Medicare Program; Establishment of the Medicare Advantage Program, 4588-4741 [05-1322]

Agencies

• Centers for Medicare & Medicaid Services
• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 70, Number 18 (Friday, January 28, 2005)]
[Rules and Regulations]
[Pages 4588-4741]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-1322]



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Part III





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 417 and 422



Medicare Program; Establishment of the Medicare Advantage Program; 
Final Rule

Federal Register / Vol. 70, No. 18 / Friday, January 28, 2005 / Rules 
and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 417 and 422

CMS-4069-F
RIN 0938-AN06


Medicare Program; Establishment of the Medicare Advantage Program

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

ACTION: Final rule.

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SUMMARY: This final rule implements provisions of the Social Security 
Act (the Act) establishing and regulating the Medicare Advantage (MA) 
program. The MA program was enacted in Title II of The Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) 
(Pub. L. 108-173) on December 8, 2003. The MA program replaces the 
Medicare+Choice (M+C) program established under Part C of title XVIII 
of the Act, while retaining most key features of the M+C program.
    The MA program attempts to broadly reform and expand the 
availability of private health plan options to Medicare beneficiaries.
    This final rule responds to public comments on a proposed rule 
published on August 3, 2004 (FR 69 46866).
EFFECTIVE DATE: These regulations are effective March 22, 2005 except 
for the following changes which will become effective on January 1, 
2006: amendment of Sec.  417.600(b); removal of Sec.  417.602 through 
Sec.  417.638; and amendments to Sec.  417.832(d); and Sec.  417.840.

FOR FURTHER INFORMATION CONTACT: Eligibility, Election, and 
Enrollment--Lynn Orlosky, 410-786-9064 or Randy Brauer, (410) 786-1618.
    Benefits and Beneficiary Protections--Frank Szeflinski, 303-844-
7119.
    Quality Improvement Program--Tony Hausner, 410-786-1093.
    Submission of Bids, Premiums, and Plan Approval--Anne Hornsby, 410-
786-1181.
    Payments to MA Organizations--Anne Hornsby, 410-786-1181.
    Special Rules for MA Regional Plans--Marty Abeln, 410-786-1032.
    Contracts with MA Organizations--Mark Smith, 410-786 8015.
    Beneficiary Appeals--Chris Gayhead, 410-786-6429.
    General Information--410-786-1296.

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Table of Contents

I. Background
    A. Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003
    B. Relevant Legislation
    1. Balanced Budget Act of 1997
    2. Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999 and the Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000
    3. Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA)
    C. Codification of Regulations
    D. Organizational Overview of Part 422

II. Analysis of and Responses to Public Comments

    A. Overview
    1. Comments on the August 3, 2004 Proposed Rule
    2. Organization of the Final Rule
    B. General Comments
    1. Administrative Procedure Act (APA) Issues
    2. Other General Comments

III. Provisions of the Proposed Rule, Analysis of and Responses to 
Comments on the Proposed Rule, and Final Decisions

IV. Provisions of the Final Rule

V. Collection of Information Requirements

VI. Regulatory Impact Analysis

Regulations Text

Acronyms

    Because of the many terms to which we refer by acronym in this 
final rule, we are listing the acronyms used and their corresponding 
terms in alphabetical order below:

ABN                                 Advance beneficiary notice
ACR                                 Adjusted Community Rate
ACRP                                Adjusted Community Rate Proposal
ADL                                 Activities of Daily Living
AHRQ                                Agency for Healthcare Research and
                                     Quality
AI/AN                               American Indian and Alaska Native
ALJ                                 Administrative law judge
APA                                 Administrative Procedure Act
BBA                                 Balanced Budget Act of 1997
BBRA                                Medicare, Medicaid and SCHIP [State
                                     Children's Health Insurance
                                     Program] Balanced Budget Refinement
                                     Act of 1999, (Pub. L. 106-113)
BIPA                                Medicare, Medicaid, and SCHIP
                                     Benefits Improvement and Protection
                                     Act of 2000 (Pub L. 105-33)
CAH                                 Critical Access Hospitals
CCPs                                Coordinated Care Plans
CMPs                                Competitive Medical Plans
CORF                                Comprehensive outpatient
                                     rehabilitation facility
DSH                                 Disproportionate Share Hospital
EGPH                                Employer and Union Group Health
                                     Plans
EOC                                 Evidence of coverage
ESRD                                End-Sage Renal Disease
FEHB                                Federal Employees Health Benefits
FFS                                 Fee-for-Service plans
FI                                  Fiscal Intermediaries
HCPP                                Health care prepayment plan
HHA                                 Home health agency
HMO                                 Health Maintenance Organizations
HOS                                 Health Outcomes Survey
ICF/MR                              Intermediate Care Facilities for
                                     Mentally Retarded
IHS                                 Indian Health Service
IPA                                 Independent Physician Association
ISAR                                Intra-Service Area Rate
I/T/U                               Indian Health Service, Tribal and
                                     Urban Health Program
LEP                                 Limited English Proficiency
LMRP                                Local Medical Review Policy
M+C                                 Medicare+Choice
MA                                  Medicare Advantage
MA-PD                               Medicare Advantage Prescription Drug
MAC                                 Medicare Appeals Council
MCOs                                Managed Care Organizations
MMA                                 Medicare Prescription Drug,
                                     Improvement, and Modernization Act
                                     of 2003
MSA                                 Medical Savings Account
MYBE                                Mid-year Benefit Enhancement
OACT                                Office of the Actuary
OPM                                 Office of Personnel Management
PACE                                Program All-Inclusive Care for the
                                     Elderly
P4P                                 Pay for Performance
PCP                                 Primary Care Physician
PDP                                 Prescription Drug Plan
PFFS                                Private Fee-For-Service
POS                                 Point of Service
PPOs                                Preferred Provider Organizations
PSOs                                Provider Sponsored Organizations
QI                                  Quality Improvement
QIO                                 Quality Improvement Organization
RFB                                 Religious Fraternal Benefit
SAE                                 Service Area Expansion
SEP                                 Special Election Period
SHIP                                State Health Insurance Programs

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SNF                                 Skilled Nursing Facility
SNPs                                Special Needs Plans
 

I. Background

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

    The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003 (MMA) (Pub. L. 108-173) was enacted on December 8, 2003. Title 
II of the MMA makes important changes to the current Medicare+Choice 
(M+C) program by replacing it with a new Medicare Advantage (MA) 
program under Part C of Medicare. On August 3, 2004, we published a 
proposed rule in the Federal Register (69 FR 46866) that set forth the 
provisions that would implement Title II of the MMA. Beginning in 2006, 
the MA program is designed to:
     Provide for regional plans that may make private plan 
options available to many more beneficiaries, especially those in rural 
areas.
     Expand the number and type of plans provided for, so that 
beneficiaries can choose from Health Maintenance Organizations (HMOs), 
Preferred Provider Organization (PPO) plans (the most popular type of 
employer-sponsored plan), Fee-for-Service (FFS) plans, and Medical 
Savings Account (MSA) plans, if available where the beneficiary lives.
     Enrich the range of benefit choices available to enrollees 
including improved prescription drug benefits, other benefits not 
covered by original Medicare, and the opportunity to share in savings 
where MA plans can deliver benefits at lower costs.
     Provide incentives to plans, and add specialized plans to 
coordinate and manage care in ways that comprehensively serve those 
with complex and disabling diseases and conditions.
     Use open season competition among MA plans to
    improve service, improve benefits, invest in preventive care, and 
hold costs down in ways that attract enrollees.
     Enhance and stabilize payments to organizations, improve 
program design, introduce new flexibility for plans, and reduce 
impediments to plan participation.
     Advance the goal of improving quality and increasing
    efficiency in the overall health care system. Medicare is the 
largest payer of health care in the world. Medicare can drive changes 
in the entire health care system.
    With these new and improved choices, Medicare beneficiaries, like 
Federal employees and retirees in the Federal Employees Health Benefits 
(FEHB) Program, will have the opportunity to obtain improved benefits, 
improved services, and reduced costs. However, beneficiaries will still 
be able to remain in traditional Medicare (referred to throughout as 
``original'' Medicare), enhanced by the new Part D drug benefit. All 
will have the opportunity to switch among plans, or to or from original 
Medicare, during the annual election period (or ``open season'') in 
November and December.
    Over time, participating plans will be under continued competitive 
pressure to improve their benefits, reduce their premiums and cost 
sharing, and improve their networks and services, in order to gain or 
retain enrollees. In addition, we expect plans to use integrated health 
plan approaches such as disease prevention, disease management, and 
other care coordination techniques. In doing so, integrated plans that 
combine the original Parts A and B of Medicare and the new Part D drug 
benefit and apply these innovative techniques must pass on savings that 
may result from these care coordination techniques to the enrollee 
through reduced premiums or additional benefits.
    Beginning in 2006, payments for local and regional MA plans will be 
based on competitive bids rather than administered pricing. MA 
organizations will submit an annual aggregate bid amount for each MA 
plan. An aggregate plan bid is based upon the MA organization's 
determination of expected costs in the plan's service area for the 
national average beneficiary for providing non-drug benefits (that is, 
original Medicare (Part A and Part B) benefits), Part D basic 
prescription drugs, and supplemental benefits if any (including 
reductions in cost sharing). Our payment to an MA organization for an 
MA plan's coverage of original Medicare benefits depends on the 
relationship of the plan's basic A/B bid to the plan benchmark. For a 
plan with a basic A/B bid below its benchmark, we will pay the MA 
organization the basic A/B bid amount, adjusted by the individual 
enrollee's risk factor, plus the rebate amount. (The rebate is 75 
percent of the difference between the plan bid and benchmark, and is 
used to provide mandatory supplemental benefits or reductions in Part B 
or Part D premiums. The government retains the other 25 percent.) For a 
plan with a bid equal to or above its benchmark, we will pay the MA 
organization the plan benchmark, adjusted by the individual enrollee's 
risk factor. In addition, we would pay the bid amount, if any, for Part 
D basic coverage. The MMA also requires other adjustments to payments. 
See the subpart G preamble for a discussion of the geographic Intra-
Service Area Rate (ISAR) adjustment and the government premium 
adjustment (referred to in the MMA as the ``adjustment relating to risk 
adjustment'').
    We will be able to negotiate bid amounts with plans in a manner 
similar to negotiations conducted by the Office of Personnel 
Management(OPM) with FEHB plans. We will work with plans to ensure 
benefit packages meet the needs of our population and that information 
is made available to beneficiaries so that they can make decisions 
about which plans best meet their needs.
    Finally, in conjunction with the new drug benefit required under 
Title I of MMA, which is addressed in separate rulemaking found in part 
423, changes made in the MMA to the M+C program (now called the MA 
program) are intended to bring about broad-based improvements to the 
Medicare program's benefit structure, including improved prescription 
drug coverage under the MA program. Organizations offering local and 
regional coordinated care MA plans must offer at least one plan with 
the Medicare prescription drug benefit or an actuarially equivalent 
drug benefit.
    In addition to the changes because of the MMA, we identified many 
areas in the proposed rule where we believed we could prevent or reduce 
unnecessary burden, duplication, or complexity either in interpreting 
the new MMA provisions or in modifying existing rules to accommodate MA 
reforms.

B. Relevant Legislation

1. Balanced Budget Act of 1997
    Section 4001 of the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-
33) added sections 1851 through 1859 to the Social Security Act (the 
Act) establishing a new Part C of the Medicare program, known as the 
Medicare+Choice (M+C) program. Under section 1851(a)(1) of the Act, 
every individual entitled to Medicare Part A and enrolled under 
Medicare Part B, except for individuals with end-stage renal disease 
(ESRD), could elect to receive benefits either through the original 
Medicare program or an M+C plan, if one was offered where he or she 
lived.
    The primary goal of the M+C program was to provide Medicare 
beneficiaries with a wider range of health plan choices through which 
to obtain their Medicare benefits. The BBA authorized

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us to contract with private organizations offering a variety of private 
health plan options for beneficiaries, including both traditional 
managed care plans (such as those offered by HMOs that had been offered 
under section 1876 of the Act), and new options that were not 
previously authorized. Four types of M+C plans were authorized under 
the new Part C, as follows:
     M+C coordinated care plans, including HMOs (with or 
without point-of-service options (POS)), provider sponsored 
organizations (PSOs), and PPOs.
     M+C MSA plans (combinations of a high deductible M+C 
health insurance plan and a contribution to an M+C MSA).
     M+C private fee-for-service (PFFS) plans.
     M+C religious and fraternal benefit (RFBs)plans.
    The BBA changed the payment methodology to Medicare health plans 
and initially afforded beneficiaries more choice of plans nationally. 
However, payment rates grew modestly in relation to the costs health 
plans incurred, resulting in fewer health plans participating in the 
M+C program, decreased choice of plans available to beneficiaries, and 
fewer extra benefits available to enrollees. Although there were large 
payment increases in rural areas as a result of the BBA provisions, 
access to Medicare coordinated care plans declined significantly in 
rural areas after 1997.
    To implement these changes, we published an interim final rule in 
the Federal Register on June 26, 1998 (63 FR 34968); a final rule on 
February 17, 1999 (64 FR 7968); and a final rule with comment on June 
29, 2000 (65 FR 40170).
2. Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 
and the Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000
    The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 
1999, Pub. L. 106-113 (BBRA) amended the M+C provisions of the BBA. 
Many of these amendments were reflected in the June 29, 2000 final rule 
with comment period. In addition, the Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act of 2000, Pub. L. 106-554 
(BIPA), enacted December 21, 2000, further amended the M+C provisions 
of the BBA and BBRA. A final rule containing BIPA provisions was 
published in the Federal Register on March 22, 2002 (67 FR 13278), as 
well as on August 22, 2003 (68 FR 50855).
    These laws enacted subsequent to the BBA made incremental changes 
to M+C payments and provided financial incentives to plans to 
participate in the M+C program. While these efforts helped stabilize 
the M+C program, they did not generally improve plan participation in 
the M+C program nor did they increase overall beneficiary enrollment or 
access to plans in rural areas.
3. Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA)
    The specific sections of Part C of the Social Security Act that 
were impacted by the MMA are as follows:
    Section 1851--Eligibility, election and enrollment.
    Section 1852--Benefits and beneficiary protections.
    Section 1853--Payments to MA organizations.
    Section 1854--Premiums.
    Section 1855--Organizational and financial requirements for MA 
organizations.
    Section 1856--Establishment of standards.
    Section 1857--Application procedures and contracts with MA 
organizations.
    Section 1858--Special rules for MA regional plans [added by the 
MMA].
    Section 1859--Definitions; Miscellaneous provisions.
    This final rule addresses the new MA provisions in Title II of MMA. 
The requirement in 1858(a)(2)(D) of the Act to conduct a market survey 
and analysis before establishing MA regions took place concurrent with 
the publication of the MA proposed rules. The announcement of the 
establishment of the MA and Prescription Drug Plan (PDP) regions 
occurred on December 6, 2004. The regions may be found at https://
cms.hhs.gov/medicarereform/mmaregions.
    Provisions of the MMA addressed in this final rule outside of Title 
II of the MMA include Section 722--Medicare Advantage Quality 
Improvement Program, of Title VII. Quality improvement provisions in 
this final rule may be found under Subpart D--Quality Assurance.

C. Codification of Regulations

    The final provisions set forth here are codified in 42 CFR Part 
422, The Medicare Advantage Program.
    The regulations for managed care organizations (MCOs) that contract 
with CMS under cost contracts will continue to be located in 42 CFR 
part 417, Health Maintenance Organizations, Competitive Medical Plans, 
and Health Care Prepayment Plans.

D. Organizational Overview of Part 422

    The MMA amended the existing provisions of the Medicare statute 
found in Part C of Title XVIII, sections 1851 through 1859 of the Act, 
and added a new section 1858 to the Act. This final rule covers a wide 
range of topics included in the existing part 422, including 
eligibility and enrollment, benefits and beneficiary protections, 
payment, contracting requirements, and grievances and appeals. We have 
generally retained the organization of the sections from part 422, 
except for reordering subparts F and G to place the bidding and payment 
provisions in sequential order.
    Where the MMA did not amend existing statute, this final rule does 
not set forth unchanged regulations text from the previous part 422. 
Thus, this final rule contains only the necessary revisions to existing 
part 422. In some subparts of part 422, the only changes are in 
nomenclature, that is, the replacement of M+C references with MA 
references. The regulations in that subpart H are not set forth in this 
final rule. The subparts with substantive changes are as follows:
    Subpart A--General provisions, establishment of the Medicare 
Advantage Program, definitions, types of MA plans, and cost-sharing in 
enrollment-related costs (user fees).
    Subpart B--Requirements concerning beneficiary eligibility, 
election, and enrollment and disenrollment procedures.
    Subpart C--Requirements concerning benefits, access to services, 
coverage determinations, and application of special benefit rules to 
PPOs and regional plans.
    Subpart D--Quality improvement program, chronic care improvement 
program requirements, and quality improvement projects.
    Subpart E--Relationships with providers.
    Subpart F--Submission of bids, premiums, and related information 
and plan approval.
    Subpart G--Payments for MA organizations.
    Subpart I--Organization compliance with State law and preemption by 
Federal law.
    Subpart J--Special rules for MA regional plans, including the 
establishment of MA regions, stabilization fund, and risk sharing.
    Subpart K--Application and contract requirements for MA 
organizations.
    Subpart L--Effect of change of ownership or leasing of facilities 
during term of contract.

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    Subpart M--Beneficiary grievances, organization determinations, and 
appeals.
    Subpart N--Medicare contract determinations and appeals.
    Subpart O--Intermediate sanctions.
Each of these subparts is discussed below in section II of this 
preamble.

II. Analysis of and Responses to Public Comments

A. Overview

1. Comments on the August 3, 2004 Proposed Rule
    We received 186 items of correspondence containing more than a 
thousand specific comments on the August 3, 2004 proposed rule. 
Commenters included MCOs and other industry representatives, 
representatives of physicians and other health care professionals, 
beneficiary advocacy groups, representatives of hospital and other 
providers, insurance companies, employers, States, accrediting and peer 
review organizations, members of the Congress, Indian Health Service 
(HIS), Indian Health Service, Tribal and Urban Health Programs (I/T/U), 
American Indians and Alaska Natives (AI/AN), and others. Consistent 
with the scope of the August 3, 2004 proposed rule, most of the 
comments addressed multiple issues, often in great detail. We received 
many comments expressing concerns unrelated to the proposed rule. Some 
commenters expressed concerns about Medicare unrelated to the MA 
program, while others addressed concerns about health care and health 
insurance coverage unrelated to Medicare. Because of the volume of 
comments we received in response to the August 3, 2004 proposed rule we 
will be unable to address comments and concerns that are unrelated to 
the proposed rule. Listed below are the six areas of the proposed 
regulation that generated the most concern:
     Bidding and Payment.
     Access issues, including network adequacy and access 
providers, including rural providers.
     Specialized Medicare Advantage Plans.
     Establishment of MA Regions.
     Eligibility and enrollment issues, including disenrollment 
for failure to pay cost sharing and lock in.
    In addition, we received many comments on the proposed rule 
relating to Part 417 for Health Maintenance Organizations; Competitive 
Medical Plans, and Health Care Prepayment Plans that contract with CMS 
under cost contracts. A discussion of those comments may be found 
separately at that Part.
2. Organization of the Final Rule
    In this final rule, we address all comments received on the 
proposed rule. We are addressing issues according to the numerical 
order of the relative regulation sections.

B. General Comments

1. Administrative Procedure Act (APA) Issues
    We received several comments on various aspects of the rulemaking 
process, as discussed below:
    Comment: One commenter suggested that we waive the APA provision 
that requires at least 30 days notice prior to a final regulation 
becoming effective in order to allow applicants applying to become 
specialized MA plans for special needs individuals, or ``SNPs,'' to 
have the new requirements apply as soon as possible. The commenter made 
this recommendation in the event that this final regulation was not 
issued prior to the MMA statutory deadline for issuing a final 
regulation for SNPs that was 1 year following the date of enactment, or 
December 8, 2004.
    Response: The first two categories of special needs individuals, 
institutionalized persons and dual eligibles, were specified in the 
statute, and we have already begun working with plans wishing to become 
specialized MA plans for these categories of special needs individuals. 
We discuss in subpart A below our approach to allowing for the 
additional category of special needs individuals--those with severe or 
disabling chronic conditions. This final rule will take effect March 
22, 2005, except where otherwise noted. We do not believe it is 
necessary to waive the 30-day notice period because it likely will take 
longer than the 30-day period for a plan's application and approval 
process to occur. However, we intend to work with applicants who wish 
to offer specialized MA plans to ensure that the approval process is as 
efficient and timely as possible.
    Comment: We received a number of comments on the timing of the 
regulation and the short timeframe between issuance of the final 
regulation and preparation of applications and bids early in 2005 for 
contract year 2006. One commenter stated that the time required to re-
contract with its commercial provider networks to ensure that the PPO 
contracts contain the Medicare required language and rate structure 
that are reflective of CMS reimbursements, is substantial. The 
commenter indicated that it needed more time to build the system 
infrastructure to support a new systems platform than would be required 
for commercial enrollees. The commenters suggested that plans may have 
to limit the number of regions in which they participate because of the 
short timeframes between issuance of the regulation and the application 
filing deadline.
    Response: We agree that working within the statutory constraints of 
the MMA, including the relatively short period of about 13 months 
between enactment of the legislation and issuance of final regulations, 
there is little time between issuance of the regulation and the 
preparation of applications and bids in 2005 for contract year 2006. 
With respect to the short time frame in applications and submission of 
bids, please refer to the comments and responses related to bidding at 
Sec.  422.254 and Sec.  422.502 related to application requirements. 
Our goal beginning on the date of enactment of the MMA was to issue 
final regulations as soon as possible so that prospective MA plans 
would have the necessary information to be able to make business 
decisions before bids are due mid 2005.
    Comment: Several commenters recommended that CMS issue a final rule 
with comment period prior to implementation of the final rules. The 
commenters expressed concern that certain aspects of the proposed rule 
that would impact rural providers have not been specified in sufficient 
detail. One commenter recommended that CMS conduct a second notice of 
proposed rulemaking incorporating changes from the first round of 
comments and allowing for public comment on the additional details that 
are currently under development, or issue the regulations on an interim 
basis with a second comment period on the additional, important details 
that are currently under development or that reflect decisions made 
following this round of comments.
    Response: Under the APA, we are required to provide the public with 
the opportunity to review and comment upon proposed regulations. We 
have done this through the publication of the August 3, 2004 proposed 
rule and its corresponding comment period. We believe that allowing for 
a second round of comments or publishing interim regulations would make 
it difficult for MA organizations wishing to offer MA plans in 2006 to 
prepare to meet the new requirements imposed by the MMA and implemented 
by this final rule.
2. Other General Comments
    Comment: A number of commenters stated that the final regulation 
must

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address the unique state of AI/AN people and the Indian health program. 
In particular, these comments raise concerns about the implications of 
the proposed rules on the Indian health care delivery system. For 
example, there is concern that the proposed rules will jeopardize 
significant revenues the Indian health system now collects from 
Medicaid for ``dual eligibles,'' that is, those individuals who are 
eligible for both Medicare and Medicaid. They ask for substantial 
modifications to the proposed rules to enable voluntary enrollment by 
AI/AN populations in MA plans. Some of the suggested modifications 
include: (1) encouraging MA enrollment by AI/AN by removing financial 
barriers, such as waiving AI/AN cost sharing for all plans; (2) 
ensuring that I/T/U Health Programs are held harmless financially, and 
are fully reimbursed for covered services provided to AI/AN who enroll 
in a MA plan.
    Response: We appreciate the numerous comments that provided 
information on unique health needs for the AI/AN populations. As noted 
elsewhere, we are implementing the MMA statute through this rulemaking. 
We do not have the flexibility to include language that would carve out 
a subset of Medicare beneficiaries, such as AI/AN populations, if it is 
not provided for in statutory language. Specific comments raised by the 
AI/AN and I/T/U organizations will be addressed in the respective 
subparts under which the comments were submitted. In general, however, 
we believe that the newly created regional plans will create new 
choices for the AI/AN populations, and that access to MA plans will be 
improved. Similarly, because MA regional plans must reimburse for all 
covered benefits in and out of network, IHS facilities may receive 
reimbursement for out of network care provided to a regional MA plan 
AI/AN beneficiary by that MA regional plan. Under provisions designed 
to protect the Medicare program from fraud and abuse, a broad waiver of 
beneficiary cost sharing of the type the commenter requests would not 
be permitted. However, we make no statement regarding the applicability 
of existing statutory and regulatory provisions that may allow for the 
waiver of cost sharing in certain cases.
    Comment: One commenter recommended that CMS develop and conduct 
educational and informational activities on the differences in the 
various MA options, particularly in areas where there are choices of 
original Medicare, managed care plans, PPOs, MSAs and PPFs plans. The 
commenter believes that there is a potential for confusion and error 
for beneficiaries with so many choices.
    Response: We agree that strong outreach to beneficiaries about 
their new choices of MA plans, as well as the drug benefit, is critical 
to the success of these new programs. We will be devoting more 
resources to providing new information and education on the new plan 
choices and drug benefit.
    Comment: We received a number of general comments on specialized MA 
plans for special needs individuals, sometimes referred to as ``SNPs'' 
or ``special needs plans''. Comments relating to definitions of SNPs 
may be found in subpart A and comments on enrollment may be found in 
subpart B below. Among the general comments was a suggestion to 
disseminate a set of guiding principles for SNPs and further refine 
them as experience increases. We also received a comment that network 
adequacy for SNPs should be evaluated to ensure timely, accessible, and 
appropriate care and that all necessary specialists are represented. 
Further, it was suggested that the provider network should be broad 
enough to ensure that vulnerable populations served have timely access 
to all necessary specialists required to address special needs.
    Additionally, several commenters stated that CMS should incorporate 
into regulation the authority to waive or modify MA requirements that 
conflict with the intent of the SNP provision. Finally, some commenters 
requested that CMS provide guidance with regard to the States' role in 
developing and approving SNPs for dual eligibles. It was recommended 
that CMS give states maximum flexibility in using waiver authority to 
integrate Medicare and Medicaid benefits for dual eligibles under SNP 
programs. A commenter suggested that CMS consult with State Medicaid 
agencies where Home and Community-based waivers are operating before 
allowing these populations to be enrolled in SNPs because this could 
add to the cost and complexity of providing services.
    Response: We provided Interim Guidance for SNPs in the 2005 Call 
Letter in June 2004 and will provide additional operational guidance 
for SNPs after publication of the final rule. Interim guidance may be 
obtained at www.cms.hhs.gov/healthplans/specialneedsplans/
qaspecneeds06-23.pdf. Consistent with current policy for network 
adequacy for MA plans as found at Sec.  422.112, we will require that 
MA organizations submit information about their provider network and 
will review this information as part of the application and approval 
process to ensure that timely, accessible, and appropriate care is 
provided. We will be particularly interested in the availability of 
care designed to address the needs of the enrolled special needs 
population. While the MMA allows SNPs to limit enrollment to a defined 
population, as described in Sec.  422.52, the law does not provide for 
waiver of other MA requirements for SNPs. We encourage States and MA 
plans to work cooperatively in developing programs to serve dual 
eligibles and will help to coordinate these efforts where appropriate. 
We believe that SNPs can be appropriate for care and services to those 
in the community and lead to the coordination of the complex services 
they need.
    Finally, we note that program oversight is an essential government 
function that is an integral component of implementing the MA program. 
Throughout this rulemaking, we refer to government activity necessary 
to implement this section, which includes program oversight authority.

III. Provisions of the Proposed Rule, Analysis of and Responses to 
Comments on the Proposed Rule, and Final Decisions

    Part 417--Health Maintenance Organizations, Competitive Medical 
Plans, and Health Care Prepayment Plans
    Subpart J-Qualifying Conditions for Medicare Contracts Extension of 
Reasonable Cost Contracts (Sec.  417.402)
    Authority for cost HMOs/CMPs (cost plans) was due to expire on 
December 31, 2004. Section 234 of the MMA provides an initial extension 
of cost plans through December 31, 2007. It also provides for a 
continued extension of cost plans beyond December 31, 2007, under 
specific conditions.
    Effective for contract years beginning on or after January 1, 2008, 
cost plans may be extended where there are fewer than two coordinated 
care plan-model MA plans of the same type available to Medicare 
beneficiaries in the same service area. Both of the ``competing'' MA 
plans of the same type must meet minimum enrollment requirements for 
the entire previous year in order to trigger mandatory cost plan non-
renewal or service area reduction. We interpreted the statute to 
require cost plan service area reduction where there are two or more MA 
plans of the same type meeting minimum enrollment requirements 
competing for Medicare members in a portion of the cost plan's service 
area. We asked for comment on our interpretation in the proposed rule 
related to mandatory service area reductions, saying that an 
alternative

[[Page 4593]]

reading of section 234 of the MMA might permit renewal of a cost plan 
in all parts of its service area until there was competition from two 
(or more) MA coordinated care plans throughout the cost plan's service 
area. After reviewing comments and responding (below), we are adopting 
the proposed policy as final.
    At Sec.  417.402, we proposed to permit existing cost plans to 
expand their service areas through September 1, 2006. Thereafter, 
service area expansion applications by cost HMOs/CMPs will be initially 
evaluated and accepted only when there are not two or more MA plans of 
the same type meeting minimum enrollment requirements in the area in 
which the cost plan proposes to expand. After reviewing comments and 
responding (below), we are adopting the proposed policy as final.
    We received the following comments on the proposed provisions for 
subpart J of part 417 and have provided our responses:
    Comment: Many commenters supported the non-renewal of cost HMOs/
CMPs as proposed in the proposed rule. These commenters made reference 
to the statutory and Conference Committee Report language that 
indicated the Congressional intent that cost plans are to be required 
to operate under the same provisions as other private plans to the 
extent other private plans are willing to enter the cost plan's service 
area. Many other commenters objected to the partial non-renewal 
proposal made in the proposed rule. Many stated that competition from 
MA coordinated care plans was more likely in urban areas, where most 
cost plan enrollment is concentrated. These commenters stated that even 
where there is no MA coordinated care plan competition in rural areas, 
the viability of a cost plan without an urban ``core'' would likely be 
threatened. To the extent CMS non-renewed cost plans in urban areas, 
the financial viability of the organization offering the cost plan 
would be undermined in rural areas as well because of the loss of 
economies of scale. Such a result would be contrary, these commenters 
said, to an underlying concept of the MMA, which is to increase choices 
for Medicare beneficiaries in rural areas. Finally, many of these 
commenters stated that continuity of care would be needlessly lost for 
members in urban areas enrolled in cost plans that were partly non-
renewed, because the members would be forced to change Medicare plans 
and providers.
    Response: We generally support the notion of continuity of care. 
However, we believe that when competing MA coordinated care plans are 
available in an area that will be non-renewed for a cost plan, non-
renewed cost members are able to continue to receive services from 
current providers through either enrollment in one of the competing MA 
coordinated care plans or by returning to FFS Medicare. We recognize 
that when a cost plan is non-renewed in an urban area with MA 
coordinated care plan competition, the financial viability of the cost 
plan in rural areas without MA coordinated care plan competition may be 
undermined. However, we believe that allowing a cost plan to continue 
to compete for members in areas of MA competition would unfairly 
undermine the financial viability of the competing MA coordinated care 
plans. Therefore, we have not modified our regulation. We believe that 
this interpretation is consistent with the statutory intent that cost 
plans will not be permitted to compete for new members under different 
provisions from those applicable to other private plans that have 
entered the cost plan's service area.
    Comment: Some commenters stated that the proposed regulation text 
at Sec.  417.402(c)(1) and (2) did not specify what kind of ``year'' 
was meant--calendar year, 12 month period, or something else. All of 
these commenters also recommended that CMS specify in regulation text 
that the ``year'' referred to is a calendar year.
    Response: We agree with this comment and have modified the 
regulation text to specify that the ``year'' in question is a calendar 
year. This is consistent with the statute, in that MA and cost plan 
offerings are for calendar years. To the extent that competition has 
been present for the entire previous calendar year, it should mean the 
calendar year immediately prior to the year in which the cost plan will 
be required to non-renew in a portion of its service area or have its 
contract non-renewed.
    Comment: Many commenters recommended that CMS distinguish between 
the meaning of ``plan'' within the section 1876 cost program and the 
meaning of ``plan'' within the MA program. Under the section 1876 cost 
program, each CMS-contracting HMO/CMP is allowed to offer a single 
Medicare cost ``plan''--see section 1876(c)(2)(A)(I) of the Act. On the 
other hand, under the MA program, each CMS-contracting MA organization 
is permitted to offer many MA ``plans''--see Sec.  422.4(b).
    Response: We disagree with the commenters. Section 234 of the MMA 
expressly provides that a cost contract may not be extended or renewed 
for a service area if such service area during the previous year was 
within the service area of two or more coordinated care plans of the 
same type (that is, regional or local) that meet the relevant 
enrollment requirements. Because a single MA organization may offer two 
different MA coordinated care plans within a cost plan's service area, 
a single MA organization can trigger the non-renewal of the cost 
contract, if the other requirements of Section 1876(h)(5)(C)(ii) of the 
Act are met.
    Comment: Several commenters submitted comments stating that 
specialized MA plans for special needs individuals (special needs plans 
or SNPs) (defined at Sec.  422.2) should not count in the MA 
coordinated care plan competition tests in Sec.  417.402(c)(1) through 
(3), because they are not available to the general public and therefore 
not a true test of the availability of MA coordinated care plans in the 
service area of a cost plan.
    Response: We agree with the commenter that the Congress intended to 
permit cost plans to remain in place in an area until the enrollees in 
that cost plan have at least two local or two regional MA plan options 
to choose from in the area. Because in many cases cost enrollees would 
not be eligible to enroll in a SNP, we do not believe that the 
existence of a SNP in a service area should automatically count as an 
option available in that service area. We note that the statute refers 
to a cost plan's service area being within the ``service area'' of two 
local or regional MA plans. The MA regulations at Sec.  422.2 define a 
plan's service area as an area within which an MA-eligible individual 
may enroll in a particular MA plan offered by an MA organization. 
Although a SNP's service area is open to all individuals in the service 
area who are in the special needs category served by the plan, it may 
not be open generally to MA-eligible individuals (for example, if it is 
a SNP that exclusively, rather than disproportionately, enrolls special 
needs individuals). For this reason, we believe that a cost plan may 
not be ``within the service area'' of a SNP, as this term is used in 
the competition test, in some cases. We will therefore apply the 
competition test on a case-by-case basis with respect to SNPs. If the 
SNP is an option available to the cost plan's enrollees, and the SNP 
meets the requirements of section 1876(h)(5)(C)(ii) of the Act and 
Sec.  417.402(c), it will be taken into account in determining whether 
the cost plan may be renewed. Similar considerations apply to MA plans 
that exclusively enroll employer/labor group members under authority 
provided in section 1857(i) of the Act

[[Page 4594]]

and Sec.  422.106(c) and (d). To the extent the employer/labor group MA 
plan is available to the cost plan's enrollees, and the MA plan meets 
the requirements of section 1876(h)(C)(ii) of the Act and Sec.  
417.402(c), it will be taken into account in determining whether the 
cost plan may be renewed. Thus, we will also apply the competition test 
on a case-by-case basis with respect to employer/labor group MA plans.
    Comment: One commenter suggested that implicit in the 
``competition'' tests was the fact that the MA coordinated care plans 
that caused the non-renewal in a portion of the service area, or that 
caused the non-renewal of the cost plan in its entire service area, 
would be available in the coming year. The commenter was concerned that 
CMS might enforce this section of the cost regulations, even if one of 
the MA plans used in establishing the ``competition'' threshold were 
non-renewing or withdrawing from the service area in the year in which 
enforcement would occur.
    Response: Because such a result would be contrary to statutory 
intent, CMS will not proceed with enforcement when fewer than two MA 
coordinated care plans will be offered to Medicare beneficiaries in the 
affected area at the time of enforcement.
    Comment: One commenter asked CMS to state its clear intent in 
regulatory text that we will allow cost plans to expand service areas 
after September 1, 2006.
    Response: As we said in the preamble of the proposed rule and 
repeated in this preamble: ``We will permit existing cost plans to 
expand their service areas through September 1, 2006. Thereafter, 
service area expansion applications by cost HMOs/CMPs will be initially 
evaluated and accepted only when there are not two or more MA plans of 
the same type meeting minimum enrollment requirements in the area in 
which the cost plan proposes to expand.'' We specifically included the 
first sentence in regulation text at Sec.  417.402(b). However, service 
area expansions are not guaranteed after that date. Please note that 
the regulation text at Sec.  417.402(b) specifically authorizing 
service area expansions through September 1, 2006, does not preclude 
them thereafter. Additionally, the new language replaces identical 
language in this section of the regulation (and which language first 
appeared in section 634 of the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (BIPA)) which provided service 
area expansion authority for cost plans through September 1, 2003. The 
commenter should note that we have previously interpreted the language 
in BIPA and in our regulations to be permissive in this area, rather 
than proscriptive. We will continue to apply it permissively in this 
area to the extent that the conditions for non-renewal under Section 
1876(h)(5)(C) and Sec.  417.402(c) are not present.

Subpart Q--Beneficiary Appeals

    Changes to subpart Q are addressed in the preamble discussion for 
subpart M, which deals with appeals policy for MA plans, cost plans and 
HCPPs.

A. Subpart A--General Provisions (Sec.  422.1)

1. Conforming Changes
    Subpart A of the August 3, 2004 proposed rule set forth several 
general and conforming changes dictated by MMA. Below is a summary of 
the provisions in subpart A. (For a broader discussion of the 
provisions, please refer to our proposed rule.) The provisions are as 
follows:
     Section Sec.  422.1 lists the statutory authority that is 
implemented in part 422. In Sec.  422.1, we have added the new section 
1858 of the Act that pertains to ``Special rule for MA Regional 
Plans.''
     We removed provisions relating to application requirements 
and evaluation and determination procedures in Sec.  422.6 and Sec.  
422.8 and added them to Sec.  422.501 and Sec.  422.502 of subpart K, 
so that all application and contracting information is in one place.
     We redesignated and amended Sec.  422.10 as Sec.  422.6 
and amended newly redesignated Sec.  422.6. Section 422.6 (formerly 
Sec.  422.10) described the user fees associated with the Medicare 
Beneficiary Education and Information Campaign, required under section 
1857(e)(2) of the Act.
2. Definitions (Sec.  422.2)
    The majority of the proposed changes in subpart A concerned new, 
revised, and obsolete definitions for the new MA Program in Sec.  
422.2. The MMA required several new and broad definitions; ``MA 
regional plans,'' ``specialized MA plans,'' ``ACR,'' ``Additional 
benefits,'' ``Adjusted community rate,'' and ``M+C'' obsolete after 
2006.
    In proposed Sec.  422.2, we also revised several existing 
definitions to make them consistent with the MMA statute. For example, 
Mandatory supplemental benefits are redefined to incorporate language 
reflecting that these benefits may be paid for through premiums and 
cost sharing or through the application of a rebate, or both. 
Therefore, 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. Benefits may include reductions in cost sharing for 
benefits under the original Medicare FFS program, and are paid for in 
the form of premiums and cost sharing, or by an application of the 
beneficiary rebate rule in section 1854(b)(1)(C)(ii)(I) of the Act, or 
both.
    However, optional supplemental benefits retained the same 
definition as under the M+C program as health services not covered by 
Medicare that are purchased at the option of the MA enrollee and paid 
for in full, directly by (or on behalf of) the Medicare enrollee, in 
the form of premiums or cost-sharing. (Throughout the regulation, the 
phrase ``supplemental benefits'' refers to both mandatory and optional 
supplemental benefits.) The terms ``mandatory supplemental'' and 
``optional supplemental'' are used when referring specifically to one 
of the types of supplemental benefits.
    We removed ``additional benefits'' from the definition of ``basic 
benefits'' because MA plans will no longer offer additional benefits. 
In addition, we replaced the word ``ACR'' process with the words 
``annual bidding'' process in the definition of ``benefits'' to reflect 
the new bidding process for submission and approval of benefits. 
Finally, we revised the definition of ``service area'' to incorporate 
the concept of the new MA regional plan's service area that consists of 
an entire region.
    Under section 1851(a)(2)(A) of the Act, two new types of 
coordinated care plans were established; MA Regional plans, which are 
regional PPO plans, and specialized MA plans for special needs 
individuals, or SNPs. We defined an ``MA local area'' as a county or 
other area specified by us because it is important to distinguish an MA 
local area from an MA region. We defined an ``MA regional plan'' 
because it is a new type of coordinated care plan choice for 
beneficiaries. While PPOs first became a choice for beneficiaries under 
the BBA, they operated as ``local'' plans on a county (including multi-
county) or partial county basis. The MA regional plan functions like a 
local PPO but must serve an entire region.
    A regional MA plan's service area is one or more entire MA regions; 
thus, we defined an ``MA regional plan'' as a private health plan that 
operates as a PPO, but serves an entire CMS-designated region. Local 
PPOs that may offer MA plans under the MA program, the regional PPOs 
must have a network of contracting providers that have agreed to a 
specific reimbursement for covered benefits that are offered by the MA 
regional plan, and must also provide for reimbursement for all

[[Page 4595]]

covered benefits regardless of whether the covered benefits are 
provided through the network providers or outside of the network.
    We defined an ``MA local plan'' as one that is not an MA regional 
plan. Also defined under part 422 are the ``Prescription Drug 
Sponsor,'' ``PDP,'' and a ``MA Prescription Drug (MA-PD) plan.'' A 
sponsor must be a private entity that meets our requirements and 
standards. PDP sponsors may offer multiple plans throughout the country 
or in a region, but sponsors must submit an individual bid for each 
plan.
    An MA-PD plan is an MA plan that also provides qualified 
prescription drug coverage as found in Part D of the Act. An 
organization offering a coordinated care MA plan must have an MA-PD 
plan in each of the service areas in which it operates, as required 
under section 1860D 21(a)(1) and (2) of Part D of the Act.
    In section 1859(b)(6)(A) of the Act, specialized MA plans for 
special needs individuals or SNPs are defined to be MA plans that 
exclusively serve special needs individuals defined in section 
1859(b)(6)(B) of the Act. The establishment of specialized MA plans 
allows MA plans to exclusively enroll special needs individuals in MA 
plans that have targeted clinical programs for these individuals.
    Section 1859(b)(6)(B) of the Act identifies three types of special 
needs individual as: (1) institutionalized individuals; (2) individuals 
entitled to medical assistance under a State plan under Title XIX; and 
(3) other individuals with severe or disabling chronic conditions as 
the Secretary determines would benefit from enrollment in a SNP plan.
    Comment: One commenter supported a broad definition that tracks 
section 1859(b)(6) of the Act in order to provide CMS with the 
flexibility needed to approve a wide range of proposals to meet the 
unique needs of special populations and expand their choices.
    Response: We agree with the commenter. We are providing general 
guidelines in our regulations in order to maintain the flexibility to 
approve a wide range of proposals, while also protecting the interests 
of special needs beneficiaries.
    The Secretary may also designate an MA plan as a specialized MA 
plan for special needs individuals, ``SNP,'' if the plan 
``disproportionately'' serves special needs individuals.
    Comment: Several commenters responded to the question in the 
proposed rule as to whether CMS should allow specialized MA plans that 
disproportionately enroll special needs individuals, or 
``disproportionate percentage'' plans and how they should be defined. 
Most commenters supported including ``disproportionate percentage'' 
plans in the definition of SNPs. One of the reasons given was to allow 
married beneficiaries, or children of special needs individuals, to 
enroll in the same plan as the spouse or parent, even if only one 
individual meets the definition of a special needs individual.
    Many commenters suggested that CMS not establish detailed criteria 
to define disproportionate percentage, particularly at the outset. It 
was felt that enrollment thresholds might act as a barrier to plan 
participation and limit choices available to Medicare beneficiaries. 
Some commenters suggested that CMS identify ``exclusive'' and 
``disproportionate'' plans at the time of each application. Some 
commenters recommended that the criteria be national, not regional or 
local.
    Several commenters agreed that the criteria should be quantitative, 
for example, an MA plan risk score in the upper quintile of all MA 
plans, or a frailty score in the upper quintile of all MA plans as 
measured by Activities of Daily Living (ADL) scores on the Health 
Outcomes Survey (HOS).
    Some commenters recommended that a ``disproportionate percentage'' 
SNP enroll fifty (50) percent or more special needs individuals. 
Another commenter suggested that SNPs remain exclusive, but if plans 
were able to enroll those without special needs, at least eighty-five 
(85) percent of the plan's enrollees should be individuals with special 
needs. Another commenter stated that requiring an upper limit of more 
than seventy-five (75) percent of special needs individuals would be 
problematic. One commenter believes that ``redesignated'' SNPs, that 
is, regular MA plans that become SNPs, be allowed to continue enrolling 
non-special needs individuals as long as overall enrollment contains a 
higher proportion of special needs individuals than exist in the plan's 
service area. One commenter suggested that--(1) an annual certification 
and compliance process; (2) that new plans have a 3-year startup period 
to attain the threshold, and (3) that CMS annually publish risk score 
distributions. Another commenter recommended that non-exclusive plans 
be defined as having a higher than average enrollment of one or more of 
the special needs individuals groups as estimated for MA plans and/or 
the FFS population.
    Response: We agree that a special needs individual's family members 
may want to join the same plan. We acknowledge that MA plans do not 
have to be exclusive to provide quality specialized programs for 
special needs individuals. We received a wide range of recommendations 
for defining a ``disproportionate percentage'' SNP. We acknowledge that 
there are numerous ways to define and identify disproportionate 
percentage SNPs and agree with those commenters who felt the parameters 
should not be overly restrictive, particularly at the outset. SNPs are 
a new type of coordinated care plan and we believe that plans and CMS 
might not anticipate all factors that should be considered in 
determining an acceptable percentage. We also want to encourage plans 
to develop programs to more effectively care for special needs 
individuals. In order to ensure flexibility, and take into 
consideration the experience gained by plans and CMS as SNPs mature, we 
will define a ``disproportionate percentage'' SNP as one that enrolls a 
greater proportion of the target group (dually eligible, 
institutionalized, or those with a specified chronic illness or 
disability) of special needs individuals than occur nationally in the 
Medicare population based on data acceptable to CMS. We will provide 
further guidance as to what data sources may be used to determine a 
national percentage for a special needs group being targeted by the 
disproportionate percentage plan. Under our authority as provided in 
section 231(d) of the MMA, we are revising the definition of 
specialized MA plan to include ``disproportionate percentage'' plans.
    Comment: Several comments were received regarding how CMS should 
identify those with severe or disabling chronic conditions that would 
make them eligible for enrollment in a SNP. Several commenters 
suggested using broad flexibility, reflecting the language in section 
1858(b)(6) of the Act. Other commenters recommended that SNPs should 
serve as laboratories for developing population-based management 
protocols, not single-disease State management protocols for diagnoses 
that could be well-served by a standard MA plan. Another commenter 
recommended limiting enrollment to those with late-stage chronic 
conditions, those with co-morbidities, adult disabled, and frail 
elderly. Some commenters suggested basing the definition on conditions 
for which alternate care delivery models, such as disease management 
and evidence-based medicine, exist, and also take into consideration 
conditions that are expensive and prevalent for

[[Page 4596]]

there to be savings and risk-management potential.
    Commenters also recommended that conditions should be those 
associated with recognized quality measures, so that CMS may carefully 
monitor specialized MA plans. None of the commenters objected to 
including those individuals who are not institutionalized but require 
an equivalent level of care. ESRD, diabetes, congestive heart failure, 
Alzheimer's and other dementias along with one or more other serious 
conditions, HIV/AIDs, and frail elderly and adult disabled with 
multiple chronic conditions requiring complex medical management were 
among the specific conditions suggested for specialized MA plans.
    Another commenter suggested that on an interim basis CMS restrict 
the definition to those who are nursing home certifiable, as defined by 
each State; ESRD patients; and those diagnosed with AIDs, and, in the 
meantime, collect ADL data through the Health Outcomes Survey (HOS) and 
use this measure in conjunction with Activities of Daily Living (ADL) 
measures to identify high-risk groups. Other commenters suggested 
additional detailed formulas for identifying groups eligible for 
specialized MA plans.
    Response: Because this is a new ``untested'' type of MA plan, we 
are not setting forth in regulation a detailed definition of severe and 
disabling chronic condition that might limit plan flexibility. We will 
review and evaluate proposals for specialized MA plans that serve 
severe or disabling chronic disease categories, including HIV/AIDs, on 
a case-by-case basis. Among the criteria to be considered will be the 
appropriateness of the target population, the existence of clinical 
programs or special expertise to serve the target population, and 
whether the proposal discriminates against ``sicker'' members of the 
target population.

Other Comments on Sec.  422.2

    We requested comments on Sec.  422.2 on the development of an HIV/
AIDS special needs plan that would address the special health needs, 
including prescription drugs, of the Medicare-eligible population 
living with HIV/AIDS.
    We received several comments supportive of the development of an 
HIV/AIDS special needs plan. Therefore, we will consider this type of 
plan application to become a special needs plan for Medicare-eligible 
individuals living with HIV/AIDs.
    For purposes of specialized MA plans, we proposed to define 
``institutionalized'' in the proposed rule as residing in a long-term 
care facility for more than 90 days as determined by the presence of a 
90-day assessment in the Minimum Data Set (MDS).
    Comment: Several commenters suggested that the 90-day residence 
requirement (as determined by a 90-day assessment in the minimum data 
set) be modified. One commenter suggested determining institutional 
status based on the discharge potential at admission. Another commenter 
suggested changing the requirement to 30 days. One commenter did not 
object to 90 days, but recommended changing the language to allow CMS 
to approve exceptions in case the institution failed to perform the 
assessment. In addition, one commenter suggested that 
``institutionalized'' also include those residing in Intermediate Care 
Facilities for the Mentally Retarded (ICF/MR). Several commenters 
recommended that those living in the community while requiring an 
institutional level of care be considered institutionalized.
    Response: In response to comments, we are clarifying and broadening 
the definition of institutionalized for purposes of defining a special 
needs individual to take into consideration those with chronic mental 
conditions and other chronic conditions. For purposes of defining a 
special needs individual, ``institutionalized'' means residing in or 
expected to reside in a long-term care facility whi