First Tier, Downstream, and Related Entities (FDRs) are organizations that play a central role in delivering services within Medicare Advantage (Part C) and Prescription Drug Plans (Part D). These groups perform administrative or health care services for the insurance company that holds the contract with the federal government. The structure of FDRs allows Medicare plans to delegate numerous functions, making the system of managed care and prescription coverage functional for millions of people.
Defining First Tier, Downstream, and Related Entities
The Centers for Medicare & Medicaid Services (CMS) mandates specific definitions to categorize the organizations involved in Medicare program operations. This regulatory framework distinguishes entities based on their contractual relationship with the primary Medicare Plan Sponsor, which is the insurance company. This separation ensures appropriate oversight and accountability throughout the service chain.
A First Tier Entity (FTE) is any party that enters into a direct, written arrangement with a Medicare Advantage organization or Part D plan sponsor. These entities provide either administrative or health care services directly to Medicare-eligible individuals under the plan’s contract with CMS. Examples of FTEs include large Pharmacy Benefit Managers (PBMs) that manage prescription drug benefits or major hospital systems that contract to provide medical care.
A Downstream Entity (DSE) is a party that contracts indirectly, meaning they enter into a written arrangement with a First Tier Entity or another Downstream Entity. A local, independent pharmacy contracting with the PBM (the FTE) to fill prescriptions is a common example of a Downstream Entity.
A Related Entity (RE) is an organization that shares common ownership or control with the Medicare Plan Sponsor. These entities often perform management functions under a contract or delegation from the plan sponsor. They can also be entities that lease property or sell materials costing more than a specific threshold to the plan sponsor. Related Entities typically handle internal administrative functions for the plan’s Medicare business.
The Operational Role of FDRs in Medicare Benefits
FDRs deliver the services promised by a Medicare Advantage or Part D plan to its members. The functions delegated to FDRs cover both the delivery of direct health care and the necessary administrative support.
In terms of health care delivery, FDRs include the physicians, specialists, hospitals, and clinics that provide medical services to beneficiaries. These entities are responsible for providing covered benefits, from routine office visits to complex surgical procedures and inpatient care. Their contracts ensure that beneficiaries have access to a network of providers who accept the plan’s terms.
For prescription drug coverage, FDRs like Pharmacy Benefit Managers handle the task of drug management. This includes developing and maintaining the formulary, which is the list of covered medications, and processing claims at the point of sale. Pharmacies, which are often Downstream Entities, directly dispense the medications to the patient.
Administrative functions are heavily delegated to FDRs, ensuring the plan runs smoothly. This includes services such as claims processing and adjudication, managing appeals and grievances, and operating customer service hotlines. FDRs also manage enrollment, disenrollment, and utilization management, which involves reviewing the appropriateness of medical services. Licensed agents and brokers who enroll beneficiaries into the plans are also considered FDRs, performing sales and marketing functions.
Ensuring Compliance and Quality
The Centers for Medicare & Medicaid Services holds the Medicare Plan Sponsor responsible for the actions and inactions of all its FDRs. This accountability means the insurance company must actively monitor and audit its contracted entities to ensure they meet federal standards. This regulatory oversight protects both the integrity of the Medicare program and the quality of care received by beneficiaries.
All FDRs must implement training programs covering compliance and the prevention of Fraud, Waste, and Abuse (FWA). Employees who work with Medicare services must complete this training within 90 days of joining the organization and annually thereafter. This education informs staff about relevant laws, regulations, and reporting mechanisms to identify and prevent improper practices.
Plan sponsors are required to conduct routine monitoring and periodic audits of their FDRs. This oversight tests the FDRs’ adherence to operational standards and compliance with Medicare program requirements. If an audit or monitoring activity identifies deficiencies, the FDR must submit a Corrective Action Plan to address the identified issues and prevent future non-compliance.