[Federal Register Volume 72, Number 99 (Wednesday, May 23, 2007)]
[Proposed Rules]
[Pages 28930-28936]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-2576]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 438 and 447

[CMS-2279-P]
RIN 0938-A095


Medicaid Program; Graduate Medical Education

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would clarify that costs and payments 
associated with Graduate Medical Education programs are not 
expenditures for medical assistance that are federally reimbursable 
under the Medicaid program.

DATES: Comment date: To be assured consideration, comments must be 
received at one of the addresses provided below, no later than 5 p.m. 
on June 22, 2007.

ADDRESSES: In commenting, please refer to file code CMS-2279-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (Fax) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues

[[Page 28931]]

in this regulation to http://www.cms.hhs.gov/eRulemaking. Click on the 
link ``Submit electronic comments on CMS regulations with an open 
comment period.'' (Attachments should be in Microsoft Word, 
WordPerfect, or Excel; however, we prefer Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address only:
    Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-2279-P, P.O. Box 8016, Baltimore, MD 
21244-8016.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address only:
    Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-2279-P, Mail Stop C4-26-05, 7500 
Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members.
    Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, 
SW., Washington, DC 20201; or 7500 Security Boulevard, Baltimore, MD 
21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period. For information on viewing public comments, see the beginning 
of the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Dianne Heffron, (410) 786-3247.

SUPPLEMENTARY INFORMATION:
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on 
CMS Regulations'' on that Web site to view public comments.
    Comments received timely will be also available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

I. Background

    Title XIX of the Social Security Act (the Act) authorizes Federal 
grants to States for Medicaid programs, operated by the State under an 
approved State plan, that provide medical assistance to needy 
individuals including low-income families, the elderly, and persons 
with disabilities. Under section 1903(a)(1) of the Act, federal grant 
funding, or federal financial participation (FFP), is available to 
States for a percentage of amounts ``expended * * * for medical 
assistance under the State plan.'' The care and services that may (or 
in some cases, must) be included within the scope of medical assistance 
under a Medicaid State plan are generally set forth in section 1905(a) 
of the Act. Included in this list, for example, in sections 1905(a)(1) 
and 1905(a)(2), are inpatient and outpatient hospital services. 
Graduate medical education (GME) is not included in this list of care 
and services within the scope of medical assistance.
    Section 1902(a)(30) of the Act requires States to develop payment 
methodologies for services provided under the Medicaid State Plan that 
are consistent with economy, efficiency and quality of care. CMS has 
previously allowed States to include hospital GME activities as a 
component of the cost of Medicaid inpatient and outpatient hospital 
services.
    For the reasons we explain in more detail below, we do not believe 
that it is consistent with the Medicaid statute to pay for GME 
activities either as a component of hospital services or separately. 
GME is not a health service that is included in the authorized coverage 
package. Nor is GME recognized under the Medicaid statute as a 
component of the cost of Medicaid inpatient and outpatient hospital 
services. GME is not a health service (in contrast to the activities of 
disproportionate share hospitals). Therefore, we are proposing in this 
issuance to preclude FFP in State payments for GME.

Inpatient Hospital Rates

    States are responsible for setting inpatient hospital rates. 
Section 1902(a)(13) of the Act requires States to develop rates for 
inpatient hospital services in a public process. Section 1902(a)(30)(A) 
of the Act further requires Medicaid service rates to be consistent 
with economy, efficiency, and quality of care. These provisions afford 
States a great deal of flexibility in determining their inpatient 
hospital rates. States may use various reimbursement systems including 
diagnosis-related groups (DRGs), per diem, case rates, cost or other 
payment methodologies as long as the methodologies meet the regulations 
at 42 CFR part 447 subpart C. An important limitation States must 
adhere to is the upper payment limit (UPL) which describes a payment 
level above which FFP is not available. The UPL implements, in part, 
the statutory requirement for payment rates that are, ``consistent with 
efficiency, economy, and quality of care'' at section 1903(a)(30)(A) of 
the Act. The regulations at 42 CFR 447.272 and 447.321 define the UPL 
for hospital services. States must demonstrate that the rates they have 
developed to reimburse Medicaid hospital services do not, in the 
aggregate, and within three provider categories (government, non-State 
government, or private), exceed a reasonable estimate of what Medicare 
would have paid for the same services using Medicare payment 
principles.
    Unlike Medicaid, the Medicare program has very specific and 
detailed statutory requirements regarding payments for hospital 
services. The current payment system for hospitals segregates payments 
made to hospitals into two basic payments; operating costs and capital 
costs of inpatient hospital services. Prospective Hospital Payments can 
be supplemented by direct medical education (DME) or indirect medical 
education (IME) payments. The requirements are set forth in section 
1886 of the Act. This section defines costs, details the cost reporting 
process, delineates a few categories of hospitals that are paid 
directly on the basis of

[[Page 28932]]

reported costs and provides for the use of reported costs in the 
development of Medicare's prospective payment system for most 
hospitals. In particular, in section 1886(a)(4) of the Act, Medicare 
defines ``operating costs of inpatient hospital services'' as:

* * * All routine operating costs, ancillary service operating 
costs, and special care unit operating costs with respect to 
inpatient hospital services as such costs are determined on an 
average per admission or per discharge basis (as determined by the 
Secretary), and includes the costs of all service for which payment 
may be made under this title that are provided by the hospital (or 
by an entity wholly owned or operated by the hospital) to the 
patient. * * * Such term does not include costs of approved 
educational activities. * * *

    Thus, Medicare expressly excludes costs associated with educational 
activities from the operating costs that can be included in the cost 
base used to develop the basic payment amounts under Medicare's 
prospective payment system for inpatient hospital services.

Medicare and Graduate Medical Education

    With the creation in 1965 of the Medicare program, in anticipation 
of a need for additional physicians to treat a newly insured, aged-
patient population, the costs associated with GME were included as 
reimbursable Medicare costs. The Office of the Inspector General (OIG) 
issued a report in 1994 entitled A Study of Graduate Medical Education 
Costs describing the origins of Medicare policy regarding GME as based 
on a physician shortage in the U.S. that existed in the 1950s and 
1960s. Physician training was viewed as a public good and,

* * * Congress decided that Medicare should participate in educating 
physicians until communities shouldered the costs in some other 
fashion. Hence, it created Medicare GME funding for teaching 
hospitals.

    By the 1980s, the U.S. had a surplus of physicians and the 
alternative community sources for GME funding never materialized. The 
same OIG report indicated that there were attempts by the Congress and 
this agency to substantially limit or eliminate Medicare GME subsidies. 
Instead, the Medicare payment system for inpatient hospital services 
was completely altered in 1983, moving from cost reimbursement to a 
prospective payment system (PPS). The PPS included payments to 
hospitals for the costs of GME. The new system created two types of 
payments unique to teaching hospitals. The direct graduate medical 
education payment (DGME) compensates teaching hospitals for the direct 
costs of their educational activities, as measured by the number of 
residents being trained and the historic cost of training residents. 
Additionally, qualifying teaching hospitals receive an indirect medical 
education (IME) adjustment to their per discharge payment under the 
Medicare IPPS (inpatient prospective payment system) to account for 
additional costs (other than the direct costs of the training program) 
that teaching hospitals incur in treating Medicare patients. This 
additional payment reflects the costs of providing care at teaching 
hospitals generally due to the added costs of ``learning by doing'' 
treatment methods, and is in addition to the basic prospective payment 
for inpatient services based on ``operating costs of inpatient hospital 
services''.
    Medicare recognizes direct costs of approved educational programs 
in sections 1886(h) and (k) of the Act. Indirect medical education 
payments are provided for at section 1886(d)(5) of the Act. These 
sections address graduate medical education activities separate and 
apart from the other costs of providing inpatient hospital services. 
The statute provides specific instructions regarding which educational 
programs qualify a hospital for the additional GME payments and 
provides an explicit methodology to calculate the Medicare payment to 
an individual hospital for both its direct graduate medical education 
program and its indirect medical education payments.
    Regulations at 42 CFR part 412 describe the prospective payment 
system. Again, direct medical education costs are identified as 
excluded from the other Medicare inpatient hospital operating costs 
used to develop Medicare's prospective inpatient rates. Direct graduate 
medical education is specifically prohibited as part of the inpatient 
PPS rate at Sec.  412.2(2)(e). Indirect medical education is separately 
identified as a payment adjustment based on a formula at Sec.  412.105. 
The costs that the IME adjustment reimburses a qualifying hospital for 
are included as inpatient hospital operating costs on the Medicare cost 
report. IME is an adjustment to the IPPS discharge rate. The IPPS rate 
is an ``average'' rate based on the efficient provision of inpatient 
care at all hospitals. The IME adjustment is intended to compensate 
teaching hospitals for the additional costs they incur when providing 
hospital services versus non-teaching hospitals.

Medicaid and Graduate Medical Education Generally

    In a 2003 state survey conducted by the Association of American 
Medical Colleges, 47 States and the District of Columbia reported using 
Medicaid funds to make GME payments under the Medicaid State Plan. Of 
these, 35 indicated that the payments were included in their per diem 
inpatient hospital rates, and 15 stated using supplemental or a 
combination of supplemental and per diem payments to make GME payments. 
This same report, Medicaid Direct and Indirect Graduate Medical 
Education Payment: A 50 State Survey, indicates that while States view 
these Medicaid GME payments as critical to State GME policy 
implementation, they generally do not track these payments.
    In large part, this inability to track Medicaid GME payments is due 
to the way in which these payments are made (which we discuss in more 
detail below). Basically, payments are made through increases in the 
rates paid for covered Medicaid services. This methodology assures 
Federal participation, but does not provide clear accountability. 
Funding intended by the States to support GME often becomes subsumed 
within MCO or hospital rates (including supplements to these rates) or 
inpatient disproportionate share hospital (DSH) payments. As a result, 
it is difficult to quantify Medicaid GME payments or monitor and 
measure the effect of Medicaid payments on GME programs.

Medicaid State Plan Payments

    As previously stated, Medicaid law does not dictate detailed 
payment requirements for covered hospital services. Rather, States are 
permitted flexibility, subject to a reasonable estimate of what 
Medicare would have paid for the services, to develop their own methods 
and standards to determine the price they will pay for Medicaid covered 
services. States are required to include such payment methodologies in 
their State plans, and thus must submit their payment methodologies to 
CMS for review and approval. Once approved, States receive FFP for the 
Medicaid payments they make under the approved methodology.
    Since there is no express authority in the Medicaid statute for 
payments to support GME programs, to receive FFP for such payments, the 
payments must be made under the guise of payments made for covered 
Medicaid services under the approved Medicaid State plan. Usually the 
payments are part of the inpatient hospital Medicaid rate

[[Page 28933]]

structure. This is because the Medicaid inpatient UPL references 
Medicare payment principles as an integral part of the inpatient UPL 
calculation, and Medicare makes GME payments as a supplement to 
inpatient hospital service payment rates.
    States routinely make payments to hospitals up to the maximum level 
permitted under the UPL, using methodologies that have a base payment 
rate and provide for supplemental payments to selected types of 
hospitals. This is possible because the base reimbursement rates are, 
in the aggregate, below the UPL for the particular category of 
provider. This creates a ``gap'' beneath the UPL that allows States to 
make the supplemental payments for select providers. Some or all of 
these supplemental payments may be directed at hospitals which operate 
GME programs.
    There are limitations on the State's flexibility in designing their 
Medicaid programs and reimbursement under current regulations to 
provide funding for GME programs stemming from the absence of any 
direct authority to reimburse GME under Title XIX. Because this funding 
must be part of payment for medical services (either directly or 
included in comprehensive capitation rates paid to MCOs), this funding 
is not necessarily limited to teaching hospitals, linked to educational 
costs or measures, or coordinated with other sources of GME funding. 
Therefore, it is difficult for States to design Medicaid payments to 
correspond with the operation of GME programs in the State. This is 
particularly true in the case of GME programs that include significant 
training in non-hospital settings. As a result, there is generally no 
assurance that supplemental Medicaid payments for GME are actually 
effective in supporting these programs, or in furnishing any benefit to 
Medicaid program beneficiaries.
    Under the Medicaid program, beneficiaries receive a defined benefit 
package consisting of a variety of mandatory and optional services 
provided to qualifying recipients. The statute creates a Federal/State 
partnership to share in the cost of providing these health care 
services to low-income populations. The current program structure 
supports State definition of eligible populations, coverage options, 
and reimbursement for covered services for these eligible individuals. 
This structure does not accommodate the State medical training policy 
and goals. The Federal government is also limited by its statutory 
authority to only evaluate and monitor the efficiency and economy of 
Medicaid spending as it relates to rates paid for medical services and 
not for GME as no such authority to do so exists within current law.
    This rule proposes to clarify that CMS will not consider funding 
for GME as expenditures for a covered Medicaid service. We distinguish 
direct GME payments from indirect medical education (IME) payments 
because IME payments (as defined under Medicare payment principles) 
represent an additional Medicare payment for health care services 
provided to Medicare beneficiaries in teaching hospitals. This rule 
would clarify that GME is outside the scope of medical assistance, and 
that GME funding is not an allowable component of payment methodologies 
included in a State's approved Medicaid State Plan or in any Medicaid 
managed care payment. This includes all payments under attachments 
4.19-A and 4.19-B of a State's Medicaid State Plan. The rule would also 
provide that when calculating an inpatient UPL, States may not include 
additional payments Medicare makes to a hospital for direct educational 
costs as part of the reasonable estimate of Medicare payment. And the 
rule would provide that States may, as part of their UPL calculation, 
include Medicare payments for indirect medical education as these 
payments represent additional costs associated with providing services 
in teaching hospitals. CMS specifically seeks comments on the propriety 
of including Medicare IME adjustments as part of the UPL calculation.
    States may not make any educational payments under the Medicaid 
State Plan but are able to recognize, as part of the inpatient hospital 
rate structure, the additional Medicaid covered service costs that 
teaching hospitals incur when delivering Medicaid covered services.
    States that currently include GME payments as part of other 
services or administrative costs under the Medicaid State Plan must 
also cease claiming Federal funds for these educational program 
payments.

II. Provisions of the Proposed Rule

    The provisions of this rule propose to clarify that, for purposes 
of Medicaid reimbursement eligible for FFP, GME is not an allowable 
cost or payment for medical assistance under the approved Medicaid 
State Plan. The provision would apply to all Medicaid providers and 
must be implemented in the first full State fiscal year following the 
effective date of the subsequent final rule.
    We are proposing to modify the regulations at 42 CFR part 447. 
Currently the general instructions regarding Medicaid State Plan 
requirements for payment methods for all Medicaid services are provided 
at Sec.  447.201. We propose to add a new Sec.  447.201(c) to indicate 
that GME cannot be included as part of any payment methodology in the 
Medicaid State Plan. We have included this clarification to address 
States that have included GME as part of their rate system for non-
institutional services, institutional services, or as an administrative 
cost eligible for FFP.
    We propose also to modify Sec. Sec.  447.257 and 447.304 to address 
that FFP is no longer available for any reimbursement that includes or 
specifically pays for GME. The current paragraph would be redesignated 
as paragraph (a) and a new paragraph (b) would be added providing that 
no FFP would be available for GME under the approved Medicaid State 
Plan.
    We propose to modify Sec.  447.272(b)(1) and 447.321(b)(1) to 
indicate that the term ``Medicare payment principles'' must exclude any 
Medicare payments associated with direct GME when calculating the 
Medicaid UPL.
    We propose to modify Sec.  438.6(c)(5) by removing paragraph (v) 
that addresses the coordination of GME payments under the State plan 
with capitated rates paid to a Medicaid MCO.
    We propose to modify Sec.  438.60 to provide that the limit on 
payment to other providers would not include an exception related to 
GME payments made to providers outside the capitation rate and under 
the Medicaid State Plan.

III. Collection of Information Requirements

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

IV. Response to Comments

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

[[Page 28934]]

V. Regulatory Impact Statement

A. Overall Impact

    We have examined the impact of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Flexibility Act (RFA) 
(September 19, 1980, Pub. L. 96-534), 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 (as amended by Executive Order 13258, which 
merely reassigns responsibility of duties, and Executive Order 13422) 
directs agencies to assess all costs and benefits of all 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 ($100 million or 
more in any 1 year). This rule would surpass the economic threshold and 
is considered a major rule. This rule is estimated to reduce Federal 
Medicaid outlays by $140 million in FY 2008, by $290 million in FY 
2009, by $440 million in FY 2010, by $450 million in FY 2011, and by 
$460 million in FY 2012.
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$6.5 million to $31.5 million in any 1 year. Individuals and States are 
not included in the definition of a small entity. We are not preparing 
an analysis for the RFA because the regulation would not have a direct 
impact on small entities. In this case, the regulation would directly 
affect payments the States receive from the Federal government, and the 
impact on health care facilities is a secondary impact. States may 
choose to continue to fund direct medical education programs using 
State-only funding; this rule simply eliminates the availability of 
Federal Medicaid funding for such direct education programs. 
Additionally, most hospitals that would qualify as small entities would 
likely be unaffected by this rule as they are unlikely to offer medical 
education programs. Generally, medical education programs are sponsored 
by large hospitals offering a variety of medical specialties and 
services. As we are uncertain of the impact on small entities, we 
specifically request public comment on the impact of small health care 
facilities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. We are not preparing an 
analysis for section 1102(b) of the Act because we have determined, and 
the Secretary certifies, that this rule would not have a direct impact 
on the operations of a substantial number of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. That threshold 
level is currently approximately $120 million. This rule would not 
result in expenditures in any 1 year by State, local, or tribal 
governments, in the aggregate, or by the private sector, of $120 
million. This rule anticipates federal savings in excess of $120 
million but does not require States to replace that federal funding 
with state funding. There is no federal mandate to fund GME programs 
with State funding. Funding GME is not a required activity or 
enforceable duty arising from participation in Medicaid, thus any 
reduction in federal funding will not decrease the funding available 
for required activities under the Medicaid program.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement or cost on 
State and local governments, preempts State law, or otherwise has 
Federalism implications. For purposes of Executive Order 13132, we find 
that this rule will not have a substantial effect on State or local 
government. While this regulation would eliminate the ability of States 
to claim Federal Medicaid funding for direct GME, it would not impose 
any requirement that States pay for such GME. The rule would simply 
recognize that GME is not authorized under the Medicaid statute as an 
element of medical assistance that is eligible for Federal Medicaid 
funding.

B. Anticipated Effects

  Estimated Reduction in Federal Medicaid Outlays Resulting From the Graduate Medical Education Proposal Being
                           Implemented by This Proposed Rule--Annual Expected Savings
                                              [Amounts in millions]
----------------------------------------------------------------------------------------------------------------
                     Reduction in Federal Medicaid outlays in million dollars by fiscal year
-----------------------------------------------------------------------------------------------------------------
                                                   2008        2009        2010        2011           2012
----------------------------------------------------------------------------------------------------------------
Graduate Medical Education Exclusion..........       $140        $290        $440        $450        $460
----------------------------------------------------------------------------------------------------------------

Accounting Statement
    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in the table below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provision of this proposed rule. This 
table provides our best estimate of the reduction in Federal Medicaid 
outlays for the years 2008 through 2012 as result of the changes 
presented in this proposed rule. This rule only affects transfer 
payments between the Federal government and State governments.
Direct Graduate Medical Education (DGME)
1. Effects on State Medicaid Programs
    Since Graduate Medical Education is not a Medicaid service 
authorized in Title XIX of the Act, States are not required to report 
GME costs on the form CMS-64-9. Instead, States that claim Federal 
funding for GME

[[Page 28935]]

generally do so as a portion of their inpatient hospital rates, 
inpatient hospital supplemental payments, MCO payments or, in limited 
instances, as part of a supplemental, non-institutional provider 
payment.
    Because of the absence of a reporting obligation, the amount 
actually expended for Medicaid GME is not readily determinable. The 
Federal Government has no way to directly determine the number of 
States making GME payments, amounts States are spending or claiming as 
GME or the total number of hospitals receiving such payments. Any GME 
funding claimed would simply be reflected within total outlays related 
to a particular service category, such as inpatient hospital, on the 
form CMS 64.9. In addition, the impact of eliminating the Medicare DGME 
payment as part of a State's UPL calculation is difficult to determine 
because most states do not include their UPL methodology as part of 
their approved Medicaid State plan. States have the option of including 
this payment in their UPL calculation but it is not a requirement.
    Estimates of the impact of eliminating Direct Graduate Medical 
Education as an allowable program cost or payment were derived from 
data on State GME payments from a survey conducted by the National 
Conference of State Legislatures (NCSL) and published in the Journal of 
Health Affairs in 2000. The NCSL GME estimates were trended forward by 
the Consumer Price Index to establish a project baseline of GME 
payments for FY 2008 through 2012. CMS also estimates an offset applied 
to these payments to account for behavioral changes, including the 
likelihood that States may replace a portion of their GME payments with 
other payments to hospitals to achieve a similar Federal spending 
level. The resulting net savings were calculated using an average 
Federal matching rate of 57 percent. CMS specifically seeks comment on 
the amount States pay and methods States use to pay for DME and IME in 
their Medicaid programs.
    States have several options to address medical education funding. 
One option is to replace funding provided as the Federal share of a 
Medicaid GME payment with State-only funding or private sector funding. 
States may increase other generally applicable taxes to provide funding 
for general medical education.
    States could also work through a better coordination of funding to 
more effectively leverage and coordinate all GME funding in a State, 
including Federal funding available through Area Health Education 
Centers (AHECs), Medicare funding, grant funding, and State funding to 
more effectively manage health education policy and outcomes.
2. Effects on Other Providers
    CMS currently cannot precisely estimate the total number of 
providers receiving Medicaid GME payments. States are not required to 
report this information nor are they required to make such payments to 
only teaching hospitals. The exclusion of the Medicare DGME payment 
when calculating a class of providers' applicable UPL could lower the 
ceiling for Medicaid payments available to a provider within that class 
but CMS cannot estimate the impact since States are not required to 
include the adjustment and CMS currently does not have information on 
how many currently do include it. However, States may pay providers up 
to the UPL, including the IME payment adjustment made by Medicare to 
compensate teaching hospitals for additional service delivery costs 
associated with providing care in teaching hospitals. Providers will 
continue to receive payments for covered Medicaid services, and 
hospitals that serve a disproportionate share of low-income patients 
will continue to be eligible for additional DSH payments. States may 
also provide State-only funding for direct educational costs thus 
alleviating any revenue loss associated with the Medicaid DGME 
exclusion.

C. Alternatives Considered

    In developing this regulation, the following alternatives were 
considered. We considered the possibility of providing stronger review 
of State Plan reimbursement methodologies for graduate medical 
education. In addition, we considered developing standard parameters 
applicable to all Medicaid GME payments (for example, a requirement 
that payment should not exceed the unmet cost of the GME program, 
counting all GME revenue when determining unmet GME program cost). 
These alternatives would address our concern over the lack of oversight 
and accountability for Medicaid GME funding. They would also address 
concerns that federal payments for GME through three separate programs 
(Medicare, Medicaid, and AHECs) are not coordinated with overall 
program goals.
    In evaluating these alternatives, however, we were limited by the 
absence of any statutory authority in the Medicaid program to make GME 
payments. Absent such authority, we believe we are limited in our 
ability to regulate such payments because the payments have been made 
under some other category. In other words, because there is no direct 
statutory authority for GME payments under a Medicaid State Plan, there 
is little authority to regulate or oversee such payments if allowed.
    As discussed above, States make GME payments through provider rates 
paid to reimburse medical services delivered. The existing statute and 
regulations addressing these payments do not provide CMS with the 
regulatory authority to require payment methodologies identified as GME 
to detail specific program requirements or apply any minimum program 
parameters for their approval.
    In short, CMS lacks any express statutory authority to match 
Medicaid GME payments as program costs and therefore lacks clear 
regulatory authority to manage Federal participation in GME programs 
under current law.

                       OMB--Statement of Accounts
------------------------------------------------------------------------
                                                           Annualized
                                                           monetized
                                                         transfers (in
                                                          millions per
                                                             year)
------------------------------------------------------------------------
Non-discounted.......................................               $356
3%...................................................                351
7%...................................................               345
------------------------------------------------------------------------
 The savings reflect a reduction in payments from the federal government
  to the States.

D. Conclusion

    For these reasons, we are not preparing an analysis for either the 
RFA or section 1102(b) of the Act because we have determined that this 
rule would not have a direct significant economic impact on a 
substantial number of small entities or a direct significant impact on 
the operations of a substantial number of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects

42 CFR Part 438

    Grant programs--health, Medicaid, Reporting and recordkeeping 
requirements.

42 CFR Part 447

    Accounting, Administrative practice and procedure, Drugs, Grant 
programs-health, Health facilities, Health professions, Medicaid, 
Reporting and recordkeeping requirements, Rural areas.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV as set forth 
below:

[[Page 28936]]

PART 438--MANAGED CARE

    1. The authority citation for part 438 continues to read as 
follows:

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

Subpart A--General Provisions


Sec.  438.6  [Amended]

    2. Section 438.6 is amended by removing paragraph (c)(5)(v).

Subpart B--State Responsibilities

    3. Section 438.60 is revised to read as follows:


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 or in 42 CFR.

PART 447--PAYMENTS FOR SERVICES

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

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

Subpart B--Payment Methods: General Provisions

    5. Section 447.201 is amended by adding a new paragraph (c) to read 
as set forth below.


Sec.  447.201  State plan requirements.

* * * * *
    (c) The plan must not include payments for graduate medical 
education to any provider or institution or include costs of graduate 
medical education as an allowable cost under any cost-based payment 
system (including costs or payments claimed as administrative costs).

Subpart C--Payment for Inpatient Hospital and Long-Term Care 
Facility Services

    6. Section 447.257 is amended by:
    A. Designating the existing paragraph as paragraph (a).
    B. Adding a new paragraph (b) to read as follows:


Sec.  447.257  FFP: Conditions relating to institutional reimbursement.

* * * * *
    (b) FFP is not available in expenditures for graduate medical 
education in hospitals and long-term care facilities.
    7. Section 447.272 is amended by republishing the heading to 
paragraph (b) and revising paragraph (b)(1) to read as follows:


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

* * * * *
    (b) General rules. (1) ``Upper payment limit'' refers to a 
reasonable estimate of the amount that would be paid for the services 
furnished by the groups of facilities under Medicare payment principles 
in subchapter B of this chapter. For purposes of the Medicaid upper 
payment limit calculation, direct graduate medical education payments 
are not an allowable component of a Medicare payment and must be 
excluded from the calculation.
* * * * *

Subpart F--Payment Methods for Other Institutional and Non-
Institutional Services

    8. Section 447.304 is amended by:
    A. Revising paragraph (b) to read as follows:


Sec.  447.304  Adherence to upper limits; FFP.

* * * * *
    (b) FFP is not available in expenditures for graduate medical 
education.
* * * * *
    9. Section 447.321 is amended by republishing the heading to 
paragraph (b) and revising paragraph (b)(1) to read as follows:


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

* * * * *
    (b) General rules. (1) ``Upper payment limit'' refers to a 
reasonable estimate of the amount that would be paid for the services 
furnished by the groups of facilities under Medicare payment principles 
in subchapter B of this chapter. For purposes of the Medicaid upper 
payment limit calculation, direct graduate medical education payments 
are not an allowable component of a Medicare payment and must be 
excluded from the calculation.
* * * * *

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

    Dated: May 11, 2007.
Leslie V. Norwalk,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: May 17, 2007.
Michael O. Leavitt,
Secretary.
[FR Doc. 07-2576 Filed 5-18-07; 4:38 pm]
BILLING CODE 4120-01-P