[Federal Register Volume 66, Number 8 (Thursday, January 11, 2001)]
[Rules and Regulations]
[Pages 2490-2688]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-607]



[[Page 2489]]

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

Part II





Department of Health and Human Services





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



Health Care Financing Administration



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



42 CFR Parts 431, 433, 435, etc.



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

  Federal Register / Vol. 66, No. 8 / Thursday, January 11, 2001 / 
Rules and Regulations  

[[Page 2490]]


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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 431, 433, 435, 436, and 457

[HCFA-2006-F]
RIN 0938-AI28


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

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

ACTION: Final rule.

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

SUMMARY: Section 4901 of the Balanced Budget Act of 1997 (BBA) amended 
the Social Security Act (the Act) by adding a new title XXI, the State 
Children's Health Insurance Program (SCHIP) . 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 final rule implements provisions related to SCHIP including 
State plan requirements and plan administration, coverage and benefits, 
eligibility and enrollment, enrollee financial responsibility, 
strategic planning, substitution of coverage, program integrity, 
certain allowable waivers, and applicant and enrollee protections. This 
final rule also implements 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. In addition, this 
final rule makes technical corrections to subparts B, and F of part 
457.

DATES: This final rule is effective April 11, 2001. Compliance dates: 
To the extent contract changes are necessary, however, States will not 
be found out of compliance until the next contract cycle. By contract 
cycle, we mean the earlier of the date of the original period of the 
existing contract, or the date of any modification or extension of the 
contract (whether or not contemplated within the scope of the contract) 
.

FOR FURTHER INFORMATION CONTACT: Regina Fletcher for general 
information, (410) 786-3293; Diona Kristian for subpart A, State plan, 
(410) 786-3283; Judy Rhoades for subpart C, Eligibility, (410) 786-
4462; Regina Fletcher for subpart D, Benefits, (410) 786-5916; Nancy 
Fasciano for subpart E, Cost sharing, (410) 786-4578; Kathleen Farrell 
for subpart G, Strategic planning, (410) 786-1236; Terese Klitenic for 
subpart H, Substitution of coverage, (410) 786-5942; Maurice Gagnon for 
subpart I, Program integrity (410) 786-60619; Cindy Shirk for subpart 
J, Allowable waivers, (410) 786-1304; Christina Moylan for subpart K, 
Applicant and enrollee protections (410) 786-6102; Judy Rhoades for 
Expanded coverage of children under Medicaid and Medicaid coordination, 
(410) 786-4462; Christine Hinds for Medicaid disproportionate share 
hospital expenditures, (410) 786-4578; and Joan Mahanes for the 
Vaccines for Children program, (410) 786-4583.

SUPPLEMENTARY INFORMATION: Copies: To order copies of the Federal 
Register containing this document, send your request to: New Orders, 
Superintendent of Documents, P.O. Box 371954, Pittsburgh, PA 15250-
7954. Specify the date of the issue requested and enclose a check or 
money order payable to the Superintendent of Documents, or enclose your 
Visa or Master Card number and expiration date. Credit card orders can 
also be placed by calling the order desk at (202) 512-1800 or by faxing 
to (202) 512-2250. The cost for each copy is $9. As an alternative, you 
can view and photocopy the Federal Register document at most libraries 
designated as Federal Depository Libraries and at many other public and 
academic libraries throughout the country that receive the Federal 
Register.
    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. Free public access is available on a Wide 
Area Information Server (WAIS) through the Internet and via 
asynchronous dial-in. Internet users can access the database by using 
the World Wide Web; the Superintendent of Documents home page address 
is 
http://www.access.gpo.gov/nara_docs/, by using local WAIS client 
software, or by telnet to swais.access.gpo.gov, then login as guest (no 
password required). Dial-in users should use communications software 
and modem to call 202-512-1661; type swais, then login as guest (no 
password required).

I. Background

    Section 490l of the BBA, Public Law 105-33, as amended by Public 
Law 105-100, added title XXI to the Act. Title XXI authorizes the SCHIP 
program 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) a separate child health program 
that meets the requirements specified under section 2103 of the Act; 
(2) expanding eligibility for benefits under the State's Medicaid plan 
under title XIX of the Act; or (3) a combination of the two approaches. 
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.
    The State Children's Health Insurance Program 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, eligibility groups, benefit packages, payment levels for 
coverage, and administrative and operating procedures. SCHIP provides a 
capped amount of funds to States on a matching basis for Federal fiscal 
years (FY) 1998 through 2007. At the Federal level, SCHIP 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 effective 
on or after October 1, 1997.
    This final rule implements 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 entitlement to title 
XXI funds, and the effective date of the program.
     Section 2102 of the Act, which sets forth the general 
contents of 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), which relates to cost-effective community based health 
delivery systems; 2105(c)(3), which relates to waivers for purchase of 
family coverage; 2105(c)(5), which relates to offsets for cost-sharing 
receipts, and 2105(c)(7) which relates to limitations on payment for 
abortion.
     Section 2106 of the Act, which describes the process for 
submission and approval 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.

[[Page 2491]]

     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 sets forth the relation of 
title XXI to other laws.
     Section 2110 of the Act, which sets forth title XXI 
definitions.
    This final rule also implements the provisions of sections 4911 and 
4912 of the BBA, that 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 enhanced Medicaid match for expanded eligibility 
under Medicaid to provide medical assistance to optional targeted low-
income children. Section 4912 of the BBA added a new section 1920A to 
the Act creating a new option to provide presumptive eligibility for 
children. Both title XXI and title XIX statutory provisions are 
discussed in detail in section II. of this preamble.
    This final rule also implements section 704 of the Balanced Budget 
Refinement Act of 1999 (BBRA, Public Law 106-113), enacted on November 
29, 1999, which requires the Secretary to refer to the title XXI 
program as the ``State Children's Health Insurance Program'' or 
``SCHIP'' in any publication or other official communication.
    We note that on May 24, 2000, HCFA published in the Federal 
Register a final rule (HCFA 2114-F) concerning financial program 
allotments and payments to States under SCHIP at (65 FR 33616). In that 
rule, we implemented section 2104 and portions of section 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 May 24, 2000 final rule (65 FR 33616). Please note that, to 
eliminate duplication and provide clarity, this final rule also amends 
selected sections of the financial rule within Subpart B.

II. Provisions of the Proposed Rule and Discussion of Public 
Comments

A. Overview

1. Summary of Proposed Provisions and Significant Revisions in This 
Final Rule.

    On November 8, 1999, we published a proposed rule that set forth 
the programmatic provisions of the State Children's Health Insurance 
Program (64 FR 60882). The provisions of the proposed regulation were 
largely based on previously released guidance, and therefore 
represented policies that had been in operation for some time. In the 
proposed rule, we identified a number of areas in which we elaborated 
on previous guidance or proposed new policies.
    We received 109 timely comments on the proposed rule. Interested 
parties that commented included States, advocacy organizations, 
individuals, and provider organizations. The comments received varied 
widely and were often very detailed. We received a significant number 
of comments on the following areas: State plan issues, such as when an 
amendment to an existing plan is needed; information that should be 
provided or made available to potential applicants, applicants and 
enrollees; the exemption to cost sharing for American Indian/Alaska 
Native children; eligibility and ``screen and enroll'' requirements; 
Medicaid coordination issues; eligibility simplification options such 
as presumptive eligibility; the definition of a targeted low-income 
child; substitution of private coverage; data collection on race, 
ethnicity, gender and primary language; grievance and appeal procedures 
and other enrollee protections; and premium assistance for employer-
sponsored coverage.
    All public comments have been summarized and are discussed in 
detail in section II below. A brief summary of key issues discussed in 
the proposed rule as well as significant revisions made in this final 
rule follows:
 Subpart A--State Plan Requirements
    The proposed regulation included several conditions under which 
States must submit amendments to approved SCHIP plans. For example, we 
proposed that a State must submit a plan amendment when the funding 
source of the State share changes, prior to such change taking effect. 
In addition, we proposed that amendments to impose cost sharing on 
beneficiaries, increase existing cost-sharing charges, or increase the 
cumulative cost-sharing maximum considered the same as amendments 
proposing a restriction in benefits. We noted that States would be 
required to follow rules regarding prior public notice and retroactive 
effective dates for these amendments.
    The final regulation clarifies several issues surrounding the 
circumstances under which amendments must be submitted. It lists more 
clearly the program changes that must be included in the State plan by 
submitting an amendment. In addition, the final rule modifies the 
budget requirements to require a 1-year projected budget for those 
amendments that have a significant budgetary impact. Budgets are no 
longer required with every State plan amendment; however States must 
submit a 3-year projected budget with its annual report (discussed in 
subpart G). Finally, States must submit an amendment before making 
changes in the source of the non-Federal share of funding.
    We have provided additional clarification with regard to the 
requirements for coordination between SCHIP and Medicaid, as well as 
coordination with other public programs. We have modified the 
regulation text to further emphasize the need for coordination with 
other public programs after screening for Medicaid eligibility during 
the SCHIP application process, as well as assisting in enrollment in 
SCHIP of children determined ineligible for Medicaid.
    The section laying out provisions for enrollment assistance and 
information requirements has been modified to include the provision of 
linguistically appropriate materials to families of potential 
applicants, applicants and enrollees in SCHIP to assist them in making 
informed health care decisions about their health plans, professionals 
and facilities. We have also clarified that, in addition to information 
about the types of benefits and participating providers. In addition, 
States must inform applicants and enrollees about their rights and 
responsibilities regarding procedures for review of adverse decisions 
regarding eligibility or health services decisions and the 
circumstances under which they may be subject to enrollment caps and 
waiting lists.
 Subpart C--Eligibility, Screening, Applications and Enrollment
    The proposed rule outlined provisions for eligibility and 
enrollment for separate child health programs and implementation of the 
``screen and enroll'' requirement. It also included the title XXI 
restrictions on the participation of children of public agency 
employees who are eligible to participate in a State health benefits 
plan, children who are residing in institutions for mental disease 
(IMDs), and children who are inmates of public institutions.
    The final rule further elaborates on issues surrounding 
eligibility, enrollment and ensuring that children eligible for 
Medicaid benefits are enrolled in Medicaid. We have modified the 
definition of ``targeted low-income child'' to parallel a modification 
to the definition of ``optional targeted low-

[[Page 2492]]

income child'' under the Medicaid regulations. This modification 
effectively excludes from title XXI ``maintenance of effort'' 
provisions certain section 1115 demonstrations that were in place on 
March 31, 1997, but that were so limited in scope that we do not 
consider them to be equivalent to Medicaid.
    We clarified the standards for eligibility for separate child 
health programs, including: (1) Clearly permitting self-declaration of 
citizenship; (2) prohibiting durational residency requirements; (3) 
prohibiting lifetime caps or other time limits on eligibility; (4) 
permitting 12 months of continuous eligibility; and (5) permitting 
enrollment caps and waiting lists when approved as part of the State 
plan. In addition, we have specifically required States to implement 
standards for conducting eligibility determinations and a process that 
does not exceed 45 days (excluding days during which the application 
has been suspended).
    The rule provides further clarification of the issues surrounding 
children of public employees, children in IMDs and children who are 
inmates of public institutions. For example, we clarified that the 
children of public employees are eligible only if the employer 
contribution under a State health benefits plan is no more than a 
nominal contribution of $10 per family, per month. We also modified the 
definition of ``State health benefits plan'' to exclude separately run 
county, city, or other public agency plans that receive no State 
contribution toward the cost of coverage and in which no State 
employees participate.
    The final rule also further clarifies the requirements for 
treatment of children found to be potentially eligible for Medicaid 
after applying for coverage under a separate child health program. In 
order to ensure the effectiveness of the screening mechanisms, States 
are required to establish a system for monitoring the screen and enroll 
process. Finally, the rule lays out procedures for States that opt to 
provide presumptive eligibility for the separate child health program 
while the application and eligibility determination process is 
underway.
 Subpart D--Coverage and Benefits
    The proposed rule provided for some flexibility for States in 
keeping the SCHIP benefit package current. A State using the benchmark 
benefit package option is not required to submit an amendment each time 
the benchmark package changes, as long as it continues to offer the 
same benefits covered under the approved State plan. However, States 
must submit an amendment to their State plan any time the benefits 
offered to enrollees change. If the change in benefits is intended to 
conform the separate State benefit package to the benchmark coverage, 
then the benefit package remains benchmark coverage. But if the change 
in benefits causes the State-offered benefits to differ from the 
benchmark coverage, then the benefits must be reclassified as benchmark 
equivalent or one of the other benefit package options.
    The proposed rule included the requirement that States use the 
``prudent layperson standard'' in defining coverage for emergency 
services under SCHIP. The proposed rule also required use of the 
American Committee on Immunization Practices (ACIP) schedule for age-
appropriate immunizations.
    The final rule retains all of the same provisions as included in 
the proposed rule. In addition, for purposes of clarity, we have moved 
a provision formerly found in Subpart G, Strategic Planning, Reporting, 
and Evaluation into this Subpart. The provision, entitled ``State 
assurance of access to care and procedures to assure quality and 
appropriateness of care'' includes the requirements for assuring access 
to covered services, including emergency services, well-baby, well-
child and well-adolescent care, and age appropriate immunizations. This 
provision also requires States to assure appropriate and timely 
procedures to monitor and treat enrollees with chronic, complex, or 
serious medical conditions, including access to an adequate number of 
visits to specialists experienced in treating the specific medical 
condition. Finally, this provision requires States to assure decisions 
related to the provision of health services are completed within 14 
days of the request for the service, in accordance with the medical 
needs of the child.
 Subpart E--Enrollee Financial Responsibilities
    Title XXI permits States to impose cost sharing on enrollees in 
separate child health programs, but places a 5 percent cap on the 
amount of cost-sharing expenditures for families with incomes greater 
than 150 percent of the Federal Poverty Level (FPL). In an attempt to 
preserve State flexibility, we proposed to give States the option to 
use either gross or net family income when calculating this cost-
sharing cap for families. In addition, we proposed to place a limit of 
2.5 percent on cost sharing for families with incomes at or below 150 
percent of the FPL, in order to ensure that those families with lower 
incomes will not be required to spend the same percentage of their 
income on cost sharing as those with higher incomes. Many commenters 
supported the need for this distinction, given the more limited amount 
of disposable income in such families. Under the proposed rule, States 
also had the option to apply medical costs for non-covered or non-
eligible family members toward the cumulative maximum cap.
    We proposed that States must have a process in place that will 
protect enrollees by ensuring an opportunity to pay past due cost-
sharing amount before they can be disenrolled from the program for 
failure to pay cost sharing. We suggested that States should look for a 
pattern of nonpayment, and provide clear notice and opportunities for 
late payment 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 proposed regulation incorporated 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.
    The final rule clarifies that States must provide to the family of 
each individual SCHIP enrollee, the cumulative cost-sharing maximum 
amount for that year. In addition, this subpart confirms that the State 
plan must clearly describe a State's cost-sharing policy in terms of 
which children will be subject to cost sharing, the consequences for 
enrollees who do not pay a charge, and the disenrollment protections 
provided to enrollees in the event that they do not pay the cost 
sharing. States must also describe the methodology to ensure that 
families do not exceed the cumulative cost-sharing maximum and assure 
that families will not be held liable for cost-sharing amounts, beyond 
the copayment amounts in the State plan, for emergency services 
provided outside of an enrollee's managed care network.
    The final rule confirms the protections included in the proposed 
rule related to AI/AN children and clarifies that States may use self-
declaration of tribal membership for identifying AI/AN children in 
order to facilitate implementation of the cost-sharing exemption.
    The final rule continues to require that States may not impose more 
than one type of cost sharing on a service; and that States may only 
impose one copayment based on the total cost of

[[Page 2493]]

services furnished during one office visit.
    Finally, States must provide enrollees with an opportunity to show 
that their family income has declined before being disenrolled for 
failure to pay cost sharing, because the child may have become eligible 
for a category with lower or no cost sharing if family income has 
declined. States must also provide enrollees with an opportunity for an 
impartial review to address disenrollment from the program for this 
reason (see discussion of new Subpart K, Applicant and Enrollee 
Protections).
 Subpart G--Strategic Planning, Reporting and Evaluation
    The proposed regulation included provisions intended to ensure 
compliance with the statute and the elements of the State's approved 
title XXI plan. This subpart included the essential elements of 
strategic objectives and performance measures to assist the States and 
the Federal government in assessing the effectiveness of the SCHIP 
program in increasing the number of children with health insurance, and 
an assessment of the quality of and access to needed health care 
services.
    The proposed rule also outlined the quarterly statistical reporting 
requirements and the required elements of States annual reports and the 
March 31, 2000 SCHIP evaluation.
    The final rule confirms these requirements and further describes 
data elements to be reported by the States, including data on gender, 
race, ethnicity, and primary language. The gender, race and ethnicity 
data will be required in the State's quarterly statistical enrollment 
reports; and the annual reports will include a description of data 
regarding the primary language of SCHIP enrollees. In addition, the 
annual reports will include an updated budget for a 3-year period, 
including any changes in the source of the non-Federal share of State 
plan expenditures. The annual reports must also include description of 
the State's current income eligibility standards and methodologies.
    Finally, the final rule notes the Secretary's intention to develop, 
with input from States, academic and intergovernmental organizations, a 
core set of national performance goals and measures. When developed, 
States will also be required to report on these measures in their 
annual reports.
 Subpart H--Substitution of Coverage
    The proposed rule set forth requirements for ensuring that States 
have in place mechanisms aimed at preventing substitution of public 
coverage for private group coverage. With respect to coverage provided 
directly through SCHIP, the preamble included a description of HCFA's 
three-tiered policy to apply increased scrutiny to States' substitution 
prevention strategies at higher incomes. For coverage provided through 
premium assistance for employers' group health plans, the proposed rule 
set forth specific requirements for a six-month period of uninsurance 
and a minimum 60 percent employer premium contribution.
    Due to a general lack of evidence of the existence of substitution 
below 200 percent of the FPL and the significant number of comments 
received on this subpart, we have revised the final rule to clarify our 
policy related to substitution. The preamble to the final rule 
clarifies that for coverage provided other than through premium 
assistance programs, we will no longer require a substitution 
prevention strategy for families with incomes below 250 percent of the 
FPL. Instead, States will be required to monitor the occurrence of 
substitution below 200 percent of the FPL. Between 200 and 250 percent 
of the FPL, we will work with States to develop procedures, in addition 
to monitoring, to prevent substitution that would be implemented in the 
event that an unacceptable level of substitution is identified. Above 
250 percent of the FPL, States must have a substitution prevention 
mechanism in place, however we encourage States to use other strategies 
than waiting periods.
    For States wishing to utilize premium assistance programs, we have 
revised the final rule to provide additional flexibility. While we have 
retained the 6-month waiting period without group health plan coverage, 
States have flexibility to include a number of exceptions for 
circumstances such as involuntary loss of coverage, economic hardship, 
and change to employment that does not offer dependent coverage. We 
have also removed the requirement for States to demonstrate an employer 
contribution of at least 60 percent when providing coverage through 
premium assistance programs. Rather, we have clarified that States must 
demonstrate cost-effectiveness of their proposals by identifying a 
minimum contribution level and providing supporting data to show that 
the level is representative of the employer-sponsored insurance market 
in their State.
    Finally, the final rule provides that the Secretary has discretion 
to reduce or waive the minimum period without private group health plan 
coverage.
 Subpart I--Program Integrity
    The provisions in this subpart are intended to preserve program 
integrity in the State Children's Health Insurance Program. We proposed 
that States must have fraud and abuse protections in place, but 
provided flexibility to States in developing program integrity 
protections for separate child health programs. States with separate 
child health programs may utilize systems already existing for 
Medicaid, but are not required to do so. In addition, we proposed that 
States have additional flexibility in setting procurement standards 
more broadly than are available under Medicaid. We proposed that States 
may choose to base payment rates on public and/or private rates for 
comparable services for comparable populations, and where appropriate, 
establish higher rates in order to ensure sufficient provider 
participation and access.
    Finally, the proposed regulation included various enrollee 
protections consistent with the President's directive regarding the 
Consumer Bill of Rights and Responsibilities, including provisions 
regarding grievances and privacy protections. In response to public 
comment about the need for consistency of provisions throughout the 
final rule, we have moved the overview of the enrollee protections to 
the preamble of this final rule, but have removed it from the final 
regulation text, as it repeated the protections included throughout the 
proposed rule. The discussion of enrollee protections is now found in 
subpart K--Applicant and Enrollee Protections.
    The final rule confirms the significance of maintaining program 
integrity in SCHIP and clarifies issues related to the certification of 
data that determines payment and the development of actuarially sound 
payment rates. It notes that States should base payment rates on public 
and/or private rates for comparable services for comparable 
populations, consistent with the principles of actuarial soundness. We 
have also moved the subsection formerly entitled, ``Grievances and 
appeals'' to the new Subpart K, where these requirements are retained 
and elaborated upon.
    Finally, the rule confirms the importance of maintaining the 
integrity of professional advice to enrollees by requiring compliance 
with the provisions of the final Medicare+Choice rule that prohibit 
interference with health care professionals' advice to enrollees; 
require that professionals provide information about treatment options 
in an appropriate manner; limits

[[Page 2494]]

physician incentive plans; and provides requirements related to 
information disclosure related to physician incentive plans.
     Subpart J--Waivers
    The proposed rule noted the requirements for obtaining a waiver to 
provide coverage through a community-based delivery system and 
discussed the circumstances under which a State may obtain a waiver in 
order to provide title XXI coverage to entire families. We proposed 
that in order to qualify for a family coverage waiver, the State must 
meet several requirements, including a requirement that the proposal be 
cost-effective.
    In the final rule, we have clarified that the provisions of this 
subpart apply to separate child health programs. The provisions apply 
to Medicaid expansions only in cases where the State files claims for 
administrative costs under title XXI and seeks a waiver of limitations 
on such claims for coverage under a community-based health delivery 
system. We have clarified that HCFA will review requests for waivers 
under this subpart using the same time frames (the 90-day review clock) 
as those used for the review of State plan amendments under SCHIP. In 
addition, in response to comments received on this subpart, we have 
extended the approval period for the waivers to provide coverage 
through a community based delivery system from two years to three years 
in an attempt to better align with the period of availability for SCHIP 
allotments.
    With regard to the family coverage waiver, the final rule clarifies 
that when applying the cost-effectiveness test, States must assess 
cost-effectiveness in its initial request for a waiver, and then 
annually. States may do the assessment either on a case-by-case basis 
or in the aggregate.
     Subpart K--Applicant and Enrollee Protections
    The proposed rule emphasized the importance of enrollee protections 
by including many of the elements of the Consumer Bill of Rights and 
Responsibilities throughout the rule. In addition, an overview of these 
protections was presented in Subpart I--Program Integrity and 
Beneficiary Protections. We received several comments on our decision 
to implement the CBRR through this regulation. While we have retained 
the protections included in the proposed rule in the appropriate 
location as related to the issue, we have attempted to clarify the 
required protections by creating a new subpart dedicated to privacy and 
a process for review of certain eligibility and health services 
matters, Subpart K--Applicant and Enrollee Protections.
    We have included more specific requirements than those that were 
included in Subpart I of the proposed rule and will require the State 
plan to include a description of the State's process for review and 
resolution of eligibility and enrollment matters such as denial or 
failure to make a timely determination of eligibility, and suspension 
or termination of enrollment, including disenrollment for failure to 
pay cost sharing. States must also provide enrollees with an 
opportunity for external review of health services matters, such as 
delay, denial, reduction, suspension or termination of health services, 
in whole or in part; and the failure to approve, furnish, or provide 
payment for health services in a timely manner. Exceptions to these 
requirements can be made in the event that the sole basis for such a 
decision is a change in the State plan or a change in Federal or State 
law that affects all or a group of applicants or enrollees without 
regard to their individual circumstances.
    The final rule lays out requirements for the core elements of 
review of eligibility or health services matters, and requires that the 
reviews be impartial, conducted by a person or entity that has not been 
directly involved or responsible for the matter under review. The rule 
also establishes a 90-day time frame within which external reviews (or 
a combination of an internal and an external review) must be completed. 
States should take into consideration the medical needs of the patient 
when conducting the reviews and provide expedited time frames if an 
enrollee's physician determines that a longer time frame could 
seriously jeopardize the enrollees life, health or ability to attain or 
regain maximum function. If the enrollee has access to both internal 
and external review, each level of expedited review may take no more 
than 72 hours.
    The final rule requires States to provide continuation of 
enrollment pending the completion of review of a suspension or 
termination of enrollment, including disenrollment for failure to pay 
cost sharing. States must also provide enrollees with timely written 
notice of any determinations subject to review including the reasons 
for the determination, an explanation of applicable rights to review, 
the time frames for review, and circumstances under which enrollment 
may continue pending a review.
    Finally, the rule provides an exception for States that operate 
premium assistance programs under SCHIP. If the State utilizes a 
premium assistance program that does not meet the requirements for 
review under this Subpart, the State must give applicants and enrollees 
the option to enroll in the non-premium assistance program in the 
State. States must provide this option at initial enrollment and at 
each renewal of eligibility.
     Expanded Coverage of Children under Medicaid and Medicaid 
Coordination.
    In this section we set forth our changes to the Medicaid 
regulations that allow for expanded coverage of children under title 
XIX. Although these regulations are related to title XXI and SCHIP, 
they are changes to the Medicaid program and all existing Medicaid 
regulations also apply. We set forth requirements related to 
presumptive eligibility for children, the enhanced FMAP (Federal 
medical assistance percentage) rate for children, and the new group of 
optional targeted low-income children established by the statute. The 
presumptive eligibility provisions have been clarified in this final 
rule to lay out specific notification requirements and establish 
procedures for making presumptive eligibility determinations and 
expands the definition of ``qualified entity'' in accordance with the 
Benefits Improvement and Protection Act of 2000 (BIPA). Finally, the 
rule establishes consistent coordination requirements between Medicaid 
and SCHIP.

2. General Comments

    In this section, we have summarized and responded to general public 
comments on the SCHIP programmatic regulation. These comments relate to 
the program or the proposed rule as a whole and not to any particular 
provision of the proposed rule. All other public comments are addressed 
below in the context of the relevant subpart.
    Comment: We received a great number of comments discussing the 
issue of providing SCHIP coverage through premium assistance programs. 
Many commenters noted the difficulty that States would have in 
requiring employer plans to meet the proposed requirements. Many 
commenters argued that the proposed rule imposed too many requirements 
on SCHIP coverage obtained through employer-sponsored insurance and 
that the proposed provisions would stifle State innovation in utilizing 
such insurance.
    Response: At the time of publication of the proposed rule, the 
experience with premium assistance programs in SCHIP had been limited 
to only a few States. Therefore, the proposed

[[Page 2495]]

regulation did not include a great deal of specificity regarding the 
regulation's applicability to premium assistance models. We have 
attempted to provide States with flexibility, while ensuring that 
States meet their statutory obligation to all SCHIP enrollees 
regardless of the insurance product being provided. Further, it would 
not be consistent with the SCHIP statute to exempt certain enrollees 
from the protections established by law, simply because of the delivery 
model. However, we also recognize the value and the increased potential 
for reaching children associated with interaction with the employer-
based insurance market. Thus, while we will ensure compliance with the 
protections set forth in this final rule, we look forward to working 
closely with States to help in the development and approval of 
proposals that utilize premium assistance programs. As noted in the 
overview section, we have provided some additional flexibility in 
subpart H, Substitution, with respect to premium assistance programs 
that we hope will facilitate increased use of premium assistance 
programs in SCHIP. We have also provided some flexibility with regard 
to certain enrollee protections in subpart K.
    Comment: One commenter noted that there is an inequity in funding 
that disadvantages States that expanded eligibility prior to March 31, 
1997. Another commenter indicted that it is difficult for States that 
had expanded Medicaid to high levels prior to March 31, 1997 to access 
SCHIP funds and suggested that States be allowed to use SCHIP funds to 
subsidize employer-sponsored insurance.
    Response: We recognize the inequities that have been caused by the 
``maintenance of effort'' provision in the SCHIP statute, which holds 
States to the current eligibility levels in effect on March 31, 1997, 
and we applaud States that were progressive in expanding their Medicaid 
programs through section 1115 demonstrations and through the 
flexibility provided under section 1902(r)(2) and section 1931 of the 
statute. However, the maintenance of effort provision in the SCHIP 
statute was put in place specifically to ensure that States did not 
roll back the eligibility and benefits standards that were in place 
prior to the existence of SCHIP, and to encourage further expansion in 
implementing States' SCHIP programs.
    Comment: Several commenters asserted that the proposed regulations 
were overly prescriptive, limit State flexibility, and raise program 
administrative costs. Several commenters specifically complained that 
the proposed regulations appeared to push States toward Medicaid or 
Medicaid-like programs. Some commenters asserted that the overall 
approach directly contradicted Executive Order 13132 on Federalism. 
Some argued that the regulations should be limited to areas Congress 
specifically required the Secretary to address in regulations, the 
administrative review process for State plans, or to clarification of 
essential terms. While some commenters recognized the need for federal 
guidance, they supported the inclusion of such guidance in the preamble 
and other guidance documents rather than in the regulation text.
    Response: In developing the proposed and final regulations, we have 
taken great care to try to balance the need to ensure that SCHIP will 
provide the full intended benefits to uninsured, low-income children 
with the goal of retaining as much State flexibility as possible. HCFA 
has tried to administer the program and develop policies in a manner 
that gives States a full opportunity to develop programs that met local 
needs, whether through a Medicaid expansion or a separate child health 
program.
    To make it possible for States to develop and implement their 
programs, from the time of enactment of the SCHIP program, HCFA has 
worked with States to disseminate as much information as possible, as 
quickly as possible. In the first three months of the program's 
existence, we released over 100 answers to frequently asked questions 
and issued several policy guidance letters. We continue to take into 
consideration the changing needs of States. The programs that States 
developed vary in scope, delivery system and many other respects. The 
diversity and innovation that has been displayed is an indication that 
State flexibility does indeed exist.
    In addition, we consulted with State and local officials in the 
course of the design and review stages of State proposals, and many of 
the policies found in the proposed and this final rule are a direct 
result of these discussions and negotiations with the States. To the 
extent consistent with the objectives of the statute, to obtain 
substantial health care coverage for uninsured low-income children in 
an effective and efficient manner, we have endeavored to preserve State 
options in implementing their programs.
    We developed these final regulations with the goal of providing a 
balanced view of both Medicaid expansions and separate child health 
programs. We made careful determinations as to whether each subpart 
should be applicable to separate child health programs and Medicaid 
expansions, or only to separate programs. In doing this, we have 
attempted to maximize flexibility and avoid the need for duplication of 
effort, while at the same time recognizing the basic differences 
between the two approaches.
    We believe our considerations, and the consultative process we 
followed during the State plan review process, fully comported with the 
requirements of Executive Order 13132, and the final regulations 
contain the framework necessary for States to achieve the statutory 
requirements and objectives set forth by Congress.
    Comment: Several commenters were concerned that the proposed 
regulations would narrow available State options, with particular 
mention of barriers to private sector models, and impose additional 
burdensome requirements on States. Some commenters were concerned that 
the proposed regulations would require administrative costs that would 
be a difficult financial burden for a small separate child health 
program.
    Response: We recognize the commenters' concern and have tried to 
keep potential administrative burden in mind in developing these 
regulations. Some administrative investment, however, is necessary to 
ensure proper delivery of health care coverage to uninsured low-income 
children, and to provide enrollees with protections to ensure that such 
coverage is furnished in an effective and efficient manner that is 
coordinated with other sources of health benefits coverage for 
children.

3. Table of Contents for Part 457

    We set forth the new provisions for the State Children's Health 
Insurance Program 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 May 24, 2000 final financial regulation (65 FR 33616).

Subchapter D--State Children's Health Insurance Program (SCHIP)

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.

[[Page 2496]]

457.60  Amendments.
457.65  Effective date and 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.
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 for and enrollment in a separate child health 
program.
457.350  Eligibility screening and facilitation of Medicaid 
enrollment.
457.353  Monitoring and evaluation of the screening process.
457.355  Presumptive eligibility.
457.380  Eligibility verification.
Subpart D--State Plan Requirements: Coverage and Benefits
457.401  Basis, scope, and applicability.
457.402  Definition of child health assistance.
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  State assurance of access to care and procedures to assure 
quality and appropriateness of care.
Subpart E--State Plan Requirements: Enrollee 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 with incomes 
at or below 150 percent of the FPL.
457.555  Maximum allowable cost-sharing charges on targeted low-
income children in families with income from 101 to 150 percent of 
the FPL.
457.560  Cumulative cost-sharing maximum.
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.
457.740  State expenditures and statistical reports.
457.750  Annual report.
Subpart H--Substitution of Coverage
457.800  Basis, scope, and applicability.
457.805  State plan requirements: Procedures to address substitution 
under group health plans.
457.810  Premium assistance programs: Required protections against 
substitution.
Subpart I--Program Integrity
457.900  Basis, scope, and applicability.
457.902  Definitions.
457.910  State program administration.
457.915  Fraud detection and investigation.
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.
457.980  Verification of enrollment and provider services received.
457.985  Integrity of professional advice to enrollees.
Subpart J--Allowable Waivers: General Provisions
457.1000  Basis, scope, and applicability.
457.1003  HCFA review of waiver requests.
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.
Subpart K--State Plan Requirements: Applicant and Enrollee Protections
457.1100  Basis, scope and applicability.
457.1110  Privacy protections.
457.1120  State plan requirement: Description of review process.
457.1130  Matters subject to review.
457.1140  Core elements of review.
457.1150  Impartial review.
457.1160  Time frames.
457.1170  Continuation of enrollment.
457.1180  Notice.
457.1190  Application of review procedures when States offer premium 
assistance for group health plans.

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

1. Program Description (Sec. 457.1)

    In proposed Sec. 457.1, we set forth a description of the State 
Children's Health Insurance Program. 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 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. We received no comments on this section and have retained 
the proposed language in this final rule.

2. Basis and Scope of Subchapter D (Sec. 457.2)

    Proposed Sec. 457.2 set forth the basis and scope of subchapter D. 
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 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. We 
received no comments on this section and have retained the proposed 
language in this final rule.

3. Definitions and Use of Terms (Sec. 457.10)

    This subpart includes the definitions relevant specifically to the 
State Children's Health Insurance Program under title XXI. In this 
subpart, we defined 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

[[Page 2497]]

regulation are defined at the opening of each subpart, however, all the 
terms are listed here. Because of the unique Federal-State relationship 
that is the basis for this program and because of our commitment to 
State flexibility, States have the discretion to define many terms.
    We proposed 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.
     State Children's Health Insurance Program (SCHIP) 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-effective has the meaning assigned in Sec. 457.1015.
     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.
     Emergency services has the meaning assigned in 
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 in Sec. 457.902.
     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.
     Health benefits coverage has the meaning assigned in 
Sec. 457.402.
     Health maintenance organization (HMO) plan has the meaning 
assigned in Sec. 457.420.
     Joint application has the meaning assigned in 
Sec. 457.301.
     Legal obligation has the meaning assigned in Sec. 457.560.
     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 (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.
     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.
     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.

[[Page 2498]]

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.
    We note that comments concerning definitions that are specific to 
certain subparts are discussed at the opening of those subparts. We 
received the following comments on the terms defined in this section:
    Comment: We received a comment suggesting that we use the terms 
``SCHIP'', ``Medicaid expansion program'' and ``separate child health 
program'' consistently throughout the regulation. The commenter noted 
that we repeatedly use the term ``SCHIP'' when it appears the term 
``separate child health program'' is meant.
    Response: We agree with the commenter and have revised the rule for 
clarity and consistency. Throughout this regulation, we use the terms 
``Medicaid expansion program'' and ``separate child health program'' to 
refer to the different types of programs that States may establish 
under title XXI. These terms are defined at Sec. 457.10. We use the 
term ``SCHIP'', also defined at Sec. 457.10, to refer to the State's 
title XXI program regardless of whether it is a Medicaid expansion 
program or a separate child health program.
    Also for purposes of clarity and consistency, we have added 
definitions of the terms ``applicant'', ``enrollee'', ``health care 
services'', and ``uninsured or uncovered child'' to the definitions 
section of the final rule. We felt that it was important to make clear 
both the distinctions and the similarities between these two groups of 
children for purposes of SCHIP (either individually or through action 
by family or other interested parties).
    ``Applicant'' means a child who has filed an application (or who 
has had an application filed on his/her behalf) for health benefits 
coverage through SCHIP. A child is an applicant until the child 
receives coverage through SCHIP. An ``enrollee'' is a child who 
receives health benefits coverage through SCHIP. ``Health care 
services'' means any of the services, devices, supplies, therapies, or 
other items listed in Sec. 457.402(a). ``Uncovered child or uninsured 
child'' means a child who does not have creditable health coverage.
    We have added a few definitions related to presumptive eligibility 
under Subpart C, including ``qualified entity'', ``presumptive income 
standard'' and ``period of presumptive eligibility''. The Benefits 
Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106-554) 
expanded the list of entities specifically eligible to make presumptive 
eligibility determinations and extended the provision related to 
presumptive eligibility for children under Medicaid to separate child 
health programs.
    Finally, we have added the definition of ``health services 
initiatives'' to the overall definitions section because it is used 
throughout the regulation. This term was previously discussed only in 
Subpart J, in relation to the waiver authority to provide services 
through community-based delivery systems.
    Comment: One commenter indicated that the definition of AI/AN 
should include a reference to the standards used by the Secretary to 
define an AI/AN. The commenter agreed with our use of section 4(c) of 
the Indian Health Care Improvement Act, 25 U.S.C. 1603(c) to define AI/
AN. The commenter believes our proposed definition will assist States 
in meeting requirements regarding the AI/AN population.
    Another commenter indicated that our use of the definition of AI/AN 
set forth in the Indian Health Care Improvement Act is appropriate for 
purposes of the premium and cost sharing exclusion. However, the 
commenter notes that the proposed definition of AI/AN set forth at 
Sec. 457.10 is narrowed by the cost-sharing provisions at Sec. 457.535, 
which specify that only American Indians and Alaska Natives who are 
members of a Federally recognized tribe are excluded from cost-sharing 
charges. The commenter believes that the definition of AI/AN at 
Sec. 457.535 is more restrictive than that set forth in the Indian 
Health Care Improvement Act and has no basis in title XXI. The 
commenter believes that the definition at Sec. 457.535 is also 
inconsistent with the proposed consultation provisions of 
Sec. 457.125(a), which expressly requests that States consult with 
``Federally recognized tribes and other Indian tribes and organizations 
in the State * * *'' The commenter asserted that there is little point 
in consulting with non-Federally recognized tribes about enrollment in 
SCHIP if the children of those tribes are not excluded from premiums 
and cost sharing.
    Response: We have modified the definition of AI/AN, after 
discussion with IHS, to make the definition as consistent as possible 
with both the Indian Health Care Improvement Act (IHCIA) and the Indian 
Self Determination Act. The definition no longer includes descendants, 
in the first or second degree, of members of federally recognized 
tribes, and we have removed the reference in paragraph (4) to 
regulations to be promulgated by the Secretary. We believe that this 
definition is substantially equivalent to, and no more restrictive 
than, the definition in the IHCIA, but is consistent with the 
flexibility available under the Indian Self Determination Act. We have 
used this definition because it gives full weight to federally 
recognized government-to-government relationship between the federal 
government and tribal governments. We do not intend, however, to 
restrict the States' ability to engage in a wider scope of consultation 
in developing their programs.
    Comment: One commenter indicated that the definition of ``child'' 
is inconsistent with their State's statute which considers children up 
to age 19 for child support purposes. Another commenter supports HCFA's 
definition of family income as it gives States the flexibility to 
define income and family.
    Response: The definition of ``child'' was taken from section 
2110(c) of the Act. With regard to the definition of family income, we 
appreciate the support and want to give States as much flexibility as 
possible when defining this aspect of their SCHIP programs.
    Comment: We received a comment on the definition of premium 
assistance for employer-sponsored group health plans. The commenter 
states that according to the definition of this term at Sec. 457.10, a 
State can pay all or part of the premium. The commenter notes that this 
definition appears to conflict with proposed Sec. 457.810(b)(2)(i) and 
(ii) which require that an employer contribute 60 percent of the cost 
of the premium, or a lower amount if the State can show that the 
average contribution in the State is lower than 60 percent, as a 
protection against substitution of coverage.
    Response: The commenter is correct. In order for the purchase of 
employer-sponsored coverage to be cost-effective in accordance with 
Sec. 457.810(b)(2), it was our intent to say that the State can pay for 
all or part of the enrollee's share of the premium for group health 
plan coverage of an eligible child or children. It is unlikely that a 
State's payment of

[[Page 2499]]

all of the premium would meet the cost-effectiveness test. Accordingly, 
we have revised the definition of premium assistance for employer-
sponsored group health plans to indicate that a State can pay for all 
or part of the enrollee's share of the premium.
    It should also be noted that, in this final rule we have made some 
significant changes in the list of terms defined, in order to clarify 
terminology for health benefits coverage provided through a group 
health plan or group health coverage. We defined the term ``premium 
assistance for employer-sponsored group health plans.'' We also used 
the term ``employer-sponsored group health plan'' and ``employer-
sponsored group health plan coverage'' throughout the proposed rule.
    In hopes of simplifying discussions of our policy, we have elected 
to create a new term that is intended to be inclusive of all types of 
group health coverage. We no longer use the term ``employer-sponsored'' 
prior to references to group health plan or group health insurance 
coverage in this final rule. We believe that the use of the term 
``employer-sponsored insurance'' or ``employer-sponsored group health 
plan'' could unintentionally narrow the scope of permitted premium 
assistance programs and wanted to avoid that result. Under HIPAA, the 
term ``group health plan'' has a very specific legal meaning and refers 
to a broad array of coverage arrangements; it does not solely refer to 
health plans offered by a single employer. Therefore, we did not want 
to cause confusion around the possible scope of programs permitted 
under Title XXI by using the term ``employer-sponsored'' in connection 
with provisions relating to premium assistance programs and rather, 
refer to all of these types of programs accordingly.
    Comment: One commenter suggested that HCFA include in the final 
rule the definition of ``health services initiatives'' set forth in the 
August 6, 1998 letter to State Health Officials. In the letter, the 
term is defined as ``activities that protect the public health, protect 
the health of individuals or improve or promote a State's capacity to 
deliver public health services and/or strengthens resources needed to 
meet public health goals.''
    Response: We agree with the commenter. We have added the definition 
of ``health services initiatives'' as set forth in the August 6, 1998 
letter.
    Comment: Commenters asserted that the definition of well-baby and 
well-child care for purposes of cost sharing (set forth at 
Sec. 457.520) be used in three other sections of the regulation: 
Definitions and use of terms Sec. 457.10; Child health assistance and 
other definitions Sec. 457.402; and Health benefits coverage options 
Sec. 457.410(b)(2). One commenter urged that our recognition in 
Sec. 457.520 that preventive oral health care is part of well-baby and 
well-child care be extended to the definition of this term at 
Secs. 457.10, 457.402, 457.410(b)(2). The commenter believes that the 
definition of well-baby and well-child care which includes preventive 
oral health care should not be treated simply as a category of services 
left to State discretion for definitional purposes. The commenter noted 
that the Medicaid program provides for a comprehensive set of services 
and screenings for oral health care services through EPSDT services. 
The commenter believes that a clearly defined set of well-baby and 
well-child care benefits is essential to ensuring a baseline of care in 
separate child health programs.
    Response: EPSDT services are required to be provided to eligible 
Medicaid beneficiaries under the age of 21 and are defined at section 
1905(r) of the Act. Title XXI does not contain the same type of 
definition for well-baby and well-child care provided under a separate 
child health program. Therefore, States have the flexibility to design 
health benefits packages that best fit their needs and resources. In 
addition, for States that have elected benchmark plans as their health 
benefits option, these plans may already include standards for 
furnishing well-baby and well-child care; and it would be inconsistent 
with the flexibility provided by the statute in this area, as well as 
cause confusion among plans and providers if we implemented another 
definition.
    Although most separate child health plans do include some type of 
dental coverage, it is by no means common. Therefore, it is not 
appropriate to require these services as part of well-baby well-child 
care. If dental coverage is provided, however, it should be included as 
part of well-baby well-child care for purposes of cost sharing. 
Specifically, 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 HMOs is to pay 100 percent for any 
routine preventive and diagnostic dental benefits offered for children. 
Therefore, consistent with section 2103(e)(2) of the Act ``no cost-
sharing on benefits for preventive services'' cost sharing may not be 
applied to these services, if a State chooses to offer them under the 
State plan.
    Comment: Commenters suggested including the word ``adolescent'' in 
the definition of well-baby and well-child care services. The 
commenters believe that we should focus on the unique health needs of 
adolescents, which make up approximately 39 percent of SCHIP eligible 
youth because their health needs differ from those of younger children. 
The commenters also urged HCFA to list specifically in the regulation 
medical sources that have guidelines for regular or preventive 
diagnostic and treatment services for infants, children and 
adolescents. These sources should include the American Academy of 
Pediatrics' ``Guidelines for Health Supervision of Infants, Children 
and Adolescents,'' the American Medical Association's ``Guidelines for 
Adolescent Preventive Services,'' and the American College of 
Obstetricians and Gynecologists' ``Primary and Preventive Health Care 
for Female Adolescents.''
    Response: We have not adopted this suggestion. The definition of 
child for purposes of SCHIP at Sec. 457.10 and section 2110(c)(1) of 
the Act indicates that a ``child'' is an ``individual under the age of 
19.'' Adolescents under age 19 are clearly included in this age group 
and therefore we have not included this term in referring to well-baby 
and well-child care. We encourage States to adopt one of the guidelines 
mentioned by the commenter, but we have not required adherence to a 
particular definition.
    The commenters urged HCFA to list specifically in the regulation 
medical sources that have guidelines for regular or preventive 
diagnostic and treatment services for infants, children and 
adolescents. The examples of medical sources that are listed in the 
preamble are meant to serve as recommendations not requirements. The 
American Medical Association's ``Guidelines for Adolescent Preventive 
Services,'' is an acceptable medical standard of practice for 
adolescents and States may use this standard if they choose.
    Comment: We received numerous comments on proposed Sec. 457.402(b) 
and (c), which set forth the definitions of emergency medical condition 
and emergency services, respectively. Many commenters supported the use 
of the prudent layperson standard in defining emergency services. 
Several commenters encouraged HCFA to retain this language because some 
State Medicaid programs and managed care organizations are not in 
compliance

[[Page 2500]]

with the prudent layperson standard and have denied payment for 
emergency services because prior authorization was absent. The 
commenters recommended that HCFA closely monitor the States' programs 
and managed care organizations on this issue.
    Response: We note the support for this provision. With respect to 
the definition of emergency services under a separate child health 
plan, States will need to review their contracts with managed care 
organizations and may need to revise their contracts in order to comply 
with this requirement. HCFA will monitor States for compliance with 
this requirement as described in Sec. 457.40 of the final regulation.
    Comment: One commenter stated that the required emergency care 
provisions may disqualify many employer plans. The commenter agreed 
that such policies can enhance access to emergency care. However, the 
commenter noted that States using premium assistance programs to 
subsidize employer-sponsored coverage lack control over emergency 
coverage. Unlike health plans with direct contracts to provide Medicaid 
or SCHIP services, requirements for employer-sponsored plans are set by 
State legislative mandate or dictated by the insurance market. If 
employer-sponsored plans do not adopt the prudent layperson standard or 
abandon pre-authorization for emergency care, their coverage may not 
qualify for SCHIP premium assistance, despite other elements that 
facilitate emergency care. The emergency care provisions could 
therefore pose a major barrier to using premium assistance programs for 
SCHIP purposes.
    The commenter recommended that HCFA recognize that the emergency 
care requirements of the proposed regulations may exclude many valuable 
employer plans from SCHIP premium assistance programs. To facilitate 
the use of premium assistance and to reflect the flexibility provided 
by title XXI, the commenter suggests that HCFA should consider State 
approaches to ensuring access to emergency care on a case-by-case 
basis.
    Response: We appreciate the recognition that the prudent layperson 
standard enhances access to emergency care. While we understand the 
commenter's concerns about the difficulty posed by these requirements 
if States seek to provide premium assistance for available group health 
plan coverage, we cannot permit States to deny emergency care to 
children covered through group health plans. While we encourage States 
to provide premium assistance for group health plan coverage, it is 
important that all SCHIP enrollees receive necessary emergency care. 
States will need to carefully review group health plans to determine 
whether the required emergency services provisions required by this 
regulation are in place. If they are not, the State must disqualify 
those plans from participation in the program or ensure that these 
requirements are met by providing coverage for emergency services 
through a wrap-around coverage package to supplement the group health 
plan coverage.
    Comment: One commenter noted that the definition of emergency 
services should include the availability of necessary resources to 
evaluate and treat illness and injury.
    Response: We have revised the definition of emergency services to 
clarify the scope of such services. Because the terms ``emergency 
medical condition'' and ``emergency services'' are used throughout this 
final regulation, we have moved the definitions for these terms to 
Sec. 457.10. Section 457.10 defines ``emergency services,'' in part, as 
services that are ``needed to evaluate or stabilize an emergency 
medical condition.'' ``Emergency medical condition'' is defined as a 
medical condition manifesting itself by acute symptoms of sufficient 
severity such that the absence of immediate medical attention could 
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. Section 457.495 requires that States describe in 
their State plan the methods they use to assure the quality and 
appropriateness of care and access to services covered under the plan. 
Specifically, States must assure access to emergency services. We are 
not including requirements for State monitoring of such services in the 
definition because we address such monitoring separately at 
Sec. 457.495. Compliance with that section includes an assurance that 
enrollees have access to required emergency services.
    Comment: One commenter referenced comments on the proposed Medicaid 
managed care rules that concerned consistency with Emergency Medical 
Treatment and Active Labor Act (EMTALA) requirements. The commenter 
suggested HCFA should coordinate its efforts to enforce relevant 
requirements for coverage of emergency services with EMTALA 
enforcement, and should work with OIG, State Medicaid agencies, health 
plans, and children's health programs to protect Medicare, Medicaid, 
and SCHIP enrollees.
    Response: The comments submitted on the Medicaid managed care 
regulation are beyond the scope of the proposed rule. Responses to 
comments received on the Medicaid managed care proposed rule will be 
addressed in the final publication of that regulation.
    With respect to the issue of consistent Federal rules, we are 
mindful of other definitions of emergency services and have attempted 
to reconcile our approach with other approaches to the extent permitted 
by the statute. As for coordination of enforcement efforts, HCFA will 
monitor the operation of State plans as described in Sec. 457.40 of 
this final regulation and work with States and other Federal agencies 
to the extent possible in enforcing the requirements relating to 
coverage of emergency services.
    Comment: One commenter mentioned the need to provide for 
appropriate payment to hospitals for services provided within the scope 
of the hospital's obligations under EMTALA. Hospitals feel that if the 
government requires certain medical screening and other stabilizing 
treatment, the government should also address how hospitals will be 
paid for these services. They also noted that obtaining payment for 
services covered under the prudent layperson standard will help to 
address the financial burden borne by hospitals.
    Response: We refer the commenter to Sec. 457.940 for information on 
payment rates under separate child health plans. We encourage States to 
ensure that provider payments are adequate to promote an adequate level 
of provider access and provider participation and the appropriate 
provision of services.
    Comment: One commenter noted that freestanding urgent care 
facilities must have the capability to identify children with emergency 
conditions, stabilize them, and provide timely access to further 
necessary care. The commenter also stated that urgent care facilities 
must have appropriate pediatric equipment and staff trained and 
experienced to provide critical support until patients are transferred 
for definitive care. In addition, the commenter noted that it is 
necessary for urgent care facilities to have prearranged access to 
comprehensive emergency services through transfer and transport 
agreements to which both facilities adhere. Available and appropriate 
modes of transport should be identified in advance.
    The commenter also noted that after-hours urgent care clinics used 
as a resource for pediatric urgent care, should solicit help from the 
pediatric

[[Page 2501]]

professional community. Moreover, in this commenter's view, 
pediatricians who are prepared to assist in the stabilization and 
management of critically ill and injured children should be accessible. 
Pediatricians responsible for managing the health care of children may 
occasionally need to use the resource of urgent care facilities after 
hours. When such clinics are recommended to patients, pediatricians 
should be certain that the urgent care center is prepared to stabilize 
and manage critically ill and injured children.
    Response: As noted earlier, under Sec. 457.495 of this final 
regulation, States must assure appropriateness of care and access to 
emergency services. A State has flexibility to determine the providers 
who furnish services, including emergency services. However, a State 
using free-standing or urgent care facilities as providers under its 
SCHIP plan for the delivery of emergency services, must meet the 
requirements of Sec. 457.495 in doing so.
    As far as the suggestion that available and appropriate modes of 
transport be identified in advance, we encourage States and urgent care 
providers to have arrangements to ensure that transportation is 
available to appropriate facilities; however the terms of such 
arrangements are left to States' discretion.
    Comment: One commenter is pleased with the guaranteed access to 
emergency services without prior authorization; however, the commenter 
was concerned about what happens in a State that provides for no mental 
health coverage in its State plan.
    Response: Under a separate child health program, States are given 
flexibility, within the confines of the health benefits coverage 
options outlined in Sec. 457.410, to design their benefit packages. 
There is no requirement for a State to provide mental health services 
under its State plan unless the health benefits coverage option 
selected by the State includes those services. However, we encourage 
States to provide coverage for mental health services. In addition, we 
note that emergency mental health services that meet the prudent 
layperson definition of ``emergency medical condition'' must be 
available regardless of whether mental health services are covered 
under the separate child health program.
    Comment: Three commenters indicated that children who were covered 
by section 1115 demonstration projects with a limited benefit package 
should not be considered to have been recipients of Medicaid. The 
commenters urged HCFA to provide clarification on the treatment of 
children eligible for Medicaid under a section 1115 demonstration 
project that limited eligibility or provided a limited range of 
services and the availability of enhanced matching for such children.
    Response: We agree with the general principle expressed by the 
commenters that it would not further the purpose of title XXI to 
exclude from children who were eligible only under a section 1115 
demonstration project that was significantly limited in scope and, 
therefore, was not generally comparable with traditional Medicaid 
coverage.
    In regard to the definition of ``targeted low income child'' at 
section 2110(b)(1)(C) of the Act, children are excluded from coverage 
in a separate child health program only when they are found eligible 
for Medicaid. These comments are relevant, however, the interpretation 
of the general condition set forth at section 2105(d)(1) of the Act 
which was implemented by the regulatory provision at 42 CFR 
457.622(b)(5), contained in the financial rule published May 24, 2000 
(65 FR 33616). That provision merely codified section 2105(d)(1) into 
regulations without interpretation. In addition, the factors discussed 
by the commenters affect how we look at ``Medicaid applicable income 
level'' which is part of the financial need standard that a targeted 
low-income child must meet.
    We have added an additional paragraph to Sec. 457.310 that 
clarifies that policies of the State's title XIX plan do not include 
statewide section 1115 demonstration projects that covered an expanded 
group of eligible children but that either (i) did not provide 
inpatient hospital coverage, or (ii) did not impose a general time 
limit on coverage but did limit eligibility by both allowing only 
children who were previously enrolled in Medicaid to qualify and 
imposing premiums as a condition of participation in the demonstration.
    We have excluded these types of demonstrations because they were 
particularly narrow in scope and not of the type intended to be 
encompassed by the reference to ``Medicaid applicable income level'' in 
section 2110(b)(4) of the Act. This provision ensures that separate 
child health programs serve low-income children whose income exceeds 
preexisting Medicaid income levels. However, we do not believe the 
provision was intended to preclude States from claiming enhanced 
matching funds for expanded coverage to children whose income is below 
the demonstration project eligibility thresholds in place as of March 
31,1997, if those programs did not offer comprehensive coverage or 
limited eligibility to individuals who were previously enrolled in 
Medicaid. Our experience with SCHIP and our increased understanding of 
how this provision is affecting States' ability to expand coverage have 
led us to agree with the commenters that an overly broad interpretation 
of the provision is contrary to the primary purpose of the statute. We 
have clarified this provision in the final rule accordingly. As a 
result, children previously eligible for these types of demonstration 
projects may be included in a separate child health program as a 
``targeted low-income child.''

4. Basis, Scope, and Applicability of Subpart A (Sec. 457.30).

    As proposed, this subpart interprets sections 2101(a) and (b), and 
2102(a), and 2106, and 2107(c), (d) and (e) of title XXI of the Social 
Security Act and sets forth the related State plan requirements for a 
SCHIP program. It includes the requirements related to administration 
of the State program, the general requirement for a State plan and the 
process for Federal review of a State plan or plan amendment. This 
subpart applies to all States that seek to provide child health 
assistance through SCHIP.
    We received no comments on this section and have therefore retained 
the regulation text language as proposed, except for technical changes.

5. State Program Administration (Sec. 457.40)

    Consistent with section 2106(d)(1) of the Act, at Sec. 457.40(a) we 
proposed 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, we 
indicated that HCFA would review the operation of the program through 
on-site review or monitoring of State programs. At Sec. 457.40(a), we 
also proposed that HCFA would 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. In the 
preamble to the proposed rule we discussed in detail the general goals 
for the monitoring provisions as well as expected outcomes of 
monitoring. We noted that the review process and the implications of 
noncompliance are specifically addressed in Sec. 457.200, which was set 
forth in the May 24, 2000

[[Page 2502]]

final financial regulation, HCFA-2114-F. (65 FR 33616)
    To ensure involvement in and commitment to the program at the 
highest level of State government, we proposed in Sec. 457.40(b) to 
require that the State plan and plan amendments be signed by the 
Governor or by an individual who has been delegated such authority by 
the Governor. This individual could be the Secretary of Health, the 
SCHIP Administrator, the Medicaid Director or any other individual who 
has been delegated authority by the Governor to submit the State plan 
or plan amendment. In order to facilitate communication between the 
appropriate State and HCFA staff, we proposed in Sec. 457.40(c) to 
require that the State plan or plan amendment identify the State 
officials who are responsible for program administration and financial 
oversight.
    We noted in the preamble that 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. At Sec. 457.40(d), we proposed 
that 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.
    Comment: One commenter recommended that Sec. 457.40(a) be amended 
to clarify that States must operate State plans and plan amendments not 
only in accordance with titles XIX and XXI, but also in accordance with 
Federal civil rights laws, including title VI of the Civil Rights Act 
of 1964 and the Americans With Disabilities Act. Accordingly, the 
commenter recommended that HCFA also monitor the operation of the State 
plans and plan amendments for compliance with these laws.
    Response: It is true that States must operate State plans and plan 
amendments in accordance with Federal civil rights laws, and we require 
in Sec. 457.130 that a State provide an assurance in its State plan 
that it will comply with all applicable civil rights requirements. In 
addition, Sec. 457.40(a) requires that States implement their programs 
in accordance with the regulations of this chapter, which include 
Sec. 457.130. Therefore, we do not believe that it is necessary to 
amend Sec. 457.40(a) to reference civil rights provisions. Moreover, 
while HCFA will monitor compliance with Sec. 457.130, the Office for 
Civil Rights is the primary authority within the Department for 
monitoring programs and enforcing federal civil rights laws.
    Comment: A few commenters suggested that States should be able to 
designate the program officials by title only, rather than by name, so 
that the State plan does not need to be amended when there is a 
staffing change. Another commenter suggested that a Governor or person 
designated by the Governor inform HCFA in writing of the names of the 
persons who are responsible for program administration and financial 
oversight. Another commenter requested that HCFA add a requirement that 
States identify in the State plan or in a subsequent State plan 
amendment the State officials who are responsible for providing data on 
children's enrollment in SCHIP and Medicaid.
    Response: We agree with the commenters that it is unnecessary to 
require State plan amendments when there is a staffing change. Our goal 
of facilitating communication between the appropriate State staff and 
HCFA staff would be accomplished by the identification of program 
officials by position title. As proposed, the regulation text did not 
indicate that this practice would suffice, and the preamble had 
indicated that the names of the officials would be required. Therefore, 
we are revising Sec. 457.40(c) to require that the State must identify, 
in the State plan or State plan amendment, the position title of the 
State officials who are responsible for program administration and 
financial oversight. While we agree with the importance of obtaining 
enrollment data on a timely basis, we do not believe that the State 
plan or plan amendments must include a list of program officials who 
are responsible for specific topics addressed in the State plan, 
including the official responsible for providing enrollment data. An 
interested party may contact the individual identified as the official 
responsible for program administration for specific information on the 
State program.
    Comment: One commenter supported the provision of the proposed rule 
that prohibits the implementation of a State plan amendment until the 
amendment had been authorized through enabling legislation by the State 
legislature if such authorization is required. In this commenter's 
opinion, ``this represents an important recognition of the ongoing role 
of the State legislature with the design and operation of SCHIP.''
    Response: We appreciate the support of the commenter.
    Comment: A few commenters expressed their support for the proposal 
stated in the preamble to conduct formal State reviews after the first 
anniversary of each State plan to ensure compliance with the 
requirements of titles XXI and XIX. More specifically, one commenter 
commended HCFA for including HRSA officials in the State review.
    Response: We appreciate the support of the commenters.
    Comment: One commenter found it disappointing that the focus of 
monitoring of State programs, as set out in the preamble, appeared to 
be punitive in nature. In the view of this commenter, it appeared that 
the Department was anticipating the failure of the States to comply and 
that it therefore must be ready to take corrective and enforcement 
actions. The commenter suggested that, at the very least, ``identifying 
the need for corrective action, enforcement and improvement within the 
State title XXI programs'' should be the last of the four listed 
expected outcomes of the monitoring.
    Response: We did not intend to be punitive, nor do we anticipate 
the failure of the States to comply with statutory or regulatory 
requirements or the specifications of the approved State plan. During 
the monitoring visits that have taken place thus far, the Department 
has focused on identifying best practices and needs for technical 
assistance rather than on compliance. In keeping with the commenters' 
views, we have rearranged the list of expected outcomes of monitoring 
as follows: (1) Recognizing and sharing best practices that may lead to 
increased enrollment; (2) identifying States' needs for technical 
assistance; (3) informing HCFA as we prepare for the Secretary's report 
to Congress; and (4) identifying the need, if any, for corrective 
action, enforcement and improvement within State title XXI programs.
    Comment: One commenter recognized that ongoing review of State 
programs is an evolving process, but suggested that HCFA identify 
either in this regulation or in a separate policy document ``the core 
set of key policy areas'' that it intends to monitor and to establish a 
protocol for doing so. The commenter specifically recommended adopting 
as key policy areas the methods to address the needs of racial and 
ethnic minority children and the needs of children with disabilities.
    Response: The HCFA Central Office and Regional Offices develop 
procedural guidelines to use in the ongoing operation of the monitoring 
visits and review process. In the flexible Federal review process that 
we have established, we will monitor to ensure consistent 
implementation of the core

[[Page 2503]]

set of key policy areas specifically described in the title XXI 
statute. These areas include enrollment and retention procedures; 
outreach; coordination with other programs; quality, appropriateness 
and access to care; and other areas related to compliance with the 
statute, regulations and approved State plan. Because the review 
process may change over time and may vary from region to region, 
depending upon specific State needs and circumstances, we do not 
believe it is appropriate to further specify these procedures in 
regulation. We agree with the commenter's concern regarding the needs 
of racial and ethnic minority children, as well as children with 
special needs, and we plan to incorporate these issues into our 
monitoring as appropriate. Furthermore, in recognition of the 
importance of assessing how SCHIP is addressing the needs of racial and 
ethnic minority children, we have added reporting requirements to 
subpart G, at Sec. 457.740(a)(2)(ii) for data on race, ethnicity and 
primary language as well as gender. We hope that these data, together 
with ongoing monitoring, will enable States, HCFA, and other interested 
parties to assess these important policy areas.
    Comment: Many commenters indicated that it is essential for HCFA to 
add a requirement that State and local community based organizations 
and ``stakeholders'' be involved in HCFA's annual reviews of State 
SCHIP operations. One commenter explained that it is a practical 
reality that State officials are at times constrained in their ability 
to identify problems in their programs candidly; therefore, the 
inclusion of a diverse group of stakeholders would considerably 
strengthen HCFA's understanding of State operations and would improve 
accountability of State programs to their constituents. One commenter 
recommended including language to recognize the critical role that 
consumers, advocates, providers, and others play in the design, 
implementation, and monitoring of SCHIP programs. One of these 
commenters suggested a public hearing as part of the review. Several 
commenters expressed a desire that, in providing public input, HCFA 
provide these organizations and stakeholders with draft and final 
reports generated through the review process.
    Response: We recognize the importance of public involvement in the 
monitoring process. As part of our ongoing monitoring of programs, 
including site visits, we have met with advocates, providers and other 
interested parties, and we have incorporated such contacts into our 
monitoring protocol. In many cases, as part of the SCHIP site visits, 
the Regional Office staff have met with advocates and providers to gain 
additional input on the State's programs. We plan to regularize such 
conduct, but do not plan to hold public hearings in the course of 
monitoring of State programs. Moreover, HCFA encourages stakeholders to 
contact their Regional Office at any time to inform them of issues, 
suggestions and concerns. The statute specifically requires public 
input in the development and implementation of SCHIP. Section 2107(c) 
of the Act, which requires public involvement, and the requirement at 
Sec. 457.120, reflect the recognition of the importance of involvement 
of interested parties in the initial design and ongoing implementation 
of SCHIP. While we will value public input in the monitoring process, 
to avoid confusion that may be caused by inaccuracies in a draft 
monitoring report, we do not plan to release draft reports. We will 
provide final reports to interested parties upon request and encourage 
such parties to inform us of their comments on these reports.
    Comment: One commenter encouraged HCFA to consult with key State 
level agencies, including Title V Maternal and Child Health and 
Children with Special Health Care Needs (MCH/CSHCN) programs, in 
conducting the reviews. In the views of this group, agencies that run 
State title V MCH/CSHCN programs are involved in SCHIP outreach and 
enrollment and are vital resources for understanding how SCHIP is 
working and, particularly, how it fits with other child and family 
services. One State specifically stated that the Child Support 
Enforcement (CSE) program should be included in the monitoring because 
CSE needs to be made aware of children in the child support enforcement 
caseload that are covered by this type of insurance.
    Response: We will monitor for compliance with all regulatory 
requirements, including the requirement that States coordinate with 
other sources of health benefits coverage. This may include consulting 
with other State agencies or programs in conducting reviews as 
appropriate based on the unique circumstances in the State. We also 
encourage States to include these partners in the review process. We 
agree that the Child Support Enforcement agency is an important partner 
in coordination efforts in the SCHIP program, and issued guidance to 
this effect in a Fact Sheet on SCHIP and CSE released in January 1999. 
While we will not require their participation in the monitoring 
process, our Regional Offices have and will continue to work with State 
SCHIP agencies to help them identify key partners, including CSE 
agencies. Further discussion of our requirements for coordination with 
other programs is found in our responses to comments on Sec. 457.80.
    Comment: One commenter recommended that State legislators be 
included in HCFA site visits that occur as part of the review process.
    Response: Because the legislative relationship with SCHIP is 
different in each State, States may have a widely varying degree of 
State legislator involvement in the ongoing implementation of their 
SCHIP programs. State legislators have a key role in the development 
and oversight of SCHIP programs; however, we do not believe it is 
appropriate for HCFA to require the inclusion of State legislators in 
every site visit, as that would intrude into the relationship between 
State executive and legislative branches. We are, however, willing and 
interested in meeting with State legislators who have an interest in 
SCHIP and appreciate their involvement and the special role they play 
in making SCHIP a success in their home State.

6. State Plan (Sec. 457.50)

    We proposed that 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 SCHIP and gives an 
assurance that the program 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 (FFP) in the State 
program. We stated in the preamble that an approved State plan is 
comprised of the initial plan submission, responses to requests for 
additional information, any other written correspondence from the State 
and subsequent approved State plan amendments.
    Comment: Several commenters strongly recommended consolidating the 
State plan into one up-to-date document rather than allowing the 
``plan'' to be a conglomeration of the ``initial plan submission, 
responses to request for additional information and subsequent approved 
State plan amendments.'' Without such consolidation, the commenter 
indicated that the job of understanding the details of the program is 
extremely difficult for

[[Page 2504]]

policy makers, advocates, and researchers.
    Response: We agree that, as some States receive approval for 
multiple State plan amendments, it will become more difficult to 
understand the details of the State programs. At this point, an 
approved State plan is comprised of the initial plan submission, 
responses to requests for additional information, any other written 
correspondence from the State related to provisions in the State plan 
or amendment and subsequent approved State plan amendments. However, in 
the future, we will request that all States submit consolidated State 
plans. At such time, we will issue guidance on the format and time 
frames for submission of a consolidated State plan.
    Comment: A commenter asked that, in order to ensure that it will be 
possible to track States SCHIP policy choices over time, HCFA should 
commit to keep a copy of each States up-to-date, approved State plan in 
effect at the beginning of each fiscal year for future reference. Thus, 
the commenter observed, even if a State plan is subsequently amended, 
HCFA will have a record of the policies in place for any given State at 
the beginning of each fiscal year. By keeping an annual ``snapshot'' of 
States' SCHIP plans, the commenter noted that HCFA will make it 
possible for Federal, State, and local policy makers, as well as 
researchers, to evaluate the impact over time of States' SCHIP 
implementation choices.
    Response: We will continue to keep a record of all State plans, 
including historic provisions with the effective date of each State 
plan amendment, so that we will have record of, and be able to make 
available to others, the policies that were in effect at any given time 
throughout the operation of a State's program.
    Comment: One commenter stated that the plan should be ``easily 
accessible.'' One commenter suggested that the preamble language state 
that the approved State plan, including any attachments, will be made 
available to the public on the web.
    Response: We will continue to make an effort, as resources permit, 
to make the approved State plan and any approved State plan amendments 
available to the public on the web site or through links to State 
sites. To facilitate the posting of this material, we encourage States 
to submit proposed plan amendments and responses to requests for 
additional information in an electronic format.

7. Amendments (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 proposed 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 decisions; changes in 
State law, organization, policy or operation of the program; or changes 
in the source of the State share of funding. In the preamble to the 
proposed rule, we discussed in detail our view that only changes that 
are substantial and noticeable would require amendments. Specifically, 
we stated that changes in program elements that would not ordinarily be 
required to be included in the State plan at all would not require an 
amendment. We proposed in Sec. 457.60(b) that 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.
    Comment: A few commenters suggested that HCFA provide SCHIP 
programs with ``preprints'' such as those provided in the Medicaid 
program to inform the State of changes in Federal law and regulations.
    Response: We agree with commenters that providing preprints would 
assist States in complying with changes in Federal laws, regulations 
and policies. In Medicaid, a ``preprint'' is similar to the State plan 
template we have provided in SCHIP, where the State agrees to 
administer the Medicaid program in accordance with federal law and 
policy. The Medicaid State plan preprint sets forth the scope of the 
Medicaid program, including groups covered, services provided, and 
reimbursement rates for providers. In SCHIP, we have provided States 
with a State plan template, which also serves as the template for 
amendments to the State plan, and lays out in a series of questions and 
check boxes a guideline for States to follow in explaining the 
components of their program. We will be revising this template to 
reflect the provisions of this final regulation.
    Comment: Many commenters asked that States be given a reasonable 
amount of time to implement new Federal requirements. One State 
specifically recommended that each State's contracting cycle time be 
used as the appropriate implementation time frame for new requirements. 
Another commenter urged the Department to take into consideration the 
many factors outside of Governors' control, such as contract cycles and 
legislative sessions, in determining when States must achieve final 
compliance.
    Another commenter strongly urged that HCFA add a new subsection to 
Sec. 457.60 that establishes a procedure by which States can submit 
State plan amendments that bring their State plans into compliance with 
the requirements of title XXI as set forth in the final version of the 
regulation. This commenter suggested that HCFA give States no more than 
six months after the issuance of the final regulations to submit State 
plan amendments that bring them into compliance.
    Response: Most of the rules set forth in these final regulations 
are not new; in most cases, these rules reflect the pre-regulatory 
guidance issued since SCHIP was enacted into law. However, we note the 
commenters' concern that States need a reasonable amount of time to 
implement new Federal rules that have been promulgated in response to 
the comments received. We have considered that compliance with these 
final rules may require State legislation or changes to contracts. We 
will require that States come into conformity with new requirements 
within 90 days of publication of this rule, or if contract changes are 
necessary, the beginning of the next contract cycle. By contract cycle, 
we mean the earlier of the date of the end of the original period of 
the existing contract, or the date of any modification or extension of 
the contract (whether or not contemplated within the scope of the 
contract). If a new regulatory provision requires a new or amended 
description of procedures in the State plan, the State must implement 
the procedures within the above time frame, but the State plan 
amendment does not necessarily need to be submitted within the 90-day 
period as provided in Sec. 457.65(a)(2). For example, if this final 
regulation were published on January 1, 2001, then States would have to 
comply with all new requirements by March 31, 2001 (unless the 
implementation of the new regulatory provision requires a contract 
change.) If a State needs to amend the State plan to include a new or 
revised description, then the State still must implement the new 
requirement by March 31, 2001, and must submit the State plan amendment 
by the end of that State fiscal year, or, if later, the end of the 90-
day period.
    Comment: A commenter requested that we require State plan 
amendments to describe the steps the State has taken to ensure that any 
organizations with which it contracts using title XXI funds are in full 
compliance. In some cases, the commenter noted, it is possible that a 
State will be unable to comply with

[[Page 2505]]

aspects of the final rule until it completes a contract cycle or 
convenes a legislative session. In such cases, the commenter 
recommended that a State could be given the opportunity to negotiate an 
alternative time frame with HCFA for implementation of selected aspects 
of the final rule.
    Response: We do not agree with the suggestion that we require 
States to describe in their State plans how they have assured 
compliance of its contractors with title XXI. The State has the 
responsibility under section 2106(d)(1) of the Act for ensuring that 
the State, including its contractors, fulfills the obligations of title 
XXI. If we find through monitoring that services are being provided in 
a manner that is substantially noncompliant with applicable Federal 
law, regulations and the approved State plan, then we may take 
compliance actions in accordance with subpart B of part 457 
(promulgated at 65 FR 33616, May 24, 2000).
    Comment: One State indicated that modifications to its State plan 
to reflect changes in Federal law would be ``counterproductive'' 
because substantial changes to the ongoing program to come into 
compliance with new regulations could lead to coverage delays for some 
children. This same State also recommended that any new regulations or 
policy interpretations that would restrict or substantially alter a 
State's SCHIP should apply only prospectively, that States should not 
have to amend their approved State plans retroactively, and that 
``agreements that were previously approved should not be changed unless 
HCFA could prove that a beneficiary would be substantially harmed in 
the absence of such a change.'' If HCFA requires States to make changes 
retroactively, this State recommended that HCFA should provide 
additional funds to help States finance the costs of the changes and 
that these funds should not be deducted from the States' title XXI 
allotments.
    Response: We are requiring that States comply with this final rule 
on a prospective basis. States will not need to comply with new 
requirements retroactively. As previously set forth, this regulation 
will take effect 90 days after the publication date, although, if 
contract changes are necessary to comply with a particular requirement 
States will not be considered out of compliance if they do not comply 
with that requirement until the beginning of the next contract cycle, 
as described above. Pre-existing Federal requirements that have been 
incorporated into this regulation are already effective. States that 
are not complying with these pre-existing requirements could be subject 
to an enforcement action.
    Comment: Several commenters asserted that proposed 
Sec. 457.60(a)(2) requiring a State plan amendment to reflect 
``[c]hanges in State law, organization, policy or operation of the 
program'' was too expansive and exceedingly burdensome. One commenter 
suggested that operational changes that do not affect eligibility or 
benefits not be treated as changes that require State plan amendments. 
Another commenter recommended that we require a State plan amendment 
only for a change that eliminates, restricts, or otherwise modifies 
eligibility, even if the change impacts only a small number of 
enrollees.
    Some commenters recommended that the State plan amendments should 
be required for any changes in the following areas: (1) Eligibility, 
including crowd-out policies; (2) benefits, including type, scope, and 
duration; (3) cost sharing; (4) data reporting; (5) screen and enroll 
procedures under Secs. 457.350 and 457.360; (6) procedures for 
rationing access to enrollment; (7) disenrollment for failure to pay 
cost sharing or for cause; and (8) substantial changes in outreach and 
enrollment policies.
    Response: We agree that the proposed requirement set forth at 
proposed Sec. 457.60(a)(2), (now Sec. 457.60(b)), was administratively 
burdensome. Our intention was better reflected in the preamble to the 
proposed rule, although this, too (particularly our use of the phrase 
``substantial and noticeable'') merited further clarification. We had 
specifically requested comments on this issue in the preamble to the 
proposed regulation.
    In light of these comments, we have revised Sec. 457.60 to be more 
precise about when amendments must be submitted. We have revised 
proposed Sec. 457.60(a)(1), now Sec. 457.60(a), to generally require a 
State to amend its State plan whenever necessary to reflect changes in 
Federal law, regulations, policy interpretation, or court decisions, 
that affect provisions in the approved State plan. This element of the 
final rule assures that a State keeps its State plan up-to-date; this 
is particularly important to assure ongoing public involvement in 
program implementation. We have revised proposed Sec. 457.60(a)(2), now 
Sec. 457.60(b), to require a State to amend its State plan whenever 
necessary to reflect changes in State law, organization, policy or 
operation of the program that affect key program elements. Thus, 
amendments are required when there are changes in eligibility, 
including but not limited to enrollment caps and disenrollment 
policies; procedures to prevent substitution of private coverage, 
including exemptions or exceptions to required periods of uninsurance; 
the type of health benefits coverage offered; addition or deletion of 
benefits offered under the plan; basic delivery system approach; cost 
sharing; screen and enroll procedures, and other Medicaid coordination 
procedures; and other comparable required program elements. We may 
issue guidance to further interpret ``other comparable required program 
elements'' as the program evolves and experience demonstrates that 
there are other changes that should require an amendment.
    We do not agree that required State plan amendments should be 
limited only to those that eliminate or restrict eligibility or 
benefits. We also have not required a State plan amendment for changes 
in data reporting, as suggested by the commenters, because for approval 
of a State plan, a State is only required to provide an assurance that 
it will provide data as required by HCFA and that data may change over 
time. Finally, we have not required a State plan amendment for 
substantial changes in outreach strategies, as suggested by the 
commenters, because we believe that a State needs to have flexibility 
to adapt its outreach strategies as frequently as it finds necessary to 
best reach potentially eligible children without having to submit a 
State plan amendment in order to do so.
    Comment: Several commenters praised HCFA for noting in the preamble 
its intent only to require an amendment for substantial and noticeable 
program changes and hoped this flexibility would be reflected in the 
final rule.
    Several commenters noted that ``substantial and noticeable'' 
changes can be interpreted in a variety of ways, depending upon whom 
the change affects. One commenter noted that a change that affects the 
eligibility of 300 families across the State, 25 families in one 
community, or a particular group such as immigrant families, will be 
substantial and noticeable to the affected families, but likely to be 
inconsequential and unnoticed by the rest of the State or the 
community. Another commenter recommend that the ``substantial change'' 
language be added to the regulation text, as opposed to only being 
mentioned in the preamble, given that courts and other agencies cannot 
rely on language contained only in the preamble.
    Response: We appreciate the commenters' support for our general

[[Page 2506]]

intent to require amendments only for significant and noticeable 
program changes. As discussed above, we agree that the discussion of 
this issue in the preamble to the proposed rule was not clear and did 
not provide sufficient guidance to States. Further, we agree that the 
policy should be included in the regulation text to ensure proper 
implementation. Therefore, we have revised Sec. 457.60(a) (now 
Sec. 457.60(b)) to clarify when a State plan amendment will be 
required, by identifying the categories of changes that, by their 
nature, have a significant effect. State plan amendments will be 
required for all program changes that fall into these categories.
    Comment: One commenter believes that HCFA should not require either 
State plan amendments or public input for small program changes.
    Response: As noted in previous responses, we have revised proposed 
Sec. 457.60(a)(2), now Sec. 457.60(b), to specify those changes that 
require a State plan amendment; the rules assure the plan will be 
revised to reflect significant program changes. We require States to 
provide assurances that it permits ongoing public involvement once the 
program has been implemented, and we require certification of public 
notice for State plan amendments relating to eligibility and benefit 
restrictions pursuant to Sec. 2106(a)(3)(B) of the Act (see 
Sec. 457.65(b)(1).) We are not, however, requiring that a State 
routinely certify that it has obtained public input prior to submitting 
a plan amendment to HCFA. We encourage States to obtain meaningful 
public input prior to submission of a State plan amendment and believe 
that public involvement prior to the implementation of a program change 
would constitute an important part of the ongoing public involvement. 
Further discussion of requirements for public involvement are found in 
response to comments on Sec. 457.120.
    Comment: One commenter suggested that proposed Sec. 457.60(a)(3) 
(now Sec. 457.60(c)) and Sec. 457.65(d)(2) (the section containing more 
detail on State plan amendments regarding changes in certain sources of 
funding) be combined for organizational purposes. Another commenter 
recommended that HCFA delete the requirement that a State submit a 
State plan amendment when the source of the State share of the SCHIP 
funding changes because the source of State funding is ``irrelevant.'' 
Another commenter recommended that HCFA should consider another 
mechanism for ensuring that States do not use prohibited revenue 
sources such as impermissible provider taxes or donations. One 
commenter noted that this requirement will deter States from modifying 
their plans in order to better provide health services to children in 
need.
    One commenter asserted that a certification by the State should be 
sufficient to assure that the State is not using impermissible taxes. 
Another commenter suggested that federal concerns would be better 
addressed by an effort to educate States as to the statutory 
limitations on such taxes.
    Response: We agree that combining proposed Sec. 457.60(a)(3) and 
Sec. 457.65(d)(2) makes organizational sense because both relate to 
changes in the source of a State share of funding. Therefore, we have 
deleted proposed Sec. 457.65(d)(2) and revised proposed 
Sec. 457.60(a)(3), now Sec. 457.60(c), to include the substance of 
Sec. 457.65(d)(2). Section Sec. 457.60(c) now requires a State to amend 
its State plan whenever necessary to reflect changes in the source of 
the State share of funding, except for changes in the type of non-
health care related revenues used to generate general revenue.
    However, we disagree with the commenter's recommendation to delete 
proposed Sec. 457.60(a)(3), now Sec. 457.60(c). The source of State 
funding is relevant because Section 2107(d) of the Act requires a State 
plan to include a description of the budget for the plan and include 
details on the sources of the non-Federal share of plan expenditures, 
as necessary. In addition, section 2107(e)(1)(C) of the Act provides 
that section 1903(w) of the Act (relating to limitations on provider 
taxes and donations) applies to States in the same manner under title 
XXI as it applies under title XIX. Because section 1903(w) of the Act 
prohibits States from collecting impermissible provider taxes and 
donations, and because the title XXI statute requires States to 
identify, in detail, sources of the States' share of expenditures, it 
is appropriate to evaluate the permissibility of the non-Federal 
funding sources involving health care-related taxes and/or donations 
prior to approval of a State plan and whenever the State changes its 
source of State funds. The method of evaluating the permissibility of 
State funding sources involving health care-related taxes and/or 
donations, as set forth at proposed Sec. 457.60(a)(3), now 
Sec. 457.60(c), is the most efficient mechanism to ensure protection to 
beneficiaries, Federal taxpayers, and States. However, it should be 
noted that if a State makes a programmatic change as a result of a 
change in the amount of the source of the State share, then it is 
required to submit a State plan amendment in accordance with 
Sec. 457.60(b).
    We believe it is our obligation to ensure the implementation of the 
congressional intent that States not use impermissible sources of 
funding for child health programs, as impermissible State funding would 
place a State's entire program at risk. Furthermore, it appears that 
Congress sought to avoid the process used in Medicaid of assessing 
penalties that may accumulate over a long period of time and the 
disruption in program operation that such penalties can create. By 
requiring a State to submit a State plan amendment for review, we have 
an opportunity to prevent the States' use of impermissible funding and 
any consequential disruption of the program. In the long run, the 
process better protects States' and the federal government's interest 
in assuring continuity and ongoing coverage of children.
    Comment: A few commenters expressed their concern that the 
requirement at proposed Sec. 457.60(b) for amended three-year budgets 
when States modify approved budgets creates a significant burden for 
both the States and HCFA. A State expressed the opinion that this 
requirement is particularly burdensome if applied to insignificant 
modifications to the approved budget.
    Two commenters suggested that a three-year budget is difficult 
because ``State budget processes and legislatures do not always 
coincide with program decisions.'' Another commenter similarly noted 
that a three-year budget is longer than a State agency can reasonably 
determine at the time program decisions are made because the State 
portion of the budget is determined annually by the State legislature. 
An additional commenter stated that the requirement at proposed 
Sec. 457.60(b) works against the budgetary processes currently in place 
at the State level, and that budgets are developed for two years into 
the future at most.
    Several commenters argued that three year budget estimates will not 
be accurate, citing reasons such as the uncertainty caused by 
tremendous enrollment growth, changing populations, variations in State 
revenues, and unstable medical expenditures. Two States commented that 
three year budget estimates would not provide the level of information 
necessary to assure financial ability to support the program change, 
and would be of limited use because they would not reflect either 
actual expenditures or actual enrollment. These States thus

[[Page 2507]]

asserted that the stated rationale in the preamble, that such a 
projection would be useful to show if States plan to spend their money 
in the succeeding two years, will not apply.
    One State asserted that there is no reason to look to Medicaid 
waiver processes for a model for SCHIP budget requirements, since the 
waiver process requires a demonstration of budget neutrality that is 
not necessary in SCHIP. This State argued that the model should be the 
title XIX State plan amendment process.
    Some States suggested alternatives for the proposed requirement for 
three-year budgets with State plan amendments, such as an assurance of 
available funding; a three year budget with the annual report but not 
each State plan amendment; or a one-year budget rather than a three-
year budget. Several commenters suggested that an amended three year 
budget should be required only when a State plan amendment would make a 
significant modification to the previously approved budget, such as a 
major change in the benefit package, eligibility rules, or cost-
sharing.
    Response: We agree with the commenters' concerns that the 
requirement for a three-year budget with a State plan amendment at 
proposed 457.60(b) creates an unnecessary burden for the States. 
Section 2107(d) requires that the State's description of the budget for 
its State plan be updated periodically as necessary. Because we 
otherwise require that the budget be updated periodically through the 
annual reports and through quarterly financial reporting, we have 
revised the requirement at proposed Sec. 457.60(b), now Sec. 457.60(d), 
to require that only a one-year budget be submitted with a plan 
amendment that has a significant impact on the approved budget. An 
amendment would have impact on the approved budget if it changes 
program elements related to eligibility, as required by 
Sec. 457.60(b)(1) or cost sharing, as required by Sec. 457.60(b)(6). We 
have also revised Sec. 457.750 to reflect this change.
    Section 457.140, will continue to require that the State submit a 
three-year budget with their annual report that describes the State's 
planned expenditures. Because States have up to three years to spend 
each annual allotment, a three-year budget is useful to show if States 
project that they will use their unused allotments in the succeeding 
two fiscal years. We realize that a State must base the required 
information on projections and that the budget projections submitted to 
HCFA are not approved by a State's legislature. We also recognize that 
projections of expenditures for a three-year period may vary from 
actual expenditures for a variety of reasons. Because SCHIP is a new 
program, States did not have experience at the beginning of the 
implementation of their programs to accurately predict enrollment of 
children or costs associated with providing services. However, we 
expect that as States gain experience in operation of their programs 
and as the State program rules stabilize over time, the three-year 
projections will become more accurate. A three-year budget helps the 
State plan program expenditures and helps HCFA to analyze spending and 
develop a responsive reallocation formula within the parameters of the 
statute.
    The preamble for Sec. 457.140 included a discussion of the budget 
projections required in other programs. We would like to clarify that 
this discussion was not intended to serve as a rationale for the 
requirement for a three-year projection of expenditures in the SCHIP 
program. This discussion was intended to demonstrate that we took the 
budgetary requirements of other programs into consideration as we 
determined our budget requirements for SCHIP.

8. Duration of State Plans and Plan Amendments (Sec. 457.65)

    In Sec. 457.65, we proposed that the State may choose any effective 
date for its State plan or plan amendment that is not earlier than 
October 1, 1997.
    We noted in the preamble that a State may implement a State plan 
prior to approval of the plan but that any State that implements an 
unapproved State plan risks the possibility that the plan will not be 
approved as implemented. If a State implements a State plan prior to 
approval and it is approved, we also indicated in the preamble our 
interpretation that the State can receive Federal matching funds on a 
retroactive basis for expenses incurred (other than expenses incurred 
earlier than October 1, 1997) for the programs if the State operated in 
compliance with the approved State plan and all applicable statutory 
and regulatory requirements. In the event that the State plan is not 
approved, the Federal government would not match the State's prior 
expenditures for implementation of the State plan.
    In the preamble to the proposed rule, we noted the risks involved 
in implementing a change in the State program without receiving prior 
approval of that change through a State plan amendment. If a State 
makes a change and the State plan amendment reflecting the change is 
later disapproved, the State may either risk its Federal matching or 
face a compliance action. The State cannot receive Federal matching for 
expenditures on a program change that is disapproved through the State 
plan amendment process if these expenditures can be segregated from 
expenditures on the approved State plan. The State would be subject to 
the compliance remedies described in section 2106(d) of the Act, as 
implemented in the final financial regulation (65 FR 33616), May 24, 
2000, if the expenditures on such a program cannot be segregated from 
expenditures on the approved State plan. A compliance action is 
appropriate because the continued operation of the unapproved program 
change constitutes a failure to conduct the State program in accordance 
with the approved 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 proposed to 
implement this provision at Sec. 457.65(a)(2). Thus, if a State program 
change is implemented and the corresponding amendments are not 
submitted within the required time frame, the State risks being found 
out of compliance with its State plan and therefore, risks loss of 
Federal financial participation in expenditures beyond the scope of the 
approved State plan or other financial sanctions, as discussed in the 
final financial regulation (65 FR 33616), May 24, 2000.
    Section 2106(d)(2) of the Act 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. Thus, we proposed to clarify certain provisions set forth in 
HCFA 2114-F (65 FR 33616, May 24, 2000). Specifically, paragraph (d)(2) 
of Sec. 457.204, ``Withholding of payment for failure to comply with 
Federal requirements,'' discussed the opportunity for correction prior 
to a financial sanction for failure to comply with a Federal 
requirement. As proposed, Sec. 457.204(d)(2) provided 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. In the SCHIP

[[Page 2508]]

programmatic regulation, we proposed to revise Sec. 457.204(d)(2) to 
address in more detail the possible scope of corrective action that 
could be required. We proposed that 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, and to ensure equitable treatment of beneficiaries.
    In accordance with section 2106(b)(3)(B)(ii) of the Act, at 
Sec. 457.65(b), we proposed that 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. We further proposed, in 
accordance with section 2106(b)(3)(B)(i), 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.
    At Sec. 457.65(c) we proposed that a State plan or plan amendment 
that implements cost-sharing charges, increases the existing cost-
sharing charges or increases the cumulative cost-sharing maximum 
permitted under proposed Sec. 457.560 is considered an amendment that 
restrict benefits and must meet the requirements of Sec. 457.65(b).
    At Sec. 457.65(d), we proposed 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. With 
regard to source of funding, we stated that 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 health care related 
revenues 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 revenues used to generate general revenue.
    In accordance with section 2106(e) of the Act, at Sec. 457.65(e), 
we proposed that an approved State plan continues in effect unless the 
State modifies its plan by obtaining approval of an amendment to the 
State plan or 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 charges that exceed Federal limits.
    Comment: A few commenters expressed concern about the time frames 
for submission of State plan amendments. A commenter suggested that 
HCFA follow guidelines similar to Medicaid guidelines that allow a 
State to submit a plan amendment that is statutorily allowable in the 
quarter after the State's implementation of the change. Another 
commenter proposed that the time frames for submitting an amendment be 
the same regardless of whether the State plan amendment limits or 
restricts eligibility or benefits. In the view of this commenter, 
States are likely to make errors if the time frames are different.
    Response: Section 2106(b)(3) of the Act provides specific time 
frames for submission of State plan amendments. A State plan amendment 
that does not eliminate or restrict eligibility or benefits can remain 
in effect 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 that State fiscal year or the 90-day period. This 
time frame is more liberal than the time frame under the Medicaid 
guidelines, which only permit a title XIX amendment to be effective 
from the first day of the quarter in which the amendment is submitted. 
Furthermore, under the statute, 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. While we note the potential 
for confusion caused by two different time frames, section 2106(b)(3) 
of the Act explicitly provides for different time frames for different 
types of amendments and does not provide authority for a different 
process. States are encouraged to discuss planned amendments with HCFA 
to assure they are submitted in a timely manner.
    Comment: One commenter appreciated HCFA's support for State 
flexibility in how to provide public notice of State plan amendments. 
Other commenters applauded HCFA's decision to treat State plan 
amendments that increase cost sharing as amendments that restrict 
``eligibility or benefits.''
    Response: We note the commenters' support.
    Comment: One commenter requested that HCFA clarify whether it 
intends to require public notice when a family will experience an 
increase in its premium share because the subsidy rate is being applied 
to a premium that resulted from an insurance carrier rate increase. In 
this commenter's view, public notice is unnecessary in this situation 
because the State is not initiating the private sector rate increases. 
The State could continue to assure that the family's total cost sharing 
remains within Federal limits.
    Response: A change in cost sharing that increases the amount of 
premium share owed by the enrollee, must be reflected in a State plan 
amendment that meets the requirements set forth in Sec. 457.65(c). 
However, an increase in premium share that does not affect the 
enrollee's cost-sharing charges or that does not bring the cost sharing 
charges above the level reflected in the State plan would not be 
subject to the public notice requirements of Sec. 457.65(b). We 
recognize that Sec. 457.65(b) could be difficult to administer in 
States that provide premium assistance for coverage provided through 
group health plans, depending how a State chooses to design its premium 
assistance program. However, such an increase may impact the enrollee's 
access to services and participation in SCHIP and, consistent with the 
statutory requirements for amendments eliminating or restricting 
benefits at 2106(b)(3)(B), the public must be given notice prior to the 
increase. The statute does not provide an exception for coverage 
provided through group health plans.
    However, a State has flexibility to design a system that will meet 
the prior public notice requirement. For example, a State may choose to 
require that the family be charged a fixed dollar amount, rather than a 
percentage of total premium, to hold constant the amount of premium 
share that the family is charged. Alternatively, a State may generally 
keep its charges for premium assistance programs below the level of 
cost sharing approved under the State plan to allow room for some cost-
sharing increases that would not bring the charges above the level 
reflected in the plan. A State also may choose to establish a mechanism 
to be notified of increases prior to those increases taking effect so 
that it may provide prior public notice as required by Sec. 457.65(b).
    Comment: A commenter asked that HCFA clarify that ``cost sharing'' 
in this context is defined in the same way as it is in Sec. 457.560 for 
purposes of imposing cumulative maximums.
    Response: So that the term ``cost sharing'' has the same meaning 
throughout the final rule, we have added a provision in Sec. 457.10 to 
define it to include premium charges, enrollment fees, deductibles, 
coinsurance, copayments, or other

[[Page 2509]]

similar fees that the enrollee has the responsibility for paying. 
However, we note that for purposes of the actuarial analysis required 
at Sec. 457.431(b)(7), cost sharing includes only copayments, 
coinsurance and deductibles as described in the Notice of Proposed 
Rulemaking.
    Comment: One commenter asked HCFA to clarify that amendments that 
lengthen or institute eligibility waiting periods of uninsurance or 
narrow exceptions to such waiting periods constitute amendments that 
affect ``eligibility or benefits.''
    Response: To clarify that instituting or changing eligibility 
waiting periods without health insurance, narrowing exceptions to such 
periods, or changing open enrollment periods in a way that would 
further restrict enrollment in the program are considered to be State 
plan amendments that restrict eligibility, we have added a new 
paragraph (d) to Sec. 457.65. This new provision specifies that a State 
plan amendment that implements eligibility waiting periods without 
health insurance; increases the length of existing eligibility waiting 
periods without health insurance; or institutes or expands the use of 
waiting lists, enrollment caps or closed enrollment periods is 
considered an amendment that restricts eligibility and must meet the 
public notice requirements set forth in this section. Eligibility 
waiting periods without health insurance and limited open enrollment 
periods are restrictions in eligibility because these enrollment 
procedures directly limit an enrollee's access to the program. We 
further clarified in Sec. 457.305 that in the State plan, the State 
must include a description of the State's policies governing enrollment 
and disenrollment, including enrollment caps, process(es) for 
instituting waiting lists, deciding which children will be given 
priority for enrollment, and informing individuals of their status on a 
waiting list, if applicable to that State.
    Comment: Many commenters expressed concern about whether the 
provision at Sec. 457.65(b)(1) requiring States only to certify that 
they have provided public notice of such plan amendments ``in a form 
and manner provided under applicable State law'' provides meaningful 
public input into proposed State plan amendments. These commenters 
questioned whether ``notice'' provides the opportunity to comment on 
and discuss a proposal, and point out that the form of notice could 
prove largely meaningless, depending on a State's particular laws. 
Several commenters recommend that the final rule require States to 
certify that they have provided prior public notice and a meaningful 
opportunity for the public to submit comments on any proposed State 
plan amendments that affect eligibility or benefits. States have found 
such input to be helpful to identify ways in which the program can be 
improved and maintain strong support for the program. An additional 
commenter believed that State plan amendments to make changes in 
benefits require public notice and comment.
    Response: We encourage States to obtain meaningful public input 
prior to submission of a State plan amendment that eliminates or 
restricts eligibility or benefits. Furthermore, we require, in 
Sec. 457.120, that States involve the public once the program has been 
implemented. However, section 2106(b)(3)(B) of the Act specifically 
permits a State to certify that it has provided public notice of the 
change in a form and manner provided under applicable State law, and we 
believe the requirements under Sec. 457.65 are consistent with the 
flexibility provided by this statutory provision.
    Comment: One commenter requested that we clarify Sec. 457.65(b)(1) 
to confirm that States must certify that they have complied with 
applicable State administrative procedure law or similar requirements 
mandating public notice and comment with respect to the promulgation of 
rules or regulations of general applicability. This commenter also 
requested modification of the provision to clarify that the State must 
certify that it has complied with all applicable State legal 
requirements for notice and a meaningful opportunity for public 
comment. Although State processes vary, this commenter indicated that 
there is generally a requirement that notice be issued for a specified 
period of time, followed by a period for public comment. This same 
commenter believes that Sec. 457.65(b)(2), which requires that public 
notice be published before the effective date of the change, should be 
eliminated because it could be interpreted to allow State plan 
amendments that restrict or eliminate eligibility or benefits to become 
effective as long as the public notice was published before the 
requested date of the change, regardless of whether or not the State 
had provided meaningful opportunity for public comment or whether the 
applicable time frames had been met.
    Response: As noted in the previous response, Sec. 457.65(b)(1) 
implements section 2106(b)(3)(B) of the Act, which specifically permits 
a State to certify that it has provided prior public notice of the 
change in a form and manner provided under applicable State law. While 
we encourage States to consider public input, title XXI addresses only 
public notice as a condition for the effective date of certain State 
plan amendments. Our regulation is not intended to restrict notice and 
comment opportunities available under State law. We note that States 
must also comply with the requirements of Sec. 457.120 regarding public 
involvement.
    Comment: One commenter suggested that proposed and submitted State 
plan amendments be posted on the HCFA and State web sites. The 
commenter noted appreciation for the effort that HCFA has made to date 
to post information about the filing of State plan amendments on its 
web site and encourages the agency to modify the preamble to clarify 
that State plan amendments (along with State plans) will continue to be 
made available to the public through the HCFA web site. According to 
this commenter, the preamble should indicate that HCFA will post the 
actual plan amendments that are pending whenever possible and that, 
should this not be possible, the agency will list the name and phone 
number of a State official who can provide a copy of the pending State 
plan amendment.
    Response: We will continue to make an effort, as resources permit, 
to make the approved State plan and any approved State plan amendments 
available to the public on the web site. However, we do not post 
pending State plan amendments on the web site because amendments are 
often altered during the approval process, and this may cause confusion 
to the public, although we will consider identifying on the HCFA web 
site whether a State has a pending plan amendment under review. The 
position title of the State official responsible for program 
administration may be found in the approved State plan. Also posted on 
the HCFA web site is a list of HCFA contacts for each State's SCHIP 
program.
    Comment: Over a dozen commenters opposed the proposed provision at 
Sec. 457.65(d) to require prior approval of a plan amendment regarding 
a States' share of program funds and requested that this requirement be 
withdrawn. According to these commenters, section 2106 of the Act 
contemplates a process under which States can specify the effective 
date of their plans or amendments and, if a plan is approved, a State 
can receive matching funds on a retroactive basis. In these commenters' 
view, the statute sets forth straightforward limits on a State's 
flexibility to specify effective dates, but those limits do not 
contemplate prior

[[Page 2510]]

approval of an amendment. The commenters asserted that the statutory 
scheme provides adequate remedies for the Secretary if the plan or plan 
amendment is subsequently disapproved.
    Response: We believe the commenters' concerns may be based in a 
misunderstanding of the process. The requirement at proposed 
Sec. 457.65(d) does not prevent States from implementing a new source 
of funding prior to receiving State plan or plan amendment approval. It 
requires that an amendment be submitted before the change can be 
implemented, but the amendment does not need to be approved in order 
for a State to receive matching funds for expenditures relating to the 
change. A State can submit its amendment on January 1, begin using the 
new source of funding on February 1, and receive matching funds 
retroactive to February 1 if the amendment is approved on or after that 
date.
    The requirement at Sec. 457.65(e) ensures that the time period 
during which a State may operate a program using impermissible funds is 
limited to the time during which the amendment is under review. HCFA 
can only approve a State plan amendment to the extent that the source 
of funding is considered permissible. Thus, while a State may implement 
a new source of funds prior to receiving State plan approval, the 
Federal matching funds are at risk until a determination of 
permissibility has been made. To the extent that source is determined 
to be impermissible, the State plan amendment would be disapproved and 
the State would realize the penalty against its SCHIP expenditures in 
accordance with the statutory penalty provisions. We expect that the 
required process will protect States from proceeding too far using 
impermissible State funds, and from thereby placing these programs and 
enrollee coverage at risk. Furthermore, a State is not required to 
submit a State plan amendment for changes in the source of general 
revenues used to fund SCHIP, as long as those changes are not affected 
by health care-related taxes or donations. For further rationale on our 
policy requiring amendments on changes in the source of State funding, 
please see earlier comments on Sec. 457.60.
    Comment: Several commenters asserted that the proposed 
Sec. 457.65(d) intruded on State budgeting and financial prerogatives, 
was contrary to practices in other federal-state matching programs, and 
could not have been intended by Congress. One commenter did not 
understand why the Federal government wants prior approval of increases 
in State commitments under title XXI when Congress has provided States 
with firm allotments for at least five years. Several commenters noted 
that it may not be possible for the State to submit a State plan 
amendment to HCFA before the effective date of any change in the source 
of the State share of funding becomes effective because of the 
legislative budgeting cycle, which sometimes includes supplemental 
funding for incurred expenditures or legislation with a retroactive 
effective date to take advantage of previously unavailable funds.
    Response: It is important to note that Sec. 457.65(d) does not 
require prior approval of new State funding sources. We recognize that 
Sec. 457.65(d) may reduce State flexibility, we must also consider the 
statutory penalties for the use of impermissible provider taxes and 
donations as specified in section 2107(e) and the public interest in 
assuring that States do not find themselves in a situation where they 
have been operating with impermissible funding sources for an extended 
period of time. Congress specifically imposed penalties for the use of 
impermissible funds and the process established by these rules protect 
States and SCHIP programs from the risk of a significant penalty that 
could make it difficult for the State to continue to operate its 
program for children. In light of the effective statutory prohibition 
on the use of these funding mechanisms, we do not believe we are unduly 
intruding on the States budget process through this requirement, as we 
are not questioning State legislative appropriations that are not 
derived from health care-related taxes or donations. A State is not 
required to submit a State plan amendment for changes in the sources of 
general revenue used to fund SCHIP, when those changes are not affected 
by health care-related taxes and donations. By reviewing the State 
source of funding, we have the opportunity to prevent the kind of 
disruption to ongoing program operations that could occur if a State 
was found to have used an impermissible source of funding for an 
extended period of time.
    Comment: One State expressed its view that the proposed requirement 
of prior approval for SCHIP funding changes is not feasible given the 
State's commitment to developing a public/private partnership with 
private donors. The State indicated that it waited almost a year for 
approval from HCFA to be able to accept a contribution from a private 
foundation. This State asserted that this requirement would hinder the 
State's ability to accept contributions from private sources.
    Response: States are not required to obtain approval of the State 
plan amendment prior to a change taking effect. Thus, we do not believe 
that the process will hinder States' ability to accept contributions 
from private sources. States are required by Sec. 457.65(e) to submit a 
State plan amendment prior to a change in State source of funding 
taking effect. While any delay in approving the amendment would not 
affect a State's ability to rely on such funds, at its own risk pending 
review, we agree that HCFA should act in an expeditious manner to 
review these amendments. The statutory requirements governing 
contributions received by States are very restrictive and we have the 
responsibility to ensure that contributions received by States from 
private sources comply with these statutory requirements. Federal 
regulations require that we evaluate contributions received by States 
on a case-by-case basis. States must submit necessary documentation to 
us in accordance with the Federal regulations so that we may evaluate 
the permissibility of a contribution. That documentation is related to 
the nature of the contributor's business and financial characteristics, 
including the source of its annual revenues. We will make our best 
effort to determine the permissibility of a contribution promptly once 
a State has provided the information that we need to make a 
determination.
    Comment: One commenter requested clarification of the exemption at 
Sec. 457.65(d)(2) to the general requirement for the submission of 
State plan amendments relating to changes in the source of State 
funding for ``non-health care related revenues.'' The commenter stated 
that clarification is necessary to ensure that, for example, income tax 
receipts from medical professionals are not considered ``health care 
related revenues.''
    Response: Taxes of general applicability are not considered 
``health care-related'' for purposes of section 1903(w) of the Social 
Security Act, and the term has the same meaning under 
Sec. 457.60(a)(3). (As noted earlier, Sec. 457.65(d)(2) has been 
combined with 457.60(a)(3) for better organization of the regulation.) 
However, section 1903(w)(3)(A) of the Act and the Federal regulations 
implementing it at 42 CFR 433.55 specify that a tax will be considered 
to be health care-related if at least 85 percent of the burden of the 
tax falls on health care providers. These provisions further state that 
a tax is considered to be health care-related if

[[Page 2511]]

the tax is not limited to health care items or services, but the tax 
treatment of individuals or entities providing or paying for those 
health care items or services is different than the treatment provided 
to other individuals or entities.
    Comment: One commenter suggested adding a new provision to proposed 
Sec. 457.65(e), now Sec. 457.65(f), to clarify that a State could 
discontinue its program by withdrawing its State plan.
    Response: As set forth in Sec. 457.170, a State may request 
withdrawal of an approved State plan by submitting a State plan 
amendment to HCFA as required by Sec. 457.60. We note in Sec. 457.170 
that because withdrawal of a State plan is a restriction of 
eligibility, a State plan amendment to request withdrawal of an 
approved State plan must be submitted in accordance with requirements 
set forth in Sec. 457.65(b), including those related to the provision 
of prior public notice. We have not added a new provision to proposed 
Sec. 457.65 because we do not find it necessary to repeat this State 
option elsewhere in the regulation text.

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 providing coverage 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. We set forth the program options at 
proposed Sec. 457.70(a).
    At Sec. 457.70(b), we proposed that a State plan must include a 
description of the State's chosen program option.
    At Sec. 457.70(c)(1), we proposed that 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 of the Act only).
     Subpart G.
     Subpart H (if the State elects the eligibility group for 
optional targeted low-income children and elects to operate a premium 
assistance program).
     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).
    We proposed that 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 May 24, 2000 final rule (HCFA 2114-F, 65 FR 33616).
    In addition, at proposed Sec. 457.70(c)(2), we specified that 
States choosing a Medicaid expansion program must submit an approvable 
amendment to the State's Medicaid State plan, as appropriate.
    At Sec. 457.70(d), we proposed that a State that chooses to 
implement a separate child health program must comply with all the 
requirements in part 457.
    At 457.70(e), we proposed that 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 (c) and (d) of 
this section.
    Comment: While the statute specifies that States have the option of 
implementing their SCHIP programs as Medicaid expansions, State-only 
programs, or a combination of the two, a commenter contended that the 
regulations favor States that have elected to use title XXI to expand 
their Medicaid programs by imposing greater administrative burdens on 
separate child health programs.
    Response: We do not agree that the regulations favor States that 
choose the Medicaid expansion option. Certain provisions in part 457 do 
not apply to Medicaid expansion programs because Medicaid rules govern 
those aspects of program operations. Furthermore, we do not believe 
that we have imposed greater administrative burdens on States that 
choose to implement separate child health programs. The regulations set 
forth in part 457 are consistent with the State options provided by 
title XXI and are important to ensure the efficient and effective 
administration of SCHIP. We have worked to ensure flexibility for 
States that wish to create separate child health programs within the 
parameters of the statute.
    Comment: One commenter noted that Sec. 457.70(c)(1)(vi) should be 
deleted because Subpart H only applies to separate child health 
programs. Another commenter said that the language of Section 457.70 
should be clarified so that readers do not assume incorrectly that 
States that choose to develop separate programs must adhere to all 
Medicaid rules.
    Response: We agree with the commenter that Subpart H does not apply 
to Medicaid expansion programs and have thus deleted 
Sec. 457.70(c)(1)(vi) of the proposed regulation and renumbered the 
subsequent provision accordingly. Subparts C, D, E, H, I, and K of part 
457 do not apply to Medicaid expansion programs because Medicaid rules 
govern the areas addressed by those subparts. A State that chooses to 
implement a separate child health program must comply with all the 
requirements in part 457 and is not required to comply with the 
requirements in title XIX, other than those specifically noted in 
Sec. 457.135. We believe that Sec. 457.70 clearly sets forth the 
applicable requirements for the respective program types. It should 
also be noted that because we no longer reference Subpart C in 
Sec. 457.229, we have also deleted proposed Sec. 457.70(c)(i)(iii).

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 proposed to require that the State plan describe the 
State's current approach to child health coverage and its plans for 
coordination of the program with other public and private health 
insurance programs in the State. In proposed paragraphs (a) through 
(c), we specified 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 the State uses 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

[[Page 2512]]

creditable health coverage, and to ensure that only eligible targeted 
low-income children are covered under title XXI.
    Comment: One commenter noted that HCFA should not require States to 
gather data on other creditable health coverage available in the State 
as proposed in Sec. 457.80(a). While useful, this information is not 
critical to the successful implementation of a SCHIP and its collection 
may actually divert resources from SCHIP.
    Response: Section 2102(a)(1) of the Act requires that the State 
plan include a description of 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. Section 457.80(a) implements 
this statutory requirement. States do not necessarily have to generate 
new data to meet this requirement, but can rely on other data sources 
that may be available. Knowledge of the availability of creditable 
health coverage will help a State determine how best to design and to 
implement its SCHIP program and outreach strategies.
    Comment: Several commenters requested that HCFA add to the 
categories of children for which it requests coverage information in 
Sec. 457.80(a). Two commenters request that HCFA add ``migrant and 
immigrant status'' to the sentence in the preamble highlighting the 
categories that States might find useful in describing current 
availability of health insurance. In these commenters' view, migrant 
and immigrant children are especially susceptible to being without 
health insurance, and the Immigration and Naturalization Service 
recently clarified in its ``public charge'' guidance, issued in a 
Notice of Proposed Rulemaking (64 FR 28675, May 26, 1999) and an 
accompanying Memorandum published the same day (64 FR 28689), that 
receipt of health benefits will not harm one's chances for legal 
immigration. Another commenter recommended that the required factors 
include ``suburban'' in addition to the age group, race and ethnicity, 
and rural/urban categories already listed in the preamble because 
suburban areas across the county have a growing number of low-income 
and uninsured families.
    Another commenter suggested that HCFA require that the State plan 
include a description of the extent of coverage by race, ethnicity, and 
primary language spoken. According to this commenter, it is now well-
established that minority children are more likely than non-minority 
children to lack health insurance. In this commenter's view, collection 
of the data also gives HHS the tools needed to monitor and enforce 
title VI of the Civil Rights Act of 1964.
    One commenter recommended that ``other relevant factors'' be 
clarified and several other commenters believed the list should include 
primary language, because children with limited English proficiency are 
at high risk of being uninsured.
    Response: We encourage States to include a description of as many 
relevant categories of children in the State plan as possible, to the 
extent that data are available. We agree that more detailed data 
classifying children is useful to learn more about the health care 
coverage status of the children in the State, but recognize that States 
may have limited data sources and that some categories have more 
relevance than others, depending on the State. Because of the potential 
limited availability of this information at the outset of a program, we 
are retaining the flexibility in Sec. 457.80(a) for a State to describe 
in the State plan the classes of children for which it has data 
available. We note, however, that we have added a provision in Subpart 
G, Strategic Planning, that requires States to report data on the 
gender, race and ethnicity of enrollees in their quarterly enrollment 
reports. In addition, States will be required to report information on 
the primary language of SCHIP enrollees in their annual reports.
    We are not adopting the commenter's recommendation to require 
information for specific categories of children in the regulation. This 
provision requires that a State describe coverage provided to children 
at the beginning of implementation of its program. We recognize that 
States may have limited resources available at that time and request 
that they provide information sufficient to illustrate that the State 
has analyzed the extent of uninsurance among children in the State 
using available data sources.
    Comment: One commenter interpreted Sec. 457.80(b) to require a 
State to take steps to get uninsured children enrolled in public and 
private health insurance programs. In this commenter's view, families 
should have a choice of where to get coverage and States should 
therefore be allowed to inform families of coverage options and, upon 
request, assist in helping families with choices made.
    Response: Section 457.80(b) requires that a State plan include a 
description of the current State efforts to provide or obtain 
creditable health coverage for uncovered children. This provision does 
not require that a State take particular steps to identify and enroll 
children in public and private health insurance programs, but rather to 
describe its efforts. However, States are required by Secs. 457.350 and 
457.360 to screen for Medicaid eligibility and to have procedures to 
ensure that children found through the screening process to be eligible 
for Medicaid apply for and are enrolled in Medicaid.
    Comment: One commenter described its view that HCFA is creating 
unnecessary obstacles in these regulations to creating public-private 
partnerships. This commenter believes that one reason States have 
problems getting providers to participate in their programs is that 
many providers do not want to respond to the various idiosyncrasies of 
government programs such as the ``unnecessary'' paperwork and the 
``awkward'' procedures that no other payor or insurance company 
requires. The commenter believes that these problems help stigmatize 
government programs and can cause well-intentioned providers to opt out 
of participation in SCHIP or other government programs. According to 
this commenter, providers that remain may develop negative attitudes 
about the program that transfer into negative attitudes about the 
participants, who may leave the program. To solve this problem, many 
States (including this commenter) have tried to address these and other 
stigma issues by creating separate child health programs that are more 
similar to private sector models and more familiar to providers and 
enrollees.
    Response: The provisions set forth in this regulation are necessary 
to implement title XXI and are not intended to create obstacles to 
public-private partnerships. Title XXI and this final regulation 
provide States with significant flexibility in designing separate child 
health programs and we do not believe that federal rules are preventing 
States from employing procedures that address negative perceptions 
about public programs that may exist among providers. As noted in 
Sec. 457.940, States have flexibility to set payment rates for 
providers and should do so in a manner that will attract a sufficient 
number and scope of providers that will adequately serve the SCHIP 
population. We believe this final rule confirms HCFA's commitment to 
working with States to establish and maintain programs that are not 
unduly burdensome to administer and accomplish the goal of providing 
needed health benefits coverage to children and families.

[[Page 2513]]

    Comment: The preamble to Sec. 457.80(b) explains that HCFA proposes 
to require States to provide an overview of current efforts made by the 
State to obtain coverage for children through other programs, such as 
WIC and the Maternal and Child Health Block Grant Program. Several 
commenters stated that although these programs offer health care or 
health-related services, they are not considered to be health insurance 
coverage programs, and requiring a description of coordination with 
these other programs in the State exceeds the scope of the SCHIP 
statute. Another State commented that describing the outreach and 
coordination efforts of all the other existing health programs would be 
extremely burdensome and should not be required.
    One commenter supported the requirement of coordination between 
SCHIP and other publicly funded programs that provide coverage to 
uninsured children but expressed concern with an overly broad and 
burdensome requirement that puts States in the potential position of 
acting as unlicensed insurance agents or brokers to link consumers with 
private creditable coverage. One State expressed that HCFA should more 
clearly define what is meant by ``coordination with other public and 
private health insurance programs.'' In defining this term, HCFA should 
keep in mind that, especially in large States, staying involved in all 
parts of the private insurance market is a challenging task.
    One commenter recommended that the Child Support Enforcement (CSE) 
program be included in the coordination provision at Sec. 457.80(c) 
because CSE needs to be made aware of children in the CSE caseload who 
are covered by SCHIP. Another commenter noted that SCHIP enrollees may 
benefit from the services offered by a State child support program, and 
that families need to understand options related to obtaining or 
enforcing child support and medical support orders.
    Response: We are responding to the comments requesting 
clarification of the required State plan provisions on coordination 
with other public and private health coverage programs by revising our 
proposed regulatory language to better reflect our intent and purposes. 
As described in the preamble, Sec. 457.80(c) is meant to reflect the 
coordination requirements of Sections 2101(a), 2102(a)(3), and 
2102(c)(2) of the Act. Section 2101(a) requires that in using title XXI 
funds to expand coverage to uninsured populations, this effort be 
``coordinated with other sources of health benefits coverage for 
children.'' Section 2012(a)(3) of the Act requires that a State plan 
describe how the plan is designed to be coordinated with such efforts 
to increase coverage under creditable health coverage. As provided by 
section 2102(c)(2) of the Act, the plan must also describe the 
coordination of the administration of the State program under this 
title with other public and private health insurance programs.
    In accordance with these requirements, we have revised 
Sec. 457.80(c) to clarify that the State plan must include a 
description of the procedures the State uses to coordinate SCHIP with 
public and private health insurance and ``other sources of health 
benefits coverage'' for children. ``Other sources of health benefits 
coverage'' would include WIC and Maternal and Child Health Programs. 
Section 2108(b)(1)(D) of the Act supports this clarification. This 
section requires an assessment of State efforts to coordinate SCHIP 
with ``other public and private programs providing health care and 
health care financing including ``Medicaid and maternal and child 
health services.''
    As noted in the preamble to the proposed rule, additional examples 
of sources of health benefits coverage could include community and 
migrant health centers, Federally Qualified Health Centers, Child 
Support Enforcement Programs, and special State programs for child 
health care. These can all be important sources of health benefits 
coverage for children. This list of examples is not intended to be an 
exhaustive list of those programs that a State should coordinate with 
its SCHIP program and describe in its State plan. We are not providing 
a specific list because we recognize that States are different and that 
it is important to respect the variety of programs and coverage plans 
that operate in each State. The State should describe its relationships 
with other State agencies, low-income community organizations, and 
large insurance providers in the State that provide health insurance or 
health benefits to children. For example, if a State has a high risk 
insurance pool program, it should describe the coordination between 
this program and SCHIP; however, not all States have such insurance 
pools and the nature of these pools will vary among States.
    Each State has a unique relationship with Federally Qualified 
Health Centers (FQHCs) and we believe that the flexibility of the State 
to structure these relationships should be maintained. Therefore, we 
have not required specific enrollment coordination procedures with 
FQHCs. However, we recognize the importance of enrolling SCHIP and 
Medicaid eligible children at sites where they typically receive care, 
such as FQHCs. Due to this relationship, FQHCs are vital partners in 
outreach and enrollment for this population. We encourage States to 
utilize these facilities in their outreach efforts.
    These coordination provisions should not be interpreted to mean 
that we are requiring any particular effort on the part of the State to 
enroll children in private coverage.
    Comment: One commenter indicated that it is extremely important for 
the regulations to specify what steps States must take in order to 
satisfy the requirement that separate child health programs be 
coordinated with existing Medicaid programs (including, for example, 
coordination of outreach and education efforts, screen and enroll 
requirements, transitioning from coverage under one program to the 
other, etc.). This commenter also recommended that the regulations 
require States to provide training to eligibility determination workers 
in both programs (as well as other workers) to ensure that appropriate 
transitions are made.
    Several commenters believed that Sec. 457.80(c) of the regulation 
(and not just the preamble to that section) should require States to 
describe the specific steps they will take to ensure that children who 
are found ineligible for Medicaid (at initial application or at 
redetermination) are provided with the opportunity to be enrolled in 
SCHIP. Another commenter pointed out that neither title XXI nor the 
proposed regulations take into consideration the movement of children 
between title XXI and title XIX programs as their eligibility status 
changes, nor have the Medicaid regulations been updated to reflect this 
possibility. A couple of these commenters suggested that perhaps the 
Medicaid regulations should be amended to address this issue. Another 
commenter believed that States should be required to describe how they 
will monitor these processes.
    Several commenters indicated that the regulations should address 
the coordination of enrollment procedures for Medicaid and SCHIP at 
Federally Qualified Health Centers (FQHCs).
    Response: We have taken the first commenters' suggestion into 
consideration and have revised the regulation at Sec. 457.80(c) to 
refer to the requirements in Secs. 457.350 and 457.360. States that 
implement separate child health programs are required to meet the 
requirements of Secs. 457.350 and 457.360. States that implement 
separate child health programs and States that implement Medicaid 
expansion

[[Page 2514]]

programs must both describe the procedures for coordination required by 
Sec. 457.80(c); however, the ``screen and enroll'' requirements of 
Secs. 457.350 and 457.360 are not relevant or applicable to States that 
implement Medicaid expansions.
    We agree that some more specificity with respect to the specific 
steps States must take to coordinate with Medicaid programs would be 
helpful in providing more clarity for States. At the same time, we 
believe that States need to retain the flexibility in coordinating 
SCHIP and Medicaid particularly in light of the specific administrative 
structures of the States' programs.
    We agree with the commenters that the regulation should be revised 
to require States to describe in the State plan procedures to ensure 
that children who are found ineligible for Medicaid are provided the 
opportunity to be enrolled in SCHIP. We have revised Sec. 457.80(c) to 
require that the State plan include a description of procedures 
designed to assist in enrolling in SCHIP those children who have been 
determined ineligible for Medicaid. This should occur both at the time 
of application and at the time of redetermination. The Medicaid 
regulations do not need to be amended because title XXI and these 
implementing regulations require coordination between SCHIP and 
Medicaid. We believe that State efforts to coordinate SCHIP with other 
public programs should include efforts to ensure that these processes 
are effective and have modified the Medicaid regulations at 
Sec. 431.636 accordingly. In addition, we expect States to have 
mechanisms to evaluate the effectiveness of coordination between the 
two programs, as noted in Sec. 457.350(f)(2)(i)(C).

11. Outreach (Sec. 457.90)

    In Sec. 457.90, we proposed to require a State to include in its 
State plan a description of the outreach process used 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. At proposed Sec. 457.90(b), we 
set forth examples of outreach strategies including education and 
awareness campaigns and enrollment simplification. We discussed these 
outreach strategies in detail in the preamble to the proposed rule.
    Comment: Many commenters expressed support for the requirement of 
outreach procedures and the examples provided. One commenter strongly 
supported the requirement that would require States to identify 
outreach procedures used to inform and assist families of children 
likely to be eligible for child health assistance under SCHIP or under 
other public/private health coverage programs. Another commenter 
supported the requirement of outreach strategies including education 
and awareness campaigns and enrollment simplification. Yet another 
commenter supported a streamlined application and enrollment process as 
a practical means of enhancing participation by qualified children, 
thereby increasing demand for needed medical and dental services.
    Response: We note the commenters' support.
    Comment: One commenter appreciated the efforts of HHS to maintain 
flexibility for the States in the outreach area as each State has 
established and continues to refine state-specific outreach efforts to 
identify SCHIP and Medicaid eligible children in their communities.
    Response: We note the commenter's support.
    Comment: One commenter suggested that we provide more examples of 
effective outreach. The commenter noted that States are being very 
creative in how they are conducting outreach and the two examples 
listed do not even ``touch the tip of the iceberg''.
    Response: There are many examples across the nation of successfully 
implemented, locally developed outreach campaigns. Because there are so 
many effective approaches for outreach, it is impracticable to list 
them in this regulation. Our intention was not to provide an exhaustive 
list of effective outreach methods in the preamble, but to highlight 
examples of a few major types of outreach strategies. HCFA, along with 
HRSA and other public agencies and private organizations, will continue 
to facilitate the sharing of ``best practices'' through information 
sharing sessions, technical assistance and guidance separate from this 
document.
    Comment: One commenter expressed that outreach is critical to the 
success of SCHIP. This commenter noted that the State of Colorado has 
done a good job of disseminating information to the public that is 
easily understood.
    Response: We agree with the commenter that outreach is critical to 
the success of SCHIP and it is for this reason that we included the 
requirements in Sec. 457.90.
    Comment: One commenter suggested that the discussion of outreach in 
the preamble to the proposed rule should have referred to ``migrant and 
immigrant populations'' instead of just ``migrant populations'' because 
of the importance of outreach for immigrants.
    Response: States may choose to target outreach activities to 
special audiences known to have large numbers of uninsured children, 
such as migrant and immigrant populations, as well as other groups.
    Comment: One commenter suggested that the discussion in the 
preamble to the proposed rule of the role of ``clinics'' should have 
included ``Community Health Centers, Rural Health Centers, and other 
community-based clinics that provide a large proportion of care to 
uninsured patients'' in the list of providers that States should 
consider for distributing SCHIP information.
    Response: The list of providers through which States could 
distribute program information was not intended to be exhaustive. We 
encourage States to distribute information through any provider that 
has the potential for reaching uninsured children, including community 
health centers, rural health centers, and other community-based 
clinics.
    Comment: One commenter recommended that HCFA encourage States to 
involve community-based organizations in application assistance 
activities and describe the available sources of Federal funds for 
these activities. The commenter noted that there are numerous examples 
of staff at community based organizations being trained to conduct 
initial processing of applications for both Medicaid and separate SCHIP 
programs. Another commenter suggested we add to the examples of 
organizations listed as potential partners with the State those 
community-based organizations with expertise in doing outreach to, and 
providing services to, specific ethnic communities. This commenter also 
recommended that Sec. 457.90(b) be amended to add examples of using 
community-based organizations. Another commenter noted that community-
based organizations, including migrant and community health centers, 
are important outreach sites for reaching members of the Hispanic 
community. According to this commenter, Hispanic community-based 
organizations could coordinate with community centers, churches, Head 
Start, GED, Job Corps and WIC offices, and locations such as grocery 
stores, pharmacies, and other commercial centers as well.
    Another commenter noted that many of the enrollment simplification 
methods, including outstationing of enrollment workers, are key to 
reaching more families, including families of children with special 
needs. States need

[[Page 2515]]

to be versatile in utilizing community-based organizations to help 
spread the word of the program to reach enrollment goals, according to 
this commenter. This commenter indicated that mechanisms for explaining 
the importance of health coverage helps families recognize the benefits 
of health insurance for their children.
    Response: We encourage States that implement separate child health 
programs to involve community-based organizations in application 
assistance activities. States that implement Medicaid expansions must 
follow all Medicaid rules relating to eligibility determinations, but 
are encouraged to use community-based organizations to help reach and 
assist low-income uninsured children to become enrolled. States can 
receive Federal matching funds for outreach activities; for States that 
establish separate child health programs, outreach matching funds are 
subject to the 10% limit on administrative expenditures.
    State experience shows that one of the most effective methods for 
reaching ethnic groups is through community-based organizations. Not 
only are the employees of these organizations familiar with the 
language and culture of the groups they serve, they are trusted members 
of the community. We strongly encourage the use of community-based 
organizations with expertise in serving specific ethnic communities as 
part of an effective outreach campaign.
    We agree that outstationing enrollment workers is an important 
method of reaching uninsured children and enrolling eligible children 
into SCHIP and Medicaid. Education and awareness campaigns and 
enrollment simplification procedures have proven to be highly effective 
strategies for successful outreach. Because there are so many effective 
methods of outreach, such as using community-based organizations and 
outstationing enrollment workers, we have not provided an exhaustive 
list in the regulation.
    Comment: One commenter urged that dentists also be listed as 
participants in education and awareness campaigns, as well as State and 
local dental and pediatric dental societies.
    Response: We encourage States to disseminate information through 
all providers that serve uninsured children.
    Comment: One commenter suggested that HCFA discuss using the CDC's 
Immunization Registries to assist States in identifying families with 
uninsured children. In planning to transition away from the use of 
immunization clinics towards integrating immunizations as part of well-
child care, we will have to pay more attention to potential financial 
barriers which could be appropriately addressed by linking immunization 
outreach to SCHIP/Medicaid outreach efforts.
    Response: Several data sets are available to assist States in the 
identification of families of uninsured children, including the CDC's 
Immunization Registries. States should strive to link health coverage 
program outreach with other forms of health-related outreach in the 
State, such as immunization outreach.
    Comment: One commenter believed States should use public benefit 
programs that serve low-income families with children to inform 
families about the availability of health coverage. The discussion 
regarding the use of existing ``data sets'' to identify uninsured 
children who are potentially eligible for coverage under Medicaid or 
SCHIP identifies the school lunch program participant lists as one of 
the sources. The commenter noted that the school lunch program only 
identifies low-income children, not specifically uninsured low-income 
children.
    Response: We encourage the use of public benefit programs that 
serve low-income families to identify children who may be eligible for 
SCHIP or Medicaid, subject to applicable confidentiality rules. We 
appreciate the commenter's note that school lunch programs do not 
identify uninsured low-income children. We support the use of school 
lunch program participant lists, and other sources that assist in the 
identification of low-income families and inform them of potentially 
eligible children of the availability of SCHIP or Medicaid. Of course, 
in using these source of information, States must comply with 
applicable laws and should ensure confidentiality.
    Comment: A few commenters believed that outreach strategies should 
be targeted specifically to adolescents and to their families. One 
commenter recommended the inclusion of the term ``age'' in giving 
examples of ways to reach diverse populations, and a distinction should 
be made between young children and adolescents. Other commenters 
believed that initiatives should include specific elements designed to 
reach underserved adolescent population such as runaway and homeless 
youth, youth in foster care or leaving state custody, immigrant youth, 
pregnant and parenting adolescents, and others. The commenters urged 
HCFA to encourage States to work with consumer groups and adolescent-
oriented service providers to develop adolescent-specific outreach 
strategies and materials. One commenter believed the list of suggested 
outreach sites should also include as broad a range of adolescent-
specific sites as permitted by Federal law. Adolescent medicine and 
service providers such as school-based health centers, family planning 
and STD clinics, Job Corps Centers, community colleges, summer job 
programs, and teen recreation centers should be added to the list of 
members of the provider community who can distribute program 
information.
    Response: Adolescents under the age of 19 are included in the term 
``child'', which is defined in Sec. 457.10 as an individual under the 
age of 19. States may implement outreach initiatives that are 
specifically designed to reach different targeted subpopulations, such 
as adolescent, runaway and homeless youth, youth in foster care or 
leaving state custody, immigrant youth, and pregnant and parenting 
children. We encourage States to disseminate information through 
providers, such as those listed by the commenter, that serve targeted 
subpopulations.
    Comment: One commenter supported HCFA's decision to emphasize the 
particular importance of using the provider community to target 
education and awareness campaigns to families of newborns in the 
preamble to the proposed regulation. This commenter urged HCFA to 
include language that also stresses the importance of targeting 
pregnant women with education and outreach campaigns to facilitate 
prompt enrollment of newborns and their siblings.
    Response: We encourage States to target special audiences, such as 
pregnant women and families of newborns, in their development of 
comprehensive education and awareness campaigns. Pregnant women and 
families of newborns will benefit from educational programs designed to 
inform them of the advantages of enrolling eligible newborns and other 
children in the family in health insurance, including obtaining well-
baby care, well-child care and immunizations.
    Comment: One commenter suggested that HCFA encourage States to 
provide materials and or eligibility workers to child care programs to 
identify and assist families of uninsured children served by the 
programs, as well as uninsured children of the programs' employees. 
These should include regulated and unregulated family-based child care 
providers as well as center-based facilities.
    Response: We encourage States to disseminate information through 
child care programs and, when practicable, to

[[Page 2516]]

outstation eligibility workers at child care provider sites.
    Comment: One commenter supported the inclusion in the proposed 
regulation text of language regarding education and awareness campaigns 
including targeted mailings and enrollment simplification. This 
commenter strongly urged HCFA to strengthen this section by requiring 
that States report to HCFA steps they have taken to simplify 
enrollment.
    Response: We note the commenter's support of the proposed 
regulation language regarding education and awareness campaigns. We 
clarified in Sec. 457.305 that States must describe in their State 
plan, policies governing enrollment and disenrollment, including 
enrollment caps, process(es) for instituting waiting lists, deciding 
which children will be given priority for enrollment, and informing 
individuals of their status on a waiting list. However, we are not 
requiring States to report on their mechanisms for simplifying 
enrollment beyond the requirement under Sec. 457.90 to include a 
description of outreach procedures in their State plan. We also 
anticipate that States may include information regarding enrollment 
simplification in their annual report's description of successes and 
barriers in State plans design and implementation and approaches under 
consideration to overcome these barriers. We will continue to work with 
the States in a collaborative way to provide technical assistance and 
share information on successful enrollment mechanisms to encourage 
States to simplify enrollment.
    Comment: One commenter recommended that HCFA emphasize the use of a 
simplified application system. This commenter noted that a simplified 
system makes it easier for a State to coordinate its Medicaid and 
separate SCHIP programs and is an essential ingredient for successful 
outreach.
    Response: A major key to successfully reaching and enrolling 
uninsured children in SCHIP and Medicaid is a simple application 
process. We wish to emphasize that a simplified application process is 
vital to successful outreach and have included a reference to 
simplified or joint application forms in Sec. 457.90(b)(2) as examples 
of outreach strategies States could employ.
    Comment: One commenter recommended that HCFA place a limit on the 
number of pages of the individual State applications. The commenter 
noted that HCFA should also require that States provide joint Medicaid 
and SCHIP applications to reduce the paperwork on the part of the 
applicant as well as the eligibility workers, and to ensure that 
applicants are registered for the appropriate program.
    Response: We disagree with the commenters' recommendations to limit 
the length of the applications and to require joint applications. As 
noted in the previous response, we strongly encourage a simplified 
application process and the majority of States with separate child 
health programs have developed joint applications. However, rather than 
prescribing specific outreach and application methods for all States, 
we are partnering with States to encourage the most effective 
approaches in each State.
    Comment: A few commenters strongly encouraged States to conduct 
coordinated outreach campaigns that help families understand their 
children's potential eligibility for regular Medicaid or SCHIP-funded 
coverage. They urged that HCFA make clear that comprehensive statewide 
education campaigns are needed to inform the public about the 
availability of both SCHIP and Medicaid, and how to enroll eligible 
children in both programs. In addition, the commenters recommend 
reversing the order of the first and second paragraphs of the response. 
Similarly, they suggested that the list of ``enrollment 
simplification'' strategies should emphasize that these steps can be 
taken in Medicaid, as well as in separate SCHIP programs.
    Response: We share the commenters' interest in, and commitment to, 
enrolling uninsured children in both Medicaid and SCHIP. We agree that 
a comprehensive, Statewide education campaign is needed to inform the 
public about the importance of the availability of both SCHIP and 
Medicaid. Virtually all of the steps that States have taken to 
implement simplified application procedures in separate child health 
programs can be taken in Medicaid, such as simplifying the application 
form, streamlining verification requirements, and eliminating any 
assets test. However, different rules apply in Medicaid with respect to 
who must make the final eligibility determination. While enrollment 
simplification in Medicaid is very important, it is not appropriate to 
address this particular issue in further detail in this final SCHIP 
rule.
    As required by section 2102(c) and implemented in Sec. 457.90, a 
State must 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 must 
assist them in enrolling their children in such programs. Medicaid is 
one of these other public health coverage programs. Furthermore, 
section Sec. 457.80(c) requires that the State plan describe the State 
procedures to coordinate SCHIP with other public health insurance 
programs. Again, Medicaid is considered a public health insurance 
program.
    We also note that the way in which States design their outreach 
initiatives has potential fiscal implications. Medicaid provides a 
federal match for States' expenditures associated with outreach to 
Medicaid-eligible children. SCHIP funds may be used to pay for outreach 
to SCHIP-eligible children (subject to the 10% limit on administrative 
expenditures). Because all children who apply for SCHIP must be 
screened for Medicaid eligibility (as required by Sec. 457.350), 
outreach targeted to children likely to be found eligible for SCHIP 
likely also will reach children eligible for Medicaid.
    Comment: Several commenters suggested that bilingual outreach 
workers, linguistically appropriate materials, and culturally 
appropriate strategies must be provided when needed. One commenter 
noted that HCFA should elaborate on Title VI's mandate for linguistic 
access to services and give examples of how States and contracted 
entities can comply with this mandate. One commenter recommended that 
HCFA specify that States must provide access to linguistically and 
culturally appropriate health care services. In this commenter's view, 
States should be required to provide all written materials and 
application assistance in all applicable languages. States should also 
assure that linguistically and culturally appropriate outreach efforts 
are undertaken to all eligible populations. Another commenter 
recommended that HCFA require that applications be made available in 
the prevailing language in the community and that translation services 
be provided.
    Response: As we seek to enroll all eligible children into coverage, 
States and HCFA should be sensitive to the cultural and linguistic 
differences of diverse populations. The diversity of the uninsured 
population requires outreach activities that are sensitive to the 
various cultural groups, their perceptions, needs and desires. For 
example, States could use outreach workers who live in the communities 
targeted for outreach, speak the language and know its cultural beliefs 
and practices. As noted in Sec. 457.130, States must comply with all 
applicable civil rights requirements, including those related to 
language access. Within DHHS, the Office for Civil Rights (OCR) is 
responsible for assuring that DHHS-

[[Page 2517]]

funded programs comply with these laws. States are encouraged to 
contact OCR for additional guidance and technical assistance about how 
to comply with these laws.
    Comment: Another commenter believed that outreach efforts should 
utilize Hispanic community-based organizations to ensure culturally and 
linguistically competent approaches to outreach. This commenter 
believed that specific outreach and education material be developed for 
the Hispanic community. Eligibility workers stationed in communities 
with a large Hispanic population should be able to speak the language 
spoken by potential applicants. The use of television (Spanish 
language) and other media sources should be used to target the Hispanic 
community. Another commenter suggested that HCFA amend Sec. 457.90(b) 
to add examples of using ethnic media for education and awareness 
campaigns.
    Response: Again, we encourage outreach activities that rely on 
workers who live in the communities being targeted for outreach, speak 
the relevant languages and know their cultural beliefs and practices. 
While we will not amend the text of Sec. 457.90(b) to add examples of 
using ethnic media for education and awareness campaigns, we recognize 
that this can be an effective means of reaching ethnic communities. 
States are encouraged to implement outreach initiatives that are 
specifically designed to reach different targeted subpopulations such 
as the Hispanic community and other ethnic groups.
    Comment: One commenter urged HCFA to amend Sec. 457.90(a) to 
require State plans to include a description of outreach strategies to 
reach children and families with special needs including limited 
English proficiency populations, and families whose children have 
disabilities. This commenter also urged HCFA to include in 
Sec. 457.90(b) examples of outreach strategies targeted to special 
populations.
    Response: As noted in previous responses, States must implement 
outreach strategies that comply with all civil rights requirements. A 
State is required to describe its outreach strategies in the State 
plan, but we do not believe that States should be required to describe 
their strategies to target all special audiences, in part because State 
outreach activities are often changing in response to information about 
what does and does not work. The examples presented in the regulation 
are not meant to be exhaustive. As noted in a response above, it is 
impracticable to list in regulation all examples of effective outreach 
strategies.
    Comment: One commenter suggested the final regulation include 
encouragement of State partnerships with HRSA grantees. This commenter 
believed that HRSA's access points in the field can and should be 
accountable for assisting States in making SCHIP outreach a success.
    Response: We encourage States to partner with HRSA grantees to 
identify potentially eligible children, inform families of the 
availability of SCHIP and other public health coverage programs and 
provide application assistance.
    Comment: Several commenters recommended that HCFA require States to 
describe in their SCHIP plans the efforts that they have made to 
consult with ``stakeholders'' regarding the outreach strategies that 
are likely to prove most effective. Suggested stakeholders include 
enrollees, providers, local officials, appropriate state agencies, WIC 
clinics, early childhood programs, schools, consumer groups, and 
homeless assistance programs. Another commenter recommended the use of 
stronger language than that used in the preamble to ensure public and 
potential enrollee participation in the creation of outreach materials 
and strategies. The commenter suggested replacing the word ``should'' 
with ``must'' in the following sentence: ``To be effective, messages 
and promotional materials must be developed with the assistance of 
people toward whom the message is directed.'' Another commenter 
recommended that HCFA require States to describe how they will identify 
populations of uninsured children and how they will enlist the 
assistance of members of these populations in developing procedures 
specifically designed to reach these populations and enroll them.
    Response: States are required in Sec. 457.120 to describe the 
methods the State uses to involve the public in both the design and 
implementation of the program and to ensure ongoing public involvement 
once the State plan has been implemented. We encourage States to 
consult with a wide variety of interested parties, including those 
listed by the commenters, in the development of outreach materials and 
strategies and recognize that such consultation, in many cases, is a 
mechanism for identifying the most effective outreach strategies. 
However, we have not revised the regulation text to specify that States 
describe in the State plan their efforts at consultation in regard to 
developing effective outreach strategies beyond the general 
requirements for public input already addressed in Sec. 457.120. While 
States should develop materials with the assistance of people toward 
whom the message is directed, we do not believe that requiring States 
to consult with specific interested parties would ensure meaningful 
public involvement and provide States with continued flexibility 
regarding how best to involve targeted audiences in the development of 
outreach materials. A further discussion of public involvement is found 
in Sec. 457.120.
    Comment: Several commenters believed that the proposed requirements 
for State outreach programs were excessive because SCHIP is not an 
entitlement program, there is an express cap on administrative 
expenditures, and some States may elect not to fund SCHIP programs at a 
level to justify extensive outreach.
    Another commenter asserted that the proposed regulation is overly 
prescriptive regarding the organizations that should be involved in 
outreach, the materials that should be produced, and the cultural 
variations that should be represented.
    Response: We disagree that the requirements set forth in the 
proposed rule were too prescriptive. Section 2102(c) of the Act 
requires that a State plan include a description of its procedures to 
inform families of the availability of health coverage programs and to 
assist families in enrolling their children into a health coverage 
program. Therefore, families must be provided certain information to 
ensure that they are aware of available child health assistance. In 
addition, because of the importance of providing information that can 
be easily understood by the family, we have further specified 
information requirements in Sec. 457.110 of this final rule. These 
basic rules for assuring that families are informed of the availability 
of coverage do not impose onerous burdens on States and in fact, are 
consistent with the activities States have already undertaken.
    A key goal of this program is to ensure that families are informed 
about available coverage and are encouraged to participate. No single 
approach to reaching potentially eligible children is provided in the 
statute and thus, we are not requiring in Sec. 457.90 that a State 
implement specific outreach activities. We also acknowledge that 
Federal funding for SCHIP is capped according to amounts specified by 
title XXI and States may design outreach programs with these caps in 
mind. States have the option to decide which methodologies and 
procedures it will use to inform families of potentially eligible 
children about the availability of SCHIP.

[[Page 2518]]

    Comment: One commenter recommended that States be required to 
evaluate outreach efforts to determine which methods have been most 
effective (that is, collecting data from enrollment sites and polling 
enrollees about how they heard of the program.) This commenter also 
recommended that States should gather information from families who 
requested applications but did not complete them in order to determine 
their reasons for not submitting a completed application. States should 
use this information to choose the most effective and efficient 
outreach strategies.
    Response: To conduct a successful outreach campaign, States should 
assess which outreach methods are most effective at enrolling eligible 
children into SCHIP. We will work with the States in a collaborative 
way to provide technical assistance and share successful strategies. 
However, we are not requiring a State to conduct a formal evaluation. 
In Sec. 457.750, we do require States to report on strategic objectives 
in the annual reports. These objectives often address effectiveness of 
outreach.
    Comment: Two commenters expressed concern about States involving 
the provider community in the program. One commenter suggested that the 
final rule encourage the participation of health care professionals 
through simplification of the provider enrollment process. Several 
commenters recommended that States be required to conduct outreach to 
the provider community about SCHIP and to provide information and 
training about the administrative/business procedures of the programs. 
This commenter noted that pediatricians and other providers must be 
informed about the new insurance programs as well as about Medicaid. 
One commenter noted that HCFA should require States to make 
administrative rules and procedures for SCHIP as simple and as similar 
to Medicaid as possible; coordinating these programs eases the 
administrative burden on physicians.
    Response: We encourage States to partner with the provider 
community as part of their efforts to deliver health care services to 
Medicaid and SCHIP enrollees. Given that the provider level is the 
point at which enrollees access health care services, active provider 
participation and an understanding of the program is essential to the 
program's success. We strongly encourage States to work with provider 
groups in the State on an ongoing basis to facilitate provider 
participation in the program. If simplifying the provider application 
process is identified as needed in a State to increase access for SCHIP 
enrollees, then we would expect that a State would make every effort to 
address the issue.
    A State and its providers should build a relationship based on the 
mutual goal of providing access to quality health care services. We 
encourage States to provide information about the administrative and 
business practices of SCHIP and Medicaid to providers' offices. We are 
promoting dual enrollment of providers.
    Comment: One commenter noted that outreach should include providing 
information about the mental health and substance abuse, benefits in 
SCHIP plans, if provided.
    Response: Neither the proposed not the final rules require States, 
as part of the outreach provision to provide information on benefits, 
including information on mental health and substance abuse benefits, to 
the general public. However, Sec. 457.110(b)(1) requires that 
information on the types of benefits, and amount duration and scope of 
benefits available under the program must be made available to 
applicants and enrollees in a timely manner. This would include 
information of mental health and substance abuse benefits, if they are 
available under the State's approved benefit package.
    Comment: One commenter recommended that HCFA require copies of 
client communication materials so that HCFA can evaluate the accuracy, 
effectiveness and perhaps establish a ``best practices'' culture for 
States in their partnership with HCFA in meeting their joint missions.
    Response: We disagree with the commenter's recommendation that HCFA 
require copies of client communication materials, although we typically 
review such materials in our monitoring visits, we agree that direct 
communication material should be clear and consistent with the State 
plan rules and plan to work to provide technical assistance and 
facilitate the sharing of ``best practices.''
    Comment: Several commenters urged HCFA to further discuss 
opportunities States have to outstation eligibility workers to help 
families enroll in separate child health programs. Several commenters 
suggested that HCFA include a full discussion of the advantages of 
using outstationed eligibility workers to enroll children in both 
Medicaid and SCHIP.
    One commenter recommended that HCFA highlight that States are 
required under federal law to outstation workers at federally qualified 
health centers (FQHCs) and Disproportionate Share Hospitals (DSH) to 
conduct Medicaid eligibility determinations and one recommended that 
DSH hospitals and FQHCs are also ideal for outstationing sites in 
separate child health programs.
    Other commenters believed that SCHIP plans should be subject to the 
Medicaid outstationing enrollment program requirements. One commenter 
noted that the requirement that States screen for Medicaid eligibility 
as part of the SCHIP application process makes it clear that State 
plans should be required to address how these requirements will be 
incorporated into the enrollment programs at FQHCs and DSH hospitals. 
Yet another commenter suggested that pediatricians' offices also serve 
as a prime location where families may receive help with the 
application process. Another commenter recommended that States consider 
outstationing eligibility workers at offices and clinics where 
uninsured families can be identified easily; and noted that monetary 
incentives can be offered to cover the cost of staff time associated 
with application assistance.
    Response: We agree that outstationing eligibility workers is a 
promising outreach strategy for enrolling Medicaid and SCHIP-eligible 
children. ``Outstationing'' means locating eligibility workers or 
relying on other workers or volunteers, in locations other than welfare 
offices to assist with the initial processing of applications. (The 
final Medicaid eligibility determination must be made by the 
appropriate State agency.) States also can outstation eligibility 
workers in other locations and they can contract with community-based 
providers and organizations to assist with applications at other 
locations. Many locations, other than DSH hospitals and FQHCs, may be 
suitable for outstationing.
    We disagree with the commenter's recommendation to include a full 
discussion of outstationing eligibility workers, and refer interested 
parties to the guidance issued on January 23, 1998, which provides the 
necessary detail. The Medicaid program already has specific regulations 
on this issue such as mandatory outstationing of workers at FQHCs and 
DSH hospitals, which can be found at 42 CFR 435.904. In separate child 
health programs, we encourage States to use outstationing, as it is one 
of many outreach strategies States have found to be valuable. Since 
Medicaid and SCHIP enrollment must be coordinated, Medicaid outstation 
sites provide a particularly important opportunity for enrolling 
children who are not eligible for Medicaid into SCHIP. In addition to 
Medicaid outstation sites, we recommend that States consider 
outstationing eligibility workers at other

[[Page 2519]]

sites that are frequented by families with children such as schools, 
child care centers, churches, Head Start centers, WIC offices, Job 
Corps sites, GED program, local Tribal organizations, Social Security 
offices, community health centers, disproportionate share hospitals and 
pediatricians' offices.
    Comment: One commenter urged HCFA to adopt a requirement in the 
final rule that States include in the State plan an assessment of the 
extent to which procedural barriers may be discouraging enrollment or 
reenrollment of eligible children. For example, a survey of families 
once enrolled but failing to reenroll might indicate the need for 
longer enrollment periods, or the need for acceptance of self-
declaration rather than actual verification of certain items like child 
care costs. This commenter suggested that the State plan could be a 
vehicle for a State to explain efforts made to examine these procedural 
barriers and indicate steps proposed to reduce them.
    Response: We encourage States to assess and simplify their 
application and enrollment processes in an effort to reduce barriers to 
enrolling uninsured children. A burdensome application and enrollment 
process can be a significant barrier to successful enrollment. However, 
we are not requiring States to perform an assessment of procedural 
barriers in their State plan, although we encourage discussion of these 
issues in the annual report. Rather, we will work with States in a 
collaborative way to provide technical assistance and share successful 
procedures.
    Comment: One commenter urged HCFA to encourage States to implement 
presumptive eligibility for both Medicaid and SCHIP.
    Response: Information on presumptive eligibility is found in 
Subpart C and Sec. 435.1101 and in our responses to comments on these 
provisions of the proposed regulation.
    Comment: One commenter urged HCFA to reiterate to States the 
importance of assuring that they have properly implemented the 
delinking of TANF and Medicaid. The commenter noted that we will not be 
able to achieve the title XXI goal of covering more children, or of 
coordinating coverage among various health programs, if children 
continue to miss out on the health care coverage for which they are 
eligible as a result of inadequate implementation of delinking. This 
commenter requested that HCFA repeat the key elements of the discussion 
of ways to effectively implement delinking included in HHS' June 5, 
1998, letter to Medicaid Directors and TANF Administrators and its 
March 22, 1999, Guide entitled Supporting Families in Transition. 
Furthermore, the commenter believed HCFA should stress that States must 
modify their computer systems to assure that families are not 
accountable for delinking, and assure that families do not lose 
Medicaid coverage inappropriately and to assure that families are 
informed about, and enrolled in, Transitional Medical Assistance 
whenever appropriate.
    Response: Improving health care coverage through the delinking of 
Medicaid and TANF is a high priority in our efforts to reduce the 
number of uninsured children. Our guidance on this important initiative 
will be issued separately from this regulation.
    Comment: Two commenters commended HCFA for the preamble discussion 
of ``enrollment simplification'' and HCFA's other efforts on this 
issue. However, this one commenter recommended that we clarify for 
States the parameters established by Federal law for taking steps to 
simplify application, enrollment, and redetermination procedures. This 
commenter recommended repeating the information provided in its 
September 10, 1998 letter to State officials regarding the minimum 
Federal requirements for the application and enrollment process for 
Medicaid and separate child health programs, with respect to 
simplification and opportunities to reduce verification requirements.
    Response: The Federal requirements for the application and 
enrollment process for Medicaid and SCHIP provide a great deal of 
flexibility to States to design an application and enrollment process 
that is streamlined and simple, and avoids burdensome requirements for 
families that apply for benefits. As indicated in our September 10, 
1998 letter to State officials, certain Federal rules apply to these 
processes. If a State chooses to develop a separate child health 
program, the only Federal requirements for the application and 
enrollment process are those listed in Subpart C for: (1) A screening 
and enrollment process designed by the State to ensure that Medicaid 
eligible children are identified and enrolled in Medicaid; and (2) 
obtaining proof of citizenship and verifying qualified alien status. 
The Federal requirements for an application and enrollment process in 
Medicaid are explained in 42 CFR 435.900. As many States' efforts to 
simplify application procedures demonstrate, States have broad 
flexibility under Federal law to simplify and streamline the enrollment 
procedures for both Medicaid and SCHIP.
    Comment: One commenter urged HCFA to place greater emphasis on the 
ultimate goal of outreach--enrollment. In this commenter's view, the 
preamble language should be strengthened to encourage States to 
implement strategies for coordinating the enrollment processes of 
benefit programs such as WIC, Head Start, the School Lunch Program, 
subsidized child care and others with Medicaid and SCHIP enrollment. 
Efforts to enroll children in health coverage programs at the same time 
they enroll in other benefit programs should be encouraged.
    Response: Thousands of low-income children are served by programs 
such as WIC, Head Start, the School Lunch Program, subsidized child 
care and the Child Support Enforcement program. We strongly encourage 
States to coordinate enrollment in other benefit programs that serve 
low-income children with Medicaid and SCHIP enrollment. For example, 
States may implement a referral system between the State's Medicaid 
agency, SCHIP agency (if different from the Medicaid agency) and other 
benefit program agencies. However, the coordination of these processes 
may only be applied to the extent that Medicaid and SCHIP rules allow. 
States must continue to meet the applicable Federal requirements for 
application and enrollment processes for Medicaid and SCHIP.
    Comment: Two commenters recommended that HCFA state the rules 
relating to its child support enforcement policy under Medicaid and 
SCHIP. They request that HCFA should explicitly note the prohibition on 
denying Medicaid to children on the grounds that their parents have 
failed to cooperate with establishing paternity, or with medical 
support enforcement. They ask that HCFA highlight that States do not 
need to include questions about non-custodial parents on their joint or 
Medicaid applications, instead they can solicit such information at the 
time they notify families of their eligibility for coverage. HCFA 
should also reiterate that, regardless of when a State solicits such 
information, it must apprize families of the opportunity to show ``good 
cause'' for not providing the requested information.
    Response: The rules for eligibility for SCHIP and our responses to 
comments on the proposed rules in this area, are found in Subpart C. 
Eligibility rules for Medicaid are issued under title XIX authority and 
are not discussed in this regulation.
    Comment: One commenter suggested the use of licensed professional

[[Page 2520]]

insurance agents and brokers to enroll children. Insurance agents and 
brokers meet with uninsured adults every day, as well as the employers 
of many of the parents of uninsured children. Health insurance agents 
and brokers have a perfect opportunity to reach those that need the 
coverage the most, and since private health insurance plans already 
include a marketing component in their administrative cost, involving 
agents and brokers can be done with no extra cost to the program.
    Response: As noted in Sec. 457.340, States that implement separate 
child health programs may contract with independent entities to 
administer part or all of the eligibility determination process. A 
further discussion on the rules, and our responses to comments on the 
proposed rules pertaining to application processing is in Subpart C.
    Comment: One commenter indicated that HCFA should include a 
description of the opportunity that States have to use innovative 
quality control projects to assure that allowing families to self-
declare income does not increase the rate at which ineligible families 
get enrolled in coverage.
    Response: Our requirements related to program integrity and 
responses to comments in this area are discussed in Subpart I.

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 proposed 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 proposed in Sec. 457.110, that the State 
must 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 proposed 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 SCHIP and the names and 
locations of current participating providers are made available to 
applicants and beneficiaries in a timely manner. This requirement also 
is consistent with the ``right to information'' provision of the 
President's Consumer Bill of Rights and Responsibilities and with the 
requirement in Section 2101(a) of the Act that child health assistance 
be provided in an effective and efficient manner.
    We noted that the requirements set forth in this section apply to 
all States that are providing child health assistance, whether through 
a Medicaid expansion, a separate child health program, or a combination 
program, and whether they use 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 Social 
Security Act, enacted by section 4701(a)(5) of the BBA.
    We proposed to require that information be easily understood and 
noted in the preamble that materials should be made available to 
applicants and beneficiaries in easily understood language and format. 
We noted in the preamble that the State should consider the special 
needs of those who, for example, are visually impaired or have limited 
reading proficiency, and the language barriers that may be faced by 
those who may use the information.
    Comment: Several commenters expressed concern that the proposed 
rule did not expressly require States to provide information in a 
linguistically appropriate format, and one commenter recommended that 
HCFA add a requirement for linguistically appropriate information to 
the regulation. Several commenters stressed that HCFA should specify in 
the preamble that applicable title VI requirements related to 
linguistic accessibility to health care services and that HCFA requires 
States to communicate with enrollees in a language that they can 
understand.
    One commenter recommended that HCFA provide examples of how States 
and contracted entities can comply with title VI requirements. Several 
commenters stated that HCFA should require States to take into account 
language in creating information materials. One commenter expressed 
concern about examples given in the preamble for overcoming language 
barriers. This commenter notes that two suggested methods should be 
used together as a part of a comprehensive plan to ensure linguistic 
access to services, but neither strategy alone would suffice to 
insulate the State from challenge under title VI.
    Other commenters stated that HCFA should require States to provide 
translated oral and written notices including signage at key points of 
contact, informing potential applicants in their own language of their 
right to receive interpreter services free of charge. They further 
stated that bilingual enrollment workers and linguistically appropriate 
materials are necessary to ensure that limited English proficiency 
families make informed health care decisions. Another commenter feels 
that it is essential for HCFA to address the research-established 
higher risk for minority children to lack access to health insurance 
and health care in implementing SCHIP. This commenter noted that 14% of 
Americans speak a language other than English pursuant to Title VI of 
the Civil Rights Act. This commenter noted that HCFA has a 
responsibility to ensure that limited English proficient persons have a 
meaningful opportunity to participate in public programs.
    Another commenter indicated that HCFA must elaborate on 
requirements to provide materials in alternative formats noted in the 
preamble and ensure that the rule includes an explicit reference to 
alternative formats. This commenter suggests that HCFA require 
materials be provided in accessible formats for persons with 
disabilities (e.g. tape recordings, large print, braille, etc.) and in 
appropriate reading levels for persons with limited literacy skills.
    Response: After considering the commenters' concerns, we have taken 
the commenters' recommendation to add a linguistically appropriate 
requirement to the regulation. Section Sec. 457.110 has been revised to 
require that the State must make accurate, easily understood, 
linguistically appropriate, information available to families of 
potential applicants, applicants, and enrollees, and provide assistance 
to these families in making informed health care decisions about their 
health plans, professionals, and facilities. In order to provide easily 
understood and linguistically appropriate information, States must 
assure meaningful communication for people who have limited English 
proficiency or have disabilities that impede their ability to 
communicate. This means that the State must assure that oral 
interpretation, sign language interpretation and auxiliary aids are 
provided to such potential applicants, applicants or enrollees. In 
addition, when necessary to ensure meaningful access, written 
information must be translated or made available in alternative formats 
such as large print or braille. ``For guidance in this area and for 
suggestions on how States can best meet title VI requirements, States 
should consult the DHHS Office for

[[Page 2521]]

Civil Rights' (OCR) ``Policy Guidance on the Title VI Prohibition 
Against National Origin Discrimination As It Affects Persons with 
Limited English Proficiency,'' (the LEP guidance) at 65 FR 52762 
(August 30, 2000). The guidance is also available on OCR's web site at 
www.hhs.gov/ocr.
    Comment: Two commenters urged HCFA to mandate language access 
policies by establishing numeric or proportional thresholds according 
to which States must provide translations of all written materials and 
by adopting minimum standards and procedures that must be met when 
those thresholds are crossed by a SCHIP program. One of these 
commenters asserted that it is important to require a numeric threshold 
rather than a proportion threshold as population densities vary 
greatly. Providing flexibility to States is important; however, 
flexibility should be granted in strategies to provide linguistically 
and culturally competent services, not in determining whether there is 
a need for these services in a particular state or service area, 
according to this commenter. This commenter recommended that States be 
required in their State plan to describe how they will target families 
who speak threshold languages and how linguistic services will be 
provided to ensure access to application and enrollment assistance.
    Response: States must comply with all civil rights requirements, 
including those related to language access. Because States must already 
comply with all civil rights requirements, we are not specifying 
thresholds for translation of material. The Office for Civil Rights 
(OCR) has responsibility for and issues policy on these matters. States 
and other interested parties may contact OCR for information relating 
to compliance with title VI requirements.
    Comment: Two commenters proposed that HCFA require States to 
describe in their plans the procedures they will use to identify 
population needs for specialized information techniques, and how they 
will develop effective informing procedures for persons whose primary 
language is not English or who have physical or mental disabilities 
which require special information techniques. The commenter felt that 
this is necessary in order for States to be in compliance (as required 
in proposed rule Sec. 457.130) with title VI of the Civil Rights Act 
and with the Americans with Disabilities Act and Section 504 of the 
Rehabilitation Act of 1973.
    Response: As discussed in previous responses, States are obligated 
to comply with civil rights requirements, including those related to 
language access. Because States must already comply with civil rights 
requirements as reflected in Sec. 457.130, we are not further 
specifying procedures for identifying populations needing specialized 
information in this regulation.
    Comment: One commenter recommended that HCFA prohibit States and 
contracted entities from requiring, suggesting, or encouraging 
beneficiaries to use family members or friends as translators except in 
cases of last resort. The commenter also recommended that the 
Department should prohibit the use of minors as translators in all 
instances.
    Response: As noted above, the Office for Civil Rights recently 
issued guidance on the issue of translation services on August 30, 
2000. The OCR guidance states that an enrollee/covered entity may not 
require an LEP person to use friends, minor children, or family members 
as interpreters. States and other interested parties may contact OCR 
for additional guidance on language access.
    Comment: One commenter recommended that ``right to information'' 
principles for targeted low-income children be required for potential 
applicants as well. Information should be provided in an understandable 
format and in a language appropriate for the potential applicants as 
well as for the enrollees.
    Response: We agree that it is important that potential applicants, 
as well as applicants and enrollees, have information about the program 
made available to them. Therefore, we have revised Sec. 457.110(c) to 
require that, States must make accurate, easily understood, 
linguistically appropriate information available to families of 
potential applicants, applicants, and enrollees. States are encouraged 
to make information widely available, so that families have the 
opportunity to become familiar with the program.
    Comment: One commenter supported the requirements in Sec. 457.110 
and the flexibility provided by suggestions in the preamble. This 
commenter believes that the proposed regulation fairly states the 
minimum information States must provide to prospective enrollees and 
enrollees. In this commenter's view, some of the preamble suggestions 
for additional information States might wish to provide are problematic 
and HCFA appropriately did not include these suggestions as 
requirements in the proposed rule. The commenter appreciates that the 
States are given the authority to determine how and when to provide 
materials in other languages and translation services.
    Response: We note the commenter's support, but also need to make 
clear that States' discretion in this area is subject to the 
requirements of title VI.
    Comment: One commenter recommended that HCFA add, in section 
457.110(b)(1), cost sharing and other information that States must make 
available in order for families to make informed health care decisions.
    One commenter suggested that HCFA include in the preamble a 
description of the types of more specific information that should be 
provided, such as access to information that assists health care 
consumers in making informed decisions and encourages accountability on 
the part of the health plans and providers. In this commenter's view, 
to alleviate concerns about overly burdensome requirements on States, 
additional categories of information could be made available to the 
public upon request.
    Response: We have revised Sec. 457.110(b) to require that certain 
information be made available to potential applicants, applicants, and 
enrollees. In addition to information on benefits and providers, 
Sec. 457.110(b) requires that a State have a mechanism in place to make 
available information related to cost sharing, enrollment procedures, 
physician incentive plans, and review processes. We have added 
Sec. 457.110(b)(2) to specify that cost-sharing requirements be made 
available. We have added Sec. 457.110(b)(4) to require States to make 
available the circumstances under which enrollment caps or waiting 
lists may be instituted, including the process for deciding which 
children will be given priority for enrollment and how they will be 
informed of their status on a waiting list. We have also added 
Sec. 457.110(b)(5) to require States to make available information on 
physician incentive plans described in Sec. 422.210(b) of this chapter, 
as required by Sec. 457.985 of this final rule. Finally, we have added 
Sec. 457.110(b)(6) to require States to make available information on 
the process for review that is available to applicants and enrollees as 
described in Sec. 457.1120. The information listed above is necessary 
to enable potential applicants, applicants and enrollees to make 
informed health care decisions.
    In addition to the information that a State must make available, 
other basic information should be made available to families upon 
request. This information could include procedures for obtaining 
services, including authorization requirements; the extent to which 
after-hours and emergency services are provided; the rights and 
responsibilities of enrollees; any appeal rights that the

[[Page 2522]]

State chooses to make available to providers; with respect to managed 
care organizations 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 
provides services through a managed care delivery system should 
consider making additional information, such as the policy on referrals 
for specialty care and for other services not furnished by the 
enrollee's primary care physician, available to families of targeted 
low-income children.
    Comment: Two commenters recommended that HCFA delete Sec. 457.110. 
These commenters feel that States should have complete flexibility in 
the use of administrative dollars because they are capped by title XXI. 
According to this commenter, development of rules in this area is 
inappropriate and reduces State flexibility to design its program in 
the way that best serves the needs of that State's children. They note 
that States should be permitted to make these decisions and allowed to 
adopt commercial sector practices or practices more consistent with 
Medicaid.
    Several commenters recommended that no specific requirements with 
respect to the information provided to families be adopted and that the 
level of assistance provided be determined by the State. These 
commenters indicated their belief that the proposed regulation is far 
too stringent and prescriptive regarding the level of enrollment 
assistance States are required to offer families. They noted that, in 
the commercial sector, health plans are not required to provide 
enrollment assistance to individuals. The commenters appreciated the 
authority provided to States to determine how and when to provide 
materials in other languages and translation materials and observed 
that States realize the importance of providing this information to 
families. However, the commenters noted that States are limited to a 10 
percent expenditure allotment for enrollment, outreach and 
administration and that requiring additional material would be onerous.
    Response: We disagree that the requirements set forth in 
Sec. 457.110 are too prescriptive. Section 2102(c) of the Act requires 
that State plans include procedures to inform families of the 
availability of child health assistance under a State's program and to 
assist them in enrolling in such a program. We have provided sufficient 
flexibility to allow a State to design strategies that best meet the 
needs of families while setting minimum requirements consistent with 
these statutory provisions for the information that must be provided to 
assist families of targeted low-income children in making informed 
decisions about their health care.
    We recognize that States have limited federal SCHIP matching funds 
available for administrative expenses. However, certain information 
must be provided to families to ensure that they are informed of the 
availability of child health assistance. We note that most private 
sector health plans routinely make available the information we have 
specified in this regulation to potential applicants and enrollees, 
including benefit descriptions and lists of participating providers. 
Moreover, a key goal of this program is to ensure that families are 
informed about available coverage and are encouraged to participate.
    Comment: One commenter noted that the outreach and enrollment 
requirements are extensive considering the 10 percent cap and 
recommends modifying the rule to address the needs of applicants by 
requiring general information, or deleting the reference to applicants.
    Response: We disagree that making this information available to 
applicants is not feasible due to the 10% cap on administrative 
spending. We are not requiring that the State provide each potential 
applicant with the required information, but to make the information 
available to potential applicants, and provide the information to 
applicants and enrollees in a timely manner. Potential applicants and 
applicants should have the opportunity to become familiar with the 
State's program so that they can make informed decisions about the 
program and selecting a health plan or provider. In the event that a 
potential applicant or an applicant becomes an enrollee, the child's 
family will already be informed about the services that are covered and 
how to access those services. This is particularly important if the 
child has immediate medical needs.
    Comment: According to one commenter, providing current provider 
participation information is an impractical requirement. States should 
be free to update provider participation information on a periodic 
basis. Other commenters stated that it is difficult to distribute hard 
copy information of up-to-date provider lists to all enrollees; 
however, they suggest that web sites and toll-free numbers be listed as 
suggested methods of making up-to-date information available.
    Response: States are required to have a mechanism to ensure that 
the names and locations of current participating providers are made 
available to applicants and enrollees. States may update directories on 
a periodic basis as long as there is another mechanism through which 
enrollees can obtain current information. For example, a State could 
use a telephone hotline to make current information available to 
applicants and enrollees.
    Comment: One commenter recommended that the State should be 
required to distribute information that lists the enrollee's benefits 
and an updated provider directory listing available providers as soon 
as a child enrolls in SCHIP. According to this commenter, States should 
be required to consistently update a database for the provider 
directory since providers will change often and materials should be 
available in all languages enrollees speak.
    Response: Under Sec. 457.110(b), States must make information 
available to potential applicants, applicants and enrollees in a timely 
manner. States should provide this information, which includes benefit 
and provider information, within a reasonable amount of time after an 
individual is enrolled in SCHIP if the information is not provided 
before enrollment. Information should be provided to enrollees so that 
they have sufficient time to choose a primary care provider and a 
health plan where there is a choice. As indicated in the previous 
response, States must have a mechanism to ensure that current provider 
information is available. Furthermore, States are required by 
Sec. 457.110(a) to make information available to families of potential 
applicants, applicants and enrollees in an easily understood, 
linguistically appropriate format. States must also meet more general 
civil rights requirements as specified under Sec. 457.130.
    Comment: One commenter encouraged States to make enrollment 
assistance available in providers' offices and indicated that 
enrollment assistance should also be provided in child care settings. 
All families applying for child care assistance should receive 
information about SCHIP and Medicaid according to this commenter.
    Response: We encourage States to make information about enrollment 
procedures available to health care providers. States that implement 
separate child health programs are required under Sec. 457.370 of this 
final regulation to provide application assistance and health care 
provider offices are often a logical place to

[[Page 2523]]

provide such assistance. Further information on this requirement is 
found in Sec. 457.361 and in our responses to comments on that section. 
We also encourage States to make SCHIP outreach material available to 
families applying for or receiving child care assistance. Child care 
agencies often serve the same children who States are trying to reach 
through their child health outreach strategies. As noted in 
Sec. 457.90, no single approach to reaching children is prescribed in 
this regulation and multiple approaches are likely to be most 
effective.
    Comment: One commenter supported the requirement that States make 
accurate, easily understood information relevant to enrollment 
available to families of potentially eligible children. The commenter 
urged HCFA to make clear that such information should be available to 
adolescents, as well as their families. In this commenter's view, 
provider information should indicate providers specializing in, or with 
an interest in, adolescent care.
    Response: As defined in Sec. 457.10, a child is an individual under 
the age of 19. Hence, the term ``child'' includes adolescents within 
that age range. We encourage States to consider ways to reach out 
directly to adolescents, such as by providing age appropriate outreach 
and education materials directly to adolescents since they may obtain 
health care services independently of their parents or family members. 
Furthermore, adolescents should be provided information that assists 
them in identifying and linking up with providers that specialize in 
adolescent health care. This information should be freely available to 
anyone who requests it.
    Comment: One commenter recommended that HCFA require States to 
inform and educate parents of children with special health needs about 
special services available for their children and how to access these 
services.
    Response: We encourage States to consider the unique needs of 
families with children with special health needs when developing 
procedures to provide information to families. If applicable, States 
should provide information regarding supplemental benefits for special 
needs populations. Further discussion on assuring appropriate treatment 
for enrollees with chronic, complex or serious medical conditions is 
found in Sec. 457.495(b) and in our response to comments on that 
section.
    Comment: A commenter suggested that HCFA emphasize that States take 
special steps to target educational material to families of newborns to 
ensure enrollment during the crucial first months of life when 
screenings, vaccinations, and preventive care visits are vital.
    Response: We encourage States to take additional steps, beyond 
making the information required at Sec. 457.110(b) available, to 
educate special audiences. Families of newborns will benefit from 
educational programs designed to inform them of the advantages of 
enrolling eligible newborns in health insurance, including obtaining 
well-baby care and immunizations. As required in Sec. 457.495, a State 
plan must include a description of the States' methods for assuring the 
quality and appropriateness of care, particularly with respect to 
providing well-baby/well-child care and childhood immunizations, as 
well as other areas highlighted by that section. A further discussion 
of State plan requirements relating to appropriateness of care is 
contained in Sec. 457.735 and our responses to comments on that 
section.
    Comment: Several commenters expressed concern that the proposed 
rules do not provide clear, detailed standards under Sec. 457.110. 
These commenters expressed that it would be appropriate for HCFA to 
provide more detailed regulatory requirements as to what is meant by 
the timely provision of information, criteria for easily understood 
information, and direction as to format. They recommend that States 
should list providers by corporate name and popular name, by individual 
provider names, and by the entity (such as health center).
    Response: States should have the flexibility to design a mechanism 
for providing information that will best meet the needs of potential 
applicants, applicants and enrollees, including whether there is a need 
to refer to providers by more than one name and their entity. In the 
spirit of State flexibility, we do not agree with the suggestion to 
further define timely provision of information, criteria for easily 
understood information, or direction as to format--aside from what has 
already been define in applicable Federal law. No one approach is most 
effective in providing information in all settings and to all 
audiences; therefore, we are not adopting this suggestion.
    Comment: One commenter noted that the family needs to understand 
the consequences of applying for a separate child health program and 
being found eligible for Medicaid.
    Response: The requirements for providing this information to 
applicants are found in subpart C, including Sec. 457.360(a), relating 
to informed application decisions.
    Comment: One commenter strongly supported the requirement that 
States provide specific benefit and provider information in an easily 
understood format and language. This commenter recommended that the 
list of other basic information, as stated in the supplementary 
information, include consent and confidentiality laws for minors and be 
included in the final language of Sec. 457.110(b). Another commenter 
noted that the section regarding the integration of the Consumer Bill 
of Rights should include protections for families as parental consent 
will generally be a requisite for treatment under SCHIP.
    Response: We note the commenter's support for the requirement to 
provide information in an easily understood format and language. 
However, we disagree with the recommendation of requiring a State to 
provide information on consent and confidentiality laws for minors. 
While we agree that this may be a good idea, we believe that requiring 
that such information be provided would be an undue burden on States, 
and therefore we have not amended the regulation text to require that 
States provide this information to applicants or enrollees. However, we 
note that in Sec. 457.1110(b)(4), we require States to assure that all 
contractors protect the confidentiality of information about minors and 
the privacy of minors in accordance with applicable Federal and State 
law.
    Comment: One commenter felt that consumer participation in 
treatment should be ``developmentally appropriate.'' The commenter 
recommended that HCFA add language about appropriate participation of 
guardians and parents and the family in general.
    Response: We encourage States and providers to communicate in terms 
that can be understood by consumers with varied developmental levels. 
Further information on assuring quality and appropriateness of care is 
found in Sec. 457.495 and the responses to comments on that section.
    Comment: One commenter requested clarification of HCFA's intent and 
expectations in requiring States to assist families in making health 
care decisions. Several other commenters requested clarification that 
assisting families does not include decisions relating to the direct 
provision of care, and that these decisions should be made between 
parents and the health care provider.
    Response: States should have the flexibility to design a mechanism 
to assist families in making informed health care decisions about their 
health

[[Page 2524]]

plans, professionals, and facilities that best meets the needs of the 
families in the State. No one approach may be the most effective in 
assisting families. Section Sec. 457.110(a) requires that the State 
provide assistance to families in making informed health care decisions 
about their health plans, professionals, and facilities. All decisions 
regarding treatment options should be made between the patient, the 
family (as appropriate), and the health care provider. In order to 
assist families in making health care decisions, States must, at a 
minimum, have a mechanism in place to ensure that information is 
provided as required by Sec. 457.110(b).

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 proposed to implement this 
provision at Sec. 457.120.
    In the preamble to the proposed rule we encourage States to provide 
for participation from organizations and groups such as hospitals, 
community health centers, and other providers, enrollees, and advocacy 
groups. We also suggested mechanisms for encouraging public involvement 
such as through holding public meetings, establishing a child health 
commission, publishing notices in newspapers, or creating other methods 
for public access to materials. We indicated that 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.
    Comment: Several commenters strongly encouraged public 
participation in all aspects of planning, implementation, evaluation 
and monitoring of SCHIP. These commenters, including several States, 
specifically cited the value of participation from individuals, 
families, Native Americans, organizations concerned with the health of 
adolescents, and other stakeholders. They noted the ability of public 
participants to assist federal State and local officials in identifying 
the characteristics and needs of enrollees, suggesting effective 
program designs and implementation techniques, and gathering and 
reporting information on enrollees' experiences with SCHIP. These 
commenters therefore supported the proposed requirements that State 
plans describe the procedures to be used to involve the public in the 
design and implementation of the program and ensure ongoing public 
involvement, and also supported the public notice requirement for State 
plan amendments. They also supported the ideas and suggestions 
contained in the preamble to the proposed rule. Some commenters 
suggested strengthening the regulatory provisions by requiring States 
to engage in specific activities and collect public participation data 
to ensure that State programs are effectively involving the public.
    Response: We agree that public involvement is integral to the 
success of SCHIP in every State and appreciate the support of the 
commenters. We have included the requirement at Sec. 457.120 for 
initial and ongoing public involvement, consistent with the statute, in 
order to ensure that it takes place. Our early experience with SCHIP as 
well as our experience with other programs demonstrate the benefit of 
public participation in identifying and resolving issues.
    We encourage States to take a thoughtful approach to ensuring 
ongoing public involvement once the State plan has been implemented. We 
believe that the most effective approach to ensuring public input is to 
allow States the flexibility to design a process that affords 
interested parties the opportunity to learn about, and comment on, 
proposed changes in the program and to identify problems and make 
suggestions for improvement to the administering agency. States should 
employ multiple methods of obtaining public input and provide for 
participation by a wide variety of stakeholders. To encourage public 
involvement, a State can--
     Hold periodic public hearings to provide a forum for 
comments when developing or implementing their State plans and plan 
amendments;
     Establish a child health commission or a consumer advisory 
committee that is responsible for soliciting broader public opinion 
about the State plan and formulating the development of program 
changes, and have their meetings open to members of the public;
     Make presentations to, and solicit input from, child 
health, consumer advisory or medical care advisory groups and provider 
groups;
     Publish notices in generally circulated newspapers 
advertising State plan or amendment development meetings so the public 
can provide input;
     Create a mechanism enabling the public to receive copies 
of working proposals, such as proposed State plan amendments, and 
provide ``stakeholders'' with the opportunity to submit comments to the 
State (such as mailing information to ``stakeholders,'' including 
providers and families likely to be served by SCHIP or posting 
information about proposed changes on a State web site);
     Use a process specified by the State legislature prior to 
submission of the proposal;
     Provide for formal notice of, and comment on, program 
changes in accordance with the State's administrative procedure act; 
and/or
     Any other similar process for public input that would 
afford an interested party the opportunity to learn about and comment 
on proposed changes in the program and to offer comments on how the 
program is operating and suggestions for improvements.
    In addition, all State plans, amendments, annual reports and 
evaluations are made available to the public on the HCFA web site to 
ensure ongoing public participation. States have flexibility in the 
manner in which they choose to involve the public in learning about and 
commenting on program design and implementation. While we will monitor 
States' activities and effectiveness related to public involvement, we 
do not accept the suggestion to require collection of public 
participation data in this final rule.
    Comment: One commenter appreciated the prompt posting of State plan 
information, approval and disapproval letters, amendment fact sheets, 
and summary information on the HCFA web site.
    Response: We appreciate the commenter's support for the information 
posted on HCFA's web site.
    Comment: Several commenters requested that HCFA further discuss the 
inclusion of various stakeholder groups into the public process. Some 
urged HCFA to discuss in the preamble ways to include parents of SCHIP 
children in the planning and monitoring of benefits and service deliver 
systems. Others suggested expanding the provisions of the rule to 
specify types of groups that should be involved, including parents, 
children, teachers, advocates, providers of services to low-income and 
uninsured children, agencies involved in the provision of medical and 
related services, managed care entities that hold SCHIP contracts, and 
the mental health and substance abuse communities. Some commenters also 
recommended including involvement by physicians' organizations and 
dentists. One commenter suggested ensuring that public participants 
should have experience in caring for, and knowledge about, adolescents. 
Several of the

[[Page 2525]]

commenters also recommended that the rule specify the aspects of the 
plan that should be subject to public input, and should include 
eligibility, benefits, program design, provider qualifications and 
payment, outreach and enrollment procedures, and family cost sharing.
    Response: We encourage States to involve all ``stakeholders'' 
throughout the development and operation of the program. 
``Stakeholders'' may include parents, children, teachers, advocates, 
the mental health and substance abuse community, dental providers, 
physicians and physicians' organizations, managed care entities, and 
other groups with experience in caring for and knowledge of children, 
including adolescents. We do not agree that the regulation should 
specify groups that must be involved nor those program elements for 
which public involvement is required, because appropriate involvement 
may vary based upon the program element under consideration and 
circumstances within a specific State. States may ensure public 
involvement through a variety of approaches, as noted above. As part of 
its ongoing method for ensuring public involvement, States are 
encouraged to consult with stakeholders in the development of annual 
reports and evaluations. As indicated in previous responses, each State 
must make a concerted effort to involve the public on an ongoing basis 
but should have the flexibility to design the processes for involving 
the public in light of the circumstances in each State.
    Comment: One commenter and its member organizations urge 
strengthened and more detailed requirements for public input at the 
State level. One commenter strongly recommended more guidance to the 
States about required public participation in the development and 
implementation of their plans, including substantial changes to the 
plans. Although this commenter's State policy makers have kept a 
coalition of stakeholders (including consumer organizations and health 
care providers) informed about many changes and have solicited the 
coalition's input on a regular basis, they noted in their view that 
numerous major program decisions that could have a significant impact 
on consumers have been made without public input. This commenter noted 
that the State SCHIP legislation requires the State agency to adopt 
rules, which requires a formal notice and hearing process, but stated 
that the agency has not yet promulgated a single rule. Another 
commenter urged that HCFA require specific methods for soliciting and 
obtaining public input, even if States are permitted to select from 
among alternate specified methods. Some commenters urged HCFA to 
specifically enforce public input requirements, and to ensure that the 
public involvement is meaningful.
    Response: We do not agree that mandating a particular set of 
procedures would necessarily ensure meaningful public involvement. 
Methods that work effectively in one State may not work or be utilized 
effectively in another State. It is vitally important that a State 
employ carefully considered methods to ensure involvement of a wide 
variety of interested parties. This variation across States 
necessitates allowing a State the flexibility to tailor its methods to 
the population it serves and other State characteristics. We encourage 
States to employ multiple methods of obtaining public input. We monitor 
compliance with all State plan and regulatory requirements, including 
those related to public involvement.
    Comment: A commenter noted that, in the preamble to the proposed 
rule, HCFA encouraged States to create a mechanism enabling the public 
to receive copies of working proposals in order to provide comments to 
the States and that most States have posted their original State plans 
on the web or have made ordering information available to the public. 
But this commenter stated that States have not extended this same 
courtesy with proposed amendments of State plans. States are often 
unwilling to share proposed amendments and changes in the program until 
the amendment has been approved by HCFA. This practice inhibits public 
involvement in the development of the program in this commenter's view. 
This commenter urged that HCFA design procedures that enforce the 
requirement that States ensure ongoing public involvement in the 
amendment process.
    Response: We encourage States to provide working copies of State 
plan amendments to interested parties so they may provide valuable 
input into the design of program changes. However, we are not requiring 
States to do so. States must have a method to ensure ongoing public 
involvement beyond the initial implementation of the program and we 
will monitor compliance with all requirements, including those related 
to ongoing public involvement. We would like to be informed if 
interested parties do not believe they have adequate means to provide 
input into the SCHIP design and implementation.
    Comment: One commenter strongly encouraged HCFA to provide further 
elaboration in the rule itself on strategies that States should use to 
promote public involvement. Specifically, the commenter recommended 
that the final rule should require States to offer the public several 
different avenues for providing substantial input into the design and 
ongoing implementation of SCHIP, including public involvement in 
``substantial'' State plan amendments. For example, the commenter noted 
that the final rule could specify that States can satisfy the 
requirement to involve the public in SCHIP by undertaking a number of 
the following activities: convening public hearings; advertising public 
hearings in generally circulated newspapers; making presentations to 
child health, consumer advisory or medical care advisory groups; 
mailing information about program implementation to stakeholders, 
including providers and families likely to be served by SCHIP; and 
posting information about the status of SCHIP implementation on a State 
web site. In this commenter's view, it is essential that the final rule 
do more than list possible examples of how States could comply with the 
public input requirement, and, in particular, not suggest that 
undertaking one of a long list of strategies will be sufficient.
    Response: We encourage States to use multiple methods of obtaining 
public input. In a previous response in this section, we have provided 
further suggestions promoting public involvement and a number of these 
suggestions reflect this commenter's suggestions. However, as noted and 
explained previously, we have not revised the regulation to require or 
include specific methods for ensuring public involvement.
    Comment: One commenter applauded HCFA's efforts to increase access 
to information and believes that requirements for State and local level 
input as the programs are developed and amended, including 
specification of a variety of clearly defined methods of providing 
input, can only help SCHIP.
    Response: As indicated in previous responses in this section, we 
encourage States to take a thoughtful approach in developing methods to 
ensure public involvement, however, specifying methods in regulation is 
not necessarily the most effective way of ensuring public involvement 
within each State.
    Comment: One commenter set forth the view that the methods 
described in the preamble for ensuring public involvement are excellent 
if used and publicized. This commenter recommended that States be 
required to report the methods used annually so that advocates and 
family members can understand the mechanisms for participation. In the 
view of this

[[Page 2526]]

commenter, small public notices are not a meaningful way to reach 
consumers and this commenter is using the web postings by HCFA to help 
educate parent leaders. This commenter encouraged families to go to the 
web site to find their States' annual report to help them understand 
the program and become involved in the SCHIP process. If the annual 
report contains no reference to public input, there is no opportunity 
for participation by consumers and the rules regarding public 
involvement are rendered useless, in this commenter's view.
    Response: We appreciate the commenter's support of our suggested 
methods for public involvement. However, we disagree that the rules for 
public involvement are useless unless we require a description of the 
State's methods in the annual report. States are required to include in 
the State plan a description of the method the State uses to ensure 
ongoing public involvement and we will monitor compliance with this 
State plan requirement as we would monitor compliance with other 
Federal requirements. To reach a wide variety of stakeholders, we 
encourage States to use multiple methods of seeking input.

14. Provision of Child Health Assistance to American Indian and Alaska 
Native (AI/AN) Children (Sec. 457.125)

    To implement section 2102(b)(3)(D) of the Act, we proposed to 
require a State in Sec. 457.125(a) to include in its State plan a 
description of procedures used to ensure the provision of child health 
assistance to American Indian or Alaska Native children. We also 
requested in Sec. 457.125(a) that the State officials responsible for 
SCHIP consult with Federally recognized Tribes and other Indian Tribes 
and organizations in the State on the development and implementation of 
the procedures used to ensure the provision of child health assistance 
to American Indian or Alaska Native children. Although not specified in 
the regulation, we had indicated in the preamble that such groups could 
include regional Indian health boards, urban Indian health 
organizations, non-Federally recognized Tribes, and units of the Indian 
Health Service.
    We proposed in Sec. 457.125(b) that we will not approve a State 
plan that imposes cost sharing on AI/AN children. In the preamble, we 
stated our view that the imposition of cost sharing on children in AI/
AN families may adversely impact the State's ability to ensure coverage 
for this group as required under section 2102(b)(3)(D) of the Act. This 
provision applies to States that operate either a separate child health 
program or a Medicaid expansion program, including Medicaid expansion 
programs under a section 1115 demonstration project.
    Please note that all comments and responses relating to the policy 
of prohibiting cost sharing for AI/AN children are addressed in the 
summary for Subpart E.
    Comment: One commenting State agreed with the provision at 
Sec. 457.125 that requires procedures to ensure that tribal children 
are offered SCHIP, and requests that States consult with federally 
recognized and other tribes. One commenter recommended that HCFA should 
strengthen Sec. 457.125 by requiring State officials responsible for 
SCHIP to consult with federally recognized tribes and other Indian 
tribes and organizations in their States on the development and 
implementation of child health assistance to American Indian and Alaska 
Native children.
    One commenter added that communication with various AI/AN groups 
(including IHS, tribal representatives, and urban Indian groups and 
organizations) is an effective way to accomplish the goal of enrolling 
AI/AN children in SCHIP. However, this commenter noted that the States 
should only be required to consult with Federally recognized Tribes. 
This commenter also noted that Federally recognized tribes should be 
the ones who ask that IHS or Indian organizations participate in 
coalitions or meetings to avoid confusion about who represents those 
tribes. In this commenter's view, federal agencies can enhance tribal/
State relations by supporting tribal/State meetings and by providing 
technical assistance.
    Response: We have taken these comments into consideration and agree 
with the recommendation to require interaction with Indian Tribes. We 
have moved and revised the provision at Sec. 457.125(a) requesting that 
a State consult with Federally recognized Tribes and other Indian 
tribes and organizations in the State on the development and 
implementation of the procedures to ensure the provision of child 
health assistance to American Indian and Alaska Native (AI/AN) 
children. Section 2102(b)(3)(D) of the Act requires a State to include 
in its plan a description of procedures used to ensure the provision of 
child health assistance to AI/AN children. A State cannot meet the 
requirement for ensuring the provision of child health assistance to 
AI/AN children without interaction with Tribes. Additionally, Section 
2102(b)(3)(D) of the Act requires that child health assistance is 
provided to Indians. We have, therefore, revised the language at 
Sec. 457.120(c) to require interaction with ``Indian Tribes and 
organizations in the State'' as opposed to limiting the interaction to 
Federally recognized Tribes. The final language at Sec. 457.120(c), 
given these revisions, requires that a State plan include a description 
of the method the State uses to ensure interaction with Indian Tribes 
and organizations in the State on the development and implementation of 
the procedures required in Sec. 457.125(a) to ensure the provision of 
child health assistance to AI/AN children.
    Given our broader definition of those Tribes that must be 
interacted with, we do not believe it is necessary to further interpret 
the definition of a ``Federally recognized Tribe'' or who should attend 
meetings. States are required to involve a range of other 
``stakeholders'' pursuant to Sec. 457.120 (a) and (b), as described 
earlier. We do support Tribal/State meetings related to SCHIP and are 
willing to provide technical assistance as needed in this area.
    Comment: Multiple commenters expressed that States have a genuine 
interest in consulting with tribes and their related organizations to 
ensure that all children receive available health coverage, but caution 
against dual State and federal consultations that may result in 
confusion.
    Response: The required interaction between States and Indian Tribes 
and other organizations in the State does not replace the federal 
government's consultation. The Federal government continues to be 
required to consult with Federally recognized Tribes. We have revised 
the language of the regulation to specify ``interaction'' to make clear 
that State actions do not replace the Federal consultation role.
    Comment: One commenter urged that HCFA make federal matching funds 
available at the 100 percent rate for expenditures under separate child 
health programs for services to AI/AN children received through IHS 
facilities, the same rate available for such expenditures under 
Medicaid. According to this commenter, the inequitable treatment of 
separate child health programs will negatively affect the ability of 
such programs to serve more SCHIP-eligible children.
    Response: Unlike Medicaid, title XXI does not provide the authority 
for Federal financial participation (FFP) at a level higher than the 
enhanced title XXI FMAP for any service including those provided at IHS 
or tribally-administered facilities. A statutory change by Congress 
would be required in order to permit 100 percent FFP for SCHIP services 
provided through IHS and tribal facilities.

[[Page 2527]]

15. Civil Rights Assurance (Sec. 457.130)

    In Sec. 457.130, we proposed to require the State plan to include 
an assurance that the State will comply with all applicable 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, 45 CFR part 80, part 84 and 
part 91, and 28 CFR part 35.
    Comment: One commenter noted that this section correctly reminds 
States that they are required to comply with civil rights laws. 
However, the commenter noted that this section of the regulation and 
the preamble should explain that States will violate civil rights laws 
if they fail to provide linguistically appropriate and accessible 
services. The commenter recommended that the final regulation should 
provide more information on each of the listed civil rights statutes 
and should include examples of violations and compliance. Many other 
commenters made similar recommendations.
    Response: Because primary authority within the Department of Health 
and Human Services for enforcement of civil rights requirements is held 
by the Office for Civil Rights, interested parties should contact the 
Office for Civil Rights directly for more information on compliance 
with these requirements. States are required by civil rights law to 
provide linguistically appropriate and linguistically accessible 
services, as described in the response to the following comment.
    Comment: Several commenters noted their view that it is very 
important for HCFA to articulate clearly the States' obligations under 
current law (Title VI, 45 CFR Part 80) to provide linguistic access. 
Three commenters specifically recommended that HCFA, at a minimum, 
should incorporate in this regulation the standards for providing 
linguistic and cultural access to services set forth in a 1998 Guidance 
Memorandum issued by OCR. These commenters also suggested that even 
stronger standards than those provided by the Guidance Memorandum are 
often necessary and recommended that HCFA mandate aggressive language 
access policies by establishing numeric or proportional thresholds, and 
then mandate minimum standards and procedures that must be adopted when 
those thresholds are met. They recommended that HCFA also should give 
consideration to ensuring the cultural and linguistic competency of a 
SCHIP program. They noted that, for example, it cannot be assumed that 
because a worker is bilingual, he or she is sufficiently familiar with 
medical terms and concepts in both languages to provide competent 
translation services.
    Several commenters recommended that the Department should also 
prohibit States and participating contractors from requiring, 
suggesting, or encouraging beneficiaries to use family members or 
friends as interpreters (which should only be done as a last resort), 
and absolutely prohibit the use of minors as interpreters, regardless 
of the enrollee's willingness. In the view of these commenters, there 
also should be explicit instructions to provide clear, translated 
signage and written materials informing applicants and clients of their 
right to receive bilingual or interpreter services. A different 
commenter agreed with the above recommendation and emphasized that 
access to SCHIP-covered services needs to be provided regardless of the 
number of individuals from a given language group who live in a given 
service area and regardless of how obscure the language is. Another 
commenter also suggested that the States and the Department analyze 
gaps in data needed for establishing the above described thresholds, 
and that States and the Department should consider encouraging 
providers to have paid, trained interpreters or bilingual providers on 
staff because face-to-face interpretive services are more effective.
    Yet another commenter also suggested the adoption of minimum 
standards for the provision of SCHIP services to persons with limited 
English proficiency (LEP). This commenter suggested that these minimum 
standards should include: written policies and procedures on the 
development, dissemination and use of medical interpreter services; 
cultural competency standards and training; notice of the right to a 
free interpreter at all points of contact; prohibition on the use of 
minors as interpreters and the use of family and friends as a last 
resort for interpretation and only after being given notice of the 
right to a free interpreter.
    Other commenters suggested that HCFA give examples of how States 
and contracted entities can comply with title VI, such as providing 
bilingual workers selected through formal criteria for translation 
vendors, and linguistically appropriate materials that include 
accommodations (such as oral, audio, or video formats) for limited 
English proficiency speakers who do not read well in their primary 
language or whose languages lack a written version.
    Response: A State's obligation to provide linguistically 
appropriate communication and services flows from a federal fund 
recipient's obligation to ensure equal access under title VI. Further 
discussion of language access is found in the responses to comments on 
Sec. 457.110(a).
    Comment: One commenter is concerned that the section does not 
address the civil rights duties of contractors. Many States contract 
and sub-contract with entities to administer their programs. This 
commenter recommended that Sec. 457.130 explain that contracted 
entities are also required to comply with civil rights laws. In 
addition, the commenter felt the following sections, and the 
discussions of each in the preamble, should emphasize that the 
Department requires contracting entities to comply with civil rights 
protections: Sec. 457.940 (procurement standards); Sec. 457.945 
(certification for contracts and proposals), Sec. 457.950 (contract and 
payment requirements including certification of payment information). 
Other commenters agreed with the recommendation that this section 
should address the civil rights duties of contractors and that the 
other sections in Subpart I should be amended similarly as well.
    Response: A State's contractors, subcontractors and grantees are 
required to comply with all civil rights laws. When the State contracts 
with other entities, the State must ensure that its contractors comply 
with all applicable laws. Because Sec. 457.130 already requires a State 
to provide an assurance that the State will comply with all applicable 
civil rights laws, we do not agree that Subpart I should be amended. 
Section 457.130 already places an obligation on a State to assure that 
it performs SCHIP-related activities in accordance with applicable 
federal laws.
    Comment: A couple of commenters requested that HCFA amend many 
other sections to ``incorporate enrollment assistance.'' Specifically, 
the commenters recommended requiring that States:
     Provide bilingual outreach workers, linguistically 
appropriate materials, and culturally appropriate strategies when 
needed (Sec. 457.90);
     Provide translated oral and written notices, including 
signage at key points of contact informing potential applicants in 
their own language of their right to receive interpreter services free 
of charge (Sec. 457.110);
     Include the use of bilingual workers, translators, and 
linguistically

[[Page 2528]]

appropriate materials for limited English proficiency populations as 
required under title VI, in application assistance (Sec. 457.361(a));
     Take reasonable steps to convey information about notices 
of rights and responsibilities and decisions concerning eligibility in 
a culturally and linguistically appropriate manner to ensure that all 
applicants, including those who are limited English proficiency, are 
given notice of, and understand, their rights, responsibilities, and 
decisions concerning their eligibility (Sec. 457.361(b), (c));
     Provide bilingual workers and linguistically appropriate 
materials regarding grievances and appeals when needed (Sec. 457.365);
     Provide notice to beneficiaries about their rights to 
linguistic access to services (Sec. 457.995).
    Other commenters urged that cultural competency and linguistic 
accessibility requirements be incorporated throughout the provisions on 
information, choice of providers and plans, access to emergency 
services, participation in treatment decisions, respect and 
nondiscrimination, and grievances and appeals.
    Response: A State must comply with civil rights requirements in the 
operation of all elements of its program. We do not agree that other 
sections of the regulation, as suggested by the commenter, should be 
amended since a State must provide an assurance pursuant to 
Sec. 457.130 that the State plan will be conducted in compliance with 
all civil rights requirements.
    Comment: One commenter noted that, without explanation, HCFA 
dropped sexual orientation, genetic information, and source of payment 
as part of the civil rights assurance in its effort to integrate the 
Consumer Bill of Rights. This commenter requested that HCFA include the 
source of payment in the final regulation, as it is a major source of 
discrimination in access to dental services.
    Response: The assurance of compliance with civil rights law seeks 
to assure that the State and its contractors comply with applicable 
civil rights laws and regulations, without specifying particular 
policies, procedures, or actions that would constitute a violation of 
those laws. Generally, to the extent that actions of the State or its 
contractors based on sexual orientation, genetic information or source 
of payment discriminate against individuals based on race, ethnicity, 
color, sex, age or disability, those actions most likely would 
constitute a violation of the civil rights laws and regulations. States 
and organizations should contact the Office for Civil Rights (OCR) for 
more information regarding specific prohibited actions under the civil 
rights laws and regulations enforced by OCR.
    Comment: One commenter asked whether States will be able to sign 
the civil rights assurance if HCFA implements Sec. 457.125 regarding 
cost sharing for AI/AN children.
    Response: As further discussed in Sec. 457.535, the exemption of 
AI/AN families from cost sharing is consistent with title VI of the 
Civil Rights Act of 1964. Therefore, the implementation of Sec. 457.125 
will not affect a State's ability to provide an assurance that it will 
comply with applicable civil rights requirements.

16. Assurance of Compliance With Other Provisions (Sec. 457.135)

    In accordance with section 2107(e) of the Act, we proposed 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).
    Section 2107(e)(2)(A) of the Act also provides that section 1115 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. In the 
preamble to the proposed rule, we discussed in detail the extent to 
which waivers of both title XIX and title XXI provisions should be 
granted under SCHIP. Specifically, we stated that 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 grant waivers under section 1115 
before States have experience in operating their new title XXI programs 
and can effectively design and monitor the results of demonstration 
proposals. We stated that 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 SCHIP experience and has conducted 
an evaluation of that experience. We invited comments on the best 
approach to considering section 1115 waivers of title XXI provisions.
    We noted that because both the Federal government and the States 
have substantial experience in administering title XIX, we believed 
that we were in a position to consider and grant waivers of title XIX 
provisions even when the demonstration project involves the SCHIP-
related enhanced match. We stated that we would consider a request for 
section 1115 waivers of title XIX provisions applicable to Medicaid 
expansion programs without any additional experience with the program.
    We only received comments in this section related to our statements 
in the preamble regarding consideration of section 1115 demonstrations. 
Therefore, we are implementing the above described regulatory 
provisions as set forth in the proposed rule. We will be considering 
those comments as we develop our policies on section 1115 demonstration 
projects under title XXI.

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 sources of the 
non-Federal share of plan expenditures, including any requirements for 
cost sharing by enrollees. We proposed in Sec. 457.140 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 (including any 
requirements for cost sharing by beneficiaries) for a 3-year period. We 
also proposed to require that an amended budget included in a State 
plan amendment include the required description for a 3-year period. We 
proposed 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.
    Please note that additional comments on budget, particularly 
related to State plan amendments, are addressed in the comments and 
responses to Sec. 457.60.
    Comment: One commenter believed that budget issues did not 
necessarily tie well with the submittal of plan amendments. For 
example, a State may go several years without submitting a plan 
amendment. Several commenters suggested that budget data would best be 
gathered through the annual reporting process through which States are 
required to update budget estimates on a yearly basis.

[[Page 2529]]

    Another commenter stated that the submission of a three-year 
budget, to the extent that it requires specific budget items, has the 
potential for being burdensome. This commenter, along with another, 
expressed that a two-year budget estimate should be sufficient for 
federal planning purposes. One State indicated that it operates on an 
annual budgetary cycle and that all budgets are developed by the 
legislature and approved by the Executive branch annually, so the State 
does not have any legal authority to develop three-year budget 
projections.
    Response: We agree with the first commenters' suggestion and have 
reconsidered the requirement at proposed Sec. 457.140 that 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 three-year 
period. We have revised Sec. 457.140 to require that the State plan or 
plan amendment include a budget that describes the State's planned 
expenditures for a one-year period. Furthermore, because we are 
requiring that the budget be updated periodically through the annual 
report and through quarterly financial reporting, we have revised the 
requirement at proposed Sec. 457.60(b), (now Sec. 457.60(d)) to require 
a one-year budget only with State plan amendments that have a 
significant budgetary impact. Examples of these types of amendments 
would be those that related to eligibility, as required by 
Sec. 457.60(b)(1), or cost sharing as required by Sec. 457.60(b)(6) or 
benefits as required by Sec. 457.60(b)(4). For example, if the 
amendment added or dropped a package of dental benefits that would have 
an impact on expenditures, the State would need to submit an amended 
budget with the amendment. The description of the budget must be 
submitted in accordance with Sec. 457.60(d) and must continue to meet 
the requirements of Sec. 457.140(a) and (b). The changes to these 
provisions will relieve States from having to provide budget 
descriptions with all State plan amendments. At the same time, we will 
continue to require a description of planned expenditures for a three-
year period each year through the annual report from every State with 
an approved State plan.
    Because States have up to three years to spend each annual 
allotment, a three-year budget is useful to show if States are planning 
to use their unused allotments in the succeeding two fiscal years and 
if they, therefore, anticipate a short fall in Federal funding. We 
realize that a State must base the required information on projections 
and that the budget projections submitted to HCFA are not approved by a 
State's legislature. However, it is important to have this information 
to ensure the State has adequately planned for its program and to 
analyze spending of the allotments.

18. HCFA Review of State Plan Material (Sec. 457.150)

    Section 2106 of the Act provides the Secretary of 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. We also 
described this delegation of authority at proposed Sec. 457.150(c).
    Under the authority of section 2106 of the Act, we proposed at 
Sec. 457.150(a) to specify that HCFA reviews, approves and disapproves 
all State plans and plan amendments. We noted in the preamble to the 
proposed regulation that the Center for Medicaid and State Operations 
within HCFA has the primary responsibility for administering the 
Federal aspects of title XXI. We also noted therein that we would 
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. Consistent with the Department's strategy, the 
current State plan and plan amendment review process involves 
collaboration with other agencies within the Department and 
Administration as well. The approval or disapproval of all State plans 
or amendments presently requires consensus among all of the 
participating Department components.
    Section 2106 does not speak of partial approval or disapproval of a 
State plan or plan amendment. Thus, at Sec. 457.150(b) we proposed that 
HCFA approves or disapproves the State plan or plan amendment only in 
its entirety. We noted in preamble to the proposed regulation that 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. In Sec. 457.150(d), we proposed that the HCFA 
Administrator designate an official to receive the initial submission 
of a State plan. In Sec. 457.150(e), we proposed that the HCFA 
Administrator designate an individual to coordinate HCFA's review for 
each State that submits a State plan.
    Comment: Many commenters questioned the necessity of approving or 
disapproving a State plan or amendment only in its entirety as provided 
under proposed Sec. 457.150(b). In the opinion of these commenters, 
this provision may detrimentally affect what States submit. In these 
commenters' view, even though a State may have an innovative idea that 
has come out of the development and public consultation process, it may 
be reluctant to ``push the envelope'' with the idea for fear that it 
may hold up a larger state plan or plan amendment. If only a single 
provision is preventing approval, it would be more effective to approve 
the rest of the submission and then work with the State on the 
questionable provision. One of these commenters noted their view that 
this requirement limits the State flexibility that Congress envisioned 
in passing title XXI.
    A different commenter believed this provision to be 
administratively burdensome because it encourages States to submit each 
component of an amendment separately rather than one complete document 
that provides a more comprehensive picture of the program. This 
commenter also requested that HCFA approve sections of a plan amendment 
and allow the State to implement the changes while other sections are 
under review. Yet another commenter also indicated their belief that 
the approval process should have more flexibility. If a State plan or 
plan amendment can be implemented without inclusion of that part, this 
commenter believes that the entire plan or plan amendment should not be 
held up for that one small part. Another State concurred with this 
view. One more commenter says that the provision may be an impediment 
to, or cause delay in, making innovative changes to a State's program. 
In this commenter's view, States will be forced to prepare amendments 
in a piecemeal fashion, causing more work and a greater administrative 
burden. It would be more efficient for States to be allowed to submit 
comprehensive program changes that HCFA can approve or deny in part 
according to this commenter.
    Response: HCFA approves or disapproves the State plan or plan 
amendment only in its entirety because section 2106 does not permit the 
Secretary to partially approve or disapprove a State plan or plan 
amendment. Additionally, it would be administratively burdensome for 
HCFA to track and monitor only portions of approved State plans or plan 
amendments. However, States may

[[Page 2530]]

withdraw or change portions of a proposed State plan or plan amendment 
at any time during the review process. States need not submit 
components of a State plan amendment separately, because States may 
withdraw portions of a pending State plan amendment that may lead to 
delay in its approval or disapproval of the amendment. Additionally, 
States have the option to split a single State plan amendment into 
separate amendments during the review process. Given these options, we 
do not agree that this provision necessarily limits State flexibility 
or increases administrative burden and we will work with States to 
prevent this from occurring.
    Comment: Several commenters asserted that the regulations should 
not provide for review of whether previously approved State plan 
material complies with title XXI requirements, unless federal law or 
regulations change. These commenters read section 2106 to mean that, 
once a State plan provision has been approved, the provision cannot be 
revoked unless the statute is amended. These commenters specifically 
argued that new regulations or guidance documents do not provide a 
basis for revoking approval of a State plan provision. And these 
commenters assert that disturbing previously approved State plan 
provisions could disrupt the stability of programs and continuity of 
care for children. Some commenters, while generally agreeing, indicated 
that, at a minimum, States should have a reasonable time to come into 
compliance.
    Response: We disagree that the scope of HCFA's authority to 
determine whether previously approved material continues to meet the 
requirements for approval should be restricted to changes in statutory 
or regulatory requirements. Sections 2101(b) and 2101(a)(1) require 
State plans to be consistent with the requirements of title XXI. 
Accordingly, we base approval or disapproval of State plan and plan 
amendments on relevant Federal statutes, including title XXI and title 
XIX, regulations, and guidelines issued by HCFA to aid in the 
interpretation of the statutes and regulations. Regulations and 
guidelines are issued by HCFA in order to implement relevant statutes.
    States may continue to rely on approval of a State plan or plan 
amendment and the receipt of federal matching funds associated with 
such approval. States will be given an opportunity to correct any parts 
of the State plan that no longer meet the conditions for approval. 
Compliance actions will not be imposed without the opportunity for 
correction afforded by section 2106(d)(2) of the Act and subpart B of 
part 457 implementing that section of the Act.

19. Notice and Timing of HCFA Action on State Plan Material 
(Sec. 457.160)

    Section 2106(c) sets forth requirements relating to notice and 
timing of State plan material. In Sec. 457.160(a), we proposed that the 
HCFA Administrator 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 proposed to require that 
written notification be sent for approvals as well.
    In Sec. 457.160(b)(2), we proposed that the State plan or plan 
amendment be considered received on the day the designated official or 
individual, as designated pursuant to Sec. 457.150(d) and (e), receives 
an electronic, fax or hard copy of the complete plan or plan amendment. 
The complete plan includes any referenced documentation, such as 
attachments, benefits plans or actuarial analyses.
    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 proposed to measure the 90-day review period 
using calendar days. The 90-day review period would not expire until 
12:00 a.m. eastern time on the 91st countable calendar day after 
receipt (except that the 90-day period cannot stop or end on a non-
business day), as calculated using the rules set forth in the proposed 
regulation and discussed below.
    Section 2106(c) sets forth requirements relating to notice and 
timing of action on State plan material. In Sec. 457.160(b)(3), we 
proposed 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. This written request 
will be considered sent on the day that the letter is signed and dated 
except if that day is a weekend or Federal holiday, in which case the 
review period will stop on the next business day. We proposed 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 5:00 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. We 
proposed 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 
proposed that HCFA may send written notice of its need for additional 
information (and therefore, stop the 90-day review period) as many 
times as necessary to obtain the necessary information for making a 
final decision whether to approve the State plan or plan amendment.
    Comment: One commenter supported HCFA's proposal to send written 
notification of State plan approvals even though the statute requires 
only written notification of disapprovals.
    Response: We note the commenter's support.
    Comment: One commenter agreed with HCFA's use of 90 calendar days. 
One commenter proposed that some allowance should be made for expedited 
approval of State plan amendments because SCHIP programs are such a 
high priority for the States and the federal government. This commenter 
expressed the opinion that allowing for more than 90 days each time 
federal approval is needed, even for simple changes, is a deterrent to 
quick, innovative program adjustments. They recommended that HCFA 
should strive for expeditious responses to State plan amendments and, 
whenever possible, should take action in fewer than 90 days.
    Response: We appreciate the support of the first commenter. As for 
the expedited approval of State plan amendments, section 2106(c)(2) of 
the Act provides that 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. We make every attempt to expedite responses to 
State plan amendments and recognize their importance to the States and 
the Federal government. The 90-day time frame is the outer time limit 
for action; it does not preclude action in a shorter time period and we 
will strive to take quicker action whenever possible.
    Comment: One commenter proposed that the State plan or amendment be

[[Page 2531]]

considered received by HCFA the day it is delivered to the HCFA office 
rather than the day it is received by a specified individual. In this 
commenter's view, the State should not be penalized for delays in 
HCFA's internal delivery system. In this State's case, two weeks after 
the amendment was delivered to the HCFA Central Office, the Regional 
Office reported to the State that the amendment had not been received 
by the Central Office. The State was able to obtain a signed cartage 
statement indicating that it had been delivered to the office and 
thereby protected the submission date.
    Response: We disagree with the commenter's suggestion that a State 
plan or plan amendment be considered received by HCFA on the day is it 
delivered to HCFA. As set forth in Sec. 457.160(b)(2), a State plan or 
plan amendment is considered received on the day the designated 
individual or official receives an electronic, fax or paper copy of the 
complete material. This is intended to simplify administration of the 
program. At this point in the program, each State has received 
correspondence notifying it of the identity of the designated 
individual. If the designated individual 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. However, in cases where 
States send an amendment to an individual or address other than the one 
designated, HCFA cannot begin the review until the amendment is 
received by the designated individual.
    Comment: One commenter disagreed with this provision that provides 
that if HCFA requests additional information, the 90 day review period 
stops but resumes on the next calendar day after HCFA receives all of 
the requested information. The commenter recommended that HCFA adopt 
the approach used in Medicaid under 42 CFR 430.16(a)(2) which states 
that if HCFA requests additional information, the 90 day review period 
for HCFA action on the plan or plan amendment begins on the day it 
receives that information. The commenter reasoned that under proposed 
Sec. 457.150(b), ``HCFA approves or disapproves the State plan or plan 
amendment only in its entirety''. Yet under proposed 
Sec. 457.160(b)(3), if HCFA has determined that additional information 
is needed, HCFA will have fewer than 90 days to review that information 
once it is submitted. Although this commenter indicated that it 
understands the strong interest in moving quickly to implement SCHIP, 
the commenter saw no reason to accelerate a review process when the 
initial State submission was inadequate or incomplete. The commenter 
felt that using the current Medicaid standard would promote consistency 
and ensure that HCFA has sufficient time for review.
    Response: We are committed to expeditious review of State plans and 
plan amendments. The process set forth in Sec. 457.160(b)(3), that the 
90 day review period resumes on the next calendar day after HCFA 
receives all requested information, will help ensure an expeditious 
review. We are not using the review period policies in effect under 
Medicaid, as the Medicaid statute differs from title XXI in this regard 
and we believe the speedier and more flexible process described in 
Sec. 457.160(b)(3) will more effectively implement title XXI 
objectives. To allow us the maximum review time within the review 
period, we have set forth rules that the review period be started (or 
restarted) on the first full day following receipt of the plan (or 
additional information) and the review period will resume 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 or any time on a non-business 
day.
    Comment: One commenter requested that HCFA make every effort to 
request all necessary information initially so that multiple stoppages 
of the 90 day clock are less likely to occur. Another commenter wrote 
that HCFA should not have unlimited ability to stop the clock.
    Response: HCFA's formal request for 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 continue 
to make every effort to identify those issues for which we need 
additional information early in the review process. However, many times 
a State's response will trigger further questions. By allowing the 
review period to be stopped as many times as necessary to obtain the 
information needed to make a decision, States are provided ample 
opportunity to demonstrate compliance with the requirements of the 
program.

20. Withdrawal Process (Sec. 457.170)

    In Sec. 457.170, we proposed to allow a State to withdraw its State 
plan or State plan amendment at any time during the review process by 
providing written notice to HCFA of the withdrawal. This proposed 
process is consistent with the process for withdrawal of a proposed 
Medicaid State plan amendment.
    Comment: A number of commenters suggested that a State be allowed 
to withdraw any portion of a proposed submitted plan (and not just a 
whole plan or amendment) in order to expedite the approval process when 
a limited number of its provisions are slowing down the plan review 
process.
    Response: In our review of State plans and plan amendments, we have 
allowed and will continue to allow a State to withdraw a portion of its 
proposed State plan or proposed plan amendment. In order to clarify 
this provision, we have revised Sec. 457.170(a) to require that a State 
may withdraw its proposed State plan or proposed plan amendment, or any 
portion of its State plan or plan amendment, at any time during the 
review process by providing written notice to HCFA of the withdrawal.
    Comment: One commenter recommended that the State be required to 
provide public notice and a meaningful opportunity for public input 
prior to any withdrawal.
    Response: We encourage States to involve the public in all phases 
of the program, including, to the extent feasible, prior to withdrawal 
of a proposed State plan amendment.
    Comment: One commenter suggested that we clarify that a State may 
withdraw its approved State plan at any time if the State chooses to 
discontinue its program.
    Response: A State may withdraw a proposed State plan or plan 
amendment by providing written notice to HCFA of the withdrawal in the 
form of a State plan amendment. We have added a provision at 
Sec. 457.170(b) to clarify that a State may request withdrawal of an 
approved State plan by submitting a State plan amendment to HCFA as 
required by Sec. 457.60. Because withdrawal of a State plan is a 
restriction on eligibility, a State plan amendment to request 
withdrawal of an approved State plan must be submitted in accordance 
with requirements set forth in Sec. 457.65(b), including those related 
to the provision of prior public notice. Although HCFA does not have 
authority to deny such a State plan amendment request, this requirement 
conforms with the requirements of section 2106(b)(3) relating to State 
plan amendments that restrict eligibility. We note that withdrawal of a 
Medicaid expansion program may also require an amendment to the title 
XIX State plan.

21. Administrative and Judicial Review of Action on State Plan Material 
(Sec. 457.190)

    Under Section 2107(e)(2)(B) of the Act, a State dissatisfied with 
the Administrator's action on State plan

[[Page 2532]]

material has a right to administrative review and judicial review. In 
Sec. 457.190(a), we proposed a procedure for administrative review. 
Specifically, we proposed to 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. Additionally, we proposed 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 also proposed that HCFA 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, HCFA will pay the State a lump sum equal to any 
funds incorrectly denied.
    Comment: One commenter supported the proposed procedure for 
administrative and judicial review.
    Response: We note the support of the commenter.

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

1. Basis, Scope, and Applicability (Sec. 457.300)

    This subpart interprets and implements provisions of section 2102 
of the Act which relate to eligibility standards and methodologies and 
to coordination with other public health insurance programs; 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. We proposed that the 
requirements of this subpart apply to a separate child health program 
and, with respect to the definition of targeted low-income child only, 
to a Medicaid expansion program.
    As discussed in the response to the first comment below, we have 
removed from the proposed definition of ``optional targeted low income 
child'' for purposes of a Medicaid expansion the cross reference to 
Sec. 457.310(a) in subpart C and have revised the definition of 
``optional targeted low-income child'', which is now located at 
Secs. 435.4 and 436.3 of this chapter. Comments regarding optional 
targeted low-income children for purposes of a Medicaid expansion 
program are addressed in the preamble to subpart M. Conforming changes 
have been made to the definition of ``targeted low-income child'' at 
Sec. 457.310. This subpart now applies only to a separate child health 
program.
    We received no comments on Sec. 457.300 and, with the exception of 
the one change noted, are implementing it as proposed. General comments 
on subpart C are discussed in detail below.
    Comment: We received two requests that the Medicaid regulations 
clarify the definition of ``optional targeted low-income child.'' The 
commenters are of the opinion that the cross-reference to the title XXI 
regulations is confusing. They note that some provisions in title XXI, 
such as permitting States to limit eligibility by geographic region, do 
not apply in Medicaid.
    Response: We accept the commenters' request to clarify the 
definition of optional targeted low-income child in the Medicaid 
regulations, rather than cross-reference Sec. 457.310(a). In proposed 
Sec. 435.229(a), the cross-reference to Sec. 457.310(a) incorporated 
provisions of the definition of targeted low-income child that only 
apply in a separate child health program. We have removed the cross-
reference to Sec. 457.310(a) and added a specific Medicaid definition 
of optional targeted low-income child in Sec. 435.4 (and in Sec. 436.3 
for Guam, Puerto Rico, and the Virgin Islands).
    Comment: We received a number of comments recognizing that certain 
policies were statutory and urging HCFA to seek statutory changes. The 
suggested changes included the following:
    Allow a State the option to keep a pregnant teen enrolled in a 
separate child health program even if she becomes eligible for Medicaid 
as a pregnant woman.
    Allow States to deem an infant eligible for a separate child health 
program for a full year if the birth is covered by a separate child 
health program.
    Response: We will take these suggestions into consideration in 
developing future legislative proposals and appreciate the commenters' 
recognition that these issues are driven by the statute.
    Comment: Several commenters were concerned about the interaction of 
various public programs. Two urged HCFA to reiterate the importance of 
ensuring the Medicaid eligibility is not tied to eligibility for 
Temporary Assistance for Needy Families (TANF) under the Personal 
Responsibility and Work Opportunity Reconciliation Act (PRWORA).
    Response: Under the welfare reform provisions of PRWORA, the link 
between Medicaid and cash assistance (previously given as Aid To 
Families with Dependent Children, or AFDC) was severed. This 
``delinking'' of Medicaid from cash assistance assured Medicaid 
eligibility for low-income families regardless of whether the family is 
receiving welfare payments, and offers States new opportunities to 
provide a broader range of low-income families health care coverage. In 
an effort to help States better understand their opportunities and 
responsibilities under the law, DHHS, HCFA, and the Administration on 
Children and Families (ACF) have issued substantial guidance on how to 
implement the delinking provisions, including fact sheets, letters to 
State Medicaid and TANF Directors, updates to the State Medicaid 
Manual, and the publication of a 28-page, plain-English guide entitled, 
``Supporting Families in Transition: A Guide to Expanding Health 
Coverage in the Post-Welfare Reform World.'' State Medicaid Director 
letters dated October 4, 1996, February 5, 1997, April 1, 1997, 
September 22, 1997, and August 17, 1998 dealt with the implementation 
of the section 1931 eligibility category; letters dated February 6, 
1997 and April 22, 1997 discussed redetermination procedures; and eight 
additional letters covered immigration, outreach and enrollment, MEQC 
errors, and the availability of the $500 million delinkage fund. Last 
fall, at the direction of President Clinton, HCFA conducted 
comprehensive on-site visits in all States to review State TANF and 
Medicaid application and enrollment policies and procedures. HCFA is 
currently finishing the ensuing reports and working with the States to 
address problems that have been identified. An April 7, 2000 letter to 
State Medicaid Directors requires States to take steps to identify and 
reinstate individuals who have been terminated improperly from Medicaid 
and to ensure that their computer systems are not improperly denying or 
terminating persons from Medicaid. The letter also provides important 
guidance regarding redetermination. A series of Questions and Answers 
concerning this letter can be found under the heading ``Welfare Reform 
and Medicaid'' on HCFA's web

[[Page 2533]]

site at: http://www.hcfa.gov/medicaid/medicaid.htm.
    Based on the findings of HCFA's reviews and the reviews that States 
are undertaking to comply with the April 7, 2000 guidance, HCFA is 
providing further guidance and technical assistance to States in the 
areas of application and notice simplification, outreach to eligible 
families, and modification of computer systems, among others. HCFA, in 
partnership with ACF, the Food and Nutrition Service, the American 
Public Human Services Association, and the National Governors 
Association, is also disseminating best practices so that States can 
assist one another as they move forward to correct problems and improve 
participation among eligible low-income families.
    Comment: We received one comment urging HCFA to include information 
about presumptive eligibility under a separate child health program in 
the preamble to the SCHIP financial regulation. Another urged HCFA to 
encourage States to provide presumptive eligibility for children as 
this is particularly important to children experiencing a mental health 
crisis.
    Response: States have the authority to implement a presumptive 
eligibility procedure under its separate child health program. This was 
implicit under title XXI as originally enacted and now, with the 
enactment of the Benefits Improvement and Protection Act of 2000(BIPA) 
(Pub. L. 106-554), the authority to implement presumptive eligibility 
procedures in separate child health programs is explicit.
    Under section 803 of BIPA, States have the option to establish a 
presumptive eligibility procedure and, consistent with the flexibility 
now granted States under the Medicaid presumptive eligibility option 
(see section 708 of BIPA, amending section 1920A(b)(3)(A)(i) of title 
XIX), States have broad discretion to determine which entities shall 
determine presumptive eligibility, subject to the approval of the 
Secretary. For example, States can rely on health care providers, child 
care providers, WIC, or Head Start centers, or the contractors that may 
be doing the initial SCHIP/Medicaid eligibility screen.
    Under the presumptive eligibility established under Medicaid and 
carried over to SCHIP under the BIPA legislation, a family has until 
the end of the month following the month in which the presumptive 
eligibility determination is made to submit an application for the 
separate child health program (or the presumptive eligibility 
application may serve as the application for the separate child health 
program, at State option). If an application is filed, the presumptive 
eligibility period continues until the State makes a determination of 
eligibility under the separate child health program (subject to the 
Medicaid screening requirements). In accordance with section 457.355, 
if a child enrolled in a separate child health program on a presumptive 
basis is later determined to have been eligible for the separate child 
health program, the costs for that child during the presumptive 
eligibility period will be considered expenditures for child health 
assistance for targeted low-income children and subject to the enhanced 
FMAP. If the child is found to have been Medicaid-eligible during the 
period of presumptive eligibility, the costs for the child during the 
presumptive eligibility period can be considered Medicaid program 
expenditures, subject to the appropriate Medicaid FMAP (the enhanced 
match rate or the regular match rate, depending on whether the child is 
a optional targeted low-income child).
    We have revised the policy stated in the preamble of the proposed 
rule regarding children who are enrolled through presumptive 
eligibility, but who are later not found to be eligible under the 
separate child health program or Medicaid. In the proposed rule, we 
noted that the costs for coverage of such children during the 
presumptive period must be claimed as SCHIP administrative 
expenditures, subject to the enhanced match and the 10 percent cap. 
BIPA, however, authorizes presumptive eligibility under separate child 
health programs in accordance with section 1920A of the Act, and the 
statute now allows health coverage expenditures for children during the 
presumptive eligibility period to be treated as health coverage for 
targeted low-income children whether or not the child is ultimately 
found eligible for the separate child health program, as long as the 
State implements presumptive eligibility in accordance with section 
1920A and section 435.1101 of this part. This preserves State 
flexibility to design presumptive eligibility procedures and allows 
States that adopt the presumptive eligibility option in accordance with 
section 435.1101 to no longer be constrained by the 10 percent cap.
    Comment: One commenter thought that greater coordination among 
HCFA, the Office of Child Support Enforcement (OCSE), State child 
support agencies, and SCHIP stakeholders would increase the likelihood 
of children receiving the best available health care. The commenter 
noted that many children who qualify for SCHIP are members of single-
parent families and could benefit from the services of the child 
support program. Conversely, SCHIP programs can ensure that children 
have access to quality health care when a noncustodial parent's 
employer does not offer health insurance, the health insurance is 
available only at a prohibitive cost, or it is not reasonably 
accessible to the child. Another commenter suggested that the preamble 
explicitly note the prohibition on denying Medicaid to children on the 
grounds that their parents have failed to cooperate with establishing 
paternity or with medical support enforcement and also highlight that 
States do not need to include questions about noncustodial parents on 
their joint applications, but rather can solicit such information at 
the time that they notify the family of eligibility.
    Response: We agree that it is important that children benefit from 
the services of the child support program. HCFA has issued guidance to 
States under title XIX about the importance of informing families who 
receive Medicaid about available State Child Support Enforcement 
services. We have instructed State Medicaid agencies to coordinate with 
State CSE agencies to ensure that children who could benefit from these 
services receive them. We encourage States to inform families who apply 
for coverage under their separate child health programs about CSE 
services.
    CSE agencies can also serve as a source of information about 
available health care coverage for families who seek CSE services. In 
many cases, families are not able to secure health care coverage 
through a child's absent parent. In such cases, CSE can help the family 
obtain coverage through SCHIP or Medicaid if the State promotes 
coordination between its CSE and child health coverage. Several States 
have reported taking such steps as part of their outreach and 
coordination activities.
    While child support services can provide important support to many 
families, questions about absent parents on a child health application 
can be a barrier to enrollment. Under Medicaid, the recent guidance 
issued to State Medicaid agencies reiterates that cooperation of a 
parent with the establishment of paternity and pursuit of support 
cannot be made a condition of a child's eligibility for Medicaid. 
Moreover, the guidance informs States that they are not required to 
request information about an absent parent on a Medicaid application 
(or a joint Medicaid/separate child health program

[[Page 2534]]

application) that is only for a child and not for the parent.
    Comment: One commenter felt that the eligibility screens and 
information requirements in the proposed regulations went beyond the 
statutory requirements, are excessively burdensome and will make it 
impossible to effectively coordinate with other programs, such as the 
school lunch program, Head Start, or WIC.
    Response: We disagree with the commenter's assertion that the 
regulations have created barriers to enrollment in the SCHIP program. 
We have provided States with considerable flexibility with respect to 
how to meet the requirements of the statute, and have worked in this 
final rule to further expand that flexibility in many cases. The 
statute specifically requires that States screen all applicant children 
for Medicaid eligibility and enroll them in Medicaid if appropriate. To 
that end we have encouraged, and the majority of States have adopted, 
joint applications which significantly decrease the complexity of the 
application and enrollment process. We have permitted States 
flexibility with respect to the design of their applications and their 
application processes, although we encourage States to streamline the 
enrollment process in SCHIP and Medicaid (for example, elimination of 
assets tests, using mail-in applications, minimizing verification 
requirements) to enable families to access coverage under a separate 
child health program or Medicaid as quickly and easily as possible. We 
acknowledge the difficulties that exist in coordinating different 
public programs and have provided flexibility wherever possible; but 
that flexibility is constrained by the statutory provisions that are 
designed to ensure that children are enrolled in the appropriate 
program. States have taken advantage of the flexibility permitted to 
design varied and effective coordination procedures. We are committed 
to working closely with the States to help them implement procedures 
that work effectively for them and to share their ideas and experiences 
with other States.

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 purposes of this subpart, we proposed to define the 
terms ``employment with a public agency,'' ``public agency,'' and 
``State health benefits plan.''
    We proposed to define ``public agency'' to include 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. We proposed to define the term ``employment with 
a public agency'' as employment with an entity under a contract with a 
public agency. The term was intended to include both direct and 
indirect employment because we did not wish to influence or restrict 
the organizational flexibility of State and local governmental units. 
We proposed to 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.
    Comment: Commenters objected to the definition of ``employment with 
a public agency'' as being too inclusive. They noted particular concern 
about the inclusion of ``entities contracting with a public agency'' in 
the definition. Commenters felt the inclusion of this group could 
unfairly deny coverage to children in families who are not State 
employees.
    Response: We are deleting our proposed definition of ``employment 
with a public agency'' in Sec. 457.301. In Sec. 457.310(c)(1)(i), we 
will track the statutory language at section 2110 (b)(2)(B), which 
excludes from eligibility ``a child who is a member of a family that is 
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.'' State law will determine whether parents employed by 
contracting agencies are employed by a public agency and whether their 
children are eligible for health benefits coverage under a State health 
benefits plan. If the State determines that a child is 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, then the child is ineligible for coverage under a separate child 
health program. In addition, we have revised the definition of ``State 
health benefits plan'' to clarify that we would not consider a benefit 
plan with no State contribution toward the cost of coverage and in 
which no State employees participate as a State health benefits plan.

3. State Plan Provisions (Sec. 457.305)

    In accordance with the requirements of section 2102(b)(1)(A) of the 
Act, we proposed to require that the State plan include a description 
of the State's eligibility standards.
    Comment: Several organizations commented that HCFA should require 
States that limit the number of children who can enroll in a separate 
child health program to describe their procedures for deciding which 
children will be given priority for enrollment and how States will 
ensure that equal access is provided to children with pre-existing 
conditions; their processes for discontinuing enrollment if program 
funds are depleted; how they will comply with the prohibition on 
enrolling children at higher income levels without covering children at 
lower income levels; how the waiting lists will be fairly administered. 
The commenters also suggested that we require these States to maintain 
sufficient records to document that favoritism or discrimination does 
not occur in selecting individuals for enrollment. Additionally, 
commenters suggested that Sec. 457.305 or Sec. 457.350, should 
specifically require that a Medicaid screen be conducted before a child 
is placed on a waiting list.
    Response: States are required under Sec. 457.305 to include as part 
of their State plan a description of their standards for determining 
eligibility. We are clarifying in regulation text that this must 
include a description of the processes, if any, for instituting 
enrollment caps, establishing waiting lists, deciding which children 
will be given priority for enrollment. This clarification of the 
regulation text conforms with actual HCFA practice. HCFA has requested 
States that have adopted enrollment caps to describe in their State 
plans their policies for establishing enrollment caps and waiting lists 
and for enrolling children from any waiting lists. We also have added a 
provision at Sec. 457.350(h) requiring that applicants must be screened 
for Medicaid prior to being placed on a waiting list due to an 
enrollment cap. Not doing so would place Medicaid-eligible children on 
a waiting list and undermine a fundamental goal of the statute--to 
enroll children in health insurance programs for which they are 
eligible. In this case, arrangements must be made for the joint 
application to be processed promptly by the Medicaid program.
    States must afford every individual the opportunity to apply for 
child health assistance without delay in accordance with Sec. 457.340, 
and facilitate Medicaid enrollment, if applicable, in accordance with 
Sec. 457.350, prior to placing a child on a waiting list for a separate 
child health program. We have amended the language of Sec. 457.305 
(relating to State

[[Page 2535]]

plan requirements) to reflect this requirement.
    If, after a State plan is approved by HCFA, the State opts to 
restrict eligibility by discontinuing enrollment, by establishing an 
enrollment cap, or by instituting a waiting list, the State must submit 
a State plan amendment requesting approval for the eligibility changes 
as required by Sec. 457.60(a). Because we believe these changes in 
enrollment procedures constitute restrictions of eligibility, the 
amendment must be submitted in accordance with the requirements at 
Sec. 457.65(d). With respect to public input, HCFA also requires in 
Sec. 457.120 that States ensure ongoing public involvement once the 
State plan has been submitted.

4. Targeted Low-Income Child (Sec. 457.310)

    In accordance with Sec. 2110(b) of the Act, we proposed to define a 
targeted low-income child as a child who meets the eligibility 
requirements established in the State plan pursuant to Sec. 457.320 as 
well as certain other statutory conditions specified in this section. 
At Sec. 457.310(b), we set forth proposed standards for targeted low-
income children that relate to financial need and eligibility for other 
health coverage, including coverage under a State health benefits plan. 
In addition, we set forth exclusions from the category of targeted low-
income children.
    With regard to financial need, we proposed 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. We 
left States the discretion to define ``income'' and ``family'' for 
purposes of determining financial need.
    We note that we have modified Sec. 457.310(b)(1) to clarify the 
definition of targeted low-income child. We made technical corrections, 
in accordance with section 2110(b) to indicate that a targeted low-
income child may reside in a State that does not have a Medicaid 
applicable income level and that a targeted low-income child may have a 
family income at or below 200 percent of the Federal poverty line for a 
family of the size involved, whether or not the State has a Medicaid 
applicable income level. In addition, we have revised proposed 
Sec. 457.310(b)(1)(iii), now Sec. 457.310(b)(1)(iii)(B), for purposes 
of clarity. A targeted low-income child who resides in a State that has 
a Medicaid applicable income level, may have income that does not 
exceed the income level that has been specified under the policies of 
the State plan under title XIX on June 1, 1997. This provision 
effectively allows children who became eligible for Medicaid as a 
result of an expansion of Medicaid that was effective between March 31 
and June 1, 1997 to be considered targeted low-income children. It also 
means that children who were below the Medicaid applicable income level 
but were not Medicaid eligible due to financial reasons that were not 
related to income (e.g. due to an assets test) can be covered by SCHIP.
    With regard to other coverage, we proposed that a targeted low-
income child must not be found 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 proposed that 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.
    With regard to exclusions, we proposed at Sec. 457.310(c)(1) that a 
targeted low-income child may not be a member 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 so long as 
more than a nominal contribution to the cost of the health benefit plan 
is available from the State or public agency with respect to the child. 
We proposed to set the nominal contribution at $10.
    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 proposed to use the Medicaid definition of IMD set forth at 
Sec. 435.1009, which provides, in relevant 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.''
    We proposed to apply the IMD eligibility exclusion any time an 
eligibility determination is made, including the time of application or 
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 coverage under a separate child health program. If a 
child who is enrolled in a separate child health program subsequently 
requires inpatient services in an IMD, the IMD services would be 
covered to the extent that the separate program includes coverage for 
such services. However, eligibility would end at the time of 
redetermination if the child resides in an IMD at that time. We stated 
that we were reviewing the IMD policy and considering various options. 
We solicited comments on an appropriate way to address this issue.
    We proposed to use the Medicaid definition of ``inmate of a public 
institution'' set forth at Sec. 435.1009. Accordingly, we stated in the 
preamble to the proposed regulation that when determining eligibility 
for a separate child health program, 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. We also stated in the preamble to the proposed regulation 
that a facility is a public institution if it is run, or 
administratively controlled by, a governmental agency.
    Under Medicaid, FFP is not available for medical care provided to 
inmates of public institutions, except when the inmate is a patient in 
a medical institution. We proposed to allow this same exception 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 that 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 that is not part of the penal 
system), would be eligible for a separate child health program (subject 
to meeting other 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 penal institution, the 
child again would be excluded from eligibility for the separate child 
health program.
    Comment: Numerous commenters supported the proposed policy that 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 and 
several others

[[Page 2536]]

requested further clarification. A third group of commenters also 
recommended that States should be allowed to determine when a plan is 
inaccessible.
    Response: The intention of the ``reasonable access to care'' 
standard is to provide relief for children who are covered by a health 
maintenance organization or managed care entity not in close geographic 
proximity through the employer of a non-custodial parent and cannot get 
treatment in the locality in which they reside due to service area or 
other restrictions. HCFA recognizes that it is often difficult for such 
children to be removed from coverage under their non-custodial parent's 
health plan, because it is often court-mandated coverage and the 
custodial parent may not be able to terminate such coverage. We 
therefore defined these children as lacking ``reasonable access to 
care.'' While we recognize that health coverage that is unaffordable 
due to high premiums or deductibles also presents issues of access, the 
statute precludes children who are covered under a group health plan or 
under health insurance coverage (as defined under HIPAA and reflected 
in our definitions) from receiving coverage under a separate child 
health program. We note that some States have established eligibility 
for children whose families have dropped such unaffordable coverage and 
it is within their discretion to adopt such procedures. However, we 
believe that to permit children who are currently enrolled in a group 
health plan or other health insurance coverage, other than children who 
do not have reasonable geographic access to coverage, to enroll in a 
separate child health program would contradict the statute. We have 
revised Sec. 457.310(b)(2)(ii) to clarify that a child would not be 
considered covered under a group health plan if the child did not have 
reasonable geographic access to care under that plan.
    Comment: Several commenters requested additional guidance on 
whether children covered under a plan which provides limited benefits 
only, such as policies covering only school sports injuries, vision, 
dental, or catastrophic care, or those with high deductibles, have 
access to insurance. One commenter requested that HCFA allow States to 
consider a child's access to dental services when making eligibility 
determinations. Clarification also was requested on whether school 
health insurance is considered creditable coverage.
    Response: Section 2110(b)(1)(C) of the Act excludes from the 
definition of targeted low-income children a child who is ``covered 
under a group health plan or under health insurance coverage'' as those 
terms are defined in Sec. 102 of the Health Insurance Portability and 
Accountability Act (HIPAA), which added section 2791 to the Public 
Health Service Act (PHSA), 42 U.S.C. 300gg-91(c). HIPAA and the 
implementing regulations (found at 45 CFR 146.145 and 148.220), in 
turn, exempt certain ``excepted benefits'' from some of the 
requirements of HIPAA to which group health plans and group health 
insurance are otherwise subject. Consistent with this treatment under 
HIPAA, a group health plan or group health insurance which meets the 
definition of ``excepted benefits'' also will not be considered as a 
group health plan or health insurance coverage for eligibility 
purposes. Under section 2110(b)(1)(C) of title XXI, a child with 
coverage under a group health plan or group health insurance coverage 
that is included under ``excepted benefits'' coverage may be provided 
with SCHIP funds, provided the child meets the other eligibility 
requirements of the separate program.
    Policies that are limited to dental or vision benefits are among 
the ``excepted benefits'' identified in HIPAA. Therefore, a child with 
coverage under a limited-scope dental or vision plan would not be 
precluded from receiving coverage under a separate child health plan. 
Similarly, school health insurance policies with very restrictive 
coverage--for example, coverage limited to treating an injury incurred 
in a school sports event--would not preclude Title XXI eligibility, so 
long as they meet the definition of ``excepted benefits'' in HIPAA.
    Comment: Two commenters requested that HCFA allow children to 
receive vision or dental services through a separate child health 
program when these services are not provided by the child's current 
health plan.
    Response: With respect to coverage of vision and dental services, 
the statute does not permit States to provide coverage to children 
under separate child health programs when these children have other 
health insurance coverage, as defined by HIPAA even when coverage for 
certain services is limited. States that are concerned about ensuring 
that children receive such services may wish to consider expanding 
eligibility under Medicaid, which does not exclude children with other 
health insurance coverage from eligibility, or providing for such 
coverage with State-only funds.
    Comment: One commenter noted that the exclusion of children of 
public employees places an additional administrative burden on States 
because they must verify whether the child has access to the State 
employee benefit system before a child may enroll in a separate child 
health program. Commenters also pointed out that under State welfare 
reform programs, many former welfare recipients are placed in entry-
level State positions and State employee coverage is not necessarily 
affordable for them.
    Response: We recognize that premiums and deductibles may present 
barriers to access to health coverage for children eligible for State 
health benefit coverage. However, the statute specifically prohibits 
coverage under a separate child health program of children who are 
eligible for health benefits coverage under a State health benefits 
plan. We have provided greater flexibility on this issue in the 
regulation, but we believe any further flexibility would violate the 
statutory prohibition. The verification requirements are subject to 
State discretion and the State may accept the individual's statement 
about eligibility for health benefits coverage under a State health 
benefits plan. Therefore, we do not agree that verification 
requirements necessarily create an undue burden on States. In any 
event, we do not have the statutory authority to permit eligibility for 
children of public employees who have access to coverage under a State 
health benefits plan.
    Comment: Many commenters requested that HCFA clarify the proposed 
nominal contribution of $10 for children of public employees by 
indicating whether this is an amount per child, per family, per month, 
or per year. Other commenters offered alternative suggestions for what 
could be considered ``nominal,'' including: allow flexibility among 
states; $15-$20; 5% or 10% of the family's income or a standard related 
to their ability to pay; 25-50% of the child's premium; 50% of the cost 
of the child's coverage; or 60% of the cost of family coverage 
(consistent with the standard set for employer-sponsored insurance). 
One commenter requested clarification on how a nominal State 
contribution of $10 could be verified.
    Response: We agree that we were unclear in the proposed regulation 
regarding the definition of nominal contribution and have clarified in 
the final regulation that the $10 contribution is per family, per 
month. While we appreciate the numerous suggestions submitted by 
commenters for alternative definitions of a ``nominal'' contribution, 
we did not change the $10 level in the final regulation. In selecting 
this level, we were attempting to offer States some

[[Page 2537]]

flexibility in determining what constitutes eligibility for a State 
health benefits plan, within the limits on eligibility for a separate 
child health program imposed by the statute. In our opinion, the $10 
nominal contribution achieves this balance. We have also added to the 
regulation text the ``maintenance of effort'' provision discussed in 
the preamble to the proposed rule to indicate that if more than a 
nominal contribution was available on November 8, 1999, the child is 
considered eligible for a State health benefits plan. The contribution 
with respect to dependent coverage is calculated by deducting the 
amount the State or public agency contributes toward coverage for the 
employee only from the amount the State or public agency contributes 
toward coverage of the family.
    For example, if a State contributes $100 per month to cover State 
workers themselves, but contributes $150 per month to cover the cost of 
the State workers themselves and their dependents, then the 
contribution toward dependent coverage would be $50 and would clearly 
exceed the $10 nominal contribution amount. A more complicated scenario 
that has arisen with certain States occurs when States offer flexible 
spending accounts in which employees are given a defined contribution 
amount and can choose from an array of health insurance options. Under 
these flexible spending plans, the State employees usually choose from 
plans that have a range of costs, some of which cost less than the 
State contribution, and some of which cost more than the State 
contribution. In such cases, if the State contributes $100 toward the 
cost of insuring the State workers themselves, and there are insurance 
options available that only cost $85 per month, then the extra $15 
dollars that the employees keep could be used to cover the cost of 
dependents and would be considered a contribution toward family 
coverage that exceeded the $10 minimum contribution amount. If the 
cheapest health insurance option under such a scenario were $95, then 
the contribution toward dependents would be $5 and would be below the 
$10 nominal amount.
    We also have clarified the language in Sec. 457.310(c)(1)(i) to 
state that a targeted low-income child must not be eligible for 
coverage under a State health benefits plan on the basis of a family 
member's employment with a public agency even if the family declines to 
accept such coverage. We have clarified this language to reflect the 
clear intent of the statute that the child's eligibility for coverage 
is the determining factor in this case.
    Comment: Several commenters requested clarification on the adoption 
of the Medicaid definition of ``inmate of a public institution.'' 
Commenters noted that, to date, the Medicaid policy has been unclear 
with unresolved issues, and one commenter queried whether the 
discussion in the preamble of the proposed regulations makes the stated 
policy official for Medicaid. Two commenters supported the policy that 
a child is no longer considered an inmate if the child is discharged 
from a public institution for treatment in a hospital. One commenter 
also requested that the term ``penal'' be included in the preamble and 
the regulation, and that the definition explain that this refers only 
to children who are incarcerated after sentencing. One organization 
requested that the term ``inmate of a public institution'' not be used 
because it makes it problematic for ensuring that children in the 
juvenile justice system, who are not always serving time for a criminal 
offense but may be awaiting trial, receive adequate care. The 
organization believes that there is no rationale for making ineligible 
a child who is temporarily confined.
    Response: We have not accepted the commenters' suggestion to revise 
the definition of ``inmate of a public institution.'' This term is used 
in both title XIX and title XXI and is included in the Medicaid 
regulation at Sec. 435.1009. For purposes of consistency it is 
appropriate that the term be defined for separate child health programs 
in these regulations as it has been defined in Medicaid.
    Further, neither the statute nor the Medicaid definition 
differentiate between temporary confinement and incarceration after 
sentencing. However, as explained in the preamble to the NPRM, there is 
a distinction between the status of children under title XXI and under 
title XIX. Under title XXI, children who are ``inmates of a public 
institution'' are not eligible for a separate child health program. In 
contrast, under title XIX such children are eligible for Medicaid, but 
no FFP is provided for services provided while the child is in the 
institution. States may address the issue of temporary confinements by 
promptly enrolling or reenrolling children into the separate child 
health program when the child is discharged, as long as the child meets 
other eligibility requirements. We emphasize that the regulations in 
this subpart apply only to separate child health programs under title 
XXI. They do not establish Medicaid policy with respect to the 
definition of ``inmate of a public institution.''
    Comment: We received many comments on the proposed policy related 
to a patient in an institution for mental diseases (IMD) and the 
requirement that a determination be made at the time of initial 
application or any redetermination. One State specifically supported 
this flexibility. Another pointed out that the proposed policy was 
inconsistent with the Medicaid policy and did not see why this 
situation was any different than other changes in living arrangements. 
Another said that the proposal to deny eligibility conflicts with 
Sec. 457.402(a)(9) which includes IMD services in the definition of 
``child health assistance,'' and that denial of eligibility is not a 
reasonable compromise between these two provisions. This commenter 
recommended that States be allowed to decide which provision best fits 
their programs. One commented that this provision of the regulation 
should be withdrawn because HCFA has not finalized its guidance for 
Medicaid. Several organizations disagreed with the proposed policy 
based on the potential negative effect on the child. One of these 
commenters recommended that the child remain eligible for a separate 
child health program until one year of creditable coverage has been 
secured for that child. One commented that it is unfair to cover some 
children and not others and that the policy on IMDs makes it very 
difficult to set accurate budget estimates and managed care rates. 
Another suggested that the exclusion apply only at the time of 
application so that the practitioner would not avoid referring a child 
for IMD services because the child might lose eligibility during his or 
her stay. This organization also said that this would allow consistent 
continued eligibility during an IMD stay for children who have been 
determined eligible for an SCHIP Medicaid expansion or separate child 
health program. Several commenters were concerned about continuity of 
care if the child lost eligibility at redetermination and commented 
that the policy was in conflict with the policy to allow a spend down 
when the spend down was met by the family paying for the IMD. Several 
commenters expressed support for the policy in the proposed regulation. 
One noted that children are often in an IMD for a short period. One 
organization commented that separate child health programs should 
continue to cover IMD services unless the child is determined not to be 
eligible for the program.
    Response: We have carefully considered the range of comments on

[[Page 2538]]

this point and have adopted the policy set forth in the proposed rule 
as the final policy with respect to children who are patients in IMDs. 
As was described in the proposed rule, the IMD eligibility exclusion 
applies any time an eligibility determination is made, either at the 
time of application or during any periodic review of eligibility. We 
believe that this is the most reasonable interpretation of section 
2110(b)(2)(A) of the Act, which excludes eligibility for residents in 
an IMD, in light of sections 2110(a)(10) and (18), which allow for 
coverage of inpatient mental health and substance abuse treatment 
services, including services furnished in a State-operated mental 
hospital. We also recognize that this policy may be perceived as 
treating children with similar needs inequitably based on the 
particular point in time at which their eligibility is being 
determined. However, we believe that this is the most reasonable way to 
implement the two statutory requirements cited above.
    We recognize the concern raised by some commenters that this policy 
differs from Medicaid rules on the IMD exclusion, and in response we 
note that the different treatment is due to differences between title 
XIX and title XXI; title XXI mandates an eligibility exclusion for 
residents in an IMD, while title XIX provides for a restriction on 
payment for services provided to IMD residents. We must also point out 
that in Medicaid expansion programs, Medicaid rules will continue to 
apply and IMD residents will be eligible for the Medicaid expansion 
program, but no Federal matching funds will be available for any 
services provided to the individual while residing in an IMD, unless 
the facility meets the requirements of subpart D of 42 CFR 441 to 
qualify as an inpatient psychiatric facility for individuals under the 
age of 21.

5. Other Eligibility Standards (Sec. 457.320)

    Section 2102(b)(1)(B) of the Act sets forth the parameters for 
other eligibility standards 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 spend downs 
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. We set 
forth these provisions at proposed Sec. 457.320(a).
    In addition, 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. We set forth these provisions at Sec. 457.320(b). We also 
proposed that States may not condition eligibility on any individual 
providing a social security number; exclude AI/AN children based on 
eligibility for, or access to, medical care funded by the Indian Health 
Service; exclude individuals based on citizenship or nationality, to 
the extent that the children are U.S. citizens, U.S. nationals or 
qualified aliens (except that, in establishing eligibility for a 
separate child health program, we proposed that States must obtain 
proof of citizenship and verify qualified alien status in accordance 
with section 432 of PRWORA); or violate any other Federal laws 
pertaining to eligibility for a separate child health program.
    In addition to the revisions made to this section based on the 
comments discussed below, we clarified the language in Sec. 457.320(b) 
to prohibit States from establishing eligibility standards or 
methodologies which would result in any of the prohibitions listed. 
``Standards'' traditionally have referred to the income eligibility 
level (for example, 133 percent of the Federal poverty level). 
``Methodologies'' includes the deductions, exemptions and exclusions 
applied to a family's gross income to arrive at the income to be 
compared against the standard in determining eligibility. This is a 
technical change necessary to implement the intent of the statute that 
States not be permitted to cover children in families with a higher 
income without covering children in families with a lower income.
    Comment: One commenter expressed concern that allowing eligibility 
standards related to geographic area, age, income, resources, and so 
forth will allow States to limit the scope of coverage to a smaller 
population, thereby defeating the goal of covering the maximum number 
of children. They recommend that HCFA ensure that States are 
maximizing, not minimizing, the number of children covered. Two 
commenters were specifically concerned that standards related to 
geography might encourage States to exclude hard-to-serve areas such as 
rural areas, although they recognized this provision was statutory.
    Response: The flexibility afforded to States in establishing 
eligibility standards was granted by Congress under section 
2102(b)(1)(A) of the Act. Although a primary purpose of SCHIP is to 
extend health insurance coverage to as many uninsured children as 
possible, States are explicitly allowed by the law to adopt certain 
eligibility rules. We note that to date, States have generally designed 
and implemented broad coverage for children and we are hopeful that 
this will continue to be the case.
    Comment: We received a few comments related to terminating benefits 
when a child reaches age 19. One commenter objected to terminating 
benefits when a child reached age 19, while another specifically 
supported doing so. A third commented that it would be clearer to say 
``not to exceed 19 years of age'' than ``not to exceed 18 years of 
age.''
    Response: Section 2110(c)(1) of the Act defines a ``child'' as an 
individual under 19 years of age. There is no statutory authority for 
payment to States for child health assistance provided to children who 
have reached age 19.
    Comment: Several commenters expressed support for allowing States 
to define income and for allowing States flexibility in verifying 
income and establishing periods of review. One strongly supported 
allowing States to determine family composition as well as whose income 
will be counted and under what circumstances, because this approach 
could provide a basis for teens (without family support) to enroll 
themselves.
    Response: We appreciate the support and agree that allowing States 
to define ``family'' and ``income'' might provide States the 
flexibility to provide coverage to certain teens who are without family 
support.
    Comment: One commenter requested that HCFA point out the advantage 
of using the same definition of income for separate child health 
programs and Medicaid.
    Response: We urge States to use the same definition of income and 
the same methods of determining income for both separate child health 
programs and Medicaid. As discussed later in this preamble, using the 
same definitions and methodologies simplifies the screening process and 
helps ensure that children are enrolled in the correct program. HCFA 
can help States to identify ways to simplify Medicaid methodologies and 
to align the rules adopted for Medicaid and a separate child health 
program.
    Comment: One commenter expressed concern that allowing States to 
use gross

[[Page 2539]]

or net income as countable when determining whether the countable 
income is below the eligibility standard will result in State 
differences and families may be convinced to move to another State for 
coverage.
    Response: Given the flexibility authorized by law, income tests 
would vary from State to State even if States were required to use the 
same method of arriving at countable income because the income 
standards to which the countable income is compared vary widely. Income 
standards (and often methodologies) for most Federally-assisted, means-
tested programs vary from State to State. Research in this area 
indicates that individuals move to be with family or for employment and 
generally do not move for the purpose of receiving means-tested 
benefits. Income standards vary widely in Medicaid and there has been 
no evidence that this has resulted in families moving from State to 
State.
    Comment: Two commenters specifically supported eliminating pre-
existing conditions as a reason for denial and stated that such a 
policy is important to children with special needs. Two additional 
commenters stated that if States may not deny eligibility based on 
preexisting conditions, it may conflict with contracts between a 
separate child health program and a health plan or with premium 
assistance programs.
    Response: Section 2102(b)(1)(B)(ii) of the Act prohibits the denial 
of coverage based on preexisting conditions and Sec. 2103(f)(1)(A) 
prohibits eligibility restrictions based on a child's preexisting 
condition. We agree that this prohibition is very important in 
providing health care to low-income children with special needs and 
have included it at Sec. 457.320(b)(2) of the regulations. States that 
have contracts with health plans which restrict eligibility based on 
preexisting conditions will have to renegotiate the contracts or 
otherwise ensure that the affected children are provided with care that 
meet the standards of title XXI.
    One limited exception to this rule is permitted. Under 
Sec. 2103(f)(1)(B) of Title XXI, if a State child health plan provides 
for benefits through payment for, or a contract with, a group health 
plan or group health insurance, the plan may permit the imposition of 
those preexisting conditions which are permitted under HIPAA. This 
permits the imposition of preexisting conditions consistent with the 
requirements of such plans when the State is providing premium 
assistance through SCHIP to subsidize child or family coverage under a 
group health plan or group health insurance pursuant to Sec. 2105(c)(3) 
of the statute.
    Comment: We received one comment specifically supporting State 
latitude to establish eligibility based on State-established disability 
criteria. Another commenter recommended that we add a new 
Sec. 457.320(b)(4) to specifically prohibit the use of eligibility 
standards that discriminate on the basis of diagnosis in accordance 
with section 2102(b)(1)(A).
    Response: Section 2102(b)(1)(A) of the Act provides that an 
eligibility standard based on disability may not ``restrict 
eligibility,'' although States may provide additional benefits to 
children with disabilities. This provision was included in the 
regulation at Sec. 457.320(b)(3). Section 2102(b)(1)(A) of the Act also 
provides that no eligibility standard may discriminate on the basis of 
diagnosis. We have revised the regulation at Sec. 457.320(b)(3), as 
suggested, to specifically prohibit discrimination on the basis of 
diagnosis. Therefore, a State may establish eligibility standards that 
are based on or related to the loss of certain functional abilities, 
whether physical or mental, if those standards result in children with 
disabilities qualifying for coverage. A State cannot, however, 
establish eligibility standards based on or related to a specific 
disease.
    Comment: We received a significant number of comments urging HCFA 
to add specific residency requirements. Many of the commenters were 
concerned about children of migrant workers and homeless children. One 
commenter specifically urged HCFA to require States to set forth rules 
and procedures for resolving residency disputes. One recommended that 
the regulations explicitly provide that families involved in work of a 
transient nature be allowed to choose to establish residency in the 
State where they work or in one particular State. One commenter 
recommended that States be required to expedite enrollment of migrant 
children. One recommended that States be prohibited from the following: 
denying eligibility to a child in an institution on the grounds that a 
child did not establish residency in the State before entering the 
institution; denying or terminating eligibility because of temporary 
absence; or denying eligibility because residence was not maintained 
permanently or at a fixed address.
    Response: Because Congress has specifically allowed States 
flexibility to establish standards, we do not establish general 
residency rules for States. However, we share the commenters' concern 
that certain children may be unable to establish eligibility in any 
State because of disputes over residency and do not believe that 
allowing such a result would be consistent with the overall intent of 
title XXI and the requirement that SCHIP be administered in an 
effective and efficient manner. We have revised paragraph (a)(7) and 
added a new paragraph (d) to Sec. 457.320 to specify residency rules in 
limited circumstances. In the case of migrant workers, when the child 
of a parent or caretaker who is involved in work of a transient nature, 
such that the child's physical location changes periodically from one 
State to another, the parent or caretaker may select either their home 
State or the State where they are currently working as the State of 
residence for the child. For example, if a migrant family moves 
temporarily from Florida to North Carolina and then returns to Florida 
during the course of a year as a result of the parents' transient 
employment, the parents can claim either Florida or North Carolina as 
the child's State of residence.
    In other instances, where two or more States cannot resolve which 
is the State of residence, the State where a non-institutionalized 
child is physically located shall be deemed the State of residence. In 
cases of disputed residency involving an institutionalized child, the 
State of residence is the parent's or caretaker's State of residence at 
the time of placement. We believe that a child who is placed in an out-
of-State institution should remain the responsibility of the State of 
residence at the time of placement. Similarly, in cases of disputed 
residency involving a child who is in State custody, the State of 
residence is the State which has the legal custody of the child. As 
indicated in the preamble to the proposed rule, under Shapiro v. 
Thompson (394 US 618), a State cannot impose a durational residency 
requirement. We have also added this prohibition to Sec. 457.320(d).
    We have not imposed further residency rules. However, we strongly 
recommend that States establish written inter-State agreements related 
to disputed residency. We note that the rules contained in 
Sec. 457.320(d)(2) of this regulation apply only if the States involved 
cannot come to agreement with respect to a child's residency.
    Comment: We solicited comments on our proposal that the eligibility 
standard relating to duration of eligibility not allow States to impose 
a maximum length durational requirement or any similar requirement. We 
received three comments in response, and all three recommended that the 
regulations make it clear that States are prohibited from

[[Page 2540]]

imposing time limits or lifetime caps on eligibility.
    Response: Under section 2102(b)(1)(A) of the Act, States have 
considerable flexibility in setting the standards used to determine the 
eligibility of targeted low-income children, including those related to 
duration of eligibility. This enables States to establish the period of 
time for which a child determined eligible for the State's separate 
child health program can remain covered prior to requiring a 
redetermination or renewal of eligibility. At the same time, it is 
important to ensure that States can identify children enrolled in a 
separate child health program who become ineligible due to a change in 
circumstances. Therefore, we have retained the provision in proposed 
Sec. 457.320(a)(10) and moved it to Sec. 457.320(e)(2) to require that 
States redetermine a child's eligibility at least every 12 months. Note 
that termination of a child's eligibility at the end of the specified 
period (e.g. after a redetermination review) would constitute a 
``denial of eligibility'' subject to the requirements of 
Sec. 457.340(d) of this subpart and subpart K.
    We agree that durational limits on eligibility are contrary to the 
intent of the program. We have added a new subsection 
Sec. 457.320(e)(1) to include a prohibition against imposing time 
limits, including lifetime caps, on a child's eligibility for coverage. 
That is, a State cannot deny eligibility to a child because he or she 
has previously received benefits. The prohibition against lifetime caps 
or other time limits on coverage is consistent with Congressional 
intent to provide meaningful health care for children and will prevent 
unequal treatment of similarly-situated children simply because one 
child has been enrolled in the program longer than the other. It will 
also prevent the possibility of jeopardizing the health of low-income 
children by terminating or denying health care on the basis of 
circumstances unrelated to the child's needs. The prohibition against 
durational limits on eligibility does not prevent a State from limiting 
enrollment based on budget constraints, or capping overall program 
enrollment due to lack of funds. This is reflected in Secs. 457.305(b) 
and 457.350(e). In addition, we have added a definition of ``enrollment 
cap'' in Sec. 457.10 of subpart A.
    Comment: One commenter specifically supported the concept of 12 
months of continuous eligibility. Another recommended that the 
regulations be more specific about the duration of eligibility. This 
commenter recommended an annual time period because health care should 
not be interrupted when income fluctuates, which the commenter believes 
happens frequently with the population being served. One commenter 
objected to requiring any interim screening process during an 
established 12-month continuous eligibility period.
    Response: We see no basis to prohibit State review of eligibility 
on a less than annual basis. We do encourage States to establish an 
annual period of review and to adopt continuous eligibility rules to 
avoid interruptions in a child's health care because of minor 
fluctuations in income. Frequent reviews can be a barrier to enrollment 
and redetermination and can reinforce the ``welfare stigma.'' In 
addition, research shows that many children lose coverage at the time 
of redetermination.
    Between the scheduled reviews, regular, periodic screenings are not 
required. A child always has the right to file for and become eligible 
for Medicaid if family income changes, and the State is required to 
take action on the application, even if the child is covered by a 
separate child health program. If a child enrolled in a separate child 
health program does not file an application for Medicaid, the State is 
not required to screen the child for Medicaid eligibility until the 
next scheduled redetermination, regardless of changes in the child's 
circumstances (other than reaching age 19).
    Comment: We received a significant number of comments on the 
discussion about pregnant teens included in the preamble, many of which 
expressed support for our position.
    One commenter suggested that Illinois KidCare is a good model under 
which a pregnant teen is automatically transferred to the Moms and 
Babies Medicaid Program. Another recommended that HCFA clearly state an 
expectation that States provide information to teenage enrollees on the 
possible benefits of seeking Medicaid if they are pregnant, rather than 
simply urging them to do so. One commenter recommended that States be 
required to inform pregnant teens about the differences between their 
Medicaid and separate child health programs. This commenter also 
asserted that the benefits of keeping a trusted health care provider 
may override the benefits of broader coverage and lower out-of-pocket 
expenses and that States, therefore, should inform pregnant teenagers 
of the possibility that changing from one program to the other may 
require the teen also to change doctors. Two commenters recommended 
that it be made clear that States providing information about Medicaid 
and the opportunity to apply for Medicaid cannot be held responsible 
for any individual who does not complete the Medicaid application 
process.
    Several commenters objected to the recommendation that pregnant 
teens switch to Medicaid midyear. They argued that this unnecessarily 
disrupts continuity of care and has negative effects on pregnant teens. 
One of these commenters recommended that pregnant adolescents in their 
second or third trimester and adolescents with high-risk pregnancies be 
allowed to continue to see their treating provider through pregnancy 
and the 60-day postpartum period. Another commenter stated that the 
regulation related to monitoring pregnant teens and moving them to 
Medicaid in the middle of an eligibility period goes beyond statutory 
authority.
    One commenter contended that all benchmark programs require 
pregnancy services and commented that establishing procedures for 
managed care contractors to notify the State of a teen's pregnancy 
would be cumbersome, expensive and a potential violation of the 
family's confidentiality.
    Finally, one commenter was concerned that the discussion about 
pregnant teens not appear to foreclose separate child health programs 
from adopting pregnancy-related benefits for pregnant teens who are not 
eligible for Medicaid.
    Response: We appreciate the comments, and we wish to clarify a 
number of points. In drawing attention to pregnant teens, it was not 
our intent to impose additional or unnecessary requirements on States 
nor to promote procedures that would disrupt the medical care of 
pregnant teens. Our intent was to ensure that pregnant teens are 
provided with sufficient, clear information about Medicaid to make an 
informed choice about staying in the separate child health program or 
applying for Medicaid. States are not required to monitor teens for 
pregnancy and cannot be held responsible for teens who choose not to 
apply for Medicaid. Managed care contractors in separate child health 
programs are not required to notify the State when a teen becomes 
pregnant. Finally, States may provide the same pregnancy-related 
services under separate child health programs that they do under 
Medicaid. We urge States to do this, but pregnancy-related services are 
not mandatory under separate child health programs. We also urge States 
to make every effort to rely

[[Page 2541]]

on the same plans and providers in their separate child health programs 
and Medicaid so that children who switch between programs because of 
changes in circumstances, including pregnancy, need not change 
providers.
    While States are not under an obligation to ensure that teens 
enrolled in separate child health programs become enrolled in Medicaid 
if they become pregnant, we remind States that there are advantages to 
Medicaid for a pregnant teen even when the benefit package is the same. 
First, cost-sharing is prohibited for pregnancy-related services under 
Medicaid and premiums are prohibited if the woman's net family income 
is at or below 150 percent of the Federal poverty level. (Above that 
level premiums are limited to 10 percent of the amount by which the 
family income exceeds 150 percent of the Federal poverty level.) In 
addition, a child born to a woman who is eligible for and receiving 
Medicaid on the day the infant is born is deemed to have filed an 
application and been found eligible for Medicaid. That infant remains 
eligible for one year if residing with the mother, regardless of family 
circumstances. If the delivery is covered by a separate child health 
program because the mother does not apply for Medicaid, the infant 
might not be eligible for Medicaid instead of automatically eligible as 
would be the case had the delivery been covered by Medicaid.
    Comment: Two commenters recommended that HCFA encourage States that 
have separate child health programs to provide newborn infants the same 
eligibility protections granted under Medicaid. Another recommended 
that HCFA allow pre-enrollment of newborns or automatic enrollment of 
newborns of pregnant teens enrolled in a separate child health program.
    Response: The statute does not provide for automatic and continuous 
eligibility for infants under a separate child health program as it 
does under Medicaid. Moreover, it is also likely that due to higher 
income standards that most States apply in Medicaid, many infants born 
to teens enrolled in a separate child health program will be eligible 
for Medicaid and therefore not eligible for a separate child health 
program.
    However, as discussed elsewhere in this preamble (in response to 
comments under both Secs. 457.300 and 457.360), we have determined that 
States may use ``presumptive eligibility'' to enroll children in a 
separate child health program pending completion of the application 
process for Medicaid or the separate plan. We recognize the need of 
infants to have immediate coverage and consider the automatic 
enrollment of newborns born to mothers covered by a separate child 
health program at the time of the delivery into the separate program as 
an example of such presumptive eligibility. Presumptive eligibility is 
time-limited, however, and States choosing to enroll these newborns 
must formally determine the infant's eligibility (including screening 
the infant for Medicaid eligibility) within the time frame set for 
completing the application process and determining eligibility.
    As noted earlier, if the infant is ultimately found not to be 
eligible for Medicaid, costs of services provided during the period of 
presumptive eligibility may be treated as health coverage for targeted 
low-income children whether or not the child is ultimately found 
eligible for the separate child health program, as long as the State 
implements presumptive eligibility in accordance with section 1920A and 
section 435.1101 of this part. Thus, States that adopt the presumptive 
eligibility option in accordance with section 435.1101 to no longer be 
constrained by the 10 percent cap.
    Alternatively, States can develop an administrative process to 
identify, prior to birth, an infant as a Medicaid-eligible individual 
as soon as he or she is born, as we understand some States have done. 
This would ensure that Medicaid coverage and services are immediately 
available to a Medicaid-eligible newborn child.
    Comment: We received a large number of comments related to 
obtaining social security numbers (SSNs) during the application 
process. Many commenters specifically supported the prohibition against 
requiring the SSN in separate child health programs. Two requested 
clarification as to whether an SSN can be required on a joint SCHIP/
Medicaid application. A few recommended that SSNs be required for 
applicants as long as there is a Medicaid screen and enroll 
requirement. One commenter did not advocate asking for an SSN, but 
commented that the policy for separate child health programs and 
Medicaid should be consistent because families prefer to give all 
information at one time and having a distinction between the 
requirements for the two programs hinders States' efforts to create a 
seamless program.
    Some commenters indicated that the prohibition against requiring 
SSNs for a separate child health program while requiring it for 
Medicaid will cause referral, tracking and coordination problems; 
handicap enrollment in States using a joint application; make it 
difficult to implement the screen and enroll provision; reinforce 
stereotypes; and prevent automatic income verification in States that 
have reduced the documentation requirements. Another added that this 
prohibition will impede efforts to identify children with access to 
State health benefits.
    Finally, another commenter suggested that Medicaid medical support 
cooperation requirements include providing information about 
noncustodial parents and that this ``section may be construed as 
excusing a Medicaid applicant from having to provide an SSN for all 
family members, including noncustodial parents absent from the home.''
    Response: The requirements and prohibitions related to the use of a 
social security number are statutory. The Privacy Act makes it unlawful 
for States to deny benefits to an individual based upon that 
individual's failure to disclose his or her social security number, 
unless such disclosure is required by Federal law or was part of a 
Federal, State or local system of records in operation before January 
1, 1975. Section 1137(a)(1) of the Social Security Act requires States 
to condition eligibility for specific benefit programs, including 
Medicaid, upon an applicant (and only the applicant) furnishing his or 
her SSN. Because SCHIP is not one of the programs identified in section 
1137 of the Act, and Title XXI does not require applicants to disclose 
their SSNs, States are prohibited under the Privacy Act from requiring 
applicants to do so.
    Thus, only the SSN of the individual who is applying for Medicaid 
(including a Medicaid expansion program under title XXI) can and must 
be required as a condition of eligibility. Children applying for 
coverage under a separate child health program cannot be required to 
provide a SSN, and States cannot require other individuals not applying 
for coverage, including a parent, to provide a SSN as a condition of 
the child's eligibility for either a Medicaid expansion program or 
separate child health program.
    We recognize that these statutory provisions can be difficult to 
reconcile in practice. Under the law, a joint Medicaid/SCHIP 
application must indicate clearly that the SSN is only needed for 
Medicaid and not for coverage under a separate child health program, 
but a family often will not know if their child is or is not Medicaid-
eligible. A State may request the SSN for all applicant children as 
long as the State makes it clear that family members are not required 
to provide the SSN and that the child's eligibility under the

[[Page 2542]]

separate child health program will not be affected if the child's SSN 
is not provided. However, the State must also inform the family that 
Medicaid eligibility cannot be determined without the SSN and that the 
child cannot be enrolled in the separate child health program if the 
child otherwise meets the eligibility standards for Medicaid.
    Comment: A significant number of commenters objected to the 
verification requirements pertaining to citizenship and alien status. 
Most of these commenters requested that subsection Sec. 457.320(c) be 
deleted. A number of the commenters pointed out that we proposed to 
require that States follow INS rules which were not yet mandatory. 
Additionally, they argued that the requirement in Sec. 457.320(b)(6) 
that States abide by all applicable Federal laws and regulations would 
be sufficient. Several commenters objected to the verification 
requirements for a number of reasons. A significant number of them 
commented that the procedures are too burdensome. One commenter felt 
that proof of citizenship might discourage some citizens who do not 
have birth certificates from applying. Another commented that requiring 
proof and verification of alien status would delay access to care for 
alien children who are otherwise eligible.
    Response: Section 432 of the PRWORA requires verification of 
citizenship for applicants of all ``Federal public benefits'' as 
defined in section 401 of the PRWORA. However, proposed regulations 
published by the Department of Justice, which is responsible for 
enforcing the verification provision, provide that a State may accept 
self-declaration of citizenship provided that (1) the federal agency 
administering the program has promulgated a regulation which permits 
States to accept self-declaration of citizenship and (2) the State 
implements fair and nondiscriminatory procedures for ensuring the 
integrity of the program at issue with respect to the citizenship 
requirement.
    Requiring documented proof of citizenship can be a time-consuming 
and difficult process for many applicants, and therefore could create a 
significant barrier to enrollment. It also can create a significant 
administrative burden for the State. Therefore, consistent with the 
statutory intent to promote access to and enrollment in separate child 
health programs and HCFA's policy to provide States with flexibility to 
simplify their application processes and eliminate barriers to 
enrollment wherever possible, we have modified Sec. 457.320(c). The 
regulation permits States to accept self-declaration of citizenship, 
provided that they have implemented effective, fair and 
nondiscriminatory procedures for ensuring the integrity of their 
application process with respect to self-declaration of citizenship.
    For example, a State could implement a system to randomly check the 
documentation of some applicants and terminate the eligibility of any 
applicants found to have provided a false declaration. If the 
percentage of false declarations was found to be high, the State would 
need to take appropriate measures to remedy the problem--including, if 
necessary, requiring documentation to verify the citizenship of every 
applicant.
    Comment: One commenter asked for clarification of the difference 
between ``proof'' and ``verification.''
    Response: We have used ``proof'' to refer to documents provided by 
individuals. ``Verification'' is used to refer to the process of 
comparing the information in the ``proof'' to the INS records. An 
individual may be considered eligible based on ``proof'' while the 
information is being verified.
    Comment: Several commenters urged that the regulations specifically 
prohibit requests for information about the citizenship or immigration 
status of non-applicants, including parents. One commenter indicated 
that States should be prohibited from verifying the status of any non-
applicant when the information is voluntarily provided.
    Response: Information about the citizenship or alien status of a 
non-applicant cannot be required as a condition of eligibility. States 
may request this information if it reasonably relates to a State 
eligibility standard and it is made clear that the provision of this 
information is optional and that refusing to provide the information 
will not affect the eligibility of applicants. We strongly urge States 
not to request this information nor to verify it if voluntarily 
provided, as this has been found to be a strong deterrent to alien 
parents filing applications on behalf of their citizen children.
    Comment: One commenter recommended that HCFA issue, through letter 
or manual and web site, Medicaid guidance on the categories of 
immigrants eligible for Medicaid and that these regulations reference 
that guidance.
    Response: Section 3210 of the State Medicaid Manual, which is 
available through links set for in HCFA's web site at www.hcfa.gov, 
discusses immigrant eligibility for Medicaid following passage of the 
Personal Responsibility and Work Opportunity Reconciliation Act of 
1996, although it does not reflect changes to immigrant eligibility 
contained in the Balanced Budget Act of 1997. We also have posted a 
fact sheet on the section of our web page addressing Medicaid and 
welfare reform. The fact sheet is entitled, ``The Link between Medicaid 
Coverage and the Immigration Provisions of the Personal Responsibility 
and Work Opportunity Act of 1996.'' Guidance to State Medicaid 
Directors dated December 8, 1997 discusses changes in immigrant 
eligibility for Medicaid under the Balanced Budget Act of 1997. 
Finally, guidance dated January 14, 1998 discusses immigrant 
eligibility for benefits under title XXI. This guidance (in the form of 
``Dear State Medicaid Director or Dear State Health Official letters) 
can be found at www.hcfa.gov.
    We will consider issuing more detailed instructions pertaining to 
the eligibility of immigrants for Medicaid and separate child health 
programs and posting such guidance on our web site.

6. Application and Enrollment in a Separate Child Health Program 
(Sec. 457.340)

    We proposed to require that the State 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. Because we have determined that proposed 
Sec. 457.361 ``Application for and enrollment in SCHIP,'' is closely 
related to this section, in this final rule we have incorporated the 
provisions of proposed Sec. 457.361 into this section. We will respond 
to the comments concerning Sec. 457.340 of the proposed rule here, and 
to those concerning Sec. 457.361 of the proposed rule below, under 
Sec. 457.361.
    Comment: We received a number of comments on this section. Many 
commenters were concerned about the complexity of the application 
process, particularly when States have a separate child health program. 
Several commenters recommended that HCFA require States to certify that 
they have conducted a review of their Medicaid and Title XXI 
application and redetermination procedures and have eliminated any 
unnecessary procedural barriers that discourage eligible children from 
enrolling in and retaining coverage. If differences remain, States 
should be required to identify in their State plan the reasons for the 
differences and explain how they are consistent with the coordination 
goals of title XXI.

[[Page 2543]]

Other commenters added that families should not be forced to understand 
and navigate two sets of application, enrollment and redetermination 
procedures.
    Several commenters focused on joint applications for Medicaid and 
separate child health programs. One commenter asked HCFA to highlight 
that States can use a joint application and a single agency. Another 
urged HCFA to require a joint application process or, at a minimum, to 
conduct rigorous oversight of the screen and enroll procedures. A third 
specifically indicated that HCFA should require States to have a single 
form for children who are applying for both programs, that it be 
limited to four pages, that States be required to accept mail-in 
applications and that States notify families when their application has 
been received. Yet another stated that the burden should rest with the 
State that chooses not to have a joint application to establish that 
its application procedures are effective. This commenter also 
recommended that HCFA require that the same verification procedures be 
used for both programs and that families not have to take any 
additional steps in order for their application to be processed by 
Medicaid.
    One commenter felt that the regulations should define a joint 
application process rather than referring to joint forms. This 
commenter believes that applicants should be subject to the same 
requirements and procedures--including a single application, the same 
verification requirements, and common entry points--for both programs, 
and that nothing additional should be required for children to enroll 
in Medicaid under one of the categories identified in 
Sec. 457.350(c)(2).
    One commenter felt that States also should be required to certify 
that they have eliminated any unnecessary procedural barriers to 
children making a transition between regular Medicaid and a Title XXI-
funded program when they lose eligibility for one program and become 
eligible for the other. Another thought it would be useful for HCFA to 
mention that flexibility regarding the eligibility determination 
process is not limited to contractors. Provider employees or 
outstationed workers at provider locations are also capable of making 
these determinations under a separate child health program.
    Two commenters emphasized the importance of States applying any 
simplifications adopted in the application process for Medicaid or a 
separate state program to children whose families also are on Food 
Stamps or TANF. Some States which generally allow families to apply for 
Medicaid on behalf of their children through a mail-in application 
reportedly do not accept mail-in applications from families who already 
happen to be receiving Food Stamps or TANF. In this commenter's view, 
such policies create inequities and impose unnecessary procedural 
barriers to Medicaid enrollment and HCFA should encourage States to 
review whether they have any such policies, and to eliminate them 
whenever possible.
    Other commenters recommended that HCFA place emphasis not only on 
helping families to apply for coverage, but also on helping them to 
remain enrolled in coverage. They felt that the simplification 
strategies listed by HCFA should also include States' adopting the same 
redetermination period in Medicaid and separate child health programs, 
and reducing verification requirements for redeterminations as well as 
for the initial application.
    Response: States are required to establish a program that is 
``effective and efficient'' and a process that allows every individual 
to apply for child health assistance without delay. Mail-in, joint 
program application forms, common entry points and applicable 
procedures, single agency oversight and administration, and simplified 
and consistent program rules and documentation requirements are several 
ways that States can facilitate families' ability to apply for the 
appropriate health coverage program as expeditiously as possible. These 
procedures can also simplify administration for States. While we are 
not requiring that States use any specific mechanism, States that do 
not take steps to streamline, align, and coordinate their enrollment 
process will have a more difficult time ensuring that children can 
apply for health insurance coverage without delay and that their 
application is assessed in an effective and efficient manner.
    We encourage, but do not require, States to use a joint application 
for their separate child health program and Medicaid programs and to 
simplify the application as much as possible. We agree with the comment 
that States should construct a joint application process, rather than 
just a joint application. States that have adopted the same or similar 
rules relating to application interviews, verification and managed care 
enrollment have an easier time coordinating the enrollment process. We 
note that most States with separate child health programs report they 
use a joint child health application and that joint applications do not 
necessarily need to cover all possible Medicaid eligibility groups.
    Section 2102(c) requires coordination of the administration of 
SCHIP with other public and private health insurance programs, and we 
also will be monitoring States' coordination of enrollment in their 
separate child health program and Medicaid programs, including 
children's transitions from one program to the other. HCFA will pay 
particular attention to outcomes in States that lack many of the 
elements of a streamlined and coordinated system. When appropriate, 
such monitoring will include requests for States to identify the number 
of children found potentially eligible for Medicaid, the percentage of 
those children who have been determined eligible for and enrolled in 
Medicaid, and the percent determined eligible for and enrolled in the 
separate child health program. These data will help States and HCFA 
determine whether the State has developed an effective method to 
coordinate enrollment and ensure that children are enrolled in the 
appropriate program.
    While States have and will continue to have the flexibility to 
design their own unique application and enrollment systems, States will 
be held accountable to ensure that children are afforded the 
opportunity to apply for the appropriate program in a timely and 
efficient manner. We believe that most States have developed 
coordinated enrollment procedures and are continuing to improve their 
systems to promote enrollment of eligible children, and we will 
continue to work with the States in developing effective systems.
    It is also true, as a few commenters pointed out, that eligibility 
determination for a separate child health program may be performed by a 
wide range of entities, as determined by the State. For example, State 
Medicaid agencies, health care plans and providers, and outstationed 
State or local eligibility workers also may determine eligibility.
    Finally, we agree with the last two points made by the commenters. 
First, we agree that States' simplifying both initial application and 
redetermination processes is critical. Second, we also agree that 
States can reduce barriers to accessing health care for all families by 
applying any simplifications adopted in the application process for 
Medicaid and the separate child health program to the application 
process for children whose families also happen to be receiving, or 
applying for, Food Stamps or TANF benefits, and we encourage States to 
do so.

[[Page 2544]]

    Comment: Several commenters requested that States be given 
flexibility to use the application for a program other than Medicaid or 
SCHIP.
    Response: States may use a joint application with other programs. 
Proposed Sec. 457.340(b) was confusing and may have implied that States 
do not retain discretion over whether or not to combine the 
applications of different programs. Because we do not want to preclude 
States from including programs other than Medicaid and SCHIP in a joint 
application and because a regulation is not needed to allow States to 
adopt a joint application, we have eliminated Sec. 457.340(b). This in 
no way implies that States are prohibited from using joint 
applications. In fact, we continue to strongly encourage States to 
consider how joint applications might promote coverage of eligible 
children.
    For example, the application for Medicaid and/or a separate child 
health program may be combined with an application for child care 
assistance or WIC. Joint applications can be an effective outreach and 
enrollment tool because they can help States reach families that are 
being served by other programs. States that use a joint application, 
however, must develop a process that allows every individual to apply 
for child health assistance without delay. If the application for the 
separate child health program and/or Medicaid is combined with an 
application for other services or benefits and sufficient information 
is provided to make a determination of eligibility for child health 
coverage, that determination must not be held up because of information 
(or action) which is needed for the other program. Joint program 
applications, while an effective tool, must not result in delays that 
would be contrary to the intent of the statute and this section.
    Comment: One organization commented that the regulations should 
clarify that underlying the provision at proposed Sec. 457.340(a) 
regarding the opportunity to apply without delay are title VI of the 
Civil Rights Act and the Americans with Disabilities Act.
    Response: Underlying the provision that individuals be able to 
apply without delay is section 2101(a) of the Act, which 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.
    Of course, this opportunity must be available to all children, 
regardless of their race, sex, ethnicity, national origin or disability 
status. Thus, the civil rights laws must be adhered to in implementing 
this requirement, but are not the only statutory authority for this 
provision.
    Comment: One commenter expressed strong support for the requirement 
that every individual be afforded the right to apply. The commenter 
asserted that adolescents not living with their parents should be 
allowed to file their own applications and recommended that HCFA, 
through the preamble, encourage States to adopt policies that 
facilitate the filing of applications by adolescents themselves.
    Response: As required by this section, States must afford every 
individual, including adolescents, the opportunity to apply for child 
health assistance without delay. We encourage States to consider how 
they might best ensure that adolescents, including those who are not 
living with their parents or caretakers, can apply for SCHIP. States 
can also allow adolescents to sign their own applications; but this is 
a matter of State law and we cannot require States to permit minors to 
do so.
    Comment: One commenter stated that the regulations should address 
methods for allowing families to report changes in circumstances in an 
efficient, family-friendly manner, such as not requiring the family to 
complete a new application when circumstances change.
    Response: Section 2101(a) of the Act requires that child health 
assistance be provided in an effective and efficient manner. A 
reporting system which requires that a child reapply every time there 
is a change in family circumstances affecting eligibility would not 
constitute effective and efficient administration. The precise manner 
in which an individual reports changes is subject to State discretion, 
as is the form used for periodic redetermination. States should develop 
methods of reporting changes that pose as few barriers to uninterrupted 
eligibility as possible and do not require families to resubmit 
information that has not changed. States that have opted to provide 
continuous eligibility generally do not require reporting of any 
changes in circumstances except at regularly scheduled 
redeterminations.

7. Eligibility Screening and Facilitating Medicaid Enrollment 
(Sec. 457.350)

    Sections 2102(b)(3)(A) and (B) of the Act require that a State plan 
include a description of screening procedures used, at intake and at 
any 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 proposed at Sec. 457.350(a) that a State plan must 
include a description of these screening procedures.
    More specifically, section 2110(b)(1)(C) of the Act provides that 
children who would be eligible, if they applied, for Medicaid are not 
eligible for coverage under a separate child health program. Section 
2102(b)(3)(B) provides that States have a responsibility to actually 
enroll children who have applied for a separate child health program in 
Medicaid if they are Medicaid-eligible.
    As stated in previous guidance, referrals to Medicaid do not 
satisfy this ``screen and enroll'' requirement. In accordance with the 
statute, we proposed 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, since 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, we also proposed at Sec. 457.350(c) 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 expected that the highest 
categorical income standard used for such older children will be the 
standard used for the optional categorically needy group of children 
eligible under section 1902(a)(10)(A)(ii)(I) of the Act. These children 
are sometimes referred to as ``Ribicoff children.'' (See Sec. 435.222.) 
Mandatory coverage of the older children in poverty-level related 
groups is 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.
    In the preamble of the proposed rule, we encouraged States to 
identify any pregnant child who is eligible for Medicaid as a poverty-
level pregnant woman described in section 1902(1)(1)(A) of the Act even 
though she is not eligible for Medicaid as a child. We noted that 
Medicaid coverage, cost-sharing rules and eligibility rules pertaining 
to infants may be more advantageous to a pregnant teen than coverage 
under a separate child health program.

[[Page 2545]]

    We proposed at Sec. 457.350(d) that to identify children who are 
potentially eligible for Medicaid, States must either initially apply a 
gross income test and then use an adjusted income test for applicants 
whose State-defined income exceeds the initial test, or use only the 
adjusted income test for all applicants. We set forth the initial gross 
income test and the adjusted income test at proposed Sec. 457.350(d)(1) 
and (2) respectively.
    As indicated in section 2102(b)(3)(B) of the Act, Congress intended 
that children eligible for Medicaid be enrolled in the Medicaid 
program. We proposed at Sec. 457.350(e)(1) that, for a child found 
potentially eligible for Medicaid, the State must not enroll the child 
in the separate child health program unless a Medicaid application for 
that child is completed and subsequently denied.
    At Sec. 457.350(e)(2) we proposed that the State must determine or 
redetermine the eligibility of such a child for the separate child 
health program if (1) an application for Medicaid has been completed 
and the child is found ineligible for Medicaid or (2) the child's 
circumstances change and another screen shows the child is ineligible 
for Medicaid. Finally, at Sec. 457.350(e)(3), we proposed 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 a separate 
child health program. Enrollment in a separate child health program for 
such a child can occur only after the Medicaid agency determines that a 
child who has been screened and found likely to be eligible for 
Medicaid is not in fact eligible for Medicaid under other eligibility 
categories.
    We also proposed to require at Sec. 457.350(f) (Sec. 457.350(g) in 
this final regulation) 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. We proposed 
that the following information must be provided to the person applying 
for the child: (1) a statement that, based on a limited review, the 
child does not appear to be eligible for Medicaid but that a final 
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.
    We have incorporated the provisions of proposed Sec. 457.360, 
``Facilitating Medicaid enrollment,'' into Sec. 457.350 because the 
requirements of both sections relate to the steps which the State or 
contractor responsible for determining eligibility under a separate 
child health program must take to comply with the ``screen and enroll'' 
requirements of Title XXI. In Sec. 457.350(a), we therefore have added 
a requirement that the State plan include a description of the 
procedures the State will use to ensure that enrollment in Medicaid is 
facilitated for children screened potentially eligible for Medicaid and 
who are then determined by the State Medicaid agency to be eligible for 
Medicaid.
    We will respond to the comments on the proposed Sec. 457.360 in our 
discussion of Sec. 457.360 rather than in our discussion of this 
section. Also, note that the obligations of the Medicaid agency in 
meeting the screen and enroll requirements are set forth in a new 
Sec. 431.636, which is discussed further in subpart M of this preamble, 
``Expanded coverage of children under Medicaid and Medicaid 
coordination.''
    We noted in the preamble 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 families may refuse to apply for 
Medicaid because they associate it with ``welfare.'' Some families may 
not complete the Medicaid application process because it may be more 
complicated than the application process for a separate child health 
program, may require more documentation, or may otherwise be seen as 
more invasive into personal lives. We solicited comments on the extent 
of these problems and possible solutions. We received many comments 
concerning the screen and enroll requirements. These comments are 
addressed below.
    Comment: One commenter indicated that the term ``found eligible'' 
should be used consistently. The regulations should not say that a 
child is ``found eligible'' for Medicaid through the screening process 
and then indicate that when the Medicaid application is processed the 
child is not ``found eligible'' for Medicaid.
    Response: We agree with the comment. A child who has been found 
through the screening process to be potentially eligible for Medicaid 
has not been determined eligible for Medicaid. We have revised the 
regulations to use the terms consistently. As revised, the term ``found 
eligible'' is only used when a final action has been taken on a 
Medicaid application and the child has been enrolled in Medicaid. The 
term ``potentially eligible'' is used when a screening indicates that a 
child appears to be eligible for Medicaid and therefore may not be 
enrolled in a separate child health program until action is taken on 
his or her Medicaid application.
    Comment: One commenter suggested that the regulations require that 
States provide comprehensive training to eligibility determination 
workers (and other workers as appropriate) in both Medicaid and a 
separate child health program to ensure that all potentially eligible 
applicants are afforded the right to apply and that no eligible 
children are terminated inadvertently or inappropriately.
    Response: One aspect of minimizing barriers and assuring 
appropriate action with respect to applications is providing adequate 
training to eligibility workers. States will need to ensure that such 
training has been, and continues to be, provided, as appropriate.
    Comment: A significant number of commenters supported the policy 
that a child could be ``found ineligible'' for Medicaid through either 
a regular Medicaid application or through a screening rather than 
requiring that an actual Medicaid application be filed and a formal 
determination be made that the child is Medicaid-ineligible.
    Response: The clear intent of title XXI is to provide benefits only 
to children who do not meet Medicaid eligibility requirements in effect 
before title XXI was enacted. This policy ensures that SCHIP funds will 
be used to cover only newly eligible children and not supplant funds 
already available through Medicaid to cover eligible children at the 
applicable Medicaid FMAP. This policy also ensures that children who 
are eligible for Medicaid benefits and cost-sharing protections receive 
the benefits and protections to which they are entitled. At the same 
time, Congress intended for children to be able to apply for, and 
obtain, health care insurance as quickly as possible, without lengthy 
delay. Requiring a formal denial by the State Medicaid agency in all 
cases would not promote the intent of the law. Permitting children who 
are found unlikely to be eligible for Medicaid through a screening 
process to proceed with their application under a separate child health 
program without a formal Medicaid determination be made, best balances 
these two goals.
    Comment: Some commenters were concerned that States would make the 
Medicaid application process difficult and unfriendly while making the

[[Page 2546]]

application for a separate child health program simple so that families 
would choose to apply for the separate program but not Medicaid, and 
that the State would get the enhanced Federal match. One commenter 
particularly supported the policy that refusal to apply for Medicaid 
affects eligibility for a separate child health program. A number of 
other commenters objected to the policy of denying eligibility for a 
separate program when a child is found potentially eligible for 
Medicaid but the family makes an informed choice not to apply for 
Medicaid or chooses not to complete the Medicaid application process. 
One commenter argued that this policy goes beyond statutory authority. 
Most of those objecting to the policy expressed concern that it would 
result in children going without health coverage at all.
    Response: How well the screening process works depends in large 
part on State Medicaid application rules and procedures. States have 
broad discretion under federal law to simplify and streamline their 
enrollment processes. We encourage States to simplify the Medicaid 
application process and to make the division between separate child 
health programs and Medicaid appear seamless, and many States have done 
so.
    While we recognize that some families may decide to go without 
insurance rather than apply for Medicaid, we believe that it would be 
contrary to the statutory purposes to permit States to enroll children 
in a separate child health program who have been found potentially 
eligible for Medicaid through a screening process. As many States have 
demonstrated, States have the flexibility to address most, if not all, 
of the reasons why families might prefer not to apply for Medicaid. If 
families are reluctant to apply for Medicaid, the State may need to 
reexamine the Medicaid application and redetermination process, as well 
as its outreach and marketing strategies, to assess how barriers to 
participation can be eliminated. For example, States have shown that 
families are more likely to complete the Medicaid application process 
if face-to-face interviews are eliminated, resource tests for children 
are dropped and documentation requirements are reduced. If a joint 
application process and a single program name are used, the procedures 
can be made seamless and the difference between separate child health 
programs and Medicaid made almost invisible to the family. States are 
continuing to experiment with different ways to promote seamless 
enrollment and coverage systems.
    HCFA will be focusing considerable attention over the coming months 
on ways to help States develop seamless, family-friendly application 
and eligibility determination systems and to promote best practices 
across States. These practices will not only help States meet the 
screen and enroll requirements, but also will help States identify and 
enroll the millions of uninsured children who are eligible for, but not 
enrolled in, Medicaid.
    Comment: Many of those commenting on the screening requirements 
were concerned that not all children who are eligible for Medicaid will 
be identified. A number of commenters disagreed with the policy that 
the screening process only needs to screen for eligibility under the 
children's poverty level groups described in 1902(l). Quite a few were 
concerned that children with special needs who might qualify for 
Medicaid under another eligibility group will end up enrolled in a 
separate child health program that may provide less coverage than 
Medicaid. Some urged HCFA to require that States ask whether a child is 
disabled or has special needs. Others disagreed with the statement in 
the preamble that requiring States to screen for eligibility under all 
possible groups would place an unreasonable administrative burden on 
States. These commenters pointed out that States have considerable 
flexibility to simplify eligibility under Medicaid, particularly under 
section 1931.
    One commenter noted that screening and determining eligibility are 
not the same. This commenter suggested that it is quite feasible to 
devise a simple, short list of questions to screen for eligibility in 
non-poverty related groups, and that the regulations should require 
that States screen considering the most liberal income eligibility 
standard for the child given the child's age, disability and the 
family's prior eligibility for Sec. 1931. One commenter suggested that 
States be required to screen for eligibility for children under 
sections 1931 and 4913 of the Balanced Budget Act of 1997. Four others 
suggested that the regulations should require States to screen 
considering the highest effective income threshold, taking income 
disregards into account.
    One commenter expressed concern about the extent to which income 
exclusions and disregards must be applied in the screening process. 
This commenter suggested that the screening should include only the 
standard deductions applicable to all poverty-level Medicaid 
eligibility groups. Another commenter stated that requiring independent 
entities to be knowledgeable about income exclusions under other 
Federal statutes, particularly those which are not likely to be 
encountered, is contrary to simplification.
    Finally, one commenter was concerned that a pregnant teen who could 
be eligible for Medicaid as a pregnant woman might be found ineligible 
for both a separate child health program and Medicaid if the screening 
process did not include a method of identifying pregnant teens.
    Response: We have tried to balance the statutory screen and enroll 
requirements with the requirement that child health benefits be 
provided in an ``effective and efficient manner,'' taking into 
consideration the fact that screening may be done by entities that may 
not be familiar with the intricacies of Medicaid eligibility. For this 
reason, we have not required a full Medicaid application or a formal 
decision on such an application before a child can be eligible for a 
separate child health program.
    We have, however, reevaluated our position on screening for 
eligibility under section 1931 of the Act in light of the fact that in 
some States the highest eligibility threshold for non-disabled children 
is applied through the Sec. 1931 eligibility group. We also recognize 
that some States expanded Medicaid eligibility through the authority of 
section 1115 of the Act, resulting in a higher eligibility threshold 
for some children. We have revised Sec. 457.350(b) (proposed 
Sec. 457.350(c)) to require that a State that has used the flexibility 
provided under Sec. 1931 to expand eligibility must screen for 
eligibility under one of the poverty level groups described in section 
1902(l), section 1931 of the Act, or a Medicaid demonstration project 
under section 1115 of the Act, whichever standard generally results in 
a higher income eligibility level.
    States that have expanded eligibility under section 1931 beyond the 
poverty level category generally have adopted similar income 
eligibility rules; at a minimum, the section 1931 income methodologies 
are not likely to be significantly more complicated than the poverty 
level rules. Further, States need not screen families under both 
section 1931 and section 1902(l). Rather, they must screen under 
whichever methodology generally results in a higher income eligibility 
level for the age group of the child applying for assistance.
    Because we are requiring States to screen under whichever 
methodology generally results in a higher income eligibility level, 
States do not have to apply every income and resource disregard used 
under its State plan.

[[Page 2547]]

Disregards that apply only in very limited circumstances need not be 
routinely used in the screening process. For example, many families 
applying for coverage under section 1931 would be expected to have 
earned income, so earned-income disregards must be applied in the 
screening process. However, few applicant families would be expected to 
have income-producing property. Thus, a State that disregards such 
income under section 1931 would not have to apply this disregard in the 
screening process.
    We had included proposed Sec. 457.350(c)(2) in the proposed rule to 
ensure that the children eligible for Medicaid under section 
1902(a)(10)(A)(ii)(I) (the ``Ribicoff children'') would not be missed 
in the screening process. However, most of these children will be 
identified under the revised Sec. 457.350(b). Therefore, cognizant of 
the need to keep the screening process as simple as possible, we have 
removed proposed Sec. 457.350(c)(2) from the final regulation.
    We share the commenters' concern about children with disabilities 
being left out of the screening process and strongly encourage States 
to screen for children who might be eligible for Medicaid on the basis 
of disability. Questions about a child's potential disability may be 
included on the separate child health or joint SCHIP/Medicaid 
application for follow-up. We require States to ensure that parents are 
provided with information about all Medicaid eligibility categories and 
coverage, are encouraged to apply for Medicaid under other eligibility 
categories and are offered assistance in applying for Medicaid. 
However, we do not agree with the comment that a child should be denied 
coverage under a separate child health program unless a full Medicaid 
disability determination has been made. The definition of disability 
for Medicaid purposes is not easily understood by people unfamiliar 
with Medicaid eligibility rules, and screening for eligibility based on 
disability could be very time-consuming. We note that States have 90 
days, rather than 45, to determine Medicaid eligibility when disability 
is involved. Moreover, particularly in light of recent State Medicaid 
expansions, most children who would be eligible for Medicaid on the 
basis of disability will also meet the eligibility requirements as a 
poverty level child.
    We also do not specifically require States to screen for 
eligibility under section 4913 of the BBA. The State is responsible for 
ensuring that disabled children who lost SSI because of the change in 
the definition of childhood disability (``section 4913 children'') are 
aware of their right to Medicaid benefits. States must identify and 
provide coverage for section 4913 children, but it is highly unlikely 
that a child who would be eligible as a section 4913 child would not be 
identified in the screening process as potentially Medicaid eligible on 
the basis of his/her income alone. In any event, Medicaid 
confidentiality rules do not allow States to provide lists of section 
4913 children to entities that determine eligibility for a separate 
child health program but that do not also determine Medicaid 
eligibility.
    Comment: One commenter pointed out that a screening based on income 
alone would be insufficient in a State that continues to apply a 
resource test to children under Medicaid. They recommended that 
Sec. 457.350 be revised to clarify that, in such situations, States 
must evaluate whether children meet both income and resource tests for 
Medicaid eligibility.
    Response: We agree that, in States that continue to apply a 
resource test to children under Medicaid, when an income screen 
indicates that a child is potentially income eligible for Medicaid, the 
State must also screen for Medicaid eligibility under the applicable 
Medicaid resource test. A resource screen limits those cases in which a 
child is found potentially eligible for Medicaid based on an income 
test, but is then reviewed under Medicaid rules and found ineligible 
based on resources (and is then sent back to the separate child health 
program for another eligibility review). We have added a new paragraph 
(d) to Sec. 457.350 to include this requirement. If a State continues 
to apply a resource test for children under the eligibility groups 
described in Sec. 457.350(b) (Sec. 457.350(c) in the proposed rule) and 
a child has been determined potentially income eligible for Medicaid, 
the State must also screen for Medicaid eligibility by comparing the 
family's countable resources to the appropriate Medicaid resource 
standard. In conducting the screening, the State must apply Medicaid 
policies related to resource requirements, including policies related 
to resource exclusions and disregards and policies related to resources 
for particular Medicaid eligibility groups. However, in an effort to 
balance the statutory mandate that children eligible for Medicaid not 
be enrolled in a separate child health program with the need to keep 
the screening process as simple as possible, States need not take into 
account disregards that apply only in very limited circumstances in the 
screening process. Any resource exclusions and disregards which the 
State does not plan to use in the screening process must be identified 
in the State plan.
    Since most States no longer apply a resource test to children, this 
added screening requirement will not affect most States. State 
experience indicates that children who are income eligible seldom have 
resources in excess of the resource standard previously used, with the 
possible exception of a car that is usually needed for transportation 
to and from work. States have found that requiring information about 
resources that are highly unlikely to make a child ineligible, or that 
rarely provide a family with a greater ability to purchase health 
coverage, is an unnecessary administrative burden, a barrier to 
eligibility, and helps to reinforce the ``welfare stigma.'' HCFA 
encourages the few States with resource requirements for children to 
eliminate or otherwise simplify any remaining resource tests under both 
Medicaid and separate child health programs. However, any State that 
retains a resource test for Medicaid must screen all applicants who 
appear income-eligible for Medicaid for eligibility under the 
applicable resource test.
    Comment: One commenter indicated that screening is particularly 
difficult when an employer-sponsored model is used for SCHIP. This 
commenter suggested that States be given the option to accept a lower 
Federal match, for example, the Medicaid match, in lieu of meeting the 
Medicaid screen and enroll requirements.
    Response: We do not have the statutory authority to provide a lower 
match in lieu of meeting the Medicaid screen and enroll requirements. 
Furthermore, because eligibility determinations are distinct from 
determinations about the kind of coverage an eligible child will 
receive, there does not seem to be any reason why the screen and enroll 
requirements would present any particular problems for States with 
premium assistance programs. States are required to screen all children 
applying for coverage under a separate child health program.
    Comment: We received a significant number of comments concerning 
the requirement that certain information about Medicaid be provided to 
families if a State uses a screening procedure other than a full 
determination of Medicaid eligibility. Many commented that this 
requirement is administratively burdensome, a waste of administrative 
resources, exceeds statutory authority, and is contrary to the purpose 
and goal of the separate child health program option provided by 
Congress. Some

[[Page 2548]]

commenters believed that this requirement would mean that a full 
Medicaid determination needs to be made in every case. Others were 
concerned that it would be confusing to families whose children were 
found eligible for a separate child health program, would slow down the 
eligibility determination process, and would create a barrier to access 
in situations where the family did not want Medicaid. Several 
commenters stated that there is no evidence that Medicaid-eligible 
children are being missed in the screening process and that to the 
contrary, State-based evidence suggests that many more such children 
are being found than anticipated.
    Other commenters did not think that the notice requirements went 
far enough and they urged HCFA to require that the information provided 
describe disability-based, medically-needy and Sec. 1925 transitional 
Medicaid eligibility. One commenter recommended that proposed 
Sec. 457.350(f)(1) be revised to read ``based on limited review, we 
could not tell if your child is eligible for Medicaid.'' Another 
recommended adding ``and orally in a manner that is literacy and 
language appropriate'' to the lead-in to the required list of 
notifications. One commenter recommended that the final rule include an 
example of notice language to be sent to children who are determined 
unlikely to be Medicaid-eligible as a result of a limited screening 
process. Several others questioned whether the cost of providing the 
information about Medicaid would be an SCHIP administrative cost 
subject to the 10 percent cap on administrative expenses.
    Response: Providing information about Medicaid will not necessarily 
create a barrier to enrollment. Families are entitled to have complete 
information on which to base a decision about applying for coverage. We 
are pleased that reports from many States indicate that many Medicaid-
eligible children are being found through the screening process. 
However, the results across all States are not uniform and there is no 
way to know how many other Medicaid-eligible children are not being 
identified. Because all families are entitled to have information on 
their child's eligibility for coverage, we are retaining this provision 
with clarification.
    We agree that families need to understand that no formal 
determination of the child's Medicaid eligibility has been made, nor 
has the child been screened under all Medicaid eligibility categories. 
We note that a Medicaid determination does not need to be made in every 
case, but rather only for those children screened as potentially 
eligible for Medicaid using the joint application, and that a Medicaid 
eligibility determination can only be issued by the State agency 
designated to make the determination. In the instance where the same 
agency that makes the Medicaid determination of eligibility also 
determines eligibility for the separate child health program, a 
determination of Medicaid eligibility must be issued, in addition to 
the notice required at Sec. 457.350(e).
    We have clarified the language of proposed Sec. 457.350(f) at 
Sec. 457.350(g)(1) of this final rule to provide that the State must 
inform the family, in writing, that based on a limited review, the 
child does not appear to be eligible for Medicaid, but that Medicaid 
eligibility can only be determined from a full review of a Medicaid 
application under all Medicaid eligibility groups. We have not included 
actual or proposed notice language in the final rule. Due to the 
differences in Medicaid programs, the language necessarily will vary 
from State to State. However, we are working to identify good notice 
language and best practices and will disseminate this material to 
States.
    We expect that the information will be comprehensive and include 
information about Medicaid eligibility based on disability, pregnancy, 
excessive medical expenses, or unemployment of the family wage earner. 
We also expect that this information will be provided in a simple and 
straightforward manner that can be understood by the average applicant 
and that meets all applicable civil rights requirements, including the 
Americans with Disabilities Act (ADA). The information can be provided 
along with other information conveyed to SCHIP applicants or it can be 
a separate notice. The cost of providing information about Medicaid 
eligibility need not be a SCHIP administrative expense subject to the 
10 percent cap. A State may choose to charge the cost of providing 
information about Medicaid as an administrative expense under title 
XIX.
    Comment: A few commenters indicated that the regulations should 
make it clear that a child can be enrolled in a separate child health 
program while undertaking the full Medicaid application process. Other 
commenters recommended enrolling a child in a separate child health 
program for 45 days to allow processing of the Medicaid application.
    Response: As discussed above, at its option, a State may 
provisionally enroll or retain current enrollment of a child who has 
been found potentially eligible for Medicaid in a separate child health 
program, for a limited period of time, as specified by the State, 
pending a final eligibility decision. However, the child cannot be 
``eligible'' for the separate program unless a Medicaid application is 
completed and a determination made that the child is not eligible for 
Medicaid.
    As noted above, we have revised our policy based on the recent 
enactment of BIPA to permit health coverage expenditures for children 
during the presumptive eligibility period to be treated as health 
coverage for targeted low-income children whether or not the child is 
ultimately found eligible for the separate child health program, as 
long as the State implements presumptive eligibility in accordance with 
section 1920A and Sec. 435.1101 of this part. This preserves State 
flexibility to design presumptive eligibility procedures and allows 
States that adopt the presumptive eligibility option in accordance with 
Sec. 435.1101 to no longer be constrained by the 10 percent cap.
    Comment: We received several comments urging HCFA to emphasize 
opportunities for simplifying the screen and enroll process and making 
the process ``family-friendly.'' Among the suggestions were: using a 
joint application or a single State agency; avoiding confusing options 
for families to opt in or out of Medicaid; eliminating age-based rules; 
adopting the same verification requirements as Medicaid; adopting the 
same income and resource methodologies as Medicaid; eliminating 
documentation requirements in Medicaid that are not required by the 
separate child health program; and requiring that any simplifications 
in the application process that States adopt for Medicaid or a separate 
child health program not be denied to children whose families also 
happen to be TANF or Food Stamp applicants or recipients.
    Response: The suggested simplifications are ways in which confusing 
options and complex procedures can be eliminated and the screen and 
enroll process be made ``family-friendly.'' We encourage States to 
adopt these simplifications. As States experiment with new ways to 
coordinate their child health coverage programs, they are finding that 
alignment of program rules and procedures can greatly simplify the task 
of coordinating enrollment. As for children who are also applying for, 
or are receiving, Food Stamps or TANF, we emphasize that, while States 
may use joint child health, Medicaid, Food Stamp and TANF applications, 
they cannot condition Medicaid eligibility on Food Stamp or TANF 
requirements that

[[Page 2549]]

do not apply to Medicaid. For example, if a State Medicaid program does 
not require a face-to-face interview to determine a child's eligibility 
for Medicaid, a child applying for Medicaid and Food Stamps on a joint 
application cannot be denied Medicaid simply because the child's family 
does not comply with the Food Stamp interview requirement. Similarly, 
States cannot condition eligibility for a separate child health program 
on Food Stamp or TANF requirements that do not apply to that program.
    Comment: Many of those who commented on the screen and enroll 
process were concerned generally about families ``falling through the 
cracks'' because of the back and forth between separate child health 
programs and Medicaid or going without any health care for a period of 
time because of the process requirements. One commenter was 
particularly concerned about children leaving State custody from foster 
care or the juvenile justice system, who are at great risk of failing 
to apply for health coverage after they leave State custody. A 
significant number suggested that the regulations provide that a State 
cannot require a child to reapply for a separate child health program 
if the child is screened potentially eligible for Medicaid, but later 
determined ineligible for Medicaid. Most suggested that the separate 
child health program application should be suspended or provisionally 
denied when a child is found to be potentially eligible for Medicaid, 
pending a final Medicaid eligibility determination.
    Other commenters found the distinction between joint and separate 
applications confusing with respect to the screening requirements. The 
commenters requested clarification as to whether the procedures for use 
of joint applications also apply to separate child health programs.
    Response: There are many policies and procedures that States with 
separate child health programs can adopt to ensure that children do not 
``fall through the cracks.'' When a child is identified through 
screening as potentially eligible for Medicaid, States may suspend, 
deny or provisionally deny the separate child health application. 
Alternatively, if the State has established a presumptive eligibility 
process for a separate child health program, the State may enroll an 
applicant in the separate child health program pending the formal 
determination of Medicaid eligibility; we have added a new section 
Sec. 457.355 to reflect this option. It should also be noted that we 
have revised our policy to allow health coverage expenditures for 
children during the presumptive eligibility period to be treated as 
health coverage for targeted low-income children whether or not the 
child is ultimately found eligible for the separate child health 
program, as long as the State implements presumptive eligibility in 
accordance with section 1920A and section 435.1101 of this part. This 
preserves State flexibility to design presumptive eligibility 
procedures and allows States that adopt the presumptive eligibility 
option in accordance with section 435.1101 to no longer be constrained 
by the 10 percent cap.
    We also have clarified the regulations at Sec. 457.350(f)(5) 
(Sec. 457.350(e)(2) in the proposed regulations) to require that, if a 
child screened potentially eligible for Medicaid is ultimately 
determined not to be eligible for Medicaid, once the State agency or 
contractor that determines eligibility for the separate child health 
program has knowledge of the Medicaid determination, the child's 
original application for the separate child health program must be 
reopened or reactivated and his/her eligibility under the separate 
child health program determined without a new application. We believe 
that most States currently follow this procedure to ensure that the 
screening process does not improperly deny coverage under the separate 
child health program.
    As discussed below, we have also added a rule directed to the 
Medicaid agency that requires that agency to promptly inform the SCHIP 
agency or contractor when a child who has been screened as potentially 
eligible for Medicaid is found ineligible for Medicaid (see section 
431.636 of this chapter).
    We have clarified Sec. 457.350(f)(1) (Sec. 457.350(e)(1) in the 
proposed rules) to indicate that a State may suspend, provisionally 
deny or deny the application of a child screened potentially eligible 
for Medicaid. (Note that to provisionally deny an application is the 
same as finding the child provisionally ineligible for the separate 
child health program.) Putting the application into suspense for a 
reasonable period of time before taking action on it would preserve the 
child's initial application date and ensure follow-up on the part of 
the State agency or contractor after the specified time period had 
elapsed or the agency or contractor learned that the child has been 
determined ineligible for Medicaid, whichever is sooner. If a State 
provisionally denies the application and the child is subsequently 
determined ineligible for Medicaid, the child's initial application 
would be reactivated as soon as the State agency or contractor that 
determines eligibility for the separate child health program learns of 
the denial of Medicaid eligibility. In either case, the family would 
not need to provide any additional information (unless there has been a 
change in circumstances that could affect eligibility).
    In most circumstances, no further action on the part of the family 
will be necessary to reactivate or reopen the application for the 
separate child health program following a denial of Medicaid 
eligibility. For example, in States in which the State Medicaid agency 
also determines eligibility for the separate child health program, no 
further action on the part of the family will be required. Similarly, 
States that use a joint application and that closely coordinate the 
eligibility determination process (for example, through electronic 
transfers or by co-locating eligibility workers) can ensure that 
Medicaid determinations for children identified as potentially 
Medicaid-eligible can be made quickly and that the decision (and 
underlying information) can also be conveyed quickly back to the 
workers responsible for determining eligibility for the separate 
program.
    We agree that the screening requirements are the same whether a 
joint application or separate applications are used, although the 
procedures States will need to adopt to meet these requirements will 
vary depending on whether a joint application is used. Therefore, we 
have deleted proposed Sec. 457.350(b) to eliminate confusion. All 
States, including those that use a joint application, are required to 
meet the screening requirements in Sec. 457.350.
    We have added a new subparagraph Sec. 457.350(f) to clarify the 
State's responsibilities for ensuring that the Medicaid application 
process for a child screened potentially eligible for Medicaid is 
initiated and, if eligible, that the child is enrolled in Medicaid, as 
required by section 2102(b)(3)(B) of the Act.
    In general, in States that use a joint application, the State 
agency or contractor that conducts the screening shall promptly 
transmit the application and all relevant documentation to the 
appropriate Medicaid office or Medicaid staff to make the Medicaid 
eligibility determination, in accordance with the requirements of 
Sec. 431.636, a new provision which sets forth the Medicaid agency's 
responsibilities with respect to the screen and enroll requirements of 
title XXI. Because the agency administering the separate child health 
program may not be the agency

[[Page 2550]]

authorized to make Medicaid determinations in the State, it is at the 
point when the joint application form is transmitted to the Medicaid 
office from the separate program that it becomes a Medicaid 
application. We have added the definition of ``joint application'' at 
Sec. 457.301 to clarify this point and to facilitate the processing of 
joint applications. Specifically, we define a joint application as a 
form used to apply for a separate child health program that, when 
transmitted to the Medicaid agency following a screening that shows the 
child is potentially eligible for Medicaid, may also be used to apply 
for Medicaid. We encourage States that use a separate application for a 
separate child health program to design their applications so that 
families can easily waive confidentiality under SCHIP to allow the 
agency or contractor that conducts the screening to transfer 
information to the Medicaid agency when a child has been found 
potentially eligible for Medicaid.
    In States which do not use a joint application for Medicaid and 
separate child health programs, the State agency or contractor that 
conducts the screening shall (1) inform the applicant that the child is 
potentially eligible for Medicaid; (2) provide the applicant with a 
Medicaid application and offer assistance in completing the 
application, including providing information about what, if any further 
information and/or documentation is needed to complete the Medicaid 
application process; and (3)promptly transmit the application and all 
other relevant information, including the results of the screening 
process, to the Medicaid agency for a final determination of Medicaid 
eligibility, in accordance with Sec. 431.636.
    It should be noted that under most circumstances, the term 
``promptly'' means that the entire process (including screening and 
facilitation between SCHIP and Medicaid) for determining eligibility 
should be completed within the 45 day period. However, we recognize 
that there are cases where the timing of the process is beyond the 
control of the separate child health program. For example, if the 
process for determining Medicaid eligibility after a screen reveals 
that the family's income has changed, making them eligible for the 
separate child health program, we understand that the need to transfer 
paperwork back and forth between programs can take additional time 
beyond the 45 days.
    Alternatively, under Sec. 457.350(f), the State can establish other 
procedures to eliminate duplicative requests for information and 
documentation and ensure that the applications and all relevant 
documents of children screened potentially eligible for Medicaid are 
transmitted to the Medicaid agency or staff and that, if eligible, such 
children are enrolled in Medicaid in a timely manner.
    We also have added a section Sec. 457.353(a) to require that States 
monitor and establish a mechanism to evaluate (1) the process 
established in accordance with Sec. 457.350 to ensure that children who 
are screened potentially eligible for Medicaid apply for and, if 
eligible, enroll in that program and (2) the process established to 
ensure that the applications for a separate program of children who are 
screened potentially eligible, but ultimately determined by the 
Medicaid agency not to be eligible, for Medicaid are processed in 
accordance with Sec. 457.340 of this subpart.
    Data collection will need to be a part of any mechanism developed 
to effectively evaluate the screen and enroll process. For example, 
States will need to collect data on the number and percent of children 
applying for a separate child health program who are screened 
potentially eligible for Medicaid; the number of those screened 
potentially eligible for Medicaid who ultimately are determined to be 
eligible versus the number determined not to be eligible for Medicaid; 
the number of those children ultimately determined not to be eligible 
for Medicaid whose applications for the separate child health program 
are processed; etc. These data will help States and HCFA evaluate 
whether the procedures States adopt are accomplishing the goal of 
enrolling children in the appropriate program or whether modifications 
are needed.
    We have modified the language in Sec. 457.350(f)(5)(ii) to clarify 
that States must determine or redetermine the eligibility of a child 
initially screened eligible for Medicaid if the child's circumstances 
change and under Sec. 457.350(e) another screening shows that the child 
does not appear to be eligible for Medicaid. We have added the phrase 
``does not appear to be'' to reflect the fact that only the State 
Medicaid agency is authorized to actually determine that a child is 
ineligible for Medicaid. Contractors can only make a determination as 
to the likelihood of the child's eligibility for purposes of proceeding 
with the application for a separate child health program.
    Second, we have added a new subparagraph at Sec. 457.350(f)(5)(iii) 
to clarify that, in determining or redetermining the eligibility for a 
separate child health program of a child screened potentially eligible, 
but ultimately determined not eligible, for Medicaid, the child may not 
be required to complete a new application, although it may supplement 
the information on the initial application to account for any changes 
in the child's circumstances or other factors that may affect 
eligibility.
    We also have added a new subsection Sec. 457.350(h) to require that 
States which have instituted a waiting list for the separate child 
health program develop procedures to ensure that the screen and enroll 
procedures set forth in Sec. 457.350 have been complied with before a 
child is placed on the waiting list. This ensures that children who are 
eligible for Medicaid are not placed on a waiting list if a State has 
closed enrollment for its separate child health program. These 
requirements ensure that eligible children are enrolled in the 
appropriate program without delay and without unnecessary paperwork 
barriers. At the same time, they give States ample leeway to design the 
system that works best for them. No one system is prescribed, but 
States will need to monitor and evaluate how well their system is 
working, and they will be held accountable for ensuring that the system 
they have designed and implemented complies with the statutory and 
regulatory requirements.
    Comment: We received one comment that the regulations should 
clearly indicate that a State may cease accepting applications for its 
separate child health program when enrollment is closed.
    Response: The State may stop accepting applications as one method 
of administering an enrollment cap. If the State is using a joint 
application, which is also an application for Medicaid, then the State 
must have provisions to assure that the Medicaid eligibility 
determination process is initiated, even if enrollment in the separate 
child health program has been suspended. If, after a State plan that 
does not authorize an enrollment cap is approved by HCFA, the State 
opts to restrict eligibility by discontinuing enrollment, the State 
must submit a State plan amendment in accordance with Secs. 457.60 and 
457.65 of this final rule.
    Comment: Two commenters suggested that the preamble reiterate that 
a child who must meet a spend down does not have ``other coverage'' and 
may be eligible for the separate child health program.
    Response: We have not required States to screen for Medicaid 
eligibility under the medically needy groups described in section 
1902(a)(10)(C) of the Act because of the uncertainty inherent in 
determining whether and

[[Page 2551]]

when a spend down has been met. A child who is not yet ``medically 
needy'' because he or she has not yet met the spend down requirements 
is not considered to be eligible for Medicaid for purposes of the 
screening requirement. However, an individual who could be eligible for 
Medicaid as medically needy with a spend down has a right to apply for 
Medicaid, and should be informed of the spend down category. If a child 
is eligible without a spend down or if it is determined that the spend 
down has been met, then the child would be eligible for Medicaid and 
would not be eligible for the separate child health program. 
Information about the State's medically needy program must be included 
in the information provided to applicants for a separate child health 
program.
    Comment: In response to our request for comments on the extent of 
the Medicaid ``stigma'' problem and possible solutions, several 
commenters noted that poor coordination between separate child health 
programs and Medicaid expansions contributes to the stigmatization of 
Medicaid. One commenter noted that many working people take pride in 
their achievements and posited that they prefer to pay their own way 
rather than participate in what they perceive as a public assistance 
program. This commenter felt that people's desire for self-reliance is 
not an attitude that public policy can (or should) change.
    According to the commenters, a program is more likely to be 
successful in insuring children if these attitudes are taken into 
account. Two commenters said that negative reactions to Medicaid are 
due to its historic association with welfare; discourteous or intrusive 
treatment by workers; difficult application processes; negative 
treatment by providers; negative personal experiences and those of 
friends and neighbors.
    Several commenters suggested that the stigma can be alleviated by 
having a simple, joint enrollment process and creating a seamless 
environment. One commenter suggested that a non-public entity be 
allowed to enroll children in Medicaid. Another recommended that HCFA 
encourage States to offer applicants a choice of settings in which to 
be enrolled, because reliance on a public monopoly reinforces the 
stigma. Additional suggestions included giving both programs one name; 
adopting a joint application; eliminating asset tests; encouraging 
presumptive eligibility; expanding outreach and enrollment sites; 
eliminating face-to-face requirements; and offering a single 
application site. One commenter also recommended that HCFA continue to 
research best practices and promote them.
    One commenter suggested that ensuring that providers in both 
programs are paid adequately and that provider networks in both 
programs provide convenient access to high quality services is a 
critical step as well. We received one suggestion that HCFA assess the 
barriers to Medicaid enrollment in each State and develop and implement 
a State-specific plan to address and remove such barriers. Several 
commenters asserted that the situation is difficult to resolve given 
the current statutory requirements and suggested that HCFA fund a study 
and make suggestions for legislative changes.
    Response: We appreciate the responses on the stigma issue and have 
incorporated many of them in our guidance and suggestions to the 
States. We will continue to research and promote best practices and 
note that many States have successfully eliminated or greatly limited 
the welfare stigma which sometimes is associated with Medicaid and have 
converted Medicaid to a program that operates as, and is perceived to 
be, a health insurance program.
    We encourage States to continue to simplify their processes and 
eliminate barriers to facilitate enrollment and retention among 
eligible individuals. We also encourage States to employ outreach 
efforts geared toward changing the perception that Medicaid is 
``welfare.'' We urge States to make clear in all their informational 
materials about the TANF cash assistance program that coverage under 
Medicaid or a separate child health program is not linked to TANF 
eligibility or enrollment and that, whether or not families apply for 
or receive TANF assistance, they are encouraged to apply for Medicaid 
and any separate child health program.

8. 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 proposed in Sec. 457.360(a) that the State plan must 
describe the reasonable procedures to be adopted to ensure that 
children found through the screening to be potentially eligible for 
Medicaid actually apply for and are enrolled in Medicaid, if eligible. 
Under proposed Sec. 457.360(b), States must establish a process to 
initiate the Medicaid enrollment process for potentially Medicaid 
eligible children and several options for States are provided.
    We also proposed to require at Sec. 457.360(c) that a State ensure 
that families have an opportunity to make an informed decision about 
whether 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 and restrictions on cost-
sharing; and (2) the effect on eligibility for coverage under the 
separate child health program of neither applying for Medicaid nor 
completing the Medicaid application process.
    Comment: We received one comment that States should not be required 
to ``ensure'' that children enroll in Medicaid because States cannot 
dictate to families, but can only assist them.
    Response: The statute specifically requires that States ``ensure'' 
that children are enrolled. It is correct that a family cannot be 
forced to apply for Medicaid and that States cannot ultimately 
``ensure'' that an eligible child is enrolled. However, it is the 
responsibility of the State to remove barriers to enrollment, adopt 
procedures that promote enrollment of eligible children, and ensure 
that the family understands the benefits of Medicaid and the 
consequences of not applying for Medicaid.
    Comment: We received a number of comments pertaining to the 
information about Medicaid which must be provided to families. One 
commenter stated that it was not reasonable to expect States to 
``ensure'' that a family's decision not to apply for Medicaid is an 
informed decision and that this could lead to costly litigation over 
whether the State has taken sufficient measures. A significant number 
of commenters were concerned that States would be required to provide 
``reams'' of in-depth information about Medicaid and commented that 
general information ordinarily provided to any family interested in 
applying for Medicaid should be sufficient. Finally, one commenter 
recommended that information about the benefits of Medicaid be provided 
to adolescents in a format and language that can be easily understood 
by both the adolescent and the family.
    Response: Sufficient information must be provided to families to 
enable them to make an informed decision about completing an 
application for Medicaid. We agree that information about Medicaid 
eligibility and the benefits of Medicaid should also be in a format 
that adolescents can understand as appropriate. We also note that the 
provision of information to families

[[Page 2552]]

under proposed Sec. 457.360(c), section Sec. 457.350(g) of the final 
rule, only applies for States that use a separate application for their 
separate child health plan and those using a joint application which 
permits families to check a box on the application to elect not to 
apply for Medicaid.
    In some cases, the general information provided ordinarily to any 
family interested in applying for Medicaid may provide sufficient 
information about Medicaid itself for these purposes. However, the 
State must also inform the family about the effect on eligibility for 
the separate child health program if the family chooses not to apply 
for Medicaid or not to complete the Medicaid application process, as 
many families will not realize that they do not have a choice between 
programs.
    We have reconsidered the use of the term ``ensure'' because we 
agree that States cannot ``ensure'' that a decision is an informed one, 
no matter how much or how understandable the available information. 
States can only make the information available in an accessible way. We 
have revised the regulation at new Sec. 457.350(g) (proposed 
Sec. 457.360(c)) to require that States provide sufficient information 
to enable the family to make an informed decision.
    Comment: One commenter suggested that, because Medicaid eligibility 
may result in automatic referral to CSE, States should inform families 
applying for the separate child health program about the rights and 
responsibilities associated with being found eligible for Medicaid, 
including the assignment of medical support rights and the right to 
claim an exemption from the cooperation requirements. The commenter is 
concerned that a mother applying for SCHIP, where there is no need for 
contact with the noncustodial parent, may not mention that she has been 
subject to domestic abuse at the time of applying, and might be 
automatically referred to CSE when there is good cause for not being 
referred.
    Response: A Medicaid application for a child should not result in a 
referral to the CSE agency absent the cooperation of a parent. We agree 
that whenever a Medicaid or separate child health program application 
is filed, the family should be informed about the services offered by 
the CSE, its opportunity to take advantage of these services, and 
whether additional information will be required. Cooperation with 
establishing paternity and pursuing medical support is not a condition 
of a child's eligibility for Medicaid. Parents can be asked whether 
they would like to pursue medical support through CSE, but a 
cooperation in obtaining CSE cannot be required as a condition of a 
child's eligibility for Medicaid. If a parent also is applying for 
Medicaid, the parent should be informed of the acceptable reasons for 
refusing to cooperate and of the distinct consequences for the parent's 
and child's eligibility of not cooperating if none of the acceptable 
reasons applies.
    Comment: One commenter noted that States should be given 
flexibility in the areas of application and enrollment. Another 
commented that the proposed regulations are overly prescriptive and 
exceed statutory authority by requiring States and SCHIP applicants to 
go through a tedious and administratively difficult process of 
obtaining a written waiver from applicants stating they do not wish to 
apply for Medicaid or complete a Medicaid application as required in 
proposed Sec. 457.360(c).
    Response: As discussed in the responses to several comments below, 
States have a great deal of flexibility in the areas of application and 
enrollment. There is no requirement that SCHIP programs ask families 
for a waiver; in fact, under title XXI, States do not have the option 
of enrolling children in the separate program if a Medicaid screen 
indicated the child may be eligible for Medicaid, even if a family 
waived their right to apply for Medicaid. States must inform families 
about the consequences for the child's coverage of not applying for 
Medicaid and develop systems to facilitate seamless enrollment in 
Medicaid for eligible children pursuant to Sec. 457.350. Under 
Sec. 457.350(f)(1), the State could suspend the child's application for 
the separate program unless or until a completed Medicaid application 
for that child is denied. This would preserve the child's initial 
application date and ensure follow-up on the part of the State SCHIP 
agency after the specified time period had elapsed.
    Alternatively, a State may deny, or provisionally deny, the 
separate child health program application. As discussed earlier, if a 
State provisionally denies the application and the child is 
subsequently determined ineligible for Medicaid, the child's initial 
separate child health program application should be reactivated as soon 
as the SCHIP agency learns of the denial of Medicaid eligibility. The 
family would not need to provide any additional information (unless 
there has been a change in circumstances that could affect 
eligibility). If the child chooses not to apply for Medicaid, the 
denial or provisional denial under a separate child health program will 
stand (unless the child's circumstances change and a new screen shows 
that the child no longer appears potentially eligible for Medicaid).
    Comment: Several commenters were concerned that the application 
process for Medicaid would be a barrier to enrollment in a separate 
child health program. Some expressed concern that the proposed rule 
would fail to prevent States from using unnecessary administrative 
barriers and hostile or adversarial treatment by Medicaid eligibility 
workers as a means of discouraging families from successfully 
completing a Medicaid application and one urged HCFA to prevent States 
from requiring that applicants screened potentially Medicaid-eligible 
go through complicated, time-consuming and demeaning processes. Two 
recommended that HCFA prohibit States from making the process for 
applying for Medicaid more burdensome, onerous or time-consuming than 
the process for applying for a separate child health program. A few 
urged that the screen and enroll requirements be enforced, monitored, 
and evaluated to ensure that all children eligible for Medicaid are 
reached. One of the commenters urged HCFA to set high standards to 
ensure that States actually enroll screened children in Medicaid.
    Response: Section 2102(b)(3)(B) of the Act requires States to 
describe in their State plan their procedures for ensuring that 
children screened potentially eligible for medical assistance under the 
State Medicaid plan under title XIX are enrolled in Medicaid. We have 
implemented that statutory provision at Sec. 457.350(a)(1). A simple 
referral to the Medicaid agency is not enough to meet this requirement. 
In Sec. 457.350, we require that States take reasonable action to 
facilitate the Medicaid application process and to promote enrollment 
of eligible children into Medicaid.
    We do not have the statutory authority to require any particular 
application process, or that the Medicaid application process be no 
more difficult than the application procedures for separate child 
health programs. However, we appreciate the commenters' concerns and 
encourage States to examine their administrative systems and to 
simplify and minimize barriers in their application and enrollment 
processes for both Medicaid and separate child health programs to the 
extent possible. We are pleased that most States are moving in this 
direction and will continue to provide technical assistance on this 
matter as needed.

[[Page 2553]]

    Given Congressional concern that title XXI funds not be used to 
supplant existing health insurance coverage, ensuring compliance with 
the screen and enroll requirements of title XXI is a high priority for 
HCFA and will be strictly monitored, evaluated, and enforced. As 
previously discussed, we have added a new Sec. 457.353(a) to require 
States to monitor and establish a mechanism to evaluate the processes 
adopted by the State to implement the screen and enroll provisions of 
Sec. 457.350.
    Comment: Two commenters recommended that States be required to send 
a notice after an initial screen finds potential Medicaid eligibility.
    Response: The State needs to provide written notice of any 
determination of eligibility under Sec. 457.340(d). If the State 
determines that an applicant is ineligible for coverage under its 
separate child health program, the State must provide written notice of 
that determination. In addition, under Sec. 457.350(g) the State must 
provide families with information to enable them to make an informed 
decision about applying for Medicaid; and under Sec. 457.350(f)(3), if 
a State does not use a joint application for Medicaid and its separate 
child health program, applicants that are screened potentially 
Medicaid-eligible must be given notice that they have been found 
potentially eligible for Medicaid, and be offered assistance in 
completing a Medicaid application (if necessary), and provided 
information about what is required to complete the Medicaid application 
process.
    Comment: We received two comments related to the effective date of 
an application. One commenter requested that the regulations clarify 
that if a joint application is used, the date of the application for a 
separate child health program is also the date of application for 
Medicaid. One commenter believed that if an application for the 
separate child health program is denied, the State must provide notice 
to the applicant and must also continue to process the Medicaid 
application within the 45-day time frame.
    Response: If a State uses a joint application for Medicaid and its 
separate child health program, the date of application for Medicaid may 
or may not be the same as the date of application for the separate 
program. As indicated earlier, this is because the State agency that 
determines eligibility for Medicaid may not be the same entity that 
determines eligibility for the separate program. In some cases, it may 
not be reasonable to hold the Medicaid agency responsible for 
determining eligibility within 45 days when it could not have initiated 
the determination process until the application was transmitted from 
the entity administering the separate child health program.
    The SCHIP entity's responsibility in this case is to promptly 
transmit the application to the Medicaid agency immediately following 
the screen. Under most circumstances, the term ``promptly'' means that 
the entire process (including screening and facilitation between the 
separate child health program and Medicaid) should be completed within 
45 days. However, we recognize that there are also circumstances where 
the timing of the process is beyond the control of the separate child 
health program and the separate child health program. For example, if 
the process for determining Medicaid eligibility after a screen reveals 
that the child's family income has changed, making them eligible for 
the separate child health program, we understand that the transfer back 
and forth between programs can take additional time.
    If a State uses separate applications for its separate child health 
program and Medicaid, States can but are not required to establish the 
date the separate application was filed as the effective date of filing 
for Medicaid. States have flexibility under the Medicaid program to 
establish the effective date of a Medicaid application. The regulations 
at Sec. 431.636 of this chapter do require that the SCHIP agency and 
the Medicaid agency coordinate to design and implement procedures that 
are developed to coordinate eligibility to ensure that eligible 
children are enrolled in the appropriate program in a timely manner.
    Comment: Two commenters recommended that the regulations require 
that, even if a separate application is used for the separate child 
health program, the application form and any supporting verification 
must be transmitted to the appropriate Medicaid office for processing 
without further action by the applicant to initiate a Medicaid 
application. One commenter recommended that if an applicant is required 
to take any additional steps in order to apply for Medicaid, that the 
Medicaid agency inform the family of the steps it must take.
    Response: As discussed above, under Sec. 457.350(f)(3), States that 
use a separate application must provide an applicant screened 
potentially eligible for Medicaid with a Medicaid application; offer 
assistance in completing the application, including providing 
information about any additional information or documentation needed to 
complete the Medicaid application process; and send information and all 
relevant documentation obtained through the screening process to the 
appropriate Medicaid office or to Medicaid staff, to begin the Medicaid 
application process. An application for Medicaid would then be 
processed in accordance with Medicaid rules and regulations. 
Documentation (or photocopies) must be forwarded to the Medicaid agency 
along with other information wherever feasible. The family cannot be 
required to repeat information or provide documentation more than once. 
However, a separate child health application is not an application for 
Medicaid unless the State allows it to be used as such. Some States do 
use the separate child health program application as the Medicaid 
application when a child is screened as potentially eligible for 
Medicaid. This practice relieves the family and the State of the need 
to complete and review another application form.
    As part of meeting their obligations under section 2102(b)(3)(B) of 
the Act, States must adopt reasonable procedures to ensure that a 
Medicaid application for children screened potentially eligible for 
Medicaid is completed and processed (provided that the family has not 
indicated that it does not wish to apply for Medicaid for the child). 
The obligations of the Medicaid agency in meeting this requirement are 
set forth in Sec. 431.636 and discussed further in subpart M of this 
preamble, ``Expanded coverage of children under Medicaid and Medicaid 
coordination.''
    Comment: A number of commenters suggested that the procedures in 
the regulations for facilitating Medicaid enrollment should 
specifically require that application assistance include bilingual 
workers, translators and language appropriate material or that the 
requirements of title VI and the ADA should be explained in the 
preamble. One commenter recommended that this include examples of how 
States and contracted entities can comply with these requirements.
    Response: As required by Sec. 457.130, the State plan must include 
an assurance that the State will comply with all applicable civil 
rights requirements. In addition, Sec. 457.110 requires that States 
provide to potential applicants, applicants and enrollees information 
about the program that is linguistically appropriate and easily 
understood. Such materials and services, as well as compliance with the 
ADA, are required and important if

[[Page 2554]]

States are to effectively reach and enroll all groups of eligible 
children. We elected not to explain in detail all applicable civil 
rights requirements identified under Sec. 457.130. However, interested 
parties can obtain additional information on these requirements by 
contacting the U.S. Health and Human Services' Office for Civil Rights.

9. Application for and Enrollment in a Separate Child Health Program 
Sec. 457.340 (Proposed Sec. 457.361)

    Because we believe that the provisions of this section are closely 
related to those contained in proposed 457.340, in this final rule, we 
have incorporated the provisions of these two sections in the final 
regulation at Sec. 457.340. However, we will respond to comments to 
proposed Sec. 457.361 here.
    In this section, we proposed 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 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.
    We noted in the preamble to the proposed rule that, 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.
    We proposed that the State must send each applicant a written 
notice of the decision on the child health application and that the 
State agency must establish time standards, not to exceed forty-five 
calendar days, for determining eligibility and inform the applicant of 
those standards. 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. We also proposed 
that the State agency must determine eligibility within the State-
established standards except in unusual circumstances and that the 
State must specify in the State plan the method for determining the 
effective date of eligibility for a separate child health program.
    In addition to the changes made in response to the comments 
discussed below, we have modified the language in Sec. 457.361(c) 
(Sec. 457.340(d) in this final regulation) to clarify that States must 
notify families whenever a decision affecting a child's eligibility is 
made--whether the decision involves denial, termination or suspension 
of eligibility. In the case of a termination or suspension of 
eligibility, the State must provide sufficient notice, in accordance 
with Sec. 457.1180, to enable the child's parent or caretaker to take 
any appropriate actions that may be required to allow coverage of the 
child to continue without interruption. This clarification has been 
added in response to comments in order to ensure that children do not 
experience an unnecessary break in coverage because they have reached 
the end of an enrollment period.
    Comment: Several commenters stated that HCFA should require States 
to notify the public of the priority standards, if any, for enrollment; 
inform individuals of their status on any waiting list; and maintain 
sufficient records to document that favoritism or discrimination does 
not occur in selecting individuals for enrollment.
    Response: As discussed in the preamble to Sec. 457.305, above, if a 
State plans to institute a waiting list or otherwise limit enrollment, 
it must include in its State plan a description of how the waiting list 
will be administered, including criteria for how priority on the list 
will be determined. In addition, Sec. 457.110 requires States to inform 
applicants about their status on a waiting list.
    Comment: We received several comments on the proposed requirement 
that a State determine eligibility under a separate child health 
program within 45 days. One commenter stated that the date of the 
application should not be the beginning of the 45 day period but rather 
the date that the application is received in the separate child health 
program eligibility office as there could be a delay for mailed-in 
applications. Another commented that the 45-day requirement does not 
take into account delays in obtaining necessary verifications from 
third parties such as employers or insurers. They suggested adding ``or 
other party with information needed to verify the application [delays * 
* *]'' or just requiring States to determine eligibility in a timely 
manner. A third supported establishing a 45-day time limit and 
prohibiting the use of time standards as a waiting period, but 
recommended that the regulations provide more specificity regarding 
when notice of rights and responsibilities must be given and a notice 
of decision provided. Another commenter felt that the 45-day 
requirement should be removed, that mirroring Medicaid is burdensome 
and costly, and allowing mail-in and drop-off applications may mean it 
will take longer to reach people to get all the necessary information.
    Response: We have not changed the requirement in Sec. 457.340(c) 
(proposed Sec. 457.361(d)) that States must determine eligibility for a 
separate child health program within 45 calendar days (or less if the 
State has established a shorter period) from the date the application 
is filed. We have, however, clarified Sec. 457.340(c)(2) 
(Sec. 457.361(d) in proposed rule) to require that States determine 
eligibility and issue a notice of decision promptly, but in any event 
not to exceed the time standards established by the State. This is 
consistent with the requirement that child health assistance be 
provided in an efficient manner, and that the 45-day period--or other 
time period specified by the State--may not be used as a waiting 
period. States have flexibility in deciding when an application is 
considered filed.
    We agree that States should not be held responsible for delays 
caused by third parties beyond the State's control and have 
accommodated that concern in Sec. 457.340(c)(2). We also have revised 
Sec. 457.340(b) to specify that the notice of rights and 
responsibilities must be provided at the time of application. This 
ensures that families have the information they may need to proceed 
with the application process and successfully enroll their child.
    Comment: We received two comments objecting to the requirement in 
Sec. 457.340(a) that States assist families in obtaining documentation. 
They commented that States are not in a position to do this and that 
the requirement has the potential for enormous administrative burden.
    Response: We will not be removing the phrase from the regulation, 
but will offer clarification related to this provision as we think the 
commenter may have misinterpreted the proposed rule. We expect that, in 
offering application assistance, the State or contractor for the 
separate child health program will provide assistance to applicants in 
understanding what documentation is needed to complete their 
applications and, to the extent possible, will assist applicants in 
determining where they might obtain the needed information. For 
example, if the State's application process requires verification of 
income and the applicant does not understand how they can prove their 
income, we would expect the State or the individual providing 
application assistance to be able to inform the family of the type of 
documentation (e.g., pay stubs or W-2 forms) needed and where the 
applicant might be able to obtain that information (e.g., from their 
employer). We do not expect a State to literally perform the

[[Page 2555]]

task of obtaining the documentation for the applicant, unless it so 
chooses or the document is readily available to it, and agree with the 
commenters that such a requirement would be administratively 
burdensome. Most States have produced application materials and program 
brochures and operate telephone help lines that provide the type of 
assistance required by the regulation.

10. Eligibility and Income Verification (Sec. 457.360)

    In this final regulation, we have moved two provisions of proposed 
Sec. 457.970, concerning eligibility and income verification, to new 
Sec. 457.360. In proposed Sec. 457.970, we proposed to require that 
States have in place procedures designed to ensure 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 proposed that States have flexibility to determine these 
documentation and verification requirements. In the preamble, we 
encouraged States to adopt procedures that ensure accountability while 
permitting self-declaration to minimize barriers in the application and 
enrollment process.
    We also noted at Sec. 457.970(c) that States with separate child 
health programs may choose to use the Medicaid income and eligibility 
verification system (IEVS) for income and resources, although they are 
not required to do so.
    Finally, in Sec. 457.970(d) we proposed to allow States to 
terminate the eligibility of an enrollee for ``good cause'' (in 
addition to terminating eligibility because the enrollee no longer 
meets the eligibility requirements)--e.g., providing false information 
affecting eligibility. Under the proposed regulations, the State would 
have to give such enrollees written notice setting forth the reasons 
for termination and providing a reasonable opportunity to appeal, 
consistent with the requirements of proposed Sec. 457.985.
    Note that, in this final regulation, we have eliminated any 
specific reference to income verification systems, as income 
requirements are but one of a number of requirements for eligibility 
under a separate child health program.
    Comment: One commenter expressed support for the flexibility HCFA 
gives States for verifying eligibility and income. Another recommended 
requiring that States' eligibility and income verification processes be 
designed to minimize barriers to and facilitate enrollment, and that 
the regulations explicitly provide that States may use self-declaration 
of income and assets. A third suggested that HCFA should include a 
description of the opportunity that States have to use innovative 
quality control projects to ensure that allowing families to self-
declare income does not increase the rate of erroneous enrollment.
    Response: We appreciate the support for the flexibility afforded to 
States and encourage States to adopt eligibility and income 
verification procedures that do not create barriers to enrollment. At 
the same time, States must have effective methods to ensure that SCHIP 
funds are spent on coverage for eligible children. We note that States 
can use their discretion in establishing reasonable verification 
mechanisms and have included this in the regulation text at 
Sec. 457.360(b). We also encourage the creation of innovative projects 
to promote program integrity.
    As stated in the preamble to the proposed rule, we also encourage 
States to develop eligibility verification systems using self-
declaration or affirmation, and have decided to include this in the 
regulation text at Sec. 457.360(b), to eliminate any question about the 
rule. States may use the existing IEVS system to verify income, as long 
as the information was provided voluntarily. While States may ask for 
voluntary disclosure of Social Security numbers, disclosure of such 
information cannot be made a condition of eligibility. States may use 
existing IEVS systems to verify income, as long as the information was 
provided voluntarily. We note that the integrity of a system which 
relies on self-declaration can be ensured through a variety of 
techniques. For example, a State could conduct a random post-
eligibility check, requiring some applicants to provide documentation, 
or it could run computer matches of information provided by applicants 
against information available to the State through other sources.
    Finally, we have deleted proposed Sec. 457.970(a)(2) (requiring 
compliance with the verification and documentation requirements 
applicable to separate child health programs under other Federal laws 
and regulations) because it does not provide meaningful guidance to 
States on what they can and cannot do in designing their verification 
systems. If the system proposed violates other Federal laws or 
regulations, we will work with the State to bring its system into 
compliance.
    Comment: One commenter noted his concern that the regulation 
authorizes States to terminate coverage of children for misconduct of a 
parent/caretaker and suggested that HCFA revise the definition of 
``good cause'' to be more limiting. This commenter also noted his 
concern that the reference in proposed paragraph (d) to termination for 
good cause is troubling. The example of good cause as reporting false 
information on the application form does not seem to be good cause for 
a child losing benefits if the false statement does not affect the 
child's eligibility. The commenter stated that this kind of standard is 
highly subjective and susceptible to abuse given the large amount of 
discretion States already have in administering their plans.
    Response: We agree with the commenter's concern and have deleted 
the good cause provisions from the regulation text accordingly. 
Children should not lose eligibility, as long as they meet the 
eligibility standards under the approved State plan and consistent with 
title XXI requirements. Further discussion of these issues can be found 
in Subpart K.

11. Review of Adverse Decisions (Sec. 457.365)

    Finally, we proposed in the NPRM to require that States 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. In an effort to 
consolidate all provisions relating to review processes in new subpart 
K, we have removed proposed Sec. 457.365. Comments on proposed 
Sec. 457.365, are addressed in full in Subpart K--Applicant and 
Enrollee Protections.

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

1. Basis, Scope, and Applicability (Sec. 457.401)

    As proposed, this subpart interprets and implements section 
2102(a)(7) of the Act, which requires that States make assurances 
relating to certain types of care, including assuring quality and 
appropriateness of care and access to covered services; section 2103 of 
the Act, which outlines coverage requirements for children's health 
benefits; section 2109 of the Act, which describes the relation of the 
SCHIP program to other laws; section 2110(a), which describes child 
health assistance; and certain provisions of section 2110(c)(6) 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

[[Page 2556]]

on the enhanced Federal medical assistance percentage. We received no 
comments on this section and have retained the language in this final 
rule.

2. Child Health Assistance and Other Definitions (Sec. 457.402)

    Proposed Sec. 457.402 set forth the definition of child health 
assistance as specified in section 2110(a) of the Act. We did not 
propose to include any additional services in the definition of child 
health assistance or attempt to further define the services set forth 
in the Act in order to give States flexibility to provide these 
services as intended under the statute. Accordingly, we proposed 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 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 proposed to define the terms ``emergency medical condition,'' 
``emergency services, and ``post-stabilization services'' to give full 
meaning to the statutory requirement at section 2102(a)(7)(B) of the 
Act that States assure access to emergency services 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. We proposed 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 proposed to define the term ``emergency services'' as covered 
inpatient or outpatient services that are furnished by any provider 
qualified to furnish emergency services without requirement for prior 
authorization and needed to evaluate or stabilize an emergency medical 
condition. Because these terms are used throughout the regulation, we 
have moved the definitions of ``emergency services'' and ``emergency 
medical condition'' to Sec. 457.10, the overall definitions section. 
The comments and responses related to these definitions are addressed 
in Sec. 457.10.
    We proposed to define ``post-stabilization services'' to mean 
covered medically necessary non-emergency services furnished to an 
enrollee after he or she is stabilized related to the emergency medical 
condition.
    We proposed to 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.
    Comment: A commenter agreed that our definition of ``child health 
assistance'' is appropriate and considered the specific identification 
of advanced practice nursing services at Sec. 457.402(a)(14) to be 
crucial to ensuring that children in fact receive the care to which 
they are entitled by statute.
    Response: We appreciate the commenter's support for our definition. 
The proposed regulation set forth the definition of child health 
assistance as specified in section 2110(a) of the Act. The provision of 
advanced practice nursing services is specifically identified in that 
section as a coverable service.
    Comment: One commenter questioned why well-baby care, well-child 
care and immunizations are not explicitly included in the list of 
definitions. These benefits are the cornerstone of pediatric care and 
the commenter indicated that it is important that they are explicitly 
included wherever appropriate.

[[Page 2557]]

    Response: Section 2102(a)(7) of the Act provides the authority for 
requiring that well-baby and well-child care and immunizations be 
included under every State plan. Well-baby and well-child care and 
immunizations were not specified in the statutory definition of ``child 
health assistance'' at section 2110 of the Act, although they clearly 
fall within this definition of ``child health assistance.'' 
Additionally, well-baby and well-child care are not separate categories 
of services, but can include services that are in any or all of the 
separately defined categories of services. However, because these terms 
are used throughout the regulation we have included them in the 
definitions at Sec. 457.10. These services are also discussed at 
Secs. 457.410 and 457.520.
    Comment: One commenter was concerned about the definition of post-
stabilization services and the language in the preamble stating that 
HCFA would expect States and their contractors to treat post-
stabilization services in the same manner as required for the Medicare 
and Medicaid programs, while recognizing that not all such services 
would be necessarily covered by the State for purposes of SCHIP.
    While the commenter did not object to permitting States to apply to 
separate child health programs an interpretation of post-stabilization 
services that is the same as that under Medicaid and Medicare, they 
believed that HCFA should give States flexibility to treat the coverage 
of post-stabilization services differently depending upon the structure 
of the State program. A State that designs its separate child health 
program to mirror its Medicaid program would want to retain the same 
interpretation for both programs. However, a State that models its 
program after commercial coverage would want to adopt an interpretation 
that is applicable to commercial coverage that is offered by MCEs. Such 
flexibility would be particularly important if the State decides to 
provide coverage to SCHIP eligibles by purchasing coverage from 
employer group health plans to cover children. In those cases, the 
emergency services requirement should parallel those applicable to the 
employer's group health insurance coverage. The commenter recommended 
that the proposed regulation be revised to reflect this needed 
flexibility.
    To the extent that States adopt or HCFA requires use of the 
interpretation of the post-stabilization services requirements 
applicable under the Medicaid and Medicare programs, the commenter 
reiterated its comments on the Medicaid managed care notice of proposed 
rulemaking and the interim final Medicare+Choice regulation. The issue 
of concern to this commenter was whether the requirement that Managed 
Care Entities (MCEs) respond to requests for approval of post-
stabilization services within one hour is reasonable.
    The commenter expressed considerable concern about requirements for 
post-stabilization care for MCEs, particularly the requirement that 
MCEs respond to requests for approval of post-stabilization care within 
one hour. The commenter suggested conditions to moderate the effect of 
this requirement.
    Response: We agree with the commenter that States should have the 
flexibility to treat coverage of post-stabilization services 
differently depending on the health benefits coverage elected by the 
State. The preamble to the proposed rule may have been misleading by 
appearing to require the provision of post-stabilization services under 
a separate child health program, therefore, we have removed the 
references to post-stabilization services, covered or otherwise, from 
the final rule. We hope that this will minimize confusion.
    Comment: Several commenters on proposed Sec. 457.995 had other 
concerns regarding the provision of post-stabilization services for 
individuals in managed care. These commenters expressed concern that 
managed care organizations should be allowed to control their own 
networks. A payment network needs the flexibility to require a patient 
to be transferred to an appropriate facility within its network after 
the emergency has been stabilized. According to these commenters, this 
regulation takes the control of non-emergency services away from the 
network and gives it to a non-network provider and could defeat the 
concept of managed care. The commenters believed that when emergency 
care is provided outside of the MCE network, it is usual and customary 
for the patient to be transferred to an appropriate facility within 
their MCE network for required post-stabilization services.
    Response: Proposed Sec. 457.995(d), the provision in the overview 
of beneficiary rights referencing post-stabilization services, has been 
removed from the regulations text along with the rest of Sec. 457.995 
for the sake of clarity and consistency.
    Comment: One commenter noted that the preamble to the proposed rule 
indicates that HCFA considered defining transportation to include 
coverage for transportation to more than primary and preventive health 
care as stated in the law. However, the commenter noted that HCFA 
decided to leave the option of establishing the definition to the 
States. The commenter regarded transportation as including urgent and 
emergent care and that transfer/transport to a hospital or health 
facility for urgent and emergent care should be included in a child's 
health benefit package.
    Response: Under the list of services in section 2110(a) of the Act 
and Sec. 457.402 of this final regulation, transportation is mentioned 
in two different items: (26) medical transportation and (27) enabling 
services (such as transportation, * * *). While coverage for 
transportation services is not required, almost every State already 
provides coverage for emergency transportation under its State plan. 
Therefore, we do not see lack of coverage of this service as a problem 
and will not further define transportation services.
    Comment: We received several comments on proposed 
Sec. 457.402(a)(26), redesignated as paragraph (27), which provides for 
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. 
One commenter indicated that States should be required to fund 
community health centers to provide outreach activities and enabling 
services such as translation and transportation (rather than, or in 
addition to, outreach costs that are reimbursed under administrative 
accounts).
    Several other commenters indicated that the phrase ``outreach 
services * * * only if designed to increase the accessibility of 
primary and preventive health care services for eligible low-income 
individuals'' is ambiguous and requested clarification. They noted that 
this phrase could be read to permit a State to pay primary health 
providers such as health centers to conduct outreach activities to find 
eligible children as part of their overall child health assistance 
services (rather than, or in addition to, outreach costs that are 
reimbursed under administrative accounts). The commenter noted that 
this is important because the SCHIP statute caps States' overall 
administrative costs and thus has been viewed as providing insufficient 
funds to support the types of outreach efforts that experts say are 
necessary to find eligible children. To the extent that the phrase 
``outreach * * * to eligible low-income individuals'' is interpreted as 
the identification of eligible children, then this represents an 
important option

[[Page 2558]]

for States and health centers. States could build outreach funds into 
their payments to SCHIP primary care providers, along with funding for 
other forms of enabling services, such as translation and 
transportation costs.
    In the context of payment to primary health care providers, one 
commenter also indicated that States could build funds for outreach and 
enabling services into their payments to SCHIP primary care providers. 
The commenter indicated that community clinics and health centers in 
its State are encountering difficulties and confusion when being 
audited for purposes of receiving cost-based reimbursement from the 
State.
    Response: In developing their State plans, States determine their 
own providers. We cannot require that community health centers be 
funded to provide outreach and enabling activities. The language of 
proposed Sec. 457.402(a)(26) was taken directly from the language at 
section 2110(a)(27) of the Act. Enabling services, including outreach 
to assist children's access to primary and preventive care, are one of 
the types of services States may choose to provide as part of the 
``child health assistance'' that meets the requirements of section 2103 
of the Act. We note that under the terms of section 2110(a) and 
2110(a)(27), these services must be delivered to ``targeted low-income 
children'' who are ``eligible'' for ``child health assistance'' under 
the State plan. Therefore, when enabling services are provided as part 
of the health benefits coverage for children who are found eligible and 
enrolled, these services would not be subject to the 10 percent cap on 
administrative expenditures under 2105(c) of the Act. However, outreach 
initiatives to potentially eligible children are subject to the 10 
percent cap in accordance with section 2105(a)(2)(C) of the Act. We do 
not understand the commenter's specific concerns regarding difficulties 
in receiving cost-based reimbursement in the State's community clinics 
and health centers so we are unable to respond to this comment. (We 
note that, in this final rule, we have listed physician services and 
surgical services (proposed Sec. 457.402(a)(3)) separately as 
paragraphs (3) and (4), respectively. As a result, the services listed 
at paragraphs (a)(4) through (a)(27) have been redesignated as 
paragraphs (5) through (28). Enabling services are now listed at 
paragraph (27).)
    Comment: One commenter noted its belief that the preamble should 
encourage States, in selecting among benefits to cover, to consider the 
needs of different age groups, their varying health status and patterns 
of morbidity and mortality, the impact of developmental states on their 
needs and their patterns of utilization. They observe, for example, 
that coverage of over-the-counter medications may be of particular 
benefit to adolescents. Also, eating disorders are more common among 
adolescents than younger children, and family planning services should 
include a choice among all contraceptive methods and options.
    Response: We concur with the commenter and encourage States to 
consider the populations they are serving and the needs of different 
age groups when designing their benefit package States need only cover 
medically necessary and appropriate services, but the statute at 
section 2102(a)(7) and the regulations at Sec. 457.495, specifically 
require States to specify the methods they will use to assure 
appropriate care.
    Comment: Two commenters noted that the language on services in the 
proposed rule was set out identically to the language in the statute. 
The commenters were concerned that the definition of both inpatient and 
outpatient mental health services excludes substance abuse treatment 
services, which are listed separately in the statute and the 
regulation. One commenter was concerned that this separation means only 
that payment may be made for these services, not that payment shall be 
made for these services and believes that States should be encouraged 
to consider their inclusion for comprehensive treatment for adolescents 
with co-occurring mental and substance abuse disorders.
    Similarly, another commenter is concerned that the separation of 
outpatient substance abuse treatment services may allow the provision 
of outpatient mental health services but not the provision of 
outpatient substance abuse services, but would include services 
furnished in a State-operated mental hospital and community-based 
services. The commenters indicated that substance abuse impacts a 
significant number of children in their States and rather than removing 
this important benefit, they recommended that the regulations need to 
encourage and even highlight the importance of offering this benefit.
    The commenter noted that while the listings for mental health 
inpatient and outpatient services in the regulations specifically 
exclude substance abuse services, these services are listed separately 
from inpatient and outpatient mental health services. The commenter 
called attention to this because of the high incidence of co-occurring 
disorders among adolescents with presenting symptoms of one or the 
other. Even though these services lack the 75 percent actuarial measure 
required when mental health services (and/or prescription drugs, vision 
and hearing services) are included, States should consider their 
inclusion for comprehensive treatment of adolescents with co-occurring 
mental and substance abuse disorders.
    Response: We appreciate the commenter's view about the importance 
of respite care services. As we have indicated previously, the proposed 
rule at Sec. 457.402 mirrors the language of section 2110(a). 
Therefore, inpatient mental health services and inpatient substance 
abuse treatment services, as well as outpatient mental health services, 
and outpatient substance abuse treatment services are listed separately 
in the regulation as they were in the statute. States choose to cover 
services from the list of services under the definition of ``child 
health assistance'' when they select a health benefits coverage option 
under Sec. 457.410. The statute supports mandating that only three 
types of services, well-baby and well-child services, immunizations, 
and emergency services, be included in all SCHIP plans regardless of 
the type of health benefits coverage chosen. HCFA encourages States to 
provide inpatient and outpatient substance abuse services. A State may 
choose to provide inpatient mental health and substance abuse services; 
however the statute provides flexibility for the States in determining 
the scope of covered benefits.
    We do, however, call the commenter's attention to the requirement 
in Sec. 457.120 of the regulations for ongoing public input in the 
development and implementation of SCHIP plans. Comments and concerns 
about benefits and coverage should be directed to and taken under 
consideration by the State SCHIP agency. We encourage States to 
consider the populations they are serving and the needs of different 
age groups when designing their benefit packages.
    Comment: One commenter particularly noted the inclusion in 
Sec. 457.402 of ``respite care services and training for family 
members,'' which are especially relevant to families with children with 
severe and persistent mental illness or brain disorders. The commenter 
stated that it would appreciate attention being called to these 
services' eligibility for coverage and relevance in plans that offer 
supplemental mental health services, in addition to other services, 
``i.e., respite care, advanced practice nurse services,

[[Page 2559]]

and pediatric nurse services * * * in a home, school or other 
setting.''
    Response: As we have indicated previously, States that implement 
separate child health programs are given broad flexibility to design 
their benefit packages. We encourage commenters to work with their 
States to assure that valuable health care services are made available 
to children to the extent possible in each State.
    Comment: One commenter recommended Sec. 457.402 be deleted because 
the statute provides States with flexibility in the design of the SCHIP 
benefit package and this section implies that coverage for certain 
services should be available under SCHIP when it is not required by 
statute and may not be included in the state-designed benefit package.
    Response: Section 2110 of the Act allows for payment for part or 
all of the cost of health benefits coverage (as defined at Sec. 457.10) 
for any services listed in section 2110(a) of the Act as implemented in 
Sec. 457.402. These provisions do not indicate that States must provide 
all of these services; rather, they list the array of services for 
which payment may be made. We disagree with the commenter and have not 
deleted this section from the proposed rule.

3. Health Benefits Coverage Options (Sec. 457.410)

    Under the authority of section 2103 of the Act, at proposed 
Sec. 457.410, we listed the four options a State has for obtaining 
health benefits coverage for eligible children. Specifically, we 
proposed that States may choose to provide benchmark coverage, 
benchmark-equivalent coverage, existing comprehensive State-based 
coverage, or Secretary-approved coverage. These four options are 
described at Secs. 457.420 through 457.450.
    Based on the authority of section 2102(a)(7) of the Act, we also 
proposed at Sec. 457.410(b) to require that a State must obtain 
coverage for well-baby and well-child care, immunizations in accordance 
with the recommendations of the Advisory Committee on Immunization 
Practices (ACIP), and emergency services. We noted that the State must 
cover these services even if coverage for these services is not 
generally included in the health benefits coverage option selected by 
the State.
    We proposed to define well-baby and well-child care for purposes of 
cost sharing at proposed Sec. 457.520(b), but we proposed to allow 
States to define well-baby and well-child care for coverage purposes. 
We encouraged 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.
    Comment: Two commenters supported the requirement that States use 
the ACIP schedule for immunizations under their separate child health 
programs. However, many commenters disagreed with the proposal that 
States be required to follow the immunization schedule of the ACIP, 
particularly because they are not allowed to participate in the VFC 
program. It was suggested that States should be able to adopt their own 
immunization periodicity schedules. One commenter suggested that we 
rewrite this section to require ``immunizations as medically 
necessary'' rather than require that immunizations be provided 
according to the ACIP schedule. Several commenters suggested that a 
State that utilizes existing commercial health plans may not use any 
particular standard immunization schedule or may follow other 
professional standards. One commenter mentioned that its State uses 
another standard, the recommended childhood immunization schedule 
jointly adopted by the American Academy of Pediatrics (AAP), the ACIP, 
and the American Academy of Family Physicians (AAFP).
    Response: Section 2102(a)(7)(A) requires that a State child health 
plan include a description of a State's methods to assure the quality 
and appropriateness of care, ``particularly with respect to * * * 
immunizations provided under the plan.'' In order to ensure that all 
SCHIP children are appropriately immunized, States should use a 
uniform, nationally recognized schedule of immunizations. The ACIP 
schedule referred to in the proposed rule is a harmonized schedule 
approved by the ACIP, the AAP, and the AAFP. It is referred to as the 
``Childhood Immunization Schedule of the United States.'' The AAP and 
AAFP no longer develop and maintain separate immunization schedules but 
rather use the harmonized ACIP schedule. This ACIP schedule is the same 
as the standard referenced by one of the commenters as the schedule 
relied on by its State. States should use the ACIP schedule because it 
reflects the current standards of these pediatric speciality providers 
who are the recognized authorities in childhood immunizations.
    Comment: Several commenters expressed their belief that requiring 
SCHIP programs to use the ACIP immunization schedule is overly 
prescriptive and has no basis in the statute. According to one 
commenter, the only statutory limit on States' discretion is found in 
section 2102(a)(7)(A), which indicates that the State plan must include 
a description of the methods used to assure the quality and 
appropriateness of care, particularly with respect to immunizations. 
The commenter cited Executive Order 13132 on federalism, and asserted 
that, consistent with that authority, States should be permitted to 
select their own immunization standards unless HCFA can demonstrate 
both a need for a federal standard and that it has considered 
alternatives that would preserve the States' prerogatives.
    Response: As described in the response to the previous comment, 
section 2102(a)(7)(A) of the Act provided authority to require 
immunizations in accordance with the recommendations of ACIP. 
Therefore, the requirement to use the ACIP schedule is not a violation 
of E.O. 13132. The ACIP schedule is a national standard developed and 
approved by three national medical organizations involved in child 
health care services, the ACIP, the AAP and the AAFP. These 
organizations use the harmonized ACIP immunization schedule and no 
longer use separate immunization schedules. Requiring coverage for 
appropriate immunizations at appropriate times, as the ACIP schedule 
recommends, does not place undue burden on States given the importance 
of childhood immunizations. In fact, it releases States from the burden 
of having to develop or choose their own individual schedules and 
establish the adequacy of those schedules with respect to title XXI 
statutory requirements. Given the unique nature of infectious diseases, 
and the mobility of the population across State lines, it is necessary 
to require a uniform approach to immunizing children across all States.
    Comment: One commenter believed the 90-day requirement explained in 
the preamble to the proposed rule for States to adhere to any changes 
in the ACIP recommendations is inappropriate. The current policy is 
that States have 90 days from the publication of the revised ACIP 
schedule in the Morbidity and Mortality Weekly Report to implement 
those changes in their programs. The commenter believed that this 
requirement fails to recognize the realities of effectuating such a 
change in benefits. States should have until the end of the current 
contract period but in no case longer than one year to comply with any 
ACIP changes.
    Response: It is essential for children to receive vaccines 
according to the most current ACIP recommendations in

[[Page 2560]]

order to maximize children's health, minimize morbidity and mortality, 
and reduce costs of treating preventable disease. In addition, good 
public health policy argues for consistent adoption of vaccine 
recommendations across all States in order to minimize the potential 
for transmission of communicable disease.
    Comment: One commenter expressed its opinion on the importance of 
children in separate child health programs receiving all necessary 
immunizations and of vaccines being incorporated in all benefit 
packages. The commenter also suggested two ways that States may provide 
immunizations through their SCHIP programs without opening up the VFC 
program: (1) a State may add on payments for the provision of 
immunizations through participating MCEs; or (2) the State may declare 
that children enrolled under a separate child health program are State 
vaccine eligible. The State may then purchase the vaccines at the 
Federal contract price and distribute them to SCHIP providers as it 
currently does for Medicaid providers. The commenter stated that 
expenditures under either of these options would be matched by the 
Federal government at the SCHIP enhanced matching rate and would not 
count as administrative expenditures under the 10 percent cap. 
Additionally, the commenter believed that the State should require that 
plan contracts include provisions that require plans to provide and 
cover additional expenses for vaccines that are approved and 
recommended for all children during the life of the contract.
    Response: We agree with the commenter that children in separate 
child health programs should receive all recommended immunizations, as 
should children in Medicaid expansion and combination programs. Also, 
regardless of the type of child health insurance program the State 
chooses, we agree with the suggestion that MCE contracts should provide 
that the MCEs furnish all vaccines, including new vaccines, recommended 
during the term of the contract.
    However, regardless of whether the State chooses to include such a 
contract provision, States must furnish vaccines in accordance with the 
recommendations of the ACIP. States should furnish newly recommended 
vaccines to all eligible children within 90 days after the 
recommendation is published in Morbidity and Mortality Weekly Report. 
This report is available over the Internet at www.cdc.gov/mmwr.
    We outlined ways that States could take advantage of the Federal 
discount contract price for vaccines in a letter dated June 25, 1999 to 
all State Health Officials. As stated in that letter, expenditures for 
vaccines will be matched by the Federal government at the enhanced 
SCHIP matching rate and will not count as expenditures subject to the 
10 percent cap on administrative expenditures under section 2105(c)(2) 
of the Act, regardless of whether the State takes advantage of the 
Federal discount contracts.
    Comment: Many commenters recommended that HCFA reconsider its 
position on the Vaccines For Children (VFC) program for various 
reasons. One commenter indicated that in light of national immunization 
goals not yet having been achieved, HCFA should not consider SCHIP 
enrolled children to be insured and therefore ineligible for free VFC 
vaccines. Several commenters expressed that States that have elected to 
implement separate child health programs are being unfairly penalized 
for not choosing to expand their Medicaid programs.
    One commenter indicated that because the SCHIP statute states 
absolutely that the legislation creates no entitlement, and because the 
VFC program defines insurance as benefits to which an individual is 
entitled, it would appear to be clear that, despite their eligibility 
for SCHIP, children in separate child health programs are not entitled 
to insurance and thus should be considered VFC-eligible. One commenter 
also stated that having seen polio epidemics and iron lung machines, 
HCFA should be working to reduce barriers that prevent many children 
from getting vaccinated so that epidemic childhood diseases do not 
become more prevalent in the United States as they are in other 
countries. One commenter believed that the interpretation of section 
316 of the Public Health Service Act, which is used to support the 
policy that separate child health programs are not eligible to 
participate in VFC, is overly strict and does not align with the intent 
of the Act to insure that children receive necessary immunizations.
    Response: We agree with the commenter that the intent of the 
statute is that all children should receive necessary immunizations, 
and therefore require at Sec. 457.410(b)(2) that all States with 
separate child health programs provide coverage for immunizations in 
accordance with the recommendations of the ACIP. We disagree with the 
commenters only as to whether the VFC program or SCHIP funds cover the 
cost of required immunizations. We disagree that the VFC program allows 
payment for immunizations provided to a child enrolled in a separate 
child health plan. As explained in a letter to State Health Officials 
of May 11, 1998, section 1928(b)(2) of the Act defines a ``Federally 
vaccine-eligible child'' or a child who is entitled to free Federal 
vaccines under the VFC program, as ``a Medicaid-eligible child, * * * a 
child who is not insured, * * * a child who is (1)administered a 
qualified pediatric vaccine by a Federally-qualified health center * * 
* or a rural health clinic * * * and (2) is not insured with respect to 
the vaccine, [or] a child who is an Indian * * * '' The law further 
defines the term ``insured'' as a child `` * * * enrolled under, and 
entitled to benefits under, a health insurance policy or plan, 
including a group health plan, a prepaid health plan, or an employee 
welfare benefit plan under the Employee Retirement Income Security Act 
of 1974 * * * '' The distinction between Medicaid coverage and other 
coverage is created by the VFC statute. Under the SCHIP statute, it is 
clear that children who are enrolled in a separate child health program 
must not be Medicaid-eligible, as explained in Sec. 457.310(b)(2) of 
these regulations. They are enrolled under, and entitled to benefits 
under, a health insurance policy or plan within the definition in 
section 1928 (b)(2)(B)(ii), as explained above, and their insurance 
covers the cost of vaccines. Although there is no Federal entitlement 
to SCHIP coverage, a child who is enrolled in a SCHIP-funded plan is 
``entitled'' to coverage under that plan just as a child enrolled under 
a group health plan is ``entitled'' to coverage under the group health 
plan. Unless they are Indians, children enrolled in SCHIP are not 
Federally vaccine-eligible under current law. Therefore, the Secretary 
cannot reconsider her decision on this matter without a change in the 
law that would define a child enrolled in a separate child health 
program as a Federally vaccine-eligible child.
    Comment: One commenter indicated that it appears that the exclusion 
of SCHIP children from the VFC program would cause the SCHIP program to 
be less cost effective than the Medicaid program. The commenter asked 
if this policy means that States may use this provision as a cost 
offset in discussions of the revenue neutrality of the SCHIP program 
design. The Federal government, by design, assures that the SCHIP 
program will be more expensive in that it must pay for a service that 
is free under Medicaid.
    Response: We do not understand the intent of this comment, as the 
concept of budget neutrality does not apply to the SCHIP program 
design. While immunizations are required to be

[[Page 2561]]

covered under a separate child health plan, States have discretion to 
determine what other services will be provided under their State plans, 
and the amount, scope, and duration of those services.
    Comment: One commenter noted that it is crucial that any expansion 
of health care services in State plans include coverage for essential 
oral health care benefits. Historically, the number of dentists 
participating in State Medicaid programs is low. This low participation 
has prevented most poor children from developing good oral hygiene 
habits. SCHIP allows States to include oral health care services in 
their State plans and the commenter urged HCFA to consider this as an 
important component of increasing the overall health of America's rural 
children as the agency reviews State plans.
    Response: We agree with the commenter that oral health is an 
integral part of the overall health of children and have engaged in a 
serious effort to promote oral health, as described earlier in a 
response to comments on this subpart. However, we do not have the 
statutory authority to require that States provide any specific 
services under their SCHIP plans other than those required under 
sections 2102(a)(7)(A) and 2103(c) of the Act. Although we do not have 
the authority to require the inclusion of these services, because of 
the importance of oral health services for children, we have included 
in the definition of well-baby and well-child care, for purposes of 
cost-sharing restrictions at Sec. 457.520(b)(5), routine and preventive 
and diagnostic dental services. Accordingly, a separate child health 
plan may not impose copayments, deductibles, coinsurance or other cost-
sharing for these services. Nonetheless, all but two States with 
separate child health programs have opted to provide coverage for some 
type of oral health services.
    Comment: One commenter recommended that the regulation clarify that 
children enrolled under a Medicaid expansion program are entitled to 
all medically necessary services to the same extent as under the 
Medicaid EPSDT service and that the services for these children would 
not be considered a State option.
    Response: The regulation indicates in Sec. 457.401(c) that the 
information in this subpart does not apply to Medicaid expansion 
programs. Therefore, because this subpart addresses only provisions 
regarding separate children's health insurance programs, we have not 
added additional language to the regulation text to indicate that 
children enrolled under Medicaid expansion programs are eligible for 
Medicaid's EPSDT services. However, as we have made clear in the 
preamble to the proposed regulation and in other guidance, all Medicaid 
benefit rules, including rules requiring EPSDT services, apply fully to 
children enrolled in Medicaid expansion programs.
    Comment: One commenter noted that the Medicaid program includes 
coverage for children with serious and severe mental illnesses. The 
commenter urged HCFA to collaborate with those States opting to develop 
separate child health programs to provide health coverage for the same 
level of treatment and service currently provided by Medicaid. Another 
commenter noted the importance of behavioral health as an integral part 
of a child's overall well being. According to this commenter, while 
rural families and children suffer mental disorders similar to those 
suffered by their urban counterparts, rural residents are less likely 
to receive treatment in part because of the extreme lack of behavioral 
health professionals in rural communities. The commenter strongly 
supported inclusion of coverage for mental health services in the State 
plans for the SCHIP program.
    Response: We agree that mental health is an integral part of the 
overall health of a child and we urge States to consider providing 
these services. However, a requirement that States include any specific 
services in their State plans other than those required under 
2102(a)(7)(A) and 2103(c) of the Act and specified under 
Sec. 457.410(b) would be inconsistent with title XXI.
    Comment: One commenter asked why the discussion of Sec. 457.410(b) 
in the preamble to the proposed regulation about offering different 
health benefits coverage for children with special needs refers only to 
children with physical disabilities, and not mental disabilities. Such 
children may be encompassed within the category of special needs, but 
the additional listing only of physical disabilities gives the false 
impression that disability cannot be mental as well.
    Response: We did not intend to exclude any type of illness, 
physical or mental, by using the example of children with physical 
disabilities in discussing the States' option to offer different health 
benefits coverage. The preamble noted that States can have more than 
one benefit package that meets the requirements of the subpart, 
including one designed for children with special needs or physical 
disabilities. We were simply giving one example of a population to 
which States may want to consider offering additional services or a 
special package of services and did not mean to offer the example as 
the only option. States should consider the needs of children with 
mental disabilities as they consider whether to adopt benefit packages 
designed specifically for children with special needs.
    Comment: One commenter supported the preamble language to proposed 
Sec. 457.410, which indicates that States can include in their 
comprehensive health benefits package ``supplemental services for 
children with special needs or physical disabilities'' and 
alternatively may offer multiple benefit packages. Such an approach 
permits States to expand services to children with special health care 
needs without regard to the 10 percent cap on Federally-matchable 
expenditures ``for other than the comprehensive services packages.'' 
The commenter supported this approach to increasing States' ability to 
help such children.
    However, numerous commenters were concerned with this language in 
the preamble to proposed Sec. 457.410. Several commenters expressed 
concern about the language in the proposed rule stating that if a State 
offers a supplemental package of limited services for children with 
special health care needs that is not part of the comprehensive 
coverage required by the regulation, then expenditures for those extra 
services would be counted against the 10 percent cap on administrative 
expenses under section 2105(c)(2) of the Act. They noted that a number 
of States have implemented SCHIP with supplemental benefits packages, 
or ``wrap-around packages'', for coverage of services for eligible 
children with special health care needs and that this is an important, 
appropriate and beneficial strategy for the provision of needed health 
care services for children. They indicated that requiring that 
expenditures for services for children with special health care needs 
count against the 10 percent cap would encourage States to limit the 
services that are offered to these children, which could affect their 
overall health and well being. The commenters argued very strongly that 
services for children with special health care needs that are provided 
through an additional limited benefits package should not be counted 
against the 10 percent cap, and that making them subject to the cap has 
the potential to discourage the development of creative benefit 
packages for children with special needs.
    Two commenters questioned whether the Department intended to 
indicate that such initiatives are subject to the 10 percent 
administrative cap as section 2105(a)(2) makes no mention of special 
needs. The commenters recommended

[[Page 2562]]

that the preamble be modified by dropping the reference to special 
needs since this reference may be misconstrued when States are 
designing and implementing certain benefit packages for special needs 
children. The commenters indicated that the statute contemplates that 
there are permissible health initiatives which would be subject to the 
10 percent cap and suggested that this section of the preamble be 
written to identify the types of initiatives subject to the limitation 
without calling into question those benefits packages for children not 
subject to the 10 percent cap.
    One commenter cautioned States about the manner in which they 
define children with special health care needs. The commenter provided 
suggested language that States should be encouraged to use to define 
children with special health care needs.
    One commenter believed that the explanation of required coverage in 
the preamble to the proposed rule forces States either to provide a 
comprehensive benefit package that is above and beyond the needs of the 
``average'' child in order to ensure that the needs of special needs 
children are met, or to put administrative dollars at risk. By 
providing such a comprehensive benefit package, the capitated rate paid 
to health plans to pay for such services will significantly increase.
    One commenter also noted that while the rules permit separate 
packages of services consistent with the ADA, the 10 percent cap is 
troubling and it is unclear what the potential impact will be or if 
this could penalize children and their families in unexpected ways.
    Response: Unfortunately, the language in the preamble to the 
proposed rule about the application of the 10 percent administrative 
cap in connection with supplemental services for children with special 
needs caused much confusion to commenters. We will attempt to clarify 
below.
    Under section 2105(a)(1), States may receive enhanced FMAP for 
expenditures for child health assistance for targeted low-income 
children provided in the form of health benefits coverage that meets 
the requirements of section 2103 of the Act. Under section 2105(a)(2) 
States may receive payment of a federal share of State expenditures for 
other items but expenditures for these other items are subject to the 
10 percent administrative cap under section 2105(c)(2). A State has two 
options for providing more health benefits coverage to special needs 
children under which the expenditures for the coverage are not subject 
to the 10 percent cap on administrative expenditures. The first option 
would be for the State to have a separate eligibility group for the 
identified special needs children with a larger health benefits package 
than for other eligibility groups. The State would have to design the 
eligibility group without violating the statutory requirement under 
section 2102(b)(1)(a) of the Act that the eligibility standards ``not 
discriminate on the basis of diagnosis.'' The second option would be 
for the State to retain the general eligibility group that includes all 
children and include in the health benefits coverage package coverage 
for services needed by special needs children. The package could 
include limitations for coverage on these services (consistent with 
other benefits requirements) to ensure that they would be available 
primarily to special needs children. Under either option, the special 
needs coverage is part of an overall health benefits coverage package 
that is consistent with section 2103 of the Act and Sec. 457.410 of the 
final regulation.
    One key aspect of section 2105(a)(2) is that SCHIP funds can be 
used for health services initiatives for targeted low-income children 
as well as other low-income children. With respect to the suggestion 
that we include some examples of public health initiatives that would 
be subject to the 10 percent cap, we are including the following 
examples, some of which were proposed by one State: (1) access to 
mental health services for low-income children in the Juvenile Court 
System; (2) health care outreach and services for homeless children and 
adolescents; (3) mental health services for low-income children with 
special needs; (4) dental care for low-income children and their 
families; (5) health care services for migrant children; and (6) an 
immunization project for low-income children who are not enrolled in 
Medicaid or SCHIP. As we indicated, these are just a few examples for 
use of title XXI funds for public health initiatives as authorized by 
section 2105(a)(2) of the Act. States are free to develop and propose 
initiatives which are specific to the needs of their population.
    Comment: One commenter noted that it was pleased that we have 
included a reference to Bright Futures in the proposed rule but 
encouraged that we use the term ``well-adolescent'' whenever we refer 
to ``well-child'' and the term ``age'' when offering examples of 
diverse populations.
    Response: Under the definition of ``child'' set forth in section 
2110(c)(1) of the Act, and implemented in Sec. 457.10 of this final 
regulation, ``child'' is an ``individual under the age of 19.'' An 
adolescent clearly fits within this definition of child, and therefore 
we have not accepted the commenter's suggestion to use the term ``well-
adolescent'' whenever we refer to well-child care. In addition, as we 
explained above, we did not intend to exclude any particular group or 
condition in describing a special population that States may want to 
consider offering additional services or a special package of services. 
Therefore, we have not added ``age'' to the example we used in the 
preamble.
    Comment: One commenter indicated that there are various ways for 
separate child health programs to make health benefits coverage 
available to enrolled children. States may use direct, fee-for-service 
coverage or can operate as primary care case managers. Separate child 
health programs can also buy benchmark or benchmark-equivalent coverage 
provided through an MCE. The commenter went on to say that what is 
listed as a class of covered benefits in the State plan may not be 
precisely what is covered if the State chooses to offer coverage solely 
through a benchmark or benchmark-equivalent package that is purchased 
from a participating insurer or MCE. Furthermore, the insurer or MCE 
may apply limits to coverage that would not apply if the coverage were 
obtained directly through the State-based plan. Finally, the proposed 
rules on coverage do not require any particular standard for the 
measurement of medical necessity for children, either by the State or 
by benchmark insurers.
    According to the commenter, because the benchmark plans may differ 
from the State comprehensive package and no specific medical necessity 
standard is required for separate child health programs, the issue of 
disclosure of coverage and coverage limitations becomes important. Both 
providers and families will need to have clear, understandable 
materials and information regarding what is and is not covered, as well 
as the limitations that apply to covered benefits. The commenter 
cautioned that benchmark plans may not be appropriately designed for 
children; for example, the plan may provide coverage for speech therapy 
after a stroke but no coverage for speech therapy to address 
developmental delays. There is nothing in the proposed rule that 
requires benchmark plans to be designed to meet the specific health 
needs of children.
    Response: In order for a State plan to be approved, the State must 
indicate what type of health benefits coverage it is electing to 
provide. The State must make available to enrollees the full

[[Page 2563]]

coverage package defined in its State plan, and may not permit 
contractors to restrict that coverage. While neither the State nor a 
contractor is required to furnish medically unnecessary services, they 
cannot alter the basic coverage package from that specified in the 
State plan.
    Because SCHIP is targeted for children under the age of 19, States 
must ensure that the health benefits coverage it elects to provide is 
appropriate for the population being served. The statute addresses the 
issue of appropriateness of coverage through the coverage requirements 
at section 2103 of the Act, which sets forth the required scope of 
health insurance coverage under a separate child health program. In 
addition, based on the authority of section 2102(a)(7) of the Act, we 
have required coverage for well-baby and well-child care, immunizations 
and emergency services. Finally, if a State elects to use benchmark-
equivalent coverage, it must cover specific services listed at section 
2103(c)(1) of the Act and be actuarially equivalent for additional 
services covered under one of the benchmark benefit packages. While we 
have not defined medical necessity for purposes of separate child 
health programs, we believe that the requirements of the statute and 
final regulations ensure the appropriateness of coverage for children 
in separate child health programs.
    With respect to the commenter's concerns regarding the availability 
of understandable materials, we refer the commenter to the requirements 
at Sec. 457.110(b) and Sec. 457.525 which discuss the requirements for 
making certain information available and for information on the public 
schedule for cost sharing.
    Comment: Several commenters agreed with HCFA's suggestion in the 
preamble to proposed Sec. 457.410 that SCHIP programs use the AAP 
guidelines and/or Bright Futures periodicity schedules. However, they 
did not agree with HCFA's reasoning for not requiring States to adopt 
this definition of well-baby and well-child for benefit coverage. One 
commenter indicated that Medicaid guarantees children coverage of 
medically necessary services through EPSDT, while separate child health 
programs do not provide the same guarantee. It is therefore more 
critical and appropriate for HCFA to place specific requirements on the 
provision of services because there is no underlying entitlement, and 
HCFA should establish an appropriate floor. Another commenter indicated 
that because Medicaid uses the EPSDT standard for its schedule of 
periodicity, the schedule should be included for SCHIP coverage to be 
consistent and allow parity. Rather than merely recommending 
periodicity schedules, HCFA should require that an endorsed 
professional standard be adopted by SCHIP programs. Allowing States to 
devise their own schedules could leave children in different States 
with widely different coverage under SCHIP.
    Response: For a number of reasons, we are not requiring States to 
use for coverage and other purposes the definition of well-baby and 
well-child care that is required for purposes of cost sharing. 
Specifically, HCFA wanted to assure States the flexibility accorded 
them under the statute in developing their SCHIP benefit packages, 
including their well-baby and well-child care packages. In addition, 
there are several expert groups that have developed professional 
standards for the delivery of well-baby and well-child care. These 
standards include those developed by the AAP, AAPD and the Bright 
Futures standards. HCFA has not endorsed any particular professional 
standard for well-baby and well-child care for Medicaid and we did not 
feel we should impose a more stringent standard on SCHIP plans. We have 
included a definition of well-baby and well-child care for purposes of 
cost sharing because Congress established basic rules for cost sharing 
that must be applied on a consistent basis across States.
    The commenter is correct that under the Medicaid program, EPSDT 
services are mandatory for most Medicaid eligible children under the 
age of 21. However, the SCHIP statute did not require this 
comprehensive service package for children in separate child health 
programs but rather gave States the flexibility to design their own 
benefit packages within certain parameters.
    With respect to the use of a specific periodicity schedule, the 
commenter is incorrect that EPSDT services require any specific 
periodicity schedule. HCFA cannot, by law, require States to use any 
particular periodicity schedule for the delivery of EPSDT services 
under Medicaid. The EPSDT statute at section 1905(r) specifies that 
each State must develop its own periodicity schedule for screening, 
vision, hearing and dental services after appropriate consultations 
with medical and dental organizations involved in child health care. In 
the proposed rule, we suggested that States use one of the professional 
standards already developed in determining their well-baby and well-
child care benefit packages; however, we have declined to require the 
use of a specific schedule. There are several professional standards 
that are acceptable for States to adopt. In fact, many States have 
adopted one of those standards for use in their EPSDT programs also. 
This policy does present the possibility, as the commenter suggests, 
that children may be treated differently in different States. However, 
this is allowable under title XXI.
    Comment: One commenter believed that States should be able to 
retain discretion to define well-baby and well-child care more broadly 
than Sec. 457.520 and that HCFA should require States to follow the AAP 
and Bright Futures periodicity schedules in both Medicaid and SCHIP 
programs. In particular, many States have not yet adopted a periodicity 
schedule providing for annual health assessments for adolescents, even 
though there is consensus among the professional community that 
adolescents should receive annual assessments.
    Response: If a State chooses to define well-baby and well-child 
care more broadly than defined in Sec. 457.520 for cost sharing 
purposes in order to limit cost sharing for a broader range of 
services, the State is free to do so. It is true that some States have 
not adopted periodicity schedules to allow for annual assessment of 
adolescents under their Medicaid program. While both programs allow for 
that flexibility in adopting periodicity schedules, HCFA encourages 
States to ensure that their periodicity schedules reflect current 
professional standards.
    Comment: One commenter recommended that the AMA's Guidelines for 
Adolescent Preventive Services (GAPS) be added to the list of 
appropriate standards for States to consider.
    Response: We agree that GAPS is an appropriate standard for States 
to use in defining well-child care periodicity schedules for 
adolescents and recommend that States consider this standard as well.
    Comment: One commenter reiterated that the preamble language 
indicates that well-baby and well-child care includes health care for 
adolescents and is subject to the cost-sharing prohibitions, but is 
ambiguous as to whether a State has to provide coverage for these 
services or merely apply the cost-sharing prohibitions to those 
services that they cover. The commenter believed that States should be 
required to provide such coverage. The commenter also urged HCFA to add 
language to the preamble encouraging States to consider the special 
problems that affect adolescents (for example, eating disorders) when 
defining special needs.

[[Page 2564]]

    Response: We appreciate the commenter's concern about adolescents. 
States are required to provide coverage for well-baby and well-child 
care services under any separate child health plan but may specifically 
define those services as they choose. We note that we have revised 
Sec. 457.410(b)(1) to provide that the State must obtain well-baby and 
well-child care services as defined by the coverage for the State. Cost 
sharing is not allowed for any services covered under a separate child 
health program that are included in the definition of well-baby and 
well-child care at Sec. 457.520. We have not included language 
encouraging States to consider special problems that affect adolescents 
when defining special needs. However, we urge States to consider the 
special needs of the population being served by the separate child 
health plan.
    Comment: One commenter recommended Sec. 475.410(b) be deleted 
because the statute provides States with the flexibility to adopt a 
benchmark plan or to develop an actuarially equivalent benefit package.
    Response: We have not adopted this suggestion. The commenter 
correctly notes that the SCHIP statute provides States with flexibility 
to adopt benchmark health benefits coverage or actuarially equivalent 
benefit-equivalent health benefits coverage when designing their 
programs. However, in accordance with section 2102(a)(7), 
Sec. 457.410(b) ensures that enrollees in separate child health 
programs receive coverage for certain basic services.

4. Benchmark Health Benefits Coverage (Sec. 457.420)

    Section 2103(b) of the Act sets forth the benchmark health benefits 
coverage from which a State may choose in accordance with section 
2103(a)(1) of the Act. We proposed to implement these statutory 
provisions at Sec. 457.420. We proposed to define benchmark health 
benefits 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 of any 
such plan in the State.
    We discussed each option for benchmark health benefits coverage in 
detail in the preamble of the proposed rule. We noted that when a State 
chooses to increase, decrease, or substitute coverage available under 
its approved State plan, a State must submit a State plan amendment for 
approval if the change in benefits is intended to conform the separate 
State benefit package to the benchmark coverage. But if the change in 
benefits causes the State offered benefits to differ from the benchmark 
coverage, then the benefits must be reclassified as benchmark 
equivalent or one of the other benefit package options.
    We also noted that section 2103(a)(1) of the Act provides that 
benchmark coverage must be ``equivalent'' to the benefits coverage in a 
reference benchmark benefit package. We stated that we would interpret 
this language to mean that coverage must be ``substantially equal'' to 
benchmark coverage. That is, benchmark coverage offered under a 
separate child health plan should differ from benchmark coverage 
available in the State only to the extent that the State must add 
coverage to the benchmark coverage, such as coverage for immunizations, 
to meet the requirements of title XXI.
    Comment: Numerous commenters had requested clarification of when a 
State plan amendment is required if a benchmark plan changes. These 
commenters interpreted the language at Sec. 457.20 of the proposed rule 
to mean that if the benchmark plan the State is using changes, we would 
not require a State plan amendment; whereas if the State chooses to 
change the coverage under its State plan to conform to the benchmark 
plan's changes, a plan amendment would be required. The commenters 
asked why changes to a State plan that simply parallel changes in a 
benchmark plan require an amendment given that benchmark plans are 
supposed to be the standard of adequacy in terms of SCHIP benefits.
    Several commenters believed the preamble should be clarified to 
indicate that an amendment is only required when the SCHIP benefits 
package is altered.
    Response: The approved State plan must accurately reflect the 
health benefits package being offered. A State must submit a State plan 
amendment to reflect any change in the health benefits coverage 
regardless of whether the change is made to conform to changes made in 
the benchmark plan to which the State's health benefits coverage is 
supposed to be equivalent, or whether the change is made to select a 
different health benefits coverage option. See subpart A for further 
discussion of when a State must submit a State plan amendment.
    Comment: One commenter felt that States should not be allowed to 
amend their State plans to make them less comprehensive in terms of 
coverage or the benefits they provide. According to this commenter, 
State plans should only be amended to improve coverage, not to diminish 
it. A basic package of benefits should be required. In other words, 
certain benefits should be Federal entitlements. States then have the 
flexibility to improve that benefit package or to offer only what is 
Federally required.
    Response: States are responsible for determining the health 
benefits coverage under a separate child health program subject to the 
standards set by title XXI and implemented in this final regulation. 
States have the option of choosing from the types of coverage specified 
in Sec. 457.410 of the proposed rule and in accordance with section 
2103 of the Act. States may amend their State plans to decrease the 
coverage provided as long as all of the requirements of Secs. 457.410-
457.490 are met, depending on the type of coverage approved in the 
State plan. The only services required to be covered under every 
separate child health program are well-baby and well-child care, 
immunizations according the ACIP schedule, and emergency services as 
defined in Sec. 457.10.
    Comment: One commenter was concerned that a State that is using the 
benchmark benefit package need not submit an amendment when the 
benchmark changes and believed this means that if the plan includes 
mental health services that are subsequently dropped, the State need 
not file a State plan amendment.
    Response: If a State has elected to provide benchmark health 
benefits coverage that is substantially equal to coverage under a 
certain benefit plan, and that plan drops coverage for mental health 
services, the State has two options. First, the State may continue to 
provide coverage for mental health services as described in its 
approved State plan, even though the benchmark plan has discontinued 
this coverage. No amendment is necessary in this case. Alternatively, 
if the State wants to discontinue providing mental health services 
under its State plan, it must submit a State plan amendment to reflect 
the dropped coverage.
    Comment: One commenter supported the preamble language on benchmark 
coverage being able to differ from coverage under a benchmark plan only 
as necessary to meet other requirements of title XXI.

[[Page 2565]]

    Response: We appreciate the support. The commenter is correct that 
benchmark health benefits coverage under Sec. 457.420 may only differ 
from coverage under the benchmark plan as necessary to meet title XXI 
requirements. For example, as noted earlier, a State may need to add 
coverage for immunizations in order to comply with the requirement that 
they be covered under every separate child health plan.
    Comment: One commenter stated that the preamble indicates in 
discussing Sec. 457.420(c) that ``in calculating commercial enrollment, 
neither Medicaid nor public agency enrollees will be counted.'' The 
commenter suggested that all public agency enrollees be counted as 
commercial enrollees when they are enrolled in a plan offered by a 
private sector HMO. If it is appropriate to count Federal employees as 
commercial enrollees, it should be just as appropriate to count any 
other public employees who are enrolled in the plan. Another commenter 
recommended that Sec. 457.420(c) be modified to be consistent with the 
preamble to exclude public agency enrollees. The proposed regulation 
only excludes Medicaid enrollees.
    Response: We agree with the comments noting that the preamble and 
regulation text were not consistent with respect to the calculation of 
commercial enrollment. We also recognize, as noted by one of the 
commenters, that the preamble statement that Federal employees are 
considered commercial enrollees, but public agency enrollees are not, 
merits further consideration.
    After further consideration, we have decided to retain the 
regulatory language as proposed, that is, the health insurance coverage 
plan that is offered through an HMO and has the largest insured 
commercial, non-Medicaid enrollment in the State. Public agency 
employees, as well as Federal employees, may be considered enrollees 
for purposes of calculating commercial enrollment.

5. Benchmark-Equivalent Health Benefits Coverage (Sec. 457.430)

    Section 2103(a)(2) of the Act provides that a State may opt to 
provide a benefits package 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 proposed 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 set forth the proposed coverage requirements for 
States selecting the benchmark-equivalent coverage option. Under the 
authority of section 2103(c)(1), we proposed that a benchmark 
equivalent plan must include coverage for inpatient and outpatient 
hospital services, physicians' surgical and medical services, 
laboratory and x-ray services, well-baby and well-child care, including 
age-appropriate immunizations provided in accordance with the 
recommendations of ACIP.
    Under the authority of section 2110(a) of the Act as implemented at 
proposed Sec. 457.402, a State may provide coverage for a wide range of 
services. Under the authority of section 2103(a)(2)(C), we proposed 
that 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 proposed 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.
    Comment: Two commenters believed Sec. 457.430 is ambiguous, 
confusing and potentially troublesome and allows for a court to read 
some distinction into the redundant provisions at 457.410(b)(1) and (2) 
and 457.430(b)(4) about well-baby and well-child care and immunizations 
applying only to benchmark-equivalent coverage. To avoid such a result, 
the commenter suggested that HCFA strike Sec. 457.430(b)(4) and revise 
subsection (b) to read as follows: ``(b) Required services. Benchmark 
equivalent health benefits coverage must include, in addition to the 
services described in Sec. 457.410(b), coverage for the following 
categories of service.''
    Response: We have accepted the commenter's suggestion to revise 
proposed Sec. 457.430. We have also revised Sec. 457.410((b)(2) of the 
regulation text to add the phrase ``age appropriate'' to immunizations 
in order to make it consistent with proposed Sec. 457.430(b)(4).
    Comment: One commenter is concerned because mental health services 
do not fall within the scope of required services under SCHIP. The 
commenter is particularly concerned that children in a State that 
initially use a Medicaid-expansion program and then move to a separate 
child health program will lose the EPSDT safety net for mental health 
services.
    Response: While children receiving SCHIP services under a Medicaid-
expansion program are required to be provided the full complement of 
EPSDT services, there is no such requirement under a separate child 
health program. It is true that some children with coverage for mental 
health services under a Medicaid expansion could lose that coverage if 
the State decided to switch to a separate child health program. Those 
children, however, would be in no worse position than if the State had 
originally elected a separate child health program. We have no basis to 
limit State flexibility by mandating benefits beyond those specifically 
required by the statute, however, we encourage States electing to shift 
from a Medicaid expansion program to a separate child health program or 
combination program to retain a comprehensive benefits package that is 
similar to the Medicaid expansion benefit package to help ensure that 
children do not experience a significant disruption in care.
    Comment: One commenter believed HCFA should promulgate minimum 
benefits standards for benchmark-equivalent coverage. They noted that 
HCFA indicated that it has chosen not to propose minimum standards for 
basic sets of services because a greatly reduced benefits schedule 
would be unlikely to meet actuarial value requirements. However, the 
commenter argues that because SCHIP plans may involve much lower cost-
sharing requirements than commercial plans, a SCHIP benefits package 
can offer far fewer services than a benchmark commercial plan and still 
pass actuarial muster. Accordingly, the commenter respectfully urged 
the Secretary to revisit this decision and promulgate minimum benefits 
standards for benchmark-equivalent coverage.
    Response: We have considered the issue raised by the commenter but 
have declined to revise the regulation to set minimum standards at this 
time. The actuarial value requirements should ensure that the benefits 
in an actuarial-equivalent benefit package that will not fall below 
levels intended by title XXI. In fact, experience has shown that States 
that have chosen to provide benchmark-equivalent health benefits 
coverage provide coverage that looks very similar

[[Page 2566]]

to coverage under other health benefits coverage options.
    Comment: One commenter recommended deleting Sec. 457.430(c)(2) 
because benchmark-equivalent coverage should not be required to include 
coverage for specific services just because they are covered in the 
benchmark package. According to this commenter, the intent of 
equivalent packages is to allow a State the flexibility to design 
coverage that meets the needs of children in the state.
    Response: The language in Sec. 457.430(c)(2) mirrors section 
2103(a)(2)(C) of the Act. Therefore, we have not adopted the 
commenter's suggestion to delete this material.

6. Actuarial Report for Benchmark-Equivalent Coverage (Sec. 457.431)

    In accordance with section 2103(c)(4) of the Act, at Sec. 457.431 
we proposed to 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. We also proposed that the 
actuarial report must specify the benchmark coverage used for 
comparison.
    The actuarial opinion must meet all the provisions of the statute. 
We proposed 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 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.
     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 SCHIP.
    Finally, we proposed that 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.
    Comment: We received two comments on this section. One commenter 
supported the requirement for a set of comprehensive actuarial reports. 
The second commenter suggested that the requirement for proof of 
actuarial equivalence of the benefits will be too costly. The commenter 
noted that insurance industry and State regulatory departments have 
developed methods of comparing coverage that would be significantly 
more cost effective and equally as useful for the program as an 
actuarial study.
    Response: We appreciate the support of the first commenter. In 
response to the suggestion of the second commenter, the actuarial 
report requirements contained in this section of the regulation text 
are basically drawn from the section 2103(c)(4) of the Act. Therefore, 
we have chosen not to alter the requirements in the regulation to allow 
an alternative approach to benchmark equivalent coverage. However, as 
discussed under Sec. 457.450, we are willing to entertain other 
suggestions for Secretary-approved coverage. We will consider States' 
specific proposals for alternatives to actuarial analysis under the 
provisions of Sec. 457.450.

7. Existing Comprehensive State-Based Coverage (Sec. 457.440)

    In accordance with section 2103(d) of the Act, at Sec. 457.440 we 
proposed 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. We noted that 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 final rule.
    We also proposed that the States (Florida, New York, and 
Pennsylvania) may modify their 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.
    We did not receive any comments on this section. Therefore, we are 
implementing these provisions as set forth in the proposed rule except 
that we have added language to the regulation to clarify that a State 
must submit an actuarial report when it amends its existing State-based 
coverage.

8. Secretary-Approved Coverage (Sec. 457.450)

    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. In proposed Sec. 457.450 we set forth the 
option of providing health benefits coverage under the Secretary-
approved health benefits coverage option.
    We proposed 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, 
including all coverage required under title XXI, but may also provide 
additional services.
     Coverage, including coverage under a group health plan, 
purchased by the State that the State demonstrates to be substantially 
equal to coverage under one of the benchmark plans specified in 
Sec. 457.420, through use of a benefit-by-benefit comparison of the 
coverage. Under this option, if coverage for just one benefit does not 
meet or exceed the coverage for that benefit under the benchmark, the 
State must provide an actuarial analysis as described in Sec. 457.431 
to determine actuarial equivalence.
    While we listed these four options as permissible types of 
Secretarial-approved coverage, we solicited comments on other specific 
examples of coverage packages that States have developed, or might wish 
to develop, to meet the Title XXI requirements. We also proposed that 
no actuarial analysis is required for Secretary-approved

[[Page 2567]]

coverage if the State can show that the proposed benefit package meets 
or exceeds the benchmark coverage. While the four options we listed 
meet or exceed the benchmark package, it is possible that a State may 
develop a Secretary-approved coverage proposal that may require an 
actuarial analysis.
    Comment: One commenter argued that ``Secretary-approved coverage'' 
should provide HCFA with greater flexibility to approve SCHIP State 
plans. The commenter points out that Secretary-approved coverage is not 
simply another name for benchmark coverage; title XXI provides for 
Secretary-approved coverage as a flexible way for HCFA to approve a 
State plan. The statute requires no actuarial analysis for this option 
but rather requires only that the coverage be deemed ``appropriate'' 
for the target population.
    The commenter recommended that the regulations should simply 
indicate that States must demonstrate, to the Secretary's satisfaction, 
that their coverage meets the needs of their SCHIP populations. The 
manner in which States make this demonstration should be left flexible 
in accordance with the discretion accorded to States by title XXI.
    Response: The list of four examples included in the regulation text 
at Sec. 457.450 was not meant to be an exhaustive list of examples of 
Secretary-approved coverage. The regulations text states that 
Secretary-approved coverage ``may include'' one of these options. We 
solicited additional examples of types of coverage that might qualify 
under this option but we did not receive any specific examples. We 
remain open to reviewing other proposals for Secretary-approved 
coverage.
    Comment: One commenter noted that a number of States are exploring 
buy-in programs where SCHIP funds will be used to subsidize coverage 
for the uninsured under group health plans. A significant issue for 
States is how to design programs that can meet HCFA's SCHIP benefit 
requirements. The preamble to the proposed rule states that if any 
benefit under an employer plan does not meet or exceed that of a 
benchmark plan provided under title XXI, based on a benefit-to-benefit 
comparison, the State must document that the two benefit packages are 
actuarially equivalent. However, providing such comparisons would 
likely be costly and burdensome to implement on an employer-by-employer 
basis. The commenter strongly encouraged HCFA to modify the preamble to 
provide for maximum State flexibility in the area of benefit 
certification under buy-in programs. HCFA could provide such 
flexibility by allowing States more flexibility to designate benefit 
packages that meet the benchmark standard or to use simple benefit 
checklists.
    Response: We recognize the administrative burden involved in 
determining whether employer plans meet benefit requirements for 
separate child health programs, and we agree that documenting the 
actuarial equivalence of a plan or using benefit side-by-side 
comparisons may be costly and burdensome. Nonetheless, employer plans 
through which States wish to offer coverage under a separate child 
health program must meet requirements for either benchmark coverage, 
benchmark-equivalent coverage, or Secretary-approved coverage in order 
to comply with section 2103 of the Act. However, we are open to, and 
encourage States to propose other options under the ``Secretary-
approved'' category.
    Comment: Two commenters recommended that proposed Sec. 457.450 
should explicitly reference Medicaid benefits for children rather than 
permit States to furnish SCHIP children with Medicaid benefits for 
adults without any actuarial analysis showing comparability to standard 
commercial benefits. Specifically, paragraphs (a) and (b) should be 
consolidated and revised to read: ``(a) Coverage that is the same as 
the coverage for children provided under the Medicaid State plan.''
    Response: While we have not adopted the exact language and 
consolidation recommended by the commenter, we have revised 
Sec. 457.450(a) to specify that coverage should be the same as that 
offered to children under the Medicaid State plan.
    Comment: One commenter believed the proposed rule should be amended 
to eliminate the use of a benefit-by-benefit comparison for determining 
whether coverage provided through premium assistance under a group 
health plan is approvable. This provision appears to require benefit-
by-benefit comparison for demonstrating that group health plans meet or 
exceed coverage requirements. This is a more rigorous test than that 
required for benchmark equivalent coverage purchased directly by 
States. Premium assisted group health plan coverage should be held to 
no more than the requirements for benchmark equivalent coverage.
    The commenter noted that their State experience has shown that 
children are more likely to be insured if their parents are insured and 
that parents prefer to cover their entire family under the same plan. 
HCFA's imposition of barriers to the use of SCHIP programs to support 
group health coverage is a misguided attempt to address substitution of 
coverage. States should be given as much flexibility as possible to 
test different approaches, including buy-in to employer sponsored 
plans, for increasing creditable coverage for uninsured children. HCFA 
should not add any restrictions to those already established by law in 
title XXI.
    Response: We did not intend to impose additional restrictions on 
States wishing to utilize premium assistance programs in SCHIP. The 
benefit-by-benefit comparison was developed in response to States who 
wanted to provide premium assistance through employer sponsored 
insurance but were concerned about the cost of performing the actuarial 
analysis required by the statute for each participating employer plan. 
Therefore, we proposed that States may compare each benefit to the 
benefits in the benchmark plan as a way of providing States with a 
simplified and lower cost option to the actuarial analysis. However, 
given the statutory requirement for actuarial equivalence we still 
require that States perform an actuarial analysis if one benefit is 
lower than the level specified in the benchmark plan.

9. Prohibited Coverage (Sec. 457.470)

    In accordance with section 2103(c)(5) of the Act, we proposed 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 that item or service. We did not receive any comments on 
this section. Therefore, we are implementing these provisions as set 
forth in the proposed rule.

10. Limitations on Coverage: Abortions (Sec. 457.475)

    This section implements sections 2105(c)(1) and (c)(7) of the Act, 
which set limitations on payment for abortion services under SCHIP. At 
Sec. 457.475, we proposed 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 proposed that FFP is not available to a State in 
expenditures of any amount 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

[[Page 2568]]

than to save the life of the mother or resulting from an act of rape or 
incest.
    We also proposed 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. 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. The proposed 
regulation also specified 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.
    Comment: One commenter recommended that abortions be covered under 
any circumstances.
    Response: Federal financial participation is available in 
expenditures for abortions in an SCHIP program only as specifically 
authorized by Congress in the statute. Section 2105(c)(1) of the Act 
limits funding of abortions to funding for those abortions necessary to 
save the life of the mother or to terminate pregnancies resulting from 
rape or incest.
    Comment: We received many comments on the requirement that States 
that wish to cover abortions other than those allowed under the statute 
use separate contracts with managed care organizations to ensure that 
no Federal SCHIP funds are used to pay for those additional abortions. 
The commenters believed that this requirement exceeds the statutory 
authority, will be burdensome for States and managed care entities, and 
may ultimately serve to dissuade States and managed care entities from 
offering abortion services. Several commenters also indicated that 
enforcement of the requirement is not feasible in an employer-sponsored 
insurance environment where the benefits package is predetermined by an 
employer and a commercial insurer, rather than by the State. They 
recommended that employer-sponsored programs be exempt from the 
separate contract requirement.
    Response: Section 2105(c)(7) of the Act specifies that ``payment 
shall not be made to a State under this section for any amount expended 
under the State plan to pay for any abortion or to assist in the 
purchase, in whole or in part, of health benefit coverage that included 
coverage of abortion.'' Congressional authorities have made clear that 
this section of the statute requires separate contracts where managed 
care organizations will be providing abortions in addition to those 
specified in the law. Thus, contrary to the opinion of the commenters, 
this prohibition can not be satisfied by carving out or allocating a 
portion of the capitated rate to be paid for with State-only funds.

11. Preexisting Condition Exclusions and Relation to Other Laws 
(Sec. 457.480)

    In proposed Sec. 457.480 we implemented the provisions of sections 
2103(f), and 2109 of the Act under the authority of section 2110(c)(6) 
we implemented the provisions of sections 2103(f), 2109 and 2110(c)(6). 
At Sec. 457.480(a), we proposed to implement section 2103(f) of the Act 
and provide that, subject to the exceptions in paragraph 
Sec. 457.480(a)(2), a State child health plan may not permit the 
imposition of any preexisting condition exclusion for covered benefits 
under the plan. In Sec. 457.480(a)(2), we proposed 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 permit the imposition of a preexisting condition exclusion 
but only insofar as permitted under ERISA and HIPAA.
    In proposed Sec. 457.480(b), we implemented sections 2109 and 
2103(f)(2) of the Act, which describe the relationship between title 
XXI and certain other provisions of law. Specifically, as set forth in 
proposed Sec. 457.480(b), these provisions include 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.
    Comment: One commenter agreed with the inclusion of language in 
Sec. 457.480 requiring compliance with the Mental Health Parity Act. 
However, several commenters raised concerns because they interpreted 
the language at Sec. 457.480(b)(3) and (4) to mean that States must 
comply with the MHPA and the NMHPA, regardless of whether or not the 
State's benchmark plan includes these components. The commenters 
believed this requirement negates the flexibility otherwise provided 
the State in choosing the option of using a separate child health plan. 
The commenters believed that this language should be removed from the 
final regulation and that States should decide if inclusion of these 
components in their separate child health programs is appropriate.
    One commenter indicated that this requirement would require the 
offeror of the benchmark plan either to price a SCHIP product 
separately to the State, to incorporate the mental health parity costs 
and benefits, or to include these benefits at the same cost (an 
unlikely scenario). Either way, the commenter argued that the provision 
reduces the flexibility of using a benchmark plan and thus the proposed 
linkage of SCHIP to these laws is not appropriate and should be 
removed.
    Response: We agree that the proposed regulation language was 
unclear and have revised the language to clarify this issue. The 
commenters appear to have interpreted the proposed rule to mean that 
States must provide coverage for mental health services and services 
for newborns and mothers regardless of whether a State's benchmark plan 
includes coverage for those services. We did not intend to impose such 
coverage requirements.
    The requirements of the MHPA apply only to group health plans (or 
health insurance coverage offered by issuers in connection with a group 
health plan) that provide such medical/surgical benefits for newborns 
and mothers and mental health benefits. Thus, the provisions of MHPA 
apply only to title XXI coverage provided through a group health plan 
and only if that plan offers mental health benefits. However, if a 
State uses a group health plan as a benchmark, then the State may be 
implicitly required to comply with the MHPA even if that law is not 
directly applicable. Similarly, the NMHPA applies directly only to 
group health plans and health insurance issuers (in the group and 
individual markets) providing benefits for hospital lengths of stay in 
connection with child birth. We did not intend to impose additional 
coverage requirements on States or to reduce the State's flexibility in 
defining its service packages. We have thus revised the regulations to 
clarify that only group health plans through which States provide 
coverage under a State plan are subject to the requirements of the 
provisions described in Secs. 457.480(b)(3) and (4).
    Comment: One commenter raised the issue of HIPAA requirements and 
the pre-existing condition exclusions. The commenter noted that because 
SCHIP enrollees generally will not meet the requirements of ``eligible 
individuals'' under HIPAA, the level of protection

[[Page 2569]]

afforded by this proposed rule against pre-existing condition exclusion 
clauses in a SCHIP benchmark package offered by a private insurer is 
unclear. The proposed rule does state that SCHIP benefits are 
creditable coverage; however, the commenter stated that the prohibition 
against pre-existing condition exclusions is triggered only if 
creditable coverage was followed by COBRA coverage. The commenter noted 
that clarification of the pre-existing condition exclusion provisions 
will be important for health providers caring for children with 
disabilities.
    One commenter also indicated that the regulations do not permit any 
``preexisting conditions exclusions'' for a State plan in general. 
However, if a SCHIP plan provides coverage through a group health plan, 
the plan could impose preexisting conditions exclusions in accordance 
with what is allowable under HIPAA. While HIPAA does limit the extent 
of preexisting condition exclusions, States should be allowed to 
negotiate with health plans the elimination of all preexisting 
condition exclusions.
    Another commenter encouraged the inclusion of a statement at 
Sec. 457.480(a)(2) that while States may, in very limited 
circumstances, permit the imposition of a pre-existing condition 
exclusion consistent with applicable Federal law, States have the 
discretion to, and are encouraged to, negotiate group health plan 
coverage free of such exclusions.
    Response: Section 457.480(a) of the regulation implements section 
2103(f)(1) of the Act and provides that a State may not permit the 
imposition of a pre-existing condition exclusion, except in the case of 
a State that obtains health benefits coverage through payment for, or a 
contract with, a group health plan or group health insurance coverage, 
in which case the State may permit the imposition of such an exclusion 
to the extent permitted under HIPAA. The protection afforded to 
enrollees is clear; they either face no pre-existing condition 
exclusion or, if enrolled in a group health plan, they potentially face 
an exclusion that in no case can be longer than the 12 months permitted 
under HIPAA. The commenter correctly notes that enrollees in a separate 
child health program may not meet the definition of ``Federally 
eligible individual'' under HIPAA's individual market protections 
(although they may if their most recent coverage was SCHIP coverage 
through a group health plan and they then exhausted any COBRA or State 
continuation coverage offered to them). Presumably, the commenter was 
concerned about former enrollees wishing to purchase private, 
individual market coverage. Title XXI does not provide enrollees with 
an assurance of meeting the definition of Federally-eligible 
individuals under HIPAA. However, section 2110(c)(2) of the Act as 
implemented at Sec. 457.410 provides that coverage meeting the 
requirements of Sec. 457.10 provided to a targeted low-income child 
constitutes creditable health coverage. Therefore, coverage under a 
separate child health program will count towards the minimum 18 months 
of coverage required for someone to qualify as a Federally-eligible 
individual.
    Comment: One commenter also urged States that do and do not have 
mental health parity statutes to include coverage for a full range of 
mental illness services in their State plans when they opt to develop 
separate child health programs.
    Response: States are given flexibility in designing their benefit 
packages. While we encourage States to provide services for mental 
illness, there is no Federal requirement for a State to include this 
coverage under its separate child health program if it does not elect 
to do so.
    Comment: One commenter believed the regulation should include a 
statement that pre-existing condition exclusions are contrary to the 
intent of SCHIP and unfair. Therefore, even under the limited 
circumstances where such exclusions are allowed, States must be 
required to demonstrate attempts to negotiate group health plan 
coverage free of such exclusions. According to this commenter, only 
after demonstrating that those efforts have been exhausted, should a 
State plan with these very limited exclusions be approved.
    One commenter asserted that the HIPAA-allowable conditions for 
permitting a waiting period for services for a preexisting condition 
are adverse to the purposes of initiating coverage for children cut off 
from access to services precisely because they lack coverage. The 
commenter believed most, if not all, children should be assessed, 
diagnosed, and treated quickly in response to their health 
deficiencies. The commenter believed this is a matter for Congress to 
reconsider.
    Response: The language in the proposed rule at Sec. 457.480(a)(1) 
and (2) was included based on section 2103(f)(1) of the Act. Section 
2103(f)(1)(B) clearly provides for the possibility that States 
providing benefits through group health plans may allow those plans to 
impose pre-existing condition exclusions to the extent permitted by 
HIPAA. One limited exception to this rule is permitted. Under 
Sec. 2103(f)(1)(B) of Title XXI, if a State child health plan provides 
for benefits through payment for, or a contract with, a group health 
plan or group health insurance, the plan may permit the imposition of 
those preexisting conditions which are permitted under HIPAA. This 
permits the imposition of preexisting conditions consistent with the 
requirements of such plans when the State is providing premium 
assistance through SCHIP to subsidize child or family coverage under a 
group health plan or group health insurance pursuant to Sec. 2105(c)(3) 
of the statute. Therefore, we are unable to revise this section as 
suggested by the commenter.

12. Delivery and Utilization Control Systems (Sec. 457.490)

    In accordance with section 2102(a)(4) of the Act, at Sec. 457.490 
we proposed to require 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 proposed regulation requires a State to address 
its choice of financing and the methods for assuring delivery of the 
insurance product to children including any variations. We also 
proposed that the State describe utilization control systems designed 
to ensure that children use only appropriate and medically necessary 
health care approved by the State or its subcontractor. We set forth 
examples of utilization control systems in the preamble to the proposed 
rule.
    Comment: One commenter noted that in this section of the proposed 
rule, HCFA requests a description of utilization controls designed to 
ensure that children use only appropriate and medically necessary 
health care, but does not define ``medically necessary'' in any 
specific manner. The commenter suggested that this term be defined in 
the regulation and suggested language to be used in the regulation as a 
definition of medically necessary.
    Response: As we have indicated in response to comments on 
Sec. 457.420, HCFA will not define medical necessity for SCHIP. The 
determination of medical necessity criteria for separate child health 
programs is left up to each State to define.
    Comment: One commenter noted that utilization controls that might 
be appropriate for the adult population may not be appropriate for the 
pediatric population. As States implement these controls, it is 
important that they are

[[Page 2570]]

appropriate for children. These controls should take into consideration 
children with special health care needs as well as the unique needs of 
children in general.
    Response: The language in Sec. 457.490(a) of the proposed rule very 
specifically says ``methods for assuring delivery of insurance products 
to the children.'' Section 457.490(b) provides for ``systems designed 
to ensure that children use only appropriate * * *'' (emphasis added). 
We believe this language, along with the language at proposed 
Sec. 457.735 (now Sec. 457.495) requiring States to assure 
appropriateness of care, very clearly requires that the utilization 
controls be appropriate for the pediatric population. If a State 
provides coverage for services for children with special health care 
needs, States would be expected to ensure appropriate utilization 
controls on these services also. We believe the language in paragraph 
Sec. 457.490(a) requiring States to describe methods to assure delivery 
of services ``including any variations,'' is sufficient to address this 
commenter's concerns. ``Variations'' would include additional services 
delivered to special needs children.
    Comment: We received two comments suggesting the addition of 
default enrollment language in the regulation. One commenter 
recommended that HCFA adopt language similar to the language in the 
Medicaid managed care proposed rule to address default enrollment under 
SCHIP for States that offer eligible children a choice of plans. The 
commenter suggested that HCFA require that States describe in their 
plans the policies and procedures that they will use to minimize rates 
of default enrollment and what efforts the State and its contractors 
will make to preserve traditional provider-patient relationships. The 
commenter also recommended that this section include an additional 
paragraph:

    Describe policies and procedures that minimize rates of default 
enrollment where beneficiaries have a choice of plans, and what 
efforts have been made by the State and its contractors to preserve 
existing provider/patient relationships. States must also describe 
opportunities for beneficiaries to disenroll both for cause or on a 
periodic basis without cause.

    Response: Default enrollment, also referred to as auto assignment, 
is a practice utilized by several States in their enrollment processes. 
However, we believe that any information or requirements regarding 
managed care enrollment procedures, including default enrollment, 
should be addressed as part of the requirements of Sec. 457.110(a), 
rather than in this section.
    Comment: One commenter supported the language in this section and 
indicated that this sets out a helpful framework that encourages States 
to ensure that utilization controls limit costs without denying 
essential health care to children.
    Response: We appreciate the commenter's support.
    Comment: One commenter recommended that Sec. 457.490(a) be modified 
to be applicable not only to the delivery of the insurance products but 
also to delivery of services covered by the product.
    Response: We have adopted this suggestion and revised the 
regulation text accordingly.
    Comment: Two commenters recommended that this section be modified 
to require State plans to identify methods the States will use to 
monitor and evaluate delivery and utilization control systems to ensure 
that children receive appropriate and medically necessary care.
    Response: Proposed Sec. 457.735 (now Sec. 457.495) addresses State 
plan requirements for assuring quality and appropriateness of care 
provided under the plan. Please see our responses to comments in that 
section.

13. Grievances and Appeals (Proposed Sec. 457.495)

    At Sec. 457.495, we proposed to require States to provide enrollees 
in a separate child health program with the right to file grievances or 
appeals for reduction or denial of services in accordance with proposed 
Sec. 457.985. In an effort to consolidate all provisions related to 
review processes, we have removed proposed Sec. 457.495 and 
incorporated those provisions into new subpart K, which contains 
provisions regarding grievances and appeals. We address comments on 
proposed Sec. 457.495 in new subpart K.

14. State Plan Requirement: State Assurance of the Quality and 
Appropriateness of Care (Sec. 457.495)

    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 and immunizations, and for ensuring 
access to covered services, including emergency services. We proposed 
to implement this provision at Sec. 457.735(a), and provided further 
specifications therein consistent with this statutory requirement.
    We also proposed to include additional, more specific assurances 
designed to ensure the quality and appropriateness of care for 
particularly vulnerable enrollees. In Sec. 457.735(b), we proposed that 
States must provide assurances of appropriate and timely procedures to 
monitor and treat enrollees with complex and serious medical 
conditions, including access to specialists.
    In this final rule, we are redesignating the provisions of proposed 
Sec. 457.735 (which were previously located in subpart G, Strategic 
planning) as Sec. 457.495. We believed that these provisions are more 
appropriately presented in the context of this subpart. We respond to 
all public comments on proposed Sec. 457.735 below.
    Comment: We received several comments indicating that this section 
of the proposed rule was unclear as to whether the requirement for 
State assurance of quality and appropriateness of care applies to SCHIP 
coverage provided through employer plans. Commenters indicated that the 
requirements of the proposed regulation seem tacitly to assume that the 
State will have a direct, contractual relationship with all SCHIP 
participating health plans, including employer-sponsored plans. A 
commenter further stated that any attempt to apply such requirements 
directly to employer-sponsored plans would mean that no employer plans 
will ever qualify for the State's premium assistance under SCHIP, as 
there is no incentive for an employer or plan to invest resources to 
comply with these requirements. Commenters indicated that employer-
sponsored health coverage systems do not identify individuals who can 
be classified into such categories as ``enrollees with special or 
complex medical conditions,'' making it difficult to report on these 
subgroups.
    Response: We understand the commenters' concerns and desire that 
data reporting requirements under SCHIP are able to work within the 
systems and regulatory structure for premium assistance programs. The 
provisions of this regulation section do apply to such coverage because 
the statute contains no exemptions from its reporting requirements for 
SCHIP coverage offered through premium assistance programs. However, 
the regulation does not require States to report encounter data in 
measuring their progress toward meeting performance goals. We encourage 
States to use a variety of methods to collect appropriate data. While 
requiring plans to report encounter data to the State is one means of 
gathering these data, it is by no means the only method. For example, 
States can rely on mail or telephone surveys of

[[Page 2571]]

participating families and surveys of participating providers, or can 
design a data collection methodology that works with the structure and 
offerings of their SCHIP programs, including those operating premium 
assistance programs.
    Comment: We received comments recommending that we require specific 
reporting requirements for States offering premium assistance programs 
through group health plans.
    Response: States that implement or design premium assistance 
programs for SCHIP have flexibility to explore different methods of 
working with employers, health plans and beneficiaries to obtain 
information on SCHIP coverage provided through group health plans. 
Because of the difficulty of obtaining data from employer plans with 
which the State may not have direct contractual relationships, we 
intend to continue to work with States exploring the implementation of 
premium assistance programs and will continue to consider a variety of 
State proposals regarding appropriate methods of obtaining information 
about the quality of care obtained through premium assistance programs.
    Comment: We received comments that the regulation should allow 
States the flexibility to use strategies that employers already have in 
place, or to use alternative strategies, to ensure quality and 
appropriateness of care.
    Response: First, it should be noted that, upon further reflection, 
we have determined that the provisions and intent of proposed 
Sec. 457.735 would fit more appropriately within Subpart D, Benefits. 
The focus of this provision is to ensure that SCHIP enrollees have 
adequate access to health care services as needed. Therefore, we have 
moved the comments and responses on this provision to Subpart D, 
Sec. 457.495.
    We agree that, pursuant to the provisions of title XXI, States 
should have the flexibility to use innovative strategies to ensure 
quality and appropriateness of care. Section 457.495(a) provides that 
States must provide HCFA with a description of the methods that a State 
uses for assuring the quality and appropriateness of care provided 
under the plan. We did not specify a particular method States must use 
to monitor appropriateness and quality of care. We anticipate that 
States will use a variety of methods, including those most suitable for 
the type of program or programs a particular State is implementing.
    Comment: Several commenters recommended that we establish specific, 
unified, quality and access standards with respect to those areas set 
forth in Sec. 457.495 and identify the methodologies for monitoring 
those standards in the regulations. Several commenters recommended that 
we require States to describe methods they will use to ensure that 
children have access to pediatricians and other health care providers 
with expertise in meeting the health care needs of children. The 
commenters felt that physicians who are appropriately educated in the 
unique physical and developmental issues surrounding the care of 
infants, children, young adults and adolescents should provide 
children's care. As the SCHIP program is specifically designed to serve 
children, commenters noted that it is critical that access to 
appropriate providers of care be required. One commenter recommended 
the annual application of a standardized survey of children's mental, 
physical, and social health.
    Response: Section 457.495 requires that a State describe the 
specific elements of its quality assurance strategies. These may 
include 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. We are not requiring 
that States meet specific, unified standards regarding access to and 
quality of care. However, the regulation at Sec. 457.495 does requires 
States to assure the quality and appropriateness of care provided under 
the State plan. As part of the State's assurances, each State agency 
would be expected to assure that all covered services are available and 
accessible to program enrollees. This means that all covered services 
would be available within reasonable time frames and in a manner that 
ensures continuity of care, adequate primary and specialized services, 
and access to providers appropriate to the population being served 
under the SCHIP plan. We believe this assurance is sufficient to 
address the concerns of the commenters.
    Comment: One commenter recommended that quality of care standards 
reflect professional judgment and local standards of care as 
distinguished from standards of care developed by third-party payers or 
fiscal intermediaries.
    Response: We encourage States, as they create methods of assuring 
and evaluating quality of care provided to SCHIP participants, to take 
into consideration sources of quality of care standards and to make a 
determination about whether to incorporate standards endorsed or used 
by local providers, national provider associations, national health 
research institutes, or health insurance or managed care organizations 
into their State plan.
    Comment: Several commenters supported the requirement in 
Sec. 457.735(a) that States describe methods of assuring the quality 
and appropriateness of care under SCHIP, particularly with regard to 
well-baby and well-child care, immunizations, and access to specialty 
care. One commenter suggested that HCFA use the phrase ``access to 
specialty services'' rather than the phrase ``access to specialists'' 
in Sec. 457.735(b).
    Response: We considered the commenters' suggestion and concluded 
that modifying the term ``access to specialists'' with the 
clarification of ``access to specialists experienced in treating the 
enrolled's medical condition'' would provide broader assurances that 
the children identified in Sec. 457.495(c) would have access to the 
appropriate specialty services. Therefore, we have revised 
Sec. 457.495(c) accordingly.
    Comment: We received several comments applauding the inclusion of 
well-adolescent care with well-child care in the quality assurance 
requirements at Sec. 457.495. Commenters suggested including the word 
``adolescent'' in the definition of well-baby and well-child services 
and using the term in connection with well-child care throughout the 
regulation. The commenters indicated that they believe we should focus 
on the unique health needs of adolescents, which make up approximately 
39 percent of SCHIP eligible youth, because their health needs differ 
from those of younger children. The commenters also urged HCFA to list 
specifically in the regulation medical sources that have guidelines for 
infants, children and adolescents. In these commenters' view, these 
sources should include the American Academy of Pediatrics' ``Guidelines 
for Health Supervision of Infants, Children and Adolescents,'' the 
American Medical Association's ``Guidelines for Adolescent Preventive 
Services,'' and the American College of Obstetricians and 
Gynecologists' ``Primary and Preventive Health Care for Female 
Adolescents.''
    Response: We appreciate the commenters' support of our emphasis on 
assuring the quality and appropriateness of care for children and our 
specific reference to certain types of adolescent care. While 
understand the view that this emphasis is important at Sec. 457.495, 
because of our concern for assuring quality and appropriateness of 
care, we have not adopted the commenters suggestion with respect to 
using this terminology throughout the

[[Page 2572]]

rest of the final rule. The definition of child for purposes of SCHIP 
at Sec. 457.10 and section 2110(c)(1) of the Act indicates that a 
``child'' is an ``individual under the age of 19.'' Adolescents within 
this age range are clearly included in this definition and therefore we 
have not included the term in other references to well-baby and well-
child care. Because we are not requiring that States adopt specific 
standards of care, we are not including the commenters' list of sources 
in the regulation text. We are including the commenters' listing here 
in the preamble so that States may consider these sources as 
recommendations in developing their own standards.
    Comment: One commenter noted that accreditation is a method widely 
used by commercial purchasers to assure the quality of care provided by 
health plans. The commenter noted that accreditation, a comprehensive 
assessment of the quality of a health plan, is particularly useful in 
assessing the effectiveness and timeliness of procedures used to 
monitor and treat enrollees with serious medical conditions. The 
commenter urged HCFA to acknowledge that a State using HEDIS (Health 
Plan Employer Data and Information Set) measures would meet the State 
plan requirements set forth in this section. The commenter noted that 
HEDIS includes measures that specifically address the elements of care 
within SCHIP including:

--Childhood and adolescent immunizations;
--Use of appropriate medications for people with asthma;
--Children's access to primary case managers (PCPs);
--Annual dental visits;
--Well child visits in the first 15 months, third, fourth, fifth, and 
sixth years of life;
--Adolescent well visits;
--Ambulatory care;
--Inpatient utilization;
--Ratings of personal doctor, nurse, specialist;
--Rating of health care;
--Rating of health plan;
--Getting needed care and getting care quickly;
--How well doctors communicate;
--Courteous and helpful staff; and
--Customer service and claims processing.

    Response: States have flexibility in determining the State-specific 
performance measures they will use in determining quality and access to 
care. In making these determinations, States have the ability to 
utilize those data collection tools and analysis methodologies that are 
most suited to the circumstances of their SCHIP program. HEDIS is one 
of several tools we recommended in the proposed regulation that States 
consider as they design ways of measuring appropriateness and quality 
of care in SCHIP, but there may be other tools States may wish to 
consider. Specifically, in the preamble to the proposed rule, we 
recommended that States refer to several tools including the Consumer 
Assessments of Health Plans Study (CAHPS), the U.S. Preventive Services 
Task Force Guidelines, Bright Futures: Guidelines for Health 
Supervision of Infants, Children, and Adolescents, and the Office of 
Disease Prevention and Health Promotion's Health People 2000 and 
Healthy People 2010.
    Comment: One commenter cautioned HCFA that while HEDIS is a widely 
accepted and adopted collection system, it has limitations in its 
usefulness for monitoring performance under SCHIP. The commenter urged 
HCFA to work with NCQA to understand these limitations and the explore 
ways to address them. Additionally, the commenter encouraged HCFA to 
include the American Academy of Pediatrics Guide for Health Supervision 
III to the list of standards, benchmarks, and guidelines states should 
look to for performance measures.
    Response: We agree that the suggested performance measure 
guidelines mentioned in the preamble to the proposed rule all have 
certain limitations that the States should take into consideration as 
they develop strategies for measuring performance goals related to 
their strategic objectives. Additionally, we encourage States to 
consider the American Academy of Pediatrics Guide for Health 
Supervision III in developing their performance measures.
    Comment: Commenters recommended that we require States to include 
procedures to monitor the extent to which the program has sufficient 
network capacity, including providers and specialists who serve the 
particular needs of the adolescent enrollees, both male and female, and 
provides services such as women's health services, family planning and 
transitional services. According to these commenters, the monitoring 
should include measures relevant to the care of adolescents, (annual 
well-adolescent visits, adolescent immunization rates, etc.) and 
immigrants, and access to services without unreasonable delay.
    Response: We have not adopted the commenters' suggestions. Section 
457.495 requires States to include in the State plan a description of 
the methods that a State uses for assuring the quality and 
appropriateness of care and for ensuring access to covered services 
provided under an SCHIP plan. It is therefore, not appropriate to 
include a list of specific types of services, specialists, or groups; 
and risk unintentionally excluding an area that also needs attention. 
However, we did include language regarding access to specialists in 
general in order to emphasize the need for such access. We have also 
required States to provide a decision regarding the authorization of 
health services within 14 days of the service being requested. A 
possible extension to this 14 day period may be granted in the event 
that the enrollee requests an extension or the physician or the health 
plan determines that additional information is required. All such 
decisions must be made in accordance with the medical needs of the 
patient. The language of section 457.495 as finalized, allows us to 
address the concerns of the commenters while allowing States the 
flexibility the SCHIP statute provides them.
    Comment: One commenter indicated that it was difficult to determine 
the applicability of the requirement to assure appropriate and timely 
procedures to monitor and treat enrollees with complex and serious 
medical conditions for fee-for-service programs. The commenter believed 
that the quality of care monitoring requirement in Sec. 457.495(a) is 
sufficient to protect enrollees and that the requirement at 
Sec. 457.495(b) regarding complex and serious medical conditions should 
be eliminated.
    Response: We disagree with the commenter. Because of the importance 
of ensuring that children with chronic, serious or complex medical 
conditions receive continuous and appropriate care, with the ability to 
access specialists as often as needed, particular attention is 
necessary in specifying the requirement at Sec. 457.495. We understand 
that it is more difficult for States to implement this requirement in 
the fee-for-service sector than it would be in a managed care 
environment. However, in order to assure quality care to participants 
with chronic, serious or complex medical conditions, it is essential 
that States provide specific assurances that they have established 
appropriate procedures to monitor and treat these participants whether 
they are enrolled through fee-for-service programs or through MCEs. 
Therefore, we have retained the requirement at Sec. 457.495(b), as 
revised.
    Comment: One commenter urged HCFA to require the States to describe

[[Page 2573]]

procedures for providing case management to those with complex and 
serious medical conditions. The commenter believed that quality of care 
for those with complex medical conditions is greatly enhanced by case 
management. The commenter also urged HCFA to require States' to include 
appropriate peer review by pediatricians and appropriate pediatric 
specialists in their quality assurance mechanism.
    Response: While States may want to establish procedures for 
providing case management to enrollees with chronic, complex or serious 
medical conditions to enhance quality and access to care for those 
participants, we have not required all States to use that particular 
method to assure quality and appropriateness of care. We note that case 
management is one service that States may, but are not required to, 
provide under Sec. 457.402. However, other methods to assure quality 
and appropriate care are also acceptable and may be just as effective, 
depending upon the design of the State's SCHIP.
    Comment: One commenter suggested that we revise Sec. 457.495(b) as 
follows: ``States must assure appropriate and timely procedures to 
monitor and treat enrollees with complex, serious or chronic medical 
conditions (including symptoms) including access to appropriate 
pediatric, adolescent and other specialists and specialty care centers 
and must assure that children with complex, serious or chronic medical 
conditions receive no lower quality of care than received by children 
with special health care needs served by the State's programs under 
title V of the Social Security Act.''
    Response: We will modify the phrase ``complex and serious'', to add 
the term ``chronic'', as suggested by the commenter. In addition, to 
provide further flexibility, we are changing the word ``and'' to 
``or''; and the phrase will be written as, ``chronic, complex or 
serious''. We believe this phrase encompasses the symptoms of these 
enrollees, making further specification unnecessary. We have also 
revised the requirement for access to specialists within that provision 
to read, ``access to specialists experienced in treating the specific 
medical condition* * *'' We believe the addition of these terms in 
Sec. 457.495(b) assures that SCHIP programs will adequately serve the 
health needs of enrollees with chronic, complex or serious medical 
conditions, by assuring that children with these conditions will have 
access to care from specialists most adequately suited to meet the 
child's needs. Since States have the flexibility to establish their own 
standards for assuring appropriate treatment and quality of care, we do 
not agree with the commenter's suggestion that we should specify the 
inclusion of specialty care centers or particular standards of care.
    Comment: One commenter mentioned several times throughout its 
comments that access to dental services is a problem under Medicaid and 
that HCFA should take action to correct this problem.
    Response: While Medicaid coverage of dental services is not the 
subject of this regulation, we would like to bring to the attention of 
the commenter the HCFA/HRSA Oral Health Initiative (OHI) which is an 
ongoing effort to improve access to high quality oral health services 
for vulnerable populations, particularly children enrolled in Medicaid 
and SCHIP. HCFA teamed with HRSA almost two years ago and initiated the 
OHI in a effort to bring together Federal staff, State Medicaid 
agencies and national, State and local level dental organizations to 
recognize and address this issue. Both HCFA and HRSA recognize that 
resolving barriers to oral health access in Medicaid and SCHIP must 
begin with the understanding that Medicaid and SCHIP are programs that 
rely upon Federal-State partnerships: the Federal government provides 
broad guidelines under which States implement individual programs. Both 
HCFA and HRSA believe that solutions to oral health disparity in 
Medicaid and SCHIP will most likely be found at the local and State 
levels. Both agencies seek to provide resources, guidance and technical 
assistance necessary to enable States and localities to better address 
their local oral health concerns.
    Some activities that have been undertaken by the OHI include: co-
sponsoring a national leadership conference that brought together for 
the first time the State Medicaid and State Dental Directors with the 
leadership of the dental profession; collaborating with the private 
sector (that is, the American Dental Association convened a second 
national leadership conference for stakeholders to continue the 
progress and dialogue achieved in the first meeting and also to include 
State legislators in the process); supporting State dental summits/
workshops to provide the opportunity for State level players to meet 
with each other on a face-to-face basis to address oral health problems 
specific to their States and develop State-specific strategies and 
implementation plans; promoting best practices by providing State 
dental officials the opportunity to share common dental concerns and 
potential best practices by initiating and supporting a privately 
managed electronic list serve which connects, for the first time, 
Medicaid program officials in each State with each other, and with 
State health officials and the Federal OHI team. Discussion of further 
activities undertaken by HCFA and the OHI to improve the oral health of 
this vulnerable population is contained in the Department responses to 
the April 27, 1999 report of the General Accounting Office (GAO), 
``Oral Health: Dental Disease is a Chronic Problem Among Low-Income 
Populations.'' This report is available from the GAO web site at 
www.gao.gov.
    Finally, in an effort to focus attention on the oral health issues 
and to build an oral health infrastructure, HCFA has appointed a full-
time Chief Dental Officer to serve as a focal point for oral health 
issues and has identified staff in each HCFA Regional Office to serve 
as Medicaid dental coordinators.
    Comment: Several commenters suggested that the regulation include 
language to specifically require access to various types of providers, 
such as, pediatric and adolescent specialists, and obstetricians/
gynecologists. In addition, one commenter suggested that State plans 
should be required to assure that female adolescents have direct access 
to women's health specialists and that pregnant adolescents be 
permitted to continue seeing their treating provider through pregnancy 
and the post-partum period in instances where the contracting plan or 
provider has left the SCHIP program.
    Response: We have not adopted the commenters' suggestions. Section 
457.495 requires that the State plan include assurances of the quality 
and appropriateness of care and services provided under a State plan 
including treatment of chronic, serious or complex medical conditions 
and access to specialists. This requirement addresses the concerns of 
the commenters while allowing States the flexibility to establish the 
means by which they will assure access to appropriate care that the 
SCHIP program provides them. This regulation requires States to ensure 
access to providers appropriate to the population being served under 
the State plan.
    Comment: Two commenters recommended that we revise the regulation 
to provide that a State and its participating contractors must provide 
services as expeditiously as the enrollee's health condition requires. 
The commenter also suggested time frames of approval of a request for 
services within seven calendar days after receipt of the request for 
services, with a possible extension of fourteen days. The

[[Page 2574]]

commenters also recommended an expedited time frame if the physician 
indicates, or the State/contractor determines that following ordinary 
time frames could seriously jeopardize the enrollee's life or health or 
ability to regain maximum function, to be no later than 72 hours after 
receipt of the request for services, with a possible extension of up to 
14 additional calendar days. Another commenter suggested requiring a 
response within seven days to an initial request for service or within 
72 hours for an expedited procedure.
    Response: We recognize the commenters' concerns and have addressed 
these issues in new subpart K, Applicant and Enrollee Protections, at 
Sec. 457.1160.

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

1. Basis, Scope, and Applicability (Sec. 457.500)

    A State that implements a separate child health program may impose 
cost-sharing charges on enrollees. A State that chooses to impose cost-
sharing charges on enrollees must meet the requirements described in 
section 2103(e) of the Act. In proposed Sec. 457.500, we set forth 
section 2103(e) of the Act as the statutory basis for this subpart, 
containing cost-sharing provisions. As proposed, 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. 
We proposed that these provisions 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.
    We noted in the preamble that these requirements apply when a State 
with a separate child health program 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 coverage under a group health plan as 
defined in Sec. 457.10. We proposed that this subpart does not apply to 
Medicaid expansion programs. In this final rule, we revised the 
statutory basis at Sec. 457.500(a) to include section 2101(a) of the 
Act, which describes 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.
    Comment: A number of commenters noted that the numerous protections 
written into the Medicaid statute were not written into the SCHIP 
statute because Congress clearly recognized that these populations are 
different and intended that they be treated differently. The commenters 
noted that cost-sharing gives working families a sense of pride in 
sharing the cost of medical services, just like their friends, 
neighbors, and relatives who have employer-based insurance. They also 
indicated that asking families to track their own cost-sharing 
expenditures contributes to the development of self-sufficiency. Some 
commenters noted that establishing low levels of cost-sharing will 
encourage substitution of coverage.
    Response: We have implemented Secs. 457.500 through 457.570 of the 
final regulation under the authority of section 2103(e) of the Act. 
Congress included cost-sharing protections for children covered under 
SCHIP through separate child health programs, in recognition of the 
important role that affordability plays in determining whether a child 
has access to health care insurance and essential health care services 
for their families. High cost-sharing charges could result in low-
income families choosing to remain uninsured, dropping insurance 
coverage, or avoiding utilization of necessary health care services. 
Increased cost sharing may also encourage enrollees to access health 
care only during times when care is most expensive (that is, during 
emergency or critical health care situations). We have retained States' 
ability to rely on a methodology for tracking cost sharing that places 
some of the responsibility on the enrollee. As noted in the preamble to 
the proposed rule, we do, however, encourage the use of more formal 
tracking mechanisms that ease any tracking or administrative burden on 
enrollees and providers, such as a swipe card. While we recognize that 
low levels of cost sharing may encourage substitution, States must meet 
the requirements in subpart H, Substitution of Coverage, that are 
intended to limit the occurrence of substitution.
    Comment: One commenter suggested that HCFA revise this section to 
apply the SCHIP copayment rules to Medicaid expansion programs, not 
just separate child health plans. The commenter believed that this 
revision would effectuate Congressional intent, which was to allow 
States flexibility in implementing SCHIP plans.
    Response: Section 2103(e)(4) of the Act provides that the cost-
sharing requirements and limitations established pursuant to section 
2103(e) do not affect the rules relating to the use of enrollment fees, 
premiums, deductions, cost sharing, and similar charges in a Medicaid 
expansion program under section 2101(a)(2). Therefore, Congress has 
made it clear that these cost-sharing provisions were intended to apply 
to separate child health assistance programs only. The title XIX cost-
sharing rules apply to Medicaid expansion programs, and these rules 
generally prohibit cost sharing for children. Therefore, the reference 
to Medicaid expansion programs in Sec. 457.500(c) has been removed.
    Comment: One commenter recommended that we include language in the 
preamble advising States that they must ensure that cost-sharing 
requirements are administratively workable and not unduly burdensome 
for managed care entities.
    Response: We agree with the commenter. States should strive to 
impose cost-sharing charges in a manner that eases administrative 
burden on managed care entities and their participating providers and 
thereby promotes provider participation in SCHIP. We believe the cost-
sharing provisions in Secs. 457.500 through 457.570 of this final rule 
provide States with flexibility to use a variety of strategies to 
implement these requirements while at the same time providing enrollees 
with important protections.

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 proposed 
that the State plan must include a description of the amount of 
premiums, deductibles, coinsurance, copayments, and other cost sharing 
imposed. We further proposed that the State plan include a description 
of the methods, including the public schedule, the State uses to inform 
enrollees, applicants, providers, and the general public of the cost-
sharing charges, the cumulative cost-sharing maximum, and any changes 
to these amounts.
    We also proposed that States that purchase family coverage or offer 
premium assistance programs must describe how they ensure that 
enrollees are not charged for copayments,

[[Page 2575]]

coinsurance, deductibles, or similar fees for well-baby and well-child 
care services and that they do not charge American Indian/Alaska Native 
(AI/AN) children cost sharing. We also proposed that a procedure that 
primarily relies on a refund given by the State to implement the 
requirements of this subpart is not an acceptable procedure. We 
proposed that in States that purchase family coverage or establish 
premium assistance programs, the State also must describe in its State 
plan the procedures used to ensure that enrollees are not charged cost 
sharing over the cumulative cost-sharing maximums proposed in 
Sec. 457.560. We emphasized that this process must not primarily rely 
on a refund for cost sharing paid in excess of the cumulative cost-
sharing maximum. In Sec. 457.505, we have added a paragraph (c) that 
will require States to include in the State plan a description of the 
disenrollment protections required under Sec. 457.570. We have also 
added paragraph (e) in this section to reduce redundancy and more 
clearly identify the State plan requirements when a State uses a 
premium assistance program.
    Comment: Several commenters did not agree with the statement in the 
preamble that suggested that providers could bill the State directly, 
so that enrollees are not inappropriately charged for certain services. 
They noted that many health plans are not willing to make the 
administrative changes necessary to bill the State agency instead of 
the enrollee and, in light of the difficulties, proposed that a refund 
component be a valid option.
    Response: We disagree. States should establish adequate procedures 
to ensure the requirements for cost-sharing charges are met and to 
educate both the provider and the enrollee regarding cost-sharing 
obligations. Having providers bill the State directly is one option 
States may use as part of these procedures. We also note that we have 
not prohibited the use of refunds in all circumstances, but we do 
require that a State not use a refund as the primary method for 
assuring compliance with cost-sharing prohibitions and cumulative cost-
sharing maximums. Other examples of tracking procedures include 
informing enrollees that they are approaching the cumulative cost-
sharing maximum right before the cap is reached, or sending monthly 
letters to providers to inform them of which enrollees do not need to 
pay copayment amounts as of a certain date. We have revised proposed 
section Sec. 457.505(d) to clarify that when States provide premium 
assistance for group health plans, cost-sharing charges are not 
permitted for well-baby and well-child care services; cost sharing is 
not permitted for AI/AN children; and enrollees must not be charged 
cost sharing that exceeds the cumulative cost-sharing maximum. These 
provisions must be described in the State plan. Finally, the provision 
specifying that ``a procedure that primarily relies on a refund given 
by the State for overpayment by an enrollee is not an acceptable 
procedure for purposes of this subpart'' has been moved to 
Sec. 457.505(e) for clarity.
    Comment: One commenter suggested that we define the word 
``primarily'' as used in Sec. 457.560 for a variety of situations. For 
example, they indicated that a State may not be able to ascertain at 
the time of eligibility determination whether an applicant is an AI/AN 
due to the lack of verification of AI/AN status on the part of the 
applicant and/or the lack of cooperation in verification on the part of 
the tribe. In this situation, the State may not waive cost-sharing 
charges for the individual and, in their view, the only way a State 
could comply with the requirement that the AI/AN population be excluded 
from cost sharing would be to use a procedure of refunds for 
overpayments, once AI/AN status was verified.
    Response: We realize that there may be unforeseen circumstances 
when an enrollee has paid cost sharing that either should not have ever 
been charged or is in excess of the cost-sharing limits. In these 
cases, refunds will be necessary. However, refunds should not be the 
State's only or ongoing method to ensure that cost sharing does not 
exceed the regulatory limits. The State should inform each enrollee of 
the precise amount of the cumulative cost-sharing maximum based on the 
enrollee's individual family income at the time of enrollment and/or 
reenrollment or, in the case of a set out-of-pocket cap, inform the 
enrollee of cost sharing as required under Sec. 457.525. Rather than 
rely on a refund mechanism, the State should educate the enrollee 
regarding the cumulative cost-sharing maximum and when not to pay cost 
sharing for the applicable time period. In the case of the AI/AN 
population, States should provide accessible information to the 
population about the State requirements for demonstrating AI/AN status 
and, as in other instances, seek to minimize the use of refunds as a 
method for compliance with the cost-sharing requirements of Subpart E.

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. At Sec. 457.510 we proposed that when a State imposes 
premiums, enrollment fees, or similar fees on SCHIP enrollees, the 
State plan must describe the amount of the premium, enrollment fee, or 
similar fee, the time period for which the charge is imposed, and the 
group or groups that are subject to these cost-sharing charges. We also 
proposed that the State plan include a description of the consequences 
for an enrollee who does not pay a required charge. We noted in the 
preamble that the State should indicate enrollee groups that are exempt 
from any disenrollment policy.
    In addition, proposed Sec. 457.510 set forth the requirement that 
the State plan include a description of the methodology used to ensure 
that total cost-sharing liability for a family does not exceed the 
cumulative cost-sharing maximum specified in proposed Sec. 457.560, 
pursuant to section 2103(e)(3)(B) of the Act. We noted in the preamble 
to the proposed rule that the State's methodology should include a 
refund for an enrollee who accidentally pays more than his or her 
cumulative cost-sharing maximum. We proposed that a methodology that 
primarily relies on a refund by the State for cost-sharing payments 
made over the cumulative cost-sharing maximum will not be an acceptable 
methodology.
    We discussed the findings of the George Washington University study 
on the types of methods States and private insurance companies use to 
track cost-sharing amounts against an enrollee's out-of-pocket 
expenditure cap. We described several examples of methods States could 
use to ensure that enrollees do not exceed the cumulative cost-sharing 
maximum. We solicited comments on tracking mechanisms States can use 
that do not place the burden of tracking cost-sharing charges on the 
enrollee.
    Comment: Two commenters specifically urged HCFA to encourage States 
to adopt cost-sharing provisions for premiums, enrollment fees, and 
similar fees, as opposed to cost-sharing charges related to the 
provision of services (copayments, coinsurance, deductibles, or similar 
cost-sharing charges). The commenter asserted that applying cost 
sharing to premiums

[[Page 2576]]

instead of services would avoid the tracking burden altogether.
    Response: We agree that it would be easier to track cost sharing if 
the State only imposed premiums or enrollment fees and that this would 
relieve States from the burden of tracking cost sharing associated with 
services. However, the statute provides States with flexibility to 
design cost sharing that meets their policy goals. While some States 
may wish to design cost sharing in a way that avoids or minimizes the 
need for tracking, others may favor the use of copayments to discourage 
over-utilization. We therefore encourage States to consider the ease of 
tracking along with many other factors in devising their cost-sharing 
systems, but do not prescribe or recommend a specific cost-sharing 
design.
    Comment: One commenter recommended that HCFA revise paragraph (d) 
of this section to require that State plans include a description of 
the disenrollment protections established pursuant to Sec. 457.570, in 
addition to the consequences for an enrollee who does not pay a charge. 
The commenter noted that Sec. 457.570 requires disenrollment 
protections; however, nothing in the regulation currently requires 
States to describe these processes in the State SCHIP plan.
    Response: We agree with this comment. We intended to require States 
to include disenrollment protections in their State plans, as stated in 
the preamble to the proposed regulation. Therefore, we have revised 
Sec. 457.510(d) and Sec. 457.515(d) to include the State plan 
requirement that States provide a description of their disenrollment 
protections as required under Sec. 457.570.
    Comment: Several commenters indicated that HCFA should require, 
rather than recommend, that States develop tracking mechanisms that do 
not rely on the beneficiary demonstrating to the State that he or she 
has met the cumulative cost-sharing maximum. The commenters did not 
believe that the finding of the George Washington study (that States 
were not charging high enough cost-sharing to make it likely that 
families reached their cap) was good cause for a weaker standard. The 
commenters noted that States are currently experiencing very good 
budget climates that are likely to weaken at some point, perhaps 
causing States to raise their cost-sharing requirements. They also 
observed that expansion to higher income eligibility groups may cause 
States to increase cost sharing under SCHIP. Moreover, the commenters 
believed that all States could develop the capability to track 
enrollees' cumulative cost sharing if required, since some States do so 
currently. And the commenters urged that the requirement be imposed on 
States and contracting plans rather than individual providers, since 
such a responsibility could deter provider participation in SCHIP.
    Response: As part of the study conducted by George Washington 
University, States were invited to a meeting to discuss tracking of 
cost sharing under SCHIP. During this discussion, HCFA noted that some 
States were capable of using sophisticated tracking mechanisms like 
swipe cards to track their cost sharing. These States typically have a 
large concentration of managed care entities with participating 
providers who already have in place hardware that aids in tracking cost 
sharing for the SCHIP population. However, States with providers 
located in rural areas, and with providers who are not part of managed 
care networks, have indicated that it is administratively expensive to 
require States to put in place a sophisticated swipe card mechanism 
that would track cost sharing. Therefore, we have decided to continue 
to encourage States to use a tracking mechanism that does not rely on 
the enrollee, but will not require such a tracking mechanism due to 
implementation challenges and resource limitations in different States.
    States must distribute, as part of the information furnished 
consistent with Secs. 457.110 and 457.525 and general outreach 
activities, materials that inform the enrollee regarding his or her 
cost-sharing obligations, and assist the family in keeping track of the 
charges paid. At a minimum, States are required to include the schedule 
of cost-sharing charges, and the dollar amount of the enrollee's 
family's cumulative cost-sharing maximum. We also recommend that States 
educate the enrollee's family regarding tracking cost sharing against 
the cumulative cost-sharing cap.
    Comment: Several commenters disagreed with our provision at 
Sec. 457.510(e) that ``a methodology that primarily relies on a refund 
given by the State for overpayment (of cost sharing) by an enrollee is 
not an acceptable methodology.'' These commenters indicated that the 
use of a refund process can be the most cost effective and simple 
approach to ensuring that cost sharing does not exceed limits, or that 
individuals exempt from cost sharing are not required to pay when it is 
not appropriate. The commenters believe States should be given the 
flexibility to develop their own process as long as the process 
guarantees that families will not have to pay cost-sharing charges for 
which they are not responsible. The commenters suggested that we 
consider that States are limited to a 10 percent cap on administrative 
costs, and that overly prescriptive measures added to administrative 
costs can take away from other important administrative functions, such 
as outreach and eligibility determinations. Several commenters also 
questioned how these provisions apply to a State that administers SCHIP 
through employer-sponsored health insurance plans.
    Response: As stated in an earlier response, we recognize that there 
are situations in which the use of a refund methodology may be 
necessary. However, we believe States generally must be proactive and 
provide specific procedures for enrollees and their families to follow 
so that they are not overcharged cost sharing. A State methodology that 
merely reimburses or refunds enrollees for any cost sharing in excess 
of the cumulative cost-sharing maximum without including steps to help 
enrollees avoid overpayment will require the enrollees to outlay cash 
to obtain access to services that they should have been able to access 
without the burden of cost sharing. We view such a refund policy to be 
contrary to the limits on cost sharing set forth in section 2103(e) of 
the Act.
    Comment: One commenter suggested that we revise this section to 
require that, in describing the methodology used to ensure that total 
cost-sharing liability for an enrollee's family does not exceed the 
cumulative cost-sharing maximum, the State plan must describe how the 
State calculates total income for each family, and how the State will 
prevent charges over the cumulative cost-sharing maximum. The commenter 
noted that the preamble stated that the description of the methodology 
must explain these areas. The commenter asked that this language be 
incorporated into the regulation.
    Response: We agree with the general point that the commenter was 
making, that States should be required to disclose the principles used 
to calculate cumulative cost sharing maximums, but we believe such 
disclosure is equally important on an individual level as on a 
statewide level. Thus, we are adding paragraph (d) to 457.560, to 
require that the States provide the enrollee's family the precise 
dollar amount of the cumulative cost-sharing maximum at the time of 
enrollment and at the time of re-enrollment. However, we have not 
revised Sec. 457.510 because it already requires the State plan to 
describe the methodology for ensuring that cost sharing for a family 
does not exceed

[[Page 2577]]

cumulative maximums, and this must include the information described 
above. If the description submitted in a proposed State plan or 
amendment does not include a full explanation of how income is 
calculated for purposes of the cumulative cost sharing maximum and 
other relevant details, HCFA requests this information in reviewing the 
submission.
    Comment: One commenter stated that, if a family must pay more than 
the customary rate for child care due to the special needs of the 
child, there should be a mechanism for that additional cost to be 
considered when determining financial status. Children with chronic 
conditions should be defined to include children with mental health and 
substance abuse conditions. Another commenter agreed with the finding 
of the George Washington study that children with chronic conditions or 
special needs often have expenses for related, non-covered services, 
which can create a tremendous financial burden for the family. The 
commenter recommended that the statute be changed to eliminate the 
cost-sharing provision for eligible children with chronic illness or 
other special needs. In this commenter's view, at a minimum, all 
related expenses should be counted toward the cumulative cost-sharing 
cap for these children. The commenter also agreed with the George 
Washington study's recommendation that States assign a case manager to 
children with chronic needs to assure that cost sharing does not exceed 
the cumulative cost-sharing maximum for these children.
    Response: Title XXI does not include any special provision 
regarding cost sharing for children with special needs or chronic 
conditions and we appreciate the commenter's recognition that this 
issue is driven by the statute. States may consider the additional 
costs, including the costs associated with child care and case 
management, borne by families of children with special needs or chronic 
conditions when imposing cost sharing on this population, but HCFA does 
not have statutory authority to require that States take these costs 
into account. In addition, States may, at their option, exempt families 
of children with special needs or chronic conditions group from cost 
sharing, because the added costs of care can significantly reduce their 
disposable income. However, we have not specifically required States to 
exempt these children, and have therefore not included the commenter's 
recommendation in the regulation text.
    Comment: Several commenters opposed our suggestion in the preamble 
that States count non-covered services towards the cumulative cost-
sharing maximum.
    Response: We do not require States to count the costs of non-
covered services towards the cumulative cost-sharing maximum. However, 
we encourage States to consider the additional costs of uncovered 
services particularly for families with special needs children, when 
imposing cost sharing. States may pursue this policy option by counting 
non-covered services toward the cumulative cost-sharing maximum or by 
implementing other State policies to limit the burden on such families.

4. Co-Payments, Coinsurance, Deductibles, or Similar Cost-Sharing 
Charges: State Plan Requirements (Sec. 457.515)

    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. We proposed that the State 
plan describe the following elements regarding copayments, coinsurance, 
deductibles or similar charges: the service for which the charge may be 
imposed; the amount of the charge; the group or groups of enrollees to 
whom the charge applies; and the consequences for an enrollee who does 
not pay a charge. We proposed that the State plan describe the 
methodology used to ensure that total cost-sharing liability for an 
enrollee'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 proposed, in accordance with the prudent layperson 
standard in the Consumer Bill of Rights and Responsibilities, that 
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. Specifically, we proposed that the 
State plan must include an assurance 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 at 
a facility that is not a participating provider in the enrollee's 
managed care network. In addition, we require that the State will not 
charge different copayment amounts for emergency services, based upon 
the location (in network or out of network) of the facility at which 
those services were provided. We indicated that we welcomed public 
comments on our proposed policy. In this final rule, we have added a 
provision to Sec. 457.515(d) that States must describe in the State 
plan the disenrollment protections adopted by the State pursuant to 
Sec. 457.570.
    Comment: One commenter suggested that Secs. 457.510(d) and 
457.515(d), which require that the State plan describe the consequences 
for an enrollee who does not pay a charge, be revised to also require 
State plans to describe the consequences for a provider who does not 
receive a payment from an enrollee. The commenter indicated that 
providers should have information on the State's policy regarding 
unpaid copayments. The commenter questioned if providers may deny 
services to, or pursue collection from, enrollees who refuse to pay 
cost sharing. The commenter also asked if States will increase payments 
to providers when enrollees do not pay.
    Response: Unlike under the Medicaid program, we do not have the 
statutory authority to prevent providers under separate child health 
programs from denying services to enrollees who do not pay their cost-
sharing charges. Nor do we have clear authority to preclude providers 
or the State from billing the enrollee for unpaid cost-sharing charges. 
State plans should, consistent with fairness and equity, ensure that 
the provider or State gives the enrollee a reasonable opportunity to 
pay cost sharing before pursuing collection. Providers should refer the 
enrollee back to the State if he or she is demonstrating a pattern of 
non-payment, so that the State can review the financial situation of 
the enrollee. For example, the State should inquire whether the 
enrollee's income has dropped to a Medicaid eligibility level, or to a 
level of SCHIP qualification that does not require cost sharing or 
requires it at a lower level. We also suggest that States maintain open 
communication with providers regarding any financial losses for the 
provider resulting from non-payment of cost sharing. However, we note 
that the State's policy in this area is a matter of State discretion 
under this regulation.
    Comment: One commenter urged HCFA to add a provision making clear 
that an enrollee may not be denied emergency services based on the 
inability to make a copayment, regardless of whether the provider is 
inside or outside of the enrollee's managed care network. The commenter 
also recommended that we include in the preamble a discussion of the 
obligations of emergency services providers under the Emergency Medical 
Treatment and Active Labor Act (EMTALA).

[[Page 2578]]

    Another commenter suggested that as a general rule for all SCHIP 
services, including emergency services, cost-sharing limits should 
apply only to services delivered through network participating 
providers. If there is to be an exception to this rule for emergency 
services, then cost-sharing limits should only apply to out-of-network 
emergency service providers that are not within a reasonable distance 
of network participating providers.
    Response: While this is not an appropriate vehicle to discuss 
EMTALA responsibilities at length, when those responsibilities are 
triggered, a hospital cannot turn away a patient solely because of 
inability to pay. In addition, Sec. 457.410 requires States to provide 
coverage of emergency services; Sec. 457.495 requires States to ensure 
that SCHIP enrollees have access to covered services, including 
emergency services; and Sec. 457.515 specifies that enrollees cannot be 
held liable for cost sharing for emergency services provided outside of 
the managed care network.
    If an enrollee goes outside of a managed care network to receive 
non-emergency services that are not authorized by the health plan, then 
the enrollee may be responsible for the full cost of the services 
provided. However, because of the nature of emergency services and the 
importance of ensuring that enrollees receive such services without 
delay or impediment, such a situation is not reasonable. Thus, as we 
discuss further below, we have retained the regulation text at 
Sec. 457.515(f) providing that enrollee financial responsibility for 
emergency services must be equal whether the enrollee obtains the 
services from a network provider or out-of-network.
    Comment: Several commenters supported the proposed requirement that 
beneficiary cost sharing for emergency services can not vary based on 
whether the provider is participating in a managed care network or not. 
One commenter specifically asserted that the use of differential 
copayments would be contrary to the spirit of the ``prudent layperson'' 
standard for emergency services. Another commenter recommended 
retaining or lowering the proposed maximum limit for copayments on 
emergency services, rather than raising the limit to levels parallel to 
those permitted in the Medicare+Choice programs, in light of the 
inability of many low-income families to access this amount at the time 
of an emergency.
    Response: In keeping with the prudent layperson standard of 
assuring immediate access to emergency services, we have retained the 
prohibition against differential copays based upon location (in-network 
or out-of-network) under Sec. 457.515(f). These services are required 
to address an emergency and can be time sensitive, and higher copayment 
levels for out of network providers might result in an unacceptable 
delay to determine whether the provider participates in the enrollee's 
managed care network. Furthermore, differential copayment levels might 
affect the ability of enrollees to access the closest and most 
accessible provider.
    We have neither raised nor lowered the proposed permissible 
copayment levels for emergency services, because we believe the overall 
cost-sharing limitations are sufficient to protect enrollee families. 
We have not adopted the Medicare+Choice policy that would have 
permitted a $5.00 copayment for emergency medical services. The cost 
sharing provisions at Sec. 457.555 will apply to emergency medical 
services.
    Comment: We received a comment on our statement in the preamble 
that we considered adopting the Medicare+Choice policy regarding 
emergency services obtained outside of the provider network. The 
commenter noted that limitations on emergency room cost sharing at 
Medicare+Choice levels, whether in network or out of network, could be 
administratively burdensome to group health plans and participating 
providers, and might dissuade such entities and practitioners from 
contracting with SCHIP.
    Response: As noted above, we have not adopted the Medicare+Choice 
policy described in the preamble to the proposed rule. We do note, 
however, that premium assistance programs are subject to the same cost-
sharing requirements and protections as other types of SCHIP programs. 
Such protections are required by statute and recognize the unique 
financial constraints of the SCHIP population. In situations where 
employer plans charge more than is permissible under these rules, the 
State will need to develop a mechanism to prevent enrollees from paying 
excess charges.

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. At proposed Sec. 457.520, we set 
forth services that constitute well-baby and well-child care for 
purposes of this cost-sharing prohibition. We proposed to define these 
well-baby and well-child services consistent with 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 proposed 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 proposed at Sec. 457.520 that the following services are 
considered well-baby and well-child care services for the purposes of 
the prohibition of cost sharing under section 2103(e)(2):
     All healthy newborn inpatient physician visits, including 
routine screening (whether provided on an inpatient or on an outpatient 
basis).
     Routine physical examinations.
     Laboratory tests relating to their visits.
     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).
    Comment: One commenter noted that the language of this section is 
ambiguous in stating that the ``State plan may not impose copayments, 
deductibles, coinsurance or other cost sharing with respect to well-
baby/well child care services as defined by the State.'' HCFA should 
clarify that no preventive service as defined by the Guidelines for 
Health Supervision III (including the appended Recommendations for 
Preventive Pediatric Health Care) and Bright Futures is subject to cost 
sharing, as was intended by the underlying statute.
    Response: We agree with the commenter and have revised 
Sec. 457.520(a) to be clearer that a State may not impose cost sharing 
on services that would ordinarily be considered well-baby and well-
child care. As described in subpart D, Benefits, States may define 
well-baby and well-child services for coverage purposes. While this may 
provide States flexibility in determining the appropriate scope of

[[Page 2579]]

benefits, such flexibility is not appropriate with respect to cost 
sharing which might deter appropriate utilization of covered services. 
Thus, we are specifying in Sec. 457.520(a) that cost sharing may not be 
imposed on any covered services that are also within the scope of AAP 
well-baby and well-child care recommendations.
    Comment: One commenter noted that there are differences between the 
discussion of this provision in the preamble (64 FR 60913) and in the 
regulations text (64 FR 60955). The commenter believed the provision as 
set forth in the regulations text is more clear.
    Response: In this final rule, we are adopting the provisions 
regarding well-baby and well-child care as set forth in the regulations 
text at Sec. 457.520, except that we have amended these provisions to 
clarify the scope of services to which the prohibition on cost sharing 
applies.
    Comment: A number of commenters expressed concern that adolescent 
health care services are not specifically listed as well-baby and well-
child care services exempt from cost sharing. Although the preamble 
notes that well-child care includes health care for adolescents, the 
commenters urged HCFA to make specific mention of this fact in the 
regulation. One commenter recommended that HCFA define adolescent 
health care services using the schedules from the American Medical 
Association's ``Guidelines for Adolescent Preventive Services,'' and 
the American College of Obstetricians and Gynecologists, ``Primary and 
Preventive Health Care for Female Adolescents'' as well as those of the 
American Academy of Pediatrics. Another commenter noted that there is 
no reason why a physical exam for a toddler should be exempt from cost-
sharing requirements while an exam and related services for an 
adolescent are not.
    Response: It is not necessary to add the term adolescent to the 
regulation because the term ``child'' as defined by the statute and 
regulation refers to enrollees under the age of 19 the cost-sharing 
rules set forth in this regulation apply to all children under age 19. 
Therefore, States cannot impose cost sharing on any well-child care 
services provided to an adolescent under the age of 19. In addition, 
the standard recommended by the AAP for routine physical exams 
specifically includes treatment of adolescents.
    Comment: One commenter disagreed with the use of a specific 
immunization schedule because it may be difficult for States using 
employer-sponsored insurance to implement this requirement. The 
commenter recommended that we revise the regulation to state 
``Immunizations and related office visits as medically necessary.''
    Response: We are not accepting the commenter's suggestion because 
immunizations recommended by the Advisory Commission on Immunization 
Practices (ACIP) are generally accepted as being medically necessary. 
The State is responsible for assuring that an enrollee does not pay 
cost sharing for any immunizations recommended by ACIP.
    Comment: One commenter recommended that the immunization schedule 
include updates.
    Response: As proposed, Sec. 457.520(b)(4) prohibits cost sharing 
for immunizations and related office visits as recommended by ACIP. We 
are retaining this language in the final regulation at 
Sec. 457.520(b)(4) which also indicates that updates to these 
guidelines must be reflected in States cost-sharing policies.
    Comment: One commenter urged that HCFA remove the term ``routine 
physical examinations'' from the list of well-baby and well-child care 
services. The inclusion of this term is confusing in this commenter's 
view because almost every office visit for children entails a 
``physical examination'' as part of the evaluation and management 
component of the office visit. As an alternative, the commenter 
recommended using the language for well-baby and well-child care 
services as listed in Sec. 457.10. Other commenters recommended that 
routine exams be specifically tied to professionally established 
periodicity schedules.
    Response: We agree that our intent may have been unclear. We have 
revised Sec. 457.520(b)(2) to provide that the well-baby and well-child 
routine physical exams, as recommended by the AAP's ``Guidelines for 
Health Supervision III'', and described in ``Bright Futures: Guidelines 
for Health Supervision of Infants, Children and Adolescents'', (which 
would include updates to either set of guidelines) may not be subject 
to cost sharing.
    Comment: Several commenters stated that lab tests should not be 
exempt from cost sharing, especially given that lab tests are expensive 
and not always preventive. Since lab services are provided by a 
separate entity, outside of the office of the physician providing the 
well-baby and well-child care service, States should be given 
flexibility in determining whether to exempt lab services from cost 
sharing, particularly in managed care settings. One commenter requested 
that HCFA clarify the intention of the provisions excluding lab 
services from cost sharing. The commenter questioned if the exemption 
is limited to laboratory tests that are associated with the well-baby 
and well-child visit.
    Response: We have revised the regulation text at Sec. 457.520(b)(3) 
to indicate that States are required to exempt from cost sharing only 
those lab tests associated with the well-baby/well-child routine 
physical exams described in Sec. 457.520(b)(2). We believe the 
exemption from cost sharing for these lab tests is consistent with the 
statutory intent that there is no cost sharing imposed on enrollees for 
well-baby and well-child care services. All other lab tests that are 
not routine and not part of a well-baby or well-child visit may be 
subject to cost-sharing charges consistent with the other cost-sharing 
provisions of this subpart.
    Comment: Several commenters indicated their view that States should 
have the flexibility to determine how best to improve access to dental 
services. In their view, the prohibition of cost-sharing for dental 
services may discourage States from offering dental services under 
SCHIP because it is an optional benefit. One commenter recommended 
prohibiting States from imposing copayments, deductibles, coinsurance 
or other cost sharing for all covered dental services. This commenter 
indicated that the Medicaid program has clearly demonstrated that 
imposing costly, difficult, and risk shifting management procedures on 
providers severely limits participation in such programs and therefore 
severely restricts access to essential oral health care for this high 
risk, high need population. The commenter stated that, for example, if 
a child arrives in a dental office without the appropriate cost-sharing 
funds, the practitioner must either defer the needed service, enter 
into costly billing procedures, or waive the money due and such waivers 
previously have, on some occasions, been interpreted as insurance 
fraud. The commenter indicated that our policy may discourage 
practitioners from participating in the SCHIP program and result in 
problems of access to care for the children with the greatest need.
    Response: The majority of separate child health programs offer 
dental benefits and do not impose cost sharing on preventive dental 
services. If States were to impose cost sharing on preventive benefits, 
due to their limited incomes, enrollees would only access services when 
needed and when services are most expensive. Almost all States have 
elected to provide at least some dental coverage in their State

[[Page 2580]]

plans without cost sharing for preventive services. The cost-sharing 
exemption policy has not caused States to discontinue coverage of 
dental services thus far. In addition, we note that the cost-sharing 
exemption on well-baby and well-child care services is based upon 
section 2103(e)(2)of the Act, which provides that the State plan may 
not impose cost sharing on benefits for these preventive services. We 
have interpreted this statutory provision to support the cost-sharing 
exemption for routine preventive and diagnostic dental services.

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. We proposed that the 
public schedule contain at least the current SCHIP cost-sharing 
charges, the beneficiary groups upon whom 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 
maximums, and the consequences for an enrollee who fails to pay a cost-
sharing charge. We also proposed that the State must make the public 
schedule available to enrollees 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, SCHIP participating 
providers and the general public. To ensure that providers impose 
appropriate cost-sharing charges at the time services are rendered, we 
proposed that the public schedule must be made available to all SCHIP 
participating providers. In this final rule, we have added 
Sec. 457.525(a)(4) which indicates that the State must include in the 
public schedule, the mechanisms for making payments for required 
charges. We also added to Sec. 457.525(a)(5) that the public schedule 
describe the disenrollment protections pursuant to Sec. 457.570.
    Comment: Several commenters recommended that States have the option 
to provide information in the public schedule that defines cumulative 
cost sharing as a percentage of income. The commenters requested that 
we clarify that States can defer responsibility for distributing the 
public schedule to all SCHIP providers to the managed care entities as 
part of their contractual obligations.
    Response: States may define the cumulative cost-sharing maximum as 
a percentage of income in the public schedule and request that managed 
care entities distribute the public schedule to all SCHIP providers 
(although the State retains the responsibility that the entities 
involved make the schedule available to providers). However, we have 
modified the regulation at Sec. 457.110(b)(2) to indicate that States 
must calculate the precise amount of the cumulative cost-sharing 
maximum (the dollar amount instead of a percentage of income) that 
applies to the individual enrollee's family at the time of enrollment 
(as well as at the time of re-enrollment) to maximize the usefulness of 
information provided to the family and to ensure uniform calculation of 
the amount, maximize the usefulness of the information, and make 
tracking easier.
    Comment: One commenter urged HCFA to include language in the 
preamble that ``applicants'' and ``enrollees'' include adolescents 
(independent from other children in their family) and that information 
should be directed to them about any schedule of costs. The commenters 
noted that adolescents often seek care on their own, not only for 
services that they need on a confidential basis, but for other services 
as well. Unless they are aware of the charges they may encounter, and 
the services that do not require a copayment, they may be deterred from 
seeking care, in this commenter's view.
    Response: Section 457.525(b) specifically requires States to 
provide a public schedule, which includes a description of the plan's 
current cost-sharing charges, to SCHIP enrollees at the time of 
application, enrollment, and when cost-sharing charges are revised. We 
have added a provision at Sec. 457.525(b)(1) requiring that States 
provide SCHIP enrollees the public schedule at reenrollment after a 
redetermination of eligibility as well. This section also requires that 
cost-sharing charges be disclosed to SCHIP applicants at the time of 
application. SCHIP enrollees, by definition, are children under age 19. 
In most cases, this information will be given to family members due to 
the age of the child. However, we encourage States to provide 
information about cost sharing directly to adolescent applicants and 
enrolles when appropriate. We also encourage States to consider the 
range of applicants, enrollees and family members who might benefit 
from the provision of this information, including adolescents, and we 
encourage States to describe the plan's current cost-sharing charges in 
language that is easily understood and tailored to the needs of target 
populations, consistent with section 457.110.
    Comment: One commenter suggested that the requirement to provide 
the public schedule to applicants may be overwhelming to both the 
program and the applicants. Enrollees are most interested in the 
information relating to the family's individual obligations.
    Response: Section 2103(e)(1)(A) of the Act provides sufficient 
authority to require States to make a public schedule available, and to 
provide all interested parties with notice of cost-sharing obligation 
for the program. In addition, applicants should be given a chance to 
review the cost sharing structure prior to enrollment, so that the 
applicant will understand the potential costs of SCHIP and can make a 
reasoned choice as a health care consumer. This policy also aids in 
future tracking of the family's cost-sharing obligation.
    Comment: One commenter recommended that HCFA require that the 
public schedule contain information about an enrollee's rights with 
respect to cost sharing, including the right to receive notice and make 
past due payments, as well as other protections established by the 
State in compliance with Sec. 457.570.
    Response: Section 457.525(a)(5) of this final rule requires that 
the public schedule include a description of the consequences for an 
enrollee who does not pay a cost-sharing charge. We are also revising 
this section to require States to discuss, as part of this description, 
the disenrollment protections it has established pursuant to 
Sec. 457.570. Section 457.570 requires States to provide enrollees with 
an opportunity to pay past due cost sharing, as well as an opportunity 
to request a reassessment of their income, prior to disenrollment.
    Comment: One commenter recommended that we require States to 
include detailed information about the cost-sharing schedule at each 
annual renewal and in the SCHIP application packet/pamphlet. 
Applications should also include information to notify participants of 
services that are subject to cost sharing.
    Response: We have revised Sec. 457.525(b)(1) to require that States 
also provide the public schedule at the time of a re-enrollment after a 
redetermination of eligibility. In addition, we note that 
Sec. 457.525(a)(1) requires that the public schedule of cost-sharing 
requirements include information on current cost-sharing charges and 
the cumulative cost-sharing maximums. This information should specify 
the services or general category of services for which cost sharing is 
imposed and services that are exempt from cost sharing.

[[Page 2581]]

7. General Cost-Sharing Protection for Lower Income Children 
(Sec. 457.530)

    At Sec. 457.530, we proposed to 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. We noted that this statutory provision and 
the implementing regulations apply to all cost sharing imposed on 
children regardless of family income.
    Comment: One commenter requested that when considering the 
requirement that States not vary cost sharing based on the family 
income of the targeted low-income children in a manner that favors 
children from families with higher income over children from families 
with lower income, HCFA should consider the issue of disposable income. 
The commenter recommended that we should consider only the income the 
family receives above 100 percent of the FPL (disposable income). When 
applying a flat percentage assessment, the assessment will consume more 
of the lower-income family's disposable income than the disposable 
income of a higher-income family. The commenter cited the following 
example: A straight 3 percent assessment would consume 9 percent of the 
disposable income for a family at 150 percent of poverty but only 6.5 
percent of the income for a family at 185 percent of poverty.
    Response: We recognize that health care costs may consume a larger 
proportion of a lower income family's disposable income. Accordingly, 
at Sec. 457.560(d), we provide for a lower cumulative cost-sharing 
maximum (2.5 percent) for cost sharing imposed on children in families 
at or below 150 percent of the FPL in part because of the higher 
proportionate consumption of disposable income at lower poverty levels. 
Also, in accordance with Sec. 457.540(b), and section 2103(a)(1)(B) of 
the Act, copayments, coinsurance, deductibles and similar charges 
imposed on children whose family income is at or below 100 percent of 
the FPL may not be more than what is permitted under the Medicaid rules 
at Sec. 447.52 of this part and the charges may not be greater for 
children in lower income families than for children in higher income 
families.

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 
Indians (as defined in section 4(c) of the Indian Health Care 
Improvement Act). To ensure the provision of health care to children 
from AI/AN families, we proposed that States must exclude AI/AN 
children from the imposition of premiums, deductibles, coinsurance, 
copayments or any other cost-sharing charges. For the purposes of this 
section, we proposed 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 also specified in 
the regulation that the State must only grant this exception to AI/AN 
members of Federally recognized tribes (as determined by the Bureau of 
Indian Affairs).
    Comment: Several commenters requested that HCFA reconsider the AI/
AN exemption. Many commenters noted that it is administratively 
burdensome (especially in States with small AI/AN populations) and 
expensive in light of the fact that a number of States have already 
negotiated contracts with health care entities that assume cost sharing 
for this population and application of the 10 percent limit on 
administrative expenditures. Many commenters recommended that we focus 
on technical assistance instead to assure that States are consulting 
with tribes. Some commenters were concerned that having no cost sharing 
for this group, but having it for other children in the program would 
single out AI/AN children in health care provider offices and 
facilities. Also, commenters believed our policy contradicts the 
statutory intent to prevent discrimination against children with lower 
family incomes. In their view, the elimination of cost sharing in these 
situations creates a different standard for a specific population group 
and may imply to both providers and families SCHIP enrollees that AI/AN 
children's parents cannot be relied upon to pay anything toward the 
costs of their health care. One commenter observed that if HCFA's 
reason for exemption is because AI/AN children are typically unable to 
pay cost sharing, then the exemption should apply to special needs 
children as well.
    Response: Section 2102(b)(3)(D) of the Act requires that a State 
ensure the provision of child health assistance to targeted low-income 
children in the State who are Indians. In accordance with this 
statutory provision and to enhance access to child health assistance, 
we have specified that States may not impose cost sharing on this 
population. This exemption is consistent with section 2103(e)(1)(B) of 
the Act because this statutory provision prohibits States from imposing 
cost sharing based on the family income of targeted low-income children 
in a manner that favors children from families with higher income over 
children from families with lower income. The exemption from cost 
sharing for AI/AN children is not a variation of the cost sharing based 
on the family's income and is not a violation of section 2103(e)(1)(B). 
The cost-sharing exemption for AI/AN children is based upon the 
statutory requirement at section 2102(b)(3)(D), which requires 
particular attention to this population.
    This cost-sharing exemption also reflects the unique Federal trust 
with and responsibility toward AI/ANs. The statute specifically singles 
out children who are AI/ANs and requires that States ensure that such 
children have access to care under SCHIP. The statute confirms that AI/
AN children are a particularly vulnerable population, and that a 
requirement to pay cost sharing will act as a barrier to access to care 
for this population. Therefore, in order to operate a SCHIP program in 
compliance with section 2103(b)(3)(D), the only way to ensure access to 
AI/AN children is to exempt them from the cost-sharing requirements. In 
addition, absent this exemption for AI/AN children, these children may 
pursue services from the Indian Health Service (IHS) (where cost 
sharing is not required) without pursuing coverage under SCHIP or 
Medicaid. We disagree with the commenter's assertion that a similar 
exemption should be granted for children with special needs, there is 
no parallel statutory provision that requires States ensure access to 
this population. While the unique medical needs of this population are 
not insignificant, the AI/AN exemption is based on the Federal tribal 
relationship and responsibility for protection of this specific group. 
However, we do not believe there is sufficient rationale or authority 
for including special needs children under this exemption.
    We further recognize that it may be administratively burdensome for 
some States to exempt this population if States are required to verify 
the status of

[[Page 2582]]

the enrollee as Indians. However, States may rely on the beneficiary to 
self-identify their membership in a Federally-recognized tribe and 
self-identification would substantially reduce the administrative 
burden and associated costs to the State. Also, this exemption will not 
single out AI/AN children at providers' offices and facilities if the 
State requires the enrollee to self-identify at the time of enrollment 
and the State provides inconspicuous identification for these children 
so that providers know not to charge them cost sharing at the time the 
enrollee receives services.
    Comment: One commenter asked HCFA to clarify that cost-sharing 
charges are not imposed by Tribal clinics or community health centers.
    Response: Under Sec. 457.535, the AI/AN population is exempt from 
cost sharing. IHS facilities and tribal facilities operating with 
funding under P.L. 93-638 (``tribal 638 facilities'') do not charge 
cost sharing to the AI/AN population.
    Comment: Several commenters recommended that the States' costs 
incurred due to the AI/AN exemption should be reimbursed with 100 
percent Federal funds.
    Response: A State will be able to claim match for increased costs 
resulting from the AI/AN exemption at the State's enhanced matching 
rate. However, we do not have authority under title XXI to provide 100 
percent FMAP for these costs and would therefore need a legislative 
change to do so.
    Comment: Several commenters recommended that AI/AN enrollees be 
permitted to self-certify their AI/AN status if HCFA does not concur 
with the commenter's request to remove the AI/AN cost-sharing 
exemption.
    Response: We agree and take note that we have revised the policy 
set forth in the preamble to the proposed rule. States may allow self-
identification for the purposes of the AI/AN cost-sharing exemption. 
Self-identification is consistent with our policies that encourage 
States to simplify the application and enrollment processes.
    Comment: One commenter suggested that we apply the AI/AN cost-
sharing exemption to all Indians based on the definition referred to in 
section 2102(b)(3)(D). The commenter requested that we remove the 
provision in the proposed regulation at Sec. 457.535 that would narrow 
this definition to ``AI/AN members of a Federally recognized tribe.'' 
The commenter stated that this definition of AI/AN children is more 
restrictive than that in the Indian Health Care Improvement Act, has no 
basis in title XXI and it is also inconsistent with the definition of 
Indian set forth in the consultation provisions at Sec. 457.125(a), 
which expressly request that States consult with ``Federal recognized 
tribes and other Indian tribes and organizations in the State * * *'' 
The commenter indicated the view that there is little point in 
consulting with non-Federally recognized tribes about enrollment in 
SCHIP if the children of those tribes are not excluded from the 
premiums and cost sharing.
    Response: Because the Federal/tribal relationship is focused only 
on AI/ANs who are members of Federally recognized tribes, this final 
rule only requires States to exempt from cost sharing AI/ANs who are 
members of Federally recognized tribes. With regard to the consultation 
requirements at proposed Sec. 457.125(a), we note that, although the 
cost-sharing exemption is required only for AI/ANs who are members of a 
Federally recognized tribe, individuals from other tribes may be 
eligible for child health assistance under SCHIP. There are numerous 
issues other than cost sharing that are involved in designing and 
operating a program, and we believe that States should be open to 
consultation with all interested parties, including non-federally 
recognized tribes. As such, we have removed the consultation 
requirement from Sec. 457.125 and encourage the participation of these 
groups in the public involvement process established by the State in 
accordance with the new Sec. 457.120(c). Finally, we have modified the 
definition of American Indian/Alaska Native at Sec. 457.10 to be 
consistent with the Indian Health Care Improvement Act, yet also 
comport more closely with the definition used in the Indian Self 
Determination Act (ISDEAA).
    Comment: One commenter suggested that HCFA allow time for States to 
comply with this new requirement and not delay approval of State plans 
or plan amendments for the time it will take to change State law to 
implement this change.
    Response: In a letter dated October 6, 1999, HCFA informed SCHIP 
State health officials that we interpret the SCHIP statute to preclude 
cost sharing on AI/AN children. Since October 1999, we have required 
States submitting State plan amendments to alter cost sharing to comply 
with the exemption in order to gain approval for these amendments. 
States that have not submitted such amendments have been given ample 
notice of this policy. We will expect all States to comply with the 
requirements of Sec. 457.565(b), which implements the exemption of AI/
AN targeted low-income children from cost sharing and comply 
immediately with this requirement upon the effective date of this 
regulation.
    Comment: One commenter suggested that States with small AI/AN 
Indian populations be waived from the cost sharing exemption so they 
can continue their programs as implemented.
    Response: We realize there is some concern about the administrative 
difficulties related to exempting AI/AN children from cost sharing in 
States with small AI/AN populations. However, as noted above, we will 
permit AI/AN applicants to self-identify at the time of enrollment for 
the purposes of the cost-sharing exemption. This policy minimizes the 
administrative burden on States.
    Comment: Two commenters asked HCFA to clarify that, in States with 
SCHIP or Medicaid expansions involving AI/AN adults or entire families, 
the cost-sharing exemption be applied to AI/AN adults as well.
    Response: In States with separate child health programs or Medicaid 
expansions that provide coverage to AI/AN adults or entire AI/AN 
families, the cost-sharing exemption only applies to children. If a 
State has imposed a premium on the family, the State must reduce the 
premium proportionately so that it applies to adults only. They also 
must not deny children access to coverage if the adults in the family 
cannot make premium payments. We are not restricting cost sharing for 
AI/AN adults because section 2102(b)(3)(D) directly refers to children 
only.

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 cost-sharing charges for children in families with 
incomes at or below 150 percent of the FPL. Pursuant to section 
2103(e)(3)(A)(I) of the Act, we proposed 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) the Act. 
Section 447.52 specifies the maximum monthly charges in the form of 
enrollment fees, premiums, and similar charges, for Medicaid eligible 
families.
    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 nominal, as determined consistent with 
regulations referred to in section 1916(a)(3) of the Act, with

[[Page 2583]]

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 found at Sec. 447.54. For children 
whose family income is at or below 100 percent of the FPL, we proposed 
that any copayments, coinsurance, deductibles or similar charges be 
equal to or less than the amounts permitted under the Medicaid 
regulations at Sec. 447.54. For children whose family income is at 101 
percent to 150 percent of the FPL, we proposed adjusted nominal amounts 
for copayments, coinsurance, and deductibles to reflect the SCHIP 
enrollees ability to pay somewhat higher cost sharing. We proposed that 
the frequency of cost sharing meet the requirements set forth in 
proposed Sec. 457.550.
    We also proposed that the cost sharing imposed on children in 
families with incomes at or below 150 percent of the FPL be limited to 
a cumulative maximum consistent with proposed Sec. 457.560. 
Specifically, we 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).
    Comment: One commenter questioned if the cost-sharing limits at 
Secs. 457.540, 457.545, 457.550, 457.555 and 457.560 apply to out-of-
network cost-sharing charges. The commenter recommended that the limits 
only apply to services delivered through the network participating 
providers. If not, the commenter argued that States cannot effectively 
use managed care to control costs and will be unable to develop 
effective partnerships with employer-sponsored health insurance 
programs to provide SCHIP services.
    Response: If an enrollee receives services outside of the network 
that were not approved or authorized by the managed care entity (MCE) 
to be received outside of the network, then the services are considered 
non-covered services and the enrollee may be responsible for related 
cost-sharing charges imposed (other than in the case of emergency 
services provided under Sec. 457.555(d)) irrespective of the limits 
established under the above referenced sections. If, however, the 
services are authorized by the MCE and provided by an out-of-network 
provider, the cost-sharing limits of this subpart apply. A State must 
ensure enrollees access to services covered under the State plan, but a 
State has discretion over whether to use a fee-for-service or a managed 
care arrangement.
    Comment: A couple of commenters observed that the premium limits as 
set forth in the Medicaid regulations at Sec. 447.52 are unreasonably 
low, since these cost-sharing provisions and limits have not been 
updated since the 1970s. These commenters proposed that we use a 
percentage (of payment) to set these amounts instead of a flat dollar 
amount.
    Response: Section 2103(e)(3)(A)(I) provides that States may not 
impose enrollment fees, premiums or similar charges that exceed the 
maximum monthly charges permitted, consistent with the standards 
established to carry out section 1916(b)(1) of the Act. Permitting 
States to charge higher premiums on families with incomes at this level 
of poverty would be inconsistent with the statute.
    Comment: One commenter suggested that the rule and preamble 
explicitly address the cost sharing treatment of children in families 
below the Federal Poverty Level. They noted that, in States that have 
retained the resource test for children in Medicaid, significant 
numbers of children below poverty will be enrolled in separate child 
health programs due to excess assets. This commenter recommended that 
Sec. 457.540 be revised to reflect the fact that some adolescents under 
100 percent of the FPL may be receiving SCHIP services until they are 
fully phased into regular Medicaid and that protections must apply to 
these children as well.
    Response: Section 457.540(b) of the proposed regulation addresses 
the need for lower cost-sharing limits for cost sharing imposed on all 
children below 100 percent of the FPL. This section limits cost sharing 
to the uninflated Medicaid cost-sharing limits permitted under 
Sec. 447.54 of this chapter. Section 2103(e)(3)(A)(I) limits premiums, 
enrollment fees, or similar charges to the maximums permitted in 
accordance with section 1916(b)(1) of the Act. In addition, because the 
definition of ``child'' includes adolescents under the age of 19, there 
is no need to revise this section. We have retained this proposed 
provision in the final regulation. However, it should be noted that we 
have added paragraphs (d) and (e) to Sec. 457.540. These requirements 
were originally part of Sec. 457.550, which has been removed to improve 
the format of the regulation.
    Comment: One commenter disagreed with the separate grouping, 
relative to cost sharing, for SCHIP enrollees under 100 percent of the 
FPL and the application of the Medicaid cost-sharing limits to this 
population. The commenter noted that the proposal is beyond the statute 
(the statute only refers to two tiers--above 150 percent of the FPL and 
at or below 150 percent of the FPL) and that the monetary difference 
between the SCHIP schedule applicable to 101 percent to 150 percent of 
the FPL and the Medicaid cost-sharing schedule is minimal. The 
commenter noted that the cost to States to create a program for this 
new income level is very significant. The commenter argued that the 
Medicaid cost-sharing requirements proposed for SCHIP enrollees under 
100 percent FPL were developed two decades ago and have no connection 
to current health care costs or program changes. According to this 
commenter, creating this new tier of eligible SCHIP enrollees does not 
seem to comport with the flexibility provided States in the 
Congressional debate on SCHIP, or written in title XXI.
    Response: 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 the 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 Secretary has the 
discretion to determine the increases to the Medicaid cost-sharing 
limitations that are reasonable and under this authority the Secretary 
has determined that it is not reasonable for States to impose cost 
sharing above the Medicaid limitations contained in Sec. 447.54 for 
children with family incomes that are below the Federal poverty line. 
As noted in the comment above, children at this income level who are 
eligible for separate child health programs typically reside in States 
that have retained the resource test for children in Medicaid, and may 
be well below 100 percent of the FPL. In this case, even small 
increments in cost sharing may impact the ability to access services.

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 the 
family's income for the year involved. The proposed regulation provided 
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). We have deleted this section because it repeats 
the requirements already stated in Sec. 457.560(c). Please see the 
comments and responses at Sec. 457.560(c) for further discussion.

[[Page 2584]]

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''. We proposed to 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. We also proposed that a State may not impose more than one 
cost-sharing charge for multiple services provided during a single 
office visit.
    We also proposed to adopt the Medicaid rules at Sec. 447.55 
regarding standard copayments. Specifically, we proposed to provide 
that States can establish a standard copayment amount for low-income 
children from families with incomes from 101-150 percent FPL for any 
service. We proposed 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 proposed 
provision would allow a State to impose a standard copayment per visit 
for non-institutional services based upon the average cost of a visit 
up to the copayment limits specified at proposed Sec. 457.555(a), on 
these families.
    Comment: A few commenters asked if States can still charge an 
enrollment fee. HCFA should clarify that States can charge both an 
enrollment fee for SCHIP and copayments for services, provided 
aggregate and individual dollar limits on cost sharing are observed.
    Response: States can charge an enrollment fee for families at or 
below 150 percent FPL as long as the enrollment fee does not exceed the 
maximums specified in Sec. 457.540(a) for children in families at or 
below 150 percent of the FPL and does not exceed the cumulative cost-
sharing maximum in accordance with Sec. 457.560(d) (2.5 percent of a 
family's income for a year or length of the child's eligibility 
period). For enrollment fees imposed on children in families with 
income above 150 percent of the FPL, enrollment fees and other cost 
sharing are limited to the cumulative cost-sharing maximum specified in 
Sec. 457.560(c) (5 percent of the enrollee's family income for a year 
or the length of the child's period of eligibility). The restriction on 
imposition of one type of cost sharing in this section applies only to 
copayments, deductibles, and coinsurance or similar charges.
    Comment: One commenter strongly supported the provision of the 
proposed rule that prohibits imposition of more than one copayment for 
multiple services provided during a single office visit. The commenter 
noted that this is a key issue for adolescents and that adolescents 
seek a variety of health care services on their own and seek to do so 
on a confidential basis (for example, diagnosis and treatment for a 
sexually transmitted disease). The commenter recommended that the 
preamble (or regulation) clarify whether there can be only one 
copayment required for a single office visit (for example, a $5.00 
copayment for the visit) and whether the copayment must cover any 
associated lab tests, diagnostic procedures, and prescription drugs, or 
whether any additional copayments can be required. The commenter urged 
that HCFA make clear that only one copayment per visit may be required 
for all services associated with the single visit.
    One commenter opposed the prohibition on imposing more than one 
cost-sharing charge for multiple services provided during a single 
office visit. In the commenter's view, cost sharing should relate to 
the provision of services rather than a visit. The commenter noted that 
CPT IV codes for physicians do not bundle multiple physicians or 
multiple services into a single visit. In this commenter's view, the 
proposed rule is also more restrictive than the current Medicaid 
provisions, which tie cost sharing to services, not to visits. The 
commenter argued that this added restraint on cost sharing is 
unnecessary because SCHIP enrollees are already protected from 
excessive charges by the overall cost-sharing caps and the limits on 
copayments.
    Response: Section 457.550(b) (now Sec. 457.540(e)) specifies that 
States cannot impose more than one copayment for multiple services 
furnished during one office visit. Thus, the copayment must cover any 
associated lab tests and diagnostic procedures. Only one copayment per 
visit may be required for all services delivered during the single 
visit. Lab tests performed at another site or prescription drugs 
obtained at a pharmacy may be subject to additional copayments. While 
the commenter notes that this is more restrictive than Medicaid, under 
Medicaid a provider cannot deny services to an enrollee if he or she 
cannot pay the associated copayment. SCHIP providers can deny services 
to enrollees under these circumstances. The per visit cost-sharing 
limit is intended to prevent access problems for SCHIP enrollees.
    Comment: Several commenters requested that Sec. 457.550(b) not 
apply to dental services or vision services because they are benefits 
that are defined by each individual service. In these commenters' view, 
limiting the frequency of cost sharing jeopardizes the State's ability 
to contract with many participating dental providers and limits the 
provision of needed dental services for SCHIP enrollees.
    Response: The majority of State child health programs offer 
coverage for dental services and we believe this provision will not 
adversely affect State coverage of these services. In addition, 
provider participation is more likely to be influenced by States' 
payment rates than by cost sharing from enrollees. Once again, we 
believe it is important that the cost sharing on enrollees at or below 
150 percent of the FPL be nominal in order to encourage enrollees to 
access vision and dental services before more expensive treatment is 
required.
    Comment: One commenter indicated that Sec. 447.550(b) should state 
that ``any copayment that the State imposes under a fee for service 
system may not exceed $5.00 per visit, regardless of the number of 
services furnished during one visit.'' Because the commenter assumes 
that the provider will seek the highest allowable copayment, for 
clarity, the rule should simply state that $5.00 is the maximum 
allowable per copayment visit. Section 457.550(b) is redesignated as 
Sec. 457.540(e).
    Response: We have modified the regulation to clarify that the 
provider can only collect up to the maximum amount allowed by the State 
based on the total cost of services delivered during the office visit. 
The provider cannot charge copayments in excess of what the State 
permits under the State plan.
    Comment: One commenter pointed out an error in paragraph (c) of 
Sec. 457.550, which refers to the maximum copayment amounts specified 
in paragraphs (b) and (c) of this section. The reference should be to 
Sec. 457.555 (b) and (c).
    Response: We agree with the commenter and have made these 
corrections to the final regulation text (Sec. 457.550(c) has been 
redesignated as Sec. 457.555(e)). In addition, we have revised the 
reference to include subsection (a) as well.

[[Page 2585]]

    12. Maximum allowable cost-sharing charges on targeted low-income 
children between 101 and 150 percent of the FPL (Sec. 457.555).
    Section 2103(e)(3)(A)(ii) of the Act specifies that for children in 
families with incomes below 150 percent of the FPL, 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''. We proposed 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.
    Specifically, for noninstitutional services provided to targeted 
low-income children whose family income is from 101 to 150 percent we 
proposed the following service payment and copayment maximum amounts 
for charges imposed under a fee-for-service system:

------------------------------------------------------------------------
                                                                Maximum
                                                                amount
       Total cost of services provided during a visit         chargeable
                                                                  to
                                                               enrollee
------------------------------------------------------------------------
$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 proposed to set a maximum per visit copayment amount of $5.00 
for enrollees enrolled in managed care organizations. In addition, we 
proposed to set a maximum on deductibles of $3.00 per month per family 
for each period of SCHIP eligibility. We noted that, 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 by $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 proposed, for the purpose of maximums on copayments and 
coinsurance, that the maximum copayment or coinsurance rate relates 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 proposed to use the standards set forth in the Medicaid 
regulations at Sec. 447.54(c). Accordingly, we proposed 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.
    We proposed 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. In 
Sec. 457.555(d), we further proposed that States must assure that 
enrollees will not be held liable for additional costs, beyond the 
specified copayment amount, associated with emergency services provided 
at a facility that is not a participating provider in the enrollee's 
managed care network.
    We realized that the regulation text as proposed regarding the 
limit on cost sharing related to emergency services was not clear. 
Therefore, we have added to Sec. 457.555(a) that the cost-sharing 
maximums provided in this section apply to non-institutional services 
provided to treat an emergency medical condition as well. We also 
clarified in paragraph (c) that any cost sharing the State imposes for 
services provided by an institution to treat an emergency medical 
condition may not exceed $5.00. We also removed proposed paragraph (d), 
because this requirement is already included in Sec. 457.515(f)
    Comment: One commenter suggested that copayments and deductibles 
for families with incomes over 150 percent of the FPL be subject to the 
same limits that apply for families with incomes 101 to 150 percent of 
the FPL, noted in Sec. 457.555 (a) and (b).
    Response: The limitations proposed in Sec. 457.555 (a) and (b) 
implement section 2103(e)(3)(A)(ii)of the Act. This section of the Act 
only applies to cost sharing imposed on targeted low-income children in 
families at or below 150 percent of the FPL. With respect to targeted 
low-income children in families above 150 percent of the FPL, the 
statute explicitly sets forth different cost-sharing provisions at 
2103(e)(3)(B) and permits States to impose cost sharing that is only 
subject to the 5 percent cumulative cost-sharing maximum. Therefore, we 
do not have the statutory authority to apply these limits to cost 
sharing on children in families with incomes above 150 percent of the 
FPL.
    Comment: One commenter encouraged HCFA to make the maximum 
allowable cost-sharing charges consistent with Medicaid. The commenter 
noted that a family with an income at or below 150 percent of the FPL 
enrolled in SCHIP has the same disposable income as a family with an 
income at or below 150 percent of the FPL in Medicaid, and therefore 
should not be expected to absorb a higher cost-sharing limit. Also, in 
this commenter's view, because the family may move from one program to 
another, there should be consistency in cost sharing.
    Another commenter stated that the cost-sharing limits in this 
section should have been based on the Medicaid maximums increased by 
the actual inflation experienced since the promulgation of the original 
Medicaid regulations.
    Response: Section 2103(e)(3)(ii) of the Act limits the copayments, 
deductibles, or similar charges imposed under SCHIP, for families with 
incomes at or below 150 percent of the FPL, to Medicaid cost-sharing 
amounts ``with such appropriate adjustments for inflation or other 
reasons as the Secretary determines to be reasonable.'' The cost-
sharing amounts under Medicaid (found at 42 CFR 447.52) were originally 
established in regulation in 1976 and have never been adjusted for 
inflation. Therefore, using the discretion permitted under the statute, 
we inflated the schedule for SCHIP for cost sharing imposed on 
enrollees whose income is from 101 to 150 percent of the FPL. In doing 
so, we looked at both the general inflation rate and the level of need 
in the population at issue in reference to Medicaid recipients. Because 
children in families with incomes below the poverty line are more 
closely tied to the traditional Medicaid population, we have not 
inflated the Medicaid cost sharing limits found at Sec. 447.52 for 
SCHIP enrollees with incomes at or below 100 percent of the FPL. We 
also note that under Medicaid, States cannot impose copayments, 
deductibles, and coinsurance on children under the age of 18. 
Therefore, children under the age of 18 who become eligible for the 
Medicaid program should not be subject to any copayments, deductibles 
or similar charges in accordance with Sec. 447.53 of the Medicaid 
regulations. The SCHIP statute, however, clearly contemplates and 
permits the application of cost-sharing to SCHIP enrollees.
    Comment: One commenter supported the higher cost sharing for non-
emergency use of the emergency room. The commenter believes in 
promoting the concept of the medical home and

[[Page 2586]]

encouraging families to receive their children's care in that context.
    Response: We appreciate the support of the commenter and also note 
that the policy, by only permitting twice the usual copayment amount 
for non-emergency use of the emergency room, protects the lower income 
populations served by SCHIP from having to pay excessive cost sharing 
if they find they can only access services at an emergency room. At the 
same time, it encourages enrollees to receive non-emergency services 
outside of an emergency room setting.
    We realized that the proposed regulation text was not clear 
regarding the limit on cost sharing related to emergency services. 
Therefore, we added to section Sec. 457.555(a) that the maximums 
provided in this section apply to non-institutional services provided 
to treat an emergency medical condition as well. We also clarified in 
paragraph (c) that any cost sharing the State imposes on services 
provided by an institution to treat an emergency medical condition may 
not exceed $5.00. Finally, we removed paragraph (d) from this section, 
because the requirement is already included in Sec. 457.515(f).
    Comment: Several commenters were concerned about the language in 
Sec. 457.995(c)(2) which prohibits patients from being held responsible 
for any additional costs, beyond the copayment amount specified in the 
State plan, that are associated with emergency services provided by a 
facility that is not a participating provider in the enrollee's managed 
care network.
    Response: With respect to the issue of additional costs for out-of-
network emergency services, we believe that any costs associated with 
evaluating and stabilizing a patient in an out-of-network facility in a 
manner consistent with the cost-sharing restrictions in this regulation 
at Sec. 457.555(d) must be worked out between the State and the managed 
care entity. Given the nature of the circumstances that may necessitate 
emergency services, enrollees may not be able to choose their place of 
care. Thus, the regulations do not allow additional cost sharing to be 
imposed on the beneficiary for emergency services including those 
provided out-of-network as described in Sec. 457.515(f)(1) of this 
final regulation.
    Comment: Two commenters asked that we clarify the interpretation of 
the phrase at Sec. 457.555 (a)(3) and (b) ``directly or through a 
contract'', with regard to payment made by the State. This commenter 
interpreted the phrase to mean that when the State operates SCHIP 
through employer-sponsored health plans, States would be expected to 
determine the rates paid by those health plans to hospitals and other 
providers and apply the standards cited in this section to determine 
allowable cost-sharing limits. The commenter asserted that, if this is 
HCFA's expectation, these requirements will make it difficult for 
States to implement SCHIP programs utilizing employer-sponsored health 
insurance since the State is not the purchaser of health care services 
in these cases and does not have a legal basis for accessing 
confidential or proprietary information, such as rates paid by plans to 
participating providers. The commenter recommended that States that use 
employer-sponsored insurance be exempt from the requirements proposed 
of Sec. 457.555 (a)(3) and (b) since these requirements are likely to 
dissuade many employers from participating in SCHIP.
    Response: Any State that contracts with another entity to provide 
health insurance coverage under the SCHIP program is paying for 
services through a contract. If a State subsidizes SCHIP coverage other 
than through a contract, such as in a premium assistance program, the 
State is still responsible for ensuring that cost-sharing charges to 
enrollees in such plans comply with this regulation. We recognize that 
this might require some additional steps but it is important to provide 
these protections to all SCHIP enrollees uniformly. States, as part of 
any contract with a health insurer, should request the payment rate 
information to assure that cost sharing being imposed by the insurer 
does not exceed the amounts in this section. We are also revising 
Sec. 457.555(b) to specify that copayments for institutional services 
cannot exceed 50 percent of the payment the State would have made under 
the Medicaid fee-for-service system for the service on the first day of 
institutional care. As previously discussed, employer-sponsored 
insurance is subject to the same cost-sharing limits as all separate 
child health programs. This rule applies to both managed care and 
premium assistance programs.
    Comment: One commenter urged HCFA to include language in the 
preamble to underscore that the philosophy and structure of managed 
care delivery systems make unnecessary the use of cost sharing to 
control utilization. HCFA should encourage States to set lower maximum 
allowable cost-sharing amounts for institutional services.
    Response: States have discretion under 2103(e) to impose cost 
sharing up to the limits established in the statute and in this 
regulation. We note that many studies have shown that cost sharing does 
impact utilization in managed care delivery systems. We also note that 
50 percent of the cost of the first day of care in an institution may 
be expensive for families below 150 percent of the FPL. We encourage 
States to set reasonable limits that take into consideration the income 
level of these families.
    Comment: One commenter supported limiting copayments per inpatient 
hospital admission, but noted that the current proposal is based on 
each institutional admission. In this commenter's view, this policy has 
the potential to promote early release and frequent readmissions that 
could be detrimental to a child's health. The commenter suggested that 
cost sharing for institutional admissions be based on a period of time 
or some other criteria in order to prevent potential inappropriate 
releases.
    Response: Section 2103(e)(3)(A)(ii) limits the imposition of cost 
sharing to the nominal amounts consistent with regulations referred to 
in section 1916(a)(3) of the Act. Proposed Sec. 457.555(b) mirrors 
Sec. 447.54 of the Medicaid regulations regarding institutional 
services with some clarification for its application in the SCHIP 
context. We have not found data that supports a pattern of early 
discharge exists in the Medicaid program due to this provision. 
Therefore, we will adopt the regulation as proposed, consistent with 
section 2103(e)(3)(A)(ii) of the Act.
    Comment: One commenter indicated that, with regard to institutional 
services, the proposed regulation states that the cost sharing cannot 
exceed 50 percent of the payment the State makes directly or through 
contract for the first day of care in that institution. The commenter 
stated that, in a managed care context, the State does not pay a per 
day amount to the managed care entity (MCE). The commenter requested 
that HCFA clarify how this institutional cost-sharing limitation is to 
be interpreted in the MCE setting.
    Response: We have clarified Sec. 457.555(b) to indicate that cost 
sharing may not exceed 50 percent of the payment the State would have 
made under the Medicaid fee-for-service system for the first day of 
care in that institution. We believe this remains consistent with the 
legislative intent to keep cost sharing at nominal levels in accordance 
with Medicaid.
    Comment: One commenter observed that the imposition of copayments 
for emergency room visits that mirror copayments for other services, 
including

[[Page 2587]]

physician or clinic visits ($5.00 copayment) provides a negative 
incentive. States should have the ability to impose a differential 
copayment for emergency visits, even if it is minimally higher than 
that imposed for visits to a primary health care provider.
    A commenter stated that, in order to control non-emergency 
utilization of the emergency room and to smooth the transition of 
families from SCHIP to commercial insurance coverage, States should be 
permitted flexibility in establishing the maximum copayment amount for 
such services and notes that, in some States, amounts up to $25.00 have 
been permissible. One commenter noted that without differential 
copayments for emergency room visits, the incentives are aligned to 
promote use of a primary care model over unimpeded access to emergency 
rooms.
    Response: We have revised Sec. 457.555(a) of the final regulation 
to specifically require that services provided to an enrollee for 
treatment of an emergency medical condition shall be limited to the 
cost schedule under (a) of that section with its maximum of $5.00. We 
also note that States are not required to charge the maximum amount 
permitted in Sec. 457.555(a) for a physician service and may choose to 
impose a lower amount than $5.00 on physician services, providing the 
incentive for the beneficiary to access services at the physician level 
before using the emergency room. In addition, Sec. 457.555(c) permits a 
maximum amount of $10.00 for nonemergency use of the emergency room, 
which may also create incentives to use the primary health care 
provider when appropriate.
    For the targeted low-income child in a family with income above 150 
percent of the FPL, States may impose a higher amount than $5.00 for 
emergency services provided in an emergency room as long as the family 
has not paid cost sharing that exceeds the cumulative cost-sharing 
maximum of 5 percent of the family's income for a year. The regulation 
only requires that States limit copayments for emergency services 
provided in the emergency room to the schedule in Sec. 457.555(a) for 
those children in families with income from 101 to 150 percent of the 
FPL, and limit such copayments consistent with Sec. 457.540(b) for 
those children in families with incomes below 100 percent of the FPL.
    Comment: A commenter recommended that no arbitrary amount ($10.00) 
be used as the maximum copayment for non-emergency use of the emergency 
room. In this commenter's view, if such an amount is included in this 
section, it should be indexed for inflation.
    Response: The maximum copayment amount is based on the statutory 
requirement that cost sharing for families at or below 150 percent of 
the FPL must be in accordance with the Medicaid rules. The amount of 
$10.00 in Sec. 457.555(c) is consistent with Sec. 447.54(b), which 
allows a waiver of the nominal amount in the Medicaid regulation for 
nonemergency services furnished in a hospital emergency room up to 
double the maximum copayment amounts. We have chosen a set limit for 
the SCHIP enrollees in families with income from 101 to 150 percent of 
the FPL in lieu of the complicated waiver requirement in Medicaid.
    Comment: A commenter agreed that non-emergency use of emergency 
facilities should be limited. However, the commenter is concerned about 
doubling the noninstitutional copayment amount permitted when an 
enrollee uses an emergency room for non-emergency services. The 
commenter noted that, in many rural areas, access to non-emergency 
facilities may not be readily available, and argued that families 
should not be penalized (charged double) when alternative services are 
not available.
    Response: Proposed Sec. 457.735 (now Sec. 457.495) of the 
regulation requires the State plan to include a description of the 
methods it uses for assuring the quality and appropriateness of care 
provided with respect to access to covered services. States must ensure 
that an adequate number of providers available so families do not need 
to seek routine treatment in an emergency room.
    Comment: Several commenters asked that the regulation clarify that 
States should use the prudent layperson standard proposed at 
Sec. 457.402(b) in the assurance that cost sharing for emergency 
services to managed care enrollees would not differ based on whether 
the provider was in the managed care network.
    Response: We agree that the prudent layperson standard should be 
applied to this section. In the proposed rule, we defined emergency 
services at Sec. 457.402(c), to include the evaluation or stabilization 
of an emergency medical condition. Because this definition is relevant 
to the entire regulation, we have moved the definitions of emergency 
services and emergency medical condition to Sec. 457.10. Section 457.10 
now defines 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 jeopardizing the individual's 
health (or in the case of pregnant women, the health of the woman or 
her unborn child), serious impairment of bodily function or serious 
dysfunction of any bodily organ or part.
    Comment: One commenter suggested that HCFA issue additional 
guidance on what, if any, sanctions for non-payment of cost sharing can 
be exercised.
    Response: States are allowed flexibility when proposing sanctions. 
HCFA will review the State sanctions as part of the State plan and 
consider proposed sanctions on a case-by-case basis. We will require 
that States, in accordance with Sec. 457.570(b), provide an opportunity 
for the targeted low-income child's family to have its income 
reevaluated when the family cannot meet its cost-sharing obligations. 
The family income may have dropped to a point where the child qualifies 
for Medicaid, or where the child is in the category of SCHIP enrollees 
that is subject to lower (or no) cost sharing.

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 proposed two general rules regarding the cumulative cost-sharing 
maximums. First, a State may establish a lower cumulative cost-sharing 
maximum than those specified in Sec. 457.560(c) and (d). Second, a 
State must count cost-sharing amounts that the family has a legal 
obligation to pay when computing whether a family has met the 
cumulative cost-sharing maximum. We proposed to define the term ``legal 
obligation'' in this context as liability to pay amounts a provider 
actually charges the family and any other amounts for which payment is 
required under applicable State law for covered services to eligible 
children, even if the family never pays those amounts.
    We proposed that for children in families above 150 percent of the 
FPL, the plan may not impose premiums,

[[Page 2588]]

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).
    We proposed 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, enrollment fees or similar cost-
sharing charges that, in the aggregate, exceed 2.5 percent of total 
family income for the length of the child's eligibility period.
    Comment: A number of commenters disagreed with the proposed 
definition of ``legal obligation'' for use in connection with counting 
cost-sharing amounts against the cumulative cost-sharing maximum. They 
noted that it is very difficult and time-consuming to track payments 
that have not occurred. One commenter suggested changing the definition 
of the term ``legal obligation'' to only those ``cost-sharing amounts, 
which families have actually paid.''
    Response: States may rely on documentation based upon provider 
bills that indicate the enrollee's share rather than relying only on 
evidence of payments made by the enrollee. We have not adopted the 
commenters' suggestion because this could result in families being 
legally obligated to pay cost-sharing amounts in excess of the 
cumulative maximum.
    Comment: One commenter asked if this provision means that for any 
and all out-of-network health services, (provider charges in excess of 
the amount paid by the health plan) must count toward the family's 
cumulative cost-sharing maximum. The commenter noted that no private 
health plans work this way, especially employer-sponsored plans. 
According to this commenter, a requirement to recognize out-of-network 
provider charges would greatly complicate this process by requiring 
States to verify that provider bills submitted by families as evidence 
of having reached the maximum were not in fact paid by the health plan 
in which the children are enrolled.
    Response: If an enrollee has been authorized by his or her health 
plan to receive out-of-network services, then the associated charges 
must comply with these rules and be counted toward the cumulative cost-
sharing maximum. In addition, an enrollee's costs incurred for 
emergency services (as defined at Sec. 457.10) furnished at an out-of-
network provider also count toward the cumulative cost-sharing maximum. 
The regulation does not require coverage of out-of-network services 
that are not authorized, except for emergency services. Therefore, 
States are not required to count costs of unauthorized services 
received out-of-network toward the cumulative cost-sharing maximum.
    Comment: One commenter recommended that States be able to retain 
the flexibility to define the year for purposes of cost sharing as the 
insurance benefit year for group insurance rather than an individual 
family's eligibility period as proposed. In this commenter's view, the 
use of individual family eligibility periods would be an 
``administrative nightmare.''
    Response: States may apply the cumulative cost-sharing limits based 
on the insurance benefit's 12 month period for group insurance. In that 
case, for families that enroll during the benefit year, the State must 
calculate the cumulative cost-sharing maximum based on the income of 
the family only for the period of time the beneficiary is actually 
enrolled within that benefit year.
    Comment: One commenter noted that these rules allow a State to 
count cost-sharing amounts that the family has a legal obligation to 
pay. The commenter indicated that as section 330 Public Health Service 
grantees, Federally qualified health care centers (FQHCs) are required 
to prepare a schedule of fees or payments for incomes at or below those 
set forth in the most recent FPL. They also noted that health centers 
are obligated to charge patients on a sliding scale basis if their 
income is between 100 and 200 percent of the FPL. Therefore, the 
commenter stated that, based on this proposed rule, health center 
patients will not receive cost-sharing credits for that portion of the 
copayments that the health center is expected to waive under a sliding 
fee schedule policy.
    The commenter requested that HCFA provide an exception to consider 
SCHIP patients served in FQHCs as having paid the full highest possible 
copay cost of the copayment in calculating the cumulative cost-sharing 
maximum, whether or not they were charged this amount. In addition, the 
commenter indicated that SCHIP plans should be instructed that, if a 
FQHC normally charges its patients with incomes between 100 and 200 
percent of the FPL on a sliding scale basis, it should not be required 
or expected to apply a cost-sharing charge to a SCHIP patient that 
would exceed its sliding scale discount. For example, if the health 
center charge for a service is $100.00, but it only charges $50.00 for 
those with incomes between 150 percent and 200 percent of the FPL, it 
should only charge 50 percent of the allowable copayment for patients 
covered under SCHIP, in this commenter's view.
    Response: States are only obligated to count towards the cumulative 
cost-sharing maximum the amounts that a patient has a legal obligation 
to pay. Therefore, States may not count the amounts that the health 
center covers towards the maximum. The State is only obligated to count 
what the SCHIP patient is actually charged by the health center for 
purposes of the cumulative cost-sharing maximum. However, we do agree 
that the FQHC should not charge the enrollee more than is permissible 
under the FQHC's sliding scale, nor should it charge the enrollee more 
than is permissible under the SCHIP program.
    Comment: Several commenters requested that we reconsider the 2.5 
percent cumulative cost-sharing maximum. They raised specific concerns 
regarding the 2.5 percent cumulative cost-sharing maximum, including: 
The provision is not supported by the statute; it is very difficult to 
administer two caps (2.5 percent and 5 percent) and track against two 
caps; limits on copayments and deductibles are already found in 
Sec. 457.555 and section 2103(e)(3)(A) of the Act; States have already 
implemented flat cumulative cost-sharing maximums that are 
administratively efficient and provide families with fluctuating 
incomes greater stability; HCFA's commissioned study by George 
Washington clearly demonstrates that it is rare that enrollees will 
reach the 5 percent cost-sharing maximum; and when a limit is set using 
a percentage, there is no need to make the percentage less.
    One of the commenters also noted that the Medicaid maximum charges 
for premiums and other cost-sharing charges, which apply to families at 
or below 150 percent of the FPL, are minimal in amount and are not 
based upon income or family size. As a result, the addition of another 
level of cost sharing (2.5 percent) adds to an already complex cost-
sharing structure, in this commenter's view. The commenter added that 
such requirements are virtually impossible to implement in a program 
that subsidizes employer sponsored insurance.
    Response: We disagree with the commenters. A lower cost-sharing 
maximum on children is necessary in order for States to comply with the 
requirements at section 2103(e)(2)(B), which require that separate 
child health plans may only vary cost sharing based on the family 
income of targeted low-income children in a manner that does not favor 
children in families with

[[Page 2589]]

higher incomes over children in families with lower incomes. If the 
State does not want to administer two caps, it does have the option to 
place the 2.5 percent cap or a flat amount equal to 2.5 percent of the 
family's income on the entire enrollee population that is subject to 
cost sharing. This should have a minimal impact on the amount of cost 
sharing States will impose; particularly in light of the George 
Washington University study, as indicated by the commenter, which found 
that it is rare for families to reach the 5 percent cap at all. The 
State may also choose to impose premiums instead of copayments, 
coinsurance or deductibles, so that tracking of cost sharing is not 
necessary.
    Comment: One commenter noted that the separate calculation 
requirement applied to each beneficiary's family to ensure that the 
five percent cost-sharing limitation is met is unwieldy and expensive. 
In this commenter's view, it is unlikely that opportunities for 
participation in premium assistance programs will be aggressively 
pursued. The commenter also asserted that our policy eliminates the 
opportunity for children in SCHIP to be enrolled in premium assistance 
programs.
    Response: For targeted-low income children in families with income 
greater than 150 percent of the FPL, section 2103(e)(3)(B) requires 
States to ensure that cost sharing does not exceed 5 percent of a 
family's income. The statute does not exempt States from this cap if 
they provide child health assistance through an employer-sponsored 
insurance program. Therefore, we have not included any exceptions to 
the rules for States utilizing premium assistance programs.
    Comment: One commenter stated that the regulation goes beyond 
legislative intent by requiring that copayments and deductibles be 
included in the computation of the maximum cost sharing for a family 
with income above 150 percent of the FPL. In support of this point, the 
commenter noted that section 2103(e)(3)(B) of the Social Security Act 
limits ``enrollment fees, premiums, or similar charges'' to five 
percent of the family's income. The commenter asserted that deductibles 
and copayments are not ``similar charges,'' because they are not 
prepayments for benefits coverage; rather, they are payments made to 
treating providers at the time of service delivery. By requiring States 
to include deductibles and copayments in the calculation of the 
maximum, HCFA has created major administrative problems, especially for 
the majority of states that are using HMOs or other insurers in this 
commenter's view. The commenter recommended that we limit the 
calculation of the maximum amount to ``enrollment fees, premiums and 
similar charges''. The State merely has to make sure it sets a premium 
below the maximum of 5 percent of family income.
    Response: Section 2103(e)(3)(B) of the Act provides that ``any 
premiums, deductibles, cost sharing, or similar charges imposed under 
the State child health plan 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 under this 
title may not exceed five percent of such family's income for the year 
involved.'' The statute's reference to ``deductibles, cost sharing, and 
similar fees'' clearly indicates that the charges to be counted towards 
the cumulative cost-sharing maximum are not to be limited to premiums 
and enrollment fees. However, States have the option to impose only 
premiums under their SCHIP plans.
    Comment: One commenter noted an error in this section. 
Specifically, the commenter pointed out that the proposed regulation 
text states that total cost sharing imposed on families with incomes 
above 150 percent of the FPL not exceed the maximum permitted under 
Sec. 457.555(c). It should be Sec. 457.560(c).
    Response: The commenter is correct that the reference should have 
been to Sec. 457.560(c). In addition, in order to eliminate this 
confusion and redundancy in the final regulation text, we have 
eliminated section Sec. 457.545 and reflected the policy at 
Sec. 457.560(c).

14. Grievances and Appeals (Sec. 457.565)

    We proposed 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. We address comments on 
proposed Sec. 457.565 in subpart K, Enrollee Protections, which now 
contains the provisions relating to applicant and enrollee protections. 
We have deleted proposed Sec. 457.565 in an effort to consolidate all 
provisions relating to the review process in the new subpart K.

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 proposed in Sec. 457.570 to require that 
States establish a process that gives enrollees reasonable notice of, 
and an opportunity to pay, past due cost-sharing amounts (premiums, 
copayments, coinsurance, deductibles and similar fees) prior to 
disenrollment. We requested comments on this requirement, including 
specific comments on the determination of an amount of time that would 
give enrollees reasonable notice and opportunity to pay cost-sharing 
amounts prior to disenrollment. We stated that we would request that 
States with approved plans submit this additional information after 
publication of the proposed rule and prior to the State's onsite 
review. We stated that we would also ask the State to include a 
description of its process in future amendments to its State plan.
    Comment: One commenter noted that disenrollment occurs in the 
Hispanic population because the SCHIP process is extremely paper-
intensive. In this commenter's view, one of the most common reasons for 
disenrollment from SCHIP is the termination of benefits due to the 
failure to provide premium payments in a timely manner. They stated 
that, Hispanics in eligible income brackets, in particular, tend to 
deal in a cash economy, making it difficult to pay SCHIP premiums in 
the preferred method of payment. In order to slow disenrollment the 
commenter stated that it is necessary to devise a plan to eliminate the 
barrier to payment, and effectively reduce the rate of disenrollment 
among Hispanics.
    Response: The SCHIP statute specifically allows States to impose 
premiums on the SCHIP population within statutorily defined limits. 
However, we encourage States to be flexible in the methods of payment 
permitted for cost-sharing charges and to allow grace periods and to 
provide adequate notice when payments are not made. We have clarified 
in the final rule that the State plan must describe the disenrollment 
protections provided to enrollees. In addition, States might monitor 
disenrollments by reason for disenrollment and determine whether 
certain groups of enrollees are more likely than others to lose 
coverage due to failure to meet the cost-sharing requirements. In 
addition, we encourage States to work with advocates from the Hispanic 
community to devise culturally sensitive methods to inform consumers 
about cost sharing and

[[Page 2590]]

devise appropriate procedures for obtaining necessary premium payments.
    Comment: One commenter noted that the appeals procedures should not 
be structured in such a way as to give a child's family an incentive to 
drop SCHIP coverage for a child until he or she needs health services. 
This practice undermines basic insurance principles and threatens the 
financial integrity of SCHIP programs because it would result in the 
pool of enrollees being significantly more sick and more costly than 
would otherwise be anticipated, in this commenter's view. They stated 
that the result of such a practice would be to unnecessarily increase 
the costs of providing coverage to enrollees, which in turn would 
potentially threaten the viability of the State's SCHIP. The commenter 
recommended that HCFA revise the regulation to require States to 
address this issue when they define the circumstances under which a 
member will be permitted to re-enroll following voluntary disenrollment 
or disenrollment for nonpayment of premiums or cost sharing.
    Response: We are aware that there may be problems when an enrollee 
is disenrolled and permitted to re-enroll. Some States have adopted 
lock-out periods to promote the appropriate utilization of health 
insurance, although other States have discontinued their lock-out 
periods because they did not find any significant increase in sicker 
enrollees. States have the flexibility to design their programs based 
on their unique circumstances to assure that eligible enrollees 
maintain coverage.
    Comment: Many commenters agreed that enrollees should be given an 
opportunity to pay past due cost sharing prior to disenrollment. Many 
commenters noted that there should not be any lock-out periods, that 
States should give families every opportunity to pay past due premiums 
and at a minimum, grant grace periods of 60 days for the non-payment of 
premiums. One commenter suggested that the preamble urge States to 
conduct a Medicaid screen if a child's family is unable to pay premiums 
due to financial hardship.
    Response: We agree that, at the very least, a State should give 
enrollees a chance to pay past due cost sharing prior to disenrollment. 
While many commenters noted that lock-out periods should not apply, it 
is appropriate to allow States to implement a lock-out period so that 
individuals are not obtaining or maintaining SCHIP coverage only when 
they need services. We also agree with the comment encouraging States 
to perform a Medicaid eligibility screen for enrollees who are unable 
to pay cost-sharing charges due to financial hardship and have 
emphasized this elsewhere in comments to this final rule. We have added 
that the disenrollment process must afford enrollees the opportunity to 
show that their family income has declined prior to being disenrolled 
for nonpayment of cost-sharing charges. In the event that such a 
showing indicates that the enrollee may have become eligible for 
Medicaid or a lower level of cost sharing under separate child health 
plans, States should take action to either enroll the child in Medicaid 
or adjust the child's cost sharing category. We expect this new 
protection will afford enrollees the opportunity to enroll in Medicaid 
if they have become eligible.
    Comment: A few commenters noted specific standards regarding 
disenrollment protections that HCFA should articulate in the final 
regulation. Specifically, the commenter recommended that HCFA clearly 
define what constitutes reasonable notice; clarify that only the State 
may disenroll a child or impose any other sanction due to an 
enrollees's failure to pay cost sharing; provide that disenrollment can 
only be effected after all reasonable steps have been undertaken to 
avoid disenrollment; require that families should be offered the 
opportunity to establish a repayment plan; and that families cannot be 
subjected to penalties or interest for past due payments.
    Response: The regulation at Sec. 457.570 regarding disenrollment 
protections provides enrollees with meaningful protections in 
connection with any disenrollment related to cost sharing while giving 
the States flexibility to establish processes consistent with the goals 
and structure of their programs. We do not accept the commenter's 
recommendation that HCFA be prescriptive in the regulation regarding 
disenrollment protections, because each State's SCHIP program is 
separate and distinct and should retain flexibility accordingly.
    Comment: One commenter noted that States should be given the 
flexibility to decide how they will implement this standard. 
Specifically, this commenter believes it is administratively burdensome 
to track a specific grace period before a family is disenrolled from 
SCHIP.
    Response: States are granted flexibility to establish disenrollment 
procedures under Sec. 457.570 of the final rule. These procedures must 
be included as part of the State plan. However, the rule does require 
States to provide reasonable notice prior to disenrollment and provides 
for a period of time (grace period) for the enrollee's family to pay 
past due amounts. The rule also enables the State to evaluate the 
enrollee's financial situation prior to disenrollment to ensure he or 
she does not qualify for Medicaid.
    Comment: One commenter complained that the proposed disenrollment 
protections were too burdensome because they do not permit 
disenrollment for nonpayment of premiums even after reminder notices 
have been sent. One commenter noted that implementing a grace period 
before disenrollment will result in duplicative coverage and wasted 
funding since research shows that the primary reason a family fails to 
pay its monthly premium is that the family has obtained other coverage.
    Response: The regulation at Sec. 457.570 regarding disenrollment 
protections gives the States flexibility to establish processes 
consistent with the goals and structures of their programs. A 
disenrollment process without any grace period could result in a system 
that would disenroll a family prematurely (without adequate notice) and 
interrupt the family's continuity of care. Therefore, we continue to 
require that States establish a process that gives enrollees reasonable 
notice of, and an opportunity to pay past due premiums, copayments, 
coinsurance, deductibles, or similar fees prior to disenrollment.
    Comment: One commenter noted that there may be cases in which the 
individual responsible for paying a premium is not the custodial party 
or head of household for the children. In such cases, the commenter 
stated that notices of disenrollment for failure to pay a premium need 
to be provided to both the payer of the premiums and the SCHIP 
beneficiary. Also, if premiums are owed by an individual other than the 
head of household, and are not paid, the family receiving the SCHIP 
benefits should not be subject to penalties, and should be given an 
opportunity to assume responsibility for making future payments.
    Response: We agree with the commenter and recommend that States 
review all viable financial options of an enrollee prior to 
disenrolling an enrollee due to a parent or caretaker's failure to pay 
cost sharing. We will also require that States include a disenrollment 
policy as part of its public schedule, so that all family members who 
are responsible for paying cost sharing on behalf of the enrollee are 
informed of the disenrollment process.

[[Page 2591]]

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

1. Basis, Scope, and Applicability (Sec. 457.700)

    As proposed, 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; and section 2108 of the Act, which sets forth 
provisions regarding annual reports and evaluations.
    In the preamble to the proposed rule, we noted the importance of 
reporting and evaluating SCHIP data. We stated that 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. We also described that our information dissemination 
policy will include making State annual reports, State evaluations and 
a summary of State expenditures and statistical reports regularly 
available on the Internet.
    Comment: Several commenters strongly supported the statement in the 
preamble to proposed Sec. 457.700 indicating that we plan to make 
annual reports, State evaluations, and summaries of State reports 
regularly available for public access on the Internet. One commenter 
recommended that an annual, separate, consumer-friendly SCHIP State-by-
State status report be available in written and electronic form to the 
public.
    Response: We plan to continue the information dissemination policy 
that includes making annual reports, State evaluations, and a summary 
of State expenditures and statistical reports regularly available on 
the Internet, to the maximum extent possible. We have already produced 
two State-by-State reports on SCHIP enrollment and released a summary 
of the States' March 31, 2000 evaluations. We plan to produce and make 
available future informational reports based on State evaluations, 
enrollment data, and other sources. We encourage the public not only to 
access our web site to read the State annual reports and other State-
specific information but also to access individual State web sites. In 
addition, we note that several national organizations, such as the 
National Governors' Association (NGA), the National Academy for State 
Health Policy (NASHP), the Children's Defense Fund, the National 
Conference of State Legislators (NCSL), the American Public Human 
Services Association (APHSA), the American Academy of Pediatrics (AAP), 
and other organizations representing State and local governmental 
entities periodically produce State-by-State SCHIP status or 
informational reports that are available to the public. We encourage 
the public to utilize these resources.
    Comment: Several commenters stated that we should require States to 
collect information in a manner that does not discourage individuals 
from applying for SCHIP. Techniques suggested for achieving this goal 
include: explaining to participants the purpose of the information 
collected, assuring confidentiality of information collected, and 
disclosing that the failure to provide the requested information will 
not be used to deny eligibility.
    Response: We agree with commenters on the importance of gathering 
evaluative information without creating barriers to participation in 
SCHIP; and we know this is a concern for States and other stakeholders 
who have worked to simplify and streamline the application process. We 
also recognize the flexibility given to States in creating and 
evaluating their uniquely designed SCHIP programs. We encourage States 
to be mindful of potential barriers created by collecting information 
and to create systems that do not prevent potential enrollees from 
applying for health insurance coverage under SCHIP.
    In addition, as noted later in the responses to comments on 
Secs. 457.740 and 457.750, in conjunction with the requirement that 
States collect and report information about the gender, race, ethnicity 
and primary language of SCHIP enrollees; we emphasize the importance of 
States ensuring through the application process that failure to provide 
information on one of these areas will not affect a child's eligibility 
for the program. In addition, States must request this information in a 
manner that is linguistically and culturally appropriate so as not to 
discourage enrollment in the program.

2. State Plan Requirements: Strategic Objectives and Performance Goals 
(Sec. 457.710)

    In accordance with section 2107(a) of the Act and the Government 
Performance and Results Act of 1993 (GPRA), proposed Sec. 457.710 
encouraged program evaluation and accountability by requiring the 
States to include in their State plan descriptions of 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, we proposed at 
Sec. 457.710(b) 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 
encouraged States to view the 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, recognizing that there will be variation among States in 
specific evaluation approaches and terminology. One of the strategic 
objectives established in the Act is the reduction in the number of 
low-income, uninsured children.
    Under section 2107(a)(3) of the Act, States must identify one or 
more performance goals for each strategic objective. We proposed to 
implement this statutory provision at Sec. 457.710(c). We noted in the 
preamble that detailed performance goals should facilitate the State's 
ability to assess the extent to which its strategic objectives are 
being achieved. In addition, we provided guidance on factors States 
should consider in drafting strategic objectives and performance goals, 
noting that they should consider not only the general population 
targeted for SCHIP enrollment, but special population subgroups of 
particular interest as well.
    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. 
We set forth specific examples of acceptable performance measures in 
the preamble to the proposed rule.
    Comment: We received several comments suggesting that we require 
States to report on a common core of widely-used, objective, 
standardized, and child-related performance measures and strategic 
objectives designated by the Secretary. Furthermore, commenters 
recommended that we require the results of these standard performance 
measures to be included in the States' annual reports. Some commenters 
feared that, absent a requirement to report a common set of measures, 
the information collected might be meaningless and could not be used to 
evaluate or compare the effectiveness of State plans.

[[Page 2592]]

    Commenters recommended strategic objectives including: the need to 
reduce and/or eliminate racial and ethnic disparities in children's 
health insurance coverage; the need to reduce and/or eliminate barriers 
to health coverage for children with disabilities; the need to reduce 
stigma and barriers to access in Medicaid; the need to ensure that the 
goal of increasing coverage for uninsured children does not supplant or 
overshadow the importance of ensuring that the receipt of health 
benefits coverage results in the provision of quality health care and 
improves health outcomes. Commenters believed that HCFA should consult 
with the States in creating these national standards, and in doing so, 
build upon the efforts of other Federal agencies, such as the 
performance measures developed for State Maternal and Child Health 
Services Block Grants by the Health Resources and Services 
Administration.
    Response: We agree there should be a common core of evidence-based, 
standardized, child-related performance measures and performance goals. 
These measures and goals can be used to evaluate the overall effect of 
the program in access, service delivery, processes of care and health 
outcomes with the intent of improving the quality of care, particularly 
in the areas of well-baby care, well-child care, well-adolescent care, 
and childhood and adolescent immunizations. Section 2701(b)(1) of the 
Act and proposed Sec. 457.20 directs that State plans must include 
assurances that the State will collect data, maintain records, and 
provide reports to the Secretary at the times and in the format the 
Secretary may require. The development of common quality and 
performance measures and goals is essential to assessing the national 
impact of the SCHIP program and we have modified the regulation text at 
Sec. 457.710(d)(3) to provide that the Secretary may prescribe a common 
core of national measures.
    However, we also acknowledge the difficulties in achieving national 
consensus on specified measures. Therefore, HCFA will convene a 
workgroup to develop a set of core performance measures and performance 
goals incorporating appropriate quality assurance indicators, and the 
methodology for implementing common measures and goals for SCHIP in an 
appropriate and timely manner. As we undertake this effort, we will be 
guided by the objectives, goals and measurement methods States have 
developed, as described in their annual reports and evaluations.
    The development of national performance indicators and goals does 
not diminish the importance of having States identify their own 
specific strategic objectives, and accompanying performance goals and 
measurements. While States may be required to adopt national 
performance measures and goals once they have been developed, we expect 
States to implement their own performance measures, performance goals 
and strategic objectives specific to the unique design and priorities 
of their own program. States, in accordance with section 2107(a)(4) of 
the Act, will continue to be required under Sec. 457.710 to establish 
State-specific performance measures and to describe how performance 
under the plan will be measured through objective, independently 
verifiable means and compared against performance goals.
    Comment: One commenter suggested that HCFA recommend to States the 
following outcome measures: out-of-home placements, the Children and 
Adolescent Functional Assessment Scale (CAFAS), days-in-school, school 
performance, and reduced involvement in the legal system.
    Response: We agree with the commenter that measures from a variety 
of sources can be useful in evaluating the impact of SCHIP on the 
health and the behavior of participants and we would encourage States 
to take them into consideration as they develop their State-specific 
performance measures. Additionally, as we convene a workgroup to 
discuss the development of national core performance and quality 
assessment measures, we will consider the measures the commenter has 
suggested. We are mindful, however, that SCHIP's first goal is to 
expand coverage to uninsured children and that, while it is generally 
believed that coverage and better access to health care can lead to 
improvements in school attendance and school achievement, it is 
difficult to isolate the cause and effect of changes in social behavior 
that are influenced by a wide range of factors and circumstances.
    Comment: We received one comment expressing concern that the 
willingness and ability of managed care entities (MCEs) to participate 
in SCHIP depended on whether the revenues adequately covered the MCEs' 
costs. The commenter noted that costs associated with collecting and 
validating data may be substantial, and thus may prevent MCEs' from 
participation in the program. The commenter expressed concern that the 
MCE might not have a large enough population of SCHIP participants to 
generate statistically valid data. Additionally, the commenter asserted 
that HCFA has failed to establish realistic goals for Quality 
Improvement System for Managed Care (QISMC)-related health plan 
activities and performance that take into consideration available 
resources and responsibilities for the delivery of quality care for 
beneficiaries.
    Response: We recognize the concerns expressed by the commenter. 
However, we disagree that the requirements in the proposed regulation 
may impose an undue financial hardship upon MCEs. This regulation 
provides States with significant flexibility regarding the performance 
measurements they will use and the preamble to the proposed rule 
encouraged States to review measures, including those widely used by 
private-sector purchasers of MCE services. We suggested in the preamble 
of the NPRM that States may wish to consider adopting standardized 
methods and tools in quality assurance and improvement, such as those 
of the QISMC initiative, but we did not propose and are not requiring 
the use of QISMC-related measures. However, the burden on MCEs would be 
minimized to the extent a State chooses measures that the MCEs are 
already using in connection with other programs.
    In any event, the regulation imposes obligations on States and does 
not directly govern actions of MCEs. While we require States to report 
data relating to their strategic objectives and specific performance 
goals, we are aware of the difficulty in compiling statistically valid 
data in small sample sizes and are mindful of States' interest in 
reducing burden for their MCEs. The regulation does not require that 
States collect encounter data. States have the option of choosing other 
methods of collecting data related to their strategic objectives, 
including, but not limited to, surveys of SCHIP participants and/or 
SCHIP health care providers and looking at encounter data, to the 
extent it is available.
    Comment: One commenter urged HCFA to include the American College 
of Obstetricians and Gynecologists educational bulletin entitled 
``Primary and Preventive Health Care for Female Adolescents'' in the 
list set forth in the preamble of examples of widely recognized 
measures and guidelines states should review in developing performance 
measures for SCHIP programs.
    Response: We agree with the commenter that there may be several 
measures beyond those we specifically mentioned in the preamble to the 
proposed rule that States might find helpful in translating their 
strategic

[[Page 2593]]

objectives into performance measures and goals. We encourage States to 
consider this bulletin as well as others that provide widely-used 
performance measures for children's and adolescent's health and health 
care.
    Comment: A couple of commenters indicated that while the Health 
Employer Data and Information Set (HEDIS) was designed to be reported 
at the health plan level, plan-reported numerators and denominators can 
be added together to yield aggregate State-level reports that could 
help measure performance in reaching State enrollment targets and in 
delivering high quality health care. The commenters indicated that 
HEDIS measures are objective, validated measures of health plan 
performance (on quality, access and availability, and the use of 
services) and, when audited using the HEDIS Compliance Audit, 
performance measures are independently verified. In addition, the 
commenters stated that national benchmarks exist for both the 
commercial and Medicaid populations which can be used to establish 
performance goals and to evaluate performance of a specific health plan 
or State SCHIP program. One commenter noted that the National Committee 
on Quality Assurance (NCQA) offered to work with HCFA and States on 
implementation strategies, including making HEDIS specifications 
broadly available.
    Response: We agree that HEDIS may be a useful tool for States in 
measuring their performance and establishing goals. We appreciate 
NCQA's willingness to assist with SCHIP implementation and are working 
with them to develop HEDIS specifications for SCHIP. In States that are 
considering using HEDIS measures, we have recommended the following 
approach to reporting data and information on SCHIP programs: Where a 
State contracts with managed care entities (MCEs) for health benefits 
coverage for SCHIP enrollees, States should, where possible, identify 
individual SCHIP enrollees for its contracting MCEs as detailed below.
    If the State has identified SCHIP enrollees to a contracting MCE, 
and the contracting MCE also contracts with the State Medicaid program, 
then the MCEs should, as directed by the State either: (1) report the 
required HEDIS measures separately for SCHIP enrollees; or (2) include 
SCHIP enrollees in their Medicaid product line reports.
    If the State has identified SCHIP enrollees to a contracting MCO 
and the contracting MCE is a commercial MCE without a Medicaid product 
line, the MCE should exclude SCHIP enrollees from its commercial 
product line reports, because including SCHIP enrollees in HEDIS 
reports for commercially enrolled populations may affect commercial 
MCE-to-MCE comparisons. Under these circumstances, HEDIS performance 
measures for SCHIP enrollees will need to be reported separately. In 
addition, MCEs with small numbers of eligible SCHIP enrollees should 
follow the small numbers general guideline. These specifications will 
be included in the HEDIS guidelines for 2001.
    Comment: In response to HCFA's solicitation for comments on 
additional measures that will assist in articulating the success of 
programs implemented under title XXI, several commenters recommended 
the following performance measures:

Access

--Percentage of Medicaid eligible enrolled in Medicaid;
--Percentage of SCHIP eligible enrolled in SCHIP;
--Percentage of children with a usual source of health care;
--Percentage of children with an unmet need for physician services and/
or delayed care;
--Reduction of hospitalization for ambulatory sensitive conditions;
--Percentage of enrollees who are enrolled for a year or more;
--Percentage of children who are identified as having special health 
care needs;
--Percentage of employers offering health insurance coverage to 
employees and dependent children;
--Percentage of enrollees whose parents decline employer-sponsored 
dependent health insurance coverage;
--Percent of children whose eligibility switches between title XIX and 
title XXI who enroll in the appropriate program (or who maintain health 
insurance coverage);
--Percentage of pediatricians, family physicians, and dentists who 
participate in Medicaid and SCHIP;

Process

--Percentage of children and adolescents who have received 
immunizations according to the ACIP/American Academy of Pediatrics 
recommended immunization schedule;
--Percentage of children and adolescents who have received all of the 
well-child visits appropriate for their ages, based on the American 
Academy of Pediatrics Recommendations for Pediatric Health Care;
--Percentage of adolescents ages 12 though 18 who were counseled for 
symptoms or risk factors for STDs;
--Percentage of children ages four through 18 during the reporting year 
who received a dental examination during that year;
--Percentage of children ages three through six who received a vision 
screening examination during the reporting year;
--Percentage of children and adolescents with all of the well-child 
visits provided at one health care site during the reporting year;
--Percentage of children and adolescents, parents or caretakers with 
difficulty communicating with health care professionals because of a 
language problem or difficulty understanding health care professionals;
--Percentage of children and adolescents with asthma who regularly use 
a peak flow meter during the reporting year, regularly use a spacer 
with a metered dose inhaler, and/or who received influenza vaccine 
during the reporting year;
--Percentage of children with special health needs who received care 
during the reporting year;

Outcomes

--Rate of hospitalization for ambulatory sensitive conditions such as 
asthma, diabetes, epilepsy, dehydration, gastroenteritis, pneumonia; or 
urinary tract infection (UTI);
--Rate of hospitalization for injuries;
--Percentage of children and adolescents reporting days lost from 
school due to health problems;
--Percentage of children reporting risky health behaviors including 
injuries, tobacco use, alcohol/drug use, sexual behavior, poor dietary 
behavior, lack of physical activity;
--Percentage of adolescents reporting attempted suicides;
--Percentage of children reporting unmet medical needs;
--Percentage of children reporting unmet vision needs;
--Percentage of children reporting unmet dental needs; and
--Percentage of family income used for medical and dental care.
    Response: Assessments of the impact of the title XXI program on 
children's health insurance coverage, access to care and use of health 
care services will occur on both the State level and national levels. 
On the State level, we would encourage States to consider the 
commenters' suggested performance measures as they identify those 
measures which are appropriate for each

[[Page 2594]]

of their strategic objectives as required under section 2107(a)(3) of 
the Act and Sec. 457.410(b).
    Nationally, as HCFA works to develop a common core of standardized 
child-related performance measures, performance levels and quality 
measures that can be used to evaluate access, service delivery, 
processes of care, health outcomes and quality in the overall SCHIP 
program, we will consider the performance measures recommended by the 
commenters.

3. State Plan Requirement: State Assurance Regarding Data Collection, 
Records, and Reports (Sec. 457.720)

    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. 
We proposed to implement this statutory provision at Sec. 457.720.
    We did not receive any comments on this section and are therefore 
implementing the provision as proposed.

4. State Plan Requirement: State Annual Reports (Sec. 457.730)

    Section 2107(b)(2) of the Act discusses the requirement that the 
State plan include a description of the State's strategy for the 
submission of annual reports and the State evaluation.
    Accordingly, we proposed to implement this provision at 
Sec. 457.730. We noted that, in order to facilitate report submission, 
a group of States worked with staff from the National Academy of State 
Health Policy (NASHP), with HCFA representation, to develop an optional 
model framework for the State evaluation due March 31, 2000 and for 
subsequent annual reports. We also noted that we would permit States to 
submit their FY 1999 annual report and their State evaluation on March 
31, 2000, together as one comprehensive document. However, since the 
States evaluations/annual reports have all been submitted, this 
provision is unnecessary and has been deleted from the final rule. In 
addition, we have moved the discussion of the annual report 
requirements to comments and responses on Sec. 457.750.
    Comment: One commenter recommended that we require States to use a 
designated framework for submitting annual reports and evaluations. 
This commenter suggested that we include clinicians, child advocates 
and research groups to participate in the development of frameworks for 
future reports.
    Response: While we do not believe it is necessary to require a 
designated framework for annual reports and evaluations, in order to 
facilitate report submission, a group of States worked with staff from 
NASHP and with representatives from HCFA to develop an optional model 
framework for the State evaluation due March 31, 2000. This framework 
was finalized and sent to every State and territory with an approved 
State plan. All States that have submitted their State evaluations have 
voluntarily used this framework as the basis for their evaluation, 
although several States supplemented their evaluations with additional 
data. We currently are in the process of analyzing and synthesizing the 
data submitted in these evaluations. We will continue to work with 
States and other interested parties to support these efforts to promote 
ease of reporting and to facilitate analysis and comparison of 
important data reported by States on their programs.
    NASHP has subsequently developed a similar framework for the annual 
reports that States will be submitting in January 2001. As SCHIP 
development continues, we encourage continued participation in the 
evaluation process by interested researchers, health care providers and 
provider groups, advocates and advocacy groups, insurance providers, 
State and local government officials, and other interested parties and 
intend to keep the process as open and collaborative as possible.

5. State Expenditures and Statistical Reports (Sec. 457.740)

    We proposed to require that the States collect required data 
beginning on the date of implementation of the approved State plan. We 
proposed that 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. In the preamble, we noted that the Territories are excepted 
from the definition of ``State'' for the purposes of quarterly 
statistical reporting. We also proposed 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 were 
ever enrolled in the separate child health program, the Medicaid 
expansion program and the Medicaid program as appropriate by age, 
service delivery, and income categories.
    We proposed 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. We further proposed to 
require States to report enrollment by the service delivery categories 
of managed care, fee-for-service, and primary care case management.
    We noted in the proposed regulation and explained in the preamble 
that States must report income by using State-defined countable income 
and State-defined family size to determine Federal poverty level (FPL) 
categories. We proposed 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 SCHIP and Medicaid 
enrollment by using two categories: at or below 150 percent of the FPL 
and over 150 percent of FPL. States that impose cost sharing at defined 
income levels (for example, at 185 percent and over of FPL) in their 
Medicaid expansion programs and/or separate child health programs would 
be required to report their Medicaid and SCHIP 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 proposed to require enrollment 
reporting by income for Medicaid as well as for SCHIP.
    We proposed that required standardized reporting be limited to 
expenditure data and enrollment data as reported by age, poverty level, 
and service delivery category. We noted in the preamble to the NPRM 
that States should collect other relevant demographic data on enrollees 
such as gender, race, national origin, and primary language and that 
collecting such data will encourage the design of outreach and health 
care delivery initiatives that address disparities based on race and 
national origin.
    We stated that we were working to develop an option for States to 
provide the needed SCHIP data through existing statistical reporting 
systems in the future.
    Comment: One commenter suggested that we revise the regulations to 
specify that a State's failure to submit the statistical reporting 
forms would ordinarily be considered substantial non-compliance.
    Response: Section 457.720 requires States to comply with data 
reporting

[[Page 2595]]

requirements. Section 2106(d)(2) of the statute and Sec. 457.204(c) 
provide the Secretary with authority to enforce these and other 
requirements. We do not believe that it is necessary to specify more 
specific sanctions for non-reporting or delayed reporting within the 
rule.
    We are working closely with States to develop and implement data 
tracking and reporting systems. SCHIP reporting may involve creating 
new systems or adjusting existing systems to collect data which can 
then be reported to DHHS and we recognize that the reporting changes 
required in this final rule may require further changes to these 
systems. We will work with the States to accommodate individual needs 
for technical assistance during the transition.
    In the past, some States have had difficulty reporting data to us 
in a timely matter due to systems constraints. However, we anticipate 
that many of these difficulties will be resolved in the near future. We 
recently implemented a new, more easily accessible web-based data 
reporting system (the Statistical Enrollment Data System (SEDS)) that 
all States can access through the Internet, rather than through the 
main frame system. We have also revised the reporting instructions to 
clarify definitions in a way that will be more clear for States and 
provide for more standardized reporting among the States. We released 
these new instructions with a letter to State Health Officials on 
September 13, 2000. In addition, we are continuing a comprehensive 
evaluation of possible modifications to the Medicaid Statistical 
Information System (MSIS), which captures State eligibility and claims 
records on a person-level 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. We look forward 
to working with States to further improve the time lines and quality of 
required SCHIP data. In addition, we have added a new reporting line to 
the quarterly reports where States indicate a ``point in time'' 
enrollment count that indicates enrollment as of the last day of the 
quarter for their SCHIP and title XIX Medicaid programs. This count is 
something the States already have available for their own purposes and 
helps provide a more complete picture of States' programs on an ongoing 
basis.
    Comment: We received several comments requesting that HCFA require 
States to collect data pertaining to one or more of the following 
categories of information about enrollees and their SCHIP coverage: 
gender, ethnicity, race, primary language, English proficiency, age, 
service delivery system, family income, and geographic location. 
Certain commenters suggested that this data be collected and reported 
to HCFA in the State evaluations, annual reports, and/or quarterly 
statistical reports. These commenters felt this information would help 
target outreach, retention, enrollment, and service efforts to under-
represented groups. These commenters also indicated that such reporting 
requirements are consistent with the goals of Healthy People 2010 and 
recently enacted legislation directing the Secretary of Commerce to 
produce statistically reliable annual State data on the number of 
uninsured, low-income children categorized by race, ethnicity, age, and 
income. One commenter indicated that HCFA should require States to 
document the appropriate range of services and networks of providers 
available, given the various language groups represented by enrollees. 
Additionally, some commenters noted that HCFA should require States to 
provide an assessment of their compliance with civil rights 
requirements.
    Response: We agree with several of the comments summarized above. 
Section 2107(b)(1) of the Act requires that ``a State child health plan 
shall include 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 the Secretary may require in order 
to enable the Secretary to monitor State program administration and 
compliance and to evaluate and compare the effectiveness of State 
plans.'' The proposed rule at Sec. 457.740(a) had included requirements 
on States to collect and submit data by age categories, service 
delivery categories and by countable income. In an effort to streamline 
data reporting requirements, we had only encouraged States to collect 
data with respect to gender, race and ethnicity, and did not propose to 
require the collection or the reporting to HCFA of such data. We 
received many comments expressing concern about this policy and urging 
us to require States to report data on gender, race, ethnicity and 
primary language of SCHIP enrollees to HCFA.
    We have reviewed our proposed policy and have decided that it is 
consistent with overall program goals, as well as the civil rights 
requirements, to require States to report data, on a quarterly basis, 
on the race, ethnicity, and gender of SCHIP enrollees using the format 
prescribed by the OMB Statistical Directive 15--Standards for the 
Maintaining, Collecting and Presenting Data on Race and Ethnicity. We 
have therefore amended Sec. 457.740(a)(2) to reflect this requirement. 
Because primary language of SCHIP enrollees is not one of the data 
elements on standardized reporting formats, we will require States to 
report on this information as part of the Annual Report, and have 
amended Sec. 457.750(b)(8) to reflect this change. We understand that 
nearly all States have already been collecting this information through 
the application process. Although States may request information on 
gender, race, ethnicity and primary language at the time of 
application, States may not require families to report this data as a 
condition of application to, or enrollment in the SCHIP program. The 
information must be collected from SCHIP applicants and enrollees on a 
voluntary basis. Having this data will enable States and the Department 
to see how and if minority children and other categories of children 
are being covered by the SCHIP program and to identify opportunities 
for more effective outreach and retention strategies.
    Furthermore, required reporting of this data is consistent with 
Departmental priorities to more effectively identify racial disparities 
in the provision of health care and to assure that language barriers do 
not interfere with children's ability to secure health care. HCFA will 
modify its data base to permit States to report these data on the same 
system as they report enrollment data. We understand States may incur 
additional administrative costs to comply with this requirement. 
However, the potential benefits for the States and for the Department 
are significant.
    Comment: Commenters asserted that neither the State nor the health 
insurance purchasing cooperative has the legal authority to require 
employer-sponsored insurance carriers to report claims data. Therefore, 
commenters noted, States with premium assistance programs would have 
difficulty reporting program expenditures and participants by age, 
income, delivery system, and program type as required by HCFA.
    Response: Since States or their contractors would be completing the 
eligibility process for children enrolling through premium assistance 
programs, States would have data available on the child's age, family 
income, the type of child health insurance program offered by the 
State, and the expenditures being made on behalf of the child. We are 
not requesting individual claims data used by group health plans 
providing SCHIP

[[Page 2596]]

coverage. Service delivery systems could be ascertained by the State by 
reviewing the benefit package available through each employer. This 
might present difficulties if an employer had several options with 
varying delivery systems available at the same cost to the State. 
Should this be the case, we would work with States on a case-by-case 
basis to consider other options for collecting this data.
    Comment: One commenter noted that the collection report Form HCFA-
64, revised in December 1998, requires additional information that is 
not reflected in Sec. 457.740, including number of months enrolled, and 
the number disenrolled per quarter. Several commenters suggested that 
HCFA require States to report this data to HCFA on a quarterly basis.
    Response: In Sec. 457.740, we did not intend to specify each data 
element that we will be requiring, because we wanted to be able to 
review and modify specific elements as the program evolves. We have 
authority under section 2107(b)(1) to specify at Sec. 457.720, that 
States must provide data ``at the times and in the standardized format 
* * *'' to enable the Secretary to monitor State program administration 
and compliance and to evaluate and compare the effectiveness of State 
plans under title XXI. This includes the number of months enrolled and 
number disenrolled per quarter.
    The forms referenced by the commenter are quarterly reports used by 
State Medicaid agencies to report to HCFA their actual Medicaid 
expenditures and the numbers of SCHIP children and other children being 
served in the Medicaid program. HCFA uses these forms to ensure that 
the appropriate level of Federal payments for the State's Medicaid 
expansion program expenditures, and to track, monitor and evaluate the 
numbers of SCHIP children being served by the Medicaid expansion 
program. HCFA uses a similar quarterly reporting form, the HCFA-21, to 
collect comparable information on separate child health programs.
    Comment: One commenter noted that the collection of data to measure 
the effectiveness of SCHIP should include the number and types of 
services actually delivered in addition to the number of children 
enrolled. This commenter suggested that we revise the regulations to 
specify that data can be collected and reported by the State using 
American Dental Association procedure codes to reflect total number of 
actual services rendered to eligible individuals.
    Response: We agree States should consider utilization measures in 
developing Statewide performance measures of progress toward meeting 
State performance goals and strategic objectives. We also envision that 
States may want to measure care and service delivery so that they may 
determine numbers of participating providers and health networks needed 
for the program. The regulation provides States with flexibility in 
developing these measures and appropriate data collection 
methodologies.
    As the Department works on developing and implementing a common 
core of standardized performance measures and performance goals, we 
will consider the outcome measures suggested by the commenter.
    Comment: One commenter generally supported the quarterly reporting 
requirements but requested one additional required report measure. 
Specifically, the commenter urged HCFA to require reporting (either 
annually or quarterly) on the number of newborns who are enrolled at 
birth and the number of infants who are enrolled within the first three 
months of life. The commenter believed this information could be used 
by States to assess whether income-eligible newborns are experiencing 
gaps in coverage between the time of birth and SCHIP enrollment.
    Response: We strongly encourage the States to collect the required 
information on age of participants in such a way that they may analyze 
the health coverage patterns of newborns and infants. We have not 
required States to report this information to HCFA. However, we will 
consider the commenter's suggestion as we develop the national core set 
of performance measures and goals.
    Comment: One commenter urged HCFA to require States to describe 
their income calculation methodologies and changes in those 
methodologies and to make that information available to the public.
    Response: We agree with the commenter's suggestion and note that 
income calculation methodologies and changes to these methodologies 
were requested to be provided by States as part of their State 
evaluations (due to HCFA on March 31, 2000). Because of the importance 
of having this information in a standardized manner, as well as keeping 
the information current, we have included this as an element of 
subsequent State annual reports. We have compiled and reviewed the 
submissions from the States thus far, and the information is available 
to the public along with the rest of the States' evaluations on the 
HCFA web site.
    In addition, we discussed in our July 31, 2000 guidance on SCHIP 
section 1115 demonstrations that in order to receive approval for a 
demonstration proposal, States must have submitted all of their 
required statistical reports and evaluations to HCFA, dating back to 
the implementation of their program.
    Comment: One commenter found the detailed reporting requirements 
problematic, cumbersome, and difficult to comply with under current 
automated systems.
    Response: We recognize the commenter's concerns. However, we will 
continue to require the collection and quarterly reporting to HCFA of 
the data required in this section. We will continue to offer technical 
assistance to States having difficulty reporting the required data due 
to automated system difficulties. As noted previously, States are able 
to report data to HCFA through a web-based reporting system on the 
Internet, to provide States with easier access to the reporting system. 
In addition, we have developed a set of revised reporting instructions 
to facilitate reporting by States in a standardized format. We believe 
these modifications will result in a reporting system with which States 
can comply with minimal difficulties.
    In addition, we are continuing a comprehensive evaluation of 
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 data related to separate child health programs as well 
as Medicaid expansion programs and will promote overall consistency 
among SCHIP and Medicaid data in the long term.
    Comment: We received several comments applauding our recognition of 
the interrelationship of Medicaid and SCHIP and the requirement of 
similar reporting for regular Medicaid, Medicaid expansion, and 
separate child health programs. However, one commenter opposed the 
requirement that all States, including those operating separate child 
health insurance programs, report changes in enrollment in both the 
SCHIP program and the Medicaid program. The commenter noted that some 
States operate separate child health programs that are administered by 
different staff, governing boards, budgets, etc. than the State 
Medicaid program. The commenter opposed a requirement that a separately 
administered SCHIP program have a contractual requirement

[[Page 2597]]

to obtain data from a Medicaid agency. The commenter stated that if 
HCFA wished to review Medicaid data, it should develop new Medicaid 
regulations to require such data and to provide reimbursement to the 
Medicaid agency as the SCHIP program has no budget or legal authority 
to collect Medicaid data. The commenter added that additional 
administrative requirements from HCFA should be accompanied by 
additional administrative dollars, or they represent unfunded mandates 
that exacerbate the 10 percent administrative-cost limit problem.
    Response: The statute anticipates that State agencies implementing 
SCHIP and Medicaid will coordinate activities and share information. 
Section 2108(b)(1)(C) of the Act requires States to report on or before 
March 31, 2000 ``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.'' In addition, section 2108(b)(1)(D) specifically requires 
States to report on coordination with other public and private programs 
providing health care and health financing, including Medicaid 
programs. Furthermore, these requirements are not specific to the State 
agency administering SCHIP or Medicaid, but rather apply to the State 
as a condition of receiving grant funding under these programs, 
regardless of how the State internally delegates responsibilities under 
these programs.
    In addition, section 2107(b)(1) of the Act requires that the State 
plan contain certain assurances regarding the collection of data and 
submission of reports to the Secretary. In addition, Sec. 431.16 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 and regulatory provisions serve as our 
authority for requiring Medicaid State expenditure and statistical 
reporting at Sec. 457.740. State agencies can reasonably be expected, 
as directed in the statute, to coordinate among programs, including by 
sharing and reporting information.
    Since Medicaid agencies receive Federal financial participation 
under title XIX for administrative costs, such as those associated with 
data collection, sharing this information with the States' title XXI 
programs should not exacerbate any difficulty States may have in 
staying within the 10 percent administrative cost limit in SCHIP.

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 proposed to 
implement the statutory provision requiring assessment of the program 
and submission of an annual report at Sec. 457.750(a).
    At proposed Sec. 457.750(b), we set forth the 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 proposed to require that the State report on: (1) progress made in 
meeting other strategic objectives and performance goals identified by 
the State; (2) successes in program design and implementation of the 
State plan; and (3) barriers in program design and implementation and 
the approaches under consideration to overcome these barriers. We also 
proposed to require that the State report on the effectiveness of its 
policies for discouraging the substitution of public coverage for 
private coverage. Further, we proposed to require that the annual 
report discuss the State's progress in addressing any specific issues, 
such as outreach, that it agreed to monitor and assess in its State 
plan.
    In accordance with section 2107(d) of the Act, we also proposed 
that a State must provide the current fiscal year budget update, 
including details on the planned use of funds for a three-year period 
and any changes in the sources of the non-Federal share of plan 
expenditures. We also proposed 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 proposed 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 annual estimates, using the chosen 
methodology, of the 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 SCHIP program. We noted in the 
preamble to the proposed rule that, in making these estimates, a State 
would not be required to use the same methodology that it used in 
identifying the estimated number of SCHIP eligibles in the State plan.
    We proposed to require that a State base the annual baseline 
estimates on data from either: (1) The March supplement to the Current 
Population Survey (CPS); (2) a State-specific survey; (3) other 
statistically adjusted CPS data; or (4) other appropriate data. We also 
proposed 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 the March supplement to the CPS. We indicated in 
the preamble to the proposed rule 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 also noted therein that traditionally, most national 
estimates of uninsured children have been based on the Bureau of Census 
March Current Population Survey (CPS). We further noted in the preamble 
that, as the only data source with the capacity to generate State-by-
State estimates of uninsured children, the CPS generally is relied upon 
by policy makers to provide an overall estimate of insurance status and 
insurance trends in the nation. We also mentioned other major surveys 
that provide insight into the number of uninsured Americans.
    Comment: One commenter recommended that we require annual reports 
to contain reasonable utilization measures indicating quality and 
access to care for children with special needs in addition to the 
general child population. The commenter believed that the Secretary 
should conduct a focused study of children with special needs. Another 
commenter noted that States providing dental benefits should report 
annually on the assistance provided to recipients in accessing needed 
services.
    Response: We are very concerned about services for special needs 
children, and we agree with the commenters that quality and access are 
important both with respect to special needs and dental benefits and 
States are encouraged to address these important

[[Page 2598]]

areas in their annual reports. However, requiring such reporting would 
be inconsistent with the flexibility permitted under the statute. At 
Sec. 457.495(b) of this final rule, we require States to provide 
assurances of appropriate and timely procedures to monitor and treat 
enrollees with chronic, complex or serious medical conditions, 
including access to specialists experienced in treating the specific 
medical condition. We leave it to the States to determine what systems 
and procedures they will implement to ensure enrollees with such 
conditions have access to quality care consistent with this standard.
    In order for States to create systems which fit their unique 
programs, the methodology for complying with Sec. 457.495 is best left 
to the State. Reporting on access to dental benefits is subsumed under 
Sec. 457.495(a), which requires States to include in their plans a 
description for assuring the quality and appropriateness of care 
provided under the plan including access to covered services listed in 
Sec. 457.402(a). Dental services is one of the optional services States 
may cover under the definition of child health assistance located at 
Sec. 457.402(a)(16). To the extent that States cover dental services in 
their SCHIP plans, they must assure access to those services. 
Therefore, we have not adopted the commenter's suggestion to add a 
separate requirement regarding dental services.
    Comment: One commenter asserted that HCFA exceeds its authority in 
the annual report requirements at Sec. 457.750(c) that requires States 
to provide a rationale and description of the methodology used to 
establish the baseline estimate, if the estimate is based on a source 
other than the CPS. The commenter contended that the purpose of the 
annual report is for States to assess the operation of their programs. 
The commenter also argued that HCFA lacked authority to compel States 
to adopt the CPS standard. The commenter referred to section 2108 of 
the Act, which provides that the State shall assess its performance and 
submit that assessment to the Secretary. The commenter noted that 
providing a rationale for a methodology made States take additional 
steps that were not prescribed by the statute. In requiring this 
rationale, the commenter suggested HCFA came perilously close to 
dictating the CPS standard, which violates the express terms of title 
XXI and Executive Order 13132, regarding Federalism. The commenter 
indicated that under Executive Order 13132, HCFA is required to justify 
the imposition of any national standard and to look for less burdensome 
alternatives. The commenter expressed the view that the proposed rule 
improperly shifts the burden of justifying standards used to evaluate 
programs from HCFA to the States.
    Response: Section 2107(b)(1) of the Act expressly gives the 
Secretary the authority to require data collection, records 
maintenance, and reports from the States ``at the times and in the 
standardized format the Secretary may require in order to enable the 
Secretary to monitor State program administration and to evaluate and 
compare the effectiveness of State plans.'' In order to effectively 
monitor State program effectiveness in reducing the number of uninsured 
children, the method of detecting the numbers of uninsured in States 
and the decline or increase in the uninsured must be known and 
understood in a standardized manner when possible. The statute uses CPS 
for formula allocating, so it was suggested as the best available 
source for State uninsurance levels among low-income children. Most 
States elected to use the CPS in establishing their initial baselines. 
However, we recognize the shortcomings of CPS for many States and have 
therefore provided flexibility to use other sources, both initially and 
prospectively. The requirement that States explain their alternative 
methodology is necessary and appropriate in order for HCFA to be able 
to identify and assess the data provided by States. In addition, we 
have further clarified that if States elect to use a different data 
source in re-establishing a baseline, the State must also note in the 
annual report the CPS estimate for that year, both as a means of 
providing standardized information across States, using a consistent 
baseline and to ensure that States are given credit for progress in 
enrolling children back to the beginning of their programs.
    Comment: One commenter requested that HCFA allow States to use 
biennial State survey figures in assessing changes in uninsurance 
rather than the annual figures from the CPS. The commenter noted that 
the CPS data is unreliable for its State and administering an annual 
survey would be cost-prohibitive for some States.
    Response: Section 457.750(c)(1)(ii) provides that a State may base 
its estimate of the number of uninsured, low-income children from a 
State-specific survey. Thus, States may use biennial data from State 
surveys, utilizing statistically relevant adjustments in the off-survey 
year or by supplementing the biennial data with additional State-
specific data from other sources to fulfill the annual reporting 
requirements of this section. We note that, as stated in the previous 
response, States will be required to provide a description of the 
methodology and rationale for using the State-specific survey, in 
accordance with Sec. 457.750(c)(2).
    Comment: One commenter urged HCFA to revise the proposed rule to 
reflect provisions of the Balanced Budget Refinement Act of 1999 
(BBRA), which require that the March Supplement of the CPS be expanded 
to allow State-level estimates of the number of uninsured children. The 
commenter believed that using these updated estimates would be 
preferable to allowing States to establish their own methodologies for 
estimating the number of uninsured children.
    Response: We note that provisions of section 703(b) of BBRA amended 
Section 2109 of the Act to modify the March Supplement of the CPS to 
detect real changes in uninsurance rates of children. The BBRA requires 
future modifications to the Current Population Survey in order to 
produce statistically reliable annual State-level data on the number of 
low-income children without health insurance coverage. One modification 
to the CPS is to include data on children by family income, age, and 
race, and ethnicity. Adjustments to be made include expanding sampling 
size used in State sampling units and expanding the number of sampling 
units in a State. Therefore, with the creation of this requirement, 
Congress sought to help provide all States with access to more reliable 
State-level data on the uninsured population through the CPS March 
Supplement. We have not modified the regulation text to reflect this 
change, as this data is not expected to be available until October or 
November 2001. We wanted to leave the regulation text open to future 
improvements to the CPS or other data sources. Even with the CPS 
adjustments, there are States that believe they can provide more 
accurate estimates of the level of uninsured children in their State 
with methodologies that use other data sources or sources that 
supplement the CPS data. We believe it is important to allow States 
this flexibility in developing the most reliable estimate for their 
State.
    Comment: One commenter supported the required collection of 
information in the annual report, and recommended we require States to 
also report on the following information in the annual reports:

--Progress in addressing the barriers to access experienced by minority 
children;

[[Page 2599]]

--Grievances, complaints of problems reported relating to enrollment, 
access, and quality of care as a means of measuring consumer 
satisfaction, ensuring they are adequate to resolve complaints within a 
reasonable time frame and that plans use grievance and complaint data 
to improve quality;
--Cultural competency measures;
--Continuity of care between plans, providers, or programs;
--Special attention to under-served or under-identified populations 
(for example, homeless children);
--Systematic integration with schools and other community groups;
--Whether primary care and pediatric specialty care capacity is 
adequate for the number of enrollees;
--Whether plans meet standards for access within reasonable time 
frames;
--Whether care is in accordance with clinical practice guidelines for 
quality of care; and
--The proportion of providers who are both Medicaid and separate SCHIP 
providers among those serving Medicaid and separate SCHIP 
beneficiaries, and the difference in payment rates to plans or 
providers in Medicaid and separate SCHIP programs.
--Estimates of the number of uninsured children under the regular 
Medicaid income thresholds as well as those under the 200 percent FPL 
and under the State's SCHIP income threshold;
--Data on the method of application for Medicaid and SCHIP (mail-in, 
outstation-site, Internet, etc.) and enrollment procedures for each 
program;
--Data on the portion of applicants denied and reason for denial;
--Number of children disenrolled for any reason, the reason for 
disenrollment, and the number of children disenrolled for nonpayment of 
premiums;
--Number of children continuously enrolled in Medicaid and/or separate 
SCHIP program for one year or more;
--Number of children identified by screening as Medicaid eligible and, 
of those, the number enrolled in Medicaid;
--Number of former Medicaid recipients enrolled in separate SCHIP;
--Data on the number of applicants denied eligibility and the reason 
for the denial, including that they were disqualified due to current 
insurance coverage as well as the number of children disqualified due 
to insurance coverage in a past period, where applicable;
--Number of children who lose coverage at redetermination and the 
reason for loss of coverage; and
--Data comparing the proportion of children enrolled and using services 
by gender, race, ethnicity, and primary language to the proportion of 
such children in the service area.

    Response: As noted earlier, HCFA participated in a workgroup led by 
the National Academy of State Health Policy to develop a template for 
States' annual reports that have provided an opportunity for States to 
report the information required in Sec. 457.750 in a standardized way. 
NASHP released this template to the States and the public in November 
2000 for States to use in completing their annual reports for FY 2000. 
In addition to budget and expenditure data, this will include 
information from States on their progress in reducing the number of 
uninsured low-income children, meeting strategic goals and performance 
measures, the effectiveness of States' policies for preventing 
substitution of coverage, and identifying successes and barriers in the 
States' plan design. In addition, the reports provide a forum for 
evaluating States' progress in addressing specific issues (such as 
outreach) and the primary language of SCHIP enrollees. We will work 
with NASHP to include these elements in a revised version of the annual 
report framework upon publication of this final rule. States will not 
be expected to address these new elements until they submit their FY 
2001 reports. In addition, because the information can be more 
appropriately displayed in the annual report than in the quarterly 
reports, we have added a new Sec. 457.750(b)(7) to require States to 
provide information on primary language of SCHIP enrollees in their 
annual reports. HCFA will continue to closely review the data collected 
and reported by the States in their annual reports.
    We note that many of these assessment elements were provided by 
States in their State evaluations. Specifically, as part of the 
evaluation, States were required, as specified in section 2108(b)(1) of 
the Act and laid out in the NASHP evaluation framework, to provide 
information on baseline numbers of uninsured low-income children in the 
State by income level; levels of previous insurance coverage for 
applicants and enrollees; and quarterly enrollment statistics 
including: number of children ever enrolled; new enrollment; number of 
member months enrolled; average months enrolled; disenrollment 
including the reasons for disenrollment; unduplicated count of 
enrollment; and enrollee characteristics, such as income. Many States 
provided additional information on enrollees' gender, race and 
ethnicity in the reports. The annual report template is not as 
extensive as the evaluation template, but many of the same elements are 
included. Therefore, States will have the ability to indicate in 
subsequent annual reports that no update is needed since the 
evaluations were submitted.
    Finally, it should be noted that, as we work toward developing and 
implementing a national core set of performance measures and goals, we 
will consider the performance goals suggested by the commenters.
    Comment: One commenter noted that the preamble to proposed 
Sec. 457.750(c)(1) was unclear as to whether the program referred to in 
the phrase ``upper eligibility level of the State's program'' is 
Medicaid or SCHIP.
    Response: The requirements of subpart G of the regulations 
regarding strategic planning, reporting, and evaluation apply to 
separate child health programs and Medicaid expansion programs. Thus, 
in Sec. 457.750(c)(1), we are referring to the upper eligibility level 
of the State's SCHIP program, which would be the upper eligibility 
level of either a Medicaid expansion or a separate child health 
program. If a State operates a combination program, the upper 
eligibility level would be the highest eligibility level of either the 
Medicaid expansion or the separate program.
    Comment: One commenter recommended that specific measures be 
defined either for all SCHIP programs or separately for employer-
sponsored insurance model programs based on HEDIS or Healthy People 
2000 guidelines, to ensure that all States report similar guidelines 
and that common agreements could be used across States. Given that some 
States plan to use an employer-sponsored insurance model for coverage, 
the commenter suggested that HEDIS measures would seem the most 
appropriate approach on which to base data collection and reporting 
systems. For States using an employer-sponsored insurance model, 
contracts or agreements between the State and carriers would be needed 
for collection and data provision, this commenter stated. In this 
commenter's view, States would have to create specific data collection 
and reporting mechanisms to do this.
    Response: The regulations do not require States, including States 
with premium assistance programs, to collect data on specifically 
defined measures, except with respect to any core set of performance 
measures that may be developed by the Secretary at a later

[[Page 2600]]

date. We encourage States to work with health plans, HCFA, and each 
other to create standards that meet their mutual needs for data. We 
particularly encourage States using premium assistance program models 
for SCHIP to explore effective methods of data collection, but 
recognize that data collection will present particular challenges to 
these types of programs because the State may not have direct 
contractual relationships with employer group health plans or with 
health insurance issuers offering group health insurance coverage. 
States may need to explore alternative methods of data collection for 
premium assistance programs, such as consumer surveys and polling.
    Comment: One commenter expressed concern that the requirement at 
Sec. 457.750(b)(5) stating that the annual report must include an 
updated budget is unnecessary and duplicative of other ongoing 
requirements, including the HCFA form 37, ``Medicaid Program Budget 
Report--State Estimate of Quarterly Grant Award.''
    Response: The requirement for updated budgets in the annual report 
is necessary for the sound administration of SCHIP. Annual reporting of 
updated budgeting with three-year projections, including changes in 
sources of non-Federal funding and details on the planned uses of all 
funds, is essential to sound financial management of this program. 
Annual updated reports are also essential to HCFA as it monitors and 
anticipates the financial needs of States implementing SCHIP programs. 
Because States have up to three years to spend each annual allotment, a 
three-year budget is useful to show if States are planning to use their 
unused allotments in the succeeding two fiscal years or if they 
anticipate a shortfall in Federal funding. Therefore, we have decided 
to retain this requirement for a three-year budget in the final 
regulation. However, we are no longer requiring a three-year budget 
with all amendments. Instead, we have limited the requirements at 
Sec. 457.80 to a one-year budget only with amendments that have a 
significant budgetary impact. A more detailed discussion of this issue 
can be found in the comments and responses to Sec. 457.80.
    Comment: One commenter noted that in Sec. 457.750(b)(5) of the 
proposed rule, States are required to include in the annual report an 
updated budget for the current Federal fiscal year. The commenter 
states that HCFA did not take into account the State appropriations 
process and the fiscal year used by the State as opposed to the Federal 
fiscal year. For example, Illinois has a July-June fiscal year, with 
the legislature appropriating funds for the final Federal quarter 
(July-September) in May. Therefore, the commenter noted, the last 
quarter in the SCHIP annual report will be an estimate. The commenter 
believed that the regulations regarding the annual report should be 
revised to permit States to estimate budgets for the final Federal 
quarter.
    Response: We have modified Sec. 457.750(b)(5) as proposed. Instead 
of requiring an annual budget for the current fiscal year, we now 
require an annual updated budget for a three-year period. We realize 
that the three-year budgets States are required to submit annually in 
fulfilling the requirements of Sec. 457.750(b)(5) are based on 
projections and may vary from actual expenditures for a variety of 
reasons. However, we believe it is important to have this information 
to ensure that States have adequately planned for the program and to 
analyze spending allotments.

7. State Evaluations (Sec. 457.760)

    In proposed Sec. 457.760 we set forth 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 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 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 SCHIP 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 SCHIP program.
    Comment: One commenter indicated that the State evaluation 
requirements should be less prescriptive and require an analysis of the 
effectiveness of elements the State may include rather than requiring 
an analysis of all eight elements listed at Sec. 457.760(c). The 
commenter asserted that such policy would allow States to identify and 
address areas relevant to their own State plans. The commenter 
suggested that we revise this section to provide that ``a description 
and analysis of elements of the State plan may include:'' the elements 
in paragraph (c) of this section.

[[Page 2601]]

    Response: States were statutorily required to report on the 
progress of the elements set forth in Sec. 457.760(c) in the State 
evaluation, due to HCFA on March 31, 2000, and we modeled the proposed 
regulation text after the statute. Section 2108(b) of the Act specifies 
the contents of the State evaluation. HCFA therefore does not have 
discretion to make these requirements optional for States. In addition, 
because all the States have submitted the required evaluation, we have 
removed this provision from the final rule. Any request for future 
evaluations will be based upon the requirements in the statute for 
evaluations and annual reports on the program.
    Comment: We received several comments expressing appreciation that 
the guidance set forth in the preamble to the proposed rule regarding 
the evaluation closely followed the evaluation framework developed by 
NASHP and the State workgroup. However, several commenters asserted 
that the information provided in State evaluations should not be used 
to establish model programs and practices. Rather, they noted, States 
should be given the freedom to design programs that best suit the needs 
of their population and circumstances, and information provided in the 
evaluation should focus on how the States have used the flexibility 
allowed by the program to create unique and successful plans.
    Response: We are using the evaluations to identify model practices. 
We believe that the identification of model practices should not 
involve comparing unlike programs or overlooking the unique 
circumstances of each State. Many States have been eager to learn about 
other State practices. We envision model practices as a means of 
sharing information with States and other interested parties on how 
other States have successfully implemented certain parts of their 
program. We develop model practices not as a means of judging or 
evaluating programs, but rather as a means of sharing those practices 
that have proven successful for one State so that other States may 
determine the merit of adopting similar practices in their own SCHIP 
implementation.
    Comment: One commenter recommended that we require States to report 
on the provision of services as well as the participation rates of 
pediatricians and other child health care providers in the program. 
Additionally, the commenter recommended that we require States to 
report the average cost-sharing requirements for families who choose to 
enroll in SCHIP rather than employer-provided coverage. The commenter 
believed that we should also require States to include an evaluation of 
the impact States' efforts to minimize substitution have had on 
children with special health care needs and their access to services. 
The commenter believed that HCFA should also require States to include 
evaluations of their screen and enroll processes.
    Response: We do not agree with the commenter's suggestion. The 
evaluation template developed by the National Academy for State Health 
Policy reflects those elements specified in section 2108(b)(1)(B) of 
the Act. To this extent, it did include assessment questions on the 
State's cost sharing and its effects on participants as well as 
questions regarding the State's screen and enroll process and its 
substitution policies and results of monitoring rates of substitution. 
We have further included a provision at Sec. 457.353 that specifically 
requires States to monitor and evaluate the effectiveness of the 
screening process. The regulatory requirements are consistent with the 
statute. In some cases, States included additional data or other 
information such as the data suggested by the commenter, in their SCHIP 
evaluations as additional measures of their progress toward strategic 
objectives of that State.
    Comment: One commenter supported the proposed categories of 
evaluation, but requesting that we require more frequent reporting and 
evaluation.
    Response: Section 2108(b) of the Act, as implemented in 
Sec. 457.760, required States to submit evaluations by March 31, 2000. 
We believe the information States will be providing through the 
quarterly and annual reports required by Sec. 457.740 and Sec. 457.750 
respectively, will be sufficient to allow ongoing assessments of 
States' SCHIP programs, making more frequent reporting and formal 
evaluations unnecessary and overly burdensome on States. The statute 
did not include a subsequent requirement for an annual evaluation and 
we have, therefore, removed this provision from the final rule.
    Comment: One commenter recommended that HCFA clarify 
Sec. 457.750(c)(1) by replacing the phrase ``coverage by other health 
insurance prior to the State plan'' with ``coverage by other health 
insurance prior to coverage under the State plan.''
    Response: Because we have deleted this provision from the final 
rule, we have not adopted the commenter's suggestion.
    Comment: One commenter recommended that HCFA encourage States to 
build on existing data collection efforts and systems, including State 
title V efforts, in developing overall SCHIP evaluation efforts and in 
collection of data.
    Response: We encourage States to build on existing databases and 
title V efforts, as well as public-private partnerships in order to 
facilitate the development and implementation of information tracking 
systems and SCHIP program evaluation efforts.

G. Subpart H--Substitution of Coverage

1. Basis, Scope, and Applicability (Sec. 457.800)

    Title XXI requires that States ensure that coverage provided under 
SCHIP 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. Another provision in 
title XXI relating to substitution of coverage is section 
2105(c)(3)(B), which sets out the conditions for a waiver for the 
purchase of family coverage as described in 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 several provisions aimed at 
preventing SCHIP from substituting for current Medicaid coverage. 
First, sections 2102(a)(2) and 2102(c)(2) of the Act requires States to 
describe procedures used to coordinate their SCHIP 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, section 1905(u)(2)(b) of 
the Act also provides that a State that chooses to create a Medicaid 
expansion program is not eligible for enhanced matching for a separate 
coverage provided to children who would have been eligible for Medicaid 
in the State under the Medicaid standards in effect on March 31, 1997. 
Finally, section 2102(b)(3)(B) of the Act requires that any child who 
applies for a separate child health program 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 coverage

[[Page 2602]]

under group health plans and sets forth State plan requirements 
relating to substitution of coverage in general and specific 
requirements relating to substitution of coverage under premium 
assistance programs. These requirements apply only to separate child 
health programs.
    Comment: Many commenters questioned the magnitude of the risk for 
substitution of private group health plan coverage by SCHIP coverage 
for children. Because the size of the risk of substitution by SCHIP 
coverage offered under both employer-sponsored insurance programs and 
non-employer-sponsored insurance programs is unclear, and because of 
the harm that substitution prevention policies may inflict, the 
commenters encouraged HCFA not to put forth a policy to prevent 
substitution that goes beyond what is clearly required by the statute. 
Many commenters also recommended that we revisit our policy on 
substitution because of their concern that waiting periods and other 
substitution prevention policies are causing significant harm to 
families with children with special health care needs and argued that 
such families can ill afford to go without coverage for any period of 
time.
    Response: We have revisited our policy on substitution and made 
several changes. With respect to substitution policies outside of the 
context of premium assistance programs, we note that the proposed 
regulatory text at Sec. 457.805 requires only that the State plan 
include reasonable procedures to prevent substitution. This approach 
permits State flexibility and implementation of policies based on the 
emerging research regarding substitution and on State experiences with 
substitution.
    Our review of States' March 31, 2000 evaluations indicated that in 
those States with data on substitution of private coverage with SCHIP 
coverage, there was little evidence that substitution was as great an 
issue as initially anticipated.
    Thus, we have revised the policy stated in the preamble to the NPRM 
regarding substitution procedures relating to SCHIP coverage provided 
outside of programs that offer premium assistance for coverage under 
group health plans as follows: States that provide coverage to children 
in families with incomes at or below 200 percent of FPL must have 
procedures to monitor the extent of substitution of SCHIP coverage for 
existing private group health coverage, as was the policy for such 
coverage provided to families under 150 percent of FPL proposed in the 
preamble to the NPRM.
    States that provide coverage to children in families with incomes 
over 200 percent of FPL should, at a minimum, have procedures to 
evaluate the incidence of substitution of SCHIP coverage for existing 
private group health coverage. In addition, States offering coverage to 
children in families over 200 percent of FPL must identify in their 
State plans specific strategies to limit substitution if monitoring 
efforts show unacceptable levels of substitution. States must determine 
a specific trigger point at which a substitution prevention mechanism 
would be instituted, as described in the State plan. For coverage above 
250 percent of the FPL, because evidence shows that there is a greater 
likelihood of substitution at higher income levels, States must have 
substitution prevention strategies in place, in addition to monitoring.
    Although a period of uninsurance is one possible substitution 
prevention procedure, we invite States to propose other effective 
strategies to limit substitution. States may submit amendments to their 
State plans if they would like to modify their current policies in 
light of the policies discussed here. We plan to work closely with each 
State to develop appropriate substitution strategies, monitoring tools, 
and trigger mechanisms.
    For premium assistance programs, we have revised our substitution 
policy in this final rule in two areas. We have eliminated the 
requirement for a 60 percent minimum employer contribution. We will no 
longer mandate a specific level of contribution, since a substantial 
employer contribution must be made in order for coverage subsidized 
through employer plans to be cost-effective, as required under 
Sec. 457.810. States will be expected to identify a reasonable minimum 
employer contribution level and provide justification for that level, 
including data and other supporting evidence, that will be reviewed in 
the context of the State plan amendment process. In addition, as 
proposed in the NPRM, States with premium assistance programs must 
monitor employer contribution levels over time to determine whether 
substitution is occurring and report their findings in their State 
annual reports.
    The identification of the minimum employer contribution and the 
monitoring process will help ensure that SCHIP funds are being used to 
supplement the cost of employer-sponsored insurance, not supplant the 
employers' share of the cost of coverage. While these revisions are 
intended to provide additional State flexibility to develop premium 
assistance programs and provide coverage to families, it is important 
to note that the cost-effectiveness test established by title XXI and 
set forth in Sec. 457.810 must be met in all cases.
    The second change we are making relates to the required waiting 
period of uninsurance. We have retained the requirement for a minimum 
6-month period without group health coverage, but will permit 
exceptions to the waiting period, as discussed in more detail in the 
comments and responses to section Sec. 457.810.

2. State Plan Requirements: Private Coverage Substitution 
(Sec. 457.805)

    The potential for substitution of SCHIP coverage for private group 
health plan coverage exists because SCHIP coverage may cost less or 
provide 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 reduced or eliminated their 
contributions for such coverage and encouraged their employees to 
enroll their children in SCHIP. At the same time, families that make 
significant contributions towards dependent group health plan coverage 
could have an incentive to drop that coverage and enroll their children 
in SCHIP 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 proposed 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 State plan does not substitute for coverage under group 
health plans.
    We opted not to propose specific procedures to limit substitution. 
Instead, we discussed in detail reasonable procedures that States may 
use to prevent substitution of coverage. Specifically, we stated in the 
preamble to the NPRM that we would consider the following to be 
reasonable procedures for addressing the potential for 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.
     States that provide coverage to children in families 
between 150 and

[[Page 2603]]

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.
     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 noted that we would ask States to assess the procedures to limit 
substitution in their evaluations submitted in March of 2000. We also 
asked all States that specified in their plans that they would monitor 
substitution to submit information on substitution in their annual 
reports.
    We also addressed the issue of 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 pursuant to section 4911 of the BBA. In the NPRM we clarified that 
States may not apply eligibility-related substitution provisions, such 
as periods of uninsurance, to the ``optional targeted low-income 
children'' group, because such eligibility conditions are inconsistent 
with the entitlement nature of Medicaid. We have retained this policy 
in this final regulation. States that currently apply eligibility-
related substitution provisions to optional targeted low-income 
children will need to come into compliance with this clarified policy. 
States that have not already come into conformity with this policy will 
have 90 days from the date of this notice to do so and must submit a 
State plan amendment in compliance with Sec. 457.65(a)(2). We recognize 
that States expanding Medicaid to optional targeted low-income children 
at higher income levels may be particularly concerned about the 
potential for substitution of coverage. States that want to maintain 
waiting periods for the optional targeted low-income children group may 
want to submit section 1115 demonstration requests for approval of 
substitution provisions. HCFA will consider section 1115 demonstration 
requests on a case-by-case basis.
    Comment: Although neither the preamble nor the proposed regulatory 
text explicitly prescribed a mandatory waiting period or period without 
group health insurance, as a condition of eligibility in separate child 
health programs that are not providing premium assistance for group 
health plans, many commenters expressed their dislike for the 
Department's policy implemented in the course of approving State plans 
and plan amendments, of mandating the imposition of periods without 
insurance for populations over 200 percent of the FPL.
    Many commenters indicated that waiting periods are unnecessary in 
general because they block access to care without any proof of their 
effectiveness in preventing substitution. Some commenters stated that 
the data on the significance of substitution has been inconclusive. One 
commenter referred to recent data from the Current Population Survey 
(CPS) on trends in coverage for low-income children that, in their 
view, raised serious questions about the magnitude of any crowd out 
effect of expansions in publicly-funded coverage for children. Another 
concern raised was that waiting periods without insurance impose a 
significant hardship for families who may be struggling to keep up 
premium payments, obtain care for children with special health care 
needs, or get by with inadequate private coverage for their children.
    Response: Our review of States' March 31, 2000 evaluations 
indicated that in those States with data on substitution of private 
coverage with SCHIP coverage, there was little evidence that 
substitution was as great an issue as initially anticipated. However, 
because of the current lack of conclusive data around the level of 
substitution which may be occurring below 200 percent of FPL, we 
maintain that monitoring of substitution of coverage in SCHIP is 
critical.
    As noted above, we have revised the policy stated in the preamble 
to the NPRM regarding substitution procedures relating to SCHIP 
coverage provided outside of programs that offer premium assistance for 
coverage under group health plans as follows:
     States that provide coverage to children in families at or 
below 200 percent of FPL must have procedures to monitor the extent of 
substitution of SCHIP coverage for existing private group health 
coverage, as was the policy for such coverage provided to families 
under 150 percent of FPL proposed in the preamble to the NPRM.
     At a minimum, States that provide coverage to children in 
families with incomes over 200 percent of FPL should have procedures to 
evaluate the incidence of substitution of SCHIP coverage for existing 
private group health coverage. In addition, States offering coverage to 
children in families over 200 percent of FPL must identify in their 
State plans specific strategies to limit substitution if monitoring 
efforts show unacceptable levels of substitution. States must monitor 
the occurrence of substitution and determine a specific trigger point 
at which a substitution prevention mechanism would be instituted, as 
described in the State plan.
     For coverage above 250 percent of the FPL, because 
evidence shows that there is a greater likelihood of substitution at 
higher income levels, States must have substitution prevention 
strategies in place, in addition to monitoring.
    Although a period of uninsurance is one possible substitution 
prevention procedure, we invite States to propose other effective 
strategies to limit substitution. States may submit amendments to their 
State plans if they would like to modify their current policies in 
light of the policies discussed here. We plan to work closely with 
States to develop appropriate substitution strategies, monitoring 
tools, and trigger mechanisms. As part of monitoring for substitution 
of coverage, States should also study the extent to which anti-
substitution policies require children who have lost group health 
coverage through no fault of their own or their employer to wait to be 
enrolled in SCHIP. To the extent that monitoring finds that such 
children are forced to go without coverage, States should consider 
adjustments to their substitution prevention policies that permit 
exceptions for children who should not be the target of such policies. 
We will continue to ask States to assess their substitution prevention 
procedures in their annual reports.
    Finally, we note that because the regulatory text at Sec. 457.805 
required that the State plan include reasonable procedures to prevent 
substitution and made no distinction for eligibility levels for 
coverage under State plans, we have not revised the regulation text. It 
is consistent with our revised policy.
    Comment: Several commenters believed that States should be allowed 
to establish guidelines that would allow families to drop coverage 
without penalty of a SCHIP-required waiting period and to enroll the 
child or children in the State's SCHIP program if they are paying more 
than they can afford for the child's insurance. The commenters 
indicated that, in some cases, the child may have special health needs 
and/or the family may be paying for insurance that does not cover many 
of the child's needs but serves only as insurance against a 
catastrophic event. In addition, some commenters suggested that States 
not be allowed to impose periods of uninsurance that impede the

[[Page 2604]]

delivery of preventive care and immunizations consistent with the AAP 
Guidelines for Health Supervision III and Bright Futures Guidelines for 
Health Supervision of Infants, Children and Adolescents.
    Response: As stated above, periods of uninsurance will not be 
required unless coverage is provided via premium assistance through 
group health plans, coverage is provided to children with significantly 
higher income levels, or substitution has been identified as a problem 
in the State. Furthermore, in the case of States with premium 
assistance programs, we continue to permit States to cover such 
children under a separate child health program (outside of coverage 
through premium assistance programs) during the waiting period, as 
stated in the preamble to the proposed rule. The required period of 
uninsurance applies only to SCHIP coverage provided through group 
health plans.
    States are therefore able to enroll special needs children, and 
those in need of preventive care and immunizations, in SCHIP in a 
timely fashion so as not to disrupt the provision of needed health care 
services. To the extent a State chooses to adopt periods of 
uninsurance, the State may want to consider exceptions to the period of 
uninsurance to address issues raised by the commenters. We note, 
however, that access to immunizations is unlikely to be proposed as an 
exception since virtually all younger children would thereby be exempt.
    Comment: One commenter urged the Department to view State 
substitution prevention efforts as a comprehensive plan, rather than 
isolating specific pieces that may or may not measure up to artificial 
Federal guidelines. In addition, the commenter noted that each State 
has developed a substitution prevention strategy that is applicable to 
the demographic and economic situation in the State, and State plans 
should therefore be judged in their entirety, not in a piecemeal 
fashion.
    Response: We agree that State's substitution prevention efforts 
should be considered in the context of the entire State plan with 
consideration given to a State's particular needs and goals. To this 
end, we have retained a flexible regulatory requirement regarding 
substitution and indicated that HCFA will incorporate additional 
flexibility in its plan review process.
    Comment: One commenter agreed with the language in proposed 
Sec. 457.805 and suggests that HCFA limit States' discretion to use 
fears about substitution as an excuse to deny health coverage and 
recommended that final regulations bar waiting periods (outside of the 
premium assistance arena) that either: (1) Impose harm on children by 
going beyond 6 months or deny coverage (except where the employee 
voluntarily drops employment-based coverage without any change in 
circumstances) for pregnant women, children with disabilities, or 
children with preexisting conditions as defined by HIPAA; or (2) deny 
SCHIP benefits to children without employer-sponsored insurance for 
reasons unrelated to SCHIP (recent adoption, loss of job, end of COBRA 
coverage, death of a parent, moving outside the plan's service area, or 
an increase in premiums that was unaffordable to the family).
    Response: As indicated above, outside of premium assistance 
programs, States have broad discretion to develop substitution 
prevention policies that best serve their particular populations. 
States that choose to retain or impose periods of uninsurance are 
encouraged to include exceptions that help prevent the imposition of 
undue hardship under a range of circumstances, including loss of 
insurance through no fault of the family, extreme economic hardship, 
death of a parent, etc.
    Comment: One commenter indicated that, while in agreement that our 
proposed policy on substitution for the lower income population is 
reasonable, HCFA should carefully monitor State programs for children 
under 200% FPL to assure that no substitution problems emerge.
    Response: We will continue to review State plan amendments to 
ensure that States monitor the occurrence of substitution at all income 
levels, and to review annual reports for any reported experiences of 
substitution. As stated in previous guidance from HCFA, in the event 
monitoring efforts indicate unacceptable levels of substitution, HCFA 
may reconsider the requirements intended to prevent substitution of 
coverage.
    Comment: One commenter indicated confusion about the preamble 
language which ``does not require'' the use of eligibility-related 
substitution prevention provisions such as periods of uninsurance for 
the Medicaid eligibility group for the ``optional targeted low income 
children,'' but goes on to say that States that currently apply 
eligibility-related substitution prevention provisions to optional 
targeted low-income children ``will need to come into compliance with 
this proposed policy.'' The commenter believed our language should have 
indicated we would ``not allow'' such States to impose a waiting period 
as opposed to ``not require.''
    Response: The commenter is correct. The policy is that the Medicaid 
statute does not allow the use of eligibility-related substitution 
prevention provisions such as periods without insurance for ``optional 
targeted low income children'' (outside of demonstration projects under 
the authority of section 1115 of the Act).
    Comment: One commenter asked for clarification whether the proposed 
requirements with respect to substitution at Sec. 457.800(c) applied 
only to separate child health programs and not to Medicaid expansion 
programs.
    Response: As noted by the commenter, this point needs 
clarification. This subpart, as stated at Sec. 457.800(c), applies only 
to separate child health programs. We have removed the reference to 
subpart H at Sec. 457.70, which had indicated the requirements that 
apply to Medicaid expansion programs.
    Comment: Several commenters indicated support for the clarification 
that waiting periods are not allowed in Medicaid expansions (outside of 
section 1115 demonstrations). One commenter asserted that this is 
consistent with Congressional intent that all Medicaid rules should 
apply to title XXI expansions of Medicaid. Another commenter suggested 
using caution when granting 1115 demonstrations to implement 
substitution prevention provisions when expanding Medicaid eligibility.
    Response: We agree with the first two points and note the concerns 
raised in connection with section 1115 demonstrations.
    Comment: One commenter indicated that States should be permitted 
the flexibility to implement the substitution provisions that they 
determine are necessary for their own SCHIP programs, and that this 
should be the rule whether the program is a Medicaid expansion or a 
separate program. Another commenter believed that it is unfair not to 
require a six-month waiting period for Medicaid expansion programs 
because it presents an unfair barrier to separate child health 
programs.
    Response: The final rule allows States the flexibility to identify 
and implement substitution prevention provisions that are necessary for 
their own separate child health programs, within the parameters 
discussed above. Title XXI explicitly requires States to have 
substitution policies. By contrast, waiting periods are not permitted 
in Medicaid expansion programs outside of section 1115 demonstrations.

[[Page 2605]]

    Comment: One commenter stated that HCFA should consider whether the 
imposition of substitution provisions, such as mandated periods of 
uninsurance applied to adults under family coverage waivers, would have 
an undesirable effect on the children's access to services.
    Response: We agree that waiting periods may have an adverse impact 
on children's access to care. In this final rule, HCFA is requiring 
States to monitor the extent to which substitution prevention policies 
require children who have lost group health coverage, through no fault 
of their own or on the part of their employer, to wait to be enrolled 
in SCHIP. If monitoring shows that such children are forced to go 
without coverage, States should consider adjustments to their 
substitution prevention policies that permit exceptions for children 
who should not be the target of such policies. Because research shows 
that the risk of substitution is greater when a State operates a 
premium assistance programs, we will continue to require that such 
coverage be available after a six month period of uninsurance. However, 
this policy does not prevent States from covering SCHIP enrollees, 
whether children or families, through a separate child health program 
or through Medicaid. The final rule also permits States to adopt 
reasonable exceptions to the waiting period requirement. (See the 
discussion of the comments and responses on Sec. 457.810.) Thus, the 
premium assistance substitution policy does not require that children 
be uninsured prior to enrolling in a premium assistance program.
    Comment: One commenter believed that collaboration with the Child 
Support Enforcement Program is necessary and that any efforts to 
monitor potential substitution of private employer group coverage 
should include a review for coverage which may already be provided by a 
noncustodial parent, or which may potentially be available through a 
noncustodial parent pursuant to a support order. The commenter also 
asked that the definition of substitution be clarified and recommended 
a definition of ``equivalent to SCHIP coverage'' or some State-defined 
minimum requirements. The commenter appeared to believe that coverage 
inferior to SCHIP coverage carried by a noncustodial parent should not 
be considered health insurance coverage when determining whether SCHIP 
coverage is substituting for private group health insurance coverage.
    Response: We agree that a State's SCHIP program should coordinate 
with the State's Child Support Program and that coverage under, or 
available through, a noncustodial parent's health plan should be 
considered by the State with respect to its substitution policies. The 
commenter is concerned that coverage available from the noncustodial 
parent be equal to SCHIP coverage or some State-defined minimum 
coverage before a concern for substitution should arise. We note that 
this final rule does not require that children be denied SCHIP coverage 
if the noncustodial parent has insurance that could cover the child. 
CSE agencies should be informed about the availability of SCHIP 
coverage because, as the commenter suggests, SCHIP coverage might 
provide better access to care than coverage potentially available 
through the noncustodial parent. The statutory provisions do, however, 
preclude SCHIP eligibility for a child who already has coverage under a 
group health plan or health insurance coverage, as those terms are 
defined under HIPAA. The only exceptions to this policy are if the 
child does not have ``reasonable geographic access'' to coverage, as 
described in subpart C, or if the policy meets the definition of 
``excepted benefits'' under HIPAA.

3. Premium Assistance Programs: Required Protections Against 
Substitution (Sec. 457.810)

    We proposed under Sec. 457.810 to require any State that implements 
a separate child health program under which the State provides premium 
assistance for group health plan coverage, to adopt specific 
protections against substitution. A State must describe these 
protections in the State plan. In the NPRM, we proposed that the 
following four requirements would need to be met to protect against 
substitution:
     Minimum period without group health plan coverage. The 
child must not have been covered by a group health plan during a period 
of at least six months prior to application for SCHIP. States may 
require a child to have been without such insurance for a longer 
period, but that period may not exceed 12 months. States may permit 
exceptions to the minimum period without insurance if the prior 
coverage was involuntarily terminated. We noted that newborns who are 
not covered by dependent coverage would not be subject to a waiting 
period. We also noted that the waiting period applies only to coverage 
through a group health plan, not SCHIP or Medicaid coverage. If an 
otherwise eligible child does not meet the requirement for a minimum 
period without group health plan coverage, the State can enroll the 
child in SCHIP under a separate child health program 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 child health program or Medicaid 
does not count as group health insurance coverage for purposes of the 
required waiting period prior to enrollment in SCHIP coverage provided 
via premium assistance programs.
     Employer contribution. The employer must make a 
substantial contribution to the cost of family coverage, equal to 60 
percent of the total cost of family coverage. States proposing a 
minimum employer contribution rate below this standard must provide the 
Department with data that demonstrate a lower average employer 
contribution in their State and support a State's contention that the 
lower contribution level will be equally effective in ensuring 
maintenance of statewide levels of employer contribution. In addition, 
the employee must apply for the full premium contribution available 
from the employer.
     Cost-effectiveness. The State's payment under its premium 
assistance program 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 SCHIP program.
     State evaluation. The State must collect information and 
evaluate the amount of substitution that occurs as a result of payments 
for group health plan coverage and the effect of those payments 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 SCHIP enrollees, or other means for reliably gathering 
information about prior health insurance status. In the preamble to the 
NPRM, we set forth specific examples of questions States could include 
in SCHIP applications to evaluate the prevalence of substitution. We 
noted that we would reevaluate our position on the requirements for 
States that subsidize employer-sponsored plans based on our review of 
the State evaluations due March 31, 2000.
    Comment: One commenter noted that employer ignorance of changing 
public benefit rules is one of the most effective safeguards against 
widespread substitution, and things such as competitive market 
pressures and rising health costs, not changing Medicaid and SCHIP 
coverage rules, drive reductions in employer subsidies for health

[[Page 2606]]

coverage. Further, the commenter stated that the safeguard of employer 
ignorance ends when the employer is contacted by a State agency and 
becomes a partner in purchasing SCHIP coverage. Another commenter 
indicated their belief that HCFA is inconsistent by indicating that it 
will scrutinize SCHIP programs subsidizing employer-sponsored insurance 
while suggesting (in Sec. 457.90) that ``Employer-based outreach is 
another avenue for providing * * * information on children's insurance 
programs.''
    Response: We note these comments and have sought to craft a 
substitution prevention policy that reflects the different pressures on 
the employer market and that balances States' desire for developing 
premium assistance programs with the risk that such programs will not 
expand coverage for children, but merely substitute employer 
contributions with SCHIP funds. There are both benefits and risks of 
partnering with employers in designing premium assistance programs. We 
have provided new flexibility to States to design such programs under 
these final rules, while retaining some requirements that are critical 
for preventing substitution.
    Comment: Many commenters indicated their strong disagreement with 
the mandatory six-month minimum period without group health insurance 
coverage prior to application for SCHIP premium assistance coverage 
through group health plans. Their arguments against this policy 
included that it has no basis in statute, that it is inconsistent with 
other SCHIP strategies to prevent substitution which allow State 
flexibility, and that waiting periods block access to coverage and care 
for an arbitrary period without evidence of the effectiveness of any 
particular length of waiting period in preventing substitution. Some of 
these commenters added that if HCFA maintains a requirement for a 
period without employer-sponsored insurance prior to eligibility for 
SCHIP coverage obtained through premium assistance programs, that the 
minimum period be changed to 3 months. One commenter noted that there 
is no State system in place to confirm if and when an individual was 
previously covered under group health plans and that requiring States 
to establish such a system would be onerous and administratively 
costly.
    Response: We have revisited and made revisions to our policy on 
substitution generally, and our policy on required periods of 
uninsurance, with respect to premium assistance for coverage under 
group health plans.
    As discussed above, when a State operates premium assistance for 
group health insurance coverage, the State is no longer required to 
comply with the requirement that the employer contribution be at least 
60 percent of the premium cost. The other requirements described in the 
proposed rule would continue to apply; namely, the requirements that 
the employee eligible for the coverage apply for the full premium 
contribution available from the employer, that such coverage be cost-
effective, and that the State evaluate the amount of substitution that 
occurs as a result of payments for group health insurance coverage and 
the effect of those payments on access to coverage.
    In addition, because of the greater likelihood of substitution of 
SCHIP coverage for group health insurance coverage offered by 
employers, we are retaining the requirement for a 6-month waiting 
period, but allowing States greater flexibility to vary from this 
general requirement. The default substitution prevention mechanism will 
be a period of uninsurance of at least six months, and not more than 12 
months, without group health insurance prior to eligibility for SCHIP 
premium assistance for coverage through group health insurance plans 
offered by employers. States may also develop reasonable exceptions to 
the required waiting period when they can identify limited 
circumstances in which substitution is less likely to occur. For 
example, if a State is targeting its premium assistance program to 
certain employers that provide only very limited health insurance 
coverage, a waiting period may not necessarily be required since the 
likelihood of substitution would be limited in those circumstances.
    In proposing exceptions to the six-month waiting period, States 
must provide reasonable justification for such exceptions, including 
data and other supporting evidence, as appropriate, which will be 
reviewed by HCFA in the context of the State plan amendment process. We 
have also listed several specific exceptions to the waiting period that 
may be granted, including involuntary loss of coverage due to employer 
termination of coverage for all employees and dependents, economic 
hardship, and change to employment that does not offer dependent 
coverage. And, as noted above, States also must monitor their premium 
assistance programs to determine whether substitution may be occurring. 
We plan to work closely with States interested in providing coverage 
via premium assistance for group health insurance coverage in order to 
provide technical assistance and help achieve a balanced approach that 
allows premium assistance plans to be implemented with appropriate 
safeguards to prevent substitution.
    Comment: Many commenters expressed concern about the 60 percent 
employer contribution requirement at proposed Sec. 457.810(b)(2) for 
SCHIP coverage provided through employer-sponsored insurance because 
employer contributions may vary in a State based on region, type and 
size of business, and wage levels of employees. The commenters' 
expressed the position that HCFA has exceeded its statutory authority 
in setting this benchmark, and they argued that it is unnecessary. 
Furthermore, the commenters stated that few employers contributing less 
than 60 percent of the premium would meet the required cost 
effectiveness test. The commenters noted that the statutory requirement 
that the purchase of employer-sponsored insurance with SCHIP funds must 
be cost effective is the most appropriate tool to use. One commenter 
indicated that the employer contribution standard should not be based 
on a statewide average of all businesses, but should be appropriate to, 
and specific to, those businesses which would participate in the SCHIP 
program that would utilize an existing health purchasing cooperative 
consisting of small businesses. One commenter also indicated that the 
level of substitution is unlikely to be affected by the 60 percent 
requirement, because employers would probably not base their health 
coverage decisions on the needs of employees eligible for premium 
assistance who, for many companies, represent only a small fraction of 
their overall employee pool. The commenter stated that crowd out occurs 
because of individual rather than corporate decisions, such as when 
individual employees elect to drop private coverage for low-cost or no-
cost public assistance. Finally, the 60 percent would be problematic 
for some commenters' States because those States are operating under 
approved 1115 demonstrations to allow premium assistance when employers 
contribute at least half the cost of coverage.
    Another commenter cited a survey that showed that in regions other 
than on the east coast, very few employers pay any part of the 
dependent premium. The recent survey indicated on average, large 
employers pay 85.51% of the employee premium and 17.62% of the 
dependent premium, and that small employers contribute 78.06% of the 
employee premium and 5.14% of the dependent premium. According to this 
commenter, HCFA's requirement

[[Page 2607]]

actually prevents access for many children.
    Several commenters that disagreed with the 60 percent employer 
contribution requirement suggested it be deleted in favor of 
maintaining a cost-effectiveness test while requiring States to simply 
describe how they plan to monitor employer contribution percentages to 
detect any reductions in the contributions and assess whether 
reductions may be related to SCHIP premium assistance. Other commenters 
also recommended subjecting employers to a maintenance of effort 
requirement with respect to the contribution level.
    One commenter recommended that if a minimum requirement is 
maintained, States be permitted to establish different standards for 
different kinds of employers, including making distinctions based on 
whether or not the employer has previously offered health insurance 
coverage and on the wage distribution of the employer's work force.
    It was one commenter's opinion that failure to allow State 
flexibility on the employer contribution will stifle many potential 
innovative approaches to reach uninsured children of low-wage workers 
and that States will be unable to enroll sufficient numbers of children 
in these programs to justify the administrative expense. In addition, 
in this commenter's view, the 60 percent requirement may result in many 
families who would prefer premium assistance being forced to enroll 
their children in the regular SCHIP program, and force the State to 
forego any employer contribution. The commenter also noted that, if 
more low-wage workers decline dependent coverage when it is offered, 
employers with many low-wage workers may stop offering coverage, 
causing a long-term, population-wide shift from private to public 
sources of coverage.
    Another commenter stated that the small employers in its State do 
not pay 60 percent of family health coverage premiums and, in fact, 
most do not cover dependents. The commenter believed that they should 
be allowed to include in premium assistance programs employers who are 
currently not covering dependents. They suggested a rule that would 
only include employers who did not cover dependents as of a certain 
date, or who paid less than a predetermined amount for coverage as of 
that date. The State would then use local objective data (and not 
``outdated, national surveys of large employers'') to determine the 
contribution amount appropriate for the locality. One commenter 
indicated that our proposed policy would punish families who find jobs 
with employers who contribute less than 60 percent and encourage them 
to take jobs with employers that don't offer family coverage.
    A commenter also suggested that whatever standard is adopted, there 
should be exceptions in instances in which employer contribution 
percentages drop solely because of an increase in premiums or where an 
employer drops its level of contribution because of documented and 
significant economic declines. In such cases, the commenter argued, 
crowd out isn't a factor in the reduced employer contribution level, 
and failure to allow employers in such circumstances to reduce their 
contribution levels may result in employees and their families losing 
their insurance. One commenter said, regarding the 60 percent employer 
contribution, that HCFA should not presume the cost neutrality of State 
initiatives to link title XIX/XXI coverage to low-wage workers, and 
said that the proposed regulations indirectly restrict a State's 
discretion to define eligibility and thereby exceed Congressional 
intent. Moreover, in this commenter's view, by establishing such a high 
level of employer contribution, HCFA effectively is excluding 
dependents of small business employees from participating in SCHIP.
    Another commenter stated that a required percentage of employer 
contribution for participation in SCHIP premium assistance programs 
would give employers a target that could be misused. If an employer 
arbitrarily reduced its percentage of contribution, the employer could 
eliminate the opportunity for additional SCHIP-eligible employees to 
purchase employer health insurance with the help of premium assistance. 
In the commenter's State, only 2.5 percent of eligible individuals with 
access to employer-sponsored health coverage have access to family 
coverage where the employer pays 60 percent or more of the premiums. 
For nearly 30 percent of the State's eligibles with access to family 
coverage via an employer, the employer contributes about 10 percent 
less than the 60 percent minimum. In this commenter's view, our 
proposed rule would eliminate the opportunity for these individuals to 
be covered under a premium assistance program.
    One commenter expressed disappointment that HCFA did not deviate 
from the policy expressed in the February 13, 1998 letter and indicated 
that the guidance is overly prescriptive and biased against the 
development of State approaches to SCHIP using employer-sponsored 
coverage. The commenter suggested providing additional State 
flexibility in determining the amount of employer contribution as long 
as plans certify that issues related to crowd out and substitution are 
addressed. If, upon evaluation, State efforts do not result in 
permissibly low levels of substitution, the commenter stated they would 
be happy to assist in the development of more detailed and specific 
guidelines. If the 60 percent requirement is not eliminated, this 
commenter suggested that States should be allowed to develop an 
alternative State average based on size of business, number of 
employees, number of low-wage employees or some other relevant factor.
    Another commenter stated that there is no evidence in its Health 
Insurance Premium Program (HIPP) that employers have reduced their 
contribution because HIPP is paying the premium, and the commenter 
would not expect employers to act differently with respect to SCHIP. 
The commenter indicated that employers have other employees to consider 
and there is no evidence to support the position that employers will 
reduce their contribution because some employees are subsidized. They 
stated their belief that the majority of employers recognize the value 
of providing health care coverage to their employees and want them 
insured.
    In this commenter's view, HCFA's position penalizes employees of 
employers who are not financially able or willing to contribute more, 
especially when health plans impose large premium increases. Also, the 
commenter believed that HCFA's position penalizes States by limiting 
their ability to buy-in to cost effective employer coverage and 
increasing the administrative burden for States. The commenter 
recommended that, if the employer plan is cost effective, States should 
have the flexibility to take advantage of the coverage, regardless of 
the amount of employer contribution.
    Response: We appreciate the concerns raised by these commenters and 
we have revised our policy in this final rule to provide additional 
flexibility for States wishing to utilize premium assistance programs. 
We will no longer require States to implement a minimum employer 
contribution of 60 percent. We agree with the commenters' position that 
the cost-effectiveness requirement of the statute reduces the need for 
a uniform minimum employer contribution level, because it is likely 
that a substantial employer contribution would be necessary in order to 
meet the test of cost-effectiveness. However, States must identify a 
specific minimum employer contribution level to ensure

[[Page 2608]]

that SCHIP funds are used to supplement the cost of employer-sponsored 
insurance rather than supplant the employers' share of the cost of 
coverage, and we have maintained the requirement that States evaluate 
substitution in the context of their premium assistance program in 
their annual reports. While allowing for significant new flexibility, 
this policy also encourages States to require the highest possible 
employer contribution level that is reasonable given the circumstances 
in their State. In addition, the rules maintain the requirement that 
the employee eligible for the coverage must utilize the full premium 
contribution available from the employer.
    We recognize that it may be necessary to revisit this policy as 
States gain experience with the provision of SCHIP coverage and we 
receive further evaluations of substitution with respect to SCHIP 
coverage provided through premium assistance for employer-sponsored 
insurance. The requirements set forth in this final rule represent our 
position on the steps necessary to implement the statutory provisions 
of section 2102(b)(3)(c) of the Act in light of what is now known about 
the interaction between private and public coverage. The rules provide 
considerable flexibility, allowing States and HCFA room to adjust the 
approach to substituion based on experience with the program.
    Comment: One commenter agreed with the proposed rule's flexibility 
to allow less than 60 percent employer contribution to family coverage 
if the State average is less than 60 percent.
    Response: We appreciate the support and as stated above, we have 
dropped the 60 percent contribution requirement in part because we 
recognize the variation in levels of average employer contributions 
across States.
    Comment: One commenter strongly disagreed with our proposal to 
allow States to set a lower standard for employer contributions than 60 
percent. The commenter asserts that because of the lack of data on 
``average'' employer contributions to dependent coverage, especially 
with regard to small employers, and the fact that the average 
contribution among employers with 50 or fewer employees is zero 
percent, and in the commenter's State large employers also often 
contribute nothing, the commenter believes our proposed policy of 
allowing a less than 60 percent contribution would permit the allowance 
of premium assistance programs even where the employer contributes 
nothing at all.
    Response: A contribution level of less than 60 percent is permitted 
under these final rules, as long as the cost-effectiveness test is met. 
We do not agree that premium assistance programs likely would be 
allowed when there is no employer contribution, as the commenter 
suggested, because the cost-effectiveness test is unlikely to be met 
without a substantial employer contribution.
    Comment: One commenter suggested that HCFA clarify whether (and 
how) the NPRM's preamble discussion of determining cost-effectiveness 
under family coverage waivers applies with respect to using employer-
sponsored insurance to provide coverage under SCHIP.
    Response: The cost-effectiveness requirement in Sec. 457.810(c) 
applies when a State provides premium assistance programs for SCHIP 
eligible children. The cost-effectiveness test for premium assistance 
for group health insurance coverage requires a comparison of the cost 
of coverage of the child that would otherwise be available under SCHIP 
to the State's cost to provide premium assistance for group health 
insurance coverage for that child. We have modeled the discussion of 
the cost-effectiveness test in the regulation text after the provision 
related to States that wish to cover family members, in addition to 
targeted low-income children at Sec. 457.1015. We have specified that 
the State's cost for coverage for children under premium assistance 
programs must not be greater than the cost of other SCHIP coverage for 
these children. Consistent with cost-effectiveness test for family 
coverage, the State may base its demonstration of cost-effectiveness on 
an assessment of the cost of coverage for children under premium 
assistance programs to the cost of other SCHIP coverage for these 
children, done on a case-by-case basis, or on the cost of premium 
assisted coverage in the aggregate.
    See the discussion at Sec. 457.1015 for further details on cost-
effectiveness for family coverage waivers.
    Comment: One commenter indicated that the 60 percent requirement 
would unrealistically require a large base of employers to report data 
on contribution levels to the State in order for the State to satisfy 
the contribution requirement. Other commenters suggested we require 
States to evaluate the percent of income families would have had to 
spend to maintain employment-based or individual coverage during the 
period they waited for SCHIP coverage in assessing their substitution 
prevention procedures for their March 2000 evaluations and annual 
reports. They recommended that State evaluations and annual reports 
assess whether individual employers are terminating coverage for low-
wage workers while maintaining coverage of higher wage workers and 
executives. Such an assessment should also examine increases in the 
amounts that employers are asking low-wage workers to contribute toward 
employment-based insurance coverage. Another commenter noted that few 
States will have implemented the employer buy-in option by the time of 
the March 2000 evaluations for HCFA to establish policy based on those 
evaluations.
    Response: We are no longer imposing a minimum employer contribution 
requirement and recognize that there is not much experience to-date 
with premium assistance programs. As HCFA and the States gain 
experience, we will be in a better position to evaluate the extent of 
substitution taking place. We recognize that there is limited data 
regarding employer coverage and contributions based on wage-levels of 
employees as well as State based information on the percent of income 
families would have had to spend to maintain private coverage while 
waiting for SCHIP coverage. In addition, we note that market forces 
other than SCHIP may influence the level of employer contribution and 
further complicate such analyses. We encourage States to assess these 
issues but recognize that data to support such assessments may be 
difficult to obtain and therefore do not require it.
    Comment: Several commenters noted concern about HCFA's policy 
permitting States to provide direct SCHIP coverage to children during 
the six-month waiting period via the State's separate child health 
program (other than premium assistance programs). Commenters indicated 
that this policy itself would actually facilitate crowd out as families 
dropped their privately-funded coverage in favor of publicly-funded 
benefits and that the privately-funded coverage would not resume until 
six months of publicly-funded coverage passed. In addition, one 
commenter noted that coverage under the State's regular SCHIP program 
is less cost-effective than its coverage under a premium assistance 
program.
    Response: To the extent that the part of State's separate child 
health program that does not involve premium assistance requires either 
no period of uninsurance or a shorter one, there would be nothing to 
prohibit a child from being enrolled in that portion of the program 
even if the family had recently dropped coverage under its group health 
plan. There is no reason

[[Page 2609]]

that States should not be allowed to offer such coverage, although we 
believe it is unlikely that many families will drop their private group 
health insurance for coverage under a State's separate child health 
program, in part because most families would prefer to keep coverage of 
all the family members under one plan.
    Comment: Many commenters suggested inclusion in the regulation of a 
mandatory list of exceptions to the proposed minimum 6-month waiting 
period and also encouraged the Department to prohibit waiting periods 
in excess of six months. Suggested exceptions included when: (1) An 
eligible individual is pregnant or disabled; (2) a waiting period 
exceeds the 63-day gap limit under HIPAA and would result in exclusion 
of coverage for a preexisting condition under the coverage offered by 
the State's separate child health program; (3) an eligible child is a 
newborn or recently adopted; (4) the waiting period would block 
coverage of a well-baby, well-child, or immunization service according 
to the periodicity schedules for such services; (5) insurance is lost 
because of involuntary job loss; (6) insurance is lost because of death 
of a parent; (7) insurance is lost because of a job change to 
employment where the new employer does not cover dependents; (8) a 
family moves out of the service area of employer coverage; (9) an 
employer terminates insurance coverage for all of its employees; (10) 
COBRA insurance benefits expire; (11) employment-based insurance ends 
because an employee becomes self-employed; (12) insurance is lost 
because of long-term disability; (13) insurance is terminated due to 
extreme economic hardship of the employer or employee; and (14) there 
is a substantial reduction in lifetime medical benefits or benefit 
category to an employee and dependents in an employee-sponsored plan. 
One of the commenters also suggested an exception when there has been a 
loss or termination of employer-based coverage due to affordability 
problems that would be determined based on a percentage of income. In 
addition, some commenters suggested exceptions when an eligible child 
has insurance that only provides limited coverage such as catastrophic 
coverage, hospital-only coverage, or scholastic coverage with very high 
deductibles, because these policies wouldn't allow access to preventive 
medical benefits.
    Response: HCFA encourages States that impose waiting periods 
without group health coverage to consider adopting exceptions. Many 
States have adopted exceptions to the period of uninsurance based on a 
variety of factors. We have approved exceptions for reasons such as: 
loss of insurance due to involuntary job loss, death of a parent, 
change of employment where the new employer does not cover dependents; 
a family moved out of the service area of employer coverage; employer 
termination of insurance coverage for all employees; expiration of 
COBRA insurance benefits; end of employment-based insurance because an 
employee becomes self-employed; loss of insurance because of a long-
term disability; termination of insurance due to economic hardship of 
the employer; when the family faces extreme economic hardship; and a 
substantial reduction in lifetime medical benefits to an employee and 
dependents in an employer-sponsored plan.
    We have made several changes to the list of exceptions to the 
minimum period without coverage under a group health plan. States may 
allow for exceptions to the minimum period without coverage under a 
group health plan when the child's coverage is involuntarily terminated 
due to employer termination of coverage for all employees and 
dependents. We have added an exception for cases when there is a change 
in employment that does not offer dependent coverage.
    In addition, States may provide an exception when the child's 
family faces economic hardship. While States have flexibility to define 
this term, examples of economic hardship could be families who are 
facing unusual economic difficulties, such as the loss of a home to 
fire, or high out-of-pocket costs due to a family member's illness not 
being covered by insurance. Another example would be if a State is 
targeting its premium assistance program to certain employers that 
provide only very limited health insurance coverage, a waiting period 
may not necessarily be required since the likelihood of substitution 
would be limited in those circumstances. Finally, we would consider an 
exception to the waiting period requirement if a State's proposal 
targeted low-wage employers in its premium assistance program, because 
substitution is much less likely when the coverage being subsidized is 
offered only by low-wage employers.
    We anticipate that these reasonable exceptions will help facilitate 
States' ability to utilize premium assistance programs to enroll 
children in SCHIP.
    Comment: One commenter noted that their State has had a Health 
Insurance Premium Payment (HIPP) program for Medicaid since July 1991. 
Under the HIPP program, the State pays the entire cost of the 
employee's share of the premium necessary to provide coverage to the 
Medicaid-eligible family members. Based on the State's experience with 
this program, they stated that they do not agree with our position that 
allowing States to assist families in the purchase of employer-related 
coverage will result in substitution of coverage. In fact, the 
commenter noted that as a condition of Medicaid eligibility, this State 
requires the family to maintain the insurance when it is cost-effective 
for the State to buy the coverage. This State argued that its policy 
supports the provision of premium assistance for employer coverage and 
avoids substitution because the State maintains the coverage for the 
family.
    The commenter believed that HCFA's position actually promotes 
substitution of coverage by making it harder for States to buy-in to 
employer health plans when they become available and, thus, depriving 
the State of the opportunity to buy coverage that is more cost 
effective to the State.
    The commenter was particularly concerned about our proposal because 
they have a strong HIPP program. It appears to the commenter that, if 
the State is purchasing employer coverage under the HIPP program for a 
Medicaid-eligible child, at the time the child transitions to their 
separate SCHIP program, the child has health insurance through an 
employer (although the State was paying for it), would result in the 
imposition of a 6-month waiting period before the child could be 
eligible for SCHIP and before the State could continue buying-in to the 
employer coverage. The commenter wanted the flexibility to maintain 
employer-sponsored coverage for children when they transition between 
Medicaid and the separate SCHIP program.
    Response: We understand the commenter's concerns and acknowledge 
that substitution policies raise complex issues for which there are no 
clear answers. We have revised our policy in a number of ways to allow 
States greater flexibility to design premium assistance programs and we 
will continue to work with States as they evaluate how these programs 
are working and whether employer contributions are maintained. We note 
that in Medicaid, unlike SCHIP, having other health insurance coverage 
does not preclude eligibility for the program. With respect to the 
problem suggested by the commenter, we note that waiting periods do not 
apply when a child moves from a Medicaid program into a separate child 
health program because of an increase in family income, even if the 
Medicaid coverage was provided through an

[[Page 2610]]

employer-based plan such as the case with the HIPP program. In this 
case the child would be considered to have been covered by Medicaid, 
rather than by group health insurance coverage.
    Comment: One commenter noted that if a family has to be uninsured 
for six months before the children can receive coverage through premium 
assistance for a group health plan, the family may miss the employer's 
open enrollment period while it waits to have access to premium 
assisted coverage.
    Response: We note that the minimum waiting period requirement 
applies to the SCHIP-eligible child, not the entire family. Thus, for 
example, a parent could elect self-only coverage and decline dependent 
coverage, and enroll immediately in the employer-sponsored health 
insurance. Then, once the six-month waiting period had been satisfied, 
the parent could enroll the child(ren) at the next open enrollment 
period and obtain SCHIP premium assistance. States may cover SCHIP-
eligible children in their regular SCHIP programs until such time as 
they can be enrolled in employer plans. Because Sec. 457.810 gives 
effect to an important congressional purpose related to SCHIP coverage, 
we are maintaining the minimum waiting period in this circumstance. 
However, we suggest that States adopt rules, under the scope of their 
regulatory authority consistent with HIPAA, to require a special 
enrollment opportunity in group health plans based on a SCHIP-eligible 
individual or family becoming eligible to enroll in the plan under a 
premium assistance program.
    Comment: One commenter suggested that the general provisions of 
proposed Sec. 457.805, which say that ``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 . . . '' are sufficient and that proposed section Sec. 457.810 
(``Premium assistance programs: Required protections against 
substitution.'') should be deleted in order to allow States the 
flexibility to develop innovative approaches to utilizing employer-
sponsored insurance coverage for SCHIP enrollees. The commenter 
indicated its belief that this approach would be in accord with 
Congress' intent that SCHIP programs be State-designed and State-
operated, and that it would allow for the fact that private insurance 
markets and employer-sponsored health insurance patterns vary 
significantly from State to State. Proposed Sec. 457.810 would make it 
very difficult for the implementation of employer-sponsored insurance 
under SCHIP.
    Response: We understand the commenters concerns and have added some 
significant flexibility in this section of the final rule, as discussed 
above. We will work closely with States to develop premium assistance 
programs that fit their needs in the simplest and most operationally 
efficient way possible, while complying with the provisions of this 
final rule.
    Comment: One commenter suggested that the language in 
Sec. 457.810(a)(1) is poorly drafted and appears to imply that children 
uninsured more than 12 months would not be provided SCHIP coverage.
    Response: We agree and have revised the language in 
Sec. 457.810(a)(1) to clarify that a State, may not require a waiting 
period that exceeds 12 months.

H. Subpart I--Program Integrity

    We proposed in subpart I to specify the provisions necessary to 
ensure the implementation of program integrity measures and enrollee 
protections within the State Children's Health Insurance Program. In 
addition, this subpart discussed the President's Consumer Bill of 
Rights and Responsibilities as it relates to the SCHIP program. This 
subpart also described how the intent of the GPRA can be upheld by 
including program integrity performance and measures as part of the 
State plans.
    The grievance and appeal, and privacy-related issues addressed 
under this Subpart of the proposed regulation are now being addressed 
in the new Subpart K, Applicant and Enrollee Protections.

1. Basis, Scope, and Applicability (Sec. 457.900)

    In Sec. 457.900, we proposed under the authority of sections 
2101(a) and 2107(e) of the Act to set forth fundamental program 
integrity requirements and options for the States. Section 2101(a) of 
the Act specifies that the purpose of the State 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. 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.
    The program integrity provisions contained in this subpart only 
apply to separate child health programs. 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.
    Comment: One commenter suggested that HCFA meet with the Office of 
the Inspector General to discuss fraud and abuse issues related to 
outreach to look at the legality of encouraging certain outreach 
strategies. The commenter noted that payment from a particular provider 
to a person, who the provider knows or should know would be likely to 
influence the individual to receive services, is prohibited.
    Response: We appreciate the concern of the commenter. We routinely 
coordinate with the OIG regarding the review of existing and proposed 
regulations in accordance with the Inspector General Act, section 
4(a)(2).
    Comment: One commenter recommended that the entire Subpart be 
revised to be consistent with the requirements in the Medicare program. 
The commenter urged HCFA to adopt detailed requirements for both fee-
for-service and managed care claims and suggested extensive revisions 
to the proposed rules. The commenter felt the need for flexibility did 
not justify State-by-State variation with respect to the applicability 
or enforcement of the False Claims Act.
    Response: We disagree with this comment. The Medicare program is 
nationally funded and administered, while Medicaid and SCHIP are 
jointly-funded Federal-State programs that are administered by the 
States within broad Federal guidelines. Therefore, it would be 
inappropriate and infeasible to require SCHIP and Medicaid programs to 
conform to fraud and abuse prevention standards of an entirely 
Federally funded and administered program. In addition, while we 
recognize the significance of the False Claims Act, standardized claims 
requirements are not necessary for the efficient and effective 
operation of the SCHIP program, or for enforcement of the False Claims 
Act.
    Comment: One commenter felt that HCFA over-emphasized the issue of 
program integrity at this point in the implementation process. They 
suggest that the States' scarce resources and personnel would be better 
focused on outreach, eligibility and enrollment rather than program 
integrity and fraud. This commenter commended our emphasis on the need 
for continuity with other State programs. One commenter recommended 
deleting Secs. 457.915, 457.920, 457.925, and 457.930 because the 
commenter felt that the proposed rule should not mandate State 
activities that are subject to the

[[Page 2611]]

administrative cap and that are not specifically required in the 
statute.
    Response: While we appreciate the commenter's concern, we disagree 
with the commenter's argument that we over-emphasized program integrity 
too early in the implementation process. We agree that outreach, 
eligibility, and enrollment are all important aspects of SCHIP programs 
and deserve adequate resources for development and implementation. 
However, program integrity initiatives are also necessary now that 
States' programs have been established. Program integrity is essential 
to protecting the SCHIP program from abuse and to ensuring that the 
program serves those it was intended to serve, uninsured low-income 
children. Therefore, to protect public funds from inappropriate and 
unintended uses and to preserve the SCHIP program, States must have a 
strong fraud prevention and detection plan early in program development 
so that it will be in place as programs develop and mature, and serve 
as a viable deterrent to potential fraud and abuse.
    Comment: One commenter requested clarification on the issue of 
limitations on provider taxes and donations as it applies to the 
provider contribution toward family cost-sharing requirements.
    Response: The donation rules at section 1903(w) of the Act govern 
donations by providers or related entities directly to the State, or to 
extinguish a State liability. Premiums are a liability of the 
recipient. When donations are given to the recipient, or to the State 
on behalf of the recipient, the liability of the recipient is reduced, 
not the liability of the State. As a reasonable safeguard, the sponsor 
paying the premium on behalf of the enrollee should either give the 
donation directly to the family, make the donation to the State tied to 
specific eligible individuals, or make the donation to the State which 
will in turn, designate the specific eligible individual(s). In the 
latter case, the State must assure donations are assigned to enrollees 
in a manner that does not favor higher income children over lower 
income children. In any case, the donation should not exceed the 
premium amount specified in the approved title XXI State plan. The 
section of the State plan related to cost sharing should describe the 
procedure for accepting such donations.
    In addition, we note that providers are prohibited from giving 
enrollees anything of value that is likely to induce an enrollee to 
select a particular provider under the provisions of section 
1128A(a)(5). Such conduct may subject the provider to civil monetary 
penalties under that section. This civil money penalty provision is 
administered by the Office of the Inspector General (OIG). In general, 
States are advised to avoid donations from providers for enrollee 
premiums that could unduly influence enrollees to select a particular 
health plan or provider. A State that is concerned that donations for 
enrollee's premiums may violate these provisions may wish to seek an 
advisory opinion from the OIG. See 42 CFR part 1008. The OIG will also 
participate in review of State plans or amendments proposing such 
donations.
    Comment: One commenter noted that the many requirements included in 
this Subpart tacitly assume that the State will have a direct, 
contractual relationship with all SCHIP participating health plans, 
including premium assistance plans. However, they stated that, for 
premium assistance programs for group health coverage, no such 
contractual mechanism will exist. The employer, not the State, is the 
entity that contracts with the health plan; and the State is simply 
providing premium assistance to enable families to enroll their 
children in premium assistance programs, according to this commenter. 
Because there is no mechanism for enforcement here, the commenter 
stated that they are assuming that the requirements in this Subpart 
would not apply to employer plans. They suggested that the preamble 
should clarify this point. They cautioned that any attempt to apply 
requirements of this sort to employer plans will mean that no employer 
plans will ever qualify for premium assistance.
    Response: While we have considered the commenter's concerns, States 
are responsible for the oversight of the use of public funds to provide 
child health assistance through premium assistance programs just as 
they are responsible for oversight in other types of children's health 
insurance programs. Consequently, it is not appropriate to make an 
exception from program integrity regulations for employer plans. In the 
case where the State has no direct contractual relationship with the 
entity providing health coverage, the State should utilize the fraud 
protections provided through the State insurance agency responsible for 
oversight of all commercial plans. For example, if State funds are 
provided under SCHIP to State-regulated health plans, the State 
insurance department anti-fraud component could conduct the State's 
anti-fraud oversight for its SCHIP funds. This final regulation 
provides flexibility to States for States to develop program integrity 
methods and systems that fit the needs of their particular SCHIP 
programs, whether or not those programs consist of premium assistance 
for group health plans.

2. Definitions (Sec. 457.902)

    We proposed five definitions for the purpose of this subpart. We 
proposed 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 proposed 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 proposed that 
``fee-for-service entity'' means any entity that provides services on a 
fee-for-service basis, including health insurance services. We proposed 
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 proposed to define the term ``grievance'' as 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 specified areas, including the 
availability, delivery or quality of health care services, payment for 
health care services and other specified areas. The grievance and 
appeal, and privacy-related issues addressed under this Subpart of the 
proposed regulation are now being addressed in the new Subpart K, 
Enrollee Protections.
    Comment: A few commenters suggested that the definitions of ``fee-
for-service entity'' and ``contractor'' raised a potential 
inconsistency in that the term ``fee-for-service entity'' does not 
include ``individual or entity'' as ``contractor'' does. This suggests 
that individual physicians or other practitioners are exempted from the 
requirement at Sec. 457.950 to attest that any claims submitted for 
payment to be accurate, complete and truthful. The commenters noted 
that these practitioners are currently required to make this 
certification under Medicare and Medicaid.

[[Page 2612]]

    Response: We agree with the comment and have modified the 
regulation text accordingly. We note again that we have created a new 
subpart intended to address more specifically the issues related to 
enrollee protections and because the term ``contractor'' will now apply 
to both this subpart and the new subpart K, we have moved the 
definition to Sec. 457.10.

3. State Program Administration (Sec. 457.910)

    In Sec. 457.910 we proposed 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 separate child 
health program. We also proposed that the State's program must provide 
the safeguards necessary to ensure that eligibility will be determined 
appropriately in accordance with Subpart C of this regulation, and that 
services will be provided in a manner consistent with administrative 
simplification and with the provisions of Subpart D--Coverage and 
Benefits.
    Comment: One commenter noted that the preamble language states that 
the Secretary wishes to give States ``maximum flexibility'' in the 
administration of their SCHIP programs. However, the commenter felt 
that the literal interpretation of this language translated into 
``methods of administration that the Secretary finds necessary,'' 
giving the Secretary too much discretion to impose methods of 
administration on States.
    Response: We understand the commenter's concerns. The commenter is 
correct that the Secretary has a great deal of discretion over the 
requirements of the SCHIP program. We remain committed to providing 
States with flexibility in the administration of their SCHIP programs 
but, as stated in the preamble to the proposed regulation, we seek to 
balance this need against the Federal government's need to remain 
accountable for the integrity of the program. The provisions of the 
regulation reflect this balance and the basic framework within the 
regulation is necessary to ensure the integrity of SCHIP. However, this 
framework does not dictate to the States what methods of administration 
they must use to prevent and detect fraud and abuse, thereby leaving 
the States with significant flexibility to administer SCHIP programs.
    Comment: One commenter encouraged HCFA to ensure administrative 
simplification, not only in the operation of the program, but in the 
provision of services and with respect to providers.
    Response: HCFA is committed to policy approaches that minimize the 
administrative burden that is placed on States in implementing their 
SCHIP programs in general. In addition, we are mindful of the need to 
strike a balance between ensuring access to SCHIP coverage, and the 
benefits provided under that coverage, without making it unduly 
burdensome for States to accomplish these goals. However, these rules 
address State requirements and are not intended to address State 
relationships with providers, which are a contractual matter between 
the State and providers.

4. Fraud Detection and Investigation (Sec. 457.915)

    Section 2107(e) references sections 1903(i)(2) and 1128A of the 
Act, which provides a basis for certain fraud detection and 
investigation activities. Section 2107(e) states that these provisions 
apply under title XXI in the same manner as they apply 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. In the proposed rule, we discussed in 
detail three possible options we considered to ensure that separate 
child health programs develop and implement adequate fraud detection 
and investigation processes and procedures. We concluded that the best 
approach would be to require States to address, specifically, the 
Medicaid goals for fraud detection and investigation, but to allow 
States to design specific procedures needed to meet the requirements of 
Sec. 455.13. We chose neither to require States with separate child 
health programs to follow the same procedures for fraud detection and 
investigation as the Medicaid program, nor did we provide States with 
full latitude in designing processes and procedures. We stated that 
this approach balances the need for maintaining State flexibility while 
establishing an acceptable minimum standard that will satisfy our need 
for accountability in the program.
    We proposed that the State must establish procedures for assuring 
program integrity and detecting fraudulent or abusive activity. We also 
proposed that the procedures must include, at a minimum, the methods 
and criteria for identifying suspected fraud and abuse cases as well as 
methods for investigating fraud and abuse cases that do not infringe on 
the legal rights of persons involved and afford due process of law. The 
State may establish an administrative agency responsible for monitoring 
and maintaining the integrity of the separate child health program, 
which is referred to in subsequent provisions of the regulation as the 
``State program integrity unit''. We further proposed that the State 
must develop and implement procedures for referring suspected fraud and 
abuse cases to the State program integrity unit (if such a unit is 
established) and to law enforcement officials. 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.
    Comment: One commenter commended HCFA for recognizing that separate 
child health programs should not be expected to have the same fraud 
detection and infrastructure as required under Medicaid. However, the 
commenter felt that by tying goals to Medicaid fraud and abuse goals, 
as well as recommending the use of the State program integrity unit, 
HCFA was pushing the States toward Medicaid procedures without backing 
them up with sufficient funding levels.
    Response: While we understand the commenter's concern, we 
specifically set out in the proposed rule a framework that attempted to 
provide flexibility to the States, while ensuring that States include 
basic, necessary protections against fraud. We are not requiring States 
to establish State program integrity units or to use Medicaid fraud and 
abuse methods or procedures to ensure the integrity of the SCHIP 
program. We invite States to design program integrity plans and 
procedures that are specific to the needs of their unique SCHIP 
programs within the broad framework required by the final rule. The 
flexibility afforded the States in this regulation allows them to 
structure program integrity activities that limit the administrative 
burden, but still ensure the integrity of the program.
    Comment: One commenter found the rules overly prescriptive and 
recommended the elimination of paragraph (b) that describes the ``State 
program integrity unit'' and the deletion of the requirement to refer 
program integrity cases to law enforcement officials in (c).
    Response: The rule encourages, but does not require, States to 
develop or use an entity that could be called a ``State program 
integrity unit''. This concept was developed in an attempt to give the 
States a framework to set up an effective program integrity strategy. 
While not required, we believe the

[[Page 2613]]

development of such a unit would be very beneficial to the States in 
designing systems to address these issues. In addition, because of 
Medicaid statutory provisions, States are not permitted to use existing 
Medicaid fraud control units (MFCUs) to conduct SCHIP program integrity 
activities. (While MFCUs have been given additional flexibility under 
the Ticket to Work Incentives Improvement Act of 1999, this flexibility 
only applies in cases that primarily involve Medicaid funds.) In 
general, States are limited to using Medicaid funds for Medicaid 
activities. If a State wanted to utilize the MFCU, it could only do so 
by hiring new staff that would be exclusively responsible for SCHIP 
program integrity activities and are funded by title XXI funds. (We 
note that this new, separately funded ``branch'' of the MFCU could be 
called the ``State program integrity unit''.) Therefore, we will not 
eliminate Sec. 457.915(b). Finally, the inclusion of, and coordination 
with, appropriate Federal and State law enforcement officials as part 
of a State's overall fraud detection efforts, and overall program 
integrity efforts, is vital to the effectiveness of its program 
integrity activities. Therefore, we will not eliminate Sec. 457.915(c).
    Comment: Several commenters noted that they appreciated the need 
for fraud and abuse protections, and hoped HCFA was allowing 
flexibility for States to utilize provider fraud detection processes of 
participating health plans or other State insurance department 
procedures. Also, these commenters hoped that States would be given 
sufficient time to implement these procedures.
    Response: These final rules provide a structure under which States 
have the flexibility to use a variety of methods to create a 
comprehensive fraud detection strategy. While we envision that the 
State insurance departments may play an important role for a State in 
SCHIP fraud and abuse detection and investigation, we anticipate that 
States may want to complement those procedures already performed by the 
State insurance departments with procedures and goals specific to 
SCHIP. Specifically, fraud and abuse stemming from procedures for, or 
other aspects of, participant enrollment in the separate child health 
program would raise distinct issues that likely fall outside of 
procedures established by State departments of insurance as they 
monitor private health plans and issuers outside of the SCHIP context. 
States must also address the concern that fraud and abuse may occur 
within a participating health plan apart from provider fraud and 
therefore, States must have additional procedures to detect and 
investigate fraud within plans. Therefore, relying on plans' processes 
to monitor provider fraud, while potentially useful, would not 
sufficiently protect against the varied types of fraud and abuse that 
could impact the SCHIP program in a State.
    We note the commenters' concern that States need a reasonable 
amount of time to implement new Federal requirements. We will require 
that States come into conformity with new requirements within 90 days 
of publication of this rule, or if contract changes are necessary, the 
beginning of the next contract cycle. In limited cases where a new 
regulatory provision requires a description of procedures in the State 
plan, then the State must implement the procedures within the above 
time frame and submit the State plan amendment in compliance with 
Sec. 457.65(a)(2).
    Comment: One commenter noted that precise, professional guidelines 
regarding care issues, industry-accepted standards for fair and 
reasonable audits, and investigations with due process protections for 
providers, are essential to expand access under SCHIP.
    Response: The best means of expanding access to care under SCHIP is 
to allow the States sufficient flexibility in designing program 
integrity procedures and methods as well as other aspects of their 
programs while maintaining a framework of Federal requirements 
consistent with title XXI. We encourage States to develop precise, 
professional guidelines as part of the design of State fraud detection 
and investigation methods. In addition, States should refer to industry 
standards in establishing audit processes as appropriate. Section 
467.915(a) specifies that States must establish procedures for 
investigating fraud and abuse cases that do not infringe on legal 
rights of persons involved and afford due process of law. These 
requirements apply to investigations of all types of fraud and abuse 
under the separate child health program, including investigations that 
involve providers.
    Comment: One commenter recommended that the language in this 
section be expanded to include use of procedures already in place that 
support these activities. In addition, they suggested revising 
Sec. 457.915(c) to clarify that suspected fraud and abuse cases should 
be referred to ``appropriate'' law enforcement officials as determined 
by State law.
    Response: We have revised the regulation text at Sec. 457.915 to 
clarify that States must develop and implement procedures for referring 
suspected fraud and abuse cases to appropriate law enforcement 
officials, although we have not included the commenters' recommended 
language ``as determined by State law'' because referrals could be made 
to Federal law enforcement officials, as appropriate. We have listed 
certain law enforcement officials under Sec. 457.915(c) because States 
may wish to contact these officials with fraud and abuse information to 
facilitate program coordination. This is not intended to be an 
exhaustive list of all law enforcement officials States may contact, 
nor is referral to all these entities required, unless it is 
appropriate.

5. Accessible Means To Report Fraud and Abuse (Sec. 457.920)

    We proposed that States with separate child health programs must 
establish, and provide access to, a mechanism of communication between 
the State and the public about potentially fraudulent and abusive 
practices by and among participating contractors, beneficiaries, and 
other entities. We noted in the preamble to the proposed regulation 
that this communication mechanism may include a toll-free telephone 
number, and also noted that States are free to use their discretion 
regarding whether to establish toll-free services for these purposes 
alone or to expand upon existing services. We noted that access to 
toll-free service for the reporting of potentially fraudulent and 
abusive practices is a integral part of any sound program integrity 
strategy.
    Comment: One commenter recommended that this provision be deleted 
because the rule should not mandate State activities that are subject 
to the administrative cap and are not specifically required by the 
statute.
    Response: We acknowledge the commenters' point and agree that this 
section should be deleted. However, we have deleted this section 
because while we do have statutory authority to include such a 
provision, the provision was unnecessary and somewhat redundant.

6. Preliminary Investigation (Sec. 457.925)

    We proposed 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 take otherwise 
appropriate action to determine whether there is sufficient basis to 
warrant a full investigation. We noted in the preamble, consistent with 
Sec. 457.915(b), that the State has the option of creating a ``State 
program integrity unit'' for separate child health

[[Page 2614]]

programs that would be responsible for monitoring and maintaining the 
integrity of the separate child health program. We also noted that each 
State has flexibility to define the role played by such units but that 
fraud and abuse activities relating to SCHIP must be funded with monies 
from the State's SCHIP allotment. Finally, while we proposed that 
preliminary investigations be conducted under the circumstances 
specified in Sec. 457.925, we remained flexible with regard to the 
processes and procedures that separate child health programs employ in 
conducting preliminary investigations and did not require or specify 
the procedures States must take to conduct their investigation in 
compliance with this requirement.
    Comment: One commenter recommended that this provision be deleted 
because the rule should not mandate State activities that are subject 
to the administrative cap and are not specifically required by the 
statute.
    Response: We disagree that this section should be deleted. As noted 
earlier, we maintain that these program integrity activities are 
necessary for the effective and efficient administration of the State 
plan as required in Sec. 2101(c)(2) of the statute, in addition to 
being based on the sound precedents set by the Medicare and Medicaid 
programs.
    Comment: One commenter recommended that HCFA specify that States 
must undertake a preliminary investigation within a reasonable time not 
to exceed 60 days.
    Response: We agree with the commenter's suggestion that a State 
must undertake a preliminary investigation within a certain amount of 
time. We have not prescribed a specific number of days, but suggest 
that 60 days is indeed a reasonable amount of time to undertake a 
preliminary investigation. We have made the appropriate change to the 
regulation text.

7. Full Investigation, Resolution, and Reporting Requirements 
(Sec. 457.930)

    We proposed that the State must establish and implement effective 
procedures for investigating and resolving suspected and apparent 
instances of fraud and abuse. We further proposed that, once the State 
determines that a full investigation is warranted, the State must 
implement certain procedures, including, but not limited to, the 
procedures specified at paragraphs (a) through (c) of Sec. 457.930.
    We noted in the preamble to the proposed rule that States may model 
their approaches after procedures for fraud and abuse investigation, 
resolution, and reporting used by the Medicaid State agency as outlined 
in Secs. 455.15, 455.16, and 455.17 of the Medicaid regulations. 
Medicaid funding cannot be used for fraud investigation activities in 
separate child health programs. MFCUs may only use Medicaid funding for 
fraud and abuse activities in States that provide child health 
assistance under a Medicaid expansion program. 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. To the extent that States want to allocate additional 
non-MFCU full-time staff, using SCHIP dollars, to work exclusively on 
fraud and abuse investigation in separate child health programs, they 
may do so. We noted that expenditures for this purpose would be subject 
to the 10 percent cap on administrative costs under section 2105(c)(2) 
of the Act.
    Comment: One commenter suggested that a better alternative to 
traditional law enforcement would be to work through the provider fraud 
processes established by participating health plans, under which the 
expenditures might be considered a benefit cost rather than an 
administrative cost.
    Response: While we intended to provide flexibility in implementing 
program integrity strategies, as noted in response to a comment on 
Sec. 457.915, States must be aware that fraud and abuse may stem from 
within a participating health plan or apart from providers. Therefore, 
States must have procedures at the State level to detect and 
investigate plan and issuer fraud and abuse, as well as provider fraud 
and abuse. Relying on plan and issuers to monitor themselves for fraud 
and abuse would not be in the public interest.
    It is true that capitated payments made to plans in conjunction 
with the provision of health benefits coverage that meets the 
requirements of title XXI and for which the plan is at risk are not 
considered administrative costs. Therefore, plan activities covered by 
these payments are considered as expenditures for child health 
assistance. However, health plan processes for the detection, 
investigation and resolution of fraud and abuse, and that protecting 
program integrity is not the only concern States must consider in 
designing their program integrity strategies. They must design 
strategies that accomplish the goals of, and comply with the 
requirements of, this subpart, thereby protecting against a range of 
potential fraud and abuse concerns, such as, but not limited to, any 
potentially problematic health plan activity.
    Comment: Several commenters recommended that HCFA allow States the 
authority to enter into agreements with other investigative bodies, not 
strictly law enforcement officials, and not necessarily a State-
established program integrity unit; rather, they recommended that 
States be able to contract with bodies such as health plan 
investigative divisions. To this aim, commenters recommended paragraph 
(c) be rewritten to include referring the fraud and abuse case to an 
appropriate investigative body as designated by the State.
    Response: We agree that States should be able to structure their 
fraud and abuse activities in different ways; however, the inclusion of 
coordination with any law enforcement officials is an integral part of 
an effective program integrity process. We have modified the regulation 
text to clarify that State should be able to determine the appropriate 
law enforcement officials to whom they should refer suspected fraud and 
abuse cases but we do not agree with the recommendation that States 
should not have to coordinate with any law enforcement officials. We 
reserve the right to review the States' program integrity procedures to 
ensure their compliance with the requirements and goals of title XXI 
and this regulation.
    Comment: One commenter believed that it is unreasonable to judge 
States' applications or amendments based on consistency of their fraud 
and abuse procedures with other State programs.
    Response: States are required to design and implement procedures 
for fraud investigation, resolution, and reporting. States are not 
required to file State plan amendments with HCFA in order to implement 
a program integrity fraud and abuse detection and investigation 
strategy. Therefore, HCFA will consider State's statement assuring the 
development and implementation of a program integrity system to be a 
requirement that is subject to review through HCFA's ongoing 
monitoring.
    Comment: We received a few comments noting that requiring States 
with separate child health programs to set up separate structures other 
than Medicaid Fraud Control Units to do the same function is a waste of 
resources, and that requiring separate processes is burdensome and 
costly. One commenter recommended that States have the option to allow 
the MFCU to conduct SCHIP fraud investigations, assuming tracking and 
claiming are conducted appropriately. Another commenter recommended 
deleting the provision because the rule should not mandate

[[Page 2615]]

State activities that are subject to the administrative cap and are not 
specifically required by the statute.
    Response: As noted above, the Medicaid statute does not permit 
MFCUs to conduct program integrity activities that are not related to 
the Medicaid program. We disagree that this section should be deleted. 
We maintain that program integrity activities are necessary for the 
effective and efficient administration of the State plan as required in 
section 2101(c)(2) of the statute, in addition to being based on the 
sound precedents set by the Medicare and Medicaid programs. While we 
recognize that some of these activities could be duplicative, we do not 
have the authority to blend the funding for fraud and abuse prevention 
efforts among the Medicaid and SCHIP programs.
    Comment: One commenter suggested that States must have written 
procedures for investigating and resolving suspected and apparent 
instances of fraud and abuse.
    Response: We agree that States should have written procedures for 
investigating and resolving suspected and apparent instances of fraud 
and abuse to ensure the effective and efficient administration of SCHIP 
programs. However, we are not requiring that States submit to HCFA such 
written procedures. We anticipate that States may continue to develop 
and to modify fraud investigation and detection procedures as SCHIP 
programs develop. Therefore, we anticipate the methods and rules 
relating to program integrity will evolve as they are implemented. We 
wish to give the States the flexibility to improve fraud and abuse 
detection systems as they develop, rather than tying States to an 
initial written plan. However, HCFA reserves the right to review a 
States' program integrity procedures, and to request that they be 
described in writing, as part of its ongoing monitoring.

8. Sanctions and Related Penalties (Sec. 457.935)

    Under the authority of sections 2101(a) and 2107(e) of the Act, and 
consistent with the requirements under Federal and State health care 
programs, we proposed 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 noted that this 
provision is necessary to implement section 1128 of the Act regarding 
exclusion of certain individuals and entities from participation in 
Medicare and State-administered health care programs. We proposed that 
the separate child health programs be 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. We also proposed to make separate 
child health programs subject to Part 455, subpart B of chapter IV of 
title 42 of the Code of Federal Regulations. In an effort to promote 
enforcement of this subsection and to provide HCFA and the Secretary 
with critical fraud and abuse data, we also proposed that the separate 
child health programs be subject to the requirements of section 1128E 
of the Act in the same manner as under the Medicare and Medicaid 
programs. In accordance with section 1128E of the Act, we proposed that 
the separate child health program 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, we noted in preamble that States should 
share such information and data with the Office of the Inspector 
General in an effort to promote enforcement.
    We did not receive any comments on this section and will therefore 
implement the regulation language as proposed.

9. Procurement Standards (Sec. 457.940)

    Section 2101(a) of the Act requires that States provide services in 
an effective and efficient manner. In order to meet our obligation to 
ensure that States use SCHIP funds in a cost-effective manner, we set 
forth provisions at proposed Sec. 457.940 regarding procurement 
standards. The proposed provisions did not include Federal oversight of 
provider payments. Rather, we proposed to require that States set rates 
in a manner that most efficiently utilize limited SCHIP funds.
    We proposed to require that States provide HCFA with a written 
assurance that title XXI services will be provided in an effective and 
efficient manner. We also proposed that the assurance must be submitted 
with the initial SCHIP plan or, for States with approved SCHIP plans, 
with the first request to amend the SCHIP plan submitted to HCFA 
following the effective date of these regulations.
    If States contract with entities for SCHIP services, they must 
provide for free and open competition, to the maximum extent possible, 
in the bidding of all contracts for coverage or other title XXI 
services in accordance with the procurement requirements of 45 CFR 
74.43.
    Alternatively, we proposed that States may base title XXI payment 
rates on public or private payment rates for comparable services. We 
noted in preamble that this applies to fee-for-service and capitated 
rates. We proposed 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. For 
example, 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 proposed that States must provide to HCFA, if requested, a 
description of the manner in which they develop SCHIP payment rates in 
accordance with the requirements of Secs. 457.940(b)(2) and (c). 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, or a description of the public or private 
rates that were used to set the SCHIP rates, if applicable, and/or an 
explanation of why rates higher than those that would be established 
using either of these two methods are necessary. HCFA may request the 
description when a State first determines its rates or, for approved 
SCHIP plans, when it updates its rates or changes its reimbursement 
methodology.
    Comment: We received several comments recommending with regard to 
Sec. 457.940(b)(1) that procurement standards in 45 CFR part 92 are 
more appropriate for non-entitlement programs such as SCHIP because 
they allow States to utilize their own procurement standards when 
purchasing services with Federal grant money. Flexibility will enable 
States to make cost-effective and quality health plan selections. One 
commenter noted that flexibility to establish higher rates to ensure 
provider participation should be coupled with stricter enforcement.
    Response: We disagree with the commenter's suggestion for changing 
the procurement standards applicable to SCHIP. We believe the 
procurement requirements of 45 CFR 74.43 are more appropriate for 
separate child health

[[Page 2616]]

programs because they allow for accountability as well as State 
flexibility in implementation. We expect all States, not just those 
establishing higher rates to ensure provider participation or for other 
permitted purposes, to strictly enforce the procurement standards of 
this section.
    Comment: Several commenters requested that Sec. 457.940(b)(2) be 
rewritten as follows: ``Basing title XXI payment rates on public and/or 
private payment rates for comparable services for comparable 
populations.'' Several commenters felt this section should be expanded 
to allow States, where such comparisons cannot be made for lack of 
data, the ability to explain their analysis of why the rates are within 
acceptable parameters.
    Response: We acknowledge the distinctions in rates that may need to 
be made based on the populations being served and have added ``for 
comparable populations'' to the regulation text as recommended. 
However, we disagree with the suggestion to change the regulation to 
allow States to explain why the payment rates are within acceptable 
parameters absent sufficient supporting data. The final regulation text 
includes a significant amount of flexibility for States to explain how 
they meet the standards of Sec. 457.940(c) regarding the need for 
higher rates than otherwise permitted and received many comments 
recognizing its flexibility. We have retained the proposed language in 
Sec. 457.940(c) regarding acceptable bases for such higher rates 
because we believe rates should only be permitted to be higher under 
those specific circumstances.
    Comment: One commenter supported the intent of the section and 
noted the importance of setting adequate reimbursement levels to ensure 
provider participation and efficient provision of services. The 
commenter found it problematic that about half of the States set 
payment rates for separate child health programs at the same levels as 
they do for Medicaid. The commenter encouraged HCFA to work with States 
to establish more reasonable rates.
    Response: Each State has the authority to set reasonable rates for 
its SCHIP population providers. It would be inappropriate for us to 
dictate to the States what specific rates they should pay to 
participating providers, especially in those States that have a 
sufficient number of providers to furnish quality care to all SCHIP 
participants. However, in accordance with Sec. 457.495, we encourage 
States to set rates and generally administer their SCHIP programs in a 
way that will provide access to providers and attract an adequate 
number of highly qualified, experienced providers with the appropriate 
range of specialties and expertise.
    Comment: One commenter suggested that HCFA incorporate a standard 
that the SCHIP rates for MCEs be actuarially sound and that we should 
clarify the meaning of actuarial soundness in the managed care context. 
In addition, another commenter suggested that HCFA require States to 
justify or prove the methodology used to establish the payment rate.
    Response: We agree with the comment that rates should be 
actuarially sound. Actuarially sound capitation rates means that they 
have been developed in accordance with generally accepted actuarial 
principles and practices, that are appropriate for the populations and 
services to be covered under the contract, and that have been certified 
by an actuary (or actuaries) meeting the qualification standards 
established by the Actuarial Standards Board. The text of the 
regulation at Sec. 457.940(b)(3) has been changed to reflect this and a 
definition is included at Sec. 457.902--Definitions.
    Comment: One commenter supported giving States maximum flexibility 
to take advantage of local market forces in establishing SCHIP payment 
rates. In this commenter's view, States should provide reimbursement 
for obstetric and gynecologic services sufficient to assure that SCHIP 
enrollees have access equal to that of privately insured patients. This 
commenter also noted that providing these types of services to 
adolescents is often quite time consuming due to the various 
developmental and psycho social issues they face, and recommended that 
compensation for physicians should be determined accordingly.
    Response: We appreciate support for the policy of giving States 
flexibility in their procurement and rate setting. However, it is 
important for States to set rates high enough to provide sufficient 
access to, and quality of, care for all SCHIP participants for all 
services. However, it is not appropriate to specify the need for 
enhanced payment rates for certain types of providers or services in 
regulation. The requirement that States provide for free and open 
competition in procurement or demonstrate that their rates meet the 
requirements of (b) or (c) should ensure that SCHIP enrollees have 
access to providers that are compensated appropriately within their 
local health care markets.
    Comment: We received one comment recommending that Sec. 457.940(a) 
include a specific reference that States must comply with all 
applicable civil rights requirements in accordance with Sec. 457.130.
    Response: Section 457.130, contained in subpart A (which is the 
subpart that sets forth many general State plan requirements), requires 
States to include in their State plan an assurance that the State will 
administer their SCHIP program in compliance with applicable civil 
rights requirements. We maintain that this provision sufficiently 
assures this compliance.

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 that payment data is accurate, 
truthful, and complete, we proposed to specify in Sec. 457.945 that 
entities that contract with the State under a separate child health 
program must also 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.
    Comment: One commenter asserted that the requirements in this 
section are overly burdensome for States. Because so many of the SCHIP 
programs utilize managed care delivery systems, the commenter noted 
that managed care entities are required, by virtue of executing their 
contracts with the States, to provide accurate, complete and truthful 
information. The commenter felt that a separate and distinct 
certification document is unnecessary.
    Response: While we appreciate the administrative challenges States 
may face in implementing SCHIP programs, we do not believe the 
requirements of this section are overly burdensome for States. The 
unique nature of the SCHIP program and its relationship with plans and 
issuers merits the inclusion in contracts of the specific 
certifications required by this section, and that compliance with this 
standard will protect against fraud and abuse in this government-funded 
program. The commenter may have interpreted this provision to require a 
separate certification document but, in fact, the required 
certification could be provided as part of, or together with, any of 
the contracts or related documents into which the State and its 
contractors have entered, and should entail minimal additional 
administrative effort.

11. Contract and Payment Requirements Including Certification of Data 
that Determines Payment (Sec. 457.950)

    At Sec. 457.950, we proposed that when SCHIP payments to managed 
care

[[Page 2617]]

entities are based on data submitted by the MCE, the State must ensure 
that its contracts with MCEs require the MCE to provide enrollment 
information and other information required by the State. We also 
proposed that the State ensure that its contract requires the MCE to 
attest to the accuracy, completeness, and truthfulness of claims and 
payment data, upon penalty of perjury. As a condition of participation 
in the 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 proposed 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 health care resources (for example, 
clinics that are funded by grants provided under section 317 of the 
Public Health Service Act).
    We proposed that when SCHIP 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 proposed 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 
necessary by the State.
    Comment: One commenter agreed that agents of the State need access 
to payment information and that payment decisions must not be made 
without proper information and involvement of providers.
    Response: We appreciate support for the requirements in 
Sec. 457.950 regarding State access to claims and payment data. As 
noted in the preamble, compliance with Sec. 457.950(b)(2) requires 
States to establish procedures to ensure and attest to the accuracy of 
information on provider claim forms. The State thereby must involve the 
provider community to the extent necessary to comply with this 
requirement and the rest of Sec. 457.950, as noted in the comments.
    Comment: One commenter recommended amending this section to include 
a requirement to comply with applicable civil rights requirements in 
accordance with Sec. 457.130.
    Response: Section 457.130 requires States to administer the entire 
SCHIP program in compliance with the Civil Rights requirements noted in 
the title XXI statute and we maintain that this provision sufficiently 
assures compliance.
    Comment: One commenter noted that the wording of this section is 
confusing. The commenter noted that because some States may make 
prospective monthly payments to MCEs on the first day of each month, 
the MCE may not have any information other than the enrollment forms 
from the State itself. These States may be unclear as to whether or not 
this section applies to their programs.
    We also received a few requests that the requirement to attest to 
the accuracy and completeness of the data reflect that, to the extent 
that data is based on projections (e.g. premium rate submissions) that 
plans be permitted to attest to the accuracy to the best of their 
knowledge, information and belief. Another commenter requested deletion 
of the phrase ``under penalty of perjury'' from paragraph (a) because 
the requirements are already enforced through contractual language and 
penalties. Also, commenters requested clarification that complete data 
refers to data that includes all elements required by the State.
    Response: One of the fundamental tenets of program integrity is the 
need for certification of payment-related information. Prospective 
monthly payments are based on certified payment-related information 
despite the fact that they are developed retrospective of the services 
delivered. The submission of enrollment forms does not constitute 
payment-related information.
    While we recognize that the clause ``under penalty of perjury'' at 
Sec. 457.950(a) may not have been appropriate for the entire paragraph, 
the Office of the Inspector General representatives indicated that it 
was an essential protection. Therefore, we have deleted ``under penalty 
of perjury'' from the general language of Sec. 457.950(a), but left it 
in Sec. 457.950(a)(2).

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 proposed under Sec. 457.955 that the State must ensure 
that 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 of or enrollees in MCEs. In order 
to maintain privacy protections for enrollees, we proposed that the 
reporting of information on enrollees would be limited only to 
information on violations of law pertaining to actual enrollment in the 
plan or to, provision of, or payment for, health services. Furthermore, 
we proposed 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 noted in the preamble 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 SCHIP enrollees; however, expenditures for EQR would be 
subject to the 10 percent limit for administrative expenses under 
section 2105(c)(2) of the Act.
    Comment: Several commenters suggested that separate SCHIP programs 
should not be required or encouraged (as in the preamble) to use the 
Medicaid external quality review of services and that there is inequity 
in that Medicaid expansion programs receive 75 percent FMAP for this 
activity while stand-alone programs are required to stay within the 10 
percent limit on administrative expenditures.
    Response: While the Medicaid EQR process is a good model for States 
implementing separate child health programs, we are not requiring the 
use of this process in the regulation text, therefore States have 
flexibility in determining the type of quality assurance processes they 
utilize. Thus, States retain discretion in the use of funds for 
administrative expenditures and how to stay within statutory limits on 
such expenditures.
    Comment: One commenter recommended that HCFA clarify what action by 
MCEs are necessary to meet the requirement that MCEs contracting under 
a separate child health plans have administrative and management 
arrangements or procedures to safeguard against fraud and abuse. The 
commenter asked how this requirement differ from the M+C program 
requirement that each M+C organization have a compliance plan. This 
commenter also recommended that our guidance convey that the reporting 
requirement in this section should only apply after the completion of a 
reasonable inquiry and a finding of credible evidence that a violation 
has occurred.
    Response: We did not attempt to make the provisions of this subpart 
consistent

[[Page 2618]]

with the M+C rule. As noted previously, the Medicare program is 
nationally-funded and administered; while Medicaid and SCHIP are funded 
by a combination of State and Federal funds.
    We have, however, added a provision at Sec. 457.955(b)(2) to 
specify that States must ensure arrangements that prohibit MCE's from 
conducting any unsolicited contact with a potential enrollee for the 
purpose of influencing an individual to enroll in the plan. This 
provision is added in order to prevent past abuses in which potential 
enrollees were influenced to join an MCE without the benefit of 
adequate information and education about their options in choosing an 
MCE and is consistent with similar provisions in Medicaid managed care, 
and Medicare+Choice.
    Comment: We received one comment recommending that as a condition 
of qualification as an MCE contractor, the MCE must allow the States to 
inspect and audit MCEs at any time, when there is a reasonable 
possibility of fraud and abuse. This condition should also apply to any 
provider under contract to provide SCHIP services, according to this 
commenter.
    Response: Section 457.955(d) of the NPRM states that ``the State 
may inspect, evaluate, and audit MCE's at any time, as necessary, in 
instances where the State determines that there is a reasonable 
possibility of fraudulent and abusive activity.'' The regulation places 
the burden on the State to make sure that its contracts or arrangements 
with MCEs allow the State to comply with this section.

13. Reporting Changes in Eligibility and Redetermining Eligibility 
(Sec. 457.960)

    We proposed in this section that States choosing to require that 
enrollees, or their representative, report changes in their 
circumstances during an eligibility period, the State must: (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.
    Comment: One commenter noted that at redetermination, a child 
enrolled in a separate child health plan who becomes eligible for 
Medicaid should have a reasonable opportunity to apply and be found 
eligible for Medicaid without a break in coverage. The rules should 
specify that the child might remain enrolled in the separate child 
health program for up to 45 days (or longer if cause exists) while the 
Medicaid application is being processed in accordance with 
Sec. 457.360. In addition, the rules should specify that prior to any 
termination of SCHIP coverage, the State should screen for potential 
Medicaid eligibility and facilitate enrollment.
    Response: We agree with the goal of providing seamless coverage to 
all children eligible for Medicaid or SCHIP. See subpart C for 
requirements regarding screening and enrollment. These requirements 
apply to both eligibility determinations and redeterminations as 
specified at Sec. 457.350(a).
    Comment: One commenter recommended that HCFA provide guidance 
regarding how the redetermination process should be conducted. States 
should not be permitted to request a re-application or require that 
enrollees provide information that is not needed to complete the 
eligibility determination. States should also be required to give the 
enrollee adequate time to respond to requests for additional 
information. States must also be required to describe in the State plan 
how the child will be enrolled in Medicaid without a break in coverage.
    Response: We recognize the concerns of the commenter, however, the 
NPRM balances the need for maintaining State flexibility while 
establishing an acceptable standard that will satisfy our need for 
accountability in the program. It would be inappropriate for us to 
dictate methods of redetermination or a specific redetermination 
process that all States must use. Rather, we are concerned that States 
have a redetermination process because SCHIP programs are best served 
by leaving the specifics of the process to each State.

14. Documentation (Sec. 457.965)

    To ensure the integrity of the program, we proposed to require that 
the State include in each applicant's record 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.
    We did not receive any comments on this section. Therefore, we are 
implementing this provision as set forth in the proposed rule.

15. Eligibility and Income Verification (Proposed Sec. 457.970)

    In this final regulation, proposed Sec. 457.970 has been moved from 
subpart I to subpart C, Eligibility to become Sec. 457.380. We have 
addressed comments on proposed Sec. 457.970 in subpart C.

16. Redetermination Intervals in Cases of Suspected Enrollment Fraud 
(Sec. 457.975)

    We proposed in Sec. 457.975 that if a State suspects enrollment 
fraud, the State may, at its own discretion, perform eligibility 
redeterminations with the frequency that the State considers to be in 
the best interest of the SCHIP program.
    Comment: One commenter noted that States should carefully consider 
the effect of not allowing immediate reenrollment of otherwise eligible 
children in SCHIP. Though the suspected fraud is very unlikely to have 
been conducted by the child, the commenter noted that it is the child 
who will suffer.
    Another commenter recommended deleting this section because they 
believed its provisions were not only unnecessary but also might easily 
be abused. The commenter expressed concern that this rule could be used 
to justify increased scrutiny of coverage provided to racial and ethnic 
minorities.
    Response: We appreciate this comment. We too are concerned with 
excluding children from coverage under SCHIP and are committed to 
ensure that States maintain coverage of children for as long as they 
are eligible and have deleted this section from the final rule.

17. Verification of Enrollment and Provider Services Received 
(Sec. 457.980)

    We proposed in Sec. 457.980 that the State must have established 
systems and procedures for verifying enrollee receipt of provider 
services. In addition, we specified 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 noted that these procedures would serve as a fundamental 
component of other program integrity activities in this proposed rule, 
including the fraud detection and investigation efforts discussed under 
Secs. 457.915, 457.925, and 457.930.
    Comment: Several commenters noted that the provisions of this 
section could be difficult to implement in managed care plans and that 
verification may be burdensome in a capitated system. The commenters 
requested that we clarify that it would be acceptable if there were a 
provision in the contract with the health plan to ensure provider 
services. One commenter expressed concern regarding external 
verification of provider services received in the managed care market, 
especially in capitation-based plans. The commenter felt that States 
should be able to handle

[[Page 2619]]

this through the normal provider evaluation and review procedures used 
by managed care entities.
    Response: It is necessary for the effective and efficient 
administration of any State separate child health insurance program to 
monitor and verify enrollee receipt of services for which providers 
have billed or received payment, or that providers have contracted to 
furnish regardless of the method of reimbursement. Therefore, the 
provisions of Sec. 457.980(a) apply to States using managed care plans 
as well as other systems of health insurance and care delivery. Plans 
participating in SCHIP are accountable to the State for providing 
services and care to SCHIP participants. States must ensure, when 
contracting with providers, that beneficiaries are receiving care to 
which they are entitled and for which States have provided funds.
    Comment: We received a couple of comments noting that an error may 
have occurred in this section as medical providers bill the State but 
are not billed themselves. This section should read, ``The State must 
establish methodologies to verify whether beneficiaries have received 
services for which providers have billed.''
    Response: We agree and have changed the text of the regulation.

18. Integrity of Professional Advice to Enrollees (Sec. 457.985)

    To address our concern that enrollees have a 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, we proposed that States must guarantee in their contracts the 
protection described in proposed Sec. 457.985(e). We proposed to 
require that States must include in their contracts for coverage and 
services, provisions regarding enrollee access to information related 
to actions that could be subject to appeal in accordance with the 
``Medicare+Choice'' regulation at Sec. 422.206, which discusses the 
protection of enrollee-provider communication and at Sec. 422.208 and 
Sec. 422.210(a) and (b) which discuss physician incentive limitations. 
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 SCHIP programs.
    Comment: One commenter expressed its support for the requirement to 
provide enrollee access to information related to actions involving 
inappropriate arrangements that could be subject to review and appeal. 
One commenter noted its support for the requirement in Sec. 457.985(e) 
that States prohibit gag rules and establish principles for disclosure 
of physician financial arrangements that could affect treatment 
decisions.
    Response: We appreciate the support and have retained these 
requirements with some modification in the final rule. Section 
457.985(e) has now been redesignated as Sec. 457.985(a) and (b).
    Comment: One commenter believed that HCFA does not have the 
authority to apply the M+C physician incentive requirements to separate 
child health plans.
    Response: We disagree with the commenter. Under Section 2101(a) of 
the Act, 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. A State cannot provide child health assistance in an 
effective and efficient manner if it allows inappropriate physician 
incentive plans that have the effect of reducing or limiting health 
services.
    Comment: Several commenters are concerned about the reference in 
proposed Sec. 457.985(e)(1) prohibiting interference with medical 
communications between health care professionals and patients. The 
proposed rule refers to M+C regulations at Sec. 422.206. The commenters 
would like to include only a specific reference to Sec. 422.206(a) 
rather than to the whole section. Section 422.206(b) includes a 
``conscience protection'' that appears to allow plans to refuse to 
include in their benefit package any counseling or referral service to 
which the plan asserts a moral or religious objection. Some commenters 
noted that there is an explicit statutory provision in the M+C portion 
of the Balanced Budget Act that deals with conscience-based refusals to 
provide services and the M+C regulatory provision parallels the 
statute, but there is no similar statutory requirement in SCHIP. The 
commenters noted that the regulation also should not reference 
Sec. 422.206(b) in order to preserve access to health care services and 
information about them. According to this commenter, a health plan that 
refuses to provide counseling or referral services impairs access to 
those services, and typically the services most at risk are 
reproductive health services provided to women. The commenters further 
argued that this provision conflicts with the CBRR goal of open 
communication between health care professionals and patients in all 
cases, without qualification or exception.
    Response: We agree that the regulation should reference only 
Sec. 422.206(a). The remainder of Sec. 422.206 contains requirements 
for reporting to HCFA sanctions for Medicare+Choice organizations that 
are not applicable in a separate child health program. However, not all 
providers are required to offer all services in the SCHIP benefit 
packages. If a State contracts with providers that have a moral or 
religious objection to providing particular services, the State retains 
the responsibility to assure that enrollees are informed of and have 
access to all services included as a part of the benefit package 
consistent with Sec. 457.495.
    Comment: One commenter noted that the preamble to the proposed rule 
(p. 60928), which cross-references Sec. 422.208 of the M+C regulations, 
appears to apply the physician incentive requirements to separate child 
health programs. However, Sec. 457.995(d) and Sec. 457.985(e) appear to 
apply only the disclosure requirements, not the substantial financial 
risk requirements, to the SCHIP program. This commenter recommended 
that HCFA clarify this requirement.
    Response: A State must guarantee compliance with all of the 
provisions of Sec. 422.208 (relating to limitations on physician 
incentive plans) and Sec. 422.210 (relating to disclosure of physician 
incentive plans) of this chapter as stated in Sec. 457.985.
    Comment: One commenter recommended that States should be allowed to 
provide protections against the gag rule and physician incentives in 
accordance with their own State law.
    Response: While we appreciate State efforts to prohibit gag rules 
and inappropriate physician incentive plans, it is necessary to require 
compliance with Sec. 422.208 and Sec. 422.210 of this chapter to ensure 
nationwide protection of enrollees in separate child health programs 
consistent with the CBRR.

I. Subpart J--Allowable Waivers: General Provisions

1. Basis, Scope, and Applicability (Sec. 457.1000)

    This subpart interprets and implements the requirements for a 
waiver under section 2105(c)(2)(B) to permit a State to exceed the 10 
percent limit on expenditures as specified in section 2105(c)(2)(A), 
and for a waiver 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

[[Page 2620]]

that the State claims administrative costs under title XXI and seeks a 
waiver of limitations on such claims for use of a community-based 
health delivery system.
    Comment: One commenter noted that there appears to be a word 
missing in Sec. 457.1000(c). The sentence ends with ``seeks a waiver of 
limitations such claims in light of a community-based health delivery 
system.'' The commenter believes that ``on'' should be inserted after 
``limitations,'' although the meaning is still unclear.
    Response: We have corrected Sec. 457.1000(c), as suggested by the 
commenter, by adding the word ``on''. We have also edited the sentence 
for clarity. The first part of the sentence now indicates that the 
requirements of this subpart apply to a separate child health program. 
The second part of the sentence clarifies that the requirements of this 
subpart also apply for States that operate Medicaid expansion programs 
if the State claims administrative costs under title XXI and seeks a 
waiver of limitations on such claims for cost-effective coverage 
through a community-based health delivery system.
    Comment: One commenter suggested that the same time frames for HCFA 
approval that are proposed for State plan and State plan amendment 
approvals be included for waivers.
    Response: We have amended the regulation text by adding a new 
Sec. 457.1003 to clarify that we will review the waivers under this 
subpart as State plan amendments under the time frames as specified in 
Sec. 457.160. In practice, State proposals for these waivers have been 
reviewed as part of the initial State plan or amendment and within the 
90-day review period permitted under statute. These waivers must be 
reflected in the State plan and updated accordingly. It should be noted 
that the 90-day time frame for review does not apply to HCFA review of 
section 1115 demonstration proposals under this title.

2. Waiver for Cost-Effective Coverage Through a Community-Based Health 
Delivery System (Sec. 457.1005)

    Section Sec. 457.1005 interprets and implements section 
2105(c)(2)(B) of the Act regarding waivers authorized for cost-
effective alternatives. In Sec. 457.1005, we 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. This 
section also clarifies the extent to which the State will be allowed to 
exceed the 10 percent limitation on such 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.
    To receive payment for cost-effective coverage through a community-
based health delivery system under an approved waiver, we proposed that 
the State must demonstrate that--
     Such coverage meets the coverage requirements of section 
2103 of the Act and subpart D of this part; 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 would otherwise be provided under the State 
plan.
    We noted in the preamble to the proposed rule that a State may 
define a community-based delivery system to meet the specific needs and 
resources of a community, as long as it ensures 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. We also proposed that all 
community-based providers must comply with all other title XXI 
provisions.
    We proposed that an approved waiver will remain in effect for two 
years and that a State may reapply three months before the end of the 
two-year period. We also proposed that, notwithstanding the 10 percent 
limit on expenditures described in 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.
    Comment: One commenter suggested that HCFA adopt the definition of 
``health services initiatives'' set forth in the August 6, 1998 letter 
to State Health Officials. In the letter, the term is defined as 
``activities that protect the public health, protect the health of 
individuals or improve or promote a State's capacity to deliver public 
health services and/or strengthens resources needed to meet public 
health goals.'' In addition, the commenter suggested that the preamble 
make clear that all immigrant children, regardless of their status or 
date of entry, can participate in, and benefit from, health services 
initiatives.
    Response: We agree with the commenter. We have added the definition 
of ``health services initiatives'' as set forth in the August 6, 1998 
letter to the definitions section of the regulations text at 
Sec. 457.10. We note that this definition of health services 
initiatives includes ``other low-income children,'' which can include 
immigrant children, regardless of their status or date of entry, and 
children who are eligible for Medicaid but not enrolled. As specified 
in our January, 14, 1998 letter to State Health Officials, health 
services initiatives may benefit the health of all low-income children, 
including but not limited to children eligible to receive services 
under title XXI. Therefore, health services initiatives such as health 
education activities, school health programs and direct services (such 
as newborn hearing and lead testing programs), could be targeted to 
low-income, immigrant communities.
    Comment: One commenter proposed that States be permitted to use 
title XXI funds under this waiver to pay for primary care services 
provided by community-based providers to children who are not targeted 
low-income children eligible for the State's title XXI program, in 
order to increase access to medically necessary primary care for 
uninsured SCHIP-eligible children who are not yet enrolled in the 
State's title XXI program.
    Response: States may provide primary care services to children who 
are not targeted low-income children through a ``health services 
initiative under the plan for improving the health of children 
(including targeted low-income children and other low-income 
children).'' These expenditures would be subject to the 10 percent 
limit as specified in section 2105(c)(2)(A), except to the extent that 
the State pays for these services through the use of savings from the 
waiver for a cost-effective alternative delivery system. In this case, 
the State could use the savings for primary care services for 
unenrolled low-income children and those expenditures would not be 
subject to the 10 percent cap.
    Another option for States to consider is using this waiver in 
conjunction with presumptive eligibility (provisional enrollment). The 
costs associated with a period of provisional enrollment are benefit 
costs when the child subsequently is determined eligible for either 
Medicaid or a separate child health program. However, the costs 
associated with a period of provisional enrollment for a child who is 
later

[[Page 2621]]

determined ineligible for either Medicaid or a separate child health 
program are costs that are normally subject to the 10 percent 
limitation. When services are provided during a period of provisional 
enrollment to a child who is low-income and whom the State later 
determines to be ineligible for either Medicaid or a separate child 
health program, the costs of providing benefits to these low-income, 
ineligible children could be funded through the use of the waiver for a 
cost effective alternative delivery system. Again, the benefits 
provided would have to meet all the requirements of Sec. 457.410.
    Comment: One commenter suggested allowing States to set aside a 
portion of their title XXI allotment for a community-based provider 
program. The commenter noted 90 percent of the set-aside funds would 
pay for services to SCHIP eligible children and 10 percent of the set-
aside funds would pay for administration.
    Response: The Act does not dictate how States set their budgets 
generally or set budget priorities relating to community-based waiver 
programs. Section 2105(a) authorizes the Secretary to pay a State from 
its allotment based upon actual expenditures for child health 
assistance. The State might be able to make expenditures according to 
the proportions described above. However, as specified in section 
2105(c)(2)(A), the amount of administrative expenditures that a State 
can claim is directly tied to the amount of expenditures they claim for 
child health assistance.
    Comment: One commenter believed that the language in section 
Sec. 457.1005(b)(2) is unclear and asked whether the ``State plan'' 
referred to is the Medicaid State plan or the SCHIP State plan.
    Response: The waiver described in proposed Sec. 457.1005(b)(2) is a 
program waiver under title XXI and, therefore, the State plan referred 
to in this section is the title XXI State plan, as defined in 
Sec. 457.10.
    Comment: One commenter recommended amending Sec. 457.1005(b)(1) 
regarding requirements for obtaining a waiver to incorporate a 
reference to the cost-sharing protections in subpart E and the various 
beneficiary protections provided in other subparts of the rule and 
summarized in Sec. 457.995. The commenter was concerned that children 
receiving care in a community-based health delivery system would not 
benefit from the consumer protections provided in the regulation, and 
that States should be not permitted to utilize this waiver as a means 
of circumventing the protections that are afforded to other SCHIP 
applicants and enrollees.
    Response: As proposed, the regulation text at Sec. 457.1005(b) 
required States obtaining a waiver for cost-effective coverage through 
a community-based health delivery system to 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. In the preamble to the proposed rule, we stated that, for 
the purposes of a waiver, all participating community-based providers 
must comply with all other title XXI provisions. On further 
consideration, we have clarified the policy under the final regulation. 
Section 457.1005(b)) now requires that, in providing child health 
assistance through the waiver, the coverage must meet all the 
requirements of this part, including subparts D and E. Therefore, the 
final regulation clarifies that all title XXI protections will apply 
under a waiver for a community-based delivery system in order to assure 
that all children receive the same protections regardless of where they 
receive services.
    Comment: One commenter believes that HCFA's example of coverage for 
a special group, such as children who are homeless or who have special 
health care needs, does not consider that the care for these children 
may cost more than the care for the average child. The commenter 
recommended that HCFA reconsider Sec. 457.1005 and provide options for 
States to proceed with caring for children with special needs in a 
manner that allows payment above the cost of providing coverage to the 
``average'' child.
    Response: Section 2105(c)(2)(B)(ii) of the Act specifies that the 
cost of coverage through the community-based health care delivery 
system, on an average per child basis, may not exceed the cost of 
coverage that would otherwise be provided under the State plan. In an 
August 6, 1998 letter to State Health Officials, we stated that the 
amount paid to the community-based delivery system on a Federal fiscal 
year, per child basis must not be greater than the amount that would 
otherwise have been paid for that child to receive coverage under title 
XXI. For example, if the amounts that the State pays health plans under 
the State plan reflect the risk entailed in providing care to special 
needs children (because the State risk adjusts its capitation payments, 
or because the State provides services to these children on a fee-for-
service basis), these above-average costs for the special needs 
children in fact, will be reflected in the cost-effectiveness 
calculation. Therefore, the cost-effectiveness calculation required 
under Sec. 457.1005(b)(2) does not preclude the State from adjusting 
its payments for the care of special needs children to provide for 
higher payment for such care.
    Comment: One commenter applauded HCFA's interpretation of waivers 
as stated in the proposed rule and agreed with the statement that the 
purpose of this waiver was to increase health services and not to 
increase funds for administration.
    Response: The preamble of the proposed rule set forth our belief 
that Congress did not intend that the waiver be used primarily to allow 
for more administrative spending or spending on outreach services under 
section 2105(a)(2). While we appreciate the support of the commenter, 
we also point out that States do retain flexibility regarding the use 
of any savings obtained as a result of this waiver pursuant to 
Sec. 457.1005(d).
    Comment: A number of commenters recommended that approved waivers 
should initially remain in effect for three years, to coincide with the 
time frames at section 2104(e) of the Act for spending the funding 
allotment for each year, and to provide time to evaluate the waiver's 
impact and to demonstrate cost-effectiveness. Following the initial 
approval period, one commenter recommended that the duration be five 
years, in keeping with the typical duration of 1115 waivers.
    Response: We agree with the commenters' suggestion that a 3-year 
approval period would coincide with statutory time frames for the 
expenditure of allotments and provide a more adequate period of time in 
which to determine cost-effectiveness. Therefore, we have revised 
Sec. 457.1005(c) to provide that the duration of time for which waivers 
for cost-effective coverage through a community-based health delivery 
system are approved is three years. We will continue to determine cost-
effectiveness upon application and renewal for the waiver. However, we 
have not accepted the recommendation to extend the waiver period to 
five years because it is important to assess the cost-effectiveness of 
community-based health delivery systems on a more frequent basis. We 
have also revised the regulation at Sec. 457.1005 to indicate that a 
State may reapply for approval 90 days before the end of the three year 
period for consistency with the 90 day review period that apply to 
State plan amendments.

[[Page 2622]]

3. Waiver for Purchase of Family Coverage (Sec. 457.1010)

    We proposed that 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. We proposed 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 does 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.
    We requested comments on whether the benefits specified in title 
XXI also apply to adults covered by 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 solicited 
comments as to whether the State should be required to offer this 
additional coverage to adults under the family waiver.
    We noted that there is no statutory definition of family coverage 
for the purposes of this subpart and we solicited input from commenters 
on the definition of ``family'' for purposes of this subpart.
    Comment: Many commenters questioned whether States covering parents 
of SCHIP children through a family coverage waiver must provide the 
benefits specified in title XXI to the family members who would not 
otherwise be eligible for SCHIP coverage. These commenters asserted 
that this decision should be left to State discretion. Commenters did 
not believe that there is any statutory basis for such a rule. 
Commenters also indicated that such a requirement would dramatically 
restrict States' ability to achieve cost-effectiveness in family 
coverage and would result in a reduction in the number of children that 
could be insured through the program. Commenters also noted that such a 
requirement could further complicate the States' administration of 
benefit and/or cost-sharing upgrades for premium assistance programs 
because of the difficulty in administering benefit upgrades.
    Response: We appreciate the commenters' consideration of this 
issue, but disagree with the recommendation and rationale because we do 
not believe it gives weight to the congressional interest in a standard 
minimum benefit package for all covered individuals. Congress clearly 
intended that title XXI funds be used to provide a comprehensive 
benefit package meeting the requirements of section 2103. Children's 
benefits under a premium assistance program must meet requirements in 
section 2103, and benefits offered under group health plans typically 
do not differ for adults and children. In addition, title XXI provides 
considerable flexibility for States to choose a benchmark package 
against which they can compare the benefits offered under a group 
health plan. Therefore, we have decided to require that any health 
benefits coverage provided under a family coverage waiver must comply 
with the benefit requirements of Sec. 457.410 and have revised the 
language at Sec. 457.1010(c) to reflect this change.
    Section 2105(c)(3)(A) provides the authority for this policy 
because it requires that the purchase of family coverage must be cost-
effective relative to the amounts that the State would have paid to 
obtain ``comparable coverage'' for only the targeted low-income 
children involved. Therefore, this provision clearly contemplates that 
the coverage offered to non-eligible family members under a family 
coverage waiver would be comparable to the coverage that would be 
offered to targeted low-income children. We believe that requiring the 
family coverage to meet title XXI standards best assures this 
comparability and is most consistent with the intended use of title XXI 
funds. However, we have interpreted the statute's use of the term 
``comparable'' to permit the coverage of non-SCHIP eligible family 
members to be based on a different title XXI benchmark than the 
targeted low-income children's coverage.
    While we recognize the cost of family coverage will increase if the 
State provides wrap-around coverage to adults in addition to the 
benefits provided by the group health plan, the degree of cost increase 
is unclear. For example, when the ``wrap-around'' supplemental coverage 
provided by the State to meet the section 2103 requirements is coverage 
only for well-baby and well-child services, there would be no 
additional costs to provide coverage that meets the requirements of 
section 2103 for adults, because this ``wrap-around'' coverage is not 
relevant for adults.
    Comment: One commenter stated that it is not clear what would be 
included in a benefits upgrade for adults. For instance, the commenter 
questioned if there would need to be a prohibition on cost sharing for 
adult preventive care visits and services to reflect the statutory 
prohibitions on copayments or cost sharing for well-baby or well-child 
care. If this were the case, the commenter indicated that the cost of 
implementing such a provision would obviously be significant.
    Response: While States must ensure that health benefits coverage 
provided to all family members, including adults, meets the 
requirements of section 2103, not all benefits are relevant to adult 
enrollees. For instance, while the statute requires the provision of 
well-baby and well-child care and prohibits cost sharing for these 
services, these services are not applicable or available to adults. 
Therefore, States would not be required to provide coverage to adults 
for these services, and the specific cost-sharing restrictions 
applicable to these services also would not apply to adults. However, 
general cost-sharing limitations do apply to covered services for 
adults and children under the family coverage waiver. For example, some 
States have expressed interest in providing coverage to families above 
150% of the FPL and, for this income level, the cumulative cost-sharing 
maximum of 5% of family income would apply.
    Comment: One commenter suggested that HCFA clarify how wrap-around 
coverage programs could be designed to make family coverage waivers 
viable, cost effective and simple to administer for group health plans.
    Response: We recognize the challenges faced by States in 
establishing and operating premium assistance programs. The challenges 
result from the fact that title XXI primarily was designed for targeted 
low-income children receiving health benefits coverage through programs 
operated directly by the State, rather than for families receiving 
health benefits coverage through group health plans. Nonetheless, it is 
possible to address these challenges. For example, some States are 
structuring their premium assistance programs to permit direct billing 
from providers to the State for services or cost sharing that is not 
covered by the group health plan. In addition, there is flexibility for 
States to select from among a variety of benchmark benefit packages, 
and States should carefully consider this flexibility when designing 
premium assistance programs. We will continue to share new approaches 
with States as they are developed.
    Comment: Commenters encouraged the use of ``family'' as defined by 
States, employers, and/or the individual contracting health insurance 
plans. One

[[Page 2623]]

commenter believed that States and the Federal government do not need 
to, and in fact cannot, develop a standard definition. Commenters noted 
that family coverage waivers will likely be provided through employer-
sponsored plans, where the issue of which family members may be 
included under the employer plan is regulated by contract with insurers 
and State insurance law. One commenter is planning to submit a request 
to subsidize employer-sponsored insurance that involves several premium 
tiers based on which family members are covered and suggests that the 
definition of ``family'' include the employee, spouse and children, or 
employee, and children depending on family composition and the coverage 
tier selected. Other commenters felt that HCFA should not create a 
definition of ``family,'' because such a definition could restrict the 
ability of group health plans or health insurance issuers from defining 
what constitutes family coverage. One commenter also noted that a more 
flexible approach would ease administration and maximize the 
availability of the family coverage waiver option. Another commenter 
suggested that the definition be left to State discretion and that once 
HCFA reviews a wide range of proposals, it can revise the regulations 
to include a definition if necessary.
    Response: We have not defined ``family'' for the purposes of this 
regulation in general and, after considering these comments, we agree 
with the commenters that one standard definition of ``family'' could 
unnecessarily restrict States' ability to utilize a family coverage 
waiver. Therefore, the decision regarding how to define ``family'' is 
left to States' discretion.
    Comment: One commenter urged that the definition of ``family'' 
include adult pregnant women without other family members. The 
commenter believes that this expansion of the definition is integral to 
ensuring that all pregnant women have access in their community to 
readily available and regularly scheduled obstetric care, beginning in 
early pregnancy and continuing through the postpartum period.
    Response: While we support States' efforts to cover pregnant women, 
title XXI does not support an expansion of coverage to include pregnant 
women who are not family members of SCHIP-eligible children. Section 
2105(c)(3) permits payment to a State for family coverage under ``a 
group health plan or health insurance coverage that includes coverage 
of targeted low-income children.'' The statute requires the State to 
compare the cost of coverage ``only of the targeted low-income children 
involved'' with the cost of coverage for the family. A State wishing to 
cover a pregnant woman who is not a family member of a targeted low-
income child would not be able to perform the required cost-
effectiveness test. Therefore, a pregnant woman can be covered through 
a family coverage waiver only to the extent that a targeted low-income 
child in her family is eligible for SCHIP coverage.
    Comment: A commenter noted that in the preamble to the proposed 
rule, we stated that States 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. We also noted that 
States may purchase coverage for children through premium assistance 
programs using employer-sponsored insurance without a family coverage 
waiver when the costs of such children are identifiable. One commenter 
was concerned that the premium tier structures available to most 
employers do not permit the costs of children to be identified. The 
commenter noted that employers offer only two coverage tiers, employee-
only and family coverage, which does not permit this kind of 
determination, because other family members, such as spouses, also may 
be covered under the family coverage tier. The commenter asserted that 
the options permitted in the proposed rule for determining the cost of 
children under employer-sponsored coverage will mean that most States 
seeking to cover a significant number of uninsured children under a 
premium assistance program will need to obtain a family coverage 
waiver.
    Because States may wish to utilize employer-sponsored insurance 
without subsidizing coverage for the adults in the family, the 
commenter suggested an alternative method for determining the cost of 
targeted low-income children covered through employer-sponsored 
coverage. The commenter proposed that States be permitted to pay a 
proportion or percentage of the cost of employer-sponsored family 
coverage without obtaining a family coverage waiver, as long as the 
portion the State pays is based on a reasonable actuarial estimate of 
what proportion of the cost of family coverage is attributable to the 
children, and as long as it meets the cost-effectiveness test.
    The commenter suggested that the actuarial determination of the 
proportion to be paid could be made once a year, based on typical group 
health coverage plan available in the State, and the percentage could 
then be applied to the actual premium for family coverage under the 
specific employer's plan.
    Response: We have reconsidered the requirement in the preamble to 
the NPRM that a family coverage waiver is needed when any title XXI 
funds are used to provide coverage for adult members of the family. We 
will not require States to obtain a family coverage waiver in cases 
where the employee's premium is not subsidized and there is no 
intention on the part of the State to cover family members other than 
targeted low-income children. We also agree that the suggestion offered 
by the commenter appears to offer another possible option for States to 
identify the costs of enrolling only the eligible child or children in 
the family into a premium assistance program, and thereby enroll the 
children without obtaining a family coverage waiver. As described in 
the proposed rule, child-only costs can be identified when a State is 
purchasing a child-only policy, or in markets in which carriers offer 
policies with a sufficient number of premium tiers to identify the 
costs of the SCHIP-eligible child or children. Such tiers might include 
an employee-only premium tier, and an employee-plus-children premium 
tier, such that the former can be subtracted from the latter to 
determine the cost of the child or children. However, as the commenter 
points out, these premium tier structures may not be common or 
uniformly available in most States.
    In a more typical group health insurance market that offers 
coverage tiers for employee-only or family coverage, the employee 
contribution amounts for employee-only and for family coverage are 
known. The difference between the two is the cost for dependent 
coverage. Again, if title XXI only subsidizes the difference between 
employee-only and family coverage, a family coverage waiver is not 
needed as long as there is no intention to cover non-SCHIP eligible 
family members. However, as an alternate approach, the State could 
decide to allocate the cost for dependent coverage between the spouse 
and children on a reasonable actuarial basis and a family coverage 
waiver would not be required if the State then pays only that portion 
allocated to coverage of the targeted low-income child or children. An 
actuary familiar with the State's group health market could produce an 
estimate of the cost of one adult relative to the cost for one child 
under a group health plan. This ratio could then be applied to the 
family composition to determine what portion of the premium pays for 
the spouse's coverage and what

[[Page 2624]]

portion pays for the children's coverage. The State would then pay only 
that portion attributable to the child or children.
    We note, however, that this method may be difficult for States to 
implement in practice given the need to obtain sufficient data to 
perform the necessary actuarial estimates. In addition, the subsidy 
amount determined under this method does not cover the family's full 
premium cost, which may discourage some families from enrolling. For 
these reasons, calculating the difference between employee-only and 
family coverage costs may be a preferable alternative to obtaining 
actuarial estimates of the costs of only the targeted low-income 
children for many States. We also note that when a State subsidizes 
family coverage, but is covering only targeted low-income children 
(that is, no payment is being made for the employee portion of the 
premium, and there is no intention to cover family members other than 
the targeted low-income children and the costs do not exceed the cost-
effective amount), the requirements of this part apply to only the 
targeted low-income children. We reiterate that family coverage waivers 
are subject to the same 90-day review period as any other title XXI 
State plan amendment and need not be unduly burdensome to obtain.
    In order to assist States in designing premium assistance programs 
to cover only targeted low-income children using employer sponsored 
insurance, we will work with States on their specific proposals to 
develop mechanisms for identifying the cost of covering the targeted 
low-income children using reasonable methods, for the purposes of 
determining cost-effectiveness.
    Comment: Several commenters indicated that family coverage waivers 
will be challenging for States to implement. One commenter expressed 
concern that the standards for family coverage waivers are impossible 
to meet and should be made easier to accomplish via a statutory change. 
Another commenter supported States' interest in developing programs to 
provide coverage to whole families and urged HCFA to provide more 
support and technical assistance and to grant more family coverage 
waivers.
    Response: We are committed to sharing best practices and providing 
guidance to States designing and implementing family coverage waivers 
and premium assistance programs. To date, three States have received 
approval for family coverage waivers. As States gain more experience 
with their premium assistance programs and their family coverage 
waivers, we will work to disseminate information about the challenges 
and successes of these programs.
    Comment: A number of commenters were concerned that the proposed 
regulations are too restrictive regarding when a family coverage waiver 
is needed. Some noted that, while Congress intended to expand coverage 
to children, recent research suggests that expanding parents' access to 
health care coverage also increases children's enrollment, as parents 
are more likely to apply for and enroll their children in a health 
insurance program if the whole family is covered by the same plan. They 
encouraged HCFA to permit States to experiment with both title XIX and 
title XXI funds to cover parents as an effective strategy to increase 
enrollment levels of children. They also noted that most States have 
not spent a significant portion of their title XXI allotments, and may 
be able to expand coverage further if more flexibility is granted for 
enrolling parents under title XXI.
    Response: We recognize the link between children's enrollment and 
parental access to SCHIP coverage. We have provided flexibility on this 
as permitted by the statute. Section 2105(c)(3) sets forth certain 
requirements relating the coverage of families through a family 
coverage waiver, and Sec. 457.1010 of this regulation implements that 
section. However, we will continue to work with States that wish to 
design and implement programs under a family coverage waiver to help 
facilitate the enrollment of parents of SCHIP-eligible children in a 
manner consistent with title XXI.
    Comment: One commenter stated that the proposed rule indicates that 
the community-based waiver applies to Medicaid expansion programs, but 
the family coverage waiver does not. It is the commenter's opinion that 
family coverage waivers should be allowed in Medicaid expansion 
programs.
    Response: Family coverage waivers are required whenever States are 
funding coverage for any non-SCHIP eligible family members with title 
XXI funds under a separate child health program. Under Medicaid, States 
are able to purchase employer-sponsored coverage for regular Medicaid 
and Medicaid expansion enrollees under section 1906 of the Act, which 
permits States to pay premiums, deductibles, and coinsurance on behalf 
of Medicaid beneficiaries eligible for enrollment in employer-based 
group health plans when it is cost-effective to do so. The only 
exception to this distinction between family coverage in Medicaid 
expansions and separate child health programs is within the context of 
our authority under section 1115 of the Act. Section 1115 
demonstrations are not subject to regular Medicaid rules when those 
rules are modified under the Secretary's authority to grant certain 
waivers, to provide federal funds for costs that would not otherwise be 
matchable and to impose special terms and conditions for such 
demonstrations. In all cases, we are committed to working with States 
interested in using either funding source, either separately, or in 
conjunction with each other. As mentioned previously, a family coverage 
waiver is not needed when the coverage of adult family members is only 
incidental.
    Comment: Several commenters supported coverage of adult family 
members under family coverage waivers. One commenter supported State 
flexibility to cover family members but believed that before granting a 
family coverage waiver, HCFA should ensure that States have utilized 
their options for expanding health coverage to lower-income adults in 
non-title XXI funded programs. The commenter notes that HCFA and ACF, 
in their publication ``Supporting Families in Transition,'' indicated 
that before expanding coverage under title XXI, States will need to 
implement a Medicaid expansion under section 1931 of the Act to avoid 
an anomalous result in which higher income families are covered under 
SCHIP, while parents of lower-income children lack coverage. Another 
commenter suggested that HCFA encourage States to apply for Medicaid 
waivers to expand insurance coverage to adult pregnant women and to 
facilitate the more rapid enrollment of their infants.
    Response: We agree that States' ability to use Medicaid rules to 
expand coverage to other family members is an important option, and we 
have been working with States to clarify the flexibility that exists to 
do this. Under Medicaid, States may purchase family coverage through 
employer-sponsored coverage under section 1906 of the Act, which 
permits States to pay enrollee premiums in employers' group health 
plans when it is cost-effective to obtain coverage for Medicaid-
eligible individuals (deductibles, coinsurance and other cost sharing 
for ineligible family members may not be paid as medical assistance).
    In addition, States may submit proposals for demonstrations under 
section 1115 of the Act to expand coverage to parents of children 
covered under SCHIP. HCFA released guidance on July 31, 2000 regarding 
parameters for consideration of such proposals.

[[Page 2625]]

    Comment: Several commenters proposed that States should meet 
prerequisites before receiving approval for family coverage waivers. 
Some commenters proposed that States must eliminate the asset test 
under Medicaid and SCHIP and adopt simplified application, enrollment 
and redetermination procedures for children. Other commenters suggested 
that States should expand coverage for children with family income up 
to at least 200 percent of FPL (or 50 percentage points above the 
State's Medicaid applicable income threshold) throughout the areas of 
the State; ensure that all eligible children are promptly enrolled into 
a State's title XXI program without being subject to a waiting list; 
and, if the State operates a separate child health program, adopt a 
joint Medicaid/SCHIP application and assure that the same or directly 
comparable application, enrollment and redetermination procedure is 
used for children under Medicaid and the separate State program. 
Another commenter proposed that States should first be required to 
ensure that there is no lessening of SCHIP benefits or increase in cost 
sharing associated with a waiver using this method of calculating cost-
effectiveness.
    Response: While we support all of these goals, title XXI provides 
no statutory authority for requiring States to meet these goals prior 
to the approval of a family coverage waiver. We have been working with 
States to clarify Federal law and to provide technical assistance 
regarding the implementation of such policies in order to support 
States' efforts to undertake activities that will expand and simplify 
eligibility, increase the number of children who enroll in States' 
programs, and to make the enrollment and redetermination processes less 
burdensome on States, applicants and enrollees.

4. Cost-Effectiveness (Sec. 457.1015)

    This section defines cost-effectiveness and describes the 
procedures for establishing cost-effectiveness for the purpose of a 
family coverage waiver.
    We proposed that cost-effectiveness means that the cost 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 such 
coverage only for the eligible targeted low-income child or children 
involved. Stated more simply, cost-effectiveness for the family 
coverage waiver means that the cost of providing family coverage 
(including coverage for the parents) is equal to or less than the cost 
of covering only the SCHIP-eligible children.
    We proposed that a State may demonstrate cost-effectiveness by 
comparing the cost of family coverage that meets the requirements of 
Secs. 457.1010 and 457.1015 of this subpart, to the cost of coverage 
only for the targeted low-income child or children under the health 
benefits packages offered by the State under the State plan for which 
the child is eligible. Alternatively, we proposed that the State may 
compare the cost of family coverage to any child-only health benefits 
package that meets the requirements of Sec. 457.410, even if the State 
does not offer it under the State plan. We stated that we would examine 
other alternatives and we invited comment on additional methods for 
demonstrating cost-effectiveness. We set forth an illustration of cost 
comparison in the proposed rule.
    We proposed that the State may demonstrate the cost-effectiveness 
of family coverage by applying the cost of family coverage for 
individual families assessed on a case-by-case basis, or for family 
coverage in the aggregate. We noted that 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 SCHIP. We further 
explained that if a State chooses to apply the cost-effectiveness 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 SCHIP plan. If the State chooses 
to assess the cost of family coverage in the aggregate, we also 
proposed that, on an annual basis, the State must compare the total 
actual 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 SCHIP plan. 
If the aggregate cost of family coverage was less than the cost to 
cover the children under the publicly available program, then the 
family coverage would be considered cost-effective. If the State 
determines through its annual assessment of cost-effectiveness that 
family coverage is not cost-effective in the aggregate, we proposed 
that the State must begin to apply the cost-effectiveness test on a 
case-by-case basis.
    Comment: Many commenters indicated that, given the two-year length 
of approved waivers, the cost-effectiveness assessment should be done 
for the life of the waiver.
    Response: Section 457.1015 addresses cost-effectiveness for family 
coverage waivers only, and does not address the cost-effectiveness of 
waivers for a community-based delivery system. Cost-effectiveness of 
waivers for a community-based delivery system is determined each time a 
State applies for or renews its waiver. As stated earlier, we have 
agreed to extend the period of time for which these waivers are 
approved from two years to three years.
    Family coverage waivers are part of the State plan and are approved 
for an open-ended period of time after an initial demonstration of 
cost-effectiveness. However, we will continue to require a State to 
demonstrate the cost-effectiveness of the family coverage waiver on an 
annual basis, whether done on a case-by case or aggregate basis, 
consistent with Sec. 457.1015(d). Because we have little information 
about the costs associated with family coverage waivers, we want to 
assure that States' premium assistance programs are being administered 
in the most cost-effective manner possible, and to be able to obtain 
results so as to share best practices with other States.
    We have reconsidered the proposed provision that would have 
permitted States to conduct its cost comparison against any child-only 
policy even if it is not offered under the State plan. The revised 
language requires that the cost comparison be done relative to the 
State's actual costs under the State plan in order to assure coverage 
is provided in the most cost effective manner.
    Comment: Several commenters wrote to express support of the rule as 
written with regard to the cost-effectiveness test. One commenter 
supported permitting States to perform retrospective cost-effectiveness 
evaluations but suggested that the cost-effectiveness comparisons 
should be clarified. Specifically, the commenter indicated that the 
first example (64 FR 60932) omits any costs for the supplemental 
coverage that will likely need to be provided and included in the cost-
effectiveness test because employer plans may not always cover some 
services that must be covered under title XXI or exempt well-baby and 
well-child care from cost sharing.
    Response: Although the example in the NPRM did not include the cost 
of supplemental benefits, the cost of supplemental benefits must be 
reflected in States' cost-effectiveness analyses. For example, assume 
the cost to cover two targeted low-income children under the State plan 
is $200 per month and the cost to cover the family in the employer

[[Page 2626]]

plan is $120 per month. The State also provides supplemental coverage 
for benefits and cost sharing that costs $40 per month per family. This 
$40 would be added to the $120 for a total of $160 which is still cost-
effective in comparison to the $200 that would have been paid under the 
State plan for only the children. We have also revised the provision at 
Sec. 457.1015 to indicate that cost-effective means that the cost of 
purchasing family 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 targeted low-income children 
involved. We have eliminated the specific reference to the cost paid 
under a group health plan or health insurance coverage in order to 
clarify that all costs associated with providing family coverage, 
including any supplemental coverage, must be considered when 
determining cost-effectiveness.
    Comment: Some commenters believed that because the Department has 
not developed standards or guidance regarding budget neutrality, State 
determinations of cost-effectiveness must be accepted and reasonable 
waivers and family coverage variances should be approved in a timely 
fashion.
    Response: We have clarified the requirements for determining cost-
effectiveness under the waiver for cost-effective coverage through a 
community based delivery system and the waiver for family coverage in 
both the NPRM and this final rule. Budget neutrality is a relevant 
consideration with respect to section 1115 demonstration projects, but 
not with respect to waivers discussed under subpart J. We are committed 
to working with States interested in designing and implementing the 
waivers under subpart J to find the best way possible to comply with 
these regulations and effectively implement their programs.

J. Subpart K--Applicant and Enrollee Protections

    In response to public comment, in this final rule, we relocated 
certain provisions involving applicant and enrollee protections to this 
new subpart K, ``Applicant and Enrollee Protections.'' Specifically, we 
moved to this subpart certain provisions of proposed Sec. 457.902, 
which set forth definitions applicable to enrollee protections, 
proposed Sec. 457.985, which set forth requirements relating to 
grievances and appeals, and proposed Sec. 457.990, which set forth 
requirements for privacy protections. Public comments received on the 
relocated proposed provisions and changes made to them are discussed 
below.
    To eliminate inconsistency and potential confusion, and in response 
to public comment, we decided to remove from the regulation text 
proposed at Sec. 457.995, which provided an overview of the enrollee 
rights provided in this part. Instead, we provide an overview of the 
enrollee protections contained throughout the part in the preamble to 
this final regulation. We respond below to the general comments on 
proposed Sec. 457.995, as well as to any general comments relating to 
the Consumer Bill of Rights and Responsibilities (CBRR). To the extent 
that a comment on proposed Sec. 457.995 relates to a specific enrollee 
protection provision cross-referenced in the proposed overview section, 
but located elsewhere than subpart I of the proposed regulation, we 
responded to that comment earlier in this final rule in conjunction 
with comments and responses relating to that specific provision.
    The most significant changes reflected in this subpart were made to 
the proposed ``grievance and appeal'' provisions at Sec. 457.985. Given 
the lack of clarity regarding the use of the terms ``grievances'' and 
``appeals,'' as noted by some of the commenters, we removed these terms 
from the final regulation. We opted instead, as we make clear in our 
responses to comments, to refer to the procedural protections required 
under this regulation as the ``review process.'' We also note that in 
clarifying the scope and type of matters subject to review, we narrowed 
the range of matters subject to review from those defined in the 
proposed regulation. The minimum requirements for a review process 
identified in this regulation will apply only to separate child health 
programs, and States retain a significant amount of flexibility in 
designing their processes.
    In this final regulation, a State is required to include in its 
State plan a description of the State's review processes and, pursuant 
to Sec. 457.120, to offer the public the opportunity to provide input 
into the design of the review process. We also clarify that matters 
involving eligibility and enrollment, on the one hand, and health 
services, on the other, are subject to somewhat different review 
requirements. Core elements for a review process applicable to reviews 
of both types of matters; States may adopt their own policies and 
procedures for reviews that address these core elements. Such policies 
and procedures must ensure that--(a) Reviews are conducted by an 
impartial person or entity in accordance with Sec. 457.1150; (b) review 
decisions are timely in accordance with Sec. 457.1160; (c) review 
decisions are written; and (d) applicants and enrollees have an 
opportunity to--(1) represent themselves or have representatives of 
their choosing in the review process; (2) timely review their files and 
other applicable information relevant to the review of the decision; 
(3) fully participate in the review process, whether the review is 
conducted in person or in writing, including by presenting supplemental 
information during the review process; and (4) receive continued 
enrollment in accordance with Sec. 457.1170. Under the provisions of 
this final rule, a State could use State employees, including State 
hearing officers, or contractors to conduct the reviews, reviews could 
be conducted in person, by phone or based on the relevant documents, 
and a State could choose to use the same general process or different 
processes for reviews of eligibility and enrollment decisions and 
health services decisions.
    With respect to enrollment matters, States must provide an 
applicant or enrollee with an opportunity for review of: (1) A denial 
of eligibility; (2) a failure to make a timely determination of 
eligibility; or (3) a suspension or termination of enrollment, 
including disenrollment for failure to pay cost sharing. States are not 
required to provide an opportunity for review of these matters if the 
sole basis for the decision is a change in the State plan or a change 
in Federal or State law (requiring an automatic change in eligibility, 
enrollment, or a change in coverage under the health benefits package 
that affects all applicants or enrollees or a group of applicants or 
enrollees without regard to their individual circumstances). For 
example, if a State amends its plan to eliminate all speech therapy 
services, a review would not be required if an individual appeals the 
denial of speech therapy. The final rules also establish that States 
must complete the review within a reasonable amount of time and that 
the process must be conducted in an impartial manner by a person or 
entity (e.g. a contractor) who has not been directly involved with the 
matter under review. For matters related to termination or suspension 
of enrollment, including a disenrollment for failure to pay cost 
sharing, the rules require that a State ensure the opportunity for 
continued enrollment pending the completion of the review.
    As to adverse health services matters, a State must provide access 
to external review of decisions to delay, deny, reduce, suspend, or 
terminate services, in whole or in part, including a

[[Page 2627]]

determination about the type or level of services; or of a failure to 
approve, furnish, or provide payment for health services in a timely 
manner. The external review must be conducted in an impartial and 
independent manner, by the State or a contractor other than the 
contractor responsible for the matter subject to external review. All 
reviews must be completed in accordance with the medical needs of the 
patient. The rules establish an overall 90-day time frame for external 
review, including any internal review that may be available. The rules 
also establish a 72-hour expedited time frame in the case where 
operating under the standard time frames could seriously jeopardize the 
enrollee's life or health or ability to attain, maintain or regain 
maximum function. In such situations, the enrollee has access to 
internal and external review, then each level of review may take no 
more than 72 hours. If the enrollee's physician determines the review 
should be expedited then it must be conducted accordingly, both for 
internal (if applicable) and external review.
    In addition, we clarify the notice requirements at Sec. 457.1180, 
and require a State in Sec. 457.110(b)(6) to make available to 
potential applicants, and provide to applicants and enrollees 
information about the review processes that are available to applicants 
and enrollees. The rules also require that States ensure that enrollees 
and applicants are provided timely written notice of any determinations 
required to be subject to review under Sec. 457.1130 that includes the 
reasons for the determination; an explanation of applicable rights to 
review of that determination, the standard and expedited time frames 
for review, and the manner in which a review can be requested; and the 
circumstances under which enrollment may continue pending review. 
Section Sec. 457.340(d) requires that in the case of a suspension or 
termination of eligibility, the State must provide sufficient notice to 
enable the child's parent or caretaker to take any appropriate actions 
that may be required to allow coverage to continue without 
interruption.
    We provide States with flexibility under Sec. 457.1190 related to 
coverage provided through premium assistance programs to assure that 
all SCHIP eligible children have access to these enrollee protections, 
while recognizing States' reduced ability, or in some cases inability, 
to affect group health plan review procedures. This section provides 
that in States choosing to offer premium assistance programs, if the 
group health plan(s) through which coverage is provided are not found 
to meet the review requirements of Secs. 457.1130(b), 457.1140, 
457.1150(b), 457.1160(b), and 457.1180, the State must give applicants 
and enrollees the option to obtain health benefits coverage other than 
coverage through that group health plan. The State must provide this 
option at initial enrollment and at each redetermination of 
eligibility.

1. Overview of Enrollee Rights (Proposed Sec. 457.995)

    In the proposed rule, we set forth in Sec. 457.995 an overview of 
certain enrollee rights that we provided throughout the proposed rule. 
In determining the scope of consumer protections to apply to separate 
child health programs, we considered the Secretary's statutory 
authority under title XXI and, within that authority, we attempted to 
balance the goal of ensuring consumer rights for SCHIP-eligible 
children with the need to afford States flexibility to design their 
separate child health programs. In this spirit, we proposed the 
enrollee protections listed in proposed Sec. 457.995 for enrollees in 
separate child health programs, and we also solicited public comments 
on how best to balance these interests in this regulation.
    As noted above, while we removed proposed Sec. 457.995 from the 
regulation text in response to public comment, we respond to the 
general comments on proposed Sec. 457.995 below. We respond to comments 
on the specific provisions cross-referenced in the Sec. 457.995 
overview and contained in other subparts along with the responses to 
other comments on those cross-referenced provisions. For example, 
proposed Sec. 457.995 contains a cross-reference to Sec. 457.110 and 
the comments to proposed Sec. 457.995 also included comments on 
Sec. 457.110. We respond to the latter set of comments on Sec. 457.110 
together with the other comments on Sec. 457.110. Below you will find 
our responses to the general comments on Sec. 457.995. Following our 
responses to general comments on this section is an overview of the 
enrollee protections provided in this final regulation.
    Comment: One commenter suggested that HCFA either (1) consolidate 
all of the sections that relate to enrollee protections in one or two 
sections; or (2) leave the protections in different parts of the 
proposed rule, ensure that the protections are consistent with the 
CBRR, and provide a summary of the protections in the preamble only. 
While this commenter strongly supported HCFA's attempt to address the 
CBRR, the commenter believed that the proposed rule does not 
incorporate the rights and requirements in a logical fashion. They 
noted that Sec. 459.995 merely summarized requirements found in other 
sections of the rule, so it seemed redundant and, at times, 
inconsistent. According to this commenter, for example, Sec. 457.110(b) 
provided that information provided to enrollees must be ``accurate'' 
and ``easily understood'' and that the information must be ``made 
available to applicants and enrollees in a timely manner.'' Proposed 
Sec. 457.995(a)(4), however, provided that ``information must be 
accurate and easily understood and provide assistance to families in 
making informed health care decisions.'' These two provisions addressed 
similar issues but included slightly different requirements, and this 
commenter argued that these inconsistencies are difficult to reconcile 
and therefore could result in inappropriate interpretations by States, 
courts, and enrollees. This commenter generally requested that HCFA 
reconcile the substantive requirements in other sections of the 
regulations with the requirements in Sec. 457.995(a) and (b).
    The commenter also recommended that the provision relating to 
``assistance'' include a reference to ``application assistance'' in 
Sec. 457.361(a) and to translation services. The same commenter 
suggested that HCFA correct the citations referenced in 
Sec. 457.995(a)(3). A different commenter noted that there is no 
Sec. 457.735(c), and the reference in Sec. 457.995(b) to 
Sec. 457.735(c) should instead be to Sec. 457.735(b). One commenter 
also suggested that HCFA divide Sec. 457.995(c) regarding access to 
emergency services into two separate sections: ``access'' and ``cost 
sharing for emergency services.''
    Response: We agree with the comments about the inconsistency 
between Sec. 457.995 and certain other substantive sections of the 
regulation. As noted above, to avoid confusion, we removed proposed 
Sec. 457.995 from the regulation text and provide an overview in the 
preamble of the enrollee protections provided throughout the 
regulation. As for the comments about the cross-references and the need 
to address certain issues separately, we made every effort to ensure 
that the cross-references in the final regulation are correct and that 
issues are adequately addressed in the regulation provisions and 
explained in the overview now provided in the preamble.
    Comment: Many commenters expressed support for HCFA's decision to 
incorporate the CBRR provisions in the proposed regulations. One

[[Page 2628]]

commenter specifically noted that the rights to apply for assistance, 
to have applications processed in a timely manner, to be informed about 
benefits, participating providers and coverage decisions, and to have 
access to a fair process to resolve disputes are basic consumer 
protections that are critical to ensuring that the program's promise of 
health care coverage becomes a reality. Another commenter supported the 
recognition of consumer protections relating to emergency services, 
participation in treatment decisions, and respect and 
nondiscrimination. One commenter expressed support for HCFA offering 
States a good deal of flexibility in the application of these 
requirements.
    Response: We appreciate the support expressed by the commenters.
    Comment: Several commenters believed that HCFA exceeded its 
statutory authority in applying the CBRR to title XXI regulations. 
Several commenters recommended deleting section Sec. 457.995 because, 
in their view, there is no basis for implementation of the CBRR in 
title XXI and, in many cases, States already have Patient Bill of 
Rights laws. One commenter noted that children in Medicaid expansion 
programs will be covered under consumer protections available in 
Medicaid, while children in separate child health programs will be 
covered under State consumer protection laws. One commenter suggested 
that, where a conflict exists, or similar requirements are imposed by 
State law, State law should prevail. This same commenter urged HCFA to 
consider a ``substantial compliance'' process in these instances. 
Several other commenters added that they support protecting health care 
consumers, but that, in their view, requiring the States to implement 
specific consumer protections for SCHIP could have additional fiscal 
and administrative impact on their programs.
    Response: In establishing the applicant and enrollee protections, 
we did not simply import the CBRR. We considered our statutory 
authority, the nature and scope of State laws that might apply to 
separate child health programs, the need for minimum consumer 
protection standards, and the States' authority under title XXI to 
design their own program consistent with the requirements of Federal 
law. There is statutory authority under title XXI for each enrollee 
protection included within this final regulation as outlined in the 
overview and set forth in this part. We describe the statutory 
authority for each of the enrollee protections in the preamble to each 
proposed section containing an enrollee protection, in the ``Basis, 
Scope, and Applicability'' regulation section of each subpart 
containing one of the enrollee protections, and often in our responses 
to the specific comments on the sections or subparts of the proposed 
rule containing the enrollee protections. While we removed Sec. 457.995 
from the regulation text, this was done for clarity and to promote 
consistency, and does not reflect any change in our position regarding 
the statutory authority for the cited enrollee protections.
    States are required to ensure that enrollees in separate child 
health programs are afforded the minimum consumer protections set forth 
in this regulation. These minimum protections set a framework within 
which States may design their procedures consistent with applicable 
State laws, and we believe it will not be difficult to ascertain 
whether Federal or State law prevails. If a contractor serving 
enrollees in a separate child health program is subject to State 
consumer protection law that is more prescriptive in the areas 
addressed in this regulation, then in complying with State law, the 
contractor will comply with this Federal regulation as well. For 
example, if a State law requires the completion of its review processes 
for certain health services decisions within a shorter time frame than 
does this regulation, the State will comply with both Federal and State 
law when it complies with the shorter State-required time frame. On the 
other hand, if the Federal time frame requirement is shorter, the 
Federal requirement will prevail. We have set specific time frames in 
only a limited number of circumstances to establish the outer 
boundaries of an efficient and effective system that accomplishes the 
purpose of the Act. Given the scope of the flexibility afforded States 
under these rules, we expect that the instances where these Federal 
rules will impose more stringent standards than those imposed by State 
law, in those States with an applicable State law, will be limited. In 
addition, the processes by which certain disputes are resolved are left 
completely to States' discretion; in such cases, State rules will 
control. By requiring that a State delineate review procedures in its 
State plan, we expect the State plan development process, including 
public notice and comment, will promote State-specific approaches to 
designing review procedures that reflect local issues and accommodate 
the State's administrative structure, while ensuring minimum 
protections to applicants and enrollees.
    We will work with States to resolve any questions that might arise 
in a particular State. No additional compliance process will be 
instituted beyond that which is already established in subpart B of 
part 457 under the authority of section 2106(d)(2) of the Act, which 
requires States to comply with the requirements under title XXI and 
empowers HCFA to withhold funds in the case of substantial 
noncompliance with such requirements.
    As for the fiscal impact of these requirements, we do not believe 
that the costs need to be large relative to the cost of services 
provided to enrollees. The protection of enrollee rights is a critical 
component of program costs for the provision of child health 
assistance. States retain broad flexibility to design and implement 
efficient and effective review processes. Because these regulations do 
not prescribe any particular review process, States have the 
flexibility to rely on other already established State review processes 
for the purpose of resolving disputes that arise in the context of 
their separate child health programs.
    Comment: One commenter noted that, in the preamble to the proposed 
regulation, we cited a Presidential directive on the CBRR as 
justification for imposing requirements on State child health plans. 
This commenter believes that this justification was not sufficient 
because the proposal conflicted with Executive Order 13132 provisions 
limiting federal agencies from unnecessarily limiting State 
flexibility. This commenter expressed the view that HCFA lacks 
authority to impose the CBRR upon the States to the extent that the 
CBRR contradicts Congress' unambiguous intent when enacting title XXI 
and to the extent that it conflicts with E.O. 13132. In this 
commenter's view, title XXI was designed to provide flexibility to the 
States in creating and implementing SCHIP programs, and requires the 
States to describe to HCFA the different aspects of the State plans 
with minimal restrictions. This commenter argued that, although 
Congress adopted a general approach intended to allow States to design 
and experiment with their programs, HCFA has applied the CBRR to remove 
States' flexibility, and has brought the CBRR to bear most heavily on 
States that exercised that flexibility. This commenter asserted that a 
State should be able to tailor its own program to achieve the broad 
goals of the CBRR and should be able to do so by innovative means 
tailored to the needs of its population. In this commenter's opinion, 
we could ``cure'' the regulation (1) by eliminating proposed 
Secs. 457.985, 457.990 and 457.995; and, more importantly, (2) by

[[Page 2629]]

evaluating each separate program on its own terms.
    Response: As noted above, there is statutory authority for each 
applicant and enrollee protection outlined in the overview and set 
forth in this part. In considering how to develop applicant and 
enrollee protections for this regulation generally, we attempted to 
balance the important goal of ensuring consumer rights for the SCHIP-
eligible population with the flexibility afforded States under title 
XXI to design their separate child health programs, and we have also 
considered the value of enrollee feedback through the review process in 
ensuring compliance with program requirements. In all instances, we 
have based our regulations on the provisions of title XXI. In our view, 
the final regulations comply with title XXI and are consistent with the 
CBRR and E.O. 13132. The regulations establish minimum standards and 
offer States the opportunity to design their own systems and procedures 
consistent with these standards. This final regulation does not require 
a uniform system for providing basic protections to children and their 
families but rather recognizes and permits significant State-by-State 
variation.
    Comment: One State expressed concern that the level of detail of 
the CBRR provisions in the proposed regulation severely limits States' 
flexibility in contracting and hampers their ability to adjust contract 
provisions that are not working well. Another commenter stated that 
HMOs and insurers would be less likely to participate in SCHIP if they 
have to implement both the State requirements and the requirements 
within the proposed rule, which may have conflicting language.
    Response: We appreciate the commenters' concerns and have taken the 
comments into account in these final regulations. In order to provide 
all applicants and enrollees the protections established by these 
regulations pursuant to title XXI, it is essential for contracts to 
reflect the provisions in this final regulation. However, while we 
included several important protections within this regulation, we also 
omitted other details and protections provided by the CBRR, to allow 
States to design their own review procedures and to minimize any 
conflict with applicable State law. States have flexibility in the 
design and implementation of applicant and enrollee protections and we 
are available to provide technical assistance to States and to 
facilitate discussions among States as they develop or revise contracts 
so that they comply with the final regulations. We will also share 
information about successful State practices among the other States.
    Comment: One commenter recommended that HCFA use national standards 
in applying the principles outlined in the CBRR, such as the Standards 
on Utilization Management and Member Rights and Responsibilities of the 
National Committee for Quality Assurance (NCQA). This commenter 
believed that a standardized system reduces administrative complexity 
and cost and is more likely to benefit all managed care enrollees. The 
commenter recommended that the final rule include provisions that allow 
States to adopt other systems that comport with the BBA and HCFA's 
Quality Improvement Standards for Managed Care objectives (QISMC), 
subject to review and approval by HCFA.
    Response: We appreciate the recommendation for using the standards 
issued by NCQA, a private organization that accredits managed care 
entities, on Utilization Management and Members Rights and 
Responsibilities. We encourage States to explore such models as a means 
to develop and implement high quality processes that protect applicant 
and enrollee rights in a comprehensive manner. While there are 
advantages to a standardized system, we considered such models and 
opted to develop minimum standards and permit States the ability to 
adopt or vary from such models, as long as the standards established by 
the final regulations are met.
    Comment: Several commenters suggested that a provision be added to 
Sec. 457.995 to require States to include in their managed care 
contracts provisions that implement all relevant State laws in the area 
of managed care consumer protections. One of these commenters believed 
that State law protections should apply to State contracts with 
entities arranging for the delivery of care that might not be licensed 
insurance carriers.
    Response: While we recognize the importance of the managed care 
consumer protections contained in many States' laws, we do not require 
that the contracts comply with State consumer protection laws 
applicable to certain health plans. The inclusion of such protections 
in SCHIP contracts is a matter of State law. To the extent that a 
managed care entity or entity that contracts with a State in connection 
with its SCHIP program is subject to State insurance or business laws, 
the entity would be required to comply with applicable State law. We 
encourage States to include in their contracts with health plans, or 
other organizations, the applicable patient protections required under 
State law to the extent they do not conflict with the standards in this 
regulation.
    Comment: One commenter suggested that this overview section also 
list enrollees' rights to linguistic access to services. This commenter 
recommended that the preamble explain these rights and provide 
examples, such as providing bilingual workers and linguistically 
appropriate materials that include recommendations on how States and 
contracted entities can comply. Another commenter requested that 
cultural competency and linguistic accessibility requirements be 
incorporated throughout the provisions on information, choice of 
providers and plans, access to emergency services, participation in 
treatment decisions, respect and nondiscrimination, and grievances and 
appeals.
    Response: We addressed these comments in subpart A along with other 
comments on Secs. 457.110 and 457.130 involving compliance with civil 
rights requirements and the linguistic appropriateness of information 
provided to enrollees.
Overview of Applicant and Enrollee Protections in Final Regulation
    In this final rule, we require States to provide certain 
protections for applicants and enrollees in separate child health 
programs. Outlined below are the protections afforded under this 
regulation.
     Information Disclosure
    Section 457.110 provides that States must make accurate, easily 
understood, linguistically appropriate information available to 
families of potential applicants, applicants, and enrollees and provide 
assistance to families in making informed health care decisions about 
their health plans, professionals, and facilities. In addition, this 
section that families be provided information on physician incentive 
plans as required by the final regulation at Sec. 457.985. We also 
require, at Sec. 457.65(b), that a State must submit a State plan 
amendment if it intends to eliminate or restrict eligibility or 
benefits, and that the State certify that it has provided prior public 
notice of the proposed change in a form and manner provided under 
applicable State law, and that public notice occurred before the 
requested effective date of the change.
    Under Sec. 457.350(g), we require States to enable families whose 
children may be eligible for Medicaid to make informed decisions about 
applying for Medicaid or completing the Medicaid application process by 
providing information in writing on the Medicaid program, including the 
benefits covered

[[Page 2630]]

and restrictions on cost sharing. Such information must also advise 
families of the effect on eligibility for a separate child health 
program of neither applying for Medicaid nor completing the Medicaid 
application process. Finally, Sec. 457.525 provides that the State must 
make a public schedule available that contains the following 
information: current cost-sharing charges; enrollee groups subject to 
the charges; cumulative cost-sharing maximums; mechanisms for making 
payments for required charges; and the consequences for an applicant or 
enrollee who does not pay a charge, including the disenrollment 
protections required in Sec. 457.570.
     Choice of Providers and Plans
    The rules provide enrollees with certain protections regarding 
choice of providers and plans through Secs. 457.110 and 457.495. 
Section 457.110 provides that the State must make accurate, easily 
understood, linguistically appropriate information available to 
families of potential applicants, applicants, and enrollees, and 
provide assistance to families in making informed health care decisions 
about their health plans, professionals, and facilities. Section 
457.495 provides that, in its State plan, a State must describe its 
methods for assuring: (1) The quality and appropriateness of care 
provided under the plan particularly with respect to well-baby, well-
child and adolescent care, and immunizations; (2) access to covered 
services, including emergency services as defined at Sec. 457.10; (3) 
and appropriate and timely procedures to monitor and treat enrollees 
with chronic, complex, or serious medical conditions, including access 
to specialists experienced in treating the specific medical condition; 
and (4) that decisions related to the prior authorization of health 
services are completed in accordance with the medical needs of the 
patient, within 14 days of the receipt of a request for services.
     Access to Emergency Services
    Sections Secs. 457.410(b), 457.515(f), 457.555(d), and 457.495 
address the right to access emergency services. Section Sec. 457.10 
defines ``emergency medical condition'' and ``emergency services'' 
using the ``prudent layperson'' standard recommended by the President's 
Advisory Commission and adopted by many States in their consumer 
protection laws. Section 457.410(b) requires that regardless of the 
type of health benefits coverage offered under a State's plan, the 
State must provide coverage for emergency services as defined in 
Sec. 457.10.
    Under Sec. 457.555(d), 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 are not emergency medical services as 
defined in Sec. 457.10. Under Sec. 457.515(f), States must assure that 
enrollees will not be held liable for cost-sharing amounts beyond the 
co-payment amounts specified in the State plan for emergency services 
provided at a facility that does not participate in the enrollee's 
managed care network. Section 457.495(b) provides that in its State 
plan, a State must describe its methods for assuring the quality and 
appropriateness of care provided under the plan particularly with 
respect to access to covered services, including emergency services as 
defined at Sec. 457.10.
     Participation in Treatment Decisions
    This regulation gives enrollees in separate child health programs 
the right and responsibility to participate fully in treatment 
decisions. Under Sec. 457.110, the State must make accurate, easily 
understood, linguistically appropriate information available to 
families of potential applicants, applicants and enrollees and provide 
assistance to families in making informed health care decisions about 
their health plans, professionals, and facilities. The State must also 
make available to applicants and enrollees information on the amount, 
duration and scope of benefits and names and locations of current 
participating providers, among other items. In addition, under 
Sec. 457.985, States must guarantee that its contracts for coverage and 
services comply with the prohibition on interference with health care 
professionals' advice to enrollees, requirement that professionals 
provide information about treatment in an appropriate manner, the 
limitations on physician incentive plans, and the information 
disclosure requirements related to those physicians incentive plans 
referenced in that provision. We also require under Sec. 457.110(b)(5) 
that the State have a mechanism in place to ensure that information on 
physician incentive plans, as required by Sec. 457.985, is available to 
potential applicants, applicants and enrollees in a timely manner. We 
also provide under Sec. 457.130 that 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.
     Civil Rights Assurances
    In Sec. 457.130, we require in the State plan 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 
parts 80, 84, and 91, as well as 28 CFR part 35. These civil rights 
laws prohibit discrimination based on race, sex, ethnicity, national 
origin, religion, or disability.
     Confidentiality of Health Information
    The regulations address this right in Sec. 457.1110, which provides 
privacy protections to enrollees in separate child health programs. 
Under that section, the State must ensure that, for medical records and 
any other health and enrollment information maintained with respect to 
enrollees (in any form) that identifies particular enrollees; the State 
and its contractors must establish and implement certain procedures to 
ensure the protection and maintenance of this information.
     Review Process
    Sections 457.1130(b) and 457.1150(b) provide that enrollees in 
separate child health programs must have an opportunity for an 
independent external review by the State or a contractor, other than 
the contractor responsible for the matter subject to external review, 
of a decision by the State or its contractor to delay, deny, reduce, 
suspend, or terminate health services, in whole or in part, including a 
determination about the type or level of services; or for failure to 
approve, furnish, or provide payment for health services in a timely 
manner. Section 457.1160(b) sets a time frame under which this process 
must occur, including an expedited time frame in the case where an 
enrollee's life or health or ability to attain, maintain or regain 
maximum function are in jeopardy.

2. Basis, Scope, and Applicability Sec. 457.1100

    This subpart interprets and implements 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; section 2102(a)(7)(B) of the Act, which 
requires that the State plan

[[Page 2631]]

include a description of the methods used to assure access to covered 
services, including emergency services; section 2102(b)(2) of the Act, 
which requires that the State plan include a description of methods of 
establishing and continuing eligibility and enrollment; and section 
2103, which outlines coverage requirements for a State that provides 
child health assistance through a separate child health program. This 
subpart sets forth minimum standards for applicant and enrollee 
protections that apply to separate child health programs.

3. Definitions and Use of Terms (Selected Provisions of Proposed 
Sec. 457.902)

    Below we will address the comments on the definitions in proposed 
Sec. 457.902 and terms used in proposed Sec. 457.985 that relate to the 
applicant and enrollee protections set forth in this new subpart K.
    In proposed Sec. 457.902, we defined contractor as ``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.'' As stated in the preamble to the proposed 
rule, we defined the term contractor in proposed Sec. 457.902 because 
it is used most significantly in reference to accountability for 
ensuring program integrity. However, we also used the term in proposed 
Sec. 457.985 relating to grievances and appeals. Because the term is 
now used in subparts I and K, we moved the definition of contractor to 
Sec. 457.10. We retained the definition of contractor set forth in the 
proposed regulation. We defined the term ``grievance'' in proposed 
Sec. 457.902 as ``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).'' In the preamble to 
the proposed rule, we indicated that we ``defined the term `grievance' 
to provide some context into the section requiring States to have 
written procedures for grievances and appeals.'' 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.
    As noted earlier, we are now referring to the procedural 
protections afforded to applicants and enrollees in separate child 
health programs under this regulation as a ``review process.'' Because 
the term grievance is no longer used or needed in our provisions 
regarding the review process, we removed the definition from the 
regulation text.
    Comment: One commenter noted that there is a definition of the term 
``grievance,'' but no definition of the term ``appeal.'' Another 
commenter proposed that we delete the definition of grievance. Several 
commenters recommended that HCFA ensure that the terms ``grievance'' 
and ``appeal'' are employed consistently across all programs, including 
Medicare, Medicaid and SCHIP; these commenters expressed confusion 
about different uses of the terms ``grievance,'' ``appeal'' and 
``complaint'' in these other programs. One commenter also questioned 
whether the reference to Sec. 457.985(e) was intended to be to 
Sec. 457.985(d). This commenter recommended that it would be clearer 
for HCFA to use the terminology used in the proposed Medicaid managed 
care regulations. Another commenter argued that federal requirements 
for resolving enrollee complaints and grievances will reduce plan 
participation because many plans will not be willing to have separate 
processes for SCHIP enrollees that exceed existing State statutory 
requirements.
    Response: Consistent with our modified approach to requirements in 
this area, under which we give States flexibility in how they choose to 
handle many types of disputes, we removed the definition of 
``grievance'' from the regulation text. We are now referring to the 
procedural protections afforded to enrollees in separate child health 
programs under this regulation as a ``review process.'' Therefore, we 
did not add a definition of ``appeal.'' We rectified the incorrect 
cross-reference noted by the commenter in removing the definition of 
grievance from the regulation text. We agree that, to the extent that 
we intend to impose Medicaid requirements, we should use the same 
terminology. In this regulation, however, we determined not to require 
States to adopt the Medicaid approach to review processes, but we did 
attempt to use consistent terminology as appropriate.
    In order to assure the fair and efficient operation of SCHIP and to 
ensure that children eligible for coverage under separate child health 
programs have access to the health care services provided under title 
XXI, these final rules establish minimum consumer protection standards 
for applicants and enrollees in separate child health programs 
balancing a recognition that State law varies in this area with the 
need to assure certain protections to all children, regardless of where 
they live. If a contractor serving separate child health program 
enrollees is subject to State consumer protection law that is more 
prescriptive in the areas addressed by this regulation, then the 
contractor, in complying with State law, will comply with this Federal 
regulation as well.
    Comment: Several commenters believed the term ``contractor'' as 
used in Sec. 457.985(a) is too broad. One commenter said the definition 
appeared to include every fee-for-service physician that serves a 
participant in a separate child health program. According to this 
commenter, this rule makes such a physician's decision to provide 
Tylenol instead of an antibiotic subject to a grievance procedure. The 
commenter noted that this policy may discourage physician participation 
in the program and recommended that the statement exclude those 
providers to whom the enrollee is not ``locked in'' or whom the 
enrollee is not otherwise required to utilize. One commenter noted that 
inconsistency in the use of ``participating contractors'' in 
Sec. 457.995(g)(1) and ``participating providers'' in Sec. 457.985(a) 
resulted in confusion. Another commenter believed that the term 
``participating providers'' as used in Sec. 457.985(a) needed to be 
clarified because ``providers'' are generally defined as health care 
professionals, agencies or institutions. It was also not clear to this 
commenter why ``health providers'' would be included in this directive. 
If the term intended was contractors, in the view of this commenter, 
Sec. 457.985(a) should be amended. If another meaning is intended, the 
commenter recommended that it be added to the definitions at 
Sec. 457.902.
    Response: We intended to include in the term ``contractor'' any 
individual or entity that would enter into a contract with a State to 
furnish child health assistance to targeted low-income children. As 
reflected in Secs. 457.1130(b) and 457.1150(b), we believe enrollees 
must have an opportunity for an independent, external review of a

[[Page 2632]]

determination to delay, deny, reduce, suspend, or terminate health 
services, in whole or in part, including a determination about the type 
or level or services; or for failure to approve, furnish, or provide 
payment for health services in a timely manner. This right applies 
whether or not the actions mentioned were taken by a State directly or 
by a contractor. Because we believe that we accomplish this goal with 
the definition as proposed, we did not modify the definition of 
contractor. We agree that we created confusion by using ``participating 
contractors'' and removed Sec. 457.995(g)(1) and its reference to 
``participating contractors'' from the regulation text. We also agree 
that we created confusion by using the term ``participating providers'' 
and not defining it. Our intent was to ensure that applicants and 
enrollees receive written notice of decisions that they have the 
opportunity to challenge through a review process. In Sec. 457.1180, we 
did not use the term ``participating providers,'' and clarified that a 
State must assure that applicants and enrollees receive timely written 
notice of any determinations subject to review under Sec. 457.1130. 
This could be accomplished, for example, by requiring contracting 
managed care entities to provide notice either directly or through a 
provider serving as an agent of that entity.

4. Privacy Protections Sec. 457.1110 (Proposed Sec. 457.990)

    We proposed that the State plan must assure that the program 
complies with the title XIX provisions as set forth under part 431, 
subpart F--Safeguarding Information on Applicants and Recipients. 
Moreover, we proposed that the State plan must assure the protection of 
information and data pertaining to enrollees 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
     Enrollee information is safeguarded in accordance with all 
Federal and State laws relating to confidentiality and disclosure of 
mental health records, medical records, and other information about the 
enrollees.
    We proposed that State child health plans are subject to any 
Federal information disclosure safeguard requirements as well as 
requirements set forth by their State regarding information disclosure, 
including use of the Internet to transmit SCHIP data between and among 
the State and its providers. We also proposed that 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 would be subject to these requirements. Finally, we proposed 
to 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.
    Comment: One commenter strongly supported the inclusion of the 
Medicaid privacy protections for all SCHIP enrollees and the listed 
contract requirements regarding information protection and access for 
enrollees.
    Response: We appreciate the commenter's support for the inclusion 
of the specific language relating to the Medicaid provisions, and we 
have retained this requirement in the final rule. As for the listed 
contract requirements regarding information protection and access for 
enrollees, we have modified slightly our requirements in the final 
rule. Specifically, we are requiring that for medical records and any 
other health information maintained with respect to enrollees that 
identifies particular enrollees, States and their contractors must 
abide by all applicable Federal and State law regarding confidentiality 
and disclosure; maintain records and information in a timely and 
accurate manner; specify the purpose for which information is used and 
disclosed; and except as provided by Federal or State law, ensure that 
enrollees may request and receive a copy of their records and request 
that information be supplemented or corrected. To minimize potential 
inconsistencies with other Federal regulations, we have removed the 
specific references to safeguarding electronic data transmissions, 
including the use of the Internet to transmit SCHIP data. Similarly, we 
have eliminated the language requiring safeguarding of information 
because subpart F of part 431 already includes such a requirement. We 
also clarify that original medical records and other identifiable 
information must be offered the same level of protection under this 
rule. These revisions should not be interpreted as a reduction in 
privacy protections. The protections addressed by the commenter will be 
afforded to SCHIP applicants and enrollees in separate child health 
programs, consistent with any other applicable law.
    Comment: Two commenters supported the provision requiring that the 
State plan must provide that all contracts will include guarantees that 
protect the confidentiality and privacy of minors, subject to 
applicable Federal and State law. One commenter noted that both State 
and Federal law contain a variety of provisions that protect the 
confidentiality of minors. According to this commenter, minor consent 
statutes in every State accord minors the right to give their own 
consent for services and often provide confidentiality protection for 
minors as well. Another commenter believed that confidentiality is 
critical to ensure that adolescents seek health care services, 
particularly those related to reproductive health. Both adolescents and 
providers consistently identify concerns about confidentiality as a 
major obstacle to health care for adolescents. This commenter urged 
HCFA to encourage States to ensure that all information, including 
statements explaining benefits related to reproductive health services 
and family planning, is provided to enrollees in a confidential manner.
    Response: We appreciate these commenters' support. The final rule 
requires States to abide by all applicable Federal and State laws 
regarding confidentiality and disclosure, including those laws 
addressing the confidentiality of information about minors and the 
privacy of minors, and privacy of individually identifiable health 
information.
    Comment: One commenter recommended that HCFA explain in the 
preamble language how these privacy protections interact with the 
privacy standards proposed in October 1999 and the security standards 
proposed in August 1998. This commenter believed that it is extremely 
important that all of the protections are harmonized so that the legal 
interpretations of State and contractor obligations are not 
unnecessarily confusing. Other commenters noted that the SCHIP 
protections should be consistent with the rulemaking on Standards for 
Privacy of Individually Identifiable Health Information (Federal 
Register, November 3, 1999).

[[Page 2633]]

    One commenter expressed general concern about what they viewed as 
the lack of consistency across the federal government and the States 
regarding privacy standards. The commenter noted that dual regulation 
increases compliance costs, which are ultimately passed on to enrollees 
and consumers. This commenter specifically suggested that 
Sec. 457.990(b) be deleted and replaced with a requirement that the 
State health plan must assure the protection of information and data 
pertaining to enrollees by providing that all contracts contain 
identical privacy protections as required under current federal 
Medicaid contract requirements. If this change was not acceptable, the 
commenter had alternative suggestions. The commenter first noted that 
the term ``authorized individuals'' is not defined in 
Sec. 457.990(b)(2) and Sec. 457.990(b)(3) and suggested that 
clarification is necessary to ensure that this definition includes all 
parties needing access to enrollee information for treatment, 
administration, payment, health care operations and other appropriate 
purposes consistent with Medicaid standards. Second, this commenter 
suggested the need to clarify in Sec. 457.990(b)(5) that enrollees' 
right to access information pertaining to them falls under the Federal 
Privacy Act of 1974.
    Response: We agree with the need to harmonize the SCHIP privacy 
requirements and other Federal privacy law and policy, and as a result 
have made several changes to this section. In revising Sec. 457.1110, 
we examined the proposed Medicaid Managed Care regulation (63 FR 
52022), the proposed Medicare+Choice regulation (63 FR 34968), and the 
proposed requirements set forth under the authority of the Health 
Insurance Portability and Accountability Act (HIPAA). Additionally, we 
acknowledge the commenters' point that ``authorized individuals'' was 
not defined and have deleted it from the final regulations so as not to 
conflict with Federal or State law addressing permissible disclosures. 
We also elected not to specify particular Federal or State laws in the 
final regulation (in order to clarify that we intend to require that 
States follow all applicable Federal and State laws, including laws and 
regulations not yet finalized or developed).
    Comment: One commenter recommended that HCFA review the American 
Academy of Pediatrics policy statement, ``Privacy Protection of Health 
Information: Patient Rights and Pediatrician Responsibilities'' 
(Pediatrics Vol. 104 No. 4, October 1999).
    Response: We appreciate the suggestion that we review the Academy's 
report, and in our review found that it provided useful information 
regarding patient rights and pediatrician responsibilities from the 
Academy's perspective. We encourage providers and others to review the 
report for additional information on complying with aspects of Federal 
and State privacy law. For the purposes of this regulation, however, we 
attempted to harmonize the privacy requirements for separate child 
health programs with other applicable Federal law, and opted not to 
adopt additional measures.
    Comment: One commenter expressed that Sec. 457.995(f) is awkward in 
that it excludes confidentiality protections and access rights afforded 
by other laws, such as local or tribal laws, as well as industry 
practices that are more protective of confidentiality and provide 
greater access to health information. This commenter recommended 
removing the words ``only'' and ``federal and State law'' from 
Sec. 457.995(f) so that it reads: ``States must ensure the 
confidentiality of a enrollee's health information and provide 
enrollees access to medical records in accordance with applicable law 
(Sec. 457.990).''
    Response: As noted above, we removed Sec. 457.995(f) from the 
regulation text. We considered this comment, however, with respect to 
proposed Sec. 457.990(b)(1), (b)(4), and (b)(6). We did not intend the 
proposed privacy protections to preclude greater local or tribal 
protections or protections of enrollee access to information. However, 
depending upon the applicable Federal or State law, it is possible that 
local or tribal protections could be preempted if the Federal or State 
law in questions requires a preemption.
    Comment: One State indicated that its separate child health program 
uses a premium assistance program under which it would not contract for 
health services and therefore would not have a mechanism to enforce the 
proposed privacy requirements. The State indicated that the mechanism 
available to impose these requirements is the State Insurance Code, and 
recommended it be recognized.
    Response: States are required to ensure that enrollees in separate 
child health programs are covered by the minimum privacy protections 
defined under Sec. 457.1110 of this regulation, regardless of what 
model is used to deliver services under a separate child health program 
funded with Federal SCHIP funds. If the premium assistance program is 
subject to State insurance law that requires the minimum privacy 
protections consistent with those set forth by this regulation, then 
the State will be in compliance with this requirement. If a group 
health plan participating in the State's premium assistance program 
does not comply with the minimum privacy requirements set forth in this 
regulation, then the State may not provide SCHIP coverage to separate 
child health program enrollees through that group health plan.

5. Review Processes Secs. 457.1120-457.1190 (Proposed Sec. 457.985)

    In the proposed rule, we provided that the State and its 
participating providers must provide applicants and enrollees written 
notice of the right to file grievances and appeals in cases where the 
State or its contractors take action to: (1) deny, suspend or terminate 
eligibility; (2) reduce or deny services provided under the State's 
benefit package; (3) disenroll for failure to pay cost sharing. In 
addition, proposed sections Secs. 457.365, 457.495, and 457.565, 
respectively, required that Sec. 457.985 apply in these specific 
circumstances. In Sec. 457.361(c), we proposed to require that 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 amount of time.
    We further proposed in Sec. 457.985(d) that 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. We proposed that these procedures for grievances must comply 
with the State requirements 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 proposed 
that procedures must include a guarantee that the grievance and appeals 
requests will be resolved within a reasonable period of time.
    We also proposed that States may elect to use the grievance 
procedures as described in part 431, 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).
    We further proposed to require that the States and their 
contractors must

[[Page 2634]]

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.
    In addition, we proposed at Sec. 457.985(e) that the State must 
guarantee, in all contracts for coverage and services, enrollee access 
to information related to actions which could be subject to appeal in 
accordance with the ``Medicare+Choice'' regulation at Sec. 422.206, 
which prohibits ``gag rules'' and protects enrollee-provider 
communications, and Sec. 422.208 and Sec. 422.210, which address 
limitations on physician incentive plans and requirements for 
information disclosure to enrollees related to those plans.
    Following are responses to comments on proposed Sec. 457.985.
    Comment: One commenter suggested reorganizing Sec. 457.985 into a 
more logical format to keep all of the grievance sections in one 
subpart, with cross-references as appropriate.
    Response: We agree with this comment and made appropriate changes 
to the regulation text to consolidate provisions relating to the review 
process. In this final regulation, we moved proposed 
Sec. 457.985(a),(b),(c), and (d) relating to review procedures from 
subpart I to subpart K, and further revised and clarified these 
sections.
    We retained subparagraph (e) related to provider-enrollee 
communications and limits on physician incentives as the whole 
Sec. 457.985 in subpart I. In addition, to improve clarity and to be 
responsive to comments, we revised that section.
    Sections Secs. 457.1120-457.1190 are the provisions of the final 
regulation that represent the reworking of proposed Sec. 457.985. 
Subpart K now contains most of the provisions relating to the review 
process, and related provisions in other subparts were revised or 
deleted as appropriate, to be consistent with the provisions of subpart 
K.
    Comment: Many commenters noted that the lack of minimum standards 
may cause lengthy time periods for completion of grievance and appeals 
processes, leaving many enrollees without needed benefits. The 
commenters believed that, despite the difficulties in establishing a 
grievance and appeals system that addresses the needs of States, 
participating contractors, Medicaid, and SCHIP, consistency between the 
Medicaid and SCHIP procedures is integral to ensuring ease of 
administration for providers and quality care for enrollees. The 
commenters noted that because enrollees may transfer between Medicaid 
and SCHIP at different times, consistency in the application of 
grievances and appeals processes would eliminate confusion. The 
commenters recommended that HCFA establish a set of minimum standards 
the States and participating providers must meet when providing 
services to enrollees.
    Response: In finalizing this regulation, we attempted to strike a 
balance between State flexibility and enrollee protection consistent 
with the provisions and framework of title XXI. Rather than requiring 
Medicaid grievance and appeal requirements for separate child health 
programs, we adopted core elements for a review process under 
Sec. 457.1140, and minimum standards for impartial review, under 
Sec. 457.1150, that States with separate child health programs must 
meet. We also included, under Sec. 457.1160, specific time frames for 
review of health services matters and a requirement that review of 
eligibility and enrollment matters be completed within a reasonable 
amount of time. We also required, in both cases, that States consider 
the need for expedited review in appropriate circumstances. We 
recognize that enrollees will often move between the two programs, and 
we encourage States to standardize the review processes to the extent 
possible and rely on Medicaid procedures when it is advisable to do so. 
In Sec. 457.110, we also require that States notify potential 
applicants, applicants and enrollees of the procedural protections 
afforded to applicants and enrollees under the separate child health 
program. This information should help ease transition between Medicaid 
and separate child health programs, to the extent that a State chooses 
to implement different review systems.
    Comment: Several commenters believed that grievance and appeal 
rights are inappropriate for title XXI. Likewise, one commenter 
believed that SCHIP is not an entitlement program and should not be 
subject to the grievance procedures required for entitlement programs. 
In the view of this commenter, HCFA has exceeded its statutory 
authority in applying the CBRR to the title XXI regulations. One 
commenter recommended deleting Sec. 457.985 because, in their view, 
there is no basis for the development of Federal grievance or appeal 
processes in title XXI, and expressed that States should have the 
flexibility to develop and apply processes consistent with State law. 
Another commenter recommended also deleting Sec. 457.365 because they 
believed we had exceeded our authority, and recommended that in the 
final rule a reference to all eligibility actions (denial, suspension, 
and termination) be incorporated in Sec. 457.361(c).
    Response: We acknowledge that a separate child health program may 
be quite different from a State's Medicaid program, and the final 
regulation does not require States to comply with the Medicaid 
requirements for grievance and appeal procedures. However, we believe 
that States operating separate child health programs under title XXI 
need to establish a review process and comply with minimum standards. 
While title XXI provides States with a great deal of flexibility, 
section 2101(a) of the Act provides that the ``purpose of the title 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.'' As we asserted in the preamble 
to the proposed rule, review processes that meet certain minimum 
standards are essential components of State programs in order to assure 
that child health assistance is provided in an effective and efficient 
manner.
    Moreover, section 2102(b)(2) requires that a State plan include a 
description of methods ``of establishing and continuing eligibility and 
enrollment.'' Procedures to address adverse determinations related to 
eligibility or enrollment are necessary for ensuring accurate 
assessments of initial and ongoing eligibility. Section 2102(a)(7)(B) 
requires a State in its State plan to describe methods used ``to assure 
access to covered services.'' This section supports our requiring 
minimal standards for a review process designed to ensure that eligible 
children have access to covered services, including an expedited review 
process when there is an immediate need for health services. Section 
2103 also requires a specific scope of coverage, and provides the 
authority for the provisions of the final regulation that seek to 
assure that a meaningful review process is in place to enforce that 
access requirement. In the final regulation, eligibility actions and 
procedural protections related to such actions are described in 
Secs. 457.1130(a), 457.1140, 457.1150(a), 457.1160(a), 457.1170, and 
457.1180.
    Comment: Several commenters believed States should be allowed to 
use existing appeal mechanisms for managed care. One commenter noted 
opposition to Federal requirements that would force the States to alter 
standard commercial plan contracts (for example, specific appeals 
criteria or procedures), and urged HCFA to allow States to develop 
appeals and grievance procedures that are consistent with State 
insurance regulations. Another

[[Page 2635]]

commenter noted that under New York law, Child Health Plus enrollees 
are granted broad grievance and utilization review rights, as well as 
external appeal rights for certain determinations. These rights are set 
forth in detail in the member handbook or contract, and whenever 
services under the program are denied as not medically necessary, 
individuals are advised of their appeal rights. This commenter 
supported allowing States to use existing procedures in lieu of 
``Medicaid-style'' procedures. One commenter noted that such an 
approach is more efficient and that a separate grievance process would 
be problematic because the costs of it would be subject to the 10 
percent administrative cap.
    Response: As noted above, we do not require any particular type of 
review process. States have discretion under these rules to design 
their own review process and we fully expect that such procedures may 
vary from State to State while still operating consistent with the 
requirements adopted here. We recognize, however, that our review 
process requirements might necessitate changes in standard commercial 
contracts if such contracts are used in separate child health programs. 
However, we believe that these changes are likely to be minimal given 
the broad discretion left to States to establish their review 
procedures. The regulations provide a minimum level of protection to 
applicants and enrollees in separate child health programs. To the 
extent that the State health insurance law on reviews is more stringent 
than, but also complies with, these requirements and the State or its 
contractor is subject to that State health insurance law, these rules 
will not impose any new requirements on States or their contractors. We 
believe that title XXI ensures that enrollees enjoy some minimal 
procedural protections regardless of the State in which they reside.
    Comment: Several commenters believed that HCFA should clarify that 
States with separate child health programs have flexibility in setting 
up appeals processes to determine what appeals are submitted to whom, 
and do not need to use the Medicaid procedures. For example, the 
commenters asked for clarification that, if a State uses the health 
plan or another appeals body for its review process, the State can have 
grievances sent directly to that entity.
    Response: While the use of Medicaid fair hearing procedures for a 
separate child health program may be efficient for some States as it 
may eliminate the need for two parallel, and to some extent, 
duplicative processes, the use of Medicaid procedures is not required 
in a separate child health program. States may determine the structure 
of their review process as long as it complies with the minimum 
standards of this regulation. In order to alleviate any confusion 
created by the language of proposed Sec. 457.985(c), which noted that 
States have the option to adopt the Medicaid procedures, we removed 
that language from the final regulation text.
    Comment: One commenter believed that HCFA should clarify that 
States that have implemented Medicaid expansions must provide 
applicants and recipients all of the Medicaid protections.
    Response: To clarify, States that implement Medicaid expansions 
must provide applicants and enrollees all of the Medicaid protections. 
Subpart K only applies to separate child health programs.
    Comment: One commenter was concerned about the grievance procedures 
proposed in the Medicaid managed care regulations. The commenter was 
concerned about the meaning of the term ``complaint;'' obligations to 
submit the decision and case file to the State agency; issues arising 
from the State fair hearing process; the obligation of a managed care 
entity to issue a notice of intended action; administrative issues 
regarding how the organization handles complaints and grievances; and 
continuation of benefits obligations pending appeal.
    Response: This commenter's concerns relate to the final regulation 
for Medicaid managed care, and are beyond the scope of this regulation. 
We direct interested parties to review the Medicaid managed care final 
rule, once published, for issues related to Medicaid managed care. 
Again, subpart K only applies and relates to separate child health 
programs.
    Comment: One commenter requested that HCFA clarify whether a State 
that has existing laws relating to consumer protections is able to 
choose its Medicaid procedures instead. A different commenter suggested 
that the proposed regulations could be read to suggest that HCFA 
anticipates that States will use both the Medicaid procedures and 
procedures applicable to commercial health plans. However, this 
commenter noted that many States do not have the same grievance rules 
for Medicaid and for commercial health plans, so it may be impossible 
for managed care entities to meet both sets of requirements. This 
second commenter assumed that HCFA intended that the use of Medicaid 
procedures and procedures applicable to commercial health plans would 
be alternatives, and recommended that HCFA clarify this issue.
    Response: As noted above, the use of Medicaid procedures may be 
efficient for States, but those procedures are not required. State laws 
applicable to commercial plans may or may not apply to a separate child 
health program, depending on the provisions of the State law. We expect 
that States that decide to adopt Medicaid procedures for the review 
process in their separate child health program will thereby be meeting 
State law requirements applicable to commercial health plans. However, 
this rule only establishes core elements and minimum standards for 
reviews; it does not require States to adopt Medicaid review 
procedures.
    Comment: A few commenters proposed giving States three options to 
comply with requirements for grievance and appeals procedures: (1) 
processes that comply with the State grievance and appeal procedures 
currently in effect for health insurance issuers; (2) the Medicaid 
rules, systems and procedures; or (3) the Health Carrier External 
Review Model Act as developed by the National Association of Insurance 
Commissioners (NAIC).
    Response: We appreciate the suggestion on possible models. However, 
rather than mandating a specific, detailed model that States must 
follow, we elected instead to establish core elements and minimum 
standards that reflect the most important aspects of these and other 
models of patient protection, but give States flexibility over the 
design of their review process. States can elect to use any model as 
long as that model addresses each of the core elements and meets or 
exceeds the minimum requirements set forth by this regulation.
    Comment: One commenter supported internal review by the contractor 
and external review by an independent agency (or the State agency) for 
appeals related to eligibility, premiums and benefits. Another 
commenter questioned HCFA's requirement for external and internal 
review.
    Response: We appreciate the support expressed by one of these 
commenters and acknowledge the diverging opinions on the value of 
internal and external reviews. In this final regulation, we address 
external review only, and only with regard to adverse health services 
matters. Under Sec. 457.1130(b) of this final regulation, we require 
that a State ensure that an enrollee has the opportunity for external 
review of a decision by the State or its contractor to delay, deny, 
reduce, suspend, or terminate health services in whole or in

[[Page 2636]]

part, including a determination about the type or level of services; or 
for failure to approve, furnish, or provide payment for health services 
in a timely manner. Under Sec. 457.1150(b) we require that States must 
provide enrollees with the opportunity for an independent, external 
review that is conducted either by the State or a contractor other than 
the contractor responsible for the matter subject to external review. 
States retain the flexibility to determine whether, how, and when to 
require internal review of these decisions and other kinds of decisions 
and actions. As for decisions relating to eligibility and disenrollment 
for failure to pay cost sharing, as described below, a review process 
that meets core elements outlined in Sec. 457.1140, and applicable 
standards of Secs. 457.1150-1180, will meet the standards set by these 
regulations. We note that under Secs. 457.1150(a), we require that a 
review of an eligibility or enrollment matter as described in 
Sec. 457.1130(a), must be conducted by a person or entity who has not 
been directly involved in the matter under review. This could be a 
State agency or an independent contractor employed by the State to 
assist with making eligibility determinations. The State may decide to 
use the same review process for reviews of eligibility and health 
services or different process at its discretion.
    Comment: One commenter believed that the grievance and appeal 
system must be designed to provide enrollees with a single point of 
entry so that, regardless of the subject matter, enrollees file their 
grievances or appeals with a single State entity. The entity would then 
be responsible for assigning it to the appropriate reviewing authority.
    Response: We recognize the importance of easy and clear access to 
the review process. In Sec. 457.110(b)(6), we require States to make 
available to potential applicants, and to provide to applicants and 
enrollees information on the review process. We also require States to 
describe the core elements of their review process in their State 
plans, in part to assure that the public has input into the design of 
the review process. A single point of entry may be an efficient way to 
manage the process, particularly if the State decides that different 
entities will be responsible for reviewing health services and 
eligibility decisions. However, a single point of entry for the review 
process is not required by this final regulation.
    Comment: One commenter expressed their view that the rules lack 
sufficient clarity and specificity to ensure that consumers will be 
accorded adequate due process protections in a State that does not 
adopt the Medicaid procedures. Accordingly, in this commenter's view, 
HCFA should outline the basic requirements that must be addressed by a 
State if it does not choose the Medicaid system. At a minimum, this 
commenter suggested that these requirements should specify: (1) the 
content of the written notice; (2) circumstances for continued 
benefits; (3) processing of grievances and fair hearings including 
exhaustion requirements; (4) the enrollees' rights and responsibilities 
during the grievance and fair hearing process; (5) standards for 
conduct of the hearing; and (6) time frames for expedited and final 
resolution of grievances and appeals.
    Several commenters underscored the need for due process protections 
in title XXI because of the lack of entitlement to benefits under the 
program and recommended requiring the Medicaid procedures. One 
commenter suggested that families need full access to an impartial 
review process, timely and adequate notices, opportunities to review 
records and evidence and examine witnesses, the right to represent 
themselves or to bring a representative, the right to receive a 
decision promptly, and the right to prompt corrective action. According 
to this commenter, referencing State laws without applying specific 
standards will be inadequate to assure equitable treatment of children 
because some of the laws are loose and vague on matters such as the 
time period within which a grievance must be resolved, who must hear 
the appeal, and what notice must be provided.
    Another commenter considered it inappropriate to allow States with 
separate child health programs to use less stringent appeal procedures 
than required under Medicaid. In the commenter's opinion, SCHIP 
benefits are targeted at low-income children who, like Medicaid 
eligibles and recipients, have limited resources. The commenter also 
noted that while SCHIP is not an entitlement, constitutional due 
process considerations may apply and require that recipients be 
afforded minimal protections. If this is the case, the commenter noted 
that HCFA's current proposed rule may not meet those standards.
    Response: We agree with these commenters about the need to set 
forth minimum standards for procedural protection for States with 
separate child health programs and provide these protections in 
Secs. 457.1120 through 457.1190 of the final regulation. We adopted 
many of the commenters' suggestions in these sections of the final 
regulation, consistent with basic principles of due process. We did not 
elect to issue requirements for exhaustion of an internal review 
process, opting instead to require external review of health services 
matters as described in Sec. 457.1130 and setting maximum time frames 
for the completion of external review (and internal, if available) in 
Sec. 457.1160(b). It is within each State's discretion whether and in 
what conditions internal review will be available. The requirement is 
that the external review be implemented within 90 days (taking into 
account the medical needs of the patient). If a State chooses to 
establish internal review, internal and external review must be 
completed within that time frame.
    We also left to the State's discretion enrollee responsibilities 
during the review process, although the regulations do set forth basic 
enrollee rights in Sec. 457.1140. Many of the other protections 
suggested by the commenters have been addressed throughout 
Secs. 457.1120-457.1180. In these sections, we identify basic 
procedural protections that are common to most review procedures and 
that must be provided in the context of separate child health programs. 
However, in the interest of preserving State flexibility, we left many 
of the particular design elements related to implementing the 
protections to the State's discretion.
    Comment: One commenter noted that clarification is needed with 
regard to which types of decisions are subject to which grievance and 
appeals processes.
    Response: We acknowledge the need for clarification about the scope 
of the requirements relating to review processes and provide it in the 
final regulation at Sec. 457.1130.
    Comment: One commenter noted inequity in the fact that Medicaid 
expansion programs receive 75 percent FMAP for grievance and appeal 
activities while separate child health programs are required to pay for 
these activities within the 10 percent limit for administrative 
expenditures.
    Response: As the commenter indicated, section 2105(c)(2) of the Act 
places a limit on administrative expenditures. The costs of a review 
process are subject to the enhanced matching rate under SCHIP and may 
or may not be considered administrative costs that fall under the 10 
percent administrative cap, depending on the nature of the expenditure 
and the method by which it is paid. While there is no cap on 
administrative expenditures within Medicaid, such

[[Page 2637]]

expenditures consume far less than 10 percent of Medicaid spending. To 
the extent that a State relies on preexisting review mechanisms, such 
as those that may be operating under the State's insurance laws, the 
State's employee health plan or it's Medicaid program, further 
efficiencies may be realized.
    Comment: Several commenters noted the need to include grievance or 
appeal protections for providers who contract with SCHIP managed care 
entities or with SCHIP programs on a fee-for-service basis. In the 
opinion of these commenters, such protections are necessary because 
many of these ``safety net'' providers cannot afford to have payments 
withheld, delayed or denied without an expedited process to challenge 
the actions of the managed care entity or SCHIP program. One State did 
not support the requirement that providers be given a notice of appeal.
    Response: We agree that States need to adopt procedures to address 
these concerns, but did not include in the proposed regulation or 
incorporate in this final regulation a requirement that States adopt 
procedural protections for providers involved in disputes with a State 
or a contractor. Providers and their advocates may work at the State 
level to obtain such protections, which States have the flexibility to 
provide.
    Comment: Several commenters recommended that the regulation require 
that bilingual workers and linguistically appropriate materials used in 
application assistance, including information relating to grievances 
and appeals, be made available to ensure that all applicants, including 
those with limited English proficiency and persons with disabilities 
(parents and guardians with disabilities) are given notice and 
understand their rights concerning eligibility. Commenters recommended 
that the preamble explain the title VI mandate requiring linguistic 
access to services and give examples of how States and contracted 
entities can comply. Two commenters asked that both the preamble and 
regulations make it clear that failure to provide linguistically and 
culturally appropriate notices and services is grounds for filing a 
grievance or appeal.
    Response: We addressed these comments in subpart A along with other 
comments on Sec. 457.110 and Sec. 457.130.
    Comment: One commenter on Sec. 457.365 noted that the grievance and 
appeal provisions depend almost entirely on the ability of families to 
know about and comprehend the nature of the rights available. According 
to this commenter, organizations upon which families rely for 
information should be utilized in a family-friendly manner.
    Response: In Sec. 457.110 we set forth requirements regarding the 
availability of accurate, easily understood, linguistically appropriate 
information for potential applicants, applicants, and enrollees, 
including information about the review process. We also encourage 
organizations working with enrollees to provide appropriate assistance 
to enrollees' families in accessing and navigating the review processes 
in the State. Additionally, under Sec. 457.1140(d)(1), we require that 
States provide applicants and enrollees with the opportunity to 
represent themselves or have representatives of their choosing in the 
review process.
     State plan requirement Sec. 457.1120 (proposed 
Sec. 457.985(b)).
    Proposed Sec. 457.985(b) required States to establish and maintain 
written procedures for addressing grievances and appeals. We received 
many comments to subpart A noting the need for more routinized public 
input into the development of the State plan. In order to ensure public 
input into the development of the grievance and appeal procedures and 
ensure that each State addresses the core elements as it designs its 
procedures, the final regulations require a State to describe its 
review process in its State plan, pursuant to Sec. 457.1120. We believe 
that the combination of State flexibility, minimum Federal standards, 
and public input will produce systems that provide necessary and 
appropriate procedural protections without imposing a ``one size fits 
all'' approach.
     Matters Subject to Review Sec. 457.1130 (proposed 
Secs. 457.361(c), 457.365, 457.495, 457.565, 457.970(d), 457.985(a)).
Eligibility and Enrollment Matters
    In Sec. 457.361(c), we proposed to require that States provide an 
applicant whose eligibility is denied or an enrollee whose enrollment 
is terminated with an explanation of the right to request a hearing. In 
proposed Sec. 457.985(a)(1) and (2), we proposed to require that States 
give applicants and enrollees written notice of their right to file 
grievances and appeals in cases where the State takes action to deny, 
suspend, or terminate eligibility, or to disenroll for failure to pay 
cost sharing. Section 457.365 of the proposed regulation provides that 
a 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. Likewise, 
Sec. 457.565 of the proposed regulation provided that a State must 
provide enrollees in separate child health programs with the right to 
file grievances and appeals as specified in Sec. 457.985 for 
disenrollment from the program for failure to pay cost sharing. In 
Sec. 457.970(d), we proposed that a State may terminate the eligibility 
of an applicant or enrollee for ``good cause'' other than failure to 
continue to meet the requirements for eligibility. We also provided 
that enrollees 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.
    Comment: One commenter indicated that since title XXI is not an 
entitlement, and therefore children are not entitled to receive 
services, States should not be required to establish a grievance 
procedure for children terminated for good cause.
    Response: As provided by Sec. 457.1130(a), States must provide 
enrollees in a separate child health program with an opportunity for a 
review of a termination of eligibility. The opportunity for a review is 
an important component of a fair and efficient system that should apply 
regardless of whether a State believes that it terminated coverage for 
good cause. Indeed, in such a situation, the purpose of the review 
would be to allow the enrollee an opportunity to address whether there 
was good cause to terminate eligibility. Reviews serve an important 
purpose regardless of whether the coverage provided is considered to be 
an entitlement. In this final regulation, we removed proposed 
Sec. 457.970(d) (concerning ``good cause'') because we found it 
unnecessary and the comments suggested it was potentially confusing. 
States have the flexibility to identify any number of reasons for 
terminating an enrollees's eligibility that are consistent with this 
regulation.
    Comment: A few commenters believed that denials, suspensions, and 
terminations of eligibility should be reviewed under a different 
process than the internal and external review process set out in 
Sec. 457.985(b). Several commenters also questioned the appropriateness 
of utilizing the envisioned grievance and appeals system for decisions 
regarding failure to pay cost sharing and noted that disenrollment for 
failure to pay cost sharing should be reviewed under a different 
process than that set out in Sec. 457.985. One commenter suggested that 
HCFA require States to use their Medicaid grievance and fair hearing 
process for eligibility and disenrollment determinations rather than 
deferring to

[[Page 2638]]

internal appeals or State-specific insurance practices.
    Response: We agree with the comment that internal and external 
review consistent with State insurance law may not be the appropriate 
form of review for eligibility and enrollment matters, but we leave 
this matter to State discretion, as long as the minimum review 
requirements are met. A State may use the same process for reviewing 
eligibility and enrollment decisions as it uses to review health 
services decisions, or it may use different processes as long as the 
requirements pertaining to each type of review are met.
    Comment: One commenter suggested that HCFA permit applicants and 
enrollees to file grievances and appeals on the grounds that 
eligibility determinations were limited or delayed.
    Response: We agree that an enrollee should be given the opportunity 
for a review to address the failure to make a timely eligibility 
determination. Section Sec. 457.1130(a) requires a review to address 
such a situation. As for the case of a limitation of eligibility, we 
believe that denials, reduction, or terminations of eligibility 
encompass and therefore require an opportunity for review of a decision 
to limit eligibility.
    Comment: One commenter believed that HCFA should modify its 
regulations to allow reasonable exceptions to grievance requirements, 
such as when disenrollment or suspension of services results from a 
State exceeding its allotment.
    Response: Under Sec. 457.1130(c), we provide an exception and do 
not require a State to provide an opportunity for review of an adverse 
eligibility, enrollment, or health services matter if the sole basis 
for the decision is a provision in the State plan or in Federal or 
State law that requires an automatic change in eligibility, enrollment, 
or a change in coverage under the health benefits package that affects 
all applicants or enrollees or a group of applicants or enrollees 
without regard to their individual circumstances. If a State stopped 
enrolling new applicants because it had spent all of its allotted 
funds, this would likely be a situation where applicants would not need 
to be granted a review of the denial of their application. Whether a 
review would be required would depend on whether the denial was 
automatic and applied broadly. For example, if a State with limited 
funds amended its approved State plan to enroll only new applicants 
with special health care needs, an opportunity for review would be 
required to provide denied applicants an opportunity to establish that 
they met the State's enrollment criteria. However, if a State exceeds 
its allotment and no longer wishes to operate its State plan as 
approved, the State could either keep the plan in place and, pursuant 
to the State plan, suspend operation of the program until the beginning 
of the next Federal fiscal year when additional funding becomes 
available, or request withdrawal of its State plan by submitting a 
State plan amendment to HCFA as described in Secs. 457.60 and 457.170. 
Under each of these scenarios, the State would no longer be approving 
any new applications and as such, reviews of application denials or 
suspensions would not be subject to the review requirements.
Health Services Matters
    In Sec. 457.985(a)(3), we proposed to require the State to provide 
the right to file grievances and appeals in cases where the State or 
its contractors take action to ``reduce or deny services provided for 
in the benefit package.'' In addition, proposed Sec. 457.495 required 
States to 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.
    We note that the range of health services-related matters required 
to be subject to review under the final rule is more narrow than the 
range of matters included within the definition of grievance in the 
proposed rule.
    Comment: Several commenters agreed with the inclusion of 
Sec. 457.985 in the proposed rule but encouraged modification of the 
provision to include the right to file a grievance or appeal for the 
termination of services as well as for reduction or denial of services 
in whole or in part.
    Response: We agree with this comment, and Sec. 457.1130(b)(1) of 
the final rule reflects that States must ensure that an enrollee has an 
opportunity for external review of matters related to delay, denial, 
reduction, suspension, or termination of health services, in whole or 
in part, including a determination about the type or level of services.
    Comment: A commenter suggested that HCFA should permit applicants 
and enrollees to file grievances and appeals on the grounds that 
requests for covered services were limited or delayed.
    Response: We agree with the comment, and in Sec. 457.1130(b)(2), we 
require States to ensure an enrollee has an opportunity for external 
review of a failure to approve, furnish, or provide payment for health 
services in a timely manner.
    Comment: One commenter noted that the system of review to an 
independent body should resemble the Medicaid system to the extent 
possible, in order to ease the burden on providers and to provide 
continuity for families who move between programs.
    Response: We recognize the importance of easing the burden on 
providers and on families who move between a separate child health 
program and Medicaid. However, we decided not to require that the 
external review for separate child health programs mirror the external 
review process required under Medicaid and to take a more flexible 
approach consistent with title XXI. We note that some States have 
chosen to adopt the Medicaid model for reviews in order to have a 
consistent system of review for their child health programs.
    Comment: One commenter indicated that States should provide a 
timely appeals process that includes direct discussion between the 
reviewing panel, the patient's physician and the relevant specialists 
and, if appropriate, an external review by an independent panel of 
pediatricians experienced in the treatment of the patient's illness.
    Response: We agree with the need for a timely process. Under 
Sec. 457.1140(b), review standards must be timely in accordance with 
the time frames set forth under Sec. 457.1160. However, under this 
final regulation, we have not prescribed the type of communication that 
must be allowed between the enrollee's physician and any review panel. 
The State has the leeway to require consultation with the enrollee's 
provider and/or with independent physicians, within the framework of 
the minimum standards established by these rules.
    Comment: One commenter believed that Sec. 457.985(d) should be 
deleted because the term ``complaint'' is not defined and it is not 
clear what type of problem constitutes a complaint that would end up 
outside the grievance and appeals processes. The commenter noted that 
it is also unclear who would be responsible for making such a 
determination, and what would happen should the plan decide that a 
consumer's grievance is really only a ``complaint,'' or vice versa. In 
this commenter's view, the regulation should not sanction the 
development or utilization of ``complaint'' systems that fall outside 
of the grievance and appeals process.
    Response: We have deleted proposed Sec. 457.985(d) from the 
regulation text because we agree that its provisions were unclear. 
Under the final regulation, we decided only to require

[[Page 2639]]

external review of the types of matters described in Sec. 457.1130(b) 
and to leave States and their contractors the flexibility, within the 
confines of applicable law, to design review procedures to address any 
decisions or actions not required to be subject to review under the 
final regulation.
     Core Elements of Review Sec. 457.1140
    Comment: One commenter asserted that HCFA should specify the basic 
components of a fair hearing, that the State agency responsible for 
administering the separate child health program, rather than a managed 
care plan, should retain responsibility for eligibility and enrollment 
appeals, and that the preamble should encourage States to use the 
Medicaid fair hearing process for appeals of this kind. According to 
this commenter, a fair hearing requires the following components: (1) 
The right to an impartial hearing officer; (2) the right to review 
records that will be used at the hearing; (3) the right to review 
evidence and examine witnesses; (4) the right to represent oneself or 
be assisted by another; and (5) the right to obtain a timely written 
decision with an explanation of the reasons for the decision. One 
commenter specifically questioned the rationale for external review of 
eligibility decisions because those decisions do not require the 
medical judgement necessary in benefit denials.
    One commenter argued that HCFA should adopt minimum standards for 
States that opt not to use their Medicaid fair hearing processes to 
ensure that: (1) Appeals and determinations are timely; (2) decisions 
are made by an impartial hearing officer or person; (3) hearings are 
held at reasonable times and places; and (4) enrollees have a right to: 
(a) Timely review their files and other applicable information 
necessary to prepare for the hearing; (b) be represented or represent 
oneself; and (c) present testimony and evidence.
    Response: While we agree that a State agency review, such as the 
Medicaid hearing process, may be more appropriate for eligibility and 
enrollment matters than an internal and external review process 
developed under an insurance model for health services matters, we 
determined it was not appropriate to require a State agency review or 
the Medicaid process for separate child health programs. Instead, these 
final regulations establish a set of core elements that each State must 
address when it designates its review process.
    Section Sec. 457.1140 incorporates certain suggestions of 
commenters and requires that States, in conducting a review, ensure 
that: (a) Reviews are conducted by an impartial person or entity in 
accordance with Sec. 457.1150; (b) review decisions are timely in 
accordance with Sec. 457.1160; (c) review decisions are written; and 
(d) applicants and enrollees have an opportunity to: (1) Represent 
themselves or have representatives of their choosing in the review 
process; (2) review their files and other applicable information 
relevant to the review of the decision; (3) fully participate in the 
review process, whether the review is conducted in person or in 
writing, including by presenting supplemental information during the 
review process; and (4) receive continued enrollment in accordance with 
Sec. 457.1170.
    Comment: Two commenters noted that Sec. 457.361(c) establishes that 
notices of eligibility decisions must include information about the 
right of applicants to request a ``hearing.'' Proposed Sec. 457.365, on 
the other hand, requires States to provide enrollees in separate child 
health programs with an opportunity to file ``grievances and appeals'' 
for denial, suspension, or termination of eligibility. These commenters 
expressed that the multiple reviews suggested by both these provisions 
of the proposed rule have the potential to create unnecessary 
administrative expenses for the State and to confuse consumers.
    One of these commenters agreed that an applicant should receive an 
explanation, preferably in writing, if an application is denied. This 
notice is particularly important when the State uses a variety of 
``helpers,'' such as community organizations or other program staff, to 
assist in the enrollment process. In such situations, the commenter 
believed that opportunities for misinformation or miscommunication 
arise. For Medicaid programs, the commenter noted the word ``hearing'' 
is used to mean the entire State fair hearing process, which is a 
formal and often lengthy procedure. For separate child health programs, 
however, a much simpler process, such as review by a senior staff 
member, is appropriate according to this commenter, given that there is 
no individual entitlement to benefits under title XXI. This commenter 
therefore recommended that Sec. 457.361(c) be amended to make it clear 
that separate child health programs need not employ the Medicaid 
hearings process and that the State should provide an opportunity for 
review of such decisions that need not take the form of a hearing.
    Response: We recognize that we may have created confusion in using 
different terminology in Secs. 457.361(c) and 457.365. We therefore 
clarified the review process that will be applicable to adverse 
eligibility matters in Sec. 457.1140 of the final regulation.
    We appreciate the commenter's concern that certain enrollee 
protections may create an additional administrative expense for some 
States. However, on balance, the importance of ensuring an enrollee's 
basic right to a fair and efficient decision regarding eligibility for 
health benefits coverage justifies the administrative expenses that may 
be incurred. We note, furthermore, that these final regulations accord 
States broad flexibility to design review processes that operate 
efficiently without undue administrative costs. We also appreciate the 
support for the requirement that notice must be provided in writing.
    As for the concerns about the mechanics of the review process, 
States with separate child health programs do not have to use the 
Medicaid fair hearing process as the mechanism for review of adverse 
eligibility and enrollment matters. While an opportunity for review of 
such matters is required, we left it to the States' discretion to 
develop the details of the review process for their separate programs, 
provided the process meets the minimum guidelines set forth in 
Secs. 457.1140, 457.1150(a), 457.1160(a), 457.1170, and 457.1180.
    Comment: One commenter asked that HCFA clarify what kinds of 
procedures will be necessary if a State does not elect to use its 
Medicaid program or does not have existing State law. One commenter 
expressed their view that the language of proposed Sec. 457.985 could 
be interpreted to mean that States without existing State laws 
requiring internal and external review procedures need not establish 
any procedures for children enrolled in SCHIP. One commenter stated 
their view that a choice between Medicaid and State insurance practices 
is appropriate for issues other than eligibility and disenrollment 
determinations.
    Response: We agree with the comment that our proposed rule could 
leave children in some States without access to a review process. Since 
State law varies and some States do not have applicable State laws, in 
order to assure some minimum standard of protections for all children, 
we elected to adopt in Sec. 457.1140 minimum standards for conducting 
reviews of matters identified in Sec. 457.1130. In addition, under 
Secs. 457.1130(b) and 457.1150(b) of this final regulation, a State is 
required to ensure that enrollees have the opportunity for an external 
review of certain health services matters,

[[Page 2640]]

regardless of whether external review is required under existing State 
law. Internal reviews are not required by these regulations.
     Impartial Review Sec. 457.1150 (proposed Sec. 457.985(b)).
    We proposed under Sec. 457.985(d) that States 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. We 
proposed that these procedures must 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.
    Comment: One commenter recommended the language at Sec. 457.985(b) 
be amended to read ``* * * process for internal review by the 
contractor and independent external review by the State agency * * *.'' 
This commenter noted it has established a strong independent review 
process through the State insurance agency. The commenter said that the 
term ``independent entity'' when used to describe an external review 
can be interpreted to mean an organization separate from the health 
plan, but chosen by the plan to do the reviews. The commenter noted 
that such an arrangement is a clear conflict of interest and indicated 
that the independence of reviewers can be best assured if the review 
goes through a neutral State agency. The commenter did not support the 
NAIC's Health Carrier External Review Model Act.
    Response: We appreciate the concern related to the independence of 
external reviews and have made some modifications to clarify and 
emphasize the need for an impartial review. To afford States the 
greatest flexibility in how they implement their external review 
process, we did not change the language to allow only for external 
review by a State agency. Consistent with applicable State law, States 
may choose the entity that will provide external review.
    However, under Sec. 457.1150(b), with respect to an external review 
of health services matters, we did specify that the external review 
must be independent and conducted by the State or a contractor other 
than the contractor responsible for the matter subject to external 
review. To the extent that a State relies on a contractor to conduct 
such reviews, we expect that States will closely monitor the review 
process to assure that enrollees are in fact receiving an independent 
review of their case. We also encourage community organizations and 
advocates to work closely with families to assist them in navigating 
the process and to assist the State in identifying issues related to 
impartiality or conflicts of interest if they arise. We would also like 
to note that in the review of eligibility and enrollment matters, we 
require under Sec. 457.1150(a) that a review must be conducted by an 
impartial person or entity who has not been directly involved in the 
matter under review.
    Comment: One commenter expressed the view that the automatic 
placement of adverse decisions on the docket of a State fair hearing 
system is critical to ensuring that the rights of enrollees are fully 
vindicated, given that the State hearing system is the first time the 
enrollees receive an independent review. This commenter believed the 
burden placed on the fair hearing system would not outweigh the 
Constitutional deficiency of not requiring an automatic filing for a 
fair hearing after an adverse decision by a non-impartial decision 
maker. This commenter said that due process concerns are significant, 
and that enrollees may not truly comprehend that they have a right to 
an external review despite the best efforts at notice on the part of a 
State/contractor and assuming they understood the notice of their 
rights. The commenter believed that automatic referral would reduce 
these problems, improve public perception about health care decisions 
given the review by an impartial decision maker, and improve the 
overall quality of care by encouraging correct treatment decisions at 
the outset.
    The commenter noted that the number of cases proceeding through the 
State fair hearing process, even with automatic referral, may not be 
substantial or costly. According to the commenter, in Medicare where 
automatic referral occurs, the cost is generally less than $300 per 
case. In 1997, automatic referral resulted in only 1.65 cases per 1000 
managed care enrolles. Yet, this commenter stated, access to an outside 
impartial review is clearly significant for enrollees. The commenter 
pointed to a Kaiser Family Foundation study on State external review 
laws that found almost 50 percent of cases considered through an 
external appeals review overturned the managed care organization's 
initial decisions. The commenter noted that while States have financial 
concerns in maintaining a streamlined external review process, such 
concerns should not overrule an enrollee's right to due process.
    Response: As noted above, States do not need to use the State fair 
hearing process as the independent external review process required 
under Secs. 457.1130(b) and 457.1150(b). External review can be done 
either by a State agency or a contractor other than the contractor 
responsible for the matter subject to external review. While we 
appreciate the commenter's concerns, we elected not to require States 
with separate child health programs to ensure the automatic referral of 
adverse decisions to external review. We did, however, adopt minimum 
procedural protections related to the right to an independent external 
review in certain situations, consistent with the requirements of due 
process.
    We acknowledge the important information contained within the study 
cited by the commenter relating to the minimal administrative cost of 
automatic referral. Given the low cost of such a process, and the added 
protections and accountability it can provide in some circumstances, we 
encourage States to consider this option carefully when establishing 
their review process.
     Timeframes Sec. 457.1160 (proposed Secs. 457.361(c), 
457.985(b) and 457.995(g)(2)).
    In proposed Sec. 457.985(b) and Sec. 457.995(g), respectively, we 
required that ``resolution of grievances and appeal requests will be 
completed within a reasonable amount of time'' and that ``grievances 
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.'' In proposed Sec. 457.361(c), we 
provided that ``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.''
    Comment: Several commenters noted that the regulation should 
require that grievances and appeals be decided in a timely fashion. 
Several commenters asserted that if HCFA decides to maintain its 
proposed policy on grievances and appeals, strict minimal timelines 
should be incorporated to ensure that grievances and appeals are 
conducted in an expedited manner. A different commenter, representing 
providers, noted that it saw no reason why providers should not be 
expected to respond within seven days to a request for treatment. That 
commenter noted that if a State/contractor denied such a request, an 
enrollee would not receive any new benefits until the final

[[Page 2641]]

resolution of the grievance process. A State/contractor could request 
an extension if it could show the extension would be in the enrollee's 
best interest. The commenter also believed that HCFA should establish 
minimum requirements for an expedited procedure to meet the needs of 
enrollees with severe medical conditions.
    This commenter also suggested a requirement of 14 days for a 
response to a standard grievance. Two commenters acknowledged that 
suggested time frames are different from the 30 day time frames in 
Medicare+Choice and Medicaid managed care, but argued that SCHIP 
enrollees do not have the opportunity to get services elsewhere while 
they are waiting for the appeal to be resolved. One commenter also 
noted that when Medicaid and SCHIP individuals are denied treatment, 
they often have no other recourse except the proposed grievance 
process. They recommended that HCFA reduce the standard resolution time 
frame in Medicaid managed care from 30 to 14 days. A different 
commenter recommended providing for an accelerated process where there 
is an initial denial of services that poses the risk of serious medical 
harm.
    Several commenters recommended HCFA define maximum time frames, and 
one commenter recommended HCFA define a ``reasonable'' time period and 
indicate what maximum time frame would still meet the ``reasonable'' 
requirement. This second commenter also believed that a lengthy 
grievance process might be held to violate an enrollee's due process 
rights. The commenter recommended a maximum time frame of fourteen days 
for responding to a standard grievance, which may be to review a 
provider's decision not to provide requested items or services, or to 
review a provider's decision to deny, suspend, or terminate 
eligibility, reduce or deny benefits, or disenroll the enrollee for 
failure to pay cost sharing. The commenter noted that, in many cases, 
the State/contractor will have an established policy and will not need 
the full fourteen days. This commenter also noted that even in cases 
which involve an assessment of an individual's condition, fourteen days 
is ample time. The commenter advocated that States be allowed to set a 
time frame of less than fourteen days. The commenter noted that a 
State/subcontractor does not necessarily save money by delaying 
resolution of a grievance, because the State remains financially 
responsible for the care and may have to reimburse the family for 
expenses incurred prior to enrollment. In certain cases, it might cost 
the State/subcontractor more to delay treatment because the treatment 
ultimately required might cost more than the initial requested 
treatment.
    Response: As reflected in the proposed regulation, we agree that a 
review process should be completed in a timely fashion and, as 
reflected in the final regulation, that there is a need for minimum 
timeliness standards. As in the proposed regulation, in Sec. 457.340(c) 
of this final regulation, we prescribed maximum time frames for 
eligibility determinations. In this final regulation, we also 
separately address the timeliness of review of eligibility and 
enrollment matters, and the timeliness of review of adverse health 
services matters. Under Sec. 457.1130(a), a State must ensure that an 
applicant or enrollee has an opportunity for review of a: (1) denial of 
eligibility; (2) failure to make a timely determination of eligibility; 
or (3) suspension or termination of enrollment, including disenrollment 
for failure to pay cost sharing. Under Sec. 457.1160(a), the State must 
complete the review of the matters described in Sec. 457.1130(a) within 
a reasonable amount of time. In order to ensure that delays in the 
review process do not cause a gap in coverage, under Sec. 457.1170, 
States are required to provide an opportunity for the continuation of 
enrollment pending the completion of review of a suspension or 
termination of enrollment, including a decision to disenroll for 
failure to pay cost sharing. We also require the State to consider the 
need for expedited review when there is an immediate need for health 
services. Under Sec. 457.1120 we require States to describe these time 
frames in their State plans.
    In light of concern about the time frames for review of health 
services matters, we specified a time standard for the resolution of 
external reviews (and any internal review if available), including 
expedited time frames, in Sec. 457.1160(b). Health services matters 
subject to review include: (1) delay, denial, reduction, suspension, or 
termination of health services, in whole or in part, including a 
determination about the type or level of services; or (2) failure to 
approve, furnish, or provide payment for health services in a timely 
manner. Reviews must be completed in accordance with the medical needs 
of the patient. Under the standard time frame, a State must ensure that 
external review of a decision as described in Sec. 457.1150(b) is 
completed within 90 calendar days of the date an enrollee initially 
requests external review (or an internal review if available) of the 
decision. Under the expedited time frame, a State must ensure that 
internal review (if available), or external review as required by 
Sec. 457.1150(b), is completed within 72 hours of the time an enrollee 
initially requests a review if the enrollee's physician determines that 
operating under the standard time frame could seriously jeopardize the 
enrollee's life or health or ability to attain, maintain or regain 
maximum function. If the enrollee has access to internal and external 
review, then each level of review must be completed within 72 hours 
(for a possible total of 144 hours). The State must provide an 
extension to the 72-hour period of up to 14 days if the enrollee 
requests such an extension. This provision for an expedited time frame 
reflects our agreement with the comments calling for an accelerated 
process if the passage of the standard time allowed for the process 
poses serious harm to the enrollee.
    Comment: One commenter recommended that in order to ensure an 
enrollee's rights to obtain timely medical care, both the internal 
grievance process and the State fair hearing process should conclude 
within 90 days. They noted that current State fair hearing regulations 
require a State to complete the fair hearing within 90 days from the 
request for the hearing.
    This commenter also stated the proposed regulations did not provide 
guidance on what happens if a State/contractor fails to meet its 
grievance and appeals procedures and recommended HCFA establish minimum 
standards to address noncompliance. The commenter said that even with 
standard health insurance practices, there is no guarantee that a 
State/contractor will comply in a timely fashion. The commenter 
recommended the approach of the Medicare+Choice regulations that 
provide that an managed care organization's failure to meet initial 
determination and reconsideration time frames is automatically 
considered an adverse decision that is referred to the next level of 
review. This commenter advocated that HCFA adopt this policy in the 
SCHIP regulations as well. The commenter believed this position, 
coupled with minimum time frames, would best protect enrollees' rights 
without causing undue hardships on providers.
    This commenter also recommended that HCFA should grant States the 
authority to impose monetary fines upon participating contractors for 
failure to meet time frames as a means to enforce compliance. The 
commenter recommended amending Sec. 457.935 to include language 
requiring States that contract with participating contractors to impose 
sanctions if the State determines that a participating

[[Page 2642]]

contractor fails to provide medically necessary services that the 
participating contractor is required to provide, or fails to meet 
specified time frames.
    Response: Under Sec. 457.1160(b)(1), we defined the standard time 
frame for the review of a health services matter. A State must ensure 
that external review, as described in Sec. 457.1150(b), is completed 
within 90 calendar days of the date an enrollee requests external 
review (or internal review if available). We expect that an enrollee 
will be provided notice of the outcome of the review within the 90-day 
time frame. As described above, the final regulations provide an 
opportunity for expedited review, under Sec. 457.1160(b)(2).
    We do not see a need to create further compliance standards or 
enforcement mechanisms beyond those that have been already implemented 
pursuant to section 2106(d)(2) of the Act. This provision requires 
States to comply with the requirements under title XXI and allows HCFA 
to withhold funds from States in the case of substantial noncompliance 
with such requirements. It is within the State's discretion to 
determine whether to include in contracts monetary fines for failure to 
meet time frames as a means to enforce compliance with required time 
frames. States are, of course, required to administer their programs in 
accordance with the law and their State plans. At a minimum, therefore, 
States are responsible for monitoring the conduct of their contractors 
and ensuring that their conduct fully complies with these regulations 
and the State plan.
    Comment: One commenter noted that the regulations do not make clear 
the relationship between the internal and external review processes. In 
most instances, State law requires exhaustion of the internal review 
process (as does the NAIC model) before a consumer can move to the 
external review. However, a number of States also include timelines and 
exceptions (for example, when the harm has already occurred) to ensure 
that this does not impede the process unnecessarily, and the commenter 
recommended that HCFA do the same. Another commenter expressed that 
HCFA should prohibit States from requiring exhaustion of internal plan 
processes. If HCFA does not prohibit such a requirement, according to 
this commenter, it must include adequate safeguards so that plans do 
not benefit from delay at the enrollee's expense. Specifically, HCFA 
should require that States set strict timetables for review and 
determination, assure aid continuing pending a determination, and 
provide for expedited review when the failure to authorize a required 
level of treatment or to provide or continue a service jeopardizes the 
enrollee's health.
    Another commenter noted that some States may require an enrollee to 
exhaust a plan's internal grievance procedures before allowing access 
to the State fair hearing process and believed these State practices 
may violate enrollee's due process rights. The commenter requested that 
we ensure that enrollees not be required to exhaust internal grievance 
procedures before accessing the State fair hearing process. The 
commenter was concerned that the internal grievance process does not 
provide impartial review. They noted that even under the proposed 
Medicaid managed care regulations, the individual conducting the 
internal review, while not familiar with the case file, is employed by 
the plan provider. According to this commenter, this individual has an 
inherent pecuniary interest to resolve the grievance in favor of the 
State/contractor. Because the enrollee is effectively denied benefits 
until the process is complete, States/contractors have little incentive 
to resolve the grievances quickly. The commenter argued that if the 
enrollee is forced to exhaust the internal grievance process, the 
enrollee would be deprived of due process. The commenter recommended 
HCFA amend Sec. 457.985(b) to permit the enrollee to request a State 
fair hearing on a grievance at any time.
    Response: It should be noted that the State fair hearing process is 
the process for external review under Medicaid managed care. While 
States have the option to use the Medicaid fair hearing process to 
satisfy the requirement for external review under this regulation, we 
do not require this process for separate child health programs. We also 
left to States the discretion to decide whether plans should be 
required to conduct an internal review and whether, if they do so, they 
should require exhaustion of internal plan processes before an enrollee 
could pursue an external review. Nonetheless, we believe it is 
important for enrollees to have certain minimum procedural protections 
consistent with due process and have therefore adopted minimum 
requirements and time frames for reviews. Under Secs. 457.1130(b) and 
457.1150(b), States must provide enrollees access to an external review 
of certain health services matters. Pursuant to Sec. 457.1150(b), 
review decisions must be independent and made by the State or a 
contractor other than the contractor responsible for the matter subject 
to external review. While a State may require an enrollee to request 
and pursue an internal review, any procedures developed by the State or 
its contractors relating to internal review cannot interfere with the 
enrollee's right to complete the external review within 90 days from 
the date a review (either internal or external) is requested.
     Continuation of Enrollment Sec. 457.1170 (Proposed 
Sec. 457.985(c)).
    We received a number of comments urging us to require continuation 
of enrollment pending completion of the review.
    Comment: Several commenters were particularly concerned that 
children receiving benefits under separate child health programs may be 
as poor as those who receive Medicaid in other States, and believed 
that States should therefore be required to continue assistance at pre-
termination levels until an impartial review of a child's case is 
completed. Multiple commenters argued that even though the SCHIP 
statute does not include the same entitlement as Medicaid, 
constitutional due process may require minimal protections that are not 
included in the proposed rule. A few commenters underscored the need 
for due process protections in title XXI because of the lack of 
entitlement to benefits under the program and recommended the Medicaid 
procedures. Other commenters echoed the specific suggestion that there 
be circumstances in which benefits continue for current recipients 
pending appeal.
    One commenter specifically recommended that continuation of 
services pending appeal should occur in circumstances where termination 
or reduction of services poses serious medical harm and to provide for 
an accelerated process where there is an initial denial of services 
that pose such harm. Two commenters noted that continuation of benefits 
is especially important for enrollees terminated for failure to pay 
cost sharing or other financial contributions, which do not relate to 
an enrollee's actual eligibility for benefits. These commenters 
recommended that HCFA require that enrollees must affirmatively request 
termination of benefits. One commenter recommended the language at 
Sec. 457.985 be amended by adding: ``Unless an enrollee affirmatively 
requests that items or services not be continued, the State/contractor 
must continue the enrollee's benefits until the issuance of the final 
grievance decision or State fair hearing decision.''
    Response: We appreciate the commenters' concerns about the need to 
protect children enrolled in separate child health programs who have 
very limited incomes and whose families have little or no ability to 
pay for costly but necessary health services, and we

[[Page 2643]]

have adopted provisions related to continuation of enrollment, as 
described below.
    Section Sec. 457.1170 requires States to ensure the opportunity for 
continuation of enrollment pending review of termination or suspension 
of enrollment, including a decision to disenroll for failure to pay 
cost sharing. A State may limit the time period during which such 
coverage is provided by arranging for a prompt review of the 
eligibility or enrollment matter. However, not all such matters are 
subject to the continuation of coverage requirement; under 
Sec. 457.1130(c), a State is not required to provide an opportunity for 
review of such a matter if the sole basis for the decision is a 
provision in the State plan or in Federal or State law requiring an 
automatic change in eligibility, enrollment, or a change in coverage 
under the health benefits package that affects all applicants or 
enrollees or a group of applicants or enrollees without regard to their 
individual circumstances. Therefore, if the situation is such that the 
State is not required to provide an opportunity for review according to 
this regulation, then the State does not have to provide the 
opportunity for continuation of enrollment. We also note that the costs 
of providing continued benefits are not administrative costs subject to 
the 10 percent cap, regardless of the outcome of the review. With 
respect to disenrollment due to failure to pay cost sharing, we have 
added a provision in Sec. 457.570(b) to ensure that the disenrollment 
process afford an enrollee the opportunity to show that the enrollee's 
family income has declined prior to disenrollment for nonpayment of 
cost-sharing charges. Finally, we note that services need not be 
continued pending a review of a health services matter, although, as 
described above, expedited review processes must be available when the 
physician or provider determines that the enrollee's life or health or 
ability to function will be jeopardized.
     Notice Sec. 457.1180 (proposed Secs. 457.361(c), 457.902, 
457.985(a), and 457.995(g)).
    In the preamble to the proposed regulation at Sec. 457.985, we 
stated that a State should make available to families of targeted low-
income children information about complaint, grievance, and fair 
hearing procedures. We proposed to require that the State and its 
``participating providers'' give applicants and enrollees written 
notice of their right to file grievances and appeals. In proposed 
Sec. 457.361(c), we required that ``the State must send each applicant 
a written notice of the decision on the application and, if eligibility 
is denied or terminated, the specific reasons or reasons for the action 
and an explanation of the right to request a hearing within a 
reasonable amount of time.''
    Comment: A commenter on Sec. 457.340 and Sec. 457.361 expressed 
strong support for the inclusion of rules setting minimum standards for 
procedural fairness, including the basic due process protections of 
opportunity to apply without delay, assistance in completing 
applications, required notices, and timely eligibility decisions. This 
commenter noted that notice is a basic due process right required by 
the U.S. Constitution under well-settled law whenever a citizen is 
denied a public benefit, and that the rules should specify that notice 
must be timely. The commenter also recommended that for current 
recipients, notice of an adverse action should be in advance of the 
action. In the commenter's view, the notice should inform people of the 
right to be accompanied by a representative as well as the right to 
appeal.
    Another commenter on Sec. 457.340 suggested that rules should 
specify that notice of denial or adverse action must be timely and in 
advance of adverse action for current benefits, with benefits 
continuing through an appeal process, should an appeal be initiated. In 
this commenter's view, notice should be required to be timely and 
include information regarding the right to appeal and to be accompanied 
to the hearing by a representative.
    Response: We appreciate the support for these standards, and the 
effort to establish rules that are consistent with due process 
requirements. We agree that notice should be timely and have added this 
to the language at Sec. 457.1180. As in the proposed regulation, the 
final regulation sets forth maximum time frames for eligibility 
determinations in Sec. 457.340(c). Additionally, in the case of 
redetermination of eligibility, under Sec. 457.340(d), the regulations 
require that in the case of a suspension or termination of eligibility, 
the State must provide sufficient and timely notice to enable the 
child's parent or caretaker to take any appropriate actions that may be 
required to ensure ongoing coverage. For example, if continued 
enrollment pending a review is allowed when a review is requested 
before enrollment is scheduled to end, notice of the action and the 
opportunity for review must be provided to the family with enough 
advance notice to allow the family to request the review and to keep 
their child enrolled pending review. Under Sec. 457.1160(a), a State 
must complete review of an eligibility or enrollment matter within a 
reasonable amount of time. In setting time frames, the State must 
consider the need for expedited decisions when there is an immediate 
need for health services. Additionally, under Sec. 457.1140(d)(2) we 
require that applicants and enrollees have a right to timely review of 
their files and other applicable information relevant to the review of 
the decision. Under this final regulation, however, while States have 
discretion to determine the precise timing of the notices in light of 
their own administrative needs, the notice of the outcome of the review 
must be delivered within the prescribed overall time frames for review.
    We addressed the issue of notice in Sec. 457.1180, in which we 
required States to ensure that applicants and enrollees are provided 
timely written notice of any determinations required to be subject to 
review under Sec. 457.1130 that includes the reasons for the 
determination; an explanation of applicable rights to review of that 
determination, the standard and expedited time frames for review, and 
the manner in which a review can be requested; and the circumstances 
under which enrollment may continue pending review. Section 
Sec. 457.340(d) cross references the notice requirements of 
Sec. 457.1180. Under Sec. 457.1140(d)(1) States must ensure that 
applicants and enrollees have an opportunity to represent themselves or 
have representatives of their choosing in the review process. As for 
continuation of enrollment, the regulations require States under 
Sec. 457.1170 to continue enrollment pending the completion of a review 
of a suspension or termination of enrollment including a decision to 
disenroll for failure to pay cost sharing.
    Comment: One commenter requested clarification on the relationship 
of Sec. 457.361(c) to the requirement in Sec. 457.360(c). This 
commenter expressed a belief that every family should be notified of 
the status of each child's application and whether: (1) the application 
for enrollment in the separate child health program has been approved; 
(2) the application has been referred to Medicaid; or (3) the child had 
been found ineligible for both programs.
    Response: The State must provide written notice of any 
determination of eligibility under Secs. 457.340(d) and 457.1180. So, 
if the State determines that an applicant is ineligible for coverage 
under its separate child health program, the State must provide written 
notice of that determination. If the application is a joint Medicaid/
SCHIP application, a State would then need to

[[Page 2644]]

comply with Medicaid requirements in providing notice about an 
applicants eligibility for Medicaid. In the case of termination or 
suspension of eligibility, under Sec. 457.340(d), the regulations 
require that the State must provide sufficient notice to enable the 
child's parent or caretaker to take any appropriate actions that may be 
required to ensure ongoing coverage.
    Comment: One commenter suggested that HCFA limit requirements that 
providers furnish notice to enrollees. According to this commenter, 
some States permit treating providers and managed care plans to provide 
SCHIP applications and perform direct marketing activities, but some do 
not. In this commenter's view, providers in States that do not allow 
such involvement would have no opportunity to provide applicants with 
notices. This commenter also suggested that HCFA not require treating 
providers who serve SCHIP enrollees under a managed care contract to 
provide notice to enrollees. This commenter suggested that this would 
be more appropriately done by the managed care plan in the member 
information materials. Yet another commenter strongly supported the 
language in Sec. 457.985(a) requiring that participating providers, in 
addition to States, provide applicants and enrollees written notice of 
their right to file grievances. This commenter argued that it is 
important that applicants and enrollees have access to information 
about their grievance and appeal rights at the points of direct 
contact--which is most often the provider.
    Response: In Sec. 457.1180, we specified the general content of the 
notice but left States the flexibility to determine who should provide 
the notice. We do not consider general statements of procedure in 
initial member information materials sufficient notice of the review 
process available for a particular determination.
    Comment: One commenter noted that enrollees should be informed of 
their right to appeal any adverse decision to an independent body.
    Response: We agree with the need for enrollee notification. Section 
457.1180 requires timely notice of determinations subject to the review 
process specified in this regulation, including matters subject to 
external review by an independent entity.
     Application of Review Procedures where States Offer 
Premium Assistance for Group Health Plans Sec. 457.1190.
    We note that under this final rule we use the term ``premium 
assistance program'' instead of ``employer-sponsored insurance model'' 
to describe a situation where a State pays part or all of the premiums 
for an enrollee or enrollees' group health insurance coverage or 
coverage under a group health plan. Our responses to comments referring 
to ``employer-sponsored insurance models'' reflect this change in 
terminology.
    Comment: One commenter noted that for coverage provided under a 
premium assistance program, the State does not contract for services 
and is not in a position to dictate compliance with requirements 
included in Sec. 457.985.
    Response: We acknowledge that States' SCHIP programs do not have 
direct authority over group health plans that may be providing coverage 
under premium assistance programs. At the same time, there is no basis 
for providing children fewer procedural protections because they may be 
enrolled in a premium assistance program under SCHIP. In order to 
balance these concerns, the regulations provide States flexibility so 
that they may offer premium assistance through plans that do not meet 
the review standards set out in these regulations, as long as families 
are not required to enroll their children in these plans. Under 
Sec. 457.1190, a State that has a premium assistance program through 
which it provides coverage under a group health plan that does not meet 
the requirements of Secs. 457.1130(b), 457.1140, 457.1150(b), 
457.1160(b), and 457.1180 must give applicants and enrollees the option 
to obtain health benefits coverage through its direct coverage plan. 
The State must provide this option at initial enrollment and at each 
redetermination of eligibility.
    Comment: One State expressed concern that the level of detail of 
the CBRR provisions in the proposed regulation inhibits States from 
developing effective premium payment systems for premium assistance 
programs. Another commenter noted that under premium assistance 
programs, there is no contractual mechanism through which to enforce 
requirements, given that the employer, not the State, contracts with 
the health plan. This commenter said that requiring States to apply 
these requirements under such a model will mean that employer plans 
will never qualify for premium assistance. This commenter assumed that 
HCFA did not intend these requirements to apply to premium assistance 
programs, and recommended that HCFA clarify its position.
    Response: While we appreciate the commenters' concern, States must 
comply with the requirements of this regulation regardless of whether 
coverage is provided through a group health plan. Under title XXI, the 
standards and protections apply to all children receiving SCHIP 
coverage, including children receiving SCHIP-funded coverage through 
group health plans. We do recognize that States do not have direct 
contractual relationships with premium assistance programs and 
accounted for this constraint in Sec. 457.1190.

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. These rules apply 
to Medicaid only.
    Section 2101 of the Act requires that States coordinate child 
health assistance under title XXI with other sources of health benefits 
coverage for children. Section 2102(b)(3)(B) of the Act requires that 
children found through the SCHIP screening process to be potentially 
eligible for Medicaid under the State's Medicaid plan shall be enrolled 
for such assistance.
    Section 4911 of the BBA, 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 for Medicaid services provided 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). ``SCHIP'' itself is not 
a new or separate Medicaid eligibility group. A State that implements a 
Medicaid expansion program under SCHIP, may expand eligibility to the 
new optional Medicaid eligibility group just mentioned, expand 
eligibility to optional targeted low-income children through expanding 
an existing Medicaid eligibility group, or implement a combination of 
the two options. We note that Medicaid expansion programs are subject 
to all the rules and requirements set forth in title XIX of the Act and 
its implementing regulations, and the State Medicaid plan. Section 4912 
of the BBA added a new section 1920A to the Act to allow States to 
provide Medicaid services to children during a period of presumptive 
eligibility.
    In addition to modifications to the proposed regulations made in 
response

[[Page 2645]]

to the comments discussed below, we have amended part 436 of this 
subchapter to reflect the changes made by the BBA to eligibility for 
Medicaid in Guam, Puerto Rico and the Virgin Islands. The changes made 
to part 436 by these regulations mirror those made to part 435, 
governing Medicaid eligibility in the States, District of Columbia, the 
Northern Mariana Islands and American Samoa. Specifically, new 
Sec. 436.3 corresponds to new Sec. 435.4; modifications to 
Secs. 436.229, 436.1001 and 436.1002 correspond to the modifications 
made to Secs. 435.229, 435.1001 and 435.1002; and new Secs. 436.1100-
1102 correspond to new Secs. 435.1100-1102. Our failure to amend part 
436 in the proposed rules was an oversight. There are no distinctions 
in policy or requirements with respect to the regulations pertaining to 
the States, District of Columbia, the Northern Mariana Islands and 
American Samoa versus those pertaining to Guam, Puerto Rico and the 
Virgin Islands. And any changes made to the proposed rules pertaining 
to expanded coverage of children under Medicaid and Medicaid 
coordination in these final regulations are also reflected in the 
amendments to part 436. We received a number of general comments on 
this subpart and one comment relating to the screen and enroll 
requirements set forth in subpart C which is relevant to this section. 
We will address these comments below.

1. General Comments

    Comment: With respect to the screen and enrollment requirements of 
section 2102(b)(3)(B) of the Act, two commenters recommended that the 
regulations require that, even if a separate application for a separate 
child health program (as opposed to a joint application with Medicaid) 
is used, the application form and any supporting verification must be 
transmitted to the appropriate Medicaid office for processing without 
further action by the applicant to initiate a Medicaid application. One 
commenter recommended that if an applicant for a separate child health 
program, who has been determined potentially eligible for Medicaid, is 
to be required to take any additional steps in order to apply for 
Medicaid, the Medicaid agency must inform the family of the action 
required.
    Response: The obligations of the State agency or contractor 
responsible for determining eligibility for a separate child health 
program with respect to the requirement that children screened 
potentially eligible for Medicaid be enrolled in that program are 
discussed in the preamble to subpart C and are set forth in 
Sec. 457.350 of the final regulations.
    We have added a new Sec. 431.636 to clarify the obligations of the 
State Medicaid agency with respect to the screen-and-enroll 
requirement. Specifically, we have added this section to require that 
State Medicaid agencies adopt procedures to complete the Medicaid 
application process for, and facilitate the enrollment of, children for 
whom the Medicaid application and enrollment process has been initiated 
pursuant to Sec. 457.350(h)(2) in subpart C of these regulations. Such 
procedures shall ensure (1) that the Medicaid application is processed 
in accordance with the regulations governing eligibility for Medicaid 
in the States and District of Columbia, 42 CFR part 435 or the 
regulations governing Medicaid eligibility in Guam, Puerto Rico and the 
Virgin Islands, 42 CFR part 436, as appropriate; and (2) that the 
applicant is not required to provide any information or documentation 
that has been provided to the State agency or contractor responsible 
for determining eligibility under the State's separate child health 
program and forwarded by such agency or contractor to the Medicaid 
agency on behalf of the child pursuant to Sec. 457.350(h)(2) of this 
subchapter.
    When a State Medicaid agency receives an application--either a 
joint SCHIP-Medicaid application or separate Medicaid application--for 
a child screened potentially eligible for Medicaid, the application 
must be processed in accordance with title XIX, Medicaid regulations, 
and the State plan. If the Medicaid agency has all the information it 
needs to process the Medicaid application, no further follow-up is 
needed until the State is ready to make a final eligibility 
determination. If additional information is needed, the agency must 
contact the family and explain what is needed to complete the Medicaid 
application process.
    If a separate application is used, the State Medicaid agency should 
promptly follow up with the family as soon as it receives information 
about the child. If the family has not already completed a Medicaid 
application, the Medicaid agency should provide the family with an 
appropriate application and inform the family about any additional 
steps that must be taken or additional information which must be 
provided in order to complete the Medicaid application process.
    Comment: We received a number of comments urging HCFA to seek 
statutory changes expressly authorizing more flexibility for States. 
The suggested changes include allowing States more flexibility under 
presumptive eligibility and a longer period of presumptive eligibility, 
and giving States the option of establishing their own filing unit 
rules by eliminating the prohibition on deeming income from anyone 
other than from a parent to a child or a spouse to a spouse.
    Response: We will take these suggestions into consideration in 
developing future legislative proposals.
    Comment: One commenter also suggested that States be allowed to 
``out-source'' (privatize) Medicaid eligibility determinations.
    Response: We have previously considered requests by States to 
privatize Medicaid eligibility determinations. Medicaid policy requires 
that most activities included in the eligibility determination process 
be performed by employees of a public agency. Therefore, we do not have 
the discretion to allow States to ``out source'' Medicaid eligibility 
determinations.
    Comment: One commenter indicated that the regulations should 
clarify that, if a State chooses to provide continuous eligibility 
under section 1902(e) of the Social Security Act, as added by section 
4731 of the BBA, it must provide continuous eligibility for all 
children who are eligible for Medicaid.
    Response: These regulations do not address changes made by the BBA 
that are not directly related to title XXI. A separate Notice of 
Proposed Rulemaking will be published addressing other changes made by 
the BBA to the Medicaid program.
    Comment: One commenter noted that, for new eligibility groups, 
States often have no eligibility determination experience and may be 
reluctant to ease the documentation and verification requirements for 
fear of increasing the error rate under the Medicaid eligibility 
quality control (MEQC). Two organizations supported waiving MEQC errors 
for new eligibility groups created by PRWORA, which we explained in the 
preamble to the proposed rule we would be willing to do. One State 
asked if the MEQC waiver of errors extended to the section 1931 group 
or to child-only groups.
    Response: Section 1903(u) of the Act, which provides the statutory 
basis for MEQC, does not give HCFA the authority to grant a grace 
period for eligibility errors. However, the statute does provide that a 
State can request a waiver of a Federal financial disallowance relating 
to eligibility errors on the basis that it made a good faith effort to 
meet the 3-percent error rate limit. Implementing regulations at 42 CFR 
431.865 include sudden and

[[Page 2646]]

unanticipated workload changes that result from changes in Federal law 
as an example of circumstances under which HCFA may find that a State 
made a good faith effort. Under this authority, we have offered in the 
past to waive errors in cases of pregnant women and infants that 
occurred during the first 6 months in which States were implementing a 
new Federal law mandating coverage of these groups (the Medicare 
Catastrophic Coverage Act of 1988). Our intent in offering this waiver 
was to encourage States to expand coverage to pregnant women and 
infants without the concern of fiscal penalties. It also allowed States 
time to develop the experience necessary to accurately determine 
Medicaid eligibility for these new groups.
    We recognize that the sweeping changes in law brought by welfare 
reform and title XXI presented similar opportunities as well as many 
challenges to States. The PRWORA of 1996 established a new eligibility 
category for families with children, which is not linked to welfare. 
The BBA of 1997 established a new coverage group for children and 
established an enhanced match rate to encourage expanded coverage of 
children under this new group or other existing Medicaid groups. HCFA 
has encouraged States to take advantage of the title XXI funds to 
expand coverage for children, and we have encouraged States to simplify 
their enrollment procedures to reduce barriers to participation for all 
Medicaid-eligible children and their families. As we explained in the 
preamble to the proposed rule we would waive MEQC eligibility errors 
attributable to the coverage of these new and expanded groups of 
children and families. Our intent is to give States the opportunity to 
gain experience in making accurate eligibility determinations for these 
newly covered children without relying on lengthy applications or 
requiring excessive eligibility verification requirements due to State 
concern with fiscal penalties.
    Although we are making MEQC waivers available, States are unlikely 
to face MEQC fiscal penalties. States have maintained a national error 
rate below 2-percent for over ten years. In addition, welfare reform 
implementation problems have resulted in eligible children and families 
being denied or terminated from Medicaid rather than ineligible 
children and families being enrolled in Medicaid. MEQC errors arise 
when a State makes erroneous payments. There are likely very few cases 
in which such erroneous payments have been made due to section 1931 
implementation.
    Finally, we have encouraged States to develop alternative MEQC 
programs because this option can be a particularly effective means of 
focusing on error-prone areas. Thirty-one States are currently 
operating alternative MEQC programs either as pilots or as part of a 
section 1115 waiver (most since 1994). For the duration of the pilot or 
section 1115 waiver, the error rates for these States are frozen at 
below 3 percent, and the States are not subject to disallowances.
    In terms of the scope of the waiver, we agree with the comment that 
any waiver should apply to the section 1931 group as well as other 
groups pertaining to children. Therefore, we have determined that we 
should grant a MEQC waiver for eligibility errors directly attributable 
to the implementation of: (1) coverage for children and families 
determined eligible after October 1, 1996 for Medicaid under section 
1931 or section 1925 of the Act; (2) coverage for children determined 
eligible after October 1, 1997 for Medicaid under the optional group of 
targeted low-income children under age 19 (or reasonable groups of 
these children) who are otherwise ineligible for Medicaid, have a 
family income below a certain State-specified level and have no health 
insurance (see section 1902(a)(10)(A)(ii) of the Act); and (3) coverage 
of children determined or redetermined eligible for Medicaid after 
October 1, 1997 whose disabled status is protected under section 4913 
of the BBA. This waiver does not apply to children covered under 
separate child health programs because the MEQC process does not apply 
to such programs.
    We are limiting the waivers to one year beginning with the 
publication date of this final rule rather than the first year of 
implementation of the legislation as we did previously with new 
coverage of pregnant women and infants. In recent months, we have 
learned that many States still need to adapt their systems to assure 
that children eligible for Medicaid under section 1931 receive 
Medicaid. Thus, at this point, limiting the waivers to one year after 
implementation of the statute would not accomplish the intended 
purpose. Since many States are still expanding coverage to children and 
are adopting new approaches to simplify their eligibility and 
redetermination procedures, waivers effective for one year following 
the promulgation of these regulations should enable States to finish 
updating their systems to ensure effective implementation of section 
1931 eligibility without incurring financial penalties as they do so. 
The incidence of erroneous Medicaid denials and terminations should 
diminish as States gain experience, and that MEQC waivers should 
encourage States to move quickly to make the changes necessary to 
determine eligibility consistent with the requirements of the law.
    Because the regulations currently provide the basis for waiver 
requests and the good faith waiver process is administrative in nature, 
it is not necessary to amend regulations at 42 CFR 431.865 to include 
this specific waiver exclusion. In the unlikely event that a State 
experiences an error rate above 3 percent over the next year, we will 
provide that State with instructions for applying for a good faith 
waiver.
    Comment: One commenter expressed strong support for the conclusion 
that all Medicaid rules, including those related to EPSDT, apply to 
Medicaid expansion programs.
    Response: We appreciate the support. A State that expands 
eligibility for children under Medicaid must apply all the title XIX 
rules to the expansion population including children for whom the State 
receives enhanced FMAP at the title XXI rate.

2. Disallowance of Federal Financial Participation for Erroneous State 
Payments (Sec. 431.865)

    We proposed to amend Sec. 431.865(b)to exclude from the definition 
of ``erroneous payment'' payments made for care and services provided 
to children during a period of presumptive eligibility. We received no 
comments on this section and are implementing it as proposed. We are, 
however, also making a technical amendment to the definition of 
erroneous payment in Sec. 431.865(b). Specifically, we are changing the 
word ``in'' in paragraph (1) to ``if'' so that the definition reads: 
``Erroneous payments means the Medicaid payment that was made for an 
individual or family under review who--(1) Was ineligible for the 
review month or, if full month coverage is not provided, at the time 
services were received.'' The use of ``in'' instead of ``if'' clearly 
was a typographical error.

3. Rates of FFP for Program Services (Sec. 433.10)

    We proposed to add a new paragraph (c)(4) to state that the FFP for 
services provided to uninsured children under an SCHIP Medicaid 
expansion program would be the enhanced FMAP established by SCHIP. We 
received no comments on this section and are implementing it as 
proposed.

[[Page 2647]]

4. Enhanced FMAP Rate for Children (Sec. 433.11)

    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, provided that 
certain conditions are met. The State's allotment under title XXI will 
be reduced by payments made at this enhanced FMAP, consistent with 
Sec. 457.616.
    Under proposed Sec. 433.11(b) 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 
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 sufficient funds available under the State's title XXI 
allotment to cover the payments involved; and
    (3) Maintain a valid method of identifying services eligible for 
the enhanced FMAP.
    Under Sec. 457.606, the State must also have an approved State plan 
in effect. 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 proposed 
to 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. However, while States 
that adopt more restrictive income or resource standards or 
methodologies than those in effect on June 1, 1997 would not be 
eligible for enhanced FMAP, the proposed rule provided that if a State 
drops an optional eligibility group entirely, the prohibition against 
receiving enhanced FMAP does not apply.
    In Sec. 433.11, we proposed that the enhanced FMAP would be used to 
determine the Federal share of State expenditures for services provided 
to three categories of children. The first category for whom the 
enhanced FMAP would be available in the proposed rule was the new group 
of ``optional targeted low-income children'' described in proposed 
Sec. 435.229. Under this category, the State would expand eligibility 
to a new group of children.
    Under the second category the State would cover children who meet 
the definition of ``optional targeted low-income child'' by expanding 
coverage under existing Medicaid groups. Thus, a State would not need 
to adopt the new eligibility group of optional targeted low-income 
children in order to receive the enhanced match. As long as the newly-
covered children under an expanded Medicaid group met the definition of 
targeted low-income child, including the requirements that they be 
uninsured and not eligible for Medicaid under the State plan in effect 
on March 31, 1997, the State could receive the enhanced match for them. 
(Note that the State could claim the regular FMAP for children covered 
by an expansion, who do not meet the definition of optional targeted 
low-income children because they are covered by private insurance.) 
These first two categories of children are reflected in proposed 
Sec. 433.11(a)(1), which implements sections 1905(u)(2)(C) and 
1902(a)(10)(A) (ii)(XIV) of the Act.
    The third category 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 subsequently 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. The enhanced FMAP is available for services 
to children in this third category even if they have creditable health 
insurance, as defined at 45 CFR 146.113. We note that, as the statutory 
phase-in of poverty-level-related children under age 19 proceeds, the 
numbers of children in this third category will diminish; by October 1, 
2002, all the children in this category 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 will be matchable at the 
State's regular FMAP.
    Concerning the second category above, it is unlikely 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 an already scheduled 
periodic cost-of-living increase. These types of changes are inherent 
in the State plan policies in effect on March 31, 1997. Enhanced FMAP 
will be available only when children are made eligible due to a change 
in State policy, which expands eligibility to cover previously 
ineligible children.
    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.
    Comment: Three commenters objected to our proposal to allow a State 
to receive enhanced FMAP if the State drops an optional eligibility 
group that was covered on March 31, 1997 because the maintenance of 
effort provision in the statute was intended to prevent States from 
dropping Medicaid coverage in order to put children in a separate child 
health program. The commenters argued that our proposal is contrary to 
the statutory intent.
    Response: We appreciate the commenters' concern. However, while the 
maintenance of effort provisions of the statute explicitly speak to 
more restrictive income and resource standards and methodologies, they 
do not reference other conditions of eligibility or other State 
actions, such as dropping optional eligibility groups.
    Prior to the enactment of SCHIP, the overwhelming majority of 
children under 19 who were eligible for Medicaid under an optional 
category received coverage under the States' medically needy programs. 
By that time, children previously covered under other optional groups 
largely had been subsumed by the mandatory poverty-related eligibility 
groups. Given the further recent expansion of eligibility under the 
poverty-related groups and through the use of less restrictive income 
and resource standards and methodologies permitted under section 1931 
of the Act, the number of children in these other groups has further 
diminished. Most of the children who remain covered under an optional 
group--other than those in a medically needy group--fall into the 
optional categorically needy group of children eligible under section 
1902(a)(10)(A)(ii)(I) of the Act, often referred to as ``Ribicoff 
children.''
    Under section 1902(a)(10)(C)(ii)(I) of the Act, States cannot drop 
only children under 19 from their medically needy programs. It is 
highly unlikely that a State would drop its entire

[[Page 2648]]

medically needy program in order to place a few children in SCHIP. 
Since the number of children in other optional eligibility groups is 
very small, there is little financial incentive for States to drop any 
of these groups either. The only reason a State might potentially drop 
one of its optional groups would be to cover the children under 
another, broader group. Such simplifications likely will promote 
enrollment of children and should not be discouraged.
    In this context, two additional points are pertinent to 
understanding our decision. First, under the proposed regulation, 
States that eliminate an optional eligibility category will not be able 
to receive the enhanced FMAP for any children who would have been 
eligible for Medicaid under the eligibility standards for the dropped 
group in effect on March 31, 1997. Thus, the proposed regulations do 
not permit States to transfer any children from coverage under an 
optional Medicaid group to a stand-alone SCHIP program or to receive 
enhanced FMAP for such children under a Medicaid expansion. States 
simply would not be precluded from receiving the enhanced match for 
other children in its SCHIP program, which is what would happen if a 
State reduced coverage under a mandatory category.
    Second, all Ribicoff children under age 19 will be subsumed by the 
mandatory poverty-level group by October 1, 2002, so any savings 
generated from eliminating this group, which, as discussed above would 
be nominal, would also be short-lived.
    Accordingly, there is little incentive for States to eliminate any 
non-medically needy eligibility categories under Medicaid. In the 
highly unlikely event that a State nonetheless chose to do so, the 
number of children who would be affected would be minimal. The small 
number of potentially (but unlikely to be) affected children does not 
justify restricting States' ability to simplify their Medicaid programs 
in this regard.
    Comment: One commenter requested that we add ``with or without 
creditable insurance'' to Sec. 433.11(a)(2), to make it clear that the 
enhanced FMAP is available for children born before October 1, 1983 who 
would be described in section 1902(l)(1)(D) of the Act (the poverty-
level children's group) if they had been born on or after that date and 
would not qualify for medical assistance under the State plan in effect 
on March 31, 1997, even if they have creditable health coverage.
    Response: We have added ``with or without group health coverage or 
other health insurance coverage'' to Sec. 433.11(a)(2) to clarify this 
point.

5. Optional Targeted Low-Income Children (Sec. 435.229)

    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 children referred to as ``optional 
targeted low-income children,'' and 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). 
Since it appears that 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 title XXI of the Act and who would not qualify 
for Medicaid under the Medicaid State plan in effect on March 31, 1997. 
Because only a child under 19 can qualify as a targeted low-income 
child under section 2110(b)(1) of the Act (see section 2110(c) of the 
Act), to be covered as an optional targeted low-income child under 
Medicaid, an individual also must be under 19 (even though individuals 
between 19 and 21 can qualify for Medicaid under other eligibility 
groups).
    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 ``optional 
targeted low-income child'' is based only on section 2110(b)(1). Thus, 
the definition of ``targeted low-income child'' for Medicaid does not 
include the exclusions described in section 2110(b)(2) that apply to 
the definition of ``optional targeted low-income child'' for separate 
child health programs under title XXI. Specifically, the following 
groups of children are excluded from eligibility for a separate child 
health program under title XXI, but are not excluded from eligibility 
for Medicaid: (1) children who are inmates of public institutions and 
patients in institutions for mental diseases (IMD); and (2) children 
who are 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.
    Under existing Medicaid eligibility rules, there is no eligibility 
exclusion for children who are inmates of a public institution, 
patients in an IMD, or children 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 (FFP) apply under some circumstances. 
Specifically, no FFP is available under Medicaid for services provided 
to inmates of public institutions or patients in an IMD. We note that 
under Medicaid, if, under section 1905(a)(16) of the Act, a State 
elects to cover inpatient psychiatric services for individuals under 
age 21, 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).
    Turning to the proposed rule, the definition of optional targeted 
low-income child at section 1905(u)(2)(B) of the Act excludes children 
who would have been eligible for medical assistance under the State 
plan in effect on March 31, 1997 on any basis, thus including those who 
would have been eligible under a State's medically needy group. This 
exclusion was set forth in proposed Sec. 435.229(a)(2). We explained in 
the preamble to the proposed rule that we would interpret section 
1905(u)(2)(B) to exclude children who would have been eligible as 
medically needy based on their current financial status without a 
``spend-down,'' an amount that can be spent on medical care before the 
child can become eligible. However, children who would have been 
eligible for Medicaid under the State plan in effect on March 31, 1997 
only after paying a spend down would not be excluded, because they 
would not have been eligible for Medicaid until the spend-down had been 
met.
    We explained in the preamble for proposed Sec. 435.229 that the 
regular Medicaid financial methodologies that govern eligibility of 
children in a State, that is, the income and resource methodologies 
under the State's AFDC plan in effect on July 16, 1996, must also be 
used to determine whether a child is eligible under the new group of 
optional targeted low-income children. However, a State may use the 
authority of section 1902(r)(2) of the Act to adopt less restrictive 
methods of determining countable income and resources for this group.
    States that choose to cover a group of optional targeted low-income 
children also must apply uniform income and

[[Page 2649]]

resource eligibility standards for the group throughout the State. 
States also are required to provide all services covered under the 
plan, including EPSDT services, to optional targeted low-income 
children. Indeed, as we explained in the preamble to the proposed rule, 
States must apply all regular Medicaid rules. We thought it worth 
emphasizing that this includes Medicaid rules pertaining to immigration 
status.
    States are not required to provide coverage to all children who 
meet the definition of an optional targeted low-income child. As with 
the existing Medicaid rules, eligibility under the optional group can 
be limited to a reasonable group or reasonable groups of such children. 
However, this option, reflected in proposed Sec. 435.229(b)(2), does 
not allow States 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, as explained 
in the preamble to the proposed rule, we do not consider it reasonable 
to limit a group by age other than by those age groups specified by 
Congress in section 1905(a)(1) and referenced in section 
1902(a)(10)(A)(ii). We believe that if Congress had intended to allow 
other uses of age to establish categories of eligibility, the statute 
would not have specified any age groups. We note that, in the case of 
the group of optional targeted low-income children, a State does not 
have the option to cover a reasonable category of children under age 21 
or 20, because for purposes of defining ``targeted low-income child'' 
for title XXI programs and ``optional targeted low-income child'' for 
Medicaid expansion programs, ``child'' is defined in section 2110(c)(1) 
of the Act as a child under age 19. (This age limitation applies to all 
optional targeted low-income children, not only those in the optional 
group.)
    Section 2110(b)(1)(B) refers to the Medicaid applicable income 
level, which, under 2110(b)(4), explicitly recognizes potentially 
different levels based upon the age of a child. The income standard for 
the optional categorically-needy group of optional targeted low-income 
children may be different for infants, children under age 6, and 
children between ages 6 and 18 (that is, under age 19) if the State's 
Medicaid applicable income levels for these age groups differ.
    We did not propose to require or allow States to apply eligibility-
related private health insurance substitution provisions, such as 
periods of uninsurance, to the ``optional targeted low-income 
children'' group because such eligibility conditions are inconsistent 
with the entitlement nature of Medicaid and are therefore not permitted 
by the Medicaid statute in the absence of a section 1115 waiver.
    Finally, we explained in the preamble to the proposed rule that 
States are obligated to continue to provide services to eligible 
optional targeted low-income children after its 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.
    Comment: Two commenters requested that the Medicaid regulations 
include a definition of optional targeted low-income child because they 
found the cross-reference to the title XXI regulations is confusing. 
They also noted that some provisions in title XXI, such as permitting 
States to limit eligibility by geographic region, do not apply in 
Medicaid.
    Response: We accept the commenters' request to clarify the 
definition of optional targeted low-income child in the Medicaid 
regulations, rather than cross-reference Sec. 457.310(a). In proposed 
Sec. 435.229(a), the cross-reference to Sec. 457.310(a) resulted in the 
inclusion of some provisions of the definition of targeted low-income 
child that only apply to separate child health programs. Therefore, we 
have removed the cross-reference in Sec. 435.229 to Sec. 457.310(a) and 
added a Medicaid-specific definition of optional targeted low-income 
child to Sec. 435.4 (for the States, the District of Columbia, the 
Northern Mariana Islands, and American Samoa) and to Sec. 436.3 (for 
Guam, Puerto Rico, and the Virgin Islands). The definition of optional 
targeted low-income child applies to the optional categorically needy 
group of optional targeted low-income children under Sec. 435.229 and 
Sec. 436.229 for whom the enhanced FMAP is available.
    Specifically, Secs. 435.4 and 436.3 include the following children 
in the definition of ``optional targeted low-income child'': (1) 
children who have family income at or below 200 percent of the Federal 
poverty line for a family of the size involved; (2) children who reside 
in a State which does not have a Medicaid applicable income level, as 
that term is defined in Sec. 457.10; or (3) children who reside in a 
State that has a Medicaid applicable income level and has a family 
income that exceeds the Medicaid applicable income level for the age of 
such child, but not by more than 50 percentage points; or (4) children 
whose income does not exceed the effective income level specified for 
such child to be eligible for medical assistance under the policies of 
the State plan under title XIX on June 1, 1997. As noted, we have 
revised the definition to clarify that an optional targeted low-income 
child that resides in a State that has a Medicaid applicable income 
level may have family income that exceeds the Medicaid applicable 
income level, but does not exceed the effective income level that has 
been specified under the policies of the State plan under title XIX on 
June 1, 1997. This provision effectively allows children who became 
eligible for Medicaid as a result of an expansion after March 31, 1997 
but before June 1, 1997 may be considered optional targeted low-income 
children. It also means that children who were below the Medicaid 
applicable income level, but were not Medicaid eligible due to 
financial reasons that were not related to income (for example, due to 
an assets test) can be covered by SCHIP.
    Furthermore, the definition in Sec. 435.4 and Sec. 436.3 requires 
that an optional targeted low-income child must not be: (1) Eligible 
for Medicaid under the policies of the State plan in effect on March 
31, 1997; or (2) covered under a group health plan or under health 
insurance coverage unless the health insurance coverage program is 
offered by the State, has been in operation since before July 1, 1997, 
and the State 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 geographic access to care under that 
plan. These criteria mirror the provisions of proposed Sec. 457.310, 
except those that apply only to separate title XXI child health 
programs.
    Comment: Three commenters indicated that children who were covered 
by section 1115 demonstration projects with a limited benefit package 
should not be considered to have been recipients of Medicaid, and 
therefore should not be excluded from the definition of optional 
targeted low-income children. They urged HCFA to provide a regulatory 
clarification so that children eligible under a section 1115 
demonstration project that only provided a limited range of services 
would be eligible for enhanced matching under the definition of an 
``optional targeted low-income child.''
    Response: We agree with the commenters and have therefore revised 
the definition of the term ``Medicaid applicable income level'' at 
Sec. 457.10, to address their concerns. Specifically, in Sec. 457.10 we 
clarify that, for purposes of the definition of ``Medicaid applicable

[[Page 2650]]

income level,'' the term ``policies of the State plan'' includes 
policies under most section 1115(a) Statewide demonstration projects; 
however, the term does not include section 1115(a) demonstrations that 
granted coverage to a new group of eligibles but which did not provide 
inpatient hospital coverage, or which limited eligibility both by 
allowing only children who were previously enrolled in Medicaid to 
qualify and imposing premiums as a condition of participation in the 
demonstration. This exception does not apply to waivers that extended 
the time period or conditions under which an individual could receive 
transitional medical assistance.
    The exclusion of children eligible for medical assistance under the 
State plan in effect as of March 31, 1997 was intended to ensure that 
States did not transfer coverage of low-income children who would have 
been eligible under their Medicaid program at the regular Federal 
matching rate to the enhanced matching rate established by SCHIP. 
However, this provision does not specifically address the treatment of 
children who could have been covered under a section 1115 demonstration 
project in effect on March 31, 1997.
    Our understanding is that the provision was not intended to 
preclude States from claiming enhanced matching funds for expanded 
coverage to children whose income is below the demonstration project 
eligibility thresholds in place as of March 31, 1997, if those programs 
did not offer comprehensive coverage or limited eligibility to 
individuals who were previously enrolled in Medicaid and imposed 
premiums as a condition of participation. Demonstrations that had these 
types of restrictions are significantly more limited in scope (either 
in coverage or eligibility) than ``traditional'' Medicaid programs. Our 
experience with SCHIP and our increased understanding of how this 
provision is affecting States' ability to expand coverage have led us 
to agree with the commenters that an overly broad interpretation of the 
exclusion contained in section 1905(u)(2)(B) of the Act would be 
contrary to the intent of the statute. Furthermore, because enrollment 
in these types of demonstrations is relatively small, any supplantation 
of State dollars would be minimal. Therefore, we have clarified this 
provision in the final rule.
    Comment: Several commenters supported the proposal that EPSDT 
policies apply to optional targeted low-income children. One of these 
commenters also agreed that there should not be a required period of 
uninsurance for these children and encouraged HCFA to explicitly 
prohibit such a requirement.
    Response: EPSDT applies to this group of children because they are 
in a Medicaid group and entitled to all benefits and protections 
provided to children under Medicaid law and regulations. With respect 
to periods of uninsurance, we have not included the prohibition against 
requiring a period of uninsurance in the regulation text for this 
provision since periods of uninsurance are already prohibited by the 
Medicaid statute and regulations. We believe that this prohibition is 
inherent in the entitlement nature of Medicaid. States may not impose 
conditions of eligibility other than those specifically allowed by 
statute, regulation, or waiver. We will work with States that have such 
policies in place to assure that the requirements of the statute are 
met.

6. Furnishing a Social Security Number (Sec. 435.910)

    Section 1137(a)(1) of the 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 because the claimant had obtained a social security 
number. As a result, that decision did not foreclose someone else with 
religious objections to applying for a social security number from 
challenging the constitutionality of section 1137(a)(1) of the Act. The 
Religious Freedom Restoration Act of 1993 also raised questions about 
the requirements of section 1137(a)(1) of the Act in cases involving 
religious objections.
    Consequently, in 1995 HCFA announced a policy that 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. In Sec. 435.910 of the proposed rule we 
attempted to accommodate the purpose of section 1137(a)(1) with the 
Constitution's protection of freedom of religion and the dictates of 
the 1993 Act by permitting alternative identifiers.
    We received no comments on this section. However, we wish to 
clarify that the statute requires an SSN of applicants and recipients 
only. States may request but may not require other individuals in the 
household to provide their SSN's. For example, if application is made 
on behalf of a child and the parent is not applying, the State may 
request the parent's SSN but must note that the SSN is not required and 
may not deny the child's eligibility if the parent does not provide 
his/her own SSN.

7. FFP for Services and FFP for Administration (Sec. 435.1001 and 
Sec. 435.1002)

    Section 1920A of the Act allows States to provide services to 
children under age 19 during a period of presumptive eligibility. The 
implementation of this provision is discussed below. In accordance with 
this new option, we proposed to amend Sec. 435.1001 to provide FFP for 
necessary administrative costs incurred by States in determining 
presumptive eligibility for children and providing services to 
presumptively eligible children. In Sec. 435.1002 we proposed to 
provide FFP for services covered under a State's plan which are 
furnished to children during a period of presumptive eligibility. We 
received no comments on either of these sections and are implementing 
them as proposed.

8. Exemption From the Limitation on FFP for Categorically Needy, 
Medically Needy, and Qualified Medicare Beneficiaries (Sec. 435.1007)

    Section 162 of Public Law 105-100 amended 1903(f)(4) of the Act to 
add the optional group of optional targeted low-income children and 
other children for whom enhanced FMAP is available 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 per se, but rather 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 
ordinarily would have been paid to a family of the same size without 
any income or resources, in the form of money payments under the Aid to 
Families with Dependent Children program. This provision effectively 
limits the use of the authority under section 1902(r)(2) to expand 
eligibility through the use of less restrictive income and resource 
methodologies for those groups that are not exempt from the limitation.
    However, section 162 of Public Law 105-100 could result in 
extending the exemption from the FFP limitation to children other than 
(1) children in the optional eligibility group of optional

[[Page 2651]]

targeted low-income children or (2) children in other groups already 
exempt from the FFP limitation. If this were to occur, a conflict with 
the comparability requirements of section 1902(a)(17) and 
Sec. 435.601(d)(4) of the Medicaid regulations could arise. If, for 
example, a State sought to use more liberal income methodologies for 
counting income in determining the medically-needy eligibility of 
optional targeted low-income children than used for counting income in 
determining the medically-needy eligibility of other children, the 
comparability requirements would be violated.
    Because the exemption from the FFP limit did not override the 
comparability requirement of the Medicaid statute, we proposed to 
continue to apply the FFP limitations described in Sec. 435.1007 to all 
children who are covered as medically-needy and to any optional 
categorically-needy group which is subject to the FFP limit. States may 
use more liberal methodologies under section 1902(r)(2) of the Act for 
the optional categorically-needy group composed exclusively of optional 
targeted low-income children without reference to the FFP limitations 
of section 1903(f). We received no comments on this section and have 
adopted this portion of the rule as proposed.

9. Presumptive Eligibility for Children (Part 435, Subpart L)

    Section 4912 of the BBA added a new section 1920A to the Act to 
allow States to provide services to children under age 19 during a 
period of presumptive eligibility, prior to a formal determination of 
Medicaid eligibility. We set forth the basis and scope of subpart L in 
proposed Sec. 435.1100.
    Under section 1920A of the Act, only a ``qualified entity'' can 
determine whether a child is presumptively eligible for Medicaid on the 
basis of preliminary information about the child's family income. In 
accordance with section 1920A(b)(3)(A) of the Act, we define a 
qualified entity in Sec. 457.1101 as 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 Medicaid State plan and is eligible 
to receive payments under the approved plan; (2) is authorized to 
determine 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. In addition, the Benefits Improvement and 
Protection Act of 2000 (BIPA) (P.L. expanded this list of qualified 
entities to include an entity that (5) is an elementary or secondary 
school, as defined in section 14101 of the Elementary and Secondary 
Education Act of 1965 (20 U.S.C. 8801); (6) is an elementary or 
secondary school operated or supported by the Bureau of Indian Affairs; 
(7) is a State or Tribal child support enforcement agency; (8) is an 
organization that is providing emergency food and shelter under a grant 
under the Stewart B. McKinney Homeless Assistance Act; (9) is a State 
or Tribal office or entity involved in enrollment in the program under 
Part A of title IV, title XIX, or title XXI; or (10) is an entity that 
determines eligibility for any assistance or benefits provided under 
any program of public or assisted housing that receives Federal funds, 
including the program under section 8 or any other section of the 
United States Housing Act of 1937 (42 U.S.C. 1437 et seq.) or under the 
Native American Housing Assistance and Self Determination Act of 1996 
(25 U.S.C. 4101 et seq.); or (11) any other entity the State so deems, 
as approved by the Secretary.
    Finally, section 1920A(b)(3)(B) also authorizes the Secretary to 
issue regulations further limiting those entities that may become 
qualified entities. We note that, although State agency staff can 
receive and process applications for regular Medicaid, they cannot make 
presumptive eligibility determinations unless they themselves meet the 
definition of a ``qualified entity'' under Sec. 457.1101.
    We note that the date that the completed 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. Alternatively, the State can opt to 
consider the date the determination of presumptive eligibility is made 
as the Medicaid application date.
    In accordance with section 1920A(b)(2), we also proposed in 
Sec. 435.1101 that the period of presumptive eligibility begins on the 
day that a qualified entity makes a determination that a child is 
presumptively eligible. The child would then have 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 on time, 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.
    Finally, proposed Sec. 435.1101 defined ``applicable income level'' 
as the highest eligibility income standard established under the State 
plan which is most likely to be used in determining the Medicaid 
eligibility of the child for the age involved. We note that there may 
be different applicable income levels for children in different age 
groups. 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 proposed in Sec. 435.1102(a) to provide limited flexibility to 
States in calculating income for purposes of determining presumptive 
eligibility. We also explained in the preamble to the proposed rule 
that under Sec. 435.1102(a) we would allow States to require that 
qualified entities request and use general information other than 
information about income, as long as the information can be obtained 
through the applicant's statements and is requested in a fair and 
nondiscriminatory manner. With respect to income, in States that adopt 
the most conservative approach to presumptive eligibility, the 
qualified entity would use gross family income. The qualified entity 
would compare gross family income to the applicable income level, as 
defined in Sec. 435.1101.
    For States wishing to adopt a more liberal approach, however, we 
specifically proposed to allow States to require that qualified 
entities apply simple income disregards, such as the general $90 earned 
income disregard. However, as explained in the preamble we did not 
propose to allow States to require that qualified entities deduct the 
costs of incurred medical expenses in order to reduce income to the 
allowed income level. We solicited 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.
    Proposed Secs. 435.1102(b)(1) and (b)(2) implement the provisions 
of section

[[Page 2652]]

1920A(b)(1) of the Act. Section 435.1102(b)(1) requires that States 
provide qualified entities with regular Medicaid application forms 
(defined in proposed Sec. 435.1101) as well as information on how to 
assist parents, guardians, and other persons in completing and filing 
such forms. At a minimum, we proposed that States must furnish 
qualified entities with the applications used to apply for Medicaid 
under the poverty-related groups described in section 1902(l)(1) of the 
Act.
    Proposed Sec. 435.1102(b)(2) requires States to establish 
procedures to ensure qualified entities--(1) notify the Medicaid agency 
that a child is presumptively eligible within 5 working days; and (2) 
provide written information to parents and custodians of children 
determined to be presumptively eligible, explaining that a regular 
Medicaid application must be filed by the last day of the following 
month in order for the child to continue to receive services after that 
date and that if an application is timely 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; and (3) 
provide written information to parents and custodians of children 
determined not to be presumptively eligible of the reason for the 
determination and that the child has a right to apply to regular 
Medicaid.
    While we are requiring such notification, we are considering 
presumptive eligibility to be a special status, distinct from regular 
Medicaid eligibility. Therefore, we did not propose to apply to a 
decision on presumptive eligibility the notification requirements, 
found in Secs. 435.911 and Sec. 435.912 and part 431, subpart E, that a 
State must meet when it makes a decision on a regular Medicaid 
application. Nor did we propose to grant rights to appeal a denial or 
termination of services under a presumptive eligibility decision 
because a determination of presumptive eligibility 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.
    Because presumptive eligibility is a special status, we considered 
whether States should be required to provide all services to 
presumptively eligible children or whether they should be permitted to 
limit the services provided. In Sec. 457.1102(b)(3), we proposed to 
require that States provide all services covered under the State plan, 
including EPSDT, to presumptively eligible children.
    Although section 1920A places no restrictions on the number of 
periods of presumptive eligibility for a child, it undermines the 
intent of the provision to provide a child with an unrestricted number 
of periods. Therefore, we proposed in Sec. 435.1102(c) to allow States 
to establish reasonable methods of limiting the number of periods of 
presumptive eligibility that can be authorized for a child in a given 
time frame. We solicited comments on what would constitute a reasonable 
limitations and whether specific limitations on the number of periods 
of presumptive eligibility should be imposed by regulation.
    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. However, as 
explained in the preamble to the NPRM, because a determination of 
presumptive eligibility is not, by definition, a determination of 
Medicaid eligibility, but simply a decision of temporary eligibility 
based on a special status, and because section 1920A(b)(2) of the Act 
expressly defines the period of presumptive eligibility, we did not 
propose to permit States to provide full-month periods of presumptive 
eligibility.
    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. This provision is reflected in proposed Sec. 435.1001. We note 
that in the event that a child determined to be presumptively eligible 
is not found eligible for Medicaid after a final eligibility 
determination, the services provided during the presumptive eligibility 
period that otherwise meet the requirements for payment will be 
covered. See Sec. 447.88 and Sec. 457.616 for a discussion of the 
options for claiming FFP payment related to presumptive eligibility.
    Comment: We received one comment that the regulations should 
clarify that a State can provide a joint SCHIP/Medicaid application or 
a shortened Medicaid application used for pregnant women and children 
as well as a ``regular Medicaid application.''
    Response: We agree that a qualified entity may provide parents and 
caretakers with either a shortened application that is used to 
establish eligibility for pregnant women and children under the 
poverty-level-related groups described in section 1902(l) of the Act or 
a joint application for a separate child health program and Medicaid 
that is used to establish eligibility of children. We have revised the 
definition of ``application form'' in Sec. 435.1101 to include the 
joint SCHIP/Medicaid application for a Medicaid and a separate child 
health program.
    We would like to clarify that, under Federal law, no application 
form for presumptive eligibility itself is required. Thus, qualified 
entities can make presumptive-eligibility determinations based strictly 
on oral information. (The qualified entity would need to record the 
pertinent information, but the parent or caretaker (or other 
responsible adult) would not themselves need to complete an 
application.) This would not preclude qualified entities from assisting 
families in completing and filing the regular Medicaid application to 
the extent permitted under law, and we strongly encourage them to do 
so.
    Alternatively, a State may choose to use a written application for 
presumptive eligibility, although it cannot require the parent or 
caretaker to provide information other than the information on income 
necessary to make the determination.
    We encourage States that choose to use a written application, 
particularly those with simplified Medicaid application forms, to use 
the same form for presumptive eligibility as that used for regular 
Medicaid, as this will eliminate the need for the child's family to 
complete two forms. The parent or caretaker can be encouraged to 
complete the application and assisted in doing so. But, again, so long 
as pertinent information on income is provided, presumptive eligibility 
in a State that has elected this option cannot be denied because the 
full application is not completed.
    In either event, of course, the State must provide qualified 
entities with information on how to assist families in completing and 
filing the application and ensure that they give presumptive-
eligibility applicants a Medicaid application form. We also strongly 
encourage States, in turn, to encourage qualified entities to provide 
such assistance to the extent permitted under Medicaid law and 
regulations.
    Comment: One commenter specifically supported the requirement that 
presumptive eligibility must be provided Statewide and one commenter 
specifically objected to this requirement. A third commenter objected 
to requiring each qualified entity to conduct Statewide

[[Page 2653]]

presumptive eligibility outreach and determination.
    Response: We have considered the commenters' suggestions and have 
retained proposed Sec. 435.1102(b)(4) related to Statewide availability 
of presumptive eligibility. Section 1920A(b)(3)(C) provides States with 
the authority to limit the classes of entities that may become 
qualified entities; and therefore may limit the population that have 
the opportunity to become presumptively eligible. For example, States 
could designate WIC agencies to make determinations of presumptive 
eligibility only for the clients who have applied for or are receiving 
WIC, but all of the WIC agencies across the State would be required to 
offer presumptive eligibility. Therefore, a State could effectively 
limit the availability of presumptive eligibility by designating 
particular qualified entity to offer it.
    Comment: One commenter noted that schools would not be able to do 
determinations of presumptive eligibility for pre-schooled, home-
schooled, drop-outs or graduates.
    Response: Although schools are not likely to be in regular contact 
with children falling into one of these groups, and as a practical 
matter may not be in a position to make presumptive eligibility 
decisions for them, schools that are Medicaid providers would not be 
precluded from determining the eligibility of a child simply because 
the child did not attend the school. Thus, schools would also be 
authorized to determine the presumptive eligibility of the children 
identified by the commenter.
    Comment: We received one comment concerning verification of 
information used to determine presumptive eligibility. The 
recommendation was that the regulations specifically require that 
``self-attestation'' be used for determinations of presumptive 
eligibility if income disregards are used and that in other cases, HCFA 
encourage States to allow applicants to attest to information required 
for a determination of presumptive eligibility without providing 
documentation.
    Response: We have revised Sec. 435.1102 to make it clear that an 
estimate of income is to be used for purposes of presumptive 
eligibility determinations even when a State has chosen to apply simple 
disregards. The statute provides that determinations of presumptive 
eligibility are based on ``preliminary information'' and we do not 
believe that requiring documentation is consistent with the intent that 
the process be simple for both the applicant and the provider and 
result in immediate eligibility. Therefore, an applicant's self-
attestation as to income is all that would be required to establish the 
amount of income for presumptive eligibility determinations, regardless 
of whether income disregards are used or not. This is consistent with 
the proposed rules pertaining to presumptive eligibility for pregnant 
women, published March 23, 1994 (59 FR 13666).
    Comment: One commenter specifically supported allowing only simple 
disregards in determinations of presumptive eligibility. Another 
commented that States should be free to decide whether to use gross or 
net income for determinations of presumptive eligibility.
    Response: We appreciate the support and agree in part with the 
second commenter. States are free to use only gross income. States may 
also apply simple disregards to gross income such as a general earned 
income disregard. However, it would not be consistent with statutory 
intent to allow States to require that qualified entities apply 
complicated income disregards or make complicated determinations. 
Therefore, we have not revised proposed Sec. 457.1102(a) in this final 
regulation.
    Comment: Three commenters expressed support for requiring that, in 
proposed Sec. 457.1102(b)(3), presumptive eligibility include EPSDT 
services. One of these commenters urged that the preamble discuss the 
steps that States should take to assure that EPSDT services are 
provided.
    Response: We are not including any specific EPSDT guidance in this 
regulation. The regular Medicaid policies which pertain to EPSDT, 
including policies about providing information about EPSDT services to 
families and generally informing families about the benefits of 
preventive health, would apply when a child is found presumptively 
eligible for Medicaid.
    Comment: We received several comments concerning written notices 
provided to the family and the responsibilities of qualified entities. 
One comment was that it would be difficult for schools to issue the 
notice of presumptive eligibility and the temporary enrollment card and 
the State should be allowed to do this instead. Another was that it 
would be difficult for schools to send a written notice to those found 
not to be presumptively eligible and might result in the family's 
confusion and anger. One comment was that, generally, HCFA should 
encourage States to develop procedures that are not burdensome to 
providers, provide adequate training and provider relations, and keep 
the provider apprized of the status of the application so that, if not 
completed at the time of any follow-up visit, the provider can 
encourage the family to complete the process, as necessary.
    Response: Our understanding is that the intent of the legislation 
is to minimize the burden placed on qualified entities, including 
schools and other providers. However, the statute specifically requires 
that the qualified entity inform the family that an application for 
Medicaid must be filed by the end of the following month. It is also 
clear that qualified entities are expected to provide Medicaid 
applications and assistance in completing and filing such applications. 
We certainly encourage States to simplify the presumptive eligibility 
process to the greatest extent allowed under the law. It is not 
unnecessarily burdensome for the qualified entity to provide written 
notices to those found presumptively eligible or ineligible, as these 
notices could be pre-printed notices provided by the State.
    Although we have not required it, it would not be unnecessarily 
burdensome for a State to require a qualified entity to provide a 
temporary enrollment card to enable the child to access services during 
the period of presumptive eligibility particularly when the qualified 
entity itself does not provide medical services. We also encourage 
States to keep qualified entities apprized of the status of the child's 
application if the entity is willing to follow up with families whose 
application has not been completed.
    Comment: One commenter suggested that Sec. 435.1102(b)(2)(iii) 
should be amended to require that qualified entities tell individuals 
who are not found presumptively eligible for Medicaid that they may 
file for coverage under a separate child health program as well as 
Medicaid and provide applications for both programs as well as 
information on how to complete and file them.
    Response: We have not required that qualified entities provide 
information about a separate child health program. However, we 
encourage States to do this as part of their outreach programs and 
coordination efforts. In addition, as noted above, we have amended 
Sec. 435.1101 to make it clear that the application provided by a 
qualified entity may be a joint Medicaid/SCHIP application.
    Comment: One commenter urged HCFA to encourage States to simplify 
the enrollment process and provide prompt, easy-to-understand 
information to the family about the eligibility determination process 
and any remaining steps that the family must

[[Page 2654]]

take. Another expressed concern that States are not required to send a 
notice at the end of a presumptive-eligibility period, which would 
alert families who sent in a Medicaid application that was never 
received.
    Response: HCFA has encouraged States to simplify both the 
eligibility requirements and the enrollment procedures to the greatest 
extent possible and will continue to do so. We also encourage States to 
make all information provided to families understandable and will 
provide technical assistance in this area. We encourage States to 
notify families that the child's presumptive eligibility will be 
terminated and that no Medicaid application has been received. We also 
encourage States to establish other procedures to follow-up with 
families of presumptively-eligible children early on in the 
presumptive-eligibility period. However, requiring States to do so is 
beyond the intent of the statute, and could discourage some States from 
adopting presumptive eligibility for children at all. We will not 
mandate that States institute such procedures.
    Comment: We received several comments in response to our specific 
request related to limitations on the number of periods of presumptive 
eligibility available to a child. One commenter believed that no more 
than one period of presumptive eligibility within 24 months would be 
reasonable, but recommended that States be allowed to set their own 
standards. Another commenter agreed it would be unreasonable to provide 
unlimited periods of presumptive eligibility, but believed that it 
would be reasonable to allow only one period per lifetime. A third 
recommended that there be no lifetime limit on the number of periods, 
but a limit on the number of periods within a specific time-frame (for 
example, one period of presumptive eligibility within a twelve-month 
period). A final commenter believed that it would be difficult for 
providers, who are considered qualified entities, to track the number 
of presumptive-eligibility any child has enjoyed.
    Response: We have decided to require that States adopt reasonable 
standards regarding the number of periods of presumptive eligibility 
that will be authorized for a child within a given period of time. 
Under some circumstances, more frequent or numerous periods of 
presumptive eligibility may be justified and individual circumstances 
may be taken into account. We are not requiring that States establish a 
specific maximum number of periods for specific time frames in this 
final regulation. We realize that the circumstances that result in a 
need for an additional period of presumptive eligibility will vary 
greatly from case to case. In addition, States may wish to have some 
experience before setting up a standard that qualified entities must 
follow. We expect States to monitor the use of presumptive eligibility 
to determine whether there is a need for specific limitations on the 
number of periods of presumptive eligibility to which a child is 
entitled.
    We appreciate the support for our position that it would be 
unreasonable to provide unlimited periods of presumptive eligibility. 
However, if a State decides to establish set limits, we do not agree 
that one period of presumptive eligibility in a lifetime is reasonable 
given the changes in a child's circumstances that may occur over time. 
It would be reasonable, however, to limit the periods of presumptive 
eligibility to one per twelve or twenty-four month period, as 
suggested. Furthermore, it would be reasonable to connect limitations 
on presumptive eligibility to the length of time during which a child 
is not covered by Medicaid. For example, a State could prohibit an 
additional period of presumptive eligibility until the child had been 
disenrolled from Medicaid for a certain period of time. In response to 
the last commenter, after a State has established how it will restrict 
the number of periods of presumptive eligibility, we expect that the 
State will develop procedures for assuring that the restrictions are 
applied without unduly burdening the qualified entities, including 
providers.

L. Medicaid Disproportionate Share Hospital (DSH) Expenditures

    Section 4911 of the BBA amended section 1905(b) of the Act to 
require that for expenditures under section 1905(u)(2)(A)(that is, 
medical assistance for optional targeted low-income children) or 
section 1905(u)(3) (that is, medical assistance for children referred 
to as ``Waxman children''), the Federal medical assistance percentage 
is equal to the enhanced FMAP described in section 2105(b)of the Act 
unless the State has exhausted its title XXI allotment, in which case 
the State's regular FMAP would apply. In other words, under the 
statute, States that provide health insurance coverage to children as 
an expansion of their Medicaid programs may receive an 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 
thus are payments made for hospital services rendered to Medicaid-
eligible patients. Depending on the State's DSH methodology, some of 
the payments may be directly identifiable as expenditures for services 
for a child in a SCHIP-related Medicaid expansion program. HCFA 
concluded in the proposed rule that those identifiable payments must 
qualify for the enhanced FMAP.
    We further proposed Sec. 433.11 which set forth provisions 
regarding the enhanced FMAP rate available for State DSH expenditures 
related to services provided to children under an expansion to the 
State's current Medicaid program. However, based on the statutory 
changes included in the ``Medicare, Medicaid, and CHIP Balanced Budget 
Refinement Act of 1999,'' this section is being deleted. Specifically, 
H.R. 3426 incorporated changes to section 1905(b) (42 U.S.C. 1396d(b)) 
by inserting the phrase ``other than expenditures under section 1923,'' 
after ``with respect to expenditures.'' By inserting this phrase, the 
statute specifically excludes Medicaid DSH expenditures from qualifying 
for enhanced FMAP.

III. Provisions of the Final Rule

    In this final rule, we are adopting the provisions as set forth in 
the November 8, 1999 proposed rule with the following substantive 
revisions:

A. Part 431--State Organization and General Administration

    We added a new Sec. 431.636 to provide for coordination of Medicaid 
with the State Children's Health Insurance Program. This section 
provides that the State must adopt procedures to facilitate the 
Medicaid application process for, and the enrollment of children for 
whom the Medicaid application and enrollment process has been 
initiated.

B. Part 433--State Fiscal Administration

    We removed proposed paragaph Sec. 433.11(b)(3) regarding enhanced 
FMAP for disporportionate share hospital expenditures provided to 
certain children.

C. Part 435--Eligibility in the States, District of Columbia, the 
Northern Mariana Islands, and American Samoa

     We added a definition of optional targeted low-income 
child at Sec. 435.4.

[[Page 2655]]

     We revised Sec. 435.229 to refer to optional targeted low-
income children as defined at Sec. 435.4.
     We revised Sec. 435.910(h)(3) to provide that a State may 
use the Medicaid identification number established by the State to the 
same extent as an SSN is used for purposes described in paragraph 
(b)(3) of this section.
     At Sec. 435.1101 we replaced the term ``applicable income 
level'' with the term ``presumptive income level.'' The definition for 
this term remains the same.
     We revised the requirement at proposed paragraph 
Sec. 435.1102(b)(4) to provide that agencies that elect to provide 
services to children during a period of presumptive eligibility must 
allow determinations of presumptive eligibility to be made by qualified 
entities on a Statewide basis.

D. Part 436--Eligibility in Guam, Puerto Rico, and the Virgin 
Islands

    In the proposed rule, we inadvertently omitted certain revisions to 
part 436. The following revisions parallel the changes made to part 
435:
     We added a definition of optional targeted low-income 
children at Sec. 436.3.
     We added a new Sec. 436.229, regarding provision of 
Medicaid to optional targeted low-income children.
     We revised paragraph (a) of Sec. 436.1001, regarding FFP 
for administration.
     We added a new paragraph (c) to Sec. 436.1002, regarding 
FFP for services.
     We added a new subpart L, Option for Coverage of Special 
Groups.

E. Part 457--Allotments and Grants to States

     We replaced the term ``Children's Health Insurance 
Program'' with the term ``State Children's Health Insurance Program'' 
throughout the regulation.
     We replaced the term ``beneficiary'' with the term 
``applicant'' or ``enrollee'' throughout the regulation.

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

Section 457.10

     We added definitions for the following terms: 
``applicant'', ``cost sharing'', ``enrollee'', ``enrollment cap'', 
``health care services'', ``health insurance coverage'', ``health 
insurance issuer'', ``health services initiatives'', ``joint 
application'', ``optional targeted low-income child'', and ``premium 
assistance program''.
     For the following terms, we eliminated the cross reference 
and set forth the full text of the definition at Sec. 457.10: 
``contractor'', ``emergency medical condition'', ``emergency 
services'', ``health benefits coverage'', ``managed care entity'', 
``post-stabilization services''.
     We revised the definition of American Indian/Alaska Native 
(AI/AN) by removing the provision that descendants in the first or 
second degree of members of Federally recognized tribes are considered 
AI/AN.
     We removed the definitions of ``contractor'', ``cost-
effectiveness'', ``employment with a public agency'', ``grievance'', 
``legal obligation'', ``post-stabilization services'', ``premium 
assistance for employer sponsored group health plans'', and ``State 
program integrity unit''.

Section 457.40

     We revised paragraph (c) to require that the State must 
identify, in the State plan or State plan amendment, by position or 
title, the State officials who are responsible for program 
administration and financial oversight.

Section 457.60

     We revised proposed paragraph (a)(1) (now paragraph (a)) 
to provide that a State must amend its State plan whenever necessary to 
reflect changes in Federal law, regulations, policy interpretations, or 
court decisions that affect provisions in the approved State plan.
     We revised proposed paragraph (a)(2) (now paragraph (b)) 
to provide that a State must amend its State plan whenever necessary to 
reflect changes in State law, organization, policy, or operation of the 
program that affect the following program elements: Eligibility, 
including enrollment caps and disenrollment policies; procedures to 
prevent substitution of private coverage, including exemptions or 
exceptions to periods of uninsurance; the type of health benefits 
coverage offered; addition or deletion of specific categories of 
benefits offered under the plan; basic delivery system approach; cost-
sharing; screen and enroll procedures, and other Medicaid coordination 
procedures, review procedures, and other comparable required program 
elements.
     We revised proposed paragraph (a)(3) (now paragraph (c)) 
to provide that a State must amend its State plan to reflect changes in 
the source of the State share of funding, except for changes in the 
type of non-health care related revenues used to generate general 
revenue.

Section 457.65

     We added a new paragraph (d) to set forth requirements for 
amendments relating to enrollment procedures.
     We redesignated proposed paragraphs (d) and (e) as 
paragraphs (e) and (f), respectively.
     We removed proposed paragraph (d)(2), as this provision 
has been incorporated into Sec. 457.60(c).
     We added a new paragraph (f)(2) to provide that an 
approved State plan continues in effect unless a State withdraws its 
plan in accordance with Sec. 457.170(b).

Section 457.70

     We removed proposed paragraph (c)(1)(vi), which provided 
that Medicaid expansion programs must meet the requirements of subpart 
H of this final rule.

Section 457.80

     We revised paragraph (c) to provide that the State plan 
must include a description of procedures the State uses to accomplish 
coordination of SCHIP with other public and private health insurance 
programs, sources of health benefits coverage for children, and 
relevant child health programs, such as title V, that provide health 
care services for low-income children.

Section 457.90

     We added a new paragraph (b)(3) to provide that outreach 
strategies may include application assistance, including opportunities 
to apply for child health assistance under the plan through community-
based organizations and in combination with other benefits and services 
available to children.

Section 457.110

     We revised paragraph (a) to provide that the State must 
make linguistically appropriate information available to families.
     We revised paragraphs (a) and (b) to provide that the 
State must ensure that information is made available to applicants, and 
enrollees.
     We revised paragraph (b) to provide that States must have 
a mechanism in place to ensure that applicant and enrollees are 
provided specific information in a timely manner.

Section 457.120

     We added a new paragraph (c) to require that the State 
plan include a description of the method the State uses to ensure 
interaction of Indian Tribes and organizations on the implementation of 
procedures regarding provision of child health assistance to AI/AN 
children.

[[Page 2656]]

Section 457.125

     We revised paragraph (a) by removing language regarding 
consultation with Indian tribes, which has been incorporated into 
Sec. 457.120(c).

Section 457.140

     We revised the introductory text of this section to 
provide that a State plan or State plan amendment must include a 1-year 
budget.

Section 457.170

     We revised this section to provide more specific rules 
regarding withdrawal of proposed State plans or plan amendments and 
withdrawal of approved State plans.

Section 457.190

     We moved the provisions of Sec. 457.190 to new 
Sec. 457.203.

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

Section 457.301

     We removed our proposed definition of ``employment with a 
public agency''.
     We added a definition of the term ``joint application''.

Section 457.305

     We revised paragraph (a) to provide that the State plan 
must include a description of the methodologies used by the State to 
calculate eligibility under the financial need standard.
     We added a new paragraph (b) to clarify that the State 
plan must describe the State's policies governing enrollment and 
disenrollment, including enrollment caps, and processes for instituting 
waiting lists, deciding which children will be given priority for 
enrollment, and informing individuals of their status on a waiting 
list.

Section 457.310

     We revised the financial need standard for a targeted low-
income child at paragraph (b)(1).
     We revised paragraph (b)(2)(ii) to provide that a child 
would not be considered covered under a group health plan if the child 
did not have reasonable geographic access to care under that plan.
     We revised paragraph (c)(1)(ii) to clarify our policy 
concerning contributions toward the cost of dependent coverage.

Section 457.320

     We revised paragraph (b)(3) to specifically prohibit 
discrimination on the basis of diagnosis.
     We revised paragraph (c) to permit States to accept self-
declaration of citizenship, provided that the State has implemented 
effective, fair, and nondiscriminatory procedures for ensuring the 
integrity of their application process with respect to self-declaration 
of citizenship.
     We revised paragraph (a)(7) and added a new paragraph (d) 
to address eligibility standards related to residency.
     We revised paragraph (a)(10) and added a new paragraph (e) 
regarding duration of eligibility.

Section 457.340

     We removed proposed Sec. 457.340 and renamed this section, 
``Application for and enrollment in a separate child health program.'' 
This section sets forth provisions regarding application assistance, 
notice of rights and responsibilities, timely determinations of 
eligibility, notice of decisions concerning eligibility, and effective 
date of eligibility.

Section 457.350

     We have revised this section for consistent use of the 
terms ``found eligible'' and ``potentially eligible''.
     We removed the provisions of proposed paragraph (b) 
regarding screening with joint applications.
     We redesignated proposed paragraph (c) as paragraph (b) 
and proposed paragraph (d) as paragraph (c)
     We revised paragraph (b) (proposed paragraph (c)) to 
require that a State must use screening procedures to identify, at a 
minimum, any applicant or enrollee who is potentially eligible for 
Medicaid under one of the poverty level related groups described in 
section 1902(l) of the Act, section 1931 of the Act, or a Medicaid 
demonstration project approved under section 1115 of the Act, applying 
whichever standard and corresponding methodology generally results in a 
higher income eligibility level for the age group of the child being 
screened.
     We added a new paragraph (d) to provide that if a State 
applies a resource test and a child has been determined potentially 
income eligible for Medicaid, the State must also screen for Medicaid 
eligibility by comparing the family's resources to the appropriate 
Medicaid standard.
     We have clarified the provisions of paragraph (e) (now 
paragraph (f)) regarding children found potentially eligible for 
Medicaid.
     We added new paragraphs (g) and (h) to specify 
requirements regarding informed application decisions and waiting 
lists, enrollment caps and closed enrollment.

Section 457.353

     We added a new section, ``Evaluation of screening process 
and provisional enrollment.'' This section sets forth requirements 
regarding monitoring and evaluations of the screen and enroll process, 
provisional enrollment during the screening process, and expenditures 
for coverage during a period of provisional enrollment.

Section 457.360

     We removed this section.

Section 457.365

     We removed the provisions of proposed Sec. 457.365, 
regarding grievances and appeals, and incorporated them into new 
subpart K.

Section 457.380 (proposed Sec. 457.970)

     We moved the provisions of proposed Sec. 457.970 to new 
Sec. 457.380.
     We removed the provision at proposed Sec. 457.970(d) that 
the State may terminate the eligibility of an applicant or beneficiary 
for ``good cause.''

Subpart D--Coverage and Benefits: General Provisions

Section 457.402

     We revised Sec. 457.402(a) to list surgical services 
separately at paragraph (a)(4).
     We moved the definitions of ``emergency medical 
condition,'' ``emergency services,'' and ``health benefits coverage,'' 
which were set forth at proposed paragraphs (b), (c), and (e) 
respectively, to Sec. 457.10.

Section 457.410

     We revised paragraph (b)(1) to provide that the State must 
obtain coverage for well-baby and well-child care services as defined 
by the State.
     We revised paragraph (b)(2) to provide that the State must 
obtain coverage for age-appropriate immunizations.

Section 457.430

     We revised Sec. 457.430 by clarifying that benchmark-
equivalent health benefits coverage must meet the requirements of 
Sec. 457.410(b) and by removing proposed paragraph (b)(4) regarding 
well-baby and well-child care and immunizations.

Section 457.440

     We revised paragraph (b)(2) to clarify that a State must 
submit an actuarial report when it amends its existing State-based 
coverage.

[[Page 2657]]

Section 457.450

     We revised paragraph (a) to provide that Secretary-
approved coverage may include coverage that is the same as the coverage 
provided to children under the Medicaid State plan.

Section 457.490

     We revised Sec. 457.490(a) to provide that the State must 
describe the methods of delivery of child health assistance including 
the methods for assuring the delivery of the insurance products and the 
delivery of health care services covered by such products to the 
enrollees, including any variations.

Section 457.495

     We removed the provisions of proposed Sec. 457.495 
regarding grievances and appeals and incorporated them into new subpart 
K.
     We moved the provisions of proposed Sec. 457.735 to 
Sec. 457.495, and renamed the section, ``State assurance of access to 
care and procedures to assure quality and appropriateness of care''.

Subpart E--State Plan Requirements: Beneficiary Financial 
Responsibilities

Section 457.500

     We added a new paragraph (a)(1) to add section 2101(a) of 
the Act to the statutory authority for this subpart.
     We revised paragraph (c) to remove the provision that, 
with respect to a mandatory cost-sharing waiver for 
AI/AN children, subpart E applies to a Medicaid expansion program.

Section 457.505

     We added a new paragraph (c) to Sec. 457.505 to provide 
that the State plan must include a description of the State's 
disenrollment protections as required under Sec. 457.570.

Section 457.510

     We revised paragraph (d) to provide that when a State 
imposes premiums, enrollment fees, or similar fees, the State plan must 
describe the consequences for an enrollee or applicant who does not pay 
a charge and the disenrollment protections adopted by the State.

Section 457.515

     We revised paragraph (d) to provide that the State plan 
must describe the consequences for an enrollee who does not pay a 
charge and the disenrollment protections adopted by the State.
     We removed the statement from paragraph (e) the a 
methodology that primarily relies on a refund is not an acceptable 
methodology.

Section 457.520

     We revised Sec. 457.520(b) to provide that for the 
purposes of cost sharing, well-baby and well-child care services 
include routine examinations as recommended by the AAP's ``Guidelines 
for Health Supervision III'', or as described in ``Bright Futures: 
Guidelines for Health and Supervision of Infants, Children and 
Adolescents,'' Laboratory tests associated with the well-baby and well-
child routine physical examinations, and immunizations as recommended 
and updated by ACIP.

Section 457.525

     We redesignated proposed paragraph (a)(4) as paragraph 
(a)(5) and revised this paragraph to provide that the public schedule 
must include information about consequences for an applicant or an 
enrollee who does not pay a charge including disenrollment protections.
     We added a new paragraph (a)(4) to provide that the public 
schedule must include information on mechanisms for making payments for 
required charges.
     We revised paragraph (b)(1) to require States to provide 
the public schedule to SCHIP enrollees at the time of reenrollment 
after a redetermination of eligibility, and when cost-sharing charges 
and cumulative cost-sharing maximums are revised.

Section 457.535

    States may not impose premiums, deductibles, coinsurance, 
copayments or any other cost-sharing charges on children who are 
American Indians and Alaska Natives, as defined in Sec. 457.10.

Section 457.540

     We redesignated proposed paragraphs 457.550(a) and (b) as 
paragraphs 457.540(d) and (e).
     We redesignated proposed paragraph (e) as paragraph (f).

Section 457.545

     We removed the provisions of this section.

Section 457.550

     We eliminated this section and incorporated its contents 
into other sections of this subpart.
     We redesignated paragraphs (a) and (b) as Sec. 457.540(d) 
and (e).
     We redesignated paragraph (c) as Sec. 457.555(e).

Section 457.555

     We revised Sec. 457.555(b) to indicate that cost sharing 
may not exceed 50 percent of the payment the State would make under the 
Medicaid fee-for-service system for the first day of care in the 
institution.
     We added a new paragraph (c) to provide that any copayment 
that the State imposes on services provided by an institution to treat 
an emergency medical condition may not exceed $5.00.
     We redesignated proposed paragraph (c) as paragraph (d).
     We removed proposed paragraph (d) regarding emergency room 
services provided outside and enrollee's managed care network.

Section 457.560

     We reorganized this section for clarity.

Section 457.565

     We eliminated this section, as it has been incorporated 
into new subpart K.

Section 457.570

     We added the requirement, at paragraph (b), that the 
disenrollment process must afford the enrollee's family the opportunity 
to show that his or her income has declined prior to disenrollment for 
nonpayment of cost-sharing and charges, and in the event that such a 
showing indicates that the enrollee may have become eligible for 
Medicaid or for a lower level of cost sharing, the State must 
facilitate enrolling the child in Medicaid or adjust the child's cost-
sharing category as appropriate.
     We added the requirement, at paragraph (c), that the State 
must provide the enrollee with an opportunity for an impartial review 
to address disenrollment from the program.

Subpart G--Strategic Planning

Section 457.710

     We added a new paragraph (e) to provide that the State's 
strategic objectives, performance goals and performance measures must 
include a common core of national performance goals and measures 
consistent with the data collection, standard methodology, and 
verification requirements, as developed by the Secretary.

Section 457.735

     We moved the provisions of proposed Sec. 457.735 to 
Sec. 457.495.

Section 457.740

     We revised paragraph (a) to provide that Territories are 
exempt from the definition of ``State'' for purposes of quarterly 
reporting.
     We redesignated proposed paragraph (a)(2) as paragraph 
(a)(3) and added an new paragraph (a)(2) to

[[Page 2658]]

provide that the quarterly reports must include data on a ``point-in-
time'' enrollment count as of the last day of each quarter of the 
Federal fiscal year.
     We added a new paragraph (a)(3)(ii) to provide that the 
quarterly report must include data on the number of children enrolled 
in Medicaid by gender, race, and ethnicity.

Section 457.750

     We revised paragraph (b)(1) to provide that in the annual 
report, the State must include information related to a core set of 
national performance goals and measures as developed by the Secretary.
     We added a new paragraph (b)(7) to provide that the annual 
report must include data regarding the primary language of SCHIP 
enrollees.
     We added a new paragraph (b)(8) to provide that the annual 
report must describe the State's current income standards and 
methodologies for its Medicaid expansion program and separate child 
health program as appropriate.
     We revised paragraph (c) to set forth requirements 
regarding the State's annual estimate of changes in the number of 
uninsured children in the State.

Section 457.760

     We removed this section.

Subpart H--Substitution of Coverage

Section 457.810

     We added introductory text to paragraph (a).
     We revised paragraph (a)(1) to provide that an enrollee 
must not have had coverage under a group health plan for a period of at 
least 6 months prior to enrollment in a premium assistance program. A 
State may not require a minimum period without coverage under a group 
health plan that exceeds 12 months.
     We revised paragraph(a)(2) to specify the circumstances in 
which States may permit reasonable exceptions to the requirement for a 
minimum period without coverage under a group health plan.
     We removed proposed paragraph (a)(3), which specified that 
a newborn is not required to have a period without insurance as a 
condition of eligibility for payment for employer-sponsored group 
health coverage.
     We added a new paragraph (a)(3) to require that the 
requirement for a minimum period without coverage under a group health 
plan does not apply to a child who, within the previous 6 months, has 
received coverage under a group health plan through Medicaid under 
section 1906 of the Act.
     We added a new paragraph (a)(4) to specify that the 
Secretary may revise the 6-month waiting period requirement at her 
discretion.
     We revised paragraph (b) to provide that for health 
benefits coverage obtained through premium assistance for group health 
plans, the employee who is eligible for the coverage must apply for the 
full premium contribution available from the employer.
     We also removed paragraph (b)(1), which included the 
minimum 60 percent employer contribution requirement.

Subpart I--Program Integrity

Section 457.902

     We added a definition of the term ``actuarilly sound 
principles''.
     We moved the definition of ``managed care entity'' to 
Sec. 457.10.
     We eliminated the definitions of ``contractor'', 
``grievance'' and ``State program integrity unit''.

Section 457.920

     We removed this section.

Section 457.940

     We revised paragraph (b)(2) to provide that a State must 
provide child health assistance in an effective and efficient manner by 
using payment rates based on public or private payment rates for 
comparable services for comparable populations, consistent with 
principles of actuarial soundness.

Section 457.950

     We revised paragraph (a)(3) to provide that a State must 
ensure that its contract with an MCE provides access for the State, 
HCFA, and the HHS Office of the Inspector General to enrollee health 
claims data and payment data.
     We redesignated proposed paragraph (b)(2) as paragraph 
(b)(3).
     We added a new paragraph (b)(2) to provide that a State 
that makes payments to fee-for-service entities under a separate child 
health program must ensure that fee-for-service entities understand 
that payment and satisfaction of the claims will be from Federal and 
State funds, and that any false claims may be prosecuted under 
applicable Federal or State laws.

Section 457.955

     We added a new paragraph (b)(2) to provide that States 
must ensure that MCEs are prohibited from conducting any unsolicited 
personal contact with a potential enrollee by an employee or agent of a 
managed care entity for the purpose of influencing the individual to 
enroll with the entity.

Section 457.970

     We removed this section and incorporated its provisions 
into Sec. 457.380.

Section 457.975

     We removed this section.

Section 457.985

     We removed this section and incorporated its provisions 
into new subpart K.
    sbull; We added a new Sec. 457.985, Integrity of professional 
advice to enrollees.

Section 457.990

     We removed this section and incorporated its provisions 
into new subpart K.

Section 457.995

     We removed this section and incorporated its provisions 
into new subpart K.

Subpart J--Allowable Waivers: General Provisions

Section 457.1000

     We revised paragraph (c) to provide that this subpart 
applies to a Medicaid expansion program when the State claims 
administrative costs under title XXI and seeks a waiver of limitations 
on such claims for use of a community-based health delivery system. 
This subpart does not apply to demonstrations requested under section 
1115 of the Act.

Section 457.1003

     We added a new Sec. 457.1003 to provide that HCFA will 
review the waivers in this subpart as State plan amendments under the 
same timeframes for State plan amendments specified in subpart A.

Section 457.1005

     We revised Sec. 457.1005(c) to provide that an approved 
waiver for cost-effective coverage through a community-based health 
delivery system remains in effect for no more than 3 years.

Section 457.1015

     We removed the requirement at paragraph (b)(2) regarding 
demonstrating cost-effectiveness through comparison with a child-only 
health benefits package.

Subpart K--Applicant and Enrollee Protections

     We relocated certain provisions involving applicant and 
enrollee

[[Page 2659]]

protections to this new subpart K, ``Applicant and Enrollee 
Protections.'' Specifically, we moved to this subpart proposed 
Sec. 457.985, which set forth requirements relating to grievances and 
appeals, and proposed Sec. 457.990, which set forth requirements for 
privacy protections.
     We added the following sections in response to public 
comment: Sec. 457.1140, Core elements of review; Sec. 457.1170, 
Continuation of Benefits; and Sec. 457.1190, Premium assistance for 
group health plans.
     The following table shows the disposition of the sections 
set forth in the proposed rule that have been incorporated into subpart 
K.

------------------------------------------------------------------------
          Proposed regulations                  Final regulations
------------------------------------------------------------------------
Definitions--Contractor................
  457.902..............................  Deleted.
Definitions--Grievance.................
  457.902..............................  Deleted.
Denial, Suspension, or Termination of    Revised 457.1130(a).
 Eligibility.
  457.365..............................  Revised 457.1130(b).
Reduction or Denial of Services........  Revised 457.1130(a).
  457.495..............................  Revised 457.1180.
Disenrollment for Failure to Pay Cost    Revised 457.1130(a) and
 Sharing.                                 457.1180.
                                         Revised 457.1130(a) and
                                          457.1180.
  457.565..............................  Revised 457.1130(b) and
                                          457.1180.
Enrollees Rights to File Grievances and  Revised 457.1120, 1150(b), and
 Appeals.                                 457.1160.
                                         Deleted.
                                         Deleted.
  457.985(a)...........................  Deleted.
                                         Deleted.
  457.985(a)(1)........................  Deleted.
                                         Revised 457.985, Cross
                                          Reference 457.110(b)(5).
  457.985(a)(2)........................  Revised 457.985, Cross
                                          Reference 457.110(b)(5).
  457.985(a)(3)........................  Revised 457.1110(b).
                                         Revised 457.1110.
  457.985(b)...........................  Revised 457.1110(a) and (d).
                                         Revised 457.1110(a) and (d).
  457.985(c)...........................  Revised 457.1110(a).
                                         Revised 457.1110(a).
  457.985(c)(1)........................  Revised 457.1110(c) and (e).
                                         Revised 457.1110(a).
  457.985(c)(2)........................  Deleted.
                                         Deleted.
  457.985(d)...........................  Deleted.
  457.985(e)...........................  Revised 457.1110(e).
  457.985(e)(1)........................  Revised 457.1120 and 457.1180,
                                          Cross Reference 457.110(b)(6).
                                         Revised 457.1130(a).
  457.985(e)(2)........................  Revised 457.1130(b).
Privacy Protections....................  Revised 457.1130(a)(3).
                                         Revised 457.1160.
  457.990(a)...........................
------------------------------------------------------------------------

F. Technical Corrections

    In this final rule we are making the following technical 
corrections to subpart B, General Administration, and subpart F, 
Payments to States, of part 457. These subparts were published in final 
on May 24, 2000 (65 FR 33616).

Subpart B--General Administration--Reviews and Audits; Withholding for 
Failure To Comply; Deferral and Disallowance of Claims; Reduction of 
Federal Medical Payments

     We moved the provisions of proposed Sec. 457.190 regarding 
administrative and judicial review to new Sec. 457.203, as we believe 
these provisions are more appropriately located in subpart B.
     We revised Sec. 457.204(d)(2) to clarify the meaning of 
the term ``corrective action.''
     We revised Sec. 457.208(a) to cross refer to the 
provisions of new Sec. 457.203.
     We removed Sec. 457.234, State plan requirements, as these 
provisions duplicate Sec. 457.50.

Subpart F--Payments to States

     We removed Sec. 457.624, Limitations of certain payments 
for certain expenditures, as paragraphs (a) and (b) of this section 
duplicate the provisions of Secs. 457.475 and 457.1010, respectively.

IV. 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 final rule does not establish the SCHIP allotment amounts. 
However, it provides for the implementation and administration of the 
SCHIP program, and as such, is an economically significant, major rule.
    We have examined the impacts of this final rule as required by 
Executive Order 12866, the Unfunded Mandate Reform Act of 1995 (Pub. L. 
104-4), and the Regulatory Flexibility Act (RFA) (Pub. L. 96-354). 
Executive Order 12866 directs agencies to assess all costs and benefits 
of available regulatory alternatives and, when regulations are

[[Page 2660]]

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 SCHIP 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 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 final rule that may have a 
significant impact on a substantial number of small entities or 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.
    In addition, 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 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 final rule will have a beneficial impact, if any, on health 
care providers.
    Therefore, 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 a substantial number of small entities 
or on the operations of a substantial number of small rural hospitals.

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 final regulation would implement all programmatic provisions of 
the State Children's Health Insurance Program (SCHIP) including 
provisions regarding State plan requirements, benefits, eligibility, 
and program integrity, which are specified in title XXI of the Act. 
This final 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.
    SCHIP is the largest single expansion of health insurance coverage 
for children since the creation of Medicaid in 1965. SCHIP 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 $40 billion 
over ten 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. We 
estimate that States enrolled at least 3 million children in fiscal 
year 2000. The implementation of SCHIP 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, SCHIP 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 Pub. L. 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 SCHIP, 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.
    Section 702 of the Balanced Budget Refinement Act of 1999 (Pub. L. 
106-113, BBRA) appropriated an additional $249 million for Territories. 
In addition, section 703(c) of the BBRA requires that the Secretary 
conduct an independent evaluation of 10 States with approved child 
health plans and appropriates $10 million for FY 2000 for this purpose. 
The additional allotments for Territories are established as follows:

                  Increased Allotments for Territories
------------------------------------------------------------------------
          Fiscal Year                             Amount
------------------------------------------------------------------------
                2000                              $34,200,000
                2001                               34,200,000
                2002                               25,200,000
                2003                               25,200,000
                2004                               25,200,000
                2005                               32,400,000
                2006                               32,400,000
                2007                               40,000,000
------------------------------------------------------------------------

    We note that the Federal spending levels for the SCHIP 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
    SCHIP 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,

[[Page 2661]]

payment levels for coverage and administrative and operating 
procedures. As such, it is difficult to quantify the economic impact on 
States beyond the obvious benefit of additional funding provided at an 
``enhanced'' matching rate as compared to the matching rates for the 
Medicaid program. 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 SCHIP 
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........................    0.6    1.3    1.9    2.5    3.0
State share..........................    0.2    0.6    0.8    1.1    1.3
                                      ----------------------------------
    Total............................    0.8    1.9    2.7    3.6    4.3
------------------------------------------------------------------------


    Note: These estimates are based on State and Federal budget 
projections and have been included in the President's FY 2001 
budget. Outlay estimates do not include costs for Medicaid expansion 
programs but only for separate child health programs.

    Because the final rule largely confirms the provisions in the 
proposed rule, which were based on previously released guidance, most 
States' programs are already in compliance with these Federal 
requirements. In addition, this final rule includes a balance of 
provisions that provide additional flexibility for States with further 
clarification of the intent of the statute. Therefore, coupled with the 
fact that States are working with a limited amount of funds, we do not 
anticipate that the publication of this rule will have a significant or 
unexpected impact on States.
3. Impact on the Private Sector
    We note that due to the flexibility that States have in designing 
and implementing their SCHIP 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 SCHIP 
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 SCHIP funding will filter down to health care providers and health 
plans that cover the SCHIP population. Health plans that provide 
insurance coverage under the SCHIP program will benefit to the extent 
that children are generally a 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, SCHIP may benefit health insurers by reducing the need 
to provide more costly health care services for serious illnesses. 
Additionally, because SCHIP 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 SCHIP 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 SCHIP. However, because States have largely been 
operating their SCHIP programs in accordance with the proposed rule 
since the beginning of their programs, we do not anticipate the final 
rule will have a significant impact on the private sector, with the 
exception of the potential for additional program expansions.
4. Impact on Beneficiaries
    The main goal of SCHIP 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. SCHIP 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 final rule sets forth provisions regarding the 
costs that beneficiaries may incur (cost sharing) under SCHIP. In 
accordance with the statute, we set forth 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 SCHIP. However, in light of the 
number of children enrolled in SCHIP, 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.
    We received the following comment on the impact analysis:
    Comment: Several commenters believe that the regulation is 
administratively burdensome. Specifically, commenters asserted that the 
administrative funding for SCHIP is insufficient to effectively operate 
a State plan under the proposed regulations. The proposed rule fails to 
adequately acknowledge that State budgets for outreach and 
administrative activities are limited to 10 percent of total 
expenditures. Commenters believe this method of computing the 
administrative cap places States in a difficult position because in 
order to increase enrollment (and consequently the State's total 
expenditures), States must incur expenditures for outreach. Commenters 
recommended that we exclude outreach expenditures from the 10 percent 
cap.
    Commenters also noted that the proposed regulations create 
additional administrative burdens that do not improve services and may 
force States to revise programs at additional costs to States. They 
indicated that for Medicaid expansion programs, Federally required 
systems changes are matched at 90 percent with no cap. However, the 
proposed regulations do not offer a similar provision for separate 
child

[[Page 2662]]

health programs required to make changes to existing systems. 
Additionally, separate child health programs are required to absorb 
these costs within the limited 10 percent administrative cap.
    Commenters strongly recommended that we carefully consider the 
administrative feasibility and the cost of the proposed regulations for 
SCHIP eligibles and their families, States and MCEs. Commenters argued 
that the burden of high administrative costs will be particularly 
difficult for health plans to bear because per enrollee revenues are 
comparatively small under SCHIP. The commenters suggested that we 
evaluate carefully the costs and benefits of administrative 
requirements to avoid threatening the economic viability of SCHIP 
programs. The participation of private health plans can offer 
significant advantages in providing attractive plans for beneficiaries, 
organizing provider networks, controlling costs and delivering 
innovations from the employer-based market. However, the low cap on 
administrative expenses has served to deter some private plans from 
participating in SCHIP programs. Some private health plans have found 
it difficult to forecast the financial risk associated with covering 
children under this program and are concerned that they cannot provide 
for adequate reserves under the cap.
    Response: Under section 2105(c)(2)(A) of the Act, States may 
receive funds at the enhanced FMAP for administrative expenditures, 
outreach, health services initiatives, and certain other child health 
assistance, only up to a ``10 Percent Limit.'' The ``10 Percent Limit'' 
found in the statute specifies that the ``total computable'' amount of 
these expenditures (the combined total State and Federal share of 
benefit and administrative expenditures) for which FFP may be claimed 
cannot exceed 10 percent of the sum of the total computable 
expenditures made under section 2105(a) of the Act and the total 
computable expenditures based on the enhanced match made under sections 
1905(u)(2) and (u)(3) of the Act.
    It is important to note that States may mitigate the effect of 
little or no program expenditures on the calculation of the 10 percent 
limit in one fiscal year by delaying the claiming of administrative 
expenditures until a subsequent fiscal year. In that case, the delayed 
administrative expenditures could be applied against the subsequent 
year's 10 percent limit, which may be calculated using presumably 
higher program expenditures. This should prove helpful to States now 
that their programs are up and running and the original start up costs 
are diminishing. In addition, as States gain more experience operating 
their programs, administrative costs should fall below the 10 percent 
cap on administrative expenditures.
    In response to the comment that some health plans have found it 
difficult to foresee the risk associated with covering children under 
this program, we have no requirement for plan administrative costs. 
These costs are subject to negotiations between the individual health 
plan and the State in a risk based capitated arrangement.

V. 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 State Children's Health 
Insurance Program (SCHIP) 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 SCHIP 
plans submitted by States and Territories at the same time as it was 
issuing guidance to States on how to operate the SCHIP 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.
    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 SCHIP applications.
    On November 8, 1999 we published in the Federal Register a proposed 
rule that set forth all programmatic provisions for SCHIP (64 FR 
60882). We received 109 timely comments on the proposed rule. 
Interested parties that commented included States, enrollee advocate 
organizations, individuals, and provider organizations. The comments 
received varied widely and were often very detailed. We received a 
significant number of comments on the following areas: State plan 
issues, such as when an amendment to an existing plan is needed; the 
exemption to cost sharing for American Indian/Alaska Native children; 
eligibility ``screen and enroll'' requirements; Medicaid coordination 
issues; eligibility simplification options such as presumptive 
eligibility; the definition of a targeted low-income child; 
substitution of private coverage; data collection on race, ethnicity, 
gender and primary language; grievance and appeal procedures; and 
premium assistance for employer-sponsored coverage. In this final rule 
we provide detailed responses to all issues raised by the commenters.
    The final programmatic regulation incorporates much of the guidance 
that already has been issued to States. As the final 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 SCHIP; specifically, the State plan approval process. In developing 
the interpretative policies set forth in this final 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. We consulted 
with State and local officials in the course of the design and review 
stages of State proposals, and many of the policies found in the 
proposed and this final rule are a direct result of these discussions 
and negotiations with the States. To the extent consistent with the 
objectives of the statute, to obtain substantial health care coverage 
for uninsured low-income children in an effective an efficient manner, 
we have endeavored to preserve State options in implementing

[[Page 2663]]

their programs. As we continue to implement the program, we have 
identified a number of areas in which we further elaborate on previous 
guidance or implement new policies. A summary of key issues is set 
forth at section II.A.1 of the preamble to this final rule.

VI. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), agencies are 
required to provide a 30-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 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 XIX (as appropriate), title XXI, 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.

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 specified requirements in subparts A, B, C, 
F, G and J 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, 
at the time of application, in writing and orally if appropriate, about 
the eligibility requirements and their rights 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 in accordance with Sec. 457.1170(b) 
(that is, the specific reason or reasons for the action and an

[[Page 2664]]

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 
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 457.440--Existing State-Based Comprehensive Coverage

    Under paragraph (b) of this section, a State may modify an existing 
comprehensive State-based coverage program described in paragraph (a) 
of the section if, among other items, the State submits an actuarial 
report when it amends its existing coverage.
    The burden associated with this requirement is the time and effort 
for a State needs to prepare an actuarial report. There are only three 
States that would have this option; we do not anticipate that more than 
one of them would modify its program in a given year. It would take 
that State an average of 40 hours to prepare the report.

Section 457.525--Public Schedule

    In summary, Sec. 457.525(b) requires a State to make the public 
schedule required under paragraph (a) available to:
    (1) SCHIP enrollees, at the time of enrollment and reenrollment 
after a redetermination of eligibility, and when cost-sharing charges 
and cumulative cost-sharing maximums are revised.
    (2) SCHIP applicants, at the time of application.
    (3) All SCHIP 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 457.570--Disenrollment Protections

    Under paragraph (a) of this section, a State must give enrollees 
reasonable written notice of and an opportunity to pay past due 
premiums, copayments, coinsurance, deductibles or similar fees prior to 
disenrollment.
    The burden associated with this requirement is the time and effort 
for a State to prepare a standardized notice and to fill out and give 
the enrollees the notice. We estimate that it will take each State four 
hours to create a notice, for a national burden of 216 hours. We 
anticipate that it will take no longer than 10 minutes per enrollee to 
fill out the notice and give it to the enrollee; we estimate that 
approximately five per cent of enrollees will be given notices. If 
there are 2.6 million children enrolled, as projected, the burden 
nationally will be 21,700 hours of burden [(2.6 million  x  5 percent 
x  10 minutes)  60].

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 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 457.810--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.

[[Page 2665]]

Section 457.940--Procurement Standards

    Under paragraph (a), a State must submit to HCFA a written 
assurance that title XXI services will be provided in an effective and 
efficient manner. The burden associated with this requirement is the 
time and effort for a State to write this assurance. We believe that 
the time involved will be minimal and assign one hour per State for 
this requirement.

Section 457.950--Contract and Payment Requirements Including 
Certification of Payment-Related Information

    This section, in paragraph (b), requires a State that makes 
payments to fee-for-service entities under a separate child health 
program to--
    (1) Establish procedures to certify and attest that information on 
claim forms is truthful, accurate, and complete.
    (2) Ensure that fee-for-service entities understand that payment 
and satisfaction of the claims will be from federal and State funds, 
and that any false claims may be prosecuted under applicable federal or 
State laws.
    (3) Require, as a condition of participation, that fee-for-service 
entities provide the State, HCFA and/or the HHS Office of the Inspector 
General with access to enrollee health claims data, claims payment data 
and related records.
    The burden associated with this requirement is the time and effort 
for a State to establish procedures. It is also the time and effort 
required for a fee-for-service entity to certify and attest that 
information on claim forms is truthful, accurate, and complete and to 
provide access to the required data to the State, HCFA and/or the HHS 
Office of the Inspector General. Depending on the situation, we 
estimate that the time required to complete such a certification would 
be 8 hours per certification, per year. Therefore, 8 hours  x  51 
States and Territories for a total burden of 408 hours per year.

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 1320(b)(3), because this 
requirement would be imposed in the absence of a Federal requirement.

Section 457.985--Integrity of Professional Advice to Enrollees

    Under this section, the State must guarantee, in all contracts for 
coverage and services, beneficiary access to information, in accordance 
with Secs. 422.208 and 422.210(a) and (b), related to limitations on 
physician incentives or compensation arrangements that have the effect 
of reducing or limiting services and information requirements 
respectively.
    The burden associated with this requirement is the time and effort 
for a State to include this guarantee in its contract(s) and for its 
contractor(s) to give beneficiaries access. We estimate that it will 
take a token hour for each State to comply with this requirement. We 
estimate that it will take each contractor 1 hour to include this 
assurance in its contracts, however the number of contractors that will 
be affected cannot be known, as States have flexibility to use 
contractors as they deem appropriate.

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 associated with this requirement is captured in Sec. 457.750 
(Annual report).

Section 457.1180--Notice

    Under this section, a State must provide enrollees and applicants 
timely written notice of any determinations required to be subject to 
review under Sec. 457.1130, a notice that includes the reasons for the 
determination; an explanation of applicable rights to review of that 
determination, the standard and expedited time frames for review, and 
the manner in which a review can be requested; and the circumstances 
under which benefits may continue pending review.
    The burden associated with this requirement is the time and effort 
for a State to prepare and give out the notice. We estimate that it 
will take each State four hours (216 hours nationally) to develop a 
standardized form into which enrollee-specific information may be 
inserted and a half hour per enrollee to prepare and give out the 
notice. We estimate that approximately 10 percent of enrollees will 
receive a notice under this provision, or 130,000 hours nationally 
[(2.6 million  x  30 minutes  x  10 percent)  60 minutes].
    We have submitted a copy of this final rule to OMB for its review 
of the information collection requirements in Secs. 457.50, 457.60, 
457.70, 457.350, 457.360, 457.361, 457.431, 457.440, 457.525, 457.740, 
457.750, 457.760, 457.810, 457.940, 457.965, 457.985, 457.1005, 
457.1015, and 457.1140. 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: Julie Brown 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: Brenda Aguilar, HCFA Medicaid Desk Officer.

List of Subjects

42 CFR Part 431

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

42 CFR Part 433

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

42 CFR Part 435

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

[[Page 2666]]

42 CFR Part 436

    Aid to Families with Dependent Children, Grant programs-health, 
Guam, Medicaid, Puerto Rico, Supplemental Security Income (SSI), Virgin 
Islands.

42 CFR Part 457

    Administrative practice and procedure, Grant programs-health, 
Children's Health Insurance Program, Reporting and record keeping 
requirements.
    42 CFR chapter IV is amended as set forth below:

    A. Part 431 is amended as follows:

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

    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).


    2. A new Sec. 431.636 is added to read as follows:


Sec. 431.636  Coordination of Medicaid with the State Children's Health 
Insurance Program (SCHIP).

    (a) Statutory basis. This section implements--
    (1) Section 2102(b)(3)(B) of the Act, which provides that children 
who apply for coverage under a separate child health plan under title 
XXI, but are found to be eligible for medical assistance under the 
State Medicaid plan, must be enrolled in the State Medicaid plan; and
    (2) Section 2102(c)(2) of the Act, which requires coordination 
between a State child health program and other public health insurance 
programs.
    (b) Obligations of State Medicaid Agency. The State Medicaid agency 
must adopt procedures to facilitate the Medicaid application process 
for, and the enrollment of children for whom the Medicaid application 
and enrollment process has been initiated in accordance with 
Sec. 457.350(f) of this chapter. The procedures must ensure that--
    (1) The applicant is not required to provide information or 
documentation that has been provided to the State agency responsible 
for determining eligibility under a separate child health program under 
title XXI and forwarded by such agency to the Medicaid agency on behalf 
of the child in accordance with Sec. 457.350(f) of this chapter;
    (2) Eligibility is determined in a timely manner in accordance with 
Sec. 435.911 of this chapter;
    (3) The Medicaid agency promptly notifies the State agency 
responsible for determining eligibility under a separate child health 
program when a child who was screened as potentially eligible for 
Medicaid is determined ineligible or eligible for Medicaid; and
    (4) The Medicaid agency adopts a process that facilitates 
enrollment in a State child health program when a child is determined 
ineligible for Medicaid at initial application or redetermination.
    3. In Sec. 431.865(b), the definition of ``erroneous payments'' is 
revised to read as follows:


Sec. 431.865  Disallowance of Federal financial participation for 
erroneous State payments (for annual assessment periods ending after 
July 1, 1990).

* * * * *
    (b) * * *
    Erroneous payments means the Medicaid payment that was made for an 
individual or family under review who--
    (1) Was ineligible for the review month or, if full month coverage 
is not provided, at the time services were received;
    (2) Was ineligible to receive a service provided during the review 
month; or
    (3) Had not properly met enrollee liability requirements prior to 
receiving Medicaid services.
    (4) 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.
* * * * *
    B. Part 433 is amended as follows:

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).


    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) of the Social Security Act, the Federal 
share of State expenditures described in Sec. 433.11(a) for services 
provided to children, is the enhanced FMAP rate determined in 
accordance with Sec. 457.622(b) of this chapter, subject to the 
conditions explained in Sec. 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, the 
enhanced FMAP determined in accordance with Sec. 457.622 of this 
chapter will be used to determine the Federal share of State 
expenditures, except any expenditures pursuant to section 1923 of the 
Act for payments to disproportionate share hospitals for--
    (1) Services provided to optional targeted low-income children 
described in Sec. 435.4 or Sec. 436.3 of this chapter; and
    (2) Services provided to children born before October 1, 1983, with 
or without group health coverage or other health insurance coverage, 
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.
    (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 policies 
of the State plan (as described in the definition of optional targeted 
low-income children at Sec. 435.4 of this chapter) in effect on June 1, 
1997; or
    (2) No funds are available in the State's title XXI allotment, as 
determined under part 457, subpart F of this chapter for the quarter 
enhanced FMAP is claimed; 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.
    C. Part 435 is amended as set forth below:

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

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

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


    2. Section 435.4 is amended by adding a definition of ``optional 
targeted low-income child,'' in alphabetical order, to read as follows:


Sec. 435.4  Definitions and use of terms.

* * * * *
    Optional targeted low-income child means a child under age 19 who 
meets the financial and categorical standards described below.
    (1) Financial need. An optional targeted low-income child:
    (i) Has a family income at or below 200 percent of the Federal 
poverty line for a family of the size involved; and

[[Page 2667]]

    (ii) Resides in a State with no Medicaid applicable income level 
(as defined at Sec. 457.10 of this chapter); or
    (iii) Resides in a State that has a Medicaid applicable income 
level (as defined at Sec. 457.10 of this chapter) and has family income 
that either:
    (A) Exceeds the Medicaid applicable income level for the age of 
such child, but not by more than 50 percentage points; or
    (B) Does not exceed the income level specified for such child to be 
eligible for medical assistance under the policies of the State plan 
under title XIX on June 1, 1997.
    (2) No other coverage and State maintenance of effort. An optional 
targeted low-income child is not covered under a group health plan or 
health insurance coverage, or would not be eligible for Medicaid under 
the policies of the State plan in effect on March 31, 1997; except 
that, for purposes of this standard--
    (i) A child shall not be considered to be covered by health 
insurance coverage based on coverage offered by the State under a 
program in operation prior to July 1, 1997 if that program received no 
Federal financial participation;
    (ii) A child shall not be considered to be covered under a group 
health plan or health insurance coverage if the child did not have 
reasonable geographic access to care under that coverage.
    (3) For purposes of this section, policies of the State plan a 
under title XIX plan include policies under a Statewide demonstration 
project under section 1115(a) of the Act other than a demonstration 
project that covered an expanded group of eligible children but that 
either--
    (i) Did not provide inpatient hospital coverage; or
    (ii) Limited eligibility to children previously enrolled in 
Medicaid, imposed premiums as a condition of initial or continued 
enrollment, and did not impose a general time limit on eligibility.
* * * * *

    3. A new Sec. 435.229 is added to read as follows:


Sec. 435.229  Optional targeted low-income children.

    The agency may provide Medicaid to--
    (a) All individuals under age 19 who are optional targeted low-
income children as defined in Sec. 435.4; or
    (b) Reasonable categories of these individuals.

    4. In Sec. 435.910, paragraph (h) is added to read as follows:


Sec. 435.910  Use of social security number.

* * * * *
    (h) Exception. (1) A State may give a Medicaid identification 
number to an applicant who, because of well established religious 
objections, refuses to obtain a Social Security Number (SSN). The 
identification number may be either an SSN obtained by the State on the 
applicant's behalf or another unique identifier.
    (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) A State may use the Medicaid identification number established 
by the State to the same extent as an SSN is used for purposes 
described in paragraph (b)(3) of this section.

    5. 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.
* * * * *

    6. 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 
Medicaid following the period of presumptive eligibility.


Sec. 435.1007  [Amended]

    7. In Sec. 435.1007, in paragraph (a), the second sentence is 
amended by adding ``and section 1905(u)'' between ``(X)'', and ``of the 
Act;''.

    8. A new subpart L is added to part 435 to read as follows:
Subpart L--Option for Coverage of Special Groups
Sec.
435.1100  Basis and scope.

Presumptive Eligibility for Children

435.1101  Definitions related to presumptive eligibility for 
children.
435.1102  General rules.

Subpart L--Option for Coverage of Special Groups


Sec. 435.1100  Basis and scope.

    (a) Statutory basis. Section 1920A of the Act allows States to 
provide Medicaid services to children under age 19 during a period of 
presumptive eligibility, prior to a formal determination of Medicaid 
eligibility.
    (b) 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 for 
children.

    Application form means at a minimum the form used to apply for 
Medicaid under the poverty-level-related eligibility groups described 
in section 1902(l) of the Act or a joint form for children to apply for 
the State Children's Health Insurance Program and Medicaid.
    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.
    Presumptive income standard 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.
    Qualified entity means an entity that is determined by the State 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 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

[[Page 2668]]

services for which financial assistance is provided under the Child 
Care and Development Block Grant Act of 1990;
    (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;
    (5) Is an elementary or secondary school, as defined in section 
14101 of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 
8801);
    (6) Is an elementary or secondary school operated or supported by 
the Bureau of Indian Affairs;
    (7) Is a State or Tribal child support enforcement agency;
    (8) Is an organization that is providing emergency food and shelter 
under a grant under the Stewart B. McKinney Homeless Assistance Act;
    (9) Is a State or Tribal office or entity involved in enrollment in 
the program under Part A of title IV, title XIX, or title XXI; or
    (10) Is an entity that determines eligibility for any assistance or 
benefits provided under any program of public or assisted housing that 
receives Federal funds, including the program under section 8 or any 
other section of the United States Housing Act of 1937 (42 U.S.C. 1437) 
or under the Native American Housing Assistance and Self Determination 
Act of 1996 (25 U.S.C. 4101 et seq.); or
    (11) Any other entity the State so deems, as approved by the 
Secretary.
    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 following a 
determination by a qualified entity that the child's estimated gross 
family income or, at the State's option, the child's estimated family 
income after applying simple disregards, does not exceed the applicable 
income standard.
    (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, caretakers and other persons 
in completing and filing such forms;
    (2) Establish procedures to ensure that qualified entities--
    (i) Notify the parent or caretaker of the child at the time a 
determination regarding presumptive eligibility is made, in writing and 
orally if appropriate, of such determination;
    (ii) Provide the parent or caretaker of the child with a regular 
Medicaid application form;
    (iii) Within five working days after the date that the 
determination is made, notify the agency that a child is presumptively 
eligible;
    (iv) For children determined to be presumptively eligible, notify 
the child's parent or caretaker at the time the determination is made, 
in writing and orally if appropriate, that--
    (A) If a Medicaid application on behalf of the child is not filed 
by the last day of the following month, the child's presumptive 
eligibility will end on that last day; and
    (B) If a Medicaid application on behalf of the child 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
    (v) For children determined not to be presumptively eligible, 
notify the child's parent or caretaker at the time the determination is 
made, in writing and orally if appropriate--
    (A) Of the reason for the determination; and
    (B) That he or she may file an application for Medicaid on the 
child's behalf with the Medicaid agency;
    (3) Provide all services covered under the plan, including EPSDT; 
and
    (4) Allow determinations of presumptive eligibility to be made by 
qualified entities on a Statewide basis.
    (c) The agency must adopt reasonable standards regarding the number 
of periods of presumptive eligibility that will be authorized for a 
child in a given time frame.
    D. Part 436 is amended as set forth below:

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

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

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


    2. Section 436.3 is amended by adding a definition of ``optional 
targeted low-income child,'' in alphabetical order, to read as follows:


Sec. 436.3  Definitions and use of terms.

* * * * *
    Optional targeted low-income child means a child under age 19 who 
meets the financial and categorical standards described below.
    (1) Financial need. An optional targeted low-income child:
    (i) Has a family income at or below 200 percent of the Federal 
poverty line for a family of the size involved;
    (ii) Resides in a State with no Medicaid applicable income level 
(as defined in Sec. 457.10 of this chapter); or,
    (iii) Resides in a State that has a Medicaid applicable income 
level (as defined in Sec. 457.10) and has family income that either:
    (A) Exceeds the Medicaid applicable income level for the age of 
such child, but not by more than 50 percentage points (expressed as a 
percentage of the Federal poverty line); or
    (B) Does not exceed the income level specified for such child to be 
eligible for medical assistance under the policies of the State plan 
under title XIX on June 1, 1997.
    (2) No other coverage and State maintenance of effort. An optional 
targeted low-income child is not covered under a group health plan or 
health insurance coverage, or would not be eligible for Medicaid under 
the policies of the State plan in effect on March 31, 1997; except 
that, for purposes of this standard--
    (i) A child shall not be considered to be covered by health 
insurance coverage based on coverage offered by the State under a 
program in operation prior to July 1, 1997 if that program received no 
Federal financial participation;
    (ii) A child shall not be considered to be covered under a group 
health plan or health insurance coverage if the child did not have 
reasonable geographic access to care under that coverage.
    (3) For purposes of this section, policies of the State plan under 
title XIX plan include policies under a Statewide demonstration project 
under section 1115(a) of the Act other than a demonstration project 
that covered an expanded group of eligible children but that either--
    (i) Did not provide inpatient hospital coverage; or
    (ii) Limited eligibility to children previously enrolled in 
Medicaid, imposed premiums as a condition of initial or continued 
enrollment, and did not impose a general time limit on eligibility.

    3. A new Sec. 436.229 is added to read as follows:


Sec. 436.229  Optional targeted low-income children.

    The agency may provide Medicaid to--
    (a) All individuals under age 19 who are optional targeted low-
income children as defined in Sec. 436.3; or
    (b) Reasonable categories of these individuals.

    4. In Sec. 436.1001 paragraph (a) is revised to read as follows:

[[Page 2669]]

Sec. 436.1001  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 436.1002 is amended by adding a new paragraph (c) to 
read as follows:


Sec. 436.1002  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 
Medicaid following the period of presumptive eligibility.

    6. A new subpart L is added to part 436 to read as follows:
Subpart L--Option for Coverage of Special Groups
Sec.
436.1100   Basis and scope.

Presumptive Eligibility for Children

436.1101   Definitions related to presumptive eligibility for 
children.
436.1102   General rules.

Subpart L--Option for Coverage of Special Groups


Sec. 436.1100  Basis and scope.

    (a) Statutory basis. Section 1920A of the Act allows States to 
provide Medicaid services to children under age 19 during a period of 
presumptive eligibility, prior to a formal determination of Medicaid 
eligibility.
    (b) 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. 436.1101  Definitions related to presumptive eligibility period 
for children.

    Application form means at a minimum the form used to apply for 
Medicaid under the poverty-level-related eligibility groups described 
in section 1902(l) of the Act or a joint form for children to apply for 
the State Children's Health Insurance Program and Medicaid.
    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.
    Presumptive income standard 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.
    Qualified entity means an entity that is determined by the State 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 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;
    (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;
    (5) Is an elementary or secondary school, as defined in section 
14101 of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 
8801);
    (6) Is an elementary or secondary school operated or supported by 
the Bureau of Indian Affairs;
    (7) Is a State or Tribal child support enforcement agency;
    (8) Is an organization that is providing emergency food and shelter 
under a grant under the Stewart B. McKinney Homeless Assistance Act;
    (9) Is a State or Tribal office or entity involved in enrollment in 
the program under Part A of title IV, title XIX, or title XXI; or
    (10) Is an entity that determines eligibility for any assistance or 
benefits provided under any program of public or assisted housing that 
receives Federal funds, including the program under section 8 or any 
other section of the United States Housing Act of 1937 (42 U.S.C. 1437) 
or under the Native American Housing Assistance and Self Determination 
Act of 1996 (25 U.S.C. 4101 et seq.); or
    (11) Any other entity the State so deems, as approved by the 
Secretary.
    Services means all services covered under the plan including EPSDT 
(see part 440 of this chapter.)


Sec. 436.1102  General rules.

    (a) The agency may provide services to children under age 19 during 
one or more periods of presumptive eligibility following a 
determination made by a qualified entity that the child's estimated 
gross family income or, at the State's option, the child's estimated 
family income after applying simple disregards, does not exceed the 
applicable income standard.
    (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, caretakers and other persons 
in completing and filing such forms;
    (2) Establish procedures to ensure that qualified entities--
    (i) Notify the parent or caretaker of the child at the time a 
determination regarding presumptive eligibility is made, in writing and 
orally if appropriate, of such determination;
    (ii) Provide the parent or caretaker of the child with a Medicaid 
application form;
    (iii) Within 5 working days after the date that the determination 
is made, notify the agency that a child is presumptively eligible;
    (iv) For children determined to be presumptively eligible, notify 
the child's parent or caretaker at the time the determination is made, 
in writing and orally if appropriate, that--
    (A) If a Medicaid application on behalf of the child is not filed 
by the last day of the following month, the child's presumptive 
eligibility will end on that last day; and
    (B) If a Medicaid application on behalf of the child 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
    (v) For children determined not to be presumptively eligible, 
notify the child's parent or caretaker at the time the determination is 
made, in writing and orally if appropriate--
    (A) Of the reason for the determination; and

[[Page 2670]]

    (B) That he or she may file an application for Medicaid on the 
child's behalf with the Medicaid agency; and
    (3) Provide all services covered under the plan, including EPSDT.
    (4) Allow determinations of presumptive eligibility to be made by 
qualified entities on a Statewide basis.
    (c) The agency must adopt reasonable standards regarding the number 
of periods of presumptive eligibility that will be authorized for a 
child in a given time frame.

    E. Part 457 is amended as follows:

PART 457--ALLOTMENTS AND GRANTS TO STATES

    1. The authority citation for part 457 continues to read as 
follows:

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


    2. A new subpart A is added to read as follows:
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   Effective date and 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.

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 benefits coverage to targeted low-income children, as defined at 
Sec. 457.310.


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;
    (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.; or
    (3) A person who is considered by the Secretary of the Interior to 
be an Indian for any purpose.
    Applicant means a child who has filed an application (or who has an 
application filed on their behalf) for health benefits coverage through 
the State Children's Health Insurance Program. A child is an applicant 
until the child receives coverage through SCHIP.
    Child means an individual under the age of 19.
    Child health assistance means payment for part or all of the cost 
of health benefits coverage provided to targeted low-income children 
for the services listed at Sec. 457.402.
    Combination program means a program under which a State implements 
both a Medicaid expansion program and a separate child health program.
    Cost sharing means premium charges, enrollment fees, deductibles, 
coinsurance, copayments, or other similar fees that the enrollee has 
responsibility for paying.
    Creditable health coverage has the meaning given the term 
``creditable coverage'' at 45 CFR 146.113 and includes coverage that 
meets the requirements of Sec. 457.410 and is provided to a targeted 
low-income child.
    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.
    Emergency services means health care services that are--
    (1) Furnished by any provider qualified to furnish such services; 
and (2) Needed to evaluate, treat, or stabilize an emergency medical 
condition.
    Enrollee means a child who receives health benefits coverage 
through SCHIP.
    Enrollment cap means a limit, established by the State in its State 
plan, on the total number of children permitted to enroll in a State's 
separate child health program.
    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 the following September.
    Fee-for-service entity has the meaning assigned in 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 means an arrangement under which enrolled 
individuals are protected from some or all liability for the cost of 
specified health care services.
    Health care services means any of the services, devices, supplies, 
therapies, or other items listed in Sec. 457.402.
    Health insurance coverage has the meaning assigned at 45 CFR 
144.103.
    Health insurance issuer has the meaning assigned at 45 CFR 144.103.
    Health maintenance organization (HMO) plan has the meaning assigned 
at Sec. 457.420.
    Health services initiatives means activities that protect the 
public health, protect the health of individuals, improve or promote a 
State's capacity to deliver public health services, or strengthen the 
human and material resources necessary to accomplish public health 
goals relating to improving the health of children (including targeted 
low-income children and other low-income children).
    Joint application has the meaning assigned at Sec. 457.301.

[[Page 2671]]

    Low-income child means a child whose family income is at or below 
200 percent of the poverty line for the size of the family involved.
    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.
    Medicaid applicable income level means, with respect to a child, 
the effective income level (expressed as a percentage of the poverty 
line) specified under the policies of 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) of the 
Act) 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 under which a State 
receives Federal funding to expand Medicaid eligibility to optional 
targeted low-income children.
    Optional targeted low-income child has the meaning assigned at 
Sec. 435.4 (for States) and Sec. 436.3 (for Territories) of this 
chapter.
    Period of presumptive eligibility has the meaning assigned at 
Sec. 457.301.
    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 program means a component of a separate child 
health program, approved under the State plan, under which a State pays 
part or all of the premiums for a SCHIP enrollee or enrollees' group 
health insurance coverage or coverage under a group health plan.
    Presumptive income standard has the meaning assigned at 
Sec. 457.301.
    Public agency has the meaning assigned in Sec. 457.301.
    Qualified entity has the meaning assigned at Sec. 457.301.
    Separate child health program means a program under which a State 
receives Federal funding from its title XXI allotment to provide child 
health assistance through obtaining coverage that meets the 
requirements of section 2103 of the Act and Sec. 457.402.
    State means all States, the District of Columbia, Puerto Rico, the 
U.S. Virgin Islands, Guam, American Samoa and the Northern Mariana 
Islands. The Territories are excluded from this definition for purposes 
of Sec. 457.740.
    State Children's Health Insurance Program (SCHIP) means a program 
established and administered by a State, 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 program.
    State health benefits plan has the meaning assigned in 
Sec. 457.301.
    State plan means the title XXI State child health plan.
    Targeted low-income child has the meaning assigned in Sec. 457.310.
    Uncovered or uninsured 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, children and adolescents 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 implements the following sections 
of the Act:
    (1) Section 2101(b), which requires that the State submit a State 
plan.
    (2) Section 2102(a), which sets forth requirements regarding the 
contents of the State plan.
    (3) Section 2102(b), which relates to eligibility standards and 
methodologies.
    (4) Section 2102(c), which 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, which specifies the process for submission, 
approval, and amendment of State plans.
    (6) Section 2107(c), which 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), which requires that the State plan include a 
description of the budget for the plan.
    (8) Section 2107(e), which provides that certain provisions of 
title XIX and title XI of the Act apply under title XXI in the same 
manner that they apply under title XIX.
    (b) Scope. This subpart sets forth provisions governing the 
administration of SCHIP, 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.


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 (as 
appropriate), and the requirements 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 (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, by position or title, 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, that describes the purpose, nature, and 
scope of the State's SCHIP and gives an assurance that the program is 
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 (FFP) in the State program.


Sec. 457.60  Amendments.

    A State may seek to amend its approved State plan in whole or in 
part at any time through the submission of an amendment to HCFA. When 
the State plan amendment has a significant impact on the approved 
budget, the amendment must include an amended budget that describes the 
State's planned expenditures for a 1-year period. A State must amend 
its State plan whenever necessary to reflect--
    (a) Changes in Federal law, regulations, policy interpretations, or

[[Page 2672]]

court decisions that affect provisions in the approved State plan;
    (b) Changes in State law, organization, policy, or operation of the 
program that affect the following program elements described in the 
State plan:
    (1) Eligibility standards, enrollment caps, and disenrollment 
policies as described in Sec. 457.305.
    (2) Procedures to prevent substitution of private coverage, 
including exemptions or exceptions to required eligibility waiting 
periods without coverage under a group health plan as described in 
Sec. 457.810.
    (3) The type of health benefits coverage offered, consistent with 
the options described in Sec. 457.410.
    (4) Addition or deletion of specific categories of benefits covered 
under the State plan.
    (5) Basic delivery system approach as described in Sec. 457.490.
    (6) Cost-sharing as described in Sec. 457.505.
    (7) Screen and enroll procedures, and other Medicaid coordination 
procedures as described in Secs. 457.350 and 457.353.
    (8) Review procedures as described in Secs. 457.1130, 457.1160, 
457.1170, 457.1180 and 457.1190.
    (9) Other comparable required program elements.
    (c) Changes in the source of the State share of funding, except for 
changes in the type of non-health care related revenues used to 
generate general revenue.


Sec. 457.65  Effective date and duration of State plans and plan 
amendments.

    (a) Effective date in general. Except as otherwise limited by this 
section--
    (1) A State plan or plan amendment takes effect on the day 
specified in the plan or plan amendment, but no earlier than October 1, 
1997.
    (2) The effective date may be no earlier than the date on which the 
State begins to incur costs to implement its State plan or plan 
amendment.
    (3) 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 following the date on 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 that 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 the 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. 457.560 is considered an amendment that restricts benefits and 
must meet the requirements in paragraph (b) of this section.
    (d) Amendments relating to enrollment procedures. A State plan 
amendment that implements a required period of uninsurance, increases 
the length of existing required periods of uninsurance, or institutes 
or extends the use of waiting lists, enrollments caps or closed 
enrollment periods is considered an amendment that restricts 
eligibility and must meet the requirements in paragraph (b) of this 
section.
    (e) Amendments relating to the source of State funding. A State 
plan amendment that changes the source of the State share of funding 
can take effect no earlier than the date of submission of the 
amendment.
    (f) 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;
    (2) Withdraws its plan in accordance with Sec. 457.170(b); or
    (3) 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 separate child health program;
    (2) A Medicaid expansion program; or
    (3) A combination program.
    (b) State plan requirement. A State must include in the State plan 
or plan amendment a description of the State's chosen program option.
    (c) Medicaid expansion program requirements. A State plan under 
title XXI for a State that elects to obtain health benefits coverage 
through its Medicaid plan must--
    (1) Meet the requirements of--
    (i) Subpart A;
    (ii) Subpart B (to the extent that the State claims administrative 
costs under title XXI);
    (iii) 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 only);
    (iv) Subpart G; and
    (v) 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).
    (2) Be consistent with the State's Medicaid State plan, or an 
approvable amendment to that plan, as required under title XIX.
    (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 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; and
    (c) Procedures the State uses to accomplish coordination of SCHIP 
with other public and private health insurance programs, sources of 
health benefits coverage for children, and relevant child health 
programs, such as title V, that provide health care services for low-
income children. Such procedures include those designed to--

[[Page 2673]]

    (1) Increase the number of children with creditable health 
coverage;
    (2) Assist in the enrollment in SCHIP of children determined 
ineligible for Medicaid; and
    (3) Ensure that only eligible targeted low-income children are 
covered under SCHIP, such as those procedures required under 
Secs. 457.350 and 457.353, as applicable.


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.
    (3) Application assistance, including opportunities to apply for 
child health assistance under the plan through community-based 
organizations and in combination with other benefits and services 
available to children.


Sec. 457.110  Enrollment assistance and information requirements.

    (a) Information disclosure. The State must make accurate, easily 
understood, linguistically appropriate information available to 
families of potential applicants, applicants and enrollees, and provide 
assistance to these families in making informed decisions about their 
health plans, professionals, and facilities.
    (b) Required information. The State must make available to 
potential applicants and provide applicants and enrollees the following 
information in a timely manner:
    (1) Types of benefits, and amount, duration and scope of benefits 
available under the program.
    (2) Cost-sharing requirements as described in Sec. 457.525.
    (3) Names and locations of current participating providers.
    (4) If an enrollment cap is in effect or the State is using a 
waiting list, a description of the procedures relating to the cap or 
waiting list, including the process for deciding which children will be 
given priority for enrollment, how children will be informed of their 
status on a waiting list and the circumstances under which enrollment 
will reopen.
    (5) Information on physician incentive plans as required by 
Sec. 457.985.
    (6) Review processes available to applicants and enrollees as 
described in the State plan pursuant to Sec. 457.1120.


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;
    (b) Ensure ongoing public involvement once the State plan has been 
implemented; and
    (c) Ensure interaction with Indian Tribes and organizations in the 
State on the development and implementation of the procedures required 
at Sec. 457.125.


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

    (a) Enrollment. A State must include in its State plan a 
description of procedures used to ensure the provision of child health 
assistance to American Indian and Alaska Native children.
    (b) Exemption from cost sharing. The procedures required by 
paragraph (a) of this section must include an exemption from cost 
sharing for American Indian and Alaska Native children in accordance 
with Sec. 457.535.


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 that has a significant impact on 
the approved budget, must include a budget that describes the State's 
planned expenditures for a 1-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; and
    (b) Projected sources of non-Federal plan expenditures, including 
any requirements for cost sharing by enrollees.


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

[[Page 2674]]

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 
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 standard 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) Withdrawal of proposed State plans or plan amendments. A State 
may withdraw a proposed State plan or plan amendment, or any portion of 
a proposed State plan or plan amendment, at any time during the review 
process by providing written notice to HCFA of the withdrawal.
    (b) Withdrawal of approved State plans. A State may request 
withdrawal of an approved State plan by submitting a State plan 
amendment to HCFA in accordance with Sec. 457.60.

Subpart B--General Administration--Reviews and Audits; Withholding 
for Failure to Comply; Deferral and Disallowance of Claims; 
Reduction of Federal Medical Payments

    3. A new Sec. 457.203 is added to read as follows:


Sec. 457.203  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 will 
pay the State a lump sum equal to any funds incorrectly denied.

    4. Paragraph (d)(2) of Sec. 457.204 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 enrollees will be treated 
equitably.
* * * * *

    5. Paragraph (a) of Sec. 457.208 is revised to read as follows:


Sec. 457.208  Judicial review.

    (a) Right to judicial review. Any State dissatisfied with the 
Administrator's final determination on approvability of plan material 
(Sec. 457.203) or compliance with Federal requirements (Sec. 457.204) 
has a right to judicial review.
* * * * *


Sec. 457.234  [Removed]

    6. Section 457.234 is removed.

    7. New subparts C, D, and E are added to read as follows:
Subpart C--State Plan Requirements: Eligibility, Screening, 
Applications, and Enrollment
Sec.
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 for and enrollment in a separate child health 
program.
457.350   Eligibility screening and facilitation of Medicaid 
enrollment.
457.353   Monitoring and evaluation of screening process.
457.355   Presumptive eligibility.
457.380   Eligibility verification.
Subpart D--State Plan Requirements: Coverage and Benefits
457.401   Basis, scope, and applicability.
457.402   Definition of child health assistance.
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   State assurance of access to care and procedures to assure 
quality and appropriateness of care.
Subpart E--State Plan Requirements: Enrollee 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 services.
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 and Alaska Natives.
457.540   Cost-sharing charges for children in families with incomes 
at or below 150 percent of the FPL.
457.555   Maximum allowable cost-sharing charges on targeted low-
income children in families with income from 101 to 150 percent of 
the FPL.

[[Page 2675]]

457.560   Cumulative cost-sharing maximum.
457.570   Disenrollment protections.

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 of the Act, which relates to eligibility standards 
and methodologies, coordination with other health insurance programs, 
and outreach and enrollment efforts to identify and enroll children who 
are eligible to participate in other public health insurance programs;
    (2) Section 2105(c)(6)(B) of the Act, which relates to the 
prohibition against 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. 
Regulations relating to eligibility, screening, applications and 
enrollment that are applicable to a Medicaid expansion program are 
found at Sec. 431.636, Sec. 435.4, Sec. 435.229, Sec. 435.1102, 
Sec. 436.3, Sec. 436.229, and Sec. 436.1102 of this chapter.


Sec. 457.301  Definitions and use of terms.

    As used in this subpart--
    Joint application means a form used to apply for the separate child 
health program that, when transmitted to the Medicaid agency following 
a screening that shows the child is potentially eligible for Medicaid, 
may also be used to apply for Medicaid.
    Qualified entity means an entity that is determined by the State 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 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;
    (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;
    (5) Is an elementary or secondary school, as defined in section 
14101 of the Elementary and Secondary Education Act of 1965 (20 U.S.C. 
8801);
    (6) Is an elementary or secondary school operated or supported by 
the Bureau of Indian Affairs;
    (7) Is a State or Tribal child support enforcement agency;
    (8) Is an organization that is providing emergency food and shelter 
under a grant under the Stewart B. McKinney Homeless Assistance Act;
    (9) Is a State or Tribal office or entity involved in enrollment in 
the program under Part A of title IV, title XIX, or title XXI; or
    (10) Is an entity that determines eligibility for any assistance or 
benefits provided under any program of public or assisted housing that 
receives Federal funds, including the program under section 8 or any 
other section of the United States Housing Act of 1937 (42 U.S.C. 1437) 
or under the Native American Housing Assistance and Self Determination 
Act of 1996 (25 U.S.C. 4101 et seq.); or
    (11) Any other entity the State so deems, as approved by the 
Secretary.
    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 separate child health 
program 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 an application for the 
separate child health program has not been filed, the last day of the 
month following the month in which the determination of presumptive 
eligibility was made.
    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.
    Presumptive income standard means the highest income eligibility 
standard established under the plan that is most likely to be used to 
establish eligibility of a child of the age involved.


Sec. 457.305  State plan provisions.

    The State plan must include a description of--
    (a) The standards, consistent with Secs. 457.310 and 457.320, used 
to determine the eligibility of children for coverage under the State 
plan.
    (b) The State's policies governing enrollment and disenrollment; 
processes for screening applicant children for and, if eligible, 
facilitating their enrollment in Medicaid; and processes for 
implementing waiting lists and enrollment caps (if any).


Sec. 457.310  Targeted low-income child.

    (a) Definition. A targeted low-income child is a child who meets 
the standards set forth below and the 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 standard. A targeted low-income child:
    (i) Has a family income at or below 200 percent of the Federal 
poverty line for a family of the size involved;
    (ii) Resides in a State with no Medicaid applicable income level 
or;
    (iii) Resides in a State that has a Medicaid applicable income 
level and has family income that either--
    (A) Exceeds the Medicaid applicable income level for the age of 
such child, but not by more than 50 percentage points; or
    (B) Does not exceed the income level specified for such child to be 
eligible for medical assistance under policies of the State plan under 
title XIX on June 1, 1997.
    (2) No other coverage standard. A targeted low-income child must 
not be--
    (i) Found eligible or potentially eligible for Medicaid under 
policies of the State plan (determined through either 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, as defined in section 2791 of the Public Health Service Act, 
unless the plan or 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 is not 
considered covered under a group health plan or health insurance 
coverage if the child does not have reasonable geographic access to 
care under that plan.
    (3) For purposes of this section, policies of the State plan under 
title XIX plan include policies under a Statewide demonstration project 
under section 1115(a) of the Act other than a demonstration project 
that covered an

[[Page 2676]]

expanded group of eligible children but that either--
    (i) Did not provide inpatient hospital coverage; or
    (ii) Limited eligibility to children previously enrolled in 
Medicaid, imposed premiums as a condition of initial or continued 
enrollment, and did not impose a general time limit on eligibility.
    (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 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 or would have been available from those sources on November 8, 
1999. A contribution is considered more than nominal if the State or 
public agency makes a contribution toward the cost of an employee's 
dependent(s) that is $10 per family, per month, more than the State or 
public agency's contribution toward the cost of covering the employee 
only.
    (2) Residents of an institution. A child must not be--
    (i) An inmate of a public institution as defined at Sec. 435.1009 
of this chapter; or
    (ii) 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) Eligibility standards. To the extent consistent with title XXI 
of the Act and 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 (up to, but not including, age 19);
    (3) Income;
    (4) Resources;
    (5) Spenddowns;
    (6) Disposition of resources;
    (7) Residency, in accordance with paragraph (d) of this section;
    (8) Disability status, provided that such standards do not restrict 
eligibility;
    (9) Access to, or coverage under, other health coverage; and
    (10) Duration of eligibility, in accordance with paragraph (e) of 
this section.
    (b) Prohibited eligibility standards. In establishing eligibility 
standards and methodologies, a State may not--
    (1) Cover children with a 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) Discriminate on the basis of diagnosis;
    (4) Require that any individual provide a social security number 
(SSN), including the SSN of the applicant 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) Exclude individuals based on citizenship or nationality, to the 
extent that the children are U.S. citizens, U.S. nationals or qualified 
aliens, (as defined at section 431 of the Personal Responsibility and 
Work Opportunity Reconciliation Act (PRWORA) of 1996, as amended by the 
BBA of 1997, except to the extent that section 403 of PRWORA precludes 
them from receiving Federal means-tested public benefits); or
    (7) Violate any other Federal laws or regulations pertaining to 
eligibility for a separate child health program under title XXI.
    (c) Self-declaration of citizenship. In establishing eligibility 
for coverage under a separate child health plan, a State may accept 
self-declaration of citizenship (including nationals of the U.S.), 
provided that the State has implemented effective, fair, and 
nondiscriminatory procedures for ensuring the integrity of its 
application process.
    (d) Residency. The State may establish residency requirements, 
except that a State may not--
    (1) Impose a durational residency requirement;
    (2) Preclude the following individuals from declaring residence in 
a State--
    (i) A non-institutionalized child who is not a ward of the State, 
if the child is physically located in that State, including as a result 
of the parent's or caretaker's employment in that State;
    (ii) An institutionalized child who is not a ward of a State, if 
the State is the State of residence of the child's custodial parent's 
or caretaker at the time of placement;
    (iii) A child who is a ward of a State, regardless of the child's 
physical location; or
    (iv) A child whose custodial parent or caretaker is involved in 
work of a transient nature, if the State is the parent's or caretaker's 
home State.
    (e) Duration of eligibility. (1) The State may not impose a 
lifetime cap or other time limit on the eligibility of an individual 
applicant or enrollee, based on the length of time such applicant or 
enrollee has received benefits under the State's separate child health 
program.
    (2) Eligibility must be redetermined at least every 12 months.


Sec. 457.340  Application for and enrollment in a separate child health 
program.

    (a) Application assistance. A State must afford families an 
opportunity to apply for child health assistance without delay, 
provided that the State has not reached an approved enrollment cap, and 
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 at the time of application, in writing and orally if 
appropriate, about the application and eligibility requirements, the 
time frame for determining eligibility, and the right to review of 
eligibility determinations as described in Sec. 457.1130.
    (c) Timely determinations of eligibility. (1) The agency must 
promptly determine eligibility and issue a notice of decision within 
the time standards established, except in circumstances that are beyond 
the agency's control.
    (2) A State must establish time standards for determining 
eligibility. These standards may not exceed forty-five calendar days 
(excluding days during which the application has been suspended, 
pursuant to Sec. 457.350(f)(1)).
    (3) In applying the time standards, the State must define ``date of 
application'' and must count each calendar day from the date of 
application to the day the agency mails or otherwise provides notice of 
its eligibility decision.
    (d) Notice of decision concerning eligibility. A State must provide 
each applicant or enrollee a written notice of any decision on the 
application or other determination concerning eligibility.
    (1) If eligibility is approved, the notice must include information 
on the enrollee's rights and responsibilities under the program, 
including the opportunity for review of matters described in 
Sec. 457.1130.
    (2) If eligibility is denied, suspended or terminated, the State 
must provide

[[Page 2677]]

notice in accordance with Sec. 457.1180. In the case of a suspension or 
termination of eligibility, the State must provide sufficient notice to 
enable the child's parent or caretaker to take any appropriate actions 
that may be required to allow coverage to continue without 
interruption.
    (e) Effective date of eligibility. A State must specify a method 
for determining the effective date of eligibility for its separate 
child health program, which can be determined based on the date of 
application or through any other reasonable method.


Sec. 457.350  Eligibility screening and facilitation of Medicaid 
enrollment.

    (a) State plan requirement. The State plan must include a 
description of--
    (1) 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; and
    (2) The procedures that the State will use to ensure that the 
Medicaid application and enrollment process is initiated and that 
Medicaid enrollment is facilitated for children found, through the 
screening process, to be potentially eligible for Medicaid.
    (b) Screening objectives. A State must use screening procedures to 
identify, at a minimum, any applicant or enrollee who is potentially 
eligible for Medicaid under one of the poverty-level-related groups 
described in section 1902(l) of the Act, section 1931 of the Act, or a 
Medicaid demonstration project approved under section 1115 of the Act, 
applying whichever standard and corresponding methodology generally 
results in a higher income eligibility level for the age group of the 
child being screened.
    (c) Income eligibility test. To identify the children described in 
paragraph (b) of this section, a State must either initially apply the 
gross income test described in paragraph (c)(1) of this section and 
then use an adjusted income test described in paragraph (c)(2) of this 
section for applicants whose gross income is above the appropriate 
Medicaid income standard, or use only the adjusted income test.
    (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 Medicaid 
standards and methodologies relating to income for the particular 
Medicaid eligibility group, including all income exclusions and 
disregards, except those that apply only in very limited circumstances.
    (d) Resource eligibility test. (1) If a State applies a resource 
test for children under the Medicaid eligibility group used for 
screening purposes as described in paragraph (b) of this section and a 
child has been determined potentially income eligible for Medicaid, the 
State must also screen for Medicaid eligibility by comparing family 
resources to the appropriate Medicaid resource standard.
    (2) In conducting the screening, the State must apply Medicaid 
standards and methodologies related to resources for the particular 
Medicaid eligibility group, including all resource exclusions and 
disregards, except those that apply only in very limited circumstances.
    (e) Children found potentially ineligible for Medicaid. If a State 
uses a screening procedure other than a full determination of Medicaid 
eligibility under all possible eligibility groups, and the screening 
process reveals that the child does not appear to be eligible for 
Medicaid, the State must provide the child's family with the following 
in writing:
    (1) A statement that based on a limited review, the child does not 
appear eligible for Medicaid, but Medicaid eligibility can only be 
determined based on a full review of a Medicaid application under all 
Medicaid eligibility groups;
    (2) Information about Medicaid eligibility and benefits; and
    (3) Information about how and where to apply for Medicaid under all 
eligibility groups.

    (f) Children found potentially eligible for Medicaid. If the 
screening process reveals that the child is potentially eligible for 
Medicaid, the State must establish procedures in coordination with the 
Medicaid agency that facilitate enrollment in Medicaid and avoid 
duplicative requests for information and documentation and must--
    (1) Except as provided in Sec. 457.355, find the child ineligible, 
provisionally ineligible, or suspend the child's application for the 
separate child health program unless and until a completed Medicaid 
application for that child is denied, or the child's circumstances 
change, and promptly transmit the separate child health application to 
the Medicaid agency as provided in paragraph (f)(3)(ii) of this 
section; and
    (2) If a State uses a joint application for its Medicaid and 
separate child health programs, promptly transmit the application, or 
the information obtained through the application, and all relevant 
documentation to the Medicaid agency; or
    (3) If a State does not use a joint application for its Medicaid 
and separate child health programs:
    (i) Promptly inform the child's parent or caretaker in writing and, 
if appropriate, orally that the child has been found likely to be 
eligible for Medicaid; provide the family with a Medicaid application 
and offer information about what, if any, further information, 
documentation, or other steps are needed to complete the Medicaid 
application process; and offer assistance in completing the application 
process;
    (ii) Promptly transmit the separate child health program 
application; or the information obtained through the application, and 
all other relevant information and documentation, including the results 
of the screening process, to the Medicaid agency for a final 
determination of Medicaid eligibility in accordance with the 
requirements of Secs. 431.636 and 457.1110 of this chapter; or
    (4) Establish other effective and efficient procedures, in 
coordination with the Medicaid agency, as described and approved in the 
State plan that ensure that children who are screened as potentially 
eligible for Medicaid are able to apply for Medicaid without delay and, 
if eligible, are enrolled in Medicaid in a timely manner; and
    (5) Determine or redetermine eligibility for the separate child 
health program, if--
    (i) The State is notified pursuant to Sec. 431.636 of this chapter 
that the child has been found ineligible for Medicaid, consistent with 
the time standards established pursuant to Sec. 457.340(c); or
    (ii) The State is notified prior to the final Medicaid eligibility 
determination that the child's circumstances have changed and another 
screening shows that the child is not likely to be eligible for 
Medicaid.
    (iii) For purposes of such determination or redetermination, the 
State must not require the child to complete a new application for the 
separate child health program, but may require supplemental information 
to account for any changes in the child's circumstances that may affect 
eligibility.
    (g) Informed application decisions. To enable a family to make an 
informed decision about applying for Medicaid or completing the 
Medicaid application process, a State must provide the child's family 
with information, in writing, about--

[[Page 2678]]

    (1) The State's Medicaid program, including the benefits covered, 
and restrictions on cost sharing; and
    (2) Eligibility rules that prohibit children who have been screened 
eligible for Medicaid from being enrolled in a separate child health 
program, other than provisional temporary enrollment while a final 
Medicaid eligibility determination is being made.
    (h) Waiting lists, enrollment caps and closed enrollment. The State 
must establish procedures to ensure that--
    (1) The procedures developed in accordance with this section have 
been followed for each child applying for a separate child health 
program before placing the child on a waiting list or otherwise 
deferring action on the child's application for the separate child 
health program; and
    (2) Families are informed that a child may be eligible for Medicaid 
if circumstances change while the child is on a waiting list for 
separate child health program.


Sec. 457.353  Monitoring and evaluation of screening process.

    States must monitor and establish a mechanism to evaluate the 
screen and enroll process described at Sec. 457.350 to ensure that 
children who are screened potentially eligible for Medicaid are 
enrolled in Medicaid, if eligible, and that children who are found 
ineligible for Medicaid are enrolled in the separate child health 
program, if eligible.


Sec. 457.355  Presumptive eligibility.

    Consistent with subpart D of this part, the State may pay costs of 
coverage under a separate child health program, during a period of 
presumptive eligibility for children applying for coverage under the 
separate child health program, pending the screening process and a 
final determination of eligibility (including applicants found through 
screening to be potentially eligible for Medicaid)
    (a) Expenditures for coverage during a period of presumptive 
eligibility. (1) Expenditures for coverage during a period of 
presumptive eligibility for a child ultimately determined eligible for 
the separate child health program, will be considered, for that period, 
as expenditures for child health assistance for targeted low-income 
children under the plan.
    (2) Expenditures for coverage during a period of presumptive 
eligibility implemented in accordance with Sec. 435.1101 of this part 
for a child ultimately determined ineligible for both the separate 
child health program and Medicaid for that period, and for a child 
whose family does not complete the Medicaid application process, will 
be considered as expenditures for targeted low-income children under 
the plan.
    (3) Expenditures for coverage during a period of presumptive 
eligibility for a child ultimately determined to be eligible for 
Medicaid may not be considered expenditures under the separate child 
health program.


Sec. 457.380  Eligibility verification.

    (a) The State must establish procedures to ensure the integrity of 
the eligibility determination process.
    (b) A State may establish reasonable eligibility verification 
mechanisms to promote enrollment of eligible children and may permit 
applicants and enrollees to demonstrate that they meet eligibility 
requirements through self-declaration or affirmation except that a 
State may permit self-declaration of citizenship only if the State has 
effective, fair and non-discriminatory procedures to ensure the 
integrity of the application process in accordance with 
Sec. 457.320(c).

Subpart D--State Plan Requirements: Coverage and Benefits


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, the quality and appropriateness of care, and 
access to covered services;
    (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 
SCHIP 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  Definition of 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 the 
following services:
    (a) Inpatient hospital services.
    (b) Outpatient hospital services.
    (c) Physician services.
    (d) Surgical services.
    (e) Clinic services (including health center services) and other 
ambulatory health care services.
    (f) 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.
    (g) Over-the-counter medications.
    (h) Laboratory and radiological services.
    (i) Prenatal care and pre-pregnancy family planning services and 
supplies.
    (j) Inpatient mental health services, other than services described 
in paragraph (r) of this section but including services furnished in a 
State-operated mental hospital and including residential or other 24-
hour therapeutically planned structured services.
    (k) Outpatient mental health services, other than services 
described in paragraph (s) of this section but including services 
furnished in a State-operated mental hospital and including community-
based services.
    (l) Durable medical equipment and other medically-related or 
remedial devices (such as prosthetic devices, implants, eyeglasses, 
hearing aids, dental devices and adaptive devices).
    (m) Disposable medical supplies.
    (n) 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.)
    (o) 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.
    (p) Abortion only if necessary to save the life of the mother or if 
the pregnancy is the result of rape or incest.
    (q) Dental services.
    (r) Inpatient substance abuse treatment services and residential 
substance abuse treatment services.
    (s) Outpatient substance abuse treatment services.
    (t) Case management services.
    (u) Care coordination services.
    (v) Physical therapy, occupational therapy, and services for 
individuals with speech, hearing and language disorders.

[[Page 2679]]

    (w) Hospice care.
    (x) 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--
    (1) Prescribed by or furnished by a physician or other licensed or 
registered practitioner within the scope of practice as defined by 
State law;
    (2) Performed under the general supervision or at the direction of 
a physician; or
    (3) 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.
    (y) Premiums for private health care insurance coverage.
    (z) Medical transportation.
    (aa) 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.
    (bb) Any other health care services or items specified by the 
Secretary and not excluded under this subchapter.


Sec. 457.410  Health benefits coverage options.

    (a) Types of health benefits coverage. States may choose to obtain 
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 at paragraph (a) of this section, that the State 
chooses to obtain, the State must obtain coverage for--
    (1) Well-baby and well-child care services as defined by the State;
    (2) Age-appropriate immunizations in accordance with the 
recommendations of the Advisory Committee on Immunization Practices 
(ACIP); and
    (3) Emergency services as defined in Sec. 457.10.


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 plans:
    (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. A 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 is 
health benefits coverage that has 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 coverage. In addition to the coverage required under 
Sec. 457.410(b), 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.
    (c) Additional coverage. (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, then 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;
    (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 (with the exception of premiums) 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 is coverage that--
    (1) Includes coverage of a range of benefits;
    (2) Is administered or overseen by the State and receives funds 
from the State;
    (3) Is offered in the State of New York, Florida or Pennsylvania; 
and
    (4) Was 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;
    (2) The State submits an actuarial report demonstrating that the 
modification does not reduce the

[[Page 2680]]

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.

    Secretary-approved coverage is health benefits coverage that, in 
the determination of the Secretary, 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 to children 
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 health benefits coverage, as 
specified in Sec. 457.420, plus any additional coverage; or
    (d) Coverage, including coverage under a group health plan 
purchased by the State, that the State demonstrates to be substantially 
equivalent to or greater than coverage under a benchmark health 
benefits plan, as specified in Sec. 457.420, through use of a benefit-
by-benefit comparison of the coverage demonstrating that coverage for 
each benefit meets or exceeds the corresponding coverage under the 
benchmark health benefits plan.


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 even if any benchmark health benefits plan includes coverage 
for that item or service.


Sec. 457.475  Limitations on coverage: Abortions.

    (a) General rule. FFP under title XXI 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 paragraph 
(b) 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 paid to a managed care entity to be paid with State-only 
funds, or append riders, attachments or addenda to existing contracts 
with managed care entities 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) Except as permitted under 
paragraph (a)(2) of this section, the State may not permit the 
imposition of any pre-existing condition exclusion for covered services 
under the State plan.
    (2) If the State obtains health benefits coverage through payment 
or a contract for health benefits coverage under 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 of 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). Health benefits coverage under 
a group health plan provided under a State plan 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). Health 
benefits coverage under a group health plan provided under a State plan 
must comply with the requirements of the NMHPA of 1996 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 and delivery of health care services covered 
by such products to the enrollees, including any variations; and
    (b) Describe utilization control systems designed to ensure that 
enrollees receiving health care services under the State plan receive 
only appropriate and medically necessary health care consistent with 
the benefit package described in the approved State plan.


Sec. 457.495  State assurance of access to care and procedures to 
assure quality and appropriateness of care.

    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, including how the State will assure:
    (a) Access to well-baby care, well-child care, well-adolescent care 
and childhood and adolescent immunizations.
    (b) Access to covered services, including emergency services as 
defined at Sec. 457.10.
    (c) Appropriate and timely procedures to monitor and treat 
enrollees with

[[Page 2681]]

chronic, complex, or serious medical conditions, including access to an 
adequate number of visits to specialists experienced in treating the 
specific medical condition and access to out-of-network providers when 
the network is not adequate for the enrollee's medical condition.
    (d) That decisions related to the prior authorization of health 
services are completed in accordance with the medical needs of the 
patient, within 14 days after receipt of a request for services. A 
possible extension of up to 14 days may be permitted if the enrollee 
requests the extension or if the physician or health plan determines 
that additional information is needed.

Subpart E--State Plan Requirements: Enrollee Financial 
Responsibilities


Sec. 457.500  Basis, scope, and applicability.

    (a) Statutory basis. This subpart implements--
    (1) Section 2101(a) of the Act, which 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; and
    (2) Section 2103(e) of the Act, which sets forth provisions 
regarding State plan requirements and options for cost sharing.
    (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 
separate child health programs.


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 enrollees, applicants, providers and the general public of the 
cost-sharing charges, the cumulative cost-sharing maximum, and any 
changes to these amounts;
    (c) The disenrollment protections as required under Sec. 457.570;
    (d) In the case of coverage obtained through premium assistance for 
group health plans--
    (1) The procedures the State uses to ensure that enrollees are not 
charged copayments, coinsurance, deductibles or similar fees on well-
baby and well-child care services described at Sec. 457.520, and that 
any cost sharing complies with the requirements of this subpart;
    (2) The procedures to ensure that American Indian and Alaska Native 
children are not charged premiums, copayments, coinsurance, 
deductibles, or similar fees in accordance with Sec. 457.535;
    (3) The procedures to ensure that enrollees are not charged cost 
sharing in excess of the cumulative cost-sharing maximum specified in 
Sec. 457.560.
    (e) Procedures that do not primarily rely on a refund given by the 
State for overpayment by an enrollee to ensure compliance with this 
subpart.


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

    When a State imposes premiums, enrollment fees, or similar fees on 
enrollees, the State plan must describe--
    (a) The amount of the premium, enrollment fee or similar fee 
imposed on enrollees;
    (b) The time period for which the charge is imposed;
    (c) The group or groups that are subject to the premiums, 
enrollment fees, or similar charges;
    (d) The consequences for an enrollee or applicant who does not pay 
a charge, and the disenrollment protections adopted by the State in 
accordance with Sec. 457.570; 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.


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

    To impose copayments, coinsurance, deductibles or similar charges 
on enrollees, the State plan must describe--
    (a) The service for which the charge is imposed;
    (b) The amount of the charge;
    (c) The group or groups of enrollees that may be subject to the 
cost-sharing charge;
    (d) The consequences for an enrollee who does not pay a charge, and 
the disenrollment protections adopted by the State in accordance with 
Sec. 457.570;
    (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; and
    (f) An assurance that enrollees will not be held liable for cost-
sharing amounts for emergency services that are provided at a facility 
that does not participate in the enrollee's managed care network beyond 
the copayment amounts specified in the State plan for emergency 
services as defined in Sec. 457.10.


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

    (a) A State may not impose copayments, deductibles, coinsurance or 
other cost sharing with respect to the well-baby and well-child care 
services covered under the State plan in either the managed care 
delivery setting or the fee-for-service delivery setting.
    (b) For the purposes of this subpart, at a minimum, any of the 
following services covered under the State plan will be considered 
well-baby and well-child care services:
    (1) All healthy newborn physician visits, including routine 
screening, whether provided on an inpatient or outpatient basis.
    (2) Routine physical examinations as recommended and updated by 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.''
    (3) Laboratory tests associated with the well-baby and well-child 
routine physical examinations as described in paragraph (b)(2) of this 
section.
    (4) Immunizations and related office visits as recommended and 
updated by the Advisory Committee on Immunization Practices (ACIP).
    (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) Enrollee groups subject to the charges.
    (3) Cumulative cost-sharing maximums.
    (4) Mechanisms for making payments for required charges.
    (5) The consequences for an applicant or an enrollee who does not 
pay a charge, including the disenrollment protections required by 
Sec. 457.570.
    (b) The State must make the public schedule available to the 
following groups:
    (1) Enrollees, at the time of enrollment and reenrollment after a

[[Page 2682]]

redetermination of eligibility, and when cost-sharing charges and 
cumulative cost-sharing maximums are revised.
    (2) Applicants, at the time of application.
    (3) All 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 and Alaska Natives.

    States may not impose premiums, deductibles, coinsurance, 
copayments or any other cost-sharing charges on children who are 
American Indians or Alaska Natives, as defined in Sec. 457.10.


Sec. 457.540  Cost-sharing charges for children in families with 
incomes at or below 150 percent of the 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 amounts 
permitted under Sec. 447.52 of this chapter for a Medicaid eligible 
family of the same size and income;
    (b) Any copayments, coinsurance, deductibles or similar charges for 
children whose family income is at or below 100 percent of the FPL are 
equal to or less than the amounts permitted under Sec. 447.54 of this 
chapter;
    (c) For children whose family income is from 101 percent to 150 
percent of the FPL, any copayments, coinsurance, deductibles or similar 
charges are equal to or less than the maximum amounts permitted under 
Sec. 457.555;
    (d) The State does not impose more than one type of cost-sharing 
charge (deductible, copayment, or coinsurance) on a service;
    (e) The State only imposes one copayment based on the total cost of 
services furnished during one office visit; and
    (f) 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(b).


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, including 
emergency 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
       Total cost of services provided during a visit         chargeable
                                                             to enrollee
------------------------------------------------------------------------
$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 for services provided by 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 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 would make 
under the Medicaid fee-for-service system for the first day of care in 
the institution.
    (c) Institutional emergency services. Any copayment that the State 
imposes on emergency services provided by an institution may not exceed 
$5.00.
    (d) 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 are not emergency services as defined 
in Sec. 457.10.
    (e) Standard copayment amount. 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 (a), (b), and (c) of 
this section to the State's average or typical payment for that 
service.


Sec. 457.560  Cumulative cost-sharing maximum.

    (a) Computation. 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. A family will be considered to 
have a legal obligation to pay amounts a provider actually charges the 
family for covered services furnished to enrollees, and any other 
amounts for which payment is required under applicable State law for 
covered services furnished to eligible children, even if the family 
never pays those amounts.
    (b) 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 State 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 length of the child's eligibility period in the State.
    (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 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 the 
length of the child's eligibility period in the State.
    (d) The State must inform the enrollee's family in writing and 
orally if appropriate of their individual cumulative cost-sharing 
maximum amount at the time of enrollment and reenrollment.


Sec. 457.570  Disenrollment protections.

    (a) The State must give enrollees reasonable notice of and an 
opportunity to pay past due premiums, copayments, coinsurance, 
deductibles or similar fees prior to disenrollment.
    (b) The disenrollment process must afford the enrollee an 
opportunity to show that the enrollee's family income has declined 
prior to disenrollment for non payment of cost-sharing charges, and in 
the event that such a showing indicates that the enrollee may have 
become eligible for Medicaid or for a lower level of cost sharing, the 
State must facilitate enrolling the child in Medicaid or adjust the 
child's cost-sharing category as appropriate.
    (c) The State must provide the enrollee with an opportunity for an 
impartial review to address

[[Page 2683]]

disenrollment from the program in accordance with Sec. 457.1130(a)(3).

Subpart F--Payments to States


Sec. 457.624  [Removed]

    8. Section 457.624 is removed.

    9. New subparts G, H, I, J, and K are added to read as follows:
Subpart G--Strategic Planning, Reporting, and Evaluation
Sec.
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.
457.740   State expenditures and statistical reports.
457.750   Annual report.
Subpart H--Substitution of Coverage
457.800   Basis, scope, and applicability.
457.805   State plan requirements: Procedures to address 
substitution under group health plans.
457.810   Premium assistance programs: Required protections against 
substitution.
Subpart I--Program Integrity
457.900  Basis, scope, and applicability.
457.902   Definitions.
457.910   State program administration.
457.915   Fraud detection and investigation.
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.
457.980  Verification of enrollment and provider services received.
457.985  Integrity of professional advice to enrollees.
Subpart J--Allowable Waivers: General Provisions
457.1000  Basis, scope, and applicability.
457.1003  HCFA review of waiver requests.
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.
Subpart K--State Plan Requirements: Applicant and Enrollee Protections
457.1100  Basis, scope and applicability.
457.1110  Privacy protections.
457.1120  State plan requirement: Description of review process.
457.1130  Matters subject to review.
457.1140  Core elements of review.
457.1150  Impartial review.
457.1160  Time frames.
457.1170  Continuation of enrollment.
457.1180  Notice.
457.1190  Application of review procedures when States offer premium 
assistance for group health plans.

Subpart G--Strategic Planning, Reporting, and Evaluation


Sec. 457.700  Basis, scope, and applicability.

    (a) Statutory basis. This subpart implements--
    (1) Sections 2107(a), (b) and (d) of the Act, which set forth 
requirements for strategic planning, reports, and program budgets; and
    (2) 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.
    (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.
    (e) Core elements. The State's strategic objectives, performance 
goals and performance measures must include a common core of national 
performance goals and measures consistent with the data collection, 
standard methodology, and verification requirements, as developed by 
the Secretary.


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.


Sec. 457.740  State expenditures and statistical reports.

    (a) Required quarterly reports. A State must submit reports to HCFA 
that contain quarterly program expenditures and statistical data no 
later than 30 days after the end of each quarter of the Federal fiscal 
year. A State must collect required data beginning on the date of 
implementation of the approved State plan. Territories are exempt from 
the definition of ``State'' for purposes of the required quarterly 
reporting under this section. The quarterly reports must include data 
on--
    (1) Program expenditures;
    (2) The number of children enrolled in the title XIX Medicaid 
program, the separate child health program, and the Medicaid expansion 
program, as applicable, as of the last day of each quarter of the 
Federal fiscal year; and
    (3) 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) Gender, race, and ethnicity.
    (iii) Service delivery system (managed care, fee-for-service, and 
primary care case management).
    (iv) 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 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 a different level or percentage of cost 
sharing at different poverty levels must report by poverty level 
categories that match the

[[Page 2684]]

poverty level categories used for purposes of cost sharing.
    (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 were enrolled in the Medicaid 
program, the separate child health program, and the Medicaid expansion 
program, as appropriate, by age, gender, race, ethnicity, service 
delivery system, 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; and 
provide information related to a core set of national performance goals 
and measures as developed by the Secretary;
    (2) Report on the effectiveness of the State's policies for 
discouraging the 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 proposed to periodically monitor 
and assess;
    (5) Provide an updated budget for a 3-year period that describes 
those elements required in Sec. 457.140, including any changes in the 
sources of the non-Federal share of State plan expenditures;
    (6) Identify the total State expenditures for family coverage and 
total number of children and adults, respectively, covered by family 
coverage during the preceding Federal fiscal year;
    (7) Collect and provide data regarding the primary language of 
SCHIP enrollees; and
    (8) Describe the State's current income standards and methodologies 
for its Medicaid expansion program, separate child health program, and 
title XIX Medicaid program, as appropriate.
    (c) Methodology for estimate of number of uninsured, low-income 
children. (1) To report on the progress made in reducing the number of 
uninsured, 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.
    (i) A State may base the estimate on data from--
    (A) The March supplement to the Current Population Survey (CPS);
    (B) A State-specific survey;
    (C) A statistically adjusted CPS; or
    (D) Another appropriate source.
    (ii) If the State does not base the estimate on data from the March 
supplement to the CPS, the State must submit a description of the 
methodology used to develop the initial baseline estimate and the 
rationale for its use.
    (2) The State must provide an annual estimate of changes in the 
number of uninsured in the State using--
    (i) The same methodology used in establishing the initial baseline; 
or
    (ii) Another methodology based on new information that enables the 
State to establish a new baseline.
    (3) If a new methodology is used, the State must also provide 
annual estimates based on either the March supplement to the CPS or the 
methodology used to develop the initial baseline.

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 
health benefits coverage 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 premium assistance programs.
    (c) Applicability. The requirements of this subpart apply to 
separate child health programs.


Sec. 457.805  State plan requirement: Procedures to address 
substitution under group health plans.

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


Sec. 457.810  Premium assistance programs: Required protections against 
substitution.

    A State that operates a premium assistance program, as defined at 
Sec. 457.10, must provide the protections against substitution of SCHIP 
coverage for coverage under group health plans specified in this 
section. The State must describe these protections in the State plan; 
and report on results of monitoring of substitution in its annual 
reports.
    (a) Minimum period without coverage under a group health plan. For 
health benefits coverage provided through premium assistance for group 
health plans, the following rules apply:
    (1) An enrollee must not have had coverage under a group health 
plan for a period of at least 6 months prior to enrollment in a premium 
assistance program. A State may not require a minimum period without 
coverage under a group health plan that exceeds 12 months.
    (2) States may permit reasonable exceptions to the requirement for 
a minimum period without coverage under a group health plan for--
    (i) Involuntary loss of coverage under a group health plan, due to 
employer termination of coverage for all employees and dependents;
    (ii) Economic hardship;
    (iii) Change to employment that does not offer dependent coverage; 
or
    (iv) Other reasons proposed by the State and approved as part of 
the State plan.
    (3) The requirement for a minimum period without coverage under a 
group health plan does not apply to a child who, within the previous 6 
months, has received coverage under a group health plan through 
Medicaid under section 1906 of the Act.
    (4) The Secretary may waive the 6-month waiting period requirement 
described in this section at her discretion.
    (b) Employer contribution. For health benefits coverage obtained 
through premium assistance for group health plans, the employee who is 
eligible for the coverage must apply for the full premium contribution 
available from the employer.
    (c) Cost effectiveness. In establishing cost effectiveness--
    (1) The State's cost for coverage for children under premium 
assistance programs must not be greater than the cost of other SCHIP 
coverage for these children; and
    (2) The State may base its demonstration of cost effectiveness on 
an assessment of the cost of coverage for children under premium 
assistance programs to the cost of other SCHIP coverage for these 
children, done on a case-by-case basis, or on the cost of premium 
assisted coverage in the aggregate.

[[Page 2685]]

    (d) State evaluation. The State must evaluate and report in the 
annual report (in accordance with Sec. 457.750(b)(2)) the amount of 
substitution that occurs as a result of premium assistance programs and 
the effect of those programs on access to coverage.

Subpart I--Program Integrity


Sec. 457.900  Basis, scope and applicability.

    (a) Statutory basis. This subpart implements--
    (1) Section 2101(a) of the Act, which 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; 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 applies to separate child health 
programs. Medicaid expansion programs are subject to the program 
integrity rules and requirements specified under title XIX.


Sec. 457.902  Definitions

    As used in this subpart--
    Actuarially sound principles means generally accepted actuarial 
principles and practices that are applied to determine aggregate 
utilization patterns, are appropriate for the population and services 
to be covered, and have been certified by actuaries who meet the 
qualification standards established by the Actuarial Standards Board.
    Fee-for-service entity means any individual or entity that 
furnishes services under the program on a fee-for-service basis, 
including health insurance services.


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.
    (c) Program coordination. The State must develop and implement 
procedures for referring suspected fraud and abuse cases to the State 
program integrity unit (if such a unit is established) and to 
appropriate law enforcement officials. Law enforcement officials 
include 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. 457.925  Preliminary investigation.

    If the State agency receives a complaint of fraud or abuse from any 
source or identifies questionable practices, the State agency must 
conduct a preliminary investigation or take otherwise appropriate 
action within a reasonable period of time 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.
    (b) Conduct a full investigation.
    (c) Refer the fraud and abuse case to appropriate law enforcement 
officials.


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 provider 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, 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

[[Page 2686]]

    (2) For States with approved plans, with the first request to amend 
the approved plan.
    (b) A State must--
    (1) Provide for free and open competition, to the maximum extent 
practical, 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) Use payment rates based on public or private payment rates for 
comparable services for comparable populations, consistent with 
principles of actuarial soundness as defined at Sec. 457.902.
    (c) A State may establish higher rates than permitted under 
paragraph (b) of this section if such rates are necessary to ensure 
sufficient provider participation, provider access, 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 (b) or (c) of this section.


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 (MCE). A State that makes payments to an 
MCE under a separate child health program, based on data submitted by 
the MCE, must ensure that its contract requires the MCE to provide--
    (1) Enrollment information and other information required by the 
State;
    (2) An attestation to the accuracy, completeness, and truthfulness 
of claims and payment data, under penalty of perjury;
    (3) Access for the State, HCFA, and the HHS Office of the Inspector 
General to enrollee health claims data and payment data, in conformance 
with the appropriate privacy protections in the State; and
    (4) A guarantee that the MCE will not avoid costs for services 
covered in its contract by referring enrollees 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 that the entity certifies and 
attests that information on claim forms is truthful, accurate, and 
complete;
    (2) Ensure that fee-for-service entities understand that payment 
and satisfaction of the claims will be from Federal and State funds, 
and that any false claims may be prosecuted under applicable Federal or 
State laws; and
    (3) Require, as a condition of participation, that fee-for-service 
entities provide the State, HCFA and/or the HHS Office of the Inspector 
General with access to enrollee health claims data, claims payment data 
and related records.


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) The State must ensure that the arrangements or procedures 
required in paragraph (a) of this section--
    (1) Enforce MCE compliance with all applicable Federal and State 
standards;
    (2) Prohibit MCEs from conducting any unsolicited personal contact 
with a potential enrollee by an employee or agent of a managed care 
entity for the purpose of influencing the individual to enroll with the 
entity; and
    (3) Include a mechanism for the MCE to report to the State, to 
HCFA, or to the Office of Inspector General (OIG) as appropriate, 
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)(3) 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 the enrollee's eligibility for child health assistance, the 
State must:
    (a) Establish procedures to ensure that enrollees make timely and 
accurate reports of any such change; 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 SCHIP.


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 have billed.
    (b) The State must establish and maintain systems to identify, 
report, and verify the accuracy of claims for those enrolled children 
who meet requirements of section 2105(a) of the Act, where enhanced 
Federal medical assistance percentage computations apply.


Sec. 457.985  Integrity of professional advice to enrollees.

    The State must ensure through its contracts for coverage and 
services that its contractors comply with--
    (a) Section 422.206(a) of this chapter, which prohibits 
interference with health care professionals' advice to enrollees and 
requires that professionals provide information about treatment in an 
appropriate manner; and
    (b) Sections 422.208 and 422.210 of this chapter, which place 
limitations on physician incentive plans, and information disclosure 
requirements related to those physician incentive plans, respectively.

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 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.
    (c) Applicability. This subpart applies to separate child health 
programs; and applies to Medicaid expansion programs when the State 
claims administrative costs under title XXI and seeks a waiver of 
limitations on such claims for use of a community-based health delivery

[[Page 2687]]

system. This subpart does not apply to demonstrations requested under 
section 1115 of the Act.


Sec. 457.1003  HCFA review of waiver requests.

    HCFA will review the waiver requests under this subpart using the 
same time frames used for State plan amendments, as specified in 
Sec. 457.160.


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 (the 10 percent limit on expenditures not 
used for health benefits coverage for targeted low-income children, 
that meets 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 all of the requirements of this part, 
including subpart D and subpart E.
    (2) The cost of such coverage, on an average per child basis, does 
not exceed the cost of coverage under the State plan.
    (c) Three-year approval period. An approved waiver remains in 
effect for no more than 3 years.
    (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, or 
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 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 family otherwise meets the requirements of 
this part.


Sec. 457.1015  Cost-effectiveness.

    (a) Definition. For purposes of this subpart, ``cost-effective'' 
means that the State's cost of purchasing family coverage that includes 
coverage for targeted low-income children is equal to or less than the 
State's cost of obtaining coverage under the State 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 to the cost of coverage 
only for the targeted low-income children under the health benefits 
package offered by the State under the State plan for which the child 
is eligible.
    (c) Individual or aggregate basis. (1) The State may base its 
demonstration of the cost-effectiveness of family coverage on an 
assessment of the cost 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.
    (3) 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 Sec. 457.750, the 
cost of family coverage purchased under the waiver, and the number of 
children and adults, respectively, covered under family coverage 
pursuant to the waiver.

Subpart K--State Plan Requirements: Applicant and Enrollee 
Protections


Sec. 457.1100  Basis, scope and applicability.

    (a) Statutory basis. This subpart interprets and implements--
    (1) Section 2101(a) of the Act, which states 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;
    (2) Section 2102(a)(7)(B) of the Act, which requires that the State 
plan include a description of the methods used to assure access to 
covered services, including emergency services;
    (3) Section 2102(b)(2) of the Act, which requires that the State 
plan include a description of methods of establishing and continuing 
eligibility and enrollment; and
    (4) Section 2103 of the Act, which outlines coverage requirements 
for a State that provides child health assistance through a separate 
child health program.
    (b) Scope. This subpart sets forth minimum standards for privacy 
protection and for procedures for review of matters relating to 
eligibility, enrollment, and health services.
    (c) Applicability. This subpart only applies to a separate child 
health program.


Sec. 457.1110  Privacy protections.

    The State must ensure that, for individual medical records and any 
other health and enrollment information maintained with respect to 
enrollees, that identifies particular enrollees (in any form), the 
State establishes and implements procedures to--
    (a) Abide by all applicable Federal and State laws regarding 
confidentiality and disclosure, including those laws addressing the 
confidentiality of information about minors and the privacy of minors, 
and privacy of individually identifiable health information;
    (b) Comply with subpart F of part 431 of this chapter;
    (c) Maintain the records and information in a timely and accurate 
manner;
    (d) Specify and make available to any enrollee requesting it--
    (1) The purposes for which information is maintained or used; and
    (2) To whom and for what purposes the information will be disclosed 
outside the State;
    (e) Except as provided by Federal and State law, ensure that each 
enrollee may request and receive a copy of records and information 
pertaining to the enrollee in a timely manner and that an enrollee may 
request that such records or information be supplemented or corrected.


Sec. 457.1120  State plan requirement: Description of review process.

    A State plan must include a description of the State's review 
process that meets the requirements of Secs. 457.1130, 457.1140, 
457.1150, 457.1160, 457.1170, 457.1180, and 457.1190.

[[Page 2688]]

Sec. 457.1130  Matters subject to review.

    (a) Eligibility or enrollment matter. A State must ensure that an 
applicant or enrollee has an opportunity for review, consistent with 
Secs. 457.1140 and 457.1150, of a--
    (1) Denial of eligibility;
    (2) Failure to make a timely determination of eligibility; and
    (3) Suspension or termination of enrollment, including 
disenrollment for failure to pay cost sharing.
    (b) Health services matter. A State must ensure that an enrollee 
has an opportunity for external review of a--
    (1) Delay, denial, reduction, suspension, or termination of health 
services, in whole or in part, including a determination about the type 
or level of services; and
    (2) Failure to approve, furnish, or provide payment for health 
services in a timely manner.
    (c) Exception. A State is not required to provide an opportunity 
for review of a matter described in paragraph (a) or (b) of this 
section if the sole basis for the decision is a provision in the State 
plan or in Federal or State law requiring an automatic change in 
eligibility, enrollment, or a change in coverage under the health 
benefits package that affects all applicants or enrollees or a group of 
applicants or enrollees without regard to their individual 
circumstances.


Sec. 457.1140  Core elements of review.

    In adopting the procedures for review of matters described in 
Sec. 457.1130, a State must ensure that--
    (a) Reviews are conducted by an impartial person or entity in 
accordance with Sec. 457.1150;
    (b) Review decisions are timely in accordance with Sec. 457.1160;
    (c) Review decisions are written; and
    (d) Applicants and enrollees have an opportunity to--
    (1) Represent themselves or have representatives of their choosing 
in the review process;
    (2) Timely review their files and other applicable information 
relevant to the review of the decision;
    (3) Fully participate in the review process, whether the review is 
conducted in person or in writing, including by presenting supplemental 
information during the review process; and
    (4) Receive continued enrollment in accordance with Sec. 457.1170.


Sec. 457.1150  Impartial review.

    (a) Eligibility or enrollment matter. The review of a matter 
described in Sec. 457.1130(a) must be conducted by a person or entity 
who has not been directly involved in the matter under review.
    (b) Health services matter. The State must ensure that an enrollee 
has an opportunity for an independent external review of a matter 
described in Sec. 457.1130(b). External review must be conducted by the 
State or a contractor other than the contractor responsible for the 
matter subject to external review.


Sec. 457.1160  Time frames.

    (a) Eligibility or enrollment matter. A State must complete the 
review of a matter described in Sec. 457.1130(a) within a reasonable 
amount of time. In setting time frames, the State must consider the 
need for expedited review when there is an immediate need for health 
services.
    (b) Health services matter. The State must ensure that reviews are 
completed in accordance with the medical needs of the patient. If the 
medical needs of the patient do not dictate a shorter time frame, the 
review must be completed within the following time frames:
    (1) Standard timeframe. A State must ensure that external review, 
as described in Sec. 457.1150(b), is completed within 90 calendar days 
of the date an enrollee requests internal (if available) or external 
review. If both internal and external review are available to the 
enrollee, both types of review must be completed within the 90 calendar 
day period.
    (2) Expedited timeframe. A State must ensure that external review, 
as described in Sec. 457.1150(b), is completed within 72 hours of the 
time an enrollee requests external review, if the enrollee's physician 
or health plan determines that operating under the standard time frame 
could seriously jeopardize the enrollee's life or health or ability to 
attain, maintain or regain maximum function. If the enrollee has access 
to internal and external review, then each level of review may take no 
more than 72 hours. The State may extend the 72-hour time frame by up 
to 14 calendar days, if the enrollee requests an extension.


Sec. 457.1170  Continuation of enrollment.

    A State must ensure the opportunity for continuation of enrollment 
pending the completion of review of a suspension or termination of 
enrollment, including a decision to disenroll for failure to pay cost 
sharing.


Sec. 457.1180  Notice.

    A State must provide enrollees and applicants timely written notice 
of any determinations required to be subject to review under 
Sec. 457.1130 that includes the reasons for the determination, an 
explanation of applicable rights to review of that determination, the 
standard and expedited time frames for review, the manner in which a 
review can be requested, and the circumstances under which enrollment 
may continue pending review.


Sec. 457.1190  Application of review procedures when States offer 
premium assistance for group health plans.

    A State that has a premium assistance program through which it 
provides coverage under a group health plan that does not meet the 
requirements of Secs. 457.1130(b), 457.1140, 457.1150(b), 457.1160(b), 
and 457.1180 must give applicants and enrollees the option to obtain 
health benefits coverage other than through that group health plan. The 
State must provide this option at initial enrollment and at each 
redetermination of eligibility.


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

    Dated: January 4, 2001.
Robert A. Berenson,
Acting Deputy Administrator, Health Care Financing Administration.
    Dated: January 4, 2001.
Donna E. Shalala,
Secretary.
[FR Doc. 01-607 Filed 1-5-01; 3:30 pm]
BILLING CODE 4120-01-P