546, the following changes are made:
a. Paragraph (b) and the Editorial Note are removed.
b. In paragraph (a), the ``(a)'' designation is removed, and the
``(1)'' and ``(2)'' designations are changed to ``(a)'' and ``(b)'',
respectively.
Sec. 417.560 [Amended]
11. In Sec. 417.560, the following changes are made:
a. Paragraph (d)(2) is removed.
b. In paragraph (d)(1), the designation ``(1)'' and the clause
``Except as provided in paragraph (d)(2) of this section'' are removed,
and the word ``the'', preceding ``Medicare share'' is revised to
``The''.
(Catalog of Federal Domestic Assistance Program No. 93.773,
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)
Dated: July 28, 1993.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
Dated: November 3, 1993.
Donna E. Shalala,
Secretary.
[FR Doc. 94-3610 Filed 2-18-94; 8:45 am]
BILLING CODE 4120-01-P
