[Federal Register Volume 59, Number 141 (Monday, July 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17816]


[[Page Unknown]]

[Federal Register: July 25, 1994]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 435, 440, and 441

[MB-008-FC]
RIN 0938-AC55

 

Medicaid Program; Home and Community-Based Services and 
Respiratory Care for Ventilator-Dependent Individuals

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

ACTION: Final rule with comment period.

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SUMMARY: This final rule with comment period expands coverage of 
Medicaid home and community-based services under the waiver provisions 
of section 1915(c) of the Social Security Act. This final rule also 
adds coverage of respiratory care services as an optional benefit under 
State Medicaid plans.
    These revisions and additions incorporate changes made by the 
Consolidated Omnibus Budget Reconciliation Act of 1985 and the Omnibus 
Budget Reconciliation Act of 1986 and respond to the public comments 
that we received as a result of the June 1, 1988, publication of a 
proposed rule. This final rule with comment period also incorporates 
self-implementing provisions of the Omnibus Budget Reconciliation Act 
of 1987, the Medicare Catastrophic Coverage Act of 1988, the Technical 
and Miscellaneous Revenue Act of 1988, and the Omnibus Budget 
Reconciliation Act of 1990 concerning home and community-based 
services, and makes other technical changes not specifically related to 
these statutes.

DATES: Effective Date: This final rule with comment period is effective 
on August 24, 1994.
    Comment Date: Written comments will be accepted on changes as noted 
in sections II.C.2., II.G.2.b., II.G.3.b., II.G.4.b., II.G.5.b., 
II.G.6.b., and II.I.2. The comments will be considered if we receive 
them at the appropriate address, as provided below, no later than 5:00 
p.m. on September 23, 1994.

ADDRESSES: Mail written comments (original and two copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: MB-008-FC, P.O. Box 7518, 
Baltimore, Maryland 21207.
    If you prefer, you may deliver your written comments (original and 
two copies) to one of the following addresses:
    Room 309-G, Hubert H. Humphrey Building, 200 Independence Ave., SW, 
Washington, DC.
    Room 132, East High Rise Building, 6325 Security Boulevard, 
Baltimore, Maryland.
    Due to staffing and resource limitations, we cannot accept comments 
by facsimile (FAX) transmission.
    If comments concern information collection or recordkeeping 
requirements, please address a copy of comments to: Office of 
Management and Budget, Office of Information and Regulatory Affairs, 
Room 10235, New Executive Office Building, Washington, DC 20503, 
Attention: Laura Oliven.
    In commenting, please refer to file code MB-008-FC. Comments 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 Avenue, SW., 
Washington DC on Monday through Friday of each week from 8:30 a.m. to 
5:00 p.m. (phone (690) 245-7890).

FOR FURTHER INFORMATION CONTACT: Robert C. Wardwell, (410) 966-5659, 
for Payment and Coverage Policy.
    Marinos T. Svolos, (410) 966-4451, for Post-Eligibility Treatment 
of Income and Resources.

SUPPLEMENTARY INFORMATION:

I. General Background

    This final rule with comment period contains final regulations for 
the provision of Medicaid home and community-based services under 
waivers granted under section 1915(c) of the Social Security Act (the 
Act), and for the provision of respiratory care services as an optional 
benefit under the Medicaid program.
    Home and community-based services are those medical assistance 
services provided under a State waiver that are not otherwise available 
under a State's Medicaid plan. These services: (1) must be furnished in 
accordance with an individually written plan of care that is subject to 
approval by the State Medicaid agency; and (2) may be furnished only to 
persons who, but for the provision of such services, would otherwise 
require the level of care provided in a hospital, nursing facility (NF) 
(formerly referred to as a skilled nursing facility (SNF) or 
intermediate care facility (ICF)), or intermediate care facility for 
the mentally retarded (ICF/MR). (Under section 4211(a)(3) of the 
Omnibus Budget Reconciliation Act of 1987 (OBRA '87), Public Law 100-
203, the distinction between SNFs and ICFs under the Medicaid program 
ended, effective October 1, 1990. Both of these facilities are now 
categorized as NFs, as defined in section 1919(a) of the Act, effective 
October 1, 1990. We generally use the acronym ``NF'' throughout this 
rule unless we are quoting directly from a statute or providing an 
historical reference. Medicaid recognizes two types of long-term care 
facilities--NFs and ICFs/MR.)
    Respiratory care services as medical assistance may be provided as 
an option under the Medicaid program, as authorized and described in 
sections 1902(e)(9) and 1905(a)(20) of the Act.
    On June 1, 1988, we published a proposed rule in the Federal 
Register (53 FR 19950) proposing to revise the Medicaid regulations 
governing the provision of home and community-based services under 
waivers and respiratory care services. This rule proposed to codify in 
regulations section 9502 of the Consolidated Omnibus Budget 
Reconciliation Act of 1985 (COBRA), Public Law 99-272, enacted on April 
7, 1986, and sections 9408, 9411, and 9435(a) of the Omnibus Budget 
Reconciliation Act of 1986 (OBRA '86), Public Law 99-509, enacted on 
October 21, 1986.
    Four additional public laws have been passed that contain 
provisions that impact on the proposed rule. These laws were enacted 
either immediately preceding or subsequent to the publication of the 
proposed rule. The public laws are:
     The Omnibus Budget Reconciliation Act of 1987 (OBRA '87), 
Public Law 100-203, enacted on December 22, 1987 (sections 4102 (b) and 
(c), 4118, and 4211);
     The Medicare Catastrophic Coverage Act of 1988 (MCCA), 
Public Law 100-360, enacted on July 1, 1988 (sections 411(k)(10)(A) and 
411(k)(10)(H));
     The Technical and Miscellaneous Revenue Act of 1988 
(TMRA), Public Law 100-647, enacted on November 10, 1988 (section 
8437); and
     The Omnibus Budget Reconciliation Act of 1990 (OBRA '90), 
Public Law 101-508, enacted on November 5, 1990 (sections 4741 and 
4742).
    In this final rule with comment period, we are incorporating 
provisions of these public laws that relate to many of the regulatory 
provisions in the June 1, 1988, proposed rule. We are inviting public 
comments on the revisions that we have made to this proposed rule in 
response to these legislative changes.
    We have also revised the proposed regulations in response to public 
comments. We received, on a timely basis, 16 letters from individuals, 
associations, State agencies, and providers of services (primarily home 
health agencies). While most commenters supported the provisions in the 
proposed rule, the majority also expressed interest in expanding the 
waiver program. Some commenters correctly noted that the proposed rule 
did not include statutory changes made by OBRA '87, MCCA, and TMRA.
    Because we have made a substantial number of revisions to the 
proposed rule in response to legislative changes, we have organized our 
discussion in this preamble by specific subject areas. We are using 
this organization to group all of the additions and revisions to each 
subject in one place. We are presenting the legislative basis for the 
proposed rule and any subsequent legislative provisions that changed or 
added to the provisions of the proposed rule. We are following the 
legislative foundation with a discussion of the proposed regulations 
for that area, any public comments we received, and our responses to 
the public comments. We conclude each topic with a description of the 
applicable provisions contained in this final rule.

II. Home and Community-Based Services Waivers

    Section 1915(c) of the Social Security Act authorizes the Secretary 
to waive certain Medicaid statutory requirements to enable a State to 
cover a broad array of home and community-based services. Coverage of 
these services enables elderly, disabled, and chronically ill persons, 
who would otherwise be institutionalized, to live in the community. 
Section 1915(c) specifies the services that may be covered, the 
conditions for granting waivers, and the provisions governing the scope 
of services under waivers. Section 1915(c) was added to title XIX of 
the Act by the Omnibus Budget Reconciliation Act of 1981 (OBRA '81), 
Public Law 97-35, to encourage the provision of services to Medicaid 
recipients in noninstitutional settings. Prior to the enactment of OBRA 
'81, the Medicaid program provided limited coverage for long-term care 
services in noninstitutional settings.
    A State may request approval by HCFA of waivers under section 
1915(c) to provide home and community-based services that are not 
otherwise available to certain recipients under the State's Medicaid 
plan. These services must be furnished in accordance with an individual 
written plan of care subject to approval by the State's Medicaid agency 
and may be furnished only if the individual would otherwise require the 
level of care provided in a hospital, NF, or ICF/MR and if the costs 
are reimbursable under the State's plan. (The original statute 
specified SNF or ICF. OBRA '87 struck out SNF or ICF and substituted NF 
or ICF/MR.)
    Existing regulations governing home and community based services 
under waivers under section 1915(c) appear in various sections of 42 
CFR parts 435, 440, and 441. This final rule with comment period 
contains regulations which amend each of these three parts.

A. Expanded Habilitation Services

1. Background
    Prior to the enactment of COBRA, a waiver granted under section 
1915(c) of the Act allowed a State to receive Federal financial 
participation (FFP) for the following services as home and community-
based services: case management services, homemaker/home health aide 
services, personal care services, adult day health services, 
habilitation services, respite care, and ``other'' services as 
requested by the State and approved by the Secretary. Section 9502(a) 
of COBRA revised section 1915(c) of the Act to explicitly include 
certain prevocational, supported employment, and educational services 
as habilitation services under home and community-based services.
    Habilitation services are authorized by section 1915(b)(4) of the 
Act and defined in section 1915(c)(5)(A) of the Act, as amended by 
section 9502 of COBRA, as services designed to assist individuals in 
acquiring, retaining, and improving the self-help, socialization, and 
adaptive skills necessary to reside successfully in home and community-
based settings. Section 9502(a) of COBRA also added new sections 
1915(c)(5) (B) and (C) to the Act that allow a State to request HCFA's 
approval to include certain additional services previously excluded 
from coverage in its definition of ``habilitation services'' for 
individuals who receive waiver services after discharge from a NF or 
ICF/MR. Sections 1915(c)(5) (B) and (C) provide that habilitation 
services include prevocational, educational, and supported employment 
services, but do not include--
     Special education and related services, as defined in 
section 602 (16) and (17) of the 1975 Amendments to the Education of 
the Handicapped Act (Public Law 94-142, now located at 20 U.S.C. 1401 
(16) and (17)), that are otherwise available to the individual through 
a local educational agency; and
     Vocational rehabilitation services that are otherwise 
available to the individual through a program funded under section 110 
of the Rehabilitation Act of 1973 (29 U.S.C. 730).
    Section 9502(j)(1) of COBRA provides that section 9502(a) is 
effective for services furnished on or after April 7, 1986. Section 
4118(j) of OBRA '87 amended section 9502(j)(1) of COBRA to provide that 
eligibility of previously institutionalized individuals for the 
expanded habilitation services under a section 1915(c) waiver is 
determined without regard to whether the individuals were receiving 
institutional services before their eligibility under the waiver. 
Section 1915(c)(5) as added by section 9502(a) of COBRA refers to 
habilitation services, ``* * * with respect to individuals who receive 
such services after discharge from a nursing facility or intermediate 
care facility for the mentally retarded * * *''. In our proposed rule, 
we interpreted ``after discharge'' as meaning that an individual is 
discharged directly into a home and community-based services waiver. 
(Individuals who have never been institutionalized, however, are not 
eligible for the expanded habilitation services.) This provision was 
effective as if it were included in the enactment of section 9502(j)(1) 
of COBRA. As indicated in the Report of the Committee on the Budget to 
accompany H.R. 3545 (OBRA '87) (H. Rept. No. 391, 100th Cong., 1st 
Sess. 537 (1987)), the Congress included this amendment to section 
9502(j) because it believed HCFA had misread COBRA in the proposed rule 
by stating that expanded habilitation services would be provided only 
to recipients discharged directly from a NF or ICF/MR into a home and 
community-based services waiver program.
    In the proposed rule, we included in regulations the provisions of 
section 9502(a) by--
     Revising Sec. 440.180 to provide for the expanded 
definition of habilitation services under paragraphs (b)(6) and (c);
     Adding Secs. 440.180(c)(2) and (3) to provide for the 
inclusion of prevocational, educational, and supported employment 
services under a home and community-based waiver and for the exclusion 
of certain services; and adding Sec. 441.302(i) and Sec. 441.303(h) to 
require documentation to support State health and welfare assurances 
for the provision of these expanded services.
     Revising Sec. 441.310(a)(3) to provide for limits on FFP 
for prevocational, educational, and supported employment services.
    We received the following comments on this proposal:
    Comment: Five commenters raised issues concerning the expanded 
definition of habilitation to include educational, prevocational, and 
supported employment services. Some commenters suggested that HCFA was 
imposing an age minimum of 22 for the expanded habilitation services. 
Others stated that our definition of prevocational services was too 
strict and should be more consistent with section 4442.3(B)(3)(a) of 
the State Medicaid Manual, which distinguishes prevocational services 
from noncovered vocational services. (This definition was added in HCFA 
Transmittal No. 37, issued in September 1988.)
    Response: We are not imposing a minimum age for the expanded 
habilitation services. Our discussion of this subject in the preamble 
of the proposed rule pertained only to the fact that most educational 
and prevocational services for individuals under 22 years of age 
ordinarily would be provided under State and Federal programs other 
than Medicaid. We agree with the commenters concerning the need for 
more consistency between the regulations defining prevocational 
services and the related HCFA instructions, and have revised 
Sec. 440.180(c)(2)(i) of the proposed regulations to make the policy 
consistent.
2. Provisions of the Final Rule
    We are adopting the proposed regulations as final rules, with the 
following changes:
     We have revised Sec. 440.180(c)(1) to provide that a State 
may provide expanded habilitation services under a new or amended 
waiver to recipients who have been discharged from a Medicaid-certified 
NF or ICF/MR, regardless of when the discharge occurred. We have made a 
conforming change to Sec. 441.302(i)(2).
     We have revised Sec. 440.180(c)(2)(i) to incorporate a 
provision to distinguish covered prevocational services from noncovered 
vocational services.
     We have revised Sec. 441.310(a)(3)(iii) to clarify that 
FFP is not available for prevocational, educational, or supported 
employment services, or any combination of these services, as part of 
habilitation services provided to recipients who were never 
institutionalized in Medicaid-certified NFs or ICFs/MR.

B. Services to Patients with Chronic Mental Illness

1. Background
    Section 9411(d) of OBRA '86 amended section 1915(c)(4)(B) of the 
Act by adding day treatment or other partial hospitalization services, 
psychosocial rehabilitation services, and clinic services (whether or 
not furnished in a facility) for individuals with chronic mental 
illness to the list of services specifically enumerated as home and 
community-based services. Therefore, effective October 21, 1986 (the 
date OBRA '86 was enacted), States may request that any of the above 
services be provided under a waiver or renewal of a waiver for persons 
diagnosed as chronically mentally ill.
    In the proposed rule, we--
     Revised Sec. 440.180 to add a new paragraph (b)(8) to 
provide for the inclusion of day treatment or other partial 
hospitalization services, psychosocial rehabilitation services, and 
clinic services for individuals with chronic mental illness as home and 
community-based waiver services;
     Added new Secs. 441.302(i) and 441.303(i) to specify 
requirements for written State health and welfare assurances for the 
provision of these services and for supporting documentation of these 
assurances;
     Added a new Sec. 441.310(a)(4) to specify limits on FFP 
for the provision of these services.
    We received the following public comment on these proposed 
regulations:
    Comment: One commenter noted that States may provide the specified 
services to the mentally retarded as well as to the chronically 
mentally ill.
    Response: Section 1915(c)(4)(B) of the Act authorizes the provision 
of day treatment or other partial hospitalization services, 
psychosocial rehabilitation services, and clinic services (whether or 
not furnished in a facility) for individuals with chronic mental 
illness. Neither the statute nor the conference committee report 
mentions individuals diagnosed as mentally retarded. However, States 
may request the authority to provide these services to the mentally 
retarded under the broader waiver authority of section 1915(c)(4)(B) of 
the Act as ``other'' services. The ``other'' services category has been 
in existence since the home and community-based services waiver program 
was established, and HCFA has approved a variety of services under this 
category that States establish as cost-effective and necessary to avoid 
institutionalization.
2. Provisions of the Final Rule
    We are adopting the proposed provisions, with minor editorial 
changes, as final rules. We have also redesignated Sec. 441.302(i) as 
Sec. 441.302(j) to accommodate other revisions.

C. Scope of Respite Care

1. Background
    Under section 1915(c)(4)(B) of the Act, a State may provide respite 
care under its home and community-based waiver services program. 
Respite care may be provided in institutional and noninstitutional 
settings. However, under existing regulations at Sec. 441.310, FFP is 
not available for the cost of room and board, except when provided as 
part of respite care in a State-approved facility that is not a private 
residence. Because respite care generally should be a short-term 
service, we have required States to fully document the need for more 
than 30 days of care.
    In the proposed Sec. 440.180(b)(7), in accordance with section 
1915(c)(4) of the Act, we imposed a 30-day limitation on the duration 
of institutional respite care services provided during a waiver year to 
any individual under a waiver program. We indicated in the proposed 
rule that we were not placing a limit on noninstitutional respite care 
but that we would closely review all waiver applications that requested 
noninstitutional respite care in excess of 30 days per waiver year.

    (Note: We have traditionally used the term ``waiver year'' for 
any 12-month period for which a waiver applies. While we recognize 
that the statute uses the term ``fiscal year'', we have not had a 
problem with our use of ``waiver year'' for ``fiscal year''. Since 
the term ``waiver year'' is generally understood and accepted by 
those involved in the waiver process, we are continuing to use it in 
the Medicaid regulations. We believe that a switch from the term 
``waiver year'' to ``fiscal year'' would cause unnecessary 
confusion.)
    Subsequent to the publication of the proposed rule, section 
4742(d)(l) of OBRA '90 amended section 1915(c)(4) of the Act to 
eliminate restrictions on the number of hours or days of respite care 
that a State may provide in any period under a waiver as long as the 
State continues to show cost-neutrality in its waiver program. (``Cost-
neutrality'' means that the average per capita expenditures for 
individuals under waivers does not exceed what the average per capita 
expenditures for these individuals would have been if the waiver had 
not been granted.) Section 4742(d)(2) of OBRA '90 specifies that the 
changes under section 4742(d)(1) apply as if included under OBRA '81, 
the original legislation for the waiver program, enacted August 13, 
1981.
    We received the following public comments on this proposal:
    Comment: Six commenters expressed concerns about the proposed 30-
day limit on institutional respite care. Two commenters indicated that 
room and board should be included under noninstitutional respite care. 
Three commenters indicated that the 30-day limit is too strict; two 
recommended a 60-day limit and one a 90-day limit. One of the 
commenters who recommended a 60-day limit also recommended a 2-week 
limit on consecutive weeks of institutional respite care.
    Response: Section 1915(c)(4) of the Act prohibits the Secretary 
from placing durational limits on respite care as long as the waiver 
retains cost-neutrality as required under section 1915(c)(2)(D). The 
issues raised by the commenters regarding our formerly proposed limits 
on institutional respite care are now moot.
    Section 1915(c)(1) of the Act specifically excludes room and board 
as a covered waiver service. However, an exception with regard to 
respite care was included under regulations based on the text of 
section 1915(c)(4)(B) of the Act, the legislative history of OBRA '81 
that amended the Act to include the home and community-based waiver 
program, and the fundamental nature of respite care services. In 
discussing the services that could be included under section 1915(c) 
waiver programs, the Congress explained in H. Rept. No. 208, 97th 
Cong., 1st Sess. 966 (1981) that respite care services were provided on 
a short-term basis to individuals unable to care for themselves and 
designed to fill-in for the absence of care or the ``need for relief 
for those persons normally providing such care.'' The Congress 
indicated that such services can be offered in ``the home of an 
individual or an approved facility such as a hospital, nursing home, 
foster home, or community-residential facility.''
    Because of the Congress' discussion of certain institutional 
facilities as locations for the provision of respite care, and the fact 
that room and board costs are a core aspect of the costs of respite 
care services offered in these facilities, we believe that the Congress 
intended to allow for payment of room and board costs as part of the 
costs of respite care services. Based in part on the cited language 
from the Conference Report, we have decided to limit institutional 
respite care to States which limit the facilities authorized to provide 
such care to (1) Medicaid-certified hospitals and nursing homes, and 
(2) foster homes and community-residential facilities that meet State 
standards as specified in an approved waiver. Payment for room and 
board costs as part of the costs of respite care services can be 
authorized only for care provided in these facilities.
    Section 1915(c)(2)(D) of the Act requires that a State maintain the 
overall cost-neutrality of its waiver program. Significant increases in 
respite care, particularly institutional respite care because it is 
generally costly, could jeopardize the cost-neutrality of a waiver 
program. A State that wishes to revise its limit on the number of hours 
or days of respite care in a previously approved waiver program must 
submit an amendment to its currently operating waiver. The amendment 
must specify the revised limits and revise the cost-neutrality formula 
to allow for the increased costs attributable to the revised respite 
care limits.
2. Provisions of the Final Rule
    We are not including in these final regulations any limits on the 
duration of respite care. However, the State must continue to show 
cost-neutrality in its waiver program. Because of the changes in the 
law, the proposed revision to Sec. 440.180(b)(7) that contained limits 
on respite care has been deleted. We will consider timely comments on 
this deletion.

D. Permitting Hospital Level of Care for Certain Ventilator-Dependent 
Recipients

1. Background
    Section 9502(b) of COBRA amended sections 1915(c)(1) and (c)(2)(C) 
of the Act. These amendments allowed States to provide home and 
community-based services to individuals who are ventilator-dependent 
and who, but for the provision of home and community-based services, 
would continue to receive inpatient hospital, NF, or ICF/MR services 
under a State's Medicaid plan. (The original statute specified SNF or 
ICF. OBRA '87 struck out ``SNF'' or ``ICF'' and substituted ``NF'' or 
``ICF/MR''.) Thus, sections 1915(c)(1) and (c)(2) of the Act authorized 
waiver payments for individuals who require an inpatient hospital level 
of care, if they enter the waiver program directly from a hospital and 
are ventilator-dependent. Prior to this legislation, only persons 
requiring NF or ICF/MR levels of care could be covered under a home and 
community-based waiver program.
    Section 9411(a)(1) of OBRA '86 subsequently amended section 
1915(c)(1) of the Act to remove the amendments made by section 9502(b) 
of COBRA and added a broader authority to permit States to extend home 
and community-based services to individuals who, but for the provision 
of these services, would require the inpatient hospital level of care. 
Section 9411(a)(2) of COBRA amended section 1915(c)(2)(B) of the Act to 
also require the State to provide for an evaluation of the individual's 
need for inpatient hospital services prior to permitting the use of 
home and community-based services as an alternative to inpatient 
hospital services.
    In the proposed rule, we revised or added provisions under 
Secs. 441.301(a)(3)(i), (b)(1)(ii), and (b)(1)(iii)(A), 
Secs. 441.302(c)(1), (c)(2)(i), (e), and (f), and Secs. 441.303(f)(1), 
(3), and (5), to incorporate the provisions of section 1915(c)(2). 
These provisions extended home and community-based services coverage to 
individuals who would otherwise need inpatient hospital care and 
required States to provide for an evaluation of the need for inpatient 
hospital services. In addition, we included a proposed expansion of 
Sec. 441.303(c)(2) to require States that use a level of care 
evaluation form other than that used for nursing home placements to 
assure us that the outcome of that evaluation form is reliable, valid, 
and fully comparable to the form used for nursing home placement.
2. Provisions of the Final Rule
    We did not receive any comments on these provisions. We have, 
however, made the following clarifying changes in the final rule:
     We substituted ``NF'' or ``ICF/MR'' for ``SNF'' or ``ICF'' 
to conform the regulations to OBRA '87.
     We have revised Sec. 441.303(c)(2) by substituting 
``hospital, nursing facility, or ICF/MR'' for ``nursing home.'' Level 
of care evaluation forms from any of these facilities will not need 
State assurances for reliability and validity.

E. Bundling of Services

1. Background
    We proposed to revise Sec. 441.301(b)(4) to require States to 
describe the services to be furnished under home and community-based 
services waivers under section 1915(c) so that each service is 
separately defined. Multiple services that are generally considered to 
be separate services cannot be consolidated under a single definition. 
Commonly accepted terms must be used to describe the service and 
definitions may not be open-ended in scope.
    We received the following comments on the proposed rule:
    Comment: Two commenters recommended that States be allowed to 
combine (bundle) certain services under a single definition under home 
and community based services waivers under section 1915(c) for ease of 
reporting.
    Response: We believe that services enumerated in the statute 
(section 1915(c)(4)(B)), such as personal care or adult day health 
services, must stand alone and not be included in a bundled service. In 
addition, bundling of these services would not ease the waiver process 
because the cost of each component of the combined service would need 
to be computed separately to show how the single service cost was 
derived. The bundling of several waiver services into a single service 
definition may also unnecessarily restrict an individual's freedom of 
choice of providers (section 1902(a)(23) of the Act) by limiting the 
pool of qualified providers. Bundling would limit the pool of providers 
able to furnish the bundled service because fewer providers would be 
capable of furnishing the broader array of services that result when 
various services are combined into bundles. Under a bundling 
arrangement, a provider must be able to furnish all of the component 
services in a bundle to qualify for a provider agreement. We will 
consider a combined service definition if the State establishes that 
the bundling of services will permit more efficient delivery of 
services and not compromise either the availability of services or an 
individual's free choice of providers. If HCFA authorizes the bundling 
of services, however, States must continue to compute separately the 
costs of the component services to support the final cost of the 
bundled waiver service for the cost-neutrality formula.
2. Provisions of the Final Rule
    We have adopted the proposed regulations as final rules with two 
modifications:
     We have revised proposed Sec. 441.301(b)(4) to specify 
that HCFA will approve combined service definitions (bundling) if the 
definitions will permit more efficient delivery of services and not 
compromise an individual's access to or free choice of providers.
     We have added a new paragraph Sec. 441.303(f)(10) to 
require States to continue to compute separately the costs and 
utilization of the component services that compose a HCFA-approved 
bundled service.

F. Waiver of Comparability Requirement and Certain Income and Resource 
Eligibility Requirements

1. Waiver of Comparability Requirement
    Section 9411(c) of OBRA '86 amended section 1915(c)(3) of the Act 
to limit the Medicaid State plan requirements under section 1902(a)(10) 
of the Act that may be waived under section 1915(c) to 
``comparability'' of covered services under section 1902(a)(10)(B); 
that is, that covered services be equal in amount, duration, and scope 
for certain Medicaid recipients. Previously, all of section 1902(a)(10) 
of the Act could be waived by the Secretary if requested by States. By 
indicating that only section 1902(a)(10)(B) of the Act may be waived, 
the Congress narrowed the scope of this particular waiver option. 
Specifically, section 1902(a)(10)(B) of the Act requires that the 
medical assistance made available to any eligible categorically needy 
individual may not be less in amount, duration, or scope than the 
medical assistance made available to any other categorically needy 
individual, and may not be less in amount, duration, or scope than the 
medical assistance made available to medically needy individuals. 
Consequently, a waiver of comparability affords the State an 
opportunity to target waivers to certain specific groups without 
providing those services to other groups. The amendment made by section 
9411(c) is effective for waivers and renewals of waivers approved on or 
after October 21, 1986.
    Regulations implementing section 1902(a)(10)(B) are located at 
Sec. 440.240.
    In the proposed rule, we revised Sec. 441.301(a)(2) to provide 
that, when applicable, a request for waiver of Medicaid requirements 
could include a waiver of sections 1902(a)(1) and (a)(10)(B) of the Act 
which concern ``statewide'' application of Medicaid and ``comparability 
of services.'' Prior to enactment of section 9411 of OBRA '86, a State 
could request and receive waivers of section 1902(a)(1) and 1902(a)(10) 
of the Act. A waiver of 1902(a)(10) included waiver of comparability as 
well as all other subsections in that section of the statute. Section 
9411(c) of OBRA '86 limited the waiver authority to section 
1902(a)(10)(B) or ``comparability of services''. Because of this 
limitation, a State could no longer apply rules for deeming of income 
and resources for institutionalized medically needy recipients to 
determine Medicaid eligibility of the waiver population.
2. Medicaid Eligibility Rules
    Section 4118(a)(1) of OBRA '87 amended section 1915(c)(3) of the 
Act to allow States to waive section 1902(a)(10)(C)(i)(III) which 
contains rules for determining income and resource eligibility for the 
medically needy. This option allows States to use income and resource 
methods and standards, other than those that would ordinarily be used 
for medically needy individuals living in the community, provided that 
such rules do not conflict with other provisions of the Medicaid 
statute which States may not waive. That is, the option permits waiver 
of rules, such as deeming of income and resources, that are applied 
differently in the community than in an institution and are barriers to 
participation in a waiver program.
    When this provision was enacted, deeming was the primary barrier. 
Over time, this has changed. There are now other eligibility policies 
applied in an institutional setting that a State may wish to use 
instead of policies that would normally be used in the community. For 
example, under its waiver, a State may wish to apply to a home and 
community-based waiver recipient living with a spouse, the spousal 
impoverishment protection rules of section 1924 of the Act which would 
have applied to this recipient had the recipient been living in a 
medical institution. As a second example, for its home and community-
based recipients, a State might use more liberal income or resource 
methods that the State has approved under section 1902(r)(2) of the Act 
for institutionalized individuals who are eligible under a special 
income level under Sec. 435.231.
    If a State elects to use more liberal income rules under this 
waiver authority, it is still subject to the FFP limits on Medicaid 
expenditures for the medically needy under section 1903(f) of the Act, 
as interpreted under Sec. 435.1007. These limits may not be waived. The 
FFP limit for the medically needy is 133 and 1/3 percent of the highest 
State's Aid to Families with Dependent Children (AFDC) money payment 
for a family of the same size which has no income or resources. Because 
the legislative history explicitly states that the Congress intended 
that this waiver option permit States to use institutional deeming 
rules, we are interpreting the FFP limits at Sec. 435.1007 to mean that 
the income used for purposes of determining if the FFP limits are met 
is income that would be used in the institutional setting. That is, 
only the waiver recipient's income would be used in calculating the FFP 
limits since spousal and parental income is not deemed to be available 
in an institution. This interpretation will be reflected in a revision 
to Sec. 435.1007 in a separate rule.
    Prior to this amendment to section 1915(c)(3) and the amendment 
under section 9411(c) of OBRA '86 limiting waivers under section 
1902(a)(10) to ``comparability'' of covered services under section 
1902(a)(10)(B), States had been permitted to waive eligibility 
requirements for the categorically needy, but not the medically needy. 
Generally, States used the waiver authority to use institutional income 
and resource deeming rules. The result of these two amendments to 
section 1915(c) is that this waiver authority no longer extends to the 
categorically needy, but extends only to the medically needy. However, 
a State may continue to use the institutional eligibility rules for 
categorically needy waiver recipients, if the individuals are members 
of an eligibility group that the State may elect to cover under section 
1902(a)(10)(A)(ii)(VI) of the Act and Sec. 435.217.
3. Post-Eligibility Treatment of Income
    In the proposed rule, we revised the post-eligibility rules at 
Sec. 435.726(c)(1) and Sec. 435.735(c)(1) to include the provisions of 
section 9502(e) of COBRA and section 9435(a) of OBRA '86. Post-
eligibility calculations for individuals who are found eligible under 
Sec. 435.217 determine how much of eligible waiver recipients' income 
is applied to the cost of home and community-based waiver services. One 
of the deductions from waiver recipients' income included in these 
calculations is a deduction for the maintenance needs of the waiver 
recipient.
    Section 9502(e) of COBRA amended section 1915(c) of the Act to 
reflect a change in the amount States may protect for the maintenance 
needs of waiver recipients in the post-eligibility calculations. The 
amendment in COBRA specifically allows States to use a higher 
maintenance needs standard for home and community-based recipients than 
permitted under Secs. 435.726 and 435.735(c)(1) for waivers approved or 
renewed on or after April 7, 1986. The amendment in OBRA '86 further 
amended section 1915(c) to also permit use of the higher maintenance 
need standards for waivers approved or renewed before April 7, 1986. In 
the proposed rule, we provided that the maintenance amount be based on 
a reasonable assessment of need and that States set an upper limit 
which cannot be exceeded for any one individual. Should a State choose 
to use maintenance need standards that vary by individual, it must 
assure that all individuals in like circumstances are treated 
comparably.
    The proposed rule did not address how the rules used to determine 
income in the post-eligibility income and resource process for an 
institutionalized individual who has a spouse who lives in the 
community would affect home and community-based waiver recipients whose 
eligibility is based on section 1924 of the Act. We are addressing this 
issue in a separate rule that will propose further revisions to the 
post-eligibility regulations. These revisions will address application 
of the section 1924 rules and other matters. They will include our 
interpretation of ``institutionalized spouse'' at section 1924(h)(1) as 
allowing, on a waiver-by-waiver basis, use of the post-eligibility 
rules at section 1924(d) to determine Medicaid benefits payable for 
individuals who are eligible for home and community-based waiver 
services under Sec. 435.217. That is, an individual would be subject to 
the section 1924 post-eligibility rules if (1) the individual's State 
elected the section 1924(h)(1) post-eligibility option, (2) the 
individual meets the criteria of Sec. 435.217, and (3) the individual 
has a spouse who is neither institutionalized in a medical institution 
or nursing facility nor receiving home and community-based waiver 
services.
    We caution States to carefully evaluate how section 1924(d) post-
eligibility rules will affect the waiver population. Generally, the 
election of the section 1924(d) post-eligibility rules would not 
adversely affect the waiver recipient. However, there is at least one 
exception with respect to individuals who are not living with their 
community spouses. If the section 1924(d) post-eligibility rules are 
used for such individuals, the waiver recipient is not likely to have 
enough protected income to pay for his or her maintenance needs. This 
situation can occur because only the personal needs allowance for 
institutionalized individuals is protected in the section 1924 post-
eligibility calculation. Income above the personal needs allowance 
would go either to the community spouse in the form of a monthly income 
allowance, or for medical and remedial care expenses (including waiver 
services). Thus, the waiver recipient is not likely to have income to 
pay for his or her food, clothing, and shelter in the community.
4. Provisions of the Final Rule
    We are adopting the proposed Sec. 441.301(a)(2) to allow a State to 
request a waiver of section 1902(a)(1) or section 1902(a)(10)(B) as 
final. We are also adding a provision to that section to allow for 
waiver of the requirements of section 1902(a)(10)(C)(i)(III) of the Act 
concerning income and resource rules applicable to institutionalized 
individuals with spouses living in the community, as added by section 
4118(a)(1) of OBRA '87.
    We are adopting the proposed revisions to Sec. 435.726(c)(l) and 
Sec. 435.735(c)(l) as final, without further modification.

G. Expenditure for Waiver Services

1. Prohibition on Imposition of Certain Regulatory Limits on 
Expenditures
    a. Background. Section 9502(c) of COBRA amended section 
1915(c)(2)(D) of the Act and added a new section 1915(c)(6). Section 
9502(c)(1) of COBRA clarified section 1915(c)(2)(D) to specify that, 
under a home and community-based services waiver, a State's estimated 
average per capita expenditure for individuals under the waiver must 
not exceed the estimated average per capita expenditure for services 
without the waiver. We refer to this as ``a cost-neutrality test for 
section 1915(c) waivers.'' (We have always interpreted section 
1915(c)(2)(D) of the Act in this manner and previously implemented the 
applicable standards accordingly.) The cost estimate formula is located 
in regulations at Sec. 441.303(f)(l).
    Section 1915(c)(6) of the Act, as enacted by section 9502(c)(2) of 
COBRA, directs the Secretary to abolish the regulatory limitation 
concerning home and community-based services waiver expenditures. This 
expenditure limitation appears in existing regulations at 
Secs. 441.302(e)(2) and 441.310(a)(2) and requires a State to provide 
satisfactory assurance that actual total expenditures for home and 
community-based services and the State's claim for FFP for the services 
will not exceed the State's approved estimates for waiver services. 
Under the existing regulations, expenditures that exceed the State's 
approved estimates would not have been eligible for FFP.
    In the proposed rule, we revised Sec. 441.302 (e) and (f) that deal 
with a State's assurances on the cost-neutrality of its waiver 
programs. Section 441.302(e) deals with a State's estimates as 
contained in its waiver proposals and Sec. 441.302(f) deals with a 
State's actual expenditures as reported on the State's annual 
expenditure reports as required under section 1915(c)(2)(E) of the Act. 
We inserted ``100 percent'' in each section to clearly indicate the 
intention of section 9502(c) of COBRA that a waiver be cost-neutral 
(formerly referred to as ``cost-effective''). The Congress intended 
that expenditures made under a State waiver not exceed 100 percent of 
the average per capita expenditure that the State reasonably estimates 
would have been made if the waiver had not been granted.
    We also proposed revisions to Sec. 441.304(d) to indicate that we 
will review all estimates very closely to determine if they are 
reasonable and based on statistically supportable assumptions. For 
waivers that are approved and operational, we will compare the data the 
State must furnish annually on its actual experience (HCFA form 372) 
with the approved expenditures the State estimated would occur absent 
the waiver. If we find that actual expenditures exceed the State's 
approved estimates for expenditures absent the waiver, we will require 
the State to amend its estimates for the subsequent waiver year(s). We 
will compare the revised estimates with the State's actual experience 
to determine if these estimates are reasonable. We may terminate a 
waiver if we find that, based on the revised estimates in the amendment 
request, the waiver is not cost-neutral or that the revised estimates 
are unreasonable. For waiver renewal requests, we will compare the 
estimated expenditures for the renewal period against the State's 
actual experience as shown in its annual reports. Based on this 
comparison, we will not approve a waiver renewal request if we find 
that the renewal request is not cost-neutral or that the estimates are 
not reasonable based on the annual reports.
    These revisions were required by section 9502(c)(2) of COBRA.
    We received the following public comments on these proposed 
provisions.
    Comment: A State agency suggested that a single recipient's cost 
not be used to determine the waiver's cost effectiveness.
    Response: In virtually all cases, we determine the cost-neutrality 
of a waiver request by comparing the average costs for all recipients 
under the waiver to the estimated average costs absent the waiver. The 
only time we would review a single recipient's cost under a home and 
community-based services waiver would be when a waiver serves only one 
person. If the recipient's costs exceeded the appropriate institutional 
costs, the waiver would not be cost-neutral. However, section 
1915(c)(4)(A) of the Act authorizes a State, at its option, to limit 
home and community-based services waivers to those recipients for whom 
the State has a reasonable expectation that the cost of medical 
assistance under the waiver for those individuals will not exceed the 
cost of medical assistance for those same recipients absent the waiver. 
Thus, this section of the Act permits States to include (1) only 
recipients whose costs under a waiver are reasonably expected to be 
less than or the same as the appropriate institutional costs under 
medical assistance and (2) individual recipients whose waiver costs are 
reasonably expected to exceed institutional costs under medical 
assistance (if the waiver did not apply), as long as the estimated 
average per capita cost with the waiver does not exceed the estimated 
average per capita cost absent the waiver.
    Comment: Two commenters asserted that a State should not be 
required to submit an amendment to its waiver proposal if the State 
exceeds its approved cost and utilization estimates.
    Response: Section 1915(c)(2)(D) of the Act requires that we assess 
the reasonableness of a State's estimates of the cost-neutrality of its 
program. The amendment must be submitted prior to the expiration of the 
waiver year in question and must include cost and utilization changes 
for the current waiver year and all waiver years that follow through 
the term of the approved waiver request. If a State anticipates 
substantive changes in its cost and utilization estimates, we believe 
that the State should be required to submit amendments to explain the 
basis and extent of the changes. The State's recomputed cost-
effectiveness formula, based on the revised cost and utilization, must 
substantiate continued cost-neutrality.
    Comment: One commenter requested that we simplify the waiver 
application process which includes estimations of expenditures based on 
an equation specified in the regulations.
    Response: We agree with the commenter's request. We are making a 
significant change in the formula values proposed at Sec. 441.303(f)(1) 
to simplify the waiver cost-neutrality formula and thus reduce the 
overall complexity of the waiver application procedure. We are reducing 
the formula by retaining only those formula values which are critical 
in assessing the cost-neutrality of the program: D, D', G, and G'.
    Section 1915(c)(2)(D) requires that States make assurances, 
satisfactory to the Secretary, that waiver programs will be cost-
neutral to the Medicaid program. Cost-neutrality is defined in terms 
which require that the average per capita annual Medicaid expenditure 
with the waiver in place not exceed the average per capita annual 
Medicaid expenditure without the waiver. The waiver formula is intended 
to provide a uniform method of providing data to the Secretary, 
sufficient to allow a determination of whether the State's estimate of 
per capita cost-neutrality is reasonable. We believe that, based on 
many years of program experience, the formula can be simplified to its 
key elements. Specifically, we would retain the two factors which 
represent average per-capita costs for waiver and other Medicaid 
services under the waiver (D and D'). These would be compared to the 
average per capita cost for alternative institutional care and other 
related Medicaid expenditures without the waiver (G and G'). To ensure 
these factors are inclusive of all relevant Medicaid expenditures, we 
have redefined D' and G' to include all other medical assistance 
expenditures and expanded services not under a State plan for early and 
periodic screening, diagnostic and treatment (EPSDT) services 
recipients. The meanings of D and G remain unchanged, but the 
definitions have been revised for clarity. We are also deleting the 
requirement at proposed Sec. 441.303(f)(3) that States must submit data 
on the estimated number of beneficiaries and expenditures for those who 
would receive hospital, NF, or ICF/MR services. With our simplification 
and redefinition of formula values, there is no longer a need for these 
data. We are renumbering the remaining paragraphs in section (f) 
accordingly.
    The following are our new definitions:

D = the estimated annual average per capita Medicaid cost for home 
and community-based services for individuals in the waiver program.
D' = the estimated annual average per capita Medicaid cost for all 
other services provided to individuals in the waiver program.
G = the estimated annual average per capita Medicaid cost for 
hospital, NF, or ICF/MR care that would be incurred for individuals 
served in the waiver, were the waiver not granted.
G' = the estimated annual average per capita Medicaid costs for all 
services other than those included in factor G for individuals 
served in the waiver, were the waiver not granted.

    Even though we have eliminated the ``C'' value (number of 
unduplicated waiver individuals a State intends to serve for each year 
of the waiver) from the equation, we will continue to require each 
State to report this information to us as part of a waiver request. 
This number may be revised when a State determines that it needs to 
increase or decrease the number of individuals it estimates it would 
serve under the waiver. We will include this number in our approval 
notices.
    b. Provisions of the final rule. We are revising Sec. 441.303(f) to 
include the changes noted above. We are simplifying the formula at 
Sec. 441.303(f)(1). We are providing in Sec. 441.303(f)(2) that, for 
purposes of the formula, the prime factors include the average per 
capita cost for all services provided under the State plan that are not 
accounted for in other formula values and include expanded EPSDT 
services.
    To further simplify the waiver application process, we are also 
revising Sec. 441.304 by deleting paragraph (a)(2), renumbering 
paragraphs (a)(1)(i) and (a)(1)(ii) as paragraphs (a)(1) and (a)(2), 
and revising paragraph (b). Section 441.304(b) will now read: HCFA will 
determine whether a request for extension of an existing waiver is 
actually an extension request or a request for a new waiver. If a State 
submits an extension request that would add a new group to the existing 
group of recipients covered under the waiver (as defined under 
Sec. 441.301(b)(6)), HCFA will consider it to be two requests: one as 
an extension request for the existing group, and the other as a new 
waiver request for the new group. Waivers may be extended for 
additional 5-year periods.
2. Computation of Estimated Expenditures Under Waivers for Individuals 
With a Particular Illness or Condition
    a. Background. Section 9502(d) of COBRA added a new section 
1915(c)(7) of the Act that authorized States that have established or 
wish to establish separate waivers for institutionalized, physically 
disabled individuals to estimate the average per capita expenditure for 
such individuals separately from the expenditures for all other 
individuals in NFs and ICFs/MR. Section 9411(a)(3) of OBRA '86 
subsequently changed section 1915(c)(7) to allow such separate 
demonstrations of cost-neutrality to be applied in any waiver targeted 
to inpatients with particular illnesses or conditions. In both cases, 
the specific group of eligible individuals must have been inpatients in 
hospitals, NFs, or ICFs/MR prior to being deinstitutionalized into the 
waiver program. Prior to the enactment of COBRA, States were not 
authorized to compute expenditures differently for a specific group of 
individuals by comparing costs to those in that group only, rather than 
total inpatient populations.
    Section 9411(a)(3) of OBRA '86 amended section 1915(c)(7) of the 
Act to allow States the option of using an alternative method for 
estimating costs under section 1915(c)(2)(D) of the Act. This 
alternative method applies to waivers for individuals with a particular 
illness or condition, who are inpatients in hospitals, NFs, or ICFs/MR. 
The State may determine the average per capita expenditure that would 
have been made in a fiscal year for those individuals under the State 
plan separately from the expenditures for other individuals who are 
inpatients of those respective facilities. Alternatively, States may 
continue to use the usual method of estimating average per capita 
expenditures; that is, include the utilization and cost of all Medicaid 
recipients otherwise using a hospital, NF, or ICF/MR.
    In the Conference Committee report for OBRA '86 (H. Rept. No. 1012, 
99th Cong., 2d Sess. 400 (1986)), the Congress indicated its intention 
by stating that ``illness or diagnosis'' meant, for example, acquired 
immune deficiency syndrome (AIDS), or AIDS-related condition (ARC) and 
that ``condition'' meant, for example, chronic mental illness or 
ventilator dependency. Thus, for waivers directed to any specified 
group, States may make expenditure estimates specific to that group of 
patients who are inpatients of hospitals, NFs, or ICFs/MR, 
distinguished by illness or condition.
    As with all home and community-based waivers, States must furnish 
reasonable and verifiable cost estimates for waivers dealing with 
individuals with a specific illness or condition.
    The provisions of section 1915(c)(7) of the Act, as amended by OBRA 
'86, apply to applications for waivers (or renewals) approved on or 
after October 21, 1986.
    Section 8437(a) of TMRA made a further amendment to section 
1915(c)(7)(A) of the Act to extend the principle of specific illness or 
condition cost estimates to individuals ``who would require the level 
of care provided in hospitals, NFs or ICFs/MR.'' As amended by TMRA, 
section 1915(c)(7)(A) specifies that, for a home and community-based 
services waiver that applies to individuals with a particular illness 
or condition, who are inpatients in, or who would require the level of 
care provided in, hospitals, NFs, or ICFs/MR, the Secretary must allow 
the State to determine the average per capita expenditure that would 
have been made in a fiscal year for those individuals under the State 
plan separately from the expenditures for other individuals who are 
inpatients in, or who would require the level of care provided in, 
those respective facilities. This provision applies to eligible 
individuals whether or not those individuals are institutionalized 
prior to entering the waiver.
    Section 8437(b) of TMRA made the amendments to section 
1915(c)(7)(A) effective for waiver applications submitted before, on, 
or after November 10, 1988, the date TMRA was enacted.
    In the proposed rule, we revised Sec. 441.303(f)(3) to provide 
that, for waivers that apply only to individuals with a particular 
illness or condition (formerly referred to as physically disabled in 
section 9502(d) of COBRA) who are inpatients in hospitals, NFs, or 
ICFs/MR, the State may determine the average per capita expenditures 
that would have been made in each waiver year for those individuals 
under the State plan separately from the expenditures for other 
inpatients of the respective certified facilities.
    We did not receive public comments on this specific provision.
    b. Provisions of the final rule. We are adopting this proposed 
provision as final with the change described below. We will consider 
timely comments submitted on this change.
    We have revised proposed Sec. 441.303(f)(4) (and renumbered it as 
Sec. 441.303(f)(3) to accommodate other revisions) to include reference 
to individuals who would require the level of care provided in 
hospitals, NFs, or ICFs/MR. In addition, we have revised this section 
to allow an agency to (1) exclude expenditures for other individuals in 
the affected hospitals, NFs, or ICFs/MR when estimating average per 
capita expenditures for a waiver for individuals with a particular 
illness or condition who would otherwise require hospital, NF, or ICF/
MR level of care, as provided for in section 8437(a) of TMRA; and (2) 
support the accompanying data with documentation to verify that the 
cost-effectiveness estimates for these illness or condition specific 
waivers are reasonable as required under section 1915(c)(2)(D) of the 
Act.
3. Computation of Estimated Expenditures Under Waiver for 
Institutionalized Developmentally Disabled Individuals
    a. Background. Section 4118(k) of OBRA '87 added a new paragraph 
(B) to section 1915(c)(7) of the Act concerning computation of the 
average per capita expenditure estimates made by a State under section 
1915(c)(2)(B) of the Act for a waiver that applies only to individuals 
with developmental disabilities who are inpatients in a nursing 
facility. (The original wording of the statute specified SNFs and 
ICFs.) The new provision states that, if the State has determined, on 
the basis of an evaluation under section 1915(c)(2)(B) of the Act, that 
individuals need the level of care provided in an ICF/MR, the State may 
determine the average per capita expenditures that would have been made 
in a fiscal year for those individuals under the State plan based on 
the average per capita expenditures under the State plan for services 
to individuals who are inpatients of ICFs/MR (rather than NFs).
    We have determined that the evaluation required under section 
1915(c)(2)(B) of the Act should be completed as part of the 
preadmission screening annual resident review (PASARR) required under 
section 1919(e)(7)(B) of the Act entitled ``State Requirements for 
Annual Resident Review.'' Section 1919(e)(7)(B)(ii) requires that, as 
of April 1, 1990, in the case of each resident of a nursing facility 
who is mentally retarded, the State mental retardation or developmental 
disability authority must review and determine--
    (1) Whether or not the resident, because of the resident's physical 
and mental condition, requires the level of services of an intermediate 
care facility described under section 1905(d) (ICF/MR); and
    (2) Whether or not the resident requires specialized services for 
mental retardation.
    We assume that the evaluation of need noted above would be 
accomplished during the annual resident review. (The requirement that 
the States use the PASARR process in conducting these evaluations was 
established by HCFA and is not contained in section 1915(c)(2)(B) of 
the Act.)
    Section 411(k)(10)(H) of MCCA amended section 1915(c)(7)(B) of the 
Act to clarify that, in making estimates as to cost-neutrality in a 
waiver that applies exclusively to developmentally disabled individuals 
under section 1915(c)(7)(B) of the Act, who have been identified as 
inappropriately placed in NFs, yet requiring the level of services 
provided by an ICF/MR, the State may estimate utilization without 
regard to the availability of ICF/MR beds for such inpatients. 
Therefore, section 1915(c)(7)(B) exempts States from the requirement to 
demonstrate ICF/MR bed capacity for recipients served by waivers 
proposed under section 1915(c)(7)(B) of the Act.
    b. Provisions of the final rule. We have added a new 
Sec. 441.303(f)(4) to provide that, in making estimates for a separate 
waiver program that applies only to individuals (1) who are 
developmentally disabled, (2) who are inpatients of a NF, and (3) who 
have been determined by the State through the PASARR process (section 
1919(e)(7)(B) of the Act) to require the level of care provided in an 
ICF/MR, the State may determine the average per capita expenditures 
that would have been made in a fiscal year for those individuals based 
on the average per capita expenditures for inpatients in an ICF/MR. 
When submitting estimates of institutional costs without the waiver, 
the State may use the average per capita costs of ICF/MR care even 
though the deinstitutionalized developmentally disabled individuals 
were inpatients of NFs. We will consider timely comments submitted on 
this addition.
4. Computation of Expenditure Estimates for Persons With Mental 
Retardation or a Related Condition in a Decertified Facility
    a. Background. Section 4742(c)(1) of OBRA '90 added a new section 
1915(c)(7)(C) to the Act relating to waivers for individuals with 
mental retardation or a related condition who are residents in an ICF/
MR that has had its participation under the State's Medicaid plan 
terminated. This added provision allows a State, when making estimates 
under section 1915(c)(2)(D) of the Act, to determine the average per 
capita expenditures under a waiver that would have been made in a 
fiscal year for those individuals without regard to the termination and 
as if Medicaid institutional payment continued. Termination of an ICF/
MR's participation under a State plan does not affect estimates made 
under section 1915(c)(2)(D).
    Section 4742(c)(2) provides that this provision applies as if 
included in the enactment of OBRA '81, but only applies to facilities 
terminated on or after November 5, 1990, the enactment date of OBRA 
'90.
    b. Provisions of the final rule. We are adding a new 
Sec. 441.303(f)(7) to state that in making estimates for waivers that 
apply to persons with mental retardation or related conditions, States 
may include costs and utilization of Medicaid residents in ICFs/MR that 
have been terminated on or after November 5, 1990, when determining the 
average per capita expenditure that would have been made in a waiver 
year. We will consider timely comments submitted on this addition.
5. Adjustments in Estimates To Include Preadmission Screening 
Requirements
    a. Background. Section 4742(e) of OBRA '90 provides that, under 
section 1915(c) of the Act, a State may adjust its waiver estimates, 
submitted under section 1915(c)(2)(D) of the Act, of average per capita 
expenditures for individuals with mental retardation or a related 
condition to include expenditures made on or after January 1, 1989, 
that result from the preadmission screening program required under 
section 1919(e)(7)(B) of the Act. The State may include increases in 
expenditures for, or utilization of, ICFs/MR resulting from its 
preadmission screening program for making determinations for 
individuals with mental retardation admitted to NFs on or after January 
1, 1989.
    b. Provisions of the final rule. We are adding a new section 
441.303(f)(9) to incorporate the provisions of section 4742(e) of OBRA 
'90. We will consider timely comments submitted on this addition.
6. Treatment of Room and Board in Submitting Estimates of Expenditures 
for Personal Caregivers
    a. Background. Section 1915(c)(1) of the Act provides for payment, 
as medical assistance, of part or all of the cost of home and 
community-based services under an approved waiver (other than room and 
board). Except for respite care furnished in a State-approved facility 
that is not a private residence, FFP is not available for room and 
board as part of a home and community-based service.
    Section 4741(a)(1) of OBRA '90 amended section 1915(c)(1) to 
specify that, for purposes of this section of the Act, ``the term `room 
and board' shall not include an amount established under a method 
determined by the State to reflect the portion of costs of rent and 
food attributable to an unrelated personal caregiver who is residing in 
the same household with an individual who, but for the assistance of 
such caregiver, would require admission to a hospital, nursing 
facility, or intermediate care facility for the mentally retarded.''
    b. Provisions of the final rule. We are adding a new 
Sec. 441.303(f)(8) to provide that, in submitting estimates for waivers 
that include personal caregivers as a waiver service, the State may 
include a portion of the rent and food attributed to the unrelated 
personal caregiver who resides in the waiver recipient's home or 
residence. The method of apportioning the costs of rent and food is 
determined by the State, subject to review and approval by HCFA. The 
method used must be explained fully to receive HCFA's approval. A 
personal caregiver provides a waiver service to meet the recipient's 
physical, social, or emotional needs (as opposed to services not 
directly related to the care of the recipient; that is, housekeeping or 
chore services). FFP for live-in caregivers is not available if the 
recipient lives in the caregiver's home or in a residence that is owned 
or leased by the caregiver. We have interpreted language in the statute 
that rent and food costs attributable to the live-in caregiver may now 
be included in the State's estimates of cost-neutrality to include 
situations in which the live-in caregiver resides in the recipient's 
home and the recipient would incur additional costs for such a 
caregiver. When the recipient lives with the caregiver, the caregiver 
incurs the additional costs for the recipient. We believe the payment 
to the caregiver for the recipient's rent and food would violate the 
room and board exclusion under section 1915(c)(1) of the Act. We will 
consider timely comments on this addition.

H. Coordinated Services Between Maternal and Child Health Programs and 
Home and Community-Based Service Programs

1. Background
    Section 9502(h) of COBRA added a new section 1915(c)(8) to the Act. 
This section allows the State agency that administers the Medicaid plan 
to make cooperative arrangements, whenever appropriate, with the State 
agency that administers the program for children with special health 
care needs under the Maternal and Child Health Program (Title V of the 
Act), to improve access to coordinated services to meet the children's 
needs. The amendment made by section 9502(h) was effective April 7, 
1986.
    In the proposed rule, we redesignated the existing Sec. 441.306 as 
Sec. 441.308 and added a new Sec. 441.306 to incorporate the provisions 
of section 1915(c)(8) of the Act, as added by section 9502(h) of COBRA.
    We did not receive any public comments on this provision.
2. Provisions of the Final Rule
    We are adopting the proposed regulations, without modification, as 
final rules.

I. Limitation on Participants in Waiver Programs

1. Background
    Section 9502(i) of COBRA added a new section 1915(c)(9) to the Act. 
This addition provides that when a waiver contains a limit on the 
number of individuals who can receive home and community-based 
services, the State may substitute additional individuals to replace 
any recipients who die or become ineligible for Medicaid services under 
the State plan. This provision was effective on April 7, 1986.
    In the proposed rule, we redesignated existing Sec. 441.305 as 
Sec. 441.307 and added a new Sec. 441.305 to provide that a State may 
substitute additional individuals to replace those under a home and 
community-based services waiver who die or become ineligible for waiver 
services, when the waiver contains a federally imposed limit on the 
number of individuals receiving waiver services, as specified in 
section 1915(c)(9) of the Act, as added by section 9502(i) of COBRA.
    Section 4118(b) (entitled ``Increase in Number of Individuals Who 
May Be Served Under Model Home and Community-Based Services Waiver) of 
OBRA '87 amended section 1915(c) of the Act by adding a new paragraph 
(10) that states that ``No waiver under this subsection shall limit by 
an amount less than 200 the number of individuals in the State who may 
receive home and community-based services under such waiver.'' We 
interpreted this provision as restricting the Secretary's ability to 
limit the number of recipients a State could serve in a model waiver 
program. That is, the Secretary may not place a limit below 200 on the 
number of persons a State may serve. While the provision could, 
arguably, be read to limit the actual number of individuals who may 
receive model waiver services to no less than 200, based on the 
legislative history, and the history of the section 1915(c) program, we 
believe that this reading is unsupportable. First, model waiver 
programs have historically had a Federally established limit of 50 
individuals who could receive services. Second, the limited size of the 
program is specifically noted in the OBRA '87 Conference Report (H. 
Rept. No. 495, 100th Cong., 1st Sess. 755 (1987)), in the section 
describing the current state of the law. Finally, section 4118 of MCCA 
is entitled ``Increase in Number of Individuals Who May Be Served Under 
Model Home and Community-Based Services Waiver.'' On these bases, we 
believe that the Congress intended to enable States to serve a greater 
number of persons while maintaining the Secretary's authority to impose 
a limit on programs which she believes are of excessive size.
    Section 411(k)(10)(A) of MCCA further amended section 1915(c)(10) 
of the Act in an attempt to clarify the language in section 4118(b) of 
OBRA '87, and confirmed our interpretation of the Congress' intent in 
enacting that provision. This amendment restricts the Secretary's power 
to limit the number of persons who can receive home and community-based 
waivers to no lower than 200. Again, in light of the history of the 
waiver program and the legislative history of this provision, we 
interpret this amendment to restrict the Secretary's power to limit the 
number of participants in the model waiver program only. Historically, 
there has been no limit on the number of participants in the regular 
home and community-based waiver programs, whereas there has been a 50-
person Federally imposed limit on the number of persons who can 
participate in a model waiver. Also, section 411(k)(10)(A) was 
specifically enacted to remedy the ambiguity in section 4118(b), which 
itself was aimed only at model waivers. We believe, therefore, that 
this provision enables the Secretary to limit the number of 
participants in a model home and community-based program to 200 
persons, or any amount above 200. Through these regulations, the 
Secretary has opted to impose a maximum limit of 200 persons for any 
State waiver program. On an individual State basis, an approved State 
plan may contain a maximum limit that is lower than 200. Thus, no State 
may serve any more than 200 persons, but any State may be limited to a 
lower number as approved in its waiver program. There is no comparable 
limit on regular waiver programs. Thus, the 200-person limit represents 
the maximum number of individuals that a State may serve under a 
``model'' home and community-based services waiver at any one time.
    A State may, in accordance with section 1915(c)(9) of the Act, 
replace individuals who die or lose Medicaid eligibility for State plan 
services. However, the State is still limited to serving no more than 
the number approved in its model waiver request, or 200 individuals, at 
any time.
    Section 411(k)(10)(A) is effective as if included in the enactment 
of OBRA `87, that is, December 22, 1987. Thus, States may continue to 
serve less than 200 recipients under approved model waivers and renew 
these requests by any number of recipients up to the new 200-person 
limit. States with model waivers approved prior to December 21, 1987, 
may submit an amendment to obtain approval to serve clients in excess 
of those originally approved, up to the new 200-person limit.
    We received the following comments on the proposed rule:
    Comment: Two commenters recommended that States be allowed to 
substitute recipients in a home and community-based services waiver 
program under section 1915(c) of the Act, as is permitted under a model 
waiver program.
    Response: The model waiver program derives its legal base from the 
same statutory authority as the section 1915(c) waiver program but 
administratively it has been limited in the total number of recipients 
that could be served. The original limit was 50 individuals. As we 
stated above, the amendment made by section 4118(b) of OBRA `87 
increased the limit on model waivers to 200 individuals and the 
amendment made by section 9502(i) of COBRA authorized substitution for 
recipients who die or lose Medicaid eligibility. Although States may 
replace recipients, there is no authorization for exceeding (at any 
point in time) the 200-person limit on the model waiver request.
    In contrast, HCFA has never prohibited the substitution of 
recipients under the section 1915(c) waiver program. In fact, we 
require that the utilization estimates submitted prior to approval must 
be based on unduplicated recipient counts, not ``slots'' or full-time 
equivalents. ``Unduplicated'' means that once a recipient is counted in 
a particular setting (in a NF, for example), that recipient cannot be 
recounted in that setting if readmitted during the reporting period 
(waiver year). This is the same reporting principle used in HCFA Forms 
64 and 2082. State waiver utilization estimates must include an 
adjustment for Medicaid recipients who die, lose eligibility, or leave 
the program for any reason (institutionalization, for example). 
Therefore, substitutions are expected, and all persons replaced should 
already be incorporated into the waiver utilization estimates approved 
for each year of every waiver program. Because the unduplicated 
recipient count includes reasonable estimates of substitution and the 
statute requires reasonableness of estimates and cost-neutrality, we 
are requiring waiver amendments if the State expects to exceed its 
approved cost and utilization estimates, regardless of the reason for 
the change.
    Comment: Two commenters stated that HCFA is narrowing the 
legislative intent by requiring institutional bed capacity to offset 
increases in waiver recipients, especially since section 9502(c)(2) of 
COBRA eliminated HCFA's proposed cap on total waiver costs as 
established under Sec. 441.304(d)(1). The proposed cap was the product 
of the State's estimate of waiver participants times the estimated 
average per capita cost.
    Response: We agree. The regulatory cap on total waiver costs has 
already been eliminated by legislative action (section 1915(c)(6) of 
the Act). Moreover, we believe the requirement that States establish 
that there would be sufficient institutional bed capacity for their 
waiver population in the event there was no waiver should be rescinded. 
While this requirement served a sound analytical purpose as part of the 
cost-neutrality test in the early days of the program, our experience 
over the last several years has shown it to be of diminishing value. 
The requirement placed an unreasonable burden on States by requiring 
them to project the estimated development of additional institutional 
capacity. That additional burden was never the requirement's intent and 
its development was contrary to the interests of the States and the 
Federal Government. Moreover, States have generally been successful in 
documenting additional bed capacity sufficient to allow the expansion 
of their waiver programs. Because the bed capacity test has become an 
unnecessary and nonproductive exercise, we are deleting this 
requirement. In lieu of this test, and in the absence of information to 
the contrary, we will accept a State's assurance that, absent the 
waiver, recipients in the waiver would receive the appropriate level of 
Medicaid funded institutional care. Also, because the elimination of 
the bed capacity test recognizes that data regarding program 
utilization will no longer be relevant to the waiver application 
process, we have simplified the waiver formula to eliminate those 
formula values that relate to utilization. Instead, the formula now 
deals exclusively with program costs, with and without the waiver. As 
noted above, we will continue to require States to submit estimates of 
the number of unduplicated waiver recipients it will serve in each year 
of the waiver term. This figure will be indicated as ``C'' value and 
may be revised as a State deems necessary.
2. Provisions of the Final Rule
    We have adopted, as final, the revised Sec. 441.303(f) and the 
proposed new Sec. 441.305 that incorporated the provision of section 
1915(c)(9) of the Act as added by section 9502(i) of COBRA, with one 
change: We have revised paragraph Sec. 441.305(b) to specify that there 
is a 200-person limit (instead of 50) for model waivers under section 
1915(c)(10) as amended by section 411(k)(10)(A) of MCCA. The revised 
Sec. 441.303(f) reads, ``An explanation with supporting documentation 
satisfactory to HCFA of how the agency estimated the average per capita 
expenditures for services.'' We will consider timely comments on these 
revisions.
    We are also redesignating proposed Sec. 441.302(g) as (h) and 
adding a new Sec. 441.302(g) to require that a State provide assurance 
that, absent a waiver, recipients in the waiver would receive the 
appropriate type of Medicaid-funded institutional care (hospital, NF, 
or ICF/MR) that they require. We will consider timely comments on this 
addition.

J. Waiver Extensions and Renewals

1. Background
    Initially, section 1915(c) of the Act provided that approved home 
and community-based services waivers could be granted for an initial 
term of 3 years and could be extended for additional 3-year periods if 
a State requests an extension. The Secretary could approve a request 
for a waiver extension if the extension request met the waiver 
requirements for the extended period and HCFA determined that the State 
met all of the required assurances for the term of the initial waiver.
    Section 9502(f) of COBRA provided that the Secretary, upon a 
State's request, may extend any home and community-based services 
waiver that expired on or after September 30, 1985, and before 
September 30, 1986, subject to the State's meeting all requirements for 
the waiver. The extension granted must be for a period of not less than 
1 year and no more than 5 years.
    Section 9502(g) of COBRA amended section 1915(c)(3) of the Act to 
revise the periods of time for which a waiver may be renewed from 
additional 3-year periods to additional 5-year periods under section 
9502(j)(6) of COBRA. This amendment is effective for waiver renewals 
approved on or after September 30, 1986.
    In our proposed rule, we revised Sec. 441.304(a) to change waiver 
extension or renewal periods to reflect the statutory requirements. We 
did not receive any public comments on this provision.
    Section 4102(c) of OBRA `87 provided that the Secretary extend 
approval of a State's section 1915(c) waiver for the elderly on the 
same terms and conditions through September 30, 1988, when (l) the 
State as of December 1, 1987, had a waiver approved for elderly 
individuals under section 1915(c) of the Act; (2) the waiver was 
scheduled to expire before July 1, 1988; and (3) the State notified the 
Secretary of its intention to file an application for a waiver under 
section 1915(d) of the Act.
2. Provisions of the Final Rule
    We have adopted, as a final rule, the proposed Sec. 441.304(a) to 
change the waiver extension and renewal periods to conform to section 
1915(c)(3), as amended by section 9502(g) of COBRA. We have not 
included in the final rule changes to paragraph (a)(2) that were 
included in the proposed rule because those changes are no longer 
necessary.

K. Technical/Administrative Changes

1. Terminology Change
    We have revised proposed Sec. 440.185 and amended Sec. 441.301 
through Sec. 441.304 and Sec. 441.310 by changing references to ``SNF'' 
and ``ICF'' to ``NF'' to conform them to nomenclature changes made to 
section 1915(c) by section 4211(a)(3) of OBRA `87.
2. Independent Assessment
    Although not specifically addressed in the proposed rule, a State 
agency asserted that our requirement in Sec. 441.303(g) for an 
independent assessment of a State's waiver program that evaluates the 
quality of care, the access to care, and the cost effectiveness is 
costly and duplicates HCFA's regional office (RO) reviews.
    Since the publication of this requirement (50 FR 10028, March 13, 
1985), various State agencies have asserted that the requirement is 
costly, unproductive, and duplicative of RO assessments. We agree with 
the commenter and are making the independent assessment voluntary. If a 
State determines it will contract for an independent assessment, FFP is 
available for the costs attributable to the assessment. The results 
should be forwarded to HCFA by the 90th day prior to expiration of the 
approved waiver and cover at least the first 24 or 48 months of the 
waiver.
3. Provision of Final Rule
    We are revising 441.303(g) to read as follows: ``The agency, at it 
option, may provide for an independent assessment of its waiver that 
evaluates the quality of care provided, access to care, and the cost-
neutrality. The results of the assessment should be submitted to HCFA 
at least 90 days prior to the expiration of the waiver and cover the 
first 24 or 48 months of the waiver. If a State chooses to provide for 
an independent assessment, FFP is available for the costs attributable 
to the independent assessment.''

III. Respiratory Care Services

A. Background
    Until the enactment of OBRA '86, the Medicaid statute did not 
permit payment for respiratory therapy services in a patient's home as 
a separate and distinct State plan service. Previously, such services 
could only be provided as a component of other State plan services or 
as a home and community-based service under a section 1915(c) waiver. 
For example, certain types of respiratory therapy services in the home 
were available when provided as a medically necessary component of 
covered home health nursing services. States also had the option of 
providing respiratory therapy services as an element of three other 
optional Medicaid benefits: medical or remedial care provided by a 
licensed practitioner, private duty nursing, and rehabilitative 
services. Thus, when respiratory care was available previously under 
the Medicaid State plan, it was provided as a part of a broader 
coverage authority. Because these authorities did not allow respiratory 
care services to be directed only to a specific population but required 
that such services be available to all recipients, very few States 
provided coverage for respiratory care services. Moreover, while 
respiratory care services could be provided to a specific population 
under a home and community-based services waiver, States' use of this 
waiver process to provide coverage was limited.
    Section 9408(a) of OBRA '86 amended section 1902(e) of the Act to 
provide, under paragraph (9), that, at the option of the State, a State 
Medicaid plan may be amended to include respiratory care services as 
medical assistance for an individual who:
     Is medically dependent on a ventilator for life support at 
least 6 hours per day;
     Has been so dependent on ventilator support for at least 
30 consecutive days as an inpatient (or the maximum number of days of 
inpatient care authorized under the State plan, if less than 30 days) 
as demonstrated by a continuous stay in one or more hospitals, NFs, or 
ICFs/MR;
     But for the availability of respiratory care services, 
would require respiratory care as an inpatient in a hospital, NF, or 
ICF/MR and would be eligible to have payment made for inpatient care 
under the State plan;
     Has adequate social support services to be cared for at 
home; and
     Wishes to be cared for at home.
    Under this provision, respiratory care services are services 
provided on a part-time basis in the home of the individual by a 
respiratory therapist or other health care professional who is trained 
in respiratory therapy (as determined by the State). The services under 
this benefit may not be included within other items and services 
furnished to these individuals as medical assistance under the State 
Medicaid plan.
    Section 9408(b) of OBRA '86 amended section 1902(a)(10) of the Act 
by adding item (IX) in the matter following section 1902(a)(10)(E), to 
provide that a State is not required to make respiratory care services 
(as defined in section 1902(e)(9)(C) of the Act) available, or 
available in the same amount, duration, and scope, to individuals who 
do not meet the criteria in section 1902(e)(9)(A) of the Act. However, 
if the State provides this benefit, it is required to make respiratory 
care services available in the same amount, duration, and scope to all 
Medicaid recipients who do meet the criteria in section 1902(e)(9)(A) 
of the Act.
    Section 9408(c) of OBRA '86 includes respiratory care services 
under the definition of medical assistance in section 1905(a)(20) of 
the Act and makes technical conforming amendments to sections 
1902(a)(10)(C)(iv) and 1902(j) of the Act.
    In our proposed rule, we added--
     A new Sec. 440.185 to allow a State the option to amend 
State Medicaid plan coverage of respiratory therapy services for 
ventilator-dependent individuals under the specific conditions of 
coverage that were enumerated by section 9408(a) of OBRA '86;
     A new Sec. 440.250(o) to the list of exceptions to the 
comparability of service requirement. In following the statutory 
language in section 9408(a) of OBRA '86, we also indicated that 
respiratory care services for ventilator-dependent individuals are 
exempt from the general comparability requirement that services be 
provided in equal amount, duration, and scope to any eligible group 
under the State plan. We have, however, required comparability of 
services among those Medicaid-eligible persons under the State plan 
satisfying the explicit conditions of coverage for these services.
    Six entities submitted comments concerning respiratory care 
services as a new optional Medicaid benefit.
    Comment: One commenter asked whether respiratory care equipment, 
particularly ventilators, would be covered as equipment under the new 
benefit.
    Response: Ventilators will not be covered under this benefit. 
Section 1902(e)(9) of the Act, as added by section 9408 of OBRA '86, 
provides for respiratory therapy services, not equipment, to be 
provided to ventilator-dependent individuals as an optional service. 
The statute and accompanying conference committee report (H. Rept. No. 
1012, 99th Cong., 2d Sess. 413-414 (1986)) do not suggest that 
equipment required in the home (such as ventilators, needed to sustain 
the recipient's health and welfare) would be included. Such equipment 
is supplied by the State as a home health benefit under 
Sec. 440.70(b)(3), that mandates the provision of medical supplies, 
equipment, and appliances suitable for use in the home. In addition, 
States that pay for the optional prosthetic devices benefit may cover 
ventilators as a prosthetic device that supports a weak or deformed 
portion of the body under Sec. 440.120(c)(3).
    Comment: Another commenter asked us to define a recipient's home.
    Response: A recipient's home is a place of residence other than a 
hospital, NF, ICF/MR, or other institution as defined at Sec. 435.1009. 
We have revised Sec. 440.185 to specify that a recipient's home does 
not include these facilities.
    Comment: Two commenters suggested that more medical direction be 
required in decisions regarding the provision of respiratory therapy at 
home. One commenter proposed the use of medically sound criteria to 
determine eligibility and the other commenter recommended that more 
physician oversight and involvement in the direction of care be 
required.
    Response: We agree with the commenters concerning the need for 
greater medical direction for individuals in need of respiratory care 
services. We have added Sec. 440.185(a)(6) to require the direction of 
a physician who is familiar with the technical and medical components 
of home ventilator support and who has determined that in-home care is 
safe and feasible.
    Comment: One commenter stated that the regulations implementing the 
option to provide respiratory care services are too restrictive and 
limited as a Medicaid State plan option because respiratory care 
services would be limited to individuals who (1) need at least 6 hours 
of ventilator support for life support, (2) depend on ventilator 
support for at least 30 consecutive days and (3) require respiratory 
care as an inpatient.
    Response: Our proposed regulations closely followed the statutory 
language and the only restrictions we imposed were those contained in 
the statute. In response to comments, we are now adding the requirement 
that a recipient receive respiratory care services under the direction 
of a physician who is familiar with the technical and medical 
components of home ventilator support and who has determined that in-
home care is safe and feasible.
    Comment: One commenter was concerned that the payment rate for in-
home respiratory therapy would not be adequate.
    Response: Under the Medicaid program, the State establishes the 
payment rate within broad Federal guidelines. We believe it would be 
inappropriate to dictate a special payment procedure for this service.
    Comment: One commenter requested that HCFA specifically refer to 
``respiratory therapy technician'' as approved provider of respiratory 
care services to effectively recognize another level of skilled 
respiratory care practitioner.
    Response: Section 9408(a) of OBRA '86 does not anticipate or 
require that we specify which practitioners or technicians are accepted 
by the States as providers. In the proposed rule (53 FR 19957 and 
19960), we designated a broad and inclusive category ``other health 
care professional trained in respiratory therapy (as determined by the 
State)'' in the preamble and in Sec. 440.185 of the regulation text. 
This ``other'' category could include the respiratory therapy 
technician as well as other types of skilled practitioners to the 
degree that they are recognized under State law.

B. Provisions of the Final Rule

    We are adopting the proposed regulations under Sec. 440.185 and 
Sec. 440.250(o) as final rules with the following modifications:
     We have added Sec. 440.185(a)(6) to require that (1) an 
individual who receives home respiratory care must receive these 
services under the care of a physician who is familiar with the 
technical and medical components of home ventilator support, and (2) 
that this physician must determine medically that in-home care is safe 
and feasible for the recipient.
     We have revised Sec. 440.185(b) to specify the facilities 
that are not considered to be a recipient's home.

IV. Regulatory Impact Analysis

A. Introduction

    Any impact of this final rule with comment period upon providers 
will be the result of individual State decisions as developed in waiver 
requests and including coverage of respiratory care for ventilator-
dependent individuals. Due to the positive reception of the home and 
community-based waiver program, we believe that this rule will be well-
received by those concerned with such programs. This rule generally 
benefits States and providers. The revisions to regulations covering 
home and community-based waivers offer broader service coverage than 
current rules and may result in new waiver applications and expansion 
of existing waivers. Thus, there may be more funds flowing through 
waivers. Because of the appeal of the program to States, the proportion 
of Medicaid expenditures flowing through home and community-based 
waivers is growing. The broader coverage made possible under this final 
rule with comment period is one factor that offers opportunity for 
further growth. Waivers would also be approved for longer periods, 
which may increase the aggregate magnitude of granted waivers.
    Thus, although this final rule with comment period should 
contribute to the growth of expenditures under waivers, we are unable 
to isolate the effects of this final rule from other factors affecting 
the growth of waivers.
    If this final rule with comment period results in a substantial 
increase in the growth of waivers, it could affect small entities. Most 
entities would benefit--contingent upon State decisions that cannot be 
predicted. Although the changes being implemented in this final rule 
will facilitate the approval of an increased volume of waivers, we do 
not expect the rule in itself to increase waivers to the extent that a 
demonstrable significant economic impact would result. With the 
exception of the revision to Sec. 441.303(f)(1) that eliminates the bed 
capacity (also called the ``cold bed test'') factor from the annual 
average per capita expenditures estimate, regulations establishing 
terms or conditions of Federal grants, contracts, or financial 
assistance call for a different form of regulatory analysis than do 
other types of regulations. In some instances, an extensive benefit-
cost analysis may be appropriate to inform the Congress and the 
President more fully about the desirability of the program, but this 
would not ordinarily be required in a regulatory impact analysis. The 
primary function of an RIA for this type of regulation should be to 
verify that the terms and conditions are the minimum necessary to 
achieve the purpose for which the funds were appropriated. Beyond 
controls to prevent abuse and to ensure that funds appropriated to 
achieve a specific purpose are channeled efficiently toward that end, 
maximum discretion should be allowed in the use of Federal funds 
particularly when the recipient is a State or local government.

B. Regulatory Flexibility Act

    We generally prepare a regulatory flexibility analysis that is 
consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
through 612) unless the Secretary certifies that a final rule does not 
have a significant economic impact on a substantial number of small 
entities. For purposes of the RFA, we consider all providers to be 
small entities. Thus, both those providers that lose patients 
deinstitutionalized into the home or community and the home and 
community-based providers of services that receive these patients/
recipients are small entities. This final rule will also affect States 
and Medicaid recipients, but they are not considered small entities 
under the RFA.

C. Effect on Medicaid Program Costs

    We anticipate that the discretionary provision to eliminate the bed 
capacity test may result in the following costs:

                             Medicaid Costs                             
             [In millions rounded to the nearest $5 million]            
------------------------------------------------------------------------
                                                       Federal    State 
                    Fiscal year                        costs      costs 
------------------------------------------------------------------------
1994................................................       $85       $65
1995................................................       110        85
1996................................................       135       100
1997................................................       160       120
1998................................................       190       145
1999................................................       225       170
------------------------------------------------------------------------


    These cost increases are due to the expectation that more 
individuals will be eligible for home and community-based waiver 
services under Medicaid as a result of the elimination of the bed 
capacity test. However, it should be noted that the State costs 
reflected in the above chart may include costs that are currently 
being, or will be in the future, spent by States to provide medical 
assistance under programs other than Medicaid. Additionally, we believe 
that costs for waiver growth may be limited as a result of the fiscal 
capacities of the States.
    Under section 1915(c)(2)(D) of the Act, the estimated average per 
capita expenditure under a home and community-based waiver may not 
exceed 100 percent of the estimated average per capita expenditure that 
the State reasonably estimates would have been made if the waiver had 
not been granted. All States have assured HCFA of this as a condition 
of waiver approval. Thus, under the law, this final rule is expected to 
be technically budget neutral with the exception of the costs 
associated with the elimination of the bed capacity test. However, 
section 9502 of COBRA and sections 9408 and 9411 of OBRA '86 have 
negligible costs associated with them overall. It is difficult to 
determine and may be impossible to assess precisely whether these 
changes would substantially affect the rate of growth in Medicaid 
expenditures.
    We expect coverage of home respiratory care for ventilator-
dependent individuals to have a similar impact. This new program also 
allows home care as an alternative to institutionalization. New 
programs may be added as alternatives to institutionalization as a 
result of this final rule with comment period.
    We do not expect that the adoption of this final rule with comment 
period will result in a major increase in costs or prices for 
consumers, individual industries, or local government agencies in any 
geographic region. Employment in institutional care is more capital 
intensive; home and community services are more labor intensive. 
Increased costs or revenue losses may be experienced by providers (both 
their owners and employees) that formerly served institutionalized 
recipients. Although an institutional provider of services may be 
adversely affected by the existence of a waiver in its area, it may 
choose to provide services covered under a home and community-based 
waiver, and the adverse impact probably will be offset by increased 
business.
    In conclusion, home and community-based waivers and respiratory 
care for ventilator-dependent individuals generally may result in 
services being furnished in different settings, often by different 
providers, with possibly some losses in revenue by some providers 
offset by increases to other providers. We do not consider this 
redistributive effect to be significant. We do expect recipients to 
benefit from a deinstitutionalized life and from the services that may 
be provided under these provisions.

D. Rural Hospital Impact Statement

    Section 1102(b) of the Social Security Act (the Act) requires the 
Secretary to prepare a regulatory impact analysis for any final rule 
that may have a significant impact on the operations of a substantial 
number of small rural hospitals. Such an analysis must conform to the 
provisions of section 604 of the RFA. For purposes of section 1102(b) 
of the Act, we define a small rural hospital as a hospital with fewer 
than 50 beds located outside a metropolitan statistical area. We have 
determined and the Secretary certifies that this final rule with 
comment period will not have a significant impact on the operations of 
a substantial number of small rural hospitals.

E. Executive Order 12866

    In accordance with the provisions of Executive Order 12866, this 
notice was reviewed by the Office of Management and Budget.

V. Recordkeeping and Reporting Requirements

    Sections 440.180, 441.301 and 441.303 of this final rule with 
comment period contain information collection requirements that are 
subject to Office of Management and Budget (OMB) approval under the 
Paperwork Reduction Act of 1980. The public is not required to comply 
with the information collection requirements until OMB approves these 
requirements under section 3507 of the Paperwork Reduction Act (44 
U.S.C. 3507). A notice will be published in the Federal Register when 
approval is obtained.

List of Subjects

42 CFR Part 435

    Aid to families with dependent children, Grant programs-health, 
Medicaid, Supplemental security income (SSI).

42 CFR Part 440

    Grant programs-health, Medicaid.

42 CFR Part 441

    Family planning, Grant programs-health, Infants and children, 
Medicaid, Penalties, Prescription drugs, Reporting and recordkeeping 
requirements.
    42 CFR chapter IV, subchapter C is amended as set forth below:

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

    A. Part 435 is amended as follows:
    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).

    2. In Sec. 435.726, the section heading is revised; the 
introductory text of paragraph (c) is republished; and paragraph (c)(1) 
is revised to read as follows:


Sec. 435.726  Post-eligibility treatment of income of individuals 
receiving home and community-based services furnished under a waiver: 
Application of patient income to the cost of care.

* * * * *
    (c) In reducing its payment for home and community-based services, 
the agency must deduct the following amounts, in the following order, 
from the individual's total income (including amounts disregarded in 
determining eligibility):
    (1) An amount for the maintenance needs of the individual that the 
State may set at any level, as long as the following conditions are 
met:
    (i) The deduction amount is based on a reasonable assessment of 
need.
    (ii) The State establishes a maximum deduction amount that will not 
be exceeded for any individual under the waiver.
* * * * *
    3. In Sec. 435.735, the introductory text of paragraph (c) is 
republished; and paragraph (c)(1) is revised to read as follows:


Sec. 435.735  Post-eligibility treatment of income and resources of 
individuals receiving home and community-based services furnished under 
a waiver: Application of patient income to the cost of care.

* * * * *
    (c) In reducing its payment for home and community-based services, 
the agency must deduct the following amounts, in the following order, 
from the individual's total income (including amounts disregarded in 
determining eligibility):
    (1) An amount for the maintenance needs of the individual that the 
State may set at any level, as long as the following conditions are 
met:
    (i) The deduction amount is based on a reasonable assessment of 
need.
    (ii) The State establishes a maximum deduction amount that will not 
be exceeded for any individual under the waiver.
* * * * *

PART 440--SERVICES: GENERAL PROVISIONS

    B. Part 440 is amended as follows:
    1. The authority citation for part 440 continues to read as 
follows:

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

    2. Section 440.180 is revised to read as follows:


Sec. 440.180  Home or community-based services.

    (a) Description and requirements for services. ``Home or community-
based services'' means services, not otherwise furnished under the 
State's Medicaid plan, that are furnished under a waiver granted under 
the provisions of Part 441, subpart G of this chapter.
    (1) These services may consist of any or all of the services listed 
in paragraph (b) of this section, as those services are defined by the 
agency and approved by HCFA.
    (2) The services must meet the standards specified in 
Sec. 441.302(a) of this chapter concerning health and welfare 
assurances.
    (3) The services are subject to the limits on FFP described in 
Sec. 441.310 of this chapter.
    (b) Included services. Home or community-based services may include 
the following services, as they are defined by the agency and approved 
by HCFA:
    (1) Case management services.
    (2) Homemaker services.
    (3) Home health aide services.
    (4) Personal care services.
    (5) Adult day health services.
    (6) Habilitation services.
    (7) Respite care services.
    (8) Day treatment or other partial hospitalization services, 
psychosocial rehabilitation services and clinic services (whether or 
not furnished in a facility) for individuals with chronic mental 
illness, subject to the conditions specified in paragraph (d) of this 
section.
    (9) Other services requested by the agency and approved by HCFA as 
cost effective and necessary to avoid institutionalization.
    (c) Expanded habilitation services, effective April 7, 1986--(1) 
General rule. Expanded habilitation services are those services 
specified in paragraph (c)(2) of this section, that are provided to 
recipients who have been discharged from a Medicaid-certified NF or 
ICF/MR, regardless of when the discharge occurred.
    (2) Services included. The agency may include as expanded 
habilitation services the following services:
    (i) Prevocational services, which means services that prepare an 
individual for paid or unpaid employment and that are not job-task 
oriented but are, instead, aimed at a generalized result. These 
services may include, for example, teaching an individual such concepts 
as compliance, attendance, task completion, problem solving and safety. 
Prevocational services are distinguishable from noncovered vocational 
services by the following criteria:
    (A) The services are provided to persons who are not expected to be 
able to join the general work force or participate in a transitional 
sheltered workshop within one year (excluding supported employment 
programs).
    (B) If the recipients are compensated, they are compensated at less 
than 50 percent of the minimum wage;
    (C) The services include activities which are not primarily 
directed at teaching specific job skills but at underlying habilitative 
goals (for example, attention span, motor skills); and
    (D) The services are reflected in a plan of care directed to 
habilitative rather than explicit employment objectives.
    (ii) Educational services, which means special education and 
related services (as defined in sections 602(16) and (17) of the 
Education of the Handicapped Act) (20 U.S.C. 1401 (16 and 17)) to the 
extent they are not prohibited under paragraph (c)(3)(i) of this 
section.
    (iii) Supported employment services, which facilitate paid 
employment, that are--
    (A) Provided to persons for whom competitive employment at or above 
the minimum wage is unlikely and who, because of their disabilities, 
need intensive ongoing support to perform in a work setting;
    (B) Conducted in a variety of settings, particularly worksites in 
which persons without disabilities are employed; and
    (C) Defined as any combination of special supervisory services, 
training, transportation, and adaptive equipment that the State 
demonstrates are essential for persons to engage in paid employment and 
that are not normally required for nondisabled persons engaged in 
competitive employment.
    (3) Services not included. The following services may not be 
included as habilitation services:
    (i) Special education and related services (as defined in sections 
602(16) and (17) of the Education of the Handicapped Act) (20 U.S.C. 
1401 (16) and (17)) that are otherwise available to the individual 
through a local educational agency.
    (ii) Vocational rehabilitation services that are otherwise 
available to the individual through a program funded under section 110 
of the Rehabilitation Act of 1973 (29 U.S.C. 730).
    (d) Services for the chronically mentally ill--(1) Services 
included. Services listed in paragraph (b)(8) of this section include 
those provided to individuals who have been diagnosed as being 
chronically mentally ill, for which the agency has requested approval 
as part of either a new waiver request or a renewal and which have been 
approved by HCFA on or after October 21, 1986.
    (2) Services not included. Any home and community-based service, 
including those indicated in paragraph (b)(8) of this section, may not 
be included in home and community-based service waivers for the 
following individuals:
    (i) For individuals aged 22 through 64 who, absent the waiver, 
would be institutionalized in an institution for mental diseases (IMD); 
and, therefore, subject to the limitation on IMDs specified in 
Sec. 435.1008(a)(2) of this subchapter.
    (ii) For individuals, not meeting the age requirements described in 
paragraph (d)(2)(i) of this section, who, absent the waiver, would be 
placed in an IMD in those States that have not opted to include the 
benefits defined in Sec. 440.140 or Sec. 440.160.
    3. Section 440.185 is added to read as follows:


Sec. 440.185   Respiratory care for ventilator-dependent individuals.

    (a) ``Respiratory care for ventilator-dependent individuals'' means 
services that are not otherwise available under the State's Medicaid 
plan, provided on a part-time basis in the recipient's home by a 
respiratory therapist or other health care professional trained in 
respiratory therapy (as determined by the State) to an individual who--
    (1) Is medically dependent on a ventilator for life support at 
least 6 hours per day;
    (2) Has been so dependent for at least 30 consecutive days (or the 
maximum number of days authorized under the State plan, whichever is 
less) as an inpatient in one or more hospitals, NFs, or ICFs/MR;
    (3) Except for the availability of respiratory care services, would 
require respiratory care as an inpatient in a hospital, NF, or ICF/MR 
and would be eligible to have payment made for inpatient care under the 
State plan;
    (4) Has adequate social support services to be cared for at home;
    (5) Wishes to be cared for at home; and
    (6) Receives services under the direction of a physician who is 
familiar with the technical and medical components of home ventilator 
support, and who has medically determined that in-home care is safe and 
feasible for the individual.
    (b) For purposes of paragraphs (a)(4) and (5) of this section, a 
recipient's home does not include a hospital, NF, ICF/MR or other 
institution as defined in Sec. 435.1009.
    4. In Sec. 440.250, a new paragraph (o) is added to read as 
follows:


Sec. 440.250   Limits on comparability of services.

* * * * *
    (o) If the agency makes respiratory care services available under 
Sec. 440.185, the services need not be made available in equal amount, 
duration, and scope to any individual not eligible for coverage under 
that section. However, the services must be made available in equal 
amount, duration, and scope to all individuals eligible for coverage 
under that section.
* * * * *
    C. Part 441 is amended as follows:

PART 441--SERVICES: REQUIREMENTS AND LIMITS APPLICABLE TO SPECIFIC 
SERVICES

    1. The authority citation for Part 441 continues to read as 
follows:

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

    2. In Sec. 441.301, paragraph (a) is revised; the introductory text 
of paragraph (b) is revised; the introductory text of paragraph (b)(1) 
is republished; paragraph (b)(1)(ii) is revised; a new paragraph 
(b)(1)(iii) is added; and paragraph (b)(4) is revised to read as 
follows:


Sec. 441.301   Contents of request for a waiver.

    (a) A request for a waiver under this section must consist of the 
following:
    (1) The assurances required by Sec. 441.302 and the supporting 
documentation required by Sec. 441.303.
    (2) When applicable, requests for waivers of the requirements of 
section 1902(a)(1), section 1902(a)(10)(B), or section 
1902(a)(10)(C)(i)(III) of the Act, which concern respectively, 
statewide application of Medicaid, comparability of services, and 
income and resource rules applicable to individuals with spouses living 
in the community.
    (3) A statement explaining whether the agency will refuse to offer 
home or community-based services to any recipient if the agency can 
reasonably expect that the cost of the services would exceed the cost 
of an equivalent level of care provided in--
    (i) A hospital (as defined in Sec. 440.10 of this chapter);
    (ii) A NF (as defined in section 1919(a) of the Act); or
    (iii) An ICF/MR (as defined in Sec. 440.150 of this chapter), if 
applicable.
    (b) If the agency furnishes home and community-based services, as 
defined in Sec. 440.180 of this subchapter, under a waiver granted 
under this subpart, the waiver request must--
    (1) Provide that the services are furnished--
* * * * *
    (ii) Only to recipients who are not inpatients of a hospital, NF, 
or ICF/MR; and
    (iii) Only to recipients who the agency determines would, in the 
absence of these services, require the Medicaid covered level of care 
provided in--
    (A) A hospital (as defined in Sec. 440.10 of this chapter);
    (B) A NF (as defined in section 1919(a) of the Act); or
    (C) An ICF/MR (as defined in Sec. 440.150 of this chapter);
* * * * *
    (4) Describe the services to be furnished so that each service is 
separately defined. Multiple services that are generally considered to 
be separate services may not be consolidated under a single definition. 
Commonly accepted terms must be used to describe the service and 
definitions may not be open ended in scope. HCFA will, however, allow 
combined service definitions (bundling) when this will permit more 
efficient delivery of services and not compromise either a recipient's 
access to or free choice of providers.
* * * * *
    3. In Sec. 441.302, the introductory paragraph is revised; 
paragraphs (c) and (e) are revised; paragraph (f) is redesignated as 
paragraph (h) and republished; and new paragraphs (f), (g), (i), and 
(j) are added to read as follows:


Sec. 441.302   State assurances.

    Unless the Medicaid agency provides the following satisfactory 
assurances to HCFA, HCFA will not grant a waiver under this subpart and 
may terminate a waiver already granted:
* * * * *
    (c) Evaluation of need.--Assurance that the agency will provide for 
the following:
    (1) Initial evaluation.--An evaluation of the need for the level of 
care provided in a hospital, a NF, or an ICF/MR when there is a 
reasonable indication that a recipient might need the services in the 
near future (that is, a month or less) unless he or she receives home 
or community-based services. For purposes of this section, 
``evaluation'' means a review of an individual recipient's condition to 
determine--
    (i) If the recipient requires the level of care provided in a 
hospital as defined in Sec. 440.40 of this subchapter, a NF as defined 
in section 1919(a) of the Act, or an ICF/MR as defined by Sec. 440.150 
of this subchapter; and
    (ii) That the recipient, but for the provision of waiver services, 
would otherwise be institutionalized in such a facility.
    (2) Periodic reevaluations.--Reevaluations, at least annually, of 
each recipient receiving home or community-based services to determine 
if the recipient continues to need the level of care provided and 
would, but for the provision of waiver services, otherwise be 
institutionalized in one of the following institutions:
    (i) A hospital;
    (ii) A NF; or
    (iii) An ICF/MR.
* * * * *
    (e) Average per capita expenditures.--Assurance that the average 
per capita fiscal year expenditures under the waiver will not exceed 
100 percent of the average per capita expenditures that would have been 
made in the fiscal year for the level of care provided in a hospital, 
NF, or ICF/MR under the State plan had the waiver not been granted.
    (1) These expenditures must be reasonably estimated and documented 
by the agency.
    (2) The estimate must be on an annual basis and must cover each 
year of the waiver period.
    (f) Actual total expenditures.--Assurance that the agency's actual 
total expenditures for home and community-based and other Medicaid 
services under the waiver and its claim for FFP in expenditures for the 
services provided to recipients under the waiver will not, in any year 
of the waiver period, exceed 100 percent of the amount that would be 
incurred by the State's Medicaid program for these individuals, absent 
the waiver, in--
    (1) A hospital;
    (2) A NF; or
    (3) An ICF/MR.
    (g) Institutionalization absent waiver.--Assurance that, absent the 
waiver, recipients in the waiver would receive the appropriate type of 
Medicaid-funded institutional care (hospital, NF, or ICF/MR) that they 
require.
    (h) Reporting.--Assurance that annually, the agency will provide 
HCFA with information on the waiver's impact. That information must be 
consistent with a data collection plan designed by HCFA and must 
address the waiver's impact on--
    (1) The type, amount, and cost of services provided under the State 
plan; and
    (2) The health and welfare of recipients.
    (i) Habilitation services.--Assurance that prevocational, 
educational, or supported employment services, or a combination of 
these services, if provided as habilitation services under the waiver, 
are--
    (1) Not otherwise available to the individual through a local 
educational agency under section 602 (16) and (17) of the Education of 
the Handicapped Act (20 U.S.C. 1401 (16 and 17)) or as services under 
section 110 of the Rehabilitation Act of 1973 (29 U.S.C. 730); and
    (2) Furnished only to individuals who have been 
deinstitutionalized, regardless of discharge date from a Medicaid-
certified NF or ICF/MR.
    (3) Furnished as part of expanded habilitation services on or after 
April 7, 1986, if the State has requested and received HCFA's approval 
under a waiver or an amendment to a waiver.
    (j) Day treatment or partial hospitalization, psychosocial 
rehabilitation services, and clinic services for individuals with 
chronic mental illness. Assurance that FFP will not be claimed in 
expenditures for waiver services including, but not limited to, day 
treatment or partial hospitalization, psychosocial rehabilitation 
services, and clinic services provided as home and community-based 
services to individuals with chronic mental illnesses if these 
individuals, in the absence of a waiver, would be placed in an IMD and 
are--
    (1) Age 22 to 64;
    (2) Age 65 and older and the State has not included the optional 
Medicaid benefit cited in Sec. 440.140; or
    (3) Age 21 and under and the State has not included the optional 
Medicaid benefit cited in Sec. 440.160.
    4. In Sec. 441.303, the introductory paragraph is revised; the 
introductory text of paragraph (c) is republished; paragraph (c)(2) is 
revised; the introductory text of paragraph (f) is revised; paragraphs 
(f)(1) and (f)(2) are revised; (f)(3) is removed; paragraph (f)(4) is 
redesignated as paragraph (f)(3) and revised; new paragraphs (f)(4), 
(5), (6), (7), (8), (9), and (10) are added; paragraph (g) is revised; 
and new paragraphs (h) and (i) are added to read as follows:


Sec. 441.303   Supporting documentation required.

    The agency must furnish HCFA with sufficient information to support 
the assurances required by Sec. 441.302. Except as HCFA may otherwise 
specify for particular waivers, the information must consist of the 
following:
* * * * *
    (c) A description of the agency's plan for the evaluation and 
reevaluation of recipients, including--
* * * * *
    (2) A copy of the evaluation form to be used; and if it differs 
from the form used in placing recipients in hospitals, NFs, or ICFs/MR, 
a description of how and why it differs and an assurance that the 
outcome of the new evaluation form is reliable, valid, and fully 
comparable to the form used for hospital, NF, or ICF/MR placement;
* * * * *
    (f) An explanation with supporting documentation satisfactory to 
HCFA of how the agency estimated the average per capita expenditures 
for services.
    (1) The annual average per capita expenditure estimate of the cost 
of home and community-based and other Medicaid services under the 
waiver must not exceed the estimated annual average per capita 
expenditures of the cost of services in the absence of a waiver. The 
estimates are to be based on the following equation:
D+D'  G+G'.

The symbol ``'' means that the result of the left side of 
the equation must be less than or equal to the result of the right 
side of the equation.
D = the estimated annual average per capita Medicaid cost for home 
and community-based services for individuals in the waiver program.
D' = the estimated annual average per capita Medicaid cost for all 
other services provided to individuals in the waiver program.
G = the estimated annual average per capita Medicaid cost for 
hospital, NF, or ICF/MR care that would be incurred for individuals 
served in the waiver, were the waiver not granted.
G' = the estimated annual average per capita Medicaid costs for all 
services other than those included in factor G for individuals 
served in the waiver, were the waiver not granted.

    (2) For purposes of the equation, the prime factors include the 
average per capita cost for all State plan services and expanded EPSDT 
services provided that are not accounted for in other formula values.
    (3) In making estimates of average per capita expenditures for a 
waiver that applies only to individuals with a particular illness (for 
example, acquired immune deficiency syndrome) or condition (for 
example, chronic mental illness) who are inpatients in or who would 
require the level of care provided in hospitals as defined by 
Sec. 440.10, NFs as defined in section 1919(a) of the Act, or ICFs/MR, 
the agency may determine the average per capita expenditures for these 
individuals absent the waiver without including expenditures for other 
individuals in the affected hospitals, NFs, or ICFs/MR.
    (4) In making estimates of average per capita expenditures for a 
separate waiver program that applies only to individuals identified 
through the preadmission screening annual resident review (PASARR) 
process who are developmentally disabled, inpatients of a NF, and 
require the level of care provided in an ICF/MR as determined by the 
State on the basis of an evaluation under Sec. 441.303(c), the agency 
may determine the average per capita expenditures that would have been 
made in a fiscal year for those individuals based on the average per 
capita expenditures for inpatients in an ICF/MR. When submitting 
estimates of institutional costs without the waiver, the agency may use 
the average per capita costs of ICF/MR care even though the 
deinstitutionalized developmentally disabled were inpatients of NFs.
    (5) For persons diverted rather than deinstitutionalized, the 
State's evaluation process required by Sec. 441.303(c) must provide for 
a more detailed description of their evaluation and screening 
procedures for recipients to ensure that waiver services will be 
limited to persons who would otherwise receive the level of care 
provided in a hospital, NF, or ICF/MR, as applicable.
    (6) The State must indicate the number of unduplicated 
beneficiaries to which it intends to provide waiver services in each 
year of its program. This number will constitute a limit on the size of 
the waiver program unless the State requests and the Secretary approves 
a greater number of waiver participants in a waiver amendment.
    (7) In determining the average per capita expenditures that would 
have been made in a waiver year, for waiver estimates that apply to 
persons with mental retardation or related conditions, the agency may 
include costs of Medicaid residents in ICFs/MR that have been 
terminated on or after November 5, 1990.
    (8) In submitting estimates for waivers that include personal 
caregivers as a waiver service, the agency may include a portion of the 
rent and food attributed to the unrelated personal caregiver who 
resides in the home or residence of the recipient covered under the 
waiver. The agency must submit to HCFA for review and approval the 
method it uses to apportion the costs of rent and food. The method must 
be explained fully to HCFA. A personal caregiver provides a waiver 
service to meet the recipient's physical, social, or emotional needs 
(as opposed to services not directly related to the care of the 
recipient; that is, housekeeping or chore services). FFP for live-in 
caregivers is not available if the recipient lives in the caregiver's 
home or in a residence that is owned or leased by the caregiver.
    (9) In submitting estimates for waivers that apply to individuals 
with mental retardation or a related condition, the agency may adjust 
its estimate of average per capita expenditures to include increases in 
expenditures for ICF/MR care resulting from implementation of a PASARR 
program for making determinations for individuals with mental 
retardation or related conditions on or after January 1, 1989.
    (10) For a State that has HCFA approval to bundle waiver services, 
the State must continue to compute separately the costs and utilization 
of the component services that make up the bundled service to support 
the final cost and utilization of the bundled service that will be used 
in the cost-neutrality formula.
    (g) The State, at its option, may provide for an independent 
assessment of its waiver that evaluates the quality of care provided, 
access to care, and cost-neutrality. The results of the assessment 
should be submitted to HCFA at least 90 days prior to the expiration 
date of the approved waiver-period and cover the first 24 or 48 months 
of the waiver. If a State chooses to provide for an independent 
assessment, FFP is available for the costs attributable to the 
independent assessment.
    (h) For States offering habilitation services that include 
prevocational, educational, or supported employment services, or a 
combination of these services, consistent with the provisions of 
Sec. 440.180(c) of this chapter, an explanation of why these services 
are not available as special education and related services under 
sections 602 (16) and (17) of the Education of the Handicapped Act (20 
U.S.C. 1401 (16 and 17)) or as services under section 110 of the 
Rehabilitation Act of 1973 (29 U.S.C. section 730);
    (i) For States offering home and community-based services for 
individuals diagnosed as chronically mentally ill, an explanation of 
why these individuals would not be placed in an institution for mental 
diseases (IMD) absent the waiver, and the age group of these 
individuals.
    5. In Sec. 441.304, paragraphs (a), (b), and (d) are revised to 
read as follows:


Sec. 441.304  Duration of a waiver.

    (a) The effective date for a new waiver of Medicaid requirements to 
provide home and community-based services approved under this subpart 
is established by HCFA prospectively on or after the date of approval 
and after consultation with the State agency. The initial approved 
waiver continues for a 3-year period from the effective date. If the 
agency requests it, the waiver may be extended for additional periods 
unless--
    (1) HCFA's review of the prior waiver period shows that the 
assurances required by Sec. 441.302 were not met; and
    (2) HCFA is not satisfied with the assurances and documentation 
provided by the State in regard to the extension period.
    (b) HCFA will determine whether a request for extension of an 
existing waiver is actually an extension request or a request for a new 
waiver. If a State submits an extension request that would add a new 
group to the existing group of recipients covered under the waiver (as 
defined under Sec. 441.301(b)(6)), HCFA will consider it to be two 
requests: One as an extension request for the existing group, and the 
other as a new waiver request for the new group. Waivers may be 
extended for additional 5-year periods.
* * * * *
    (d) If HCFA finds that an agency is not meeting one or more of the 
requirements for a waiver contained in this subpart, the agency is 
given a notice of HCFA's findings and an opportunity for a hearing to 
rebut the findings. If HCFA determines that the agency is not in 
compliance with this subpart after the notice and any hearing, HCFA may 
terminate the waiver. For example, a State submits to HCFA a waiver 
request for home and community-based services that includes an estimate 
of the expenditures that would be incurred if the services were 
provided to the covered individuals in a hospital, NF, or ICF/MR in the 
absence of the waiver. HCFA approves the waiver. At the end of the 
waiver year, the State submits to HCFA a report of its actual 
expenditures under the waiver. HCFA finds that the actual expenditures 
under the waiver exceed 100 percent of the State's approved estimate of 
expenditures for these individuals in a hospital, NF, or ICF/MR in the 
absence of the waiver. HCFA next requires the State to amend its 
estimates for subsequent waiver year(s). HCFA then compares the revised 
estimates with the State's actual experience to determine if the 
revised estimates are reasonable. HCFA may terminate the waiver if the 
revised estimates indicate that the waiver is not cost-neutral or that 
the revised estimates are unreasonable.


Sec. 441.305  [Redesignated as Sec. 441.307]

    6. Section 441.305 is redesignated as Sec. 441.307.
    7. A new Sec. 441.305 is added to read as follows:


Sec. 441.305  Replacement of recipients in approved waiver programs.

    (a) Regular waivers. A State's estimate of the number of 
individuals who may receive home and community-based services must 
include those who will replace recipients who leave the program for any 
reason. A State may replace recipients who leave the program due to 
death or loss of eligibility under the State plan without regard to any 
federally-imposed limit on utilization, but must maintain a record of 
recipients replaced on this basis.
    (b) Model waivers.
    (1) The number of individuals who may receive home and community-
based services under a model waiver may not exceed 200 recipients at 
any one time.
    (2) The agency may replace any individuals who die or become 
ineligible for State plan services to maintain a count up to the number 
specified by the State and approved by HCFA within the 200-maximum 
limit.


Sec. 441.306  [Redesignated as Sec. 441.308]

    8. Section 441.306 is redesignated as Sec. 441.308.
    9. A new Sec. 441.306 is added to read as follows:


Sec. 441.306  Cooperative arrangements with the Maternal and Child 
Health program.

    Whenever appropriate, the State agency administering the plan under 
Medicaid may enter into cooperative arrangements with the State agency 
responsible for administering a program for children with special 
health care needs under the Maternal and Child Health program (Title V 
of the Act) in order to ensure improved access to coordinated services 
to meet the children's needs.
    10. Section 441.310 is revised to read as follows:


Sec. 441.310  Limits on Federal financial participation (FFP).

    (a) FFP for home and community-based services listed in 
Sec. 440.180 of this chapter is not available in expenditures for the 
following:
    (1) Services provided in a facility subject to the health and 
welfare requirements described in Sec. 441.302(a) during any period in 
which the facility is found not to be in compliance with the applicable 
State standards described in that section.
    (2) The cost of room and board except when provided as--
    (i) Part of respite care services in a facility approved by the 
State that is not a private residence; or
    (ii) For waivers that allow personal caregivers as providers of 
approved waiver services, a portion of the rent and food that may be 
reasonably attributed to the unrelated caregiver who resides in the 
same household with the waiver recipient. FFP for a live-in caregiver 
is not available if the recipient lives in the caregiver's home or in a 
residence that is owned or leased by the provider of Medicaid services 
(the caregiver). For purposes of this provision, ``board'' means 3 
meals a day or any other full nutritional regimen and does not include 
meals provided as part of a program of adult day health services as 
long as the meals provided do not constitute a ``full'' nutritional 
regimen.
    (3) Prevocational, educational, or supported employment services, 
or any combination of these services, as part of habilitation services 
that are--
    (i) Provided prior to April 7, 1986;
    (ii) Provided in approved waivers that include a definition of 
``habilitation services'' but which have not included prevocational, 
educational and supported employment services in that definition;
    (iii) Provided to recipients who were never institutionalized in a 
Medicaid certified NF,or ICF/MR; or
    (iv) Otherwise available to the recipient under either special 
education and related services as defined in section 602(16) and (17) 
of the Education of the Handicapped Act (20 U.S.C. 1401 (16) and (17)) 
or vocational rehabilitation services available to the individual 
through a program funded under section 110 of the Rehabilitation Act of 
1973 (29 U.S.C. 730).
    (4) For waiver applications and renewals approved on or after 
October 21, 1986, home and community-based services provided to 
individuals aged 22 through 64 diagnosed as chronically mentally ill 
who would be placed in an institution for mental diseases. FFP is also 
not available for such services provided to individuals aged 65 and 
over and 21 and under as an alternative to institutionalization in an 
IMD if the State does not include the appropriate optional Medicaid 
benefits specified at Secs. 440.140 and 440.160 of this chapter in its 
State plan.
    (b) FFP is available for expenditures for expanded habilitation 
services, as described in Sec. 440.180, if the services are included 
under a waiver or waiver amendment approved by HCFA on or after April 
7, 1986.

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

    Dated: May 11, 1994.
Bruce C. Vladeck,
Administrator, Health Care Financing Administration.
    Dated: June 21, 1994.
Donna E. Shalala,
Secretary.
[FR Doc. 94-17816 Filed 7-22-94; 8:45 am]
BILLING CODE 4120-01-P