Medicare Program; Medicare Integrity Program, Fiscal Intermediary and Carrier Functions, and Conflict of Interest Requirements, 48870-48888 [E7-16606]

Agencies

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

[Federal Register Volume 72, Number 164 (Friday, August 24, 2007)]
[Rules and Regulations]
[Pages 48870-48888]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-16606]



[[Page 48869]]

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Part VII





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 400 and 421



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

Federal Register / Vol. 72 , No. 164 / Friday, August 24, 2007 / 
Rules and Regulations

[[Page 48870]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare and Medicaid Services (CMS)

42 CFR Parts 400 and 421

[CMS-6030-F]
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: Final rule.

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SUMMARY: This final rule establishes the Medicare Integrity Program 
(MIP) and implements program integrity activities that are funded from 
the Federal Hospital Insurance Trust Fund. This final rule sets forth 
the definitions related to 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 final rule brings certain sections of the Medicare regulations 
concerning fiscal intermediaries (FIs) and carriers into conformity 
with the Social Security Act (the Act). The rule distinguishes between 
those functions that the statute requires to be included in agreements 
with FIs and those that may be included in the agreements. It also 
provides that some or all of the functions may be included in carrier 
contracts.

DATES: Effective Dates: These regulations are effective on October 23, 
2007.

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

SUPPLEMENTARY INFORMATION:

I. Background

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 enacting 
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), as those sections existed prior to the 
October 1, 2005 effective date of amendments made by section 911(b) and 
(c) of the Medicare Prescription Drug, Improvement, and Modernization 
Act of 2003 (Pub. L. 108-173) (MMA), the Congress provided that public 
agencies or private organizations may participate administering the 
Medicare program under agreements or contracts entered into with CMS.
    These Medicare contractors (which are, for the purposes of this 
preamble, contractors that received awards under sections 1816 and 1842 
of the Act prior to October 1, 2005) are known as fiscal intermediaries 
(FIs) and carriers. With certain exceptions, FIs 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. 
``Provider'' means a hospital, a critical access hospital (CAH), a 
skilled nursing facility, a comprehensive outpatient rehabilitation 
facility, a home health agency, or 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 in effect a similar 
agreement but only to furnish outpatient physical therapy or speech 
pathology services; or a community mental health center that has in 
effect a similar agreement but only to furnish partial hospitalization 
services. ``Supplier'' is defined as a physician or other practitioner, 
or an entity other than a provider that furnishes health care services 
under Medicare.)
    The former section 1842(a) of the Act authorized 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. The former section 
1842(f) of the Act provided 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 was eligible for consideration for a carrier 
contract unless it could demonstrate that it met this definition of 
carrier.
    Section 1842(b) of the Act provided 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, 
remained in effect for carrier contracts.
    The former section 1816(a) of the Act authorized us to enter into 
agreements with public agencies or private organizations (that is, FIs) 
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. Section 1816(a) gave us the authority to 
enter into an agreement with an entity to serve as a FI 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 
MMA eliminated the requirement that FIs 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 CMS and a FI 
specify the functions the FI must perform. In addition to requiring any 
items specified by CMS in the agreement that are unique to that FI, our 
regulations require that all FIs 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 FIs 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

[[Page 48871]]

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, utilization patterns, 
and Part B redeterminations. 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 FI 
and carrier contracts are significantly different from standard Federal 
government contracts.
    The Medicare FI 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 then-existing 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 FIs 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 terminating FI agreements in 
certain circumstances, and, similarly, Sec.  421.205 provides for 
terminating carrier contracts.
    Each year, the Congress appropriates funds to support Medicare 
contractor activities. In addition, the Medicare Integrity Program 
(MIP) authorized by the Health Insurance Portability and Accountability 
Act of 1996 (Pub. L. 104-191) (HIPAA) provides funding for program 
integrity efforts. These funds are distributed to the contractors based 
on annual budget and performance negotiations, where funds are provided 
by program activity to each of the current Medicare contractors. 
Historically, approximately 33 percent of these funds were for payment 
for the processing of claims; an additional 25 percent of the funds 
were for program integrity activities. These include 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 or settling 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 operational functions.

B. Discussion About Medicare Administrative Contractors (MACs)

    Section 911 of the MMA added 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 FI and carrier contractors with new 
MACs using competitive procedures.
    In 2005, we began the process to conduct full and open competitions 
to replace the current contracts with MACs. (This process is required 
to be completed by 2011.) These MACs will handle many of the same basic 
functions that are now performed by FIs and carriers. Additionally, 
MACs may be charged with performing functions under the MIP under 
section 1893 of the Act. The statute does not preclude the current FIs 
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 MIP contract); and 
specifies various requirements for the structure, terms, and conditions 
of these new MAC contracts. In particular, section 1874A(a)(6) of the 
Act specifies that the Federal Acquisition Regulation (FAR) (48 CFR 
Chapter 1) 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 
section 1874A of the Act, directed CMS in section 1874A(a)(6) of the 
Act to utilize the existing well-defined regulatory framework of the 
FAR.
    As one element of our implementation of section 1874A of the Act, 
we published the Medicare Hospital Outpatient Prospective Payment 
System and CY 2007 Payment Rates final rule (71 FR 68228 through 68230) 
which made certain changes to 42 CFR 421 Subparts A and B, and 
established a new Subpart E, to make clear how Medicare providers and 
suppliers will be assigned to FIs, carriers, and MACs during the 
implementation period for section 1874A.
    The first of the full and open MAC competitions was for the DME 
claims workloads. We decided to start the Medicare contractor reform 
initiative with the DME MAC contracts because the workload of the then-
existing four durable medical equipment regional carriers (DMERCs) was 
stable and the risk of any significant program disruption to the 
provider and beneficiary communities would have been minimal. We 
awarded the contracts for the four specialty MACs that will handle 
administration of Medicare claims for DME during 2006, and we 
anticipate that the last of these workloads will be fully implemented 
by the summer of 2007.
    During the initial implementation phase (2005 through 2011), we 
plan to compete and award contracts for 15 Part A and Part B MACs 
servicing the majority of all types of providers (both Part A and Part 
B). We designed the new MAC jurisdictions to balance the allocation of 
workloads, promote competition, account for the integration of claims 
processing activities, and mitigate the risk to the Medicare program 
during the transition to the new contractors. The new jurisdictions 
reasonably balance the number of FFS beneficiaries and providers. These 
jurisdictions will be substantially more alike in size than the 
existing FI and carrier jurisdictions, and they will promote much 
greater efficiency in processing Medicare's billion claims a year. On 
July 31, 2006, we announced that we had awarded the first of the Part 
A/B MAC contracts (Jurisdiction 3).
    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

    Section 202 of HIPAA added new section 1893 to the Act establishing 
the MIP. This program is funded from the Medicare Hospital Insurance 
Trust Fund to perform program integrity activities with respect to all 
parts of the Medicare program. Specifically, section 1893 of the Act 
expanded 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;

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educating 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 performing 
specific Medicare program integrity activities, which 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 eliminating responsibilities of an individual FI 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 any relationship 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 stable funding source 
allows us the flexibility to invest in innovative strategies to combat 
potential fraud and abuse. The funding mechanism has helped us shift 
our emphasis from postpayment 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. 
The flexibility made possible by 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 us specific 
contracting authority, consistent with the FAR, to enter into contracts 
with entities to promote the integrity of the Medicare program.
    In the March 20, 1998 Federal Register (63 FR 13590), we published 
a proposed rule that would implement provisions of section 1893 of the 
Act. We reviewed and considered all the timely comments received 
concerning the proposed MIP regulatory provisions. 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. 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 publishing the final rule.
    Section 1871(a), added by 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 3 years except under exceptional circumstances. Given 
that it had been greater than 3 years since the publication of the 
initial proposed MIP regulations, we issued a second proposed rule in 
the Federal Register on June 17, 2005 (70 FR 35204 through 35220).
    In the March 20, 1998 proposed rule (63 FR 13590), we outlined our 
authority to contract with entities to perform Medicare program 
integrity functions to promote the integrity of the Medicare program 
prior to publishing a final rule. 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; 1 Coordination of Benefits 
(COB) contract, 8 IDIQ contracts for the Medicare Managed Care (MMC) 
Program Integrity Contractors effort, 8 IDIQ contracts for the Medicare 
Drug Integrity Contractor (MEDIC) effort, and other contracts. (IDIQ 
contracts are explained in detail in FAR 48 CFR subpart 16.5.) After 
being awarded an IDIQ contract, organizations are given a fair 
opportunity to be considered for award of task orders released by CMS 
to specifically address program integrity issues within the scope of 
the IDIQ contract. These MIP contractors, which are discussed in the 
following section, must comply with the CMS Business Partners Systems 
Security Manual (BPSSM) and its operational appendices (A, B, C, and 
D); the CMS Policy for IT Security; and the CMS Information Security 
``Virtual Handbook.'' CMS' Core Security Requirements, as defined in 
the CMS BPSSM, include, but are not limited to, security standards 
adopted under the Health Insurance Reform regulations published under 
the HIPAA and Title X, section 1002 of the Homeland Security Act of 
2002, the Federal Information Security Management Act of 2002 (FISMA) 
(Pub. L. 107-296). The CMS requirements are applicable to MIP contracts 
and to all subcontracts to MIP contractors. The BPSSM can be found at 
https://www.cms.hhs.gov/informationsecurity/. The security requirements 
include the following:
     Contractor appointment of a dedicated systems security 
officer.
     Contractor certification for compliance with CMS Systems 
Security Requirements.
     Contractor administration of a systems security program.
     Contractor correction of any security deficiencies, 
conditions, weaknesses, findings, or gaps identified by all audits, 
reviews, evaluations, tests, and assessments.

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     Contractor compliance with CMS' security certification and 
accreditation.
    CMS security requirements are fully defined at https://
www.cms.hhs.gov/informationsecurity/ and will be described in detail in 
the MIP-related statement of work and task orders.
1. Program Safeguard Contractors (PSCs)
    Since 1999, we have awarded more than 65 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 
identifying and developing 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)).
    Overall, we have been successful in implementing the PSC program. 
Since 2002, 12 of the 17 BI Model PSC contracts were awarded and 
transitioned. Typically, a 3 to 6 month period was allowed for the PSCs 
to transition the BI workload from the FI 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 the 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 most MSP-related inquiries, including those 
seeking general MSP information.
    Another task that the COB contractor is responsible for is 
coordinating benefits with entities (including insurers and other 
benefit programs) that pay after Medicare. These entities sign a 
standard COB agreement for this purpose. Under a signed COB agreement, 
the COB contractor collects information about beneficiaries who have 
supplemental insurance. This information is used under Parts A and B of 
Medicare to cross Medicare processed claims data over to insurers or 
benefit programs for calculating their supplemental or tertiary 
payments, as applicable. This coordination of benefits is consolidated 
at the COB contractor. The COB contractor also has a role under Part D 
to collect supplemental payer information. This information is then 
shared and used by pharmacies to send secondary claims to supplemental 
payers.
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, the MMC-PIC was designed specifically to 
identify, stop, and prevent fraud, waste, and abuse.
    Services performed by a 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

    In the June 17, 2005 Federal Register (70 FR 35204), we published a 
proposed rule as part of our overall contracting strategy, which is 
designed to build on the strengths of the marketplace. We will continue 
to encourage new and innovative approaches in the marketplace to 
protect the Medicare Trust Funds.
    As discussed in the section I.B. of this preamble, implementing 
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 final rule, 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 MAC implementation through this site.

A. The Medicare Integrity Program

1. Basis, Scope, and Applicability
    In accordance with section 1893 of the Act, we proposed to amend 
part 421 by adding a new subpart D entitled, ``Medicare Integrity 
Program Contractors.'' This subpart would--
     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 would 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, we proposed to add 
Sec.  421.302(a) to 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 investigating and deterring potential

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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 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 proposed to 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.
    In the June 17, 2005 proposed rule (70 FR 35204), we stated that it 
is not possible to identify each and every possible contractor 
eligibility requirement that may appear in a future solicitation. 
Therefore, we proposed that 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 Sec.  421.302(a)(1) through (a)(4) would be contained in the 
applicable solicitation.
    At Sec.  421.302(a)(1), we proposed to clarify that a MAC under 
section 1874A of the Act may perform any or all of the MIP functions 
listed and described in Sec.  421.304. However, in performing these 
functions, the MAC may not duplicate work being performed under a MIP 
contract. We believe the proposed provision is consistent with sections 
1874A(a)(4)(G) and 1874A(a)(5) of the Act, as added by the MMA.
    At proposed Sec.  421.302(b), we also clarified 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) related to demonstrated capability and 
the third requirement related to addressing conflicts of interest were 
consistent with provisions in the authorizing statute for MAC contracts 
(section 1874A(a)(2)of the Act). While the second requirement, which 
pertained to cooperation with the OIG and other forms of law 
enforcement, was not stated in section 1874A of the Act, we believed 
that 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 with provisions within Title XI of the Act. 
The fourth requirement clarified our authority to impose additional 
reasonable requirements through contract, and therefore, it made sense 
to apply this element to MAC contractors. Our specific approach to all 
these issues would be clarified in any solicitation for MAC contracts.
    In accordance with section 1893(d) of the Act, we may continue to 
contract, for the performance of MIP activities, with FIs and carriers 
that had a contract with us on August 21, 1996 (the effective date of 
enactment of HIPAA). However, in accordance with sections 1816(l) or 
1842(c)(6) of the Act (both added by HIPAA and both now repealed by the 
MMA), and section 1874A(a)(5)(A) of the Act (added by the MMA), these 
contractors and MACs (which may also perform MIP activities) may not 
duplicate activities under a FI 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 FI and carrier contracts 
until they are phased out in accordance to section 911(d) of the MMA 
was provided for in proposed changes to Sec.  421.100 and Sec.  
421.200.
3. Definition of MIP Contractor (Sec.  400.202)
    We proposed 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 identified 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 
identifying 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 identifying the education needs of 
beneficiaries, providers, and suppliers.
    Potential fraud review includes fraud prevention initiatives, 
responding to external customer complaints of alleged fraud, developing 
strategies to detect potentially fraudulent activities that may result 
in improper Medicare payment, and identifying and developing potential 
fraud cases to refer to law enforcement.
    (b) Cost Report Audits. Providers and managed care plans receiving 
Medicare payments are subject to audits for all payments. The audits 
help ensure that proper payments are made in accordance with Medicare 
payment policy, verify financial information for making a final 
determination of allowable costs, identify potential instances of fraud 
and abuse, and ensure the completion of special projects. This 
functional area includes the receipt, processing, and settlement of 
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. Contractors performing Medicare 
secondary payer functions would be responsible for identifying Medicare 
secondary payer situations and pursuing the recovery of

[[Page 48875]]

mistaken 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 were not limited to services 
furnished under FFS 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 also apply to payments made under the Medicare Part D 
prescription drug benefit that was implemented on January 1, 2006.
5. Competitive Requirements (Sec.  421.306)
    We specified, in Sec.  421.306(a), that MIP contracts would 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 specified that the 
procedures set forth in these authorities would be used: (1) When 
entering into new contracts; (2) when entering into contracts that may 
result in the elimination of responsibilities of an individual FI or 
carrier; and (3) at any other time we consider appropriate.
    In Sec.  421.306(b), we proposed to establish an exception to 
competition that allows a successor in interest to a FI 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 would remain in 
effect until all FI agreements and carrier contracts were transitioned 
to MACs in accordance with section 1874A of the Act.
    The proposal was made in anticipation that some FIs 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 FI's or carrier's MIP activities were 
transferred along with its other Medicare-related resources to the 
successor in interest. For example, the FI 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 as specified in the 
FAR at 48 CFR 42.1200.
    If the FI or carrier was performing program integrity activities 
under its contract on August 21, 1996, the date of the enactment of the 
MIP legislation, section 1893(d) of the Act permits us to continue to 
contract with the FI 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 was the authority to establish 
exceptions to those procedures. (See 48 CFR 6.3) Moreover, the statute 
stated that FI agreements and carrier contracts would 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 FI 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 the time 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 FI 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 FI and carrier workloads (both 
MIP and non-MIP functions) in accordance with section 1874A(b) of the 
Act. 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.
    In Sec.  421.306(c), we further specified 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) specified 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 can be in the best interest of the 
Medicare program. The benefits are realized through early communication 
of our intention whether to renew a contract, which permits both 
parties to plan for

[[Page 48876]]

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 and resources to transfer the MIP functions if a 
reassignment of the functions becomes necessary (either because the 
contractor has given notice of its intent to nonrenew or because we 
have determined that reassignment is in the best interest of the 
Medicare program). Therefore, in Sec.  421.308(a), we proposed to 
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 would 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 subpart 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 the FAR at 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 go into effect only after exhausting 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 specified, 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.
    At Sec.  421.308(c), we provided 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 nonrenewal. This is consistent with our longstanding 
policy for FI and carrier contracts.
7. Conflict of Interest Rules
    The proposed rule established 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.
    Given the sensitive nature of the work to be performed under the 
MIP contract(s), the need to preserve the public trust, and the history 
of fraud and abuse in the Medicare program, our contracting officers 
may include an organizational conflict of interest provision in the 
solicitation and subsequent contract award document, which may be 
tailored to each procurement. The contract provision will be consistent 
with the guidelines found at FAR 9.5, Organizational and consultant 
conflicts of interest, as well as address specific concerns for 
identifying, mitigating and resolving actual, apparent or perceived 
conflict(s) of interest. In general, the contracting officer will not 
enter into a MIP contract with an offeror that has been determined to 
have, or has the potential for, an unresolved organizational conflict 
of interest.
    In Sec.  421.310(a), we specified that an offeror for MIP contracts 
is, and MIP contractors are, subject to the organizational 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 stated 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 
incorporated 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 specified in Sec.  421.310(b) that 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 
specified that, if we determine that a conflict of interest exists, we 
may, as we deem appropriate--
     Not renew the contract for an additional term;
     Modify the contract; or
     Terminate the contract for default.
    We also specified that the solicitation may require more detailed 
information than identified above. Our proposed provisions did 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 intended to minimize the reporting and recordkeeping 
requirements as much as is feasible, while taking into consideration 
our need to have assurance that MIP contractors do not have, and will 
not develop during the time of performance, a conflict of interest.
    Because potential offerors may have questions about whether 
information submitted in response to a solicitation, including 
information regarding potential conflicts of interest, may be disclosed 
under a request submitted under the Freedom of Information Act (FOIA), 
we provided 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, and a FOIA request is made for a copy of that 
proposal, we will withhold the proposal to the extent authorized by 
law. This withholding is based upon 41 U.S.C. 253b(m). However, there 
is one exception to this requirement that involves any proposal that is 
set forth or incorporated by reference in the contract awarded to an 
offeror or bidder. In such cases, the FOIA does not offer presumptive 
categorical protection. Rather, we would withhold, under 5 U.S.C. 
552(b)(4), information within the proposal that constitutes trade 
secrets or commercial or financial information that is privileged or 
confidential, provided the criteria established by National Parks & 
Conservation Association v. Morton, 498

[[Page 48877]]

F.2d 765 (D.C. Cir. 1974), as applicable, are met. In such cases, we 
will follow the predisclosure 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 
proposals such as this, we will follow the predisclosure 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 would cause a clearly unwarranted 
invasion of personal privacy if disclosed. 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 of commercial information, at Sec.  421.312(d) we 
proposed protection of disclosed submitted proprietary information as 
allowed under the FOIA and to require signed statements from our 
personnel with access to proprietary information that prohibit 
unauthorized use during the procurement process and term of the 
contract.
    In Sec.  421.312, we described our proposal to resolve conflicts of 
interest. We specified that we may establish a Conflicts of Interest 
Review Board to assist the contracting officer in resolving conflicts 
of interest and determine when or if the Board is convened. We would 
define resolution of an organizational conflict of interest as a 
determination of the following:
     The conflict was 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.
     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 will 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 unless the range is further reduced for 
purposes of efficiency in accordance with FAR 15.306. Using the process 
in the proposed regulation, offerors would not be excluded from the 
competitive range based solely on conflicts of interest. If we 
determined 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 Conflicts 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 also 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 that perform activities under the MIP contract would be 
reviewing activities of providers and suppliers that provide services 
to Medicare beneficiaries. Their contracts would 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 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, as specified in 
Sec.  421.316(a), we proposed to protect MIP contractors from liability 
in the performance of their contracts provided they carry out their 
contractual duties with due care.
    In accordance with section 1893(e) of the Act, we proposed 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) 
would provide that we 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 proposed 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.
    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

[[Page 48878]]

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 FI 
agreements and carrier contracts. However, we may indemnify a MIP 
contractor only to the extent we have specific statutory authority to 
do so, and 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, we proposed at Sec.  421.316(a) to provide 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 would have immunity from liability as 
specified in Sec.  421.316(a).

B. Intermediary and Carrier Functions

    The former section 1816(a) of the Act, which provided that 
providers could nominate a FI, required only that nominated FIs perform 
the functions of determining payment amounts and making payment, and 
the former section 1842(a) of the Act required only that carriers 
perform some or all of the functions cited in that section. Section 911 
of the MMA eliminated the requirement that FIs be nominated, and 
effective October 1, 2005, established the requirement that Medicare 
contracts awarded to MACs be competitively bid by September 30, 2011.
    Our existing requirements at Sec.  421.100 and Sec.  421.200 
concerning functions to be included in FI agreements and carrier 
contracts far exceeded those of the statute. Therefore, in the February 
22, 1994 Federal Register (59 FR 8446), we published a proposed rule 
that would distinguish between those functions that the statute 
previously required to be included in agreements with FIs and those 
functions that, while not required to be performed by FIs, could have 
been included in FI agreements at our discretion. We also proposed that 
any functions included in carrier contracts may be included at our 
discretion. In addition, we proposed to add payment on a fee schedule 
basis as a new function that may be performed by carriers.
    The February 22, 1994 proposed rule was never finalized, but its 
content was reproposed in our initial March 20, 1998 proposed rule for 
the MIP program (63 FR 13590). The second proposed rule, published on 
June 17, 2005, set forth a new proposal to bring those sections of the 
regulations that concern the functions Medicare FIs and carriers 
perform into conformity with the provisions of sections 1816(a), 
1842(a), and 1893(b) of the Act, for so long as the FI and carrier 
contracts exist until they are all replaced by MAC contracts.
    As noted in section I.A. of this preamble, our current regulations 
at Sec.  421.100 specify a list of functions that must, at a minimum, 
be included in all FI agreements. Similarly, Sec.  421.200 specifies a 
list of functions that must, at a minimum, be included in all carrier 
contracts. These requirements far exceed those of the statute.
    Until October 1, 2005, section 1816(a) of the Act required only 
that a FI agreement provide for determination of the amount of payments 
to be made to providers and for the making of the payments. Pending the 
effective date of changes made by the MMA, section 1816(a) permitted, 
but did not require, a FI agreement to include provisions for the FI to 
provide consultative service