[Federal Register Volume 66, Number 172 (Wednesday, September 5, 2001)]
[Rules and Regulations]
[Pages 46397-46399]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-22269]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2100-F]
RIN 0938-AK89


Medicaid Program; Modification of the Medicaid Upper Payment 
Limit Transition Period for Inpatient Hospital Services, Outpatient 
Hospital Services, Nursing Facility Services, Intermediate Care 
Facility Services for the Mentally Retarded, and Clinic Services

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Final rule.
SUMMARY: This final rule modifies the Medicaid upper payment (UPL) 
limit provisions by establishing a new transition period for States 
that submitted plan amendments before March 13, 2001 that do not comply 
with the new UPLs effective on that date (but do comply with the prior 
UPLs) and were approved on or after January 22, 2001. This new 
transition period applies to payments for inpatient hospital services, 
outpatient hospital services, nursing facility services, intermediate 
care facility services for the mentally retarded, and clinic services.

EFFECTIVE DATE: November 5, 2001.

FOR FURTHER INFORMATION CONTACT:

Robert Weaver, (410) 786-5914--Nursing facility services and 
intermediate care facility services for the mentally retarded
Marge Lee, (410) 786-4361--Inpatient and outpatient hospital services 
and clinic services

SUPPLEMENTARY INFORMATION:

I. Background

    In the final rule published on January 12, 2001 in the Federal 
Register (66 FR 3148), we specified transition periods for those States 
with State plan amendments (SPAs) approved before the final rule 
effective date of March 13, 2001. In our March 13, 2001 letter to State 
Medicaid Directors, we clarified that state plan amendments submitted 
on or after the effective date of that final rule would be subject to 
the new requirements of that final rule. We further explained that we 
would disapprove any state plan amendment that is submitted on or after 
that date, including modification to existing state plans, that does 
not conform with the new upper payment limitations.
    The State Medicaid Directors letter did not address the amendments 
pending CMS approval. After reviewing the legal and policy issues 
involved, the Administration now believes that each State's pending 
amendment should be reviewed under the criteria in place when it was 
submitted, and, for those submitted before March 13, 2001, the criteria 
before the January 12, 2001 final rule rather than applying the 
provisions of that rule. However, the Administration is also committed 
to phasing out the UPL loophole and assuring that tax dollars are spent 
properly. Absent modification of the UPL transition provisions, 
approval of these State plan amendments could trigger a 2-year 
transition period through September 30, 2002, which would have greater 
budget implications than anticipated.

II. Provisions of the Proposed Rule

    On April 3, 2001, we published a proposed rule in the Federal 
Register (66 FR 17657) proposing to create a separate UPL transition 
period for State plan amendments that were submitted to us before March 
13, 2001 but were approved on or after January 22, 2001. We proposed 
that these State plan amendments would qualify for a transition period 
that would end on the later of March 13, 2001 or 1 year after the 
approved effective date of each State plan amendment. With respect to 
pending UPL plans that are expansions of previously approved plans, we 
proposed that the separate transition period would only apply to the 
portion of spending under the pending plan that is above the amount 
that was previously approved.
    The proposed rule did not include those State plan amendments that 
were actively (not deemed) approved after January 12, 2001 based on 
their compliance with the final rule of January 12, 2001. Because these 
amendments comply with the January 12, 2001 final rule, the amendments 
are not subject to the transition periods specified in the January 12, 
2001 final rule. Also, as noted in the State Medicaid Directors letter 
of March 13, 2001, any State plan amendments submitted on or after 
March 13, 2001 would be reviewed and acted upon under the January 12, 
2001 final rule. We would also treat any material change submitted on 
or after March 13, 2001 to a State plan amendment pending on that date 
as a new State plan amendment. We would not be able to approve such a 
submission under the UPL requirements in effect, and it would not be 
eligible for the new transition period.

III. Analysis of and Responses to Public Comments

    We received 7 timely comments in response to the April 3, 2001 
proposed rule. The majority of the comments were from State agencies, 
and associations representing hospitals, health care systems, and 
providers of long-term care, assisted living, and nursing facilities. 
We reviewed each comment and grouped like or related comments. The 
comments and our responses are summarized below.
    Comment: Several commenters requested either this regulation be 
withdrawn or that State plan amendments submitted prior to March 13, 
2001 and approved after January 22, 2001 receive the transition period 
as defined in the January 12, 2001 final UPL rule. Several of these 
commenters felt the rule was a retroactive application of policy. Two 
commenters pointed out that the impact on one State would be to reduce 
its transition period from September 30, 2002 to September 30, 2001. 
Another commenter felt it was unfair to change the rules in mid-stream 
on States that had submitted amendments prior to January 12, 2001. If 
we decline to withdraw this proposal, one commenter asked that States 
submitting plan amendments on or before January 12, 2001 be allowed to 
exceed the newly established payment limits until September 30, 2002, 
the rationale being that States did not receive official word until the 
rule was published on January 12, 2001.
    Response: We do not agree with the request to withdraw this rule or 
to extend the full two-year transition period to States with pending 
(unapproved) amendments as of January 12, 2001 but we have altered the 
timing of the new transition period to ensure that it will not apply 
retroactively to any payments that may already have been made.
    We note that States had clear and sufficient notice of an impending 
change in the UPL rules, and should have had no reasonable expectation 
of favorable treatment for unapproved amendments after the publication 
of the final rule. Therefore, the proposed shorter transition reflected 
an approach to balance our interest in curtailing the use of 
inappropriate Federal Medicaid funds with the States concerns about a 
shift in federal rules. When the final UPL regulation was issued on 
January 12, 2001, we did not state that pending State plan amendments 
would be approved. Thus, we do not believe

[[Page 46398]]

States had a reasonable reliance on the expectation of a full 
transition period. Nevertheless, we were aware of the possibility that 
some States may have been adversely affected by the timing of the 
issuance of the final rule. Thus, we determined that we would approve 
amendments pending prior to the effective date (March 13, 2001) of the 
January UPL regulation but we announced that we would propose a shorter 
transition period for those amendments.
    The duration of the proposed new transition period was not intended 
to apply retroactively to any payments. Because of the timing in 
issuing this final rule, we have lengthened the duration of the new 
transition period to ensure that this remains the case. The new 
transition period will not end until the later of: (1) One year from 
the initial effective date of the State plan provision; or (2) the 
effective date of this final rule.
    As a result of this change, no State that qualifies for this new 
transition period will have its transition period expire prior to the 
effective date of this final rule. In addition, all such States will 
also have or have had at least 1 full year to make payments under their 
amendments, which was our intent in issuing the transition policies in 
the April 3, 2001 proposed rule.
    Comment: One commenter asked for clarification that state plan 
amendments pending as of March 12, 2001 that do not increase spending 
levels at non-State, government owned hospitals would not be impacted 
by this rule.
    Response: If the pending amendments do not increase spending, then 
the transition period provided by this rule would not be applicable.
    Comment: Two commenters indicated that they were uncertain how the 
transition period in this final regulation would impact States that 
have relied on enhanced Medicaid funding for many years. One of these 
commenters was under the impression that this regulation would permit a 
window of two years for those States that had approved state plans 
before October 1, 1992 and did not submit amendments.
    Response: A State's eligibility for one of the two longer 
transition periods set forth in the January 12, 2001 final UPL rule is 
not altered by this rule. What could be impacted is the maximum amount 
of excessive funding that is phased out over long periods of time. If 
an amendment pending on March 13 was approved after January 22, 2001, 
and the amendment had the effect of increasing the amount of spending 
that already exceeded the January 12, 2001 final UPL rule, then just 
the incremental increase provided by that amendment would be subject to 
the transition period in this rule.
    Comment: One commenter recommended that only state plan amendments 
submitted to CMS on or after March 13, 2001, the effective date of the 
January 12, 2001 UPL regulation, be subject to this regulation. A 
second commenter similarly recommended this regulation apply only to 
amendments submitted after January 12, 2001.
    Response: We do not agree with these comments. The purpose of 
providing any transition period is to help mitigate the effect the new 
upper payment limits may have in States which have relied on enhanced 
payments under the former regulations to leverage federal Medicaid 
dollars. By extending a grace period to amendments submitted after the 
March 13, 2001 effective date of the new upper payment limits, this 
recommendation would provide a transition period to spending situations 
where clearly there was no reliance when the new rules took effect. We 
similarly believe that any State that submitted an amendment after the 
January 12, 2001 publication date of the final rule arguably had no 
basis to expect the amendment would be approved or had any history of 
reliance on such spending.
    Comment: One commenter stated that we did not respond adequately in 
the January 12, 2001 final rule to several comments submitted on the 
October 10, 2000 proposed rule. Another commenter expressed concerns 
over the provisions of the January 12, 2001 final rule.
    Response: We believe that, in the January 12, 2001 final rule, we 
adequately responded to all comments submitted in response to the 
October 10, 2000 proposed rule. We do not think it is necessary or 
appropriate to further respond to those comments, or respond to 
comments on the provisions of the January 12, 2001 final rule, in this 
final rule.

IV. Provisions of the Final Regulation

    For the reasons discussed in section III of this preamble, this 
final rule adopts the separate UPL transition period proposed in the 
April 3, 2001 proposed rule.

V. Collection of Information Requirements

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

VI. Regulatory Impact Analysis

A. Introduction

    We have examined the impact of this final rule as required by 
Executive Order (EO) 12866, the Unfunded Mandates Act of 1995, and the 
Regulatory Flexibility Act (RFA) (Pub. L. 96-354). Executive Order 
12866 directs agencies to assess all costs and benefits of available 
regulatory alternatives and, if regulation is necessary, to select 
regulatory approaches that maximize net benefits (including potential 
economic, environmental, public health and safety effects, distributive 
impacts, and equity). A regulatory impact analysis (RIA) must be 
prepared for major rules with economically significant effects ($110 
million or more in any one year). We consider this to be a major rule 
and we have provided an analysis below.

B. Overall Impact

    The estimates provided below are based on State-reported Federal 
fiscal year information submitted with State plan amendments and State 
expenditure information, where available. We have lowered our estimate 
of potentially impacted State plan amendments that may qualify for a 
transition period to 4. In the April 3, 2001 proposed rule, we had 
estimated that 11 State plan amendments may have qualified for the 
transition period provided by this rule. Our revised estimate is based 
on a better understanding of State spending made pursuant to the 
amendments that targeted payments to public providers.
    Were these State plan amendments to be approved under the 2-year 
transition period, we estimate the increase in spending attributed to 
these amendments would total $1.0 billion over fiscal years 2001 and 
2002 as a result of the two-year transition period ending on September 
30, 2002. Subjecting these same state payment provisions to the new 
shorter transition periods provided by this final rule will result in 
.5 billion savings over the same period relative to the spending that 
could have occurred under transition 2-year transition period ending 
September 30, 2002.

C. Impact on Small Entities and Rural Hospitals

    The Regulatory Flexibility Act requires agencies to analyze options 
for regulatory relief of small entities. For purposes of the RFA, small 
entities include small businesses, nonprofit organizations and 
government agencies. Most hospitals and most other providers and 
suppliers are small entities, either by nonprofit status or by having

[[Page 46399]]

revenues of $5 million to $25 million (see 65 FR 69432) or less 
annually. For purposes of the RFA, all hospitals, nursing facilities, 
intermediate care facilities for the mentally retarded, and clinics are 
considered to be small entities. Individuals and States are not 
included in the definition of a small entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule 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 of a Metropolitan 
Statistical Area and has fewer than 100 beds.
    We do not believe the shorter transition periods adopted in this 
final rule will have a significant impact on small entities, including 
small rural hospitals. Although the transition policy allows States to 
make higher payments to government providers than what otherwise would 
have been allowable under the rules that were effective on March 13, 
2001, this flexibility is only available for one year. Therefore, we do 
not expect small entities to develop any reliance on these payments.

D. The Unfunded Mandates Act

    The Unfunded Mandates Reform Act of 1995 also requires (in section 
202) that agencies perform an assessment of anticipated costs and 
benefits before proposing any rule that may result in a mandated 
expenditure in any one year by State, local, or Tribal governments, in 
the aggregate, or by the private sector, of $110 million. Because this 
final rule does not mandate any new spending requirements or costs, but 
rather provides for new transition periods, we do not believe it has 
any unfunded mandate implications.

E. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct compliance costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. We do not believe this final rule in any way imposes 
substantial direct compliance costs on State and local governments, or 
preempts or supersedes State or local law. However, we realize the 
reform of upper payment limits is an issue some States are very 
interested in. Therefore, in addition to providing States with an 
opportunity to comment on the proposed rule, we have tried to afford 
States ample opportunities to express their interest and concerns as we 
have moved forward in developing reforms.

F. Executive Order 12866

    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 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 part 447 is 
amended as follows:

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. In Sec. 447.272, revise paragraph (e)(2)(ii)(A) and add a new 
paragraph (e)(2)(ii)(D) to read as follows:


Sec. 447.272  Inpatient services: Application of upper payment limits.

* * * * *
    (e) * * *
    (2) * * *
    (ii) * * *
    (A) For State plan provisions that are effective after September 
30, 1999 and were approved before January 22, 2001, payments may exceed 
the upper payment limit in paragraph (b) of this section until 
September 30, 2002.
* * * * *
    (D) For State plan provisions that were effective after September 
30, 1999, submitted to CMS before March 13, 2001, and approved by CMS 
after January 21, 2001, payments may exceed the limit in paragraph (b) 
of this section until the later of November 5, 2001, or 1 year from the 
approved effective date of the State plan provision.
* * * * *

    3. In Sec. 447.321, revise paragraph (e)(2)(ii)(A) and add a new 
paragraph (e)(2)(ii)(D) to read as follows:


Sec. 447.321  Outpatient hospital and clinic services: Application of 
upper payment limits.

* * * * *
    (e) * * *
    (2) * * *
    (ii) * * *
    (A) For State plan provisions that are effective after September 
30, 1999 and were approved before January 22, 2001, payments may exceed 
the upper payment limit in paragraph (b) of this section until 
September 30, 2002.
* * * * *
    (D) For State plan provisions that were effective after September 
30, 1999, submitted to CMS before March 13, 2001, and approved by CMS 
after January 21, 2001, payments may exceed the limit in paragraph (b) 
of this section until the later of November 5, 2001, or 1 year from the 
approved effective date of the State plan provision.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

    Dated: August 9, 2001.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
[FR Doc. 01-22269 Filed 9-4-01; 8:45 am]
BILLING CODE 4120-01-P