CMS Pub. 100-16, ch. mc86c17a, § 10

Chapter 17, Subchapter A, sets forth the rules CMS follows in determining the amount

CMS will pay to TEFRA cost-based Health Maintenance Organizations and Competitive

Medical Plans (HMO/CMPs) for services furnished on a reasonable cost basis. Chapter

17, Subchapter A, deals with general requirements, bill processing options, budget and

enrollment forecasting, interim payments and reports, adjustments of payments, interim

settlement procedures, final certified cost reports, final settlement, general payment

principles for cost-based HMO/CMPs, the prudent buyer principle, reimbursable costs,

record keeping, and accounting standards.

Chapter 17, Subchapter B, gives the provider payment principles applicable to cost-based

contracts, references specific cost topics in the Medicare Provider Reimbursement

Manual, Pub 15, and provides specific guidelines on provider of services, physician and

other Part B service costs and costs related to enrollment, marketing, membership, and

reinsurance for cost-based HMO/CMPs. Chapter 17, Subchapter C, covers cost

apportionment for cost-based HMO/CMPs. Chapter 18 will provide guidance on Health

Care Prepayment Plans (HCPPs), including payment of reasonable cost, allowable costs

and cost apportionment.

Background

HMO/CMPs are public or private entities that are organized under the laws of a State to

provide health services on a prepayment basis to enrolled members. These HMO/CMPs

are eligible to enter into contracts with the Secretary of the Department of Health and

Human Services under §1876 of the Social Security Act (the Act) to furnish services to

Medicare beneficiaries. Originally, §1876 of the Act provided two methods of payment

for services furnished to Medicare enrollees of HMO/CMPs, reasonable cost

reimbursement (TEFRA cost-based) and risk-based payment. The Balanced Budget Act

of 1997 (BBA) removed the risk-based option under Section 1876 and replaced it with

the Medicare+Choice program in §§1851 - 1859 of the Act. The BBA also included

provisions for phasing out the §1876 cost-based HMO/CMPs. Chapter 17 of the manual

is in effect for cost-based HMO/CMPs with active contracts until December 31, 2004,

and through any applicable audit periods for that contract year. Cost-based HMO/CMPs

are paid the reasonable cost actually incurred in providing Medicare covered services to

Medicare enrollees. These organizations are paid each month, in advance, an interim per

capita rate for each Medicare enrollee. The total monthly payment is determined by

multiplying the interim per capita rate by the number of the HMO/CMP's Medicare

enrollees, plus or minus adjustments made by CMS. Further adjustments may be made at

the end of the contract period to bring the interim payments made to the HMO/CMP

during the period into agreement with the reimbursement amount determined payable to

the HMO/CMP for services rendered to Medicare enrollees during that period. Total

payment is calculated based on the HMO/CMP's final certified cost report.

In addition, the HMO/CMP may furnish services to Medicare beneficiaries who are not

enrolled in the organization. Since payment to the HMO/CMP under §1876 of the Act is

limited to the HMO/CMP's Medicare enrollees, services furnished to non-enrolled

Medicare beneficiaries are outside the scope of the HMO/CMP's agreement with the

Secretary. Medicare payment for services furnished to non-enrolled beneficiaries are

made through the original Medicare Fee-For-Service (FFS) payment system in

accordance with the usual Medicare payment process.