[Federal Register Volume 72, Number 188 (Friday, September 28, 2007)]
[Proposed Rules]
[Pages 55158-55166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-19154]



[[Page 55158]]

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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 440 and 447

[CMS-2213-P]
RIN 0938-AO17


Medicaid Program; Clarification of Outpatient Clinic and Hospital 
Facility Services Definition and Upper Payment Limit

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

ACTION: Proposed rule.

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

SUMMARY: This proposed rule would amend the regulatory definition of 
outpatient hospital services for the Medicaid program. Outpatient 
hospital services are a mandatory part of the standard Medicaid benefit 
package. The current regulatory definition at 42 CFR 440.20 is broader 
than the definition in Medicare, and can overlap with other covered 
benefit categories. The purpose of this amendment is to align the 
Medicaid definition more closely to the Medicare definition in order to 
improve the functionality of the applicable upper payment limits under 
42 CFR 447.321 (which are based on a comparison to Medicare payments 
for the same services), provide more transparency in determining 
available coverage in any State, and generally clarify the scope of 
services for which Federal financial participation (FFP) is available 
under the outpatient hospital services benefit category.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on October 29, 2007.

ADDRESSES: In commenting, please refer to file code CMS-2213-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 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-2213-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-2213-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: Jeremy Silanskis, (410) 786-1592.

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. You can assist us by referencing the file code 
CMS-2213-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    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 also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

I. Introduction

    Title XIX of the Social Security Act (the Act) authorizes the 
Secretary of the Department of Health and Human Services (the 
Secretary) to provide grants to States to partially finance programs 
furnishing medical assistance (State Medicaid programs) to specified 
groups of needy individuals in accordance with an approved State Plan. 
``Medical Assistance'' is defined at section 1905(a) as payment for 
part or all of the cost of a list of specified care and services, 
including at section 1905(a)(2)(A), ``outpatient hospital services.''
    Details concerning the scope of covered services, the groups of 
eligible individuals, the payment methodologies for covered services, 
and all other information necessary to assure that the plan can be a 
basis for Federal Medicaid funding must be set forth in the approved 
Medicaid State Plan. For approval, the Medicaid State plan must comply 
with requirements set forth in section 1902(a) of the Social Security 
Act (the Act), as implemented and interpreted in applicable regulations 
and guidance issued by the Centers for Medicare & Medicaid Services 
(CMS). The Secretary has delegated overall authority for the Federal 
Medicaid program, including State Plan approval, to CMS.
    Medicaid services are jointly funded by the Federal and State 
governments in accordance with section 1903(a) of the Act. Section 
1903(a)(1) of the Act provides for payments to States of a percentage 
of expenditures under the approved State Plan for covered medical 
assistance. The percentage of Federal financial participation (FFP) is 
the ``Federal Medicaid assistance percentage'' (FMAP). For ordinary 
medical assistance, the FMAP varies

[[Page 55159]]

among the States based on a complex formula set forth in section 
1905(b) of the Act.
    Section 1902(a)(30)(A) of the Act requires a State Medicaid plan to 
meet certain requirements in setting payment amounts for covered care 
and services. One of these requirements is that State Plan 
methodologies must assure that payments are consistent with efficiency, 
economy, and quality of care. This provision provides authority for 
specific upper payment limits (UPLs) set forth in Federal regulations 
in 42 CFR part 447 relating to certain Medicaid covered services. The 
UPL applicable to outpatient hospital services is at Sec.  447.321.
    The purpose of this proposed rule is to clarify the definition of 
the benefit for ``outpatient hospital services'' under section 
1905(a)(2)(A) of the Act, and the application of that definition under 
the applicable UPL. This rule proposes to describe the scope of 
services States may include in the outpatient hospital UPL and define 
appropriate Medicare references that States must use when calculating 
the UPL for Medicaid outpatient hospital services. The rule proposes to 
align the Medicaid definition of outpatient services with the Medicare 
definition of outpatient services and clarify Medicaid's corresponding 
UPLs for outpatient hospital and clinic services.

II. Background

A. Medicaid Outpatient Hospital Services as Currently Defined

    Section 1905(a)(2)(A) of the Act lists outpatient hospital services 
as a benefit that can be covered under a State Medicaid program, and it 
is among those benefits that is mandatory for the most eligible 
Medicaid populations under sections 1902(a)(10)(A) and 
1902(a)(10)(C)(iv) of the Act. The statute does not provide a 
definition for these services. The current implementing regulation at 
Sec.  440.20 describes ``outpatient hospital services'' as preventive, 
diagnostic, therapeutic, rehabilitative, or palliative services that--
    (1) Are furnished to outpatients;
    (2) Are furnished by or under the direction of a physician or 
dentist; and
    (3) Are furnished by an institution that--(i) Is licensed or 
formally approved as a hospital by an officially designated authority 
for State standard-setting; and (ii) Meets the requirements for 
participation in Medicare as a hospital;
    (4) May be limited by a Medicaid agency in the following manner: A 
Medicaid agency may exclude from the definition of ``outpatient 
hospital services'' those types of items and services that are not 
generally furnished by most hospitals in the State.
    An ``outpatient'' is defined in Sec.  440.2(a) as ``a patient of an 
organized medical facility, or distinct part of that facility who is 
expected by the facility to receive and who does receive professional 
services for less than a 24-hour period regardless of the hour of 
admission, whether or not a bed is used, or whether or not the patient 
remains in the facility past midnight.''
    Because the regulatory definition of outpatient hospital services 
is so broad, there is a high possibility of overlap between outpatient 
hospital services and other covered benefits. This overlap results in 
circumstances in which payment for services is made at the high levels 
customary for outpatient hospital services instead of the levels 
associated with the other covered benefits. For example, there have 
been instances of claims for payment of physician services as 
outpatient hospital services, which result in payment far in excess of 
the rates available in the State for physician services. In addition, 
the Fifth Circuit Court of Appeals, in Louisiana Department of Health 
and Hospitals v. CMS, 346 F. 3d 571 (2003), found that hospital-based 
rural health clinic services were within the current definition of 
outpatient hospital services and, although paid under a separate 
methodology, could be included in calculating supplemental payments for 
uncompensated care costs of outpatient hospital services. The result of 
these overlapping definitions is payment for identical services of a 
higher amount under the outpatient hospital benefit than otherwise 
available under the State Plan.
    In addition, the current broad definition of outpatient hospital 
services is not clear on whether outpatient hospital services can 
include types of services that are outside the normal responsibility of 
outpatient hospitals, such as practitioner, school-based, and 
rehabilitative services. In other words, the current broad definition 
does not clearly limit the scope of the outpatient hospital service 
benefit to those services over which the outpatient hospital has 
oversight and control.
    Also important, as we discuss further in the following section 
below, the broad definition of Medicaid outpatient hospital services is 
inconsistent with the applicable UPL, which is based on the premise of 
some level of comparability between the Medicare and Medicaid 
definitions of outpatient hospital and clinic services. The UPL 
regulation at Sec.  447.321 limits outpatient service payments to what 
Medicare would pay for equivalent services. This proposed regulation 
would clarify the scope of services that may be included in the State 
Plan definition of outpatient hospital services to clarify coverage and 
payment requirements for outpatient services.

B. Medicaid Outpatient Hospital Services Upper Payment Limit as 
Currently Defined

    Limitations on aggregate State payments for outpatient hospital and 
clinic services are established in regulation at Sec.  447.321, 
``Outpatient hospital services and clinic services: Application of 
upper limits of payments.'' This regulation requires that aggregate 
State Medicaid payments for outpatient hospital and/or clinic services 
not exceed a reasonable estimate of the amount the provider would be 
paid under Medicare payment principles, forming a UPL for these 
services. The aggregate Medicaid payments and corresponding UPL for 
outpatient hospital and/or clinic services are calculated for private 
facilities. FFP is not available for State expenditures that exceed the 
upper payment limit.
    Before 1981, States were required to pay rates for hospital and 
long-term care services that were directly related to Medicare 
reasonable cost reimbursement. To comply with this requirement, many 
States set Medicaid hospital rates using reasonable costs as determined 
by Medicare. The Congress removed the Medicare cost-based reimbursement 
requirements by enacting legislation in 1980 and 1981, collectively 
referred to as the Boren Amendment.
    Under section 962 of the Omnibus Reconciliation Act of 1980 (ORA 
1980), Pub. L. 96-499, and Section 2173 of the Omnibus Budget 
Reconciliation Act of 1981 (OBRA 1981), Pub. L. 97-85, the Congress 
provided States flexibility to deviate from Medicare cost 
determinations for hospital reimbursement. In lieu of using Medicare 
cost reimbursement rates, States were allowed to set rates based on the 
costs of efficiently and economically operated facilities.
    Though the Boren Amendment removed the specific requirement that 
States adhere to Medicare cost principles, the legislative history 
indicates the intent that the Secretary continue to require that 
payments made to hospitals and other inpatient facilities under the 
State Plan not exceed Medicare payment principles.
    The Senate Finance Committee stated that ``the Secretary would be 
expected

[[Page 55160]]

to continue to apply current regulations that require that payments 
made under State plans do not exceed amounts that would be determined 
under Medicare principles of reimbursement (S. Rep. No. 471, 96th Cong. 
1st Sess. (1979)).'' These limitations provide us with the authority to 
establish UPLs for outpatient and inpatient hospital services.
    The Congress allowed for even more flexibility for State payments 
to hospital and other providers under the Balanced Budget Act of 1997 
(BBA), Pub. L. 105-33. The BBA effectively replaced the requirements of 
the Boren Amendment with a public process to determine the rates of 
payment under the State Plan. The public process requires that States 
publish proposed and final rates, the methodologies underlying the 
established rates, and the justification for the rates. Providers, 
beneficiaries, and other concerned State residents have an opportunity 
to review and comment on the rates before they become final.
    Section 705 of the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (BIPA) required that we publish 
final regulations authorizing transition periods for States to comply 
with the UPL regulations. In response to this statutory directive, we 
modified the UPL regulations for inpatient and outpatient hospital 
services through a final regulation on January 12, 2001 (66 FR 3147).
    In addition, on May 29, 2007 (72 FR 29748), CMS published a final 
rule (CMS-2258-FC) which will impact the outpatient and inpatient 
hospital upper payment limits for services provided by units of 
government. Congress has enacted a one year moratorium that delays CMS 
from implementing the policies established under that final rule. The 
provisions proposed in this regulation address completely different 
policy matters than those set forth in CMS-2258-FC.
    The current outpatient hospital UPL regulation prohibits States 
from paying more, in the aggregate, for Medicaid outpatient hospital 
services than the ``reasonable estimate'' that Medicare would pay for 
equivalent services in privately operated facilities.
    As with the scope of outpatient hospital services that may be 
included under the State Plan, the ``reasonable estimate'' of what 
Medicare would pay for equivalent Medicaid services has had varied 
interpretations. Some States have proposed to use their own hospital 
cost reports to assess the ``reasonable estimate'' of Medicare payment. 
These cost reports may not represent finalized data or accurately 
reflect Medicare payment and/or charge rates. To establish 
standardization across all States, the proposed rule would require 
States to base the ``reasonable estimate'' upon service charge ratios 
reported in the most recently filed Medicare hospital cost report, or a 
State cost report for which the State can clearly demonstrate gathers 
data elements directly from the proposed standard worksheets and lines 
on the most recently filed Medicare cost report. We believe that these 
standards will provide an accurate resource for the ``reasonable 
estimate'' of what Medicare would pay for equivalent Medicaid services.

C. General Intention of Proposed Rule

    In our review of Medicaid State Plans, we have noted instances 
where the State allows non-facility services and/or non-traditional 
outpatient hospital services to be paid under the outpatient hospital 
benefit. The definition of outpatient hospital services in current 
regulation may allow States to include such non-facility services (that 
is, physician and professional services) and/or non-traditional 
outpatient hospital services (that is, school-based and rehabilitative 
services) within the State Plan definition of outpatient hospital 
services. We do not believe that such a broad definition of outpatient 
hospital services is consistent with congressional intent when enacting 
section 1905(a)(2)(A) of the Act.
    Therefore, as discussed in more detail below, we are proposing to 
change the definition and scope of outpatient hospital services, and 
the corresponding UPL for outpatient hospital and clinic services, in 
an effort to clarify the current regulatory language and make it 
consistent with the intent of the Congress in enacting section 
1905(a)(2)(A) of the Act. This revised definition of outpatient 
hospital services would align the outpatient services covered by 
Medicaid with those covered by Medicare. As a result, the calculation 
of the Medicaid UPLs would reflect a comparison of like services. The 
revised definition would also narrow the scope of Medicaid outpatient 
services to those traditionally and typically recognized as outpatient 
facility services. While we recognize that Medicaid covers certain 
services that are not covered by Medicare, this regulation would not 
prohibit States from covering any Medicaid service allowable under 
section 1905(a) of the Act. Rather, the regulation would only define 
services that may be covered, and reimbursed, under the outpatient 
hospital services benefit in the Medicaid State Plan.
    In addition, a number of States have requested that we clarify in 
regulation the requirements for calculating Medicare comparable UPLs on 
outpatient and clinic services. The current regulation at Sec.  447.321 
limits outpatient hospital and rural health clinic payments in 
privately operated facilities to ``a reasonable estimate of the amount 
that would be paid for services furnished by the group of facilities 
under Medicare payment principles.''
    The current regulation does not address how this estimate should be 
made, nor does it address the treatment of services that are not 
comparable to a service furnished under Medicare. As States provide an 
array of services in a variety of settings authorized under Sec.  
440.90, we are proposing to set forth effective UPLs to limit Medicaid 
payments in all clinic settings.
    To address these concerns, as discussed below in more detail, in 
addition to revising the definition of ``outpatient hospital services'' 
for consistency between Medicare and Medicaid, we are proposing changes 
to address the method for calculating the UPL. The proposed UPL 
definition of outpatient hospital services and clinics would establish 
payments as reported on the most recently filed Medicare cost report, 
or a State cost report for which the State can clearly demonstrate 
gathers data elements directly from the proposed standard worksheets 
and lines on the most recently filed Medicare cost report, as the 
standard for the reasonable estimate of what Medicare would pay for 
equivalent Medicaid services. The Medicare cost report reflects cost-
to-charge ratios for all outpatient services reimbursed prospectively 
or reimbursed under a fee schedule by Medicare. Additionally, payment-
to-charge ratios may be derived from the Medicare cost report for all 
facility payments reported to the Medicare fiscal intermediary. 
Medicare regularly updates these payment systems to recover costs for 
providers.
    We believe that the Medicare costs or payments reported in the most 
recently filed Medicare cost reports, or an equivalent State cost 
report as described above, provide the most accurate measure of what 
Medicare would pay for Medicaid-equivalent outpatient hospital 
services.

D. Medicaid Outpatient Hospital Service Definition

Scope of Outpatient Hospital Services--Proposed Rule
    The BBA required CMS (formerly the Health Care Financing 
Administration) to implement an outpatient prospective

[[Page 55161]]

payment system (OPPS) for hospital services reimbursed under the 
Medicare program. Before the implementation of OPPS, services were 
reimbursed on a formula-driven basis. As part of the development 
process for the OPPS, we published a proposed rule on September 8, 1998 
(63 FR 47552) that, among other provisions, described the services that 
would be paid for by Medicare on a prospective basis. The final rule 
was published in the Federal Register on April 7, 2000 (65 FR 18434).
    Regulations at 42 CFR part 419--Prospective Payment System for 
hospital Outpatient Department Services--describes the categories of 
hospitals and the services that are included and excluded from the 
Medicare hospital OPPS. The proposed rule references the services that 
Medicare pays for under the OPPS, defined at Sec.  419.2. In addition, 
the proposed rule references other outpatient hospital facility 
services that Medicare pays through an alternate methodology, such as a 
fee schedule, as coverable Medicaid outpatient hospital services. While 
Medicare pays for both professional and facility services through 
alternate payment methodologies, the proposed rule would limit Medicaid 
coverage and payment for outpatient hospital services to facility 
services only. For example, States may cover and reimburse prosthetic 
devices, prosthetics, supplies, and orthotic devices, durable medical 
equipment, and clinical diagnostic laboratory services as outpatient 
hospital services.
    In addition, the proposed rule would allow States to cover 
outpatient services provided outside of the hospital only in a 
department of a provider that meets the standards defined under 
Medicare regulations in 42 CFR part 413, subpart E--Payments to 
Providers. This section of the regulations describes the relationship 
that facilities with provider-based status must have with a hospital in 
order to receive Medicare payments equivalent to those received by 
hospitals. Specifically, our intention is to ensure that a department 
of a hospital that meets the Medicare requirements for provider-based 
status and is reimbursed for Medicaid outpatient hospital services is 
treated the same as the main provider. In contrast, a provider-based 
entity that is not a department of the main provider would be treated 
as a separate, non-hospital, entity for this purpose (by definition, 
under 42 CFR 413.65(a)(2), provider-based entities provide health care 
services of a different type from those of the main provider).
    We have considered other options and believe that the services 
recognized under Medicare regulations as outpatient hospital services 
represent an industry-accepted class of services. By including services 
reimbursed to outpatient hospitals under Medicare OPPS and outpatient 
services reimbursed through Medicare fee schedules within the Medicaid 
definition, we would provide greater consistency between the two 
federally funded programs. In addition, we are proposing to adopt 
Medicare's definition of a department of a provider meeting the 
requirements of provider-based status, into Medicaid regulation to 
assure that all providers that are reimbursed for outpatient hospital 
services have a legal relationship with a main provider that is defined 
under regulation. This is consistent with efficiency and economy as set 
forth in section 1902(a)(30)(A) of the Act.
    The proposed rule also would exclude States from covering under the 
Medicaid outpatient hospital benefit services that are covered under 
another medical assistance service category under the State Plan. Our 
review of State Plan methodologies recently submitted to CMS finds that 
States may include non-facility and/or non-traditional hospital 
services (that is, school-based services and rehabilitation services) 
within the definition of covered outpatient hospital services. For 
example, States have proposed including school-based, adult day health 
and rehabilitative services in the outpatient hospital coverage section 
of the State Plan. In many cases, these services are already covered 
and paid for under another methodology under the plan. In at least one 
instance, a State reimburses non-traditional hospital services at the 
rate that community providers receive, as defined under the distinct 
payment methodology for those services under the State Plan, rather 
than the higher outpatient rate that should be paid for a covered 
outpatient service.
    Such inconsistencies have the potential to enhance the UPL for 
outpatient services by increasing the scope of outpatient hospital 
services that might be included in the UPL calculation. We are 
proposing to exclude non-facility and/or non-traditional hospital 
services from the outpatient definition in this proposed rule to assure 
efficiency and economy within the scope of outpatient hospital services 
as outpatient service rates are generally higher than rates for other 
Medicaid non-facility services. An outpatient hospital service may not 
be covered and/or reimbursed under another Medical Assistance services 
category under the State Plan. However, States may continue to cover 
any service that is authorized under section 1905(a) of the Act within 
the State Plan under a coverage benefit that is distinct from 
outpatient hospital services.
    Finally, the proposed rule would make a clear distinction between 
outpatient services billed by a recognized hospital facility in which 
services are furnished and those billed by physicians and other 
professionals. Under Medicaid, States generally pay a fee schedule rate 
for physician and other professional services and a separate rate to 
hospitals providing outpatient services. We are restricting the 
Medicaid outpatient hospital definition to facility services only to 
prevent duplicative payments for professional services that are 
reimbursed under a separate payment methodology, under a different 
benefit category under section 1905(a) of the Act.

E. Upper Payment Limits--Proposed Rule

    We are proposing to revise Sec.  447.321 to clarify the appropriate 
Medicare references that States may use to derive the reasonable 
estimate of what would be paid for Medicaid outpatient and clinic 
services furnished by the group of facilities under Medicare payment 
principles.
Outpatient Hospital Upper Payment Limit
    The revisions to the outpatient UPL, as defined in the proposed 
rule, would limit the services that may be included in the outpatient 
hospital UPL for privately operated facilities to those with a Medicare 
equivalent as reported through the most recently filed Medicare cost 
report, for each outpatient hospital Medicaid service provider, or a 
State cost report for which the State can clearly demonstrate gathers 
data directly from the proposed standardized Medicare cost report 
references. The proposed rule would allow States to include within the 
UPL calculation only services that (1) may be covered under the 
Medicaid outpatient coverage definition; and (2) that show up on 
outpatient-specific Medicare hospital cost report worksheets. Thus, the 
scope of outpatient hospital services as defined by Medicaid would be 
the same services as those included in the outpatient hospital UPL. 
Though we recognize that Medicaid covers more services than Medicare, 
we believe that an economic and efficient UPL should include only 
services to which there exists a Medicare equivalent.

[[Page 55162]]

    Restricting the permissible scope of Medicaid outpatient hospital 
services to Medicare's definition would allow us to define standard 
references that States may use to calculate the UPL. All Medicare-
certified institutional providers, including hospitals, are required to 
submit annual cost reports to a fiscal intermediary. These cost reports 
include information such as facility characteristics, utilization data, 
cost and charges by cost center (in total and for Medicare), Medicare 
settlement data, and financial Statement data. The Medicare hospital 
cost report captures all of the services that are included in the 
proposed revised definition of Medicaid outpatient hospital services, 
and it is the most accurate reflection of what Medicare would pay for 
Medicaid equivalent services.
    As previously stated, the Medicare hospital cost report includes 
line items that calculate a cost-to-charge ratio (ratio of the 
provider's actual costs vs. the amount the provider charges). The cost-
to-charge ratio on the Medicare cost report captures the highest 
possible amount that Medicare would pay for an outpatient service. The 
proposed rule would allow States to use either the cost-to-charge 
ratio, as reported on the most recently filed Medicare hospital cost 
report, or a payment-to-charge ratio (the ratio of the amount that 
Medicare actually pays for outpatient hospital services through the 
fiscal intermediary vs. the amount of the hospital's charges for such 
services) to develop the foundation of a reasonable estimate of what 
Medicare would pay for Medicaid's outpatient hospital services. For 
either UPL methodology, the dates of service as reported to the 
Medicare hospital cost report for Medicare cost or payment must match 
the dates of service for Medicare charges as reported to the cost 
report.
    We currently require that States demonstrate compliance with the 
UPL for outpatient hospital services using one of the methods described 
above when the State submits a Medicaid State plan amendment for 
outpatient services. The UPL demonstration must include a formula that 
clearly accounts for either the ratio of Medicare cost to Medicare 
charges multiplied by Medicaid outpatient charges, or the ratio of 
Medicare payments to Medicare charges multiplied by Medicaid outpatient 
charges. The State must cite all references from the most recently 
filed Medicare hospital cost report that are included in the Medicare 
cost-to-charge ratio or Medicare payment-to-charge ratio portion of the 
UPL formula. States utilizing a State-specific cost report must 
demonstrate a clear crosswalk between the proposed Medicare cost report 
references that may be included in a UPL demonstration and the State's 
reporting system.
    For a cost-to-charge UPL demonstration, the link to Medicare is 
made through reference to ancillary and outpatient hospital services 
cost center cost-to-charge ratios as found on Worksheet C, Column 9, 
lines 37--68 or Worksheet D, Part V, Column 1.01, lines 37-68 of the 
CMS 2552-96. These ratios, which must be determined for each provider, 
include all cost regardless of payer for all ancillary and outpatient 
cost centers and charges made to all payers including Medicaid. CMS 
will not accept a UPL that is inflated by adjusting Medicare's allowed 
cost as reported on these worksheets.
    The applicable outpatient hospital service payment references for a 
payment-to-charge UPL demonstration may be found on Worksheet E, Part B 
of the CMS 2552-96. While Worksheet E represents what Medicare pays for 
services within hospitals, States must make certain adjustments in 
order to reflect equivalent Medicaid outpatient hospital provider 
services that may be included in the UPL demonstration. For example, 
all lines that report payments associated with professional services 
must be removed from the numerator. Additionally, States must ensure 
that bad debts are not over-reported by including deductibles and 
coinsurance and reimbursable bad debt in Medicare payments. If 
deductible and coinsurance are added on to the Medicare payment, the 
State should remove reimbursable bad debts included in the Medicare 
payment. The resulting payments reported from Worksheet E should 
represent allowable Medicare payments for purposes of the UPL 
demonstration. The source of Medicare charge data, reflected in the 
ratio's denominator, must come from Worksheet D, Part V and Part VI of 
the Medicare cost report.
    We note that a payment-to-charge ratio UPL methodology may not be 
inclusive of the full scope of outpatient hospital services because 
payments and charges on the Medicare cost report do not include 
payments and charges reimbursed on a fee-for-service basis through the 
Medicare Part B Carrier. For example, durable medical equipment 
payments and charges are not included on Worksheets E and D. We believe 
States should have the flexibility to determine the UPL through a 
comparison of Medicare payment.
    We also note that the specific line references from the Medicare 
hospital cost report are subject to change as the Medicare cost report 
and reporting requirements are modified by CMS. However, only those 
costs, charges, and payments included in the above worksheets and lines 
on the CMS 2552-96 (the current standard Medicare hospital cost report 
form at the issuance of this proposed rule) may be included in the 
outpatient UPL demonstration for Medicaid services.
    Depending on which UPL demonstration methodology the State 
utilizes, the Medicare cost-to-charge ratio or the Medicare payment-to-
charge ratio for each provider, this ratio is multiplied by the 
Medicaid outpatient hospital charges associated with paid claims for 
each provider as reported to the Medicaid Management Information System 
(MMIS). We have considered other methods and believe that the use of 
adjudicated claims excludes outpatient services paid for by Medicare 
for patients dually eligible for Medicare and Medicaid and helps to 
assure that charges represent covered Medicaid services. The Medicaid 
charge data must exclude clinical diagnostic laboratory services, which 
are limited to a separate UPL under section 1903(i)(7) of the Act, and 
all professional services.
    The resulting product is an estimate of the actual cost or payment 
associated with Medicaid outpatient hospital facility services. The 
total estimate of Medicaid cost or payment is compared to actual 
Medicaid paid claims to determine whether outpatient hospital payments 
exceed the UPL.
    States may choose to trend the UPL data to the current rate year. 
Under the proposed rule, we are proposing that all data must be trended 
uniformly in successive years and use the Medicare Market Basket Index 
as the trending factor. The State must demonstrate to CMS the effect of 
the trended data for each successive year from the base year to the 
current rate year. In addition, the State must demonstrate its 
methodology for any proposed volume trending.
Clinic Upper Payment Limit
    For privately operated clinics that are not providing outpatient 
hospital services under Sec.  440.20 (those that would not be paid by 
Medicare in that setting under OPPS or under an alternative outpatient 
hospital service payment methodology) but instead are covered under the 
authority of Sec.  440.90, the UPL is the reasonable estimate of what 
would be paid for clinic services furnished by the group of facilities 
under Medicare payment principles. In calculating the reasonable 
estimate of what Medicare would pay for Medicaid clinic services, we 
must consider Medicare's reimbursement methods for these services.

[[Page 55163]]

    Medicare does not typically pay for clinic services on the basis of 
cost as reported by the facility. Rather, through the resource-based 
relative value (RBRVS) system, used to determine the fee-for-service 
rate, Medicare recognizes specific clinic costs eligible for 
reimbursement in a clinic setting. For clinic services, a reasonable 
estimate of what Medicare would pay for equivalent Medicaid services is 
the non-facility professional rate for those services.
    We propose two options for States to demonstrate compliance with 
the proposed UPL rule for clinic services provided in privately 
operated facilities, which requires payment that does not exceed a 
reasonable estimate of what Medicare would pay for equivalent Medicaid 
services. A State may choose to limit clinic reimbursement to a 
percentage, not to exceed 100 percent, of what Medicare pays under the 
non-facility professional rate for equivalent Medicaid services.
    This first option would require States to include language in the 
State Plan that specifies the percentage of the Medicare facility fee 
schedule that would be paid for services in clinic settings. If the 
State pays a percentage of what Medicare pays under a facility-specific 
fee schedule or the non-facility professional rate and wishes to make 
supplemental payments up to 100 percent of what Medicare pays, the 
State must demonstrate per CPT code what Medicare would pay for 
equivalent Medicaid services. The calculation may be conducted in the 
aggregate for clinic type or by specific facilities (end-stage renal 
disease (ESRD), ambulatory surgical center (ASC), etc.). If a State 
opts to pay 100 percent of what Medicare pays under a facility-specific 
fee schedule or the non-facility professional rate for equivalent 
Medicaid services, the State would not have the option of making 
supplemental payments. However, the State would not be required to 
submit documentation for a clinic UPL demonstration.
    As a second option, a State may develop a fee schedule for Medicaid 
clinic services, which is not based on the Medicare professional fee 
schedule. Clinical diagnostic laboratory services may not be included 
in this demonstration because section 1903(i)(7) of the Act requires 
that these services not exceed the Medicare fee schedule. For all other 
clinic services, the State may pay through an encounter rate or a 
Medicaid specific fee schedule that is not based on Medicare payment 
principles. Under this option, a UPL demonstration is required to 
demonstrate that Medicaid clinic reimbursement would not exceed what 
Medicare would pay for equivalent services. This demonstration must 
show a comparison by CPT code of the amount paid by Medicare for 
equivalent Medicaid services. The calculation may be conducted in the 
aggregate for clinic type or by specific facilities (ESRD, ASC, etc.). 
Under the second option, a State may pay more than Medicare for some 
services or facilities, and less than Medicare for others, as long as 
the aggregate Medicaid payment is equal to or less than the amount that 
Medicare would pay in the aggregate.
    We include a special provision for dental services provided in 
clinics for purposes of UPL calculations because we recognize that 
Medicare does not generally cover dental services. Since there is no 
Medicare payment for dental services in clinic settings, we allow the 
State to incorporate the Medicaid State Plan fee schedule rate as the 
reasonable estimate of what Medicare would pay for dental services. As 
a result, dental clinic providers are not excluded from the State's 
aggregate clinic UPL calculation.

III. Provisions of the Proposed Rule

A. Overview

    Under our proposal, the outpatient hospital services covered under 
the Medicaid program would continue to be set forth in regulation under 
Sec.  440.20. In addition, the UPL requirements for outpatient hospital 
services would continue to be defined under Sec.  447.321. However, 
both current definitions would undergo significant revision to clarify 
the scope of outpatient hospital services recognized by the Medicaid 
program and to standardize Medicare cost and payment principles as the 
basis to accurately determine the reasonable estimate of what Medicare 
would pay for equivalent Medicaid services in a privately operated 
outpatient facility.

B. General Provisions

    The revised definitions would begin with existing Sec.  440.20 that 
describes outpatient hospital services and rural health clinic 
services. The definition of rural health clinic services would be 
revised to apply to all clinic settings. In addition, the existing 
Sec.  447.321 that describes UPLs for Medicaid services provided in 
outpatient hospitals and clinics would be revised.
1. Outpatient Hospital Services and Rural Health Clinic Services 
(Proposed Sec.  440.20)
    Existing Sec.  440.20 sets forth definitions for outpatient 
hospital services and rural health clinic services. We are proposing to 
change Sec.  440.20(a) to specify the scope of facility services 
covered under the Medicaid program. We propose to substitute in Sec.  
440.20(a) the term ``by an institution'' for ``in a facility.'' We 
believe this term better describes outpatient hospital settings where 
Medicaid services may be covered.
    We proposed to modify the requirements for a participating facility 
to include those described in Sec.  413.65. Though the current 
regulation requires that participating facilities meet the requirements 
for participation in Medicare as a hospital, we included the criteria 
for provider-based status as a department of an outpatient hospital 
facility, as described in Sec.  413.65, to recognize all settings where 
Medicaid outpatient hospital services may be provided. In accordance 
with Sec.  413.65, a department of a provider must furnish health care 
services of a same type as those of the main provider under the name, 
ownership, and administrative and financial control of the main 
provider.
    We proposed to add to the current definition a comprehensive list 
of the scope of services that may be included under the Medicaid 
outpatient hospital services benefit. The modified definition allows 
States to cover outpatient services paid for under the Medicare OPPS 
and all other outpatient hospital facility services that Medicare pays 
under a fee schedule. These services are limited only to hospital 
facility services and exclude all professional services. Professional 
services may continue to be billed under a separate fee schedule rate. 
The Medicare provision for OPPS covered services may be found at Sec.  
419.2(b).
    Finally, we excluded all services, other than outpatient hospital 
services, that are covered and paid under medical assistance under 
section 1905(a) of the Act. For example, services paid for under a fee 
schedule (for example, Federally Qualified Health Centers) or services 
that are typically covered under a different section of the State Plan 
(for example, rehabilitative services).
2. Outpatient Hospital and Clinic Services: Application of Upper 
Payment Limits (Proposed Sec.  447.321)
    We propose to modify the existing definition of UPLs for outpatient 
hospital and clinic services to provide States with clear and accurate 
guidance on the ``reasonable estimate of the amount that would be paid 
for the services furnished by the group of facilities under Medicare 
payment principles in subchapter B of this chapter.'' The proposed rule 
would allow States to include within the UPL

[[Page 55164]]

calculation only services that may be covered under the Medicaid 
outpatient coverage definition and that appear on the Medicare hospital 
cost report.
    All hospitals throughout the nation report cost and charge data 
through Medicare hospital cost reports. Since these reports reflect 
Medicare data for all outpatient hospital payments made by Medicare, we 
require States to reference the Medicare hospital cost reports, or a 
State cost report for which the State can clearly demonstrate gathers 
data directly from the proposed standardized Medicare cost report 
references, when calculating the Medicaid outpatient UPL for privately 
operated facilities. From the Medicare cost reports, States may use 
payment-to-charge ratios or cost-to-charge ratios and apply the ratios 
to Medicaid outpatient hospital charges from the MMIS to determine the 
outpatient UPL. We base the UPL calculation on Medicare hospital cost 
reports because we believe they provide the most accurate reflection of 
what Medicare would pay for equivalent Medicaid outpatient hospital 
services.
    Medicare pays on a different basis for clinic services. These rates 
incorporate some of the facility costs and are higher than traditional 
fee schedule payments for professional services. States may continue to 
calculate the reasonable estimate of what Medicare would pay for 
equivalent Medicaid clinic services using these rates. However, States 
must demonstrate a clinic UPL by either specifying a percentage, not to 
exceed 100 percent, of the Medicare rate that is paid by Medicaid. Or a 
State can demonstrate that, in the aggregate, Medicaid-specific payment 
rates that are not directly related to Medicare rates are less than 
what Medicare would pay based on a comparison of what Medicaid pays by 
CMS Common Procedure Coding System (CPT) code to the amount paid by 
Medicare for equivalent Medicaid services.
    In addition, Medicare generally does not reimburse for dental 
services. With this in mind, we added a provision allowing States to 
use the Medicaid fee schedule rate for dental services to calculate the 
UPL for such services. This provision would allow dental services to be 
included in the aggregate clinic UPL calculation, and, thus, allow 
dental providers to be eligible for supplemental payments. Since 
Medicare generally does not pay for dental services, we believe this is 
the best alternative for inclusion of dental services in the clinic UPL 
calculation.

IV. Collection of Information Requirements

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

V. 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.

VI. Regulatory Impact Statement

    We have examined the impact of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), 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. 104-04), and Executive Order 13132.
    Due to a lack of available data, we cannot determine the fiscal 
impact of this proposed rule. The proposed rule defines the scope of 
services that may be reimbursed under the outpatient hospital benefit 
category covered in the Medicaid State plan. In addition, the rule 
clarifies the appropriate methods States may use to calculate the 
Medicaid upper payment limit for those services paid to private service 
providers. CMS does not intend to eliminate or limit the scope of 
Medicaid services that are defined under Title XIX of the Act.
    We have reviewed the effects of the proposed rule and have 
determined that it would clarify current vague regulatory language but 
would not significantly alter current practices in most States. This 
proposed rule is a proactive attempt to clarify and clearly define 
regulatory language and prevent over calculation of the outpatient 
hospital upper payment limit. Therefore, we do not believe the proposed 
rule would have significant economic effects.
    Over the past 4 years, CMS has approved outpatient hospital 
reimbursement methodologies submitted by 32 States. As part of our 
review process, we have determined that only one of the 32 States 
currently defines non-hospital services as part of the outpatient 
hospital Medicaid State plan service benefit.
    Furthermore, with respect to the one State that CMS believes 
currently includes non-hospital services under the outpatient hospital 
benefit category, this rule would not impact the rates of payment for 
these services under the State plan. While the current regulation might 
permit payment at a higher outpatient hospital payment rate, that State 
currently pays for such services at the same rate that is paid for such 
services outside of the outpatient hospital benefit category.
    The rule would have an undetermined effect on the aggregate upper 
payment limit for private outpatient hospital services within the 
State. As part of the upper payment limit calculation the State 
includes the non-hospital services. This effectively raises the limit 
that Medicaid may pay to hospitals. The rule would prevent the State 
from defining these services as outpatient hospital services and 
including them in the UPL calculation.
    States calculate the UPL, the reasonable estimate of Medicare 
payment for equivalent Medicaid services, in the aggregate for all 
Medicaid services provided by all private providers. This total for all 
providers is reduced by actual Medicaid payments in a rate year to 
determine a pool of funding that may be distributed as supplemental 
payments to outpatient hospital providers. Supplemental payments for 
outpatient hospital services up to the UPL may be distributed to any 
hospital within the private category. States are not required to 
equitably distribute supplemental payments among providers or exhaust 
the available supplemental payment pool.
    Considering the UPL is calculated in the aggregate for all 
outpatient hospital service for all private providers, it is impossible 
to isolate the exact fiscal impact of removing non-hospital services 
from the UPL calculation. Even if the payments for these services could 
be isolated in a particular year, the difference between the reasonable 
estimate of Medicare payment for a particular service and Medicaid 
payments for these services could vary drastically from year-to-year as 
payment amounts for services change within each program. Additionally, 
the UPL calculation considers the volume of a particular service 
rendered to Medicaid beneficiaries, which also varies between rate 
years. Therefore, we cannot determine the exact fiscal impact of 
removing non-hospital services from the private UPL calculation within 
this one State.
    We believe the fiscal impact would be minimal because most States

[[Page 55165]]

historically have not made supplemental payments to private providers 
up to the upper payment limit. In fact, the State that we suspect could 
be affected by this rule has recently reported paying approximately $68 
million under the outpatient hospital UPL to private facilities. We do 
not believe the services that would be removed by this proposed rule 
would cause such a significant impact on the UPL calculation. We invite 
public comment on the potential impact of the rule.
    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 the 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). 
The rule proposes to clarify the definition of outpatient hospital 
services and the UPL for these services to provide additional guidance 
to States that interpret these definitions. Under the revised 
regulations, States would not be prevented from covering Medicaid 
services under the State Plan. Rather, a few States may need to move 
services that are not outpatient in nature, as defined by Medicare, to 
the appropriate coverage and payment methodology in the State Plan. 
With this in mind, the rule would not reach the economic threshold and 
thus is not considered a major rule.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and government agencies. 
Most hospitals and most other providers and suppliers are small 
entities, either by nonprofit status or by having revenues of $6 
million to $29 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 this RFA because we have determined that this rule would 
not have a significant economic impact on a substantial number of small 
entities.
    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 that 
this rule would not have a significant 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 that may result in expenditures in any 1 year by 
State, local, or tribal governments, in the aggregate, or by the 
private sector, of $110 million. The proposed rule would not prevent 
States from receiving FFP for Medicaid covered services. Therefore, the 
net change in appropriate FFP that can be received by States for 
Medicaid expenditures is economically insignificant. The proposed rule 
would not result in anticipated costs or benefits to the private 
sector.
    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 costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. Because the proposed rule seeks to curb inappropriate 
Federal revenue maximization, the proposed rule would not impose any 
additional costs to States. Again, States may receive FFP for all 
appropriate Medicaid expenditures for covered services.
    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 440

    Grant programs--health, Medicaid.

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 would amend 42 CFR chapter IV as set forth below:

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. Section 440.20 is amended by revising the section heading and 
paragraph (a) to read as follows:


Sec.  440.20  Outpatient clinic and hospital facility services and 
rural health clinic services.

    (a) Outpatient hospital services means preventive, diagnostic, 
therapeutic, rehabilitative, or palliative services that--
    (1) Are furnished to outpatients;
    (2) Are furnished by or under the direction of a physician or 
dentist;
    (3) Are furnished in a facility that--
    (i) Is licensed or formally approved as a hospital by an officially 
designated authority for State standard-setting; and
    (ii) Meets the requirements for participation in Medicare as a 
hospital;
    (4) Are limited to the scope of facility services that--
    (i) Would be included, in the setting delivered, in the Medicare 
outpatient prospective payment system (OPPS) as defined under Sec.  
419.2(b) of this chapter or are paid by Medicare as an outpatient 
hospital service under an alternate payment methodology;
    (ii) Are furnished by an outpatient hospital facility, including an 
entity that meets the standards for provider-based status as a 
department of an outpatient hospital set forth in Sec.  413.65 of this 
chapter;
    (iii) Are not covered under the scope of another Medical Assistance 
service category under the State Plan; and
    (5) May be limited by a Medicaid agency in the following manner: A 
Medicaid agency may exclude from the definition of ``outpatient 
hospital services'' those types of items and services that are not 
generally furnished by most hospitals in the State.
* * * * *

PART 447--PAYMENTS FOR SERVICES

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

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

    4. Section 447.321 is amended by revising paragraphs (a) and (b) to 
read as follows:


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

    (a) Scope. This section applies to rates set by the agency to pay 
for outpatient services furnished by hospitals and clinics within one 
of the following categories:
    (1) State government operated facilities (that is, all facilities 
that are operated by the State) as defined at Sec.  433.50(a) of this 
chapter.

[[Page 55166]]

    (2) Non-State government operated facilities (that is, all 
governmentally operated facilities that are not operated by the State) 
as defined at Sec.  433.50(a) of this chapter.
    (3) Privately operated facilities that is, all facilities that are 
not operated by a unit of government as defined at Sec.  433.50(a) of 
this chapter.
    (b) General rules. (1) For privately operated facilities, upper 
Payment Limit (UPL) refers to a reasonable estimate of the amount that 
would be paid for the services furnished by the group of facilities 
under Medicare payment principles in subchapter B of this chapter.
    (i) Private Outpatient Hospital Services. Services included in the 
calculation of the private outpatient hospital UPL must meet all of the 
criteria for outpatient hospital services defined in Sec.  440.20 of 
this chapter. A reasonable estimate of the amount that would be paid 
for outpatient hospital services under Medicare payment principles is 
determined through--
    (A) Calculation of estimated Medicare payment for Medicaid 
equivalent outpatient services reimbursed under current Medicare 
payment systems, including--
    (1) Outpatient hospital services paid under the Medicare outpatient 
prospective payment system as defined under Sec.  419.2 of this 
chapter; and
    (2) Outpatient hospital services or clinic services paid under a 
Medicare outpatient hospital or clinic fee schedule or alternate 
payment methodology.
    (B) The estimated Medicare payment may be based on the Medicare 
cost report, or an accepted State cost report that reports the same 
data from the Medicare cost report references in paragraphs 
(b)(1)(i)(B)(1) through (b)(1)(i)(B)(2) of this section, as the source 
to determine either:
    (1) The ratio of costs-to-charges for all services included in the 
outpatient hospital UPL calculation. The Medicare cost-to-charges 
ratios for outpatient hospital services are found on Worksheet C and 
Worksheet D, Part V of the Medicare cost report; or
    (2) The ratio of payments-to-charges for all services included in 
the outpatient hospital UPL calculation. Medicare outpatient payments 
are found on Worksheet E, Part B and outpatient charges are found on 
Worksheet D, Part V of the Medicare cost report.
    (3) The charge ratios in paragraphs (b)(1)(i)(B)(1) through 
(b)(1)(i)(B)(2) of this section for Medicare equivalent services are 
multiplied by Medicaid charges as reported to the Medicaid Management 
Information System (MMIS).
    (ii) Private Clinic Services. For privately operated clinics that 
are not providing outpatient hospital services under Sec.  440.20 
(those that would not be paid by Medicare in that setting under OPPS or 
under an alternative outpatient hospital service payment methodology), 
the reasonable estimate of what Medicare would pay for equivalent 
Medicaid services may be determined through:
    (A) A State Plan reimbursement methodology for covered services 
that is a defined percentage, not to exceed 100 percent, of what 
Medicare pays under the non-facility fee schedule; or
    (B) For reimbursement methodologies based upon a Medicaid-specific 
fee schedule or encounter rate, a comparison by CPT code of the amount 
paid by Medicare for equivalent Medicaid services. The calculation may 
be conducted in the aggregate for clinic type or by specific facilities 
(ESRD, ASC, etc). Clinical diagnostic laboratory services or any other 
services for which the Act defines a separate upper limit for Medicaid 
reimbursement must be excluded from the clinic UPL.
    (C) For dentists providing services in clinics, the clinic UPL 
calculation may include payment amounts at the amount that Medicaid 
would pay outside of the facility.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

    Dated: March 15, 2007.
Leslie V. Norwalk,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: June 20, 2007.
Michael O. Leavitt,
Secretary.

    Editorial Note: This document was received at the Office of the 
Federal Register on September 24, 2007.

[FR Doc. E7-19154 Filed 9-27-07; 8:45 am]
BILLING CODE 4120-01-P