modification of a contract.

(a) Non-renewal by HMO. (1) If an HMO does not intend to renew its contract, it must:

(i) Give written notice to HCFA at least 90 days before the end of the current contract period;

(ii) Notify each Medicare enrollee by mail, at least 60 days before the end of the contract period; and

(iii) Notify the general public at least 30 days before the end of the contract period, by publishing a notice in one or more newspapers of general circulation in each community county located in the HMO's enrollment area.

or

(2) The Secretary, at his discretion, may accept a non-renewal notice submitted less than 90 days before the end of the contract period if:

(i) The HMO notifies its Medicare enrollees and the public in accordance with paragraphs (a)(1) (ii) and (iii) of this section; and

(ii) Acceptance would not otherwise jeopardize the effective and efficient administraion of the Medicare pro

gram.

(b) Termination or modification by * mutual consent. An HMO and the Secretary may modify or terminate the contract at any time by written

mutual consent.

(1) Modification. If the contract is modified, the HMO must notify its Medicare enrollees of any modifications which the Secretary determines is appropriate.

(2) Termination. If the contract is terminated:

(i) The HMO must notify its Medicare enrollees at least 30 days before the termination date; and

(ii) HCFA will notify the public at least 30 days before the termination date.

(c) Non-renewal by the Secretary. The Secretary may decide not to

renew the HMO's contract at the end of the term. If the Secretary decides not to renew a contract, he will:

(1) Notify the HMO at least 90 days before the end of the contract period; (2) Notify the HMO's Medicare enrollees at least 60 days before the end of the contract period;

(3) Notify the general public at least 30 days before the end of the contract period; and

(4) Notify the HMO that if it is dissatisfied with the decision, it may request a review of the decision by following the procedures for reconsiderations of initial determinations specified in §§ 417.265 through 417.292.

(d) Termination by the Secretary. The Secretary may terminate a contract during its term for any of the reasons specified in § 417.266(b)(1)-(3) by:

(1) Following the procedures specified in §§ 417.265 through 417.292; and (2) Notifying the HMO's enrollees and the general public at least 30 days before the effective date of the termination.

§ 417.239 Transfer of HMO ownership.

(a) General rule. (1) A transfer of the ownership or operation of an HMO, as specified in paragraphs (b), (c), (d), and (e) of this section, will render the contract invalid between the Secretary and the transferee, unless HCFA has approved a third party as the successor in interest to the contract through a novation agreement, as provided in paragraphs (f) and (g) of this section.

(2) An HMO which is contemplating or negotiating a change of ownership must notify HCFA at least 60 days in advance of the anticipated change of ownership. If it does not, the HMO (transferor) will continue to be liable to HCFA for per capita payments made to it by HCFA on behalf of its Medicare enrollees after the effective date of the transfer of ownership.

(3) If a change of ownership takes place without a novation agreement, the contract becomes invalid. If the new owner wishes to participate as an HMO under Medicare, it must:

(i) Notify HCFA that there has been a transfer of ownership of the HMO without a novation agreement; and

(ii) Apply for and enter into a contract as an HMO under Medicare, as specified in §§ 417.229 through 417.236.

(b) Partnership. In the case of a partnership, a change of ownership takes place in the circumstances specified in § 489.18(a)(1) of this chapter.

(c) Sole proprietorship. In the case of a sole proprietorship, a change of ownership takes place in the circumstances specified in § 489.18(a)(2) of this chapter.

(d) Corporation. (1) If an HMO is a corporate body, a change of ownership does not ordinarily occur if:

(i) There is a transfer of corporate stock; or

(ii) There is a merger of one or more corporations, with the HMO corporation surviving.

(2) A merger of two or more corporations involving an HMO corporation does constitute a change of ownership if the merger results in a new corporate entity.

(e) Leasing. If an HMO leases its facilities, in whole or in part, to another entity, the lessee does not assume HMO status under section 1876 of the Act.

(1) If the HMO leases all of its facilities to another organization, the Secretary's contract with the lessor organization terminates unless he has approved the transaction in advance.

(2) If the HMO leases part of its facilities to another organization, the contract remains in effect. However, HCFA will conduct a survey to determine whether the HMO continues to be in compliance with the HMO qualifying conditions specified in §§ 417.201 through 417.207.

(3) If the lessee of the facilities wishes to participate as an HMO under the Medicare program, it must apply for and enter into a contract with the Secretary as specified in §§ 417.229 through 417.236.

(f) Provisions of novation agreement—(1) Definition. “Novation agreement" means the legal instrument executed by the current owner (transferor of an HMO), the proposed new owner (transferee) of an HMO, and

HCFA, under which HCFA recognizes the transferee as the successor in interest to the existing contract.

(2) Provisions. (i) The transferee must assume all obligations under the contract; and

(ii) The transferor must waive its rights under the contract to obtain from the Secretary reimbursement for covered services furnished during the current contract period.

(3) Guarantee of performance. The transferor must guarantee performance of the contract by the transferee, or the transferee must post a satisfactory performance bond which is approved by HCFA.

(4) Records access. The transferor must agree to make its books, records, and other necessary information available to the transferee and to HCFA to permit an accurate determination of costs for the final settlement of the contract period.

(g) Requirements for HCFA approval of a novation agreement. A novation agreement may be approved and executed by HCFA if:

(1) The HMO (transferor) notifies HCFA at least 60 days in advance of the proposed change of ownership;

(2) The HMO submits, at least 30 days before the anticipated date of change of ownership, three signed copies of a proposed novation agreement to HCFA and one copy of any other documents required by HCFA; and

(3) HCFA determines that:

(i) The proposed transferee is in fact a successor in interest to the contract; (ii) Recognition of the new party as a successor in interest to the contract with the HMO is in the best interest of the Medicare HMO program; and

(iii) The successor organization meets the requirements of this subpart to qualify as an HMO.

PRINCIPLES OF REIMBURSEMENT FOR COST-BASIS HMO'S UNDER TITLE XVIII

SOURCE: Sections 417.240 through 417.247 appear at 41 FR 49595, Nov. 9, 1976, unless otherwise noted. Redesignated at 42 FR 52826, Sept. 30, 1977, and at 50 FR 1345, Jan. 10, 1985.

§ 417.240 Reimbursement of cost-basis HMO's-introduction.

(a) A developing HMO, or a mature HMO that elects to be reimbursed on a cost basis (see § 417.201(b) for defini

tions of mature and developing

HMO's), is paid the "reasonable cost" of the covered services it furnishes to its enrollees who are beneficiaries under title XVIII of the Act. The principles of reimbursement and guidelines to be used in determining the reasonable costs of such HMO's are set forth in §§ 417.241 through 417.247. Since the law contemplates that only those costs which are allowable under title XVIII of the Act generally may be recognized as allowable HMO costs, the principles and related policies in §§ 417.241 through 417.244 are based, in large part, on the principles of reimbursement for provider costs (see parts 412 and 413 of this chapter).

(b) The principles governing cost reimbursement to HMO's offer certain alternatives and options to HMO's in order to reflect the variation in operations among HMO's. For example, in § 417.243(h) the principles applicable to developing HMO's allow time for those that do not already have the capability of reporting statistical and financial data by departments or functional service centers to meet this requirement. The principles governing cost reimbursement to HMO's also take into account the special nature of the HMO by recognizing costs of marketing, enrollment, and certain other costs that are unique to the HMO form of health care delivery.

[41 FR 49595, Nov. 9, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977. Redesignated at 50 FR 1345, Jan. 10, 1985, and amended at 51 FR 34832, Sept. 30, 1986]

8 417.241 Cost reimbursement-general.

(a) The costs incurred by the HMO in providing services covered under the hospital insurance program and supplementary medical insurance program are reimbursable if proper and necessary, reasonable in amount, and appropriately apportioned among enrollees who are title XVIII beneficiaries, other enrollees, and nonenrolled patients of the HMO. Implicit in the intention that the amount paid be reasonable is the expectation that each

HMO will seek to minimize the costs that it incurs in furnishing this care so that its actual costs will not exceed what a prudent and cost-conscious buyer would incur in furnishing such

care.

(b) In formulating methods for making fair and equitable reimbursements to HMO's for services rendered to title XVIII beneficiaries who are enrolled in such organizations, the cost reimbursement principles set forth in paragraphs (a) and (b) of § 413.5 of this chapter shall apply. In evaluating the reasonableness of costs, for a cost-basis HMO, the Health Care Financing Administration (hereafter referred to as HCFA) shall also take into account the HMO's per capita incurred costs for providing covered services to enrollees who are title XVIII beneficiaries in relation to the adjusted average per capita cost as described in section 1876(a)(3)(A)(iv) of the Act for the geographic area served by the HMO, or a similar area. In such cases, the adjusted average per capita cost shall be used as a general guideline to evaluate the reasonableness of HMO costs rather than a strict reimbursement limitation as is the case with risk-basis HMO's (see § 417.251).

(c) HCFA shall determine an interim per capita cost rate of payment in accordance with § 417.245 which shall be paid to the HMO each month, in advance, for each title XVIII beneficiary enrolled with the HMO for which the health insurance program is responsible for making such a payment pursuant to this subpart. HCFA shall adjust the interim per capita rate to the extent necessary, as provided in § 417.245(c). Interim payments shall be subject to retroactive adjustment at the end of each contract period as provided in §§ 417.246 and 417.247. In determining the amount due the HMO, there shall be deducted from the reasonable cost actually incurred by the HMO, for covered services furnished title XVIII beneficiaries enrolled with the HMO, an amount equal to the actuarial value of the deductible and coinsurance amounts which would otherwise be applicable to the covered services for which payment is being made if the title XVIII beneficiaries who re

ceived the services had not been enrolled in the HMO.

(d) An HMO may elect to have providers of services that furnish covered services to enrollees who are title XVIII beneficiaries, obtain reimbursement directly from the health insurance program. The election, which is binding for the entire contract period, must be made in writing to HCFA prior to the beginning of the contract period. When the HMO makes the election, the providers are each paid for covered services they furnish enrollees of the organization in accordance with parts 412 and 413 of this chapter. The amount of such reimbursement will not be included in payments made to the HMO.

[41 FR 49595, Nov. 9, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, and amended at 48 FR 39837, Sept. 1, 1983. Redesignated at 50 FR 1345, Jan. 10, 1985, and amended at 51 FR 34832, Sept. 30, 1986]

(a) General. Allowable costs are those direct and indirect costs, including normal standby costs, which are incurred by the HMO and are proper and necessary to the efficient delivery by the HMO of needed health care. Such costs include those related to the care of beneficiaries under title XVIII, enrollment, membership, and similar costs that are proper and necessary to the HMO plan operations. The treatment of certain items of costs following, in essence, the principles of reimbursement for provider costs is discussed in paragraph (b) of this section. The treatment of other items of cost is described in paragraphs (c) through (i) of this section.

(b) Provider cost reimbursement principles applicable to HMO's. The types and items of cost generally incurred by providers of services that are allowable under the principles of reimbursement for provider costs (see parts 412 and 413 of this chapter), including the following items, are allowable when incurred by an HMO or by providers of services and other facilities owned or operated by the HMO through which covered care is furnished to the HMO's enrollees who are title XVIII beneficiaries, unless otherwise specified in this subpart:

(1) Depreciation. An appropriate allowance for depreciation on buildings and equipment is an allowable expense. The HMO shall follow the provisions of §§ 413.134, 413.144, and 413.149 of this chapter.

(2) Interest expense. Necessary and proper interest on both current and capital indebtedness is an allowable expense in accordance with § 413.153 of this chapter.

(3) Bad debts. Bad debts are deductions from revenue and are not to be included in allowable costs; however, bad debts attributable to deductible and co-insurance amounts for Part A and Part B covered services for which the beneficiary is liable in a contract period pursuant to § 417.222(b) are reimbursable under the health insurance program in accordance with the provisions of § 413.80 of this chapter.

(i) When deductible and coinsurance amounts are paid by all or a portion of a monthly premium, or other periodic amount, the amount of allowable bad debts for an enrollee who is a title XVIII beneficiary for a contract period shall be limited to an amount not to exceed three times the monthly rate for the actuarial value of the deductible and coinsurance amounts, or its equivalent if the periodic charge or premium is payable on other than a monthly basis.

(ii) Any bad debt related to a service furnished to an enrollee of the HMO who is a title XVIII beneficiary and claimed on a cost report submitted for reimbursement under title XVIII of the Act by a provider of services, or other facility reimbursed on a cost basis, may not be claimed as a bad debt by the HMO.

(4) Charity and courtesy allowances. Charity and courtesy allowances are deductions from revenue and are not to be included in allowable costs in ac cordance with § 413.80 of this chapter.

(5) Cost of educational activities. An appropriate part of the net cost of ap proved educational activities engaged in by a provider of services or other health care facility owned or operated by the HMO is an allowable cost in accordance with § 413.85 of this chapter.

(6) Research costs. Cost incurred for research purposes, over and above usual patient care, in accordance with

§ 413.90 of this chapter, are not includable in allowable costs of the HMO.

(7) Grants, gifts, and income from endowments. Grants, gifts, and income from endowments are treated in accordance with § 405.4231.

(8) Value of services of nonpaid workers. The value of services of certain nonpaid workers is an allowable cost in accordance with § 413.94 of this chapter.

(9) Purchase discounts and allowances and refunds of expenses. Discounts and allowances received on purchases of goods and services are reductions of the HMO's costs to which they relate. Similarly, refunds of previous expense payments are reductions of the related expense in accordance with § 413.98 of this chapter.

(10) Compensation of owners. A reasonable allowance of compensation for services of owners is an allowable cost provided that the services are actually performed in a necessary function in accordance with § 413.102 of this chapter.

(11) Cost to related organizations. Costs applicable to services, facilities, and supplies furnished to the HMO by organizations related to the HMO by common ownership or control are inIcludable in the allowable cost of the HMO at the cost to the related organization. However, such cost must not exceed the price of comparable services, facilities, or supplies which would be paid by a prudent buyer purchasing elsewhere. The provisions of § 413.17 of this chapter are applicable to HMO's; however, in applying those provisions to HMO's, a provider of services, medical group, or other facility or supplier is not deemed a related organization solely because of a risksharing or incentive agreement with an HMO for reimbursement or compensation for services furnished HMO enrollees, or solely because substantially all services furnished by the provider or supplier are furnished enrollees of the HMO. However, such an economically dependent organization and the HMO shall be considered related if one of them clearly exercises

1 Section 405.423 was removed at 48 FR 39811, Sept. 1, 1983.

significant management or ownership influence or control over the other.

(12) Return on equity capital of proprietary providers owned by the HMO. An allowance for a reasonable return on equity capital invested and used in the provision of patient care is allowable as an element of the reasonable cost of covered services furnished by a proprietary provider of services owned by an HMO in accordance with § 413.157 of this chapter.

(13) Limitation on Federal participation for capital expenditures. Section 1122 of the Social Security Act prohibits the use of Federal funds to support certain capital expenditures made by or on behalf of HMO's (or health care facilities) that are determined to be inconsistent with State or local health facility planning requirements. HMO's are subject to the provisions of section 1122 in accordance with the principles in §§ 413.5, 413.134, 413.153, 413.157, and 413.161 of this chapter.

(14) Title XVIII limitations on reimbursement. (i) Unless otherwise specified in this subpart, the reimbursement limitations imposed on the amounts payable to providers of services and other health care facilities under section 1861(v) of the Social Security Act apply to the amount payable by the health insurance program for covered services furnished by providers of services or other health care facilities that are owned or operated by a cost-basis HMO or are related to the cost-basis HMO by common ownership or control, and for services furnished by providers of services or other health care facilities that are reimbursed on a reasonable-cost basis. The reimbursement limitations applicable to cost-basis HMO's include, but are not necessarily limited to, the following:

(a) The cost of treatment for chronic renal disease (§ 405.502(e) and § 413.5(f) of this chapter);

(b) The limitation on coverage of costs set forth in § 413.30 of this chapter;

(c) The reasonable cost of physical and other therapy services furnished under arrangements (§ 413.106 of this chapter);