[Federal Register Volume 67, Number 115 (Friday, June 14, 2002)]
[Rules and Regulations]
[Pages 40989-41116]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14747]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

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

[CMS-2104-F]
RIN 0938-AK96


Medicaid Program; Medicaid Managed Care: New Provisions

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

ACTION: Final rule.

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SUMMARY: This final rule amends the Medicaid regulations to implement 
provisions of the Balanced Budget Act of 1997 (BBA) that allow the 
States greater flexibility by permitting them to amend their State plan 
to require certain categories of Medicaid beneficiaries to enroll in 
managed care entities without obtaining waivers if beneficiary choice 
is provided; establish new beneficiary protections in areas such as 
quality assurance, grievance rights, and coverage of emergency 
services; and eliminate certain requirements viewed by State agencies 
as impediments to the growth of managed care programs, such as, the 
enrollment composition requirement, the right to disenroll without 
cause at any time, and the prohibition against enrollee cost-sharing.

EFFECTIVE DATE: These regulations are effective on August 13, 2002. 
States will have until June 16, 2003, to bring all aspects of their 
State managed care program (that is, contracts, waivers, State plan 
amendments and State operations) into compliance with the final rule 
provisions.

FOR FURTHER INFORMATION CONTACT:

Subparts A and B--Bruce Johnson, (410) 786-0615.
Subpart C--Kristin Fan, (410) 786-4581.
Subpart D--Deborah Larwood, (410) 786-9500.
Subpart F--Tim Roe, (410) 786-2006.
Subpart H--Donna Schmidt, (410) 786-5532.
Subpart I--Tim Roe, (410) 786-2006.
Subpart J--Bruce Johnson, (410) 786-0615.

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I. Background

A. General

    In 1965, amendments to the Social Security Act (the Act) 
established the Medicaid program as a joint Federal and State program 
for providing financial assistance to individuals with low incomes to 
enable them to receive medical care. Under the Medicaid program, each 
State establishes its own eligibility standards, benefits packages, 
payment rates and program administration in accordance with certain 
Federal statutory and regulatory requirements. The provisions of each 
State's Medicaid program are described in the State's Medicaid ``State 
plan'' that we must approve. In addition to approving State plans and 
monitoring States for compliance with Federal Medicaid laws, the 
Federal role also includes providing matching funds to State agencies 
to pay for a portion of the costs of providing health care to Medicaid 
beneficiaries. Medicaid beneficiaries typically include low-income 
children and their families, pregnant women, individuals age 65 and 
older, and individuals with disabilities. (Throughout this preamble, we 
use the term ``beneficiaries'' to mean ``individuals eligible for and 
receiving Medicaid benefits.'' The term ``recipients'' in the 
regulations text has the same meaning as the term ``beneficiary.'')
    When the Medicaid program was created, coverage typically was 
provided through reimbursements by the State agency to health care 
providers who submitted claims for payment after they provided health 
care services to Medicaid beneficiaries. This reimbursement arrangement 
is referred to as ``fee-for-service'' (FFS) payment. Before 1982, 99 
percent of Medicaid beneficiaries received Medicaid coverage through 
fee-for-service arrangements. Since 1982, State agencies increasingly 
have provided Medicaid coverage through contracts with managed care 
organizations (MCOs), such as health maintenance organizations (HMOs). 
Through these contracts an MCO is paid a fixed, prospective, monthly 
payment for each beneficiary enrolled with the entity for health 
coverage. This payment approach is referred to as ``capitation.'' 
Beneficiaries enrolled in capitated MCOs are required to receive health 
care services provided under the MCO's contract, through the MCO that 
receives the capitation payment. The Omnibus Budget Reconciliation Act 
(OBRA) of 1981 (Pub. L. 97-35 enacted on August 13, 1981) allowed State 
agencies to mandate that Medicaid beneficiaries enroll in MCOs, which 
increased the use of MCOs. In most States, mandatory enrollment takes 
place for at least certain categories of beneficiaries. To achieve this 
mandatory enrollment, before the enactment of the Balanced Budget Act 
(BBA) of 1997 (Pub. L. 105-33, enacted on August 5, 1997), States were 
required to obtain a waiver of a Medicaid statutory requirement for 
beneficiary ``freedom of choice'' of providers. (State programs that 
offered beneficiaries voluntary enrollment in MCOs do not require these 
waivers.) As a result, in 1997, just before the passage of the BBA, 
almost 8.5 million Medicaid beneficiaries, or 43 percent of all 
Medicaid beneficiaries, were enrolled in MCOs for a comprehensive array 
of Medicaid services. Some of these beneficiaries and additional 
Medicaid beneficiaries were enrolled in other organizations that 
received capitated payment for a limited array of services, such as 
behavioral health or dental services. These organizations that receive 
capitation payment for a limited array of services are referred to as 
``prepaid health plans (PHPs).''
    While the Act was further amended in the 1980s and in 1990 to 
address certain

[[Page 40990]]

aspects of Medicaid managed care, the BBA represents the first 
comprehensive revision to Federal statutes governing Medicaid managed 
care in over a decade. In general, Chapter One (subtitle H) of the BBA 
significantly renovated the Medicaid managed care program by modifying 
Federal statute to: (1) Allow States to mandate the enrollment of 
certain Medicaid beneficiaries into MCOs without having to first seek a 
waiver of Federal statutory requirements; (2) eliminate requirements on 
the composition of enrollment in MCOs that had not been proven to be 
effective; (3) apply consumer protections that were receiving 
widespread acceptance in the commercial and Medicare marketplaces to 
Medicaid beneficiaries; for example, consumer information standards and 
standards for access to services; and (4) apply the advances and 
developments in health care quality improvement that are in widespread 
use in the private sector to Medicaid managed care programs. 
Specifically, sections 4701 through 4710 of the BBA provisions: (1) 
Reduce requirements for State agencies to obtain waivers to implement 
certain managed care programs; (2) eliminate enrollment composition 
requirements for managed care contracts; (3) increase beneficiary 
protections for enrollees in Medicaid managed care entities; (4) 
improve quality assurance; (5) establish solvency standards; (6) 
protect against fraud and abuse; (7) permit a period of guaranteed 
eligibility for Medicaid beneficiaries; and (8) improve certain 
administrative features of State managed care programs.
    We have already implemented provisions of the BBA that did not 
require regulations. CMS provided guidance on these provisions through 
the issuance of State Medicaid Director letters, which are listed 
below. These letters can be found on the CMS website at www.hcfa.gov/medicaid/letters/.

                      State Medicaid Director Letters on Managed Care Provisions of the BBA
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       Section of the Act issued                    Subject                               Date
----------------------------------------------------------------------------------------------------------------
1932(a)(1)............................  State Plan Option for Managed   December 17, 1997.
                                         Care.
1932(b)(1)............................  Specification of Benefits.....  December 17, 1997.
1932(d)(2)............................  Marketing Restrictions........  December 30, 1997.
1932(b)(6), 1128B(d)(1),                Miscellaneous Managed Care      December 30, 1997.
 1124(a)(2)(A), 1932(d)(3), 1903(i),     Provisions.
 1916(a)(2)(D), 1916(b)(2)(D), and
 1903(m)(1)(C).
1932(a)(1)(B), 1932(a)(3), and          Definition of a managed care    January 14, 1998.
 1903(m)(2)(A).                          entity, Choice, Repeal of 75/
                                         25, and Approval Threshold.
1932(c)(2) and 1903(a)(3)(C)..........  External Quality Review.......  January 20, 1998.
1932(a)(4)............................  Enrollment, Termination, and    January 21, 1998.
                                         Default Assignment.
1905(t) and 1905(a)(25)...............  PCCM Services Without Waiver..  January 21, 1998.
1932(e)...............................  Sanctions for Noncompliance...  February 20, 1998.
1932(a)(5) BBA Section 4710(a)........  Provision of Information &      February 20, 1998.
                                         Effective Dates.
1932(b)(2)............................  Emergency Services............  February 20, 1998.
1932(b)(4)............................  Grievance Procedures..........  February 20, 1998.
1932(d)(1)............................  Debarred Individuals..........  February 20, 1998.
1932(b)(3), 1932(b)(7), and 1932(b)(5)  Enrollee-Provider               February 20, 1998.
                                         Communications,
                                         Antidiscrimination of
                                         Providers, and Adequate
                                         Capacity.
1932(d)(2)............................  Effective Date of Marketing     February 20, 1998.
                                         Restrictions.
1902(e)(2)............................  Guaranteed Eligibility........  March 23, 1998.
BBA Section 4710(c)...................  Application to Waivers........  March 25, 1998.
1932(b)(2)............................  Prudent Layperson Standard....  May 6, 1998.
1932(b)(2)............................  Post-Stabilization Services...  August 5, 1998.
1932(b)...............................  Emergency Services............  April 18, 2000.
----------------------------------------------------------------------------------------------------------------

B. Statutory Basis

    Section 4701 of the BBA enacted section 1932 of the Act, changes 
terminology in title XIX of the Act (most significantly, the BBA uses 
the term ``managed care organization'' to refer to entities previously 
labeled ``health maintenance organizations'', and amends section 
1903(m) to require that MCOs and MCO contracts comply with applicable 
requirements in newly added section 1932 of the Act. Among other 
things, section 1932 of the Act permits States to require most groups 
of Medicaid beneficiaries to enroll in managed care arrangements 
without waiver authority granted under section 1915(b) or 1115(a) of 
the Act. Under the statute before the BBA, a State agency was required 
to obtain Federal authority to waive beneficiary free choice of 
providers in order to restrict their coverage to managed care 
arrangements. Section 1932 also defines the term ``managed care 
entity'' (MCE) to include MCOs and primary care case managers (PCCMs); 
establishes new requirements for managed care enrollment and choice of 
coverage; and requires MCEs and State agencies to provide specified 
information to enrollees and potential enrollees.
    Section 4702 of the BBA amended section 1905 of the Act to provide 
for States to contract with primary care case managers without waiver 
authority. Instead, primary care case management services may be made 
available under a State's Medicaid plan as an optional service.
    Section 4703 of the BBA eliminated a former statutory requirement 
that no more than 75 percent of the enrollees in an MCO be Medicaid or 
Medicare beneficiaries.
    Section 4704 of the BBA created section 1932(b) of the Act to add 
increased protections for those enrolled in managed care arrangements. 
These protections include, the application of a ``prudent layperson's'' 
standard to determine whether emergency room use by a beneficiary was 
appropriate; criteria for showing adequate capacity and services; 
grievance procedures; and protections for enrollees against liability 
for payment of an organization's or provider's debts in the case of 
insolvency.
    Section 4705 of the BBA created section 1932(c) of the Act, which 
requires States to develop and implement quality assessment and 
improvement strategies for their managed care arrangements and to 
provide for external, independent review of managed care activities.

[[Page 40991]]

    Section 4706 of the BBA provided that, with limited exceptions, an 
MCO must meet the same solvency standards set by States for private 
HMOs, or otherwise be licensed or certified by the State as a risk-
bearing entity.
    Section 4707 of the BBA enacted section 1932(d) of the Act to add 
protections against fraud and abuse, such as restrictions on marketing 
and sanctions for noncompliance.
    Section 4708 of the BBA added a number of provisions to the Act to 
improve the administration of managed care arrangements. These include, 
provisions raising the threshold value of managed care contracts that 
require the Secretary's prior approval, and permitting the same 
copayments in MCOs as apply to fee-for-service arrangements.
    Section 4709 of the BBA allows States the option to provide 6 
months of guaranteed eligibility for all individuals enrolled in an 
MCE. Section 4710 of the BBA specifies the effective dates for all the 
provisions identified in sections 4701 through 4709 of the BBA, and 
specifies that these provisions do not apply to the extent they are 
inconsistent with the terms and conditions of waivers under section 
1915(b) or section 1115 of the Act.

C. Federal Register Publications

    On September 29, 1998, we published in the Federal Register (63 FR 
52022) a proposed rule to implement the above provisions of the BBA. In 
that 1998 proposed rule, we also proposed to strengthen regulatory 
requirements of PHPs by incorporating regulatory requirements that 
would otherwise apply only to MCOs. We received over 300 comments on 
the 1998 proposed rule. The comments were extensive and generally 
addressed all sections of that proposed rule. On January 19, 2001, we 
published in the Federal Register (66 FR 6228) a final rule with 
comment period that summarized, and responded to the public comments we 
received on the proposed rule. It also contained additional provisions 
not included in the 1998 proposed rule. Among these were revisions 
eliminating the existing ``upper payment limit'' (UPL) on risk 
capitation payments in Sec. 447.361, and replacing this limit with 
provisions in Sec. 438.6(c) setting forth requirements designed to 
ensure that rates were actuarially sound. We invited comments only on 
these last two changes.
    In a Federal Register notice (66 FR 11546) published on February 
26, 2001, we announced a 60-day delay in the effective date of the 
January 19, 2001 final rule with comment period. This 60-day delay 
postponed the effective date of the rule until June 18, 2001. This 
delay in effective date was necessary to give Department officials the 
opportunity for further review and consideration of the new 
regulations. During that review, we heard from key stakeholders in the 
Medicaid managed care program, including States, advocates for 
beneficiaries, and provider organizations. These parties expressed 
strong (sometimes opposing) views about the regulation. In particular, 
concerns were expressed about the revisions based on public comments we 
received on the proposed rule. Other commenters raised concerns about 
how we chose to implement those provisions in the final rule without 
further opportunity for public comment.
    As a result of these comments, on June 18, 2001, we published a 
final rule in the Federal Register that further delayed the effective 
date of the January 19, 2001 final rule with comment period an 
additional 60 days, from June 18, 2001 until August 17, 2001, (66 FR 
32776) for further review and consideration on the most appropriate way 
to address the concerns expressed by key stakeholders. In response to 
these concerns, on August 20, 2001 we published a new proposed rule in 
the Federal Register. In addition, in order to give us the time to 
consider the public comments and take final action on the new proposed 
rule, we also published in the August 17, 2001 Federal Register an 
interim final rule with comment period that further delayed until 
August 16, 2002, the effective date of the January 2001 final rule with 
comment period.
    The new proposed rule was published to address the concerns that 
were expressed to the Department during our review. After careful 
consideration, we decided the best approach was to make some 
modifications to the January 19, 2001 final rule and republish it as a 
proposed rule. This would enable the public the opportunity to comment 
on all of the provisions and revisions.
    In developing the proposed rule, we were guided by several 
considerations. First, we gave serious attention to all the concerns 
that were communicated to us. Second, we tried to discern when a 
difference of opinion represented different goals or different methods 
of achieving the same goals. Finally, we believed that all commenters 
expressed the same goal, namely: Strong, viable, Medicaid managed care 
programs that deliver high quality health care to Medicaid 
beneficiaries. We note that we have published elsewhere in this Federal 
Register a final rule withdrawing the January 19, 2001 final rule with 
comment period.
    We have drafted the provisions of this final rule in full 
recognition of the statutorily designed structure of the Medicaid 
program as a Federal-State partnership. States are assigned the 
responsibility of designing their State programs, and typically do so 
addressing local, as well as State needs. We have drafted this final 
rule to recognize the responsibilities of the States and the need to 
employ different approaches to achieving the same goal within their 
varying State marketplaces and health care delivery systems.
    Finally, we appreciate that new advances and findings in health 
care, health care quality assessment and improvement, and health 
services research unfold on an almost daily basis. In many instances, 
States have been at the forefront of implementing these new 
developments and innovations. We have sought to standardize, through 
regulation, those practices that have been found to be necessary to the 
delivery of high quality health care. We simultaneously have sought to 
continue to allow States, in consultation with their State and local 
partners and customers (beneficiaries), to determine the best approach 
to implementing their managed care program when there is an absence of 
clear evidence about the superiority of a given approach.
    Overall, we recognize the great diversity and sometimes ``special 
needs'' of Medicaid beneficiaries. While the greatest numbers (54 
percent) of Medicaid beneficiaries are children, 11 percent are age 65 
or older. Medicaid also serves as a significant source of health care 
for individuals with disabilities and conditions that place them at 
risk of developing disabilities. In 1997, more than 6 million children 
and adults were eligible for Medicaid on the basis of a physical, 
mental, or cognitive disability. The Medicaid program insures more than 
half of all people with Acquired Immune Deficiency Syndrome (AIDS) in 
this country and up to 90 percent of children with AIDS. Medicaid also 
is a significant source of health care coverage for individuals with 
serious and persistent mental illness, and children in foster care. Our 
report to the Congress, ``Safeguards for Individuals with Special 
Health Care Needs Enrolled in Medicaid Managed Care'' (November 6, 
2000), summarized existing evidence on effective practices in caring 
for individuals with special health care needs.
    The regulations in this final rule are mostly set forth as new 
provisions in part 438. All new managed care regulations created under 
the authority

[[Page 40992]]

of the BBA, other sections of existing Medicaid regulations pertaining 
to managed care, and appropriate cross references will appear in this 
new part. By creating this new part, we aim to help users of the 
regulations to better understand the overall regulatory framework for 
managed care.

D. Overview of Medicaid Managed Care

    Medicaid managed care programs have been in existence almost since 
the inception of the Medicaid program in 1965. In New York State, 
Medicaid beneficiaries were enrolled in the Health Insurance Plan of 
Greater New York beginning in 1967. The State of Washington began 
contracting with Group Health of Puget Sound in 1970, and, by 1972, 
various regional operations of Kaiser-Permanente served Medicaid 
beneficiaries in three different States. Initially, there were no 
statutory or regulatory provisions specifically addressing the use of 
managed care by State agencies.
    As a result of the increasing use of managed care in Medicaid, 
Medicare and the private sector, statutory provisions and regulations 
have since been adopted to specifically address Medicaid managed care. 
In 1976, the Health Maintenance Organization Act put forth the first 
specific Federal requirements for Medicaid contracts with HMOs or 
comparable organizations, by essentially requiring, with some 
exceptions, that contracts with entities to provide ``comprehensive'' 
specified services, be entered into only with Federally qualified HMOs. 
By 1981, little more than 1 percent of Medicaid beneficiaries were 
enrolled in managed care. Further legislative and regulatory changes 
made in 1981 and 1982 made possible more widespread use of managed care 
by State agencies but were also accompanied by increased requirements 
in some areas (For example, OBRA 1981 required that Medicaid enrollees 
be allowed to voluntarily disenroll without cause from HMOs. This was 
subsequently amended to permit a 6-month lock-in for individuals 
enrolled in federally qualified HMOs.) Until the enactment of the BBA, 
modification of the statutes and regulations governing Medicaid managed 
care after OBRA 1981 and the Tax Equity and Fiscal Responsibility Act 
of 1982 (TEFRA) (Pub. L. 97-248, enacted on September 3, 1982) has 
occurred in a piecemeal manner. The BBA represents the first major 
revision of the statutes governing Medicaid managed care in over a 
decade.
    The period from 1981 to the present has seen significant changes in 
Medicaid managed care programs. While only approximately 250,000 
Medicaid beneficiaries were enrolled in managed care in 1981, by 1997 
this number had increased to over 15 million. As of June 2000, 
approximately 56 percent of the entire Medicaid population received at 
least some services through an MCO, PHP, or a primary care case 
management arrangement. In the last decade, a number of studies and 
reports have documented that State agencies need both flexibility and 
assistance to implement new approaches and tools to effectively 
administer their contracts with MCOs. A 1997 General Accounting Office 
Report entitled, ``Medicaid Managed Care--Challenge of Holding Plans 
Accountable Requires Greater State Effort,'' indicated the need for 
priority attention to beneficiary information and education, and access 
to care and quality monitoring.
    As noted above, Medicaid managed care contracts were originally 
entered into by some State agencies without any specific statutory 
provision for these arrangements. When the Congress acted to regulate 
managed care arrangements, it limited the applicability of these 
statutory requirements to contracts that were comprehensive in the 
services they covered.
    Specifically, the statutory requirements enacted by the Congress in 
section 1903(m) of the Act have always applied to contracts for 
inpatient services plus any one of the other services specified in 
section 1903(m)(2)(A) of the Act, or for any three of the non-inpatient 
services specified in section 1903(m)(2)(A) of the Act. Managed care 
contracts that were less than comprehensive remained exempt from all 
statutory managed care requirements. In recognition of this fact, we 
have in the past exercised our authority under section 1902(a)(4) of 
the Act to specify ``methods of administration'' that were ``necessary 
for proper and efficient administration'' to impose regulatory 
requirements on entities that were exempt from the statutory 
requirements in section 1903(m), either because they provided less than 
comprehensive services or because they were specifically exempted by 
the Congress from complying with section 1903(m) requirements. These 
entities were called ``prepaid health plans,'' or ``PHPs.''
    The regulatory requirements we applied to PHPs were not as 
stringent in many areas as those under section 1903(m). For example, 
while PHPs were subject to an enrollment composition requirement like 
comprehensive HMO contractors, the PHP enrollment composition 
requirement could be waived by the State for ``good cause.'' PHPs also 
were not subject to the section 1903(m) requirement that beneficiaries 
have the right to disenroll without cause at any time, and 
beneficiaries enrolled in PHPs thus could have their ability to 
disenroll restricted under section 1915(b) waiver authority, (where the 
right to disenroll required under section 1903(m) could not be waived).
    In part, because of the less stringent requirements that applied to 
PHPs, there has been a substantial growth in PHP enrollment. Some of 
these PHPs are single service managed care plans (for example, 
behavioral health plans) and their enrollees are also enrolled in other 
managed care plans for their routine primary and acute care. Other 
PHPs, such as the Health Insurance Plan (HIP) of New York, provide a 
full range of services, but were exempted by the Congress from the 
requirements in section 1903(m) of the Act. As discussed more fully 
below, certain PHPs are required to meet most of the provisions that 
apply to MCOs.
    Concurrent with the increasing size of, and need for, stronger 
Medicaid managed care programs, over the last decade we have been 
developing improved tools, techniques, and strategies that State 
agencies can use to strengthen their managed care programs. In 1991, we 
began the Quality Assurance Reform Initiative (QARI) to provide 
technical assistance tools and assistance to State agencies. In 1993, 
we produced a QARI guide entitled, ``A Health Care Quality Improvement 
System for Medicaid Managed Care--A Guide for States,'' which contained 
four areas of guidance for States: (1) A framework for quality 
improvement systems for Medicaid managed care programs; (2) guidelines 
for internal quality assurance programs of Medicaid HMOs and PHPs; (3) 
guidelines for clinical and health services focus areas and use of 
quality indicators and clinical practice guidelines; and (4) guidelines 
for the conduct of external quality reviews conducted under section 
1902(a)(30)(C) of the Act. In 1995, we worked collaboratively with the 
National Committee for Quality Assurance (NCQA) and the American Public 
Human Services Association to produce a Medicaid version of the Health 
Plan Employer Data and Information Set (HEDIS). HEDIS is a standardized 
quality performance measurement system used by private sector 
purchasers of managed care services, which we modified for use by State 
agencies. We contracted with NCQA to develop ``Health Care Quality

[[Page 40993]]

Improvement Studies in Managed Care Settings: Design and Assessment--A 
Guide for State Medicaid Agencies''.
    In 1996, we undertook the Quality Improvement System for Managed 
Care (QISMC) initiative to accomplish several goals: (1) To update the 
1993 QARI guidelines; (2) to develop coordinated Medicare and Medicaid 
quality standards that would reduce duplicative or conflicting efforts; 
(3) to make the most efficient and effective use of recent developments 
in the art and science of quality measurement, while allowing 
sufficient flexibility to incorporate developments in this rapidly 
evolving discipline; and (4) to assist the Federal government and State 
agencies in becoming more effective ``value-based'' purchasers of 
health care for vulnerable populations. In developing QISMC, we worked 
with representatives from, and with tools developed by, health plans, 
State agencies, advocacy organizations, and experts in quality 
measurement and improvement such as the NCQA, the Foundation for 
Accountability (FACCT) and the Joint Commission on the Accreditation of 
Healthcare Organizations. With the assistance of the experts and their 
products, we identified the approaches, tools, and techniques that we 
believed would most effectively measure and improve health care quality 
in managed care. The quality assurance provisions of this final rule 
espouse the same philosophy and goals for performance improvement as 
are reflected in QISMC, but have been modified based on recent 
developments in Medicaid, managed care, and quality assessment and 
improvement. For example, QISMC was written before our report to the 
Congress addressing individuals with special health care needs.
    In 1997, the Agency for Health Care Policy and Research (AHCPR) 
(now, the Agency for Healthcare Research and Quality) produced a set of 
consumer survey instruments and measurement tools under the auspices of 
the Consumer Assessment of Health Plan Study (CAHPS). The CAHPS 
instruments include measures and tools specifically designed for use by 
State agencies. Also in 1997, the George Washington University Center 
for Health Policy Research published a compendium of provisions of 
State contracts with Medicaid managed care organizations. This 
nationwide study of Medicaid managed care contracts has provided 
valuable information that can be used by all State agencies in the 
design and management of their managed care contracts.
    More recently, in 1999, we produced a technical assistance manual 
for State agencies entitled, ``Writing and Designing Print Materials 
for Beneficiaries: A Guide for State Medicaid Agencies.'' This 
technical assistance tool for States was in direct response to the BBA 
statutory provisions calling for dissemination of information to 
Medicaid beneficiaries. A contract with FACCT produced a manual 
describing valid and reliable tools that State agencies can use to 
identify children and adults with special health care needs. In 
addition, a contract with the Center for Health Program Development and 
Management at the University of Maryland Baltimore County will develop 
a guidance manual for States that will describe various approaches to 
using health status-based risk adjustment in making payments to MCOs.
    These and other tools we have in planning stages can be applied to 
the efforts of State agencies to become even more effective in 
purchasing managed care services for Medicaid beneficiaries. This final 
rule provides an opportunity to clarify for MCOs, beneficiaries, and 
State agencies, how these advances in the management and oversight of 
health care can be applied to Medicaid managed care programs.
    Through these regulations, we promote uniform national application 
of knowledge and best practices learned from these initiatives. While 
we promote uniform best practice, the Medicaid statute has always given 
State agencies latitude to design their Medicaid programs, as long as 
they meet certain minimum Federal standards. Current Federal 
requirements in the Medicaid managed care area are imposed either as 
conditions for Federal matching funds to support contracts with MCOs, 
as conditions for receiving a waiver of freedom of choice under section 
1915(b) of the Act, or as conditions for falling within the section 
1932 exception to the freedom of choice requirement in section 
1902(a)(23) of the Act. In the first case, failure to comply with 
section 1932 requirements could result in a disallowance of Federal 
financial participation (FFP) in contract payments. In the latter two 
cases, if the State fails to meet conditions for the section 1932 
exception to the freedom-of-choice requirement in section 1902(a)(23), 
or has its section 1915(b) waiver nonrenewed or terminated for a 
failure to meet waiver conditions, the State agency would be out of 
compliance with the freedom of choice requirement in section 
1902(a)(23), and the State agency would be subject to a compliance 
enforcement action under section 1904 of the Act.
    Because the Medicaid program is a State-administered program 
subject to Federal guidance and rules, Medicaid regulations do not 
generally adopt the same approach to regulating managed care 
organizations as Federal Medicare regulations. Instead, Medicaid rules 
generally regulate State agencies and place requirements on their 
contracts with managed care organizations or managed care programs. 
This final rule adopts this direction in implementing the new 
requirements in the BBA.
    Section 4710(c) of the BBA provided for a time-limited exemption 
from the requirements in sections 4701 through 4710 for approved waiver 
programs or demonstration projects under the authority of sections 1115 
or 1915(b) of the Act. Specifically, the BBA in section 4710(c) 
provided that none of the provisions contained in sections 4701 through 
4710 would affect the terms and conditions of any approved section 
1915(b) waiver or demonstration project under section 1115, as the 
waiver or demonstration project was in effect on the date of the 
enactment of the BBA (that is, August 5, 1997.) We interpreted this 
``grandfather provision'' to apply only for the period for which the 
waiver or demonstration project was approved as of August 5, 1997. 
Thus, at the expiration of any 2-year waiver period under section 
1915(b), or at the end of the period for which a demonstration project 
was approved under section 1115, the grandfather provision in section 
4710(c) would no longer apply.
    In general, during the period approved as of August 5, 1997, any 
provision of a State's approved section 1115 or section 1915(b) waiver 
program that was specifically addressed in the State's waiver proposal, 
statutory waivers, special terms and conditions, operational protocol, 
or other official State policy or procedures approved by us, was not 
affected by the BBA provisions, even if it differed from the BBA 
managed care requirements. As long as the BBA provisions were addressed 
in the State's approved waiver materials, no determination needed to be 
made as to whether the State's policy or procedures meet or exceeded 
the BBA requirements. If the BBA provisions were not addressed, the 
State was required to meet the BBA requirements, except as specified 
below for newly submitted or amended waivers.
    As noted above, under our interpretation, the exemption from the 
BBA requirements applied to section 1915(b) waiver programs only until 
the date that the waiver authority approved or in effect as of August 
5, 1997 expired, which in all cases occurred no later than

[[Page 40994]]

1999. As of the date of the two year section 1915(b) waiver period 
approved on August 5, 1997 expired, the State was required to comply 
with all BBA requirements that in effect.
    In the case of section 1115 demonstrations, while the 
``grandfather'' provision in section 4710(c) only applies until the end 
of the period for which the demonstration project was approved as of 
August 5, 1997, if the demonstration project has been extended under 
the provisions in section 1115(e) of the Act, existing terms and 
conditions inconsistent with BBA requirements are extended for three 
years, nullifying the effect of the ``expiration'' of the grandfather 
provision in section 4710(c). Therefore, any exemptions from the BBA 
requirements to which these programs were entitled under the 
``grandfather provision'' may continue during the period of the 
extended waiver authority.
    The Medicare, Medicaid, and State Child Health Insurance Program 
Benefits Improvement and Protection Act of 2000 (BIPA), enacted on 
December 21, 2000 (Pub. L. 106-554) provided for additional extensions 
of section 1115 health care reform demonstrations, but did not include 
language extending the same terms and conditions through this period. 
Thus, we conclude that provisions of the BBA would apply to the 
demonstrations in these extension periods under BIPA as well as all 
other demonstrations in extensions under any authority other than 
section 1115(e)(2), unless the Secretary uses his discretionary 
authority to waive the requirements.
    For newly submitted or amended section 1915(b) or section 1115 
waivers, the Secretary retains the discretionary authority to waive the 
BBA managed care provisions. Generally, waivers are granted that allow 
States some flexibility in operating their Medicaid programs, while 
promoting the proper and efficient administration of a State's plan. In 
particular, for the BBA provisions related to increased beneficiary 
protections and quality assurance standards, we anticipate that the BBA 
provisions would apply unless a State can demonstrate that a waiver 
program beneficiary protection or quality standard would equal or 
exceed the BBA requirement.

II. Provisions of the Proposed Rule and Analysis of and Response to 
Public Comments

    We received comments from 387 States, national and State 
organizations, health plans, advocacy groups and other individuals on 
the August 20, 2001 proposed rule. The comments were extensive and 
generally pertained to the new rate-setting provisions, the quality 
requirements and the grievance system requirements contained in the 
proposed rule. We carefully reviewed all of the comments and revisited 
the policies contained in the proposed rule that related to the 
comments. This final rule responds to these comments. In the following 
discussion, we present a summary of the proposed provisions and our 
responses to the public comments.
    In the proposed rule, we set forth the new organizational format 
for part 438 as follows:

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

A. General Provisions (Subpart A)

1. Basis and Scope (Proposed Sec. 438.1)
    Section 438.1 of the proposed regulation set forth the basis and 
scope of part 438 including the fact that regulations in this part 
implement authority in sections 1902(a)(4), 1903(m), 1905(t), and 1932 
of the Act. Proposed Sec. 438.1 also briefly described these statutory 
provisions.
2. Definitions (Proposed Secs. 400.203, 438.2, 430.5)
    Sections 400.203, 438.2 and 430.5 of the proposed rule included 
definitions of terms that would apply for purposes of proposed part 
438. In reviewing the definitions in this section of the proposed rule, 
we recognized that the current definition of health insuring 
organization (HIO) is confusing, and not useful to the reader. The 
current definition encompasses entities that also meet the definition 
of managed care organization (MCO), and are subject to MCO 
requirements. This is because the language in section 1903(m)(2)(A) 
contemplates that there would be HIOs that are subject to the 
requirements in that section, including the requirement that the HIO 
meet the definition of MCO. (The introductory clause to the 
requirements in section 1903(m)(2)(A) includes the parenthetical 
``including a health insuring organization.'')
    This language dates to a time when HIOs that arranged for care were 
exempt from the MCO requirements in section 1903(m)(2)(A). 
Specifically, the language was added in 1985 legislation (the 
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)) that 
``grandfathered'' this exemption for HIOs operating before January 1, 
1986. The parenthetical language was designed to make clear that other 
``HIOs'' would be subject to 1903(m)(2)(A) requirements. Because one of 
the requirements of section 1903(m)(2)(A) is meeting the definition of 
MCO, any entity in this latter category would be covered by references 
in the regulations to MCOs. Thus, the term HIO has no legal 
significance for these entities. The term HIO is only relevant insofar 
as an exemption from section 1903(m)(2)(A) uses this term to refer to 
the exempt entity.
    In the Omnibus Budget Reconciliation Act of 1990 (OBRA 90), the 
Congress again used the term HIO, in exempting certain county-operated 
entities in California from section 1903(m)(2)(A) requirements. After 
these amendments, the term HIO is only legally relevant for purposes of 
identifying this new group of exempt entities, and the entities 
grandfathered in COBRA. For this reason, and to avoid confusion, in 
this final rule, we are changing the definition of HIO to refer only to 
these section 1903(m)(2)(A)-exempt entities for which the term has 
continuing legal relevance. This change has no effect on any entities' 
rights or obligations.
    Also among these definitions are new definitions of a ``Prepaid 
Inpatient Health Plan'' (PIHP) and a ``Prepaid Ambulatory Health Plan'' 
(PAHP). These new definitions divide the definition of ``Prepaid Health 
Plan'' (PHP) in the January 19, 2001 final rule into two subcategories 
of PHPs, to which different regulatory requirements would apply in this 
final rule. PIHPs are entities that provide some inpatient services, 
and would be subject to more requirements than PAHPs, which do not 
provide inpatient services. We received the following comments on the 
proposed definitions in the proposed rule, including the new proposed 
definitions of PIHP and PAHP.
    Comment: One commenter expressed concern that the proposed 
definition of ``provider'' included in Sec. 400.203 encompasses all 
entities and individuals engaged in, or arranging for, the delivery of 
a medical service in a managed care delivery system. The commenter 
believed that this broad definition creates a problem when applied in 
proposed Sec. 438.214(b), which requires the credentialing of providers 
who participate with an MCO or PIHP. The commenter contended that 
including all

[[Page 40995]]

ancillary and non-licensed providers under this credentialing 
requirement goes far beyond current industry standards that apply only 
to licensed health professionals such as physicians, psychologists, 
podiatrists, and mid-level practitioners. The commenter suggested 
limiting the scope of the requirements in Sec. 438.214(b) to those 
health professionals that are engaged in the delivery of direct patient 
care and are licensed within their State.
    Response: The definition of ``provider'' as published in our 
proposed rule, mirrors the definition of provider used in the 
Medicare+Choice regulations. However, to further clarify the definition 
in the proposed rule, and to be consistent with the definition of 
``physician'' used in section 1861(r)(1) of the Act, we revised the 
definition of ``provider'' to be ``any individual or entity that is 
engaged in the delivery of health care services and is legally 
authorized to do so by the State in which it delivers the services.'' 
We believe that the proposed definition is correct, and the 
requirements that States have a process for credentialing and 
recredentialing all individuals involved in the delivery of health care 
services is an appropriate beneficiary protection. There is no 
requirement that the process be the same for each provider type within 
a network, only that there be a process in place. Further, this 
definition provides States the flexibility to determine what State 
requirements any provider must meet (for example, licensure and 
certification requirements) in order to provide services under managed 
care arrangement, and allows States, at their option, to include 
licensure or certification requirements imposed by tribal governments.
    Comment: One commenter suggested that we add the definition of 
health care professional in Sec. 438.102 to this section.
    Response: Proposed Sec. 438.102(a) contains the statutory 
definition of health care professional found in section 1932(b)(3)(C) 
of the Act, which specifically applies to the provisions governing 
enrollee-provider communications. However, in light of the fact that 
this term is also used for other purposes throughout part 438, we agree 
with the commenter that the definition of health care professional in 
proposed Sec. 438.102 should be moved to Sec. 438.2, and have done so.
    Comment: A large number of commenters opposed the separation of 
PHPs into PIHPs and PAHPs. Some felt that we had not provided 
sufficient reasons for making this distinction, that the primary 
purpose of the change was to exempt a broad catch-all category of PAHPs 
from regulatory standards, and argued that defining the entity and the 
level of regulation based on the scope of the services provided was not 
logical, and could deny beneficiaries needed protections. These 
commenters felt that this distinction could jeopardize the quality and 
consistency of health care, particularly for women, due to the PAHPs' 
exemption from anti-discrimination provisions, State quality 
strategies, adequate service and capacity requirements and grievance 
and appeal rights. The commenters further noted that the January 19, 
2001 final rule would apply to all PHPs. Several commenters felt that 
the new definitions could lead to gaming by contractors and create an 
incentive for MCOs or PIHPs to carve out various services (for example, 
inpatient hospital services) in order to limit the degree to which they 
are regulated. One commenter suggested that the term PAHP be more 
clearly defined, or limited to a specific set of non-medical or non-
health care services, in order to prevent such carve-outs.
    Some commenters wanted to return to the original PHP definition and 
subject all PHPs to all MCO requirements, while others suggested 
keeping the current PHP definition but allowing for individual rules to 
be relaxed where they are inapplicable.
    Other commenters supported making the distinction between types of 
PHPs and believed that basing this distinction on the scope of services 
is a useful way to distinguish between requirements that are relevant 
to each contracting arrangement, and to provide the flexibility needed 
to appropriately regulate each type of contractor.
    Response: We believe that the distinction between types of PHPs 
established in the proposed rule is appropriate and we will maintain 
the separate definition of PIHP and PAHP in this final rule. There are 
clear differences in terms of the degree of financial risk, contractual 
obligation, scope of services, and capitation rates paid to these 
different types of entities. The distinction between PIHPs and PAHPs 
based upon the scope of services in their contract is modeled after the 
requirement in section 1903(m)(2)(A) of the Act, which defines the 
scope of contracted services that requires an MCO. This scope of 
services is set forth in Sec. 438.2, which defines comprehensive risk 
contract as a risk contract that covers inpatient hospital services and 
any of the following services, or any three or more of the following 
services: (1) Outpatient hospital services; (2) Rural health clinic 
services; (3) FQHC services; (4) Other laboratory and X-ray services; 
(5) Nursing facility (NF) services; (6) Early and periodic screening 
diagnostic, and treatment (EPSDT) services; (7) Family planning 
services; (8) Physician services; or (9) Home health services.
    PHPs were originally designated by regulation as entities that 
incurred risk for a lesser scope of services. Since that time, the PHP 
definition has been expanded to include a scope of services that would 
have required an MCO, except that their contracts covered only a 
portion of inpatient hospital services (for example, inpatient mental 
health services) rather than all inpatient hospital care. These 
entities incurred far greater risk, were obligated to provide a greater 
range of services, and have greater responsibility for the beneficiary 
care than the early PHPs, which were predominantly capitated primary 
care physicians and physician groups at risk for the cost of physician 
and one other outpatient Medicaid service.
    Recognizing that the scope of contractual responsibility for these 
larger PHPs, now designated PIHPs, was far more like the 
responsibilities in MCO contracts, we have imposed most MCO 
requirements on these entities. The PAHP designation allows us to 
impose requirements on this smaller group that are more appropriate to 
the scope of services they are obligated to provide. Not only do we 
believe it is unnecessary to subject prepaid dental plans, 
transportation providers, and capitated primary care case managers to 
the same standards as MCOs and PIHPs, it is not logical to impose the 
same administrative burdens on contractors who receive a fraction of 
the amount in capitation rates that MCOs and PIHPs are paid. Further, 
for these types of entities, access to care could be negatively 
impacted by the imposition of inappropriate levels of administrative 
burdens.
    Further, we do not believe it likely that MCOs and PIHPs that 
contract with States will arbitrarily reduce the benefit package they 
provide in order to limit the degree to which they are regulated. 
First, much of the savings to be achieved from managed care come from 
reductions in the cost of inpatient care for beneficiaries, and a 
contractor would not likely choose to carve-out the source of most of 
their potential savings. Neither is it to the State's advantage to 
permit such carve-outs, since the State would then be obligated to 
assume all responsibilities for coordination of care required under 
Subpart D that would otherwise be the contractor's responsibility.
    Finally, we believe that the distinction is clear between PIHPs and 
PAHPs and MCOs. If an entity has less-

[[Page 40996]]

than a comprehensive risk contract, but has any responsibility for an 
enrollee's inpatient hospital or institutional care, it is a PIHP and 
subject to all PIHP requirements. However, as discussed below, in 
Sec. 438.8 we have expanded the requirements that apply to PAHPs, as 
described in that section.
    Comment: Several commenters felt that many PHPs that provide a 
comprehensive range of services; (for example, outpatient services, 
including primary care, mental health care, reproductive health care, 
and/or HIV services), but do not provide inpatient care should not be 
exempt from the managed care requirements in the proposed rule. One 
commenter asked whether an entity responsible only for behavioral 
health services (inpatient and outpatient) is considered a PIHP.
    Response: In making the distinction between PIHPs and PAHPs, we 
have not changed current policy under which entities that contract for 
a subset of inpatient and outpatient care, as with behavioral health 
carve-outs, do not have comprehensive risk contracts subject to the 
statutory requirements that apply to MCOs. Thus, in answer to the 
commenters' question, such a behavioral health contractor is a PIHP 
(due to its provision of some inpatient services), not an MCO. 
Similarly, the definition of comprehensive risk contract in section 
1903(m)(2)(A) of the Act has not changed, so that an entity that is at 
risk for inpatient hospital services generally, and any one of the 
other specified services, or three or more of the services identified 
in the definition of comprehensive risk contract, falls under the MCO 
requirements in section 1903(m)(2)(A).
    Comment: Several commenters argued that ambulatory and community-
based plans should not be exempt from essential protections, while 
others felt that these programs did not need to be included as PIHPs.
    Response: We are not expanding the PIHP definition to include these 
programs. If these programs are responsible for institutional care, 
they will be subject to PIHP requirements. Otherwise, we believe their 
scope of risk and operations for these programs are more like PAHPs.
    Comment: One commenter believed that the use of the terms PIHP and 
PAHP would permit States to mandate enrollment in PIHPs and PAHPs of 
populations who were exempted from mandatory enrollment in MCOs and 
PCCMs under the authority in section 1932(a).
    Response: The authority in section 1932(a)(1) of the Act and 
proposed Sec. 438.50 permitting States to mandate managed care 
enrollment through a State plan amendment does not extend to certain 
specified groups of beneficiaries who are exempted from having managed 
care enrollment mandated under that provision. In addition, the 
authority in section 1932(a)(1) is limited to mandating enrollment in 
MCOs and PCCMs, and does not give States authority to mandate 
enrollment in either PIHPs or PAHPs, unless the PAHP qualifies as both 
a PCCM and a PAHP. But, this would still not permit the mandatory 
enrollment of the exempted groups under section 1932(a). However, the 
exemption of certain populations from mandatory enrollment under 
section 1932(a)(1) applies only to enrollment under the new authority 
in that section, and did not preclude the mandatory enrollment of these 
groups of beneficiaries in MCOs, PCCMs, PIHPs, or PAHPs under existing 
authority in sections 1115 or 1915(b) of the Act.
    Comment: One commenter believes that the definition of ``primary 
care'' should include services provided by a Master of Social Work, 
psychologist, psychiatrist, physician assistant, advanced registered 
nurse practitioner, or other health care professional.
    Response: The definition of primary care in this section is taken 
from section 1905(t)(4) of the Act, which specifically identifies the 
services that the Congress intended to be included as primary care. We 
do not believe adding the services suggested by the commenter would be 
an appropriate extension of this section of the Act. We note, however, 
that States have the option of using physician assistants, certified 
nurse midwives, and nurse practitioners as primary care case managers, 
although the primary care services they provide would still be as 
defined in this section.
3. Contract Requirements (Proposed Sec. 438.6)
    Proposed Sec. 438.6 set forth rules governing contracts with MCOs, 
PIHPs, PAHPs and PCCMs. Paragraph (a) of proposed Sec. 438.6 required 
the CMS Regional Office to review and approve all MCO, PIHP and PAHP 
contracts, including those that are not subject to the statutory prior 
approval requirement implemented in Sec. 438.806. Paragraph (b) set 
forth the entities with which a State may enter into a comprehensive 
risk contract. Paragraph (c) proposed new rules governing payments 
under risk contracts, to replace the upper payment limit in 
Sec. 447.361. Paragraph (d) contained requirements regarding 
enrollment; that enrollments be accepted in the order of application up 
to capacity limits, that enrollment be voluntary unless specified 
exceptions apply, and that beneficiaries not be discriminated against 
based on health status. Paragraph (e) provided that MCOs, PIHPs, and 
PAHPs can cover services for enrollees in addition to those covered 
under the State plan. Paragraph (f) required that contracts must meet 
the requirements in Sec. 438.6. Paragraph (g) required that risk 
contracts provide that the State and HHS have access to financial 
records of contractors and subcontractors. Paragraph (h) required 
compliance with physician incentive plan requirements in Secs. 422.208 
and 422.210. Paragraph (i) required compliance with advance directive 
requirements. Paragraph (j) provided that with certain exceptions, HIOs 
are subject to MCO requirements. Paragraph (k) proposed new rules from 
section 1905(t)(3) of the Act that apply to contracts with primary care 
case managers. Paragraph (l) and (m) set forth existing requirements 
for subcontracts and enrollees' right to choice of health professional 
to the extent possible and appropriate, respectively. Because of the 
volume of comments we received on this section, we have grouped our 
comments and responses according to the paragraph designation. We note 
that we did not receive comments on paragraphs (a), (b), (d), (h) and 
(j) of this section and are therefore implementing those provisions as 
proposed.
 Payment Under Risk Contracts (Proposed Sec. 438.6(c))

General Comments

    This section proposed new rules to replace the upper payment limit 
(UPL) for risk contracts in Sec. 447.361, which is being repealed as 
part of this final rule. The new rules require actuarial certification 
of capitation rates; specify data elements that must be included in the 
methodology used to set capitation rates; require States to consider 
the costs for individuals with special health care needs or 
catastrophic claims in developing rates; require States to provide 
explanations of risk sharing or incentive methodologies; and impose 
special rules, including a limitation on the amount that can be paid in 
FFP under some of these arrangements.
    Comment: Nearly all commenters expressed strong support for 
replacing the UPL with an actuarial process and methodology 
requirement.
    Response: We appreciate the commenters' support. We have been 
working for several years to move away from the UPL requirement for 
risk-based managed care contracts and appreciates the input it has 
received from a number of sources including States, managed

[[Page 40997]]

care entities, actuaries, and various organizations in this process. 
There was a broad consensus among these parties to eliminate the UPL 
requirement.
    Comment: Commenters wanted us to allocate additional resources to 
ensure that the agency has the necessary expertise to review rates and 
to provide technical assistance to States in order to implement the new 
rate setting process.
    Response: We have been providing training and tools to review 
payment rates under these rules to our regional office personnel who 
are responsible for the review all of the MCO, PIHP, and PAHP risk 
contracts using this new methodology. The rate review checklists to be 
used by our regional offices are available from CMS regional offices. 
Section 1903(k) of the Act specifically authorizes us to provide this 
assistance to States at no cost, although most States have currently 
elected to contract with their own actuaries. If States request this 
assistance as these new requirements are implemented, we will provide 
it.
    Comment: One commenter asked what appeals process is available for 
rate disputes. Another commenter recommended that we establish a 
mechanism to mediate disputes between MCOs and States over rates 
similar to the mediation process currently used in one State, 
involving: (1) Meetings between State and MCO actuaries where there is 
a dispute, during which the parties identify areas of continued 
disagreement; and (2) selection of a mutually acceptable independent 
actuary to mediate the dispute and make his/her (non-binding) findings 
available to the State and MCO.
    Response: Some States have formal processes for appeals or dispute 
resolution on payment rates, while in others there may be a more 
informal process for this purpose. While we support these mechanisms to 
emphasize the partnership between States and MCOs in Medicaid managed 
care, and believe they may help to sustain the viability of these 
programs, we do not believe it would be appropriate for the Federal 
government to impose specific requirements on States. Rather, we 
believe that a State should have the flexibility to provide for the 
processes that works best for that State.
    Comment: A number of commenters believed that State rate setting 
processes should be more open, and that States should be required to 
disclose core data assumptions regarding the State's rate setting 
methodology, utilization data for each rate category, and trend factors 
used. Several other commenters suggested that we require States (other 
than those using a competitive bidding process) to disclose sufficient 
information to permit MCOs to replicate the calculation of proposed 
rates, including the unit cost and utilization assumptions used and 
assumptions used in calculating administrative cost and retention 
factors. These commenters believe that this sharing of information will 
permit informed discussions between States and MCOs in the process and 
increase the continued viability of Medicaid managed care programs.
    Response: We agree that sharing information in a negotiated rate 
setting process to the extent possible is a good way to enhance the 
partnership between States and MCOs and to maintain the viability of a 
State's Medicaid managed care program. However, we recognize that this 
will not always be possible and may not be a preferred contracting 
approach in some markets, even where competitive bidding is not the 
rate setting mechanism used by a State. Consequently, we are not 
willing to impose a Federal requirement that certain information be 
shared, and continue to believe that MCOs, PIHPs, and PAHPs contracting 
with States on a risk basis must make their own independent judgments 
of proposed rates based on their own costs of doing business and their 
understanding of the population to be covered.
    Comment: One commenter asked how States would be required under the 
new rules to make payment adjustments to account for changes in trends 
or new administrative requirements that occur between legislative 
sessions or contract renewals.
    Response: Contracts may be of varying lengths, but any changes to 
the terms of a contract during that period require a contract amendment 
that must be reviewed and approved by us. FFP is available for such 
amended contracts only after both parties have agreed to the changes 
and CMS has approved the contract amendment. We will not require States 
to amend contracts due to changes in such things as trends in inflation 
rates, unless payment rates are changed as a result. However, we 
believe that changes in the services to be provided or the 
administrative requirements in a contract would warrant changes in 
payment rates to reflect the expected impact of the required change in 
services or administration.
    Comment: A commenter asked what would occur if a State refuses to 
pay rates that have been approved by CMS as actuarially sound. The 
commenter wanted to know how we would enforce these rates.
    Response: We only review the rates that are submitted by States as 
part of the contract review process. We believe it would be unlikely 
that States would submit capitation rates for contract approval, and 
then not pay the approved rates. In the event that this were to occur, 
and be documented, the State would be subject to a disallowance of FFP 
for failing to comply with the requirement in section 
1903(m)(2)(A)(iii) that rates be actuarially sound.
    Comment: One commenter was concerned that eliminating the UPL and 
requiring actuarially sound capitation rates may increase the burden if 
States need to continue to calculate a UPL to determine cost 
effectiveness. Another commenter noted that we had indicated in the 
proposed rule that we would issue a revised methodology for determining 
the cost effectiveness of section 1915(b) waivers, and wanted to know 
(1) when waiver applications would be modified to contain the new 
methodology and (2) how States are to document cost effectiveness in 
the interim.
    Response: We do not wish to impose additional burden on States in 
moving from the UPL test to a rule that requires an actuarially sound 
methodology as set forth in this final rule. As the commenter noted, we 
are issuing new cost effectiveness requirements for section 1915(b) 
waiver applications for both new and existing waivers, which will more 
closely correspond to the principles in the new rate setting 
guidelines. We expect to issue new guidelines for cost effectiveness 
before the effective date of this regulation, and will attempt in these 
guidelines to reduce the burden on States in documenting the cost 
effectiveness of these waiver programs. Recognizing the difficulty in 
changing long-standing methodologies in both setting rates and 
documenting cost effectiveness, we will permit States to use either the 
current methodology with its FFS comparison, or the rate setting 
process in this regulation in the period between the effective date of 
these rules and the final implementation date.
    Comment: One commenter asked if we have any guidelines or 
regulations on the length of time FFS data must be retained, since 
these data still have some use in setting capitation rates.
    Response: We agree that FFS data are one of the possible sources 
for establishing base year costs and utilization under this rule. 
However, one of the reasons for moving to the new rate setting rules, 
and away from the UPL requirement, is that FFS data loses its validity 
for this purpose as it becomes older. We are not establishing any rule 
as to the age of data used for rate setting purposes, since we would

[[Page 40998]]

rely on an actuarial certification that the data used had sufficient 
validity for this purpose. For the retention of FFS data in general, 
Sec. 433.32(b) and (c) require States to retain records, such as FFS 
data, for 3 years from the date of submission of a final expenditure 
report (or longer of audit findings have not been resolved). We believe 
that these data have value for rate setting purposes beyond the time 
period they are required to be retained under that regulation.
    Comment: One commenter suggested that requirements for actuarial 
soundness extend to payment rates between MCOs and subcontracting 
providers.
    Response: Except in the case of payments to FQHCs that subcontract 
with MCOs, which are governed by section 1903(m)(2)(A)(ix), we do not 
regulate the payment rates between MCOs and subcontracting providers. 
While section 1903(m)(2)(A)(iii) requires that payments to MCOs be 
actuarially sound, other than in the case of FQHCs, the Congress has 
not established any standards for payments to subcontractors. We 
believe that this is because one of the efficiencies of managed care is 
premised on an MCO's ability to negotiate favorable payment rates with 
network providers. MCOs must pay sufficient rates to guarantee that 
their networks meet the access requirements in subpart C of this final 
rule. We believe that payment rates are adequate to the extent the MCO 
has documented the adequacy of its network.

Definition of Actuarially Sound Capitation Rates

    Comment: Many commenters believed that CMS should go beyond simply 
defining an actuarially sound process, and instead should establish 
prescriptive standards for actuarial soundness. Some commenters 
believed that the definition of ``actuarially sound capitation rates'' 
should include the concept that rates be sufficient to cover the 
reasonable costs of the MCO. Other commenters suggested that we adopt 
the definition of actuarial soundness adopted by the Health Committee 
of the Actuarial Standards Board in the context of the small group 
market, which requires that payments ``are adequate to provide for all 
expected costs, including health benefits, health benefit settlement 
expenses, marketing and administrative expenses, and the cost of 
capital. Another commenter believed the definition of actuarially sound 
rate setting should be replaced with language similar to the following: 
rates are determined using generally accepted actuarial methods based 
on analyses of historical State contractual rates and an MCO's 
experience in providing heath care for the eligible populations, and 
are paid based on legislative allocations for the Medicaid program. 
Several other commenters supported our proposed approach requiring that 
rates be developed using accepted actuarial principles and practices.
    Response: As discussed in detail below, we considered various 
approaches in defining actuarial soundness, but decided that basing the 
definition on a methodology that uses accepted actuarial principles and 
practices, and that is certified by a member of the American Academy of 
Actuaries, is the best approach in that it gives States and actuaries 
maximum flexibility while still ensuring that rates be certified as 
actuarially sound.
    Comment: A number of commenters wanted the actuarial soundness test 
at Sec. 438.6(c)(1)(i) to be revised to require that payment rates be 
adequate to cover the actual cost of services to be provided, and 
wanted us to take a more active role in assuring the adequacy of rates, 
including; (1) Reviewing key components and underlying assumptions of 
the rates, rather than accepting an actuary's certification; (2) 
ensuring proper adjustment and enforcement of the payment rules; (3) 
disapproving rates determined to be inadequate; (4) requiring 
disclosure of rate calculation inputs; and (5) resolving rate 
calculation disputes between MCOs and States. In contrast, several 
other commenters believed that we had gone too far in establishing a 
standard for rate adequacy that would be difficult to administer and 
justify.
    Response: While, as indicated above, there was a consensus among 
commenters on the need to replace the UPL requirement, there were a 
wide variety of opinions among commenters on requirements to replace 
it. In the proposed rule, we sought to strike a balance between merely 
accepting State assurances on capitation rates in risk contracts on one 
hand, and requiring that the amounts of the capitation rates paid in 
each contract meet specific requirements for reasonableness and 
adequacy on the other. Under the former concept, we did not believe 
that we would meet our statutory responsibility to ensure that rates 
are actuarially sound as required under section 1903(m)(2)(A)(iii). 
Under the latter format, we would be establishing standards for 
reasonableness and adequacy of rates, which: (1) Would require that a 
determination be made on every rate cell in each risk contract 
submitted to us for review; (2) would require that we obtain sufficient 
actuarial expertise to review every risk contract in Medicaid managed 
care; and (3) would establish a new ``reasonable and adequate'' payment 
standard for Medicaid managed care when, in the BBA, the Congress 
amended title XIX to eliminate a similar requirement for Medicaid 
payments to institutional providers.
    As a result of these considerations, we have established a 
requirement that payment rates in risk contracts be actuarially sound, 
that is, that they have been developed in accordance with generally 
accepted actuarial principles and practices, are appropriate for the 
populations and services under the contract, and have been certified by 
an actuary as meeting the requirements in this rule and the standards 
of the Actuarial Standards Board. This rule then sets forth the basic 
requirements that States must apply in setting capitation rates, and 
the documentation that States must provide to us to support their rate 
setting process. We believe that by reviewing the process used in 
setting the rates under a risk contract, we will fulfill our regulatory 
responsibilities to the fiscal integrity of the Medicaid program and 
will assure that States have considered all relevant factors in this 
process. We believe that MCOs, PIHPs, and PAHPs, that contract with 
States on a risk basis, are better able to determine whether rates are 
reasonable and adequate, and will do so in deciding whether or not to 
agree to contract or continue to contract with a State to provide 
services as part of a Medicaid managed care program.
    Comment: A commenter believed that we should acknowledge that 
actuarially sound rates may vary between MCOs in the same service area.
    Response: We acknowledge that rates may differ between MCOs in the 
same area for a variety of reasons, but most often when States utilize 
risk adjustment based upon health status or diagnosis.
    Comment: One commenter asked whether the actuarial soundness 
requirement applies only to capitation rates under an entire contract, 
or to each rate cell under the contract.
    Response: The requirement in proposed Sec. 438.6(c)(2)(i) that all 
capitation rates paid under risk contracts and all risk sharing 
mechanisms in the contracts must be actuarially sound applies this 
requirement to all rate cells, as well as the entire contract, and all 
payments made under the contract. This is a change from the UPL 
requirement where individual rate cells within the contract

[[Page 40999]]

could exceed the UPL as long as the entire contract did not exceed the 
UPL. In order to clarify that the requirement for actuarial soundness 
applies to all payments, we are replacing the phrase ``capitation rates 
paid'' in proposed Sec. 438.6(c)(2)(i) with the word ``payments.''
    Comment: One commenter believed that the requirement that rates be 
``appropriate'' for the population and services to be covered under the 
contract to be too vague, and subject to being interpreted by some to 
mean covering the full cost of care at billed charges.
    Response: The term ``appropriate'' as used in this paragraph is 
merely intended to illustrate the requirements that follow in the 
remainder of Sec. 438.6. ``Appropriate for populations covered'' means 
that the rates are based upon specific populations, by eligibility 
category, age, gender, locality, and other distinctions decided by the 
State. ``Appropriate to the services to be covered'' means that the 
rates must be based upon the State plan services to be provided under 
the contract. There is no stated or implied requirement that MCOs be 
reimbursed the full cost of care at billed charges.

Basic Requirements

    Comment: One commenter wanted us to define the term ``actuarial 
basis,'' as used in Sec. 438.06(c)(2)(ii), and provide sample contract 
language to implement this provision.
    Response: ``Actuarial basis'' as used in Sec. 438.06(c)(2)(ii) 
merely refers to the principles and assumptions used by the actuary in 
computing the rates in the contract. We do not believe it is necessary 
to define this term in the text of the regulation.
    Comment: One commenter was concerned about meeting the requirements 
of Sec. 438.6(c)(2)(ii), which provides that the contract must specify 
the capitation rates that are paid. Specifically, the commenter asked 
if States would be able to submit final rates in an addendum to the 
contract when the rates are developed after the rest of the contract is 
implemented.
    Response: In answer to the commenter's question, rates must be part 
of the contract that is approved by us as part of the contract approval 
process that is a pre-condition for FFP Sec. 438.806 in the case of 
comprehensive risk contracts with MCOs. If rates are not yet agreed 
upon between the State and the contractor at the time the remainder of 
the contract is approved, the State could operate under the payment 
rates that were previously approved by us, although FFP would not be 
available in new payment rates until they are approved as well. If the 
contract is a renewal or extension of a previously approved contract, 
FFP could be claimed and payments made based the rates in the 
previously approved contract, until an addendum to that contract with 
new rates and the supporting documentation required by this section of 
the regulations is approved.

Requirements for Actuarially Sound Rates

    Comment: Some commenters believe that we should clarify that this 
provision does not preclude States from using additional elements, such 
as case-rate type payments (for pregnant women or others) and family-
based rate cells as long as they are consistent with other 
requirements.
    Response: The requirements in this section are not meant to be all 
inclusive. States are required either to apply the elements in 
Sec. 438.6(c)(3), or to explain why they are not applicable. Examples 
of reasons that these elements would not be applicable would include 
the State's use of case-rate type methodologies or other rate setting 
methods, that still meet the test for actuarial soundness, or where the 
rate cells broken down to this level are not large enough to be 
statistically valid.
    Comment: Several commenters wanted us to require States to explain 
how they have taken into account: Potential data inaccuracy due to lack 
of historical Medicaid managed care data for a new population or 
service; potential data inaccuracy due to reasonably anticipated under-
reporting; and other similar data shortcomings that may be reasonably 
foreseeable.
    Response: We agree with the commenters that these are important 
factors in determining payment rates. The adjustments required to 
smooth data should include adjustments for incomplete data, whether due 
to incurred-but-not-reported expenditures, delays in claims submission, 
or other factors. In response to this comment, we are adding data 
completion factors to Sec. 438.6(c)(3)(ii) as one of the required data 
smoothing adjustments. However, we believe that this is not the only 
mechanism that could be used to account for unexpected costs of new 
populations or services, and that these issues are better addressed 
through risk adjustment or risk sharing provisions in the contract.
    Comment: Several commenters wanted us to require States to identify 
their method for compensating MCOs for changes in obligations imposed 
on the MCOs during a contract year, so that new requirements cannot be 
imposed while payment rates remain unchanged.
    Response: The terms of a contract must be agreed upon by both 
parties in order for the contract to be in effect, as required by 
Sec. 438.802(a)(2). One option is for the contract to include a term 
providing for an increase in payment in the event there are changes in 
the MCO's obligation (for example, if the contract binds the MCO to 
cover all State plan services, and services are added to a State plan 
mid-year). Absent such a provision, the contract would have to be 
amended in order for payment to be increased to cover new obligations. 
Any such amendment would have to be approved by us. We will not review 
and approve those amendments unless both parties, that is, the State 
and the MCO, PIHP, or PAHP have agreed to the new terms. Thus, we 
believe that the issue of how changes in contractual obligations are 
addressed should be the subject of negotiation between the parties, who 
are in the best position to agree upon an approach that works in their 
situation.
    Comment: One commenter asked whether States will have the 
flexibility to take into account their FFS budgets, and managed care 
budget authority, when developing actuarially sound rates.
    Response: We understand the fact that all Medicaid programs are 
subject to budgets set by the governor and/or the State legislature, 
and that this obviously must be taken into account in negotiating rates 
with MCOs, as well as in deciding whether the State can afford to do 
so. In some cases, there may be insufficient funding to begin or to 
continue a Medicaid managed care program. We are not in a position to 
determine if and when a State may have insufficient funding. The 
Medicaid agency may determine this in advance, or as the result of 
being unable to attract contractors who are willing to operate a 
managed care program for the payment rates that the State is able to 
pay. When contracts are submitted to us for review and approval, the 
determination of whether adequate funding is available has already been 
made, in that the State has an agreement with one or more managed care 
entities and has determined that these entities can meet the 
contractual obligations to be imposed on them. The managed care 
entities have determined that the rates they are to be paid are 
adequate to meet their obligations under the contract. We do not have 
the authority to change the way States budget for their Medicaid 
programs in this final rule. We will use our authority to review and 
approve rates in risk contracts based on the

[[Page 41000]]

actuarial certification and the documentation provided showing that the 
requirements in this section are met.
    Comment: Several commenters asked what sources we will accept as 
base utilization and cost data in determining actuarially sound rates 
(for example, FFS data, encounter data, MCO financial data) and most of 
these commenters believed that the rule should specify that these other 
sources are permissible. Another commenter asked who makes the 
determination as to whether ``costs'' are to be determined by FFS 
history, MCO experience, or other factors.
    Response: A State's FFS data would be the best source of baseline 
data, since they represent the most complete claims history available 
on the population to be covered under managed care, but only to the 
extent that the data are recent enough to be valid for this purpose. 
The fact that there is an increasing number of States that lack recent 
FFS data to use for rate setting is one of the main reasons that it has 
become necessary to repeal the UPL requirement. We agree that other 
sources, such as encounter data, need to be used for this purpose. 
However, we also recognize that not all States have even begun to 
collect encounter data, and that not all of those States that are 
collecting the data have yet developed mechanisms to ensure their 
validity. States without recent FFS history and no validated encounter 
data will need to develop other data sources for this purpose. States 
and their actuaries will have to decide which source of the data to use 
for this purpose, based on which source is determined to have the 
highest degree of reliability.
    Comment: One commenter believed that experience data used to 
develop the base period medical cost should only be from the population 
being rated and categorized by the rate cells used.
    Response: In general, we agree with the commenter that the best 
source of base period data would be the population to be covered under 
the managed care contract, but as indicated above, this is not always 
possible. If the data are not available or usable, States must use 
other data for this purpose.
    Comment: One commenter wanted us to clarify that the phrase 
``derived from the Medicaid population'' at Sec. 438.6(c)(3)(i) means 
those Medicaid beneficiaries enrolled in MCOs. As set forth, this 
provision would permit the use of State FFS cost data, which may have 
understated cost assumptions, and inflation data, especially in the 
area of prescription drugs where MCOs are unable to negotiate prices 
comparable to those available to the States.
    Response: We disagree with the commenter. The phrase ``derived from 
the Medicaid population'' means that the source of the base utilization 
and cost data is the historical utilization and cost data of the 
Medicaid eligibles to be covered under the managed care contract. These 
data may be derived from the FFS history, managed care history, or a 
combination of both. Regardless of the source, adjustments should be 
made to achieve a degree of predictability for the rates that are 
developed. The commenter's example of prescription drug costs 
represents one specific area where the new rate setting rules allow 
greater flexibility in rate setting than permitted previously. Under 
the UPL requirement, capitation rates in a contract could not exceed 
what would have been paid under FFS for the same services provided to a 
comparable population. For the prescription drug component of a 
capitation rate, this amount would have been net of the amount of drug 
rebates received by the State through its FFS system. Under the new 
rules, the component of the capitation rate for prescription drugs will 
not be limited by the UPL.
    Comment: Several commenters wanted CMS to require States to provide 
information on base year costs by primary service category included in 
the contract, such as, pharmaceuticals, hospital, and physician 
services, and to clarify that these data will specifically include unit 
cost and utilization data as separate assumptions, in order to evaluate 
the adequacy of the rates.
    Response: States must report information on base year costs by the 
primary service category, at a minimum, for the primary services 
included in the contract. Further, we agree with the commenter that 
States should use separate assumptions with respect to unit cost and 
utilization data.
    Comment: One commenter believed that the proposed regulation was 
unclear as to the adjustment factors to be used to make base period 
data comparable to the Medicaid population in cases in which data 
specific to the Medicaid population do not exist.
    Response: As discussed above, the best source of data for 
determining base period cost and utilization will have to be determined 
by the State and its actuaries, subject to CMS approval. States will 
also need to determine what adjustments are necessary to make data 
comparable to the Medicaid population if there are no usable Medicaid 
data available. We would expect these adjustments to be based upon a 
comparison of the population whose data are used to the State's 
Medicaid population in terms such as income, demographics, and 
historical medical costs. In instances where non-Medicaid data are 
used, the required actuarial certification will need to include an 
explanation of the adjustments used to make the data comparable.
    Comment: Several commenters suggested that base year costs be 
trended forward by ``medical'' inflation, not just ``inflation'' as 
stated in the proposed rule, and that we should clarify this in the 
regulation text.
    Response: We agree with the commenters, and in response to this 
comment have changed the regulation text at Sec. 438.6(c)(3)(ii) 
accordingly. In making this change, we want to emphasize that the rate 
of medical inflation may be determined from such sources as the medical 
market basket or the State's historical Medicaid costs.
    Comment: Some commenters wanted the administrative adjustment to be 
expanded to require it to reflect an MCO's cost of complying with 
Medicaid managed care requirements in such areas as service delivery, 
reporting, and operational and accountability standards. These 
commenters argued that administrative costs would have to be 
significantly increased to comply with the quality provisions and other 
reporting requirements in this regulation, and that payment rates 
should reflect these costs.
    Response: We agree that the capitation rate should include an 
administrative adjustment that recognizes administrative costs incurred 
by the contractor in providing the services to be delivered under the 
contract. However, we recognize that this adjustment may not 
necessarily fully compensate the contractor for its administrative 
costs under the contract, and potential contractors need to consider 
proposed payment rates in the aggregate, as to whether or not they will 
be sufficient to cover both the cost of services and the administrative 
costs it will incur under the terms of the contract.
    Comment: Several commenters asked that we clarify how the limits in 
proposed Sec. 438.6(c)(4)(ii) (regarding an assurance that all payment 
rates are based only upon services covered under the State plan) apply 
to the adjustments for inflation and administration in paragraph 
(c)(3)(ii), and whether we plan to issue guidelines on acceptable 
adjustment factors and any limits that will be in place.
    Response: The intent of this limitation in Sec. 438.6(c)(4)(ii) is 
to prevent States from obtaining FFP for things such as State-funded 
services for which FFP would not ordinarily be available, by

[[Page 41001]]

including them in an MCO, PIHP, or PAHP contract. This limitation is 
extended to the adjustments in paragraph (c)(3)(ii), so that the only 
administrative costs recognized are those associated with the MCO's, 
PIHP's, or PAHP's provision of State plan services to Medicaid 
enrollees. We do not intend to issue specific guidelines on these 
limits, as we believe that decisions will have to be made on a case-by-
case basis.
    Comment: Several commenters urged us to specify that risk or profit 
levels, along with an administrative component, should be included in 
actuarially sound rates, and that the adjustment requirement in 
Sec. 438.6(c)(3)(ii) is not sufficient to achieve this purpose.
    Response: This is another area where we believe all MCOs, PIHPs, 
and PAHPs which intend to contract with States must consider proposed 
payment rates in the aggregate, as to whether or not the payments will 
be sufficient to cover the cost of all of their contractual obligations 
and their desired risk and profit levels as well. We do not believe it 
would be appropriate to establish standards for risk and profit levels.
    Comment: One commenter believed that there are many other 
adjustments that should be applied beyond those listed in the proposed 
rule, such as adjustments for new procedures or technologies or the 
addition of new Medicaid benefits.
    Response: We agree that there are other appropriate adjustments 
currently used by States in setting their capitation rates, and will 
approve those supported by the accompanying certification and 
documentation as contracts are reviewed and approved. However, we are 
not mandating any additional adjustments at this time.
    For the addition of new Medicaid benefits, however, we believe that 
the inclusion of any additional Medicaid services during the term of a 
contract could either be handled through a contract amendment or a 
contract term that provides for the contingency, subject to CMS 
approval, subject to CMS approval.
    Comment: A number of commenters expressed concerns over the 
requirements in Sec. 438.6(c)(3)(iii) that rate cells be specific to 
the enrolled population by eligibility category, age, gender, and 
locality or region. Some commenters asked whether this provision 
mandates the use of these specific breakouts in developing rate cells, 
and were concerned that requiring rate cells to be broken down to this 
level could result in rates in some small cells that are not 
actuarially sound in States with small populations. Other commenters 
wanted us to clarify that other types of rate cells, such as case rate 
or family-based cells are permissible.
    Response: It is our intent that, to the extent possible and 
practical, rate cells be broken down by these categories. The vast 
majority of capitation rates in Medicaid managed care contracts 
currently use these breakouts. However, we recognize that there are 
valid reasons why this breakout may not be appropriate or possible in a 
particular State--because of such factors as the size of the 
population, or because a decision has been made to use another 
methodology, which still complies with the overall requirement for 
actuarial soundness. For this reason, the introductory language in 
Sec. 438.6(c)(3) requires States to apply the elements in setting their 
capitation rates, ``or explain why they are not applicable.''
    Comment: Several commenters wanted us to specify the type of 
explanation it would accept for a State that does not use these 
adjustments, and quantify the burden on States to comply with this 
provision. One commenter asked whether the explanation could cover an 
entire managed care program, or whether the State had to separately 
justify every region or county where the program operates. One 
commenter wanted us to allow States to use an actuarially appropriate 
method that may include these cells as appropriate, without requiring 
the State to justify its approach during each rate-setting process.
    Response: We believe that the most obvious reason a State would not 
use rate cells broken out to this degree would be insufficient numbers 
of enrollees in any one category for the category to have statistical 
validity. Another example that would be accepted is the use of a 
different methodology such as case rates or family-based cells, 
provided the methodology still meets the other requirements of this 
section and has the required actuarial certification. These decisions 
will be made on a case-by-case basis, and we do not want to limit the 
flexibility States can have in developing new methodologies by 
specifying all allowable exceptions in this rule. On the other hand, 
these rate cells are the most commonly used breakouts in current 
Medicaid managed care contracts, and we believe that it is not 
unreasonable to require States to justify other methodologies if that 
is the approach they decide to use.
    We disagree with the commenter that this requirement places any 
significant burden on States. Most States are already in compliance 
with the requirement. The remaining States should either be able to 
provide a simple justification for their alternative methodologies, or 
need to consider a different approach in setting their capitation 
rates.
    Comment: One commenter wanted us to add a requirement for rate 
cells by major category of service (that is, inpatient, outpatient, 
primary care specialist, pharmacy, medical supplies, ambulance and 
other).
    Response: We do not believe that such a requirement would serve a 
useful purpose. It is important for contracting MCOs, PIHPs and PAHPs 
to know a payment amount per enrollee, but it is up to the contractor 
to determine how to allocate that amount at the provider (or service 
category) level.
    Comment: Several commenters felt that the requirements in 
Sec. 438.6(c)(3)(iv) were not clear. This provision required that there 
be payment mechanisms and assumptions recognizing higher than average 
medical costs for certain enrollees, for example, through risk 
adjustment, risk sharing, or other cost neutral methods. One commenter 
urged that we clarify that a rate setting method that uses utilization 
and cost data for populations that include individuals with chronic 
illness, disability, ongoing health care needs, or catastrophic claims 
already meets this requirement without additional adjustments, since 
the higher costs would be reflected in the enrollees' utilization. 
Another commenter questioned whether this rule requires health status 
or diagnosis-based risk adjustment, or other risk sharing methods.
    Response: The intent of this requirement is that contracts will 
have some mechanism selected to recognize the financial burden a 
contractor may incur as a result of enrollees who have much higher than 
normal health care costs, as a result of either a chronic or acute 
condition. The fact that the costs of these individuals are included in 
the aggregate data used for setting rates will not account for the 
costs to be incurred by a contractor that, due to adverse selection or 
other reasons, enrolls a disproportionately high number of these 
persons. Thus, we are requiring some mechanism for risk-sharing or risk 
adjustment to address this issue. Most MCO contracts currently use 
either stop-loss, risk corridors, reinsurance, health status-based risk 
adjusters, or some combination of these approaches. We have not 
mandated that any particular approach be adopted.
    Comment: One commenter asked how we define the terms ``chronic 
illness'', ``disability,'' ``ongoing health care

[[Page 41002]]

needs,'' and ``catastrophic claims,'' as used in Sec. 438.6(c)(3)(iv), 
and whether these are the same individuals categorized as enrollees at 
risk of having special health care needs, as may be defined by States 
in Sec. 438.208(b)(3).
    Response: The individuals intended to be covered by this 
requirement would likely include those described as having special 
health care needs, but would not necessarily be limited to that group. 
This provision is also intended to address individuals for whom a 
contractor may incur short-term catastrophic claims, but who may not be 
defined by the State as having special health care needs. Further, the 
individuals referred to in this paragraph are identified by their 
medical costs, while the individuals referred to in Sec. 438.208(b) are 
identified by their medical needs.
    Comment: One commenter asked whether we intend to make risk 
adjustment by health status mandatory in the future, since we have 
indicated that risk adjustment is an appropriate smoothing factor for 
individuals with special health care needs, and has contracted to 
produce a guidance manual for States to use health-status risk 
adjustment.
    Response: The commenter is correct that we support the use of 
health status risk adjusters as one way of making capitation rates more 
predictable and accurate, and have contracted for technical assistance 
for States in developing and using payment systems that are risk 
adjusted based on health status or diagnosis, and will be providing a 
guidance manual for States to use for this purpose. However, each State 
will still need to determine whether it wishes to invest the extensive 
resources necessary to develop and utilize this type of risk adjustment 
system. We do not intend to mandate this requirement.
    Comment: One commenter wanted us to define the term ``appropriate'' 
as used in Sec. 438.6(c)(3)(iv), which refers to appropriate payment 
mechanisms and utilization and cost assumptions.
    Response: As used both here and in the definition of actuarially 
sound rates, the term ``appropriate'' means specific to the population 
for which the payment rate, or in this instance risk sharing mechanism, 
is intended. This requirement applies to individuals who have health 
care costs that are much higher than the average. Appropriate for the 
populations covered means that the rates are based upon specific 
populations, by eligibility category, age, gender, locality, and other 
distinctions decided by the State. Appropriate to the services to be 
covered means that the rates must be based upon the State plan services 
to be provided under the contract.
    Comment: Several commenters wanted us to define the term ``cost 
neutral'' as used at Sec. 438.6(c)(1)(ii), and specify how this 
requirement will be measured. One commenter asked whether a risk 
sharing model, where the State shares a percentage of excess profits 
and losses with its MCO, would be considered cost neutral. Several 
commenters asked whether all of the mechanisms mentioned in 
Sec. 438.6(c)(3)(iv) need to be cost neutral, and whether these 
mechanisms must be cost neutral over the entire Medicaid program, or 
just as applied to specific populations.
    Response: In using the term ``cost neutral,'' we are requiring that 
risk sharing mechanisms recognize the fact that while some enrollees 
will have much higher than average health care costs, other will have 
much lower than average costs. Actuarially sound risk sharing 
methodologies will be cost neutral in that they will not merely add 
additional payments to the contractors' rates, but will have a negative 
impact on other rates, through offsets or reductions in capitation 
rates, so that there is no net aggregate impact across all payments. A 
risk corridor model, as described by the commenter, where the State and 
contractor share equal percentages of profits and losses beyond a 
threshold amount, would be cost neutral. In response to these 
commenters we have added a definition of ``cost neutral'' at 
Sec. 438.6(c)(1)(iii).
    In response to the other commenters, the cost neutrality 
requirement must apply to all mechanisms described in 
Sec. 438.6(c)(3)(iv). The mechanism, as set forth in the rate setting 
methodology, should be cost neutral in the aggregate. How that is 
determined, however, will differ based on the type of mechanism that is 
used. A stop-loss mechanism will require an offset to all capitation 
rates under the contract, based on the amount of the stop-loss. Health 
status-based risk adjustment may require an adjustment to the 
capitation rate for all individuals categorized through the risk 
adjustment system, but the aggregate impact will still be neutral. We 
recognize that any of these mechanisms may result in actual payments 
that are not cost neutral, in that there could be changes in the case 
mix or relative health status of the enrolled population. As long as 
the risk sharing or risk adjustment system is designed to be cost 
neutral, it would meet this requirement regardless of unforeseen 
outcomes such as these resulting in higher actual payments.
    Comment: A number of commenters believed that an actuarial 
certification alone would not be sufficient to justify the payment 
rates. Some believed that the impact of the adequacy and timeliness of 
data and the State's budget process must be addressed as well. Other 
commenters wanted the certification to include enough information for 
another actuary to independently evaluate the results, including: 
Underlying data, its source and adjustments made; description of rate 
methodology; documentation of assumptions used; presentation of rates; 
and expected impact on each MCO's revenues.
    Response: We will be looking beyond the actuarial certification of 
the capitation rates in reviewing and approving rates in risk 
contracts. The certification is one part of the documentation that will 
be required, and as described elsewhere in Sec. 438.6, there are a 
number of assurances and explanations that must accompany this 
certification in order for rates to be approved. We do not believe it 
is necessary, or in some cases appropriate, for other actuaries to be 
able to independently evaluate the results and assumptions in setting 
the rates (other than for our actuaries in cases where their assistance 
is required). As we stated above, we believe that MCOs, PIHPs, and 
PAHPs contracting with States on a risk basis must make their own 
independent judgments of proposed rates based on their own costs of 
doing business and their understanding of the population to be covered, 
not necessarily their actuaries' review of the State's actuaries' 
assumptions and process in setting the rates.
    Comment: One commenter was concerned that States or their 
contracted actuaries may be required to provide proprietary information 
to document the assumptions and methodology used to establish the 
capitation rates.
    Response: We do not believe that States will be required to provide 
any information that is proprietary in nature in order to justify their 
capitation rates in risk contracts. However, if there are instances 
where actuaries believe that information their State is required to 
submit would represent trade secrets or proprietary information, as 
described in the Freedom of Information Act (FOIA) (5 U.S.C. 552(a)), 
the information should be identified as such and may be withheld from 
public disclosure under the provisions of the FOIA.
    Comment: One commenter believed that additional documentation 
should be required, including: eligibility and enrollment trends; 
provider

[[Page 41003]]

reimbursement at the Medicaid market level; utilization trends; 
pharmacy and ancillary costs; benefits in the contract period; and 
administration.
    Response: We believe that the documentation requirements in 
Sec. 438.6(c)(4), along with the other provisions of this rule, will 
provide sufficient information on which to base decisions to approve or 
disapprove capitation rates in risk contracts. Thus, we do not believe 
that the additional documentation suggested by the commenter is 
necessary.
    Comment: A large number of commenters expressed concern over the 
requirement in Sec. 438.6(c)(4)(ii) that payment rates may only be 
based upon services covered under the State plan. Some of these 
commenters felt that MCOs need to maintain the flexibility to arrange 
for, and provide services in the most efficient manner that meets the 
needs of the individual, and these alternative services may not be in 
the State plan. The commenters asked whether this paragraph prohibits 
States and MCOs from offering additional services or providing services 
in alternative settings determined to be more appropriate, when these 
services are not in the State plan. Others asked whether MCOs can still 
receive payment for these services when they provide them. Some 
commenters wanted us to allow these costs to be incorporated into the 
rate calculations.
    Response: When a State agency decides to contract with an MCO or 
other type of managed care entity, it is arranging to have some or all 
of its State plan services provided to its Medicaid population through 
that entity. The State has not modified the services that are covered 
under its State plan, nor is it continuing to pay, on a FFS basis, for 
each and every service to be provided by the entity. Further, MCOs and 
other managed care contractors have the ability to do as suggested by 
the commenters--to provide services that are in the place of, or in 
addition to, the services covered under the State plan, in the most 
efficient manner that meets the needs of the individual enrollee.
    These additional or alternative services do not affect the 
capitation rate paid to the MCO by the State. Neither do we believe 
that the capitation rate should be developed on the basis on these 
services. This requirement sets forth that principle--that the State 
determines the scope of State plan benefits to be covered under the 
managed care contract, and sets payment rates based on those services. 
This does not affect the MCOs right, however, to use these payments to 
provide alternative services to enrollees that would not be available 
under the State plan to beneficiaries not enrolled in the MCO.
    Comment: Several commenters asked how the cost of non-State plan 
services, provided as cost-effective alternatives to State plan covered 
services, can be factored into the development of the capitation rates 
when a State uses MCO utilization and cost data in setting rates, if 
under Sec. 438.6(c)(4)(ii) rates can only be based upon services 
covered under the State plan. These commenters believed that States 
need to be able to incorporate the cost of alternative services in rate 
calculations. Some commenters suggested that trade-offs should be 
incorporated into the rate calculation so that the cost of these 
services can be recognized.
    Response: We agree that there must be a mechanism whereby States 
using MCO encounter data can base utilization costs of actuarially 
correct rates on non-FFS data. However, actuaries must adjust the data 
to reflect FFS State plan services only. States cannot use unilaterally 
contractually required or ``suggested'' services not part of the State 
plan (also known as ``1915(b)(3) services'') to calculate actuarially 
sound rates. We are open to suggestions from States and their 
actuaries, but we will not modify the basic principle that rates be 
based only on services covered under the State plan.
    Comment: One commenter asked whether capitation rates can be 
adjusted to reflect additional requirements for services like EPSDT and 
other preventive care that may not have been provided under the State 
plan in FFS.
    Response: Another reason that we decided to replace the UPL 
requirement with the requirement for actuarially sound rate setting is 
to permit States to pay for the amount, duration and scope of State 
plan services that States expect to be delivered under a managed care 
contract. Thus, States may adjust the capitation rate to cover services 
such as EPSDT or prenatal care at the rate the State wants the service 
to be delivered to the enrolled population. States may use other 
mechanisms such as financial penalties if service delivery targets are 
not met, or incentives for when targets are met.
    Comment: Another commenter asked if the requirement in 
Sec. 438.6(c)(4)(ii) that payment rates based upon the cost of State 
plan covered services would prohibit payment for administration, 
profit, and contingencies, and what effect this would have on the FFP 
match.
    Response: As noted previously, we have clarified the language in 
Sec. 438.6(c)(4)(ii) to indicate that payment may also be made for a 
contractor's administrative costs directly related to providing 
Medicaid services covered under the contract. In accordance with 
Sec. 438.812, all costs under a risk contract are considered a medical 
assistance cost, so there is no impact on FFP.
    Comment: A number of commenters raised questions regarding the 
requirement at Sec. 438.6(c)(4)(iii) for a comparison of projected 
expenditures for a past year to actual expenditures for that year. 
Several commenters wanted to know what our purpose was in requiring the 
reporting of year-to-year expenditure differences when evaluating 
actuarial soundness.
    Response: The purpose of this requirement is to provide us with an 
indicator of the accuracy of prior year projections and the rate of 
growth in a State's expenditures under its managed care program, and to 
provide some direction to reviewers as to whether it may be necessary 
to look behind the assumptions used by the State in setting the rates. 
An increase in expenditures that far exceeds the inflation rate in the 
medical market basket for a given period may warrant further review, as 
may rates that have been unchanged through several contracting cycles. 
However, these are not factors that would, in and of themselves, result 
in the disapproval of proposed rates.
    Comment: One commenter requested that we clarify whether the 
requirement for documentation is an annual requirement or if the 
information is to be submitted on some other basis.
    Response: This information, along with the rest of the 
documentation required by this rule, would have to be submitted with 
any new contract, or contract renewal or amendment that included new 
rates, as part of that required documentation. Thus, the information is 
not necessarily required to be submitted on an annual basis. States 
will need to submit the documentation of past and projected future 
expenditures in time for us to review the expenditure comparison as 
part of its review of new, renewed, or amended contracts (with revised 
rates).
    Comment: One commenter asked whether the comparison of expenditure 
data is intended to cover the State's entire Medicaid population, or 
only that portion which is to be enrolled in managed care during the 
contract year.
    Response: These data should cover expenditures for all Medicaid 
eligible beneficiaries in areas where they are or could be enrolled in 
managed care. Thus, if all TANF eligibles in a part of the State are 
mandatorily enrolled in managed care, in either a PCCM or an

[[Page 41004]]

MCO, they would be included in all of past expenditures data and future 
projections. Also, if SSI eligibles could voluntarily enroll in managed 
care, data on all SSI beneficiaries (whether the individuals are 
enrolled in managed care or not) should be included.
    Comment: Several commenters believed that we should clarify what is 
meant by the provision at Sec. 438.6(c)(4)(iii), which requires 
``documenting'' the prior year's expenditures as compared to the 
projected expenditures in the contract year, and asked what type of 
documentation would be required, and when it would be due. These 
commenters wanted to know whether we will issue guidelines on the 
process to be used to project the prior year's expenditures.
    Response: We do not believe the provision of these data is either a 
complex or burdensome process. We require that the State identify that 
portion of its expenditures in the most recent complete year that are 
attributable to populations who are or could be enrolled in managed 
care.
    Comment: One commenter asked what flexibility States will have in 
determining the methodology for making expenditure projections under 
this provision, and believed States should be able to provide these 
projections on the basis of either aggregate or per capita 
expenditures.
    Response: While we are not prescribing the methodology for 
providing this information, we believe that per capita expenditures are 
the only valid means to provide the type of information that can be 
compared from year to year.
    Comment: One commenter asked what information States must submit to 
comply with the requirement at Sec. 438.6(c)(4)(iv) to explain 
incentive arrangements, or stop-loss, reinsurance, or other risk 
sharing methodologies in MCO contracts.
    Response: These risk sharing methodologies can sometimes be very 
complex. In order for the mechanism to be approved in the contract, the 
State or its actuary will need to provide enough information for our 
reviewer to understand both the operation and the financing of the risk 
sharing mechanism.
    Comment: Several commenters raised questions regarding stop/loss 
and reinsurance coverage, and asked whether we will require MCOs to 
obtain stop-loss/reinsurance coverage.
    Response: Although a number of States require MCOs to obtain stop-
loss or reinsurance coverage, there is no Federal requirement that they 
do so.
    Comment: One commenter asked whether, in cases where the State 
requires stop-loss insurance, we would require the State to provide a 
copy of a contract between the MCO and the re-insurer or stop-loss 
provider to us. Another commenter asked if we would require States to 
verify the actuarial soundness of MCO stop-loss/reinsurance contracts 
purchased commercially.
    Response: We will not review the actuarial soundness of 
commercially purchased stop-loss/reinsurance coverage. As mentioned 
above, there is no Federal requirement that MCOs obtain this coverage, 
and we will not generally require a copy of the stop-loss/reinsurance 
coverage contract. However, there are situations where this may be 
required, due to unusual circumstances, such as an MCO that is 
financially unstable.

Special Provisions

    A number of commenters expressed concerns about the limitation in 
Sec. 438.814 on FFP in contracts with incentive arrangements or risk 
corridors. These comments are addressed in the portion of the preamble 
on that section. For purposes of clarity and in order to include these 
limitations on payment in the same subpart as the other rules governing 
payments in risk contracts we have moved these provisions from 
Sec. 438.814 to Sec. 438.6(c)(5)(ii) and (c)(5)(iii). We have also 
removed the phrase in Sec. 438.6(c)(5)(i), which excepted risk 
corridors from the requirement for actuarial soundness, since it 
contradicted other provisions of the regulation.
    Comment: Several commenters wanted us to define the terms ``risk 
corridors'' and ``incentive arrangements'' as used in 
Sec. 438.6(c)(5)(ii) and Sec. 438.814.
    Response: The term ``incentive arrangements,'' as used in this 
part, means any payment mechanism under which a contractor may receive 
additional funds over and above the capitation rates it was paid, for 
meeting targets specified in the contract. These targets may be for 
such things as delivery of services such as EPSDT at a specified rate 
(beyond the level envisioned in the capitation rate), or meeting 
certain quality improvement standards. Risk corridors are defined as a 
risk sharing mechanism in which States and MCOs share in both profits 
and losses under the contract outside of predetermined threshold 
amount. The amount of risk shared under this arrangement is usually 
graduated so that after an initial corridor in which the MCO is 
responsible for all losses or retains all profits, the State 
contributes a portion toward any additional losses, and receives a 
portion of any additional profits. In response to these commenters we 
have added definitions for ``incentive arrangement'' and ``risk 
corridor'' at Sec. 438.6 in paragraphs (c)(1)(iv) and (c)(1)(v) 
respectively.
    Comment: Several commenters questioned the provision in proposed 
Sec. 438.6(c)(5)(iii)(C) that would have required the withholding of 
payments or other financial penalties in any contract with incentive 
arrangements, where the incentives are not met. These commenters stated 
that the requirement did not make sense, since these are two different 
types of provisions that act independently and serve different 
purposes.
    Response: We agree with the commenter that this proposed provision 
was confusing and have deleted it from this final rule. Proposed 
Sec. 438.6(c)(5)(iii)(D) has been recodified as 
Sec. 438.6(c)(5)(iv)(C), with subsequent paragraphs similarly renamed.
    Comment: One commenter wanted us to clarify what is intended by the 
requirement in proposed Sec. 438.6(c)(5)(iii)(E) (now 
Sec. 436.6(c)(5)(iv)(D) in this final rule), that incentive payments 
cannot be conditioned on intergovernmental transfer agreements.
    Response: The purpose of this prohibition is to prevent incentive 
arrangements in managed care contracts from being used as funding 
mechanisms between State agencies or State and county agencies.
    Comment: One commenter believes that the requirement in proposed 
Sec. 438.6(c)(5)(iii)(F), (now Sec. 436.6(c)(5)(iv)(E) in this final 
rule) that incentive arrangements be necessary for the specified 
activities and targets is unclear and a highly subjective 
determination. The commenter felt that the provision should either be 
deleted, or alternatively that responsibility for the determination of 
necessity be placed on the State.
    Response: We do not believe that this provision is unclear or 
highly subjective. A State that decides to use incentive arrangements 
will have made a determination that they are needed in the contract, 
and we agree that this should be the State's determination.
    Comment: Many commenters objected to the provision in proposed 
Sec. 438.60 prohibiting direct payments to teaching hospitals for 
graduate medical education (GME) when the hospital's services are 
provided through managed care. Commenters indicated that this 
prohibition would disturb longstanding arrangements in many States.

[[Page 41005]]

    Response: In response to the concerns raised by these commenters, 
we have modified that section to permit such payments to the extent the 
capitation rate has been adjusted to reflect the amount of the GME 
payment made directly to the hospital. We have added new 
Sec. 438.6(c)(5)(v), which requires States making payments to providers 
for GME costs under an approved State plan, to adjust the actuarially 
sound capitation rates to account for the aggregate amount of GME 
payments to be made directly to hospitals on behalf of enrollees 
covered under the contract. This amount cannot exceed the aggregate 
amount that would have been paid under the approved state plan for FFS. 
We believe this approach addresses State concerns of preventing harm to 
teaching hospitals and Federal concerns of ensuring the fiscal 
accountability of these payments. As part of our larger strategy of 
improving the fiscal integrity of Medicaid payments, we also plan to 
study existing Medicaid GME payment arrangements and may issue 
additional policies in the future.
 Services That May Be Covered (Proposed Sec. 438.6(e))
    The proposed rule at Sec. 438.6(e) provided that an MCO, PIHP, or 
PAHP, contract may cover, for enrollees, services that are in addition 
to those covered under the State plan.
    Comment: One commenter was pleased that the proposed rule expressly 
provides for MCO contracts to cover services that are in addition to 
those covered under the State plan, because it will allow them to find 
new, innovative ways to more effectively treat health problems. A few 
commenters believed these non-State plan services will allow for cost-
effective substitutions for State plan services. However, these 
commenters question why these non-State plan services cannot be used by 
the State in the development of payment rates under Sec. 438.6(c). One 
commenter noted that if they are not paid for such non-State plan 
services it would stifle MCOs in the use of innovative treatment 
methodologies and technologies. Another commenter questioned how FFP is 
impacted for these additional services, since they are not allowed to 
be included in the rate setting methodology under Sec. 438.6(c)(4)(ii). 
This commenter also asked whether we were requiring payments for these 
additional services to be actuarially sound and certified as required 
by Sec. 438.6(c).
    Response: Those commenters who appear to believe that Sec. 438.6(e) 
allows for payment for additional services that can be provided in lieu 
of State plan services are not correct. The additional services allowed 
under Sec. 438.6(e) are not included in the calculation of capitation 
payments. These services may only be offered by an MCO, PIHP, or PAHP 
paid on a risk basis. This is because these entities would typically 
use ``savings'' (a portion of the risk payment not needed to cover 
State plan services) to cover the additional services in question. 
Additional services may also be provided for under section 1915(b)(3) 
waiver authority which allows a State to share savings resulting from 
the use of more cost-effective medical care with beneficiaries by 
providing them with additional services. In either case these services 
are additions to State plan services and are paid for by plans or 
through shared savings under the waiver program. Since payment is made 
by the plans or through shared savings, such payments do not have to be 
actuarially sound and certified. In order to clarify the confusion over 
this provision, we have added the phrase, ``although the cost of the 
services cannot be included when determining the payment rates under 
Sec. 438.6(c).'' Further, for a discussion of the prohibition against 
including non-State plan services in setting capitation rates, see the 
preamble discussion of Sec. 438.6(c)(4).
 Compliance With Contracting Rules (Proposed Sec. 438.6(f))
    This section requires all contracts under this subpart to comply 
with all Federal and State laws and regulations and meet all 
requirements of this section.
    Comment: We received one comment supporting the provisions 
regarding compliance with applicable Federal and State laws and 
regulations found in Sec. 438.6(f).
    Response: We are retaining the provisions supported by the 
commenter in this final rule, and appreciate the commenter's supportive 
comments.
 Inspection and Audit of Financial Records (Proposed 
Sec. 438.6(g))
    This section of the proposed rule required that the financial 
records of contractors and subcontractors be available for audit and 
inspection.
    Comment: One commenter supported the explicit requirements of 
Sec. 438.6(g). The commenter noted that without access to financial 
arrangements with subcontractors, it is difficult to track whether 
rates are sufficient to ensure that children have access. The commenter 
urged us to make this information publicly available.
    Response: We are not imposing a requirement on States to make these 
financial data public, nor will we establish a mechanism to do so at 
the Federal level. However, under Sec. 438.10(g) (3) enrollees are 
entitled to obtain information on the structure and operations of their 
MCO or PIHP, and for States with mandatory managed care under section 
1932(a)(1), Sec. 438.10(i)(3)(iv) provides that beneficiaries are 
entitled to receive quality and performance indicators on the MCOs and 
PIHPs available to them. We believe that this type of information has 
more value to Medicaid beneficiaries than the financial data required 
by this section.
 Advance Directives (Proposed Sec. 438.6(i))
    Proposed Sec. 438.6(i) requires that all MCO and PIHP contracts 
comply with the requirements of Sec. 422.128 (M+C rules) for 
maintaining written policies and procedures for advance directives, and 
reflect changes in State law within 90 days.
    Comment: One commenter asked for the definition of the term 
``advance directive'' as used in Sec. 438.6(i).
    Response: The provisions on advance directives are cross referenced 
to the more detailed M+C rules in Sec. 422.128, which are further 
linked to the definition of the term in Sec. 489.100. As defined in 
Sec. 489.100, ``advance directive'' means a written instruction, such 
as a living will or durable power of attorney for health care, 
recognized under State law (whether statutory or as recognized by the 
courts of the State), relating to the provision of health care when the 
individual is incapacitated.
    Comment: One commenter was concerned that providing all adult 
enrollees with written information on advance directive policies, and 
including a description of applicable State law changes, will cause 
MCOs to duplicate information and develop documentation systems that 
will add unnecessary cost and an administrative burden, thereby 
reducing efficiency of providing health care.
    Response: Because section 1903(m)(1)(A) of the Act requires MCOs to 
provide information on advance directives to enrollees, we do not have 
the authority to eliminate or modify the advance directives provision 
for MCOs under Sec. 438.6(i).
    Comment: Another commenter believes the advance directive 
requirements should be expanded to all managed care enrollees and not 
just for those enrollees in MCOs and PIHPs. The commenter believes that 
beneficiaries have the same right to make informed

[[Page 41006]]

choices about outpatient treatments as those beneficiaries do about 
inpatient treatments.
    Response: Section 489.102(a) identifies those providers required to 
comply with advance directive requirements. That section includes 
providers that could be participating in a PAHP network, including 
hospital outpatient providers and home health agencies. Therefore, we 
agree with the commenter that advance directives should apply to PAHPs 
if their network includes any of the providers that are listed in 
Sec. 489.102(a). We have added a new Sec. 438.6(i)(2) to include this 
requirement.
 Additional Rules for Contracts With PCCMs (Proposed 
Sec. 438.6(k)
    This section proposed new rules found in section 1905(t)(3) of the 
Act which specify the requirements that must be included in contracts 
with primary care case managers.
    Comment: One commenter felt that the contract requirements for 
PCCMs were too minimal, and that patients in PCCM programs should have 
rights of access, coverage, information, and disclosure that are as 
strong as those that apply to MCOs, PIHPs, and PAHPs.
    Response: The contract requirements for primary care case managers 
in proposed Sec. 438.6(k) largely mirror the language set forth in 
section 1905(t)(3) of the Act, which was added by section 4702 of the 
BBA. The BBA is clear in setting forth which contracting requirements 
should be placed on primary care case managers, which should be placed 
on MCOs, and which apply to all MCOs, PHPs, or PCCMs. PCCM contracts 
must include those requirements set forth in section 1905(t)(3) as well 
as any additional requirements in section 1932 of the Act that apply to 
them. For example, a PCCM must meet the information requirements set 
forth in Sec. 438.10 that apply to it. We also have applied access, 
coverage, and information requirements to primary care case managers 
where applicable. Where the BBA specifies that requirements apply to 
MCOs, such requirements are not applicable to PCCM contracts. However, 
where a PCCM is paid on a capitated basis, the PCCM would meet the 
definition of a PAHP and would also be subject, by regulation, to all 
PAHP requirements.
    Comment: One commenter is concerned that the requirement in 
Sec. 438.6(k)(2) that ``restricts enrollment to recipients who reside 
sufficiently near one of the manager's delivery sites to reach that 
site within a reasonable time using available and affordable modes of 
transportation'' does not take into consideration the special 
circumstances and characteristics of frontier states. The commenter 
wanted us to clarify what is a ``reasonable'' time in frontier states 
where the nearest provider may be more than 100 miles from the 
beneficiary, and very few locations have any public or commercial 
transportation available. The commenter asked whether this prohibits a 
recipient from choosing a provider who is further away, which could 
result in decreased beneficiary satisfaction and choice. The commenter 
suggests a standard based on ``normal and customary'' practices that 
would allow for a frontier state to better serve its population.
    Response: We do not believe that this requirement imposes any 
unreasonable burden on frontier states as suggested by the commenter. 
The requirement in proposed Sec. 438.6(k)(2), that beneficiaries be 
able to access care within reasonable time using affordable modes of 
transportation, is derived from statutory language in section 
1905(t)(3)(B) and cannot be changed. However, states have the 
flexibility to determine their own standards for reasonableness based 
on normal distance and travel times in the area, the needs of the 
beneficiaries, provider availability, and the geographic uniqueness of 
the State. One example, as noted in the preamble of the proposed rule, 
is the 30-minute travel time standard that many States have adopted for 
urban areas. Other States have established 10 to 30 mile distance 
standard, depending on specific circumstances within the area of the 
State to be served. We have consistently permitted States to develop 
their own standards, based upon customary treatment patterns in their 
unrestricted FFS programs, in the approval of section 1915(b) waiver 
programs.
    While we require States to develop their PCCM programs so that 
enrollees should not have to travel an unreasonable distance beyond 
what is customary in the State's unrestricted FFS program, we encourage 
States, to the extent practical, to make exceptions for beneficiaries 
who request to travel further than the time and distance standards set 
by the State, for such reasons as a desire to maintain an ongoing 
relationship with a particular participating provider. Section 
438.6(k)(2) would not prohibit such exceptions, provided the 
beneficiary was aware of his or her options and could make an informed 
choice of PCCM.
 Subcontracts (Proposed Sec. 438.6(l))
    This proposed rule requires all subcontractors to fulfill the 
requirements of Sec. 438.6 that are appropriate to the services or 
activity delegated under the subcontract.
    Comment: One commenter asked for clarification about whether the 
CMS Regional Office must also review and approve all subcontracts since 
Sec. 438.6(l) requires that all subcontracts must fulfill the 
requirements of Sec. 438.6, and Sec. 438.6(a) requires the CMS Regional 
Office to review and approve all MCO, PIHP, and PAHP contracts.
    Response: The requirement for Regional Office review of contracts 
in Sec. 438.6(a) only pertains to contracts between States and MCOs, 
PIHPs, and PAHPs, but not to subcontracts between any of these entities 
and their subcontractors. As noted above, Sec. 438.6(l) only requires 
compliance with provisions in Sec. 438.6 that are ``appropriate'' to 
the service or activity covered under the subcontract, and we do not 
believe that such review would be appropriate to the services or 
activities delegated under the subcontracts, or a worthwhile 
expenditure of our resources. Our focus is on the contractual 
relationship between the State and the MCO, PIHP, or PAHP as the 
primary contractor, as required by section 1903(m) of the Act, with 
respect to MCOs. The primary contractor is the entity that is obligated 
to comply with all provisions of the contract, whether it uses 
subcontractors in order to do this or not. The use of subcontracts does 
not in any way alter the primary contractor's responsibilities, 
obligations, or authority under the contract.
 Choice of Health Professional (Proposed Sec. 438.6(m))
    This section sets forth the right of an MCO enrollee to choose his 
or her health professional to the extent possible and appropriate.
    Comment: One commenter suggested that the regulations should 
specify that MCOs must let enrollees choose their primary care provider 
from among all qualified participating providers, including 
specialists. The commenter also suggested that when an enrollee is 
unable to be linked to their first choice of primary care provider, the 
MCO should have a mechanism for linking the enrollee to that provider 
when the provider becomes available.
    Response: Section 438.6(m) permits an enrollee to choose his or her 
health professional to the extent possible and appropriate. This would 
include the selection of primary care providers participating in the 
MCO, PIHP or PAHP network, unless they were already at capacity. We do 
not believe it is necessarily appropriate for specialist to act as 
primary care providers in every

[[Page 41007]]

instance. Primary care is defined in Sec. 438.2, and does not describe 
the range of services provided by many specialists. We believe that the 
decision on whether a specialist is the appropriate PCP for any 
enrollee should be left to the MCO, PIHP, PAHP, and/or the State to be 
determined on an individual basis. If an enrollee is unable to be 
placed with their first choice of primary care provider, they may 
continue to check on that provider's availability and change PCP when 
it becomes possible to do so. We do not believe this change is 
necessary in the regulation text. However, we are removing reference to 
MCOs, since this requirement applies to PIHPs and PAHPs as well under 
Sec. 438.8.
4. Provisions That Apply to PIHPs and PAHPs (Proposed Sec. 438.8)
    This section specifies which provisions of this rule apply to PIHPs 
and which apply to PAHPs.
    Comment: Many commenters believed that the same requirements should 
apply to both PIHPs and PAHPs, and several suggested that both types of 
PHPs should be subject to the same requirements as MCOs. These 
commenters argued that both types of entities cover an increasingly 
large portion of the Medicaid population, that requirements for an 
adequate and appropriate network are just as relevant and necessary for 
dental and transportation providers as for MCOs, that children with 
special health care needs require specialized care regardless of the 
scope of services their managed care contractor provides, and that any 
plans that provide any type of medical care should be required to 
comply with the protections in the BBA, such as network adequacy, 
credentialing, and grievance rights.
    Several other commenters suggested that even plans providing non-
medical services, such as transportation should be required to have an 
adequate network, provide services timely, and have a mechanism to 
resolve complaints.
    Another commenter suggested returning to a single set of 
requirements for PHPs, but accommodating PHPs covering a more limited 
array of services by permitting them to deviate from standards that are 
not applicable to the entity or services it provides or allow 
additional time to come into compliance.
    Other commenters expressed support for the distinction in 
requirements between PIHPs and PAHPs and the flexibility in the rule to 
determine how to most appropriately regulate PAHPs.
    Response: As stated above in the discussion regarding definitions 
at Sec. 438.2, we believe that there are clear differences in terms of 
the degree of financial risk, contractual obligations, scope of 
services, and capitation rates paid to these different types of 
entities, and that the scope of rules that apply to these entities 
under this regulation should reflect these distinct differences. 
However, in considering the provisions of the proposed rule and the 
issues raised by commenters, we agree that there are additional 
provisions of this regulation that should apply to PAHPs and have 
modified the requirements of the final rule to implement these changes. 
In Sec. 438.8(b), we have added the following requirements to PAHPs: 
Advance directives where a PAHP has a network of providers that 
includes either hospital outpatient departments or home health agencies 
(see the response to comments on Sec. 438.6(i) advance directives), all 
of subpart C on Enrollee Rights, and designated portions of subpart D 
on Quality Assessment and Performance Improvement. We have added new 
information requirements specific to PAHPs in a new paragraph (h) in 
Sec. 438.10 (with the existing paragraph (h) renamed paragraph (i)). 
Finally, at Sec. 438.6(b)(7), we have reaffirmed a PAHP enrollee's 
right to a fair hearing under Sec. 431.220. We believe that with these 
changes, we have maintained an appropriate level of regulatory 
requirements for these entities and provided the necessary degree of 
flexibility for States to implement these programs and impose any 
additional requirements States determine to be necessary. In addition, 
we believe we have provided the necessary level of beneficiary 
protections for these programs, including network adequacy (where 
applicable), provider credentialing, and appeal rights. We do not 
believe that applying additional provisions to PAHPs would be 
appropriate based on the scope of services they provide and the 
capitation rates they are paid in comparison to PIHPs and MCOs.
    Comment: Several commenters raised specific concerns about PAHP 
rules governing prepaid dental plans. Some commenters indicated that 
Medicaid dental patients need patient protections like MCO enrollees, 
since oral and systemic health are both integral to overall health, and 
should have the same patient protections. Another commenter asked 
whether MCO or PAHP rules apply to MCOs that subcontract for dental 
care. Several commenters were concerned that dental services are 
provided as part of MCO contracts and FFS as well as by prepaid dental 
plans, and PAHP dental enrollees should have the same protections as 
MCO enrollees receiving dental care.
    Response: We agree with the commenters regarding the importance of 
dental health and that beneficiary protections are an important 
requirement for dental PAHPs, particularly the requirement for network 
adequacy. One reason that States use prepaid dental plans is because of 
the lack of dental providers who provide care under FFS. Guaranteeing 
an adequate network in a dental PAHP will provide Medicaid 
beneficiaries access to dental care that is often otherwise 
unavailable.
    The determination as to which rules apply to any service or 
delivery system is the identity of the entity that contracts with the 
State. Thus, in situations where an MCO has a contract with a State, 
MCO rules apply to services furnished by the MCO or its sub-
contractors, including a subcontracting pre-paid dental plan. Where a 
PIHP or PAHP contracts with the State, PIHP or PAHP rules apply 
respectively.
    Comment: Several commenters objected to the requirements imposed on 
PIHPs. They believed that the proposed requirements were unclear, 
ambiguous, and burdensome, and would require the State to spend money 
on administrative expenses rather than patient care. These commenters 
felt that the proposed requirements were targeted to a medical model 
and did not take into account behavioral health services, such as 
mental health and substance abuse or rehabilitation models. They 
pointed out that PIHPs only authorize and pay for community psychiatric 
hospital beds and not all inpatient hospital care, and thus should not 
be subject to MCO requirements.
    Response: We acknowledge that this rule will impose many new 
requirements on PIHPs, just as it imposes new requirements on MCOs and 
PAHPs. Most of the new rules imposed on MCOs were derived from the BBA. 
Prior to the BBA, PHPs were subject, under Part 434, to most of the 
rules governing Medicaid-contracting HMOs. We believe that the Congress 
determined that additional costs and administrative burden were 
justified in order to provide sufficient protections for beneficiaries 
enrolled in MCOs. We believe that these same considerations apply to 
PHPs that provide inpatient services. In addition, we believe that 
beneficiaries in need of mental health and substance abuse services may 
be particularly vulnerable, and need these

[[Page 41008]]

protections more than some other healthier Medicaid beneficiaries.
    Comment: One commenter apparently believed that while PCCMs 
covering some or all of the following services were subject to PCCM 
requirements (case management, durable medical equipment, EPSDT, family 
planning, hearing, home health care, immunizations, laboratory, 
outpatient hospital, pharmacy, physician, transportation, vision, and 
x-ray) a managed care plans covering a subset of theses services would 
be exempt from all enrollee safeguards and quality and integrity 
requirements.
    Response: It is true that the referenced services can be furnished 
through a PCCM arrangement, under which the primary care case manager 
provides physician services and case management, and has the 
responsibility to refer or prior authorize these other services for 
their enrollees. It is also true, that in such a case, the PCCM 
requirements, and any requirement that applies to a ``managed care 
entity'' (both MCOs and PCCMs) would apply in this case. However, it is 
also true that a managed care plan that provides a subset of these 
services would be subject to enrollee safeguards and quality and 
integrity requirements, as an MCO or a PAHP. An entity that was at risk 
for the full scope of services described by the commenter (or any 
subset of three or more of the services described in Sec. 438.2 in the 
definition of comprehensive risk contract) would be considered an MCO, 
even though inpatient services were not being provided. If the ``subset 
of services'' did not trigger the definition of comprehensive risk 
contract, the entity would still be regulated as a PAHP, and PAHPs are 
not exempt from all enrollee safeguards and quality provisions.
    Comment: Several commenters wanted us to impose PIHP requirements 
on prepaid providers of home and community-based services (under a 
section 1915(c) waiver) in order to assure that beneficiaries in 
programs that maximize community-based care and minimize the need for 
institutionalization will have sufficient protections. One commenter 
contended that the Supreme Court's decision in Olmstead v. L.C., and 
the President's New Freedom Initiative, dictate that all provisions in 
the proposed rule that would improve or ensure access to care must be 
provided to those who need community-based care in order to reside 
outside of institutions. Other commenters believed that PIHP rules 
should not apply to home and community-based services, since the rules 
could discourage participation of these needed providers, and take away 
State and local discretion to impose, waive, or adjust requirements as 
best determined at that level.
    Response: Home and community based service providers by definition 
do not provide ``inpatient'' care, and accordingly would not meet the 
definition of PIHP. In light of our decision, discussed above, to 
impose additional requirements on PAHPs, we believe that we have 
provided sufficient beneficiary protections for PAHPs that provide home 
and community based services, while at the same time accommodating the 
latter commenter's concern about requirements discouraging 
participation. In so doing, we believe that we are helping to implement 
the Olmstead v. L.C. decision and the President's New Freedom 
Initiative, and to ensure access to community-based care with 
appropriate enrollee protections and quality assurance.
    Comment: One commenter felt that all PIHPs and PAHPs should be 
subject to sanctions if they do not comply with the regulations.
    Response: The sanction authority enacted by the Congress in the BBA 
is limited to MCOs. We do not believe we have authority, by regulation, 
to authorize States to impose civil money penalties on PAHPs or PIHPs. 
However, States may cover PIHPs and PAHPs under their own State 
sanction laws, and we encourage States to do so whenever they believe 
it is necessary.
    Comment: One commenter wanted us to add a provision to exempt MCOs 
with less than 500 members from the same requirements from which PAHPs 
are exempt.
    Response: Because PIHP and PAHP requirements are based on broad on 
the authority in section 1902(a)(4) of the Act, we have the discretion 
to impose those requirements on PIHPs and PAHPs that we determine to be 
appropriate through regulations. However, requirements for MCOs are 
specified in sections 1903(m) and 1932 of the Act, and are not subject 
to modification by regulation on the basis of the number of an MCO's 
enrollees.
5. Information Requirements (Proposed Sec. 438.10)
    Proposed Sec. 438.10 set forth the requirements that apply to 
States, MCOs, PIHPs, PAHPs, PCCMs, and enrollment brokers concerning 
the provision of information to enrollees and potential enrollees. 
Paragraph (a) defined the terms used in this section. Paragraph (b) set 
forth the basic rule that all information provided must be in a manner 
and format that may be easily understood. Paragraph (c) established 
rules regarding language. Paragraph (d) specified the format for 
information and that alternative formats must be available. Paragraph 
(e) described information requirements for potential enrollees. 
Paragraph (f) set forth the general information requirements for 
enrollees of all MCOs, PIHPs, PAHPs, and PCCMs. Paragraph (g) contained 
specific information requirements for MCO and PIHP enrollees. And 
paragraph (h) set forth the special rules required of States with 
mandatory enrollment under the State plan authority in Sec. 438.50.

General Comments on Sec. 438.10

    Comment: Some commenters appreciated the clarity and content of 
this section, and stated that they did not believe the provisions were 
too prescriptive. By contrast, another commenter contended that the 
requirements were too prescriptive, and would be difficult to meet even 
for a non-Medicaid population. This commenter believed this section as 
a whole did not take into consideration the nature of frontier States. 
The commenter recommended reducing the Federal role in the provision of 
information to beneficiaries, and letting States have the discretion to 
determine what is most appropriate.
    Finally, one commenter believed that the proposed rule did not 
ensure that enrollees would receive adequate information to understand 
their rights and responsibilities, and that it failed to provide 
potential enrollees with enough information to make an appropriate 
decision. The commenter believed this is especially true for 
individuals with chronic health conditions, who often see numerous 
medical professionals. The commenter asserted that these beneficiaries 
must have adequate information to make the best decision to ensure that 
their health needs can be met within a plan's network.
    Response: We believe the proposed rule achieves an appropriate 
balance between ensuring potential enrollees and enrollees have 
sufficient information, and giving the State flexibility in 
implementing the regulation. We appreciate the comments in support of 
the clarity of the proposed rule, and the comment that it contains an 
appropriate level of prescriptiveness. For frontier areas, enrollees 
there also need a minimum set of information to navigate a managed care 
program. We believe the regulations are flexible enough to accommodate 
the unique circumstances of rural and frontier areas, and have 
identified specific instances in our responses to

[[Page 41009]]

subsequent comments. Finally, we believe the minimum information 
required in the proposed rule is sufficient for all potential enrollees 
and enrollees, even those with disabilities or chronic illnesses. There 
are areas where information that might be especially useful for this 
population is available upon request instead of provided automatically 
(for example Sec. 438.10(d) on alternative formats, 
Sec. 438.10(e)(2)(ii)(D) on summary provider information, and 
Sec. 438.10(g) on information on plan structure and operations), but 
the final rule makes clear that these enrollees and potential enrollees 
must be informed of how and where to get this information.

Definitions (Proposed Sec. 438.10(a))

    Proposed paragraph (a) set forth definitions of ``potential 
enrollee'' and ``enrollee.''
    Comment: One commenter supported the definitions of ``potential 
enrollee'' and ``enrollee.'' Another commenter, however, felt that the 
regulation needs to clarify who an enrollee is in the case of a 
specialty plan. For example, in the commenter's State, all Medicaid 
recipients are required to receive mental health services from certain 
plans, but the State does not give information about mental health 
services until an individual actually receives services. This commenter 
recommended the State or plan should provide minimum general 
information about the plan and what services are provided at the time 
of initial enrollment in the plan, and provide more detailed 
information when the beneficiary first contacts the plan to inquire 
about services available.
    Response: We believe that the definition of enrollee is appropriate 
for any managed care program, including mental health managed care. We 
believe that the regulation's flexibility on providing certain 
information in summary format meets the commenter's first suggestion. 
We disagree with the suggestion to delay providing the full set of 
required enrollee information to the point in time when an enrollee 
requests services. This fails to provide adequate information to 
enrollees, and could be a barrier to care for enrollees who are unsure 
of what services the plan provides and how to access those services. We 
acknowledge that this will result in increased burden for States such 
as those in which the commenter resides where there is a single PIHP 
per service area in which every beneficiary is automatically enrolled 
upon determination of Medicaid eligibility. Some of the anticipated 
burden could be reduced by providing the required potential enrollee 
and enrollee information at the same time.

Mechanism To Assist Understanding (Proposed Sec. 438.10(b))

    As noted above, proposed paragraph (b) set forth the basic rule 
that all information provided must be in a manner and format that may 
be easily understood.
    Comment: Numerous commenters believed that the proposed basic rule 
at Sec. 438.10(b) failed to require States to have a mechanism to help 
enrollees and potential enrollees understand the managed care program, 
and failed to require MCOs, PIHPs, and PAHPs to have a mechanism for 
enrollees and potential enrollees to understand the requirements and 
benefits of the plan. Several argued that beneficiaries need to have 
the ability to get information from a variety of resources, not just 
written material. They felt that a mechanism was needed to ensure that 
enrollees and potential enrollees have information necessary for 
informed decisions. Some commenters believed that the lack of such a 
source of assistance would have a harmful impact on persons with 
disabilities, especially mental retardation and other cognitive 
impairments. One commenter urged that such a mechanism be family-
friendly. Several commenters noted that such a mechanism was included 
in the Bipartisan Patient Protection Act (HR 2653), CMS' Report to the 
Congress entitled ``Safeguards for Individuals with Special Health Care 
Needs Enrolled in Medicaid Managed Care,'' and the President's Advisory 
Commission on Consumer Protection and Quality in the Healthcare 
Industry.
    The commenters recommended requiring States to have a mechanism for 
potential enrollees and enrollees to understand the State's managed 
care program. Examples included a toll-free hotline, ombudsman, and 
other types of consumer assistance. Many of the commenters further 
recommended requiring that MCOs, PIHPs, and PAHPs have a mechanism to 
help potential enrollees and enrollees understand the requirements and 
benefits of the specific plan. Two commenters recommended the plan's 
mechanism need only be provided for enrollees, not potential enrollees.
    Response: We agree with commenters that written information may not 
be sufficient for potential enrollees and enrollees to understand a 
managed care program. In response to these comments, we have amended 
Sec. 438.10(b), by adding paragraphs (b)(1) and (b)(2) to require that 
States, MCOs and PIHPs have mechanisms in place to help beneficiaries 
that need such help to understand the managed care program, and plan 
requirements and plan benefits. We believe that it is not necessary to 
separately require PAHPs and PCCMs to have such mechanisms, as 
information on such plans could be addressed by the State's mechanism. 
We will require the mechanism to be available to both potential 
enrollees and enrollees, especially given that much of the required 
potential enrollee information need only be provided in summary format. 
We believe, however, that the State and plans should be given the 
discretion and flexibility to provide the mechanism most appropriate to 
their situation, so we are not specifying the type of mechanism that 
must be in place.
    Comment: One commenter requested that health plans be made aware of 
their responsibility to respond to a beneficiary's questions in a 
timely manner.
    Response: We agree that plans should respond in a timely manner, 
and expect them to do so. However, we do not believe that it is 
necessary to specifically provide for this in regulation text.
    Comment: Numerous commenters noted that the basic rule requires 
that only certain information be presented in a manner and format that 
is easily understood. They objected that this did not appropriately 
safeguard the rights of beneficiaries. The commenters believed that 
limiting the requirement to only certain material fails to give 
beneficiaries with limited English proficiency sufficient information. 
Some expressed concern that this could also violate section 
1932(a)(5)(A) of the Act, which the preamble to the proposed rule 
characterized as requiring ``all written information be provided in an 
easily understood language and format.'' Commenters recommended 
expanding the requirement to include ``all'' materials. On the other 
hand, there was one commenter who agreed with the limitations on which 
materials must meet the criteria.
    Response: While we share the commenters concern that all material 
should be in a manner and format that is easily understood, this 
section of the regulations is derived from section 1932(a)(5)(A) of the 
Act which specifically requires that responsible parties ``provide all 
enrollment notices and information and instructional materials * * * in 
a manner and format which may be easily understood.'' Thus, 
notwithstanding the unqualified language in the preamble, section 
1932(a)(5)(A) of the Act limits the type of information covered by its 
provisions.

[[Page 41010]]

However, in addition to the specific requirements that apply to 
enrollment notices and information and instructional materials 
contained in this section, provisions of the regulation governing 
information on enrollee rights, provider enrollee communications, 
marketing, grievances and appeals, and termination of MCOs and PCCMs 
all reference the requirements of this section. We believe that this 
extends the requirements for an easily understood language and format 
to virtually all written material provided to potential enrollees and 
enrollees. Thus, we do not agree that it is necessary to revise the 
regulation in response to this comment.

Clarifying Responsible Entity (Proposed Rules Sec. 438.10(b) and 
Sec. 438.10(f))

    As noted above, paragraph (b) sets forth the basic principle that 
information must be provided in a form that is easily understood. 
However, it does not set forth which entities are obligated to provide 
what specific information. This also is the case with respect to one 
paragraph in paragraph (f), which sets forth the general information 
requirements for enrollees of all MCOs, PIHPs, PAHPs, and PCCMs. The 
introductory paragraph to paragraph (f) refers to information being 
made ``available.''
    Comment: Numerous commenters objected to the fact that the text of 
the ``basic rule'' in Sec. 438.10(b) does not identify who is 
responsible for providing information to potential enrollees and 
enrollees. One commenter asserted it is not enough for Sec. 438.10(f) 
to require only that information be made ``available'' to enrollees, 
because this creates what the commenter believed to be a needless 
barrier to ensuring beneficiaries have the information they need. 
Finally, many commenters expressed concern that Sec. 438.10(f)(6) 
(regarding required information for enrollees) did not specify who was 
responsible for providing required information to enrollees. Some of 
these commenters recommended clarifying that the State is responsible 
for providing required information to enrollees, and that the State can 
delegate this responsibility to the health plan. Other commenters 
suggested clarifying that the plan is responsible for providing 
required information, and that the State is responsible for ensuring 
compliance.
    Response: While the text in Sec. 438.10(b) setting forth the 
``basic rule'' does not itself identify who is responsible for 
providing what information to potential enrollees and enrollees, we 
believe that other provisions of the regulations text make this clear. 
Specifically, Sec. 438.10(e)(1) specifies that the State or its 
contracted entity is responsible for providing required information to 
potential enrollees; Sec. 438.10(f), with one exception discussed 
below, specifies which entity or entities is responsible for providing 
specified information; Sec. 438.10(g) specifies that MCOs and PIHPs are 
responsible for providing information specific to those types of 
programs; Sec. 438.10(h) specifies that the State or a PAHP must 
provide information on PAHPs; and Sec. 438.10(i); specifies the State 
is responsible for providing certain information required under a State 
plan amendment.
    Within Sec. 438.10(f), each of the paragraphs specifies a 
responsible party, except, as commenters note, paragraph (f)(6). While 
Sec. 438.10(f)(3) specifies who is responsible for providing the 
information in Sec. 438.10(f)(6), we agree that Sec. 438.10(f)(6)--read 
alone--is unclear. We are revising Sec. 438.10(f)(6) to specify the 
State or at its discretion, its contracted entity, the MCO, PIHP, PAHP, 
or PCCM, is responsible for providing required information to 
enrollees. We will also conform the language identifying responsible 
parties in Sec. 438.10(f)(4) and Sec. 438.10(g) with the language used 
in other paragraphs. Finally, while each paragraph in Sec. 438.10(f) 
requires the provision of certain information, in response to this 
comment, and for consistency, we are revising the introductory 
paragraph to replace ``made available'' with ``provide.''

Prevalent Languages (Proposed Sec. 438.10(c))

    Proposed paragraph (c) required that information be made available 
in prevalent languages.
    Comment: One commenter supported basing the determination of 
whether a language is prevalent in the potential enrollee and enrollee 
population, rather than the State's population as a whole. The 
commenter stated this more appropriately targets those who would use 
information being translated.
    By contrast, a few commenters noted that proposed rule only 
requires States to identify prevalent languages, not all languages 
spoken by potential enrollees and enrollees. They asserted this is a 
weak standard, and disproportionately harms community health centers, 
which serve a disproportionate share of people with limited English 
proficiency. The commenters recommended the State be required to 
identify all languages spoken in State, not just prevalent languages.
    Response: We agree with the first commenter that the proposed 
rule's focus on the enrollee and potential enrollee population in the 
state is most effective. We disagree with the latter commenters that 
the proposed ``prevalent languages'' standard is weak. The proposed 
rule conforms with the Office for Civil Rights' ``Policy Guidance title 
VI Prohibition Against National Origin Discrimination As It Affects 
Persons With Limited English Proficiency.'' Specifically, that Guidance 
suggested that written material should be translated into regularly 
encountered languages other than English spoken by a significant number 
or percentage of the population eligible to be served.
    Comment: One commenter noted that there is generic (versus plan-
specific) information in Sec. 438.10(f)(6) that must be translated into 
prevalent languages. The commenter believed it would be wasteful and 
inefficient to require each plan to translate it, and any variation in 
this generic language across plans would be confusing to beneficiaries. 
The commenter recommended requiring States to make translations of 
generic information available to plans.
    Response: Nothing in the proposed rule would prohibit the State 
from translating material that is not plan specific. However, we 
believe States should have flexibility on whether to adopt this 
approach.
    Comment: One commenter noted that the proposed regulatory 
provisions placed sole responsibility for identifying prevalent 
languages on the State. In the commenter's State, there is a model in 
which plans are required to identify the prevalent languages spoken by 
their enrollees, and forward that data to the State. The commenter 
stated this allows the plan to concentrate on the language needs of 
their membership; the State then combines its data with plans' data for 
a more accurate picture of non-English languages spoken. The commenter 
recommended flexibility in this area so that the maximum amount of 
prevalent language data can be collected at all levels of contact with 
the enrollee.
    Response: We believe the proposed rule provides the flexibility 
this commenter seeks. Specifically, Sec. 438.10(c)(1) requires the 
State to ``establish a methodology,'' but gives States the discretion 
on what the actual methodology is. It would not preclude the 
methodology described by the commenter.
    Comment: Numerous commenters expressed concern that the definition 
of ``prevalent'' at Sec. 438.10(c)(1) was based on prevalence among the 
enrollee and

[[Page 41011]]

prospective enrollee population at a Statewide level, not a service 
area level. They observed that if beneficiaries with limited English 
proficiency are concentrated in a few areas, there may not be enough to 
meet statewide prevalence threshold. One commenter stated this was 
especially an issue in more populated States.
    The commenters recommended basing prevalence on service area, not a 
statewide threshold. One recommended it be based on geographic area, as 
stated in the preamble to the proposed rule. Another commenter 
recommended the rule define service area. Still others urged the rule 
go further, and specify a threshold of 5 percent within localized area. 
A few proposed the rule set a threshold of 10 percent or 3,000 in a 
service area, with additional specifications if there are 5 percent or 
less, as well as under 100 potential enrollees or enrollees. Finally, a 
commenter suggested that if the State does not identify prevalent 
languages by service area, that plans be required to do so.
    Response: We appreciate the commenters' point regarding languages 
that may be prevalent at a service area level but not meet a statewide 
threshold. However, we believe the proposed rule takes this into 
account. Specifically, Sec. 438.10(c)(2) requires the State to 
``Provide written information in each prevalent non-English language.'' 
However, Sec. 438.10(c)(3) requires each MCO, PIHP, PAHP, and PCCM to 
make its written information available in the prevalent non-English 
languages in its particular service area. For potential enrollees and 
enrollees who primarily speak a non-English language that is not 
prevalent, the mechanism we are requiring in response to a comment on 
Sec. 438.10(b) will provide them an avenue for obtaining needed 
information.
    Comment: One commenter contended that requiring States to identify 
prevalent languages is administratively burdensome and costly. Another 
commenter found the language requirements problematic, especially for 
rural States, and believed they would create additional costs for State 
and plans. Finally, a commenter noted the difficulty of consistently 
producing materials in prevalent non-English languages in a timely 
fashion. On the other hand, numerous commenters supported the proposed 
rule requiring a methodology to identify prevalent non-English 
languages, and provision of written information in those languages.
    Commenters who had concerns about the prescriptiveness of the 
proposed language requirements recommended more flexibility in the 
language requirements, including allowing States the flexibility to 
determine if additional language versions of written information are 
necessary.
    Response: The OCR Guidance we referenced in our earlier response 
makes clear that all entities that receive Federal financial assistance 
from the Department of Health and Human Services, either directly or 
indirectly, must provide meaningful access to its services for 
beneficiaries with limited English proficiency. This includes providing 
translated versions of vital documents into non-English languages 
regularly encountered in the eligible population. The Guidance provides 
suggested methodologies for identifying prevalent languages, which may 
be of use to States that do not yet have a methodology in place. It may 
be that in a rural State, there are no non-English languages that would 
meet a prevalence test. In those instances, States must still arrange 
for oral interpretation and have a mechanism (see comment and response 
on Sec. 438.10(b)) to assist non-English speaking beneficiaries to 
understand written materials that are not translated.
    We believe the proposed rule gives considerable discretion to 
States in what methodology they use.
    Comment: Several commenters expressed support of the proposed 
rule's reinforcement of existing language requirements under title VI 
of Civil Rights Act of 1964. Others suggested specifically referencing 
in the rule guidance issued by the Office for Civil Rights, since it 
applies to States and plans receiving Federal funding under Medicaid.
    Response: We appreciate the commenters' support on this issue. We 
have disseminated the Guidance to States via a State Medicaid Director 
letter dated August 31, 2000, and it is also available on our website. 
We do not believe it necessary to specifically reference the OCR 
Guidance in the regulation.
    Comment: Numerous commenters noted that the definition of 
``prevalent'' does not define what constitutes a ``significant number 
or percentage.'' They believe this is not sufficient guidance, and that 
there is no compelling need for States to have discretion. On the other 
hand, a few commenters expressed support for giving States the 
discretion to define prevalent.
    The commenters concerned about lack of guidance uniformly 
recommended the final rule establish a minimum threshold. 
Recommendations included defining prevalent as 10 percent or 3,000; 
incorporating OCR guidance on ``safe harbors,'' and using a threshold 
of 5 percent in a localized area and a Statewide level of 5 percent as 
well.
    Response: We believe that the language and format requirements are 
essential elements for ensuring that enrollees and potential enrollees 
receive the information necessary to make an informed choice and access 
benefits. While we believe they are essential elements, we also 
continue to believe that the best methodology for determining the 
prevalent language spoken by a population in a service area may differ 
from State to State and therefore we will not be modifying the 
regulation to mandate a specific methodology. We also note that the OCR 
policy guidance referenced above gives further examples and guidance on 
meeting individuals' language needs.
    Comment: One commenter noted that Sec. 438.10(c)(2) requires States 
to provide written information in each prevalent language, but 
Sec. 438.10(c)(3) only requires plans to make translated written 
material available. The commenter believes that this seems to suggest 
that unlike plans, States cannot simply respond to a request and 
instead must actually ensure it distributes translated materials to 
each beneficiary with limited English proficiency. The commenter stated 
this would be an onerous requirement, and recommended instead that 
latitude be given to States to respond to an inquiry.
    Response: We agree that the wording could be construed to required 
different levels of effort between the State and plans. In response to 
this comment, we are revising Sec. 438.10(c)(2) to clarify that States 
need only make translated materials available. We note that 
Sec. 438.10(c)(5) still requires States and plans to notify enrollees 
and potential enrollees that translated materials are available and how 
to obtain them.
    Comment: One commenter noted that the proposed rule required States 
and plans to identify beneficiaries with limited English proficiency. 
However, the commenter believed that individuals with limited English 
proficiency should be able to self-identify and receive appropriate 
written and oral communication.
    Response: We agree that beneficiaries with limited English 
proficiency should be able to self-identify and receive appropriate 
written and oral communication, and believe the regulation does allow 
this. First, anyone who self-identifies as having limited English 
proficiency would at that point be identified as such by the State as 
well as a result. Secondly, Sec. 438.10(c)(5) requires States and plans 
to notify

[[Page 41012]]

potential enrollees and enrollees about the availability of oral 
interpretation, written information in prevalent languages, and how to 
access those services. Those services are available regardless of 
whether the State or plan identifies the beneficiary as having limited 
English proficiency, or the beneficiary self-identifies as such.
    Comment: One commenter concurred with the requirement in 
Sec. 438.10(c)(3) on making translated material available, and limiting 
it to written information.
    Response: We appreciate the commenter's support for this 
clarification.

Oral Interpretation (Proposed Sec. 438.10(c))

    Comment: A few commenters noted that sign language was not 
specifically referenced in the proposed rule, and that interpretation 
for persons with hearing impairments is required by the Americans with 
Disabilities Act and title VI of the Civil Rights Act. One commenter 
suggested that clarification of this point in the regulation text would 
avoid confusion about the applicability of ADA requirements. The 
commenters recommended specifically including sign language and other 
interpreter services for beneficiaries with hearing impairments.
    Response: We agree that sign language interpretation should be 
available for potential enrollees and enrollees with hearing 
impairments. However, Sec. 438.6(f) specifically requires MCOs, PIHPs, 
PAHPs, and PCCMs to comply with the Americans with Disabilities Act and 
other applicable Federal statutes. We do not believe it would be 
necessary or appropriate to restate all of the specific requirements of 
that law in this section of the regulation text.
    Comment: A few commenters supported the availability of 
interpretation services, but believed it would be extremely difficult 
for most office-based physicians to set up and finance these services. 
They noted there is little coverage of these services by States, and 
the cost would be substantial for office-based physicians, often 
exceeding their reimbursement for the office visit itself. The 
commenters felt it was critical that we require States to create and 
fund systems to ensure appropriate interpretation services Statewide. 
They further stipulated that the services should be funded separately, 
not bundled into provider or capitation payments.
    Response: While we believe that it is appropriate and necessary to 
require that interpretation and translation services be available for 
all potential enrollees and enrollees, we also believes that the States 
should be afforded the flexibility to determine how these translation 
services are provided and paid for.
    Comment: One commenter contended that the requirement in 
Sec. 438.10(c)(4) to make oral interpretation available for all non-
English languages does not take into consideration special 
circumstances and characteristics of frontier States. To expect a State 
with a small population to have someone available to speak any possible 
language would be unreasonable in this commenter's view. This view was 
based on the commenter's belief that the increased cost and could 
result in decreased access if providers drop their participation in 
Medicaid. Another commenter argued that requiring oral interpretation 
for all languages was administratively burdensome and costly. The 
commenters recommended allowing State flexibility to determine if oral 
interpretation was necessary.
    Response: We appreciate the difficulties in arranging for oral 
interpretation for languages that are less frequently encountered. 
However, we believe the proposed rule does not create any new 
requirements, but rather clarifies that existing requirements under 
title VI of the Civil Rights Act apply to Medicaid managed care 
programs. The OCR guidance reinforces this, but allows for flexibility 
in how oral interpretation is arranged. For example, it acknowledges 
that on-site interpretation may not always be realistic, in which case 
other options such as telephone language lines may be used.
    Comment: Numerous commenters supported the requirement for 
provision of oral interpretation. One commenter specifically supported 
the provision that it be available free of charge to each potential 
enrollee and enrollee, but believed the requirement should be 
strengthened. The commenter suggested adding language stipulating that 
oral interpretation be provided when needed, and in a manner convenient 
to the beneficiary.
    Response: We appreciate the commenters' support of this provision. 
We believe that some flexibility is appropriate, as noted in the OCR 
guidance, which sets forth a variety of factors to take into 
consideration when determining how to provide meaningful translation.

Alternative Formats (Proposed Sec. 438.10(d)(2))

    As noted above, proposed paragraph (d) specified the format for 
information, and that alternative formats must be available for those 
with special needs.
    Comment: Numerous commenters supported the requirement that written 
material be available in alternative formats, but objected to the fact 
that the proposed rule did not expressly identify who was responsible 
for providing them. They believed that specifying responsibility was 
essential to ensuring that the information is transmitted in a timely 
manner. The commenters recommended that the final regulation specify 
that both the State and health plans have responsibility for making 
available their respective written materials in alternative formats.
    Response: We believe that the proposed rule makes clear that 
written material must be available in alternative formats. We believe 
that as drafted, it is clear that this requirement applies to whomever 
is providing the written material at issue to potential enrollees and 
enrollees. Therefore, we believe it is unnecessary to list each party 
in the regulations text.

Required Information -- General (Proposed Sec. 438.10 (e) Through (g))

    As noted above, proposed paragraph (e) described information 
requirements for potential enrollees; paragraph (f) set forth the 
general information requirements for enrollees of MCOs, PIHPs, PAHPs, 
and PCCMs, and paragraph (g) contained specific information 
requirements for MCO and PIHP enrollees.
    Comment: One commenter noted that requiring specific information 
for potential enrollees and enrollees would require additional State 
and contractor financial and staff resources. The commenter believed 
this would lead to increased costs of production and distribution for 
both State and plans.
    Response: We appreciate that additional resources may be needed to 
compile, produce, and disseminate the required information. However, we 
believe this information is critical for potential enrollees to make 
informed decisions, and enrollees to understand how to access services.

Information for Potential Enrollees (Proposed Sec. 438.10(e)(1)(i))

    Comment: Numerous commenters believed the proposed rule would 
result in a delay in potential enrollees receiving information. The 
commenters noted that as proposed, the rule would require information 
be given to potential enrollees when they become eligible to 
voluntarily enroll in managed care, or face mandated enrollment in 
managed care. They were concerned this could delay when beneficiaries 
receive the information, reducing the amount of time they have to 
digest it. Some

[[Page 41013]]

commenters proposed that an additional option should be added, i.e., 
the time when the potential enrollee first becomes eligible for 
Medicaid. Others recommended adding the following language to 
Sec. 438.10(e)(1)(i): ``When eligible to choose among MCOs, PIHPs, 
PAHPs, or PCCMs in a voluntary program.''
    Response: We believe the proposed rule ensures that potential 
enrollees are provided required information at the earliest appropriate 
time. We acknowledge that a beneficiary may become Medicaid eligible 
first, and only later be eligible to enroll in a voluntary program, or 
required to enroll in a mandatory program. However, we are concerned 
that the provision of information for which the beneficiary has no 
immediate use will result in the information being disregarded. In the 
majority of cases, a beneficiary becomes a ``potential enrollee'' 
immediately upon Medicaid eligibility determination, and in these 
instances will get the information at the time suggested by commenters.
    Comment: One commenter noted that the proposed rule does not 
expressly require the State to provide the required information on a 
plan to all potential enrollees in the plan's service area. The 
commenter recommended adding this language.
    Response: The proposed rule requires the State to provide the 
required information to all potential enrollees, which already would 
include all potential enrollees in a particular plan's service area. 
Therefore, we believe it unnecessary to add the recommended language on 
ensuring that the information must be provided to all potential 
enrollees in a plan's service area.

Summary Information for Potential Enrollees (Proposed 
Sec. 438.10(e)(2)(ii))

    Comment: Some commenters supported proposed Sec. 438.10(e)(2)(ii), 
which provided that States need only provide summary information 
specific to each plan, with detailed information to be provided upon 
request. They believe this flexibility allowed States and plans to make 
better use of their resources by giving specific information only where 
it is needed to make informed choices, without broadly disseminating 
voluminous information that will generally receive little attention.
    Another commenter was concerned that the requirement for States to 
provide only summary information--versus providing detailed 
information--would mean that many potential enrollees may not receive 
basic information on service areas, cost-sharing, benefits covered, 
provider information (including family planning), and other benefits 
not covered under contract. The commenter believed the burden in 
providing more detailed information is minimal, so the final rule 
should require the State to provide detailed information to all 
potential enrollees, not just upon request.
    Numerous commenters specifically objected to proposed 
Sec. 438.10(e)(2)(ii)(E), which required the State to provide to 
potential enrollees only summary information on State plan services not 
covered by the contract. They believed this provision eliminated one 
way potential enrollees learn about the full range of what is available 
under the State plan. Some commenters were especially concerned that it 
was important for access to reproductive health services, which plans 
may not offer. Some commenters were concerned that the delay caused by 
needing to ask for the information could result in a beneficiary being 
defaulted into such a plan. Finally, there were commenters who asserted 
summary information was not adequate to allow potential enrollees to 
make an informed decision.
    Many of the commenters recommended that the final regulation 
require detailed--not summary--information on all items specific to 
each MCO, PIHP, and PAHP. Others also suggested the final rule require 
health plans to refer enrollees to a State sponsored, toll-free number 
that informs beneficiaries about how and where to access services plan 
the plan does not provide. They further suggested that this information 
be provided on an annual basis and at the point of service.
    Response: We believe the proposed rule strikes the proper balance 
between providing needed information and ensuring the information is 
useful rather than overwhelming. The proposed rule does not preclude a 
State from providing detailed information. However, if it opts to 
provide summary information, then it must under Sec. 438.10(e)(12)(ii) 
ensure potential enrollees and enrollees are informed that more 
detailed information is available upon request, and how to request it. 
Lists of Participating Providers (Sec. 438.10(e)(2)(ii)(D) and 
Sec. 438.10(f)(6)(i))
    These proposed sections required the provision of a list of 
participating providers, including the name, phone number address, non-
English languages spoken, and other information.
    Comment: For potential enrollees, one commenter suggested limiting 
the list of providers on whom information is provided to hospital and 
primary care. The commenter believed that providing a full specialty 
provider directory may create confusion on how to navigate the plan's 
referral process, giving the impression that referrals or authorization 
are not needed. The commenter recommended potential enrollees who want 
the specialty network information be directed to call the plan or 
enrollment broker.
    Response: Although we acknowledge that including information on 
specialists adds to the volume of information and further complicates 
the process of keeping information current, we do believe that a 
significant number of potential enrollees rely on this information and 
therefore continue to believe that, at a minimum, information on 
provider networks should include information on primary care 
physicians, specialists, and hospitals.
    Comment: One commenter believed that even in summary format, 
provider information would be too voluminous, and its value for 
potential enrollees is highly questionable. In the commenter's view, 
based on experience with managed care, people are more likely to read 
mailings that contain simple, limited information focusing only on the 
most important issues. The commenter suggested the requirement be 
limited to informing potential enrollees how they can obtain this 
information.
    Another commenter was unclear how provider network information 
could be summarized. Even a summary could be voluminous, especially if 
it has to be kept up to date. The commenter asserted that States need 
flexibility to determine the most efficient method that will get 
accurate information to beneficiaries via the easiest media. The 
commenter suggested making this information available upon request, 
with assistance available from both State and plans.
    Response: For many potential enrollees, a decisive factor in 
selecting a plan is whether their current primary care provider is in 
the network. For beneficiaries with disabilities or chronic illnesses, 
participating specialists can carry the same weight. We believe the 
flexibility to summarize provider information will allow States to 
minimize the volume. For example, clinics or group practices could be 
identified in lieu of listing individual physicians. States and their 
contractors must highlight to potential enrollees how to obtain 
detailed listings or to inquire whether a specific provider is 
participating.
    Comment: A commenter pointed out that identifying non-English 
languages spoken by providers--as required in

[[Page 41014]]

Sec. 438.10(e)(2)(ii)(D) and Sec. 438.10(f)(6)(i)--is an example of how 
the proposed rule would impose requirements on managed care programs 
which are not required in Medicaid FFS programs. In the commenter's 
view, it would be problematic to obtain this information, and the State 
could place itself at risk if it is construed that it is in some way 
``certifying'' their ability to speak the language. Another commenter 
noted that maintaining information on non-English languages spoken by 
specialists and hospitals is extremely difficult due to the frequency 
with which it changes. The commenter recommended this only be required 
for PCPs.
    Response: We acknowledge that this information may be problematic 
to obtain and keep current. However, it is our belief that potential 
enrollees and enrollees need this information to make informed choices. 
We encourage States and plans to highlight to potential enrollees and 
enrollees that it is important to verify through a phone call or other 
means that the information is current.
    Comment: A few commenters felt that it would be difficult to keep 
information on which providers are accepting new enrollees current--as 
required in Sec. 438.10(f)(6)(i)--especially in a printed format. One 
of the commenters suggested clarifying that plans may state in their 
materials that potential enrollees must contact the plan for oral 
updates of this information, or that they be required to keep the 
printed information reasonably up to date. Another commenter suggested 
that the final rule be revised to require the plan to prominently 
display a toll-free number to get this information. Another recommended 
the rule be clarified to provide that a plan's best effort would be 
sufficient, or allow for a phone number to be available to provide the 
information.
    Response: We acknowledge that this information is time sensitive; 
however, it is our belief that beneficiaries need this information to 
make an informed selection. Therefore, we encourage States and their 
contractors to highlight to potential enrollees and enrollees that it 
is important to verify through a phone call, or other means, that the 
information is still current. We also expect that States and their 
contractors will provide updates to provider directories within a 
reasonable time frame, although the exact time is left to the State to 
determine.

Required Information--General (Proposed Sec. 438.10(e) through (f))

    Comment: One commenter observed that some of the information 
required before and after enrollment is duplicative.
    Response: We agree that the requirement to provide information on 
benefits, cost sharing, service area, and participating providers 
required for potential enrollees in Sec. 438.10(e)(2)(ii) duplicates 
required information for enrollees in Sec. 438.10(f)(6). However, we 
would note that for potential enrollees, States may provide summary 
information, with detailed information provided upon request. For 
enrollees, detailed information is necessary to understand the services 
for which they are covered and how to access them.
    Comment: One commenter believes that all the required information 
for both potential enrollees and enrollees should be in writing, and 
should also be available to enrollees through a toll-free telephone 
number established by the State.
    Response: While we expect that the required information will be 
provided in writing, we do not want to preclude other formats. We note 
that the ``mechanism'' for assisting enrollee understanding that we are 
requiring in response to comments on proposed Sec. 438.10(b) will 
provide another source of information, though as noted above, we 
believe States and plans are in the best position to determine the most 
effective mechanism to be used.
    Comment: Numerous commenters believed that a core patient 
protection is access to information on the quality of health plan and 
providers. This conforms with the President's Advisory Commission on 
Consumer Protection and Quality in the Health Care Industry. The 
commenters recommended requiring MCOs and PIHPs to provide to potential 
enrollees and enrollees, upon request, (1) information on licensure, 
certification and accreditation status of MCOs and health care 
facilities; (2) information on education, licensure, Board 
certification and recertification; (3) a description of cost-control 
procedures; (4) summary descriptions of methods of compensation for 
physicians; and (5) information on the financial condition of the plan, 
including the most recent audit.
    Response: We believe the provision in Sec. 438.10(g)(4), which 
requires MCOs and PIHPs to provide certain information upon request to 
enrollees, including information on the structure and operation of the 
plan, is sufficient to cover the bulk of the information the commenters 
specifically mentioned. As a result, we are not revising the 
regulations text to add additional references.

Notice of Disenrollment (Proposed Sec. 438.10(f)(1))

    Comment: One commenter suggested modifying the requirement for 
annual disenrollment notice to not apply when there is no lock-in, 
while several other commenters supported the requirement for States to 
notify enrollees of their disenrollment rights at least annually, and 
at least 60 days prior to each open enrollment period.
    Response: We agree that the proposed rule as written would be 
awkward for a program with no lock-in provision. However, we believe it 
important for enrollees to be notified annually of their disenrollment 
rights under Sec. 438.56, even in a program with no lock-in, and 
therefore are not eliminating this provision.
    Traditionally, States with no lock-in program could still delay the 
effective date of disenrollment to the beginning of the subsequent 
month, leading to a de facto lock-in of 1 month. Section 1932(a)(4) of 
the Act did not eliminate this scenario, but did permit States to lock-
in enrollees for up to a year. The Act also provides that if there is a 
lock-in, enrollees can disenroll without cause for the first 90 days of 
enrollment in an MCO, which assumes that a lock-in period will be at 
least 90 days long. Finally, the statute provides that if States have a 
lock-in, they must notify enrollees at least 60 days prior to each 
annual enrollment opportunity of the right to disenroll. We are 
revising the regulation to clarify that the 60-day timeframe for 
notifying enrollees of the right to disenroll applies solely to 
programs with lock-ins of 90 days or greater.

Annual Notice (Proposed Sec. 438.10(f)(2) and Sec. 438.10(g))

    Comment: Numerous commenters objected to the fact that the annual 
notice requirement in Sec. 438.10(f)(2) need only notify enrollees of 
the availability of required enrollee information (that is, that they 
may receive it upon request) rather than requiring that the information 
be furnished to all enrollees. Many commenters believed that the result 
would be that many enrollees would not receive information for many 
years, and would be unaware of their rights, because they did not 
bother to specifically ask for the information. Some commenters found 
this especially problematic in light of the fact that some services may 
not be provided because of the conscience clause. One commenter

[[Page 41015]]

noted that an annual mailing of a full set of information typically is 
sent to enrollees in private health plans, and believed that Medicaid 
enrollees deserve no less. Another commenter argued that by actually 
furnishing all required information yearly, rather than only upon 
request, enrollees are ensured timely information about their rights, 
as well as a complete compilation of the previous year's changes or 
amendments to services provided. Finally, a commenter expressed the 
view that the information in question is critical for enrollees 
deciding to remain with a particular plan or switch during an open 
enrollment season.
    On a related issue, numerous commenters supported the MCO and PIHP-
specific provisions in Sec. 438.10(g), but recommended the annual 
notice in Sec. 438.10(f)(2) be amended to require the information be 
provided in full on an annual basis.
    Response: We appreciate the arguments for ensuring enrollees have 
up-to-date information on the managed care plans with which they are 
enrolled. However, we believe the proposed rule achieves a balance. The 
rule ensures enrollees receive detailed information upon enrollment. In 
Sec. 438.10(f)(4), we require plans to give each enrollee written 
notice of significant changes at least 30 days prior to the effective 
date of the change. To ensure that they are updated on all required 
information, we are adding a requirement at Sec. 438.10(f)(2) and 
(f)(3) that enrollees be updated on changes to required information in 
Sec. 438.10(g), regarding MCO- or PIHP-specific information.

Timing of Information to Enrollees (Proposed Sec. 438.10(f)(3) Through 
(f)(5))

    Comment: One commenter expressed concern about the requirement that 
plans send specified information to enrollees within a reasonable time 
after plans receive notice of enrollment. The commenter noted that in 
some cases, notice of enrollment precedes the effective date by a wide 
enough margin that it will be confusing to send the information that 
early. The commenter suggested revising the language in the proposed 
rule to read ``a reasonable time after the MCO received the notice of 
the recipient's enrollment or the effective date of enrollment, 
whichever is later.''
    Response: The regulation requires that the information be provided 
within a ``reasonable time after it receives, from the State or the 
enrollment broker, notice of the recipient's enrollment.'' We believe 
that the State is in the best position to define this specific time 
requirement (i.e., what is ``reasonable'') for providing this 
information.
    Comment: One commenter noted that the requirement in 
Sec. 438.10(f)(4) for 30 days written notice of any significant change, 
as defined by the State, is not always possible to comply with, since 
States do not always have 30 days notice of such changes. However, 
numerous other commenters supported the provision to require plans to 
give 30 days prior notice of significant changes.
    Response: While we understand that there may be instances in which 
plans receive less than 30 days notice of a change, we believe this 
would be the rare exception, and that a general rule for 30 days notice 
would generally be possible to meet. We believe that where it is 
possible, this timeframe should be satisfied, since we believe that it 
is needed in order to give enrollees adequate notice of significant 
changes that could affect their care. As a result, we are not changing 
this provision.
    Comment: One commenter was concerned that the provision in 
Sec. 438.10(f)(5) requiring 15 days notice to enrollees of their 
provider's termination from the plan's network was not enough to ensure 
continuity of care. The commenter recommended requiring 60 days notice, 
with prior approval by the State. The commenter further suggested that 
if 60 days notice is not given, the plan should pay for enrollee care 
from the terminating provider for 60 days or until the enrollee 
transfers to another plan.
    Response: We recognize a more stringent threshold would likely 
further promote continuity of care, and we believe the proposed rule 
provides States with the discretion to do so. However, we also 
recognize the reality that providers often give little notice of their 
plans to terminate participation in a network. We believe the proposed 
rule provides a realistic threshold that protects enrollees' interests.

Required Information for All Enrollees (Proposed Sec. 438.10(f)(6))

    Paragraph (f)(6) sets forth information that must be provided to 
all enrollees.
    Comment: One commenter found that the requirement in 
Sec. 438.10(f)(6)(i), to provide the names and other information for 
hospital and specialists, would be impractical for a PCCM program, 
since all Medicaid-participating providers are eligible. The commenter 
observed that specialists also move, change offices, etc., making 
maintenance of such a list impractical. In addition, the commenter 
noted that identifying all participating PCCMs for enrollees does not 
seem necessary or reasonable.
    Response: We agree with the commenter, and in response to this 
comment are conforming the language in Sec. 438.10(f)(6)(i) to the 
language in Sec. 438.10(e)(2)(ii)(D), which clarifies that information 
on specialists and hospitals is only required for MCOs, PIHPs, and 
PAHPs. We are also clarifying the State need only identify 
participating PCCMs in an enrollee's service area.
    Comment: Numerous commenters supported the statement in the 
preamble to the proposed rule that information provided must (1) 
clearly indicate which providers are available under any subnetworks 
with which a plan contracts, and (2) explain the procedures under which 
an enrollee may request a referral to an affiliated provider not in the 
subnetwork. These commenters believed that compliance with this 
requirement was especially important for women who may be obtaining 
services from a subnetwork that limits access to reproductive health 
services. The commenters recommended including an explicit requirement 
in the regulation text, specifically in Sec. 438.10(f)(6)(ii).
    Response: While we do not believe it would be appropriate to 
dictate permissible contracting entities for plans, we do require under 
Sec. 438.10(e)(2)(iii) that if there are restrictions within a network, 
the beneficiary be informed of these restrictions as part of the 
information that they receive.
    Comment: Numerous commenters noted that the preamble to the 
proposed rule specifically discussed the provision of information on 
pharmaceuticals, mental health and substance abuse benefits. H.R. 2564, 
as passed by the House, and supported by the President, specifically 
requires disclosure of prescription drug benefits. If the intent is for 
plans to disclose this information, the commenters believed that 
Sec. 438.10(f)(6)(v) should explicitly list them.
    Response: We believe that the language in Sec. 438.10(f)(6)(v) 
already ensures full disclosure of information on all benefits, 
including prescription drug coverage and mental health benefits. It 
requires information on the ``amount, duration, and scope of benefits 
available under the contract in sufficient detail to ensure that 
enrollees understand the benefits to which they are entitled.'' Since 
this applies to all contracted benefits, it is unnecessary to single 
out specific benefits in the regulation text.
    Comment: Numerous commenters noted that proposed Sec. 438.62 would 
require States to ensure continued services to beneficiaries who are 
transitioning, out of an MCO, PIHP, PAHP, or PCCM, but did not require

[[Page 41016]]

that enrollees be provided with information on how to obtain benefits 
during such a transition. The commenters recommended adding this as 
required information for enrollees.
    Response: The proposed rule requires the State agency to actively 
arrange for continued services to beneficiaries transitioning in and 
out of a managed care system. We believe States should be given 
discretion as to how they fulfill that responsibility.
    Comment: Several commenters supported the requirement in 
Sec. 438.10(f)(6)(vii) to specify the ability to access family planning 
providers out of network. They recommended clarifying that this 
requirement applies to all plans, not just those with conscience 
clauses.
    Response: We believe that it is clear that the language in the 
proposed rule applies to all managed care programs (unless this 
obligation were ever waived under a section 1115 demonstration), and 
are not making further revisions.
    Comment: With respect to Sec. 438.10(f)(viii)(C), one commenter 
noted that in some frontier and rural States, 911 is not yet 
operational throughout the State. The commenter stated that printing 
and updating materials specific to the system in each locale would 
increase costs and burden. The commenter observed that this would also 
lead to another situation in which managed care requirements would be 
greater than those in fee-for-service.
    Response: The requirement for providing information on how to use 
the 911 service is limited, implicitly, to areas where this service 
exists to use. For areas that have not yet implemented a 911 system, it 
would be acceptable for the State to generally instruct the enrollee to 
call their local emergency number without specifying the actual phone 
number. We believe that it is important, however, to include 
information on using 911 wherever this service is available.
    Comment: One commenter asked why the requirements in 
Sec. 438.10(f)(6)(viii)(D) through (f)(6)(viii)(E) concerning the 
provision of information on emergency services applied to PCCM 
programs. The commenter believed that in PCCM programs, there were no 
additional restrictions on which emergency settings PCCM enrollees can 
use. The commenter believed there was no difference between PCCMs and 
regular FFS Medicaid on this point.
    Response: While enrollees must be able to access emergency care at 
any hospital setting, MCOs, PIHPs, and PAHPs also often contract with 
specific hospitals for these services; in those instances, these 
contracted providers need to be identified. We acknowledge that the 
only contracted providers in PCCM programs are PCPs. For PCCM programs, 
it will be sufficient for the State to direct enrollees to the nearest 
emergency room.
    Comment: Numerous commenters supported the requirement in 
Sec. 438.10(f)(6)(viii) through (f)(6)(ix) that MCOs and PIHPs make 
certain information available to enrollees regarding how emergency 
services are covered, and the process for accessing these services. 
Some of the commenters, however, suggested that plans also be required 
to send required enrollee information on emergency care to affected 
providers and hospitals.
    Response: Since an enrollee must be able to access emergency 
services at any hospital setting, it would be virtually impossible for 
plans to send the information to all such providers. For hospitals and 
providers with which plans contract to provide emergency services, 
Sec. 438.230(b)(2)(ii) requires that a subcontract ``[s]pecifies the 
activities * * * delegated to the subcontractor,'' so this would ensure 
that at least these providers would be aware of procedures regarding 
emergency services.
    Comment: Numerous commenters believed there was a gap in proposed 
Sec. 438.10(f)(xii) with respect to how enrollees would be informed of 
where and how to obtain counseling or referral services that plans do 
not provide on the grounds of moral or religious objection. As written, 
these commenters asserted that the proposed rule does not require plans 
to provide information, nor refer enrollees to a source of information 
concerning these services. They acknowledged that States are required 
to provide this information, but did not feel that it should be up to 
the enrollee to figure this out. Some commenters argued that requiring 
enrollees to go to two places to obtain information about how and where 
to access family planning services is confusing, constitutes a barrier 
to care, and could delay care unnecessarily. These commenters believed 
this would permit discrimination against women, ignoring their health 
care needs. Another commenter noted that remedying this problem would 
reduce State burden in complying with the requirements. A few 
commenters felt that as written, the proposed rule would permit plans 
to create ``gag rules'' against physicians and other health providers, 
who can be barred from even discussing how to find information about 
certain services. Finally, some commenters believed that this provision 
violated section 1932(b)(3)(B)(ii) of the Act, which requires plans to 
inform enrollees about services not covered because of moral or 
religious objections.
    Several commenters recommended that plans be required to refer 
enrollees to where they can obtain the information addressed in section 
438.10(f)(xii). Some commenters suggested that plans specifically 
provide referral to toll-free line--which States should be responsible 
for maintaining--that tells beneficiaries how and where to access 
services the health plan does not provide. A few also suggested that 
such a toll-free line be used to inform enrollees about the extent to 
which they can access out of network providers, including family 
planning (per Sec. 438.10(f)(6)(vii)), and services available under the 
State plan but not under the contract (per Sec. 438.10(f)(6)(xii)). 
Other commenters suggested that plans be required to inform 
beneficiaries of all State plan services not available in the plan but 
otherwise available in Medicaid, and that this information be provided 
at point of service and annually.
    Response: We believe it would be inappropriate, and inconsistent 
with the intent of the conscience clause provision, to require a health 
plan that morally objects to a service to provide information on how 
and where to access the service. This is why we provided in the 
regulations that the State should be responsible for doing so. We 
believe the proposed rule was clear, in stating that information must 
be ``furnished'' by the State, that the State had the responsibility of 
providing beneficiaries with this information, not merely making it 
available to them. It appears, however, that at least some commenters 
have inferred some lesser level of State responsibility from the fact 
that the word ``furnish'' was used instead of ``provide,'' which is 
used elsewhere in the regulation text. While we believe these words to 
be interchangeable, the commenter seems to believe that furnish, as 
used here, means only that the materials must be furnished upon request 
(that is, ``made available''). In order to avoid any such inferences, 
and to make it clear that States are required actually to provide this 
information to enrollees, we are revising the text of 
Sec. 438.10(e)(2)(ii)(E) and Sec. 438.10(f)(6)(xii) to use the word 
``provide'' instead of ``furnish'' in describing the State's 
responsibility. We are also revising Sec. 438.102(d) to clarify the 
State is responsible for providing the required information not only 
for potential enrollees, but for enrollees as well. We believe States 
should be given

[[Page 41017]]

discretion as to how they fulfill that responsibility.

MCO/PIHP Specific Information (Proposed Sec. 438.10(g))

    Comment: One commenter urged that it be made clear how grievances 
and appeals work, not only within the health plans, but within State 
government as well.
    Response: Section 438.10(g)(1)(i) requires that plans provide 
information on the State fair hearing process, as well as their own 
grievance procedures.
    Comment: One commenter recommended that the required information 
for MCOs and PIHPs should also apply to PAHPs.
    Response: The information requirements in Sec. 438.10(g) of the 
proposed rule reflect requirements elsewhere in the regulation that 
apply only to MCOs and PIHPs. However, in response to a comment on 
Sec. 438.2 and 438.8, two additional provisions on which information is 
required in Sec. 438.10(g) are being imposed on PAHPs. First, under 
Sec. 438.8(b)(1)(ii), the advance directives requirement in 
Sec. 438.6(i)(2) now applies to the extent that the PAHP includes any 
of the providers listed in Sec. 489.102(a). Second, PAHP enrollees are 
entitled to an affirmation of their right to a State Fair Hearing. In 
response to this comment, and as noted above, we are adding a new 
paragraph (h) for PAHP-specific requirements (with proposed paragraph 
(h) renamed paragraph (i)), and including a reference to it in 
appropriate parts of Sec. 438.10(f). Finally, Sec. 438.6(h) and 
438.8(b) of the proposed rule already extended the Physician Incentive 
Plan requirements of 434.70 to PAHPs. We are adding in the new 
paragraph (h) of Sec. 438.10, that this information be provided upon 
request.
    Comment: One commenter was unclear as to why the information on 
provider appeal rights required by proposed Sec. 438.10(g)(1)(vii) was 
critical for enrollees. In the commenter's view, enrollees already feel 
that the amount of information they currently receive is too much, or 
borders on it. The commenter suggested requiring plans to send notices 
of provider appeal rights to network providers rather than enrollees.
    Response: The requirement in Sec. 438.10(g)(1)(vii) simply reflects 
the statutory requirement in section 1932(a)(5)(B)(iii) of the Act that 
information on ``procedures available to * * * a health care provider 
to challenge or appeal the failure of the organization to cover a 
service.'' This should not be interpreted as creating a new right in 
Medicaid for providers to file an appeal. However, should the State, 
MCO, or PIHP provide for such a right, they must inform enrollees of 
its availability.
    Comment: A few commenters noted that under the grievance and 
appeals rules in proposed subpart F of part 438, enrollees have the 
right to representation. These commenters were believed that grievances 
and appeals are complicated proceedings involving difficult to 
understand rules, and that enrollees should be made aware they have the 
option to obtain assistance. In addition, the commenters believed that 
enrollees should be protected against retaliation for filing an appeal 
or grievance, and provided with information on this right as well, so 
they will not forgo appeals out of fear of retaliation. The commenters 
recommended requiring health plans to inform enrollees they have a 
right to representation, and that they will not suffer from retaliation 
for filing an appeal or grievance.
    Response: We agree that enrollees need to understand the grievance 
system for it to be effective. However, we note the proposed rule at 
Sec. 438.10(g)(1)(iv) already stipulates that enrollees must be 
informed of the ``availability of assistance in the filing process.'' 
We believe this is sufficient to ensure enrollees understand the 
ability to obtain assistance, and are not adding the suggested 
clarification. We also disagree with the commenter that it is necessary 
to include an explicit statement that the beneficiary will not face 
retaliation for appealing. We do not believe that beneficiaries would 
assume that they would face retaliation in such a case.
    Comment: A few commenters questioned the provision of complex 
information such the information on physician incentive plans provided 
under proposed Sec. 438.10(g)(3)(B). These commenters believed that 
many enrollees would not want such information, and may have difficulty 
understanding it, making its automatic provision counterproductive. The 
commenters recommended making it available upon request.
    Response: We agree that requiring the provision of detailed 
information on physician incentive plans may be counterproductive. We 
are revising the regulation to provide at Sec. 438.10(g)(3)(B) to 
require MCOs and PIHPs to inform enrollees it is available upon 
request.
    Comment: A few commenters objected to the lack of a requirement for 
plans to notify enrollees of their ability to obtain, upon request, 
information on requirements for accessing services, including factors 
such as physical accessibility. These commenters believed that if plans 
did not furnish this information, the enrollee would have to contact 
numerous providers to obtain such information. In an emergency, the 
commenters were concerned that this could delay lifesaving care. One 
commenter referenced the need for TTY's service. Commenters also 
specifically noted that the 14th recommendation in CMS' Report to 
Congress on Special Needs addressed ensuring that plans and providers 
are physically accessible to those they will serve. Other commenters 
asserted that this was a requirement of the Americans with Disabilities 
Act. The commenters urged that plans be required to notify enrollees 
that this information is available upon request, and that this also be 
included in the annual notice.
    Response: We believe that the overall requirements of this section, 
in particular the new requirement for a mechanism to assist 
beneficiaries understand the managed care program and their own plans 
requirements and benefits, will fulfill the needs identified by the 
commenters. Further, Sec. 438.6(f) specifically requires MCOs, PIHPs, 
PAHPs and PCCMs to comply with the provisions of the Americans with 
Disabilities Act and other anti-discrimination statutes. We do not 
believe any additional changes to the regulations text are necessary.

Comparative Information Under the State Plan Option (Proposed 
Sec. 438.10(h)--Current Sec. 438.10(i))

    Comment: One commenter noted that there is a common understanding 
that quality and performance indicators are still evolving. This 
commenter believed that the reliability of such indicators for 
comparing plans varies for reasons such as difficulty in adjusting for 
factors not within the plan's control; reporting inconsistencies; or 
lack of statistical validity due to small plan size. The commenter 
recommended requiring States to address these issues as they determine 
which measures to include, and how the information is presented, 
explained, and qualified. In addition, the commenter recommended that 
the final rule advise States whether there are circumstances in which 
reporting data that is not statistically valid would be misleading.
    A few commenters urged that MCO information be consistent with 
HEDIS standards, and be based on the MCO's overall performance. Another 
commenter suggested giving States the latitude to develop and apply 
regional standards for comparative information. Finally, a commenter 
contended that disenrollment rates are not valid

[[Page 41018]]

indicators when auto-assignment is used.
    Response: We believe that States are aware of the evolving nature 
of quality indicators. The proposed rule includes the statutory 
discretion in section 1932(a)(5)(c)(iii) to provide quality indicators 
``to the extent available.'' We believe States are in the best position 
to determine which quality indicators to use, and that there is no 
impediment to regional standards for comparative information. With 
respect to disenrollment rates, we agree that there are valid concerns 
with respect to their use in a situation with auto-assignment. We note 
that disenrollment rates were not included in Medicaid HEDIS because of 
methodological problems, including the fact that most were related to 
loss of Medicaid eligibility. As a result, in response to this comment, 
we are revising the regulation at Sec. 438.10(i)(3)(iv) to delete the 
reference to disenrollment rates.
    Comment: One commenter believed that the type, scope, nature, and 
format of the comparative information that must be furnished in the 
case of the State plan option would be extremely costly. Another 
commenter argued that charting this information for individual PCCM 
providers would unduly complicate comparisons for enrollees, and be 
confusing for many service areas. This commenter believed that 
collection and maintenance would be cumbersome and costly to the State. 
The commenter suggested deleting this requirement for PCCMs.
    Response: We recognize these requirements will result in some 
additional costs, but do not believe compliance will be as onerous as 
the commenter believes. The information on benefits, cost-sharing, and 
service area are already available to the State. We do not have any 
flexibility on the requirement that information be presented in a 
comparative chart-like format, since this is specifically required by 
section 1932(a)(5)(C) of the Act. We also do not have flexibility on 
the applicability of this requirement to PCCMs under section 1932(a)(1) 
authority, as this is also required under section 1932(A)(5). (Section 
1932(a)(5) requires the provision of information on ``managed care 
entities,'' which includes MCOs and PCCMs.)
    There is flexibility for States to provide certain information that 
is identical across plans or PCCMs only once. For example, the State 
may provide a list of services provided or coordinated by all entities, 
and only identify and compare variations such as additional services 
provided, or services not provided because of the entity's religious or 
moral objections. The quality indicators are only required ``to the 
extent available.''
    We are, however, clarifying that the State need only provide 
comparative information on MCOs and PCCMs on a service area basis, to 
ensure that enrollees do not receive information on entities with which 
they cannot enroll.
    Comment: One commenter believed that it did not make sense to 
require the comparative information to be provided to potential 
enrollees at least once a year. The commenter assumed this was an 
error. The commenter suggested making this information available to 
enrollees and potential enrollees, rather than furnishing it. The 
commenter further suggested that States be required to provide the 
information prior to enrollment or anytime upon request.
    Response: The commenter is correct that we made an error. The 
error, however, was not the fact that the information be provided, 
rather than merely being made available upon request. Rather, the error 
was in omitting a reference to enrollees in what is now 
Sec. 438.10(i)(3). Section 1932(a)(5)(C) provides that ``A State that 
requires individuals to enroll with managed care entities under 
paragraph (1)(A) shall annually (and upon request) provide, directly or 
through the managed care entity, to such individuals * * *.'' The 
statute thus requires that information be provided to all potential 
enrollees and enrollees, and contrary to the commenter's suggestion 
that information only be made available upon request, it requires that 
this information be ``provid[ed]'' annually. Thus, in this respect, the 
regulation is not in error. We are making the needed correction to 
conform Sec. 438.10(i)(3) in this final rule with the statute. 
Specifically, we are clarifying that the information needs to be 
provided to potential enrollees in the timeframe required in 
Sec. 438.10(e)(1) (since enrollment is mandated for potential enrollees 
under section 1932(a)(1), these individuals would be enrollees when the 
obligation to provide information after one year occurs), and that 
enrollees should receive it annually and upon request. Further, we are 
acknowledging in Sec. 438.10(i) that the comparative information 
required in this paragraph may duplicate what is required in 
Sec. 438.10(e) for potential enrollees and Sec. 438.10(f)(6) for 
enrollees.
    Comment: A few commenters supported the idea that access to 
comparative information on health plans is essential to allow Medicaid 
beneficiaries to make informed choices. The commenters believed that 
exempting PIHPs and PAHPs from this requirement would undermine true 
competition among plans. The commenters recommended including PIHPs and 
PAHPs.
    Response: The requirements in Sec. 438.10(i) (proposed 
Sec. 438.10(h) apply only to managed care programs operated under State 
plan amendment, as authorized by Section 1932(a)(1) of the BBA. States 
may only use this authority for mandatory MCO and PCCM programs; 
mandatory PIHP and PAHP programs cannot be operated under this 
authority. Thus, Sec. 438.10(i) applies, PIHPs and PAHPs that are not 
also PCCMs (if they wee, they would be included as such) would not be 
among the plans from which beneficiaries could choose. As a result, we 
are not extending the requirement for comparative information to PIHPs 
and PAHPs as the commenter suggests.

Technical Corrections

    Comment: Some commenters noted areas where technical corrections 
are needed. In the introductory paragraph of Sec. 438.10(g), the 
reference should be to ``438.10(f)'' instead of ``Sec. 438.10(e).'' In 
Sec. 438.10(h)(1), they noted the correct reference was ``(h)(3),'' not 
``(g)(3).'' In Sec. 438.10(h)(3), they recommended changing ``paragraph 
(d)'' to ``paragraph (e),'' and changing ``paragraph (g)(2)'' to 
``paragraph (h)(2).''
    Response: We appreciate the commenters pointing out the errors, and 
are making the recommended corrections. In addition, we are correcting 
a drafting error in Sec. 438.10(a), in the definition of ``potential 
enrollee.'' Specifically, we are deleting the words ``in a'' in the 
phrase ``* * * not yet an enrollee of a specific in a MCO * * *''
6. Provider Discrimination (Proposed Sec. 438.12)
    Proposed 438.12 would implement the prohibition on provider 
discrimination in section 1932(b)(7) of the Act. The intent of these 
requirements is to ensure that an MCO does not discriminate against 
providers, with respect to participation, reimbursement, or 
indemnification, solely on the basis of their licensure or 
certification. We extended this requirement to PIHPs and PAHPs in 
proposed Sec. 438.12. These requirements do not prohibit an MCO, PIHP 
or PAHP from including providers only to the extent necessary to meet 
their needs. Further, the requirements do not preclude an MCO, PIHP or 
PAHP from establishing different payment rates for different 
specialties, and do not preclude an MCO, PIHP or PAHP from establishing 
measures designed to maintain the quality of services and

[[Page 41019]]

control costs, consistent with its responsibilities.
    Comment: One commenter agreed that health plans should be 
prohibited from excluding providers from their networks for reasons 
that are inconsistent with public policy, such as discrimination 
against providers serving a high need population or retaliation against 
providers who advocate on behalf of their patients. However, the 
commenter stated that the vast majority of health plans' decisions are 
wholly unrelated to these concerns. The commenter noted that the 
issuance of a written notice is unlikely to prevent the few cases of 
improper conduct. The commenter believed that the written notice 
provision would impose an unnecessary administrative burden and cost on 
health plans without substantially protecting providers, and therefore 
should be eliminated.
    Response: We continue to believe that such notice is important to 
help enforce the anti-discrimination requirements in section 1932(b)(7) 
of the Act and Sec. 438.12. The notice will provide reasons why 
providers were not included in the MCO's, PIHP's, or PAHP's network and 
may be used by States in its monitoring efforts. Further, we estimate 
that it will take one hour to draft and furnish any given notice and on 
average each MCO, PIHP, and PAHP will only need to produce 10 notices 
per year.
    Comment: One commenter strongly disagreed with this provision, as 
the commenter believed it was intervening with the ability of the MCO 
to contract and develop networks without undue restraint. The commenter 
specified that in a managed care business model, selection of networks 
is made on the basis of quality and market need and that States should 
be given the latitude to address these issues as part of their network 
analysis. The commenter also argued that this provision would handicap 
MCOs in requiring all providers be credentialed.
    Response: We disagree with the commenter. Section 438.12, 
implementing section 1932(b)(7) of the Act, provides sufficient 
latitude for MCOs, PIHPs and PAHPs with respect to network selection. 
This provision does not require MCOs, PIHPs and PAHPs to contract with 
providers beyond the number necessary to meet the needs of its 
enrollees. Further, this provision does not preclude these entities 
from establishing measures for provider selection that are designed to 
maintain quality of services and control costs and are consistent with 
its responsibilities to enrollees. Finally, this provision does not 
require entities to contract with any willing provider. We also would 
not have the discretion to eliminate this provision even if we agreed 
with the commenter, as it is set forth in the statute.
    Comment: One commenter urged CMS to clarify in this section that 
Medicaid managed care entities may not prohibit or limit fully licensed 
physicians, such as psychiatrists from providing services within their 
scope of practice.
    Response: The requirements in Sec. 438.12 are intended to ensure 
that an MCO, PIHP or PAHP does not discriminate against providers with 
respect to participation, reimbursement or indemnification solely on 
the basis of their licensure or certification. We do not believe it is 
appropriate to include the suggested statement, as this requirement 
does not pertain to scope of practice. Section 438.214 addresses 
provider selection and credentialing requirements.

B. State Responsibilities (Subpart B)

    Proposed subpart B set forth the State option to implement 
mandatory managed care through a State plan amendment, as well as other 
State responsibilities in connection with managed care, such as 
beneficiary choice, provisions for disenrollment, continuity of care, 
conflict of interest standards, limits on payment, and monitoring.
1. State Plan Requirements (Proposed Sec. 438.50)
    Proposed Sec. 438.50 permits State agencies to enroll most Medicaid 
beneficiaries in MCOs or PCCMs on a mandatory basis without a waiver 
under sections 1915(b) or 1115 of the Act, and without being out of 
compliance with the provisions in section 1902 of the Act for 
Statewideness, comparability, or freedom of choice. Paragraphs (b) and 
(c) set forth the requirements for these programs and the assurances 
that States must provide. Paragraphs (d) and (e) identified populations 
that cannot be mandatorily enrolled in an MCO or PCCM and address the 
requirements for a default enrollment mechanism.
    Comment: Two commenters viewed proposed Sec. 438.50(b)(2) as a 
first step in better understanding how managed care organizations pay 
physicians and recognize that payment to providers in managed care is 
controlled by the managed care organizations. The commenters 
recommended that CMS also require managed care plans to specify the 
manner in which increases in Medicaid payment for services will be 
passed through to intended physicians.
    Response: Section 438.50(b)(2) is a general requirement that a 
State plan amendment under this authority specify the payment 
arrangement between the State and its managed care contractor. This 
section does not require the submission of any information regarding 
payment mechanisms or amounts between MCOs and their subcontracting 
providers. CMS does not review these subcontracts. We do not believe 
that it is necessary to impose these requirements beyond requiring that 
payments to providers be sufficient to encourage sufficient provider 
participation.
    Comment: Several commenters supported the provisions for public 
involvement in the design and implementation of the State plan 
amendment and on-going public participation after implementation of the 
State plan amendment as proposed in Sec. 438(b)(4). One commenter 
opposed the requirements for public involvement citing that this 
requirement is not applied to any other State plan amendment and 
requires additional State resources. The commenter suggested that 
latitude be given to States with history of public appearance.
    Response: While not all State plan amendments require public 
involvement, this language is consistent with the public notice 
requirements of the State Children's Health Insurance Program and 
reflects the requirements under the section 1115 of the Act 
demonstration authority.
    Comment: Several commenters suggested adding PIHPs and PAHPs, as 
well as MCOs and PCCMs, to the introductory clause in Sec. 438.50(d), 
which describes populations that cannot be mandatorily enrolled in an 
MCO or PCCM under the authority in section 1932(a) of the Act and 
Sec. 438.50(a).
    Response: Section 1932(a)(1) prohibits States from mandatorily 
enrolling specified groups of beneficiaries in MCOs and PCCMs under the 
authority in that section, which is implemented in Sec. 438.50. This 
section of the statute and regulations only permit States to enroll 
beneficiaries in MCOs and PCCMs, even if the beneficiaries are not in 
an exempted group. Since this provision is an exception to authority 
that only permits enrollments in MCOs or PCCMs, it is not appropriate 
to reference PIHPs or PAHPs in this provision. Unless the PAHP also 
qualifies as a PCCM, and thus, would already be covered by this latter 
term, enrollment in a PIHP or PAHP may only be mandated under waiver 
authority in sections 1915(b) or 1115(a) of the Act.
    Comment: We received several comments on the enrollment by default

[[Page 41020]]

in proposed Sec. 438.50(f) with one commenter applauding CMS' effort to 
maintain existing relations that recipients may have with providers. 
Another commenter recommended that CMS delete the specific requirements 
to take relationships with existing providers into account. Two 
commenters believe that the default enrollment process discourages 
health plans and providers who have not traditionally served Medicaid 
beneficiaries. Another commenter inquired as to how the default 
enrollment process should function if the individual's provider is part 
of more than one MCO network. One commenter recommended that the 
default enrollment process consider geographic location, family 
relations and special needs of the individual.
    Response: Section 1932(a)(4)(D) of the Act clearly states that the 
default mechanism must consider existing relationships or 
``relationships with providers that have traditionally served 
beneficiaries under this title.'' We believe that the States should 
have the flexibility to consider other factors in the design of a 
default enrollment process that best meets the needs of the individual, 
including factors suggested by the commenter. Therefore, we have not 
added any new requirements to Sec. 438.50(f).
    Comment: A few commenters requested clarification of the phrase in 
proposed Sec. 438.50(f)(2), ``must distribute the recipients 
equitably.'' One commenter recommended that the regulation be restated 
to explicitly grant States the right to determine what is an equitable 
distribution.
    Response: This provision requires States to have a process whereby 
they can assign beneficiaries to MCOs or PCCMs, if the beneficiary does 
not exercise his or her right to choose. When the State is unable to 
make an assignment based on an existing provider-recipient relationship 
or a relationship with a provider that has traditionally serviced the 
Medicaid population, it must do so by distributing ``the recipients 
equitably among qualified MCOs and PCCMs available to enroll them.'' 
The State is the only party that can determine when it is unable to 
make an assignment based on its records of an existing relationship or 
traditional service to the Medicaid population. Further, we agree with 
the commenter that the State is best suited to determine how to make an 
equitable distribution of default-assigned beneficiaries. This may be 
done through a specific assignment algorithm or as a simple 
distribution among all qualified providers up to any limits 
established. We have added language to the text of Sec. 438.50(f)(2) to 
clarify this.
    Comment: To help ensure the best quality of care, one commenter 
recommended that the proposed requirement for ``existing provider-
recipient relations'' in Sec. 438.50(f)(3) be based on the provider 
being the main source of Medicaid services for the recipient in the 
last 2 years.
    Response: We believe that a 1-year period allowed in 
Sec. 438.50(f)(3) is sufficiently long to identify an existing 
provider-recipient relationship. This provision only applies to the 
default assignment of individuals who did not take the opportunity to 
choose their MCO or PCCM, and we would assume that most individuals 
would make this selection if their relationship with a particular 
provider is important to them.
    Comment: One commenter expressed concerns that these provisions in 
Sec. 438.50 do not directly address the importance of ensuring that 
families are able to choose among health plans and health care 
providers when enrolling in mandatory managed care plan. The commenter 
believes that the process of auto-assigning can cause problems with the 
assignment of different family members of the same family to numerous 
providers and the assignment of certain individuals to providers many 
miles away and recommended that States be required to make every effort 
to ensure that families make their own selections.
    Response: Through a mandatory assignment under Sec. 438.50(f), or 
any mandatory managed care arrangement under a waiver authority, it is 
possible that individuals in a family may be assigned to different 
providers. We do not believe that this should be prohibited, since the 
arrangement may be in the best interest of the individuals in the 
family based on their specific health care needs. If this assignment is 
problematic, all enrollees are free to disenroll without cause during 
the first 90 days of their enrollment period. Consequently, we do not 
believe any changes are warranted in this provision.
2. Choice of MCOs, PIHPs, PAHPs, and PCCMs (Proposed Sec. 438.52)
    Proposed Sec. 438.52 implements the requirement in section 
1932(a)(3) of the Act that States must permit an individual to choose 
from at least two MCOs or PCCMs, but would have permitted States to 
offer a single MCO in a rural area under certain conditions, and to 
offer a single HIO in certain counties.
    Comment: Several commenters were concerned about the impact of 
these regulations on States with a single carve-out PIHP contract, such 
as a mental health carve-out in a non-rural area, because the 
requirement for choice in this section would appear to prohibit this 
type of program.
    Response: Although we are extending the choice requirement in 
Sec. 438.52 to PIHPs and PAHPs under the authority of this regulation, 
the Secretary will continue to have the discretionary authority to 
grant waivers for the operation of managed care programs contracting 
with single PIHPs or PAHPs on a case-by-case basis.
    As under current provisions, these entities can operate under 
waivers of the freedom of choice requirement in section 1902(a)(23) of 
the Act, which permits a State to establish or continue a program. For 
the purposes of PIHPs and PAHPs, this waiver could extend to the 
requirement for choice in section 1932(a)(3) of the Act. All 
requirements that apply to PIHPs and PAHPs, including the choice 
requirement, are based only upon the regulatory authority for the 
existence of these entities, which is derived from section 1902(a)(4) 
of the Act, which can be waived under section 1915(b). The waiver would 
not be possible for MCOs or PCCMs since this section of the Act cannot 
be waived under section 1915(b).
    Therefore, under these rules, as before, CMS can grant States a 
waiver to operate a program with a single PIHP or PAHP, in a rural or 
non-rural area.
    Comment: One commenter pointed out that a State could not restrict 
enrollment in one plan as a sanction in non-rural areas where only two 
plans exist, because the State would not be in compliance with this 
requirement for choice.
    Response: The commenter is correct that a State cannot impose a 
sanction that would leave only one plan available in a non-rural area 
unless the State then offers fee-for-service as an alternative.
    Comment: A few commenters suggested there should be no exception to 
allow a State to limit choice in rural areas. Another commenter felt 
that allowing a choice in a rural area of two primary care providers as 
opposed to two managed care systems, would limit choices that might in 
fact be otherwise available to an enrollee.
    Response: The exception allowing a State agency to restrict choice 
of coverage to a single MCO or PCCM system in rural areas is specified 
in section 1932(a)(3)(B) of the Act and cannot be revoked by this 
regulation. Even without the rural exception to the choice requirement 
permitted by section 1932(a)(3)(B), a State may limit a beneficiary's 
freedom of choice of providers in a rural or any other area

[[Page 41021]]

through a waiver under section 1115 or 1915(b) of the Act, or a State 
plan amendment under section 1932(a)(1) of the Act. Both these waivers 
and the exception permitted under this rule may have the impact of 
limiting beneficiary choices, which would otherwise be available, as 
suggested by the commenter. However, the limitation in this rule is 
specifically authorized by section 1932(a)(3) of the Act.
    We have specified conditions that must be met in order for this 
exception to be implemented. These include the requirement in 
Sec. 438.52(b)(2) that a beneficiary in a rural area who has been 
receiving services from a provider that is not part of the managed care 
network can receive out-of-plan treatment from that provider on a 
limited basis, as specified in that paragraph. Thus, we believe that 
the statute and this final rule contain sufficient beneficiary 
protections when the choice of managed care entity is restricted in 
rural areas.
    Comment: One commenter was concerned that rural area PIHPs and 
PAHPs that do not include primary care services would not qualify for a 
rural exception because of the requirement to permit beneficiaries to 
choose from at least two physicians or case managers.
    Response: If either of these entities operating in a rural area do 
not include primary care services, then the requirement would not apply 
to them. These primary care services would be available through another 
source.
    Comment: One commenter was concerned about what the commenter saw 
as a contradiction in the preamble in the statement that, allowing 
beneficiaries in a single rural plan to choose another primary care 
provider in the network would make it unnecessary for a State agency to 
operate a parallel fee-for-service system for those individuals who 
disenroll for cause.
    Response: The commenter is correct that this statement is 
misleading, and a State may not always be able to be relieved from 
operating a fee-for-service system in this situation. The State may be 
obligated to cover out-of-network services on a FFS basis in the 
situations described in Sec. 438.52(2)(b)(ii)(A) through (b)(ii)(D). 
Further, enrollees in a program operated under the rural exception to 
the choice requirement, have the right to disenroll from their primary 
care providers, but not necessarily from the single entity providing 
health care in the rural area (except for instances when the enrollee 
moves out of the entity's service area). When the enrollee no longer 
resides in the rural area served by the single entity, he or she may be 
required to re-enroll in a managed care entity serving his or her new 
area of residence.
    However, the commenter is correct that there may always be 
individual instances when States must maintain the ability to make FFS 
payments to providers even if an entire parallel FFS system is no 
longer necessary.
    Comment: There were several commenters who appreciated requiring 
MCOs to solicit enrollment of providers who are the source of service 
to a new enrollee, and to transition the enrollee within 60 days to 
other providers in the MCO network if the provider chooses not to 
participate. These commenters were concerned that rural area enrollees 
would otherwise remain out-of-network indefinitely. One commenter 
suggested a transition period shorter than 60 days and a few suggested 
a longer period. Many commenters felt that it was not appropriate to 
require a rural provider to join an MCO in order to continue to serve a 
patient with whom there was a prior relationship, particularly for 
pregnant women. They indicated belief that rural providers would choose 
not to enroll and, therefore, enrollees' choices would be severely 
restricted. Some commenters questioned if this section meets the 
requirement of section 1396u-2(a)(3)(B)(ii) U.S.C. to allow for 
consideration of when using an out-of-plan provider is ``appropriate.'' 
Some commenters opposed requiring MCOs to offer contracts to ``any 
willing provider'' because it would prevent MCOs from building networks 
that are the correct composition for their enrollees and would 
undermine the financial viability of MCO networks.
    Response: We believe that in establishing the ``appropriate 
circumstances'' for allowing an enrollee to go out of network when 
there is a rural exception to choice, we need to balance the needs of 
enrollees with supporting good managed care practices. By requiring an 
MCO to offer a contract to any qualified provider who is the main 
source of service to the recipient, we prohibit the MCO from barring 
the client's access to that provider. The 60-day period provides 
sufficient time to assure that a provider has the option to continue to 
serve an enrollee with whom they have an existing relationship. 
Allowing a recipient to continue indefinitely (that is, as long as an 
acute medical condition exists) to see a non-participating provider 
could encourage providers to not contract with MCOs and not continue 
their participation in the Medicaid program. We especially want to 
encourage, rather than discourage, the continued participation of 
providers who treat pregnant women, and we believe that this provision 
helps to accomplish that goal.
    We disagree with the commenter that this provision requires MCOs to 
offer contracts to ``any willing provider.'' Section 
438.52(b)(2)(ii)(B)(2) specifically recognizes that a provider ``may 
not meet the qualification requirements to join'' the managed care 
network. If this is the case, there is no requirement that the provider 
be offered a contract, and the beneficiary must be transitioned into 
the managed care network.
    Comment: Two commenters were concerned that the definition of 
``rural'' at Sec. 438.52(b)(3) does not recognize that a Metropolitan 
Statistical Area may be largely rural although it has a large city, and 
due to the rural nature outside the city it would be appropriate for an 
exemption to the choice of two MCOs requirement. They suggested that 
the State should apply its own definition of ``rural'' subject to 
approval of CMS.
    Response: We initially proposed three possible definitions of 
rural, and asked for comments. There was no clear consensus among the 
comments we received at that time, and CMS decided to use the single 
definition of rural based on being outside of an MSA. We believe that 
this definition best assures that States can use the exemption when 
appropriate but it reasonably limits the extent to which an area is 
considered rural, and is consistent with the Medicare definition for 
the purpose of defining rural hospitals.
3. Enrollment and Disenrollment (Proposed Sec. 438.56)
    Proposed Sec. 438.56 implements the provision in section 1932(a)(4) 
of the Act, and sets forth a number of requirements relating to 
enrollment and disenrollment in Medicaid managed care programs.
    Comment: One commenter questioned the authority to apply the 
provisions of this section to voluntary managed care programs.
    Response: Section 1932(a)(4) of the Act contains new requirements 
that apply to the enrollment and disenrollment of beneficiaries in MCOs 
and PCCMs. In addition to applying directly to the mandatory programs 
under section 1932(a)(1)(A) of the Act, these requirements are 
incorporated under section 1903(m)(2)(A) of the Act for MCOs and 
section 1905(t) of the Act for PCCMs. In addition, through this 
regulation we are extending these provisions to PIHPs and PAHPs.
    Comment: Several commenters were pleased that the proposed 
Sec. 438.56(b) was consistent with the Medicare+Choice requirements 
restricting disenrollment by a plan. One

[[Page 41022]]

commenter was concerned that there was no guidance as to what would 
constitute acceptable grounds for disenrollment.
    Response: We believe that Sec. 438.56(b)(2) clearly identifies the 
reasons an MCO, PIHP, PAHP, or PCCM may not request disenrollment of a 
beneficiary. We have not provided other limits as long as beneficiaries 
are not disenrolled for these reasons. States may wish to establish 
specific instances in which entities may request disenrollment of a 
beneficiary in their contract provisions.
    However, we note that Sec. 438.56(b)(2) as set forth in the 
proposed rule omitted the word ``adverse,'' describing a change in an 
enrollee's health status, as contained in the prior section governing 
disenrollment by the plan in Sec. 434.27(a)(2). We inadvertently 
omitted this term, and we have inserted ``adverse'' in the final rule 
to clarify that the prohibition on requests for disenrollment under 
this section applies only to adverse changes in health status, not 
where an enrollee's health status has improved.
    Comment: Several commenters expressed concern that the ability to 
disenroll without cause during the 90 days following initial enrollment 
would disrupt continuity of care and was contrary to HEDIS reporting 
timeframes. Several other commenters were concerned that 90 days was 
not enough time and there should be more flexibility to change without 
cause.
    Response: Under section 1932(a)(4)(A) of the Act, beneficiaries 
must be able to disenroll without cause from an MCO or PCCM within the 
first 90 days of initial enrollment. We have no authority to modify 
this requirement by this regulation, but we believe that represents a 
reasonable time period for enrollees to decide whether the managed care 
entity in which they are enrolled will best meet their needs.
    Comment: One commenter suggested that all States with ongoing 
programs should be required to provide a right to disenroll without 
cause, immediately upon implementation of these regulations. The 
commenter also suggested that disenrollments for cause should be 
applied retroactively.
    Response: Nearly every State (that is not operating under the 
authority of a section 1115 demonstration) has already implemented the 
BBA rules regarding enrollment and disenrollment in accordance with the 
guidance contained in the letter to all State Medicaid Directors letter 
dated January 21, 1998. As discussed elsewhere, provisions of this rule 
will become effective 60 days following publication of this final rule 
and must be implemented by 1 year from the effective date of this final 
rule.
    We believe that an automatic disenrollment without cause for all of 
the over 25 million Medicaid managed care enrollees upon implementation 
of the regulation would create a chaotic situation disrupting current 
patterns of care, and is not justified by any evidence of problems in 
States' existing Medicaid managed care programs. We do not understand 
how the commenter envisions implementing retroactive disenrollments for 
cause, but we do not believe there is any justification for the 
suggested provision.
    Comment: Many commenters suggested that homelessness or being a 
migrant worker should be added as a cause for disenrollment at any 
time.
    Response: We do not believe it is necessary to add these conditions 
as a cause for disenrollment. A beneficiary in one of these 
circumstances, like all other Medicaid enrollees, is entitled to 
disenroll, without cause for the first 90 days of enrollment in an MCO, 
PIHP, PAHP, or PCCM. Further, he or she may still disenroll for cause 
after that date, if one of the conditions in Sec. 438.56(d)(2) listed 
is met. Section 438.56(d)(2)(i) specifies that an enrollee's movement 
out of an MCO, PIHP, PAHP, or PCCM service area is one of the required 
examples of cause for disenrollment. We believe that this option will 
often be available to migrant workers. In addition, a State may include 
additional reasons, such as homelessness as a cause for disenrollment 
under Sec. 438.56(d)(2)(iv).
    Comment: One commenter was supportive of the reasons allowed for 
disenrollment with cause. Another commenter was concerned that the 
broad definition of cause for other reasons at Secs. 438.56(d)(2)(iv) 
was too broad and could lead to disenrollment on demand, particularly 
if MCOs may approve disenrollment through the grievance process.
    Response: CMS has specified three specific circumstances where 
cause for disenrollment exists and permitted States to develop other 
reasons, including but limited to, the examples in Sec. 438.56(d)(iv). 
It is not our intent in this provision to permit disenrollment on 
demand. States will make determinations on request for disenrollment 
based on these requirements and any others they select, and beyond 
these limited requirements, have the flexibility to implement this 
provision as best serves their beneficiaries and the Medicaid program.
    Comment: One commenter suggested that the timeframe for processing 
disenrollments should be more flexible to accommodate situations where 
more time is needed to make a determination.
    Response: We believe that the fixed timeframe will assure that all 
information is properly collected and evaluated in a timely fashion. 
Making the timeframe flexible could create an incentive to delay in 
accumulating necessary information. This timeframe reflects the time 
permitted for the determinations previously, and we do not believe it 
was problematic.
    Comment: One commenter suggested that the requirement in 
Secs. 438.56(f)(1), that enrollees be given written notice of their 
disenrollment rights at least 60 days before the end of each enrollment 
period, would confuse enrollees and seem to encourage disenrollment. 
The commenter suggested that including disenrollment rights in 
enrollment materials, and providing information through the enrollment 
broker should be sufficient.
    Response: Section 1932(a)(4) requires an annual notice at least 60 
days before the beginning of an individual's annual opportunity to 
disenroll. We believe that this information will be provided to 
enrollees along with all other enrollment materials that must be 
provided in this time frame. The purpose of this requirement is to 
ensure that enrollees have sufficient information in order to make a 
decision whether or not to continue enrollment in their current MCO, 
PIHP, PAHP, or PCCM within the time allotted for a change in 
enrollment.
    Comment: One commenter applauded the requirement to automatically 
reenroll a recipient who was disenrolled solely because he or she lost 
Medicaid eligibility for a period of 2 months or less.
    Response: We appreciate the commenters' support.
4. Conflict of Interest Safeguards (Sec. 438.58)
    Proposed Sec. 438.58 requires as a condition for contracting with 
MCOs that States establish conflict of interest safeguards at least as 
effective as those specified in section 27 of the Office of Federal 
Procurement Policy Act. We received no comments on this section.
5. Limit on Payment to Other Providers (Proposed Sec. 438.60)
    Proposed Sec. 438.60 prohibits direct payments to providers for 
services available under a contract with an MCO, PIHP, or PAHP.
    Comment: Many commenters asked what type of payments to providers 
are exempt from this prohibition on direct payments, based on 
exceptions in title XIX of the Act or Federal regulations,

[[Page 41023]]

and whether this exemption applies to graduate medical education (GME) 
payments to teaching hospitals, requiring GME payments to be included 
in capitation rates.
    Response: The exemption in proposed Sec. 438.60 applies to two 
types of providers--disproportionate share hospitals (DSH) and 
Federally qualified health centers (FQHCs). Section 1902(a)(13) of the 
Act specifically requires direct payments to these providers when they 
are part of an MCO provider network. The proposed provision would 
prohibit States from making direct payments to teaching hospitals for 
GME when their Medicaid patients are enrolled in, and their services 
are provided under a contract between the State and an MCO or PIHP. 
Proposed Sec. 438.60 would require any GME payments to be included in 
the capitation rates paid the MCO or PIHP.
    Comment: Numerous commenters opposed this limitation on GME 
payments in managed care arrangements, arguing that States should be 
permitted to maintain their current payment methodology for GME. A 
number of these commenters stated that this prohibition on GME is 
directly contradictory to the Medicare managed care requirements, for 
GME be carved out and paid directly to the teaching hospitals, and 
asked for CMS' rationale for this inconsistency.
    Many commenters stated that this requirement would adversely impact 
teaching hospitals and discourage them from participating in managed 
care. Others indicated that including GME payments in capitation rates 
would not work since payments vary widely by provider and therefore by 
MCO network. They added that including GME in capitation rates would 
take away States' control over whether and to what extent teaching 
hospitals receive payments intended to go to them.
    Most commenters suggested that approved GME payments should be made 
an exception to this provision, like DSH and FQHC payments.
    Response: The intent of proposed Sec. 438.60 was to prevent 
duplicate and inappropriate supplemental payments to providers. Under 
the new rules governing payments under risk contracts in Sec. 438.6(c), 
States are expected to make actuarially sound payments to MCOs, PIHPs, 
and PAHPs that include amounts for all services covered under the 
contract. In most instances, we do not believe there should be a need 
for payments directly from the State to providers who are delivering 
all of their services to Medicaid MCO enrollees. The Congress has made 
a statutory exception to require States to pay directly to the two 
types of providers identified above, when their services are delivered 
through a Medicaid-contracting MCO. As some commenters pointed out, the 
Congress also made an exception for Medicare GME, where amounts are 
required to be carved out of Medicare managed care payments and paid 
directly to teaching hospitals. A rationale for treating GME 
differently in Medicaid would be that the Medicare statute specifically 
authorizes payment of GME, while the Medicaid statute does not contain 
a similar provision.
    However, we recognize that GME payments have become a common 
payment practice in State Medicaid programs. In response to the 
concerns raised, we are amending Sec. 438.60 to allow an exception to 
this prohibition on direct payment to providers, ``where the State 
agency has adjusted the actuarially sound capitation rates paid under 
the contract in accordance with Sec. 438.6(c)(5)(v), to make payments 
for graduate medical education.'' The aggregate amount of allowable 
payments under this exception would be limited to the total amount that 
would have been paid under the approved state plan for FFS. We believe 
that this is an equitable approach that mirrors the requirements in 
Medicare managed care and addresses State concerns of preventing harm 
to teaching hospitals and Federal concerns of ensuring the fiscal 
accountability of these payments. As part of our larger strategy of 
improving the fiscal integrity of Medicaid payments, we also plan to 
study existing Medicaid GME payment arrangements and may issue 
additional policies in the future.
6. Continued Service to Recipients (Proposed Sec. 438.62)
    Proposed Sec. 438.62 requires States to arrange for continued 
services to beneficiaries who were enrolled in an MCO, PIHP, PAHP, or 
PCCM whose contract was terminated, or for any enrollee who is 
disenrolled for any reason other than ineligibility for Medicaid.
    Comment: Many commenters recommended adding provisions to require 
mechanisms to assure continued access for enrollees with ongoing health 
care needs who move from FFS to managed care, between one managed care 
entity and another, or from managed care to FFS. These commenters 
wanted the requirements to apply to all special needs children, 
beneficiaries over age 65, pregnant women, and other groups identified 
by the State and include procedures for notification regarding the 
State's transition mechanisms and assurances that enrollees' ongoing 
health care needs would be met.
    These commenters felt that enrollees may not understand how to 
access continued services during transition and this could be dangerous 
for those with special health care needs for which continuity of care 
is necessary. For example, an enrollee who requires home health 
services may find himself unable to receive care while being 
transferred from one MCO to another.
    Another commenter stated that it was important to have some type of 
mechanism to insure that individuals may be treated by their current 
provider for a reasonable period of time. One commenter also suggested 
requiring a period of up to 60 days for beneficiaries going through one 
of these transitions, during which they could continue an ongoing 
course of treatment with a nonparticipating health care provider.
    Several commenters supported the proposed provision.
    Response: The goal of our proposed rule is to ensure that there are 
adequate protections for managed care enrollees, while providing 
flexibility to States to determine how to best implement these 
protections. Most States, in their waiver programs under sections 1115 
or 1915(b) of the Act already have mechanisms in place to transition 
enrollees into managed care from fee-for-service (FFS) and from one MCO 
to another. Further, we are concerned that it would be very difficult 
to enforce the requirement when a recipient moves from managed care to 
FFS as there are few mechanisms in the FFS delivery system for care 
coordination and follow-up.
7. Monitoring Procedures (Proposed Sec. 438.66)
    Proposed Sec. 438.66 is a redesignation of Sec. 434.63, with non-
substantive revisions and appropriate changes in terminology, and 
requires States to have in place procedures for monitoring MCOs, PIHPs, 
and PAHPs.
    Comment: One commenter stated that since Medicaid provides care to 
many low income children, monitoring should include a focus on 
pediatric services. A recent General Accounting Office report (GAO-01-
749, published July 2001) found that States have done a poor job in 
complying with EPSDT requirements, particularly in the area of managed 
care. The commenter urged CMS to implement the GAO recommendations to 
work with States to develop a timetable for improving their compliance, 
and for highlighting best practices.

[[Page 41024]]

    Response: We have initiated a number of projects that address the 
GAO recommendations, and are working to improve our monitoring of 
States as well as identifying and providing needed technical assistance 
to them.

C. Enrollee Rights and Protections (Subpart C)

    Proposed subpart C set forth a variety of enrollee protections, 
including enrollee rights (proposed Sec. 438.100), protection of 
provider-enrollee communications (proposed Sec. 438.102), limits on 
marketing activities (proposed Sec. 438.104), limits on enrollee 
liability for payment (proposed Sec. 438.106) and cost-sharing 
(proposed Sec. 438.108), rights in connection with emergency and post-
stabilization services (proposed Sec. 438.114), and solvency standards 
(proposed Sec. 438.116).
1. Enrollee Rights (Proposed Sec. 438.100)
    As part of these standards, proposed Sec. 438.100, required that 
each MCO and PIHP have written policies with respect to enrollee 
rights, and that each MCO, PIHP, PAHP, and PCCM ensure compliance with 
Federal and State laws affecting the rights of enrollees, and ensure 
that its staff and affiliated providers take these rights into account 
when furnishing services. Under proposed Sec. 438.100(b), States were 
required to ensure that each enrollee of an MCO, PIHP, PAHP, or PCCM 
has the right to (1) receive information regarding his or her health 
care; (2) be treated with respect and with due consideration for 
enrollee dignity and privacy; (3) receive information on available 
treatment options and alternatives that is presented in a manner 
appropriate to the enrollee's condition and ability to understand; (4) 
participate in decisions regarding his or her health care, including 
the right to refuse treatment; and (5) be free from any form of 
restraint or seclusion used as a means of coercion, discipline, 
convenience, or retaliation. Further, enrollees of MCOs or PIHPs were 
given the right to (1) be furnished health care services in accordance 
with proposed Secs. 438.206 through 438.210; (2) obtain a second 
opinion from an appropriately qualified health care professional; (3) 
request and receive a copy of his or her medical records, and to 
request that they be amended or corrected. The State also had to ensure 
that each enrollee is free to exercise his or her rights, and that the 
exercise of those rights does not adversely affect the way the MCO, 
PIHP, PAHP, or PCCM and its providers or the State agency treat the 
enrollee. Proposed Sec. 438.100(d) required that States ensure 
compliance with various civil rights laws.
    Comment: Several commenters provided support for the enrollee 
rights provisions as proposed. Several other commenters felt that all 
of the rights in this section should apply to PAHPs as well as PIHPs, 
or that the differences between these two types of plans should be 
narrower.
    Response: In response to the latter comments, we have expanded the 
enrollee rights to be provided for PAHP enrollees. We have clarified 
that PAHP enrollees have the right to request and receive a copy of 
their medical records, and to request that they be amended, as 
specified in 45 CFR part 164. Further, we have revised 
Sec. 438.100(b)(3) to provide that PAHP enrollees, consistent with the 
scope of the PAHP's contracted services, have the right to be furnished 
health care services in accordance with Secs. 438.206 through 438.210. 
We also removed from the regulation text the language referring to the 
right to obtain a second opinion from an appropriately qualified health 
care professional in accordance with Sec. 438.206(b)(3) to avoid 
duplication. Please note, this language was only removed to avoid 
duplication, we did not remove the right to a second opinion, as it is 
subsumed within Sec. 438.100(b)(3) as one of the health care services 
enrollees of MCOs, PIHPs and PAHPs have the right to be furnished under 
Sec. 438.206.
    Comment: One commenter suggested that CMS should consider HIPAA 
privacy rules before finalizing this rule to ensure that there is no 
conflict.
    Response: The Health Insurance Portability and Accountability Act 
of 1996 (HIPAA) included comprehensive health privacy legislation. HHS 
published the final privacy rule on December 28, 2000 (65 FR 82462). 
The final rule took effect on April 14, 2001 and applies to covered 
entities as that term is defined at 45 CFR 160.103. Most health plans 
and providers must comply with the new requirements by April 14, 2003. 
Enforcement of the privacy rule requirements will not occur until April 
2003. The compliance date for small health plans is April 14, 2004. The 
privacy rule gives patients greater access to their own medical records 
and more control over how their personal health information is used. 
Specifically, the privacy rule gives patients the right to access their 
records, request a change or challenge a particular part of the medical 
record, and have that challenge be included in the permanent records. 
The privacy rule also covers permissible uses and disclosures of 
protected health information and requires that appropriate safeguards 
are used to ensure against misuse of such information. This final rule 
neither conflicts with the privacy rule, nor does it impose any privacy 
provisions of its own. Moreover, nothing in this final rule affects a 
State's or any other covered entity's responsibilities under the 
privacy rule. We reference the privacy rule at Secs. 438.100(b)(2)(vi), 
438.208(b)(4), and 438.224, to the extent that it is applicable.
    Comment: One commenter expressed concern that proposed 
Sec. 438.100(a)(2) specifies that all MCOs and PCCMs must comply with 
any applicable Federal and State laws that pertain to enrollees rights. 
The commenter was concerned that State laws on enrollee rights might be 
in conflict with this section. The commenter expressed the concern that 
requiring MCOs to comply with two sets of regulations addressing the 
same operational areas is unnecessarily confusing and burdensome for 
MCOs and for managed care enrollees. The commenter requested that this 
provision be restated such that if State law on enrollee rights is 
consistent with section 1932(b) of the Act, CMS does not have the 
authority to impose additional regulation.
    Response: As Federal law supercedes State law, all States must 
conform with Federal regulations for Medicaid managed care enrollees, 
so there would not be a situation in which two conflicting sets of 
requirements would apply, and this concern of the commenter is not 
valid. We proposed these standards because interpersonal aspects of 
care are highly important to most patients and closely related to 
quality of care. Enrollees' interactions with the organization and its 
providers can have an important bearing on their willingness and 
ability to understand and comply with recommended treatments and hence 
on outcomes and costs. While many States have requirements in place 
that would assure these rights, not all States do. We believe that 
these minimum standards are justified for all Medicaid beneficiaries. 
We accordingly do not accept the commenter's suggestion that we defer 
totally to State law with respect to enrollee rights. However, we note 
that these Federal regulations set a floor for the level of enrollee 
standards. States may establish more stringent standards that are not 
inconsistent with these requirements.
2. Provider-Enrollee Communications (Proposed Sec. 438.102)
    Medicaid beneficiaries are entitled to receive from their health 
care providers the full range of medical advice and counseling that is 
appropriate for their

[[Page 41025]]

condition. Section 1932(b)(3)(A), added by the BBA, clarifies and 
expands on this basic right by expressly precluding an MCO from 
establishing restrictions that interfere with enrollee-provider 
communications, and expressly ensuring the right of a health care 
professional to give medical advice, without regard to whether the 
course of treatment advised is covered under the MCO's plan. In 
Sec. 438.102 of the proposed rule, we provided a definition of the term 
``health care professional'' (as discussed above, in this final rule, 
the definition is located at Sec. 438.2), and outlined the general rule 
prohibiting interference with provider-enrollee communications. We also 
included language reflecting the provision in section 1932(b)(3)(B) 
specifying that the requirements in section 1932(b)(3)(A) should not be 
construed to require the MCO cover, furnish or pay for a particular 
counseling or referral service if the MCO objects to the provision of 
that service on moral or religious grounds, and provides information to 
the State, prospective enrollees, and to current enrollees within 90 
days after adopting the policy with respect to objections of any 
particular service. In proposed Sec. 438.102, under the authority in 
section 1902(a)(4), we extended both the explicit right to give advice 
in section 1932(b)(3)(A) and the moral or religious objection exception 
in section 1932(b)(3)(B) to PIHPs and PAHPs.
    Comment: Several commenters believe that enrollees should receive 
information from their providers about treatment options in a 
culturally competent manner so that enrollees can better understand 
information about their health care. One commenter suggested that if 
information about treatment options is not delivered in a culturally 
sensitive way, it could affect patient compliance with medical advice, 
and trigger health conditions and medical care episodes that escalate 
the cost of care. The commenter also felt that this would adversely 
affect not only patients' health status, and ultimately health plans, 
but States' and CMS' combined efforts to eliminate ethnic and racial 
health disparities. Another commenter pointed out that many enrollees 
who have disabilities come from another country and do not speak 
English, or have a low education level that limits their ability to 
understand their medical care and insurance. In other instances 
enrollees have disabilities that can be a barrier to engaging a health 
care provider. The commenter believes that this could be true for 
people with mental disabilities, making it difficult for certain 
enrollees to get the health care that they need. Several of the 
commenters recommended that we include a provision, which mirrors a 
Medicare+Choice requirement, to require that MCOs, PIHPs, and PAHPs 
take steps to ensure that health professionals furnish information 
about treatment options (including option of no treatment) in a 
culturally competent manner, and ensure that enrollees with 
disabilities have effective communication in making decisions with 
respect to treatment options.
    Response: We believe it is important for enrollees to receive 
information in a culturally competent manner, however, we do not agree 
that additional regulatory provisions are necessary. The regulation 
already requires, at Sec. 438.206(c)(2), that each MCO and PIHP 
participate in the State's efforts to promote the delivery of services 
in a culturally competent manner to all enrollees, including those with 
limited English proficiency and diverse cultural and ethnic 
backgrounds. It is up to each State to design its own cultural 
competency efforts to fit its individual needs and place 
responsibilities on its providers. In addition, we require at 
Sec. 438.10(b) that information be provided to all enrollees in a 
manner and format that may be easily understood, taking into 
consideration cultural and linguistic needs and disabilities of 
enrollees. Finally, at Sec. 438.100(b)(2)(iv), MCO, PIHP, and PAHP 
enrollees have the right to participate in decisions regarding his or 
her care, including the right to refuse treatment. We believe these 
provisions address the commenters' concerns.
    Comment: One commenter suggested that Sec. 438.102 make clear that 
States have the affirmative responsibility to provide race, ethnicity, 
and language data to health plans.
    Response: It is not clear why the commenter believes that such a 
requirement would belong in the section dealing with provider-enrollee 
communications. In any event, Sec. 438.204(b)(2) already requires that 
the State quality strategy identify the race, ethnicity and primary 
language spoken of each Medicaid enrollee, and that States provide this 
information to MCOs and PIHPs for each Medicaid enrollee at the time of 
enrollment. We therefore do not believe it is necessary to include 
additional regulatory requirements in this section of the regulations.
    Comment: We received numerous comments on the definition of health 
care professional. One commenter recommended that language be added 
that would permit expansion of the disciplines based on recognition of 
new medical providers/additional licensed individuals offering 
services. Others recommended a more general definition, that does not 
rely on identifying specific disciplines, or at a minimum adding ``and 
any other health care professional identified by the State'' at the end 
of the definition. Commenters were concerned that the definition in the 
proposed rule did not include all health care professionals authorized 
to provide care in all States, and that as the health care industry 
continues to evolve, the list will become outdated.
    Response: We recognize the commenters' concerns, however we will 
not be making any changes to the definition, as section 1932(b)(3)(C) 
of the Act provides an exact list of professions that are covered under 
this provision. As noted above, we have moved the definition of health 
care professional to Sec. 438.2.
    Comment: A few commenters noted that the provisions in paragraphs 
(c)(1), (c)(1)(ii)(B) and (c)(2) of Sec. 438.102 make references to a 
paragraph (b)(3), which does not exist.
    Response: We appreciate these comments and have corrected the 
erroneous references.
    Comment: A few commenters raised concerns about the fact that under 
proposed Sec. 438.102(b)(2), health plans that exclude coverage of 
certain counseling or referral services on moral or religious grounds 
are not required to provide information on how and where to obtain 
information about the service. One commenter believes that any 
responsibility to provide information to beneficiaries eliminates what 
the commenter saw as the crucial means for women to access information 
at the point of service. The commenter felt that this provision 
discounts the moral and religious beliefs, and health care needs, of 
female Medicaid beneficiaries. Another commenter pointed out that the 
proposed rule transfers the responsibility for providing information on 
services the MCO declines to cover under Sec. 438.102(b)(2) to the 
State, with no mention on how the State would provide that information 
to enrollees on a timely basis. The commenter urged that health plans 
be required to inform enrollees that it does not provide certain 
services on moral or religious grounds, and at a minimum, provide a 
referral to a State-sponsored toll-free number that informs 
beneficiaries about how and where to access these services.
    Response: Ultimately, it is the State's responsibility to deliver 
information on, and furnish, these services. As discussed above in 
section A., Sec. 438.10(e) requires that information on each MCO, PIHP, 
or PAHP, be provided

[[Page 41026]]

to potential enrollees (at the time the potential enrollee is first 
required to enroll in a mandatory enrollment program and within a 
timeframe that enables the potential enrollee to use the information in 
choosing among available MCOs, PIHPs, or PAHPs), including the benefits 
covered by the MCO, PIHP, or PAHP and the benefits available under the 
State plan, but not covered under the MCO's, PIHP's, or PAHP's 
contract. In addition, Sec. 438.10(f) provides that for a counseling or 
referral service not covered because of moral or religious reasons, the 
State must furnish information about how and where to obtain the 
services. Section 438.102(b) requires the MCO, PIHP or PAHP to notify 
potential enrollees of services it does not cover because of moral or 
religious reasons. Further, this provision does not preclude health 
providers from providing information on how and where to obtain 
services, if they so choose. In addition, we do not believe that these 
provisions compromise the needs of female Medicaid beneficiaries, as 
the Medicaid statute guarantees freedom of choice for family planning 
services. An enrollee may seek family planning services out-of-network. 
We also permit enrollees to disenroll if services are not covered 
because of moral or religious objections, though because of the freedom 
of choice provisions, disenrollment is not necessary in order to access 
family planning services.
3. Marketing Activities (Proposed Sec. 438.104)
    Consistent with the rules in section 1932(d)(2) of the Act that 
apply to MCOs and PCCMs, and in part under our authority in section 
1902(a)(4), proposed Sec. 438.104 set forth requirements for, and 
restrictions on, marketing activities by MCOs, PIHPs, PAHPs and PCCMs. 
Proposed Sec. 438.104 included definitions of ``cold-call marketing,'' 
``marketing,'' and ``marketing materials.'' It also set forth 
requirements and prohibitions for MCO, PIHP, PAHP or PCCM contracts, 
specifically: (1) The entity must not distribute any marketing 
materials without first obtaining State approval; (2) the entity must 
distribute the materials to its entire service area as indicated in the 
contract; (3) the entity complies with the information requirements of 
Sec. 438.10 to ensure that before enrolling, the beneficiary receives 
from the entity or State, the accurate oral and written information he 
or she needs to make an informed decision on whether to enroll; (4) the 
entity does not seek to influence enrollment in conjunction with the 
sale or offering of any other insurance; and (5) the entity does not, 
directly or indirectly, engage in door-to-door, telephone, or other 
cold-call marketing activities. Proposed Sec. 438.104(b)(2) requires 
that MCOs, PIHPs, PAHPs, and PCCMs specify the methods by which the 
entity assures the State agency that marketing plans and materials are 
accurate and do not mislead, confuse, or defraud the beneficiaries or 
State agency. Finally, Sec. 438.104(c) proposed to require the State to 
consult with a Medical Care Advisory Committee or an advisory committee 
with similar membership in reviewing marketing materials.

General Comments

    Comment: Several commenters believe that proposed Sec. 438.104 
should apply to current enrollees rather than just potential enrollees, 
and that the fact that it does not do so is inconsistent with the 
marketing requirements in the BBA.
    Response: We have defined marketing as any communication, from an 
MCO, PIHP, PAHP, or PCCM to a Medicaid beneficiary who is not enrolled 
in that entity, that can reasonably be interpreted as intended to 
influence the beneficiary to enroll in that MCO, PIHP, PAHP, or PCCM, 
or either to not enroll in, or to disenroll from, another MCO's, 
PIHP's, PAHP's, or PCCM's Medicaid product. We believe that MCOs, 
PIHPs, PAHPs, and PCCMs are not engaged in marketing for the purposes 
of influencing enrollment or disenrollment when communicating with 
current enrollees. We do not believe this is a violation of the BBA 
marketing provisions in section 1932(d)(2), as this section does not 
address to whom the marketing covered by its provisions is directed. We 
believe that our interpretation of the word marketing is reasonable, 
and consistent with section 1932(d)(2).

Cold-Call Marketing

    Proposed Sec. 438.104(a) defines cold-call marketing as any 
unsolicited personal contact by the MCO, PIHP, PAHP, or PCCM with a 
potential enrollee for the purpose of influencing the individual to 
enroll in that particular MCO, PIHP, PAHP, or PCCM. Cold-call marketing 
includes door-to-door, telephone or other related marketing activities 
performed by MCOs, PIHPs, PAHPs, or PCCMs and their employees (that is, 
direct marketing) or by agents, affiliated providers, or contractors 
(that is, indirect marketing). In the preamble to the proposed rule, we 
noted that cold-call marketing included such activities as a physician, 
other member of the medical staff, a salesperson, other MCO, PIHP, 
PAHP, or PCCM employees, or independent contractors approaching a 
beneficiary in order to influence his or her decision to enroll with a 
particular MCO, PIHP, PAHP, or PCCM. In proposed Sec. 438.104(b)(1)(v), 
we expressly prohibited MCOs, PIHPs, PAHPs, or PCCMs from directly or 
indirectly engaging in door-to-door, telephone, or other cold-call 
marketing activities.
    Comment: Numerous commenters stated that the definition of cold-
call marketing is too broad and might impede legitimate marketing 
efforts.
    Response: The prohibition on cold-call marketing only applies to 
unsolicited contact by the MCO, PIHP, PAHP, or PCCM. For example, if a 
beneficiary attends a health fair or similar event, he or she would be 
seeking out information about health care and, therefore, the contact 
between the MCO, PIHP, PAHP, or PCCM and the beneficiary would not be 
considered unsolicited. We note, however, that MCO, PIHP, PAHP, or PCCM 
participation in health fairs and other community activities is 
considered marketing and, therefore, must have State approval.
    Section 1932(d)(2)(E) of the Act prohibits direct or indirect door-
to-door, telephonic, or other cold-call marketing of enrollment. Our 
interpretation of Congressional intent is that the statutory language 
was meant to minimize the potential for abusive marketing practices in 
both voluntary and mandatory programs. There are several other types of 
marketing that are permitted under section 1932(d) and this regulation. 
For example, States may permit the use of billboards, newspaper, 
television, and other media to advertise MCOs, PIHPs, PAHPs, or PCCMs. 
Mailings are also permitted as long as they are distributed to the 
MCO's, PIHP's, PAHP's, or PCCM's entire service area covered by the 
contact. States may also provide marketing materials on behalf of MCOs, 
PIHPs, PAHPs, and PCCMs.
    This regulation does not prohibit educational activities on the 
part of MCOs, PIHPs, PAHPs, or PCCMs. However, any contacts other than 
patient counseling by any MCO, PIHP, PAHP, or PCCM staff or 
representative, would be considered marketing subject to State 
oversight. The regulation does not prohibit States from permitting 
MCOs, PIHPs, PAHPs, or PCCMs to market to groups in schools, churches, 
day care centers, etc. States are responsible for approving and 
monitoring these types of presentations and ensuring that beneficiaries 
attend

[[Page 41027]]

voluntarily with knowledge that they are attending a marketing 
presentation.
    States may permit and establish rules for marketing in public 
places. However, States may not permit uninvited personal solicitations 
in public places such as eligibility offices and supermarkets. Some 
States allow representatives of available MCOs, PIHPs, PAHPs, and PCCMs 
to be in eligibility offices or other locations on certain days or on a 
rotating basis to answer questions and provide information to 
beneficiaries. In these situations, there should be provisions to 
monitor contacts to ensure that unbiased information is available about 
all options and that beneficiaries are not coerced. However, marketing 
or other MCO, PIHP, PAHP, or PCCM representatives who approach 
beneficiaries as they enter or exit eligibility offices or other public 
places, call at residences uninvited, etc., are considered cold-call 
contacts and are not permitted.
    We believe the regulation gives States broad authority to determine 
what marketing activities are permitted, with the exception of 
unsolicited personal contacts by MCOs, PIHPs, PAHPs, and PCCMs or their 
representatives. States are free to use MCOs, PIHPs, PAHPs, and PCCMs 
in community-based efforts. However, those efforts are considered 
marketing; therefore the materials (activities, materials, 
presentations, etc.) are subject to State review and approval.

Service Area

    Proposed Sec. 438.104(b)(1)(ii) required that marketing materials 
be distributed to the entire service area as indicated in the contract.
    Comment: Some commenters believe that the proposed requirement was 
unnecessary, unduly burdensome and costly. One commenter suggested that 
MCOs should not have to distribute marketing materials to areas they 
already serve and should be allowed to limit distribution to new areas 
only. Another commenter thought it reasonable to require materials be 
sent only to those who are eligible or potentially eligible for 
Medicaid in a given service area and recommended that we require MCOs, 
PIHPs, PAHPs, and PCCMs to distribute materials to all eligible 
enrollees in a specified county or region to avoid confusion to those 
in a particular sector in which the marketing materials do not apply.
    Response: Section 1932(d)(2)(B) of the Act requires that marketing 
materials be distributed to the entire service area. The intent of this 
provision is to prohibit marketing practices that favor certain 
geographic areas over those thought to produce more costly enrollees. 
Section 438.104(b)(1)(ii) requires that each MCO, PIHP, PAHP, and PCCM 
contract must provide that the entity ``distributes the materials to 
its entire service area as indicated in the contract.'' (Emphasis 
added.) The phrase ``as indicated in the contract'' is intended to 
provide States and MCOs, PIHPs, PAHPs, and PCCMs with some flexibility 
in designing and implementing marketing plans and in developing 
marketing materials. We expect that when States review MCO, PIHP, PAHP, 
and PCCM marketing and informing practices, they will not only consider 
accuracy of information, but also factors such as language, reading 
level, understandability, cultural sensitivity, and diversity. In 
addition, State review should ensure that MCOs, PIHPs, PAHPs, and PCCMs 
do not target or avoid populations based on their perceived health 
status, cost, or for other discriminatory reasons.
    For example, a State may permit distribution of materials 
customized for a Hispanic population group as long as the materials are 
comparable to those distributed to the English speaking population. 
While the presentation and formats of the information may be varied 
based on the culture and distinct needs of the population, the 
information conveyed should be the same, in accordance with 
Sec. 438.10. In the above example, the materials for the Hispanic 
population group must be distributed to all those Medicaid eligibles or 
enrollees who require or request Hispanic-related materials. States 
that use this flexibility to allow selective marketing may permit 
distribution by zip code, county, or other criteria within a service 
area if the information to be distributed pertains to a local event 
such as a health fair, or provider, such as a hospital or clinic. 
However, States must ensure that health fairs are not held only in 
areas known to have or perceived as having a more desirable population. 
We have chosen not to limit the distribution requirement only to 
mailings because broadcast advertising and other marketing activities 
can also be done selectively. All marketing activities should be 
conducted in a manner that provides for equitable distribution of 
materials and without bias toward or against any group.

Sale of Other Insurance

    Proposed Sec. 438.104(b)(1)(iv) requires MCO, PIHP, PAHP, and PCCM 
contracts to assure that the entity does not seek to influence 
enrollment in conjunction with the sale or offering of any other 
insurance. We interpreted this provision to mean that MCOs, PIHPs, 
PAHPs, and PCCMs may not entice a potential enrollee to join the MCO, 
PIHP, PAHP, or PCCM by selling or offering any other type of insurance 
as a bonus for enrollment. However, we invited comment on this 
provision, because we did not have any legislative history to consider 
when developing our interpretation.
    Comment: Several commenters strongly recommended that CMS clarify 
that this provision does not apply to Medicaid enrollees who are 
eligible for Medicare. As it is worded, commenters believe that this 
section precludes a Medicare sales representative from telling a 
potential enrollee eligible for Medicare and Medicaid services about 
Medicare. Another commenter indicated that this section could impede 
coordination efforts between Medicare and Medicaid programs. Another 
commenter stated that the section should not apply to Medicare, since 
the Medicare program is subject to marketing regulations.
    Response: We agree with the commenters that the proposed regulatory 
text could impede the interaction of marketing to dual eligibles by 
MCOs, PIHPs, PAHPs or PCCMs. We have clarified the regulation text at 
Sec. 438.104(b)(1)(iv) by adding language clarifying that this 
provision applies to the sale or offering of any private insurance. 
This would not preclude a Medicare sales representative from telling a 
dually eligible beneficiary about the health plan's Medicare+Choice 
benefits. Rather, it is intended to apply to such types of insurance as 
burial insurance.

State Agency Review

    Proposed Sec. 438.104(c) provides that, in reviewing the marketing 
materials submitted by MCOs, PIHPs, PAHPs, and PCCMs, the State must 
consult with its Medical Care Advisory Committee (MCAC) or an advisory 
committee with similar membership. Section 431.12, of existing rules, 
sets forth the requirements for establishment of an MCAC. The MCAC must 
include Board-certified physicians and other representatives of the 
health professions who are familiar with the medical needs of low-
income populations and with the resources available and required for 
their care. The MCAC must also include the Director of the Public 
Welfare Department or the Public Health Department, whichever does not 
head the Medicaid agency, as well as members of consumer groups 
including Medicaid beneficiaries and consumer organizations such as 
labor unions, cooperatives, and consumer-sponsored prepaid group 
practice plans.

[[Page 41028]]

    Comment: Several commenters felt that the MCAC review of marketing 
materials would be cumbersome, an administrative burden to the States, 
and may create delays in distributing marketing information to 
potential enrollees. The commenters indicated that States should 
consult the MCAC on marketing policy, regulations, and guidelines, 
rather than review each piece of marketing materials submitted. One 
commenter felt that if the MCAC were to review pieces of marketing 
material, then it should be done in a timely manner.
    Response: We did not intend to require that the committee itself 
review and approve marketing materials. Rather, we intend to reflect 
section 1932(d)(2)(A)(ii) of the Act, which requires the State to 
consult with the committee during the State's own process of review and 
approval. The State is not required to obtain the committee's approval 
of, or consensus on, the materials. The State has flexibility in 
determining how to consult with the committee. A State may elect to 
require the committee to review the actual marketing materials. If so, 
in order to expedite the total review time, the State could permit the 
committee members to conduct their review concurrently with the State's 
review.
    States may also consult with the committee in the development of 
standardized guidelines or protocols that are intended to facilitate 
State review. States may consult with the committee to develop 
suggested language and deem approval of an MCO's, PIHP's, PAHP's, or 
PCCM's materials if that language is used. MCOs, PIHPs, PAHPs, and 
PCCMs could also use some of the suggested language and then identify 
areas where different language has been used, and States could then 
limit review and/or consultation to that particular portion of the 
materials.
4. Liability for Payment (Proposed Sec. 438.106)
    Proposed Sec. 438.106, consistent with section 1932(b)(6) of the 
Act, requires MCOs, PIHPs, and PAHPs to provide that their Medicaid 
enrollees will not be held liable for (a) the debts of the MCO, PIHP, 
or PAHP in the event of insolvency; (b) covered services provided to 
the enrollee for which the State does not pay the MCO, PIHP, or PAHP; 
or (c) payments for covered services furnished under a contract, 
referral, or other arrangement, to the extent that those payments are 
in excess of the amount that the enrollees would owe if the MCO, PIHP, 
or PAHP provided the services directly.
    Comment: One commenter expressed support for this provision.
    Response: We acknowledge and thank the commenter for their support.
5. Cost Sharing (Proposed Sec. 438.108)
    Prior to the enactment of the BBA, MCOs were prohibited from 
imposing cost sharing on enrollees. The BBA eliminated this 
prohibition, and provided that copayments for services furnished by 
MCOs may be imposed in the same manner as they are under fee-for-
service. In Sec. 438.108, we proposed that the contract must provide 
that any cost sharing imposed on Medicaid enrollees is in accordance 
with Sec. 447.50 through Sec. 447.58 of the existing regulations.
    Comment: Two commenters supported this provision. One commenter 
expressed concern about the inappropriate use of hospital emergency 
rooms. The commenter recommended that we allow and encourage States to 
charge beneficiaries a $25 copayment per visit for inappropriate use of 
the emergency room. Under the commenter's recommended approach, MCOs 
would require that hospitals collect the copayment at the time of the 
visit; provided, however, that enrollees would not be denied care 
because of inability to pay the copayment. Under the commenter's 
suggested policy, if it was determined that a true emergency existed, 
the copayment would be refunded. The commenter believes that this would 
serve as an incentive to enrollees to seek care in the appropriate 
setting, at the appropriate time and would allow the primary care 
physician to establish a medical relationship with the beneficiary.
    Response: Under Sec. 447.53(b)(4), emergency services are exempt 
from cost sharing. Specifically, copayments may not be imposed on 
``[s]ervices provided in a hospital, clinic, office, or other facility 
that is equipped to furnish the required care, after the sudden onset 
of a medical condition manifesting itself by acute symptoms of 
sufficient severity (including severe pain) that the absence of 
immediate medical attention could reasonably be expected to result in--
(i) Placing the patient's health in serious jeopardy; (ii) serious 
impairment to bodily functions; or (iii) serious dysfunction of any 
bodily organ or part.'' We emphasize that as long as the enrollee seeks 
emergency services that could reasonably be expected to have the above 
effects, a copayment may not be imposed, even if the condition was 
determined not to be an emergency.
    We believe that allowing the collection of an ``upfront'' copayment 
in a hospital emergency room as the commenter suggested violate 
Sec. 447.53(b)(4), and be inconsistent with the enrollee's right to 
coverage of emergency services when a ``prudent layperson'' would 
reasonably believe that an emergency exists (see discussion above). 
However, enrollees should be aware that if they seek services in an 
emergency room when it is clear that the standard in Sec. 447.53(b)(4) 
is not met, coverage of these services may be denied entirely.
6. Emergency and Post-Stabilization Services (Proposed Sec. 438.114)
    Section 4704(a) of the BBA added section 1932(b)(2) to the Act to 
assure that Medicaid managed care beneficiaries have the right to 
immediately obtain emergency care and services, and the right to post-
stabilization services following an emergency medical condition under 
certain circumstances. (Post-stabilization services are medically 
necessary services related to an emergency medical condition that are 
received at the site at which the patient is treated for an emergency 
medical condition, after the individual's condition is sufficiently 
stabilized that he or she could alternatively be safely discharged or 
transferred to another facility.) Each contract with an MCO and PCCM 
must require the organization to provide for coverage of emergency 
services and post-stabilization services as described below. In section 
1932(b)(2)(A)(i) of the Act, while the Congress required MCOs and PCCMs 
to provide coverage of emergency services, it did not define the word 
``coverage,'' even though these health care models generally do not 
cover emergency services in the same manner. In proposed Sec. 438.114, 
we interpreted the obligation in section 1932(b)(2)(A)(i) of the Act to 
provide for coverage of emergency services to mean that an MCO or State 
(as payer in the case of a PCCM) that pays for hospital services 
generally, must pay for the cost of emergency services obtained by 
Medicaid managed care enrollees. We interpreted coverage in the PCCM 
context to mean that the PCCM must allow direct access to emergency 
services without prior authorization. We applied different meanings to 
the word ``coverage'' because while PCCMs are individuals paid on a 
fee-for-service basis, they receive a State payment to manage an 
enrollee's care. Unlike MCOs, PCCMs would not likely be involved in a 
payment dispute involving emergency services, though

[[Page 41029]]

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

[[Page 41030]]

stabilization services, be set forth in Sec. 438.114, rather than 
simply referencing Sec. 422.113. The commenter felt this would make the 
Medicaid regulations easier to understand.
    Response: We agree. In response to this comment, we have set forth 
the full definitions of emergency medical condition, emergency services 
and post-stabilization services in Sec. 438.114.
    Comment: Several commenters noted that the Emergency Treatment and 
Active Labor Act (EMTALA) requires hospitals and emergency providers to 
screen and treat those Medicaid enrollees that present at the emergency 
room, and argued that managed care organizations (MCOs) and States 
should have to cover costs that EMTALA mandates. A few commenters 
expressed the view that EMTALA was being enforced on hospitals with 
more vigilance than the prudent layperson standard is on MCOs, PIHPs, 
and States.
    Response: While MCOs, PIHPs, and States are responsible for 
covering emergency medical conditions, this is not the same mandate as 
the services that must be covered under EMTALA. For example, if a 
prudent layperson would not reasonably believe that an emergency 
medical condition existed, MCOs, PIHPs, or States would not be liable 
for costs when the individual presents at an emergency room without 
prior authorization. Under EMTALA, however, obligations to at least 
perform screening exist regardless of the condition of the presenting 
individual. Hence, the scope of a hospital's obligations under EMTALA 
is broader than the scope of an MCO's or State's obligation under 
section 1932(b)(2) (or, by extension under this regulation, a PIHP 
where applicable). However, we agree that the mandates under each rule 
overlap significantly in most cases. We encourage parties who have 
concerns about violations or enforcement to contact either the State or 
CMS regional office responsible for the area in question.
    Comment: One commenter suggested that we remove the provision which 
precludes an MCO, PIHP or State from refusing to cover services without 
the primary care provider's (PCP) authorization number. The commenter 
was concerned that without such a number, there was not a practical 
mechanism to alert a State or health plan that its enrollee had 
presented to the emergency room. The commenter also said that its 
computer system would have to be reconfigured in order to leave out 
this information, costing a significant amount of money.
    Response: Originally, we added this requirement because we were 
concerned that MCOs, PIHPs, and States could attempt to avoid their 
obligations under Sec. 438.114 by refusing to pay claims based on 
technicalities concerning the submission of claims. However, we agree 
with the commenter that there is a vested interest in MCOs, PIHPs, and 
States tracking individual enrollees' emergency room presentation 
rates. Therefore, we are allowing MCOs, PIHPs, and States to require 
the PCP number to be on a claim before it will be processed for 
payments. However, we have provided in Sec. 438.114(d)(1)(ii) that MCO, 
PIHPs, and States must provide hospitals, emergency room providers, or 
their fiscal intermediaries, when applicable, a minimum of 10 business 
days to notify the primary care provider or other designated contact 
before a payment may be denied for a failure to provide notice.
    Comment: One commenter was concerned about the prohibition against 
denying claims based on lists of symptoms or final diagnosis codes. A 
number of States require MCOs to pay a screening fee even if there was 
no emergency, but do not require them to pay for the service based on 
their emergency services fee schedule. The commenter wanted to know if 
there was a conflict with the regulation.
    Response: There is no conflict in this situation if the 
determination was made taking into account the presenting symptoms 
rather than the final diagnosis. We prohibit the use of codes (either 
symptoms or final diagnosis) for denying claims because there is no way 
a list can capture every scenario that could indicate an emergency 
medical condition as required in the BBA. An MCO, PIHP, or State may 
pay claims using those lists and require coverage of screens even if no 
emergency medical condition exists. However, we do not require coverage 
of a screen if it reveals no emergency medical condition (as opposed to 
EMTALA requirements on Medicare participating hospitals).
    Comment: A few commenters were concerned that the Federal rules 
provide little State flexibility when it comes to setting State rules 
involving claims coverage, or educating enrollees about emergency room 
use. One commenter was concerned that, if read literally, the rule 
prohibits denial of a claim for any reason other than not meeting the 
prudent layperson standard. The commenter stated that under the 
proposed rule, reasons for denial could include claims not submitted in 
a timely manner, claims that are not clean, or claims submitted by 
providers who refuse to sign provider agreements.
    Response: We never intended this rule to prevent States from 
setting reasonable claim filing deadlines, asking for charts or other 
information before making a decision, or covering claims submitted by 
providers refusing to sign provider agreements. The purpose of the rule 
is to ensure that enrollees have unfettered emergency room access for 
emergency medical conditions, and that hospitals receive payment for 
those claims meeting that definition without having to navigate through 
unreasonable administrative loopholes. However, as long as filing 
deadlines specifically outlined for an appeals process are not used to 
deny initial claims, a State may set its own filing timeframes and 
other administrative rules (as long as it is not contrary to specific 
Federal provisions such as the 10 business day post-notification 
minimum timeframe requirement).
    Comment: One commenter was concerned about the application of 
proposed Sec. 438.114 to situations involving mental health 
emergencies. The commenter felt that the present definition cannot be 
readily understood in the context of emergencies related to mental 
disorders.
    Response: We agree that the present definition is primarily 
designed to cover physical rather than mental health. However, since 
the definition comes directly from the BBA, we do not have the legal 
authority to expand or change it. The present definition does apply to 
mental health as well when its standards are met (for example, 
``placing the health of the individual in serious jeopardy'').
    Comment: A few commenters believe that the one-hour rule for MCOs 
to notify hospitals before post-stabilization services may be performed 
is too short a timeframe, and is contrary to their own State rules. One 
commenter indicated that it follows a 2-hour timeframe before post-
stabilization services may be performed, finding it much more 
reasonable in order to give MCOs and PCPs an opportunity to coordinate 
an enrollee's non-emergent care.
    Response: Section 1932(b)(2)(a)(ii) of the Act requires MCOs and 
PCCMs to comply with guidelines established under section 1852(d)(2) of 
the Act regarding coordination of post-stabilization care in the same 
manner as the guidelines apply to Medicare+Choice plans under Part C of 
title XVIII. Therefore, according to statute, we must follow the rules 
that apply under the Medicare+Choice program. In this case, that is a 
1-hour timeframe for MCOs or PCCMs to notify a hospital before post-
stabilization services may begin.

[[Page 41031]]

    Comment: A few commenters pointed out that proposed 
Sec. 438.114(c)(1) contains an error by referring to entities 
identified in subparagraph (c) when it should refer to paragraph (b).
    Response: The commenters are correct. We have made the change in 
the final rule.
7. Solvency Standards (Proposed Sec. 438.116)
    Section 4706 of the BBA added new solvency standards to section 
1903(m)(1) of the Act, requiring that an MCO's provision against the 
risk of insolvency meet the requirements of a new section 
1903(m)(1)(C)(i), unless exceptions in section 1903(m)(1)(C)(ii) apply. 
Under section 1903(m)(1)(C)(i), the organization must meet ``solvency 
standards established by the State for private health maintenance 
organizations'' (or be ``licensed or certified by the State as a risk-
bearing entity.'') The exceptions to this new requirement in section 
1903(m)(1)(C)(ii) apply if the MCO, (1) is not responsible for 
inpatient services, (2) is a public entity, (3) has its solvency 
guaranteed by the State, or (4) is, or is controlled by FQHCs, and 
meets standards the State applies to FQHCs. Section 4710(b)(4) of the 
BBA provided that the new solvency standards applied to contracts 
entered into or renewed on or after October 1, 1998. Proposed 
Sec. 438.116 reflects these statutory provisions. We received no 
comments on this section and are implementing it as proposed.

D. Quality Assessment and Performance Improvement (Subpart D)--
Background

    Section 4705 of the BBA added section 1932(c) to the Act. Section 
1932(c)(1) requires State agencies that contract with Medicaid MCOs 
under section 1903(m) of the Act to develop and implement quality 
assessment and improvement strategies that are consistent with 
standards established by the Secretary. Subpart D would implement this 
provision. We proposed that the requirements be applied to PIHPs and, 
in some cases, to PAHPs.
1. Scope (Proposed Sec. 438.200)
    Proposed Sec. 438.200 set forth the scope of subpart D. Proposed 
subpart D would implement section 1932(c)(1) by setting forth 
specifications for quality assessment and performance improvement 
strategies that States must implement. Subpart D also proposed 
standards that would apply to States, MCOs, Prepaid Inpatient Health 
Plans (PIHPs), and in some cases, Prepaid Ambulatory Health Plans 
(PAHPs).
    Comment: One commenter stated that the provisions of subpart D were 
appropriate overall but that more flexibility is needed for smaller 
States and MCOs because their administrative burden is greater. Many 
commenters supported the approach taken in the August 2001 proposed 
rule and the balance struck between requirements and flexibility. They 
stated their belief that subpart D avoids the imposition of 
requirements with administrative burden and serves the interest of 
beneficiaries.
    Response: We believe that Sec. 438.204 provides the structure for 
State quality strategies consistent with the intent of the Congress 
when it addressed quality in section 4705(a) of the BBA. We also 
believe that we have provided sufficient flexibility for States to 
design and implement quality strategies that will best meet their 
needs. We do not relax the requirements for smaller States or MCOs 
because we do not believe that quality should be compromised due to the 
size of an organization. However, we do not believe the burden on 
States is excessive, even for smaller States, and we believe that 
States may impose the appropriate activities on MCOs and PIHPs. For 
example, a State might require less in the way of quality assessment 
and performance improvement activities for smaller plans. The State 
also might contract with an organization that does external quality 
review for the State pursuant to section 1932(c)(2) of the Act, to 
calculate performance measures or design quality improvement projects. 
(See 64 FR 67223, December 1, 1999 for the proposed rules that would 
govern ``External Quality Review Organizations,'' or ``EQROs.'')
    Comment: Many commenters stated that the provisions of subpart D 
should apply to PAHPs, including dental plans, as well as to MCOs and 
PIHPs. They believe that all capitated programs, including those that 
provide transportation, should be subject to the quality provisions. 
Other commenters stated that exempting ``mental health carve out'' 
plans from the quality requirements is inconsistent with the findings 
of the General Accounting Office (GAO) report of September, 1999 on 
mental health carve out programs in Medicaid managed care.
    Response: We agree with the commenter. Therefore, in this final 
rule, we have applied additional sections of the regulation to PAHPs. 
(See Sec. 438.8(b).) In subpart D, we now apply the provisions of 
Secs. 438.206, 438.207, 438.208, 438.210, 438.214, 438.230, and 438.236 
to PAHPs. These sections address access to care and the provision of 
quality care. We believe that the protections of these sections should 
be extended to enrollees in PAHPs. We do not apply the other provisions 
of subpart D related to a quality strategy and quality improvement 
activities, as we believe these requirements would impose a burden on 
States and PAHPs that is unreasonable given the scope of PAHP 
activities.
    The terms ``mental health carve out program'' or ``behavioral 
health carve out program'' refer to prepaid plans that provide only 
mental health services. Under a waiver, a State Medicaid managed care 
program can contract with such a program. The GAO Report issued on 
September 17, 1999, indicated that CMS needs to oversee mental health 
carveouts more systematically, and noted approvingly that we were 
developing a rule that would include a requirement for annual external 
quality reviews. Mental health carve out programs that provide hospital 
as well as ambulatory care are PIHPs, and are subject to all the 
subpart D requirements. We believe that most of the large mental health 
carve out programs fall into this category, and that this final rule is 
therefore consistent with the intent of the September 1999 GAO report.
2. State Responsibilities (Proposed Sec. 438.202)
    Proposed Sec. 438.202 set forth the State's responsibilities in 
implementing its quality strategy. Specifically, proposed Sec. 438.202 
required that each State (1) have a written strategy for assessing and 
improving the quality of managed care services, (2) provide input by 
stakeholders into the strategy, (3) ensure compliance with State-
established standards, (4) periodically review the strategy for its 
effectiveness and update as needed, and (5) submit to CMS a copy of the 
initial and revised strategies and regular reports on their 
implementation and effectiveness.
    Comment: One commenter suggested that in Sec. 438.202 ``strategy'' 
be replaced with ``policy.''
    Response: Section 1932(c)(1) of the Act requires a State to develop 
and implement a quality assessment and improvement strategy if it 
contracts with an MCO. Therefore, we retain the term ``strategy'' in 
Sec. 438.202 of the final rule to be consistent with the term used in 
the statute.
    Comment: One commenter believes that the provisions regarding a 
State quality strategy are heavy handed, over controlling, and result 
in CMS substituting its judgment regarding quality for the State's.

[[Page 41032]]

    Response: We believe the regulation provides a balance between an 
appropriate amount of detail needed to ensure that States develop and 
implement sound quality strategies and flexibility for States to 
determine the best approach for developing these strategies.
    Comment: One commenter said that the State's quality strategy 
should clearly outline the relationship between the MCO and PIHP 
quality requirements and the strategy components. Each MCO and PIHP 
requirement should clearly support a component of the strategy.
    Response: The MCO and PIHP quality requirements of subpart D 
(Secs. 438.206 through 438.242) are incorporated as an element of the 
State's quality strategy (Sec. 438.204(g)). Specifically, 
Sec. 438.204(g) requires that the State quality strategy include 
information on how the State plans to make MCOs and PIHPs comply with 
State access standards, structural and operational standards, and 
measurement and improvement standards. We do not believe we need to 
revise Sec. 438.204 to provide clarifying language to show the 
relationship between the quality strategy and the MCO and PIHP quality 
requirements under Sec. 438.240.
    Comment: Many commenters stated that the requirement in proposed 
Sec. 438.208(c) and (d) (now Sec. 438.208 (b) and (c)) for States to 
assess the quality and appropriateness of care and services furnished 
to all Medicaid enrollees, including those with special health care 
needs, is ambiguous. Commenters believe it can be read to mean that the 
overall population must be measured, including special needs 
populations, rather than that the quality for special needs populations 
be measured separately. They see this as a problem because the results 
may yield no specific information about persons with special health 
care needs.
    Response: Our intent for the proposed provision was to have States 
assess the quality and appropriateness of care and services to all 
Medicaid enrollees as well as to assess separately the quality and 
appropriateness of care and services for individuals with special 
health care needs. For clarification purposes, we have revised 
Sec. 438.208(b) and (c).
    Comment: One commenter objected to the inclusion of the word 
``all'' in Sec. 438.204(b) because States do not have the budgets or 
staffs to assess the needs of all Medicaid enrollees.
    Response: Section 438.204(b) requires the State to identify in the 
quality strategy how it plans to implement procedures to assess the 
quality and appropriateness of care and services furnished to all 
Medicaid beneficiaries. We disagree with the commenter because States 
have the flexibility to determine the methods and timeframes that will 
work best to assess the quality and appropriateness of care and 
services to all Medicaid beneficiaries. There are a variety of options 
States can choose from to meet this requirement. For example, States 
can use findings from performance measures collected, performance 
improvement projects conducted, reviews for compliance with State 
standards, consumer surveys, or the analysis of grievance and appeal 
information. States can conduct these activities, use a State 
contractor to conduct these activities, and/or use findings from MCO 
and PIHP quality assessment and performance improvement programs.
    Comment: One commenter questioned if there are specific quality 
measures for individuals with special health care needs, other than 
surveys, that can be used to meet the requirement of the regulation 
that States assess the appropriateness of care of these enrollees.
    Response: As stated above, there are numerous activities that can 
be conducted to assess the appropriateness and quality of care and 
services provided to beneficiaries. When targeting an assessment of 
individuals with special health care needs States can stratify the data 
by identified categories or conduct activities specifically targeted to 
a specified population. For example, a State could conduct or have 
their MCOs and PIHPs conduct a performance improvement project on 
access to care for individuals needing substance abuse services.
    Comment: Many commenters suggested that proposed Sec. 438.208(b) 
(now Sec. 438.208(c)) should require States to provide information to 
MCOs and PHPs about Medicaid enrollees known by the agency to have 
special needs, as this step is crucial to assessing the quality and 
appropriateness of care provided to these beneficiaries.
    Response: We agree with the commenters. Therefore, we have revised 
Sec. 438.208(c) to require that States implement mechanisms that 
identify individuals with special health care needs. The State or its 
enrollment broker may determine which individuals have special needs, 
and then inform the MCO, or the State may require that the MCO, PIHP, 
or PAHP apply the mechanisms to identify these individuals.
    Comment: Many commenters expressed support for the requirement that 
State quality strategies be in writing. One commenter mistakenly 
believed that the proposed rule did not include the requirement that 
the strategy be in writing and asked that this requirement be included.
    Response: We agree with the commenters and we will retain the 
requirements in Sec. 438.202(a). We believe it important that the 
quality strategy be in writing to provide a document for stakeholders 
to react to, as well as, for the States to assess on a regular basis 
and update as necessary.
    Comment: Several commenters stated that the regulation appears to 
contemplate a formal solicitation of public input to the quality 
strategy. A formal public process is costly and administratively 
burdensome. One commenter said that they have found a public process to 
solicit input ineffective. The commenter asked that we clarify in text 
or preamble language that a less formal process is permissible. Another 
urged its deletion. Several commenters supported the requirement for 
public input into the State quality strategy.
    Response: Our intent is that there be a formal process to obtain 
input from beneficiaries and other program stakeholders in the 
development of the State quality strategy. We leave it to the State to 
define this process. We believe public input provides for the 
integration of various perspectives and priorities and will facilitate 
a more useful end product. Therefore, we retain the requirement in 
Sec. 438.202(b) of this final rule.
    Comment: One commenter expressed concern that the regulation will 
require a continual process of formal comments on a State's quality 
strategy because it will change frequently as new quality tools become 
available, laws and regulations change, and CMS places conditions on 
States when approving waivers.
    Response: As stated above, we intend for States to obtain public 
comments on updated quality strategies when significant changes are 
made. We do not expect States to obtain public comments when 
modifications are made to the strategy that are not considered 
significant, as defined by the State.
    Comment: Many commenters believe that CMS should specify a 
timeframe for States to update their quality strategies, such as 
annually or every 3 years. They believe that ``periodic'' is 
insufficient, as the term is not defined. One commenter stated that the 
review should be conducted annually, the review should identify the 
degree to which the MCO or PIHP interventions continue to support the 
goals of the strategy, and the findings should be reported annually to 
CMS and to the public.

[[Page 41033]]

    Response: We do not agree that we should require a specific time 
period for States to update their quality strategies. We have provided 
States with the flexibility to determine these timeframes. We believe 
that a State's review and evaluation of the effectiveness of the 
strategy will guide the State's decision as to when and how the 
strategy should be revised. Therefore, we retain the requirement in 
Sec. 438.202(d).
    Comment: One commenter said that the requirement that States submit 
their quality strategies to CMS implied a role for CMS in approving the 
strategy. Another commenter requested a provision stating that CMS' 
review will be limited to verification that each required element is 
addressed.
    Response: As part of the CMS regional office review of Medicaid 
managed care programs, regional office staff will assess State quality 
strategies to ensure compliance with this rule. We have not yet 
determined the scope of review activities that regional office staff 
will undertake. As we develop this process, we will work in 
collaboration with States and other stakeholders.
    Comment: One commenter suggested that a provision be included to 
require States to review health plans' quality strategies at least 
every 3 years.
    Response: MCOs and PIHPs are not required to develop quality 
strategies. MCOs and PIHPs are required to have a quality assessment 
and performance improvement program as specified under Sec. 438.240. 
The State is required to review this program annually to determine the 
impact and effectiveness of the program.
    Comment: One commenter stated that progress toward goals in the 
quality strategy should be shared by States with their MCOs and PIHPs 
to reinforce collaboration, monitor progress, and make needed 
revisions.
    Response: We encourage States to share findings of the 
effectiveness of the State quality strategy with MCOs and PIHPs. We are 
not requiring this, however, in regulation.
3. Elements of State Quality Strategies (Proposed Sec. 438.204)
    Proposed Sec. 438.204 set forth the elements of a State quality 
strategy, including, in Sec. 438.204(a), contract provisions that 
incorporate the standards specified in this subpart. Section 438.204(b) 
required that the State strategy must include procedures that (1) 
assess the quality and appropriateness of care and services furnished 
to all Medicaid enrollees, including those enrollees with special 
health needs; (2) identify and provide to MCOs and PIHPs information on 
the race, ethnicity, and primary language spoken of each Medicaid 
enrollee; and (3) monitor and evaluate the compliance of MCOs and PIHPs 
with these standards.
    Section 438.204(c) provided that the State quality strategy must 
include any performance measures and levels developed by CMS in 
consultation with States and other stakeholders. ``Performance 
measures'' or ``measures'' refer to how often a desired action or 
result is achieved or produced, such as the percent of two-year olds 
who are immunized. ``Levels'' refers to a specified percentage to be 
achieved or a measure.
    Section 438.204(d) required an annual, external independent review 
of the quality outcomes and timeliness of, and access to, the services 
covered by the MCO or PIHP contract.
    Section 438.204(e), (f), and (g) required that State strategies use 
intermediate sanctions; include an information system to support the 
operation and review of the strategy; and include standards for access 
to care, structure and operations, and quality measurement and 
improvement, all consistent with the requirements of other sections of 
this subpart.
    Comment: One commenter suggested that States be required to use the 
definition of children with special health care needs established by 
the Bureau of Maternal and Child Health and, through monitoring the use 
of services, identify children who received subspecialty care.
    Response: There are numerous definitions for individuals with 
special health care needs. However, health services research is still 
in the process of developing conceptual models, screening tools, and 
approaches to identifying these individuals. We, therefore, do not 
agree that this regulation should require States to use a particular 
definition. We provide States with the flexibility to define 
individuals with special health care needs. This regulation requires 
that States identify procedures to assess the quality and 
appropriateness of care provided to individuals with special health 
care needs and that States conduct reviews to evaluate the 
effectiveness of the strategy, including quality activities targeting 
individuals with special health care needs.
    Comment: Many commenters strongly supported the provision that 
States be required to identify the race, ethnicity, and primary 
language spoken of each Medicaid enrollee and provide this to the MCO 
or PIHP upon enrollment. This supports the HHS goal of eradicating 
racial and ethnic disparities in health care by the year 2010. It also 
ensures that MCOs and PIHPs have the information necessary to comply 
with title VI of the Civil Rights Act of 1964. They allege that it has 
been long recognized that effective recording and reporting of data is 
the basis used to determine that Federal fund recipients are in 
compliance with the law.
    Response: To ensure that Medicaid services are provided in a manner 
that meets the needs of beneficiaries, we retain the provision in 
Sec. 438.204(b)(2) in the final rule.
    Comment: One commenter urged that the regulation permit the 
collection of information on race, ethnicity, and primary language at 
both the State and MCO and PIHP level. They note that State data is not 
always accurate.
    Response: In addition to the information provided to MCOs and PIHPs 
by the States, MCOs and PIHPs have the option to collect information on 
race, ethnicity and primary language. We are not requiring this in 
regulation but we note that States may do so.
    Comment: One commenter asked for clarification on the level of 
specificity that would be required to meet the requirement to collect 
data on ethnicity.
    Response: We are providing States with the flexibility to determine 
how they would like to define and categorize ethnicity. Ethnicity 
information is collected for census purposes and we encourage States to 
consider using standard categories used by the Bureau of the Census.
    Comment: One commenter noted that race data in State eligibility 
systems is not always accurate and that identifying primary language 
will cost money to make required systems changes.
    Response: We recognize that some States will need to modify their 
Medicaid Management Information Systems (MMIS) to collect data on 
primary language. We will allow States sufficient time to modify their 
systems to capture these data. We also recognize that the race data 
collected by States may not always be accurate and that it will always 
be subject to omission due to a variety of factors including 
beneficiary unwillingness to provide the information.
    Comment: One commenter said that information on race, ethnicity, 
and primary language is not available from the Social Security 
Administration (SSA) for Supplemental Security Income (SSI) 
beneficiaries or that States do not control what information SSA 
collects. States should not be required to provide this information to 
MCOs unless it is available from SSA.

[[Page 41034]]

    Response: Information on race is available from SSA on SSI 
beneficiaries and is available to States through the State Data 
Exchange (SDX) file. Information on ethnicity and primary language, 
however, is not available from SSA. We encourage States to pursue 
methods to collect information on ethnicity and primary language spoken 
for these beneficiaries. The information may be available in files of 
other State programs. We recognize that this information may not be 
complete for a variety of reasons.
    Comment: One commenter said that the State has no legitimate 
interest in the primary language spoken by beneficiaries, as this does 
not indicate that use of English presents a barrier.
    Response: We disagree with the commenter. We believe that the 
primary language spoken by a beneficiary indicates that there could be 
a potential barrier to appropriate use of health care services.
    Comment: Several commenters said that data on race, ethnicity, and 
primary language are difficult to collect and unreliable due to the 
reliance on self-reporting. One commenter noted that undocumented 
parents may be reluctant to apply for benefits if this question is 
asked. The commenter further suggested that this provision be deleted 
or not required.
    Response: Self-report data are used for numerous purposes including 
consumer satisfaction surveys and initial screening of beneficiary 
needs. There are methodological pros and cons to using any types of 
data, including self-report data. While we realize that self-report 
data about race, ethnicity, and language will not always be completely 
reliable, we believe that collecting it will allow MCOs, PIHPs, and 
PAHPs to take into account the cultural barriers that may undermine the 
delivery of health care to particular populations enrolled in the MCO. 
We do not believe that collection of this information will discourage 
undocumented parents from applying for benefits for eligible children 
because the question will be in reference to the children.
    Comment: One commenter said that requiring beneficiaries to 
disclose race or ethnicity constitutes a potential violation of the 
Civil Rights Act.
    Response: This rule does not require beneficiaries to disclose race 
or ethnicity. It requires States to make an effort to identify this 
information. In addition, the Civil Rights Act of 1964 does not 
prohibit a State or any other Federally assisted entity from asking a 
beneficiary to disclose his or her race or ethnicity. The failure to 
disclose the requested information, however, cannot be used as a basis 
to deny services or benefits to the beneficiary.
    Comment: Several commenters noted that the requirement for States 
to collect information on race, ethnicity, and primary language would 
require systems modifications and training of intake staff. The 
commenter expressed the hope that CMS, when conducting compliance 
reviews, would be sensitive to the time it will take for States to 
fully implement this provision. Another commenter suggested that States 
may need technical assistance.
    Response: We recognize that some States will need to modify their 
MMIS systems to capture these data, although we believe most States are 
already capturing data on race and ethnicity. We will allow States 
sufficient time to modify their systems to capture these data. We also 
recognize that training of intake staff may need to occur and that 
technical assistance to State may need to be provided. We plan to 
conduct training pertaining to the implementation of the provisions in 
this rule shortly after its publication.
    Comment: One commenter suggested that the regulation require States 
to furnish MCOs and PIHPs with the age of children being enrolled along 
with information on race, ethnicity, and primary language spoken.
    Response: The purpose of requiring States to identify race, 
ethnicity, and primary language is to facilitate the appropriate 
delivery of health care services. We believe that MCOs and PIHPs can 
adequately obtain age information from the enrollee and are, therefore, 
not requiring that the age of enrolled children be provided.
    Comment: One commenter appreciated that we are permitting States to 
develop strategies for identifying race, ethnicity, and primary 
language, rather than requiring States to identify these factors.
    Response: We believe the commenter misunderstood the provision. The 
regulation requires States to identify the race, ethnicity, and primary 
language of enrollees.
    Comment: One commenter asked that States be required to provide the 
date of redetermination for new enrollees to MCOs and PIHPs. This would 
allow MCOs and PIHPs to outreach to enrollees to ensure that eligible 
beneficiaries continue to receive services.
    Response: We do not agree that this regulation should require 
States to provide the date of redetermination for new enrollees to MCOs 
and PIHPs. If MCOs and PIHPs would find this information useful to 
provide continuity of services and do not currently receive it, we 
suggest that they raise this issue with their State.
    Comment: One commenter asked that the requirement in proposed 
Sec. 438.204(b)(3) for ``continuous'' monitoring be changed to 
``periodic'' monitoring as continuous means nonstop, and this is an 
unreasonable requirement.
    Response: We agree with the commenter and have revised 
Sec. 438.204(b)(3) of the regulation text to provide for regular 
monitoring, as opposed to continuous monitoring.
    Comment: Many commenters applauded the provision that performance 
measures and levels be identified and developed by CMS in consultation 
with States and other stakeholders. Some recommended that beneficiaries 
and groups that represent them should be among the stakeholders 
consulted. One commenter suggested that CMS ask the American 
Association of Health Plans (AAHP) to obtain recommendations and 
comments about proposed measures from MCOs. Others urged that 
performance measures be implemented in a way that allows MCOs to meet a 
realistic schedule. They further recommended that CMS take into 
consideration nationally demonstrated performance levels in both MCOs 
and in State fee-for-service (FFS) programs. One commenter recommended 
that any new measures be tested for one year to assess the data and 
results before States, MCOs and PIHPs are considered out of compliance.
    Response: We anticipate that States, beneficiary advocacy groups, 
and MCOs and PIHPs would all be invited by CMS to participate in the 
process to develop standard measures. The implementation process would 
be discussed at this time and would include issues such as measure 
specifications, testing of measures, and measure reporting. States 
would need to ensure that their contracting MCOs and PIHPs collect any 
measures specified by CMS. We would encourage States to also use 
standard measures in their FFS programs. If CMS prescribes any national 
performance measures, it will consider a testing phase. Finally, should 
CMS consider setting levels for performance measures, we would consider 
levels used in both managed care and FFS programs.
    Comment: One commenter suggested that the number of national 
measures be limited so as not to unnecessarily increase costs or burden 
or interfere with State efforts.
    Response: We agree that national measures should be limited in 
number.
    Comment: One commenter suggested that quality improvement 
initiatives must be recognized as long-term efforts

[[Page 41035]]

and that States and MCOs must partner to identify meaningful topics 
that should be measured, and track these over time. Continual, 
capricious changes to quality initiatives are not conducive to 
meaningful study and improvement.
    Response: We agree with the commenter and acknowledge that a 
quality improvement initiative (the process of measuring performance, 
implementing interventions to respond to identified quality problems, 
and then remeasuring performance) needs sufficient time to be 
implemented and for findings to be made available. We do not prescribe 
the duration in which performance improvement projects must be 
completed. We expect States to require that a project be completed in a 
reasonable time period and that information be provided on the 
project's progress annually.
    Comment: One commenter requested detailed standards to ensure that 
Medicaid children are receiving the care to which they are entitled. 
Specifically, the commenter recommended the regulation include 
standards for accreditation of MCOs and PIHPs, consumer satisfaction 
and quality of care ``report cards,'' and use of criteria consistent 
with national standards for assessing outcomes of care of children. In 
addition, the commenter suggested that CMS work with states to develop 
criteria and a timetable for improving the reporting of early and 
periodic, screening, diagnosis and treatment (EPSDT) services.
    Response: The provisions under subpart D provide for access 
standards, structural and operational standards, and measurement and 
improvement standards. These standards apply regardless of the 
composition of the Medicaid population that is provided health care 
services through a State Medicaid managed care program. A review of 
these standards will be conducted as specified in the forthcoming final 
External Quality Review (EQR) regulation (64 FR 67223). As part of EQR, 
we have proposed that States may contract with external quality review 
organizations (EQROs) to conduct consumer surveys and validate and 
calculate performance measures and obtain a 75 percent enhanced Federal 
matching rate. Alternatively, States can have a contractor that is not 
an EQRO conduct these activities, and obtain the 50 percent 
administrative matching rate. States, the EQROs they contract with, or 
other State contractors will be able to extract information obtained 
from these quality measurement activities in a way that allows them to 
look at the quality of care of specified populations, including 
children. Regarding the comment about EPSDT, we do not believe that 
this is within the scope of this regulation.
    Comment: Many commenters suggested that only non-medical PHPs (that 
is, transportation and dental) be excluded from the requirement for EQR 
and that a State audit substitute for the EQR for these entities.
    Response: We have proposed to exclude all PAHPs, including 
transportation and dental PAHPs, from the EQR requirements. We believe 
that requiring EQR for PAHPs would impose an unreasonable burden given 
the limited scope of their services.
    Comment: One commenter stated that many States conduct extensive 
quality reviews, either though another State agency or through an 
accreditation organization. These reviews, the commenter contended, are 
similar to or more rigorous than the CMS required external review and 
he suggested that, if a review is done by another State agency or an 
accreditation organization, that the MCO or PIHP be exempt from the 
EQR.
    Response: We plan to address when an MCO or PIHP can be exempt from 
certain EQR activities or from EQR in its entirety in the final EQR 
regulation.
    Comment: One commenter asked if it will be permissible to contract 
with State medical and allied health professional schools for EQR.
    Response: We plan to address who is qualified to be an EQRO in the 
final EQR regulation.
    Comment: One commenter mistakenly believed that we deleted the EQR 
requirement from the quality strategy and was in agreement with this 
deletion arguing that the requirement was excessive and costly.
    Response: Section 1932(c)(2) of the Act requires an EQR of managed 
care activities. While we have included the EQR requirement as part of 
the quality strategy under this subpart, specific requirements 
regarding compliance with the EQR provision were published in a 
separate EQR Notice of Proposed Rulemaking on December 1, 1999 (64 FR 
67223). The final EQR rule is forthcoming.
    Comment: One commenter stated that some PIHPs have enrollments of 
less than 200 and serve fewer than 10 beneficiaries a year. The 
commenter is concerned that for these PIHPs the cost of an EQR could 
exceed the costs of providing health care services. The commenter 
suggested that for PIHPs include an option for Section 1115 and 1915(b) 
waiver programs allowing the use of the independent assessment of the 
waiver program in lieu of an EQR.
    Response: The independent assessment requirement only applies to 
programs operated under section 1915(b) waivers, and if the assessment 
is found to be acceptable, is generally required for only the first two 
waiver periods. It does not apply to a managed care program conducted 
under section 1932(a) or section 1115 of the Act or one that enrolls 
beneficiaries in managed care on a voluntary basis. We therefore do not 
agree that this option is a suitable replacement for the EQR 
requirement. If a PIHP contracts with a State to provide services to 
Medicaid beneficiaries it will be required to comply with the 
provisions in this rule including the EQR requirements.
    Comment: One commenter recommended that Sec. 438.204(e), which 
requires the use of intermediate sanctions, be amended to indicate that 
it is applicable to MCOs only and not to PIHPs because subpart I does 
not apply to PIHPs.
    Response: We agree with the commenter and have deleted the 
reference to PIHPs under Sec. 438.204(e). In addition, to clarify the 
applicability of Sec. 438.204(c), we have included language that 
clarifies that this provision applies to both MCOs and PIHPs.
4. Availability of Services (Proposed Sec. 438.206)
    Section 1932(c)(1)(A)(i) of the Act, as added by section 4705 of 
the BBA, requires each State that contracts with MCOs under section 
1903(m) of the Act to develop and implement standards for access to 
care under its quality assessment and improvement strategy. Section 
438.206 of the proposed rule established standards for access to care. 
Paragraph (a) required that States ensure that all covered services are 
available and accessible to enrollees. Paragraph (b) proposed new 
requirements for the delivery networks of MCOs and PIHPs. These 
requirements would be imposed on State agencies, which in turn would 
enforce these requirements on MCOs and PIHPs through contract 
provisions.
    Specifically, paragraph (b)(1) proposed that all MCOs and PIHPs 
maintain and monitor a network of appropriate providers that is 
supported by written arrangements and is sufficient to provide adequate 
access to covered services. In establishing and maintaining such a 
network, the proposed rule required MCOs and PIHPs to consider (1) 
anticipated enrollment; (2) the expected utilization of services, 
considering enrollee characteristics and health care needs; (3) the 
numbers and types of network providers required to furnish contract

[[Page 41036]]

services; (4) the number of network providers who are not accepting new 
patients; and (5) the geographic location of providers and enrollees, 
considering distance, travel time, the means of transportation normally 
used by enrollees, and whether the location provides physical access 
for enrollees with disabilities.
    In Sec. 438.206(b)(2) we proposed that the State be required to 
ensure that MCOs and PIHPs allow women direct access to a woman's 
health specialist for women's routine and preventative services. 
Proposed Sec. 438.206(b)(3) required that MCOs and PIHPs provide for a 
second opinion from a qualified health care professional within the 
network, or arrange for the enrollee to obtain one outside the network, 
at no cost to the enrollee. In paragraph (4), we proposed that the MCO 
or PIHP must cover medically necessary services for enrollees obtained 
outside the network if, and for as long as, they cannot be obtained 
from within the network. Paragraph (5) of the proposed rule required 
out-of-network providers to coordinate with the MCO and PIHP with 
respect to payment and ensure that the cost to the enrollee is no more 
than it would be if the services were provided within the network. In 
paragraph (6), we proposed that MCOs and PIHPs demonstrate that their 
providers are credentialed in accordance with Sec. 438.214(b).
    Paragraph (c)(1) required MCOs and PIHPs to meet State standards 
for timely access to services and to require that their providers also 
meet these standards. It also required MCOs and PIHPs to (1) ensure 
that network providers offer hours of operation that are no less than 
the hours of operation offered to commercial enrollees or comparable 
Medicaid fee-for-service, if the provider serves only Medicaid 
enrollees; (2) make services available 24 hours a day, 7 days a week, 
when medically necessary; (3) establish mechanisms to ensure compliance 
with these requirements; (4) monitor for compliance continuously; and 
(5) take corrective action if there is a failure to comply.
    Paragraph (c)(2) required that the State ensure that each MCO and 
PIHP participate in State efforts to promote the delivery of services 
in a culturally competent manner to all enrollees with limited English 
proficiency and diverse cultural and ethnic backgrounds.
    Comment: Many commenters said that the provisions in proposed 
Sec. 438.206 should apply to all PHPs because PAHPs should have the 
same requirements for an adequate provider network as applies to MCOs 
and PIHPs. One commenter said that this section should apply to dental 
plans.
    Response: We agree with the commenters that the availability of 
services provisions should apply to PAHPs. Therefore, in Sec. 438.206 
of the final rule, we have added ``PAHP'' in each instance in which the 
terms ``MCO or PIHP'' appeared in the proposed rule. Therefore, these 
requirements will now apply to dental PAHPs. We note that the types of 
providers that a PAHP must include in its network is limited to those 
needed to provide the services under its contract.
    Comment: Several commenters supported the provisions at 
Sec. 438.206(a) requiring that all covered services be available and 
accessible.
    Response: We agree with the commenters and believe that these 
provisions are consistent with the intent of the Congress concerning 
the development and implementation of standards for access to care.
    Comment: Many commenters said that proposed Sec. 438.206(b) fails 
to provide for direct accountability by States in that it provides only 
that States ensure compliance through their contracts. These commenters 
believe that this wording does not require States to ensure that the 
contract provisions are carried out in practice.
    Response: We agree with the commenter. We now specify in the 
regulation that Sec. 438.206 be reflected in contracts with MCOs, 
PIHPs, and PAHPs, because it is essential that these requirements be 
included in the contract to be enforceable by the State. The regulation 
also requires, at Sec. 438.204(b)(3), that States ``monitor and 
evaluate the MCO, PIHP, and PAHP compliance with the standards''.
    Comment: One commenter said that a requirement that MCOs have a 
network ``sufficient to provide adequate access to all services under 
the contract'' is a significant departure from 1902(a)(30)(A) of the 
Act that requires the State to establish methods, procedures, and 
payments ``sufficient to enlist enough providers so that care and 
services are available under the plan at least to the extent that such 
care and services are available to the general population in a 
geographic area''. The commenter is concerned that the language in the 
proposed regulation obligates the State to guarantee that all covered 
services are available at all times, which may be beyond the ability of 
the State due to shortages of service providers.
    Response: Section 1902(a)(30)(A) is a requirement that applies to 
the State's fee-for-service program, operated pursuant to the State 
plan. The provision that specifically governs the availability of 
services under a State's managed care program is section 
1932(c)(1)(A)(i) of the Act, which requires that services be available 
``in a manner that ensures continuity of care and adequate primary and 
specialized services capacity.'' We believe that the provisions of 
Sec. 438.206(b)(1) carry out the intent of the Congress under section 
1932 to provide access standards that will ensure the availability of 
care in MCOs, PIHPs and PAHPs.
    Comment: One commenter expressed support for the provision 
requiring networks to have experienced providers.
    Response: We agree that it is important that MCOs, PIHPs, and PAHPs 
have experienced providers in order to provide quality care to Medicaid 
enrollees. This is especially true for enrollees with special health 
care needs, whose needs may be sufficiently rare or complex due to 
multiple conditions that a provider, even one who is a specialist, may 
have little or no experience in treating the enrollee's condition or 
conditions. Accordingly, in section 438.206(b)(1)(iii) we specify that 
the MCO, PIHP, or PAHP must consider the training, experience, and 
specialization of providers.
    Comment: One commenter recommended adding language to require MCOs 
and PIHPs that serve children with special health care needs to include 
appropriately trained physicians in their network, including pediatric 
specialty and subspecialty physicians.
    Response: We do not believe it necessary to include an explicit 
requirement for specific specialty and subspecialty physicians for 
particular groups of enrollees. The general requirement that a network 
be adequate to provide access to all services under the contract, 
taking into account the anticipated enrollment and the expected 
utilization, is sufficient to ensure that the network will be adequate 
to meet all needs. Inclusion of language related to particular groups 
may even be detrimental in that it would be impossible to list the 
particular requirements of all groups.
    Comment: One commenter suggested that we add an explicit 
requirement that MCOs and PHPs pay particular attention to the needs of 
enrollees with disabilities when developing and maintaining networks. 
Without such a provision, the commenter is concerned that specialized 
psychiatric treatment for children and adults with severe mental 
illness may not be available. The commenter believes that the inclusion 
of such a requirement has the potential

[[Page 41037]]

to bring psychiatrists who refuse to treat FFS Medicaid beneficiaries 
into the program because MCOs would use their market power to recruit 
these providers.
    Response: As stated above, we do not agree that we should address 
the special needs of particular groups of enrollees for specialty 
providers. We believe that the requirement of the regulation for 
adequate provider networks will cause the States to include appropriate 
requirements in their contracts with MCOs, PIHPs, and PAHPs and that 
the assurances of adequate capacity and services, provided under 
Sec. 438.207 of this regulation, will further ensure that provider 
networks include the range of providers necessary to meet the needs of 
their enrollees.
    Comment: Several commenters suggested that the regulation include a 
provision that MCOs and PIHPs pay particular attention to pregnant 
women and individuals with special health care needs because MCO and 
PIHPs may interpret a general requirement to require only an overall 
survey of enrollees, rather than a targeted assessment of the needs of 
the most vulnerable and ill patients.
    Response: For the reasons stated above, we do not agree that the 
regulation should include a specific provision for these groups. We 
believe that the intent of this regulation is clear, that is, that the 
needs of all enrollees must be met through the provider network.
    Comment: One commenter said that the regulation should require 
States to ensure that MCOs and PIHPs consider and address existing 
underutilization problems when establishing and monitoring their 
service networks.
    Response: The regulation places an affirmative obligation on States 
and MCOs, PIHPs, and PAHPs to consider the needs of their anticipated 
enrollees and provide an adequate provider network to meet those needs. 
We believe that this requirement makes it unnecessary to include a 
provision to address existing underutilization problems.
    Comment: Several commenters said that the regulation should require 
MCOs and PIHPs that seek to expand their service areas to demonstrate 
that they have sufficient numbers and types of providers to meet the 
anticipated volume and types of services enrollees in those areas will 
require. Failure to include this provision could violate sections 
1902(a)(19) and 1932(b)(5) of the Act which require State plans to 
provide safeguards to assure that services be provided, and MCOs to 
provide assurances that they have the capacity to serve the expected 
enrollment, respectively.
    Response: We do not agree that it is necessary for the regulation 
to specifically require that MCOs, PIHPs, and PAHPs that seek to expand 
their service areas have sufficient numbers and types of providers to 
meet the expected increased enrollee volume. The general requirement 
that MCOs, PIHPs, and PAHPs have adequate networks applies whatever the 
service area. Furthermore, Sec. 438.207(c) requires that MCOs, PIHPs, 
and PAHPs submit documentation to the State at any time there has been 
a significant change in their operation, including changes to the 
geographic service area.
    Comment: Many commenters asked that a provision be included in the 
regulation to require States to make available all services included in 
the State plan and make information available to beneficiaries on how 
to access these benefits. The commenter is concerned that without this 
requirement important community services that many State plans include 
through the Rehabilitation Option, such as services that are part of 
the assertive community treatment model, will not be accessed by 
beneficiaries.
    Response: States are required to make available to all 
beneficiaries all services covered in the State plan. States may use 
voluntary or mandatory managed care to provide some or all of these 
services. If the beneficiary is enrolled in an MCO that does not 
provide all Medicaid services, or is enrolled in a PIHP or PAHP (which, 
by definition, is not a comprehensive risk contract), the State remains 
responsible for making available all Medicaid services not covered in 
the contract. The regulation provides that both potential enrollees and 
current enrollees be informed about the services not covered under the 
contract and how and where they can be obtained. See 
Sec. 438.10(e)(2)(ii)(E) and (f)(6)(xii).
    Comment: Many commenters said that the rule should require States 
to notify enrollees how and where to obtain services, including 
transportation, for services covered by the State plan but not included 
in the MCO, PHP, or PCCM contract.
    Response: Section 438.10(f)(6) requires the State, it's contracted 
representative, or the MCO, PIHP, PAHP, or PCCM to notify enrollees 
annually of their right to request this information. In addition, 
Sec. 438.10(e)(2)(i)(E) requires that this information be provided to 
potential enrollees at the time the potential enrollee first becomes 
eligible to enroll in a voluntary program or is first required to 
enroll in a mandatory program.
    Comment: One commenter expressed concern that use of a distance 
standard for urban enrollees could force travel to outlying suburban 
areas or neighboring counties. The commenter would like the final rule 
to include language to protect urban enrollees from needing to make 
lengthy trips to obtain services.
    Response: The regulation provides that the State must ensure 
through its contracts that the provider network is accessible to 
enrollees, taking into account several factors related to geographic 
location of providers and enrollees. Depending on State and local 
circumstances, we believe that the significance of the factors listed--
distance, travel time, and means of transportation ordinarily used by 
Medicaid enrollees--will differ. For urban enrollees, States may find 
that the latter two factors are more important considerations than 
distance. When using distance for enrollees in urban areas, we believe 
that States will factor in the other elements and select a distance 
criterion that meets the overall intent of the regulation. We believe 
that the State is in the best position to determine how these criteria 
should be applied in each of its service areas.
    Comment: Many commenters applauded the use of the term ``women's 
health care specialist'' because they believe that it recognizes the 
important role played by a variety of health care professionals in 
addition to physicians. These commenters asked that ``routine and 
preventative'' be defined in order to ensure that MCOs and PIHPs do not 
place barriers to impede women's access to women's health specialists. 
According to the commenters, the definition should include initial and 
follow up visits for prenatal care, mammograms, pap tests, family 
planning, and treatment of vaginal and urinary tract infections and 
sexually transmitted diseases.
    Response: We believe that the use of the words ``routine and 
preventative'' in the regulation is sufficient to categorize the types 
of services that women can access directly through a women's health 
specialist.
    Comment: One commenter seeks inclusion of a requirement that 
children have direct access to pediatricians, including specialists. 
The commenter noted that the regulation provides for direct access to 
women's health specialists and that the patient's rights legislation 
endorsed by the Administration provides for direct access to 
pediatricians.
    Response: We do not believe that it is appropriate to require 
direct access to

[[Page 41038]]

pediatricians. While we believe that most children enrolled in Medicaid 
managed care will have pediatricians as their primary care physicians, 
pediatricians are not locally available in all areas of the country, 
and some children will use other physicians, such as family physicians, 
as their source of primary care. We believe that direct access should 
generally be to the primary care physician. For women's routine and 
preventative care we make an exception to this rule because we think it 
appropriate that women have the choice to see a women's health 
specialist for routine and preventative care rather than a generalist 
or other specialty physician.
    Comment: One commenter said that the regulation should require 
direct access to psychiatrists.
    Response: We do not agree that the regulation should provide direct 
access to psychiatrists. We are concerned about coordination of care 
and believe that States should have the option to require that patients 
be referred to psychiatrists by their primary care physician. This 
helps to ensure that the primary care physician is cognizant of both 
the physical and mental health needs of patients and has the 
information needed to coordinate the care needed by patients.
    Comment: One commenter asked that we retain the provision for out-
of-network second opinions from health care professionals, which are 
not currently available. The commenter stated that a second opinion for 
a denied service from an in-network provider is a meaningless right.
    Response: We disagree with the commenter. The proposed rule 
provided for a second opinion from a provider in the network, if one is 
available, and from a provider outside the network only if there is not 
another qualified provider within the network. We believe that it is 
important to provide an enrollee with the right to a second opinion, 
but we believe that this does not require access to a second opinion 
from a provider who is out of the network.
    Comment: Several commenters believe that second opinions should be 
given by participating physicians when one in the specialty is 
available. Enrollees would then only be allowed to go out of network 
when no qualified alternative exists with the network.
    Response: As stated in the previous response, the proposed and 
final rule provide enrollees the right to a second opinion from a 
provider within the network if a qualified health care professional 
within the network is available to provide the second opinion. When a 
qualified health care professional is not available within the network 
to give a second opinion, the enrollee may obtain it from a health care 
professional who is not in the network.
    Comment: One commenter suggested that the regulation require that 
second opinions regarding care for a child be provided by physicians 
with appropriate pediatric education and training. This would be 
consistent with the pending patient's bill of rights.
    Response: The rule specifies that the health care professional 
giving the second opinion must be qualified to do so. We leave to the 
States the responsibility for determining the qualifications to be 
used. States best know their health care markets and are responsible 
for setting provider qualifications and, therefore, are in the best 
position to make this decision.
    Comment: One commenter suggested that the regulation limit second 
opinions from out-of-State providers to instances in which a qualified 
professional is not available within the State. In addition, the 
commenter asked that the regulation require that the nearest out-of-
State provider be used.
    Response: The regulation provides that second opinions be obtained 
from a provider in the network if such a qualified provider is 
available. This limitation applies when the desired out-of-network 
provider is within or outside of the State. We have not added other 
requirements to this provision, as recommended by the commenter. This 
allows States to decide, or to allow MCOs, PIHPs, and PAHPs to decide, 
who is to provide a second opinion when one is to be obtained from an 
out-of-network provider.
    Comment: One commenter believes that CMS should conduct studies to 
determine if second opinions routinely result in a change of treatment 
plan and in better outcomes. Unless it can be established that second 
opinions result in better outcomes, they do not warrant the extra cost.
    Response: We disagree that CMS should study if second opinions 
result in a change of treatment plan or in better outcomes to document 
their benefit before establishing them as an enrollee right. Second 
opinions are widely used and accepted in both FFS and managed care 
service delivery systems. In FFS, Medicaid beneficiaries can freely 
access a second opinion by simply seeing another physician. Likewise, 
in FFS, insurance companies often require confirmatory second opinions 
before authorizing certain services or procedures. We believe that 
second opinions are well established in the practice of medicine in 
this country and should be available to Medicaid managed care 
enrollees.
    Comment: Two commenters asked that the regulation limit payment to 
non-participating providers to the Medicaid FFS fee schedule.
    Response: We do not require that non-participating providers be 
paid according to the Medicaid FFS fee schedule. We believe that States 
are in the best position to determine whether payment limits should 
apply to out-of-network providers or if the MCO, PIHP, and PAHP should 
be free to negotiate rates.
    Comment: One commenter asked that we retain the requirement that 
MCO and PIHPs pay for services received out of network when they are 
not available in the network because this will lead to less 
disenrollment. Another commenter supported inclusion of this provision.
    Response: We agree that it is the responsibility of the MCO, PIHP, 
or PAHP to pay for services, covered under their contracts, received 
out of network when they are not available from within the network. The 
MCO, PIHP, or PAHP must arrange for all services needed by their 
enrollees. We agree that establishing this as an MCO, PIHP, and PAHP 
responsibility will decrease enrollee disenrollments. We retain this 
provision in the final rule.
    Comment: Many commenters supported the provision that services 
received out of network may not result in costs to the enrollee greater 
than would have been within the network. One commenter asked that the 
wording be revised so that MCOs and PIHPs would not be responsible for 
actions by out-of-network providers in relation to fees charged to 
enrollees.
    Response: We believe that it is important that Medicaid enrollees 
not be placed at a financial disadvantage should their MCO, PIHP, or 
PAHP refer them to an out-of-network provider for a covered service 
because a qualified provider is not available in the network. The MCO, 
PIHP, or PAHP must negotiate the amount they will pay the provider and, 
as part of this negotiation, can best ensure that the enrollee does not 
incur out-of-pocket costs.
    Comment: One commenter expressed the opinion that the hours of 
operation offered commercial enrollees is not relevant to the Medicaid 
contract. He believes that this requirement is impossible to oversee or 
enforce and could result in a decrease in the number of providers 
available to serve Medicaid beneficiaries. Another commenter believes 
that it is not realistic for Medicaid to achieve this standard because 
Medicaid reimburses providers significantly less than commercial

[[Page 41039]]

plans. And another commenter said that it is not usual practice for 
States to track providers' hours of operation if they do not treat 
Medicaid patients. One commenter said that the requirement should be 
that services are available and accessible to the same extent that they 
are for FFS beneficiaries or the general public. Another commenter 
supported the provision as written.
    Response: In the final rule we have retained the provision related 
to hours of operation as proposed. The purpose of this requirement is 
to make certain that Medicaid enrollees have the same access to 
providers as do enrollees of other payers. We believe that the 
provision is appropriate and is enforceable by MCOs, PIHPs, and PAHPs 
through their contracts with providers. Access can be monitored by the 
State or the MCO, PIHP, or PAHP by reviewing patient appointments or by 
monitoring enrollee grievances. The commenter who stated that States do 
not track providers' hours of operation if they do not treat Medicaid 
patients misunderstood the provision. It applies only to providers in 
Medicaid managed care networks. For those providers who serve only 
Medicaid patients, we set the hours of operation for FFS Medicaid 
patients as the standard that must also be applied to managed care 
enrollees.
    Comment: One commenter suggested that proposed Sec. 438.204(b)(3) 
should not require States to ``continuously'' monitor hours of 
operation, as this represents an increased burden on States. Rather the 
regulation should require that States monitor for this requirement 
``regularly''.
    Response: We agree that the use of the term ``continuously'' may be 
confusing and that ``regularly'' better conveys our intent. We have 
revised Sec. 438.204(b)(3) of the regulation to reflect this change.
    Comment: Many commenters said that the requirement that MCOs 
participate in States' efforts to promote the delivery of care in a 
culturally competent manner is not sufficient. They believe that 
systems of care must be designed to be respectful of and responsive to 
cultural and linguistic needs in order to provide equal access to 
quality health care. Failure to provide information about treatment 
options in a culturally sensitive way could affect patient compliance, 
lead to declines in the patient's health, and escalate costs.
    Response: We agree that health care needs to be delivered in a 
culturally competent manner for it to be most effective. However, in 
the final regulation we have retained the provision of the proposed 
rule, that MCOs, PIHPs, and PAHPs participate in State efforts to 
promote the delivery of care in a culturally competent manner, because 
we believe that it is through this requirement that MCOs, PIHPs, and 
PAHPs, will gain the knowledge and experience to provide culturally 
competent care.
    Comment: Several commenters supported the approach taken in the 
NPRM regarding cultural competency and believe that the State is in the 
best position to lead initiatives on cultural competency. This allows 
States to advance initiatives crossing FFS and managed care.
    Response: We agree with the commenters and have retained this 
provision in the final rule.
    Comment: Many commenters said that MCOs, all PHPs, and PCCMs should 
be required to provide services in a culturally competent manner 
because, as recipients of Federal funds, they are all required to do 
this.
    Response: This regulation requires MCOs, PIHPs, and PAHPs to 
participate in State efforts to promote cultural competency in order to 
comply with the requirements of section 1932 of the Act. It does not 
address requirements of other statutes that might also apply.
    Comment: One commenter objected to the Medicaid rule having what he 
viewed as weaker requirements relating to cultural competency than the 
Medicare+Choice rule. He noted that in the preamble to that rule CMS 
stated that the M+C provisions are consistent with title VI of the 
Civil Rights Act, recommendations from the President's Race Initiative, 
and the President's Advisory Commission on Consumer Protection and 
Quality in the Health Care Industry.
    Response: Medicaid is a State/Federal program and States retain 
responsibility for much of the program and operational policy of their 
programs. We believe that States can best decide how to advance 
cultural competency in their managed care programs. We are working with 
the Medicare program to develop tools for managed care organizations to 
use to improve the delivery of culturally competent health care. When 
these tools are available, we will share them with States so that they 
can use them at their option.
    Comment: One commenter suggested that the new standards developed 
by the Office of Minority Health (National Standards on Culturally and 
Linguistically Appropriate Services) be referenced as a more detailed 
document that clarifies the regulatory provision.
    Response: We agree that these guidelines are a valuable tool and we 
encourage States to review them and consider their use.
    Comment: Many commenters suggested the addition of a provision to 
prohibit discrimination by providers toward Medicaid enrollees. One 
commenter noted that the President's Commission on Consumer Protection 
and Quality in the Health Care Industry opposed discrimination on the 
basis of source of payment.
    Response: We have decided not to include a provision in the 
regulation to prohibit providers from discriminating against Medicaid 
enrollees. We do not believe that this provision is needed in this 
regulation. States remain responsible for ensuring Medicaid enrollees 
adequate access to providers and are in the best position to choose the 
mechanisms they believe will be effective to ensure this result. We 
also have a provision in the regulation that requires that network 
providers offer Medicaid enrollees the same hours of operation offered 
to commercial enrollees. We believe that this requirement will help 
ensure equal access for Medicaid enrollees to providers.
    Comment: Many commenters recommended inclusion of a provision to 
require States that limit freedom of choice to comply with the 
requirements of Sec. 438.52.
    Response: The requirements related to freedom of choice at 
Sec. 438.52 apply in accordance with the provisions of that section. It 
is unnecessary to reiterate or cross reference those requirements in 
this section.
5. Assurances of Adequate Capacity and Services (Proposed Sec. 438.207)
    Under the authority of section 1932(b)(5) of the Act, proposed 
Sec. 438.207(a) required that the MCO and PIHP provide the State with 
adequate assurances that the MCO or PIHP has the capacity to serve the 
expected enrollment in the service area. Proposed Sec. 438.207(b) 
required that documentation submitted to the State must be in a format 
set by the State and acceptable to CMS and must demonstrate that the 
MCO or PIHP offers an appropriate range of services, including 
preventative services, primary care services, and specialty services. 
The MCO and PIHP was also required to document that it maintains a 
network of providers sufficient in number, mix, and geographic 
distribution.
    Section Sec. 438.207(c) specified when documentation must be 
provided including (1) at the time the MCO or PIHP enters into a 
contract with the State, and (2) whenever there has been a significant 
change in the MCO's or PIHP's operations that would affect adequate 
capacity and services such as

[[Page 41040]]

changes in services provided, benefits, geographic service areas, 
payments, or enrollment of a new population.
    Comment: One commenter recommended that this section apply to 
dental plans.
    Response: We agree that it is important for PAHPs, including dental 
plans, as well as MCOs and PIHPs to have adequate provider networks and 
to provide the State with assurances as to the adequacy of their 
networks. Therefore, in the final rule, we extend the provisions of 
this section to PAHPs. We note that the provider network for PIHPs and 
PAHPs need only include provider types necessary to provide the 
services included in their contracts.
    Comment: One commenter stated that MCOs and PIHPs need to contract 
with the appropriate number and mix of pediatric-trained specialists 
and tertiary care centers for children in order to ensure that they 
have adequate capacity to serve their expected enrollment. If a plan 
fails to contract with an adequate number of these providers, the plan 
should be required to provide these services out of network at no 
additional cost.
    Response: As we stated earlier in this preamble, we have chosen not 
to specify types of specialists or other providers that health plans 
must contract with in order to meet the requirements of the regulation. 
Rather, in Sec. 438.206(b)(1), we retain the general requirement that 
provider networks must be adequate to provide adequate access to all 
services covered under the contract. In Sec. 438.206(b)(4), we provide 
that necessary medical services not available within the network, must 
be covered by the MCO, PIHP, or PAHP out of network.
    Comment: One commenter suggested that this provision be revised to 
require the State to ensure, through its contracts, that MCOs provide a 
full range of psychiatric services and have a sufficient number of 
psychiatrists participating in the plan.
    Response: As stated above, in the final rule we are not specifying 
specific provider types needed by MCOs, PIHPs, and PAHPs, but rather 
providing a general requirement that the networks be sufficient to 
provide adequate access to covered services to all enrollees.
    Comment: One commenter disagreed with CMS' decision to interpret 
``adequate assurances'' to require extensive documentation suggested in 
the preamble. The commenter believes that extensive and detailed data 
are often of little use in determining the adequacy of the provider 
network and that network deficiencies are often found when an enrollee 
changes primary care physicians, calls enrollee services, or files a 
grievance.
    Response: We continue to believe that it is necessary and 
appropriate for the regulation to require that each MCO, PIHP, and PAHP 
document that it has adequate provider capacity to provide necessary 
medical services. The heading for section 1932(b)(5) of the Act is 
``Demonstration of Adequate Capacity and Services.'' We believe that 
the MCO, PIHP or PAHP cannot demonstrate that it has the capacity to 
serve its expected enrollment without providing documentation. In 
addition, we require that the State have documentation to support its 
certification to the Secretary under Sec. 438.207(d). This 
documentation is required prospectively to avoid problems that may 
otherwise not be detected until an enrollee complains or takes other 
steps to address a situation caused by the lack of an adequate provider 
network.
    Comment: Many commenters objected to the omission of a provision to 
require MCOs and PIHPs to have in place policies and procedures to 
respond to situations in which there is an unanticipated need for 
providers with particular types of expertise or an unanticipated 
limitation on the availability of such providers. The commenters 
believe that such a provision is necessary to meet the statutory 
requirement for a quality strategy that includes access standards to 
ensure that covered services are available within reasonable timeframes 
and in a manner that ensures continuity of care and adequate primary 
care and specialty care. Another commenter supported the omission of 
such a provision.
    Response: We have not included a provision in the final rule to 
require MCOs, PIHPs, and PAHPs to have policies and procedures in place 
to respond to situations in which there is an unanticipated need for 
providers or a limitation on the availability of needed providers. We 
again rely on the requirement in Sec. 438.206(b)(1) and 
Sec. 438.206(b)(4) that MCOs, PIHPs, and PAHPs must have adequate 
provider networks or, if the MCO, PIHP, or PAHP is unable to provide 
them, must adequately and timely provide these services out of network.
6. Coordination and Continuity of Care (Proposed Sec. 438.208)
    Proposed Sec. 438.208 contained provisions specifying how the care 
of Medicaid beneficiaries enrolled in MCOs and PIHPs is to be provided 
in order to promote coordination and continuity of care, especially 
with respect to individuals with special health care needs. In proposed 
paragraph (a) we allowed for two exceptions to some of these 
coordination and continuity of care provisions. In the first instance, 
provisions pertaining to some screening, assessment and primary care 
requirements would apply to PIHPs as the state determines appropriate, 
based on the scope of the PIHP's contracted services and the way the 
state has organized the delivery of managed care services. In the 
second instance, for Medicaid-contracting MCOs that serve certain 
Medicaid enrollees also enrolled in Medicare+Choice plans and receiving 
Medicare benefits, the State similarly determines, based on the 
services it requires the MCO to furnish to dually eligible enrollees, 
the extent to which the MCO must meet certain screening, assessment, 
referral, treatment planning, primary care and care coordination 
requirements. In proposed paragraph (b) we put forth requirements for 
the state Medicaid agency to identify certain enrollees with special 
health care needs and to further identify these enrollees to its 
enrollment broker, if applicable, and contracting MCOs and PIHPs. In 
proposed paragraph (c) we specified requirements for the screening and 
assessment of individuals with special health care needs. In proposed 
paragraph (d) we specified requirements for referrals and treatment 
plans for MCO and PIHP enrollees determined to have ongoing special 
conditions that require a course of treatment or regular care 
monitoring. These requirements addressed access to specialists and the 
development of treatment plans. In proposed paragraph (e) we specified 
requirements pertaining to MCO and PIHP care coordination programs, 
including requirements that these programs: provide each enrollee with 
an ongoing source of primary care, coordinate each enrollee's health 
care services, appropriately share with other MCOs and PIHPs the 
results of any screenings or assessments in order to prevent 
unnecessary burden on the enrollee, and protect enrollee privacy and 
confidentiality.
    One commenter heartily endorsed Sec. 438.208 of the proposed rule 
and urged CMS to preserve it in the final rule and monitor for 
compliance with it. However, many other commenters recommended that 
this section of the regulation include more specific or stronger 
requirements for States and managed care entities, particularly with 
respect to the care of individuals with special health care needs. Most 
commenters offered specific

[[Page 41041]]

recommendations for changing this section of the regulation. We agree 
with these comments and have revised Sec. 438.208 as discussed below, 
in response to these comments.

Identification of ``At Risk'' Individuals

    Comment: Many commenters recommended that we require States to 
identify individuals ``at risk'' of having special health care needs. 
Many of these commenters identified these individuals as: children and 
adults who receive SSI benefits; children in foster care; enrollees 
over the age of 65; enrollees in relevant, state-established, risk-
adjusted, higher-cost payment categories; and any other category of 
recipients identified by CMS. A few commenters recommended that we 
allow States to use additional State-identified categories of people 
who are ``at risk'' for having special health care needs. One commenter 
stated that children under age 2 and pregnant women should be 
identified as being ``at risk'' of having special health care needs. 
Another commenter stated that children enrolled in a State's Title V 
program for children with special health care needs should be included 
in a regulatory definition of persons ``at risk'' of having special 
health care needs.
    Response: The proposed rule at Sec. 438.208(b) required States to 
identify individuals ``with'' (as opposed to individuals ``at risk of 
having'') special health care needs. For several reasons, we believe it 
is appropriate to retain this distinction in this final rule, and not 
additionally require States to identify individuals ``at risk of 
having'' special health care needs. First, States already well 
appreciate the increased risk that certain populations (for example, 
children and adults who receive SSI benefits; children in foster care; 
enrollees over the age of 65; and enrollees in relevant, state-
established, risk-adjusted, higher-cost payment categories) have for 
needing special services or high levels of service. States can also 
readily identify these individuals. We do not believe that regulations 
are necessary to call States' attention to these individuals or that 
States need encouragement or assistance in identifying these 
individuals. To additionally require States to create a new 
administrative mechanism in order to categorize as ``at-risk'' those 
individuals who are already well-known to State Medicaid agencies and 
can be easily identified, would dilute the attention paid to 
individuals who actually have special health care needs. Instead, in 
Sec. 438.208(c) of this final regulation we require States to focus 
their attention more closely on identifying individuals who actually 
have special health care needs. Second, the concept of ``at risk'' of 
having special health care needs (beyond the categorical groups 
discussed above) is widely recognized as difficult to put into 
operation. Well-known researchers in this field have explicitly 
declined to address the concept of ``at risk'' when developing 
screening tools to identify children and adults with special health 
care needs. Because the science in this area is still elementary, we 
believe it is premature to ask States to implement this concept at this 
time. Finally, we note that commenters did not agree among themselves 
on which populations should be included in a category of ``at risk of 
having'' special health care needs. For these reasons, in this final 
rule we do not require States to identify individuals ``at risk'' of 
having special health care needs.

Definition of Individuals With Special Health Care Needs

    Comment: Many commenters recommended that proposed Sec. 438.208(b) 
should specify certain groups of individuals as ``having'' special 
health care needs. Many of the recommended groups were identical to the 
groups identified by other commenters as individuals who should be 
considered ``at risk'' of having special health care needs. 
Specifically, the following groups were recommended by many commenters: 
children and adults who are receiving SSI benefits; children in foster 
care; enrollees over the age of 65; enrollees in relevant, state-
established, risk-adjusted, higher-cost payment categories; and any 
other category of recipients identified by CMS. Many commenters also 
identified children under age 2 and other enrollees known by the State 
to be pregnant or having other special health care needs as categories 
of persons requiring special attention and about whom the State should 
notify the MCO/PIHP of their having a special health care need.
    Other commenters stated that proposed Sec. 438.208(b) should 
specify a threshold or minimum definition of persons with special 
health care needs. One commenter stated that the definition should be 
as follows, ``Individuals with special health care needs include adults 
and children who daily face physical, mental, or environmental 
challenges that place at risk their health and ability to fully 
function in society (for example, individuals with mental retardation 
or serious chronic illnesses, pregnant women, children under the age of 
7, children in foster care or out-of-home placement, and individuals 
over age 65).'' Other commenters stated that children with special 
health care needs should be defined consistent with the Department's 
Maternal and Child Health Bureau's definition which reads, ``Children 
with special health care needs are those who have or are at elevated 
risk for chronic physical, developmental, behavioral, or emotional 
conditions and who also require health and related services of a type 
or amount not usually required by children.''
    In contrast, several commenters expressed support for allowing 
States to define which populations need to be identified and how to 
identify them. One commenter asked us to confirm that the proposed rule 
would allow States the flexibility to define ``individuals with special 
health care needs.'' Another commenter stated that the requirement for 
States to identify enrollees with special health care needs and 
identify these enrollees to its enrollment broker (if applicable) and 
MCOs should be eliminated. The commenter stated that this requirement 
is neither feasible nor practical because (1) the State does not have a 
mechanism to identify persons with special health care needs--other 
than individuals who receive SSI; (2) enrollees may not choose to 
reveal information about their health, which should be held between the 
enrollee and his or her provider, and possibly the health plans; and 
(3) the appropriate mechanism for identifying a person with a special 
health care need is through an assessment which is required elsewhere 
in the regulation.
    Response: In our report to the Congress, Safeguards for Individuals 
with Special Health Care Needs Enrolled in Medicaid Managed Care, dated 
November 6, 2000, we identified, ``the presence or increased risk of 
disability,'' as a shared characteristic of populations with special 
health care needs. We identified 6 populations as examples of groups 
that had an increased prevalence or risk of disability: (1) Children 
with special health care needs; (2) children in foster care; (3) 
individuals with serious and persistent mental illness and/or substance 
abuse; (4) individuals who are homeless; (5) older adults with 
disabilities; and (6) non-elderly adults who are disabled or 
chronically ill with physical or mental disabilities. However, this 
same report, while calling these groups to the attention of States, 
recognized the difficulty that States face in identifying not just 
population groups that have an increased prevalence or risk of 
disability, but in identifying individuals who actually have a special 
health care need. Because of this, we entered into a contract with

[[Page 41042]]

the Foundation for Accountability (FACCT) to produce a reference manual 
for State Medicaid agencies and other interested parties. The manual 
will present and discuss reliable and valid approaches to identifying 
individuals who have special health care needs. In addition, we asked 
FACCT to develop a new screening tool that can be used to help identify 
adults with special health care needs. This adult screener has now been 
developed and tested. It, along with other valid and reliable 
approaches to identifying adults and children with special health care 
needs, will be included in the reference manual for States. Because 
this research conducted for us by FACCT has documented that there are 
different ways (with varying degrees of sensitivity, specificity, and 
resource implications) to identify individuals with special health care 
needs, we do not believe it appropriate to require one approach, and 
thereby one definition. Rather, we encourage States to review these 
different approaches, in conjunction with beneficiaries and 
stakeholders, as a part of their State quality strategy developed under 
Sec. 438.204, and select the approach or approaches to identifying 
individuals with special health care needs that best complements the 
design of the State's Medicaid program and managed care initiatives.
    Comment: Many commenters recommended that States also be required 
to identify enrollees with special health care needs to PAHPs and 
PCCMs.
    Response: We agree with the commenters and we have revised 
Sec. 438.208(c) to include PAHPs. However, we have not applied these 
provisions to PCCMs because, as noted elsewhere in this preamble, the 
statutory provisions of the BBA, which authorized these quality 
requirements, apply only to prepaid, capitated forms of managed care.

Screening and Assessment

    Comment: Many commenters expressed confusion over the use of the 
words ``screening'' and ``assessment'' in Sec. 438.208(c) of the 
proposed rule. One commenter erroneously stated that the provisions for 
screening and assessment of special needs individuals were not 
contained in the proposed regulation. Many commenters stated that the 
proposed rule did not differentiate between the words, ``screening'' 
and ``assessment.'' One commenter urged us to specify that an initial 
screen must be sufficient to identify individuals with special health 
care needs and facilities that can meet those needs, and that a health 
assessment must be comprehensive and include a physical examination.
    Response: We agree that the proposed rule provisions at 
Secs. 438.208(b) and (c) respectively calling for ``State 
responsibility to identify certain enrollees with special health care 
needs,'' and ``Screening and assessment'' are confusing, in part 
because of some redundancy. The proposed rule intended to convey that 
identification of individuals with special health care needs should be 
accomplished through some form of screening. Therefore, we have revised 
Sec. 438.208(c) and replaced the word ``screening'' with the words, 
``mechanisms to identify.'' This change is supported by information 
from several experts in screening who reminded us that screening tools 
by their very nature are not perfect, and that subsequent follow-up 
through a more intensive assessment is needed in order to better 
determine if an individual's special health care needs actually require 
a course of therapy or monitoring. We also made other changes to the 
organization of this section in order to better distinguish the 
identification activity from the assessment function.
    However, we did not, as requested by one commenter, specify that an 
initial screen (identification mechanism) must be sufficient to 
identify facilities that can meet an individual's special needs. We 
believe that determining appropriate facilities, when care in a 
facility is needed, should not be based on the results of a screen or 
identification mechanism, but upon an assessment and ongoing 
communication between the patient and his or her health care 
provider(s). We further did not explicitly state in Sec. 438.208(c)(2) 
that the enrollee's health assessment must be comprehensive because we 
believe that ``comprehensive'' is subject to varying interpretations, 
and therefore is not readily able to be reliably monitored or 
consistently enforced by CMS. Further, the provisions in 
Sec. 438.208(c)(2) already require assessments to ``identify any 
ongoing special conditions of the enrollee that require a course of 
treatment or regular care monitoring'' and that the assessment 
mechanisms must use appropriate health care professionals. We also have 
not required that the assessment include a physical examination, 
because we believe that for some individuals, a course of treatment or 
regular care monitoring might be determined to be unnecessary without a 
physical examination. We therefore defer to States to set further 
standards for assessment, noting that these standards for 
identification and assessment are included as part of a State's quality 
strategies under Sec. 438.204. Therefore, any State standards for 
assessment will be developed with the input of Medicaid beneficiaries 
and other stakeholders. We believe that any greater specificity in 
requirements pertaining to assessments should be developed as a part of 
this process.
    Comment: One commenter stated that proposed Sec. 438.208(c) failed 
to quantify what will be substantial burden associated with the 
requirements for screening and assessment.
    Response: It would be very difficult to more accurately quantify 
the overall impact and burden of this provision of the regulation 
because of the variation in State programs and how States will choose 
to implement these provisions. In Sec. 438.208(c) of the final rule we 
have retained State flexibility in identification, assessment, 
treatment planning for individuals with special health care needs, and 
with respect to how provisions will be applied to MCOs, PIHPs, and 
PAHPs that serve dually eligible enrollees. Because of our desire to 
allow States to have this flexibility, and the variations in practice 
that currently exist within the managed care industry, it is not 
possible to more accurately quantify the burden of these provisions.
    Comment: One commenter stated that it could not comply with the 
requirement stated in the preamble to proposed Sec. 438.208 that in 
instances when an MCO is not able to meet requirements for screening or 
assessment for an individual enrollee, because, for example, it is not 
possible to contact the enrollee or the enrollee refused to respond to 
the MCO, that the MCO ensure that the reason why the enrollee could not 
be screened or assessed be documented in the enrollee's medical record. 
The commenter stated that it does not own its contracted providers and 
does not have the ability to enforce the requirement.
    Response: We disagree with the commenter. We believe that MCOs can 
include this as a requirement in their written agreements with 
participating providers. However, the commenter is incorrect in 
indicating that we have required this in the preamble. Rather, the 
preamble states that an MCO or PIHP ``should'' take steps to ensure 
that this information is documented.

Identification

    Comment: One commenter asked us to clarify CMS's goal with respect 
to individuals with special health care needs given the commenter's

[[Page 41043]]

observation that these individuals will have great variability in the 
coverage and care they will receive between States. One commenter 
stated that Sec. 438.208(b) of the proposed rules did not emphasize 
clearly the importance of identifying all persons with special health 
care needs. A few commenters expressed concern that the proposed rule 
did not contain provisions that would require the State to have a 
strategy to identify enrollees with special health care needs. One 
commenter stated that the regulation does not contain requirements that 
MCOs have procedures in place to identify individual enrollees with 
serious and multiple medical conditions, ``whether they be physical-
health, mental health, or substance-abuse related in nature.'' The 
commenter maintained that CMS must include these provisions. A few 
commenters stated their support for a requirement that MCOs must screen 
all enrollees to detect special health care needs. A few commenters 
also stated that each MCO and PHP should be required to implement a 
mechanism to identify enrollees who develop special health care needs 
after they enroll in the MCO or PIHP. One commenter asked if CMS would 
be monitoring States with respect to the requirement in Sec. 438.208(b) 
pertaining to State's responsibility to identify certain enrollees with 
special health care needs, and if so, if the monitoring will use a tool 
that has been developed for CMS by FACCT.
    Response: We have revised Sec. 438.208(c)(1) and (c)(2) to clarify 
our goals with respect to individuals with special health care needs 
and emphasize the importance of identifying the individuals. We did 
not, as one commenter directed, require MCOs to have procedures in 
place to identify individual enrollees with serious and multiple 
medical conditions, ``whether they be physical-health, mental health, 
or substance-abuse related in nature,'' because we believe that the 
State should be the one to consider the issues as it develops its 
mechanism to identify individuals with special health care needs, as 
part of its quality strategy, and with the input of Medicaid recipients 
and other stakeholders. In our revisions, we also did not require each 
MCO and PIHP to implement a mechanism to identify enrollees who develop 
special health care needs after they enroll in the MCO or PIHP. We 
believe that the extent to which this should occur should be considered 
by the States in the context of the States' overall strategy and 
mechanism for identifying individuals with special health care needs. 
Finally, we affirm that CMS will be monitoring States with respect to 
the requirement to identify enrollees with special health care needs. 
However, we note that the tool that has been developed for CMS by FACCT 
is a screening tool, not a monitoring tool. Additionally, it is one of 
several screening tools that will be shared with States for their 
discretionary use. Therefore, the FACCT tool is not likely to be used 
by CMS for monitoring activities.

Assessment

    Comment: One commenter stated that the proposed rule does not 
contain provisions that MCOs assess the condition of individual 
enrollees with serious and multiple medical conditions. The commenter 
maintained that CMS must include these provisions. Another commenter 
stated that the regulation should specify groups of beneficiaries for 
whom special health assessments should be required so that there will 
not be significant variation in access and quality of care among the 
various state Medicaid programs. In contrast, other commenters 
expressed support for the provisions of the regulation pertaining to 
assessment of people with special health care needs and for allowing 
states and plans to develop timelines and procedures that meet the 
needs of their enrolled population. Still other commenters further 
expressed support for allowing States to determine how to assess 
individuals with special health care needs.
    Response: The final regulation contains requirements that MCOs (and 
also PIHPs and PAHPs at the discretion of the State) assess individual 
enrollees with special health care needs. We believe that individuals 
with ``serious and multiple medical conditions'' are included in the 
concept of special health care needs, and intend that States' 
mechanisms to identify individuals with special health care needs will 
identify individuals with serious and multiple medical conditions. 
However, in Sec. 438.208(c)(1) we allow States the discretion of 
determining how to identify individuals with special health care needs, 
and therefore how to implement this concept. Consistent with this 
position, we do not believe that we should specify groups of 
beneficiaries for whom special health assessments should be required.

Initial Assessments

    Comment: One commenter expressed concern that the proposed 
regulation does not require MCOs or PHPs to conduct initial assessments 
of all new Medicaid enrollees, noting that Medicare+Choice plans are 
required to conduct the assessments.
    Response: We used the term ``initial assessment'' in a Medicaid 
proposed rule published on September 29, 1998 (63 FR 52022) to 
implement these same statutory provisions. Since that time, we have 
received numerous and ongoing comments that the purpose and scope of an 
``initial'' assessment has not been well understood. The words 
``initial assessment'' do not appear in widespread use in the private 
sector or in health services research or policy studies. We have 
attempted to address this problem in subsequent versions of the 
regulation, and in Sec. 438.208(c)(1) and (c)(2) of this final 
regulation, by dropping the terminology ``initial assessment'' and 
separating out what we believe are the two essential activities; that 
is, identifying individuals who have special health care needs, and 
assessing their needs. We do not believe it necessary to further 
specify the need for primary care providers operating under the 
auspices of an MCO, PIHP, or PAHP to assess the health of their 
patients, because we believe this to be a well-established component of 
primary health care.

Timeframes

    Comment: One commenter stated that the regulation must ensure that 
people with identifiable risks for having special health care needs 
receive an expedited review of their health care needs. Many commenters 
stated that the final rules should include a health assessment soon 
after enrollment to identify pregnant women's health care needs and 
course of treatment. Many other commenters stated that the regulation 
should specify timeframes for managed care entities to screen and 
assess individuals with special health care needs, individuals ``at 
risk'' of special health care needs, and other enrollees. Many of these 
commenters recommended a variety of specific timeframes as follows. 
MCOs and PHPs should be required to: (1) Screen enrollees identified as 
``at risk'' by the State within 30 days of the enrollees being so 
identified; (2) screen all other enrollees within 90 days of enrollment 
to determine whether the enrollee is pregnant or has a special health 
care need; (3) for any screened enrollee identified as being pregnant 
or having special health care needs, provide a comprehensive health 
assessment as expeditiously as the enrollee's health condition 
requires, but no later than 30 days from the date of the 
identification;

[[Page 41044]]

(4) for enrollees identified by the State as being pregnant, or who 
have self-identified as being pregnant or having special health care 
needs, provide a comprehensive health assessment within 30 days without 
needing an initial screen. Other commenters stated that screening 
should be performed on enrollees identified by the State as having 
special health care needs within 30 days after having been so 
identified by the State. One commenter stated that the regulation 
should require initial assessment of each pregnant woman by her MCO as 
soon as possible, but always within 30 days of enrollment. The 
commenter also stated that standards for individuals with complex and 
serious medical conditions should be similarly revised. Another 
commenter recommended that each MCO and PHP be required to make a best 
effort to screen the following individuals within 30 days of their 
being identified: Children and adults who receive SSI, children in 
Title IV-E foster care, enrollees over the age of 65, and enrollees in 
relevant, state-established, risk-adjusted, higher cost payment 
categories, and other categories identified by CMS. This commenter also 
recommended that each MCO and PHP be required to make a best effort to 
assess individuals who are pregnant or who have a special health care 
need within 30 days of their being identified. Another commenter 
recommend that disabled children and adults, foster children, enrollees 
over the age of 65, pregnant enrollees and infants and toddlers be 
screened by their MCOs within 30 days; other MCO enrollees should be 
screened within 90 days. Several other commenters, however, did not 
recommend a specific timeline. One commenter stated that timelines 
should be specified in advance by the State and approved in advance by 
CMS.
    In contrast, one commenter stated that proposed Sec. 438.208(c) and 
(d) that pertain to assessment and treatment of people with special 
health care needs are realistic and allow States and plans to develop 
timelines and procedures that meet the needs of their enrolled 
population. Another commenter expressed support for allowing States the 
authority to determine workable timeframes for their individual 
programs.
    Response: We have carefully reviewed all the suggestions, and we do 
not believe it best for the Federal government, rather than the States, 
to establish timeframes specifying when all managed care entities are 
to screen and assess individuals with special health care needs, 
individuals ``at risk'' of special health care needs, and other 
enrollees. We believe that it would be more appropriate and effective 
for screening and assessment timelines to be established by the State 
agency, in consultation with beneficiaries and other stakeholders, 
taking into consideration access and availability standards set by the 
State, the definitions and mechanisms chosen by the State agency to 
identify individuals with special health care needs, the character of 
the state's managed care marketplace, and State and/or local standards 
in both the public and private marketplace. With respect to the comment 
that timelines should be specified in advance by the State and approved 
in advance by CMS, we note that because we believe that any necessary 
timelines should be established by the State based on State 
considerations, CMS would not likely have more relevant information 
than the State, on existing access and availability standards set by 
the State, definitions and mechanisms chosen by the State agency to 
identify individuals with special health care needs, the character of 
the State's managed care marketplace, and State and/or local standards 
in both the public and private marketplace. We therefore decline to 
require prior Federal approval of State timelines.

Treatment Plan

    Comment: Many commenters supported our proposed Sec. 438.208(d) 
that pertains to a treatment plan for enrollees with special health 
care needs, but disagreed with the provision in Sec. 438.208(d)(2) that 
states that the decision is left to the discretion of the enrollee's 
MCO/PHP of whether or not an individual with special health care needs 
would receive a treatment plan. Many commenters further stated that the 
regulation should indicate the individuals for whom health plans must 
develop and implement treatment plans, including individuals with 
special health care needs and pregnant women, particularly those 
pregnant women at high risk such as those with gestational diabetes or 
with a history of miscarriages.
    Many commenters also suggested a number of additional provisions be 
added to the requirements for a treatment plan; specifically, that 
treatment plans: (1) Be appropriate to the enrollee's identified and 
assessed conditions and needs; (2) be for a specific period of time and 
updated periodically; (3) specify a standing referral or an adequate 
number of direct access visits to specialists; (4) ensure adequate 
coordination of care among providers; (5) be developed with enrollee 
participation and (6) ensure periodic reassessment of each enrollee as 
his or her health condition requires. A few commenters stated that the 
treatment plan should be required to be appropriate to the standard of 
care for the enrollee's condition and identified needs. Other 
commenters noted that the Medicare+Choice regulations require a 
treatment plan for all enrollees with serious medical conditions. One 
commenter stated that the regulation should add a new provision 
requiring that, ``the MCO or PHP must continue the existing treatment 
plan of an enrollee until an initial assessment of that enrollee 
occurs.'' The commenter stated that this provision would address the 
adverse effects that individuals can experience when there is an 
interruption in the ongoing clinical treatment of their illness or 
health condition. One commenter recommended the inclusion of 
requirements that treatment plans include direct access to specialists 
as required by the treatment plan and that the treatment plan be 
updated periodically by the physician responsible for the overall 
coordination of the enrollee's health.
    In contrast, a few other commenters supported the provisions of the 
regulation pertaining to assessment and treatment of people with 
special health care needs, stating that the provisions are realistic 
and reasonable and allow states and plans to develop timelines and 
procedures that meet the needs of their enrolled population. One 
commenter stated that the enrollee, provider, and MCO clinical staff 
should determine the provisions that need to be included in a member's 
treatment plan. One commenter expressed support for allowing states to 
determine the extent to which MCOs must put in place mechanisms to 
allow enrollees to participate in the development of the treatment 
plan. One commenter recommended that an additional exemption be created 
in paragraph (a) with respect to the requirement that there be 
consultation with the primary care provider in the development of the 
treatment plans. The commenter noted that in his or her State, fee-for-
service primary care providers are not a part of the specialty managed 
care network, and are not responsible for coordinating their primary 
care with mental health professionals. The commenter recommended that a 
new exception be added as section 438.208-(a)(2) (iii) ``to consult 
with the enrollee's primary care provider in the development of a 
treatment plan as specified in paragraph (d)(2) of this section.''
    Response: We have revised Sec. 438.208(c)(2) of this regulation, 
that

[[Page 41045]]

left the decision of whether or not an individual with special health 
care needs receives a treatment plan up to the discretion of the 
enrollee's MCO, PIHP, or PAHP. We agree with many of the commenters 
that this decision should not be left up to the MCO, PIHP, or PAHP and 
have revised the regulation to give States the authority to determine 
the extent to which treatment plans would be required. States will be 
required to address this as a component of their quality strategy and 
to develop these standards with input from Medicaid recipients and 
other stakeholders.
    For a variety of reasons, we disagree with commenters that we 
should add certain other requirements for treatment plans; that is that 
treatment plans be required to: (1) Be appropriate to the enrollee's 
identified and assessed conditions and needs; (2) be for a specific 
period of time and updated periodically; (3) ensure periodic 
reassessment of each enrollee as his or her health condition requires; 
and (4) be required to be appropriate to the standard of care for the 
enrollee's condition and identified needs. We found a number of these 
requirements to be vague and therefore difficult to monitor and 
enforce, and not providing significant benefit to beneficiaries; for 
example, ``be for a specific period of time and updated periodically,'' 
``appropriate to * * * conditions and needs'' and ``appropriate to the 
standard of care for the enrollee's condition and identified needs.'' 
In addition, we note that two of these proposed additions to treatment 
plan requirements are more strongly addressed elsewhere in this 
section. The recommended requirement that the treatment plan specify a 
standing referral or an adequate number of direct access visits to 
specialists is addressed in paragraph (c)(4), Direct Access to 
Specialists, which states that, ``For enrollees determined through 
assessment to need a course of treatment or regular care monitoring, 
each MCO, PIHP, and PAHP must have a mechanism in place to allow 
enrollees to directly access a specialist (for example, through a 
standing referral or an approved number of visits) as appropriate for 
the enrollee's condition and identified needs.'' The recommended 
requirement that the treatment plan ensure adequate coordination of 
care among providers is addressed in paragraph (b), Primary care and 
coordination of health care services for all MCO, PIHP, and PAHP 
enrollees. We also did not add a requirement that, ``The MCO or PHP 
must continue the existing treatment plan of an enrollee until an 
initial assessment of that enrollee occurs.'' We believe that the 
situation, which the commenter has identified, is addressed by the 
provisions at Sec. 438.208(b) pertaining to primary care and 
coordination of health care services.

Direct Access to Specialists

    Comment: One commenter stated that proposed Sec. 438.208(d) that 
pertains to direct access to specialists should be clarified that 
direct access to a specialist should be a determination made in concert 
with the primary care physician, health plan, patient, and specialist 
based on each patient's specific circumstances, not made through a 
screening instrument that identifies an individual as having special 
health care needs. Another commenter expressed support for the 
regulatory provisions allowing States to determine MCOs mechanisms 
through which Medicaid enrollees with special health care needs will 
have direct access to specialists.
    Response: We agree that a decision about access to specialists 
should not be based on the results of screening. In Sec. 438.208(c)(4) 
of the final rule, we clarify that access to specialists should be made 
as a result of a more detailed assessment using (consistent with 
Sec. 438.208(c)(2)) ``appropriate health care professionals.'' We 
believe appropriate health care professionals include the enrollee's 
primary care provider, but not necessarily the MCO or a specialist. 
Participation of the enrollee in this decision is guaranteed under the 
provisions in Sec. 438.100 (b)(2)(iv) pertaining to the enrollee's 
right to participate in decisions regarding his or her health care.

Exemptions

    Comment: One commenter expressed support for the exemption allowing 
State Medicaid agencies to determine to what extent any MCO that serves 
enrollees who are also enrolled in a M+C plan and receive Medicare 
benefits must meet the screening and assessment, referral and treatment 
plan, and primary care and coordination requirements of proposed 
Sec. 438.208(c), (d), and (e)(1) (now Sec. 438.208(b) and (c)). The 
commenter recommended that dual eligible enrollees receive one 
screening and assessment that satisfies requirements for 
Medicare+Choice.
    Response: We appreciate and agree with the commenter's support for 
the provision in Sec. 438.208(b) and (c) that allow State Medicaid 
agencies to determine to what extent any MCO that serves enrollees who 
are also enrolled in a M+C plan and receive Medicare benefits must meet 
requirements pertaining to coordination, identification, assessment, 
and treatment planning. We agree that it is desirable for dual eligible 
enrollees to receive one screening and assessment that satisfies 
requirements for both Medicaid and Medicare+Choice, but we are not 
imposing this requirement at this time, in recognition of the 
operational and policy issues that first must be addressed in order to 
accomplish this and because it may not be feasible in all instances.

Patient Confidentiality and Sharing of Information

    Comment: One commenter expressed concern about the provision of 
proposed Sec. 438.208(e)(3) which would require MCOs and PIHPs to share 
with other MCOs and PIHPs serving an enrollee, the results of its 
screening and assessments so that those activities need not be 
duplicated. The commenter understood of the intent of the provision but 
expressed concern over possible effects on patient confidentiality. The 
commenter offered no specific recommendation to address these competing 
concerns. Another commenter noted that the requirements might present 
concerns about patient confidentiality if MCOs are not able to obtain 
enrollee consent for the sharing of information. One commenter 
supported the proposed regulation's provision in Sec. 438.208(e)(4) 
pertaining to the protection of enrollee privacy.
    Response: We also share commenters' concerns about protecting the 
privacy of patient information. For this reason, we have retained the 
provision, now at Sec. 438.208(b)(4), that states that, ``* * * in the 
process of coordinating care, each enrollee's privacy is protected in 
accordance with the privacy requirements in 45 CFR parts 160 and 164, 
subparts A and E, to the extent that they are applicable.

Primary Care and Coordination Program

    Comment: One commenter noted that the proposed regulations in 
Sec. 438.208(e) allowed primary care coordination to be conducted by 
``a person or entity.'' The commenter stated that it is inappropriate 
to allow MCOs or PHPs to delegate management of an enrollee's health 
care to an unlicensed or non-credentialed person or entity. The 
commenter recommended that primary care coordination be performed by a 
health care professional, as that term is defined in proposed 
Sec. 438.102. One commenter recommended that CMS should describe in the 
regulation necessary coordination efforts and include specific 
references and examples.

[[Page 41046]]

    Response: We have retained the wording, ``a person or entity'' in 
this final rule to acknowledge that sometimes care coordination might 
be performed by an organization, such as a Federally Qualified Health 
Center (FQHC), as opposed to an individual. We have not described in 
the regulation necessary coordination efforts and specific references 
and examples because we believe that there are more appropriate 
vehicles than this regulation for disseminating best practices, 
reference materials and examples of care coordination.

Monitoring

    Comment: One commenter recommended that CMS: (1) Closely monitor 
State agency and managed care entity procedures to identify any 
problems or disruptions in the continued treatment of patients with 
mental illness, including a substance abuse disorder; (2) provide 
direction to the State or State agency to facilitate effective 
solutions; and (3) use CMS resources to assure that continuity and 
coordination is maintained.
    Response: We will closely monitor State agencies and their managed 
care initiatives to identify any problems or disruptions in the 
services or treatment of all Medicaid enrollees, including enrollees 
with special health care needs such as mental illness and/or substance 
abuse. When deficiencies are found, we typically direct the State 
agency to undertake solutions and use our resources to assure that the 
solutions are effective.

Factors That Hinder Access

    Comment: Many commenters recommended an addition to MCO/PIHP 
coordination provisions at proposed Sec. 438.208(e) to require plans to 
have in effect procedures to address factors, such as lack of 
transportation, that may hinder enrollee access to health care 
treatments or regimens.
    Response: We do not agree with this recommendation. We know that 
many States and MCOs, PIHPs, and PAHPs in the absence of federal 
regulations, have in effect procedures to address factors, such as lack 
of transportation, that may hinder enrollee access to health care 
treatments or regimens. However, we believe that the extent to which 
these procedures should be the responsibility of the MCO, PIHP, or PAHP 
in contrast to the State agency or other agent of the State, is a 
decision best made by the State agency.

Maintenance of Health Records

    Comment: Many commenters recommended that a provision be added to 
require each MCO and PHP to ensure that its providers have the 
information necessary for effective and continuous patient care and 
quality improvement, consistent with certain confidentiality and 
accuracy requirements. Many commenters also recommended that each MCO 
and PHP be required to ensure that each provider maintains health 
records that meet professional standards and that there is appropriate 
and confidential sharing of information among providers.
    Response: We believe that both of these issues are already 
addressed in other sections of the regulation. Section 438.242, Health 
Information Systems, requires the MCO and PIHP to maintain a health 
information system that ``collects, analyzes, integrates, and reports 
data and can achieve the objectives of this subpart'' and ``ensures 
that data received from providers is accurate and complete.'' We 
believe that this requirement is a stronger and more effective standard 
than a requirement that each provider maintain health records that meet 
professional standards. In addition, Sec. 438.224, Confidentiality, 
requires each MCO and PIHP to establish and implement procedures in 
accordance with confidentiality requirements in 45 CFR parts 160 and 
164. We believe these provisions more strongly address confidential 
sharing of information among providers.
7. Coverage and Authorization of Services (Proposed Sec. 438.210)
    Proposed Sec. 438.210 set forth requirements to ensure that each 
contract with an MCO or PIHP identifies all services offered under the 
contract, and that the MCO or PIHP establishes and follows written 
policies and procedures for processing requests for services in a 
manner that ensures appropriate beneficiary access to these services. 
Further, the proposed requirements would ensure that utilization 
management activities are not structured in a manner that is 
detrimental to enrollees. These standards implement sections 1932(b)(1) 
and (b)(4) of the Act.
    In Sec. 438.210(a) we proposed that the State, in its contracts 
with MCOs and PIHPs, identify, define, and specify the amount, 
duration, and scope of all Medicaid benefits that the MCO or PIHP must 
furnish. Furthermore, the contract must specify what constitutes 
medically necessary services to the extent they are described in the 
State plan, and provide that the MCO or PIHP furnish the services in 
accordance with that provision. We believe that it is important for 
enrollees and providers to know that the contract includes specific 
information on all services available under the contract and how the 
State applies its medical necessity criteria. We also required that the 
contract be clear on coverage of services related to (1) the 
prevention, diagnosis, and treatment of health impairments; (2) the 
ability to achieve age appropriate growth; and (3) the ability to 
attain, maintain, or regain functional capacity.
    In Sec. 438.210(b) we required that MCOs and PIHPs, and their 
subcontractors, have in place and follow written policies and 
procedures for initial and continuing authorization of services. We 
also required that MCOs and PIHPs consistently apply review criteria 
when authorizing services; consult with the requesting provider, when 
appropriate; and that decisions to deny requests for authorizations, or 
authorize a service in an amount, duration, or scope that is less than 
was requested, must be made by a health care professional who has the 
appropriate clinical expertise in treating the enrollee's condition or 
disease.
    In paragraph (c), we proposed that MCO and PIHP contracts provide 
that written notice of decisions to deny a service authorization 
request or to authorize the request in an amount, duration, or scope 
that is less than what was requested be provided to the enrollee and 
the provider. The notice to the enrollee must be in writing.
    In paragraph (d), we proposed timeframes for decisions to authorize 
services. For standard authorization decisions, the notice must be 
provided as expeditiously as the enrollee's health condition requires 
and within State-established timeframes that do not exceed 14 calendar 
days following the request for service. A 14 calendar-day extension 
would apply at the enrollee's or provider's request or if the MCO or 
PIHP justifies a need for additional information and how the extension 
is in the enrollee's interest. We believe that an extension would be in 
the enrollee's interest when more information is needed for the MCO or 
PIHP to authorize the service and failure to extend the timeframe would 
result in a denial of the authorization.
    For expedited authorization decisions, we proposed that the MCO or 
PIHP have a maximum of 3 working days after receipt of the request to 
make a decision. This period could be extended for 14 days under the 
same circumstances as apply for standard decisions.
    In proposed Sec. 438.210(e), we required that each MCO and PIHP 
contract must provide, consistent with Sec. 438.6(g) and 
Sec. 438.210(a)(2), that compensation to

[[Page 41047]]

individuals and entities that conduct utilization management activities 
not be structured so as to provide incentives to deny, limit, or 
discontinue medically necessary services to enrollees.
    Comment: One commenter expressed the opinion that Sec. 438.210 
should apply to dental plans.
    Response: We agree with the commenter. We decided to extend the 
provisions of Sec. 438.210 to include PAHPs as well as MCOs and PIHPs 
because we believe that enrollees of PAHPs need the protections 
provided under this section. This includes dental plans as well as 
other PAHPs. We note that the services included in the plans are 
limited to those provided for under the contract and that the 
provisions are not always applicable to certain PAHPs, for example, 
transportation PAHPs.
    Comment: Several commenters recommended a Federal definition of 
medical necessity be included in the regulation that includes access to 
habilitative services. One commenter said that habilitative services 
are important for children and adults with severe mental impairments.
    Response: We do not agree that the regulation should include a 
Federal definition of medical necessity. There currently exists no 
widely accepted national definition and at present States are allowed, 
under Sec. 440.230(d), to ``place appropriate limits on a service based 
on such criteria as medical necessity or on utilization control 
procedures,'' and have great flexibility in defining those criteria. 
Therefore, we do not believe it is appropriate to promulgate a national 
definition. However, we believe it is necessary to provide some 
specific guidance regarding what State contracts must include. In 
particular, we believe that whatever a State's fee-for-service Medicaid 
program uses as medical necessity criteria should not be further 
restricted by Medicaid MCOs, PIHPs, and PAHPs. Making this clear to all 
parties should decrease the potential for dispute. If the State's fee-
for-service medical necessity criteria address whether a service is 
needed ``to attain, maintain or regain functional capacity,'' the 
regulation requires the contract with the MCO, PIHP, or PAHP to address 
this as well. We believe this would address the extent to which 
habilitative services are considered medically necessary. While we are 
not mandating that specific services must be covered to meet these 
goals, the contract must clearly address the extent of each MCO's, 
PIHP's, and PAHP's responsibility to provide such services.
    Comment: One commenter asked that the words ``enrollee's ability to 
attain, maintain, or regain maximum function * * * could be 
jeopardized'' should be deleted from the definition of medical 
necessity, as this definition is so broad that it could be applied to 
nearly all medical necessity determinations.
    Response: These words are not part of a definition of medical 
necessity. Rather, they make clear that State policies related to 
medical necessity under fee-for-service address any of the items listed 
in Sec. 438.210(a)(4)(ii), then the State's contract with an MCO, PIHP 
or PAHP must also address these items. We believe this greater clarity 
will decrease the potential for disputes, among beneficiaries, the 
State and MCOs, PIHPs, and PAHPs.
    Comment: One commenter expressed concern that the proposed rule 
allows MCOs and PIHPs to limit services on the basis of the medical 
necessity definition and utilization controls. This commenter noted 
that the EPSDT provision of the Medicaid statute ensures children the 
full range of needed health care services and recommended specific 
language in the regulation to ensure this end.
    Response: Under Sec. 440.230(d) States already have the authority 
to ``place limits on a service based on such criteria as medical 
necessity or on utilization control procedures'' and have great 
flexibility in defining those criteria. This provision also applies to 
services provided through the EPSDT program.
    This managed care regulation does not affect any of the pre-
existing EPSDT regulations. Furthermore, some States may choose to 
provide EPSDT services outside of the managed care contract. We believe 
it is redundant and unnecessary to repeat all existing requirements in 
this regulation, which focuses on managed care programs.
    Comment: One commenter expressed concern that an MCO should not be 
``placed in the middle of a decision'' by a provider to deny a service 
based on ``field experience and clinical documentation''. The commenter 
said that their State has consumer safeguards in place, both in the 
coverage and authorization process and grievance and appeal process, to 
protect enrollees.
    Response: Section 1932(b)(4) of the Act requires that MCOs have 
internal grievance procedures for enrollees. Therefore, we must provide 
for such a process in the regulation and the MCO or PIHP must approve 
or disapprove a provider's decision.
    Comment: Several commenters asked that the notice of action and 
right to appeal be removed in the case of a physician who denies a 
request for service, as this is not a realistic requirement and would 
trigger service continuation requirements. The commenter stated that 
there is no practical way for an MCO to know that a physician counseled 
against a medical service. Also, the requirement is unduly burdensome, 
particularly as it relates to modified requests for service 
authorizations that are agreed to by the requesting provider. One 
commenter said that this requirement is inconsistent with industry and 
Medicaid practice.
    Response: We acknowledge that it is difficult for an MCO or PIHP to 
know when a physician counseled against a service and that it would be 
burdensome to require physicians to provide notice of denial to 
enrollees or to inform the MCO or PIHP that a requested service was not 
provided. To address this issue, in the final rule, at 
Sec. 438.404(b)(1), we have revised the regulation to specify that the 
enrollee has the right to appeal a denial by the MCO or PIHP. The 
physician's decision to provide a service does not trigger an appeal 
right. This will require the enrollee who wishes to receive a service 
that the physician will not provide to contact the MCO or PIHP to 
request approval of the service. A denial of the service at that point 
by the MCO or PIHP will constitute an action that may be appealed by 
the enrollee. In response to the comment related to service 
continuation, we note that services must be continued only if they have 
been approved in advance by the MCO or PIHP, or by a provider acting on 
behalf of the MCO or PIHP.
    Comment: One commenter asked for clarification that Sec. 438.210 
applies to provider requests for authorization and not when a 
beneficiary requests a service that the provider does not find to be 
medically necessary.
    Response: As explained in the previous response, we specify in the 
final rule that the appeal right is triggered when an action is taken 
by the MCO or PIHP to deny a requested service or authorize it in an 
amount, duration, or scope that is less than was requested by the 
enrollee.
    Comment: One commenter asked if the regulation intends to require 
that a ``clinical peer'' within the MCO be used to deny a service 
authorization. If so, the commenter stated that this would impose an 
additional requirement beyond what is required in State law (which 
permits any licensed physician to deny an authorization). This would 
require a significant change in operation for MCOs in that State.
    Response: We do not use the term ``clinical peer'' to describe the 
qualifications of the health care

[[Page 41048]]

professional who must make a service authorization decision. Rather we 
say that the health care professional must have ``appropriate clinical 
expertise in treating the enrollee's condition or disease''. We believe 
that this criterion provides States latitude to specify what clinical 
experience will be required for individuals making authorization 
decisions. We also do not specify that the health care professional 
must be employed by the MCO or PIHP. This permits MCOs and PIHPs to 
contract for the services of health care professionals if they choose 
and the State approves.
    Comment: One commenter believes that the standard set by the 
regulation, that prior authorization decisions be made by a health care 
professional who has appropriate clinical expertise, is unclear and may 
lead to unnecessary litigation. The commenter also noted that this 
standard is not imposed in FFS, nor is this expertise required at a 
State fair hearing.
    Response: We believe that it is important that individuals who make 
authorization decisions for MCOs and PIHPs have appropriate medical 
knowledge and clinical experience when making these decisions. This 
supports the credibility of decisions and may be a factor in the 
enrollee's decision to appeal. In FFS and State fair hearings the 
situation is different, but in both cases, professional clinical 
judgments are available. In FFS, the beneficiary has an option to seek 
out another provider should a physician not agree to provide requested 
services. For State fair hearings, beneficiaries may present medical 
evidence in support of their claims.
    Comment: One commenter suggested changing ``treating'' to 
``assessing'' or ``evaluating'' in regard to the health care 
professional who must deny or limit a service authorization request. 
This would allow clinicians some latitude to determine if their level 
of expertise is appropriate for the review. The State in which the 
commenter resides holds licensed physician professionals accountable 
for consulting with appropriate specialists for each decision to deny 
care.
    Response: We continue to believe that the requirement should be 
that health care professionals have clinical experience in treating the 
condition or disease under review. As noted above, we believe that the 
requirement provides some latitude for States to determine what 
experience is appropriate. We do not think it appropriate for a health 
care professional without clinical treatment experience to make 
judgments regarding treatment.
    Comment: One commenter said that the lack of a definition of 
``appropriate'' in Sec. 438.210(b)(3) is problematic. This relates to 
health care professionals with the expertise to deny a service 
authorization request.
    Response: We believe that the word ``appropriate'' conveys a 
responsibility to the State to specify further criteria to meet the 
intent of this provision. We do not believe that Federal regulations 
should provide greater detail as we are not able to address all medical 
situations or local conditions. We believe this responsibility should 
rest with the States.
    Comment: One commenter suggested that the health care professional 
denying a request for services should be required to see the patient.
    Response: We do not agree that a health care professional denying a 
request should be required to see the patient. We include a requirement 
under Sec. 438.210(b)(2)(ii) that the MCO or PIHP policies and 
procedures include consultation with the requesting provider, when 
appropriate. We believe that this requirement will ensure that the MCO 
or PIHP has the information needed to make an informed decision.
    Comment: One commenter suggested that we add ``or who has 
considered advice from a health care professional with clinical 
expertise in treating the enrollee's condition or disease'' at the end 
of Sec. 438.210(b)(3).
    Response: We do not agree that it is sufficient for the decision 
maker to rely on information gained through consultation with a 
clinical expert. We believe that the decision maker must be capable of 
rendering a decision based on his or her own expertise. Therefore, we 
have not revised the regulation as requested by the commenter.
    Comment: Several commenters asked how we define ``standard 
decisions,'' as no definition is provided in the regulation.
    Response: A standard decision is one that does not meet the 
criteria for an expedited decision. These criteria are specified in 
Sec. 438.210(d)(2) and again at Sec. 438.410(a).
    Comment: Many commenters urged that expedited authorizations be 
required to be made within 72 hours rather than in 3 working days. A 
72-hour standard would ensure that decisions are made in a timeframe 
consistent with the urgent medical needs of the case. This would also 
apply to Medicaid enrollees the same protections that apply to other 
private and public health programs and are consistent with the 
provision of the patient's bill of rights.
    Response: In Sec. 438.210(d)(2), we have retained the maximum 
timeframe for expedited decisions at 3 working days because this 
provides a State flexibility to set a timeframe that it believes 
appropriate while protecting beneficiaries by stipulating a maximum 
timeframe. The regulation also requires that the decision be made ``as 
expeditiously as the enrollee's health care condition requires.'' This 
provides beneficiaries further protection when a quicker decision is 
necessary because the timeframes set by the State would seriously 
jeopardize the enrollee's life or health.
    Comment: Many commenters disagreed with the provision that would 
allow MCOs and PIHPs to extend the timeframe for expedited 
authorization decisions by 14 days when the extension is in the 
interest of the enrollee. The commenters believe that this provision 
undermines the strength of the shorter timeframe for expedited 
decisions and lessens the likelihood that the expedited timeframe will 
be met in practice. They also note that the provision is inconsistent 
with the Employee Retirement Income Security Act (ERISA) rules 
governing employer-sponsored groups and the patients' rights 
legislation supported by the Administration.
    Response: We retain the provision that allows the MCO or PIHP to 
extend the decision period by up to 14 days when the extension is in 
the best interest of the enrollee. We believe this protects the 
enrollee in situations in which sufficient information is not available 
to authorize a service at the end of the 3-day period. Without this 
provision, the enrollee would be denied the service and would need to 
appeal the denial to pursue the request. With this provision, the MCO 
or PIHP can continue to pursue the outstanding information and, 
ultimately, approve the request, if appropriate.
    Comment: One commenter suggested that the timeframe for 
authorization should begin when all information necessary to make a 
decision is received by the MCO and not when the enrollee's request is 
first denied.
    Response: We have not accepted this comment because this would 
require a separate decision that all information needed to make a 
decision has been received. The authorization decision is generally 
made when information sufficient to make a decision is reviewed by the 
deciding health care professional. We believe that it is an important 
protection for the enrollee that the timeframe begin when the request 
for service is denied. It also provides an incentive for the MCO or

[[Page 41049]]

PIHP to promptly gather information needed for a decision.
    Comment: One commenter said that the 14-day extension should not 
apply when MCOs and PIHPs make late requests for additional 
information.
    Response: It would be difficult to assess when a request for 
information is late, as the deciding health care professional may find 
a need for additional information when reviewing the information 
associated with the request. Therefore, we do not believe that this is 
an appropriate standard to use.
    Comment: One commenter asked that the regulation not provide a 
national timeframe for authorization decisions. Rather, States should 
be required to set standards based on community norms.
    Response: We note that the timeframe provided in the regulation is 
a maximum timeframe; States may set shorter timeframes if they choose. 
We continue to believe that it is appropriate to set a maximum national 
timeframe as an important protection to Medicaid managed care 
enrollees.
    Comment: Several commenters asked for a provision to prohibit 
requests for authorizations from having unnecessary or unduly 
burdensome information requirements for enrollees or providers. The 
commenters believe that such a provision is necessary to prohibit MCOs 
and PIHPs from increasing the ``hassle factor'' on physicians as a 
means of cutting costs.
    Response: It is not possible or reasonable to regulate against 
unnecessary or burdensome information requirements. States have other 
tools to ensure that MCOs and PIHPs with which they contract are not 
deliberately making it difficult for enrollees to access services. 
These include monitoring grievances and appeals by enrollees; 
requirements for adequate provider networks, as providers are unlikely 
to contract with MCOs or PIHPs that make it difficult for them to 
provide services; and other monitoring by the State.
    Comment: Many commenters asked that the regulation include a 
provision to require that MCO and PIHP policies and procedures for 
decisions on coverage and authorization of services reflect current 
standards of medical practice. One commenter believes that omission of 
such a provision suggests that providers would be permitted to have 
policies and procedures that do not reflect current medical practice 
standards.
    Response: We believe that such a provision is unnecessary as the 
requirement related to medical necessity will ensure that coverage and 
authorization decisions reflect current standards of medical practice. 
The omission of this as a requirement in no way implies that States or 
CMS sanction or permit practitioners to have policies and procedures 
contrary to current standards of medical practice. On the contrary, the 
provision on practice guidelines at Sec. 438.236 requires that MCOs, 
PIHPs, and PAHPs (where appropriate) adopt and disseminate practice 
guidelines to their contracting providers to ensure that enrollees' 
care is consistent with the latest and most effective clinical 
practices.
8. Provider Selection (Proposed Sec. 438.214)
    Proposed Sec. 438.214 required State Medicaid agencies to ensure 
that contracted MCOs and PIHPs have written policies and procedures for 
the selection and retention of providers and a documented process for 
the initial credentialing and recredentialing of providers. It also 
required that MCOs and PIHPs not discriminate against providers who 
serve high-risk populations or specialize in conditions that require 
costly treatment. Finally, it prohibited MCOs and PIHPs from 
contracting with providers excluded from participation in Medicare and 
State health care programs.
    Comment: One commenter asked that language be added under 
Sec. 438.214(b) to say ``state-licensed providers'' and add ``of 
primary care, including at a minimum, physicians, psychologists, 
physician assistants, midwives, and nurse practitioners''.
    Response: The definition of provider, at Sec. 400.203, as amended 
by this regulation, requires that the individual or entity be legally 
authorized by the State to deliver health care services. Therefore, it 
is not necessary to say ``state-licensed providers.'' In addition, it 
is not necessary to specifically list types of providers, as the 
definition of provider is broad enough to encompass these types of 
individuals or entities.
    Comment: Many commenters recommended that we apply the 
Medicare+Choice credentialing rules to Medicaid MCOs, PIHPs, and PAHPs.
    Response: We have decided not to apply the Medicare+Choice 
credentialing rules. Since each State Medicaid managed care program is 
unique, we do not believe that it would be appropriate to create 
detailed national standards. The regulation was written to promote 
State flexibility to manage their programs. However, we agree that 
there should be a uniform State standard for credentialing and 
recredentialing and have revised Sec. 438.214(b) to require the State 
to set this standard policy. These policies and procedures must, at a 
minimum, include a documented process for credentialing and 
recredentialing, not discriminate against providers that serve high-
risk populations or specialize in conditions that require costly 
treatment, and may not employ or contract with providers excluded from 
participation in Federal health care programs. We also revised 
Sec. 438.214 to apply it to PAHPs, based on general comments requesting 
that all the provision of subpart D apply to PAHPs.
    Comment: One commenter expressed approval of not including specific 
requirements in the regulation but asked that CMS require States to use 
a process consistent with the credentialing guidelines of the National 
Committee on Quality Assurance (NCQA).
    Response: We have decided not to require States to use a process 
consistent with NCQA's credentialing guidelines. It is up to each State 
to decide if they want to use these guidelines. Our regulation only 
requires MCOs, PIHPs, and PAHPs to implement written policies for the 
selection and retention of providers. However, we do require that each 
State set a uniform credentialing policy for all of its MCOs, PIHPs, 
and PAHPs.
    Comment: One commenter seeks clarification that MCOs not be 
required to credential non-physician providers of licensed health 
facilities under contract to the plan if the facility itself 
credentials its providers.
    Response: We do not address this level of specificity in the final 
rule. This provision speaks to the credentialing of providers and does 
not make a distinction between non-physician and physician providers or 
who does the credentialing. At a minimum, each MCO, PIHP, and PAHP must 
follow a documented process for credentialing and recredentialing 
providers who have signed contracts or participation agreements with 
the MCO, PIHP, or PAHP. Further, a provider in Medicaid managed care is 
defined as any individual or entity who is engaged in the delivery of 
health care services and is legally authorized to do so by the State in 
which he or she delivers the services.
    Comment: One commenter stated that in the absence of a 
credentialing regulation, in many States, providers would set their own 
standards.
    Response: This final rule does not allow individual providers to 
establish their own credentialing standards. Section 438.214(b) 
requires States to set uniform credentialing policies and each MCO, 
PIHP, and PAHP must follow this policy for credentialing providers.

[[Page 41050]]

    Comment: One commenter expressed the opinion that a lack of 
specific credentialing requirements is an open door for States to lower 
standards for doctors who see Medicaid beneficiaries.
    Response: We do not believe that States will establish lower 
standards for doctors who serve Medicaid beneficiaries. We allow States 
the flexibility to determine the credentialing policy that best fits 
their State's needs. The providers being credentialed must be legally 
authorized to deliver services in the State. Further, States must 
ensure that each MCO, PIHP, and PAHP maintains a network of providers 
that is appropriate to meet the needs of its enrolled population.
9. Enrollee Information (Proposed Sec. 438.218)
    This section provided that the information requirements under 
Sec. 438.10 are part of a State's quality strategy. We received no 
comments on this section and have retained it as in the proposed rule.
10. Confidentiality (Proposed Sec. 438.224)
    This section of the proposed rule required that States must ensure 
that MCOs and PIHPs meet the privacy requirements of subpart F of part 
431 of this chapter and 45 CFR parts 160 and 164.
    Comment: Many commenters suggested that we strengthen the 
regulation to make clear that monitoring and oversight do not end with 
inclusion of contract language. The commenters suggested the addition 
of the following language ``The State must ensure, through its 
contracts and by monitoring compliance with those contracts, that 
etc.''
    Response: We agree that monitoring and oversight require more than 
the inclusion of contract language. However, we provide for monitoring 
and oversight within the regulation. Under Sec. 438.204(b)(3), the 
State quality strategy must include procedures to regularly monitor and 
evaluate MCO and PIHP compliance with the contract standards.
    Comment: One commenter asked if State confidentiality laws that are 
stricter than Federal privacy laws will continue to apply.
    Response: The Federal privacy laws do not pre-empt State 
confidentiality laws, to the extent that State laws are stricter.
    Comment: One commenter noted that the privacy regulation cross 
referenced in this rule does not take effect until April 14, 2003. 
Assuming this regulation takes effect prior to that date, the commenter 
asked whether the privacy rules take effect earlier for Medicaid 
managed care MCOs and PIHPs.
    Response: The privacy rule became effective on April 14, 2001. Most 
health plans and providers that are covered by the new rule must comply 
with the new requirements by April 14, 2003. Enforcement of the privacy 
rule will not occur until April, 2003. This final rule does not alter 
these dates, nor does it impose privacy requirements in addition to 
those of the privacy final rule that became effective on April 14, 2001 
(65 FR 82462).
    Comment: Several commenters requested that the regulation make 
clear that the confidentiality provisions extend to minors who seek 
health services through Medicaid.
    Response: Section 438.224, as a whole, was intended to ensure that 
MCOs and PIHPs have procedures to protect the confidentiality of all 
enrollees. We intend the term ``enrollee'' to encompass all enrollees, 
regardless of age. Further, the privacy rule provides all individuals 
with certain rights with respect to their personal health information, 
including the right to obtain access to, and request amendment of, 
health information about themselves. The privacy rule also has specific 
requirements regarding a minor and the minor's personal representative 
and their control over the minor's health care information (See 45 CFR 
164.502(g)).
11. Enrollment and Disenrollment (Proposed Sec. 438.226)
    This section of the proposed rule provided that each MCO and PIHP 
contact must comply with the enrollment and disenrollment requirements 
and limitations set forth in Sec. 438.56. We received no comments on 
this section and have retained it as proposed.
12. Grievance Systems (Proposed Sec. 438.228)
    Proposed Sec. 438.228(a) required that the State ensure through its 
contracts with MCOs and PIHPs that they have grievance systems that met 
the requirements of subpart F. Paragraph (b) required States that 
delegate to the MCO or PIHP responsibility for notifying enrollees of 
an adverse action to conduct random reviews of the MCO, PIHP, and their 
providers to ensure that notices are provided in a timely manner.
    Comment: Many commenters urged that the provisions of subpart F on 
grievances and appeals be applied to PAHPs. They believe that enrollees 
of these plans should have equal rights to grieve and appeal and that 
States should have access to data on grievances and appeals to monitor 
PAHPs for quality. Another commenter said that enrollees of PAHPs 
should have access to grievances and appeals because managed care, by 
its nature, includes conflicts of interest between the plans and their 
enrollees.
    Response: We do not agree that the grievance system required under 
Federal regulation should apply to PAHPs. The services provided by 
PAHPs are generally of a much more limited scope than those provided by 
MCOs and PIHPs. We note that States may extend the grievance system 
requirements to PAHPs, or may require another grievance and appeals 
process.
    Comment: Many commenters suggested that the State should be 
required to review quality of care grievances at the request of the 
enrollee. Without a provision for quality of care grievances no 
external record exists of MCOs and PIHPs that consistently fail to 
adhere to basic quality standards. Another commenter stated his 
opposition to inclusion of a category of grievance for quality of care.
    Response: The final regulation does not include a category of 
grievance for those related to quality of care. Rather, grievances 
related to quality of care fall into the general grievance category. We 
agree that data on grievances and appeals provide States with important 
information about the quality of care delivered by MCOs and PIHPs. For 
this reason, in Sec. 438.416, we require that States must require MCOs 
and PIHPs to maintain records of grievances and appeals and review that 
information as part of the State quality strategy. While we do not 
require that States review quality of care grievances, we believe that 
States are responsive to issues raised by enrollees related to quality 
and will generally review these grievances when requested.
13. Subcontractual Relationships and Delegation (Proposed Sec. 438.230)
    Proposed Sec. 438.230(a) set forth requirements specifying that an 
MCO or PIHP that contracts with the State retains full accountability 
for any activities under its contract that it delegates to a 
subcontractor. Paragraph (b) required that before an MCO or PIHP 
delegates responsibility to a subcontractor it must (1) evaluate the 
prospective contractor's ability to perform the functions to be 
delegated, and (2) have a written agreement that specifies the 
activities and report responsibilities of the subcontractor and 
provides for revoking the delegation or imposing sanctions if the 
subcontractor's performance is

[[Page 41051]]

inadequate. Paragraph (c) required that the MCO or PIHP monitor the 
performance of the subcontractor and conduct periodic formal reviews on 
a schedule established by the State.
    We received no comments on this section and we have retained 
Sec. 438.230 as proposed.
14. Practice Guidelines (Proposed Sec. 438.236)
    Proposed Sec. 438.236 required that States ensure that each MCO and 
PIHP adopt practice guidelines that (1) are based on valid and reliable 
clinical evidence or a consensus of health care professionals in the 
particular field, (2) consider the needs of the MCO's or PIHP's 
enrollees, (3) are adopted in consultation with contracting health care 
professionals, and (4) are reviewed and updated periodically as 
appropriate. We also proposed that MCOs and PIHPs disseminate the 
guidelines to all affected providers and, upon request, to enrollees 
and potential enrollees. Finally, we specified that decisions with 
respect to utilization management, enrollee education, coverage of 
services, and other areas to which the guidelines apply must be 
consistent with the guidelines.
    Comment: One commenter said that Sec. 438.236 should apply to 
dental plans.
    Response: We agree with the commenter. This section should apply to 
PAHPs, including dental plans, as well as to MCOs and PIHPs, and we 
have revised Sec. 438.236 accordingly. We note that the scope of 
services in the PAHP contract will determine the areas in which 
practice guidelines are appropriate. For example, dental guidelines 
would only be appropriate for plans that are responsible for providing 
dental services. Likewise, a clinical practice guideline is 
incompatible with transportation services, making this section 
inapplicable to transportation PAHPs.
    Comment: One commenter recommended that the regulation require MCOs 
and PIHPs to use practice guidelines developed and/or endorsed by the 
American Academy of Pediatrics.
    Response: We are not specifying what guidelines MCOs and PIHPs must 
adopt but rather are establishing criteria to be used by MCOs and PIHPs 
in adopting guidelines.
    Comment: Several commenters objected to the requirement that MCOs 
and PIHPs adopt practice guidelines. One commenter said that guideline 
adoption should not be required because nationally accepted standards 
are not available for all clinical areas, for example, for 
rehabilitative mental health services. Another commenter objected to 
this provision because he believes that to require use of clinical 
practice guidelines substitutes the judgment of CMS, the States, and 
MCOs and PIHPs for the judgment of health care professionals. Other 
commenters supported the provision but suggested that reference be made 
to HIV/AIDS guidelines or that the provision also require the use of 
clinical review criteria that are directed specifically to meeting the 
needs of at-risk populations.
    Response: We continue to believe that States should require MCOs, 
PIHPs, and PAHPs (where appropriate) to adopt clinical practice 
guidelines in order to ensure the highest quality of care to enrollees. 
We are aware that clinical practice guidelines are not available for 
all areas of clinical practice. However, we believe that it is 
important to promote the use of guidelines based on clinical evidence. 
Guidelines are being developed by a variety of organizations in a 
variety of areas and will increasingly become available for use. This 
is why we have set criteria for MCOs, PIHPs, and PAHPs to use when 
adopting guidelines rather than specifying particular guidelines to be 
used. We do not agree that requiring the use of practice guidelines 
substitutes the judgement of CMS, States, or health plans for the 
judgement of health care professionals. Rather, guidelines assist 
health care professionals to apply the best evidenced-based practice to 
clinical care. Guidelines are developed to assist the health care 
professional, not to dictate a specific course of action. We require 
that MCOs, PIHPs, and PAHPs consult with their contracting health care 
professionals when adopting practice guidelines to ensure that the 
health care professionals have input into these decisions.
    Comment: One commenter stated that the regulation should require 
MCOs to consult with organizations that develop practice guidelines.
    Response: We do not agree that it is necessary or practical to 
require MCOs, PIHPs, and PAHPs to consult with organizations that 
develop practice guidelines. What we believe is important is that the 
guidelines are valid and reliable, are relevant to the enrollee 
population, are adopted in consultation with the contracting health 
care providers, and are reviewed and updated periodically to ensure 
that they continue to reflect the most recent evidence. Therefore, 
these are the criteria we specify in the regulation for MCOs, PIHPs, 
and PAHPs to use when adopting practice guidelines.
15. Quality Assessment and Performance Improvement Program (Proposed 
Sec. 438.240)
    This section sets forth the State's responsibility to ensure that 
each MCO and PIHP with which it contracts have in place a quality 
assessment and performance improvement program for the services it 
furnishes to Medicaid enrollees. In the NPRM we proposed that States 
must require that each MCO and PIHP include the following basic 
elements in its quality assessment and performance improvement program: 
(1) Conduct performance improvement projects, (2) have in effect 
mechanisms to detect both underutilization and overutilization of 
services, and (3) have in effect mechanisms to assess the quality and 
appropriateness of care furnished to enrollees with special health care 
needs.
    In our proposed rule we specified that CMS, in consultation with 
States, and other stakeholders, may specify standardized quality 
measures and topics for performance improvement projects to be required 
by States in their contracts with MCOs and PIHPs. We proposed that MCOs 
and PIHPs measure performance using standardized measures annually, and 
implement performance improvement projects that address clinical and 
non-clinical areas. We also proposed that States review, at least 
annually, the impact and effectiveness of their quality assessment and 
performance improvement programs.
    Comment: Several commenters supported the quality assessment and 
performance improvement provisions.
    Response: We retain the provisions in Sec. 438.240 in the final 
rule with certain revisions, discussed below.
    Comment: One commenter supported the provision that CMS will 
consult with States and other stakeholders if we decide to exercise our 
authority to specify quality measures or topics for performance 
improvement projects that we would require States to include in their 
contracts with MCOs.
    Response: We believe it is important to include all stakeholders in 
any discussions that would lead to specifying performance measures or 
topics for performance improvement projects that we would require 
States to include in their contracts with MCOs and PIHPs.
    Comment: Several commenters were concerned that measures identified 
and developed by CMS, in consultation with States and other 
stakeholders, would be measures that are not routinely collected nor 
applicable to the unique circumstances of States and MCOs/

[[Page 41052]]

PIHPs and that the standardized performance measures would impose 
additional burden. The commenters suggested this requirement be 
removed. One commenter agreed that some standardization of performance 
measures is appropriate but believes the specifications for the 
measures should be determined by the MCO or PIHP.
    Response: We hope that by including all stakeholders in discussions 
about performance measures that we will reach agreement about measures 
that are important to a wide range of stakeholders and to CMS. We 
recognize that each State and MCO and PIHP will have unique program 
circumstances and that the national measures chosen will not meet all 
these needs. However, the requirement to use standard measures does not 
preclude States, MCOs, and PIHPs from also using performance measures 
that they find useful. We believe we should have the ability to specify 
standard measures and topics for performance improvement projects to 
provide comparability across States for some measures and to establish 
national priority areas for performance improvement projects. 
Therefore, we retain this provision in the final rule.
    Comment: Several commenters requested that we permit exceptions or 
deviations from the standard measures required by us.
    Response: As we stated in the preamble to the proposed rule, we 
believe we should have the ability to specify standard measures and 
that we will be working in consultation with States and other 
stakeholders to agree upon standard measures. Policy regarding the 
implementation of the measures, including whether any exceptions should 
apply, will also be determined in consultation with stakeholders.
    Comment: Several commenters disagreed with our proposal to allow 
CMS to specify topics for performance improvement projects. One 
commenter stated that States are in the best position to identify State 
health priorities and how to allocate their resources and suggested 
that this provision be removed. Several commenters encouraged us to 
defer to States in determining the number and type of studies to be 
performed. One commenter agreed that the identification of standard 
performance improvement project topics is appropriate but believes that 
the intervention and measurement specifications should be left up to 
the MCOs/PIHPs.
    Response: As stated in the preamble of the August 2001 proposed 
rule, we believe that as the art of quality improvement and measurement 
advances, we should have the ability to specify standard measures and 
topics for performance improvement projects. We retain this provision 
in the final rule. As in the proposed rule, in the final rule, we do 
not specify the number or types of quality improvement projects nor do 
we specify improvement interventions that MCOs and PIHPs must 
implement.
    Comment: Several commenters expressed concern that requiring 
performance improvement projects to achieve demonstrable and sustained 
improvement is not always feasible. Commenters said that this 
requirement could have a negative impact on quality improvement 
activities because it may impact the willingness of MCOs and PIHPs to 
take on difficult projects. One commenter suggested that the language 
in this section be changed to reflect that these projects have the goal 
of achieving demonstrable and sustained improvement as opposed to 
requiring the projects to achieve this improvement. Another commenter 
suggested deeming MCOs/PIHPs as having satisfied the quality assurance 
requirements found in this subpart if the MCO or PIHP is accredited by 
a private accreditation organization.
    Response: We agree with the commenters that achieving demonstrable 
improvement is not always feasible. We have revised Sec. 438.240(b)(1) 
to require that performance improvement projects be designed to achieve 
significant improvement sustained over time. This language is 
consistent with Medicare requirements that define demonstrable 
improvement as ``significant improvement sustained over time.'' We plan 
to address deeming of MCO and PIHP quality initiatives in the EQR final 
rule.
    Comment: One commenter suggested that we allow States discretion to 
require demonstrable improvement or not.
    Response: As indicated in the response to the previous comment, we 
are no longer requiring that performance improvement projects achieve 
demonstrable improvement. We are requiring that these projects be 
designed to achieve significant improvement sustained over time. States 
will have the discretion to define what is to be considered significant 
improvement.
    Comment: Many commenters argued that MCOs and PIHPs should be 
required to meet minimum performance levels established by the States 
as part of their quality assessment and performance improvement 
program. The commenters recommended that this requirement be added 
under Sec. 438.240(b). One commenter supported that we did not propose 
to require MCOs and PIHPs to meet minimum performance standards. The 
commenter argued that it is difficult to identify reasonable 
performance levels when taking into consideration the variation of 
local conditions, beneficiaries, and unique program characteristics. 
This commenter recommended that the provision for standard quality 
measures be modified to allow States to recommend modification to the 
standards on a regional or State basis.
    Response: We do not agree that we should require States to 
establish minimum performance levels that MCOs and PIHPs must meet as 
an element of the quality assessment and improvement program. States 
have the option to establish such levels, whether they are State 
standards or regional standards. We agree that performance measures 
should be included as an element of the quality assessment and 
performance improvement program. This was our original intent. We have 
changed Sec. 438.240(b)(2) to add calculation of performance measures 
as a basic element of quality assessment and performance improvement 
programs.
    Comment: One commenter suggested that States require that the 
information obtained from assessments of underutilization and 
overutilization and of the quality and appropriateness of care to 
enrollees with special health care needs be reported by age, race, and 
ethnicity of Medicaid enrollees.
    Response: We do not agree that this regulation should specify that 
information obtained on underutilization and overutilization of 
services or the quality and appropriateness of care furnished to 
enrollees with special health care needs should be reported according 
to age, race, and ethnicity. We believe that each State should specify 
how the information should be reported based upon individual State 
needs.
    Comment: One commenter agreed with the requirement that MCOs and 
PIHPs annually measure performance using standard measures required by 
the State and report this information to the State. The commenter 
believes that this provision maintains MCO and PIHP accountability 
while providing critical flexibility in the manner in which the 
requirements are carried out.
    Response: We agree with the commenter and we have retained the 
provision in Sec. 438.240(c) of the final rule. We also take this 
opportunity to clarify that the State performance measures described in 
Sec. 438.240(c) must

[[Page 41053]]

reflect any national performance measures that may be prescribed by the 
Secretary, consistent with Sec. 438.204(c) and Sec. 438.240(a)(2).
    We also have taken the opportunity to recognize an additional 
approach to producing performance measures that maintains MCO and PIHP 
accountability while providing flexibility in the manner in which 
provisions at Sec. 438.240(c) pertaining to performance measurement are 
met. Specifically, we have been reminded of a practice used by a 
growing number of States in which State agencies calculate measures of 
the performance of their MCOs or PIHPs using encounter and claims data 
transmitted by the MCO or PIHP to the State. We believe this is an 
acceptable practice that can reduce burden on MCOs and PIHPs, 
especially when MCOs or PIHPs are already transmitting encounter data 
to the State. Therefore, we have revised Sec. 438.240(c) to indicate 
that there are three acceptable ways for States to obtain performance 
measures for each MCO and PIHP: (1) The MCO or PIHP could calculate the 
measures according to the States' specifications; (2) the State could 
calculate the measures using encounter or similar data submitted to the 
State by the MCO or PIHP; and (3) a State could obtain performance 
measures using a combination of these two approaches. We authorize 
States to determine the best approach or approaches to be used in its 
State, recognizing that a State may decide to use different approaches 
for individual MCOs or PIHPs.
    Comment: Several commenters agreed with the limited detail included 
in this regulation related to performance improvement projects. The 
commenters argued that the regulation sufficiently describes Federal 
standards while allowing States and MCOs and PIHPs the flexibility to 
develop processes that work best to fit their programs. One commenter 
requested that we work with MCOs and PIHPs and other stakeholders to 
develop guidance related to the final regulation that will further 
explain our expectations for implementing performance improvement 
projects (for example, challenges inherent in efforts to positively 
affect quality of care and outcomes given eligibility status, changes 
of enrollees, small populations, etc.).
    Response: We retain Sec. 438.240(d) in our final rule. We have 
developed guidance for States on implementing performance improvement 
projects. As part of the development of the EQR regulation, we were 
statutorily mandated to contract with a national accreditation 
organization to develop protocols to be used in EQR. We awarded a 
contract to the Joint Commission on Accreditation of Healthcare 
Organizations (JCAHO) to develop these protocols. The JCAHO, as part of 
this effort, convened an expert panel composed of State agencies, MCOs, 
experts on quality improvement activities, and other stakeholders to 
provide us feedback on the development of the protocols. Two protocols 
address performance improvement projects. One protocol provides 
guidance on how to conduct performance improvement projects and one 
provides guidance on how to validate performance improvement projects. 
These protocols can be found on our web site at http://www.hcfa.gov/medicaid/mceqrhmp.htm.
    Comment: Several commenters asked us to clarify under 
Sec. 438.240(d)(2) what is meant by the ``new information on quality of 
care every year'' that we are requiring be reported by the MCO or PIHP 
on each project upon request by the State.
    Response: The MCO or PIHP should provide to the State new 
information from performance improvement projects underway or 
information on projects that had been initiated since the previous 
annual report. For example, a project recently initiated by the MCO or 
PIHP may only be able to describe the topic selected and methodology to 
be used at the time of the first report. In year two, the intervention 
may have been implemented, but there may not yet be data to report. In 
year three, base line data may be collected, and in year four, there 
may be a repeat measurement. As projects progress, different 
information will be available to report.
    Comment: Many commenters argued that our final rule should include 
more specific requirements related to performance improvement projects 
that include more specificity such as (1) that the MCOs/PIHPs include 
objective, clearly and unambiguously defined measures based on current 
clinical knowledge or health services research (2) that the measures 
measure outcomes such as change in health status, functional status, 
enrollees satisfaction, or proxies of these outcomes, and (3) that over 
time, MCOs/PIHPs vary projects to focus on a full spectrum of services 
rather than repeatedly monitoring areas that are easy to measure and 
improve. One commenter was concerned that the lack of specificity in 
the NPRM will result in MCOs and PIHPs developing quality measures that 
may be irrelevant to patient care and projects that may not protect 
patients. Another commenter was concerned that the lack of specificity 
relieves States and MCOs from developing and monitoring performance 
measures for specific conditions such as mental illness and other 
severe disabilities.
    Response: We do not agree that this regulation should provide more 
detail on performance improvement projects or on the indicators used to 
measure performance. We believe the final regulation creates a balance 
between an appropriate amount of detail needed to ensure that States 
implement interventions to improve quality, while at the same time, 
provides States with the flexibility to determine the measures and 
levels they want to require of their contracting MCOs and PIHPs. We 
believe that States and MCOs and PIHPs will use performance measures 
and performance improvement projects that reflect important areas. 
These activities are costly and time-consuming and we believe that 
States and MCOs/PIHPs will target the investments in financial and 
staffing resources required for these activities to topics that will 
benefit from program improvement.
    Section 438.240 requires, as a basic element of a quality 
assessment and performance improvement program, that MCOs and PIHPs 
have in effect mechanisms to assess the quality and appropriateness of 
care furnished to enrollees with special health care needs. This 
includes beneficiaries with conditions such as mental illness and other 
severe disabilities.
    Comment: Many commenters argued that MCOs and PHPs should be 
required to conduct performance improvement projects on topics 
specified by the State and that MCOs and PIHPs should be required to 
participate in at least one statewide project. The commenters 
recommended that we incorporate these requirements in our final rule.
    Response: We do not agree that this rule should require that States 
have their MCOs and PIHPs participate in statewide projects. We reserve 
the right to set performance improvement project topics in the future 
as specified in Sec. 438.240(a)(2). A State, at its discretion, 
however, may choose to specify topics for MCOs or PIHPs improvement 
projects or to mandate participation in statewide projects.
    Comment: One commenter encouraged us to recognize the long-term 
nature of quality initiatives, that improvement in quality is 
incremental. The commenter was concerned that the short-term commitment 
to initiatives that is usually the perspective of States does not 
provide a paradigm for studying and understanding what works in managed 
care. The commenter argued

[[Page 41054]]

that quality initiatives should not change capriciously from year to 
year.
    Response: We agree with the commenter and acknowledge that quality 
improvement initiatives need a sufficient amount of time to be 
implemented and for findings to be determined. We do not prescribe the 
duration in which performance improvement projects must be completed. 
We only require that a project be completed in a reasonable time period 
and that information be provided on the project's progress annually.
    Comment: Several commenters asked for clarification on how the 
program review by States will be coordinated with the EQR regulations. 
Several commenters suggested that we coordinate these efforts to avoid 
duplication of efforts. For example, one commenter suggested that we 
permit MCOs and PIHPs that are certified by an accreditation agency or 
who are reviewed by another State agency to be exempt from Medicaid 
reviews and EQR. One commenter suggested that we provide a cross 
reference to the EQR regulation and that we provide States sufficient 
discretion to define and modify their external review activities. 
Another commenter suggested that we amend the regulation to allow a 
State to use the EQR to meet the program review by the State 
requirements under Sec. 438.240(e).
    Response: States at their option may use EQR findings to meet the 
program review requirements under Sec. 438.240(e)(1). The final EQR 
rule addresses the circumstances under which an MCO or PIHP may be 
exempt from quality initiatives and what types of quality initiatives 
we consider to be EQR activities. We are not providing a cross 
reference to the EQR provisions or amending this rule to stipulate that 
EQR can be used to meet this requirement. We are providing States with 
the flexibility to decide if they want to use EQR or some other 
activity to meet these requirements.
    Comment: One commenter agreed with the requirement that States 
review the MCO's and PIHP's performance on standard measures on which 
MCOs and PIHPs are required to report.
    Response: In the final rule, we retain Sec. 438.240(e)(1) as 
proposed.
16. Health Information Systems (Proposed Sec. 438.242)
    Section 1932(c)(1)(iii) of the Act requires States that contract 
with MCOs to develop a quality assessment and improvement strategy that 
includes procedures for monitoring and evaluating the quality and 
appropriateness of care and services to enrollees. It also provides 
that MCOs provide quality assurance data to the State using the data 
and information set specified by the Secretary for the Medicare+Choice 
program or other data specified by the Secretary in consultation with 
States. Section 438.242 proposed that States require that MCOs and 
PIHPs have health information systems sufficient to provide data to 
States and CMS.
    Paragraph (a) required that States must ensure that MCOs and PIHPs 
maintain data systems that collect, analyze, integrate, and report data 
to achieve the objectives of subpart D. It required that the system 
must provide information on utilization, grievances, and disenrollments 
(other than those that result from ineligibility for Medicaid). 
Paragraph (b) provided that the State must require MCOs and PIHPs to 
collect data on enrollee and provider characteristics and on services 
furnished to enrollees, and to ensure the accuracy and completeness of 
data received from providers by (1) verifying its accuracy and 
completeness; (2) screening the data for completeness, logic, and 
consistency; and (3) collecting service information in standard formats 
to the extent feasible and appropriate.
    Paragraph(c) required MCOs and PIHPs to make all data available, as 
required in this subpart, to the State and, on request, to CMS.
    Comment: One commenter urged CMS to establish national data 
collection standards for collection of encounter data, EPSDT 
information, and network information by States, using standards 
established under the Health Insurance Portability and Accountability 
Act (HIPAA) where possible.
    Response: We do not agree that CMS should establish national data 
collection standards as part of this regulation. Under HIPAA, the 
Secretary is establishing standards for the electronic transfer of 
health data, including encounter data. The HIPAA regulations also 
specify the entities to which the standards apply. Medicaid MCOs and 
PIHPs, as well as State Medicaid agencies, will need to comply with the 
HIPAA regulations to the extent they apply.
    Comment: One commenter noted that MCO and PIHPs can only supply 
data to States to the extent they are provided data by providers. This 
commenter suggested that this regulation require that providers give 
data to health plans.
    Response: This regulation is directed to States and, by placing 
requirements on States for their contracts with MCOs, PIHPs, PAHPs, and 
PCCMs, on these other entities. The regulation does not address the 
relationships of MCOs and PIHPs and their providers. Therefore, we are 
not including a provision to require data reporting by providers.
    Comment: One commenter noted that it is important for States to 
negotiate price discounts with hardware and software vendors that can 
be passed on to providers and to develop guidance materials for 
practices preparing to install hardware and software.
    Response: States are in the best position to identify means to 
assist providers with the electronic submission of data. We do not 
believe that this issue should be addressed in Federal regulations. We 
revised Sec. 438.242(a) by adding the words ``and appeals'' after 
``grievances''. This change was made to be consistent with 
Sec. 438.416, which requires States to review information collected by 
MCOs and PIHPs as part of the State quality strategy.

E. Grievance System (Subpart F)

    Proposed subpart F is based on section 1902(a)(3) of the Act, 
(which requires a State plan to provide an opportunity for a fair 
hearing to any person whose request for assistance is denied or not 
acted upon promptly), section 1902(a)(4) of the Act, (which authorizes 
the Secretary to specify methods of administration that are 
``necessary'' for ``proper and efficient administration''), and section 
1932(b)(4) of the Act, (which requires that MCOs have an internal 
grievance procedure under which a Medicaid enrollee, or a provider on 
behalf of an enrollee, may challenge the denial of coverage of, or 
payment by, the MCO).
    In this subpart, we proposed regulations that lay out the elements 
of the grievance system required under section 1932(b)(4) of the Act, 
and how it interfaces with the State fair hearing requirements in 
section 1902(a)(3). We defined terms, described what constitutes a 
notice of action, and addressed how grievances and appeals must be 
handled, including timeframes for taking action. We included a process 
for expedited resolution of appeals in specific circumstances; 
addressed the requirement for continuation of benefits; and laid out 
the requirements relating to record keeping, monitoring and 
effectuation of reversed appeal resolutions.
    We proposed conforming amendments to part 431 to reflect changes in 
terminology and other new provisions enacted in the BBA. We also made 
conforming changes to the fair hearing regulations in subpart E of part

[[Page 41055]]

431, to reflect the MCO grievance and appeals process in subpart F of 
part 438. We note that we revised Sec. 431.244(f)(3) to require State 
approval for direct access to an expedited State fair hearing for MCO 
and PIHP enrollees. Due to the close relationship of the subject matter 
with subpart F, comments and responses regarding part 431 are addressed 
in this subpart.
1. Statutory Basis and Definitions (Proposed Sec. 438.400)
    Definitions of terms used in proposed subpart F are found in 
proposed Sec. 438.400 and have the following meanings:
    Action means, in the case of an MCO or PIHP or any of its 
providers,
     The denial or limited authorization of a requested 
service, including the type or level of service;
     The reduction, suspension, or termination of a previously 
authorized service;
     The denial, in whole or in part, of payment for a service; 
or
     For a resident of a rural area with only one MCO or PIHP, 
the denial of a Medicaid enrollee's request to exercise his or her 
right to obtain services outside the network.
    Appeal means a request for review of an action, as ``action'' is 
defined in this subpart.
    Grievance is defined as an expression of dissatisfaction about any 
matter other than an action. This term can also be used to refer to the 
overall system that includes grievances and appeals handled at the MCO 
or PIHP level and access to the State fair hearing Process. Possible 
subjects for grievances include, but are not limited to, the quality of 
care or services provided, aspects of interpersonal relationships such 
as rudeness of a provider or employee, or failure to respect the 
enrollee's rights.
    Proposed Sec. 438.400 contained the definition of a ``governing 
body.'' We, however, had not proposed regulatory requirements for a 
governing body. Therefore, we are removing the definition of a 
governing body in the final rule.
    We received the following comments on these definitions.
    Comment: One commenter felt that having several potentially 
conflicting Federal statutes and State laws related to a health care 
plan's grievance system is troubling for the plans. They asked that, if 
a Patients' Bill of Rights is enacted, CMS review the provisions of 
this regulation to make it consistent with the mandate under that 
legislation, as well as ERISA rules.
    Response: We agree with the commenter. If a Patients' Bill of 
Rights is enacted, we of course would be required to conform to the new 
statute if it applied to Medicaid, but even if it did not, we would 
review the provisions and consider making changes if it is appropriate 
for the Medicaid program.
    Comment: Many commenters believe that the definition of ``action'' 
must include the failure to furnish services in a timely manner, the 
failure to resolve an appeal in a timely manner, or the denial of an 
enrollee's request to disenroll. They argued that if a plan delays 
furnishing services or adjudicating a claim in a timely manner, no 
``action'' is triggered. Therefore, the enrollee would be denied his or 
her right under section 1902(a)(3) to a fair hearing if a claim medical 
assistance is ``not acted upon with reasonable promptness.''
    Response: We agree that section 1902(a)(3) of the Act requires 
access to a State fair hearing for those requests not acted upon in a 
timely manner, and therefore, in Sec. 438.400(b) we have modified the 
definition of ``action'' to include unreasonable delays in services, or 
appeals not acted upon within the timeframes provided in 
Sec. 438.408(b). However, we disagree that a denial of a request to 
disenroll constitutes an ``action,'' as it addresses an issue separate 
from those specific denials, limitations, reductions, or suspensions of 
services that trigger fair hearing requirements.
    Comment: Some commenters believe that the grievance and appeals 
provisions should apply to PAHPs as well as to MCOs and PIHPs.
    Response: We agree that PAHP enrollees should have the right to 
appeal denials, but believe that direct access to the existing fee-for-
service fair hearing process is the more appropriate vehicle for this 
in the case of PAHPs. Therefore, in response to this comment, we have 
revised the fair hearing regulations in subpart E of part 431 to 
expressly reference PAHP enrollees as having a right to a fair hearing 
under those provisions in the case of an ``action.'' In general, we 
believe that the State should decide how best to address grievances 
involving PAHPs that do not involve an action, since they are often 
individual physicians or small group practices and cannot be expected 
to have the administrative structure to support a grievance process.
    Comment: Several commenters disagreed that the independent 
professional judgment of providers should automatically trigger an 
action in the same manner as a denial from an MCO or PIHP. They 
believed that it is sometimes impossible for the MCO or PIHP to know 
when a provider has denied a service, or offered an alternative form of 
treatment that may or may not be a denial. They requested that 
providers be removed from the ``action'' definition.
    Response: We agree with the commenters. Since a provider is making 
independent professional judgments as to the care and treatment of 
enrollees, his or her denial of a particular request, or the suggestion 
of an alternative should not automatically trigger a formal notice of 
appeal rights from the MCO or PIHP. We have removed ``or any of its 
providers'' from the definition of an ``action.'' However, anytime an 
enrollee challenges the decision of a provider to the MCO or PIHP, an 
action is triggered if the MCO or PIHP affirms the provider's decision, 
triggering a notice from the MCO or PIHP.
    Comment: Many commenters wanted the regulations to provide 
expressly for a ``quality of care'' grievance in cases in which the 
enrollee believed that any aspect of his or her care was substandard, 
or could have caused them harm. These commenters recommended that the 
State be required to review any such ``quality'' grievance that was not 
disposed of to the enrollee's satisfaction. Some commenters wanted 
these grievances to be reviewable by a State fair hearing.
    Response: We believe that those enrollee complaints not meeting the 
standard of an appeal should be treated uniformly under Federal 
statute. The definition of ``grievance'' includes ``quality of care'' 
and it should be up to the State to decide whether or not a review, or 
a mechanism allowing State review, is necessary. We also believe that 
an enrollee only has the right to a State fair hearing under section 
1902(a)(3) in cases that involve an ``action,'' since section 
1902(a)(3) refers to a denial of medical assistance, or a case in which 
a claim for assistance is ``not acted upon,'' and not a case in which 
there are concerns about the quality of the assistance. We believe that 
the quality assurance requirements in subpart D of part 438 address the 
commenter's concerns.
    Comment: One commenter felt that appeal rights should be extended 
to providers in managed care systems. They argued that this is notable 
considering the appeal rights extended to MCOs in the right to pre-
termination hearings.
    Response: The grievance and appeal rights in this subpart implement 
statutory provisions that grant rights to Medicaid beneficiaries, not 
providers. The right to a fair hearing in section 1902(a)(3) applies to 
an ``individual'' whose claim for medical assistance is

[[Page 41056]]

denied or not acted upon. The statutory requirement in section 
1932(b)(4) that MCOs have grievance procedures similarly applies to 
``an enrollee* * *or a provider on behalf of an enrollee. * * *'' 
(Emphasis added.) While it is true that the statute provides for the 
right to a hearing before an MCO contract is terminated, there is no 
statutory provision for an appeal right for providers subcontracting 
with managed care plans. While States are free to provide such rights, 
and information must be provided about such rights where they exist 
(see section A. above), there are no such rights under Federal statute. 
We defer to congressional intent on this issue, and have not provided 
for any subcontracting provider appeal rights in this final rule.
2. General Requirements (Proposed Sec. 438.402)
    Proposed Sec. 438.402 required each MCO and PIHP to have a 
grievance system in place for enrollees that includes a grievance 
process, an appeal process, and access to the State's fair hearing 
system.
    Proposed Sec. 438.402(b)(1) specified that an enrollee may file a 
grievance or an MCO or PIHP level appeal, and may request a State fair 
hearing. In addition, as provided in section 1932(b)(4), the proposed 
rule provides that a provider, acting on behalf of an enrollee (with 
the enrollee's written consent) may file an appeal of a ``denial of 
coverage of or payment for'' assistance, or an ``action.'' However, 
under proposed Sec. 438.402(b)(1)(ii), the provider could not file a 
grievance or request a State fair hearing on behalf of the enrollee.
    Under Sec. 438.402(b)(2), we proposed timeframes within which the 
enrollee or provider (on the enrollee's behalf) may file an appeal. Our 
intent was to mirror the filing timeframes for a State fair hearing, 
that is, a reasonable amount of time up to 90 days. In addition, we 
incorporated the longstanding policy at section 2901.3 of the State 
Medicaid Manual that beneficiaries be given a minimum of 20 days to 
file an appeal. We believe that this policy gives beneficiaries a 
reasonable amount of time to file an appeal. Therefore, the proposed 
regulation required that the State specifies a timeframe for filing an 
appeal that is no less than 20 days or more than 90 days from the date 
of the MCO's or PIHP's notice of action. Within this timeframe, the 
enrollee (or the provider on his or her behalf) may file an appeal, and 
in a State that does not require exhaustion of the MCO and PIHP level 
appeals, the enrollee may request a State fair hearing.
    In proposed Sec. 438.402(b)(3), we specified the manner in which 
enrollees may file grievances, and enrollees (or a provider on the 
enrollee's behalf) may file an appeal. For grievances, the enrollee may 
file either orally or in writing, either with the State or the MCO or 
PIHP, as determined by the State. The enrollee (or the provider on the 
enrollee's behalf) was permitted to file an appeal either orally or in 
writing, and unless he or she requests expedited resolution, was 
required to follow an oral filing with a written, signed, appeal. While 
enrollees were permitted to start the appeal clock with an oral 
request, under the proposed rule, they were required under the proposed 
rule to follow it with a written request, as we determined that a 
written appeal best documents the issue being appealed. In expedited 
situations, the proposed rule provided that the enrollee was not 
required to put the appeal in writing.
    Comment: A few commenters believed that permitting States to 
require the exhaustion of internal MCO or PIHP appeals procedures was 
unwarranted, and favored appeal rights administered by a state agency 
using the Federal fair hearing regulations. Other commenters believed 
that since MCOs are responsible for coordinating care and making 
coverage decisions, enrollees should be required to utilize their 
internal appeals process first before filing for a State fair hearing.
    Response: We disagree with both sets of commenters. With respect to 
the commenters opposing an internal grievance procedure, section 
1932(b)(4) actually requires that such a procedure be available, and 
that enrollees be permitted to ``challenge'' a ``denial of coverage of, 
or payment for'' services under such procedures. Thus, using 
exclusively a State administered fair hearing mechanism was not even an 
option under the law. Furthermore, providing for an MCO/PIHP level of 
review is consistent with the appeals rules under the Medicare+Choice 
program, and most versions of Patients Bill of Rights legislation. We 
believe that as long as the timeframes and notice requirements conform 
with what is allowed under direct access, an internal system is a 
proper and efficient way to adjudicate appeals. However, we also 
believe that the State should have full discretion when it comes to 
whether to require the utilization of the required internal appeals 
process, or permit direct access to State fair hearing.
    Comment: Some commenters found that the word ``grievance,'' 
referring to the overall system as well as a particular avenue of 
adjudication, is inherently confusing. They recommended changing 
``grievance system'' to something such as the ``dispute resolution 
process'' or ``complaint process.'' Others felt that the definition was 
too broad, triggering rights where a different avenue for resolution 
would make more sense.
    Response: While we refer to the overall process as the ``grievance 
system,'' States are free to call it by any name they prefer. We chose 
``grievance system'' over terms such as ``dispute resolution process'' 
or ``complaint process'' because this is the term used in section 
1932(b)(4), and the other terms suggested by the commenters were too 
informal. To some people, ``complaint'' conjures up ideas of more 
trivial matters, while ``dispute resolution'' is sometimes associated 
with arbitration, which connotes a less strict standard than we wanted 
to convey. While we based our reference to the overall system on the 
reference to ``an internal grievance procedure'' in section 1932(b)(4), 
our use of the term ``grievance'' to refer to disputes not resulting 
from an ``action'' tracks the approach in the Medicare+Choice 
regulations, and is based on the broad connotations of the word 
grievance to capture a variety of types of complaints. We believe that 
the timeframes and other administrative requirements in this final rule 
provide sufficient State flexibility to not be a burden on the 
grievance system.
    Comment: Many commenters recommended additional general 
requirements for the grievance system. These recommendations included 
specific terms in the regulations requiring: (1) That all processes, 
policies, and procedures meet the conditions set forth in this subpart; 
(2) a State's written approval of an MCO's or PHP's policies and 
procedures before implementation; (3) a governing body responsible for 
effective operation of the system including disposing of grievances and 
resolving appeals; (4) assurance that punitive action is neither 
threatened nor taken against a provider who requests or supports a 
grievance or appeal; (5) acceptance of grievances and appeals from the 
enrollee or his or her representative; (6) the provision of information 
required under this subpart, (7) the referral to the State of quality 
of care grievances in which the enrollee is dissatisfied; and (8) that 
providers be required to give notice in accordance with 
Sec. 438.404(d).
    Response: We believe that many of the above suggested requirements 
are already addressed in this final rule, either directly or 
implicitly. For example, we believe that while it would be clear 
without any explicit statement that grievance processes, policies and

[[Page 41057]]

procedures must be consistent with the regulatory requirements in part 
F, Sec. 438.228 already expressly requires States to ensure, through 
its contracts, that MCOs and PIHPs have grievance systems that satisfy 
the requirements of this subpart. This includes the requirement on 
States to conduct random reviews of MCOs and PIHPs to ensure that they 
are notifying enrollees in a timely manner. The acceptance of appeals 
and grievances from the enrollee or a representative is similarly 
already provided for, as is the requirement, in Sec. 438.10, for 
provision of information on appeals. We have addressed in section A of 
this preamble the commenters' suggestion for an assurance of no 
punitive action for requesting an appeal. Most of the other suggestions 
above would in our view most appropriately be addressed by the States 
without further Federal regulation.
    Comment: Many commenters believed that a State should not be 
permitted to establish a deadline for appealing an adverse action that 
is less than 30 days, even though shorter periods are now permissible 
in the fee-for-service Medicaid program.
    Response: As stated in the introduction, our intent was to mirror 
the filing timeframes for the State fair hearing; that is, a reasonable 
amount of time up to 90 days. In addition, we incorporated the 
longstanding policy at Sec. 2901.3 of the State Medicaid Manual that 
beneficiaries be given a minimum of 20 days to file an appeal. We 
believe that this policy gives beneficiaries a reasonable amount of 
time to file an appeal, while providing States with the flexibility to 
tailor those timeframes to their particular internal and State 
procedures. Therefore, we will retain the requirement that the State 
specify a timeframe for filing an appeal that is no less than 20 days 
and does not exceed 90 days from the date of the MCO's or PIHP's notice 
of action.
    Comment: One commenter objected to the fact that the proposed rule 
would allow providers, with written consent, to file an appeal on 
behalf of the enrollee, but prohibit providers from acting as an 
authorized representative for grievances or State fair hearings.
    Response: As noted in section E. 1. above, we have limited the 
right to request a fair hearing, and the right to appeal a denial of 
coverage, to enrollees, and to providers on behalf of enrollees, in 
deference to our interpretation of congressional intent. In the case of 
grievances, since these are likely to involve a provider, we have 
limited the right to file a grievance to an enrollee. The commenter, 
however, correctly notes that we have not just denied a provider the 
right to file a grievance or fair hearing request on behalf of an 
enrollee, but have affirmatively prohibited providers from doing so, 
through the second sentence in proposed Sec. 438.402(b)(1)(ii). In 
considering this comment, we have determined that we do not wish to 
prohibit providers from acting as authorized representatives for 
grievances, appeals and state fair hearings, if the State wishes to 
provide them with this right. Since the current prohibition would pre-
empt a State law to the contrary, we are, in response to this comment, 
changing the second sentence in proposed Sec. 438.402(b)(1)(ii) to 
read, ``A provider may file a grievance or fair hearing request on 
behalf of an enrollee if the State permits the provider to act as the 
enrollee's authorized representative in doing so.''
3. Notice of Action (Proposed Sec. 438.404)
    Under the proposed rule, the notice MCOs and PIHPs are required to 
provide to enrollees under proposed Sec. 438.404 would be the first 
step in the grievance system. It would serve as the enrollee's first 
formal indication that the MCO or PIHP will or has taken action, such 
as denying payment or denying, limiting, reducing, suspending or 
terminating a service through a service authorization decision. We 
proposed in Sec. 438.404(a) that the notice meet the language and 
format requirements of proposed Sec. 438.10(c) and (d) of this chapter 
to ensure ease of understanding. The notice must include the elements 
that are listed in proposed Sec. 438.404(b), as follows:
     The action the MCO or PIHP or its contractor has taken or 
intends to take.
     The reasons for the action.
     The enrollee's or the provider's right to file an MCO or 
PIHP appeal.
     If the State does not require the enrollee to exhaust the 
MCO or PIHP level appeal procedures, the enrollee's right to request a 
State fair hearing.
     The procedures for exercising the rights specified in this 
section.
     The circumstances under which expedited resolution of an 
appeal is available, and how to request it.
     The enrollee's right to have benefits continue pending 
resolution of the appeal, how to request that benefits be continued, 
and the circumstances under which the enrollee may be required to pay 
the costs of these services.
    In proposed Sec. 438.404(c), we specified the timeframes in which 
the MCO and PIHP must mail the notices. Under proposed 
Sec. 438.404(c)(1), timeframes for notices for the reduction, 
suspension, or termination of previously authorized services are 
governed by the State fair hearing regulations found in 42 CFR part 
431, subpart E. While some MCOs and PIHPs may find the advance notice 
requirement inappropriate, there are exceptions to advance notice that 
allow notice to be given on the date of the action (see Sec. 431.213). 
These exceptions would cover the situation in which a provider believes 
an immediate change in care is appropriate for the health condition of 
the enrollee. For denial of payment, we required in proposed 
Sec. 438.404(c)(2) that notice be given at the time of any action 
affecting the claim. Proposed Sec. 438.404(c)(3) and (c)(4) required 
that for standard service authorization decisions that deny or limit 
services, notice must be given within the timeframes specified in 
Sec. 438.210(d). Further, if the MCO or PIHP were to extend the 
timeframe in accordance with proposed Sec. 438.210(d), it would have to 
give the enrollee written notice of the reason for the decision to 
extend the timeframe, inform the enrollee of the right to file a 
grievance if he or she disagrees with that decision, and issue and 
carry out its determination as expeditiously as the enrollee's health 
conditions requires and no later than the date the extension expires. 
In situations in which the service authorization decision is not 
reached within specified timeframes, and the failure to authorize a 
decision constitutes an adverse decision, we proposed at 
Sec. 438.404(c)(5) that notice be mailed on the date that the timeframe 
for authorizing services expires without an authorization decision 
being made. Finally, for expedited service authorization decisions, 
under the proposed rule notice had to be given within the timeframes 
specified in proposed Sec. 438.210(e) (recodified in this final rule at 
Sec. 438.210(d)).
    Comment: Several commenters believed that a strict application of 
the proposed notice requirement would be burdensome, especially if 
applied to decisions of primary care physicians (PCPs) made without 
involvement of the MCO or PHP. Commenters also asked that CMS 
distinguish between claims that involve liability where the enrollee is 
actually billed, versus where there is no actual payment liability. 
Some commenters contended that MCOs and PIHPs do not always know when 
their providers deny services, making it difficult for them to comply 
with the notice requirements. Another commenter was concerned with 
Sec. 438.404(b)(1) requiring a notice to explain the action the MCO or 
PIHP or its contractor has taken or intends to take. They felt that 
``contractor'' could

[[Page 41058]]

be read as being a provider. They requested clarification.
    Response: We agree with the commenters that a provider, using his 
or her professional judgement in making a determination of medical 
necessity, should not trigger a notice by reason of recommending 
against or preferring an alternative to a particular treatment. As 
discussed above, in response to comments received (including this 
comment), we have removed the word ``provider'' from the definition of 
``action'' triggering notice obligations and appeal rights. As used in 
Sec. 438.404(b)(1), a ``contractor'' would not include a provider, but 
rather any entity in which an MCO or PIHP delegated this particular 
authority/responsibility. However, an enrollee retains the right to 
request that the MCO or PIHP provide a particular service against the 
advice of a provider, triggering the requirement of a notice from that 
MCO or PIHP if the request results in a denial, reduction, or 
suspension. We disagree that notice rights are triggered only when a 
beneficiary is actually held liable for a particular claim. An action 
that may include a claim arising from a third party (such as, a 
hospital) because an MCO or PIHP refused to pay the claim. Even though 
the hospital may choose not to bill the beneficiary, a denial for 
payment of a service has occurred, triggering a notice to the 
beneficiary that the claim was denied. This ensures that a beneficiary 
is made aware of his or her appeal rights in case they are billed by a 
third party.
    Comment: Several commenters noted that they do not believe that the 
expiration of an approved number of visits should be considered a 
termination. They noted that the enrollee is free to request that the 
service be continued, but that this request should be treated as a new 
request for a service. Other commenters expressed the opposite view; 
they believe that re-authorization of a service at a lower level than 
previously received, or a denial of re-authorization, is a termination 
or reduction of the service and should require notice and the 
continuation of benefits pending appeal.
    Response: We agree with the first set of commenters that the 
expiration of an approved number of visits does not constitute a 
termination for purposes of notice and continuation of benefits. 
Likewise, when a prescription (including refills) runs out and the 
enrollee requests another prescription, this is a new request not a 
termination of benefits. In these circumstances, the MCO or PIHP would 
not need to send a notice or continue benefits pending the outcome of 
an appeal or State fair hearing. If the enrollee requests a re-
authorization that the MCO or PIHP denies, the MCO or PIHP must treat 
this request as a new request for service authorization and provide 
notice of the denial or limitation. We disagree with the second 
commenters that a denial of authorization for additional days is a 
``termination,'' since the enrollee had no expectation of coverage on 
those days, and this was thus simply a denial of a new request, not a 
termination of services the enrollee had a right to expect to continue.
    We believe that the proposed rule already clearly reflected the 
above interpretation. In the definition of ``Action,'' the reference to 
a ``reduction, suspension, or termination'' in the proposed rule was 
qualified by the phrase, ``of a previously authorized service.'' Thus, 
the cessation of services because the authorization expired would not 
be an ``action,'' because services after the date when the 
authorization expired would not be ``previously authorized.'' In 
proposed Sec. 438.404(c)(1), the reference to timeframes for a notice 
of a ``termination, suspension, or reduction'' was similarly qualified 
by ``of previously authorized Medicaid-covered services.'' In proposed 
Sec. 438.420(b), specifically governing the continuation of services, 
the right to continued benefits is expressly conditioned on the ``[t]he 
appeal involv[ing] the termination, suspension, or reduction of a 
previously authorized course of treatment.'' Again, we believe it is 
clear that if additional days were not authorized, ending treatment as 
provided in the original authorization would not constitute a 
termination triggering the right to continued benefits. We have made 
one change in this rule in response to this comment, however. In a case 
in which services which were ``previously authorized'' are continued or 
reinstated at the request of the enrollee pending appeal, and during 
this continuation period, the period of authorization expires, services 
may be terminated as provided in the original authorization. We have 
added a new Sec. 438.420(c)(4) to make this clear.
    Comment: One commenter believed that CMS underestimated the true 
burden associated with MCO and PIHP notices, suggesting that it is 
closer to 20 minutes than 30 seconds per notice.
    Response: We address this issue under the Collection of Information 
Requirements section of this preamble.
    Comment: We received many comments regarding the elements of a 
notice. Several commenters suggested that the written notice 
requirements of proposed Sec. 434.404 be modified to mirror the 
existing State fair hearing regulations. Other commenters did not 
believe that there were sufficient protections in place to ensure that 
enrollees not only have rights, but have effective notice of those 
rights. These other commenters recommended additional requirements 
addressing the right to request a State fair hearing, the right to 
present evidence, how to contact the MCO or PHP for assistance, how to 
obtain copies of enrollee records, the right of an enrollee to 
represent himself or herself or use counsel, and the right to be free 
from any negative impact from having filed an appeal. Several 
commenters were concerned that while oral requests for standard appeals 
must be followed up in writing, there was no requirement that enrollees 
be told this in the notice. They wanted to see this added.
    Response: We agree that information given by MCOs and PIHPs should 
generally contain the information required by the State fair hearing 
notices. However, the provision of most of this information is required 
under the information requirements in Sec. 438.10(g)(1) and the content 
requirements for a notice in Sec. 438.404. These requirements will 
ensure that enrollees are informed, for example, that an oral request 
for a standard appeal will not be pursued unless it is followed up in 
writing, of the enrollee's right to a hearing, the method for having a 
hearing, and circumstances surrounding continuation of benefits, if 
applicable. We have previously addressed the comment on language 
concerning negative actions by an MCO or PIHP.
    Comment: One commenter noted that Sec. 438.404(c)(6) included an 
incorrect reference. The reference to Sec. 438.210(e) should read 
``Sec. 438.210(d).''
    Response: We agree with the commenter. We have made the appropriate 
change in Sec. 438.404(c)(6) by correcting the cross reference to read 
Sec. 438.210(d).
4. Handling of Grievances and Appeals (Proposed Sec. 438.406)
    Section 438.406 proposed to set forth how grievances and appeals 
must be handled. The general requirement for handling grievances and 
appeals would require MCOs and PIHPs to do the following:
     Give enrollees any reasonable assistance in completing 
forms and taking other procedural steps.
     Acknowledge receipt of each grievance and appeal.
     Ensure that individuals who make decisions on grievances 
and appeals are

[[Page 41059]]

individuals who were not involved in any previous level of review or 
decision making and who, if deciding an appeal of a denial that is 
based on lack of medical necessity, a grievance regarding denial of 
expedited resolution of an appeal, or a grievance or appeal that 
involves clinical issues, are health care professionals who have the 
appropriate clinical expertise in treating the enrollee's condition or 
disease.
    We would require the MCO and PIHP, at proposed Sec. 438.406(a)(1), 
that the ``reasonable assistance'' provided to enrollees include 
interpreter services and toll free numbers that have adequate TTY/TTD 
and interpreter capability. By including these as examples of types of 
assistance required to meet certain needs, we did not intend that other 
reasonable assistance need not be given. We believe, for example, that 
MCOs and PIHPs are required by this provision to provide reasonable 
assistance to meet other needs of enrollees, and assisting enrollees 
who have low-literacy abilities.
    Proposed Sec. 438.406(b) specified the following requirements that 
the appeals process would have to meet:
     Provide that oral inquiries seeking to appeal an action 
are treated as appeals and must be confirmed in writing, unless the 
enrollee or the provider requests expedited resolution. This is 
required in order to establish the earliest possible filing date for 
the appeal.
     Provide the enrollee a reasonable opportunity to present 
evidence, and allegations of fact or law, in person as well as in 
writing.
     Provide the enroll and his or her representative the 
opportunity, before and during the appeals process, to examine the 
enrollee's case file, including medical records, and any other 
documents and records considered during the appeals process.
     Include, as parties to the appeal, the enrollee and his or 
her representative or the legal representative of a deceased enrollee's 
estate.
    Comment: One commenter was unclear whether the proposed rule 
permitted conducting State fair hearings using a video-conferencing 
system. The commenter noted that many states now use this technology, 
with videoconference facilities in numerous locations. Multiple sites 
can be linked to make it more convenient for all parties to participate 
in the hearing, reducing travel costs, and conserving time.
    Response: Nothing in the statute or regulation prevents MCOs, 
PIHPs, or States from using videoconferencing equipment as long as they 
adhere to the evidentiary rules described in parts 431 and 438.
    Comment: Several commenters recommended that CMS establish more 
general standards regarding the qualifications of hearings officers. 
Commenters were concerned with the burden of finding providers with 
clinical expertise for a voluminous number of cases. They requested 
that it be permissible to either use physicians or other types of 
providers with appropriate clinical expertise. Other commenters 
recommended being more specific in linking certain cases to a 
particular area of expertise. For example, one commenter wanted 
language ensuring that all grievances and appeals involving care to a 
child be reviewed by pediatricians and pediatric specialists.
    Response: We believe that it is important for adjudicators to have 
clinical training appropriate for the case in which they are presiding. 
However, we are leaving the definition of ``appropriate clinical 
expertise'' to be defined by the States. This allows States to decide 
what clinical expertise level is necessary to fit its particular 
appeals process and volume of cases.
    Comment: Several commenters suggested adding ``but not limited to'' 
to Sec. 438.406(a)(1) where it includes examples of enrollee assistance 
with grievance and appeals procedures. They believed that this addition 
would make the language of the regulation comport with the expressed 
intent of CMS.
    Response: We agree with the commenters, and in response to this 
comment, we have added ``but is not limited to'' in Sec. 438.406(a)(1).
    Comment: Several commenters urged CMS to require MCOs and PHPs to 
have an adequately staffed office designated as the central point for 
enrollee issues, including grievances and appeals. This would ensure 
that the processing is someone's job, and not viewed as a chore that is 
handled on an ad hoc basis.
    Response: We disagree with the commenters. As long as States can 
ensure that those requirements in Sec. 438.406 are met, we believe that 
it should be their decision as to how best an MCO or PIHP can fulfill 
those requirements.
    Comment: Several commenters questioned the impartiality of an 
internal appeals system, and felt that CMS should add language to the 
regulation preventing any employees of the MCO or PHP from being final 
decision makers on coverage decisions. ]
    Response: In both the Medicare and Medicaid programs, the Congress 
has provided for an initial level of review of enrollee appeals at the 
managed care organization level. We believe that the use of the words 
``internal grievance procedure'' in section 1932(b)(4) indicates that 
the Congress contemplated that review be performed by MCO employees. 
Within this context, this final rule requires that the decision-makers 
not be individuals involved in any previous level of review, and either 
be physicians or have the clinical expertise needed to make a decision 
involving the enrollee's particular condition or disease. We believe 
that these requirements help insure that internal decisions will be as 
objective as possible. With respect to the ``final decision'' on a 
coverage question, all MCO or PIHP coverage decisions are subject to 
review by non-MCO employees at the State fair hearing level. We believe 
that those safeguards are reasonable and necessary at the internal 
appeals level.
    Comment: Several commenters believed that we should require MCOs 
and PHPs to explicitly state that enrollees may obtain copies of their 
records.
    Response: Section 438.406(b)(3) requires that MCOs and PIHPs 
provide the enrollee and his or her representative with the opportunity 
to examine the enrollee's case file, including medical records, and any 
other documents and records considered during the appeals process. 
However, we believe that the State is in the best position to decide in 
what way enrollees must be notified about this right.
5. Resolution and Notification: Grievances and Appeals (Proposed 
Sec. 438.408)
    In proposed Sec. 438.408(a), we required that the MCO or PIHP 
dispose of each grievance and resolve each appeal, and provide notice, 
as expeditiously as the enrollee's health condition requires. In 
addition, this section required that the State establish timeframes for 
disposition of grievances and resolution of appeals, not to exceed the 
specific timeframes proposed in this section.
    While we proposed timeframes to resolve appeals, we realize that 
the Congress, as part of proposals for a patient's bill of rights, is 
considering several other timeframes for internal MCO appeals. Some of 
these proposals would apply the timeframes to the Medicaid program. If 
these proposals were enacted, such statutory timeframes would supersede 
those set forth in this final rule.
    Under proposed Sec. 438.408(b), we established the specific maximum 
timeframes for disposition of grievances

[[Page 41060]]

and resolution of appeals. For the standard disposition of a grievance 
and notice to affected parties, the State may establish a timeframe for 
disposition that may not exceed 90 days from the day the MCO or PIHP 
receives the grievance. For standard resolution of an appeal and notice 
to affected parties, proposed Sec. 438.408(b)(2) required that the 
State establish a timeframe no longer than 45 days from the day the MCO 
or PIHP receives the appeal. However, this proposed timeframe could be 
extended under proposed Sec. 438.408(c), which specified that the MCO 
or PIHP may extend the timeframe by up to 14 calendar days if the 
enrollee requests the extension, or the MCO or PIHP shows (to the 
satisfaction of the State agency, upon its request) that there is need 
for additional information and how the delay is in the enrollee's 
interest.
    Proposed Sec. 438.408(b)(3) provided a maximum timeframe for 
expedited resolution of appeals and notice to affected parties. We 
required that the State establish a timeframe no longer than 3 working 
days after the MCO or PIHP receives the appeal. We believe that 
expedited resolution is necessary to ensure that appeals of situations 
that potentially place an enrollee's heath in jeopardy are not delayed. 
Although States have historically instituted different processes to 
protect beneficiaries, we believe that a standardized expedited appeal 
process is needed to protect beneficiaries in a capitated health care 
delivery system. Further, this is an important beneficiary protection 
and is necessary to ensure that the overall timeframe of 90 days for a 
decision at the State fair hearing (excluding the time the beneficiary 
takes to file for a State fair hearing) can be met in all cases. 
However, similar to standard resolution of appeals, we proposed that 
this expedited timeframe can also be extended by 14 calendar days if 
the enrollee requests extension or the MCO or PIHP shows (to the 
satisfaction of the State agency, upon its request) that there is need 
for additional information and how the delay is in the enrollee's 
interest.
    We proposed certain parameters for the extension process. Under 
proposed Sec. 438.408(c)(2), if the MCO or PIHP grants itself an 
extension, it is required to notify the enrollee in writing of the 
reason for the delay. In Sec. 438.408(d), we required the State to 
establish the method MCOs and PIHPs will use to notify an enrollee of 
the disposition of a grievance. Under proposed Sec. 438.408(e), we 
specified that written notice of the appeal resolution must include the 
following:
     The results of the resolution process and the date it was 
completed.
     For appeals not resolved in favor of the enrollee, the 
enrollee's right to request a State fair hearing and how to do so, the 
right to request to receive continuation of benefits, and that the 
enrollee may be held liable for the cost of those continued benefits if 
the State fair hearing decision upholds the MCO's or PIHP's action.
    Finally, at proposed Sec. 438.408(f) (this paragraph was 
erroneously codified as a second paragraph (c), an error that has been 
corrected in this final rule), we outlined the requirements for State 
fair hearings. We required the State to permit the enrollee to request 
a State fair hearing within a reasonable time period specified by the 
State, but not less than 20 days or in excess of 90 days from the date 
of the MCO's or PIHP's notice of resolution (if the State requires 
exhaustion of the MCO or PIHP level appeal procedures) or from the date 
on the MCO's or PIHP's notice of action (if the State does not require 
exhaustion and the enrollee appeals directly to the State for a fair 
hearing). We also felt it was important to outline at proposed 
Sec. 438.408(f)(2) that the parties to the State fair hearing include 
the MCO or PIHP as well as the enrollee and his or her representative, 
or the representative of a deceased enrollee's estate.
    Comment: Several commenters felt that proposed Sec. 438.408(a) 
should be revised to require that all notices of dispositions of 
grievances be provided in writing. These commenters argued that MCOs 
and PIHPs often confuse cases which should be treated as a grievance 
with those that should be handled as an appeal. Written dispositions of 
grievances would in the views of these commenters provide a mechanism 
for addressing this issue by revealing whether or not an MCO or PIHP is 
resolving a dispute pursuant to the appropriate mechanism.
    Response: We believe that Sec. 438.408 makes the difference between 
a grievance and an appeal very clear. An appeal is triggered through an 
action, while a grievance involves any dissatisfaction other than an 
action. If a State chooses to monitor its MCOs and PIHPs by requiring 
written notices, it may do so. However, we see no reason to require a 
written notice at the Federal level for all grievances, when many may 
not be of a nature for which such a notice is appropriate, and there is 
no Federal right to review by the State of such matters.
    Comment: Comments on timeframes widely differed. Many commenters 
questioned the fact that the timeframes for appeals in the proposed 
rule were longer than those in place under Medicaid fee-for-service, 
Medicare+Choice, and versions of Patients Bill of Rights legislation. 
The commenters apparently believed that departing from these standards 
failed to adequately protect beneficiaries, and raised constitutional 
due process questions. These commenters wanted standard internal 
appeals to be resolved within 30 days. However, several other 
commenters found the 45-day timeframe more reasonable. Still other 
commenters were confused about the timeframes in general, and wanted an 
explanation of how they worked.
    Response: We realize that the proposed timeframes were confusing as 
proposed, and potentially would not give the State a reasonable amount 
of time--or under some scenarios, any time, to conduct a fair hearing. 
We believe that after an MCO or PIHP takes up to 45 days, plus a 
possible 14-day extension, to make a decision, the 90-day clock for a 
fair hearing decision should stop during the time the enrollee takes to 
file for a State fair hearing (which could be as long as 90 days 
itself). Therefore, in response to the above comments, we have 
clarified in Sec. 431.244(f) that the State is required to resolve the 
State fair hearing within 90 days of the day the MCO or PIHP received 
the appeal, not including the number of days the enrollee took to 
subsequently file for a State fair hearing. We believe that this is a 
reasonable timeframe because it holds the State accountable within a 
90-day timeframe as long as the enrollee takes prompt action to follow 
up any denial at the internal appeal level. This will guarantee a high 
level of commitment on both sides. We also believe that 45 days is a 
reasonable standard timeframe for an MCO or PIHPs, because an enrollee 
may request an expedited appeal if he or she feels that a standard 
timeframe could jeopardize his or her health. With respect to the 
comments raising constitutional due process issues, we believe that 
applying this timeframe in this situation is fully consistent with due 
process requirements.
    Comment: Some commenters noted that most States already have a 
complex grievance system in place, with specified timeframes and other 
rules, and changing these requirements may be confusing for 
beneficiaries and may not provide any additional protections to 
enrollees. These commenters asked us to permit ``deeming'' of 
compliance with Medicaid rules when the State's system met certain 
standards.
    Response: The grievance and appeals requirements in Sec. 438.408 
set forth

[[Page 41061]]

minimum standards that MCOs, PIHPs, and States must follow. As long as 
those standards are met, a State is free to tailor those to the system 
it operates. We believe that these timeframes, notice requirements, and 
other standards grant States flexibility (e.g., the State is granted 
the discretion to establish timeframes, within ranges), and constitute 
the minimum necessary to ensure reasonable beneficiary protections. We 
strongly believe that the established timeframes give States, MCOs and 
PIHPs adequate time to make an informed decision for enrollees at both 
the internal and State fair hearing levels.
    Comment: Several commenters believed that the mandatory timeframes 
for the grievance and appeals process in Sec. 438.408 might be 
difficult to meet if enrollees fail to submit timely information, or 
are not available for an in-person presentation to the MCO or PIHP. 
These commenters asked that a limit be placed on the number of days 
MCOs and PIHPs are responsible for providing continued services pending 
a final determination in the case of an appeal from a termination of 
benefits. Some commenters wanted the timeframes to begin when all 
documentation is received from providers, rather than the date of 
notice of the action being appealed, for fear that the timeframes would 
be impossible to meet in certain cases.
    Response: We believe that the timeframes in Sec. 438.408 will 
result in timely decisions based on all necessary evidence in the vast 
majority of cases. Enrollees have a strong incentive to cooperate fully 
with officials in an internal appeals process to facilitate timely 
coverage decisions. However, if some enrollees do not provide enough 
information to support their appeal, the MCO or PIHP is responsible for 
deciding the appeal on the basis of available information within the 
timeframes set out. Since continuation of benefits for authorized 
services being terminated may, at the beneficiary's request, continue 
throughout the appeals process until the final decision is made at the 
MCO, PIHP, or State level, we believe that it is reasonable to require 
MCOs and PIHPs to make decisions within the specified timeframes so 
they are not responsible for covering benefits due to another party's 
delay.
    Comment: One commenter felt that the timeliness for grievance and 
fair hearing completions may be difficult to meet in the case of mental 
health enrollees. The commenter inquired as to whether decisions on an 
action could be made retroactively, still comply with the requirements.
    Response: The timeframe for filing an appeal in a State will be 
between 20 and 90 days, as determined by that State. We believe that 
this should be sufficient time for all enrollees to request a hearing. 
MCO, PIHPs, and States are then responsible for assisting enrollees 
with any procedural barriers they may encounter. Once the appeal is 
filed, the MCO, PIHP, or State is responsible for ensuring that a fair 
decision is made within the mandated timeframes.
    Comment: A few commenters noted that in proposed Sec. 438.408, the 
paragraph titled ``Requirements for a State fair hearing,'' which was 
identified in the preamble as paragraph (f), was inadvertently labeled 
paragraph (c) in the regulations text. The commenter assumed this was a 
typographical error.
    Response: We agree with the commenter, and as noted above, we have 
made the appropriate change in Sec. 438.408.
6. Expedited Resolution of Appeals (Proposed Sec. 438.410)
    In proposed Sec. 438.410 we required each MCO and PIHP to establish 
and maintain an expedited review process for appeals when the MCO or 
PIHP determines or the provider indicates that taking the time for a 
standard resolution could seriously jeopardize the enrollee's life or 
health or ability to attain, maintain, or regain maximum function. 
Further, the MCO or PIHP was required under proposed Sec. 438.410(b) to 
ensure that no punitive action is threatened or taken against a 
provider who requests an expedited resolution, or supports an 
enrollee's request for an expedited appeal.
    If the MCO or PIHP denies a request for expedited resolution of an 
appeal, it would be required under proposed Sec. 438.410(c) to transfer 
the appeal to the standard resolution timeframe in accordance with 
proposed Sec. 438.408(b)(2), and give the enrollee prompt oral notice 
of the denial following within two calendar days with a written notice.
    Comment: One commenter contended that the definition of ``expedited 
authorization decisions'' can be applied to nearly any medical 
necessity determination. This commenter recommend removing language 
related to the ``enrollee's ability to attain, maintain, or regain 
maximum function * * * could be jeopardized.''
    Response: We disagree with the commenter. If a standard appeals 
process is long enough to place an enrollee's health in jeopardy based 
on the definition above, we believe that an expedited appeal is 
warranted. Furthermore, the provider, MCO, PIHP, or State has the final 
decision on whether or not that threshold has been met. Therefore, we 
believe that it does not add any unwarranted administrative burden to 
MCOs, PIHPs, or States during the process.
    Comment: Comments on the timeframes in proposed Sec. 438.410 again 
differed widely. Many commenters (again citing due process concerns and 
comparing the timeframes to other situations) wanted expedited internal 
appeals to be resolved within 72 hours, mirroring Medicare+Choice and 
State fair hearing timeframes.
    However, several commenters found the timeframes unreasonable, 
unrealistic, subjective, and too prescriptive, and asked for more State 
flexibility to set timeframes. Some wanted the expedited process to be 
longer, such as a minimum of five working days, arguing that the 
present timeframe was unworkable. One commenter noted that most States 
already have timeframes, and suggested that changing these requirements 
may be confusing for beneficiaries while not providing any additional 
meaningful protections to enrollees.
    Response: We continue to believe that the regulation should 
establish timeframes for steps in the internal appeal process, and that 
an expedited timeframe is necessary when the use of standard timeframes 
may jeopardize the enrollee's health. An expedited timeframe is an 
important beneficiary protection and ensures that those enrollees who 
need a quick decision will receive one. However, we believe that three 
working days for an expedited internal appeal makes the most sense. It 
provides for a very timely decision for those enrollees whose health 
may be in jeopardy, yet facilitates MCOs and PIHPs with the difficulty 
of operating during weekends and holidays. If an enrollee's health is 
jeopardized by an emergency medical condition, as defined in 
Sec. 438.114(a), then he or she would go to the nearest emergency room. 
In Sec. 438.408(a) we provide for States to establish timeframes that 
may not exceed the timeframes specified in this final rule. Thus, 
States may establish shorter timeframes. Again, with respect to the 
commenter's due process concerns, we are unaware of any legal basis for 
the suggestion that these regulations would violate due process.
    Comment: Several commenters suggested that the regulations 
expressly allow the beneficiary to obtain an expedited review based on 
their primary care provider's opinion that the standard for expedited 
review has been met. They believed that MCOs and

[[Page 41062]]

PIHPs should not be given complete control over the situation, because 
their financial arrangements may provide an incentive to deny services.
    Response: Under Sec. 438.410(a), an MCO or PIHP must provide 
expedited review if it determines the standard for such review has been 
met, in the case of a request by an enrollee or if ``the provider'' 
makes such a determination. The preamble to the proposed rule did not 
specify whether ``the provider'' included the enrollee's primary care 
provider, or only the provider who would be furnishing the service 
requested in connection with the appeal. In response to this comment, 
we are clarifying that ``the provider,'' as used in Sec. 438.410(a), 
refers to the provider of the services requested, since this provider 
is in the best position to evaluate the enrollee's need for those 
services. In some cases, this may be the primary care provider, in 
which case the current regulations would provide for the result the 
commenter seeks. In other cases, however, the primary care provider's 
opinion would not be dispositive of whether expedited review would be 
granted. We assume that the primary care provider's views would be 
taken into account by the MCO or PIHP in making their determination, or 
by ``the provider'' of the services sought, in deciding whether to 
request review or support the enrollee's request as provided in 
Sec. 438.410(a). If an enrollee disagrees with the MCO's or PIHP's 
decision, and the provider who would be furnishing the services does 
not support the enrollee's request, nothing prevents him or her from 
contacting the State and asking for its involvement or assistance. 
Furthermore, States have the option to make a primary care provider's 
decision binding in all cases as part of their contract requirements, 
or State law, if they choose.
    Comment: Several commenters were concerned about the MCO's and 
PIHP's ability to extend the 3-day expedited timeframe for 14 more days 
in cases in which this extension was not requested by the enrollee, and 
with the fact that the enrollee does not have the right to appeal such 
an extension. These commenters argued that the State has no mechanism 
for knowing that an MCO or PIHP has given itself such an extension, 
making the expedited provision arguably an empty mechanism. 
Furthermore, it appears to these commenters that the MCO or PIHP could 
give itself extensions indefinitely because there is no requirement to 
resolve the appeal after the first extension. They recommended only 
allowing an extension in these cases if the enrollee requests it.
    Response: We partially disagree with the commenters' interpretation 
of the regulation. We state in Sec. 438.408(b)(3) that an MCO or PIHP 
may extend the timeframe of 3 working days up to an additional 14 
calendar days. This is intended to be the outer time limit before a 
decision is made or the enrollee is eligible to file for a State fair 
hearing. Thus, an MCO or PIHP could not continue ``indefinitely'' to 
grant additional 14 day extensions. With respect to cases in which an 
enrollee does not request the extension, the extension still must be in 
the enrollee's interests, and an enrollee is free to argue to the State 
that this standard has not been met. The State then may decide if it 
should intervene. Moreover, we note that States have the option in 
contracts or in State law of permitting extensions only when requested 
by the enrollee.
    Comment: One commenter expressed concern regarding the logistics of 
requiring MCOs and PHPs to give prompt oral notice to an enrollee of 
any denial of an expedited request. They noted that some Medicaid 
enrollees may not be accessible by telephone.
    Response: We are aware that some Medicaid enrollees may not have 
telephones, and that it therefore may be difficult in some cases to 
provide oral notice. Therefore, in response to this comment, we have 
revised Sec. 438.410(c)(2) by requiring MCOs and PIHPs to make 
reasonable efforts to notify enrollees orally of decisions not to 
expedite an appeal, and to follow up with a written notice within two 
calendar days. MCOs and PIHPs should request information from enrollees 
about how and where they can be contacted.
    Comment: Several commenters recommended that the State Medicaid 
agency be permitted 3 working days to hear expedited appeals that they 
receive, rather than 72 hours.
    Response: We agree with the commenters. In response to this 
comment, the final rule, at Sec. 431.244(f)(2) and (3), now requires 
the State to conduct a fair hearing and make its decision within 3 
working days for service authorization denials that meet the criteria 
for expeditious handling. We have chosen to use the same 3-working-days 
standard that applies to MCO or PIHP review in expedited cases so that 
the State would not be required to complete review of all expedited 
cases during weekends or holidays.
    Comment: Many commenters advocated a requirement that expedited 
internal appeals not decided wholly in the enrollee's favor be 
automatically forwarded to the State fair hearing process. These 
commenters felt that timing during an expedited process was essential, 
and that automatic forwarding would provide necessary speed to the 
process.
    Response: We disagree with the commenters. We believe that the 
burden on MCOs, PIHPs and States, of automatic forwarding of appeal 
materials even in cases in which the enrollee may not wish to pursue a 
further appeal outweighs any benefits that might be achieved by such a 
policy. As in the case of when a beneficiary files an appeal during the 
90 standard timeframe, it is reasonable to expect any enrollee who is 
seeking a particular service or benefit to promptly file for a State 
fair hearing if he or she is not wholly successful at the internal 
appeals level. We do not believe this would significantly add to the 
time it takes to handle the appeal. We note that the MCO or PIHP must 
give enrollees reasonable assistance in completing forms and taking 
other procedural steps.
    Comment: One commenter noted that the proposed rule did not grant 
enrollees a right to a State fair hearing for an enrollee whose request 
for an expedited resolution is denied. Specifically, the commenter 
noted that this was not listed among the bases for a State fair 
hearing. The commenter wanted clarification on this point.
    Response: The omission of a denial of a request for an expedited 
hearing from the ground for a fair hearing was intentional. As noted 
above, if a request for an expedited resolution is denied, the case is 
automatically treated as a standard appeal. However, if that internal 
appeal is not resolved wholly in favor of the enrollee, then the 
enrollee has a right to a State fair hearing.
    Comment: One commenter objected to the fact that the proposed rule 
did not include a requirement for an expedited review process for 
grievances. They argued that this would be dangerous for enrollees with 
severe health problems who could not wait for the time frame of the 
standard review process.
    Response: A grievance involves any dispute other than an 
``action.'' Only an action should involve the possibility of a delay 
putting an enrollee with severe health problems at risk. We have an 
expedited provision for those type of disputes. Therefore, we do not 
believe that an expedited grievance process is a necessary mandate at 
the Federal level.
    Comment: One commenter noted that proposed Sec. 438.410(a) should 
have a period at the end rather than a semi-colon.
    Response: We agree with the commenter, and we made the appropriate 
change in Sec. 438.410(a) the final regulation.

[[Page 41063]]

7. Information About the Grievance System to Providers and 
Subcontractors (Proposed Sec. 438.414)
    Proposed Sec. 438.414 required that the MCO or PIHP must provide 
the information specified at Sec. 438.10(g)(1) about the grievance 
system to all providers and subcontractors at the time they enter into 
a contract.
    Comment: One commenter requested that CMS require that information 
about the grievance system be provided to subcontractors as well as to 
contracting providers.
    Response: Proposed Sec. 438.414, which is unchanged in this final 
rule, already provided that this information must be provided to 
providers ``and subcontractors.''
8. Recordkeeping and Reporting Requirements (Proposed Sec. 438.416)
    Proposed Sec. 438.416 required the State to require MCOs and PIHPs 
to maintain records of grievances and appeals and review the 
information as part of the State quality strategy.
    Comment: Commenters urged that the regulation require States to 
provide members of the public, upon request, with MCO and PHP summaries 
of grievance and appeal logs.
    Response: States have the authority to require that MCOs and PIHPs 
make available to the State, or at the State's option, to members of 
the public, grievance and appeal logs or other MCO and PIHP grievance 
system documents. We do not agree that we should mandate this, however. 
In some cases, raw appeals data may be confusing to the public, or 
potentially misleading. We believe States are in the best position to 
decide how such information should be presented to the public. In 
designing their quality strategies, States should consider what 
information they and the public will need to support those strategies.
9. Continuation of Benefits When an MCO or PIHP Appeal of a 
Termination, Suspension, or Reduction, and State Fair Hearing on Such 
an Action, are Pending (Proposed Sec. 438.420)
    Proposed Sec. 438.420 required that when the dispute involves the 
termination, suspension, or reduction of a previously authorized course 
of treatment, the MCO or PIHP must continue the enrollee's benefits 
until issuance of the final appeal decision or State fair hearing 
decision, if all of the following occur:
      The enrollee or the provider files the appeal timely.
      The services were ordered by an authorized provider.
      The period covered by the authorization has not expired.
      The enrollee requests such an extension of benefits.
    We specified that timely filing means filing on or before the later 
of either the expiration of the timeframe specified by the State (in 
accordance with Sec. 438.404(c)(2)) and communicated in the notice of 
action or the intended effective date of the MCO's or PIHP's proposed 
action.
    This provision would apply only when the MCO or PIHP physician 
initially authorized the services (that is, it would not apply to pre-
service authorization requests that were denied) and when the 
beneficiary requests the services be continued (that is, the mere 
action of filing for an appeal or State fair hearing in a timely manner 
is not sufficient for benefits to be continued). The continuation of 
benefits provision would not require a further statement of 
authorization from the MCO or PIHP physician or affect benefits not 
originally authorized.
    If the MCO or PIHP continues or reinstates the enrollee's benefits 
while the appeal is pending, under proposed Sec. 438.420(c), the 
benefits must be continued until one of the following occurs:
      The enrollee withdraws the appeal.
      The MCO or PIHP resolves the appeal against the enrollee, 
unless the enrollee has requested a State fair hearing with 
continuation of benefits until a State fair hearing decision is 
reached.
      A State fair hearing officer issues a hearing decision 
adverse to the enrollee.
    Beneficiaries who have received continuation of benefits while they 
appeal to the MCO or PIHP are not obligated to pursue their appeal 
further, through the State fair hearing process, if the MCO or PIHP 
denies their appeal. It remains the beneficiaries' choice. It is 
important to note, however, that enrollees who lose their appeal at 
either the MCO, PIHP or State fair hearing levels will be liable for 
the costs of all appealed services from the later of the effective date 
of the notice of intended action or the date of the timely-filed 
appeal, through the date of the denial of the appeal. As a result, in 
Sec. 438.420(d), we proposed that if the final resolution of the appeal 
is adverse to the enrollee (that is, it upholds the MCO's or PIHP's 
action) the MCO or PIHP may recover the cost of the services furnished 
to the enrollee while the appeal was pending, to the extent that they 
were furnished solely because of the requirements of this section, and 
in accordance with Sec. 431.230(b).
    Comment: Many commenters pointed out that the proposed rule does 
not specify all the same circumstances set forth in Secs. 431.230 and 
430.231 as situations in which benefits must be continued or 
reinstated. These commenters specifically cited advanced notice 
requirements, and argued that this rewards MCOs and PIHPs that do not 
provide advanced notice.
    Response: We disagree with the commenters. MCOs, PIHPs, and States 
have a strong incentive to notify enrollees timely of any reduction, 
limitation, or suspension of existing services. While enrollees have to 
actively request continuation of benefits while filing an appeal, they 
must be given the opportunity to do so before the benefits are reduced, 
limited, or suspended. And since enrollees have this right until an 
adverse State fair hearing decision (assuming of course that he or she 
follows the applicable rules), a delay in notice only gives enrollees 
benefits for a longer period of time. However, in response to this 
comment, we now state in the regulation text that the enrollee has 10 
days after the MCO or PIHP mails the notice of action to request 
continuation of benefits. Therefore, even if the effective date of 
action has passed, an MCO or PIHP may not discontinue those benefits 
until 10 days after the notice is mailed. We believe that this 
sufficiently addresses the commenters' concern.
    Comment: We received many comments regarding enrollees' rights to 
continuation of benefits during the MCO and PIHP appeal process. 
Several commenters thought that the regulations mandate that MCOs and 
PIHPs continue benefits in all cases in which the appeal involves 
services that are being terminated or reduced. Several commenters felt 
that continuation of benefits pending resolution of an appeal or State 
fair hearing, without financial risk, is one of the most important 
protections needed for managed care enrollees.
    In contrast, several other commenters were opposed to extending 
continuation of benefits requirements to the MCO and PIHP appeal 
process. One commenter contended that this requirement would have 
significant cost implications for MCOs and PIHPs. Another commenter 
felt that benefits should be continued only at the point when an 
enrollee requests a State fair hearing.
    One commenter thought that requiring MCOs and PHPs to continue 
benefits would place them in an untenable position with their 
providers, compromising their ability to manage care and cost. This 
commenter expressed concern that this provision

[[Page 41064]]

may damage managed care programs, and believed it was unnecessary, 
given the requirement of expedited review of appeals in cases in which 
a delay could jeopardize health.
    Response: Because we allow States to require exhaustion of the MCO 
and PIHP appeal before receiving a State fair hearing, we believe that, 
in order for the right to continued benefits during a State fair 
hearing to be meaningful, continuation of benefits must begin with the 
filing of an MCO or PIHP appeal, and continue until the State fair 
hearing decision. Given that, with few exceptions, the overall 90-day 
timeframe for a final fair hearing decision applies even when 
exhaustion is required, the amount of time benefits must be continued 
is the same under this final rule as under the longstanding fair 
hearing system. Continuation of benefits at the MCO and PIHP level thus 
is part of the same longstanding right to continuation of benefits that 
has existed for Medicaid beneficiaries when services are reduced or 
terminated.
    As in fee-for-service, under managed care, the right to 
continuation of benefits is not exercised without financial risk to the 
beneficiary of payment for services provided should he or she lose the 
appeal. Otherwise, MCOs, PIHPs, or States would be unfairly liable for 
treatment in which they were correct in limiting, reducing, or 
suspending. It is because of this potential risk for enrollees that we 
require that the enrollee specifically request continuation of 
benefits. Under Sec. 438.404(b)(7), the notice of adverse action must 
include an explanation of this choice.
    While expedited appeals will decrease the amount of time MCOs and 
PIHPs are liable to continue benefits for enrollees with pending 
appeals, the expedited appeal process does not substitute for the 
protection provided to Medicaid beneficiaries of the right to 
continuation of previously authorized benefits pending the outcome of a 
State fair hearing decision.
    If the benefit is a Medicaid covered service, but not an MCO or 
PIHP covered service, the State, not the MCO or PIHP is responsible for 
providing those services pending the outcome of the State fair hearing.
    Comment: Several commenters requested that Sec. 438.420 should 
clearly state that re-authorization of a service at a lower level than 
previously received, or a denial of re-authorization, is a termination 
or reduction of the service requiring the continuation of benefits 
pending appeal. Other commenters requested that we make clear in the 
regulation text that continuation of benefits does not include the 
expiration of an approved number of visits through an authorized course 
of treatment.
    Response: As noted above, we agree that the expiration of an 
approved number of visits does not constitute a termination for 
purposes of notice and continuation of benefits. If an enrollee 
requests re-authorization for services and the MCO or PIHP denies the 
request or re-authorizes the services at a lower level than requested, 
the MCO or PIHP must treat this request as a new service authorization 
request and provide notice of the denial. We have explained above that 
the language in the proposed rule already limited the right to 
continued benefits to services that were authorized. In response to 
this comment, in order to make clear that the continuation of benefits 
itself is not what we mean by ``authorized,'' we have revised 
Sec. 438.420(b)(4) by adding the word ``original'' to make clear that 
benefits are only continued to the extent they were originally 
authorized. As noted above, we also have added a new Sec. 438.420(c)(4) 
in this final rule to make clear that when benefits are continued under 
Sec. 438.420(b), they may be discontinued when the original 
authorization expires.
    Comment: One commenter was concerned about the status of enrollees 
who received authorization for a course of treatment from a non-network 
physician but then had those benefits limited by a new MCO once the 
course of treatment had begun. They believe that these enrollees need 
protection for their benefits.
    Response: An enrollee who has his or her existing benefits reduced, 
limited, or suspended by an MCO, PIHP, or State has the right to 
request a continuation of benefits regardless of the source as long as 
it originated from a Medicaid participating provider. It is the State's 
decision as to what entity is liable for those benefits during the 
appeals process.
    Comment: One commenter argued that discontinuing services being 
provided by an MCO without a State fair hearing was unconstitutional.
    Response: We do not believe that we need reach constitutional 
issues (such as, regarding whether a property interest or State action 
exist) because Medicaid beneficiary rights are directly addressed in 
section 1902(a)(3) and 1932(b)(4), and it is these statutory rights 
that are implemented in this final rule. As noted above, we believe 
that if services are discontinued on the date the authorization 
expires, this is not a ``termination'' of services that the enrollee 
had any right to expect to receive, and thus is not a termination 
within the meaning of section 1902(a)(3) and the implementing 
regulations. In the case of a termination of authorized services prior 
to the expiration date of the authorization, we agree with the 
commenter that a beneficiary should have the right to have these 
benefits continue pending a hearing on the termination. We provide the 
enrollee with 10 days to request to have benefits continue under these 
circumstances, pending an appeal and State fair hearing. We believe 
that this process is fully consistent with the Medicaid statute and 
constitutional requirements, to the extent applicable.
    Comment: Several commenters requested that we delete the 
requirement that the beneficiary must request continued benefits. They 
contended that this requirement was constitutionally defective in that 
they believed continued benefits, without pre-requisites to obtaining 
them, to be required under due process.
    The commenters noted that while the existing regulation at 
Sec. 431.230(b) provides for the possibility of recoupment, benefits 
are continued when an appeal is filed timely. The commenters found no 
reason to change this long-standing rule for beneficiaries who are 
receiving services through an MCO or PIHP. Also, several commenters 
believed that proposed Sec. 438.420(c)(2) made it impossible for 
benefits to continue through a State fair hearing, because a 
beneficiary would have had to file for a State fair hearing before the 
MCO or PIHP had even made its internal appeal decision in order for 
benefits to continue.
    Response: Again, we do not believe we need reach constitutional 
issues here, but that the final rule as proposed is fully consistent 
with any applicable constitutional requirements. It is not true that 
benefits continue under fee-for-service Medicaid ``without pre-
requisites to obtaining them.'' Benefits only continue under fee-for-
service if the beneficiary timely files an appeal. We do not see the 
difference between requiring the filing of an appeal for benefits to 
continue and requiring that as part of such an appeal, the beneficiary 
request that benefits continue. Indeed, given the possibility of 
beneficiary liability in both cases, we believe that the approach in 
this final rule is more protective of beneficiary rights. Under this 
rule, after an action, the beneficiary will be notified both of this 
right to continuation of benefits and the possible liability for 
services if the final decision is not in his or her favor. Thus, we 
believe the general concern about continued benefits not being 
automatic with an appeal is unfounded.

[[Page 41065]]

    However, we agree with the concerns expressed by several 
commenters' that proposed Sec. 438.420(c)(2) could make it impossible 
for benefits to continue through a State fair hearing as proposed. 
Therefore, in response to these comments, we have revised 
Sec. 438.420(c)(2) by requiring beneficiaries to re-request 
continuation of benefits within 10 days after the mailing of the 
internal appeal decision against the enrollee, in order to preserve 
continuation of benefits during a State fair hearing.
10. Effectuation of Reversed Appeal Resolutions (Proposed Sec. 438.424)
    Proposed Sec. 438.424 required that if the MCO, PIHP, or the State 
fair hearing officer reverses a decision to deny, limit, or delay 
services that were not furnished while the appeal was pending, the MCO 
or PIHP must authorize or provide the disputed services promptly, and 
as expeditiously as the enrollee's health condition requires. 
Furthermore, if the MCO, PIHP, or the State fair hearing officer 
reverses a decision to deny authorization of services, and the enrollee 
received the disputed services while the appeal was pending, the MCO, 
PIHP, or the State would be required to pay for those services, in 
accordance with State policy and regulations.
    Comment: Many commenters supported a time frame of no more than 10 
days for an MCO or PIHP to provide or pay for services subsequent to a 
State fair hearing because enrollees with successful appeals should not 
have to adjudicate over the word ``promptly.''
    Response: We disagree that MCOs and PIHPs should be held to a 
Federal timeframe to provide or pay for services, because such a 
timeframe may not be reasonable in the case of the circumstances of all 
States. Consistent with the State fair hearing policy in Sec. 431.246, 
we are requiring that the services are provided promptly, or as 
expeditiously as the enrollee's health condition requires. We believe 
that the States are in the best position to decide whether to require 
specific time limits if they choose.

F. Certifications and Program Integrity (Subpart H)

    Fraud and abuse can negatively affect both the quality of health 
care services rendered to Medicaid beneficiaries, and an MCO's, PIHP's, 
PAHP's, or PCCM's financial viability. Promoting program integrity 
within Medicaid managed care programs can protect against misspent 
Medicaid program funds, and promote quality health care services. 
Proposed subpart H of part 438 contains safeguards against fraud and 
abuse and requires that organizations with Medicaid contracts make a 
commitment to a formal and effective fraud and abuse program.
    In proposed Sec. 438.600 we stated that the statutory basis for 
this subpart is under sections 1902(a)(4) and 1902(a)(19) of the Act. 
These sections require that methods be provided in the State plan for 
the proper and efficient operation of the plan and that safeguards are 
provided consistent with the best interests of the recipients.
    In proposed Sec. 438.602 we provided that the certification and 
program integrity requirements contained in subpart H apply to MCOs and 
PIHPs as a condition for contracting and for receiving payment under 
the Medicaid managed care program.
    In proposed Sec. 438.604 we provided that data, including 
enrollment and encounter data, must be certified and submitted to the 
State, if State payments are based on the data. We also specified that 
other information required by the State and information included in 
contracts, proposals, and other related documents must be certified. We 
also required in Sec. 438.604(b) that the MCO or PIHP certify that they 
are in substantial compliance with the terms of the contract.
    In proposed Sec. 438.606 we required that certifications be 
provided concurrently with the data they relate to, and required that 
certifications be signed by the MCO's or PIHP's Chief Executive 
Officer, Chief Financial Officer, or an individual delegated authority 
to sign for one of these individuals. We proposed that the 
certifications must include attestations to the truthfulness, accuracy, 
and completeness of the data based on best knowledge, information, and 
belief.
    In proposed Sec. 438.608 we required that each MCO or PIHP have 
administrative and management arrangements or procedures, including a 
mandatory compliance plan, designed to guard against fraud and abuse. 
This section also outlined the required elements to be included in the 
arrangements and procedures.
    In this final rule we are making a technical correction to add two 
additional sources of authority. First, we are adding a citation to 
section 1903(m), which establishes conditions for payments to the State 
with respect to contracts with MCOs. Second, we are adding a new 
Sec. 438.610 to incorporate the requirements of section 1932(d)(1) of 
the Act. That provision of the statute is self-implementing, and 
therefore we did not include it in the proposed regulation. However, we 
are including the substance of the requirement in this final regulation 
to make it easier for the public to find all the relevant provisions in 
one place. Under the authority of section 1902(a)(4) of the Act, we are 
also applying these provisions to PIHPs and PAHPs.
    We believe it is in the best interests of State Agencies, MCOs, 
PCCMs, PIHPs, PAHPs, and CMS to significantly aid in the fight against 
fraud and abuse and the requirements of this subpart work to achieve 
that goal.
    Comment: One commenter proposed that we develop a standard form for 
certifications since we are requiring certifications by the Chief 
Executive Officer or the Chief Financial Officer or other person who is 
delegated the authority of the MCO or PIHP to certify data submitted.
    Response: We disagree with the commenter as we wish to maintain 
State flexibility in this area. In Secs. 438.604 and 438.606 
respectively, we provide that data certifications are required if data 
are being used to set payments. We have described the source, content, 
and timing required for certifications. We do not, however, wish to be 
overly prescriptive and therefore, we are not prescribing the format of 
the certifications. If the commenter is requesting a sample format that 
could be used as a model certification form, one can be found on the 
CMS website at http://www.hcfa.gov/medicaid/letters/smd80700.htm in the 
document entitled, ``Guidelines for Addressing Fraud and Abuse in 
Medicaid Managed Care'' at appendix 2.
    Comment: One commenter suggested that it is unclear as to when 
certifications are required and if the certifications of data to set 
payments is meant to reference payments under the current contract year 
or for proposed contract years. The commenter also believes that the 
requirements for certifications for substantial compliance with the 
terms of the contract are unclear.
    Response: In Sec. 438.604(a) we require that MCOs and PIHPs provide 
certification of data requested by the State if payments to the MCOs 
and PIHPs are based on the data submitted, and in Sec. 438.606(c) we 
require that MCOs and PIHPs submit the certification concurrently with 
the data. This applies regardless of whether the data are used for 
setting payments for current contract years, or for other contract 
years. If data are not being used to set payments, then certifications 
would not be required.
    We agree with the commenter that clarification is necessary 
regarding

[[Page 41066]]

certification for substantial compliance with the terms of the 
contract. We previously proposed, in Secs. 438.604(b), that an MCO or 
PIHP must certify that it is in substantial compliance with the terms 
of its contract.
    We understand the commenter's confusion regarding this requirement 
since the statute and regulations already require States to monitor 
compliance with contracts executed under this rule and provides 
sanctions to be used where certain requirements are not met. Further we 
would expect to require corrective action plans in situations in which 
a State is found to be out of compliance with these rules. 
Consequently, we believe that the requirements on States, MCOs, PIHPs, 
PAHPs, and PCCMs contained in Sec. 438.6 and elsewhere in this rule and 
the mechanisms for monitoring and enforcement are sufficiently clear 
that the requirements for ``substantial compliance'' in Secs. 438.604 
and 438.606 are unnecessary and we have deleted them from this subpart. 
Hence renumbering has taken place in these sections.
    Comment: Several commenters believe that subcontractor 
certifications are necessary since MCOs could delegate functions to 
subcontractors including physicians, hospitals, and clinics as well as 
to administrative service organizations that collect data from network 
providers and report the data to the MCO and the State. The commenters 
argued that without accurate and complete data, States may not have the 
information necessary to set actuarially sound capitation rates. 
Commenters expressed opposing views on this issue with one commenter 
believing that this requirement would be burdensome to plans and 
providers because of the complexities involved in obtaining provider 
certifications. Other commenters stated that subcontractor 
certifications are necessary to protect CMS and others against being 
defrauded or paying an MCO more than the amount to which it should be 
entitled. We received further suggestions that not having subcontractor 
requirements could undermine federal enforcement of the False Claims 
Act.
    Response: We have considered the commenters' suggestions and we 
agree that subcontractors play an important role in an MCO's network. 
We require MCOs and PIHPs to certify all data they submit, which would 
include any data produced by subcontractors. We believe that MCOs and 
PIHPs should be held accountable for their subcontractors and their 
subcontractors' data. We believe that States must be able to rely on 
the MCOs' and PIHPs' certifications if they are to combat potential 
fraud and abuse, and continue to set capitation payments to MCOs and 
PIHPs appropriately. Therefore, we are only requiring in this subpart 
that data certifications be required of MCOs and PIHPs and not of their 
subcontractors. It is up to the State or the MCO or PIHP to determine 
whether subcontractor data is accurate. If data is not used to set 
payments, certifications by MCOs and PIHPs are not necessary.
    Comment: We received opposing views about whether PAHPs should be 
exempt from the program integrity protections outlined in this subpart. 
One commenter suggested that PAHPs should be required to have fraud and 
abuse plans and data certifications to justify State payments, since 
fraud can be significant in ambulatory plans also. In contrast, another 
commenter believes we should require that fraud and abuse plans be 
implemented only by entities with 10,000 enrollees or more.
    Response: We clearly intend that PAHPs should work to combat 
against fraud and abuse. However, we are recognizing that it may not be 
appropriate to require those organizations to implement formal fraud 
and abuse plans, given that they generally have relatively few 
enrollees and provide a relatively narrow range of services. We believe 
that the benefits of requiring PAHPs to comply with the formal measures 
of subpart H in order to protect against fraud and abuse is outweighed 
by the level of burden placed on these organizations, which could place 
some plans at financial risk.
    Consequently, we are only requiring that Secs. 438.600 through 
438.610 apply to MCOs, to PIHPs, and only to PAHPs and PCCMs where 
specifically noted. Typically, MCOs and PIHPs, which include at least 
some inpatient hospital or institutional care services, are larger, 
more complex organizations, and will in most cases, have higher 
enrollment levels.
    We believe the more comprehensive plans (such as, MCOs and PIHPs) 
are likely to need to provide for more sophisticated methods for 
combating fraud and abuse and may also need to provide for compliance 
officers as part of their staff. This is because they are more complex 
organizations, and need to contract with a large number, and greater 
variety of providers. These plans typically serve more enrollees and 
provide more services. Furthermore, more complex organizations are 
likelier to include administrative staff that collect and report data, 
and that need more in-depth monitoring. We disagree with the commenter 
that the applicability of these requirements should depend on the 
PAHP's enrollment level, because enrollment can fluctuate, and we 
believe that approach would lead to arbitrary results.
    Comment: A commenter suggested that we should not mandate the use 
of a compliance plan developed by a federal enforcement agency, that 
is, the OIG, that was intended for M+C plans.
    Response: We agree with the commenter that to require the use of 
guidelines developed for a national program (such as, M+C) by a Federal 
enforcement agency would be overly prescriptive and could impede State 
flexibility in combating fraud and abuse. In Sec. 438.608 we require 
MCOs and PIHPs to have administrative and management procedures, 
including a mandatory compliance plan, designed to guard against fraud 
and abuse; however, we have not mandated the use of the compliance plan 
developed by the OIG. The commenter is correct that the compliance plan 
developed by the OIG is intended for M+C plans and not for Medicaid 
managed care plans. Further, we agree that it is important for States 
to have flexibility in combating fraud and abuse in the Medicaid 
program and we believe States can maintain that flexibility by 
developing their own compliance plans.

G. Sanctions (Subpart I)

    Section 1932(e)(1) of the Act requires, as a condition for entering 
into or renewing contracts under section 1903(m) of the Act, that State 
agencies establish intermediate sanctions that the State agency may 
impose on an MCO that commits one of six specified offenses: (1) 
Failing substantially to provide medically necessary items and services 
that are required by law, or are required under the MCO's contract with 
the State; (2) imposing premiums or charges in excess of those 
permitted under title XIX; (3) discriminating among enrollees based on 
health status or requirements for health care services; (4) 
misrepresenting or falsifying information; and (5) failing to comply 
with statutory requirements that apply to physician incentive plans. 
Under section 1932(e)(1)(A) a State may also impose sanctions against 
MCOs and PCCMs for distributing, directly or through an agent or 
contractor, marketing materials that contain false or materially 
misleading information. Proposed Sec. 438.700 contained the above 
provisions from section 1932(e)(1) of the Act.
    In section 1932(e)(2) of the Act, Congress described the types of 
sanction authority that would satisfy the State's obligation to have 
intermediate

[[Page 41067]]

sanctions. For the most part, the State has discretion to choose which 
of these sanctions to use. However, the State is required to have 
authority to appoint temporary management under section 1932(e)(2)(B), 
and to permit individuals to terminate without cause under section 
1932(e)(2)(C). This is because section 1932(e)(3) requires the State to 
impose at least those two sanctions if an MCO repeatedly fails to meet 
the requirements of sections 1903(m) or 1932. The other provisions that 
would clearly satisfy the State's obligation to have intermediate 
sanction authority include authority to impose civil money penalties 
for specified violations, up to specified maximum amounts, and to 
suspend enrollment or payment for new enrollees. These provisions were 
reflected in proposed Sec. 438.702(a).
    Under section 1932(e)(2)(B), one of the sanctions that would 
satisfy section 1932(e)(1) is for the State to oversee the operation of 
the MCO ``upon a finding by the State that there is continued egregious 
behavior by the organization or there is a substantial risk to the 
health of enrollees * * * or to assure the health of the organization's 
enrollees.'' Given the extraordinary nature of the sanction of taking 
over management of an MCO, we proposed in Sec. 438.706 that this 
sanction be imposed only when those egregious circumstances exist.
    The requirement in section 1932(e)(1), that the State have 
intermediate sanction authority as a condition of contracting, only 
applies to contracts with MCOs. It does not place a similar requirement 
on States with respect to PCCMs. However, subsections (e)(1)(A) and 
(e)(2)(D) and (E) refer to ``managed care entities,'' and thus envision 
that the State would choose to apply those sanctions to PCCMs as well.
    Section 1932(e)(4) of the Act authorizes State agencies to 
terminate the contract of any MCO or PCCM that fails to meet the 
requirements in sections 1932, 1903(m), or 1905(t) of the Act. This 
provision was included in proposed Sec. 438.708. However, if the State 
chooses that remedy, under section 1932(e)(4)(B) the State is required 
to provide a hearing before terminating a contract. Proposed 
Sec. 438.710 set forth requirements that apply to the notice to the MCO 
or PCCM, and to the pre-termination hearing. Under section 
1932(e)(4)(C), enrollees may be notified of their right to disenroll 
immediately without cause in the case of any entity subject to a 
termination hearing. Proposed Sec. 438.722 described the provisions for 
disenrollment during the termination hearing process. Finally, in 
Sec. 438.724, we proposed that States be required to notify CMS 
whenever it imposes or lifts a sanction.
    Under section 1903(m)(5) of the Act, CMS has its own direct 
authority to impose sanctions when Medicaid-contracting MCOs commit 
offenses that are essentially the same as those identified in section 
1932(e)(1) of the Act. Section 1903(m)(5) is currently implemented by 
regulations codified at 42 CFR Sec. 434.67. We proposed to move those 
regulations to proposed Sec. 438.730. However, we inadvertently made 
substantive changes, including omission of parts of the original 
regulation text dealing with denial of payment, and expanding the State 
plan requirement previously found in Sec. 434.67(i). The final rule 
conforms the text of Secs. 438.726 and 438.730 to the text of 
Sec. 434.67. We proposed in Sec. 438.726 to broaden the State plan 
requirements to include a plan to monitor for violations that involve 
the actions and failures to act that are specified in part 438 and to 
implement the provisions of part 438. We received no comments on this 
change and will maintain as it was proposed in this final rule. It also 
incorporates into Sec. 438.726 the text of the existing Sec. 434.22, 
which was cross-referenced by Sec. 434.67(e), and which was 
inadvertently eliminated in the proposed changes to the regulation. 
Finally, there were certain ambiguities in the original regulation text 
which we are clarifying. In particular, Sec. 434.67(c) was not clear 
with respect to who would forward the notice of sanction to the OIG at 
the same time it was sent to the MCO. We have clarified that it is sent 
by CMS.
    Comment: One commenter requested clarification as to which 
sanctions were mandatory and which were discretionary.
    Response: Section 1932(e)(1) of the Act requires, as a condition 
for entering into or renewing contracts under section 1903(m) of the 
Act, that State agencies must establish intermediate sanctions that the 
agency may impose on an MCO that commits one of the specified offenses 
in Sec. 438.700(b). The type of sanction and the discretion to apply 
sanctions is generally up to the State agency. However, if it finds 
that an MCO has repeatedly failed to meet substantive requirements in 
section 1903(m) or section 1932 of the Act, or this Part, then the 
State must impose temporary management, must permit beneficiaries to 
disenroll without cause, and must notify them of the right to 
disenroll. See section 1932(e)(3) of the Act, and proposed 
Secs. 438.706(b) and 438.702(a)(3).
    Comment: Many commenters suggested that PIHPs and PAHPs be subject 
to the same sanctioning as MCOs.
    Response: We disagree with the suggestion. The PIHP and PAHP 
regulations are based on the authority under section 1902(a)(4) of the 
Act to provide for methods of administration that are ``found by the 
Secretary to be necessary for * * * proper and efficient 
administration.'' While we believe this provides the authority to 
establish requirements that apply to PIHPs and PAHPs, we do not believe 
it provides the authority to promulgate regulations that would 
authorize a State to impose civil money penalties, or other sanctions 
that are provided for by the Congress only in the case of MCOs. 
However, States may cover PIHPs and PAHPs under their own State 
sanction laws, and we encourage States to do so whenever they believe 
it necessary.
    Comment: A commenter requested clarification of whether the 
requirement for a pre-termination hearing in proposed Sec. 438.710(b) 
applies if the State is terminating an MCO or PCCM contract under State 
authority and not the authority in Sec. 438.708.
    Response: A State that is not relying on the authority in 
Sec. 438.708 to terminate an MCO or PCCM contract should follow only 
the State procedures related to the authority they are exercising to 
terminate the MCO or PCCM contract. To the extent the State is relying 
on the authority under Sec. 438.708, the State must meet the 
requirements for a pre-termination hearing. The State may exercise the 
disenrollment options provided in Sec. 438.722 regardless of the 
underlying authority on which they are basing termination.
    Comment: One commenter was unclear about whether the notice to CMS 
under proposed Sec. 438.724(a) was required only for sanctions 
specified in Sec. 438.702(a) or if it also applied to State operated 
penalty systems such as a progressive penalty point accumulation 
system.
    Response: Under Sec. 438.724, notice to CMS is only required when a 
State imposes an intermediate sanction for one of the violations in 
Sec. 438.700(b). To the extent the State has sanctions that it imposes 
for additional violations, notice to CMS is not required, but 
encouraged. We have added clarifying language to the regulation text.
    Comment: Many commenters suggested notification to CMS was 
appropriate but that beneficiaries have the right to know when a plan 
has been sanctioned and that publication of the notice should be 
required in the

[[Page 41068]]

regulations. These commenters recommended that the State publish a 
notice describing the intermediate sanction imposed, explaining the 
reasons for the sanction and specifying the amount of any civil money 
penalty. Further, this notice should be published no later than 30 days 
after the State imposes the sanction, and the notice should be 
published in the newspaper of widest circulation in each city within 
the MCO's service area that has a population of 50,000 or more or in 
the newspaper of widest circulation in the MCO's service area, if there 
is no city with a population of 50,000 or more in that area. Several 
other commenters supported limiting the notification requirements to 
notifying CMS noting that publication is an unnecessary expense and 
inconsistent with current insurance practices.
    Response: We agree that widespread publication would be an 
unnecessary expense. We also believe requiring public publication could 
discourage a State from imposing sanctions and could unnecessarily 
alarm enrollees. In addition, a State is not prohibited from publishing 
sanction information.
    Comment: One commenter requested that we clarify in proposed 
Sec. 438.726 that States can delegate certain functions to other 
entities as an acceptable way of accomplishing the goal of enrollee 
protection.
    Response: The State agency is ultimately responsible for 
implementation of the provisions of this subpart but may delegate 
appropriate functions to other entities as part of their process.
    Comment: One commenter indicated that it is crucial that the 
State's ability to delegate certain functions to other entities be 
explicitly recognized as an acceptable method for accomplishing the 
goal of enrollee protection through the use of sanctions and temporary 
management.
    Response: We believe that the regulation, as written, maintains the 
State's ability to delegate functions. We recognize that with the 
imposition of temporary management, the State may need to delegate 
activities to another department within the State. We have maintained 
flexibility for States to determine what best fits their needs.

H. Conditions for Federal Financial Participation (Subpart J)

    Subpart J of the proposed rule contains rules regarding the 
availability of Federal financial participation (FFP) in MCO contracts. 
In addition to setting forth recodified versions of existing 
regulations governing eligibility for FFP currently set forth in part 
434, subpart F, the regulations in proposed subpart J reflected new 
provisions in the BBA affecting FFP (such as., the new restrictions on 
FFP in enrollment broker contracts), and set forth a proposed new 
limitation on FFP related to the actuarial soundness requirements in 
proposed Sec. 438.6(c).
1. Basic Requirements (Proposed Sec. 438.802)
    Proposed Sec. 438.802 was based largely on the existing 
Sec. 434.70, and provided that FFP is only available in expenditures 
under MCO contracts for periods for which (1) the contract is in effect 
and meets specified requirements, and (2) the MCO, its subcontractors, 
and the State, are in substantial compliance with specified contract 
requirements and the requirements in part 438.
    Comment: One commenter requested that we clarify what we meant by 
the requirement in Sec. 438.802 that the MCO and its subcontractors be 
in ``substantial compliance'' with physician incentive plan 
requirements and that the MCO and the State be in ``substantial 
compliance'' with the contract and these regulations, in order to 
qualify for FFP.
    Response: Proposed Sec. 438.802 was based on the existing 
Sec. 434.70, which, in paragraph (b), specifically provided that FFP 
may be withheld for any period the MCO fails to comply with the 
physician incentive requirements, or the MCO or the State fail to 
comply with the terms of the contract between them or the provisions of 
this regulation. We understand the commenter's confusion regarding this 
requirement since this rule already requires states to monitor 
compliance with this rule and contracts executed under this rule and 
provides sanctions to be used where certain requirements are not met. 
Further we would expect to initiate penalties such as corrective action 
plans in these situations where a state is found to be out of 
compliance with these rules. Finally, in considering the commenter's 
question, we realize the difficulty in issuing useful guidance as to 
what constitutes ``substantial compliance'' for purposes of putting FFP 
at risk. Because we believe that the requirements on States and MCOs 
contained in Sec. 438.6 and elsewhere in this rule, and the mechanisms 
for monitoring and enforcement are sufficiently clear, the requirement 
for ``substantial compliance'' in Sec. 438.802 is potentially confusing 
and unnecessary, we have deleted it from this section.
2. Prior Approval (Proposed Sec. 438.806)
    Proposed Sec. 438.806 was based on Sec. 434.71 (as affected by new 
threshold amounts for prior approval enacted in section 4708(a) of the 
BBA), and provided that FFP was not available in expenditures under 
contracts involving over a specified financial amount ($1,000,000 for 
1998, adjusted by the consumer price index for future years) unless the 
contracts were ``prior approved'' by CMS.
    Comment: One commenter inquired whether Sec. 438.806 precludes the 
availability of FFP for a period that a risk contract was under review 
by CMS, and whether the prior approval requirement applied to all MCOs 
or just new MCOs. If applicable to all MCOs, the commenter asked 
whether the FFP limitation applied to the entire amount paid or just 
the marginal difference from the previously approved contract amount?
    Response: The requirement for prior approval of a new contract or 
new contract amendment applies to all comprehensive risk contracts, 
whether with a new or currently contracting MCO. FFP is not available 
for contracts that CMS has not approved. However, once we approve a 
contract, FFP is available for any period during which an approvable 
contract was under review. The limitation on FFP in this provision must 
be applied to the entire contract. FFP is not available for any 
portions of the contract unless it is approved.
    Comment: One commenter questioned whether the requirement in 
Sec. 438.806(a)(2) meant that a State would lose FFP should it not 
reach its quality strategy goals.
    Response: Section 438.806(a)(2) requires that the written contract 
with the MCO meets the requirements specified as a condition for FFP. 
The contract would not be approved if it did not meet all the 
requirements of the law and regulations, including establishing the 
quality assessment and performance improvement program required by 
Sec. 438.240. However, this is different from the issue of the MCO's or 
State's performance in implementing this contractually required 
program. A failure on the part of an MCO or State to meet a particular 
quality goal would not apply to the conditions in Sec. 438.806(a)(2).
    Comment: Several commenters pointed out that the reference in 
Sec. 438.806(a)(1) to entities described in Sec. 438.6 (a)(2) through 
(a)(5) should instead refer to Sec. 438.6(b)(2) through (b)(5).
    Response: We appreciate the commenters' assistance and have made 
the appropriate changes.

[[Page 41069]]

3. Exclusion of Entities (Proposed Sec. 438.808)
    Proposed Sec. 438.808 reflects the limitation on FFP in section 
1902(p)(2) of the Act, under which FFP in payments to an MCO is 
conditioned on the State excluding from participation as an MCO any 
entity that could be excluded from Medicare and Medicaid under section 
1128(b)(8) of the Act, that--
     Has substantial contractual relationship with an entity 
described in section 1128(b)(8)(B) of the Act.
     Employs or contracts with individuals excluded from 
Medicaid. We received no comments on this section.
4. Expenditures for Enrollment Broker Services (Proposed Sec. 438.810)
    Proposed Sec. 438.810 reflects the conditions on FFP for enrollment 
broker services set forth in section 1903(b)(4) of the Act, which was 
added by section 4707(b) of the BBA. This section permits FFP in State 
expenditures for the use of enrollment brokers only if the following 
conditions are met:
     The broker is independent of any managed care entity or 
health care provider that furnishes services in the State in which the 
broker provides enrollment services (regardless of whether the entity 
or provider participates in Medicaid).
     No person who is the owner, employee, or consultant of the 
broker or has any contract with the broker:
     Has any direct or indirect financial interest in any 
managed care entity or health care provider that furnishes services in 
the State in which the broker provides enrollment services.
     Has been excluded from participation under title XVIII or 
XIX of the Act.
     Has been debarred by any Federal agency.
     Has been, or is now, subject to civil monetary penalties 
under the Act.
    In addition to reflecting the above statutory requirements from 
section 1903(b)(4), proposed Sec. 438.812 included the following 
proposed requirement:
     The initial contract or memorandum of agreement (MOA) or 
memorandum of understanding (MOU) for services performed by the broker 
must be reviewed and approved by CMS before the effective date of the 
contract or MOA.
    Comment: One commenter felt that the proposed regulations were too 
broad for application in many States, and that States thus were 
required to create standards to ensure protective measures to support 
independent operations of enrollment brokers.
    Response: We disagree with the commenter that the regulations are 
too broad. We believe that the language in section 1903(b)(4) of the 
Act, reflected in Sec. 438.810, is very specific about limitations as 
to who can serve as an enrollment broker. A broker either is 
independent of ``any'' MCO, PIHP, or PCCM and of ``any health care 
providers'' that provide services in the State, or it is not. 
Similarly, a broker either does or does not have an owner, employee, 
consultant or contract with a person who (1) has a direct or indirect 
interest in an MCO, PIHP, PCCM or provider, or (2) has been excluded, 
debarred or subject to civil money penalties. While these standards are 
``broad'' in their reach, this was a decision made by Congress. We do 
not believe that significant additional clarification is required. 
Moreover, Sec. 438.810 does contain some additional clarification, in 
that paragraph (a) contains definitions of ``choice counseling,'' 
``enrollment activities,'' ``enrollment broker,'' and ``enrollment 
services.'' It is not clear what additional clarification the commenter 
thinks would be needed. We also note that States may set rules more 
stringent than the Federal rules if they wish.
    Comment: One commenter questioned whether there was a conflict 
between Sec. 438.208(c), which provides for health screening 
assessments by an enrollment broker, and Sec. 438.810(b)(1), which 
requires that enrollment brokers be independent.
    Response: There is no conflict between these two sections. The 
independence of enrollment brokers from MCOs, PIHPs, PCCMs and 
providers of services is a separate issue from the activities of the 
enrollment broker in assessing and screening special needs individuals. 
The latter activities are performed by the broker for the State, as 
part of its activities as an enrollment broker, and not as the agents 
of an MCO, PIHP, PCCM or provider.
    Comment: A commenter asked whether it was CMS' intent to exclude 
all potential enrollment brokers who have any relationship with a 
health care provider, whether or not that health care provider serves 
the Medicaid population.
    Response: CMS is bound by the statutory provision on enrollment 
brokers, and section 1903(b)(4)(A) of the Act specifically prohibits 
the availability of FFP for enrollment brokers who are not independent 
of any health care providers, ``whether or not any such provider 
participates in the State plan under this title.'' Congress presumably 
believed that such independence was necessary to ensure that the 
Medicaid enrollment process was free from even potential bias.
    Comment: Several commenters noted that the independence requirement 
could prevent employees of a county from serving as enrollment brokers 
that operates an MCO, PIHP, or PCCM, or provides services or is 
affiliated with providers, from serving as enrollment brokers, and 
contended that this result would be detrimental to the enrollment 
process. Commenters also felt that MCOs should be able to assist in 
enrollments. One commenter believed that it was not feasible for States 
to rely only upon community-based or non-profit organizations to 
process enrollments.
    Response: First, with respect to the comments on MCO involvement in 
enrollment, States may permit MCOs to process enrollments in their own 
plans. This provision only involves a State contract with an enrollment 
``broker'' which processes enrollments in multiple plans. With respect 
to the issue of employees of counties that operate managed care 
entities or provide health care services, we believe that such an 
employee would not meet the statutory standard of being ``independent'' 
of such providers, and that Congress has prohibited them from serving 
as enrollment brokers. An enrollment broker might be a public or quasi-
public entity with a contract or MOA/MOU with the State or county, as 
long as the entity does not furnish health care services in the State. 
For example, a State may not claim FFP for a contract with, or have an 
MOU with, a county health department to do managed care enrollment or 
choice counseling because the health department provides health 
services. A community organization that provides health services in the 
State, for example, an organization providing health care to homeless 
individuals, may contract or subcontract to perform outreach and 
education, but not enrollment and choice counseling functions covered 
by the enrollment broker provisions in section 1903(b)(4).
    Neither the statute nor these rules specifically address the use of 
non-profit or community-based organizations to fulfill the enrollment 
broker function, but these entities would be subject to the same 
requirements for independence and prohibitions on conflict of interest 
as any other prospective brokers. We note that the regulations also 
would permit for-profit enrollment brokers if they met the conditions 
in Sec. 438.810.

[[Page 41070]]

5. Costs Under Risk and Nonrisk Contracts (Proposed Sec. 438.812)
    Proposed Sec. 438.812 was transferred in its entirety from previous 
Secs. 434.74 and 434.75. It provides that States receive Federal 
matching for all costs covered under a risk contract at the medical 
assistance rate, while under a non-risk contract, only the costs of 
medical services are matched as medical assistance, while all other 
costs are matched at the administrative rate. We received no comments 
on this provision.
6. Limit on Payments in Excess of Capitation Rates (Proposed 
Sec. 438.814)
    Section 438.814 proposed limitations on the availability of FFP in 
contracts, which contain incentive arrangement or ``risk corridors.'' 
As described in proposed Sec. 438.6(c)(5) on rate setting for risk 
contracts, under this proposal, FFP was only available in contract 
payments to the extent they did not exceed 105 percent of the payment 
rate determined to be ``actuarially sound.'' The theory for this 
limitation was that rates too far in excess of those established to be 
actuarially sound were not actuarially sound, and therefore did not 
meet the condition for FFP in section 1903(m)(2)(A)(iii).
    Comment: Many commenters disagreed with the proposal to limit 
Federal matching at 105 percent of approved capitation rates in 
contracts with risk corridors. Some commenters questioned the rationale 
for setting the limit at 105 percent, while others questioned how it 
was determined that this limit would be appropriate for every 
contracting situation, State and contractor. Most commenters felt that 
the limit on risk corridors was inappropriate and arbitrary; would 
discourage States from using this mechanism, which the commenters felt 
could be an effective tool in setting rates for populations with little 
or no managed care experience, including the chronically ill and 
disabled; would prevent the State and Federal governments from sharing 
in profits and being protected from overpayments; and would discourage 
MCOs from taking the risk to cover these populations.
    Other commenters pointed out that risk corridors are an important 
mechanism to address unforeseen costs to MCOs during contract periods 
from these factors as changes in case mix, enrollment patterns, 
utilization patterns, or provider networks, or coverage of populations 
with little or no managed care history. A 105 percent cap on these 
arrangements constrains States' flexibility to effectively address 
these issues without administratively cumbersome mid-year rate 
adjustments and could, in the commenters' view, result in over-
projection of capitation rates in order to remain under the ceiling. 
Commenters suggested CMS either: (1) Accept an actuarial certification 
that the amount paid to an MCO after settlement is actuarially sound, 
and permit FFP for that entire amount; (2) permit a ``good cause'' 
exception to the 105 percent limit; or (3) or raise the limit to 110 
percent. One commenter supported CMS' acknowledgment of risk sharing 
and risk corridors as acceptable payment mechanisms up to 105 percent 
of capitation rates.
    Response: We understand the commenters concerns and upon 
consideration of these comments, agree that the 105 percent limit on 
FFP on contracts, or portions of contracts with risk corridors, is too 
restrictive to permit the continued use of this important risk sharing 
mechanism. We agree that is inappropriate to place a specific 
percentage limitation on FFP where risk corridors are used in a 
contract. The purpose of this mechanism is to share both the risk and 
the profits between the contractor and the State (and the Federal 
government by virtue of its matching of State expenditures.) One 
potential risk that can be addressed in risk corridors is the risk of 
fluctuations in utilization based on the changing demographics of a 
population (such as, the high costs of an increased percentage of 
disabled enrollees.) A fixed percentage limit does not take such risks 
into account. In considering the commenters' concerns, we have 
determined that a more appropriate outer limit on the actuarial 
soundness of payments under a risk corridor methodology would be a 
limitation based on what Medicaid would spend for the specific services 
utilized, plus an amount to cover the managed care plan's reasonable 
administrative costs. Such a limit would be similar to the ``non-risk 
upper payment limit'' in Sec. 447.362, except for the recognition of 
administrative costs. The reason we did not simply adopt the rule in 
Sec. 447.362 is because the amount allocable to administrative costs 
under that section of the regulations is not based on a managed care 
entity's reasonable administrative costs, but rather on the amount the 
Medicaid agency ``saves'' in its administrative costs by not having to 
pay fee-for-service claims for the beneficiaries enrolled in the 
managed care plan. We believe this amount is likely to be much lower 
than even the administrative costs of a well run managed care 
organization.
    Thus, we are revising the requirement in proposed Sec. 438.814 to 
impose an upper limit on payments under risk corridors that is based on 
``what Medicaid would have paid on a fee for service basis for the 
services actually furnished to recipients'' plus an allowance for the 
managed care plan's reasonable actual administrative costs. This limit 
reflects the fact that a risk corridor extended to its ultimate extreme 
would become a nonrisk contract, and that the rule governing FFP in 
nonrisk contracts (with the modification noted) is the most logical 
limit to apply. We are also moving this requirement to Sec. 438.6(c)(5) 
in order to have all of the payment provisions in one subpart of this 
rule.
    Comment: Some commenters also believe the 105 percent limit was 
arbitrary and inappropriate for incentive arrangements, and could 
discourage programs intended to achieve quality-related goals (such as 
increases in EPSDT services and meeting quality improvement targets).
    Response: We do not agree with commenters that the 105 percent 
limit is inappropriate and arbitrary for, and would discourage the use 
of, incentive arrangements. Under the new payment rules in 
Sec. 438.6(c), capitation rates are to be established to reflect the 
level of State plan services to be delivered under the contract. 
Further, States are free to combine financial withholds and incentives 
for such things as quality improvement targets. Thus, we do not believe 
it is necessary to establish financial incentives above a level at 
which FFP would be available under this provision. As with the 
provision on risk corridors, we are moving this provision to 
Sec. 438.6(c)(5).
    Comment: One commenter asked that CMS define the term ``risk 
corridors'' as used in this section and in Sec. 438.6(c).
    Response: A risk corridor is a risk sharing mechanism in which 
States and MCOs share in both profits and losses under the contract 
outside of predetermined threshold amount. The amount of risk shared 
under this arrangement is usually graduated so that after an initial 
corridor in which the MCO is responsible for all losses or retains all 
profits, the State contributes a portion toward any additional losses, 
and receives a portion of any additional profits.
    Comment: Several commenters asked whether this provision places a 
limit on any and all payments and payment mechanisms that are in excess 
of the capitation rate, or whether there are any

[[Page 41071]]

payment mechanisms which would be excepted from the cap?
    Response: Section 438.6(c) sets forth the requirements for payments 
under all risk contracts, and requires that these payments be 
identified and computed on an actuarially sound basis. This requirement 
applies to reinsurance, stop-loss limits, or other risk sharing 
mechanisms. We believe that amounts payable under these other 
arrangements (except for incentives and risk corridors) will be offset 
by actuarially determined amounts in determining the capitation rate to 
be paid. Thus, the limit in any of these arrangements will be 
predetermined based on the amount of the offset or deduction from the 
capitation rate. Since the potential payments under these risk-sharing 
mechanisms are determined in this manner, the limits in this provision 
do not apply. Section 438.6(c) does not authorize any other payment in 
excess of the capitation rates.
    Comment: Several commenters asked that CMS define what is included 
in the term ``aggregate amount of approved capitation payments'' as 
used in this section. Specifically, the commenters wanted to know 
whether this includes administration, profit and other expenditures. 
One commenter asked whether this provision applies when a State 
withholds a percentage of approved capitation rates and later 
distributes the pool of withheld funds based on some type of risk 
arrangement, and whether the amount of funds withheld would be 
considered part of the approved capitation amount, or would be capped 
under this provision.
    Response: The term ``aggregate amount of approved capitation 
payments'' as used in this section refers to the total amount of the 
capitation rates approved under the contract that are attributable to 
the individuals and services covered by the incentive arrangement. This 
would include portions of the rate intended for administration, profit 
or any other purposes and would be determined prior to any withhold 
amount being deducted. Further, the 105 percent limit applies only to 
those portions of a contract, which apply to the individuals or 
services, governed by the incentive arrangement. For example, if the 
contract includes provisions to withhold a portion of the capitation 
payments for not meeting targets for initial screenings for enrollees, 
neither the payments nor any withheld amounts for these services would 
be part of the calculation for determining any incentive payments due 
the plan under a separate contract provision for meeting targets for 
childhood immunizations. To further clarify this distinction, we have 
eliminated the provision in Sec. 438.6(c)(5)(iii)(C) that required 
contracts with incentive arrangements to have withhold penalties for 
targets not met (proposed paragraphs (D), (E) and (F) have been 
redesignated as paragraphs (C)).
    Comment: One commenter questioned whether the 105 percent limit is 
to be applied in the aggregate, or is it applicable to each individual 
rating cell.
    Response: This would be determined by the specific arrangement 
under the contract. In most contracts, we would expect a target 
established for specific populations who may comprise their own rate 
cells under the contract. In this case, the limit would have to be 
applied to each individual or groups of cells covered by the 
arrangement. If the incentive applies to the entire population covered 
under the contract, the limit would be applied in the aggregate.

I. Revisions to Parts 435, 440, and 447; Miscellaneous Comments

    In addition to the provisions set forth in the new part 438 and the 
fair hearing provisions in part 431 discussed in section II. E. of this 
preamble, the proposed rule contained amendments to parts 435, 440, and 
447 that we discuss below. These provisions included amendments to 
Secs. 435.212 and 435.326 to reflect the new terminology adopted by the 
BBA. We also proposed a new Sec. 440.168 in part 440 to include a 
description of primary care case management services. Amendments to 
part 447 not already addressed above include a new Sec. 447.46(f) 
implementing the timely claims payment requirements in section 1932(f), 
and a new Sec. 447.60 regulating MCO cost-sharing, which was made 
permissible under BBA amendments to section 1916 of the Act. In this 
section, we discuss the comments we received on the above regulations. 
We received no comments on the revisions to Sec. 447.60. In this 
section, we also address miscellaneous comments that did not relate to 
a specific section of the proposed regulations.
1. Guaranteed Eligibility (Proposed Sec. 435.212)
    Section 435.212 was revised in the proposed rule to implement 
section 1902(e)(2) of the Social Security Act. This change will permit 
State agencies, at their option, to provide for a minimum enrollment 
period of up to 6 months for individuals enrolled in a PCCM or any MCO. 
Previously, this option was only available to enrollees of Federally 
qualified HMOs.
    Comment: One commenter expressed support for this provision.
    Response: We thank the commenter for the support.
2. Definition of PCCM Services (Proposed Sec. 440.168)
    Section 4702 of the BBA added PCCM services to the list of optional 
Medicaid services in section 1905(a) of the Act. The BBA also added 
section 1905(t) to the Act. This subsection defines PCCM services, 
identifies who may provide them, and sets forth requirements for 
contracts between PCCMs and the State agency. This means that in 
addition to contracting with PCCMs under a section 1915(b) waiver 
program or section 1115 demonstration project, or under the new 
authority in section 1932(a)(1) to mandate managed care enrollment, 
States may add PCCMs as an optional State plan service. Regardless of 
the vehicle used, proposed Sec. 438.6(k) set forth the minimum contract 
requirements States must have with their primary care case managers.
    Proposed Sec. 440.168(a), implementing section 1905(t)(1) of the 
Act, defined ``primary care case management services'' as case 
management related services that include locating, coordinating and 
monitoring health care services, and that are provided under a contract 
between the State and a primary care case manager. A PCCM was defined 
as including either (1) an individual physician (or, at State option, a 
physician assistant, nurse practitioner, or certified nurse-midwife), 
or (2) a group practice or entity that employs or arranges with 
physicians to furnish services. Proposed Sec. 440.168(b) provided that 
PCCM services may be offered as a voluntary option under the State 
plan, or on a mandatory basis under section 1932(a)(1) or under a 
section 1115 or section 1915(b) waiver.
    Comment: One commenter disagreed with the language designating it a 
``State's Option'' to qualify nurse practitioners as PCCM providers. 
The commenter believes nurse practitioners should be recognized as PCCM 
providers by the Medicaid program. It is critical that CMS ensure that 
Medicaid beneficiaries have the option to choose a nurse practitioner 
as their PCCM provider.
    Response: The definition of a primary care case manager in 
Sec. 438.2 of this part mirrors the statutory language in section 
1905(t)(2) of the Act. The statute is clear that there are two 
categories of PCCMs. The first category is PCCMs that are physicians or 
physician groups, or that employ or arrange for the provision of 
physician services. The definition of a physician does not include a 
nurse

[[Page 41072]]

practitioner. (See sections 1905(a)(5)(A) and 1861(r)(1) of the Act.) 
The second category is non-physicians who are included as PCCMs ``at 
State option.'' The statute expressly provides for nurse practitioners 
to be PCCMs ``at State option.''
3. Timely Claims Payment by MCOs (Proposed Sec. 447.46)
    Section 1932(f) of the Act specifies that contracts with MCOs under 
section 1903(m) must provide that, unless an alternative arrangement is 
agreed to, payment to health care providers for items and services 
covered under the contract must be made on a timely basis, consistent 
with the claims payment procedures described under section 
1902(a)(37)(A) of the Act. Section 1902(a)(37)(A) of the Act requires 
that 90 percent of claims for payment (for which no further written 
information or substantiation is required in order to make payment) 
made for covered services provided by health care providers are paid 
within 30 days of receipt, and that 99 percent of the claims are paid 
within 90 days of receipt. These requirements were included in proposed 
Sec. 447.46. We received no comments on this section.
4. Miscellaneous Preamble Comments
a. Effective Date of the Final Rule
    Comment: Numerous commenters offered suggestions for the effective 
date and timeframe for implementation of the final rule. The commenters 
urged CMS to provide an adequate opportunity for MCOs and States to 
come into compliance with the regulation following its effective date 
as implementation will require both States and MCOs to make substantial 
changes to contracts, waivers, and other State procedures. One 
commenter recommended that the effective date be 180 days after the 
State's MCO contract renewal date following publication of the final 
rule. A few commenters recommended that States be given 2 years to come 
into compliance with the final rule. Several other commenters 
recommended that a full year be given for all contracts, regardless of 
their renewal date, to come into compliance with the final rule.
    Response: We agree with the commenters that adequate time needs to 
be given for implementation of this final rule. Therefore, we have 
established that the final regulation will become effective 60 days 
post publication, and must be fully implemented by 1 year from the 
effective date of the regulation. This would allow new provisions to be 
implemented without forcing States to amend contracts in mid-term, 
although States would have the option to implement portions of the 
regulation in the interim period.
b. Violation of APA
    Comment: A few commenters contended that the August 20, 2001 
proposed rule did not comply with the Administrative Procedure Act 
(APA) as interpreted by the Supreme Court in Motor Vehicle 
Manufacturers Assoc. v. State Farm Mutual Automobile Ins. Co., 463 U.S. 
29 (1983). Specifically, the commenters suggested that we did not 
comply with the requirement in that case that agencies supply reasoned 
analysis in support of a change in policy. The commenters also quoted 
the U.S. Court of Appeals for the District of Columbia's decision in 
National Black Media Coalition v. FCC, 775 F.2d 342, 356 n. 17 (D.C. 
Cir. 1985) for the proposition that ``an agency may not repudiate 
precedent simply to conform with shifting political mood,'' and that 
``the agency must demonstrate that its new policy is consistent with 
the mandate with which the Congress has charged it.'' In citing these 
cases, these commenters were comparing the regulations in the August 
20, 2001 proposed rule, to those in the January 19, 2001 final rule 
that never took effect. The commenters believe that we were required in 
the proposed rule to explain any differences between the rules proposed 
in the August 2001 proposed rule and those published on January 19, 
2001 and find support in ``the rulemaking record'' for any such 
differences.
    Response: The cases cited by the commenters concern changes made to 
existing regulations. In those cases, regulations had been published 
and taken effect, and the agencies were making changes to existing 
regulations. In this case, as noted in the previous comment, the 
effective date of the January 19, 2001 final rule was delayed, and 
those regulations had never taken effect. Thus, there are no ``existing 
regulations'' in part 438 that this proposed rule would ``change.'' 
Rather, the existing regulations governing Medicaid managed care are 
the regulations in part 434 which predate the earlier rulemaking that 
led to the January 19, 2001 final rule. We believe that the preamble to 
the proposed rule clearly articulates our reasons for proposing changes 
to these existing part 434 regulations. Most of the major changes in 
the proposed rule implement, or are based on, Medicaid managed care 
provisions in the Balanced Budget Act of 1997 (BBA), which was enacted 
after the existing part 434 regulations were promulgated. When we 
proposed changes in policy not directly based on BBA provisions, the 
preamble explains the basis for the policy choice made, including 
discussion of inadequacies in the part 434 regulations, when 
appropriate.
    We note that, while not required to do so by the cases cited by the 
commenters, we did explain in the preamble our rationale for the 
departures in this proposed rule from the approach taken in the January 
19, 2001 regulations. We indicated that in developing this proposed 
rule, we were ``guided by several considerations'' set forth in detail 
in the preamble. (See 66 FR 43616.) For example, we indicated that the 
proposed rule was designed to recognize that Medicaid is a ``Federal-
State partnership'' under which ``States are assigned the 
responsibility of designing their State programs'' and need the 
flexibility to ``employ different approaches to achieving the same goal 
within their varying State marketplaces and health care delivery 
systems.'' We also noted ``new advances and findings in health care, 
health quality assessment and improvement'' that ``unfold on an almost 
daily basis,'' and noted that regulations containing too rigid a 
structure are not able to adapt to these changes. The extent to which 
some aspects of the proposed rule differed from those in the January 
19, 2001 rule is attributable to our reassessment, described above.
c. Applicability of BBA Provisions and Other Parts of This Final Rule 
To Waiver Programs
    Section 4710(c) of the BBA specifies that the requirements in 
sections 4701 through 4710 do not affect the terms and conditions of 
any demonstration projects or waiver programs approved by the Secretary 
under the authority of sections 1115 or 1915(b) of the Act. We have 
consistently interpreted this to be a ``grandfather'' provision that 
applies only to waivers or demonstration projects that were in effect, 
or already approved, as of August 5, 1997, the date of enactment of the 
BBA. Thus, when the waiver or demonstration project expires, the 
grandfather provision in section 4710(c) no longer applies.
    Under section 4710(c), the grandfather provision applies to the 
``terms and conditions'' of a waiver. Any provisions of a State's 
section 1115 demonstration project or section 1915(b) waiver program 
that were specifically addressed in the State's waiver proposal, 
statutory waivers, special terms and conditions, operational protocol, 
or other official State policy or procedures approved by us, are

[[Page 41073]]

considered to be the ``terms and conditions'' of the waiver. To the 
extent the terms and conditions of the State's approved waiver program 
covered the same subject matter as any of the BBA requirements, that 
portion of the State's program would not have to comply with the BBA 
until the waiver expired. For example, if the State's waiver program 
included enrollment and disenrollment rules, the enrollment and 
disenrollment rules in section 1932 of the Act would not apply while 
the waiver was still in effect. For any part of the State's Medicaid 
managed care program that was not within the scope of the waiver, the 
BBA provisions applied immediately, with certain exceptions specified 
below, dealing with newly submitted or amended waivers.
    As noted above, under our interpretation, the exemption from the 
BBA requirements applied to section 1915(b) waiver programs only until 
the date that the waiver authority that was approved or in effect as of 
August 5, 1997 expired. Because none of those waivers exceeded two 
years, all of them expired no later than 1999. After the waiver 
expired, the State was required to comply with all BBA requirements. 
Similarly, in the case of section 1115 demonstration projects, the 
``grandfather'' provision in 4710(c) only applies until the 
demonstration expires, as established by the expiration date that 
appears in the waiver documents that were approved or in effect on 
August 5, 1997. However, section 1115(e) of the Act provides a State 
with a statutory right to extend any waiver previously approved under 
1115(a), on the same ``terms and conditions,'' unless the Secretary 
specifically disapproves the extension. This extension can be for up to 
three years. As long as the State applies for an extension under 
section 1115(e) while its demonstration project is still subject to the 
``grandfather'' provision described above, the statutory requirement 
that the waiver continue under the ``same terms and conditions'' means 
that those waiver provisions cannot be subject to the BBA requirements 
until the extension expires. The Medicare, Medicaid, and State Child 
Health Insurance Program Benefits Improvement and Protection Act of 
2000 (BIPA), enacted on December 21, 2000 (Pub. L. 106-554) added 
section 1115(f) of the Act, to provide for additional extensions of 
section 1115 health care reform demonstrations. Unlike section 1115(e), 
section 1115(f) does not require that the demonstration project be 
extended under the same terms and conditions, providing, instead, for 
the negotiation of new terms and conditions. Therefore, unless the 
Secretary uses his discretionary authority to waive the requirements, 
as explained below, the BBA requirements apply to all demonstration 
projects approved under section 1115 except during the ``grandfather'' 
period and any subsequent extension under section 1115(e)(2).
    For newly submitted or amended section 1115 waivers, the Secretary 
of DHHS retains the discretionary authority to exempt the State from 
specific BBA managed care provisions. Generally, exemptions are granted 
to allow States some flexibility in operating their Medicaid programs, 
while promoting the proper and efficient administration of a State's 
plan. However, particularly for those BBA provisions related to 
increased beneficiary protections and quality assurance standards, we 
anticipate that we would not approve an exemption unless a State can 
demonstrate that the waiver program has beneficiary protections or 
quality standards that would equal or exceed the BBA requirements.
    In addition, the Secretary may use his discretionary authority (to 
the extent permitted by the specific waiver provision) to waive other 
requirements in this rule which do not implement provisions of the BBA, 
such as the new rate setting requirements, requirements that apply to 
PIHPs and PAHPs, and requirements that were redesignated from part 434 
or other parts of 42 CFR.
    Comment: Several commenters questioned the applicability of these 
rules to waiver programs. One commenter wanted CMS to confirm the 
belief that the proposed rule does not apply to States with current 
section 1115 demonstrations, while another wanted CMS to specify in the 
text of final rule that these regulations do not apply to waiver 
programs under section 1115 or 1915(b), to be consistent with section 
4710(c) of the BBA. Another commenter supported CMS' decision to apply 
the final rule to both new and renewed section 1115 and 1915(b) 
waivers.
    Response: As stated in the proposed rule and reiterated above, 
section 4710(c) of the BBA is time-limited, has expired for all section 
1915(b) waiver programs, and only applies to section 1115 health care 
reform demonstrations during the period of approval that was in effect 
as of August 5, 1997 and any 3-year extension periods granted under the 
authority in section 1115(e)(2) of the Act. We disagree with the 
suggestion that the provisions of this part should never apply to 
programs conducted under these waivers.
    Comment: One commenter asked that CMS grant States flexibility in 
applying these rules through 1915(b) waivers, but another commenter 
opposed the decision to consider granting any new waivers of these 
requirements.
    Response: As indicated above, waiver authorities in section 1915(b) 
and 1115 remain in effect. If a State requests a waiver in order to 
implement an alternative approach for its Medicaid program that 
requires a waiver of provisions contained in this rule, while 
maintaining necessary beneficiary protections and meeting the specific 
requirements of the waiver authority requested, we may grant the 
waiver. We believe granting these waivers reflects the intent of the 
Congress which did not modify or limit the authority in either of these 
waiver provisions.
    Comment: One commenter asked to what extent the provisions in this 
rule apply to section 1915(c) waiver programs.
    Response: To the extent any provisions of these rules are relevant 
to the contract requirement, payment mechanisms, enrollment, or any 
other aspect of a program operating under a section 1915(c) waiver 
authority, the requirements apply. While we do not believe that most 
current 1915(c) programs would be subject to any of these requirements, 
any program operating under a combined 1915(b) and (c) authority which 
includes such things as an enrollment lock-in period, a capitated 
reimbursement methodology, or a provider that qualifies as a PAHP, 
would have to comply with the provision of this final rule as 
applicable.
    See section II.E. of this preamble for further discussion regarding 
the applicability of the BBA requirements to States with waivers.
d. Education of MCOs, PIHPs, PAHPs, and PCCMs About Special Health Care 
Needs
    Comment: Many commenters believe that there should be language 
stating that the ``State agency must have in effect procedures for 
educating MCOs, PIHPs, PAHPs, PCCMs, and any subcontracting providers 
about the clinical and other needs of enrollees with special health 
care needs.'' The commenters stated that this is an essential way for 
the State to ensure that health plans, that have not traditionally 
served Medicaid enrollees or enrollees with special health care needs, 
understand those needs. Another commenter stated that managed care must 
be sensitized to the needs of special needs beneficiaries, for whom

[[Page 41074]]

disruptions in service and impediments to access can be serious.
    Response: While we understand the need for awareness of special 
health care needs, we want to give States the flexibility to decide at 
what level this should happen. Many States may not have the capability 
or feel that it is appropriate for the State to provide education to 
MCOs, PIHPs, PAHPs, PCCMs, and providers on what is often a clinical 
issue. Public health departments and local medical societies are often 
doing this type of work in the State.
e. Miscellaneous Comments
    Comment: Numerous commenters applauded CMS for amending the 
Medicaid managed care regulations with the proposed rule published on 
August 20, 2001. Commenters appreciated that the proposed regulation 
removed much of the prescriptiveness of the requirements and 
acknowledged the expertise and work that continues at the State level. 
Most commenters were pleased to see a renewed emphasis on State 
flexibility. The proposed rule changed the focus from detailing how 
States and MCOs should operate to laying out the basic requirements for 
Medicaid managed care and allowing States the authority to implement 
them in a manner appropriate for each State. Further, commenters stated 
that the new rule simplified many of the provisions and eliminated 
redundancy so that requirements are stated only once. Commenters 
believe that the simplification of the regulation and removal of 
duplicative and redundant provisions will help States to accurately 
interpret, follow, and enforce this regulation.
    Other commenters stated that the proposed rule will permit 
innovation and support program growth under standards that respond to 
the needs of the full spectrum of enrollees and implementation of the 
January 2001 rule would have seriously undermined the availability of 
the benefits of MCOs to Medicaid beneficiaries. Another commenter 
believes that removal of much of the highly detailed language contained 
in the January 2001 rule will enhance the ability of both the Federal 
and State governments to exercise responsibilities as purchasers and 
regulators effectively. Further, States have proven their ability to 
innovate in the quality arena and will continue to strive towards 
providing the highest quality care to Medicaid beneficiaries. Several 
other commenters noted that the proposed rule is a significant 
improvement over the rules published in January 2001, many provisions 
of which would have significantly raised health plan compliance costs 
without meaningfully improving patient care. One commenter urged 
immediate implementation of the proposed rule.
    Response: We thank the commenters for their support. We will 
continue to work with States during the implementation period of the 
final rule.
    Comment: Numerous commenters expressed their dissatisfaction with 
the proposed rule published on August 20, 2001. These commenters 
strongly support the immediate implementation of the January 19, 2001 
final rule. Most of these commenters stated that the January rule 
reflected a true balance between providing States additional 
flexibility and providing Medicaid beneficiaries, including those with 
disabilities, the protections they need to ensure that Medicaid managed 
care meets their needs; that the revised proposed rule and the 
accompanying delays in implementation demonstrate that the 
Administration is more attuned to the desires of the States and managed 
care industry than to the needs of the people who are supposed to 
benefit from the Medicaid program; that the proposed rule pays too 
little attention to the special needs of children and adults with 
mental retardation and other disabilities. These commenters believe 
that the January rules establish important new protections for 
beneficiaries with respect to access to care, grievance and appeal 
procedures, and mandatory enrollment requirements.
    Other commenters stated that more specific requirements are 
warranted related to transitioning children into and out of managed 
care, and the identification, screening and assessment of children with 
special health care needs. Some commenters urged CMS to strengthen the 
proposed rule to ensure safeguards for children with special health 
care needs, consistent with the waiver criteria for children with 
special health care needs. These commenters also called upon CMS to 
incorporate the recommendations of the Department's November 2000 
Report to the Congress entitled ``Safeguards for Individuals with 
Special Health Care Needs Enrolled in Medicaid Managed Care'' into the 
regulation.
    Another commenter expressed concern that many provisions of the 
proposed rule do not provide adequate protections for consumers of 
mental health and substance abuse services enrolled in managed care 
plans through the Medicaid program. The commenter further suggested 
that the proposed rule unjustifiably undermines the consumer safeguards 
established in the January 2001 final rule. Another commenter specified 
that the proposed rule represents a profound failure to implement the 
statutory provisions of the BBA and does not provide even basic patient 
protections. These commenters urged CMS to reinstate many aspects of 
the January rule, which they believe better effectuate the BBA. Many 
other commenters believe that if the proposed rule is implemented it 
will be extremely harmful to Medicaid beneficiaries with special health 
care needs, including people living with HIV/AIDS.
    Response: In development of the proposed and final rules we gave 
serious attention to all of the concerns raised to us. We believe the 
final rule reflects the path chosen by the Congress to strike an 
appropriate balance between State flexibility and beneficiary 
protections. We believe that this final rule reflects that balance and 
appropriately implements the beneficiary protections established by the 
BBA. We believe all commenters have expressed the same goal, namely: 
strong, viable, State Medicaid managed care programs that deliver high 
quality health care to Medicaid beneficiaries. We believe that the 
final rule will help States achieve this goal. The Congress drafted the 
statute in full recognition of the Medicaid program as a Federal-State 
partnership and we share that recognition. States are assigned the 
responsibility of designing their State programs. We drafted this 
regulation to recognize the responsibilities of the States and the need 
to employ different approaches to achieving the same goal within their 
State marketplaces and health care delivery systems. We heard from some 
key stakeholders in Medicaid managed care, including States, provider 
organizations, and advocates for beneficiaries. Some of these 
stakeholders expressed serious concerns about the regulation, including 
changes made to the January 2001 final rule that had not been included 
in the September 1998 proposed rule. Other stakeholders strongly 
supported the January 2001 final rule and urged us to continue with 
implementation. We decided that the best approach was to make some 
modifications to the January 19, 2001 final rule and republish it as a 
proposed rule in order to give everyone the opportunity to comment on 
all of the provisions.
    We believe we have created a set of requirements that appropriately 
balances the necessary protections for all beneficiaries enrolled in 
Medicaid managed care plans, including individuals with special health 
care needs, and States' flexibility to manage

[[Page 41075]]

their managed care programs. We have not reduced the emphasis on 
requiring States to provide high quality care to beneficiaries, 
especially those with special needs. The rule requires States to 
identify managed care enrollees with special needs to make sure that 
they will receive appropriate access to quality care. States retain the 
flexibility to develop these mechanisms and define the special needs 
populations. This approach enables States to better target their 
Medicaid resources to those most in need. We believe this is a far more 
efficient approach than imposing regulatory burdens that may not have 
their intended effects.
    Comment: One commenter expressed concern that the August 20, 2001 
proposed rule did not contain important regulatory language that was 
included in the 1998 proposed rule supportive of protections for the 
mentally ill in Medicaid managed care. The commenter pointed out that a 
number of its recommendations were not included and the commenter 
requests an explanation for these negative decisions.
    Response: The regulation, as now written, is intended to address 
the needs of, and protections for, all Medicaid beneficiaries in 
managed care, including persons with disabilities and those who suffer 
from mental illness. The regulation is written in a manner to establish 
a general framework for States to use when developing managed care 
programs to serve all of its enrolled populations. Therefore, we do not 
believe it is necessary to list specific medical conditions within the 
regulation text. As far as comments received on the September 28, 1998 
proposed rule, responses to all of the comments and rationale for 
changes can be found in the January 19, 2001 final rule preamble.
    Comment: A few commenters, while supportive of the fact that CMS 
delayed implementation of the January 2001 final rule and then made 
substantial revisions in the August proposed rule, were still concerned 
that the proposed rule will increase the cost and administrative burden 
associated with Medicaid managed care. The commenters believe that 
health plans serving members other than Medicaid beneficiaries will be 
placed at a disadvantage. The commenters also urged CMS to take steps 
to encourage commercial plans and providers to participate in Medicaid 
managed care programs and to regulate the program in a manner that 
allows States to continue moving forward with managed care. Another 
commenter expressed concern regarding the overall impact on access, 
quality of care and cost effectiveness of applying the regulations to 
specialty mental health programs. And to the extent CMS does not 
provide more flexibility to States in these regulations, it should 
seriously consider providing reasonable flexibility to States in the 
section 1915(b) waiver process. Another commenter stated that the speed 
with which these rules have been rewritten has lead to a proposed rule 
that shows a lack of clarity and careful consideration. The regulatory 
process did not provide for adequate participation by the States with 
the knowledge and experience to help draft effective and efficient 
rules for managed care. The commenter urged CMS to involve State 
representatives in a final rewrite of the rule. In addition, when 
considering the imposition of every new administrative requirement, CMS 
needs to be cognizant that each of those requirements costs the States' 
increasingly limited resources that could better be focused on 
provision of care. Further, every new requirement on MCOs and providers 
can affect their continued participation in managed care. Another 
commenter advised CMS to keep in mind that as regulations are designed 
with particular focus on enrollee protections, it is critical to keep 
in mind that overly prescriptive requirements that shift potentially 
unnecessary administrative costs and burdens to plans and providers may 
result in the unintended consequence of provider and/or plan withdrawal 
from the Medicaid program. This could then lead to impeded access to 
quality care for vulnerable populations.
    Response: The regulation was developed to provide States with an 
appropriate level of flexibility that we believe to be consistent with 
necessary beneficiary protections.
    State flexibility had to be balanced against the statutory 
requirements of the BBA. Further, the regulation has been designed to 
provide a framework that allows CMS and States to continue to 
incorporate further advances for oversight of managed care, 
particularly as they pertain to beneficiary protection and quality of 
care. We recognize that States are unique and have different needs for 
their enrolled populations. This final rule was designed to promote 
State flexibility as much as possible so that States can implement 
managed care programs that meet the needs of their beneficiaries. With 
respect to MCO and provider participation, we further believe that the 
new rate-setting provisions will allow States to set rates that more 
appropriately reflect the costs of health services for the variety of 
Medicaid populations served, especially those with special health care 
needs.
    Comment: One commenter stated that changes should be made to the 
proposed rule to ensure that providers are compensated in a timely 
manner, so they can continue to provide needed services to low-income 
patients.
    Response: Section 1932(f) of the Act specifies that contracts under 
1903(m) must provide that, unless an alternative arrangement is agreed 
to, payment to health care providers for services covered under the 
contract be made on a timely basis, consistent with the claims payment 
procedures described under section 1902(a)(37)(A) of the Act. These 
procedures require that 90 percent of claims for payment (for which no 
further written information or substantiation is required in order to 
make payment) made for services covered under the contract and provided 
by health care providers are paid within 30 days of receipt, and that 
99 percent of the claims are paid within 90 days of receipt. These 
requirements are included in Sec. 447.46. We do not believe that 
additional changes need to be made.
    Comment: One commenter noted that the proposed rule does not take 
into consideration the frontier nature of some States. Many of the 
provisions would be difficult to meet even for the non-Medicaid 
population.
    Response: We believe this final rule affords States the flexibility 
to implement these requirements for Medicaid managed care in all areas 
of their State. Further, the final rule provides for an exception to 
the choice requirements (Sec. 438.52) for residents in rural areas.
    Comment: One commenter stated that these rules continue to require 
monitoring and oversight on issues that would result in higher 
requirements for Medicaid enrollees than for fee-for-service Medicaid 
or the general population. The commenter noted that it remains a 
distressing tendency to enforce things for managed care that are not 
enforced for the fee-for-service population.
    Response: While CMS agrees that beneficiary protections are also 
important for beneficiaries receiving care under fee-for-service 
arrangements, this rulemaking implements Chapter 1 of Subtitle H of the 
BBA, titled ``Managed Care.'' These statutory provisions do not apply 
to fee-for-service Medicaid, and cannot be extended to fee-for-service 
arrangements in this final rule. However, States do have the 
flexibility to develop beneficiary protections similar to those 
presented in this regulation for those still receiving care through 
fee-for-service. States may establish similar

[[Page 41076]]

standards that can be monitored on the same scale as those standards 
established for Medicaid managed care. We agree that it is important to 
recognize that beneficiaries are afforded additional assistance in 
managed care than may be afforded in fee-for-service.
    Comment: One commenter noted that when establishing protections for 
Medicaid managed care beneficiaries, CMS should recognize that oral 
health is an inseparable part of an individual's overall health and the 
formation of an effective Medicaid dental delivery system is just as 
important as the creation of an adequate Medicaid medical delivery 
system. The commenter stated that all dental patients, whether they are 
in private plans, Medicaid fee-for-service or any Medicaid managed care 
arrangement, deserve equal access to health services and equal 
protections under the law.
    Response: We recognize the importance of oral health and the 
importance of serving the dental needs of the Medicaid population. The 
final rule is designed to address access issues related to all Medicaid 
managed care services. For example, an MCO or PAHP that delivers dental 
services to Medicaid beneficiaries must comply with the access 
requirements in this regulation. The MCO or PAHP must ensure that it 
offers an appropriate range of services and that it maintains a network 
of providers that is sufficient to meet the needs of enrollees. 
Further, each State must ensure that all of the covered services are 
accessible for all beneficiaries enrolled. We are also optimistic that 
managed care will facilitate increased utilization in the area of 
dental services.
    Comment: One commenter expressed concern regarding some of the 
regulatory provisions, as they may pose or have a different effect in 
the territories, particularly since Medicaid funds are capped.
    Response: We recognize the commenter's concern, however territories 
are required to meet all Medicaid requirements except for provisions 
specified in Federal law and regulation.
    Comment: Several commenters stated that none of the Medicaid 
managed care rules has included any discussion of the need for State 
Medicaid programs to develop incentives for physicians to participate 
in Medicaid managed care plans. The commenters specified that lack of 
sufficient physician participation may pose a significant barrier to 
high quality care for Medicaid beneficiaries. Development of incentives 
for physician participation should be a central issue for Federal and 
State governments as they design, implement and evaluate managed care 
programs. One commenter recommended that State agencies be required to 
consult with State medical societies early on in the process of 
designing Medicaid managed care programs and continue to seek input 
from the physician community throughout implementation. The commenter 
cited a recent report from the American Academy of Pediatrics that 
concluded ``in order to ensure that expanding insurance coverage for 
children translates into viable access to care, States must provide 
incentives for pediatricians to extend their resources to serve new 
Medicaid and SCHIP enrollees.''
    Response: We realize that physician consultation is an important 
factor in the development of Medicaid managed care initiatives and 
encourage stakeholder input at all stages of managed care development. 
However, we are not specifically requiring stakeholder involvement 
since States, based on the uniqueness of their Medicaid managed care 
programs, are in the best position to determine how this involvement 
should be structured. Each State is required to have a Medical Care 
Advisory Committee (MCAC) established for the purpose of advising the 
Medicaid agency about health and medical services. This committee, by 
regulatory definition, is required to include physicians. We encourage 
States to continue to use the MCAC as a mechanism for obtaining input 
on managed care issues. Likewise, under Sec. 438.202, we require public 
consultation in development of the State's quality strategy.
    Comment: One commenter disagreed with the deletion of the 
requirement that no more than 75 percent of enrollees in risk contracts 
be eligible for Medicare or Medicaid.
    Response: This change was made by the Congress in the BBA, and we 
thus had no discretion in this rulemaking to retain it. We note that 
this requirement was previously used as a rough ``proxy'' to ensure 
quality services by requiring that an MCO attract commercial consumers. 
This ``proxy'' has been replaced in the BBA with more direct quality 
requirements implemented in this final rule.

III. Summary of Changes to the Proposed Rule

    For reasons discussed above in the preamble, we have made the 
following changes to the proposed rule:

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

Section 431.200

    We have added language to include PAHP actions to suspend, 
terminate, or reduce services such as those that would result in access 
to the State fair hearing.

Section 431.220

    We have included a new paragraph (a)(6) requiring that any PAHP 
enrollee who has an action must be granted the opportunity for a State 
fair hearing.

Section 431.244

    We have added language in paragraph (f)(1)(i) to specify that the 
90-day timeframe for resolution of the State fair hearing begins the 
date the enrollee filed an MCO or PIHP appeal, not including the number 
of days the enrollee took to subsequently file for a State fair 
hearing. In paragraph (f)(1)(ii) we clarify the regulation text to 
State that if permitted by the State, the date the enrollee filed for 
direct access to a State fair hearing.
    In paragraphs (f)(2) and (f)(3) we have changed the limit for 
appeals of a denial of service by an MCO or PIHP 72 hours to three 
working days.

PART 438--MANAGED CARE PROVISIONS

Subpart A--General Provisions

Section 438.1

    In paragraph (b), we have included PIHPs in the scope of contracted 
entities provided in part 438.

Section 438.2

    We moved the definition of ``health care professional'' from 
Sec. 438.102 to Sec. 438.2, as it applies to all of part 438.
    We have clarified the definition of ``health insuring 
organization'' to reflect language in section 1932(a)(3) of the act.

Section 438.6

    In paragraph (c)(3)(ii), we have added language to clarify that we 
are referring to data factors such as medical trend inflation, 
incomplete data, and MCO, PIHP, or PAHP administration.
    In paragraph (c)(4)(ii), we have added language to clarify that 
payment rates are based only upon services covered under the State 
plan, or costs directly related to providing these services (such as, 
MCO, PIHP, or PAHP administration.)
    We removed proposed Sec. 438.6(c)(5)(ii) that referred to 
limitations on payment for risk corridors and incentive arrangements in 
proposed Sec. 438.814. We

[[Page 41077]]

added new paragraph c)(5)(ii), which contains revised limitations on 
payment for risk corridors.
    We added a new paragraph c)(5)(iii) that contains the payment 
limitations for incentive arrangements that were originally in proposed 
Sec. 438.814.
    We have redesignated proposed paragraph (c)(5)(iii) as (c)(5)(iv).
    We have removed proposed paragraph (c)(5)(iii)(C), which required 
that for all incentive arrangements, the contract must provide that the 
arrangement is designed to include withholds or other payment penalties 
if the contractor does not perform the specified activities or does not 
meet the specified targets.
    We have included a new paragraph (c)(5)(v) to require that if a 
State makes payments to providers for graduate medical education costs 
under an approved State plan, the State must adjust the capitation 
rates to account for the aggregate amount of the graduate medical 
education payments to be made on behalf of enrollees covered under the 
contract.
    We have included a new paragraph (i)(2) specifying that all PAHP 
contracts must also provide compliance with the advance directive 
requirements if the PAHP includes, in its network, any of those 
providers listed under requirements on advance directives in 
Sec. 489.102(a).

Section 438.8

    We have made revisions in paragraph (b)(1) to specify that PAHPs 
must meet the contract requirements of Sec. 438.6, except for those 
that pertain to HIOs and the requirements for advance directives unless 
the PAHP includes any of the providers listed in Sec. 489.102.
    We have revised paragraph (b)(6) to require PAHPs to meet all 
designated portions of subpart D (Quality Assessment and Performance 
Improvement).
    We have added a new paragraph (b)(7) to specify that PAHP enrollees 
have the right to a State fair hearing under subpart E of part 431 
(State Organization and General Administration).

Section 438.10

    We have added paragraph (b)(2) requiring that the State must have 
in place a mechanism to help enrollees and potential enrollees 
understand the State's managed care plan. We also added paragraph 
(b)(3) requiring each MCO and PIHP to have in place a mechanism to help 
enrollees and potential enrollees understand the requirements and 
benefits of the plan.
    We have revised paragraph (c)(2) to require that the State must 
make available written information in each prevalent non-English 
language.
    In paragraph (f) we rephrased the introductory language to require 
that information be furnished to MCO, PIHP, PAHP, and PCCM enrollees. 
In paragraph (f)(1) we have added language to clarify that for those 
States that choose to restrict disenrollment for periods of 90 days or 
more, notice of the enrollees disenrollment rights must be sent no less 
than 60 days before the start of each enrollment period. In paragraphs 
(f)(2) and (3) we now include references to paragraphs (g) and (h) of 
this section to specify the information certain enrollees have a right 
to request and obtain at least once a year.
    We have included, in paragraph (f)(4) that the State, its 
contracted representative, or the MCO, PIHP, PAHP, or PCCM must give 
each enrollee written notice of any change that is deemed significant 
in the specified information in paragraphs (f)(6) of this section and 
paragraphs (g) and (h) of this section, if applicable.
    In paragraph (f)(6) we have clarified that the information in this 
section must be provided by the State, its contracted representative, 
or the MCO, PIHP, PAHP, or PCCM. We have revised paragraph (f)(6)(i) to 
clarify that information on the names, locations, telephone numbers of, 
and non-English languages spoken by current contracting providers in 
the enrollees service area, including identification of providers that 
are not accepting new patients be provided to all enrollees. For MCOs, 
PIHPs, and PAHPs this includes, at a minimum, information on primary 
care physicians, specialists and hospitals. Further, in paragraph 
(f)(6)(iv) we add that for PAHP enrollees, the information specified in 
Sec. 438.10(h) must be provided.
    We have revised paragraph (g)(3) to provide that detailed 
information of physician incentive plans is available upon request.
    We have added a new paragraph (h) that requires specific 
information that must be provided for PAHP enrollees. The State, its 
contracted representative, or the PAHP must provide information to 
their enrollees on the right to a State fair hearing, including the 
right to a hearing, the method for obtaining a hearing, and the rules 
that govern representation. In paragraph (h)(2), we have specified that 
information must be provided on advance directives, as set forth in 
Sec. 438.6(i)(2) and in paragraph (h)(3) that, upon request, 
information must be provided on physician incentive plans as set forth 
in Sec. 438.6(h). We have redesignated the previous paragraph (h) as 
paragraph (i) in the final rule.
    We have clarified in paragraph (i)(2)(i) the timeframes for when 
information must be furnished to all enrollees of a State plan program 
under Sec. 438.50. For these enrollees, the timeframe is annually and 
upon request and for potential enrollees within the timeframe specified 
in Sec. 438.10(e)(1). In paragraph (i)(3), we have clarified that the 
information provided is only for each contracting MCO or PCCM in the 
potential enrollee and enrollee's service area. Finally, in paragraph 
(i)(3)(v), we have removed reference to disenrollment rates as defined 
by the States as information that must be included.

Subpart B--State Responsibilities

Section 438.60

    We have included language allowing for payment exceptions when the 
State has adjusted the capitation rates paid under the contract, in 
accordance with Sec. 438.6(c)(5)(v), to make payments for graduate 
medical education.

Subpart C--Enrollee Rights and Protections

Section 438.100

    We have moved paragraph (b)(3)(iii) regarding requests for medical 
records to new paragraph (b)(2)(vi). We have revised paragraph (b)(3) 
to specify that an enrollee of an MCO, PIHP, or PAHP (consistent with 
the scope of the PAHP's contracted services) has the right to be 
furnished health care services in accordance with Secs. 438.206 through 
438.210. We have removed paragraph (b)(3)(ii), regarding the right to 
obtain a second opinion.

Section 438.102

    We have moved the definition of health care professional to 
Sec. 438.2.

Section 438.104

    We have revised paragraph (b)(1)(iv) to clarify that the 
requirement regarding the sale of other insurance applies to 
``private'' insurance.
    In paragraphs (b)(2) and (c) we have corrected cross-references to 
paragraphs (e) and (f) of Sec. 438.10.

Section 438.114

    In paragraph (a) we have removed references to Sec. 422.113(b) and 
(c) and included the full text of definitions of emergency medical 
condition, emergency services and post-stabilization care services. In 
paragraph (d)(1)(ii) we have revised language to specify that entities 
may not refuse to

[[Page 41078]]

cover emergency services based on the emergency room provider, 
hospital, or fiscal agent not notifying the enrollee's primary care 
provider, MCO, or applicable State entity of the enrollee's screening 
and treatment within 10 days of presentation for emergency services.

Subpart D--Quality Assessment and Performance Improvement

    In subpart D, Secs. 438.200, 438.206, 438.207, 438.208, 438.210, 
438.214, 438.224, 438.230, and 438.236 have been amended by adding 
PAHPs to allow this network to have the same services.

Section 438.202

    In paragraph (b) we replaced the words ``provide for'' with 
``obtain'' and the words ``including making'' to ``and make.'' In 
paragraph (c) we replaced the word ``compliance'' with the words ``The 
MCOs, PIHPs, and PAHPs comply.''

Section 438.204

    In paragraph (b)(1) we have removed the word ``including'' and 
clarified that procedures must assess the quality and appropriateness 
of care and services furnished to Medicaid enrollees under the MCO and 
PIHP contracts, and to all individuals with special health care needs. 
In paragraph (b)(3), we have clarified that the procedures must 
regularly monitor and evaluate the MCO and PIHP compliance with the 
standards. In paragraph (c) we have added, ``For MCOs and PIHPs, any 
national'' before ``performance'' and ``that may be'' before 
``identified.'' In paragraph (e) we have added the phrase ``For MCOs,'' 
before ``appropriate.''

Section 438.206

    In paragraph (a) we reversed the words ``services'' and 
``covered,'' and added the words ``under the State plan'' after 
``covered.''
    In paragraph (b)(1)(ii) we revised the second clause to read 
``taking into consideration the characteristics and health care needs 
of specific Medicaid populations represented in the particular MCO, 
PIHP, and PAHP.''
    In paragraph (c)(1)(i) we added the word ``the'' between the words 
``of'' and ``need.''
    In paragraph (c)(1)(iv) we added at the end, the words ``by 
providers.''
    In paragraph (c)(1)(v), we added the word ``providers'' after the 
word ``Monitor'' and replaced ``continuously'' with ``regularly'' to 
clarify that each MCO, PIHP, and PAHP must monitor regularly to 
determine compliance.

Section 438.207

    In paragraph (a), we added the words ``and providers supporting 
documentation that demonstrates'' after the word ``State.''
    In paragraph (b), we changed the title from ``Nature of 
assurances'' to ``Nature of supporting documentation'' and removed the 
words ``acceptable to CMS.''
    In paragraph (c), we removed the words ``and specifically'' and 
replaced them with ``but no less frequently than.''
    In paragraph (d) we replaced the word ``submission'' to 
``certification'' in the title.

Section 438.208

    Section 438.208 is revised. We have made significant changes to the 
organization of this section.

Section 438.210

    In paragraph (a), we have reorganized and revised language for 
clarity.

Section 438.214

    In paragraph (b) we have added a requirement that each State must 
establish a uniform credentialing and recredentialing policy that each 
MCO, PIHP, and PAHP must follow.

Section 438.240

    In paragraph (a)(2) we have removed ``standardized quality 
measures'' and replaced it with ``performance measures.'' We have 
revised paragraph (b)(1) to require that performance improvement 
projects must be designed to achieve, through ongoing measurements and 
intervention, significant improvement, sustained over time, in clinical 
care and non-clinical care areas that are expected to have a favorable 
effect on health outcomes and enrollee satisfaction. We redesignated 
paragraph (b)(2) as (b)(3) and we redesignated paragraph (b)(3) as 
(b)(4). We added a new paragraph (b)(2) to specify that each MCO and 
PIHP must submit performance measurement data, as described in 
paragraph (c) of this section.
    In paragraphs (c) and (d)(2) we have clarified that each MCO and 
PIHP must annually measure and report to the State its performance 
(including requirements under Sec. 438.204(c) and Sec. 438.240(a)(2)), 
submit to the State data to enable the State to calculate measures, or 
perform a combination of the above activities.

Section 438.242

    In paragraph (a) we have added ``and appeals'' after ``grievances'' 
to clarify that a health information system must provide information on 
appeals.

Subpart E--[Reserved]

Subpart F--Grievance System

Section 438.400

    We have removed ``or any of its providers'' from the definition of 
``action.'' We have clarified the definition of ``action,'' to include 
unreasonable delays in services or appeals not acted upon within the 
necessary timeframes provided in Sec. 438.408(b).

Section 438.402

    In paragraph (b)(1)(ii) we clarified that a provider may file a 
grievance or request a State fair hearing on behalf of an enrollee, if 
the State permits the provider to act as the enrollee's authorized 
representative in doing so.

Section 438.404

    In paragraph (c)(6) we have corrected the cross-reference to 
Sec. 438.210(d)--timeframes for expedited service authorizations.

Section 438.406

    We have revised paragraph (a)(1) to clarify that giving enrollees 
any reasonable assistance in completing forms and taking other 
procedural steps is not limited to providing interpreter services and 
toll-free numbers that have adequate TTY/TTD and interpreter 
capability.
    In paragraph (a)(3)(ii) we have clarified that the individuals who 
make decisions on grievances and appeals are individuals who are health 
care professionals who have the appropriate clinical expertise, as 
determined by the State, in treating the enrollee's condition or 
disease.

Section 438.408

    In paragraph (d)(2)(ii) we have added language clarifying that the 
MCO or PIHP must also make reasonable efforts to provide oral notice.

Section 438.410

    In paragraph (c)(2) we have added language clarifying the MCO or 
PIHP must make reasonable efforts to give the enrollee prompt oral 
notice of the denial.

Section 438.420

    In paragraph (b)(4) we have included the word, ``original'' to 
describe the type of authorization.
    In paragraph (c), we have added language to clarify the duration of 
continued or reinstated benefits. If, at the enrollee's request, the 
MCO or PIHP continues or reinstates the enrollee's benefits while the 
appeal is pending, the

[[Page 41079]]

benefits must be continued until one of the following occurs:
     The enrollee withdraws the appeal.
     Ten days have passed after the MCO or PIHP resolves the 
appeal against the enrollee, unless the enrollee, within the 10-day 
timeframe, has requested a State fair hearing with continuation of 
benefits until a State fair hearing decision is reached.
    We have added a new paragraph (c)(4) to specify that benefits must 
be continued until the time period or service limits of a previously 
authorized service has been met.

Subpart G--[Reserved]

Subpart H--Certifications and Program Integrity

Section 438.600

    We have added sections ``1903(m)'' and ``1932(d)(1)'' to the 
statutory basis to establish conditions for payments to the State with 
respect to contracts with MCOs and to incorporate the BBA provisions 
prohibiting affiliations with individuals debarred by Federal agencies.

Sections 438.604 and 438.606

    We deleted the requirement for ``substantial compliance'' with the 
terms of the contract and for submitting certifications for 
``substantial compliance'' respectively in order to prevent unnecessary 
lawsuits against MCOs and States. In addition, the statute and 
regulations already require States to monitor compliance with contracts 
executed under this rule.

Section 438.610

    We added a new section to incorporate language from section 
1932(d)(1) of the Act to the regulation to implement the BBA provisions 
prohibiting affiliations with individuals debarred by Federal agencies. 
This self-implementing provision has not been published previously, but 
was added in the final rule to include all of the relevant protections 
against fraud and abuse in one section.
    We added application to PCCMs and to PAHPs to this section. (The 
BBA provided that section 1932(d)(1) of the Act be applied to MCEs; 
therefore we included application to PCCMs. We applied this section to 
PAHPs under the authority of section 1902(a)(4) of the Act.

Subpart I--Sanctions

Section 438.724

    We have clarified that the notice that must be given to the CMS 
Regional Office whenever a State imposes or lifts a sanction is only 
applicable to those sanctions under Sec. 438.700.

Section 438.726

    We have added a new paragraph (b) which states that a contract with 
an MCO must provide that payments provided for under the contract will 
be denied for new enrollees when, and for so long as payment for those 
enrollees is denied by CMS.

Section 438.730

    We have reorganized this section so that it conforms to removed 
Sec. 434.67.

Subpart J--Conditions for Federal Financial Participation

Section 438.802

    We have removed the requirement for substantial compliance with 
physician incentive plans, the MCO's contract, and the provisions of 
part 438 as a condition for FFP.

Section 438.806

    We have made technical revisions to correct erroneous cross-
references in paragraph (a)(1). We now correctly refer back to 
paragraphs (b)(2) through (b)(5) of Sec. 438.6.

Section 438.814

    We have revised and moved the provisions of this section to 
paragraphs (c)(5)(ii) and (c)(5)(iii) of Sec. 438.6.

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act (PRA) of 1995, we are required to 
provide 30-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 OMB should approve an 
information collection, section 3506(c)(2)(A) of the PRA of 1995 
requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    Therefore, we are soliciting public comments on each of these 
issues for the information collection requirements discussed below.
    The following information collection requirements and associated 
burdens are subject to the PRA. For purposes of this requirement, we 
incorporated pertinent managed care data from the 2000 Medicaid 
enrollment report. As of June, 2000, there were 339 managed care 
organizations (MCOs) (this includes three HIOs that must adhere to the 
MCO requirements of this regulation), 37 primary care case management 
(PCCM) systems, 376 managed care entities (MCOs and PCCMs combined), 
123 mental health and substance abuse prepaid health plans (PIHPs) and 
34 dental, primary care and transportation prepaid health plans (PAHP), 
all of which have previously been regulated as PHPs. There were a total 
of 25,821,196 beneficiaries enrolled in these plans (some beneficiaries 
are enrolled in more than one plan) in forty-eight States and the 
District of Columbia (Wyoming and Alaska do not currently enroll 
beneficiaries in any type of managed care).

A. Section 438.6  Contract Requirements

Section 438.6(c)  Payments Under Risk Contracts
    1. Requirement. Section 438.6(c) modifies the rules governing 
payments to MCOs, PIHPs, and PAHPs by doing the following: (1) 
Eliminating the upper payment limit (UPL) requirement; (2) requiring 
actuarial certification of capitation rates; (3) specifying data 
elements that must be included in the methodology used to set 
capitation rates; (4) requiring States to consider the costs for 
individuals with chronic illness, disability, ongoing health care 
needs, or catastrophic claims in developing rates; (5) requiring States 
to provide explanations of risk sharing or incentive methodologies; and 
(6) imposing special rules, including a limitation on the amount that 
can be paid under FFP in some of these arrangements.
    2. Burden. It is difficult to quantify the burden on States of 
providing information to support the actuarial soundness of the 
capitation rates for their risk-based, managed care contracts, because 
the rate setting methodologies and data sources vary widely from State 
to State. Under the UPL requirements, States were required to provide 
the capitation rates and any requested supporting documentation for all 
rate cells used which may vary from 5 to 10 cells on one end to 60 or 
more on another. In addition, States needed to generate data to meet 
the UPL requirement using historical fee-for-service (FFS) data trended 
forward to

[[Page 41080]]

the contract year. This would be a relatively simple process for a 
State initiating its managed care program, where it can rely on a very 
recent full year of FFS data for this purpose. However, almost all 
States have been operating risk-based managed care programs for at 
least 5 to 10 years and must make numerous adjustments to that data so 
that it can be used for this purpose. We estimate the average burden on 
States to comply with the current rate setting and UPL rules to be 16 
hours per contract for documenting the capitation rates (setting out 
and explaining rate cells, risk sharing mechanisms, etc) and 40 hours 
per contract for generating a UPL for comparison purposes. This results 
in a total burden of 56 hours per contract for 496 risk contracts, 
resulting in a total burden of 27,776 hours.
    Under the new requirements for actuarial soundness, States will 
need to provide an actuarial certification and additional documentation 
not previously required, including: specific data elements used to set 
capitation rates; methodologies to consider the costs for individuals 
with chronic illness, disability, ongoing health care needs, or 
catastrophic claims; explanations of risk sharing or incentive 
methodologies; and documentation supporting special contract 
provisions. We estimate the burden to comply with these requirements to 
average approximately 32 hours per contract for the 496 risk contracts, 
resulting in a total burden of 15,872 hours. This amount is limited to 
the time required for the State to compile documentation the State and 
its actuaries would already have developed in determining the 
capitation rates and submitting this documentation, as required, to 
CMS. Since, under this new rule, States will no longer need to generate 
a UPL in addition to the rate setting burden, this change results in a 
net reduction in burden of 11,904 hours.
Section 438.6(i)(3)  Advance directives
    1. Requirement. This paragraph requires that MCOs, PIHPs, and 
certain PAHPs provide adult enrollees with written information on 
advance directives policies and include a description of applicable 
State law.
    2. Burden. The burden associated with this requirement is the time 
it takes to furnish the information to enrollees. We assume that this 
information would be furnished with the rest of the information 
required by Sec. 438.10 and is therefore subsumed under those 
requirements.
    There is also an implied recordkeeping requirement associated with 
contracts; i.e., that would be documented. Maintaining documentation is 
a usual and customary business practice and does not add to the burden.

B. Section 438.8  Provisions That Apply to PIHPs and PAHPs

    1. Requirement. This section specifies which of the contract 
requirements contained in Sec. 438.6 apply to PIHPs and which apply to 
PAHPs. Requirements for advance directives apply only to PIHPs and 
certain limited numbers of PAHPs.
    2. Burden. PHPs (now designated as PIHPs and PAHPs) have not 
previously been required to maintain written policies and procedures 
with respect to advance directives. This rule requires the PIHP and 
some PAHPs to provide written information to enrollees of their rights 
under this provision and the PIHPs policies with respect to the 
implementation of those rights. We project 8 hours of time for each of 
123 PIHPs and 2 PAHPs to establish this policy and 2 minutes per 
enrollee for provision of this information, and acceptance of this 
right to each of approximately 6.3 million individuals enrolled in 
PIHPs and the specified PAHPs. The total time for this is approximately 
212,000 hours.
    1. Requirement. Under the physician incentive plan provision, PIHPs 
and PAHPs, like MCOs, will be required to provide descriptive 
information to States and CMS to determine whether or not there is 
substantial financial risk in their subcontracts. In addition, 
enrollees must be surveyed and provided information on the risk 
arrangements when substantial risk exists.
    2. Burden. We are basing our projections of burden upon information 
published in the Federal Register on March 27, 1996 and December 31, 
1996 (61 FR 13445 and 61 FR 69049) which contained the original 
regulatory provisions on physician incentive plans for Medicare and 
Medicaid HMOs. Based on those assumptions, we believe no more than \1/
3\ of the approximately 157 PIHPs and PAHPs use incentive or risk 
payment arrangements with their subcontracting providers. Affected 
PIHPs and PAHPs would be required to provide detailed responses to 
State surveys regarding their payment mechanisms and amounts. At the 
projected 100 hours per response for approximately 53 PIHPs and PAHPs 
the total burden would be 5,300 hours. For those PIHPs and PAHPs with 
substantial financial risk, there are other requirements such as stop/
loss insurance and beneficiary surveys. We believe there would be 
minimal additional burden as a result of these requirements (because 
many already comply with these requirements) and that this would apply 
to no more than \1/4\ of those PIHPs and PAHPs with risk or incentive 
payments, or a total of 13. We estimate an additional 10 hours per plan 
for a total of 130 hours. Altogether, we estimate 5,430 hours of burden 
through imposition of this requirement on PIHPs and PAHPs.

C. Section 438.10  Information Requirements

Section 438.10(c), (d), (e), (f), (g), and (h)
    1. Requirement. In summary, Sec. 438.10 requires that each State, 
its contracted representative, or at the option of the State, each MCO, 
PIHP, PAHP, and PCCM furnish information to enrollees and potential 
enrollees to meet the requirements of this section. Paragraph (c)(4) 
requires that the State and each MCO, PIHP, PAHP, and PCCM, make oral 
interpretation available in languages other than English. Paragraph 
(c)(5) requires that beneficiaries be informed how to access those 
services. Paragraph (d)(2) requires that all enrollees and potential 
enrollees must be informed that information is available in alternative 
formats and how to access those formats. The basic information listed 
in paragraph (e)(2) must be provided to each potential enrollee by the 
State or its contracted representative.
    The State, its contracted representative or the MCO, PIHP, PAHP, or 
PCCM must provide the information in paragraph (f)(6), and for MCOs and 
PIHPs, in paragraph (g) at least once a year. The information that must 
be provided includes the following:
    (a) Information for potential enrollees:
    (1) General information must be provided about the basic features 
of managed care, which populations are excluded from enrollment, 
subject to mandatory enrollment, or free to enroll voluntarily in an 
MCO or PIHP, and MCO and PIHP responsibilities for coordination of 
enrollee care.
    (2) Information specific to each MCO, PIHP, PAHP, and PCCM serving 
an area that encompasses the potential enrollee's service area must be 
provided in summary form, or in more detail, upon request of the 
enrollee. This includes information on benefits covered; cost sharing 
if any; service area; names, locations, and telephone numbers of 
current network providers, including at a minimum, information on 
primary care physicians, specialists, and hospitals, and identification 
of providers that are not accepting new

[[Page 41081]]

patients; and benefits that are available under the State plan but are 
not covered under the contract, including how and where the enrollee 
may obtain those benefits, any cost sharing, and how transportation is 
provided.
    (b) Information for enrollees:
    (1) The State must notify enrollees of their disenrollment rights 
annually. The State, or the MCO, PIHP, PAHP, and PCCM, if delegated 
this responsibility by the State, must provide certain information to 
new enrollees and notify enrollees annually of their right to request 
additional information. The State must give each enrollee written 
notice of any change (that the State defines as ``significant'') in the 
information specified at least 30 days before the intended effective 
date of the change and make a good faith effort to give written notice 
of termination of a contracted provider, within 15 days after receipt 
or issuance of the termination notice, to each enrollee who received 
his or her primary care from, or was seen on a regular basis by, the 
terminated provider.
    (c) General information for all enrollees of MCOs, PIHPs, PAHPs, 
and PCCMs:
    (1) Names, locations, and telephone numbers of, and non-English 
languages spoken by, current network providers, including information 
at least on primary care physicians, specialists, and hospitals, and 
identification of providers that are not accepting new patients.
    (2) Any restrictions on the enrollee's freedom of choice among 
network providers.
    (3) Enrollee rights and responsibilities as specified in 
Sec. 438.100.
    (4) Information on grievance and fair hearing procedures, and for 
MCO and PIHP enrollees, the information specified in Sec. 438.10(g)(i).
    (5) The amount, duration, and scope of benefits available under the 
contract in sufficient detail to ensure that enrollees understand the 
benefits to which they are entitled.
    (6) Procedures for obtaining benefits, including authorization 
requirements.
    (7) The extent to which, and how, enrollees may obtain benefits, 
including family planning services from out-of-town network providers.
    (8) The extent to which, and how, after-hours and emergency 
coverage are provided.
    (9) What constitutes emergency medical condition, emergency 
services, and post-stabilization services, with reference to the 
definitions in Sec. 438.114, and the fact that prior authorization is 
not required for emergency services.
    (10) The post-stabilization care services rules set forth at 
Sec. 438.113(c) of this chapter.
    (11) Policy on referrals for specialty care and for other benefits 
not furnished by the enrollee's primary care provider.
    (12) Cost sharing, if any.
    (13) How and where to access any benefits that are available under 
the State plan but are not covered under the contract, including how 
and where the enrollee may obtain those benefits, any cost sharing, and 
how transportation is provided.
    (14) For a counseling or referral service the MCO, PIHP, PAHP, or 
PCCM does not cover because of moral or religious objections, the MCO, 
PIHP, or PCCM need not furnish information on how and where to obtain 
the service. The State must furnish information about how and where to 
obtain the service.
(d) Specific information requirements for enrollees of MCOs and PIHPs:
    (1) In addition to the requirements in Sec. 438.10(e), MCOs and 
PIHPs must provide to their enrollees the following information 
specified in Sec. 438.10(g):
    (i) Grievance, appeal, and fair hearing procedures and timeframes, 
as provided in Sec. 438.400 through 438.424, in a State-developed or 
State-approved description, which includes:
    (ii) The right to a State fair hearing and the method for obtaining 
a hearing,
    (iii) The rules governing representation at the hearing,
    (iv) The right to file grievances and appeals
    (v) The filing requirements, timeframes, and availability of 
assistance with the filing process,
    (vi) The toll-free numbers enrollees can use to file a grievance or 
appeal by phone,
    (vii) The fact that when requested by the enrollee, benefits will 
continue if the enrollee files an appeal or a request for a State fair 
hearing within the specified timeframes,
    (viii) The possibility that the enrollee may be required to pay the 
cost of services furnished during the appeal process, if the final 
decision is adverse,
    (ix) Any appeal rights that the State chooses to make available to 
providers to challenge the failure of the organization to cover a 
service,
    (x) Information on advance directives, as set forth in 
Sec. 438.6(i)(2) and physician incentive plans, as set forth in 
Sec. 438.6(h) and
    (xi) Additional information that is available upon request, 
including structure and operation of the MCO or PIHP
    2. Burden. We believe the burden placed on States, MCOs, PIHPs, 
PAHPs, and PCCMs, and enrollment brokers as a result of these 
requirements is the time associated with modifying the content of 
existing information materials, as well as the time associated with 
distributing the materials to enrollees as specified by the regulation. 
We estimate that it will initially take 12 hours for each MCO, PIHP, 
PAHP, or PCCM system to modify existing information materials to 
conform to the requirements above. We further estimate that there are 
approximately 533 MCOs, PIHPs, PAHPs, and PCCM systems equating to an 
initial modification burden of approximately 6,396 hours. After the 
initial modification, we estimate that it will take MCOs, PIHPs, and 
PAHPs approximately 4 hours each to annually update the information 
materials, equating to an annual total burden of approximately 2,132 
hours.
    We estimate that that it will take MCOs, PIHPs, PAHPs, and PCCM 
systems approximately 5 minutes per enrollee to mail a packet of 
materials to potential enrollees and enrollees. We estimate that each 
year approximately 15 percent of the Medicaid managed care enrollee 
population are new enrollees. This equates to approximately 3.9 million 
potential enrollees a year for a total burden on the States of 65,000 
hours. Mailing the annual packet of information to the 25,731,040 
enrollees, at 5 minutes a packet, will result in a burden to the State, 
or the MCOs, PIHPs, PAHPs, and PCCMs, if delegated this responsibility 
by the State, of 2,144,253 hours.
    We similarly estimate that it annually will take MCOs, PIHPs, 
PAHPs, and PCCMs 5 minutes per enrollee to supply information requested 
by potential enrollees and enrollees. We estimate that 10 percent of 
potential enrollees and enrollees will request information each year. 
For the 390,000 potential enrollees requesting information, this 
results in a burden on States of 6,500 hours. For the 2,573,104 
enrollees requesting information, this results in a burden on States, 
or MCOs, PIHPs, PAHPs, and PCCMs if delegated this responsibility by 
the State, of 214,425 hours.
    Section 438.10(i) Special Rules: States With Mandatory Enrollment 
Under State Plan Authority
    1. Requirement. Under (h), if the State plan provides for mandatory 
MCO or PCCM enrollment under section 1932(a)(1)(A) of the Act, the 
State or its contracted representative must provide information in a 
comparative, chart-like format, to potential enrollees. The information 
must include the MCO's or PCCM's service area, the benefits covered 
under the contract, any cost

[[Page 41082]]

sharing imposed by the MCOs or PCCMs and, to the extent available, 
quality and performance indicators, including but not limited to 
disenrollment rates and enrollee satisfaction.
    2. Burden. For the requirement to provide information in a chart-
like format, we believe that the additional burden on States (i.e., not 
yet captured in the above provisions) is the length of time associated 
with creating the comparative chart. We estimate that it will take 
States approximately 8 hours each to create the comparative chart. 
Currently, 10 States per year have approved managed care under the 
State Plan Option, for a total annual burden of approximately 80 hours.

D. Section 438.12  Provider Discrimination Prohibited

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

E. Section 438.50(b)  State Plan Information

    1. Requirements. Each State must have a process for the design and 
initial implementation of the State plan that involves the public and 
must have methods in place to ensure ongoing public involvement once 
the State plan has been implemented.
    2. Burden. The burden associated with this section includes the 
time associated with developing the process for public involvement, 
including annual updates. We estimate that it will take 10 current 
States 40 hours per State to develop the process for involving the 
public for a total burden of 400 hours. We estimate that ensuring 
ongoing public involvement will take another 20 hours per State 
annually for a total annual burden of 200 hours.
    The recordkeeping burden involved in maintaining documentation that 
the requirements are met is a usual and customary business practice and 
imposes no additional burden.

F. Section 438.56  Disenrollment: Requirements and Limitations

Section 438.56(d)(1)
    1. Requirement. In order to disenroll, the beneficiary (or his or 
her representative) must submit an oral or written request to the State 
agency (or its agent) or to the MCO, PIHP, PAHP, or PCCM where 
permitted.
    2. Burden. We believe that the burden associated with this 
requirement is the length of time it would take enrollees to submit in 
writing a disenrollment request, if they choose to use the written 
format. We estimate that it will take approximately 10 minutes per 
enrollee to generate a written disenrollment request. We estimate that 
approximately 5 percent of MCO, PIHP, PAHP, and PCCM enrollees will 
request that they be disenrolled from an MCO, PIHP, PAHP, or PCCM. 
Approximately one-fourth of the enrollees will choose a written rather 
than an oral request. This equates to an annual burden of approximately 
10 minutes multiplied by 321,638 affected enrollees (one-fourth of the 
1,286,552 enrollees requesting disenrollment), or approximately 53,606 
hours. We estimate a burden of 3 minutes per oral request for 
disenrollment (for 3/4ths of the 1,286,552 enrollees, or 964,914 
enrollees) for a total burden of 48,246 hours.
Section 438.56(f)
    1. Requirement. Under paragraph (f), a State that restricts 
disenrollment under this section must provide that enrollees and their 
representatives are given written notice of disenrollment rights at 
least 60 days before the start of each enrollment period.
    2. Burden. The burden for this section is addressed in 
Sec. 438.10(f).

G. Section 438.102  Enrollee-Provider Communications

    1. Requirement. Section 438.102(a)(2) states that the general rule 
in paragraph (a)(1) of this section does not require the MCOs, PIHPs, 
and PAHPs to cover, furnish, or pay for a particular counseling or 
referral service if the MCO, PIHP, or PAHP objects to the provision of 
that service on moral or religious grounds; and makes written 
information on these policies available to (1) prospective enrollees, 
before and during enrollment and, (2) current enrollees, within 90 days 
after adopting the policy with respect to an any particular service.
    2. Burden. We believe the burden associated with this requirement 
will affect no more than 3 MCOs or PIHPs annually since it applies only 
to the services they discontinue providing on moral or religious 
grounds during the contract period. We estimate that it takes 4 hours 
to devise a notice and 5 minutes to mail, affecting 52,000 enrollees, 
for a total burden of 4,345 hours. [12 hours + (52,000 x \1/2\)] The 
burden for notification of prospective enrollees of the services not 
covered by the MCO, PIHP, or PAHP on these grounds is included in the 
overall burden arising from the Information Requirements in 
Sec. 438.10.

H. Section 438.202  State Responsibilities

    1. Requirement. Each State contracting with an MCO or PIHP must 
have a written strategy for assessing and improving the quality of 
managed care services offered by the MCO or PIHP, make it available for 
public comment before adopting it in final, and conduct periodic 
reviews to evaluate the effectiveness of the strategy. We expect States 
will conduct these periodic reviews every 3 years. Each State must also 
submit to CMS a copy of the initial strategy and a copy of the revised 
strategy whenever significant changes are made. In addition, States are 
required to submit to CMS regular reports on the implementation and 
effectiveness of the strategy, consistent with the State's own periodic 
review of its strategy's effectiveness.
    2. Burden. The burden associated with this section is limited to 
those States offering managed care through MCOs or PIHPs (41) and 
includes the time associated with developing the proposed strategy, 
publicizing the proposed strategy, incorporating public comments, 
submitting an initial copy of the strategy to CMS prior to its 
implementation and whenever significant changes are made, and 
submitting regular reports on the implementation and effectiveness of 
the strategy. We estimate that it will take 40 hours per State to 
develop the proposed strategy for a total burden of 1,640 hours. We 
estimate that publicizing the proposed strategy will take 2 hours per 
State for a total burden of 82 hours. We estimate that incorporating 
public comments for the final strategy will take another 40 hours per 
State for a total burden of 1640 hours. We estimate it will take 1 hour 
per State to submit an initial copy of the strategy to CMS prior to 
implementation and whenever significant changes are made for a total of 
41 hours. We estimate it will take 40 hours per State to create and 
submit a report on the implementation and effectiveness of the strategy 
and that these reports will be submitted at

[[Page 41083]]

approximately every 3 years for a total annual burden of 546 hours.

I. Section 438.204  Elements of State Quality Strategies:

    1. Requirement. In the final rule we require at Sec. 438.204(b)(2) 
that a State identify the race, ethnicity, and primary language spoken 
by each MCO and PIHP enrollee and report this information to each MCO 
and PIHP in which each beneficiary enrolls at the time of their 
enrollment.
    2. Burden. We believe that most States currently track race and 
ethnicity data in their eligibility systems. If States do not, minor 
changes in their software will be needed. With respect to primary 
language of enrollees, there will likely be additional programming 
needed for all States. We estimate that this would require 4 hours of 
programming for each of the 41 jurisdictions for a total of 164 hours.

J. Section 438.207  Assurances of Adequate Capacity and Services

    1. Requirement. Section 438.207(b) requires that each MCO, PIHP, 
and PAHP (where applicable) submit documentation to the State, in a 
format specified by the State, to demonstrate that it has the capacity 
to demonstrate that it complies with specified requirements and that it 
has the capacity to serve the expected enrollment in its service area 
in accordance with the State's standards for access to care and meets 
specified requirements.
    Section 438.207(c) requires that this documentation be submitted to 
the State at the time the MCO, PIHP, or PAHP enters into a contract 
with the State and at any time there has been a significant change (as 
defined both by the State and this regulation) in the MCO's, PIHP's, or 
PAHPs operations that would affect adequate capacity and services.
    Section 438.207(d) requires the State, after reviewing the MCO's, 
PIHP's, or PAHP's documentation, to certify to CMS that the MCO, PIHP, 
or PAHP has complied with the State's requirements for availability of 
services, as set forth at Sec. 438.206.
    2. Burden. We believe that MCOs, PIHPs, and PAHPs already collect 
and provide this information to State agencies as part of their 
customary and usual business practices and that the only additional 
burden on MCOs, PIHPs, and PAHPs is the length of time required for 
these entities to compile this information in the format specified by 
the State agency, and the length of time to mail the information to the 
State and to CMS. We estimate that it will take each MCO, PIHP, and 
PAHP approximately 20 hours to compile the information necessary to 
meet this requirement, for a total of 20 hours multiplied by 486 MCOs, 
PIHPs, and PAHPs with networks, or approximately 9,720 hours. In 
addition, we estimate that it will take MCOs, PIHPs, and PAHPs 
approximately 5 minutes each to mail the materials associated with this 
burden to the State for an annual burden of approximately 5 minutes 
multiplied by 486 of these entities, or approximately 4 hours.
    We estimate that obtaining information on: (1) The numbers and 
types of persons with special health care needs that could be 
anticipated to enroll in the MCO or PIHP; (2) the types of experienced 
providers they would require; (3) the experience of the existing 
providers in the MCO's or PIHPs network; and (4) the numbers and types 
of additional experienced providers needed, would require an estimated 
40 hours of work for each of the 462 MCOs, PIHP, and PAHP for a total 
estimated burden of 18,480 hours.

K. Section 438.208  Coordination and Continuity of Care

    1. Requirement. Under paragraph (b)(3) of this section requires 
MCOs, PIHPs, and PAHPs to share with other MCOs, PIHPs, and PAHPs 
serving the enrollee the results of its identification and assessment 
of any enrollee with special health care needs so that those activities 
need not be duplicated.
    2. Burden. The burden associated with this information collection 
requirement is the time it will take to disclose information on 
enrollees. We estimated that it will be necessary to disclose 
information on 619,709 enrollees and take it will take 45 minutes for 
each one, for an annual total of 464,782 hours.

L. Section 438.210  Coverage and Authorization of Services

    1. Requirement. Under paragraph (b) of this section, for the 
processing of requests for initial and continuing authorizations of 
services, each contract must require that the MCO, PIHP, or PAHP and 
its subcontractors have in place written policies and procedures.
    2. Burden. The burden associated with this requirement is the time 
required to develop the policies and procedures. We do not believe that 
this requirement will increase an entity's burden as it part of usual 
and customary business practices.
    1. Requirement. Under paragraph (c) of this section, each contract 
must provide for the MCO, PIHP, or PAHP to notify the requesting 
provider, and give the enrollee written notice of any decision by the 
MCO, PIHP, or PAHP to deny a service authorization request, or to 
authorize a service in an amount, duration, or scope that is less than 
requested.
    2. Burden. The burden associated with this requirement will be the 
time required to notify the requesting provider and the enrollee. We 
believe that there will be approximately 100 notifications under this 
provision and that it will take 60 minutes to complete the notification 
(including writing it) per MCO or PIHP. There are approximately 339 
MCOs and 123 PIHPs for a total of 462 for a total of 46,200.

M. Section 438.214  Provider Selection

    1. Requirement. Under this section, each State must ensure, through 
its contracts, that each MCO, PIHP, or PAHP implements written policies 
and procedures for selection and retention of providers.
    2. Burden. The burden associated with this requirement is the usual 
and customary recordkeeping collection associated with maintaining 
documentation.

N. Section 438.230  Subcontractual Relationships and Delegation

    1. Requirement. Under paragraph (b), there must be a written 
agreement that specifies the activities and report responsibilities 
delegated to the subcontractor and provides for revoking delegation or 
imposing other sanctions if the subcontractor's performance is 
inadequate.
    2. Burden. The burden associated with this requirement is the time 
required to write the agreement and the time required to maintain 
documentation of the agreement. We believe that these activities and 
usual and customary business practices and do not affect the entities' 
burden.

O. Section 438.236  Practice Guidelines

    1. Requirement. Under paragraph (c) of this section, each MCO, 
PIHP, and PHAP must disseminate guidelines to its affected providers 
and, upon request, to enrollees and potential enrollees.
    2. Burden. The burden associated with this requirement is the time 
required to disseminate the guidelines. We believe that these will be 
rare requests and will occur infrequently.

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

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

[[Page 41084]]

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

Q. Section 438.242  Health Information Systems

    1. Requirement. Section 438.242(b)(1) requires the State to require 
each MCO and PIHP to collect data on enrollee and provider 
characteristics as specified by the State, and on services furnished to 
enrollees, through an encounter data system or other such methods as 
may be specified by the State. Paragraph (3) requires that the data be 
made available to the State and, upon request, to CMS.
    2. Burden. The above information collection requirement is subject 
to the PRA. However, we believe that the burden associated with these 
information collection requirements is exempt from the Act in 
accordance with 5 CFR 1320.3(b)(2) because the time, effort, and 
financial resources necessary to comply with these requirements would 
be incurred by persons in the normal course of their activities.

R. Section 438.402  General Requirements

    1. Requirement. In summary, Sec. 438.402 requires each MCO and PIHP 
to have a grievance system, sets out general requirements for the 
system, and establishes filing requirements. It provides that 
grievances and appeals may be filed either orally or in writing, but 
that oral appeals (except those with respect to expedited service 
authorization decisions) must be followed by a written request.
    2. Burden. We estimate that it will take approximately 5.5 hours 
for each MCO and PIHP to conform their existing general grievance 
system requirements to those in the regulation. It will take 
approximately 2.5 hours to create or change the filing requirements, 
including developing or revising templates for a notice of action and a 
notice of disposition or resolution. The total burden for 462 MCOs and 
PIHPs is 3,696 hours.
    We estimate that approximately 1 percent of 23.7 million MCO and 
PIHP enrollees (237,000) annually will file a grievance with their MCO 
or PIHP and that approximately .5 percent (118,000) annually will file 
an appeal. For these cases, we estimate that the burden on the enrollee 
filing a grievance or appeal is approximately 20 minutes per case. The 
total annual burden on enrollees is 118,500 hours.

S. Section 438.404  Notice of Action

    1. Requirement. In summary, Sec. 438.404 states that if an MCO or 
PIHP intends to deny, limit, reduce, or terminate a service; deny 
payment; deny the request of an enrollee in a rural area with one MCO 
or PIHP to go out of network to obtain a service; or fails to furnish, 
arrange, provide, or pay for a service in a timely manner, the MCO or 
PIHP must give the enrollee timely written notice and sets forth the 
requirements of that notice.
    2. Burden. We estimate that the burden associated with this 
requirement is the length of time it would take an MCO or PIHP to 
provide written notice of an intended action. We estimate that it will 
take MCOs and PIHP 30 seconds per action to make this notification. We 
estimate that approximately 5 percent (1,185,000) of the approximately 
23.7 million MCO and PIHP enrollees will receive one notice of intended 
action per year from their MCO or PIHP for a total burden of 
approximately 9,875 hours.

T. Section 438.406  Handling of Grievances and Appeals

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

U. Section 438.408  Resolution and Notification: Grievances and Appeals

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

V. Section 438.410  Expedited Resolution of Appeals

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

W. Section 438.414  Information About the Grievance System to Providers 
and Subcontractors

    1. Requirement. Under this section, the MCO or PIHP must provide 
the information specified at Sec. 438.10(g)(i) about the grievance 
system to all providers and subcontractors at the time they enter into 
a contract.
    2. Burden. The burden associated with this requirement is the time 
required to include the necessary language in the contract. We believe 
that this is usual and customary business practice and does not add any 
burden.

[[Page 41085]]

X. Section 438.416  Record Keeping and Reporting Requirements

    1. Requirement. This section requires the State to require MCOs and 
PIHPs to maintain records of grievances and appeals.
    2. Burden. We estimate that approximately 95,000 (.5 percent) of 
the approximately 19 million MCO and PIHP enrollees will file a 
grievance or appeal with their MCO or PIHP (205 per MCO or PIHP). The 
recording and tracking burden associated with each grievance is 
estimated to be 1 minute per request (3.4 hours per MCO or PIHP), for a 
total burden of 1,583 hours (1 minute multiplied by an estimated 95,000 
enrollees who would file a grievance or appeal).

Y. Section 438.604  Data That Must Be Certified

    1. Requirement. The data that must be certified include, but are 
not limited to, enrollment information, encounter data, and other 
information required by the State and contained in contracts, 
proposals, and related documents.
    2. Burden. While the requirement for MCOs and PIHPs is to certify 
all documents required by the State, the burden associated with these 
requirements is captured during the submission of such information. 
Therefore, we are assigning 1 token hour of burden for this requirement

Z. Section 438.608  Program Integrity Requirements.

    1. Requirement. Under this section, the MCO or PIHP must have 
administrative and management arrangements or procedures that are 
designed to guard against fraud and abuse. The arrangements or 
procedures must include written policies, procedures, and standards of 
conduct that articulate the organization's commitment to comply with 
all applicable Federal and State standards and the designation of a 
compliance officer and a compliance committee that are accountable to 
senior management.
    2. Burden. The burden associated with this requirement is the time 
required to file a copy of the written procedures. We believe that this 
is a normal business practice and does not add any burden.

AA. Section 438.710  Due Process: Notice of Sanction and Pre-
Termination Hearing

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

BB. Section 438.722  Disenrollment During Termination Hearing Process

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

CC. Section 438.724  Notice to CMS

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

DD. Section 438.730  Sanction by CMS: Special Rules for MCOs With Risk 
Contracts

    1. Requirement. Section 438.730(b), Notice of Sanction, requires 
that if CMS accepts a State agency's recommendation for a sanction, the 
State agency gives the MCO written notice of the proposed sanction.
    Paragraph (c) of this section, Informal reconsideration, requires 
that if the MCO submits a timely response to the notice of sanction, 
the State agency gives the MCO a concise written decision setting forth 
the factual and legal basis for the decision. In addition, if CMS 
reverses the State's decision, the State sends a copy to the MCO.
    2. Burden. These requirements are exempt under 5 CFR 1320.4(a) 
because they occur as part of administrative actions.

EE. Section 438.810  Expenditures for Enrollment Broker Services

    1. Requirement. Section 438.810(c) requires that a State 
contracting with an enrollment broker must submit the contract or 
memorandum of agreement (MOA) for services performed by the broker to 
CMS for review and approval.
    2. Burden. The burden associated with this requirement is the 
length of time for a State to mail each contract to CMS for review. We 
estimated that the burden associated with this requirement is 5 minutes 
per enrollment broker contract, for a total annual burden of 
approximately 3 hours per year (5 minutes multiplied by an estimated 35 
enrollment broker contracts in the States using brokers).
    We have submitted a copy of this final rule to OMB for its review 
of the information collection requirements described above in 
Secs. 438.6, 438.8, 438.10, 438.12, 438.50, 438.56, 438.102,

[[Page 41086]]

438.202, 438.204, 438.207, 438.208, 438.210, 438.214, 438.230, 438.236, 
438.240, 438.242, 438.402, 438.404, 438.406, 438.408, 438.410, 438.414, 
438.416, 438.608, 438.710, 438.722, 438.724, 438.730, and 438.804. 
These requirements are not effective until they have been approved by 
OMB.
    If you comment on these information collection requirements, please 
mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Information 
Services, DCES, SSG, Attn: Julie Brown, CMS-2104-F, Room N2-14-26, 7500 
Security Boulevard, Baltimore, MD 21244-1850;
      and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Brenda Aguilar, Desk Officer.

V. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review) and the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub.L. 104-4), and Executive Order 13132. Executive 
Order 12866 directs agencies to assess all costs and benefits of 
available regulatory alternatives and, if regulation is necessary, to 
select regulatory approaches that maximize net benefits (including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity). A regulatory impact analysis (RIA) 
must be prepared for major rules with economically significant effects 
($100 million or more in any 1 year.) We project the cost of this rule 
to be between $221 and $295 million annually. The burden of these costs 
will be shared between States, MCOs, PIHPs, PAHPs, PCCMs, and the 
Federal government. It should be noted that a large portion of these 
costs will be born by the Federal government through its matching 
payments to States for Medicaid expenditures.
    This rule will implement new requirements for Medicaid managed care 
programs which have not been previously implemented through either the 
previous Part 434 of the CFR or the State Medicaid Director Letters 
listed in section I.A. of the Preamble, or self-implemented through the 
BBA. The new provisions implemented under this rule are requirements 
governing : (1) Payments under risk contracts; (2) PIHPs and PAHPs; (3) 
information that must be provided to beneficiaries; quality assessment 
and performance improvement for managed care programs; and (4) 
grievances and appeals.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. We have provided an analysis of alternatives to 
these rules in section V.C. of the Preamble.
    This final rule primarily impacts beneficiaries, State agencies, 
enrollment brokers, MCOs, PIHPs, PAHPs, and PCCMs. Small entities 
include small businesses in the health care sector that are HMO medical 
centers or health practitioners as prepaid health plans with receipts 
of less than $8.5 million, nonprofit organizations, and other entities. 
(See 65 FR 69432). For purposes of the RFA, individuals and State 
governments are not included in this definition. In the proposed rule 
we invited comments on alternatives to provisions of the proposed rule 
that would reduce burden on small entities. We did not receive any 
comments in response to this invitation.
    As of June 2000, there were 339 MCOs, 123 PIHPs, 34 PAHPs, and 37 
PCCM systems. We believe that only a few of these entities qualify as 
small entities. Specifically, we believe that 16 MCOs, 14 PIHPs, 11 
PAHPs, and most managed care entities in the 37 PCCM systems are likely 
to be small entities. We estimate that there are 4.8 million 
beneficiaries enrolled in these small entities. We believe that the 
remaining MCOs, PIHPs, and PAHPs have annual receipts from Medicaid 
contracts and other business interests in excess of $8.5 million.
    The primary impact on small entities will be through the 
requirements placed on PIHPs and PAHPs by Sec. 438.8. Under this rule, 
PIHPs will be subject to nearly all of the requirements for MCOs, 
including the requirements for quality assessment and improvement and 
grievances and appeals. PAHPs are not subject to the grievance and 
appeals requirements, but will be subject to quality requirements like 
network adequacy and coverage and authorization of services where it is 
determined to be applicable. The impact on these entities from these 
provisions is discussed later in this section. However, we are 
identifying additional burden on the 14 PIHPs and 11 PAHPs, which we 
project to be small entities of 2,000 hours from the requirement for 
advance directives and 900 hours on information on solvency 
requirements, for a total burden of 2,900 hours. Using the mean hourly 
wage the average wage for the health care service sector of $16.34 
(Bureau of Labor Statistics, March 2001), this will result in a total 
cost to these small entities of $47,386.
    The most significant burden relates to providing information to 
enrollees. Specifically, MCOs, PIHPs, PAHPs, and PCCMs are required to 
make written materials available in languages that are prevalent in its 
service area (as determined by the State) and provide oral 
interpretation services when needed. The final rule requires MCOs, 
PIHPs, PAHPs, and PCCMs to make oral interpretation services available 
to each potential enrollee or enrollee requesting them. This 
requirement is actually derived from the provisions of Title VI of the 
Civil Rights Act of 1964 and Executive Order 13166, and not created by 
this rule. We estimate that less than 1% of the enrollees of these 
entities (or 48,000 individuals) will require this service an average 
of 2 times per year. Using the baseline commercial language line 
charges of $2.20 per minute with a one hour minimum, we estimate the 
cost of providing oral interpretation services to be $12.7 million 
annually. We believe that this estimate may overstate the impact of 
this requirement, because: (1) Many providers are bilingual or have 
staff that are bilingual (particularly in areas with relatively a large 
percentage of non-English speaking individuals); (2) there are less 
costly alternatives than the example we have used to provide oral 
interpretation; (3) many enrollees in need of oral interpretation will 
prefer to use a friend or relative; and (4) these specific costs should 
be mitigated by the costs of complying with current civil rights 
requirements to provide translation services.
    We do not believe that there is significant burden as a result of 
the remainder of this section. PCCMs or PAHPs do not normally provide 
much written material directly to enrollees since, in the final rule, 
we place the responsibility on States, rather than PCCMs and PAHPs. We 
believe that States will usually prepare this information so that the 
only burden on PCCMs and PAHPs will be to distribute the information 
when it is requested by an enrollee. For the small entities who must 
perform this function themselves, including those MCOs and PIHPs 
identified as such we have projected a burden of 36,000 hours for 
compliance with the requirements in the information section. This 
results in an additional burden of $588,240.
    The final rule also imposes requirements for quality assessment and 
improvement in subpart D on all MCOs

[[Page 41087]]

and PIHPs and those PAHPs designated by the State. Based on the 
estimates in the Collection of Information section of this preamble, we 
project a burden of 3,800 hours or $62,092.
    In addition, Subpart F of this rule requires the 16 MCOs and 14 
PIHPs that are small entities to develop and implement a grievance 
system as described in that section. While most of these entities would 
have had a system in place already, they will, at a minimum, need to 
modify the current system to comply with the requirements of this 
section. We project the burden for these modifications and operation of 
the grievance systems by these entities to be a total of 8 hours per 
entity for the development and modification of the current system and 
an average of 4 hours each for the resolution of the expected 1440 
grievances and appeals filed by the enrollees of these entities (based 
on the estimates contained in section IV of this preamble on 
Information Collection Requirements). This results in a total burden of 
6,000 hours at the mean hourly wage of $16.34, for a total cost of 
$98,040.
    We do not believe that the remaining impact of the provisions of 
this final rule are great on the small entities that we have 
identified. These small entities must meet certain contract 
requirements, however, these are consistent with the nature of their 
business in contracting with the State for the provision of services to 
Medicaid enrollees. They, likewise, must meet requirements related to 
disenrollment of enrollees for cause, including receipt and initial 
processing of disenrollment requests if the State delegates this 
function to the entity. However, all enrollees have an annual 
opportunity to disenroll, and historically the number of disenrollment 
requests for cause are small. In addition, these entities must submit 
marketing material to the State for review and approval, and those 
MCOs, PIHPs, and PAHPs which are at risk for emergency services must 
cover and pay for emergency services based on the prudent layperson 
standard. However, the provisions governing marketing materials and 
emergency services have already been implemented through State Medicaid 
Director Letters.
    We have clarified that PAHP enrollees have the right to a State 
fair hearing under subpart E of part 431, although this is not a new 
requirement. Additionally, PAHPs may not discriminate against providers 
seeking to participate in the plan. This requirement imposes no burden 
as it would reflect their usual and customary business operations.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis for any rule that may have a significant 
impact on the operations of a substantial number of small rural 
hospitals. This analysis must conform to the provisions of section 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 a 
Metropolitan Statistical Area and has fewer than 100 beds.
    We do not anticipate that the provisions in this final rule will 
have a substantial economic impact on most hospitals, including small 
rural hospitals. The BBA provisions include some new requirements on 
States, MCOs, and PIHPs, but no new direct requirements on individual 
hospitals. However, the prudent layperson standard for emergency 
services should benefit these hospitals by providing a uniform standard 
on which to determine the potential for coverage of these services 
across all MCOs. The impact on individual hospitals will vary according 
to each hospital's current and future contractual relationships with 
MCOs and PIHPs, but any additional burden on small rural hospitals 
should be negligible.
    We have determined that we are not preparing analysis for either 
the RFA or section 1102(b) of the Act because we have determined, and 
we certify that this rule will not have a significant economic impact 
on a substantial number of small entities or a significant impact on 
the operations of a substantial number of small rural hospitals in 
comparison to total revenues of these entities.

B. Anticipated Effects

    This final rule implements the Medicaid provisions as directed by 
the BBA. The primary objectives of these provisions are to provide 
greater beneficiary protections and quality assurance standards and to 
allow for greater flexibility for State agencies to participate in 
Medicaid managed care programs. The final rule addresses pertinent 
areas of concern between States and MCOs, PIHPs, PAHPs and PCCMs.
    Specific provisions of the regulation include the following:
     Permitting States to require in their State plan that 
Medicaid beneficiaries be enrolled in managed care. (This provision was 
implemented through a State Medicaid Director (SMD) Letter dated 
December 17, 1997, but this rule adds requirements for public 
involvement in the process.)
     Eliminating the requirement that no more than 75 percent 
of enrollees in an MCO or PHP be Medicaid or Medicare enrollees. (This 
provision was implemented through an SMD Letter dated January 14, 
1998.)
     Specifying a grievance and appeal procedure for MCO and 
PIHP enrollees.
     Providing for the types of information that must be given 
to enrollees and potential enrollees, including requirements related to 
language and format.
     Requiring that MCOs, PIHPs and PAHPs document for the 
States that they have adequate capacity to serve their enrollees and 
that States certify this to us.
     Specifying quality standards for States, MCOs, and PIHPs.
     Increasing program integrity protections and requiring 
certification of data by MCOs and PIHPs.
     Increasing the threshold for prior approval of MCO 
contracts. (This provision was implemented through an SMD Letter dated 
January 14, 1998.)
     Permitting cost sharing for managed care enrollees under 
the same circumstances as permitted in fee-for-service. (This provision 
was implemented through an SMD Letter dated December 30, 1997.)
     Expanding the managed care population for which States can 
provide 6 months of guaranteed eligibility. (This provision was 
implemented through an SMD Letter dated March 23, 1998.)
     Revising the rules for setting capitation rates.
    It is extremely difficult to accurately quantify the overall impact 
of this regulation on States, MCOs, PIHPs, PAHPs, and PCCMs because 
there is enormous variation among States and these entities regarding 
their current regulatory and contract requirements, as well as 
organizational structure and capacity. Any generalization would mask 
important variations in the impact by State or managed care program 
type. The Lewin Group, under a contract with the Center for Health Care 
Strategies, released a study of the cost impact of the earlier proposed 
regulation published on September 29, 1998 the Federal Register (63 FR 
52022). Because this new final rule addresses the same areas as the 
September 29, 1998 proposed rule and includes many similar provisions, 
the Lewin study remains the best information we have available on the 
potential incremental impact of this final rule. However, the 
provisions discussed in the study were more prescriptive, and thus more 
costly to implement, than the provisions contained in this final rule. 
Consequently, we believe that these

[[Page 41088]]

estimates are higher than the actual costs will be to implement these 
requirements.
    The Lewin study did not analyze the original proposed regulation in 
total, but focused on four areas within the original proposed 
regulation: individual treatment plans, initial health assessments, 
quality improvement programs, and grievance systems/State fair 
hearings. These areas are discussed in more detail in the specific 
section of the Impact Analysis addressing that provision. While the 
study's focus is limited to selected provisions of the previous 
regulation, and some of the details of the provisions in this final 
rule differ from the earlier proposed rule, nevertheless, we believe 
that the overall cost conclusions are relevant to this final rule. In 
addition to examining the four regulatory requirements, the Lewin study 
cited the need to evaluate both the incremental and aggregate effects 
of the rule; the affect on different managed care environments (for 
example, overall enrollment; the Medicare, commercial, and Medicaid 
mix; geographic location); and differing regulatory requirements of the 
State (for example, State patient rights laws, regulation of 
noninsurance entities). The Lewin report also points out that many of 
the BBA provisions were implemented through previous guidance to the 
States, so the regulatory impact only captures a subset of the actual 
impact of the totality of BBA requirements.
    In summary, according to the Lewin Study, States and their 
contracting managed care plans have already implemented many provisions 
of the BBA. While there are incremental costs associated with these 
regulatory requirements, they will vary widely based on characteristics 
of individual managed care plans and States. Finally, the BBA 
requirements are being implemented in an increasingly regulatory 
environment at the State level. Therefore, States, MCOs, and PIHPs will 
likely face additional costs not related to these regulatory 
requirements absent these new regulations. Thus, the incremental impact 
of these requirements on costs to be incurred would be difficult if not 
impossible to project.
    We believe that the overall impact of this final rule will be 
beneficial to Medicaid beneficiaries, MCOs, PIHPs, PAHPs, PCCMs, 
States, and CMS. Many of the BBA Medicaid managed care requirements 
merely codify the Federal statute standards widely in place in State 
law or in the managed care industry. Some of the BBA provisions 
represent new requirements for States, MCOs, PIHPs, PAHPs, and PCCMs, 
but also provide expanded opportunities for participation in Medicaid 
managed care.
    It is clear that all State agencies will be affected by this final 
Medicaid rule but in varying degrees. Much of the burden will be on 
MCOs, PIHPs, PAHPs, and PCCMs contracting with States, but this will 
also vary by existing and continuing relationships between State 
agencies and MCOs, PIHPs, PAHPs, and PCCMs. This regulation is intended 
to provide important beneficiary protections while giving States 
flexibility and minimizing the compliance cost to States, MCOs, PIHPs, 
PAHPs, and PCCMs to the extent possible consistent with the detailed 
BBA requirements. We believe the final rule provisions will result in 
improved patient care outcomes and satisfaction over the long term.
    Recognizing that a large number of entities, such as hospitals, 
State agencies, MCOs, PIHPs, PAHPs, and PCCMs will be affected by the 
implementation of these statutory provisions, and a substantial number 
of these entities may be required to make changes in their operations, 
we have prepared the following analysis. This analysis, in combination 
with the rest of the preamble, is consistent with the standards for 
analysis set forth by both the RFA and RIA.
1. State Options To Use Managed Care
    Under this provision, a State agency may amend its State plan to 
require all Medicaid beneficiaries in the State to enroll in either an 
MCO or PCCM without the need to apply for a waiver of ``freedom of 
choice'' requirements under either section 1915(b) or 1115 of the Act. 
However, waivers will still be required to include certain exempted 
populations in mandatory managed care programs, notably dual Medicare-
Medicaid eligibles, Indians, and groups of children with special needs. 
Federal review will be limited to a one-time State plan amendment 
approval, while States will no longer need to request waiver renewals 
every 2 years for section 1915(b) of the Act and 3-5 years for section 
1115 of the Act waivers. State agencies may include ``exempted'' 
populations as voluntary enrollees in the State plan managed care 
programs or as mandatory enrollees in State waiver programs. Currently, 
ten States use State plan amendments to require beneficiary enrollment 
in MCOs and PCCMs. In short, the new State plan option provides State 
agencies with a new choice of method to require participation in 
managed care. The ability of States to require enrollment in managed 
care through their State plans rather than through a waiver will not 
alter the standards of care practiced by MCOs and health care providers 
and, therefore, will not change the cost of providing care to managed 
care enrollees.
    Pursuing the State plan amendment option rather than a waiver under 
section 1915(b) or 1115 of the Act waiver may reduce State 
administrative costs because it will eliminate the need for States to 
go through the waiver renewal process. Likewise, we will benefit from a 
reduced administrative burden if fewer waiver applications and renewals 
are requested. However, we believe the overall reduction in 
administrative burden to both the States and Federal government of 
approximately 40 hours annually per State will be offset by an 
additional burden of approximately 40 hours annually to develop and 
maintain the public process required by this rule.
2. Elimination of 75/25 Rule
    Before the passage of the BBA, nearly all MCOs, and PHPs 
contracting with Medicaid were required to limit combined Medicare and 
Medicaid participation to 75 percent of their enrollment, and State 
agencies had to verify enrollment composition as a contract 
requirement. Elimination of this rule allows MCOs, PIHPs, and PAHPs to 
participate without meeting this requirement and eliminates the need 
for States to monitor enrollment composition in contracting MCOs, 
PIHPs, and PAHPs. This will broaden the number of MCOs, PIHPs, and 
PAHPs available to States for contracting, leading to more choice for 
beneficiaries. This provision results in no additional burden on States 
since it merely eliminates a previous statutory requirement and has 
already been implemented through the BBA amendment and the State 
Medicaid Director Letter in 1998.
3. Increased Beneficiary Protection--Grievance Procedures
    The BBA requires MCOs to establish internal grievance procedures 
that permit an eligible enrollee, or a provider on behalf of an 
enrollee, to challenge the denials of medical assistance or denials of 
payment. Prior to the enactment of the BBA, the regulations at 42 CFR 
434.59, required MCOs and PHPs to have an internal grievance procedure. 
While the regulations do not specify a procedure for MCOs or PIHPs to 
follow for their grievance process, we believe that these entities have 
grievance systems that are similar in their processes to the 
requirements of this final regulation. This belief is supported

[[Page 41089]]

by surveys of State Medicaid agencies, such as the survey of 10 States 
conducted by the National Academy for State Health Policy in 1999, and 
the survey of 13 States conducted by the American Public Human Services 
Association in 1997. Therefore, while this regulation will require 
uniform procedures across MCOs and PIHPs, and will require MCOs and 
PIHPs to change their procedures to conform to the regulation, the 
requirements of the final rule will not impose significant additional 
requirements on MCOs and PIHPs, beyond the 8 hours per entity we 
estimated in the Collection of Information section of this preamble 
(and included in the totals below) to make current systems conform with 
the provisions of this rule. For States, we estimate an additional 
burden for the development of an expedited process for State fair 
hearings of 20 hours per State for the 40 States that contract with 
MCOs and/or PIHPs for a total burden of 800 hours and a cost of 
$13,640.
    In the Collection of Information section of this preamble, we 
assigned 9,875 burden hours to MCOs and PIHPs for the notice 
requirements of the grievance system, and 1,583 hours for the record 
keeping requirements and summary reports to be prepared by MCOs and 
PIHPs and submitted to the States. This results in 11,458 total burden 
hours. Using the mean hourly wage for the health care service sector 
(the Bureau of Labor Statistics, March 2001) of $16.34, this would 
result in a total cost to MCOs and PIHPs of $187,224.
4. Provision of Information
    In mandatory managed care programs, we require that beneficiaries 
be informed of the choices available to them when enrolling with MCOs, 
PIHPs, PAHPs, and PCCMs. Section 1932(a)(5) of the Act, enacted in 
section 4701(a)(5) of the BBA, describes the kind of information that 
must be made available to Medicaid enrollees and potential enrollees. 
It also requires that this information, and all enrollment notices and 
instructional materials related to enrollment in MCOs, PIHPs, PAHPs, 
and PCCMs be in a format that can be easily understood by the 
individuals to whom it is directed. We do not believe that these 
requirements deviate substantially from current practice, including the 
new mechanism requirement. Programs operated under section 1915(b) and 
1115 authority have always had more stringent beneficiary protections. 
Furthermore, there is no way to quantify the degree of burden on State 
agencies, MCOs, PIHPs, PAHPs, and PCCMs for several reasons. We do not 
have State-specific data on what information States currently provide, 
or the manner in which they provide it. Variability among States 
indicates that implementing or continuing enrollee information 
requirements will represent different degrees of difficulty and 
expense.
    The information requirements for MCOs and PCCMs in the final rule 
are required under the BBA. In this final rule, however, we extend 
requirements to PIHPs and PAHPs. In the Collection of Information 
section of this Preamble, we have estimated the total burden on States, 
MCOs, PIHPs, PAHPs, and PCCMs of 2,358,678 hours to comply with these 
requirements. Using a weighted average between the mean hourly wages 
for State employees and the health care service sector of $16.70, this 
results in a total cost of $39,389,923.
    As a requirement under the provision of information section, State 
agencies opting to implement mandatory managed care programs under the 
State plan amendment option are required to provide comparative 
information on MCOs and PCCMs to potential enrollees. Currently only 
ten States have exercised the option to use a State plan amendment to 
require beneficiary enrollment in managed care. However, for States 
that do select this option, we do not believe that providing the 
comparative data in itself represents an additional burden, as these 
are elements of information that most States currently provide. The 
regulation specifies that the information must be presented in a 
comparative or chart-like form that facilitates comparison among MCOs, 
and PCCMs. This may be perceived as a burden to States that have 
previously provided this information in some other manner; however, it 
is our belief that even in the absence of the regulation, the trend is 
for States, and many accreditation bodies such as the National 
Committee for Quality Assurance (NCQA), to use chart-like formats. 
Consequently, enrollees will benefit from having better information for 
selecting MCOs, and PCCMs. Only a few States have opted for State plan 
amendments so far, but it is anticipated that more States will 
participate over the long term. States that participate in the future 
will benefit from any comparative tools developed by other States. We 
state in the Collection of Information section of this preamble that 
ten States availed themselves of the State Plan option, and thereby 
will be required to display information on a comparative chart. We are 
assuming it will take 8 hours each to create the comparative chart, or 
80 hours for 10 States. Using the mean hourly wage for State employees 
(the Bureau of Labor Statistics, March 2001) of $17.05, this would 
result in total costs to States of $1364. We estimate that there may be 
additional costs associated with the production of these charts of 
$2,000--$5,000 per state that are not reflected in the Collection of 
Information requirements. This results in a total estimated cost from 
$21,364 to $51,364 to comply with this requirement
5. Demonstration of Adequate Capacity and Services
    The BBA requires Medicaid MCOs to provide the State and the 
Secretary of HHS with assurances of adequate capacity and services, 
including service coverage, within reasonable timeframes. States 
currently require assurances of adequate capacity and services as part 
of their existing contractual arrangements with MCOs, PIHPs and PAHPs. 
However, certification of adequacy has not been routinely provided to 
us in the past. Under this rule, each State retains its authority to 
establish standards for adequate capacity and services within MCO, PIHP 
and PAHP contracts. This may be perceived as a burden to MCOs, PIHPs 
and PAHPs, and for States that have not been required to formally 
certify that an MCO, PIHP or PAHP meets the States' capacity and 
service requirements. However, certification to us will ensure an 
important beneficiary protection while imposing only a minor burden on 
States to issue a certification to us of the information that should 
already be in their possession.
    Each State agency has its own documentation requirements and its 
own procedures to assure adequate capacity and services. This 
regulation contemplates that States continue to have that flexibility.
    Under this regulation, State agencies must determine and specify 
both the detail and type of documentation to be submitted by the MCO, 
PIHP or PAHP as applicable, to assure adequate capacity and services 
and the type of certification to be submitted to us. We believe the 24 
PAHPs contracting as dental plans or transportation providers will need 
to meet this requirement. Accordingly, variability among State agencies 
implementing this regulation represents different degrees of detail and 
expense. Regardless of the level of additional burden on MCOs, PIHPs, 
PAHPs, State agencies, and us, Medicaid beneficiaries will receive 
continued protections in access to health care under both State and 
Federal statute. For purposes of the Collection of Information section 
of this preamble, we assume that it would take 20 hours per

[[Page 41090]]

MCO, PIHP, or PAHP to complete this requirement. For the 486 MCOs, 
PIHPs, and PAHPs, this requirement would take 9,720 hours to complete 
annually. Based on a mix of clerical and administrative salaries to 
produce, verify, and submit this information, we project a total cost 
of $174,960 (9720 hours at $18 per hour) to MCOs, PIHPs, and PAHPs to 
comply with this requirement.
6. New Quality Standards
    The BBA requires that each State agency have an ongoing quality 
assessment and improvement strategy for its Medicaid managed care 
contracting program. The strategy, among other things, must include: 
(1) Standards for access to care so that covered services are available 
within reasonable timeframes and in a manner that ensures continuity of 
care and adequate capacity of primary care and specialized services 
providers; (2) examination of other aspects of care and service 
directly related to quality of care, including grievance procedures and 
information standards; (3) procedures for monitoring and evaluating the 
quality and appropriateness of care and service to enrollees; and (4) 
periodic reviews to evaluate the effectiveness of the State's quality 
strategy.
    The provisions of this final rule impose requirements for State 
quality strategies and requirements for MCOs and PIHPs that States are 
to incorporate as part of their quality strategy. These MCO and PIHP 
requirements address: (1) MCO and PIHP structure and operations; (2) 
Medicaid enrollees' access to care; and (3) MCO and PIHP 
responsibilities for measuring and improving quality. While these new 
Medicaid requirements are a significant increase in Medicaid regulatory 
requirements in comparison to the regulatory requirements that existed 
before the BBA, we believe the increases are appropriate because many 
of the requirements are either identical to or consistent with quality 
requirements placed on MCOs by private sector purchasers, the Medicare 
program, State licensing agencies, and private sector accreditation 
organizations. While these new requirements also will have implications 
for State Medicaid agencies that are responsible for monitoring for 
compliance with the new requirements, we believe that a number of 
recent statutory, regulatory, and private sector developments will 
enable State Medicaid agencies to more easily monitor for compliance 
than in the past at potentially less cost to the State.
    Prior to issuance of that proposed rule, we worked closely with 
State Technical Advisory Groups (TAGs) in developing the managed care 
quality regulations and standards. Requirements under this final 
regulation build on a variety of initiatives of State Medicaid agencies 
and us to promote the assessment and improvement of quality in plans 
contracting with Medicaid, including:
    The Quality Improvement System for Managed Care (QISMC), an 
initiative with State and Federal officials, beneficiary advocates, and 
the managed care industry to develop a coordinated quality oversight 
system for Medicare and Medicaid that reduces duplicate or conflicting 
efforts and emphasizes demonstrable and measurable improvement.
    QARI, serving as a foundation to the development of QISMC, 
highlights the key elements in the Health Care Quality Improvement 
System (HCQIS), including internal quality assurance programs, State 
agency monitoring, and Federal oversight. This guidance emphasizes 
quality standards developed in conjunction with all system 
participants, such as managed care contractors, State regulators, 
Medicaid beneficiaries or their representatives, and external review 
organizations.
    Further, we have built on efforts in other sectors in developing 
these quality requirements in order to capitalize on current activities 
and trends in the health care industry. For example, many employers and 
cooperative purchasing groups and some State agencies already require 
that organizations be accredited by the National Committee on Quality 
Assurance (NCQA), the Joint Commission on Accreditation of Healthcare 
Organizations (JCAHO), the American Accreditation Healthcare Commission 
(AAHC), or other independent bodies. Many also require that 
organizations report their performance using Health Plan Employer Data 
& Information Set (HEDIS), Foundation for Accountability (FACCT), or 
other measures and conduct enrollee surveys using the Consumer 
Assessment of Health Plans Study (CAHPS) or other instruments. NCQA 
estimates that more than 90 percent of plans are collecting some or all 
of HEDIS data for their commercial population. Also, States have 
heightened their regulatory efforts through insurance or licensing 
requirements, and the National Association of Insurance Commissioners 
(NAIC) has developed model acts on network adequacy, quality assessment 
and improvement, and utilization review.
    While we anticipate that many organizations will need to invest in 
new staff and information systems in order to perform these new quality 
improvement activities, it is difficult to quantify these financial and 
operational ``investments,'' as State agencies, MCOs, and PIHPs across 
the country exhibit varying capabilities in meeting these standards. 
These new quality requirements may present administrative challenges 
for some State agencies, MCOs, and PIHPs. However, States have 
significant latitude in how these requirements are implemented. 
Acknowledging that there likely will be some degree of burden on 
States, MCOs, and PIHPs, we also believe that the long-term benefits of 
greater accountability and improved quality in care delivery outweigh 
the costs of implementing and maintaining these processes over time.
    According to the MCOs included in the Lewin study, many of the 
quality provisions in the September 1998 proposed rule (as well as 
those in this final rule) are not expected to have large incremental 
costs. The study mainly focused on the assessment and treatment 
management components of the regulation, as well as the quality 
improvement projects. For example, they estimate the cost of an initial 
assessment (called ``screening'' in this final regulation) as ranging 
from $0.17 to $0.26 per member per month (PMPM), but for an MCO that 
currently performs an initial assessment, the incremental cost is 
estimated as $0.03 to $0.06 PMPM. Extrapolating these estimates to the 
population of Medicaid managed care enrollees, if all enrollees were 
enrolled in plans doing initial assessments, the total cost would range 
from $6.8 million to $13.5 million. If all enrollees were enrolled in 
plans that did not perform initial assessments, the total cost would be 
$38 million to $58 million.
    Similarly, the costs of quality improvement projects can vary from 
$60,000 to $100,000 per project in the first year (start-up), $80,000 
to $100,000 in the second and third years (the intervention and 
improvement measurement cycle), and $40,000 to $50,000 for the forth 
and subsequent years (ongoing performance measurement). If we assume 
that each of the approximately 339 MCOs and 123 PIHPs were to have one 
quality improvement project in each year, these costs will range from 
$180,000 to $230,000 per MCO or PIHP for a total cost of between $83 
and $106 million.

[[Page 41091]]

7. Administration
    a. Certifications and Program Integrity Protections. Sections 
1902(a)(4) and (19) of BBA require that States conduct appropriate 
processes and methods to ensure the efficient operation of the health 
plans. This includes mechanisms to not only safeguard against fraud and 
abuse but also to ensure accurate reporting of data among health plans, 
States, and us.
    Section 438.602 of the final rule addresses the importance of 
reliable data that are submitted to States and requires MCOs and PIHPs 
to certify the accuracy of these data to the State. These data include 
enrollment information, encounter data, or other information that is 
used for payment determination. Even if States do not use encounter 
data to set capitation rates for MCOs and PIHPs, these data, along with 
provider and enrollment data, are useful for States in measuring 
quality performance and other monitoring of health plans. The provision 
of the final rule that requires plans to attest to the validity of data 
presents an additional step in the process of data submission. MCOs and 
PHPs have historically worked closely with States when reporting 
Medicaid data in order to affirm that the data are accurate and 
complete. Submitting a certification of validity of data submitted does 
not represent a significant burden to health plans.
    Section 438.606 requires MCOs and PIHPs to have effective 
operational capabilities to guard against fraud and abuse. As a result, 
MCOs and PIHPs will uncover information about possible violations of 
law that they would be required to report to the State. We do not 
believe that these will be frequent or large in number and, therefore, 
will not result in burdens to the MCOs and PIHPs beyond what is usual 
in the course of business.
    b. Change in Threshold from $100,000 to $1 Million. Before the 
passage of the BBA, the Secretary's prior approval was required for all 
HMO contracts involving expenditures of $100,000 or more. Under the 
BBA, the threshold amount is increased to $1 million. This change in 
threshold will have minimal impact on plans currently contracting with 
State agencies for Medicaid managed care. Currently, only one or two 
plans in the country have annual Medicaid expenditures of under $1 
million. Therefore, this final rule provision will not affect a 
significant number of plans or States.
8. Permitting Same Copayments in Managed Care as in FFP
    Under section 4708(c) of the BBA, States may now allow copayments 
for services provided by MCOs to the same extent that they allow 
copayments under fee-for-service. Imposition of copayments in 
commercial markets typically results in lower utilization of medical 
services, depending on the magnitude of payments required of the 
enrollee. Thus, we normally expect State agencies that implement 
copayments for MCO enrollees to achieve some savings. However, applying 
copayments to Medicaid enrollees may cause States and MCOs to incur 
administrative costs that more than offset these savings. This is due 
to several factors. First, the amount of copayments allowed by statute 
are significantly lower than typical commercial copayments. Second, it 
is difficult to ensure compliance with these payments, especially given 
that the enrollees have limited income. Third, to achieve maximum 
compliance, collection efforts will be necessary on the part of MCOs or 
PHPs. It is also possible that, if State agencies take advantage of 
this option, Medicaid managed care enrollees may defer receipt of 
health care services, their health conditions may deteriorate, and the 
costs of medical treatment may be greater over the long term. For these 
reasons, it is difficult to predict how many States will take advantage 
of this option or of the net costs or savings that would result.
9. Six-Month Guaranteed Eligibility
    The legislation expanded the States' option to guarantee up to 6 
months eligibility in two ways. First, it expands the types of MCOs 
whose members may have guaranteed eligibility, in that it now includes 
anyone who is enrolled with a Medicaid managed care organization as 
defined in section 1903(m)(1)(A) of the Act. Second, it expands the 
option to include those enrolled with a PCCM as defined in section 
1905(t) of the Act. These changes were effective October 1, 1997. To 
the extent that State agencies choose this option, we expect MCOs, 
PIHPs, PAHPs, and PCCMs in those States to support the use of this 
provision since it affords health plans with assurance of membership 
for a specified period of time. Likewise, beneficiaries will gain from 
this coverage expansion, and continuity of care would be enhanced. The 
table below displays our estimates of the impact of the expanded option 
for 6 months of guaranteed eligibility under section 4709 of the BBA.

              Cost of 6-Month Guaranteed Eligibility Option
         [Dollars in millions rounded to the nearest $5 million]
------------------------------------------------------------------------
                                            FY      FY      FY      FY
                                           2002    2003    2004    2005
------------------------------------------------------------------------
Federal.................................      80     115     165     230
State...................................      60      90     125     175
                                         -------------------------------
    Total...............................     140     205     290     405
------------------------------------------------------------------------

    Because this provision was effective shortly after enactment of the 
BBA, the estimates of Federal costs have been reflected in our Medicaid 
budget since FY 1998. The estimates assume that half of the current 
Medicaid population is enrolled in managed care and that this 
proportion would increase to about two-thirds by 2003. We also assume 
that 15 percent of managed care enrollees were covered by guaranteed 
eligibility under rules in effect prior to enactment of the BBA and 
that the effect of the expanded option under section 4709 of the BBA 
would be to increase this rate to 20 percent initially and to 30 
percent by 2003. The guaranteed eligibility provision is assumed to 
increase average enrollment by 3 percent in populations covered by the 
option. This assumption is based on computer simulations of enrollment 
and turnover in the Medicaid program. Per capita costs used for the 
estimate were taken from the President's FY 1999 budget projections and 
the costs for children take into account the interaction of this 
provision with the State option for 12 months of continuous eligibility 
under section 4731 of the BBA. The distribution between Federal and 
State costs is based on the average Federal share representing 57 
percent of the total costs.
    In States electing the 6-month guaranteed eligibility option, 
Medicaid beneficiaries will have access to increased continuity of 
care, which should result in better health care management and improved 
clinical outcomes.
10. Financial Impact of Revised Rules for Setting Capitation Payments
    This final rule replaces the current UPL requirement at 
Sec. 447.361 with new rate-setting rules incorporating an expanded 
requirement for actuarial soundness of capitation rates as described in 
detail in Sec. 438.6(c). In general, we do not expect a major budget 
impact from the use of these new rate setting rules. While the rate 
setting rules may provide some States additional flexibility in setting 
higher capitation rates than what would have

[[Page 41092]]

been allowed under current rules, we believe that the requirements for 
actuarial certification of rates, along with budgetary considerations 
by State policy makers, would serve to limit increases to within 
reasonable amounts. Moreover, the Secretary retains the authority to 
look behind rates that appear questionable and disapprove any that do 
not comply with the rate setting requirements.
    Because we cannot predict State behavior in these areas, we are 
unable to quantify the impact of potential rate increases that may be 
triggered by these new rules. However, as an illustration of the 
potential impact, we can compare states such as Oregon and Tennessee, 
which have had the upper payment limit requirement waived under their 
health care reform demonstrations to the other states providing managed 
care through contracts with MCOs. The capitation rates paid by these 
states do no vary significantly from most states operating under the 
UPL requirement.
    Another example to consider is pediatric dental care, where low 
payment rates have frequently been cited as a barrier to access. Using 
Medicaid statistical and financial data, we estimate that the average 
Medicaid payment for dental services to children, on a per member per 
month (PMPM) basis, is about $10. A recent study by the Milbank 
Memorial Fund recommended a model pediatric dental program that is 
estimated to cost $14.50 PMPM, or 45 percent higher than the current 
average.
    If these new rules induced 10 percent of States (on a dollar volume 
basis) to adopt the Millbank program or its monetary equivalent, annual 
Federal and State premium costs for children would rise by about 0.3 
percent, or approximately $50 million. As indicated above, such 
increases in spending could be achieved under current rules, so it is 
difficult to predict the extent to which the proposed changes to rate 
setting requirements would precipitate these or any other additional 
costs to the Medicaid program.
    As discussed in the Collection of Information section of this 
Preamble, we expect a net reduction in administrative burden on states 
of 11,904 hours through this change, resulting in a projected savings 
of $202,963.
11. Costs to States and Providers of Provisions Assigned Burden Hours
    The Collection of Information Requirements section of this preamble 
includes estimates of the number of hours it will take States, 
providers, and enrollees to provide information required under this 
regulation. For States, the total hours are estimated to be 2,481,076. 
To estimate the cost impact of these requirements on States, we assume 
the total cost of these requirements to be the sum of the estimated 
hours times the mean hourly wage for State employees of $17.05 (the 
Bureau of Labor Statistics, March, 2001), or $42,302,346. Because the 
Federal government shares the general administrative costs of the 
Medicaid program with the States, we estimate the total cost of these 
requirements to States to be approximately $21 million dollars 
annually.
    For MCOs, PIHPs, PAHPs, and PCCMs, we estimate that the Collection 
and Information Requirements will take 1,264,461.5 hours annually to 
complete. To estimate the cost impact of these requirements on 
providers, we multiplied these hours by the mean hourly wage for health 
care service workers of $16.34 (the Bureau of Labor Statistics, March, 
2001) to estimate the cost of these requirements to be approximately 
$20.7 million.
12. Contract Monitoring
    This final rule requires States to include certain specifications 
in their contracts with MCOs, PIHPs, PAHPs, and PCCMs and to monitor 
compliance with those contract provisions. It also requires States to 
take a proactive role in monitoring the quality of their managed care 
program. These requirements add some administrative burden and costs to 
States. The amount of additional administrative cost will vary by State 
depending on how inclusive current practice is of the new requirements. 
In addition, for those States not using like requirements at present, 
we believe that most will be adopting similar requirements on their own 
in the future absent this final rule.
    The final rule also increases Federal responsibilities for 
monitoring State performance in managing their managed care programs. 
However, no new Federal costs are expected as we plan to use existing 
staff to monitor these new requirements.

C. Alternatives Considered

    In publishing this final rule implementing the BBA Medicaid managed 
care provisions, we considered two main alternatives. The first 
alternative was to allow the January 19, 2001 final rule with comment 
to become effective as published. The second alternative was to 
implement the BBA statute as written and not regulate beyond the 
statutory language. We believe that this final rule as now written 
maintains an appropriate balance between these two alternatives.
    We realized that allowing the more prescriptive January 2001 rule 
to become effective would cost states and health plans more to 
implement and could potentially restrict access if states and health 
plans became unwilling to participate in Medicaid managed care. We 
heard from several key stakeholders that the January 2001 final rule 
with comment was overly burdensome and did not allow sufficient State 
flexibility. In addition, others stated that the January 2001 final 
rule was a micro-managing approach to Medicaid managed care and would 
make it increasingly difficult for State Medicaid agencies to provide 
access to quality health care through managed care, since MCOs and 
other providers would not be willing to participate. Many felt that the 
requirements would be administratively burdensome to implement, 
particularly for small entities, and created significant business risks 
for MCOs. The rules would have resulted in an increase in health plan 
compliance costs and a significant additional burden on small entities 
without meaningfully improving patient care. Particular examples of 
provisions, which would increase costs significantly, were the 
requirements for specific timeframes for conducting initial health 
screenings, performing comprehensive health assessments and the 
detailed requirements under the notice of action provisions. Based on 
these concerns we decided that we needed more time to understand the 
impact of the January 2001 final rule. In the interim we believed the 
best approach was to streamline the January 2001 provisions and 
republish as a proposed rule. The removal of the highly prescriptive 
requirements will enhance States' abilities to continue innovations 
with their managed care programs leading to improved efficiencies and 
reduced costs. Further the new rate setting provisions will result in 
rates that more appropriately reflect the cost of health services.
    On the other hand, implementing the BBA statutory language as 
written would not have provided adequate patient protections and may 
have resulted in lower overall quality of care. In addition to the 
broad patient protection and quality provisions in the BBA statute, 
this final rule provides consumers with comprehensive, easy-to-
understand information about their health plan, establishes timeframes 
for review of grievance and appeals, requires adequate provider 
networks sufficient to meet the needs of enrolled individuals, requires 
identification of individuals with special health care

[[Page 41093]]

needs, specifies timeframes for service authorization decisions and 
requires continuity and coordination of care. In addition, States must 
have an overall strategy to ensure the delivery of quality health care 
by its MCOs, PIHPs and PAHPs. Further, MCOs and PIHPs are required to 
conduct performance improvement projects that must be designed to 
achieve significant improvement in clinical care and nonclinical care 
areas that are expected to have a favorable effect on health outcomes 
and enrollee satisfaction. We believe that all of these provisions, 
while consistent with the BBA's intent will work to improve overall 
quality of care for Medicaid beneficiaries enrolled in Medicaid managed 
care. Through enhanced care coordination and quality monitoring, the 
final rule's provisions will enable the earlier identification of 
serious medical conditions and the effective management of individuals 
with special health care needs. States will be able to highlight 
quality of care, which will result in decreased costs for health plans 
and States. All of these requirements will work together to improve 
patient outcomes and possibly reduce health complications and costly 
procedures.
    These new rules appropriately balance the necessary protections for 
all beneficiaries enrolled in MMC and state flexibility to manage their 
programs. They create a framework for States to design managed care 
programs that will permit innovation and support program growth. This 
final rule is written to recognize the responsibilities of States and 
the need to employ different approaches to achieving the same goal of 
strong, viable Medicaid managed care programs that deliver high quality 
health care within State marketplaces and health care delivery systems.

D. Conclusion

    This BBA managed care final rule will affect States, MCOs, PIHPs, 
PAHPs, PCCMs, providers, and beneficiaries and us in different ways. 
The initial investments that are needed by State agencies and MCOs, 
PIHPs, PAHPs, and PCCMs will result in improved and more consistent 
standards for the delivery of health care to Medicaid beneficiaries. 
Greater consumer safeguards will result from new quality improvement 
and protection provisions, which meet or exceed those in other public 
or private health care plans. In addition, this rule provides a degree 
of flexibility in how these new requirements are met, so that necessary 
changes can be phased in by states and health plans in ways that work 
best in a particular state's Medicaid program. Further, the new rules 
on payments under risk contracts remove the limitation on payment rates 
at historical fee-for-service costs, giving states some added 
flexibility in establishing payment systems that maintain or expand 
their current managed care programs, thus enhancing choice for Medicaid 
consumers and their ability to find a medical home. Consequently, long 
term savings will be derived from more consistent standards across 
States, MCOs, PIHPs, PAHPs, and PCCMs and increased opportunities for 
provider and beneficiary involvement in improved access, outcomes, and 
satisfaction.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

E. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that may result in an expenditure in any 1 year by 
State, local, and tribal governments, in the aggregate, or by the 
private sector, of $110 million or more (adjusted annually for 
inflation). We have determined that this final rule does not impose any 
mandates on State, local, or tribal governments, or the private sector 
that will result in an annual expenditure of $110 million or more.

F. Federalism

    Under Executive Order 13132, we are required to adhere to certain 
criteria regarding Federalism in developing regulations. We have 
determined that this final rule would not significantly affect States 
rights, roles, and responsibilities. This regulation supersedes 
existing State laws regulating managed care, unless State laws are more 
restrictive.
    The BBA requires States that contract with organizations under 
section 1903(m) of the Act to have certain beneficiary protections in 
place when mandating managed care enrollment. This rule implements 
those BBA provisions in accordance with the Administrative Procedure 
Act. This rule also eliminates certain requirements viewed by States as 
impediments to the growth of managed care programs, such as 
disenrollment without cause at any time and the inability to require 
enrollment in managed care without a waiver. We also apply many of 
these requirements to prepaid health plans that provide for inpatient 
hospital and institutional services. We believe this is consistent with 
the intent of the Congress in enacting the quality and beneficiary 
protection provisions of the BBA. We worked with States in developing 
this final regulation. In 1997-1998, when we were developing the 
original proposed rule, published in September 1998, we consulted with 
State Medicaid agency representatives in order to understand the 
potential impacts of the provisions of the regulations then being 
considered. In November 1997 we met with the Executive Board of the 
National Association of State Medicaid Directors (NASMD) and discussed 
the process for providing initial guidance to States about the Medicaid 
provisions of the BBA. We provided this guidance in a series of over 50 
letters to State Medicaid Directors. Much of the policy included in 
this final regulation relating to the State plan option provision was 
included in these letters. In May 1998, we briefed the Executive 
Committee of NASMD on the general content of the proposed regulation. 
More specific State input was obtained through discussions throughout 
the spring of 1998 with the Medicaid Technical Advisory Groups (TAGs) 
on Managed Care and Quality. These groups are comprised of Medicaid 
agency staff with notable expertise in the subject area and our 
regional office staff and are staffed by the American Public Human 
Services Association. The Managed Care TAG devoted much of its agenda 
for several monthly meetings to BBA issues. The Quality TAG 
participated in two conference calls exclusively devoted to discussion 
of BBA quality issues. Through these contacts, we explored with State 
agencies their preferences regarding policy issues and the feasibility 
and practicality of implementing policy under consideration. We also 
invited public comments as part of the rulemaking process and received 
comments from over 380 individuals and organizations. Most of the 
commenters had substantial comments that addressed many provisions of 
the regulation.
    Following publication of the final rule with comment on January 19, 
2001, the new Administration delayed the effective date of the January 
2001 rule three times to provide it an opportunity to conduct its own 
review of the regulation. During this additional review period, we 
heard from key stakeholders in the Medicaid managed care program, 
including States, provider organizations, and advocates for 
beneficiaries. Some of these parties expressed serious concerns about 
the regulation. After further consideration of the regulations and the 
issues raised,

[[Page 41094]]

in August 2001 we published an interim final rule with comment period 
to further delay the effective date of the January 2001 final rule with 
comment. Immediately following the further delay, on August 20, 2001 we 
published a new Medicaid managed care proposed rule to implement the 
Medicaid managed care provisions of the BBA and to give consideration 
to all the concerns that were communicated to us.
    We received comments from over 300 parties (States, managed care 
organizations, providers, provider organizations and advocates for 
beneficiaries) on the August 2001 proposed rule. Many of the 
recommendations made by commenters have been incorporated into this 
final rule. For recommendations not accepted, a response has been 
included in this preamble. Moreover, we discussed technical issues with 
State experts through the TAGS to make certain that the final rule 
could be practically applied.

List of Subjects

42 CFR Part 400

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

42 CFR Part 430

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

42 CFR Part 431

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

42 CFR Part 434

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

42 CFR Part 435

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

42 CFR Part 438

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

42 CFR Part 440

    Grant programs-health, Medicaid.

    For the reasons set forth in the preamble, 42 CFR chapter IV is 
amended as set forth below:

PART 400--INTRODUCTION; DEFINITIONS

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

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

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


Sec. 400.203  Definitions specific to Medicaid.

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

PART 430--GRANTS TO STATES FOR MEDICAL ASSISTANCE PROGRAMS

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

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

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


Sec. 430.5  Definitions.

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

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

    1. The authority citation for part 431 continues to read as 
follows:

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


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


Sec. 431.51  Free choice of providers.

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

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


Sec. 431.55  Waiver of other Medicaid requirements.

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


Sec. 431.200  Basis and scope.

    This subpart--
    (a) Implements section 1902(a)(3) of the Act, which requires that a 
State plan provide an opportunity for a fair hearing to any person 
whose claim for assistance is denied or not acted upon promptly;
    (b) Prescribes procedures for an opportunity for a hearing if the 
State agency or PAHP takes action, as stated in this subpart, to 
suspend, terminate, or reduce services, or an MCO or PIHP

[[Page 41095]]

takes action under subpart F of part 438 of this chapter; and
    (c) Implements sections 1919(f)(3) and 1919(e)(7)(F) of the Act by 
providing an appeals process for any person who--
    (1) Is subject to a proposed transfer or discharge from a nursing 
facility; or
    (2) Is adversely affected by the pre-admission screening or the 
annual resident review that are required by section 1919(e)(7) of the 
Act.

    5. In Sec. 431.201, the following definition is added in 
alphabetical order:


Sec. 431.201  Definitions.

* * * * *
    Service authorization request means a managed care enrollee's 
request for the provision of a service.

    6. In Sec. 431.220, the introductory text of paragraph (a) is 
revised, the semicolons after paragraphs (a)(1), (a)(2), and (a)(3) and 
the ``and'' at the end of paragraph (a)(3) are removed and periods are 
added in their place, and new paragraphs (a)(5) and (a)(6) are added, 
to read as follows:


Sec. 431.220  When a hearing is required.

    (a) The State agency must grant an opportunity for a hearing to the 
following:
    * * *
    (5) Any MCO or PIHP enrollee who is entitled to a hearing under 
subpart F of part 438 of this chapter.
    (6) Any PAHP enrollee who has an action as stated in this subpart.
* * * * *

    7. In Sec. 431.244, paragraph (f) is revised to read as follows:


Sec. 431.244  Hearing decisions.

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

PART 434--CONTRACTS

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

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


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


Sec. 434.1  Basis and scope.

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


Sec. 434.2  [Amended]

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


Sec. 434.6  [Amended]

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


Secs. 434.20 through 434.38 (Subpart C)  [Removed]

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


Secs. 434.42 through 434.44  [Removed]

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


Secs. 434.50 through 434.67 (Subpart E)  [Removed]

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

    8. Section 434.70 is revised to read as follows:


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

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


Secs. 434.71 through 434.75 and 434.80  [Removed]

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

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

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

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


Sec. 435.212  [Amended]

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


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

    The State agency may provide that a recipient who is enrolled in an 
MCO or PCCM and who becomes ineligible for Medicaid is considered to 
continue to be eligible--
* * * * *

    3. Section 435.326 is revised to read as follows:


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

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


Sec. 435.1002  [Amended]

    4. In Secs. 435.1002, in paragraph (a), ``Secs. 435.1007 and 
435.1008'' is revised to read ``Secs. 435.1007, 435.1008, and 438.814 
of this chapter''.

    5. A new part 438 is added to chapter IV to read as follows:

[[Page 41096]]

PART 438--MANAGED CARE

Subpart A--General Provisions

Sec.
438.1  Basis and scope.
438.2  Definitions.
438.6  Contract requirements.
438.8  Provisions that apply to PIHPs and PAHPs.
438.10  Information requirements.
438.12  Provider discrimination prohibited.

Subpart B--State Responsibilities

438.50  State Plan requirements.
438.52  Choice of MCOs, PIHPs, PAHPs, and PCCMs.
438.56  Disenrollment: Requirements and limitations.
438.58  Conflict of interest safeguards.
438.60  Limit on payment to other providers.
438.62  Continued services to recipients.
438.66  Monitoring procedures.

Subpart C--Enrollee Rights and Protections

438.100   Enrollee rights.
438.102  Provider-enrollee communications.
438.104  Marketing activities.
438.106  Liability for payment.
438.108  Cost sharing.
438.114  Emergency and poststabilization services.
438.116  Solvency standards.

Subpart D--Quality Assessment and Performance Improvement

438.200  Scope.
438.202  State responsibilities.
438.204  Elements of State quality strategies.

Access Standards

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

Structure and Operation Standards

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

Measurement and Improvement Standards

438.236  Practice guidelines.
438.240  Quality assessment and performance improvement program.
438.242  Health information systems.

Subpart E--[Reserved]

Subpart F--Grievance System

438.400   Statutory basis and definitions.
438.402  General requirements.
438.404  Notice of action.
438.406  Handling of grievances and appeals.
438.408  Resolution and notification: Grievances and appeals.
438.410  Expedited resolution of appeals.
438.414  Information about the grievance system to providers and 
subcontractors.
438.416  Recordkeeping and reporting requirements.
438.420  Continuation of benefits while the MCO or PIHP appeal and 
the State fair hearing are pending.
438.424  Effectuation of reversed appeal resolutions.

Subpart G--[Reserved]

Subpart H--Certifications and Program Integrity

438.600  Statutory basis.
438.602  Basic rule.
438.604  Data that must be certified.
438.606  Source, content, and timing of certification.
438.608  Program integrity requirements.
438.610  Prohibited affiliations with individuals debarred by 
Federal agencies.

Subpart I--Sanctions

438.700  Basis for imposition of sanctions.
438.702  Types of intermediate sanctions.
438.704  Amounts of civil money penalties.
438.706  Special rules for temporary management.
438.708  Termination of an MCO or PCCM contract.
438.710  Due process: Notice of sanction and pre-termination 
hearing.
438.722  Disenrollment during termination hearing process.
438.724  Notice to CMS.
438.726  State plan requirement.
438.730  Sanction by CMS: Special rules for MCOs.

Subpart J--Conditions for Federal Financial Participation

438.802  Basic requirements.
438.806  Prior approval.
438.808  Exclusion of entities.
438.810  Expenditures for enrollment broker services.
438.812  Costs under risk and nonrisk contracts.

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

Subpart A--General Provisions


Sec. 438.1  Basis and scope.

    (a) Statutory basis. This part is based on sections 1902(a)(4), 
1903(m), 1905(t), and 1932 of the Act.
    (1) Section 1902(a)(4) requires that States provide for methods of 
administration that the Secretary finds necessary for proper and 
efficient operation of the State plan. The application of the 
requirements of this part to PIHPs and PAHPs that do not meet the 
statutory definition of an MCO or a PCCM is under the authority in 
section 1902(a)(4).
    (2) Section 1903(m) contains requirements that apply to 
comprehensive risk contracts.
    (3) Section 1903(m)(2)(H) provides that an enrollee who loses 
Medicaid eligibility for not more than 2 months may be enrolled in the 
succeeding month in the same MCO or PCCM if that MCO or PCCM still has 
a contract with the State.
    (4) Section 1905(t) contains requirements that apply to PCCMs.
    (5) Section 1932--
    (i) Provides that, with specified exceptions, a State may require 
Medicaid recipients to enroll in MCOs or PCCMs;
    (ii) Establishes the rules that MCOs, PCCMs, the State, and the 
contracts between the State and those entities must meet, including 
compliance with requirements in sections 1903(m) and 1905(t) of the Act 
that are implemented in this part;
    (iii) Establishes protections for enrollees of MCOs and PCCMs;
    (iv) Requires States to develop a quality assessment and 
performance improvement strategy;
    (v) Specifies certain prohibitions aimed at the prevention of fraud 
and abuse;
    (vi) Provides that a State may not enter into contracts with MCOs 
unless it has established intermediate sanctions that it may impose on 
an MCO that fails to comply with specified requirements; and
    (vii) Makes other minor changes in the Medicaid program.
    (b) Scope. This part sets forth requirements, prohibitions, and 
procedures for the provision of Medicaid services through MCOs, PIHPs, 
PAHPs, and PCCMs. Requirements vary depending on the type of entity and 
on the authority under which the State contracts with the entity. 
Provisions that apply only when the contract is under a mandatory 
managed care program authorized by section 1932(a)(1)(A) of the Act are 
identified as such.


Sec. 438.2  Definitions.

    As used in this part--
    Capitation payment means a payment the State agency makes 
periodically to a contractor on behalf of each recipient enrolled under 
a contract for the provision of medical services under the State plan. 
The State agency makes the payment regardless of whether the particular 
recipient receives services during the period covered by the payment.

[[Page 41097]]

    Comprehensive risk contract means a risk contract that covers 
comprehensive services, that is, inpatient hospital services and any of 
the following services, or any three or more of the following services:
    (1) Outpatient hospital services.
    (2) Rural health clinic services.
    (3) FQHC services.
    (4) Other laboratory and X-ray services.
    (5) Nursing facility (NF) services.
    (6) Early and periodic screening, diagnostic, and treatment (EPSDT) 
services.
    (7) Family planning services.
    (8) Physician services.
    (9) Home health services.
    Federally qualified HMO means an HMO that CMS has determined is a 
qualified HMO under section 1310(d) of the PHS Act.
    Health care professional means a physician or any of the following: 
a podiatrist, optometrist, chiropractor, psychologist, dentist, 
physician assistant, physical or occupational therapist, therapist 
assistant, speech-language pathologist, audiologist, registered or 
practical nurse (including nurse practitioner, clinical nurse 
specialist, certified registered nurse anesthetist, and certified nurse 
midwife), licensed certified social worker, registered respiratory 
therapist, and certified respiratory therapy technician.
    Health insuring organization (HIO) means a county operated entity, 
that in exchange for capitation payments, covers services for 
recipients--
    (1) Through payments to, or arrangements with, providers;
    (2) Under a comprehensive risk contract with the State; and
    (3) Meets the following criteria--
    (i) First became operational prior to January 1, 1986; or
    (ii) Is described in section 9517(e)(3) of the Omnibus Budget 
Reconciliation Act of 1985 (as amended by section 4734 of the Omnibus 
Budget Reconciliation Act of 1990).
    Managed care organization (MCO) means an entity that has, or is 
seeking to qualify for, a comprehensive risk contract under this part, 
and that is--
    (1) A Federally qualified HMO that meets the advance directives 
requirements of subpart I of part 489 of this chapter; or
    (2) Any public or private entity that meets the advance directives 
requirements and is determined to also meet the following conditions:
    (i) Makes the services it provides to its Medicaid enrollees as 
accessible (in terms of timeliness, amount, duration, and scope) as 
those services are to other Medicaid recipients within the area served 
by the entity.
    (ii) Meets the solvency standards of Sec. 438.116.
    Nonrisk contract means a contract under which the contractor--
    (1) Is not at financial risk for changes in utilization or for 
costs incurred under the contract that do not exceed the upper payment 
limits specified in Sec. 447.362 of this chapter; and
    (2) May be reimbursed by the State at the end of the contract 
period on the basis of the incurred costs, subject to the specified 
limits.
    Prepaid ambulatory health plan (PAHP) means an entity that--
    (1) Provides medical services to enrollees under contract with the 
State agency, and on the basis of prepaid capitation payments, or other 
payment arrangements that do not use State plan payment rates;
    (2) Does not provide or arrange for, and is not otherwise 
responsible for the provision of any inpatient hospital or 
institutional services for its enrollees; and
    (3) Does not have a comprehensive risk contract.
    Prepaid inpatient health plan (PIHP) means an entity that--
    (1) Provides medical services to enrollees under contract with the 
State agency, and on the basis of prepaid capitation payments, or other 
payment arrangements that do not use State plan payment rates;
    (2) Provides, arranges for, or otherwise has responsibility for the 
provision of any inpatient hospital or institutional services for its 
enrollees; and
    (3) Does not have a comprehensive risk contract.
    Primary care means all health care services and laboratory services 
customarily furnished by or through a general practitioner, family 
physician, internal medicine physician, obstetrician/gynecologist, or 
pediatrician, to the extent the furnishing of those services is legally 
authorized in the State in which the practitioner furnishes them.
    Primary care case management means a system under which a PCCM 
contracts with the State to furnish case management services (which 
include the location, coordination and monitoring of primary health 
care services) to Medicaid recipients.
    Primary care case manager (PCCM) means a physician, a physician 
group practice, an entity that employs or arranges with physicians to 
furnish primary care case management services or, at State option, any 
of the following:
    (1) A physician assistant.
    (2) A nurse practitioner.
    (3) A certified nurse-midwife.
    Risk contract means a contract under which the contractor--
    (1) Assumes risk for the cost of the services covered under the 
contract; and
    (2) Incurs loss if the cost of furnishing the services exceeds the 
payments under the contract.


Sec. 438.6  Contract requirements.

    (a) Regional office review. The CMS Regional Office must review and 
approve all MCO, PIHP, and PAHP contracts, including those risk and 
nonrisk contracts that, on the basis of their value, are not subject to 
the prior approval requirement in Sec. 438.806.
    (b) Entities eligible for comprehensive risk contracts. A State 
agency may enter into a comprehensive risk contract only with the 
following:
    (1) An MCO.
    (2) The entities identified in section 1903(m)(2)(B)(i), (ii), and 
(iii) of the Act.
    (3) Community, Migrant, and Appalachian Health Centers identified 
in section 1903(m)(2)(G) of the Act. Unless they qualify for a total 
exemption under section 1903(m)(2)(B) of the Act, these entities are 
subject to the regulations governing MCOs under this part.
    (4) An HIO that arranges for services and became operational before 
January 1986.
    (5) An HIO described in section 9517(c)(3) of the Omnibus Budget 
Reconciliation Act of 1985 (as added by section 4734(2) of the Omnibus 
Budget Reconciliation Act of 1990).
    (c) Payments under risk contracts.
    (1) Terminology. As used in this paragraph, the following terms 
have the indicated meanings:
    (i) Actuarially sound capitation rates means capitation rates that-
-
    (A) Have been developed in accordance with generally accepted 
actuarial principles and practices;
    (B) Are appropriate for the populations to be covered, and the 
services to be furnished under the contract; and
    (C) Have been certified, as meeting the requirements of this 
paragraph (c), by actuaries who meet the qualification standards 
established by the American Academy of Actuaries and follow the 
practice standards established by the Actuarial Standards Board.
    (ii) Adjustments to smooth data means adjustments made, by cost-
neutral methods, across rate cells, to compensate for distortions in 
costs, utilization, or the number of eligibles.
    (iii) Cost neutral means that the mechanism used to smooth data, 
share risk, or adjust for risk will recognize

[[Page 41098]]

both higher and lower expected costs and is not intended to create a 
net aggregate gain or loss across all payments.
    (iv) Incentive arrangement means any payment mechanism under which 
a contractor may receive additional funds over and above the capitation 
rates it was paid for meeting targets specified in the contract.
    (v) Risk corridor means a risk sharing mechanism in which States 
and contractors share in both profits and losses under the contract 
outside of predetermined threshold amount, so that after an initial 
corridor in which the contractor is responsible for all losses or 
retains all profits, the State contributes a portion toward any 
additional losses, and receives a portion of any additional profits.
    (2) Basic requirements. (i) All payments under risk contracts and 
all risk-sharing mechanisms in contracts must be actuarially sound.
    (ii) The contract must specify the payment rates and any risk-
sharing mechanisms, and the actuarial basis for computation of those 
rates and mechanisms.
    (3) Requirements for actuarially sound rates. In setting 
actuarially sound capitation rates, the State must apply the following 
elements, or explain why they are not applicable:
    (i) Base utilization and cost data that are derived from the 
Medicaid population, or if not, are adjusted to make them comparable to 
the Medicaid population.
    (ii) Adjustments made to smooth data and adjustments to account for 
factors such as medical trend inflation, incomplete data, MCO, PIHP, or 
PAHP administration (subject to the limits in paragraph (c)(4)(ii) of 
this section), and utilization;
    (iii) Rate cells specific to the enrolled population, by--
    (A) Eligibility category;
    (B) Age;
    (C) Gender;
    (D) Locality/region; and
    (E) Risk adjustments based on diagnosis or health status (if used).
    (iv) Other payment mechanisms and utilization and cost assumptions 
that are appropriate for individuals with chronic illness, disability, 
ongoing health care needs, or catastrophic claims, using risk 
adjustment, risk sharing, or other appropriate cost-neutral methods.
    (4) Documentation. The State must provide the following 
documentation:
    (i) The actuarial certification of the capitation rates.
    (ii) An assurance (in accordance with paragraph (c)(3) of this 
section) that all payment rates are--
    (A) Based only upon services covered under the State plan (or costs 
directly related to providing these services, for example, MCO, PIHP, 
or PAHP administration).
    (B) Provided under the contract to Medicaid-eligible individuals.
    (iii) The State's projection of expenditures under its previous 
year's contract (or under its FFS program if it did not have a contract 
in the previous year) compared to those projected under the proposed 
contract.
    (iv) An explanation of any incentive arrangements, or stop-loss, 
reinsurance, or any other risk-sharing methodologies under the 
contract.
    (5) Special contract provisions.
    (i) Contract provisions for reinsurance, stop-loss limits or other 
risk-sharing methodologies must be computed on an actuarially sound 
basis.
    (ii) If risk corridor arrangements result in payments that exceed 
the approved capitation rates, these excess payments will not be 
considered actuarially sound to the extent that they result in total 
payments that exceed the amount Medicaid would have paid, on a fee-for-
service basis, for the State plan services actually furnished to 
enrolled individuals, plus an amount for MCO, PIHP, or PAHP 
administrative costs directly related to the provision of these 
services.
    (iii) Contracts with incentive arrangements may not provide for 
payment in excess of 105 percent of the approved capitation payments 
attributable to the enrollees or services covered by the incentive 
arrangement, since such total payments will not be considered to be 
actuarially sound.
    (iv) For all incentive arrangements, the contract must provide that 
the arrangement is--
    (A) For a fixed period of time;
    (B) Not to be renewed automatically;
    (C) Made available to both public and private contractors;
    (D) Not conditioned on intergovernmental transfer agreements; and
    (E) Necessary for the specified activities and targets.
    (v) If a State makes payments to providers for graduate medical 
education (GME) costs under an approved State plan, the State must 
adjust the actuarially sound capitation rates to account for the GME 
payments to be made on behalf of enrollees covered under the contract, 
not to exceed the aggregate amount that would have been paid under the 
approved State plan for FFS. States must first establish actuarially 
sound capitation rates prior to making adjustments for GME.
    (d) Enrollment discrimination prohibited. Contracts with MCOs, 
PIHPs, PAHPs, and PCCMs must provide as follows:
    (1) The MCO, PIHP, PAHP, or PCCM accepts individuals eligible for 
enrollment in the order in which they apply without restriction (unless 
authorized by the Regional Administrator), up to the limits set under 
the contract.
    (2) Enrollment is voluntary, except in the case of mandatory 
enrollment programs that meet the conditions set forth in 
Sec. 438.50(a).
    (3) The MCO, PIHP, PAHP, or PCCM will not, on the basis of health 
status or need for health care services, discriminate against 
individuals eligible to enroll.
    (4) The MCO, PIHP, PAHP, or PCCM will not discriminate against 
individuals eligible to enroll on the basis of race, color, or national 
origin, and will not use any policy or practice that has the effect of 
discriminating on the basis of race, color, or national origin.
    (e) Services that may be covered. An MCO, PIHP, or PAHP contract 
may cover, for enrollees, services that are in addition to those 
covered under the State plan, although the cost of these services 
cannot be included when determining the payment rates under 
Sec. 438.6(c).
    (f) Compliance with contracting rules. All contracts under this 
subpart must:
    (1) Comply with all applicable Federal and State laws and 
regulations including title VI of the Civil Rights Act of 1964; title 
IX of the Education Amendments of 1972 (regarding education programs 
and activities); the Age Discrimination Act of 1975; the Rehabilitation 
Act of 1973; and the Americans with Disabilities Act; and
    (2) Meet all the requirements of this section.
    (g) Inspection and audit of financial records. Risk contracts must 
provide that the State agency and the Department may inspect and audit 
any financial records of the entity or its subcontractors.
    (h) Physician incentive plans. (1) MCO, PIHP, and PAHP contracts 
must provide for compliance with the requirements set forth in 
Secs. 422.208 and 422.210 of this chapter.
    (2) In applying the provisions of Secs. 422.208 and 422.210 of this 
chapter, references to ``M+C organization'', ``CMS'', and ``Medicare 
beneficiaries'' must be read as references to ``MCO, PIHP, or PAHP'', 
``State agency'' and ``Medicaid recipients'', respectively.
    (i) Advance directives. (1) All MCO and PIHP contracts must provide 
for

[[Page 41099]]

compliance with the requirements of Sec. 422.128 of this chapter for 
maintaining written policies and procedures for advance directives.
    (2) All PAHP contracts must provide for compliance with the 
requirements of Sec. 422.128 of this chapter for maintaining written 
policies and procedures for advance directives if the PAHP includes, in 
its network, any of those providers listed in Sec. 489.102(a) of this 
chapter.
    (3) The MCO, PIHP, or PAHP subject to this requirement must provide 
adult enrollees with written information on advance directives 
policies, and include a description of applicable State law.
    (4) The information must reflect changes in State law as soon as 
possible, but no later than 90 days after the effective date of the 
change.
    (j) Special rules for certain HIOs. Contracts with HIOs that began 
operating on or after January 1, 1986, and that the statute does not 
explicitly exempt from requirements in section 1903(m) of the Act, are 
subject to all the requirements of this part that apply to MCOs and 
contracts with MCOs. These HIOs may enter into comprehensive risk 
contracts only if they meet the criteria of paragraph (a) of this 
section.
    (k) Additional rules for contracts with PCCMs. A PCCM contract must 
meet the following requirements:
    (1) Provide for reasonable and adequate hours of operation, 
including 24-hour availability of information, referral, and treatment 
for emergency medical conditions.
    (2) Restrict enrollment to recipients who reside sufficiently near 
one of the manager's delivery sites to reach that site within a 
reasonable time using available and affordable modes of transportation.
    (3) Provide for arrangements with, or referrals to, sufficient 
numbers of physicians and other practitioners to ensure that services 
under the contract can be furnished to enrollees promptly and without 
compromise to quality of care.
    (4) Prohibit discrimination in enrollment, disenrollment, and re-
enrollment, based on the recipient's health status or need for health 
care services.
    (5) Provide that enrollees have the right to disenroll from their 
PCCM in accordance with Sec. 438.56(c).
    (l) Subcontracts. All subcontracts must fulfill the requirements of 
this part that are appropriate to the service or activity delegated 
under the subcontract.
    (m) Choice of health professional. The contract must allow each 
enrollee to choose his or her health professional to the extent 
possible and appropriate.


Sec. 438.8  Provisions that apply to PIHPs and PAHPs.

    (a) The following requirements and options apply to PIHPs, PIHP 
contracts, and States with respect to PIHPs, to the same extent that 
they apply to MCOs, MCO contracts, and States for MCOs.
    (1) The contract requirements of Sec. 438.6, except for 
requirements that pertain to HIOs.
    (2) The information requirements in Sec. 438.10.
    (3) The provision against provider discrimination in Sec. 438.12.
    (4) The State responsibility provisions of subpart B of this part 
except Sec. 438.50.
    (5) The enrollee rights and protection provisions in subpart C of 
this part.
    (6) The quality assessment and performance improvement provisions 
in subpart D of this part to the extent that they are applicable to 
services furnished by the PIHP.
    (7) The grievance system provisions in subpart F of this part.
    (8) The certification and program integrity protection provisions 
set forth in subpart H of this part.
    (b) The following requirements and options for PAHPs apply to 
PAHPs, PAHP contracts, and States.
    (1) The contract requirements of Sec. 438.6, except requirements 
for--
    (i) HIOs.
    (ii) Advance directives (unless the PAHP includes any of the 
providers listed in Sec. 489.102) of this chapter.
    (2) All applicable portions of the information requirements in 
Sec. 438.10.
    (3) The provision against provider discrimination in Sec. 438.12.
    (4) The State responsibility provisions of subpart B of this part 
except Sec. 438.50.
    (5) The provisions on enrollee rights and protections in subpart C 
of this part.
    (6) Designated portions of subpart D of this part.
    (7) An enrollee's right to a State fair hearing under subpart E of 
part 431 of this chapter.


Sec. 438.10  Information requirements.

    (a) Terminology. As used in this section, the following terms have 
the indicated meanings:
    Enrollee means a Medicaid recipient who is currently enrolled in an 
MCO, PIHP, PAHP, or PCCM in a given managed care program.
    Potential enrollee means a Medicaid recipient who is subject to 
mandatory enrollment or may voluntarily elect to enroll in a given 
managed care program, but is not yet an enrollee of a specific MCO, 
PIHP, PAHP, or PCCM.
    (b) Basic rules. (1) Each State, enrollment broker, MCO, PIHP, 
PAHP, and PCCM must provide all enrollment notices, informational 
materials, and instructional materials relating to enrollees and 
potential enrollees in a manner and format that may be easily 
understood.
    (2) The State must have in place a mechanism to help enrollees and 
potential enrollees understand the State's managed care program.
    (3) Each MCO and PIHP must have in place a mechanism to help 
enrollees and potential enrollees understand the requirements and 
benefits of the plan.
    (c) Language. The State must do the following:
    (1) Establish a methodology for identifying the prevalent non-
English languages spoken by enrollees and potential enrollees 
throughout the State. ``Prevalent'' means a non-English language spoken 
by a significant number or percentage of potential enrollees and 
enrollees in the State.
    (2) Make available written information in each prevalent non-
English language.
    (3) Require each MCO, PIHP, PAHP, and PCCM to make its written 
information available in the prevalent non-English languages in its 
particular service area.
    (4) Make oral interpretation services available and require each 
MCO, PIHP, PAHP, and PCCM to make those services available free of 
charge to each potential enrollee and enrollee. This applies to all 
non-English languages, not just those that the State identifies as 
prevalent.
    (5) Notify enrollees and potential enrollees, and require each MCO, 
PIHP, PAHP, and PCCM to notify its enrollees--
    (i) That oral interpretation is available for any language and 
written information is available in prevalent languages; and
    (ii) How to access those services.
    (d) Format. (1) Written material must--
    (i) Use easily understood language and format; and
    (ii) Be available in alternative formats and in an appropriate 
manner that takes into consideration the special needs of those who, 
for example, are visually limited or have limited reading proficiency.
    (2) All enrollees and potential enrollees must be informed that 
information is available in alternative formats and how to access those 
formats.
    (e) Information for potential enrollees.
    (1) The State or its contracted representative must provide the 
information specified in paragraph (e)(2) of this section to each 
potential enrollee as follows:

[[Page 41100]]

    (i) At the time the potential enrollee first becomes eligible to 
enroll in a voluntary program, or is first required to enroll in a 
mandatory enrollment program.
    (ii) Within a timeframe that enables the potential enrollee to use 
the information in choosing among available MCOs, PIHP, PAHPs, or 
PCCMs.
    (2) The information for potential enrollees must include the 
following:
    (i) General information about--
    (A) The basic features of managed care;
    (B) Which populations are excluded from enrollment, subject to 
mandatory enrollment, or free to enroll voluntarily in the program; and
    (C) MCO, PIHP, PAHP, and PCCM responsibilities for coordination of 
enrollee care;
    (ii) Information specific to each MCO, PIHP, PAHP, or PCCM program 
operating in potential enrollee's service area. A summary of the 
following information is sufficient, but the State must provide more 
detailed information upon request:
    (A) Benefits covered.
    (B) Cost sharing, if any.
    (C) Service area.
    (D) Names, locations, telephone numbers of, and non-English 
language spoken by current contracted providers, and including 
identification of providers that are not accepting new patients. For 
MCOs, PIHPs, and PAHPs, this includes at a minimum information on 
primary care physicians, specialists, and hospitals.
    (E) Benefits that are available under the State plan but are not 
covered under the contract, including how and where the enrollee may 
obtain those benefits, any cost sharing, and how transportation is 
provided. For a counseling or referral service that the MCO, PIHP, 
PAHP, or PCCM does not cover because of moral or religious objections, 
the State must provide information about where and how to obtain the 
service.
    (f) General information for all enrollees of MCOs, PIHPs, PAHPs, 
and PCCMs. Information must be furnished to MCO, PIHP, PAHP, and PCCM 
enrollees as follows:
    (1) The State must notify all enrollees of their disenrollment 
rights, at a minimum, annually. For States that choose to restrict 
disenrollment for periods of 90 days or more, States must send the 
notice no less than 60 days before the start of each enrollment period.
    (2) The State, its contracted representative, or the MCO, PIHP, 
PAHP, or PCCM must notify all enrollees of their right to request and 
obtain the information listed in paragraph (f)(6) of this section and, 
if applicable, paragraphs (g) and (h) of this section, at least once a 
year.
    (3) The State, its contracted representative, or the MCO, PIHP, 
PAHP, or PCCM must furnish to each of its enrollees the information 
specified in paragraph (f)(6) of this section and, if applicable, 
paragraphs (g) and (h) of this section, within a reasonable time after 
the MCO, PIHP, PAHP, or PCCM receives, from the State or its contracted 
representative, notice of the recipient's enrollment.
    (4) The State, its contracted representative, or the MCO, PIHP, 
PAHP, or PCCM must give each enrollee written notice of any change 
(that the State defines as ``significant'') in the information 
specified in paragraphs (f)(6) of this section and, if applicable, 
paragraphs (g) and (h) of this section, at least 30 days before the 
intended effective date of the change.
    (5) The MCO, PIHP, and, when appropriate, the PAHP or PCCM, must 
make a good faith effort to give written notice of termination of a 
contracted provider, within 15 days after receipt or issuance of the 
termination notice, to each enrollee who received his or her primary 
care from, or was seen on a regular basis by, the terminated provider.
    (6) The State, its contracted representative, or the MCO, PIHP, 
PAHP, or PCCM must provide the following information to all enrollees:
    (i) Names, locations, telephone numbers of, and non-English 
languages spoken by current contracted providers in the enrollee's 
service area, including identification of providers that are not 
accepting new patients. For MCOs, PIHPs, and PAHPs this includes, at a 
minimum, information on primary care physicians, specialists, and 
hospitals.
    (ii) Any restrictions on the enrollee's freedom of choice among 
network providers.
    (iii) Enrollee rights and protections, as specified in 
Sec. 438.100.
    (iv) Information on grievance and fair hearing procedures, and for 
MCO and PIHP enrollees, the information specified in Sec. 438.10(g)(1), 
and for PAHP enrollees, the information specified in Sec. 438.10(h).
    (v) The amount, duration, and scope of benefits available under the 
contract in sufficient detail to ensure that enrollees understand the 
benefits to which they are entitled.
    (vi) Procedures for obtaining benefits, including authorization 
requirements.
    (vii) The extent to which, and how, enrollees may obtain benefits, 
including family planning services, from out-of-network providers.
    (viii) The extent to which, and how, after-hours and emergency 
coverage are provided, including:
    (A) What constitutes emergency medical condition, emergency 
services, and poststabilization services, with reference to the 
definitions in Sec. 438.114(a).
    (B) The fact that prior authorization is not required for emergency 
services.
    (C) The process and procedures for obtaining emergency services, 
including use of the 911-telephone system or its local equivalent.
    (D) The locations of any emergency settings and other locations at 
which providers and hospitals furnish emergency services and 
poststabilization services covered under the contract.
    (E) The fact that, subject to the provisions of this section, the 
enrollee has a right to use any hospital or other setting for emergency 
care.
    (ix) The poststabilization care services rules set forth at 
Sec. 422.113(c) of this chapter.
    (x) Policy on referrals for specialty care and for other benefits 
not furnished by the enrollee's primary care provider.
    (xi) Cost sharing, if any.
    (xii) How and where to access any benefits that are available under 
the State plan but are not covered under the contract, including any 
cost sharing, and how transportation is provided. For a counseling or 
referral service that the MCO, PIHP, PAHP, or PCCM does not cover 
because of moral or religious objections, the MCO, PIHP, PAHP, or PCCM 
need not furnish information on how and where to obtain the service. 
The State must provide information on how and where to obtain the 
service.
    (g) Specific information requirements for enrollees of MCOs and 
PIHPs. In addition to the requirements in Sec. 438.10(f), the State, 
its contracted representative, or the MCO and PIHP must provide the 
following information to their enrollees:
    (1) Grievance, appeal, and fair hearing procedures and timeframes, 
as provided in Secs. 438.400 through 438.424, in a State-developed or 
State-approved description, that must include the following:
    (i) For State fair hearing--
    (A) The right to hearing;
    (B) The method for obtaining a hearing; and
    (C) The rules that govern representation at the hearing.
    (ii) The right to file grievances and appeals.
    (iii) The requirements and timeframes for filing a grievance or 
appeal.

[[Page 41101]]

    (iv) The availability of assistance in the filing process.
    (v) The toll-free numbers that the enrollee can use to file a 
grievance or an appeal by phone.
    (vi) The fact that, when requested by the enrollee--
    (A) Benefits will continue if the enrollee files an appeal or a 
request for State fair hearing within the timeframes specified for 
filing; and
    (B) The enrollee may be required to pay the cost of services 
furnished while the appeal is pending, if the final decision is adverse 
to the enrollee.
    (vii) Any appeal rights that the State chooses to make available to 
providers to challenge the failure of the organization to cover a 
service.
    (2) Advance directives, as set forth in Sec. 438.6(i)(2).
    (3) Additional information that is available upon request, 
including the following:
    (i) Information on the structure and operation of the MCO or PIHP.
    (ii) Physician incentive plans as set forth in Sec. 438.6(h) of 
this chapter.
    (h) Specific information for PAHPs. The State, its contracted 
representative, or the PAHP must provide the following information to 
their enrollees:
    (1) The right to a State fair hearing, including the following:
    (i) The right to a hearing.
    (ii) The method for obtaining a hearing.
    (iii) The rules that govern representation.
    (2) Advance directives, as set forth in Sec. 438.6(i)(2), to the 
extent that the PAHP includes any of the providers listed in 
Sec. 489.102(a) of this chapter.
    (3) Upon request, physician incentive plans as set forth in 
Sec. 438.6(h).
    (i) Special rules: States with mandatory enrollment under State 
plan authority--(1) Basic rule. If the State plan provides for 
mandatory enrollment under Sec. 438.50, the State or its contracted 
representative must provide information on MCOs and PCCMs (as specified 
in paragraph (i)(3) of this section), either directly or through the 
MCO or PCCM.
    (2) When and how the information must be furnished. The information 
must be furnished as follows:
    (i) For potential enrollees, within the timeframe specified in 
Sec. 438.10(e)(1).
    (ii) For enrollees, annually and upon request.
    (iii) In a comparative, chart-like format.
    (3) Required information. Some of the information is the same as 
the information required for potential enrollees under paragraph (e) of 
this section and for enrollees under paragraph (f) of this section. 
However, all of the information in this paragraph is subject to the 
timeframe and format requirements of paragraph (i)(2) of this section, 
and includes the following for each contracting MCO or PCCM in the 
potential enrollee and enrollee's service area:
    (i) The MCO's or PCCM's service area.
    (ii) The benefits covered under the contract.
    (iii) Any cost sharing imposed by the MCO or PCCM.
    (iv) To the extent available, quality and performance indicators, 
including enrollee satisfaction.


Sec. 438.12  Provider discrimination prohibited.

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

Subpart B--State Responsibilities


Sec. 438.50  State Plan requirements.

    (a) General rule. A State plan that requires Medicaid recipients to 
enroll in managed care entities must comply with the provisions of this 
section, except when the State imposes the requirement--
    (1) As part of a demonstration project under section 1115 of the 
Act; or
    (2) Under a waiver granted under section 1915(b) of the Act.
    (b) State plan information. The plan must specify--
    (1) The types of entities with which the State contracts;
    (2) The payment method it uses (for example, whether fee-for-
service or capitation);
    (3) Whether it contracts on a comprehensive risk basis; and
    (4) The process the State uses to involve the public in both design 
and initial implementation of the program and the methods it uses to 
ensure ongoing public involvement once the State plan has been 
implemented.
    (c) State plan assurances. The plan must provide assurances that 
the State meets applicable requirements of the following statute and 
regulations:
    (1) Section 1903(m) of the Act, for MCOs and MCO contracts.
    (2) Section 1905(t) of the Act, for PCCMs and PCCM contracts.
    (3) Section 1932(a)(1)(A) of the Act, for the State's option to 
limit freedom of choice by requiring recipients to receive their 
benefits through managed care entities.
    (4) This part, for MCOs and PCCMs.
    (5) Part 434 of this chapter, for all contracts.
    (6) Section 438.6(c), for payments under any risk contracts, and 
Sec. 447.362 of this chapter for payments under any nonrisk contracts.
    (d) Limitations on enrollment. The State must provide assurances 
that, in implementing the State plan managed care option, it will not 
require the following groups to enroll in an MCO or PCCM:
    (1) Recipients who are also eligible for Medicare.
    (2) Indians who are members of Federally recognized tribes, except 
when the MCO or PCCM is--
    (i) The Indian Health Service; or
    (ii) An Indian health program or Urban Indian program operated by a 
tribe or tribal organization under a contract, grant, cooperative 
agreement or compact with the Indian Health Service.
    (3) Children under 19 years of age who are--
    (i) Eligible for SSI under title XVI;
    (ii) Eligible under section 1902(e)(3) of the Act;
    (iii) In foster care or other out-of-home placement;
    (iv) Receiving foster care or adoption assistance; or
    (v) Receiving services through a family-centered, community-based, 
coordinated care system that receives grant funds under section 
501(a)(1)(D) of title V, and is defined by the State in terms of either 
program participation or special health care needs.
    (e) Priority for enrollment. The State must have an enrollment 
system under which recipients already enrolled in an MCO or PCCM are 
given priority to

[[Page 41102]]

continue that enrollment if the MCO or PCCM does not have the capacity 
to accept all those seeking enrollment under the program.
    (f) Enrollment by default. (1) For recipients who do not choose an 
MCO or PCCM during their enrollment period, the State must have a 
default enrollment process for assigning those recipients to 
contracting MCOs and PCCMs.
    (2) The process must seek to preserve existing provider-recipient 
relationships and relationships with providers that have traditionally 
served Medicaid recipients. If that is not possible, the State must 
distribute the recipients equitably among qualified MCOs and PCCMs 
available to enroll them, excluding those that are subject to the 
intermediate sanction described in Sec. 438.702(a)(4).
    (3) An ``existing provider-recipient relationship'' is one in which 
the provider was the main source of Medicaid services for the recipient 
during the previous year. This may be established through State records 
of previous managed care enrollment or fee-for-service experience, or 
through contact with the recipient.
    (4) A provider is considered to have ``traditionally served'' 
Medicaid recipients if it has experience in serving the Medicaid 
population.


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

    (a) General rule. Except as specified in paragraphs (b) and (c) of 
this section, a State that requires Medicaid recipients to enroll in an 
MCO, PIHP, PAHP, or PCCM must give those recipients a choice of at 
least two entities.
    (b) Exception for rural area residents. (1) Under any of the 
following programs, and subject to the requirements of paragraph (b)(2) 
of this section, a State may limit a rural area resident to a single 
MCO, PIHP, PAHP, or PCCM system:
    (i) A program authorized by a plan amendment under section 1932(a) 
of the Act.
    (ii) A waiver under section 1115 of the Act.
    (iii) A waiver under section 1915(b) of the Act.
    (2) A State that elects the option provided under paragraph (b)(1) 
of this section, must permit the recipient--
    (i) To choose from at least two physicians or case managers; and
    (ii) To obtain services from any other provider under any of the 
following circumstances:
    (A) The service or type of provider (in terms of training, 
experience, and specialization) is not available within the MCO, PIHP, 
PAHP, or PCCM network.
    (B) The provider is not part of the network, but is the main source 
of a service to the recipient, provided that--
    (1) The provider is given the opportunity to become a participating 
provider under the same requirements for participation in the MCO, 
PIHP, PAHP, or PCCM network as other network providers of that type.
    (2) If the provider chooses not to join the network, or does not 
meet the necessary qualification requirements to join, the enrollee 
will be transitioned to a participating provider within 60 days (after 
being given an opportunity to select a provider who participates).
    (C) The only plan or provider available to the recipient does not, 
because of moral or religious objections, provide the service the 
enrollee seeks.
    (D) The recipient's primary care provider or other provider 
determines that the recipient needs related services that would subject 
the recipient to unnecessary risk if received separately (for example, 
a cesarean section and a tubal ligation) and not all of the related 
services are available within the network.
    (E) The State determines that other circumstances warrant out-of-
network treatment.
    (3) As used in this paragraph, ``rural area'' is any area other 
than an ``urban area'' as defined in Sec. 412.62(f)(1)(ii) of this 
chapter.
    (c) Exception for certain health insuring organizations (HIOs). The 
State may limit recipients to a single HIO if--
    (1) The HIO is one of those described in section 1932(a)(3)(C) of 
the Act; and
    (2) The recipient who enrolls in the HIO has a choice of at least 
two primary care providers within the entity.
    (d) Limitations on changes between primary care providers. For an 
enrollee of a single MCO, PIHP, PAHP, or HIO under paragraph (b)(2) or 
(b)(3) of this section, any limitation the State imposes on his or her 
freedom to change between primary care providers may be no more 
restrictive than the limitations on disenrollment under Sec. 438.56(c).


Sec. 438.56  Disenrollment: Requirements and limitations.

    (a) Applicability. The provisions of this section apply to all 
managed care arrangements whether enrollment is mandatory or voluntary 
and whether the contract is with an MCO, a PIHP, a PAHP, or a PCCM.
    (b) Disenrollment requested by the MCO, PIHP, PAHP, or PCCM. All 
MCO, PIHP, PAHP, and PCCM contracts must--(1) Specify the reasons for 
which the MCO, PIHP, PAHP, or PCCM may request disenrollment of an 
enrollee;
    (2) Provide that the MCO, PIHP, PAHP, or PCCM may not request 
disenrollment because of an adverse change in the enrollee's health 
status, or because of the enrollee's utilization of medical services, 
diminished mental capacity, or uncooperative or disruptive behavior 
resulting from his or her special needs (except when his or her 
continued enrollment in the MCO, PIHP, PAHP, or PCCM seriously impairs 
the entity's ability to furnish services to either this particular 
enrollee or other enrollees); and
    (3) Specify the methods by which the MCO, PIHP, PAHP, or PCCM 
assures the agency that it does not request disenrollment for reasons 
other than those permitted under the contract.
    (c) Disenrollment requested by the enrollee. If the State chooses 
to limit disenrollment, its MCO, PIHP, PAHP, and PCCM contracts must 
provide that a recipient may request disenrollment as follows:
    (1) For cause, at any time.
    (2) Without cause, at the following times:
    (i) During the 90 days following the date of the recipient's 
initial enrollment with the MCO, PIHP, PAHP, or PCCM, or the date the 
State sends the recipient notice of the enrollment, whichever is later.
    (ii) At least once every 12 months thereafter.
    (iii) Upon automatic reenrollment under paragraph (g) of this 
section, if the temporary loss of Medicaid eligibility has caused the 
recipient to miss the annual disenrollment opportunity.
    (iv) When the State imposes the intermediate sanction specified in 
Sec. 438.702(a)(3).
    (d) Procedures for disenrollment-- (1) Request for disenrollment. 
The recipient (or his or her representative) must submit an oral or 
written request--
    (i) To the State agency (or its agent); or
    (ii) To the MCO, PIHP, PAHP, or PCCM, if the State permits MCOs, 
PIHP, PAHPs, and PCCMs to process disenrollment requests.
    (2) Cause for disenrollment. The following are cause for 
disenrollment:
    (i) The enrollee moves out of the MCO's, PIHP's, PAHP's, or PCCM's 
service area.
    (ii) The plan does not, because of moral or religious objections, 
cover the service the enrollee seeks.
    (iii) The enrollee needs related services (for example a cesarean 
section and a tubal ligation) to be performed at the same time; not all 
related services are available within the network; and the enrollee's 
primary care provider or

[[Page 41103]]

another provider determines that receiving the services separately 
would subject the enrollee to unnecessary risk.
    (iv) Other reasons, including but not limited to, poor quality of 
care, lack of access to services covered under the contract, or lack of 
access to providers experienced in dealing with the enrollee's health 
care needs.
    (3) MCO, PIHP, PAHP, or PCCM action on request. (i) An MCO, PIHP, 
PAHP, or PCCM may either approve a request for disenrollment or refer 
the request to the State.
    (ii) If the MCO, PIHP, PAHP, PCCM, or State agency (whichever is 
responsible) fails to make a disenrollment determination so that the 
recipient can be disenrolled within the timeframes specified in 
paragraph (e)(1) of this section, the disenrollment is considered 
approved.
    (4) State agency action on request. For a request received directly 
from the recipient, or one referred by the MCO, PIHP, PAHP, or PCCM, 
the State agency must take action to approve or disapprove the request 
based on the following:
    (i) Reasons cited in the request.
    (ii) Information provided by the MCO, PIHP, PAHP, or PCCM at the 
agency's request.
    (iii) Any of the reasons specified in paragraph (d)(2) of this 
section.
    (5) Use of the MCO, PIHP, PAHP, or PCCM grievance procedures. (i) 
The State agency may require that the enrollee seek redress through the 
MCO, PIHP, PAHP, or PCCM's grievance system before making a 
determination on the enrollee's request.
    (ii) The grievance process, if used, must be completed in time to 
permit the disenrollment (if approved) to be effective in accordance 
with the timeframe specified in Sec. 438.56(e)(1).
    (iii) If, as a result of the grievance process, the MCO, PIHP, 
PAHP, or PCCM approves the disenrollment, the State agency is not 
required to make a determination.
    (e) Timeframe for disenrollment determinations. (1) Regardless of 
the procedures followed, the effective date of an approved 
disenrollment must be no later than the first day of the second month 
following the month in which the enrollee or the MCO, PIHP, PAHP, or 
PCCM files the request.
    (2) If the MCO, PIHP, PAHP, or PCCM or the State agency (whichever 
is responsible) fails to make the determination within the timeframes 
specified in paragraph (e)(1) of this section, the disenrollment is 
considered approved.
    (f) Notice and appeals. A State that restricts disenrollment under 
this section must take the following actions:
    (1) Provide that enrollees and their representatives are given 
written notice of disenrollment rights at least 60 days before the 
start of each enrollment period.
    (2) Ensure access to State fair hearing for any enrollee 
dissatisfied with a State agency determination that there is not good 
cause for disenrollment.
    (g) Automatic reenrollment: Contract requirement. If the State plan 
so specifies, the contract must provide for automatic reenrollment of a 
recipient who is disenrolled solely because he or she loses Medicaid 
eligibility for a period of 2 months or less.


Sec. 438.58  Conflict of interest safeguards.

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


Sec. 438.60  Limit on payment to other providers.

    The State agency must ensure that no payment is made to a provider 
other than the MCO, PIHP, or PAHP for services available under the 
contract between the State and the MCO, PIHP, or PAHP, except when 
these payments are provided for in title XIX of the Act, in 42 CFR, or 
when the State agency has adjusted the capitation rates paid under the 
contract, in accordance with Sec. 438.6(c)(5)(v), to make payments for 
graduate medical education.


Sec. 438.62  Continued services to recipients.

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


Sec. 438.66  Monitoring procedures.

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

Subpart C--Enrollee Rights and Protections


Sec. 438.100  Enrollee rights.

    (a) General rule. The State must ensure that--
    (1) Each MCO and PIHP has written policies regarding the enrollee 
rights specified in this section; and
    (2) Each MCO, PIHP, PAHP, and PCCM complies with any applicable 
Federal and State laws that pertain to enrollee rights, and ensures 
that its staff and affiliated providers take those rights into account 
when furnishing services to enrollees.
    (b) Specific rights-- (1) Basic requirement. The State must ensure 
that each managed care enrollee is guaranteed the rights as specified 
in paragraphs (b)(2) and (b)(3) of this section.
    (2) An enrollee of an MCO, PIHP, PAHP, or PCCM has the following 
rights: The right to --
    (i) Receive information in accordance with Sec. 438.10.
    (ii) Be treated with respect and with due consideration for his or 
her dignity and privacy.
    (iii) Receive information on available treatment options and 
alternatives, presented in a manner appropriate to the enrollee's 
condition and ability to understand. (The information requirements for 
services that are not covered under the contract because of moral or 
religious objections are set forth in Sec. 438.10(f)(6)(xiii).)
    (iv) Participate in decisions regarding his or her health care, 
including the right to refuse treatment.
    (v) Be free from any form of restraint or seclusion used as a means 
of coercion, discipline, convenience or retaliation, as specified in 
other Federal regulations on the use of restraints and seclusion.
    (vi) If the privacy rule, as set forth in 45 CFR parts 160 and 164 
subparts A and E, applies, request and receive a copy of his or her 
medical records, and request that they be amended or corrected, as 
specified in 45 CFR Sec. 164.524 and 164.526.
    (3) An enrollee of an MCO, PIHP, or PAHP (consistent with the scope 
of the PAHP's contracted services) has the right to be furnished health 
care services

[[Page 41104]]

in accordance with Secs. 438.206 through 438.210.
    (c) Free exercise of rights. The State must ensure that each 
enrollee is free to exercise his or her rights, and that the exercise 
of those rights does not adversely affect the way the MCO, PIHP, PAHP, 
or PCCM and its providers or the State agency treat the enrollee.
    (d) Compliance with other Federal and State laws. The State must 
ensure that each MCO, PIHP, PAHP, and PCCM complies with any other 
applicable Federal and State laws (such as: title VI of the Civil 
Rights Act of 1964 as implemented by regulations at 45 CFR part 80; the 
Age Discrimination Act of 1975 as implemented by regulations at 45 CFR 
part 91; the Rehabilitation Act of 1973; and titles II and III of the 
Americans with Disabilities Act; and other laws regarding privacy and 
confidentiality).


Sec. 438.102  Provider-enrollee communications.

    (a) General rules. (1) An MCO, PIHP, or PAHP may not prohibit, or 
otherwise restrict, a health care professional acting within the lawful 
scope of practice, from advising or advocating on behalf of an enrollee 
who is his or her patient, for the following:
    (i) The enrollee's health status, medical care, or treatment 
options, including any alternative treatment that may be self-
administered.
    (ii) Any information the enrollee needs in order to decide among 
all relevant treatment options.
    (iii) The risks, benefits, and consequences of treatment or 
nontreatment.
    (iv) The enrollee's right to participate in decisions regarding his 
or her health care, including the right to refuse treatment, and to 
express preferences about future treatment decisions.
    (2) Subject to the information requirements of paragraph (b) of 
this section, an MCO, PIHP, or PAHP that would otherwise be required to 
provide, reimburse for, or provide coverage of, a counseling or 
referral service because of the requirement in paragraph (a)(1) of this 
section is not required to do so if the MCO, PIHP, or PAHP objects to 
the service on moral or religious grounds.
    (b) Information requirements: MCO, PIHP, and PAHP responsibility. 
(1) An MCO, PIHP, or PAHP that elects the option provided in paragraph 
(a)(2) of this section must furnish information about the services it 
does not cover as follows:
    (i) To the State--
    (A) With its application for a Medicaid contract; and
    (B) Whenever it adopts the policy during the term of the contract.
    (ii) Consistent with the provisions of Sec. 438.10--
    (A) To potential enrollees, before and during enrollment; and
    (B) To enrollees, within 90 days after adopting the policy with 
respect to any particular service. (Although this timeframe would be 
sufficient to entitle the MCO, PIHP, or PAHP to the option provided in 
paragraph (a)(2) of this section, the overriding rule in 
Sec. 438.10(f)(4) requires the State, its contracted representative, or 
MCO, PIHP, or PAHP to furnish the information at least 30 days before 
the effective date of the policy.)
    (2) As specified in Sec. 438.10(e) and (f), the information that 
MCOs, PIHPs, and PAHPs must furnish to enrollees and potential 
enrollees does not include how and where to obtain the service excluded 
under paragraph (a)(2) of this section.
    (c) Information requirements: State responsibility. For each 
service excluded by an MCO, PIHP, or PAHP under paragraph (a)(2) of 
this section, the State must provide information on how and where to 
obtain the service, as specified in Sec. 438.10(e)(2)(ii) and 
(f)(6)(xii).
    (d) Sanction. An MCO that violates the prohibition of paragraph 
(a)(1) of this section is subject to intermediate sanctions under 
subpart I of this part.


Sec. 438.104  Marketing activities.

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


Sec. 438.106  Liability for payment.

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

[[Page 41105]]

the MCO, PIHP, or PAHP provided the services directly.


Sec. 438.108  Cost sharing.

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


Sec. 438.114  Emergency and poststabilization services.

    (a) Definitions. As used in this section--
    Emergency medical condition means a medical condition manifesting 
itself by acute symptoms of sufficient severity (including severe pain) 
that a prudent layperson, who possesses an average knowledge of health 
and medicine, could reasonably expect the absence of immediate medical 
attention to result in the following:
    (1) Placing the health of the individual (or, with respect to a 
pregnant woman, the health of the woman or her unborn child) in serious 
jeopardy.
    (2) Serious impairment to bodily functions.
    (3) Serious dysfunction of any bodily organ or part.
    Emergency services means covered inpatient and outpatient services 
that are as follows:
    (1) Furnished by a provider that is qualified to furnish these 
services under this title.
    (2) Needed to evaluate or stabilize an emergency medical condition.
    Poststabilization care services means covered services, related to 
an emergency medical condition that are provided after an enrollee is 
stabilized in order to maintain the stabilized condition, or, under the 
circumstances described in paragraph (e) of this section, to improve or 
resolve the enrollee's condition.
    (b) Coverage and payment: General rule. The following entities are 
responsible for coverage and payment of emergency services and 
poststabilization care services.
    (1) The MCO, PIHP, or PAHP.
    (2) The PCCM that has a risk contract that covers these services.
    (3) The State, in the case of a PCCM that has a fee-for-service 
contract.
    (c) Coverage and payment: Emergency services. (1) The entities 
identified in paragraph (b) of this section--
    (i) Must cover and pay for emergency services regardless of whether 
the provider that furnishes the services has a contract with the MCO, 
PIHP, PAHP, or PCCM; and
    (ii) May not deny payment for treatment obtained under either of 
the following circumstances:
    (A) An enrollee had an emergency medical condition, including cases 
in which the absence of immediate medical attention would not have had 
the outcomes specified in paragraphs (1), (2), and (3) of the 
definition of emergency medical condition in paragraph (a) of this 
section.
    (B) A representative of the MCO, PIHP, PAHP, or PCCM instructs the 
enrollee to seek emergency services.
    (2) A PCCM must--
    (i) Allow enrollees to obtain emergency services outside the 
primary care case management system regardless of whether the case 
manager referred the enrollee to the provider that furnishes the 
services; and
    (ii) Pay for the services if the manager's contract is a risk 
contract that covers those services.
    (d) Additional rules for emergency services. (1) The entities 
specified in paragraph (b) of this section may not--
    (i) Limit what constitutes an emergency medical condition with 
reference to paragraph (a) of this section, on the basis of lists of 
diagnoses or symptoms; and
    (ii) Refuse to cover emergency services based on the emergency room 
provider, hospital, or fiscal agent not notifying the enrollee's 
primary care provider, MCO, or applicable State entity of the 
enrollee's screening and treatment within 10 calendar days of 
presentation for emergency services.
    (2) An enrollee who has an emergency medical condition may not be 
held liable for payment of subsequent screening and treatment needed to 
diagnose the specific condition or stabilize the patient.
    (3) The attending emergency physician, or the provider actually 
treating the enrollee, is responsible for determining when the enrollee 
is sufficiently stabilized for transfer or discharge, and that 
determination is binding on the entities identified in paragraph (b) of 
this section as responsible for coverage and payment.
    (e) Coverage and payment: Poststabilization care services. 
Poststabilization care services are covered and paid for in accordance 
with provisions set forth at Sec. 422.113(c) of this chapter. In 
applying those provisions, reference to ``M+C organization'' must be 
read as reference to the entities responsible for Medicaid payment, as 
specified in paragraph (b) of this section.
    (f) Applicability to PIHPs and PAHPs. To the extent that services 
required to treat an emergency medical condition fall within the scope 
of the services for which the PIHP or PAHP is responsible, the rules 
under this section apply.


Sec. 438.116  Solvency standards.

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

Subpart D--Quality Assessment and Performance Improvement


Sec. 438.200  Scope.

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


Sec. 438.202  State responsibilities.

    Each State contracting with an MCO or PIHP must do the following:
    (a) Have a written strategy for assessing and improving the quality 
of managed care services offered by all MCOs and PIHPs.
    (b) Obtain the input of recipients and other stakeholders in the 
development of the strategy and make the strategy available for public 
comment before adopting it in final.
    (c) Ensure that MCOs, PIHPs, and PAHPs comply with standards 
established by the State, consistent with this subpart.

[[Page 41106]]

    (d) Conduct periodic reviews to evaluate the effectiveness of the 
strategy, and update the strategy periodically, as needed.
    (e) Submit to CMS the following:
    (1) A copy of the initial strategy, and a copy of the revised 
strategy whenever significant changes are made.
    (2) Regular reports on the implementation and effectiveness of the 
strategy.


Sec. 438.204  Elements of State quality strategies.

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

Access Standards


Sec. 438.206  Availability of services.

    (a) Basic rule. Each State must ensure that all services covered 
under the State plan are available and accessible to enrollees of MCOs, 
PIHPs, and PAHPs.
    (b) Delivery network. The State must ensure, through its contracts, 
that each MCO, and each PIHP and PAHP consistent with the scope of the 
PIHP's or PAHP's contracted services, meets the following requirements:
    (1) Maintains and monitors a network of appropriate providers that 
is supported by written agreements and is sufficient to provide 
adequate access to all services covered under the contract. In 
establishing and maintaining the network, each MCO, PIHP, and PAHP must 
consider the following:
    (i) The anticipated Medicaid enrollment.
    (ii) The expected utilization of services, taking into 
consideration the characteristics and health care needs of specific 
Medicaid populations represented in the particular MCO, PIHP, and PAHP.
    (iii) The numbers and types (in terms of training, experience, and 
specialization) of providers required to furnish the contracted 
Medicaid services.
    (iv) The numbers of network providers who are not accepting new 
Medicaid patients.
    (v) The geographic location of providers and Medicaid enrollees, 
considering distance, travel time, the means of transportation 
ordinarily used by Medicaid enrollees, and whether the location 
provides physical access for Medicaid enrollees with disabilities.
    (2) Provides female enrollees with direct access to a women's 
health specialist within the network for covered care necessary to 
provide women's routine and preventive health care services. This is in 
addition to the enrollee's designated source of primary care if that 
source is not a women's health specialist.
    (3) Provides for a second opinion from a qualified health care 
professional within the network, or arranges for the enrollee to obtain 
one outside the network, at no cost to the enrollee.
    (4) If the network is unable to provide necessary services, covered 
under the contract, to a particular enrollee, the MCO, PIHP, or PAHP 
must adequately and timely cover these services out of network for the 
enrollee, for as long as the MCO, PIHP, or PAHP is unable to provide 
them.
    (5) Requires out-of-network providers to coordinate with the MCO or 
PIHP with respect to payment and ensures that cost to the enrollee is 
no greater than it would be if the services were furnished within the 
network.
    (6) Demonstrates that its providers are credentialed as required by 
Sec. 438.214.
    (c) Furnishing of services. The State must ensure that each MCO, 
PIHP, and PAHP contract complies with the requirements of this 
paragraph.
    (1) Timely access. Each MCO, PIHP, and PAHP must do the following:
    (i) Meet and require its providers to meet State standards for 
timely access to care and services, taking into account the urgency of 
the need for services.
    (ii) Ensure that the network providers offer hours of operation 
that are no less than the hours of operation offered to commercial 
enrollees or comparable to Medicaid fee-for-service, if the provider 
serves only Medicaid enrollees.
    (iii) Make services included in the contract available 24 hours a 
day, 7 days a week, when medically necessary.
    (iv) Establish mechanisms to ensure compliance by providers.
    (v) Monitor providers regularly to determine compliance.
    (vi) Take corrective action if there is a failure to comply.
    (2) Cultural considerations. Each MCO, PIHP, and PAHP participates 
in the State's efforts to promote the delivery of services in a 
culturally competent manner to all enrollees, including those with 
limited English proficiency and diverse cultural and ethnic 
backgrounds.


Sec. 438.207  Assurances of adequate capacity and services.

    (a) Basic rule. The State must ensure, through its contracts, that 
each MCO, PIHP, and PAHP gives assurances to the State and provides 
supporting documentation that demonstrates that it has the capacity to 
serve the expected enrollment in its service area in accordance with 
the State's standards for access to care under this subpart.
    (b) Nature of supporting documentation. Each MCO, PIHP, and PAHP 
must submit documentation to the State, in a format specified by the 
State to demonstrate that it complies with the following requirements:
    (1) Offers an appropriate range of preventive, primary care, and 
specialty services that is adequate for the anticipated number of 
enrollees for the service area.
    (2) Maintains a network of providers that is sufficient in number, 
mix, and geographic distribution to meet the needs of the anticipated 
number of enrollees in the service area.
    (c) Timing of documentation. Each MCO, PIHP, and PAHP must submit 
the documentation described in paragraph (b) of this section as 
specified by the State, but no less frequently than the following:
    (1) At the time it enters into a contract with the State.
    (2) At any time there has been a significant change (as defined by 
the State) in the MCO's, PIHP's, or PAHP's operations that would affect 
adequate capacity and services, including--

[[Page 41107]]

    (i) Changes in MCO, PIHP, or PAHP services, benefits, geographic 
service area or payments; or
    (ii) Enrollment of a new population in the MCO, PIHP, or PAHP.
    (d) State review and certification to CMS. After the State reviews 
the documentation submitted by the MCO, PIHP, or PAHP, the State must 
certify to CMS that the MCO, PIHP, or PAHP has complied with the 
State's requirements for availability of services, as set forth in 
Sec. 438.206.
    (e) CMS' right to inspect documentation. The State must make 
available to CMS, upon request, all documentation collected by the 
State from the MCO, PIHP, or PAHP.


Sec. 438.208  Coordination and continuity of care.

    (a) Basic requirement--(1) General rule. Except as specified in 
paragraphs (a)(2) and (a)(3) of this section, the State must ensure 
through its contracts, that each MCO, PIHP, and PAHP complies with the 
requirements of this section.
    (2) PIHP and PAHP exception. For PIHPs and PAHPs, the State 
determines, based on the scope of the entity's services, and on the way 
the State has organized the delivery of managed care services, whether 
a particular PIHP or PAHP is required to--
    (i) Meet the primary care requirement of paragraph (b)(1) of this 
section; and
    (ii) Implement mechanisms for identifying, assessing, and producing 
a treatment plan for an individual with special health care needs, as 
specified in paragraph (c) of this section.
    (3) Exception for MCOs that serve dually eligible enrollees. (i) 
For each MCO that serves enrollees who are also enrolled in and receive 
Medicare benefits from a Medicare+Choice plan, the State determines to 
what extent the MCO must meet the primary care coordination, 
identification, assessment, and treatment planning provisions of 
paragraphs (b) and (c) of this section with respect to dually eligible 
individuals.
    (ii) The State bases its determination on the services it requires 
the MCO to furnish to dually eligible enrollees.
    (b) Primary care and coordination of health care services for all 
MCO, PIHP, and PAHP enrollees. Each MCO, PIHP, and PAHP must implement 
procedures to deliver primary care to and coordinate health care 
service for all MCO, PIHP, and PAHP enrollees. These procedures must 
meet State requirements and must do the following:
    (1) Ensure that each enrollee has an ongoing source of primary care 
appropriate to his or her needs and a person or entity formally 
designated as primarily responsible for coordinating the health care 
services furnished to the enrollee.
    (2) Coordinate the services the MCO, PIHP, or PAHP furnishes to the 
enrollee with the services the enrollee receives from any other MCO, 
PIHP, or PAHP.
    (3) Share with other MCOs, PIHPs, and PAHPs serving the enrollee 
with special health care needs the results of its identification and 
assessment of that enrollee's needs to prevent duplication of those 
activities.
    (4) Ensure that in the process of coordinating care, each 
enrollee's privacy is protected in accordance with the privacy 
requirements in 45 CFR parts 160 and 164 subparts A and E, to the 
extent that they are applicable.
    (c) Additional services for enrollees with special health care 
needs.
    (1) Identification. The State must implement mechanisms to identify 
persons with special health care needs to MCOs, PIHPs and PAHPs, as 
those persons are defined by the State. These identification 
mechanisms--
    (i) Must be specified in the State's quality improvement strategy 
in Sec. 438.202; and
    (ii) May use State staff, the State's enrollment broker, or the 
State's MCOs,
    PIHPs and PAHPs.
    (2) Assessment. Each MCO, PIHP, and PAHP must implement mechanisms 
to assess each Medicaid enrollee identified by the State (through the 
mechanism specified in paragraph (c)(1) of this section) and identified 
to the MCO, PIHP, and PAHP by the State as having special health care 
needs in order to identify any ongoing special conditions of the 
enrollee that require a course of treatment or regular care monitoring. 
The assessment mechanisms must use appropriate health care 
professionals.
    (3) Treatment plans. If the State requires MCOs, PIHPs, and PAHPs 
to produce a treatment plan for enrollees with special health care 
needs who are determined through assessment to need a course of 
treatment or regular care monitoring, the treatment plan must be--
    (i) Developed by the enrollee's primary care provider with enrollee 
participation, and in consultation with any specialists caring for the 
enrollee;
    (ii) Approved by the MCO, PIHP, or PAHP in a timely manner, if this 
approval is required by the MCO, PIHP, or PAHP; and
    (iii) In accord with any applicable State quality assurance and 
utilization review standards.
    (4) Direct access to specialists. For enrollees with special health 
care needs determined through an assessment by appropriate health care 
professionals (consistent with Sec. 438.208(c)(2)) to need a course of 
treatment or regular care monitoring, each MCO, PIHP, and PAHP must 
have a mechanism in place to allow enrollees to directly access a 
specialist (for example, through a standing referral or an approved 
number of visits) as appropriate for the enrollee's condition and 
identified needs.


Sec. 438.210  Coverage and authorization of services.

    (a) Coverage. Each contract with an MCO, PIHP, or PAHP must do the 
following:
    (1) Identify, define, and specify the amount, duration, and scope 
of each service that the MCO, PIHP, or PAHP is required to offer.
    (2) Require that the services identified in paragraph (a)(1) of 
this section be furnished in an amount, duration, and scope that is no 
less than the amount, duration, and scope for the same services 
furnished to beneficiaries under fee-for-service Medicaid, as set forth 
in Sec. 440.230.
    (3) Provide that the MCO, PIHP, or PAHP--
    (i) Must ensure that the services are sufficient in amount, 
duration, or scope to reasonably be expected to achieve the purpose for 
which the services are furnished.
    (ii) May not arbitrarily deny or reduce the amount, duration, or 
scope of a required service solely because of diagnosis, type of 
illness, or condition of the beneficiary;
    (iii) May place appropriate limits on a service--
    (A) On the basis of criteria applied under the State plan, such as 
medical necessity; or
    (B) For the purpose of utilization control, provided the services 
furnished can reasonably be expected to achieve their purpose, as 
required in paragraph (a)(3)(i) of this section; and
    (4) Specify what constitutes ``medically necessary services'' in a 
manner that--
    (i) Is no more restrictive than that used in the State Medicaid 
program as indicated in State statutes and regulations, the State Plan, 
and other State policy and procedures; and
    (ii) Addresses the extent to which the MCO, PIHP, or PAHP is 
responsible for covering services related to the following:
    (A) The prevention, diagnosis, and treatment of health impairments.
    (B) The ability to achieve age-appropriate growth and development.
    (C) The ability to attain, maintain, or regain functional capacity.

[[Page 41108]]

    (b) Authorization of services. For the processing of requests for 
initial and continuing authorizations of services, each contract must 
require--
    (1) That the MCO, PIHP, or PAHP and its subcontractors have in 
place, and follow, written policies and procedures.
    (2) That the MCO, PIHP, or PAHP--
    (i) Have in effect mechanisms to ensure consistent application of 
review criteria for authorization decisions; and
    (ii) Consult with the requesting provider when appropriate.
    (3) That any decision to deny a service authorization request or to 
authorize a service in an amount, duration, or scope that is less than 
requested, be made by a health care professional who has appropriate 
clinical expertise in treating the enrollee's condition or disease.
    (c) Notice of adverse action. Each contract must provide for the 
MCO, PIHP, or PAHP to notify the requesting provider, and give the 
enrollee written notice of any decision by the MCO, PIHP, or PAHP to 
deny a service authorization request, or to authorize a service in an 
amount, duration, or scope that is less than requested. For MCOs and 
PIHPs, the notice must meet the requirements of Sec. 438.404, except 
that the notice to the provider need not be in writing.
    (d) Timeframe for decisions. Each MCO, PIHP, or PAHP contract must 
provide for the following decisions and notices:
    (1) Standard authorization decisions. For standard authorization 
decisions, provide notice as expeditiously as the enrollee's health 
condition requires and within State-established timeframes that may not 
exceed 14 calendar days following receipt of the request for service, 
with a possible extension of up to 14 additional calendar days, if--
    (i) The enrollee, or the provider, requests extension; or
    (ii) The MCO, PIHP, or PAHP justifies (to the State agency upon 
request) a need for additional information and how the extension is in 
the enrollee's interest.
    (2) Expedited authorization decisions. (i) For cases in which a 
provider indicates, or the MCO, PIHP, or PAHP determines, that 
following the standard timeframe could seriously jeopardize the 
enrollee's life or health or ability to attain, maintain, or regain 
maximum function, the MCO, PIHP, or PAHP must make an expedited 
authorization decision and provide notice as expeditiously as the 
enrollee's health condition requires and no later than 3 working days 
after receipt of the request for service.
    (ii) The MCO, PIHP, or PAHP may extend the 3 working days time 
period by up to 14 calendar days if the enrollee requests an extension, 
or if the MCO, PIHP, or PAHP justifies (to the State agency upon 
request) a need for additional information and how the extension is in 
the enrollee's interest.
    (e) Compensation for utilization management activities. Each 
contract must provide that, consistent with Sec. 438.6(h), and 
Sec. 422.208 of this chapter, compensation to individuals or entities 
that conduct utilization management activities is not structured so as 
to provide incentives for the individual or entity to deny, limit, or 
discontinue medically necessary services to any enrollee.

Structure and Operation Standards


Sec. 438.214  Provider selection.

    (a) General rules. The State must ensure, through its contracts, 
that each MCO, PIHP, or PAHP implements written policies and procedures 
for selection and retention of providers and that those policies and 
procedures include, at a minimum, the requirements of this section.
    (a) Credentialing and recredentialing requirements. (1) Each State 
must establish a uniform credentialing and recredentialing policy that 
each MCO, PIHP, and PAHP must follow.
    (2) Each MCO, PIHP, and PAHP must follow a documented process for 
credentialing and recredentialing of providers who have signed 
contracts or participation agreements with the MCO, PIHP, or PAHP.
    (c) Nondiscrimination. MCO, PIHP, and PAHP provider selection 
policies and procedures, consistent with Sec. 438.12, must not 
discriminate against particular providers that serve high-risk 
populations or specialize in conditions that require costly treatment.
    (d) Excluded providers. MCOs, PIHPs, and PAHPs may not employ or 
contract with providers excluded from participation in Federal health 
care programs under either section 1128 or section 1128A of the Act.
    (e) State requirements. Each MCO, PIHP, and PAHP must comply with 
any additional requirements established by the State.


Sec. 438.218  Enrollee information.

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


Sec. 438.224  Confidentiality.

    The State must ensure, through its contracts, that (consistent with 
subpart F of part 431 of this chapter), for medical records and any 
other health and enrollment information that identifies a particular 
enrollee, each MCO, PIHP, and PAHP uses and discloses such individually 
identifiable health information in accordance with the privacy 
requirements in 45 CFR parts 160 and 164, subparts A and E, to the 
extent that these requirements are applicable.


Sec. 438.226  Enrollment and disenrollment.

    The State must ensure that each MCO, PIHP, and PAHP contract 
complies with the enrollment and disenrollment requirements and 
limitations set forth in Sec. 438.56.


Sec. 438.228  Grievance systems.

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


Sec. 438.230  Subcontractual relationships and delegation.

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

[[Page 41109]]

Measurement and Improvement Standards


Sec. 438.236  Practice guidelines.

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


Sec. 438.240  Quality assessment and performance improvement program.

    (a) General rules. (1) The State must require, through its 
contracts, that each MCO and PIHP have an ongoing quality assessment 
and performance improvement program for the services it furnishes to 
its enrollees.
    (2) CMS, in consultation with States and other stakeholders, may 
specify performance measures and topics for performance improvement 
projects to be required by States in their contracts with MCOs and 
PIHPs.
    (b) Basic elements of MCO and PIHP quality assessment and 
performance improvement programs. At a minimum, the State must require 
that each MCO and PIHP comply with the following requirements:
    (1) Conduct performance improvement projects as described in 
paragraph (d) of this section. These projects must be designed to 
achieve, through ongoing measurements and intervention, significant 
improvement, sustained over time, in clinical care and nonclinical care 
areas that are expected to have a favorable effect on health outcomes 
and enrollee satisfaction.
    (2) Submit performance measurement data as described in paragraph 
(c) of this section.
    (3) Have in effect mechanisms to detect both underutilization and 
overutilization of services.
    (4) Have in effect mechanisms to assess the quality and 
appropriateness of care furnished to enrollees with special health care 
needs.
    (c) Performance measurement. Annually each MCO and PIHP must--
    (1) Measure and report to the State its performance, using standard 
measures required by the State including those that incorporate the 
requirements of Sec. 438.204(c) and Sec. 438.240(a)(2);
    (2) Submit to the State, data specified by the State, that enables 
the State to measure the MCO's or PIHP's performance; or
    (3) Perform a combination of the activities described in paragraphs 
(c)(1) and (c)(2) of this section.
    (d) Performance improvement projects. (1) MCOs and PIHPs must have 
an ongoing program of performance improvement projects that focus on 
clinical and nonclinical areas, and that involve the following:
    (i) Measurement of performance using objective quality indicators.
    (ii) Implementation of system interventions to achieve improvement 
in quality.
    (iii) Evaluation of the effectiveness of the interventions.
    (iv) Planning and initiation of activities for increasing or 
sustaining improvement.
    (2) Each MCO and PIHP must report the status and results of each 
project to the State as requested, including those that incorporate the 
requirements of Sec. 438.240(a)(2). Each performance improvement 
project must be completed in a reasonable time period so as to 
generally allow information on the success of performance improvement 
projects in the aggregate to produce new information on quality of care 
every year.
    (e) Program review by the State.
    (1) The State must review, at least annually, the impact and 
effectiveness of each MCO's and PIHP's quality assessment and 
performance improvement program. The review must include--
    (i) The MCO's and PIHP's performance on the standard measures on 
which it is required to report; and
    (ii) The results of each MCO's and PIHP's performance improvement 
projects.
    (2) The State may require that an MCO or PIHP have in effect a 
process for its own evaluation of the impact and effectiveness of its 
quality assessment and performance improvement program.


Sec. 438.242  Health information systems.

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

Subpart E--[Reserved]

Subpart F--Grievance System


Sec. 438.400  Statutory basis and definitions.

    (a) Statutory basis. This subpart is based on sections 1902(a)(3), 
1902(a)(4), and 1932(b)(4) of the Act.
    (1) Section 1902(a)(3) requires that a State plan provide an 
opportunity for a fair hearing to any person whose claim for assistance 
is denied or not acted upon promptly.
    (2) Section 1902(a)(4) requires that the State plan provide for 
methods of administration that the Secretary finds necessary for the 
proper and efficient operation of the plan.
    (3) Section 1932(b)(4) requires Medicaid managed care organizations 
to establish internal grievance procedures under which Medicaid 
enrollees, or providers acting on their behalf, may challenge the 
denial of coverage of, or payment for, medical assistance.
    (b) Definitions. As used in this subpart, the following terms have 
the indicated meanings:
    Action means--
    In the case of an MCO or PIHP--
    (1) The denial or limited authorization of a requested service, 
including the type or level of service;

[[Page 41110]]

    (2) The reduction, suspension, or termination of a previously 
authorized service;
    (3) The denial, in whole or in part, of payment for a service;
    (4) The failure to provide services in a timely manner, as defined 
by the State;
    (5) The failure of an MCO or PIHP to act within the timeframes 
provided in Sec. 438.408(b); or
    (6) For a resident of a rural area with only one MCO, the denial of 
a Medicaid enrollee's request to exercise his or her right, under 
Sec. 438.52(b)(2)(ii), to obtain services outside the network.
    Appeal means a request for review of an action, as ``action'' is 
defined in this section.
    Grievance means an expression of dissatisfaction about any matter 
other than an action, as ``action'' is defined in this section. The 
term is also used to refer to the overall system that includes 
grievances and appeals handled at the MCO or PIHP level and access to 
the State fair hearing process. (Possible subjects for grievances 
include, but are not limited to, the quality of care or services 
provided, and aspects of interpersonal relationships such as rudeness 
of a provider or employee, or failure to respect the enrollee's 
rights.)


Sec. 438.402  General requirements.

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


Sec. 438.404  Notice of action.

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


Sec. 438.406  Handling of grievances and appeals.

    (a) General requirements. In handling grievances and appeals, each 
MCO and each PIHP must meet the following requirements:
    (1) Give enrollees any reasonable assistance in completing forms 
and taking other procedural steps. This includes, but is not limited 
to, providing interpreter services and toll-free numbers that have 
adequate TTY/TTD and interpreter capability.
    (2) Acknowledge receipt of each grievance and appeal.
    (3) Ensure that the individuals who make decisions on grievances 
and appeals are individuals--
    (i) Who were not involved in any previous level of review or 
decision-making; and
    (ii) Who, if deciding any of the following, are health care 
professionals who have the appropriate clinical expertise, as 
determined by the State, in treating the enrollee's condition or 
disease.
    (A) An appeal of a denial that is based on lack of medical 
necessity.
    (B) A grievance regarding denial of expedited resolution of an 
appeal.
    (C) A grievance or appeal that involves clinical issues.
    (b) Special requirements for appeals. The process for appeals must:
    (1) Provide that oral inquiries seeking to appeal an action are 
treated as appeals (to establish the earliest possible filing date for 
the appeal) and must be confirmed in writing, unless the enrollee or 
the provider requests expedited resolution.
    (2) Provide the enrollee a reasonable opportunity to present 
evidence, and allegations of fact or law, in person as well as in 
writing. (The MCO or PIHP must inform the enrollee of the limited time 
available for this in the case of expedited resolution.)
    (3) Provide the enrollee and his or her representative opportunity, 
before and during the appeals process, to examine the enrollee's case 
file, including medical records, and any other documents and records 
considered during the appeals process.
    (4) Include, as parties to the appeal--
    (i) The enrollee and his or her representative; or
    (ii) The legal representative of a deceased enrollee's estate.


Sec. 438.408  Resolution and notification: Grievances and appeals.

    (a) Basic rule. The MCO or PIHP must dispose of each grievance and 
resolve

[[Page 41111]]

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


Sec. 438.410  Expedited resolution of appeals.

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


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

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


Sec. 438.416  Recordkeeping and reporting requirements.

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


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

    (a) Terminology. As used in this section, ``timely'' filing means 
filing on or before the later of the following:
    (1) Within ten days of the MCO or PIHP mailing the notice of 
action.
    (2) The intended effective date of the MCO's or PIHP's proposed 
action.
    (b) Continuation of benefits. The MCO or PIHP must continue the 
enrollee's benefits if--
    (1) The enrollee or the provider files the appeal timely;
    (2) The appeal involves the termination, suspension, or reduction 
of a previously authorized course of treatment;
    (3) The services were ordered by an authorized provider;
    (4) The original period covered by the original authorization has 
not expired; and
    (5) The enrollee requests extension of benefits.
    (c) Duration of continued or reinstated benefits. If, at the 
enrollee's request, the MCO or PIHP continues or reinstates the 
enrollee's benefits while the appeal is pending, the benefits must be 
continued until one of following occurs:
    (1) The enrollee withdraws the appeal.
    (2) Ten days pass after the MCO or PIHP mails the notice, providing 
the resolution of the appeal against the enrollee, unless the enrollee, 
within the 10-day timeframe, has requested a State fair hearing with 
continuation of benefits until a State fair hearing decision is 
reached.
    (3) A State fair hearing Office issues a hearing decision adverse 
to the enrollee.
    (4) The time period or service limits of a previously authorized 
service has been met.
    (d) Enrollee responsibility for services furnished while the appeal 
is pending. If the final resolution of the appeal is adverse to the 
enrollee, that is, upholds the MCO's or PIHP's action, the MCO or PIHP 
may recover the cost of the services furnished to the enrollee while 
the appeal is pending, to the extent that they were furnished solely 
because of the requirements of this section, and in accordance with the 
policy set forth in Sec. 431.230(b) of this chapter.

[[Page 41112]]

Sec. 438.424  Effectuation of reversed appeal resolutions.

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

Subpart G--[Reserved]

Subpart H--Certifications and Program Integrity


Sec. 438.600  Statutory basis.

    This subpart is based on sections 1902(a)(4), 1902(a)(19), 1903(m), 
and 1932(d)(1) of the Act.
    (a) Section 1902(a)(4) requires that the State plan provide for 
methods of administration that the Secretary finds necessary for the 
proper and efficient operation of the plan.
    (b) Section 1902(a)(19) requires that the State plan provide the 
safeguards necessary to ensure that eligibility is determined and 
services are provided in a manner consistent with simplicity of 
administration and the best interests of the recipients.
    (c) Section 1903(m) establishes conditions for payments to the 
State with respect to contracts with MCOs.
    (d) Section 1932(d)(1) prohibits MCOs and PCCMs from knowingly 
having certain types of relationships with individuals excluded under 
Federal regulations from participating in specified activities, or with 
affiliates of those individuals.


Sec. 438.602  Basic rule.

    As a condition for receiving payment under the Medicaid managed 
care program, an MCO, PCCM, PIHP, or PAHP must comply with the 
applicable certification, program integrity and prohibited affiliation 
requirements of this subpart.


Sec. 438.604  Data that must be certified.

    (a) Data certifications. When State payments to an MCO or PIHP are 
based on data submitted by the MCO or PIHP, the State must require 
certification of the data as provided in Sec. 438.606. The data that 
must be certified include, but are not limited to, enrollment 
information, encounter data, and other information required by the 
State and contained in contracts, proposals, and related documents.
    (b) Additional certifications. Certification is required, as 
provided in Sec. 438.606, for all documents specified by the State.


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

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


Sec. 438.608  Program integrity requirements.

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


Sec. 438.610  Prohibited Affiliations with Individuals Debarred by 
Federal Agencies.

    (a) General requirement. An MCO, PCCM, PIHP, or PAHP may not 
knowingly have a relationship of the type described in paragraph (b) of 
this section with the following:
    (1) An individual who is debarred, suspended, or otherwise excluded 
from participating in procurement activities under the Federal 
Acquisition Regulation or from participating in nonprocurement 
activities under regulations issued under Executive Order No. 12549 or 
under guidelines implementing Executive Order No. 12549.
    (2) An individual who is an affiliate, as defined in the Federal 
Acquisition Regulation, of a person described in paragraph (a)(1) of 
this section.
    (b) Specific requirements. The relationships described in this 
paragraph are as follow:
    (1) A director, officer, or partner of the MCO, PCCM, PIHP, or 
PAHP.
    (2) A person with beneficial ownership of five percent or more of 
the MCO's, PCCM's, PIHP's, or PAHP's equity.
    (3) A person with an employment, consulting or other arrangement 
with the MCO, PCCM, PIHP, or PAHP for the provision of items and 
services that are significant and material to the MCO's, PCCM's, 
PIHP's, or PAHP's obligations under its contract with the State.
    (c) Effect of Noncompliance. If a State finds that an MCO, PCCM, 
PIHP, or PAHP is not in compliance with paragraphs (a) and (b) of this 
section, the State:
    (1) Must notify the Secretary of the noncompliance.
    (2) May continue an existing agreement with the MCO, PCCM, PIHP, or 
PAHP unless the Secretary directs otherwise.
    (3) May not renew or otherwise extend the duration of an existing 
agreement with the MCO, PCCM, PIHP, or PAHP unless the Secretary 
provides to the State and to Congress a written statement describing 
compelling reasons that exist for renewing or extending the agreement.
    (d) Consultation with the Inspector General. Any action by the 
Secretary described in paragraphs (c)(2) or (c)(3) of this section is 
taken in consultation with the Inspector General.

[[Page 41113]]

Subpart I--Sanctions


Sec. 438.700  Basis for imposition of sanctions.

    (a) Each State that contracts with an MCO must, and each State that 
contracts with a PCCM may, establish intermediate sanctions, as 
specified in Sec. 438.702, that it may impose if it makes any of the 
determinations specified in paragraphs (b) through (d) of this section. 
The State may base its determinations on findings from onsite surveys, 
enrollee or other complaints, financial status, or any other source.
    (b) A State determines whether an MCO acts or fails to act as 
follows:
    (1) Fails substantially to provide medically necessary services 
that the MCO is required to provide, under law or under its contract 
with the State, to an enrollee covered under the contract.
    (2) Imposes on enrollees premiums or charges that are in excess of 
the premiums or charges permitted under the Medicaid program.
    (3) Acts to discriminate among enrollees on the basis of their 
health status or need for health care services. This includes 
termination of enrollment or refusal to reenroll a recipient, except as 
permitted under the Medicaid program, or any practice that would 
reasonably be expected to discourage enrollment by recipients whose 
medical condition or history indicates probable need for substantial 
future medical services.
    (4) Misrepresents or falsifies information that it furnishes to CMS 
or to the State.
    (5) Misrepresents or falsifies information that it furnishes to an 
enrollee, potential enrollee, or health care provider.
    (6) Fails to comply with the requirements for physician incentive 
plans, as set forth (for Medicare) in Secs. 422.208 and 422.210 of this 
chapter.
    (c) A State determines whether an MCO, PIHP, PAHP or PCCM has 
distributed directly, or indirectly through any agent or independent 
contractor, marketing materials that have not been approved by the 
State or that contain false or materially misleading information.
    (d) A State determines whether--
    (1) An MCO has violated any of the other requirements of 
sections1903(m) or 1932 of the Act, and any implementing regulations;
    (2) A PCCM has violated any of the other applicable requirements of 
sections 1932 or 1905(t)(3) of the Act and any implementing 
regulations;
    (3) For any of the violations under paragraphs (d)(1) and (d)(2) of 
this section, only the sanctions specified in Sec. 438.702, paragraphs 
(a)(3), (a)(4), and (a)(5) may be imposed.


Sec. 438.702  Types of intermediate sanctions.

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


Sec. 438.704  Amounts of civil money penalties.

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


Sec. 438.706  Special rules for temporary management.

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


Sec. 438.708  Termination of an MCO or PCCM contract.

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

[[Page 41114]]

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

    (a) Notice of sanction. Except as provided in Sec. 438.706(c), 
before imposing any of the intermediate sanctions specified in this 
subpart, the State must give the affected entity timely written notice 
that explains the following:
    (1) The basis and nature of the sanction.
    (2) Any other due process protections that the State elects to 
provide.
    (b) Pre-termination hearing-- (1) General rule. Before terminating 
an MCO or PCCM contract under Sec. 438.708, the State must provide the 
entity a pre-termination hearing.
    (2) Procedures. The State must do the following:
    (i) Give the MCO or PCCM written notice of its intent to terminate, 
the reason for termination, and the time and place of the hearing;
    (ii) After the hearing, give the entity written notice of the 
decision affirming or reversing the proposed termination of the 
contract and, for an affirming decision, the effective date of 
termination; and
    (iii) For an affirming decision, give enrollees of the MCO or PCCM 
notice of the termination and information, consistent with Sec. 438.10, 
on their options for receiving Medicaid services following the 
effective date of termination.


Sec. 438.722  Disenrollment during termination hearing process.

    After a State notifies an MCO or PCCM that it intends to terminate 
the contract, the State may do the following:
    (a) Give the entity's enrollees written notice of the State's 
intent to terminate the contract.
    (b) Allow enrollees to disenroll immediately without cause.


Sec. 438.724  Notice to CMS.

    (a) The State must give the CMS Regional Office written notice 
whenever it imposes or lifts a sanction for one of the violations 
listed in Sec. 438.700.
    (b) The notice must--
    (1) Be given no later than 30 days after the State imposes or lifts 
a sanction; and
    (2) Specify the affected MCO, the kind of sanction, and the reason 
for the State's decision to impose or lift a sanction.


Sec. 438.726  State plan requirement.

    (a) The State plan must include a plan to monitor for violations 
that involve the actions and failures to act specified in this part and 
to implement the provisions of this part.
    (b) A contract with an MCO must provide that payments provided for 
under the contract will be denied for new enrollees when, and for so 
long as, payment for those enrollees is denied by CMS under section 
438.730(e).


Sec. 438.730  Sanction by CMS: Special rules for MCOs

    (a) Basis for sanction. (1) A State agency may recommend that CMS 
impose the denial of payment sanction specified in paragraph (e) of 
this section on an MCO with a contract under this part if the agency 
determines that the MCO acts or fails to act as specified in 
Sec. 438.700(b)(1) through (b)(6).
    (b) Effect of an Agency Determination. (1) The State agency's 
determination becomes CMS's determination for purposes of section 
1903(m)(5)(A) of the Act unless CMS reverses or modifies it within 15 
days.
    (2) When the agency decides to recommend imposing the sanction 
described in paragraph (e) of this section, this recommendation becomes 
CMS's decision, for purposes of section 1903(m)(5)(B)(ii) of the Act, 
unless CMS rejects this recommendation within 15 days.
    (c) Notice of sanction. If the State agency's determination becomes 
CMS's determination under section (b)(2), the State agency takes the 
following actions:
    (1) Gives the MCO written notice of the nature and basis of the 
proposed sanction;
    (2) Allows the MCO 15 days from the date it receives the notice to 
provide evidence that it has not acted or failed to act in the manner 
that is the basis for the recommended sanction;
    (3) May extend the initial 15-day period for an additional 15 days 
if--
    (i) the MCO submits a written request that includes a credible 
explanation of why it needs additional time;
    (ii) the request is received by CMS before the end of the initial 
period; and
    (iii) CMS has not determined that the MCO's conduct poses a threat 
to an enrollee's health or safety.
    (d) Informal reconsideration. (1) If the MCO submits a timely 
response to the notice of sanction, the State agency--
    (i) Conducts an informal reconsideration that includes review of 
the evidence by a State agency official who did not participate in the 
original recommendation;
    (ii) Gives the MCO a concise written decision setting forth the 
factual and legal basis for the decision; and
    (iii) Forwards the decision to CMS.
    (2) The agency decision under paragraph (d)(1)(ii) of this section 
becomes CMS's decision unless CMS reverses or modifies the decision 
within 15 days from date of receipt by CMS.
    (3) If CMS reverses or modifies the State agency decision, the 
agency sends the MCO a copy of CMS's decision.
    (e) Denial of payment. (1) CMS, based upon the recommendation of 
the agency, may deny payment to the State for new enrollees of the HMO 
under section 1903(m)(5)(B)(ii) of the Act in the following situations:
    (i) If a CMS determination that an MCO has acted or failed to act, 
as described in paragraphs (b)(1) through (b)(6) of Sec. 438.700, is 
affirmed on review under paragraph (d) of this section.
    (ii) If the CMS determination is not timely contested by the MCO 
under paragraph (c) of this section.
    (2) Under Sec. 438.726(b), CMS's denial of payment for new 
enrollees automatically results in a denial of agency payments to the 
HMO for the same enrollees. (A new enrollee is an enrollee that applies 
for enrollment after the effective date in paragraph (f)(1) of this 
section.)
    (f) Effective date of sanction. (1) If the MCO does not seek 
reconsideration, a sanction is effective 15 days after the date the MCO 
is notified under paragraph (b) of this section of the decision to 
impose the sanction.
    (2) If the MCO seeks reconsideration, the following rules apply:
    (i) Except as specified in paragraph (d)(2)(ii) of this section, 
the sanction is effective on the date specified in CMS's 
reconsideration notice.
    (ii) If CMS, in consultation with the State agency, determines that 
the MCO's conduct poses a serious threat to an enrollee's health or 
safety, the sanction may be made effective earlier than the date of the 
agency's reconsideration decision under paragraph (c)(1)(ii) of this 
section.
    (g) CMS's role. (1) CMS retains the right to independently perform 
the functions assigned to the State agency under paragraphs (a) through 
(d) of this section.
    (2) At the same time that the agency sends notice to the MCO under 
paragraph (c)(1)(i) of this section, CMS forwards a copy of the notice 
to the OIG.
    (3) CMS conveys the determination described in paragraph (b) of 
this section to the OIG for consideration of possible imposition of 
civil money penalties under section 1903(m)(5)(A) of the Act and part 
1003 of this title. In accordance with the provisions of part 1003, the 
OIG may impose civil money penalties on the MCO in addition to, or in 
place of, the sanctions that may be imposed under this section.

[[Page 41115]]

Subpart J--Conditions for Federal Financial Participation


Sec. 438.802  Basic requirements.

    FFP is available in expenditures for payments under an MCO contract 
only for the periods during which the contract--
    (a) Meets the requirements of this part; and
    (b) Is in effect.


Sec. 438.806  Prior approval.

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


Sec. 438.808  Exclusion of entities.

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


Sec. 438.810  Expenditures for enrollment broker services.

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


Sec. 438.812  Costs under risk and nonrisk contracts.

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

PART 440--SERVICES: GENERAL PROVISIONS

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

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

    2. In subpart A, a new Sec. 440.168 is added to read as follows:


Sec. 440.168  Primary care case management services.

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

PART 447--PAYMENTS FOR SERVICES

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

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


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

[[Page 41116]]

Sec. 447.46  Timely claims payment by MCOs.

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


Sec. 447.53  [Amended]

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


Sec. 447.53  Applicability; specification; multiple charges.

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


Sec. 447.58  [Amended]

    4. In Sec. 447.58, ``Except for HMO services subject to the 
copayment exclusion in Sec. 447.53(b)(6), if'' is removed and ``If'' is 
added in its place.

    5. A new Sec. 447.60 is added to subpart A to read as follows:


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

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


Sec. 447.361  [Removed]

    6. Section 447.361 is removed.

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

    Dated: April 17, 2002.
Thomas A. Scully,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: May 14, 2002.
Tommy G. Thompson,
Secretary.
[FR Doc. 02-14747 Filed 6-13-02; 8:45 am]
BILLING CODE 4120-01-P