[Federal Register Volume 66, Number 161 (Monday, August 20, 2001)]
[Proposed Rules]
[Pages 43614-43677]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20715]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 400, 430, et al.



Medicaid Program; Medicaid Managed Care; Proposed Rule

  Federal Register / Vol. 66, No. 161 / Monday, August 20, 2001 / 
Proposed Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 400, 430, 431, 434, 435, 438, 440, and 447

[CMS-2104-P]

RIN 0938-AK96


Medicaid Program; Medicaid Managed Care

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would amend the Medicaid regulations 
published in the Federal Register on January 19, 2001 (66 FR 6228) 
setting forth policies to implement provisions of the Balanced Budget 
Act of 1997 (BBA) that--allow the States greater flexibility by 
permitting them to amend their State plan to require certain categories 
of Medicaid beneficiaries to enroll in managed care entities without 
obtaining waivers if beneficiary choice is provided; establish new 
beneficiary protections in areas such as quality assurance, grievance 
rights, and coverage of emergency services; and eliminate certain 
requirements viewed by State agencies as impediments to the growth of 
managed care programs, such as the enrollment composition requirement, 
the right to disenroll without cause at any time, and the prohibition 
against enrollee cost-sharing. In addition, this proposed rule would 
expand on existing regulatory beneficiary protections provided to 
enrollees of prepaid health plans (PHPs) by requiring certain PHPs that 
provide services on an inpatient basis to meet specified BBA 
requirements that would not otherwise apply to these entities.

DATES: We will consider comments if we receive them at the appropriate 
address, as provided below, no later than 4 p.m. on October 19, 2001.

ADDRESSES: Mail written comments (one original and three copies) to the 
following address only: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-2104-P, P.O. 
Box 8016, Baltimore, MD 21244-8016.
    To ensure that mailed comments are received in time for us to 
consider them, please allow for possible delays in delivering them.
    If you prefer, you may deliver (by hand or courier) your written 
comments (one original and three copies) to one of the following 
addresses: Room 443-G, Hubert H. Humphrey Building, 200 Independence 
Avenue, SW., Washington, DC 20201, or Room C5-16-03, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and could be considered late.
    Because of staff and resource limitations, we cannot accept 
comments by facsimile (FAX) transmission. In commenting, please refer 
to file code CMS-2104-P. For information on viewing public comments see 
the beginning of the SUPPLEMENTARY INFORMATION section.
    If you have comments on the information collection requirements, 
please mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Information 
Services, DHES, SSG, Attn: Julie Brown, CMS-2001-F, Room N2-14-26, 7500 
Security Boulevard, Baltimore, MD 21244-1850;

and

Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Brenda Aguilar, Desk Officer.

FOR FURTHER INFORMATION CONTACT: Part 438, Subparts A and B--Bruce 
Johnson: (410) 786-0615.

Subpart C--Tim Roe: (410) 786-2006
Subpart D--Ann Page: (410) 786-0083
Subpart F--Tim Roe: (410) 786-2006
Subpart H--Tim Roe: (410) 786-2006
Subpart I--Tim Roe: (410) 786-2006
Subpart J--Bruce Johnson (410) 786-0615

    For other amendments--Dierdre Duzor (410) 786-4626

SUPPLEMENTARY INFORMATION:
    Inspection of Public Comments: Comments received timely will be 
available for public inspection as they are received, generally 
beginning approximately 3 weeks after publication of a document, at 
7500 Security Blvd, Baltimore, Maryland 21244, Monday through Friday of 
each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view 
the public comments, phone: (410) 786-7195.
    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 
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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. The Website address is: http://www.access.gpo.gov/nara/index.html.

I. Background

A. General

    In 1965, amendments to the Social Security Act (the Act) 
established the Medicaid program as a joint Federal and State program 
for providing financial assistance to individuals with low incomes to 
enable them to receive medical care. Under the Medicaid program, each 
State establishes its own eligibility standards, benefits packages, 
payment rates and program administration in accordance with certain 
Federal statutory and regulatory requirements. The provisions of each 
State's Medicaid program are described in the State's Medicaid ``State 
plan'' that we must approve. In addition to approving State plans and 
monitoring States for compliance with Federal Medicaid laws, the 
Federal role also includes providing matching funds to State agencies 
to pay for a portion of the costs of providing health care to Medicaid 
beneficiaries. Medicaid beneficiaries typically include low-income 
children and their families, pregnant women, individuals age 65 and 
older, and individuals with disabilities. (Throughout this preamble, we 
use the term ``beneficiaries'' to mean ``individuals eligible for and 
receiving Medicaid benefits.'' The term ``recipients'' in the CFR text 
has the same meaning as the term ``beneficiary.'')
    When the Medicaid program was created, coverage typically was 
provided through reimbursements by the State agency to health care 
providers who submitted claims for payment after they provided health 
care services to Medicaid beneficiaries. This reimbursement arrangement 
is referred to as ``fee-for-service'' payment. Before 1982, 99 percent 
of Medicaid beneficiaries received Medicaid coverage through fee-for-
service

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arrangements. Since 1982, State agencies increasingly have provided 
Medicaid coverage through contracts with managed care organizations 
(MCOs), such as health maintenance organizations (HMOs). Through these 
contracts an MCO is paid a fixed, prospective, monthly payment for each 
beneficiary enrolled with the entity for health coverage. This payment 
approach is referred to as ``capitation.'' Beneficiaries enrolled in 
capitated MCOs are required to receive health care services provided 
under the MCO's contract, through the MCO that receives the capitation 
payment. The Omnibus Budget Reconciliation Act (OBRA) of 1981 (Pub. L. 
97-35 enacted on August 13, 1981) allowed State agencies to mandate 
that Medicaid beneficiaries enroll in MCOs, which increased the use of 
MCOs. In most States, mandatory enrollment takes place for at least 
certain categories of beneficiaries. To achieve this mandatory 
enrollment, before the enactment of the Balanced Budget Act (BBA) of 
1997 (Pub. L. 105-33, enacted on August 5, 1997), States were required 
to obtain a waiver of a Medicaid statutory requirement for beneficiary 
``freedom of choice'' of providers. (State programs that offered 
beneficiaries voluntary enrollment in MCOs do not require these 
waivers.) As a result, in 1997, just before the passage of the BBA, 
almost 8.5 million Medicaid beneficiaries, or 43 percent of all 
Medicaid beneficiaries, were enrolled in MCOs for a comprehensive array 
of Medicaid services. Some of these beneficiaries and additional 
Medicaid beneficiaries were enrolled in other organizations that 
received capitated payment for a limited array of services, such as 
behavioral health or dental services. These organizations that receive 
capitation payment for a limited array of services are referred to as 
``Prepaid Health Plans (PHP).''
    While the Act was further amended in the 1980's and in 1990 to 
address certain aspects of Medicaid managed care, the BBA represents 
the first comprehensive revision to Federal statutes governing Medicaid 
managed care in over a decade. In general, Chapter One (subtitle H) of 
the BBA significantly renovated the Medicaid managed care program by 
modifying Federal statute to: (1) Allow States to mandate the 
enrollment of certain Medicaid beneficiaries into MCOs without having 
to first seek a waiver of Federal law; (2) eliminate requirements on 
the composition of enrollment in MCOs that had not been proven to be 
effective; (3) apply consumer protections that were receiving 
widespread acceptance in the commercial and Medicare marketplaces to 
Medicaid beneficiaries; for example, consumer information standards and 
standards for access to services; and (4) apply the advances and 
developments in health care quality improvement that are in widespread 
use in the private sector to State Medicaid managed care programs. 
Specifically, sections 4701 through 4710 of the BBA provisions: (1) 
Reduce requirements for State agencies to obtain waivers to implement 
certain managed care programs; (2) eliminate enrollment composition 
requirements for managed care contracts; (3) increase beneficiary 
protections for enrollees in Medicaid managed care entities; (4) 
improve quality assurance; (5) establish solvency standards; (6) 
protect against fraud and abuse; (7) permit a period of guaranteed 
eligibility for Medicaid beneficiaries; and (8) improve certain 
administrative features of State managed care programs.

B. Statutory Basis

    Section 4701 of the BBA enacted section 1932 of the Act, changes 
terminology in title XIX of the Act (most significantly, the BBA uses 
the term ``managed care organization'' to refer to entities previously 
labeled (``health maintenance organizations''), and amends section 
1903(m) to require that MCOs and MCO contracts comply with applicable 
requirements in newly added section 1932. Among other things, section 
1932 permits States to require most groups of Medicaid beneficiaries to 
enroll in managed care arrangements without waiver authority granted 
under section 1915(b) or 1115(a) of the Act. Under the statute before 
the BBA, a State agency was required to obtain Federal authority to 
waive beneficiary free choice of providers in order to restrict their 
coverage to managed care arrangements. Section 1932 also defines the 
term ``managed care entity'' (MCE) to include MCOs and primary care 
case managers (PCCMs); establishes new requirements for managed care 
enrollment and choice of coverage; and requires MCEs and State agencies 
to provide specified information to enrollees and potential enrollees.
    Section 4702 amended section 1905 of the Act to provide for States 
to contract with primary care case managers without waiver authority. 
Instead, primary care case management services may be made available 
under a State's Medicaid plan as an optional service.
    Section 4703 eliminated a former statutory requirement that no more 
than 75 percent of the enrollees in an MCO be Medicaid or Medicare 
beneficiaries.
    Section 4704 created section 1932(b) of the Act to add increased 
protections for those enrolled in managed care arrangements. These 
include, the application of a ``prudent layperson's'' standard to 
determine whether emergency room use by a beneficiary was appropriate; 
criteria for showing adequate capacity and services; grievance 
procedures; and protections for enrollees against liability for payment 
of an organization's or provider's debts in the case of insolvency.
    Section 4705 created section 1932(c) of the Act, which requires 
States to develop and implement quality assessment and improvement 
strategies for their managed care arrangements and to provide for 
external, independent review of managed care activities.
    Section 4706 provided that, with limited exceptions, an MCO must 
meet the same solvency standards set by States for private HMOs, or 
otherwise be licensed or certified by the State as a risk-bearing 
entity.
    Section 4707 enacted section 1932(d) of the Act to add protections 
against fraud and abuse, such as restrictions on marketing and 
sanctions for noncompliance.
    Section 4708 added a number of provisions to the Act to improve the 
administration of managed care arrangements. These include, provisions 
raising the threshold value of managed care contracts that require the 
Secretary's prior approval, and permitting the same copayments in MCOs 
as apply to fee-for-service arrangements.
    Section 4709 allows States the option to provide 6 months of 
guaranteed eligibility for all individuals enrolled in an MCE.
    Section 4710 specifies the effective dates for all the provisions 
identified in sections 4701 through 4709, and specifies that these 
provisions do not apply to the extent they are inconsistent with the 
terms and conditions of waivers under section 1915(b) or section 1115 
of the Act.

C. Federal Register Publications

    On September 29, 1998, we published in the Federal Register (63 FR 
52022) a proposed rule, setting forth proposed regulations to implement 
the above provisions of the BBA. In that 1998 proposed rule, we also 
proposed to strengthen regulatory requirements of PHPs by incorporating 
regulatory requirements that would otherwise apply only to MCOs. We 
received over 300 comments on the 1998 proposed rule. The comments were 
extensive and generally addressed all sections of that

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proposed rule. On January 19, 2001, we published in the Federal 
Register (66 FR 6228) a final rule with comment period that summarized, 
and responded to the public comments we received on the proposed rule. 
It also contained additional provisions not included in the 1998 
proposed rule. Among these were revisions eliminating the existing 
``upper payment limit'' (UPL) on risk capitation payments in 
Sec. 447.361, and replacing this limit with provisions in Sec. 438.6(c) 
setting forth requirements designed to ensure that rates were 
actuarially sound. We invited comments only on these last two changes.
    In a Federal Register notice (66 FR 11546) published on February 
26, 2001, we announced a 60-day delay in the effective date of the 
January 19, 2001 final rule with comment period. This 60-day delay 
postponed the effective date of the rule until June 18, 2001. This 
delay in effective date was necessary to give Department officials the 
opportunity for further review and consideration of the new 
regulations. During that review, we heard from key stakeholders in the 
Medicaid managed care program, including States, advocates for 
beneficiaries, and provider organizations. These parties expressed 
strong (sometimes opposing) views about the regulation. In particular, 
concerns were expressed about the revisions based on public comments we 
received on the proposed rule. Other commenters raised concerns about 
how we chose to implement those provisions in the final rule without 
further opportunity for public comment. As a result of these comments, 
on June 18, 2001, we published a final rule in the Federal Register 
that delayed the effective date of the January 19, 2001 final rule with 
comment period an additional 60 days, from June 18, 2001 until August 
17, 2001, (66 FR 32776) for further review and consideration on the 
most appropriate way to address the concerns expressed by key 
stakeholders. In response to these concerns, we have prepared and are 
requesting public comment on the proposed rule that is set forth in 
this notice of proposed rulemaking. In addition, in order to give us 
the time in the coming months to consider the public comments and take 
final action on this rulemaking, we have also published in the August 
17, 2001 Federal Register an interim final rule with comment period 
that further delays until August 16, 2002, the effective date of the 
January 2001 final rule with comment period.
    We are publishing this new proposed rule to address some of the 
concerns that were expressed to the Department during our review, as 
well as to allow additional opportunity for public comment. In 
developing this proposed rule, we have been guided by several 
considerations. First, we gave serious attention to all the concerns 
that have been communicated to us to date. We have tried to discern 
when a difference of opinion represented different goals or different 
methods of achieving the same goals. We believe that all commenters 
have expressed the same goal, namely: strong, viable, State Medicaid 
managed care programs that deliver high quality health care to Medicaid 
beneficiaries. We have attempted to craft a regulation that will help 
States to achieve this goal.
    Second, we have drafted the provisions of this rule in full 
recognition of the statutorily-designed structure of the Medicaid 
program as a Federal-State partnership. States are assigned the 
responsibility of designing their State programs, and typically do so 
addressing local, as well as State needs. We have drafted this 
regulation to recognize the responsibilities of the States and the need 
to employ different approaches to achieving the same goal within their 
varying State marketplaces and health care delivery systems.
    Third, we appreciate that new advances and findings in health care, 
health care quality assessment and improvement, and health services 
research unfold on an almost daily basis. In many instances, States 
have been at the forefront of implementing these new developments and 
innovations. We have sought to standardize, through regulation, those 
practices that have been found to be necessary to the delivery of high 
quality health care. We simultaneously have sought to continue to allow 
States, in consultation with their State and local partners and 
customers (beneficiaries), to determine the best approach to 
implementing their managed care program when there is an absence of 
clear evidence about the superiority of a given approach.
    Overall, we recognize the great diversity and sometimes ``special 
needs'' of Medicaid beneficiaries. While the greatest numbers (54 
percent) of Medicaid beneficiaries are children, 11 percent are age 65 
or older. Medicaid also serves as a significant source of health care 
for individuals with disabilities and conditions that place them at 
risk of developing disabilities. In 1997, more than 6 million children 
and adults were eligible for Medicaid on the basis of a physical, 
mental, or cognitive disability. The Medicaid program insures more than 
half of all people with Acquired Immune Deficiency Syndrome (AIDS) in 
this country and up to 90 percent of children with AIDS. Medicaid also 
is a significant source of health care coverage for individuals with 
serious and persistent mental illness, and children in foster care. Our 
report to the Congress, ``Safeguards for Individuals with Special 
Health Care Needs Enrolled in Medicaid Managed Care'' (November 6, 
2000), summarized existing evidence on effective practices in caring 
for individuals with special health care needs. That report provides a 
basis for some of the provisions in this proposed regulation.
    The regulations in this proposed rule would mostly be set forth as 
new provisions in part 438 created in the January 19, 2001 final rule. 
All new managed care regulations created under the authority of the 
BBA, other sections of existing Medicaid regulations pertaining to 
managed care, and appropriate cross references will appear in this new 
part. By creating this new part, we aim to help users of the 
regulations to better understand the overall regulatory framework for 
managed care. More detailed discussions of the content of each of the 
subparts of this proposed rule are found at the beginning of each 
subpart.

D. Overview of Medicaid Managed Care

    Medicaid managed care programs have been in existence almost since 
the inception of the Medicaid program in 1965. In New York State, 
Medicaid beneficiaries were enrolled in the Health Insurance Plan of 
Greater New York beginning in 1967. The State of Washington began 
contracting with Group Health of Puget Sound in 1970, and, by 1972, 
various regional operations of Kaiser-Permanente served Medicaid 
beneficiaries in three different States. Initially, there were no 
statutory or regulatory provisions specifically addressing the use of 
managed care by State agencies.
    As a result of the increasing use of managed care in Medicaid, 
Medicare and the private sector, statutory provisions and regulations 
have since been adopted to specifically address Medicaid managed care. 
In 1976, the Health Maintenance Organization Act put forth the first 
specific Federal requirements for Medicaid contracts with HMOs or 
comparable organizations, by essentially requiring, with some 
exceptions, that contracts with entities to provide ``comprehensive'' 
specified services, be entered into only with Federally qualified HMOs. 
By 1981, little more than 1 percent of Medicaid beneficiaries were 
enrolled in managed care. Further legislative and regulatory changes 
made in 1981 and 1982 made possible more

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widespread use of managed care by State agencies but were also 
accompanied by increased requirements in some areas (for example, OBRA 
1981 required that Medicaid enrollees be allowed to voluntarily 
disenroll without cause from HMOs. This was subsequently amended to 
permit a 6-month lock-in for individuals enrolled in Federally 
qualified HMOs.) Until the BBA, modification of the laws and 
regulations governing Medicaid managed care after OBRA 1981 and the Tax 
Equity and Fiscal Responsibility Act of 1982 (TEFRA) (Pub. L. 97-248, 
enacted on September 3, 1982) has occurred in a piecemeal manner. The 
BBA represents the first major revision of the statutes governing 
Medicaid managed care in over a decade.
    The period from 1981 to the present has seen significant changes in 
Medicaid managed care programs. While only approximately 250,000 
Medicaid beneficiaries were enrolled in managed care in 1981, by 1997 
this number had increased to over 15 million. As of June 2000, 
approximately 56 percent of the entire Medicaid population received at 
least some services through an MCO, PHP, or a primary care case 
management arrangement. In the last decade, a number of studies and 
reports have documented that State agencies need both flexibility and 
assistance to implement new approaches and tools to effectively 
administer their contracts with MCOs. A 1997 General Accounting Office 
Report entitled, ``Medicaid Managed Care--Challenge of Holding Plans 
Accountable Requires Greater State Effort,'' indicated the need for 
priority attention to beneficiary information and education, and access 
to care and quality monitoring.
    As noted above, Medicaid managed care contracts were originally 
entered into by some State agencies without any specific statutory 
provision for these arrangements. When the Congress acted to regulate 
managed care arrangements, it limited the applicability of these 
statutory requirements to contracts that were comprehensive in the 
services they covered.
    Specifically, the statutory requirements enacted by the Congress in 
section 1903(m) of the Act have always applied to contracts for 
inpatient services plus any one of the other services specified in 
section 1903(m)(2)(A) of the Act, or for any three of the non-inpatient 
services specified in section 1903(m)(2)(A) of the Act. Managed care 
contracts that were less than comprehensive remained exempt from all 
statutory managed care requirements. In recognition of this fact, we 
have in the past exercised our authority under section 1902(a)(4) of 
the Act to specify ``methods of administration'' that were ``necessary 
for proper and efficient administration'' to impose regulatory 
requirements on entities that were exempt from the statutory 
requirements in section 1903(m), either because they provided less than 
comprehensive services or because they were specifically exempted by 
the Congress from complying with section 1903(m) requirements. These 
entities were called ``prepaid health plans,'' or ``PHPs.''
    The regulatory requirements we applied to PHPs were not as 
stringent in many areas as those under section 1903(m). For example, 
while PHPs were subject to an enrollment composition requirement like 
comprehensive HMO contractors, the PHP enrollment composition 
requirement could be waived by the State for ``good cause.'' PHPs also 
were not subject to the section 1903(m) requirement that beneficiaries 
have the right to disenroll without cause at any time, and 
beneficiaries enrolled in PHPs thus could have their ability to 
disenroll restricted under section 1915(b) waiver authority, (where the 
right to disenroll required under section 1903(m) could not be waived).
    In part, because of the less stringent requirements that applied to 
PHPs, there has been a substantial growth in PHP enrollment. Some of 
these PHPs are single service managed care plans (for example, 
behavioral health plans) and their enrollees are also enrolled in other 
managed care plans for their routine primary and acute care. Other 
PHPs, such as the Health Insurance Plan (HIP) of New York, provide a 
full range of services, but were exempted by the Congress from the 
requirements in section 1903(m) of the Act. As discussed more fully 
below, in this proposed rule, we are proposing to require that certain 
PHPs meet most of the requirements that will apply to MCOs.
    Concurrent with the increasing size of, and need for, stronger 
Medicaid managed care programs, over the last decade we have been 
developing improved tools, techniques, and strategies that State 
agencies can use to strengthen their managed care programs. In 1991, we 
began the Quality Assurance Reform Initiative (QARI) to provide 
technical assistance tools and assistance to State agencies. In 1993, 
we produced a QARI guide entitled, ``A Health Care Quality Improvement 
System for Medicaid Managed Care--A Guide for States,'' which contained 
four areas of guidance for States: (1) a framework for quality 
improvement systems for Medicaid managed care programs; (2) guidelines 
for internal quality assurance programs of Medicaid HMOs and PHPs; (3) 
guidelines for clinical and health services focus areas and use of 
quality indicators and clinical practice guidelines; and (4) guidelines 
for the conduct of external quality reviews conducted under section 
1902(a)(30)(C) of the Act. In 1995, we worked collaboratively with the 
National Committee for Quality Assurance (NCQA) and the American Public 
Human Services Association to produce a Medicaid version of the Health 
Plan Employer Data and Information Set (HEDIS). HEDIS is a standardized 
quality performance measurement system used by private sector 
purchasers of managed care services, which we modified for use by State 
agencies. We contracted with NCQA to develop ``Health Care Quality 
Improvement Studies in Managed Care Settings: Design and Assessment--A 
Guide for State Medicaid Agencies''.
    In 1996, we undertook the Quality Improvement System for Managed 
Care (QISMC) initiative to accomplish several goals: (1) To update the 
1993 QARI guidelines; (2) to develop coordinated Medicare and Medicaid 
quality standards that would reduce duplicative or conflicting efforts; 
(3) to make the most efficient and effective use of recent developments 
in the art and science of quality measurement, while allowing 
sufficient flexibility to incorporate developments in this rapidly 
evolving discipline; and (4) to assist the Federal government and State 
agencies in becoming more effective ``value-based'' purchasers of 
health care for vulnerable populations. In developing QISMC, we worked 
with representatives from, and with tools developed by, health plans, 
State agencies, advocacy organizations, and experts in quality 
measurement and improvement such as the NCQA, the Foundation for 
Accountability (FACCT) and the Joint Commission on the Accreditation of 
Healthcare Organizations. With the assistance of the experts and their 
products, we identified the approaches, tools, and techniques that we 
believed would most effectively measure and improve health care quality 
in managed care. The quality assurance provisions of this regulation 
espouse the same philosophy and goals for performance improvement as 
are reflected in QISMC, but have been modified based on recent 
developments in Medicaid, managed care and quality assessment and 
improvement. For example, QISMC was written before our report to the 
Congress addressing

[[Page 43618]]

individuals with special health care needs.
    In 1997, the Agency for Health Care Policy and Research (AHCPR) 
(now, the Agency for Healthcare Research and Quality) produced a set of 
consumer survey instruments and measurement tools under the auspices of 
the Consumer Assessment of Health Plan Study (CAHPS). The CAHPS 
instruments include measures and tools specifically designed for use by 
State agencies. Also in 1997, the George Washington University Center 
for Health Policy Research published a compendium of provisions of 
State contracts with Medicaid managed care organizations. This 
nationwide study of Medicaid managed care contracts has provided 
valuable information that can be used by all State agencies in the 
design and management of their managed care contracts.
    More recently, in 1999, we produced a technical assistance manual 
for State agencies entitled, ``Writing and Designing Print Materials 
for Beneficiaries: A Guide for State Medicaid Agencies.'' This 
technical assistance tool for States was in direct response to the BBA 
statutory provisions calling for dissemination of information to 
Medicaid beneficiaries. Similarly, we currently have two additional 
technical assistance projects underway. A contract with FACCT will 
produce in the Fall of 2001 a manual describing valid and reliable 
tools that State agencies can use to identify children and adults with 
special health care needs. A contract with the Center for Health 
Program Development and Management at the University of Maryland 
Baltimore County will develop a guidance manual for States that will 
describe various approaches to using health status-based risk 
adjustment in making payments to MCOs.
    These and other tools we have in planning stages can be applied to 
the efforts of State agencies to become even more effective in 
purchasing managed care services for Medicaid beneficiaries. This 
proposed rule provides an opportunity to clarify for MCOs, 
beneficiaries, and State agencies, how these advances in the management 
and oversight of health care can be applied to Medicaid managed care 
programs.
    Through these regulations, we promote uniform national application 
of knowledge and best practices learned from these initiatives. While 
we promote uniform best practice, the Medicaid statute has always given 
State agencies latitude to design their Medicaid programs, as long as 
they meet certain minimum Federal standards. Current Federal 
requirements in the Medicaid managed care area are imposed either as 
conditions for Federal matching funds to support contracts with MCOs, 
as conditions for receiving a waiver of freedom of choice under section 
1915(b) of the Act, or as conditions for falling within the section 
1932 exception to the freedom of choice requirement in section 
1902(a)(23) of the Act. In the first case, failure to comply with 
section 1932 requirements could result in a disallowance of Federal 
financial participation (FFP) in contract payments. In the latter two 
cases, if the State fails to meet conditions for the section 1932 
exception to the freedom-of-choice requirement in section 1902(a)(23), 
or has its section 1915(b) waiver nonrenewed or terminated for a 
failure to meet waiver conditions, the State agency would be out of 
compliance with the freedom of choice requirement in section 
1902(a)(23), and the State agency would be subject to a compliance 
enforcement action under section 1904 of the Act.
    Because the Medicaid program is a State-administered program 
subject to Federal guidance and rules, Medicaid regulations do not 
generally adopt the same approach to regulating managed care 
organizations as Federal Medicare regulations. Instead, Medicaid rules 
generally regulate State agencies and place requirements on their 
contracts with managed care organizations or managed care programs.
    This proposed rule adopts this direction in implementing the new 
requirements in the BBA, and, as discussed below, extends many of these 
requirements to certain PHPs.
    Section 4710(c) provided for a time-limited exemption from the 
requirements in sections 4701 through 4710 for approved waiver programs 
or demonstration projects under the authority of sections 1115 or 
1915(b) of the Act. Specifically, the BBA States section 4710(c) 
provided that none of the provisions contained in sections 4701 through 
4710 would affect the terms and conditions of any approved section 
1915(b) waiver or demonstration project under section 1115, as the 
waiver or demonstration project was in effect on the date of the 
enactment of the BBA (that is, August 5, 1997.) We interpreted this 
``grandfather provision'' to apply only for the period for which the 
waiver or demonstration project was approved as of August 5, 1997. 
Thus, at the expiration of any 2-year waiver period under section 
1915(b), or at the end of the period for which a demonstration project 
was approved under section 1115, the grandfather provision in section 
4710(c) would no longer apply.
    In general, during the period approved as of August 5, 1997, any 
provision of a State's approved section 1115 or section 1915(b) waiver 
program that was specifically addressed in the State's waiver proposal, 
statutory waivers, special terms and conditions, operational protocol, 
or other official State policy or procedures approved by us, was not 
affected by the BBA provisions, even if it differed from the BBA 
managed care requirements. As long as the BBA provisions were addressed 
in the State's approved waiver materials, no determination needed to be 
made as to whether the State's policy or procedures meet or exceeded 
the BBA requirements. If the BBA provisions were not addressed, the 
State was required to meet the BBA requirements, except as specified 
below for newly submitted or amended waivers.
    As noted above, under our interpretation, the exemption from the 
BBA requirements applied to section 1915(b) waiver programs only until 
the date that the waiver authority approved or in effect as of August 
5, 1997 expired, which in all cases occurred no later than 1999. As of 
the date of the two year section 1915(b) waiver period approved on 
August 5, 1997 expired, the State was required to comply with all BBA 
requirements that were in effect.
    In the case of section 1115 demonstrations, while the 
``grandfather'' provision in 4710(c) only applies until the end of the 
period for which the demonstration project was approved as of August 5, 
1997, if the demonstration project has been extended under the 
provisions in section 1115(e) of the Act, existing terms and conditions 
inconsistent with BBA requirements are extended for three years, 
nullifying the effect of the ``expiration'' of the grandfather 
provision in section 4710(c). Therefore, any exemptions from the BBA 
requirements to which these programs were entitled under the 
``grandfather provision'' may continue during the period of the 
extended waiver authority.
    The Medicare, Medicaid, and State Child Health Insurance Program 
Benefits Improvement and Protection Act of 2000 (BIPA), enacted on 
December 21, 2000 (Pub. L. 106-554) provided for additional extensions 
of section 1115 health care reform demonstrations, but did not include 
language extending the same terms and conditions through this period. 
Thus, we conclude that provisions of the BBA would apply to the 
demonstrations in these extension periods under BIPA,

[[Page 43619]]

unless the Secretary uses his discretionary authority to waive the 
requirements.
    For newly submitted or amended section 1915(b) or section 1115 
waivers, the Secretary of DHHS retains the discretionary authority to 
waive the BBA managed care provisions. Generally, waivers are granted 
that allow States some flexibility in operating their Medicaid 
programs, while promoting the proper and efficient administration of a 
State's plan. In particular, for the BBA provisions related to 
increased beneficiary protections and quality assurance standards, we 
anticipate that the BBA provisions would apply unless a State can 
demonstrate that a waiver program beneficiary protection or quality 
standard would equal or exceed the BBA requirement.

II. Provisions of the Proposed Rule

    This proposed rule would amend the Medicaid regulations setting 
forth policies to implement provisions of the Balanced Budget Act of 
1997 (BBA) that (1) allow the States greater flexibility by permitting 
them to amend their State plan to require certain categories of 
Medicaid beneficiaries to enroll in managed care entities without 
obtaining waivers if beneficiary choice is provided; (2) establish new 
beneficiary protections in areas such as quality assurance, grievance 
rights, and coverage of emergency services; and (3) eliminate certain 
requirements viewed by State agencies as impediments to the growth of 
managed care programs, such as the enrollment composition requirement, 
the right to disenroll without cause at any time, and the prohibition 
against enrollee cost-sharing. In addition, this proposed rule would 
expand on existing regulatory beneficiary protections provided to 
enrollees of prepaid health plans (PHPs) by requiring certain PHPs that 
provide services on an inpatient basis to meet specified BBA 
requirements that would not otherwise apply to these entities.
    Under our proposal, virtually all managed care regulations would be 
set forth in 42 CFR part 438. Some existing sections from part 434, 
would be moved to this part. We propose this restructuring to assist 
the reader in easily accessing all managed care regulations. The 
proposed new organizational format for part 438 is as follows:

Subpart A--General Provisions
Subpart B--State Responsibilities
Subpart C--Enrollee Rights and Protections
Subpart D--Quality Assessment and Performance Improvement
Subpart E--[Reserved]
Subpart F--Grievance System
Subpart G [Reserved]
Subpart H--Certifications and Program Integrity
Subpart I--Sanctions
Subpart J--Conditions for Federal Financial Participation

A. General Provisions (Subpart A)

1. Basis and Scope (Sec. 438.1)
    Section 438.1 of the regulations sets forth the basis and scope of 
part 438, including the fact that regulations in this part implement 
sections 1902(a)(4), 1903(m), 1905(t), and 1932 of the Act. Section 
438.1 of the regulations also briefly describes these statutory 
provisions, and sets forth the scope of the applicabilty of these 
regulations.
2. Definitions (Sec. 438.2)
    Section 438.2 includes definitions of terms that apply for the 
purpose of part 438. These definitions reflect revisions in terminology 
made in section 4701(b) of the BBA. The most significant of these 
changes is the use of the term Managed Care Organization (MCO) to refer 
to entities with comprehensive risk contracts that were formerly 
referred to by the term ``health maintenance organization'' (HMO). 
There is a new statutory definition of Medicaid MCO, which builds on 
the pre-BBA definition of HMO. As was the case for the pre-BBA 
definition of HMO, absent a statutory exemption, an entity must be 
found to meet the definition of MCO in order to enter into a Medicaid 
``comprehensive risk contract'' (defined in Sec. 430.5). The new 
statutory definition defines an MCO as one of several listed types of 
full risk arrangements (for example, HMOs, a provider sponsored 
organization, an ``M+C organization'' that contracts with Medicare) or 
any other ``public or private entity'' that complies with advanced 
directive requirements in section 1902(w) of the Act, and meets a 
modified version of the same two requirements included in the pre-BBA 
definition of HMO. The first of these two requirements, involving 
access to services covered under the contract, is unchanged by the BBA 
(see section 1903(m)(1)(A)(i) of the Act). The second requirement, 
involving meeting State-approved solvency standards, has been amended 
to require (with some exceptions discussed in section 3 below) that the 
MCO be licensed as an HMO or as a risk bearing entity (see section 
1903(m)(1)(A)(ii) of the Act.) Finally, the new statutory definition 
provides that an entity that is a Federally-qualified HMO under title 
XIII of the Public Health Service Act is deemed to meet the above 
access and solvency requirements (but not the advance directive 
requirements).
    In Sec. 438.2, we essentially have adopted the statutory definition 
of MCO. Because the managed care entities specifically listed in the 
revised version of section 1903(m)(1)(A) of the Act all necessarily 
fall within the category ``public or private organization,'' our 
definition refers only to a ``public or private entity'' that meets the 
requirements in question. Because Federally qualified HMOs are deemed 
to meet the access and solvency requirements in sections 
1903(m)(1)(A)(i), (m)(1)(A)(ii), and (m)(1)(C) of the Act, we do not 
apply these requirements to Federally qualified HMOs in our definition 
of MCO. Finally, we have retained a third requirement from the current 
regulation implementing the pre-BBA definition of HMO (see 
Sec. 434.20(c)(1)). This provision requires that the entity be 
organized primarily for the purpose of providing health care services.
    Section 438.2 of the regulations also includes existing definitions 
of current managed care terms, and the statutory definitions of primary 
care case management and primary care case manager from the BBA. We 
have not included the term ``managed care entity'' in the definitions 
or the text of the regulation. This term was used in the BBA to include 
MCOs and PCCMs. However, for purpose of clarity in the proposed rule, 
we have specified in the text of the regulation whether each specific 
provision applies to MCOs, PCCMs or both.
    While most existing managed care definitions are unchanged, we are 
proposing to split the current designation of prepaid health plans 
(PHPs) into two new types of entities. We rely upon the authority in 
section 1902(a)(4) of the Act to permit States to contract with PHPs 
and to establish the requirements that these entities must meet. The 
earliest PHPs in Medicaid managed care programs were predominantly the 
equivalent of a capitated PCCM. Over the years, States have developed 
programs using capitated reimbursement for much larger delivery 
systems, most notably in the area of behavioral health. These contracts 
may include a portion of the inpatient hospital benefit, as well as 
physician, outpatient, and some other limited Medicaid services. States 
have also developed PHPs to deliver transportation services and 
contracted with dental PHPs to expand access to dental care for the 
Medicaid population. We have recently reviewed proposals to contract 
for institutional long-term care

[[Page 43620]]

services on a risk basis. Based on these developments, we have 
concluded that it is no longer appropriate to describe all of these 
models in the same way or subject them all to the same requirements.
    In this proposed rule, we have eliminated the term PHP and replaced 
it with two types of entities--Prepaid Inpatient Health Plans (PIHPs), 
and Prepaid Ambulatory Health Plans (PAHPs). ``Prepaid inpatient health 
plan'' (PIHP) means an entity that provides medical service on the 
basis of capitation or other non-State plan payment rates, is 
responsible for any inpatient hospital or institutional services, and 
does not have a comprehensive risk contract. ``Prepaid ambulatory 
health plan'' (``PAHP'') means an entity that provides medical service 
on the basis of capitation or other non-State plan payment rates, is 
not responsible for any inpatient or institutional services, and does 
not have a comprehensive risk contract.
    These two definitions include all entities that were previously 
defined as PHPs, but make a distinction between (1) those responsible 
for at least some (but not all) inpatient hospital or institutional 
care an enrollee receives, as in the case of a large behavioral health 
plans, and (2) those that are not, such as dental or transportation 
plans and capitated PCCMs. The requirements that each type of entity 
must meet are set forth in Sec. 438.8. By making the distinction 
between these two types of entities, we are able to impose requirements 
that more accurately reflect the scope of benefits that they contract 
to provide. We are seeking comments on whether prepaid contracts that 
include home and community based services should be subject to the 
additional MCO-like requirements that we have proposed to apply to 
PIHPs.
    The new requirements enacted by the Congress in the BBA apply to 
managed care arrangements in one or more of three ways. First, section 
1903(m)(2)(A)(xi) of the Act requires that MCOs and MCO contracts 
comply with all applicable requirements in the new section 1932 of the 
Act enacted by the BBA. Thus, unless the above-discussed ``grandfather 
provision'' in section 4710(c) of the BBA applies to the requirement in 
question, these requirements apply to an MCO whether the MCO is 
participating in a mandatory managed care enrollment program or is 
offered as a purely voluntary enrollment option.
    Requirements in section 1932 of the Act also apply as conditions 
for meeting the definition of ``primary care case manager'' (which 
incorporates the definition of ``primary care case management 
contract'' requiring compliance with requirements in section 1932 of 
the Act). Meeting this definition is required in order for a non-MCO to 
participate as an enrollment option under a mandatory managed care 
enrollment program under section 1932(a) of the Act. Meeting this 
definition also makes an entity eligible for automatic re-enrollment 
under section 1903(m)(2)(H) of the Act, whether enrollment was 
originally voluntary or mandatory. Finally, meeting this definition 
permits an entity to offer ``primary care case management services'' as 
a State plan service under section 1905(a)(25) of the Act.
    Certain requirements in section 1932 of the Act apply only in the 
context of a mandatory managed care enrollment program under section 
1932(a) of the Act. The latter includes specific requirements on 
comparative information, as found in Sec. 438.10(h); and methods for 
establishing certain enrollment practices and the default enrollment 
process, as found in Sec. 438.50.
    The terms MCO and PCCM are used in the statute to identify where 
different requirements apply only to that entity. (As discussed above, 
the term ``managed care entity'' is used to describe requirements that 
apply both to MCOs and PCCMs.) As proposed in Sec. 438.2, an MCO is 
either a Federally qualified HMO or any other public or private entity 
that is organized primarily for the purpose of providing health care 
services, makes the services it provides to its Medicaid enrollees as 
accessible (in terms of timeliness, amount, duration, and scope) as 
those services are to other Medicaid beneficiaries within the area 
served by the entity, and meets the solvency standards of Sec. 438.116. 
Thus, in general, HMOs that participate in Medicaid would be considered 
as MCOs. For purposes of this rule, as described in detail under 
Sec. 438.8(a), most requirements that would apply to MCOs would also 
apply to PIHPs. Section 438.8(b) contains requirements that apply to 
PAHPs.
3. Contract Requirements (Sec. 438.6)
    Proposed Sec. 438.6 contains most of the existing managed care 
provisions currently found in part 434, revised to reflect changes made 
by the BBA.
    Proposed Sec. 438.6(a) clarifies that the CMS Regional Office must 
review and approve all MCO, PIHP, and PAHP contracts, including those 
that, on the basis of their value, are not subject to the prior 
approval requirement in Sec. 438.806.
    Section 438.6(b), like the current Sec. 434.20(a), proposes that 
State agencies may enter into comprehensive risk contracts only with 
certain specified entities. In addition to entities meeting the 
definition of MCO, certain other entities are listed that either are 
exempt from the requirement in section 1903(m)(1)(A) of the Act that 
comprehensive risk contractors meet the definition of MCO, or are 
exempt altogether from the statutory requirements in section 
1903(m)(2)(A) of the Act, and from the requirements in this proposed 
rule.
    Proposed Sec. 438.6(c) addresses the computation of capitation 
payments. We are proposing to delete the upper payment limit 
requirement for risk contracts in existing Sec. 447.361 and create a 
new Sec. 438.6(c), Payments under risk contracts, which: (1) Does not 
include a UPL; (2) requires actuarial certification of capitation 
rates; (3) specifies data elements that must be included in the 
methodology used to set capitation rates; (4) requires States to 
consider the costs for individuals with special health care needs or 
catastrophic claims in developing rates; (5) requires States to provide 
explanations of risk sharing or incentive methodologies; and (6) 
imposes special rules, including a limitation on the amount that can be 
paid under FFP in some of these arrangements.
    We believe that the UPL is no longer an effective tool for purposes 
of judging capitated payment rates. Many States no longer have fee-for-
service base year data recent enough to use as a reasonable comparison 
to the costs of a current capitated managed care system, and the UPL 
may not account for the cost of all services expected to be delivered 
under an MCO contract.
    In these changes, we are proposing that we move from a review that 
compares capitation rates in risk contracts to the historical fee-for-
service cost of the services under contract for an actuarially 
equivalent non-enrolled population, to a review of the utilization and 
cost assumptions and methodology used by the state to set the actual 
capitation rates. Eliminating the UPL requirement removes what has 
become a barrier to effective managed care contracting in some areas, 
and increasingly irrelevant as a regulatory tool. We also believe that 
this change could result in a more appropriate review of capitation 
rates by examining how the rates have been established rather than how 
they compare to an increasingly difficult to establish fee-for-service 
equivalent.
    This change does not affect the rules governing UPLs for other 
types of

[[Page 43621]]

providers or services including the currently applicable provisions in 
Secs. 447.272, 447.304, and 447.321 or those in a final rule published 
in the Federal Register (66 FR 3148) on January 12, 2001 on payments to 
hospitals, nursing facilities, intermediate care facilities for the 
mentally retarded, and clinics. Nor will this change affect the UPL for 
nonrisk contracts in Sec. 447.362, which remains in effect.
    As set forth above, FFP is only available for risk contracts to the 
extent that payments are determined on an actuarially sound basis. 
Under these provisions, we have determined that where total payments 
exceed 105 percent of the capitation payments paid under the contract, 
these payments are no longer actuarially sound. Thus, no FFP would be 
available for payments resulting from risk corridors or incentive 
arrangements for amounts that exceed 105 percent of the capitation 
payments made under the contract. If the risk corridor or incentive 
arrangement does not apply to all enrollees or services under the 
contract, the 105 percent limit is based only in that portion of the 
total capitation payments for the enrollees or services covered by the 
arrangement. States could make payments under these arrangements with 
their own funds, but would be precluded from claiming FFP for these 
payments.
    This limitation protects the Federal government against potentially 
unlimited exposure under risk corridor or bonus arrangements. This is 
particularly important since the ``cost-effectiveness'' requirement in 
section 1915(b) and the ``budget neutrality'' standard imposed under 
section 1115(a) demonstrations generally do not contain an outright 
limit on the Federal share of expenditures under the contract. And, 
neither of these limits apply to voluntary managed care contracts under 
section 1915(a) or contracts for mandatory enrollment under section 
1932(a)(1)(A) using State plan authority.
    Without any upper limit on the amount that can be paid in incentive 
arrangements or risk sharing mechanisms the potential exists for 
inefficiency or inappropriate actions by the contractor to maximize 
funding, resulting in rates that bear no relationship to those 
certified by actuaries, and that, thus, are no longer ``actuarially 
sound.'' We have proposed limitations in Secs. 438.6(c)(5)(ii) and 
438.814 as a workable alternative to the current UPL which meets the 
following criteria: (1) It provides a clear consistent rule that can be 
applied to all risk contracts, regardless of the authority under which 
the contract operates (waiver or otherwise); (2) it should not 
discourage the use of any of these arrangements; (3) it explicitly 
conditions Federal matching on the imposition of these limits under any 
of these arrangements to prevent any potential abuses; and (4) it can 
be easily administered. Similarly, proposed Sec. 438.60 also clarifies 
that a State may not make payments directly to providers for services 
that are available under its contracts with MCOs, PIHPs, or PAHPs, 
except where these payments are provided for in Federal statute or 
regulation. This provision is intended to preclude duplicate or 
supplemental payments for amounts that should be included in the 
capitation rate.
    Although not part of this proposed rule, we also are planning to 
revise the policies governing cost effectiveness for section 1915(b) 
waiver programs. The current regulations at Sec. 431.55, which require 
waiver programs to be cost effective and efficient and require States 
to document this cost effectiveness of their waiver programs, will 
remain unchanged. However, HCFA is modifying the process by which 
States document this cost effectiveness through re-issuance of State 
Medicaid Manual provisions and revision of the section 1915(b) Medicaid 
waiver applications. The revised waiver cost effectiveness test will 
apply to all waivers under section 1915(b) of the Act, regardless of 
the payment system, such as capitation or fee-for-service.
    Section 438.6(d) includes the enrollment requirements currently in 
Sec. 434.25. We specify that an MCO, PIHP, PAHP, or PCCM contract must 
provide for an open enrollment period when the MCO, PIHP, PAHP, or PCCM 
accepts individuals eligible for enrollment in the order in which they 
apply without restriction, unless authorized by the Regional 
Administrator, up to the limits specified in the contract. In 
Sec. 438.6(d)(2), we have added language expressly providing for 
exceptions to the requirement that enrollment be voluntary.
    Section 438.6(e) includes language currently in Sec. 434.20(d) and 
provides that an MCO contract may cover services not provided under the 
State plan to enrolled beneficiaries. If enrollment is voluntary, the 
additional services may, under section 1915(a) of the Act, be provided 
without regard to statewideness and comparability. If enrollment is 
mandated under section 1932(a) of the Act, the statute provides that 
contracts can be carried out without regard to statewideness and 
comparability requirements. If enrollment is mandated under sections 
1915(b) or 1115 of the Act, CMS can waive statewideness and 
comparability requirements if additional services are offered.
    Section 438.6(f) would retain the requirement currently found in 
Sec. 434.20(e)(1), that contracts comply with the general contract 
requirements in Sec. 438.6, and has been expanded to specify Federal 
anti-discrimination statues with which contracts must comply.
    Section 438.6(g) contains the current requirement in Sec. 434.38 
that risk contracts must provide the Medicaid agency and the Department 
of Health and Human Services, including CMS, the right to inspect or 
audit financial records of the MCO or its subcontractors.
    Proposed Sec. 438.6(h) would implement the physician incentive plan 
requirements in section 1903(m)(2)(A)(x) of the Act, which currently 
are implemented in existing paragraphs (2) through (4) of 
Sec. 434.70(a) of the regulations. We propose to expand this 
requirement to apply to PIHPs and PAHPs, both of which may contract 
with physicians and put them at financial risk. Section 
1903(m)(2)(A)(x) of the Act requires that MCOs comply with the 
physician incentive plan requirements in section 1876(i)(8) of the Act, 
which prior to 1999, applied to entities with Medicare risk contracts 
under section 1876 of the Act. Section 1876(i)(8) of the Act prohibits 
certain physician incentive payments and requires incentive plans that 
place physicians at ``substantial financial risk'' for services they do 
not provide to conduct enrollee surveys, and provide ``adequate and 
appropriate'' stop-loss protection. Section 1876(i)(8) of the Act was 
implemented in Sec. 417.479, which defines ``substantial financial 
risk'' and ``adequate and appropriate'' stop-loss protection. The 
current Medicaid physician incentive plan provisions in paragraphs 
(a)(2) through (a)(4) of Sec. 434.70 reference Sec. 417.479.
    On January 1, 1999, however, Medicare risk contractors were 
required to enter into Medicare+Choice (M+C) contracts under Part C of 
Title XVIII if they wished to continue to contract with Medicare. The 
physician incentive rules in part 417 of the regulations that 
implemented section 1876(i)(8) of the Act no longer apply and will be 
removed from the Code of Federal Regulations.
    Section 1852(j)(4) of the Act, which applies to M+C organizations, 
contains the same substantive requirements governing physician 
incentive plans as section 1876(i)(8) of the Act. We have

[[Page 43622]]

implemented section 1852(j)(4) in M+C regulations in part 422. While 
the substantive requirements and standards in section 1852(j)(4) of the 
Act are identical to those in section 1876(i)(8) of the Act, the 
regulations in part 422 implementing section 1852(j)(4) of the Act 
differ from those in part 417 implementing section 1876(i)(8) of the 
Act in one significant respect. Because the data in question are now 
available from other sources, we deleted a reporting requirement 
involving capitation arrangements. (See 63 FR 35002.) Because the 
regulations in part 417 have not applied to Medicare contracts since 
1998, we did not revise the regulations in part 417 to eliminate this 
reporting requirement.
    Even though the Medicaid statute continues to cite section 
1876(i)(8) of the Act, proposed Sec. 438.6(g) incorporates the 
regulations in part 422 that implement nearly identical statutory 
language, and the same substantive requirements, as set forth in 
section 1852(j)(4) of the Act.
    Section 438.6(i) contains the ``advance directive'' requirements 
currently found in Sec. 434.28, which also must be met in order for an 
entity to qualify as an MCO or PIHP.
    Section 438.6(j) would implement the statutory requirement that 
``HIOs'' that began operating on or after January 1, 1986 and are not 
otherwise exempted by statute, comply with all requirements in section 
1903(m)(2)(A) of the Act if they have a comprehensive risk contract, 
including the requirement that they meet the definition of MCO. This 
provision would replace the current Sec. 434.44.
    Section 438.6(k) specifies additional rules that apply to contracts 
with primary care case managers. These rules relate to the provision of 
care and services within reasonable and adequate hours of operation; 
specification for arrangements or referral to other physicians or 
practitioners; prohibitions on discrimination in enrollment, 
disenrollment, or re-enrollment; and provisions on enrollee rights to 
disenroll.
    Section 438.6(l) incorporates terminology currently in 
Sec. 434.6(a)(ii)(b) on subcontracts. Section 438.6(m) incorporates 
terminology currently in Sec. 434.29 on choice of health professionals.
4. Provisions That Apply to PIHPs and PAHPs (Sec. 438.8)
    In this proposed rule, we propose to eliminate the term PHP and 
replaced it with two types of entities--Prepaid Inpatient Health Plans 
(PIHPs), and Prepaid Ambulatory Health Plans (PAHPs). A PIHP is an 
entity that provides medical services to enrollees, under a contract 
with the State agency that is not risk comprehensive, but for which 
payment is made on a prepaid capitation basis or other payment 
arrangements that do not use State plan payment rates, and in which the 
entity provides, arranges for, or is otherwise responsible for the 
provision of, any inpatient hospital or institutional services for its 
enrollees. Like a PIHP, a PAHP is an entity that provides medical 
services to enrollees, under a contract with the State agency that is 
not risk comprehensive, and for which payments are made on the basis of 
prepaid capitation payments or other payment arrangements that do not 
use State plan payment rates. However, unlike a PIHP, a PAHP the entity 
does not provide or arrange for, and is not otherwise responsible for 
the provision of any inpatient hospital services for its enrollees. All 
entities that met the definition of PHP under part 434 will meet one of 
these definitions in Sec. 438.8.
    Title XIX does not specifically address State contracts with PHPs 
(now PIHPs or PAHPs), and thus does not impose requirements on these 
entities. Instead, we have relied upon section 1902(a)(4) of the Act 
for the authority to publish regulations governing these entities. This 
section of the Act provides the Secretary with discretion to specify 
methods of administration determined to be necessary for proper and 
efficient operation of State Medicaid programs. Under that authority we 
are now substituting the terms PIHP and PAHP and proposing to apply 
specific provisions of this proposed rule to each of these entities.
    This change, from the approach taken in the January 19, 2000 final 
rule, which applied most of these requirements to all PHPs, is 
warranted for several reasons. First, the scope of services under PHP 
contracts with States has greatly expanded over the years. The earliest 
PHPs in Medicaid managed care programs were predominantly capitated 
PCCMs. States have developed programs using capitated reimbursement for 
much larger delivery systems, most notably in the area of behavioral 
health. These contracts may include a portion of the inpatient hospital 
benefit, as well as physician, outpatient, and some other limited 
Medicaid services. More than two-thirds of all current PHP contracts 
are of this type. States have also developed PHPs to deliver 
transportation services and found that contracting with dental PHPs 
provides an opportunity to expand access to dental care for the 
Medicaid population. We have recently reviewed proposals to contract 
for institutional long-term care services on a risk basis. Based on 
these developments, we have concluded that it is no longer appropriate 
to describe all of these models in the same way or subject them all to 
the same requirements.
    Second, the BBA and this proposed rule contain many significant 
beneficiary protections that were intended to apply to MCOs and States 
contracting with MCOs. We believe that these protections are also 
appropriate for those PHPs that are responsible for a benefit package 
that closely resembles the risk comprehensive range of services 
provided by MCOs. However, where PHPs contract to provide a much more 
limited array of services, such as transportation or dental care, we 
believe applying the same requirements would not be appropriate. Thus 
we are making a distinction between these two types of entities based 
on whether they are responsible for all or some of the inpatient 
hospital or institutional services needed by their enrollees.
    In Sec. 438.8(a), we propose to make PIHPs subject to nearly all of 
the requirements that apply to MCOs, including: the contract 
requirements of Sec. 438.6, except for requirements that pertain to 
HIOs; the information requirements in Sec. 438.10; the provision 
against provider discrimination in Sec. 438.12; the State 
responsibility provisions of subpart B, except Sec. 438.50; the 
enrollee rights and protection provisions in subpart C of this part; 
the quality assessment and performance improvement requirements in 
subpart D of this part to the extent that they are applicable to 
services furnished by the PIHP; the grievance system provisions in 
subpart F of this part; and the certification and program integrity 
protection provisions in subpart H of this part.
    Under proposed Sec. 438.8(a)(6), the State agency would have to 
require, at a minimum, through its contract, that the PIHP meet all of 
the requirements that MCOs must meet relating to minimum performance 
levels and performance improvement levels that apply to services 
furnished by the PIHP. The nature of some PIHPs may not allow them to 
report on performance measures in all of the clinical and non-clinical 
areas as MCOs can. Also, some PIHPs may not be able to undertake 
performance projects in the same clinical areas as MCOs can address. 
The State agency would be required to evaluate the applicability of the 
MCO performance measures and improvement project areas when 
establishing the PIHP's contractual

[[Page 43623]]

obligations for its quality assessment and performance improvement 
program.
    In proposed Sec. 438.8(b) we would make PAHPs subject to the 
following requirements: the contract requirements of Sec. 438.6, except 
for requirements for advance directives and those that pertain to HIOs; 
designated portions of the information requirements in Sec. 438.10; the 
provision against provider discrimination in Sec. 438.12; the State 
responsibility provisions of subpart B, except Sec. 438.50; designated 
portions of subpart C on enrollee rights and protections; and 
Sec. 438.206(a) on availability of services.
    We have not applied the provisions for sanctions in subpart I to 
PIHPs or PAHPs (except to the extent that they contract as PCCMs, in 
which case designated provisions apply). This does not, however, 
preclude States from applying sanctions to PIHPs and/or PAHPs with 
which they contract. Similarly, we have not specifically applied the 
Conditions for FFP in subpart J to PIHPs or PAHPs, since these 
provisions govern the Federal-State relationship rather than the State-
contractor relationship. Nonetheless, provisions governing the 
availability of FFP to a State may have an impact on the contract a 
State implements with a PIHP and a PAHP, such as the provisions in 
Sec. 438.812 governing costs under risk and nonrisk contracts and in 
Sec. 438.814 governing the limit on payment in excess of capitation 
rates.
    We believe that this two-tiered approach provides the flexibility 
necessary for innovative contracting by States while applying 
regulatory requirements that are appropriate to the range of services 
under the contract. We note that a primary care case manager as defined 
in section 1905(t)(2) of the Act, could also meet the definition of a 
PAHP and be subject to the requirements in Sec. 438.8(b). In this case, 
the primary care case manager would be both a PAHP and a PCCM. This 
entity would be subject to the requirements in Sec. 438.6(k) and 
Sec. 438.8(b).
    While we are proposing to apply MCO requirements to PIHPs and 
PAHPs, State agencies would still be free to apply for Federal waiver 
authority, under sections 1915(b) or 1115 of the Act, to seek relief 
from some of the provisions. For example, a State agency may request 
1915(b) waiver authority for a behavioral health managed care program 
in which enrollees are mandated to use a single behavioral health PIHP. 
In this instance, the Secretary has the discretionary authority to 
waive freedom of choice, under section 1902(a)(23) of the Act, and the 
right to disenroll in part 438 (for PIHPs and PAHPs is authorized under 
section 1902(a)(4) of the Act, and therefore, can be waived) to enable 
the State agency to establish or continue these programs.
5. Information Requirements (Sec. 438.10)
    Section 438.10(b) contains the basic rule that all enrollment 
notices and informational and instructional materials relating to 
enrollment in MCOs, PIHPs, PAHPs, and PCCMs must be provided in a 
manner and form that are easily understood by Medicaid enrollees and 
potential enrollees. As a general rule, each State agency, MCO, PIHP, 
PAHP, PCCM, and enrollment broker must meet the requirements of 
Sec. 438.10 that pertain to language and format requirements (as 
specified in Sec. 438.10(c) and (d)). However, a distinction is made 
within the regulation as to which information needs to be provided to 
an enrollee or a potential enrollee. We have defined these terms in 
Sec. 438.10(a). And we have made a distinction between which 
information needs to be provided to all managed care enrollees and 
which information needs to be provided only to MCO and PIHP enrollees. 
Finally, we have identified some information that only has to be made 
available upon request.
    In Sec. 438.10(c) we propose requirements for the languages in 
which information would have to be made available. We are proposing to 
require that State agencies establish a methodology for determining the 
prevalent languages spoken by populations in a geographic area and 
include provisions in their MCO, PIHP, PAHP, or PCCM contracts to 
ensure that written materials are available in those specified 
languages. States have discretion to determine criteria for when a 
language is ``prevalent'' for purposes of this requirement, as long as 
they comply with the requirements of Title VI of the Civil Rights Act 
of 1964. For technical assistance, States may contact the HHS Office of 
Civil Rights. Enrollees and potential enrollees must be informed about 
how to obtain written information published in prevalent languages in 
that area. Specific methodologies, such as those based upon a 
consideration of geographic composition, population density, or 
enrolled population are not imposed by this regulation, as the most 
appropriate approach to fulfilling this requirement may vary from State 
to State. However, we are proposing that the State agency, enrollment 
broker, MCO, PIHP, PAHP, and PCCM be required to have oral 
interpretation services available free of charge for each enrollee and 
potential enrollee who has limited English proficiency, and that 
enrollees and potential enrollees be informed about how to obtain these 
services.
    In Sec. 438.10(d), we propose to implement the requirement in 
section 1932(a)(5)(A) of the Act that all written information be 
provided in an easily understood language and format. Generally, 
materials should be understandable to enrollees at a fourth-fifth grade 
reading level, or at another level established by the State agency that 
adequately reflects the potential population to be enrolled. Materials 
should use an easily readable typeface (for example, 14 point), 
frequent headings, and should provide short, simple explanations of key 
concepts. Technical or legal language should be avoided whenever 
possible. Use of focus groups and cognitive testing may be beneficial 
in determining the appropriateness of the information. In addition, in 
Sec. 438.10(d)(1)(i) and (ii), we propose that enrollment notices as 
well as informational and instructional materials relating to 
enrollment in MCOs, PIHPs, PAHPS, and PCCMs take into account the 
specific needs of enrollees and potential enrollees. This would include 
furnishing information in alternative formats for the visually impaired 
(through other media such as, large print, Braille, or audio tapes) and 
for individuals with limited reading proficiency (through video or 
audio tapes).
    In Sec. 438.10(e) we propose to require the State to provide 
certain information to potential enrollees. While section 1932(a)(5)(B) 
requires MCOs and PCCMs to make information available to enrollees and 
potential enrollees ``upon request,'' we believe it is important to 
ensure that potential enrollees have certain information prior to 
enrollment, so they may make an informed choice. It would be 
unreasonable, however, to require every MCO, PIHP, PAHP or PCCM to 
provide the relevant information to all potential enrollees. The State 
agency is the more appropriate entity to do so. Therefore, under 
authority in section 1902(a)(4) of the Act to provide for necessary and 
proper methods of administration, we propose in Sec. 438.10(e) that the 
State (or its contracted representative) be required to provide the 
information described below to each potential enrollee.
    The required information includes general information about the 
basic features of managed care; which populations are excluded from 
enrollment, subject to mandatory enrollment, or free to enroll 
voluntarily in the MCOs, PIHPs, PAHPs and PCCMs; and MCO, PIHP, PAHP 
and

[[Page 43624]]

PCCM responsibilities for coordination of enrollee care. In addition, 
Sec. 438.10(e)(2)(ii) proposes to require the State to provide at least 
summary information specific to each MCO, PIHP, and PAHP, and for PCCM 
programs in the potential enrollee's service area, including benefits 
covered, cost sharing, service area, network provider information, and 
benefits covered under the State plan but not available under the 
contract.
    In Sec. 438.10(f), we propose to require MCOs, PIHPs, PAHPs, and 
PCCMs or States on behalf of their PCCM programs, to provide certain 
information to their own enrollees. We have proposed this requirement 
because we do not believe that enrollees can effectively access their 
benefits if they are not furnished adequate information concerning 
these fundamental elements as enrollees' rights and responsibilities. 
Further, it is our belief that it is not sufficient for this 
information to merely be ``available'' at designated locations. 
Therefore, in keeping with the Congress' intent to provide adequate 
information to actual enrollees, under the authority in section 
1902(a)(4), we propose to require these entities to provide basic 
information that all enrollees should have. In addition, we propose in 
paragraphs (f)(1) through (f)(5) to require specific timeframes for the 
provision of specific information, such as disenrollment rights, and 
changes in providers or operations of the managed care program. 
Paragraph (f)(2) specifically would require MCOs, PIHPs, PAHPs, PCCMs 
or the State to notify enrollees annually of their right to request 
information listed in paragraphs (f) and (g) of this section (as 
applicable).
    In proposed Sec. 438.10(f)(6), we set forth the type of information 
that, under section 1932(a)(5)(B) of the Act, MCOs and PCCMs must 
provide to enrollees. We are proposing in Sec. 438.10(f)(6) to require 
that the information must also be furnished to enrollees of PIHPs and 
PAHPs. This information must include at least the following:
     Names, locations and telephone numbers of current network 
providers, including identification of those who speak languages other 
than English and those who are not accepting new patients. At a 
minimum, information on the provider networks should include 
information on primary care physicians, specialists, and hospitals. We 
also suggest that information be provided regarding ancillary care 
providers on which enrollees with special health care needs may be 
dependent for care. If this information is not included, information 
must be provided to enrollees explaining how they can obtain this 
supplemental information. Enrollees making a decision about whether to 
enroll in a particular MCO, PIHP, PAHP, or PCCM may rely on the 
provider listing in making their selection, and may assume that they 
will be able to obtain covered services from any of the providers 
listed. Therefore, if a provider is not accepting new Medicaid 
enrollees, this must be clearly indicated, as this provider may not be 
a choice for new enrollees.
     Any restriction on the enrollee's freedom of choice among 
network providers. It is essential that the MCO's, PIHP's, PAHP's, or 
PCCM program's informational materials emphasize any limitations on 
enrollees' provider selections. If an MCO, PIHP, PAHP, or PCCM program 
contracts with formal subnetworks, or the entity's arrangement with 
primary care providers allow for the establishment of informal 
subnetworks, the informational materials must clearly indicate which 
providers are available under each subnetwork. The materials must also 
explain the procedures under which an enrollee may request referral to 
an affiliated provider not included in the subnetwork.
     Enrollee rights as described in Sec. 438.100.
     Grievance and fair hearing procedures.
     Benefits offered, and the amount, duration, and scope of 
benefits and services available under the contract. Sufficient detail 
should be furnished to ensure that beneficiaries receive the services 
to which they are entitled, such as pharmaceuticals, mental health, and 
substance abuse services.
     Procedures for obtaining services, including authorization 
requirements. These procedures must include the procedures for 
obtaining pharmaceuticals and mental health and substance abuse 
services, as well as the procedure for obtaining out-of-area coverage.
     The extent to which an enrollee may obtain services from 
out-of-network providers. For example, enrollees should be notified of 
their right to obtain family planning services from any Medicaid-
participating provider (unless otherwise restricted).
     Provisions for coverage of after-hours, emergency, and 
post-stabilization services.
     Policies on referrals for specialty care and other 
services not furnished by the enrollee's primary care provider.
     Cost sharing, if any.
     Any benefits to which they may be entitled under the 
Medicaid program, but that are not made available to them through the 
MCO, PIHP, PAHP, or PCCM. For example, enrollees would have to be 
provided notice about how to access mental health coverage if it is not 
a service covered by the MCO, PIHP, PAHP, or PCCM or if the entity 
provides only limited coverage. This information would have to be 
provided either directly by the State agency or through the MCO, PIHP, 
PAHP, or PCCM. The notice would have to provide information on where 
and how enrollees may access benefits such as mental health coverage 
not available through the entity. In addition, this notice would be 
required to include information on how transportation services not 
covered by the MCO, PIHP, PAHP, or PCCM would be furnished.
    While State agencies would be required to develop grievance and 
appeal processes for enrollees in accordance with subpart F of part 
438, this proposed requirement is not meant to imply that State 
agencies must establish grievance and appeal processes for individual 
health care providers. However, if these processes exist, information 
on the processes must be made available to enrollees and potential 
enrollees in accordance with the requirements of this section.
    Proposed Sec. 438.10(g) would require MCOs and PIHPs to provide 
additional information to their enrollees, based on provisions that 
apply only to those types of entities. This information must be 
provided by the MCO or PIHP except where prohibited by the State agency 
through restrictions on marketing or some other means (in which case 
the State agency or subcontractor of the State agency must provide the 
information). MCOs and PIHPs would be required to provide information 
on grievance, appeal and fair hearing procedures and timeframes in 
Sec. 438.400. This includes the following:
     The right to a State fair hearing, the method for 
obtaining a State fair hearing, and the rules that govern 
representation at the hearing.
     The right to file grievances and appeals.
     The requirements and timeframes for filing a grievance or 
appeal.
     The availability of assistance in the filing process.
     The toll-free numbers that the enrollee can use to file a 
grievance or an appeal by phone.
     The fact that, when requested by the enrollee, benefits 
will continue if the enrollee files an appeal or a request for State 
fair hearing within the timeframes specified for filing; and that the 
enrollee may be required to pay the cost of services furnished while 
the

[[Page 43625]]

appeal is pending, if the final decision is adverse to the enrollee.
    Further, if the State agency chooses to furnish appeal rights to 
providers, it must provide MCO and PIHP enrollees information on these 
appeal rights. We note that while section 1932(a)(5)(A)(ii) of the Act 
provides for furnishing information on ``procedures available to * * * 
a health care provider to challenge or appeal'' an MCO decision, there 
is no Federal Medicaid requirement that these procedures be provided by 
MCOs or PIHPs. To the contrary, as discussed below, the requirement in 
section 1932(b)(4) of the Act that MCOs have grievance procedures 
refers to rights extended to an enrollee ``or a provider on behalf of 
an enrollee.''
    MCOs and PIHPs are also required to provide information on advance 
directives, physician incentive plans, and upon request, information on 
the structure and operation of the entity as follows:
     Health plans' and health care facilities' licensure, 
certification, and accreditation status; and
     Information on health professionals, including but not 
limited to, education and board certification and recertification.
     Other information on accessing services, including 
physical accessibility and non-English languages spoken
     A description of procedures to control utilization and 
expenditures
     A summary of the method for compensating physicians.
    We are distinguishing between information that must be furnished to 
all enrollees and information furnished on request because it is our 
belief that some information is not typically used by enrollees in 
selecting a provider. By making the information available by request, 
interested beneficiaries can obtain the information, and MCOs and PIHPs 
are not required to furnish information that will not be used.
    Proposed Sec. 438.10(h) would implement section 1932(a)(5)(C) of 
the Act, which requires that comparative information be provided by 
State agencies that implement mandatory managed care programs under the 
authority in section 1932(a)(1)(A) of the Act. Under proposed 
Sec. 438.10(h), this information would be provided directly by the 
State agency, or through the MCO or PCCM at least annually, as well as 
upon request. The information must be presented in a comparative chart-
like form that facilitates comparison among MCOs and PCCMs and must be 
available in the prevalent languages (as determined by the State) 
spoken by populations in the geographic area. It should include the 
following information for each MCO or PCCM: (1) The service area of the 
MCO or PCCM; (2) the benefits covered; (3) any cost-sharing imposed by 
the MCO or PCCM; and (4) to the extent available, quality and 
performance indicators, including, but not limited to, disenrollment 
rates, as defined by the State agency and consumer satisfaction. State 
agencies must specify the meaning of ``disenrollment rates'' and the 
voluntary disenrollment from one plan to another plan.
6. Provider Discrimination (Sec. 438.12)
    Proposed Sec. 438.12 would reflect the anti-discrimination 
provisions in section 1932(b)(7) of the Act. Those provisions state 
that an MCO must not discriminate with respect to participation, 
reimbursement, or indemnification as to any provider who is acting 
within the scope of the provider's license or certification under 
applicable State law, solely on the basis of the license or 
certification. Section 1932(b)(7) also states, that this provision does 
not prohibit an organization from including providers only to the 
extent necessary to meet the needs of the MCO's enrollees, from 
establishing different payment rates, or from establishing measures 
designed to maintain quality and control costs consistent with the 
responsibilities of the MCO.
    Proposed Sec. 438.12 must not be construed as an ``any willing 
provider'' provision. We believe that in section 1932(b)(7) of the Act 
the Congress intended only to ensure that MCOs do not adopt arbitrary 
policies concerning non-physician providers who, in the past, may have 
been discriminated against because they do not hold the same licenses 
and certifications as practicing physicians. Any discriminatory actions 
may have provided beneficiaries with fewer choices and may have reduced 
beneficiaries' overall access to quality health care. Accordingly, 
under proposed Sec. 438.12, MCOs and, under the authority in section 
1902(a)(4) of the Act, PIHPs would be required to implement policies 
for provider participation, reimbursement, and indemnification that are 
not arbitrary, but rather relate to quality factors such as outcome 
measures and satisfaction surveys, cost factors, and other legitimate 
business concerns.
    We also propose in Sec. 438.12 that an MCO or PIHP that declines to 
include individual or groups of providers in its network must give the 
provider written notice of the reason for its decision.

B. State Responsibilities (Subpart B)

1. State Plan Requirements (Sec. 438.50)
    Proposed Sec. 438.50 would implement section 1932(a)(1)(A) of the 
Act, which permits State agencies to enroll their Medicaid 
beneficiaries in an MCO or PCCM on a mandatory basis without a waiver 
under sections 1915(b) or 1115 of the Act. Under section 1932(a)(1)(A) 
of the Act and proposed Sec. 438.50, a State agency no longer needs to 
request, obtain, and seek periodic renewal of CMS waivers to restrict 
freedom of choice for most Medicaid beneficiaries. Rather, a State 
agency may amend its Medicaid plan to require these Medicaid 
beneficiaries to enroll in MCOs or PCCMs, without being out of 
compliance with the freedom of choice, statewideness, or comparability 
of services requirements.
    We are requiring State agencies to submit a Medicaid State plan 
amendment to implement the managed care provisions under section 
1932(a)of the Act and the implementing regulations at Sec. 438.50. As 
specified in the current regulations at Sec. 430.16, we must make a 
decision to approve or disapprove a State agency's request within 90 
days of receipt of the State plan amendment, or we may request 
additional information from the State agency. If we ask for additional 
information, we must make a decision to approve or disapprove a State 
plan amendment within 90 days of receipt of the State agency's response 
to the additional information request. As with other State plan 
amendments, the effective date provisions specified in the current 
regulations at Secs. 430.20 and 447.256 apply to State plan amendments 
submitted to implement a section 1932(a) of the Act request. Thus, 
section 1932(a) State plan amendments may be effective as early as the 
first day of the quarter in which a State plan amendment is submitted 
to CMS.
    Under proposed Sec. 438.50(b), we identify what the State plan 
would be required to specify, including the payment method, whether the 
State contracts on a comprehensive risk basis, and how the State 
involves the public. Under paragraph (c), State agencies wishing to 
utilize the authority in Sec. 438.50 would be required to provide 
assurances of State compliance with all applicable requirements.
    Proposed Sec. 438.50(d) reflects the statutory exclusion of the 
following populations from mandatory managed care enrollment under the 
State plan option in section 1932(a) of the Act:
     Dual Medicare-Medicaid eligibles.
     Indians who are members of Federally-recognized tribes 
except when

[[Page 43626]]

the MCO or PCCM is either the Indian Health Service or an Indian Health 
program operated by a tribe or tribal organization under a contract, 
grant, cooperative agreement, or compact with The Indian Health 
Service.
     Children (under 19 years of age) who are--

--eligible for Supplemental Security Income benefits under Title XVI of 
the Act;
--described in section 1902(e)(3) of the Act;
--in foster care or other out-of-home placement;
--receiving foster care or adoption assistance; or
--receiving services through a family-centered, community-based, 
coordinated care system receiving grant funds under section 
501(a)(1)(D) of the Act.

    While State agencies are prohibited from enrolling the above groups 
under the State plan option, a State agency may permit voluntary 
enrollment of these individuals in a program authorized under section 
1932(a) of the Act or use a section 1915(b) waiver or section 1115 
demonstration authority to mandate enrollment for these individuals in 
a managed care system. Under section 1915(b) or section 1115 authority, 
a State agency would be required to demonstrate how the individuals' 
special needs and circumstances would be met under the managed care 
arrangements. There is a growing body of State experience and best 
practices regarding enrollment of these groups. We will use this 
knowledge when evaluating whether a particular State's waiver or 
demonstration request demonstrates that their program will adequately 
address the needs and complexities of these groups, that set them apart 
from the groups that can be mandatorily enrolled without a waiver.
    The requirements in paragraph (e) reflect the requirements in 
section 1932(a)(4)(C) on enrollment priorities. For beneficiaries 
enrolled under the State plan option under section 1932(a)(1) of the 
Act, the State agency must establish a method whereby individuals 
already enrolled with an MCO or PCCM must be given priority to continue 
that enrollment where the MCO or PCCM does not have the capacity to 
enroll all individuals seeking enrollment under the program.
    Proposed Sec. 438.50(f) reflects the provisions in section 
1932(a)(4)(D) of the Act, which stipulate that in applying the default 
assignment provision under section 1932(a)(1) programs, State agencies 
are required to establish an enrollment process that takes into 
consideration a beneficiary's existing relationships with providers and 
providers'traditional service to Medicaid beneficiaries. If enrollment 
based on the foregoing considerations is not possible, States must 
utilize an assignment process that equitably distributes enrollees 
among qualified, available MCOs or PCCMs.
    Except when State agencies have a fee-for-service experience or 
prior MCO or PCCM enrollment data regarding an individual, it may be 
difficult to establish a provider and individual relationship for 
default assignment purposes. We recommend that State agencies ask 
potential enrollees in this situation for the names of providers from 
whom they receive services and whether they would wish to continue this 
relationship. When the beneficiary identifies a provider who is 
participating and has additional capacity, this information should be 
used in determining the individual's assignment. In this instance, the 
State agency makes the assignment to any MCO or PCCM in which that 
provider participates.
    We propose under Sec. 438.50(f)(3) that existing provider-
individual relationships be defined as the provider who was the main 
source of care for the beneficiary in the last year. This can be 
established through State records of previous MCO or PCCM enrollment or 
fee-for-service experience, or through contact with the beneficiary. 
Under proposed Sec. 438.50(f)(4), we describe providers as 
traditionally serving Medicaid beneficiaries if the provider has 
experience in dealing with the Medicaid population. If the State agency 
has no recent claims history, cannot get a response from the 
beneficiary, or the named provider does not participate, the State 
agency must give consideration to traditional providers. If no 
traditional providers are available, remaining individuals are to be 
equitably distributed among qualified MCOs and PCCMs with adequate 
capacity.
2. Choice of MCO, PIHPs, PAHPs, and PCCMs (Sec. 438.52)
    Subject to certain exceptions, under section 1932(a)(3) of the Act, 
a State agency that requires Medicaid beneficiaries to enroll in an MCO 
or PCCM must offer to its beneficiaries a choice of at least two MCOs 
or PCCMs. This is consistent with the longstanding requirement under 
section 1915(b) waivers that beneficiaries have at least two options. 
This requirement derived from the fact that the right to disenroll 
provided in section 1903(m)(2)(A)(vi) of the Act could not be waived 
under section 1915(b) of the Act. Thus, in the case of a comprehensive 
risk contract subject to section 1903(m) of the Act (formerly HMO 
contracts, now MCO contracts), a beneficiary has always had the right 
to disenroll to another option. Section 1932(a)(3) of the Act reflects 
this existing mandatory managed care policy, and applies to primary 
care case managers under section 1905(t) of the Act as well. Therefore, 
a State agency could comply with this provision by offering a choice of 
two practitioners for a primary care case management system as long as 
each practitioner is a separate primary care provider. We also propose 
to extend this requirement to PIHPs and PAHPs.
    Section 1932(a)(3) of the Act provides two exceptions to the 
general choice of coverage requirement in section 1932(a)(3)(A) of the 
Act. First, under section 1932(a)(3)(B) of the Act, in rural areas, a 
State agency may restrict choice of coverage to a single MCO, PIHP, 
PAHP, or PCCM if certain conditions are met. In those situations, the 
State agency must allow the beneficiary to choose from at least two 
physicians or case managers (to the extent that at least two physicians 
or case managers are available to furnish care and services in the 
area), and the State agency must allow the beneficiary to obtain 
assistance from any other provider outside the network in appropriate 
circumstances, as established by the State agency under CMS 
regulations.
    Since a State agency may elect to implement this rural exception, 
the BBA requires us to promulgate regulations under which State 
agencies can establish the ``appropriate circumstances'' under which an 
individual will be permitted to obtain care from any provider. In 
Sec. 438.52(b)(2), we propose the following as appropriate 
circumstances under which a State agency must permit beneficiaries to 
seek out-of-plan treatment: (1) When a service or type of provider is 
not available within the MCO, PIHP, PAHP, or PCCM network; (2) for up 
to 60 days, when a provider that is not part of the MCO, PIHP, PAHP, or 
PCCM network, has an existing relationship with the beneficiary, is the 
beneficiary's main source of care, and has not accepted an offer to 
participate in the network; (3) when the only plan or provider 
available to the beneficiary does not, because of moral or religious 
objections, furnish the service the enrollee seeks; or (4) when the 
beneficiary's primary care provider determines that there is 
unnecessary risk to the beneficiary to receive separately a related 
service not

[[Page 43627]]

available in the network. We also propose that State agencies have the 
discretion to determine additional circumstances that warrant out-of-
network treatment. The State agency must ensure that enrollees are 
informed of the appropriate circumstances for out-of-plan treatment. We 
invite comments and additional suggestions in this area.
    For purposes of the rural area exception in section 1932(a)(3)(B) 
of the Act, we propose in paragraph (b)(3) to define ``rural area'' as 
any area not meeting the Medicare definition of ``urban area'' at 
Sec. 412.62(f)(1)(ii). Under this definition, any area that is part of 
a Metropolitan Statistical Area cannot be considered ``rural'' for the 
purposes of this exception. Areas designated as Metropolitan Areas, 
Primary Metropolitan Statistical Areas, or Consolidated Metropolitan 
Statistical Areas are all considered to be urban. Therefore, they are 
ineligible for this exception.
    In the case of certain HIOs (specifically, pre-1986 HIOs or the 
county-operated HIOs in California that are exempt from section 1903(m) 
of the Act), the choice requirement in section 1932(a)(3)(A)of the Act 
is deemed to be met if a choice of at least two providers within the 
entity is provided.
    Finally, we propose in paragraph (d) that when there is a rural or 
HIO exception to choice, any limitation to change between primary care 
providers may be no more restrictive than the limitations on 
disenrollment under Sec. 438.56(c).
    Section 1932(a)(4)(A)(i) of the Act expressly permits individuals 
to disenroll at any time with cause. Under section 1932(a)(4)(A)(ii), 
enrollees must be permitted to disenroll without cause during the 
initial 90 days of enrollment with an MCO or PCCM, and at least once 
every 12 months thereafter. If read to apply in all circumstances, this 
requirement would be inconsistent with allowing only one MCO or PCCM 
option, such as under the rural area and HIO exceptions provided under 
sections 1932(a)(3)(B) and (C) of the Act. We believe that in 
authorizing mandatory enrollment in a single entity under these 
exceptions, while imposing as a condition the right to choose among 
individual providers within the entity, the Congress was providing for 
an implicit exception to the general rule under section 1932(a)(4) of 
the Act in these cases. Under these exceptions, therefore, we propose 
that the requirements in section 1932(a)(4)(A) of the Act are deemed 
satisfied by providing that beneficiaries can disenroll to a different 
primary care physician or case manager. Thus, individuals may disenroll 
from their current primary care provider, but must continue as an 
enrollee in the MCO or PCCM system. This would make it unnecessary for 
a State agency to operate a parallel fee-for-service system for those 
individuals who disenroll. We note that this ``exception'' to the 
ordinary operation of the requirement in section 1932(a)(4) of the Act 
would also be incorporated in section 1903(m)(2)(A)(vi) of the Act, 
which cannot be waived under a section 1915(b) waiver program. Thus, 
under our proposed rule, a State agency could offer a single MCO or 
multi-provider PCCM in a rural area under a section 1915(b) waiver, as 
long as the requirements in Sec. 438.52(c) are satisfied. (The issue of 
section 1903(m)(2)(A)(vi) of the Act does not arise for the HIOs 
addressed in Sec. 438.52(d), because they are exempt from section 
1903(m) requirements.)
    3. Enrollment and Disenrollment: Requirements and Limitations 
(Sec. 438.56)
    Section 1932(a)(4) of the Act contains new requirements that apply 
to the enrollment and disenrollment of beneficiaries in MCOs and PCCMs. 
In addition to applying ``directly'' to mandatory programs under 
section 1932(a)(1)(A) of the Act, these requirements are also 
incorporated under section 1903(m)(2)(A) of the Act for MCOs and 
section 1905(t) of the Act for PCCMs. Thus, these new requirements also 
apply to voluntary programs, and, unless the ``grandfather provision'' 
in section 4710(c) of the BBA applies or an exception is authorized by 
CMS under section 1115(a)(2) in the case of a demonstration project, to 
mandatory programs under section 1915(b) or section 1115.
    Under section 1932(a)(4)(A) of the Act, enrolled beneficiaries may 
terminate or change their enrollment for cause at any time, unless the 
beneficiary is enrolled in a single MCO or PCCM in a rural area as 
described earlier in regards to Sec. 438.52(b). Beneficiaries must also 
be permitted to disenroll without cause from an MCO or PCCM within the 
first 90 days of the initial enrollment period of up to 12 months, and 
annually thereafter. We propose in Sec. 438.56 that these enrollment 
provisions would apply to all PIHPs and PAHPs as well. Thus, the 
provisions apply to virtually all Medicaid managed care entities and 
programs.
    We propose to replace Sec. 434.27, which required HMO and PHP 
contracts to specify when they could request beneficiary disenrollment, 
with proposed Sec. 438.56(b). The new requirement specifies the 
conditions under which an MCO, PIHP, PAHP, or PCCM may request 
beneficiary disenrollment. These conditions are consistent with 
Medicare+Choice requirements.
    The right of an enrollee to disenroll without cause (paragraph 
(c)(2)) during the first 90 days of enrollment, from a particular MCO, 
PIHP, PAHP, or PCCM and at least annually thereafter, replaces the pre-
BBA version of section 1903(m)(2)(A)(vi) of the Act, which provided 
enrollees with the right to disenroll without cause at any time, or in 
the case of Federally qualified HMOs and certain other entities, at 
least every 6 months.
    Under the pre-BBA version of section 1903(m)(2)(A)(vi) of the Act, 
a 12-month lock-in was possible only under a section 1115 
demonstration, since section 1115(a)(2) authority was required in order 
to exempt an HMO from the requirement in that version of section 
1903(m)(2)(A)(vi) of the Act. The BBA permitted 12-month lock-ins 
without demonstration authority, and even in the case of a voluntary 
program.
    In addition to extending the maximum enrollment period from 6 
months to 12 months and allowing for a 90-day, without-cause 
disenrollment period, section 1932(a)(4) of the Act--
     Applies this lengthened enrollment period to all MCOs and 
PCCMs, rather than a specific type of HMO;
     Requires that beneficiaries be notified of their ability 
to disenroll or change plans during an enrollment period that occurs at 
least every 12 months, and at least 60 days before the start of each 
enrollment period; and
     Eliminates all previous statutory provisions on enrollment 
and termination of enrollment.
    Under proposed Sec. 438.56(c), the above provisions apply to 
enrollment and disenrollment in MCOs, PIHPs, PAHPs, and PCCMs, 
regardless of authority, with the exception of (1) waiver or 
demonstration projects ``grandfathered'' under section 4710(c) of the 
BBA, and (2) States that have been granted an exception from these 
rules under section 1115, or, for PIHPs and PAHPs, under section 
1915(b) of the Act.
    We note that the language in section 1932(a)(4)(A)(ii) of the Act 
specifies that the 90-day period to disenroll without cause is to begin 
on the date the individual ``receives notice of such enrollment * * *'' 
However, we recognize that a literal application of this starting date 
could make this provision extremely difficult for State agencies to 
administer, and therefore propose in Sec. 438.56(c)(2)(i) that the 90 
days will begin when enrollment is

[[Page 43628]]

effective or notice is sent, whichever is later.
    We provide that the 90-day period for disenrollment without cause 
applies only when an individual first enrolls with a particular MCO, 
PIHP, PAHP, or PCCM. The language in section 1932(a)(4) of the Act 
regarding the 90-day period for disenrollment without cause expressly 
provides for a 90-day period that begins with enrollment with the 
entity in which the beneficiary is enrolled. Thus, beneficiaries are 
entitled to a 90-day ``without cause'' period for disenrollment any 
time they enroll in a new MCO, PIHP, PAHP, or PCCM.
    Section 1932(a)(4) of the Act provides for a notice of termination 
rights under which an enrollee must be informed of his or her ability 
to terminate or change enrollment at least 60 days before the start of 
each enrollment period. This 60-day period gives individuals the 
opportunity to change MCO, PIHP, PAHP, or PCCM effective with the start 
of their initial enrollment period with a particular MCO, PIHP, PAHP, 
or PCCM. If they choose to remain in the same plan, they have had their 
opportunity for disenrollment without cause and declined it. However, 
enrollees who change plans, would have an opportunity to try out the 
new MCO, PIHP, PAHP, or PCCM and determine whether they wish to remain 
enrolled through the enrollment period. This interpretation is 
consistent with the statutory language, that refers to a 90-day period 
beginning with the date of enrollment with ``the entity,'' and is also 
consistent with what we believe to be the intent of this provision. We 
believe that this provision was designed to provide a beneficiary with 
a period of time to try out an MCO, PIHP, PAHP, or PCCM and see whether 
it is right for him or her. A beneficiary who has already had a 90-day 
period with a particular MCO, PIHP, PAHP, or PCCM does not need another 
one in order to try out that entity. The only exceptions provided are 
when a beneficiary is automatically re-enrolled under paragraph (g) and 
missed the annual enrollment opportunity, and when a State imposes 
intermediate sanctions specified in proposed Sec. 438.702(a)(3).
    Proposed Sec. 438.56(d) sets forth procedures for disenrollment. 
The enrollee may submit a disenrollment request orally or in writing to 
the State agency. In Sec. 438.56(d)(1)(ii), we propose that the MCO, 
PIHP, PAHP, or PCCM may approve the request for disenrollment if the 
State agency permits this.
    We propose to describe cause for disenrollment in paragraph (d)(2) 
to include circumstances in which the beneficiary moves out of the MCO, 
PIHP's, PAHP's, or PCCM's service area; cases in which the plan does 
not cover, because of moral or religious objections, a service the 
enrollee seeks; and for other reasons determined by the State, such as 
for homeless individuals or migrant workers.
    In paragraph (d)(3) and (d)(4), we propose that the disenrollment 
request be processed within the timeframe specified in paragraph (e), 
or the request be deemed approved. In paragraph (d)(5), we permit the 
State agency to require that the enrollee seek redress in the MCO's, 
PIHP's, PAHP's, or PCCM's grievance system before making a 
determination on the request.
    In paragraph (e), we propose to establish the timeframe for 
processing all disenrollment requests. The effective date of an 
approved disenrollment would have to be no later than the first day of 
the second month in which the request was filed. If a determination is 
not made within that timeframe, it would be considered approved.
    In accordance with section 1932(a)(4)(B) of the Act, we propose, in 
Sec. 438.56(f), a requirement for States that restrict disenrollment to 
notify enrollees 60 days before the start of each enrollment period, 
and ensure access to the State fair hearing process if disenrollment 
for cause is denied.
    Section 1932(a)(4), of the Act requires State agencies to permit 
disenrollment without cause at least every 12 months after the 
individual's enrollment with an MCO or PCCM. State agencies may fulfill 
this requirement by having an annual open season for all MCO or PCCM 
enrollees or establishing an open enrollment opportunity for each 
individual based on the individual's date of enrollment. Through this 
regulation, we would apply these provisions to PIHPs and PAHPs as well.
    Section 438.56(g) incorporates section 4732(c) of Pub. L. 101-508, 
effective November 5, 1990, as well as the provision set forth in 
section 4702(b)(1) of the BBA, to allow State agencies to provide in 
their State plans and contracts with MCOs and PCCMs for the automatic 
re-enrollment of beneficiaries who become disenrolled from the MCO or 
PCCM solely by virtue of becoming temporarily (for months or less) 
ineligible for Medicaid.
4. Conflict of Interest Safeguards (Sec. 438.58)
    Under section 1932(d)(3) of the Act, State agencies cannot enter 
into contracts with any MCO, unless the State agency has in effect 
conflict-of-interest safeguards with respect to its officers and 
employees, and local officers and employees who have responsibilities 
relating to contracts with these MCOs, or to the default enrollment 
process. These safeguards must be at least as effective as the Federal 
safeguards provided under section 27 of the Office of Federal 
Procurement Policy Act (41 U.S.C. 423). This provision applies to 
contracts entered into or renewed by October 1, 1997 and signed by both 
parties.
    The Federal Procurement Policy Act specifies prohibitions for 
former and current employees from entering into any type of 
communications with individuals or third parties to unduly influence 
their decisions. These provisions include the following:
     Prohibited conduct by competing contractors.
     Prohibited conduct by procurement officials.
     Refusal to engage in discussion with competing 
contractors.
     Disclosure to unauthorized persons.
     Certification and enforcement matters.
    These requirements are designed to ensure that there is no undue 
influence or preference given to an MCO because a State employee has an 
interest in that MCO and to require State agencies to have stringent 
safeguards over individuals for the proper and efficient administration 
of a State Plan.
    Before section 1932(d)(3) of the Act was added by section 4207 of 
the BBA, section 1902(a)(4)(C) of the Act provided that Medicaid State 
and local officers or employees, former officers or employees, and 
partners of former officers or employees were prohibited from 
committing any act that is prohibited by Section 207 or 208 of title 18 
of the United States Code. Section 207 or 208 of title 18, prohibits 
former and current employees from entering into communications to 
influence on behalf of any other persons.
    In proposed Sec. 438.58, we would extend these provisions to PIHPs 
and PAHPs as well, under our authority under section 1902(a)(4) of the 
Act.
5. Limit on Payment to Other Providers (Sec. 438.60)
    We are proposing to redesignate existing Sec. 434.57 as 
Sec. 438.60, and to clarify that this section prohibits payments to 
providers for services available under an MCO, PIHP, or PAHP contract. 
The only exceptions to this prohibition are for payments specifically 
authorized by Federal statute or regulation.

[[Page 43629]]

6. Continued Service to Beneficiaries (Sec. 438.62)
    We propose to redesignate Sec. 434.59 as Sec. 438.62 with 
appropriate changes in terminology.
7. Monitoring Procedures (Sec. 438.66)
    We propose to redesignate Sec. 434.63 as Sec. 438.66 with non-
substantive revisions and appropriate changes in terminology.

C. Enrollee Rights and Protections (Subpart C)

1. Enrollee Rights (Sec. 438.100)
    We are proposing requirements to ensure that each contract with an 
MCO or PIHP have written polices regarding enrollee rights and that 
MCOs, PIHPs, PAHPs, and PCCMs ensure compliance with Federal and State 
laws affecting the rights of enrollees. Under this proposed rule, as 
set forth in proposed Sec. 438.100, each enrollee would have the right 
to receive information in accordance with proposed Sec. 438.10; be 
treated with respect and consideration for enrollee dignity and 
privacy; receive information on available treatment options or 
alternative courses of care; participate in decision-making regarding 
his or her health care; and be free from any form of restraint or 
seclusion used as a means of coercion, discipline, convenience, or 
retaliation. In addition, each enrollee of an MCO or PIHP would have 
the right to obtain a second opinion from a qualified health care 
provider in accordance with proposed Sec. 438.206(b), and to access his 
or her medical records and request that they be amended or corrected.
    We are proposing these standards because interpersonal aspects of 
care are highly important to most patients and closely related to 
quality of care. Enrollees' interactions with the organization and its 
providers can have an important bearing on their willingness and 
ability to understand and comply with recommended treatments and hence 
on outcomes and costs. Further, under proposed Sec. 438.100, the MCO, 
PIHP, PAHP, and PCCM would have to comply with any other Federal and 
State law pertaining to enrollee rights. These requirements extend to 
an individual acting on behalf of someone who is unable to exercise his 
or her rights.
    In proposed Sec. 438.100(d), we would require that States ensure 
that MCOs, PIHPs, PAHPs, and PCCMs and their subcontractors comply with 
Federal and State laws affecting the rights of enrollees. Federal laws 
affecting the rights of enrollees include, but are not limited to: 
Title VI of the Civil Rights Act of 1964 as implemented by regulations 
at 45 CFR part 484; the Age Discrimination Act of 1975 as implemented 
by regulations at 45 CFR part 91; the Rehabilitation Act of 1973; and 
Titles II and III of the Americans with Disabilities Act; and other 
laws regarding privacy and confidentiality.
2. Enrollee-Provider Communications (Sec. 438.102)
    Medicaid beneficiaries have historically been entitled to receive 
from their health care providers the full range of medical advice and 
counseling that is appropriate for their condition. The BBA expanded 
upon this basic right by expressly precluding an MCO from establishing 
restrictions that interfere with enrollee-practitioner communications. 
Under proposed Sec. 438.102, which expands this right to PIHPs and 
PAHPs, a health care professional who is acting within his or her scope 
of practice, must be permitted to freely advise a patient about his or 
her health status and discuss appropriate medical care or treatment for 
that condition or disease regardless of whether the care or treatment 
is covered under the contract with the MCO, PIHP, or PAHP. A health 
care professional means a physician, physician assistant, physical or 
occupational therapist, therapist assistant, speech-language 
pathologist, audiologist, registered or practical nurse (including 
nurse practitioner, clinical nurse specialist, certified registered 
nurse anesthetist, and certified nurse midwife), licensed certified 
social worker, registered respiratory therapist, and certified 
respiratory therapy technician.
    While the new provision precludes MCOs, PIHPs, and PAHPs from 
interfering with enrollee-practitioner communications, it does not 
require MCOs, PIHPs and PAHPs to provide reimbursement for, or provide 
coverage of counseling or referral services for specific services, if 
the MCO, PIHP, or PAHP objects to the service on moral or religious 
grounds. Please note, however, that the State agency remains 
responsible for ensuring access to all covered services. In these 
cases, the MCO, PIHP, or PAHP must inform beneficiaries in writing of 
its policies before and during enrollment. If the MCO, PIHP, or PAHP 
changes its policies with regard to a specific counseling or referral 
service, the organization must provide written notification to 
enrollees within 90 days of the change. However, this timeframe, while 
sufficient to meet the statutory requirement related to changes in 
counseling or referral services, is overridden by the provision at 
proposed Sec. 438.10(e)(1)(ii) that requires the MCO and PIHP to 
furnish the information at least 30 days before the effective date of 
the policy.
3. Marketing Activities (Sec. 438.104)
    Terminology. We currently require each MCO, under Sec. 434.36, to 
specify in its contract a methodology for assuring that marketing 
plans, procedures, and materials are accurate and do not mislead, 
confuse, or defraud either recipients or the Medicaid agency. Section 
1932(d)(2) of the Act, established by section 4707(a) of the BBA, 
further strengthened consumer protections and prohibits fraud and abuse 
by restricting marketing activities by MCOs and PCCMs. Section 
1932(d)(2) of the Act requires that marketing materials be distributed 
to the entire service area covered under contract, prohibits ``cold-
call'' marketing, and requires that marketing materials not be 
distributed without the prior approval of the State agency. We propose 
to implement these BBA provisions and prohibit certain other marketing 
practices, under proposed Sec. 438.104. We also propose to extend the 
requirements to PIHPs and PAHPs.
    For the purposes of this regulation, we propose in Sec. 438.104(a) 
to define marketing materials as materials produced in any medium, by 
or on behalf of an MCO, PIHP, PAHP, or PCCM, used to communicate with 
individuals who are not its enrollees and that can reasonably be 
interpreted as intended to influence the individuals to enroll in that 
particular MCO, PIHP, PAHP, or PCCM.
    Required Marketing Activities. In Sec. 438.104(b)(1)(i) and (ii), 
we propose to reflect the requirements in section 1932(d)(2)(B) of the 
Act that MCOs and PCCMs must: (1) Obtain State approval before 
distributing marketing materials; and (2) distribute marketing 
materials to the entire service area in which they have contracts under 
sections 1903(m) or 1903(t)(3) of the Act. According to the last 
sentence in section 1932(d)(2)(A)(i) of the Act this, prior approval 
requirement was to take effect on a date specified by the Secretary in 
consultation with the State agency. Following this consultation, this 
requirement became effective on July 1, 1998. In 
Sec. 438.104(b)(1)(iii), we propose to include the requirement in 
section 1932(d)(2)(D) of the Act that MCOs and PCCMs that comply with 
the information requirements set forth in Sec. 438.10 to ensure that 
each Medicaid beneficiary receives accurate oral and written 
information in order that the individual can make an informed decision 
whether or not to enroll.

[[Page 43630]]

    Prohibited Marketing Activities. In Sec. 438.104(b)(1)(iv), we 
propose to include the prohibition in section 1932(d)(2) of the Act on 
the MCO, PCCM, or any agent attempting to influence enrollment with the 
MCO or PCCM in conjunction with the sale of any other insurance. We 
interpret this to mean that MCOs and PCCMs may not entice a Medicaid 
beneficiary to join the MCO or PCCM by offering the sale of any other 
type of insurance as a bonus for enrollment. However, we invite comment 
on this provision since no legislative history is available to help 
determine if this interpretation is accurate.
    In Sec. 438.104(b)(1)(v) we propose to include the prohibition in 
section 1932(d)(2)(E) of the Act barring an MCO or PCCM, directly or 
indirectly, from conducting door-to-door, telephonic, or other ``cold-
call'' marketing of enrollment. MCOs , PCCMs, and their employees are 
prohibited from conducting these marketing practices either by 
themselves (directly) or by using an agent, affiliated provider, or 
contractor (indirectly). This provision does not prohibit MCOs and 
PCCMs from engaging in other State approved activities, such as 
marketing at health fairs, procuring billboards, bus signs, or other 
broadcast advertising materials, and contacting in person, Medicaid 
beneficiaries who request further information about the entity. 
However, it is the prerogative of the State agency to further limit 
marketing practices beyond those prohibited or required by Federal 
statute. Cold-call marketing is defined in proposed Sec. 438.104(a) as 
any unsolicited personal contact with a potential enrollee by an 
employee, affiliated provider or contractor of the entity for the 
purpose of influencing enrollment with that entity. This would include 
those activities as a physician or other member of the medical staff or 
salesperson or other managed care entity, employee, or independent 
contractor approaching a beneficiary in order to influence the Medicaid 
beneficiaries decision to enroll with a particular plan.
    In addition, we propose in Sec. 438.104(b)(2) to implement the 
provision in section 1932(d)(2)(A)(i)(II) of the Act on the 
distribution by MCOs, PCCMs, or any agents, of marketing materials that 
contain false or materially misleading information by requiring that 
MCO and PCCM contracts specify the methods by which compliance with 
this requirement is assured. Examples of misleading marketing 
information would be an assertion that the beneficiary must enroll with 
the MCO or PCCM to get Medicaid benefits, or that the MCO or PCCM is 
recommended or endorsed by us.
    Consultation in State Agency Approval of Marketing Materials. In 
Sec. 438.104(c) we propose to specify the requirement in section 
1932(d)(2)(A)(ii) of the Act that State agencies provide for 
consultation with a Medical Care Advisory Committee (MAC) in the 
process of reviewing and approving marketing materials. Currently, MAC 
is described in the regulations at Sec. 431.12. The current MCAC must 
include Board-certified physicians and other representatives of the 
health professions who are familiar with the medical needs of low-
income population groups and with the resources available and required 
for their care; members of consumers' groups that include Medicaid 
recipients and consumer organizations such as labor unions, 
cooperatives, consumer sponsored prepaid group practice plans, and 
others; and the Director of the Public Welfare Department or the Public 
Health Department, whichever does not head the Medicaid agency. State 
agencies do not have to use the current MCAC but can establish a new 
MCAC for consultation in reviewing and approving marketing material. If 
a new MCAC is established, it must be composed of similar membership to 
that described above and in Sec. 431.12.
4. Liability for Payment (Sec. 438.106)
    In Sec. 438.106, we propose to specify the requirement in section 
1932(b)(6) of the Act that MCOs protect Medicaid beneficiaries from 
being held responsible for payment liabilities incurred by the MCO or 
by a health care provider with a contractual, referral, or other 
arrangement with the MCO. For example, under the regulation, if the 
MCO, PIHP, or PAHP were to become bankrupt, the Medicaid enrollee would 
not have to assume responsibility for costs that the MCO, PIHP, or PAHP 
was responsible for covering, nor any of the debts of the providers 
affiliated with the MCO, PIHP, or PAHP. In addition, if the MCO, PIHP, 
or PAHP fails to receive payment from the State agency, or if a 
provider fails to receive payment from the State agency or the MCO, 
PIHP, or PAHP, the Medicaid enrollee cannot be held responsible for 
these payments. The Medicaid enrollee cannot be held responsible for 
payments to a provider in excess of the amount that he or she would 
have owed if the MCO, PIHP, or PAHP had directly provided the service.
5. Cost Sharing (Sec. 438.108)
    Proposed Sec. 438.108 would require compliance with the 
restrictions on cost-sharing in Secs. 447.50 through 447.60. We note 
that section 4708(b) of the BBA amended sections 1916(a)(2)(D) and 
1916(b)(2)(D) of the Act to eliminate the prohibition that existed 
prior to the BBA on the imposition cost-sharing by MCOs. Copayments for 
services provided by MCOs, PIHPs, and PAHP, may now be imposed in the 
same manner as copayments are applied under fee-for-service, as 
discussed in Secs. 447.50 through 447.60.
    Accordingly, State agencies must use their fee-for-service payment 
rates to serve as the basis for determining copayments that can be 
assigned for managed care services. State agencies would be allowed to 
impose copayment requirements to the same extent that they are allowed 
to impose copayment requirements on Medicaid beneficiaries not enrolled 
in MCOs, PIHPs, and PAHPs. For example, State agencies would have the 
option of establishing a standard copayment amount for managed care 
services that is determined by applying the maximum copayment amounts 
specified at Sec. 447.54 as applied to the State agency's fee-for-
service payment for that service.
    In addition, any beneficiary groups excluded by statute from having 
to pay copayments under fee-for-service would continue to be excluded 
from any copayment responsibility for managed care services. These 
beneficiary groups include children, pregnant women, and 
institutionalized beneficiaries. Also prohibited are copayments for 
emergency services and family planning services.
    We also propose in Sec. 447.53(e) that no provider may deny 
services to an individual who is eligible for the services on account 
of the individual's inability to pay the cost sharing. This language 
closely tracks the statutory language in section 1916(e) of the Act. 
This proposed provision applies to services furnished by either an MCO 
or under fee-for-service.
6. Emergency and Post-Stabilization Services (Sec. 438.114)
    Section 4704(a) of the BBA added section 1932(b)(2) to the Act to 
assure that Medicaid managed care beneficiaries have the right to 
immediately obtain emergency care and services, and the right to post-
stabilization services following an emergency condition under certain 
circumstances. Each contract with an MCO and PCCM must require the 
organization to provide for coverage of emergency services and post-
stabilization services as described below. In section 1932(b)(2)(A)(i) 
of the Act, while the Congress required MCOs and PCCMs to provide 
coverage of

[[Page 43631]]

emergency services, it did not define the word ``coverage'' even though 
these health care models generally do not cover emergency services in 
the same manner. In proposed Sec. 438.114, we interpret the obligation 
in section 1932(b)(2)(A)(i) of the Act to provide for coverage of 
emergency services to mean that an MCO or State (as payer of a PCCM) 
that pays for hospital services generally, must pay for the cost of 
emergency services obtained by Medicaid enrollees. We interpret 
coverage in the PCCM context to mean that the PCCM must allow direct 
access to emergency services without prior authorization. We apply 
different meanings to the word ``coverage'' because while PCCMs are 
individuals paid on a fee-for-service basis, they receive a State 
payment to manage an enrollee's care. Unlike MCOs, PCCMs would not 
likely be involved in a payment dispute involving emergency services, 
they could be involved in an authorization dispute over whether a self-
referral to an emergency room is authorized without prior approval of 
the PCCM. Accordingly, in Sec. 438.114(c)(2), we propose to provide 
that enrollees of PCCMs are entitled to the same emergency services 
coverage without prior authorization that is available to MCO enrollees 
under section 1932(b)(2) of the Act.
    The BBA further stipulates that emergency services must be covered 
without regard to prior authorization or the emergency care provider's 
contractual relationship with the organization. These provisions 
collectively enable a Medicaid enrollee to immediately obtain emergency 
services at the nearest provider when and where the need arises.
    Section 1932(b)(2)(B) of the Act defines emergency services as 
covered inpatient or outpatient services that are furnished by a 
provider qualified to furnish these services under Medicaid that are 
needed to evaluate or stabilize an emergency medical condition. An 
``emergency medical condition'' is in turn defined in section 
1932(b)(2)(C) of the Act as a medical condition manifesting itself by 
acute symptoms of sufficient severity (including severe pain) that a 
prudent layperson, who possesses an average knowledge of health and 
medicine, could reasonably expect the absence of immediate medical 
attention to result in placing the health of the individual (or for a 
pregnant woman, the health of the woman or her unborn child) in serious 
jeopardy, serious impairment to body functions, or serious dysfunction 
of any bodily organ or part. While this standard encompasses clinical 
emergencies, it also clearly requires MCOs to base coverage decisions 
for emergency services on the severity of the symptoms at the time of 
presentation and to cover examinations when the presenting symptoms are 
of sufficient severity to constitute an emergency medical condition in 
the judgment of a prudent layperson. The above definitions are set 
forth in proposed Sec. 438.114(a).
    In some cases, the ``emergency'' services required to diagnose or 
treat an ``emergency medical condition'' may fall within the scope of 
services that a PIHP, or even a PAHP, is required to cover under its 
contract. In this case, we believe that enrollees should have the same 
rights to have these services covered without delay, and ``out of 
plan'' as in the case of services covered by an MCO or through a PCCM. 
Accordingly, through our authority in section 1902(a)(4) of the Act, we 
provide in proposed Sec. 438.114(f) that the requirements in 
Sec. 438.114 apply to PIHPs and PAHPs to the extent that the services 
required to treat the emergency medical condition, or the required 
post-stabilization services in question, fall within the scope of the 
services for which the PIHP or PAHP is responsible.
    Proposed Sec. 438.114(b) requires that MCOs, PIHPs, PAHPs (to the 
extent applicable), at-risk PCCMs, or the State agency pay for 
emergency and post-stabilization services without prior authorization 
(other than the pre-approval of post-stabilization services no later 
than within one hour of a request for approval).
    Proposed Sec. 438.114(c)(1)(i) provides that an MCO or, to the 
extent applicable, a PIHP or PAHP, must pay for emergency services 
regardless of whether the entity that furnishes the services has a 
contract with the MCO, PIHP, or PAHP. In proposed 
Sec. 438.114(c)(1)(ii), MCOs, PIHPs, or PAHPs may not deny payments if, 
on the basis of symptoms identified by the enrollee, he or she appeared 
to have an emergency medical condition, but turned out not to have a 
condition in which the absence of immediate medical care would have 
resulted in serious jeopardy to the health of the individual or, in the 
case of a pregnant woman, the health of her unborn child, serious 
impairment of bodily function, or serious dysfunction of any bodily 
organ or part. Likewise, the MCO, PIHP, PAHP, or PCCM cannot deny 
payment if the enrollee obtained services based on instructions of a 
practitioner or other representative of the MCO, PIHP, or PAHP. 
Proposed Sec. 438.114(c)(2) provides that if a PCCM contract is a risk 
contract that covers the services, a PCCM system must allow enrollees 
to obtain emergency services outside of the PCCM system.
    Proposed Sec. 438.114(d) further clarifies financial 
responsibility. Proposed Sec. 438.114(d)(1) provides that MCOs, PIHPs 
and PAHPs (to the extent applicable), at-risk PCCMs, or States may not 
limit what constitutes an emergency medical condition through lists of 
symptoms or final diagnoses/conditions and may not refuse to process a 
claim because it does not contain the primary care provider's 
authorization number. Proposed Sec. 438.114(d)(2) provides that an 
enrollee who, based on the treating emergency provider's determination, 
has an emergency medical condition, may not be held liable for payment 
concerning the screening and treatment of that condition necessary to 
stabilize the enrollee. Proposed Sec. 438.114(d)(3) provides that the 
attending physician or practitioner actually treating the enrollee 
determines when the enrollee is sufficiently stabilized for transfer or 
discharge, and that this determination is binding on the MCO, PIHP, or 
PAHP for coverage purposes.
    Section 1932(b)(2)(A)(ii) of the Act also provides MCO and PCCM 
enrollees with the right to coverage of ``post-stabilization'' services 
after they have been ``stabilized'' (that is, they no longer have an 
emergency medical condition) following an admission for an emergency 
medical condition. Specifically, the services that must be covered are 
those that must be covered under Medicare rules implementing section 
1852(d)(2) of the Act, in the same manner as these rules apply to M+C 
plans offered under Part C of Title XVIII. In section 1932(b)(2)(A) of 
the Act, this requirement was effective 30 days after the Medicare 
rules were established, which was August 26, 1998. The M+C post-
stabilization requirements referenced by section 1932(b)(2)(A)(ii) of 
the Act are set forth in proposed Sec. 438.114(e), which references 
Sec. 422.113(c) of the M+C final regulation. Post-stabilization care 
means covered services, related to an emergency medical condition, that 
are provided after an enrollee is stabilized in order to maintain the 
stabilized condition, or under the circumstances described in paragraph 
Sec. 422.113(c)(2)(iii), to improve or resolve the enrollee's 
condition.
    The above emergency provisions are consistent with most of the 
emergency services provisions in the M+C regulations.
    These regulations deviate from Medicare in two ways. First, the 
Medicare statute has specific provisions

[[Page 43632]]

for non-emergency, but urgently needed services, while the Medicaid 
statute does not contain any similar references. Second, the PCCM, 
PIHP, and PAHP models are delivery systems unique to Medicaid; and 
there is no Medicare counterpart to the special rules described above 
that apply to PCCM enrollees.
7. Solvency Standards (Sec. 438.116)
    Section 4706 of the BBA amended section 1903(m)(1) of the Act by 
providing additional requirements for the solvency standards that an 
MCO must meet. Previously, MCOs had to make adequate provision against 
the risk of insolvency to the satisfaction of the State agency, and 
provide that enrolled Medicaid beneficiaries were not held liable for 
the debts of the MCO in the case of insolvency. Now, under the BBA, 
unless they meet one of the exceptions noted below, MCOs must either 
meet the same solvency standards that the State agency establishes for 
its private HMOs, or otherwise be licensed or certified by the State 
agency as a risk bearing entity. By meeting these standards, these MCOs 
are considered to have met the general solvency standards. However, 
this provision does not apply to MCOs that do not provide inpatient and 
physician services, are public entities, have solvency guaranteed by 
the State agency, or are Federally qualified health centers (FQHCs) or 
are controlled by an FQHC that meets the solvency standards already 
established for these centers by the State agency. For further 
clarification, the term ``control'' (for an MCO being controlled by an 
FQHC) means the possession, whether direct or indirect, of the power to 
direct or cause the direction of the management and policies of the MCO 
through membership, board representation, or an ownership interest 
equal to or greater than 50.1 percent. These MCOs must still meet the 
general requirement that MCOs have to make adequate provision against 
the risk of insolvency to the satisfaction of the State agency and 
provide that Medicaid beneficiaries enrolled will not be held liable 
for the debts of the MCO in the case of its insolvency.
    In accordance with our authority under section 1902(a)(4), we have 
extended the new solvency requirements in section 1903(m)(1)(A) to 
PIHPs and PAHPs, as the risks to enrollees from an insolvency apply 
equally in these settings.

D. Quality Assessment and Performance Improvement (Subpart D)

1. Background
    Before the passage of the BBA, Medicaid statute and regulations 
included a number of disparate and incremental provisions addressing 
quality. The statute focused specifically on services furnished by HMOs 
under 1903(m) of the Act. Section 1902(a)(30)(C) of the Act required 
State agencies to conduct on an annual basis, an independent, external 
review of the quality of services furnished under each State contract 
with an HMO.
    Medicaid regulations contained several provisions that related to 
quality. Specifically, the regulations required HMOs to have an 
internal quality assurance plan that met limited requirements 
(Sec. 434.34); required the State to conduct periodic medical audits of 
HMOs to ensure that each organization furnished quality and accessible 
care to all Medicaid enrollees (Sec. 434.53); provided that contracts 
include provisions that identify the population covered under the 
contract, and to specify the amount, duration, and scope of medical 
services to be provided (Sec. 434.6(a)), required the State to obtain 
proof from its contractor of its ability to provide services under the 
contract efficiently, effectively, and economically (Sec. 434.50(b)), 
and proof that the contractor furnished the health services required by 
the enrolled recipients as promptly as is appropriate, meeting the 
State agency's quality standards (Sec. 434.52). The State agency and 
HHS were given discretion in the regulations to evaluate through 
inspection or other means, the quality, appropriateness, and timeliness 
of services performed under the contract (Sec. 434.6(a)(6)).
    Other requirements that related to the quality of services included 
grievance procedures for beneficiaries enrolled in HMOs (Sec. 434.32), 
emergency medical services (Sec. 434.30), enrollee choice of health 
professional (Sec. 434.29), other State monitoring procedures 
(Sec. 434.63), and use of sanctions for HMO failure to provide 
medically necessary services resulting in an adverse effect on the 
enrollee.
    In addition to the above, Medicaid statute included several 
indirect assurances related to quality, such as a requirement that 
States contract with HMOs that met certain enrollment composition 
requirements (specifically, at least 25 percent of a health plan's 
enrollment was to consist of persons not covered by Medicare or 
Medicaid), solvency standards for HMOs serving Medicaid beneficiaries, 
and a requirement that the State ensure that access to and quality of 
services provided under managed care are at least comparable to those 
provided under the fee-for-service program. For the latter, neither the 
statute nor the regulation specified the specific methods or standards 
to support the access and quality assurances.
    As illustrated above, a number of the statutory and regulatory 
requirements before 1997 were duplicative (for example, periodic audits 
of managed care plans by State agencies and external reviews of HMOs 
from an agent of the State) or otherwise failed to allow for 
improvements in technology of measuring and improving quality (for 
example, use of performance measures and consumer surveys). As a 
consequence, it was unclear to many stakeholders how the various 
statutory and regulatory requirements worked together to effectively 
and efficiently ensure, and improve where appropriate, the quality of 
care delivered under managed care arrangements.
2. Overview
    Under section 1932 (c)(1)(A) of the Act, as added by section 
4705(a) of the BBA, each State that elects to furnish services to 
Medicaid beneficiaries through an MCO must develop and implement a 
quality assessment and performance improvement strategy that includes 
access standards, other measures, monitoring procedures, and periodic 
review. This statutory arrangement applies regardless of whether the 
managed care arrangement is mandatory or voluntary. Further, this 
strategy must be ``consistent with standards'' that we establish in 
regulations (section 1932(c)(1)(B) of the Act).
    Proposed subpart D of part 438 contains our proposed standards, 
developed in accordance with the statute. The proposed standards, 
discussed later in greater detail, would require a State's strategy to 
include various access standards, structure and operation standards, 
and measurement and improvement standards. Once developed, each State 
would be required to review the strategy to ensure its overall 
effectiveness in achieving its desired results.
    Many of the requirements in this subpart would be imposed on 
States. States in turn would impose these requirements on MCOs. As 
previously discussed, we have proposed to add PIHPs as entities subject 
to this subpart under our authority at section 1902(a)(4) of the Act.

[[Page 43633]]

Proposed Provisions of Subpart D

3. Scope (Sec. 438.200)
    This section sets forth the scope of Subpart D.
4. State Responsibilities (Sec. 438.202)
    This section sets forth the State responsibilities in implementing 
its quality strategy. Specifically, proposed Sec. 438.202 would require 
that each State contracting with an MCO or PIHP do the following:
     Have a written strategy for assessing and improving the 
quality of managed care services provided by the MCO and PIHP.
     Have a means for obtaining input of recipients and other 
stakeholders in the development of the strategy, including making the 
strategy available for public comment before adopting it as final.
     Ensure compliance with standards established by the State.
     Conduct periodic reviews to evaluate the effectiveness of 
the strategy and update the strategy, periodically, as needed.
     Submit a copy of the initial strategy to CMS as well as a 
revised strategy when significant changes are made.
    Additionally, regular reports on the implementation and 
effectiveness of the strategy would have to be submitted to us, 
consistent with the State's periodic reviews.
5. Elements of State Quality Strategies (Sec. 438.204)
    This section sets forth the minimum elements of a State's quality 
strategy. We propose that these elements include the following:
     MCO and PIHP contract provisions that incorporate the 
standards in this subpart.
     Procedures for accessing the quality and appropriateness 
of care and services furnished to all Medicaid enrollees under the MCO 
and PIHP contracts, including individuals with special health care 
news. We suggest states reference the November 6, 2000 Report to the 
Congress entities safeguards for individuals with special health care 
needs enrolled in Medicaid managed care to determine what populations 
to consider when determining individuals with special health care 
needs. We also propose that the State strategy include procedures that 
identify the race, ethnicity, and primary language spoken of each 
Medicaid enrollee. We would require the latter information to be 
provided to the MCO and PIHP at the time of enrollment.
     Continuous monitoring and evaluation of MCO and PIHP 
compliance with the standards.
     Performance measures and levels, identified and developed 
by CMS in consultation with States and other relevant stakeholders.
     Arranging for annual, external independent reviews of 
quality outcomes and timeliness of, and access to, the services covered 
under the contract.
     Appropriate use of intermediate sanctions that, at a 
minimum, meet the requirements of subpart I of this part.
     An information system that supports initial and ongoing 
operation and review of the State's quality strategy.
     Standards, at least as stringent as those in the following 
sections of this subpart, for access to care, structure and operations, 
and quality measurement and improvement.
    In the development of the proposed rule, some stakeholders 
expressed concern over any provision that would require States to 
identify to MCOs and PIHPs the race, ethnicity, and primary language 
spoken by MCO and PIHP enrollees. Some stakeholders expressed concern 
that the requirement for ethnicity would require States to change their 
information systems. They questioned whether the value of requiring 
this information was worth the cost. In response to these concerns, we 
believe that most States are currently collecting and reporting data on 
race and ethnicity and, thus, should not have to expend significant 
costs for systems changes. Based on this current practice, we believe 
that States should not be unduly burdened by this provision of the 
proposed rule. We invite comments on this issue.
    We have included as an element of States quality strategies that 
they must include ``performance measures and levels, certified and 
developed by CMS in consultation with States and other relevant 
stakeholders.'' We propose this requirement because of the increasing 
interest in comparable information across health plans and States on 
their performance in serving Medicaid enrollees. We invite public 
comment on this proposal, including what would be an effective means to 
provide State and other stakeholder input into the development of these 
measures.
    Access standards. The following sections are proposed in accordance 
with statutory authority that requires State agencies that contract 
with MCOs under section 1903(m) of the Act to develop a quality 
assessment and improvement strategy that includes standards for access 
to care so that all covered services are available in a manner that 
ensures continuity of care, adequate primary care, and specialized 
services capacity (section 1932(c)(1)(A) of the Act, as added by 
section 4704 of the BBA).
6. Availability of Services (Sec. 438.206)
     Basic rule. Paragraph (a) of this section sets forth the 
basic requirement for this section, which would require the State to 
ensure, through its contracts, that all covered services are available 
and accessible to enrollees.
     Delivery Network. Paragraph (b) of this section would 
require the State to ensure the following:

--Each MCO and PIHP maintains and monitors a network of appropriate 
providers that is supported by written agreements and is sufficient to 
provide adequate access to all services covered under the contract. 
(Each MCO and PIHP would have to consider the anticipated enrollment in 
the MCO or PIHP, the expected utilization of services, considering 
enrollee characteristics and health care needs, the number and types 
(in terms of training, experience, and specialization) of providers 
required to furnish the contracted services, the numbers of network 
providers who are not accepting new Medicaid patients, and the 
geographic location of providers and Medicaid enrollees, considering 
distance, travel time, the means of transportation ordinarily used by 
Medicaid enrollees, and whether the location provides physical access 
for Medicaid enrollee with disabilities.)
--The MCO or PIHP provides female enrollees with direct access to a 
women's health specialist within the network for covered care necessary 
to provide women's routine and preventative health care services.
--The MCO or PIHP provides for a second opinion from a qualified health 
care professional within the network, or arranges for the enrollee to 
obtain one outside of the network, at no cost to the enrollee.
--If the network is unable to provide necessary medical services, 
covered under the contract, to a particular enrollee, the MCO or PIHP 
adequately and timely covers these services out of network for the 
enrollee, for as long as the MCO or PIHP is unable to provide them.
--The MCO or PIHP requires the out-of-network providers to coordinate 
with the MCO or PIHP with respect to payment and ensures that cost to 
the enrollee is no greater than it would be if the services are 
furnished within the network.
--The MCO or PIHP demonstrates that its providers are credentialed as 
required by Sec. 438.214.


[[Page 43634]]


     Furnishing of services. Paragraph (c) of this section 
would require States to ensure that MCOs and PIHPs meet requirements 
addressing the following:
--Timely access to services. Specifically, MCOs and PIHPs would have to 
meet and require their providers to: meet State-established standards 
for timely access to care, that would take into account the urgency of 
need for services; ensure that the network providers offer hours of 
operation that are no less than the hours of operation offered to 
commercial enrollees or comparable to Medicaid fee-for-service, if the 
provider serves only Medicaid enrollees; make services available 24 
hours a day, 7 days a week, when medically necessary; establish 
mechanisms to ensure compliance; monitor continuously to determine 
compliance; and take corrective action if there is a failure to comply.
--Cultural considerations. In addition to timely access standards, we 
believe that it is important for MCOs and PIHPs to address cultural 
considerations. Therefore, we are proposing in paragraph (c)(2) of this 
section that each MCO and PIHP participates in the State's efforts to 
promote the delivery of services in a culturally competent manner to 
all enrollees, including those with limited English proficiency and 
diverse cultural and ethnic backgrounds.
7. Assurances of Adequate Capacity and Services (Sec. 438.207)
    Apart from the statutory provisions addressing the State's quality 
strategy, and the need to develop access standards under that strategy, 
the statute specifically requires MCOs to provide to the State agency 
and the Secretary adequate assurances that it has the capacity to serve 
the expected enrollment in its service area (section 1932(b)(5) of the 
Act, as added by section 4704(a) of the BBA). The statute provides that 
the adequate assurances must be provided in a time and manner 
determined by the Secretary, and must demonstrate that each MCO offers 
an appropriate range of services and a sufficient number, mix, and 
geographic distribution of providers of services.
    The requirements in this section are proposed in accordance with 
section 1932(b)(5) of the Act, described earlier. In order to avoid 
confusion between proposed Sec. 438.206 and Sec. 438.207, we would 
clarify that proposed Sec. 438.207 would address procedural 
requirements for submitting assurances of adequate capacity and 
services, while proposed Sec. 438.206 would address substantive 
standards relating to the availability of services. Both sections are 
related in the sense that we are requiring MCOs and PIHPs to submit 
documentation to the State (which in turn will submit assurances to 
CMS) addressing how the MCO or PIHP has met the access standards 
proposed under Sec. 438.206. We believe this fulfills the intent of 
Congress that MCOs submit assurances of adequate capacity and services, 
in a form and manner determined by the Secretary. As previously 
discussed, we added PIHPs as entities subject to this subpart under our 
authority at 1902(a)(4) of the Act.
     Basic Rule. Section 438.207(a) sets forth the basic 
provision of this section. It would require the State to ensure, 
through its contracts, that each MCO and each PIHP provides assurances 
to the State that it has the capacity to serve the expected enrollment 
in its service area in accordance with the State's standards for access 
to care under this subpart.
     Nature of assurances. Paragraph (b) of this section would 
require each MCO and each PIHP to submit documentation to the State, in 
a format specified by the State and acceptable to CMS, to demonstrate 
that it complies with the following requirements:

--Offers an appropriate range of services, including preventive 
services, primary care services and specialty services that is adequate 
for the anticipated number of enrollees for the service area.
--Maintains a network of providers that is sufficient in number, mix, 
and geographic distribution to meet the needs of the anticipated number 
of enrollees in the service area.
     Timing of documentation. Paragraph (c) would require each 
MCO and PIHP to submit the documentation described in paragraph (b) of 
this section as specifies by the State, and specifically--
--At the time it enters into a contract with the State.
--At any time there has been a significant change (as defined by the 
State) in the MCO's or PIHP's operations that would affect adequate 
capacity and services. These include changes in the MCO or PIHP 
services, benefits, geographic service area or payments, and enrollment 
of a new population in the MCO or PIHP.
     State review and submission to CMS. Paragraph (d) would 
require the State, after it reviews the documentation submitted by the 
MCO or PIHP, to certify to CMS that the MCO or PIHP has complied with 
the State's requirements for availability of services, as set forth in 
Sec. 438.206.
     CMS's right to inspect documentation. Paragraph (e) would 
ensure that the State makes available to CMS, upon request, all 
documentation collected by the State from the MCO or PIHP.
8. Coordination and Continuity of Care (Sec. 438.208)
    Basic Requirement. Paragraph (a) of this section sets forth the 
basic requirement of this proposed section. We would require the State 
to ensure, through its contracts, that MCOs and PIHPs, except as 
otherwise specified in this section, meet the provisions outlined in 
this section. This paragraph also acknowledges two exceptions: one for 
PIHPs and another for MCOs that serve dually eligible enrollees. It 
would permit a State to determine, based on the scope of the PIHP's 
services, and the way the State has organized the delivery of managed 
care services, whether a PIHP is required to perform the screenings and 
assessments specified in paragraph (c) or required to meet the primary 
care requirements of paragraph (e)(1). The second exception would 
permit the State to determine to what extent an MCO that serves 
enrollees who are also enrolled in a Medicare+Choice plan and receive 
Medicare benefits, must meet the screening and assessment, referral and 
treatment plan, and primary care and coordination requirements of 
paragraphs (c), (d) and (e)(1) of this section, respectively.
    We believe that the paragraphs of this section should apply to 
PIHPs to the extent they are applicable to the services furnished by 
the PIHP. Because some PIHPs provide services to the most vulnerable 
Medicaid enrollees, many of whom have been diagnosed with chronic 
conditions or who are determined to have long term care needs, it is 
important that those PIHPs have mechanisms for timely screening and 
assessment of enrollees requiring special attention. We acknowledge, 
however, that the State might design a system that involves PIHPs for 
which the screening and assessment function is performed by an acute 
care MCO and imposing a similar requirement on the PIHP would be 
duplicative (that is, a carve-out program for mental health services in 
which the enrollee was referred by the MCO contracted to provide 
physical health services). Likewise, some of the requirements of this 
section might be duplicative for an MCO that serves dual eligible 
enrollees who are also enrolled in a Medicare+Choice plan and receive 
Medicare benefits. Accordingly, we drafted an exception that would 
permit

[[Page 43635]]

a State to determine the application of these requirements to the MCOs, 
based on the services the MCO is contracted to furnish. We invite 
comments in this area.
    State Responsibility To Identify Certain Enrollees with Special 
Health Care Needs. This paragraph would require the State implement a 
mechanism to identify to its enrollment broker, if applicable prior to 
enrollment, and the MCO and PIHP, upon enrollment, individuals with 
special health care needs, as specified by the state. This requirement 
is proposed to facilitate the early identification and assessment of 
enrollees with special health care needs. Although we do not define in 
regulation the term ``special health care needs,'' our Report to the 
Congress entitled, ``Safeguards for Individuals with Special Health 
Care Needs Enrolled in Medicaid Managed Care'' (November 6, 2000), 
identified certain groups of individuals at risk of having special 
health care needs. We encourage States to consider those groups as they 
establish their own definitions. We invite comment in this area.
    Screening and Assessment. This paragraph sets forth the requirement 
that the State (either through its own staff or its enrollment broker), 
or at the State's discretion, each MCO or PIHP (through appropriate 
health care professionals) must ensure a best effort is made to meet 
the following standards:
    The proposed requirements of this section permit States some 
discretion to use their own staff or an enrollment broker to conduct 
screening and assessment functions of individuals enrolling in MCOs or 
PIHPs. It also permits States to require MCOs or PIHPs, as appropriate, 
to perform the screening and assessment functions through appropriate 
health care professionals. We acknowledge that 100 percent compliance 
may not be achieved in the case of individuals who refuse to undergo a 
screening or assessment, or for those the MCO or PIHP has tried to 
contact on multiple occasions but has been unable to reach. In those 
cases the MCO or PIHP, through appropriate health care professionals, 
should ensure that this information is documented in the enrollee's 
medical records explaining why the screening or assessment was not 
performed.
    Treatment plans. This paragraph proposes that the State ensures 
that each MCO and PIHP has a mechanism in place for enrollees 
determined through an assessment to have ongoing special conditions 
that require a course of treatment or regular care monitoring as 
follows:
     The enrollee may directly access a specialist (for 
example, through a standing referral or an approved number of visits) 
as is appropriate for the enrollee's condition and identified needs.
     A treatment plan, if required by the MCO or PIHP, is 
developed by a specialist in consultation with the enrollees primary 
care provider; is developed with enrollee participation; is approved by 
the MCO or PIHP in a timely manner, if an approval is required; and is 
in accordance with the State's quality assurance and utilization review 
standards. We envision that for children with special healthcare needs, 
enrollee participation would also encompass participation by the 
family.
    During the development of this proposed rule, some stakeholders 
expressed concern that our requirements not be overly prescriptive and 
burdensome with respect to screening, assessment, and treatment plans. 
We believe the proposed rules set forth minimum requirements that are 
critical to the success of managed care for persons with special health 
care needs. We further believe that some level of prescription is 
necessary to ensure that enrollees with ongoing special conditions who 
are undergoing a course of treatment or requiring care coordination 
from specialist can do so without having to receive a referral from 
their primary care provider for each specialist visit or treatment. We 
invite public comments in this area. Further treatment plans should be 
updated when these are changes in the enrollee's condition, including 
changes in developmental status and needs.
     Primary care and coordination program. This paragraph 
would require each MCO and each PIHP to implement a coordination 
program that meets State requirements and achieves the following:
--Ensures that each enrollee has an ongoing source of primary care 
appropriate to his or her needs and a person or entity formally 
designated as primarily responsible for coordinating the health care 
services furnished to the enrollee.
--Coordinates the services the MCO or PIHP furnishes to the enrollee 
with the services the enrollee receives from any other MCOs and PIHPs.
--Shares with other MCOs and PIHPs serving the enrollee the results of 
its screenings and assessments of the enrollee so that those activities 
need not be duplicated.
--Ensures that in the process of coordinating care, each enrollee's 
privacy is protected consistent with privacy rules at 45 CFR 160 and 
164.
9. Coverage and Authorization of Services (Sec. 438.210)
     Coverage. This paragraph sets forth proposed basic 
coverage requirements. We are proposing that each contract with an MCO 
or PIHP do the following:
--Identify, define, and specify each service that the MCO or PIHP is 
required to offer.

--Require that the MCO or PIHP make available the services it is 
required to furnish in no less than the amount, duration, and scope 
that are specified in the State plan and that are sufficient to 
reasonably be expected to achieve the purpose for which the services 
are furnished.
--Provide that the MCO or PIHP may not arbitrarily deny or reduce the 
amount, duration, or scope of a required service solely because of the 
diagnosis, type of illness, or condition (although they may place 
appropriate limits on services on the basis of criteria such as medical 
necessity or utilization control, provided the services furnished can 
reasonably be expected to achieve their purpose).
--Specify what constitutes ``medically necessary services'' in a manner 
that is no more restrictive than the State Medicaid program as 
indicated in State statutes and regulations, the State Plan, and other 
State policy and procedures, and addresses the extent to which the MCO 
or PIHP is responsible for covering services related to the prevention, 
diagnosis, and treatment of health impairments, the ability to achieve 
age-appropriate growth and development, and the ability to attain, 
maintain, or regain functional capacity.
     Processing of requests. In this paragraph, we are 
proposing that, for the processing of requests for initial and 
continuing authorizations of services, each contract must require the 
following:

--The MCO or PIHP and its subcontractors have in place, and follow, 
written policies and procedures.
--Any decision to deny a service authorization request or to authorize 
a service in an amount, duration, or scope that is less than requested, 
be made by a health care professional who has appropriate clinical 
expertise in treating the enrollees's condition or disease. For the 
review criteria, we propose that MCOs and PIHPs have in effect 
mechanisms to ensure the consistent application of the review criteria 
for authorization decision;

[[Page 43636]]

and consult with requesting providers when appropriate.
     Notice of adverse action. In this paragraph, we are 
proposing that each contract be required to provide for the MCO or PIHP 
to notify the requesting provider, and give the enrollee written notice 
of any decision by the MCO or PIHP to deny a service authorization 
request, or a decision to authorize a service in an amount, duration, 
or scope that is less than requested. We specify that the notice must 
meet the requirements of Sec. 438.404, except that the notice to the 
provider need not be in writing.
     Timeframe for decisions. In this paragraph, we are 
proposing that each MCO or PIHP contract provide for the following 
decisions and notices for standard authorization decisions and 
expedited authorization decisions. For standard authorization 
decisions, the MCO or PIHP would provide notice as expeditiously as the 
enrollee's health condition requires and within State-established 
timeframes that may not exceed 14 calendar days following receipt of 
the request for service (with a possible extension of up to 14 
additional calendar days if the enrollee, or the provider, requests an 
extension or the MCO or PIHP justifies (to the State agency upon 
request) a need for additional information and how the extension is in 
the enrollee's interest). For cases in which a provider indicates, or 
the MCO or PIHP determines, that following the standard timeframe could 
seriously jeopardize the enrollee's life or health or ability to 
attain, maintain, or regain maximum function, the MCO or PIHP would be 
required to make an expedited authorization decision, and provide 
notice as expeditiously as the enrollee's health condition requires and 
no later than 3 working days after receipt of the request for service. 
We propose that the MCO or PIHP be permitted to extend the 3 working 
days time period by up to 14 calendar days if the enrollee requests an 
extension, or if the MCO or PIHP justifies that a need for additional 
information is in the enrollee's interest.
     Compensation for utilization management activities. This 
paragraph would require each contract to provide that compensation to 
individuals or entities that conduct utilization management activities 
is not structured so as to provide incentives for the individual or 
entity to deny, limit, or discontinue medically necessary services to 
any enrollee.
    Structure and Operation Standards. The following sections are 
proposed in accordance with statutory authority that requires State 
agencies that contract with MCOs under section 1903(m) of the Act to 
develop a quality assessment and improvement strategy that includes 
examination of other aspects of care and service directly related to 
the improvement of quality of care (Section 1932(c)(1)(A) of the Act, 
as added by section 4704 of the BBA).
10. Provider Selection (Sec. 438.214)
     General rules. This paragraph sets forth the proposed 
rules for this section. The State would be required to ensure, through 
its contracts, that MCOs and PIHPs implement written policies and 
procedures for the selection and retention of providers and that those 
policies and procedures include, at a minimum, the requirements 
outlined in the following paragraphs.
     Credentialing and recredentialing requirements. In this 
paragraph, we propose that each MCO and PIHP would have to follow a 
documented process for credentialing and recredentialing of providers 
who have signed contracts or participation agreements with the MCO or 
the PIHP.
     Nondiscrimination. In this paragraph, we would require the 
MCO and PIHP provider selection policies and procedures to be 
consistent with the antidiscrimination requirements at Sec. 438.12 and 
to not discriminate against particular providers that serve high risk 
populations or specialize in conditions that require costly treatment.
     Excluded providers. This proposed paragraph would provide 
that MCOs or PIHPs may not employ or contract with providers excluded 
from participation in Federal health care programs under either section 
1128 or section 1128A of the Act.
     State requirements. In this paragraph, we are proposing 
that MCOs and PIHPs comply with any additional requirements established 
by the State.
11. Enrollee Information (Sec. 438.218)
    In this section, we propose to incorporate the information 
requirements under Sec. 438.10 as part of the State's quality strategy.
12. Confidentiality (Sec. 438.224)
    This section sets forth the requirement that States must ensure 
MCOs and PIHPs meet privacy requirements at Subpart F of part 431 of 
this chapter and 45 CFR 160 and 164.
13. Enrollment and Disenrollment (Sec. 438.226)
    In this section, we propose to incorporate the enrollment and 
disenrollment requirements in other parts of this rule as part of the 
State's quality assessment and improvement strategy. We would require 
the State to ensure that each MCO and PIHP contract complies with the 
enrollment and disenrollment requirements and limitations set forth in 
Sec. 438.56.
14. Grievance Systems (Sec. 438.228)
    In this section, we propose to incorporate the requirements for a 
grievance system as part of the State's quality assessment and 
improvement strategy. Thus, we would require the State to ensure, 
through its contracts, that each MCO and PIHP has in effect a grievance 
system that meets the requirements of subpart F of this part. We also 
require that if the State delegates to the MCO or PIHP responsibility 
for notice of action under subpart E of part 431 of this chapter, the 
State must conduct random reviews of each delegated MCO or PIHP and its 
providers and subcontractors to ensure that they are notifying 
enrollees in a timely manner.
15. Subcontractual Relationships and Delegation (Sec. 438.230)
    In this section, we address subcontracting and delegation. We would 
require the State to ensure, through its contracts, that each MCO and 
PIHP oversees and is accountable for any functions and responsibilities 
that it delegates to any subcontractor, and meets specific conditions. 
The specific conditions require the following:
     Before any delegation, each MCO and PIHP evaluates the 
prospective subcontractor's ability to perform the activities to be 
delegated.
     There be a written agreement that specifies the activities 
and report responsibilities delegated to the subcontractor and provides 
for revoking delegation or imposing other sanctions if the 
subcontractor's performance is inadequate.
     The MCO or PIHP monitors the subcontractor's performance 
on an ongoing basis and subjects it to formal review according to a 
periodic schedule established by the State, consistent with industry 
standards or State MCO laws and regulations.
     If any MCO or PIHP identifies deficiencies or areas for 
improvement, the MCO and the subcontractor take corrective action.
    Measurement and Improvement Standards. The following sections are 
proposed pursuant to statutory authority that requires State agencies 
that contract with MCOs under section 1903(m) of the Act to develop a 
quality assessment and improvement strategy that includes procedures 
for monitoring and evaluating the quality and

[[Page 43637]]

appropriateness of care and services to enrollees (section 
1932(c)(1)(A) of the Act, as added by section 4704 of the BBA).
16. Practice Guidelines (Sec. 438.236)
    This section addresses the adoption, dissemination, and application 
of practice guidelines. We propose that each MCO and PIHP adopts 
practice guidelines that: (1) are based on valid and reliable clinical 
evidence or a consensus of health care professionals in the particular 
field; (2) consider the needs of the MCO's or PIHP's enrollees; (3) are 
adopted in consultation with contracting health care professionals; and 
(4) are reviewed and updated periodically as appropriate. We also 
propose that MCOs and PIHPs disseminate the guidelines to all affected 
providers and, upon request, to enrollees and potential enrollees. 
Finally, we specify that decisions with respect to utilization 
management, enrollee education, coverage of services, and other areas 
to which the guidelines apply are consistent with the guidelines.
17. Quality Assessment and Performance Improvement Program 
(Sec. 438.240)
     General rules. This paragraph sets forth the proposed 
general requirements of this section. We would require the State to 
ensure, through its contracts, that each MCO and PIHP has an ongoing 
quality assessment and performance improvement program for the services 
it furnishes to its enrollees. In addition, we specify that CMS, in 
consultation with States and other stakeholders, may specify 
standardized quality measures, and topics for performance improvement 
projects to be required by States in their contracts with MCOs and 
PIHPs.
     Basic elements of an MCO and PIHP quality assessment and 
performance improvement programs. In this paragraph, we propose the 
basic elements of an MCO and PIHP quality assessment and improvement 
program. We propose that, at a minimum, the State must require that 
each MCO and PIHP do the following:

--Conduct performance improvement projects as described in paragraph 
(d) of this section.
--Have in effect mechanisms to detect both underutilization and 
overutilization of services.
--Have in effect mechanisms to assess the quality and appropriateness 
of care furnished to enrollees with special health care needs.
    We specify that the performance improvement projects would have to 
achieve, through ongoing measurements and intervention, demonstrable 
and sustained improvement in significant aspects of clinical care and 
non-clinical care areas that can be expected to have a favorable effect 
on health outcomes and enrollee satisfaction.
     Performance measurement and improvement. In this 
paragraph, we propose that each MCO and PIHP annually measure its 
performance, using standard measures required by the State consistent 
with the requirements of Sec. 438.204(c), and report its performance to 
the State.
     Performance improvement projects. In this paragraph, we 
propose the following:

--Each MCO and PIHP would be required to have an ongoing program of 
performance improvement projects that focuses on clinical and non-
clinical areas.
--Each MCO and PIHP must report the status and results of each project 
to the State as requested.

    We envision States will establish quality indicators that are 
objective, clearly and unambiguously defined, and based on current 
clinical knowledge or health services research, and capable of 
measuring outcomes such as changes in health status, functional status, 
and enrollee satisfaction, or valid proxies of these outcomes. Further, 
performance improvement projects must use objective quality indicators, 
the implementation of system interventions to achieve improvement in 
quality, evaluation of the effectiveness of the interventions, and 
planning and initiation of activities for increasing or sustaining 
improvement.
    Finally, we specify that each performance improvement project must 
be completed in a reasonable time period so as to generally allow 
information on the success of performance improvement projects in the 
aggregate to produce new information on quality of care every year.
    In the development of this proposed rule, some stakeholders 
expressed concern that we not mandate the number, type, or quantity of 
quality improvement studies a State requires the MCO to undertake. 
Stakeholders expressed concern that targets for improvement vary 
greatly from State to State, and region to region within a State. Thus, 
a national consensus would be difficult to achieve. Further, 
stakeholders also expressed concern that we not set minimum levels for 
performance measures, noting that by setting them at a level that all 
plans could reasonably achieve, we might lower performance in the 
aggregate. Moreover, our actions might undercut a State's negotiating 
position. We are sympathetic to many the above concerns, and have 
considered them in the development of this proposed rule. However, as 
the art of quality improvement and measurement advances, we believe 
that we should have the ability to specify standardized measures and 
topics for improvement projects. We preserve this right in regulation 
and clarify that, in exercising this right, we will consult with States 
and other stakeholders to achieve consensus to the greatest extent 
possible. We invite public comments in this area.
     Program review by the State. In this paragraph, we propose 
requirements for the State's review of the MCO and PIHP quality 
assessment and improvement program. We would require the State to 
review, at least annually, the impact and effectiveness of each MCO's 
and PIHP's quality assessment and performance improvement program. We 
also would require the State's review to address the MCO's and PIHP's 
performance on the standard measures on which it is required to report, 
and the results of the each MCO's and PIHP's performance improvement 
projects. Finally, we specify that the State may require that an MCO or 
PIHP have in effect a process for its own evaluation of the impact and 
effectiveness of its quality assessment and performance improvement 
program.
18. Health Information Systems (Sec. 438.242)
    This section proposes requirements for health information systems. 
We generally would require the State to ensure, through its contracts, 
that the MCO and PIHP maintains a health information system that 
collects, analyzes, integrates, and reports data and can achieve the 
objectives of this subpart. We specify that the system should provide 
information on areas including, but not limited to, utilization, 
grievances, and disenrollments for other than loss of Medicaid 
eligibility. At a minimum, the MCO and PIHP would be required to do the 
following:
     Collect data on enrollee and provider characteristics as 
specified by the State, and on services furnished to enrollees through 
an encounter data system or other methods as may be specified by the 
State.
     Ensure that data received from providers is accurate and 
complete.
     Make all collected data available to the State, and upon 
request to CMS, as required in this subpart. In ensuring that the data 
from providers is accurate and complete, we specify that the MCO and 
PIHP must have mechanisms to verify

[[Page 43638]]

the accuracy and timeliness of reported data, screen the data for 
completeness, logic, and consistency, and collect service information 
in standardized formats to the extent feasible and appropriate.

E. Subpart E

    We are proposing to reserve Subpart E.

F. Grievance Systems (Subpart F)

    Proposed Subpart F is based on section 1902(a)(3) of the Act, 
(which requires a State plan to provide an opportunity for a fair 
hearing to any person whose request for assistance is denied or not 
acted upon promptly), section 1902(a)(4) of the Act, which (authorizes 
the Secretary to specify methods of administration that are 
``necessary'' for ``proper and efficient administration''), and section 
1932(b)(4) of the Act, (which requires that MCOs have an internal 
grievance procedure under which a Medicaid enrollee, or a provider on 
behalf of an enrollee, may challenge the denial of coverage of or 
payment by the MCO).
    In this subpart, we propose regulations that lay out the elements 
of the grievance system required under section 1932(b)(4) of the Act, 
and how it interfaces with the State fair hearing requirements in 
section 1902(a)(3). We define terms, describe what constitutes a notice 
of action, and address how grievances and appeals must be handled, 
including timeframes for taking action. We include a process for 
expedited resolution of appeals in specific circumstances; address the 
requirement for continuation of benefits; and lay out the requirements 
relating to record keeping, monitoring and effectuation of reversed 
appeal resolutions.
1. Statutory Basis and Definitions (Sec. 438.400)
    Definitions of terms used in proposed subpart F are found in 
proposed Sec. 438.400 and would have the following meanings:
    Action means, in the case of an MCO or PIHP or any of its 
providers,
     The denial or limited authorization of a requested 
service, including the type or level of service;
     The reduction, suspension, or termination of a previously 
authorized service;
     The denial, in whole or in part, of payment for a service; 
or
     For a resident of a rural area with only one MCO or PIHP, 
the denial of a Medicaid enrollee's request to exercise his or her 
right to obtain services outside the network.
    Appeal means a request for review of an action, as ``action'' is 
defined in this subpart.
    Governing body means the MCO's or PIHP's Board of Directors, or a 
designated committee of its senior management.
    Grievance is defined as an expression of dissatisfaction about any 
matter other than an action. This term can also be used to refer to the 
overall system that includes grievances and appeals handled at the MCO 
or PIHP level and access to the State Fair Hearing Process. Possible 
subjects for grievances include, but are not limited to, the quality of 
care or services provided, aspects of interpersonal relationships such 
as rudeness of a provider or employee, or failure to respect the 
enrollee's rights.
2. General Requirements (Proposed Sec. 438.402)
    Proposed Sec. 438.402 would require that each MCO and PIHP must 
have a grievance system in place for enrollees that includes a 
grievance process, an appeal process, and access to the State's fair 
hearing system.
    Proposed Sec. 438.402(b)(1) would specify that an enrollee may file 
a grievance or an MCO or PIHP level appeal, and may request a State 
fair hearing. In addition, a provider, acting on behalf of an enrollee 
and with the enrollee's written consent may file an appeal. However, 
the provider cannot file a grievance or request a State fair hearing on 
behalf of the enrollee.
    Under Sec. 438.402(b)(2), we propose timeframes within which the 
enrollee or provider may file an appeal. Our intent is to mirror the 
filing timeframes for the State fair hearing, that is, a reasonable 
amount of time up to 90 days. In addition, we have incorporated the 
longstanding policy at section 2901.3 of the Medicaid Manual that 
beneficiaries be given a minimum of 20 days to file an appeal. We 
believe that this policy gives beneficiaries a reasonable amount of 
time to file an appeal. Therefore, the proposed regulation requires 
that the State specify a timeframe for filing an appeal that is no less 
than 20 days and does not exceed 90 days from the date of the MCO's or 
PIHP's notice of action. Within this timeframe, the enrollee or the 
provider may file an appeal, and in a State that does not require 
exhaustion of the MCO and PIHP level appeals, the enrollee may request 
a State fair hearing.
    In proposed Sec. 438.402(b)(3), we specify the manner in which 
enrollees may file grievances, and enrollees or the provider may file 
appeals. For grievances, the enrollee may file either orally or in 
writing either to the State or with the MCO or PIHP, as determined by 
the State. The enrollee or the provider may file an appeal either 
orally or in writing, and unless he or she requests expedited 
resolution, must follow an oral filing with a written, signed, appeal. 
While enrollees may start the appeal clock with an oral request, they 
must follow it with a written request as a written appeal best 
documents the issue being appealed. In expedited situations, this 
proposed rule provides that the enrollee is not required to place the 
appeal in writing.
3. Notice of Action (Sec. 438.404)
    We are proposing that the notice MCOs and PIHPs would be required 
to provide to enrollees under proposed Sec. 438.404 be the first step 
in the grievance system. It would serve as the enrollee's first formal 
indication that the MCO or PIHP will or has taken action, such as 
denying payment or denying, limiting, reducing, suspending or 
terminating a service through a service authorization decision. We 
propose that the notice must meet the language and format requirements 
of proposed Sec. 438.10(c) and (d) of this chapter to ensure ease of 
understanding. The notice would be required to include the elements 
that are listed in proposed Sec. 438.404, as follows:
     The action the MCO or PIHP or its contractor has taken or 
intends to take.
     The reasons for the action.
     The enrollee's or the provider's right to file an MCO or 
PIHP appeal.
     If the State does not require the enrollee to exhaust the 
MCO or PIHP level appeal procedures, the enrollee's right to request a 
State fair hearing.
     The procedures for exercising the rights specified in this 
section.
     The circumstances under which expedited resolution of an 
appeal is available, and how to request it.
     The enrollee's right to have benefits continue pending 
resolution of the appeal how to request that benefits be continued and, 
the circumstances under which the enrollee may be required to pay the 
costs of these services.
    In proposed Sec. 438.404(c) we specify the timeframes in which the 
MCO and PIHP must mail the notices. Under proposed Sec. 438.404(c)(1), 
timeframes for notices for the reduction, suspension, or termination of 
previously authorized services are governed by the State fair hearing 
regulations found in 42 CFR 431 Subpart E. While some MCOs and PIHPs 
may find the advance notice requirement inappropriate, there are 
exceptions to advance notice that allow notice to be given on the date 
of the action (see Sec. 431.213). These exceptions would cover the 
situation in which a

[[Page 43639]]

provider believes an immediate change in care is appropriate for the 
health condition of the enrollee. For denial of payment, we propose 
that notice be given at the time of any action affecting the claim. 
Proposed Sec. 438.404(c)(3) and (c)(4) requires that for standard 
service authorization decisions that deny or limit services, notice 
must be given within the timeframes specified in Sec. 438.210(d). 
Further, if the MCO or PIHP were to extend the timeframe in accordance 
with proposed Sec. 438.210(d), it would have to give the enrollee 
written notice of the reason for the decision to extend the timeframe, 
inform the enrollee of the right to file a grievance if he or she 
disagrees with that decision, and issue and carry out its determination 
as expeditiously as the enrollee's health conditions requires and no 
later than the date the extension expires. In situations where the 
service authorization decision is not reached within specified 
timeframes, we propose at Sec. 438.404(c)(5) that notice be mailed on 
the date that the timeframe expires. Finally, for expedited service 
authorization decisions, notice must be given within the timeframes 
specified in proposed Sec. 438.210(e).
4. Handling of Grievances and Appeals (Sec. 438.406)
    Section 438.406 proposes to set forth how grievances and appeals 
must be handled. The general requirement for handling grievances and 
appeals would require MCOs and PIHPs to do the following:
     Give enrollees any reasonable assistance in completing 
forms and taking other procedural steps.
     Acknowledge receipt of each grievance and appeal.
     Ensure that individuals who make decisions on grievances 
and appeals are individuals who were not involved in any previous level 
of review or decision making and who, if deciding an appeal of a denial 
that is based on lack of medical necessity, a grievance regarding 
denial of expedited resolution of an appeal, or a grievance or appeal 
that involves clinical issues, are health care professionals who have 
the appropriate clinical expertise in treating the enrollee's condition 
or disease.
    We would require the MCO and PIHP, at proposed Sec. 438.406(a)(1), 
to give enrollees any reasonable assistance. We would also require that 
MCOs and PIHPs make interpreter services available to enrollees, as 
well as, toll free numbers that have adequate TTY/TTD and interpreter 
capability. By including these as examples of types of assistance 
required to meet certain needs, we do not intend that other reasonable 
assistance need not be given. We believe, for example, that MCOs and 
PIHPs are required by this provision to provide reasonable assistance 
to meet other needs of enrollees, and assisting enrollees who have low-
literacy abilities.
    Proposed Sec. 438.406(b) specifies the following requirements that 
the appeals process would have to meet:
     Provide that oral inquiries seeking to appeal an action 
are treated as appeals and must be confirmed in writing, unless the 
enrollee or the provider requests expedited resolution. This is 
required in order to establish the earliest possible filing date for 
the appeal;
     Provide the enrollee a reasonable opportunity to present 
evidence, and allegations of fact or law, in person as well as in 
writing;
     Provide the enrollee and his or her representative the 
opportunity, before and during the appeals process, to examine the 
enrollee's case file, including medical records, and any other 
documents and records considered during the appeals process;
     Include, as parties to the appeal, the enrollee and his or 
her representative or the legal representative of a deceased enrollee's 
estate.
5. Resolution and Notification: Grievances and Appeals (Sec. 438.408)
    In Sec. 438.408(a) we propose to require that the MCO or PIHP must 
dispose of each grievance and resolve each appeal, and provide notice, 
as expeditiously as the enrollee's health condition requires. In 
addition, this section proposes that the State must establish 
timeframes for disposition of grievances and resolution of appeals, but 
that they may not exceed the specific timeframes proposed in this 
section.
    While we are proposing timeframes to resolve appeals, we realize 
that Congress, as part of proposals for a patient's bill of rights, is 
considering several other timeframes for internal MCO appeals. Some of 
these proposals would apply the timeframes to the Medicaid program. We 
believe that uniform timeframes, across payers, are desirable in that 
this will make the process more understandable to enrollees and ease 
the burden on health plans of administering the internal appeals 
system. Therefore, our intent, in this proposed rule, is to consider a 
patient's bill of rights when enacted by the Congress.
    Under proposed Sec. 438.408(b), we would establish the specific 
timeframes for disposition of grievances and resolution of appeals. For 
disposition of a grievance and notice to affected parties, the State 
may establish a timeframe for disposition that may not exceed 90 days 
from the day the MCO or PIHP receives the grievance. For standard 
resolution of an appeal and notice to affected parties, we propose at 
Sec. 438.408(b)(2) that the State establish a timeframe that is no 
longer than 45 days from the day the MCO or PIHP receives the appeal. 
However, we would allow this timeframe to be extended. Under proposed 
Sec. 438.408(c) we specify that the MCO or PIHP may extend the 
timeframe by up to 14 calendar days if the enrollee requests the 
extension, or the MCO or PIHP shows (to the satisfaction of the State 
agency, upon its request) that there is need for additional information 
and how the delay is in the enrollee's interest.
    Proposed Sec. 438.408(b)(3) would provide a maximum timeframe for 
expedited resolution of appeals and notice to affected parties. We 
propose that the State establish a timeframe that is no longer than 3 
working days after the MCO or PIHP receives the appeal. We believe that 
expedited resolution is necessary to ensure that appeals of situations 
that potentially place an enrollee's heath in jeopardy are not delayed. 
Although States have historically instituted different processes to 
protect beneficiaries, we believe that a standardized expedited appeal 
process is needed to protect beneficiaries in a capitated health care 
delivery system. Further, this is an important beneficiary protection 
and is necessary to ensure that the overall timeframe of 90 days for a 
decision at the State fair hearing (excluding the time the beneficiary 
takes to file for a State fair hearing) can be met in all cases. 
However, similar to standard resolution of appeals, we propose that 
this expedited timeframe can also be extended by 14 calendar days if 
the enrollee requests extension or the MCO or PIHP shows (to the 
satisfaction of the State agency, upon its request) that there is need 
for additional information and how the delay is in the enrollee's 
interest.
    We do propose some parameters for the extension process. Under 
proposed Sec. 438.408(c)(2), if the MCO or PIHP grants themselves an 
extension, they would be required to notify the enrollee in writing of 
the reason for the delay. In Sec. 438.408(d), we propose, that the 
State must establish the method MCOs and PIHPs will use to notify an 
enrollee of the disposition of a grievance. Under proposed 
Sec. 438.408(e), we specify that written notice of the appeal 
resolution must include the following:
     The results of the resolution process and the date it was 
completed.

[[Page 43640]]

     For appeals not resolved in favor of the enrollee, the 
enrollee's right to request a State fair hearing and how to do so, the 
right to request to receive continuation of benefits, and that the 
enrollee may be held liable for the cost of those continued benefits if 
the State fair hearing decision upholds the MCO's or PIHP's action.
    Finally at proposed Sec. 438.408(f) we outline the requirements for 
State fair hearings. We propose that the State must permit the enrollee 
to request a State fair hearing within a reasonable time period 
specified by the State, but not less than 20 days or in excess of 90 
days from the date of the MCO's or PIHP's notice of resolution (if the 
State requires exhaustion of the MCO or PIHP level appeal procedures) 
or from the date on the MCO's or PIHP's notice of action (if the State 
does not require exhaustion and the enrollee appeals directly to the 
State for a fair hearing). We also felt it was important to outline at 
proposed Sec. 438.408(f)(2) that the parties to the State fair hearing 
include the MCO or PIHP as well as the enrollee and his or her 
representative or the representative of a deceased enrollee's estate.
6. Expedited Resolution of Appeals. (Sec. 438.410)
    In proposed Sec. 438.410 we specify that each MCO and PIHP must 
establish and maintain an expedited review process for appeals when the 
MCO or PIHP determines or the provider indicates that taking the time 
for a standard resolution could seriously jeopardize the enrollee's 
life or health or ability to attain, maintain, or regain maximum 
function. Further, the MCO or PIHP would be required to ensure that 
punitive action is neither threatened nor taken against a provider who 
requests an expedited resolution or supports an enrollee's appeal.
    If the MCO or PIHP denies a request for expedited resolution of an 
appeal, according to proposed Sec. 438.410(c), it would be required to 
transfer the appeal to the timeframe for standard resolution in 
accordance with Sec. 438.408(b)(2) and give the enrollee prompt oral 
notice of the denial following within two calendar days with a written 
notice.
7. Record Keeping and Reporting Requirements (Sec. 438.416)
    Proposed Sec. 438.416 would require the State to require MCOs and 
PIHPs to maintain records of grievances and appeals and review the 
information as part of the State quality strategy.
8. Continuation of Benefits While the MCO or PIHP Appeal and the State 
Fair Hearing are Pending (Sec. 438.420)
    In Sec. 438.420, we propose that when the dispute involves the 
termination, suspension, or reduction of a previously authorized course 
of treatment, the MCO or PIHP must continue the enrollee's benefits 
until issuance of the final appeal decision or State fair hearing 
decision, if all of the following occur:
     The enrollee or the provider files the appeal timely.
     The services were ordered by an authorized provider.
     The period covered by the authorization has not expired.
     The enrollee requests extension of benefits.
    We specify that timely filing means filing on or before the later 
of either the expiration of the timeframe specified by the State (in 
accordance with Sec. 438.404(c)(2)) and communicated in the notice of 
action or the intended effective date of the MCO's or PIHP's proposed 
action.
    This provision would apply only when the MCO physician initially 
authorized the services (that is, it would not apply to pre-service 
authorization requests that were denied) and when the beneficiary 
requests the services be continued (that is, the mere action of filing 
for an appeal or State fair hearing in a timely manner is not 
sufficient for benefits to be continued). The continuation of benefits 
provision would not require a further statement of authorization from 
the MCO physician or affect benefits not originally authorized. We 
expect that the MCO will neither take nor threaten to take any punitive 
action against a physician who requests continuation of benefits or 
supports an enrollee's request for continuation of benefits.
    If the MCO or PIHP continues or reinstates the enrollee's benefits 
while the appeal is pending, according to proposed Sec. 438.420(c), the 
benefits must be continued until one of the following occurs:
     The enrollee withdraws the appeal.
     The MCO or PIHP resolves the appeal against the enrollee, 
unless the enrollee has requested a State fair hearing with 
continuation of benefits until a State fair hearing decision is 
reached.
     A State fair hearing office issues a hearing decision 
adverse to the enrollee.
    Beneficiaries who have received continuation of benefits while they 
appeal to the MCO or PIHP are not obligated to pursue their appeal 
further, through the State fair hearing process, if the MCO or PIHP 
denies their appeal. It remains the beneficiaries' choice. It is 
important to note, however, that enrollees who lose their appeal at 
either the MCO, PIHP or State fair hearing levels will be liable for 
the costs of all appealed services from the later of the effective date 
of the notice of intended action or the date of the timely-filed 
appeal, through the date of the denial of the appeal. As a result, in 
Sec. 438.420(d), we propose that if the final resolution of the appeal 
is adverse to the enrollee (that is, it upholds the MCO's or PIHP's 
action) the MCO or PIHP may recover the cost of the services furnished 
to the enrollee while the appeal was pending, to the extent that they 
were furnished solely because of the requirements of this section, and 
in accordance with Sec. 431.230(b).
    We considered but rejected an option that would have required MCOs 
to automatically forward appeals they reject to the State fair hearing 
process for external review, as is currently the case in Medicare. 
Under this option, continuation of benefits could have also 
automatically occurred with the forwarding of the request. We have 
rejected this as well. We determined that this option would have been 
too burdensome and in many cases would result in forwarding unnecessary 
paperwork to the State fair hearing office.
9. Effectuation of Reversed Appeal Resolutions (Sec. 438.424)
    In Sec. 438.424 we propose that if the MCO, PIHP, or the State fair 
hearing officer reverses a decision to deny, limit, or delay services 
that were not furnished while the appeal was pending, the MCO or PIHP 
must authorize or provide the disputed services promptly, and as 
expeditiously as the enrollee's health condition requires. Furthermore, 
if the MCO, PIHP, or the State fair hearing officer reverses a decision 
to deny authorization of services, and the enrollee received the 
disputed services while the appeal was pending, the MCO, PIHP, or the 
State would be required to pay for those services, in accordance with 
State policy and regulations.

G. Subpart G

    We are proposing to reserve Subpart G.

H. Certifications and Program Integrity Protections (Subpart H)

    Subpart H contains provisions pertaining to plan certification of 
data, information, and material and general contract provisions.

[[Page 43641]]

    Sections 1902(a)(4) and (a)(19) of the Act establish methods of 
administration that are necessary for the proper and efficient 
operation of the plan and ensure that care and services will be 
provided in a manner consistent with the best interest of the recipient 
and to preserve the integrity of the Medicaid program.
    In this proposed rule, we are requiring MCOs and PIHPs to certify 
the accuracy, completeness, and truthfulness of any data, including but 
not limited to, enrollment information, encounter data, data upon which 
payment is based, and other information required by the State, that may 
be submitted to determine the basis for payment from a State agency. 
The certification must be made by the MCO's or PIHP's Chief Executive 
Officer, Chief Operating Officer, or their delegate. Each MCO and PIHP 
must certify that it is in substantial compliance with the contract and 
provide additional certification as required by the State. Consistent 
with the Medicare+Choice provisions, we propose to require that the 
certifications be based on best knowledge, information, and belief.
    We are also requiring, consistent with Medicare+Choice, that any 
entity seeking to contract as an MCO or PIHP must have administrative 
and management arrangements or procedures, including a mandatory 
compliance plan, designed to guard against fraud and abuse. We specify 
in Sec. 438.608 what those arrangements must include.

I. Sanctions (Subpart I)

    Section 1932(e)(1) of the Act requires, as a condition for entering 
into or renewing contracts under section 1903(m) of the Act, that 
States establish intermediate sanctions that the State may impose on an 
MCO that commits one of six specified offenses: (1) Failing 
substantially to provide medically necessary services; (2) imposing 
premiums or charges in excess of those permitted; (3) discriminating 
among enrollees based on health status or requirements for health care 
services; (4) misrepresenting or falsifying information; (5) failing to 
comply with physician incentive plan requirements; and (6) distributing 
marketing materials that have not been approved or that contain false 
or materially misleading information. In the case of the violation 
related to marketing materials (number 6), the statute imposes 
sanctions against PCCMs as well as MCOs. Proposed Sec. 438.700 contains 
the above provisions from section 1932(e)(1) of the Act.
    In section 1932(e)(2) of the Act, the Congress provided specific 
sanction authority under which States may impose civil money penalties 
in specified amounts for specified violations, take over temporary 
control of an MCO, suspend enrollment or payment for new enrollees, or 
authorize enrollees to disenroll without cause. These provisions are 
reflected in proposed Sec. 438.702(a). Given the extraordinary nature 
of the sanction of taking over management of an MCO, we propose in 
Sec. 438.706 that this sanction be imposed only in the case of 
``continued egregious behavior,'' in situations in which there is 
``substantial risk'' to enrollee health, or when the sanction is 
``necessary to ensure the health of enrollees.'' We also want to 
clarify that States have the right and authority to terminate an MCO's 
contract before temporary management would have to be imposed. We 
recognize the burden associated with this sanction and realize that 
most States would rather terminate a contract before having to impose 
temporary management. We believe we have written the proposed rule to 
allow this flexibility.
    We have not applied the sanction provisions to PIHPs and PAHPs 
because we do not believe that the statutory authority on which PIHPs 
and PAHPs are based (section 1902(a)(4) of the Act) provides authority 
to publish regulations that would authorize a State to impose civil 
money penalties or other sanctions that are provided for by the 
Congress only in the case of MCOs.
    Although these sanctions are referenced in section 1932(e)(1) of 
the Act as sanctions to be imposed on MCOs, and on PCCMs only in the 
case of marketing violations, section 1932(e)(2)(C) of the Act refers 
to a ``managed care entity,'' while paragraphs (D) and (E) that follow 
refer to ``the entity'' and provide for suspension of enrollment or 
suspension of payment after the date the Secretary notifies ``the 
entity'' of a determination that it has violated ``section 1903(m) or * 
* * section [1932].'' While only an MCO could violate section 1903(m) 
of the Act, a PCCM could violate requirements of section 1932 of the 
Act that apply to MCOs and PCCMs generally or to PCCMs specifically. In 
proposed Sec. 438.700(d), we interpret the foregoing language to mean 
that the sanctions in sections 1932(e)(2)(D) and (E) of the Act are 
available in the case of a PCCM that violates ``any requirement'' in 
section 1932 of the Act. The general intermediate sanction authority in 
paragraphs (D) and (E) of section 1932(e)(2) of the Act is reflected in 
proposed Sec. 438.700(d) for MCOs. In light of the foregoing 
interpretation, paragraphs (a)(4) and (a)(5) of proposed Sec. 438.702 
can be applied to MCOs or PCCMs rather than MCOs only, even though the 
only ``determinations'' that apply to PCCMs are terminations under 
proposed Sec. 438.700(c) (marketing violations) or the general 
violations of section 1932 of the Act that are addressed in proposed 
Sec. 438.700(d).
    Section 1932(e)(3) of the Act requires that, for MCOs with chronic 
violations, the State impose temporary management and allow 
disenrollment without cause. This provision is implemented in proposed 
Sec. 438.706.
    Section 1932(e)(4) of the Act authorizes State agencies to 
terminate the contract of any MCO or PCCM that fails to meet the 
requirements in sections 1932, 1903(m), or 1905(t) of the Act. This 
authority is implemented in proposed Sec. 438.708. Under section 
1932(e)(4)(B) of the Act, before terminating a contract, the State is 
required to provide a hearing. Proposed Sec. 438.710 sets forth this 
hearing requirement as well as procedures for the hearing. Under 
section 1932(e)(4)(C) of the Act, enrollees must be notified of their 
right to disenroll immediately without cause in the case of any 
enrollee subject to a termination hearing. Proposed Sec. 438.722 
reflects this provision.
    Section 1932(e)(5) of the Act contains a general requirement that 
States provide ``notice'' and ``such other due process protections as 
the State may provide'' in the case of sanctions other than 
terminations, which are governed by section 1932(e)(4)(B) of the Act. 
Section 1932(e)(5) of the Act also provides that ``a State may not 
provide a managed care entity with a . . . hearing before imposing the 
sanction'' of temporary management. Proposed Sec. 438.706(c) reflects 
this statutory language.
    In proposed Sec. 438.724, we propose that States be required to 
notify CMS whenever they impose or lift a sanction.
    The new sanction authority in section 1932(e) of the Act represents 
the first time that the Congress has granted Medicaid sanction 
authority directly to State agencies. Under section 1903(m)(5) of the 
Act, which the Congress has left in place, CMS has authority to impose 
sanctions when Medicaid-contracting MCOs commit offenses that are 
essentially the same as those identified in section 1932(e)(1) of the 
Act. In proposed Sec. 438.730, we retain the existing regulations 
implementing section 1903(m)(5) of the Act, which is currently in 
Sec. 434.67.

[[Page 43642]]

J. Conditions for Federal Financial Participation (Subpart J)

    In subpart J, we propose to include both existing and new 
regulations pertaining to State eligibility for FFP in payments under 
managed care contracts. Absent a statutory exemption from its 
provisions, section 1903(m)(2)(A) of the Act conditions Federal 
matching in payments under a comprehensive risk contract on compliance 
with the requirements in section 1903(m)(2)(A) of the Act. The 
requirements of this section of the Act include an entity meeting the 
definition of MCO, payment on an actuarially sound basis, prior 
approval by CMS of the contract, physician incentive requirements, and 
the new disenrollment rights under section 1932(a)(4) of the Act, which 
are incorporated under section 1903(m)(2)(A)(vi) of the Act. Most 
significantly, section 1903(m)(2)(A)(xi) of the Act conditions Federal 
matching in comprehensive risk contracts on the contract's and the 
MCO's compliance with applicable requirements in section 1932 of the 
Act. This includes the MCO's role in complying with the State quality 
strategy proposed under subpart D, the beneficiary protections in 
subpart C, and the grievance requirements in subpart F. All of the 
requirements in this part that apply to MCOs implement either section 
1903(m) or section 1932 of the Act. Thus, Federal matching in MCO 
contracts is conditioned on compliance with these requirements.
1. Basic Requirements (Sec. 438.802)
    We propose in Sec. 438.802 that FFP is available in expenditures 
for payments under an MCO contract only for periods during which the 
contract meets the requirements of part 438 and is in effect. We also 
propose that FFP is available only when the MCO and its subcontractors 
are in substantial compliance with the physician incentive plan 
requirements and the requirements of the MCO contract.
2. Prior Approval (Sec. 438.806)
    Section 4708(a) of the BBA amended section 1903(m)(2)(A)(iii) of 
the Act to require the Secretary's prior approval for all MCO contracts 
involving expenditures in excess of $1,000,000 for 1998. For subsequent 
years, the threshold amount for MCO contracts will be increased by the 
percentage increase as determined by the consumer price index for all 
urban consumers.
    Before the amendments made by section 4708 (a) of the BBA, section 
1903 (m)(2)(A)(iii) of the Act required that the Secretary must provide 
prior approval for all HMO contracts involving expenditures in excess 
of $100,000. There was no reference in statute or regulations made for 
monetary increases of the threshold amount in future years.
3. Exclusion of Entities (Sec. 438.808)
    We propose to redesignate existing Sec. 434.80 as 438.808 to 
describe entities that must be excluded.
4. Expenditures for Enrollment Broker Services (Sec. 438.810)
    Proposed Sec. 438.810 would implement section 1903(b)(4) of the 
Act, added by section 4707(b) of the BBA, which provides for 
limitations on FFP in payments to enrollment brokers. Prior to this 
provision, there was no reference or provisions in current law or 
regulations specifically pertaining to enrollment brokers and their 
expenditures. This provision clarifies that States' expenditures for 
enrollment brokers are considered necessary for the proper 
administration of the State Plan, but only if the broker is independent 
of any managed care entity or health care provider that provides 
services in the same State in which the broker is conducting enrollment 
activities. No owner, employee, board member, or person who has a 
contract with the broker may have financial interest in that entity or 
provider, nor may the individual have been debarred by any Federal 
agency or subject to civil penalties under the Act or be excluded from 
participation under title XVIII or XIX of the Act. An enrollment broker 
would not meet the test for independence if it is an MCO, PIHP, PAHP, 
PCCM or other health care provider, or owns, or is owned by an MCO, 
PIHP, PAHP, PCCM, or other health care provider in the State in which 
the broker operates. This would include county eligibility employees 
performing enrollment activities when the county also provides health 
care services.
    In addition, under our proposed rule, State agencies would be 
required to submit to CMS all initial enrollment broker contracts or 
Memoranda of Agreement (MOA) for approval. Contracts being renewed with 
the same contractor would not be subject to approval. We are proposing 
to impose this requirement under our authority under section 1902(a)(4) 
of the Act to provide for necessary and proper methods of 
administration. We believe that it is important that all parties know 
whether an enrollment broker arrangement meets the requirements for 
FFP. We accordingly believe that it is ``necessary and proper'' for the 
State agency to obtain approval of broker arrangements. CMS will review 
contracts or MOAs to ensure that they meet the requirements for FFP.
5. Costs Under Risk and Nonrisk Contracts (Sec. 438.812)
    Proposed Sec. 438.812 contains the rules on Federal matching rates 
for medical services and administrative costs under risk and non-risk 
contracts currently set forth in Secs. 434.74 and 434.75.
6. Limit on Payments in Excess of Capitation Rates (Sec. 483.814)
    As discussed earlier in this preamble in regards to proposed 
Sec. 438.6(c), we propose in Sec. 438.814 that FFP is not available in 
expenditures for payments under risk corridors or incentive payments in 
excess of 105 percent of the aggregate capitation payments made under 
proposed Sec. 438.6(c). We are concerned that without any upper limit 
on the amount that can be paid in incentive arrangements or risk-
sharing mechanisms, the potential exists for inefficiency or 
inappropriate actions by the contractor to maximize funding. This 
funding maximization may result in payments that bear no relationship 
to the rates certified by actuaries and that are no longer 
``actuarially sound.''

K. Amendments and Revisions to Parts 400, 430, 431, 434, 435, 440, and 
447

1. Revisions to Part 400
    We propose at Sec. 400.203 to add the following definitions. We 
propose specifying that PCCM stands for primary care case manager and 
PCP stands for primary care physician. We believe it is important to 
include these definitions early in the regulation text, as these are 
commonly used terms that are used in numerous subparts.
    We also propose to revise the definition of provider to mean either 
of the following: (1) For the fee-for-service program, any individual 
or entity furnishing Medicaid services under an agreement with the 
State Medicaid agency; and (2) for managed care programs, any 
individual or entity that is engaged in the delivery of health care 
services and is legally authorized to do so by the State in which it 
delivers the services. We believe that this definition is sufficiently 
broad to allow State flexibility in designation of its providers.
2. Revisions to Part 430
    We propose to add a new Sec. 430.5, containing two definitions that 
currently appear in part 434 or elsewhere. We propose to revise the 
definition of contractor to eliminate listed examples and apply it more

[[Page 43643]]

broadly to any contractor that meets the current introductory clause. 
The definition, as proposed, would specify that a contractor means any 
entity that contracts with the State agency, under the State plan and 
in return for a payment, to process claims, to provide or pay for 
medical services, or to enhance the State agency's capability for 
effective administration of the program.
    We also propose to include a definition of representative. This 
term will have the meaning given by each State consistent with its 
laws, regulations, and policies. We believe that this definition will 
allow flexibility in determining who can serve as a Medicaid 
beneficiary's representative and will not place any restrictions on 
State definitions currently in use.
3. Revisions to Part 431
    We propose conforming amendments to part 431 to reflect changes in 
terminology and other new provisions enacted in the BBA. As discussed 
in section II.B.5. of this preamble, we also have made conforming 
changes to the fair hearing regulations in part 431, subpart E, to 
reflect the MCO grievance and appeals requirements in part 438 subpart 
F.
4. Revisions to Part 434
    As discussed earlier, we propose to revise part 434 to remove 
provisions relating to managed care, which we have moved to part 438.
5. Revisions to Part 435
    Technical and Conforming Changes. We propose conforming amendments 
to part 435 to reflect changes in terminology and other new provisions 
enacted in the BBA. As discussed above, in section II.B.5. of this 
preamble, we also have made conforming changes to the fair hearing 
regulations in subpart E of part 435 to reflect the grievance and 
appeals provisions in subpart F of part 438. In addition, we propose to 
implement BBA changes to the rules on guaranteed eligibility.
    Guaranteed Eligibility (Secs. 435.212 and 435.326). Prior to the 
enactment on August 5, 1997 of section 4709 of the BBA, section 
1902(e)(2) of the Act provided that State agencies, at their option, 
could provide for a minimum enrollment period, during which a Medicaid 
individual enrolled in a Federally qualified HMO or one of certain 
other specified entities retains eligibility for Medicaid services the 
HMO provides even if the enrollee otherwise loses Medicaid eligibility. 
Even though this provision was enacted in 1983, since that time only a 
few State agencies have opted to implement this provision. One factor 
we believe that has kept State agencies from making greater use of this 
provision is the requirement that it was limited only to those 
individuals who were enrolled in Federally qualified HMOs and other 
entities that are not prevalent in all States.
    Section 4709 of the BBA expands section 1902(e)(2)(A) of the Act to 
include individuals enrolled in MCOs and primary care case management 
systems. This expansion greatly increases the number of individuals who 
will be potentially eligible for the guaranteed eligibility provision.
    Specifically, section 4709 expands the State's option to guarantee 
up to 6 months of eligibility in two ways: (1) it expands the types of 
MCOs or PCCMs whose members may have guaranteed eligibility in that it 
now includes anyone who is enrolled with a Medicaid MCO as defined in 
section 1903(m)(1)(A) of the Act, and (2) it expands the option to 
include those individuals enrolled with a primary care case manager as 
defined in section 1905(t) of the Act. The provision also describes 
that when Medicaid benefits are furnished under the guaranteed 
eligibility provisions, the benefits include only those provided by the 
MCO or by or through the case manager. This provision applies to the 50 
States and the District of Columbia.
    We note that section 1902(e)(2) limits the ``guaranteed'' benefits 
provided for under its authority to benefits provided to the individual 
as an enrollee of the MCO, or by or through the case manager for 
primary care case management enrollees. For primary care case 
management arrangements, we have interpreted that the guaranteed 
benefits provided under this provision extend to services that do not 
require case-by-case authorization of the case manager, such as 
emergency services, dental, or OB/GYN services received by an enrollee. 
The scope of the blanket authorization can be defined by the State 
agency. An example of a blanket authorization would be one that allows 
Medicaid beneficiaries to access emergency room or dental services 
without the need to consult a case manager.
6. Revisions to Part 440: Primary Care Case Management Services 
(Sec. 440.168)
    Section 4702 of the BBA adds primary care case management services 
to the list of optional Medicaid services in section 1905(a) of the 
Act. The BBA also added section 1905(t) to the Act. This new section 
defines primary care case management services, identifies who may 
provide them, and sets forth requirements for contracts between primary 
care case managers and the State agency. Before to the BBA, State 
agencies were permitted to implement a primary care case management 
system only through a freedom of choice waiver under section 1915(b)(1) 
of the Act or through a section 1115 waiver authority. This provision 
was set forth in order to allow State agencies more flexibility in 
providing quality services to Medicaid beneficiaries through an 
arrangement that has proven to be cost effective for the Medicaid 
program. We are proposing to add Sec. 440.168--Primary Care Case 
Management Services. This new section will define primary care case 
management services and identify who may provide them.
    Primary care case management services means case management related 
services that include the locating, coordinating, and monitoring of 
health care services provided by a primary care case management 
provider under contract with the State agency as set forth in 
Sec. 438.6(k). This includes the authority for a primary care case 
management provider to deny services that are not medically necessary 
to require preauthorization of services.
    A primary care case manager is a physician, physician group 
practice, or an entity employing or having other arrangements with 
physicians to provide primary care case management services under 
contract with the State agency. At the State's option, nurse 
practitioners, certified nurse midwives, and physician assistants may 
also qualify as primary care case management providers.
    Primary care for the purpose of this provision includes all health 
care services and laboratory services customarily provided by or 
through a general practitioner, family medicine physician, internal 
medicine physician, obstetrician/gynecologist, or pediatrician in 
accordance with State licensure and certification laws and regulations.
7. Revisions to Part 447
    Technical and Conforming Changes. We propose to make technical and 
conforming changes reflecting changes in terminology and other 
revisions made by the BBA.
    Timely Claims Payment by Managed Care Organizations (Sec. 447.46). 
The purpose of this new section of the regulations is to implement 
section 4708(c) of the BBA, which added section 1932(f) to the Act. 
Under this provision, contracts, under section 1903(m) of the Act, with 
managed care organizations must provide that payment to affiliated 
health care providers for items and services covered

[[Page 43644]]

under the contract must be made on a timely basis, consistent with the 
claims payment procedures described under section 1902(a)(37)(A) of the 
Act. To be consistent with section 1902(a)(37(A) of the Act, the 
Medicaid MCO's contract must ensure that 90 percent of claims for 
payment (for which no further written information or substantiation is 
required in order to make payment) made for services covered under the 
contract and furnished by health care providers are paid within 30 days 
of receipt and that 99 percent of the claims are paid within 90 days of 
receipt. However, the MCO and health care providers have the 
flexibility to establish an alternative payment schedule that is 
mutually agreed upon. If an alternative payment schedule is 
established, it should also be described in the managed care 
organization's contract, so that providers are ensured payment under 
the procedures agreed to.
    We also made conforming changes to Secs. 447.53 through 447.60.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act (PRA) of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval.
    In order to fairly evaluate whether an information collection 
should be approved by OMB, section 3506(c)(2)(A) of the PRA of 1995 
requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comments on each of these 
issues for the information collection requirements discussed below.
    The following information collection requirements and associated 
burdens are subject to the PRA. For purposes of this requirement, we 
incorporated pertinent managed care data from the 2000 Medicaid 
enrollment report. As of June, 2000, there were 339 managed care 
organizations (MCOs) (this includes 3 HIOs that must adhere to the MCO 
requirements of this regulation), 37 primary care case management 
(PCCM) systems, 376 managed care entities (MCOs and PCCMs combined), 
123 mental health and substance abuse prepaid health plans (PIHPs) and 
34 dental, primary care and transportation prepaid health plans (PAHP), 
all of which have previously been regulated as PHPs. There were a total 
of 25,731,040 beneficiaries enrolled in these plans (some beneficiaries 
are enrolled in more than one plan) in 48 States and the District of 
Columbia (Wyoming and Alaska do not currently enroll beneficiaries in 
any type of managed care).

A. Section 438.6 Contract Requirements

Section 438.6(c) Payments Under Risk Contracts
1. Requirement
    Section 438.6(c) would modify the rules governing payments to MCOs, 
PIHPs and PAHPs by doing the following: (1) Eliminates the upper limit 
(UPL) requirements; (2) requires actuarial certification of capitation 
rates; (3) specifies data elements that must be included in the 
methodology used to set capitation rates; (4) requires States to 
consider the costs for individuals with chronic illness, disability, 
ongoing health care needs, or catastrophic claims in developing rates; 
(5) requires States to provide explanations of risk sharing or 
incentive methodologies; and (6) imposes special rules, including a 
limitation on the amount that can be paid under FFP in some of these 
arrangements.
2. Burden
    We believe that the burden of providing additional information to 
support the actuarial soundness of a State's capitation rates will be 
offset by the elimination of the UPL requirement. States will no longer 
be required to extract FFS data and manipulate the data by trending and 
other adjustments in order to establish a FFS equivalent for purposes 
of comparison to capitation rates. We invite comment on this burden 
assumption.

B. Section 438.8 Provisions That Apply To PIHPs and PAHPs

Section 438.8(a) Contract Requirements
1. Requirement
    This section specifies which of the contract requirements contained 
in Sec. 438.6 apply to PIHPs and which apply to PAHPs. Requirements for 
advance directives apply only to PIHPs, while physician incentive plan 
requirements apply to both PIHPs and PAHPs.
2. Burden
    PHPs (now designated as PIHPs and PAHPs) have not previously been 
required to maintain written policies and procedures with respect to 
advance directives. This rule requires the PIHPs to provide written 
information to enrollees of their rights under this provision and the 
PIHP's policies for the implementation of those rights. We project 8 
hours for each of the 123 PIHPs to establish this policy and 2 minutes 
per enrollee for provision of this information, and acceptance of this 
right to each of approximately 6.3 million individuals enrolled in 
PIHPs. The total time for this would be 210,984 hours.
    Under the physician incentive plan provision, PIHPs and PAHPs, like 
MCOs, will be required to provide descriptive information to States and 
us to determine whether or not there is substantial financial risk in 
their subcontracts. In addition, enrollees must be surveyed and 
provided information on the risk arrangements when substantial risk 
exists.
    We are basing our projections of burden upon information published 
in the Federal Register on March 27, 1996 and December 31, 1996 (61 FR 
13445 and 61 FR 69049) that contained the original regulatory 
provisions on physician incentive plans for Medicare and Medicaid HMOs. 
Based on those assumptions, we believe no more than one third of the 
approximately 157 PIHPs and PAHPs use incentive or risk payment 
arrangements with their subcontracting providers. Affected PIHPs and 
PAHPs would be required to provide detailed responses to State surveys 
regarding their payment mechanisms and amounts. At the projected 100 
hours per response for approximately 52 PIHPs and PAHPs the total 
burden would be 5,200 hours. For those PIHPs and PAHPs with substantial 
financial risk, there are other requirements such as stop loss 
insurance and beneficiary surveys. We believe there would be minimal 
additional burden as a result of these requirements (because many 
already comply with these requirements) and that this would apply to no 
more than one fourth of those PIHPs and PAHPs with risk or incentive 
payments, or a total of 13. We estimate an additional 10 hours per plan 
for a total of 113 hours. Altogether, we estimate 5,313 hours of burden 
through imposition of this requirement on PIHPs and PAHPs.

[[Page 43645]]

C. Section 438.10 Information requirements

Section 438.10(e), (f), (g), and (h)
1. Requirement
    In summary, Sec. 438.10 requires that each State or its contracted 
representative, or at the option of the State, each MCO, PIHP, PAHP, 
and PCCM furnish information to enrollees and potential enrollees to 
meet the requirements of this section. Paragraph (c)(4) requires that 
the State notify enrollees and potential enrollees, and require each 
MCO, PIHP, and PAHP and PCCM to notify its enrollees and potential 
enrollees that oral interpretation and written information are 
available in languages other than English and how to access those 
services. The basic information listed in paragraph (e) of this section 
must be provided to each potential enrollee by the State, MCO, or PIHP. 
The information listed paragraph (f) must be furnished to enrollees by 
the MCO or PIHP within a reasonable time after it receives from the 
State notice of the beneficiary's enrollment. The MCO or PIHP must 
notify enrollees annually of their right to disenroll and receive the 
information listed in paragraph (f)(6) and, if applicable, paragraph 
(g). The information that must be provided includes the following:
2. Information for Potential Enrollees
    General information must be provided about the basic features of 
managed care, which populations are excluded from enrollment, subject 
to mandatory enrollment, or free to enroll voluntarily in an MCO or 
PIHP, and MCO, and PIHP responsibilities for coordination of enrollee 
care.
    Information specific to each MCO and PIHP serving an area that 
encompasses the potential enrollee's service area must be provided in 
summary form, or in more detail, upon request of the enrollee. This 
includes information on benefits covered; cost sharing if any; service 
area; names, locations, and telephone numbers of current network 
providers, including at a minimum information on primary care 
physicians, specialists, and hospitals, and identification of providers 
that are not accepting new patients; and benefits that are available 
under the State plan but are not covered under the contract, including 
how and where the enrollee may obtain those benefits, any cost sharing, 
and how transportation is provided.
3. Information for Enrollees
    The State must notify enrollees of their disenrollment rights 
annually. The State, or the MCO, PIHP, PAHP, and PCCM, if delegated 
this responsibility by the State, must provide certain information to 
new enrollees and notify enrollees annually of their right to request 
additional information. The State must give each enrollee written 
notice of any change (that the State defines as ``significant'') in the 
information specified at least 30 days before the intended effective 
date of the change and make a good faith effort to give written notice 
of termination of a contracted provider, within 15 days after receipt 
or issuance of the termination notice, to each enrollee who received 
his or her primary care from, or was seen on a regular basis by, the 
terminated provider.

Information Required for MCOs, PIHPs, PAHPs, and PCCMs

     Names, locations, and telephone numbers of current network 
providers, including information at least on primary care physicians, 
specialists, and hospitals, and identification of providers that are 
not accepting new patients.
     Any restrictions on the enrollee's freedom of choice among 
network providers.
     Enrollee rights as specified in Sec. 438.100.
     Kinds of benefits, and amount, duration, and scope of 
benefits available under the contract.
     Procedures for obtaining benefits, including authorization 
requirements.
     The extent to which, and how, enrollees may obtain 
benefits, including family planning services, from out-of-network 
providers.
     The extent to which, and how, after-hours and emergency 
coverage are provided.
     The rules for emergency and post-stabilization services, 
as set forth in Sec. 438.114.
     Additional information that is available upon request, and 
how to request that information.
     Cost sharing, if any.
     Any benefits that are available under the State plan but 
are not covered under the contract, including how and where the 
enrollee may obtain those benefits, and cost sharing, and how 
transportation is provided. The State must furnish information about 
how and where to obtain the service.
Additional Information Required of MCOs and PIHPs
     Grievance, appeal, and fair hearing procedures and 
timeframes, as provided in Sec. 438.400 through Sec. 438.424, in a 
State-approved or State-developed description.
     Advance directives, as set forth in Sec. 438.6(I)(2).
     Physician incentive plans as set forth in 
Sec. 438.70(a)(4).
     Additional information that is available upon request, 
including information on the structure and operations of the MCO or 
PIHP.
    Burden. We believe the burden placed on States, MCOs, PIHPs, PAHPs, 
and PCCMs and enrollment brokers as a result of this requirement is the 
time associated with modifying the content of existing information 
materials, as well as the time associated with distributing the 
materials to enrollees as specified by the regulation. We estimate that 
it will initially take 12 hours for each MCO, PIHP, PAHP, or PCCM to 
modify existing information materials to conform with the requirement 
above. We further estimate that there are approximately 533 MCOs, 
PIHPs, PAHPs, and PCCMs equating to an initial modification burden of 
approximately 6,396 hours. After the initial modification, we estimate 
that it will take MCOs, PIHPs, PAHPs, and PCCMs approximately 4 hours 
each to annually update the information materials, equating to an 
annual total burden of approximately 2,132 hours.
    We estimate that that it will take MCOs, PIHPs, PAHPs, and PCCMs 5 
minutes to mail a packet of materials to potential enrollees and 
enrollees. We estimate that each year approximately 15 percent of the 
Medicaid managed care enrollee population are new enrollees. This 
equates to approximately 3.9 million potential enrollees a year for a 
total burden on the States of 65,000 hours. Mailing the annual packet 
of information to the 25,731,040 enrollees, at 5 minutes a packet, will 
result in a burden to the State, or the MCOs, PIHPs, PAHPs, and PCCMs, 
if delegated this responsibility by the State, of 2,144,253 hours.
    We similarly estimate that it will take 5 minutes for MCO, PIHPs, 
PAHPs, and PCCM to supply information requested by potential enrollees 
and enrollees. We estimate that 10 percent of potential enrollees and 
enrollees will request information each year. For the 390,000 potential 
enrollees requesting information, this results in a burden on States of 
6,500 hours. For the 2,573,104 enrollees requesting information, this 
results in a burden on States, or MCO, PIHPs, PAHP, and PCCMs if 
delegated this responsibility by the State, of 214,425 hours.
Section 438.10(h)
1. Requirement
    In summary, Sec. 438.10(h) states that if a State plan provides for 
mandatory

[[Page 43646]]

MCO or PCCM enrollment under section 1932(a)(1)(A) of the Act, the 
State or its contracted representative must provide information in a 
comparative, chart-like format, to potential enrollees. The information 
must include the MCO's or PCCM's service area, the benefits covered 
under the contract, any cost sharing imposed by the MCOs or PCCMs and, 
to the extent available, quality and performance indicators, including 
but not limited to disenrollment rates and enrollee satisfaction.
2. Burden
    We believe that the additional burden on States (that is, burden 
not yet captured in the above provisions) is the length of time 
associated with creating the comparative chart. We estimate that it 
will take States approximately 4 hours each to create the comparative 
chart. Currently 9 States per year have approved manage care under the 
State Plan Option, for a total annual burden of approximately 36 hours.

D. Section 438.12  Provider Discrimination Prohibited

1. Requirement
    This section requires that if an MCO, PIHP, or PAHP declines to 
include individual or groups of providers in its network, it must give 
the affected providers written notice of the reason for its decision.
2. Burden
    The burden associated with this requirement is the time it takes 
the MCO, PIHP, or PAHP to draft and furnish the providers with the 
requisite notice. We estimate that it will take 1 hour to draft and 
furnish any given notice. We estimate that on average each MCO, PIHP, 
and PAHP will need to produce 10 notices per year for a total of 4,960 
hours.

E. Section 438.50(b)  State Plan Information

1. Requirements
    Each State must have a process for the design and initial 
implementation of the State plan that involves the public and have 
methods in place to ensure ongoing public involvement once the State 
plan has been implemented.
2. Burden
    The burden associated with this section includes the time 
associated with developing the process for public involvement, 
including annual updates. We estimate that it will take 40 hours per 
State to develop the process for involving, the public for a total 
burden of 1,960 hours (48 States and D.C.). We estimate that ensuring 
ongoing public involvement will take another 20 hours per State 
annually for a total annual burden of 980 hours.

F. Section 438.56  Disenrollment: Requirements and Limitations

Section 438.56(b)
1. Requirement
    All MCO, PIHP, PAHP, and PCCM contracts must:
    (1) Specify the reasons for which the MCO, PIHP, PAHP, or PCCM may 
request disenrollment of an enrollee;
    (2) Provide that the MCO, PIHP, PAHP, or PCCM may not request 
disenrollment because of a change in the enrollee's health status, or 
because of the enrollee's utilization of medical services, diminished 
mental capacity, or uncooperative or disruptive behavior resulting from 
his or her special needs; and
    (3) Specify the methods by which the MCO, PIHP, PAHP, or PCCM 
ensures the agency that it does not request disenrollment for reasons 
other than those permitted under the contract.
2. Burden
    The burden of submitting this supporting documentation when MCOs, 
PIHPs and PAHPs, or PCCMs request disenrollment of beneficiaries would 
be 2 hours per request. We calculate that approximately one-tenth of 
one percent of enrollees (25,731) would be affected, or 48 per MCO, 
PIHP, PAHP, or PCCM annually. The total burden would be 51,462 hours, 
or approximately 97 hours per MCO, PIHP, PAHP, or PCCM.
Section 438.56(d)(1)
1. Requirement
    In order to disenroll, the beneficiary (or his or her 
representative) must submit an oral or written request to the State 
agency (or its agent) or to the MCO, PIHP, PAHP, or PCCM where 
permitted.
2. Burden
    We believe that the burden associated with this requirement is the 
length of time it would take enrollees to submit in writing a 
disenrollment request, if they choose to use the written format. We 
estimate that it will take approximately 10 minutes per enrollee to 
generate a written disenrollment request. We estimate that 
approximately 5 percent of MCO, PIHP, PAHP, and PCCM enrollees will 
request that they be disenrolled from an MCO, PIHP, PAHP, or PCCM. 
Approximately one-fourth of the enrollees will choose a written rather 
than an oral request. This equates to an annual burden of approximately 
10 minutes multiplied by 321,638 affected enrollees (one-fourth of the 
1,286,552 enrollees requesting disenrollment), or approximately 53,606 
hours.
Section 438.56(d)(3)
1. Requirement
    When MCOs, PIHP, PAHP, or PCCMs are processing disenrollment 
requests and do not act to approve them, they must submit written 
notice to the State and then the State takes action. When a State is 
acting on a for-cause disenrollment request, they may request written 
information from the MCO, PIHP, PAHP, or PCCM to determine the outcome. 
In addition, if the MCO, PIHP, PAHP, or PCCM approves the disenrollment 
for cause, it must give the enrollee and the State agency written 
notice of its determination.
2. Burden
    We believe that the burden associated with this requirement is the 
time taken for MCOs, PIHPs and PAHPs, or PCCMs to submit written notice 
to the State and beneficiaries.
    Of the 1,286,552 affected enrollees, we calculate that one-fifth 
(257,310) will not be approved. If each notice takes 15 minutes to 
produce, the total burden would be 64,328 hours. Of the 257,310 
enrollees not approved, we calculate that three-fourths (192,983) will 
involve the State requesting information from the MCO, PIHP, PAHP, or 
PCCM justifying the denial. At 1 hour per request, the total burden on 
MCOs, PIHPs, PAHPs, or PCCMs would be 192.983 hours.
    We estimate that the MCOs, PIHPs, PAHPs, and PCCMs will need to 
produce notices for the remaining four-fifths of enrollees whose 
disenrollment (1,029,240) is approved. As this notice will probably be 
a short form letter, with attachments as necessary, we believe that it 
will take ten minutes per request to send out the notices, for an 
annual burden of 171,540 hours.

G. Section 438.102  Enrollee-Provider Communications

1. Requirement
    Section 438.102(c) states that the general rule in paragraph (b) of 
this section does not require the MCOs and PIHPs to cover, furnish, or 
pay for a particular counseling or referral service if the MCO or PIHPs 
objects to the provision of that service on moral or religious grounds; 
and makes written information on these policies available to: (1) 
prospective enrollees, before and during enrollment; and, (2) current

[[Page 43647]]

enrollees, within 90 days after adopting the policy for any particular 
service.
2. Burden
    The above information collection requirement is subject to the PRA. 
However, we believe the burden associated with these requirements is 
captured in the general information requirements in Sec. 438.10.

H. Section 438.114 Emergency Services

1. Requirement
    Section 438.114(b) states that at the time of enrollment and at 
least annually thereafter, each MCO, PIHP, PAHP, and State (for a PCCM) 
must provide, in clear, accurate, and standardized form, information 
that, at a minimum, describes or explains (1) What constitutes an 
emergency, with reference to the definitions in paragraph (a) of this 
section, (2) the appropriate use of emergency services, (3) the process 
and procedures for obtaining emergency services, including use of the 
911 telephone system or its local equivalent, (4) the locations of 
emergency settings and other locations at which MCO, PIHP, or PAHP 
physicians and hospitals provide emergency services and post-
stabilization care covered under the contract, and (5) the fact that 
prior authorization is not required.
2. Burden
    The following information collection requirement is subject to the 
PRA. However, we believe the burden associated with these requirements 
is captured in the general information requirements in Sec. 438.10.

I. Section 438.202 State Responsibilities

1. Requirement
    Each State contracting with an MCO or PIHP must have a written 
strategy for assessing and improving the quality of managed care 
services offered by the MCO or PIHP, make it available for public 
comment before adopting it in final, and conduct periodic reviews to 
evaluate the effectiveness of the strategy at least every 3 years. Each 
State must also submit to us a copy of the initial strategy and a copy 
of the revised strategy whenever significant changes are made. In 
addition, States are required to submit to us regular reports on the 
implementation and effectiveness of the strategy, consistent with the 
State's own periodic review of its strategy's effectiveness.
2. Burden
    The burden associated with this section is limited to those States 
offering managed care through MCOs or PIHPs (41) and includes the time 
associated with developing the proposed strategy, publicizing the 
proposed strategy, incorporating public comments, submitting an initial 
copy of the strategy to us prior to its implementation and whenever 
significant changes are made, and submitting regular reports on the 
implementation and effectiveness of the strategy. We estimate that it 
will take 40 hours per State to develop the proposed strategy for a 
total burden of 1640 hours. We estimate that publicizing the proposed 
strategy will take 2 hours per State for a total burden of 82 hours. We 
estimate that incorporating public comments for the final strategy will 
take another 40 hours per State for a total burden of 1640 hours. We 
estimate it will take 1 hour per State to submit an initial copy of the 
strategy to us and whenever significant changes are made for a total of 
41 hours. We estimate it will take 40 hours per State to create and 
submit a report on the implementation and effectiveness of the strategy 
and that these reports will be submitted at least every 3 years for a 
total annual burden of 546 hours.

J. Section 438.204 Elements of State Quality Strategies

1. Requirement
    In this proposed rule we require at Sec. 438.204(b)(1)(iii) that a 
State identify the race, ethnicity, and primary language spoken by each 
MCO and PIHP enrollee and report this information to each MCO and PIHP 
in which each beneficiary enrolls at the time of their enrollment.
2. Burden
    We believe that most States currently track race and ethnicity data 
in their eligibility systems. If States do not, minor changes in their 
software will be needed. With respect to primary language of enrollees, 
there will likely be additional programming needed for all States. We 
estimate that this would require 2 hours of programming for each of the 
41 jurisdictions for a total of 82 hours.

K. Section 438.207 Assurances of Adequate Capacity and Services

1. Requirement
    Section 438.207(b) requires that each MCO and PIHP must submit 
documentation to the State, in a format specified by the State and 
acceptable to us, to demonstrate that it has the capacity to 
demonstrate that it complies with specified requirements and that it 
has the capacity to serve the expected enrollment in its service area 
in accordance with the State'standards for access to care and meets 
specified requirements.
    Section 438.207(c) requires that this documentation be submitted to 
the State at least annually, and specifically at the time the MCO or 
PIHP enters into a contract with the State and at any time there has 
been a significant change (as defined both by the State and this 
regulation) in the MCO's or PIHP's operations that would affect 
adequate capacity and services.
    Section 438.207(d) requires the State, after reviewing the MCO's or 
PIHP's documentation, to certify to us that the MCO or PIHP has 
complied with the State's requirements for availability of services, as 
set forth at Sec. 438.206.
2. Burden
    We believe that MCOs and PIHPs already collect and provide this 
information to State agencies as part of their customary and usual 
business practices and that the only additional burden on MCOs and 
PIHPs is the length of time required for MCOs and PIHPs to compile this 
information in the format specified by the State agency, and the length 
of time for the MCOs and PIHPs to mail the information to the State and 
to us. We estimate that it will take each MCO and PIHP approximately 20 
hours to compile the information necessary to meet this requirement, 
for a total of 20 hours multiplied by 462 MCOs and PIHPs, or 
approximately 9,240 hours. In addition, we estimate that it will take 
MCOs and PIHPs approximately 5 minutes each to mail the materials 
associated with this burden to the State for an annual burden of 
approximately 5 minutes multiplied by 462 MCOs and PIHPs, or 
approximately 39 hours.
    We estimate that obtaining information on: (1) The numbers and 
types of persons with special health care needs that could be 
anticipated to enroll in the MCO or PIHP; (2) the types of experienced 
providers they would require; (3) the experience of the existing 
providers in the MCOs or PIHPs network; and (4) the numbers and types 
of additional experienced providers needed, would require an estimated 
40 hours of work for each of the 462 MCOs and PIHP for a total 
estimated burden of 18,480 hours.

L. Section 438.240 Quality Assessment and Performance Improvement 
Program; Performance Improvement Projects

1. Requirement
    Section 438.240(c) states that each MCO and PIHP must annually 
measure

[[Page 43648]]

its performance using standard measures required by the State and 
report its performance to the State. In addition to using and reporting 
on measures of its performance, in Sec. 438.240(d)(1) States are to 
ensure that each MCO and PIHP must have an ongoing program of 
performance improvement projects. In Sec. 438.240(d)(2) each MCO and 
PIHP is required to report the status and results of each project to 
the State as requested.
2. Burden
    This regulation would require States to require each MCO and PIHP 
to have an ongoing program of performance improvement. Based on 
discussions with the 17 States with the largest Medicaid managed care 
enrollments, all 17 States are already have these programs. Because the 
use of performance measures in managed care has become commonplace in 
commercial, Medicare, and Medicaid managed care, we do not believe that 
this regulatory provision imposes any new burden on MCOs, PIHPs, or 
States.
    For the requirements for an ongoing program performance improvement 
projects in Sec. 438.240(d), we estimate that, in any given year, each 
MCO and PIHP will complete two projects, and will have 4 others 
underway. We further expect that States will request the status and 
results of each MCOs and PIHPs projects annually. Accordingly, we 
estimate that it will take each MCO and PIHP 5 hours to prepare its 
report for each project, for an annual total burden of 30 hours per MCO 
and PIHP. In aggregate, this burden equates to 30 hours multiplied by 
an estimated 462 MCOs and PIHPs, or approximately 13,860 hours.

M. Section 438.242 Health Information Systems

1. Requirement
    Section 438.242(b)(1) requires the State to require each MCO and 
PIHP to collect data on enrollee and provider characteristics as 
specified by the State, and on services furnished to enrollees, through 
an encounter data system or other methods as may be specified by the 
State.
2. Burden
    The above information collection requirement is subject to the PRA. 
However, we believe that the burden associated with these information 
collection requirements is exempt from the Act in accordance with 5 CFR 
1320.3(b)(2) because the time, effort, and financial resources 
necessary to comply with these requirements would be incurred by 
persons in the normal course of their activities.

N. Section 438.402 General Requirements

1. Requirement
    In summary, Sec. 438.402 requires each MCO and PIHP to have a 
grievance system, sets out general requirements for the system, and 
establishes filing requirements. It provides that grievances and 
appeals may be filed either orally or in writing, but that oral appeals 
(except those for expedited service authorization decisions) must be 
followed by a written request.
2. Burden
    We estimate that approximately 1 percent of 19 million MCO and PIHP 
enrollees (190,000) annually will file a grievance with their MCO or 
PIHP and that approximately .5 percent (95,000) annually will file an 
appeal. For these cases, we estimate that the burden on the enrollee 
filing a grievance or appeal is approximately 20 minutes per case. The 
total annual burden on enrollees is 95,000 hours.

O. Section 438.404 Notice of Action

1. Requirement
    In summary, Sec. 438.404 states that if an MCO or PIHP intends to 
deny, limit, reduce, or terminate a service; deny payment; deny the 
request of an enrollee in a rural area with one MCO or PIHP to go out 
of network to obtain a service; or fails to furnish, arrange, provide, 
or pay for a service in a timely manner, the MCO or PIHP must give the 
enrollee timely written notice and sets forth the requirements of that 
notice.
2. Burden
    We estimate that the burden associated with this requirement is the 
length of time it would take an MCO or PIHP to provide written notice 
of an intended action. We estimate that it will take MCOs and PIHP 30 
seconds per action to make this notification. We estimate that 
approximately 5 percent (950,000) of the approximately 19 million MCO 
and PIHP enrollees will receive one notice of intended action per year 
from their MCO or PIHP (approximately 17 hours per MCO or PIHP) for a 
total burden of approximately 7917 hours.

P. Section 438.406 Handling of Grievances and Appeals

1. Requirement
    In summary, Sec. 438.406 states that each MCO and PIHP must 
acknowledge receipt of each grievance and appeal.
2. Burden
    The above information collection requirement is not subject to the 
PRA. It is exempt under 5 CFR 1320.4(a) because it occurs as part of an 
administrative action.

Q. Section 438.408 Resolution and Notification: Grievances and Appeals

1. Requirement
    In summary, Sec. 438.408 states that for grievances filed in 
writing, the MCO or PIHP must notify the enrollee in writing of its 
decision within specified timeframes. The notice must also specify that 
the enrollee has the right to seek further review by the State and how 
to seek it. All decisions on appeals must be sent to the enrollee in 
writing within specified timeframes and, for notice of expedited 
resolution, the MCO or PIHP must also provide oral notice. The decision 
notice must include the MCO or PIHP contact for the appeal and the 
results of the process and the date it was completed. For an oral 
grievance that does not relate to quality of care, the MCO or PIHP may 
provide oral notice unless the enrollee requests that it be written.
2. Burden
    The above information collection requirements are not subject to 
the PRA. They are exempt under 5 CFR 1320.4(a) because they occur as 
part of an administrative action.

R. Section 438.410 Expedited Resolution of Grievances

Paragraph (c)
1. Requirement
    Paragraph (c), Action following denial of a request for expected 
resolution, requires each MCO and PIHP to provide written notice to an 
enrollee whose request for expedited resolution is denied.
2. Burden
    The above information collection requirement is not subject to the 
PRA. It is exempt under 5 CFR 1320.4(a) because it occurs as part of an 
administrative action.

S. Section 438.416 Record Keeping and Reporting Requirements

1. Requirement
    Section 438.416 paragraphs (a) and (c) state that each MCO and PIHP 
must maintain records of grievances and appeals.
2. Burden
    We estimate that approximately 95,000 (.5 percent) of the 
approximately

[[Page 43649]]

19 million MCO and PIHP enrollees will file a grievance or appeal with 
their MCO or PIHP (205 per MCO or PIHP). The recording and tracking 
burden associated with each grievance is estimated to be 1 minute per 
request (3.4 hours per MCO or PIHP), for a total burden of 1,583 hours 
(1 minute multiplied by an estimated 95,000 enrollees who would file a 
grievance or appeal).

T. Section 438.604 Data That Must Be Certified

1. Requirement
    Each MCO and PIHP must certify that it is in substantial compliance 
with its contract. Certification is required, as provided in 
Sec. 438.606, for all documents specified by the State.
2. Burden
    While the requirement for MCOs and PIHP to certify its compliance 
with its contract and for all documents required by the State, the 
burden associated with these requirements is captured during the 
submission of the information. Therefore, we are assigning 1 token hour 
of burden for this requirement. Submission of the certified information 
and data occurs when the MCO or PIHP requests payment from the State 
according to the terms of its contract. There is no burden assigned to 
the submission as it is not required by this regulation, but rather by 
terms of the MCO's or PIHP's contract with the State.

U. Section 438.710 Due Process: Notice of Sanction and Pre-termination 
Hearing

Section 438.710(a) Due Process: Notice of Sanction and Pre-termination 
Hearing
1. Requirement
    Section 438.710(a) states that before imposing any of the sanctions 
specified in this subpart, the State must give the affected MCO or PCCM 
written notice that explains the basis and nature of the sanction.
2. Burden
    The above information collection requirements are not subject to 
the P.A. They are exempt under 5 CFR 1320.4(a) because they occur as 
part of an administrative action.
Section 438.710 (b)(2) Due Process: Notice of Sanction and Pre-
termination Hearing
1. Requirement
    Section 438.710(b)(2) states that before terminating an MCO's or 
PCCM's contract, the State must:
    (i) Give the MCO or PCCM written notice of its intent to terminate, 
the reason for termination, the time and place of the hearing;
    (ii) After the hearing, give the entity written notice of the 
decision affirming or reversing the proposed termination of the 
contract and, for an affirming decision, the effective date of 
termination; and
    (iii) For an affirming decision, give enrollees of the MCO or PCCM 
notice of the termination and information, consistent with Sec. 438.10, 
on their options for receiving Medicaid services following the 
effective date of termination.
2. Burden
    The above information collection requirement is not subject to the 
PRA. It is exempt under 5 CFR 1320.4(a) because it occurs as part of an 
administrative action.

V. Section 438.722 Disenrollment During Termination Hearing Process

1. Requirement
    Section 438.722(a) states that after a State has notified an MCO or 
PCCM of its intention to terminate the MCO or PCCM's contract, the 
State may give the MCO's or PCCM's enrollees written notice of the 
State's intent to terminate the MCO's or PCCM's contract.
2. Burden
    States already have the authority to terminate MCO or PCCM 
contracts according to State law and have been providing written notice 
to the MCOs or PCCMs. States are now given, at their discretion, the 
option of notifying the MCO's or PCCM's enrollees of the State's intent 
to terminate the MCO's or PCCM's contract. While it is not possible to 
gather an exact figure, we estimate that 12 States may terminate 1 
contract per year. We estimate that it will take States 1 hour to 
prepare the notice to enrollees, for a total burden of 12 hours. In 
addition, we estimate that it will take States approximately 5 minutes 
per beneficiary to notify them of the termination, equating to a burden 
of 5 minutes multiplied by 12 States multiplied by 46,194 beneficiaries 
per MCO or PCCM, for a burden of approximately 46,194 hours. The total 
burden of preparing the notice and notifying enrollees is 46,206.

W. Section 438.724

1. Requirement
    Section 438.724 requires that the State give our Regional Office 
written notice whenever it imposes or lifts a sanction. The notice must 
specify the affected MCO, the kind of sanction, and the reason for the 
State's decision to impose or lift a sanction.
2. Burden
    We anticipate that no more than 36 States would impose or lift a 
sanction each year and that it would take each one 30 minutes to give 
the regional office notice. Thus the annual burden would be 18 hours.

X. Section 438.810 Expenditures for Enrollment Broker Services

1. Requirement
    Section 438.810(c) requires that a State contracting with an 
enrollment broker must submit the contract or memorandum of agreement 
(MOA) for services performed by the broker to us for review and 
approval prior to the effective date of services required by the 
contract or MOA.
2. Burden
    The burden associated with this requirement is the length of time 
for a State to mail each contract to us for review. We estimate that 
the burden associated with this requirement is 5 minutes per enrollment 
broker contract, for a total annual burden of approximately 3 hours per 
year (5 minutes multiplied by an estimated 35 enrollment broker 
contracts in the States using brokers).
    We have submitted a copy of this proposed rule to OMB for its 
review of the information collection requirements described above. 
These requirements are not effective until they have been approved by 
OMB.

BILLING CODE 4120-01-P

[[Page 43650]]

[GRAPHIC] [TIFF OMITTED] TP20AU01.000

BILLING CODE 4120-01-C

[[Page 43651]]

IV. Regulatory Impact

A. Introduction

    We have examined the impacts of this proposed rule as required by 
Executive Order 12866 and the Regulatory Flexibility Act (RFA). 
Executive Order 12866 directs agencies to assess all costs and benefits 
of available regulatory alternatives and, when regulation is necessary, 
to select regulatory approaches that maximize net benefits, including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity. A regulatory impact analysis (RIA) 
must be prepared for major rules with economically significant effects 
($100 million or more in any 1 year). This rule meets the criteria of 
being economically significant because the impact would be over $100 
million.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. This rule implements Medicaid managed care 
provisions as directed by BBA. The statute does not permit significant 
alternatives to these regulatory provisions; however, we invite 
comments on alternatives to provisions of this proposed rule that would 
reduce burden on small entities.
    This proposed rule primarily impacts beneficiaries, State agencies, 
enrollment brokers, MCOs, PIHPs, PAHPs, and PCCMs. Small entities 
include small business in the health care sector with receipts of less 
than $5 million to $25 million, nonprofit organizations, and other 
entities. (See 65 FR 69432). For purposes of the RFA, individuals and 
State governments are not included in this definition. We estimate that 
in 2000 there were 339 MCOs, 123 PIHPs, 34 PAHPs, and 37 PCCMs. We 
believe that only a few of these entities qualify as small entities.
    Specifically, we believe that the 37 PCCM systems are likely to be 
small entities, as are approximately 12 of the PAHPs. We believe that 
the 10 PAHPs that are at risk for ambulatory medical services only are 
likely to be small businesses, as are two dental PAHPs. We believe that 
the remaining PAHPs and all the MCOs and PIHPs have annual receipts 
from Medicaid contacts and other business interests in excess of $25 
million.
    We do not believe that the impact of the new provisions of this 
proposed regulation are great on the small entities that we have 
identified. The most significant requirement relates to providing 
information to enrollees. Specifically, PCCMs and PAHPs are required to 
make written materials available in languages that are prevalent in its 
service area (as determined by the State) and provide oral 
interpretation services when needed. We do not believe that PCCMs or 
PAHPs provide much written material to enrollees. In fact, in the 
proposed regulation, we place the responsibility on States, rather than 
PCCMs and PAHPs, to provide information to potential enrollees. The 
regulation does provide that the State may require the PCCM or PAHP to 
provide additional information to enrollees, at their request, 
concerning the grievance procedures available to enrollees. However, 
the State may take responsibility for this rather than require that it 
be done by the PCCM or PAHP. In either case, we believe that States 
will prepare this information so that the only burden on PCCMs and 
PAHPs would be to distribute the information when it is requested by an 
enrollee.
    The regulation would require managed care entities, including PCCMs 
and PAHPs, to make oral interpretation services available to each 
potential enrollee or enrollee requesting them. We do not have 
information on which to base an estimate of the burden of this 
requirement. We invite comment on the burden of this provision and cost 
data to help us develop estimates.
    PCCMs and PAHPs also must meet certain contract requirements, 
however, these are consistent with the nature of their business in 
contracting with the State for the provision of services to Medicaid 
enrollees. They, likewise, must meet requirements related to 
disenrollment of enrollees for cause, including receipt and initial 
processing of disenrollment requests if the State delegates this 
function to the PCCM or PAHP. However, as all enrollees will have an 
annual opportunity to disenroll, we believe that the number of 
disenrollment requests for cause will be small. In addition, PCCMs and 
PAHPs must submit marketing material to the State for review and 
approval and must cover and pay for emergency services based on the 
prudent layperson standard (this only applies to PCCMs if they have a 
risk contract). We believe that only the two dental PAHPs are likely to 
produce marketing material and that only the 10 PAHPs with a risk 
contract will be subject to the emergency services provision.
    PAHPs must meet two other requirements. First they may not 
discriminate against providers seeking to participate in the plan. This 
requirement imposes no burden. Second, they must meet solvency 
standards to ensure that Medicaid enrollees will not be responsible for 
any debt should the entity become insolvent. We believe that this 
imposes little burden in addition to normal business requirements for 
entities assuming risk.
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis for any rule that may have a significant impact on the 
operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside a Metropolitan 
Statistical Area and has fewer than 100 beds.
    We do not anticipate that the provisions in this proposed rule 
would have a substantial economic impact on most hospitals, including 
small rural hospitals. The BBA provisions include some new requirements 
on States, MCOs, and PIHPs, but no new direct requirements on 
individual hospitals. The impact on individual hospitals would vary 
according to each hospital's current and future contractual 
relationships with MCOs and PIHPs. Furthermore, the impact would also 
vary according to each hospital's current procedures and level of 
compliance with existing statute and regulation pertaining to Medicaid 
managed care. For these reasons, this proposed rule is not expected to 
have a significant impact on the operations of a substantial number of 
hospitals.
    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 in any 1 year by 
State, local, and tribal governments, in the aggregate, or by the 
private sector, of $110 million or more (adjusted annually for 
inflation). We have determined that this rule does not impose any 
mandates on State, local, or tribal governments, or the private sector 
that would result in an annual expenditure of $110 million or more.

B. Summary of the Proposed Rule

    This proposed rule implements the Medicaid provisions as directed 
by the BBA. The primary objectives of these provisions are to allow for 
greater flexibility for State agencies to participate in Medicaid 
managed care programs and provide greater beneficiary protections and 
quality assurance standards. The regulation addresses pertinent areas 
of concern between States and MCOs, PIHPs, and, for some provisions, 
PAHPs and PCCMs.
    Specific provisions of the regulation include the following:

[[Page 43652]]

     Permitting States to require in their State plan that 
Medicaid beneficiaries be enrolled in managed care.
     Eliminating the requirement that no more than 75 percent 
of enrollees in an MCO or PHP be Medicaid or Medicare enrollees.
     Specifying a grievance and appeal procedure for MCO and 
PIHP enrollees.
     Providing for the types of information that must be given 
to enrollees and potential enrollees, including requirements related to 
language and format.
     Requiring that MCOs and PIHPs document for the States that 
they have adequate capacity to serve their enrollees and that States 
certify this to us.
     Specifying quality standards for States, MCOs, and PIHPs.
     Increasing program integrity protections and requiring 
certification of data by MCOs and PIHPs.
     Increasing the threshold for prior approval of MCO 
contracts from $100,000 to $1 million.
     Permitting cost sharing for managed care enrollees under 
the same circumstances as permitted in fee-for-service.
     Expanding the managed care population for which States can 
provide 6 months of guaranteed eligibility.
     Revising the rules for setting capitation rates.
    It would be extremely difficult to accurately quantify the overall 
impact of this regulation on States, MCOs, PIHPs, PAHPs, and PCCMs 
because there is enormous variation among States and these entities 
regarding their current regulatory and contract requirements, as well 
as organizational structure and capacity. Any generalization would mask 
important variations in the impact by State or managed care program 
type. The Lewin Group, under a contract with the Center for Health Care 
Strategies, released a study of the cost impact of the original 
proposed regulation published on September 29, 1998 the Federal 
Register (63 FR 52022). Because this new proposed regulation addresses 
the same areas as the September 29, 1998 proposed rule and includes 
many similar provisions, the Lewin study remains the best information 
we have available on the potential incremental impact of this proposed 
regulation. However, the study did not analyze the original proposed 
regulation in total, but focused on four areas within the original 
proposed regulation: individual treatment plans, initial health 
assessments, quality improvement programs, and grievance systems/State 
fair hearings. While the study's focus is limited to selected 
provisions of the previously proposed regulation, and some of the 
details of the provisions in this proposed rule differ from the earlier 
proposed rule, nevertheless, we believe that the overall cost 
conclusions are relevant to this proposed rule. In addition to 
examining the four regulatory requirements, the Lewin study cited the 
need to evaluate both the incremental and aggregate effects of the 
rule; the effect on different managed care environments (for example, 
overall enrollment; the Medicare, commercial, and Medicaid mix; 
geographic location); and differing regulatory requirements of the 
State (for example, State patient rights laws, regulation of 
noninsurance entities). The Lewin report also points out that many of 
the BBA provisions were implemented through previous guidance to the 
States, so the regulatory impact only captures a subset of the actual 
impact of the totality of BBA requirements.
    According to the MCOs included in the Lewin study, many of the 
proposed provisions are not expected to have large incremental costs. 
The study mainly focused on the assessment and treatment management 
components of the regulation, as well as the quality improvement 
projects. For example, they estimate the cost of an initial assessment 
(called screening in this proposed regulation) as ranging from $0.17 to 
$0.26 per member per month (PMPM), but for an MCO that currently 
performs an initial assessment, the incremental cost is estimated as 
$0.03 to $0.06 PMPM. Extrapolating these estimates to the population of 
Medicaid managed care enrollees, if all enrollees were enrolled in 
plans doing initial assessments, the total cost would range from $6.8 
million to $13.5 million. If all enrollees were enrolled in plans that 
did not perform initial assessments, the total cost would be $38 
million to $58 million. Similarly, the costs of quality improvement 
projects can vary from $60,000 to $100,000 in the first year (start-
up), $80,000 to $100,000 in the second and third years (the 
intervention and improvement measurement cycle), and $40,000 to $50,000 
for the fourth and subsequent years (ongoing performance measurement).
    In summary, according to the Lewin Study, States and their 
contracting managed care plans have already implemented many provisions 
of the BBA. While there are incremental costs associated with these 
proposed regulatory requirements, they would vary widely based on 
characteristics of individual managed care plans and States. Finally, 
the BBA requirements are being implemented in an increasingly 
regulatory environment at the State level. Therefore, States, MCOs, and 
PIHPs would likely face additional costs not related to these 
regulatory requirements absent these new regulations. Thus, the 
incremental impact of these requirements on costs to be incurred would 
be difficult if not impossible to project.
    We believe that the overall impact of this proposed rule would be 
beneficial to Medicaid beneficiaries, MCOs, PIHPs PAHPs, PCCMs, States, 
and us. Many of the BBA Medicaid managed care requirements merely 
codify Federal statute standards widely in place in State law or in the 
managed care industry. Some of the BBA provisions represent new 
requirements for States, MCOs, PIHPs, PAHPs, and PCCMs but also provide 
expanded opportunities for participation in Medicaid managed care.
    It is clear that all State agencies would be affected by this 
proposed Medicaid regulation but in varying degrees. Much of the burden 
would be on MCOs, PIHPs, PAHPs, and PCCMs contracting with States, but 
this would also vary by existing and continuing relationships between 
State agencies and MCOs, PIHPs, PAHPs, and PCCMs. This regulation is 
intended to provide States flexibility and minimize the compliance cost 
to States, MCOs, PIHPs, PAHPs, and PCCMs to the extent possible 
consistent with the detailed BBA requirements. We believe the proposed 
provisions would result in improved patient care outcomes and 
satisfaction over the long term.
    Recognizing that a large number of entities, such as hospitals, 
State agencies, MCOs, and PIHPs would be affected by the implementation 
of these statutory provisions, and a substantial number of these 
entities may be required to make changes in their operations, we have 
prepared the following analysis. This analysis, in combination with the 
rest of the preamble, is consistent with the standards for analysis set 
forth by both the RFA and RIA.

C. State Options to Use Managed Care

Managed Care Organizations
    Under this provision, a State agency may amend its State plan to 
require all Medicaid beneficiaries in the State to enroll in either an 
MCO or PCCM without the need to apply for a waiver of ``freedom of 
choice'' requirements under either section 1915(b) or 1115 of the Act. 
However, waivers would still be required to include certain exempted 
populations in mandatory managed care programs, notably SSI 
populations,

[[Page 43653]]

Indians, and groups of children with special needs. Federal review 
would be limited to a one-time State plan amendment approval, while 
States would no longer need to request waiver renewals every 2 years 
for section 1915(b) of the Act and 5 years for section 1115 of the Act 
waivers. State agencies may include ``exempted'' populations as 
voluntary enrollees in State plan managed care programs. Currently, 
nine States use State plan amendments to require beneficiary enrollment 
in MCOs and PCCMs. In short, the new State plan option provides State 
agencies with a new choice of method to require participation in 
managed care. The ability of States to require enrollment in managed 
care through their State plans rather than through a waiver would not 
alter the standards of care practiced by MCOs and health care providers 
and, therefore, would not change the cost of providing care to managed 
care enrollees.
    Pursuing the State plan amendment option rather than a waiver under 
section 1915(b) or 1115 of the Act waiver may reduce State 
administrative costs because it would eliminate the need for States to 
go through the waiver renewal process. Likewise, we would benefit from 
a reduced administrative burden if fewer waiver applications and 
renewals are requested. However, we believe the overall reduction in 
burden to both States and to Medicare would be small in relation to the 
overall administrative requirements of the Medicaid program.

D. Elimination of 75/5 Rule

    Before the passage of the BBA, nearly all MCOs, and PHPs 
contracting with Medicaid were required to limit combined Medicare and 
Medicaid participation to 75 percent of their enrollment, and State 
agencies had to verify enrollment composition as a contract 
requirement. Elimination of this rule allows MCOs, PIHPs, and PAHPs to 
participate without meeting this requirement and eliminates the need 
for States to monitor enrollment composition in contracting MCOs, 
PIHPs, and PAHPs. This would broaden the number of MCOs, PIHPs, and 
PAHPs available to States for contracting, leading to more choice for 
beneficiaries.

E. Increased Beneficiary Protection--Grievance Procedures

    The BBA requires MCOs to establish internal grievance procedures 
that permit an eligible enrollee, or a provider on behalf of an 
enrollee, to challenge the denials of medical assistance or denials of 
payment. Prior to the enactment of the BBA, the regulations at 42 CFR 
434.59, required MCOs and PHPs to have an internal grievance procedure. 
While the regulations have not specified a procedure for MCOs or PIHPs 
to follow for their grievance process, we believe that these entities 
have grievance systems that are similar in their processes to the 
requirements of this proposed regulation. This belief is supported by 
recent State surveys, such as the survey of 10 States conducted by the 
National Academy for State Health Policy in 1999, and the survey of 13 
States conducted by the American Public Human Services Association in 
1997. Therefore, while this regulation would require uniform procedures 
across MCOs and PIHPs, and would require MCOs and PIHPs to change their 
procedures to conform to the regulation, the requirements of the 
proposed regulation would not impose additional requirements on MCOs 
and PIHPs over what is currently in place.
    In the Collection of Information section of this preamble, we 
assigned 7,917 burden hours to MCOs and PIHPs for the notice 
requirements of the grievance system, and 1583 hours for the record 
keeping requirements and summary reports to be prepared by MCOs and 
PIHPs and submitted to the States. This results in 9,500 total burden 
hours. Using the mean hourly wage for the health care service sector 
(the Bureau of Labor Statistics, March 2001) of $16.34, this would 
result in a total cost to MCOs and PIHPs of $155,230.

F. Provision of Information

    In mandatory managed care programs, we have required that 
beneficiaries be informed of the choices available to them when 
enrolling with MCOs, PIHPs, PAHPs, and PCCMs. Section 1932(a)(5) of the 
Act, enacted in section 4701(a)(5) of the BBA, describes the kind of 
information that must be made available to Medicaid enrollees and 
potential enrollees. It also requires that this information, and all 
enrollment notices and instructional materials related to enrollment in 
MCOs, PIHPs, PAHPs, and PCCMs be in a format that can be easily 
understood by the individuals to whom it is directed. We do not believe 
that these requirements deviate substantially from current practice. 
Furthermore, there is no way to quantify the degree of burden on State 
agencies, MCOs, PIHPs, PAHPs, and PCCMs for several reasons. We do not 
have State-specific data on what information States currently provide, 
or the manner in which they provide it. Variability among States 
indicates that implementing or continuing enrollee information 
requirements would represent different degrees of difficulty and 
expense.
    The information requirements for MCOs and PCCMs in the proposed 
regulation are required under the BBA. In this proposed regulation, 
however, we extend requirements to PIHPs and PAHPs. We welcome examples 
of the current experience of PIHPs and PAHPs in providing information 
to enrollees. This would assist us in more accurately estimating the 
impact of these provisions.
    As a requirement under the provision of information section, State 
agencies opting to implement mandatory managed care programs under the 
State plan amendment option are required to provide comparative 
information on MCOs and PCCMs to potential enrollees. Currently only 9 
States have exercised the option to use a State plan amendment to 
require beneficiary enrollment in managed care. However, for States 
that do select this option, we do not believe that providing the 
comparative data in itself represents a burden, as these are elements 
of information that most States currently provide. The regulation 
specifies that the information must be presented in a comparative or 
chart-like form that facilitates comparison among MCOs, and PCCMs. This 
may be perceived as a burden to States that have previously provided 
this information in some other manner; however, it is our belief that 
even in the absence of the regulation, the trend is for States, and 
many accreditation bodies such as the National Committee for Quality 
Assurance (NCQA), to use chart-like formats. Consequently, enrollees 
would benefit from having better information for selecting MCOs, and 
PCCMs. Only a few States have opted for State plan amendments so far, 
but it is anticipated that more States will participate over the long 
term. States that participate in the future will benefit from any 
comparative tools developed by other States. We state in the Collection 
of Information section of this preamble that 9 States availed 
themselves of the State Plan option, and thereby will be required to 
display information on a comparative chart. We are assuming it will 
take 4 hours to create a chart, or 36 hours for 9 States. Using the 
mean hourly wage for State employees (the Bureau of Labor Statistics, 
March 2001) of $17.05, this would result in total costs to States of 
$614.

G. Demonstration of Adequate Capacity and Services

    The BBA requires Medicaid MCOs to provide the State and the 
Secretary of HHS with assurances of adequate

[[Page 43654]]

capacity and services, including service coverage, within reasonable 
timeframes. States currently require assurances of adequate capacity 
and services as part of their existing contractual arrangements with 
MCOs and PIHPs. However, certification of adequacy has not been 
routinely provided to us in the past. Under this rule, each State 
retains its authority to establish standards for adequate capacity and 
services within MCO and PIHP contracts. This may be perceived as a 
burden to MCOs and PIHPs, and for States that have not been required to 
formally certify that an MCO or PIHP meets the States' capacity and 
service requirements. However, certification to us would ensure an 
important beneficiary protection while imposing only a minor burden on 
States to issue a certification to us.
    Quantifying the additional burden on States, MCOs, or PIHPs as a 
result of implementing this regulation is not feasible for several 
reasons. First, we do not have State-specific data on the types of 
detailed information States currently require of their MCOs and PIHPs 
to assure adequate capacity and services. Second, we do not have State-
specific information on the manner in which State agencies collect and 
evaluate documentation in this area. Rather, each State agency has its 
own documentation requirements and its own procedures to assure 
adequate capacity and services. This regulation contemplates that 
States continue to have that flexibility.
    Under this regulation, State agencies would determine and specify 
both the detail and type of documentation to be submitted by the MCO or 
PIHP to assure adequate capacity and services and the type of 
certification to be submitted to us. Accordingly, variability among 
State agencies implementing this regulation represents different 
degrees of detail and expense. Regardless of the level of additional 
burden on MCOs, PIHPs, State agencies, and us, Medicaid beneficiaries 
would receive continued protections in access to health care under both 
State and Federal statute. For purposes of the Collection of 
Information section of this preamble, we assume that it would take 20 
hours per MCO or PIHP to complete this requirement. For the 462 MCOs 
and PIHPs, this requirement would take 9,240 hours to complete 
annually.

H. New Quality Standards

    The BBA requires that each State agency have an ongoing quality 
assessment and improvement strategy for its Medicaid managed care 
contracting program. The strategy, among other things, must include: 
(1) Standards for access to care so that covered services are available 
within reasonable timeframes and in a manner that ensures continuity of 
care and adequate capacity of primary care and specialized services 
providers; (2) examination of other aspects of care and service 
directly related to quality of care, including grievance procedures, 
marketing, and information standards; (3) procedures for monitoring and 
evaluating the quality and appropriateness of care and service to 
enrollees; and (4) regular and periodic examinations of the scope and 
content of the State's quality strategy.
    The provisions of this regulation propose requirements for State 
quality strategies and requirements for MCOs and PIHPs that States are 
to incorporate as part of their quality strategy. These MCO and PIHP 
requirements address: (1) MCO and PIHP structure and operations; (2) 
Medicaid enrollees' access to care; and (3) MCO and PIHP 
responsibilities for measuring and improving quality. While these new 
Medicaid requirements are a significant increase in Medicaid regulatory 
requirements in comparison to the regulatory requirements that existed 
before the BBA, we believe the increases are appropriate because many 
of the requirements are either identical to or consistent with quality 
requirements placed on MCOs by private sector purchasers, the Medicare 
program, State licensing agencies, and private sector accreditation 
organizations. While these new requirements also would have 
implications for State Medicaid agencies that would be responsible for 
monitoring for compliance with the new requirements, we believe that a 
number of recent statutory, regulatory, and private sector developments 
would enable State Medicaid agencies to more easily monitor for 
compliance than in the past at potentially less cost to the State. 
First, the BBA included provisions addressing how States are to fulfill 
the statutory requirement for an annual, external quality review (EQR) 
of each Medicaid-contracting MCO and PIHP. (These provisions are 
addressed in a separate rule). Prior to the BBA, 75 percent Federal 
financial participation in the cost of these activities was available 
to States only if the State used a narrowly defined list of entities to 
perform the quality review. The BBA opened up the possibility for use 
of a much wider array of entities to perform this function. Further, in 
our proposed rule to implement these EQR provisions published in the 
Federal Register on December 1, 1999 (64 FR 67223), we specified that 
the 75 percent Federal match would be available to EQR organizations 
that performed activities necessary for monitoring compliance with 
these BBA quality requirements for MCOs and PIHPs. The BBA also 
provided that States could exercise an option whereby MCOs that were 
accredited by a private accrediting organization under certain 
conditions could be determined to meet certain quality requirements 
specified in this rule, thereby avoiding costs to the State of directly 
monitoring for compliance with these requirements. In response to this, 
private accrediting organizations such as the National Committee for 
Quality Assurance have developed Medicaid accreditation product lines.
    In addition, prior to issuance of that proposed rule, we worked 
closely with State Technical Advisory Groups (TAGs) in developing the 
managed care quality regulations and standards. Requirements under this 
proposed regulation build on a variety of initiatives of State Medicaid 
agencies and us to promote the assessment and improvement of quality in 
plans contracting with Medicaid, including:
    The Quality Improvement System for Managed Care (QISMC), an 
initiative with State and Federal officials, beneficiary advocates, and 
the managed care industry to develop a coordinated quality oversight 
system for Medicare and Medicaid that reduces duplicate or conflicting 
efforts and emphasizes demonstrable and measurable improvement.
    QARI, serving as a foundation to the development of QISMC, 
highlights the key elements in the Health Care Quality Improvement 
System (HCQIS), including internal quality assurance programs, State 
agency monitoring, and Federal oversight. This guidance emphasizes 
quality standards developed in conjunction with all system 
participants, such as managed care contractors, State regulators, 
Medicaid beneficiaries or their representatives, and external review 
organizations.
    Further, we have built on efforts in other sectors in developing 
these quality requirements in order to capitalize on current activities 
and trends in the health care industry. For example, many employers and 
cooperative purchasing groups and some State agencies already require 
that organizations be accredited by the National Committee on Quality 
Assurance (NCQA), the Joint Commission on Accreditation of Healthcare 
Organizations (JCAHO), the American Accreditation Healthcare Commission 
(AAHC), or other independent bodies. Many also require that 
organizations report their performance using Health Plan Employer Data 
& Information Set

[[Page 43655]]

(HEDIS), Foundation for Accountability (FACCT), or other measures and 
conduct enrollee surveys using the Consumer Assessment of Health Plans 
Study (CAHPS) or other instruments. NCQA estimates that more than 90 
percent of plans are collecting some or all of HEDIS data for their 
commercial population. Also, States have heightened their regulatory 
efforts through insurance or licensing requirements, and the National 
Association of Insurance Commissioners (NAIC) has developed model acts 
on network adequacy, quality assessment and improvement, and 
utilization review.
    While we anticipate that many organizations would need to invest in 
new staff and information systems in order to perform these new quality 
improvement activities, it is difficult to quantify these financial and 
operational ``investments,'' as State agencies, MCOs, and PIHPs across 
the country exhibit varying capabilities in meeting these standards. 
These new quality requirements would present administrative challenges 
for some State agencies, MCOs, and PIHPs. However, States have 
significant latitude in how these requirements would be implemented. 
Acknowledging that there likely would be some degree of burden on 
States, MCOs, and PIHPs, we also believe that the long-term benefits of 
greater accountability and improved quality in care delivery would 
outweigh the costs of implementing and maintaining these processes over 
time.

I. Administration

1. Certifications and Program Integrity Protections
    Sections 1902(a)(4) and (19) of BBA require that States conduct 
appropriate processes and methods to ensure the efficient operation of 
the health plans. This includes mechanisms to not only safeguard 
against fraud and abuse but also to ensure accurate reporting of data 
among health plans, States, and us.
    Section 438.602 of the proposed regulation addresses the importance 
of reliable data that are submitted to States and requires MCOs and 
PIHPs to certify the accuracy of these data to the State. These data 
include enrollment information, encounter data, or other information 
that is used for payment determination. Even if States do not use 
encounter data to set capitation rates for MCOs and PIHPs, these data, 
along with provider and enrollment data, are useful for States in 
measuring quality performance and other monitoring of health plans. The 
provision of the proposed regulation that would require plans to attest 
to the validity of data presents an additional step in the process of 
data submission. MCOs and PHPs have historically worked closely with 
States when reporting Medicaid data in order to affirm that the data 
are accurate and complete. Submitting a certification of validity of 
data submitted does not represent a significant burden to health plans.
    Section 438.606 would require MCOs and PIHPs to have effective 
operational capabilities to guard against fraud and abuse. As a result, 
MCOs and PIHPs would uncover information about possible violations of 
law that they would be required to report to the State. We do not 
believe that these would be frequent or large in number and, therefore, 
would not result in burdens to the MCOs and PIHPs beyond what is usual 
in the course of business.
2. Change in Threshold from $100,000 to $1 Million
    Before the passage of the BBA, the Secretary's prior approval was 
required for all HMO contracts involving expenditures of $100,000 or 
more. Under the BBA, the threshold amount is increased to $1 million. 
This change in threshold would have minimal impact on plans currently 
contracting with State agencies for Medicaid managed care. Currently, 
only one or two plans in the country have annual Medicaid expenditures 
of under $1 million. Therefore, this proposed provision would not 
affect a significant number of plans or States.

J. Permitting Same Copayments in Managed Care as in FFP

    Under section 4708(c) of the BBA, States may now allow copayments 
for services provided by MCOs to the same extent that they allow 
copayments under fee-for-service. Imposition of copayments in 
commercial markets typically results in lower utilization of medical 
services, depending on the magnitude of payments required of the 
enrollee. Thus, we would normally expect State agencies that implement 
copayments for MCO enrollees to achieve some savings. However, applying 
copayments to Medicaid enrollees may cause States and MCOs to incur 
administrative costs that more than offset these savings. This is due 
to several factors. First, the amount of copayments allowed by statute 
are significantly lower than typical commercial copayments. Second, it 
is difficult to ensure compliance with these payments, especially given 
that the enrollees have limited income. Third, to achieve maximum 
compliance, collection efforts would be necessary on the part of MCOs 
or PHPs. It is also possible that, if State agencies take advantage of 
this option, Medicaid managed care enrollees may defer receipt of 
health care services, their health conditions may deteriorate, and the 
costs of medical treatment may be greater over the long term. For these 
reasons, it is difficult to predict how many States would take 
advantage of this option or of the net costs or savings that would 
result.

K. Six-Month Guaranteed Eligibility

    The legislation expanded the States' option to guarantee up to 6 
months eligibility in two ways. First, it expands the types of MCOs 
whose members may have guaranteed eligibility, in that it now includes 
anyone who is enrolled with a Medicaid managed care organization as 
defined in section 1903(m)(1)(A) of the Act. Second, it expands the 
option to include those enrolled with a PCCM as defined in section 
1905(t) of the Act. These changes were effective October 1, 1997. To 
the extent that State agencies choose this option, we expect MCOs, 
PIHPs, PAHPs, and PCCMs in those States to support the use of this 
provision since it affords health plans with assurance of membership 
for a specified period of time. Likewise, beneficiaries would gain from 
this coverage expansion, and continuity of care would be enhanced. The 
table below displays our estimates of the impact of the expanded option 
for 6 months of guaranteed eligibility under section 4709 of the BBA.

                                  Cost of 6-Month Guaranteed Eligibility Option
                             [Dollars in millions rounded to the nearest $5 million]
----------------------------------------------------------------------------------------------------------------
                                                            FY 2001    FY 2002    FY 2003    FY 2004    FY 2005
----------------------------------------------------------------------------------------------------------------
Federal..................................................         55         80        115        165        230
State....................................................         45         60         90        125        175
----------------------------------------------------------------------------------------------------------------

[[Page 43656]]

 
    Total................................................        100        140        205        290        405
----------------------------------------------------------------------------------------------------------------

    Because this provision was effective shortly after enactment of the 
BBA, the estimates of Federal costs have been reflected in our Medicaid 
budget since FY 1998. The estimates assume that half of the current 
Medicaid population is enrolled in managed care and that this 
proportion would increase to about two-thirds by 2003. We also assume 
that 15 percent of managed care enrollees were covered by guaranteed 
eligibility under rules in effect prior to enactment of the BBA and 
that the effect of the expanded option under section 4709 of the BBA 
would be to increase this rate to 20 percent initially and to 30 
percent by 2003. The guaranteed eligibility provision is assumed to 
increase average enrollment by 3 percent in populations covered by the 
option. This assumption is based on computer simulations of enrollment 
and turnover in the Medicaid program. Per capita costs used for the 
estimate were taken from the President's FY 1999 budget projections and 
the costs for children take into account the interaction of this 
provision with the State option for 12 months of continuous eligibility 
under section 4731 of the BBA. The distribution between Federal and 
State costs is based on the average Federal share representing 57 
percent of the total costs.
    In States electing the 6-month guaranteed eligibility option, 
Medicaid beneficiaries would have access to increased continuity of 
care, which should result in better health care management and improved 
clinical outcomes.

L. Financial Impact of Revised Rules for Setting Capitation Payments

    This rule proposes to replace the current UPL requirement at 
447.361 with new rate-setting rules incorporating an expanded 
requirement for actuarial soundness of capitation rates as described in 
detail in proposed 438.6(c). In general, we would not expect a major 
budget impact from the use of these proposed rate setting rules. While 
the rate setting rules may provide some states additional flexibility 
in setting higher capitation rates than what would have been allowed 
under current rules, we believe that the requirements for actuarial 
certification of rates, along with budgetary considerations by state 
policy makers, would serve to limit increases to within reasonable 
amounts. Moreover, the Secretary would retain the authority to look 
behind rates that appear questionable and disapprove any that did not 
comply with the proposed rate setting requirements.

M. Costs to States and Providers of Provisions Assigned Burden Hours

    The preceding section on Collection of Information Requirements 
includes estimates of the number of hours it will take States, 
providers, and enrollees to provide information required under this 
regulation. For States, the total hours are estimated to be 42,342,191. 
To estimate the cost impact of these requirements on States, we assume 
the total cost of these requirements to be the sum of the estimated 
hours times the mean hourly wage for State employees of $17.05 (the 
Bureau of Labor Statistics, March, 2001), or $21,171,095. Because the 
Federal government shares the general administrative costs of the 
Medicaid program with the States, we estimate the total cost of these 
requirements to States to be approximately $10.5 million annually.
    For MCOs, PIHPs, PAHPs, and PCCMs, we estimate that the Collection 
and Information Requirements will take 761,217 hours annually to 
complete. To estimate the cost impact of these requirements on 
providers, we multiplied these hours by the mean hourly wage for health 
care service workers of $16.34 (the Bureau of Labor Statistics, March, 
2001) to estimate the cost of these requirements to be approximately 
$12.5 million.

N. Administrative Costs

    This proposed regulation would require States to include certain 
specifications in their contracts with MCOs, PIHPs, PAHPs, and PCCMs 
and to monitor compliance with those contract provisions. It also 
requires States to take a proactive role in monitoring the quality of 
their managed care program. These requirements would add some 
administrative burden and costs to States. The amount of additional 
administrative cost would vary by State depending on how inclusive 
current practice is of the new requirements. In addition, for those 
States not using like requirements at present, we believe that most 
would be adopting similar requirements on their own in the future 
absent this proposed regulation.
    The proposed regulation would also increase Federal 
responsibilities for monitoring State performance in managing their 
managed care programs. However, no new Federal costs are expected as we 
plan to use existing staff to monitor these new requirements.

O. Alternatives Considered

    We considered allowing the January 19, 2001 final rule with comment 
to become effective as published, after the two 60-day delays in 
effective date for Department review. However, the serious concerns 
raised by some key stakeholders, especially regarding changes made to 
the final rule that had not been included in the proposed rule, led us 
to decide to develop a new proposed rule.

P. Conclusion

    This BBA managed care proposed regulation would affect States, 
MCOs, PIHPs, PAHPs, PCCMs, providers, beneficiaries, and us in 
different ways. The initial investments that are needed by State 
agencies and MCOs, PIHPs, PAHPs, and PCCMs would result in improved and 
more consistent standards for the delivery of health care to Medicaid 
beneficiaries. Greater consumer safeguards would result from new 
quality improvement and protection provisions. Consequently, long term 
savings would derive from more consistent standards across States, 
MCOs, PIHPs, PAHPs, and PCCMs and increased opportunities for provider 
and beneficiary involvement in improved access, outcomes, and 
satisfaction.

Q. Federalism

    Under Executive Order 13132, we are required to adhere to certain 
criteria regarding Federalism in developing regulations. We have 
determined that this proposed rule would not significantly affect 
States rights, roles, and responsibilities. This regulation, when 
published in final, would supersede existing State laws regulating 
managed care, unless State laws are more restrictive.
    The BBA requires States that contract with organizations under 
section 1903(m) of the Act to have certain

[[Page 43657]]

beneficiary protections in place when mandating managed care 
enrollment. This rule proposes to implement those BBA provisions in 
accordance with the Administrative Procedure Act. This rule also 
proposes to eliminate certain requirements viewed by States as 
impediments to the growth of managed care programs, such as 
disenrollment without cause at any time and the inability to require 
enrollment in managed care without a waiver. We also propose to apply 
many of these requirements to prepaid health plans that provide for 
inpatient hospital and institutional services. We believe this is 
consistent with the intent of the Congress in enacting the quality and 
beneficiary protection provisions of the BBA. We worked with States in 
developing this proposed regulation. In 1997-1998, when we were 
developing the original proposed rule, we consulted with State Medicaid 
agency representatives in order to understand the potential impacts of 
the provisions of the regulations then being considered. In November, 
1997 we met with the Executive Board of the National Association of 
State Medicaid Directors (NASMD) and discussed the process for 
providing initial guidance to States about the Medicaid provisions of 
the BBA. We provided this guidance in a series of over 50 letters to 
State Medicaid Directors. Much of the policy included in this proposed 
regulation relating to the State plan option provision was included in 
these letters. In May 1998, we briefed the Executive Committee of NASMD 
on the general content of the proposed regulation. More specific State 
input was obtained through discussions throughout the Spring of 1998 
with the Medicaid Technical Advisory Groups (TAGs) on Managed Care and 
Quality. These groups are comprised of Medicaid agency staff with 
notable expertise in the subject area and our regional office staff and 
are staffed by the American Public Human Services Association. The 
Managed Care TAG devoted much of its agenda for several monthly 
meetings to BBA issues. The Quality TAG participated in two conference 
calls exclusively devoted to discussion of BBA quality issues. Through 
these contacts, we explored with State agencies their preferences 
regarding policy issues and the feasibility and practicality of 
implementing policy under consideration. We also invited public 
comments as part of the rulemaking process and received comments from 
over 300 individuals and organizations. Most of the commenters had 
substantial comments that addressed many provisions of the regulation.
    Following publication of the final rule on January 19, 2001, the 
new Administration delayed the effective date of the rule to provide it 
an opportunity to conduct its own review of the regulation. Following 
the announcement of the delay, we received additional comments from the 
APHSA, individual States, provider organizations, and advocates for 
beneficiaries. We considered those comments when developing this 
proposed rule. To provide an opportunity for comment by the public, we 
are now soliciting comments on this proposed rule. We will consider and 
respond to all comments received in the preamble to the final rule.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 400

    Grant programs-health, Health facilities, Health maintenance 
organizations (HMO), Medicaid, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 430

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

42 CFR Part 431

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

42 CFR Part 434

    Grant programs-health, Health maintenance organizations (HMO), 
Medicaid, Reporting and recordkeeping requirements.

42 CFR Part 435

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

42 CFR Part 438

    Grant programs-health, Managed care entities, Medicaid, Quality 
assurance, Reporting and recordkeeping requirements.

42 CFR Part 440

    Grant programs-health, Medicaid.

42 CFR Part 447

    Accounting, Administrative practice and procedure, Drugs, Grant 
programs-health, Health facilities, Health professions, Medicaid, 
Reporting and recordkeeping requirements, Rural areas.
    For the reasons set forth in the preamble, 42 CFR Chapter IV is 
proposed to be amended as set forth below:

PART 400--INTRODUCTION; DEFINITIONS

    1. The authority citation for part 400 continues to read as 
follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).

    2. In Sec. 400.203, the following definitions for ``PCCM'' and 
``PCP'' are added, in alphabetical order, and the definition of 
``provider'' is revised to read as follows:


Sec. 400.203  Definitions specific to Medicaid.

* * * * *
    PCCM stands for primary care case manager.
    PCP stands for primary care physician.
    Provider means either of the following:
    (1) For the fee-for-service program, any individual or entity 
furnishing Medicaid services under an agreement with the Medicaid 
agency.
    (2) For the managed care program, any individual or entity that is 
engaged in the delivery of health care services and is legally 
authorized to do so by the State in which it delivers the services.
* * * * *

PART 430--GRANTS TO STATES FOR MEDICAL ASSISTANCE PROGRAMS

    1. The authority citation for part 430 continues to read as 
follows:

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

    2. New Sec. 430.5 is added to read as follows:


Sec. 430.5  Definitions.

    As used in this subchapter, unless the context indicates 
otherwise--
    Contractor means any entity that contracts with the State agency, 
under the State plan and in return for a payment, to process claims, to 
provide or pay for medical services, or to enhance the State agency's 
capability for effective administration of the program.
    Representative has the meaning given the term by each State 
consistent with its laws, regulations, and policies.

[[Page 43658]]

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).


Sec. 431.51  [Amended]

    2. In Sec. 431.51, the following changes are made:
    a. In paragraph (a) introductory text, the phrase ``and 1915(a) and 
(b) of the Act'' is revised to read ``1915(a) and (b) and 1932(a)(3) of 
the Act.''
    b. Paragraphs (a)(4) and (a)(5) are revised and a new paragraph 
(a)(6) is added, to read as set forth below.
    c. In paragraph (b)(1) introductory text, ``and part 438 of this 
chapter'' is added immediately before the comma that follows ``this 
section''.
    d. In paragraph (b)(2), ``an HMO'' is revised to read ``a Medicaid 
MCO''.


Sec. 431.51  Free choice of providers.

    (a) Statutory basis. * * *
    (4) Section 1902(a)(23) of the Act provides that a recipient 
enrolled in a primary care case management system or Medicaid managed 
care organization (MCO) may not be denied freedom of choice of 
qualified providers of family planning services.
    (5) Section 1902(e)(2) of the Act provides that an enrollee who, 
while completing a minimum enrollment period, is deemed eligible only 
for services furnished by or through the MCO or PCCM, may, as an 
exception to the deemed limitation, seek family planning services from 
any qualified provider.
    (6) Section 1932(a) of the Act permits a State to restrict the 
freedom of choice required by section 1902(a)(23), under specified 
circumstances, for all services except family planning services.
* * * * *


Sec. 431.55  [Amended]

    3. In Sec. 431.55, a sentence is added at the end of paragraph 
(c)(1)(i), to read as follows:


Sec. 431.55  Waiver of other Medicaid requirements.

* * * * *
    (c) * * *
    (1) * * *
    (i) * * * The person or agency must comply with the requirements 
set forth in part 438 of this chapter for primary care case management 
contracts and systems.
* * * * *
    4. Section 431.200 is revised to read as follows:


Sec. 431.200  Basis and scope.

    This subpart--
    (a) Implements section 1902(a)(3) of the Act, which requires that a 
State plan provide an opportunity for a fair hearing to any person 
whose claim for assistance is denied or not acted upon promptly;
    (b) Prescribes procedures for an opportunity for hearing if the 
State agency takes action to suspend, terminate, or reduce services, or 
an MCO or PIHP takes action under subpart F of part 438 of this 
chapter; and
    (c) Implements sections 1919(f)(3) and 1919(e)(7)(F) of the Act by 
providing an appeals process for any person who--
    (1) Is subject to a proposed transfer or discharge from a nursing 
facility; or
    (2) Is adversely affected by the pre-admission screening or the 
annual resident review that are required by section 1919(e)(7) of the 
Act.
    5. In Sec. 431.201, the following definition is added in 
alphabetical order:


Sec. 431.201  Definitions.

* * * * *
    Service authorization request means a managed care enrollee's 
request for the provision of a service.
* * * * *
    6. In Sec. 431.220, the introductory text of paragraph (a) is 
revised, the semicolons after paragraphs (a)(1), (a)(2), and (a)(3) and 
the ``and'' after the third semicolon are removed and periods are 
inserted in their place, and a new paragraph (a)(5) is added, to read 
as follows:


Sec. 431.220  When a hearing is required.

    (a) The State agency must grant an opportunity for a hearing to the 
following:
    * * *
    (5) Any MCO or PIHP enrollee who is entitled to a hearing under 
subpart F of part 438 of this chapter.
    7. In Sec. 431.244, paragraph (f) is revised to read as follows:


Sec. 431.244  Hearing decisions.

* * * * *
    (f) The agency must take final administrative action as follows:
    (1) Ordinarily, within 90 days from the earlier of the following:
    (i) The date the enrollee files an MCO or PIHP appeal.
    (ii) The date the enrollee files a request for State fair hearing.
    (2) As expeditiously as the enrollee's health condition requires, 
but no later than 72 hours after the agency receives, from the MCO or 
PIHP, the case file and information for any appeal of a denial of a 
service that, as indicated by the MCO or PIHP--
    (i) Meets the criteria for expedited resolution as set forth in 
Sec. 438.410(c)(2) of this chapter, but was not resolved within the 
timeframe for expedited resolution; or
    (ii) Was resolved within the timeframe for expedited resolution, 
but reached a decision wholly or partially adverse to the enrollee.
    (3) As expeditiously as the enrollee's health condition requires, 
but no later than 72 hours after the agency receives, directly from an 
MCO or PIHP enrollee, a fair hearing request on a decision to deny a 
service that it determines meets the criteria for expedited resolution, 
as set forth in Sec. 438.410(a) of this chapter.
* * * * *

PART 434--CONTRACTS

    1. The authority citation for part 434 continues to read as 
follows:

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


Sec. 434.1  [Amended]

    2. In Sec. 434.1, paragraph (a) is revised to read as follows:


Sec. 434.1  Basis and scope.

    (a) Statutory basis. This part is based on section 1902(a)(4) of 
the Act, which requires that the State plan provide for methods of 
administration that the Secretary finds necessary for the proper and 
efficient operation of the plan.
* * * * *


Sec. 434.2  [Amended]

    3. In Sec. 434.2, the definitions of ``capitation fee'', ``clinical 
laboratory'', ``contractor'', ``enrolled recipient'', ``Federally 
qualified HMO'', ``health insuring organization'', ``Health maintenance 
organization (HMO)'', ``nonrisk'', ``Prepaid health plan (PHP) 
``provisional status HMO'', and ``risk or underwriting risk'' are 
removed.


Sec. 434.6  [Amended]

    4. In paragraph (a)(1), the term, ``appendix G'' is removed.

Subpart C [Removed]

    5. Subpart C, consisting of Secs. 434.20 through 434.38, is removed 
and reserved.

Subpart D [Amended]

    6. In subpart D, Secs. 434.42 and 434.44 are removed.

Subpart E [Removed]

    7. Subpart E, consisting of Secs. 434.50 through 434.67, is removed 
and reserved.

[[Page 43659]]

Sec. 434.70  [Revised]

    8. Section 434.70 is revised to read as follows:


Sec. 434.70  Conditions for Federal financial participation (FFP).

    (a) Basic requirements. FFP is available only for periods during 
which the contract--
    (1) Meets the requirements of this part;
    (2) Meets the applicable requirements of 45 CFR part 74; and
    (3) Is in effect.
    (b) Basis for withholding. CMS may withhold FFP for any period 
during which--
    (1) The State fails to meet the State plan requirements of this 
part; or
    (2) Either party substantially fails to carry out the terms of the 
contract.


Secs. 434.71 through 434.75 and 434.80  [Removed]

    9. Sections 434.71 through 434.75, and 434.80 are removed.

PART 435--ELIGIBILITY IN THE STATES, THE 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).


Sec. 435.212  [Amended]

    2. In Sec. 435.212, the following changes are made.
    a. Throughout the section, ``HMO'', wherever it appears, is revised 
to read ``MCO''.
    b. The section heading and the introductory text is revised to read 
as follows:


Sec. 435.212  Individuals who would be ineligible if they were not 
enrolled in an MCO or PCCM .

    The State agency may provide that a recipient who is enrolled in an 
MCO or PCCM and who becomes ineligible for Medicaid is considered to 
continue to be eligible--
* * * * *
    3. Section 435.326 is revised to read as follows:


Sec. 435.326  Individuals who would be ineligible if they were not 
enrolled in an MCO or PCCM.

    If the agency provides Medicaid to the categorically needy under 
Sec. 435.212, it may provide it under the same rules to medically needy 
recipients who are enrolled in MCOs or PCCMs.


Sec. 435.1002  [Amended]

    4. In Sec. 435.1002, in paragraph (a), ``Secs. 435.1007 and 
435.1008'' is revised to read ``Secs. 435.1007, 435.1008, and 438.814 
of this chapter.''
    5. A new part 438 is added to chapter IV to read as follows:

PART 438--MANAGED CARE

Subpart A--General Provisions

Sec.
438.1  Basis and scope.
438.2  Definitions.
438.6  Contract requirements.
438.8  Provisions that apply to PIHPs and PAHPs.
438.10  Information requirements.
438.12  Provider discrimination prohibited.
Subpart B--State Responsibilities
438.50  State Plan requirements.
438.52  Choice of MCOs, PIHPs, PAHPs, and PCCMs.
438.56  Disenrollment: Requirements and limitations
438.58  Conflict of interest safeguards.
438.60  Limit on payment to other providers.
438.62  Continued services to recipients.
438.66  Monitoring procedures.
Subpart C--Enrollee Rights and Protections
438.100  Enrollee rights.
438.102  Provider-enrollee communications.
438.104  Marketing activities.
438.106  Liability for payment.
438.108  Cost sharing.
438.114  Emergency and post-stabilization services.
438.116  Solvency standards.
Subpart D--Quality Assessment and Performance Improvement
438.200  Scope.
438.202  State responsibilities.
438.204  Elements of State quality strategies.

Access Standards

438.206  Availability of services.
438.207  Assurances of adequate capacity and services.
438.208  Coordination and continuity of care.
438.210  Coverage and authorization of services.

Structure and Operation Standards

438.214  Provider selection.
438.218  Enrollee information.
438.224  Confidentiality.
438.226  Enrollment and disenrollment.
438.228  Grievance systems.
438.230  Subcontractual relationships and delegation.

Measurement and Improvement Standards

438.236  Practice guidelines.
438.240  Quality assessment and performance improvement program.
438.242  Health information systems.
Subpart E--[Reserved]
Subpart F--Grievance System
438.400  Statutory basis and definitions.
438.402  General requirements.
438.404  Notice of action.
438.406  Handling of grievances and appeals.
438.408  Resolution and notification: Grievances and appeals.
438.410  Expedited resolution of appeals.
438.414  Information about the grievance system to providers and 
subcontractors.
438.416  Recordkeeping and reporting requirements.
438.420  Continuation of benefits while the MCO or PIHP appeal and 
the State Fair Hearing are pending.
438.424  Effectuation of reversed appeal resolutions.
Subpart G--[Reserved]
Subpart H--Certifications and Program Integrity
438.600  Statutory basis.
438.602  Basic rule.
438.604  Data that must be certified.
438.606  Source, content, and timing of certification.
438.608  Program integrity requirements.
Subpart I--Sanctions
438.700  Basis for imposition of sanctions.
438.702  Types of intermediate sanctions.
438.704  Amounts of civil money penalties.
438.706  Special rules for temporary management.
438.708  Termination of an MCO or PCCM contract.
438.710  Due process: Notice of sanction and pre-termination 
hearing.
438.722  Disenrollment during termination hearing process.
438.724  Notice to CMS.
438.726  State plan requirement.
438.730  Sanction by CMS: Special rules for MCOs with risk 
contracts.
Subpart J--Conditions for Federal Financial Participation
438.802  Basic requirements.
438.806  Prior approval.
438.808  Exclusion of entities.
438.810  Expenditures for enrollment broker services.
438.812  Costs under risk and nonrisk contracts.
438.814  Limit on payments in excess of capitation rates.

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

Subpart A--General Provisions


Sec. 438.1  Basis and scope.

    (a) Statutory basis. This part is based on sections 1902(a)(4), 
1903(m), 1905(t), and 1932 of the Act.
    (1) Section 1902(a)(4) requires that States provide for methods of 
administration that the Secretary finds necessary for proper and 
efficient operation of the State plan. The application of the 
requirements of this part to PIHPs and PAHPs that do not meet the 
statutory definition of an MCO or a PCCM is under the authority in 
section 1902(a)(4).
    (2) Section 1903(m) contains requirements that apply to 
comprehensive risk contracts.

[[Page 43660]]

    (3) Section 1903(m)(2)(H) provides that an enrollee who loses 
Medicaid eligibility for not more than 2 months may be enrolled in the 
succeeding month in the same MCO or PCCM if that MCO or PCCM still has 
a contract with the State.
    (4) Section 1905(t) contains requirements that apply to PCCMs.
    (5) Section 1932--
    (i) Provides that, with specified exceptions, a State may require 
Medicaid recipients to enroll in MCOs or PCCMs;
    (ii) Establishes the rules that MCOs, PCCMs , the State, and the 
contracts between the State and those entities must meet, including 
compliance with requirements in sections 1903(m) and 1905(t) of the Act 
that are implemented in this part;
    (iii) Establishes protections for enrollees of MCOs and PCCMs ;
    (iv) Requires States to develop a quality assessment and 
performance improvement strategy;
    (v) Specifies certain prohibitions aimed at the prevention of fraud 
and abuse;
    (vi) Provides that a State may not enter into contracts with MCOs 
unless it has established intermediate sanctions that it may impose on 
an MCO that fails to comply with specified requirements; and
    (vii) Makes other minor changes in the Medicaid program.
    (b) Scope. This part sets forth requirements, prohibitions, and 
procedures for the provision of Medicaid services through MCOs, PIHPs 
and PAHPs, and PCCMs. Requirements vary depending on the type of entity 
and on the authority under which the State contracts with the entity. 
Provisions that apply only when the contract is under a mandatory 
managed care program authorized by section 1932(a)(1)(A) of the Act are 
identified as such.


Sec. 438.2  Definitions.

    As used in this part--
    Capitation payment means a payment the State agency makes 
periodically to a contractor on behalf of each recipient enrolled under 
a contract for the provision of medical services under the State plan. 
The State agency makes the payment regardless of whether the particular 
recipient receives services during the period covered by the payment.
    Comprehensive risk contract means a risk contract that covers 
comprehensive services, that is, inpatient hospital services and any of 
the following services, or any three or more of the following services:
    (1) Outpatient hospital services.
    (2) Rural health clinic services.
    (3) FQHC services.
    (4) Other laboratory and X-ray services.
    (5) Nursing facility (NF) services.
    (6) Early and periodic screening diagnostic, and treatment (EPSDT) 
services.
    (7) Family planning services.
    (8) Physician services.
    (9) Home health services.
    Federally qualified HMO means an HMO that CMS has determined is a 
qualified HMO under section 1310(d) of the PHS Act.
    Health insuring organization (HIO) means an entity that in exchange 
for capitation payments, covers services for recipients--
    (1) Through payments to, or arrangements with, providers; and
    (2) Under a risk contract with the State.
    Managed care organization (MCO) means an entity that has, or is 
seeking to qualify for, a comprehensive risk contract under this part, 
and that is--
    (1) A Federally qualified HMO that meets the advance directives 
requirements of subpart I of part 489 of this chapter; or
    (2) Any public or private entity that meets the advance directives 
requirements and is determined to also meet the following conditions:
    (i) Makes the services it provides to its Medicaid enrollees as 
accessible (in terms of timeliness, amount, duration, and scope) as 
those services are to other Medicaid recipients within the area served 
by the entity.
    (ii) Meets the solvency standards of Sec. 438.116.
    Nonrisk contract means a contract under which the contractor--
    (1) Is not at financial risk for changes in utilization or for 
costs incurred under the contract that do not exceed the upper payment 
limits specified in Sec. 447.362 of this chapter; and
    (2) May be reimbursed by the State at the end of the contract 
period on the basis of the incurred costs, subject to the specified 
limits.
    Prepaid ambulatory health plan (PAHP) means an entity that--
    (1) Provides medical services to enrollees under contract with the 
State agency, and on the basis of prepaid capitation payments, or other 
payment arrangements that do not use State plan payment rates;
    (2) Does not provide or arrange for, and is not otherwise 
responsible for the provision of any inpatient hospital or 
institutional services for its enrollees; and
    (3) Does not have a comprehensive risk contract.
    Prepaid inpatient health plan (PIHP) means an entity that--
    (1) Provides medical services to enrollees under contract with the 
State agency, and on the basis of prepaid capitation payments, or other 
payment arrangements that do not use State plan payment rates;
    (2) Provides, arranges for, or otherwise has responsibility for the 
provision of any inpatient hospital or institutional services for its 
enrollees; and
    (3) Does not have a comprehensive risk contract.
    Primary care means all health care services and laboratory services 
customarily furnished by or through a general practitioner, family 
physician, internal medicine physician, obstetrician/gynecologist, or 
pediatrician, to the extent the furnishing of those services is legally 
authorized in the State in which the practitioner furnishes them.
    Primary care case management means a system under which a PCCM 
contracts with the State to furnish case management services (which 
include the location, coordination and monitoring of primary health 
care services) to Medicaid recipients.
    Primary care case manager (PCCM) means a physician, a physician 
group practice, an entity that employs or arranges with physicians to 
furnish primary care case management services or, at State option, any 
of the following:
    (1) A physician assistant.
    (2) A nurse practitioner.
    (3) A certified nurse-midwife.
    Risk contract means a contract under which the contractor--
    (1) Assumes risk for the cost of the services covered under the 
contract; and
    (2) Incurs loss if the cost of furnishing the services exceeds the 
payments under the contract.


Sec. 438.6  Contract requirements.

    (a) Regional office review. The CMS Regional Office must review and 
approve all MCO, PIHP, and PAHP contracts, including those risk and 
nonrisk contracts that, on the basis of their value, are not subject to 
the prior approval requirement in Sec. 438.806.
    (b) Entities eligible for comprehensive risk contracts. A State 
agency may enter into a comprehensive risk contract only with one of 
the following:
    (1) An MCO.
    (2) The entities identified in section 1903(m)(2)(B)(i), (ii), and 
(iii) of the Act.
    (3) Community, Migrant, and Appalachian Health Centers identified 
in section 1903(m)(2)(G) of the Act. Unless they qualify for a total 
exemption under section 1903(m)(2)(B)

[[Page 43661]]

of the Act, these entities are subject to the regulations governing 
MCOs under this part.
    (4) An HIO that arranges for services and became operational before 
January 1986.
    (5) An HIO described in section 9517(c)(3) of the Omnibus Budget 
Reconciliation Act of 1985 (as added by section 4734(2) of the Omnibus 
Budget Reconciliation Act of 1990).
    (c) Payments under risk contracts--(1) Terminology. As used in this 
paragraph, the following terms have the indicated meanings:
    (i) Actuarially sound capitation rates means capitation rates 
that--
    (A) Have been developed in accordance with generally accepted 
actuarial principles and practices;
    (B) Are appropriate for the populations to be covered, and the 
services to be furnished under the contract; and
    (C) Have been certified, as meeting the requirements of this 
paragraph (c), by actuaries who meet the qualification standards 
established by the American Academy of Actuaries and follow the 
practice standards established by the Actuarial Standards Board.
    (ii) Adjustments to smooth data means adjustments made, by cost-
neutral methods, across rate cells, to compensate for distortions in 
costs, utilization, or the number of eligibles.
    (2) Basic requirements. (i) All capitation rates paid under risk 
contracts and all risk-sharing mechanisms in contracts must be 
actuarially sound.
    (ii) The contract must specify the payment rates and any risk-
sharing mechanisms, and the actuarial basis for computation of those 
rates and mechanisms.
    (3) Requirements for actuarially sound rates. In setting 
actuarially sound capitation rates, the State must apply the following 
elements, or explain why they are not applicable:
    (i) Base utilization and cost data that are derived from the 
Medicaid population, or if not, are adjusted to make them comparable to 
the Medicaid population.
    (ii) Adjustments made to smooth data and adjustments to account for 
factors such as inflation, an MCO, PIHP, or PAHP administration 
(subject to the limits in paragraph (c)(4)(ii) of this section), and 
utilization;
    (iii) Rate cells specific to the enrolled population, by:
    (A) Eligibility category;
    (B) Age;
    (C) Gender;
    (D) Locality/region; and
    (E) Risk adjustments based on diagnosis or health status (if used).
    (iv) Other payment mechanisms and utilization and cost assumptions 
that are appropriate for individuals with chronic illness, disability, 
ongoing health care needs, or catastrophic claims, using risk 
adjustment, risk sharing, or other appropriate cost-neutral methods.
    (4) Documentation. The State must provide the following 
documentation:
    (i) The actuarial certification of the capitation rates.
    (ii) An assurance (in accordance with paragraph (c)(3) of this 
section) that all payment rates are based only upon services covered 
under the State plan and to be provided under the contract to Medicaid-
eligible individuals.
    (iii) Its projection of expenditures under its previous year's 
contract (or under its FFS program if it did not have a contract in the 
previous year) compared to those projected under the proposed contract.
    (iv) An explanation of any incentive arrangements, or stop-loss, 
reinsurance, or any other risk-sharing methodologies under the 
contract.
    (5) Special contract provisions. (i) Contract provisions for 
reinsurance, stop-loss limits or other risk-sharing methodologies 
(other than risk corridors) must be computed on an actuarially sound 
basis.
    (ii) If risk corridors or incentive arrangements result in payments 
that exceed the approved capitation rates, the FFP limitation of 
Sec. 438.814 applies.
    (iii) For all incentive arrangements, the contract must provide 
that the arrangement is--
    (A) For a fixed period of time;
    (B) Not to be renewed automatically;
    (C) Designed to include withholds or other payment penalties if the 
contractor does not perform the specified activities or does not meet 
the specified targets;
    (D) Made available to both public and private contractors;
    (E) Not conditioned on intergovernmental transfer agreements; and
    (F) Necessary for the specified activities and targets.
    (d) Enrollment discrimination prohibited. Contracts with MCOs, 
PIHPs and PAHPs, and PCCMs must provide as follows:
    (1) The MCO, PIHP, PAHP, or PCCM accepts individuals eligible for 
enrollment in the order in which they apply without restriction (unless 
authorized by the Regional Administrator), up to the limits set under 
the contract.
    (2) Enrollment is voluntary, except in the case of mandatory 
enrollment programs that meet the conditions set forth in 
Sec. 438.50(a).
    (3) The MCO, PIHP, PAHP, or PCCM will not, on the basis of health 
status or need for health care services, discriminate against 
individuals eligible to enroll.
    (4) The MCO, PIHP, PAHP, or PCCM will not discriminate against 
individuals eligible to enroll on the basis of race, color, or national 
origin, and will not use any policy or practice that has the effect of 
discriminating on the basis of race, color, or national origin.
    (e) Services that may be covered. An MCO, PIHP, or PAHP, contract 
may cover, for enrollees, services that are in addition to those 
covered under the State plan.
    (f) Compliance with contracting rules. All contracts under this 
subpart must:
    (1) Comply with all applicable Federal and State laws and 
regulations including Title VI of the Civil Rights Act of 1964; Title 
IX of the Education Amendments of 1972 (regarding education programs 
and activities); the Age Discrimination Act of 1975; the Rehabilitation 
Act of 1973; and the Americans with Disabilities Act; and
    (2) Meet all the requirements of this section.
    (g) Inspection and audit of financial records. Risk contracts must 
provide that the State agency and the Department may inspect and audit 
any financial records of the entity or its subcontractors.
    (h) Physician incentive plans. (1) MCO, PIHP, and PAHP contracts 
must provide for compliance with the requirements set forth in 
Secs. 422.208 and 422.210 of this chapter.
    (2) In applying the provisions of Secs. 422.208 and 422.210, 
references to ``M+C organization'', ``CMS'', and ``Medicare 
beneficiaries'' must be read as references to ``MCO, PIHP, or PAHP'', 
``State agency'' and ``Medicaid recipients'', respectively.
    (i) Advance directives. (1) All MCO and PIHP contracts must provide 
for compliance with the requirements of Sec. 422.128 of this chapter 
for maintaining written policies and procedures for advance directives.
    (2) The MCO or PIHP must provide adult enrollees with written 
information on advance directives policies, and include a description 
of applicable State law.
    (3) The information must reflect changes in State law as soon as 
possible, but no later than 90 days after the effective date of the 
change.
    (j) Special rules for certain HIOs. Contracts with HIOs that began 
operating on or after January 1, 1986, and that the statute does not 
explicitly exempt from requirements in section

[[Page 43662]]

1903(m) of the Act are subject to all the requirements of this part 
that apply to MCOs and contracts with MCOs. These HIOs may enter into 
comprehensive risk contracts only if they meet the criteria of 
paragraph (a) of this section.
    (k) Additional rules for contracts with PCCMs. A PCCM contract must 
meet the following requirements:
    (1) Provide for reasonable and adequate hours of operation, 
including 24-hour availability of information, referral, and treatment 
for emergency medical conditions.
    (2) Restrict enrollment to recipients who reside sufficiently near 
one of the manager's delivery sites to reach that site within a 
reasonable time using available and affordable modes of transportation.
    (3) Provide for arrangements with, or referrals to, sufficient 
numbers of physicians and other practitioners to ensure that services 
under the contract can be furnished to enrollees promptly and without 
compromise to quality of care.
    (4) Prohibit discrimination in enrollment, disenrollment, and re-
enrollment, based on the recipient's health status or need for health 
care services.
    (5) Provide that enrollees have the right to disenroll from their 
PCCM in accordance with Sec. 438.56.
    (l) Subcontracts. All subcontracts must fulfill the requirements of 
this part that are appropriate to the service or activity delegated 
under the subcontract.
    (m) Choice of health professional. The contract must allow each 
enrollee to choose his or her health professional in the MCO to the 
extent possible and appropriate.


Sec. 438.8  Provisions that apply to PIHPs and PAHPs.

    (a) The following requirements and options apply to PIHPs, PIHP 
contracts, and States with respect to PIHPs, to the same extent that 
they apply to MCOs, MCO contracts, and States for MCOs.
    (1) The contract requirements of Sec. 438.6, except for 
requirements that pertain to HIOs.
    (2) The information requirements in Sec. 438.10.
    (3) The provision against provider discrimination in Sec. 438.12.
    (4) The State responsibility provisions of subpart B except 
Sec. 438.50.
    (5) The enrollee rights and protection provisions in subpart C of 
this part.
    (6) The quality assessment and performance improvement provisions 
in subpart D of this part to the extent that they are applicable to 
services furnished by the PIHP.
    (7) The grievance system provisions in subpart F of this part.
    (8) The certification and program integrity protection provisions 
set forth in subpart H of this part.
    (b) The following requirements and options apply to PAHPs, PAHP 
contracts, and States for PAHPs.
    (1) The contract requirements of Sec. 438.6, except for 
requirements for advance directives and those that pertain to HIOs.
    (2) Designated portions of the information requirements in 
Sec. 438.10.
    (3) The provision against provider discrimination in Sec. 438.12.
    (4) The State responsibility provisions of subpart B except 
Sec. 438.50.
    (5) Designated portions of subpart C on enrollee rights and 
protections.
    (6) Section 438.206(a) on availability of services.


Sec. 438.10  Information requirements.

    (a) Terminology. As used in this section, the following terms have 
the indicated meanings:
    Potential enrollee means a Medicaid recipient who is subject to 
mandatory enrollment or may voluntarily elect to enroll in a given 
managed care program, but is not yet an enrollee of a specific in a 
MCO, PIHP, PAHP, or PCCM.
    Enrollee means a Medicaid recipient who is currently enrolled in an 
MCO, PIHP, PAHP, or PCCM in a given managed care program.
    (b) Basic rule. Each State, enrollment broker, MCO, PIHP, PAHP, and 
PCCM must provide all enrollment notices, informational materials, and 
instructional materials relating to enrollees and potential enrollees 
in a manner and format that may be easily understood.
    (c) Language. The State must:
    (1) Establish a methodology for identifying the prevalent non-
English languages spoken by enrollees and potential enrollees 
throughout the State. ``Prevalent'' means a non-English language spoken 
by a significant number or percentage of potential enrollees and 
enrollees in the State.
    (2) Provide written information in each prevalent non-English 
language.
    (3) Require each MCO, PIHP, PAHP, and PCCM to make its written 
information available in the prevalent non-English languages in its 
particular service area.
    (4) Make oral interpretation services available and require each 
MCO, PIHP, PAHP, and PCCM to make those services available free of 
charge to the each potential enrollee and enrollee. This applies to all 
non-English languages, not just those that the State identifies as 
prevalent.
    (5) Notify enrollees and potential enrollees, and require each MCO, 
PIHP, PAHP, and PCCM to notify its enrollees--
    (i) That oral interpretation is available for any language and 
written information is available in prevalent languages; and
    (ii) How to access those services.
    (d) Format. (1) Written material must--
    (i) Use easily understood language and format;
    (ii) Be available in alternative formats and in an appropriate 
manner that takes into consideration the special needs of those who, 
for example, are visually limited or have limited reading proficiency.
    (2) All enrollees and potential enrollees must be informed that 
information is available in alternative formats and how to access those 
formats.
    (e) Information for potential enrollees. (1) The State or its 
contracted representative must provide the information specified in 
paragraph (e)(2) of this section to each potential enrollee as follows:
    (i) At the time the potential enrollee first becomes eligible to 
enroll in a voluntary program, or is first required to enroll in a 
mandatory enrollment program; and
    (ii) Within a timeframe that enables the potential enrollee to use 
the information in choosing among available MCOs, PIHP, PAHPs, or 
PCCMs.
    (2) The information for potential enrollees must include the 
following:
    (i) General information about--
    (A) The basic features of managed care;
    (B) Which populations are excluded from enrollment, subject to 
mandatory enrollment, or free to enroll voluntarily in the program; and
    (C) MCO, PIHP, PAHP, and PCCM responsibilities for coordination of 
enrollee care;
    (ii) Information specific to each MCO, PIHP, PAHP, or PCCM program 
operating in potential enrollee's service area. A summary of the 
following information is sufficient, but the State must provide more 
detailed information upon request:
    (A) Benefits covered;
    (B) Cost sharing, if any;
    (C) Service area;
    (D) Names, locations, telephone numbers of, and non-English 
language spoken by current contracted providers, and including 
identification of providers that are not accepting new patients. For 
MCOs, PIHPs, and PAHPs, this includes at a minimum information

[[Page 43663]]

on primary care physicians, specialists, and hospitals.
    (E) Benefits that are available under the State plan but are not 
covered under the contract, including how and where the enrollee may 
obtain those benefits, any cost sharing, and how transportation is 
provided. For a counseling or referral service that the MCO, PIHP, 
PAHP, or PCCM does not cover because of moral or religious objections, 
the State must furnish information about where and how to obtain the 
service.
    (f) General Information for all enrollees of MCOs, PIHPs, PAHPs, 
and PCCMs. Information must be made available to MCO, PIHP, PAHP, and 
PCCM enrollees as follows:
    (1) The State must notify all enrollees of their disenrollment 
rights at least annually, and no less than 60 days before the start of 
each enrollment period.
    (2) The State, its contracted representative, or the MCO, PIHP, 
PAHP, or PCCM must notify all enrollees of their right to request and 
obtain the information listed in paragraph (f)(6) of this section, (and 
(g) of this section if applicable) at least once a year.
    (3) The State, its contracted representative, or the MCO, PIHP, 
PAHP, or PCCM must furnish to each of its enrollees the information 
specified in paragraph (f)(6) of this section, (and (g) of this section 
if applicable) within a reasonable time after the MCO, PIHP, PAHP, or 
PCCM receives, from the State or its contracted representative, notice 
of the recipient's enrollment.
    (4) The MCO, PIHP, PAHP, or PCCM must give each enrollee written 
notice of any change (that the State defines as ``significant'') in the 
information specified in paragraph (f)(6) of this section, at least 30 
days before the intended effective date of the change.
    (5) The MCO, PIHP, and where appropriate, the PAHP or PCCM, must 
make a good faith effort to give written notice of termination of a 
contracted provider, within 15 days after receipt or issuance of the 
termination notice, to each enrollee who received his or her primary 
care from, or was seen on a regular basis by, the terminated provider.
    (6) The following information must also be provided to all 
enrollees:
    (i) Names, locations, telephone numbers of, and non-English 
languages spoken by current network providers, including information at 
least on primary care physicians, specialists, and hospitals, and 
identification of providers that are not accepting new patients.
    (ii) Any restrictions on the enrollee's freedom of choice among 
network providers.
    (iii) Enrollee rights and responsibilities, as specified in 
Sec. 438.100.
    (iv) Information on grievance and fair hearing procedures, and for 
MCO and PIHP enrollees, the information specified in Sec. 438.10(g)(i).
    (v) The amount, duration, and scope of benefits available under the 
contract in sufficient detail to ensure that enrollees understand the 
benefits to which they are entitled.
    (vi) Procedures for obtaining benefits, including authorization 
requirements.
    (vii) The extent to which, and how, enrollees may obtain benefits, 
including family planning services, from out-of-network providers.
    (viii) The extent to which, and how, after-hours and emergency 
coverage are provided, including:
    (A) What constitutes emergency medical condition, emergency 
services, and post-stabilization services, with reference to the 
definitions in Sec. 438.114 (a).
    (B) The fact that prior authorization is not required for emergency 
services.
    (C) The process and procedures for obtaining emergency services, 
including use of the 911 telephone system or its local equivalent.
    (D) The locations of any emergency settings and other locations at 
which providers and hospitals furnish emergency services and post-
stabilization services covered under the contract.
    (E) The fact that, subject to the provisions of this section, the 
enrollee has a right to use any hospital or other setting for emergency 
care.
    (ix) The post-stabilization care services rules set forth at 
Sec. 422.113(c) of this chapter.
    (x) Policy on referrals for specialty care and for other benefits 
not furnished by the enrollee's primary care provider.
    (xi) Cost sharing, if any.
    (xii) How and where to access any benefits that are available under 
the State plan but are not covered under the contract, including any 
cost sharing, and how transportation is provided. For a counseling or 
referral service that the MCO, PIHP, PAHP, or PCCM does not cover 
because of moral or religious objections, the MCO, PIHP, PAHP, or PCCM 
need not furnish information on how and where to obtain the service. 
The State must furnish information about how and where to obtain the 
service.
    (g) Specific Information Requirements for enrollees of MCOs and 
PIHPs. In addition to the requirements in Sec. 438.10(e), MCOs and 
PIHPs must provide the following information to their enrollees:
    (1) Grievance, appeal, and fair hearing procedures and timeframes, 
as provided in Secs. 438.400 through 438.424, in a State-developed or 
State-approved description, that must include:
    (i) For State fair hearing--
    (A) The right to hearing;
    (B) The method for obtaining a hearing; and
    (C) The rules that govern representation at the hearing.
    (ii) The right to file grievances and appeals
    (iii) The requirements and timeframes for filing a grievance or 
appeal.
    (iv) The availability of assistance in the filing process.
    (v) The toll-free numbers that the enrollee can use to file a 
grievance or an appeal by phone.
    (vi) The fact that, when requested by the enrollee--
    (A) Benefits will continue if the enrollee files an appeal or a 
request for State fair hearing within the timeframes specified for 
filing; and
    (B) The enrollee may be required to pay the cost of services 
furnished while the appeal is pending, if the final decision is adverse 
to the enrollee.
    (vii) Any appeal rights that the State chooses to make available to 
providers to challenge the failure of the organization to cover a 
service.
    (2) Advance directives, as set forth in Sec. 438.6(i)(2).
    (3) Physician incentive plans as set forth in Sec. 434.70(a)(4) of 
this chapter.
    (4) Additional information that is available upon request, 
including information on the structure and operation of the MCO or 
PIHP.
    (h) Special rules: States with mandatory enrollment under state 
plan authority.--(1) Basic rule. If the State plan provides for 
mandatory enrollment under Sec. 438.50, the State or its contracted 
representative must provide information on MCOs, and PCCMs (as 
specified in paragraph (g)(3) of this section), either directly or 
through the MCO or PCCM.
    (2) When and how the information must be furnished. The information 
must be furnished to all potential enrollees--
    (i) At least once a year; and
    (ii) In a comparative, chart-like format.
    (3) Required information. Some of the information is the same as 
the information required for potential enrollees under paragraph (d) of 
this section. However, all of the information in this paragraph is 
subject to the timeframe and format requirements of

[[Page 43664]]

paragraph (g)(2) of this section, and includes the following for each 
contracting MCO or PCCM:
    (i) The MCO's or PCCM's service area.
    (ii) The benefits covered under the contract.
    (iii) Any cost sharing imposed by the MCO or PCCM.
    (iv) To the extent available, quality and performance indicators, 
including, but not limited to, disenrollment rates as defined by the 
State, and enrollee satisfaction.


Sec. 438.12  Provider discrimination prohibited.

    (a) General rules. (1) An MCO, PIHP, or PAHP may not discriminate 
for the participation, reimbursement, or indemnification of any 
provider who is acting within the scope of his or her license or 
certification under applicable State law, solely on the basis of that 
license or certification. If an MCO, PIHP, or PAHP declines to include 
individual or groups of providers in its network, it must give the 
affected providers written notice of the reason for its decision.
    (2) In all contracts with health care professionals an MCO, PIHP, 
or PAHP must comply with the requirements specified in Sec. 438.214.
    (b) Construction. Paragraph (a) of this section may not be 
construed to--
    (1) Require the MCO, PIHP, or PAHP to contract with providers 
beyond the number necessary to meet the needs of its enrollees;
    (2) Preclude the MCO, PIHP, or PAHP from using different 
reimbursement amounts for different specialties or for different 
practitioners in the same specialty; or
    (3) Preclude the MCO, PIHP, or PAHP from establishing measures that 
are designed to maintain quality of services and control costs and are 
consistent with its responsibilities to enrollees.

Subpart B--State Responsibilities


Sec. 438.50  State Plan requirements.

    (a) General rule. A State plan that provides for requiring Medicaid 
recipients to enroll in managed care entities must comply with the 
provisions of this section, except when the State imposes the 
requirement--
    (1) As part of a demonstration project under section 1115 of the 
Act; or
    (2) Under a waiver granted under section 1915(b) of the Act.
    (b) State plan information. The plan must specify--
    (1) The types of entities with which the State contracts;
    (2) The payment method it uses (for example, whether fee-for-
service or capitation);
    (3) Whether it contracts on a comprehensive risk basis; and
    (4) The process the State uses to involve the public in both design 
and initial implementation of the program and the methods it uses to 
ensure ongoing public involvement once the State plan has been 
implemented.
    (c) State plan assurances. The plan must provide assurances that 
the State meets applicable requirements of the following statute and 
regulations:
    (1) Section 1903(m) of the Act, for MCOs and MCO contracts.
    (2) Section 1905(t) of the Act, for PCCMs and PCCM contracts.
    (3) Section 1932(a)(1)(A) of the Act, for the State's option to 
limit freedom of choice by requiring recipients to receive their 
benefits through managed care entities.
    (4) This part, for MCOs and PCCMs.
    (5) Part 434 of this chapter, for all contracts.
    (6) Section 438.6(c), for payments under any risk contracts, and 
Sec. 447.362 of this chapter for payments under any nonrisk contracts.
    (d) Limitations on enrollment. The State must provide assurances 
that, in implementing the State plan managed care option, it will not 
require the following groups to enroll in an MCO or PCCM:
    (1) Recipients who are also eligible for Medicare.
    (2) Indians who are members of Federally recognized tribes, except 
when the MCO or PCCM is--
    (i) The Indian Health Service; or
    (ii) An Indian health program or Urban Indian program operated by a 
tribe or tribal organization under a contract, grant, cooperative 
agreement or compact with the Indian Health Service.
    (3) Children under 19 years of age who are--
    (i) Eligible for SSI under title XVI;
    (ii) Eligible under section 1902(e)(3) of the Act;
    (iii) In foster care or other out-of-home placement;
    (iv) Receiving foster care or adoption assistance; or
    (v) Receiving services through a family-centered, community-based, 
coordinated care system that receives grant funds under section 
501(a)(1)(D) of title V, and is defined by the State in terms of either 
program participation or special health care needs.
    (e) Priority for enrollment. The State must have an enrollment 
system under which recipients already enrolled in an MCO or PCCM are 
given priority to continue that enrollment if the MCO or PCCM does not 
have the capacity to accept all those seeking enrollment under the 
program.
    (f) Enrollment by default. (1) For recipients who do not choose an 
MCO or PCCM during their enrollment period, the State must have a 
default enrollment process for assigning those recipients to 
contracting MCOs and PCCMs.
    (2) The process must seek to preserve existing provider-recipient 
relationships and relationships with providers that have traditionally 
served Medicaid recipients. If that is not possible, the State must 
distribute the recipients equitably among qualified MCOs and PCCMs 
available to enroll them, excluding those that are subject to the 
intermediate sanction described in Sec. 438.702(a)(4).
    (3) An ``existing provider-recipient relationship'' is one in which 
the provider was the main source of Medicaid services for the recipient 
during the previous year. This may be established through State records 
of previous managed care enrollment or fee-for-service experience, or 
through contact with the recipient.
    (4) A provider is considered to have ``traditionally served'' 
Medicaid recipients if it has experience in serving the Medicaid 
population.


Sec. 438.52  Choice of MCOs, PIHPs, PAHPs, and PCCMs.

    (a) General rule. Except as specified in paragraphs (b) and (c) of 
this section, a State that requires Medicaid recipients to enroll in an 
MCO, PIHP, PAHP, or PCCM must give those recipients a choice of at 
least two entities.
    (b) Exception for rural area residents. (1) Under any of the 
following programs, and subject to the requirements of paragraph (b)(2) 
of this section, a State may limit a rural area resident to a single 
MCO, PIHP, PAHP, or PCCM system:
    (i) A program authorized by a plan amendment under section 1932(a) 
of the Act.
    (ii) A waiver under section 1115 of the Act.
    (iii) A waiver under section 1915(b) of the Act.
    (2) A State that elects the option provided under paragraph (b)(1) 
of this section, must permit the recipient--
    (i) To choose from at least two physicians or case managers; and
    (ii) To obtain services from any other provider under any of the 
following circumstances:
    (A) The service or type of provider (in terms of training, 
experience, and specialization) is not available within the MCO, PIHP, 
PAHP, or PCCM network.
    (B) The provider is not part of the network, but is the main source 
of a service to the recipient, provided that--

[[Page 43665]]

    (1) The provider is given the opportunity to become a participating 
provider under the same requirements for participation in the MCO, 
PIHP, PAHP, or PCCM network as other network providers of that type.
    (2) If the provider chooses not to join the network, or does not 
meet the necessary qualification requirements to join, the enrollee 
will be transitioned to a participating provider within 60 days (after 
being given an opportunity to select a provider who participates).
    (C) The only plan or provider available to the recipient does not, 
because of moral or religious objections, provide the service the 
enrollee seeks.
    (D) The recipient's primary care provider or other provider 
determines that the recipient needs related services that would subject 
the recipient to unnecessary risk if received separately (for example, 
a cesarean section and a tubal ligation) and not all of the related 
services are available within the network.
    (E) The State determines that other circumstances warrant out-of-
network treatment.
    (3) As used in this paragraph, ``rural area'' is any area other 
than an ``urban area'' as defined in Sec. 412.62(f)(1)(ii) of this 
chapter.
    (c) Exception for certain health insuring organizations (HIOs). The 
State may limit recipients to a single HIO if--
    (1) The HIO is one of those described in section 1932(a)(3)(C) of 
the Act;
    (2) The recipient who enrolls in the HIO has a choice of at least 
two primary care providers within the entity.
    (d) Limitations on changes between primary care providers. For an 
enrollee of a single MCO, PIHP, PAHP, or HIO under paragraph (b)(2) or 
(b)(3) of this section, any limitation the State imposes on his or her 
freedom to change between primary care providers may be no more 
restrictive than the limitations on disenrollment under Sec. 438.56(c).


Sec. 438.56  Disenrollment: Requirements and limitations.

    (a) Applicability. The provisions of this section apply to all 
managed care arrangements whether enrollment is mandatory or voluntary 
and whether the contract is with an MCO, a PIHP, PAHP, or a PCCM.
    (b) Disenrollment requested by the MCO, PIHP, PAHP or PCCM. All 
MCO, PIHP, PAHP, and PCCM contracts must--(1) Specify the reasons for 
which the MCO, PIHP, PAHP or PCCM may request disenrollment of an 
enrollee;
    (2) Provide that the MCO, PIHP, PAHP or PCCM may not request 
disenrollment because of a change in the enrollee's health status, or 
because of the enrollee's utilization of medical services, diminished 
mental capacity, or uncooperative or disruptive behavior resulting from 
his or her special needs (except where his or her continued enrollment 
in the MCO, PIHP, PAHP or PCCM seriously impairs the entity's ability 
to furnish services to either this particular enrollee or other 
enrollees); and
    (3) Specify the methods by which the MCO, PIHP, PAHP or PCCM 
assures the agency that it does not request disenrollment for reasons 
other than those permitted under the contract.
    (c) Disenrollment requested by the enrollee. If the State chooses 
to limit disenrollment, its MCO, PIHP, PAHP, and PCCM contracts must 
provide that a recipient may request disenrollment as follows:
    (1) For cause, at any time.
    (2) Without cause, at the following times:
    (i) During the 90 days following the date of the recipient's 
initial enrollment with the MCO, PIHP, PAHP or PCCM, or the date the 
State sends the recipient notice of the enrollment, whichever is later.
    (ii) At least once every 12 months thereafter.
    (iii) Upon automatic reenrollment under paragraph (g) of this 
section, if the temporary loss of Medicaid eligibility has caused the 
recipient to miss the annual disenrollment opportunity.
    (iv) When the State imposes the intermediate sanction specified in 
Sec. 438.702(a)(3).
    (d) Procedures for disenrollment. (1) Request for disenrollment. 
The recipient (or his or her representative) must submit an oral or 
written request--
    (i) To the State agency (or its agent); or
    (ii) To the MCO, PIHP, PAHP or PCCM, if the State permits MCOs, 
PIHP, PAHPs, and PCCMs to process disenrollment requests.
    (2) Cause for disenrollment. The following are cause for 
disenrollment:
    (i) The enrollee moves out of the MCO's, PIHP's, PAHP's or PCCM's 
service area.
    (ii) The plan does not, because of moral or religious objections, 
cover the service the enrollee seeks.
    (iii) The enrollee needs related services (for example a cesarean 
section and a tubal ligation) to be performed at the same time; not all 
related services are available within the network; and the enrollee's 
primary care provider or another provider determines that receiving the 
services separately would subject the enrollee to unnecessary risk.
    (iv) Other reasons, including but not limited to, poor quality of 
care, lack of access to services covered under the contract, or lack of 
access to providers experienced in dealing with the enrollee's health 
care needs.
    (3) MCO, PIHP, PAHP or PCCM action on request. (i) An MCO, PIHP, 
PAHP or PCCM may either approve a request for disenrollment or refer 
the request to the State.
    (ii) If the MCO, PIHP, PAHP, PCCM, or State agency (whichever is 
responsible) fails to make a disenrollment determination so that the 
recipient can be disenrolled within the timeframes specified in 
paragraph (e)(1) of this section, the disenrollment is considered 
approved.
    (4) State agency action on request. For a request received directly 
from the recipient, or one referred by the MCO, PIHP, PAHP or PCCM, the 
State agency must take action to approve or disapprove the request 
based on the following:
    (i) Reasons cited in the request.
    (ii) Information provided by the MCO, PIHP, PAHP or the PCCM at the 
agency's request.
    (iii) Any of the reasons specified in paragraph (d)(2) of this 
section.
    (5) Use of the MCO, PIHP, PAHP, or PCCM grievance procedures. (i) 
The State agency may require that the enrollee seek redress through the 
MCO, PIHP, PAHP, or PCCM's grievance system before making a 
determination on the enrollee's request.
    (ii) The grievance process, if used, must be completed in time to 
permit the disenrollment (if approved) to be effective in accordance 
with the timeframe specified in Sec. 438.56(e)(1).
    (iii) If, as a result of the grievance process, the MCO, PIHP, 
PAHP, or PCCM approves the disenrollment, the State agency is not 
required to make a determination.
    (e) Timeframe for disenrollment determinations. (1) Regardless of 
the procedures followed, the effective date of an approved 
disenrollment must be no later than the first day of the second month 
following the month in which the enrollee or the MCO, PIHP, PAHP or 
PCCM files the request.
    (2) If the MCO, PIHP, PAHP or PCCM or the State agency (whichever 
is responsible) fails to make the determination within the timeframes 
specified in paragraphs (e)(1) and (e)(2) of this section, the 
disenrollment is considered approved.
    (f) Notice and appeals. A State that restricts disenrollment under 
this section must take the following actions:
    (1) Provide that enrollees and their representatives are given 
written notice of disenrollment rights at least 60 days

[[Page 43666]]

before the start of each enrollment period.
    (2) Ensure access to State fair hearing for any enrollee 
dissatisfied with a State agency determination that there is not good 
cause for disenrollment.
    (g) Automatic reenrollment: Contract requirement. If the State plan 
so specifies, the contract must provide for automatic reenrollment of a 
recipient who is disenrolled solely because he or she loses Medicaid 
eligibility for a period of 2 months or less.


Sec. 438.58  Conflict of interest safeguards.

    (a) As a condition for contracting with MCOs, PIHPs, or PAHPs, a 
State must have in effect safeguards against conflict of interest on 
the part of State and local officers and employees and agents of the 
State who have responsibilities relating to the MCO, PIHP, or PAHP 
contracts or the default enrollment process specified in 
Sec. 438.50(f).
    (b) These safeguards must be at least as effective as the 
safeguards specified in section 27 of the Office of Federal Procurement 
Policy Act (41 U.S.C. 423).


Sec. 438.60  Limit on payment to other providers.

    The State agency must ensure that no payment is made to a provider 
other than the MCO, PIHP, or PAHP for services available under the 
contract between the State and the MCO, PIHP, or PAHP, except where 
these payments are provided for in title XIX of the Act or in 42 CFR.


Sec. 438.62  Continued services to recipients.

    The State agency must arrange for Medicaid services to be provided 
without delay to any Medicaid enrollee of an MCO, PIHP, PAHP, or PCCM 
whose contract is terminated and for any Medicaid enrollee who is 
disenrolled from an MCO, PIHP, PAHP or PCCM for any reason other than 
ineligibility for Medicaid.


Sec. 438.66  Monitoring procedures.

    The State agency must have in effect procedures for monitoring the 
MCO's, PIHP's, or PAHP's operations, including, at a minimum, 
operations related to:
    (a) Recipient enrollment and disenrollment.
    (b) Processing of grievances and appeals.
    (c) Violations subject to intermediate sanctions, as set forth in 
subpart I of this part.
    (d) Violations of the conditions for FFP, as set forth in subpart J 
of this part.
    (e) All other provisions of the contract, as appropriate.

Subpart C--Enrollee Rights and Protections


Sec. 438.100  Enrollee rights.

    (a) General rule. The State must ensure that--
    (1) Each MCO and each PIHP has written policies regarding the 
enrollee rights specified in this section; and
    (2) Each MCO, PIHP, PAHP, and PCCM complies with any applicable 
Federal and State laws that pertain to enrollee rights, and ensures 
that its staff and affiliated providers take those rights into account 
when furnishing services to enrollees.
    (b) Specific rights. (1) Basic requirement. The State must ensure 
that each managed care enrollee is guaranteed the rights as specified 
in paragraphs (b)(2) and (b)(3) of this section.
    (2) An enrollee of an MCO, PIHP, PAHP, or PCCM has the following 
rights: The right to--
    (i) Receive information in accordance with Sec. 438.10.
    (ii) Be treated with respect and with due consideration for his or 
her dignity and privacy.
    (iii) Receive information on available treatment options and 
alternatives, presented in a manner appropriate to the enrollee's 
condition and ability to understand. (The information requirements for 
services that are not covered under the contract because of moral or 
religious objections are set forth in Sec. 438.10(e).)
    (iv) Participate in decisions regarding his or her health care, 
including the right to refuse treatment.
    (v) Be free from any form of restraint or seclusion used as a means 
of coercion, discipline, convenience, or retaliation, as specified in 
other Federal regulations on the use of restraints and seclusion.
    (3) An enrollee of an MCO or a PIHP also has the right to--
    (i) Be furnished health care services in accordance with 
Secs. 438.206 through 438.210.
    (ii) Obtain a second opinion from an appropriately qualified health 
care professional in accordance with Sec. 438.206(b)(3).
    (iii) Request and receive a copy of his or her medical records, and 
to request that they be amended or corrected, as specified in 45 CFR 
part 164.
    (c) Free exercise of rights. The State must ensure that each 
enrollee is free to exercise his or her rights, and that the exercise 
of those rights does not adversely affect the way the MCO, PIHP, PAHP, 
or PCCM and its providers or the State agency treat the enrollee.
    (d) Compliance with other Federal and State laws. The State must 
ensure that each MCO, PIHP, PAHP, and PCCM complies with any other 
applicable Federal and State laws (such as: Title VI of the Civil 
Rights Act of 1964 as implemented by regulations at 45 CFR part 80; the 
Age Discrimination Act of 1975 as implemented by regulations at 45 CFR 
part 91; the Rehabilitation Act of 1973; and Titles II and III of the 
Americans with Disabilities Act and other laws regarding privacy and 
confidentiality).


Sec. 438.102  Provider-enrollee communications.

    (a) Health care professional defined. As used in this subpart, 
``health care professional'' means a physician or any of the following: 
a podiatrist, optometrist, chiropractor, psychologist, dentist, 
physician assistant, physical or occupational therapist, therapist 
assistant, speech-language pathologist, audiologist, registered or 
practical nurse (including nurse practitioner, clinical nurse 
specialist, certified registered nurse anesthetist, and certified nurse 
midwife), licensed certified social worker, registered respiratory 
therapist, and certified respiratory therapy technician.
    (b) General rules. (1) An MCO, PIHP, or PAHP may not prohibit, or 
otherwise restrict a health care professional acting within the lawful 
scope of practice, from advising or advocating on behalf of an enrollee 
who is his or her patient, for the following:
    (i) The enrollee's health status, medical care, or treatment 
options, including any alternative treatment that may be self-
administered.
    (ii) Any information the enrollee needs in order to decide among 
all relevant treatment options.
    (iii) The risks, benefits, and consequences of treatment or non-
treatment.
    (iv) The enrollee's right to participate in decisions regarding his 
or her health care, including the right to refuse treatment, and to 
express preferences about future treatment decisions.
    (2) Subject to the information requirements of paragraph (c) of 
this section, an MCO, PIHP, or PAHP that would otherwise be required to 
provide, reimburse for, or provide coverage of, a counseling or 
referral service because of the requirement in paragraph (b)(1) of this 
section is not required to do so if the MCO, PIHP, or PAHP objects to 
the service on moral or religious grounds.
    (c) Information requirements: MCO, PIHP, and PAHP responsibility. 
(1) An MCO, PIHP, or PAHP that elects the option provided in paragraph 
(b)(3) of this section must furnish information

[[Page 43667]]

about the services it does not cover as follows:
    (i) To the State--
    (A) With its application for a Medicaid contract; and
    (B) Whenever it adopts the policy during the term of the contract.
    (ii) Consistent with the provisions of Sec. 438.10--
    (A) To potential enrollees, before and during enrollment; and
    (B) To enrollees, within 90 days after adopting the policy with 
respect to any particular service. (Although this timeframe would be 
sufficient to entitle the MCO, PIHP, or PAHP to the option provided in 
paragraph (b)(3) of this section, the overriding rule in 
Sec. 438.10(f)(4) requires the MCO, PIHP, or PAHP to furnish the 
information at least 30 days before the effective date of the policy.)
    (2) As specified in Sec. 438.10(d) and (e), the information that 
MCOs, PIHPs, and PAHPs must furnish to enrollees and potential 
enrollees does not include how and where to obtain the service excluded 
under paragraph (b)(3) of this section.
    (d) Information requirements: State responsibility. For each 
service excluded by an MCO, PIHP, or PAHP under paragraph (b)(2) of 
this section, the State must provide information on how and where to 
obtain the service, as specified in Sec. 438.10(e)(2)(ii)(E).
    (e) Sanction. An MCO that violates the prohibition of paragraph 
(b)(1) of this section is subject to intermediate sanctions under 
subpart I of this part.


Sec. 438.104  Marketing activities.

    (a) Terminology. As used in this section, the following terms have 
the indicated meanings:
    Cold-call marketing means any unsolicited personal contact by the 
MCO, PIHP, PAHP, or PCCM with a potential enrollee for the purpose of 
marketing as defined in this paragraph.
    Marketing means any communication, from an MCO, PIHP, PAHP, or PCCM 
to a Medicaid recipient who is not enrolled in that entity, that can 
reasonably be interpreted as intended to influence the recipient to 
enroll in that particular MCO's, PIHP's, PAHP's, or PCCM's Medicaid 
product, or either to not enroll in, or to disenroll from, another 
MCO's, PIHP's, PAHP's, or PCCM's Medicaid product.
    Marketing materials means materials that--
    (1) Are produced in any medium, by or on behalf of an MCO, PIHP, 
PAHP, or PCCM; and
    (2) Can reasonably be interpreted as intended to market to 
potential enrollees.
    MCO, PIHP, PAHP, or PCCM include any of the entity's employees, 
affiliated providers, agents, or contractors.
    (b) Contract requirements. Each contract with an MCO, PIHP, PAHP, 
or PCCM must comply with the following requirements:
    (1) Provide that the entity--
    (i) Does not distribute any marketing materials without first 
obtaining State approval;
    (ii) Distributes the materials to its entire service area as 
indicated in the contract;
    (iii) Complies with the information requirements of Sec. 438.10 to 
ensure that, before enrolling, the recipient receives, from the entity 
or the State, the accurate oral and written information he or she needs 
to make an informed decision on whether to enroll;
    (iv) Does not seek to influence enrollment in conjunction with the 
sale or offering of any other insurance; and
    (v) Does not, directly or indirectly, engage in door-to-door, 
telephone, or other cold-call marketing activities.
    (2) Specify the methods by which the entity assures the State 
agency that marketing, including plans and materials, is accurate and 
does not mislead, confuse, or defraud the recipients or the State 
agency. Statements that will be considered inaccurate, false, or 
misleading include, but are not limited to, any assertion or statement 
(whether written or oral) that--
    (i) The recipient must enroll in the MCO, PIHP, PAHP, or PCCM in 
order to obtain benefits or in order to not lose benefits; or
    (ii) The MCO, PIHP, PAHP, or PCCM is endorsed by CMS, the Federal 
or State government, or similar entity.
    (c) State agency review. In reviewing the marketing materials 
submitted by the entity, the State must consult with the Medical Care 
Advisory Committee established under Sec. 431.12 of this chapter or an 
advisory committee with similar membership.


Sec. 438.106  Liability for payment.

    Each MCO, PIHP, and PAHP must provide that its Medicaid enrollees 
are not held liable for any of the following:
    (a) The MCO's, PIHP's, or PAHP's debts, in the event of the 
entity's insolvency.
    (b) Covered services provided to the enrollee, for which--
    (1) The State does not pay the MCO, PIHP, or PAHP, or
    (2) The State, or the MCO, PIHP, or PAHP does not pay the 
individual or health care provider that furnishes the services under a 
contractual, referral, or other arrangement.
    (c) Payments for covered services furnished under a contract, 
referral, or other arrangement, to the extent that those payments are 
in excess of the amount that the enrollee would owe if the MCO, PIHP, 
or PAHP provided the services directly.


Sec. 438.108  Cost sharing.

    The contract must provide that any cost sharing imposed on Medicaid 
enrollees is in accordance with Secs. 447.50 through 447.60 of this 
chapter.


Sec. 438.114  Emergency and post-stabilization services.

    (a) Definitions. As used in this section--
    Emergency medical condition has the meaning given the term in 
Sec. 422.113(b) of this chapter.
    Emergency services has the meaning given the term in 
Sec. 422.113(b) of this chapter.
    Post-stabilization care services has the meaning given the term in 
Sec. 422.113(c) of this chapter.
    (b) Coverage and payment: General rule. The following entities are 
responsible for coverage and payment of emergency services and post-
stabilization care services.
    (1) The MCO, PIHP, or PAHP.
    (2) The PCCM that has a risk contract that covers these services.
    (3) The State, in the case of a PCCM that has a fee-for-service 
contract.
    (c) Coverage and payment: Emergency services. (1) The entities 
identified in paragraph (c) of this section--
    (i) Must cover and pay for emergency services regardless of whether 
the entity that furnishes the services has a contract with the MCO, 
PIHP, PAHP, or PCCM; and
    (ii) May not deny payment for treatment obtained under either of 
the following circumstances:
    (A) An enrollee had an emergency medical condition, including cases 
in which the absence of immediate medical attention would not have had 
the outcomes specified in paragraphs (b)(1)(i)(A), (B), and (C) of the 
definition of emergency medical condition in Sec. 422.113 of this 
chapter.
    (B) A representative of the MCO, PIHP, PAHP, or PCCM instructs the 
enrollee to seek emergency services.
    (2) A PCCM must--
    (i) Allow enrollees to obtain emergency services outside the 
primary care case management system regardless of whether the case 
manager referred the enrollee to the provider that furnishes the 
services; and
    (ii) Pay for the services if the manager's contract is a risk 
contract that covers those services.

[[Page 43668]]

    (d) Additional rules for emergency services. (1) The entities 
specified in paragraph (c) of this section may not--
    (i) Limit what constitutes an emergency medical condition with 
reference to paragraph (a) of this section, on the basis of lists of 
diagnoses or symptoms; and
    (ii) Refuse to process any claim because it does not contain the 
primary care provider's authorization number.
    (2) An enrollee who has an emergency medical condition may not be 
held liable for payment of subsequent screening and treatment needed to 
diagnose the specific condition or stabilize the patient.
    (3) The attending emergency physician, or the provider actually 
treating the enrollee, is responsible for determining when the enrollee 
is sufficiently stabilized for transfer or discharge, and that 
determination is binding on the entities identified in paragraph (c) of 
this section as responsible for coverage and payment.
    (e) Coverage and payment: Post-stabilization care services. Post-
stabilization care services are covered and paid for in accordance with 
provisions set forth at Sec. 422.113 (c) of this chapter. In applying 
those provisions, reference to ``M+C organization'' must be read as 
reference to the entities responsible for Medicaid payment, as 
specified in paragraph (b) of this section.
    (f) Applicability to PIHPs and PAHPs. To the extent that services 
required to treat an emergency medical condition fall within the scope 
of the services for which the PIHP or PAHP is responsible, the rules 
under this section apply.


Sec. 438.116  Solvency standards.

    (a) Requirement for assurances (1) Each MCO, PIHP, and PAHP that is 
not a Federally qualified HMO (as defined in section 1310 of the Public 
Health Service Act) must provide assurances satisfactory to the State 
showing that its provision against the risk of insolvency is adequate 
to ensure that its Medicaid enrollees will not be liable for the MCO's, 
PIHP's, or PAHP's debts if the entity becomes insolvent.
    (2) Federally qualified HMOs, as defined in section 1310 of the 
Public Health Service Act, are exempt from this requirement.
    (b) Other requirements--(1) General rule. Except as provided in 
paragraph (b)(2) of this section, an MCO, PIHP, and PAHP must meet the 
solvency standards established by the State for private health 
maintenance organizations, or be licensed or certified by the State as 
a risk-bearing entity.
    (2) Exception. Paragraph (b)(1) of this section does not apply to 
an MCO, PIHP, or PAHP that meets any of the following conditions:
    (i) Does not provide both inpatient hospital services and physician 
services.
    (ii) Is a public entity.
    (iii) Is (or is controlled by) one or more Federally qualified 
health centers and meets the solvency standards established by the 
State for those centers.
    (iv) Has its solvency guaranteed by the State.

Subpart D--Quality Assessment and Performance Improvement


Sec. 438.200  Scope.

    This subpart implements section 1932(c)(1) of the Act and sets 
forth specifications for quality assessment and performance improvement 
strategies that States must implement to ensure the delivery of quality 
health care by all MCOs and PIHPs. It also establishes standards that 
States, MCOs and PIHPs must meet.


Sec. 438.202  State responsibilities.

    Each State contracting with an MCO or PIHP must--
    (a) Have a written strategy for assessing and improving the quality 
of managed care services offered by all MCOs and PIHPs:
    (b) Provide for the input of recipients and other stake-holders in 
the development of the strategy, including making the strategy 
available for public comment before adopting it in final;
    (c) Ensure compliance with standards established by the State, 
consistent with this subpart; and
    (d) Conduct periodic reviews to evaluate the effectiveness of the 
strategy, and update the strategy periodically, as needed.
    (e) Submit to CMS the following:
    (1) A copy of the initial strategy, and a copy of the revised 
strategy whenever significant changes are made.
    (2) Regular reports on the implementation and effectiveness of the 
strategy.


Sec. 438.204  Elements of State quality strategies.

    At a minimum, State strategies must include the following--
    (a) The MCO and PIHP contract provisions that incorporate the 
standards specified in this subpart.
    (b) Procedures that--
    (1) Assess the quality and appropriateness of care and services 
furnished to all Medicaid enrollees under the MCO and PIHP contracts, 
including individuals with special health care needs.
    (2) Identify the race, ethnicity, and primary language spoken of 
each Medicaid enrollee. States must provide this information to the MCO 
and PIHP for each Medicaid enrollee at the time of enrollment.
    (3) Continuously monitor and evaluate the MCO and PIHP compliance 
with the standards.
    (c) Performance measures and levels identified and developed by CMS 
in consultation with States and other relevant stakeholders.
    (d) Arrangments for annual, external independent reviews of the 
quality outcomes and timeliness of, and access to, the services covered 
under each MCO and PIHP contract.
    (e) Appropriate use of intermediate sanctions that, at a minimum, 
meet the requirements of subpart I of this part.
    (f) An information system that supports initial and ongoing 
operation and review of the State's quality strategy.
    (g) Standards, at least as stringent as those in the following 
sections of this subpart, for access to care, structure and operations, 
and quality measurement and improvement.

Access Standards


Sec. 438.206  Availability of services.

    (a) Basic rule. Each State must ensure that all covered services 
are available and accessible to enrollees.
    (b) Delivery network. The State must ensure, through its contracts, 
that each MCO, and each PIHP consistent with the scope of PHIP's 
contracted services, meets the following requirements.
    (1) Maintains and monitors a network of appropriate providers that 
is supported by written agreements and is sufficient to provide 
adequate access to all services covered under the contract. In 
establishing and maintaining the network, each MCO and PIHP must 
consider the following:
    (i) The anticipated Medicaid enrollment.
    (ii) The expected utilization of services, considering Medicaid 
enrollee characteristics and health care needs.
    (iii) The numbers and types (in terms of training, experience, and 
specialization) of providers required to furnish the contracted 
Medicaid services.
    (iv) The numbers of network providers who are not accepting new 
Medicaid patients.
    (v) The geographic location of providers and Medicaid enrollees, 
considering distance, travel time, the means of transportation 
ordinarily used by Medicaid enrollees, and whether the location 
provides physical access for Medicaid enrollees with disabilities.

[[Page 43669]]

    (2) Provides female enrollees with direct access to a women's 
health specialist within the network for covered care necessary to 
provide women's routine and preventive health care services. This is in 
addition to the enrollee's designated source of primary care if that 
source is not a women's health specialist.
    (3) Provides for a second opinion from a qualified health care 
professional within the network, or arranges for the enrollee to obtain 
one outside the network, at no cost to the enrollee.
    (4) If the network is unable to provide necessary medical services, 
covered under the contract, to a particular enrollee, the MCO or PIHP 
must adequately and timely cover these services out of network for the 
enrollee, for as long as the MCO or PIHP is unable to provide them.
    (5) Requires out-of-network providers to coordinate with the MCO or 
PIHP with respect to payment and ensures that cost to the enrollee is 
no greater than it would be if the services were furnished within the 
network.
    (6) Demonstrates that its providers are credentialed as required by 
Sec. 438.214.
    (c) Furnishing of services. The State must ensure that each MCO and 
PHIP contract complies with the requirements of this paragraph.
    (1) Timely access. Each MCO and each PIHP must--
    (i) Meet and require its providers to meet State standards for 
timely access to care and services, taking into account the urgency of 
need for services.
    (ii) Ensure that the network providers offer hours of operation 
that are no less than the hours of operation offered to commercial 
enrollees or comparable to Medicaid fee-for-service, if the provider 
serves only Medicaid enrollees.
    (iii) Make services available 24 hours a day, 7 days a week, when 
medically necessary.
    (iv) Establish mechanisms to ensure compliance.
    (v) Monitor continuously to determine compliance.
    (vi) Take corrective action if there is a failure to comply.
    (2) Cultural considerations. Each MCO and each PIHP participates in 
the State's efforts to promote the delivery of services in a culturally 
competent manner to all enrollees, including those with limited English 
proficiency and diverse cultural and ethnic backgrounds.


Sec. 438.207  Assurances of adequate capacity and services.

    (a) Basic rule. The State must ensure, through its contracts, that 
each MCO and each PIHP gives assurances to the State that it has the 
capacity to serve the expected enrollment in its service area in 
accordance with the State's standards for access to care under this 
subpart.
    (b) Nature of assurances. Each MCO and each PIHP must submit 
documentation to the State, in a format specified by the State and 
acceptable to CMS, to demonstrate that it complies with the following 
requirements:
    (1) Offers an appropriate range of services, including preventive 
services, primary care services and specialty services that is adequate 
for the anticipated number of enrollees for the service area.
    (2) Maintains a network of providers that is sufficient in number, 
mix, and geographic distribution to meet the needs of the anticipated 
number of enrollees in the service area.
    (c) Timing of documentation. Each MCO and each PIHP must submit the 
documentation described in paragraph (b) of this section as specified 
by the State, and specifically--
    (1) At the time it enters into a contract with the State; and
    (2) At any time there has been a significant change (as defined by 
the State) in the MCO's or PIHP's operations that would affect adequate 
capacity and services, including--
    (i) Changes in MCO or PIHP services, benefits, geographic service 
area or payments, or;
    (ii) Enrollment of a new population in the MCO or PIHP.
    (d) State review and submission to CMS. After the State reviews the 
documentation submitted by the MCO or PIHP, the State must certify to 
CMS that the MCO or PIHP has complied with the State's requirements for 
availability of services, as set forth in Sec. 438.206.
    (e) CMS' right to inspect documentation. The State must make 
available to CMS, upon request, all documentation collected by the 
State from the MCO or PIHP.


Sec. 438.208  Coordination and continuity of care.

    (a) Basic requirement. (1) General rule. Except as specified in 
paragraphs (a)(2) and (a)(3) of this section, the State must ensure 
through its contracts, that each MCO and PIHPs complies with the 
requirements of this section.
    (2) PIHP exception. For PIHPs, the State determines, based on the 
scope of the entity's services, and on the way the State has organized 
the delivery of managed care services, whether a particular PIHP is 
required--
    (i) To implement mechanisms for the screenings and assessments 
specified in paragraphs (c) of this section; and
    (ii) To meet the primary care requirement of paragraph (e)(1) of 
this section.
    (3) Exception for MCOs that serve dually eligible enrollees. (i) 
For an MCO that serves enrollees who are also enrolled in a 
Medicare+Choice plan and also receive Medicare benefits, the State 
determines to what extent that an MCO must meet the screening and 
assessment, referral and treatment plan and primary care and 
coordination provisions of paragraphs (c), (d), and (e)(1) of this 
section.
    (ii) The State bases its determination on the services it requires 
the MCO to furnish to dually eligible enrollees.
    (b) State responsibility to identify certain enrollees with special 
health care needs. The State must implement mechanisms to identify to 
its enrollment broker, if applicable prior to enrollment, and the MCO 
and PIHP, upon enrollment, individuals with special health care needs, 
as specified by the State.
    (c) Screening and assessment. The State (either through its own 
staff or its enrollment broker) or at the State's discretion each MCO 
or PIHP (through appropriate health care professionals) must implement 
mechanisms for the identification and assessment of persons with 
special health care needs as defined by the State. These mechanisms 
should be identified in the State's quality improvement strategy in 
Sec. 438.202.
    (d) Referrals and treatment plans. The state must ensure that each 
MCO and PIHP has a mechanism in place for enrollees determined to have 
ongoing special conditions that require a course of treatment or 
regular care monitoring that:
    (1) The enrollee may directly access a specialist (for example, 
through a standing referral or an approved number of visits) as is 
appropriate for the enrollee's condition and identified needs.
    (2) A treatment plan, if required by the MCO or PIHP is developed 
by the specialist in consultation with the enrollee's primary care 
provider, and
    (i) Is developed with enrollee participation.
    (ii) Is approved by the MCO or PIHP in a timely manner, if this 
approval is required,
    (iii) Is in accordance with the State's quality assurance and 
utilization review standards.
    (e) Primary care and coordination program. Each MCO and each PIHP 
must implement a coordination program that meets State requirements and 
achieves the following:

[[Page 43670]]

    (1) Ensures that each enrollee has an ongoing source of primary 
care appropriate to his or her needs and a person or entity formally 
designated as primarily responsible for coordinating the health care 
services furnished to the enrollee.
    (2) Coordinates the services the MCO or PIHP furnishes to the 
enrollee with the services the enrollee receives from any other MCOs 
and PIHPs;
    (3) Shares with other MCOs and PIHPs serving the enrollee the 
results of its screenings and assessments of the enrollee so that those 
activities need not be duplicated.
    (4) Ensures that in the process of coordinating care, each 
enrollee's privacy is protected consistent with the confidentiality 
requirements in 45 CFR parts 160 and 164.


Sec. 438.210  Coverage and authorization of services.

    (a) Coverage. Each contract with an MCO or PIHP must:
    (1) Identify, define, and specify each service that the MCO or PIHP 
is required to offer.
    (2) Require that the MCO or PIHP make available the services it is 
required to furnish in no less than the amount, duration, and scope 
that are specified in the State plan and are sufficient to reasonably 
be expected to achieve the purpose for which the services are 
furnished.
    (3) Provide that the MCO or PIHP--
    (i) May not arbitrarily deny or reduce the amount, duration, or 
scope of a required service solely because of the diagnosis, type of 
illness, or condition; and
    (ii) May place appropriate limits on a service--
    (A) On the basis of criteria such as medical necessity; or
    (B) For the purpose of utilization control, provided the services 
furnished can reasonably be expected to achieve their purpose, as 
required in paragraph (a)(2) of this section; and
    (4) Specify what constitutes ``medically necessary services'' in a 
manner that--
    (i) Is no more restrictive than the State Medicaid program as 
indicated in State statutes and regulations, the State Plan, and other 
State policy and procedures; and
    (ii) Addresses the extent to which the MCO or PIHP is responsible 
for covering services related to the following:
    (A) The prevention, diagnosis, and treatment of health impairments.
    (B) The ability to achieve age-appropriate growth and development.
    (C) The ability to attain, maintain, or regain functional capacity.
    (b) Processing of requests. For the processing of requests for 
initial and continuing authorizations of services, each contract must 
require--
    (1) That the MCO or PIHP and its subcontractors have in place, and 
follow, written policies and procedures.
    (2) That the MCO or PIHP--
    (i) Have in effect mechanisms to ensure consistent application of 
review criteria for authorization decisions; and
    (ii) Consult with the requesting provider when appropriate.
    (3) That any decision to deny a service authorization request or to 
authorize a service in an amount, duration, or scope that is less than 
requested, be made by a health care professional who has appropriate 
clinical expertise in treating the enrollees's condition or disease.
    (c) Notice of adverse action. Each contract must provide for the 
MCO or PIHP to notify the requesting provider, and give the enrollee 
written notice of any decision by the MCO or PIHP to deny a service 
authorization request, or to authorize a service in an amount, 
duration, or scope that is less than requested. The notice must meet 
the requirements of Sec. 438.404, except that the notice to the 
provider need not be in writing.
    (d) Timeframe for decisions. Each MCO or PIHP contract must provide 
for the following decisions and notices:
    (1) Standard authorization decisions. For standard authorization 
decisions, provide notice as expeditiously as the enrollee's health 
condition requires and within State-established timeframes that may not 
exceed 14 calendar days following receipt of the request for service, 
with a possible extension of up to 14 additional calendar days, if--
    (i) The enrollee, or the provider, requests extension; or
    (ii) The MCO or the PIHP justifies (to the State agency upon 
request) a need for additional information and how the extension is in 
the enrollee's interest.
    (2) Expedited authorization decisions. (i) For cases in which a 
provider indicates, or the MCO or PIHP determines, that following the 
standard timeframe could seriously jeopardize the enrollee's life or 
health or ability to attain, maintain, or regain maximum function, the 
MCO or PIHP must make an expedited authorization decision and provide 
notice as expeditiously as the enrollee's health condition requires and 
no later than 3 working days after receipt of the request for service.
    (ii) The MCO or PIHP may extend the 3 working days time period by 
up to 14 calendar days if the enrollee requests an extension, or if the 
MCO or PIHP justifies (to the State agency upon request) a need for 
additional information and how the extension is in the enrollee's 
interest.
    (e) Compensation for utilization management activities. Each 
contract must provide that, consistent with Sec. 438.6(g), and 
Sec. 422.208 of this chapter, compensation to individuals or entities 
that conduct utilization management activities is not structured so as 
to provide incentives for the individual or entity to deny, limit, or 
discontinue medically necessary services to any enrollee.

Structure and Operation Standards


Sec. 438.214  Provider selection.

    (a) General rules. The State must ensure, through its contracts, 
that each MCO and PIHP implements written policies and procedures for 
selection and retention of providers and that those policies and 
procedures include, at a minimum, the requirements of this section.
    (b) Credentialing and recredentialing requirements. Each MCO and 
PIHP must follow a documented process for credentialing and 
recredentialing of providers who have signed contracts or participation 
agreements with the MCO or the PIHP.
    (c) Nondiscrimination. MCO and PIHP provider selection policies and 
procedures, consistent with Sec. 438.12, do not discriminate against 
particular providers that serve high risk populations or specialize in 
conditions that require costly treatment.
    (d) Excluded providers. MCOs or PIHPs may not employ or contract 
with providers excluded from participation in Federal health care 
programs under either section 1128 or section 1128A of the Act.
    (e) State requirements. Each MCO and PIHP must comply with any 
additional requirements established by the State.


Sec. 438.218  Enrollee information.

    The requirements that States must meet under Sec. 438.10 constitute 
part of the State's quality strategy at Sec. 438.204.


Sec. 438.224  Confidentiality.

    The State must ensure, through its contracts, that (consistent with 
subpart F of part 431 of this chapter), for medical records and any 
other health and enrollment information that identifies a particular 
enrollee, each MCO and PIHP establishes and implements procedures 
consistent with confidentiality requirements in 45 CFR parts 160 and 
164.


Sec. 438.226  Enrollment and disenrollment.

    The State must ensure that each MCO and PIHP contract complies with 
the

[[Page 43671]]

enrollment and disenrollment requirements and limitations set forth in 
Sec. 438.56.


Sec. 438.228  Grievance systems.

    (a) The State must ensure, through its contracts, that each MCO and 
PIHP has in effect a grievance system that meets the requirements of 
subpart F of this part.
    (b) If the State delegates to the MCO or PIHP responsibility for 
notice of action under subpart E of part 431 of this chapter, the State 
must conduct random reviews of each delegated MCO or PIHP and its 
providers and subcontractors to ensure that they are notifying 
enrollees in a timely manner.


Sec. 438.230  Subcontractual relationships and delegation.

    (a) General rule. The State must ensure, through its contracts, 
that each MCO and PIHP--
    (1) Oversees and is accountable for any functions and 
responsibilities that it delegates to any subcontractor; and
    (2) Meets the conditions of paragraph (b) of this section.
    (b) Specific conditions. (1) Before any delegation, each MCO and 
PIHP evaluates the prospective subcontractor's ability to perform the 
activities to be delegated.
    (2) There is a written agreement that--
    (i) Specifies the activities and report responsibilities delegated 
to the subcontractor; and
    (ii) Provides for revoking delegation or imposing other sanctions 
if the subcontractor's performance is inadequate.
    (3) The MCO or PIHP monitors the subcontractor's performance on an 
ongoing basis and subjects it to formal review according to a periodic 
schedule established by the State, consistent with industry standards 
or State MCO laws and regulations.
    (4) If any MCO or PIHP identifies deficiencies or areas for 
improvement, the MCO and the subcontractor take corrective action.

Measurement and Improvement Standards


Sec. 438.236  Practice guidelines.

    (a) Basic rule. The State must ensure, through its contracts, that 
each MCO and PIHP meets the requirements of this section.
    (b) Adoption of practice guidelines. Each MCO and PIHP adopts 
practice guidelines that meet the following requirements:
    (1) Are based on valid and reliable clinical evidence or a 
consensus of health care professionals in the particular field;
    (2) Consider the needs of the MCO's or PIHP's enrollees;
    (3) Are adopted in consultation with contracting health care 
professionals; and
    (4) Are reviewed and updated periodically as appropriate.
    (c) Dissemination of guidelines. Each MCO and PIHP disseminates the 
guidelines to all affected providers and, upon request, to enrollees 
and potential enrollees.
    (d) Application of guidelines. Decisions for utilization 
management, enrollee education, coverage of services, and other areas 
to which the guidelines apply are consistent with the guidelines.


Sec. 438.240  Quality assessment and performance improvement program.

    (a) General rules. (1) The State must require, through its 
contracts, that each MCO and PIHP have an ongoing quality assessment 
and performance improvement program for the services it furnishes to 
its enrollees.
    (2) CMS, in consultation with States and other stakeholders, may 
specify standardized quality measures and topics for performance 
improvement projects to be required by States in their contracts with 
MCOs and PIHPs.
    (b) Basic elements of MCO and PIHP quality assessment and 
performance improvement programs. At a minimum, the State must require 
that each MCO and PIHP comply with the following requirements:
    (1) Conduct performance improvement projects as described in 
paragraph (d) of this section. These projects must achieve, through 
ongoing measurements and intervention, demonstrable and sustained 
improvement in significant aspects of clinical care and non-clinical 
care areas that are expected to have a favorable effect on health 
outcomes and enrollee satisfaction;
    (2) Have in effect mechanisms to detect both underutilization and 
overutilization of services; and
    (3) Have in effect mechanisms to assess the quality and 
appropriateness of care furnished to enrollees with special health care 
needs.
    (c) Performance measurement and improvement. Each MCO and PIHP must 
annually measure its performance, using standard measures required by 
the State, consistent with the requirements of Sec. 438.204(c), and 
report its performance to the State.
    (d) Performance improvement projects. (1) MCOs and PIHPs must have 
an ongoing program of performance improvement projects that focus on 
clinical and non-clinical areas, and that involve the following:
    (i) Measurement of performance using objective quality indicators.
    (ii) Implementation of system interventions to achieve improvement 
in quality.
    (iii) Evaluation of the effectiveness of the interventions.
    (iv) Planning and initiation of activities for increasing or 
sustaining improvement.
    (2) Each MCO and PIHP must report the status and results of each 
project to the State as requested. Each performance improvement project 
must be completed in a reasonable time period so as to generally allow 
information on the success of performance improvement projects in the 
aggregate to produce new information on quality of care every year.
    (e) Program review by the State. (1) The State must review, at 
least annually, the impact and effectiveness of each MCO's and PIHP's 
quality assessment and performance improvement program. The review must 
include--
    (i) The MCO's and PIHP's performance on the standard measures on 
which it is required to report; and
    (ii) The results of the each MCO's and PIHP's performance 
improvement projects.
    (2) The State may require that an MCO or PIHP have in effect a 
process for its own evaluation of the impact and effectiveness of its 
quality assessment and performance improvement program.


Sec. 438.242  Health information systems.

    (a) General rule. The State must ensure, through its contracts, 
that each MCO and PIHP maintains a health information system that 
collects, analyzes, integrates, and reports data and can achieve the 
objectives of this subpart. The system must provide information on 
areas including, but not limited to, utilization, grievances, and 
disenrollments for other than loss of Medicaid eligibility.
    (b) Basic elements of a health information system. The State must 
require, at a minimum, that each MCO and PIHP comply with the 
following:
    (1) Collect data on enrollee and provider characteristics as 
specified by the State, and on services furnished to enrollees through 
an encounter data system or other methods as may be specified by the 
State.
    (2) Ensure that data received from providers is accurate and 
complete by--
    (i) Verifying the accuracy and timeliness of reported data;
    (ii) Screening the data for completeness, logic, and consistency; 
and

[[Page 43672]]

    (iii) Collecting service information in standardized formats to the 
extent feasible and appropriate.
    (3) Make all collected data available to the State and upon request 
to CMS, as required in this subpart.

Subpart E--[Reserved]

Subpart F--Grievance System


Sec. 438.400  Statutory basis and definitions.

    (a) Statutory basis. This subpart is based on sections 1902(a)(3), 
1902(a)(4), and 1932(b)(4) of the Act.
    (1) Section 1902(a)(3) requires that a State plan provide an 
opportunity for a fair hearing to any person whose claim for assistance 
is denied or not acted upon promptly.
    (2) Section 1902(a)(4) requires that the State plan provide for 
methods of administration that the Secretary finds necessary for the 
proper and efficient operation of the plan.
    (3) Section 1932(b)(4) requires Medicaid managed care organizations 
to establish internal grievance procedures under which Medicaid 
enrollees, or providers acting on their behalf, may challenge the 
denial of coverage of, or payment for, medical assistance.
    (b) Definitions. As used in this subpart, the following terms have 
the indicated meanings:
    Action means--
    (1) In the case of an MCO or PIHP or any of its providers--
    (i) The denial or limited authorization of a requested service, 
including the type or level of service;
    (ii) The reduction, suspension, or termination of a previously 
authorized service;
    (iii) The denial, in whole or in part, of payment for a service;
    (iv) For a resident of a rural area with only one MCO or PIHP, the 
denial of a Medicaid enrollee's request to exercise his or her right to 
obtain services outside the network; or
    Appeal means a request for review of an action, as ``action'' is 
defined in this section.
    Governing body means the MCO's or PIHP's Board of Directors, or a 
designated committee of its senior management.
    Grievance means an expression of dissatisfaction about any matter 
other than an action, as ``action'' is defined in this section. The 
term is also used to refer to the overall system that includes 
grievances and appeals handled at the MCO or PIHP level and access to 
the State Fair Hearing process. (Possible subjects for grievances 
include, but are not limited to, the quality of care or services 
provided, and aspects of interpersonal relationships such as rudeness 
of a provider or employee, or failure to respect the enrollee's 
rights.)


Sec. 438.402  General requirements.

    (a) The grievance system. Each MCO and PIHP must have a system in 
place for enrollees that includes a grievance process, an appeal 
process, and access to the State's fair hearing system.
    (b) Filing requirements--(1) Authority to file. (i) An enrollee may 
file a grievance and an MCO or PIHP level appeal, and may request a 
State fair hearing.
    (ii) A provider, acting on behalf of the enrollee and with the 
enrollee's written consent, may file an appeal. A provider may not file 
a grievance or request a State fair hearing.
    (2) Timing. The State specifies a reasonable timeframe that may be 
no less than 20 days and not to exceed 90 days from the date on the 
MCO's or PIHP's notice of action. Within that timeframe--
    (i) The enrollee or the provider may file an appeal; and
    (ii) In a State that does not require exhaustion of MCO and PIHP 
level appeals, the enrollee may request a State fair hearing.
    (3) Procedures. (i) The enrollee may file a grievance either orally 
or in writing and, as determined by the State, either with the State or 
with the MCO or the PIHP.
    (ii) The enrollee or the provider may file an appeal either orally 
or in writing, and unless he or she requests expedited resolution, must 
follow an oral filing with a written, signed, appeal.


Sec. 438.404  Notice of action.

    (a) Language and format requirements. The notice must be in writing 
and must meet the language and format requirements of Sec. 438.10(c) 
and (d) of this chapter to ensure ease of understanding.
    (b) Content of notice. The notice must explain the following:
    (1) The action the MCO or PIHP or its contractor has taken or 
intends to take.
    (2) The reasons for the action.
    (3) The enrollee's or the provider's right to file an MCO or PIHP 
appeal.
    (4) If the State does not require the enrollee to exhaust the MCO 
or PIHP level appeal procedures, the enrollee's right to request a 
State fair hearing.
    (5) The procedures for exercising the rights specified in this 
paragraph.
    (6) The circumstances under which expedited resolution is available 
and how to request it.
    (7) The enrollee's right to have benefits continue pending 
resolution of the appeal, how to request that benefits be continued 
and, the circumstances under which the enrollee may be required to pay 
the costs of these services.
    (c) Timing of notice. The MCO or PIHP must mail the notice within 
the following timeframes:
    (1) For termination, suspension, or reduction of previously 
authorized Medicaid-covered services, within the timeframes specified 
in Secs. 431.211, 431.213, and 431.214 of this chapter.
    (2) For denial of payment, at the time of any action affecting the 
claim.
    (3) For standard service authorization decisions that deny or limit 
services, within the timeframe specified in Sec. 438.210(d)
    (4) If the MCO or PIHP extends the timeframe in accordance with 
Sec. 438.210(d), it must--
    (i) Give the enrollee written notice of the reason for the decision 
to extend the timeframe and inform the enrollee of the right to file a 
grievance if he or she disagrees with that decision; and
    (ii) Issue and carry out its determination as expeditiously as the 
enrollee's health condition requires and no later than the date the 
extension expires.
    (5) For service authorization decisions not reached within the 
timeframes specified in Sec. 438.210(d) (which constitutes a denial and 
is thus an adverse action), on the date that the timeframes expire.
    (6) For expedited service authorization decisions, within the 
timeframes specified in Sec. 438.210(e).


Sec. 438.406  Handling of grievances and appeals.

    (a) General requirements. In handling grievances and appeals, each 
MCO and each PIHP must meet the following requirements:
    (1) Give enrollees any reasonable assistance in completing forms 
and taking other procedural steps. This includes providing interpreter 
services and toll-free numbers that have adequate TTY/TTD and 
interpreter capability.
    (2) Acknowledge receipt of each grievance and appeal.
    (3) Ensure that the individuals who make decisions on grievances 
and appeals are individuals--
    (i) Who were not involved in any previous level of review or 
decision-making; and
    (ii) Who, if deciding any of the following, are health care 
professionals who have the appropriate clinical expertise in treating 
the enrollee's condition or disease.
    (A) An appeal of a denial that is based on lack of medical 
necessity.

[[Page 43673]]

    (B) A grievance regarding denial of expedited resolution of an 
appeal.
    (C) A grievance or appeal that involves clinical issues.
    (b) Special requirements for appeals. The process for appeals must:
    (1) Provide that oral inquiries seeking to appeal an action are 
treated as appeals (to establish the earliest possible filing date for 
the appeal) and must be confirmed in writing, unless the enrollee or 
the provider requests expedited resolution.
    (2) Provide the enrollee a reasonable opportunity to present 
evidence, and allegations of fact or law, in person as well as in 
writing. (The MCO or PIHP must inform the enrollee of the limited time 
available for this in the case of expedited resolution.)
    (3) Provide the enrollee and his or her representative opportunity, 
before and during the appeals process, to examine the enrollee's case 
file, including medical records, and any other documents and records 
considered during the appeals process.
    (4) Include, as parties to the appeal--
    (i) The enrollee and his or her representative; or
    (ii) The legal representative of a deceased enrollee's estate.


Sec. 438.408  Resolution and notification: Grievances and appeals.

    (a) Basic rule. The MCO or PIHP must dispose of each grievance and 
resolve each appeal, and provide notice, as expeditiously as the 
enrollee's health condition requires, within State-established 
timeframes that may not exceed the timeframes specified in this 
section.
    (b) Specific timeframes. (1) Standard disposition of grievances. 
For standard disposition of a grievance and notice to the affected 
parties, the timeframe is established by the State but may not exceed 
90 days from the day the MCO or PIHP receives the grievance.
    (2) Standard resolution of appeals. For standard resolution of an 
appeal and notice to the affected parties, the State must establish a 
timeframe that is no longer than 45 days from the day the MCO or PIHP 
receives the appeal. This timeframe may be extended under paragraph (d) 
of this section.
    (3) Expedited resolution of appeals. For expedited resolution of an 
appeal and notice to affected parties, the State must establish a 
timeframe that is no longer than 3 working days after the MCO or PIHP 
receives the appeal. This timeframe may be extended under paragraph (c) 
of this section.
    (c) Extension of timeframes. (1) The MCO or PIHP may extend the 
timeframes from paragraph (b) of this section by up to 14 calendar days 
if--
    (i) The enrollee requests the extension; or
    (ii) The MCO or PIHP shows (to the satisfaction of the State 
agency, upon its request) that there is need for additional information 
and how the delay is in the enrollee's interest.
    (2) Requirements following extension. If the MCO or PIHP extends 
the timeframes, it must--For any extension not requested by the 
enrollee, give the enrollee written notice of the reason for the delay.
    (d) Format of notice. (1) Grievances. The State must establish the 
method MCOs and PIHPs will use to notify an enrollee of the disposition 
of a grievance.
    (2) Appeals. (i) For all appeals, the MCO or PIHP must provide 
written notice of disposition.
    (ii) For notice of expedited resolution, the MCO or PIHP must also 
provide oral notice.
    (e) Content of notice of appeal resolution. The written notice of 
the resolution must include the following:
    (1) The results of the resolution process and the date it was 
completed.
    (2) For appeals not resolved wholly in favor of the enrollees--
    (i) The right to request a State Fair Hearing, and how to do so;
    (ii) The right to request to receive benefits while the hearing is 
pending, and how to make the request; and
    (iii) That the enrollee may be held liable for the cost of those 
benefits if the hearing decision upholds the MCO's or PIHP's action.
    (c) Requirements for State fair hearings.--(1) Availability. The 
State must permit the enrollee to request a State fair hearing within a 
reasonable time period specified by the State, but not less than 20 or 
in excess of 90 days from whichever of the following dates applies--
    (i) If the State requires exhaustion of the MCO or PIHP level 
appeal procedures, from the date of the MCO's or PIHP's notice of 
resolution; and
    (ii) If the State does not require exhaustion of the MCO or PIHP 
level appeal procedures and the enrollee appeals directly to the State 
for a fair hearing, from the date on the MCO's or PIHP's notice of 
action.
    (2) Parties. The parties to the State fair hearing include the MCO 
or PIHP as well as the enrollee and his or her representative or the 
representative of a deceased enrollee's estate.


Sec. 438.410  Expedited resolution of appeals.

    (a) General rule. Each MCO and PIHP must establish and maintain an 
expedited review process for appeals, when the MCO or PIHP determines 
(for a request from the enrollee) or the provider indicates (in making 
the request on the enrollee's behalf or supporting the enrollee's 
request) that taking the time for a standard resolution could seriously 
jeopardize the enrollee's life or health or ability to attain, 
maintain, or regain maximum function;
    (b) Punitive Action. The MCO or PIHP must ensure that punitive 
action is neither taken against a provider who requests an expedited 
resolution or supports an enrollee's appeal.
    (c) Action following denial of a request for expedited resolution. 
If the MCO or PIHP denies a request for expedited resolution of an 
appeal, it must--
    (1) Transfer the appeal to the timeframe for standard resolution in 
accordance with Sec. 438.408(b)(2);
    (2) Give the enrollee prompt oral notice of the denial, and follow 
up within two calendar days with a written notice.


Sec. 438.414  Information about the grievance system to providers and 
subcontractors.

    The MCO or PIHP must provide the information specified at 
Sec. 438.10(g)(1) about the grievance system to all providers and 
subcontractors at the time they enter into a contract.


Sec. 438.416  Record keeping and reporting requirements.

    The State must require MCOs and PIHPs to maintain records of 
grievances and appeals and must review the information as part of the 
state quality strategy.


Sec. 438.420  Continuation of benefits while the MCO or PIHP appeal and 
the State Fair Hearing are pending.

    (a) Terminology. As used in this section, ``timely'' filing means 
filing on or before the later of the following:
    (1) The expiration of the timeframe specified by the State (in 
accordance with Sec. 438.402(b)(2)) and communicated in the notice of 
action.
    (2) The intended effective date of the MCO's or PIHP's proposed 
action.
    (b) Continuation of benefits. The MCO or PIHP must continue the 
enrollee's benefits if--
    (1) The enrollee or the provider files the appeal timely;
    (2) The appeal involves the termination, suspension, or reduction 
of a previously authorized course of treatment;
    (3) The services were ordered by an authorized provider;
    (4) The period covered by the authorization has not expired; and
    (5) The enrollee requests extension of benefits.
    (c) Duration of continued or reinstated benefits. If, at the 
enrollee's

[[Page 43674]]

request, the MCO or PIHP continues or reinstates the enrollee's 
benefits while the appeal is pending, the benefits must be continued 
until one of following occurs:
    (1) The enrollee withdraws the appeal.
    (2) The MCO or PIHP resolves the appeal against the enrollee, 
unless the enrollee has requested a State fair hearing with 
continuation of benefits until a State fair hearing decision is 
reached.
    (3) A State Fair Hearing Office issues a hearing decision adverse 
to the enrollee.
    (d) Enrollee responsibility for services furnished while the appeal 
is pending. If the final resolution of the appeal is adverse to the 
enrollee, that is, upholds the MCO's or PIHP's action, the MCO or PIHP 
may recover the cost of the services furnished to the enrollee while 
the appeal is pending, to the extent that they were furnished solely 
because of the requirements of this section, and in accordance with the 
policy set forth in Sec. 431.230(b) of this chapter.


Sec. 438.424  Effectuation of reversed appeal resolutions.

    (a) Services not furnished while the appeal is pending. If the MCO 
or PIHP, or the State fair hearing officer reverses a decision to deny, 
limit, or delay services that were not furnished while the appeal was 
pending, the MCO or PIHP must authorize or provide the disputed 
services promptly, and as expeditiously as the enrollee's health 
condition requires.
    (b) Services furnished while the appeal is pending. If the MCO or 
PIHP, or the State fair hearing officer reverses a decision to deny 
authorization of services, and the enrollee received the disputed 
services while the appeal was pending, the MCO or the PIHP or the State 
must pay for those services, in accordance with State policy and 
regulations.

Subpart G--[Reserved]

Subpart H--Certifications and Program Integrity Provisions


Sec. 438.600  Statutory basis.

    This subpart is based on sections 1902(a)(4) and 1902(a)(19) of the 
Act.
    (a) Section 1902(a)(4) requires that the State plan provide for 
methods of administration that the Secretary finds necessary for the 
proper and efficient operation of the plan.
    (b) Section 1902(a)(19) requires that the State plan provide the 
safeguards necessary to ensure that eligibility is determined and 
services are provided in a manner consistent with simplicity of 
administration and the best interests of the recipients.


Sec. 438.602  Basic rule.

    As a condition for contracting and for receiving payment under the 
Medicaid managed care program, an MCO or PIHP must comply with the 
certification and program integrity requirements of this section.


Sec. 438.604  Data that must be certified.

    (a) Data certifications. When State payments to the MCO or PIHP are 
based on data submitted by the MCO or PIHP, the State must require 
certification of the data as provided in Sec. 438.606. The data that 
must be certified includes, but is not limited to, enrollment 
information, encounter data, and other information required by the 
State and contained in contracts, proposals, and related documents.
    (b) Certification of substantial compliance with contract. 
Regardless of whether payment is based on data, each MCO and PIHP must 
certify that it is in substantial compliance with its contract.
    (c) Additional certifications. Certification is required, as 
provided in Sec. 438.606, for all documents specified by the State.


Sec. 438.606  Source, content, and timing of certification.

    (a) Source of certification. For the data specified in 
Sec. 438.604, the MCO or PIHP must require that one of the following 
certify the data the MCO or PIHP submits to the State:
    (1) The MCO's or PIHP's Chief Executive Officer.
    (2) The MCO's or PIHP's Chief Financial Officer.
    (3) An individual who has delegated authority to sign for, and who 
reports directly to, the MCO's or PIHP's Chief Executive Officer or 
Chief Financial Officer.
    (b) Content of certification. The certification must attest, based 
on best knowledge, information, and belief, as follows:
    (1) To the accuracy, completeness and truthfulness of data.
    (2) That the MCO or PIHP is in substantial compliance with its 
contract.
    (3) To the accuracy, completeness and truthfulness of documents 
specified by the State.
    (c) Timing of certification. The MCO or PIHP must submit the 
certification concurrently with the certified data or, in the case of 
compliance with the terms of the contract, when requesting payment.


Sec. 438.608  Program integrity requirements.

    (a) General requirement. The MCO or PIHP must have administrative 
and management arrangements or procedures, including a mandatory 
compliance plan, that are designed to guard against fraud and abuse.
    (b) Specific requirements. The arrangements or procedures must 
include the following:
    (1) Written policies, procedures, and standards of conduct that 
articulate the organization's commitment to comply with all applicable 
Federal and State standards.
    (2) The designation of a compliance officer and a compliance 
committee that are accountable to senior management.
    (3) Effective training and education for the compliance officer and 
the organization's employees.
    (4) Effective lines of communication between the compliance officer 
and the organization's employees.
    (5) Enforcement of standards through well-publicized disciplinary 
guidelines.
    (6) Provision of internal monitoring and auditing.
    (7) Provision for prompt response to detected offenses, and for 
development of corrective action initiatives relating to the MCO's or 
PIHP's contract.

Subpart I--Sanctions


Sec. 438.700  Basis for imposition of sanctions.

    (a) Each State that contracts with a MCO must, and each State that 
contracts with a PCCM may, establish intermediate sanctions, as 
specified in Sec. 438.702, that it may impose if it makes any of the 
determinations specified in paragraphs (b) through (d) of this section. 
The State's determination may be based on findings from onsite survey, 
enrollee or other complaints, financial status, or any other source.
    (b) A MCO acts or fails to act as follows:
    (1) Fails substantially to provide medically necessary services 
that the MCO is required to provide, under law or under its contract 
with the State, to an enrollee covered under the contract.
    (2) Imposes on enrollees premiums or charges that are in excess of 
the premiums or charges permitted under the Medicaid program.
    (3) Acts to discriminate among enrollees on the basis of their 
health status or need for health care services. This includes 
termination of enrollment or refusal to reenroll a recipient, except as 
permitted under the Medicaid program, or any practice that would 
reasonably be expected to discourage enrollment by recipients whose 
medical condition or history indicates probable

[[Page 43675]]

need for substantial future medical services.
    (4) Misrepresents or falsifies information that it furnishes to CMS 
or to the State.
    (5) Misrepresents or falsifies information that it furnishes to an 
enrollee, potential enrollee, or health care provider.
    (6) Fails to comply with the requirements for physician incentive 
plans, as set forth (for Medicare) in Secs. 422.208 and 422.210 of this 
chapter.
    (c) A MCO or a PCCM distributes directly, or indirectly through any 
agent or independent contractor, marketing materials that have not been 
approved by the State or that contain false or materially misleading 
information.
    (d) A MCO violates any of the requirements in section 1903(m) of 
the Act and implementing regulations, or a MCO or a PCCM violates any 
of the requirements of section 1932 of the Act and implementing 
regulations. (For these violations, only the sanctions specified in 
Sec. 438.702(a)(4) and (a)(5) may be imposed.)


Sec. 438.702  Types of intermediate sanctions.

    (a) The types of intermediate sanctions that a State may impose 
under this subpart include the following:
    (1) Civil money penalties in the amounts specified in Sec. 438.704.
    (2) Appointment of temporary management as provided in 
Sec. 438.706. (The State may not impose this sanction on a PCCM.)
    (3) Granting enrollees the right to terminate enrollment without 
cause. (The State must notify the affected enrollees of their right to 
disenroll.)
    (4) Suspension of all new enrollment, including default enrollment, 
after the effective date of the sanction.
    (5) Suspension of payment for recipients enrolled after the 
effective date of the sanction and until CMS or the State is satisfied 
that the reason for imposition of the sanction no longer exists and is 
not likely to recur.
    (b) State agencies retain authority to impose additional sanctions 
under State statutes or State regulations that address areas of 
noncompliance specified in Sec. 438.700, as well as additional areas of 
noncompliance. Nothing in this subpart prevents State agencies from 
exercising that authority.


Sec. 438.704  Amounts of civil money penalties.

    (a) General rule. The limit on, or specific amount of, a civil 
money penalty the State may impose varies depending on the nature of 
the MCO's or PCCM's action or failure to act, as provided in this 
section.
    (b) Specific limits. (1) The limit is $25,000 for each 
determination under the following paragraphs of Sec. 438.700:
    (i) Paragraph (b)(1) (Failure to provide services).
    (ii) Paragraph (b)(5) (Misrepresentation or false statements to 
enrollees, potential enrollees, or health care providers).
    (iii) Paragraph (b)(6) (Failure to comply with physician incentive 
plan requirements).
    (iv) Paragraph (c) (Marketing violations).
    (2) The limit is $100,000 for each determination under paragraph 
(b)(3) (discrimination) or (b)(4) (Misrepresentation or false 
statements to CMS or the State) of Sec. 438.700.
    (3) The limit is $15,000 for each recipient the State determines 
was not enrolled because of a discriminatory practice under paragraph 
(b)(3) of Sec. 438.700. (This is subject to the overall limit of 
$100,000 under paragraph (b)(2) of this section).
    (c) Specific amount. For premiums or charges in excess of the 
amounts permitted under the Medicaid program, the amount of the penalty 
is $25,000 or double the amount of the excess charges, whichever is 
greater. The State must deduct from the penalty the amount of 
overcharge and return it to the affected enrollees.


Sec. 438.706  Special rules for temporary management.

    (a) Optional imposition of sanction. The State may impose temporary 
management if it finds (through onsite survey, enrollee complaints, 
financial audits, or any other means) that--
    (1) There is continued egregious behavior by the MCO, including but 
not limited to behavior that is described in Sec. 438.700, or that is 
contrary to any requirements of sections 1903(m) and 1932 of the Act;
    (2) There is substantial risk to enrollees' health; or
    (3) The sanction is necessary to ensure the health of the MCO's 
enrollees--
    (i) While improvements are made to remedy violations under 
Sec. 438.700; or
    (ii) Until there is an orderly termination or reorganization of the 
MCO.
    (b) Required imposition of sanction. The State must impose 
temporary management (regardless of any other sanction that may be 
imposed) if it finds that an MCO has repeatedly failed to meet 
substantive requirements in section 1903(m) or section 1932 of the Act, 
or this subpart. The State must also grant enrollees the right to 
terminate enrollment without cause, as described in Sec. 438.702(a)(3).
    (c) Hearing. The State may not delay imposition of temporary 
management to provide a hearing before imposing this sanction.
    (d) Duration of sanction. The State may not terminate temporary 
management until it determines that the MCO can ensure that the 
sanctioned behavior will not recur.


Sec. 438.708  Termination of an MCO or PCCM contract.

    A State has the authority to terminate an MCO or PCCM contract and 
enroll that entity's enrollees in other MCOs or PCCMs, or provide their 
Medicaid benefits through other options included in the State plan, if 
the State determines that the MCO or PCCM has failed to do either of 
the following:
    (a) Carry out the substantive terms of its contract; or
    (b) Meet applicable requirements in sections 1932, 1903(m), and 
1905(t) of the Act.


Sec. 438.710  Due process: Notice of sanction and pre-termination 
hearing.

    (a) Notice of sanction. Before imposing any of the alternative 
sanctions specified in this subpart, the State must give the affected 
entity timely written notice that explains the following:
    (1) The basis and nature of the sanction.
    (2) Any other due process protections that the State elects to 
provide.
    (b) Pre-termination hearing. (1) General rule. Before terminating 
an MCO or PCCM contract under Sec. 438.708, the State must provide the 
entity a pre-termination hearing.
    (2) Procedures. The State must do the following:
    (i) Give the MCO or PCCM written notice of its intent to terminate, 
the reason for termination, and the time and place of the hearing;
    (ii) After the hearing, give the entity written notice of the 
decision affirming or reversing the proposed termination of the 
contract and, for an affirming decision, the effective date of 
termination; and
    (iii) For an affirming decision, give enrollees of the MCO or PCCM 
notice of the termination and information, consistent with Sec. 438.10, 
on their options for receiving Medicaid services following the 
effective date of termination.


Sec. 438.722  Disenrollment during termination hearing process.

    After a State notifies an MCO or PCCM that it intends to terminate 
the contract, the State may do the following:

[[Page 43676]]

    (a) Give the entity's enrollees written notice of the State's 
intent to terminate the contract.
    (b) Allow enrollees to disenroll immediately without cause.


Sec. 438.724  Notice to CMS.

    (a) The State must give the CMS Regional Office written notice 
whenever it imposes or lifts a sanction.
    (b) The notice must--
    (1) Be given no later than 30 days after the State imposes or lifts 
a sanction; and
    (2) Specify the affected MCO, the kind of sanction, and the reason 
for the State's decision to impose or lift a sanction.


Sec. 438.726  State plan requirement.

    The State plan must provide for the State to monitor for violations 
that involve the actions and failures to act specified in this part and 
to implement the provisions of this part.


Sec. 438.730  Sanction by CMS: Special rules for MCOs with risk 
contracts.

    (a) Basis for sanction. (1) A State agency may recommend that CMS 
impose the denial of payment sanction on an MCO with a comprehensive 
risk contract if the MCO acts or fails to act as specified in 
Sec. 438.700(b)(1) through (b)(6).
    (2) The State agency's recommendation becomes CMS's recommendation 
unless CMS rejects it within 15 days of receipt.
    (b) Notice of sanction. If CMS accepts the recommendation, the 
State agency and CMS take the following actions:
    (1) The State agency--
    (i) Gives the MCO written notice of the proposed sanction;
    (ii) Allows the MCO 15 days from date of receipt of the notice to 
provide evidence that it has not acted or failed to act in the manner 
that is the basis for the recommended sanction;
    (iii) May extend the initial 15-day period for an additional 15 
days if, before the end of the initial period, the MCO submits a 
written request that includes a credible explanation of why it needs 
additional time; and
    (iv) May not grant an extension if CMS determines that the MCO's 
conduct poses a threat to an enrollee's health or safety.
    (2) CMS conveys the determination to the OIG for consideration of 
possible imposition of civil money penalties under section 
1903(m)(5)(A) of the Act and part 1003 of this title. In accordance 
with the provisions of part 1003, the OIG may impose civil money 
penalties in addition to, or in place of, the sanctions that may be 
imposed under this section.
    (c) Informal reconsideration. (1) If the MCO submits a timely 
response to the notice of sanction, the State agency--
    (i) Conducts an informal reconsideration that includes review of 
the evidence by a State agency official who did not participate in the 
original recommendation; and
    (ii) Gives the MCO a concise written decision setting forth the 
factual and legal basis for the decision.
    (2) The State agency decision under paragraph (c)(1) of this 
section, forwarded to CMS, becomes CMS's decision unless CMS reverses 
or modifies the decision within 15 days from date of receipt.
    (3) If CMS reverses or modifies the State agency decision, the 
agency sends the MCO a copy of CMS's decision.
    (d) Effective date of sanction. (1) If the MCO does not seek 
reconsideration, a sanction is effective 15 days after the date of the 
notice of sanction under paragraph (b) of this section.
    (2) If the MCO seeks reconsideration, the following rules apply:
    (i) Except as specified in paragraph (d)(2)(ii) of this section, 
the sanction is effective on the date specified in CMS's 
reconsideration notice.
    (ii) If CMS, in consultation with the State agency, determines that 
the MCO's conduct poses a serious threat to an enrollee's health or 
safety, CMS may make the sanction effective earlier than the date of 
CMS's reconsideration decision under paragraph (c) of this section.
    (e) CMS's role. CMS retains the right to independently perform the 
functions assigned to the State agency under this section.

Subpart J--Conditions for Federal Financial Participation


Sec. 438.802  Basic requirements.

    FFP is available in expenditures for payments under an MCO contract 
only for the periods during which the following conditions are met:
    (a) The contract--
    (1) Meets the requirements of this part; and
    (2) Is in effect.
    (b) The MCO and its subcontractors are in substantial compliance 
with the physician incentive plan requirements set forth in 
Secs. 422.208 and 422.210 of this chapter.
    (c) The MCO and the State are in substantial compliance with the 
requirements of the MCO contract and of this part.


Sec. 438.806  Prior approval.

    (a) Comprehensive risk contracts. FFP is available under a 
comprehensive risk contract only if--
    (1) The Regional Office has confirmed that the contractor meets the 
definition of MCO or is one of the entities described in paragraphs 
(a)(2) through (a)(5) of Sec. 438.6; and
    (2) The contract meets all the requirements of section 
1903(m)(2)(A) of the Act, the applicable requirements of section 1932 
of the Act, and the implementing regulations in this part.
    (b) MCO contracts. Prior approval by CMS is a condition for FFP 
under any MCO contract that extends for less than one full year or that 
has a value equal to, or greater than, the following threshold amounts:
    (1) For 1998, the threshold is $1,000,000.
    (2) For subsequent years, the amount is increased by the percentage 
increase in the consumer price index for all urban consumers.
    (c) FFP is not available in an MCO contract that does not have 
prior approval from CMS under paragraph (b) of this section.


Sec. 438.808  Exclusion of entities.

    (a) General rule. FFP is available in payments under MCO contracts 
only if the State excludes from the contracts any entities described in 
paragraph (b) of this section.
    (b) Entities that must be excluded. (1) An entity that could be 
excluded under section 1128(b)(8) of the Act as being controlled by a 
sanctioned individual.
    (2) An entity that has a substantial contractual relationship as 
defined in Sec. 431.55(h)(3) of this chapter, either directly or 
indirectly, with an individual convicted of certain crimes as described 
in section 1128(b)(8)(B) of the Act.
    (3) An entity that employs or contracts, directly or indirectly, 
for the furnishing of health care, utilization review, medical social 
work, or administrative services, with one of the following:
    (i) Any individual or entity excluded from participation in Federal 
health care programs under either section 1128 or section 1128A of the 
Act.
    (ii) Any entity that would provide those services through an 
excluded individual or entity.


Sec. 438.810  Expenditures for enrollment broker services.

    (a) Terminology. As used in this section--
    Choice counseling means activities such as answering questions and 
providing information (in an unbiased manner) on available MCO, PIHP's 
or PCCM delivery system options, and advising on what factors to 
consider when choosing among them and in selecting a primary care 
provider;

[[Page 43677]]

    Enrollment activities means activities such as distributing, 
collecting, and processing enrollment materials and taking enrollments 
by phone or in person; and
    Enrollment broker means an individual or entity that performs 
choice counseling or enrollment activities, or both.
    Enrollment services means choice counseling, or enrollment 
activities, or both.
    (b) Conditions that enrollment brokers must meet. State 
expenditures for the use of enrollment brokers are considered necessary 
for the proper and efficient operation of the State plan and thus 
eligible for FFP only if the broker and its subcontractors meet the 
following conditions:
    (1) Independence. The broker and its subcontractors are independent 
of any MCO, PIHP, PAHP, PCCM, or other health care provider in the 
State in which they provide enrollment services. A broker or 
subcontractor is not considered ``independent'' if it--
    (i) Is an MCO, PIHP, PAHP, PCCM or other health care provider in 
the State;
    (ii) Is owned or controlled by an MCO, PIHP, PAHP, PCCM, or other 
health care provider in the State; or
    (iii) Owns or controls an MCO, PIHP, PAHP, PCCM or other health 
care provider in the State.
    (2) Freedom from conflict of interest. The broker and its 
subcontractor are free from conflict of interest. A broker or 
subcontractor is not considered free from conflict of interest if any 
person who is the owner, employee, or consultant of the broker or 
subcontractor or has any contract with them--
    (i) Has any direct or indirect financial interest in any entity or 
health care provider that furnishes services in the State in which the 
broker or subcontractor provides enrollment services;
    (ii) Has been excluded from participation under title XVIII or XIX 
of the Act;
    (iii) Has been debarred by any Federal agency; or
    (iv) Has been, or is now, subject to civil money penalties under 
the Act.
    (c) Approval. The initial contract or memorandum of agreement (MOA) 
for services performed by the broker has been reviewed and approved by 
CMS.


Sec. 438.812  Costs under risk and nonrisk contracts.

    (a) Under a risk contract, the total amount the State agency pays 
for carrying out the contract provisions is a medical assistance cost.
    (b) Under a nonrisk contract--
    (1) The amount the State agency pays for the furnishing of medical 
services to eligible recipients is a medical assistance cost; and
    (2) The amount the State agency pays for the contractor's 
performance of other functions is an administrative cost.


Sec. 438.814  Limit on payments in excess of capitation rates.

    FFP is not available for payments pursuant to risk corridors or 
incentive arrangements that exceed 105 percent of that portion of the 
aggregate amount of approved capitation payments attributable to the 
enrollees or services covered by the risk corridor or incentive 
arrangement.

PART 440--SERVICES: GENERAL PROVISIONS

    1. The authority citation for part 440 continues to read as 
follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).
    2. In subpart A, a new Sec. 440.168 is added to read as follows:


Sec. 440.168  Primary care case management services.

    (a) Primary care case management services means case management 
related services that--
    (1) Include location, coordination, and monitoring of primary 
health care services; and
    (2) Are provided under a contract between the State and either of 
the following:
    (i) A PCCM who is a physician or may, at State option, be a 
physician assistant, nurse practitioner, or certified nurse-midwife.
    (ii) A physician group practice, or an entity that employs or 
arranges with physicians to furnish the services.
    (b) Primary care case management services may be offered by the 
State--
    (1) As a voluntary option under the regular State plan program; or
    (2) On a mandatory basis under section 1932 (a)(1) of the Act or 
under section 1915(b) or section 1115 waiver authority.

PART 447--PAYMENTS FOR SERVICES

    1. The authority citation for part 447 continues to read as 
follows:

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

    2. A new Sec. 447.46 is added, to read as follows:


Sec. 447.46  Timely claims payment by MCOs.

    (a) Basis and scope. This section implements section 1932(f) of the 
Act by specifying the rules and exceptions for prompt payment of claims 
by MCOs.
    (b) Definitions. ``Claim'' and ``clean claim'' have the meaning 
given those terms in Sec. 447.45.
    (c) Contract requirements. (1) Basic rule. A contract with an MCO 
must provide that the organization will meet the requirements of 
Secs. 447.45(d)(2) and (d)(3), and abide by the specifications of 
Secs. 447.45(d)(5) and (d)(6).
    (2) Exception. The MCO and its providers may, by mutual agreement, 
establish an alternative payment schedule.
    (3) Any alternative schedule must be stipulated in the contract.


Sec. 447.53  [Amended]

    3. In Sec. 447.53, the following changes are made:
    A. In paragraph (b) introductory text, the parenthetical phrase is 
removed.
    B. Paragraph (b)(6) is removed.
    C. A new paragraph (e) is added to read as follows:


Sec. 447.53  Applicability; specification; multiple charges.

    (e) No provider may deny services, to an individual who is eligible 
for the services, on account of the individual's inability to pay the 
cost sharing.


Sec. 447.58  [Amended]

    4. In Sec. 447.58, ``Except for HMO services subject to the 
copayment exclusion in Sec. 447.53(b)(6), if'' is removed and ``If'' is 
inserted in its place.
    5. A new Sec. 447.60 is added to subpart A to read as follows:


Sec. 447.60  Cost-sharing requirements for services furnished by MCOs.

    Contracts with MCOs must provide that any cost-sharing charges the 
MCO imposes on Medicaid enrollees are in accordance with the 
requirements set forth in Secs. 447.50 and 447.53 through 447.58 for 
cost-sharing charges imposed by the State agency.


Sec. 447.361  [Removed]

    Section 447.361 is removed.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)
    Dated: August 1, 2001.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: August 10, 2001.
Tommy G. Thompson,
Secretary.
[FR Doc. 01-20715 Filed 8-16-01; 8:45 am]
BILLING CODE 4120-01-P