[Federal Register Volume 64, Number 215 (Monday, November 8, 1999)]
[Proposed Rules]
[Pages 60882-60963]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-28693]



[[Page 60881]]

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Part II





Department of Health and Human Services





_______________________________________________________________________



Health Care Financing Administration



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42 CFR Parts 431, 433, 435, and 457



State Child Health; Implementing Regulations for the State Children's 
Health Insurance Program; Proposed Rule

  Federal Register / Vol. 64, No. 215 / Monday, November 8, 1999 / 
Proposed Rules  

[[Page 60882]]



DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 431, 433, 435, and 457;

[HCFA-2006-P]
RIN 0938-AI28


State Child Health; Implementing Regulations for the State 
Children's Health Insurance Program

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

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: Section 4901 of the Balanced Budget Act of 1997 (BBA) amended 
the Social Security Act by adding a new title XXI. Title XXI provides 
funds to States to enable them to initiate and expand the provision of 
child health assistance to uninsured, low-income children in an 
effective and efficient manner. To be eligible for funds under this 
program, States must submit a State plan, which must be approved by the 
Secretary.
    This proposed rule would implement provisions related to the State 
Children's Health Insurance Program (CHIP)including State plan 
requirements, coverage and benefits, eligibility, beneficiary financial 
responsibility, strategic planning, substitution of coverage, program 
integrity, and waivers. In addition, this proposed rule would implement 
the provisions of sections 4911 and 4912 of the BBA, which amended 
title XIX of the Act to expand State options for coverage of children 
under the Medicaid program.

DATES: Written comments will be considered if we receive them at the 
appropriate address, as provided below, no later than 5:00 p.m. on 
January 7, 2000.

ADDRESSES: Mail written comments (one original and three copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: HCFA-2006-P, P.O. Box 8010, 
Baltimore, MD 21244-8010.
    If you prefer, you may deliver your written comments (one original 
and three copies) to one of the following addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW, 
Washington, DC, or
Room C5-14-03, Central Building, 7500 Security Boulevard, Baltimore, 
Maryland

    If you wish to submit written comments on the information 
collection requirements contained in this proposed rule, you may submit 
written comments to the following:

Lori Schack, HCFA Medicaid Desk Officer, Office of Information and 
Regulatory Affairs, Room 10235, New Executive Office Building, 
Washington, DC 20503; and
Health Care Financing Administration, Office of Information Services, 
Security and Standards Group, Division of HCFA Enterprise Standards, 
Room N2-14-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    ATTN: John Burke, HCFA-2006-P

FOR FURTHER INFORMATION CONTACT:

Regina Fletcher for general information, (410)786-3293;
Diona Kristian for subpart A, State plan, (410)786-3283;
Jeannine Witles for subpart C, Eligibility, (410)786-5664;
Cindy Ruff for subpart D, Benefits, (410)786-5916;
Christine Hinds for subpart E, Cost sharing, (410)786-4578;
Barbara Greenberg for subpart G, Strategic planning, (410)786-0435;
Anna Fallierias for subpart H, Substitution of coverage, (410)786-8281;
Jennifer Ryan for subpart I, Program integrity and beneficiary 
protections, (410)786-1304;
Cindy Ruff for subpart J, Allowable waivers, (410)786-5916;
Judy Rhoades for section K of preamble, Expanded coverage of children 
under Medicaid and Medicaid coordination, (410)786-4462;
Chris Hinds for section L of preamble, Medicaid disproportionate share 
hospital expenditures, (410)786-4578;
Joan Mahanes for section M of preamble, Vaccines for Children program, 
(410)786-4583

SUPPLEMENTARY INFORMATION:

Comments, Procedures, Availability of Copies, and Electronic Access

    Because of staff and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code HCFA-2006-P. Comments received timely will be available 
for public inspection as they are received, generally beginning 
approximately 3 weeks after publication of a document, in Room 443-G of 
the Department's office at 200 Independence Avenue, SW., Washington, 
DC, on Monday through Friday of each week from 8:30 to 5 p.m. (phone: 
(202) 690-7890).
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password required).

I. Background

    Section 4901 of the Balanced Budget Act of 1997 (BBA), Public Law 
105-33, as amended by Public Law 105-100, added title XXI to the Social 
Security Act (the Act). Title XXI authorizes a new State Children's 
Health Insurance Program (CHIP) to assist State efforts to initiate and 
expand the provision of child health assistance to uninsured, low-
income children. Under title XXI, States may provide child health 
assistance primarily for obtaining health benefits coverage through (1) 
obtaining coverage under a separate child health program that meets the 
requirements specified under section 2103 of the Act; or (2) expanding 
benefits under the State's Medicaid plan under title XIX of the Act; or 
(3) a combination of both. To be eligible for funds under this program, 
States must submit a State child health plan (State plan), which must 
be approved by the Secretary.
    This proposed rule would implement the following sections of title 
XXI of the Act:
     Section 2101 of the Act, which sets forth the purpose of 
title XXI, the requirements of a State plan, State

[[Page 60883]]

entitlement to title XXI funds, and the effective date of the program.
     Section 2102 of the Act, which sets forth the requirements 
for a State plan, including eligibility standards and methodologies, 
coordination, and outreach.
     Section 2103 of the Act, which contains coverage 
requirements for children's health insurance.
     The following parts of section 2105 of the Act: 
2105(c)(2)(B) relating to cost-effective community based health 
delivery systems; 2105(c)(3) relating to family coverage; 2105(c)(5) 
relating to cost sharing and 2105(c)(7) relating to limitations on 
payment for abortion.
     Section 2106 of the Act, which describes the process for 
submission, approval and amendment of State child health plans and plan 
amendments.
     Section 2107 of the Act, which sets forth requirements 
relating to strategic objectives, performance goals and program 
administration.
     Section 2108 of the Act, which requires States to submit 
annual reports and evaluations of the effectiveness of the State's 
title XXI plan.
     Section 2109 of the Act, which provides that health 
insurance coverage provided under a State child health program and 
coverage provided as a cost effective alternative are treated as 
``creditable coverage'' under section 2701(c) of the Public Health 
Service Act (PHS).
     Section 2110 of the Act, which includes title XXI 
definitions.
    This proposed rule would also implement the provisions of sections 
4911 and 4912 of the BBA, which amended title XIX of the Act to provide 
expanded coverage to children under the Medicaid program. Specifically, 
section 4911 of the BBA set forth provisions for use of State child 
health assistance funds for targeted and optional low-income children 
eligible for enhanced Medicaid match for expanded eligibility under 
Medicaid. Section 4912 of the BBA added a new section 1920A to the Act 
creating a new optional group for presumptive eligibility for children. 
Both title XXI and title XIX statutory provisions are discussed in 
detail in section II of this preamble.
    We note that on March 4, 1999, we published in the Federal Register 
a proposed rule concerning financial program allotments and payments to 
States under CHIP at 64 FR 10412. In that rule, we proposed to 
implement sections 2104 and portions of 2105 of the Act, which relate 
to allotments and payments to States under title XXI. For a detailed 
discussion of title XXI and related title XIX financial provisions 
including the allotment process, the payment process, financial 
reporting requirements and the grant award process, refer to the March 
4, 1999 proposed rule.

II. Provisions of the Proposed Rule

A. Overview

    Title XXI authorizes grants to States that initiate or expand 
health insurance programs for low-income, uninsured children. A 
Children's Health Insurance Program (CHIP) under title XXI is jointly 
financed by the Federal and State governments and is administered by 
the States. Within broad Federal guidelines, each State determines the 
design of its program, eligible groups, benefit packages, payment 
levels for coverage and administrative and operating procedures. CHIP 
provides a capped amount of funds to States on a matched basis for 
fiscal years (FY) 1998 through 2007. At the Federal level, CHIP is 
administered by the Department of Health and Human Services, through 
the Center for Medicaid and State Operations (CMSO) of the Health Care 
Financing Administration (HCFA).
    Federal payments under title XXI to States are based on State 
expenditures under approved plans that could be effective on or after 
October 1, 1997. The short time frame between the enactment of the BBA 
(August 5, 1997) and the availability of the funding for States 
required the Department to begin reviewing CHIP plans submitted by 
States and Territories at the same time as it was issuing guidance to 
States on how to operate the CHIP programs. The Department worked 
closely with States to disseminate as much information as possible, as 
quickly as possible, so States could begin to implement their new 
programs expeditiously.
    The Department began issuing guidance to States within one month of 
enactment of the BBA. We provided information on each State's allotment 
through two Federal Register notices published on September 12, 1997 
(62 FR 48098) and February 8, 1999 (64 FR 6102). We developed a model 
application template to assist State's in applying for title XXI funds. 
We provided over 100 answers to frequently asked questions. We issued 
policy guidance through a series of 20 letters to State health 
officials. All of this information is available on our website located 
on the Internet at ``http://www.HCFA.gov.'' We have also provided 
technical assistance to all States in development of CHIP applications.
    CHIP programs operate in almost every State and Territory in the 
country. As of April 27 1999, we have approved 52 CHIP plans and have 
approved 15 amendments to these plans. Prior to the enactment of Public 
Law 105-174, which gave States an additional year to secure their 
fiscal year 1998 CHIP allotments, a number of States originally 
submitted ``place-holder'' plans in order to secure their fiscal year 
1998 allotments. Many of these States now indicate that they will 
submit amendments to further expand their programs. Over half of the 
approved CHIP plans already provide coverage to families with income 
levels at or above 200 percent of the poverty line. We expect that most 
of the States and Territories that have not yet expanded eligibility to 
children in families with income at or below 200 percent of the Federal 
poverty line will eventually do so.
    States and Territories have used the guidance we have issued to 
design and implement their programs. We intend to formalize this 
guidance in two regulations--a financial regulation mentioned 
previously (the proposed rule published March 4, 1999) and this 
proposed programmatic regulation. This proposed regulation incorporates 
much of the programmatic guidance that already has been issued to 
States.
    In addition, this proposed rule addresses beneficiary protections 
necessary for the program to effectively function. These fundamental 
protections are consistent with the Presidential directive known as the 
Consumer Bill of Rights and Responsibilities. See subpart I for a 
discussion of the rights which are addressed in this proposed rule.
    This proposed regulation builds upon previously released guidance 
and therefore, most of the regulation represents policies that have 
been in operation for some time. As we continue to implement the 
program, however, we have identified a number of areas in which we 
further elaborate on previous guidance or propose new policies that 
have not yet been made public. In an attempt to highlight the key 
issues, a brief summary follows:
 Subpart A--State Plan Requirements
    The regulation would clarify several conditions under which States 
must submit amendments to approved CHIP plans. For example, we propose 
that States submit a plan amendment when the funding source of the 
State share changes, prior to such change taking effect. The purpose of 
this proposed requirement is to ensure that programs are operated using 
only permissible sources of funding. In addition, amendments to impose 
cost-sharing on

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beneficiaries, increase existing cost-sharing charges, or increase the 
cumulative cost sharing maximum will be considered the same as 
amendments proposing a restriction in benefits. Therefore, States will 
be required to follow rules regarding prior public notice and 
retroactive effective dates.
 Subpart C--Eligibility, Screening, Applications and Enrollment
    Title XXI prohibits the participation of children of public agency 
employees who are eligible to participate in a State health benefits 
plan. The only case where such a child could be covered under CHIP is 
the case where the employer provides no more than a nominal 
contribution available for the child's health benefits coverage. We 
propose to clarify that these children would not be considered to be 
``eligible for health benefits coverage under a State health benefits 
plan'' and could then be eligible for coverage through CHIP.
 Subpart D--Coverage and Benefits
    The proposed regulation provides some flexibility for States in 
keeping the benefit package current. States using the benchmark benefit 
package option are not required to submit an amendment each time the 
benchmark package changes. States need only submit amendments when 
proposing to make a change to the benefit package for the separate 
child health program, and then they only need to compare their benefit 
package to the most recent benchmark package.
    The proposed regulation also clarifies policy regarding the 
conditions under which abortion services are permitted under title XXI 
and proposes that managed care entities providing this service must do 
so under a separate contract.
 Subpart E--Beneficiary Financial Responsibilities
    The statute places a 5 percent cap on cost-sharing expenditures for 
families with incomes greater than 150 percent of the Federal Poverty 
Level (FPL) who are enrolled in separate child health programs. In an 
attempt to preserve State flexibility, the proposed regulation gives 
States the option to use either gross or net family income when 
calculating the cost-sharing cap.
    In addition, the regulation proposes to place a comparable limit of 
2.5 percent on cost-sharing for families with incomes below 150 percent 
of the poverty line, in order to ensure that those families with lower 
incomes will not be forced to pay the same amount of cost-sharing as 
those with higher incomes. In addition, States have the option to apply 
cost-sharing imposed on adults in CHIP family coverage plans toward the 
cumulative maximum cap.
    The regulation proposes that States must have a process in place 
that will protect beneficiaries by ensuring ``due process'' before 
beneficiaries can be disenrolled from the program for failure to pay 
cost-sharing. This preamble suggests that States may look for a pattern 
of nonpayment, provide clear notice and opportunities for late payment, 
and wait at least one billing cycle before taking action to disenroll.
    Finally, title XXI includes provisions to ensure enrollment and 
access to health care services for American Indian and Alaska Native 
(AI/AN) children. The regulation incorporates our interpretation that 
in light of the unique Federal relationship with tribal governments, 
cost-sharing requirements for individuals who are members of a 
Federally recognized tribe are not consistent with this statutory 
requirement.
 Subpart G--Strategic Planning, Reporting and Evaluation
    The regulation includes provisions intended to ensure compliance 
with both the statute, the elements of the State's title XXI plan and 
the onsite review of State programs. In addition, monitoring will 
enable tracking of CHIP data submissions, which will ultimately help 
ensure enrollment in both the CHIP and Medicaid programs.
 Subpart I--Program Integrity and Beneficiary Protections
    This subpart is intended to underscore the importance of preserving 
program integrity in the Children's Health Insurance Program. The 
regulation proposes that States must have fraud and abuse protections 
in place, but provides flexibility to States in developing program 
integrity protections for separate child health programs. States are 
encouraged to utilize systems already existing for Medicaid, but are 
not required to do so.
    In addition, the regulation proposes that States have additional 
flexibility in setting procurement standards more broadly than 
Medicaid. States may choose to base payment rates on public and/or 
private rates for comparable services, and where appropriate, establish 
higher rates in order to ensure sufficient provider participation.
    Finally, this regulation includes various beneficiary protections 
consistent with the President's directive regarding the Consumer Bill 
of Rights and Responsibilities. Provisions are included throughout the 
regulation to ensure that beneficiaries are given the opportunity to 
participate in and make informed medical decisions, to have access to 
needed services, and to be treated with dignity and respect.
 Subpart J--Waivers
    The proposed regulation discusses the circumstances under which 
States may obtain a waiver in order to provide Title XXI coverage to 
entire families. We propose that in order to qualify for such a waiver, 
the State must meet several requirements, including a requirement that 
the proposal be cost effective.
    Under our proposal, the new provisions for the Children's Health 
Insurance Program would be set forth in regulations at 42 CFR part 457, 
subchapter D. We note that the following table of contents is for all 
of part 457 and lists some subparts which have been reserved for 
provisions set forth in the March 4, 1999 proposed financial 
regulation.
    The proposed table of contents for new part 457, subchapter D is as 
follows:

Subchapter D--Children's Health Insurance Program (CHIP)

PART 457--ALLOTMENTS AND GRANTS TO STATES

Subpart A--Introduction; State Plans for Child Health Insurance 
Programs and Outreach Strategies

Sec. 457.1  Program description.
Sec. 457.2  Basis and scope of subchapter D.
Sec. 457.10  Definitions and use of terms.
Sec. 457.30  Basis, scope, and applicability of subpart A.
Sec. 457.40  State program administration.
Sec. 457.50  State plan.
Sec. 457.60  Amendments.
Sec. 457.65  Duration of State plans and plan amendments.
Sec. 457.70  Program options.
Sec. 457.80  Current State child health insurance coverage and 
coordination.
Sec. 457.90  Outreach.
Sec. 457.110  Enrollment assistance and information requirements.
Sec. 457.120  Public involvement in program development.
Sec. 457.125  Provision of child health assistance to American Indian 
and Alaska Native children.
Sec. 457.130  Civil rights assurance.
Sec. 457.135  Assurance of compliance with other provisions.
Sec. 457.140  Budget.
Sec. 457.150  HCFA review of State plan material.
Sec. 457.160  Notice and timing of HCFA action on State plan material.

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Sec. 457.170  Withdrawal process.
Sec. 457.190  Administrative and judicial review of action on State 
plan material.

Subpart B--[Reserved]

Subpart C--State Plan Requirements: Eligibility, Screening, 
Applications, and Enrollment

Sec. 457.300  Basis, scope, and applicability.
Sec. 457.301  Definitions and use of terms.
Sec. 457.305  State plan provisions.
Sec. 457.310  Targeted low-income child.
Sec. 457.320  Other eligibility standards.
Sec. 457.340  Application.
Sec. 457.350  Eligibility screening.
Sec. 457.360  Facilitating Medicaid enrollment.
Sec. 457.361  Application for and enrollment in CHIP.
Sec. 457.365  Grievances and appeals.

Subpart D--Coverage and Benefits: General Provisions

Sec. 457.401  Basis, scope, and applicability.
Sec. 457.402  Child health assistance and other definitions.
Sec. 457.410  Health benefits coverage options.
Sec. 457.420  Benchmark health benefits coverage.
Sec. 457.430  Benchmark-equivalent health benefits coverage.
Sec. 457.431  Actuarial report for benchmark-equivalent coverage.
Sec. 457.440  Existing comprehensive State-based coverage.
Sec. 457.450  Secretary-approved coverage.
Sec. 457.470  Prohibited coverage.
Sec. 457.475  Limitations on coverage: Abortions.
Sec. 457.480  Preexisting condition exclusions and relation to other 
laws.
Sec. 457.490  Delivery and utilization control systems.
Sec. 457.495  Grievances and appeals.

Subpart E--State Plan Requirements: Beneficiary Financial 
Responsibilities

Sec. 457.500  Basis, scope, and applicability.
Sec. 457.505  General State plan requirements.
Sec. 457.510  Premiums, enrollment fees, or similar fees: State plan 
requirements.
Sec. 457.515  Co-payments, coinsurance, deductibles, or similar cost 
sharing charges: State plan requirements.
Sec. 457.520  Cost sharing for well-baby and well-child care.
Sec. 457.525  Public schedule.
Sec. 457.530  General cost sharing protection for lower income 
children.
Sec. 457.535  Cost sharing protection to ensure enrollment of American 
Indians/Alaska Natives.
Sec. 457.540  Cost sharing charges for children in families at or below 
150 percent of the Federal poverty line (FPL).
Sec. 457.545  Cost sharing for children in families above 150 percent 
of the FPL.
Sec. 457.550  Restriction on the frequency of cost sharing charges on 
targeted low-income children in families at or below 150 percent of the 
FPL.
Sec. 457.555  Maximum allowable cost sharing charges on targeted low-
income children at or below 150 percent of the FPL.
Sec. 457.560  Cumulative cost sharing maximum.
Sec. 457.565  Grievances and appeals.
Sec. 457.570  Disenrollment protections.

Subpart F--[Reserved]

Subpart G--Strategic Planning, Reporting, and Evaluation

Sec. 457.700  Basis, scope, and applicability.
Sec. 457.710  State plan requirements: Strategic objectives and 
performance goals.
Sec. 457.720  State plan requirement: State assurance regarding data 
collection, records, and reports.
Sec. 457.730  State plan requirement: State annual reports and 
evaluation.
Sec. 457.735  State plan requirement: State assurance of the quality 
and appropriateness of care.
Sec. 457.740  State expenditures and statistical reports.
Sec. 457.750  Annual report.
Sec. 457.760  State evaluations.

Subpart H--Substitution of Coverage

Sec. 457.800  Basis, scope, and applicability.
Sec. 457.805  State plan requirements: Private coverage substitution.
Sec. 457.810  Premium assistance for employer-sponsored group health 
plans: Required protections against substitution.

Subpart I--Program Integrity and Beneficiary Protections

Sec. 457.900  Basis, scope, and applicability.
Sec. 457.902  Definitions.
Sec. 457.910  State program administration.
Sec. 457.915  Fraud detection and investigation.
Sec. 457.920  Accessible means to report fraud and abuse.
Sec. 457.925  Preliminary investigation.
Sec. 457.930  Full investigation, resolution, and reporting 
requirements.
Sec. 457.935  Sanctions and related penalties.
Sec. 457.940  Procurement standards.
Sec. 457.945  Certification for contracts and proposals.
Sec. 457.950  Contract and payment requirements including certification 
of payment related information.
Sec. 457.955  Conditions necessary to contract as a managed care entity 
(MCE).
Sec. 457.960  Reporting changes in eligibility and redetermining 
eligibility.
Sec. 457.965  Documentation.
Sec. 457.970  Eligibility and income verification.
Sec. 457.975  Redetermination intervals in cases of suspected 
enrollment fraud.
Sec. 457.980  Verification of enrollment and provider services 
received.
Sec. 457.985  Enrollee rights to file grievances and appeals.
Sec. 457.990  Privacy protections.
Sec. 457.995  Consumer Bill of Rights and Responsibilities.

Subpart J--Allowable Waivers: General Provisions

Sec. 457.1000  Basis, scope, and applicability.
Sec. 457.1005  Waiver for cost-effective coverage through a community-
based health delivery system.
Sec. 457.1010  Waiver for purchase of family coverage.
Sec. 457.1015  Cost-effectiveness.
    Editor's note: In the preamble we discuss new CHIP provisions (part 
457) before we discuss relevant changes to the Medicaid regulations 
(Medicaid coordination, section K of the preamble, and parts 431, 433, 
and 435 of the regulations text). We believe this order is the most 
logical presentation for the preamble. However, because regulations 
text must be set forth in numerical order, proposed changes to the 
Medicaid regulations precede the new regulations text for part 457.

B. Subpart A--Introduction; State Plans for Child Health Insurance 
Programs and Outreach Strategies

1. Program Description (Sec. 457.1)
    Proposed Sec. 457.1 states that title XXI of the Social Security 
Act, enacted in 1997 by the BBA, authorizes Federal grants to States 
for provision of child health assistance to uninsured, low-income 
children. The program is jointly

[[Page 60886]]

financed by the Federal and State governments and administered by the 
States. Within broad Federal rules, each State decides eligible groups, 
types and ranges of services, payment levels for benefit coverage, and 
administrative and operating procedures.
2. Basis and Scope of Subchapter D (Sec. 457.2)
    This subchapter implements title XXI of the Act, which authorizes 
Federal grants to States for the provision of child health assistance 
to uninsured, low-income children.
    The regulations in subchapter D would set forth State plan 
requirements, standards, procedures, and conditions for obtaining 
Federal financial participation (FFP) to enable States to provide 
health benefit coverage to targeted low-income children, as defined in 
Sec. 457.310.
3. Definitions and Use of Terms (Sec. 457.10)
    This subpart includes the definitions relevant specifically to the 
Children's Health Insurance Program under title XXI. We have defined in 
this subpart key terms that are specified in the statute or frequently 
used in this regulation. We note that those terms that are specific to 
certain subparts of this regulation are defined at the opening of those 
subparts, however, all the terms are listed here. For example, since 
the definition of ``targeted low-income child'' is specifically 
relevant in making eligibility determinations, the term is defined in 
subpart C--Eligibility. Because of the unique Federal-State 
relationship that is the basis for this program and because of our 
commitment to State flexibility, we determined States should have the 
discretion to define many terms.
    In accordance with section 2110 of the Act, which sets forth 
definitions for title XXI, we propose to adopt definitions for the 
terms, ``creditable health coverage'', ``group health insurance 
coverage'', ``group health plan'' and ``preexisting condition 
exclusion'' from sections 2701(c) and 2791 of the Public Health Service 
Act (PHS) (42 U.S.C. 300gg(c)) as specifically required under the 
statute. These definitions are consistent with the definitions set 
forth in regulations at 45 CFR 144.103 and 146.113. Section 2109(a)(1) 
of title XXI provides that health insurance coverage provided under a 
State child health plan and coverage provided as a cost-effective 
alternative are treated as ``creditable coverage'' under section 
2701(c) of the PHS Act. In addition, section 2103(f) of title XXI 
provides that the State plan cannot impose a preexisting condition 
exclusion; however, if the State plan provides for benefits through 
payment for, or contract with, a group health plan or health insurance 
coverage, the State plan can permit the imposition of a preexisting 
condition exclusion insofar as it is permitted under HIPAA. (Creditable 
coverage counts as credit for previous health coverage against the 
application of a preexisting condition exclusion period when moving 
from one group health plan to another, from a group health plan to an 
individual policy, or from an individual policy to a group health 
plan.)
    We propose the following definitions:
     American Indian/Alaska Native (AI/AN) means (1) A member 
of a Federally recognized Indian tribe, band, or group or a descendant 
in the first or second degree, of any such member; (2) an Eskimo or 
Aleut or other Alaska Native enrolled by the Secretary of the Interior 
pursuant to the Alaska Native Claims Settlement Act 43 U.S.C. 1601 et 
seq; (3) a person who is considered by the Secretary of the Interior to 
be an Indian for any purpose; (4) a person who is determined to be an 
Indian under regulations promulgated by the Secretary.
     Child means an individual under the age of 19.
     Child health assistance has the meaning assigned in 
Sec. 457.402 of these proposed regulations.
     Children's Health Insurance Program (CHIP) means a program 
established and administered by a State, but jointly funded with the 
Federal government to provide child health assistance to uninsured, 
low-income children through a separate child health program, a Medicaid 
expansion program, or a combination of both.
     Combination program means a program under which a State 
provides child health assistance through both a Medicaid expansion 
program and a separate child health program.
     Contractor has the meaning assigned in Sec. 457.902.
     Cost-effectiveness has the meaning assigned in 
Sec. 457.1015 of these proposed regulations.
     Creditable health coverage has the meaning given the term 
``creditable coverage'' at 45 CFR 146.113. Under this definition, the 
term means the coverage of an individual under any of the following:

--A group health plan (as defined in 45 CFR 144.103).
--Health insurance coverage (as defined in 45 CFR 144.103).
--Part A or part B of title XVIII of the Act (Medicare).
--Title XIX of the Act, other than coverage consisting solely of 
benefits under section 1928 (the program for distribution of pediatric 
vaccines).
--Chapter 55 of title 10, United States Code (medical and dental care 
for members and certain former members of the uniformed services, and 
for their dependents).
--A medical care program of the Indian Health Service or of a tribal 
organization.
--A State health benefits risk pool (as defined in 45 CFR 146.113).
--A health plan offered under chapter 89 of title 5, United States Code 
(Federal Employees Health Benefits Program).
--A public health plan. (For purposes of this section, a public health 
plan means any plan established or maintained by a State, county, or 
other political subdivisions of a State that provides health insurance 
coverage to individuals who are enrolled in the plan.
--A health benefit plan under section 5(e) of the Peace Corps Act (22 
U.S.C. 2504(e)).
    The term ``creditable health coverage'' does not include coverage 
consisting solely of coverage of excepted benefits including limited 
excepted benefits and non-coordinated benefits. (See 45 CFR 146.145)
     Emergency medical condition has the meaning assigned at 
Sec. 457.402 of these proposed regulations.
     Emergency services has the meaning assigned in 
Sec. 457.402 of these proposed regulations.
     Employment with a public agency has the meaning assigned 
in Sec. 457.301 of these proposed regulations.
     Family income means income as determined by the State for 
a family as defined by the State.
     Federal fiscal year starts on the first day of October 
each year and ends on the last day of September.
     Fee-for-service entity has the meaning assigned in 
Sec. 457.902 of these proposed regulations.
     Grievance has the meaning assigned in Sec. 457.902 of 
these proposed regulations.
     Group health insurance coverage means health insurance 
coverage offered in connection with a group health plan as defined at 
45 CFR 144.103.
     Group health plan means an employee welfare benefit plan, 
to the extent that the plan provides medical care as defined in section 
2791(a)(2) of the PHS Act (including items and services paid for as 
medical care) to employees or their dependents directly (as defined 
under the terms of the plan), or through insurance, reimbursement, or 
otherwise, as defined at 45 CFR 144.103.

[[Page 60887]]

     Health benefits coverage has the meaning assigned in 
Sec. 457.402 of these proposed regulations.
     Health maintenance organization (HMO) plan has the meaning 
assigned in Sec. 457.420 of these proposed regulations.
     Legal obligation has the meaning assigned in Sec. 457.555 
of these proposed regulations.
     Low-income child means a child whose family income is at 
or below 200 percent of the poverty line for the size family involved.
     Managed care entity (MCE) has the meaning assigned in 
Sec. 457.902 of these proposed regulations.
     Medicaid applicable income level means, with respect to a 
child, the effective income level (expressed as a percentage of the 
poverty line) that has been specified under the State plan under title 
XIX (including for these purposes, a section 1115 waiver authorized by 
the Secretary or under the authority of section 1902(r)(2)), as of 
March 31, 1997, for the child to be eligible for medical assistance 
under either section 1902(l)(2) or 1905(n)(2) of the Act.
     Medicaid expansion program means a program where a State 
receives Federal funding at the enhanced matching rate available for 
expanding eligibility to targeted low-income children.
     Post-stabilization services has the meaning assigned in 
Sec. 457.402 of these proposed regulations.
     Poverty line/Federal poverty level means the poverty 
guidelines updated annually in the Federal Register by the U.S. 
Department of Health and Human Services under authority of 42 U.S.C. 
9902(2).
     Preexisting condition exclusion has the meaning assigned 
at 45 CFR 144.103, which provides that the term means a limitation or 
exclusion of benefits relating to a condition based on the fact that 
the condition was present before the first day of coverage, whether or 
not any medical advice, diagnosis, care or treatment was recommended or 
received before that day. A preexisting condition exclusion includes 
any exclusion applicable to an individual as a result of information 
that is obtained relating to an individual's health status before the 
individual's first day of coverage, such as a condition identified as a 
result of a pre-enrollment questionnaire or physical examination given 
to the individual, or review of medical records relating to the pre-
enrollment period.
     Premium assistance for employer-sponsored group health 
plans means State payment of part or all of premiums for group health 
plan or group health insurance coverage of an eligible child or 
children.
     Public agency has the meaning assigned in Sec. 457.301 of 
these propose regulations.
     Separate child health program means a program under which 
a State receives Federal funding from its title XXI allotment under an 
approved plan that obtains child health assistance through obtaining 
coverage that meets the requirements of section 2103 of the Act.
     State means all States, the District of Columbia, Puerto 
Rico, the U.S. Virgin Islands, Guam, American Samoa and the Northern 
Mariana Islands.
     State health benefits plan has the meaning assigned in 
Sec. 457.301 of these proposed regulations.
     State plan means the approved or pending title XXI State 
child health plan.
     State program integrity unit has the meaning assigned in 
Sec. 457.902 of these proposed regulations.
     Targeted low-income child has the meaning assigned in 
Sec. 457.310 of these proposed regulations.
     Uncovered child means a child who does not have creditable 
health coverage.
     Well-baby and well-child care services means regular or 
preventive diagnostic and treatment services necessary to ensure the 
health of babies and children as defined by the State. For purposes of 
cost sharing, the term has the meaning assigned at Sec. 457.520 of the 
proposed regulations.
4. Basis, Scope, and Applicability of Subpart A (Sec. 457.30)
    This subpart interprets sections 2101(a) and (b), 2102(a), 2102(c), 
2106, 2107(c), (d) and (e) of title XXI of the Social Security Act and 
sets forth the related State plan requirements for a State child health 
assistance program. It includes the requirements related to 
administration of the State program and the process for Federal review 
of a State plan or plan amendment. This subpart applies to all States 
that seek to provide health benefits coverage through CHIP.
5. State Program Administration (Sec. 457.40)
    Consistent with section 2106(d)(1) of the Act, we would specify in 
Sec. 457.40(a) that it is the State's responsibility to implement and 
conduct its program in accordance with the approved State plan and plan 
amendments, the requirements of title XXI and title XIX (as 
appropriate), and the regulations in chapter IV.
    To ensure that the State is operating its program accordingly, HCFA 
will review the operation of the program through on-site review or 
monitoring of State programs. At proposed Sec. 457.40(a), we would 
provide that HCFA will monitor the operation of the approved State plan 
and plan amendments to ensure compliance with title XXI, title XIX (as 
appropriate) and the regulations in chapter IV. There are two general 
goals for the proposed monitoring provisions. Specifically, monitoring 
will assure State compliance with both statutory and regulatory 
requirements under title XXI and with the specifications of the State 
plan. In addition, monitoring will allow us to track the submission of 
requested data related to CHIP, including enrollment and expenditure 
data and other efforts related to ultimately ensuring enrollment of 
eligible children into both CHIP and Medicaid. Expected outcomes of 
CHIP monitoring include: (1) Identifying the need for corrective 
action, enforcement and improvement within State title XXI programs; 
(2) recognizing and sharing best practices that may lead to increased 
enrollment; (3) identifying States' needs for technical assistance; and 
(4) informing HCFA as we prepare for the Secretary's report to 
Congress.
    The ongoing review of State programs is an evolving process as 
there is wide variation among implemented children's health insurance 
programs. Many programs are just being implemented, while others have 
been built upon programs in existence long before the passage of title 
XXI. Because of both variation in program design and differences in 
stages of program implementation, we have established a flexible review 
process that is focused primarily on assuring compliance with Federal 
law and regulations. In subsequent years Federal review of State 
programs may also examine how well programs are achieving the overall 
goals outlined in their State plans and plan amendments.
    In the Federal review process, however, we will monitor to ensure 
consistent implementation of the core set of key policy areas 
specifically described in the title XXI statute. We expect our 
monitoring effort to be an interactive and informative process for both 
the Department and the States. As a result, we plan to work with the 
States to identify any areas of need for technical assistance, to 
identify best practices that will assist States in understanding what 
works in specific situations and to ensure policies are implemented 
consistently across States.
    Although HCFA central and regional offices are in constant contact 
with the States, after the first anniversary of the

[[Page 60888]]

implementation of each CHIP, a formal State review will be conducted by 
a team led by HCFA regional staff with participation of HRSA regional 
staff.
    The review process may include site visits and phone interviews. 
Regional staff will put its preliminary findings into a report and 
share that report with the State to provide an opportunity for response 
to any issues raised in the review process before they make 
recommendations and send the report to HCFA central office. If 
necessary, HCFA, with participation of HRSA regional staff, will work 
with States to address areas in which they are not in compliance with 
either the statute, applicable regulations, or a State's plan.
    The review process and the implications of noncompliance are 
specifically addressed in Sec. 457.200, which was set forth in the 
March 4, 1999 proposed financial regulation.
    To ensure involvement in and commitment to the program at the 
highest level of State government, we are proposing in Sec. 457.40(b) 
to require that the State plan and plan amendments be signed by the 
State Governor or by an individual who has been delegated authority by 
the Governor to submit it. This individual could be the Secretary of 
Health, the CHIP Administrator, the Medicaid Director or any other 
individual who has authority, delegated by the Governor, to submit the 
State plan or plan amendment. In order to facilitate communication 
between the appropriate State and HCFA staff, we are proposing in 
Sec. 457.40(c) to require that the State include in the State plan or 
plan amendment the names of the State officials who are responsible for 
program administration and financial oversight.
    An additional aspect of program administration for the State is the 
passage of enabling legislation, which a State may need to implement a 
State plan. When the passage of State enabling legislation is required 
to implement a State plan, a State can submit its State plan 
application before the passage of the legislation. States must indicate 
in their application if such legislation is necessary and when it will 
be in place. The State plan must include an assurance that the State 
will not claim expenditures for child health assistance prior to the 
time that the State has legislative authority to operate the State plan 
or plan amendment as approved by HCFA. We are proposing this provision 
so that we can approve State plans and plan amendments while a State's 
legislative authority is pending. This provision is consistent with the 
requirement that a State must implement and conduct its CHIP in 
accordance with the approved State plan.
6. State Plan (Sec. 457.50)
    The State plan is a comprehensive written statement submitted by 
the State to HCFA for approval. The State plan describes the purpose, 
nature, and scope of its CHIP and gives assurance that the program will 
be administered in conformity with the specific requirements of title 
XXI, title XIX (as appropriate), and the regulations in chapter IV. The 
State plan contains all information necessary for HCFA to determine 
whether the plan can be approved to serve as a basis for Federal 
financial participation (FFP) in the State program.
    An approved State plan is comprised of the initial plan submission, 
responses to requests for additional information and subsequent 
approved State plan amendments. The first item that forms part of the 
approved State plan is the State's original application. The 
information that must be included in the original submission varies 
according to how the State chooses to provide health benefits coverage. 
In addition, the State's written responses to requests from HCFA for 
additional information, whether formal or informal, and any other 
written correspondence from the State are considered part of the 
approved State plan. The State's correspondence modifies the original 
submission; that is, information received from a State supersedes any 
contrary information that is included in the original plan or other 
earlier submissions. Moreover, if there are several submissions from 
the State that are inconsistent, the latest submission is the governing 
document. Most often the information in the additional responses should 
clarify or add to the language of the original submission. All 
documents that are included in the approved State plan will be 
referenced in the approval letter. Documents pertaining to all State 
plan amendments are also components of the approved State plan.
7. Amendments word (Sec. 457.60)
    Section 2106(b)(1) of the Act permits a State to amend its approved 
State plan in whole or in part at any time through the submittal of a 
plan amendment. We propose in Sec. 457.60(a) that the State plan must 
be amended whenever necessary to reflect changes in Federal law, 
regulations, policy interpretations or court decision; changes in State 
law, organization, policy or operation of the program; and changes in 
the source of the State share of funding.
    Although the proposed language of Sec. 457.60(a) contains no 
exceptions, we believe in practice only changes that are substantial 
and noticeable would require amendments. Changes in program elements 
that would not ordinarily be required to be included in the State plan 
at all would thus not require an amendment. For example, a change in 
the date for mailing enrollment material from June 1 to July 1 would 
not be considered substantial or noticeable and a State plan amendment 
would thus not be required. We are seeking comments on how to further 
interpret and express in regulations the necessity for State plan 
amendment submission.
    We are proposing in Sec. 457.60(a)(3) to require an amendment if 
the source of State share of funding changes. Furthermore, we are 
proposing in Sec. 457.65(d) that such amendment must be submitted to 
HCFA prior to such change taking effect. From the beginning of the 
program, our policy has been to only approve State plans that can 
assure, to our satisfaction, that the program has a permissible source 
of funding. Pursuant to section 2107(e)(1)(C) of the Act, a State is 
required as a condition for approval of its State plan to assure that 
the State will comply with section 1903(w) of the Act, relating to 
limitations on provider taxes and donations. Section 2107(d) of the Act 
requires that the State plan include a description of the budget, which 
is an advance plan for expenditures. Section 2107(d) also provides that 
the budget be updated periodically as necessary. We believe that 
proposed Sec. 457.60(a)(3) and Sec. 457.65(d) will ensure ongoing 
compliance with our requirement for permissible sources of funding and 
will avoid situations that require a disallowance for non-compliance. 
If a State has indicated that general revenues are the source of 
funding, then we would require a plan amendment for changes in the 
State's tax structure that reflect or include a change to general 
revenues based on taxes related to health care used to finance the 
State's share of title XXI expenditures. We would not require a plan 
amendment to reflect changes in the type of non-health care related 
taxes used to generate general revenue.
    We are proposing in Sec. 457.60(b) to require that a State 
proposing to amend its plan include an amended 3-year budget if the 
proposed amendment would result in different expenditures than those 
described in the budget accompanying the approved State plan. Under 
section 2107(d) of the Act, a State plan clearly must include the 
budget for

[[Page 60889]]

the plan. If a plan amendment that affects the budget is approved 
without a revision to the budget, then the current description of the 
budget would no longer be accurate for the entire State plan. If the 
proposed changes in the State plan amendment have no impact on the 
budget, then an updated budget is not required.
8. Duration of State Plans and Plan Amendments (Sec. 457.65)
    In Sec. 457.65, we propose that the State may choose any effective 
date for its State plan or plan amendment, but no earlier than October 
1, 1997. We believe that the intent of section 2106(a)(2)(B) of the Act 
is to provide flexibility to States in choosing an effective date. We 
considered requiring that a State must be providing health coverage to 
targeted low-income children as of the date the State specified as its 
effective date; however, such a requirement would preclude a State from 
claiming FFP for administrative start-up costs that are eligible for 
FFP. Therefore, in order to allow the State to claim program and 
administrative expenditures that the State may incur prior to providing 
coverage, we propose to define ``effective date'' as the date on which 
the State begins to incur costs to implement its State plan or plan 
amendment. This effective date may be prior to the date on which the 
State begins to provide coverage to targeted low-income children.
    A State may implement a State plan prior to approval of that plan 
but this may put the State at some risk. If a State implements a plan 
prior to approval and that plan is approved, the State can receive 
Federal matching funds on a retroactive basis for expenses incurred for 
programs operated in compliance with the approved plan and all 
applicable statutory and regulatory requirements (other than expenses 
incurred earlier than October 1, 1997).
    Any State that implements an unapproved State plan risks the 
possibility that the plan will not be approved as implemented. In the 
event that the State plan is not approved as it was implemented, the 
Federal government would not match the State's prior expenditures. HCFA 
has no authority to pay claims for periods prior to the effective date 
of the approved State plan for activities that are not consistent with 
an approved plan, or for activities that do not meet the requirements 
of title XXI. Section 2106 of the Act gives the Secretary authority to 
disapprove an initial State plan submission that does not fully comply 
with title XXI, and to approve an effective date for that State plan 
submission. We believe this authority necessarily means that the 
Secretary may deny an effective date that would include any time period 
during which the operating program did not fully comply with title XXI. 
Moreover, this authority permits the Secretary to deny claims for 
Federal matching funds for such time periods. We base that conclusion 
on the reasoning that there would be no approved State plan at the time 
of any claimed expenditures during those time periods. Under section 
2105(a), the Secretary is authorized to pay Federal matching funds to 
States based on child health assistance and certain other expenditures 
``under'' an approved State plan (up to the amount of the State's 
allotment). Absent an approved State plan, no Federal matching funds 
may be paid to a State. Although section 2106(c)(3) states that ``* * * 
the Secretary shall provide a State with a reasonable opportunity for 
correction before taking financial sanctions against the State on the 
basis of such [a] disapproval,'' this provision does not require that 
the Secretary accept claims in the absence of an approved State plan.
    Any State that implements an unapproved State plan amendment also 
risks the possibility that the plan amendment will not be approved as 
implemented. The reasoning described above for State plans also applies 
to State plan amendments that result in additional Federal financial 
participation. For a State that implements an unapprovable State plan 
amendment that results in expenditures that can be identified as beyond 
the scope of the approved State plan, these expenditures could not be 
used as a basis for Federal funding under section 2105(a)(1). An 
example of this situation is the implementation of a State plan 
amendment that adds a new population. For those populations, the 
expenditures would simply be beyond the scope of the approved State 
plan.
    For unapproved State plan amendments that do not result in 
expenditures that can be identified as beyond the scope of an approved 
State plan, we believe a different analysis must be applied. The 
implementation is a failure to conduct the State program in accordance 
with the approved State plan, and would be subject to the compliance 
remedies described in section 2106(d) of the Act. In this situation, 
HCFA would only withhold Federal matching funds after following the 
compliance procedures permitting the State a ``reasonable opportunity 
for correction'' in accordance with section 2106(d)(2).
    On March 4, 1999, we published a proposed rule addressing the 
financial provisions for title XXI. We are proposing to clarify certain 
provisions which were set forth in subpart B of that proposed rule. 
Specifically, paragraph (d)(2) of Sec. 457.204, ``Withholding of 
payment for failure to comply with Federal requirements,'' discusses 
the opportunity for correction prior to a financial sanction for 
failure to comply with a Federal requirement. As proposed, 
Sec. 457.204(d)(2) provides that if enforcement actions are proposed, 
the State must submit evidence of corrective action related to the 
findings of noncompliance to the Administrator within 30 days from the 
date of the preliminary notification. The proposed regulation would 
implement section 2106(d)(2) of the Act, which requires that the 
Secretary provide a State with a reasonable opportunity for correction 
before taking financial sanctions against the State on the basis of an 
enforcement action. We would revise the proposed regulatory text at 
Sec. 457.204(d)(2) to address in more detail the possible scope of 
corrective action that could be required. We would specify that such 
corrective action can include actions to ensure that the plan is and 
will be administered consistent with applicable law and regulations, 
actions to address past deficiencies in plan administration, and 
actions to ensure equitable treatment of beneficiaries. We recognize 
that not every situation will require all of these different types of 
corrective action. We are reserving to the Secretary the determination 
of the appropriate scope of corrective action under the individual 
circumstances presented. Such a determination necessarily will be made 
in the final determination on the findings of noncompliance, and will 
be reflected in the final notice described in proposed 
Sec. 457.204(d)(3).
    Certain special provisions govern the establishment of allotments 
for FY 1998 and FY 1999 for States that receive approval for their 
State plans during FY 1999. Under Public Law 105-277, effective October 
21, 1998, if a State submits a State plan during FY 1999, and the plan 
is approved by HCFA by the end of FY 1999 (that is, by September 30, 
1999), then CHIP allotments may be obligated for the State for both FY 
1998 and FY 1999. The effective date for the State plan would be the 
date requested by the State, but no earlier than the beginning of FY 
1998, (that is, October 1, 1997).
    After FY 1999, a State's initial State plan must be approved by 
HCFA by the end of a fiscal year in order to receive a State CHIP 
allotment for that fiscal year. For example, if HCFA approves a

[[Page 60890]]

State's initial State plan during FY 2000, the State could only receive 
a State allotment for FY 2000; the State could not receive an allotment 
for FY 1998 or for FY 1999. Since the State did not have a State plan 
approved by HCFA in FY 1998 or by the end of FY 1999, it could not 
receive a State allotment for FY 1998 or FY 1999.
    If a State submits a State plan that is first approved during FY 
2000, a FY 2000 allotment would be obligated for that State, but there 
would be no allotment for FY 1998 or FY 1999. However, the FY 2000 
allotment is potentially available to provide Federal financial 
participation (FFP) in the State's allowable FY 1998 and FY 1999 
expenditures, such as administrative costs, assuming the State has 
requested an effective date for its State plan in one of those fiscal 
years. For example, a State plan could be approved November 1, 1999, at 
which time the FY 2000 allotment would be obligated, and have an 
effective date of September 1, 1999, when the State began incurring 
administrative costs related to the State plan. These administrative 
costs could then be claimed under the FY 2000 allotment. Thus, a State 
may potentially have an effective date for its State plan in a fiscal 
year and receive FFP in expenditures incurred in a fiscal year for 
which it does not have a State CHIP allotment.
    Medicaid rules regarding effective dates continue to apply to child 
health assistance provided under a Medicaid expansion program. In 
accordance with Sec. 430.20(b) of the Medicaid regulations, the 
effective date of title XIX State plan amendments cannot be earlier 
than the first day of the quarter in which an approvable title XIX 
State plan amendment is submitted to HCFA. It is, therefore, important 
for a State to submit a title XIX State plan amendment either prior to 
or during the calendar quarter in which it wants the amendment to take 
effect. As discussed in proposed Sec. 457.70, States must submit both a 
Medicaid State plan amendment and a title XXI plan for the Medicaid 
expansion. Medicaid State plan amendments will be reviewed using the 
established process for title XIX. We will make every effort to 
coordinate the approval of a Medicaid State plan amendment with the 
approval of the title XXI State plan.
    Section 2106(b)(3)(C) of the Act provides that any State plan 
amendment that does not eliminate or restrict eligibility or benefits 
can remain in effect only until the end of the State fiscal year in 
which it becomes effective (or, if later, the end of the 90-day period 
in which it becomes effective) unless the State plan amendment is 
submitted to HCFA before the end of the period. We would implement this 
provision at proposed Sec. 457.65(a)(2). Thus, if a State plan 
amendment is implemented but is not submitted within the required time 
frame, the State risks being found out of compliance with its State 
plan, and loss of Federal participation in expenditures beyond the 
scope of the approved plan or other financial sanctions, as discussed 
below and in the proposed financial regulation (64 FR 10412).
    In accordance with section 2106(b)(3)(B)(ii) of the Act, an 
amendment that eliminates or restricts eligibility or benefits under 
the plan may not be effective for longer than a 60-day period unless 
the amendment is submitted to HCFA before the end of that 60-day 
period. Section 2106(b)(3)(B)(i) requires that amendments that 
eliminate or restrict eligibility or benefits under the plan may not 
take effect unless the State certifies that it has provided prior 
public notice of the proposed change in a form and manner provided 
under applicable State law. The notice must be published prior to the 
requested effective date of change. We propose to implement this 
provision at Sec. 457.65(b). In the amendment request, the State should 
describe the public notice process.
    We are also proposing that State plan and State plan amendments 
imposing new or increased cost sharing on beneficiaries would be 
treated as a restriction on benefits and subject to the prior public 
notice requirements set forth at Sec. 457.65 of these proposed 
regulations. We view cost sharing as a restriction on benefits since a 
beneficiary's financial responsibility for certain costs associated 
with CHIP may be an impediment to the beneficiary's access to certain 
covered services. Therefore, in accordance with section 2106(a)(3)(B) 
of the Act, we are proposing that the State plan must comply with the 
prior public notice requirements at Sec. 457.65 when the plan 
implements cost sharing charges, increases the existing cost sharing 
charges or increases the cumulative cost sharing maximum set forth at 
proposed Sec. 457.555. We believe that prior public notice would give 
interested parties the opportunity to react to the proposed changes. In 
addition, our proposed notice requirements would allow States to take 
into account the public's concerns regarding the potential impact of 
cost sharing on beneficiary access to services and participation in 
CHIP.
    As discussed previously at proposed Sec. 457.65(d), we would 
specify that a State plan amendment that requests approval of changes 
in the source of the State share of funding must be submitted prior to 
such change taking effect.
    In accordance with section 2106(e) of the Act, at Sec. 457.65(e) we 
propose that an approved State plan shall continue in effect unless and 
until the State modifies its plan by obtaining approval of an amendment 
to the State plan. The new plan will consist of the originally approved 
State plan and any approved State plan amendments. The State plan shall 
also continue in effect unless and until the Secretary finds 
substantial non-compliance of the plan with the requirements of the 
statute and regulations. An example of substantial non-compliance would 
be the imposition of cost sharing that exceeds Federal limits.
9. Program options (Sec. 457.70)
    Under section 2101(a) of the Act, a State may obtain health 
benefits coverage for uninsured, low-income children in one of three 
ways: (1) A State may provide coverage by expanding its Medicaid 
program; (2) a State may develop a plan that meets the requirements of 
section 2103 of the Act; or (3) a State may provide coverage through a 
combination of a Medicaid expansion program and a separate child health 
program. The following subparts apply to States that elect Medicaid 
expansions:
     Subpart A
     Subpart B (if the State claims administrative costs under 
title XXI).
     Subpart C (with respect to the definition of a targeted 
low-income child only).
     Subpart F (with respect to determination of the allotment 
for purposes of the enhanced matching rate, determination of the 
enhanced matching rate, and payment of any claims for administrative 
costs under title XXI).
     Subpart G.
     Subpart H (if the State elects the eligibility group for 
optional targeted low-income children and elects to pay for employer-
sponsored insurance).
     Subpart J (if the State claims administrative costs under 
title XXI and seeks a waiver of limitations on such claims based on a 
community based health delivery system). Subparts D, E, and I of part 
457 do not apply to Medicaid expansion programs because Medicaid rules 
govern benefits, cost-sharing, program integrity and other provisions 
included in those subparts. We note that the provisions of subparts B 
and F were set forth in the March 4, 1999 proposed rule.
    A State that chooses to implement a separate child health program 
must

[[Page 60891]]

comply with all the requirements in part 457. We would set forth the 
program options at Sec. 457.70(a).
    At Sec. 457.70(b), we propose that a State plan must include a 
description of the State's chosen program option. In addition, at 
proposed Sec. 457.70(c) we specify that States choosing a Medicaid 
expansion program must submit an amendment to the State's Medicaid 
State plan as appropriate. These States will be required to complete an 
abbreviated State plan and, in most circumstances, a Medicaid State 
plan amendment. If a State is expanding Medicaid within the scope of an 
1115 demonstration project, then that demonstration project may need to 
be modified by submission of a formal request for a change to the 
demonstration project and not through a Medicaid State plan amendment. 
If such a modification is needed, then the request for a change to the 
demonstration project must be submitted in addition to the title XXI 
State plan. The abbreviated State plan must include the State plan 
requirements specified in this subpart and subpart G of this proposed 
rule. A State that chooses to implement a separate child health program 
must include in its State plan all of the State plan requirements 
specified in part 457. A State selecting a combination program would 
need to submit a title XXI State plan, as well as a Medicaid State plan 
amendment.
    States may choose one option and switch to a different option at 
any time if a State plan amendment describing this change meets the 
requirements of the statute and these regulations and is approved by 
HCFA.
10. Current State Child Health Insurance Coverage and Coordination 
(Sec. 457.80)
    In accordance with sections 2102(a)(1) and (2) and 2102(c)(2) of 
the Act, we propose to require that the State plan describe the State's 
current approach to child health coverage and plans for coordination of 
the program with other insurance programs in the State. We specify that 
the State must provide a description of the following:
     The extent to which, and manner in which, children in the 
State, including targeted low-income children and other classes of 
children, by income level and other relevant factors, currently have 
creditable health coverage (as defined by Sec. 457.10) and, if 
sufficient information is available, whether the creditable health 
coverage they have is under public health insurance programs or health 
insurance programs that involve public-private partnerships.
     Current State efforts to provide or obtain creditable 
health coverage for uncovered children, including the steps the State 
is taking to identify and enroll all uncovered children who are 
eligible to participate in public health insurance programs and health 
insurance programs that involve public-private partnerships.
     Procedures used by the State to accomplish coordination of 
the program under title XXI with other public and private health 
insurance programs, including procedures designed to increase the 
number of children with creditable health coverage, and to ensure that 
only eligible targeted low-income children are covered under title XXI. 
The degree of creditable coverage a child has impacts whether a 
preexisting condition exclusion applies and therefore, tracking this 
information would be beneficial to the child.
    The purpose of this section is to require the State to justify the 
insurance expansion approach it has chosen to ensure that the State 
does not use Federal funds to supplant existing programs and funding 
but rather uses the funds for children who are uninsured. To the extent 
possible, the income level categories by which the State reports the 
current availability of creditable coverage should correspond to the 
income level categories used for other purposes such as eligibility or 
cost-sharing. The State may classify children by family income level, 
age group, race and ethnicity, urban versus rural location and any 
other categorization that the State finds useful in describing its 
situation. If sufficient information is available, the State should 
describe the extent to which the classes of children it sets forth are 
insured through Medicaid, employer-based coverage, or other forms of 
publicly supported insurance, such as State-only programs and public/
private partnerships. In addition, the State should describe the extent 
to which children in the State are uninsured. The State plan should 
clearly identify the sources of the data it uses in this section. We 
recognize that States may not initially have data available for an in-
depth study of the insurance status of its children. However, the 
information provided should be sufficient to illustrate that the State 
has analyzed the problem, using available data sources. The demographic 
information requested in this section can be used for State planning 
and will be used strictly for informational purposes. These data will 
not be used as a basis for the State's allotment. We also note that 
these data are not necessarily the baseline data required to be 
submitted as part of the annual report under subpart G.
    In addition, at Sec. 457.80(b), we propose that the State must 
provide an overview of current efforts made by the State through child 
related programs (such as Medicaid, the Maternal and Child Health Block 
Grant, title V, WIC, community and migrant health centers or special 
State programs for child health care) to provide health care services 
or obtain creditable health coverage for uncovered children by 
identifying and enrolling all uncovered children.
    Section 457.80(c) would require the State plan to include a 
description of the coordination of the plan with other public and 
private health insurance programs in accordance with sections 
2102(a)(3) and 2102(c)(2) of the Act. This section of the State plan 
should include an overview of how new enrollment outreach efforts will 
be coordinated with and improve upon existing State efforts as 
described in Sec. 457.80(a).
    A State that implements a separate child health program should 
describe how children who are determined to be eligible for Medicaid or 
another State-only program will be referred to and enrolled into that 
program, as required by proposed Sec. 457.350 and Sec. 457.360. Because 
children identified as Medicaid eligible are required to be enrolled in 
Medicaid, the State should describe how it will coordinate enrollment 
in CHIP and Medicaid. The State plan should also describe how Medicaid 
eligibility workers will refer non-Medicaid eligible children to the 
separate child health program.
11. Outreach (Sec. 457.90)
    In Sec. 457.90, we propose to require a State to implement an 
outreach process to inform families of the availability of health 
coverage programs and to assist families in enrolling their children 
into a health coverage program pursuant to section 2102(c) of the Act. 
A State plan must include a description of the procedures used for 
outreach. According to the statute, a State has the option to decide 
which methodologies and procedures it will use to inform families of 
uninsured, potentially eligible children about enrollment for child 
health assistance under the program. No single approach to reaching 
these children is provided in the statute. While States are expected to 
identify enrollment targets, they are encouraged to design and 
implement outreach activities that will reach diverse groups of 
children. We realize that the challenges States face in reaching out to 
families and assuring access to services

[[Page 60892]]

are great and will require vigorous sustained efforts.
    Outreach includes identifying, educating, and enrolling uninsured 
children, while remaining sensitive to the cultural and linguistic 
differences and special health care needs of diverse populations. There 
is no one model for outreach and there are many examples of 
successfully implemented, locally developed campaigns. Outreach is 
intrinsically linked to eligibility and enrollment and calls for 
activities that remove barriers that deter families from applying to 
the program. At proposed Sec. 457.90(b), we set forth examples of 
outreach strategies. The following two major types of outreach 
procedures, when designed with the targeted populations in mind, serve 
to encourage significant enrollment and reduction in the numbers of 
uninsured children:
     Education and awareness campaigns. A comprehensive 
Statewide education and awareness campaign is needed to inform the 
public about the importance of availability of CHIP and how to enroll 
eligible children. Implementing this campaign in multiple venues 
frequented by families, with culturally sensitive information, will 
help to keep the message of health insurance in front of the target 
audience. Families will benefit from educational programs designed to 
inform them of the advantages of enrolling eligible children in health 
insurance, including having a regular source of care, and obtaining 
well-child check ups including immunization. All outreach efforts 
should include information about how families can find out if their 
children are eligible and how to get them enrolled.
    Identifying families with uninsured children is the first step in 
outreach. States must develop and sustain comprehensive education and 
awareness campaigns to reach these children and families. Several data 
sets are available to assist States in the identification of families 
with uninsured children (for example, immunization registries, hospital 
discharge databases, school lunch program participant lists and 
hospital charity care databases). States should assure confidentiality 
when using their own existing data to identify uninsured children. 
Schools may also help in the education and awareness process as they 
often know who the uninsured children are. School nurses and school 
health centers, Parent Teacher Associations, and school health screens 
and fairs offer excellent opportunities for outreach for this new 
insurance program.
    States often begin outreach campaigns by sending printed material 
such as brochures, flyers, and program applications to families 
considered to be potentially eligible for enrollment. States may choose 
to target mailings to special audiences of potentially uninsured 
children. Hispanic/Latinos, Tribal/Native Americans, adolescents, 
African-Americans, Asians, migrant populations, rural and homeless, are 
populations considered to have large numbers of uninsured children.
    States have choices as to the breadth of distribution of program 
materials, prepared specifically for the different targeted 
subpopulations. Flyers, posters and brochures, developed in appropriate 
languages, can be made available through many programs that are closely 
identified with low-income families. Programs such as Head Start, 
school lunch programs, Child Care Centers and WIC programs serve 
thousands of low-income children. Welfare/food stamp offices are 
frequented by low-income families who may be eligible for CHIP.
    The provider community can also distribute program information. 
States could include major providers such as clinics (especially for 
newborns), hospitals, physicians (including OB/GYNs, pediatricians, and 
family physicians), pharmacies, mobile health units, mental health/
addiction centers, and health trade associations.
    Workers who live in the community, speak the language, and know its 
cultural beliefs and practices can be effective in disseminating 
information and answering basic questions. The diversity of the 
uninsured population requires that States, in designing outreach 
activities, be sensitive to the various cultural groups, their 
perceptions, needs, and desires. To be effective, messages and 
promotional materials should be developed with the assistance of people 
toward whom the message is directed.
    Employer-based outreach is another avenue for providing targeted 
populations with basic information on children's insurance programs. 
Working families may not know that their children are potentially 
eligible for enrollment in either CHIP or Medicaid. Small businesses, 
factories, city and State chambers of commerce and labor unions are 
often eager to spread the word about insurance coverage to their 
members or community groups with whom they are associated.
    A broad array of private and public sector partnerships affords 
States the opportunity to extend the CHIP message to many areas through 
groups and organizations not traditionally involved in outreach. 
Strategic partnerships with media, volunteer organizations, school 
personnel, community volunteers, clergy, and agency caseworkers may 
lend innovation to an outreach campaign. Churches and faith-based 
communities, civic clubs, YMCA, 4-H Clubs, Boy Scouts and Girl Scouts 
and senior citizen organizations are additional organizations committed 
to providing voluntary assistance for community causes. Private and 
public sector partnerships, enhanced by large numbers of volunteers, 
strengthen dissemination of program information in conjunction with 
State and local level campaigns.
     Enrollment Simplification. A major key to successfully 
reaching and enrolling uninsured children in CHIP and Medicaid is a 
simple application and enrollment process. While it is important to 
maintain program integrity (as described in subpart I of this proposed 
rule), burdensome applications and enrollment processes have created 
significant barriers to successful enrollment. Federal requirements for 
application and enrollment in Medicaid and CHIP provide broad 
flexibility to States in application and enrollment design. Several 
actions currently undertaken by States to encourage enrollment include: 
reducing and simplifying the application forms; providing mail-in 
applications; creating joint CHIP/Medicaid applications; eliminating 
the assets test; allowing self-declaration of income with follow-up 
verification by the State; reducing verification and documentation 
requirements that go beyond Federal regulation; implementing 
presumptive eligibility and 12-month continuous eligibility; allowing 
redeterminations by mail; and developing a follow-up process for 
families not completing the application. These changes, made in 
conjunction with other outreach activities undertaken by States, will 
help produce significant increases in enrollment.
    When a State selects a separate child health program, the State may 
consider new ways of providing families with assistance in filling out 
applications. We encourage these States to consider outstationing 
eligibility workers at sites that are frequented by families with 
children such as schools, child care centers, churches, Head Start 
centers, WIC offices, Job Corps sites, GED programs, local Tribal 
organizations, and Social Security Field Offices. However, States that 
implement Medicaid expansions must follow all Medicaid rules relating 
to application assistance and eligibility determination.

[[Page 60893]]

12. Enrollment Assistance and Information Requirements (Sec. 457.110)
    Section 2102(c) of the Act requires that State plans include 
procedures to inform families of the availability of child health 
assistance. In accordance with this provision, we are proposing to 
require that a State have procedures to ensure that targeted low-income 
children are given information and assistance needed to access program 
benefits. Specifically, we propose in Sec. 457.110, that the State plan 
describe methods the State will use to make accurate, easily understood 
information available to families of targeted low-income children and 
provide assistance to them in making informed health care decisions 
about their health plans, professionals, and facilities. In order to 
assist families of targeted low-income children in making informed 
decisions about their health care, we propose in Sec. 457.110(b) to 
require that States have a mechanism in place to ensure that the type 
of benefits and amount, duration and scope of benefits available under 
CHIP and the names and locations of current participating providers are 
made available to beneficiaries in a timely manner. This requirement is 
consistent with the ``right to information'' disclosure provision of 
the President's Consumer Bill of Rights and Responsibilities and is 
further discussed in subpart I.
    The proposed requirements set forth in this section apply to all 
States that are providing child health assistance whether through a 
Medicaid expansion or separate child health program under fee-for-
service or managed care delivery systems. Because Medicaid rules apply 
to States that implement Medicaid expansion programs, a State that is 
operating a Medicaid expansion program that uses managed care delivery 
systems would also be required to comply with the requirements of 
section 1932(a)(5) of the Act, enacted by section 4701(a)(5) of the 
BBA, and the regulations that implement that statutory provision. The 
Medicaid statute and regulations govern the kind of information that 
must be made available to Medicaid enrollees and potential enrollees 
and require that this information, and certain enrollment materials, be 
in a format that can be easily understood by the individuals to whom it 
is directed.
    We propose to require that materials be made available to 
applicants and beneficiaries in easily understood language and format. 
The State should consider the special needs of those who, for example, 
are visually impaired or have limited reading proficiency, and the 
language barriers of those who may use the information. A State may 
overcome language barriers by establishing a methodology for 
determining the prevalent language or languages in a geographic area 
and making information available in the languages that prevail 
throughout the State or in limited geographic areas where appropriate. 
A State may also overcome language barriers by making translation 
services available to enrollees and potential enrollees. In any case, 
the State should provide instructions to enrollees and potential 
enrollees on how to obtain information in the appropriate language or 
how to access translation services. While we encourage States to apply 
these principles in outreach, this provision is specifically designed 
to provide information to targeted low-income children once they have 
enrolled in CHIP.
    In addition to the benefit and provider information that a State 
must make available, other basic information should be made available 
to families of eligible targeted low-income children. This information 
could include procedures for obtaining services, including 
authorization requirements; the extent to which after-hours and 
emergency coverage are provided; cost sharing, if any; the rights and 
responsibilities of enrollees; complaint, grievance, and fair hearing 
procedures; any appeal rights that the State chooses to make available 
to providers; with respect to managed care organizations (MCOs) and 
health care facilities, their licensure, certification, and 
accreditation status; and, with respect to health professionals, 
information that includes, but is not limited to, education and Board 
certification and recertification.
    A State that delivers services through a managed care delivery 
system should consider making additional information available to 
families of targeted low-income children. This additional information 
may include any restrictions on the enrollee's freedom of choice among 
network providers; policy on referrals for specialty care and for other 
services not furnished by the enrollee's primary care provider; the 
extent to which enrollees may obtain services from out-of-network 
providers; and any benefits to which they may be entitled under the 
program, but that are not covered under the MCO contract and specific 
instructions on where and how to obtain those benefits.
13. Public Involvement in Program Development (Sec. 457.120)
    States are required under section 2107(c) of the Act to include in 
the State plan the process that the State used to accomplish public 
involvement in the design and implementation of the plan and the method 
to ensure ongoing public involvement. We would implement this provision 
at Sec. 457.120. Beneficiaries, providers, and interested groups and 
organizations can provide valuable input in developing a plan and 
insight into the successes and challenges faced by a State during 
implementation and throughout the operation of the program. Experience 
with section 1115 demonstrations and other Medicaid programs 
demonstrates the benefit of early consultation in identifying and 
resolving issues. States should provide for participation from 
organizations and groups such as hospitals, community health centers, 
and other providers, beneficiaries, and advocacy groups. States may 
ensure such involvement through a wide variety of approaches. For 
instance, to encourage public involvement, States can--
     Hold periodic public hearings to provide a forum for 
comments when developing or implementing their plans;
     Establish a child health commission or a consumer advisory 
committee responsible for soliciting public opinion about the State 
plan;
     Publish notices in generally circulated newspapers 
advertising State plan development meetings so the public can provide 
input; or
     Create a mechanism enabling the public to receive copies 
of working proposals in order to provide comments to the State.
    States may use methods other than those listed above. In fact, 
States may use any process for public input that affords interested 
parties the opportunity to learn about the State plan and allow for 
public input in all phases of the program.
14. Provision of child health assistance to American Indian and Alaska 
Native children (Sec. 457.125)
    Section 2102(b)(3)(D) of the Act requires a State to include in its 
plan a description of procedures to be used to ensure the provision of 
child health assistance to American Indian or Alaska Native children. 
We believe that a State cannot meet the requirement for ensuring the 
provision of child health assistance to American Indian or Alaska 
Native children without consultation with Tribes and Tribal 
organizations. Therefore, we are requesting in

[[Page 60894]]

457.125(a) that the State officials responsible for CHIP consult with 
Federally recognized Tribes and other Indian Tribes and organizations 
in the State (such as regional Indian health boards, urban Indian 
health organizations, non-Federally recognized Tribes, and units of the 
Indian Health Service) on development and implementation of the 
procedures used to ensure the provision of child health assistance to 
American Indian or Alaska Native children. This request is consistent 
with the February 24, 1998 letter to State Officials addressing 
consultation with Tribes and Tribal organizations.
    The Federal government and the governments of American Indians and 
Alaska Natives (AI/AN or Indian people) have a ``government-to-
government'' relationship based on the U.S. Constitution, treaties, 
Federal statutes, court decisions, and Executive Branch policies. This 
special relationship also constitutes a trust relationship between 
these governments. Certain benefits provided to Indian people through 
Federally enacted programs flow from this trust relationship. These 
benefits are not based upon race, but rather, are derived from the 
government-to-government relationship. A vital component of this 
relationship is consultation between the Federal and tribal 
governments. Increasingly, this special relationship has emphasized 
self-determination for Indian people and meaningful involvement by 
Indian people in Federal decision making (consultation) where such 
decisions affect Indian people, either because of their status as 
Indian people or otherwise. In cases where the government-to-government 
relationship does not exist, as with urban Indian centers, Inter-tribal 
organizations, State recognized tribal groups, and other Indian 
organizations, we nevertheless encourage States to engage in 
consultation.
    Consultation is an enhanced form of communication which emphasizes 
trust, respect and shared responsibility. It is an open and free 
exchange of information and opinion among parties which leads to mutual 
understanding and comprehension. Consultation is integral to a 
deliberative process that results in effective collaboration and 
informed decision making. We encourage States, in addition to 
consulting with Federally recognized Tribes, to consult with other 
Indian Tribes and organizations before taking actions that affect these 
governments or the Indian people residing within the State.
    In consulting with tribes and tribal organizations regarding the 
procedures to ensure provision of child health assistance, State might 
want to consider the following:
     Reimbursing facilities that serve Indian populations, 
including tribal and urban programs, for CHIP covered services at 
higher rates than other facilities to assure access to adequate 
services.
     Improving enrollment procedures for AI/AN children by 
placing outstation eligibility workers in the IHS, tribal, and urban 
facilities, by developing culturally appropriate education materials 
for enrollment of AI/AN children and by using tribal and community 
resources to increase eligibility outreach.
    We encourage States to consult with Tribes and Indian organizations 
throughout the process of developing and implementing their State 
plans, outreach strategies, and other policies and procedures. These 
are matters of great interest to Tribes and others in the Indian health 
community and on which they have significant expertise and insight.
    We propose in Sec. 457.125(b) that HCFA will not approve a State 
plan that imposes cost sharing on AI/AN children. We believe that the 
imposition of cost sharing on children in AI/AN families may impact the 
State's ability to ensure coverage for this group as required under 
section 2102(b)(3)(D) of the Act. Our rationale for exempting AI/AN 
children from cost sharing is further discussed in the preamble for 
proposed Sec. 457.535. This proposed provision would apply to states 
that submit State plans for either a separate child health program or a 
Medicaid expansion program, including Medicaid expansion programs under 
a section 1115 demonstration project.
15. Civil Rights Assurance (Sec. 457.130)
    In Sec. 457.130, we propose to require the State to provide an 
assurance that the State plan will be conducted in compliance with all 
civil rights requirements. This assurance is necessary for all programs 
involving continuing Federal financial assistance in accordance with 45 
CFR 80.4 and 84.5. These civil rights requirements include title VI of 
the Civil Rights Act of 1964, title II of the Americans with 
Disabilities Act of 1990, section 504 of the Rehabilitation Act of 
1973, the Age Discrimination Act of 1975 and 45 CFR part 80, part 84 
and part 91 and 28 CFR part 35.
16. Assurance of Compliance with Other Provisions (Sec. 457.135)
    In accordance with section 2107(e) of the Act, we propose in 
Sec. 457.135 to require that the State plan include an assurance that 
the State will comply under title XXI with the following provisions of 
titles XIX and XI of the Social Security Act:
     Section 1902(a)(4)(C) (relating to conflict of interest 
standards).
     Paragraphs (2), (16) and (17) of section 1903(i) (relating 
to limitations on payment).
     Section 1903(w) (relating to limitations on provider 
donations and taxes).
     Section 1132 (relating to periods within which claims must 
be filed).
    We note that section 2107(e)(2)(A) of the Act provides that section 
1115 the of Act, pertaining to research and demonstration waivers, 
applies to title XXI. This provision grants the Secretary the same 
section 1115 waiver authority in title XXI programs as in title XIX 
programs. Title XXI provides a broad range of options to allow States 
maximum flexibility in designing the program that best meets the needs 
of their children. We have carefully considered the extent to which 
waivers of both title XIX and title XXI provisions should be granted 
under CHIP.
    While the law permits the Secretary to use section 1115 authority 
to waive provisions of title XXI in order to pursue research and 
demonstration projects, we do not believe it would be reasonable to 
exercise this authority before States have experience in operating 
their new title XXI programs and can effectively design and monitor the 
results of demonstration proposals. In addition, we do not yet have 
sufficient experience in the operation of CHIP to review and evaluate 
the merits of a proposal to waive title XXI provisions. Therefore, we 
would consider a section 1115 demonstration proposal for waiver of 
title XXI provisions only after a State has had at least one year of 
CHIP experience and has conducted an evaluation of that experience. We 
are inviting comments on the best approach to considering section 1115 
waivers of title XXI provisions.
    Because both the Federal government and the States have substantial 
experience in administering title XIX, we believe that we are in a 
position to consider and grant waivers of title XIX provisions even 
when the demonstration project involves the CHIP-related enhanced 
match. We would consider a request for section 1115 waivers of title 
XIX provisions

[[Page 60895]]

applicable to Medicaid expansion programs without any additional 
experience with the program. We would require, however, that proposals 
be consistent with what would be allowable in a separate child health 
program in order to be approvable. We have approved waiver requests for 
three States. For example, we granted Missouri a waiver of title XIX 
requirements to provide non-emergency medical transportation because 
those services would not have been required under a title XXI benefit 
package. We have granted waivers for Missouri, New Mexico, and 
Wisconsin to waive title XIX cost sharing limitations to the extent 
that cost sharing is consistent with limitations of title XXI.
    States that submit section 1115 research and demonstration 
proposals of Medicaid laws and requirements must meet the existing 
section 1115 requirements, including requirements for research and 
evaluation design. To the extent that title XIX funds could be utilized 
to implement the demonstration, it would be necessary to negotiate 
budget neutrality. A State that wishes to have a section 1115 
demonstration proposal considered must submit a full section 1115 
application in addition to a title XXI State plan or plan amendment 
request that indicates that the State intends to implement title XXI 
through an approved Medicaid demonstration project. The State plan or 
plan amendment must describe the applicable Medicaid requirements that 
will be waived if the section 1115 demonstration project is approved.
    Although a 90-day review period applies to CHIP State plans, the 
90-day review period does not apply to section 1115 demonstration 
requests. Section 1115 does not impose any restrictions on review of 
waiver applications. While the President has committed to treat 
requests for waivers expeditiously, the complexity of waiver proposals 
under Medicaid and CHIP means that a 90-day review period may not be 
sufficient.
    To the extent that a proposed title XXI State plan or plan 
amendment depends upon section 1115 demonstration authority (waivers) 
which will take longer than 90 days for HCFA to approve or otherwise 
act on, HCFA may not be able to approve the proposed title XXI 
submission within 90 days. In such a circumstance, HCFA will advise the 
State that additional time will be required to review the waiver 
request. In addition, HCFA will ask the State for additional 
information on whether a final determination on the title XXI 
submission is required before approval of the waiver request, and how 
the State will implement the title XXI submission absent approved 
waivers. If the State does not provide information about implementation 
absent approved waivers, then the 90-day review period will not resume 
and HCFA will not proceed to final determination of the title XXI 
submission before acting on the related waiver request. If the State 
responds with information on how the submission will be implemented and 
implementation continues to rely upon waivers that have not yet been 
granted, then the 90-day review period will resume and HCFA may be 
required to disapprove the title XXI submission.
17. Budget (Sec. 457.140)
    Section 2107(d) of the Act specifies that a State plan must include 
a description of the budget, updated periodically as necessary, 
including details on the planned use of funds and the source(s) of the 
non-Federal share of plan expenditures, including any requirements for 
cost-sharing by beneficiaries. We are proposing in Sec. 457.140(a) that 
the State plan must include a budget that describes both planned use of 
funds and sources of the non-Federal share of plan expenditures for a 
3-year period. An amended budget included in a State plan amendment 
must also include the required description for a 3-year period.
    We are proposing that the planned use of funds include the 
projected amount to be spent on health services, the projected amount 
to be spent on administrative costs and assumptions on which the budget 
is based. The amount spent on health services would be the cost of the 
benefits provided to beneficiaries, such as payments to providers or 
health plans. Administrative costs include the costs specified in 
section 2105(a)(2) of the Act, examples of which are costs associated 
with outreach, child health initiatives and evaluation. We propose that 
assumptions on which the budget is based must include the cost per 
child and expected enrollment. We realize that a State must base the 
required information on projections. However, we believe it is 
important to have this information to ensure the State has adequately 
planned for its program. In particular, we want to ensure that the 
State understands the limits placed on administrative expenditures and 
that the plan is being developed in an ``effective and efficient'' 
manner.
    Although section 2107(d) does not specifically require States to 
submit a 3-year budget, it provides a sufficient authority for our 
proposed requirement. We propose to require a 3-year budget for the 
initial State plan because States have up to 3 years to spend each 
annual allotment. A 3-year budget is useful to show if States are 
planning to use their unused allotments in the succeeding 2 fiscal 
years. In developing this policy, we also considered the budget 
requirements for Medicaid programs. Section 1115 demonstration projects 
require a 5-year budget and section 1915(b) waivers require a 2-year 
budget.
    In accordance with section 2107(d), we are requiring in 
Sec. 457.140(b) that the budget in the State plan describe the 
projected source of non-Federal plan expenditures, including any 
requirements for cost sharing by beneficiaries. Under Sec. 457.224 of 
the March 4, 1999 proposed regulation concerning program allotments and 
payments to States (64 FR 10412), FFP would not be available for cost 
sharing amounts such as enrollment fees, premiums, deductibles, 
coinsurance, copayments, or similar charges as required by section 
2105(c)(5). To ensure this result, the amount of expenditures under the 
State plan must be reduced by the amount of any premiums and other 
cost-sharing received by the State.
    HCFA's approval of a State plan, including amendments, is 
contingent on the State's use of permissible funding sources for the 
non-Federal share of plan expenditures.
    Furthermore, we reserve the right to disallow funds, to the extent 
we find that the State is using impermissible funding for the non-
Federal share of plan expenditures under a previously approved plan. 
Any revenues received by a State through contribution(s) from or the 
imposition of tax(es) on health care providers or related entities, 
regardless of whether or not the State uses the contribution for 
Federal matching purposes, is subject to the statutory provisions of 
1903(w) of the Act.
18. HCFA Review of State Plan Material (Sec. 457.150)
    Section 2106 of the Act provides the Secretary of the Department of 
Health and Human Services (DHHS) with the authority to approve and 
disapprove State plans and plan amendments. The authority vested in the 
Secretary under title XXI has been delegated to the Administrator of 
HCFA with the limitation that no State plan or plan amendment will be 
disapproved without consultation and discussion by the Administrator 
with the Secretary.
    Therefore, in Sec. 457.150, we propose to specify that HCFA 
reviews, approves and disapproves all State plans and plan amendments. 
The Center for Medicaid and State Operations within HCFA has

[[Page 60896]]

the primary responsibility for administering the Federal aspects of 
title XXI. We will continue to work jointly with the Health Resources 
and Services Administration (HRSA) to implement and monitor the new 
program as a part of the Department's overall strategy to support 
coordination with other Federal and State health programs in providing 
outreach to uninsured children and promoting coordination of care and 
other public health interventions. At this time, State plans and plan 
amendments are reviewed by a team of DHHS staff, including HRSA staff, 
who must concur on approval of the plan. Departmental concurrence is an 
internal policy that is subject to change.
    We base approval or disapproval of State plans on relevant Federal 
statutes, including title XXI and title XIX, regulations, and 
guidelines issued by HCFA. We published and will continue to publish 
guidelines in the format of State Health Official letters and Questions 
and Answers, which may be accessed through the website.
    Section 2106 does not allow the Secretary to partially approve or 
disapprove a State plan or plan amendment. Thus, at Sec. 457.150(b) we 
propose that HCFA approves or disapproves the State plan or plan 
amendment only in its entirety. For example, if a State submitted one 
proposal to implement a combination program, we would not approve the 
Medicaid expansion portion and disapprove the separate program portion. 
The proposal would only be considered as a whole. If a State wants HCFA 
to consider portions of a proposal separately, then the State must 
expressly divide the proposal into distinct and separate proposed State 
plan or State plan amendment submissions. For example, a State could 
receive approval for a Medicaid expansion program described in the 
State plan and then receive approval to turn the program into a 
combination program as described in a plan amendment. As appropriate 
and feasible, States may withdraw portions of a pending State plan or 
plan amendment that may lead to delay in its approval or disapproval of 
the program.
    In Sec. 457.150(d), we propose to designate an official to receive 
the initial submission of a State plan. By designating one official to 
receive all initial State plans, we eliminate any confusion of where to 
send the first submission. The identity of this individual is posted on 
HCFA's website. If this designated official is unavailable, the review 
period is started and counted as if the designated official was in the 
office.
    In Sec. 457.150(e), we propose to designate an individual to 
coordinate HCFA's review for each State that submits a State plan. We 
will notify the State of the identity of the designated individual in 
the first correspondence from HCFA relating to the plan, such as a 
formal request for additional information. We will also notify the 
State at any time there is a change in the designated individual. If 
the designated individual for a State is unavailable during regular 
business hours, another HCFA employee will act in place of the 
designated individual to ensure that the review period is counted as if 
the designated individual was in the office. We believe that this 
procedure will simplify administration of the program.
19. Notice and Timing of HCFA Action on State Plan Material 
(Sec. 457.160)
    In Sec. 457.160(a), we propose that HCFA will send written 
notification of the approval or disapproval of a State plan or plan 
amendment. While section 2106(c)(2) only requires that written 
notification be sent for disapproval and requests for additional 
information, we are proposing to require that written notification be 
sent for approval as well. This rule is consistent with the Medicaid 
approval process during which HCFA sends written notices of approval of 
Medicaid State plan amendments and 1915 (b) and (c) waivers.
    We will closely track the review period, which begins on the first 
full day following receipt of the initial State plan by the designated 
official or the State plan amendment by the designated individual. In 
Sec. 457.160(b)(2), we propose that the State plan or plan amendment be 
considered received on the day the designated official or individual, 
as determined in Sec. 457.150 (d) and (e), receives an electronic, fax 
or hard copy of the complete plan. The complete plan includes any 
referenced documentation, such as attachments, benefits plans or 
actuarial analyses. If the designated official or individual receives a 
State plan without the referenced documentation, then the review period 
begins not on the first full day following receipt of the initial, 
incomplete plan, but rather on the first full day after the designated 
individual receives the documentation. We strongly encourage States to 
submit their State plans or plan amendments in electronic format (via 
disk or e-mail) to facilitate its distribution to DHHS' reviewing 
components. We request that the State submit the State plan and plan 
amendments to both the HCFA central office and the appropriate regional 
office at the same time. If the State submits the State plan or plan 
amendment in hard copy, we request that the State submit twenty (20) 
copies to the central office and three (3) copies to their regional 
office. If the State submits the State plan or plan amendment 
electronically, then the State should send three (3) hard copies to the 
central office and one (1) hard copy to their regional office. We also 
request that States include the name and telephone number of their 
primary contact person for CHIP (if different from the information 
required in Sec. 457.40(c)) in the State's transmittal letter to help 
ensure an early and ongoing dialogue on the submission.
    As required by section 2106(c)(2), a State plan or plan amendment 
will be considered approved unless HCFA, within 90 days after receipt 
of the State plan or plan amendment, sends the State written notice of 
disapproval or written notice of any additional information it needs in 
order to make a final determination. The Act does not specify calendar 
days or business days. We propose to measure the 90-day review period 
using calendar days. The 90-day review period would not expire until 12 
a.m. eastern time on the 91st countable calendar day after receipt, as 
calculated using the rules set forth in the proposed regulation and 
discussed below (except that the 90-day period cannot stop or end on a 
non-business day).
    HCFA's formal request for additional information may include a 
description of specific issues that need clarification, an outline of 
additional information required, or a request for resolution of any 
inconsistencies of the plan with title XXI provisions. We will make a 
formal request for information only when the State may need a 
significant amount of time to resolve issues or develop required 
information. In order to ensure that additional information responding 
to HCFA's formal requests will be sufficient to restart the approval 
process, we encourage States to work with HCFA in developing any 
responses.
    In Sec. 457.160(b)(3), we propose that if HCFA provides written 
notice requesting additional information, the 90-day review period is 
stopped on the day HCFA sends the written request for additional 
information. HCFA will not stop a review period on a weekend or a 
Federal holiday. This written request will be considered sent on the 
day that the letter is signed and dated except if the day is a weekend 
or Federal holiday, in which case the review period will stop on the 
next business day. We will

[[Page 60897]]

attempt to ensure that the State receives the letter on that same day, 
through some means of electronic transmission, and will try to confirm 
receipt by telephone contact during normal business hours. We propose 
that the review period will resume on the next calendar day after the 
complete additional information is received by the designated 
individual, unless the State's response is received after 5 p.m. 
eastern time on a day prior to a non-business day or any time on a non-
business day, in which case the review period will resume on the 
following business day. For example, if the formal request for 
information is sent on day 45, the review will begin again at day 46 on 
the first full business day following receipt of the requested 
information by the designated individual. If the formal request for 
information is sent on day 45 and the State's response is received at 6 
p.m. eastern time on a Friday, then day 46 will be the following Monday 
(assuming it is not a holiday). We propose in Sec. 457.160(b)(4) that 
the 90-day review period cannot stop or end on a non-business day. HCFA 
will not stop a review period on a weekend or holiday. If the 90th day 
of a review period is scheduled to be on a weekend or holiday, then the 
90th day will be the following business day. Additionally, in 
Sec. 457.160(b)(5), we propose that the 90-day review period may be 
stopped as many times as necessary to obtain the necessary information 
for making a final decision whether to approve the State plan or plan 
amendment.
    In developing our policy for the review period, we considered 
applying the review periods associated with the review of title XIX 
State plan amendments (SPA) and 1915 (b) and (c) waiver requests. In 
the review of a SPA and 1915 (b) and (c) waiver request, the 90-day 
clock begins on the day of receipt of the SPA or waiver request and 
ends 90 days later and only business days are counted. The 90-day clock 
can be stopped only once by a written request for additional 
information. A new 90-day period begins on the day the requested 
information is received.
    We are not proposing to use the same review period policies under 
title XXI, as we believe the proposed process will more effectively 
implement title XXI objectives because it will be speedier and more 
flexible. Rather than having a 90-day clock that restarts at the 
beginning when additional information is requested and received, we 
propose a clock that consists of only 90 calendar days and resumes on 
the day additional information was requested, when that information is 
received. The proposed time frame allows States ample opportunity to 
comply with the requirements of this new program by allowing the review 
period to be stopped as many times as necessary rather than only once. 
We are proposing that the review period be started (or restarted) on 
the first full day following receipt of the plan (or additional 
information) in order to allow us the fullest amount of time for 
review. Furthermore, our proposal to resume the review period on the 
following business day if the response is received after 5 p.m. eastern 
time on a day prior to a non-business day would allow us maximum review 
time. This provision and the provision that the review period cannot 
end on a non-business day safeguard against a plan becoming 
automatically approved on a non-business day. While we are committed to 
expedient review, we believe it would not be reasonable to count non-
business days on which we could not have reasonably taken action.
    We permit and encourage informal discussion between the State and 
HCFA during the review period. We may informally request additional 
information through meetings or telephone contact, or in writing. 
Because an informal request does not stop the 90-day approval time 
frame, HCFA usually makes such a request only when HCFA has concerns 
that the State could address in a timely manner through clarification 
of information already contained in the plan. It is important that 
States respond as quickly as possible to informal requests for 
clarification because these requests do not stop the review period.
20. Withdrawal Process (Sec. 457.170)
    In Sec. 457.170, we propose to allow a State to withdraw its State 
plan during the review process by providing written notice to HCFA of 
the withdrawal. This process is consistent with the process for 
withdrawal of a Medicaid State plan amendment.
21. Administrative and Judicial Review of Action on State Plan Material 
(Sec. 457.190)
    A State dissatisfied with the Administrator's action on State plan 
material has a right to administrative review. In Sec. 457.190(a), we 
propose a procedure for administrative review under the authority of 
section 2107(e)(2)(B) of the Act. Specifically, we would require that 
any State dissatisfied with the Administrator's action on State plan 
material under Sec. 457.150 may, within 60 days after receipt of the 
notice of final determination provided under Sec. 457.160(a), request 
that the Administrator reconsider whether the State plan or plan 
amendment conforms with the requirements for approval. This procedure 
is consistent with the procedure for administrative review in Medicaid. 
Additionally, we propose that the procedures for hearings and judicial 
review be the same procedures used in Medicaid which are set forth in 
regulations at part 430, subpart D. We propose to use the same 
procedures that are used in Medicaid because the infrastructure 
supporting these procedures is already in place and well known. We 
believe it is important for a State to be familiar with the process for 
requesting reconsideration of a HCFA action in order for that State to 
have full opportunity to dispute the action. In addition, we propose 
that we will not delay the denial of Federal funds, if required by the 
Administrator's original determination, pending a hearing decision. If 
the Administrator determines that the original decision was incorrect, 
we pay the State a lump sum equal to any funds incorrectly denied.

C. Subpart C--State Plan Requirements: Eligibility, Screening, 
Applications, and Enrollment

1. Basis, Scope, and Applicability (Sec. 457.300)
    This subpart interprets and implements section 2102(b) of the Act, 
which relates to eligibility standards and methodologies; section 
2105(c)(6)(B), which precludes payment for expenditures for child 
health assistance provided to children eligible for coverage under 
other Federal health care programs other than programs operated or 
financed by the Indian Health Service; and section 2110(b), which 
defines the term ``targeted low-income child.'' This subpart sets forth 
the requirements relating to eligibility standards and to screening, 
application and enrollment procedures. The requirements of this subpart 
apply to a separate child health program and, with respect to the 
definition of targeted low-income child only, a Medicaid expansion 
program.
2. Definitions and Use of Terms (Sec. 457.301)
    This section includes the definitions and terms used in this 
subpart. Because of the unique Federal-State relationship that is the 
basis for this program and in keeping with our commitment to State 
flexibility, we determined that many terms should be left to the States 
to define. For example, we did not define the terms ``family'' or 
``income'' as there is a great deal of variation among States. States 
have the option to count either

[[Page 60898]]

gross or net income when making eligibility determinations; and the 
term family can be defined any number of ways, ranging from only the 
individual child to including parents, grandparents or other non-
related guardians. States have discretion in making these 
determinations.
    The statutory phrase ``public agency in the State'' is not 
restricted to State government agencies, but would include other public 
agencies, such as local agencies in the State. Therefore, we propose to 
define ``public agency'' as a State, county, city or other type of 
municipal agency, including a public school district, transportation 
district, irrigation district, or any other type of public entity. Such 
an interpretation is consistent with the use of the term under 
Sec. 433.51 of the Medicaid regulations, which includes State and local 
governmental units, as well as Indian tribes, as public agencies. We 
are proposing to define the term ``employment with a public agency'' as 
employment either directly or with an entity under a contract with a 
public agency. This term includes both direct and indirect employment 
because we do not wish to influence or restrict the organizational 
flexibility of State and local governmental units.
    We would define the term ``State health benefits plan'' as a plan 
that is offered or organized by the State government on behalf of State 
employees or other public agency employees within the State. For 
example, if a local government, such as a county or a city, has its own 
insurance plan that is separate from the State employee plan, the 
children of that entity's employees could be eligible for CHIP as long 
as they are uninsured and meet all other eligibility requirements under 
the plan. The term does not include a separately run county, city, or 
other public agency plan or a plan that provides coverage only for a 
specific type of care, such as dental or vision care. Our definition 
parallels the definition in section 2791(d)(8) of the Public Health 
Service Act, which refers to plans ``established or maintained for its 
employees,'' except that we would limit the term to a plan under which 
an actual benefit in the form of a more than nominal premium subsidy is 
available for coverage of a dependent child. In the absence of a more 
than nominal premium subsidy, we would not consider the plan to be a 
``benefits plan'' with respect to the child, because no benefit would 
be extended by the State for that child.
3. State Plan Provisions (Sec. 457.305)
    In accordance with the requirements of section 2102(b)(1)(A) of the 
Act, we propose to require that the State plan include a description of 
the eligibility standards under the State plan.
4. Targeted Low-income Child (Sec. 457.310)
    Section 2110(b) of the Act defines a targeted low-income child. In 
accordance with this section, we have defined a targeted low-income 
child as a child who meets the eligibility requirements established in 
the State plan and certain other statutory conditions to be a targeted 
low-income child. At Sec. 457.310(b), we set forth proposed standards 
for targeted low-income children that relate to financial need, 
eligibility for other coverage including coverage under a State health 
benefits plan. In addition, we set forth exclusions from the category 
of low-income children.
    With regard to financial need, we propose that a child who resides 
in a State with a Medicaid applicable income level, must have: (1) 
Family income at or below 200 percent of the Federal poverty line; or 
(2) family income that either exceeds the Medicaid applicable income 
level but by not more than 50 percentage points or does not exceed the 
Medicaid applicable income level determined as of June 1, 1997. Section 
2110(b)(1)(B)(ii)(II) of the Act refers to the term Medicaid applicable 
income level in the definition of targeted low-income child. As 
specified in a technical amendment passed by Congress, the March 31, 
1997 date from section 2110(b)(4), defining Medicaid applicable income 
level, was replaced with the June 1, 1997 date in the text of this 
proposed regulation.
    With regard to other coverage, we propose that a targeted low-
income child must not be eligible for Medicaid (determined either 
through the Medicaid application process or the screening process 
discussed later in this preamble); or covered under a group health plan 
or under health insurance coverage, unless the health insurance 
coverage has been in operation since before July 1, 1997, and is 
administered by a State that receives no Federal funds for the 
program's operation. However, we would not consider a child to be 
covered under a group health plan if the child did not have reasonable 
access to care under that plan. For example, if a child is covered by a 
health maintenance organization in another State through the employer 
of an absent parent and cannot get treatment (other than emergency 
care) in his State of residence, we would not consider the child to 
have health insurance coverage for purposes of eligibility in the State 
of residency.
    Section 2110(b)(3) allows low-income children who have insurance 
coverage under a State program operating since before July 1, 1997 
without Federal funds to be considered targeted low-income children. 
This rule applies to programs that are State-operated, that is, 
administered by the State in some respect. Children in such programs 
continuously operating since June 30, 1997 would not be precluded from 
being considered as targeted low-income children, but would have to 
meet other applicable eligibility requirements.
    In the State plan review process, we have been asked whether 
children in Blue Cross/Blue Shield (BC/BS) Caring Programs for Children 
are eligible for a separate child health program. As of May 1997, there 
were more than 20 Blue Cross/Blue Shield (BC/BS) Caring Programs for 
Children. These programs are generally funded by contributions from the 
community that are matched by BC/BS and no Federal funds have been used 
to support these programs. Whether such children can be covered under a 
separate child health program depends on whether the Caring Program is 
State-operated. Assuming a particular Caring Program is not within the 
pre-existing State program exception, children would nevertheless only 
be ineligible to the extent that they were covered by the Caring 
program. To the extent that the Caring program terminates, or alters 
its eligibility criteria so that these children are no longer eligible, 
the children previously covered under the Caring program could be 
eligible for CHIP coverage as long as they meet the State's eligibility 
requirements. We also note that to the extent that a Caring Program 
does not meet the definition of ``health insurance coverage'' under 
HIPAA, children covered by a Caring Program may be eligible for CHIP 
coverage.
    As defined in section 2110(b)(2)(B) of the Act, the definition of 
targeted low-income child excludes a child who is a member of a family 
that is eligible for health benefits coverage under a State health 
benefits plan in a State on the basis of a family member's employment 
with a public agency. This provision would exclude children based on 
eligibility rather than actual coverage. Therefore a child who is 
eligible and offered coverage could not be a targeted low-income child 
even if the family declined to accept the coverage.
    There may be circumstances in which a State may cover otherwise 
eligible

[[Page 60899]]

children of public agency employees. The exclusion only extends to 
children ``eligible for health benefits coverage under a State health 
benefits plan''. We do not believe this condition is met in any 
meaningful sense when only a nominal employee benefit is available for 
health benefits coverage for the child. If the State or public agency 
contribution for the cost of the child's health benefits coverage is 
merely nominal, the child is not ``eligible for health benefits 
coverage under a State health benefits plan''. We would find an 
employee benefit available to the extent that a more than nominal State 
or public agency contribution was available under any health coverage 
option offered by the plan, regardless of the actual choice between 
those options made by the employee. In other words, if the State offers 
a cafeteria plan with multiple choices, we would look to whether a more 
than nominal State or public agency contribution could be available 
under any of the available choices, regardless of the actual choice 
made by the employee. This means that some children of public agency 
employees whose parents have access to State health benefits may be 
eligible for CHIP, while others may not, depending on whether the 
parent's public agency employer offers more than a nominal contribution 
that is available for the cost of the coverage of any dependent in the 
family.
    In order to ensure that States do not change their contribution 
levels to make children of public agency employees eligible for CHIP, 
we are proposing to provide that the exception discussed above would 
not apply if the State made available an employee benefit to pay for 
part or all of dependent coverage on, the date this proposed rule is 
published, November 8, 1999, whether or not the State later terminates 
that employee benefit. This proposed limitation would ensure that CHIP 
coverage does not displace current coverage and substitute Federal 
dollars for existing private and public dollars already spent on 
coverage. The proposed limitation is to ensure that our overall 
interpretation of the public agency employee exclusion is consistent 
with the overall purposes of the CHIP statute, and results in effective 
and efficient use of CHIP resources.
    We propose to find that a child is only ``eligible for health 
benefits coverage under a State health plan'' when an employee benefit 
is available to cover part or all of the cost of health benefits 
coverage under the State plan. Of course, such a benefit would be 
available if the child is the employee and directly entitled to State 
or public agency contribution to the cost of employee care. In the more 
likely instance that the child is a dependent of a State or public 
agency employee, the exclusion would be triggered if a State or public 
agency makes available a more than nominal contribution under the plan 
that exceeds the minimum amount necessary for coverage of the employee 
alone, and could be available to cover part or all of the cost of 
dependent coverage. This applies regardless of whether the State offers 
a defined benefit plan or a defined contribution applicable to a range 
of optional benefits. In other words, if the family must pay the full 
cost of coverage for dependents, with the exception of a nominal 
amount, then effectively no benefit is available, and children in the 
family could be eligible for a separate child health program. On the 
other hand, if the State makes available a more than nominal 
contribution for the cost of coverage beyond the amount needed to cover 
the cost of the employee alone, then a benefit would be available for 
dependent coverage, and children in the family would not be eligible.
    We are proposing to consider any contribution over $10 towards the 
cost of dependent coverage to be more than nominal. We considered an 
interpretation that the exclusion would be triggered by any State or 
public agency employer contribution over the minimum amount necessary 
for coverage of the employee alone, but we believe that this 
interpretation would be administratively difficult because of the 
inability in some cases to accurately determine the overall cost of 
such coverage, particularly on a prospective basis. Moreover, the 
exclusion operates to prevent substitution of CHIP coverage for 
existing State supported coverage, which is not an issue when the State 
or public agency contribution is merely nominal and provides 
insignificant financial support toward enrolling the child.
    Section 2110(b)(2)(A) of the Act excludes from the definition of 
targeted low-income child, a child who is an inmate of a public 
institution or who is a patient in an institution for mental diseases 
(IMD). We have proposed to use the Medicaid definition of IMD set forth 
at Sec. 435.1009. This definition states, in part, that an IMD ``means 
a hospital, nursing facility, or other institution of more than 16 beds 
that is primarily engaged in providing diagnosis, treatment or care of 
persons with mental diseases, including medical attention, nursing care 
and related services. Whether an institution is an institution for 
mental diseases is determined by its overall character as that of a 
facility established and maintained primarily for the care and 
treatment of individuals with mental diseases, whether or not it is 
licensed as such.''
    We propose to apply the IMD eligibility exclusion any time an 
eligibility determination is made, either at the time of application or 
during any periodic review of eligibility (for example, at the end of 
an enrollment period). Therefore, a child who is an inpatient in an IMD 
at the time of application, or during any eligibility determination, 
would be ineligible for CHIP coverage. If a child is enrolled in CHIP 
and subsequently requires inpatient services in an IMD, the IMD 
services would be covered to the extent that CHIP coverage includes 
coverage for such services. However, eligibility would end at the time 
of redetermination if the child resides in an IMD at that time.
    Some States have had questions regarding our policy on the 
provision of services to eligible individuals residing in IMDs. Under 
section 2110(b)(2)(A) of the Act, children who reside in IMDs are 
specifically excluded from being eligible for CHIP as a targeted low-
income child. However, there may be situations where a child already 
determined eligible for CHIP may require inpatient mental health 
services and the State CHIP plan covers IMD services. This situation 
raises the issue of whether the child is eligible for CHIP services 
once he or she enters the IMD. In a question and answer released on 
July 29, 1998, we noted that a child in an IMD may not be eligible for 
CHIP but an eligible child who then enters an IMD may remain eligible 
for CHIP services until such time as the child's eligibility is 
redetermined. In developing this policy, we were attempting to allow 
services to be provided to more individuals. However, it had been 
suggested that our policy as stated in the July 29, 1998 question and 
answer has the potential for allowing services to be delivered 
inequitably among children with similar needs. For example, if one 
child is receiving services in an IMD and is redetermined after 2 
months, that child will no longer be eligible for CHIP at that time. 
Another child may be receiving IMD services but may not be redetermined 
for 12 months. The second child would receive more services than the 
first although they are similarly situated. Moreover, the CHIP guidance 
is not consistent with the Medicaid IMD policy. Under Medicaid, 
children residing in IMDs remain eligible for Medicaid, but Federal 
matching funds are not available for any services

[[Page 60900]]

provided to the individual unless the facility is qualified as an 
inpatient psychiatric hospital for individuals under the age of 21.
    We are currently reviewing the CHIP IMD policy and considering 
various options. We are soliciting comments on an appropriate way to 
address this issue. We note that inpatient mental health services may 
be available under a State CHIP program in settings and facilities 
other than IMDs.
    We have proposed to use the Medicaid definition of inmate of a 
public institution set forth at Sec. 435.1009. Accordingly, when 
determining eligibility for CHIP, an individual is an inmate when 
serving time for a criminal offense or confined involuntarily in State 
or Federal prisons, jails, detention facilities, or other penal 
facilities. A facility is a public institution when it is under the 
responsibility of a governmental unit or when a governmental unit 
exercises administrative control.
    Under Medicaid, FFP is not available for medical care provided to 
inmates of public institutions, except when the inmate becomes a 
patient in a medical institution. We believe that the underlying basis 
for this exception to the FFP exclusion in Medicaid is to recognize 
that the term ``inmate'' includes only a person involuntarily residing 
in a penal setting. When discharged from a penal setting, or 
temporarily transferred to a medical institution (which does not 
include institutions that are part of the State's penal system, since 
such an institution is primarily a penal institution rather than a 
medical institution) a person is no longer an ``inmate'' and is treated 
as part of the general health care community. While the person is in 
the medical institution, FFP is available for Medicaid covered 
services.
    We propose to allow this same exception when determining 
eligibility for a separate child health program because we believe an 
inmate residing in a penal institution who is subsequently discharged 
or temporarily transferred to a medical institution for treatment is no 
longer an ``inmate.'' Therefore, an inmate who becomes an inpatient in 
a medical institution which is not part of the penal system (that is, 
is admitted as an inpatient in a hospital, nursing facility, juvenile 
psychiatric facility, or intermediate care facility), would then be 
eligible for CHIP (subject to meeting other CHIP eligibility 
requirements), and the State would receive FFP for medical care 
provided to that child. If the child is taken out of the medical 
institution and returned to a public institution, the child would again 
be excluded from eligibility for CHIP.
4. Other Eligibility Standards (Sec. 457.320)
    Section 2102(b) of the Act sets forth the parameters for other 
eligibility standards and methodologies a State may use under a 
separate child health program. With certain exceptions, the State may 
establish different standards for different groups of children. Such 
standards may include those related to geographic areas served by the 
plan, age, income and resources (including any standards relating to 
spenddowns and disposition of resources), residency, disability status 
(so long as any standard relating to disability does not restrict 
eligibility), access to other health coverage and duration of 
eligibility. Under the statute, the State may not use eligibility 
standards that discriminate on the basis of diagnosis, cover children 
with higher family income without covering children with a lower family 
income within any defined group of covered targeted low-income 
children, or deny eligibility on the basis of a preexisting medical 
condition.
    Accordingly, with certain exceptions, States are free to choose the 
standards that they will use to establish eligibility under a separate 
child health program. A State can set the income limit or limits, 
consistent with title XXI and these regulations, against which to 
compare income to determine eligibility. With the exception of income 
that cannot be counted because of a prohibition in another Federal 
statute, a State can determine what constitutes income, what income is 
counted, and what income is excluded or disregarded. A State can 
calculate eligibility using either gross income or net income after 
deductions and disregards. A State can also determine who is in a 
child's family and therefore, whose income will be counted and under 
what circumstances. However, as noted, certain other Federal statutes 
prohibit counting certain payments in determining eligibility under 
certain means tested programs including a separate child health 
program. For example, relocation payments provided under the Uniform 
Relocation Assistance and Real Property Acquisition Policies Act of 
1970 and student financial assistance for attendance costs received 
from a program funded in whole or in part under title IV of the Higher 
Education Act of 1965, as amended, or under the Bureau of Indian 
Affairs student assistance programs cannot be counted as income under a 
separate child health program.
    A State has the option to impose a resource test. However, very few 
States have elected this option. Most States believe that a resource 
test unnecessarily complicates the eligibility process and is a barrier 
to enrollment. Most families who meet the income requirements for 
eligibility do not have significant resources. If a State chooses to 
impose a resource test, it may set the resource limits(s) that it will 
use to establish eligibility and determine what constitutes a resource 
and what resources, if any, will be excluded or disregarded.
    The statute provides that in establishing eligibility, the 
standards may include those related to a ``spenddown''. We would 
interpret this language to allow a child who would be eligible except 
for excess income and/or resources, to become eligible when the family 
has either incurred or paid medical expenses in the amount of the 
excess income and/or resources. We would allow the State to establish 
the period of eligibility for children who become eligible for the 
program by virtue of a spenddown. As it already exists under the 
Medicaid program, we would also allow States to have a ``pay-in 
spenddown'' policy. Under a ``pay-in spenddown,'' a State would 
establish the amount of the excess income or resources that a family 
had and allow the family to pay that amount directly to the State to 
establish immediate eligibility without waiting until the family incurs 
the medical expenses. In the event that the family did not incur 
medical expenses sufficient to cover the pay-in spenddown amount for 
the spenddown period, the State would need to have reasonable 
procedures in place for the disposition of the unused pay-in spenddown 
amount, such as refunding the unused amount or crediting it to a future 
spenddown period. The State cannot use money collected for matching 
purposes.
    The statute provides that in establishing eligibility, the 
standards may relate to ``disposition of resources.'' We interpret this 
provision to allow a State to impose a period of ineligibility, or 
other penalty, if the State finds that an individual, whose resources 
are relevant to a child's eligibility for CHIP, disposed of resources 
for less than fair market value in order to make the child eligible for 
CHIP coverage.
    The statute provides that the standards used may include those 
related to geographic area. We interpret this language to allow a State 
to provide coverage only to children living in certain areas or 
jurisdictions within the State and to have different eligibility 
criteria for different areas or

[[Page 60901]]

jurisdictions within the State. However, we recommend that States 
strive to maximize coverage throughout the State.
    Eligibility standards may also relate to disability status as long 
as any standard relating to such status does not restrict eligibility. 
We interpret this provision to allow a State to establish a group of 
children who may be eligible because they meet State-established 
disability criteria or have a particular disabling condition. The State 
could establish different eligibility criteria for each such group, as 
long as the criteria do not restrict eligibility for either group.
    The statute provides that the standards may relate to age. We 
interpret this provision to allow States to provide coverage only to 
children of a certain age or ages or to have different eligibility 
criteria for children of different ages. We have specified that the age 
used cannot exceed age 18 because section 2110(c)(1) defines a child 
for purposes of title XXI as an individual under the age of 19. This 
means that a State cannot provide coverage to a child who has attained 
age 19. We considered whether there was statutory authority to continue 
coverage after a child's 19th birthday if the child was in a course of 
treatment and decided that there is no statutory authority to do so. We 
also considered whether a child who attains age 19 during what would 
otherwise have been a period of guaranteed eligibility, explained 
below, could remain eligible until the end of that period. We decided 
that there is no authority for such continuous eligibility and 
therefore eligibility must be terminated on the date that the child 
attains age 19. If coverage for a given period has been pre-paid under 
the State's usual and customary administrative procedures prior to the 
date the child attains age 19, the coverage may continue until the end 
of the pre-paid period even though the child is no longer eligible.
    Eligibility standards may also include those related to residency. 
We interpret this language to allow States to provide child health 
assistance under a separate child health program only to residents of 
the State. We would also allow a State to determine what constitutes 
residency in the State. However, under the 1969 decision of the Supreme 
Court in Shapiro v. Thompson (394 US 618), a State cannot impose a 
durational residency requirement. Therefore, we propose to require that 
an eligibility standard relating residency cannot exclude those who 
have recently moved to the State. In addition, in establishing 
residency requirements we urge States to be particularly attentive to 
meeting the health needs of migrant targeted low-income children. We 
encourage States to allow migrants to maintain residency in the State 
in which they reside most often, if they choose, or to establish 
residency in the State in which they are working. We also strongly 
recommend that States establish written inter-State agreements setting 
forth rules and procedures for resolving cases of disputed residency as 
States do under Medicaid. (See Sec. 435.403 for Medicaid regulations 
pertaining to residency.)
    The eligibility standards also may relate to access to other health 
coverage. See Subpart H of this proposed rule for a discussion of 
substitution of coverage.
    Furthermore, we want to ensure that the State periodically 
disenrolls from the program enrollees that no longer meet the 
eligibility standards under section 2102 and these regulations for any 
reason including a change in age, income, and other health coverage. 
For this reason, we would specify that the State agency may, at its own 
discretion, establish a period for regular review of eligibility, not 
to exceed 1 year. During the period between regular eligibility 
reviews, a child need not have eligibility redetermined, and thus will 
remain eligible throughout the period, unless the child reaches age 19 
or (as discussed below) is found eligible for Medicaid. Note that, 
States that implement CHIP through the Medicaid expansion option are 
subject to the Medicaid regulations (42 CFR 435.916), under which a 
State must also redetermine eligibility at least every 12 months. The 
eligibility standard relating to duration of eligibility would not 
allow States to impose a maximum length durational requirement or any 
similar requirement. We solicit comments on this issue.
    We are particularly concerned about the impact of age, income, and 
benefits restrictions under a separate child health program on pregnant 
teens and their children. We urge States to pay particular attention to 
the interaction of a separate child health program and the Medicaid 
program when it comes to the State's attention that a teen is pregnant. 
Although States may provide pregnancy-related and delivery services 
under a separate child health program, it is often to the pregnant teen 
and newborn's advantage to be covered by Medicaid, if eligible. Under 
Medicaid, once a pregnant teen is determined eligible, she remains 
eligible without regard to changes in income until the end of the 
postpartum period. Under a separate child health program, a pregnant 
teen may lose eligibility due to an increase in income and at that 
point, be unable to establish eligibility for Medicaid. She then might 
be without coverage for the rest of her prenatal care and her delivery. 
In addition, an infant born to a teen who is eligible for and receiving 
Medicaid on the date of the infant's birth is deemed to have filed a 
Medicaid application and been found eligible. The infant also remains 
eligible for 1 year, without regard to changes in income, as long as 
the infant continues to reside with the mother. An infant born to a 
mother whose delivery was covered by a separate child health program 
would not have this protection. To be eligible for separate child 
health program, an application would have to be filed for the infant 
and the infant would have to meet income eligibility standards.
    In addition, we urge States to be particularly attentive to the 
possibility that a pregnant teen who loses eligibility under a State 
child health program because she attains age 19 might be eligible for 
Medicaid as a pregnant teen although she was not eligible for Medicaid 
otherwise. In some States, the income standard applied under Medicaid 
to a pregnant teen is higher than the standard used for non-pregnant 
teens of the same age, which means that pregnant teens with higher 
incomes than other children of the same age may be Medicaid eligible.
    A State must allow any child, including a pregnant teen, to apply 
for Medicaid at any time and must take timely action on that 
application. If the teen is determined to be eligible for Medicaid, the 
teen is no longer eligible for CHIP. Any child who is covered under 
CHIP at all times is entitled to apply for and receive Medicaid, if 
eligible, regardless of the State's practice for determining and 
reestablishing eligibility under the State program. When the State 
determines that a child is Medicaid eligible, the child is no longer 
eligible for CHIP. States that have opted to provide presumptive 
eligibility for pregnant women under the Medicaid program must also 
allow providers to find pregnant teens presumptively eligible for 
Medicaid.
    Finally, in some States, the benefits provided to pregnant teens 
under Medicaid, particularly those related to prenatal care and 
delivery, may be better and less expensive than those provided under 
CHIP. We urge States to provide sufficient information to a pregnant 
teen for her to make an informed choice about applying for Medicaid 
during a period of guaranteed eligibility.
    In keeping with section 2102(b)(1)(B)(i) and (ii), States may not 
cover children with higher family income without covering children with

[[Page 60902]]

lower family income within any State-defined group of covered targeted 
low-income children or deny eligibility based on a preexisting medical 
condition.
    We have proposed certain other restrictions on eligibility 
standards. The first proposed restriction is that a State not require 
that a social security number (SSN) of an applicant child or family 
member be provided as a condition of eligibility. We wish to clarify 
that, under section 1137 of the Act, a SSN must be supplied only by 
applicants for and recipients of Medicaid benefits. In all other cases, 
including non-applicant parents of children applying for Medicaid and 
children applying for a separate child health program, States are 
prohibited from making the provision of a SSN by another family member 
a condition of the child's eligibility. This rule also applies to other 
members of the household whose income might be used in making the 
child's eligibility determination.
    Some States use parents' SSNs as a means of verifying family income 
in the process of making an eligibility determination. While the 
statute does not permit States to require disclosure of the SSN for 
applicants or non-applicants, voluntary disclosure by the parent may 
facilitate the verification of income and contribute to a speedier and 
more accurate determination of the child's eligibility. States may 
advise parents and other household members of this as long as they do 
so in a manner that does not coerce provision of the SSN or deter 
application for benefits. Once more, we wish to clarify that States 
have no legal basis for denying an application based upon the failure 
to supply the SSN for verification purposes.
    We also propose to specifically provide that the eligibility 
standards used for a separate child health program cannot exclude 
American Indian or Alaska Native children who are eligible to receive 
medical care funded by the Indian Health Service (IHS). We believe this 
provision is effectively required by the statutory mandate that State 
child health plans contain procedures to ensure the provision of child 
health assistance to targeted low-income children who are Indians, and 
the statutory provision, discussed below, that CHIP payment may be made 
primary to any IHS payment for CHIP-covered services.
    Section 2105(c)(6)(B) of the Act specifically exempts programs 
operated or financed by IHS from the restriction on payment to prevent 
duplication between CHIP and other Federally operated or financed 
health programs. In light of IHS policies, we read this provision to 
require that a separate child health program must pay for services that 
are covered under the plan and are provided by IHS and IHS-funded 
Tribal health programs participating in the separate child health 
program. IHS only pays for items and services not covered by any other 
third-party coverage. The Indian Health Care Improvement Act grants IHS 
and IHS-funded Tribal health programs authority to bill Medicaid and 
all other third party insurance for services provided directly to the 
Indian person. The IHS or Tribal program also may require health care 
providers with whom they contract for other services for Indian 
beneficiaries to bill Medicaid and other health insurance before 
billing the IHS or Tribal program.
    In addition, we would provide that the eligibility standards used 
for a separate child health program cannot violate any other Federal 
law. For example, under the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996 (PRWORA), as amended (8 U.S.C. 
1601 et seq.), a State must cover those legal immigrant children who 
meet the Federal definition of qualified alien and who are otherwise 
eligible. We believe that the following qualified alien children who 
are otherwise eligible must be covered:
     All qualified alien children who were in the United States 
before August 22, 1996.
     Refugees, asylees, certain Cuban, Haitian and Amerasian 
immigrants, and certain aliens whose deportation is being withheld.
     Unmarried, dependent children of veterans and active duty 
service members of the Armed Forces.
     The following children who enter the United States on or 
after August 22, 1996 and who are in continuous residence for 5 years 
(Earliest eligibility for this group will be August 22, 2001.):

-- Alien lawfully admitted for permanent residence;
--Certain battered aliens or children of battered aliens;
--Certain parolees who have been paroled for at least 1 year;

We note that States implementing a separate child health program do not 
have the option provided to them under Medicaid to deny Medicaid to 
some qualified aliens.
    In establishing eligibility for CHIP coverage, States must obtain 
proof of citizenship, (including nationals of the U.S.) and verify 
qualified alien status in accordance with section 432 of PRWORA, as 
amended (8 U.S.C. 1642).
    In addition to verifying qualified alien status, PRWORA requires 
that Federal public benefit programs, such as Medicaid and CHIP, must 
also obtain proof that an applicant who so claims is a citizen of the 
United States. As required by law, on August 4, 1998, the Immigration 
and Naturalization Service (INS) published a notice of proposed rule 
making in the Federal Register that set forth proposed procedures for 
providing proof of citizenship and qualified alien status.
    For verification purposes, the INS proposed rules require the 
applicant to declare in writing, under penalty of law, whether the 
applicant is a national of the United States. (National means either a 
US citizen or a person who, though not a citizen of the United States, 
owes permanent allegiance to the United States). For unemancipated 
minors under 18, the regulations provide for the declaration to be 
executed by a parent, legal guardian, or other person legally qualified 
to act on behalf of the applicant. The proposed rules set out what 
constitutes primary or secondary evidence of US national status. In 
lieu of evidence from the applicant, the proposals allow the option to 
consult agency records, or to accept a third party declaration in the 
case of an applicant who cannot produce evidence of US national status. 
The regulations also permit reliance upon attestation as temporary 
evidence of US nationality only until the applicant can provide the 
required evidence.
    While a letter to State Health Officials issued by HCFA on 
September 10, 1998, advised States that they could accept self-
declarations of US citizenship without further proof, once the INS 
regulation cited above becomes a final rule, it is very likely that 
self-declaration will no longer be permitted. States that currently 
permit self-declaration, as well as States that employ other procedures 
not consistent with the INS final rule, will need to come into 
compliance with the INS final rule within 2 years after the rule 
becomes final.
    Section 2102(b)(1)(A) specifies that a State may adopt eligibility 
standards relating to duration of eligibility but does not prescribe a 
particular duration. We propose at Sec. 457.320(a)(10) to allow the 
State to establish the period between eligibility redeterminations as 
long as the period does not exceed one year. During the period between 
eligibility redeterminations, a child need not have eligibility 
redetermined and thus will remain eligible throughout the period, 
unless the child reaches age 19 or (as discussed above) is found 
eligible for Medicaid. The State is required to reestablish eligibility 
of a child, with

[[Page 60903]]

respect to circumstances that may change, at least once every twelve 
months. This will allow States to provide continuous eligibility for 
children under a separate child health program without regard to 
changes in circumstances other than age or Medicaid eligibility, for a 
guaranteed period of time in the same manner as the State provides 
continuous eligibility under Medicaid (Section 1902(e)(12) of the Act). 
We will consider all payments made during a guaranteed period of 
eligibility after a final determination of initial eligibility to be 
correct. We believe a longer period between eligibility 
redeterminations would be inconsistent with the requirements and 
objectives of title XXI, in particular the goal to extend coverage 
primarily to targeted low-income children.
5. Application (Sec. 457.340)
    We propose to require that the State must afford every individual 
the opportunity to apply for child health assistance without delay. 
Section 2101(a) of the Act requires States to provide child health 
assistance to uninsured, low-income children in an effective and 
efficient manner. The opportunity to apply without delay is necessary 
for an effective and efficient program.
    In addition, we propose that a State may use either a separate 
application for CHIP or a joint application for CHIP and Medicaid. If a 
State chooses to use a separate application, the State must ensure that 
the screening procedures described in proposed Sec. 457.350 are 
followed.
    If a State chooses to use a joint application for CHIP and 
Medicaid, the application does not necessarily need to be an 
application for Medicaid under all possible Medicaid eligibility 
groups. The application for Medicaid could be an application only for a 
child-related Medicaid eligibility group that must be used for 
screening purposes as explained in the discussion of Sec. 457.350. 
However, if a State chooses to use this type of limited application, 
the application must inform the individual that it is an application 
only for one kind of children's health benefits under Medicaid and is 
not a full Medicaid application, and that even if the child is not 
found eligible for this kind of children's health benefits under 
Medicaid, the child may be eligible for Medicaid on some other basis 
and has a right to complete a full Medicaid application. The Medicaid 
denial notice must also provide this information. For the same reasons 
that we believe it would be overly burdensome and contrary to the 
intent of title XXI to require that a State screen for eligibility 
under all Medicaid eligibility groups, we believe that it would be 
overly burdensome and against the intent of the program to require a 
State using a joint application to use a form that allows a full 
application for Medicaid under any eligibility group.
    We encourage States to use a joint application for their CHIP and 
Medicaid programs. A joint application is an actual Medicaid 
application. It must be processed in the same manner as any other 
application for Medicaid. All of the Medicaid rules pertaining to 
application would apply to a joint application. Joint applications 
would ensure that the proposed screen and enroll requirements set forth 
at Sec. 457.350 are met. Joint applications also permit a family to 
submit information once during the application process. On September 
10, 1998, we released a model joint application form as an attachment 
to a letter clarifying eligibility procedures. This information can be 
found on the HCFA website.
    If a State chooses to use separate applications for CHIP and 
Medicaid, there is considerable flexibility, within certain limits, in 
developing application forms and the eligibility intake process. For 
example, States that implement a separate child health program have 
flexibility to contract with independent entities to perform initial 
Medicaid screening and to make preliminary eligibility determinations. 
Title XXI does not prohibit this type of arrangement and the 
requirement to provide child health assistance in an effective and 
efficient manner allows this flexibility for a separate child health 
program. In addition, the State may contract with an independent entity 
for the purpose of eligibility screening if the State uses a joint 
application because this function is being performed under title XXI 
requirements and the funding comes from title XXI. However, if the 
screening shows that the child is potentially eligible for Medicaid, 
the evaluation of the application for Medicaid purposes and the 
determination of Medicaid eligibility must be made by State or local 
governmental merit personnel authorized by the State to perform these 
functions and the cost must be paid by title XIX.
    In addition, there are requirements under other laws that may apply 
to the administration of eligibility under separate child health 
programs. For example, there are requirements in the Personal 
Responsibility and Work Opportunity Act of 1996, as amended, that apply 
to separate CHIP programs which call for verification of citizenship or 
national status, and of immigration status. Therefore, subject to the 
provisions noted above, States may use State employees or non-public 
employees to administer part or all of the eligibility determination 
process, may take and process applications at locations they determine, 
and establish application and enrollment procedures.
6. Eligibility Screening (Sec. 457.350)
    Among our highest priorities is to ensure that CHIP actually 
provides health assistance to the individuals for whom Congress 
designed the program. That is, we want the State plan to ensure that 
individuals applying for CHIP, but who are eligible for Medicaid or any 
other form of health care assistance programs, are enrolled in those 
other programs and not inappropriately enrolled in CHIP. Section 
2102(b)(3) (A) and (B) of the Act require that a State plan include a 
description of screening procedures used, at intake and any follow up 
including any periodic redetermination, to ensure that only children 
who meet the definition of a targeted low-income child receive child 
health assistance under the plan, and that all children who are 
eligible for Medicaid are enrolled in that program. In accordance with 
the statutory provisions, we propose at Sec. 457.350(a) that a State 
plan must include a description of these screening procedures.
    We believe that in establishing CHIP, Congress intended to make 
health insurance available to uninsured children at higher income 
levels than the income levels of children eligible for Medicaid and to 
identify the estimated 4 million children who are eligible for Medicaid 
but are not enrolled in that program. We believe that section 
2110(b)(1)(C) clearly provides that children who would be eligible for 
Medicaid if they applied are not eligible for coverage under CHIP. The 
statute at 2110(b)(3)(B) also clearly provides that States have a 
responsibility to actually enroll children in Medicaid if they are 
ineligible for the separate child health program because they are 
Medicaid eligible. A simple referral to the Medicaid agency is not 
enough to meet this requirement.
    We considered a number of options in interpreting these ``screen 
and enroll'' requirements. First we considered whether ``Medicaid 
eligible'' meant that the child had actually applied for Medicaid and 
been determined eligible. We decided that the intent of the provision 
was to identify children who would be eligible for Medicaid if they 
applied. We considered permitting any screening process that 
represented a

[[Page 60904]]

reasonable attempt to identify Medicaid eligible children. We, however, 
do not believe that this option meets the statutory requirement that 
children who are eligible for Medicaid be identified and enrolled in 
Medicaid. Nonetheless, while a ``reasonable attempt'' to identify all 
Medicaid eligible children may not be enough, we are aware of the 
complexity of Medicaid eligibility and the burden that would be placed 
on both States and families if we required that children be screened 
for Medicaid eligibility under every possible Medicaid eligibility 
group.
    We therefore propose only to require States to use screening 
procedures that identify any child who is potentially eligible for 
Medicaid under one of the poverty-level-related groups described in 
section 1902(l) of the Act. However, States are not mandated to cover 
children below the age of 19 who were born before October 1, 1983 under 
the poverty-level-related Medicaid groups. Therefore, we also propose 
to require, at a minimum, that a State use screening procedures that 
identify any child who is ineligible for Medicaid under the poverty 
level related groups solely because of age but is potentially eligible 
under the highest categorical income standard used under the State's 
title XIX State plan for children under age 19 born before October 1, 
1983. In almost all circumstances, we expect the highest categorical 
income standard used for such older children to be the standard used 
for the optional categorically needy group of children eligible under 
section 1902(a)(10)(A)(ii)(I). These children are sometimes referred to 
as ``Ribicoff children''. Mandatory coverage of the older children in 
poverty-level related groups are being phased in and by October 1, 
2002, all children under age 19 will be included in the poverty-level-
related groups in all States.
    During the screening process, we encourage States to identify any 
pregnant child who is eligible for Medicaid as a poverty-level pregnant 
woman described in section 1902(l)(1)(A) of the Act even though she is 
not eligible for Medicaid as a child. As discussed above, Medicaid 
eligibility standards may be more advantageous to a pregnant teen than 
coverage under a separate child health program.
    We have not proposed to require that a State screen for Medicaid 
eligibility under all possible groups because we believe that this 
would place an unreasonable administrative burden on States due to the 
complexity of the eligibility requirements under some Medicaid groups, 
particularly the group of low-income families with children described 
in section 1931 of the Act and the medically needy groups described in 
1902(a)(10)(C) of the Act. We believe that screening for eligibility 
under these other Medicaid groups might deter families from applying 
for the title XXI State program because they would have to provide all 
the information necessary for these complicated Medicaid eligibility 
determinations. We believe that simplification of the eligibility 
process is essential to encouraging families to enroll their children. 
The poverty-level-related Medicaid eligibility groups usually have the 
highest standard under which a child is eligible for Medicaid, have no 
resource requirements, and no requirements pertaining to the child's 
living arrangement, so we believe that almost all children who are 
Medicaid eligible will be identified through the proposed policy.
    However, as noted above, the proposed policy will not identify 
every Medicaid eligible child. Therefore, we also propose to require 
that States choosing not to screen for Medicaid eligibility under all 
possible groups provide certain written information to all families of 
children who, through the screening process, appear unlikely to be 
found eligible for Medicaid if a full Medicaid eligibility 
determination were done. The following information must be provided to 
the person applying for the child: (1) A statement that, on initial 
review, the child does not appear to be eligible for Medicaid but that 
a final full determination of Medicaid eligibility can only be made 
based on a review of a full Medicaid application; (2) information about 
Medicaid benefits (if such information has not already been provided); 
and (3) information about how and where to apply for Medicaid.
    As indicated in section 2102(b)(3)(B), Congress intended that 
children eligible for Medicaid be enrolled in the Medicaid program. We 
propose that if a child is found through a State screening process to 
be potentially eligible for Medicaid but fails to complete the Medicaid 
application process for any reason, the child cannot be enrolled in 
CHIP. Enrollment in CHIP can occur only after an appropriate screen 
shows that the child is ineligible for Medicaid.
    States should make every effort to ensure that a decision by a 
family not to apply for Medicaid or not to complete the application 
process is an informed one. The screen and enroll procedures must 
provide the family with full and complete information about Medicaid, 
including the early preventive, screening, diagnostic and treatment 
services, the prohibition against cost sharing and the difference 
between Medicaid and CHIP. States should inform families that they do 
not have a choice of programs because children may not be enrolled in 
CHIP if they are Medicaid eligible. The process should ensure that the 
family understands the consequences of not applying for Medicaid or 
failing to complete the application process. We believe that these 
policies are consistent with the Congressional intent to provide 
coverage to children who are not and cannot be covered under Medicaid.
    However, we are aware that there is great concern among a number of 
States and others that children will go without health care because of 
these screen and enroll policies. The concern centers around the 
perceived stigma of Medicaid. Some States allege that families refuse 
to apply for Medicaid, which is free, because they associate it with 
``welfare''. It is noted that some families will not complete the 
Medicaid application process because it may be more complicated than 
the application process for CHIP, require more documentation, and may 
be seen as more invasive into personal lives. We particularly solicit 
comments on the extent of these problems and possible solutions. In the 
meantime we encourage States to employ outreach efforts that work to 
change the perception that Medicaid is ``welfare'' and to simplify the 
Medicaid eligibility process.
7. Facilitating Medicaid Enrollment (Sec. 457.360)
    Under section 2102(b)(3)(B) of the Act, States are required to 
ensure that children found through the screening process described 
above to be eligible for Medicaid apply for and are actually enrolled 
in Medicaid. We would require that the State take reasonable action to 
facilitate the Medicaid application process and to promote enrollment 
of eligible children into Medicaid. Under 457.360(b), States must 
establish a process whereby the State initiates the action to begin the 
Medicaid enrollment process and several options for States are 
provided. For example, States can forward the information received from 
the Medicaid screen onto the Medicaid eligibility unit and then this 
information could automatically trigger the beginning of the Medicaid 
application process. We do not believe that a simple referral to the 
Medicaid office meets this requirement. We also do not believe that it 
is reasonable to make the application for and enrollment in Medicaid 
dependent solely on actions by the applicant or the individual applying 
on the applicant's behalf. We encourage States to develop procedures 
which will

[[Page 60905]]

reduce or eliminate the need for applicants to provide information more 
than once. We also encourage the use of outstationed Medicaid 
eligibility workers who can take Medicaid applications at the same site 
as the one used to apply for CHIP. At a minimum, we urge that Medicaid 
and CHIP intake workers be well informed about the other program and 
its application procedures.
    We have also proposed to require that a State ensure that families 
have an opportunity to make an informed decision of whether or not to 
complete the Medicaid application process by providing full and 
complete information, in writing, about: (1) The State's Medicaid 
program, including the benefits covered, restrictions on cost-sharing; 
and (2) the effect on eligibility for CHIP of neither applying for 
Medicaid nor completing the Medicaid application process.
8. Application for and Enrollment in CHIP (Sec. 457.361)
    We propose to require that States afford individuals a reasonable 
opportunity to complete the application process and offer assistance in 
understanding and completing applications and in obtaining any required 
documentation. Furthermore, we have proposed to require that States 
inform applicants, in writing and orally if appropriate, about the 
eligibility requirements and their rights and responsibilities under 
the program.
    Although not specifically addressed in statute, a State may choose 
to provide a period of presumptive eligibility during which services 
are provided, although actual eligibility has not been established. 
Unlike presumptive eligibility under Medicaid, which has rules 
prescribed by statute, a State has the flexibility to establish the 
rules for a program of presumptive eligibility under a separate child 
health program. (See section 435.1101 for the proposed rules pertaining 
to presumptive eligibility under Medicaid.) If a presumptively eligible 
child is subsequently determined to have been eligible during a period 
of presumptive eligibility, FFP will be provided at the enhanced FMAP 
rate for services provided during the presumptive period. However, if a 
child is not subsequently determined to have been eligible during the 
period of presumptive eligibility because either the State determined 
the child to be ineligible or the child's family did not complete the 
application process, the costs of services provided during the 
presumptive period will be considered administrative expenses. (For the 
rules pertaining to payments to States see 457.600 of the March 4, 1999 
proposed rule on allotment and payment issues.)
    The State agency must establish time standards for determining 
eligibility and inform the applicant of those standards. These 
standards may not exceed forty-five calendar days. In applying the time 
standards, the State must count each calendar day from the day of 
application to the day the agency mails written notice of its decision 
to the applicant.
    The State agency must also determine eligibility within the State-
established standards except in unusual circumstances, for example, 
when the agency cannot reach a decision because the applicant delays or 
fails to take a required action, or when there is an administrative or 
other emergency beyond the agency's control. The agency must not use 
the time standards as a waiting period before determining eligibility; 
or as a reason for denying eligibility (because it has not determined 
eligibility within the time standards). The State must also make 
eligibility effective as of the date specified in the State plan on 
which eligibility becomes effective.
9. Grievances and Appeals (Sec. 457.365)
    Finally, we propose to require that States send each applicant a 
written notice of the decision on his application, and if eligibility 
is terminated or denied, the specific reason for the action and an 
explanation of his right to file a grievance or appeal within a 
reasonable time. (See Sec. 457.985 in subpart I of these proposed 
regulations for rules on appeals and grievances.)

D. Subpart D--Coverage and Benefits: General Provisions

1. Basis, Scope, and Applicability (Sec. 457.401)
    At proposed Sec. 457.401 we would provide that this subpart 
interprets and implements section 2102(a)(7) of the Act, which requires 
that States make assurances relating to certain types of care; section 
2103 of the Act, which outlines coverage requirements for children's 
health insurance; section 2109 of the Act, which describes the relation 
of the CHIP program to other laws; section 2110(a), which describes 
child health assistance; and section 2110(c) of the Act, which contains 
definitions applicable to this subpart. The requirements of this 
subpart apply to child health assistance provided under a separate 
child health program and do not apply to Medicaid expansion programs 
even when funding is based on the enhanced Federal medical assistance 
percentage.
2. Child Health Assistance and Other Definitions (Sec. 457.402)
    Proposed Sec. 457.402 sets forth the definition of child health 
assistance as specified in section 2110(a) of the Act. We considered 
whether we should further define the services listed in this section or 
add to the list. For example, we considered defining transportation as 
including coverage for urgent care and not just primary and preventive 
health care as included in the statute at section 2110(a)(27). We also 
considered whether traditional healers or alternative therapies should 
be specifically mentioned as providers and coverage options. However, 
we have not included any additional services in the definition or 
attempted to further define these services in order to give States the 
flexibility to provide these services as intended under the statute. 
Accordingly, we propose that the term ``child health assistance'' means 
payment for part or all of the cost of health benefits coverage, 
provided to targeted low-income children through any method described 
in Sec. 457.410 for any of the following services as specified in the 
statute:
     Inpatient hospital services.
     Outpatient hospital services.
     Physician services and surgical services.
     Clinic services (including health center services) and 
other ambulatory health care services.
     Prescription drugs and biologicals and the administration 
of such drugs and biologicals, only if such drugs and biologicals are 
not furnished for the purpose of causing, or assisting in causing, the 
death, suicide, euthanasia, or mercy killing of a person.
     Over-the-counter medications.
     Laboratory and radiological services.
     Prenatal care and prepregnancy family planning services 
and supplies.
     Inpatient mental health services, other than inpatient 
substance abuse treatment services and residential substance abuse 
treatment services, but including services furnished in a State-
operated mental hospital and including residential or other 24-hour 
therapeutically planned structured services.
     Outpatient mental health services, other than outpatient 
substance abuse treatment services, but including services furnished in 
a State-operated mental hospital and including community-based 
services.
     Durable medical equipment and other medically related or 
remedial

[[Page 60906]]

devices (such as prosthetic devices, implants, eyeglasses, hearing 
aids, dental devices and adaptive devices).
     Disposable medical supplies.
     Home and community-based health care services and related 
supportive services (such as home health nursing services, personal 
care, assistance with activities of daily living, chore services, day 
care services, respite care services, training for family members and 
minor modification to the home).
     Nursing care services (such as nurse practitioner 
services, nurse midwife services, advanced practice nurse services, 
private duty nursing, pediatric nurse services and respiratory care 
services) in a home, school, or other setting.
     Abortion only if necessary to save the life of the mother 
or if the pregnancy is the result of rape or incest.
     Dental services.
     Inpatient substance abuse treatment services and 
residential substance abuse treatment services.
     Outpatient substance abuse treatment services.
     Case management services.
     Care coordination services.
     Physical therapy, occupational therapy, and services for 
individuals with speech, hearing and language disorders. `` Hospice 
care.
     Any other medical, diagnostic, screening, preventive, 
restorative, remedial, therapeutic, or rehabilitative services (whether 
in a facility, home, school, or other setting) if recognized by State 
law and only if the service is prescribed by or furnished by a 
physician or other licensed or registered practitioner within the scope 
of practice as defined by State law; performed under the general 
supervision or at the direction of a physician; or furnished by a 
health care facility that is operated by a State or local government or 
is licensed under State law and operating within the scope of the 
license.
     Premiums for private health care insurance coverage.
     Medical transportation.
     Enabling services (such as transportation, translation, 
and outreach services) only if designed to increase the accessibility 
of primary and preventive health care services for eligible low-income 
individuals.
     Any other health care services or items specified by the 
Secretary and not excluded under this subchapter.
    We propose to define the terms ``emergency medical condition,'' 
``emergency services,'' and ``post-stabilization services'' to give 
full meaning to the statutory requirement that States assure access to 
emergency services, at section 2102(a)(7)(B), and consistent with the 
President's directive to Federal agencies to address the Consumer Bill 
of Rights and Responsibilities, which includes the right to access to 
emergency services. For purposes of consistency, we used the 
definitions found in the proposed regulations for Medicaid managed 
care, published in the Federal Register on September 29, 1998 (63 FR 
52022). Because access to emergency services may not be possible if a 
delay is involved, we propose to require States to guarantee access to 
emergency services without any requirement for prior authorization for 
those services. In addition, we would expect that States and their 
contractors would treat post-stabilization services in the same manner 
as required for the Medicare and Medicaid programs, while recognizing 
that not all such services would necessarily be covered by the State 
for purposes of CHIP.
    Specifically, we propose to define the term ``emergency medical 
condition'' as a medical condition manifesting itself by acute symptoms 
of sufficient severity (including severe pain) such that a prudent 
layperson, with an average knowledge of health and medicine, could 
reasonably expect the absence of immediate medical attention to result 
in --
     Serious jeopardy to the health of the individual or, in 
the case of a pregnant woman, the health of a woman or her unborn 
child;
     Serious impairment of bodily function; or
     Serious dysfunction of any bodily organ or part. We would 
define the term ``emergency services'' as covered inpatient or 
outpatient services that are furnished by a provider qualified to 
furnish emergency services and needed to evaluate or stabilize an 
emergency medical condition.
    We would define ``post-stabilization services'' to mean medically 
necessary non-emergency services furnished to an enrollee after he or 
she is stabilized following an emergency medical condition.
    We would define ``health benefits coverage'' as an arrangement 
under which enrolled individuals are protected from some or all 
liability for the cost of specified health care services. We note that 
this term is included in the definitions at proposed Sec. 457.10.
3. Health Benefits Coverage Options (Sec. 457.410)
    At proposed Sec. 457.410, we list the four options a State has in 
obtaining health benefits coverage for eligible children. Specifically, 
we propose that States may choose to provide benchmark coverage, 
benchmark-equivalent coverage, existing comprehensive State-based 
coverage, or Secretary approved coverage. These four options, specified 
in section 2103(a) of the Act, are described in full at Secs. 457.420 
through 457.450.
    Based on the authority of section 2102(a)(7) of the Act, we also 
propose at Sec. 457.410(b), to require that any health benefits 
coverage obtained in accordance with proposed Sec. 457.410 must include 
coverage for well-baby and well-child care, immunizations and emergency 
services. We note that these services must be covered even if coverage 
for these services is not generally included in the health benefits 
coverage option selected by the State.
    The statute does not define well-baby or well-child care. We have 
defined well-baby and well-child care for purposes of cost sharing at 
proposed Sec. 457.520(b), but we propose to allow States to define 
well-baby and well-child care for coverage purposes. We encourage 
States, however, to adopt the benefits and periodicity schedules 
recommended by a medical or professional organization involved in child 
health care when defining well-baby and well-child care coverage. Well 
child care includes health care for adolescents and includes the cost 
sharing prohibitions mentioned at proposed Sec. 457.520(b). We 
recommend the schedules from the American Academy of Pediatrics, the 
American Academy of Pediatric Dentistry, and Bright Futures: Guidelines 
for Health Supervision of Infants, Children and Adolescents. 
    We propose to require all separate child health programs to follow 
the recommendations of the Advisory Committee on Immunization Practices 
(ACIP). The proposed requirements for immunizations under separate 
child health programs are identical to those under the Medicaid 
program. The Vaccines for Children (VFC) program, established under 
section 1928 of the Act also requires providers to immunize eligible 
children according to the recommendations of ACIP. We note that 
children enrolled in separate child health programs will not meet the 
VFC definition of Federally-vaccine eligible because they are not 
``uninsured'' and therefore will not be eligible to receive free 
vaccines as part of the VFC program. State Medicaid programs are 
required to implement new recommendations of the ACIP within 90 days of 
their publication. Separate child health programs must also cover newly 
recommended vaccines within this timeframe. State contracts for CHIP

[[Page 60907]]

coverage should provide for coverage of newly recommended vaccines 
within 90 days of publication of the ACIP recommendations.
    We have only recommended that States use the periodicity schedules 
recommended by certain medical or professional organizations while we 
propose to require the use of the ACIP schedule for the provision of 
immunizations. Under the Medicaid program, we do not require a specific 
periodicity schedule for well-baby and well-child visits except that we 
do require the ACIP schedule for immunizations. This is because the 
Medicaid program has no Federal requirements for using a certain 
periodicity schedule. We do not believe we can hold a State CHIP 
program to a higher standard than a Medicaid program.
    We also propose at Sec. 457.410(b) to require that any health 
benefits coverage obtained in accordance with this section include 
emergency services as defined in proposed Sec. 457.402(c). We note that 
a State may offer different health benefit coverage to children with 
special needs consistent with the eligibility standards set forth at 
Sec. 457.320 as long as each benefit package meets the basic coverage 
requirement. The State can define the health benefit coverage to 
include supplemental services for children with special needs or 
physical disabilities. Alternatively, a State may have more than one 
benefit package that meets all the requirements of this subpart 
including one designed for children with special needs or physical 
disabilities, as long as the State complies with the Americans with 
Disabilities Act in establishing eligibility standards. We also note 
that if no different benefit packages are offered for children with 
special needs, they are eligible for whatever child health assistance 
is available in the State if they meet all other eligibility criteria.
    If a State offers a limited package of services to address special 
needs that is not part of the comprehensive coverage required under 
this subpart, State expenditures for the limited package would be 
subject to the 10 percent limitation on Federally-matchable 
expenditures for items other than the comprehensive coverage package, 
under section 2105(a)(2) of the Act.
4. Benchmark Health Benefits Coverage (Sec. 457.420)
    Section 2103(b) of the Act sets forth the benchmark benefit 
packages from which a State may choose. We propose to implement these 
provisions at Sec. 457.420. We considered the possibility that the 
health benefits coverage package available under a benchmark plan may 
change from year to year and the possible need to require an annual 
review to ensure that the plan continues to meet the requirements of 
this subpart. However, we do not propose to require an annual review in 
part because of the requirements of section 2106 of the Act, 
implemented at Sec. 457.65 of these proposed regulations, which 
provides that an approved CHIP plan shall continue in effect unless and 
until the State amends the plan or the Secretary finds substantial 
noncompliance of the plan. For example, we believe it would be unduly 
burdensome to require States to review and alter their benchmark 
benefit package on an annual basis. Therefore, if a State has elected 
the State employee's health benefit package as its benchmark plan, and 
the benefit package changes from one year to another, the State is not 
required to submit a State plan amendment as long as it continues to 
offer the benefits described in its approved State plan. However, when 
a State chooses to increase, decrease, or substitute benefits available 
under its State plan, an amendment must be submitted for approval. The 
State would then decide whether to continue to use the benchmark plan 
(including any benefit changes to the original package), provide a 
benchmark-equivalent using an actuarial analysis, or use one of the 
other health benefits package options. We will monitor compliance with 
benchmark requirements as we will with all other requirements of the 
program as discussed in proposed Sec. 457.150(e).
    The statute provides that benchmark coverage must be ``equivalent'' 
to the benefits coverage in a reference benchmark benefit package. We 
are proposing to interpret this term to mean ``substantially equal,'' 
differing only from the reference package as necessary to meet other 
requirements of Title XXI. Clearly, the word ``equivalent'' cannot 
reasonably be read to mean ``actuarially equivalent,'' since the 
statute separately requires actuarial equivalence for benchmark-
equivalent coverage. Therefore, we are proposing to require that a 
benchmark package offered under a separate child health plan can differ 
from what is otherwise available in the State under the benchmark 
package only to the extent that the CHIP package must differ to meet 
the requirements of title XXI. For example, benchmark coverage offered 
by a State under a separate child health program must include coverage 
for immunizations even if the benchmark coverage after which the State 
models the CHIP coverage does not include coverage for immunizations. 
If the benchmark package chosen by the State does not meet the 
requirements of title XXI, then the State must enlarge the benchmark 
benefit package so that it meets the title XXI requirements. The 
additional benefits should be coordinated to the greatest extent 
possible with the other benchmark package providers and benefits.
    According to the statute, we propose to define benchmark coverage 
as health benefits coverage that is substantially equal to the health 
benefits coverage in one of the following benefit packages:
     The Federal Employee Health Benefits Program (FEHBP) Blue 
Cross/Blue Shield Standard Option Service Benefit Plan with Preferred 
Provider arrangements;
     A health benefits plan that the State offers and makes 
generally available to its own employees; or
     A plan offered by a Health Maintenance Organization (HMO) 
that has the largest insured commercial, non-Medicaid enrollment and is 
offered by an HMO (as defined in section 2791(b)(3) of the Public 
Health Service Act) in the State.
    Each benchmark benefits package is discussed in detail below.
    Federal Employee Health Benefits Plan Blue Cross/Blue Shield 
Standard Option Service Benefit Plan with Preferred Provider 
arrangements (FEHBP). The FEHBP is available to Federal employees in 
all parts of the United States, under 5 U.S.C. 8903(1). Contract No. CS 
1039 between the Blue Cross and Blue Shield Association and the U.S. 
Office of Personnel Management contains a description of the benefits 
offered under the plan. In addition, the Federal Employees Health 
Benefits Plan publication RI-71-5 and the plan's home page on the 
Internet (http://www.fepblue.org) include descriptions of the benefits.
    State Employee Plan. We propose to allow a State to design a 
separate child health program under which it offers coverage modeled 
after the coverage by a health benefits plan that is offered and 
generally available to its own employees.
    Plan of a health maintenance organization with the largest 
enrollment in the State. We propose to allow a State to choose as a 
model for the coverage offered under its separate child health plan the 
coverage offered by an HMO that has the largest insured commercial non-
Medicaid enrollment in the State. As defined in section 2791(b)(3) of 
the Public Health Service Act, the term ``health maintenance 
organization'' means--

[[Page 60908]]

     A Federally qualified health maintenance organization as 
defined in section 1301 of the Public Health Service Act and further 
described in regulations at 42 CFR part 417, subparts A, B, and C;
     An organization recognized under State law as a health 
maintenance organization; or
     A similar organization regulated under State law for 
solvency in the same manner and to same extent as a health maintenance 
organization as defined in State law.
    If the health maintenance organization offers more than one 
coverage plan, the benchmark plan under the separate child health 
program must mirror the specific plan offered by the HMO that has the 
largest commercial enrollment. For example, if an HMO offers different 
benefit packages to Federal employees, postal employees and private 
industry employees, respectively, the CHIP benchmark plan must mirror 
the HMO plan with the largest enrollment. In calculating commercial 
enrollment, neither Medicaid nor public agency enrollees will be 
counted. However, Federal employees are considered to be commercial 
enrollees.
5. Benchmark-Equivalent Health Benefits Coverage (Sec. 457.430)
    Section 2103(a)(2) of the Act provides that a State may opt to 
design a program under which it offers coverage with an aggregate 
actuarial value that is at least equal to the value of one of the 
benchmark benefit packages. In accordance with the statute, we propose 
at Sec. 457.430 that the benchmark-equivalent coverage must have an 
aggregate actuarial value, determined in accordance with proposed 
Sec. 457.431, that is at least actuarially equivalent to coverage under 
one of the benchmark packages outlined in Sec. 457.420.
    In Sec. 457.430 we would set forth the coverage requirements for 
States selecting the benchmark-equivalent coverage option. Under the 
authority of section 2103(c)(1), we would specify that a benchmark 
equivalent plan must include coverage for inpatient and outpatient 
hospital services, physicians' surgical and medical services, 
laboratory and x-ray services, immunizations, and well-baby and well-
child care, including age-appropriate immunizations provided in 
accordance with the recommendations of ACIP. We considered proposing 
minimum standards for basic sets of required services (for example, a 
minimum of 14 inpatient hospital days). We concluded that it would be 
unlikely that a State could provide greatly reduced benefits (such as 
only 2 inpatient hospital days) and still meet the actuarial value 
requirement. Therefore, we did not propose such minimum standards.
    Under the authority of section 2110(a) of the Act (implemented at 
proposed Sec. 457.402), a State may provide coverage for a wide range 
of services. If the State provides coverage for prescription drugs, 
mental health services, vision services, or hearing services the 
coverage for these services must have an actuarial value that is equal 
to at least 75 percent of the actuarial value of the coverage of that 
category of service in the benchmark benefit package. In addition, we 
propose that if the benchmark plan does not cover one of the above 
additional categories of services, then the benchmark-equivalent 
coverage package may, but is not required to, include coverage for that 
category of service. A State may provide services listed in 
Sec. 457.402 other than the services listed in Sec. 457.430(b) without 
meeting the 75 percent actuarial value test.
6. Actuarial Report for Benchmark-Equivalent Coverage (Sec. 457.431)
    In accordance with section 2103(c)(4) of the Act, at proposed 
Sec. 457.431 we would require a State, as a condition of approval of 
benchmark-equivalent coverage, to provide an actuarial report, with an 
actuarial opinion that the benchmark-equivalent coverage meets the 
actuarial requirements of Sec. 457.430.
    States are free to pool their resources to obtain actuarial 
services. The actuarial value of the benchmark coverage and the State-
designed benchmark-equivalent coverage, however, will vary from State 
to State so the determination of actuarial value must be made for each 
individual State.
    We note that some States have suggested that to spare States some 
of the expense of hiring actuaries, we should determine the actuarial 
value for the FEHBP Blue Cross Blue Shield (BC/BS) preferred provider 
option (PPO) because it is a national health insurance plan. We have 
decided that it would not be feasible for HCFA to determine the 
actuarial value of the FEHBP plan because the value of the coverage 
under the plan will vary by State even though the benefit package 
remains the same. If a State offers benchmark-equivalent coverage, it 
must obtain an opinion from a member of the American Academy of 
Actuaries to determine the value of the FEHBP because the actuarial 
value of this plan will vary from State to State for several reasons, 
including regional cost variations and differences in the target 
population.
    The actuarial opinion must meet all the provisions of the statute. 
We propose that the report must explicitly state the following 
information:
     The actuary issuing the opinion is a member of the 
American Academy of Actuaries (and meets Academy standards for issuing 
such an opinion).
     The actuary used generally accepted actuarial principles 
and methodologies of the American Academy of Actuaries, standard 
utilization and price factors, and a standardized population 
representative of privately insured children of the age of those 
expected to be covered under the State child health insurance plan.
     The same principles and factors were used in analyzing 
both the proposed benchmark-equivalent coverage and the benchmark 
coverage, without taking into account differences in coverage based on 
the method of delivery or means of cost control or utilization used. 
States must assure that the assumptions used to estimate the State-
designed benchmark-equivalent package are the same as those used in the 
actuarial analysis of the benchmark package. These same assumptions 
must be used consistently throughout the actuarial analysis.
     The report should also state if the analysis took into 
account the State's ability to reduce benefits because of the increase 
in actuarial value due to limitations on cost sharing in the State 
child health insurance plan.
    The report should specify which benchmark plan is being used for 
comparison. It should also specify the value of the benchmark plan, the 
value of the coverage under the plan being offered by the State and 
that the plan meets the overall requirement of actuarial equivalence. 
In addition, the value of coverage of the specific additional services 
listed in the statute (prescription drugs, mental heath services, 
vision services and hearing services) must also meet the 75 percent 
requirement of substantial actuarial value for each of the additional 
services included in the benchmark plan. The actuarial opinion should 
also outline the major differences, if any, in coverage.
    The opinion should provide sufficient detail regarding the 
methodologies used to estimate the value so that HCFA's actuaries can 
review the States' calculations and assumptions for accuracy and 
completeness. Should discrepancies arise in the course of our review, 
the actuaries can request States to provide detail sufficient to allow 
the actuaries to replicate the results.
    The opinion narrative should assure the reviewer that the actuary 
has taken

[[Page 60909]]

into account all factors that affect the relative value of the plans 
being compared. Adjustments made to data and the rationale for the 
adjustments should be included. In this way, even if the specifics and 
the derivation of the adjustments are not specified, we can feel 
confident that allowances were made for all relevant considerations.
    Our review of State plans that elect to adopt an actuarially 
equivalent benchmark benefit plan may include review by our actuaries. 
States must submit to HCFA all information necessary for our actuaries 
to perform this review. We will review the actuarial report as part of 
the overall plan approval process as described in subpart A of these 
proposed regulations. When the actuarial report is not complete or 
raises questions, we will contact the State to request clarification 
and may request additional information from the State. If, even after 
the complete information is received, we determine that the benefits do 
not meet the requirements of title XXI, we may disapprove the State's 
child health plan.
    Several issues and questions have been raised with respect to the 
actuarial determinations. While these issues have been addressed in the 
five sets of questions and answers released by HCFA, and available on 
the HCFA web site, www.hcfa.gov, we will address them here to ensure 
that States have full knowledge of the issues involved.
    We were asked if a State must determine actuarial equivalence of 
coverage under a benchmark plan for an individual or for a family. The 
statute does not specify whether the States that decide to use a 
benchmark-equivalent plan must calculate actuarial equivalence to 
family coverage or to individual coverage. Therefore, a State may make 
either comparison. In addition, the coverage offered to families and 
individuals under a benchmark plan rarely differs. Employees usually 
have a choice of whether to cover themselves only or themselves and 
additional family members. Therefore, the actuarial value of family 
coverage and individual coverage should be essentially the same. We 
also want to clarify that States should not take premiums into account 
when determining the actuarial value of a health insurance plan. States 
should take into account only benefits and cost sharing (such as 
copayments, coinsurance and deductibles).
7. Existing Comprehensive State-Based Coverage (Sec. 457.440).
    In accordance with section 2103(d) of the Act, at proposed 
Sec. 457.440 we provide that existing comprehensive State-based health 
benefits coverage must include coverage of a range of benefits, be 
administered or overseen by the State and receive funds from the State, 
be offered in the State of New York, Florida, or Pennsylvania, and have 
been offered as of August 5, 1997. In essence, Congress deemed the 
existing State-based health benefit packages of three States as meeting 
the requirements of section 2103 of the Act. However, these States 
still need to meet other requirements of title XXI, including 
requirements relating to cost sharing such as copayments, deductibles 
and premiums as specified in subpart E of this proposed rule.
    We would also specify that the State (Florida, New York, or 
Pennsylvania) may modify its existing, comprehensive, State-based 
program under certain conditions. First, the program must continue to 
offer a range of benefits. Second, the modification must not reduce the 
actuarial value of the coverage available under the program below 
either the actuarial value of the coverage as of August 5, 1997 or the 
actuarial value of a benchmark benefit package. A State must submit an 
actuarial report when it amends its existing State-based coverage.
    Even though the benefits packages offered in Florida, New York, and 
Pennsylvania were deemed to have met title XXI benefits requirements, 
these States must still submit CHIP plans for approval by HCFA. Each 
State plan must demonstrate that the State meets all the title XXI 
requirements, including the cost sharing requirements specified in 
subpart E of this proposed rule.
8. Secretary-approved coverage (Sec. 457.450)
    In proposed Sec. 457.450 we discuss the option of providing health 
benefits coverage under the Secretary-approved health benefits coverage 
option. Section 2103(a)(4) of the Act defines Secretary-approved 
coverage as any other health benefits coverage that provides 
appropriate coverage for the population of targeted low-income children 
to be covered by the program. A State must select this health benefit 
coverage option when it submits its plan to HCFA for approval.
    We propose that the following coverage be recognized as Secretary-
approved coverage under a separate child health program:
     Coverage that is the same as the coverage provided under a 
State's Medicaid benefit package as described in the existing Medicaid 
State plan.
     Comprehensive coverage offered under a Sec. 1115 waiver 
that either includes coverage for the full EPSDT benefit or that the 
State has extended to the entire Medicaid population in the State.
     Coverage that includes benchmark coverage, as specified in 
Sec. 457.420, plus additional coverage. Under this option, the State 
must clearly demonstrate that it provides all the benchmark coverage.
     Coverage, including coverage under an employer-sponsored 
group health plan, purchased by the State that the State demonstrates 
to be substantially equal to benchmark coverage, as specified in 
Sec. 457.420, through use of a benefit-by-benefit comparison of the 
coverage compared to a benchmark plan. Under this option, if there is 
just one benefit that does not meet or exceed the benchmark, the State 
must provide an actuarial analysis to determine actuarial equivalence. 
At this point, it would no longer be Secretarial approved coverage and 
would fall under benchmark equivalent health benefits coverage under 
Sec. 457.430.
    While these four options have been identified for permissible 
Secretarial-approved coverage, we solicit comments on other specific 
examples of coverage packages that States have developed that meet the 
title XXI requirements.
    We also propose that no actuarial analysis is required for 
Secretary-approved coverage except for coverage that does not meet or 
exceed benchmark coverage. States should be cognizant, however, that to 
date we have not allowed a State to offer a health benefits package 
that does not provide all of the coverage provided under a benchmark 
plan without requiring the State to submit an actuarial analysis. We 
have approved some State plans under which the States offer health 
benefit packages that provide all the coverage of the benchmark package 
plus additional coverage. In approving State child health plans, we 
intend to ensure that children receive services that are cost 
effective, comprehensive, and high-quality. If a State wants to reduce 
any benchmark benefit, it must use the benchmark-equivalent coverage 
option.
9. Prohibited Coverage (Sec. 457.470)
    In accordance with section 2103(c)(5) of the Act, we propose at 
Sec. 457.470 that a State is not required to provide health benefits 
coverage under the plan for an item or service for which payment is 
prohibited under title XXI even if any benchmark package includes 
coverage for such item or service.
10. Limitations on Coverage: Abortions (Sec. 457.475)
    This section would implement sections 2105(c)(1) and (c)(7) of the 
Act, which set limitations on payment for

[[Page 60910]]

abortion services under the CHIP program. At Sec. 457.475, we propose 
that FFP is not available in expenditures for an abortion, or in 
expenditures for the purchase of health benefits coverage that includes 
coverage of abortion services, unless the abortion is necessary to save 
the life of the mother or the abortion is performed to terminate a 
pregnancy resulting from an act of rape or incest.
    Additionally, we propose that FFP is not available to a State for 
any amount expended under its title XXI plan to assist in the purchase, 
in whole or in part, of health benefits coverage that includes coverage 
of abortions other than to save the life of the mother or resulting 
from an act of rape or incest.
    We also would provide that, if a State wishes to have managed care 
entities provide abortions in addition to those specified above, those 
abortions must be provided pursuant to a separate contract using non-
Federal funds. Under our proposal, a State may not set aside a portion 
of the capitated rate to be paid with State-only funds, or to append 
riders, attachments, or addenda to existing contracts to separate the 
additional abortion services from the other services covered by the 
contract. We believe that these requirements are necessary to enforce 
the statutory prohibition against the purchase of health benefits 
coverage that includes abortion services not explicitly permitted by 
the statute. However, the proposed regulation also specifies that this 
requirement should not be construed as restricting the ability of any 
managed care provider to offer abortion coverage or the ability of a 
State or locality to contract separately with a managed care provider 
for additional abortion coverage using State or local funds.
11. Preexisting Condition Exclusions and Relation to Other Laws 
(Sec. 457.480)
    In proposed Sec. 457.480 we discuss the provisions of sections 
2103(f), 2109 and 2110(c) of the Act. We propose to adopt the 
definitions of ``creditable coverage,'' ``group health plan,'' ``group 
health insurance coverage,'' ``health insurance coverage,'' and 
``preexisting condition exclusion'' set forth in the HIPAA regulations 
at 45 CFR 144.103 and 146.133. Definitions for these terms are set 
forth at proposed Sec. 457.10.
    In proposed Sec. 457.480(a) we implement section 2103(f)(1) of the 
Act and provide that, subject to the exceptions in paragraph (b), a 
State child health plan may not permit the imposition of any 
preexisting condition exclusion for covered benefits under the plan. 
Further, in paragraph (b), we would specify that if the State child 
health plan provides for benefits through payment for, or a contract 
with, a group health plan or group health insurance coverage, the plan 
may only permit the imposition of a preexisting condition exclusion 
insofar as it is permitted under HIPAA.
    In paragraphs (c)(1) through (c)(4), we would set forth the 
requirement of sections 2109 and 2103(f)(2) of the Act, which provides 
that State plans must comply with the requirements of subpart 2 of part 
A of title XXVII of the PHS Act and certain other provisions of law. 
Specifically, we have included section 514 of ERISA, HIPAA, the Mental 
Health Parity Act of 1996 (MHPA), regarding parity in the application 
of annual and lifetime dollar limits to mental health benefits, and the 
Newborns and Mothers Health Protection Act of 1996 (NMHPA), regarding 
requirements for minimum hospital stays for mothers and newborns. See 
regulations at 45 CFR 146.136 for a discussion of the MHPA and 45 CFR 
146.130 and 148.170 for a discussion of the NMHPA.
12. Delivery and Utilization Control Systems (Sec. 457.490)
    In accordance with section 2102(a)(4) of the Act, proposed 
Sec. 457.490 requires that State plans include a description of the 
type of child health assistance to be provided including the proposed 
methods of delivery and proposed utilization control systems. In 
describing the methods of delivery of the child health assistance using 
title XXI funds, the State should address its choice of financing the 
insurance products and the methods for assuring delivery of the 
insurance product to children. These methods may include, but are not 
necessarily limited to, contracts with managed health care plans 
(including fully and partially capitated plans), contracts with 
indemnity health insurance plans, and other arrangements for health 
care delivery. The State should describe any variations based upon 
geography, as well as the methods for establishing and defining the 
delivery systems.
    Utilization control systems are administrative mechanisms designed 
to ensure that children use only health care that is appropriate, 
medically necessary and approved by the State or its subcontractor. 
Examples of utilization control systems include, but are not limited 
to, requirements for referrals to specialty care, requirements that 
clinicians use clinical practice guidelines, or demand management 
systems (such as, use of an 800 number for after-hours and urgent 
care). The State should describe its plan for review, coordination, and 
implementation of utilization controls, addressing other procedures and 
State developed standards for review, in order to assure that necessary 
care is delivered in a cost-effective and efficient manner.
13. Grievances and Appeals (Sec. 457.495)
    At proposed Sec. 457.495, we would require States to provide 
enrollees in a separate child health program the right to file 
grievances or appeals for reduction or denial of services in accordance 
with proposed Sec. 457.985.

E. Subpart E--State Plan Requirements: Beneficiary Financial 
Responsibilities

1. Basis, Scope, and Applicability (Sec. 457.500)
    States that implement a separate child health program may impose 
cost sharing charges on beneficiaries. A State that chooses to impose 
cost sharing charges on beneficiaries must meet the requirements 
described in section 2103(e) of the Act. These requirements apply to 
all separate child health programs regardless of the type of coverage 
(benchmark, benchmark equivalent, Secretary-approved or existing 
comprehensive State-based coverage) provided through the program. These 
requirements also apply when a State purchases family coverage for the 
targeted low-income child under the waiver authority of section 
2105(c)(3) of the Act and proposed Sec. 457.1010 and when a State 
provides premium assistance for employer-sponsored group health plan 
coverage under proposed Sec. 457.810.
    Under section 2103(e)(1) of the Act, when a State determines it 
will impose cost sharing, the State plan must include a description of 
the amount of premiums, deductibles, coinsurance and other cost sharing 
charges imposed. If the State chooses to vary cost sharing charges, the 
State plan may only vary premiums, deductibles, coinsurance, and other 
cost sharing based on family income of targeted low-income children in 
a manner that does not favor children from families with higher income 
over children from families with lower income. Also, the State must 
make available a public schedule of any cost sharing charges imposed 
under the State plan.
    Section 2103(e)(2) specifies that a State may not impose cost 
sharing charges on benefits for certain preventive services. Section 
2103(e)(3) specifies the limitations on the amount of cost sharing 
charges that may be imposed on a beneficiary, including a cumulative 
cost sharing maximum on

[[Page 60911]]

cost sharing imposed on children in families with income above 150 
percent of the FPL. Section 2103(e)(4) clarifies that CHIP cost sharing 
rules will not apply to beneficiaries who are provided child health 
assistance in the form of coverage under a Medicaid expansion program.
    This subpart consists of provisions relating to the imposition 
under a separate child health program of cost sharing charges including 
enrollment fees, premiums, deductibles, coinsurance, copayments, and 
similar cost sharing charges. This subpart does not apply to States 
that provide child health assistance through a Medicaid expansion 
program.
2. General State Plan Requirements (Sec. 457.505)
    Section 2103(e)(1)(A) of the Act specifies that a State plan must 
include a description of the amount (if any) of premiums, deductibles, 
coinsurance, and other cost sharing imposed. Section 2103(e)(1)(A) also 
specifies that any such charges be imposed pursuant to a public 
schedule. In accordance with the statute, at Sec. 457.505, we propose 
that the State plan must include a description of the amount of 
premiums, deductibles, coinsurance, copayments, and other cost sharing 
imposed. We further propose that the State plan include a description 
of the methods, including the public schedule, the State uses to inform 
beneficiaries, applicants, providers, and the general public of cost 
sharing charges, the cumulative cost sharing maximum, and any changes 
in these amounts. Under Sec. 457.525, the State may choose to include 
the public schedule in pamphlets, separate mailings, or newspapers to 
inform the public of beneficiary financial responsibilities under the 
program.
    We also propose that States that purchase family coverage under the 
authority provided in section 2105(c)(3) and proposed Sec. 457.1010, or 
provide premium assistance for employer-sponsored group health 
insurance (as defined in proposed Sec. 457.10) have a process in place 
to ensure that providers do not charge beneficiaries for copayments, 
coinsurance, deductibles, or similar fees for well-baby and well-child 
care services as defined in proposed Sec. 457.520 and do not charge AI/
AN children cost sharing as required in proposed Sec. 457.535. We would 
also provide that a procedure that primarily relies on a refund given 
by the State for a beneficiary's cost sharing payment of well-baby/well 
child-care services is not an acceptable procedure. An acceptable 
alternative approach would be one where a State requires that providers 
bill the State directly for copayments that are not permissible, or 
provides beneficiaries with identification that providers can use to 
verify that these beneficiaries are not subject to cost sharing on 
these services and therefore not charge cost sharing to such 
beneficiaries. We also propose that in States that purchase family 
coverage or provide premium assistance for employer-sponsored health 
insurance that the State have a process to ensure that beneficiaries do 
not pay cost sharing over the cumulative cost sharing maximums proposed 
in Sec. 457.555. We emphasize that this process must not rely on a 
refund for cost sharing in excess of the cumulative cost sharing 
maximum.
3. Premiums, Enrollment Fees, or Similar Fees: State Plan Requirements 
(Sec. 457.510)
    Section 2103(e)(1)(A) of the Act requires that the State plan 
include a description of the amount of premiums, deductibles, 
coinsurance and other cost sharing imposed pursuant to a public 
schedule. Section 457.510 proposes that when a State imposes premiums, 
enrollment fees, or similar fees on CHIP beneficiaries, the State plan 
must describe the amount of the premium, enrollment fee, or similar 
fee, the period of liability for the charge, and the group or groups 
that will be subject to the cost sharing charge.
    We also propose that the State plan include a description of the 
consequences for a beneficiary who does not pay required charges. For 
example, some States disenroll a beneficiary for non-payment of certain 
co-payment or premium charges. Under our proposed regulations, these 
States would discuss this disenrollment policy in full, including the 
State's policy on reenrollment of the child once payment of the charge 
is made, and any ``grace period'' allowed after non-payment such as, 
notification to beneficiary for failure to pay after one month or 
cancellation after two months of non-payment. We would also require the 
State to indicate any beneficiary groups that are exempt from the 
disenrollment policy.
    In addition, proposed Sec. 457.510 would require that the State 
plan include a description of the methodology used to ensure that total 
cost sharing liability for a beneficiary's families does not exceed the 
cumulative cost sharing maximums as required by section 2103(e)(3)(B) 
of the Act and specified in proposed Sec. 457.555. This description 
must explain how the State calculates total income for each family, and 
how the State will prevent charges over the cumulative costs sharing 
maximums.
    The State's methodology should include a refund for a beneficiary 
who accidentally pays over his or her cumulative cost sharing maximum. 
However, as stated earlier, we propose that a methodology that 
primarily relies on a refund to the beneficiary for cost sharing 
payments made over the cumulative cost sharing maximum will not be an 
acceptable methodology.
    Many States that impose cost sharing have established a ``shoe-
box'' policy. Under this policy, the beneficiary's family is 
responsible for demonstrating with receipts that he or she has paid 
cost sharing charges up to the cumulative maximum cost sharing charges 
(5 percent of the family's total income). Concern has been raised that 
the beneficiary's family should not have the primary responsibility for 
ensuring that it does not make payments that exceed the cumulative cost 
sharing maximum.
    We asked George Washington University's Center for Health Policy 
Research to conduct a study on the types of methods States and private 
insurance companies use to track cost sharing amounts against a 
beneficiary's out-of-pocket expenditure cap. The George Washington 
study concluded that the risk that a beneficiary in a family with 
income above 150 percent of the FPL will reach the cumulative cost 
sharing maximum (5 percent of family income cap) is minimal since the 
amounts of cost sharing States are currently imposing are relatively 
low. The study also found that most of the States hold the beneficiary 
responsible for demonstrating with receipts that he or she has paid 
cost sharing charges up to the cumulative cost sharing maximum. George 
Washington also noted that the private insurers typically rely on the 
beneficiary when tracking out-of-pocket expenses.
    The George Washington study also found that while the risk of 
reaching the cumulative cost sharing maximum was relatively low for 
children in families above 150 percent of the FPL, this risk increases 
for a family that has a child with a chronic condition. The statute 
does not require States to count the beneficiary's costs of paying for 
services not covered under the plan towards the cumulative cost sharing 
cap. The George Washington study found that since States are not 
required to count non-covered services toward the cumulative cost 
sharing maximum, a chronically ill child could be subject to the 
financial burdens of cost sharing charges for services not covered 
under the State plan, in addition to the payments for

[[Page 60912]]

services that are covered under the State plan. This policy could be 
especially burdensome on children in States with benefit packages under 
a separate child health program that do not cover a wide range of 
services. Therefore, a family with a chronically ill child may be faced 
with extraordinary expenses. Based on these findings, we believe a 
statutory change will be needed to prevent the additional burden of 
cost sharing on children with chronic conditions.
    Until any such statutory change is enacted, we recommend that 
States, when possible, develop a more formal tracking mechanism when 
imposing cost sharing charges, especially when States impose cost 
sharing charges on children with chronic conditions. We believe that a 
tracking mechanism that does not rely on the beneficiary demonstrating 
to the State that he or she has met the cumulative cost sharing maximum 
would be preferable. An example of a formal tracking mechanism is when 
a State issues a swipe card to a beneficiary at the time of enrollment 
which is used to record the cost sharing amounts a provider collects. 
Once the beneficiary reaches his or her cumulative cost sharing maximum 
as indicated by the swipe card, the provider cannot collect additional 
cost sharing amounts from the beneficiary. Another example of a formal 
tracking mechanism is to issue a credit card to the beneficiary. The 
beneficiary can use this card to pay his or her copayments to the 
provider. The State will bill the beneficiary for the copayments and 
reimburse the provider. A provider would be able to determine if the 
beneficiary has reached his or her credit card maximum by calling the 
State agency to obtain the credit limit available.
    To address the needs of the chronically ill child, the George 
Washington University study also suggests that States assign 
chronically ill children to a case manager who will be responsible for 
assuring that the beneficiary's cost sharing does not exceed the 
cumulative cost sharing maximum. Also, while a State is not required to 
count non-covered services costs towards the cumulative maximum, we 
recommend that a State count these costs towards the cumulative cost 
sharing maximum, when possible.
    While we require that the State plan describe a method of ensuring 
that beneficiaries do not exceed the cumulative cost sharing maximum, 
the previous examples are only recommendations. We solicit comments on 
tracking mechanisms States can use that do not place the burden of 
tracking cost sharing charges on the beneficiary.
4. Copayments, Coinsurance, Deductibles, or Similar Cost Sharing 
Charges: State Plan Requirements (Sec. 457.515)
    In addition to proposed Sec. 457.510, proposed Sec. 457.515 is also 
based on section 2103(e)(1)(A) of the Act, which requires that the 
State child health plan include a description of the amount of 
premiums, deductibles, coinsurance and other cost sharing imposed. We 
propose that the State plan describe the following elements regarding 
copayments, coinsurance, deductibles or similar fees: the amount of the 
copayments, coinsurance, deductibles, or similar fees; the time period 
for which the charge is imposed; the group of beneficiaries to whom the 
charge applies; the consequences for a beneficiary who does not pay a 
charge; and the service on which the charge is made. Also, as stated in 
the discussion of Sec. 457.510, for State plan requirements for 
imposing premiums, we propose that the State plan describe the 
methodology used to ensure that total cost sharing liability for a 
beneficiary's family does not exceed the cumulative cost sharing 
maximums. This description must explain how the State calculates total 
income for each family, and how the State will prevent charges over the 
cumulative cost sharing maximums.
    Finally, we propose that, in accordance with the prudent layperson 
standard in the Consumer Bill of Rights and Responsibilities, States 
must provide assurances that enrollees will not be held liable for 
costs for emergency services above and beyond the copayment amount that 
is specified in the State plan. We propose that States must work with 
their managed care contractors to absorb any additional costs 
associated with providing emergency room services at a facility that is 
not a participating provider in the enrollee's managed care plan or 
network. In addition, although no State has proposed to include such a 
provision in a State child health plan, we considered options for 
requiring States to assure that copayment amounts for emergency 
services do not vary depending on the location (in or out of the 
managed care network) at which those services were provided. In keeping 
with the prudent layperson standard of assuring immediate access to 
emergency care, we have elected to propose this prohibition on 
differential copayments. However, we have also taken into consideration 
the importance of consistency between HCFA's programs (Medicare, 
Medicaid and CHIP) in this area. For example, we considered adopting 
the policy outlined in the proposed Medicare+Choice regulation, which 
limits cost sharing for emergency services obtained outside of the M+C 
plan's provider network equal to the lesser of $50 or what the 
organization may charge within the managed care network. We also 
considered that it would be appropriate to lower this dollar limit to 
accommodate the lower income population being served in this program. 
We welcome comments on these issues.
5. Cost Sharing for Well-Baby and Well-Child Care (Sec. 457.520)
    Under section 2103(e)(2) of the Act, the State plan may not impose 
copayments, deductibles, coinsurance or other cost sharing with respect 
to well-baby and well-child care services in either the managed care or 
the fee-for-service delivery setting. We have set forth in the proposed 
regulation services that constitute well-baby and well-child care for 
purposes of cost sharing. We propose to define these well-baby and 
well-child services to include the definition of well-baby and well-
child care used by the American Academy of Pediatrics (AAP) and 
incorporated in the Federal Employees Health Benefits Program (FEHBP) 
Blue Cross and Blue Shield benchmark plan.
    We also propose to apply the prohibition on cost sharing to 
services that fit the definition of routine preventive dental services 
used by the American Academy of Pediatric Dentistry (AAPD) when a State 
opts to cover these services under its program. We propose to prohibit 
cost sharing for these services for two reasons. First, preventive 
dental care can be viewed as the oral health equivalent of 
immunizations in that it can prevent most cavities and subsequent tooth 
loss, both of which are highly correlated to poverty and lack of access 
to dental care. Second, we found that the prevailing practice among 
State employee plans and large health maintenance organizations (HMOs) 
is to pay 100 percent for any routine preventive and diagnostic dental 
benefits offered.
    Accordingly, we propose at Sec. 457.520 that when the State opts to 
cover the following services, they must be considered well baby and 
well child care services for the purposes of the prohibition of cost 
sharing under section 2103(e)(2):
     All healthy new born inpatient physician visits, including 
routine screening (inpatient and outpatient).
     Routine physical examinations.
     Laboratory tests.

[[Page 60913]]

     Immunizations, and related office visits as recommended in 
the AAP's ``Guidelines for Health Supervision III'' (June 1997), and 
described in ``Bright Futures: Guidelines for Health Supervision of 
Infants, Children, and Adolescents'' (Green M., (ed.). 1994).
     When covered under the State plan, at the State's option, 
routine preventive and diagnostic dental services (for example, oral 
examinations, prophylaxis and topical fluoride applications, sealants, 
and x-rays) as described by the AAPD's current Reference Manual 
(Pediatric Dentistry, Special Issue, 1997-1998, vol 19:7, page 71-2).
6. Public Schedule (Sec. 457.525)
    Section 2103(e)(1)(A) of the Act requires that the State provide a 
public schedule of all cost sharing charges. The statute does not 
specify the standards a State must meet when making the cost sharing 
schedule available to the public, and allows States a great amount of 
flexibility in developing cost sharing policies. Therefore, we believe 
that the more information the State includes in the public schedule 
regarding its cost sharing policy, the more informed beneficiaries will 
be about their financial responsibilities under their State's separate 
child health program. We propose that the public schedule contain at 
least the current CHIP cost sharing charges, the beneficiary groups on 
which cost sharing will be imposed (for example, cost sharing imposed 
only on children in families with income above 150 percent of the FPL), 
the cumulative cost sharing maximum allowed under Sec. 457.555, and the 
consequences for a beneficiary who fails to pay a cost sharing charge. 
We also propose that the State must make the public schedule available 
to beneficiaries at the time of enrollment and when the State revises 
the cost sharing charges and/or cumulative cost sharing maximum, 
applicants at the time of application, and the general public. To 
ensure that providers impose appropriate cost sharing charges at the 
time services are rendered, we also propose that the public schedule 
must be made available to all CHIP participating providers.
7. General Cost Sharing Protection for Lower Income Children 
(Sec. 457.530).
    At proposed Sec. 457.530, we would implement section 2103(e)(1)(B) 
of the Act, which specifies that the State plan may only vary premiums, 
deductibles, coinsurance, and other cost sharing charges based on the 
family income of targeted low-income children in a manner that does not 
favor children from families with higher income over children from 
families with lower income. This statutory provision and the 
implementing regulations apply to all cost sharing imposed on children 
regardless of family income level. A State would not be in compliance 
with this provision if, for example, it imposed cost sharing charges on 
families at 150 percent of the FPL that were more than the cost sharing 
amounts imposed on children in families at 200 percent of the FPL.
8. Cost Sharing Protection To Ensure Enrollment of American Indians/
Alaska Natives (Sec. 457.535)
    Section 2102(b)(3)(D) of the Act requires the State plan to include 
a description of the procedures used to ensure the provision of child 
health assistance to targeted low-income children in the State who are 
American Indians. We are concerned that States that impose cost sharing 
on children in American Indian/Alaska Native (AI/AN) families will 
restrict access to essential CHIP services for this vulnerable 
beneficiary group, and may impact the State's ability to ensure 
coverage for this group as required under section 2102(b)(3)(D) of the 
Act.
    Title VI of the Civil Rights Act of 1964 prohibits programs 
receiving Federal financial assistance from discriminating on the basis 
of race, color or national origin. But title VI does not preclude the 
Federal government from requiring States to recognize unique 
obligations to AI/ANs under Federal law. Based upon the unique legal 
status of Tribes under Federal law, the Federal government's trust and 
responsibility toward AI/ANs as authorized by Congress, and the 
requirements under section 2102(b)(3)(D) of the Act, HCFA must 
affirmatively address barriers to AI/AN enrollment. Moreover, access to 
health care funded by the Indian Health Service (IHS), which is 
available without charge, creates a unique disincentive to AI/AN 
enrollment in a CHIP program that imposes cost sharing. Thus, we 
believe that in some States, targeted incentives for AI/AN enrollment, 
including waiver of cost sharing, is consistent with title VI of the 
Civil Rights Act of 1964 and warranted by the CHIP statute.
    Therefore, we propose that States must exclude children from AI/AN 
families from the imposition of premiums, deductibles, coinsurance, 
copayments or any other cost sharing charges. For the purposes of this 
section, we propose to use the definition of Indians referred to in 
section 2102(b)(3)(D) of the Act, which defines Alaska Natives and 
American Indians as Indians defined in section 4(c) of the Indian 
Health Care Improvement Act, 25 U.S.C. 1603(c). We would also specify 
in the regulation that the State only grant this exception to AI/AN 
members of a Federally recognized tribe (as determined by the Bureau of 
Indian Affairs).
    We realize that when States impose cost sharing on their CHIP 
beneficiaries States will need to identify AI/AN children of Federally 
recognized tribes for the purpose of waiving this group from premiums 
and other cost sharing. States will need to request from applicants 
identification that verifies the AI/AN status of the child. For 
example, the State may ask for Tribal membership identification or a 
Certificate of Indian Blood (CIB) to verify the applicant's AI/AN 
status. Eligibility enrollment staff should be trained to present, in a 
culturally sensitive manner, the option to AI/AN beneficiaries of 
either presenting their identification to the State or foregoing their 
option to be exempt from cost sharing.
    States should strive to inconspicuously identify AI/AN children 
when waiving cost sharing that is typically collected by providers (for 
example--deductibles, copayments, and coinsurance). For example, a 
State that waives lower-income CHIP children from copayments in 
addition to AI/AN children should provide both waived groups with 
similar identification. The AI/AN child should not be separately 
identified from other beneficiary groups whose copayments have been 
waived. Another example of inconspicuously identifying AI/AN children 
is by providing identification (via a special code or color on the CHIP 
insurance card, or providing cost sharing amounts on the card) to those 
who are subject to cost sharing.
    We believe that most States and their providers will not realize a 
negative financial impact by the mandatory waiver on AI/AN cost 
sharing. However, we understand that those States with a significant 
AI/AN population enrolled in their CHIP program may have to adjust 
payment rates to providers or capitation payments to MCOs since these 
entities can no longer collect cost sharing from AI/AN children. State 
eligibility systems and billing systems will also need to be adjusted 
to account for the mandatory waiver of cost sharing for the AI/AN 
children.
9. Cost Sharing Charges for Children in Families at or Below 150 
Percent of the Federal Poverty Line (FPL) (Sec. 457.540)
    Section 2103(e)(3) of the Act sets forth the limitations on 
premiums and other

[[Page 60914]]

cost sharing charges for children in families at or below 150 percent 
of the FPL. In accordance with section 2103(e)(3)(A)(i) of the Act, we 
propose that in the case of a targeted low-income child whose family 
income is at or below 150 percent of the FPL, the State plan may not 
impose any enrollment fee, premium, or similar charge that exceeds the 
charges permitted under the Medicaid regulations at Sec. 447.52, which 
implement section 1916(b)(1) of the Act. Section 447.52 specifies the 
maximum monthly charges in the form of enrollment fees, premiums, and 
similar charges, for Medicaid eligible families. We propose to apply 
these Medicaid maximum monthly charges to the charges imposed on 
children of families whose incomes are at or below 150 percent of the 
FPL under CHIP. The Medicaid rules limit premiums to a specified 
monthly amount per family according to a sliding income scale. For 
example, the maximum monthly charge for a family with $1001 monthly 
income is $19 for a family of 1 or 2 persons, $16 for a family of 3 or 
4, and $15 for a family of 5 or more. The regulations prescribe lower 
maximum monthly charges for families with lower income.
    Section 2103(e)(3)(A)(ii) provides that copayments, coinsurance or 
similar charges imposed on children in families with income at or below 
150 percent of the FPL must be equal to or less than the amounts 
considered nominal (as determined consistent with regulations referred 
to in section 1916(a)(3) of the Act), with such appropriate adjustment 
for inflation or other reasons as the Secretary determines to be 
reasonable. The Medicaid regulations that set forth these nominal 
amounts are located at Sec. 447.54. For children whose family income is 
at or below 100 percent of the FPL, we propose that any copayments, 
coinsurance, deductibles or similar charges remain equal to or less 
than the amounts permitted under the Medicaid regulations at 
Sec. 447.54. Because the statute gives the Secretary the authority to 
adjust the limitations found in Sec. 447.54, for children whose family 
income is 101 percent to 150 percent of the FPL we propose adjusted 
nominal amounts for copayments, coinsurance, and deductibles to reflect 
the CHIP beneficiary's ability to pay higher cost sharing. We also 
propose that the frequency of cost sharing meet the requirements noted 
in proposed Sec. 457.550. These restrictions are adopted from the 
Medicaid rules at Sec. 447.53(c). The proposed restrictions are 
discussed more fully in the discussion regarding Sec. 457.550 below.
    We propose that the cost sharing imposed on children in families 
with income at or below 150 percent of the FPL be limited to a 
cumulative maximum. Specifically, we have proposed that total cost 
sharing imposed on children in this population be limited to 2.5 
percent of a family's income for a year (or 12 month eligibility 
period). A more in-depth discussion on the cumulative cost sharing 
maximum as proposed in Sec. 457.555, and our rationale for the 2.5 
percent cumulative cost sharing maximum is discussed later in the 
preamble to this proposed rule.
10. Cost Sharing for Children in Families Above 150 Percent of the FPL 
(Sec. 457.545)
    Section 2103(e)(3)(B) mandates that the total annual aggregate cost 
sharing with respect to all targeted low-income children in a family 
with income above 150 percent of the FPL not exceed 5 percent of such a 
family's income for the year involved. The proposed regulation provides 
that the plan may not impose total premiums, enrollment fees, 
copayments, coinsurance, deductibles, or similar cost sharing charges 
in excess of 5 percent of a family's income for a year (or 12 month 
eligibility period).
11. Restriction on the Frequency of Cost Sharing Charges on Targeted 
Low-Income Children in Families at or Below 150 Percent of the FPL 
(Sec. 457.550)
    Section 2103(e)(3)(A)(ii) of the Act specifies that the State plan 
may not impose a deductible, cost sharing, or similar charge that 
exceeds an amount that is nominal as determined consistent with 
regulations referred to in section 1916(a)(3) of the Act, ``with such 
appropriate adjustments for inflation or other reasons as the Secretary 
determines to be reasonable''. In order to protect families at or below 
150 percent of the FPL from excessive charges, we would adopt the 
Medicaid rule at Sec. 447.53(c) that does not permit the plan to impose 
more than one type of cost sharing charge (deductible, copayment, or 
coinsurance) on a service. Under this rule, for example, a plan could 
not impose a copayment for a service if there is a deductible for the 
same service. We would also provide that a State may not impose more 
than one cost sharing charge for multiple services provided during a 
single office visit. For example, a beneficiary cannot be charged two 
copayments for two sets of lab tests performed during one visit. In 
addition, under our proposal a beneficiary cannot be charged two 
copayments if the beneficiary was seen by two different physicians 
during one visit.
    We would also adopt the Medicaid rules at Sec. 447.55 regarding 
standard copayments. Specifically, we would provide that States can 
establish a standard copayment for any service. We propose to expand 
upon the Medicaid rules and allow States to provide a standard 
copayment amount for any visit. Similar to the provisions at 
Sec. 447.55 that allow a standard copayment to be based upon the 
average or typical payment of the service, our provision would allow a 
State to impose a standard copayment per visit based upon the average 
cost of a visit up to the copayment limits specified at proposed 
Sec. 457.555(a).
12. Maximum Allowable Cost Sharing Charges on Targeted Low-Income 
Children at or Below 150 Percent of the FPL (Sec. 457.555)
    Section 2103(e)(3)(A)(ii) of the Act specifies that the State plan 
may not impose a deductible, cost sharing, or similar charge that 
exceeds an amount that is nominal as determined consistent with 
regulations referred to in section 1916(a)(3) of the Act, ``with such 
appropriate adjustment for inflation or other reasons as the Secretary 
determines to be reasonable''. Because CHIP is designed for families 
with incomes above the Medicaid eligibility levels, we believe it is 
reasonable to set maximum copayments that are higher than those under 
the Medicaid program, which are set forth at Secs. 447.53 and 447.54. 
Therefore, we propose provisions regarding maximum allowable cost 
sharing charges on targeted low-income children at 101 to 150 percent 
of the FPL that mirror the provisions of Secs. 447.53 and 447.54 but 
are adjusted to permit higher amounts.
    For noninstitutional services provided to targeted low-income 
children whose family income is from 101 to 150 percent of the FPL, we 
propose a maximum copayment charge of $5.00 (as opposed to the $3.00 
maximum copayment charge under Medicaid). When deciding how to adjust 
the Medicaid copayment maximums for the CHIP population, we considered 
adjusting for current dollars the copayment maximums at 
Sec. 447.54(a)(3) (which were published in 1976) using the Consumer 
Price Index (CPI) for all items, CPI--Medical Services, and Real 
Personal Income Growth. After considering the figures computed using 
these inflation adjustments, current copayment levels under State 
programs, and the potential overall impact of copayments on the 
utilization of services by children in families with incomes at or 
below 150 percent of the FPL, we propose the following service

[[Page 60915]]

payment and copayment maximum amounts:

------------------------------------------------------------------------
                                                          Maximum amount
                 Payment for the service                   chargeable to
                                                            beneficiary
------------------------------------------------------------------------
$15.00 or less..........................................           $1.00
$15.01 to $40...........................................            2.00
$40.01 to $80...........................................            3.00
$80.01 or more..........................................            5.00
------------------------------------------------------------------------

    We also propose to set a maximum per visit copayment amount for 
beneficiaries enrolled in managed care organizations. The Medicaid 
regulations do not address cost sharing for HMO enrollees and therefore 
do not address a maximum charge on cost sharing in this setting. The 
$5.00 maximum copayment per visit is based upon the maximum copayment 
per service amount noted in the preceding chart. We urge States to 
apply this requirement in a way that continues to protect beneficiaries 
from unnecessarily high out-of-pocket costs that would prevent children 
from accessing essential services.
    We propose to set a maximum on deductibles of $3.00 per month per 
family. This CHIP maximum deductible is higher than the Medicaid 
maximum deductible of $2.00 per month per family. If a State imposes a 
deductible for a time period other than a month, the maximum deductible 
for that time period is the product of the number of months in the time 
period and $3.00. For example, the maximum deductible that a State may 
impose on a family for a three-month period is $9.00.
    We also propose, for the purpose of maximums on copayments and 
coinsurance, that the maximum copayment or coinsurance rate relate to 
the payment made to the provider, regardless of whether the payment 
source is the State or an entity under contract with the State.
    With regard to institutional services provided to targeted low-
income children whose family income is from 101 to 150 percent of the 
FPL, we propose to use the standards set forth in the Medicaid 
regulations at Sec. 447.54(c). Accordingly, we propose to require that 
for targeted low-income children whose family income is at or below 150 
percent of the FPL, the State plan must provide that the maximum 
deductible, coinsurance or copayment charge for each institutional 
admission does not exceed 50 percent of the payment made for the first 
day of care in the institution. Again, we have clarified that the 
percentage applies to the payment of the service regardless of the 
payment source.
    We propose to allow States to impose a charge for non-emergency use 
of the emergency room up to twice the nominal charge for 
noninstitutional services provided to targeted low-income children 
whose family income is from 101 to 150 percent of the FPL. Medicaid 
regulations at Sec. 447.54(b) specify that a waiver of the nominal 
requirement is permitted when non-emergency services are furnished in a 
hospital emergency room. We propose that the State be permitted, 
without a waiver from HCFA, to charge twice the noninstitutional 
copayment amount permitted when a beneficiary uses an emergency room 
for nonemergency services, capped at a maximum of ten dollars. This 
requirement would allow States the flexibility to charge cost sharing 
amounts on inappropriate use of the emergency room, without the burden 
of requesting a waiver from HCFA. The proposed ten dollar maximum is 
twice the proposed nominal copayment maximum ($5.00) for 
noninstitutional services under CHIP. Finally, in Sec. 457.555(d), we 
proposed that States must assure that enrollees can receive emergency 
services from any qualified provider, regardless of whether the 
enrollee's managed care plan has a contract with that provider. We 
proposed this provision because emergency care, by its nature, may need 
to be obtained from the nearest available qualified provider. In 
addition, we propose that States must assure that enrollees are not 
held liable for any additional costs, beyond the standard co-payment 
amount, of emergency services furnished outside of the individuals 
managed care network.
13. Cumulative Cost Sharing Maximum (Sec. 457.560)
    Section 2103(e)(3)(B) of the Act provides that any premiums, 
deductibles, cost sharing or similar charges imposed on targeted low-
income children in families above 150 percent of the FPL may be imposed 
on a sliding scale related to income, except that the total annual 
aggregate cost sharing with respect to all targeted low-income children 
in a family may not exceed 5 percent of the family's income for the 
year involved. We refer to this cap on total cost sharing as the 
cumulative cost sharing maximum.
    We propose two general rules regarding the cumulative cost sharing 
maximum. First, a State may establish a lower cumulative cost sharing 
maximum than that specified in Sec. 457.560. Second, a State must count 
cost sharing amount that the family has a legal obligation to pay when 
computing whether a family has met the cumulative cost sharing maximum. 
We propose to define the term ``legal obligation'' as the family's 
obligation to pay amounts the provider actually charges the family and 
any other amounts for which the family is legally liable even if the 
family never pays those amounts. For example, a cost sharing charge 
that is billed to the family but not paid must nevertheless be counted 
toward the cumulative cost sharing maximum. We note that a State that 
purchases family coverage under the authority of 2105(c)(3) of the Act 
may want to count cost sharing imposed on adult family members against 
the cumulative cost sharing maximum. This practice is permissible but 
not mandatory because the statutory provisions on the cumulative cost 
sharing maximum specify that only cost sharing charges associated with 
targeted low-income children be counted toward the cumulative cost 
sharing maximum. However, the statute does not preclude a State from 
including other cost sharing charges.
    We propose that for children in families above 150 percent of the 
FPL, the plan may not impose premiums, enrollment fees, copayments, 
coinsurance, deductibles, or similar cost sharing charges in excess of 
5 percent of a family's income for a year (or 12 month eligibility 
period). We propose that for targeted low-income children in families 
at or below 150 percent of the FPL, the plan may not impose premiums, 
deductibles, copayments, co-insurance or similar cost sharing charges 
that, in the aggregate, exceed 2.5 percent of total family income for 
the year. Section 2103(e)(3)(A) gives the Secretary the authority to 
adjust cost sharing amounts so that they remain nominal, consistent 
with Medicaid regulations. The requirement at section 2103(e)(1)(B), 
which does not allow a State to impose cost sharing that favors 
children from families with higher income over children from families 
with lower income, and the Secretary's authority to make appropriate 
adjustments to permissible cost sharing amounts under section 
2103(e)(3)(A)(ii), serve as the basis for our proposal to place a 
cumulative cost sharing maximum on the amount of cost sharing imposed 
on children at or below 150 percent of the FPL.
    We believe that the lower maximum is consistent with the 
Congressional intent of section 2103(e)(1)(B) because it will ensure 
that children from families with higher income (over 150 percent of the 
FPL) are not favored over children from families with lower income (at 
or below 150 percent of the FPL). In addition, we reviewed cost sharing 
and

[[Page 60916]]

premium maximums for families whose incomes are under 150 percent of 
the FPL, under approved State plans. After this review, we specifically 
analyzed cost sharing maximums in six States that impose a maximum 
other than the 5 percent maximum imposed under Sec. 457.560(c) to 
determine the percentage of income that a full payment of the cost 
sharing represents for a family of four at 100 percent of the FPL, 
which for FY 1998 is $16,450. For example, one State imposed a $250 per 
year per family cap on cost sharing. This amount represents 
approximately 1.5 percent of the income of a family at 100 percent of 
the FPL. We found that the cost sharing maximums range from a low of 
.72 percent of the income at 100 percent of the FPL to a high of 3 
percent of the family's income at 100 percent of the FPL.
    The majority of the States' cost-sharing maximums represented 
between 2 to 3 percent of the income of a family at 100 percent of the 
FPL. We therefore propose that a cumulative cost sharing maximum of 2.5 
percent of the family's income (or an equivalent dollar amount) be 
placed on cost sharing imposed on children in families below 150 
percent of the FPL. We encourage States and beneficiary groups to 
submit comments regarding our proposed limit on this population, 
because our historical data regarding cost sharing on this part of the 
CHIP population is limited.
    Depending on the income level of the family, the cumulative cost 
sharing maximum would thus be set as 2.5 or 5 percent of a family's 
income. The State may define family income as it chooses, as long as 
under the State's definition, family income is no more than gross 
family income used by the State for determining CHIP eligibility prior 
to the application of disregards or exclusions.
14. Grievances and Appeals (Sec. 457.565)
    We propose that the State must provide enrollees in a separate 
child health plan the right to file grievances and appeals in 
accordance with proposed Sec. 457.985 for disenrollment from the 
program due to failure to pay cost sharing.
15. Disenrollment Protections (Sec. 457.570)
    Section 2101(a) of the Act provides that the purpose of title XXI 
is to provide funds to States to enable them to initiate and expand the 
provision of child health assistance to uninsured, low-income children 
in an effective and efficient manner that is coordinated with other 
sources of health benefits coverage for children. Based upon this 
provision of the statute, we propose in Sec. 457.570 to require that 
States establish a process that gives beneficiaries reasonable notice 
of and an opportunity to pay past due cost sharing amounts (premiums, 
copayments, coinsurance, deductibles and similar fees) prior to 
disenrollment. We would require that States have this process in place 
because we do not believe it would be effective and efficient to 
disenroll a child without notice to the family of the impending 
disenrollment, or if a family was experiencing temporary financial 
hardship and could not afford to pay a premium or any other cost 
sharing amount. Examples of State processes that provide a reasonable 
notice and opportunity to pay include--waiving cost sharing for 
families experiencing temporary financial hardship, implementing grace 
periods before disenrolling beneficiaries, observing a beneficiary's 
pattern of non-payment before disenrollment, or establishing payment 
schedules to allow beneficiaries time to pay their outstanding cost 
sharing debts. We request comments on this requirement, including 
specific comments on the determination of an amount of time that would 
give beneficiaries reasonable notice and opportunity to pay cost 
sharing amounts prior to disenrollment. HCFA will request that States 
with approved plans submit this additional information once this 
proposed rule is published and prior to the State's onsite review. We 
will also ask the State to include its process in future amendments to 
its State plan.

F. Subpart G--Strategic Planning, Reporting, and Evaluation

1. Basis, Scope, and Applicability (Sec. 457.700)
    This subpart sets forth the State plan requirements for strategic 
planning, monitoring, reporting, and evaluation under title XXI. 
Specifically, this subpart implements sections 2107(a), (b), and (d) of 
the Act, which relate to strategic planning, reports and program 
budgets; section 2108 of the Act, which sets forth provisions regarding 
annual reports and evaluation; and sections 2102(a)(7)(A) and (B), 
relating to assurances of quality and appropriateness of care, and 
access to covered services.
    Although States are given great flexibility in developing title XXI 
programs, sections 2107 and 2108 of the Act emphasize accountability at 
both the State and Federal level. Title XXI provides for performance 
measurement, evaluation, and reporting that promote the collection and 
analysis of data critical to understanding the impact of CHIP on 
children's insurance coverage, access to care, and use of health care 
services. Reporting and evaluating the progress of program design and 
implementation involve articulating program objectives and translating 
them into meaningful, measurable evaluation goals; using valid and 
reliable performance measures; and developing data collection and 
analysis strategies that are relevant to the measures. Sections 2107 
and 2108 of the Act require the Secretary to monitor State program 
development and implementation, and to evaluate and compare the 
effectiveness of State plans. Under section 2108(a) of the Act, States 
must assess the operation of their State plans in each preceding 
Federal fiscal year and report to the Secretary annually on their 
progress in reducing the number of uncovered, low-income children. In 
addition, section 2108(b)(1) requires States to submit an evaluation of 
their program by March 31, 2000. Under section 2108(b)(2), the 
Secretary is required to submit a report to Congress based on these 
evaluations by December 31, 2001 and to make the report available to 
the public.
    Sections 2107 and 2108 of the Act contain guidance on reporting, 
performance measurement, and evaluation activities. These activities 
will provide the critical information necessary for meeting Federal 
reporting requirements, documenting program achievements, improving 
program function, and assessing program effectiveness in achieving 
policy goals. Data that facilitate the objective assessment of how 
programs are working will allow States to examine critical program 
design decisions and take action to improve their programs. Reporting 
and evaluation also will assist States and program advocates in 
documenting title XXI achievements. We share States' concern for the 
need to accurately measure the impact of CHIP. While this section 
outlines current Federal requirements related to measuring program 
achievements, we are soliciting comments for additional measures that 
will assist in articulating the success of programs implemented under 
title XXI. As part of our effort to increase understanding and 
knowledge of title XXI programs, we plan to establish an information 
dissemination policy that includes making State annual reports, State 
evaluations, and a summary of State expenditures and statistical 
reports regularly available on the Internet.
    States have a strong interest in developing data collection 
strategies and capabilities that will allow them to

[[Page 60917]]

document that title XXI funds are being used efficiently and 
effectively to provide children with affordable, quality health 
insurance coverage. By enacting title XXI, Congress has made a 
significant investment in providing health insurance coverage to a 
substantial proportion of uninsured children. Continued support and 
funding will depend on providing policy makers with objective and 
accurate data about the success of the program.
    Reporting and evaluating data will be critical to following the 
progress of States as they develop their own unique approaches to 
insuring children. Title XXI affords States broad flexibility and 
choice in program design and implementation. The array of choices 
available to States allows them to develop programs that address their 
specific needs. However, the variability in programs complicates the 
effort to measure and document program effectiveness and to make State-
to-State comparisons. In developing their reporting strategy, States 
may find it helpful to work with their HCFA Regional Offices to 
identify technical assistance needs and to coordinate approaches to 
meeting those needs. We plan to work collaboratively with States on 
technical assistance issues in order to encourage utilization of 
relevant and valid program and quality of care performance measures 
that facilitate reporting and evaluation.
2. State Plan Requirements: Strategic Objectives and Performance Goals 
(Sec. 457.710)
    In accordance with section 2107(a) of the Act and the intent of the 
Government Performance and Results Act of 1993 (GPRA), proposed 
Sec. 457.710 encourages program evaluation and accountability by 
requiring the State plan to describe the strategic objectives, 
performance goals, and performance measures the State has established 
for providing child health assistance to targeted low-income children 
under the plan and for otherwise maximizing health benefits coverage 
for other low-income children and children generally in the State.
    In accordance with section 2107(a)(2) of the Act, at 
Sec. 457.710(b), we propose that the State plan must identify specific 
strategic objectives related to increasing the extent of health 
coverage among targeted low-income children and other low-income 
children. We understand there will be variation among States in 
specific evaluation approaches and terminology. However, we encourage 
States to view development of strategic objectives as a process that 
involves translating the basic overall aims of the State plan into a 
commitment to achieving specific performance goals or targets. One of 
the strategic objectives established in the Act is the reduction in the 
number of low-income, uninsured children. Although this objective is of 
central importance, States must articulate other strategic objectives, 
such as increasing access to health care and improving the quality of 
health services delivered to beneficiaries.
    Under section 2107(a)(3) of the Act, States must identify one or 
more performance goals for each strategic objective. We propose to 
implement this statutory provision at Sec. 457.710(c). The performance 
goals should be central to the State's strategic objectives and should 
facilitate assessing the extent to which strategic objectives are being 
achieved. Performance goals should be more specific than strategic 
objectives. Performance goals express target levels of performance in 
the form of tangible, measurable expected levels of achievement against 
which actual achievements for an explicit time frame can be measured.
    In formulating strategic objectives and performance goals, States 
should consider not only the general population targeted for CHIP 
enrollment but also special population subgroups of particular 
interest. Such subgroups may include racial or ethnic minorities, 
specific high-risk groups such as children with special needs, children 
in foster care, homeless children, or hard to reach groups such as 
children who live in under-served rural areas or urban areas. Health 
services research studies have documented racial, ethnic, and cultural 
differences in health insurance coverage and patterns of care. For 
example, studies show that non-white children are more likely to be 
uninsured and under-immunized. Therefore, States may want to consider 
developing performance goals that relate to improving coverage, access, 
and utilization for specific subgroups.
    In accordance with section 2107(a)(4) of the Act, proposed 
Sec. 457.710(d) provides that the State plan must describe how 
performance under the plan will be measured through objective, 
independently verifiable means and compared against performance goals. 
For purposes of measurement, States may find it helpful to 
conceptualize performance in two broad categories: quality of care 
measures and program operations measures. Quality of care measures 
focus on access to care, health status and delivery of clinical 
services. A measure of performance in either category must be valid 
(that is, reflect the concept it is intended to capture) and reliable 
(that is, yield results that are reproducible in repeated analyses). 
For example, waiting time for appointments with health care providers 
is a widely used, standardized measure of access.
    Developing and testing performance measures to ensure their 
validity and reliability can prove expensive and time-consuming. For 
this reason, States may want to carefully review widely used measures 
including all of the following:
     The percentage of Medicaid-eligible children enrolled in 
Medicaid;
     The percentage of children with a usual source of health 
care;
     The percentage of children with unmet need for physician 
services and/or delayed care;
     The reduction of hospitalization for ambulatory-sensitive 
conditions;
     The array of measures in the Health Employer Data and 
Information Set (HEDIS) and the Consumer Assessments of Health Plans 
Study (CAHPS).
    We note that HEDIS is widely used by private sector purchasers of 
managed care services. It contains a wide range of quality measures, 
including child and adolescent immunization measures and well child 
care and well adolescent care visits. The Agency for Health Care Policy 
and Research (AHCPR) has sponsored the development of a set of 
standardized CAHPS surveys and reporting formats. CAHPS measures and 
reports on consumer experience and satisfaction with specific aspects 
of health care such as access, interpersonal interactions between 
patients and providers, and service availability.
    States may also find it helpful to use their measures to compare 
performance with widely recognized standards, benchmarks or guidelines. 
Prominent examples include:
     The US Preventive Services Task Force Guidelines;
     Bright Futures: Guidelines for Health Supervision of 
Infants, Children and Adolescents;
     The Office of Disease Prevention and Health Promotion's 
Healthy People 2000 and Healthy People 2010.
    States also may want to keep apprised of major efforts that are 
currently underway to develop new child quality measures such as the 
National Committee for Quality Assurance (NCQA) and Foundation for 
Accountability (FACCT) Child and Adolescent Health Measurement 
Initiative (CAHMI).
    Similarly, States should also consider using widely accepted 
program performance measures. For example, many States are likely to 
adopt outreach

[[Page 60918]]

and substitution of private coverage performance goals because of the 
substantial public policy focus on these areas. In order to report and 
evaluate progress in these two areas, States may want to adopt a broad 
measurement strategy that characterizes structural aspects of program 
operations, program processes, and program outcomes. To use such a 
broad array of performance measures, States may want to consider a 
variety of data collection approaches including administrative data 
collection; mail, in-person, or telephone beneficiary surveys; 
disenrollee surveys; surveys of employers; site visit interviews and 
observation; and focus group interviews with beneficiaries, potential 
enrollees and employers.
    Potential substitution of coverage performance measures include: 
beneficiary self-reported coverage status at eligibility determination, 
beneficiary self-reported coverage status after disenrollment, self-
reported knowledge of low-income workers and small employers about the 
availability of public insurance, and length of waiting period for 
child health insurance. We understand that substitution is particularly 
challenging to measure because assessment relies so heavily on 
beneficiaries' self reported behavior and employers reports of their 
motivation for reducing or eliminating employer coverage. However, the 
public policy importance of the issue of substitution of coverage 
suggests that States should try to design data collection and analysis 
strategies that promote assessing the effectiveness of their 
substitution prevention policies.
    Potential outreach performance measures include: proportion of 
families who know about the program, application simplification, 
enrollment application processing time, number of outreach workers per 
estimated eligible child, time elapsed between initial coverage request 
and enrollment, the percentage of mail-in applications (instead of on-
site applications), number and productivity of out-stationed 
eligibility workers, total expenditures on outreach per estimated 
number of eligible children, number of children using a 12-month 
continuous eligibility option, the number of times an enrollee reports 
having been exposed to CHIP information prior to requesting an 
application, and enrollee satisfaction with the intake/enrollment 
process.
3. State Plan Requirement: State Assurance Regarding Data Collection, 
Records, and Reports and State Annual Reports and Evaluation 
(Secs. 457.720 and 457.730)
    Section 2107(b)(1) of the Act requires the State plan to provide an 
assurance that the State will collect the data, maintain the records, 
and furnish the reports to the Secretary, at the times and in the 
standardized format that the Secretary may require to enable the 
Secretary to monitor State program administration and compliance and to 
evaluate and compare the effectiveness of State plans under title XXI. 
In accordance with the statute, we would implement this provision at 
Sec. 457.720.
    Section 2107(b)(2) of the Act discusses the requirement that the 
State plan include a description of the State's approach to submitting 
annual reports and the State evaluation. Accordingly, we would 
implement this provision at Sec. 457.730. In order to facilitate report 
submission, a group of States has worked with staff from the National 
Academy of State Health Policy, with HCFA representation, to develop an 
optional model framework for the State evaluation due March 31, 2000. 
This framework has been finalized and sent to every State and territory 
with an approved State plan. States are permitted to submit their FY 
1999 annual report and their State evaluation on March 31, 2000, 
together as one comprehensive document. Each State's submission will 
need to meet the title XXI requirements for both the FY 1999 annual 
report and the State evaluation. The NASHP framework has been designed 
to accommodate these requirements. The State workgroup facilitated by 
NASHP will reconvene to develop an optional model framework for future 
annual reports. We encourage States to use this optional framework to 
assure the reporting of timely and consistent data. We will continue to 
work with States to support this effort.
4. State Plan Requirement: State Assurance of the Quality and 
Appropriateness of Care (Sec. 457.735)
    Sections 2102(a)(7)(A) and (B) of the Act require the State plan to 
describe the strategy the State has adopted for assuring the quality 
and appropriateness of care, particularly with respect to providing 
well baby care, well-child care, well adolescent care, and childhood 
and adolescent immunizations and for ensuring access to covered 
services, including emergency services and covered post-stabilization 
services. We propose to implement this provision at Sec. 457.735. In 
this section of the State plan, States should discuss the specific 
elements of its quality assessment and improvement strategies, 
including the use of any of the following methods: Quality of care 
standards; performance measurement, information and reporting 
strategies, licensing standards, credentialing/recredentialing 
processes, periodic reviews and external reviews. In developing quality 
assessment strategies, States may find it helpful to refer to the 
Medicaid Managed Care proposed rule, published on September 29, 1998, 
for a discussion of standardized methods and tools in quality assurance 
and improvement and the Quality Improvement System for Managed Care 
(QISMC) Initiative (63 FR 52039). States are encouraged but not 
required to describe the State's strategy to assure that children have 
access to pediatricians and other health care providers with expertise 
in meeting the health care needs of children.
    We propose to include an additional set of assurances that we 
believe is necessary to ensure the quality and appropriateness of care 
for enrollees. In Sec. 457.735(b) we propose that States must assure 
that there are appropriate procedures in place to monitor and treat 
enrollees with complex and serious medical conditions, including access 
to specialists. While we believe that treatment plans are a desirable 
approach to address the needs of individuals with such medical 
conditions, we did not propose to require treatment plans. In addition, 
our proposed language does not mirror the language set forth in the 
proposed Medicaid managed care rule, which requires an adequate number 
of ``direct access'' visits because this language implies the use of a 
managed care approach that may not be applicable under CHIP.
5. State Expenditures and Statistical Reports (Sec. 457.740)
    The recent implementation of CHIP, results of welfare reform, 
increased economic stability and reductions in unemployment have 
affected the scope of health insurance coverage for children. Because 
each of these factors may confound the coverage level, additional data 
is needed from States to measure the effectiveness of CHIP in providing 
coverage to low-income, uninsured children. Consistent quarterly 
enrollment data for separate child health programs, Medicaid 
expansions, and regular Medicaid is necessary for HCFA to effectively 
administer CHIP, to understand its relative impact on rates of 
uninsurance among low-income children, and to

[[Page 60919]]

meet the changing needs of this population.
    Therefore, section 2107(b)(1) of the Act, as implemented in 
proposed Secs. 457.720 and 457.730, requires that the State plan 
contain certain assurances regarding the submission of reports to the 
Secretary. In addition, Sec. .16 of the Medicaid regulations specifies 
that a State plan must provide that the Medicaid agency will submit all 
reports required by the Secretary, follow the Secretary's instructions 
with regard to the format and content of those reports, and comply with 
any provisions that the Secretary finds necessary to verify and assure 
the correctness of the reports. These statutory provisions and 
regulations serve as our authority for proposing State expenditure and 
statistical reporting requirements at Sec. 457.740. (For information on 
forms that States should use in reporting expenditures and statistical 
data, see the proposed rule concerning State Children's Health 
Insurance Program Allotments and Payments to States, published in the 
Federal Register on March 4, 1999 (64 FR 10412). The final approved 
forms were published on December 2, 1998 (64 FR 66552).
    We would require that the State collect required data beginning on 
the date of implementation of the approved State plan. States must 
submit quarterly reports on the number of children under 19 years of 
age who are enrolled in separate child health programs, Medicaid-
expansion programs, and regular Medicaid programs (at regular FMAP) by 
age, income and service delivery categories. (Territories are excepted 
from the definition of ``State'' for the purposes of quarterly 
statistical reporting.) We also propose to require that thirty days 
after the end of the Federal fiscal year, the State must submit an 
unduplicated count for that Federal fiscal year of children who are 
enrolled in the separate child health program, the Medicaid expansion 
program and the Medicaid program as appropriate by age, service 
delivery, and income categories. Reporting an unduplicated count will 
provide insight into the continuity of coverage by clarifying the 
dynamics of program retention, dropout, and re-enrollment and 
facilitate designing and implementing more effective outreach policies.
    We propose that the age categories that must be used to report the 
data are: Under 1 year of age, 1 through 5 years of age, 6 through 12 
years of age, and 13 through 18 years of age. These age categories were 
chosen because they correspond with eligibility categories as well as 
with health status/health risk categories. States also are required to 
report by service delivery categories because it is important to 
understand the provider setting in which care is organized and 
delivered. The service delivery system categories that the State would 
be required to use are: Managed care, fee-for-service, and primary care 
case management.
    We propose that States must report income by using State-defined 
countable income and State-defined family size to determine Federal 
poverty level (FPL) categories. We propose that States that do not 
impose cost-sharing and States that only impose cost-sharing based on a 
fixed percentage of income (such as 2 percent) in their Medicaid-
expansion program or their separate child health program must report 
their CHIP and Medicaid enrollment by using two categories: At or below 
150 percent of the Federal poverty level (FPL) and over 150 percent of 
FPL. States that impose cost-sharing at defined levels (for example, at 
185 percent and over of FPL) in their Medicaid-expansion program and 
separate child health program would be required to report their CHIP 
and Medicaid enrollment by poverty level (that is, countable income and 
household size) categories that match their Medicaid-expansion program 
and separate child health program cost sharing categories.
    We propose to require enrollment reporting by countable family 
income as defined by the State consistent with the definition at 
proposed Sec. 457.10 rather than gross income. We are requiring the use 
of countable income because this maintains consistency with the program 
operational level definition of income and recognizes the wide 
variation that exists in how States compute enrollee family income and 
household size.
    We also propose to require enrollment reporting by income for 
Medicaid as well as for CHIP. Because the income of low-income families 
tends to vary, children's eligibility status may change quite 
frequently and many children may be required to shift back and forth 
between Medicaid and the Medicaid-expansion or separate child health 
program. Therefore, it is important to understand program enrollment by 
income levels.
    We propose that required standardized reporting be limited to 
expenditure data and enrollment data as reported by age, poverty level, 
and service delivery categories. We developed these proposed reporting 
requirements through extensive consultation with interested States and 
agencies within the Department and careful consideration of the need to 
document the progress of title XXI programs.
    We also believe States should, as a matter of sound administration 
of their programs, collect other relevant demographic data on enrollees 
such as sex, race, national origin, and primary language. Collection of 
such data will encourage design of outreach and health care delivery 
initiatives that address disparities based on race and national origin. 
It also will facilitate State compliance with Office for Civil Rights 
data needs in the event of complaint investigations or compliance 
reviews.
    In order to streamline State reporting requirements, we plan to 
develop an option for States to provide the needed CHIP data through 
existing statistical reporting systems in the future. We are currently 
evaluating possible modifications to the Medicaid Statistical 
Information System (MSIS), which captures State eligibility and claims 
records on a quarterly basis. The modifications will give States the 
option of using MSIS to supply the data elements that will meet the 
title XXI quarterly statistical reporting requirements. Under the 
implementation schedule for the FY 1999 MSIS changes, this option will 
not be available at an early enough date for States to report the data 
required by these regulations.
6. Annual Report (Sec. 457.750)
    Section 2108(a) of the Act provides that the State must assess the 
operation of the State child health plan in each fiscal year, and 
report to the Secretary, by January 1 following the end of the fiscal 
year, on the results of the assessment. In addition, this section of 
the Act provides that the State must assess the progress made in 
reducing the number of uncovered, low-income children. We would 
implement the statutory provision requiring assessment of the program 
and submission of an annual report at proposed Sec. 457.750(a).
    At Sec. 457.750(b), we set forth the proposed required contents of 
the annual report. Specifically, in accordance with the statute, the 
annual report must provide an assessment of the operation of the State 
plan in the preceding Federal fiscal year including the progress made 
in reducing the number of uncovered, low-income children. In addition, 
we propose to require that the State report on progress made in meeting 
other strategic objectives and performance goals identified by the 
State, successes in program design, planning, and implementation of the 
State plan, identify barriers to program development and 
implementation, and

[[Page 60920]]

the State's approach to overcoming these barriers. We also propose to 
require that the State report on the effectiveness of its policies in 
discouraging the substitution of public coverage for private coverage. 
Further, we would require that the annual report discuss the State's 
progress in addressing any specific issues, such as outreach, that it 
agreed to assess in its State plan. In accordance with section 2107(d) 
of the Act, we also propose that a State also must provide the current 
fiscal year budget update, including details on the planned use of 
funds and any changes in the sources of the non-Federal share of plan 
expenditures. We also propose that the State must identify the total 
State expenditures for family coverage and total number of children and 
adults covered by family coverage during the preceding Federal fiscal 
year. We believe that a State must report on these issues in order to 
appropriately assess the operations of the State plan under section 
2108(a) of the Act.
    We propose that, in order to report on the progress made in 
reducing the number of uncovered low-income children in the annual 
report, a State must choose a methodology to establish an initial 
baseline estimate of the number of low-income children who are 
uninsured in the State and provide estimates, using the chosen 
methodology, of the annual change in this number of low-income 
uninsured children at two poverty levels: 200 percent FPL and at the 
current upper eligibility level of the State's CHIP program. In making 
these estimates, a State would not be required to use the same 
methodology that it used in identifying the estimated number of CHIP 
eligibles in the State plan.
    We are requiring States to provide an estimate of the number of 
low-income, uninsured children at two poverty levels in order to gain 
insight into the progress made in providing low-income children with 
health insurance coverage. By requiring an estimate at the current 
upper eligibility level of the State's program, we can obtain data on 
the state interpretation of the number of low income children current 
targeted for enrollment. Over time, as some States choose to increase 
their upper eligibility levels, we will be able to identify how the 
number of targeted children has changed because of expanded income 
eligibility thresholds. By also requiring the State to provide a 
baseline estimate at the 200 percent FPL, we can obtain an aggregated 
state interpretation of the number of low income children in the United 
States. Title XXI generally defines low income children as children in 
families with income below 200 percent of the FPL. Most public policy 
and survey research experts also adopt this definition. Therefore, 
requiring the State to estimate the baseline number of uninsured 
children at this FPL will allow us to compare an aggregated State 
estimate with estimates obtained from other sources.
    We would require that a State base the annual baseline estimates on 
either : (1) Data from the March supplement to the Current Population 
Survey (CPS); (2) data from State-specific surveys; (3) other 
statistically adjusted CPS data; or (4) other appropriate data. We also 
propose that a State must submit a description of the methodology used 
to develop these estimates and the rationale for its use, including the 
specific strengths and weaknesses of the methodology, unless the State 
bases the estimate on March CPS data. We propose that once a State 
submits a specific methodology in the annual report for estimating the 
baseline numbers, the State must use the same methodology to provide 
annual estimates unless it provides a detailed justification for 
adopting a different methodology.
    We propose to give States the option of deciding how to estimate 
the number of uninsured children in the State, rather than requiring 
the use of one standard methodology. We note that making such estimates 
is inherently difficult and all the existing data sources have 
limitations. Traditionally, most national estimates of uninsured 
children have been based on the Bureau of Census March Current 
Population Survey (CPS). In fact, Congress used CPS estimates of the 
uninsured to allocate the CHIP funds available to each State. The CPS 
is a monthly survey of approximately 57,000 households in the United 
States. Each March the CPS includes supplemental survey questions about 
health insurance status. More specifically, individuals are asked 
whether they had any of various types of private or public health 
insurance in the previous year. Individuals who do not report insurance 
coverage are categorized as having been uninsured.
    One major reason for the CPS's widespread use is that it is the 
only data source with the capacity to generate State-by-State estimates 
of uninsured children. However, in States with small populations, CPS 
State-specific estimates rely on very small sample sizes and may not be 
reliable. Because of this concern, Congress used 3-year averages of CPS 
estimates to allocate CHIP funds to States.
    Despite its shortcomings, the CPS generally is relied upon by 
policy makers to provide an overall estimate of insurance status and 
insurance trends in the nation. Other major surveys that provide 
insight into the number of uninsured Americans include the Survey of 
Income and Program Participation (SIPP), the Medical Expenditure Panel 
Survey (MEPS), the Community Tracking Study, the National Health 
Interview Survey (NHIS) and the National Survey of American Families. 
However, these surveys produce estimates with a significant time lag, 
and several are conducted on an irregular or infrequent basis. For 
example, the Urban Institute conducted the National Survey of American 
Families in a sample of households in 13 States in 1997 and plans 
additional survey rounds in 1999 and 2001, but results of the 1997 
survey will not be available until Spring of 1999 and the results of 
the 1999 survey will not be available until late 2000.
    Although the National Center for Health Statistics has been 
developing the State and Local Area Integrated Survey (SLAITS) with a 
health care module, it currently remains unfunded and some 
methodological concerns have been raised about its applicability to 
CHIP. Therefore, we expect that most State-specific estimates of the 
number of uninsured children will use the CPS, a statistically adjusted 
CPS, or a State funded survey of the uninsured population. A well-
designed State-specific survey can maximize the opportunity to capture 
information that is most relevant and of greatest interest. However, 
cost and time considerations will limit the reliability and validity 
testing of State-specific surveys, and these limitations can increase 
concerns about methodological shortcomings. Because data sources and 
methodologies for estimating the number of uninsured children may vary 
significantly across States, State-by-State comparisons of the 
estimates may be difficult. We will continue to work with States to 
give us the ability to compare estimates and develop comparable data.
7. State Evaluations (Sec. 457.760)
    Proposed Sec. 457.760 discusses the requirement that States submit 
a comprehensive evaluation by March 31, 2000 that analyzes the progress 
and effectiveness of the State child health program. In the evaluation, 
a State must report on the operation of its Medicaid expansion program, 
separate child health program, or combination program. As specified in 
section 2108(b)(1)(B) of the Act, the State evaluation must include all 
of the following:
     An assessment of the effectiveness of the State plan in 
increasing the

[[Page 60921]]

number of children with creditable health coverage. In addition, the 
State must report on progress made in meeting other strategic 
objectives and performance goals identified by the State plan.
     An assessment of the State's progress in meeting other 
strategic objectives and performance goals identified by the State 
plan.
     A description and analysis of the effectiveness of 
elements of the State plan, including the following elements:

--The characteristics of the children and families assisted under the 
State plan, including age of the children and family income. The State 
also must report on children's access to, or coverage by, other health 
insurance prior to the existence of the State program and after 
eligibility for the State program ends (the child is disenrolled). As 
an optional strategy, the State also should consider reporting on other 
relevant characteristics of children and their families such as sex, 
ethnicity, race, primary language, parental marital status, and family 
employment status.
--The quality of health coverage provided under the State plan, 
including the results or plans to assess the results of any quality 
assurance and improvement, monitoring, and performance measurement 
process or other process that is used to assure the quality and 
appropriateness of care.
--The amount and level of assistance including payment of part or all 
of any premiums, copayments, or enrollment fees provided by the State.
--The service area of the State plan (for example, Metropolitan 
Statistical Area (MSA) or non-MSA).
--The time limits for coverage of a child under the State plan. As an 
optional strategy, the State should consider reporting the average 
length of time children are assisted under the State plan.
--The extent of substitution of public coverage for private coverage 
and the State's effectiveness in designing policies that discourage 
substitution.
--The State's choice of health benefits coverage, including types of 
benefits provided and the scope and range of these benefits, and other 
methods used for providing child health assistance.
--The sources of non-Federal funding used in the State plan.

     An assessment of the effectiveness of other public and 
private programs in the State in increasing the availability of 
affordable quality individual and family health insurance for children.
     A review and assessment of State activities to coordinate 
the CHIP plan with other public and private programs providing health 
care and health care financing, including Medicaid and maternal and 
child health services;
     An analysis of changes and trends in the State that affect 
the provision of accessible, affordable, quality health insurance and 
health care to children.
     A description of any plans the State has for improving the 
availability of health insurance and health care for children.
     Recommendations for improving the CHIP program.

G. Subpart H--Substitution of Coverage

1. Basis, Scope, and Applicability (Sec. 457.800)
    One of the fundamental principles of title XXI is that CHIP 
coverage should not supplant existing public or private coverage. Title 
XXI contains provisions specifically designed to ensure that States use 
CHIP funds to provide coverage only to uninsured children. These 
provisions maximize the use of Federal dollars. Specifically, title XXI 
requires that States ensure that coverage provided under CHIP does not 
substitute for coverage under either private group health plans or 
Medicaid. Section 2102(b)(3)(C) of the Act requires that State plans 
include descriptions of procedures used to ensure that the insurance 
provided under the State child health plan does not substitute for 
coverage under group health plans. A final provision in title XXI 
relating to substitution of coverage is in section 2105(c)(3)(B), which 
sets out the conditions for a waiver for the purchase of family 
coverage as described in proposed Sec. 457.1010. Under this provision, 
States must establish that family coverage would not be provided if it 
would substitute for other health insurance provided to children. In 
addition, title XXI contains three provisions aimed at preventing CHIP 
from substituting for current Medicaid coverage.
    First, section 2102(c)(2) of the Act requires States to describe 
procedures used to coordinate their CHIP programs with other public and 
private programs. Second, section 2105(d) of the Act includes 
``maintenance of effort'' provisions for Medicaid eligibility. That is, 
under section 2105(d) of the Act, a State that chooses to create a 
separate child health program cannot adopt income and resource 
methodologies for Medicaid children that are more restrictive than 
those in effect on June 1, 1997. Furthermore, title XXI also provides 
that a State that chooses to create a Medicaid expansion program, is 
not eligible for enhanced matching for CHIP coverage provided to 
children who would have been eligible for Medicaid in the State under 
the Medicaid standards in effect on March 31, 1997. Third, section 
2102(b)(3)(B) of the Act requires that any child who applies for CHIP 
must be screened for Medicaid eligibility and, if found eligible, 
enrolled in Medicaid.
    This subpart interprets and implements section 2102(b)(3)(C) of the 
Act regarding substitution of group health coverage and sets forth 
State plan requirements relating to substitution of coverage in general 
and specific requirements relating to substitution of coverage under 
employer-sponsored group health plans. These requirements apply to 
separate child health programs.
2. State Plan Requirements: Private Coverage Substitution 
(Sec. 457.805)
    The potential for substitution of CHIP coverage for private group 
health coverage exists because CHIP coverage costs less or provides 
better coverage than coverage some individuals and employers purchase 
with their own funds. Specifically, employers who make contributions to 
coverage for dependents of lower-wage employees could potentially save 
money if they reduce or eliminate their contributions for such coverage 
and encourage their employees to enroll their children in CHIP. At the 
same time, families that make significant contributions towards 
dependent group health coverage could have an incentive to drop that 
coverage and enroll their children in CHIP if the benefits would be 
comparable or better and their out-of-pocket costs would be reduced.
    In accordance with section 2102(b)(3)(C) of the Act, we propose at 
Sec. 457.805 to require that each State plan include a description of 
reasonable procedures that the State will use to ensure that coverage 
under the plan does not substitute for group health plans. We will 
review State CHIP plans for the procedures.
    The following is a discussion of the procedures relating to 
substitution of coverage under CHIP.
    State plan requirements to prevent substitution. States that 
operate a separate child health program will be required in their State 
plans to describe procedures to address the potential for substitution. 
There is general agreement that substitution is a more significant 
problem at higher levels of income where a greater proportion of 
children have access to coverage. Therefore, we propose to more closely 
scrutinize State

[[Page 60922]]

plans that expand eligibility for children in families with higher 
income levels.
    We would consider the following to be reasonable procedures to 
prevent substitution:
     States that provide coverage to children in families at or 
below 150 percent of the Federal poverty line (FPL) should, at a 
minimum, have procedures to monitor the extent of substitution of that 
coverage for existing private group health coverage. We believe that 
there is limited evidence of substitution at income levels below 150 
percent of FPL.
     States that provide coverage to children in families 
between 150 and 200 percent of FPL should, at a minimum, have 
procedures to study the incidence of substitution of that coverage for 
existing private group health coverage. In addition, States should 
specify in their State plans the steps they will take to prevent 
substitution in the event that the States' monitoring efforts discover 
substitution has occurred at an unacceptable level. In the event that 
the Secretary finds an unacceptable level of substitution, the State in 
question should implement the procedures to limit substitution that 
were identified in its State plan. We would apply a stricter standard 
for this higher income group because of the increased potential risk of 
substitution at this income level.
     States that provide coverage to children in families above 
200% of FPL should implement, concurrent with program implementation, 
specific procedures or a strategy to limit substitution. We will not 
prescribe a particular strategy, but will evaluate each State's 
strategy separately.
    We will ask States to assess the procedures to limit substitution 
in their evaluations submitted in March of 2000. States that monitor 
substitution in their plans will also submit information on 
substitution in their annual reports. We will examine any data on the 
effectiveness of States' procedures to prevent substitution of 
coverage. If our review of States' experience shows that substitution 
is occurring at an unacceptable rate, we may issue new requirements and 
require States to alter their plans at a future date.
    The other option that we considered was to require a set of 
specific procedures that each State would have to use to address 
substitution. We rejected this option because the statute authorizes 
States to design approaches to prevent substitution, not the Federal 
government. We also recognized that there is not substantial evidence 
favoring any specific approach to reduce the potential for 
substitution.
    We have received questions about applying substitution provisions 
to the Medicaid eligibility group for the ``optional targeted low-
income children'', which was added to section 1902(a)(10)(A)(ii)(XIV) 
of the Act in accordance with section 4911 of the BBA. We are not 
proposing to require States to apply eligibility-related substitution 
provisions such as periods of uninsurance to the ``optional targeted 
low-income children'' group, because we believe that such eligibility 
conditions are inconsistent with the entitlement nature of Medicaid. 
States that currently apply eligibility-related substitution provisions 
to optional targeted low-income children will need to come into 
compliance with this policy. We recognize that States expanding 
Medicaid to this group at higher income levels may be particularly 
concerned about the potential for substitution of coverage. We will 
review section 1115 demonstration requests for substitution provisions 
and consider those that are consistent with our proposed policy under 
title XXI. State proposals to apply substitution provisions must 
satisfactorily demonstrate how the proposal will test new ideas of 
policy merit and be formally evaluated, consistent with the research 
and demonstration objectives of section 1115 of the Act. States that 
have approved Medicaid demonstration projects under section 1115(a)(2) 
that currently apply substitution provisions, such as waiting periods, 
to expansion populations under this demonstration authority may 
continue to do so. Moreover, States may use mechanisms other than 
eligibility restrictions to discourage substitution of coverage.
3. Premium Assistance for Employer-Sponsored Group Health Plans: 
Required Protections Against Substitution (Sec. 457.810)
    We will particularly scrutinize CHIP programs under which States 
subsidize coverage under employer-sponsored group health plans, 
regardless of the income levels of the children who benefit from the 
subsidies, because we believe there is a greater potential for 
substitution of public funding for existing private funding for health 
insurance in this type of arrangement. First, we believe that State 
subsidies of private coverage under CHIP might increase the likelihood 
that families that purchase dependent coverage under employer-sponsored 
plans would drop that coverage and seek CHIP coverage if these families 
could obtain the same coverage under CHIP at lower cost. Lower income 
families may actually be more likely to drop their contribution to 
employer-sponsored coverage than higher income families because of the 
higher cost of insurance relative to their income. Second, employers 
with low-wage workers may have incentives to reduce or eliminate their 
premium contributions for dependent coverage if the CHIP assistance 
could replace that contribution.
    We propose under Sec. 457.810 to require any State that implements 
a separate child health program under which the State provides premium 
assistance for coverage under employer-sponsored group health plans, to 
adopt specific protections against substitution. A State must describe 
these protections in the State plan. We believe that without these 
additional protections, new Federal dollars will not extend coverage to 
as many uninsured, low-income children. The following four requirements 
must be met to protect against substitution:
     The child must not have been covered by employer-sponsored 
group health insurance during a period of at least six months prior to 
application for CHIP. States may require a child to have been without 
insurance for a longer period, but that period may not exceed 12 
months. We believe that any longer waiting period would conflict with 
the overall goal of title XXI to provide child health assistance to 
uninsured, low-income children. We do not believe a waiting period of 
longer than 12 months is a reasonable procedure to prevent substitution 
of coverage. Exceptions to the minimum period without insurance would 
be allowed if the prior coverage was involuntarily terminated. Newborns 
who are not covered by dependent coverage would not be subject to any 
such waiting period.
    We proposed this waiting period without employer-sponsored group 
health insurance to ensure that coverage is targeted to children in 
families that previously were unable to afford dependent coverage. We 
chose a minimum waiting period of 6 months because we felt that this 
time period would be long enough to significantly deter families from 
dropping existing coverage. The other option we considered was a 3 
month waiting period. We believe, however, that parents would be more 
willing to drop existing coverage and allow their children to be 
uninsured for this shorter time period in order to take advantage of 
the premium assistance coverage through CHIP.
    We believe that States that do not impose a 6-month waiting period 
must have a viable alternative to waiting periods, subject to approval 
by HCFA.

[[Page 60923]]

For example, a State could not simply reduce the waiting period from 
our minimum period of 6 months. It is important to note, however, that 
the waiting period is based only on coverage by employer-sponsored 
group health insurance, not CHIP or Medicaid coverage. If an otherwise 
eligible child does not meet the requirement for a minimum period 
without employer-sponsored group health coverage, the State can enroll 
the child in a separate State program or in Medicaid without purchasing 
employer-sponsored coverage for the interim waiting period, and can 
still consider the child uninsured for purposes of the waiting period. 
That is, coverage under a separate State program or Medicaid does not 
count for purposes of the waiting period.
     The employer must make a substantial contribution to the 
cost of family coverage, equal to 60 percent of the total cost of 
family coverage. We propose this requirement to discourage employers 
from lowering or eliminating their existing contributions for dependent 
coverage. We chose 60 percent based on several employer studies, which 
show that, on average, employers contribute roughly two thirds of the 
cost of family coverage. The Department is reluctant to permit a rate 
of contribution significantly lower than the 60 percent standard. 
States proposing an employer contribution rate below this standard must 
provide the Department with data that exemplify a lower average 
employer contribution in their State. The data must support the State's 
contention that the lower level of contribution will be equally 
effective in ensuring maintenance of statewide levels of employer 
contributions. We would also consider a somewhat lower level if a State 
had additional, effective, provisions to limit employers' ability to 
lower contribution levels or a State could show through specific data 
that the average employer contribution in the State is lower than 60 
percent. For example, one State demonstrated to us by using the Medical 
Expenditures Panel Survey (MEPS) that the contribution rate was lower 
than 60 percent (55 percent) in that State. For ease of administration, 
the State may establish a minimum dollar employer contribution or some 
other method that is roughly equivalent to the 60 percent requirement 
to assure that employers continue to pay a meaningful share of the 
costs in these programs. The employee must apply for the full premium 
contribution available from the employer. We propose this requirement 
to promote cost-effectiveness and maximum employer contribution. This 
employer contribution would reduce the CHIP contribution toward the 
premium.
     The State's premium assistance for employer-sponsored 
coverage must not be greater than the payment that the State otherwise 
would make on the child's behalf for other coverage under the State's 
CHIP program. We have proposed this requirement to ensure that the 
provision of child health assistance through employer-sponsored group 
health plans is cost-effective and that the State is not 
inappropriately providing premium assistance for coverage for the 
adults in a family.
     The State must collect information and evaluate the amount 
of substitution that occurs as a result of the subsidies and the effect 
of subsidies on access to coverage. To conduct this evaluation, States 
must assess the prior insurance coverage of enrolled children. States 
may obtain information on prior coverage through the enrollment 
process, separate studies of CHIP enrollees, or other means for 
reliably gathering information about prior health insurance status. 
States should consider collecting the following information on the 
application to evaluate the prevalence of substitution:

--When did you last have insurance? __ Never __ less than 3 months ago 
__ 3-6 months ago __ 6-12 months ago __ more than 12 months ago
--What type of insurance did you have most recently? __ Medicaid __ 
Employer-sponsored insurance __ Individual __ Other (e.g., CHAMPUS, 
Medicare , VA) [Note: More than one may apply.]
--What reason best characterizes why you don't have insurance today? __ 
No longer working for the employer who offered the insurance __ Can't 
afford insurance __ Employer dropped coverage __ Public benefits are 
better __ No longer need insurance __ Employer does not offer health 
insurance

These questions may need to be adapted by survey researchers to obtain 
the appropriate information. Proposed Sec. 457.750 and Sec. 457.760 
provide additional information on reporting and evaluation 
requirements. To determine the level of substitution, we encourage 
States to analyze the number of families who choose to enroll in CHIP 
who might have retained or bought private insurance had they not 
received CHIP funding for employer-sponsored insurance. We would ask 
States that choose to provide premium assistance for children's 
coverage through employer-sponsored group health plans to describe in 
their State plan and annual reports (described in proposed 
Sec. 457.750) their compliance with these guidelines. We would also ask 
States to discuss their adherence to these guidelines in their March 
31, 2000 evaluations. Based on the State evaluations submitted in March 
of 2000, we will reevaluate our position on these requirements for 
States that subsidize employer-sponsored group health plans.

H. Subpart I--Program Integrity and Beneficiary Protections

    We propose to add a new subpart I, that would specify the 
provisions necessary to ensure the implementation of program integrity 
measures and beneficiary protections within the State Children's Health 
Insurance Program. In addition, this subpart discusses the President's 
Consumer Bill of Rights and Responsibilities as it relates to the CHIP 
program. This subpart also describes how the intent of the GPRA can be 
upheld by including program integrity performance and measures as part 
of the State plans.
1. Basis, Scope, and Applicability (Sec. 457.900)
    We remain committed to our proactive efforts to preserve the 
integrity of our Federal and State government health care programs. 
Indeed, among HCFA's top priorities is to strengthen our ability to 
fight waste, fraud, and abuse in the Medicare and Medicaid programs and 
now in CHIP. We specify in Sec. 457.900, that sections 2101(a) and 
2107(e) authorize HCFA to set forth fundamental program integrity 
requirements and options for the States.
    Specifically, section 2101(a) of the Act specifies that the purpose 
of the Children's Health Insurance Program is to provide funds to 
States to enable them to initiate and expand the provision of child 
health assistance to uninsured, low-income children in an effective and 
efficient manner. We believe that assuring program integrity is an 
integral part of an effective and efficient CHIP program and we have 
used this section of the Act as part of the authority for this subpart. 
In addition, section 2107(e) of the Act lists specific sections of 
title XIX and title XI and provides that these sections apply to States 
under title XXI in the same manner they apply to a State under title 
XIX. Therefore, we include the provisions set forth in section 2107(e) 
in specifying the authority for this subpart.
    We note that the program integrity provisions contained in this 
proposed rule only apply to States that implement separate child health 
programs under the authority of section 2101(a)(1) of the

[[Page 60924]]

Act. States that implement a Medicaid expansion program are subject to 
the Medicaid program integrity provisions set forth in the Medicaid 
regulations at part 455, Program Integrity: Medicaid. While we are 
dedicated to preserving the inherent flexibility the Act provides to 
States that implement separate child health programs, we are proposing 
that States design programs that address the fundamental program 
integrity protections established for the Medicaid program. We believe 
this approach to program integrity will ensure continuity among States 
in implementing CHIP, while at the same time allowing States the 
opportunity to maximize efficiencies from existing administrative 
processes and practices that States have established for program 
integrity.
2. Definitions (Sec. 457.902)
    We have included five definitions for the purpose of this subpart. 
The terms ``contractor,'' ``managed care entity,'' and ``fee-for-
service entity'' relate to the entities with which States may contract 
in order to provide services to the CHIP population. We defined the 
terms ``contractor'' and ``managed care entity'' in this subpart 
because the two terms are used most significantly in reference to 
accountability for ensuring program integrity. We wanted to find a term 
that would encompass all health care related entities involved in 
service delivery to this population. We defined the term ``grievance'' 
to provide some context into the section requiring States to have 
written procedures for grievances and appeals. In addition, we defined 
the term ``State program integrity unit'' because separate child health 
programs may elect to create an organization whose purpose is to 
conduct program integrity activities. We created this term to have a 
uniform way of describing this organization for States that take the 
opportunity to develop a fraud and abuse prevention system for separate 
child health programs. Such a system could be similar to that of the 
Medicaid Fraud Control Units (MFCUs), but activities would be funded 
through Title XXI rather than Medicaid.
    Specifically, we propose that ``contractor'' means any individual 
or entity that enters into a contract, or a subcontract to provide, 
arrange, or pay for services under title XXI. This definition includes, 
but is not limited to, managed care organizations, prepaid health 
plans, primary care case managers, and fee-for-service providers and 
insurers.
    We propose that a ``managed care entity'' is any entity that enters 
into a contract to provide services in a managed care delivery system, 
including but not limited to managed care organizations, prepaid health 
plans, and primary care case managers. We propose that ``fee-for-
service entity'' means any entity that provides services on a fee-for-
service basis, including health insurance. We propose that ``State 
program integrity unit'' means a part of an organization designated by 
the State (at its option) to conduct program integrity activities for 
separate child health programs.
    Finally, we defined the term ``grievance'' to be consistent with 
the proposed Medicaid managed care regulations, and to give the States 
the opportunity to utilize the process that is already in place for the 
Medicaid program.
3. State Program Administration (Sec. 457.910)
    We are aware of the need to provide States with maximum flexibility 
as they implement their State plans, while balancing the need of the 
Federal government to remain accountable to Congress for the integrity 
of the program. We note that section 2101(a) of the Act allows 
flexibility by requiring States to provide child health assistance to 
uninsured, low-income children in an effective and efficient manner. 
Toward that end, we would specify in Sec. 457.910 that the State child 
health plan must provide for methods of administration that the 
Secretary finds necessary for the proper and efficient operation of the 
State child health program. We would also provide that the State's 
program must provide the safeguards necessary to ensure that 
eligibility as set forth in subpart C of these proposed regulations 
will be determined appropriately, and services will be provided in a 
manner consistent with simplicity of administration and with the 
provisions of proposed subpart D regarding benefits. We believe these 
requirements are relevant and consistent with the general program 
integrity protections that are common to most Federal and State health 
programs and provide States with flexibility in tailoring their 
individual CHIP programs.
4. Fraud Detection and Investigation (Sec. 457.915)
    Section 2107(e) references sections 1903(i)(2), and 1128A of the 
Act, which authorize certain fraud detection and investigation 
activities. Section 2107(e) states that these provisions apply under 
title XXI in the same manner as applied to a State under title XIX. 
Moreover, these provisions are cited as authority in the Medicaid 
regulations at part 455, subpart A--Medicaid Agency Fraud Detection and 
Integrity Program. We recognize that States that implement their State 
plans through the Medicaid expansion option are subject to all Medicaid 
program integrity requirements under part 455, Program Integrity: 
Medicaid. However, States that implement separate child health programs 
have more flexibility in designing and implementing program integrity 
procedures for their programs. In recognition of this flexibility, we 
considered three possible options to ensure that separate child health 
programs develop and implement adequate fraud detection and 
investigation processes and procedures.
    We considered declining to specify any fraud detection and 
investigation assurances, thereby providing States with full discretion 
in designing processes and procedures to meet their specific needs. 
However, we are not proposing this option because we do not believe it 
supports the Secretary's need for accountability and responsibility to 
Congress for CHIP evaluation and reporting requirements. We also 
considered proposing to require that all separate child health programs 
follow the same processes and procedures for fraud detection and 
investigation for the Medicaid program (and CHIP Medicaid expansions) 
specified under Sec. 455.13 regarding methods for identification, 
investigation and referral. However, while there are several advantages 
in maintaining a central focal point for all State Medicaid and CHIP 
activities, we did not propose this option because we believed that 
this approach was not sufficiently flexible for separate child health 
programs, which vary in structure from Medicaid. The compromise option 
that we are proposing is to require States to address, specifically, 
the Medicaid goals for fraud detection and investigation, but allow 
States to design specific procedures needed to meet the requirements of 
Sec. 455.13. We believe this option balances the need for maintaining 
State flexibility while establishing an acceptable minimum standard 
that will satisfy our need for accountability in the program. For 
example, under this option we would indicate that States may consider 
Medicaid agency criteria for identifying suspected fraud cases in CHIP 
and work in collaboration with the State program integrity unit, legal 
authorities, and law enforcement officials in referring suspected fraud 
and abuse cases.
    Specifically, we propose that the State must establish procedures 
for assuring program integrity and detecting fraudulent or abusive 
activity. We propose that HCFA and the States develop program integrity 
standards and

[[Page 60925]]

measures, such as payment error rate, acceptable levels of payment 
error, and the recovery of funds from erroneous payments. These 
examples of measures demonstrate Federal and State commitment to the 
principles and the intent of the GPRA. We would provide that the 
procedures must include, at a minimum, the methods and criteria for 
identifying and investigating suspected fraud and abuse cases that do 
not infringe on the legal rights of persons involved and afford due 
process of law. We also propose that the State may establish an 
administrative agency responsible for monitoring and maintaining the 
integrity of the separate child health program, which would be referred 
to as the ``State Program Integrity Unit.'' We further provide that in 
the event that a State chooses to establish a State Program Integrity 
Unit, the State must develop and implement procedures for referring 
suspected fraud and abuse cases to law enforcement officials. We would 
specify that law enforcement officials include, but are not limited to 
the Department of Health and Human Services Office of Inspector 
General(OIG), the Department of Justice (DOJ), the Federal Bureau of 
Investigation (FBI), and the State Attorney General's office.
5. Accessible Means To Report Fraud and Abuse (Sec. 457.920)
    We propose that States with separate child health programs must 
establish and provide access to a mechanism that facilitates 
communication between the State and the public for information exchange 
on instances of potentially fraudulent and abusive practices by and 
among participating contractors, and other entities. This communication 
mechanism may include a toll-free telephone number. We realize that 
toll-free service is the primary means for referring fraud and abuse in 
the Medicaid program, and that these toll-free services are unique and 
vary from State to State. While States that expand current Medicaid 
programs can utilize the existing toll-free services, we note that 
States with separate child health programs may establish similar toll-
free service as a viable method to provide the public with an 
accessible means for reporting fraud and abuse. For example, States are 
free to use discretion in establishing new toll-free services 
specifically designed for their enrollees, or in maximizing the 
benefits of an existing Medicaid fraud and abuse toll-free service by 
expanding these toll-free services to include fraud and abuse 
reporting. As evidenced by the Medicare, Medicare+Choice, and Medicaid 
programs, we believe that providing access to toll-free service for the 
reporting of potentially fraudulent and abusive practices is an 
integral part of any sound program integrity strategy.
6. Preliminary Investigation (Sec. 457.925)
    We would specify that if the State receives a complaint of fraud or 
abuse from any source, or identifies any questionable practices, the 
State agency must conduct a preliminary investigation or implement 
otherwise appropriate actions to determine whether there is sufficient 
basis to warrant a full investigation. We are proposing that the State 
has the option of creating a ``State program integrity unit'' for 
separate child health programs that would conduct fraud and abuse 
prevention activities parallel to the activities of Medicaid Fraud 
Control Units. States have flexibility to define the role, if any, that 
State program integrity units play. However, such activities must be 
funded with monies from the State's CHIP allotment. While we are 
proposing that preliminary investigations be conducted, we remain 
flexible with regard to the processes and procedures that separate 
child health programs may employ in conducting preliminary 
investigations. We would encourage States to work closely with the 
State Medicaid program integrity unit or units in structuring the 
approach to program integrity and developing procedures for conducting 
these investigations. Since the Medicaid and separate State program 
integrity units would be working on similar issues, sometimes on 
parallel investigations, the two units could reside in the same 
organization, entity, or division within the State. We believe this 
represents a feasible option to help States bolster their effectiveness 
and efficiency in conducting fraud and abuse investigations for 
separate child health programs.
7. Full Investigation, Resolution, and Reporting Requirements 
(Sec. 457.930)
    We would specify that the State must establish and implement 
effective procedures for investigating and resolving suspected and 
apparent instances of fraud and abuse. While we would preserve State 
flexibility in tailoring processes to best suit their specific State 
program needs, we note that States may model their approaches, to the 
extent necessary as determined by the State, after fraud and abuse 
investigation, resolution, and reporting congruent with the Medicaid 
State agency processes and procedures as outlined in Secs. 455.15, 
455.16, and 455.17 of the Medicaid regulations. For example, the State 
must work in conjunction with law enforcement officials and the 
Medicaid State program integrity unit. Some States may choose to adopt 
the existing Medicaid State agency process for fraud and abuse 
investigation, resolution, and reporting activities. However, MFCUs may 
only use Medicaid funding for fraud and abuse activities in States that 
provide child health assistance under a Medicaid expansion program. 
Medicaid funding cannot be used for fraud investigation activities in 
separate child health programs. This is because all MFCU professional 
staff being paid with Medicaid dollars must be full-time employees of 
the Medicaid fraud agency and devote their efforts exclusively to 
Medicaid fraud activities. However, to the extent that States want to 
allocate additional non-MFCU full-time staff, using CHIP dollars, to 
work exclusively on fraud and abuse investigation in separate child 
health programs, they may do so. States may choose to do this in 
conjunction with a State program integrity unit. We note that 
expenditures for this purpose would be subject to the 10 percent cap on 
administrative costs.
    States with separate child health programs may choose to implement 
distinct and separate processes for investigating and resolving fraud 
and abuse cases. In addition, some States may choose to use some of the 
existing processes in their Medicaid State agency together with new and 
separately developed fraud and abuse processes. Regardless of the 
approach that States choose, we believe it is imperative that fraud and 
abuse processes under a separate child health program maintain a sense 
of continuity including elements that are generally consistent with 
other State programs and that are familiar to State officials, law 
enforcement officials, and the general public. Moreover, maintaining 
this sense of commonality in the State's programs may help to mitigate 
the risk of increasing confusion among entities that report fraud and 
abuse, and may help to promote synergy between CHIP and other State 
programs regarding fraud and abuse investigation, resolution, and 
reporting activities.
    Therefore, we propose that the State must establish and implement 
effective procedures for handling suspected and apparent instances of 
fraud and abuse. We further propose that, once the State determines 
that a full investigation is warranted, the State may implement certain 
procedures. Specifically, we would provide that, to the greatest extent 
possible, the State must cooperate with and refer fraud and abuse cases 
to the State program integrity unit when requested to do so

[[Page 60926]]

by that unit. The State program integrity unit would also refer fraud 
cases to appropriate law enforcement officials.
8. Sanctions and Related Penalties (Sec. 457.935)
    Under the authority of section 2107(e) of the Act, and consistent 
with the requirements under Federal and State health care programs, we 
would specify that a State may not make payments for any item or 
service furnished, ordered, or prescribed under a separate child health 
program to any contractor who has been excluded from participating in 
the Medicare and Medicaid programs. We note that our authority stems 
from section 1128 of the Act regarding exclusion of certain individuals 
and entities from participation in Medicare and State administered 
health care programs. We assert this authority because section 1128 
specifically references the authority in sections 1124, 1126, 1128A, 
and 1128B of the Act, which also have been included under section 
2107(e) of the Act and apply to the Children's Health Insurance Program 
in the same manner as applied to a State's Medicaid program under title 
XIX. Accordingly, we would specify that the separate child health 
programs are subject to program integrity provisions set forth in the 
Act including: (1) Section 1124 relating to disclosure of ownership and 
related information; (2) section 1126 relating to disclosure of 
information about certain convicted individuals; (3) section 1128A 
relating to civil monetary penalties; and (4) section 1128B(d) relating 
to criminal penalties for acts involving Federal health programs. In an 
effort to promote enforcement of this subsection and to provide HCFA 
and the Secretary with critical fraud and abuse data, we would specify 
that the separate child health programs are subject to the requirements 
of section 1128E of the Act in the same manner as applied to the 
Medicare and Medicaid programs. In accordance with section 1128E of the 
Act, we would consistently specify that the State child health plan be 
subject to the requirements pertaining to the reporting of final 
adverse actions on liability findings made against health care 
providers, suppliers, and practitioners. In addition, States must share 
such information and data with the Office of the Inspector General in 
an effort to promote enforcement.
9. Procurement Standards (Sec. 457.940)
    Section 2101(a) of the Act requires that States provide services in 
an effective and efficient manner. We believe that Congress intended 
that title XXI funds be used to provide health services to the maximum 
number of uninsured children possible. Therefore, we have an obligation 
to ensure that States use these funds in a cost-effective manner. In 
order to meet this obligation, we have set forth provisions at proposed 
Sec. 457.940 regarding procurement standards. We note that these 
provisions do not include Federal oversight of provider payments. 
Rather, we propose to require that States set rates in a manner that 
most efficiently utilizes limited CHIP funds.
    We propose to require that States provide HCFA with a written 
assurance that title XXI services will be provided in an effective and 
efficient manner. The assurance must be submitted with the initial CHIP 
plan or, for States with approved CHIP plans, with the first request to 
amend the CHIP plan submitted to HCFA following the effective date of 
these regulations.
    If States contract with entities for CHIP services, they must 
provide for free and open competition, to the maximum extent possible, 
in the bidding of all contracts for title XXI services in accordance 
with the procurement requirements of 45 CFR 74.43. As a grant program, 
title XXI is subject to the requirements of 45 CFR part 74 (Uniform 
Administrative Requirements for Awards and Subawards to Institutions of 
Higher Education, Hospitals, Other Nonprofit Organizations, and 
Commercial Organizations; and Certain Grants and Agreements with 
States, Local Governments and Indian Tribal Governments), including 
part 74.43.
    Alternatively, States may base title XXI fee-for-service or 
capitated rates on public or private payment rates for comparable 
services. We believe that this option will give States maximum 
flexibility and will permit them to take advantage of local market 
forces in establishing CHIP rates. We propose that if a State finds it 
necessary to establish higher rates than would be established using 
either of the above methods, it may do so if those rates are necessary 
to ensure sufficient provider participation or to enroll providers who 
demonstrate exceptional efficiency or quality in the provision of 
services. This method will allow States the flexibility to establish 
higher rates to attract providers in under-served areas or to enroll 
more costly specialty providers.
    We also propose that States must provide HCFA with a description of 
the manner in which they develop CHIP rates. The description would 
include an assurance that the rates were competitively bid or an 
explanation of the applicability of the exceptions of 45 CFR part 74, a 
description of the public or private rates that were used to set the 
CHIP rates, if applicable, and/or an explanation of why rates higher 
than those that would be established using either of these two methods 
is necessary. The description must be submitted to HCFA when a State 
first determines its rates or, for approved CHIP plans, when it updates 
its rates or changes its reimbursement methodology.
10. Certification for Contracts and Proposals (Sec. 457.945)
    In addition to the proposed requirements in Sec. 457.950, which 
specify that contractors must certify payment data is accurate, 
truthful, and complete, we would also specify in Sec. 457.945 that 
entities that contract with the State must also certify the accuracy, 
completeness, and truthfulness of information in contracts, requests 
for proposals, information on subcontractors, and other related 
documents as specified by the State. We are proposing this requirement 
to meet our need for accountability under CHIP (as discussed in our 
rationale for proposed Sec. 457.915) and to address the concerns of the 
OIG, DOJ, and HCFA regarding program integrity assurances from its 
contractors.
11. Contract and Payment Requirements Including Certification of Data 
That Determines Payment (Sec. 457.950)
    We believe it imperative that CHIP payments for health care 
services are based on accurate and validated claims information and 
supporting data from managed care organizations and health care 
providers. As the majority of approved State child health plans offer 
some type of managed care delivery, we believe the issue of 
certification of payment data is important to ensuring program 
integrity in State child health plans. In addition, we share the 
concerns of our other Federal government partners that adequate steps 
must be taken by States to ensure the accuracy, completeness, and 
truthfulness of data by contracting entities.
    Therefore, at Sec. 457.950 we propose that when CHIP payments to 
managed care entities are based on data submitted by the MCE, the State 
must ensure their contracts with MCEs provide that the data include, 
but are not limited to, enrollment information and other information 
required by the State. We also provide that as a condition for 
receiving payment, the MCE must attest to the accuracy, completeness, 
and truthfulness of claims and payment data. We would provide that as a 
condition of participation in the

[[Page 60927]]

separate child health program, MCEs must provide the State with access 
to enrollee health claims data and payment data, as determined by the 
State and in conformance with the appropriate privacy protections in 
the State. We also propose that managed care contracts must include a 
guarantee that the MCE will not avoid costs for services, such as 
immunizations, covered in its contract by referring individuals to 
publicly supported resources (for example, clinics that are funded by 
grants provided under section 317 of the Public Health Service Act).
    We would provide that when CHIP payments are made to fee-for-
service entities, the State must establish procedures to ensure and 
attest that information on provider claim forms is truthful, accurate, 
and complete. We also propose that as condition of participation in the 
State plan, fee-for-service entities must provide the State with access 
to enrollee health claims data and payment data, as determined by the 
State.
12. Conditions Necessary To Contract as a Managed Care Entity (MCE) 
(Sec. 457.955)
    In addition to implementing program integrity protections at the 
State level, we would specify under Sec. 457.955 that the State must 
ensure MCEs have in place fraud and abuse detection and prevention 
processes. These processes would include mechanisms for the reporting 
of information to appropriate State and Federal agencies on any 
unlawful practices by subcontractors or enrollees of MCEs. In order to 
maintain privacy protections for enrollees, we propose that the 
reporting of information on enrollees would be limited only to 
information on violations of law pertaining to the actual enrollment, 
provision of, and payment for health services. Furthermore, we would 
provide that the State maintains the authority and the ability to 
inspect, evaluate and audit MCEs as determined necessary by the State 
in instances where the State determines that there is a reasonable 
possibility of fraudulent or abusive activity.
    We believe these requirements are necessary because the majority of 
States utilize managed care delivery for children's health benefits 
coverage. In addition, we believe that our proposed requirements for 
CHIP managed care contracting in the area of program integrity are 
similar to the program integrity assurances specified in Sec. 438.606 
of the proposed Medicaid managed care provisions, published on 
September 29, 1998 (63 FR 52022). However, we note that MCEs are 
accountable to the State, and not to the Federal government. We believe 
this approach allows MCEs and States maximum flexibility in developing 
mechanisms for reporting on violations of law that are most effective 
and efficient for the unique operation of the MCE, and are also in the 
best interest of the specific State child health plan.
    We propose that States that have Medicaid expansion programs and 
contract with MCEs under section 1903(m) of the Act may arrange for an 
annual independent, external review of the quality of services (EQR) 
delivered by each MCE as provided for under section 1932(c)(2) of the 
Act. States are permitted to draw down 75 percent FFP for this 
activity. States with separate child health programs are encouraged to 
provide for EQR of each MCE under contract to provide services to CHIP 
enrollees; however, the State must use funds within the 10 percent 
limit for administrative activities.
13. Reporting Changes in Eligibility and Redetermining Eligibility 
(Sec. 457.960)
    If a State chooses to require that individuals report changes in 
circumstances during an eligibility period, we propose to require that 
the State: (1) establish procedures to ensure that beneficiaries make 
timely and accurate reports of any changes in circumstances that may 
affect eligibility; and (2) promptly redetermine eligibility when it 
receives information about changes in a child's circumstances that may 
affect his or her eligibility.
    We believe that these two requirements are important in addressing 
our concern that children are appropriately enrolled in the program.
14. Documentation (Sec. 457.965)
    To ensure the integrity of the program, we propose to require that 
each applicant's record include certain facts that would, if necessary, 
support the State's determination of a child's eligibility. This 
documentation should be consistent with standard State laws and 
procedures.
15. Eligibility and Income Verification (Sec. 457.970)
    A key to successfully enrolling children in CHIP and Medicaid is a 
simple application and enrollment process. A burdensome application and 
enrollment process can be a significant barrier to successful 
enrollment. However, it is important that States have in place 
procedures designed to assure program integrity. We propose to require 
that States have in place procedures designed to assure the integrity 
of the eligibility determination process, and to abide by verification 
and documentation requirements applicable to separate child health 
programs under other Federal laws and regulations. We propose that 
States have flexibility to determine these documentation and 
verification requirements, and can use self-declaration of income and 
assets.
    States with separate child health programs are not required to use 
the Medicaid income and eligibility verification system (IEVS) for 
income and resources or to adopt a similar system.
    Nonetheless, the establishment of effective program integrity 
procedures as part of the eligibility determination process is an 
integral part of providing coverage under a separate child health 
program in an effective and efficient manner as required under section 
2101(a), and of ensuring accountability to State and Federal executive 
and legislative authorities. We encourage States to adopt procedures 
that assure accountability but do not create barriers in the 
application and enrollment process. For example, a State that provides 
for self-declaration by the applicant of income and assets could 
conduct random post-eligibility verification or adopt other procedures 
designed to assure program integrity.
    The State could also use the Medicaid IEVS verification system, or 
some variation of it. For eligibility requirements that pose particular 
program integrity problems, the State could require verification or 
documentation as part of the eligibility determination process.
    We would also allow a State to terminate the eligibility of a 
beneficiary for ``good cause'' other than failure to continue to meet 
the requirements for eligibility. An example of ``good cause'' would be 
if any information or other action causes the beneficiary to fail to 
meet the requirements of income and eligibility verification as 
reasonably determined by the State. For example, a reasonable basis for 
termination would exist in a case where the applicant provided false 
information about an eligibility requirement. Beneficiaries terminated 
for good cause must be given a notice of the termination decision that 
sets forth the reasons for termination and provides a reasonable 
opportunity to appeal the termination decision as specified in section 
457.985.
16. Redetermination Intervals in Cases of Suspected Enrollment Fraud 
(Sec. 457.975)
    Among our highest priorities is to ensure that a State child health 
assistance program actually provides health assistance to the 
individuals

[[Page 60928]]

Congress designed the program to serve. That is, we want the State to 
ensure that children applying for CHIP, but who are eligible for 
Medicaid or any other form of health assistance, are enrolled in those 
programs if appropriate. Furthermore, if a State suspects enrollment 
fraud, the State should periodically disenroll from the program 
beneficiaries that no longer meet the eligibility standards under 
section 2102 of the Act for any reason including a change in age, 
income, or source of other health coverage. If a State suspects 
enrollment fraud, the State may, at its own discretion, perform 
eligibility redeterminations at any frequency that the State considers 
to be in the best interest of the CHIP program.
17. Verification of Enrollment and Provider Services Received 
(Sec. 457.980)
    Integral to a sound program integrity strategy is the ability to 
ensure that services billed by contractors are actually received by 
enrollees. Under the Medicaid program, this is accomplished in large 
part by the claims processing system used by States, the Medicaid 
Management Information System (MMIS). The MMIS captures provider and 
service information on claims and provides individual notices, within 
45 days of the payment of claims to all or a sample group of enrollees 
receiving the services. These requirements and procedures under the 
Medicaid program are specified under Secs. 455.20 and 433.116 
accordingly. While States with Medicaid expansion programs are subject 
to these Medicaid requirements, we want to ensure that separate child 
health programs have procedures in place to verify receipt of provider 
services. We recognize that some States may choose to use the existing 
claims processing system for Medicaid expansion programs. However, some 
States may choose to use separate systems for the separate child health 
program. In these cases, we would specify that the program must have 
established systems and procedures for verifying enrollee receipt of 
provider services. In addition, we would specify that the State must 
establish and maintain systems to distinguish and report enrollee 
claims for which the State receives enhanced FMAP payments under 
section 2105 of the Act. We believe that the requirements specified 
above would serve as a fundamental component of other program integrity 
activities in this proposed rule, including the fraud detection and 
investigation efforts as discussed under Secs. 457.915, 457.925, 
457.930.
18. Enrollee Rights To File Grievances and Appeals (Sec. 457.985)
    Section 2101 of the Act allows the Secretary to provide health 
assistance in an effective and efficient manner that promotes the best 
interests of enrollees. Under this authority, we would specify that the 
State must allow enrollees the right to due process in circumstances 
where their health care services were denied, suspended, terminated or 
reduced by the State or by its providers. Specifically, we propose that 
States must afford individuals the opportunity to file grievances and 
appeals regarding denial, suspension or termination of eligibility; 
reduction or denial of services provided for in the State's plan; and 
disenrollment for failure to pay cost-sharing. Sections 457.365, 
457.495, and 457.560 respectively require that this section applies in 
these specific circumstances.
    We would specify that separate child health programs must establish 
and maintain written procedures for grievances that are consistent with 
the health industry practices currently in effect in the particular 
State. Such procedures must include a guarantee that the grievance and 
appeals processes will be resolved within a reasonable period of time. 
An example of a reasonable period of time would be as proposed in the 
Medicaid managed care rule (63 FR 52022), a period of 30 calendar days 
or 72 hours in an expedited case.
    We would further require that these procedures for grievances meet 
the State rules and regulations for grievances and appeals that are 
currently in effect for health insurance issuers (as defined in section 
2791(b) of the Public Health Service Act) within the State. We would 
require these provisions for grievances and appeals on a State-specific 
basis because we realize that procedures may vary from State to State, 
and States may also modify their own requirements as circumstances 
warrant. Furthermore, we encourage States to use the grievance 
procedures as described in part , subpart E regarding fair hearings for 
Medicaid applicants and recipients, and the Medicaid grievance and 
appeal procedures for Medicaid managed care entities, which were set 
forth in the Medicaid Managed Care proposed rule (63 FR 52022).
    The State should maintain effective, efficient, and timely 
processes for grievances, appeals, and determinations for its 
enrollees. In addition, the State child health program and its 
providers should ensure that all enrollees receive written information 
about the grievance and appeal procedures that are available to them. 
We believe that assuring CHIP enrollees of their grievance rights is 
consistent with the Administration's ongoing efforts to institute the 
Consumer Bill of Rights and Responsibilities for all Federal health 
programs.
    We are concerned that beneficiaries be afforded the right to make 
informed decisions about their medical care free from any form of 
financial incentive or conflict of interest involving their provider of 
care that could directly or indirectly affect the kinds of services or 
treatment offered or provided. Therefore, we propose that the State 
must guarantee, in all contracts for coverage and services, beneficiary 
access to information related to actions which could be subject to 
appeal in accordance with the ``Medicare+Choice'' regulation at 
Sec. 422.206, which discusses the prohibition of ``gag rules'' and 
protection of enrollee-provider communications, and Sec. 422.208 and 
Sec. 422.210(a) and (b) which discuss physician incentive limitations 
and requirements for information disclosure to beneficiaries. We remain 
committed to ensuring that appropriate actions are taken to guarantee 
the protection of enrollee rights regarding their health care services 
under the Medicare, Medicaid, and CHIP programs.
19. Privacy Protections (Sec. 457.990)
    Privacy protections are an essential part of an effective and 
efficient program because these protections ensure beneficiary trust 
and honest communication with caregivers and payers. Furthermore, 
protecting the rights of beneficiaries is of paramount importance in 
our overall efforts to manage and oversee Federal and State health care 
programs. This can be evidenced through recent activities including the 
Administration's commitment to the Consumer Bill of Rights and 
Responsibilities, as well as HCFA's focus on beneficiary rights as 
demonstrated in the recent Medicare+Choice regulations set forth at 
part 422 and the proposed Medicaid managed care regulations published 
on September 29, 1998 (63 FR 52022). For example, the Medicare+Choice 
regulations at Sec. 422.118 and the proposed Medicaid managed care 
regulations at Sec. 438.324 set forth provisions that address enrollee 
privacy protections in the areas of ensuring original medical records 
and information are released only in accordance with Federal or State 
law, or court orders or subpoenas; safeguarding the privacy of 
information; maintaining accurate and timely information and

[[Page 60929]]

records; abiding by all State and Federal laws concerning 
confidentiality and disclosure of information; protecting the 
confidentiality and privacy of minors in accordance with Federal and 
State law; prohibiting the access to or tampering with records by 
unauthorized individuals; ensuring that enrollees have timely access to 
their records and to information that pertains to them; and ensuring 
that MCOs release records and information only to authorized 
individuals.
    In light of these concerns, and our obligation under section 
2102(a)(1) to ensure that States provide child health assistance in an 
effective and efficient manner, we would specify that the State plan 
must assure that the program complies with the title XIX provisions as 
set forth under part , subpart F--Safeguarding Information on 
Applicants and Recipients. Moreover, we would provide that the State 
plan must assure the protection of information and data pertaining to 
beneficiaries by providing that all contracts will include guarantees 
that:
     Original medical records are released only in accordance 
with Federal or State law, or court orders or subpoenas;
     Information from or copies of medical records are released 
only to authorized individuals;
     Medical records and other information are accessed only by 
authorized individuals;
     Confidentiality and privacy of minors is protected in 
accordance with applicable Federal and State law;
     Enrollees have timely access to their records and to 
information that pertains to them; and
     Beneficiary information is safeguarded by following all 
Federal and State laws that pertain to confidentiality and disclosure 
of mental health records, medical records, and all other applicable 
health and other information specific to enrollees.
    Furthermore, we continue to be concerned about privacy issues as 
more States utilize electronic media such as the Internet to transmit 
enrollee health care information. For example, some States have 
indicated their intent to allow for the completion of CHIP applications 
on-line, to allow for the downloading of completed applications and 
patient enrollment records by authorized users, and to allow on-line 
access to eligibility systems for qualified providers. For States 
choosing to pursue these types of activities, we would specify that 
State child health plans sending data to HCFA through the Internet will 
be subject to HCFA's Internet Security Policy regarding confidentiality 
of data transmissions (found on HCFA's website at ``www.hcfa.gov''). 
Data transmissions between providers, health plans, and the State would 
also be subject to these requirements. In addition, we would specify 
that State child health plans are subject to any Federal requirements 
as well as requirements set forth by their State regarding information 
disclosure, including use of the Internet to transmit CHIP data between 
and among the State and its providers. Data transmissions between 
providers, health plans, and the State would be subject to these 
requirements also. Finally, we would provide that the State must assure 
that the program will be operated in compliance with all applicable 
State and Federal requirements to protect the confidentiality of 
information transmitted by electronic means, including the Internet.
20. Overview of Beneficiary Rights (Sec. 457.995)
    In February 1998, the President directed the Department of Health 
and Human Services, along with the Departments of Labor, Defense and 
Veterans' Affairs and the Office of Personnel Management, to use their 
regulatory and administrative authority to bring their health programs 
into compliance with the Consumer Bill of Rights and Responsibilities, 
as proposed by the President's Advisory Commission on Consumer 
Protection and Quality in the Health Care Industry.
    Since that time, HHS has moved aggressively to strengthen existing 
consumer protections under the Medicare and Medicaid programs. In 
particular, in developing regulations implementing the Medicare and 
Medicaid managed care provisions of the Balanced Budget Act of 1997, we 
have been able to meet or substantially address all of the rights 
identified in the Consumer Bill of Rights and Responsibilities. The 
Interim Final Rule for Medicare, published on June 26, 1998 (63 FR 
34968), has largely taken effect as of January 1999, with the 
implementation of the Medicare+Choice program. The Notice of Proposed 
Rulemaking for Medicaid managed care, published on September 29, 1998 
(63 FR 52022), expanded and codified protections for Medicaid 
beneficiaries enrolled in managed care arrangements. However, this 
regulation will not be fully implemented until the States incorporate 
the changes into their new contracts, one year after the publication of 
the final rule, which is expected to be issued in late 1999.
    The Children's Health Insurance Program was also established by the 
Balanced Budget Act of 1997. The protections that apply to the general 
Medicaid program also apply to States that expand existing Medicaid 
programs as a means of implementing CHIP. In considering how to apply 
the President's directive for consumer protections in separate child 
health programs, we have attempted to balance the Administration's 
desire to ensure consumer rights for the broadest population with the 
need to preserve State flexibility. In this spirit, we have identified 
the following rights for enrollees in separate child health programs. 
We welcome public comments on how best to address the Consumer Bill of 
Rights and Responsibilities or other needed beneficiary protections in 
this regulation.
 Information Disclosure
    The Consumer Bill of Rights and Responsibilities provides that 
consumers should receive accurate, easily understood information and 
assistance in making informed health care decisions about their health 
plans, professionals, and facilities.
    Section 2102(c) of the Act requires that State plans include 
procedures ``to inform children of the availability of child health 
assistance and to assist in enrolling children.'' We implement this 
provision of the Act at Sec. 457.65--Duration of State plans and plan 
amendments, and Sec. 457.110--Enrollment assistance and information 
requirements, and Sec. 457.525--Public notice of cost sharing 
requirements.
 Choice of Providers and Plans
    The State must provide applicants and enrollees with assistance in 
making informed health care decisions (Secs. 457.110 and 457.985(e)) 
and have methods to assure appropriate and timely procedures to monitor 
and treat enrollees with complex and serious medical conditions, 
including access to specialists (Sec. 457.735). We note that this 
provision is similar to the provisions set forth in the proposed 
Medicaid Managed Care regulation.
     Access to Emergency Services
    The Consumer Bill of Rights and Responsibilities provides that 
consumers should have access to emergency health services. Health plans 
should provide payment when a consumer presents to an emergency 
department with acute symptoms of sufficient severity--including severe 
pain--that a ``prudent layperson'' could reasonably expect the absence 
of medical attention to result in placing that consumer's health in 
serious jeopardy, serious impairment to bodily

[[Page 60930]]

functions, or serious dysfunction of any bodily organ or part.
    Section 2102(a)(7)(B) of the Act expressly requires that States 
include in their CHIP plans methods ``to assure access to covered 
services, including emergency services.'' We have proposed to apply in 
the benefits section (Sec. 457.402) the definitions of emergency 
services, emergency medical condition, and post-stabilization services, 
which were included in the President's directive and proposed in the 
Medicaid managed care regulation. In addition, the proposed regulation 
text at Sec. 457.735--State plan requirement: State assurance of the 
quality and appropriateness of care, further addresses the right to 
emergency services.
 Participation in Treatment Decisions
    The Consumer Bill of Rights and Responsibilities would give 
consumers the right and responsibility to participate in treatment 
decisions and to be represented if not able to do so. Enrollees in 
separate child health programs have the opportunity to make such 
decisions and to receive the pertinent information (Sec. 457.110). In 
addition, States must prohibit gag rules and establish principles for 
disclosure of physician financial arrangements that could affect 
treatment decisions (Sec. 457.985(e)).
 Respect and Nondiscrimination
    The Consumer Bill of Rights and Responsibilities sets forth that 
consumers have the right to considerate, respectful care that is free 
of discrimination in the delivery of health care services, as well as, 
marketing and enrollment practices based on race, ethnicity, national 
origin, religion, sex, age, mental or physical disability, sexual 
orientation, genetic information, or source of payment.
    We have proposed to apply general grant requirements to both States 
and contractors (health plans) that preclude discrimination based on 
race, sex, ethnicity, national origin, religion, or disability. The 
proposed regulation text addresses this right at Sec. 457.130--Civil 
rights assurance.
 Confidentiality of Health Information
    The Consumer Bill of Rights and Responsibilities provides that 
consumers should be permitted to communicate with health care providers 
in confidence and to have the confidentiality of their individually-
identifiable health care information protected. Consumers also have the 
right to review and copy their own medical records and request 
amendments to their records.
    We believe that privacy protections are essential to effective and 
efficient operation of a separate child health program, and have 
proposed to require such protections at proposed Sec. 457.990--Privacy 
protections. In addition, we would require that the State program 
comply with other applicable Federal and State laws used to enforce 
confidentiality. These proposed requirements are based on our authority 
under section 2102(a)(1) of the Act to require that child health 
assistance is furnished in an effective and efficient manner. We 
believe protecting the confidentiality of patient information is 
essential to ensure that families will be willing to enroll eligible 
children and seek benefits under the program. We would require the 
program to be in compliance with all applicable State and Federal rules 
concerning confidentiality.
     Grievances and Appeals
    The Consumer Bill of Rights and Responsibilities provides that a 
fair and efficient process should be in place for resolving differences 
with health plans and other health care providers, including a system 
of timely internal and external review of grievances and a meaningful 
process for addressing complaints.
    Section 2103 specifies the parameters of the coverage that must be 
part of a CHIP plan. In order to ensure that this coverage is actually 
furnished as specified in that section, and in the approved State plan, 
we propose to require that States and their contractors afford 
beneficiaries a ``fair and efficient'' appeals process, consistent with 
rules applicable to health insurance issuers in the State.
    The regulation also proposes at Sec. 457.985 that States must have 
written processes in place and notify enrollees of those processes and 
rights in accordance with procedures used by health insurance issuers 
in the State and that States must ensure that resolution is reached 
within a reasonable time period (for example, 30 days or 72 hours in an 
expedited case).

I. Subpart J--Allowable Waivers: General Provisions

1. Basis, Scope, and Applicability (Sec. 457.1000)
    At proposed Sec. 457.1000 we would provide that this subpart 
interprets and implements the requirements for a waiver to permit a 
State to exceed the 10 percent cost limit on expenditures under section 
2105(c)(2)(B) and to permit the purchase of family coverage under 
section 2105(c)(3) of the Act. This subpart applies to a separate child 
health program and to a Medicaid expansion program only to the extent 
that the State claims administrative costs under title XXI and seeks a 
waiver of limitations on such claims in light of a community-based 
health delivery system.
2. Waiver for Cost-Effective Coverage Through a Community-Based Health 
Delivery System (Sec. 457.1005)
    Proposed Sec. 457.1005 would interpret and implement section 
2105(c)(2)(B) of the Act regarding waivers authorized for cost-
effective alternatives. As stated above, on March 4, 1999, we published 
a proposed regulation that set forth financial requirements for the 
CHIP program (64 FR 10412). In Sec. 457.618 of that proposed rule, we 
set forth requirements to implement sections 2105(c)(1) and (c)(2)(A) 
of the Act, which contain provisions related to the 10 percent limit on 
certain CHIP expenditures. In Sec. 457.1005, we specify the proposed 
requirements for a State wishing to obtain a waiver of the 10 percent 
limit on expenditures not used for child health assistance in the form 
of health benefits coverage that meets the requirements of Sec. 457.410 
of these proposed regulations. This section also clarifies the extent 
to which the State will be allowed to exceed the 10 percent limitation 
on expenditures in order to provide child health assistance to targeted 
low-income children under the State plan through cost-effective, 
community-based health care delivery systems. This waiver was designed 
to create flexibility for States to provide child health coverage using 
community-based delivery systems. A State could use the waiver, for 
example, to provide child health coverage for special groups, such as 
children who are homeless or who have special health care needs. 
Congress did not intend that the waiver be used simply to allow for 
more administrative spending or outreach services under section 
2105(a)(2), and the statute does not provide this flexibility.
    To receive payment for cost effective coverage through a community-
based health delivery system under an approved waiver, we propose that 
the State must demonstrate that--
     Such coverage meets the coverage requirements of section 
2103 of the Act and subpart D of these proposed regulations; and
     The cost of coverage through the community-based health 
care delivery system, on an average per child basis, does not exceed 
the cost of coverage that

[[Page 60931]]

would otherwise be provided under the State plan.
    A State may establish a community-based health delivery system 
through contracts with health centers receiving funds under section 330 
of the Public Health Service Act or with hospitals receiving 
disproportionate share payment adjustments under section 1886(d)(5)(F) 
or section 1923 of the Act. However, these are not the only types of 
community-based health delivery systems. We believe a community-based 
delivery system would include a network of providers that has a 
contract with the State to provide care under title XXI and that 
traditionally serves the population of targeted low-income children. A 
State may define a community-based delivery system to meet the specific 
needs and resources of a community. A State must ensure that its 
community-based delivery system (either through direct provision or 
referral) can provide all appropriate services to targeted low-income 
children in accordance with section 2103 of the Act. In addition, all 
participating community-based providers must comply with all other 
title XXI provisions.
    It is not necessary for States to serve all of their CHIP enrollees 
through a cost-effective, community-based delivery system in order to 
receive an approved waiver. A State may receive a waiver for each 
system or network delivering care in a particular geographic area in 
order to avail itself of cost-effective health coverage alternatives.
    We propose that an approved waiver will remain in effect for two 
years. A State may reapply three months before the end of the two-year 
period.
    We propose that, notwithstanding the 10 percent limit on 
expenditures described in proposed Sec. 457.618, if the cost of 
coverage of a child under a community-based health delivery system is 
equal to or less than the cost of coverage of a child under the State 
plan, the State may use the cost savings for--
     Child health assistance to targeted low-income children 
and other low-income children other than the required health benefits 
coverage, health services initiatives, and outreach; or
     Any reasonable costs necessary to administer the State 
Children's Health Insurance Program.
    The following example clarifies this permissible use of cost 
savings. In a given State, assume that a child has three health benefit 
plans under title XXI from which to choose. Two options are title XXI 
managed care plans that have annual capitated rates of $1000 and $1020 
respectively. One option is a plan offered through a community-based 
delivery system at an annual cost of $900. By enrolling a child in the 
community-based plan, the State has saved at least $100. If there are 
4,000 children enrolled in the community-based provider system, the 
State has saved at least $400,000. As a result, the State could exceed 
the 10 percent cap by, and receive match for, an additional $400,000. 
If the 10 percent cap on expenditures in this State had been estimated 
to be $1,000,000 without the waiver, then the waiver under this 
scenario would increase the estimated cap to $1,400,000.
3. Waiver for Purchase of Family Coverage (Sec. 457.1010)
    A State must apply for a family coverage waiver when any title XXI 
funds are used to purchase coverage for adult family members in 
addition to targeted low-income children. For example, the State may 
wish to purchase employer sponsored group health coverage for a child 
but the employer does not offer a policy that covers only the 
child(ren) in addition to the employee. In this case, the State will be 
subsidizing the cost of both children and adults and, therefore, the 
State must apply for a family coverage waiver. In the case where 
employers offer ``tiered'' coverage where a State can identify the cost 
of one, two or more dependents, the State may use title XXI funds to 
only cover a child and, therefore, does not need to seek a family 
coverage waiver. In addition, if the State has created a special child-
only option in which employers may participate and, as a result, is 
providing coverage for children only, a family coverage waiver would 
not be needed. In this context, the State simply needs to identify in 
its State plan how it intends to provide this coverage. All other 
requirements of title XXI must be met.
    We are seeking comments on whether the benefits specified in title 
XXI also apply to adults in a family coverage waiver. For example, if a 
State offers ``wraparound coverage'' to bring an employer's benefits up 
to the title XXI standards, we would seek comments as to whether the 
State should be required to offer this additional coverage to adults 
under the family waiver.
    Proposed Sec. 457.1010 would implement section 2105(c)(3) of the 
Act under which the Secretary may allow a State to purchase family 
coverage under a group health plan or health insurance coverage that 
includes coverage of targeted low-income children. As set forth in 
subpart A of this proposed rule, ``group health plan'' has the same 
meaning as given the term under section 2791 of the Public Health 
Service Act. The term means an employee welfare benefit plan (as 
defined in section 3(1) of ERISA) to the extent that the plan provides 
medical care (as defined in section 2791(a)(2) of the Public Health 
Service Act and including items and services paid for as medical care) 
to employees or their dependents (as defined under the terms of the 
plan) directly or through insurance, reimbursement or otherwise.
    Also as set forth in subpart A, ``health insurance coverage'' has 
the same meaning as given the term under section 2791 of the Public 
Health Service Act. It means benefits consisting of medical care 
(provided directly through insurance or reimbursement or otherwise) 
under any hospital or medical service policy or certificate, hospital 
or medical service plan contract, or HMO contract offered by a health 
insurance issuer.
    There is no statutory definition of family coverage for the 
purposes of this subpart. We are therefore soliciting input from 
commenters on the definition of ``family'' for purposes of this 
subpart. We believe ``family'' may be defined differently for different 
subparts of this regulation and are requesting input on this issue. A 
specific definition may be important for this subpart because it may 
define what types of adult family members can receive health benefits 
coverage under a family coverage waiver. However, we may not want to 
define ``family'' in this subpart since it is also possible that a 
group health plan offered by an employer may include a definition of 
``family'' for coverage purposes.
    Based on the language of section 2105(c)(3) of the Act, we propose 
at Sec. 457.1010 that a waiver for family coverage will be approved by 
the Secretary if--
     Purchase of family coverage is cost-effective under the 
standards described in Sec. 457.1015 of this subpart;
     The State will not purchase such coverage if it would 
otherwise substitute for health insurance coverage that would be 
provided to such children but for the purchase of family coverage; and
     The coverage for the child otherwise meets the 
requirements of this part.
4. Cost-Effectiveness (Sec. 457.1015)
    This section defines cost-effectiveness and describes the 
procedures for establishing cost-effectiveness for the purpose of a 
waiver for the purchase of family coverage.
    We propose that cost-effectiveness means that the cost of 
purchasing family

[[Page 60932]]

coverage under a group health plan or health insurance coverage that 
includes coverage for targeted low-income children is not greater than 
the State's cost of obtaining such coverage only for the eligible 
targeted low-income children involved. Stated more simply, cost 
effectiveness means that the cost of providing family coverage 
(including coverage for the parents) under title XXI is equal to or 
less than the cost of covering only the uninsured children.
 Cost Comparisons
    The following is a discussion of our proposed requirements 
regarding methods for cost comparison the State may use to demonstrate 
cost-effectiveness. A State may demonstrate cost-effectiveness by 
comparing the cost of family coverage that meets the requirements of 
Sec. 457.1010 and 457.1015 of this subpart, to the cost of coverage 
only for the targeted low-income children under the health benefits 
packages offered by the State under the State plan for which the child 
is eligible. We have not identified specific alternatives for cost 
comparison for family coverage under CHIP. However, we recognize the 
growing interest of States to utilize this option in order to keep 
families together under one health plan as this practice may result in 
increased access to and utilization of preventive and other necessary 
health services for children. Therefore, we are willing to examine 
alternatives and invite comment on additional methods to demonstrate 
cost-effectiveness. We note that the most likely option for meeting the 
cost-effectiveness standard is the purchase of family coverage through 
an employer sponsored group health plan because the employer is 
subsidizing a large part of the costs. States must meet the 
requirements designed to prevent substitution of coverage (as specified 
in subpart H), when employer-sponsored coverage is purchased.
    Illustration of cost comparison. The cost of employer-sponsored 
family coverage (for the employee and two children) is $600. The 
employer pays 60 percent of the cost, which is $360, and the employee 
therefore pays $240. Under the State's CHIP plan there is a $10 monthly 
premium for each child with a maximum premium amount of $30 per family. 
The State pays $150 per child per month for the State CHIP coverage 
less the premiums paid by the family. The State would apply the cost-
effectiveness test by calculating the cost to the State of the family 
coverage, which would be $220 for the employee and two children 
($240-$20 premium = $220), and comparing that cost to the cost of the 
State CHIP coverage for the children, which would be $280 
($150 x 2-2 x $10 premium = $280). The comparison of $220 compared to 
$280 shows that family coverage costs $60 less per month than CHIP 
coverage only for the children. When there is such a savings the State 
could buy family coverage through the employer or provide CHIP coverage 
to the uninsured child or children only.
    Thus far, no State has proposed to provide cost-effective family 
coverage other than through employer-sponsored coverage. However, the 
proposed regulation provides flexibility so that, if a State develops 
another type of cost-effective coverage, we may consider that 
alternative. We are also working with States to identify other 
feasible, cost-effective models. We have identified this method through 
the State plan approval process as one that States have proposed for 
applying the cost-effectiveness test that meets Federal requirements. 
We also note that the cost comparison must be made to the health 
benefits package the child is actually eligible for if a State offers 
different packages of services to different populations of children. 
For example, a State may offer children with special health care needs 
additional services under a separate health benefits package. The cost 
comparison would have to be made to this separate health benefits 
package if the cost effectiveness test was being done for a special 
needs child.
 Cost-Effective Comparison to Actual Coverage Available in the 
State
    We propose that the determination of cost-effectiveness must be 
made based on costs for health benefit coverage that is actually 
available for purchase in the State. States should not use hypothetical 
premium rates and family sizes in demonstrating cost-effectiveness. For 
example, if a State proposed to demonstrate cost-effectiveness based on 
the assumption that the average family consists of 3.14 family members 
(1.7 children and 1.44 adults), we would not approve of this approach 
as further explained. Using this example and assumptions, the cost to 
cover 1.7 children in a State employees' health plan would be $407.13 
(if the total family premium was $752 divided by 3.14 family members, 
times 1.7 children). The State asserts it can cover the entire family 
under its separate child health program for $367.38 (3.14 family 
members times $117 per member per month). This comparison shows that it 
costs $39.75 less to cover the family ($407.13 to cover 1.7 children 
minus $367.38 to cover the family). However, this would not be 
acceptable because it is a hypothetical plan and not a plan that a 
family can actually buy for its children in the State. In addition, we 
believe demonstrations of cost-effectiveness must examine the actual 
family sizes, rather than average family size.
    With respect to applying the cost-effective test, we are requiring 
States to make available to HCFA documentation on how much was spent on 
family coverage and report how many children and adults were covered. 
We are proposing that the State may base its demonstration of the cost-
effectiveness of family coverage on an assessment of cost-effectiveness 
of family coverage for individual families, done on a case-by-case 
basis, or for family coverage in the aggregate.
    We are proposing to require the State to apply the cost-
effectiveness test annually. If an annual assessment of the cost-
effectiveness of family coverage in the aggregate reveals that it is 
not cost-effective, the State must begin assessing cost-effectiveness 
on a case-by-case basis.
 Cost-Effectiveness of Family Coverage on a Case-by-Case Basis
    If a State chooses to apply the cost-effectiveness test on a case-
by-case basis, the State must compare the cost of coverage for each 
family to the cost of coverage for only the child or children in the 
family under CHIP.
    This approach favors larger families because most insurers offer 
one rate for family coverage regardless of the number of children in 
the family. Also, this approach may be resource and labor intensive for 
some States.
 Cost-Effectiveness of Family Coverage in the Aggregate
    If a State chooses to apply the cost-effective test in the 
aggregate, the State must provide an estimate of the projected total 
costs of the family coverage program compared to the cost the State 
would have incurred for covering just the children in those families 
under the publicly available CHIP plan. Subsequently, on an annual 
basis, the State must compare the total cost of covering all families 
for whom the State has purchased family coverage to the cost the State 
would have incurred covering just the children in those families under 
the publicly available CHIP plan as outlined below. If the aggregate 
cost of family coverage was less than the cost to cover the children in 
the publicly available program, then the family coverage would be 
considered cost-effective. If the State determines through its annual

[[Page 60933]]

assessment of cost effectiveness that family coverage is not cost-
effective in the aggregate, then the State must begin to apply the 
cost-effectiveness test on a family-by-family basis.
    Under this approach, States would report how much was spent on 
family coverage and report how many children and adults were covered. 
This test would be applied retrospectively and would represent an 
aggregate cost of family coverage across all plans. The aggregate cost 
would be verified by the claims submitted by the State. No additional 
FFP above the cost-effective amount will be paid for these children and 
families if the test shows that family coverage is not cost-effective 
for the period. This option requires States clearly to separate the 
costs of the family coverage from the costs of coverage under the rest 
of the program.
    Using the retrospective approach may potentially create some 
difficulties for States in calculating cost-effectiveness (for example, 
timely submission of State data, State systems may not be able to 
produce necessary data, vagaries of using historical data that may not 
capture recent changes). We will work with States to develop guidance 
on how to conduct retrospective assessments of cost-effectiveness.

K. Expanded Coverage of Children Under Medicaid and Medicaid 
Coordination

    The proposed regulations discussed in this subsection are changes 
to Medicaid regulations found in parts, 433, and 435. This subpart 
applies to Medicaid only.
    Section 4911 of the Balanced Budget Act of 1997 (BBA '97), Public 
Law 105-33, enacted on August 5, 1997 and amended by section 162 of the 
DC Appropriations Act, Public Law 105-100, enacted on November 19, 
1997, established a new optional categorically needy eligibility group 
known as ``optional targeted low-income children.'' The law provides 
for an enhanced Federal matching rate to be used to determine the 
Federal share of State expenditures for services to children eligible 
under this group. The BBA also provides for States to receive this 
enhanced Federal matching rate for services to children who meet the 
definition of ``optional targeted low-income children'' and whom the 
State covers by expanding an existing Medicaid eligibility group (for 
example, poverty-related children). ``CHIP'' itself is not a new or 
separate Medicaid eligibility group. Medicaid expansion programs under 
CHIP, which may be referred to as ``M-CHIP,'' consist of the new 
optional Medicaid eligibility group just mentioned, or coverage of 
optional targeted low-income children through an expansion of an 
existing Medicaid eligibility group, or a combination of the two. 
Section 4912 of the BBA added a new section 1920A to the Act to allow 
States to provide services to children during a period of presumptive 
eligibility. Although these proposed regulations are related to title 
XXI and CHIP, they constitute changes to the Medicaid program. All 
existing Medicaid regulations also continue to apply.
1. Enhanced FMAP Rate for Children
    Section 4911 the BBA as amended by section 162 of Public Law 105-
100, authorized an increase in the Federal medical assistance 
percentage (FMAP) used to determine the Federal share of State 
expenditures for services provided to certain children. Federal 
financial participation for these children will be paid at the enhanced 
FMAP rate determined in accordance with Sec. 457.622 if certain 
conditions are met. The State's allotment under title XXI will be 
reduced by payments made at this enhanced FMAP (see Sec. 457.616).
    In order to be eligible to receive Federal payments at the enhanced 
FMAP, a State must:
    (1) Not adopt income and resource standards and methodologies for 
purposes of determining a child's eligibility under the Medicaid State 
plan that are more restrictive than those applied under the State plan 
in effect on June 1, 1997;
    (2) Have an approved title XXI State plan in effect;
    (3) Have sufficient funds available under the State's title XXI 
allotment to cover the payments involved; and
    (4) Maintain a valid method of identifying services eligible for 
the enhanced FMAP.
    For purposes of determining whether an income or resource standard 
or methodology is more restrictive than the standard or methodology 
under the State plan in effect on June 1, 1997, we would compare it to 
the standard or methodology that was actually being applied under the 
plan on June 1, 1997. For purposes of this section, a pending Medicaid 
State plan amendment that would establish a more restrictive standard 
or methodology, but that has an effective date later than June 1, 1997, 
would not be considered ``in effect'' on June 1, 1997, regardless of 
when it was submitted. Also, although a State that adopted more 
restrictive income or resource standards or methodologies than those in 
effect on June 1, 1997 would not be eligible for enhanced FMAP, we 
believe that, if a State drops an optional eligibility group entirely, 
this prohibition against receiving enhanced FMAP does not apply.
    The enhanced FMAP discussed in this section will be used to 
determine the Federal share of State expenditures for services provided 
to three groups of children. The first group for whom the enhanced FMAP 
is available is the new optional eligibility group of ``optional 
targeted low-income children'' described in the new Sec. 435.229.
    The second group is children who meet the definition of ``targeted 
low-income children'' and who would not be eligible under the Medicaid 
policies in effect under the State plan on March 31, 1997. Thus, a 
State need not necessarily adopt the new optional group of ``optional 
targeted low-income children'' to receive the enhanced FMAP for 
targeted low-income children. The State may receive the enhanced FMAP 
for these children by covering them under expansions of existing 
Medicaid groups, as long as the children meet the definition of 
``targeted low-income children,'' including the requirement that they 
be uninsured. (The State may claim its regular FMAP for children with 
creditable health insurance who are covered under the expansion.)
    The third group for whom the State may receive the enhanced FMAP 
consists of children born before October 1, 1983 who would not be 
eligible for Medicaid under the policies in the Medicaid State plan in 
effect on March 31, 1997, but to whom the State extends eligibility by 
using an earlier birth date in defining eligibility for the group of 
poverty-level-related children described in section 1902(l)(1)(D) of 
the Act. Under the law, the enhanced FMAP is available for services to 
children in this third group even if they have creditable health 
insurance. We note that, as the statutory phase-in of poverty-level-
related children under age 19 proceeds, the numbers of children in this 
third group will diminish; by October 1, 2002, all the children in this 
group will be included in the mandatory group of children described in 
section 1902(l)(1)(D) of the Act, and State spending for services to 
them matchable at the State's regular FMAP.
    Concerning the second group above, we do not believe that Congress 
intended to provide enhanced FMAP for services provided to children 
who, although not eligible under the policies in effect in the Medicaid 
State plan in effect on March 31, 1997, became eligible after that date 
due solely to a Federal statutory change or a scheduled periodic cost-
of-living increase. We believe that such changes are inherent

[[Page 60934]]

in the State plan policies in effect on March 31, 1997. Enhanced FMAP 
will be available only when children are made eligible because a State 
elects to adopt an optional policy.
    Federal payments made at the enhanced FMAP rate reduce the title 
XXI appropriation in accordance with section 2104(d) of the Act. Thus, 
HCFA must apply such payments against a State's title XXI allotment 
until that allotment is exhausted. After the title XXI allotment is 
exhausted, expenditures will be matched at the State's regular FMAP 
rate.
2. Optional Targeted Low-income Children
    Section 4911 of the BBA amended the Social Security Act by adding a 
new section 1902(a)(10)(A)(ii)(XIV) to establish an optional 
categorically needy group of optional targeted low-income children. The 
optional eligibility group is defined as ``optional targeted low-income 
children described in section 1905(u)(2)(C) of the Act.'' Section 
1905(u)(2)(C), as added by section 4911 of the BBA, was subsequently 
revised by section 162 of Public Law 105-100 and, in the process, 
``(C)'' was changed to ``(B)''. In an apparent oversight, no conforming 
change was made to section 1902(a)(10)(A)(ii)(XIV) of the Act to refer 
to section 1905(u)(2)(B), rather than to 1905(u)(2)(C). Because we 
believe this was simply a drafting error, we consider the reference to 
1905(u)(2)(C) in this section to be a reference to 1905(u)(2)(B).
    Section 1905(u)(2)(B), defines an optional targeted low-income 
child as a child who meets the definition of a targeted low-income 
child in section 2110(b)(1) of the Act (see Sec. 457.310(a)) and who 
would not qualify for Medicaid under the Medicaid State plan as in 
effect on March 31, 1997.
    The very specific cross reference in section 1905(u)(2)(B) to 
section 2110(b)(1) for the definition of an optional targeted low-
income child indicates that the Medicaid definition of an optional 
targeted low-income child is based only on section 2110(b)(1). Thus, 
the Medicaid definition does not include the exclusions described in 
section 2110(b)(2) that would by contrast apply in a separate child 
health program. Specifically, the exclusions from the definition of 
targeted low-income children that apply in a separate child health 
program but not in Medicaid are (1) children who are inmates of public 
institutions and patients in institutions for mental diseases (IMD), 
and (2) children of State employees, as outlined in section 2110(b)(2).
    Under normal Medicaid eligibility rules, there is no eligibility 
exclusion of children who are inmates of a public institution, patients 
in an institution for mental diseases, or members of a family eligible 
for health benefits coverage under a State health benefits plan on the 
basis of a family member's employment with a public agency in the State 
(although restrictions on Federal financial participation may apply 
under some circumstances). Restrictions on Federal financial 
participation under Medicaid, however, apply for services provided to 
inmates of public institutions and patients in institutions for mental 
diseases. This means no payment can be made for services to individuals 
residing in an IMD. We note that under Medicaid, FFP is available for 
services furnished to children in psychiatric facilities for 
individuals under age 21 that meet certain standards and conditions 
(see Sec. 441.150ff).
    The definition of optional targeted low-income child at section 
1905(u)(2)(B) of the Act excludes a child who would have been eligible 
for Medical assistance under the State plan on March 31, 1997 on any 
basis including medically needy. This exclusion applies to all children 
eligible for Medicaid including those eligible under States' medically 
needy groups. We propose to interpret the exclusion in the following 
manner. Children who are eligible for Medicaid only after paying a 
spenddown would not be excluded, because they are not eligible under 
title XIX until the spenddown is met. However, a child who is medically 
needy without a spenddown is eligible for Medicaid and therefore cannot 
be an optional targeted low-income child. Thus, if a child would have 
qualified for Medicaid as medically needy without a spenddown under the 
State's March 31, 1997 Medicaid State plan, even if not eligible under 
current rules, the child could not be covered as an optional targeted 
low-income child.
    The regular Medicaid financial methodologies that govern 
eligibility of children in a State must also be used to determine 
whether a child in that State is eligible under the new optional group 
of optional targeted low-income children. These are the income and 
resource methodologies under the State's AFDC plan in effect on July 
16, 1996. However, a State may use the authority of Sec. 1902(r)(2) to 
adopt less restrictive methods of determining countable income and 
resources for this group.
    States that choose to cover the group of optional targeted low-
income children are not required to provide coverage to all children 
who meet the definition of an optional targeted low-income child. As 
with the current Medicaid program, eligibility can be limited to a 
reasonable group or reasonable groups of such children. We do not 
consider it reasonable to limit a group by geographic location because 
of the requirement in section 1902(a)(1) of the Act that a State plan 
be in effect in all political subdivisions of the State. Also, we do 
not consider it reasonable to limit a group by age other than those 
specified by Congress in section 1905(a)(1) and referenced in section 
1902(a)(10)(A)(ii). We believe that if Congress intended to allow use 
of age to establish a reasonable category, the statutory language would 
not have specified any ages. We note that in the case of the optional 
targeted low-income children, a State does not have the option to have 
a reasonable category of children under age 21 or 20, because the group 
itself is limited to children under age 19. Although a State may not 
define a reasonable group by age, the income standard used to determine 
eligibility under the optional targeted low-income children's group 
because it is related to income standards used for existing poverty 
level groups, may be different for infants, children under age 6, and 
children who have attained age 6 but have not attained age 19, if the 
State's Medicaid applicable income levels for these age groups differ. 
Eligibility standards for optional targeted low-income children must be 
uniform throughout the State. A State is required to provide all 
services covered under the plan, including EPSDT services, to optional 
targeted low-income children and apply all regular Medicaid rules, 
including those pertaining to immigration status.
    We are not proposing to require States to apply eligibility-related 
substitution provisions such as periods of uninsurance to the 
``optional targeted low-income children'' group because we believe that 
such eligibility conditions are inconsistent with the entitlement 
nature of Medicaid.
    A State is obligated to continue to provide services to eligible 
optional targeted low-income children after the title XXI allotment is 
exhausted, unless the Medicaid State plan is amended to drop the group 
of optional targeted low-income children. Once the title XXI allotment 
is exhausted, Medicaid matching funds are available for these children 
at the regular matching rate rather than the enhanced rate.

[[Page 60935]]

3. Furnishing a Social Security Number
    Section 1137(a)(1) of the Social Security Act requires applicants 
and recipients of Medicaid to furnish the State with their social 
security number(s) as a condition of eligibility. While the United 
States Supreme Court in Bowen v. Roy, 476 U.S. 693 (1986) upheld this 
requirement, it did so in a plurality decision in which some of the 
Justices held that the challenge was moot since the claimant had 
obtained a social security number. That decision did foreclose a 
challenge to the requirement by an individual who had not already 
secured a social security number and had religious objections to 
applying for a number. The Religious Freedom Restoration Act of 1993 
also raised questions about the requirements of section 1137(a) of the 
Act in these cases. Thus, in 1995 HCFA announced a policy which permits 
States to obtain or assign alternative identifiers to eligible 
individuals who object to obtaining an SSN on religious grounds. This 
policy was adopted in order to enable States to administer Medicaid in 
the most efficient manner possible. While, in 1997, a portion of the 
Religious Freedom Restoration Act was held to be unconstitutional, that 
portion only involved the applicability of that Act to State and local 
officials. The proposed rule seeks to accommodate the purpose of 
section 1137(a) with the Constitution's protection of freedom of 
religion and the dictates of the 1993 Act by permitting alternative 
identifiers.
4. Exemption From the Limitation on FFP
    Section 162 of Public Law 105-100 amended section 1903(f)(4) of the 
Act to add the optional group of targeted low-income children and other 
children for whom enhanced FMAP is available under Sec. 456.622 (or 
would be available except for the fact that the title XXI allotment is 
exhausted) to the list of those who are exempt from the limitations on 
FFP found in section 1903(f). All previous citations in section 1903(f) 
were references to Medicaid eligibility groups, whereas this new 
provision adds not an eligibility group but children on whose behalf 
enhanced FMAP is available.
    With certain exceptions, section 1903(f) limits FFP to families 
whose income does not exceed 133\1/3\ percent of the amount that would 
ordinarily be paid to a family of the same size without any income or 
resources, in the form of money payments under the program of Aid to 
Dependent Children. As explained in Sec. 435.1007, this provision 
effectively limits the use of the authority under section 1902(r)(2) to 
expand eligibility through the use of more liberal income and resource 
methodologies for those groups that are not exempt from the limitation. 
However, to the extent that section 162 of Public law 105-100 resulted 
in the exemption from the FFP limitation of children other than those 
in the optional eligibility group of optional targeted low-income 
children or in other groups already exempt from the FFP limitation, a 
conflict with the comparability requirements of section 1902(a)(17) of 
the Act and Sec. 435.601(d)(4) of the Medicaid regulations would arise. 
We would continue to require that all children within a given group be 
treated comparably. Therefore, the FFP limitations described in 
Sec. 435.1007 would continue to apply to all children who are covered 
as medically needy, and to those covered under an optional 
categorically needy group other than the new group of optional targeted 
low-income children or the optional categorically needy groups which 
are already exempt. However, Federal matching may be available at the 
enhanced rate for some children in the group.
5. Presumptive Eligibility for Children
    Section 4912 of the BBA added a new section 1920A to the Act to 
allow States to provide services to children during a period of 
presumptive eligibility. Under section 1920A, services are available to 
children under age 19 prior to a formal determination of Medicaid 
eligibility. Under the statutory provisions, a qualified entity, as 
defined in section 1920A(b)(3)(A), determines whether a child is 
presumptively eligible for Medicaid on the basis of preliminary 
information about the child's family income. At the time of the 
determination, the qualified entity must refer the child to the 
Medicaid agency. The State must provide the qualified entity with 
application forms for Medicaid and information about how to assist in 
completing and filing an application for regular Medicaid. If an 
application for regular Medicaid is filed, the Medicaid agency will 
establish whether or not the child is eligible for regular Medicaid. We 
propose to require that if a State chooses to provide services to 
children during a period of presumptive eligibility, the State must 
make presumptive eligibility available Statewide to all children. We 
considered whether to allow States to limit the availability of 
presumptive eligibility to certain jurisdictions or certain groups of 
children but found no indication in the statute or legislative history 
that such a limitation should be allowed. Although we consider 
presumptive eligibility a special status, we believe that the 
requirements pertaining to Statewideness and comparability which apply 
to the provision of regular Medicaid should apply here as well.
    In some respects, the provisions of section 1920A mirror the 
provisions related to section 1920, which provide for presumptive 
eligibility for pregnant women. Where this is the case, we propose 
policies associated with section 1920A that are consistent with the 
March 23, 1994 notice of proposed rulemaking related to presumptive 
eligibility for pregnant women (59 FR 13666). We make one exception. 
The proposed regulations pertaining to presumptive eligibility for 
pregnant women would require that States use gross income alone to 
determine presumptive eligibility. We propose here that in determining 
presumptive eligibility for children, States be permitted to request 
some additional information and to apply simple disregards as explained 
later in this section.
    In accordance with section 1920A(b)(2), the period of presumptive 
eligibility begins on the day that a qualified entity makes a 
determination that a child is presumptively eligible. The child then 
has until the last calendar day of the following month to file a 
regular Medicaid application with the Medicaid agency. If the child 
does not file a regular Medicaid application by that last day, 
presumptive eligibility ends on that last day. If the child files an 
application for regular Medicaid, presumptive eligibility ends on the 
date that a determination is made on the regular Medicaid application.
    Although section 1920A places no restrictions on the number of 
periods of presumptive eligibility for a child, we believe it is 
unreasonable to provide a child with unrestricted number of periods of 
presumptive eligibility. Such a policy would effectively allow 
continuous eligibility for children who never file an application for 
regular Medicaid and are never determined to be eligible for regular 
Medicaid. Also, by reinforcing the ability to establish immediate short 
term eligibility for medical assistance, such an approach could be 
counter productive to efforts to promote the use of preventive and 
primary care and effective management of care for children. At the same 
time, we also believe that it is unreasonable to limit a child to one 
period of presumptive eligibility in a lifetime. Therefore, we propose 
to allow States to establish reasonable methods of limiting the number 
of periods of presumptive

[[Page 60936]]

eligibility that can be authorized for a child in a given time frame. 
We are particularly seeking comments on what would constitute a 
reasonable limitation and whether specific limitations on the number of 
periods of presumptive eligibility should be imposed by regulation.
    In implementing the provisions of section 1920A that specify that 
determinations of presumptive eligibility must be based on family 
income, we would provide limited flexibility to States in calculating 
income for this purpose. We would also allow States to require that 
qualified entities request and use general information other than about 
income, as long as the information is relatively simple to obtain and 
is requested in a fair and nondiscriminatory manner. In States that 
adopt the most conservative approach to presumptive eligibility, the 
qualified entity would use gross family income. The qualified entity 
would compare family income to the highest income eligibility standard 
established under the plan that is most likely to be used to establish 
the regular Medicaid eligibility of a child of the age involved. As a 
result, there may not be a single income standard for all children. For 
example, the standards for presumptive eligibility might be 133 percent 
of the Federal poverty level (FPL) for children under 6 and 100 percent 
FPL for children age 6 through 19, if these were the highest standards 
applicable to children of the specified ages under a State's Medicaid 
plan.
    We would specifically allow a State to require that qualified 
entities apply simple income disregards, such as the general $90 earned 
income disregard. However, we would not allow a State to require that 
qualified entities deduct the costs of incurred medical expenses in 
order to reduce income to the allowed income level. We believe that 
Congress intended by the use of the term ``applicable level'' to 
require qualified entities to make simple calculations and not 
complicated adjustments of income such as those involved in applying 
spenddown rules or in disregarding certain types of income. To impose 
detailed and complicated calculations on qualified entities would be 
administratively burdensome and contrary to efficient administration 
because of the short-term nature of presumptive eligibility and because 
no eligibility requirements other than income need be considered.
    We do not believe that we are imposing an undue hardship on a child 
by not allowing spenddown or not disregarding certain income. If a 
qualified entity decides that the child does not ``appear'' to meet the 
income criteria, the child has a right to apply for regular Medicaid 
and have a formal eligibility determination made. We are specifically 
seeking comments on whether States should be allowed to require that 
qualified entities make certain adjustments to gross income and ways 
that these adjustments could be limited.
    Section 1920A(b)(3)(A) of the Act defines qualified entity as an 
entity that:
    (1) Furnishes health care items and services covered under the 
approved Medicaid State plan and is eligible to receive payments under 
the approved plan; or
    (2) Is authorized to determine eligibility of a child to 
participate in a Head Start program under the Head Start Act; or
    (3) Is authorized to determine eligibility of a child to receive 
child care services for which financial assistance is provided under 
the Child Care and Development Block Grant Act of 1990; or
    (4) Is authorized to determine eligibility of an infant or child to 
receive assistance under the special nutrition program for women, 
infants, and children (WIC) under section 17 of the Child Nutrition Act 
of 1966; and
    (5) Is determined by the agency to be capable of making 
determinations of presumptive eligibility for children. Section 
1920A(b)(3)(B) authorizes the Secretary to issue regulations further 
limiting those entities that may become qualified entities. We have not 
proposed any further limitations at this time. We have also found no 
authority to expand those entities that may be designated qualified 
entities.
    In accordance with section 1920A(c)(1), we would require States to 
provide qualified entities with regular Medicaid application forms and 
information on how to assist parents, guardians, and other persons in 
completing and filing such forms. As provided by section 1920A(c)(3), 
the application provided may be an application developed by the State 
for use by children who wish to apply as low-income children described 
in section 1902(l)(1) of the Act. We would not require States to 
provide any other application forms. The date that the regular Medicaid 
application form is received by the Medicaid State agency is the 
Medicaid filing date for Medicaid eligibility unless State agency staff 
are located on site at the qualified entity, in which case the Medicaid 
filing date is the date that the onsite State agency staff person 
receives the completed form. However, even though State agency staff 
can receive and process applications for regular Medicaid, they cannot 
make presumptive eligibility determinations unless they themselves meet 
the definition of ``qualified entity'' under section 1920A(b)(3) of the 
Act.
    Since we are considering presumptive eligibility a special status, 
we propose not to apply to a decision on presumptive eligibility the 
notification requirements that a State must meet when it makes a 
decision on a regular Medicaid application. Existing regulations under 
Secs. 435.911 and Sec. 435.912 and part , subpart E, require Medicaid 
agencies to send Medicaid applicants written notice within a specified 
period of time of the agency's decision on a regular Medicaid 
application, and if eligibility is denied the reasons for the denial, 
the regulatory basis for it, and an explanation of rights to a hearing. 
Although we propose not to apply these requirements to presumptive 
eligibility determinations, we are proposing to require that the 
qualified entity inform the parent or custodian of the child, in 
writing, of the presumptive eligibility decision at the time of the 
determination. In a case of a denial of presumptive eligibility, the 
qualified entity would be required to inform the parent or custodian of 
the child, in writing, of the reason for the denial and his/her right 
to apply for regular Medicaid.
    In accordance with section 1920A(c)(2) of the Act, we propose to 
require the qualified entity to provide written information to the 
parent or custodian of a child who is determined presumptively 
eligible, indicating that a regular Medicaid application must be filed 
on the child's behalf by the last day of the following month if the 
child wishes to continue to receive services after that date. The 
qualified entity must also inform the parent or custodian of the child, 
in writing, that if an application for regular Medicaid is not filed on 
the child's behalf by the last day of the month following the month of 
the determination of presumptive eligibility, the presumptive 
eligibility will end on that date. However, if an application is filed 
on the child's behalf, the child will remain presumptively eligible 
until a determination of the child's eligibility for regular Medicaid 
has been made. Under section 1920A(c)(2), the qualified entity also 
must notify the State agency within 5 working days after the date on 
which the entity determines that the child is presumptively eligible.
    We considered defining ``custodian'' for purposes of presumptive 
eligibility but have decided to allow States flexibility to determine 
who is a child's custodian. We expect that some States

[[Page 60937]]

will consider any interested adult who has the child in his/her care at 
the moment to be the custodian for purposes of presumptive eligibility 
under section 1920A. We expect that other States will only consider an 
adult to be a child's custodian if the adult has a legal responsibility 
for the child.
    Because we do not consider presumptive eligibility to be 
eligibility for Medicaid per se, and because termination of presumptive 
eligibility occurs automatically after specified time periods, we 
propose not to apply the existing provisions of the regulations that 
require Medicaid agencies to provide timely written notice of reduction 
or termination of Medicaid benefits and rights to appeal of an adverse 
action (part , subpart E and Sec. 435.919). As indicated earlier, we 
propose to require a qualified entity to provide written notice of the 
date that the child can expect the presumptive eligibility to end. 
However, we propose not to grant rights to appeal a denial or 
termination of services under a presumptive eligibility decision 
because it is not considered to be a determination of Medicaid 
eligibility. If a regular Medicaid application is filed on the child's 
behalf and is denied, the child would have the right to appeal that 
denial.
    We do not believe that we are imposing an undue burden on qualified 
entities by requiring that notification be in writing. We do not 
foresee that this written notice will necessarily be individual 
personal letters. We considered requiring States to supply qualified 
entities with preprinted notices. However, we decided to allow States 
the flexibility to determine how best to arrange for this notification 
within each State program.
    Existing regulations at Sec. 435.914 permit States to provide 
Medicaid for an entire month when the individual is eligible for 
Medicaid under the plan at any time during the month. We propose not to 
permit States to provide full-month eligibility for presumptive 
eligibility periods because by definition a presumptive determination 
is not a determination of Medicaid eligibility but eligibility for a 
special status. In addition, section 1920A(b)(2) of the Act expressly 
defines the period of presumptive eligibility.
    Since presumptive eligibility is a special status, we considered 
whether States should be required to provide all services to 
presumptively eligible children or should be required or allowed to 
limit the services provided. For example, we considered allowing States 
to limit services to ambulatory care. Although presumptive eligibility 
for pregnant women includes a statutory restriction on services, there 
is no similar statutory restriction pertaining to presumptive 
eligibility for children. We propose to require that States provide all 
services covered under the State plan, including EPSDT, to 
presumptively eligible children. We believe most presumptively eligible 
children will be found retroactively eligible for Medicaid during what 
was a presumptive eligibility period, and complete and adequate medical 
care should not be delayed pending the decision on the regular Medicaid 
application.
    Section 4912 of the BBA provides that, for purposes of Federal 
financial participation, services that are covered under the plan, 
furnished by a provider that is eligible for payment under the plan, 
and furnished to a child during a period of presumptive eligibility, 
will be treated as expenditures for medical assistance under the State 
plan. See Sec. 447.88 and Sec. 457.616 for a discussion of the options 
for claiming FFP payment related to presumptive eligibility.
    Other than payments made for children during a presumptive 
eligibility period, section 4912 of the BBA does not hold States 
harmless for Medicaid payments made for services provided to ineligible 
children. However, HCFA and the States share a mutual commitment to 
enrolling uninsured children in Medicaid. An estimated 4 million 
children are eligible for Medicaid but remain uninsured due partly to 
the complexities associated with outreach and enrollment efforts. A 
basic strategy for overcoming this problem is simplification of States' 
Medicaid applications for children, and the removal of other enrollment 
barriers, such as burdensome documentation requirements.
    For eligibility groups that are new, States often have no 
eligibility determination experience, and may be reluctant to ease the 
documentation and verification requirements because they can help ease 
Medicaid eligibility quality control concerns until experience has been 
gained. To remove this potential barrier to simplification, and to 
encourage States to simplify the Medicaid application process and 
enroll uninsured children, HCFA is asserting its policy to waive MEQC 
eligibility errors resulting from the coverage of children under new 
eligibility groups added by the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996 and the BBA, including the 
optional group of optional targeted low-income children described in 
section 1902(a)(10)(A)(ii)(XIV) of the Act. If a State has an error 
rate over three percent, the State is subject to a disallowance of FFP. 
The State can appeal this disallowance through a waiver process 
outlined in Sec. .865. As part of this waiver process error cases and 
associated claims identified by the State as directly attributable to 
the enrollment of children in these groups will be excluded from the 
error rate calculation.

L. Medicaid Disproportionate Share Hospital (DSH) Expenditures

    Section 4911 of the BBA amended section 1905(b) of the Act to 
require that for expenditures for section 1905(u)(2)(A)(medical 
assistance expenditures of optional targeted low-income children) or 
section 1905(u)(3) (Waxman children), the Federal medical assistance 
percentage is equal to the enhanced FMAP described in section 2105(b)of 
the Act to the extent of the available title XXI allotment. In other 
words, under the statute, States that provide health insurance coverage 
to children as an expansion of their Medicaid programs may receive 
enhanced match for services provided to the Medicaid expansion 
population.
    Under the authority of section 1902(a)(13)(A)(iv) of the Act, 
States are required to take into account the situation of hospitals 
that serve a disproportionate number of low-income patients with 
special needs when developing rates for Medicaid inpatient hospital 
services. Medicaid disproportionate share hospital (DSH) expenditures 
are defined as payments made for hospital services rendered to Medicaid 
eligibles and the uninsured. Some of the expenditures may be 
identifiable as expenditures for services for a child in a CHIP-related 
Medicaid expansion program. Those identifiable payments may qualify for 
the enhanced FMAP.
    Proposed Sec. 433.11 sets forth provisions regarding the enhanced 
FMAP rate available for State expenditures related to services provided 
to children under an expansion to the State's current Medicaid program. 
Paragraph (a)(3) specifies that the enhanced FMAP rate determined in 
accordance with the proposed regulation at section 457.622 will be used 
to determine the Federal share of State expenditures for 
disproportionate share hospital expenditures as they relate to children 
eligible for health insurance coverage under an expansion to the 
State's current Medicaid program.
    Any DSH payments that are calculated at the enhanced matching rate 
will be counted against the CHIP allotment, the Federal DSH allotments

[[Page 60938]]

as published in section 4721 of the BBA, and the disproportionate share 
hospitals amount of uncompensated care cost limits as required under 
section 1923(g) of the Act.
    The State should work with the HCFA Regional Office to develop an 
appropriate methodology to allocate a portion of the DSH payments to 
the Medicaid expansion group so that these expenditures are 
appropriately claimed at the enhanced FMAP and counted against the 
State's title XXI allotment. Federal payments for such DSH expenditures 
will also be counted against the State's Medicaid DSH allotment.
    We understand that questions have been raised concerning the 
interaction of title XXI allotments, Federal DSH payment allotments (as 
enacted in section 4721 of the BBA) and DSH payments for services 
rendered to 1905(u)(2) and 1905(u)(3) children in Medicaid. 
Specifically, there is concern about whether enhanced matching rates 
should apply to DSH payments. We believe a statutory change would be 
needed not to apply enhanced FMAP. However, since any such statutory 
changes would be completed following the publication of this proposed 
regulation, we have developed this proposed regulation text in 
accordance with current law.

M. Vaccines for Children Program

    As discussed in the letter to State Health Officials of May 11, 
1998, under the authority of section 1928(b)(2) of the Act, children 
covered under a CHIP program that is a Medicaid expansion are Federally 
vaccine-eligible under the Vaccines for Children (VFC) program. 
Children served by a separate State child health program are not 
Federally vaccine eligible because they are neither entitled to 
Medicaid nor uninsured, as required in section 1928(b)(2) of the Act. 
Under the authority of section 1928(b)(3), States may elect to obtain 
vaccine for children enrolled in a separate child health program at the 
Federal discount price (plus an amount to cover the costs of 
administrative overhead and distribution). States may want to use this 
authority given the existence of the VFC program and its potential to 
save money.
    Under section 1928 of the Social Security Act and section 317 of 
the Public Health Service Act, the Centers for Disease Control and 
Prevention (CDC) contracts with vaccine manufacturers to purchase 
vaccines, usually at a substantial discount from retail prices. These 
vaccines are furnished to State health departments, as grantees of CDC, 
for distribution to providers that participate in the VFC program, and 
other providers authorized to administer vaccines under section 317. 
Because the immunization program of the State health department is the 
CDC grantee, and has sole authority to order and distribute vaccine 
purchased under the CDC discount contracts, a State that elects to 
obtain these vaccines for its separate child health program population 
must negotiate a memorandum of agreement between its separate child 
health program and the State immunization program, to order vaccines 
and distribute them to CHIP providers. As part of that agreement, the 
separate child health program must agree to reimburse the immunization 
program for the cost of each dose of vaccine, including a pro rata 
share of administrative overhead and distribution costs. Providers who 
receive vaccine must agree to comply with reporting and other 
requirements of the State immunization program, in order to assure that 
vaccine distributed is accounted for appropriately.
    States electing to purchase vaccine at the Federal discount price 
must retain overall responsibility for the required health benefits 
coverage package, under the requirements of Sec. 457.490 (a)(1), 
``Methods of Administration.'' However, the State may subcontract for 
any and all other services, with the exception of vaccine products, 
provided under its separate child health program, including 
professional services required to immunize eligible children.
    If HCFA establishes that the State has retained overall 
responsibility for the provision of services and if the State 
Immunization program has established one price per dose which includes 
all charges for vaccine, the cost of vaccines will be treated as part 
of the required health benefits coverage package and will not be 
subject to 10 percent cap on other expenditures of title XXI funds. 
Moreover, these costs are eligible for the enhanced match.

III. Regulatory Impact Analysis

A. Impact Statement

    Section 804(2) of title 5, United States Code (as added by section 
251 of Public Law 104-121), specifies that a ``major rule'' is any rule 
that the Office of Management and Budget finds is likely to result in--
     An annual effect on the economy of $100 million or more;
     A major increase in costs or prices for consumers, 
individual industries, Federal, State, or local government agencies, or 
geographic regions; or
     Significant adverse effects on competition, employment, 
investment productivity, innovation, or on the ability of United States 
based enterprises to compete with foreign based enterprises in domestic 
and export markets.
    This proposed rule does not establish the CHIP allotment amounts. 
However, it provides for the implementation and administration of the 
CHIP program, and as such, is an economically significant, major rule.
    We have examined the impacts of this proposed rule as required by 
Executive Order 12866, the Unfunded Mandate Reform Act of 1995 (Public 
Law 104-4), and the Regulatory Flexibility Act (RFA) (Public Law 96-
354). Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, when regulations are 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic environments, public health and safety, 
other advantages, distributive impacts, and equity).
    The Unfunded Mandates Reform Act of 1995 requires that agencies 
prepare an assessment of anticipated costs and benefits before 
proposing any rule that may result in an expenditure by State, local, 
and tribal governments, in the aggregate, or by the private sector, of 
$100,000,000 or more (adjusted annually for inflation) in any one year. 
Because participation in the CHIP program on the part of States is 
voluntary, any payments and expenditures States make or incur on behalf 
of the program that are not reimbursed by the Federal government are 
made voluntarily. These regulations would implement narrowly defined 
statutory language and would not create an unfunded mandate on States, 
tribal or local governments.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis for any proposed 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. With the exception of hospitals located in 
certain rural counties adjacent to urban areas, for purposes of section 
1102(b) of the Act, we define a small rural hospital as a hospital that 
is located outside of a Metropolitan Statistical Area and has fewer 
than 50 beds. We are not preparing an analysis for section 1102(b) of 
the Act because we have determined, and we certify, that this rule will 
not have a significant impact on the operations of a substantial number 
of small rural hospitals.
    For purposes of the RFA, we prepare a regulatory flexibility 
analysis unless

[[Page 60939]]

we certify that a rule will not have a significant economic impact on a 
substantial number of small entities. Small entities include small 
businesses, non-profit organizations, and governmental agencies. Most 
hospitals and other providers and suppliers are small entities, either 
by non-profit status or by having revenues of $5 million or less 
annually. Individuals and State agencies are not included in the 
definition of small entity. As discussed in detail below this proposed 
rule will have a beneficial impact on health care providers.

B. Cost Benefit Analysis

    This analysis addresses a wide range of costs and benefits of this 
rule. Whenever possible, we express impact quantitatively. In cases 
where quantitative approaches are not feasible, we present our best 
examination of determinable costs, benefits, and associated issues. 
This proposed regulation would implement all programmatic provisions of 
the State Children's Health Insurance Program (CHIP) including 
provisions regarding State plan requirements, benefits, eligibility, 
and program integrity, which are specified in title XXI of the Act. 
This proposed regulation would have a beneficial impact in that it 
would allow States to expand the provision of health benefits coverage 
to uninsured, low-income children who previously had limited access to 
health care.
    CHIP is the largest single expansion of health insurance coverage 
for children since the creation of Medicaid in 1965. CHIP was designed 
to reach children from working families with incomes too high to 
qualify for Medicaid, but too low to afford private health insurance. 
As discussed in detail below, this initiative set aside $24 billion 
over five years for States to provide new health coverage for millions 
of children. To date, plans prepared by all 50 States, 5 U.S. 
territories, and the District of Columbia have been approved. States 
expect to enroll an estimated 2.6 million children by September 2000. 
The implementation of CHIP has significantly reduced the number of 
uninsured children nationwide. Previously uninsured children now have 
access to a range of health care services including well baby and well 
child care, immunizations, and emergency services. In addition to the 
obvious benefit of providing access to health care coverage for 
millions of children, as discussed in detail below, CHIP will also have 
a beneficial impact on the private sector.
1. Disbursement of Federal Funds
    Budget authority for title XXI is specified in section 2104(a) of 
the Act with additional funding authorized in Public Law 105-100. The 
total national amount of Federal funding available for allotment to the 
50 States, the District of Columbia, and the Commonwealths and 
Territories for the life of CHIP, is established as follows:

                       Total Amount of Allotments
------------------------------------------------------------------------
                     Fiscal year                             Amount
------------------------------------------------------------------------
1998.................................................     $4,295,000,000
1999.................................................      4,275,000,000
2000.................................................      4,275,000,000
2001.................................................      4,275,000,000
2002.................................................      3,150,000,000
2003.................................................      3,150,000,000
2004.................................................      3,150,000,000
2005.................................................      4,050,000,000
2006.................................................      4,050,000,000
2007.................................................      5,000,000,000
------------------------------------------------------------------------

    Under Public Law 105-277, an additional $32 million was 
appropriated for allotment only to the Commonwealths and Territories, 
and only for FY 1999. In addition, we note that there was an additional 
allocation of $20 million in FY 1998, which increases the FY 1998 total 
allotment amount to $4.295 billion. Also, for each of the first five 
years, $60 million of the allotment must be used for the special 
diabetes programs. We note that the Federal spending levels for the 
CHIP program are based entirely on the spending and allocation formulas 
contained in the statute. The Secretary has no discretion over these 
spending levels and initial allotments of funds allocated to States. 
Both direct program and administrative costs are covered by the 
allotments.
2. Impact on States
    CHIP is a State-Federal program under which funds go directly to 
States, which have great flexibility in designing their programs. 
Specifically, within broad Federal guidelines, each State determines 
the design of its program, eligible groups, benefit packages, payment 
levels for coverage and administrative and operating procedures. As 
such, it is difficult to quantify the economic impact on States. As 
stated above, the total Federal payments available to States are 
specified in the statute and are allocated according to a statutory 
formula based on the number of uninsured, low-income children for each 
State, and a geographic adjustment factor. For qualifying expenditures, 
States will receive an enhanced Federal matching rate equal to its 
current FMAP increased by 30 percent of the difference between its 
regular matching rate and 100 percent, except that the enhanced match 
cannot exceed 85 percent.
    The following chart depicts estimated outlays for the CHIP program. 
These estimates differ from the allotments referred to above in that 
the allotments allow the money to be spent over a period of three 
years.

                                               Fiscal Year Outlays
                                                 [In $billions]
----------------------------------------------------------------------------------------------------------------
                                                     1999         2000         2001         2002         2003
----------------------------------------------------------------------------------------------------------------
Federal Share..................................          1.4          1.9          2.8          3.5          4.3
State Share....................................          0.6          0.8          1.2          1.5          1.9
                                                ----------------------------------------------------------------
      Total....................................          2.0          2.7          4.0          5.0         6.2
----------------------------------------------------------------------------------------------------------------
Note: These estimates are based on State and Federal budget projections and have been included in the
  President's FY 2000 budget.

3. Impact on the Private Sector
    We note that due to the flexibility that States have in designing 
and implementing their CHIP programs it is not possible to determine 
the impact on individual providers groups of providers, insurers, 
health plans, or employers. However, we anticipate that the CHIP 
program will benefit the private sector in a number of ways. The 
program may have a positive impact on a number of small entities given 
that CHIP funding will filter down to health care providers and health 
plans that cover the CHIP population. Health plans that provide 
insurance coverage under the CHIP program will benefit to the extent 
that children are generally a

[[Page 60940]]

lower-risk population. That is, children tend to use fewer high-cost 
health care services than older segments of the population. Thus, by 
providing health insurance coverage for preventive care such as well-
baby and well-child care and immunizations, CHIP may benefit health 
insurers by reducing the need to provide more costly health care 
services for serious illnesses. Additionally, because CHIP provides 
health insurance coverage to children who were previously uninsured, 
health care providers will no longer have to absorb the cost of 
uncompensated care for these children. The private sector may also 
benefit from CHIP to the extent that children and families with health 
insurance coverage are more likely to use health care services. Thus, 
health care providers are likely to experience an increase in demand 
for their services. Small businesses that are unable to afford private 
health insurance for their employees will benefit to the extent that 
the employees, or their children qualify for CHIP.
4. Impact on Beneficiaries
    The main goal of CHIP is to provide health insurance coverage for 
children in families that are not eligible for Medicaid, but do not 
earn enough to afford private health insurance. CHIP will allow a large 
number of children who were previously uninsured to have access to 
health insurance and the opportunity to receive health care services on 
a regular basis.
    Subpart E of this proposed rule sets forth provisions regarding the 
costs that beneficiaries may incur (cost sharing) under CHIP. In 
accordance with the statute, we proposed provisions concerning general 
cost sharing protection for lower income children and American Indians/
Alaska Natives, cost sharing for children from families with certain 
income levels, and cumulative cost-sharing maximums. Section 457.555 
sets forth maximum allowable cost sharing charges on targeted low-
income children in families with income from 101 to 150 percent of the 
FPL. This section specifies maximum copayment amounts that may be 
imposed under fee-for-service delivery systems and managed care 
organizations. Additionally, regarding cumulative cost sharing 
maximums, Sec. 457.560 provides that cost sharing for children with 
family income above 150 percent of the Federal poverty level may not 
exceed 5 percent of total family income for the year. For children with 
family income at or below 150 percent of the Federal poverty level, 
cost sharing may not exceed 2.5 percent of total family income for the 
year.
    We note that due to State flexibility in establishing cost-sharing 
amounts below the maximums and differing utilization patterns among 
beneficiaries, it is difficult to quantify the amount of cost sharing 
that families incur to participate in CHIP. However, in light of the 
number of children enrolled in CHIP, we believe that for most 
beneficiaries, the benefit of access to health insurance coverage 
outweighs the costs associated with participation in the program.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

IV. Federalism

    Under Executive Order 13132, we are required to adhere to certain 
criteria regarding Federalism in developing regulations. Title XXI 
authorizes grants to States that initiate or expand health insurance 
programs for low-income, uninsured children. A Children's Health 
Insurance Program (CHIP) under title XXI is jointly financed by the 
Federal and State governments and is administered by the States. Within 
broad Federal guidelines, each State determines the design of its 
program, eligible groups, benefit packages, payment levels for coverage 
and administrative and operating procedures. States have great 
flexibility in designing programs to best meet the needs of their 
beneficiaries. HCFA works closely with the States during the State plan 
and State plan amendment approval process to ensure that we reach a 
mutually agreeable decision.
    Federal payments under title XXI to States are based on State 
expenditures under approved plans that could be effective on or after 
October 1, 1997. The short time frame between the enactment of the 
Balanced Budget Act (BBA) (August 5, 1997) and the availability of the 
funding for States required the Department to begin reviewing CHIP 
plans submitted by States and Territories at the same time as it was 
issuing guidance to States on how to operate the CHIP programs. The 
Department worked closely with States to disseminate as much 
information as possible, as quickly as possible, so States could begin 
to implement their new programs expeditiously.
    In the course of the State plan and amendment approval process, we 
consulted with State and local officials to discuss all aspects of the 
State's proposed plan or amendment. We discussed with each State 
provisions and policy decisions that arose from its proposed plans and 
amendments. In this process, States put forward their policy concerns 
and proposed statutory interpretations.
    The proposed programmatic regulation incorporates much of the 
guidance that already has been issued to States. As the proposed 
regulation builds upon previously released guidance, most of the 
regulation represents policies that have been in operation for some 
time and are a result of the consultation process that is required as 
part of the implementation of CHIP; specifically, the State plan 
approval process.
    To be more specific, the Department began issuing guidance to 
States within one month of enactment of the BBA. We provided 
information on each State's allotment through two Federal Register 
notices published on September 12, 1997 (62 FR 48098) and February 8, 
1999 (64 FR 6102). We developed a model application template to assist 
State's in applying for title XXI funds. We provided over 100 answers 
to frequently asked questions. We issued policy guidance through a 
series of 23 letters to State health officials. All of this information 
is currently available on our website located on the Internet at http:/
/www.hcfa.gov. We have also provided technical assistance to all States 
in development of CHIP applications.
    In the exhaustive approval process, we listened to States' 
concerns. This proposed regulation builds upon previously released 
guidance and therefore, most of the regulation represents policies that 
have been in operation for some time. States and Territories have used 
this guidance to design and implement their programs.
    In developing the interpretative policies set forth in this 
proposed rule, we also listened to the concerns of States through 
processes other than the State plan process as well, by attending 
conferences and meeting with various groups representing State and 
public interests.
    As we continue to implement the program, however, we have 
identified a number of areas in which we further elaborate on previous 
guidance or propose new policies that have not yet been made public. In 
an attempt to highlight the key issues, a brief summary follows:

A. Subpart A--State Plan Requirements

    The regulation would clarify several conditions under which States 
must submit amendments to approved CHIP plans. For example, we propose 
that States submit a plan amendment when the funding source of the 
State share changes, prior to such change taking effect. The purpose of 
this proposed

[[Page 60941]]

requirement is to ensure that programs are operated using only 
permissible sources of funding. In addition, amendments to impose cost-
sharing on beneficiaries, increase existing cost-sharing charges, or 
increase the cumulative cost sharing maximum will be considered the 
same as amendments proposing a restriction in benefits. Therefore, we 
propose to require for these amendments that States adhere to the 
statutory requirements relating to prior public notice and retroactive 
effective dates.

B. Subpart C--Eligibility, Screening, Applications and Enrollment

    Title XXI prohibits the participation of children of public agency 
employees who are eligible to participate in a State health benefits 
plan. We interpret this statutory prohibition to be triggered only when 
the employer makes more than a nominal contribution available for the 
child's health benefits coverage. We propose to clarify that when only 
a nominal contribution is available, children would not be considered 
eligible for health benefits coverage under a State health benefits 
plan and could be eligible for coverage through CHIP.

C. Subpart D--Coverage and Benefits

    The proposed regulation provides some flexibility for States in 
updating the benefit package. States using the benchmark benefit 
package option are not required to submit an amendment each time the 
benchmark package changes. States need only submit amendments when 
proposing to make a change to the benefit package for the separate 
child health program. At that time, the State must compare their 
benefit package to the most recent benchmark coverage.
    The proposed regulation also clarifies policy regarding the 
conditions under which abortion services are permitted under title XXI 
and proposes that, when States contract with managed care entities for 
CHIP services, those contracts cannot include abortion services. To the 
extent that a managed care entity furnishes these services, the managed 
care entity must do so under a separate contractual arrangement.

D. Subpart E--Beneficiary Financial Responsibilities

    The statute places a 5 percent cap on cost-sharing expenditures for 
families with incomes greater than 150 percent of the Federal Poverty 
Level (FPL) who are enrolled in separate child health programs. In an 
attempt to preserve State flexibility, the proposed regulation gives 
States the option to use either gross or net family income when 
calculating the cost-sharing cap.
    In addition, the regulation proposes to place a comparable limit of 
2.5 percent on cost-sharing for families with incomes below 150 percent 
of the poverty line, in order to ensure that those families with lower 
incomes will not be forced to pay the same amount of cost-sharing as 
those with higher incomes. And States would have the option to apply 
cost-sharing imposed on adults in CHIP family coverage plans toward the 
cumulative maximum cap.
    The regulation proposes that States must have a process in place 
that will protect beneficiaries by ensuring due process before 
beneficiaries can be disenrolled from the program for failure to pay 
cost-sharing. This preamble suggests that States may look for a pattern 
of nonpayment, provide clear notice and opportunities for late payment, 
and wait at least one billing cycle before taking action to disenroll.
    Finally, title XXI includes provisions to ensure enrollment and 
access to health care services for American Indian and Alaska Native 
(AI/AN) children. The regulation incorporates our interpretation that 
in light of the unique Federal relationship with tribal governments, 
cost-sharing requirements for individuals who are members of a 
Federally recognized tribe are not consistent with this statutory 
requirement.

E. Subpart G--Strategic Planning, Reporting and Evaluation

    The proposed regulation includes provisions intended to ensure 
compliance with both the statute, the elements of the State's title XXI 
plan and the onsite review of State programs. In addition, monitoring 
will enable tracking of CHIP data submissions, which will ultimately 
help ensure enrollment in both the CHIP and Medicaid programs.
    In addition, the regulation proposes that States have additional 
flexibility in setting procurement standards more broadly than 
Medicaid. States could choose to base payment rates on public and/or 
private rates for comparable services, and where appropriate, establish 
higher rates in order to ensure sufficient provider participation.
    Finally, this proposed regulation includes various beneficiary 
protections consistent with the President's directive regarding the 
Consumer Bill of Rights and Responsibilities. Provisions are included 
throughout the proposed regulation to ensure that beneficiaries are 
given the opportunity to participate in and make informed medical 
decisions, to have access to needed services, and to be treated with 
dignity and respect.

F. Subpart I--Program Integrity and Beneficiary Protections

    This subpart is intended to underscore the importance of preserving 
program integrity in the Children's Health Insurance Program. The 
regulation proposes that States must have fraud and abuse protections 
in place, but provides flexibility to States in developing program 
integrity protections for separate child health programs. States are 
encouraged to utilize systems already existing for Medicaid, but are 
not required to do so.

F. Subpart J--Waivers

    The proposed regulation discusses the circumstances under which 
States may obtain a waiver in order to provide title XXI coverage to 
entire families. We propose that in order to qualify for such a waiver, 
the State must meet several requirements, including a requirement that 
the proposal be cost effective. The proposed regulation would give 
States added flexibility by permitting alternate methods States can use 
to meet the cost effectiveness test. States would be able to compare 
the cost of coverage for the family to any child-only health benefits 
package that is available for purchase, even if it is not included 
under the State plan.

V. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), agencies are 
required to provide a 60-day notice in the Federal Register and solicit 
public comment before a collection of information requirement is 
submitted to the Office of Management and Budget (OMB) for review and 
approval. To fairly evaluate whether an information collection should 
be approved by OMB, section 3506(c)(2)(A) of the PRA requires that we 
solicit comments on the following issues:
     Whether the information collection is necessary and useful 
to carry out the proper functions of the agency;
     The accuracy of the agency's estimate of the information 
collection burden;
     The quality, utility, and clarity of the information to be 
collected; and
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comment on each of these issues 
for the information collection requirement discussed below. The 
following sections

[[Page 60942]]

of this document contain information collection requirements:

Section 457.50  State Plan

    In summary, Sec. 457.50 requires a State to submit a child health 
plan to HCFA for approval. The child health plan is a comprehensive 
written statement submitted by the State describing the purpose, 
nature, and scope of its Child Health Insurance Program and giving 
assurance that it will be administered in conformity with the specific 
requirements of title XXI, title XIX (as appropriate), and the 
regulations in this chapter. The State plan contains all information 
necessary for HCFA to determine whether the plan can be approved to 
serve as a basis for Federal financial participation in the State 
program.
    The burden associated with this requirement is the time and effort 
for a State to prepare and submit its child health plan to HCFA for 
approval. These collection requirements are currently approved by OMB 
under OMB# 0938-0707, with a current expiration date of 6/30/2000.

Section 457.60  Amendments

    In summary, Sec. 457.60 requires a State to submit to HCFA for 
approval an amendment to its approved State plan, whenever necessary, 
to reflect any changes in (1) Federal law, regulations, policy 
interpretations, or court decisions, (2) State law, organization, 
policy or operation of the program, or (3) the source of the State 
share of funding.
    The burden associated with this requirement is the time and effort 
for a State to prepare and submit any necessary amendments to its State 
plan to HCFA for approval. Based upon HCFA's previous experiences with 
State plan amendments we estimate that on average, it will take a State 
80 hours to complete and submit an amendment. We estimate that 10 
States/territories will submit an amendment on an annual basis for a 
total burden of 800 hours.

Section 457.70  Program Options

    In summary, Sec. 457.70 requires a State that elects to obtain 
health benefits coverage through its Medicaid plan to submit an 
amendment to the State's Medicaid State plan as appropriate, 
demonstrating that it meets the requirements in subparts A, and G of 
part 457 and the applicable Medicaid regulations.
    The burden associated with this requirement is the time and effort 
for a State to prepare and submit the necessary amendment to its 
Medicaid State plan to HCFA for approval. Based upon HCFA's previous 
experiences with State Plan amendments we estimate that on average, it 
will take a State 2 hours to complete and submit an amendment for HCFA 
approval. We estimate that 28 States/territories will submit an 
amendment for a total one-time burden of 56 hours.

Section 457.350  Eligibility Screening

    In summary, Sec. 457.350 requires a State that chooses to screen 
for Medicaid eligibility under the poverty level related groups 
described in 1902(l) of the Act, to provide written notification to the 
family if the child is found not to be Medicaid eligible.
    The burden associated with this requirement is the time and effort 
for a State to prepare and provide written notification to the family 
if the child is found not to be Medicaid eligible. The average burden 
upon the State to prepare the notice is a one time burden estimated to 
be 10 hours and that it will take 3 minutes for the State to provide 
and the family to read the information. We estimate that on average, 
that each State will be required to provide 1 million notices on an 
annual basis for a total annual burden of 50,000 hours, per State. 
Therefore, the total estimated burden is calculated to be 2,700,000 
hours on an annual basis.

Section 457.360  Facilitating Medicaid Enrollment

    In summary Sec. 457.360(c) requires a State to provide full and 
complete information, in writing to the family (that meets the 
requirements of (c)(1) through (c)(2) of this section), to ensure that 
a decision by the family not to apply for Medicaid or not to complete 
the Medicaid application process represents an informed decision.
    The burden associated with this requirement is the time and effort 
for a State to prepare and provide written notice to the family to 
ensure that a decision by the family not to apply for Medicaid or not 
to complete the Medicaid application process represents an informed 
decision. The average burden upon the State to disseminate a standard 
notice to the family is estimated to be 3 minutes. We estimate that on 
average, each State will be required to provide 1 million notices on an 
annual basis for a total annual burden of 50,000 hours, per State. 
Therefore, the total estimated burden is calculated to be 2,700,000 
hours on an annual basis.

Section 457.361  Application for and Enrollment in CHIP

    In summary, Sec. 457.361(b) requires a State to inform applicants, 
in writing and orally if appropriate, about the eligibility 
requirements and their rights and obligations under the program.
    The burden associated with this requirement is the time and effort 
for a State to inform each applicant in writing and orally if 
appropriate, about the eligibility requirements and their rights and 
obligations under the program. We estimate the average burden upon the 
State to disseminate a standard notice to the family is estimated to be 
3 minutes. We estimate that on average, each State will be required to 
provide 1 million notices on an annual basis for a total annual burden 
of 50,000 hours, per State. Therefore, the total estimated burden is 
calculated to be 2,700,000 hours on an annual basis.
    In summary, Sec. 457.361(c) requires a State to send each applicant 
a written notice of the agency's decision on the application, and if 
eligibility is denied or terminated, the specific reason or reasons for 
the action and an explanation of the right to request a hearing within 
a reasonable time.
    The burden associated with this requirement is the time and effort 
for a State to prepare and provide written notice to each applicant of 
the agency's decision on the application, and if eligibility is denied 
or terminated, the specific reason or reasons for the action and an 
explanation of the right to request a hearing within a reasonable time. 
We estimate that on average, it will take each State 3 minutes to 
prepare each notice and that each State will be required to provide 1 
million notices on an annual basis for a total annual burden of 50,000 
hours, per State. Therefore, the total estimated burden is calculated 
to be 2,700,000 hours on an annual basis.

Section 457.431  Actuarial Report for Benchmark-Equivalent Coverage

    In summary, Sec. 457.431 requires a State that wants to obtain 
approval for benchmark-equivalent benefits coverage described under 
Sec. 457.430, to submit to HCFA an actuarial report that; (1) compares 
the actuarial value of coverage of the benchmark package to the State-
designed benchmark-equivalent benefit package, (2) demonstrates through 
an actuarial analysis of the benchmark-equivalent package that coverage 
requirements under Sec. 457.430 are met, and (3) meets the requirements 
of Sec. 457.431(b).
    The burden associated with this requirement is the time and effort 
for a State that wants to obtain approval for benchmark-equivalent 
benefits coverage described under Sec. 457.430, to prepare and submit 
its actuarial report to HCFA for approval. We estimate that on

[[Page 60943]]

average, it will take a State 40 hours to prepare and submit a report 
for HCFA approval. We estimate that 6 States/territories will submit a 
plan for a total burden of 240 hours.

Section 457.525  Public Schedule

    In summary, Sec. 457.505 requires a State to make the public 
schedule available to: (1) CHIP beneficiaries (enrolled and non-
enrolled) before the imposition of the charges, (2) CHIP applicants at 
the time of application, (3) all CHIP participating providers, (4) the 
general public.
    The burden associated with this requirement is the time and effort 
for a State to prepare and make available its public schedule available 
to these four groups. We estimate that on average, it will take each 
State/Territory 120 minutes to prepare its public schedule and 3 
minutes to disseminate no more than 20,000 copies of its schedule on an 
annual basis for a total annual burden of 1000 hours, per State/
Territory. Therefore, the total estimated burden is calculated to be 
54,000 hours on an annual basis.

Section 457.740  State Expenditure and Statistical Reports

    In summary, Sec. 457.740 requires a State to submit a report to the 
Secretary that contains quarterly program expenditures and statistical 
data, no later than 30 days after the end of each quarter of the 
federal fiscal year. The burden associated with this requirement is the 
time and effort for a State to prepare and submit its report to the 
Secretary. These collection requirements are currently approved by 
under OMB approval number OMB# 0938-0731, with a current expiration 
date of 1/31/2002.
    In addition Sec. 457.740 requires a State to submit an annual 
report, thirty days after the end of the Federal fiscal year, of an 
unduplicated count for the Federal fiscal year of children who are 
enrolled in the title XIX Medicaid program, and the separate child 
health and Medicaid-expansion programs, as appropriate, by age, service 
delivery, and income categories described in paragraphs (a) and (b) of 
this section.
    The burden associated with this requirement is the time and effort 
for a State to prepare and submit its annual report to the Secretary. 
We estimate that on average, it will take a State 40 hours to complete 
and submit their report. We estimate that 54 States/territories will 
submit a plan for a total burden of 2160 hours.

Section 457.750  Annual Report

    In summary, Sec. 457.750 requires a State to submit a report to the 
Secretary by January 1 following the end of each preceding federal 
fiscal year, on the results of the State's assessment of operation of 
the State child health plan.
    The burden associated with this requirement is the time and effort 
for a State to prepare and submit its annual report on the results of 
the State's assessment of operation of the State child health plan. We 
estimate that on average, it will take a State 40 hours to complete and 
submit their report. We estimate that 54 States/territories will submit 
a plan for a total burden of 2160 hours.

Section 457.760  State Evaluations

    In summary, Sec. 457.760 requires a State to submit by March 31, 
2000, an evaluation to the Secretary that includes all of the elements 
referenced in paragraphs (a) through (g) of this section.
    The one time burden associated with this requirement is the time 
and effort for a State to prepare and submit an evaluation to the 
Secretary that includes all of the elements referenced in paragraphs 
(a) though (g) of this section. We estimate that on average, it will 
take a State 40 hours to complete and submit their evaluation. We 
estimate that 54 States/territories will submit a plan for a total 
burden of 2,160 hours.

Section 457.810  Premium Assistance for Employer-Sponsored Group Health 
Plans: Required Protections Against Substitution

    In summary, Sec. 457.810(d) requires a State that uses title XXI 
funds to provide premium subsidies under employer-sponsored group 
health plans to collect information to evaluate the amount of 
substitution that occurs as a result of the subsidies and the effect of 
subsidies on access to coverage.
    The burden associated with this requirement is the time and effort 
for a State to collect the necessary data to evaluate the amount of 
substitution that occurs as a result of the subsidies and the effect of 
subsidies on access to coverage. We estimate that on average, it will 
take a State 20 hours to collect the necessary data for their 
evaluation. We estimate that 54 States/territories will submit a plan 
for a total burden of 1,080 hours.

Section 457.965  Documentation

    In summary, Sec. 457.965 requires a State to include in each 
applicant's record facts to support the State's determination of the 
applicant's eligibility for CHIP. While this requirement is subject to 
the PRA, we believe that the burden associated with this requirement is 
exempt from the PRA as defined in 5 CFR 13203(b)(3), because this 
requirement would be imposed in the absence of a Federal requirement.

Section 457.985  Enrollee Rights To File Grievances and Appeals

    In summary, Sec. 457.985(b) requires a State to establish and 
maintain written procedures for grievances and appeals that adhere to 
generally acceptable industry practices within the State and comply 
with State-specific grievance and appeal requirements currently in 
effect for commercially licensed health care related businesses. While 
this requirement is subject to the PRA, we believe that the burden 
associated with this requirement is exempt from the PRA, as defined in 
5 CFR 1320.3(b)(3), because this requirement would be imposed in the 
absence of a Federal requirement.

Section 457.1005  Waiver for Cost-Effective Coverage Through a 
Community-Based Health Delivery System

    In summary, Sec. 457.1005 requires a State requesting a waiver for 
cost-effective coverage through a community-based health delivery 
system, to submit documentation to HCFA that demonstrates that they 
meet the requirements of Sec. 457.1005(b)(1) and (b)(2).
    The burden associated with this requirement is the time and effort 
for a State that wants to obtain a waiver to prepare and submit the 
necessary documentation to HCFA that demonstrates that they meet the 
requirements of Sec. 457.1005.
    We estimate that on average, it will take a State 24 hours to 
prepare and submit a waiver request for HCFA approval. We estimate that 
10 States/territories will submit a request for a total burden of 240 
hours.

Section 457.1015  Cost Effectiveness

    In summary, Sec. 457.1015 requires a State to report to HCFA in its 
annual report the amount it spent on family coverage and the number of 
children it covered. While this requirement is subject to the PRA, the 
burden associate with this requirement is captured in Sec. 457.750 
(Annual report).
    We have submitted a copy of this proposed rule to OMB for its 
review of the information collection requirements in Secs. 457.50, 
457.60, 457.70, 457.350, 457.360, 457.431, 457.525, 457.555, 457.740, 
457.750, 457.760, 457.810, 457.965, 457.985, 457.1005, and

[[Page 60944]]

457.1015. These requirements are not effective until they have been 
approved by OMB.
    If you have any comments on any of these information collection and 
record keeping requirements, please mail the original and 3 copies 
directly to the following:

Health Care Financing Administration, Office of Information Services, 
Standards and Security Group, Division of HCFA Enterprise Standards, 
Room N2-14-26, 7500 Security Boulevard, Baltimore, MD 21244-1850. Attn: 
John Burke HCFA-2006-P.

    And,

Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Lori Schack, HCFA Medicaid Desk Officer.

VI. Response to Comments

    Because of the large number of items of correspondence we normally 
receive on Federal Register documents published for comment, we are not 
able to acknowledge or respond to them individually. We will consider 
all comments we receive by the date and time specified in the DATES 
section of this preamble, and, if we proceed with a subsequent 
document, we will respond to the comments in the preamble to that 
document.

List of Subjects

42 CFR Part 431

    Grant programs-health, Health facilities, Medicaid, Privacy, 
Reporting and recordkeeping requirements.

42 CFR Part 433

    Administrative practice and procedure, Child support, Claims, Grant 
programs-health, Medicaid, Reporting and recordkeeping requirements.

42 CFR Part 435

    Aid to Families with Dependent Children, Grant programs-health, 
Medicaid, Reporting and recordkeeping requirements, Supplemental 
Security Income (SSI), Wages.

42 CFR Part 457

    Administrative practice and procedure, Grant programs-health, 
Children's Health Insurance Program, Reporting and recordkeeping 
requirements.

    42 CFR chapter IV would be amended as set forth below:

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

    A. Part 431 is amended as follows:
    1. The authority citation for part 431 continues to read as 
follows:

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


Sec. 431.865  [Amended]

    2. In Sec. 431.865(b), the definition of ``erroneous payment'' is 
amended by adding the sentence, ``The term does not include payments 
made for care and services covered under the State plan and furnished 
to children during a presumptive eligibility period as described in 
Sec. 435.1102 of this chapter.'' at the end of paragraph (3) of the 
definition.

PART 433--STATE FISCAL ADMINISTRATION

    B. Part 433 is amended as follows:
    1. The authority citation for part 433 is revised to read as 
follows:

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

    2. In Sec. 433.10, the heading of paragraph (c) is republished and 
a new paragraph (c)(4) is added to read as follows:


Sec. 433.10  Rates of FFP for program services.

* * * * *
    (c) Special provisions. * * *
    (4) Under section 1905(b), the Federal share of State expenditures 
for services provided to children described in 433.11(a) is the 
enhanced FMAP rate determined in accordance with Sec. 457.622(b) of 
this chapter, subject to the conditions explained in 433.11(b).
    3. A new Sec. 433.11 is added to read as follows:


Sec. 433.11  Enhanced FMAP rate for children.

    (a) Subject to the conditions in paragraph (b) of this section, 
enhanced FMAP determined in accordance with Sec. 457.622 of this 
chapter will be used to determine the Federal share of State 
expenditures for--
    (1) Services provided to optional targeted low-income children 
described in Sec. 435.229(b) of this chapter; and
    (2) Services provided to children born before October 1, 1983 who 
would be described in section 1902(l)(1)(D) of the Act (poverty-level-
related children's groups) if--
    (i) They had been born on or after that date; and
    (ii) They would not qualify for medical assistance under the State 
plan in effect on March 31, 1997.
    (3) Disproportionate share hospital expenditures identified as 
payment for services provided to children described in paragraphs 
(a)(1) and (a)(2) of this section.
    (b) Enhanced FMAP is not available if--
    (1) A State adopts income and resource standards and methodologies 
for purposes of determining a child's eligibility under the Medicaid 
State plan that are more restrictive than those applied under the State 
plan in effect on June 1, 1997; or
    (2) No funds are available in the State's title XXI allotment for 
the quarter enhanced FMAP is claimed, as that allotment is determined 
under part 457, subpart F of this chapter; or
    (3) The State fails to maintain a valid method of identifying 
services provided on behalf of children listed in paragraph (a) of this 
section.

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

    C. Part 435 is amended as set forth below:
    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. A new Sec. 435.229 is added to read as follows:


Sec. 435.229  Optional targeted low-income children.

    (a) An optional targeted low-income child is a child who:
    (1) Is a targeted low-income child as defined in Sec. 457.310(a) of 
this chapter; and
    (2) Would not be eligible for Medicaid under the policies of the 
State plan in effect on March 31, 1997.
    (b) The State agency may provide Medicaid to:
    (1) Individuals under age 19 who are optional targeted low-income 
children described in paragraph (a) of this section; or
    (2) Reasonable categories of these individuals.
    3. In Sec. 435.910, paragraph (h) is added to read as follows:


Sec. 435.910  Use of social security number.

* * * * *
    (h) Exception. (1) An applicant who, because of well established 
religious objections, refuses to obtain a Social Security Number (SSN) 
may be given a Medicaid identification number by the State. Such a 
number may be either an SSN obtained by the State on the applicant's 
behalf or another unique identifier.

[[Page 60945]]

    (2) The term ``well established religious objections'' means that 
the applicant:
    (i) Is a member of a recognized religious sect or division of the 
sect; and
    (ii) Adheres to the tenets or teachings of the sect or division of 
the sect and for that reason is conscientiously opposed to applying for 
or using a national identification number.
    (3) An alternative number established by the State to identify such 
an individual shall be used to the same extent as an SSN is used by the 
State as described in paragraph (b)(3) of this section.
    4. In Sec. 435.1001 paragraph (a) is revised to read as follows:


Sec. 435.1001  FFP for administration.

    (a) FFP is available in the necessary administrative costs the 
State incurs in--
    (1) Determining and redetermining Medicaid eligibility and in 
providing Medicaid to eligible individuals; and
    (2) Determining presumptive eligibility for children and providing 
services to presumptively eligible children.
* * * * *
    5. Section 435.1002 is amended by adding a new paragraph (c) to 
read as follows:


Sec. 435.1002  FFP for services.

* * * * *
    (c) FFP is available in expenditures for services covered under the 
plan that are furnished--
    (1) To children who are determined by a qualified entity to be 
presumptively eligible;
    (2) During a period of presumptive eligibility;
    (3) By a provider that is eligible for payment under the plan; and
    (4) Regardless of whether the children are determined eligible for 
regular Medicaid following the period of presumptive eligibility.


Sec. 435.1007  [Amended]

    6. In paragraph (a), the second sentence is amended by adding ``and 
1905(u)'' between ``(X)'', and ``of the Act;''.
    7. A new subpart L is added to part 435 to read as follows:

Subpart L--Option for Coverage of Special Groups

Sec.
435.1100  Scope.

Presumptive Eligibility for Children

435.1101  Definitions related to presumptive eligibility period for 
children.
435.1102  General Rules.


Sec. 435.1100  Scope.

    This subpart prescribes the requirements for providing medical 
assistance to special groups who are not eligible for Medicaid as 
categorically or medically needy.

Presumptive Eligibility for Children


Sec. 435.1101  Definitions related to presumptive eligibility period 
for children.

    Applicable income level means the highest income eligibility 
standard established under the plan that is most likely to be used to 
establish the regular Medicaid eligibility of a child of the age 
involved.
    Application form means at a minimum the application form used to 
apply for Medicaid under the poverty-level-related eligibility groups 
described in section 1902(l) of the Act.
    Period of presumptive eligibility means a period that begins on the 
date on which a qualified entity determines that a child is 
presumptively eligible and ends with the earlier of--
    (1) In the case of a child on whose behalf a Medicaid application 
has been filed, the day on which a decision is made on that 
application; or
    (2) In the case of a child on whose behalf a Medicaid application 
has not been filed, the last day of the month following the month in 
which the determination of presumptive eligibility was made.
    Qualified entity means an entity that is determined by the agency 
to be capable of making determinations of presumptive eligibility for 
children, and that--
    (1) Furnishes health care items and services covered under the 
approved plan and is eligible to receive payments under the approved 
plan;
    (2) Is authorized to determine the eligibility of a child to 
participate in a Head Start program under the Head Start Act;
    (3) Is authorized to determine eligibility of a child to receive 
child care services for which financial assistance is provided under 
the Child Care and Development Block Grant Act of 1990; or
    (4) Is authorized to determine eligibility of an infant or child to 
receive assistance under the special nutrition program for women, 
infants, and children (WIC) under section 17 of the Child Nutrition Act 
of 1966.
    Services means all services covered under the plan including EPSDT 
(see part 440 of this chapter.)


Sec. 435.1102  General rules.

    (a) The agency may provide services to children under age 19 during 
one or more periods of presumptive eligibility based on a determination 
of presumptive eligibility made by a qualified entity on the basis that 
the child's estimated gross family income, or at State option family 
income after application of simple disregards, does not exceed the 
applicable income level.
    (b) If the agency elects to provide services to children during a 
period of presumptive eligibility, the agency must--
    (1) Provide qualified entities with application forms for Medicaid 
and information on how to assist parents, guardians, and other persons 
in completing and filing such forms;
    (2) Establish procedures to ensure that qualified entities--
    (i) Notify the agency that a child is presumptively eligible within 
5 working days after the date that the determination is made;
    (ii) In writing at the time that a determination is made, inform 
the parent or custodian of a child determined to be presumptively 
eligible that if a Medicaid application is not filed by the last day of 
the following month, the presumptive eligibility will end on that last 
day and that if a Medicaid application is filed by the last day of the 
following month, the child's presumptive eligibility will end on the 
day that a decision is made on the Medicaid application; and
    (iii) In writing at the time that a determination is made, inform 
the parent or custodian of a child determined not to be presumptively 
eligible of the reason for the determination and that he/she may file 
an application for Medicaid on the child's behalf;
    (3) Provide all services covered under the plan, including EPSDT: 
and
    (4) Make determinations of presumptive eligibility available 
Statewide to all children.
    (c) The agency may establish reasonable methods of determining the 
number of periods of presumptive eligibility that will be authorized 
for a child in a given time frame.
    D. Subchapter D is redesignated as subchapter F; and Parts 462, 
466, 473, and 476 are redesignated as parts 475, 476, 478 and 480, 
respectively.
    E. Subchapter E is redesignated as subchapter G.
    F. A new subchapter D consisting of part 457 is added to read as 
follows:

[[Page 60946]]

SUBCHAPTER D--CHILDREN'S HEALTH INSURANCE PROGRAM (CHIP)

PART 457--ALLOTMENTS AND GRANTS TO STATES

Subpart A--Introduction; State Plans for Child Health Insurance 
Programs and Outreach Strategies

Sec.
457.1  Program description.
457.2  Basis and scope of subchapter D.
457.10  Definitions and use of terms.
457.30  Basis, scope, and applicability of subpart A.
457.40  State program administration.
457.50  State plan.
457.60  Amendments.
457.65  Duration of State plans and plan amendments.
457.70  Program options.
457.80  Current State child health insurance coverage and 
coordination.
457.90  Outreach.
457.110  Enrollment assistance and information requirements.
457.120  Public involvement in program development.
457.125  Provision of child health assistance to American Indian and 
Alaska Native children
457.130  Civil rights assurance.
457.135  Assurance of compliance with other provisions.
457.140  Budget.
457.150  HCFA review of State plan material.
457.160  Notice and timing of HCFA action on State plan material.
457.170  Withdrawal process.
457.190   Administrative and judicial review of action on State plan 
material.

Subpart B--[Reserved]

Subpart C--State Plan Requirements: Eligibility, Screening, 
Applications, and Enrollment

457.300  Basis, scope, and applicability.
457.301  Definitions and use of terms.
457.305  State plan provisions.
457.310  Targeted low-income child.
457.320  Other eligibility standards.
457.340  Application.
457.350  Eligibility screening.
457.360  Facilitating Medicaid enrollment.
457.361  Application for and enrollment in CHIP.
457.365  Grievances and appeals.

Subpart D--Coverage and Benefits: General Provisions

457.401  Basis, scope, and applicability.
457.402  Child health assistance and other definitions.
457.410  Health benefits coverage options.
457.420  Benchmark health benefits coverage.
457.430  Benchmark-equivalent health benefits coverage.
457.431  Actuarial report for benchmark-equivalent coverage.
457.440  Existing comprehensive State-based coverage.
457.450  Secretary-approved coverage.
457.470  Prohibited coverage.
457.475  Limitations on coverage: Abortions.
457.480  Preexisting condition exclusions and relation to other 
laws.
457.490  Delivery and utilization control systems.
457.495  Grievances and appeals.

Subpart E--State Plan Requirements: Beneficiary Financial 
Responsibilities

457.500  Basis, scope, and applicability.
457.505  General State plan requirements.
457.510  Premiums, enrollment fees, or similar fees: State plan 
requirements.
457.515  Co-payments, coinsurance, deductibles, or similar cost 
sharing charges: State plan requirements.
457.520  Cost sharing for well-baby and well-child care.
457.525  Public schedule.
457.530  General cost sharing protection for lower income children.
457.535  Cost sharing protection to ensure enrollment of American 
Indians/Alaska Natives.
457.540  Cost sharing charges for children in families at or below 
150 percent of the Federal poverty line (FPL).
457.545  Cost sharing for children in families above 150 percent of 
the FPL.
457.550  Restriction on the frequency of cost sharing charges on 
targeted low-income children in families at or below 150 percent of 
the FPL.
457.555  Maximum allowable cost sharing charges on targeted low-
income children at or below 150 percent of the FPL.
457.560  Cumulative cost sharing maximum.
457.565  Grievances and appeals.
457.570  Disenrollment protections.

Subpart F--[Reserved]

Subpart G--Strategic Planning, Reporting, and Evaluation

457.700  Basis, scope, and applicability.
457.710  State plan requirements: Strategic objectives and 
performance goals.
457.720  State plan requirement: State assurance regarding data 
collection, records, and reports.
457.730  State plan requirement: State annual reports and 
evaluation.
457.735  State plan requirement: State assurance of the quality and 
appropriateness of care.
457.740  State expenditures and statistical reports.
457.750  Annual report.
457.760  State evaluations.

Subpart H--Substitution of Coverage

457.800  Basis, scope, and applicability.
457.805  State plan requirements: Private coverage substitution.
457.810  Premium assistance for employer-sponsored group health 
plans: Required protections against substitution.

Subpart I--Program Integrity and Beneficiary Protections

457.900  Basis, scope, and applicability.
457.902  Definitions.
457.910  State program administration.
457.915  Fraud detection and investigation.
457.920  Accessible means to report fraud and abuse.
457.925  Preliminary investigation.
457.930  Full investigation, resolution, and reporting requirements.
457.935  Sanctions and related penalties.
457.940  Procurement standards.
457.945  Certification for contracts and proposals.
457.950  Contract and payment requirements including certification 
of payment-related information.
457.955  Conditions necessary to contract as a managed care entity 
(MCE).
457.960  Reporting changes in eligibility and redetermining 
eligibility.
457.965  Documentation.
457.970  Eligibility and income verification.
457.975  Redetermination intervals in cases of suspected enrollment 
fraud.
457.980  Verification of enrollment and provider services received.
457.985  Enrollee rights to file grievances and appeals.
457.990  Privacy protections.
457.995  Consumer Bill of Rights and Responsibilities.

Subpart J--Allowable Waivers: General Provisions

457.1000  Basis, scope, and applicability.
457.1005  Waiver for cost-effective coverage through a community-
based health delivery system.
457.1010  Waiver for purchase of family coverage.
457.1015  Cost-effectiveness.

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

Subpart A--Introduction; State Plans for Child Health Insurance 
Programs and Outreach Strategies


Sec. 457.1  Program description.

    Title XXI of the Social Security Act, enacted in 1997 by the 
Balanced Budget Act, authorizes Federal grants to States for provision 
of child health assistance to uninsured, low-income children. The 
program is jointly financed by the Federal and State governments and 
administered by the States. Within broad Federal rules, each State 
decides eligible groups, types and ranges of services, payment levels 
for benefit coverage, and administrative and operating procedures.


Sec. 457.2  Basis and scope of subchapter D.

    (a) Basis. This subchapter implements title XXI of the Act, which 
authorizes Federal grants to States for the provision of child health 
assistance to uninsured, low-income children.
    (b) Scope. The regulations in subchapter D set forth State plan 
requirements, standards, procedures, and conditions for obtaining 
Federal financial participation (FFP) to enable States to provide 
health benefit coverage to targeted low-income children, as defined in 
457.310(b).

[[Page 60947]]

Sec. 457.10  Definitions and use of terms.

    For purposes of this part the following definitions apply:
    American Indian/Alaska Native
(AI/AN) means--

    (1) A member of a Federally recognized Indian tribe, band, or group 
or a descendant in the first or second degree of any such member;
    (2) An Eskimo or Aleut or other Alaska Native enrolled by the 
Secretary of the Interior pursuant to the Alaska Native Claims 
Settlement Act, 43 U.S.C. 1601 et seq.; 
    (3) A person who is considered by the Secretary of the Interior to 
be an Indian for any purpose; or
    (4) A person who is determined to be an Indian under regulations 
promulgated by the Secretary.
    Child means an individual under the age of 19.
    Child health assistance has the meaning assigned in Sec. 457.402.
    Children's Health Insurance Program (CHIP) means a program 
established and administered by a State, but jointly funded with the 
Federal government to provide child health assistance to uninsured, 
low-income children through a separate child health program, a Medicaid 
expansion program, or a combination of both.
    Combination program means a program under which a State provides 
child health assistance through both a Medicaid expansion program and a 
separate child health program.
    Contractor has the meaning assigned in Sec. 457.902.
    Cost-effectiveness has the meaning assigned in Sec. 457.1015.
    Creditable health coverage has the meaning given the term 
``creditable coverage'' at 45 CFR 146.113.
    Emergency medical condition has the meaning assigned at 
Sec. 457.402.
    Emergency medical services has the meaning assigned at 
Sec. 457.402.
    Employment with a public agency has the meaning assigned in 
Sec. 457.301.
    Family income means income as determined by the State for a family 
as defined by the State.
    Federal fiscal year starts on the first day of October each year 
and ends on the last day of September.
    Fee-for-service entity has the meaning assigned in Sec. 457.902.
    Grievance has the meaning assigned at Sec. 457.902.
    Group health insurance coverage has the meaning assigned at 45 CFR 
144.103.
    Group health plan has the meaning assigned at 45 CFR 144.103.
    Health benefits coverage has the meaning assigned in Sec. 457.402.
    Health maintenance organization (HMO) plan has the meaning assigned 
in Sec. 457.420.
    Legal obligation has the meaning assigned in Sec. 457.555.
    Low-income child means a child whose family income is at or below 
200 percent of the poverty line for the size family involved.
    Managed care entity (MCE) has the meaning assigned in Sec. 457.902.
    Medicaid applicable income level means, with respect to a child, 
the effective income level (expressed as a percentage of the poverty 
line) that has been specified under the State plan under title XIX of 
the Act (including for these purposes, a section 1115 waiver authorized 
by the Secretary or under the authority of section 1902(r)(2)), as of 
March 31, 1997, for the child to be eligible for medical assistance 
under either section 1902(l)(2) or 1905(n)(2).
    Medicaid expansion program means a program where a State receives 
Federal funding at the enhanced matching rate available for expanding 
eligibility to targeted low-income children.
    Post-stabilization services has the meaning assigned in 
Sec. 457.402.
    Poverty line/Federal poverty level means the poverty guidelines 
updated annually in the Federal Register by the U.S. Department of 
Health and Human Services under authority of 42 U.S.C. 9902(2).
    Preexisting condition exclusion has the meaning assigned at 45 CFR 
144.103.
    Premium assistance for employer-sponsored group health plans means 
State payment of part or all of premiums for group health plan or group 
health insurance coverage of an eligible child or children.
    Public agency has the meaning assigned in Sec. 457.301.
    Separate child health program means a program under which a State 
receives Federal funding from its title XXI of the Act allotment under 
an approved plan that obtains child health assistance through obtaining 
coverage that meets the requirements of section 2103 of the Act.
    State means all States, the District of Columbia, Puerto Rico, the 
U.S. Virgin Islands, Guam, American Samoa and the Northern Mariana 
Islands.
    State health benefits plan has the meaning assigned in 
Sec. 457.301.
    State plan means the approved or pending title XXI State child 
health plan.
    State program integrity unit has the meaning assigned in 
Sec. 457.902.
    Targeted low-income child has the meaning assigned in Sec. 457.310.
    Uncovered child means a child who does not have creditable health 
coverage.
    Well-baby and well-child care services means regular or preventive 
diagnostic and treatment services necessary to ensure the health of 
babies and children as defined by the State. For purposes of cost 
sharing, the term has the meaning assigned at Sec. 457.520.


Sec. 457.30  Basis, scope, and applicability of subpart A.

    (a) Statutory basis. This subpart is based on the following 
sections of the Act:
    (1) Section 2101(a) of the Act specifies that the purpose of title 
XXI of the Act is to provide to States funds to enable them to initiate 
and expand child health assistance to uninsured low-income children in 
an effective and efficient manner that is coordinated with other 
sources of health benefits coverage for children.
    (2) Section 2101(b) requires that the State submit a State plan.
    (3) Section 2102(a) sets forth requirements regarding the contents 
of the State plan.
    (4) Section 2102(c) requires that the State plan include a 
description of the procedures to be used by the State to accomplish 
outreach and coordination with other health insurance programs.
    (5) Section 2106 specifies the process for submission, approval, 
and amendment of State plans.
    (6) Section 2107(c) requires that the State plan include a 
description of the process used to involve the public in the design and 
implementation of the plan.
    (7) Section 2107(d) requires that the State plan include a 
description of the budget for the plan.
    (8) Section 2107(e) of the Act, which provides that certain 
provisions of title XIX and title XI of the Act apply under title XXI 
of the Act in the same manner that they apply under title XIX.
    (b) Scope. This subpart sets forth provisions governing the 
administration of a CHIP, the general requirements for a State plan, 
and a description of the process for review of a State plan or plan 
amendment.
    (c) Applicability. This subpart applies to all States that request 
Federal financial participation to provide child health assistance 
under title XXI of the Act.


Sec. 457.40  State program administration.

    (a) Program operation. The State must implement its program in 
accordance with the approved State plan, any approved State plan 
amendments, the requirements of title XXI and title XIX of the Act (as 
appropriate), and the

[[Page 60948]]

regulations in this chapter. HCFA monitors the operation of the 
approved State plan and plan amendments to ensure compliance with the 
requirements of title XXI, title XIX of the Act (as appropriate) and 
this chapter.
    (b) State authority to submit State plan. A State plan or plan 
amendment must be signed by the State Governor, or signed by an 
individual who has been delegated authority by the Governor to submit 
it.
    (c) State program officials. The State must identify, in the State 
plan or State plan amendment, the State officials who are responsible 
for program administration and financial oversight.
    (d) State legislative authority. The State plan must include an 
assurance that the State will not claim expenditures for child health 
assistance prior to the time that the State has legislative authority 
to operate the State plan or plan amendment as approved by HCFA.


Sec. 457.50  State plan.

    The State plan is a comprehensive written statement submitted by 
the State to HCFA for approval, which describes the purpose, nature, 
and scope of the State's CHIP and gives assurance that the program is 
administered in conformity with the specific requirements of title XXI, 
title XIX of the Act (as appropriate), and the regulations in this 
chapter. The State plan contains all information necessary for HCFA to 
determine whether the plan can be approved to serve as a basis for 
Federal financial participation (FFP) in the State program.


Sec. 457.60  Amendments.

    (a) Submittal of plan amendments. A State may amend its approved 
State plan in whole or in part at any time through the submission of an 
amendment to HCFA. A State must amend its State plan whenever necessary 
to reflect--
    (1) Changes in Federal law, regulations, policy interpretations, or 
court decisions;
    (2) Changes in State law, organization, policy, or operation of the 
program; and
    (3) Changes in the source of the State share of funding.
    (b) Budget amendment. When the State plan amendment makes any 
modification to the approved budget, a State must include an amended 
budget that describes the State's planned expenditures for a three year 
period.


Sec. 457.65  Duration of State plans and plan amendments.

    (a) Effective date in general. (1) A State plan or plan amendment 
takes effect on the day specified in the plan but no earlier than 
October 1, 1997. The effective date is no earlier than the date on 
which the State begins to incur costs to implement its State plan or 
plan amendment.
    (2) A State plan amendment that takes effect prior to submission of 
the amendment to HCFA may remain in effect only until the end of the 
State fiscal year in which the State makes it effective, or, if later, 
the end of the 90-day period in which the State makes it effective, 
unless the State submits the amendment to HCFA for approval before the 
end of that State fiscal year or 90-day period.
    (b) Amendments relating to eligibility or benefits. A State plan 
amendment that eliminates or restricts eligibility or benefits may not 
be in effect for longer than a 60-day period unless the amendment is 
submitted to HCFA before the end of that 60-day period. The amendment 
may not take effect unless--
    (1) The State certifies that it has provided prior public notice of 
the proposed change in a form and manner provided under applicable 
State law; and
    (2) The public notice was published before the requested effective 
date of change.
    (c) Amendments relating to cost sharing. A State plan amendment 
that implements cost sharing charges, increases existing cost sharing 
charges, or increases the cumulative cost sharing maximum as set forth 
at Sec. 457.555 is considered an amendment that restricts benefits and 
must meet the requirements in paragraph (b) of this section.
    (d) Amendments relating to source of State funding. (1) A State 
must submit a plan amendment to HCFA before any change in the source of 
the State share of funding from the source reflected in the approved 
State plan can take effect.
    (2) A State is not required to submit a plan amendment for changes 
in the type of non-health care related revenues used to generate 
general revenue.
    (e) Continued approval. An approved State plan continues in effect 
unless--
    (1) The State adopts a new plan by obtaining approval under 
Sec. 457.60 of an amendment to the State plan; or
    (2) The Secretary finds substantial noncompliance of the plan with 
the requirements of the statute or regulations.


Sec. 457.70  Program options.

    (a) Health benefits coverage options. A State may elect to obtain 
health benefits coverage under its plan through--
    (1) A Medicaid expansion program;
    (2) A separate child health program; or
    (3) A combination program.
    (b) State plan requirement. A State plan must include a description 
of the State's chosen program option.
    (c) Medicaid expansion program requirements. A State that elects to 
obtain health benefits coverage through its Medicaid plan must--
    (1) Meet the requirements of the following subparts of this part--
    (i) Subpart A;
    (ii) Subpart B (if the State claims administrative costs under 
title XXI of the Act;
    (iii) Subpart C (with respect to the definition of a targeted low-
income child only);
    (iv) Subpart F (with respect to determination of the allotment for 
purposes of the enhanced matching rate, determination of the enhanced 
matching rate, and payment of any claims for administrative costs under 
title XXI of the Act only);
    (v) Subpart G;
    (vi) Subpart H (if the State elects the eligibility group for 
optional targeted low-income children and elects to pay for employer-
sponsored insurance); and
    (vii) Subpart J (if the State claims administrative costs under 
title XXI of the Act and seeks a waiver of limitations on such claims 
based on a community based health delivery system).
    (2) Submit an approvable amendment to the State's Medicaid State 
plan as appropriate.
    (d) Separate child health program requirements. A State that elects 
to obtain health benefits coverage under its plan through a separate 
child health program must meet all the requirements of part 457.
    (e) Combination program requirements. A State that elects to obtain 
health benefits coverage through both a separate child health program 
and a Medicaid expansion program must meet the requirements of 
paragraphs (c) and (d) of this section.


Sec. 457.80  Current State child health insurance coverage and 
coordination.

    A State plan must include a description of--
    (a) The extent to which, and manner in which, children in the 
State, including targeted low-income children and other classes of 
children, by income level and other relevant factors, currently have 
creditable health coverage (as defined in Sec. 457.10) and, if 
sufficient information is available, whether the creditable health 
coverage they have is under public health insurance programs or health 
insurance

[[Page 60949]]

programs that involve public-private partnerships;
    (b) Current State efforts to provide or obtain creditable health 
coverage for uncovered children, including the steps the State is 
taking to identify and enroll all uncovered children who are eligible 
to participate in public health insurance programs and health insurance 
programs that involve public-private partnerships;
    (c) Procedures the State uses to accomplish coordination of CHIP 
with other public and private health insurance programs, including 
procedures designed to increase the number of children with creditable 
health coverage and to ensure that only eligible targeted low-income 
children are covered under CHIP.


Sec. 457.90  Outreach.

    (a) Procedures required. A State plan must include a description of 
procedures used to inform families of children likely to be eligible 
for child health assistance under the plan or under other public or 
private health coverage programs of the availability of the programs, 
and to assist them in enrolling their children in one of the programs.
    (b) Examples. Outreach strategies may include but are not limited 
to the following:
    (1) Education and awareness campaigns, including targeted mailings 
and information distribution through various organizations.
    (2) Enrollment simplification, such as simplified or joint 
application forms.


Sec. 457.110  Enrollment assistance and information requirements.

    (a) Information disclosure. The State must make accurate, easily 
understood information available to families of targeted low-income 
children and provide assistance to these families in making informed 
health care decisions about their health plans, professionals, and 
facilities.
    (b) Required information. The State must have a mechanism in place 
to ensure that the following information is made available to 
applicants and beneficiaries in a timely manner:
    (1) Types of benefits, and amount, duration and scope of benefits 
available under the program.
    (2) Names and locations of current participating providers.


Sec. 457.120  Public involvement in program development.

    A State plan must include a description of the method the State 
uses to--
    (a) Involve the public in both the design and initial 
implementation of the program; and
    (b) Ensure ongoing public involvement once the State plan has been 
implemented.


Sec. 457.125  Provision of child health assistance to American Indian 
and Alaska Native children.

    (a) Enrollment. A State must include a description of procedures 
used to ensure the provision of child health assistance to American 
Indian and Alaska Native children. HCFA requests that the State 
official responsible for CHIP consult with Federally recognized Tribes 
and other Indian tribes and organizations in the State on the 
development and implementation of these procedures.
    (b) Exemption from cost sharing. HCFA will not approve a State plan 
that imposes cost sharing on American Indian and Alaska Native 
children.


Sec. 457.130  Civil rights assurance.

    The State plan must include an assurance that the State will comply 
with all applicable civil rights requirements, including title VI of 
the Civil Rights Act of 1964, title II of the Americans with 
Disabilities Act of 1990, section 504 of the Rehabilitation Act of 
1973, the Age Discrimination Act of 1975, 45 CFR part 80, part 84, and 
part 91, and 28 CFR part 35.


Sec. 457.135  Assurance of compliance with other provisions.

    The State plan must include an assurance that the State will comply 
under title XXI with the following provisions of titles XIX and XI of 
the Social Security Act:
    (a) Section 1902(a)(4)(C) (relating to conflict of interest 
standards).
    (b) Paragraphs (2), (16) and (17) of section 1903(i) (relating to 
limitations on payment).
    (c) Section 1903(w) (relating to limitations on provider donations 
and taxes).
    (d) Section 1132 (relating to periods within which claims must be 
filed).


Sec. 457.140  Budget.

    The State plan, or plan amendment as required at Sec. 457.60(b), 
must include a budget that describes the State's planned expenditures 
for a 3-year period. The budget must describe:
    (a) Planned use of funds, including--
    (1) Projected amount to be spent on health services;
    (2) Projected amount to be spent on administrative costs, such as 
outreach, child health initiatives, and evaluation; and
    (3) Assumptions on which the budget is based, including cost per 
child and expected enrollment.
    (b) Projected source of non-Federal plan expenditures, including 
any requirements for cost-sharing by beneficiaries.


Sec. 457.150  HCFA review of State plan material.

    (a) Basis for action. HCFA reviews each State plan and plan 
amendment to determine whether it meets or continues to meet the 
requirements for approval under relevant Federal statutes, regulations, 
and guidelines furnished by HCFA to assist in the interpretation of 
these regulations.
    (b) Action on complete plan. HCFA approves or disapproves the State 
plan or plan amendment only in its entirety.
    (c) Authority. The HCFA Administrator exercises delegated authority 
to review and then to approve or disapprove the State plan or plan 
amendment, or to determine that previously approved material no longer 
meets the requirements for approval. The Administrator does not make a 
final determination of disapproval without first consulting the 
Secretary.
    (d) Initial submission. The Administrator designates an official to 
receive the initial submission of State plans.
    (e) Review process. (1) The Administrator designates an individual 
to coordinate HCFA's review for each State that submits a State plan.
    (2) HCFA notifies the State of the identity of the designated 
individual in the first correspondence relating to that plan, and at 
any time there is a change in the designated individual.
    (3) In the temporary absence of the designated individual during 
regular business hours, an alternate individual will act in place of 
the designated individual.


Sec. 457.160  Notice and timing of HCFA action on State plan material.

    (a) Notice of final determination. The Administrator provides 
written notification to the State of the approval or disapproval of a 
State plan or plan amendment.
    (b) Timing. (1) A State plan or plan amendment will be considered 
approved unless HCFA, within 90 calendar days after receipt of the 
State plan or plan amendment in the HCFA central office, sends the 
State--
    (i) Written notice of disapproval; or (ii) Written notice of 
additional information it needs in order to make a final determination.
    (2) A State plan or plan amendment is considered received when the

[[Page 60950]]

designated official or individual, as determined in Sec. 457.150(d) and 
(e), receives an electronic, fax or paper copy of the complete 
material.
    (3) If HCFA requests additional information, the 90-day review 
period for HCFA action on the State plan or plan amendment--
    (i) Stops on the day HCFA sends a written request for additional 
information or the next business day if the request is sent on a 
Federal holiday or weekend; and
    (ii) Resumes on the next calendar day after the HCFA designated 
individual receives an electronic, fax, or hard copy from the State of 
all the requested additional information, unless the information is 
received after 5 p.m. eastern time on a day prior to a non-business day 
or any time on a non-business day, in which case the review period 
resumes on the following business day.
    (4) The 90-day review period cannot stop or end on a non-business 
day. If the 90th calendar day falls on a non-business day, HCFA will 
consider the 90th day to be the next business day.
    (5) HCFA may send written notice of its need for additional 
information as many times as necessary to obtain the complete 
information necessary to review the State plan or plan amendment.


Sec. 457.170  Withdrawal process.

    A State may withdraw its State plan or plan amendment at any time 
during the review process by providing written notice to HCFA of the 
withdrawal.


Sec. 457.190  Administrative and judicial review of action on State 
plan material.

    (a) Request for reconsideration. Any State dissatisfied with the 
Administrator's action on State plan material under Sec. 457.150 may, 
within 60 days after receipt of the notice of final determination 
provided under Sec. 457.160(a), request that the Administrator 
reconsider whether the State plan or plan amendment conforms with the 
requirements for approval.
    (b) Notice of hearing. Within 30 days after receipt of the request, 
the Administrator notifies the State of the time and place of a hearing 
to be held for the purpose of reconsideration.
    (c) Hearing procedures. The hearing procedures set forth in part 
430, subpart D of this chapter govern a hearing requested under this 
section.
    (d) Effect of hearing decision. HCFA does not delay the denial of 
Federal funds, if required by the Administrator's original 
determination, pending a hearing decision. If the Administrator 
determines that his or her original decision was incorrect, HCFA pays 
the State a lump sum equal to any funds incorrectly denied.
    (e) Judicial review. Judicial review of a final determination made 
under this subchapter is governed by Sec. 430.38 of this chapter.

Subpart B--[Reserved]

Subpart C--State Plan Requirements: Eligibility, Screening, 
Applications, and Enrollment


Sec. 457.300  Basis, scope, and applicability.

    (a) Statutory basis. This subpart interprets and implements --
    (1) Section 2102(b) of the Act, which relates to eligibility 
standards and methodologies;
    (2) Section 2105(c)(6)(B) of the Act, which relates to no payment 
for expenditures for child health assistance provided to children 
eligible for coverage under other Federal health care programs other 
than programs operated or financed by the Indian Health Service; and
    (3) Section 2110(b) of the Act, which provides a definition of 
targeted low-income child.
    (b) Scope. This subpart sets forth the requirements relating to 
eligibility standards and to screening, application and enrollment 
procedures.
    (c) Applicability. The requirements of this subpart apply to child 
health assistance provided under a separate child health program and 
apply to a Medicaid expansion program only with respect to the 
definition of a targeted low-income child.


Sec. 457.301  Definitions and use of terms.

    As used in this subpart--
    Employment with a public agency includes employment with an entity 
under a contract with a public agency;
    Public agency means a State, county, city or other type of 
municipal agency, including a public school district, transportation 
district, irrigation district, or any other type of public entity;
    State health benefits plan means a plan that is offered or 
organized by the State government on behalf of State employees or other 
public agency employees within the State. The term does not include a 
separately run county, city, or other public agency plan or a plan that 
provides coverage only for a specific type of care, such as dental or 
vision care.


Sec. 457.305  State plan provisions.

    The State plan must include a description of standards consistent 
with Sec. 457.310 and Sec. 457.320 used to determine the eligibility of 
children for coverage under the State plan.


Sec. 457.310  Targeted low-income child.

    (a) Definition. A targeted low-income child is a child who meets 
the standards set forth in paragraph (b) of this section and other 
eligibility standards established by the State under Sec. 457.320.
    (b) Standards. A targeted low-income child must meet the following 
standards:
    (1) Financial need. A child who resides in a State with a Medicaid 
applicable income level must have a family income at or below 200 
percent of the Federal poverty line or family income that--
    (i) Exceeds the Medicaid applicable income level but not by more 
than 50 percentage points (expressed as a percentage of the Federal 
poverty line); or
    (ii) Does not exceed the Medicaid applicable income level 
calculated using June 1, 1997 instead of March 31, 1997.
    (2) No other coverage. A targeted low-income child must not be--
    (i) Found eligible for Medicaid (determined either through the 
Medicaid application process or the screening process described at 
Sec. 457.350); or
    (ii) Covered under a group health plan or under health insurance 
coverage, unless the health insurance coverage program has been in 
operation since before July 1, 1997, and is administered by a State 
that receives no Federal funds for the program's operation. A child 
would not be considered covered under a group health plan if the child 
did not have reasonable access to care under that plan.
    (c) Exclusions. Notwithstanding paragraph (a) of this section, the 
following groups are excluded from the definition of targeted low-
income children:
    (1) Children eligible for certain State health benefits coverage. 
(i) A targeted low-income child may not be a member of a family 
eligible for health benefits coverage under a State health benefits 
plan in the State on the basis of a family member's employment with a 
public agency, even if the family declines to accept the coverage.
    (ii) A child is considered eligible for health benefits coverage 
under a State health benefits plan if a more than nominal contribution 
to the cost of health benefits coverage under a State health benefits 
plan is available from the State or public agency with respect to the 
child. A contribution over $10

[[Page 60951]]

towards the cost of dependent coverage is considered more than nominal.
    (iii) The contribution with respect to the child is calculated by 
deducting amounts only available to an adult employee from the total 
State or public agency contribution.
    (2) Residents of an institution. A child must not be an inmate of a 
public institution or a patient in an institution for mental diseases 
as defined at Sec. 435.1009 of this chapter, at the time of initial 
application or any redetermination of eligibility.


Sec. 457.320  Other eligibility standards.

    (a) Except as provided in paragraph (b) of this section, the State 
plan may adopt eligibility standards for one or more groups of children 
related to--
    (1) Geographic area(s) served by the plan;
    (2) Age (not to exceed 18 years);
    (3) Income;
    (4) Resources;
    (5) Spenddowns;
    (6) Disposition of resources;
    (7) Residency;
    (8) Disability status;
    (9) Access to or coverage under other health coverage; or
    (10) Duration of eligibility (as long as eligibility is determined 
at least every 12 months).
    (b) In establishing eligibility standards, a State may not--
    (1) Cover children with higher family income without covering 
children with a lower family income within any defined group of covered 
targeted low-income children;
    (2) Deny eligibility based on a preexisting medical condition;
    (3) Restrict eligibility based on disability status;
    (4) Require that any individual provide a social security number, 
including the social security number of the child or that of a family 
member whose income or resources might be used in making the child's 
eligibility determination;
    (5) Exclude American Indian or Alaska Native children based on 
eligibility for, or access to, medical care funded by the Indian Health 
Service;
    (6) Violate any other Federal laws or regulations pertaining to 
eligibility for CHIP, including laws that require exclusion of certain 
income or resources from all consideration and laws that require 
verification of certain items or statuses;
    (7) Exclude individuals based on citizenship or nationality, to the 
extent that the children are U.S. citizens, U.S. nationals or qualified 
aliens (except to the extent that 8 U.S.C. 1613(a) precludes them from 
receiving Federal means-tested public benefits).
    (c) In establishing eligibility for CHIP coverage, States must 
obtain proof of citizenship (including nationals of the U.S.) and 
verify qualified alien status in accordance with section 432 of PRWORA, 
as amended (8 U.S.C. 1642).


Sec. 457.340  Application.

    (a) Opportunity to apply. The State must afford every individual 
the opportunity to apply for child health assistance without delay.
    (b) Application forms. The application form used to apply for child 
health assistance may be--
    (1) A joint application for both Medicaid and CHIP; or
    (2) A separate application for CHIP only.


Sec. 457.350  Eligibility screening.

    (a) State plan requirement. The State plan must include a 
description of the screening procedures that the State will use, at 
intake and any follow-up eligibility determination, including any 
periodic redetermination, to ensure that only targeted low-income 
children are furnished child health assistance under the plan.
    (b) Screening with joint application. A State that uses a joint 
application for Medicaid and CHIP must use the screening procedures 
described in paragraphs (c) and (d) of this section for children who 
apply for CHIP.
    (c) Screening objectives. Except as described in paragraph (e) of 
this section, a State must use screening procedures to identify, at 
minimum, any child who--
    (1) Is potentially eligible for Medicaid under one of the poverty 
level related groups described in section 1902(l) of the Act; or
    (2) If the State has not extended eligibility in the groups 
described in paragraph (c)(1) of this section to children of a 
particular age, is potentially eligible for Medicaid because the child 
meets the highest categorical income standards used under Medicaid to 
establish eligibility for non-disabled children of that age.
    (d) Eligibility test. To identify the children in paragraph (c) of 
this section, at a minimum, States must either initially apply a gross 
income test described in paragraph (d)(1) of this section and then use 
an adjusted income test described in paragraph (d)(2) of this section 
for applicants whose State-defined income exceeds the initial test, or 
use only the adjusted income test for all applicants.
    (1) Initial gross income test. Under this test, a State initially 
screens for Medicaid eligibility by comparing gross family income to 
the appropriate Medicaid income standard.
    (2) Adjusted income test. Under this test, a State screens for 
Medicaid eligibility by comparing adjusted family income to the 
appropriate Medicaid income standard. The State must apply all Medicaid 
policies relating to income for the particular Medicaid eligibility 
group, including--
    (i) Income standards;
    (ii) Income exclusions and disregards; and
    (iii) Methodologies for determining countable income and resources 
including State Medicaid policies and procedures for deeming of income.
    (e) Treatment of children found potentially eligible for Medicaid. 
After applying the appropriate eligibility tests, the State must--
    (1) Find ineligible for CHIP a child whose State-defined income or 
adjusted family income is below the applicable Medicaid income 
standard, or who is found potentially eligible for Medicaid under any 
other tests that the State has chosen to apply, unless a completed 
Medicaid application for that child is denied;
    (2) Redetermine eligibility for a child found ineligible for CHIP 
through the screening process if--
    (i) An application for Medicaid is completed for the child and the 
child is found ineligible for Medicaid; or
    (ii) The child's circumstances change and another screening shows 
that the child is ineligible for Medicaid; and
    (3) Provide that the child found ineligible for CHIP remains 
ineligible for CHIP unless the child's circumstances change even if the 
child refuses to apply for Medicaid or does not complete the Medicaid 
application process for any reason.
    (f) Treatment of child found potentially ineligible for Medicaid. 
If the State uses a screening procedure other than a full determination 
of Medicaid eligibility under all possible groups, and the screening 
reveals that the child is ineligible for Medicaid, the State must 
provide the child's family the following in writing:
    (1) A statement that, based on an initial review, the child does 
not appear eligible for Medicaid, but Medicaid eligibility can only be 
determined based on review of a full Medicaid application.
    (2) Information about Medicaid benefits (if that information was 
not already furnished).
    (3) Information about how and where to apply for Medicaid.


Sec. 457.360  Facilitating Medicaid enrollment.

    (a) State Plan requirement. The State plan must include a 
description of reasonable procedures, including the

[[Page 60952]]

procedures described in paragraphs (b) and (c) of this section, to 
ensure that children found through the screening process described in 
Sec. 457.350 to be eligible for Medicaid actually apply for and are 
enrolled in Medicaid.
    (b) The State must establish procedures through which the State 
initiates the Medicaid enrollment process for children found through 
eligibility screening to be potentially Medicaid eligible consistent 
with the following requirements:
    (1) States that use a separate Medicaid application must either--
    (i) Provide Medicaid application assistance at the CHIP office to 
the extent permitted under Medicaid law and regulations;
    (ii) Send information obtained through the screening process to the 
appropriate Medicaid office or to Medicaid staff, to begin the Medicaid 
application process; or
    (iii) Use other reasonable procedures designed to ensure 
application and enrollment in Medicaid.
    (2) States that use a joint Medicaid and CHIP application must send 
the application to the appropriate Medicaid office or to Medicaid staff 
to make the Medicaid eligibility determination.
    (c) Informed application decisions. A State must ensure that a 
decision by a family not to apply for Medicaid or not to complete the 
Medicaid application process represents an informed decision by 
providing full and complete information, in writing, about--
    (1) The State's Medicaid program, including the benefits covered 
and, restrictions on cost-sharing; and
    (2) The effect on eligibility for CHIP of neither applying for 
Medicaid nor completing the Medicaid application process.


Sec. 457.361  Application for and enrollment in CHIP.

    (a) Application assistance. A State must afford families a 
reasonable opportunity to complete the application process and must 
offer assistance to families in understanding and completing 
applications and in obtaining any required documentation.
    (b) Notice of rights and responsibilities. A State must inform 
applicants, in writing and orally if appropriate, about the eligibility 
requirements, their obligations under the program, and their right to 
file grievances and appeals in accordance Sec. 457.985.
    (c) Notice of decision concerning eligibility. The State must send 
each applicant a written notice of the decision on the application and, 
if eligibility is denied or terminated, the specific reason or reasons 
for the action and an explanation of the right to request a hearing 
within a reasonable time.
    (d) Timely determinations of eligibility. The State must establish 
time standards for determining eligibility and inform the applicant of 
those standards. These standards may not exceed forty-five calendar 
days.
    (1) In applying the time standards, the State must count each 
calendar day from the day of application to the day the agency mails 
notice of its decision to the applicant.
    (2) The agency must determine eligibility within the standards 
except in unusual circumstances, for example--
    (i) When the agency cannot reach a decision because the applicant 
delays or fails to take a required action; or
    (ii) When there is an administrative or other emergency beyond the 
agency's control.
    (3) The agency must not use the time standards--
    (i) As a waiting period before determining eligibility; or
    (ii) As a reason for denying eligibility (because it has not 
determined eligibility within the time standards).
    (e) Effective date of eligibility. The State must specify in its 
approved state plan a method for determining the effective date of CHIP 
eligibility, which can be determined based on the date of application 
or through any other reasonable method.


Sec. 457.365  Grievances and appeals.

    The State must provide enrollees in separate child health programs 
with an opportunity to file grievances and appeals for denial, 
suspension or termination of eligibility in accordance with 
Sec. 457.985.

Subpart D--Coverage and Benefits: General Provisions


Sec. 457.401  Basis, scope, and applicability.

    (a) Statutory basis. This subpart interprets and implements--
    (1) Section 2102(a)(7) of the Act, which requires that States make 
assurances relating to certain types of care;
    (2) Section 2103 of the Act, which outlines coverage requirements 
for children's health insurance;
    (3) Section 2109 of the Act, which describes the relation of the 
CHIP program to other laws;
    (4) Section 2110(a) of the Act, which describes child health 
assistance; and
    (5) Section 2110(c) of the Act, which contains definitions 
applicable to this subpart.
    (b) Scope. This subpart sets forth requirements for health benefits 
coverage and child health assistance under a separate child health 
plan.
    (c) Applicability. The requirements of this subpart apply to child 
health assistance provided under a separate child health program and do 
not apply to a Medicaid expansion program.


Sec. 457.402  Child health assistance and other definitions.

    (a) Child health assistance. For the purpose of this subpart, the 
term ``child health assistance'' means payment for part or all of the 
cost of health benefits coverage provided to targeted low-income 
children for:
    (1) Inpatient hospital services.
    (2) Outpatient hospital services.
    (3) Physician services and surgical services.
    (4) Clinic services (including health center services) and other 
ambulatory health care services.
    (5) Prescription drugs and biologicals and the administration of 
these drugs and biologicals, only if these drugs and biologicals are 
not furnished for the purpose of causing, or assisting in causing, the 
death, suicide, euthanasia, or mercy killing of a person.
    (6) Over-the-counter medications.
    (7) Laboratory and radiological services.
    (8) Prenatal care and prepregnancy family planning services and 
supplies.
    (9) Inpatient mental health services, other than services described 
in paragraph (a)(17) of this section but including services furnished 
in a State-operated mental hospital and including residential or other 
24-hour therapeutically planned structured services.
    (10) Outpatient mental health services, other than services 
described in paragraph (a)(18) of this section but including services 
furnished in a State-operated mental hospital and including community-
based services.
    (11) Durable medical equipment and other medically-related or 
remedial devices (such as prosthetic devices, implants, eyeglasses, 
hearing aids, dental devices and adaptive devices).
    (12) Disposable medical supplies.
    (13) Home and community-based health care services and related 
supportive services (such as home health nursing services, personal 
care, assistance with activities of daily living, chore services, day 
care services, respite care services, training for family members and 
minor modification to the home.)
    (14) Nursing care services (such as nurse practitioner services, 
nurse midwife services, advanced practice

[[Page 60953]]

nurse services, private duty nursing, pediatric nurse services and 
respiratory care services) in a home, school, or other setting.
    (15) Abortion only if necessary to save the life of the mother or 
if the pregnancy is the result of rape or incest.
    (16) Dental services.
    (17) Inpatient substance abuse treatment services and residential 
substance abuse treatment services.
    (18) Outpatient substance abuse treatment services.
    (19) Case management services.
    (20) Care coordination services.
    (21) Physical therapy, occupational therapy, and services for 
individuals with speech, hearing and language disorders.
    (22) Hospice care.
    (23) Any other medical, diagnostic, screening, preventive, 
restorative, remedial, therapeutic, or rehabilitative services (whether 
in a facility, home, school, or other setting) if recognized by State 
law and only if the service is--
    (i) Prescribed by or furnished by a physician or other licensed or 
registered practitioner within the scope of practice as defined by 
State law;
    (ii) Performed under the general supervision or at the direction of 
a physician; or
    (iii) Furnished by a health care facility that is operated by a 
State or local government or is licensed under State law and operating 
within the scope of the license.
    (24) Premiums for private health care insurance coverage.
    (25) Medical transportation.
    (26) Enabling services (such as transportation, translation, and 
outreach services) only if designed to increase the accessibility of 
primary and preventive health care services for eligible low-income 
individuals.
    (27) Any other health care services or items specified by the 
Secretary and not excluded under this subchapter.
    (b) Emergency medical condition means a medical condition 
manifesting itself by acute symptoms of sufficient severity (including 
severe pain) such that a prudent layperson, with an average knowledge 
of health and medicine, could reasonably expect the absence of 
immediate medical attention to result in--
    (1) Serious jeopardy to the health of the individual or, in the 
case of a pregnant woman, the health of a woman or her unborn child;
    (2) Serious impairment of bodily function; or
    (3) Serious dysfunction of any bodily organ or part.
    (c) Emergency services means covered inpatient or outpatient 
services that are--
    (1) Furnished by any provider qualified to furnish emergency 
services without requirement for prior authorization; and
    (2) Needed to evaluate or stabilize an emergency medical condition.
    (d) Post-stabilization services means medically necessary non-
emergency services furnished to an enrollee after he or she is 
stabilized related to the emergency medical condition.
    (e) Health benefits coverage means an arrangement under which 
enrolled individuals are protected from some or all liability for the 
cost of specified health care services.


Sec. 457.410  Health benefits coverage options.

    (a) Types of health benefits coverage. States may choose to provide 
any of the following four types of health benefits coverage:
    (1) Benchmark coverage in accordance with Sec. 457.420.
    (2) Benchmark-equivalent coverage in accordance with Sec. 457.430.
    (3) Existing comprehensive State-based coverage in accordance with 
Sec. 457.440.
    (4) Secretary-approved coverage in accordance with Sec. 457.450.
    (b) Required coverage. Regardless of the type of health benefits 
coverage described under paragraph (a) of this section that the State 
chooses to obtain, the State must obtain coverage for--
    (1) Well-baby and well-child care;
    (2) Immunizations in accordance with the recommendations of the 
Advisory Committee on Immunization Practices (ACIP); and
    (3) Emergency services as defined in Sec. 457.402(c).


Sec. 457.420  Benchmark health benefits coverage.

    Benchmark coverage is health benefits coverage that is 
substantially equal to the health benefits coverage in one of the 
following benefit packages:
    (a) Federal Employees Health Benefit Plan (FEHBP). The standard 
Blue Cross/Blue Shield preferred provider option service benefit plan 
that is described in and offered to Federal employees, under 5 U.S.C. 
8903(1).
    (b) State employee plan. A health benefits plan that is offered and 
generally available to State employees in the State.
    (c) Health maintenance organization (HMO) plan. The health 
insurance coverage plan that is offered through an HMO (as defined in 
section 2791(b)(3) of the Public Health Service Act) and has the 
largest insured commercial, non-Medicaid enrollment in the State.


Sec. 457.430  Benchmark-equivalent health benefits coverage.

    (a) Aggregate actuarial value. Benchmark-equivalent coverage must 
have an aggregate actuarial value determined in accordance with 
Sec. 457.431 that is at least actuarially equivalent to the coverage 
under one of the benchmark packages specified in Sec. 457.420.
    (b) Required services. Benchmark-equivalent health benefits 
coverage must include coverage for the following categories of 
services:
    (1) Inpatient and outpatient hospital services.
    (2) Physicians' surgical and medical services.
    (3) Laboratory and x-ray services.
    (4) Well-baby and well-child care, including age-appropriate 
immunizations provided in accordance with the recommendations of the 
ACIP.
    (c) Additional services. (1) In addition to the categories of 
services in paragraph (b) of this section, benchmark-equivalent 
coverage may include coverage for any additional services specified in 
Sec. 457.402.
    (2) If the benchmark coverage package used by the State for 
purposes of comparison in establishing the aggregate actuarial value of 
the benchmark-equivalent coverage package includes coverage for 
prescription drugs, mental health services, vision services or hearing 
services, the actuarial value of the coverage for each of these 
categories of service in the benchmark-equivalent coverage package must 
be at least 75 percent of the value of the coverage for such a category 
or service in the benchmark plan used for comparison by the State.
    (3) If the benchmark coverage package does not cover one of the 
categories of services in paragraph (c)(2) of this section, then the 
benchmark-equivalent coverage package may, but is not required to, 
include coverage for that category of service.


Sec. 457.431  Actuarial report for benchmark-equivalent coverage.

    (a) To obtain approval for benchmark-equivalent health benefits 
coverage described under Sec. 457.430, the State must submit to HCFA an 
actuarial report that contains an actuarial opinion that the health 
benefits coverage meets the actuarial requirements under Sec. 457.430. 
The report must also specify the benchmark coverage used for 
comparison.
    (b) The actuarial report must state that it was prepared--
    (1) By an individual who is a member of the American Academy of 
Actuaries;

[[Page 60954]]

    (2) Using generally accepted actuarial principles and methodologies 
of the American Academy of Actuaries;
    (3) Using a standardized set of utilization and price factors;
    (4) Using a standardized population that is representative of 
privately insured children of the age of those expected to be covered 
under the State plan;
    (5) Applying the same principles and factors in comparing the value 
of different coverage (or categories of services);
    (6) Without taking into account any differences in coverage based 
on the method of delivery or means of cost control or utilization used; 
and
    (7) Taking into account the ability of a State to reduce benefits 
by considering the increase in actuarial value of health benefits 
coverage offered under the State plan that results from the limitations 
on cost sharing under that coverage.
    (c) The actuary who prepares the opinion must select and specify 
the standardized set and population to be used under paragraphs (b)(3) 
and (b)(4) of this section.
    (d) The State must provide sufficient detail to explain the basis 
of the methodologies used to estimate the actuarial value or, if 
requested by HCFA, to replicate the State's result.


Sec. 457.440  Existing comprehensive State-based coverage.

    (a) General requirements. Existing comprehensive State-based health 
benefits coverage must--
    (1) Include coverage of a range of benefits;
    (2) Be administered or overseen by the State and receive funds from 
the State;
    (3) Be offered in the State of New York, Florida or Pennsylvania; 
and (4) Have been offered as of August 5, 1997.
    (b) Modifications. A State may modify an existing comprehensive 
State-based coverage program described in paragraph (a) of this section 
if--
    (1) The program continues to include a range of benefits; and
    (2) The modification does not reduce the actuarial value of the 
coverage under the program below the lower of either--
    (i) The actuarial value of the coverage under the program as of 
August 5, 1997; or
    (ii) The actuarial value of a benchmark benefit package as 
described in Sec. 457.430 evaluated at the time the modification is 
requested.


Sec. 457.450  Secretary-approved coverage.

    A State may provide health benefits coverage that the Secretary 
determines, upon application by a State, provides appropriate coverage 
for the population of targeted low-income children covered under the 
program. Secretary-approved coverage, for which no actuarial analysis 
is required, may include--
    (a) Coverage that is the same as the coverage provided under the 
Medicaid State plan;
    (b) Comprehensive coverage offered by the State under a Medicaid 
demonstration project approved by the Secretary under section 1115 of 
the Act that either includes coverage for the full Early and Periodic 
Screening, Diagnostic, and Treatment (EPSDT) benefit or that the State 
has extended to the entire Medicaid population in the State;
    (c) Coverage that includes benchmark coverage, as specified in 
Sec. 457.420, plus any additional coverage; or
    (d) Coverage, including coverage under an employer-sponsored group 
health plan purchased by the State, that the State demonstrates to be 
substantially equivalent to benchmark coverage, as specified in 
Sec. 457.420, through use of a benefit-by-benefit comparison of the 
coverage demonstrating that each benefit meets or exceeds the 
corresponding benefit in the benchmark.


Sec. 457.470  Prohibited coverage.

    A State is not required to provide health benefits coverage under 
the plan for an item or service for which payment is prohibited under 
title XXI of the Act even if any benchmark package includes coverage 
for that item or service.


Sec. 457.475  Limitations on coverage: Abortions.

    (a) General rule. FFP under title XXI of the Act is not available 
in expenditures for an abortion, or in expenditures for the purchase of 
health benefits coverage that includes coverage of abortion services 
unless the abortion services meet the conditions specified in 
paragraphs (b)(1) and (b)(2) of this section.
    (b) Exceptions. (1) Life of mother. FFP is available in 
expenditures for abortion services when a physician has found that the 
abortion is necessary to save the life of the mother.
    (2) Rape or incest. FFP is available in expenditures for abortion 
services performed to terminate a pregnancy resulting from an act of 
rape or incest.
    (c) Partial Federal funding prohibited. (1) FFP is not available to 
a State for any amount expended under the title XXI plan to assist in 
the purchase, in whole or in part, of health benefits coverage that 
includes coverage of abortions other than those specified in paragraph 
(b) of this section.
    (2) If a State wishes to have managed care entities provide 
abortions in addition to those specified in paragraph (b) of this 
section, those abortions must be provided under a separate contract 
using non-Federal funds. A State may not set aside a portion of the 
capitated rate to be paid with State-only funds, or append riders, 
attachments or addenda to existing contracts to separate the additional 
abortion services from the other services covered by the contract.
    (3) Nothing in this section affects the expenditure by a State, 
locality, or private person or entity of State, local, or private funds 
(other than those expended under the State plan) for any abortion 
services or for health benefits coverage that includes coverage of 
abortion services.


Sec. 457.480  Preexisting condition exclusions and relation to other 
laws.

    (a) Preexisting condition exclusions. (1) Subject to paragraph 
(a)(2) of this section, the State child health insurance plan may not 
permit the imposition of any pre-existing condition exclusion for 
covered benefits under the plan.
    (2) If the State obtains health benefits coverage through payment 
for, or a contract with, a group health plan or group health insurance 
coverage, the State may permit the imposition of a pre-existing 
condition exclusion but only to the extent that the exclusion is 
permitted under the applicable provisions of part 7 of subtitle B of 
title I of the Employee Retirement Income Security Act of 1974 (ERISA) 
and title XXVII of the Public Health Service Act.
    (b) Relation of title XXI to other laws. (1) ERISA. Nothing in this 
title affects or modifies section 514 of ERISA with respect to a group 
health plan as defined by section 2791(a)(1) of the Public Health 
Service Act.
    (2) Health Insurance Portability and Accountability Act (HIPAA). 
Health benefits coverage provided under a State plan and coverage 
provided as a cost-effective alternative, as described in subpart J of 
this part, is creditable coverage for purposes of part 7 of subtitle B 
of title II ERISA, title XXVII of the Public Health Service Act, and 
subtitle K of the Internal Revenue Code of 1986.
    (3) Mental Health Parity Act (MHPA). A State plan under this 
subpart must comply with the requirements of the MHPA of 1996 regarding 
parity in the application of annual and lifetime dollar limits to 
mental health benefits in accordance with 45 CFR 146.136.
    (4) Newborns and Mothers Health Protection Act (NMHPA). A State 
plan under this subpart must comply with the requirements of the NMHPA 
of 1996

[[Page 60955]]

regarding requirements for minimum hospital stays for mothers and 
newborns in accordance with 45 CFR 146.130 and 148.170.


Sec. 457.490  Delivery and utilization control systems.

    A State that elects to obtain health benefits coverage through a 
separate child health program must include in its State plan a 
description of the child health assistance provided under the plan for 
targeted low-income children, including a description of the proposed 
methods of delivery and utilization control systems. A State must--
    (a) Describe the methods of delivery of child health assistance 
including the choice of financing and the methods for assuring delivery 
of the insurance products to the children, including any variations; 
and
    (b) Describe utilization controls systems designed to ensure that 
children use only appropriate and medically necessary health care 
approved by the State or its subcontractor.


Sec. 457.495  Grievances and appeals.

    States must provide enrollees in a separate child health program 
the right to file grievances or appeals for reduction or denial of 
services as specified in Sec. 457.985.

Subpart E--State Plan Requirements: Beneficiary Financial 
Responsibilities


Sec. 457.500  Basis, scope, and applicability.

    (a) Statutory basis. This subpart implements section 2103(e) of the 
Act, which sets forth provisions regarding State plan requirements for 
cost sharing limitations and options.
    (b) Scope. This subpart consists of provisions relating to the 
imposition under a separate child health program of cost sharing 
charges including enrollment fees, premiums, deductibles, coinsurance, 
copayments, and similar cost sharing charges.
    (c) Applicability. The requirements of this subpart apply to child 
health assistance provided under a separate child health program and, 
with respect to the mandatory cost sharing waiver for AI/AN children 
only, a Medicaid expansion program.


Sec. 457.505  General State plan requirements.

    The State plan must include a description of --
    (a) The amount of premiums, deductibles, coinsurance, copayments, 
and other cost sharing imposed;
    (b) The methods, including the public schedule, the State uses to 
inform beneficiaries, applicants, providers and the general public of 
the cost sharing charges, the cumulative cost sharing maximum, and any 
changes to these amounts; and
    (c) When States purchase coverage through, or provide premium 
assistance for, employer sponsored group health plans--
    (1) The procedures the State uses to ensure that beneficiaries are 
not charged copayments, coinsurance, deductibles or similar fees on 
well-baby and well-child care as defined in Sec. 457.520. A procedure 
that primarily relies on a refund given by the State for overpayment by 
a beneficiary is not an acceptable procedure.
    (2) The procedures to ensure that AI/AN children are not charged 
premiums, copayments, coinsurance, deductibles, or similar fees as 
required in Sec. 457.535. A procedure that primarily relies on a refund 
given by the State for overpayment by a beneficiary is not an 
acceptable procedure.
    (3) The procedures to ensure that beneficiaries are not charged 
cost sharing in excess of the cumulative cost sharing maximum specified 
in Sec. 457.555. A procedure that primarily relies on a refund given by 
the State for overpayment by a beneficiary is not an acceptable 
procedure.


Sec. 457.510  Premiums, enrollment fees, or similar fees: State plan 
requirements.

    When a State imposes premiums, enrollment fees, or similar fees on 
CHIP beneficiaries, the State plan must describe--
    (a) The amount of the premium, enrollment fee or similar fee 
imposed on beneficiaries;
    (b) The time period for which the charge is imposed;
    (c) The group or groups that are subject to the premium, enrollment 
fees, or similar charges;
    (d) The consequences for a beneficiary who does not pay a charge; 
and
    (e) A methodology to ensure that total cost sharing liability for a 
family does not exceed the cumulative cost sharing maximum specified in 
Sec. 457.560. A methodology that primarily relies on a refund given by 
the State for overpayment by a beneficiary is not an acceptable 
methodology.


Sec. 457.515  Co-payments, coinsurance, deductibles, or similar cost 
sharing charges: State plan requirements.

    To impose copayments, coinsurance, deductibles or similar charges 
on beneficiaries, the State plan must describe--
    (a) The service for which the charge may be imposed;
    (b) The amount of the charge;
    (c) The group or groups that may be subject to the cost sharing 
charge;
    (d) The consequences for a beneficiary who does not pay a charge; 
and
    (e) The methodology used to ensure that total cost sharing 
liability for a family does not exceed the cumulative cost sharing 
maximum specified in Sec. 457.560. A methodology that primarily relies 
on a refund given by the State for overpayment by a beneficiary is not 
an acceptable methodology.
    (f) An assurance that--
    (1) Enrollees will not be held liable for additional costs, beyond 
the copayment amounts specified in the State plan, that are associated 
with emergency services provided at a facility that is not a 
participating provider in the enrollee's managed care network; and
    (2) The State will not charge different copayment amounts for 
emergency services, based upon the location (in network or out of 
network) at which those services were provided.


Sec. 457.520  Cost sharing for well-baby and well-child care.

    (a) The State plan may not impose copayments, deductibles, 
coinsurance or other cost sharing with respect to well-baby and well-
child care services as defined by the State in either the managed care 
delivery setting or the fee-for-service delivery setting.
    (b) For the purposes of this subpart, any of the following services 
covered under the State plan are well-baby and well-child care 
services:
    (1) All healthy newborn inpatient physician visits, including 
routine screening whether provided on an inpatient or outpatient basis.
    (2) Routine physical examinations.
    (3) Laboratory tests.
    (4) Immunizations and related office visits as recommended and 
updated in the American Academy of Pediatrics (AAP) ``Guidelines for 
Health Supervision III'' and described in ``Bright Futures: Guidelines 
for Health Supervision of Infants, Children and Adolescents.''
    (5) Routine preventive and diagnostic dental services (such as oral 
examinations, prophylaxis and topical fluoride applications, sealants, 
and x-rays) as described in the most recent guidelines issued by the 
American Academy of Pediatric Dentistry (AAPD).


Sec. 457.525  Public schedule.

    (a) The State must make available to the groups in paragraph (b) of 
this section a public schedule that contains the following information:
    (1) Current cost sharing charges.
    (2) Beneficiary groups subject to the charges.
    (3) Cumulative cost sharing maximums.

[[Page 60956]]

    (4) The consequences for a beneficiary who does not pay a charge.
    (b) The State must make the public schedule available to the 
following groups:

    (1) CHIP beneficiaries, at the time of enrollment, and when cost 
sharing charges and cumulative cost sharing maximums are revised.
    (2) CHIP applicants, at the time of application.
    (3) All CHIP participating providers.
    (4) The general public.


Sec. 457.530  General cost sharing protection for lower income 
children.

    The State may vary premiums, deductibles, coinsurance, copayments 
or any other cost sharing based on family income only in a manner that 
does not favor children from families with higher income over children 
from families with lower income.


Sec. 457.535  Cost sharing protection to ensure enrollment of American 
Indians/Alaska Natives.

    States must exclude from premiums, deductibles, coinsurance, 
copayments or any other cost sharing charges those children who are 
American Indians and Alaska Natives, members of a Federally recognized 
tribe, and enrolled in a separate child health program.


Sec. 457.540  Cost sharing charges for children in families at or below 
150 percent of the Federal poverty line (FPL).

    The State may impose premiums, enrollment fees, deductibles, 
copayments, coinsurance, cost sharing and other similar charges for 
children whose family income is at or below 150 percent of the FPL as 
long as--
    (a) Aggregate monthly enrollment fees, premiums, or similar charges 
imposed on a family are less than or equal to the maximum monthly 
charges described in Sec. 447.52 of this chapter for a Medicaid 
eligible family of the same size and income;
    (b) For children whose family income is at or below 100 percent of 
the FPL, any copayments, coinsurance, deductibles or similar charges 
are equal to or less than the amounts permitted under Sec. 447.54 of 
this chapter;
    (c) For children whose family income is 101 percent to 150 percent 
of the FPL, any copayments, coinsurance, deductibles or similar charges 
are equal to or less than the amounts permitted under Sec. 457.555;
    (d) The frequency of cost sharing charges is consistent with 
Sec. 457.550; and
    (e) Aggregate annual cost sharing of all types, with respect to all 
targeted low-income children in a family, does not exceed the maximum 
permitted under Sec. 457.560(d).


Sec. 457.545  Cost sharing for children in families above 150 percent 
of the FPL.

    The State may impose premiums, enrollment fees, copayments, 
deductibles, coinsurance, cost sharing and similar charges on children 
in families above 150 percent of the FPL, as long as aggregate annual 
cost sharing, of all types, with respect to all targeted low-income 
children in a family, does not exceed the maximum permitted under 
Sec. 457.555(c).


Sec. 457.550  Restriction on the frequency of cost sharing charges on 
targeted low-income children in families at or below 150 percent of the 
FPL.

    (a) The State plan may not impose more than one type of cost 
sharing charge (deductible, copayment, or coinsurance) on a service.
    (b) The State plan may not impose more than one copayment for 
multiple services furnished during one office visit.
    (c) For targeted low-income children whose family income is from 
101 to 150 percent of the FPL, a standard copayment amount for any 
service may be determined by applying the maximum copayment amounts 
specified in paragraphs (b) and (c) of this section to the State's 
average or typical payment for that service.


Sec. 457.555  Maximum allowable cost sharing charges on targeted low-
income children in families with income from 101 to 150 percent of the 
FPL.

    (a) Non-institutional services. For targeted low-income children 
whose family income is from 101 to 150 percent of the FPL, the State 
plan must provide that for non-institutional services--
    (1) Any copayment or similar charge the State imposes under a fee-
for-service delivery system does not exceed the following amounts:

------------------------------------------------------------------------
                                                          Maximum amount
                 Payment for the service                   chargeable to
                                                            beneficiary
------------------------------------------------------------------------
$15.00 or less..........................................           $1.00
$15.01 to $40...........................................            2.00
$40.01 to $80...........................................            3.00
$80.01 or more..........................................            5.00
------------------------------------------------------------------------

    (2) Any copayment that the State imposes under a managed care 
organization may not exceed $5.00 per visit;
    (3) Any coinsurance rate the State imposes may not exceed 5 percent 
of the payment the State directly or through contract makes for the 
service; and
    (4) Any deductible the State imposes may not exceed $3.00 per 
month, per family for each period of CHIP eligibility.
    (b) Institutional services. For targeted low-income children whose 
family income is from 101 to 150 percent of the FPL, the maximum 
deductible, coinsurance or copayment charge for each institutional 
admission may not exceed 50 percent of the payment the State makes 
directly or through contract for the first day of care in the 
institution.
    (c) Nonemergency use of the emergency room. For targeted low-income 
children whose family income is from 101 to 150 percent of the FPL, the 
State may charge up to twice the charge for non-institutional services, 
up to a maximum amount of $10.00, for services furnished in a hospital 
emergency room if those services do not result from an emergency 
medical condition.
    (d) Emergency room services provided outside of the enrollee's 
managed care network. States must assure that enrollees will not be 
held liable for additional costs associated with emergency services 
provided at a facility that is not a participating provider in the 
enrollee's managed care network beyond the specified co-payment amount.


Sec. 457.560  Cumulative cost sharing maximum.

    (a) Legal obligation means liability to pay amounts a provider 
actually charges and any other amounts for which payment may be 
required under applicable State law for covered services to eligible 
children, even if payment is never actually made.
    (b) General rules. (1) The State plan may set cumulative cost 
sharing maximum levels lower than the maximum levels specified in 
paragraphs (c) and (d) of this section, but may not set maximum levels 
in excess of the specified levels.
    (2) A State must count cost sharing amounts that the family has a 
legal obligation to pay in computing whether a family has met the 
cumulative cost sharing maximum.
    (c) Children with family incomes above 150 percent of the FPL. For 
targeted low-income children with family income above 150 percent of 
the FPL, the State plan may not impose premiums, enrollment fees, 
copayments, coinsurance, deductibles, or similar cost sharing charges 
that, in the aggregate, exceed 5 percent of total family income for a 
year (or 12 month eligibility period).

[[Page 60957]]

    (d) Children with family incomes at or below 150 percent of the 
FPL. For targeted low-income children with family income at or below 
150 percent of the FPL, the plan may not impose premiums, deductibles, 
copayments, coinsurance, enrollment fees, or similar cost sharing 
charges that, in the aggregate, exceed 2.5 percent of total family 
income for the year.


Sec. 457.565  Grievances and appeals.

    The State must provide enrollees in a separate child health program 
the right to file grievances and appeals as specified in Sec. 457.985 
for disenrollment from the program due to failure to pay cost sharing.


Sec. 457.570  Disenrollment protections.

    The State must establish a process that gives beneficiaries 
reasonable notice of and an opportunity to pay past due premiums, 
copayments, coinsurance, deductibles or similar fees prior to 
disenrollment.

Subpart F--[Reserved]

Subpart G--Strategic Planning, Reporting, and Evaluation


Sec. 457.700  Basis, scope, and applicability.

    (a) Statutory basis. This subpart implements--
    (1) Sections 2102(a)(7)(A) and (B) of the Act, which relate to 
assurances of quality and appropriateness of care, and access to 
covered services;
    (2) Sections 2107(a), (b) and (d) of the Act, which set forth 
requirements for strategic planning, reports, and program budgets; and
    (3) Section 2108 of the Act, which sets forth provisions regarding 
annual reports and evaluation.
    (b) Scope. This subpart sets forth requirements for strategic 
planning, monitoring, reporting and evaluation under title XXI of the 
Act.
    (c) Applicability. The requirements of this subpart apply to 
separate child health programs and Medicaid expansion programs.


Sec. 457.710  State plan requirements: Strategic objectives and 
performance goals.

    (a) Plan description. A State plan must include a description of--
    (1) The strategic objectives as described in paragraph (b) of this 
section;
    (2) The performance goals as described in paragraph (c) of this 
section; and
    (3) The performance measurements, as described in paragraph (d) of 
this section, that the State has established for providing child health 
assistance to targeted low-income children under the plan and otherwise 
for maximizing health benefits coverage for other low-income children 
and children generally in the State.
    (b) Strategic objectives. The State plan must identify specific 
strategic objectives relating to increasing the extent of creditable 
health coverage among targeted low-income children and other low-income 
children.
    (c) Performance goals. The State plan must specify one or more 
performance goals for each strategic objective identified.
    (d) Performance measurements. The State plan must describe how 
performance under the plan is--
    (1) Measured through objective, independently verifiable means; and
    (2) Compared against performance goals.


Sec. 457.720  State plan requirement: State assurance regarding data 
collection, records, and reports.

    A State plan must include an assurance that the State collects 
data, maintains records, and furnishes reports to the Secretary, at the 
times and in the standardized format the Secretary may require to 
enable the Secretary to monitor State program administration and 
compliance and to evaluate and compare the effectiveness of State plans 
under title XXI of the Act.


Sec. 457.730  State plan requirement: State annual reports and 
evaluation.

    A State plan must include a description of the State's strategy for 
the submission of the annual reports required under Sec. 457.750, and 
the evaluation required by Sec. 457.760.


Sec. 457.735  State plan requirement: State assurance of the quality 
and appropriateness of care.

    (a) A State plan must include a description of the methods that a 
State uses for assuring the quality and appropriateness of care 
provided under the plan, particularly with respect to--
    (1) Well-baby care, well-child care, well-adolescent care and 
childhood and adolescent immunizations; and
    (2) Access to covered services, including covered emergency 
services and covered post-stabilization services as defined at 
Sec. 457.402.
    (b) States must assure appropriate and timely procedures to monitor 
and treat enrollees with complex and serious medical conditions, 
including access to specialists.


Sec. 457.740  State expenditures and statistical reports.

    (a) Required quarterly reports. A State must submit a report to 
HCFA that contains quarterly program expenditures and statistical data 
no later than 30 days after the end of each quarter of the Federal 
fiscal year. Territories are excepted from the definition of ``State'' 
for the purposes of quarterly reporting. A State must collect required 
data beginning on the date of implementation of the approved State 
plan. The quarterly reports must include data on--
    (1) Program expenditures; and
    (2) The number of children under 19 years of age who are enrolled 
in the title XIX Medicaid program, the separate child health program, 
and in the Medicaid-expansion program, as appropriate, by the following 
categories:
    (i) Age (under 1 year of age, 1 through 5 years of age, 6 through 
12 years of age, and 13 through 18 years of age).
    (ii) Service delivery system (managed care, fee-for-service, and 
primary care case management).
    (iii) Family income as a percentage of the Federal poverty level as 
described in paragraph (b) of this section.
    (b) Reportable family income categories. (1) A State that does not 
impose cost sharing or a State that only imposes cost-sharing based on 
a fixed percentage of income must report by two family income 
categories:
    (i) At or below 150 percent of FPL.
    (ii) Over 150 percent of FPL.
    (2) A State that imposes cost sharing at one or more poverty levels 
must report by poverty level categories that match the poverty level 
categories used for purposes of cost sharing in the separate child 
health program and in the Medicaid-expansion program.
    (c) Required unduplicated counts. Thirty days after the end of the 
Federal fiscal year, the State must submit an unduplicated count for 
the Federal fiscal year of children who are enrolled in the Medicaid 
program, the separate child health program, and the Medicaid-expansion 
program, as appropriate, by age, service delivery, and poverty level 
categories described in paragraphs (a) and (b) of this section.


Sec. 457.750  Annual report.

    (a) Report required for each Federal fiscal year. A State must 
report to HCFA by January 1 following the end of each Federal fiscal 
year, on the results of the State's assessment of the operation of the 
State plan.
    (b) Contents of annual report. In the annual report required under 
paragraph (a) of this section, a State must--
    (1) Describe the State's progress in reducing the number of 
uncovered, low-income children and in meeting other strategic 
objectives and performance goals identified in the State plan;
    (2) Report on the effectiveness of the State's policies for 
discouraging the

[[Page 60958]]

substitution of public coverage for private coverage;
    (3) Identify successes and barriers in State plan design and 
implementation, and the approaches the State is considering to overcome 
these barriers;
    (4) Describe the State's progress in addressing any specific issues 
(such as outreach) that the State plan agreed to periodically monitor 
and assess;
    (5) Provide an updated budget for the current Federal fiscal year 
with details on the planned use of funds and any changes in the sources 
of the non-Federal share of State plan expenditures; and
    (6) Identify the total State expenditures for family coverage and 
total number of children and adults covered by family coverage during 
the preceding Federal fiscal year.
    (c) Methodology for estimate of number of uninsured, low-income 
children. (1) To report on the progress made in reducing the number of 
uncovered, low-income children as required in paragraph (b) of this 
section, a State must choose a methodology to establish an initial 
baseline estimate of the number of low-income children who are 
uninsured in the State and to provide an annual estimate of changes in 
this number at two poverty levels, 200 percent FPL and at the current 
upper eligibility level of the State's program. A State may base the 
estimate on data from--
    (i) The March supplement to the Current Population Survey (CPS);
    (ii) A State-specific survey;
    (iii) A statistically adjusted CPS; or
    (iv) Another appropriate source.
    (2) A State must submit a description of the methodology used to 
develop the initial baseline estimate and the rationale for its use 
unless the State bases the estimate on data from the March supplement 
to the CPS.


Sec. 457.760  State evaluations.

    By March 31, 2000, a State that has an approved State plan must 
submit to HCFA a report on the operation of its Medicaid-expansion 
program, separate child health program, or combination program. The 
report must provide an evaluation of the State plan that includes the 
following:
    (a) An assessment of the effectiveness of the State plan in 
increasing the number of children with creditable health coverage.
    (b) A report on progress made in meeting other strategic objectives 
and performance goals identified by the State plan.
    (c) A description and analysis of the effectiveness of elements of 
the State plan, including--
    (1) The characteristics of the children and families assisted under 
the State plan, including age of the children, family income, and the 
assisted children's access to coverage or coverage by other health 
insurance prior to the State plan and after eligibility for coverage 
under the State plan ends;
    (2) The quality of health coverage provided, including the results 
or the plans to assess the results of any monitoring or other methods 
used to assure quality and appropriateness of care;
    (3) The amount and level of assistance (including payment of part 
or all of any premiums, copayments, or enrollment fees) provided by the 
State;
    (4) The service area of the State program;
    (5) The time limits for coverage of a child under the program;
    (6) The extent of substitution of public coverage for private 
coverage and the State's effectiveness in designing policies that 
discourage substitution.
    (7) The State's choice of health benefits coverage, including the 
types of benefits provided and the scope and range of these benefits, 
and other methods used for providing child health assistance; and
    (8) The sources of non-Federal funding used in the program.
    (d) A State that subsidizes children's coverage through employer-
sponsored group health plans must provide an assessment of the 
effectiveness of its substitution prevention strategies.
    (e) An assessment of the effectiveness of other public and private 
programs in the State in increasing the availability of affordable 
quality individual and family health insurance for children.
    (f) A review and assessment of State activities to coordinate the 
program with other public and private programs providing health care 
and health care financing, including Medicaid and maternal and child 
health services.
    (g) An analysis of changes and trends in the State that affect the 
provision of accessible, affordable, quality health insurance and 
health care to children.
    (h) A description of any plans the State has for improving the 
availability of health insurance and health care for children.
    (i) Recommendations for improving the program.

Subpart H--Substitution of Coverage


Sec. 457.800  Basis, scope, and applicability.

    (a) Statutory basis. This subpart interprets and implements section 
2102(b)(3)(C) of the Act, which provides that the State plan must 
include a description of procedures the State uses to ensure that 
insurance provided under the State plan does not substitute for 
coverage under group health plans.
    (b) Scope. This subpart sets forth State plan requirements relating 
to substitution of coverage in general and specific requirements 
relating to substitution of coverage under employer-sponsored group 
health plans.
    (c) Applicability. The requirements of this subpart apply to 
separate child health programs.


Sec. 457.805  State plan requirements: Private coverage substitution.

    The State plan must include a description of reasonable procedures 
to ensure that coverage provided under the plan does not substitute for 
coverage under group health plans as defined at Sec. 457.10.


Sec. 457.810  Premium assistance for employer-sponsored group health 
plans: Required protections against substitution.

    If a State obtains health benefits coverage through employer-
sponsored group health plans, the State must provide the protections 
against substitution of CHIP coverage for private coverage specified in 
this section. States must describe these provisions in their State 
plan, annual reports, and State evaluations.
    (a) Minimum period without employer-sponsored group health 
coverage. (1) As a condition of eligibility for CHIP payment for 
employer-sponsored group health coverage, a child must not have had 
employer-sponsored group health coverage for a period of at least 6 
months and not more than 12 months prior to application for CHIP.
    (2) States may permit exceptions to the minimum period without 
employer-sponsored group health coverage if a child's coverage during 
the minimum period was involuntarily terminated by an employer.
    (3) A newborn is not required to have a period without insurance as 
a condition of eligibility for CHIP payment for employer-sponsored 
group health coverage.
    (b) Employer contribution. As a condition of eligibility for CHIP 
payment for employer-sponsored group health coverage--
    (1) The employee who is eligible for the coverage must apply for 
the full premium contribution available from the employer; and
    (2) The employer must make a substantial contribution to the cost 
of family coverage equal to--
    (i) 60 percent of the total cost; or
    (ii) A lower amount if the State can show that the average 
contribution in the State is lower than 60 percent.

[[Page 60959]]

    (c) Cost effectiveness. The State's payment for coverage for a 
child under an employer-sponsored group health plan must not be greater 
than the cost of other CHIP coverage.
    (d) State evaluation. The State must evaluate the amount of 
substitution that occurs as a result of payments for employer sponsored 
group health plans and the effect of those payments on access to 
coverage.

Subpart I--Program Integrity and Beneficiary Protections


Sec. 457.900  Basis, scope and applicability.

    (a) Statutory basis. This subpart interprets and implements--
    (1) Section 2101(a) of the Act, which provides that the purpose of 
title XXI of the Act is to provide funds to States to enable them to 
initiate and expand the provision of child health assistance to 
uninsured, low-income children in an effective and efficient manner; 
and
    (2) Section 2107(e) of the Act, which provides that certain title 
XIX and title XI provisions, including the following, apply to States 
under title XXI in the same manner as they apply to a State under title 
XIX:
    (i) Section 1902(a)(4)(C) of the Act, relating to conflict of 
interest standards.
    (ii) Paragraphs (2), (16), and (17), of section 1903(i) of the Act, 
relating to limitations on payment.
    (iii) Section 1903(w) of the Act, relating to limitations on 
provider taxes and donations.
    (iv) Section 1124 of the Act, relating to disclosure of ownership 
and related information.
    (v) Section 1126 of the Act, relating to disclosure of information 
about certain convicted individuals.
    (vi) Section 1128 of the Act, relating to exclusions.
    (vii) Section 1128A of the Act, relating to civil monetary 
penalties.
    (viii) Section 1128B(d) of the Act, relating to criminal penalties 
for certain additional charges.
    (ix) Section 1132 of the Act, relating to periods within which 
claims must be filed.
    (b) Scope. This subpart sets forth requirements, options, and 
standards for program integrity assurances that must be included in the 
approved State plan.
    (c) Applicability. This subpart only applies to States that 
implement separate child health programs. States that implement 
Medicaid expansion programs are subject to the program integrity rules 
and requirements specified under title XIX of the Act.


Sec. 457.902  Definitions.

    As used in this subpart--
    Contractor means any individual or entity that enters into a 
contract, or a subcontract to provide, arrange, or pay for services 
under title XXI of the Act. This definition includes, but is not 
limited to, managed care organizations, prepaid health plans, primary 
care case managers, and fee-for-service providers and insurers.
    Fee-for-service entity means any entity that furnishes services, 
under the program on a fee-for-service basis, including health 
insurance services.
    Grievance means a written communication, submitted by or on behalf 
of an enrollee in a child health program, expressing dissatisfaction 
with any aspect of a State, a managed care or fee-for-service entity, 
or a provider's operations, activities or behavior that pertains to--
    (1) The availability, delivery, or quality of health care services, 
including utilization review decisions that are adverse to the 
enrollee;
    (2) Payment, treatment, or reimbursement of claims for health care 
services; or
    (3) Issues unresolved through the complaint process established in 
accordance with Sec. 457.985(e).
    Managed care entity (MCE) means an entity that enters into a 
contract to provide services in a managed care delivery system, 
including but not limited to managed care organizations, prepaid health 
plans, and primary care case managers.
    State program integrity unit means a part of an organization 
designated by the State (at its option) to conduct program integrity 
activities for separate child health programs.


Sec. 457.910  State program administration.

    The State's child health program must include--
    (a) Methods of administration that the Secretary finds necessary 
for the proper and efficient operation of the separate child health 
program; and
    (b) Safeguards necessary to ensure that--
    (1) Eligibility will be determined appropriately in accordance with 
subpart C of this part; and
    (2) Services will be provided in a manner consistent with 
administrative simplification and with the provisions of subpart D of 
this part.


Sec. 457.915  Fraud detection and investigation.

    (a) State program requirements. The State must establish procedures 
for ensuring program integrity and detecting fraudulent or abusive 
activity. These procedures must include the following:
    (1) Methods and criteria for identifying suspected fraud and abuse 
cases.
    (2) Methods for investigating fraud and abuse cases that--
    (i) Do not infringe on legal rights of persons involved; and
    (ii) Afford due process of law.
    (b) State program integrity unit. The State may establish an 
administrative agency responsible for monitoring and maintaining the 
integrity of the separate child health program (hereafter referred to 
as the ``State program integrity unit''),
    (c) Program coordination. The State must develop and implement 
procedures for referring suspected fraud and abuse cases to the State 
program integrity unit and to law enforcement officials. Law 
enforcement officials include, but are not limited to the--
    (1) U.S. Department of Health and Human Services Office of 
Inspector General (OIG);
    (2) U.S. Attorney's Office, Department of Justice (DOJ);
    (3) Federal Bureau of Investigation (FBI); and
    (4) State Attorney General's office.


Sec. 457.920  Accessible means to report fraud and abuse.

    The State agency must establish and provide access to a mechanism 
for communication between the State and the public about potentially 
fraudulent and abusive practices by and among contractors, 
beneficiaries, and other entities. This communication mechanism may 
include a toll-free telephone number.


Sec. 457.925  Preliminary investigation.

    If the State agency receives a complaint of fraud or abuse from any 
source or identifies any questionable practices, the State agency must 
conduct a preliminary investigation or take otherwise appropriate 
action to determine whether there is sufficient basis to warrant a full 
investigation.


Sec. 457.930  Full investigation, resolution, and reporting 
requirements.

    The State must establish and implement effective procedures for 
investigating and resolving suspected and apparent instances of fraud 
and abuse. Once the State determines that a full investigation is 
warranted, the State must implement procedures including, but not 
limited to the following:
    (a) Cooperate with and refer potential fraud and abuse cases to the 
State program integrity unit, if such a unit exists, when requested to 
do so by that unit.
    (b) Conduct a full investigation; or
    (c) Refer the fraud and abuse case to appropriate law enforcement 
officials.

[[Page 60960]]

Sec. 457.935  Sanctions and related penalties.

    (a) A State may not make payments for any item or service 
furnished, ordered, or prescribed under a separate child health program 
to any contractor who has been excluded from participating in the 
Medicare and Medicaid programs.
    (b) The following provisions and their corresponding regulations 
apply to a State under title XXI of the Act, in the same manner as 
these provisions and regulations apply to a State under title XIX:
    (1) Part 455, subpart B of this chapter.
    (2) Section 1124 of the Act pertaining to disclosure of ownership 
and related information.
    (3) Section 1126 of the Act pertaining to disclosure by 
institutions, organizations, and agencies of owners and certain other 
individuals who have been convicted of certain offenses.
    (4) Section 1128 of the Act pertaining to exclusions.
    (5) Section 1128A of the Act pertaining to civil monetary 
penalties.
    (6) Section 1128B of the Act pertaining to criminal penalties for 
acts involving Federal health care programs.
    (7) Section 1128E of the Act pertaining to the reporting of final 
adverse actions on liability findings made against health care 
providers, suppliers, and practitioners under the health care fraud and 
abuse data collection program.


Sec. 457.940  Procurement standards.

    (a) A State must submit to HCFA a written assurance that title XXI 
services will be provided in an effective and efficient manner. The 
State must submit the assurance--
    (1) With the initial State plan; or
    (2) For States with approved plans, with the first request to amend 
the approved plan.
    (b) A State must provide child health assistance in an effective 
and efficient manner by--
    (1) Providing for free and open competition, to the maximum extent 
possible, in the bidding of all procurement contracts for coverage or 
other services in accordance with the procurement requirements of 45 
CFR 74.43; or
    (2) Basing title XXI payment rates on public and/or private payment 
rates for comparable services.
    (c) A State may establish higher rates than permitted under 
paragraph (a) of this section if such rates are necessary to ensure 
sufficient provider participation or to enroll providers who 
demonstrate exceptional efficiency or quality in the provision of 
services.
    (d) All contracts under this part must include provisions that 
define a sound and complete procurement contract, as required by 45 CFR 
part 74.
    (e) The State must provide to HCFA, if requested, a description of 
the manner in which rates were developed in accordance with the 
requirements of paragraphs (a) or (b) of this section. HCFA may request 
this description either when a State--
    (1) Determines its rates initially;
    (2) Updates its rates; or
    (3) Changes its reimbursement methodology.


Sec. 457.945  Certification for contracts and proposals.

    Entities that contract with the State under a separate child health 
program must certify the accuracy, completeness, and truthfulness of 
information in contracts and proposals, including information on 
subcontractors, and other related documents as specified by the State.


Sec. 457.950  Contract and payment requirements including certification 
of payment-related information.

    (a) Managed care entity. A State that makes payments to a managed 
care entity under a separate child health program, based on data 
submitted, must ensure that its contract requires the managed care 
entity to provide, under penalty of perjury --
    (1) Enrollment information and other information required by the 
State;
    (2) An attestation to the accuracy, completeness, and truthfulness 
of claims and payment data, upon penalty of perjury;
    (3) Access for the State to enrollee health claims data and payment 
data, as determined by the State in conformance with the appropriate 
privacy protections in the State; and
    (4) A guarantee that managed care entities will not avoid costs for 
services covered in its contract by referring beneficiaries to publicly 
supported health care resources.
    (b) Fee-for-service entities. A State that makes payments to fee-
for-service entities under a separate child health program must--
    (1) Establish procedures to ensure and attest that information on 
claim forms is truthful, accurate, and complete; and
    (2) Require, as a condition of participation, that fee-for-service 
entities provide the State with access to enrollee health claims data 
and claims payment data as determined necessary by the State.


Sec. 457.955  Conditions necessary to contract as a managed care entity 
(MCE).

    (a) The State must assure that any entity seeking to contract as an 
MCE under a separate child health program has administrative and 
management arrangements or procedures designed to safeguard against 
fraud and abuse.
    (b) Unless otherwise provided for by State law, the State must 
ensure the arrangements or procedures required in paragraph (a) of this 
section --
    (1) Enforce MCE compliance with all applicable Federal and State 
standards; and
    (2) Include a mechanism for the MCE to report to the State, and to 
HCFA and/or the Office of Inspector General (OIG) information on 
violations of law by subcontractors or enrollees of an MCE and other 
individuals.
    (c) With respect to enrollees, the reporting requirement in 
paragraph (b) of this section applies only to information on violations 
of law that pertain to enrollment in the plan, or the provision of, or 
payment for, health services.
    (d) The State may inspect, evaluate, and audit MCEs at any time, as 
necessary, in instances where the State determines that there is a 
reasonable possibility of fraudulent and abusive activity.


Sec. 457.960  Reporting changes in eligibility and redetermining 
eligibility.

    If the State requires reporting of changes in circumstances that 
may affect their eligibility for child health assistance, the State 
must:
    (a) Establish procedures to ensure that beneficiaries make timely 
and accurate reports of any changes; and
    (b) Promptly redetermine eligibility when the State has information 
about these changes.


Sec. 457.965  Documentation.

    The State must include in each applicant's record facts to support 
the State's determination of the applicant's eligibility for CHIP.


Sec. 457.970  Eligibility and income verification.

    (a) The State must establish procedures to ensure --
    (1) The integrity of the eligibility determination process; and
    (2) Compliance with verification and documentation requirements 
applicable to separate child health programs under other Federal laws 
and regulations.
    (b) A State may use its discretion in establishing reasonable 
income and eligibility verification mechanisms.
    (c) The State may choose to use the income and eligibility 
verification system requirements set forth in section 1137 of title XI 
of the Act at Secs. 435.940 through 435.953 of this chapter.
    (d) The State may terminate the eligibility of an applicant or 
beneficiary for ``good cause''.

[[Page 60961]]

    (1) For purposes of this section, ``good cause'' exists if any 
information or other action makes the beneficiary fail to meet the 
requirements of income and eligibility verification or documentation as 
reasonably determined by the State.
    (2) Beneficiaries terminated for good cause must be given notice of 
the termination decision that sets forth the reasons for termination 
and provides a reasonable opportunity to appeal the termination 
decision as specified in Sec. 457.985.


Sec. 457.975  Redetermination intervals in cases of suspected 
enrollment fraud.

    If a State suspects enrollment fraud, the State may, at its own 
discretion, perform eligibility redetermination at any frequency 
interval that is considered by the State to be in the best interest of 
the program.


Sec. 457.980  Verification of enrollment and provider services 
received.

    (a) The State must establish methodologies to verify whether 
beneficiaries have received services for which providers are billed.
    (b) The State must establish and maintain systems to identify, 
report, and verify those enrolled children that meet requirements of 
section 2105(a) of the Act, where enhanced Federal medical assistance 
percentage computations apply.


Sec. 457.985  Enrollee rights to file grievances and appeals.

    (a) The State and its participating providers must give applicants 
and enrollees written notice of their right to file grievances and 
appeals in cases where the State or its contractors take actions to:
    (1) Deny, suspend or terminate eligibility;
    (2) Disenroll for failure to pay cost-sharing; or
    (3) Reduce or deny services provided for in the benefit package.
    (b) The State must establish and maintain written procedures for 
addressing grievances and appeal requests, including processes for 
internal review by the contractor and external review by an independent 
entity or the State agency, that comply with State-specific grievance 
and appeal requirements currently in effect for health insurance 
issuers (as defined in section 2791(b) of the Public Health Service 
Act) in the State. Such procedures must include a guarantee that 
resolution of grievances and appeal requests will be completed within a 
reasonable amount of time.
    (c) The State may elect in its State plan to use the rules, 
systems, and procedures used in the Medicaid program such as--
    (1) Part 431, subpart E of this chapter regarding fair hearings for 
Medicaid applicants and recipients; and
    (2) Medicaid appeal procedures for Medicaid managed care entities.
    (d) The State and its contractors must have in place a meaningful 
process for reviewing and resolving complaints that are submitted 
outside of the grievance and appeals procedures as part of the quality 
assurance process.
    (e) The State must guarantee in all contracts for coverage and 
services, beneficiary access to information related to actions which 
could be subject to grievance or appeal in accordance with:
    (1) Section 422.206 of this chapter, which prohibits interference 
with health care professionals' advice to enrollees; and
    (2) Sections 422.208 and 422.210(a) and (b) of this chapter, 
related to limitations on physician incentives, or compensation 
arrangements that have the effect of reducing or limiting services, and 
information disclosure requirements respectively.


Sec. 457.990  Privacy protections.

    (a) The State plan must assure that the program will be operated in 
compliance with the provisions of part 431, subpart F of this chapter 
related to safeguarding information on Medicaid applicants and 
recipients.
    (b) The State plan must assure the protection of information and 
data pertaining to beneficiaries by providing that all contracts will 
include guarantees that--
    (1) Original medical records are released only in accordance with 
Federal or State law, or court orders or subpoenas;
    (2) Information from or copies of medical records are released only 
to authorized individuals;
    (3) Medical records and other information are accessed only by 
authorized individuals;
    (4) Confidentiality and privacy of minors is protected in 
accordance with applicable Federal and State law;
    (5) Enrollees will have timely access to their records and to 
information that pertains to them;
    (6) Beneficiary information is safeguarded in accordance with all 
Federal and State law relating to confidentiality and disclosure of 
mental health records, medical records, and other related information 
about the beneficiary; and
    (7) Any electronic transmission of data to HCFA must comply with 
HCFA's policies and requirements regarding privacy and confidentiality 
of data transmissions. Data transmissions between providers, health 
plans and the State are also subject to these requirements.
    (c) The State plan is subject to any Federal information disclosure 
safeguards as well as requirements mandated by the State including the 
use of the Internet to transmit CHIP data between the State and its 
providers.
    (d) The State must assure that the program will be operated in 
compliance with all applicable State and Federal requirements to 
protect the confidentiality of information transmitted by electronic 
means, including the Internet.


Sec. 457.995  Overview of beneficiary rights.

    In order to ensure that coverage and services are effectively and 
efficiently furnished to eligible beneficiaries, the following 
beneficiary protections are addressed in this part:
    (a) Information. States are required to provide information to 
families of targeted low-income children regarding:
    (1) Types of benefits, the amount, duration and scope of those 
benefits, and names and locations of current participating providers 
(Sec. 457.110(b));
    (2) Either individually or through public notice, changes related 
to cost sharing or any other restrictions of eligibility or benefits 
(Secs. 457.525 and 457.65);
    (3) Enrollment assistance to potentially eligible children and 
their families (Sec. 457.360(d)) and information about beneficiary 
rights and obligations under the program (Sec. 457.360(e)); and
    (4) Information must be accurate and easily understood and provide 
assistance to families in making informed health care decisions.
    (b) Choice of providers and plans. States must provide enrollees 
assistance in making health care decisions and must assure appropriate 
and timely procedures to monitor and treat enrollees with complex and 
serious medical conditions including access to specialists in 
accordance with Secs. 457.110 and 457.735(c) respectively.
    (c) Access to emergency services. (1) States are required to 
provide an assurance of the quality and appropriateness of care, 
including access to covered services, including emergency services and 
covered post-stabilization services, as defined in Sec. 457.402 and in 
accordance with Sec. 457.735 respectively.
    (2) States must assure that enrollees will not be held liable for 
additional costs, beyond the copayment amounts specified in the State 
plan, that are associated with emergency services provided by a 
facility that is not a

[[Page 60962]]

participating provider in the enrollee's managed care network 
(Sec. 457.515(f)).
    (d) Participation in treatment decisions. Enrollees have the right 
to participate in their own care and to receive information on health 
plans, professionals, and facilities (Sec. 457.110 and 
Sec. 457.985(e)). States must prohibit gag rules and establish 
principles for disclosure of physician financial arrangements that 
could affect treatment decisions (Sec. 457.985(e)).
    (e) Respect and nondiscrimination. States must assure that families 
of targeted low-income children are treated with respect and 
nondiscrimination in accordance with applicable civil rights assurances 
and requirements found at Sec. 457.130.
    (f) Confidentiality of health information. States must ensure the 
confidentiality of a beneficiary's health information and provide 
beneficiaries access to medical records only in accordance with 
applicable Federal and State laws (Sec. 457.990).
    (g) Grievances and appeals. (1) States and their participating 
contractors must ensure the family's right to file grievances and 
appeals by notifying beneficiaries of this right, and by having written 
procedures in place to afford applicants and enrollees the right to 
file grievances in cases where action is taken to--
    (i) Deny, suspend or terminate eligibility in accordance with 
Sec. 457.365;
    (ii) Reduce or deny benefits provided for in the plan in accordance 
with Sec. 457.495; or
    (iii) Disenroll for failure to pay cost-sharing in accordance with 
Sec. 457.560.
    (2) Procedures for grievances, complaints and appeals must be 
conducted and resolved in a timely manner that is consistent with the 
standard health insurance practices in the State in accordance with 
Sec. 457.985.

Subpart J--Allowable Waivers: General Provisions


Sec. 457.1000  Basis, scope, and applicability.

    (a) Statutory basis. This subpart interprets and implements --
    (1) Section 2105(c)(2)(B) of the Act, which sets forth the 
requirements for a waiver to permit a State to exceed the 10 percent 
cost limit on expenditures other than benefit package expenditures; and
    (2) Section 2105(c)(3) of the Act, which permits a waiver for the 
purchase of family coverage.
    (b) Scope. This subpart sets forth requirements for obtaining a 
waiver under title XXI of the Act.
    (c) Applicability. The requirements of this subpart apply to child 
health assistance provided under a separate child health program and to 
a Medicaid expansion program only to the extent that the State claims 
administrative costs under title XXI and seeks a waiver of limitations 
such claims in light of a community-based health delivery system.


Sec. 457.1005  Waiver for cost-effective coverage through a community-
based health delivery system.

    (a) Availability of waiver. The Secretary may waive the 
requirements of Sec. 457.618 regarding the 10 percent limit on 
expenditures not used for child health assistance in the form of health 
benefits coverage meeting the requirements of Sec. 457.410, in order to 
provide child health assistance to targeted low-income children under 
the State plan through a cost-effective, community-based health care 
delivery system, such as through contracts with health centers 
receiving funds under section 330 of the Public Health Service Act or 
with hospitals such as those that receive disproportionate share 
payment adjustments under section 1886(c)(5)(F) or section 1923 of the 
Act.
    (b) Requirements for obtaining a waiver. To obtain a waiver for 
cost effective coverage through a community-based health delivery 
system, a State must demonstrate that --
    (1) The coverage meets the coverage requirements of section 2103 of 
the Act and subpart D of this part; and
    (2) The cost of such coverage, on an average per child basis, does 
not exceed the cost of coverage under the State plan.
    (c) Two-year approval period. An approved waiver remains in effect 
for 2 years. A State may reapply for approval 3 months before the end 
of the 2-year period.
    (d) Application of cost savings. If the cost of coverage of a child 
under a community-based health delivery system is equal to or less than 
the cost of coverage of a child under the State plan, the State may use 
the difference in the cost of coverage for each child enrolled in a 
community-based health delivery system for--
    (1) Other child health assistance, health services initiatives, and 
outreach; or
    (2) Any reasonable costs necessary to administer the State's 
program.


Sec. 457.1010  Waiver for purchase of family coverage.

    A State may purchase family coverage under a group health plan or 
health insurance coverage that includes coverage for targeted low-
income children if the State establishes that--
    (a) Purchase of family coverage is cost effective under the 
standards described in Sec. 457.1015;
    (b) The State does not purchase the coverage if it would otherwise 
substitute for health insurance coverage that would be provided to 
targeted, low-income children but for the purchase of family coverage; 
and
    (c) The coverage for the child otherwise meets the requirements of 
this part.


Sec. 457.1015  Cost-effectiveness.

    (a) Definition. For purposes of this subpart, ``cost-effective'' 
means that the cost paid under the plan of purchasing family coverage 
under a group health plan or health insurance coverage that includes 
coverage for targeted low-income children is equal to or less than the 
State's cost of obtaining coverage under the plan only for the eligible 
targeted low-income children involved.
    (b) Cost comparisons. A State may demonstrate cost-effectiveness by 
comparing the cost of coverage for the family that meets the 
requirements of Sec. 457.1010 to the cost of coverage only for the 
targeted low-income children under--
    (1) The health benefits packages offered by the State under the 
State plan for which the child is eligible; or
    (2) Any child-only health benefits package available for purchase 
in the State that meets the requirements of Sec. 457.410, even if the 
State does not offer it under the State plan.
    (c) Individual or aggregate basis. (1) The State may base its 
demonstration of the cost-effectiveness of family coverage on an 
assessment of cost-effectiveness of family coverage for individual 
families, done on a case-by-case basis, or on the cost of family 
coverage in the aggregate.
    (2) The State must assess cost-effectiveness in its initial request 
for a waiver and then annually. For any State that chooses the 
aggregate cost method, if an annual assessment of the cost-
effectiveness of family coverage in the aggregate reveals that it is 
not cost-effective, the State must assess cost-effectiveness on a case-
by-case basis.
    (d) Reports on family coverage. A State with a waiver under this 
section must include in its annual report pursuant to subpart G of this 
part the cost of family coverage purchased under the waiver, and the 
number of children and adults covered under family coverage pursuant to 
the waiver.

PART 457--ALLOTMENTS AND GRANTS TO STATES

    G. Part 457 is amended as follows:
    1. The authority citation for part 457 continues to read as 
follows:


[[Page 60963]]


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

    2. Section 457.204(d)(2), as proposed at 64 FR 10428, March 4, 
1999, is revised to read as follows:


Sec. 457.204  Withholding of payment for failure to comply with Federal 
requirements.

* * * * *
    (d) * * *
    (2) Opportunity for corrective action. If enforcement actions are 
proposed, the State must submit evidence of corrective action related 
to the findings of noncompliance to the Administrator within 30 days 
from the date of the preliminary notification. Corrective action is 
action to ensure that the plan is, and will be, administered consistent 
with applicable law and regulations, to ameliorate past deficiencies in 
plan administration, or to ensure that beneficiaries will be treated 
equitably.
* * * * *
(Section 1102 of the Social Security Act (42 U.S.C. 1302)

(Catalog of Federal Domestic Assistance Program No. 00.000, State 
Children's Health Insurance Program)

    Dated: March 16, 1999.
Nancy-Ann Min DeParle,
Administrator, Health Care Financing Administration.

    Dated: September 23, 1999.
Donna E. Shalala,
Secretary.
[FR Doc. 99-28693 Filed 11-1-99; 8:45 am]
BILLING CODE 4120-01-P