[Federal Register Volume 59, Number 8 (Wednesday, January 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-547]


[[Page Unknown]]

[Federal Register: January 12, 1994]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES
42 CFR Parts 435 and 436

[MB-020-FC]
RIN 0938-AB07

 

Medicaid Program; Deduction of Incurred Medical Expenses 
(Spenddown)

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Final rule with comment period.

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SUMMARY: This final rule with comment period permits States flexibility 
to revise the process by which incurred medical expenses are considered 
to reduce an individual's or family's income to become Medicaid 
eligible. This process is commonly referred to as ``spenddown.'' Only 
States which cover the medically needy, and States which use more 
restrictive criteria to determine eligibility of the aged, blind, and 
disabled, than the criteria used to determine eligibility for 
Supplemental Security Income (SSI) benefits (section 1902(f) States) 
have a spenddown.
    These revisions permit States to: Consider as incurred medical 
expenses projected institutional expenses at the Medicaid reimbursement 
rate, and deduct those projected expenses from income in determining 
eligibility; combine the retroactive and prospective medically needy 
budget periods; either include or exclude medical expenses incurred 
earlier than the third month before the month of application (States 
must, however, deduct current payments on old bills not previously 
deducted in any budget period); and deduct incurred medical expenses 
from income in the order in which the services were provided, in the 
order each bill is submitted to the agency, or by type of service.
    All States with medically needy programs using the criteria of the 
SSI program may implement any of the provisions. States using more 
restrictive criteria than the SSI program under section 1902(f) of the 
Social Security Act may implement all of these provisions except for 
the option to exclude medical expenses incurred earlier than the third 
month before the month of application.

DATES: These regulations are effective March 14, 1994.
    To ensure that comments will be considered, we must receive them at 
the appropriate address, as provided below, no later than 5 p.m. on 
March 14, 1994.

ADDRESSES: Mail written comments (original and 3 copies) to the 
following address: Health Care Financing Administration, U.S. 
Department of Health and Human Services, Attention: MB-020-FC, P.O. Box 
26676, Baltimore, MD 21207.
    If you prefer, you may deliver your written comments (original and 
3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Ave., SW., 
Washington, DC, or
Room 132, East High Rise Building, 6325 Security Boulevard, Baltimore, 
MD.

    Due to staffing and resource limitations, we cannot accept comments 
by facsimile (FAX) transmission.
    In commenting, please refer to file code MB-020-FC. Comments 
received timely will be available for public inspection as they are 
received, beginning approximately three weeks after publication of this 
document, in room 309-G of the Department's offices at 200 Independence 
Ave., SW., Washington, DC, on Monday through Friday of each week from 
8:30 a.m. to 5 p.m. (phone: 202-690-7890).

FOR FURTHER INFORMATION, CONTACT: Richard Coyne, (410) 966-4458.

SUPPLEMENTARY INFORMATION:

I. Background

    States must provide Medicaid to categorical groups of individuals 
who are eligible to receive cash payments under one of the existing 
cash assistance programs established under the Social Security Act (the 
Act). In addition, States may provide Medicaid to the medically needy; 
that is, to those individuals who meet the categorical group 
requirements, have sufficient income to meet basic living expenses and, 
thus, are ineligible for a cash assistance program but who have 
insufficient income to pay for medical expenses. Sections 1902(a)(17) 
and 1903(f)(2) of the Act provide that, for individuals applying as 
medically needy, certain incurred medical expenses must be deducted 
from income if income exceeds the eligibility standard established by 
the State. The process is commonly referred to as ``spenddown.''
    In the medically needy program, the spenddown process currently 
operates as follows: The State selects one or more medically needy 
budget periods between 1 and 6 months and a medically needy income 
level, against which countable income is measured. If countable income, 
after certain deductions are taken, is equal to or less than the income 
standard (medically needy income level), the individual (or family) is 
eligible for Medicaid. If the income is higher than this standard, the 
individual nevertheless may be eligible for Medicaid if, by deducting 
incurred medical expenses (i.e., spending down the ``excess'' income), 
the income equals or falls below the standard.
    Section 1902(f) of the Act contains a similar provision for 
deduction of incurred medical expenses from income. This spenddown 
applies to categorically needy and medically needy aged, blind, and 
disabled individuals in States using more restrictive eligibility 
criteria than those of the Supplemental Security Income (SSI) program. 
These States are known as section 1902(f) States. In those States, 
section 1902(f) of the Act requires that, in determining how much 
income is to be counted when determining eligibility, the Medicaid 
agency must deduct from income: (1) any SSI benefit received; and (2) 
any additional benefit paid by the State. If, after these deductions 
are taken, income is equal to or less than the State established income 
standard, the individual is eligible for Medicaid. If income is higher 
than the standard, the agency must deduct incurred medical expenses 
from the individual's countable income to determine whether or not he 
or she is eligible.
    States using section 1902(f) criteria may elect to have medically 
needy programs. Individuals who become eligible for Medicaid by meeting 
the section 1902(f) spenddown are categorically needy unless the 
section 1902(f) State has a medically needy program. In section 1902(f) 
States with medically needy programs, an individual who spends down in 
order to meet the income test will be either medically needy or 
categorically needy. If he or she is an SSI or State supplement 
recipient, or meets the income test for SSI or a State supplement, he 
or she will be categorically needy. Otherwise, when the individual 
spends down, he or she will be medically needy. Once a section 1902(f) 
State elects to use more restrictive standards than those which the 
State is otherwise obligated to use under title XIX for those who will 
qualify as medically needy, its spenddown rules are governed by section 
1902(f).
    The statutory authority behind the general medically needy and 
section 1902(f) spenddowns is different. Under the general medically 
needy spenddown in section 1902(a)(17), States must take into account, 
except to the extent prescribed by the Secretary, the costs incurred 
for medical care or any other type of remedial care recognized under 
State law. Under section 1902(f), the spenddown language is broader. 
That is, the Secretary has not been granted the same authority to 
impose a limit: States must deduct from an individual's countable 
income incurred expenses for medical care as recognized under State 
law. However, section 1902(f) allows States to limit the deductible 
amount of expenses by recognizing only the limited amount under State 
law.
    All States are currently required by section 1902(a)(34) of the Act 
to provide Medicaid benefits 3 months prior to the month in which an 
application is filed, subject to certain conditions. These conditions 
are that the individual (a) received covered services under the State 
plan at any time during that 3-month period, and (b) would have been 
eligible for Medicaid at the time services were received if he or she 
had applied.

II. Provisions of the Proposed Rule

Summary of Provisions

    On September 2, 1983, we published in the Federal Register (48 FR 
39959) a proposed rule (NPRM) to solicit comments on five sets of 
proposed changes to spenddown procedures (Provisions A through E, as 
described below). Our proposals are summarized below.
    We proposed that all States with medically needy programs, 
including those using more restrictive eligibility criteria than SSI 
under section 1902(f) of the Act, be permitted to choose option A. In 
the NPRM we specified that a literal interpretation of section 1902(f) 
of the Act would prevent these States from implementing the remaining 
options (Provisions B through E).

Provision A--Allow States to Consider Projected Institutional Expenses 
at the Medicaid Rate as Incurred Medical Expenses

    We proposed that all States, including those using more restrictive 
eligibility criteria than SSI, be permitted to count as incurred 
medical expenses in calculating whether spenddown requirements are met, 
projected institutional expenses (not subject to payment by a third 
party) at the Medicaid reimbursement rate instead of using only the 
private patient rate, as is currently required.

Provision B--Allow States To Combine Retroactive and Prospective 
Medically Needy Budget Periods

    For those States that choose to have a medically needy program, we 
proposed the use of more flexible budget periods. These are periods 
over which an individual's income and medical expenses are compared to 
the State's medically needy income level to determine whether or not 
the individual is eligible. Specifically, States would be able to 
choose a medically needy budget period of up to 6 months that could 
include all or part of the 3-month period before an application for 
Medicaid (the retroactive period). Under current regulations, the 3-
month retroactive period must be treated separately from whatever 
prospective budget period is chosen by the State.

Provision C--Permit States To Exclude from Incurred Medical Expenses 
Those Bills for Services Furnished More Than 3 Months Before a Medicaid 
Application

    Except for current payments on older bills not previously applied 
in the spenddown process, we proposed that States be permitted to 
exclude from incurred medical expenses those bills for services 
furnished more than 3 months before the month of application or 
redetermination. Current regulations and policy require that States 
deduct all incurred expenses that an individual incurs before 
application, regardless of the date of the service, if they have not 
already been used in another budget period, if the individual is still 
liable for them, or if the individual has paid for them in the current 
budget period.

Provision D--Permit States to Apply Incurred Medical Expenses to the 
Spenddown Process in Chronological Order.

    We proposed that States with a medically needy program may deduct 
incurred medical expenses from income in chronological order, rather 
than in the order specified in current regulations, which is by type of 
expenditure. The chronological order the State chooses can be either 
the order in which the services are furnished, or the order in which 
the bills are presented to the agency.

Provision E--Allow States To Limit Deductible Medical Expenses to 
Services Covered Under the State Plan

    We proposed to allow States to exclude services that are not 
covered in their State plan from incurred medical expenses, except for 
Medicare and health insurance premiums, Medicaid deductibles, 
copayments or similar cost-sharing charges imposed by health insurance. 
Current regulations require that States deduct all incurred medical 
expenses recognized under State law that are not subject to payment by 
a third party.

Revision of NPRM Scope

    We have decided to withdraw Provision E from all States. We explain 
our reasons under the analysis and response to public comments section 
of this preamble.

III. Analysis and Response to Public Comments

    In response to our request for comments on the September 2, 1983, 
NPRM, we received 107 letters, 32 from client advocacy groups, 26 from 
individuals, 18 from providers or provider organizations, 15 from State 
governmental agencies, 13 from legal advocacy groups, and 3 from 
religious affiliated groups. The specific comments are grouped 
according to the five provisions identified in the NPRM.

Comments on Specific Provisions of the NPRM

Provision A--Allow States to Consider Projected Institutional Expenses 
at the Medicaid Rate as Incurred Medical Expenses
    It should also be noted that Provision A does not govern 
implementation of section 1929(b)(3) of the Act, which permits States 
to project medical expenses in determining eligibility for medical 
assistance for home and community care under section 1929. Regulations 
governing section 1929 will be published separately.
    Comment: Several commenters objected to Provision A, believing that 
allowing States to project institutional expenses at the Medicaid rate 
contravenes the law. They believe that since the law requires 
accounting for ``incurred'' expenses and since expenses are incurred at 
the private patient payment rate, a projection of expenses, as a part 
of accounting for incurred expenses, should only be at the private 
patient payment rate.
    Response: We do not agree with the commenters. In the preamble to 
the NPRM, we noted that ``[i]t is currently permissible for States to 
project anticipated institutional expenses at the private patient 
rate'' but that we were proposing to revise regulations to also 
``provide that States may count institutional expenses (not subject to 
payment by a third party) at the Medicaid reimbursement rate instead of 
the private payment rate in calculating spenddown.'' (48 FR 39960). As 
discussed in more detail below, we have analyzed the issue further and 
have concluded that it is inappropriate to project expenses at the 
private patient payment rate.
    First, the spenddown rules in sections 1902(a)(17) and 1902(f) of 
the Act provide for reducing income by ``incurred'' expenses (i.e., 
expenses for which the individual is liable). Under these provisions, 
the Secretary does not have to allow States to project any expenses 
since projection involves treating an expense as incurred before the 
liability arises. However, States are permitted to project expenses 
under the Secretary's general rulemaking authority in sections 1102 and 
1902(a)(4) of the Act because projection may be necessary for the 
efficient operation of the Medicaid program.
    The assumption underlying the projection of expenses is that 
liability for the expenses will subsequently arise since only the 
amounts for which the individual is ultimately liable can be used to 
reduce income. However, when the private patient payment rate is higher 
than the Medicaid rate and expenses are projected at the private 
payment rate, liability for the projected expenses may not actually 
arise. That is, once expenses are projected and spenddown liability is 
met, the provider may charge expenses only at the Medicaid rate as 
specified in Sec. 447.15. Thus, expenses projected at the private 
payment rate will actually be incurred at the Medicaid rate, and the 
State will need to reconcile the amounts accordingly. This 
reconciliation would make the projection at the private payment rate 
less efficient than if the projection were done initially at the 
Medicaid rate. Further, when expenses ultimately incurred at the 
Medicaid rate are insufficient to meet the person's spenddown 
liability, the determination of eligibility would have been in error. 
Only using the Medicaid rate to project expenses avoids these problems. 
Therefore, we are allowing projections only at the Medicaid 
reimbursement rate.
    Comment: A number of commenters argued that the use of the Medicaid 
reimbursement rate is arbitrary and generally less than the private 
rate.
    Response: States are required by section 1902(a)(13)(A) of the Act 
to pay for long-term care services using rates that are reasonable and 
adequate to meet the costs that efficiently and economically operated 
facilities must incur to provide care that conforms to applicable State 
and Federal laws, regulations, and quality and safety standards. We are 
clarifying in these final regulations at Secs. 435.831(g)(1), 
435.831(i), 436.831(g)(1), and 436.831(i) that States may project 
institutional expenses only at the Medicaid rate.
    Comment: Many commenters were concerned that if a State uses the 
Medicaid rate rather than the private rate in the spenddown process, it 
could take longer to reduce excess income using the usually lower 
Medicaid rate. Thus, it would delay eligibility. A number of commenters 
were concerned that certain individuals may have insufficient income to 
pay the private institutional rate, yet have income in excess of the 
Medicaid reimbursement rate.
    Response: As we proposed, an individual is eligible whenever 
incurred medical expenses, including projected institutional expenses, 
equal or exceed the individual's excess income over the State's income 
standard. (The amount of income exceeding the State's income standard 
is referred to as an individual's spenddown liability.) In some 
instances the amount of projected institutional expenses at the 
Medicaid rate may not be enough to meet the individual's spenddown 
liability. In that case, the individual remains ineligible. However, 
the individual will become eligible when actually incurred 
institutional expenses at the private rate reduce income enough to 
establish eligibility.
    As indicated in response to an earlier comment, the State Medicaid 
rate is the appropriate amount to use in projecting expenses because it 
reduces the need to reconcile projected and actually incurred expenses 
and helps to avoid erroneous determinations of eligibility. If an 
individual is not eligible because his or her spenddown liability 
exceeds institutional expenses projected over the budget period at the 
Medicaid rate, the State must determine eligibility based on deducting 
actually incurred institutional expenses or based on a combination of 
expenses actually incurred at the private payment rate and remaining 
expenses projected at the Medicaid rate. (If eligibility results and 
eligibility is retroactive to the first day of the month because the 
State provides coverage in whole months, expenses incurred at the 
private payment rate prior to the determination of eligibility remain 
valid. Ordinarily, a participating provider may charge an eligible 
individual no more than the Medicaid rate. However, these charges need 
not be adjusted since the charges were incurred at the private payment 
rate and since the charges were part of expenses needed to qualify the 
individual for Medicaid under the spenddown. Otherwise, the adjustment 
could result in the individual no longer being eligible for Medicaid 
during the month. Furthermore, unless required under State law or the 
terms of the State's provider agreement, Medicaid providers need not 
accept all Medicaid eligible individuals as Medicaid patients. Thus, 
during the period prior to the determination of Medicaid eligibility, 
the provider could be viewed as only accepting the patient as a private 
payment patient. Charges incurred after the determination of 
eligibility may not exceed the Medicaid rate.)

    Example: The individual is in the institution as of the first 
day of the month. The monthly spenddown liability is $1,500. The 
projected Medicaid rate for the month is $1,200 ($40 per day). The 
private rate is $1,800 per month ($60 per day). Since projected 
monthly expenses at the Medicaid rate ($1,200) are not sufficient to 
meet the spenddown liability ($1,500), the individual is not 
eligible. However, after remaining in the institution for 15 days 
the individual has actually incurred expenses of $900 at the private 
rate ($60  x  15 days). The projected institutional expenses at the 
Medicaid rate for the remaining days in the month are $600 ($40  x  
15 days). Thus, as of the 15th day of the month the combination of 
actually incurred bills ($900) plus projected expenses at the 
Medicaid rate ($600) equal the spenddown liability ($1,500) and the 
individual is eligible.
    Comment: Several commenters expressed concern that institutional 
providers that admit individuals at the private rate will be paid only 
at the usually lower Medicaid rate. This payment differential may have 
negative effects, both on providers and beneficiaries. Providers will 
receive less compensation under the proposal, and it may cause 
providers to admit fewer potential Medicaid patients.
    Response: It is not clear why the commenters believe that 
institutional providers will be paid less as a direct result of the 
policy to require States to project expenses at the Medicaid payment 
rate. Providers can charge patients at the private payment rate for 
expenses incurred prior to the determination of Medicaid eligibility 
when spenddown liability was unmet. The individual is responsible for 
the full amount of those charges. Providers do not have to accept the 
Medicaid rate until after the individual becomes eligible. Therefore, 
by using the lower Medicaid rate, there may be a delay in meeting 
spenddown. This delayed eligibility could actually entitle providers to 
the higher rate for a longer period.
    Comment: Some commenters objected to the exclusion of expenses 
incurred in an acute care facility when considering projection of 
institutional expenses in spenddown.
    Response: As noted in the NPRM, we excluded projection of expenses 
in acute care facilities because these expenses are not as recurring 
and predictable as are expenses in long-term care facilities. We 
believe that it is not as easy to anticipate the cost of a stay in a 
hospital or to predict when it may occur as it is to anticipate long-
term care costs. While acute care facility expenses may not be 
projected, they are valid medical expenses and may be deducted from 
excess income in spenddown when they actually occur.
    Comment: A number of commenters suggested that the regulations be 
revised to include actually incurred institutional expenses in addition 
to projected institutional expenses.
    Response: There was no intention on our part to exclude actually 
incurred institutional or other medical expenses from spenddown. 
Actually incurred (past) institutional expenses may be deducted along 
with projected (future) additional institutional expenses. In view of 
the comments indicating confusion on this point, we are revising 
paragraph (i) in both Secs. 435.831 and 436.831 of the final 
regulations to clarify this.
    Comment: Several commenters pointed out that eligibility begins not 
on the first day of institutionalization as indicated in the NPRM, but 
on the day on which an individual incurs medical expenses (including 
projected institutional expenses) equal to or exceeding the spenddown 
liability.
    Response: We generally agree with these comments. In States that 
elect partial month coverage, the first day of eligibility is the day 
that deduction of incurred medical expenses reduces income to the 
income standard. In States with full month coverage, eligibility begins 
on the first day of the month in which spenddown liability is met. 
However, a State may not begin eligibility later than the beginning of 
the budget (spenddown) period if the individual is subject to the post-
eligibility process and, under the post-eligibility process, would owe 
the provider more than the individual has in contributable income. This 
issue can occur when the State uses either a monthly budget period or a 
multi-month budget period. We are revising paragraph (i) (paragraph (e) 
in the NPRM) in both Secs. 435.831 and 436.831 of the regulations to 
reflect these points. (It should be noted that regardless of when 
eligibility begins in a budget period, expenses used to meet spenddown 
liability are not reimbursable under Medicaid. Since these expenses may 
be deductible from income in the post-eligibility process under the 
requirements of section 1902(r)(2) of the Act, States may need to 
reduce the otherwise reimbursable amount of provider charges by 
spenddown expenses to prevent the transfer of spenddown liabilities to 
the Medicaid program. The three examples in the response to the fifth 
comment below show in detail how the spenddown and post-eligibility 
policies interact in these cases.)
    We considered beginning eligibility in all cases on the first day 
of the budget period in which spenddown liability is met. However, this 
option could increase State administrative burdens without advantaging 
recipients in cases not covered by the exception in Secs. 435.831(i)(3) 
and 436.831(i)(3). Many States use eligibility and claims payment 
systems that are automated to pay claims beginning with the date of 
eligibility. These States would have to weed out bills from the first 
day of the budget period (up to 6 months before) that were used to meet 
spenddown liability to ensure that their automated systems do not pay 
those bills. Under these rules, no such weeding is required in States 
that begin eligibility with the day spenddown is met. (Note that these 
States would have to begin eligibility on the first day of the budget 
period in cases where the individual, in the post-eligibility process, 
would otherwise owe the provider more than he or she has in 
contributable income.) In States that provide coverage in whole months, 
weeding is required only from the first day of the month in which 
spenddown is met to the day spenddown is met. The failure of the 
individual to identify all of his or her incurred expenses before the 
spenddown determination is made can have an adverse effect on the date 
of the individual's eligibility. In these cases, States may, but are 
not required to reopen the spenddown determination and take the 
additional expenses into account. (For individuals in partial-month 
coverage States who are subject to the post-eligibility process for the 
partial month, income and income deductions (e.g., the personal needs 
allowance) should be prorated in the post-eligibility process to 
reflect the number of days of eligibility.)
    Comment: Some commenters advocated permitting States to project 
copayments, deductibles, and insurance premiums in addition to 
projecting institutional expenses. Other commenters argued that States 
should be permitted to deduct any projected medical expense that is 
predictable.
    Response: This provision is intended to cover only projection of 
long-term care institutional expenses, at the Medicaid reimbursement 
rate, as they are constant and predictable.
    We believe expenses mentioned in the comment such as deductibles or 
coinsurance, which are generally associated with the utilization and 
varying costs of other medical services, are difficult to predict. 
Because of the difficulty in determining what kinds of care, and what 
amounts, are predictable, we have limited the application of this 
provision to long-term care institutional expenses. Regardless of 
whether States implement this provision, they are still required to 
deduct actually incurred copayments, deductibles and insurance premiums 
in spenddown. We further discuss State flexibility concerning 
copayments and deductibles under the comments and responses on 
Provision E.
    Comment: Several commenters asked how a State would apply the 
projection of institutional expenses option if it also chooses to 
combine the retroactive and prospective budget periods under Provision 
B.
    Response: If the budget period includes part or all of the 3-month 
retroactive period, institutional and other medical expenses actually 
incurred during that portion of the retroactive period would be added 
to projected institutional expenses in the prospective period. An 
individual is eligible if the combined total of actually incurred plus 
projected medical expenses equals or exceeds his or her spenddown 
liability for the budget period.
    Comment: Commenters suggested that we revise the regulations to 
clarify that States may continue to use a 1-month budget period for 
institutional cases.
    Response: We agree that a clarification to the proposed regulations 
is needed on this point. In regard to medically needy eligibility, the 
proposed regulations at Secs. 435.831 and 436.831 specify that, ``[t]he 
agency must use a budget period of not more than 6 months to compute 
income.'' It is clear that any budget period between 1 and 6 months may 
be used. However, it was not clear in the proposed rule that a State 
may use more than one budget period.
    For example, under the proposed rule, a State may use a 6-month 
budget period for all medically needy individuals. Or, the State may 
use one budget period for institutionalized individuals in long-term 
care facilities (e.g., 1 month), and another for noninstitutionalized 
individuals. A third option would be for a State to use different 
budget periods for different groups of institutionalized individuals or 
use different budget periods for different groups of 
noninstitutionalized individuals.
    We believe States should have the flexibility to prescribe 
different spenddown periods to simplify the administration of their 
Medicaid programs. For example, for effective and efficient 
administration in cases where the individual is institutionalized, the 
State may wish to use the same time period for determining spenddown 
liability that the State uses to determine the Medicaid contribution 
toward the cost of care. Allowing States to prescribe the spenddown 
period in these cases permits States to align the budget period used 
for spenddown purposes with the budget period used in the post-
eligibility process. Thus, a State that uses a 6-month period for 
determining medically needy spenddown liability for 
noninstitutionalized individuals and a 1-month period for determining 
contributions toward the costs of care for the institutionalized may 
wish to begin new 1-month spenddown periods for medically needy 
recipients who become institutionalized. Alternatively, the State may 
wish to determine contributions toward the costs of care in 6-month 
periods to coincide with the 6-month medically needy spenddown period 
used. In either situation, administrative simplification could be 
achieved in some cases by using the same income calculation for both 
the determination of spenddown liability and the determination of the 
contribution toward the costs of care. However, if a State imposes 
different spenddown budget periods in different situations, the 
variations should have general application and not be applied on an 
individual-by-individual basis, and the variations should be based on 
reasonable standards. We are clarifying this point in the regulations 
by revising Secs. 435.831(a) and 436.831(a) to specify that States are 
not limited to the use of a single budget period, but must use budget 
periods of not more than 6 months to compute income.
    Comment: Several commenters asked for clarification on how 
projection at the Medicaid reimbursement rate will be used by a State 
when an individual enters an institution during the month rather than 
on the first day of the month.
    Response: As noted in the response to an earlier comment, actually 
incurred institutional and other medical expenses are added to 
projected institutional expenses during a budget period. If the 
combined total of these expenses exceeds an individual's spenddown 
liability, the individual is eligible on the day that liability is met 
(or on the first day of the month in full-month coverage States or, if 
the exception in Secs. 435.831(i)(3) and 436.831(i)(3) applies, on the 
first day of the budget period whether the State uses a monthly budget 
period or a multi-month budget period). Thus, depending on individual 
circumstances, an individual could be eligible on the first day of the 
budget period, on the first day of institutionalization occurring on or 
after the first day of the budget period, or at some other time during 
the budget period, as illustrated by the following examples.

    Example 1. The individual enters the institution on the 16th of 
the month. The monthly spenddown liability is $500. The projected 
institutional expenses at the Medicaid rate to the end of the month 
are $800 ($1,600 monthly rate). The individual has also incurred 
$600 in other medical expenses before the month of application, 
which remain the individual's current liability. Because the 
individual has $600 of other medical expenses, the spenddown is met 
on the first day of the monthly budget period (before the first day 
of institutionalization).
    Example 2. The facts are the same as in Example 1 except that 
the individual has no previously incurred medical expenses, only 
institutional expenses. In this case based on projection of expenses 
at the Medicaid rate, the individual may become eligible on the 
first day of institutionalization (the 16th of the month). (Although 
the State may be a full-month coverage State, retroactivity to the 
first day of the month would have no effect because the individual 
has no previously incurred medical expenses.)
    Example 3. The individual enters the institution on the 16th of 
the month. The monthly spenddown liability is $900. The projected 
institutional expenses at the Medicaid rate to the end of the month 
are $800 (one-half of the $1,600 monthly rate). The individual has 
no other expenses at this time. Based on projection of institutional 
expenses at the Medicaid rate, the individual does not meet 
spenddown. Thus, the individual will not be eligible on the 16th of 
the month. The individual may become eligible at a later time during 
the month should the amount of actually incurred and any remaining 
projected expenses (e.g., the amount after application of any 
reasonable limits established by the State) equal or exceed the 
spenddown liability. In such a case, eligibility would still be 
retroactive to the first day of the month in full-month coverage 
States. (When a combination of incurred and projected expenses is 
used, ``remaining projected expenses'' does not include any expenses 
that have already been incurred. Further, any expense used to meet 
spenddown liability is not reimbursable under Medicaid.)

    Comment: Commenters asked how income would be applied to the cost 
of care after an individual is determined eligible when the Medicaid 
rate is used instead of the private payment rate.
    Response: There is no change in the treatment of income once an 
individual is eligible for Medicaid. Regulations at 42 CFR 435.725, 
435.733, 435.832 and 436.832 specify how an eligible individual's 
income is to be applied to the cost of institutional care. For 
clarification, we provide some examples.

    Example 1: An individual's monthly income for post-eligibility 
purposes is $925. The monthly Medicaid rate is $1,000. The monthly 
spenddown liability is $600. The individual is in the institution as 
of the first day of the month. Since the projected monthly Medicaid 
rate ($1,000) exceeds the monthly spenddown liability ($600), the 
individual is considered eligible on the first of the month. Thus, 
the post-eligibility treatment of income rules apply. First, to 
account for the individual's responsibility for $600 in spenddown 
liability, the State should consider as a starting point for the 
amount it will pay to the institution only $400 of the $1,000 in 
institutional charges. However, from the individual's $925 in 
income, the State would deduct $630 ($30 protected for personal 
needs and $600 in unreimbursable medical expenses reflecting the 
individual's spenddown liability). (Income also would be protected 
for the maintenance of the individual's spouse and family under 
specified circumstances and, at the option of the State, for the 
maintenance of the individual's community home.) This leaves $295 in 
income that can be contributed toward the $400 in institutional 
charges taken into account in the post-eligibility process. Thus, of 
the original $1,000 bill, the Medicaid program would contribute $105 
($400--$295) and the individual would contribute $895 ($600 in 
spenddown liability plus $295 determined in the post-eligibility 
process).
    Example 2: The State uses a 3-month budget period. Eligibility 
is being determined for the last quarter of the year. The 
individual's monthly income for post-eligibility purposes is $910 
($2,730 for the quarter). The 3-month Medicaid rate is $3,720 ($40 
per day  x  31 days per month  x  3 months). The 3-month spenddown 
liability is $2,250 ($750 per month). The individual is in the 
institution as of the first day of the quarter (October 1). Since 
the projected Medicaid rate for the quarter ($3,720) exceeds the 
spenddown liability for the quarter ($2,250), the individual is 
eligible on the first day of the quarter. Thus, the post-eligibility 
treatment of income rules apply.
    First, the State would begin eligibility with, and apply the 
post-eligibility rules for, the same 3-month period used in the 
spenddown calculations. (The State may begin eligibility with the 
month or day spenddown liability is met, if later, and apply the 
post-eligibility rules for the shorter period only if the later date 
does not cause the individual's share of the institutional charges 
for the spenddown period to exceed the individual's contributable 
income for the period.) To account for the individual's 
responsibility for $2,250 in spenddown liability, the State would 
consider as a starting point only $1,470 of the $3,720 in 
institutional charges. However, from the individual's $2,730 in 
income, the State would deduct $2,340 ($90 protected for personal 
needs for the quarter and $2,250 in unreimbursable medical expenses 
reflecting the individual's spenddown liability). (Income also would 
be protected for any other allowable deductions.) This leaves $390 
in income that can be contributed toward the $1,470 in institutional 
charges taken into account in the post-eligibility process. Thus, of 
the original $3,720 in charges, the Medicaid program would 
contribute $1,080 ($1,470-$390) and the individual would contribute 
$2640 ($2,250 in spenddown liability plus $390 determined in the 
post-eligibility process).
    Example 3: An individual's monthly income for post-eligibility 
purposes is $1,820. The monthly Medicaid rate is $1,200 ($40 per 
day), and the private rate is $1,800 ($60 per day). The monthly 
spenddown liability is $1,500. The individual is in the institution 
as of the first day of the month and the State projects 
institutional expenses at the Medicaid rate.
    Since projected monthly expenses as of the first day of the 
month at the Medicaid rate ($1,200) are not sufficient to meet the 
spenddown liability ($1,500), the individual is not eligible. 
However, after remaining in the institution for 15 days the 
individual has actually incurred expenses of $900 at the private 
rate ($60  x  15 days). The projected institutional expenses at the 
Medicaid rate for the remaining days in the month are $600 ($40  x  
15 days). Thus, as of the 15th day of the month, the individual is 
eligible and the rules on post-eligibility treatment of income 
apply.
    The same post-eligibility procedure described in Examples 1 and 
2 apply to Example 3. Since the individual has $900 in actually 
incurred expenses and another $600 in projected expenses, the 
individual has met the spenddown liability of $1,500. However, 
because the individual remains liable for the $1,500 in 
institutional charges, reimbursable institutional expenses are 
reduced to zero. Therefore, no additional steps apply in the post-
eligibility process. The individual would be expected to use $1,500 
of his or her $1,820 in income to cover institutional charges, 
leaving the individual with $30 earmarked for personal needs and 
$290 for discretionary use.
    It should be noted that if the individual were to incur 
additional noninstitutional health care expenses during the period 
of Medicaid eligibility, the State, at its option, can have the 
individual contribute more of his or her discretionary income toward 
total health care costs included in the State plan. This can be done 
by substituting the noninstitutional expenses (for which the State 
would otherwise pay) for a corresponding amount of projected 
institutional costs in the spenddown calculation. The individual 
becomes liable for the noninstitutional expenses as part of his or 
her spenddown liability and has to contribute remaining 
discretionary income toward the replaced institutional costs under 
the post-eligibility calculation.
    For example, assume that the individual in this example incurs 
$200 in noninstitutional physical therapy expenses included in the 
State plan and the State substitutes those expenses for $200 of the 
$600 in projected institutional charges. The individual's spenddown 
liability of $1,500 is now composed of $900 in actual institutional 
charges, $400 in projected institutional charges, and $200 in 
physical therapy expenses. The otherwise reimbursable institutional 
charges of $1,500 are then reduced to $200 to offset the $1,300 in 
institutional charges that are deductible from income. Under the 
post-eligibility procedures, the individual would have $290 that can 
be contributed toward the cost of care ($1,820 total income, less 
$1,500 in unreimbursable health care expenses, less $30 projected 
for personal needs) and, thus, would be responsible for the $200 in 
reimbursable institutional charges. The individual is now 
responsible for $1,700 (instead of $1,500) in health care costs 
($1,300 in institutional charges used to meet spenddown liability, 
$200 in noninstitutional physical therapy expenses used to meet the 
spenddown liability, and $200 in institutional charges under the 
post-eligibility process). This leaves the individual with $90 in 
discretionary income instead of $290, with Medicaid paying $200 
less.

    Comment: Commenters requested clarification on how to apply the 
projection option when an individual leaves the institution before the 
end of the budget period: if eligibility is based on projected 
institutional expenses that are, in part, not actually incurred, how 
would a State handle this?
    Response: This would be treated by a State as a change of 
circumstances. Whenever a change of circumstances occurs during a 
budget period, a State is required by regulations at Sec. 435.916 to 
make a redetermination. The State should be alert for other changes in 
circumstances (e.g., changes in levels of institutional care) that 
could affect the projected amount of expenses and make any necessary 
redeterminations.
    Comment: Commenters asked that we clarify how projection of 
institutional expenses would operate when a third party is responsible 
for payment of a portion of an individual's institutional care. For 
example, if the first 60 days of institutionalization are paid by a 
third party, could those expenses be counted as a deduction from an 
individual's income under the spenddown process?
    Response: Except for the legislative change discussed in the note 
below, we have made no changes to the policy on treatment of expenses 
for which there is third party liability. Thus, in these final rules, 
as proposed (Secs. 435.831(d) and 436.831(d)), we continue existing 
policy that only incurred medical expenses that are not subject to 
payment by a third party may be deducted from income. In the above 
comment's example, expenses for the first 60 days of 
institutionalization, for which a third party is liable, are not 
allowable deductions under this provision or under existing 
regulations.

    Note: Under 1987 legislation, States are required to deduct 
health care expenses reimbursed under another State or local public 
program. This amendment will be dealt with more fully in separate 
regulations.

    Comment: Several commenters thought that the provision for 
projection of institutional expenses at the Medicaid rate would be 
difficult to administer. They added that if there are many changes in 
the Medicaid rate, States would be required to reassess eligibility.
    Response: As discussed in response to an earlier comment, we have 
concluded that the Medicaid rate is the only appropriate rate to use 
for projecting institutional expenses. If a State finds projecting at 
the Medicaid rate undesirable, the State may discontinue the practice 
of projecting expenses and instead, use expenses as they are actually 
incurred.
    Comment: Several commenters expressed the opinion that the 
potential economic impact was greater than what we estimated in the 
NPRM and the commenters believe that we should develop regulatory 
impact and/or regulatory flexibility analyses.
    Response: We reviewed our estimates in light of the commenters' 
criticisms and concluded that the impacts of the provision are not such 
as to require regulatory impact or regulatory flexibility analyses. We 
acknowledge that these provisions will result in some economic effects. 
However, we do not believe that the impacts will approach the amounts 
(e.g., $195 million for provision ``A'' alone) that some of the 
commenters estimated. Further discussion about our estimate is included 
in section V (Regulatory Impact Statement) of the preamble.

Provision B--Allow States To Combine Retroactive and Prospective 
Medically Needy Budget Periods

    Comment: Some commenters questioned the statutory basis for this 
revision. They asked whether the statute gives us the authority to make 
this option available to States.
    Response: We base our revisions to the medically needy budget 
period on section 1102 of the Act, which gives the Secretary general 
authority to adopt rules necessary for the efficient operation of the 
Medicaid program, and section 1902(a)(17) of the Act, which authorizes 
us to prescribe standards for determining eligibility for Medicaid 
consistent with the objectives of the program and is also the authority 
for the medically needy spenddown program. We also base our revisions 
on section 1902(a)(34) of the Act, which mandates and describes the 3-
month retroactive period for an individual who was (or upon application 
would have been) eligible for such medical assistance at the time care 
and service were furnished in the retroactive period. If a State uses a 
6-month budget period, when it looks at the eligibility of an 
individual had he or she applied at a particular time, it would look at 
6 months' worth of income. The regulation permits States to view 
section 1902(a)(34) of the Act in this manner, rather than considering 
the retroactive period as a special and discrete period.
    Comment: Some commenters opposed this provision because, in their 
view, combining the retroactive and prospective eligibility periods 
violates comparability requirements between the medically needy and 
categorically needy in section 1902(a)(17) of the Act, since the 
combined eligibility period affects only the medically needy.
    Response: We disagree with the commenters' views. We believe that 
comparability requirements are not violated because the Act contains 
different requirements for categorically and medically needy groups. 
This position was upheld by the Supreme Court in the Atkins v. Rivera 
decision (477 U.S. 154 (1986)). The Court found that the length of the 
medically needy budget period (or spenddown period) was not required by 
comparability to be the same as the budget period used for the 
categorically needy.
    Comment: Some commenters argued that combining the retroactive 
period with the prospective period results in a potentially longer 
budget period, which means that individuals must incur medical expenses 
over a longer period of time. Few providers are willing to extend 
credit over, for example, a 6-month period.
    Response: The proposed combined budget period can be no longer than 
the prospective period allowed under the existing requirements 
specified in Secs. 435.831 and 436.831. Presently, the prospective 
period may be no more than 6 months in length. The proposal, depending 
on State choices, may result in a combined budget period of 2 to 6 
months. Thus, the combined budget period can be no longer than the 
maximum (6 month) period permitted under existing regulations.
    Comment: Several commenters asked how States would apply this 
provision when a prospective budget period would not apply. For 
instance, if an individual dies after filing an application for 
Medicaid, and has unpaid medical bills in the 3-month period before the 
application was filed, there is no prospective period.
    Response: When there is no prospective period because the 
individual dies before the prospective period could begin, eligibility 
would be determined for the three month retroactive period only. This 
is consistent with our policy for terminating a wholly prospective 
budget period when a recipient dies. In cases where an individual dies 
after the prospective period has begun and the State has elected to 
combine the retroactive and prospective period, the combined period 
would terminate with the death of the recipient. In still other cases 
where the individual, though alive, seeks eligibility only for the 
retroactive period in a State that has elected to combine the 
retroactive and prospective period, the combined period would still be 
used to determine eligibility. States, under policies of general 
applicability, may treat the entire retroactive period as one budget 
period or divide the retroactive period into monthly budget periods. 
Any portion of the retroactive period may be added to the first 
prospective period for a combined period not to exceed 6 months.
    Comment: Some commenters suggested that we revise the regulations 
by clarifying that the combined budget period would not automatically 
include the entire 3-month retroactive period if the individual has no 
medical expenses in that period.
    Response: The commenter is correct that an individual may be 
determined eligible for Medicaid in the 3-month period before the month 
of application only if an individual received covered services under 
the State plan at any time during that period and would have been 
Medicaid eligible at the time services were received if he or she had 
applied. This is based on section 1902(a)(34) of the Act and 
regulations at Sec. 435.914. This principle is very clearly specified 
in Sec. 435.914. However, we have revised Secs. 435.831(a) and 
436.831(a) to clarify that the retroactive budget period begins no 
earlier than the first month in the 3-month retroactive period in which 
the individual received covered services.
    Comment: Many commenters opposed the revision to permit States to 
combine the retroactive period with the prospective period because 
States are permitted to consider an individual's income over a longer 
period, potentially 6 months, rather than just the 3 months of the 
retroactive period. Under the existing rule, an individual who was, for 
example, hospitalized and out of work for a 3-month period could apply 
for Medicaid after he or she had returned to work and have eligibility 
determined solely on the 3-month period before application when no 
income was received. If the individual met other eligibility 
requirements, that individual could have been eligible. Under the 
proposal, and these final rules, States have the option to consider 
income over an additional 3-month period extending from the date of 
application. When a longer budget period is used, greater income is 
available to the individual and, when measured against the State's 
income standard, that same individual might not be eligible for 
Medicaid.
    Response: Individuals may apply for Medicaid to cover high medical 
expenses that are incurred during a very short period of time, as in 
the above example, in the 3-month period before an application, or they 
may wish to cover expenses incurred over a longer period. We believe 
that it is appropriate to consider available income over a longer 
period than just a period when acute illness may affect a person's 
employment or other income. Therefore, we believe the option for States 
to select the use of a combined budget period is appropriate.
    Comment: Several commenters asked why we are making these revisions 
when they know of no evidence that individuals abuse the current system 
by manipulating the timing of an application for Medicaid to suit their 
needs.
    Response: We agree that it is difficult to document the extent to 
which individuals may be abusing the existing system. The potential for 
abuse exists, however, and we believe States should have the 
flexibility to control it if it occurs.
    Comment: A number of commenters advocated giving individuals the 
option to choose the start of the budget period, rather than giving the 
State that option. The commenters were concerned that a State might 
begin the budget period in the retroactive period, counting income 
received in such period, when the individual may have had no covered 
expenses in the period. The commenters believe that the individual 
should have the option of restricting the budget period to the first 
month in the retroactive period in which covered services were 
received.
    Response: As discussed in response to an earlier comment, we have 
revised Secs. 435.831(a) and 436.831(a) to clarify that the retroactive 
period begins no earlier than the first month in the period in which 
covered services were received. Therefore, there is no need for the 
individual to elect such a restriction.
    Comment: Some commenters believed that the current method of 
separating the retroactive period from the prospective period is easier 
to administer than the proposed method of combining the two periods.
    Response: Since this provision is optional, States may select 
whichever method is easier for them to administer.
    Comment: Some commenters suggested that we require the use of a 
monthly budget period instead of a flexible period from 1 to 6 months.
    Response: Existing regulations, Secs. 435.831 and 436.831, permit 
States to select a prospective budget period extending from 1 to 6 
months. Administrative flexibility for States was a major consideration 
in proposing revisions to the budget period. It is our view that 
requiring the use of a monthly budget period not only restricts State 
flexibility from that currently existing, but requires that a State 
spend more time evaluating eligibility. Of course, States that prefer 
the use of a 1-month period may continue to use it. Therefore, we have 
decided to retain the flexible budget period as proposed.

Provision C--Permit States To Exclude From Incurred Medical Expenses 
Those Bills for Services Furnished More Than Three Months Before a 
Medicaid Application

    Comment: Several commenters noted that the Act does not place a 
limit on the age of bills for medical expenses to be deducted from 
income in the spenddown process, nor does it authorize us to place 
limits on the age of bills.
    Response: We agree with the commenters with respect to States that 
elect to use the eligibility criteria prescribed in section 1902(f) of 
the Act. Under that provision, States are required to deduct incurred 
expenses without regard to when the expenses were incurred. However, as 
noted in the NPRM, section 1902(a)(17) of the Act gives us the 
authority to prescribe the extent to which costs of medical care may be 
deducted from income when determining Medicaid eligibility. We believe 
this authority permits us to place limits on the age of medical bills 
to be applied to the spenddown process in States that do not elect to 
use the more restrictive eligibility criteria permitted under section 
1902(f) of the Act. We have decided to use the authority to set limits 
on the bills which must be taken into account by authorizing States to 
adopt certain limits on which bills will be taken into account.
    Comment: A few commenters opposed this provision because it appears 
to penalize individuals when providers do not promptly furnish bills. 
These commenters suggested that expenses cannot be deducted from income 
until the provider's bill is received. One commenter suggested that we 
revise the regulations to specify that the age of the expense is 
measured by the billing date rather than the date the service was 
furnished.
    Response: We believe that it would be reasonable for States to use 
the date the service was furnished if the individual incurred (that is, 
became liable for) the expense at that time. We do not believe that 
individuals will be penalized for delays in billing by providers 
because other documentation could be furnished to verify that expenses 
were incurred. For example, a State could verify an expense by 
telephoning the provider. A State may presume that liability arises 
when services are rendered unless evidence is presented to the 
contrary. In such a case, the State should determine when the liability 
arose and use the resulting date.
    We are persuaded, however, by numerous comments on this issue that 
a rigid 3-month limit on deductible medical bills would restrict rather 
than enhance State flexibility. Note that the existing regulations and 
interpretations specify that States must deduct all medical expenses 
incurred before application, no matter how far back in time the 
expenses are incurred if they have not already been used in another 
budget period, if the individual is still liable for them, or if the 
individual has paid for them in the current budget period. We are 
modifying Secs. 435.831(d)(5) and 436.831(d)(5) of the proposed 
regulations, redesignated in these final regulations as 
Secs. 435.831(g)(2) and 436.831(g)(2), to specify that in determining 
deductible incurred medical expenses, States have the option to include 
(or exclude) expenses incurred earlier than the third month before the 
month of application. The period chosen by the State must be specified 
in the State plan. We are also clarifying in new Secs. 435.831 (f)(2) 
and (f)(4) and 436.831 (f)(2) and (f)(4) that expenses must be deducted 
in any spenddown calculation for the retroactive eligibility period if 
the expenses were incurred in the retroactive period, were a current 
liability of the individual in the period for which the spenddown 
calculation is made, and had not been previously deducted from income 
in establishing Medicaid eligibility.
    Comment: Some commenters objected to this provision on the basis 
that it is not any easier for States to administer than the existing 
provisions. Under the proposal, States must continue to assure that 
bills are applied no more than once in meeting the spenddown liability, 
and that a bill remains the current liability of an individual.
    Response: As we mentioned before, since this revision is optional, 
States may choose either to use it or retain the existing method. There 
are certain advantages, however, to applying a limit to the age of 
medical bills. Limiting bills to expenses incurred no more than 3 
months before the month of application (or the age established by the 
State, as discussed earlier) reduces the burden on the State of proving 
that a bill is no longer an individual's current liability. Bills older 
than the State set age limit would not generally be applied in 
spenddown whether or not an individual remains liable for the bill.
    Comment: Commenters pointed out that States often find that it 
takes more than 3 months to determine the extent of liability when a 
third party is responsible for a medical bill. The commenters suggested 
that these bills be dated from the point at which liability is 
determined.
    Response: We acknowledge that there may be a delay in determining 
the extent of the individual's liability when a third party may be 
liable for some or all of the expenses. However, we do not agree that 
the State should change how it determines the age of a bill as a 
result. As we explained in response to an earlier comment, the age of a 
bill is measured from the date the expense is incurred--that is, the 
date the liability arises. (We have clarified in new Secs. 435.831(d) 
and 436.831(d) that an expense is incurred on the date liability for 
the expense arises.) The date of the determination of the extent of the 
individual's liability is treated as the date the individual's 
liability begins. That is the date from which the age of the 
individual's expenses is measured. We see no reason why the State 
should use any other date.
    When a third party may be liable for part or all of an expense, any 
portion of the expense that can be attributed to the individual with 
reasonable certainty should be treated as the individual's liability 
and included in the spenddown calculation pending the final 
determination of third party liability. When there is a reasonable 
question of the extent of the third party's liability, the State may, 
but is not required to, include the questionable portion in the 
spenddown calculation on an interim basis pending the final 
determination of liability. In either case, the date the individual 
incurs the expense in question is the date of the determination that 
there is no third party liability for the expense or, if earlier, the 
date that the State elects to include the questionable amount in the 
spenddown calculation pending the determination of third party 
liability. When there is a determination of third party liability for 
the expense, the amount in question is excluded (retroactively, if 
necessary) in spenddown calculations.
    Comment: Commenters suggested that we use the phrase, ``3 months 
before the month of application'', rather than ``3 months before the 
date of application''.
    Response: We agree with the commenters as this is a more flexible 
approach. Therefore, we are revising proposed Secs. 435.831(d)(5) and 
436.831(d)(5), designated as Secs. 435.831(g)(2) and 436.831(g)(2) in 
the final rule, to specify that States may include bills incurred 
earlier than 3 months before the month of application.
    Comment: Some commenters thought that the use of a 3-month period 
is arbitrary.
    Response: Under section 1902(a)(17) of the Act, we have authority 
to prescribe the extent to which costs of medical care may be deducted 
from income. We believe that permitting States to limit the 
applicability of medical expenses to the 3-month period before the 
month in which a Medicaid application is filed or to include earlier 
expenses is reasonable in that it affords States some administrative 
relief, while recognizing that individuals may be liable for old bills. 
It also corresponds to the 3-month period in section 1902(a)(34) of the 
Act and, therefore, is not arbitrary. We believe that Congress' 
decision to restrict the retroactivity of eligibility to 3 months 
provides a suitable guideline for determining how far back States 
should be required to look in accounting for incurred health care 
expenses since both cases reflect efforts to provide a measure of 
coverage for services received before application is made for medical 
assistance.
    Comment: Commenters were concerned that this provision penalizes 
individuals who, in trying to pay their own medical bills, may not 
apply for Medicaid until they are far behind in payments, often more 
than 3 months after the bills were incurred. Commenters suggested that 
we revise the regulations so that an individual may deduct an entire 
bill older than 3 months if the individual verifies that he or she is 
still liable for the bill.
    Response: By permitting an individual who actually makes payment on 
old bills to deduct the amount paid toward the spenddown, the 
regulation addresses an objective of section 1902(a)(17) of the Act for 
the medically needy. That objective is that an individual's income for 
purposes of Medicaid eligibility should be reduced to cover the costs 
of his or her uncovered medical care since if the individual spends 
this income on medical care, he or she will not have that income 
available for maintenance needs. However, if the individual does not 
pay the old bills, the individual's income need not be reduced by the 
amount of a liability which the individual may never satisfy. To give 
an individual a one shot lifetime opportunity to reduce income for each 
unpaid bill encourages individuals to forgo making payment on their 
liability for medical care. The regulation permits States to minimize 
this disincentive to paying old bills.
    Comment: Some commenters (State agencies) proposed that medical 
expenses which may be used to meet the spenddown be limited to those 
expenses that are incurred within the current budget period.
    Response: It would be unnecessarily harsh to limit income 
deductions to newly incurred expenses, especially when an expense is 
incurred shortly before the current budget period. We believe the 
requirement to deduct income for expenses incurred in the retroactive 
eligibility period is a reasonable compromise between deducting income 
for all old expenses and deducting income only for newly incurred 
expenses. Therefore, we did not adopt the commenter's suggestion.
    Comment: Commenters questioned our rationale for the revisions, 
stating that they knew of no evidence that individuals abuse the 
present system.
    Response: Concern about abuse of the existing spenddown methods was 
not the motivation behind these proposals. The primary objectives of 
these revisions were to give States greater flexibility to reasonably 
administer their Medicaid programs and to ensure that eligibility was 
appropriately based on need. In our communications with States, we were 
convinced that certain spenddown requirements, although originally well 
intended, had unintended results. Deduction of older medical bills, for 
example, was difficult for States to administer, as noted in the NPRM, 
because we required that States verify whether an individual remained 
liable for an old bill. In addition, because bills incurred before the 
eligibility period were deductible only if they were unpaid, as 
specified under prior policy, an incentive was created for individuals 
not to pay their bills. The revisions, therefore, are intended to 
alleviate administrative problems for States and, by only requiring the 
deduction of payments on older bills, create an incentive for 
individuals to pay older bills.
    Comment: Commenters suggested that any incurred medical expenses 
not deducted from income during a budget period should be carried over 
to the next budget period. They suggested that the expenses be carried 
forward whether the spenddown liability was met (that is, an individual 
became eligible) or not met (that is, expenses were insufficient to 
meet the spenddown requirement) during the first budget period.
    Response: We agree, in part, with the commenters. When an 
individual's incurred expenses exceed his or her spenddown liability 
(that is, the person becomes eligible without deducting all of the 
expenses) and when the excess expenses are unpaid, the excess expenses 
are deductible from excess income in subsequent budget periods, but 
only under certain conditions. HCFA requires the carryover of excess 
(that is, unused) expenses to account more fully for incurred 
unreimbursable expenses in determining whether the Medicaid income 
standard is met. If States were not required to carry over excess 
expenses, the spenddown provision would be practically meaningless when 
an individual with a small monthly amount of excess income incurs a 
large medical expense. In such a case, the individual could only apply 
the small amount of excess income in 1 month based on that expense. We 
have concluded that such a result would not be in keeping with the 
objective of the spenddown provision to account for unreimbursable 
expenses incurred for necessary care recognized under State law. 
Therefore, this final rule provides that medical expenses not deducted 
from income during one budget period must be carried over and deducted 
in the succeeding budget periods under the conditions described below.
    Proposed Secs. 435.831(d)(6) and 436.831(d)(6) (designated as 
Secs. 435.831(f)(3) and 436.831(f)(3) in the final rule) provide that 
medical expenses not deducted from income during one budget period must 
be carried over and deducted in the next budget period. These proposed 
rules were applicable, however, only when the individual was eligible 
in the first budget period after meeting the spenddown liability. We 
are revising what are now Secs. 435.831(f)(3) and 436.831(f)(3) to 
clarify when excess, unpaid expenses are deductible in subsequent 
budget periods. In order for excess expenses to be carried over under 
this provision, eligibility must be established for the budget period 
in which the excess expenses were unused and in each subsequent budget 
period in which any part of the excess remains unused; in addition, the 
spenddown provision must apply in each such subsequent period. (To 
relieve States of the burden of carrying over such excess expenses 
indefinitely, specific excess amounts need not be carried over beyond 
the first subsequent period in which there is no eligibility or no 
excess income.)
    It should be noted that the ``carryover'' concept is used in these 
regulations to describe the ongoing deduction of unused and unpaid 
expenses, as contrasted to the deduction of expenses based on their 
being incurred in the retroactive eligibility period or, at State 
option, earlier. We make a distinction between the two kinds of 
expenses because of the option for States to disregard old expenses 
(i.e., expenses incurred prior to the retroactive eligibility period). 
One of the reasons for allowing old expenses to be disregarded is the 
administrative difficulty States may encounter in verifying and 
documenting whether liability for the expense continues. Once an old, 
or current, expense is initially verified and documented, it should not 
be unduly difficult to determine the extent of continuing liability 
from one budget period to another as long as the agency is maintaining 
contact with the individual. For this reason, we require that the 
unused, unpaid portion of such expenses be carried over from one budget 
period to the next, but only for as long as the individual is eligible 
in each such period (ensuring continuing contact with the agency). On 
this basis, we are providing that deductible expenses incurred before 
the month of application may become carryover expenses if they remain 
unused and unpaid after eligibility is established. The limit a State 
may place on the deductibility of expenses incurred before the 
retroactive eligibility period does not affect how long expenses remain 
deductible under the carryover provision. The age limit that can be 
placed on old expenses relates to how long before the retroactive 
eligibility period expenses can be incurred and be deductible rather 
than to how long they remain deductible thereafter.
    Comment: Commenters suggested that we revise the regulations so 
that both paid and unpaid bills may be carried over from one budget 
period to the next.
    Response: We do not agree with the views of the commenters on this 
point. The spenddown process is based on the principle that an 
individual's actual income is reduced by incurred medical expenses 
(that is, expenses for which he or she is liable) to the point at which 
his or her income is equal to or below the State's medically needy 
income standard. Once the individual is determined eligible for 
Medicaid, the State Medicaid program pays medical expenses covered 
under its State plan that were not used to satisfy the spenddown. The 
individual remains liable for payment of incurred bills that he or she 
deducted in the spenddown process.
    When an individual pays a bill, his or her income (or resources) is 
reduced, thus reducing the countable amount of remaining income (or 
resources) in determining whether the individual is eligible (or 
remains eligible) for medical assistance. Therefore, there is less 
justification for deducting the payment in a later spenddown 
calculation. In contrast, an enforceable unpaid bill remains a current 
claim on the individual's income or resources that should be taken into 
account when the payment is made.
    Comment: Commenters suggested that individuals should be able to 
carry over not only noncovered medical expenses from one budget period 
to the next, as we proposed in Secs. 435.831(d)(6) and 436.831(d)(6), 
but also expenses covered under the State plan.
    Response: When an individual is determined eligible, with the 
exception of bills deducted in spenddown, medically necessary expenses 
covered under the State plan are normally paid by Medicaid. Hence, 
there would be no covered expenses to carry over. In a State that 
places payment limits on the amount, duration or scope of services 
included in the State plan, however, bills for services that exceed the 
State's limits are not paid by Medicaid, even though the services are 
included in the State plan. In this situation, there would be 
unreimbursed noncovered expenses. Expenses exceeding amount, duration 
or scope limits (like unpaid, unused old bills the State elects to 
deduct) must be carried over and deducted from income in the next 
budget period when an individual is eligible in the immediately 
preceding budget period (or periods).
    Comment: Some commenters suggested that we define current payments 
on old bills to include only those bills being repaid on a negotiated 
payment schedule.
    Response: We have defined ``current payments'' in 
Secs. 435.831(f)(5) and 436.831(f)(5) to mean only those payments made 
in the current budget period. Our intent in proposing that current 
payments on old bills be counted as deductions from income was to 
provide an incentive for individuals to pay those old bills, no matter 
how small the payments might be. We believe that to count only payments 
made on a negotiated payment schedule would act as a disincentive for 
individuals to repay the old bills not subject to a payment schedule.
    Comment: Some commenters objected to this provision on the basis 
that placing limits on the age of bills which can be deducted in 
spenddown acts as a disincentive for individuals to pay old bills.
    Response: We do not believe there is a greater disincentive for 
individuals to pay old bills under the proposal than under the policy 
in existence at the time of the proposed rule or under the existing 
method. In fact, the policy in existence at the time of the proposed 
rule specified that bills incurred before the eligibility period could 
be deducted from income only if they were unpaid. Current policy allows 
current payments and unpaid bills to be deducted. This appears to be a 
direct incentive for individuals not to pay old bills. Therefore, we 
believe no revisions are necessary with regard to this comment.

Provision D--Permit States To Apply Incurred Medical Expenses to the 
Spenddown Period in Chronological Order

    Comment: Commenters argued that the Act does not authorize us to 
revise regulations to permit States to deduct medical expenses in 
chronological order.
    Response: As noted earlier, we have authority under section 
1902(a)(17) of the Act to prescribe the extent to which medical costs 
may be deducted from income for the medically needy. This covers the 
order in which incurred medical expenses will be counted.
    Comment: Some commenters proposed that this provision be extended 
to States using more restrictive eligibility criteria than SSI, under 
section 1902(f) of the Act.
    Response: We believe it is useful to clarify our earlier, and 
perhaps overly broad, statement in the NPRM that this provision cannot 
be applied to the eligibility process as specified in section 1902(f) 
of the Act.
    Section 1902(f) provides for the deduction of ``incurred expenses 
for medical care as recognized under State law'' in determining 
eligibility of certain individuals. As a consequence, that deduction 
process must allow for consideration of expenses recognized under State 
law. Section 1902(a)(17), on which these medically needy regulations 
are largely based, provides for taking into account ``except to the 
extent prescribed by the Secretary, the costs * * * incurred for 
medical care or for any type of remedial care recognized under State 
law'' (emphasis supplied). Thus, while eligibility of the medically 
needy generally can be determined using the provisions of these 
regulations, the eligibility of those medically needy in the States 
that use the more restrictive eligibility criteria permitted by section 
1902(f) must be determined using expenses for medical care recognized 
under State law (including any limitations enacted under State law on 
the deductible amount of such expenses from income). However, there is 
nothing in section 1902(f) that precludes consideration of medical 
costs in chronological order for purposes of the spenddown specified in 
section 1902(f). Therefore, we are extending this option to States that 
determine eligibility under the criteria in section 1902(f).
    Comment: Some commenters objected to this provision because 
insurance premiums, copayments, and deductibles and other cost sharing 
amounts deducted in chronological order may not count toward spenddown 
if there are a large number of other medical bills incurred early in 
the budget period. The commenters believe that these items should be 
deducted no matter when they are incurred.
    Response: Many States find it administratively difficult to deduct 
incurred expenses out of the sequence in which the expenses are 
submitted to the agency or the sequence in which the services are 
provided. Because one of the objectives of the Medicaid program is the 
use of efficient methods of administration and since the sequential 
deduction of incurred expenses is one such method, we consider it 
appropriate to permit States to deduct expenses from income in 
chronological order.
    Comment: Some commenters suggested that the proposal is inequitable 
because individuals with identical medical bills during a budget 
period, when deducted in chronological order, can have different 
eligibility determinations.
    Response: First, we point out that two individuals in truly 
identical situations, meaning that the individuals have the same 
medical bills incurred in the same order, would be treated identically 
under the rule. In other cases, the individuals are not identical. They 
may have the same amount of medical expenses but the bills are not 
identical. In these cases, assuming other eligibility factors are met 
and the bills are sufficient to meet spenddown liability, both 
individuals will be eligible for Medicaid under this provision. The 
difference is in which bills are paid once eligibility begins. For 
example, if one individual incurs mostly covered services early in the 
spenddown period, any remaining bills for noncovered services left over 
after the spenddown liability is met would not be paid by the State 
because they are not covered in the State plan. Conversely, if a second 
individual incurring mostly noncovered medical expenses early in the 
spenddown period is determined eligible, any bills for covered services 
remaining after meeting the spenddown liability would be paid by the 
State. We acknowledge that this result may disadvantage the first 
individual. However, we believe that in the interest of efficient 
operation of the programs, States should be allowed to deduct expenses 
in chronological order if they wish to do so.
    Comment: Some commenters were concerned that under this proposal an 
individual's eligibility or ineligibility depends on when a doctor 
mails the bills or on the arbitrary order in which an eligibility 
worker itemizes medical bills.
    Response: Eligibility does not depend on when a doctor mails bills 
but on the date the service was furnished; an individual can document 
this date without a bill. In addition, eligibility workers are not 
allowed to choose an arbitrary order but must itemize bills in the 
manner prescribed by regulations.
    Comment: Commenters suggested that the result of this proposed 
provision may be that individuals will defer medical care for services 
covered under the State plan if they know that the State will pay for 
those expenses once they are eligible for Medicaid.
    Response: We have no evidence that indicates that individuals will 
manipulate the proposed system as suggested by the commenters. On the 
contrary, we believe that medical needs will continue to determine 
utilization of medical services.
    Comment: Commenters requested that we clarify the proposed 
regulations by specifying that there is no change in the existing 
policy that medical expenses which will satisfy the spenddown include 
those expenses incurred by the individual, the family or financially 
responsible relatives.
    Response: This regulation does not change the existing regulations 
requiring the use of family members' medical expenses in the spenddown 
(except by recodifying at Secs. 435.831(e) and 436.831(e) in the final 
rule, to take into account other changes made by this regulation). By 
making these changes, we do not mean to reaffirm the validity of this 
facet of the existing regulations in cases where the courts have set it 
aside. Numerous Courts of Appeals decisions have not upheld the 
underlying assumption of the existing regulations in the context of the 
standard filing unit cases. These courts' interpretation of section 
1902(a)(17)(D) preclude States from counting medical expenses of family 
members (other than a spouse for a spouse and parents for their minor 
children). Nevertheless, the United States District Court for the 
Northern District of California has held that States in the Ninth 
Circuit must continue to deduct the medical expenses of family members 
in determining the spenddown, as long as the present regulations remain 
extant. States outside of the Ninth Circuit should assess the 
continuing validity of the existing regulations for spenddown purposes 
in light of any applicable court order invalidating the use of the AFDC 
standard filing unit rule for purposes of Medicaid eligibility. The 
existing regulations would continue to apply to the extent that they do 
not explicitly conflict with the court order.
    Comment: We received a suggestion that States establish a limit on 
deduction of projected medical expenses incurred by ineligible family 
members that are not covered under the State plan. If actual bills 
exceed this limit, the State could credit the excess amount in the 
current or the next spenddown period.
    Response: This suggestion goes beyond the scope of the proposal.

Provision E--Allow States to Limit Deductible Medical Expenses to 
Services Covered Under the State Plan

    Comment: Commenters questioned our legal authority for making this 
proposal. They believe that the Act does not authorize us to permit 
States to exclude bills for services that are not paid for under the 
State plan.
    A large number of commenters were not in favor of this proposal 
because, in their view, it might have a negative impact on individuals, 
since many individuals require noncovered services. A variety of 
concerns were expressed. Some commenters were concerned that this 
proposal would delay eligibility for some individuals if noncovered 
medical expenses could not be deducted. Other commenters predicted that 
the proposal would cause individuals to pay a greater share of their 
medical bills.
    Response: Except in States that determine eligibility under section 
1902(f) of the Act, we believe adequate legal authority exists in 
section 1902(a)(17) of the Act, which delegates to the Secretary of HHS 
the authority to prescribe the extent to which incurred expenses will 
be taken into account in determining eligibility for Medicaid under the 
medically needy option. However, we have decided to withdraw the option 
and continue the current policy (with respect to expenses incurred in 
the current budget period and the 3-month retroactive eligibility 
period) because the option would have a potentially severe negative 
impact on applicants and recipients. We now believe that offering 
States this administrative option would reduce a person's Medicaid 
eligibility or the amount of medical assistance provided. Further, 
Congress passed legislation in 1988 amending the Social Security Act 
(section 1902(r)(1)) to override a similar option we provided States in 
the post-eligibility process. We believe it would be inconsistent with 
the direction taken by Congress in the post-eligibility process to 
allow a similar limitation in the spenddown process.
    Comment: Some commenters predicted that this proposed provision 
would result in increased Medicaid expenditures because individuals 
will choose to obtain more costly services known to be covered under 
the Medicaid plan, rather than less costly, possibly noncovered 
services. Further, they predict that individuals will wait to seek 
medical treatment if those expenses are not deductible in the spenddown 
process instead of getting early treatment for a medical condition.
    Response: While we have withdrawn this option, studies of the 
effects of cost-sharing on utilization and health status have been 
inconclusive. Therefore, it is not clear that patterns of utilization 
of medical care would have been significantly altered if we had adopted 
this option and States had implemented it.
    Comment: Some commenters questioned why the NPRM did not offer this 
option to States using more restrictive eligibility criteria than SSI, 
under section 1902(f) of the Act.
    Response: As discussed earlier, this option has been dropped 
altogether.
    Comment: A commenter suggested that, for purposes of the spenddown 
provision, we define the term ``medical expenses included in the plan'' 
as all services provided to categorically needy individuals.
    Response: We have withdrawn the option for States to limit 
deductible medical expenses to those for services included in the State 
plan. Therefore, we have not considered the commenter's suggestion in 
the context of that option. (States are required to continue deducting 
nonreimbursable expenses for premiums, deductibles, and coinsurance and 
for necessary care that is recognized under State law, whether or not 
such expenses are included in the State plan.)
    However, while States are required to deduct expenses for services 
not included in the State plan, States may continue to place reasonable 
limits on the deductible amount. Therefore, we considered the 
commenter's suggestion in this context, and we disagree with the 
suggestion. (This issue does not arise in States that determine 
eligibility under section 1902(f) of the Act because the inclusion or 
exclusion of services under State plans is not a factor in the 
spenddown process in these States.) States may provide a different 
range of services for the categorically needy than they do for the 
medically needy population. The spenddown procedures in Provisions A 
through D apply to medically needy individuals and apply both for AFDC-
related cases and for the aged, blind, and disabled. Individuals 
eligible as medically needy are eligible for only those specific 
services that a State has chosen to provide to its medically needy 
population. If ``included in the State plan'' referred to services for 
the categorically needy, as the commenter suggested, the State would be 
unable to place reasonable limits on the deductible amount of expenses 
in the spenddown process, which only applies to the medically needy in 
States that are not determining eligibility under section 1902(f). We 
find no compelling program reason for such a restriction. Therefore, we 
believe that it is appropriate to allow each State to define ``included 
services'' for purposes of applying ``reasonable limits'' to mean 
services a State provides to medically needy individuals (rather than 
only to categorically needy individuals). In this way, the State may 
place reasonable limits on the deductible amounts of expenses for the 
medically needy except those included in the State plan. (It should be 
noted that ``reasonable limits'' refers to the amount, rather than the 
type, of expense that is deductible. For example, States may limit the 
amount, but not the type, of health insurance premiums that are 
deductible.)
    Comment: Commenters predicted that this provision will be error 
prone in practice, as eligibility workers and providers will need to 
distinguish correctly between covered and noncovered services to deduct 
only covered services during spenddown accurately.
    Response: We withdrew the option because of its negative impact on 
applicants and recipients.
    Comment: Several States disagreed with our proposal that States may 
not place amount, duration or scope limits on covered services in the 
spenddown process, even though the State applies those limits when 
paying for services furnished to Medicaid-eligible individuals. These 
commenters contended that their authority to place amount, duration and 
scope limits on services they pay for under Medicaid is an extension of 
their authority to decide which services they will cover under the 
State plan. They believe that this is an unnecessary restriction on the 
right to control their Medicaid program.
    Response: We do not agree with the commenters on this point. Under 
existing regulations, which have not been revised, States may place 
reasonable limits on the deductible amount of expenses not included in 
the State plan but may not limit the deduction of expenses included in 
the State plan. (Expenses ``included'' in the State plan are those for 
services which are listed in the State plan, whether or not Medicaid 
will pay for them. By contrast, ``covered'' expenses are a subset of 
``included'' expenses. Covered expenses are expenses for services for 
which Medicaid will pay if furnished to the individual by a Medicaid 
provider. Expenses incurred for services which are for care which 
exceed State plan limits on amount, duration, and scope are not 
considered to be covered expenses.) The basic requirement in section 
1902(a)(17) is that incurred expenses recognized under State law be 
taken into account in the spenddown process. We believe that this is in 
keeping with the thrust of this requirement to require the deduction 
from income of expenses recognized under State law when the State has 
also included the expenses in the State plan, even though the State 
limits the amount of such expenses it pays for. We, therefore, allow 
States to limit the deductions only for incurred expenses recognized 
under State law that are not included in the State plan.
    As we explained in response to a comment under Provision A 
concerning projecting institutional expenses, we find adequate 
authority for this policy in existing sections of the Act. The 
Secretary has authority under section 1902(a)(17) of the Act to 
prescribe the extent to which costs of medical care may be deducted 
from income in medically needy programs.
    Comment: One State pointed out that it is reasonable to require 
that States deduct insurance premiums, as this encourages individuals 
to continue insurance coverage. The commenter argued that it is not 
logical, however, for us to require that States deduct coinsurance and 
deductibles on services that are not covered under the plan. An 
individual still benefits from the insurance coverage because he or she 
must pay only the deductible or coinsurance rather than 100 percent of 
the charge.
    Response: As we explained in the response to the first comment in 
this section, Congress passed legislation on the post-eligibility 
process requiring the deduction of expenses for deductibles and 
coinsurance in the post-eligibility process. It would be inconsistent 
with the direction taken by Congress to allow States to exclude these 
expenses in the spenddown process altogether. Therefore, States are 
required to deduct a reasonable amount of these expenses from income. 
We rely on the authority in section 1902(a)(17) of the Act to allow 
States to place reasonable limits on the deductible amounts of these 
cost-sharing expenses even though no such limits are allowable in the 
post eligibility process.

IV. Summary of Changes to the Regulations

    In this final rule, we are making the revisions proposed in the 
NPRM with the following modifications based on our review and analysis 
of public comments.
    1. We are revising proposed Secs. 435.831(e)(1) (designated as 
Sec. 435.831(g)(1) in this final rule) and Sec. 436.831(e)(1) 
(designated as Sec. 436.831(g)(1) in this final rule) to clarify that 
incurred medical expenses may include projected institutional expenses 
at the Medicaid reimbursement rate. We are not revising 
Sec. 435.732(c)(3) (redesignated as Sec. 435.121(f)(1)(iii)) to make 
the same clarification since that section applies to States with more 
restrictive criteria than SSI.
    2. We are also clarifying in Secs. 435.831(i) and 436.831(i) 
(proposed Secs. 435.831(e)(1) and 436.831(e)(1)) that an 
institutionalized individual is eligible when incurred medical 
expenses, including projected institutional expenses, reduce an 
individual's income to the income standard, rather than on the first 
day of institutionalization as indicated in the NPRM.
    3. We are revising Secs. 435.831(a) and 436.831(a) to clarify that 
an agency is not limited to the use of a single budget period to 
compute income. However, an agency must use budget periods of not more 
than 6 months to compute income.
    4. In addition to other changes noted, we are revising paragraph 
(d) as proposed in Secs. 435.831 and 436.831 by transferring most of 
its contents to new paragraphs (e), (f) and (g) and cross-referring to 
those sections.
    a. New paragraph (e) in both sections includes the contents of 
paragraph (d)(1)(ii)(A), (B), and (C) as paragraphs (e)(1), (2), and 
(3) respectively.
    b. New paragraph (f)(3) in both sections consists of the contents 
of proposed paragraph (d)(6).
    c. New paragraph (h) in both sections consists of the contents of 
paragraph (d)(1)(i), (ii), and (iii) as paragraphs (h)(2), (1), and 
(3), respectively.
    d. New paragraphs (g)(1), (2) and (3) in both sections contain the 
contents of paragraphs (d)(4), (5), and (3), respectively.
    5. We are revising Secs. 435.831(d)(5) and 436.831(d)(5) 
(redesignated as Secs. 435.831(g)(2) and 436.831(g)(2)) to specify that 
an agency is not required to deduct expenses incurred earlier than 3 
months before the month of application for Medicaid, clarifying that 
the 3-month period is measured from the month of application, rather 
than from the date of application as specified in the NPRM.
    6. We are clarifying in Secs. 435.831(e)(3) and 436.831(e)(3) 
(Secs. 435.831(d)(1)(ii)(C) and 436.831(d)(1)(ii)(C) in the proposed 
rule) that a State must deduct expenses for necessary medical and 
remedial services included in the State plan even when those services 
exceed agency limitations on amount, duration or scope.
    7. We are adding a new paragraph (f)(1) to Secs. 435.831 and 
436.831 to show that the State must deduct expenses incurred during the 
month of application and any of the preceding 3 months to the extent 
the individual's liability arose in that period and the expenses have 
not been deducted previously. We are also adding a new paragraph (f)(2) 
to show the State must deduct current payments on old bills not 
previously deducted.

V. Request for Additional Public Comments

    We invite comments on the bases for and the consequences of 
extending additional flexibility to States using the more restrictive 
eligibility criteria of section 1902(f) of the Act to implement any of 
the provisions in this rule. Because of the large number of comments we 
receive, we cannot acknowledge or respond to them individually. If 
appropriate, we will respond to public comments received on this issue 
in a future Federal Register publication.

VI. Regulatory Impact Statement

    Executive Order 12291 requires us to prepare and publish a 
regulatory impact analysis for regulations that are likely to have an 
annual effect on the economy of $100 million or more, cause a major 
increase in costs or prices, or meet other threshold criteria that are 
specified in the Executive Order. Consistent with the Regulatory 
Flexibility Act, 5 U.S.C. 601-612, we prepare and publish a regulatory 
flexibility analysis for regulations unless the Secretary certifies 
that the regulations will not have a significant economic impact on a 
substantial number of small entities. (For purposes of the Regulatory 
Flexibility Act, small entities include all nonprofit and most for-
profit providers.) Under both the Executive Order and the Regulatory 
Flexibility Act, such analyses must, when prepared, show that the 
agency issuing the regulations has examined alternatives that might 
minimize an unnecessary burden or otherwise ensure that the regulations 
are cost-effective.
    In the NPRM published on September 2, 1983 (48 FR 39959), we 
examined the five separate provisions contained in these regulations 
for the significance of their annual economic impact. In four of the 
five proposed provisions (B, C, D and E), we could not quantify 
estimates, but we were confident that any impacts would not meet the 
threshold criteria of the Executive Order or the Regulatory Flexibility 
Act. However, for provision A (Consideration of Projected Institutional 
Expenses at the Medicaid Rate as Incurred Medical Expenses), we 
estimated total Federal and State savings of $18 million.
    In light of the public comments received regarding Provision A and 
because of the need to analyze the effects of these final regulations, 
we reviewed the analysis noted in the NPRM. After reviewing our data 
and assumptions, we have concluded that the current impact of Provision 
A will increase from the original estimate of $18 million to $65 
million. This increase is a reflection of Medicaid program growth 
through 1993.
    Savings will occur in the few cases in which an institutionalized 
individual will not become eligible or will be found eligible later in 
time because his or her income significantly exceeded the medically 
needy income level and the State Medicaid payment rate was used in the 
eligibility calculation rather than whatever rate the institution chose 
to charge. Delay or denial of an individual's eligibility will reduce 
State expenditures and Federal contributions, resulting in negligible 
savings. Some individuals whose eligibility is delayed and who are 
spending down at the private payment rate, rather than the lower 
Medicaid rate during that period, will spend down to the income 
standard quicker and become eligible for Medicaid sooner. Further, this 
provision is optional and it is an option only for States with 
medically needy programs that are not section 1902(f) States. At this 
time, we do not expect that it will be adopted by all or most States. 
In addition, some States have already adopted interpretations of the 
existing regulations on the spenddown process that are very close to 
our final rule. For all these reasons, we now believe that this 
provision will have a negligible net impact.
    For these reasons, we have found that the effect of the provisions 
of this final rule will not meet the threshold criteria of Executive 
Order 12291. Further, we have determined, and the Secretary certifies, 
that this final rule will not result in an annual economic impact that 
will affect significantly a substantial number of small entities. 
Therefore, we conclude that neither a regulatory impact nor a 
regulatory flexibility analysis is required.

VII. Paperwork Reduction Act

    These changes do not impose information collection requirements; 
consequently, they need not be reviewed by the Executive Office of 
Management and Budget under the authority of the Paperwork Reduction 
Act of 1980 (44 U.S.C. 3501 et seq.).

List of Subjects

42 CFR Part 435

    Aid to families with dependent children, Aliens, Categorically 
needy, Contracts (agreements--state plan), Eligibility, Grant-in-aid 
program--health, Health facilities, Medicaid, Medically needy, 
Reporting requirements, Spend-down, Supplemental security income (SSI).

42 CFR Part 436

    Aid to Families with Dependent Children, Aliens, Contracts 
(Agreements), Eligibility, Grant-in-Aid program--health, Guam, Health 
facilities, Medicaid, Puerto Rico, Supplemental security income (SSI), 
Virgin Islands.

    A. 42 CFR part 435 is amended as set forth below:

PART 435--ELIGIBILITY IN THE STATES, DISTRICT OF COLUMBIA, THE 
NORTHERN MARIANA ISLANDS, AND AMERICAN SAMOA

    1. The authority citation for part 435 continues to read as 
follows:

    Authority: Sec. 1102 of the Social Security Act, (42 U.S.C. 
1302), unless otherwise noted.

    2. Section 435.831 is revised to read as follows:


Sec. 435.831  Income eligibility.

    The agency must determine income eligibility of medically needy 
individuals in accordance with this section.
    (a) Budget periods. (1) The agency must use budget periods of not 
more than 6 months to compute income. The agency may use more than one 
budget period.
    (2) The agency may include in the budget period in which income is 
computed all or part of the 3-month retroactive period specified in 
Sec. 435.914. The budget period can begin no earlier than the first 
month in the retroactive period in which the individual received 
covered services. This provision applies to all medically needy 
individuals except in groups for whom criteria more restrictive than 
that used in the SSI program apply.
    (3) If the agency elects to begin the first budget period for the 
medically needy in any month of the 3-month period prior to the date of 
the application in which the applicant received covered services, this 
election applies to all medically needy groups.
    (b) Determining countable income. The agency must deduct the 
following amounts from income to determine the individual's countable 
income.
    (1) For individuals under age 21 and caretaker relatives, the 
agency must deduct amounts that would be deducted in determining 
eligibility under the State's AFDC plan.
    (2) For aged, blind, or disabled individuals in States covering all 
SSI recipients, the agency must deduct amounts that would be deducted 
in determining eligibility under SSI. However, the agency must also 
deduct the highest amounts from income that would be deducted in 
determining eligibility for optional State supplements if these 
supplements are paid to all individuals who are receiving SSI or would 
be eligible for SSI except for their income.
    (3) For aged, blind, or disabled individuals in States using income 
requirements more restrictive than SSI, the agency must deduct amounts 
that are no more restrictive than those used under the Medicaid plan on 
January 1, 1972 and no more liberal than those used in determining 
eligibility under SSI or an optional State supplement. However, the 
amounts must be at least the same as those that would be deducted in 
determining eligibility, under Sec. 435.121, of the categorically 
needy.
    (c) Eligibility based on countable income. If countable income 
determined under paragraph (b) of this section is equal to or less than 
the applicable income standard under Sec. 435.814, the individual or 
family is eligible for Medicaid.
    (d) Deduction of incurred medical expenses. If countable income 
exceeds the income standard, the agency must deduct from income medical 
expenses incurred by the individual or family or financially 
responsible relatives that are not subject to payment by a third party. 
An expense is incurred on the date liability for the expense arises. 
The agency must determine deductible incurred expenses in accordance 
with paragraphs (e), (f), and (g) of this section and deduct those 
expenses in accordance with paragraph (h) of this section.
    (e) Determination of deductible incurred expenses: Required 
deductions based on kinds of services. Subject to the provisions of 
paragraph (g), in determining incurred medical expenses to be deducted 
from income, the agency must include the following:
    (1) Expenses for Medicare and other health insurance premiums, and 
deductibles or coinsurance charges, including enrollment fees, 
copayments, or deductibles imposed under Sec. 447.51 or Sec. 447.53 of 
this subchapter;
    (2) Expenses incurred by the individual or family or financially 
responsible relatives for necessary medical and remedial services that 
are recognized under State law but not included in the plan;
    (3) Expenses incurred by the individual or family or by financially 
responsible relatives for necessary medical and remedial services that 
are included in the plan, including those that exceed agency 
limitations on amount, duration, or scope of services.
    (f) Determination of deductible incurred expenses: Required 
deductions based on the age of bills. Subject to the provisions of 
paragraph (g), in determining incurred medical expenses to be deducted 
from income, the agency must include the following:
    (1) For the first budget period or periods that include only months 
before the month of application for medical assistance, expenses 
incurred during such period or periods, whether paid or unpaid, to the 
extent that the expenses have not been deducted previously in 
establishing eligibility;
    (2) For the first prospective budget period that also includes any 
of the 3 months before the month of application for medical assistance, 
expenses incurred during such budget period, whether paid or unpaid, to 
the extent that the expenses have not been deducted previously in 
establishing eligibility;
    (3) For the first prospective budget period that includes none of 
the months preceding the month of application, expenses incurred during 
such budget period and any of the 3 preceding months, whether paid or 
unpaid, to the extent that the expenses have not been deducted 
previously in establishing eligibility;
    (4) For any of the 3 months preceding the month of application that 
are not includable under paragraph (f)(2) of this section, expenses 
incurred in the 3-month period that were a current liability of the 
individual in any such month for which a spenddown calculation is made 
and that had not been previously deducted from income in establishing 
eligibility for medical assistance;
    (5) Current payments (that is, payments made in the current budget 
period) on other expenses incurred before the current budget period and 
not previously deducted from income in any budget period in 
establishing eligibility for such period; and
    (6) If the individual's eligibility for medical assistance was 
established in each such preceding period, expenses incurred before the 
current budget period but not previously deducted from income in 
establishing eligibility, to the extent that such expenses are unpaid 
and are:
    (i) Described in paragraphs (e)(1) through (e)(3) of this section; 
and
    (ii) Carried over from the preceding budget period or periods 
because the individual had a spenddown liability in each such preceding 
period that was met without deducting all such incurred, unpaid 
expenses.
    (g) Determination of deductible incurred medical expenses: Optional 
deductions. In determining incurred medical expenses to be deducted 
from income, the agency--
    (1) May include medical institutional expenses (other than expenses 
in acute care facilities) projected to the end of the budget period at 
the Medicaid reimbursement rate;
    (2) May, to the extent determined by the State and specified in its 
approved plan, include expenses incurred earlier than the third month 
before the month of application (except States using more restrictive 
eligibility criteria under the option in section 1902(f) of the Act 
must deduct incurred expenses regardless of when the expenses were 
incurred); and
    (3) May set reasonable limits on the amount to be deducted for 
expenses specified in paragraphs (e)(1), (e)(2), and (g)(2) of this 
section.
    (h) Order of deduction. The agency must deduct incurred medical 
expenses that are deductible under paragraphs (e), (f), and (g) of this 
section in the order prescribed under one of the following three 
options:
    (1) Type of service. Under this option, the agency deducts expenses 
in the following order based on type of expense or service:
    (i) Cost-sharing expenses as specified in paragraph (e)(1) of this 
section.
    (ii) Services not included in the State plan as specified in 
paragraph (e)(2) of this section.
    (iii) Services included in the State plan as specified in paragraph 
(e)(3) of this section but that exceed limitations on amounts, 
duration, or scope of services.
    (iv) Services included in the State plan as specified in paragraph 
(e)(3) of this section but that are within agency limitations on 
amount, duration, or scope of services.
    (2) Chronological order by service date. Under this option, the 
agency deducts expenses in chronological order by the date each service 
is furnished, or in the case of insurance premiums, coinsurance or 
deductible charges, the date such amounts are due. Expenses for 
services furnished on the same day may be deducted in any reasonable 
order established by the State.
    (3) Chronological order by bill submission date. Under this option, 
the agency deducts expenses in chronological order by the date each 
bill is submitted to the agency by the individual. If more than one 
bill is submitted at one time, the agency must deduct the bills from 
income in the order prescribed in either paragraph (h)(1) or (h)(2) of 
this section.
    (i) Eligibility based on incurred medical expenses.
    (1) Whether a State elects partial or full month coverage, an 
individual who is expected to contribute a portion of his or her income 
toward the costs of institutional care or home and community-based 
services under Secs. 435.725, 435.726, 435.733, 435.735 or 435.832 is 
eligible on the first day of the applicable budget (spenddown) period--
    (i) If his or her spenddown liability is met after the first day of 
the budget period; and
    (ii) If beginning eligibility after the first day of the budget 
period makes the individual's share of health care expenses under 
Secs. 435.725, 435.726, 435.733, 435.735 or 435.832 greater than the 
individual's contributable income determined under these sections.
    (2) At the end of the prospective period specified in paragraphs 
(f)(2) and (f)(3) of this section, and any subsequent prospective 
period or, if earlier, when any significant change occurs, the agency 
must reconcile the projected amounts with the actual amounts incurred, 
or with changes in circumstances, to determine if the adjusted 
deduction of incurred expenses reduces income to the income standard.
    (3) Except as provided in paragraph (i)(1) of this section, in 
States that elect partial month coverage, an individual is eligible for 
Medicaid on the day that the deduction of incurred health care expenses 
(and of projected institutional expenses if the agency elects the 
option under paragraph (g)(1) of this section) reduces income to the 
income standard.
    (4) Except as provided in paragraph (i)(1) of this section, in 
States that elect full month coverage, an individual is eligible on the 
first day of the month in which spenddown liability is met.
    (5) Expenses used to meet spenddown liability are not reimbursable 
under Medicaid. To the extent necessary to prevent the transfer of an 
individual's spenddown liability to the Medicaid program, States must 
reduce the amount of provider charges that would otherwise be 
reimbursable under Medicaid.
    B. 42 CFR part 436 is amended as set forth below:

PART 436--ELIGIBILITY IN GUAM, PUERTO RICO, AND THE VIRGIN ISLANDS

    1. The authority citation for part 436 continues to read as 
follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302), unless otherwise noted.

    2. Section 436.831 is revised to read as follows:


Sec. 436.831  Income eligibility.

    The agency must determine income eligibility of medically needy 
individuals in accordance with this section.
    (a) Budget periods. (1) The agency must use budget periods of not 
more than 6 months to compute income. The agency may use more than one 
budget period.
    (2) The agency must include in the budget period in which income is 
computed all or part of the 3-month retroactive period specified in 
Sec. 435.914. The budget period can begin no earlier then the first 
month in the retroactive period in which the individual received 
covered services.
    (3) If the agency elects to begin the first budget period for the 
medically needy in any month of the 3-month period prior to the date of 
application in which the applicant received covered services, this 
election applies to all medically needy groups.
    (b) Determining countable income. The agency must, to determine 
countable income, deduct amounts that would be deducted in determining 
eligibility under the State's approved plan for OAA, AFDC, AB, APTD, or 
AABD.
    (c) Eligibility based on countable income.  If countable income 
determined under paragraph (b) of this section is equal to or less than 
the applicable income standard under Sec. 436.814, the individual is 
eligible for Medicaid.
    (d) Deduction of incurred medical expenses. If countable income 
exceeds the income standard, the agency must deduct from income medical 
expenses incurred by the individual or family or financially 
responsible relatives that are not subject to payment by a third party. 
An expense is incurred on the date liability for the expense arises. 
The agency must determine deductible incurred expenses in accordance 
with paragraphs (e), (f) and (g) of this section and deduct those 
expenses in accordance with paragraph (h) of this section.
    (e) Determination of deductible incurred expenses: Required 
deductions based on kinds of services. Subject to the provisions of 
paragraph (g) of this section, in determining incurred medical expenses 
to be deducted from income, the agency must include the following: (1) 
Expenses for Medicare and other health insurance premiums, and 
deductibles or coinsurance charges, including enrollment fees, 
copayments, or deductibles imposed under Sec. 447.51 or Sec. 447.53 of 
this chapter;
    (2) Expenses incurred by the individual or family or financially 
responsible relatives for necessary medical and remedial services that 
are recognized under State law but not included in the plan;
    (3) Expenses incurred by the individual or family or by financially 
responsible relatives for necessary medical and remedial services that 
are included in the plan, including those that exceed agency 
limitations on amount, duration or scope of services;
    (f) Determination of deductible incurred expenses: Required 
deductions based on the age of bills. Subject to the provisions of 
paragraph (g) of this section, in determining incurred medical expenses 
to be deducted from income, the agency must include the following:
    (1) For the first budget period or periods that include only months 
before the month of application for medical assistance, expenses 
incurred during such period or periods, whether paid or unpaid, to the 
extent that the expenses have not been deducted previously in 
establishing eligibility;
    (2) For the first prospective budget period that also includes any 
of the 3 months before the month of application for medical assistance, 
expenses incurred during such budget period, whether paid or unpaid, to 
the extent that the expenses have not been deducted previously in 
establishing eligibility;
    (3) For the first prospective budget period that includes none of 
the months preceding the month of application, expenses incurred during 
such budget period and any of the 3 preceding months, whether paid or 
unpaid, to the extent that the expenses have not been deducted 
previously in establishing eligibility;
    (4) For any of the 3 months preceding the month of application that 
are not includable under paragraph (f)(2) of this section, expenses 
incurred in the 3-month period that were a current liability of the 
individual in any such month for which a spenddown calculation is made 
and that had not been previously deducted from income in establishing 
eligibility for medical assistance;
    (5) Current payments (that is, payments made in the current budget 
period) on other expenses incurred before the current budget period and 
not previously deducted from income in any budget period in 
establishing eligibility for such period; and
    (6) If the individual's eligibility for medical assistance was 
established in each such preceding period, expenses incurred before the 
current budget period but not previously deducted from income, to the 
extent that such expenses are unpaid and are:
    (i) Described in paragraphs (e)(1) through (e)(3) of this section; 
and
    (ii) Are carried over from the preceding budget period or periods 
because the individual had a spenddown liability in each such preceding 
period that was met without deducting all such incurred, unpaid 
expenses.
    (g) Determination of deductible incurred medical expenses: Optional 
deductions. In determining incurred medical expenses to be deducted 
from income, the agency--
    (1) May include medical institutional expenses (other than expenses 
in acute care facilities) projected to the end of the budget period at 
the Medicaid reimbursement rate;
    (2) May, to the extent determined by the agency and specified in 
its approved plan, include expenses incurred earlier than the third 
month before the month of application; and
    (3) May set reasonable limits on the amount to be deducted for 
expenses specified in paragraphs (e)(1), (e)(2), and (g)(2) of this 
section.
    (h) Order of deduction. The agency must deduct incurred medical 
expenses that are deductible under paragraphs (e), (f), and (g) of this 
section, in the order prescribed under one of the following three 
options:
    (1) Type of service. Under this option, the agency deducts expenses 
in the following order based on type of service:
    (i) Cost-sharing expenses as specified in paragraph (e)(1) of this 
section.
    (ii) Services not included in the State plan as specified in 
paragraph (e)(2) of this section.
    (iii) Services included in the State plan as specified in paragraph 
(e)(3) of this section but that exceed agency limitations on amount, 
duration, or scope of services.
    (iv) Services included in the State plan as specified in paragraph 
(e)(3) of this section but that are within agency limitations on 
amount, duration, or scope of services.
    (2) Chronological order by service date. Under this option, the 
agency deducts expenses in chronological order by the date each service 
is furnished, or in the case of insurance premiums, coinsurance, or 
deductibles charges the date such amounts are due. Expenses for 
services furnished on the same day may be deducted in any reasonable 
order established by the State.
    (3) Chronological order by bill submission date. Under this option, 
the agency deducts expenses in chronological order by the date each 
bill is submitted to the agency by the individual. If more than one 
bill is submitted at one time, the agency must deduct the bills from 
income in the order prescribed in either paragraph (h)(1) or (h)(2) of 
this section.
    (i) Eligibility based on incurred medical expenses.
    (1) Whether a State elects partial or full month coverage, an 
individual who is expected to contribute a portion of his or her income 
toward the costs of institutional care or home and community-based 
services under Sec. 436.832 is eligible on the first day of the 
applicable budget (spenddown) period--
    (i) If his or her spenddown liability is met after the first day of 
the budget period; and
    (ii) If beginning eligibility after the first day of the budget 
period makes the individual's share of health care expenses under 
Sec. 436.832 greater than the individual's contributable income 
determined under this section.
    (2) At the end of the prospective period specified in paragraph 
(f)(2) or (f)(3) of this section and any subsequent prospective period 
or, if earlier, when any significant change occurs, the agency must 
reconcile the projected amounts with the actual amounts incurred, or 
with changes in circumstances, to determine if the adjusted deduction 
of incurred expenses reduces income to the income standard.
    (3) Except as provided in paragraph (i)(1) of this section, if 
agencies elect partial month coverage, an individual is eligible for 
Medicaid on the day that the deduction of incurred health care expenses 
(and of projected institutional expenses if the agency elects the 
option under paragraph (g)(1) of this section) reduces income to the 
income standard.
    (4) Except as provided in paragraph (i)(1) of this section, if 
agencies elect full month coverage, an individual is eligible on the 
first day of the month in which spenddown liability is met.
    (5) Expenses used to meet spenddown liability are not reimbursable 
under Medicaid. Therefore, to the extent necessary to prevent the 
transfer of an individual's spenddown liability to the Medicaid 
program, States must reduce the amount of provider charges that would 
otherwise be reimbursable under Medicaid.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

    Dated: July 12, 1993.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
    Dated: October 4, 1993.
Donna E. Shalala,
Secretary.
[FR Doc. 94-547 Filed 1-11-94; 8:45 am]
BILLING CODE 4120-01-P