A Downstream Entity (DE) is central to compliance and contractual relationships within the regulated American healthcare system, particularly for organizations involved in Medicare Advantage (MA) and Medicare Part D plans. The Centers for Medicare & Medicaid Services (CMS) delegates service delivery to private insurance companies and their partners. Understanding the role and obligations of a DE is necessary for any organization providing administrative or healthcare services under a government contract. This distinction determines the regulatory requirements that apply directly to the entity and how they are monitored by upstream partners.
Defining the Downstream Entity
A Downstream Entity (DE) is formally defined as any party that enters into a written arrangement with another entity involved in the MA or Part D benefit, operating below the level of the arrangement between a plan sponsor and a First Tier Entity (FTE). These arrangements form a chain of contracts reaching the ultimate provider of clinical or administrative services. The DE functions as a subcontractor, receiving a delegation of responsibility from a party already under contract with the Medicare Advantage Organization (MAO) or Prescription Drug Plan (PDP). The DE performs functions for which the MAO or PDP is ultimately accountable to CMS. The scope of a DE’s work ranges from direct patient care to specialized administrative tasks, but the link is always through a subcontract.
The Regulatory Hierarchy of Healthcare Entities
CMS categorizes contracted parties into three groups, collectively known as FDRs: First Tier Entities (FTEs), Downstream Entities (DEs), and Related Entities (REs). An FTE holds the direct written agreement with the MAO or PDP sponsor to provide administrative or healthcare services to Medicare beneficiaries, establishing the FTE as the primary delegate responsible for compliant service delivery. Related Entities (REs) are linked to the MAO or PDP through common ownership or control and perform management functions or furnish services under that shared structure. The DE operates one or more steps removed from the MAO, contracting with an FTE or another DE further down the chain. This tiered structure ensures that regulatory standards are uniformly applied across the entire network, with the compliance burden flowing from the MAO through the FTE to all subsequent DEs.
Essential Compliance Obligations
DEs must adhere to the same compliance standards that apply to the MAO, a requirement flowing down through contractual arrangements. A fundamental obligation is the mandatory completion of annual training for general compliance and Fraud, Waste, and Abuse (FWA) prevention. These training modules must be completed by all relevant employees, often within 90 days of hiring or contracting. The entity must also adopt and distribute a Code of Conduct or Ethics, which sets the standard for ethical business practices and outlines expectations for reporting non-compliance.
A rigorous requirement involves screening all employees and contractors against federal and state exclusion lists prior to contracting and on a regular basis. This process uses resources like the OIG’s List of Excluded Individuals and Entities (LEIE) and the General Services Administration’s System for Award Management (SAM). Federal law prohibits Medicare from paying for services provided by excluded individuals or entities. The DE must also ensure employees understand their responsibility to report suspected FWA or compliance issues through confidential mechanisms.
Oversight and Monitoring Requirements
The contractual relationship requires the upstream entity—the First Tier Entity or the plan sponsor—to conduct continuous oversight and monitoring of its Downstream Entities. This monitoring verifies that the DE is meeting all compliance obligations detailed in its subcontract. Upstream entities must maintain documentation showing they have reviewed FWA and general compliance training records for all relevant DE personnel. Contractual agreements grant the upstream entity the right to perform periodic audits of the DE’s operations, systems, and records to ensure adherence to Medicare rules. If deficiencies are found, the upstream entity must ensure the DE implements a Corrective Action Plan (CAP) to address the root cause of the non-compliance.
Practical Examples of Downstream Entities
Specialty Provider Groups
A large physician group may contract directly with a Medicare Advantage Organization (MAO), making the group the First Tier Entity. This FTE may then subcontract with a specialized mental health clinic or physical therapy center to provide specific services to MA members. Because this specialty group contracts with the physician group and not the MAO directly, it functions as a Downstream Entity delivering delegated healthcare services.
Pharmacy Benefit Managers (PBMs)
While a major PBM often acts as a First Tier Entity for a plan sponsor, the PBM frequently subcontracts specific services to other vendors. For example, a PBM may contract with a company specializing in complex medication management or mail-order fulfillment for certain drugs. In this scenario, the specialized fulfillment company is a Downstream Entity providing a delegated administrative function related to the Part D benefit.
Utilization Review Organizations
Healthcare plans delegate the function of reviewing medical services to determine their necessity and appropriateness before they are performed. An organization specializing in managing prior authorization requests and utilization reviews may contract with a larger administrative services organization (the FTE). This organization becomes a Downstream Entity, performing a core administrative function that the MA plan is obligated to ensure is done correctly.
Credentialing Services
Verifying provider qualifications and licensure is a necessary administrative function for any health plan network. If a plan contracts with a Credentials Verification Organization (CVO) as an FTE, the CVO may then subcontract with a vendor to conduct background checks and primary source verification. That vendor operates as a Downstream Entity, involved in highly sensitive data and regulatory processes.
Certain IT and Data Vendors
Entities that handle Protected Health Information (PHI) or administrative data under a subcontract with a First Tier Entity are often classified as Downstream Entities. This includes vendors providing cloud storage, claims processing software, or data analytics services that access beneficiary information on behalf of the MA plan. Regulatory scrutiny on these DEs is high due to the strict privacy and security standards under HIPAA.