[Federal Register Volume 67, Number 13 (Friday, January 18, 2002)]
[Rules and Regulations]
[Pages 2602-2611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1482]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 447

[CMS-2134-F]
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:  Final rule.

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SUMMARY: This final rule modifies the Medicaid upper payment limit 
(UPL) 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 final 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

[[Page 2603]]

payments unrelated to actual covered Medicaid services.

EFFECTIVE DATE: These regulations are effective on March 19, 2002.

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

SUPPLEMENTARY INFORMATION:

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 ensure 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 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 payments to these public hospitals needed a higher UPL 
because of their important role in serving the Medicaid population.
    Based on further analysis, we do not believe that a higher UPL is 
necessary to achieve the objective of assuring access for Medicaid 
patients to the services of public hospitals. Our rationale is partly 
based on the following:
     We believe that the 100 percent UPL is more than 
sufficient to ensure adequate access to services for Medicaid 
beneficiaries at public hospitals. Under this limit, States may pay 
public providers up to 100 percent of a reasonable estimate of what 
Medicare would have paid for services provided to Medicaid 
beneficiaries. States also retain some flexibility to make enhanced 
payments to selected public hospitals under the aggregate limit.
     We do not believe that the higher payments are necessarily 
being used to further the mission of these hospitals or their role in 
serving Medicaid patients. The OIG has issued several reports 
demonstrating that a portion of the enhanced payments made as part of 
the UPL process 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). In 
cases for which hospitals did retain UPL-related enhanced payments, the 
OIG found that these same hospitals either did not receive 
disproportionate share hospital (DSH) payments or if they did, 
typically returned the DSH payments directly back to the State through 
intergovernmental transfers. We believe that Medicaid provisions 
permitting enhanced payments to disproportionate share hospitals should 
be sufficient to ensure that Medicaid beneficiaries have access to the 
services of these hospitals.
     Many of the public safety net hospitals affected by this 
rule qualify as DSH hospitals. The Medicare, Medicaid, and SCHIP 
Benefits Improvement and Protection Act of 2000 (BIPA), enacted on 
December 21, 2000, provides additional funding to public hospitals by 
increasing the hospital-specific DSH limits originally set under the 
Omnibus Budget Reconciliation Act of 1993. States will have the ability 
to make Medicaid DSH payments to public hospitals up to 175 percent of 
a hospital's reasonable costs of treating the uninsured and Medicaid 
beneficiaries for a period of two State fiscal years beginning after 
September 30, 2002.
     We wish to restore payment equity among hospital providers 
and across other provider types.
    Furthermore, the OIG stated in a report dated September 11, 2001 
that the need for the higher UPL for non-State government-owned or 
operated hospitals has not been adequately supported through an 
analysis of these hospitals' financial operations. Since the public 
hospitals are not retaining all of the funds available under the UPL or 
DSH program, we believe the higher UPL is neither furthering their 
special mission nor ensuring continued access to these facilities for 
the Medicaid population. Instead, the main result is that the Federal 
government is effectively paying more than its share of State Medicaid 
expenditures.

II. Provisions of the Proposed Regulations

    On November 23, 2001, we published a proposed rule in the Federal 
Register (66 FR 58694) proposing to lower the UPL for non-State 
government-owned or operated hospitals from 150 percent to 100 percent. 
The proposed rule is part of this Administration's efforts to promote 
fiscal integrity to the Medicaid program and restore the appropriate 
balance between the Federal Government and States with respect to 
funding the Medicaid program. In the November 2001 proposed rule, we 
proposed to revise Secs. 447.272(c) and 447.321(c) to remove the 
exception in paragraph (c)(1) regarding payments to non-State 
government-owned or operated hospitals. In Sec. 447.272(c), we proposed 
to 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). We also proposed to 
revise the compliance dates described in Secs. 447.272(d) and 
447.321(d) to make clear that States would need to comply with the UPL 
for these non-State government-owned or operated hospitals as of the 
effective date of the final rule.
    In addition to eliminating the higher UPL, we proposed conforming 
technical changes to Secs. 447.272(b) and 447.321(b) that would clarify 
the single UPL standard generally applicable to aggregate payments to 
each group of facilities, including non-State government-owned or 
operated hospitals. This proposal would not change the substantive 
standard that aggregate payments would be limited to a reasonable 
estimate of the amount that would be paid for the services furnished by 
the group of facilities under Medicare payment principles. Except as 
permitted under the transition periods, payments under an approved 
State plan would need to be reduced to comply with this limit as of the 
effective date of the final rule. We stated in the preamble of the 
proposed rule that we would not approve any State plan amendments that 
would allow payments in excess of this limit as of the effective date 
of the final rule. And we referenced a letter to State Medicaid 
Directors issued November 20, 2001, in which we indicated that we did 
not intend to approve any amendments submitted after the publication 
date of the proposed rule that would provide for payments that exceed 
those permitted under this proposed rule because we did not believe 
that States should have any reasonable reliance that such plan 
amendments would be approved.
    We did not propose any change to the standards for determining 
transition periods; thus there would be no change

[[Page 2604]]

in the State payment methodologies that qualified for a transition 
described in Secs. 447.272(e) and 447.321(e). 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. As noted above, we proposed a compliance provision at 
Secs. 447.272(d) and 447.321(d) that would require that 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 also proposed some minor technical changes to Secs. 447.272 and 
447.321 redesignating paragraph (e)(2)(ii)(C)(8) regarding when a 
reduction begins as paragraph (e)(2)(iii). We also proposed to 
redesignate paragraph (e)(2)(iii) as (e)(2)(iv).
    We also proposed to remove Sec. 447.272(f)(1)(i) and (f)(1)(ii) and 
Sec. 447.321(f)(1)(i) and (f)(1)(ii), which describe the reporting 
requirements for non-State government-owned or operated hospitals, and 
retain paragraph (f)(1) that describes 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. Analysis of and Responses to Public Comments

    We received approximately 200 timely comments in response to the 
November 23, 2001 proposed rule. We received letters from State 
government officials, county government organizations, beneficiary 
organizations, health care providers and provider organizations, and 
private citizens. We reviewed each comment and grouped like or related 
comments. The comments and our responses are summarized below.

Support for Eliminating the 150 Percent UPL

    Comment: Several commenters expressed support for removing the 150 
percent UPL for inpatient and outpatient hospital services furnished by 
non-State government-owned or operated facilities, stating that one 
group of providers should not have a financial benefit over another 
group of providers who provide the same type of services.
    Response: We agree. Our intent in this rule is to treat all 
facilities equally, and apply the same aggregate UPL to each group of 
facilities, regardless of who owns or operates the facilities.

Support for Retaining the 150 Percent UPL

    Comment: Several commenters urged us to retain the 150 percent UPL 
and not publish this final rule.
    Response: We believe that the 150 percent provision is not being 
used to increase real payments to hospitals but instead to replace 
State funds with Federal funds. We have not accepted this comment 
because this rule is critical for maintaining the fiscal integrity of 
the Medicaid program and ensuring that all facilities are treated 
equally under Federal Medicaid UPL regulations.
    Comment: One commenter urged us to withdraw the rule and submit a 
report to the Congress on how future changes would impact public 
hospitals.
    Response: Reports from the OIG demonstrate that, in many cases, 
higher upper payment limits are not being used to support the mission 
of public hospitals. As a result, we believe that the impact of this 
rule will not be severe for many hospitals, as they have not kept all 
of the funds generated by the upper payment limits. Moreover, as noted 
elsewhere in this rule, we are not making any changes to Medicaid DSH 
payments, which are designed to be the primary vehicle for supporting 
hospitals that serve a large number of indigent or uninsured patients. 
The expected impact on hospitals is discussed more fully in the 
Regulatory Impact Analysis in section VI of this final rule.
    Comment: Several commenters expressed concern about the effect of 
this rule on the health care safety net in specific States. They 
indicated that a reduction in funds resulting from this final rule 
would cause hospitals to cut services or close altogether. Further, 
commenters indicated this rule would cut access to critically needed 
health services for the uninsured, including immigrants and working 
families. One commenter pointed out that the reduction in reimbursement 
rates would produce a crisis in health care in one State, which would 
result in many more serious illnesses and deaths across that State. 
Another commenter expressed particular concern with the impact of the 
rule on children's hospitals.
    Response: This rule would permit States to reimburse hospitals for 
100 percent of their reasonable costs of providing care to Medicaid 
patients, based on a reasonable estimate of what Medicare would have 
paid for services provided to Medicaid patients. Although we previously 
believed a higher UPL was necessary to ensure the availability of 
safety net facilities, we have concluded that a 100 percent UPL will 
achieve that purpose because it is adequate to pay hospitals their 
reasonable costs of serving Medicaid patients. States also have the 
ability to pay additional Medicaid payments to safety-net hospitals and 
receive Federal funding under the Medicaid disproportionate share 
hospital program. The statutory authority for such payments permits 
States to recognize those hospitals that treat a high number of 
Medicaid and low-income patients by increasing Medicaid payments to 
those hospitals that qualify.
    Comment: One commenter noted that the 150 percent UPL was adopted 
by us in the January 12, 2001 regulation to help mitigate the impact of 
reduced Federal Medicaid funding available to public hospitals. The 
commenter was concerned that this modification would withdraw Federal 
funds available to help States with the special problems facing these 
hospitals.
    Response: For those States that have relied on Federal funds 
generated through UPL payments to assist public hospitals, relief can 
be sought from two sources. First, this rule does not remove the 
transition periods set forth in the January 12, 2001 final regulation 
for those States and hospitals that have relied on the funding 
available under the UPL for a number of years. Second, the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA), enacted on December 21, 2000, provides additional funding to 
public hospitals by increasing the hospital-specific disproportionate 
share hospital limits originally set under the Omnibus Budget 
Reconciliation Act of 1993. States will have the ability to make 
Medicaid disproportionate share hospital payments to public hospitals 
up to 175 percent of a hospital's reasonable costs of treating the 
uninsured and Medicaid beneficiaries for a period of two State fiscal 
years beginning after September 30, 2002 and receive Federal matching 
funds for these higher DSH payments.
    Comment: Several commenters pointed out that in the wake of 
September 11, 2001, rising unemployment will not only increase the 
number of Medicaid beneficiaries and indigents but will also reduce 
State tax revenues needed to finance Medicaid costs. Other commenters 
further added that the decrease is

[[Page 2605]]

inappropriate given the increased demands being made on hospitals since 
September 11, 2001. Another commenter voiced the opinion that issuing 
this rule is contrary to democratic views and will exacerbate the 
social problems of our highly diverse society.
    Response: We recognize that the events of September 11, 2001 have 
affected many Americans and caused States to incur costs not otherwise 
anticipated. We want to stress that this rule addresses only the 
Federal responsibility to assist States to pay for health care services 
provided to Medicaid beneficiaries at public hospitals. This rule is 
not intended to have an adverse effect on reimbursement for Medicaid 
services provided to Medicaid beneficiaries. Under this rule, States 
will retain the flexibility to pay these facilities up to 100 percent 
of a reasonable estimate of what Medicare would have paid for services 
provided to Medicaid beneficiaries. If the number or severity of 
Medicaid beneficiaries increases for whatever reason, the payment that 
can be made consistent with the UPL will likewise increase commensurate 
with the reasonable cost of serving the Medicaid population in each 
State. While we understand the situation of States that are faced with 
reduced budgets and strained tax revenues in the current national 
economic climate, we want to point out that the Congress established 
the Medicaid program as a joint Federal and State partnership, where 
each party shares in the financial responsibility of providing care to 
Medicaid beneficiaries.
    Comment: One commenter noted that this rule will have a significant 
negative impact on the State's continued ability to draw down Federal 
funds, and, therefore, will be detrimental to all health and human 
services.
    Response: Under this rule, States will be able to receive Federal 
funding for hospital expenditures incurred on behalf of Medicaid-
eligibles, as permitted under Federal law. While the rule will limit 
States' ability to receive Federal funding for excessive payments, we 
believe States will retain flexibility to set fair and appropriate 
payment rates to public hospitals.
    Comment: Several commenters stated that the 150 percent UPL is part 
of an agreement between Congressional leaders, CMS, and the Office of 
Management and Budget (OMB). The agreement aimed to protect the fragile 
network of health care services for low-income individuals. It is 
neither prudent nor fair to change the rules so quickly and nullify an 
agreement that was supposed to help ensure health care for those in 
need.
    Response: We have a responsibility to interpret and apply the 
provisions of the Medicaid statute, including the requirement at 
section 1902(a)(30)(A) of the Social Security Act that payments under 
State plans must be consistent with efficiency, economy and quality of 
care. Whether or not any particular individuals had an agreement in the 
past about how this requirement should apply is not at issue.
    Comment: One commenter suggested that we add a requirement that 
public hospitals have a net gain of at least two-thirds of the 
additional Federal funds collected under hospital-based UPL plans in 
order to ensure that public hospitals are, in fact, primary 
beneficiaries of any UPL arrangements.
    Response: It is not clear what the commenter believes would be the 
legal authority for CMS to limit a hospital's use of its own funds. 
Furthermore, while the suggested approach allows public hospitals to 
retain the Federal funds, it does not limit other public hospital 
revenues from being transferred from the hospital to the State 
government. Federal funds, once received by the hospital, are fungible. 
We do not believe this alternative would increase the net funding 
available to these hospitals, nor do we believe that this alternative 
would improve access to hospital services for Medicaid beneficiaries. 
We do not believe this alternative would decrease the Federal share of 
the Medicaid program expenditures for these hospitals. Therefore, we 
believe the reduction of the UPL from 150 percent to 100 percent will 
be sufficient to maintain the fiscal integrity of the Medicaid Program 
and ensure that all facilities are treated equally under Federal 
Medicaid UPL regulations.
    Comment: One commenter noted that the Congress, in passing BIPA, in 
effect required us to retain the 150 percent UPL for non-State 
government-owned or operated hospitals. The new proposed rule lowering 
the UPL is clearly contrary to the intent of the Congress in passing 
section 705 of BIPA because the Congress clearly wanted to provide a 
transition period for States down to the 150 percent UPL without 
causing economic dislocations to non-State government-owned hospitals.
    Response: We do not agree that the statute at section 705(a) of 
BIPA requires that we retain the 150 percent UPL forever simply because 
it was in the October 10, 2000 proposed rule. Section 705 of BIPA 
required that we publish a rule based on the proposed rule, but did not 
remove agency discretion as to the contents of the final rule except to 
the extent of requiring a transition period not specified in the 
proposed rule. We published that final rule, fulfilling those BIPA 
requirements. Section 705 of BIPA did not preclude the agency from 
revisiting and revising its rule.
    Comment: Several commenters indicated that our timing could not be 
worse with this rule given the economic turndown, workforce downsizing, 
and Medicaid experiencing a financial deficit due to a rise in health 
care costs. One commenter expressed concern that this rule would make 
it difficult for hospitals to attract and keep quality workers.
    Response: This rule allows States to pay hospitals up to 100 
percent of the reasonable costs of serving Medicaid patients, based on 
a reasonable estimate of what Medicare would have paid for the services 
provided to Medicaid patients. Also, as noted in an earlier response, 
if the number or severity of Medicaid beneficiaries increases, for 
whatever reason, the payment that can be made consistent with the UPL 
will likewise increase commensurate with the reasonable cost of serving 
the Medicaid population in each State.
    Comment: One commenter noted that President Bush wants more funding 
for the military, but, at the same time, is willing to slash the 
country's public health care system. The commenter viewed this policy 
as indicating a lack of compassion for the country's poor. Another 
commenter considers it irresponsible for the Department and the 
Administration to be considering a rule change that is sure to have 
inhumane and tragic results.
    Response: This rule is not a statement of public policy on funding 
for this nation's health care system. This rule also does not intend to 
cut funds to care for the country's poor, but is intended to promote 
fiscal integrity and restore an appropriate balance between the Federal 
government and States with respect to funding the Medicaid program. 
Since the publication of the January 12, 2001 rule, many States have 
increased payments to non-State government-owned hospitals and 
requested hospitals transfer a portion of those payments back to the 
State, county, or local governments or used Federal monies to supplant 
State monies for these payments. Therefore, these enhanced payments are 
not being used by the hospital to provide additional services to 
Medicaid beneficiaries, but are being transferred back to the State 
government for purposes not necessarily related to providing Medicaid 
services to Medicaid beneficiaries.

[[Page 2606]]

    Comment: One commenter recommended that we leave the 150 percent 
UPL intact for those States that transfer the Federal funds, through 
intergovernmental transfers, to the public hospitals and not back into 
the State general fund. Another commenter urged us to create an 
exception to the 100 percent UPL for those States that operate under 
cost-neutral waivers.
    Response: Because of the administrative difficulty in identifying 
and tracking Federal funds once the State draws down the Federal share 
for Medicaid expenditures, it is unrealistic to consider implementing a 
regulation that permits the 150 percent UPL to remain for some States, 
but eliminates it for others. Furthermore, the reduction to a 100 
percent UPL applies to all States, regardless of whether they operate 
under cost neutral waivers, except to the extent that the State is 
entitled to a transition period, discussed in detail below.
    Comment: One commenter noted that the 150 percent limit should 
remain and that CMS has no basis for the exclusion of long term care 
facilities from consideration for a more flexible UPL. Additionally, 
this commenter requested that the 150 percent UPL be expanded to 
include Medicaid payments to nursing facilities.
    Response: Modifying the upper payment limit for nursing home 
facilities is outside the scope of this rule and contrary to our intent 
to preserve the fiscal integrity of the Medicaid program. Therefore, we 
do not accept this comment.

Intergovernmental Transfers

    Comment: One commenter pointed out that some States have used 
intergovernmental transfers (IGT) of funds to take advantage of the 
flexibility in past and current UPL rules to draw down excess Federal 
dollars. The commenter recommended that we should adopt rules that will 
prevent States from requiring hospitals to transfer a sizable portion 
of enhanced payments back to the State for other purposes. At the same 
time, the commenter pointed out that limiting a State's ability to 
finance its Medicaid program using IGT payments may result in reduced 
access to services for Medicaid beneficiaries. Other commenters noted 
that a regulation to require non-State government-owned or operated 
hospitals to retain their Medicaid funding would be more prudent.
    Response: Under section 1903(w)(6)(A) of the Social Security Act, 
the Congress limited authority to regulate States' certain uses of 
IGTs. We have clear authority to limit the State payment levels that 
are not consistent with efficiency, economy, and quality of care 
because they exceed the amount appropriate for the Medicaid services 
being furnished. These limits are a reasonable measure to protect the 
overall fiscal integrity of the Federal Medicaid program.
    Comment: The proposed rule, by lowering the UPL to 100 percent of 
what reasonable Medicare payments would be, effectively eliminates the 
use of intergovernmental transfers and thus permits the Secretary to do 
indirectly what section 1903(w)(6) of the Act prohibits the Secretary 
from doing directly.
    Response: We are not restricting the States' use of funds 
transferred or certified from units of government. This reduction in 
the UPL restricts the States' payment to non-State government-owned or 
operated hospitals. The State still maintains control as to what 
government funding sources it may use to make Medicaid payments.

Transition Periods

    Comment: One commenter noted that the transition periods permitted 
under previous rules should be eliminated or reduced.
    Response: We are retaining the transition periods outlined in 
previously published rules in this final rule. We continue to believe 
that States that have had longstanding reliance on these funds need 
time to find other funding sources to replace the money generated by 
the UPL payment mechanisms. However, we want to reiterate our position 
with regard to States that have had payment methodologies in effect 
that provide for payments to non-State government-owned or operated 
hospitals up to the 150 percent UPL. These States were not previously 
entitled to a transition period and regardless of the effective date of 
such payment methodologies, we are not establishing a new transition 
period during which these States may make payments in excess of the 100 
percent UPL. We have modified the regulation text at Secs. 447.272(e) 
and 447.321(e) to clarify that States with payment methodologies that 
provide for payments to non-State government-owned or operated 
hospitals up to the 150 percent UPL do not qualify for a transition 
period. Such States must reduce such payments to comply with the 100 
percent UPL as of the effective date of this rule.
    Comment: Several commenters pointed out that States have already 
factored Medicaid monies gained through the 150 percent UPL into their 
State budgets for health care expenditures. Other commenters pointed 
out that at the very least States that relied on the final rule in 
developing their biennial budgets should be afforded a transition. 
Several commenters further noted that it is unfair to allow transition 
periods for some facilities to come into compliance with the 100 
percent UPL, but not permit States that recently began using the 150 
percent UPL to use similar transition periods. They believe it unfairly 
penalizes States that have more recently used the 150 percent UPL 
funds. Several commenters also noted that not allowing a transition 
period from the 150 percent UPL to the 100 percent UPL is arbitrary and 
capricious.
    Response: Although we acknowledge that States may have established 
budgets based on the 150 percent UPL, the higher UPL has only been in 
effect since March 2001. The impact of the reduced funding available to 
public hospitals through the rule published on January 12, 2001 is 
mitigated by the transition periods contained in that rule, as well as 
those in the rule published on September 5, 2001. Furthermore, the 
transition periods contained in prior regulations apply equally to all 
States and all State payment methodologies. The transition periods are 
designed to mitigate the impact of the creation of new categories of 
providers subject to an aggregate 100 percent UPL. All States that meet 
the requirements of one or more transition periods will be able to 
reduce their payments gradually based on the schedules in the 
transition periods. However, as previously noted, the 150 percent UPL 
has only been in place since March 2001, and, therefore, States have 
not developed the same reasonable reliance on that higher UPL as they 
have on payments that were in place for several years. In the absence 
of any reasonable reliance on higher payment levels, we do not agree 
that additional modification of the transition periods is required.
    Comment: One commenter requested that we clarify our intention in 
applying the 100 percent UPL to States that qualify for a transition 
period.
    Response: For States that qualify for the 5 and 8 year transition 
periods, the maximum amount allowable during each transition period 
will be based on a percentage of the 100 percent UPL during each year. 
For example, during the 8-year transition period, for State FY 2006, a 
State may pay up to the 100 percent UPL for State FY 2006, plus 55 
percent of the State's excess payment above 100 percent during the base 
year. Had we not published this rule, the State would be able to pay up 
to the 150

[[Page 2607]]

percent UPL for State FY 2006, plus 55 percent of the State's excess 
payment above 150 percent during the base year. For States that qualify 
for the 2-year transition period, payments must be reduced to the 100 
percent UPL as of October 1, 2002.

Reporting Requirements

    Comment: One commenter pointed out that the 150 percent UPL was put 
in place less than one year ago. When the higher UPL was established, 
we also created requirements for States to report to us how they were 
spending Medicaid funds under the 150 percent UPL. The commenter 
recommended that we delay implementing a reduction in the 150 percent 
UPL until we have evaluated those reports. Another commenter 
recommended that we allow more time to evaluate the effects of the 
January 12, 2001 final rule to allow a more balanced response to any 
legitimate concerns that might be found to exist.
    Response: Our reporting requirements are not sufficiently detailed 
to allow us to evaluate State spending in the manner suggested by the 
commenters. Regardless, our decision to reduce the UPL for public 
hospitals to 100 percent is not based on the reporting requirements 
associated with the higher UPL. Based on a number of detailed reports 
by the OIG, it has become clear that Federal funding being claimed for 
excessive payments was not always being used by the public hospitals 
themselves; instead a portion of the Federal funding was being used to 
substitute for State funding. This is clearly inappropriate in the 
context of a joint Federal-State program and we do not see any reason 
to delay reducing the UPL to a level that would limit these abuses.
    Comment: One commenter suggested that if additional reporting is 
required, the staffing for preparing the data and reports should be 
eligible for enhanced Federal match at 90 percent due to the extensive 
additional workload. Another commenter urged that the reporting 
requirements be strengthened to include the level of IGTs or other 
funds provided by or on behalf of health care providers in UPL 
arrangements.
    Response: We have evaluated the impact of the reporting 
requirements in the regulatory impact section below. As noted in a 
previous comment, we are decreasing the reporting requirements in this 
regulation. As we also previously noted, this rule does not address the 
States' abilities to transfer funds. Accordingly, such a reporting 
requirement would have no bearing on the intent of this final rule.

Impact on State Plan Amendments

    Commenter: One commenter has asked what effect this final rule will 
have on those 150 percent UPL State plans submitted before publication 
of the proposed rule, but which have not been approved.
    Response: We reviewed and approved numerous State plans submitted 
before we issued the proposed rule that permitted 150 percent UPL 
payments. These amendments were reviewed based upon the current 
regulation in effect at the time of review. Unless these amendments 
qualify for a transition period, however, as of the effective date of 
this rule, no payments may be made that exceed the revised UPL. The 
requirements contained in this regulation will not take effect until 60 
days after the publication of the regulation and, at that time, we will 
disapprove any pending amendments that would provide for payments that 
exceed the UPL in effect. Any new State plan amendments submitted on or 
after the effective date will be disapproved to the extent that 
payments would exceed the revised UPL.
    Commenter: One commenter stated that States with already approved 
State plans that allow UPL payments up to 150 percent should be 
exempted from the proposed rule.
    Response: We can not legally exempt from this rule States with 
approved State plan amendments supporting a higher UPL. We will handle 
all States equally with respect to the UPL. We can and have allowed 
States that qualify for transition periods to continue to have those 
transition periods at a lower level of Federal funding.

Miscellaneous

    Comment: Several commenters indicated that we should consider the 
number of proposals the OIG has made including requiring annual audits 
of UPL calculations; providing definitive guidance on calculating the 
UPL that is uniform to all States; and requiring States to demonstrate 
that the enhanced payments are actually made available to the 
facilities and that these payments are for approved Medicaid services 
only. Another commenter indicated that we have an obligation to analyze 
the problem much more thoroughly and exercise our already broad 
authority to control the UPL problem using more appropriate methods 
targeted to the situation. For example, we could issue guidelines to 
clarify how States are actually calculating their upper payment limits 
and that Medicaid payments are reasonable and are being retained by the 
provider. Other commenters suggested alternatives to issuing a final 
rule. For example, we could reinstate the previous practice of 
requiring States to submit assurances that the UPL has not been 
exceeded.
    Response: We want to curtail unnecessary spending in a way that 
results in the least amount of burden administratively on the States 
and the Federal government. The quickest way to reduce unnecessary 
spending is to stop the funding stream soon after the States begin to 
rely on it. In addition, we are considering increasing our oversight 
activities with respect to evaluating States' enhanced payments. The 
majority of the State plan proposals submitted since the effective date 
of the January 12, 2001 rule required hospitals to either fund the 
State's share of the costs of the 150 percent UPL payment or transfer 
part of the UPL payment back to the State or local government. In our 
view, the 100 percent UPL is adequate reimbursement as long as the 
States allow hospitals to retain the Medicaid payment. Furthermore, we 
do not see how creating a requirement that States submit assurances 
would result in the savings anticipated in this final rule.
    Comment: One commenter suggested that abuses of the system be 
corrected on a case-by-case basis instead of by imposition of a broad 
based policy.
    Response: We feel strongly that the problem being corrected in this 
rule is of national importance and is most appropriately addressed by 
this rule, rather than pursuing abuses based on other authorities on a 
case-by-case basis. As noted earlier, we want to limit any unnecessary 
spending that would result in burdensome administrative proceedings for 
the States and the Federal government. To track and evaluate each case 
of possible abuse would also require additional resources not currently 
available.
    Comment: One commenter suggested that we have not met the 
requirements of the Administrative Procedure Act (APA) in publishing 
this rule. The commenter noted that relevant case law regarding the APA 
permits an agency to change a regulation if it can demonstrate good 
cause for making the change and can clearly explain the reasons for its 
departure from its prior stance. The commenter noted that before the 
January 12, 2001 rule took effect, the President announced a proposal 
to modify this UPL. The commenter believes we cannot articulate a 
reasonable basis for our policy reversal and, as a result, we cannot 
meet the requirements of the APA.
    Response: We disagree. In publishing this rule, we have adhered to 
the law. In publishing this rule, we have based

[[Page 2608]]

our actions on a review of the OIG reports pertaining to UPL payments 
as well as our own review of the new State plan amendments submitted 
after the January 2001 rule took effect and our further analysis of the 
requirements of the Medicaid statute. This additional information and 
analysis underlay the President's proposal to modify the UPL, and the 
proposal has been promulgated using full notice and comment procedures. 
Therefore, this regulatory action to modify the UPL does not violate 
the APA.
    Comment: One commenter stated that in attempting to implement the 
proposed regulation immediately, we are violating rulemaking 
requirements for the effective date of a regulation. In addition, the 
commenter believes that we are attempting to evade the rulemaking 
requirements contained in Executive Order 12866 by failing to make a 
serious effort to evaluate existing law and regulations.
    Response: We have not implemented these proposed regulations to 
date, nor do we have any intention of so doing until the effective date 
stated in this rule. This effective date is consistent with all 
requirements of law. Furthermore the results intended to be achieved by 
this rule are fully consistent with the Medicaid statute and we believe 
are necessary to ensure the fiscal integrity of the Medicaid program. 
The Medicaid statute contains a formula for the Federal and State 
shares of expenditures; as explained above, the 150 percent UPL has 
been a means for States to effectively claim a higher Federal share 
than warranted. The payments that States are permitted to make to 
hospitals consistent with the revised UPL are sufficient to pay the 
full reasonable costs to hospitals of serving the Medicaid population, 
and will assure access to those hospitals for Medicaid beneficiaries. 
The revised UPL will assure that payments will be consistent with 
``efficiency, economy and quality of care'' as required by section 
1902(a)(30)(A) of the Social Security Act. The Medicaid statute has 
specific provisions for the additional payments to assist 
disproportionate share hospitals but does not contemplate other general 
assistance to hospitals, or use of excessive payments as mechanisms to 
finance general State obligations. In section VI below, we set forth 
our full regulatory impact analysis.

IV. Provisions of the Final Regulations

    We are adopting the provisions of the regulations text in the 
November 23, 2001 proposed rule as final. In response to comments, we 
have modified Secs. 447.272(e) and 447.321(e) to clarify that States 
with payment methodologies that provide for payments to non-State 
government-owned or operated hospitals up to the 150 percent of the UPL 
do not qualify for a transition period.

V. Collection of Information Requirements

    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.
    Therefore, we have solicited public comment on each of these issues 
for the information collection requirements 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 Sec. 447.272(e), and that make payments that exceed the 
limit under Sec. 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 Sec. 447.321(e), and that make payments that exceed the 
limit under Sec. 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 
report, 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 revising these requirements by eliminating the reporting 
requirement that States report hospital expenditures up to the 150 
percent UPL, consistent with its elimination in this final rule. This 
would reduce the reporting burden by 31 reports (for the 31 States 
noted in section VI.B of this final rule) and 248 hours of burden.
    We 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. We plan to submit a revised 
request for approval to OMB shortly that incorporates the elimination 
of the reporting requirement that States report hospital expenditures 
up to 150 percent of the UPL. This change will not become effective 
until approved by OMB.

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 Reform 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

[[Page 2609]]

($100 million or more in any one year). We consider this a major rule 
and provide an analysis below.

B. Overall Impact

    We have identified approximately 31 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 
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 reduces potential 
Federal costs by about $9 billion over fiscal years 2002 through 2006.

C. Impact on Small Entities and Rural Hospitals

    The RFA 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 entities, including small rural hospitals. This analysis must 
conform to the provisions of section 604 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.
    The purpose of this rule is to promote fiscal integrity to the 
Medicaid program and restore an appropriate balance between the Federal 
government and States with respect to funding the Medicaid program. 
This rule is necessary because, as the OIG concluded in a report dated 
September 11, 2001, States' use of intergovernmental transfers as part 
of enhanced payment programs was a financing mechanism designed to 
maximize Federal Medicaid reimbursements, thus effectively avoiding 
Federal/State matching requirements.
    We believe the UPL in this final rule may potentially have a 
significant impact on small entities, including rural hospitals. 
Nationwide, we believe there are approximately 1,275 non-State 
government-owned or operated hospitals that could potentially be 
affected by this rule. We included facilities in all 50 States in this 
estimate because although not every State is currently making enhanced 
payments to non-State government-owned or operated hospitals, this rule 
will prevent new proposals from all States in the future. We believe 
that the 100 percent payment limit permits States to set fair and 
appropriate rates to non-State government-owned or operated hospitals 
for services provided to Medicaid beneficiaries. Even if States were 
paying rates to public hospitals to help subsidize the cost of care to 
non-Medicaid eligible individuals, the impact of this final rule will 
be mitigated due to several factors:
     First, if these hospitals are treating large numbers of 
indigent patients, they should be eligible to qualify as a 
disproportionate share hospital. Under both the Medicaid and Medicare 
program, supplemental funding is available to assist hospitals that 
serve a disproportionate share of indigent patients. In Federal fiscal 
year 2000, the Federal government provided more than $8.4 billion in 
financial assistance to safety net hospitals through the Medicaid DSH 
program. As noted previously, the Congress provided additional funding 
to public safety net hospitals by increasing the hospital-specific DSH 
limits from 100 percent to 175 percent of a hospital's reasonable costs 
of treating the uninsured and Medicaid beneficiaries for a period of 
two fiscal years beginning after September 30, 2002.
     Second, payment methodologies in excess of the January 12, 
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 final 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. 
Currently, we believe that two States qualify for the 8-year transition 
period, four States for the 5-year transition period, and two States 
for the 2-year transition period. From 2002 through 2006, these States 
will require approximately $2.9 billion because of the transition 
periods allowed for in the rule.
     Third, the OIG issued a report on September 11, 2001 
stating that the higher UPL for non-State government-owned or operated 
hospitals has not been adequately supported through an analysis of 
these hospitals' financial operations. To the extent that States now 
pay providers efficient rates that are retained by these providers, we 
do not believe States will be able to further reduce these rates.
    We received comments on the impact analysis stating that we did not 
adequately consider the impact on these entities and that in fact 
monies paid under the 150 percent UPL were in fact retained by these 
facilities. The commenters also noted that the OIG did not specifically 
look at the 150 percent UPL. In addition, commenters noted that CMS did 
not effectively analyze the effects of the 150 percent UPL before 
issuing this new rule.
    We believe that the OIG reports confirmed our subsequent analysis 
that States did not use these excess funds as part of the proper State 
and Federal match for the Medicaid program for any facilities, 
including non-State government-owned and operated hospitals. In fact, 
the OIG concluded that even in those cases where UPL enhanced payments 
were retained by public hospitals, these hospitals would instead return 
the majority of any Medicaid DSH payments to their State via 
intergovernmental transfers. States appear to have been replacing DSH 
payments with UPL enhanced payments, even though Medicaid DSH payments 
are specifically intended to help hospitals that provide care to a 
large number of Medicaid beneficiaries and uninsured patients.

D. Other Alternatives Considered

    Section 1902(a)(30) of the Act requires in part that Medicaid 
service payments be consistent with efficiency and economy. In addition 
to the interpretation we are providing in this final rule, we 
considered several other alternatives to ensure that Medicaid service 
payments are consistent with efficiency and economy. In this section, 
we will explain these other alternatives and why we did not select 
them.

[[Page 2610]]

1. Maintain a Higher Upper Limit for Non-State Government-Owned or 
Operated Facilities
    Under this option, we would set the upper payment limit for non-
State government-owned or operated hospitals at a level between 100 
percent and 150 percent. There are several reasons for not pursuing 
this option. As we have stated earlier, we believe that payments above 
the 100 percent UPL have resulted in excessive payments to these 
hospitals that have either been returned to the State via 
intergovernmental transfers or used to replace DSH funding returned to 
the State. The information available to date indicates that States are 
combining higher payments to public hospitals with intergovernmental 
transfers to effectively raise their Federal match rate. Furthermore, 
both the Medicaid and Medicare program include disproportionate share 
programs that are intended to assist facilities in providing care and 
services to indigent patients.
2. ``Grandfathering'' Existing Arrangements
    Under this option, we would not approve any new plan amendments 
after the effective date of the final rule but would allow those that 
have been approved to continue operating. This would permit States that 
are currently making excessive payments to non-State government-owned 
or operated hospitals to continue making those payments indefinitely. 
However, allowing some States to permanently continue making excessive 
payments solely because they were approved before this rule is 
published and effective would be inconsistent with our responsibility 
to administer the Medicaid program in an equitable manner.
3. Create a Facility-Specific Upper Payment Limit
    Under this option, Medicaid spending would be limited to a 
provider-specific application of Medicare payment principles. FFP would 
not be available on the amount of Medicaid service payments in excess 
of what a provider would have been paid using Medicare payment 
principles. These limits would be applied to all hospitals, or just to 
public hospitals where the incentives for overpayment are significant. 
While a facility-specific limitation may be the most effective method 
to ensure State service payments are consistent with economy and 
efficiency, implementation of such an option would require significant 
additional reporting and recordkeeping requirements to verify 
compliance.
    We believe that the transition periods provided to States in the 
January 12, 2001 rule, the 2-year increase in the DSH payment limit for 
public safety net hospitals enacted by the Congress, and the 
elimination of any reporting requirements on hospitals, should minimize 
the significant economic impact on small entities.

E. The Unfunded Mandates Reform 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 $110 million. Because this 
final 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.

F. 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 in which some States are 
very interested. 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.

G. 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 amends 42 CFR, chapter IV, 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. Add paragraph (e)(2)(v).
    j. Revise paragraph (f).
    The addition and revisions read as follows:


Sec. 447.272  Inpatient 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.
* * * * *
    (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--March 19, 
2002.
    (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.
* * * * *
    (2) General rules. * * *
    (v) A State with an approved State plan amendment payment provision 
that makes payments up to 150 percent of the UPL described in paragraph 
(b)(1) of this section to providers described in

[[Page 2611]]

paragraph (a)(2) of this section does not qualify for a transition 
period.
    (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. Add paragraph (e)(2)(v).
    f. Revise paragraph (f).
    The addition and revisions read as follows:


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--March 19, 
2002.
    (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.
* * * * *
    (2) General rules.* * *
    (v) A State with an approved State plan amendment payment provision 
that makes payments up to 150 percent of the UPL described in paragraph 
(b)(1) of this section to providers described in paragraph (a)(2) of 
this section does not qualify for a transition period.
    (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: January 14, 2002.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: January 15, 2002.
Tommy G. Thompson,
Secretary.
[FR Doc. 02-1482 Filed 1-17-02; 8:45 am]
BILLING CODE 4120-01-P