[Federal Register Volume 64, Number 230 (Wednesday, December 1, 1999)]
[Proposed Rules]
[Pages 67223-67235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31101]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 433 and 438

[HCFA-2015-P]
RIN 0938-AJ06


Medicaid Program; External Quality Review of Medicaid Managed 
Care Organizations

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would establish requirements and procedures 
for external quality review (EQR) of Medicaid managed care 
organizations (MCOs). The rule would implement section 1932(c)(2) of 
the Social Security Act (the Act), which was enacted in section 4705(a) 
of the Balanced Budget Act of 1997 (BBA), and section 1903(a)(3)(C)(ii) 
of the Act, which was enacted in section 4705(b) of the BBA. Under 
section 1932(c)(2) each contract between a State Medicaid agency (State 
agency) and an MCO must provide for an annual EQR of the quality 
outcomes, the timeliness of, and access to, the services for which the 
MCO is responsible under the contract. Section 1903(a)(3)(C) provides 
enhanced matching for these activities.
    This annual external review is to be conducted by an independent 
entity that meets the qualifications set forth in this rule, using 
protocols also set forth in this rule.
    In addition, these BBA provisions allow State agencies to exempt 
certain Medicare MCOs from all EQR requirements or from particular 
review activities that would duplicate review activities conducted as 
part of a Medicare MCO's external review or accreditation processes.
    These BBA provisions require that the results of the EQR be made 
available to participating health care providers, enrollees and 
potential enrollees of the MCO, and also authorize the payment of 
enhanced Federal financial participation at the 75 percent rate for the 
administrative costs of EQRs that are conducted by approved entities.

DATES: Comment date. Comments will be considered if we receive them at 
the appropriate address, as provided below no later than 5 p.m. on 
January 31, 2000.

ADDRESSES: Mail written comments (1 original and 3 copies) to the 
following address: Health Care Financing Administration, Department of 
Health and Human Services, Attention: HCFA-2015-P, P.O. Box 7517, 
Baltimore, MD 21207-0517.
    If you prefer, you may deliver your written comments (1 original 
and 3 copies) to one of the following addresses:

Room 443-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., 
Washington, DC, or
Room C5-16-03, 7500 Security Boulevard, Baltimore, MD.

Because of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission. In commenting, please refer to file code 
HCFA-2015-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).

FOR FURTHER INFORMATION CONTACT: Sharon Gilles, (410) 786-1177.

SUPPLEMENTARY INFORMATION:

I. Background

    In 1965, the Congress passed Title XIX of the Social Security Act 
(the Act) which established the Medicaid program. Under this title, we 
pay Federal financial participation (FFP) to State Medicaid agencies 
(State agencies) to assist in the costs of health care for low-income 
pregnant women, families, and aged, blind and disabled individuals. The 
Medicaid program is administered by State agencies subject to Federal 
statutory and regulatory requirements, which are implemented in 
accordance with a ``State plan'' that must be approved by the Health 
Care Financing Administration (HCFA).
    In the early years of the Medicaid program, State agencies provided 
most Medicaid coverage by paying health care providers on a fee-for-
service (FFS) basis. Beginning in the 1980s and continuing throughout 
the 1990s, State agencies have increasingly provided Medicaid coverage 
through managed care contracts, under which they pay a health 
maintenance organization (HMO) or other similar entity a fixed monthly 
capitation payment for each Medicaid beneficiary 1 enrolled 
with the entity.
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    \1\ The term ``beneficiary'', used throughout the preamble is 
synonymous with the term ``recipient'', used in the text of the 
regulation. Both refer to an individual who is eligible for and 
receiving Medicaid benefits.
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    As these managed care programs have grown in number and complexity, 
so has Federal oversight, particularly oversight of quality of care. 
Many studies conducted by health services researchers indicate that, 
with few exceptions, the quality of care furnished by managed care 
organizations 2 (MCO) is similar to that furnished by FFS 
providers. Despite these findings, the quality of managed care has 
received increased attention from the Congress, HCFA and the States. 
This has been--
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    \2\ Section 4701(b) of the Balanced Budget Act of 1997 (BBA) 
established this term to encompass not only HMOs but also M+C 
organizations, other types of organizations that may participate in 
the Medicare program, and other public or private organizations that 
meet specified statutory requirements.
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     Prompted originally by the fact that, in the early years 
of Medicaid managed care, there were highly publicized accounts of 
Medicaid enrollees encountering barriers to accessing care, and other 
quality-related problems;
     Encouraged by developments in the private sector, such as 
the use of ``continuous quality improvement'' and ``value-based 
purchasing'', which can be applied in the public sector to obtain

[[Page 67224]]

high quality health care for Medicaid beneficiaries; and
     Made feasible by the fact that an MCO that contracts to 
furnish defined services to a defined population can be held 
accountable in a way that is not possible under FFS Medicaid. For 
example, under FFS Medicaid, if a child does not receive an 
immunization, it is difficult to place responsibility on any of the 
providers that may have treated that child for different illnesses.
    As a result of the above, the number of legislative, regulatory, 
and HCFA initiatives to improve health care quality have increased both 
in number and in sophistication.
    Federal statutes governing Medicaid managed care contracts did not 
contain provisions explicitly addressing quality of care until 1986. 
However, before that date, our regulations required HMOs to have an 
internal quality assurance system and required State agencies to 
conduct periodic medical audits to ensure the furnishing of quality 
health care and access to that care. In the Omnibus Budget 
Reconciliation Act of 1986 (OBRA '86), the Congress called for a new 
approach that complemented an HMO's internal quality assurance program 
and the periodic medical audits conducted by State agencies. OBRA '86 
required that each State agency that contracted with an HMO use an 
independent external organization to conduct an annual review of the 
quality of services furnished to Medicaid beneficiaries served by each 
HMO.
    Between 1986 and 1997, we and the State agencies developed tools to 
use in implementing these quality oversight responsibilities. In 1991, 
we began the Quality Assurance Reform Initiative (QARI), which in 1993, 
resulted in the publication of, ``A Health Care Quality Improvement 
System for Medicaid Managed Care-A Guide for States.'' This document 
contained: (1) A framework for quality improvement systems for Medicaid 
managed care programs; (2) guidelines for internal quality assurance 
programs of Medicaid HMOs and similar organizations; (3) guidelines for 
clinical and health services focus areas and use of quality indicators 
and clinical practice guidelines; and (4) guidelines for the conduct of 
external quality reviews (EQRs) mandated in OBRA '86.
    In 1995, HCFA in collaboration with the National Committee for 
Quality Assurance (NCQA) and the American Public Human Services 
Association (APHSA), produced a Medicaid version of the Health Plan 
Employer Data and Information Set (HEDIS), a standardized quality 
performance measurement system used by private sector purchasers of 
managed care. We also contracted with NCQA to produce, ``Health Care 
Quality Improvement Studies in Managed Care Settings--Design and 
Assessment: A Guide for State Medicaid Agencies''.

II. The Balanced Budget Act of 1997

    The Balanced Budget Act of 1997 (BBA) added to the Act a new 
section 1932 that pertains to Medicaid managed care. Most of the 
provisions of section 1932 would be implemented in accordance with a 
proposed rule that was published in September, 1998 and is discussed 
under part III C of this preamble.
    Section 1932(c), added by section 4705 of the BBA, describes in 
detail how quality measurement and performance improvement methods 
should be applied to Medicaid managed care programs through two 
specific approaches:
     All State agencies must develop and implement a quality 
assessment and improvement strategy that includes: (1) standards for 
access to care; (2) examination of other aspects of care and services 
related to improving quality; and (3) monitoring procedures for regular 
and periodic review of the strategy. (This requirement was addressed in 
the September proposal.)
     State agencies that contract with Medicaid MCOs must 
provide for an annual external, independent review of the access to, 
timeliness of, and quality outcomes of the services included in the 
contract between the State agency and the MCO. (This requirement is 
addressed in this proposed rule.)
    Section 1932(c) of the Act also requires the Secretary--
     In consultation with the States, to establish a method for 
identifying entities qualified to conduct EQR (section 
1932(c)(2)(A)(ii)); and
     In coordination with the National Governors' Association 
(NGA), to contract with an independent quality review organization to 
develop the protocols to be used in EQRs (section 1932(c)(2)(A)(iii)).
    For the first requirement, we obtained the input of an expert panel 
convened by the National Academy for State Health Policy (NASHP).
    To meet the second requirement, on July 7, 1998, we issued a 
Request for Proposal (RFP) for one or more contractors to develop a set 
of review protocols for external quality review organizations (EQROs) 
to use in the conduct of EQRs. Two State representatives selected by 
the NGA were members of the panel which reviewed responding proposals. 
As a result of this competitive procurement, a contract was awarded to 
the Joint Commission on Accreditation of Healthcare Organizations 
(JCAHO) to develop protocols for the activities we believed were most 
frequently conducted by EQROs. Our belief was subsequently confirmed 
through surveys conducted by the Department's Office of the Inspector 
General (OIG) and the NASHP. The JCAHO has not completed development of 
the protocols for EQR. Although the text of the protocols themselves 
will not be included in regulations text, this proposed rule does 
identify the areas to be covered by them and what is to be included in 
such protocols.
    The other section 1932 provisions that are pertinent to this 
proposal are provisions that--(1) Require that the results of EQRs be 
made available to participating health care providers, enrollees and 
potential enrollees (section 1932(c)(2)(A)(iv)), and (2) Provide that a 
State agency--
     May, at its option, take steps to ensure that an EQR does 
not duplicate a review conducted either by a private independent 
accrediting organization or as part of an external review conducted 
under the Medicare program (section 1932(c)(2)(B)); and
     May exempt an MCO from EQR under certain specified 
conditions (section 1932(c)(2)(C)).
    Section 4705(b) of the BBA provides for increased FFP (75%) for the 
costs of conducting EQR under Section 1932(c)(2)(A), providing the EQRO 
meets the requirements set forth in regulations. Under the OBRA '86 
provision, 75% FFP is available only if EQR is conducted by a 
utilization and quality control peer review organization (PRO) or an 
entity that meets the requirements to be a PRO but does not have a PRO 
contract with Medicare. Accreditation organizations may also be used to 
conduct EQR, but their review activities are matched at the 50 percent 
rate under the current OBRA '86 rules.

III Development of the Proposed Rule

A. Major Purposes

    In developing this proposed rule, we had two major purposes: (1) To 
provide flexibility for State agencies; and (2) to reflect the well-
accepted advances in the technology of quality measurement and 
improvement.
    Flexibility is particularly important because the EQR requirement 
is not new. States have been monitoring quality under the OBRA '86 
requirements for which final regulations were never published. 
Accordingly, this proposal would not require State

[[Page 67225]]

agencies to dismantle EQR mechanisms that they have used and found to 
be effective and efficient. The BBA language calling for State agencies 
to develop their own Quality Assessment and Improvement Strategies, 
supports our approach of recognizing the unique characteristics of 
States, their managed care programs and the sophistication of the 
managed care marketplace within each State.
    In addition, the BBA provides greater flexibility in the types of 
entities that State agencies may use to conduct EQR. Consequently, this 
rule allows State agencies to coordinate EQRs with other similar 
quality reviews conducted for other purposes, thereby reducing the 
burden to State agencies and EQROs in complying with the requirement.
    Despite the necessary flexibility, the BBA ensures comparability 
among State EQR results by requiring us to develop protocols to be used 
by all State agencies and EQROs in conducting the reviews.
    Although the definition of EQR (shown under part IV of this 
preamble) makes clear that EQR must be conducted by an EQRO, it does 
not preclude State agencies from using other entities to conduct 
additional activities to monitor quality. For example, State agencies 
may themselves collect performance measures or encounter data, or 
monitor MCOs for compliance with structural and operational quality 
standards, or contract with an entity other than an EQRO to perform 
these projects. This approach allows State agencies considerable 
flexibility in the conduct of quality review activities and permits 
them to continue current practices at the 50% administrative match 
rate.
    With respect to the second purpose, there is growing acceptance of 
the health care industry's ability to measure and improve health care 
quality, as documented in the President's Advisory Commission on 
Consumer Protection and Quality in the Health Care Industry, and the 
development of stronger tools to accomplish this measurement (such as 
the Consumer Assessment of Health Plans Study (CAHPS)). In developing 
this rule, we have incorporated best practices in the assessment and 
improvement of health care quality.

B. Information Used

    In order to develop this proposal we needed information on--
     How States have implemented EQR requirements under OBRA 
'86; and
     What qualifications to require for EQROs.
State Experience Under OBRA '86
    Because a final regulation for the OBRA '86 requirement was never 
published, State agencies have considerable latitude in defining the 
activities conducted as part of EQR. We knew that State agencies were 
using the EQR requirement to implement different approaches to quality 
review. For example, some State agencies use EQR to monitor HMO 
compliance with QARI standards, while others use EQRs to conduct 
focused studies on defined clinical topics, such as immunizations, to 
determine HMO performance. We did not know how widely State practices 
varied.
    In order to determine the extent and the success of each variation, 
we relied on information from two sources. The first was a study 
conducted by the Department's Office of Inspector General (OIG) 
entitled, ``Lessons Learned From Medicaid's Use of External Quality 
Review Organizations'' published in September, 1998. This study 
reviewed the practices of seven States (Arizona, California, 
Massachusetts, Minnesota, Missouri, Ohio and Washington) that had 
considerable experience with Medicaid managed care or in working with 
EQROs. The study documented that focused studies of quality of care, 
that is, review of medical records to obtain information on services 
delivered to a group of individuals with the same health care needs, 
was the most frequent activity performed by EQROs. In these States, 
focused studies accounted for nearly 80 percent of their budgets for 
EQRO. However, in the OIG study, States expressed an awareness of the 
limitations of the use of focused studies alone, stating that they fail 
to offer a broad assessment of the care delivered to all those enrolled 
in a State's Medicaid managed care program. As summarized by the study: 
``At best they capture a slice of care delivered to one or two sub 
populations. Even if a Medicaid agency designed the perfect system to 
capture prenatal care visits or child immunizations, this is only a 
tiny fraction of care provided to the Medicaid population.'' For this 
reason, State agencies are beginning to use EQROs to undertake other 
approaches to quality review, including: (1) Validation of encounter 
data or aggregate MCO-level performance measures; (2) individual case 
review; (3) evaluation of quality studies conducted by MCOs; (4) 
conducting beneficiary surveys; and (5) provision of technical 
assistance.
    The OIG study also documented that these seven States had typically 
used Medicare PROs to conduct the EQRO function. This was generally 
satisfactory to the States, especially because most States use EQR to 
conduct focused studies. However, some State agencies expressed 
reservations about using PROs for other EQR functions, such as 
processing and verifying encounter data or conducting consumer surveys. 
As a result, all of the State agencies in this study contracted with 
entities other than their EQRO contractors to perform additional 
quality review activities even though the FFP rate for these services 
was 50%, rather than 75%. These entities included: universities, 
consulting groups, claims or data management groups, and survey firms. 
In addition, four of the seven had additional arrangements with State 
agencies other than the Medicaid agency, including Departments of 
Health, Departments of Mental Health, or State data entities. The two 
overall conclusions expressed by the OIG, report were that Medicaid 
agencies find value in using a variety of quality oversight functions 
in EQR, and that they would prefer to use several different types of 
contractors.
    To obtain additional information, we contracted with the NASHP to 
conduct a more comprehensive survey of all State agencies using EQROs. 
The NASHP survey reaffirmed the OIG survey finding that focused quality 
of care studies were the most common EQRO activity, with additional 
activities including: data validation, random medical record review, 
surveys, data audits and validation, and contract compliance reviews. 
The survey also affirmed the States' desire to contract with additional 
types of organizations for their EQRs, although three State agencies 
explicitly recommended that new entities not be permitted. Those State 
agencies wishing to contract with new entities identified State 
entities other than Medicaid such as public health or insurance 
departments, and other entities such as universities, consulting firms 
and research foundations, as desirable organizations.
EQRO Qualifications
    OBRA '86 as amended by OBRA '87 specified the types of entities 
State agencies could contract with to conduct EQR. The BBA, instead of 
specifying types of entities, requires the Secretary to consult with 
States and establish a method for the identification of entities that 
are qualified to conduct EQR. To fulfill this requirement, we 
contracted with the NASHP to convene an expert panel comprised of a 
majority of State representatives but also including consumer advocates 
and other stakeholders, an MCO representative, a

[[Page 67226]]

quality improvement expert and members of our staff. The expert panel 
met for two days to discuss the following:
     What is the skill set required to conduct the EQR scope of 
work?
     What does it mean for an EQRO to be ``independent''?
     Who should be the authority to designate ``qualified'' 
entities to serve as EQROs?
     Should these designations be made on a categorical or 
case-by-case basis?
     Must all EQR activities be conducted by a single entity or 
may several entities conduct EQR activities, and may entities use 
subcontractors?
    We used the recommendations included as part of the NASHP report of 
the meeting to develop the provisions of this proposed rule.

C. Relation to Other Proposed Rules

    On September 29, 1998, at 63 FR 520220, we published a proposed 
rule identified as HCFA-2001-P, Medicaid Managed Care Provisions 
(September proposal). That rule proposed to add to the Medicaid 
regulations a new part 438 that includes a subpart E--Quality 
Assessment and Performance Improvement. Under subpart E, it is a 
State's responsibility to arrange for an annual external independent 
review of the timeliness, access, and quality of the services that each 
contracting MCO furnishes to its Medicaid enrollees. The September 
proposal did not include the specific EQR provisions because we had not 
yet complied with the BBA's requirement to consult with States to 
establish a method for identifying entities that are qualified to 
conduct EQR. Now that we have complied with this requirement, we can 
propose the rules for EQR.
    The September proposal includes a Sec. 438.8(h) which lists those 
requirements, set forth elsewhere in part 438, that also apply to 
Prepaid Health Plans (PHPs). Prepaid Health Plans, like MCOs, are 
organizations paid on a prepaid capitation basis for services furnished 
to enrollees, but unlike MCOs, they do not always provide comprehensive 
health care services nor do they always assume risk. (Examples of PHPs, 
are managed dental or behavioral health plans.)
    When part 438 is published in final form (following consideration 
of comments received on both proposed rules), we plan to amend the 
Sec. 438.8(h) list to include the EQR requirements as applicable to 
PHPs, for the benefit of PHP enrollees. As in the case of PHP 
requirements generally, this requirement would be promulgated under 
section 1902(a)(4) of the Act which authorizes the Secretary to 
establish requirements necessary ``for the proper and efficient 
operation of the plan.'' We also believe that this is consistent with 
Congressional intent. In the Joint Explanatory Statement of the 
Committee of the Conference accompanying the BBA, the section entitled 
``Current Law,'' includes the following: ``States are required to 
obtain an independent assessment of the quality of services furnished 
by contracting HMOs and prepaid health plans (those offering a non-
comprehensive set of services under partial capitation), using either a 
utilization and quality control peer review organization (PRO) under 
contract to the Secretary or another independent accrediting body.'' 
Although the OBRA '86 requirement did not apply to PHPs, the fact that 
the Congress believed that it did and chose not to exempt PHPs, as it 
did primary care case managers, we take as a sign that the Congress 
perceives EQR requirements as appropriately applied to PHPs.
    Currently, 42 CFR 434.53 requires States to have a system of 
periodic medical audits to ensure that each HMO and PHP furnishes 
quality and accessible health care to enrollees. Our September proposal 
eliminates the periodic Medical Audit requirement. We intend this new 
EQR requirement to replace the requirement on PHPs for periodic medical 
audits.
    Because PHPs do not always provide comprehensive services, we 
intend that an EQR of a PHP will assess only the scope of services for 
which the State has contracted. We invite comment on our decision to 
apply the EQR requirement to PHPs. We will only consider comments that 
pertain specifically to our proposal to include EQR requirements in 
Sec. 438.8(h), and not on the broader issue of subjecting PHPs to other 
MCO quality requirements. Comments on those other requirements would 
have been appropriate in response to the September proposal.
    In addition to proposing that these provisions apply to PHPs, we 
are also proposing to apply the EQR provisions to organizations that 
have comprehensive risk contracts but are exempt from 1903(m) 
requirements, such as Health Insuring Organizations (HIOs) which began 
operating prior to January 1, 1986, certain county-operated HIOs in 
California, and entities described in section 1903(m)(2)(B). As 
reflected in Sec. 438.6 of the September 29, 1998 proposed rule, only 
contracts with HIOs that began operating on or after January 1, 1986 
are subject to MCO requirements unless they have been specifically 
exempted by statute from these requirements, as in the case of certain 
county operated HIOs in California. As discussed above, pursuant to our 
authority under section 1902(a)(4) to establish requirements necessary 
for ``proper and efficient administration,'' we have proposed to apply 
several beneficiary protections and quality-related requirements 
(including the EQR requirement proposed in this rule) to PHPs, which do 
not have comprehensive risk contracts.
    Entities with comprehensive risk contracts that have been exempted 
by statute from the MCO requirements in section 1903(m) and section 
1932, however, were not included in our proposed revised definition of 
PHP. As discussed above, we did not believe it was appropriate to 
subject these entities, in effect, to virtually the full range of MCO 
requirements (as we proposed to do in the case of PHPs) when Congress 
had provided these entities with explicit statutory exemptions from 
these requirements. We do not believe, however, that these entities 
should be exempted entirely from any check on the quality of the 
services they provide to their enrollees. We accordingly are proposing 
in section Sec. 438.1 (c) to require compliance with EQR requirements 
by entities with comprehensive risk contracts that are statutorily 
exempt from the requirements in section 1903(m)(2)(A). We believe this 
is consistent with Congressional intent to ensure quality outcomes and 
timeliness of and access to services of all Medicaid beneficiaries 
enrolled in capitated risk arrangements. We invite comment on our 
decision to apply the EQR requirement to entities with statutory 
exemptions from section 1903(m)(2)(A) requirements.
    The final rule for part 438 will probably assign a separate subpart 
for the rules specific to EQR.

IV. Provisions of the Proposed Rule

A. Definitions (Section 438.2)

    Section 438.2 establishes ``EQR'' and ``EQRO'' as representing 
``external quality review'' and ``external quality review 
organization'' respectively. It also defines four terms frequently used 
in the text:
    ``External quality review'' means the analysis and evaluation, by 
an EQRO, of aggregated information on timeliness, access, and quality 
of health care services furnished to Medicaid enrollees by each MCO, 
and other related activities performed by an EQRO.
    ``External quality review organization'' means an organization

[[Page 67227]]

that meets the competence and independence requirements set forth in 
Sec. 438.354, and performs EQR.
    ``Quality'', as it pertains to EQR, means the degree to which an 
MCO maintains or improves the health outcomes of its enrollees through 
its structural and operational characteristics and through the 
provision of services. This definition recognizes structure, process, 
and outcomes as the variables that affect and constitute the delivery 
of appropriate health care and that have historically been used in the 
review of quality of care.
    ``Validation'' means the review of information, data, and 
procedures to determine the extent to which they are accurate, 
reliable, free from bias, and in accord with standards for data 
collection and analysis.

B. State Responsibilities (Section 438.350)

    Section 438.350 sets forth the State's responsibilities related to 
EQR. Each State agency that contracts with MCOs under section 1903(m) 
of the Act must ensure that--
     Except as provided in Sec. 438.362, an annual EQR is 
performed by a qualified EQRO for each contracting MCO;
     The EQRO has sufficient information to use in performing 
the review;
     The information that the State agency provides to the EQRO 
is obtained through methods consistent with protocols specified by 
HCFA; and
     The results of the EQR are made available, upon request, 
to specified groups and to the general public.
    The information that the State agency must make available to the 
EQRO is specified in Sec. 438.358. The information that constitutes the 
``results'' of the EQR is specified in Sec. 438.364.
    Section 1932(c)(2)(A) of the Act requires that each contract with 
an MCO ``provide for an annual (as appropriate) external independent 
review, conducted by a qualified independent entity* * *''. We have 
interpreted the parenthetical statement (for which there is no 
explanation in the legislative history) to be a reference to those MCOs 
that may be exempted from EQR under section 1932(c)(2)(C) of the Act on 
the basis of ``deemed compliance.'' We invite comment on other possible 
interpretations.

C. External Quality Review Protocols (Section 438.352)

    In our RFP for the development of protocols, we defined them as 
``detailed instructions to be followed by personnel performing reviews 
of health care quality.'' Protocols must specify: (1) The data to be 
gathered, that is, the substantive areas to be covered by the protocol; 
(2) the source of the data; (3) detailed procedures to be followed in 
collecting the data to promote its accuracy, validity, and reliability; 
(4) the proposed methods for valid analysis and interpretation of the 
data; and (5) all instructions, guidelines, worksheets and any other 
documents or tools necessary for implementing the protocol.
    The protocols that the JCAHO is developing under the guidance of an 
expert panel are reflected in proposed section 438.358 discussed below. 
They will address: (1) Monitoring for compliance with structural and 
operational quality standards; (2) validating client-level data; (3) 
calculating performance measures; (4) validating performance measures 
produced by MCOs; (5) conducting quality-assessment and performance-
improvement projects; (6) validating MCO-conducted quality-assessment 
and performance-improvement projects; (7) conducting studies on 
quality, focused on a particular aspect of clinical or non-clinical 
services furnished at a particular time; (8) validating consumer or 
provider surveys; and (9) administering consumer or provider surveys.
    We have asked the JCAHO to draw from existing protocols that have 
been tested for reliability and validity and that have been used in the 
public and private sectors to conduct reviews of the quality of MCO 
services, consistent with current industry practice. We have also 
expressed a preference for protocols that are in the public domain.
    We expect that the protocols will be detailed and many pages in 
length. This is one reason for not including them in our regulations. 
Another reason is the fact that quality measurement is a rapidly 
changing technology. Protocols developed in the private sector for 
validation of performance measures and administration of consumer 
surveys are revised at least annually. The delays inherent in revising 
regulations would make it difficult to make such frequent changes.
    All activities that provide information for EQR must use protocols 
that are consistent with those that we specify. This will ensure that 
the conduct of the activities enhances the quality of EQR for State 
agencies and that the conduct of the activities is methodologically 
sound. However, by requiring protocols that are ``consistent'', rather 
than ``identical'', with those that we specify, we leave the State 
agencies free to improve their protocols continuously, as the art and 
science of quality measurement improve.

D. Qualifications of External Quality Review Organizations (Section 
438.354)

    Section 438.354 sets forth the requirements that an entity must 
meet in order to qualify as an EQRO. We worked in consultation with 
States, consumer advocates, and other stakeholders, under the auspices 
of NASHP, to determine how to ensure that EQROs are both ``competent'' 
and ``independent''.
    This proposed rule does not define categories of entities that are 
qualified to perform EQR. Rather, it proposes that in order to qualify, 
entities must meet specified competence and independence standards. To 
meet the competence standards, the entity must have at least the 
following:
     Staff with knowledge of (1) Medicaid beneficiaries, 
policies, data systems, and processes; (2) managed care delivery 
systems, organizations, and financing; (3) quality assessment and 
improvement technologies; and (4) research design and methodology;
     Sufficient physical, technological, and financial 
resources to conduct EQR; and
     Other clinical and nonclinical skills to carry out the 
review and to supervise the work of any subcontractors.
    To meet the independence requirement, we propose two tests:
     The EQRO and any subcontractors must be independent from 
the State Medicaid agency and from any MCO they review.
     The relationship between the MCO and the EQRO must be such 
as to preclude conflict of interest.
    The first test would allow State entities to qualify as EQROs, with 
the following limitations:
    A State entity could not qualify if it (1) Has Medicaid purchasing 
or managed care licensing authority; (2) delivers any health care 
services to Medicaid beneficiaries; or (3) conducts, on the State's 
behalf, any other ongoing Medicaid program operations related to 
oversight of the quality of MCO services. In addition, the State entity 
must be governed by a Board or similar body, the majority of whose 
members are not government employees.
    We were concerned about the limitation on board membership. We 
wondered whether it was feasible to have a State entity with an 
oversight body composed predominantly of non-State employees. We found 
that a number of State entities do have such boards. For example, 
Vermont's Program for Quality in Health Care is an organization 
authorized by the Vermont

[[Page 67228]]

legislature to oversee the quality of care for both commercial and 
public consumers. It is a non-profit organization that is governed by a 
board of directors, the majority of whom, are not government employees 
and which includes representatives of consumers, hospitals, insurers, 
MCOs, employers, physicians, and State government. The organization is 
charged with improving the quality, efficiency, and cost effectiveness 
of Vermont's health care system. It measures health care quality 
through data collection and analysis, and works with health care 
providers and others to develop standards of care and indicators of 
quality.
    Maryland's Health Care Access and Cost Commission (HCACC), created 
in 1993, is an independent commission with nine members who are 
appointed by the governor with the advice and consent of the Senate. 
The majority of the nine Board members are not government employees. 
Among its responsibilities, the HCACC is required to establish and 
implement a system to comparatively evaluate the quality and 
performance of MCOs.
    The NASHP expert panel also recommended that EQROs be required to 
have participation by Medicaid beneficiaries. With respect to this 
recommendation, we welcome such participation, however, we do not 
propose to mandate it, for two reasons:
    1. EQR is only one facet of the State's quality assessment and 
performance improvement strategy.
    2. We believe that stakeholder input on EQR might be more effective 
if provided to the State agency (rather than the EQRO), as it develops 
that strategy.
    The second test of independence from the MCO applies to all 
entities contracting under EQR. The NASHP summary report, based on its 
expert panel's input, recommended providing that an EQRO may not review 
an MCO if either has an ownership interest greater than 5 percent in 
the other, or if they share management or corporate board membership. 
That would be consistent with our disclosure of ownership and related 
information requirements under our program integrity regulations (part 
420 for Medicare, and part 455 for Medicaid). However, we are proposing 
a broader approach that is consistent with other HCFA regulations on 
contracting and is based on the concept of ``affiliation'',3 
as the term is explained in 48 CFR 19.101.4 In accordance 
with that regulation, an EQRO and an MCO would be considered to be 
``affiliated'' if either one controls or has the power to control the 
other, or another entity controls or has the power to control both. We 
believe that this concept of ``control'' can better ensure that no 
actual conflicts of interest exist between the EQRO and the MCO it 
reviews. We request comments on how better to identify situations that 
create conflict of interest, on our proposing to allow State entities 
to qualify as EQROs, and on our decision to apply the ``independence `` 
requirement to subcontractors as well as contractors.
---------------------------------------------------------------------------

    \3\ That is the concept we propose to use in implementing the 
Medicare Integrity Program (MIP) established by the Health Insurance 
Portability and Accountability Act of 1996 (Public Law 104-191). The 
MIP proposed rule published in March 1998, identifies offerors or 
entities as having a conflict of interest if they are 
``affiliated.''
    \4\ Title 48 of the CFR contains the Federal Acquisition 
Regulations (FAR) system, which ``is established for the 
codification and publication of uniform policies and procedures for 
acquisition by all executive agencies.'' Most government acquisition 
is accomplished through contracting.
---------------------------------------------------------------------------

    Another NASHP summary report recommendation based on its expert 
panel's input was that EQROs be selected by State agencies through RFPs 
that would not require prior approval by us, but would be subject to 
review later to ensure that, as a condition for FFP at the 75 percent 
rate, the State agency followed all applicable procedures and criteria. 
We note that this recommendation requires no changes or additions to 
current law because it is current practice for State agencies to use 
RFPs to select EQROs. It is also standard practice for our regional 
office staff to monitor implementation of Medicaid managed care 
initiatives. With respect to EQR, Regional Office staff may review the 
State's most recent RFP for external review services, the EQR contract, 
or the EQR reports.

E. State Contract Options (Section 438.356)

    Section 438.356 sets forth requirements that State agencies must 
follow, and options that they may use in selecting EQROs. On the basis 
of the NASHP expert panel's recommendations, as well as the findings of 
the OIG report, we propose that State agencies may contract with more 
than one EQRO and each EQRO may use subcontractors. EQROs that use 
subcontractors are accountable for and required to oversee all EQR 
activities performed by the subcontractors. In addition, each 
contractor must meet the competency requirements and each contractor 
and subcontractor must meet the independence requirement.
    We considered requiring only the contractor to meet the test of 
independence. We determined that such an approach would permit entities 
with conflicts of interest to serve as subcontractors under a ``shell'' 
contractor, and thus not ensure a truly independent review.
    This section also requires that State agencies follow an open 
competitive procurement process that is in accordance with State law 
and regulation and consistent with 45 CFR part 74, as it applies to 
State procurement of Medicaid services.

F. Activities Related to External Quality Review (Section 438.358)

    Section 438.358 requires that the EQR use information obtained from 
specified mandatory activities that must be performed by the State 
agency or the EQRO; and identifies other optional activities that the 
State agency may wish to perform, or have the EQRO perform, to produce 
additional information for use in the EQR. The mandatory activities are 
consistent with the requirements set forth in the September proposal. 
The optional activities were not included in that proposal. They are, 
however, activities that both the OIG and the NASHP surveys identified 
as activities that States have found useful in reviewing quality. 
Inclusion of these optional activities would permit States to use their 
EQROs for the full range of activities they are now conducting. This 
section also authorizes States to use EQROs to provide technical 
assistance to MCOs.
    This rule proposes that each year, information to be used by the 
EQRO be obtained from the validation of performance improvement 
projects performed that year and the validation of performance measures 
reported that year. However, we recognize that a State, or Medicare, or 
a private accreditation organization may review MCO compliance with 
structural and operational quality standards less frequently than once 
a year. For example, NCQA and JCAHO generally perform their 
accreditation reviews once every three years. Because of this, we 
propose that the information used by the EQRO on this type of review 
must be from the most recent review performed within the previous three 
years.

G. Non-Duplication of Mandatory Activities (Section 438.360)

    Section 438.360 is based on section 1932(c)(2)(B) of the Act which 
provides the option for a State agency to exempt an MCO from specified 
EQR-related activities that would duplicate activities conducted as 
part of Medicare reviews or independent accreditation surveys.

[[Page 67229]]

For this provision, we had to determine how a State agency could obtain 
information about the quality of care found through Medicare reviews or 
accreditation if there was no EQR to provide information. Moreover, 
because Medicare serves the elderly and disabled, while Medicaid 
predominantly serves families and children, we needed to take into 
account that review activities usually differ for these populations in 
terms of the types of data collected, the measures used, and the 
studies conducted. These differences limit the extent to which they can 
be considered to duplicate each other. Accordingly, we propose that an 
MCO that is a certified M+C organization with a current Medicare 
contract--
     Qualifies for exemption if it has had an independent 
quality review under Medicare or is fully accredited by a private 
accreditation organization; but
     The exemption applies only to the activities specified in 
Sec. 438.358(a)(2). Those are specific to reviewing compliance with 
standards for (1) availability of services; (2) continuity and 
coordination of care; (3) coverage and authorization of services; (4) 
establishment of provider networks; (5) enrollee information; (6) 
enrollee rights; (7) confidentiality; (8) enrollment and disenrollment; 
(9) grievance systems; (10) subcontractual relationships and 
delegation; (11) use of practice guidelines; (12) health information 
systems; and (13) mechanisms to detect both underutilization and 
overutilization of services as part of the quality assessment and 
performance improvement programs.
    We believe that these activities are essentially the same 
regardless of the population served, but the activities specified in 
Sec. 438.358(a)(1) are sensitive to the type of population served. For 
example, performance improvement projects that target the elderly would 
not be appropriate for addressing maternal and child health issues, and 
would not be considered duplicative. The rule provides one exception to 
this limitation: a State agency may exempt from all mandatory 
activities (listed in paragraphs (a)(1) and (a)(2) of proposed 
Sec. 438.358) any MCO that serves only individuals who are eligible for 
both Medicare and Medicaid. In that situation, there is no reason for 
concern, since the population served is the same for both programs.
    The State agency must require each MCO exempted under this section 
to make available to the State agency all reports and findings and the 
results of the Medicare quality review or the accreditation survey, in 
order to: (1) Provide that information to the EQRO; and (2) ensure that 
State agencies and Medicaid beneficiaries have access to comparative 
information on MCOs and M+C organizations.

H. Exemption From External Quality Review (Section 438.362)

    This section implements section 1932(c)(2)(C) of the Act which 
provides that a State agency may exempt an MCO from the EQR 
requirements in section 1932(c)(2)(A) if the MCO has a current Medicare 
contract under Part C of title XVIII or under section 1876 of the Act; 
and, for at least two years, has had in effect a Medicaid contract 
under section 1903(m) of the Act.
    In developing this proposed rule, we asked ourselves (1) how to 
interpret the statutory requirements for having a Medicare contract, 
and having had a Medicaid contract for at least two years; (2) whether 
the exemption should apply to an MCO whose Medicare and Medicaid 
contracts do not cover the same geographic area; (3) whether the 
Congress intended that the State agency grant an exemption without 
consideration of the MCO's performance during the preceding 2-year 
period; and (4) what information, if any, the State agency needs to 
obtain with respect to an exempted MCO. On the basis of our responses 
to those questions, we added three requirements. We particularly 
request comments on these requirements because they are not based on 
any explicit language in the statute or the Conference Committee 
Report.
    The first requirement is that the two contracts cover all or part 
of the same geographic area. The purpose is to prevent exemption on the 
basis of a Medicare contract that covers a geographic area, for 
example, another State or a different part of the same State, that is 
completely different from the area covered by the MCO's Medicaid 
contract. (Sec. 438.362(a)(2))
    We believe that an MCO that serves different areas typically has 
different provider networks in each area. Since research has clearly 
shown variations in practice patterns among physicians in different 
geographic areas, it is reasonable to interpret the deemed compliance 
provisions as requiring some common service areas.
    The second added requirement is that, during each of the two years 
preceding the granting of an exemption, the MCO has had an EQR that 
found it to be performing acceptably with respect to the timeliness, 
access, and quality of health care services provided to Medicaid 
enrollees. (Sec. 438.362(a)(3)).
    We considered several possible rationales for the statutory 
provision that grants exemption on the basis of two-year participation 
in the Medicaid program:
     After two years of dealing with the MCO as a contractor, 
the State agency is sufficiently familiar with its performance 
generally, thus making EQR unnecessary.
     Two years of serving the Medicaid population (a different 
population than Medicare's) is sufficient to exempt the MCO from EQR.
     During each of the two years of the Medicaid contract, the 
MCO will have been subject to the section 1932(c)(2)(A) requirements, 
and will have been able to demonstrate its performance through the 
annual EQR, demonstrating that the MCO's ongoing Medicare compliance is 
likely to remain predictive of high quality Medicaid services.
    Given the importance that the Congress has placed on quality in the 
BBA provisions, we are proposing to interpret the two year rule to have 
been adopted based upon the third rationale above. Accordingly, we 
propose that the State agency have the option to exempt the MCO if, 
during the two preceding years of Medicaid contract under section 
1903(m) it has been subject to EQR and been found to be performing 
acceptably with respect to the timeliness, access, and quality of care 
furnished to Medicaid enrollees. The State agency could not exempt an 
MCO that, during the previous two-year period had been found to have 
significant problems requiring corrective action. We note that our 
interpretation would effectively delay exercise of the option until at 
least two years after this rule is published in final.
    The third added provision is that the State agency require each 
exempted MCO to provide it, annually, with copies of all Medicare 
reviews performed by us, or by any of our agents or any private 
accreditation organization, with respect to the timeliness, access, or 
quality of its services. (Sec. 438.362(b)) The rationale for this 
requirement is that the statutory provision exempts the MCO from EQR 
requirements specifically, but not from continued State agency 
oversight of the quality of MCO services.

I. EQR Results. (Section 438.364)

    Section 438.364 requires that the EQR produce the following 
information:
     A detailed technical report that describes the following 
for each activity conducted under accordance with Sec. 438.358: (1) The 
objectives; (2) the technical methods of data collection and analysis; 
(3) the data obtained; and (4) the conclusions drawn from the data. In 
addition, the report must also describe

[[Page 67230]]

the manner in which the data from all activities conducted in 
accordance with Sec. 438.358 were aggregated, analyzed, and the 
conclusions were drawn as to the quality of the care furnished by the 
MCO.
     A detailed assessment of each MCO's strength and 
weaknesses with respect to timeliness, access, and quality of the 
health care services furnished to Medicaid enrollees.
     The recommendations for improving the quality of the 
services furnished by each MCO.
     Comparative data about all MCOs, as determined appropriate 
by the State agency.
     An assessment of the degree to which each MCO addressed 
effectively the recommendations for quality improvement, as made by the 
EQRO during the previous year's EQR.
    We considered three alternatives for the level of detail of the 
information to be released to the public as EQR ``results.''
    1. Do not provide a Federal definition of what constitutes 
``results'' but allow each State agency to develop its own definition. 
This option would provide the greatest flexibility but was not selected 
because we believe that the statute intended a Federal ``definition'' 
to ensure that all State agencies provide sufficient information.
    2. Require that all validated data and information be made 
available. Although this option would provide consumers with great 
detail about every aspect of MCO performance, the information would 
lack the sense of context necessary to ensure appropriate 
interpretation. It would impose additional burdens on State agencies 
for the release of large quantities of data, and would also be 
inconsistent with what experts have advised us is the best way to share 
information with consumers for their decision making, for example, to 
help potential enrollees choose among available MCOs.
    3. Require that State agencies provide copies only of the summary 
findings, conclusions, and recommendations of the EQR. This would 
include the highest level conclusions drawn from a synthesis of all 
available information on MCO performance.
    This proposed rule requires State agencies to provide information 
sufficient to enable interested parties to evaluate the conclusions of 
the EQR. To promote confidence in the validity of the conclusions, 
States may wish to release, in addition to the technical report, the 
more detailed underlying data to researchers or others as the States 
deem appropriate. However, the proposed rule does not require the 
States to do so. In addition, these data may be available through 
State-based authorities similar to Freedom of Information Act 
requirements for individuals to request and receive as much of the 
detailed information that goes into an EQR analysis and report as they 
want. (Sec. 438.364(a))
    This section also (1) gives examples of groups of interested 
parties to which State agencies would provide copies, of the EQR 
results, upon request; (2) specifies that they must also give them to 
members of the general public who request them (Sec. 438.364(b)); and 
(3) provides that the information released may not disclose the 
identity of any patient (Sec. 438.364(c)).

J. Federal Financial Participation (FFP) (Section 438.370)

    Section 438.370 provides that FFP at the 75 percent rate is 
available in expenditures for EQR, including the production of EQR 
information, performed by EQROs and at the 50 percent rate in 
expenditures for EQR-related activities performed by any entity that 
does not qualify as an EQRO. The 50 percent rate applies even if the 
activities are of the same type as those performed by EQROs.

V. Effective Date of the Final Rule

    When this regulation is published as a final rule, we intend to 
make it effective 60 days following publication. Provisions that must 
be implemented through contracts with EQROs will be effective with 
contracts entered into or revised on or after 60 days following the 
effective data, but no longer than 12 months from the effective date.

VI. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement report is 
submitted to the Office of Management and Budget (OMB) for review and 
approval. In order to fairly evaluate whether an information collection 
should be approved by OMB, section 3506(c)(2)(A) of the PRA, requires 
that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for 
Secs. 438.360, 438.362 and 438.364 of this document that contain 
information collection requirements.

Section 438.360  Nonduplication of Mandatory Activities

    In order to avoid duplication, the State agency may exempt an MCO 
from mandatory activities (as specified in Sec. 438.358) if the 
conditions of paragraph (b) or paragraph (c) of this section are met. 
To demonstrate compliance with these requirements an MCO must provide 
to the State agency, all the reports, findings, and other results of 
the Medicare review or the private accreditation survey.
    The burden associated with these requirements is the time and 
effort for an MCO to disclose all the reports, findings, and other 
results of the Medicare review or the private accreditation survey to 
the State agency. Our current data indicate that there are 
approximately 420 MCOs and 90 PHPs providing Medicaid services. Of 
these, approximately 135 are Medicaid only MCOs. We believe that there 
is the potential for States to allow the remaining 285 MCOs to take 
advantage of the non-duplication provision and that these MCOs will be 
required to disclose the necessary information to each State agency. We 
further estimate that it will take each MCO 4 hours to disclose the 
necessary documentation to the State. Therefore, the total burden 
associated with this requirement is 285 MCO's  x  4 hours = 1140 annual 
burden hours.
    This section also requires that a State agency provide all the 
reports, findings, and other results of the Medicare review or the 
private accreditation survey to the appropriate EQRO. We estimate that 
it will take, on average, 4 hours for a State to disclose the necessary 
documentation to the appropriate EQRO. The total annual burden 
associated with this requirement is 1140 hours.

Section 438.362  Exemption From External Quality Review

    Each year, exempted MCO's must provide to the State agency the most 
recent Medicare review findings reported to the MCO by HCFA or its 
agent. This information must include (1) all data, correspondence, 
information, and findings pertaining to the MCO's compliance with 
Medicare standards for access, quality assessment and performance 
improvement, health services, or delegation of these activities; (2) 
all measures of the MCO's

[[Page 67231]]

performance; and (3) the findings and results of all performance 
improvement projects pertaining to Medicare enrollees.
    If an exempted MCO has been reviewed by a private accreditation 
organization and the survey results have been used to either fulfill 
certain requirements for Medicare external review under Subpart D of 
part 422 of this chapter or to deem compliance with Medicare 
requirements as provided in Sec. 422.156, the MCO must submit a copy of 
all findings pertaining to its most recent accreditation survey to the 
State agency. These findings shall include accreditation survey results 
of evaluation of compliance with individual accreditation standards, 
noted deficiencies, corrective action plans, and summaries of unmet 
accreditation requirements.
    The burden associated with these requirements is not applicable for 
two years following the final publication of this regulation. After two 
years, the time and effort for an exempted MCO to disclose the findings 
of its most recent Medicare review or private accreditation survey to 
the State agency will be the burden associated with these requirements. 
We believe, of the approximately 285 MCOs that potentially may provide 
Medicare services in addition to Medicaid services, State agencies will 
allow for approximately 10% of the MCOs to be exempt from the EQR 
requirement. We further estimate that it will take each MCO 8 hours to 
prepare and submit the necessary documentation to the State agency. 
Therefore, the total burden associated with this requirement is 10% of 
285 MCO's  x  8 hours = 228 annual burden hours.

Section 438.364  External Quality Review Results

    Each EQRO is required to submit to the State agency a detailed 
technical report that describes, for each EQR and each related 
mandatory and optional activity undertaken by the EQRO, the objectives, 
technical methods of data collection and analysis, data obtained, 
conclusions drawn from the data, and the manner in which the 
conclusions were drawn as to the quality of the care furnished by the 
MCO. In addition, the report must include: (1) A detailed assessment of 
each MCO's strengths and weaknesses with respect to the timeliness, 
access, and quality of health care services furnished to Medicaid 
beneficiaries; (2) recommendations for improving the quality of health 
care services furnished by each MCO; (3) as the State agency determines 
methodologically appropriate, comparative information about all MCOs, 
and (4) an assessment of the degree to which each MCO has addressed 
effectively the recommendations for quality improvement, as made by the 
EQRO during the previous year's EQR.
    The burden associated with this requirement is the time and effort 
for a EQRO to submit to a State agency a detailed technical report for 
each EQR conducted. It is estimated that it will take an EQRO 160 hours 
to prepare and submit the necessary documentation to the State agency. 
Therefore, the total burden associated with this requirement is, 510 
technical reports (420 MCOs + 90 PHPs)  x  160 hours = 81600 annual 
burden hours.
    This section also requires each State agency to provide copies of 
technical reports, upon request, to interested parties such as 
participating health care providers, enrollees and potential enrollees 
of the MCO, beneficiary advocate groups, and members of the general 
public.
    The burden associated with this requirement is the time and effort 
for a State agency to disclose copies of a given technical report to 
interested parties. We estimate that on average, it will take a State 
agency 4 hours to disclose the required information. Therefore, the 
total burden associated with this requirement is 420 MCOs + 90 PHPs  x  
25 requests per MCO or PHP  x  4 hours = 51000 annual burden hours.
    We have submitted a copy of this proposed rule to OMB for its 
review of the information collection requirements described above. We 
will also submit the final EQR protocols upon their completion to OMB. 
These requirements are not effective until they have been approved by 
OMB. As stated in the preamble of this rule, the EQR protocols are 
detailed instructions to be followed by personnel performing reviews of 
health care quality. The JCAHO is developing these protocols under the 
guidance of an expert panel. All activities that provide information 
for EQR must use protocols that are consistent with the protocols being 
developed. This will ensure that the conduct of the activities enhances 
the quality of EQR for State agencies and that the conduct of the 
activities is methodologically sound.
    We anticipate that the protocols will be complete in the spring of 
2000. Upon their completion, a Federal Register notice will be 
published. To obtain a copy of the protocols when they become 
available, access them on the HCFA Internet homepage at www.hcfa.gov, 
or submit a request to the HCFA address below: 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; Attention Julie Brown, 
HCFA-2015-P.
    If you comment on any of these information collection and record 
keeping requirements, please mail 3 copies directly to the following:

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; 
Attention Julie Brown, HCFA-2015-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 Desk Officer.

VII. Response to Comments

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

VIII. Impact Statement

A. Regulatory Impact Analysis

    We have examined the impacts of this rule as required by Executive 
Order 12866 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 regulation is 
necessary, to select regulatory approaches that maximize net benefits, 
including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity. A regulatory impact analysis 
(RIA) must be prepared for major rules with economically significant 
effects ($100 million or more annually). The RFA requires agencies to 
analyze options for regulatory relief of small entities. For purposes 
of the RFA, we prepare a regulatory flexibility analysis unless 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

[[Page 67232]]

small entities, either by nonprofit status or by having revenues of $5 
million or less annually. Individuals and States are not included in 
the definition of a small entity.
    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. This analysis must conform to the provisions of section 603 
of the RFA. For purposes of section 1102(b) of the Act, we define a 
small rural hospital as a hospital that is located outside a 
Metropolitan Statistical Area and has fewer than 50 beds.
    The Unfunded Mandates Reform Act (Public Law 104-4) requires that 
agencies prepare an assessment of anticipated costs and benefits before 
proposing any rule that may result in an annual 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). This 
rule does not impose any mandates on State, local, or tribal 
governments, or the private sector that will result in an annual 
expenditure of $100,000,000 or more.
    The rule implements Medicaid provisions as directed by the BBA; 
thus, alternatives were not considered. The only alternative would be 
to seek repeal of the legislation. This would be inconsistent with the 
major focus of the new provisions: protection of beneficiary rights in 
a health care system in which MCOs have gained broad powers.
    We do not anticipate that the provisions in this proposed rule will 
have a substantial economic impact on most hospitals, including small 
rural hospitals. The BBA provisions include some new requirements on 
State agencies and MCOs, but not directly on individual hospitals. The 
impact on individual hospitals will vary according to each hospital's 
current and future contractual relationships with MCOs. Furthermore, 
the impact will also vary according to each hospital's current 
procedures and level of compliance with existing law and regulation 
pertaining to Medicaid managed care. For these reasons, this proposed 
rule would not have a significant impact on the operations of a 
substantial number of hospitals. The only other small entity affected 
by these regulations would be the EQROs. However, this rule does not 
impose additional burdens on them. Instead, the rule offers these 
organizations the benefit of opportunities for additional revenues. 
Thus we certify that this rule will not have a significant economic 
impact on a substantial number of small entities.
    We do not anticipate a significant increase in Medicaid 
expenditures as a result of the publication of these regulations for 
the following reasons. First, 44 States, accounting for nearly 98 
percent of Medicaid administrative expenditures, are currently 
obtaining 75 percent enhanced FFP for EQR activities carried out by PRO 
and PRO-like organizations. Permitting these State agencies to claim 75 
percent matching for EQR activities conducted by the additional types 
of entities allowed by these regulations would therefore not result in 
increased costs to the extent that State agencies switch from PRO or 
PRO-like organizations to these additional entities. Moreover, we 
believe that, by expanding the pool of organizations available to 
conduct EQR, these State agencies may be able to negotiate savings 
compared to current costs of dealing with PRO and PRO-like 
organizations. Additional savings may be realized through opportunities 
afforded by the proposed rule to coordinate EQR activities with quality 
reviews conducted for other purposes, as discussed above. Additional 
costs may arise where State agencies currently conduct quality review 
activities at 50 percent Federal matching rate that would now qualify 
for 75 percent, and from new EQR activities undertaken as a result of 
the BBA requirements.
    In addition, even though we are proposing to extend this 
requirement to PHPs, again we do not expect this to significantly 
increase Medicaid expenditures. PHP costs account for approximately 5 
percent of the payments we make to capitated arrangements. Furthermore, 
State agencies currently conduct quality review activities on PHPs at a 
50 percent Federal matching rate. Additional costs may arise for States 
quality review activities that would now qualify for 75 percent and for 
new quality review activities undertaken as a results of the activities 
required in this proposed rule.
    Although we cannot quantify these various cost and savings effects, 
we believe that their net impact would be well below the $100 million 
annual threshold for a major rule, and therefore that a regulatory 
impact analysis is not required. The impact of this proposed regulation 
is subsumed in estimates of the aggregate impact of the BBA, which have 
already been included in Medicaid baseline projections for the 
President's budget.

B. Federalism

    Under Executive Order 13132, we are required to adhere to certain 
criteria regarding Federalism in developing regulations. We have 
determined that this proposed regulation will not significantly affect 
States rights, roles, and responsibilities. Section 1903(a)(30)(C) of 
the Act currently requires an EQR for each contract a State has with a 
section 1903(m) organization. In accordance with section 4705 of the 
BBA, this proposed rule would establish requirements and procedures for 
EQR of Medicaid MCOs. We propose to require States to ensure that an 
annual EQR is performed by a qualified EQRO for each contracting MCO, 
the EQRO has adequate information to carry out the review, and that the 
results of the reviews are made available to interested parties such as 
participating health care providers, enrollees, advocate groups, and 
the general public. We propose that these EQR requirements apply to 
PHPs and certain entities with comprehensive risk contracts that have 
been exempted from section 1903(m)(2)(A) requirements. We believe this 
is consistent with the intent of the Congress in enacting the quality 
provisions of the BBA. This proposed rule would not require State 
agencies to dismantle EQR mechanisms that they have used to meet 
section 1902 (a)(30)(C) of the Act and which they have found to be 
effective and efficient. Rather, this proposed rule would provide 
States greater flexibility in the types of entities they may use to 
conduct EQR.
    We worked closely with States in developing this regulation. 
Specifically, in accordance with section 1932(c)(2)(A)(ii) of the Act, 
which requires the Secretary to consult with States to establish a 
method for identifying entities qualified to conduct EQR, we met with 
States and other stakeholders under the auspices of the National 
Academy of State Health Policy to establish a criteria to identify 
qualified entities. Most of the recommendations made at this meeting 
have been incorporated into this proposed rule. For recommendations not 
accepted, an explanation has been provided.
    In addition, section 1932(c)(2)(A)(iii) requires the Secretary to 
coordinate with the NGA in contracting with an independent quality 
review organization to develop protocols to be used in EQR. To meet 
this requirement, we issued a RFP for one or more contractors to 
develop a set of review protocols for EQROs to use in the conduct of 
EQRs. Two State

[[Page 67233]]

representatives selected by the NGA were members of the panel that 
reviewed and rated responding proposals. Moreover, part of the 
development of the EQR protocols includes convening an expert panel for 
review and comment of the protocols. State representatives are included 
in this process.

List of Subjects

42 CFR Part 433

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

42 CFR Part 438

    Grant Programs--health, Managed care entities, Medicaid, Quality 
assurance, Reporting and record keeping requirements.

    42 CFR Chapter IV would be amended as set forth below.

A. PART 433--STATE FISCAL ADMINISTRATION

    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).


Sec. 433.15  [Amended]

    2. In Sec. 433.15, the following change is made: A new paragraph 
(b)(10) is added to read as set forth below.


Sec. 433.15  Rates of FFP for administration.

* * * * *
    (b) * * *
    (10) Funds expended for the performance of external quality review 
or the related activities described in Sec. 438.358 of this chapter 
when they are performed by an external quality review organization as 
defined in Sec. 438.2 of this chapter: 75 percent.
    B. A new part 438 is added, to read as set forth below.

PART 438--MANAGED CARE PROVISIONS

Subpart A--General Provisions

Sec.
438.1  Basis, scope and applicability.
438.2  Definitions.

Subparts B through D [Reserved]

Subpart E--External Quality Review

Sec.
438.350  State responsibilities.
438.352  EQR protocols.
438.354  Qualifications of EQROs.
438.356  State contract options.
438.358  Activities related to external quality review.
438.360  Non-duplication of mandatory activities.
438.362  Exemption from external quality review.
438.364  External quality review results.
438.370  Federal financial participation.

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

Subpart A--General Provisions


Sec. 438.1  Basis, scope and applicability.

    (a) Statutory basis. This part is based on section 1932(c)(2) of 
the Act.
    (b) Scope. This part sets forth requirements for annual external 
quality reviews of each contracting MCO, including--
    (1) Criteria that States must use in selecting entities to perform 
the reviews;
    (2) Specifications for the activities related to external quality 
review;
    (3) Circumstances under which external quality review may use the 
results of Medicare quality reviews or private accreditation surveys; 
and
    (4) Standards for making available the results of the reviews.
    (c) Applicability. The provisions of this part apply to managed 
care organizations (MCOs), prepaid health plans (PHPs), and entities 
with comprehensive risk contracts that have been exempted by statute 
from the requirements in section 1903(m)(2)(A).


Sec. 438.2  Definitions.

    As used in this subpart--
    EQR stands for external quality review;
    EQRO stands for external quality review organization.
    External quality review means the analysis and evaluation, by an 
EQRO, of aggregated information on timeliness, access, and quality of 
the health care services furnished to Medicaid recipients by each MCO 
and other related activities performed by an EQRO.
    External quality review organization means an organization that 
meets the competence and independence requirements set forth in 
Sec. 438.354, and performs external quality review.
    Quality, as it pertains to external quality review, means the 
degree to which an MCO maintains or improves the health outcomes of its 
enrollees through its structural and operational characteristics and 
through the provision of services.
    Validation means the review of information, data, and procedures to 
determine the extent to which they are accurate, reliable, free from 
bias, and in accord with standards for data collection and analysis.

Subparts B through D--[Reserved]

Subpart E--External Quality Review


Sec. 438.350  State responsibilities.

    Each State that contracts with MCOs must ensure that--
    (a) Except as provided in Sec. 438.362, an annual EQR is performed 
by a qualified EQRO for each contracting MCO;
    (b) The EQRO has information, obtained from the related activities 
described in Sec. 438.358, to carry out the review;
    (c) The information provided to the EQRO in accordance with 
paragraph (b) of this section is obtained through methods consistent 
with the protocols established under Sec. 438.352; and
    (d) The results of the reviews are made available as specified in 
Sec. 438.364.


Sec. 438.352  EQR protocols.

    Each protocol must specify--
    (a) The data to be gathered;
    (b) The sources of the data;
    (c) The detailed procedures to be followed in collecting the data 
to promote its accuracy, validity, and reliability;
    (d) The proposed method or methods for validly analyzing and 
interpreting the data once obtained; and
    (e) All instructions, guidelines, worksheets, and any other 
documents or tools necessary for implementing the protocol.


Sec. 438.354  Qualifications of EQROs.

    (a) General rule. The State must ensure that each organization it 
selects to perform EQR meets the requirements of this section.
    (b) Competence. The organization must have at least the following:
    (1) Staff with knowledge of--
    (i) Medicaid recipients, policies, data systems, and processes;
    (ii) Managed care delivery systems, organizations, and financing;
    (iii) Quality assessment and improvement technologies; and
    (iv) Research design and methodology, including statistical 
analysis.
    (2) Sufficient physical, technological, and financial resources to 
conduct EQR.
    (3) Other clinical and nonclinical skills to carry out the review 
and to supervise the work of any subcontractors.
    (c) Independence. The organization and its subcontractors are 
independent from the State Medicaid agency and from the MCOs they 
review. In order to qualify as ``independent'' and serve as an EQRO--

[[Page 67234]]

    (1) A State agency, department, university, or other State entity 
may not--
    (i) Have Medicaid purchasing or managed care licensing authority;
    (ii) Deliver any health care services to Medicaid recipients; or
    (iii) Conduct, on the State's behalf, any other ongoing Medicaid 
program operations related to oversight of the quality of MCO services.
    (2) A State agency, department, university, or other State entity 
must be governed by a Board or similar body the majority of whose 
members are not government employees.
    (3) An EQRO may not review a particular MCO if either the EQRO or 
the MCO exerts control over the other. (As used in this paragraph, 
``control'' has the meaning given the term in 48 CFR 19.101.)


Sec. 438.356  State contract options.

    (a) The State must contract with one or more EQROs.
    (b) Each contractor must meet the competence requirements as 
specified in Sec. 438.354(b).
    (c) Each contracting EQRO is permitted to use subcontractors. The 
EQRO is accountable for, and must oversee, all subcontractor functions.
    (d) Each contractor and subcontractor must meet the requirements 
for independence, as specified in Sec. 438.354(c)
    (e) For each contract, the State must follow an open, competitive 
procurement process that is in accordance with State law and 
regulations and consistent with 45 CFR part 74 as it applies to State 
procurement of Medicaid services.


Sec. 438.358  Activities related to external quality review.

    (a) Mandatory activities. The EQR must use information obtained 
from the following activities which must be performed by the State or 
its agent or, if they are not so performed, must be performed by the 
EQRO:
    (1) Each year, for each MCO, the EQR must use information obtained 
from the following:
    (i) Validation of performance improvement projects that were 
required by the State and were performed during the preceding 12 
months.
    (ii) Validation of performance measures that the State required and 
that the MCO reported during the preceding 12 months.
    (2) Each year, the EQR must also use information obtained from a 
review, conducted within the previous 3 year period, to determine the 
MCO's compliance with standards established by the State for the 
following:
    (i) Availability of services.
    (ii) Continuity and coordination of care.
    (iii) Coverage and authorization of services.
    (iv) Establishment of provider networks.
    (v) Enrollee information.
    (vi) Enrollee rights.
    (vii) Confidentiality.
    (viii) Enrollment and disenrollment.
    (ix) Grievance systems.
    (x) Subcontractual relationships and delegation.
    (xi) Use of practice guidelines.
    (xii) Health information systems.
    (xiii) Mechanisms to detect both underutilization and 
overutilization of services as part of the quality assessment and 
performance improvement programs.
    (b) Optional activities. The review may also use information 
derived from the following optional activities performed by the State 
or its agent, or the EQRO:
    (1) The validation of client level data (such as claims and 
encounters) reported by the MCO.
    (2) The administration or validation of consumer or provider 
surveys of quality of care.
    (3) The calculation of performance measures in addition to those 
reported by the MCO and validated by the EQRO.
    (4) The conduct of performance improvement projects in addition to 
those conducted by the MCO and validated by the EQRO.
    (5) The conduct of studies on quality, focused on a particular 
aspect of clinical or non-clinics services at a point in time.
    (c) Technical assistance. The EQRO may, at the State's direction, 
provide technical guidance to groups of MCOs to assist them in 
conducting activities related to the mandatory and optional activities 
that provide information for the EQR.


Sec. 438.360  Nonduplication of mandatory activities.

    (a) General rule In order to avoid duplication, the State may 
exempt an MCO from mandatory activities (as specified in Sec. 438.358) 
if the conditions of paragraph (b) or paragraph (c) of this section are 
met.
    (b) Certified M+C organization. The State may exempt an MCO from 
the mandatory activity specified in Sec. 438.358(a)(2), if the 
following conditions are met:
    (1) The MCO is also a certified M+C organization with a current 
Medicare contract.
    (2) The MCO meets either of the following conditions:
    (i) The MCO's current structure and its compliance with the 
standards established by the State under Sec. 438.358(a)(2) have been 
evaluated and approved by HCFA or its contractor.
    (ii) The MCO is currently fully accredited by a private accrediting 
organization that HCFA approves and recognizes as having standards and 
review procedures at least as stringent as those established by HCFA 
for the mandatory activity specified in Sec. 438.358(a)(2).
    (3) The MCO provides to the State all the reports, findings, and 
other results of the Medicare review or the private accreditation 
survey. The State provides the information to the EQRO.
    (c) MCO serves only the dually eligible. The State may exempt an 
MCO from the mandatory activities specified in Sec. 438.358(a)(1) and 
(a)(2) if the following conditions are met:
    (1) The MCO serves only individuals who receive both Medicare and 
Medicaid benefits.
    (2) The Medicare review activities are substantially comparable to 
the State-specified mandatory activities in Sec. 438.358(a)(1) and 
(a)(2).
    (3) The MCO provides to the State all the reports, findings, and 
other results of the Medicare review. The State provides the 
information to the EQRO.


Sec. 438.362  Exemption from external quality review.

    (a) Basis for exemption. The State may exempt an MCO from EQR if 
the following conditions are met:
    (1) The MCO has a current Medicare contract under part C of title 
XVIII or under section 1876 of the Act, and a current Medicaid contract 
under section 1903(m) of the Act.
    (2) The two contracts cover all or part of the same geographic 
area.
    (3) The Medicaid contract has been in effect for at least two 
consecutive years before the effective date of the exemption and during 
those two years the MCO has been subject to EQR under this part, and 
found to be performing acceptably with respect to the timeliness, 
access, and quality of health care services it provides to Medicaid 
recipients.
    (b) Information on exempted MCOs. (1) Information on Medicare 
review findings. Each year, the State must obtain from each MCO that it 
exempts from EQR, the most recent Medicare review findings reported to 
the MCO by HCFA or its agent including--
    (i) All data, correspondence, information, and findings pertaining 
to the MCO's compliance with Medicare

[[Page 67235]]

standards for access, quality assessment and performance improvement, 
health services, or delegation of these activities;
    (ii) All measures of the MCO's performance; and
    (iii) The findings and results of all performance improvement 
projects pertaining to Medicare enrollees.
    (2) Information on accreditation surveys. (i) If an exempted MCO 
has been reviewed by a private accreditation organization, the State 
must require the MCO to ensure that the State receives a copy of all 
findings pertaining to its most recent survey if the accreditation 
survey has been used for either of the following purposes:
    (A) To fulfill certain requirements for Medicare external review 
under subpart D of part 422 of this chapter,
    (B) To deem compliance with Medicare requirements, as provided in 
Sec. 422.156.
    (ii) These findings must include, but need not be limited to, 
accreditation survey results of evaluation of compliance with 
individual accreditation standards, noted deficiencies, corrective 
action plans, and summaries of unmet accreditation requirements.


Sec. 438.364  External quality review results.

    (a) Information that must be produced. The State must ensure that 
the EQR produces at least the following information:
    (1) A detailed technical report that describes the manner in which 
the data from all activities conducted in accordance with Sec. 438.358 
were aggregated, analyzed, and the conclusions were drawn as to the 
quality of the care furnished by the MCO. The report must also include 
the following for each activity conducted in accordance with 
Sec. 438.358:
    (i) Objectives;
    (ii) Technical methods of data collection and analysis;
    (iii) Data obtained; and
    (iv) Conclusions drawn from the data.
    (2) A detailed assessment of each MCO's strengths and weaknesses 
with respect to the timeliness, access, and quality of health care 
services furnished to Medicaid recipients.
    (3) Recommendations for improving the quality of health care 
services furnished by each MCO.
    (4) As the State determines methodologically appropriate, 
comparative information about all MCOs.
    (5) An assessment of the degree to which each MCO has addressed 
effectively the recommendations for quality improvement, as made by the 
EQRO during the previous year's EQR.
    (b) Availability of information. The State must provide copies of 
the information specified in paragraph (a) of this section, upon 
request, to interested parties such as participating health care 
providers, enrollees and potential enrollees of the MCO, recipient 
advocate groups, and members of the general public.
    (c) Safeguarding patient identity. The information released under 
paragraph (b) of this section may not disclose the identity of any 
patient.


Sec. 438.370  Federal financial participation.

    (a) FFP at the 75 percent rate is available in expenditures for EQR 
(including the production of EQR information), performed by EQROs and 
their subcontractors.
    (b) FFP at the 50 percent rate is available in expenditures for 
EQR-related activities performed by any entity that does not qualify as 
an EQRO.

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

    Dated: August 2, 1999.
Michael M. Hash,
Deputy Administrator, Health Care Financing Administration.

    Approved: September 9, 1999.
Donna E. Shalala,
Secretary.
[FR Doc. 99-31101 Filed 11-30-99; 8:45 am]
BILLING CODE 4120-01-P