Medicare and Medicaid Programs; Programs of All-Inclusive Care for the Elderly (PACE); Program Revisions, 71244-71337 [E6-20544]

Agencies

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

[Federal Register Volume 71, Number 236 (Friday, December 8, 2006)]
[Rules and Regulations]
[Pages 71244-71337]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-20544]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 460, 462, 466, 473, and 476



Medicare and Medicaid Programs; Programs of All-Inclusive Care for the 
Elderly (PACE); Program Revisions; Final Rule

Federal Register / Vol. 71, No. 236 / Friday, December 8, 2006 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 460, 462, 466, 473, and 476

[CMS-1201-F]
RIN 0938-AN83


Medicare and Medicaid Programs; Programs of All-Inclusive Care 
for the Elderly (PACE); Program Revisions

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

ACTION: Final rule.

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SUMMARY: This rule finalizes the interim final rule with comment period 
published in the Federal Register November 24, 1999 (64 FR 66234) and 
the interim final rule with comment period published in the Federal 
Register on October 1, 2002 (67 FR 61496). The November 1999 interim 
final rule implemented sections 4801 through 4803 of the Balanced 
Budget Act of 1997 (Pub. L. 105-33) and established requirements for 
Programs of All-inclusive Care for the Elderly (PACE) under the 
Medicare and Medicaid programs. The interim final rule with comment 
period published on October 1, 2002 (67 FR 61496) implemented section 
903 of the Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA) (Pub. L. 106-554).

DATES: Effective Date: These regulations are effective on January 8, 
2007.

FOR FURTHER INFORMATION CONTACT: Jana Petze, (410) 786-4533, or Carrie 
Smith, for State technical assistance, (410) 786-4485.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Program Description
    B. Legislative History
    1. Demonstration Project
    2. Balanced Budget Act (BBA) of 1997 (Pub. L. 105-33)
    a. Use of the PACE Protocol
    b. Consultation With States
    c. Consultation With State Agency on Aging
    d. State Medicaid Plan Requirement
    e. Interaction with Medicare + Choice (Now Medicare Advantage)
    f. Flexibility Under the BBA
    3. The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA)
    a. Background
    b. Contracting for IDT Members and Administrative Staff
    c. Contracting With Another Entity to Furnish PACE Center 
Services
    d. Oversight of Direct Patient Care Services
    e. Waiver Process
    4. Medicare Prescription Drug Improvement and Modernization Act 
of 2003, (MMA)
II. Analysis of Public Comments
    A. Summary of Comments on the 1999 Interim Final Rule
    B. Summary of Comments on the 2002 Interim Final Rule
III. Provisions of the 1999 Interim Final Rule With Comment and the 
2002 Interim Final Rule With Comment, Analysis of and Response to 
Public Comments and Final Rule Actions
IV. Provisions of the Final Rule
V. Collection of Information Requirements
VI. Regulatory Impact Statement
Regulation Text
Addendum--PACE Protocol (1999)

ACRONYMS for the PACE Final Rule

ADLs Activities of Daily Living
BBA Balanced Budget Act of 1997
BIPA Medicare, Medicaid and SCHIP Benefits Improvement and Protection 
Act of 2000
CAP Corrective Action Plan
CBRR Consumer Bill of Rights and Responsibilities
CMS Centers for Medicare & Medicaid Services
COBRA Consolidated Omnibus Budget Reconciliation Act of 1985
COP Condition of Participation
CHSPR Center for Health Services and Policy Research
CMS-HCC CMS Hierarchical Conditions Category
ESRD End-Stage Renal Disease
FFP Federal Financial Participation
HOS Health Outcomes Survey
HPMS Health Plan Management System
IDT Interdisciplinary Team
IRE Independent Review Entity
LCS Life Safety Code
MA Medicare Advantage (formerly Medicare + Choice(M + C))
MA-PDP Medicare Advantage--Prescription Drug Plan
M + C Medicare + Choice (now Medicare Advantage (MA))
MMA Medicare Prescription DrugImprovement 
andModernization Act of 2003
NF Nursing Facility
NPA National PACE Association
OBCQI Outcome-Based Continuous Quality Improvement
PACE Programs of All-inclusive Care for the Elderly
PCA Personal Care Attendant
PCP Primary Care Physician
PHS PACE Health Survey
PO PACE Organization
QAPI Quality Assessment and Performance Improvement
RAI Request for Additional Information
SAA State Administering Agency
SFH State Fair Hearing
SPA State Plan Amendment
SSA Social Security Administration

Requirements for Issuance of Regulations

    Section 902 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173 enacted on December 8, 
2003, amended section 1871(a) of the Social Security Act (the Act)) 
requires the Secretary, in consultation with the Director of the Office 
of Management and Budget, to establish and publish timelines for the 
publication of Medicare final regulations based on the previous 
publication of a Medicare proposed or interim final regulation. Section 
902 of the MMA states that the timelines for these regulations may vary 
among different regulations but shall not exceed 3 years after 
publication of the preceding proposed or interim final regulation 
except under exceptional circumstances. Section 902 also directs the 
Secretary to establish an appropriate period for finalizing those 
interim final regulations that were published before the enactment of 
MMA on December 8, 2003. Pursuant to this requirement, we published a 
notice in the Federal Register (69 FR 78442) establishing a publication 
deadline of 3 years from MMA enactment, that is December 8, 2006, for 
finalizing interim final rules published prior to MMA enactment.
    This final rule finalizes provisions set forth in the November 24, 
1999 and October 1, 2002 interim final rules with comment. These 
interim final regulations will be finalized within the 3-year period 
after MMA enactment that was established under section of the MMA 902. 
Therefore, we believe that this final rule is in accordance with the 
Congress' intent to ensure timely publication of final regulations.

I. Background

A. Program Description

    The Program of All-inclusive Care for the Elderly (PACE) program is 
a unique model of managed care service delivery for the frail 
community-dwelling elderly, most of whom are dually eligible for 
Medicare and Medicaid benefits, and all of whom are assessed as being 
eligible for nursing home placement according to the standards 
established by their respective States.

B. Legislative History

1. Demonstration Project
    Section 603(c) of the Social Security Amendments of 1983 (Pub. L. 
98-21), as extended by section 9220 of the Consolidated Omnibus Budget

[[Page 71245]]

Reconciliation Act of 1985 (COBRA) (Pub. L. 99-272) authorized the 
original demonstration PACE program for On Lok Senior Health Services 
(On Lok) in San Francisco. Section 9412(b) of Pub. L. 99-509, the 
Omnibus Budget Reconciliation Act of 1986 (OBRA, 1986), authorized us 
to conduct a PACE demonstration program to determine whether the model 
of care developed by On Lok could be replicated across the country. The 
number of sites was originally limited to 10, but the Omnibus Budget 
Reconciliation Act of l990 (Pub. L. 101-508) authorized an increase to 
15 PACE demonstration programs.
    The PACE model of care includes as core services the provision of 
adult day health care and interdisciplinary team (IDT) care management, 
through which access to and allocation of all health services is 
managed. Physician, therapeutic, ancillary, and social support services 
are furnished in the participant's residence or on-site at a PACE 
center. Hospital, nursing home, home health, and other specialized 
services are generally furnished under contract. Financing of the PACE 
demonstration model was accomplished through prospective capitation of 
both Medicare and Medicaid. PACE demonstration programs had been 
permitted by section 4118(g) of Pub. L. 100-203 (OBRA 1987) to assume 
full financial risk progressively over the initial three years. As such 
authority was removed by section 4803(b)(1)(B) of the Balanced Budget 
Act of 1997 (BBA) (Pub. L. 105-33), PACE demonstration programs 
approved after August 5, 1997 had to assume full financial risk at 
start-up.
    The PACE demonstration program was operated under a Protocol 
established and published by On Lok, Inc. on April 4, 1995.
2. Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33)
    The BBA built on the success of the PACE demonstration program. 
Section 4801 of the BBA, authorized coverage of PACE under the Medicare 
program. It amended title XVIII of the Act by adding section 1894, 
which addresses Medicare payments and coverage of benefits under PACE. 
Section 4802 of the BBA authorized the establishment of PACE as a State 
option under Medicaid. It amended title XIX of the Act by adding 
section 1934, which directly parallels the provisions of section 1894. 
Section 4803 of the BBA addresses implementation of PACE under both 
Medicare and Medicaid, the effective date, timely issuance of 
regulations, priority and special consideration in processing 
applications, and transition from PACE demonstration program status.
    As directed by section 4803 of BBA, we published an interim final 
rule on November 24, 1999, permitting entities to establish and operate 
PACE programs under section 1894 and 1934 of the Act (64 FR 66234).
    The 1999 interim final rule was a comprehensive rule that addressed 
eligibility, administrative requirements, application procedures, 
services, payment, participant rights, and quality assurance.
a. Use of the PACE Protocol
    Throughout the 1999 interim final rule, when we referred to ``the 
Protocol'' we meant the PACE Protocol, as published by On Lok, Inc., 
the parent company of On Lok Senior Health Services. A copy of the 
Protocol was included as an attachment to the 1999 interim final rule 
with comment period.
    We were directed by sections 1894(f)(2) and 1934(f)(2) of the Act 
to incorporate into regulation the requirements applied to PACE 
demonstration programs under the Protocol, to the extent consistent 
with the provisions of sections 1894 and 1934 of the Act. We also were 
authorized to modify or waive certain provisions of the Protocol in the 
development of the regulation, if the modification or waiver were not 
inconsistent with and would not impair the essential elements, 
objectives, and requirements of sections 1894 and 1934 of the Act.
b. Consultation With States
    Sections 4801 and 4802 of Pub. L. 105-33 clearly dictate a 
cooperative relationship between the Secretary and the States in the 
development, implementation and administration of the PACE program. In 
order to fulfill these requirements, we utilized the American Public 
Human Services (formerly, the American Public Welfare Association) as 
the conduit to solicit States for volunteers to consult with CMS staff. 
The participating State staff members represented States with a range 
of PACE experience. Each State staff volunteer selected a specific 
target area to provide information.
    In order to efficiently and effectively obtain a large amount of 
feedback in a short period of time, CMS staff arranged a series of 
conference calls to discuss a wide range of issues pertaining to PACE 
including requirements on the application process, enrollment, and 
payment and related financial data collection. Each subject area 
discussion included CMS staff and two to three State representatives. 
The feedback obtained during these meetings was an invaluable source of 
information in understanding State operational concerns and in 
constructing the regulation. We believed that this approach would 
minimize operational barriers that are frequently inherent when new 
programs are initiated. For this reason, CMS continues to regularly 
consult and receive feedback from States regarding PACE policy by means 
of teleconferences and forums.
c. Consultation With State Agency on Aging
    Under the Older Americans Act, State Agencies on Aging were charged 
with the responsibility of promoting comprehensive and coordinated 
service systems for older persons in their States. Consistent with this 
responsibility, State Agencies on Aging oversee important programs for 
home and community-based services which are funded through title III of 
the Older Americans Act, State revenues, and the Medicaid home and 
community-based waiver program.
    The State agencies also implement and oversee important planning, 
referral, case management, and quality assurance functions. In 
addition, State agencies are responsible for administering the State 
Long Term Care Ombudsman Program through which service quality in 
nursing homes and board and care homes are monitored in every State.
    Each State agency that administers the PACE program should 
regularly consult with their respective State Agency on Aging in order 
to avoid service duplication in the PACE service areas and to assure 
the delivery and quality of services to PACE participants. In our 1999 
interim final rule, we indicated we were considering the extent to 
which the State Long Term Care Ombudsman Program would be useful in 
promoting the rights of PACE participants and in monitoring the quality 
of care provided by PACE organizations (POs). We received a number of 
comments on this issue that we discuss in Subpart G ``Participant 
Rights'' of this final rule.
d. State Medicaid Plan Requirement
    The State Medicaid plan is a comprehensive written statement 
submitted by the State and approved by CMS describing the nature and 
scope of the Medicaid program and giving assurance that the Medicaid 
program will be administered according to Federal law and policy. The 
State plan preprint sets forth the scope of the Medicaid program, 
including groups covered, services furnished, and

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payment policy. When a State completes a new State plan preprint page 
because of changes in its Medicaid program (called a ``State plan 
amendment (SPA)''), the preprint page must be approved by CMS in order 
for the State to receive Federal matching funds.
    Section 1905(a)(26) of the Act, as added by section 4802(a)(1) of 
the BBA, provided authority for States to elect PACE as an optional 
Medicaid benefit. The State plan electing the optional PACE program 
must be approved before CMS and the State enter into a program 
agreement with a PO. To aid States in modifying their State plans, the 
CMS Center for Medicaid and State Operations developed an interim State 
plan preprint for PACE. A State Medicaid letter dated March 23, 1998, 
provided information and guidance to State Medicaid agencies on how to 
satisfy the State plan amendment requirement. Additional directions for 
completing the State plan amendment were provided in a State Medicaid 
Director letter that was issued November 9, 2000. The most current 
version of the State Plan preprint is available on the CMS PACE 
homepage, https://www.cms.hhs.gov/PACE/04_
InformationforStateAgencies.asp.
e. Interaction With Medicare+Choice (Now Medicare Advantage)
    The BBA also established the Medicare+Choice (M+C) program, which 
expanded the health care options available to Medicare beneficiaries. 
Under the M+C program, beneficiaries could elect to receive Medicare 
benefits through enrollment in one of several private health plan 
choices beyond the original (fee-for-service) Medicare program or 
choose a plan previously available through managed care organizations 
under section 1876 of the Act.
    The BBA set forth the requirements for M+C organizations in a new 
Part C of title XVIII of the Act. The interim final rule that 
implemented the M+C program was published June 26, 1998 (63 FR 34968). 
The final regulation addressing comments was published on February 17, 
1999 (64 FR 7968).
    Significant changes were made to the M+C program by the Medicare 
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) 
(Pub. L. 108-173, enacted on December 8, 2003). The two final 
regulations that implemented the MMA were published January 28, 2005 
(70 FR 4194 and 4588). The first regulation established the Medicare 
Prescription Drug Benefit or Medicare Part D and the second regulation 
established the Medicare Advantage (MA) program which replaced the M+C 
program.
    In this final rule, we are finalizing our regulations that 
implement the PACE provisions of the BBA and BIPA statutes. We are 
limiting our discussion of the effects of MMA provisions to those 
issues that have been addressed in other MMA rulemaking. We think our 
regulations on Part D and MA provide sufficient and appropriate 
guidance to all affected entities, including POs. However, we believe 
it is essential to highlight the impact of MMA, particularly with 
respect to how Medicare Part D relates to a PO. Specifically, the MMA 
provides that POs electing to provide Part D coverage to their 
enrollees shall be treated in a manner similar to Medicare Advantage 
Prescription Drug Plans (MA-PDPs). A more detailed discussion of the 
relevant MMA provisions is provided later in this section.
    Although the PACE program has certain fundamental similarities to 
M+C (now MA), PACE is not a M+C plan. The BBA established separate and 
distinct requirements for the PACE program. PACE is similar to some M+C 
options in these ways: it is capitated; it is risk-based; it provides 
managed care; and it is an elective option. However, PACE differs 
significantly from M+C plans in other ways such as: it is not available 
nationwide (only in a limited number of sites); statutory waivers 
expand the scope of Medicare covered services; it is not available to 
all beneficiaries (only to a defined subset of frail elderly); and it 
is a joint Medicare/Medicaid program. However, the BBA directed us to 
consider some of the requirements established for the M+C program as we 
developed regulations for POs in certain areas common to both programs, 
for example, beneficiary protections, payment rates, and sanctions.
f. Flexibility Under the BBA
    As noted above, the PACE demonstration program was operated 
pursuant to a Protocol developed by On Lok, Inc. The Protocol provided 
authority for CMS and the State Administering Agency (SAA) (that is, 
the State Agency designated to administer the PACE program) to waive 
specific requirements of the Protocol, if, in their judgment, the 
following criteria were met:
     The intent of the requirements was met by the proposed 
alternative and
     Safe and quality care would be provided.

In addition, written requests for waivers were required to be approved 
by CMS and the SAA before implementation of the proposed alternative.
    Flexibility was limited to the requirements in the section on 
service coverage and arrangement. That section includes the following 
requirements:
     POs must provide all Medicare and Medicaid services and 
provide care 7 days per week, 365 days per year;
     A listing of required and excluded services and minimum 
services;
     Each participant be assigned to an IDT;
     The composition and duties of the IDT;
     The assessment and reassessment requirements.
    Flexibility was not authorized for other sections of the Protocol, 
such as participant rights, enrollment and disenrollment, and 
administration.
    Sections 1894(f)(2)(B) and 1934(f)(2)(B) of the Act give the 
Secretary the authority to waive regulatory provisions as follows:

    In order to provide for reasonable flexibility in adapting the 
PACE service delivery model to the needs of particular organizations 
(such as those in rural areas or those that may determine it 
appropriate to use non-staff physicians according to State licensing 
law requirements) * * * the Secretary (in close consultation with 
State administering agencies) may modify or waive provisions of the 
PACE protocol as long as the modification or waiver is consistent 
with and would not impair the essential elements, objectives, and 
requirements of this section * * *.

    The statute also specifies the following essential elements that 
may not be waived:
     The focus on frail elderly qualifying individuals who 
require the level of care provided in a nursing facility.
     The delivery of comprehensive, integrated acute and long-
term care services.
     The multidisciplinary team approach to care management and 
service delivery.
     Capitated, integrated financing that allows the provider 
to pool payments received from public and private programs and 
individuals.
     The assumption by the provider of full financial risk.
    To implement sections 1894(f)(2)(B) and 1934(f)(2)(B) of the Act, 
in the 1999 interim final rule, we identified specific waivers that 
were intended to encourage the development of PACE programs in rural 
and Tribal areas. The waivers included the following three 
requirements:
     A prohibition on members of the governing body and their 
family members from having a direct or indirect interest in contracts 
with the organization (see Sec.  460.68(c));

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     A requirement that members of the IDT primarily serve PACE 
participants (see Sec.  460.102(g)); and
     A requirement that the primary care physician (PCP) must 
be employed by the PO (see Sec.  460.102(g)).
    The regulation included specific criteria for each waiver related 
to whether the PO's service area is rural or Tribal, the accessibility 
of individuals who meet the three regulatory requirements listed above, 
and a requirement that the proposed alternative does not adversely 
affect the availability or quality of care furnished to PACE 
participants.
    Our rationale for this initial, limited view of the flexibility 
provision was based on our belief that all PACE demonstration programs 
were in compliance with the Protocol, necessitating only minor changes 
in their operations to meet the PACE regulatory requirements. Our 
intention was to allow some flexibility to promote PACE in rural and 
Tribal areas while maintaining consistency of the requirements for 
other PACE programs. We intended to provide more flexibility to all POs 
once we had gained sufficient experience in administering the PACE 
program.
    However, after publication of the 1999 interim final rule, we 
learned that although the early PACE demonstration programs initially 
complied with the Protocol, most of them modified the Protocol 
requirements as they expanded, using the flexibility authorized in the 
Protocol. While many of these modifications were related to the 
allowable areas of service coverage and arrangement provisions, many 
others were not authorized by the flexibility clause in the Protocol. 
Furthermore, many of the later PACE demonstration programs also 
inappropriately exercised the flexibility clause in the Protocol, 
especially with regard to direct employment of staff. Finally, very few 
of the waivers were requested in writing or approved by CMS or the SAA 
before implementation.
    We subsequently revised our regulations on the waiver process in 
response to comments on the 1999 interim final rule and in accordance 
with the requirements of section 903 of the Medicare, Medicaid, and 
SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 
106-554, enacted on December 21, 2000), as discussed below. A detailed 
discussion of waivers and the waiver process is located in section III, 
subpart B of this final rule.
3. The Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA)
a. Background
    BIPA modified the PACE program in the following three ways:
     Section 901 extended the transition period for the PACE 
demonstration programs to allow an additional year for these 
organizations to transition to the permanent PACE program.
     Section 902 gave the Secretary the authority to 
grandfather in the modifications these programs had implemented as of 
July 1, 2000. This provision allowed the PACE demonstration programs to 
continue program modifications they had implemented and avoid 
disruptions in participant care where these modifications were 
determined to be consistent with the PACE model. These sections were 
implemented administratively.
     Section 903 specifically addressed flexibility in 
exercising the waiver authority provided under sections 1894(f)(2)(B) 
and 1934(f)(2)(B) of the Act. It authorized CMS to modify or waive PACE 
regulatory provisions in a manner that responds promptly to the needs 
of POs relating to the areas of employment and the use of community-
based PCPs. Section 903 of BIPA also established a 90-day review period 
for waiver requests. As the flexibility language is part of the 
statutory section dealing with regulations (sections 1894(f) and 
1934(f) of the Act), we believed it was intended that waiver 
requirements be incorporated into the PACE regulations. In order to 
implement section 903 of BIPA, we published the 2002 PACE interim final 
rule.
b. Contracting for IDT Members and Administrative Staff
    In the 2002 interim final rule, we amended the PACE regulations to 
replace the term ``multidisciplinary'' with ``interdisciplinary'' to 
more accurately reflect the interactive and collaborative approach of 
the PACE care team.
    In the 2002 interim final rule, we responded to public comments 
regarding flexibility, including comments on Sec.  460.102(f) of the 
1999 interim final rule, which required that the PACE IDT members be 
employees of the PO or PACE center. In the 2002 interim final rule, we 
deleted Sec.  460.102(f) and revised Sec.  460.60 to allow the PO to 
employ or contract with the program director and the medical director. 
We also added requirements at Sec.  460.70 that must be met when the PO 
is contracting for services.
    A more detailed discussion of Sec.  460.60 and Sec.  460.70 is 
located in section III, subpart E of this final rule.
c. Contracting With Another Entity To Furnish PACE Center Services
    After publication of the 1999 interim final rule, we learned that 
in 1995, On Lok, Inc. had changed the Protocol to reflect a contractual 
arrangement they entered into with another organization to provide all 
PACE center services. Under this arrangement, the IDT was employed and 
managed by the contracting organization but On Lok retained 
responsibility for all care provided to and all risk entailed in 
meeting the healthcare needs of the participants attending the center. 
Through this contractual relationship, On Lok was able to expand PACE 
services within their service area. As this approach was reflected in 
the PACE Protocol, we amended the PACE regulations in the 2002 interim 
final rule to allow POs to provide PACE center services through 
contractual arrangements. We also revised Sec.  460.70 to identify the 
criteria that a PO must meet to contract out PACE center services. A 
more detailed discussion of Sec.  460.70 is located in section at IV.B. 
of this final rule.
d. Oversight of Direct Patient Care Services
    As discussed above, in the 2002 interim final rule, we revised the 
requirements of the 1999 interim final rule to allow for the 
contracting of IDT members, program director, medical director, and all 
PACE center services. For this reason, we believed it was essential to 
establish oversight criteria that POs must implement for all employees 
and contracted staff who furnish direct patient care. This was 
accomplished with the addition of Sec.  460.71. A more detailed 
description of Sec.  460.71 is located in section IV, subpart E of this 
final rule.
e. Waiver Process
    To implement section 903 of BIPA, we established a process for 
submission and approval of waiver requests. The 2002 interim final rule 
amended the 1999 interim final rule by adding Sec.  460.26, which 
specifies the requirements for submission and evaluation of waiver 
requests and Sec.  460.28, which addresses requirements related to CMS 
review of waiver requests. In the 2002 interim final rule, we also 
removed the restrictive waiver provisions for rural and Tribal

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organizations that were included in the 1999 interim final rule.
    A more detailed description of Sec.  460.26 and Sec.  460.28 is 
located in section III, subpart B of this final rule.
4. Medicare Prescription Drug Improvement and Modernization Act of 2003 
(MMA)
    On December 8, 2003, the Congress enacted the MMA of 2003 (Pub. L. 
108-173). Several sections of the MMA impact POs. Most notably, section 
101 of the MMA affected the way in which POs are paid for providing 
certain outpatient prescription drugs to any Part D eligible 
participant. As specified in sections 1894 and 1934 of the Act, POs 
shall provide all medically necessary services including prescription 
drugs, without any limitation or condition as to amount, duration, or 
scope and without application of deductibles, co-payments, coinsurance, 
or other cost sharing that would otherwise apply under Medicare or 
Medicaid. Up until January 1, 2006, payment for drugs covered under 
Medicare parts A and B was included in the monthly Medicare capitation 
rate paid to POs for Medicare beneficiaries, while payment for 
outpatient prescription drugs was included in the monthly Medicaid 
capitation rate paid to POs for Medicaid recipients, or as a portion of 
the amount equal to the Medicaid premium paid by non-Medicaid 
recipients.
    Consequently, in order for POs to continue to meet the statutory 
requirement of providing prescription drug coverage to their enrollees, 
and to ensure that they receive adequate payment for the provision of 
Part D drugs, beginning January 1, 2006, POs could begin to offer 
qualified prescription drug coverage to their enrollees who are Part D 
eligible individuals. The MMA did not impact the manner in which POs 
are paid for the provision of outpatient prescription drugs to non-part 
D eligible PACE participants.
    Section 1860D-21(f) of the Act, added by section 101 of the MMA, 
provides that POs may elect to provide qualified prescription drug 
coverage to enrollees who are Part D eligible individuals.
    This section also provides that in the case of a PACE program that 
elects to provide qualified Part D prescription drug coverage, the 
requirements under Part D apply to the provision of such coverage in a 
manner that is similar to the manner in which those requirements apply 
to the provision of such coverage under an MA-PD local plan. However, 
because we did not believe that Congress intended for the MMA to alter 
the way in which PACE services, including outpatient prescription drugs 
are provided to PACE enrollees, we indicated in the final rule that 
implements Part D (70 FR 4194) that POs would not be deemed to be MA-PD 
local plans, but rather, would be treated in a manner similar to an MA-
PD local plan for purposes of payment under Part D. We stated that this 
approach is consistent with section 1894(d)(1) of the Act, which 
provides that payments will be made to POs ``in the same manner and 
from the same sources'' as payments are made to a MA organization.
    The MMA allows CMS the flexibility to deem POs as MA-PD plans or to 
treat POs that elect to provide qualified drug coverage in a manner 
similar to MA-PD plans. Due to inconsistencies in the PACE and MMA 
statutes, we chose to treat POs in a similar manner as MA-PD plans 
avoiding conflicting requirements. The requirements that apply to POs 
that elect to provide qualified prescription drug coverage to Part D 
eligible enrollees are set forth in subpart T of the preamble to the 
Part D final rule (70 FR 4194). To the extent that we need to address 
additional issues regarding Part D as it applies to POs, we will do so 
in a future rulemaking.
    In addition, section 236 of the MMA amended the Act to extend to 
POs the existing statutory Medicare and Medicaid balance billing 
protections that had previously applied to POs under PACE demonstration 
program authority. Specifically, provisions of the Act that limit 
balance billing against MA organizations by non-contract physicians, 
providers of service, and other entities with respect to services 
covered under title XVIII now include PACE providers. Similarly, 
Medicaid billing limitations specified in the Act now apply to 
providers participating under the State plan under title XIX that do 
not have a contract or other agreement with a PACE provider. Both MMA 
provisions apply to services furnished on or after January 1, 2004.
    Section 301 of the MMA amends the Medicare Secondary Payer (MSP) 
provisions in section 1862(b) of the Act. These amendments clarify the 
obligations of primary plans and primary payers, the nature of the 
insurance arrangements subject to the MSP rules, the circumstances 
under which Medicare may make conditional payments, and the obligations 
of primary payers to reimburse Medicare. To implement section 301 of 
the MMA, we issued an interim final rule with comment period (71 FR 
9466), published on February 24, 2006, revising our MSP regulations at 
part 411. Our PACE regulations at Sec.  460.180(d) specify that 
Medicare does not pay for PACE services to the extent that Medicare is 
not the primary payer under part 411. The MSP interim final rule 
establishes our current policies regarding the obligations of other 
payers. If there are any provisions specific to PACE organizations that 
result from issuance of the final MSP rule, we will address those 
provisions in a future PACE rulemaking.
    Finally, as discussed above, under the rulemaking requirements of 
section 902 of the MMA and our notice in the Federal Register on 
December 30, 2004 (69 FR 78442), interim final regulations issued 
before enactment of MMA on December 8, 2003 must be finalized within 3 
years of the date of enactment or the regulations shall not continue in 
effect. This rule finalizes both the PACE interim final rule with 
comment period published in the Federal Register November 24, 1999 (64 
FR 66234) and the PACE interim final rule with comment period published 
in the Federal Register on October 1, 2002 (67 FR 61496).

II. Analysis of and Response to Public Comments

    This final rule responds to public comments received on both the 
November 24, 1999 interim final rule with comment (64 FR 66234) and the 
October 1, 2002 interim final rule with comment (67 FR 61496).

A. Summary of Comments on the 1999 Interim Final Rule

    We received 34 items of correspondence containing more than 500 
specific comments on the 1999 interim final rule. In this document, we 
will refer to this regulation as the 1999 interim final rule. 
Commenters included representatives of professional associations, State 
and county governments, PACE demonstration programs, potential PACE 
programs, various health care providers, and advocacy organizations.
    Consistent with the scope of the 1999 interim final rule, most of 
the commenters addressed multiple issues, often in great detail. Some 
commenters expressed concerns about Medicare and Medicaid issues that 
do not pertain to the PACE program.
    Numerous commenters disapproved of the limited flexibility provided 
in the regulation, stating that the regulation restricts programs from 
developing innovatively and responsively to participant preferences, 
community needs, and the healthcare marketplace. They asked for 
operational and service delivery flexibility, while permitting

[[Page 71249]]

liberal exceptions for established programs that have proven success in 
furnishing the PACE benefit. Commenters also noted the regulatory 
language was too prescriptive in several key areas (personnel 
qualifications) and too vague in others (Medicare rate-setting), saying 
that prescriptive language also reduces flexibility in organizational 
design and limits innovative strategies for service delivery.
    Commenters indicated that the application of M+C requirements was 
often made without considering the differences between the PACE program 
and M+C plans and that the differences between PACE and nursing 
facilities should be recognized in the final requirements.
    In addition, commenters indicated that the numerous written notices 
required by the 1999 interim final rule were unduly burdensome.
    Comments also indicated that in some instances requirements from 
other programs (for example, the Outcome Assessment Information Set 
(OASIS) for home health agencies) have been applied to PACE, thereby 
disregarding the differences between the programs and adding the burden 
of information collection.
    Finally, commenters opposed the prescriptive language that they 
thought limited State discretion and usurped traditional State 
regulatory activities rather than optimizing the opportunity to 
encourage cooperation with the States. We respond to the particular 
comments as they relate to specific provisions discussed in section III 
of this final rule.
    Listed below are the six areas of the 1999 interim final rule that 
generated the most concern:
    Subpart D: Sanctions, Enforcement Actions and Termination including 
civil money penalties;
    Subpart E: PACE Administrative Requirements including 
organizational structure, personnel qualifications, contracted services 
and marketing;
    Subpart F: PACE Services including the interdisciplinary team and 
participant assessment;
    Subpart G: Participant Rights including the appeals process;
    Subpart I: Participant Enrollment and Disenrollment which includes 
eligibility to enroll, enrollment process, continuation of enrollment, 
and involuntary disenrollment;
    Subpart J: Payment including Medicare payment.

B. Summary of Comments on the 2002 Interim Final Rule

    We received 4 letters of public comment on the October 1, 2002 
interim final rule (67 FR 61496) containing more than 17 specific 
comments. Commenters included representatives of professional 
associations, a State government, and an advocacy organization. In this 
document, we will refer to this regulation as the 2002 interim final 
rule.
    Commenters expressed opposing opinions on the flexibility permitted 
in the 2002 interim final rule. In general, commenters expressed 
concerns about flexibility related to all aspects of the program, 
including waivers and the waiver process, contracted services including 
staff and contractors, and oversight of direct participant care. Listed 
below are the three areas that generated the most concern:
    Subpart B: PO Application and Waiver Process;
    Subpart D: Sanctions, Enforcement Actions and Termination;
    Subpart E: Administrative Requirements.

III. Provisions of the 1999 Interim Final Rule With Comment and the 
2002 Interim Final Rule With Comment, Analysis of and Responses to 
Comments and Final Rule Actions

    The purpose of this final rule is to respond to public comments and 
finalize the regulations established in the 1999 and 2002 interim final 
rules. Below we will list each PACE regulation, note any comments and 
responses, and then note our final action.

Subpart A--Basis, Scope, and Purpose

    This subpart provides the basis for this regulation, the scope and 
purpose, and defines terms specific to the PACE benefit.

Section 460.2 Basis

    As stated in the 1999 interim final rule, the regulations set forth 
in 42 CFR part 460 are based on Sections 1894, 1905(a), and 1934 of the 
Act. Section 1894 of the Act authorizes Medicare payments to and 
coverage of benefits under PACE. Sections 1905(a) and 1934 of the Act 
authorize the establishment of PACE as an option under the State 
Medicaid plan to provide for Medicaid coverage of services furnished by 
the PACE program.
    No comments were received on this section.
    Final rule actions:
    This final rule will finalize Sec.  460.2 as published in the 1999 
interim final rule.

Section 460.4 Scope and Purpose

    We stated in the 1999 interim final rule that the purpose of the 
regulation was to set forth the requirements that an entity must meet 
in order to be approved as a PO under Medicare and Medicaid. It also 
sets forth how individuals may qualify to enroll in PACE, how Medicare 
and Medicaid payment will be made for PACE services, provisions for 
Federal and State monitoring of PACE programs, and procedures for 
sanctions and termination.
    We stated the purpose of a PACE program is to provide pre-paid, 
capitated, comprehensive health care services that are designed to:
     Enhance the quality of life and autonomy for frail, older 
adults;
     Maximize dignity of and respect for older adults;
     Enable frail, older adults to live in their homes and in 
the community as long as medically and socially feasible; and
     Preserve and support the older adult's family unit.
    This philosophy is based on Part I, section A, of the Protocol. 
Adopting a mission or philosophy statement that includes these elements 
indicates that an entity is guided by a set of values that influence 
its structure, planning, and day-to-day operations that is consistent 
with the purpose of PACE.
    No comments were received on this section.
    Final rule actions:
    This final rule will finalize Sec.  460.4 as published in the 1999 
interim final rule.

Section 460.6 Definitions

    This section of the 1999 interim final rule included the following 
definitions based on those in sections 1894(a) and 1934(a) of the Act 
and other terms determined necessary by CMS.
    Contract year means the term of a PACE program agreement, which is 
a calendar year, except that a PO's initial contract year may be from 
12 to 23 months, as determined by CMS.
    Medicare beneficiary means an individual who is entitled to 
Medicare Part A benefits or enrolled under Medicare Part B, or both.
    Medicaid participant means an individual determined eligible for 
Medicaid who is enrolled in a PACE program.
    Medicare participant means a Medicare beneficiary who is enrolled 
in a PACE program.
    PACE stands for Programs of All-inclusive Care for the Elderly.
    PACE center means a facility operated by a PO where primary care is 
furnished to participants.

[[Page 71250]]

    PACE organization (PO) means an entity that has in effect a PACE 
program agreement to operate a PACE program under this part.
    PACE program agreement means an agreement between a PO, CMS, and 
the State administering agency for the operation of a PACE program.
    Participant means an individual who is enrolled in a PACE program.
    Services include both items and services.
    State administering agency means the State agency responsible for 
administering the PACE program agreement.
    Trial period means the first 3 contract years in which a PO 
operates under a PACE program agreement, including any contract year 
during which the entity operated under a PACE demonstration program.
    In developing the definition of PACE organization, we explained in 
the 1999 interim final rule that sections 1894(a)(3) and 1934(a)(3) of 
the Act defined a ``PACE provider.'' We changed that term to ``PACE 
organization'' (PO) because we believed that the term ``PACE provider'' 
would be confusing. Medicare regulations (at 42 CFR 400.202) and 
Medicaid regulations (at 42 CFR 400.203) define the word ``provider,'' 
but the definitions are different and neither applies to entities that 
operate PACE programs. Those definitions denote individual providers of 
individual services under conventional fee-for-service systems. We 
selected the alternative term, PO, since ``organization'' is a term 
used in both titles XVIII and XIX when referring to managed care 
organizations, which are more similar to entities under PACE. In the 
few places where we use the term ``provider'' in this regulation, we 
are using it in the broad generic sense to refer to an individual or an 
entity that furnishes health care services. Our use of the term is not 
limited to the narrower Medicare definition in Sec.  400.202.
    Also, in defining contract year, we explained that a PO's initial 
(start-up) contract year may be from 12 to 23 months, as determined by 
CMS, to enable us to adjust the length of the initial (start-up) 
contract year so that subsequent years are on a standard annual 
calendar year cycle.
    Comment: One commenter suggested that we clarify the term 
``center'' by replacing it with the term ``PACE center.''
    Response: We agree and have replaced the term ``center'' with 
``PACE center'' throughout the regulation.
    Comment: We received several comments requesting that we clearly 
define PACE, what constitutes a PO, and what constitutes a PACE center 
including clarification that a PACE provider is considered a PACE 
program and may have more than one center.
    It was also recommended that we adopt the definition of PACE center 
as contained in the Protocol, which explicitly addresses the full range 
of services and benefits available at the PACE center.
    Response: In response to these comments, in this final rule, we are 
redefining ``PACE center'' to be more consistent with the definition 
provided in the Protocol and the statute by defining it as a facility 
which includes a primary care clinic, areas for therapeutic recreation, 
restorative therapies, socialization, personal care, and dining, and 
which serves as the focal point for coordination and provision of most 
PACE services.
    In addition, as noted below we are adding a definition of ``PACE 
program''. However, we disagree with the commenter who requested that 
we adopt the definition of ``PACE center'' as contained in the Protocol 
which explicitly identifies the full range of services and benefits 
available at the PACE center. We believe that our modification is more 
appropriate and less cumbersome than including every required service 
in the definition. We also believe that by expanding the definition of 
``PACE center'' that was published in the 1999 interim final rule, we 
are clarifying that a PACE center is a facility where most PACE 
services are provided, not just primary care.
    As noted earlier in this section, in the 1999 interim final rule, 
we defined PACE center as ``a facility operated by a PO where primary 
care is furnished to participants.'' This definition was based on 
section IV. B. 2 of the Protocol, which states: ``The PACE center is 
the focal point for coordination and provision of most PACE services. 
The PACE center is a facility which includes a primary care clinic, and 
areas for therapeutic recreation, restorative therapies, socialization, 
personal care and dining.'' The Protocol identified other requirements 
for a PACE center, which were included in other sections of the 1999 
interim final rule. Those requirements are included in the following 
sections: The list of required services is at Sec.  460.98; the 
requirement that POs operate at least one PACE center is in Sec.  
460.98(d)(1); the requirement that the frequency of attendance is 
determined by the IDT based on each participant's needs is at Sec.  
460.98(e); and the requirement that the PACE center is designed, 
equipped, and maintained to provide for the physical safety of 
participants, personnel, or visitors and to ensure a safe and sanitary 
environment is at Sec.  460.72.
    We believe the list of explicit services and benefits belongs in 
Sec.  460.98 which relates to ``Service delivery,'' and in Sec.  
460.72, which relates to ``Physical environment.''
    Comment: A commenter requested that we add a definition of a ``PACE 
program'' and use the following language ``all centers and service 
provision by an approved PACE provider in an approved service area.''
    Response: ``PACE program'' is defined in the Act at sections 
1894(a)(2) and 1934(a)(2) as an entity that meets the statutory 
requirements to be a PACE provider and provides comprehensive health 
care services to PACE program eligible individuals in accordance with 
the PACE program agreement and regulations. We have not included a 
definition for ``PACE program'' in our regulations at Sec.  460.6. 
However, we agree with the commenter that doing so would help to 
clarify and standardize PACE terminology. As noted above, we changed 
the term ``PACE provider'' to ``PACE organization'' and defined that 
term in the 1999 interim final rule.
    Based on sections 1894(a)(2) and 1934(a)(2) of the Act, we are 
defining a PACE program as a program of all-inclusive care for the 
elderly that is operated by an approved PACE organization and that 
provides comprehensive health care services to PACE enrollees in 
accordance with a PACE program agreement. As noted above, we are 
defining a PACE center as a facility which includes a primary care 
clinic, areas for therapeutic recreation, restorative therapies, 
socialization, personal care, and dining, and which serves as the focal 
point for coordination and provision of most PACE services. We do not 
think the commenter's language would be needed to ensure that PACE 
centers are included within the definition of a PACE program.
    Final rule actions:
    In this final rule we are:
     Replacing the term ``center'' with the term ``PACE 
center'' throughout the regulation.
     Redefining the term ``PACE center'' as ``a facility which 
includes a primary care clinic, areas for therapeutic recreation, 
restorative therapies, socialization, personal care, and dining, and 
which serves as the focal point for coordination and provision of most 
PACE services.''
     Defining ``PACE program'' to mean a program of all-
inclusive care for the elderly that is operated by an approved PACE 
organization and that provides

[[Page 71251]]

comprehensive health care services to PACE enrollees in accordance with 
a PACE program agreement.

Subpart B--PO Application and Waiver Process

Section 460.10 Purpose

    We established in the 1999 interim final rule, that this subpart 
sets forth application requirements for an entity that seeks approval 
from CMS as a PO. In the 2002 interim final rule, we amended Sec.  
460.10 to clarify that subpart B also establishes a process by which a 
PO may request a waiver of certain regulatory requirements in order to 
provide for reasonable flexibility in adapting the PACE service 
delivery model to the needs of particular organizations (such as those 
in rural areas).
PACE Under Both Medicare and Medicaid
    We require that each PO must enter into a program agreement under 
both sections 1894 and 1934 of the Act, that is, that each organization 
participate in both Medicare and Medicaid. Most of the text in those 
two sections is identical and our analysis indicates that key language 
contemplates entities acting as POs under both programs.
    Sections 1894(f)(2) and 1934(f)(2) of the Act require that we 
incorporate in our regulations the requirements applied to PACE 
demonstration programs under the PACE Protocol, to the extent 
consistent with the provisions of sections 1894 and 1934 of the Act. 
Under the Protocol, PACE demonstration programs operated under both 
Medicare and Medicaid. We believe that the directive to incorporate the 
requirements in the Protocol reflected an expectation by the Congress 
that all POs would participate in both Medicare and Medicaid. This view 
is reinforced by paragraph (f)(2)(B) of these sections, which permits 
us to modify or waive provisions of the PACE Protocol ``so long as such 
modification or waiver is not inconsistent with and would not impair 
the essential elements, objectives, and requirements'' of sections 1894 
and 1934 of the Act, but which forbids modifying or waiving, among 
others, the following provisions:
     Capitated, integrated financing that allows the 
organization to pool payments received from public and private programs 
and individuals; and
     The assumption by the organization of full financial risk.
    We concluded that both of these provisions preclude the possibility 
of a Medicare-only or Medicaid-only PACE program. For example, if a 
program could collect capitation payments from Medicare but bill fee-
for-service under Medicaid, not all financing would be capitated, nor 
would financing be integrated, nor would the organization assume full 
financial risk.
    However, the law does not require that States offer the PACE 
benefit under Medicaid. As indicated by its title, section 4802 of BBA 
provides for the ``Establishment of PACE Program as Medicaid State 
Option.'' If an entity attempted to become a PO under Medicare in a 
State which has not included PACE program services as an option under 
its Medicaid program, it would not be possible for that entity to be 
both a Medicare and a Medicaid PO. While this would curtail the 
availability of PACE programs in those States, we have concluded that 
this result was intended because a Medicare-only program could not meet 
the fundamental concept of an all-inclusive, integrated, capitated, 
full-risk program.
    Moreover, both sections 1894 and 1934 of the Act contemplate the 
active collaboration of Federal and State governments in the 
administration of PACE. Each State must have a SAA that is responsible 
for administering PACE program agreements in their State under sections 
1894 and 1934 of the Act. The SAA closely cooperates with CMS in 
establishing procedures for entering into, extending, and terminating 
PACE program agreements. The SAA cooperates with CMS and the PO in the 
development of participant health status and quality of life outcome 
measures. The SAA also cooperates with us in conducting oversight 
reviews of PACE programs and has the authority to terminate a PACE 
program agreement for cause. If Medicare-only programs had been 
contemplated in a State that does not elect the PACE option, there 
would have been no reason to assign such a significant role to an SAA. 
We believe that a State which has not chosen PACE as an optional 
service would be ill-prepared or unable to perform this role.
    As mentioned earlier, most of the text of section 1894 of the Act 
is identical to text in section 1934 of the Act. Portions of both text 
reflect the concept of entities acting as POs under both programs. The 
scope of Medicare PACE program benefits includes ``all items and 
services covered under this title (for individuals enrolled under this 
section [section 1894]) and all items and services covered under title 
XIX.'' Similarly, section 1934 of the Act, defines the Medicaid benefit 
package as ``all items and services covered under title XVIII (for 
individuals enrolled under section 1894) and all items and services 
covered under this title.'' In addition, to be eligible for PACE, an 
individual must require the nursing facility (NF) level of care covered 
under the State Medicaid plan.
    Section 1894(e) of the Act provides that ``CMS, in close 
cooperation with the SAA'' will establish program agreements for 
``entities that meet the requirements for a PO under this section, 
section 1934, and regulations.'' A corresponding provision is found at 
section 1934(e) of the Act, referring to ``entities that meet the 
requirements for a PO under this section, section 1894, and 
regulations.'' We believe that the use of the correlative ``and'' 
indicates that PACE entities would have to meet all three sets of 
requirements.
    A parallel provision provides for termination of PACE program 
agreements (see paragraphs (e)(5) of sections 1894 and 1934 of the 
Act). Termination of an agreement under both sections 1894 and 1934 of 
the Act may be accomplished by either ``CMS or a SAA.''
    Nonetheless, it is highly unlikely that any entity could be a 
viable PO without approval under both Medicare and Medicaid. The 
majority of potential participants are Medicare beneficiaries who also 
are eligible for Medicaid. Those who are not currently Medicaid-
eligible may eventually exhaust their financial resources and become 
eligible. Medicare participants who are not enrolled in PACE under 
Medicaid must pay premiums equal to the Medicaid capitation rate. Aside 
from the technicality that there would not be an established Medicaid 
capitation rate in a State that does not elect the PACE option, most of 
these participants would lack the ability to pay these significant 
premiums.
    As the above citations illustrate, some provisions of the law are 
conflicting and thus ambiguous. We therefore interpreted them to give 
effect to many of the provisions and policy objectives that they 
advance. Furthermore, in keeping with the congressional intent that the 
Protocol guide our implementation of the PACE program, we determined 
that POs must be approved under both Medicare and Medicaid.
    Based on this interpretation, if a State should choose not to amend 
its State Medicaid plan to adopt PACE as an optional Medicaid service, 
we would not accept PACE applications from entities in that State. 
Also, if a State has elected the optional benefit but declines to 
recommend a particular entity as a PO, we would not accept an 
application from that entity.

[[Page 71252]]

    We stated in the 2002 interim final rule that to implement section 
903 of BIPA, we amended the PACE regulation by adding Sec.  460.26 and 
Sec.  460.28 to establish a process for a PO to request waiver of 
regulatory requirements. This process allows for variations while 
achieving the intent of the regulatory provision and responding to the 
needs of POs to develop and expand within their States' long-term care 
delivery system.
    Waivers will be discussed in detail under Sec.  460.26 and Sec.  
460.28.
    Comment: Another commenter recommended that social support services 
and participant care be more clearly defined so beneficiaries and 
caregivers may make informed decisions about the type and level of care 
to be provided.
    Response: In response to the comment regarding a more defined 
regulation where social services and participant care is concerned, we 
disagree with this commenter, as required services are participant 
specific. After the IDT determines a participant requires a service and 
it is included in their plan of care, those services become required 
for that participant for that specific need. Therefore, it would not 
truly represent the PACE model to constrain the benefit by defining it 
in regulatory language.
    Final rule actions:
    This final rule will finalize Sec.  460.10, as published in the 
2002 interim final rule.

Section 460.12 Application Requirements

    We established Sec.  460.12 to set forth the application 
requirements for the PACE program. In order for CMS to determine 
whether an entity qualifies as a PO, an individual authorized to act 
for the entity must submit an application that describes thoroughly how 
the entity meets all the requirements specified in this regulation. In 
recognition of the 90-day review timeframe specified in the statute and 
described below and the numerical limit on the number of PACE program 
agreements, we will review and take action to approve, deny, or request 
additional information only on complete applications; those 
applications that address all elements of the PACE program agreement. 
We will send a letter to each applicant indicating whether or not the 
application is complete and specifying when the 90-day review period 
ends.
    We require in Sec.  460.12(b) that applications for PO status be 
accompanied by an assurance from the SAA indicating that it considers 
the entity to be qualified to be a PO and that the State is willing to 
enter into a PACE program agreement with the entity. We will not accept 
applications from entities that have not obtained these assurances.
    To enable a SAA to make these assurances, an entity would have 
established to the satisfaction of the State that it is committed to 
the PACE model of care, that there is sufficient funding for program 
development and facilities, that there is adequate demand for PACE 
services as shown by demographic analysis.
    Entities that are interested in developing a PACE program agreement 
should contact their SAA to determine whether the State has submitted 
or plans to submit a SPA to elect PACE as an optional benefit under its 
State Medicaid plan and if the State has established additional 
requirements for POs. Section 1905(a)(26) of the Act provides authority 
for States to elect PACE as an optional Medicaid benefit. The State 
plan electing the optional PACE program must be approved before we can 
approve an application for a PO in that State. We received three 
comments related to application requirements.
    Comment: Commenters questioned the requirement that POs must be 
approved by their SAA. Further, they requested that we specify an 
absolute role for SAA, and revise the regulatory language to reflect 
the SAAs' responsibility to submit the program application and the 
States' role in the application process.
    Response: As we explained in the 1999 interim final rule, States 
have played a significant role in the development of the PACE 
demonstration program as well as other community-based alternatives to 
institutionalization. Most States have implemented home and community 
based programs that provide comprehensive coordinated services to 
various groups of Medicaid recipients. As a result, States have gained 
extensive experience in demographic analysis and contracting with 
entities that are capable of delivering a specified range of services.
    Although the PACE statute does not specify the States' role in the 
application approval process, many aspects of implementing PACE in 
Medicare and Medicaid will necessitate extensive involvement of the 
SAAs and the State Medicaid Agencies. The State must elect to provide 
PACE services as an option under the Medicaid State plan and PACE 
applications must be accompanied by an assurance from the SAA that the 
State considers the entity to be qualified to be a PO and is willing to 
enter into a program agreement with them.
    With regard to applications, we continue to believe the States are 
in the best position to work with potential organizations to develop 
programs that meet our requirements and are integrated into the States' 
overall long-term care delivery system.
    Comment: One commenter asked us to clarify the regulatory provision 
related to the hiring requirements of non-operational programs before 
submission of their program application. The commenter stated that it 
is unreasonable to expect the applicant would have hired core staff 
before application submission.
    Response: Although hiring requirements for non-operational PACE 
programs do not appear in our regulations at Sec.  460.12, we addressed 
these requirements in the preamble of the 1999 interim final rule (64 
FR 66238). We stated, ``To enable a State to make such assurances, an 
entity would have established to the satisfaction of the State that it 
is committed to the PACE model of care, that there is sufficient 
funding for program development and facilities, that there is adequate 
demand for PACE services as shown by demographic analysis, and that the 
entity has hired core PACE staff and has developed contracts for 
referral arrangements and other program services that the site will not 
furnish directly.''
    When the 1999 interim final rule was developed, there were several 
PACE demonstration programs that needed to transition to permanent 
provider status. As they were operational and had key staff members in 
place before submitting their PACE provider applications, this 
requirement was not an issue.
    However, as all PACE demonstration programs have transitioned to 
permanent provider status, applications will now be primarily from non-
operational providers. We acknowledge that start-up costs are extensive 
and paying salaries for top management staff without a revenue stream 
is unrealistic. We do not believe that it is appropriate to hold non-
operational applicants to the same standard as POs that had been fully 
operational under the PACE demonstration program. Therefore, we are not 
requiring that core staff be hired before application approval. 
However, at the time of an organization's Readiness Review, we do 
expec