Medicare Program; Medicare Integrity Program, Fiscal Intermediary and Carrier Functions, and Conflict of Interest Requirements, 35204-35220 [05-11775]

Agencies

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

[Federal Register Volume 70, Number 116 (Friday, June 17, 2005)]
[Proposed Rules]
[Pages 35204-35220]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-11775]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare and Medicaid Services

42 CFR Parts 400 and 421

[CMS-6030-P2]
RIN 0938-AN72


Medicare Program; Medicare Integrity Program, Fiscal Intermediary 
and Carrier Functions, and Conflict of Interest Requirements

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would establish the Medicare Integrity 
Program (MIP) and implement program integrity activities that are 
funded from the Federal Hospital Insurance Trust Fund. This proposed 
rule would set forth the definition of eligible entities; services to 
be procured; competitive requirements based on Federal acquisition 
regulations and exceptions (guidelines for automatic renewal); 
procedures for identification, evaluation, and resolution of conflicts 
of interest; and limitations on contractor liability.
    This proposed rule would bring certain sections of the Medicare 
regulations concerning fiscal intermediaries and carriers into 
conformity with the Social Security Act (the Act). The rule would 
distinguish between those functions that the statute requires to be 
included in agreements with fiscal intermediaries and those that may be 
included in the agreements. It would also provide that some or all of 
the functions may be included in carrier contracts. Currently all these 
functions are mandatory for carrier contracts.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. e.d.t on August 16, 
2005.

ADDRESSES: In commenting, please refer to file code CMS-6030-P2. 
Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of three ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments to https://
www.cms.hhs.gov/regulations/ecomments, (attachments should be in 
Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft 
Word).
    2. By mail. You may mail written comments (one original and two 
copies) to the following address ONLY: Centers for Medicare & Medicaid 
Services,

[[Page 35205]]

Department of Health and Human Services, Attention: CMS-6030-P2, P.O. 
Box 8014, Baltimore, MD 21244-8014.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number 1-800-743-3951 in advance to schedule your arrival 
with one of our staff members.
    Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, 
SW., Washington, DC 20201; or 7500 Security Boulevard, Baltimore, MD 
21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Brenda Thew, (410) 786-4889.

SUPPLEMENTARY INFORMATION:
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. Comments will be most useful if they are 
organized by the section of the proposed rule to which they apply. You 
can assist us by referencing the file code [CMS-6030-P2] and the 
specific ``issue identifier'' that precedes the section on which you 
choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. After the close of the 
comment period, CMS posts all electronic comments received before the 
close of the comment period on its public website. Comments received 
timely will be available for public inspection as they are received, 
generally beginning approximately 3 weeks after publication of a 
document, at the headquarters of the Centers for Medicare & Medicaid 
Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday 
through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an 
appointment to view public comments, phone 1-800-743-3951.

I. Background

[If you choose to comment on issues in this section, please include the 
caption ``Background'' at the beginning of your comments.]

A. Current Medicare Contracting Environment

    Since the inception of the Medicare program, the Medicare 
contracting authorities have been in place and largely unchanged until 
the last few years. At the inception of the Medicare program, the 
health insurance and medical communities raised concerns that the 
enactment of Medicare could result in a large Federal presence in the 
provision of health care. In response, under sections 1816(a) and 
1842(a) of the Social Security Act (the Act), the Congress provided 
that public agencies or private organizations may participate in the 
administration of the Medicare program under agreements or contracts 
entered into with CMS.
    These Medicare contractors are known as fiscal intermediaries 
(section 1816(a) of the Act) and carriers (section 1842(a) of the Act). 
With certain exceptions, fiscal intermediaries perform bill processing 
and benefit payment functions for Part A of the program (Hospital 
Insurance) and carriers perform claims processing and benefit payment 
functions for Part B of the program (Supplementary Medical Insurance).
    (For the following discussion, the terms ``provider'' and 
``supplier'' are used as those terms are defined in Sec.  400.202. That 
is, a provider is a hospital, rural care primary hospital, skilled 
nursing facility (SNF), home health agency (HHA), a hospice that has in 
effect an agreement to participate in Medicare, or a clinic, a 
rehabilitation agency, or a public health agency that has a similar 
agreement to furnish outpatient physical therapy or speech pathology 
services. Supplier is defined as a physician or other practitioner or 
an entity other than a ``provider,'' that furnishes health care 
services under Medicare.)
    Section 1842(a) of the Act authorizes us to contract with private 
entities (carriers) for the purpose of administering the Medicare Part 
B program. Medicare carriers determine payment amounts and make 
payments for services (including items) furnished by physicians and 
other suppliers such as nonphysician practitioners (NPP), laboratories, 
and durable medical equipment (DME) suppliers. In addition, carriers 
perform other functions required for the efficient and effective 
administration of the Part B program. Section 1842(f) of the Act 
provides that a carrier must be a ``voluntary association, corporation, 
partnership, or other nongovernmental organization which is lawfully 
engaged in providing, paying for, or reimbursing the cost of, health 
services under group insurance policies or contracts, medical or 
hospital service agreements, membership or subscription contracts, or 
similar group arrangements, in consideration of premiums or other 
periodic charges payable to the carrier, including a health benefits 
plan duly sponsored or underwritten by an employee organization.'' No 
entity may be considered for a carrier contract unless it can 
demonstrate that it meets this definition of carrier.
    Section 1842(b) of the Act provides us with the discretion to enter 
into carrier contracts without regard to any provision of the statute 
requiring competitive bidding. Many other provisions of generally 
applicable Federal contract law and regulations, as well as the 
Department of Health and Human Services (HHS) procurement regulations, 
remain in effect for carrier contracts.
    Section 1816(a) of the Act authorizes us to enter into agreements 
with public agencies or private organizations (fiscal intermediaries) 
for the purpose of administering Part A of the Medicare program. These 
entities are responsible for determining the amount of payment due to 
providers in consideration of services provided to beneficiaries, and 
for making these payments. We may enter into an agreement with an 
entity to serve as a fiscal intermediary if the entity was first 
``nominated'' by a group or association of providers to make Medicare 
payments to it. Effective October 1, 2005, section 911 of the Medicare 
Prescription Drug, Improvement and Modernization Act of 2003 (MMA) 
(Pub. L. 108-173) eliminates the requirement that fiscal intermediaries 
be nominated, and establishes the requirement that Medicare contracts 
awarded to Medicare Administrative Contractors (MACs) be competitively 
bid.
    Section 421.100 requires that the agreement between us and a fiscal 
intermediary specify the functions the fiscal intermediary must 
perform. In addition to requiring any items

[[Page 35206]]

specified by us in the agreement that are unique to that fiscal 
intermediary, our regulations require that all fiscal intermediaries 
perform activities relating to determining and making payments for 
covered Medicare services, fiscal management, provider audits, 
utilization patterns, resolution of cost report disputes, and 
reconsideration of determinations. Finally, our regulations require 
that all fiscal intermediaries furnish information and reports, perform 
certain functions for provider-based HHAs and provider-based hospices, 
and comply with all applicable laws and regulations and with any other 
terms and conditions included in their agreements.
    Similarly, Sec.  421.200 requires that the contract between CMS and 
a Part B carrier specify the functions the carrier must perform. In 
addition to requiring any items specified by CMS in the contract that 
are unique to that carrier, we require that all Part B carriers perform 
activities relating to determining and making payments (on a cost or 
charge basis) for covered Medicare services, fiscal management, 
provider audits, utilization patterns, and Part B beneficiary hearings. 
In addition, Sec.  421.200 requires that all carriers furnish 
information and reports, maintain and make available records, and 
comply with any other terms and conditions included in their contracts. 
It is within this context that Medicare fiscal intermediary and carrier 
contracts are significantly different from standard Federal Government 
contracts.
    Specifically, the Medicare fiscal intermediary and carrier 
contracts are normally renewed automatically from year to year, in 
contrast to the typical Government contract that is recompeted at the 
conclusion of the contract term. The Congress, in providing for the 
nomination process under section 1816 of the Act, and authorizing the 
automatic renewal of the carrier contracts in section 1842(b)(5) of the 
Act, contemplated a contracting process that would permit us to 
noncompetitively renew the Medicare contracts from year to year.
    For both fiscal intermediaries and carriers, Sec.  421.5 states 
that we have the authority not to renew a Part A agreement or a Part B 
contract when it expires. Section 421.126 provides for termination of 
the fiscal intermediary agreements in certain circumstances, and, 
similarly, Sec.  421.205 provides for termination of carrier contracts.
    Each year, the Congress appropriates funds to support Medicare 
contractor activities. These funds are distributed to the contractors 
based on annual budget and performance negotiations, which allocate 
funds by program activity to each of the current Medicare contractors. 
Historically, approximately one-half of the funds were for payment for 
the processing of claims; an additional one-quarter of the funds were 
for program integrity activities to fund activities such as conducting 
medical review of claims to determine whether services are medically 
necessary and constitute an appropriate level of care, deterring and 
detecting potential Medicare fraud, auditing provider cost reports, and 
ensuring that Medicare acts as a secondary payer when a beneficiary has 
primary coverage through other insurance. The remainder of the funds 
was allocated for beneficiary and provider or supplier services and for 
various productivity investments.

B. Discussion About Medicare Administrative Contractors (MACs)

    The MMA was enacted on December 8, 2003. Section 911 of the MMA 
adds new section 1874A to the Act, establishing the Medicare Fee-for-
Service (FFS) Contracting Reform (MCR) initiative that will be 
implemented over the next several years. Under this provision, 
effective October 1, 2005, we have the authority to replace the current 
Medicare fiscal intermediary and carrier contracts with new MACs using 
competitive procedures.
    Between 2005 and 2011, we will conduct full and open competitions 
to replace the current contracts with MACs. These MACs will handle many 
of the same basic functions that are now performed by fiscal 
intermediaries and carriers. Additionally, MACs may be charged with 
performing functions under the Medicare Integrity Program under section 
1893 of the Act. The statute does not preclude the current fiscal 
intermediaries and carriers from competing for the MAC contracts.
    Among other provisions, section 1874A of the Act establishes 
eligibility requirements for the MACs, describes the functions these 
new contractors may perform (which may include functions of section 
1893 of the Act so long as these responsibilities do not duplicate 
activities that are being carried out under a Medicare Integrity 
Program contract), and specifies various requirements for the 
structure, terms and conditions of these new MAC contracts. In 
particular, section 1874A of the Act specifies that the Federal 
Acquisition Regulation (FAR) will apply to the MAC contracts, except to 
the extent inconsistent with a specific requirement of section 1874A of 
the Act. Unlike the contracting authority of section 1893 of the Act, 
the new authority of section 1874A of the Act does not mandate that the 
Secretary publish either a proposed or final regulation prior to 
entering into MAC contracts. Instead, the Congress when enacting the 
authority of section 1874A of the Act, placed a clear reliance on the 
existing well-defined regulatory framework of the FAR.
    We considered whether we should propose regulations for the MAC 
authority in conjunction with this proposed rule to implement the 
authority of section 1893 of the Act. Since we are still analyzing 
whether any of the specific requirements of section 1874A of the Act 
need elaboration in the regulations, we are not prepared to do so at 
this time. As section 1874A of the Act places reliance on the FAR for 
MAC contracts and since section 1874A of the Act does not impose any 
requirement to issue additional rules in order to initiate procurements 
under the MAC authority, we do not believe such rules are required to 
initiate the implementation of section 1874A of the Act. We will, 
however, continue to analyze issues posed by the new contracting 
authority and the transition to that framework, and will propose rules 
for the authority of new section 1874A of the Act if and when we 
identify issues that need to be addressed through rulemaking.
    However, because the history and structure of the Medicare program 
dictate that claims processing, customer service, and program integrity 
functions are highly interdependent, and since sections 1816, 1842, 
1893 and 1874A of the Act are part of the same legislative development 
relating to Medicare administration, we will from time-to-time discuss 
the section 1874A of the Act authority and its potential impact on 
fiscal intermediaries, carriers, and the MIP contractors in this 
preamble. Further, this proposed rule was modified from our earlier 
proposal on this topic to make clear that section 1874A of the Act 
authorizes MAC contractors to perform functions of section 1893 of the 
Act. We also make clear that we may impose certain MIP requirements 
(for example, those proposed for Sec.  421.302(a)) on the MACs when we 
elect to include functions of section 1893 of the Act in their 
contracts. Finally, it is our intention that the proposed rule changes 
at Sec.  421.100 and Sec.  421.200 discussed below would remain in 
effect only until all the Medicare fiscal intermediary and carrier 
contracts are replaced by MAC contracts in accordance with the MMA.
    The MMA establishes a phase-in process for the transition of the 
current contractors to MACs. We are currently in the process of 
developing the Statement of Work (SOW) and

[[Page 35207]]

performance requirements for MACs, and further regulatory and 
administrative guidance will be published as these details are 
developed. More information about our plans to implement Medicare 
contracting reform, including our Report to the Congress on this 
subject, can be obtained by accessing the Internet at https://
www.cms.hhs.gov/medicarereform/contractingreform/.

C. The Medicare Integrity Program

    The Health Insurance Portability and Accountability Act of 1996 
(HIPAA) (Pub. L. 104-191) was enacted on August 21, 1996. Section 202 
of HIPAA added new section 1893 to the Act establishing the Medicare 
Integrity Program (MIP). This program is funded from the Medicare 
Hospital Insurance Trust Fund for program integrity activities. 
Specifically, section 1893 of the Act expands our contracting authority 
to allow us to contract with eligible entities to perform Medicare 
program integrity activities. These activities include: Medical, 
potential fraud, and utilization review; cost report audits; Medicare 
secondary payer determinations; overpayment recovery; education of 
providers, suppliers, beneficiaries, and other persons regarding 
payment integrity and benefit quality assurance issues; and, developing 
and updating a list of DME items that, under section 1834(a)(15) of the 
Act, are subject to prior authorization.
    Section 1893(d) of the Act requires us to set forth, through 
regulations, procedures for entering into contracts for the performance 
of specific Medicare program integrity activities. These procedures are 
to include the following:
     Procedures for identifying, evaluating, and resolving 
organizational conflicts of interest that are consistent with rules 
generally applicable to Federal acquisition and procurement.
     Competitive procedures for entering into new contracts 
under section 1893 of the Act and for entering into contracts that may 
result in the elimination of responsibilities of an individual fiscal 
intermediary or carrier, and other procedures we deem appropriate.
     A process for renewing contracts entered into under 
section 1893 of the Act.
    Section 1893(d) of the Act also specifies the process for 
contracting with eligible entities to perform program integrity 
activities. In addition, section 1893(e) of the Act requires us to set 
forth, through regulations, the limitation of a contractor's liability 
for actions taken to carry out a contract.
    The Congress established section 1893 of the Act to strengthen our 
ability to deter potential fraud and abuse in the Medicare program in a 
number of ways. First, it provides a separate and stable long-term 
funding mechanism for MIP activities. Historically, Medicare contractor 
budgets were subject to wide fluctuations in funding levels from year 
to year. The variations in funding did not have anything to do with the 
underlying requirements for program integrity activities. This 
instability made it difficult for us to invest in innovative strategies 
to control potential fraud and abuse. Our contractors also found it 
difficult to attract, train, and retain qualified professional staff, 
including auditors and fraud investigators. A dependable funding source 
allows us the flexibility to invest in innovative strategies to combat 
potential fraud and abuse. The funding mechanism will help us shift 
emphasis from post-payment recoveries on potentially fraudulent claims 
to prepayment strategies designed to ensure that more claims are paid 
correctly the first time.
    Second, to allow us to more aggressively carry out the MIP 
functions and to require us to use procedures and technologies that 
exceed those generally in use in 1996, section 1893 of the Act greatly 
expands our contracting authority relative to the contracting authority 
of original sections 1816 and 1842 of the Act. Previously, we had a 
limited pool of entities with whom to contract. This limited our 
ability to maximize efforts to effectively carry out the MIP functions. 
Section 1893 of the Act allows us to attract a variety of offerors with 
potentially new and different skill sets and permits those offerors to 
propose innovative approaches to implement MIP to deter potential fraud 
and abuse. By using competitive procedures, as established in the FAR 
and supplemented by the Department of Health and Human Services 
Acquisition Regulation (HHSAR), our ability to manage the MIP 
activities is greatly enhanced, and we can seek to obtain the best 
value for our contracted services.
    Third, section 1893 of the Act requires us to address potential 
conflicts of interest among prospective MIP contractors before entering 
into any contracting arrangements with them. Section 1893 of the Act 
instructs the Secretary to establish procedures for identifying, 
evaluating, and resolving organizational conflicts of interest that are 
generally applicable to FAR contracts.

D. Experience With MIP Contractors

    The MIP authority, established by HIPAA, gave CMS specific 
contracting authority, consistent with the FAR, to enter into contracts 
with entities to promote the integrity of the Medicare program.
    On March 20, 1998, we issued a proposed rule to implement 
provisions of section 1893 of the Act to which we received comments (63 
FR 13590). We reviewed and considered all the comments received 
concerning the MIP regulation. Comments received addressed a variety of 
issues, such as conflict of interest issues, coordination among 
Medicare contractors, contractor functions, and eligibility 
requirements. Overall, we found that few changes were needed to the 
regulatory text. Due to time constraints, however, a final rule was 
never published. Notwithstanding, section 1893 of the Act granted us 
the authority to contract with eligible entities to perform program 
integrity activities prior to publication of the final rule.
    Section 902 of the MMA mandated that final rules relating to the 
Medicare program based on a previous publication of a proposed 
regulation or an interim final regulation be published within three 
years except under exceptional circumstances. Given that it has been 
greater than three years since the publication of the initial proposed 
MIP regulations, we are reissuing these regulations in proposed form at 
this time.
    The publication of the 1998 proposed rule (63 FR 13590) enabled us 
to contract with entities to perform Medicare program integrity 
functions to promote the integrity of the Medicare program prior to the 
publication of a final rule.
    Since the publication of the 1998 proposed rule and in accordance 
with this MIP authority, we currently maintain the following MIP 
contracts: 12 Indefinite Delivery-Indefinite Quantity (IDIQ) contracts 
for the Program Safeguard Contractor (PSC) effort; one Coordination of 
Benefits (COB) contract, and 8 IDIQ contracts for the Medicare Managed 
Care (MMC) Program Integrity Contractors effort. (IDIQ contracts are 
explained in detail in FAR 48 CFR subpart 16.5.) After being awarded an 
IDIQ contract, organizations can competitively bid on task orders 
released by CMS to specifically address program integrity issues within 
the scope of the IDIQ contract. These MIP contractors are discussed 
below.

[[Page 35208]]

1. Program Safeguard Contractors (PSCs)
    Since 1999, we have awarded more than 40 individual task orders 
under the PSC IDIQ contract, including 17 Benefit Integrity (BI) Model 
PSCs. These BI PSCs are tasked with performing fraud and abuse 
detection and prevention activities for their respective jurisdictions. 
Specific activities include fraud case development, local and national 
data analysis to identify potentially fraudulent billing schemes or 
patterns, law enforcement support, medical review for a BI purpose, and 
identification and development of appropriate administrative actions. 
Four of the 17 BI PSCs have additional medical review functions. The 
remaining task orders issued under the PSC IDIQ contract have focused 
on specific program vulnerabilities and problem areas (for example, 
Comprehensive Error Rate Testing (CERT), Correct Coding Initiative 
(CCI), and Data Assessment & Verification (DAVe)). More information on 
PSCs can be accessed on the Internet at https://www.cms.hhs.gov/
PROVIDERS/PSC/pscwebp2.asp.
    Overall, we have seen success in the implementation of the PSC 
program. Since 2002, 12 of the 17 BI Model PSCs were awarded and 
transitioned. Typically, a 3 to 6 month period was allowed for the PSCs 
to transition the BI workload from the Fiscal Intermediary and Carrier 
that had previously been performing this workload.
2. Coordination of Benefits Contractor (COB)
    In November 1999, we awarded one COB contract to consolidate 
activities that support the collection, management, and reporting of 
other health insurance coverage for Medicare beneficiaries. The 
purposes of the COB program are to identify the health benefits 
available to a Medicare beneficiary and to coordinate the payment 
process to prevent mistaken payment of Medicare benefits. In January 
2001, the COB contractor assumed all Medicare Secondary Payer (MSP) 
claims investigations. Implementing this single-source development 
approach greatly reduced the amount of duplicate MSP investigations. It 
also offered a centralized, one-stop customer service approach for all 
MSP-related inquiries, including those seeking general MSP information, 
except for those related to specific claims or recoveries that serve to 
protect the Medicare Trust Funds.
3. Medicare Managed Care Program Integrity Contractors (MMC-PICs)
    MMC-PICs supplement our regional office integrity responsibilities 
related to Medicare Advantage (MA), formerly known as Medicare+Choice 
(M+C). Similar to the PSC, MMC-PIC was designed specifically to 
identify, stop, and prevent fraud, waste, and abuse.
    Services performed under MMC-PIC include--
     Complete monthly analysis of plan discrepancies and report 
to MA Organizations;
     Review and analyze State regulatory practices;
     Evaluate marketing operations;
     Audit financial and medical records including claims, 
payments, and benefit packages;
     Evaluate enrollment and encounter data;
     Collect information and review matters that may contain 
evidence of fraud, waste, and abuse and make referrals to the 
appropriate government authority;
     Compliance testing of internal controls of Health Care 
Prepayment Plan (HCPP) contracting organizations;
     Complete all Retroactive Payment Adjustments and 
Retroactive Enrollments or Disenrollments submitted by MA 
Organizations;
     Complete final reconciliation of payment for non-renewals 
of MA contracts; and,
     Make reconsideration determinations with plans that 
request decisions regarding payments.

II. Provisions of the Proposed Rule

[If you choose to comment on issues in this section, please include the 
caption ``Provisions of the Proposed Rule'' at the beginning of your 
comments.]
    This regulation is part of our overall contracting strategy, which 
is designed to build on the strengths of the marketplace. We are 
committed to conducting procurements using full and open competition 
that will provide opportunities for a wide range of contractors to 
participate in the program. We will continue to encourage new and 
innovative approaches in the marketplace to protect the Medicare Trust 
Funds.
    As discussed earlier in the background section, the implementation 
of section 1874A of the Act is also a major element of our contracting 
strategy. We are not including extensive rules relating to that 
authority in this proposal, for the reasons discussed earlier, but 
interested parties can gain information about our plans for 
implementing section 1874A of the Act by accessing the Internet at 
https://www.cms.hhs.gov/medicarereform/contractingreform. In addition, 
the public can also send us informal questions about the Medicare 
administrative contractor (MAC) implementation through this site; any 
official comments on this proposed rule should be submitted in 
accordance with the instructions contained in the ``Addresses'' section 
of this preamble.

A. The Medicare Integrity Program

1. Basis, Scope, and Applicability
    In accordance with section 1893 of the Act, this proposed rule 
would amend part 421 by adding a new subpart D entitled, ``Medicare 
Integrity Program Contractors.'' This subpart will:
     Define the types of entities eligible to become MIP 
contractors. We also clarify that, in accordance with section 1874A of 
the Act, a MAC may perform MIP functions under certain conditions;
     Identify program integrity functions a MIP contractor may 
perform;
     Describe procedures for awarding and renewing contracts;
     Establish procedures for identifying, evaluating, and 
resolving organizational conflicts of interest consistent with the FAR;
     Prescribe responsibilities; and,
     Set forth limitations on MIP contractor liability.
    Subpart D will apply to entities that seek to compete for, or 
receive award of, a contract under section 1893 of the Act including 
entities that perform functions under this subpart emanating from the 
processing of claims for individuals entitled to benefits as qualified 
railroad retirement beneficiaries. We would set forth the basis, scope, 
and applicability of subpart D in Sec.  421.300.
2. Definition of Eligible Entities (Sec.  421.302)
    In accordance with section 1893(c) of the Act, proposed Sec.  
421.302(a) would provide that an entity is eligible to enter into a MIP 
contract if it:
     Demonstrates the capability to perform MIP contractor 
functions;
     Agrees to cooperate with the Office of Inspector General 
(OIG), the Department of Justice (DOJ), and other law enforcement 
agencies in the investigation and deterrence of potential fraud and 
abuse in the Medicare program, including making referrals;
     Complies with the conflict of interest standards in 48 CFR 
Chapters 1 and 3 and is not excluded under the conflict of interest 
provisions established by this rule;
     Maintains an appropriate written code of conduct and 
compliance

[[Page 35209]]

policies that include, without limitation, an enforced policy on 
employee conflicts of interest;
     Meets financial and business integrity requirements to 
reflect adequate solvency and satisfactory legal history; and,
     Meets other requirements that we may impose.
    Also, in accordance with the undesignated paragraph following 
section 1893(c)(4) of the Act, we would specify that Medicare carriers 
are deemed to be eligible to perform the activity of developing and 
periodically updating a list of DME items that are subject to prior 
authorization.
    It is not possible to identify in this rule each and every possible 
contractor eligibility requirement that may appear in a future 
solicitation. In order to permit us maximum flexibility to tailor our 
contractor eligibility requirements to specific solicitations while 
satisfying the intent of section 1893 of the Act, any contractor 
eligibility requirements in addition to those specified in proposed 
Sec.  421.302(a)(1) through (a)(4) will be contained in the applicable 
solicitation.
    At Sec.  421.302(b)(1), we propose to make clear that a MAC under 
section 1874A of the Act may perform any or all of the MIP functions as 
are listed and described in Sec.  421.304. However, in performing such 
functions, the MAC may not duplicate work being performed under a MIP 
contract. We believe this proposed provision is consistent with 
sections 1874A(a)(4)(G) and 1874A(a)(5) of the Act, as added by the 
MMA.
    At Sec.  421.302(b)(2), we also make clear our discretion to 
require a MAC performing any of the MIP functions under Sec.  421.304 
to abide by the eligibility requirements applicable to MIP contracts, 
that is, the four elements listed at Sec.  421.302(a). The first 
requirement at Sec.  421.302(a) relating to demonstrated capability and 
the third requirement relating to addressing conflicts of interest are 
consistent with provisions in the authorizing statute for MAC contracts 
(section 1874A(a)(2)of the Act). While the second requirement, which 
pertains to cooperation with the OIG and other forms of law 
enforcement, is not reiterated in section 1874A of the Act, we believe 
this requirement is not inconsistent with section 1874A of the Act or 
the FAR. This requirement is, in fact, compatible with our general 
practices, multiple statutes and regulations governing HHS operations 
and contracts, and finally also with provisions within title XI of the 
Act. Once again, the fourth requirement makes clear our authority to 
impose additional reasonable requirements through contract and it makes 
sense to apply this element to MAC contractors. Our specific approach 
to all these issues, of course, will be made clear in any solicitation 
for MAC contracts.
    Note that, in accordance with section 1893(d) of the Act, we may 
continue to contract, for the performance of MIP activities, with 
fiscal intermediaries and carriers that had a contract with us on 
August 21, 1996 (the effective date of enactment of Pub. L. 104-191). 
However, in accordance with sections 1816(l) or 1842(c)(6) of the Act 
(both added by Pub. L. 104-191), and section 1874A(a)(5)(A) of the Act 
(added by the MMA), these contractors as well as MACs may not duplicate 
activities under a fiscal intermediary agreement or carrier contract 
and a MIP contract, with one excepted activity. The exception permits a 
carrier or a MAC to develop and update a list of items of DME that are 
subject to prior authorization both under the MIP contract and its 
contract under section 1842 of the Act. This discretion to continue the 
performance of MIP activities through the fiscal intermediary and 
carrier contracts until they are phased out in accordance to section 
911(d) of the MMA, is provided for in proposed changes to Sec.  421.100 
and Sec.  421.200 discussed later in this preamble.
3. Definition of MIP Contractor (Sec.  400.202)
    We propose to define ``Medicare integrity program contractor,'' at 
Sec.  400.202 (Definitions specific to Medicare), as an entity that has 
a contract with us under section 1893 of the Act to perform exclusively 
one or more of the program integrity activities specified in that 
section. The inclusion of the word ``exclusively'' in this definition 
is intended to conform with section 1874A(a)(5)(B) of the Act as added 
by the MMA.
4. Services to be Procured (Sec.  421.304)
    A MIP contractor may perform some or all of the MIP activities 
listed in Sec.  421.304. Section 421.304 would state that the contract 
between CMS and a MIP contractor specifies the functions the contractor 
performs. In accordance with section 1893(b) of the Act, proposed Sec.  
421.304 identifies the following as MIP activities.
    (a) Medical, utilization, and potential fraud review. Medical and 
utilization review includes the processes necessary to ensure both the 
appropriate utilization of services and that services meet the 
professionally recognized standards of care. These processes include 
review of claims, medical records, and medical necessity documentation 
and analysis of patterns of utilization to identify inappropriate 
utilization of services. This would include reviewing the activities of 
providers or suppliers and other individuals and entities (including 
health maintenance organizations, competitive medical plans, health 
care prepayment plans, and MA plans). This function results in the 
identification of overpayments, prepayment denials, recommendations for 
changes in national coverage policy, changes in local coverage 
determinations (LCD) policies and payment screens, referrals for 
potential fraud and abuse, and the identification of the education 
needs of beneficiaries, providers, and suppliers.
    Potential fraud review includes fraud prevention initiatives, 
responding to external customer complaints of alleged fraud, the 
development of strategies to detect potentially fraudulent activities 
that may result in improper Medicare payment, and the identification 
and development of potential fraud cases for referral to law 
enforcement. Each solicitation will specify when cases should be 
referred to the OIG or other law enforcement agency. In general, 
however, identified overpayments, recurring acts of improper billing, 
and substantiated allegations of potentially fraudulent activity will 
be promptly referred to a Regional OIG.
    (b) Cost report audits. Providers and managed care plans receiving 
Medicare payments are subject to audits for all payments applicable to 
services furnished to beneficiaries. The audit ensures that proper 
payments are made for covered services, provides verified financial 
information for making a final determination of allowable costs, 
identifies potential instances of fraud and abuse, and ensures the 
completion of special projects. This functional area includes the 
receipt, processing, and recommended settlement terms for cost reports 
based on reasonable costs, prospective payment, or any other basis, and 
the establishment or adjustment of the interim payment rate using cost 
report or other information.
    (c) Medicare secondary payer activities. The Medicare secondary 
payer function is a process developed as a payment safeguard to protect 
the Medicare program against making mistaken primary payments. The 
focus of this process is to ensure that the Medicare program pays only 
to the extent required by statute. Entities under a MIP contract that 
includes Medicare secondary payer functions would be responsible for 
identifying Medicare secondary payer situations and pursuing recovery 
of mistaken

[[Page 35210]]

payments from the appropriate entity or individual, depending on the 
specifics of the contract. This functional area includes the processes 
performed to identify beneficiaries for whom there is coverage which is 
primary to Medicare. Through these processes, information may be 
acquired for subsequent use in beneficiary claims adjudication, 
recovery, and litigation.
    (d) Education. This functional area includes educating 
beneficiaries, providers, suppliers, and other individuals regarding 
payment integrity and benefit quality assurance issues.
    (e) Developing prior authorization lists. This functional area 
includes developing and periodically updating a list of DME items that, 
in accordance with section 1834(a)(15) of the Act, are subject to prior 
authorization. Prior authorization is a determination that an item of 
DME is covered prior to when the equipment is delivered to the Medicare 
beneficiary. Section 1834(a)(15) of the Act requires prior 
authorization to be performed on the following items of DME:
     Items identified as subject to unnecessary utilization;
     Items supplied by suppliers that have had a substantial 
number of claims denied under section 1862(a)(1) of the Act as not 
reasonable or necessary or for whom a pattern of overutilization has 
been identified; or
     A customized item if the beneficiary or supplier has 
requested an advance determination.
    We note that the MIP functions are not limited to services 
furnished under fee-for-service payment methodologies. MIP functions 
apply to all types of claims. They also apply to all types of payment 
systems including, but not limited to, managed care and demonstration 
projects. MIP functions will also apply to payments made under the 
Medicare Part D prescription drug benefit that will be implemented on 
January 1, 2006.
5. Competitive Requirements (Sec.  421.306)
    We would specify, in Sec.  421.306(a), that MIP contracts will be 
awarded in accordance with 48 CFR chapters 1 and 3, 42 CFR part 421 
subpart D, and all other applicable laws and regulations. Furthermore, 
in accordance with section 1893(d)(2) of the Act, we would specify that 
the procedures set forth in these authorities will be used: (a) When 
entering into new contracts; (b) when entering into contracts that may 
result in the elimination of responsibilities of an individual fiscal 
intermediary or carrier; and (c) at any other time we consider 
appropriate.
    In proposed Sec.  421.306(b), we will establish an exception to 
competition that allows a successor in interest to a fiscal 
intermediary agreement or carrier contract to be awarded a contract for 
MIP functions without competition if its predecessor performed program 
integrity functions under the transferred agreement or contract and the 
resources, including personnel, which were involved in performing those 
functions, were transferred to the successor. This provision will 
remain in effect until all fiscal intermediary agreements and carrier 
contracts are transitioned to MACs in accordance with section 911(d) of 
the MMA.
    This proposal is made in anticipation that some fiscal 
intermediaries and carriers, prior to the competition of their 
contracts in accordance with the MMA, may engage in transactions under 
which the recognition of a successor in interest by means of a novation 
agreement may be appropriate, and the resources involved in the fiscal 
intermediary's or carrier's MIP activities are transferred along with 
its other Medicare-related resources to the successor in interest. For 
example, the fiscal intermediary or carrier may undergo a corporate 
reorganization under which the corporation's Medicare business is 
transferred entirely to a new subsidiary corporation. When all of a 
contractor's resources or the entire portion of the resources involved 
in performing a contract are transferred to a third party, we may 
recognize the third party as the successor in interest to the contract 
through approval of a novation agreement. (See 48 CFR 42.12.)
    If the fiscal intermediary or carrier was performing program 
integrity activities under its contract on August 21, 1996, the date of 
the enactment of the MIP legislation, the statute permits us to 
continue to contract with the fiscal intermediary or carrier for the 
performance of those activities without using competitive procedures 
(but only through and, no later than, September 30, 2011). In the 
context of a corporate reorganization under which all of the resources 
involved in performing the contract, including those involved in 
performing MIP activities, are transferred to a successor in interest, 
we may determine that breaking out the MIP activities and competing 
them separately (prior to the MAC contract competitions) would not be 
in the best interest of the Government.
    Inherent in the requirement of section 1893(d) of the Act that the 
Secretary establish competitive procedures to be used when entering 
into contracts for MIP functions is the authority to establish 
exceptions to those procedures. (See 48 CFR 6.3) Moreover, the statute 
states that fiscal intermediary agreements and carrier contracts will 
be noncompetitively awarded under sections 1816(a) and 1842(b)(1) of 
the Act. Furthermore, those agreements and contracts have, in recent 
years prior and subsequent to the enactment of the MIP legislation, 
included program integrity activities, a fact that the Congress 
acknowledged in section 1893(d)(2) of the Act. Creating an exception to 
the use of competition for cases in which the same resources, including 
the same personnel, continue to be used by a third party as successor 
in interest to a fiscal intermediary agreement or carrier contract is 
consistent with the Congress' authorization to forego competition when 
the contracting entity was carrying out the MIP functions on the date 
of enactment of the MIP legislation. Section 421.306(b) permits 
continuity in the performance of the MIP functions until such time as 
we determine a need to procure MIP functions on the basis of full and 
open competition.
    The exception to competition will operate only where a fiscal 
intermediary or carrier that performed program integrity functions 
under an agreement or a contract in place on August 21, 1996, transfers 
its functions by means of a valid novation agreement in accordance with 
the requirements of the FAR. This exception is intended to be applied 
only until we are prepared to award MIP contracts on the basis of FAR 
competitive procedures, or until we compete the full fiscal 
intermediary and carrier workloads (both MIP and non-MIP functions) in 
accordance with the MMA. The exception is not intended, and will not be 
used, to circumvent the competitive process when we make competitive 
awards of MIP and MAC contracts. This provision is intended to provide 
us with flexibility in handling Medicare functions in the face of bona 
fide changes in corporate structure that often have little, if 
anything, to do with the Medicare program.
    We further specify, in Sec.  421.306(c), that an entity must meet 
the eligibility requirements established in proposed Sec.  421.302 to 
be eligible to be awarded a MIP contract.
6. Renewal of MIP Contracts (Sec.  421.308)
    Proposed Sec.  421.308(a) specifies that an initial contract term 
will be defined in the MIP contract and that contracts may contain 
renewal clauses. Contract renewal provides a mutual benefit to both 
parties. Renewing a contract, when appropriate, results in continuity 
both for us and the contractor and is in the best interest of the 
Medicare program. The benefits are realized through early

[[Page 35211]]

communication of our intention whether to renew a contract, which 
permits both parties to plan for any necessary changes in the event of 
nonrenewal. Furthermore, as a prudent administrator of the Medicare 
program, we must ensure that we have sufficient time to transfer the 
MIP functions if a reassignment of the functions becomes necessary 
(either because the contractor has given notice of its intent to non-
renew or because we have determined that reassignment is in the best 
interest of the Medicare program). Therefore, in Sec.  421.308(a), we 
would specify that we may renew a MIP contract, as we determine 
appropriate, by giving the contractor notice, within timeframes 
specified in the contract, of our intention to do so. (The solicitation 
document that results in the contract will contain further details 
regarding this provision.)
    The renewal clause referred to in this section is not an ``option'' 
as defined in the FAR at 48 CFR 2.101. Section 1893 of the Act allows 
for the renewal of MIP contracts without regard to any provision of the 
law requiring competition if the contractor has met or exceeded 
performance requirements. As stated in FAR 48 CFR 2.101, `` `Option' 
means a unilateral right in a contract by which, for a specified time, 
the Government may elect to purchase additional supplies or services 
called for by the contract, or may elect to extend the term of the 
contract.''
    As described in the FAR, 48 CFR subpart 17.2, an option is 
different than a renewal clause in several respects. The length of time 
of an option is established in a contract. In contrast, the length of a 
renewal period in a MIP contract may not be defined. Furthermore, an 
option must be exercised during the life of the contract. A MIP renewal 
clause can be invoked only after the exhaustion of the initial contract 
period of performance, including any option provisions. Finally, an 
option allows us to extend the term of a contract only up to 60 months, 
the maximum term allowed by the FAR (excluding GSA awards). A MIP 
contract renewal clause allows the term of a MIP contract to surpass 
that limit, as long as the contractor meets the conditions in the 
regulation and the contract (including performance standards 
established in its contract) and we have a continuing need for the 
supplies or services under contract.
    Based on section 1893(d)(3) of the Act, we would specify, in Sec.  
421.308(b), that we may renew a MIP contract without competition if the 
contractor continues to meet all the requirements of proposed subpart D 
of part 421, the contractor meets or exceeds the performance standards 
and requirements in the contract, and it is in the best interest of the 
Government.
    We would provide, at Sec.  421.308(c), that, if we do not renew the 
contract, the contract will end in accordance with its terms, and the 
contractor does not have a right to a hearing or judicial review 
regarding the non-renewal. This is consistent with our longstanding 
policy for fiscal intermediary and carrier contracts.
7. Conflict of Interest Rules
    This proposed rule would establish the process for identifying, 
evaluating, and resolving conflicts of interest as required by section 
1893(d)(1) of the Act. The process was designed to ensure that the more 
diversified business arrangements of potential contractors do not 
inhibit competition between providers, suppliers, or other types of 
businesses related to the insurance industry, or have the potential for 
harming Government interests.
    When soliciting for MIP contracts, we will adhere to the 
requirements of the FAR organizational conflict of interest guidance, 
found at 48 CFR subpart 9.5. Given the sensitive nature of the work to 
be performed under the contract, the need to preserve the public trust, 
and the history of fraud and abuse in the Medicare Program, we will 
maintain the rebuttable presumption that each prospective contract 
involves a significant potential organizational conflict of interest. 
In light of this presumption, we will apply the general rules in FAR 
905.5 and such requirements as may be applicable to an individual 
procurement.
    Prior to awarding a MIP contract, our contracting officer will 
fashion an organizational conflict of interest clause specific to the 
contractor for inclusion in the contract. In general, we will not enter 
into a MIP contract with an offeror or contractor that we have 
determined has, or has the potential for, an unresolved organizational 
conflict of interest.
    In Sec.  421.310(a), we will specify that an offeror for MIP 
contracts is, and MIP contractors are, subject to the conflict of 
interest standards and requirements of the FAR organizational conflict 
of interest guidance, found at 48 CFR subpart 9.5, and the requirements 
and standards as are contained in each individual contract awarded to 
perform functions found at section 1893 of the Act.
    In Sec.  421.310(b), we state that we consider that a conflict of 
interest has occurred if, during the term of the contract, the 
contractor or its employee, agent or subcontractor has received, 
solicited, or arranged to receive any fee, compensation, gift, payment 
of expenses, offer of employment, or any other thing of value from any 
entity that is reviewed, audited, investigated, or contacted during the 
normal course of performing activities under the MIP contract. We 
incorporate the definition of ``gift'' from 5 CFR 2635.203(b) of the 
Standards of Ethical Conduct for Employees of the Executive Branch, 
which excludes from the definition items such as greeting cards, soft 
drinks, and coffee.
    We also specify in Sec.  421.310(b), if we determine that the 
contractor's activities are creating a conflict, then a conflict of 
interest has occurred during the term of the contract. In addition, we 
would specify that, if we determine that a conflict of interest exists, 
among other actions, we may, as we deem appropriate:
     Not renew the contract for an additional term;
     Modify the contract; or
     Terminate the contract for default.
    We would also specify that the solicitation may require more 
detailed information than identified above. Our proposed provisions do 
not describe all of the information that may be required, or the level 
of detail that would be required, because we wish to have the 
flexibility to tailor the disclosure requirements to each specific 
procurement.
    We intend to reduce the reporting and recordkeeping requirements as 
much as is feasible, while taking into consideration our need to have 
assurance that a conflict of interest does not exist in the MIP 
contractors.
    Because potential offerors may have questions about whether 
information submitted in response to a solicitation, including 
information regarding potential conflicts of interest, may be 
redisclosed under the Freedom of Information Act (FOIA), we provide the 
following information.
    To the extent that a proposal containing information is submitted 
to us as a requirement of a competitive solicitation under 41 U.S.C. 
Chapter 4, Subchapter IV, we will withhold the proposal when requested 
under the FOIA. This withholding is based upon 41 U.S.C. 253b(m). 
However, there is one exception to this policy. It involves any 
proposal that is set forth or incorporated by reference in the contract 
awarded to the proposing bidder. Such a proposal may not receive 
categorical protection. Rather, we will withhold, under 5 U.S.C. 
552(b)(4), information within the proposal that is required to be 
submitted that constitutes

[[Page 35212]]

trade secrets or commercial or financial information that is privileged 
or confidential provided the criteria established by National Parks & 
Conservation Association v. Morton, 498 F.2d 765 (D.C. Cir 1974), as 
applicable, are met. For any such proposal, we will follow pre-
disclosure notification procedures set forth at 45 CFR 5.65(d).
    Any proposal containing the information submitted to us under an 
authority other than 41 U.S.C. Chapter 4, Subchapter IV, and any 
information submitted independent of a proposal will be evaluated 
solely on the criteria established by National Parks & Conservation 
Association v. Morton and other appropriate authorities to determine if 
the proposal in whole or in part contains trade secrets or commercial 
or financial information that is privileged or confidential and 
protected from disclosure under 5 U.S.C. 552(b)(4). Again, for any such 
proposal, we will follow pre-disclosure notification procedures set 
forth at 45 CFR 5.65(d) and will also invoke 5 U.S.C. 552(b)(6) to 
protect information that is of a highly sensitive personal nature. It 
should be noted that the protection of proposals under FOIA does not 
preclude CMS from releasing contractor proposals when necessitated by 
law, such as in the case of a lawful subpoena.
    We already protect information we receive in the contracting 
process. However, to allay any fears potential offerors might have 
about disclosure, at Sec.  421.312(d) we propose to provide, that we 
protect disclosed proprietary information as allowed under the FOIA and 
that we require signed statements from our personnel with access to 
proprietary information that prohibit personal use during the 
procurement process and term of the contract.
    In proposed Sec.  421.312, we describe how conflicts of interest 
are resolved. We specify that we may establish a Conflicts of Interest 
Review Board to assist the contracting officer in resolving conflicts 
of interest and we determine when or if the Board is convened. We would 
define resolution of an organizational conflict of interest as a 
determination that:
     The conflict has been mitigated;
     The conflict precludes award of a contract to the offeror;
     The conflict requires that we modify an existing contract;
     The conflict requires that we terminate an existing 
contract for default; or,
     It is in the best interest of the Government to contract 
with the offeror or contractor even though the conflict exists.
    The following are examples of methods an offeror or contractor may 
use to mitigate organizational conflicts of interest, including those 
created as a result of the financial relationships of individuals 
within the organization. These examples are not intended to be an 
exhaustive list of all the possible methods to mitigate conflicts of 
interest nor are we obligated to approve a mitigation method that uses 
one or more of these examples. (An offeror's or contractor's method of 
mitigating conflicts of interest would be evaluated on a case-by-case 
basis.)
     Divestiture of, or reduction in the amount of, the 
financial relationship the organization has in another organization to 
a level acceptable to us and appropriate for the situation.
     If shared responsibilities create the conflict, a plan, 
subject to our approval, to separate lines of business and management 
or critical staff from work on the MIP contract.
     If the conflict exists because of the amount of financial 
dependence upon the Federal Government, negotiating a phasing out of 
other contracts or grants that continue in effect at the start of the 
MIP contract.
     If the conflict exists because of the financial 
relationships of individuals within the organization, divestiture of 
the relationships by the individual involved.
     If the conflict exists because of an individual's indirect 
interest, divestiture of the interest to levels acceptable to us or 
removal of the individual from the work under the MIP contract.
    In the procurement process, we determine which proposals are in a 
``competitive range.'' The competitive range is based on cost or price 
and other factors that are stated in the solicitation and includes the 
most highly rated proposals that have a reasonable chance for contract 
award unless the range is further reduced for purposes of efficiency in 
accordance with FAR 15.306. Using the process proposed in this 
regulation, offerors will not be excluded from the competitive range 
based solely on conflicts of interest. If we determine that an offeror 
in the competitive range has a conflict of interest that is not 
adequately mitigated, we would inform the offeror of the deficiency and 
give it an opportunity to submit a revised mitigation plan. At any time 
during the procurement process, we may convene the Conflict of Interest 
Review Board to evaluate and assist the contracting officer in 
resolving conflicts of interest.
    By providing a better process for the identification, evaluation, 
and resolution of conflicts of interest, we not only protect Government 
interests but help ensure that contractors will not hinder competition 
in their service areas by misusing their position as a MIP contractor.
8. Limitation on MIP Contractor Liability and Payment of Legal Expenses
    Contractors which perform activities under the MIP contract will be 
reviewing activities of providers and suppliers that provide services 
to Medicare beneficiaries. Their contracts will authorize them to 
evaluate the performance of providers, suppliers, individuals, and 
other entities that may subsequently challenge their decisions. To 
reduce or eliminate a MIP contractor's exposure to possible legal 
action from those it reviews, section 1893(e) of the Act requires that 
we, by regulation, limit a MIP contractor's liability for actions taken 
in carrying out its contract. We must establish, to the extent we find 
appropriate, standards and other substantive and procedural provisions 
that are the same as, or comparable to, those contained in section 1157 
of the Act.
    Section 1157 of the Act limits liability and provides for the 
payment of legal expenses of a Quality Improvement Organization (QIO) 
(formerly Peer Review Organization (PRO)) that contracts to carry out 
functions under section 1154(e) of the Act. Specifically, section 1157 
of the Act provides that QIOs, their employees, fiduciaries, and anyone 
who furnishes professional services to a QIO, are protected from civil 
and criminal liability in performing their duties under the Act or 
their contract, provided these duties are performed with due care. 
Following the mandate of section 1893(e) of the Act, this proposed 
rule, at Sec.  421.316(a), would protect MIP contractors from liability 
in the performance of their contracts provided they carry out their 
contractual duties with care.
    In accordance with section 1893(e) of the Act, we propose to employ 
the same standards for the payment of legal expenses as are contained 
in section 1157(d) of the Act. Therefore, Sec.  421.316(b) will provide 
that we will make payment to MIP contractors, their members, employees, 
and anyone who provides them legal counsel or services for expenses 
incurred in the defense of any legal action related to the performance 
of a MIP contract. We propose that the payment be limited to the 
reasonable amount of expenses incurred, as determined by us, provided 
funds are available and that the payment is otherwise allowable under 
the terms of the contract.

[[Page 35213]]

    In drafting Sec.  421.316(a), we considered employing a standard 
for the limitation of liability other than the due care standard. For 
example, we considered whether it would be appropriate to provide that 
a contractor would not be criminally or civilly liable by reason of the 
performance of any duty, function, or activity under its contract 
provided the contractor was not grossly negligent in that performance. 
However, section 1893(e) of the Act requires that we employ the same or 
comparable standards and provisions as are contained in section 1157 of 
the Act. We do not believe that it would be appropriate to expand the 
scope of immunity to a standard of gross negligence, as it would not be 
a comparable standard to that set forth in section 1157(b) of the Act.
    We also considered indemnifying MIP contractors employing 
provisions similar to those contained in the current Medicare fiscal 
intermediary agreements and carrier contracts. Generally, fiscal 
intermediaries and carriers are indemnified for any liability arising 
from the performance of contract functions provided the fiscal 
intermediary's or carrier's conduct was not grossly negligent, 
fraudulent, or criminal. However, we may indemnify a MIP contractor 
only to the extent we have specific statutory authority to do so. 
Section 1893(e) of the Act does not provide that authority. Note 
however, that section 1874A of the Act as added by the MMA would 
provide us with some discretion to indemnify MAC contractors. In 
addition, proposed Sec.  421.316(a) provides for immunity from 
liability in connection with the performance of a MIP contract provided 
the contractor exercised due care. Indemnification is not necessary 
since the MIP contractors will have immunity from liability under Sec.  
421.316(a).

B. Intermediary and Carrier Functions

    Section 1816(a) of the Act, which provides that providers may 
nominate a fiscal intermediary, requires only that nominated fiscal 
intermediaries perform the functions of determining payment amounts and 
making payment