[Federal Register Volume 82, Number 11 (Wednesday, January 18, 2017)]
[Rules and Regulations]
[Pages 5415-5429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00916]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 438

[CMS-2402-F]
RIN 0938-AT10


Medicaid Program; The Use of New or Increased Pass-Through 
Payments in Medicaid Managed Care Delivery Systems

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

ACTION: Final rule.

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SUMMARY: This rule finalizes changes to the pass-through payment 
transition periods and the maximum amount of pass-through payments 
permitted annually during the transition periods under Medicaid managed 
care contract(s) and rate certification(s). This final rule prevents 
increases in pass-through payments and the addition of new pass-through 
payments beyond those in place when the pass-through payment transition 
periods were established, in the final Medicaid managed care 
regulations effective July 5, 2016.

DATES: Effective Date: These regulations are effective on March 20, 
2017.

FOR FURTHER INFORMATION CONTACT: John Giles, (410) 786-1255.

SUPPLEMENTARY INFORMATION: 

I. Background

    In the June 1, 2015 Federal Register (80 FR 31098), we published 
the ``Medicaid and Children's Health Insurance Program (CHIP) Programs; 
Medicaid Managed Care, CHIP Delivered in Managed Care, Medicaid and 
CHIP Comprehensive Quality Strategies, and Revisions Related to Third 
Party Liability'' proposed rule (``June 1, 2015 proposed rule''). As 
part of the actuarial soundness proposals, we proposed to define 
actuarially sound capitation rates as those sufficient to provide for 
all reasonable, appropriate, and attainable costs that are required 
under the terms of the contract, including furnishing of covered 
services and operation of the managed care plan for the duration of the 
contract. Among the proposals was a general rule that the state may not 
direct the managed care organization's (MCO's), prepaid inpatient 
health plan's (PIHP's), or prepaid ambulatory health plan's (PAHP's) 
expenditures under the contract.
    In the May 6, 2016 Federal Register (81 FR 27498), we published the 
``Medicaid and Children's Health Insurance Program (CHIP) Programs; 
Medicaid Managed Care, CHIP Delivered in Managed Care, and Revisions 
Related to Third Party Liability'' final rule (``May 6, 2016 final 
rule''), which finalized the June 1, 2015 proposed rule. In the final 
rule, we finalized, with some revisions, the proposal which limited 
state direction of payments, including pass-through payments as defined 
below.
    In the November 22, 2016 Federal Register (81 FR 83777), we 
published the ``Medicaid Program; The Use of New or Increased Pass-
Through Payments in Medicaid Managed Care Delivery Systems'' proposed 
rule (``November 22, 2016 proposed rule''). This rule finalizes the 
November 22, 2016 proposed rule as discussed below. This final rule is 
consistent with the intent of the May 6, 2016 final rule to provide 
transition periods for states that already use pass-through payments--
these transition periods allow states to implement changes to existing 
pass-through payments over a period of time to minimize disruption and 
to ensure continued financial support for safety-net providers. As we 
discussed in the November 22, 2016 proposed rule, this final rule is 
also consistent with the CMCS Informational Bulletin (CIB) concerning 
``The Use of New or Increased Pass-Through Payments in Medicaid Managed 
Care Delivery Systems,'' which was published on July 29, 2016.

A. Summary of the Medicaid Managed Care May 6, 2016 Final Rule

    We finalized a policy to limit state direction of payments, 
including pass-through payments, at Sec.  438.6(c) and (d) in the May 
6, 2016 final rule (81 FR 27587 through 27592). Specifically, under the 
final rule (81 FR 27588), we defined pass-through payments at Sec.  
438.6(a) as any amount required by the state (and considered in 
calculating the actuarially sound capitation rate) to be added to the 
contracted payment rates paid by the MCO, PIHP, or PAHP to hospitals, 
physicians, or nursing facilities that is not for the following 
purposes: A specific service or benefit provided to a specific enrollee 
covered under the contract; a provider payment methodology permitted 
under Sec.  438.6(c)(1)(i) through (iii) for services and enrollees 
covered under the contract; a subcapitated payment arrangement for a 
specific set of services and enrollees covered under the contract; 
graduate medical education (GME) payments; or federally-qualified 
health center (FQHC) or rural health clinic (RHC) wrap around payments. 
We noted that section 1903(m)(2)(A) of the Social Security Act (the 
Act) requires that capitation payments to managed care plans be 
actuarially sound; we interpret this requirement to mean that payments 
under the managed care contract must align with the provision of 
services to beneficiaries covered under the contract. We provided that 
these pass-through payments are not consistent with our regulatory 
standards for actuarially sound rates because they do not tie provider 
payments with the provision of services. The final rule contains a 
detailed description of the policy rationale (81 FR 27587 through 
27592).
    In an effort to provide a smooth transition for network providers, 
to support access for the beneficiaries they serve, and to provide 
states and managed care plans with adequate time to design and 
implement payment systems that link provider reimbursement with 
services covered under the contract or associated quality outcomes, we 
finalized transition periods related to pass-through payments for the 
specified provider types to which states make most pass-through 
payments under Medicaid managed care programs: Hospitals, physicians, 
and nursing homes (81 FR 27590 through 27592). As finalized, Sec.  
438.6(d)(2) and (3) provide a 10-year transition period for hospitals, 
subject to limitations on the amount of pass-through payments. For MCO, 
PIHP, or PAHP contracts beginning on or after July 1, 2027, states will 
not be permitted to require pass-through payments for hospitals. The 
final rule also provides a 5-year transition period for pass-through 
payments to physicians and nursing facilities. For MCO, PIHP, or PAHP 
contracts beginning on or after July 1, 2022, states will not be 
permitted to require pass-through payments for physicians or nursing 
facilities. These transition periods provide states, network providers, 
and managed care plans significant time and flexibility to integrate 
current pass-through payment arrangements into allowable payment 
structures under actuarially sound capitation rates, including enhanced 
fee schedules or the other approaches consistent with Sec.  438.6(c).
    As finalized in the May 6, 2016 final rule, Sec.  438.6(d) limits 
the amount of pass-through payments to hospitals as a percentage of the 
``base amount,'' which is defined in paragraph (a) and

[[Page 5416]]

calculated under rules in paragraph (d)(2). Section 438.6(d)(3) 
specifies a schedule for the phased reduction of the base amount, 
limiting the amount of pass-through payments to hospitals. For 
contracts beginning on or after July 1, 2017, the state may require 
pass-through payments to hospitals under the contract up to 100 percent 
of the base amount, as defined in the final rule. For subsequent 
contract years (contracts beginning on or after July 1, 2018 through 
contracts beginning on or after July 1, 2026), the portion of the base 
amount available for pass-through payments decreases by 10 percentage 
points per year. For contracts beginning on or after July 1, 2027, no 
pass-through payments to hospitals are permitted. The May 6, 2016 final 
rule noted that nothing would prohibit a state from eliminating pass-
through payments to hospitals before contracts beginning on or after 
July 1, 2027. However, the final rule provided for a phased reduction 
in the percentage of the base amount that can be used for pass-through 
payments, because a phased transition would support the development of 
permissible and accountable payment approaches while mitigating any 
disruption to states and providers.
    We believe that states will be able to more easily transition 
existing pass-through payments to physicians and nursing facilities to 
payment structures linked to services covered under the contract 
compared to the transition necessary for similar payments to hospitals. 
Consequently, the May 6, 2016 final rule, in Sec.  438.6(d)(5), 
provided a shorter time period for eliminating pass-through payments to 
physicians and nursing facilities and did not prescribe a limit or 
phased reduction in these payments; states have the option to eliminate 
these payments immediately or phase down these payments over the 5 year 
transition period if they prefer. As noted in the May 6, 2016 final 
rule, the distinction between hospitals and nursing facilities and 
physicians was also based on the comments from stakeholders during the 
public comment period (81 FR 27590).

B. Questions About the May 6, 2016 Final Rule

    Since publication of the May 6, 2016 final rule, we have received 
inquiries about states' ability to integrate new or increased pass-
through payments into Medicaid managed care contracts. As explained in 
the CMCS Informational Bulletin (CIB) published on July 29, 2016,\1\ 
adding new or increased pass-through payments for hospitals, 
physicians, or nursing facilities complicates the required transition 
of these pass-through payments to permissible provider payment models.
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    \1\ The Use of New or Increased Pass-Through Payments in 
Medicaid Managed Care Delivery Systems; available at https://www.medicaid.gov/federal-policy-guidance/downloads/cib072916.pdf. 
CMCS also noted in this CIB that it intended to further address in 
future rulemaking the issue of adding new or increased pass-through 
payments to managed care contracts.
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    The transition periods under the May 6, 2016 final rule provide 
states, network providers, and managed care plans significant time and 
flexibility to move existing pass-through payment arrangements (that 
is, those in effect when the final rule was published) into different, 
permissible payment structures under actuarially sound capitation 
rates, including enhanced fee schedules or the other approaches 
consistent with Sec.  438.6(c). We did not intend for states, after the 
May 6, 2016 final rule was published, to begin additional or new pass-
through payments, or to increase existing pass-through payments; such 
actions are contrary to and undermine the policy goal of eliminating 
pass-through payments. We proposed in the November 22, 2016 proposed 
rule and finalize here that we will not permit a pass-through payment 
amount to exceed the lesser of the amounts calculated under paragraph 
(d)(3) of this final rule. For states to add new or to increase 
existing pass-through payments is inconsistent with longstanding CMS 
policy, the proposal made in the June 1, 2015 proposed rule, and the 
May 6, 2016 final rule, which reflects the general policy goal to 
effectively and efficiently transition away from pass-through payments.
    Under the May 6, 2016 final rule, we provided a delayed compliance 
deadline for Sec.  438.6(c) and (d); we will enforce compliance with 
Sec.  438.6(c) and (d) no later than the rating period for Medicaid 
managed care contracts beginning on or after July 1, 2017. Our exercise 
of enforcement discretion in this respect was not intended to create 
new opportunities for states to add or increase existing pass-through 
payments before July 1, 2017. This delay was intended to address 
concerns articulated by commenters, among them states and providers, 
that an abrupt end to directed pass-through payments could cause 
damaging disruption to safety-net providers. As discussed in the May 6, 
2016 final rule and this final rule, pass-through payments are 
inconsistent with our interpretation and implementation of the 
statutory requirement for actuarially sound capitation rates because 
pass-through payments do not tie provider payments to the provision of 
services under the contract (81 FR 27588). A distinguishing 
characteristic of a pass-through payment is that a managed care plan is 
contractually required by the state to pay providers an amount that is 
disconnected from the amount, quality, or outcomes of services 
delivered to enrollees under the contract during the rating period of 
the contract. When managed care plans only serve as a conduit for 
passing payments to providers independent of delivered services, such 
payments reduce managed care plans' ability to control expenditures, 
effectively use value-based purchasing strategies, implement provider-
based quality initiatives, and generally use the full capitation 
payment to manage the care of enrollees. The May 6, 2016 final rule 
made clear our position on these payments and our intent that they be 
eliminated from Medicaid managed care delivery systems, except for the 
directed payment models permitted by Sec.  438.6(c), or the payments 
excluded from the definition of a pass-through payment in Sec.  
438.6(a), such as FQHC wrap payments.
    The transition periods provided under Sec.  438.6(d) are for states 
to identify existing pass-through payments and begin either tying such 
payments directly to services and utilization covered under the 
contract or eliminating them completely in favor of other support 
mechanisms for providers that comply with the requirements in Sec.  
438.6(c). The transition periods for current pass-through payments 
minimize disruption to local health care systems and interruption of 
beneficiary access by permitting a gradual step down from current 
levels of pass-through payments: (1) At the schedule and subject to the 
limit announced in the May 6, 2016 final rule for hospitals under Sec.  
438.6(d)(3); and (2) at a schedule adopted by the state for physicians 
and nursing facilities under Sec.  438.6(d)(5). By providing states, 
network providers, and managed care plans significant time and 
flexibility to integrate current pass-through payment arrangements into 
different payment structures (including enhanced fee schedules or the 
other approaches consistent with Sec.  438.6(c)) and into actuarially 
sound capitation rates, we intended to address comments that the June 
1, 2015 proposed rule would be unnecessarily disruptive and endanger 
safety-net provider systems that states have developed for Medicaid.
    Questions from states following the May 6, 2016 final rule 
indicated that the transition period and delayed enforcement date have 
caused some

[[Page 5417]]

confusion regarding our intent for increased and new pass-through 
payments for contracts prior to July 1, 2017, because the final rule 
did not explicitly prohibit such additions or increases. While we 
assumed such a prohibition was implicit in the May 6, 2016 final rule, 
as our discussion of Sec.  438.6(d) made clear that pass-through 
payments were to be discontinued, we believe that this additional 
rulemaking is necessary to clarify this issue in light of the recent 
questions. Under this final rule, we are linking pass-through payments 
permitted during the transition period to the aggregate amounts of 
pass-through payments that were in place at the time the May 6, 2016 
final rule became effective on July 5, 2016, which is consistent with 
the intent under the May 6, 2016 final rule to phase out pass-through 
payments under Medicaid managed care contracts.

II. Provisions of the Proposed Regulations and Analysis of and 
Responses to Public Comments

    We received 46 timely comments from the public, including comments 
from hospitals, hospital associations, state Medicaid agencies, 
Medicaid managed care plans, and other healthcare providers and 
associations. The following sections, arranged by subject area, are a 
summary of the comments we received. In response to the November 22, 
2016 proposed rule, some commenters chose to raise issues that were 
beyond the scope of our proposals. In this final rule, we are not 
summarizing or responding to those comments.
    We proposed to revise Sec.  438.6(d) to better effectuate the 
intent of the May 6, 2016 final rule. In the November 22, 2016 proposed 
rule, we first proposed to limit the availability of the transition 
periods in Sec.  438.6(d)(3) and (5) (that is, the ability to continue 
pass-through payments for hospitals, physicians, or nursing facilities) 
to states that can demonstrate that they had such pass-through payments 
in either: (A) Managed care contract(s) and rate certification(s) for 
the rating period that includes July 5, 2016, and that were submitted 
for our review and approval on or before July 5, 2016; or (B) if the 
managed care contract(s) and rate certification(s) for the rating 
period that includes July 5, 2016 had not been submitted to us on or 
before July 5, 2016, the managed care contract(s) and rate 
certification(s) for a rating period before July 5, 2016 that had been 
most recently submitted to us for review and approval as of July 5, 
2016.
    Second, we proposed to prohibit retroactive adjustments or 
amendments to managed care contract(s) and rate certification(s) to add 
new pass-through payments or increase existing pass-through payments 
defined in Sec.  438.6(a). In the proposed rule, we noted that we would 
not permit a pass-through payment amount to exceed the lesser of the 
amounts calculated under paragraph (d)(3).
    Third, we proposed to establish a new maximum amount of permitted 
pass-through payments for each year of the transition period. For 
hospitals, a state would be limited (in the total amount of permissible 
pass-through payments) during each year of the transition period to the 
lesser of either: (A) The percentage of the base amount applicable to 
that contract year; or (B) the pass-through payment amount identified 
in proposed paragraph (d)(1)(i). Thus, the amount of pass-through 
payments identified by the state in order to satisfy proposed paragraph 
(d)(1)(i) would be compared to the amount representing the applicable 
percentage of the base amount that is calculated for each year of the 
transition period. For pass-through payments to physicians and nursing 
facilities, we also proposed to limit the amount of pass-through 
payments during the transition period to the amount of pass-through 
payments to physicians and nursing facilities under the contract and 
rate certification identified in proposed paragraph (d)(1)(i).
    In making these comparisons to the pass-through payments under the 
managed care contract(s) in effect for the rating period covering July 
5, 2016 as identified in proposed paragraph (d)(1)(i)(A), or the rating 
period before July 5, 2016 as identified in proposed paragraph 
(d)(1)(i)(B), we noted that we would look at total pass-through payment 
amounts for the specified provider types. Past aggregate amounts of 
hospital pass-through payments will be used in determining the maximum 
amount for hospital pass-through payments during the transition period; 
past aggregate amounts of physician pass-through payments will be used 
in determining the maximum amount for physician pass-through payments 
during the transition period; and past aggregate amounts of nursing 
facility pass-through payments will be used in determining the maximum 
amount for nursing facility pass-through payments during the transition 
period.
    Under the November 22, 2016 proposed rule, the aggregate amounts of 
pass-through payments in each provider category would be used to set 
applicable limits for the provider type during the transition period, 
without regard to the specific provider(s) that received a pass-through 
payment. For example, if the pass-through payments in the contract 
identified under paragraph (d)(1)(i) were to 5 specific hospitals, the 
aggregate amount of pass-through payments to those hospitals would be 
relevant in establishing the limit during the transition period, but 
different hospitals could be the recipients of pass-through payments 
during the transition. We requested comment on our proposed approach as 
a whole, as well as our specific proposals to amend the existing 
regulation text and revise paragraph (d)(1) (adding new (d)(1)(i) and 
(ii)), revise paragraph (d)(3) (adding new (d)(3)(i) and (ii)), and 
revise paragraph (d)(5).

A. General Comments

    Comment: Some commenters stated concerns with the overall proposal 
and stated that the current proposal would limit state flexibility for 
pass-through payments beyond what was finalized in the May 6, 2016 
final rule; these commenters recommended that we not finalize the 
November 22, 2016 proposed rule and recommended that we ensure that 
states continue to have the flexibility permitted in the May 6, 2016 
final rule for pass-through payments in Medicaid managed care programs.
    Response: We do not agree with commenters that states should have 
more flexibility in this area than this final rule provides. We believe 
that this final rule flows from the intent of the May 6, 2016 final 
rule to phase out pass-through payments under Medicaid managed care 
contracts and ensure that the transition periods be used by states that 
had pass-through payments in their MCO, PIHP, or PAHP contracts when we 
finalized the May 6, 2016 final rule. While we recognize that the 
regulation text finalized in the May 6, 2016 final rule was not 
explicit on this point and have taken steps to amend this final rule 
here to rectify that, this final rule is consistent with the policy and 
goals of the May 6, 2016 final rule in adopting transition periods. 
This final regulation maintains the significant time and flexibility 
provided to states, network providers, and managed care plans during 
the transition periods to move existing pass-through payment 
arrangements (those in effect when the May 6, 2016 final rule was 
published) into different, permissible payment structures under 
actuarially sound capitation rates, including enhanced fee schedules or 
the other approaches consistent with Sec.  438.6(c) that tie managed 
care payments to services and utilization (and outcomes) covered under 
the contract.

[[Page 5418]]

    Comment: Some commenters recommended that we not finalize this rule 
and that we not further restrict or limit pass-through payments beyond 
what was included in the May 6, 2016 final rule to support safety-net 
providers that provide care to Medicaid managed care enrollees. These 
commenters stated that states and providers have already begun to plan 
for the transition periods beginning in July 2017 and that additional 
constraints will add significant burden on safety-net providers.
    Response: We do not agree that the proposed provisions, finalized 
here, restrict or limit states from continuing to use pass-through 
payments to support safety-net providers that provide care to Medicaid 
managed care enrollees during the transition periods adopted in the May 
6, 2016 final rule. The May 6, 2016 final rule provided transition 
periods designed and finalized to enable affected providers, states, 
and managed care plans--meaning those that already had pass-through 
payments in place--to transition away from existing pass-through 
payments and limit disruption to safety-net providers. We believe such 
payments can be transitioned into permissible and accountable payment 
models that are tied to covered services, value-based payment 
structures, or delivery system reform initiatives without undermining 
access for Medicaid managed care enrollees. This rule flows from and 
reinforces the intent of the May 6, 2016 final rule by ensuring that 
the transition periods are used by states that had pass-through 
payments in their MCO, PIHP, or PAHP contracts when we finalized the 
May 6, 2016 final rule. These are the states for which we were 
concerned, based on the comments to the June 1, 2015 proposed rule, 
that an abrupt end to pass-through payments could be disruptive to 
their health care delivery system and safety-net providers. While we 
recognize that the regulation text finalized in the May 6, 2016 final 
rule was not explicit on this point and have taken steps to amend this 
final rule here to rectify that, this final rule is consistent with the 
policy and goals of the May 6, 2016 final rule in adopting transition 
periods.
    If states do not currently have pass-through payments in their 
managed care contracts, we believe that the transition periods are 
unnecessary to avoid disruption. States that do not have pass-through 
payments in their managed care contracts that wish to pursue delivery 
system and provider payment initiatives are already in a strong 
position to design and implement allowable payment structures under 
actuarially sound capitation rates, including enhanced fee schedules or 
the other approaches consistent with Sec.  438.6(c) that tie managed 
care payments to services and utilization covered under the contract.
    We understand that states and providers have already begun to plan 
for the transition periods beginning in July 2017, but we do not 
believe that this rule will create substantially more constraints or 
add significant burden on safety-net providers. Under the May 6, 2016 
final rule, we did not intend to permit or encourage states to add new 
pass-through payments or to ramp-up pass-through payments in ways that 
are not consistent with the elimination of pass-through payments during 
the transition periods. Adding new or increased pass-through payments 
would substantially complicate the required transition away from pass-
through payments, potentially creating more disruption for safety-net 
providers by increasing dependence on these payments and then 
compressing the actual amount of time available to eliminate them.
    Comment: Some commenters recommended that the proposed rule not be 
finalized until the new administration has the opportunity to review 
and ensure that the policy in the November 22, 2016 proposed rule is 
consistent with the new administration's Medicaid policy and goals. 
These commenters stated that such an approach is congruent with the 
general practice and policy that significant new rules should not be 
issued shortly before a change in the administration.
    Response: A delay in finalizing this rule is contrary to our goals 
and policy so we do not accept this recommendation. This final rule 
flows from and reinforces the intent of the May 6, 2016 final rule to 
phase out pass-through payments under Medicaid managed care contracts; 
any delay would undermine the goals of that rule and make the 
transition to an actuarially sound approach more difficult. We 
discussed in the June 1, 2015 proposed rule, the May 6, 2016 final 
rule, the July 29, 2016 CIB, and the November 22, 2016 proposed rule 
the rationale for our position that pass-through payments are not 
consistent with our regulatory standards for actuarially sound rates; 
specifically, because they do not tie provider payments with the 
provision of services. While we recognize that the regulation text 
finalized in the May 6, 2016 final rule was not explicit on the point 
that this final rulemaking addresses (for example, that the transition 
periods were not for the initial adoption of and then elimination of 
new or increased pass-through payments), this final rule is consistent 
with the policy and goals of the May 6, 2016 final rule in adopting 
transition periods. This final rule is congruent with established and 
published policy guidance, is not a new policy being implemented at the 
last minute, and is timely as states prepare for the July 1, 2017 
implementation date.
    In addition to comments on the proposal generally, we received 
comments about specific provisions in the proposal. We address and 
respond to those comments below.

B. Comments on Sec.  438.6(d)(1)

    We proposed to revise paragraph (d)(1) to clarify that a state may 
continue to require an MCO, PIHP, or PAHP to make pass-through payments 
(as defined in Sec.  438.6(a)) to network providers that are hospitals, 
physicians, or nursing facilities under the contract, provided the 
requirements of paragraph (d) are met. We proposed retaining the 
regulation text that provides explicitly that states may not require 
MCOs, PIHPs, or PAHPs to make pass-through payments other than those 
permitted under paragraph (d). We received the following comments in 
response to our proposal to revise Sec.  438.6(d)(1).
    Comment: Some commenters recommended that we remove the regulation 
text that provides explicitly that states may not require MCOs, PIHPs, 
or PAHPs to make pass-through payments other than those permitted under 
paragraph (d); these commenters recommended that we reconsider the 
pass-through payment policy finalized in the May 6, 2016 final rule.
    Response: Since commenters did not raise any new issues for our 
consideration in paragraph (d)(1), we do not agree with commenters that 
we should remove the regulation text that provides explicitly that 
states may not require MCOs, PIHPs, or PAHPs to make pass-through 
payments other than those permitted under paragraph (d). The May 6, 
2016 final rule provided a detailed description of the policy rationale 
(81 FR 27587 through 27592) for why we established pass-through payment 
transition periods and limited pass-through payments to hospitals, 
physicians, and nursing facilities, and this policy rationale has not 
changed. With the proposal to amend the regulation text to more 
explicitly reflect our intent for the transition periods and the limits 
on pass-through payments, we did not intend to revisit our rationale 
for establishing the pass-through payment transition periods. We 
continue to believe that pass-through payments are not consistent with 
the statutory

[[Page 5419]]

requirements that capitation rates be actuarially sound.
    After considering the comments, we are finalizing Sec.  438.6(d)(1) 
as proposed without revision.

C. Comments on Sec.  438.6(d)(1)(i)

    Under proposed paragraph (d)(1)(i), a state would be able to use 
the transition period for pass-through payments to hospitals, 
physicians, or nursing facilities only if the state can demonstrate 
that it had pass-through payments for hospitals, physicians, or nursing 
facilities, respectively, in both the managed care contract(s) and rate 
certification(s) that meet the requirements in either proposed 
paragraph (d)(1)(i)(A) or (B).
    We proposed in paragraph (d)(1)(i)(A) that the managed care 
contract(s) and rate certification(s) must be for the rating period 
that includes July 5, 2016 and have been submitted for our review and 
approval on or before July 5, 2016. If the state had not yet submitted 
MCO, PIHP, or PAHP contract(s) and rate certification(s) for the rating 
period that includes July 5, 2016, we proposed in paragraph 
(d)(1)(i)(B) that the state must demonstrate that it required the MCO, 
PIHP, or PAHP to make pass-through payments for a rating period before 
July 5, 2016 in the managed care contract(s) and rate certification(s) 
that were most recently submitted for our review and approval as of 
July 5, 2016.
    We proposed to use the date July 5, 2016 for the purpose of 
identifying the pass-through payments in managed care contract(s) and 
rate certification(s) that are eligible for the pass-through payment 
transition period because it is consistent with the intent of the May 
6, 2016 final rule that the transition period be used by states that 
had pass-through payments in their MCO, PIHP, or PAHP contracts when 
that rule was finalized. The transition period was intended to address 
concerns, articulated in the comments to the June 1, 2015 proposed 
rule, that an abrupt end to pass-through payments could be disruptive 
to state health care delivery systems and safety-net providers. We 
noted in the November 22, 2016 proposed rule that limiting the use of 
the transition period to states that had pass-through payments in 
effect as of the effective date of the May 6, 2016 final rule 
facilitates elimination of these types of payments. We did not intend 
for the May 6, 2016 final rule to incentivize or encourage states to 
add new pass-through payments, as we believe that these payments are 
inconsistent with actuarially sound rates. We received the following 
comments in response to our proposal to revise Sec.  438.6(d)(1)(i), 
including new paragraphs (d)(1)(i)(A) and (B).
    Comment: Some commenters recommended that we not finalize paragraph 
(d)(1)(i) because this new provision will be administratively 
burdensome on states and has the potential to delay our approval of 
managed care contracts and rate certifications. Other commenters 
recommended that we add regulatory text to address scenarios in which 
states had not submitted managed care contracts or rate certifications 
to us by July 5, 2016, but states had already executed contracts with 
their managed care plans. These commenters recommended that we permit 
states to produce these executed contracts and allow these states to 
use these managed care contracts and rate certifications for the 
purpose of the transition period.
    Response: We believe that the requirements under Sec.  
438.6(d)(1)(i) will not be significantly more burdensome on states and 
will not cause delays in the approval of managed care contracts and 
rate certifications. To the contrary, we believe that the proposed 
requirements under Sec.  438.6(d)(1)(i) will streamline the process for 
documenting and demonstrating pass-through payments and will facilitate 
a quicker approval process because the pass-through payments will be 
more transparently identified. In addition, we currently review and 
work with states on managed care contracts and rates, and because pass-
through payments exist today, any additional burden to state or federal 
governments should be minimal.
    We also do not agree that additional regulatory text is necessary 
to address scenarios in which states had not submitted managed care 
contracts or rate certifications to us by July 5, 2016, but states had 
already executed contracts with their managed care plans. As proposed 
in Sec.  438.6(d)(1)(i), we will permit states to demonstrate pass-
through payments in two ways: (1) Pass-through payments for hospitals, 
physicians, or nursing facilities were in managed care contracts and 
rate certifications for the rating period that includes July 5, 2016 
and were submitted for our review and approval before July 5, 2016; or 
(2) if the managed care contracts and rate certifications for the 
rating period that includes July 5, 2016 had not been submitted to us 
on or before July 5, 2016, pass-through payments for hospitals, 
physicians, or nursing facilities were in managed care contracts and 
rate certifications for a rating period before July 5, 2016 that had 
been most recently submitted for our review and approval as of July 5, 
2016. We believe these requirements strike the appropriate balance 
between administrative simplicity and flexibility.
    Comment: Some commenters recommended that we withdraw this 
proposal. These commenters stated that establishing value-based payment 
arrangements, delivery system reform, minimum fee schedules, and 
payment rate increases require substantial time and attention. These 
commenters believed that the fact that some states had established 
pass-through payments before the effective date of the May 6, 2016 
final rule (July 5, 2016) should not preclude other states from 
receiving similar reasonable flexibilities to implement permissible 
payment arrangements under Medicaid managed care.
    Response: We do not agree with commenters that we should withdraw 
this proposal. While we understand that establishing value-based 
payment arrangements, delivery system reform, minimum fee schedules, 
and payment rate increases require substantial time and attention, we 
see no rationale to provide transition periods for states to phase out 
and transition away from pass-through payments if they have not 
previously implemented such payments. Unlike states that already have 
pass-through payments in place and need to reverse those actions, 
states that have not already used such pass-through payments are 
starting from a clean slate in terms of adopting payment mechanisms and 
systems described in Sec.  438.6(c). To permit new and increased pass-
through payments is contrary to the policy adopted in the May 6, 2016 
final rule of eliminating pass-through payments and is not consistent 
with our regulatory standards for actuarially sound rates. Further, 
encouraging or enabling states to add or increase such pass-through 
payments during the transition periods only exacerbates the challenges 
of eliminating them and transitioning to actuarially sound rates, or 
establishing value-based payment arrangements, delivery system reform, 
and fee schedule and payment rate reforms. For states with existing 
pass-through payments, the transition periods provide significant time 
and flexibility to integrate existing pass-through payment arrangements 
into permissible payment structures that tie provider payments to the 
provision of services (or outcomes) under the contract. For states that 
currently do not have pass-through payments in their managed care 
contracts that wish to pursue delivery system and provider payment 
initiatives, we believe such states are already in a better and 
superior position to design and

[[Page 5420]]

implement allowable payment structures within actuarially sound 
capitation rates, including enhanced fee schedules or the other 
approaches consistent with Sec.  438.6(c) that tie managed care 
payments to services and utilization covered under the contract.
    Comment: Some commenters did not agree with the use of the July 5, 
2016 date and characterized the use of that date as finalizing a rule 
that applies retroactively. These commenters stated that the use of the 
July 5, 2016 date and retroactive rulemaking is not consistent with the 
intent of notice and comment rulemaking under the Administrative 
Procedure Act (APA) and makes it impossible for states and providers to 
plan for the potential impact of such rulemaking. Some commenters 
recommended that we withdraw the proposed rule immediately and stated 
that our proposals would significantly and retroactively change the 
compliance date for the pass-through payment phase-down and would 
effectively move-up the start of the phase-out period a full year from 
July 1, 2017 to July 5, 2016. These commenters stated that such a 
change in the compliance date would result in substantial new payment 
restrictions with little time for states and hospitals to make 
adjustments. These commenters stated concern that further limiting 
pass-through payments could adversely affect hospitals and the patients 
they serve.
    Response: This final rule will not and does not apply retroactively 
to July 5, 2016, and we have followed all notice and comment procedures 
for rulemaking under the APA. This final rule only affects future 
action of states and does not penalize or invalidate past actions taken 
by states, which is permissible rulemaking.\2\ We provided our detailed 
rationale in the proposed rule for using the July 5, 2016 date; we are 
only using the July 5, 2016 date for the purpose of identifying the 
pass-through payments in managed care contracts and rate certifications 
that are eligible for the pass-through payment transition period. That 
date was chosen because it is consistent with our intent that the 
transition period be used by states that had pass-through payments in 
their MCO, PIHP, or PAHP contracts when we finalized that rule. 
Limiting the use of the transition period to states that had pass-
through payments in effect as of the effective date of the May 6, 2016 
final rule (July 5, 2016) supports the policy goal of eliminating these 
types of payments, while ensuring that an abrupt end to pass-through 
payments will not be disruptive to state health care delivery systems 
and safety-net providers. Using this past date as the point by which to 
determine eligibility for the transition period eliminates the 
possibility that the transition period itself encourages states to 
create new or increase pass-through payments.
---------------------------------------------------------------------------

    \2\ Here, the rule only affects future action and limits future 
choices available to states. Retroactive rules ``alter[ ] the past 
legal consequences of past actions.'' Bowen v. Georgetown Univ. 
Hosp., 488 U.S. 204, 219, 109 S. Ct. 468 (1988) (Scalia, J., 
concurring) (emphasis in original). When an agency takes action to 
alter the future effect but not the past legal consequences of an 
activity, the agency has not taken a retroactive action; similarly, 
when agency action upsets expectations for future activity that are 
based on prior law, it has not taken a retroaction action. Mobile 
Relay Assocs. v. F.C.C., 457 F.3d 1, 10-11 (D.C. Cir. 2006).
---------------------------------------------------------------------------

    For commenters concerned about compliance dates, we want to clarify 
that this rule does not change the original compliance date for Sec.  
438.6(d) from the May 6, 2016 final rule. We will still enforce 
compliance with the requirements in Sec.  438.6(d) no later than the 
rating period for Medicaid managed care contracts beginning on or after 
July 1, 2017. As discussed in the November 22, 2016 proposed rule and 
this final rule, our exercise of enforcement discretion in permitting 
delayed compliance of the May 6, 2016 final rule with Sec.  438.6(d) 
was not intended to create new opportunities for states to add or 
increase existing pass-through payments either before or after July 1, 
2017. This delay was intended to address concerns articulated by 
commenters, among them states and providers, that an abrupt end to 
directed pass-through payments could cause damaging disruption to 
safety-net providers. The delay was also intended to give states and 
managed care plans time to appropriately address any contract or rate 
issues needed to implement and comply with Sec.  438.6(d). This final 
rule amends the parameters for the transition periods that begin with 
rating periods for contracts starting on or after July 1, 2017. As that 
date is still several months in the future, this final rule is not 
retroactive.
    We understand the need for states and providers to have adequate 
time to make adjustments in complying with the requirements at Sec.  
438.6(d)--that is why the May 6, 2016 final rule provided transition 
periods to phase-down pass-through payments. We agree and noted in the 
May 6, 2016 final rule (81 FR 27589) and the November 22, 2016 proposed 
rule (81 FR 83782) that the transition from one payment structure to 
another often requires robust provider and stakeholder engagement, 
agreement on approaches to care delivery and payment, establishing 
systems for measuring outcomes and quality, planning efforts to 
implement changes, and evaluating the potential impact of change on 
Medicaid financing mechanisms. However, for states that do not 
currently have pass-through payments in their managed care contracts, 
transition periods are unnecessary. States that do not have pass-
through payments in their managed care contracts that wish to pursue 
delivery system and provider payment initiatives can design and 
implement allowable payment structures under actuarially sound 
capitation rates tying managed care payments to services and 
utilization covered under the contract without concern that modifying 
existing pass-through payments could potentially undermine access for 
Medicaid managed care enrollees or adversely impact hospitals.
    Comment: Some commenters stated that for many states, the 
capitation rates and contracts submitted as of or prior to July 5, 2016 
were for prior rating periods when both enrollment numbers and the cost 
of providing care would be substantially less than the total 
enrollments and costs for current and future rating periods. These 
commenters stated that the limitation on setting pass-through payments 
based on a prior submitted date (July 5, 2016) of capitation rates and 
contracts deviates from the longstanding practice of states making 
retroactive adjustments and amendments to actuarially sound capitation 
rates. These commenters stated that the setting of an aggregate pass-
through payment amount limit based on capitation rates and contracts 
submitted by states as of July 5, 2016 has the added effect of speeding 
up the transition periods established under the May 6, 2016 final rule 
and that states should be provided additional time to submit for our 
approval new managed care capitation rates, including pass-through 
payments, because states and providers had no notice prior to this 
cutoff date; some of these commenters recommended that we modify the 
rule to allow the use of the most recent rate year for demonstrating 
previous pass-through payments.
    Response: We understand that for some states, the capitation rates 
and contracts submitted as of or prior to July 5, 2016 would be for 
prior rating periods; it is for this reason that under the proposed 
requirements in Sec.  438.6(d)(1)(i), we permitted states to 
demonstrate pass-through payments in the two ways described in 
paragraphs (d)(1)(i)(A) and (B).
    We do not believe that the limitation on setting pass-through 
payments based on a prior submitted date deviates from the practice of 
retroactive amendments

[[Page 5421]]

to capitation rates. Under this final rule, we are not generally 
restricting states from adjusting or amending their actuarially sound 
capitation rates; the requirements for retroactive adjustments to 
capitation rates are specified at Sec.  438.7(c)(2) and those 
requirements are not changed with this final rule. Since we will 
enforce compliance with the requirements of Sec.  438.7(c)(2) for 
rating periods for contracts beginning July 1, 2017, we also note that 
before the May 6, 2016 final rule, states were permitted to adjust and 
amend actuarially sound capitation rates retroactively under Sec.  
438.6(c)(1). This final rule does not change these policies in 
permitting states to adjust and amend actuarially sound capitation 
rates retroactively.
    Under paragraph (d)(1)(ii), as proposed and as finalized, we will 
not approve a retroactive adjustment or amendment to managed care 
contracts and rate certifications to add new pass-through payments or 
increase existing pass-through payments, as defined in Sec.  438.6(a). 
This limit only applies to retroactive adjustments to capitation rates 
related to new or increased pass-through payments; other retroactive 
adjustments to rates are not affected by this final rule. The existing 
policy permitting states flexibility to make other changes in 
capitation rates, subject to the limits on filing claims for FFP under 
45 CFR 95.7 and, for contracts for rating periods after July 1, 2017, 
subject to the requirements in Sec.  438.7(c)(2), remains in effect for 
all other changes to capitation rates.
    We also do not agree that this proposal has the added effect of 
speeding up the transition periods established under the May 6, 2016 
final rule. We indicated in the proposed rule that we did not intend to 
speed up the rate of a state's phase down of pass-through payments; 
rather, the proposed rule intended only to prevent increases in pass-
through payments and the addition of new pass-through payments beyond 
what was already in place when the pass-through payment limits and 
transition periods were finalized in the May 6, 2016 final rule. The 
length of the transition periods remains the same under this final 
rule: 10 years for hospital pass-through payments and 5 years for 
physician and nursing facility pass-through payments. States that were 
reliant on and using pass-through payments at the time we finalized the 
May 6, 2016 final rule will continue to be eligible for the full 
transition periods under this final rule. Further, this final rule will 
permit states to continue pass-through payments in the same amount as 
before the beginning of the transition period, unless and until, that 
amount exceeds the percentage of the base amount available for the 
applicable year of the transition period for hospital pass-through 
payments. Our amendments to Sec.  438.6(d) only serve to prevent states 
from adding new pass-through payments, or increasing the total amount 
of pass-through payments, in the Medicaid managed care context.
    We also do not agree that states should be provided additional time 
to submit new managed care capitation rates to include new or increased 
pass-through payments, because such an approach is contrary to our 
policy goal of eliminating pass-through payments. We believe that 
limiting the use of the transition period to states that had pass-
through payments in effect as of the effective date of the May 6, 2016 
final rule (July 5, 2016) supports the policy goal of eliminating these 
types of payments, while ensuring that an abrupt end to already 
existing pass-through payments will not be disruptive to state health 
care delivery systems and safety-net providers. Using the date of July 
5, 2016 as the point by which to determine eligibility for the 
transition period eliminates concern that the transition period itself 
encourages states to create new or increase pass-through payments 
despite our policy concerns that such payments are inconsistent with 
actuarial soundness and may compromise a managed care plan's ability to 
effectively direct care and implement quality improvement strategies.
    Comment: Some commenters recommended that we include specific 
regulatory text at Sec.  438.6(d)(1)(i) to also specify that in order 
to use a transition period described under paragraph (d), a state must 
demonstrate that it had pass-through payments for hospitals, 
physicians, or nursing facilities ``in managed care contracts and rate 
certifications for the rating period beginning before October 1, 2016, 
regardless of the date of submission to CMS, if the state can 
demonstrate that funding for the pass-through payment was approved by 
the state's legislature prior to July 5, 2016, and that corresponding 
supplemental payments were made under Medicaid fee-for-service (FFS) or 
section 1115 demonstration programs for at least 10 consecutive years 
prior to July 5, 2016.'' These commenters stated that this language 
would ensure that a specific pass-through payment would meet the 
criteria under the proposed rule.
    Response: We understand the commenters' concerns regarding a 
specific pass-through payment that was recently approved by their state 
legislature; however, including the commenters' suggested regulatory 
text at Sec.  438.6(d)(1)(i) would not comport with our policy goals. 
The pass-through payment transition periods included in the May 6, 2016 
final rule were intended to be used by states that already had pass-
through payments in place and would face significant disruption if 
immediate compliance with Sec.  438.6(c) were required. Under the 
proposed rule and this final rule, we are linking pass-through payments 
permitted during the transition period to the aggregate amounts of 
pass-through payments that were in place at the time the May 6, 2016 
final rule became effective on July 5, 2016, which is consistent with 
the intent under the May 6, 2016 final rule to eliminate pass-through 
payments but provide a transition period to limit disruption to safety 
net providers. Changing our proposal to include ``managed care 
contracts and rate certifications for the rating period beginning 
before October 1, 2016 regardless of the date of submission to CMS'' is 
not consistent with the rationale in the May 6, 2016 final rule or the 
November 22, 2016 proposed rule and would permit certain new or 
increased pass-through payments beyond those already in place at the 
time the May 6, 2016 final rule became effective on July 5, 2016.
    Further, we do not believe that we should allow new or increased 
pass-through payments for states with corresponding supplemental 
payments that were made under Medicaid FFS or section 1115 
demonstration programs prior to July 5, 2016. As we have described 
throughout this rule, pass-through payments are not consistent with our 
regulatory standards for actuarially sound rates because they do not 
tie provider payments with the provision of services. For states with 
supplemental payments that were made under Medicaid FFS or section 1115 
demonstration programs prior to July 5, 2016, we believe that as part 
of a state's transition to a managed care delivery system, the state 
needs to integrate such FFS supplemental payments into allowable 
payment structures that tie managed care payments to services and 
utilization covered under the contract. Integrating the FFS 
supplemental payments into allowable payment structures at the time of 
the transition will ensure that the state can hold managed care plans 
accountable for the cost and quality of services delivered under the 
contract.
    After considering the comments, we are finalizing Sec.  
438.6(d)(1)(i) as proposed without revision.

[[Page 5422]]

D. Comments on Sec.  438.6(d)(1)(ii)

    We proposed in paragraph (d)(1)(ii) that we would not approve a 
retroactive adjustment or amendment to managed care contract(s) and 
rate certification(s) to add new pass-through payments or increase 
existing pass-through payments defined in Sec.  438.6(a). We noted that 
we would not permit a pass-through payment amount for hospitals to 
exceed the lesser of the amounts calculated under paragraph (d)(3) in 
the proposed rule. We also proposed, in paragraph (d)(5), that pass-
through payment amounts to physicians and nursing facilities would be 
limited to the amount in place in the managed care contracts and rate 
certifications submitted pursuant to paragraph (d)(1)(i). We proposed 
paragraph (d)(1)(ii) to prevent states from undermining the policy goal 
of limiting the use of the transition period to states that had pass-
through payments in effect as of the effective date of the May 6, 2016 
final rule. This proposed change also aligns with the policy rationale 
under the May 6, 2016 final rule and the July 29, 2016 CMCS 
Informational Bulletin (CIB) by prohibiting new or increased pass-
through payments in Medicaid managed care contract(s), notwithstanding 
the adjustments to the base amount permitted in Sec.  438.6(d)(2). We 
received the following comments in response to our proposal to revise 
Sec.  438.6(d)(1)(ii).
    Comment: Some commenters recommended that we address scenarios in 
which states are already paying pass-through payments through their 
managed care plans and were currently in the process of amending 
managed care contracts and rate certifications when the proposed rule 
was issued; these commenters recommended that we permit such 
retroactive adjustments and amendments. Some commenters provided that 
states have historically implemented retroactive rate adjustments to 
capitation rates and processed routine adjustments and amendments every 
year; these commenters recommended that we permit these adjustments and 
amendments and address how such routine activities would fit with this 
rule. Other commenters recommended that we permit retroactive 
adjustments and amendments through July 1, 2017 to account for 
potential increases in pass-through payments that were put into place 
before this rule was issued.
    Response: We do not agree that additional regulatory text is needed 
to address scenarios in which states are already paying pass-through 
payments through their managed care plans and were in the process of 
amending managed care contracts and rate certifications at the time of 
the May 6, 2016 final rule or the November 22, 2016 proposed rule. It 
is unclear to us what standard we could use to implement this 
recommendation while preventing new or increased pass-through payments. 
We note that Sec.  438.6(d)(1)(ii), as proposed and as finalized here, 
will not be a barrier to the approval of retroactive changes to managed 
care contracts and rate certifications when the retroactive change does 
not purport to add or increase a pass-through payment to hospitals, 
physicians, or nursing facilities. Therefore, states that were in the 
process of amending contracts or rates for other purposes should not be 
affected by Sec.  438.6(d)(1)(ii).
    States will need to meet the requirements in Sec.  438.6(d)(1)(i) 
in order to use a transition period described in Sec.  438.6(d). That 
means that states must be able to demonstrate pass-through payments in 
managed care contracts and rate certifications under the requirements 
in proposed Sec.  438.6(d)(1)(i)(A) and (B). For commenters concerned 
about general adjustments and amendments unrelated to new or increased 
pass-through payments, this rule does not impact those routine 
activities that states undertake each year; the requirements in Sec.  
438.6(d)(1)(ii), as proposed and finalized here, only limit retroactive 
adjustments and amendments intended to add new pass-through payments or 
increase existing pass-through payments defined in Sec.  438.6(a). 
Without this provision limiting retroactive changes to pass-through 
payments, a state could retroactively change a prior, submitted managed 
care contract and rate certification to increase or add pass-through 
payments and eliminate the restrictions on the use of the transition 
periods that were proposed in the November 22, 2016 proposed rule and 
finalized in this rule. Further, the adjustments to the base amount 
under Sec.  438.6(d)(2) are still permitted upon finalization of this 
rule; therefore, the base amount will be calculated annually and 
increases in Medicaid and Medicare FFS rates will be taken into account 
even though a smaller percentage of the base amount will be available 
for pass-through payments. However, we would not permit a pass-through 
payment amount to exceed the lesser of the amounts calculated under 
paragraph (d)(3) in this rule. We are not generally restricting states 
from adjusting or amending their actuarially sound capitation rates 
that are unrelated to new or increased pass-through payments; the 
general requirements for retroactive adjustments to capitation rates 
are specified at Sec.  438.7(c)(2) and those requirements are not 
changed with this final rule. Only contract actions to add or increase 
pass-through payments on a retroactive basis will be denied under Sec.  
438.6(d)(1)(ii); other retroactive rate changes will be evaluated and 
approved pursuant to other applicable rules adopted prior to this 
rulemaking.
    Finally, we do not believe that we should permit retroactive 
adjustments and amendments through July 1, 2017 to account for 
potential increases in pass-through payments that were put into place 
before this rule. This approach is not consistent with our policy, 
which has been discussed in the May 6, 2016 final rule and throughout 
this final rule, to eliminate pass-through payments, which are 
inconsistent with our regulatory standards for actuarially sound 
capitation rates.
    After considering the comments, we are finalizing Sec.  
438.6(d)(1)(ii) as proposed without revision.

E. Comments on Sec.  438.6(d)(3)

    In paragraph (d)(3), we proposed to amend the cap on the amount of 
pass-through payments to hospitals that may be incorporated into 
managed care contract(s) and rate certification(s) during the 
transition period for hospital payments, which will apply to rating 
periods for contract(s) beginning on or after July 1, 2017. 
Specifically, we proposed to revise Sec.  438.6(d)(3) to require that 
the limit on pass-through payments each year of the transition period 
be the lesser of: (A) The sum of the results of paragraphs (d)(2)(i) 
and (ii),\3\ as modified under the schedule in this paragraph (d)(3); 
or (B) the total dollar amount of pass-through payments to hospitals 
identified by the state in the managed care contract(s) and rate 
certification(s) used to meet the requirement in paragraph (d)(1)(i). 
This proposed language would limit the amount of pass-through payments 
each contract year to the lesser of the calculation adopted in the May 
6, 2016 final rule (the ``base amount''), as decreased each successive 
year under

[[Page 5423]]

the schedule in this paragraph (d)(3), or the total dollar amount of 
pass-through payments to hospitals identified by the state in managed 
care contract(s) and rate certification(s) described in paragraph 
(d)(1)(i). For example, if a state had $10 million in pass-through 
payments to hospitals in the contract and rate certification used to 
meet the requirement in paragraph (d)(1)(i), that $10 million figure 
would be compared each year to the base amount as reduced on the 
schedule described in this paragraph (d)(3); the lower number would be 
used to limit the total amount of pass-through payments to hospitals 
allowed for that specific contract year.
---------------------------------------------------------------------------

    \3\ The portion of the base amount calculated in Sec.  
438.6(d)(2)(i) is analogous to performing UPL calculations under a 
FFS delivery system, using payments from managed care plans for 
Medicaid managed care hospital services in place of the state's 
payments for FFS hospital services under the state plan. The portion 
of the base amount calculated in Sec.  438.6(d)(2)(ii) takes into 
account hospital services and populations included in managed care 
during the rating period that includes pass-through payments which 
were in FFS two years prior.
---------------------------------------------------------------------------

    We noted that this proposed language would prevent increases of 
aggregate pass-through payments for hospitals during the transition 
period beyond what was already in place when the pass-through payment 
limits and transition periods were finalized in the May 6, 2016 final 
rule. We also noted that our proposal was not intended to speed up the 
rate of a state's phase down of pass-through payments; rather, the 
proposed rule intended to prevent increases in pass-through payments 
and the addition of new pass-through payments beyond what was already 
in place when the pass-through payment limits and transition periods 
were finalized given that this was the final rule's intent.
    In addition, we proposed to amend paragraph (d)(3) to provide that 
states must meet the requirements in paragraph (d)(1)(i) to make pass-
through payments for hospitals during the transition period. We noted 
that this additional text was necessary to be consistent with our 
intent, explained above, for the proposed revisions to paragraph 
(d)(1). As in the May 6, 2016 final rule, we noted that pass-through 
payments to hospitals must be phased out no longer than on the 10-year 
schedule, beginning with rating periods for contracts that start on or 
after July 1, 2017. We proposed to add the phrase ``rating periods'' to 
be consistent with our approach in the May 6, 2016 final rule; we made 
this revision throughout proposed paragraphs (d)(3) and (d)(5). We 
received the following comments in response to our proposal to revise 
Sec.  438.6(d)(3), including new paragraphs (d)(3)(i) and (ii).
    Comment: Some commenters recommended that we not finalize proposed 
paragraph (d)(3). Some commenters recommended that we permit increases 
in pass-through payments over the 10-year transition period to give 
states the maximum amount of flexibility in phasing down pass-through 
payments for hospitals. Some commenters recommended that we permit new 
or increased pass-through payments for states that are currently in the 
process of moving hospital FFS supplemental payments into managed care, 
or that we provide states that had received federal approval to 
transition to managed care before this rule, the opportunity to 
implement their managed care programs using the pass-through payment 
transition periods and amounts established in the May 6, 2016 final 
rule. Some commenters similarly recommended that we permit new or 
increased pass-through payments for states with Medicaid state plan 
approved UPL payments for hospitals as of July 5, 2016 and allow such 
states to utilize the transition periods and amounts outlined in the 
May 6, 2016 final rule.
    Response: We do not agree with commenters that we should not 
finalize proposed paragraph (d)(3). We have explained throughout this 
rule our rationale to prevent increases of pass-through payments for 
hospitals during the transition period beyond what was already in place 
when the pass-through payment limits and transition periods were 
finalized in the May 6, 2016 final rule.
    We also do not believe that we should permit increased pass-through 
payments through the 10-year transition period. The 10-year transition 
period provides states with significant flexibility and time to phase 
down existing pass-through payments for hospitals. We believe that we 
should not allow new or increased pass-through payments for states that 
are currently in the process of moving hospital FFS supplemental 
payments into managed care, and that we should not permit new or 
increased pass-through payments for states with Medicaid state plan 
approved UPL payments for hospitals as of July 5, 2016. As we have 
reiterated throughout this rule, pass-through payments are not 
consistent with our regulatory standards for actuarially sound rates 
because they do not tie provider payments with the provision of 
services. When pass-through payments guarantee a portion of a 
provider's payment and divorce the payment from service delivery, there 
is little accountability for the payment and it is more challenging for 
managed care plans to negotiate provider contracts with incentives 
focused on outcomes and managing individuals' overall care. 
Consequently, for states that are currently in the process of moving 
hospital FFS supplemental payments into managed care, we believe that 
integrating the FFS supplemental payments into allowable payment 
structures at the time of the transition will facilitate a state's 
ability to hold managed care plans accountable for the cost and quality 
of services delivered under the contract. To date, we have already 
provided technical assistance to states who are seeking to implement 
these types of allowable payment structures and remain available to 
provide future technical assistance. We will work with states to 
integrate FFS supplemental payments into allowed payment structures as 
states undertake transitions to managed care.
    Comment: Some commenters recommended that we withdraw all caps and 
limits on the ``base amount'' for hospitals and allow states the 
flexibility to adjust pass-through payment amounts to reflect 
significant programmatic changes and increases in the managed care 
population. These commenters provided that if the base amount increases 
from one year to the next, the ``total dollar amount'' limit should 
also be permitted to increase at the same percentage. Some commenters 
similarly recommended a ``per-member per-month'' (PMPM) basis rather 
than a total dollar amount limitation on the maximum amount of pass-
through payments for hospitals. Other commenters stated the concern 
that this proposed rule is effectively limiting the maximum amount of 
pass-through payments to the amount in place prior to the final rule's 
compliance date and would give state Medicaid programs and hospitals no 
time to transition these payments.
    Response: We do not agree that we should withdraw all caps and 
limits on the base amount for hospitals, and we do not agree that the 
``total dollar amount'' limit should be permitted to increase, or that 
we should permit PMPM increases, as these approaches could have the 
effect of permitting increased pass-through payments for hospitals, 
which would be counter to our stated policy goals. We believe that 
adopting these recommendations would complicate the required transition 
of pass-through payments to permissible provider payment models and 
delay the development of permissible and accountable payment approaches 
that are based on the utilization and delivery of services or the 
quality and outcomes of services. We also note that states can 
implement allowed payment structures to reflect significant 
programmatic changes and increases in the managed care population.
    In the June 1, 2015 proposed rule and the May 6, 2016 final rule, 
we discussed how the payment structures permitted under Sec.  438.6(c) 
tied payments to services while permitting states to reward quality in 
the provision of

[[Page 5424]]

services, assure minimum payment rates, or develop delivery system 
reform. One advantage of using an allowed payment mechanism to address 
changes in the managed care population is that such a structure would 
allow states and managed care plans to link payments to significant 
programmatic changes. Linking provider payments to utilization and 
outcomes under a managed care plan's control facilitates a state's 
ability to hold managed care plans accountable for the quality, 
utilization, and cost of care provided to beneficiaries.
    We agree with commenters that this final rule limits the maximum 
amount of pass-through payments to the amount in place on the effective 
date of the May 6, 2016 final rule (July 5, 2016). However, we do not 
agree that this final rule eliminates the transition period for 
existing pass-through payments. This final rule does not change the 
transition periods established under the May 6, 2016 final rule. This 
final rule provides a new maximum amount of pass-through payments for 
hospitals in order to prevent new or increased pass-through payments. 
States that were reliant on and using pass-through payments at the time 
we finalized the May 6, 2016 final rule will continue to be eligible 
for the full transition periods under this final rule. This final rule 
does not accelerate the transition period for states compared to the 
May 6, 2016 final rule.
    Comment: Some commenters stated that Sec.  438.6(d) of the May 6, 
2016 final rule allowed for specific calculations and adjustments to 
the base amount to determine the upper limit of pass-through payments 
for hospitals. These commenters stated that Sec.  438.6(d) allowed 
states to account for changes in the demographics, service mix, 
enrollment, and utilization of Medicaid managed care beneficiaries 
beginning July 1, 2017. These commenters stated concerns that the 
proposed rule eliminates these flexibilities by artificially limiting 
``the total dollar amount'' of pass-through payments without accounting 
for the permitted adjustments in the May 6, 2016 final rule.
    Response: We understand commenters' concerns regarding the base 
amount calculations and permitted adjustments at Sec.  438.6(d)(2) in 
the May 6, 2016 final rule. This final rule does not modify the 
adjustments to the base amount permitted under Sec.  438.6(d)(2); 
however, this final rule does not permit a pass-through payment amount 
to exceed the lesser of the amounts calculated under paragraph (d)(3) 
in this final rule, as we believe such a flexibility could have the 
effect of permitting increased pass-through payments for hospitals. We 
believe that increasing pass-through payments will complicate the 
required transition of pass-through payments to permissible provider 
payment models and delay the development of permissible and accountable 
payment approaches that are based on the utilization and delivery of 
services or the quality and outcomes of services.
    Under Sec.  438.6(d)(2), states can account for changes in the 
demographics, service mix, enrollment, and utilization in their 
Medicaid managed care programs (see 81 FR 27591). States can also 
account for changes in the demographics, service mix, enrollment, and 
utilization through permissible payment mechanisms. One advantage of 
using an allowed payment mechanism to address changes in the managed 
care population (such as demographics, service mix, enrollment, or 
utilization) is that such a structure would allow states and managed 
care plans to link new and increased funding to the corresponding 
increase in services that result from the programmatic changes or 
increased population. Linking provider payments to utilization and 
outcomes under a managed care plan's control facilitates a state's 
ability to hold managed care plans accountable for the quality, 
utilization, and cost of care provided to beneficiaries. Therefore, we 
do not agree that the proposed rule, which is finalized here, 
eliminates these flexibilities. Also, as described throughout this 
final rule, the ``total dollar amount'' limit for pass-through payments 
was established under paragraphs (d)(3) and (d)(5) for hospitals, 
physicians, and nursing facilities because we did not intend states to 
begin additional or new pass-through payments, or to increase existing 
pass-through payments.
    After considering the comments, we are finalizing Sec.  438.6(d)(3) 
as proposed without revision.

F. Comments on Sec.  438.6(d)(5)

    We proposed to revise Sec.  438.6(d)(5) to be consistent with the 
proposed revisions in Sec.  438.6(d)(1)(i) and to limit the total 
dollar amount of pass-through payments that is available each contract 
year for physicians and nursing facilities. We noted that we were not 
proposing to implement a phase-down for pass-through payments to 
physicians or nursing facilities. We proposed that for states that meet 
the requirements in paragraph (d)(1)(i), rating periods for contracts 
beginning on or after July 1, 2017 through rating periods for contracts 
beginning on or after July 1, 2021, may continue to require pass-
through payments to physicians or nursing facilities under the MCO, 
PIHP, or PAHP contract; such pass-through payments may be no more than 
the total dollar amount of pass-through payments for each category 
identified in the managed care contracts and rate certifications used 
to meet the requirement in paragraph (d)(1)(i). We proposed to add the 
phrase ``rating periods'' to be consistent with our approach in the May 
6, 2016 final rule; we made this revision throughout proposed 
paragraphs (d)(3) and (d)(5). We received the following comments in 
response to our proposal to revise Sec.  438.6(d)(5).
    Comment: Some commenters recommended that we not finalize the 
``total dollar amount'' limit on pass-through payments over the 5-year 
transition period for physicians and nursing facilities because such a 
limit does not recognize significant programmatic changes and increases 
in the managed care population. Commenters recommended that we continue 
to allow increases over the 5-year transition period to give states the 
maximum amount of flexibility in phasing down pass-through payments. 
Some commenters also recommended that we permit new or increased pass-
through payments for states that are currently in the process of moving 
physician or nursing facility FFS supplemental payments into managed 
care, or that we provide states that had received federal approval to 
transition to managed care before this rule, the opportunity to 
implement their managed care programs using the pass-through payment 
transition periods and amounts established in the May 6, 2016 final 
rule.
    Response: As noted above, we believe the lack of an affirmative 
limit on pass-through payments at the total amount of prior pass-
through payments identified under paragraph (d)(1)(i) will permit 
states to increase pass-through payments to physicians and nursing 
facilities, which is contrary to our policy goals for eliminating these 
types of payments. This final rule will encourage states to use the 
other, permissible payment types described in Sec.  438.6(c) in 
directing payments to nursing facilities and physicians. We explained 
throughout this final rule our rationale for prohibiting increases of 
pass-through payments during the transition period beyond what was 
already in place when the pass-through payment limits and transition 
periods were finalized in the May 6, 2016 final rule. We reiterate that 
states can

[[Page 5425]]

implement allowed, accountable payment structures to reflect 
significant programmatic changes and increases in the managed care 
population. One advantage of using an allowed payment mechanism to 
address the changes is that such a structure would allow states and 
managed care plans to link new and increased funding to the 
corresponding increased utilization resulting from the programmatic 
changes or increased population. Additionally, the 5-year transition 
period provides states with significant flexibility and time to phase 
down existing pass-through payments for physicians and nursing 
facilities.
    Consistent with our response for hospital FFS supplemental 
payments, we do not believe that we should allow new or increased pass-
through payments for states that are currently in the process of moving 
physician or nursing facility FFS supplemental payments into managed 
care. As we have provided throughout this rule, pass-through payments 
are not consistent with our interpretation of the statutory requirement 
for actuarial soundness and our regulatory standards for actuarially 
sound rates because they do not tie provider payments with the 
provision of services. For states that are currently in the process of 
moving physician or nursing facility FFS supplemental payments into 
managed care, we believe that integrating the FFS supplemental payments 
into allowable payment structures at the time of the transition will 
ensure that the state can hold managed care plans accountable for the 
cost and quality of services delivered under the contract.
    We did not receive any comments on our proposal to use the phrase 
``rating period'' in Sec.  438.6(d)(3) and (5). After considering the 
comments, we are finalizing Sec.  438.6(d)(5) as proposed without 
revision.

III. Provisions of the Final Regulations

    As a result of the public comments received under the proposed 
rule, this final rule incorporates the provisions of the proposed rule 
without revision.

IV. Collection of Information Requirements

    This final rule will not impose any new or revised information 
collection, reporting, recordkeeping, or third-party disclosure 
requirements or burden. Our revision of Sec.  438.6(d) will not impose 
any new or revised IT system requirements or burden because the 
existing regulation at Sec.  438.7 requires the rate certification to 
document special contract provisions under Sec.  438.6. Consequently, 
there is no need for review by the Office of Management and Budget 
under the authority of the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501 et seq.).

V. Regulatory Impact Analysis

A. Statement of Need

    As discussed in the May 6, 2016 final rule, the proposed rule, and 
this final rule, we have significant concerns that pass-through 
payments have negative consequences for the delivery of services in the 
Medicaid program. The existence of pass-through payments may affect the 
amount that a managed care plan is willing or able to pay for the 
delivery of services through its base rates or fee schedule. In 
addition, pass-through payments may make it more difficult to implement 
quality initiatives or to direct beneficiaries' utilization of services 
to higher quality providers because a portion of the capitation rate 
under the contract is independent of the services delivered and outside 
of the managed care plan's control. Put another way, when the fee 
schedule for services is set below the normal market, or negotiated 
rate, to account for pass-through payments, moving utilization to 
higher quality providers can be difficult because there may not be 
adequate funding available to incentivize the provider to accept the 
increased utilization. When pass-through payments guarantee a portion 
of a provider's payment and divorce the payment from service delivery, 
it is more challenging for managed care plans to negotiate provider 
contracts with incentives focused on outcomes and managing individuals' 
overall care.
    We realize that some pass-through payments have served as a 
critical source of support for safety-net providers who provide care to 
Medicaid beneficiaries. Several commenters raised this issue in 
response to the June 1, 2015 proposed rule.\4\ Therefore, in response 
to some commenters' request for a delayed implementation of the 
limitation on directed payments and to address concerns that an abrupt 
end to these payments could create significant disruptions for some 
safety-net providers who serve Medicaid managed care enrollees, we 
included in the May 6, 2016 final rule a delay in the compliance date 
and a transition period for existing pass-through payments to 
hospitals, physicians, and nursing facilities. These transition periods 
begin with the compliance date, and were designed and finalized to 
enable affected providers, states, and managed care plans to transition 
away from existing pass-through payments. Such payments could be 
transitioned into payments tied to covered services, value-based 
payment structures, or delivery system reform initiatives without 
undermining access for the beneficiaries; alternatively, states could 
step down such payments and devise other methods to support safety-net 
providers to come into compliance with Sec.  438.6(c) and (d).
---------------------------------------------------------------------------

    \4\ Available at: https://www.gpo.gov/fdsys/pkg/FR-2015-06-01/pdf/2015-12965.pdf.
---------------------------------------------------------------------------

    However, as noted previously, the transition period and delayed 
enforcement date caused some confusion regarding increased and new 
pass-through payments. The May 6, 2016 final rule inadvertently created 
a strong incentive for states to move swiftly to put pass-through 
payments into place in order to take advantage of the pass-through 
payment transition periods established in the May 6, 2016 final rule. 
Contrary to our discussion in the May 6, 2016 final rule regarding the 
statutory requirements in section 1903(m) of the Act and regulations 
for actuarially sound capitation rates, some states expressed interest 
in developing new and increased pass-through payments for their 
respective Medicaid managed care programs as a result of the May 6, 
2016 final rule. In response to this interest, we published the July 
29, 2016 CMCS Informational Bulletin (CIB) to quickly address questions 
regarding the May 6, 2016 final rule's intent regarding states' ability 
to increase or add new pass-through payments under Medicaid managed 
care plan contracts and capitation rates, and to describe our plan for 
monitoring the transition of pass-through payments to approaches for 
provider payment under Medicaid managed care programs that are based on 
the delivery of services, utilization, and the outcomes and quality of 
the delivered services.
    We noted in the CIB that the transition from one payment structure 
to another requires robust provider and stakeholder engagement, 
agreement on approaches to care delivery and payment, establishing 
systems for measuring outcomes and quality, planning efforts to 
implement changes, and evaluating the potential impact of change on 
Medicaid financing mechanisms. Whether implementing value-based payment 
structures, implementing other delivery system reform initiatives, or 
eliminating pass-through payments, there will be transition issues for 
states coming into compliance; adequately working through transition 
issues, including ensuring adequate base rates, is central to both 
delivery system reform and to strengthening access, quality, and 
efficiency in the Medicaid program. We

[[Page 5426]]

stressed that the purpose and intention of the transition periods is to 
acknowledge that pass-through payments existed prior to the May 6, 2016 
final rule and to provide states, network providers, and managed care 
plans time and flexibility to integrate existing pass-through payment 
arrangements into permissible payment structures.
    As we noted in the CIB and throughout this final rule, we believe 
that adding new or increased pass-through payments for hospitals, 
physicians, or nursing facilities, beyond what was included as of July 
5, 2016, into Medicaid managed care contracts exacerbates a problematic 
practice that is inconsistent with our interpretation of statutory and 
regulatory requirements, complicates the required transition of these 
pass-through payments to permissible and accountable payment approaches 
that are based on the utilization and delivery of services to enrollees 
covered under the contract, or the quality and outcomes of such 
services, and reduces managed care plans' ability to effectively use 
value-based purchasing strategies and implement provider-based quality 
initiatives. In the CIB, we signaled the possible need, and our intent, 
to further address this policy in future rulemaking and link pass-
through payments through the transition period to the amounts of pass-
through payments in place at the time the Medicaid managed care rule 
was effective on July 5, 2016.

B. Overall Impact

    We have examined the impacts of this final rule as required by 
Executive Order 12866 on Regulatory Planning and Review (September 30, 
1993), Executive Order 13563 on Improving Regulation and Regulatory 
Review (January 18, 2011), the Regulatory Flexibility Act (RFA) 
(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Act, 
section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 
1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 
1999), and the Congressional Review Act (5 U.S.C. 804(2)).
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Section 
3(f) of Executive Order 12866 defines a ``significant regulatory 
action'' as an action that is likely to result in a rule: (1) Having an 
annual effect on the economy of $100 million or more in any 1 year, or 
adversely and materially affecting a sector of the economy, 
productivity, competition, jobs, the environment, public health or 
safety, or state, local or tribal governments or communities (also 
referred to as ``economically significant''); (2) creating a serious 
inconsistency or otherwise interfering with an action taken or planned 
by another agency; (3) materially altering the budgetary impacts of 
entitlement grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or (4) raising novel legal or policy 
issues arising out of legal mandates, the President's priorities, or 
the principles set forth in the Executive Order.
    A regulatory impact analysis (RIA) must be prepared for major rules 
with economically significant effects ($100 million or more in any 1 
year). We estimate that this final rule is ``economically significant'' 
as measured by the $100 million threshold, and hence a major rule under 
the Congressional Review Act.
    The May 6, 2016 final rule included a RIA (81 FR 27830). During 
that analysis, we did not project a significant fiscal impact for Sec.  
438.6(d). When we reviewed and analyzed the May 6, 2016 final rule, we 
concluded that states would have other mechanisms to build in the 
amounts currently provided through pass-through payments in approvable 
ways, such as approaches consistent with Sec.  438.6(c). If a state was 
currently building in $10 million in pass-through payments to hospitals 
under their current managed care contracts, we assumed that the state 
would incorporate the $10 million into their managed care rates in 
permissible ways rather than spending less in Medicaid managed care. 
While it is possible that this would be more difficult for states with 
relatively larger amounts of pass-through payments, the long transition 
period provided under the May 6, 2016 final rule to phase out pass-
through payments should help states to integrate existing pass-through 
payments into actuarially sound capitation rates through permissible 
Medicaid financing structures, including enhanced fee schedules or the 
other approaches consistent with Sec.  438.6(c) that tie managed care 
payments to services and utilization covered under the contract.
    A number of states have integrated some form of pass-through 
payments into their managed care contracts for hospitals, nursing 
facilities, and physicians. In general, the size and number of the 
pass-through payments for hospitals has been more significant than for 
nursing facilities and physicians. We noted in the May 6, 2016 final 
rule (81 FR 27589) a number of reasons provided by states for using 
pass-through payments in their managed care contracts. As of the 
effective date of the May 6, 2016 final rule, we estimate that at least 
eight states have implemented approximately $105 million in pass-
through payments for physicians annually; we estimate that at least 
three states have implemented approximately $50 million in pass-through 
payments for nursing facilities annually; and we estimate that at least 
16 states have implemented approximately $3.3 billion in pass-through 
payments for hospitals annually. These estimates are somewhat 
uncertain, as before the final rule, we did not have regulatory 
requirements for states to document and describe pass-through payments 
in their managed care contracts or rate certifications. The amount of 
pass-through payments often represents a significant portion of the 
overall capitation rate under a managed care contract. We have seen 
pass-through payments that have represented 25 percent, or more, of the 
overall managed care contract and 50 percent of individual rate cells. 
The rationale for these pass-through payments in the development of the 
capitation rates is often not transparent, and it is not clear what the 
relationship of these pass-through payments is to the provision of 
services or the requirement for actuarially sound rates.
    Since the publication of the May 6, 2016 final rule, we received a 
formal proposal from one state regarding $250 to $275 million in pass-
through payments to hospitals; we have been working with the state to 
identify permissible implementation options for their proposal, 
including under Sec.  438.6(c), and tie such payments to the 
utilization and delivery of services (as well as the outcomes of 
delivered services). We heard informally that two additional states are 
working to develop pass-through payment mechanisms to increase total 
payments to hospitals by approximately $10 billion cumulatively. We 
also heard informally from one state regarding a $200 million proposal 
for pass-through payments to physicians. We also continue to receive 
inquiries from states, provider associations, and consultants who are 
developing formal proposals to add new pass-through payments, or 
increase existing pass-through payments, and incorporate such payments 
into Medicaid managed care rates. These state proposals have not been 
approved to date. While it is

[[Page 5427]]

difficult for us to conduct a detailed quantitative analysis given this 
considerable uncertainty and lack of data, we believe that without this 
final rulemaking, states will continue to ramp-up pass-through payments 
in ways that are not consistent with the pass-through payment 
transition periods established in the May 6, 2016 final rule.
    Since we cannot produce a detailed quantitative analysis, we have 
developed a qualitative discussion for this RIA. We believe there are 
many benefits with this regulation, including consistency with our 
interpretation and implementation of the statutory requirements in 
section 1903(m) of the Act and regulations for actuarially sound 
capitation rates, improved transparency in rate development processes, 
permissible and accountable payment approaches that are based on the 
utilization and delivery of services to enrollees covered under the 
contract, or the quality and outcomes of such services, and improved 
support for delivery system reform that is focused on improved care and 
quality for Medicaid beneficiaries. We believe that the costs of this 
regulation to state and federal governments will not be significant; we 
currently review and work with states on managed care contracts and 
rates, and because pass-through payments exist today, any additional 
costs to state or federal governments should be negligible.
    Relative to the current baseline, this final rule builds on the May 
6, 2016 final rule and may further reduce the likelihood of increases 
in or the development of new pass-through payments, which could reduce 
state and federal government transfers to hospitals, physicians, and 
nursing facilities. However, states may instead increase or develop 
actuarially sound payments that link provider reimbursement with 
services covered under the contract or associated quality outcomes. 
Because we lack sufficient information to forecast the eventual overall 
impact of the May 6, 2016 final rule on state pass-through payments, we 
provide only a qualitative discussion of the impact of this final rule 
on avoided transfers. Given the potential for avoided transfers, we 
believe this final rule is economically significant as defined by 
Executive Order 12866.
    We received the following comment on the proposed overall impact 
and regulatory impact analysis.
    Comment: One commenter stated concern that we did not provide, in 
the proposed rule and to the public, a careful and transparent analysis 
of the anticipated quantitative consequences of this economically 
significant regulatory action. This commenter recommended that we 
withdraw the proposed rule until such a quantitative analysis is 
completed.
    Response: The commenter did not provide any substantive information 
with which to conduct such an analysis. As stated in the proposed rule, 
it is difficult for us to conduct a detailed quantitative analysis 
given the considerable uncertainty and lack of data discussed above; 
however we continue to believe that without this final rulemaking, 
states will continue to ramp-up pass-through payments in ways that are 
not consistent with the pass-through payment transition periods 
established in the May 6, 2016 final rule. We solicited and received no 
substantive suggestions on doing such an analysis. Since we cannot 
produce a detailed quantitative analysis, we have developed a 
qualitative discussion for this final rule.
    After considering the comments, we are finalizing the regulatory 
impact analysis as proposed without revision.

C. Anticipated Effects

    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. Small entities are those entities, such as health care 
providers, having revenues between $7.5 million and $38.5 million in 
any 1 year. Individuals and states are not included in the definition 
of a small entity. We do not believe that this final rule will have a 
significant economic impact on a substantial number of small 
businesses.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis for any rule that may have a significant 
impact on the operations of a substantial number of small rural 
hospitals. This analysis must conform to the provisions of section 604 
of the RFA. For purposes of section 1102(b) of the Act, we define a 
small rural hospital as a hospital that is located outside a 
Metropolitan Statistical Area and has fewer than 100 beds. We do not 
anticipate that the provisions in this final rule will have a 
substantial economic impact on small rural hospitals. We are not 
preparing analysis for either the RFA or section 1102(b) of the Act 
because we have determined, and the Secretary certifies, that this 
final rule will not have a significant economic impact on a substantial 
number of small entities or a significant impact on the operations of a 
substantial number of small rural hospitals in comparison to total 
revenues of these entities.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 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. In 2016, that 
is approximately $146 million. This final rule does not mandate any 
costs (beyond this threshold) resulting from (A) imposing enforceable 
duties on state, local, or tribal governments, or on the private 
sector, or (B) increasing the stringency of conditions in, or 
decreasing the funding of, state, local, or tribal governments under 
entitlement programs.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it issues a rule that imposes substantial direct 
requirements or costs on state and local governments, preempts state 
law, or otherwise has federalism implications. Since this final rule 
does not impose any costs on state or local governments, the 
requirements of Executive Order 13132 are not applicable. In accordance 
with the provisions of Executive Order 12866, this final rule was 
reviewed by the Office of Management and Budget.
    We did not receive comments on the proposed anticipated effects for 
the revisions to Sec.  438.6(d) and finalize our analysis in this rule.

D. Alternatives Considered

    During the development of this final rule, we assessed all 
regulatory alternatives and discussed in the preamble of the proposed 
rule a few alternatives that we considered. First, in discussing our 
revisions to paragraphs (d)(1)(i) and (ii) in the proposed rule, we 
considered linking eligibility for the transition period to those 
states with pass-through payments for hospitals, physicians, or nursing 
facilities that were in approved (not just submitted for our review and 
approval) managed care contract(s) and rate certification(s) only for 
the rating period covering July 5, 2016. We noted in the proposed rule 
that we believed such an approach was not administratively feasible for 
states or us because it did not recognize the nuances of the timing and 
approval processes. We believe our approach under this final rule 
provides the appropriate parameters and conditions for pass-through 
payments in managed care contract(s) and rate certification(s) during 
the transition period.
    Second, in discussing our revisions to paragraphs (d)(3) and (d)(5) 
in the proposed rule, we described that the

[[Page 5428]]

aggregate amounts of pass-through payments in each provider category 
would be used to set applicable limits for the provider type during the 
transition period, without regard to the specific provider(s) that 
received a pass-through payment. We considered proposing that the state 
should be limited by amount and recipient during the transition period; 
however, this narrower policy would be more limiting than originally 
intended under the May 6, 2016 final rule when the pass-through payment 
transition periods were finalized. We requested comment on our 
alternative proposals.
    We did not receive comments on the alternative proposals to revise 
Sec.  438.6(d) and, as noted above, are finalizing the proposed 
amendments to Sec.  438.6(d).

E. Accounting Statement

    As discussed in this RIA, the benefits, costs, and transfers of 
this final regulation are identified in table 1 as qualitative impacts 
only.

                                                              Table 1--Accounting Statement
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Units
                Category                      Primary      Low estimate    High estimate ------------------------------------------------      Notes
                                             estimate                                      Year dollars    Discount rate  Period covered
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Benefits
--------------------------------------------------------------------------------------------------------------------------------------------------------
Non-Quantified..........................    Benefits include: Consistency with the statutory requirements in section 1903(m) of the Act and regulations
                                               for actuarially sound capitation rates; improved transparency in rate development processes; greater
                                             incentives for payment approaches that are based on the utilization and delivery of services to enrollees
                                            covered under the contract, or the quality and outcomes of such services; and improved support for delivery
                                                      system reform that is focused on improved care and quality for Medicaid beneficiaries.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
Non-Quantified..........................                            Costs to state or federal governments should be negligible.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Transfers
--------------------------------------------------------------------------------------------------------------------------------------------------------
Non-Quantified..........................   Relative to the current baseline, this final rule builds on the May 6, 2016 final rule and may further reduce
                                           the likelihood of increases in or the development of new pass-through payments, which could reduce state and
                                          federal government transfers to hospitals, physicians, and nursing facilities. Given the potential for avoided
                                              transfers, we believe this final rule is economically significant as defined by Executive Order 12866.
--------------------------------------------------------------------------------------------------------------------------------------------------------

List of Subjects in 42 CFR Part 438

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

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

PART 438--MANAGED CARE

0
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).


0
2. Section 438.6 is amended by revising paragraphs (d)(1), (3), and (5) 
to read as follows:


Sec.  438.6   Special contract provisions related to payment.

* * * * *
    (d) * * * (1) General rule. States may continue to require MCOs, 
PIHPs, and PAHPs to make pass-through payments (as defined in paragraph 
(a) of this section) to network providers that are hospitals, 
physicians, or nursing facilities under the contract, provided the 
requirements of this paragraph (d) are met. States may not require 
MCOs, PIHPs, and PAHPs to make pass-through payments other than those 
permitted under this paragraph (d).
    (i) In order to use a transition period described in this paragraph 
(d), a State must demonstrate that it had pass-through payments for 
hospitals, physicians, or nursing facilities in:
    (A) Managed care contract(s) and rate certification(s) for the 
rating period that includes July 5, 2016, and were submitted for CMS 
review and approval on or before July 5, 2016; or
    (B) If the managed care contract(s) and rate certification(s) for 
the rating period that includes July 5, 2016 had not been submitted to 
CMS on or before July 5, 2016, the managed care contract(s) and rate 
certification(s) for a rating period before July 5, 2016 that had been 
most recently submitted for CMS review and approval as of July 5, 2016.
    (ii) CMS will not approve a retroactive adjustment or amendment, 
notwithstanding the adjustments to the base amount permitted in 
paragraph (d)(2) of this section, to managed care contract(s) and rate 
certification(s) to add new pass-through payments or increase existing 
pass-through payments defined in paragraph (a) of this section.
* * * * *
    (3) Schedule for the reduction of the base amount of pass-through 
payments for hospitals under the MCO, PIHP, or PAHP contract and 
maximum amount of permitted pass-through payments for each year of the 
transition period. For States that meet the requirement in paragraph 
(d)(1)(i) of this section, pass-through payments for hospitals may 
continue to be required under the contract but must be phased out no 
longer than on the 10-year schedule, beginning with rating periods for 
contract(s) that start on or after July 1, 2017. For rating periods for 
contract(s) beginning on or after July 1, 2027, the State cannot 
require pass-through payments for hospitals under a MCO, PIHP, or PAHP 
contract. Until July 1, 2027, the total dollar amount of pass-through 
payments to hospitals may not exceed the lesser of:
    (i) A percentage of the base amount, beginning with 100 percent for 
rating periods for contract(s) beginning on or after July 1, 2017, and 
decreasing by 10 percentage points each successive year; or
    (ii) The total dollar amount of pass-through payments to hospitals 
identified in the managed care contract(s) and rate certification(s) 
used to meet the requirement of paragraph (d)(1)(i) of this section.
* * * * *
    (5) Pass-through payments to physicians or nursing facilities. For 
States that meet the requirement in paragraph (d)(1)(i) of this 
section, rating

[[Page 5429]]

periods for contract(s) beginning on or after July 1, 2017 through 
rating periods for contract(s) beginning on or after July 1, 2021, may 
continue to require pass-through payments to physicians or nursing 
facilities under the MCO, PIHP, or PAHP contract of no more than the 
total dollar amount of pass-through payments to physicians or nursing 
facilities, respectively, identified in the managed care contract(s) 
and rate certification(s) used to meet the requirement of paragraph 
(d)(1)(i) of this section. For rating periods for contract(s) beginning 
on or after July 1, 2022, the State cannot require pass-through 
payments for physicians or nursing facilities under a MCO, PIHP, or 
PAHP contract.

    Dated: January 3, 2017.
Andrew M. Slavitt,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Dated: January 10, 2017.
Sylvia M. Burwell,
Secretary, Department of Health and Human Services.
[FR Doc. 2017-00916 Filed 1-17-17; 8:45 am]
 BILLING CODE 4120-01-P