[Federal Register Volume 66, Number 226 (Friday, November 23, 2001)]
[Proposed Rules]
[Pages 58694-58697]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29327]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2134-P]
RIN 0938-AL05


Medicaid Program; Modification of the Medicaid Upper Payment 
Limit for Non-State Government-Owned or Operated Hospitals

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

ACTION: Proposed rule.

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

SUMMARY: This proposed rule would modify the Medicaid upper payment 
limit provisions to remove the 150 percent UPL for inpatient hospital 
services and outpatient hospital services furnished by non-State 
government-owned or operated hospitals. This proposed rule is part of 
this Administration's efforts to restore fiscal integrity to the 
Medicaid program and reduce the opportunity for abusive funding 
practices based on payments unrelated to actual covered Medicaid 
services.

DATES: We will consider comments if we receive them at the appropriate 
address, as provided below, no later than 5 p.m. on December 24, 2001.

ADDRESSES: In commenting, please refer to file code CMS-2134-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    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-2134-P, P.O. 
Box 8016, Baltimore, MD 21244-8016.
    Please allow sufficient time for mailed comments to be timely 
received in the event of delivery delays.
    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 C5-14-03, 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. For 
information on viewing public comments, see the beginning of the 
SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Marge Lee, (410) 786-4361.

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 the headquarters of the Centers for Medicare & 
Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, 
Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule 
an appointment to view public comments, call Ms. Freddie Wilder at 
(410) 786-7195 or (410) 786-0082.

I. Background

    Section 1902(a)(30)(A) of the Social Security Act (the Act) 
requires that Medicaid State plans have methods and procedures relating 
to the payment for care and services to assure that payments are 
consistent with efficiency, economy, and quality of care. This 
provision is implemented in regulations at 42 CFR part 447 that set 
upper payment limits (UPLs) for different types of items and services. 
For certain institutional providers, including hospitals, these upper 
payment limits apply in the aggregate to all payments to a particular 
class of providers, and are based on the estimated payment under 
Medicare payment principles.
    In a final rule published on January 12, 2001 in the Federal 
Register (66 FR 3148), we revised the Medicaid upper payment limit 
(UPL) for inpatient and outpatient hospitals to require separate UPLs 
for State-owned or operated facilities, non-State government-owned or 
operated facilities, and privately owned and operated facilities. In 
that final rule, we also created an exception for payments to non-State 
government-owned or operated hospitals. That exception provided that 
the aggregate Medicaid payments to those hospitals may not exceed 150 
percent of a reasonable estimate of the amount that would be paid for 
the services furnished by these hospitals under Medicare payment 
principles. At that time, we believed that there was a need for a 
higher UPL to apply to payments to these public hospitals because their 
important role in serving the Medicaid population.
    Based on further analysis, we do not believe that a significant 
amount of the additional payments permitted under this exception is 
being used to further the mission of these hospitals or their role in 
serving Medicaid patients. The Office of the Inspector General has 
issued several reports demonstrating that a portion of the additional 
payments are being transferred directly back to the State via 
intergovernmental transfers and used for other purposes (which may 
include funding the State share of other Medicaid expenditures). Since 
the public hospitals are not retaining the funds available as a result 
of this higher UPL, those funds are neither furthering their special 
mission nor ensuring continued access to these facilities for the 
Medicaid population. Instead, the only result of the higher UPL is that 
the Federal government is effectively paying more than its share of net 
State Medicaid expenditures.

II. Provisions of the Proposed Rule

    As part of this Administration's efforts to restore fiscal 
integrity to the Medicaid program and reduce the opportunity for 
abusive funding practices based on payments unrelated to actual covered 
Medicaid services, we propose to remove the 150 percent UPL for non-
State government-owned or operated hospitals.
    Under Secs. 447.272(b) and 447.321(b), aggregate payments to non-
State government-owned or operated facilities would be limited to a 
reasonable estimate of the amount that would be

[[Page 58695]]

paid for the services furnished by this group of facilities under 
Medicare payment principles. Payments under an approved State plan 
would be reduced to comply with this limit as of the effective date of 
the subsequent final rule. In addition, we would not approve any 
methodologies that allow payments in excess of this limit as of the 
effective date of the final rule. Moreover, States should note that we 
have issued a letter to State Medicaid Directors announcing a policy 
for addressing amendments submitted after the publication date of this 
proposed rule, which would provide for payments that exceed those 
permitted under this proposed rule. States cannot reasonably expect to 
rely on financing from such plan amendments that exceed the proposed 
limit as we intend to proceed with a final rule in the near future.
    In Sec. 447.272(c), we would remove the exception in paragraph 
(c)(1) regarding payments to non-State government-owned or operated 
hospitals. We would redesignate the exceptions in paragraph (c)(2) to 
(c)(1) and (c)(3) to (c)(2) for payments to Indian Health Services and 
tribal facilities and disproportionate share hospitals (subject to a 
separate limit on payments to disproportionate share hospitals). In 
Sec. 447.321, we would revise paragraphs (b) through (d).
    State payment methodologies that qualify for a transition period 
described in Secs. 447.272(e) and 447.321(e) would continue to qualify 
for the same transition period. However, aggregate payments to non-
State government-owned or operated hospitals during the transition 
period would need to be reduced to 100 percent of a reasonable estimate 
of the amount that would be paid for the services furnished by this 
group of facilities under Medicare payment principles rather than 150 
percent as described in the final rule published on January 12, 2001. 
In Secs. 447.272 and 447.321, we would redesignate paragraph 
(e)(2)(ii)(C)(8) regarding when a reduction begins as paragraph 
(e)(2)(iii). We would also redesignate paragraph (e)(2)(iii) as 
(e)(2)(iv).
    State payment methodologies that do not qualify for a transition 
period must be in compliance with the 100 percent UPL for non-State 
government-owned or operated hospitals as of the effective date of a 
subsequent final rule.
    We would also remove Sec. 447.272(f)(1)(i) and (f)(1)(ii) and 
Sec. 447.321(f)(1)(i) and (f)(1)(ii), which describes the reporting 
requirements for non-State government-owned or operated hospitals, and 
retain paragraph (f)(1) that describes only the reporting requirements 
for payments made by States in excess of the amount described in 
paragraph (b) of this section during the transition periods. The 
reporting requirements for these States would not change.

III. Response to Comments

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

IV. Collection of Information Requirements Paperwork Reduction Act

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

Section 447.272  Inpatient Services: Application of Upper Payment 
Limits

    Under paragraph (f), Reporting requirements for payments during the 
transition periods, States that are eligible for a transition period 
described in section 447.272(e), and that make payments that exceed the 
limit under section 447.272(b) must report annually the following 
information to CMS:
    (1) The total Medicaid payments made to each facility for services 
furnished during the entire State fiscal year.
    (2) A reasonable estimate of the amount that would be paid for the 
services furnished by the facility under Medicare payment principles.
    We estimate that there would be 57 reports filed the first year and 
that they would take 8 hours, for a total of 456 hours. The number of 
reports and corresponding burden would decrease each year.

Section 447.321  Outpatient Hospital and Clinic Services: Application 
of Upper Payment Limits

    Under paragraph (f), Reporting requirements for payments during the 
transition periods, States that are eligible for a transition period 
described in section 447.321(e), and that make payments that exceed the 
limit under section 447.321(b), would have to report annually the 
following information to CMS:
    (1) The total Medicaid payments made to each facility for services 
furnished during the entire State fiscal year.
    (2) A reasonable estimate of the amount that would be paid for the 
services furnished by the facility under Medicare payment principles.
    We estimate that there would be 31 reports filed the first year 
under this section and that it would take 8 hours to complete one, for 
a total of 248 hours. The number of reports and corresponding burden 
would decrease over the next 8 years.
    The particular information collection requirements contained in 
these two sections were published in the January 12, 2001 final rule. 
We are proposing to revise these requirements by eliminating the 
reporting requirement that States report hospital expenditures up to 
the 150 percent UPL, consistent with its elimination in this proposed 
rule.
    We have recently submitted an emergency request for approval of the 
information collection requirements associated with the January 12, 
2001 final rule to OMB for review of the requirements in Secs. 447.272 
and 447.321. These sections have been approved by OMB under OMB number 
0938-0855 through May 2002 and are now in effect. In conjunction with 
the development of this proposed rule, we plan to revise these 
reporting requirements consistent with the content of the final rule, 
taking all comments into account.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following: Centers for 
Medicare and Medicaid, Office of Information Services, DHES, SSG, Attn: 
Julie Brown, CMS-2134-P, 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

[[Page 58696]]

Building, Washington, DC 20503, Attn: Brenda Aguilar.

V. Regulatory Impact Analysis

A. Introduction

    We have examined the impact of this proposed rule as required by 
Executive Order (EO) 12866, the Unfunded Mandates Act of 1995, and the 
Regulatory Flexibility Act (RFA) (Pub. L. 96-354). EO 12866 directs 
agencies to assess all costs and benefits of available regulatory 
alternatives and, if regulation is necessary, to select regulatory 
approaches that maximize net benefits (including potential economic, 
environmental, public health and safety effects, distributive impacts, 
and equity). A regulatory impact analysis (RIA) must be prepared for 
major rules with economically significant effects ($100 million or more 
in any one year). We consider this a major rule and provide 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 identified approximately 28 States with State plan 
amendments that may provide for payments to non-State government-owned 
or operated hospitals for inpatient or outpatient services in excess of 
the 100 percent UPL. These plans currently account for approximately 
$3.1 billion in Federal spending annually. This estimate is based on 
State-reported Federal fiscal information submitted with State plan 
amendments and State expenditure information, where available. In 
addition, we expect that, absent rulemaking, additional States would 
submit amendments to increase spending above the 100 percent UPL in the 
future. Estimates of these increased costs, both current and future, 
are included in the President's FY 2002 Medicaid budget baseline. Based 
on these budget estimates, we estimate that removing the higher UPL for 
non-State government-owned or operated hospitals would reduce potential 
Federal costs by about $9 billion over fiscal years 2002 through 2006.

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 other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$5 million to $25 million (see 65 FR 69432) or less annually. For 
purposes of the RFA, all hospitals 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 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 believe the removal of the higher UPL proposed in this rule may 
have a significant impact on small entities, including rural hospitals. 
Although the rules published on January 12, 2001 would allow States to 
make higher payments to non-State government-owned or operated 
hospitals, States had made higher payments to these providers under the 
prior rules. Arguably, these hospitals may have developed a reasonable 
reliance on the higher payments. Nevertheless, we believe the impact of 
this rule will be largely mitigated due to several factors. First, 
payment methodologies in excess of the January 2001 final rule may 
qualify for one of the transition periods described in Secs. 447.272(e) 
and 447.321(e). State payment methodologies that qualify for one of the 
transition periods would continue to qualify under this rule; the only 
difference is that payments to non-State government-owned or operated 
hospitals must be reduced over the transition period to a 100 percent 
UPL rather than a 150 percent UPL. In addition, the OIG has issued 
several reports demonstrating that hospitals transfer the bulk of the 
higher payments to the States. Since the hospitals are not retaining 
the funds available as a result of this higher UPL, those funds are 
neither furthering their special mission nor ensuring continued access 
to these facilities for the Medicaid population.
    We invite public comments on the possible effects that this 
proposed rule would have on small entities in general and on small 
rural hospitals in particular.

D. The Unfunded Mandates Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires 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 private sector, of $100 million. Because this 
proposed rule does not mandate any new spending requirements or costs, 
but rather limits aggregate payments to a group of hospitals, 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 proposed rule in any way imposes 
substantial direct compliance costs on State and local governments or 
preempts or supersedes State or local law.

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 reasons set forth in the preamble, the Centers for Medicare and 
Medicaid Services proposes to amend 42 CFR part 447 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. Amend Sec. 447.272 as follows:
    a. Revise paragraph (b).
    b. Remove paragraph (c)(1).
    c. Redesignate paragraph (c)(2) as (c)(1).
    d. Redesignate paragraph (c)(3) as (c)(2).
    e. Revise paragraph (d).
    f. Revise paragraph (e)(1)(ii).
    g. Redesignate paragraph (e)(2)(iii) as (e)(2)(iv).
    h. Redesignate paragraph (e)(2)(ii)(C)(8) as paragraph (e)(2)(iii).
    i. Revise paragraph (f).


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

* * * * *
    (b) General rules. (1) Upper payment limit refers to a reasonable 
estimate of

[[Page 58697]]

the amount that would be paid for the services furnished by the group 
of facilities under Medicare payment principles in subchapter B of this 
chapter.
    (2) Except as provided in paragraph (c) of this section, aggregate 
Medicaid payments to a group of facilities within one of the categories 
described in paragraph (a) of this section may not exceed the upper 
payment limit described in paragraph (b)(1) of this section.
* * * * *
    (d) Compliance dates. Except as permitted under paragraph (e) of 
this section, a State must comply with the upper payment limit 
described in paragraph (b)(1) of this section by one of the following 
dates:
    (1) For non-State government-owned or operated hospitals--[the 
effective date of the final rule].
    (1) For all other facilities--March 13, 2001.
    (e) Transition periods--* * *
    (1) * * *
    (ii) UPL stands for the upper payment limit described in paragraph 
(b)(1) of this section for the referenced year.
* * * * *
    (f) Reporting requirements for payments during the transition 
periods. States that are eligible for a transition period described in 
paragraph (e) of this section, and that make payments that exceed the 
upper payment limit under paragraph (b)(1) of this section, must report 
annually the following information to CMS:
    (1) The total Medicaid payments made to each facility for services 
furnished during the entire State fiscal year.
    (2) A reasonable estimate of the amount that would be paid for the 
services furnished by the facility under Medicare payment principles.
    3.Amend Sec. 447.321 as follows:
    a. Revise paragraphs (b) through (d).
    b. Revise paragraph (e)(1)(ii).
    c. Redesignate paragraph (e)(2)(iii) as (e)(2)(iv).
    d. Redesignate paragraph (e)(2)(ii)(C)(8) as paragraph (e)(2)(iii).
    e. Revise paragraph (f).


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

* * * * *
    (b) General rules. (1) Upper payment limit refers to a reasonable 
estimate of the amount that would be paid for the services furnished by 
the group of facilities under Medicare payment principles in subchapter 
B of this chapter.
    (2) Except as provided in paragraph (c) of this section, aggregate 
Medicaid payments to a group of facilities within one of the categories 
described in paragraph (a) of this section may not exceed the upper 
payment limit described in paragraph (b)(1) of this section.
    (c) Exception--Indian Health Services and tribal facilities. The 
limitation in paragraph (b) of this section does not apply to Indian 
Health Services facilities and tribal facilities that are funded 
through the Indian Self-Determination and Education Assistance Act 
(Public Law 93-638).
    (d) Compliance dates. Except as permitted under paragraph (e) of 
this section, a State must comply with the upper payment limit 
described in paragraph (b)(1) of this section by one of the following 
dates:
    (1) For non-State government-owned or operated hospitals--[the 
effective date of the final rule].
    (2) For all other facilities--March 13, 2001.
    (e) Transition periods--* * *
    (1) * * *
    (ii) UPL stands for the upper payment limit described in paragraph 
(b)(1) of this section for the referenced year.
* * * * *
    (f) Reporting requirements for payments during the transition 
periods. States that are eligible for a transition period described in 
paragraph (e) of this section, and that make payments that exceed the 
limit under paragraph (b)(1) of this section, must report annually the 
following information to CMS:
    (1) The total Medicaid payments made to each facility for services 
furnished during the entire State fiscal year.
    (2) A reasonable estimate of the amount that would be paid for the 
services furnished by the facility under Medicare payment principles.

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


    Dated: October 16, 2001.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.

    Approved: November 6, 2001.
Tommy G. Thompson,
Secretary.
[FR Doc. 01-29327 Filed 11-20-01; 11:00 am]
BILLING CODE 4120-01-P