CMS Proposed Rule to Establish the Medicare Modernization Act's Medicare Advantage Program.

I. Introduction

On August 3, 2004, the Centers for Medicare and Medicaid Services ("CMS") published proposed regulations addressing certain Medicare proposals contained in the "Medicare Prescription Drug, Improvement, and Modernization Act of 2003" (P.L. 108-173) (the "MMA"), signed into law on December 8, 2003.1 Among other things, the MMA expanded Medicare prescription drug coverage under a new Medicare Part D program ("Part D") and created additional managed care options for Medicare beneficiaries through the implementation of the Medicare Advantage program ("MA"), which has replaced the previous Medicare+Choice program. 2

The August 3, 2004 regulatory proposals were issued under the statutory authority of the MMA and address, as separate proposed rules, both the new Part D prescription drug program and the MA program.3 This memorandum summarizes key aspects of the MA program regulatory proposal (the "Proposed Rule"). In the preamble to the Proposed Rule, CMS seeks comments on a number of specific issues. Comments are due to CMS by October 4, 2004.

II. Summary Of Key Provisions Of The Proposed Rule

A. New Plan Options

A significant feature of the MMA was the expansion of the types of health plans available to Medicare beneficiaries. The three health plan types previously available under the Medicare+Choice program - i.e., coordinated care plans, medical savings account ("MSA") plans, and private fee-forservice ("FFS") plans - will largely continue to be available to Medicare beneficiaries under MA. The MMA established new coordinated care plan options for beneficiaries through the creation of regional plans and specialized MA plans. In addition to implementing these new options, the Proposed Rule would implement the MMA's extension and availability of MSAs and Medicare cost contracts.

1. MA Regional Plans

MA regional plans feature prominently in MA. The Proposed Rule would define an MA regional plan as, "a coordinated care plan structured as a preferred provider organization ("PPO") that serves one or more entire MA regions. An MA regional plan must have a network of contracting providers that have agreed to specific reimbursement for the plan's covered services whether provided in or out of the network." 69 Fed. Reg. 46866, 46952 [Aug. 3, 2004] (Proposed s. 422.2).4 The MMA requires the Secretary to establish no fewer than 10 and no more than 50 regions by January 1, 2005. CMS is interested in receiving comments on how to design the regions in order to maximize beneficiary access. Because MA regions may ultimately encompass multiple states, regional plans operating in more than one state may receive a temporary waiver of the MA state licensure requirement as long as the plan is licensed in at least one state in the region and can demonstrate that licensure applications for other relevant states are pending.

Since enactment of the MMA, existing coordinated care plans, such as health maintenance organizations ("HMOs"), are referred to as "MA local plans" which the Proposed Rule would define as, "an MA plan that is not an MA regional plan." (Proposed s. 422.2). The payment area for a local plan is a county or an equivalent area to be established by CMS. To encourage the formation of regional plans, the MMA established a two-year moratorium on new local PPOs from January 1, 2006 through December 31, 2008. PPOs existing prior to 2006 may continue operations in their existing service areas.

The MMA established incentives to encourage the development of regional plans, including the MA Regional Plan Stabilization Fund ("Fund"), from which entry and retention bonus payments will be made. For a six-year period beginning on January 1, 2007, the Fund will have $10 billion available for bonus payments. National and regional bonuses will be available to encourage organizations to offer MA regional plans in areas of the country in which those plans had not been offered in the previous year and to encourage plans not to withdraw from other areas.

2. Specialized MA Plans

Specialized MA plans are being proposed by CMS in recognition of the special health care needs facing some Medicare beneficiaries. Implementation of these plans is allowed under, but not mandated by, the MMA. The Proposed Rule would define a specialized MA plan as, "any type of MA coordinated care plan that exclusively enrolls special needs individuals." (Proposed s. 422.2.) Under the MMA, specialized MA plans will limit their enrollment to "special needs individuals," defined as beneficiaries who are institutionalized, Medicaid-eligible ("dual eligibles"), have severe or disabling chronic conditions, or who would benefit from enrollment in a specialized MA plan based on criteria to be established by CMS. Under the MMA, effective January 1, 2006, certain dual eligibles will be required to receive prescription drug coverage solely through Part D. The Proposed Rule would mandate that specialized plans provide Part D prescription coverage, as CMS has indicated that this will be the only mechanism by which such dual eligibles would have access to prescription benefits. Previously beneficiaries with end-stage renal disease ("ESRD") were precluded from enrolling in managed care plans. The MMA removed this restriction, and CMS now has the discretion to permit individuals with ESRD to enroll in specialized MA plans.

CMS is seeking comments on a number of issues related to specialized MA plans, including standards for defining a "severe or disabling chronic condition," criteria for limiting enrollment to those with such conditions, and whether to allow such plans to exclusively enroll subgroups of Medicaid or institutionalized beneficiaries. CMS also seeks comments regarding quality oversight mechanisms that could be applied to specialized MA plans.

3. MA MSAs

MSAs are not a new concept in Medicare; they were available to Medicare beneficiaries prior to the MMA, albeit as a demonstration project. The Proposed Rule would describe a Medicare MSA as a "high-deductible insurance policy combined with a savings account for health care expenses." 69 Fed. Reg. at 46872. Previously MSAs were available with certain enrollment limits, although as CMS noted, no plans participated in the demonstration. The MMA expanded the availability of the MSA option by eliminating enrollment limits and establishing MSAs as a permanent option available to beneficiaries, effective January 1, 2006. The MMA also exempted MSAs from certain quality assurance requirements required of other network MA plans. CMS is seeking comments as to whether these changes would help attract MSA sponsors and beneficiaries to the program.

4. Extension of Cost Contracts

The MMA provided for an initial extension of reasonable cost reimbursement contracts through December 31, 2007, with indefinite extension beginning January 1, 2008 under certain conditions. CMS interprets this extension provision to require the reduction of the service areas of cost plans where two or more MA regional or local plans are offered in the area. The Proposed Rule would permit cost plans to expand their services in the short-term, through September 1, 2006, but would authorize service area expansions thereafter only if the extension conditions are met.

B. Benefits and Beneficiary Protections

1. Enrollment in MA Plans (Proposed s. 422.60)

The MMA established the annual election period during which current Medicare beneficiaries may enroll in an MA plan as November 15 through December 31, with beneficiaries making their elections at that time for the following calendar year. For 2006, the election period was extended to allow beneficiaries to select an MA plan until May 15, 2006.

In recognition of the fact that many beneficiaries become eligible for Medicare during the remainder of the calendar year, the MMA also extended the initial enrollment period for all newlyeligible beneficiaries. Additionally, CMS is considering allowing automatic enrollment of beneficiaries receiving Medicare benefits through an employer group-sponsored MA plan.

While the Proposed Rule would retain the eligibility and election rules previously in place under the Medicare+Choice program, the methods for election would be revised to allow additional modes of election utilizing modern technology. As a result, MA plans would be able to allow beneficiaries to enroll using secure Internet sites or health plan customer service centers, or other methods if approved by CMS.

Currently, all MA plans are responsible for fulfilling certain mandatory disclosure obligations by notifying newly-enrolled beneficiaries of the availability of information on the various Medicare programs and products in which they can enroll. To fulfill this obligation, CMS is considering requiring MA organizations to establish websites that would provide beneficiaries and the general public with basic MA plan information and materials.

2. Balance Billing by Non-Contracted Providers (Proposed s. 422.100)

Under existing balance billing rules, if a physician (participating or non-participating) does not have a contractual arrangement with an MA plan, the default payment-in-full amount would be equal to the fee-for-service Medicare payment amount. Non-participating physicians are permitted to accept the assignment of claims on a case-by-case basis, and generally must accept the non-participating Medicare fee schedule amount as payment in full. If the non-participating physician elects not to accept assignment, the physician will generally retain the ability to balance-bill the beneficiary for a maximum of 115% of the non-participating physician fee schedule amount (known as the "limiting charge"). Prior to the MMA, these protections were only available to Medicare beneficiaries in coordinated care plans.

The MMA extended such protection to MSAs and required non-contracting providers to accept as payment-in-full the amount the provider would have collected if the beneficiary was not enrolled in a coordinated care plan or MSA. It is important to note that this prohibition applies to physicians and other entities, but does not apply to statutorily-defined "providers of services" (i.e., hospitals, critical access hospitals, skilled nursing facilities ("SNFs"), comprehensive outpatient rehabilitation facilities, home health agencies, or hospice programs). 69 Fed. Reg. at 46878; See also 42 U.S.C.S. s. 1395x(u) (definition). The Proposed Rule would revise existing regulations regarding balance billing to implement these MMA requirements.

3. Benefits and Cost-Sharing (Proposed s.s. 422.101, 422.102)

MA plans are required to provide basic benefits that include inpatient hospital services ("Part A") and outpatient services ("Part B"). MA plans may elect to offer Medicare non-covered services as supplemental benefits. Prescription coverage will be available to MA plan enrollees pursuant to the Part D prescription drug benefit.

Beneficiaries continue to be responsible for cost-sharing obligations established by their plans. MA regional plans that apply deductibles may not charge beneficiaries a separate deductible for Part A and Part B services; a single deductible will be required for the provision of all basic benefits. Additionally, regional plans must have a catastrophic limit on out-of-pocket expenditures for in-network benefits and an additional catastrophic limit on total out-of-pocket expenditures for all benefits whether in-network or out-of-network. Under the Proposed Rule, MA plans would be responsible for tracking these out-of-pocket limits and for notifying beneficiaries when the limits have been met.

MA plans may reduce beneficiary cost-sharing obligations as a mandatory supplemental benefit to enrollees. Mandatory supplemental benefits are defined as, "health care services not covered by Medicare that an MA enrollee must purchase as part of an MA plan. The benefits...are paid for in the form of premiums and cost-sharing, or by an application of the beneficiary rebate rule [internal citation omitted], or both." 69 Fed. Reg. at 46953 (Proposed s.422.2).

The MMA required all MA coordinated care plans to offer prescription drug benefits through Medicare Part D to enrollees through at least one of their MA plans. See 42 U.S.C.S. s. 1395w-131. To effectuate this, CMS will require MA plans to provide formulary and other prescription benefit information on a website available to enrollees.

4. Access to Services and Network Adequacy (Proposed s. 422.112)

The Proposed Rule would not create new access or network adequacy requirements for MA plans. Instead, the rules would largely retain those that existed under the Medicare+Choice program, with proposed alterations that include:

Elimination of continuity of care requirements for MSAs, private FFS plans, local PPOs, and regional plans;

Revision to cost-sharing obligations for emergency services and post-stabilization care; and

Extension of "home SNF" admission eligibility by eliminating the requirement that the beneficiary have a prior qualifying hospital stay.

MA regional plans would have alternative means of meeting access requirements for their enrollees. CMS would not require regional plans to offer comprehensive networks of contracted providers, but would instead require only that the plan offer "reasonable access to in-network costsharing" through an exception process available to plans that include rural areas in their service area. Even if the MA plan did not have contracts in place with specific provider types in the service area, the plan could still meet access requirements by ensuring that beneficiaries had access to non-network providers at in-network cost-sharing levels.

In order to facilitate an MA regional plan's ability to meet network adequacy requirements across large geographic areas, the MMA authorized CMS to make additional payments to "essential hospitals" that provide inpatient hospital services to regional plan enrollees. For a hospital to be determined to be an "essential hospital," the hospital must be a general acute care hospital and the MA regional plan must certify that it made a "good faith effort" to contract with the hospital. The hospital must also provide convincing evidence to CMS that the MA regional plan payments are less than the hospital's costs. Payments to "essential hospitals" will be made from the Federal Hospital Insurance Trust Fund and are limited to a total of $25 million for 2006. CMS is seeking comments on several aspects of "essential hospital" payments, including how CMS can best ensure that a "good faith effort" to contract has occurred, and the best way to determine that a hospital's costs actually exceeded the amount normally payable.

C. Quality Improvement Program (Proposed s. 422.152)

The MMA excluded MSAs and private FFS plans from the requirement to maintain an ongoing quality improvement program, and the Proposed Rule would establish greater flexibility for all other MA plans offered by MA organizations through the removal of specifically mandated quality improvement topics and performance measures. MA plans would thereby have flexibility in the establishment and implementation of quality improvement initiatives, and could tailor projects to their enrollees' needs.

As a part of the quality improvement program, an MA plan must have in place a chronic care program and develop methods for identifying enrollees with severe chronic health conditions for evaluation and monitoring. MA plans must also engage in other organization-wide quality improvement projects addressing both clinical and non-clinical areas. Such projects must utilize objective quality indicators to measure performance and must result in measurable and sustained improvement.

To facilitate quality improvement programs, the MMA required MA plans to collect data about their enrollees. The Proposed Rule would interpret this to require MA plans to continue to collect, analyze, and report to CMS the performance data previously required (e.g., HEDIS, CAHPS), and also to allow CMS to revise data and reporting requirements over time. CMS is seeking comments on whether to require that all MA plans submit the same data in order to facilitate comparison among all plans, or whether to tailor data metrics to the specific types of MA plans.

D. The Competitive Bidding Process and Plan Payments

The MMA established a new bidding process, replacing the existing adjusted community rating ("ACR") process, for MA organizations who want to offer MA plans as of January 2006. In June 2005, each MA organization must submit to CMS a monthly aggregate bid amount for each MA plan intended to be offered. The monthly aggregate bid amount is the organization's estimate of the revenue required for providing coverage to a typical MA enrollee in the categories of basic benefits, prescription drug coverage and supplemental benefits. To ensure the appropriateness of the bid amount, the MMA required that the cost-sharing component reflect either the mandated Parts A and B cost-sharing levels or be actuarially equivalent to them. CMS is requesting comments on the proposed three methods of calculating the "actuarial equivalence" of MA plan and fee-for-service cost-sharing (i.e., uniform amount, plan-specific amount, and proportional method), and on how they would be implemented. (Proposed s. 422.254).

Plan payments will be based on the comparison of the submitted bid to an area-specific benchmark. The relevant area will be determined by the plan type. If the plan's bid is below the benchmark, the plan will be paid on the basis of its bid amount, less adjustments for beneficiary demographics, intra-area variations in local payment rates, and risk adjustment. If the plan's bid is above the benchmark, the plan will be paid the benchmark rate and beneficiaries will pay the difference in the form of a premium. If the MA plan's benchmark amount exceeds its submitted bid for providing services, 75 percent of the average per capita savings must be provided to the enrollee as a rebate. Rebates may take the form of lower premiums or cost-sharing or additional benefits.

The Proposed Rule would prohibit MA plans from offering reductions in cost-sharing amounts related to Parts A or B (or Part D) and from offering enhancements to Parts A and B benefits. In making this proposal, CMS expressed concerns about the impact of such optional supplemental benefits on the accuracy of the multi-component bid and the equitability of including such benefits, as the costs associated with them would be borne by all beneficiaries, regardless of whether they elected the supplemental benefits.

CMS is seeking comments on the MA payment process, including the use of statewide versus plan-specific risk adjustment for determining rebate amounts and methods of adjusting regional and local plan payments for intra-area variation in payment rates.

E. Preemption of State Laws

The MMA replaced the previous "general" and "specific" preemption rules applicable under the Medicare+Choice program. Under those requirements, a state law was preempted if it conflicted with a Medicare+Choice standard or if it addressed benefit requirements, provider issues, appeals and grievances, or marketing. Under the MMA, all state laws are preempted except those addressing health plan/health insurer licensure and solvency. The Proposed Rule would clarify that these exceptions are intended to be interpreted strictly, in order to promote uniformity in operation of the Medicare program under federal law. To that end, "licensure laws" that address requirements for becoming licensed in a given state would not be preempted, while state operational requirements imposed on licensed entities would be preempted. 69 Fed. Reg. at 46904.

F. Other Provisions

Other regulatory proposals and areas in which CMS is seeking public comment include:

Allowing MA plans to disenroll individuals for nonpayment of cost-sharing obligations;

Allowing MA plan beneficiaries to pursue state legal remedies in disputes that are not related to the organization's status as an MA plan or MA organization;

Mandatory inquiry by MA plans into discovered evidence of "misconduct" (i.e., fraud and abuse) related to payment or delivery of health benefits under the MA contract;

The ability of employers, labor organizations, and fund trusts to directly contract with CMS to provide MA plans to their employees/retirees/members; and

Whether to require or permit MA network and out-of-network providers to provide notice to beneficiaries of their potential liability when MA enrollees access non-Medicare covered services or utilize out-of-network providers without a referral.

Footnotes

1 The text of the proposed rule is available at:

http://a257.g.akamaitech.net/7/257/2422/06jun20041800/edocket.access.gpo.gov/2004/pdf/04- 17228.pdf.

2 The legislative details of these provisions and the other elements of the MMA were described in detail in the memorandum titled, "The Medicare Prescription Drug, Improvement, and Modernization Act of 2003," (Health Care Bulletin HC2003-21) released on December 10, 2003. The memorandum is available through the Reed Smith website at www.reedsmith.com/library/publicationView.cfm?itemid=61104.

3 Reed Smith has prepared a separate client memo summarizing the Part D proposed rule. This memo soon will be available on our website, www.reedsmith.com.

4 Parenthetical citations are to the proposed regulatory provision to be set forth in Title 42 of the Code of Federal Regulations upon adoption of a final rule.

This article is presented for informational purposes only and is not intended to constitute legal advice.

Ms Debra McCurdy

Reed Smith

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