(d) The allowable cost for drugs under § 413.110 of this chapter.

(ii) The limitation on health insurance program payment to the lesser of the reasonable cost or customary charges for covered services (§ 413.13 of this chapter) does not apply with respect to services furnished to an HMO's enrollees who are title XVIII beneficiaries by a provider of services or other health care facility owned or operated by the HMO or related to the HMO by common ownership or control.

(c) Enrollment and marketing costs-(1) Principle. Enrollment and marketing costs incurred in accordance with § 417.223 are allowable costs. (See § 417.243(f) and § 417.244.)

(2) Definition. Allowable enrollment and marketing costs are those necessary and proper costs incurred in offering the HMO's plan to potential enrollees in accordance with this subpart. Such costs include selling, advertising, promotional, and other marketing costs and may not exceed an amount that would be incurred by a prudent and cost-conscious management.

(3) Application. Membership costs, described in paragraph (e) of this section, are not included in enrollment and marketing costs. Enrollment and marketing costs are allowable, whether incurred directly by HMO staff or under contract with marketing specialists or other outside consultants.

(4) Enrollment and marketing costs reimbursement limitation. The relatively higher costs that a developing HMO is likely to incur in offering its plan to title XVIII beneficiaries and that a mature HMO is likely to incur in initially offering its plan to title XVIII beneficiaries are taken into account in determining whether enrollment and marketing costs are reasonable in amount. However, if such costs exceed amounts which would be paid by prudent HMO management, the excess shall not be allowed.

(d) Reinsurance. (1) The health insurance program's share of reasonable costs for reinsurance (i.e., protection against all or part of the financial risk that the HMO is obligated to assume under its subscriber agreement with enrollees who are title XVIII benefici

aries) is allowable to the extent that the HMO incurs reinsurance costs for: (i) Covered emergency services (§ 417.205(a)(3)(i)) furnished outside the HMO's service area

(§ 417.205(a)(1)),

(ii) Covered urgently needed services (§ 417.205(a)(3)(ii)) furnished outside the HMO's enrollment area

(§ 417.205(a)(1)), and

(iii) Other covered items and services furnished outside the HMO's enrollment area through arrangements (§ 417.205(a)(2)).

(2) If the actual cost of reinsurance cannot be readily determined for the covered items or services, which are specified in paragraph (d)(1) of this section and are furnished to enrollees who are title XVIII beneficiaries, a reasonable estimate may be used.

(3) When the HMO's reinsurance covers only part of the cost of such covered services described in paragraph (d)(1) of this section, the share to be borne by the health insurance program for the cost of these covered services, including reinsurance cost and other payments, shall not exceed the amount that would otherwise be paid under this subpart. Otr reinsurance costs are not allowable.

(e) Membership costs—(1) Principle. Membership costs are allowable (see §§ 417.243(f) and 417.244(e) on cost apportionment and cost finding).

(2) Definition. Membership costs are allowable if incurred in maintaining and servicing subscriber contracts for prepayment enrollees. Membership costs include, but are not limited to: reasonable costs incurred in connection with maintaining statistical, financial, and other data on members.

(3) Application. For health insurance program purposes, membership costs shall not be included with allowable enrollment and marketing costs or with costs described in paragraph (i) of this section.

(f) Physician compensation—(1) Principle. Compensation paid by an HMO to physicians is an allowable cost to the extent that such compensation is commensurate with the compensation paid for similar services performed by similar physicians practicing in the same or similar locality. To the extent such compensation cost is

in excess of what is normally incurred, the excess is not an allowable cost.

(2) Application. Compensation for the personal services of physicians (i.e., salaries, wages, incentive payments, fringe benefits, etc.) shall be distinguished from payments to physicians for nonpersonal services (i.e., expense attributable to facilities, equipment, support personnel, supplies, etc.) in determining whether compensation is allowable. Physicians influence the management of an HMO to a very significant degree, and, therefore, directly affect the costs of services and the financial status of an HMO. Their compensation may take various forms, but it is intended that the aggregate compensation allowable be reasonable in relation to the services personally rendered. Reasonableness of compensation may be determined by reference to, or in comparison with, compensation paid for comparable services and responsibilities.

(g) Physicians' services under arrangements. (1) The amount paid by an HMO to a physician group (organized on a group-practice or individual-practice basis) for physicians' services, and for other covered Part B services, furnished under arrangements (as described in § 110.104 of this title), is an allowable expense to the extent it is reasonable.

(2) The amount paid by an HMO on a-fee-for-service basis to physicians and other suppliers and to a physician group organized on an individual-practice basis for physicians' services and other covered Part B services furnished under arrangements (as described in § 110.104 of this title) is an allowable expense to the extent it is not in excess of the reasonable charges, as defined in subpart E of part 405 of this chapter. Therefore, payment is limited to the amount that would otherwise be paid if the services were furnished by the physician group (or by similar physicians, practitioners, or suppliers) to Medicare beneficiaries who are not enrolled in the HMO. The same limitation also applies to the amount paid by the HMO for such covered services furnished under arrangements with a physician, physician-directed clinic, or a supplier of services.

(3) However, an exception to the reasonable charges limitation described in paragraph (g)(2) of this section is permitted, if the HMO demonstrates to HCFA's satisfaction that the physician group organized on an individualpractice basis has an agreement that includes acceptance by the members of the physician group of effective incentives, such as risk-sharing or other financial incentives, designed to avoid unnecessary or unduly costly utilization of health services. In such cases, the amount of physician compensation paid by an HMO is an allowable expense to the extent it is reasonable.

(h) Provider services through arrangements. The cost incurred by an HMO for covered services furnished by a provider through arrangements (see § 110.104 of this title and § 417.243(b)) are allowable to the extent that such cost would be allowable and reimbursable pursuant to subpart D of part 405 of this chapter unless the HMO can demonstrate to the satisfaction of HCFA that payment in excess of the reasonable cost allowed pursuant to such subpart D of Part 405 of this chapter is justified on the basis of advantages gained by the HMO. For example, if an HMO has an arrangement with a provider of services located outside the HMO's enrollment area that is not related to the HMO by common ownership or control, payment for the provider's charges to the HMO for covered services (rather than the provider's reasonable cost as determined under parts 412 and 413 of this chapter) may be justified if: The provider furnishes services to enrollees of the HMO on an infrequent basis; the charges represent an insignificant amount of total reimbursement to the HMO by the program; and the charges do not exceed the customary charges by the provider to its other patients for similar services. The advantages gained under this arrangement include a more timely final settlement with the HMO and the elimination of administrative costs necessary to determine the provider's reasonable cost for these services. An advantage gained represents a real and tangible benefit received by the HMO for the excess cost incurred. Any such excess payment is also subject to other

applicable requirements of Part 405 of this chapter, including tests of reasonableness.

(i) Special Title XVIII program requirements. (1) The total reasonable cost incurred by an HMO for services specified in this paragraph, which are solely for the purposes of the health insurance program and unique to the health insurance program's HMO provision, shall be reimbursed in full by the program. However, in reimbursing for the cost specified in this paragraph for an independently certified cost report, only those additional costs incurred by an HMO that are related to the certification of the HMO's cost report are reimbursable in full by the program. The normal administrative costs incurred by the HMO in obtaining reimbursement from the health insurance program (such as the cost of maintaining and reporting statistical and acturial data needed to determined the amount of reimbursement due the HMO and the cost of preparing cost reports) are apportioned to the health insurance program (see § 417.243(f)). The reasonable cost of preparing independently certified financial statements for the HMO and the reasonable cost of other HMO management services are also apportioned in accordance with § 417.243(f). Costs that are reimbursable in full under this paragraph shall be separately budgeted and approved in advance of the contract period. The following costs shall be reimbursed in full as specified in this paragraph.

(i) The reasonable cost of reporting individual title XVIII beneficiary enrollment accretion and deletion data; and

(ii) The reasonable cost incurred solely for the purposes of title XVIII for the HMO's independently certified cost report described in § 417.247(b) for cost-basis HMO'S and § 417.254(b) for risk-basis HMO's.

in

(2) The total reasonable cost of special data required from HMO's by the health insurance program solely for program evaluation and planning purposes shall be reimbursed in full by the program under the requirements of paragraph (i)(1) of this section. Except as specifically provided for, paragraph (i)(1) of this section shall

not apply to data the HMO is required to maintain and furnish HCFA under any other provision of this subpart.

[41 FR 49596, Nov. 9, 1976; 41 FR 53320, Dec. 6, 1976. Redesignated at 42 FR 52826, Sept. 30, 1977, and amended at 47 FR 58258, Dec. 30, 1982. Redesignated and amended at 50 FR 1345, Jan. 10, 1985; 51 FR 34832, Sept. 30, 1986]

§ 417.243 Cost apportionment.

(a) General. Total allowable direct and indirect costs of an HMO shall be apportioned among title XVIII benefiIciaries who are enrolled in the HMO, other enrollees, and any nonenrolled patients of the HMO. This apportionment shall be accomplished on the basis of requirements set forth in this section using methodologies approved by HCFA. (See § 417.242(i) for reimbursement of costs incurred in meeting special title XVIII program requirements.) The two basic objectives of this apportionment are that, to the extent reasonably possible, (1) the costs of efficiently delivering covered care to enrollees who are title XVIII beneficiaries will not be borne by other enrollees, and by any nonenrolled patients of the HMO, and (2) the costs of delivering care to enrollees other than enrollees who are title XVIII beneficiaries and any nonenrolled patients will not be borne by the health insurance program under section 1876 of the Act. (The HMO shall be reimbursed for covered services furnished to title XVIII beneficiaries not enrolled in the HMO through the HMO's health insurance program fiscal intermediary or carrier, as appropriate.)

(b) Methods of apportionment for provider services-(1) Provider services furnished directly by the HMO. The method of apportionment required by §§ 405.480, 413.55, and 413.24 of this chapter shall be used to determine the share to be borne by the health insurance program for the cost of covered services furnished to enrollees who are title XVIII beneficiaries directly by the HMO through a "provider of services" (as defined in § 413.1 of this chapter) which is owned or operated by the HMO, or related to the HMO by common ownership or con

trol (see § 417.244(c) for cost-finding requirements).

(2) Provider services furnished by the HMO through arrangements with others. The share to be borne by the health insurance program for covered services furnished to enrollees who are title XVIII beneficiaries, by the HMO through arrangements with a provider of services which is not owned or operated by the HMO, or related to the HMO by common ownership or control, shall be determined as follows:

(i) The share to be borne by the health insurance program for covered services furnished to enrollees who are title XVIII beneficiaries by the provider shall be based on the cost the HMO pays the provider, pursuant to its financial arrangement with the provider, to the extent it is reasonable and subject to conditions and limitations set forth in § 417.242(a). The share to be borne by the health insurance program shall be determined on the same approved basis otherwise used by the provider in apportioning the health insurance program's share of allowable costs for covered services furnished title XVIII beneficiaries that are not enrollees of the HMO subject to conditions and limitations set forth in § 417.242(h). In the event that apportionment on this basis, because of the special nature or terms of the HMO's financial arrangement with the provider, would result in the health insurance program's bearing the costs of delivering care to individuals other than enrollees who are title XVIII beneficiaries, the apportionment shall be on some other appropriate basis approved by HCFA, intended to assure that the share allocated to the health insurance program does not include costs of delivering care to individuals other than enrollees who are title XVIII beneficiaries.

(ii) Where the HMO elects to have providers of services seek reimbursement from their health insurance program intermediary for covered services furnished to the HMO's enrollees who are title XVIII beneficiaries, the share to be borne by the health insurance program for covered services shall be the amount paid the provider pursuant to § 417.241(d).

(as

(3) Emergency services; urgently needed services and out-of-area provider services for which the HMO assumes financial responsibility. Providers of services may be reimbursed through their health insurance program intermediary for the reasonable cost of coVered emergency services (as defined in § 417.205(a)(3)(i)), urgently needed services defined in § 417.205(a)(3)(ii)), and other covered out-of-area services for which the HMO assumes financial responsibility, except for services covered under reinsurance, the cost of which is allowable pursuant to § 417.242(d), 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. If an HMO pays the provider of services for emergency, urgently needed, and other covered outof-area services, the cost incurred by the HMO shall be allowable and reimbursable under parts 412 and 413 of this chapter, unless the HMO can demonstrate to the satisfaction of HCFA that payment in excess of the reasonable cost allowed under parts 412 and 413 of this chapter is justified on the basis of advantages gained by the HMO as described in § 417.242(h).

(c) Methods of apportionment of covered physicians' services and other covered Part B services which are not provider services-(1) Medical services furnished directly by the HMO. The total allowable direct and indirect costs of covered physicians' services and other Part B services not furnished through a provider of services, but which the HMO furnishes directly through physicians and other health care personnel who are employees or partners of the HMO, or by a group of physicians or by a health center or other facility which is related to the HMO by common control or ownership, shall be apportioned on the basis of the ratio of covered Part B services provided to enrollees who are title XVIII beneficiaries to total services furnished to all enrollees of the HMO and other patients on a departmental basis. The sum of the apportioned costs for each department furnishing covered services is the total share of the medical costs to be borne by the health insurance program (see exam

ple in paragraph (e) of this section for services furnished directly).

(2) Medical services furnished under arrangements by the HMO. The share to be borne by the health insurance program of the cost of covered physicians' services and other Part B services not furnished through a provider of services, but which the HMO furnishes to its enrollees who are title XVIII beneficiaries under arrangements such as with a group of physicians (organized on a group-practice or individual-practice basis) shall be determined as follows:

the

(i) The share to be borne by the health insurance program for covered Part B services furnished to HMO's enrollees who are title XVIII beneficiaries under an arrangement whereby the HMO pays for the services on some basis other than fee-forservice shall be based on the cost the HMO pays, pursuant to its financial arrangement with the group of physicians or supplier, to the extent it is reasonable. The share to be borne by the health insurance program under this arrangement shall be determined on the basis of a ratio of the covered services furnished to the HMO's enrollees who are title XVIII beneficiaries to total services furnished to the HMO's enrollees and other patients covered by the payment, except where apportionment on this basis would result in the health insurance program's bearing the costs of delivering care to individuals who are not title XVIII beneficiaries. In that event, apportionment shall be on some other appropriate basis approved by HCFA so that the share allocated to the health insurance program does not include costs of delivering care to individuals who are not title XVIII beneficiaries.

(ii) The share to be borne by the health insurance program for covered Part B services furnished by the HMO to its enrollees who are title XVIII beneficiaries under an arrangement whereby the HMO pays for the services on a fee-for-service basis shall be the charges pursuant to the terms of the agreement for these covered services provided these charges do not exceed the reasonable charge for the service, as defined in Subpart E of

Part 405 of this chapter. However, an exception to this reasonable charges limitation is permitted a physician group organized on an individual-practice basis that meets the conditions set forth in § 417.242(g)(3).

(3) Emergency services, urgently needed services and other covered medical services for which the HMO assumes financial responsibility. The share to be borne by the health insurance program for covered physicians' services and other covered Part B services which are not furnished by a provider of services and are emergency services (as defined in § 417.205(a) (3)(i), urgently needed services (as defined in § 417.205(a)(3)(ii)), or other covered services for which the HMO assumes financial responsibility, except for services covered under reinsurance, the cost of which is allowable pursuant to § 417.242(d), shall be determined in accordance with paragraph (c)(2) of this section, unless payment of a greater amount is justified to the satisfaction of HCFA. For example, payment of the charges of a physician or other Part B supplier rather than reasonable charge for the service as defined in subpart E of part 405 of this chapter may be justified if: The physician or other Part B supplier furnishes services to enrollees of the HMO on an infrequent basis; such charges represent an insignificant amount of total reimbursement to the HMO by the program; and such charges do not exceed the amounts charged by such physician or other Part B supplier to other patients for similar services.

(d) Weighting for services of physicians and other health care personnel. (1) Since the direct professional services of physicians and other health care personnel vary in time and complexity from patient to patient, depending on the patient's condition and other factors, the HMO may weight for time and complexity the services that are used to compute the apportionment of costs for the direct professional services of physicians and other health care personnel pursuant to paragraph (c)(1) of this section provided such weighting is approved by HCFA. The HMO may use statistics or reasonable estimates that are based on