or portion of a facility. Costs which the Secretary determines to be inappropriate to the needs of a particular HMO and other costs which the Secretary specifies in materials to be provided to each applicant are not eligible costs.

(b) The cost of acquisition of equipment is an eligible cost only if the equipment is for a facility acquired or constructed, or to be acquired or constructed, with a loan made or guaranteed under §§ 417.170 through 417.180.

(c) Acquisition of land for a facility is an eligible cost only if it is in connection with the acquisition or construction of a facility on that land.

(d) The costs of leasing land, a facility, or equipment for a facility are not eligible costs. The costs of construction on leased land, including renovation of a leased facility, may be eligible costs if adequate security is available to protect the financial interests of the United States.

(e) The cost of repaying an interim construction loan for a facility is an eligible cost.

§ 417.178 What security is required?

(a) Each loan made by the Secretary shall bear interest at a rate comparable to the current rate prevailing, with respect to marketable obligations of the United States of comparable maturities, adjusted to provide for appropriate administrative charges. The Secretary may set rates of interest for each disbursement at a rate comparable to the rate of interest prevailing on the date the disbursement is made for marketable obligations of the United States of comparable maturities, adjusted to provide for appropriate administrative charges.

(b) Each loan guaranteed by the Secretary shall bear interest at a rate the Secretary determines to be reasonable, taking into account the range of interest rates prevailing in the private market for loans with similar maturities, terms, conditions, and security and the risks assumed by the United States.

[47 FR 19342, May 5, 1982. Redesignated at 52 FR 36746, Sept. 30, 1987]

§ 417.179 How and over what period are loans and guaranteed loans to be repaid?

(a) The principal amount of each loan or guaranteed loan, together with interest thereon, must be repayable in accordance with a repayment schedule which is to be agreed upon by the parties to the loan, or by the parties to the guaranteed loan and the Secretary, prior to or at the time of the closing of the loan. Unless otherwise authorized by the Secretary, each loan made or guaranteed by the Secretary must be repayable in substantially level installments of interest and principal (except as provided in paragraph (b) of this section) sufficient to amortize the loan through the final year of the life of the loan.

(b) Interest on the unpaid principal amount of the loan shall be due and payable not less frequently than semiannually from the date of the initial disbursement of funds under the loan. Principal repayments shall be paid not less frequently than semi-annually but may be deferred until completion of the project.

(c) Each loan or guaranteed loan shall be repayable over a period approved by the Secretary, not to exceed 25 years beginning on the date of closing of the loan.

(1) The Secretary may approve a repayment period of less than 25 years in particular cases if he or she determines that a shorter repayment period is more appropriate to an applicant's total financial plan and not inconsistent with the financial interests of the United States.

(2) A loan repayment period may not exceed the estimated useful life of the facility to be acquired or constructed with the assistance of the loan. In the case of a loan solely for acquisition of equipment for a facility previously assisted under §§ 417.170 through 417.180, the loan repayment period may not exceed the estimated useful life of the most expensive items of equipment.

(3) Where a leased facility is being constructed (i.e., renovated) with assistance under §§ 417.170 through 417.180, or a facility is being acquired or constructed on leased land with as

sistance under this subpart, the loan repayment period may not be longer than the period of the lease.

[45 FR 24353, Apr. 9, 1980. Redesignated at 47 FR 19342, May 5, 1982. Redesignated at 52 FR 36746, Sept. 30, 1987]

§ 417.180 On what basis may the Secretary waive rights of recovery?

a

In determining whether there is good cause for waiver of any right of recovery which the Secretary may have against an HMO, either because of loan made under §§ 417.170 through 417.180 or because of a payment made under a loan guarantee under §§ 417.170 through 417.180, he or she will take into consideration the extent to which:

(a) The recipient of the loan or guaranteed loan or other owner of the facility with respect to which the loan or loan guarantee was made will continue to use it for (1) the purpose for which it was constructed or (2) another public or nonprofit purpose which will promote the purposes of the Public Health Service Act;

(b) There are reasonable assurances that for the remainder of the repayment period of the loan, other public or nonprofit facilities not previously used for the purpose for which the facility was constructed will be so used and are substantially equivalent in nature and extent for that purpose;

(c) The recovery would seriously curtail the provision of medical services to persons in need of these services in the area; and

(d) It is likely that payment can be obtained which would be greater than the costs the government would incur as a result of continuing to pursue collection.

[45 FR 24353, Apr. 9, 1980. Redesignated at 47 FR 19342, May 5, 1982. Redesignated at 52 FR 36746, Sept. 30, 1987]

Subpart B-Health Maintenance Organizations

EDITORIAL NOTE: Nomenclature changes affecting Subpart B appear at 50 FR 1345, Jan. 10, 1985.

§ 417.201 Health maintenance organizations; general.

(a) Introduction. The regulations in this Subpart B set forth the requirements which an organization must meet in order to be eligible to enter into a contract with the Secretary as a health maintenance organization (HMO) under the health insurance program for the aged and disabled (title XVIII of the Social Security Act) and to be reimbursed through capitation payments for covered items or services the organization furnishes title XVIII beneficiaries who have enrolled with it. Any references in this subpart to functions being performed by HCFA may at HCFA's option be performed directly by HCFA or by contract.

(1) HMO Amendments of 1976. The requirements described in this subpart reflect the provisions of section 201 of Pub. L. 94-460 (the HMO Amendments of 1976) which amended section 1876 of the Social Security Act, to align the title XVIII definition of an HMO more closely with the definition of an HMO under title XIII of the Public Health Service (PHS) Act. The 1976 amendments, however, preserved a number of statutory requirements which apply to any organization which wishes to participate as an HMO under title XVIII. These regulations include the PHS requirements that apply to an HMO under title XVIII. They are specified in § 417.203. The requirements which are unique to title XVIII are described in §§ 417.201(b), 417.204, 417.205, and 417.207, and include those dealing with types of HMO's, HMO membership (including an open-enrollment provision which is different from that applied under the PHS Act), range of services, method of reimbursement, and other requirements as specified.

(2) General definition of a title XVIII HMO. For title XVIII purposes, an HMO is defined as a legal entity which, except as provided by section 1876(b)(1) of the Social Security Act, provides health services on a prepayment basis to its enrolled members in a manner prescribed by section 1301(b) of the PHS Act (42 U.S.C. 300e), and is organized and operated in

a manner prescribed by section 1301(c) of the PHS Act, and meets all other applicable requirements of section 1876 and this subpart.

(3) Contract with the Secretary. In order to participate and receive payment as an HMO under Medicare, an organization must enter into a contract with the Secretary as an HMO. The requirements pertaining to the Secretary's contract with an HMO are specified in §§ 417.228 through 417.239.

regulations.

(b) Other applicable Subpart C of this part contains regulations and effective dates applicable to organizations qualifying for Medicare payments under section 1876 of the Act as amended by section 114 of Pub. L. 97-248 (Tax Equity and Fiscal Responsibility Act of 1982).

(c) Types of title XVIII health maintenance organizations. HMO's may be distinguished according to their level of development or method of Medicare (title XVIII) reimbursement.

(1) For purposes of this subpart, a "mature" HMO refers to an organization which meets the statutory definition of an HMO (see section 1876(b) of the Act) and is in full compliance with the qualifying conditions set forth in this subpart. Where a mature HMO also meets the requirements of paragraph (a)(1) or (a)(2) of § 417.204 which are applicable to the organization, it may elect to contract with the Secretary as either a "risk-basis" or & "cost-basis" HMO (as described in paragraph (b)(4) of this section). A mature HMO which does not meet the applicable requirements of paragraph (a)(1) or (a)(2) of § 417.204 can only contract with the Secretary on a cost basis.

(2) A "developing HMO" refers to an organization which does not fully meet the requirements applicable to a mature HMO. To qualify as a developing HMO, an organization must demonstrate to the Secretary that it has a reasonable prospect of fully meeting all the requirements for a mature HMO and it must have a planned program which is acceptable to the Secretary and to which it is committed for meeting all of the requirements for a mature HMO within 3 years after the effective date of its initial contract

with the Secretary as an HMO under title XVIII. Periodic reviews are conducted by the Secretary or his designate to determine whether the developing HMO is accomplishing its planned program on schedule and, where the HMO has fallen behind schedule, the Secretary determines whether the HMO has made sufficient progress toward meeting the requirements of a mature HMO to warrant a renewal of its title XVIII contract. A developing HMO may contract with the Secretary only on a cost-basis.

(3) The Secretary may extend the period of time beyond the 3 years specified in paragraph (b)(2) of this section, for a developing HMO to qualify as a mature HMO:

(i) Where the HMO documents that it has made every effort to comply within three years of its initial contract as a developing HMO and that it is currently making sufficient progress in meeting applicable qualifying conditions and standards;

(ii) Where the HMO establishes a timetable for meeting the requirements, which is acceptable to the Secretary; and

(iii) Where the HMO meets such requirements as may be set forth by the Secretary for extension of the period of time beyond the three years specified in paragraph (b)(2) of this section.

(4) If a mature HMO, which is eligi ble to contract with the Secretary on a risk-basis, elects to do so, it shall share with the health insurance program a portion of the savings which accrue where it provides services to its enrollees who are title XVIII beneficiaries at a cost lower than the adjusted average per capital cost, as defined in section 1876(a)(3)(A) of the Act and in this subpart. Savings up to 20 percent of the adjusted average per capita cost shall be apportioned equally between the risk-basis HMO and the Federal Hospital Insurance Trust Fund and/or the Federal Supplementary Medical Insurance Trust Fund. Savings in excess of 20 percent of the adjusted average per capita cost shall be apportioned entirely to such trust funds. Losses incurred by the risk-basis HMO shall be absorbed by such organization, but losses shall be carried forward and offset from savings realized

in later years. An organization, either mature or developing, which enters into a cost-basis contract with the Secretary is reimbursed the reasonable cost it incurs in providing covered items and services to its title XVIII beneficiaries.

[40 FR 28018, July 2, 1975; 40 FR 29706, July 15, 1975. Redesignated at 42 FR 52826, Sept. 30, 1977, and amended at 43 FR 5826, Feb. 10, 1978; 44 FR 29061, May 18, 1979; 49 FR 3659, Jan. 30, 1984; 49 FR 36103, Sept. 14, 1984. Redesignated and amended at 50 FR 1345, Jan. 10, 1985]

§ 417.202 Qualifying conditions: General.

An HMO which wishes to contract with the Secretary pursuant to section 1876 of the Act must be able to demonstrate its ability to provide to its enrollees who are title XVIII beneficiaries, a specified range of comprehensive services efficiently, effectively, and economically. An assessment of an organization's ability to meet the definitional requirements of an HMO under title XVIII of the Act as defined in section 1876 is necessarily based on the organization's ability to enroll members and deliver high quality health services. The qualifying conditions specified in §§ 417.203 through 417.205 and 417.207 are designed to assure the Secretary or his delegate of the HMO's ability to fulfill these requirements as provided by section 1876 of the Act. Generally, each qualifying condition is interpreted by a series of standards. Reference to these standards is made by the Secretary when surveying an HMO to document its activities, to establish the nature and extent of its deficiencies, if any, and if the Secretary enters into a contract with the HMO, to assess the HMO's need for improvement in relation to the prescribed qualifying conditions. The application of the standard indicates the extent and degree to which an applicant organization is complying with each condition. To qualify as an HMO under title XVIII of the Act, a mature HMO must be in compliance with all of the qualifying conditions and applicable standards set forth in §§ 417.203

through 417.205 and 417.207. A developing HMO in order to qualify as an HMO under title XVIII of the Act must be in compliance with

[43 FR 5826, Feb. 10, 1978. Redesignated at 50 FR 1345, Jan. 10, 1985]

§ 417.203 Qualifying conditions: Public Health Service Act requirements.

An HMO must demonstrate that, except as provided by section 1876(b)(1) of the Social Security Act, it meets the applicable requirements of section 1301(b) and section 1301(c) of the PHS Act and applicable regulations (see 42 CFR Part 110 on Health Maintenance Organizations). In compiying with this condition, an HMO must meet the PHS regulatory requirements in 42 CFR 110.101 (i) or (j); 110.104(a) (1), (2), and (3); 110.105(a) (1) and (2); 110.106(a); 110.107; 110.108 (a) and (c); and 110.108 (f) through (r).

[43 FR 5827, Feb. 10, 1978. Redesignated at 50 FR 1345, Jan. 10, 1985]

§ 417.204 Qualifying condition: Membership.

The HMO must demonstrate that it has operating experience and an enrolled population sufficient to provide a reasonable basis for establishing a prospective per capita reimbursement rate.

(a) Standard: Operating experience for mature HMO's. To be eligible to contract as a mature HMO, the organization must have a current enrollment of at least 5,000 members on a prepaid capitation basis. In order to be eligible to contract as a risk-basis HMO (see § 417.201(b)), the requirements regarding operating experience in paragraph (a)(1) or (a)(2) of this section apply:

(1) The organization must have a current enrollment of at least 25,000 members on a prepaid capitation basis, and must have been the primary source of health care for at least the range of health care services described in § 417.205(b) which were provided to

at least 8,000 persons in each of the 2 years immediately preceding the contract year in which it first qualifies as a risk-basis HMO.

(2) Where the organization serves a non-urban geographic area, and has a current enrollment of at least 5,000 members on a prepaid capitation basis, it need not meet the requirements in paragraph (a)(1) of this section if it has provided at least the range of health care services referred to in § 417.205(b) to at least 1,500 persons in each of the 3 years immediately preceding the contract year in which it first qualifies as a risk-basis HMO. For purposes of this section, a non-urban HMO is an organization:

(i) Whose service area is located in a non-metropolitan county (i.e., a county with fewer than 50,000 inhabitants); or

(ii) Whose normal service area includes at least one such county or

(iii) Whose service area is located outside a metropolitan area and whose facilities are within reasonable travel distance of fewer than 50,000 people. In assessing what is a reasonable travel distance primary consideration will be given to the actual availability of services and general community standards in securing health services.

(3) Where an organization is a subdivision or subsidiary of a mature HMO which meets the requirements of paragraph (a)(1) or (a)(2) of this section, such subdivision or subsidiary need not demonstrate that it meets such requirements as an independent unit if the mature organization assumes responsibility for the financial risk and adequate management and supervision of health care services rendered by such a subsidiary. Also, two or more independent organizations may combine through merger or effective affiliation arrangements in order to satisfy the minimum enrollment standard specified in paragraph (a)(1) or (a)(2) of this section.

(b) Standard: Operating experience for developing HMO's. To contract as a developing HMO (see § 417.201(b)), the organization must provide at least the range of services referred to in § 417.205(b) on a prepaid capitation rate basis to a sufficient number of individuals to assure the Secretary that

there is a reasonable basis for determining a prospective per capita rate of reimbursement or have some other method acceptable to the Secretary of providing a sound basis for making proper cost projections.

(c) Standard: Composition of enrollment. In addition to meeting the requirements of paragraph (a) or (b) of this section, HMO's, whether mature or developing, must meet the following standards with respect to the composition of their enrollment:

(1) At least 50 percent of the HMO's membership must be under age 65. However, this requirement may be waived by the Secretary where:

(i) The requirement would result in enrollment of enrollees substantially nonrepresentative of the population in the geographic area served by such HMO, or

(ii) The organization presents a plan which satisfies the Secretary that it will meet this requirement within 3 years after it enters into its initial contract with the Secretary and the HMO demonstrates each year that it is making continuous efforts and progress towards achieving compliance with the requirement within such three-year period by holding open enrollment periods and taking other steps as necessary.

(2) No more than 50 percent of the organization's members may be beneficiaries (or recipients) of the health benefit programs established by titles XVIII and XIX of the Act; however, this requirement may be waived by the Secretary where:

(i) The organization presents a plan which satisfies the Secretary that it will meet such requirements within 3 years after it enters into its initial contract with the Secretary and the HMO demonstrates each year that it is making continuous efforts and progress toward achieving compliance with this requirement within such 3year period by holding open-enrollment periods and taking other steps, as necessary; or

(ii) Beneficiaries of such programs comprise more than fifty percent of the population of the geographic area served by the organization and the HMO's enrollment of such beneficiaries is not substantially nonrepresen