[Federal Register Volume 65, Number 196 (Tuesday, October 10, 2000)]
[Proposed Rules]
[Pages 60151-60159]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25935]
[[Page 60151]]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
42 CFR Part 447
[HCFA-2071-P]
RIN 0938-AK12
Medicaid Program; Revision to Medicaid Upper Payment Limit
Requirements for Hospital Services, Nursing Facility Services,
Intermediate Care Facility Services for the Mentally Retarded, and
Clinic Services
AGENCY: Health Care Financing Administration (HCFA), HHS.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would modify Medicaid upper payment limits
for inpatient hospital services, outpatient hospital services, nursing
facility services, intermediate care facility services for the mentally
retarded, and clinic services. For each type of Medicaid inpatient
service, current regulations place an upper limit on overall aggregate
payments to all facilities and a separate aggregate upper limit on
payments made to State-operated facilities. This proposed rule would
establish a third aggregate upper limit that would apply to payments
made to all other types of government facilities that are not State-
owned or operated facilities.
With respect to outpatient hospital and clinic services, current
regulations place a single upper limit on aggregate payments made to
all facilities. For these services, this proposed rule would establish
a separate aggregate upper limit on payments made to State-owned or
operated facilities and an aggregate upper limit on payments made to
all other government-owned or operated facilities.
These proposed upper limits are necessary to ensure State Medicaid
payment systems promote economy and efficiency, while recognizing the
higher cost of inpatient and outpatient services in public hospitals.
In addition, to ensure continued access to care and the ability to
adjust to proposed changes, the proposed rule includes a transition for
States with approved State plan amendments.
DATES: We will consider comments if we receive them at the appropriate
address, as provided below, no later than 5 p.m. on November 9, 2000.
ADDRESSES: Mail written comments (1 original and 3 copies) to the
following address ONLY: Health Care Financing Administration,
Department of Health and Human Services, Attention: HCFA-2071-P, P.O.
Box 8010, Baltimore, MD 21244-8010.
Because comments must be received by the date specified above,
please allow sufficient time for mailed comments to be timely received
in the event of delivery delays.
If you prefer, you may deliver your written comments (1 original
and 3 copies) to one of the following addresses: Room 443-G, Hubert H.
Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201,
or Room C5-14-03, 7500 Security Boulevard, Baltimore, MD 21244-1850.
Comments mailed to the two above addresses may be delayed and
received too late to be considered.
FOR FURTHER INFORMATION CONTACT: Robert Weaver, (410) 786-5914--Nursing
facility services and intermediate care facility services for the
mentally retarded.
Larry Reed, (410) 786-3325--Inpatient and outpatient hospital
services and clinic services.
SUPPLEMENTARY INFORMATION: Because of staff and resource limitations,
we cannot accept comments by facsimile (FAX) transmission. In
commenting, please refer to file code HCFA-2071-P. Comments received
timely will be available for public inspection as they are received,
generally beginning approximately 3 weeks after publication of a
document, in Room 443-G of the Department's office at 200 Independence
Avenue, SW., Washington, DC, on Monday through Friday of each week from
8:30 to 5 p.m. (phone: (202) 690-7890).
This Federal Register document is also available from the Federal
Register online database through GPO Access, a service of the U.S.
Government Printing Office. The Website address is: http://www.access.gpo.gov/nara/index.html.
I. Statutory and Regulatory Framework
Title XIX of the Social Security Act (the Act) authorizes Federal
grants to States for Medicaid programs that provide medical assistance
to low-income families, elderly and persons with disabilities. Each
State Medicaid program is administered by the State in accordance with
an approved State plan. While the State has considerable flexibility in
designing its State plan and operating its Medicaid program, it must
comply with Federal requirements specified in the Medicaid statute,
regulation and program guidance. Additionally, the plan must be
approved by the Secretary, who has delegated this authority to HCFA.
Section 1902(a)(30) of the Act requires a State plan to meet
certain requirements in setting payment amounts to obtain Medicaid care
and services. One of these requirements is that payment for care and
services under an approved State Medicaid plan be consistent with
efficiency, economy, and quality of care. This provision provides
authority for specific upper payment limits (UPL) set forth in Federal
regulations in 42 CFR part 447 relating to different types of Medicaid
covered services. With respect to inpatient hospital services, nursing
facility (NF) services and intermediate care facility services for the
mentally retarded (ICF/MR), upper payment limits are set forth in
regulations at Sec. 447.272, ``Application of upper payment limits.''
This provision limits overall aggregate State payments and aggregate
payments to State-operated providers. With respect to outpatient
hospital services and clinic services, upper payment limits are set
forth in regulations at Sec. 447.321, ``Outpatient hospital services
and clinic services: Upper limits of payment.''
These regulations stipulate that aggregate State payments for
services provided by each group of health care facilities, that is,
inpatient hospital and outpatient hospital services, NF services, ICF/
MR services, and clinic services may not exceed a reasonable estimate
of the amount the State would have paid under Medicare payment
principles. Under Secs. 447.257, ``FFP: Conditions relating to
institutional reimbursement,'' and 447.304, ``Adherence to upper
limits; FFP, paragraph (c),'' FFP is not available for State
expenditures that exceed the applicable upper payment limit.
The statute also permits States some flexibility to use local
government resources. Under section 1902(a)(2) of the Act, States may
fund up to 60 percent of the non-Federal share of Medicaid expenditures
with local government funds. Section 1903(w)(6) of the Act specifically
limits the Secretary's ability to place restrictions on a State's use
of certain funds transferred to it from a local unit of government
subject to the requirements in section 1902(a)(2) of the Act.
II. Background
Before 1981, States were required to pay rates for hospital and
long term care services that were directly related to cost
reimbursement. To obtain approval from HCFA, many States set rates
using Medicare reasonable cost payment principles.
In 1980 and 1981, the Congress enacted legislation, at section 962
of the Omnibus Reconciliation Act of 1980 (OBRA `80), Pub. L. 96-499
and section
[[Page 60152]]
2173 of the Omnibus Budget Reconciliation Act of 1981 (OBRA `81), Pub.
L. 97-35, collectively known as the ``Boren Amendment'' that amended
section 1902(a)(13) of the Act to give States flexibility to deviate
from Medicare's cost payment principles in setting payment rates for
hospital and long term care services.
The Boren Amendment was primarily considered a floor on State
spending because it required States to set rates that would meet the
costs incurred by efficiently and economically operated facilities.
However, the Boren Amendment also supported upper payment limits on
overall rates. In legislative history, the Congress directed the
Secretary to maintain ceiling requirements that limited State payments
in the aggregate from exceeding Medicare payment levels. The Senate
Finance Committee report on the legislation states that ``the Secretary
would be expected to continue to apply current regulations that require
that payments made under State plans do not exceed amounts that would
be determined under Medicare principles of reimbursement.'' S. Rep. No.
96-471, 96 Cong., 1st Sess. 1979.
In 1986, the Congress affirmed the use of upper limits on payments
for inpatient hospital services, NF services and intermediate care
facility (ICF) (now ICF/MR) services. Section 9433 of the Omnibus
Budget Reconciliation Act of 1986 (Pub. L. 99-509) titled ``A
Clarification of State Flexibility for State Medicaid Payment Systems
for Inpatient Services'' precluded the Secretary from placing limits on
State disproportionate share hospital (DSH) payments but maintained the
application of limits on regular inpatient payment rates.
The current upper limits were last changed in a final rule in the
Federal Register (52 FR 28141) on July 28, 1987 that addressed the
application of the upper payment limit to States that had multiple
payment rates for the same class of services. This rule addressed the
differential rate issue in the context of State-operated facilities
because several audits had revealed that the circumstances of State-
operated facilities resulted in a lack of incentives to curb excessive
payments. A high volume of uninsured patients will increase the costs
of providing services in State-owned or operated facilities. These
costs, in turn, are passed on to the State. To offset those higher
costs, States established payment methodologies which paid State-owned
or operated facilities at a higher rate than privately-operated
facilities. Higher Medicaid payments to State-owned or operated
facilities allowed States to obtain additional Federal Medicaid dollars
to cover costs formerly met entirely by State dollars. To ensure
payments to State-operated facilities would be consistent with
efficiency and economy, the final rule applied the Medicare upper limit
test to State-operated facilities separate from other facilities.
However, the final rule did not create a separate upper payment limit
for other government facilities, allowing their payments to count
toward the same aggregate upper payment limit as private facilities.
Section 4711 of the Balanced Budget Act of 1997 (BBA)(Pub. L. 105-
33) amended section 1902(a)(13) of the Act to increase State
flexibility in rate setting by replacing the substantive requirements
of the Boren amendment with a new public process. Under section 4711 of
the BBA, States have flexibility to target rate increases to particular
types of facilities so long as the rates are established in accordance
with the new public process requirements.
III. Provisions of the Proposed Regulations
A. Description of the Problem
It has become apparent that the current regulation creates a
financial incentive for States to overpay non-State-operated government
facilities because States, counties, cities and/or public providers
can, through this practice, lower current State or local spending and/
or gain extra Federal matching payments. This practice is not
consistent with Medicaid statute and has contributed to rapidly growing
Medicaid spending.
The incentive and ability for States to pay excessive rates to non-
State government-owned or operated Medicaid providers can be explained
as follows. As stated previously, the current aggregate upper payment
limit is applied to both private and non-State government-owned or
operated facilities. By developing a payment methodology that sets
rates for proprietary and nonprofit facilities at lower levels, States
can set rates for county or city facilities at substantially higher
levels and still comply with the current aggregate upper payment limit.
The Federal government matches these higher payment rates to public
facilities. Because these facilities are public entities, funds to
cover the State share may be transferred from those facilities (or the
local government units that operate them) to the State, thus generating
increased Federal funding with no net increase in State expenditures.
This is not consistent with the intent of statutory requirements that
Medicaid payments be economical and efficient.
On July 26, 2000, the Director of the Center for Medicaid and State
Operations sent a letter to all State Medicaid Directors notifying them
that ``the Administration is developing a proposal to ensure that
Medicaid payments meet the statutory definition of efficiency and
economy'' and that we would issue a proposed rule to address this
problem. The Office of the Inspector General (OIG) and the General
Accounting Office (GAO) have begun to monitor States with State plans
that permit these types of payments. Both the GAO and OIG testified on
the scope of the financing practices, their impact on State and Federal
spending, and on the resultant uses of increased Federal funds.
Preliminary results of OIG's work to date are described below.
To date, the OIG has substantially completed reviews in three
States and is continuing reviews in three additional States. Although
the specifics of the enhanced payment programs and associated financing
mechanisms differed somewhat in the three States they have reviewed
thus far, they have found that the payment programs share some common
characteristics. These similarities are included below:
The States did not base the enhanced payments on the
actual cost of providing services or increasing the quality of care to
the Medicaid residents of the targeted nursing facilities.
The counties involved in the enhanced payment process used
little or none of the enhanced payments to provide services to Medicaid
residents. Instead, the counties returned these funds to their original
source. That is, the funds were returned to the State's general funds
or used to repay loans that were made to initiate the transaction, or
both.
The States were clear winners in that they were able to
reduce their share of Medicaid costs and cause the Federal government
to pay significantly more than it should for the same volume and level
of Medicaid services. The Federal share of the enhanced funding went
into State accounts and, in some cases, could be used for any purpose.
Some States effectively recycled the Federal funds
received from these enhanced payments to generate additional Federal
matching funds.
Similarly, the GAO testified that current arrangements violate the
basic integrity of Medicaid as a joint Federal/State program. By taking
advantage of a technicality, these financing schemes allow States, in
effect, to replace State
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Medicaid dollars with Federal Medicaid dollars.
B. Application of the Upper Payment Limit
To address these problems, we are proposing to revise the
regulations at Secs. 447.272, ``Application of upper payment limits,''
and 447.321, ``Outpatient hospital services and clinic services: Upper
limits of payment,'' to establish separate upper payment limits for
non-State government-owned or operated facilities. This approach is
consistent with the last regulatory change which created separate upper
payment limits for State-operated facilities. While the proposal would
still allow for flexibility in payment methodologies, it prevents
States from setting rates to public facilities well in excess of the
average upper payment limit and the actual cost of providing Medicaid
covered services to eligible individuals. This change is necessary to
ensure that the Medicaid regulations conform to Medicaid statutory
requirements that promote efficiency and economy.
The upper payment limit requirements for Medicaid inpatient
hospital services, NF services and ICF/MR services are set forth in
regulations at Sec. 447.272. Paragraph (a) of this section provides
that aggregate payments by an agency to each group of health care
facilities (that is, hospitals, nursing facilities and ICFs for the
mentally retarded (ICFs/MR)), may not exceed a reasonable estimate of
what would have been paid for those services under Medicare payment
principles. Paragraph (a) provides an exception to specify that
disproportionate share hospital payments are not counted toward the
general limit. We would amend paragraph (a) to specify that an
exception also applies for payments made to non-State-owned or operated
public hospitals under paragraph (b)(2) of this section.
Paragraph (b) of this section currently limits aggregate payment to
State-operated facilities in each class of service. We would revise
Sec. 447.272(b) to establish an additional upper payment limit that
would apply to payments made to all other types of government
facilities. To establish this new upper payment limit, we propose to
make the following changes to Sec. 447.272(b).
Specifically, we propose to revise paragraph (b) of this section to
specify that payments made to each type of government-owned or operated
health care facility (that is, inpatient hospital, NF, ICF/MR) may not
exceed the specified allowable limits. Proposed paragraph (b)(1) would
continue the limitation on aggregate payments made to State-owned or
operated facilities from exceeding a reasonable estimate of what would
have been paid using Medicare payment principles. In addition, we
propose to add a new paragraph (b)(2) that would impose an aggregate
upper limit restriction on payments for services furnished by all other
government-owned or operated facilities (other than Indian Health
Service (IHS) facilities and tribal facilities funded through Pub. L.
93-638) that are not State-owned or operated. (Although we invite
specific comments, we excluded IHS facilities because we believe there
is little incentive for States to pay enhanced rates to these
facilities. Rates to these facilities are generally set by the State in
accordance with rates published by the Federal government.) Under
paragraph (b)(2), we would specify that aggregate payments to NFs IFCs/
MR may not exceed a reasonable estimate of what would have been paid
for those services under Medicare payment principles. We would also
specify that aggregate payment to non-State-owned or operated public
hospitals may not exceed 150 percent of a reasonable estimate of what
would have been paid for those services under Medicare payment
principles.
We are proposing a higher upper payment limit for services in non-
State-owned or operated public hospitals operated by governmental
entities other than the State itself because we believe that allowing
higher Medicaid payments will fully reflect the value of public
hospitals' services to Medicaid and the populations it serves. Public
hospitals are established to ensure access to needed care in
underserved areas, and often provide a range of care not readily
available in the community, including expensive specialized services,
such as trauma and burn care and outpatient tuberculosis services. They
also provide a significant proportion of the uncompensated care in the
nation.
The size and scale of public hospitals create extreme stresses and
uncertainties, especially given their dependence on public funding
sources. We are concerned that these stresses may threaten the ability
of these public hospitals to fulfill their mission and fully serve the
Medicaid population. As such, we are proposing a higher UPL for these
facilities. Specifically, this higher aggregate UPL would allow States
to pay non-State-owned or operated public hospitals up to 150 percent
of the amount that would have been paid for inpatient and outpatient
services using Medicare payment principles.
We also recognize that, in some instances, these public hospitals
may be required by State or local governments to transfer back a
portion of payments that they receive under Medicaid. This practice
raises serious concerns about whether the purposes of the higher
payment limits being proposed for public hospitals will be met. To
ensure that higher payment levels will assist in ensuring the stability
of public hospitals as a vital link in the resources available for care
to Medicaid beneficiaries, we intend to require in our final rule that
payments made to public hospitals under this provision be separately
identified and reported to HCFA. We request comment on the most
suitable ways of reporting and accounting for these payments. In
addition, we are soliciting comments on whether the 150 percent limit
is appropriate.
For outpatient hospital services and clinic services, the current
upper payment limit is in regulations at Sec. 447.321. This limit
precludes FFP on aggregate payments for outpatient hospital services
and clinic services that exceed the amount that would be payable to all
providers (State-owned or operated, other government-owned or operated,
and private) under comparable circumstances under Medicare. Unlike
other classes of services subject to the upper payment limit, there is
no separate limit for State-owned or operated facilities. We propose to
amend Sec. 447.321 to establish additional upper payment limits that
would apply to aggregate payments for Medicaid services furnished by
State-owned or operated and all other government-owned or operated
facilities.
We propose to move the current provisions under paragraph (a) of
this section, as discussed below, to Sec. 447.304 and add a new
paragraph (a) to conform the language in this section to the language
in Sec. 447.272, for purposes of consistency within the Medicaid
regulations. We would provide in Sec. 447.321(a) that aggregate
payments by an agency to each group of health care facilities (that is,
outpatient hospitals and clinics) may not exceed a reasonable estimate
of what would have been paid for each of those services under Medicare
payment principles. We would also specify that an exception applies for
payments made to non-State-owned or operated public hospitals under
paragraph (b)(2) of this section. Consistent with the changes to
Sec. 447.272, we propose to establish separate upper payment limits for
Medicaid services furnished by--(1) State-owned or operated facilities;
and (2) all other government-owned or
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operated facilities that are not State-owned or operated. In
Sec. 447.321, proposed paragraph (b)(1) would establish the upper
payment limit for Medicaid services furnished by State-owned or
operated facilities. Like the current UPL for inpatient hospital
services, aggregate Medicaid payments for outpatient services or clinic
services furnished by State facilities would be limited to a reasonable
estimate of what would have been paid under Medicare reimbursement
principles.
Proposed paragraph (b)(2) would establish a similar aggregate upper
limit restriction for Medicaid services furnished by all other
government providers that are not State-owned or operated except that
the payment maximum for outpatient services would be set at 150 percent
of what would have been paid using Medicare payment principles. See the
earlier discussion of our rationale for the higher limit to these
public hospitals. Under the proposed limits in Secs. 447.272 and
447.321, States would have flexibility to consider either Medicare
principles of reasonable cost reimbursement or a Medicare prospective
payment system if available, to estimate the Medicare payment amount
for Medicaid services.
In addition, we are moving the language regarding prohibition for
FFP currently found in Sec. 447.321(a) to Sec. 447.304, ``Adherence to
upper limits; FFP,'' paragraph (c). The provision in Sec. 447.304(c)
currently specifies that FFP is available for State expenditures that
do not exceed upper limits. We propose to revise this section to
specify that FFP is not available for payment that exceeds the upper
limits specified in subpart F. This revision would conform to our
approach in Sec. 447.257.
C. Transition Periods for States That Have Approved Rate Enhancement
Payment Arrangements
We recognize that the new upper payment limits we are proposing may
disrupt State budget arrangements for States with approved enhanced
plan amendments. Therefore, we are proposing a transition policy for
States with approved rate enhancement amendments that would be affected
by the proposed UPLs. We refer to these amendments as noncompliant
because they result in payments that exceed the maximum amount
allowable under the new UPLs. We are proposing two transition periods
and are soliciting comments on the material elements of these
transition periods, including the starting point for the phase-out, the
percentage reduction each year, and whether a longer or shorter period
would be appropriate.
1. Transition period for noncompliant approved State plan
amendments effective on or after October 1, 1999.
For noncompliant approved State plan amendments with an effective
date on or after October 1,1999, we are proposing a transition period
that would end on September 30, 2002. Because these programs are
relatively new (in fact, some may be deemed approved during the comment
period for this proposed rule), States are not likely to have developed
the same level of reliance on the enhanced payments addressed in this
proposed rule as States with older programs. Additionally, during the
review period for these amendments, we have been informing States of
our intent to curtail this practice and advising them not to rely on
the continuation of this funding. For these reasons, we believe a short
transition period is appropriate.
2. Transition period for noncompliant approved State plan
amendments effective before October 1, 1999.
For noncompliant approved State plan amendments with an effective
date before October 1, 1999, we are proposing a 3-year transition
period beginning in the State FY that begins calendar year 2002.
We propose to implement the reductions on a State Fiscal Year (FY)
basis starting with the first full State FY that begins in calendar
year 2002. Specifically, the transition generally consists of reducing
aggregate payments with the proposed classes to the proposed UPLs in
increments, with the proposed UPL becoming fully effective in the first
State FY beginning in Calendar Year 2005. In the first year of
implementation, States would have to reduce the aggregate payments
above the new UPL by 25 percent. In the second year, the amount of
excess aggregate payments must be reduced by 50 percent and in the
third year by 75 percent. By the first day of the fourth year, State
payments would have to be in compliance with the new UPL policy.
We are proposing to use State FY 2000 as the base period to
determine the excess payment that must be phased down. To compute the
dollar amount of the excess, States would be required to compare State
FY 2000 payments paid to the current class of providers to the maximum
aggregate payments for its new class of providers (that is, State-owned
or operated and other government-owned or operated) under the proposed
UPL for State FY 2000. The difference is considered the excess payment
that must be phased out over the transition period.
The table below illustrates the transition policy. In this example,
State FY 2000 payments for nursing facility services provided by other
government-owned or operated providers are $300 million and new UPL is
$100 million. The amount in excess of the upper payment limit, $200
million, must be reduced in successive State FYs by 25 percent, 50
percent and 75 percent respectively. The steps to calculate the maximum
allowable payment during this transition period are as follows:
Subtract the amount that would have been allowed under the
new UPL for State FY 2000 services from the State FY 2000 payment.
Multiply that difference by the phase down rate.
Add to that result, the new UPL for Medicaid services
furnished on or after State FY 2000.
At the end of the transition period, State payments would have to
be in full compliance with the new upper payment limit.
[[Page 60155]]
Table--Illustrative Example of Transition \1\ Other Government-Owned or Operated Nursing Home Providers
[Dollars in millions]
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SFY 2003* SFY 2004 SFY 2005 SFY 2006
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Excess Payment in SFY 2000 \2\.............................. 200 200 200 200
Phase-out rate (in percent)................................. 25% 50% 75% 100%
Maximum allowable excess.................................... 150 100 50 0
New UPL \3\................................................. 105 110 115 120
Transition UPL.............................................. 255 210 165 120
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* Assumes that the SFY 2003 begins on July 1, 2002.
\1\ State FY 2001 and State FY 2002 payments would not be subject to this proposed rule because it assumes that
the transition period begins in State FY 2003.
\2\ The $200 million excess payment is derived by subtracting the new aggregate UPL for State FY 2000 services
provided by other government-owned or operated providers from the actual FY 2000 payment made to these
providers.
\3\ Assumes $5 million annual growth in the program.
To implement these provisions, we propose to make further revisions
to Secs. 447.272 and 447.321 to include regulations that establish
transition periods for States that will be affected by the new upper
payment limits that we are proposing.
Specifically, Sec. 447.272 sets forth the rules regarding the
application of the upper payment limit requirements for Medicaid
inpatient hospital services, NF services and ICF/MR services. We
propose to revise Sec. 447.272(b) to establish a shorter-term
transition period and a 3-year transition period. Specifically,
proposed paragraph (b)(2)(i) of this section would specify that
noncompliant State plan amendments effective on or after October 1,
1999 and approved before the effective date of the final rule have
until September 30, 2002 to come into compliance with the requirements
of the new upper payment limits. Proposed paragraph (b)(2)(ii) of this
section would specify that noncompliant approved State plan amendments
effective before October 1, 1999 are allowed a 3-year transition period
beginning in the State FY that begins in calendar year 2002. Paragraph
(b)(2) of this section refers to payments made to those other
government-owned or operated facilities that are not State-owned or
operated.
Section 447.321 sets forth rules regarding the application of the
upper payment limit requirements for Medicaid outpatient hospital
services and clinic services. We are proposing similar revisions to
Sec. 447.321(b) to include our proposed transition periods. We apply
these transition periods to States for payments made to State-owned or
operated facilities and other government-owned or operated facilities
described in proposed paragraphs (b)(1) and (b)(2) of this section.
Specifically, proposed paragraphs (b)(1)(i) and (b)(1)(ii) of this
section would specify the requirements for the short-term and the 3-
year transition periods for State-owned or operated facilities.
Proposed paragraphs (b)(2)(i) and (b)(2)(ii) of this section would set
forth the short-term and the 3-year transition periods for all other
government-owned or operated facilities.
To the extent this regulation alters allowable Medicaid
expenditures in a State with a section 1115 title XIX waiver, the
estimates of the expected cost to the Federal government without the
waiver will be adjusted (upward or downward) to accurately reflect
these changes in allowable Medicaid expenditures. These adjustments are
consistent with current section 1115 waiver budget neutrality policy.
IV. Response to Comments
Because of the large number of items of correspondence we normally
receive on Federal Register documents published for comment, we are not
able to acknowledge or respond to them individually. We will consider
all comments we receive by the date and time specified in the DATES
section of this preamble, and, if we proceed with a subsequent
document, we will respond to the major comments in the preamble to that
document.
V. Regulatory Impact Analysis
A. Introduction
We have examined the impact of this rule as required by Executive
Order (EO) 12866, the Unfunded Mandates Act of 1995, and the Regulatory
Flexibility Act (RFA) (Pub. L. 96-354). Executive Order 12866 directs
agencies to assess all costs and benefits of available regulatory
alternatives and, if regulation is necessary, to select regulatory
approaches that maximize net benefits (including potential economic,
environmental, public health and safety effects, distributive impacts,
and equity). A regulatory impact analysis (RIA) must be prepared for
major rules with economically significant effects ($100 million or more
in any one year).
B. Overall Impact
We are unable to provide a specific dollar estimate of the economic
impact this proposed regulation will have on State and local
governments and Medicaid participating health care facilities due to
data limitations and State behavioral responses. This proposed
regulation does not reduce the overall aggregate amount States can
spend on Medicaid services or place a fixed ceiling on the amount of
State spending that will be eligible for Federal matching dollars.
Under the proposed limitations, States will be able to set reasonable
rates as determined under Medicare payment principles for Medicaid
services furnished by public providers to eligible individuals. The
amount of spending permitted under the proposed limits will vary
directly with the amount of Medicaid services furnished by public
providers to eligible individuals. While the proposed regulation does
not affect the overall aggregate amount States can spend, by setting an
upper payment limit for government providers, it may impact how States
distribute available funding to participating health care facilities.
We have identified 28 States with approved and/or pending rate
proposals that target enhanced Medicaid payments to hospital and
nursing service providers that are owned or operated by county or local
governments. There are 17 States with approved State plan amendments or
waivers and 7 States with pending plan amendments. In addition, there
are 4 States that have both approved and pending plan amendments. We
estimate that these proposals currently account for approximately $3.7
billion in Federal spending annually. This estimate is based on State
reported Federal fiscal information submitted with State plan
amendments and State expenditure
[[Page 60156]]
information where available. It may be understated or overstated to the
degree that actual State expenditures would vary from the estimates
included with State plan submissions. For example, a State could
include a provision in its State Medicaid plan that would enable it to
spend up to allowable amounts by making additional payments to
designated providers. Under this scenario, if the upper payment
limitation permitted the State to spend an additional $200 million, the
actual annual expenditure could vary from zero to $200 million
depending upon the State's willingness to finance its share of the
payment. In the final rule, we may revise our estimate of $3.7 billion
in Federal spending to reflect findings reported by the OIG and the
GAO.
Of this $3.7 billion in spending, we do not have sufficient
information to permit us to quantify accurately the amount of payments
to State and local government providers that may exceed the proposed
upper payment limits. In addition, because some States may be using the
Federal share of enhanced payments in a manner that allows some funds
to be re-invested in Medicaid (and thereby drawing down additional
FFP), the potential impact may extend to other Medicaid services not
reflected in the above spending. Because we believe that the potential
impact will exceed $100 million, we consider this proposed rule to be a
major rule.
We are seeking information to help us quantify the impact of this
proposed rule. We invite comments on how the proposed rule may affect
State Medicaid programs and other State programs. In particular, we
seek information to help us quantify the fiscal impact of this proposed
rule (also taking into account the proposed transition periods and
higher UPLs for non-State-owned or operated public hospitals) on State
Medicaid programs and other State programs.
C. Impact on Small Entities and Rural Hospitals
The Regulatory Flexibility Act requires agencies to analyze options
for regulatory relief of small entities. For purposes of the RFA, small
entities include small businesses, nonprofit organizations and
government agencies. Most hospitals and most other providers and
suppliers are small entities, either by nonprofit status or by having
revenues of $5 million or less annually. For purposes of the RFA, all
hospitals, nursing facilities, intermediate care facilities for the
mentally retarded, and clinics are considered to be small entities.
Individuals and States are not included in the definition of a small
entity.
In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis if a rule may have a significant impact on
the operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 603 of the RFA. For
purposes of section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside of a Metropolitan
Statistical Area and has fewer than 50 beds.
The chart below indicates the type and number of providers
potentially affected by this regulation in all 50 States and the
District of Columbia. We included facilities in all 50 States because
although every State is not currently making enhanced payments to
government non-State-owned or operated facilities, this rule will
prevent new proposals from all States in the future. We do not believe
any States have payment arrangements with providers of ICF/MR services
or clinic services that will be affected by this regulation and
therefore we did not include those providers in the chart below.
Potentially Affected Providers by Number and Type
----------------------------------------------------------------------------------------------------------------
Government state- Government non-
Provider type owned or state-owned or Total
operated operated
----------------------------------------------------------------------------------------------------------------
Nursing Facilities........................................... \1\ N/A 892 892
Hospitals.................................................... 254 1,275 1,529
----------------------------------------------------------------------------------------------------------------
\1\ These facilities are already subject to a separate aggregate UPL and will not be affected by the final rule.
As explained earlier in the preamble, it is very difficult to
predict how States will respond to the proposed rule and consequently
how State decisions will impact Medicaid providers. Each State makes
its own budgetary and rate setting decisions. Since we do not collect
information about the specific services that providers use Medicaid
payments to support, we cannot determine how potential payment rate
adjustments will affect providers or the patients they serve. Under the
proposed UPLs, States would continue to be able to set rates that
provide fair compensation for Medicaid services furnished to Medicaid
patients. Hospitals that are owned or operated by local governments may
benefit from the higher UPLs we are proposing for inpatient and
outpatient services. Additionally, if these hospitals furnish services
to indigent patients, they may qualify as a DSH and qualify for funding
under a State's program. With respect to small entities that are not
government-owned or operated, the proposed UPLs do not apply to them
and therefore, they should not be impacted.
With respect to the impact on small rural hospitals, we do not
believe the proposed rule will have a significant overall impact on
rural hospitals. With respect to Medicaid services furnished by rural
hospitals, the proposed upper payment limits do not interfere with
States setting rates that result in fair compensation. Additionally,
rural hospitals that are owned or operated by local governments should
be able to benefit from the higher UPLs we are proposing for inpatient
and outpatient hospital services. Finally, if a rural hospital provides
services to indigent patients, they may qualify as a DSH and qualify
for funding under a State's DSH payment program.
We invite public comment on the possible effects this proposed rule
may have on small entities in general and on small rural hospitals in
particular.
D. Alternatives Considered
Section 1902(a)(30) of the Act requires in part that Medicaid
service payments be consistent with efficiency and economy. In addition
to the interpretation we are proposing in this proposed rule, we
considered several other alternatives to ensure Medicaid service
payments are consistent with economy and efficiency. In this section,
we will explain these other alternatives and why we did not select
them.
1. Facility-Specific Upper Payment Limit. Under this option,
Medicaid spending would be limited on a provider-specific application
of Medicare payment principles. FFP
[[Page 60157]]
would not be available on the amount of Medicaid service payment in
excess of what a provider would have been paid using Medicare payment
principles.
These limits would be applied to all institutions, or just to
public institutions where the incentives for over-payment are
significant. While a facility-specific limitation may be the most
effective method to ensure State service payments are consistent with
economy and efficiency, when balanced against the additional
administrative requirements on States and the congressional intent for
States to have flexibility in rate setting, we are not sure that the
increased amount of cost efficiency, if any, justifies this approach as
a viable option.
2. Government-owned or Operated Upper Payment Limit. This proposal
would limit, in the aggregate, the amount of payment States can make to
public providers. Under this proposal, State and local government
providers would be grouped together and payments to them as a group
could not exceed an aggregate limit. The aggregate limit would continue
to be based on Medicare payment principles. This option, relative to
upper payment limitations we are proposing, would have allowed States
to exercise more flexibility granted to them in the rate setting
process. While this option permits more flexibility, we believe the
aggregation of Medicaid service payments by all types of government
providers would have the unintended consequence of reopening
differential rate issues between State facilities and other types of
government facilities.
3. Intergovernmental Transfers (IGTs). Because in many cases we
believe there is a connection between excessive payments and IGTs, we
gave consideration to formulating policy with respect to them.
Generally, States have genuine incentive to set Medicaid service rates
at levels consistent with economy and efficiency since they share the
financial burden with the Federal government. As explained in section
III of the preamble, the use of IGTs to move funds between government
entities makes it possible to generate enhanced Federal matching
payment. However, we did not pursue this alternative because we
recognize that States, counties, and cities have developed their own
unique arrangements for sharing in Medicaid costs. Furthermore, there
are statutory limitations placed on the Secretary which limit the
authority to place restrictions on IGTs.
4. ``Grandfathering'' existing arrangement. Under this proposal, we
would not approve any new plan amendments after the effective date of
the final rule. This would permit States that are currently making
excessive payments to local government facilities to continue making
such payments indefinitely. Allowing some States to permanently
continue making excessive payments solely because they were approved
before this rule is published and effective appears to be arbitrary,
capricious, and inconsistent with our administrative authority.
We invite comment on these alternatives we considered and on other
possible approaches for achieving our objective to ensure Medicaid
service payments are consistent with efficiency and economy. We
specifically invite comment on alternative means of setting the maximum
amount that may be paid to public hospitals that have traditionally
provided ``safety-net'' care and services to underserved communities
and individuals who are uninsured. We request information regarding the
mechanisms used to finance these hospitals under current regulations,
as well as proposals for a means of curbing excessive payments while
allowing States the flexibility to recognize higher costs faced by
these hospitals.
E. The Unfunded Mandates Act
The Unfunded Mandates Reform Act of 1995 also requires (in section
202) that agencies perform an assessment of anticipated costs and
benefits before proposing any rule that may result in a mandated
expenditure in any one year by State, local, or Tribal governments, in
the aggregate, or by the private sector, of $100 million. Absent FFP,
we do not believe States will continue to set excessive payment rates
for Medicaid services furnished by government providers. Generally,
discontinuing an expenditure should not result in new costs, unless the
State has to fund the portion of the expenditure that is no longer
Federally funded with all State and local dollars. There are no Federal
requirements under the Medicaid statute that mandate States to make
these type of payments to Medicaid public providers and therefore we do
not believe the proposed limits have any unfunded mandate implications.
F. Federalism
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct compliance costs on State
and local governments, preempts State law, or otherwise has Federalism
implications.
In developing the interpretative policies set forth in this
proposed rule, we met with interested parties and listened to their
ideas and concerns. These discussions were held with members of
Congress and their staff. We also met with various associations
representing State and local governments including the National
Governors' Association, the National Conference of State Legislatures,
and the National Association of State Medicaid Directors. In addition,
we met with many hospital associations, advocacy groups, labor
organizations, and numerous other interested parties. We do not believe
this proposed rule in any way imposes substantial direct compliance
costs on State and local governments or preempts or supersedes State or
local law.
The financial implications of this proposed rule are highly
uncertain for the reasons we have previously indicated. We anticipate
that many State Medicaid programs will be unaffected by the upper
payment limits we are proposing. With respect to affected States, to
some degree we will be limiting flexibility in the management of their
Medicaid programs. If these States wish to continue to make payments in
excess of the proposed limits, they will have to fund the amount in
excess with only State and local resources. In the absence of FFP, we
anticipate States will reinvest these resources to support other
Medicaid activities to take advantage of and maintain Federal
resources. Should States realign their payment systems or divert State
matching dollars to support other Medicaid activities, the total amount
of available Federal funds should remain unchanged.
G. Executive Order 12866
In accordance with the provisions of Executive Order 12866, this
regulation was reviewed by the Office of Management and Budget.
List of Subjects in 42 CFR Part 447
Accounting, Administrative practice and procedure, Drugs, Grant
programs--health, Health facilities, Health professions, Medicaid,
Reporting and recordkeeping requirements, Rural areas.
For the reasons set forth in the preamble, 42 CFR part 447 is
proposed to be amended as follows:
PART 447--PAYMENTS FOR SERVICES
1. The authority citation for part 447 continues to read as
follows:
[[Page 60158]]
Authority: Sec. 1102 of the Social Security Act (42 U.S.C.
1302).
2. In Sec. 447.272 revise paragraphs (a) and (b) to read as
follows:
Sec. 447.272 Application of upper payment limits.
(a) General rule. Except as provided in paragraphs (b)(2) and (c)
of this section, aggregate payments by an agency to each group of
health care facilities (that is, hospitals, nursing facilities and ICFs
for the mentally retarded (ICFs/MR)), may not exceed a reasonable
estimate of what would have been paid for those services under Medicare
payment principles.
(b) Government-owned or operated facilities. In addition to being
subject to the requirements in paragraph (a) of this section, payments
by an agency to each group of government-owned or operated health care
facilities (that is, hospitals, nursing facilities and ICFs for the
mentally retarded (ICFs/MR)), may not exceed the limits specified in
paragraph (b)(1) or (b)(2) of this section.
(1) State-owned or operated facilities. Aggregate payments to
State-owned or operated facilities may not exceed a reasonable estimate
of what would have been paid for those services under Medicare payment
principles.
(2) Other government-owned or operated facilities. Except for
public hospitals, aggregate payments to all other government-owned or
operated facilities (other than Indian Health Services facilities (IHS)
and tribal facilities funded through Pub. L. 93-638) may not exceed a
reasonable estimate of what would have been paid for those services
under Medicare payment principles. Payment to non-State-owned or
operated public hospitals may not exceed 150 percent of a reasonable
estimate of what would have been paid for those services under Medicare
payment principles, except as provided below.
(i) Transition period for noncompliant State plan amendments
effective on or after October 1, 1999 and approved before the effective
date of the final rule. Enhanced payment arrangements with an effective
date on or after October 1, 1999 and approved before the effective date
of the final rule must come into compliance by September 30, 2002.
(ii) Transition period for noncompliant approved State plan
amendments effective before October 1, 1999. A 3-year transition period
applies to approved State payment arrangements with an effective date
before October 1, 1999. During the 3 successive State fiscal years
beginning in State FY 2003, State payments must comply with the
excessive payment phase down payment reduction schedule.
(iii) State payments may not exceed the lower of the base State FY
2000 payments or the following limits:
State FY 2003 UPL + .75x
State FY 2004 UPL + .50x
State FY 2005 UPL + .25x
UPL = Upper Payment Limit.
X = Payments to local government providers less the UPL described in
Sec. 447.272(b)(2) for services furnished in State FY 2000.
3. In Sec. 447.304, revise paragraph (c) and remove the note to
read as follows:
Sec. 447.304 Adherence to upper limits; FFP.
* * * * *
(c) FFP is not available for a State's expenditures for services
that are in excess of the amounts allowable under this subpart.
4. Section 447.321 is revised to read as follows:
Sec. 447.321 Outpatient hospital services or clinic services:
Application of upper payment limits.
(a) General rule. Except as provided in paragraph (b)(2) of this
section, aggregate payments by an agency to each group of health care
facilities, (that is, outpatient hospitals or clinics) may not exceed a
reasonable estimate of what would have been paid for each of those
services under Medicare payment principles.
(b) Government-owned or operated facilities. In addition to being
subject to the requirements in paragraph (a) of this section, payments
by an agency to each group of government-owned or operated health care
facilities, (that is, outpatient hospitals or clinics) may not exceed
the limits specified in paragraph (b)(1) or (b)(2) of this section.
(1) State-owned or operated facilities. Aggregate payments to
State-owned or operated facilities may not exceed a reasonable estimate
of what would have been paid for those services under Medicare payment
principles, except as provided below.
(i) Transition period for noncompliant State plan amendments
effective on or after October 1, 1999 and approved before the effective
date of the final rule. Enhanced payment arrangements with an effective
date on or after October 1, 1999 and approved before the effective date
of the final rule must come into compliance by September 30, 2002.
(ii) Three-year phase down transition period for noncompliant
approved State plan amendments effective before October 1, 1999. A 3-
year transition period applies to approved State payment arrangements
with an effective date before October 1, 1999. During the 3 successive
State fiscal years beginning in State FY 2003, State payments must
comply with the excessive payment phase down payment reduction
schedule.
(iii) State payments may not exceed the lower of the base State FY
2000 payments or the following limits:
State FY 2003 UPL + .75X
State FY 2004 UPL + .50x
State FY 2005 UPL + .25x
State FY 2006 UPL
UPL = Upper Payment Limit
X = Payments to local government providers and State-owned or
operated providers less the applicable UPL described in
Sec. 447.321(b) for services furnished in State FY 2000.
(2) Other government-owned or operated facilities. Except for
public hospitals, aggregate payments to all other government-owned or
operated facilities (other than Indian Health Services facilities (IHS)
and tribal facilities funded through Pub. L. 93-638) may not exceed a
reasonable estimate of what would have been paid for those services
under Medicare payment principles. Payment to non-State-owned or
operated public hospitals may not exceed 150 percent of a reasonable
estimate of what would have been paid for those services under Medicare
payment principles, except as provided below.
(i) Transition period for noncompliant State plan amendments
effective on or after October 1, 1999 and approved before the effective
date of the final rule. Enhanced payment arrangements with an effective
date on or after October 1, 1999 and approved before the effective date
of the final rule must come into compliance by September 30, 2002.
(ii) Three-year phase down transition period for noncompliant
approved State plan amendments effective before October 1, 1999. A 3-
year transition period applies to approved State payment arrangements
with an effective date before October 1, 1999. During the 3 successive
State fiscal years beginning in State FY 2003, State payments must
comply with the excessive payment phase down payment reduction
schedule.
(iii) State payments may not exceed the lower of the base State FY
2000 payments or the following limits:
State FY 2003 UPL + .75X
State FY 2004 UPL + .50x
State FY 2005 UPL + .25x
State FY 2006 UPL
UPL = Upper Payment Limit
X = Payments to local government providers and State-owned or
operated providers less the UPL described in Sec. 447.321(b)(1) for
services furnished in State FY 2000.
(Catalog of Federal Domestic Assistance Program No. 93.778, Medical
Assistance Program)
[[Page 60159]]
Dated: October 3, 2000.
Michael M. Hash,
Acting, Administrator, Health Care Financing Administration.
Approved: October 4, 2000.
Donna E. Shalala,
Secretary.
[FR Doc. 00-25935 Filed 10-5-00; 1:00 pm]
BILLING CODE 4120-01-P