[Federal Register Volume 66, Number 8 (Thursday, January 11, 2001)]
[Rules and Regulations]
[Pages 2316-2322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-666]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 435

[HCFA-2086-F]
RIN 0938-AJ96


Medicaid Program; Change in Application of Federal Financial 
Participation Limits

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

ACTION: Final rule.

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SUMMARY: This final rule changes the current requirement that limits on 
Federal Financial Participation (FFP) must be applied before States use 
less restrictive income methodologies than those used by related cash 
assistance programs in determining eligibility for Medicaid. This 
change was originally published as a proposed rule on October 31, 2000 
(65 FR 64919).
    This regulatory change is necessary because the current regulatory 
interpretation of how the FFP limits apply to income methodologies 
under section 1902(r)(2) of the Social Security Act (the Act) 
unnecessarily restricts States' ability to take advantage of the 
authority to use less restrictive income methodologies under that 
section of the statute. While the enactment of section 1902(r)(2) of 
the Act could be read in the limited manner embodied in current 
regulations the statute does not require such a reading, and subsequent 
State experience with implementing section 1902(r)(2)of the Act calls 
into question the current regulation's approach.

EFFECTIVE DATE: These regulations are effective on March 12, 2001.

FOR FURTHER INFORMATION CONTACT: Roy Trudel, (410) 786-3417.

SUPPLEMENTARY INFORMATION: Generally, in determining financial 
eligibility of individuals for the Medicaid program, State agencies 
must apply the financial methodologies and requirements of the cash 
assistance program that is most closely categorically related to the 
individual's status. Our regulations at 42 CFR 435.601 set forth the 
requirements for State agencies applying less restrictive income and 
resource methodologies when determining Medicaid eligibility under the 
authority of section 1902(r)(2) of the Social Security Act (the Act). 
Current regulations at 42 CFR 435.1007 provide that when States use 
less restrictive income and resource methodologies under section 
1902(r)(2), the limits on Federal Financial Participation (FFP) in 
section 1903(f) of the Act apply before application of any less 
restrictive income methodologies. We are amending that regulation to 
change this requirement so that the 133\1/3\ percent FFP limit 
contained in section 1903(f)(1) of the Social Security Act would apply 
after application of any less restrictive income methodologies under 
section 1902(r)(2) of the Act.
    The adoption of this policy gives States additional flexibility in 
setting Medicaid eligibility requirements. Also, we believe adoption of 
this policy reflects the intent of Congress to move the Medicaid 
program away from cash assistance program rules, as evidenced by 
enactment of the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996, which severed the link between the Aid to 
Families with Dependent Children (AFDC) program and Medicaid.

I. Background

    Section 2373(c) of the Deficit Reduction Act of 1984 (DRA) 
established a moratorium period beginning on October 1, 1981, during 
which the Secretary was prohibited from taking any compliance, 
disallowance, penalty, or other regulatory action against a State 
because a State's Medicaid plan included a standard or methodology for 
determining financial eligibility for the medically needy that the 
Secretary determined was less restrictive than the

[[Page 2317]]

standard or methodology required under the related cash assistance 
program.
    The provisions of the DRA moratorium were clarified by section 9 of 
the Medicare and Medicaid Patient Program Protection Act of 1987. 
Section 9 amended section 2373(c) of DRA to specify that the moratorium 
applied to the Secretary's compliance, disallowance, penalty, or other 
regulatory actions against a State because the State plan is determined 
to be in violation of provisions of the Act for coverage, as optional 
categorically needy, of certain aged, blind, and disabled individuals 
who were in institutions or receiving home and community-based 
services, as well as methodologies for determining financial 
eligibility of the medically needy.
    The moratorium applied to an amendment or other changes in Medicaid 
State plans, or operation or program manuals, regardless of whether the 
Secretary had approved, disapproved, acted upon, or not acted upon the 
amendment or other change, or operation or program manual.
    Authority to adopt less restrictive financial methodologies as part 
of a State's Medicaid plan was added to the law in 1988. Section 303(e) 
of the Medicare Catastrophic Coverage Act of 1988, enacted on July 1, 
1988 (and amended by section 608(d)(16)(C) of the Family Support Act of 
1988), amended the Act to permit States to use less restrictive 
financial methodologies in determining eligibility not only for the 
medically needy eligibility group at section 1902(a)(10)(C) of the Act, 
but also for specified categorically needy groups of individuals. These 
categorically needy groups include qualified pregnant women and 
children (section 1902(a)(10)(A)(i)(III) of the Act), poverty level 
pregnant women and infants (section 1902(a)(10)(A)(i)(IV) of the Act), 
qualified Medicare beneficiaries (section 1905(p) of the Act), all of 
the optional categorically needy groups specified in section 
1902(a)(10)(A)(ii) of the Act, and individuals in States that have 
elected, under section 1902(f) of the Act, to apply more restrictive 
eligibility criteria than are used by the Supplemental Security Income 
(SSI) program. This provision of the Medicare Catastrophic Coverage Act 
was effective for medical assistance furnished on or after October 1, 
1982. This authority was codified in a new section 1902(r)(2) of the 
Act.
    The application of FFP limits prior to the use of more liberal 
income methodologies under section 1902(r)(2) of the Act was based on 
the Senate Report accompanying the 1987 amendment to the DRA moratorium 
(Senate Report No. 109, 100th Congress, 1st session at 24-25) which 
stated that:

    The moratorium does not eliminate the limits on income and 
resources of eligible individuals and families under section 1903(f) 
(including the requirements that the applicable medically needy 
income level not exceed the amount determined in accordance with 
standards prescribed by the Secretary to be equivalent to 133\1/3\ 
percent of the most generous AFDC eligibility standard, and that the 
income of individuals receiving a State supplementary payment in a 
medical institution or receiving home and community-based services 
under a special income standard not exceed 300% of the SSI 
standard). The moratorium also does not permit States to provide 
Medicaid benefits to those who are not ``categorically related'' 
individuals (that is, individuals who would not be eligible for 
Medicaid, regardless of the amount of their income and resources)''.

    Since, as the legislative history indicates, section 1902(r)(2) of 
the Act is essentially the codification of the DRA moratorium, we 
continued to apply the 133\1/3\ percent FFP limit at section 1903(f)(1) 
of the Act when developing the implementing regulations for section 
1902(r)(2) of the Act.
    However, subsequent experience has shown that the policy we adopted 
restricted the flexibility Congress intended States to have when it 
enacted section 1902(r)(2) of the Act in ways we did not foresee when 
we published the current regulations. The real effect of the policy we 
adopted was to make it almost impossible for States to actually use 
less restrictive income methodologies for many eligibility groups, 
including the medically needy, because use of such methodologies would 
violate the 133\1/3\ percent FFP limit. States have noted that the 
application of the 133\1/3\ percent FFP limit prior to use of less 
restrictive income methodologies unnecessarily limits their flexibility 
to provide health coverage under Medicaid and to simplify program 
administration by modifying cash assistance financial methodologies 
that do not work well in the Medicaid context.
    Further, the passage of Pub. L. 104-193, the Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996, leads 
us to believe that the current application of the FFP income limits 
under section 1902(r)(2) of the Act no longer reflects Congressional 
intent. In enacting this legislation, Congress clearly expressed its 
intent that States should have the flexibility to depart from cash 
assistance program-based income criteria to define Medicaid 
eligibility. Given that Congress chose to sever the link between cash 
assistance and Medicaid under this legislation, we believe it is valid 
to conclude that Congress did not actually intend that FFP limits, 
which are based on cash assistance standards, apply prior to use of 
less restrictive financial methodologies under section 1902(r)(2) of 
the Act for those eligibility groups to which section 1902(r)(2) of the 
Act applies.
    Also, section 1903(f) of the Act was enacted prior to section 
1902(r)(2) of the Act. Had Congress intended that the 133\1/3\ percent 
FFP limit apply prior to use of less restrictive income methodologies, 
it could have amended section 1903(f)(1) of the Act or section 
1902(r)(2) of the Act to so state. The fact that section 1903(f)(1) of 
the Act was not so amended indicates that Congress intended that the 
133\1/3\ percent FFP limit apply after, not before, use of less 
restrictive income methodologies.
    Thus, the change in this regulation gives States needed additional 
flexibility in setting Medicaid eligibility requirements. Even though 
section 1902(r)(2) of the Act was derived from the DRA moratorium, its 
own legislative history did not contain any similar discussion of its 
interaction with the section 1903(f) of the Act FFP limits. As such, we 
do not believe it is necessary to consider the legislative history of 
DRA to be determinative of Congressional understanding of the operation 
of section 1902(r)(2) of the Act.

II. Provisions of the Final Regulations

    We are amending Sec. 435.1007 to change the requirement that the 
133 \1/3\ percent FFP limit applies prior to use of any less 
restrictive income methodologies under section 1902(r)(2) of the Act.

Section 435.1007 Categorically Needy, Medically Needy, and Qualified 
Medicare Beneficiaries

    In Sec. 435.1007(b), we are deleting the phrase ``does not exceed'' 
and replace it with the word ``exceeds''. This is purely an editorial 
and technical change to correct an error in wording in the current 
regulation which is contrary to statute. This change is necessary in 
order to conform the regulation to the statute's requirement. This 
change was explained in the proposed rule. We received no public 
comments on this change.
    In Sec. 435.1007, we are amending paragraph (e) by removing the 
phrase ``are applied and before the less restrictive income deductions 
under Sec. 435.601(c)'' and replacing it with the following language: 
``and any income disregards in the State plan authorized under section 
1902(r)(2)''.

[[Page 2318]]

    We are further amending Sec. 435.1007 by adding a new paragraph (f) 
to read: ``A State may use the less restrictive income methodologies 
included under its State plan as authorized under Sec. 435.601 in 
determining whether a family's income exceeds the limitation described 
in paragraph (b) of this section.''

III. Analysis of and Responses to Public Comments

    We received a total of 37 comments from States, advocacy groups, 
associations and a few individuals on the proposed regulation that was 
published on October 31, 2000 (65 FR 64919). All of the comments we 
received expressed support for the proposed change. A number chose not 
to offer any suggestions or other comments beyond an expression of 
support. Some offered examples, similar to those we included in the 
preamble to the NPRM, of ways States could use the proposed change to 
alleviate current problems with their Medicaid programs. These included 
such things as raising low medically needy income levels, reducing 
institutional bias, and administrative simplification. We appreciate 
the overwhelming show of support for the proposed change.
    In addition to expressing support for the proposed rule, a number 
of commenters offered comments on five separate issues concerning the 
proposed change. Those comments, and our responses, are discussed 
below.
    Comment: One commenter expressed concern that unless changes are 
also made to a number of subsections of 42 CFR 435, HCFA will not be 
bound by the proposed policy change. The commenter expressed further 
concern that unless additional changes are made, States might still be 
subject to FFP penalties if an individual's income prior to application 
of the less restrictive methodologies adopted pursuant to section 
1902(r)(2) of the Act exceeds the FFP limitation in section 1903(f) of 
the Act.
    Response: We do not agree that additional changes to the 
regulations are needed. We believe that the proposed change makes it 
clear that income remaining after application of any less restrictive 
methodologies adopted pursuant to section 1902(r)(2) of the Act is the 
income used to determine whether the 133\1/3\ percent limitation on FFP 
is exceeded under all circumstances. States will not be subject to FFP 
penalties because income prior to application of the less restrictive 
methodologies exceeds the 133\1/3\ percent limitation in section 
1903(f)(1) of the Act. We proposed this change with the express intent 
that States would not be subject to such FFP penalties, and we believe 
that the changes adopted here accomplish that goal. We are clearly 
bound by this regulation as we are bound by all regulations that we 
promulgate.
    Comment: Several commenters urged that the proposed change go into 
effect as soon as possible; some requested an effective date of January 
1, 2001.
    Response: We agree that the change should be effective at the 
earliest possible date. However, this regulation is considered to be a 
major rule and the statute governing congressional review of agency 
rulemaking requires that final regulations that are major rules cannot 
be effective sooner than 60 days after publication in the Federal 
Register unless a showing of good cause to dispense with the notice and 
public comment procedures that were included in the rule. To make this 
showing the agency must find that notice and public comment procedures 
are impracticable, unnecessary, or contrary to the public interest. We 
do not believe we can satisfy this test since the rule is being adopted 
after notice and public comment. The effective date of this change is 
set forth in the Effective Date section of this final rule.
    Comment: Several commenters suggested that the preamble be expanded 
to include such things as a clear explanation and list of the 
eligibility groups to which the proposed change would apply, a similar 
list of the groups to which section 1902(r)(2) of the Act applies but 
which were not subject to the FFP limits under the old regulation, and 
discussions of steps States can take to make their income eligibility 
policies more supportive of efforts to integrate people with 
disabilities in the mainstream of community life. One commenter also 
suggested providing ongoing guidance on this general subject in a 
publicly visible place such as the HCFA website.
    Response: In general, the new rule applies to all of the optional 
categorically needy eligibility groups cited in the statute at section 
1902(a)(10)(A)(ii) of the Act except for those groups which were 
already exempt from the FFP limits under existing statute (section 
1903(f)(4) of the Act). Also, the new rule applies to the medically 
needy.
    We agree that more information about the various topics listed 
above would be of considerable value to States and other interested 
parties. However, this final rule is not a technical assistance 
document, and for that reason we believe that much of the detailed 
programmatic information and advice suggested by the commenters is best 
provided through other venues. Rather than include this kind of 
extensive material regarding more general Medicaid eligibility topics 
in the preamble to this final rule, we will provide guidance on these 
and similar issues to States and others through an administrative 
issuance, such as a letter to all State Medicaid Directors. 
Administrative guidance issued in such a form would also be available 
to the public on HCFA's website.
    Comment: One commenter suggested that in addition to our proposed 
revision of the regulations at Sec. 435.1007, we should similarly 
revise the regulations at Sec. 435.1005 to allow the use of less 
restrictive income methodologies before applying the FFP limits for the 
special income level group (section 1902(a)(10)(A)(ii)(V) of the Act). 
This would enable States to disregard additional income for individuals 
eligible under this group.
    Response: We understand the commenter's interest in not having the 
FFP limits apply to less restrictive income disregards for the special 
income level group. However, the Medicaid statute precludes our doing 
so.
    Most of the eligibility groups to which the FFP limits apply are 
subject to a limit that is defined in section 1903(f)(1)(B)(i) of the 
Act as 133\1/3\ percent of the State's AFDC payment standard. The 
special income level group, however, is subject to a different FFP 
limit which is defined in section 1903(f)(4)(C) of the Act as 300 
percent of the SSI Federal Benefit Rate. Further, this section of the 
statute includes specific requirements for how a person's income is to 
be counted in determining whether his or her income exceeds the 300 
percent FFP limit. Under the statute, the person's income is determined 
under section 1612 of the Act, but without regard to the exclusions and 
disregards listed in subsection 1612(b) of the Act.
    In other words, the person's gross income, without the application 
of any disregards normally used by the SSI program to determine 
eligibility, must be used to determine whether the person's income 
exceeds the 300 percent FFP limit. By contrast, the sections of the 
statute pertaining to the 133\1/3\ percent FFP limit do not include 
similar specific requirements for how income is to be counted in 
determining whether a person's income exceeds the FFP limit.
    Because section 1903(f)(4)(C) of the Act specifies how income is to 
be counted in determining whether a person's income exceeds the 300

[[Page 2319]]

percent FFP limit, the statute precludes our being able to permit, via 
regulation, the use of less restrictive income methodologies prior to 
application of that FFP limit. The statute itself would have to be 
changed to permit the use of less restrictive income methodologies in 
that manner.
    Comment: Three commenters suggested that we make the use of less 
restrictive methodologies mandatory for States rather than their use 
being optional as is now the case. One commenter further suggested that 
provision of home and community-based waiver services should also be 
made mandatory for States.
    Response: Use of less restrictive methodologies and provision of 
home and community-based waiver services is optional for States because 
the Medicaid statute gives States the choice of using such 
methodologies and providing such services. Given the language of the 
statute itself, we have no authority to require through regulations 
that States use less restrictive methodologies or provide home and 
community-based waiver services.

IV. Provisions of the Final Regulations

    This final rule incorporates in their entirety the provisions of 
the proposed rule.

V. Collection of Information Requirements

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 35).

VI. Regulatory Impact

A. Overall Impact

    We and the Office of Management and Budget have examined the 
impacts of this rule as required by Executive Order 12866 (September 
1993, Regulatory Planning and Review) and the Regulatory Flexibility 
Act (RFA) (September 19, 1980, Pub. L. 96-354). Executive Order 12866 
directs agencies to assess all costs and benefits of available 
regulatory alternatives and, if regulation is necessary, to select 
regulatory approaches that maximize net benefits (including potential 
economic, environmental, public health and safety effects, distributive 
impacts, and equity). A regulatory impact analysis (RIA) must be 
prepared for major rules with economically significant effects ($100 
million or more in any one year). This rule is considered to be a major 
rule with economically significant effects.
    The cost impact of this final rule is extremely difficult to 
project, given the broad discretion and flexibility that States will 
have in implementing its provisions. In the proposed rule we cited a 
projected cost to the Federal government of $860 million over 5 years 
for Medicaid and $100 million for Medicare. As those estimates were 
based on information from only two States, we solicited feedback on the 
potential financial impact this rule might have. We received no 
comments specifically related to cost issues in the responses to the 
proposed rule; nevertheless, we are providing additional detail 
concerning the original cost estimates. The table below summarizes our 
estimated 5-year costs to Medicaid and Medicare.

                    Estimated Cost of Removing FFP Limits Under Section 1902(r)(2) of the Act
                                         (Costs in millions of dollars)
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                                FFY 2001     FFY 2002     FFY 2003     FFY 2004     FFY 2005     FFYs 2001-2005
----------------------------------------------------------------------------------------------------------------
Federal Medicaid............           40          125          220          230          245                860
State Medicaid..............           30          100          175          185          190                680
Total Medicaid..............           70          225          395          415          435               1540
Medicare....................           10           15           25           25           25                100
----------------------------------------------------------------------------------------------------------------

    As stated in the proposed rule, these estimates were developed from 
cost information about two States (Utah and California) which expressed 
interest in using the regulation to expand their Medicaid programs. 
Estimated costs for these States were related to their aggregate 
Medicaid spending for the medically needy and projected to the national 
level assuming that states representing one-fourth of Medicaid 
expenditures would implement changes of a similar magnitude. The one-
fourth assumption was based on our belief that the potential costs of 
broader expansions would serve to limit State participation, at least 
during the 5-year budget window. The Medicare cost results from 
increased payments under the Medicare disproportionate share hospital 
(DSH) program and results from the anticipated increase in Medicaid 
enrollment accompanying the Medicaid costs shown above. Projected 
Medicare DSH cost per Medicaid beneficiary were applied to this 
increased enrollment to obtain the $100 million 5-year Medicare DSH 
cost.
    Arriving at the Medicaid and Medicare costs was difficult due to 
the fact that implementation of the option under this rule is entirely 
at the discretion of the State. Further, States that choose to exercise 
the option have great latitude in establishing the extent to which, and 
the eligibility groups for which, the option would be applied under 
their State Medicaid plans.
Benefits of the Proposed Rule Change
    We believe this change will benefit both States and individuals in 
a number of ways. For example, under normal eligibility rules, States 
are required to count many kinds of income. Some of these types of 
income are administratively burdensome to deal with, and often do not 
materially affect the outcome of the eligibility determination. Some 
examples are the value of food or shelter provided to an applicant 
(called in-kind support and maintenance), income belonging to a parent 
of a child, or a spouse who is not applying for benefits (called deemed 
income), and low amounts of income such as interest earned on savings 
accounts. This final rule will allow States to use income disregards to 
simplify the process of determining eligibility by not counting types 
of income that primarily impose an administrative burden.
Medically Needy Income Limits
    Under a medically needy program, States can choose to cover under 
Medicaid individuals with income that is too high to otherwise be 
eligible, but who, by subtracting incurred medical expenses from their 
income, could reduce their income to the State's medically needy income 
standard. This process is known as spending down excess income, or 
``spenddown''.
    However, in many States the medically needy income standard is very 
low; in at least 22 States, the

[[Page 2320]]

medically needy income standard is actually lower than the income 
standard for SSI benefits ($512 a month for an individual in 2000). In 
four States, the medically needy income standard is less than $200 a 
month. This creates a situation where individuals whose income is just 
slightly over the limit that would allow them to receive Medicaid as 
SSI recipients must spend down a certain amount of ``excess'' income to 
reach the medically needy income level.
    For example, a person with $512 a month in countable income can be 
eligible for SSI and receive Medicaid coverage in most States. A person 
with just $1 more cannot be eligible for SSI, and thus cannot receive 
Medicaid health coverage based on receiving SSI benefits. Depending on 
a particular State's medically needy income level, such an individual 
with $513 in countable monthly income may have to spend over $300 on 
medical care each month just to reach a medically needy income limit 
that is that far below the SSI level.
    Under the Medicaid statute, States cannot just increase their 
medically needy income levels to deal with this problem. However, under 
this final rule, a State could use section 1902(r)(2) of the Act to 
disregard additional amounts of income under its medically needy 
program, effectively reducing or even eliminating the large spenddown 
liability described in the example above.
Helping People Move from Institutions to the Community
    The medically needy spenddown problem described above can also have 
adverse effects for people in medical institutions who would like to 
receive care in community settings. Since Medicaid will pay for room 
and board expenses in a medical institution, the individual needs to 
retain relatively little income after application of the medically 
needy spenddown requirement. However, Medicaid will not pay for room or 
board expenses in a community setting. Few individuals will be able to 
move from a medical institution to the community if they are permitted 
to retain only $200-$400 after meeting Medicaid spenddown requirements.
    The practical effect of this is that many people in institutions 
who would like to move to the community, and who would normally be able 
to manage in a community setting, remain in the institution because 
they literally cannot leave. This final rule gives States opportunities 
to correct spenddown problems so that more people could leave 
institutional settings and live in the community.
Encouraging Work Effort
    While legislation enacted in the last few years has given States 
new options for providing Medicaid to individuals with disabilities who 
want to work, States may want to encourage work effort among 
individuals eligible under other groups such as the medically needy, or 
among individuals who may not readily fit into one of the new work 
incentives groups. One way to encourage work effort is to allow people 
to keep more of the income they earn without forcing them to either 
spend more for medical care under a medically needy spenddown, or risk 
losing Medicaid altogether.
    Under section 1902(r)(2) of the Act a State could do that by 
increasing the amount of earned income that is not counted in 
determining a person's eligibility. However, the current application of 
the FFP limits to the use of less restrictive income disregards 
effectively precludes States from offering that kind of encouragement 
for many eligibility groups. This final rule removes that restriction, 
giving States another way to encourage work effort.
Expanding Health Coverage
    In addition to the specific examples described above, section 
1902(r)(2) of the Act gives States the option of extending health 
coverage to more individuals by disregarding additional types and 
amounts of income, thereby allowing people who could not otherwise meet 
the program's eligibility requirements to become eligible. However, the 
current application of the FFP limits to the use of less restrictive 
income disregards greatly reduces the options States have to implement 
that kind of health coverage expansion. This final rule will give 
States the full flexibility provided by section 1902(r)(2) of the Act 
to expand their base of eligible individuals if they choose to do so.
Youth Age 19-20 Years
    This change provides State flexibility to offer health coverage to 
youth 19 and 20 years of age consistent with the health coverage 
options available under Federal law to children under 19 years of age 
as described in section 1902(l) of the Act. Such youth are often at a 
high risk of being uninsured because they are still in school or 
beginning employment. To clarify, youth 19 and 20 years of age are 
included in the group described in section 1902(a)(10)(A)(ii)(I) of the 
Act. Under current statutory and regulatory authority, States are able 
to effectively expand eligibility of all children under 19 years of age 
to whatever level they choose. However, the eligibility of youth 19 to 
20 years of age (as children) is limited to the group noted above, and 
that group is currently subject to the FFP cap. This final regulation 
allows States to expand eligibility for these older children to the 
same level that they use for children under 19 years of age.
Effect on Small Businesses and Small Rural Hospitals
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most hospitals and most other providers and suppliers are small 
entities, either by nonprofit status or by having revenues of $5 
million or less annually. Individuals and States are not included in 
the definition of a small entity.
    We expect that small entities will be indirectly impacted by this 
final rule. We expect that any indirect impact will be positive. States 
will decide individually whether to take advantage of the options that 
this final rule makes available. If a State exercises the options under 
this final rule, small entities such as small businesses, nonprofit 
organizations, and governmental agencies may receive additional 
Medicaid payments as a result of their service to the increased number 
of individuals who would be eligible under the program. We invited 
comments in this area and received none. Because the indirect impact on 
small entities depends on the extent and degree to which States 
exercise the options under this rule and the number of small entities 
that may be indirectly impacted, we are unable with any degree of 
certainty to estimate the fiscal impact on small entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have significant impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 50 beds.
    This final rule will have only indirect impact on small rural 
hospitals. We believe that any indirect impact will be positive. This 
final rule primarily affects States and each State will make its own 
decision regarding acceptance of the options presented in these 
regulations. As a result, small rural hospitals are in no way involved 
in the decision-making

[[Page 2321]]

process and would be impacted only to the extent that a State's use of 
less restrictive income methodologies could result in some increase in 
the number of individuals eligible for Medicaid. This in turn could 
result in a slight increase in utilization of rural hospital services 
which could increase the Medicaid payment received by these hospitals. 
We invited comments in this area and received none. Because the 
indirect impact on small rural hospitals depends on the extent and 
degree to which States exercise the options under this rule and the 
number of small rural hospitals that may be indirectly impacted, we are 
unable with any degree of certainty to estimate the fiscal impact on 
small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in an expenditure by State, local, or 
tribal governments, in the aggregate, or by the private sector, of $100 
million in any one year. This final rule will have no impact on the 
private sector. The rule imposes no requirements on State, local or 
tribal governments. Rather, it offers State governments additional 
flexibility in operating their Medicaid programs, but does not require 
that they make any changes in their programs.
Federalism
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that would impose substantial direct requirement costs on 
State and local governments, preempts State law, or otherwise has 
Federalism implications. This final rule imposes no requirement costs 
on governments, nor does it preempt State law or otherwise have 
Federalism implications.
    We have had discussions of this issue with a number of State 
governments since approximately 1990. Those discussions have taken 
place both with individual States and with groups of States, including 
HCFA's Medicaid Eligibility Technical Advisory Group and the National 
Association of State Medicaid Directors Executive Committee. Based on 
the many discussions we have had, and comments we received as discussed 
elsewhere in this final rule, we believe States are overwhelmingly in 
favor of the change.

B. Anticipated Effects

1. Effects on State Governments
    This final rule gives States greater flexibility in designing and 
operating their Medicaid programs.
2. Effects on Providers
    Providers will only be indirectly affected by this rule and we 
expect any indirect impact will be positive. Each State will decide 
whether to take advantage of the options the regulations make 
available. To the extent that States decide to exercise their options 
under this final rule, we expect the ultimate indirect impact on 
providers to be positive due to the added Medicaid revenues that 
providers may garner.
3. Effects on the Medicare and Medicaid Programs
    This rule may increase Medicare costs by about $100 million over 5 
years. Since the rule may increase the number of individuals eligible 
for Medicaid who receive inpatient hospital services, it may affect the 
calculation of hospitals' disproportionate share hospital (DSH) 
calculations under the Medicare program. We estimate that Medicare DSH 
payments could increase by $100 million over 5 years due to changes in 
this rule.
    Under Medicaid, it is projected that the Federal cost of this rule 
could be as much as $860 million over 5 years. However, because actual 
implementation of the provisions of the rule is strictly at the option 
of each State, actual Federal program costs would depend on whether, 
and to what degree, States choose to take advantage of the flexibility 
provided by this final rule.

C. Alternatives Considered

    There were few alternatives to the proposed rule to consider. One 
alternative was to maintain the requirement that the FFP limits apply 
prior to use of less restrictive income methodologies under 
Sec. 435.601, but allow additional disregards at a somewhat higher 
level than is possible under the current regulations. However, this 
would not provide States the level of flexibility to operate their 
Medicaid programs that is provided under the proposed rule, and thus 
would be of only limited value. We rejected this alternative because it 
would not give States what they need to effectively operate their 
Medicaid programs.
    We also considered pursuing a legislative option that would have 
changed the Medicaid statute itself to clarify that the FFP limits at 
section 1903(f) of the Act should apply after, rather than before, the 
use of any less restrictive income methodologies under section 
1902(r)(2) of the Act. However, as explained previously the current 
policy concerning application of the FFP limits to less restrictive 
income methodologies does not reflect a clear statutory requirement, 
but rather is an administrative interpretation of the statute. Since 
the statute as written will support this change in policy, we believed 
the issue should be addressed via a change in the regulations rather 
than a change in the statute. Also, we believe that this rule is the 
most efficient and expedient way of accomplishing the desired change.

D. Conclusion

    We expect this rule to benefit State Medicaid programs and Medicaid 
beneficiaries by giving States additional flexibility in designing and 
operating their programs. In turn, this would allow States to make 
individuals eligible for Medicaid who otherwise could not be eligible 
under the current regulations.
    Because this rule is considered major rule that is economically 
significant, we have prepared a regulatory impact statement. We believe 
that this rule will have an estimated cost of $960 million dollars over 
5 years based on best available data. In addition, we certify that this 
rule will not have a significant economic impact on a substantial 
number of small entities or a significant impact on the operations of a 
substantial number of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 435

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

    For the reasons set forth in the preamble, 42 CFR part 435 is 
amended as set forth below:

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

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

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

    2. Section 435.1007 is amended by revising paragraphs (b) and (e) 
and adding paragraph (f) to read as follows:

[[Page 2322]]

Sec. 435.1007  Categorically needy, medically needy, and qualified 
Medicare beneficiaries.

* * * * *
    (b) Except as provided in paragraphs (c) and (d) of this section, 
FFP is not available in State expenditures for individuals (including 
the medically needy) whose annual income after deductions specified in 
Sec. 435.831(a) and (c) exceeds the following amounts, rounded to the 
next higher multiple of $100.
* * * * *
    (e) FFP is not available in expenditures for services provided to 
categorically needy and medically needy recipients subject to the FFP 
limits if their annual income, after the cash assistance income 
deductions and any income disregards in the State plan authorized under 
section 1902(r)(2) of the Act are applied, exceeds the 133\1/3\ percent 
limitation described under paragraphs (b), (c), and (d) of this 
section.
    (f) A State may use the less restrictive income methodologies 
included under its State plan as authorized under Sec. 435.601 in 
determining whether a family's income exceeds the limitation described 
in paragraph (b) of this section.

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

    Dated: January 4, 2001.
Robert A. Berenson, M.D.,
Acting Deputy Administrator, Health Care Financing Administration.
    Approved: January 4, 2001.
Donna E. Shalala,
Secretary.
[FR Doc. 01-666 Filed 1-18-01; 11:49 am]
BILLING CODE 4120-01-P