The 3 Things CMS Looks for in a Subcontractor Monitoring Plan (42 CFR § 422.504(i))

Small practices often sign Medicare Advantage (MA) contracts that quietly make them part of the plan’s “first tier, downstream, or related entities” structure, with real oversight responsibilities under 42 CFR 422.504(i). If your practice bills MA plans, runs care management, does risk adjustment, or uses outside vendors for those services, CMS expects a subcontractor monitoring plan, even if you only have a handful of staff.

In practice, CMS looks for three things: clear contracts that mirror 42 CFR 422.504(i) requirements, documented ongoing monitoring and auditing of subcontractors, and an effective corrective action and termination process when problems are found. These expectations are enforced primarily through CMS audits of MA and Part D sponsors, but the impact quickly reaches small practices that are first tier or downstream entities.

A small clinic that cannot show how it monitors its subcontractors can become a weak link in the sponsor’s compliance program, leading to rushed remediation demands, loss of referrals, delayed payments, or even contract termination. By building a short, repeatable monitoring plan anchored in 42 CFR 422.504(i), a low budget practice can both protect revenue and make itself a safer, more attractive partner for MA plans.

Most small practices think of “CMS audits” as something that happens to big health plans, not to the solo cardiologist or community primary care group. The reality is that many small clinics are first tier or downstream entities under MA and Part D contracts, which means the sponsor must oversee them for compliance with Medicare requirements. Under 42 CFR 422.504(i), that oversight has to be more than a signature on a contract.

When CMS audits an MA organization, it looks at how effectively that sponsor oversees its first tier, downstream, and related entities. Sponsors then turn to their contracted providers and vendors for proof that delegated responsibilities are being carried out properly. If your practice has no subcontractor monitoring plan, you may struggle to respond to urgent data requests, remediate deficiencies, or show that you have taken compliance obligations seriously.

A practical, three part monitoring approach can fit even in a lean office. By aligning your contracts, monitoring routines, and corrective action process with 42 CFR 422.504(i), you reduce your risk of being blamed for systemic issues and improve your negotiating position with MA plans.

Understanding Legal Framework & Scope Under 42 CFR 422.504(i)

42 CFR 422.504 sets out the basic contract requirements between CMS and MA organizations. The paragraph (i) focuses on contracts between the MA organization and its first tier, downstream, and related entities, often referred to collectively as FDRs. It requires that these contracts contain specific provisions and that the MA organization maintains oversight of delegated functions.

Key points from 42 CFR 422.504(i) include:

• Agreements with first tier and downstream entities must specify the delegated activities, reporting responsibilities, and performance standards.

• Contracts must require the subcontractor to comply with all applicable Medicare laws, regulations, and CMS instructions, including those related to fraud, waste, and abuse.

• The MA organization must retain the right to audit, inspect, and revoke delegation if the subcontractor fails to perform satisfactorily.

• The sponsor remains ultimately responsible to CMS for the services and functions performed by its subcontractors.

For a small practice, this framework matters in two ways. First, you may be a first tier entity directly contracted with a plan and may also subcontract parts of the work, such as care management or call center functions, creating your own downstream chain. Second, even if you do not delegate further, the MA sponsor will expect evidence that you understand and meet your delegated responsibilities.

There is limited state flexibility here, because Medicare Advantage is a federal program and 42 CFR 422.504(i) applies uniformly. State contract or insurance law may add additional requirements, but it cannot replace the federal oversight obligations. Understanding this framework reduces friction when plans ask for monitoring data, helps you negotiate realistic responsibilities, and lowers the chance that your practice is caught off guard by sponsor audit requests.

CMS is the primary enforcement body for 42 CFR 422.504(i), acting through its oversight of MA organizations. It reviews contracts, monitoring processes, and audit outcomes to determine whether sponsors are effectively overseeing their FDRs. When sponsors fail, CMS may issue corrective action plans, civil money penalties, or even suspend or terminate contracts.

Although CMS does not typically sanction individual small practices under 42 CFR 422.504(i), it expects MA organizations to hold their subcontractors accountable. As a result, noncompliant practices may experience:

• Contract termination or non-renewal when deemed a high risk or unresponsive, FDR.

• Payment holds or recoupments linked to improperly delegated activities or noncompliant processes.

• Removal from preferred or narrow networks when plans attempt to improve their audit profile.

Common triggers for closer review of FDR oversight include:

• CMS program audits where data errors or compliance failures trace back to specific providers or vendors.

• Complaints from beneficiaries about marketing, access, or billing that involve contracted entities.

• Outlier patterns in claims data, risk adjustment submissions, or utilization management decisions linked to a specific FDR.

For a small practice, this means that a poorly managed subcontractor relationship is not just a private business problem. It can become evidence that the MA sponsor lacks an effective compliance program, leading to pressure on the practice to quickly correct problems or face termination.

Although the heading refers to HIPAA, the controls in this section focus on practical steps a small practice can take to survive CMS driven oversight tied to 42 CFR 422.504(i). Each control connects to the requirements for FDR contracts, monitoring, and corrective action.

1. Maintain a simple, accurate FDR inventory

   Create a one-page list of all entities that perform Medicare Advantage related functions for your practice, including billing, patient outreach, prior authorization support, risk adjustment, or care coordination. For each entry, identify whether it is first tier (direct contract with a plan) or downstream (contracted through another entity) and which delegated functions tie back to 42 CFR 422.504(i). Evidence can be the dated spreadsheet and copies of the underlying contracts. A low-cost option is to maintain the inventory in a shared cloud spreadsheet that can be exported quickly for plans or auditors.

2. Use a standard contract addendum that mirrors 42 CFR 422.504(i)

   For any vendor performing Medicare related functions, attach a short addendum that incorporates the key contract provisions required by 42 CFR 422.504(i), such as Medicare law compliance, audit rights, cooperation with CMS requests, performance standards, and termination rights for noncompliance. Evidence includes the signed addendum and legal review notes. A low-cost approach is to adapt a sponsor provided FDR addendum template, ensuring your downstream agreements track the same clauses.

3. Implement a risk based monitoring calendar,

   Not all subcontractors have the same risk profile. Use your FDR inventory to assign a simple risk rating, such as high, medium, or low, based on function and impact on beneficiaries. For high risk entities, schedule at least annual monitoring activities that may include file reviews, policy checks, or staff interviews. Medium and low risk entities can be monitored less frequently, but still on a defined timetable. Evidence includes a monitoring calendar, meeting minutes, and documented review results. This approach aligns with CMS expectations that sponsor use risk based audits and monitoring of FDRs under 42 CFR 422.504(i).

4. Standardize monitoring tools and questions

   For each type of subcontractor, design a short, repeatable monitoring form with targeted questions, for example about training, complaints, documentation, and adherence to MA plan policies. This keeps the workload manageable while still producing comparable data. Evidence includes completed forms, follow-up emails, and any corrective action plans. A low-cost option is to store forms as simple documents that can be reused across different entities.

5. Build a basic corrective action and escalation process

   monitoring has little value if findings are not addressed. Define a simple process that includes issuing written findings, agreeing on corrective actions with deadlines, verifying completion, and escalating to leadership if the subcontractor fails to improve. Tie this directly to your contract rights under 42 CFR 422.504(i), including possible revocation of delegated activities. Evidence includes corrective action plan documents, progress updates, and final closure notes.

6. Coordinate with MA sponsors on oversight expectations

   Where possible, align your plan with the MA organization’s own FDR oversight program. Ask how they define high risk functions, what data they need from you, and how often they expect monitoring to occur. Evidence includes email correspondence, shared checklists, and plan guidance documents. This coordination helps ensure your monitoring program satisfies both 42 CFR 422.504(i) and sponsor specific requirements.

Together, these controls turn subcontractor oversight from a vague obligation into a series of small, repeatable steps that directly support the regulatory framework in 42 CFR 422.504(i).

Case Study

A small multi-specialty clinic contracts directly with an MA plan to provide primary and specialty care. As part of the arrangement, the clinic also outsources it's after hours nurse advice line and prior authorization support to a third party vendor. These services are billed through the clinic, and the MA plan treats the clinic as a first tier entity and the call center as a downstream entity under 42 CFR 422.504(i).

During a CMS program audit, the MA plan is cited for failures in timeliness and documentation of prior authorization decisions. Data analysis shows a pattern linked to requests handled by the outsourced call center. CMS asks the plan to demonstrate effective oversight of its FDRs, including the clinic and downstream vendor.

The MA plan requests from the clinic copies of contracts with the call center, evidence of monitoring and auditing activities, and documentation of any corrective actions related to prior authorizations. The clinic has a signed contract but no FDR inventory, no monitoring forms, and no documented review of the vendor’s performance. Its only evidence consists of informal emails and anecdotal complaints.

CMS ultimately requires the plan to implement a corrective action plan that includes stronger FDR oversight. The plan responds by tightening standards for its first tier entities. The clinic is given a short deadline to create and implement a subcontractor monitoring plan, but it struggles to catch up and is eventually moved out of a preferred network tier, resulting in fewer MA referrals and reduced revenue.

If the clinic had implemented the controls described above, the story would look different. A simple FDR inventory would have identified the call center as a high risk entity due to its role in authorizations. A standardized monitoring form and annual review could have detected documentation gaps earlier. A defined corrective action process linked to 42 CFR 422.504(i) contract provisions would have allowed the clinic to require improvements or replace the vendor before CMS scrutiny intensified. In that scenario, the clinic could present clear evidence to the MA plan and CMS, positioning itself as part of the solution instead of the problem.

Use this short checklist table to see whether your subcontractor monitoring plan lines up with 42 CFR 422.504(i). Each task should have an owner, a schedule, and a direct link to the regulation.

Completing this checklist on a regular basis builds a body of evidence that your practice understands and meets its oversight responsibilities as contemplated by 42 CFR 422.504(i).

Common Audit Pitfalls to Avoid Under 42 CFR 422.504(i)

Subcontractor oversight problems often repeat across different practices. Focusing on a few specific pitfalls can significantly reduce your risk exposure.

• Assuming the MA plan alone is responsible for FDR monitoring, leading to no internal tracking of subcontractors or their delegated activities, which conflicts with shared responsibility expectations under 42 CFR 422.504(i).

• Using generic vendor contracts that omit required provisions such as CMS and plan audit rights, Medicare compliance language, or clear performance standards, which can cause findings in sponsor contract reviews under 42 CFR 422.504(i).

• Failing to recognize that outsourcing call centers, utilization management, care management, or risk adjustment functions creates downstream entities whose performance will be scrutinized during CMS audits of the sponsor.

• Conducting informal monitoring, such as casual conversations about performance, without written documentation that can be produced to MA plans or regulators as evidence of oversight under 42 CFR 422.504(i).

• Treating corrective action as optional, allowing the same subcontractor problems to continue through multiple plan years and creating a pattern that can trigger more serious responses from sponsors and CMS.

• Ignoring subcontractor performance until a complaint, grievance, or audit forces a crisis response, instead of using a simple monitoring calendar to identify problems early.

Addressing these pitfalls by formalizing contracts, monitoring routines, and corrective actions creates a more defensible oversight program and directly lowers compliance risk under 42 CFR 422.504(i).

A subcontractor monitoring plan is more sustainable when it is part of your practice’s overall culture and governance rather than a one time project. Leadership should clearly assign responsibility for FDR oversight and ensure that the person filling that role has both time and visibility.

Training expectations should be simple but consistent. Staff who select, manage, or work with subcontractors that touch MA business need periodic reminders about the practice’s obligations under 42 CFR 422.504(i). That includes basic awareness of which vendors are high risk, what monitoring looks like, and when to escalate concerns.

Simple metrics can help leadership stay informed without drowning in data. Examples include the percentage of high risk subcontractors with a completed annual review, the number of open corrective action plans, and the age of any overdue monitoring activities. Reviewing these metrics quarterly supports continuous improvement and demonstrates to MA sponsors that the practice takes its delegated responsibilities seriously.

For small practices, subcontractor monitoring under 42 CFR 422.504(i) is often invisible until an MA plan or CMS audit brings it into focus. By that time, gaps in contracts, oversight routines, and documentation can quickly threaten network status and revenue. A simple plan built around three elements, clear contracts, risk based monitoring, and effective corrective action can transform FDR oversight from a vulnerability into a strength.

The most important point is that size does not excuse a practice from meeting these expectations. MA sponsors remain ultimately accountable to CMS, and they must be able to demonstrate that even their smallest contracted entities understand and manage delegated responsibilities. When your practice can produce a current FDR inventory, monitoring records, and evidence of timely corrective action, you become a safer partner for plans and a less likely target for disruptive network changes.

Concrete next steps for a small clinic include:

1. Build and validate a complete FDR inventory that identifies which vendors and partners perform MA related functions.

2. Review and update contracts to ensure they include key provisions aligned with 42 CFR 422.504(i), including Medicare compliance, audit rights, and delegation revocation language.

3. Assign risk levels and create a simple monitoring calendar, starting with at least one documented review of each high risk subcontractor in the next 12 months.

4. Develop a short, written corrective action procedure that specifies how findings are documented, tracked, and closed, including escalation thresholds.

5. Establish a quarterly review where leadership looks at FDR monitoring metrics and adjusts resources or timelines as needed.

By completing these steps, a small practice moves from reactive responses to proactive, documented oversight that is ready for scrutiny under 42 CFR 422.504(i).

Recommended compliance tool: 

Simple subcontractor (FDR) monitoring tracker in a shared spreadsheet with risk scores, activity dates, and findings.

Advice: 

Identify your three highest risk subcontractors today and schedule a documented monitoring review for each within 30 days.

• 42 CFR 422.504 Contracts between CMS and Medicare Advantage organizations
  

• 42 CFR 422.503 General provisions
  

• Medicare Managed Care Manual, Chapter 21 – Compliance Program Guidelines
  

• Medicare Prescription Drug Benefit Manual, Chapter 9 – Compliance Program Guidelines
  

• CMS Medicare Advantage and Part D Program Audit Process Overview