[Federal Register Volume 84, Number 222 (Monday, November 18, 2019)]
[Proposed Rules]
[Pages 63722-63785]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-24763]



[[Page 63721]]

Vol. 84

Monday,

No. 222

November 18, 2019

Part II





Department of Health and Human Services





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 Centers for Medicare & Medicaid Services





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42 CFR Parts 430, 433, et al.





 Medicaid Program; Medicaid Fiscal Accountability Regulation; Proposed 
Rule

  Federal Register / Vol. 84 , No. 222 / Monday, November 18, 2019 / 
Proposed Rules  

[[Page 63722]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 430, 433, 447, 455, and 457

[CMS-2393-P]
RIN 0938-AT50


Medicaid Program; Medicaid Fiscal Accountability Regulation

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would promote transparency by establishing 
new reporting requirements for states to provide CMS with certain 
information on supplemental payments to Medicaid providers, including 
supplemental payments approved under either Medicaid state plan or 
demonstration authority, and applicable upper payment limits. 
Additionally, the proposed rule would establish requirements to ensure 
that state plan amendments proposing new supplemental payments are 
consistent with the proper and efficient operation of the state plan 
and with efficiency, economy, and quality of care. This proposed rule 
addresses the financing of supplemental and base Medicaid payments 
through the non-federal share, including states' uses of health care-
related taxes and bona fide provider-related donations, as well as the 
requirements on the non-federal share of any Medicaid payment.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on January 17, 2020.

ADDRESSES: In commenting, please refer to file code CMS-2393-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    Comments, including mass comment submissions, must be submitted in 
one of the following three ways (please choose only one of the ways 
listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    2. By regular mail. You may mail written comments to the following 
address ONLY: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-2393-P, P.O. Box 8016, 
Baltimore, MD 21244-8016.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address ONLY: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-2393-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Andrew Badaracco, (410) 786-4589, 
Richard Kimball, (410) 786-2278, and Daniil Yablochnikov, (410) 786-
8912, for Medicaid Provider Payments, Supplemental Payments, Upper 
Payment Limits, Provider Categories, Intergovernmental Transfers, and 
Certified Public Expenditures.
    Timothy Davidson, (410) 786-1167, Jonathan Endelman, (410) 786-
4738, and Stuart Goldstein, (410) 786-0694, for Health Care-Related 
Taxes, Provider-Related Donations, and Disallowances.
    Lia Adams, (410) 786-8258, Charlie Arnold, (404) 562-7425, Richard 
Cuno, (410) 786-1111, and Charles Hines, (410) 786-0252, for Medicaid 
Disproportionate Share Hospital Payments and Overpayments.
    Jennifer Clark, (410) 786-2013, and Deborah McClure, (410) 786-
3128, for Children's Health Insurance Program (CHIP).

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: All comments 
received before the close of the comment period are available for 
viewing by the public, including any personally identifiable or 
confidential business information that is included in a comment. We 
post all comments received before the close of the comment period on 
the following website as soon as possible after they have been 
received: http://www.regulations.gov. Follow the search instructions on 
that website to view public comments.

I. Background

A. Overview

    Title XIX of the Social Security Act (the Act) established the 
Medicaid program as a federal-state partnership for the purpose of 
providing and financing medical assistance to specified groups of 
eligible individuals. States have considerable flexibility in designing 
their programs, but must abide by requirements specified in the federal 
Medicaid statute and regulations. Each state is responsible for 
administering its Medicaid program in accordance with an approved state 
plan, which specifies the scope of covered services, groups of eligible 
individuals, payment methodologies, and all other information necessary 
to assure the state plan describes a comprehensive and sound structure 
for operating the Medicaid program, and ultimately, provides a clear 
basis for claiming federal matching funds.
    As discussed in more detail below, the goal of this proposed rule 
is to strengthen overall fiscal integrity of the Medicaid program. The 
proposed rule focuses on four topic areas that are frequently discussed 
as program vulnerabilities by federal oversight authorities, including 
the Government Accountability Office (GAO), the Department of Health 
and Human Services' Office of Inspector General (OIG), and the Medicaid 
and CHIP Payment and Access Commission (MACPAC). These topics include: 
Medicaid fee-for-service (FFS) provider payments; disproportionate 
share hospital (DSH) payments; Medicaid program financing; supplemental 
payments; and health care-related taxes and provider-related donations. 
Due to the complex nature of these topic areas, we have organized this 
proposed rule to separately discuss each topic and describe the 
programmatic concerns that we seek to address through this proposed 
rule. However, the proposed provisions would rely on similar strategies 
to improve our and states' abilities to oversee fiscal integrity by 
requiring transparency through better data reporting, clarifying 
regulatory payment and financing definitions, refining administrative 
procedures used by states to comply with federal regulations, 
clarifying regulatory language that could be subject to 
misinterpretation, and removing regulatory requirements that have been 
difficult to administer and do not further our oversight objectives. As 
a result, the provisions of the proposed rule aim to address multiple 
topic areas as part of the overall strategy to improve fiscal 
integrity.
    While some of the proposed policies are new, there are policies 
within the proposed rule that CMS has operationalized through our work 
with states and interpretations of the statute in subregulatory 
guidance and federal regulations. We have implemented this subset of 
policies using existing legal authority. Some of the proposed policies 
in the proposed rule, such as the non-bona fide provider related 
donations provisions, have been reviewed and upheld by the Departmental 
Appeals Board (DAB) and the courts. Therefore, we are clarifying the 
regulatory language

[[Page 63723]]

in this proposed rule that may have been subject to misinterpretation 
by states and other stakeholders, or that otherwise could benefit from 
additional specificity. In these cases, as discussed below, we are not 
proposing new statutory interpretations, but are merely proposing to 
codify existing policies into the Code of Federal Regulations (CFR) to 
improve guidance to states and other stakeholders and, to the extent 
possible, help prevent states from implementing policies that do not 
comport with applicable statutory requirements.

B. General Information on Certain Medicaid Financial Topics Addressed 
in This Proposed Rule

1. Medicaid FFS Provider Payments
a. General Background
    States are responsible for developing FFS rates to pay providers 
for furnishing health care services to beneficiaries who receive 
covered services through the FFS delivery system. In recognition of the 
states' front line responsibility, the statute affords states 
considerable flexibility by not prescribing any particular rate setting 
approach or method (for most Medicaid services), but instead allows 
states to develop their own approaches unique to their local 
circumstances so long as they are consistent with applicable statutory 
requirements and provide the public and interested parties an 
opportunity to comment and offer input. In particular, section 4711 of 
the Balanced Budget Act of 1997 (BBA 97) (Pub. L. 105-33, enacted 
August 5, 1997) amended section 1902(a)(13)(A) of the Act to give 
states greater flexibility to develop their own payment methods and 
standards by replacing prescriptive rate setting requirements with the 
present standard that rates for inpatient hospital, nursing facility, 
and intermediate care facility for individuals with intellectual 
disabilities (ICF/IID) services be established in accordance with a 
public process. The public process emphasizes transparency in how 
states approach rate setting by providing stakeholders with a 
reasonable opportunity to review and comment on the proposed FFS rates, 
rate setting methodologies, and justifications before states publish 
final rates, underlying methodologies, and justifications. However, it 
does not impose any constraints on states with respect to the payment 
methodologies they may wish to adopt to purchase Medicaid services.
    Similarly, states are free to develop their own approach to 
establishing payment rates for other Medicaid services and, under 
longstanding regulations at Sec.  447.205, generally must publish 
public notice in advance to implement new, or change existing, methods 
and standards for setting payment rates for services. For example, 
states may decide to use a prospective payment or a retrospective 
payment system and may elect to reimburse on a per unit, per day, or 
per discharge basis. Whatever payment methodology or system a state 
elects to implement, the state must describe the methodology or system 
comprehensively in its Medicaid state plan and submit the proposed 
methodology to CMS for review and approval in a manner consistent with 
42 CFR part 430, subpart B.
    State payment methodologies typically provide for a standard 
payment to all Medicaid providers on a per claim basis for services 
rendered to a Medicaid beneficiary in a FFS environment. We refer to 
these payments as ``base payments.'' Base payments also include any 
payment adjustments, add-ons, or other additional payments received by 
the provider that can be attributed to services identifiable as having 
been provided to an individual beneficiary, including those that are 
made to account for a higher level of care or complexity or intensity 
of services provided to an individual beneficiary.
    Having established a base payment system, states may wish to offer 
extra compensation to certain providers by establishing supplemental 
payments within the state's overall approach to reimbursing Medicaid 
providers. ``Supplemental payments'' are payments made to providers 
that are in addition to the base payment the provider receives for 
services furnished. They can be directed to all providers or directed 
to a designated set of providers, with the amount of the payment 
depending upon applicable upper payment limit (UPL) demonstration 
requirements in Sec. Sec.  447.272 and 447.321 for inpatient and 
outpatient settings, respectively. Unlike base FFS payments, which are 
directly attributable to a covered service furnished to an individual 
beneficiary, supplemental payments are often made to the provider in a 
lump sum on a monthly, quarterly, or annual basis apart from payments 
for a provider claim, and therefore, cannot be directly linked to a 
provider claim for specific services provided to an individual Medicaid 
beneficiary. Effectively, the supplemental payments serve to increase 
total Medicaid payments to a provider for all Medicaid services 
furnished over a set period of time as shown in the state's UPL 
demonstration. The UPL demonstration is the means by which the state 
documents that the Medicaid payments for the applicable services are 
below the aggregate UPL amount. In general, supplemental payments are 
recognized as service payments as they supplement base payments 
previously made to purchase Medicaid services from providers. 
Typically, they are made under FFS state plan authority but, more 
recently, states have made similar types of payments through 
demonstration and managed care authorities.
    As discussed previously, for most services, the Medicaid statute 
does not prescribe a particular payment approach; however, the statute 
does contemplate that states will be prudent purchasers of health care 
services. More specific to rate setting, section 1902(a)(30)(A) of the 
Act requires states to have methods and procedures to assure Medicaid 
payments for services, including any base and supplemental payments, 
are consistent with efficiency, economy, and quality of care and are 
sufficient to enlist enough providers so that care and services are 
available under the plan at least to the extent that such care and 
services are available to the general population in the geographic 
area. Under section 1902(a)(30)(A) authority, implementing federal 
regulations establish UPLs for certain services and rely on these 
limits to help assure that state Medicaid payments are consistent with 
``efficiency and economy.'' Federal financial participation (FFP) is 
not available for state Medicaid expenditures that exceed an applicable 
UPL.
    Medicaid UPLs are codified in regulations at Sec. Sec.  447.272 and 
447.321 and apply to payments for Medicaid inpatient hospital, nursing 
facility and ICF/IID services, as well as for outpatient hospital and 
clinic services. For each of these Medicaid benefits, the UPLs are 
first constructed by categorizing providers into groups (``ownership 
groups'') according to the ownership or operational interests: State 
government-owned or operated, non-state government-owned or operated, 
and privately-owned and operated. States are restricted, in the 
aggregate for each ownership group, from paying more than a reasonable 
estimate of the amount Medicare would pay for the services furnished by 
the providers in the applicable ownership group. The aggregate 
application of these UPLs has preserved state flexibility for setting 
facility-specific payments while creating an overall payment ceiling as 
a mechanism for determining economy and efficiency of payment for the

[[Page 63724]]

services described above, consistent with section 1902(a)(30)(A) of the 
Act.
    Where Medicaid base payments are below the aggregate UPL 
calculation, states have the ability to make supplemental payments to 
providers, by ownership group, up to the calculated limit. With the 
aggregate UPL calculations, states have the ability to pay some 
providers in excess of a reasonable amount that Medicare would pay 
those individual providers for their services furnished, so long as the 
aggregate Medicaid payments are less than or equal to the aggregate UPL 
amount for the ownership category. Should states wish to make payments 
up to the UPL and have the non-federal share available to do so, after 
giving public notice, they may modify their state plan payment 
methodologies to provide for supplemental payments. We note that, 
without a regulatory standard to govern UPLs for practitioner services, 
CMS has allowed states to make Medicaid supplemental payments for 
practitioner services up to Medicare payment amounts or, based on data 
documentation, up to the average commercial rate (ACR) made to 
providers. As discussed later in this proposed rule, ACRs are payments 
developed using the average of some commercial payers' payment rates 
for medical services to establish a supplemental Medicaid rate for 
certain practitioners, typically physicians, under the state plan. 
Unlike other supplemental payments subject to UPLs, some of these 
practitioner supplemental payments have resulted in payments to 
providers in excess of a reasonable estimate of what Medicare would 
have paid for the services furnished, as the relevant ACRs generally 
are higher than Medicare rates. This result is possible because there 
currently is no UPL applicable to payments for practitioner services 
based on a reasonable estimate of what Medicare would pay.
    Under our current UPL regulations and CMS policy, approval of a 
supplemental payment is not an indication that a state's proposal to 
use supplemental payments within its payment system is the best 
approach to setting Medicaid payments. Instead, our approvals have been 
based on the state's documentation of UPL calculations, where 
applicable, showing that the total Medicaid payments (base and 
supplemental) paid to providers under the state plan are within the 
federal limits. Beyond that test and a review of state plan amendments 
(SPAs) which propose to add or amend supplemental payment methodologies 
or aggregate supplemental payments, we have not closely examined how 
states distribute Medicaid payments to individual providers as a matter 
of routine oversight.
    Through the policies proposed in this proposed rule, we are seeking 
to better understand the relationship between and among the following: 
Supplemental provider payments, costs incurred by providers, current 
UPL requirements, state financing of the non-federal share of 
supplemental payments, and the impact of supplemental payments on the 
Medicaid program (such as improvements in the quality of, or access to, 
care). It often appears to us that most of these payment methodologies 
do not result in an equitable distribution of payments to improve 
adequacy of rates across providers within the service class or 
ownership group, or otherwise improve the Medicaid program in some 
measurable, value-added way. Instead, many supplemental payment 
strategies appear to target only those providers that can participate 
in financing the non-federal share funding required to support a 
state's claim for FFP. In certain circumstances, this practice may be 
inconsistent with section 1902(a)(2) of the Act, which requires states 
to assure that a lack of funds from local sources will not result in 
lowering the amount, duration, scope, or quality of services or level 
of administration under the plan, since the payments are only available 
to providers with the means to provide the non-federal share.
    For instance, states might use the entire UPL gap (the difference 
between the amounts paid in base payments and the aggregate UPL) for 
each service type and provider ownership group to make a supplemental 
payment to only a small subset of providers in the group. In an example 
of this type of supplemental payment structure, one state implemented 
an inpatient hospital supplemental payment methodology to make payments 
up to the UPL for non-state government operated hospitals. The 
supplemental payment was funded by intergovernmental transfers (IGTs) 
from a local (city) government. Although the total amount of the 
supplemental payment was based on the available UPL room for 26 non-
state government operated hospitals, under the terms of the 
methodology, only three hospitals qualified to receive the supplemental 
payment. This resulted in total payments to those three hospitals that 
far exceeded their reported total cost incurred for all Medicaid 
services, which is inconsistent with section 1902(a)(30)(A) of the Act.
    Supplemental payments now comprise a large and growing percentage 
of total Medicaid payments. They are commonly paid both to 
institutional providers (for example, inpatient hospitals, nursing 
facilities, and ICF/IIDs) and for outpatient services (for example, 
outpatient hospitals, clinics, and physician services). Currently, 48 
states reported using at least one type of supplemental payment 
methodology under the Medicaid state plan. As a percentage of total 
Medicaid payments for institutional providers, data from the Medicaid 
Budget and Expenditure System (MBES) indicate that supplemental 
payments have steadily increased from 9.4 percent in FY 2010, the first 
year in which states separately reported these payments, to 17.5 
percent of all FFS payments to hospitals, nursing facilities, ICF/IIDs, 
and physician service payments in FY 2017. Supplemental payments to 
providers under demonstration authority, which can allow additional 
flexibility to cover beneficiaries and services not usually permitted 
under state plan authority, have also grown. In December 2018, MACPAC 
released the ``Medicaid Inpatient Hospital Services Fee-for Service 
Payment Policy'' issue brief where it noted that expenditures for 
hospital UPL supplemental payments increased from 2 to 3 percent of 
total expenditures for Medicaid benefits between 2001 and 2016.\1\ In 
the MACPAC analysis, the totality of supplemental payments, DSH 
payments, and uncompensated care payments made under demonstration 
authority, as a share of the total computable Medicaid payments to 
hospitals in FY 2016, was 27 percent. In all, the MACPAC analysis 
concluded that the total expenditures in 2016 for DSH payments were 
$16.5 billion, for UPL supplemental payments were $16.4 billion, and 
for uncompensated care payments were $8.5 billion.
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    \1\ https://www.macpac.gov/wp-content/uploads/2016/03/Medicaid-Inpatient-Hospital-Services-Fee-for-Service-Payment-Policy.pdf.
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b. Current CMS Review of Provider Payments and Oversight Concerns
    The Medicaid statute and regulations require states to report 
program-related information to CMS regarding their payment 
methodologies and incurred expenditures that are claimed for federal 
matching funds. Section 1902(a)(6) of the Act requires the Medicaid 
agency to make reports as the Secretary of Health and Human Services 
(the Secretary) may require and to comply with provisions the Secretary 
finds necessary to assure the correctness and verification of such 
reports. Implementing regulations at 42 CFR 431.107(b) require states 
to ensure that providers maintain auditable

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documentation of the services furnished to beneficiaries for which the 
state makes program expenditures and claims FFP, to allow the federal 
government to ensure that all applicable federal requirements are met. 
Additionally, 42 CFR 430.30(c) requires states to submit the Form CMS-
64, which is a quarterly accounting statement of the state's actual 
recorded expenditures that serves as the primary basis for Medicaid 
payments to states under section 1903(a)(1) of the Act.
    The primary means to collect information on Medicaid program 
eligibility, services, and expenditures has historically been through 
CMS' Medicaid Statistical Information System (MSIS), which is populated 
by FFS claims and managed care encounter data from states' Medicaid 
Management Information Systems (MMIS), which are an integrated group of 
procedures and computer processing operations (sub-systems) developed 
at the general design level to meet principal objectives, and CMS' 
MBES, which is the system through which states file quarterly Medicaid 
expenditures on the Form CMS-64. These systems have been essential to 
both the states and the federal government in operating Medicaid and 
provide valuable program information. However, neither the modern 
Transformed Medicaid Statistical Information System (T-MSIS), which has 
replaced MSIS, discussed further below, nor MBES, separately or 
together, provides the level of detail on the payment and financing of 
supplemental payments necessary to effectively monitor and evaluate the 
use and impact of those payments.
    MSIS is an eligibility and claims data set that provides a summary 
of services and payments linked to specific beneficiaries on the basis 
of claims submitted to the states by providers. However, the MSIS data 
include very little information about the providers furnishing 
services. In addition, MSIS is unable to capture the providers' 
supplemental payments since those payments are not directly tied to 
specific beneficiaries, but rather, typically, are made based on the 
volume of Medicaid services rendered and generally are paid to 
providers as lump sums, separately from payments for service claims. 
Another often cited problem with MSIS data is that, in spite of 
regulations requiring timely reporting, there is generally a 
considerable time lag between when the services are paid for by the 
state and when data on those payments is furnished to CMS through MSIS.
    To improve the completeness and timeliness of such data for the 
purposes of program monitoring and oversight, we currently are working 
with states to collect more robust data through an expansion and update 
of MSIS, which is referred to as the T-MSIS. T-MSIS data improves our 
ability to study utilization patterns and trends, identify high cost 
and high needs populations, analyze expenditures by category of service 
and provider type, monitor enrollment and expenditures within delivery 
systems, assess the impact of different types of delivery system models 
on beneficiary outcomes, and examine access to care issues. However, 
although we are currently working to improve T-MSIS' reporting 
capability for supplemental payments, T-MSIS will not capture 
supplemental payments at the level of detail proposed under this 
proposed rule. It should be noted that T-MSIS is capable of capturing 
the non-federal share of base rate payments. Currently, there are 
significant gaps in state reporting related to this particular data 
element, which we also are working with states to correct.
    MBES data include all state expenditures filed on the Form CMS-64. 
The Form CMS-64 is a summary of a state's actual Medicaid expenditures, 
for both state program administration and medical assistance (that is, 
payments for services furnished to beneficiaries), derived from source 
documents including invoices, payment vouchers, governmental funds 
transfers, expenditure certifications, cost reports and settlements, 
and eligibility records. This form shows the disposition of Medicaid 
grant funds for the quarter being reported and any prior period 
adjustments. It also accounts for any overpayments, underpayments, 
refunds received by the state Medicaid agency, and income earned on 
grant funds. With limited exceptions, MBES does not contain 
beneficiary, provider, or claim-level information for the reported 
expenditures, including supplemental payments. We can only obtain such 
information by requesting separate supporting documentation from the 
state. Attempting to improve oversight and transparency of supplemental 
payments, we added expenditure reporting lines in MBES in 2010 for 
states to separately report the amounts of supplemental payments made 
for various types of services. This information is reported at the 
aggregate service level and does not include details on which providers 
receive those payments, the specific amount received by each, or the 
source of the non-federal share that supports those expenditures. While 
this reporting requirement slightly improved transparency, there were 
large variations in the total payment amounts reported through MBES and 
the total payment amounts through UPL demonstrations and we are 
concerned that state reporting has not always been complete and 
accurate and should be improved.
    We also gather information on the nature and extent of proposed 
supplemental payments during our review of SPAs. As part of the 
documentation submitted with payment-related SPAs, states must describe 
which providers would be eligible for the payments and how the payments 
would be calculated and distributed, provide an estimate of the fiscal 
impact, and disclose the source of the non-federal share of the 
proposed expenditures. The opportunity to evaluate the permissibility 
and potential impact of supplemental payments is presented when a state 
submits a proposal. Current regulations do not contemplate that, once 
we have approved a SPA, as described in part 430, subpart B, we would 
routinely monitor the implementation and effects of the SPA in a 
formal, systematic way. The opportunity to review state payments after 
the agency has approved a SPA generally is limited to the submission of 
SPAs to update or change the supplemental payment methodology. Our 
other mechanisms for review are financial management reviews and audits 
of state programs which may cover any area of the Medicaid program and 
require advanced planning and are resource intensive for CMS and 
states. We also have relied upon reviews conducted by other government 
oversight bodies. These reviews are often resource intensive and 
require a large amount of data sharing, consultation, discussions, and 
policy reviews. As such, many years may pass before we are able to 
finalize the reviews and revisit supplemental payment methodologies, 
either through financial management review or the submission of a SPA. 
Because of this, we are unable to periodically evaluate these payment 
arrangements, including individual underlying provider payment amounts, 
to determine if the payments have been consistent with economy, 
efficiency, quality, access, and appropriate utilization, as required 
by statute. We do not generally collect further information associated 
with a SPA in a centralized manner, and such information generally is 
not presented at the provider level.
    In its March 2014 Report to the Congress on Medicaid and CHIP, 
MACPAC noted that supplemental payments to hospitals, according to 
their analysis of supplemental payments

[[Page 63726]]

in 5 states, accounted for more than 20 percent of total computable 
Medicaid FFS payments to hospitals in those 5 states, and in some 
states account for more than 50 percent of such payments.\2\ MACPAC has 
recommended that the Secretary collect provider-level data on 
supplemental payments to, among other things, provide greater 
transparency regarding Medicaid payments and facilitate assessments of 
Medicaid payments and analysis of the relationship between supplemental 
payments and access to care, as well as the economy and efficiency of 
Medicaid payments. In developing this proposed rule, we also considered 
the findings reported by MACPAC in the March 2012 Report to the 
Congress on Medicaid and CHIP, which identified data limitations 
regarding lump-sum Medicaid supplemental payments as an impediment to 
comparing payment levels across providers and states, determining the 
total amount of Medicaid spending on specific services and populations, 
and evaluating the impact of Medicaid payment policies.\3\
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    \2\ Medicaid and CHIP Payment and Access Commission, Report to 
the Congress on Medicaid and CHIP, March 14, 2014, 184 (2014), 
https://www.macpac.gov/wp-content/uploads/2015/01/2014-03-14_Macpac_Report.pdf.
    \3\ Medicaid and CHIP Payment and Access Commission, Report to 
the Congress on Medicaid and CHIP, March 15, 2012, 167 (2012), 
https://www.macpac.gov/wp-content/uploads/2015/01/State_Approaches_for_Financing_Medicaid_and_Update_on_Federal_Financing_of_CHIP.pdf.
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    Without complete provider-level payment information, we do not have 
sufficient information to evaluate whether rate methodologies result in 
payments within a service type and provider ownership group that are 
economic and efficient as required under section 1902(a)(30)(A) of the 
Act. The GAO has issued a series of reports which note that the lack of 
reliable CMS data about Medicaid payments to providers and state 
financing of the non-federal share hinders our ability to adequately 
oversee the Medicaid program. To help ensure that each state meets the 
statutory and regulatory requirements regarding its oversight 
responsibilities, data reporting, and financial participation, the GAO 
has recommended that regulatory and legislative efforts be 
strengthened. Specific to Medicaid supplemental payments, the GAO has 
had longstanding concerns regarding the need for improved transparency 
and accountability. For example, in 2015, the GAO issued a report 
entitled, ``Medicaid: CMS Oversight of Provider Payments Is Hampered by 
Limited Data and Unclear Policy,'' that stated, ``[w]ithout good data 
on payments to individual providers, a policy and criteria for 
assessing whether the payments are economical and efficient, and a 
process for reviewing such payments, the federal government could be 
paying states hundreds of millions, or billions, more than what is 
appropriate.'' \4\ As a result, the GAO has recommended that to better 
ensure the fiscal integrity of the program, we should establish 
financial reporting at a provider-specific level and clarify 
permissible methods for calculating Medicaid supplemental payment 
amounts.
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    \4\ U.S. Gov't Accountability Office, GAO-15-322, Medicaid: CMS 
Oversight of Provider Payments Is Hampered by Limited Data and 
Unclear Policy, 46 (2015), https://www.gao.gov/assets/670/669561.pdf.
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    Since the availability of FFS supplemental payments under the 
aggregate UPL is driven by the volume of services provided through the 
FFS system, a shift to managed care or certain demonstration projects 
results in a lowered UPL estimate and a corresponding decrease in the 
level of FFS supplemental payments that a state can make. For example, 
there are instances when pool payments established through a 
demonstration authorized under section 1115(a) of the Act pay for 
uncompensated care costs for the provision of health care services to 
Medicaid beneficiaries, the underinsured, and the uninsured, or for 
state projects that promote delivery system reforms. States have also 
authorized pass-through payments or incentive arrangements to providers 
under managed care contracts that can operate similarly to existing FFS 
supplemental payments. We have authorized these payments within certain 
requirements described in 42 CFR part 438 and demonstration terms and 
conditions, as applicable, noting that the financing requirements in 42 
CFR parts 430 and 433 and addressed in this proposed rule are 
applicable to FFS, managed care, and demonstration authorities.
    Given the growing prevalence of supplemental payments and concerns 
raised by federal oversight agencies, we are concerned that our past 
practice of basing approval of SPAs regarding supplemental payments 
primarily on aggregate UPL compliance does not provide us with 
sufficient information to adequately ensure that supplemental payments 
are consistent with statutory requirements for economy and efficiency, 
quality of care, and access, or otherwise with sound program management 
principles. As a result, as discussed in greater detail in section II. 
of this proposed rule, the Provisions of the Proposed Rule section, we 
are proposing to gather additional information to better understand how 
states distribute supplemental payments to individual providers and 
whether there are benefits to the Medicaid program resulting from the 
supplemental payments.
2. Disproportionate Share Hospital (DSH) Payments
a. Background
    States have statutory authority to make DSH payments to qualifying 
hospitals. Section 1902(a)(13)(A)(iv) of the Act requires that states 
take into account the situation of hospitals that serve a 
disproportionate share of low-income patients with special needs, in a 
manner consistent with section 1923 of the Act. These are not 
considered part of the base rate payments or supplemental payments, as 
they are made under distinct statutory authority. Section 1923 of the 
Act contains specific requirements related to DSH payments, including 
aggregate annual state-specific DSH allotments that limit FFP for 
statewide total DSH payments under section 1923(f) of the Act, and 
hospital-specific limits on DSH payments under section 1923(g) of the 
Act. Under the hospital-specific limits, a hospital's DSH payments may 
not exceed the costs incurred by that hospital in furnishing inpatient 
and outpatient hospital services during the year to Medicaid 
beneficiaries and the uninsured, less payments received from or on 
behalf of the Medicaid beneficiaries or uninsured patients. In 
addition, section 1923(a)(2)(D) of the Act requires states to provide 
an annual report to the Secretary describing the DSH payment 
adjustments made to each DSH.
    Section 1001(d) of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA) (Pub. L. 108-173, enacted December 8, 
2003) added section 1923(j) of the Act to require states to report 
additional information about their DSH programs. Section 1923(j)(1) of 
the Act requires states to submit an annual report including an 
identification of each DSH that received a DSH payment adjustment 
during the preceding fiscal year (FY) and the amount of such 
adjustment, and such other information as the Secretary determines 
necessary to ensure the appropriateness of the DSH payment adjustments 
for such fiscal year. Additionally, section 1923(j)(2) of the Act 
requires states to submit an independent certified audit of the state's 
DSH program, including specified content, annually to the Secretary.

[[Page 63727]]

b. Concerns Raised Regarding Overpayments Identified Through Annual DSH 
Audits
    The ``Medicaid Program; Disproportionate Share Hospital Payments'' 
final rule published in the December 19, 2008 Federal Register (73 FR 
77904) (and herein referred to as the 2008 DSH audit final rule) 
requires state reports and audits to ensure the appropriate use of 
Medicaid DSH payments and compliance with the hospital-specific DSH 
limits under section 1923(g) of the Act.
    The regulations at 42 CFR part 455, subpart D, implement section 
1923(j)(2) of the Act. FFP is not available for DSH payments that are 
found in the independent certified audit to exceed the hospital-
specific limit. Amounts in excess of the hospital-specific limit are 
regarded as overpayments to providers, under 42 CFR part 433, subpart 
F. The discovery of overpayments necessitates the return of the federal 
share or redistribution by the state of the overpaid amounts to other 
qualifying hospitals, in accordance with the state's approved Medicaid 
state plan. The regulations in part 433, subpart F provide for 
refunding of the federal share of Medicaid overpayments paid to 
providers. While the preamble to the 2008 DSH audit final rule 
generally addressed the return or redistribution of provider 
overpayments identified through DSH audits, it did not include specific 
procedural requirements for returning or redistributing overpayments. 
As described below, we are proposing to incorporate into regulation 
procedural requirements associated with the return and redistribution 
of DSH overpayments.
    While the information included in the independent certified audits 
and associated reports provides CMS and states with robust data, we are 
often unable to determine whether a DSH overpayment to a provider has 
occurred, the root causes of any overpayments, and the amount of the 
overpayments associated with each cause. Despite the robust data, 
potential data gaps may exist as a result of an auditor identifying an 
area, or areas, in which documentation is missing or unavailable for 
certain costs or payments that are required to be included in the 
calculation of the total eligible uncompensated care costs. Therefore, 
in current practice, an auditor may include a finding (or ``caveat'') 
in the audit stating that the missing information may impact the 
calculation of total eligible uncompensated care costs, instead of 
making a determination of the actual financial impact of the identified 
issue. This lack of transparency results in uncertainty and restricts 
CMS' and states' ability to ensure proper recovery of all FFP 
associated with DSH overpayments identified through annual DSH audits. 
For example, an audit may identify that a hospital was unable to 
satisfactorily document the outpatient services it provided to 
Medicaid-eligible patients, indicating that charges and payments were 
not included in the DSH uncompensated care calculation. Based on this 
lack of documentation, the audit includes a caveat of its finding 
indicating that the hospital's uncompensated care cost may be misstated 
as a result of this exclusion and that the impact is unknown. Given 
this lack of quantification of the financial impact of this finding, we 
are unable to determine whether an overpayment, if any, has resulted 
from this audit finding. To obtain such information, either CMS and/or 
the state would have to conduct a secondary review or audit, which 
would be burdensome and largely redundant. Specifically, conducting a 
secondary review or audit after the independent auditors have completed 
theirs would lengthen the review process, and therefore, delay the 
results of the audit. It would also require additional time, personnel, 
and resources by CMS, states, and hospitals to participate in a 
secondary review or audit.
    The OIG and GAO have raised concerns similar to ours with respect 
to our ability to adequately oversee the Medicaid DSH program. 
Specifically, the OIG published the report, ``Audit of Selected States' 
Medicaid Disproportionate Share Hospital Programs'' in March 2006,\5\ 
in which the OIG recommended that we establish regulations requiring 
states to implement procedures to ensure that future DSH payments are 
adjusted to actual incurred costs, incorporate these adjustment 
procedures into their approved state plans, and include only allowable 
costs as uncompensated care costs in their DSH calculations. The 2008 
DSH audit final rule addressed the concerns raised by the OIG in 
regulations implementing the independent certified audit requirements 
under section 1923(j) of the Act, by requiring states to include data 
elements as specified in Sec.  447.299(c) with their annual audits. In 
2012, the GAO published the report, ``Medicaid: More Transparency of 
and Accountability for Supplemental Payments are Needed,'' \6\ in which 
the GAO examined how information on DSH audits facilitates our 
oversight of DSH payments. In the report, GAO analyzed the 2010 DSH 
audits submitted by states. Of the 2,953 audits submitted to CMS, 228 
had data reliability or documentation issues that inhibited the 
auditor's ability to determine compliance with DSH audit requirements. 
While the independent certified audit requirements have allowed us to 
identify various compliance issues and quantify some provider 
overpayments, in some instances, audits have identified issues related 
to incomplete or missing data and have failed to make a determination 
regarding the financial impact of these issues. Therefore, we have 
identified this area as an opportunity to strengthen program oversight 
and integrity protections, specifically with respect to the overpayment 
and redistribution reporting process and requirements for identifying 
the financial impact of audit findings. In proposing an additional data 
element, as discussed below, we hope to further enhance our oversight 
to better ensure the integrity of hospital-specific limit calculations.
---------------------------------------------------------------------------

    \5\ Audit of Selected States' Medicaid Disproportionate Share 
Hospital Programs,'' March 2006 (A-06-03-00031), https://www.oig.hhs.gov/oas/reports/region6/60300031.pdf.
    \6\ https://www.gao.gov/assets/660/650322.pdf.
---------------------------------------------------------------------------

    The new data element we are proposing to add to annual DSH 
reporting would require auditors to quantify the financial impact of 
any finding, including those resulting from incomplete or missing data, 
which may affect whether each hospital has received DSH payments for 
which it is eligible within its hospital-specific DSH limit. We believe 
that requiring the quantification of these findings would limit the 
burden on both states and CMS of performing follow-up reviews or audits 
and will help ensure appropriate recovery and redistribution, as 
applicable, of all DSH overpayments.
    To enhance federal oversight of the Medicaid DSH program and 
improve the accuracy of DSH audit overpayments identified and collected 
through annual DSH audits, we are also proposing to require states to 
report overpayments identified through annual DSH audits and related 
payment redistributions on the Form CMS-64 in a timely and transparent 
manner. Specifically, we propose to clarify the reporting requirement 
for overpayments identified through the annual DSH audits at Sec.  
447.299(f), by directing states to return payments in excess of 
hospital-specific cost limits to the federal government by reporting 
the excess amount on Form CMS-64, as a decreasing adjustment. We are 
proposing to require states to report these decreasing adjustments to

[[Page 63728]]

correspond with the fiscal year DSH allotment on the Form CMS-64. 
Additionally, we are proposing to establish reporting requirements on 
the redistribution of DSH overpayments, as determined under Sec.  
447.299(g) of this chapter in accordance with a redistribution 
methodology in the approved Medicaid state plan. We propose to require 
states to report the redistribution of DSH overpayments to correspond 
with the fiscal year DSH allotment and Medicaid state plan rate year, 
on the Form CMS-64. This proposal memorializes our redistribution 
policy in regulations and enhances proper oversight. We are proposing 
that overpayment amounts be redistributed within 2 years from the date 
of discovery, as proposed under Sec.  447.299(g).
c. Modernizing the Publication of Annual DSH Allotments
    Section 447.297 provides a process and timeline for CMS to publish 
preliminary and final annual DSH allotments and national expenditure 
targets in the Federal Register. The current requirements specify that 
we publish DSH allotments and national expenditure targets, in 
preliminary and final formats, by October 1st (preliminary target and 
allotments) and April 1st (final target and allotments) of each federal 
fiscal year. We have found the current regulatory Federal Register 
publication process to be time consuming and administratively 
burdensome and are concerned that the information is not available to 
states and other interested parties in a timely and easily accessible 
manner. In this proposed rule, we propose to make allotment and 
national expenditure targets available more timely by posting the 
information on Medicaid.gov and in MBES, or its successor website or 
system, instead of publishing this information in the Federal Register.
3. Medicaid Program Financing
a. Background
    Medicaid expenditures are jointly funded by the federal and state 
governments. Section 1903(a)(1) of the Act provides for payments to 
states of a percentage of medical assistance expenditures authorized 
under the approved state plan. FFP is available when there is a covered 
Medicaid service provided to a Medicaid beneficiary, which results in a 
federally matchable expenditure that is funded in part through non-
federal funds from the state or a non-state governmental entity (except 
when the statute provides a 100 percent federal match rate for 
specified expenditures). The percentage of federal funding is the 
federal medical assistance percentage (FMAP) that is determined for 
each state using a formula set forth in section 1905(b) of the Act, or 
other applicable federal matching rates specified by the statute.
    The foundation of federal-state shared responsibility for the 
Medicaid program is that the state must participate in the financial 
burdens and risks of the program, which provides the state with an 
interest in operating and monitoring its Medicaid program in a manner 
that results in receiving the best value for the funds expended. 
Sections 1902(a), 1903(a), and 1905(b) of the Act require states to 
share in the cost of medical assistance and in the cost of 
administering the state plan. Section 1902(a)(2) of the Act and its 
implementing regulation in part 433, subpart B require states to share 
in the cost of medical assistance expenditures and permit other units 
of state or local government to contribute to the financing of the non-
federal share of medical assistance expenditures. These provisions are 
intended to safeguard the federal-state partnership, irrespective of 
the Medicaid delivery system or authority (for example, FFS, managed 
care, and demonstration authorities), by ensuring that states are 
meaningfully engaged in identifying, assessing, mitigating, and sharing 
in the risks and responsibilities inherent in a program as complex and 
economically significant as Medicaid and are accordingly motivated to 
administer their programs economically and efficiently.
    Of the permissible means for financing the non-federal share of 
Medicaid expenditures, the most common is through state general funds, 
typically derived from tax revenue appropriated directly to the 
Medicaid agency. Revenue derived from health care-related taxes can be 
used to finance the non-federal share only when consistent with federal 
statutory requirements at section 1903(w) of the Act and implementing 
regulations at part 433, subpart B. The non-federal share may also be 
funded in part from provider-related donations to the state, but these 
donations must be ``bona fide'' in accordance with section 1903(w) of 
the Act and implementing regulations, which means truly voluntary and 
not part of a hold harmless arrangement that effectively repays the 
donation to the provider (or to providers furnishing the same class of 
items and services).
    Non-federal share financing sources can also come from IGTs or 
certified public expenditures (CPEs) from local units of government or 
other units of state government in which non-state governmental 
entities contribute funding of the non-federal share for Medicaid 
either by transferring their own funds to and for the unrestricted use 
of the Medicaid agency or by certifying to the state Medicaid agency 
the amount of allowed expenditures incurred. In each instance, 
allowable IGTs and CPEs, as with funds appropriated to the state 
Medicaid Agency, must be derived from state or local tax revenue or 
from funds appropriated to state university teaching hospitals. IGTs 
may not be derived from impermissible health care-related taxes or 
provider-related donations (discussed below); they are subject to all 
applicable federal statutory and regulatory restrictions. Even when 
using funds contributed by local governmental entities, the state must 
meet the requirements at section 1902(a)(2) of the Act and Sec.  433.53 
that obligate the state to fund at least 40 percent of the non-federal 
share of total Medicaid expenditures (both service related and 
administrative expenditures) with state funds. Additionally, these 
authorities require states to assure that a lack of funds from local 
sources will not result in lowering the amount, duration, scope, or 
quality of services or level of administration under the plan in any 
part of the state.
    The extent to which private providers may participate in the 
funding of any Medicaid payment (for example, managed care, FFS base, 
or supplemental payments) is essentially restricted to the state's 
authority to levy limited health care-related taxes and to rely on bona 
fide provider-related donation in accordance with statutory and 
regulatory requirements. Since the use of IGTs and CPEs are restricted 
to governmental entities, states and providers increasingly have turned 
to the use of health care-related taxes to enable the maintenance of, 
or increases to, Medicaid payments to providers. In addition, several 
states have explored the use of provider-related donation arrangements 
to further leverage private provider funding.
b. Current CMS Review of Medicaid Financing and Oversight Concerns
    We employ various oversight mechanisms to review state methods for 
funding the non-federal share of Medicaid payments including, but not 
limited to, reviews of proposed SPAs, quarterly financial reviews of 
state expenditures reported on the Form CMS-64, focused financial 
management reviews, and reviews of state health care-related tax and 
provider-related donation proposals and waiver requests. As discussed 
in detail above, states

[[Page 63729]]

must submit Medicaid SPAs to CMS for review and approval when adding or 
changing FFS provider payment methodologies. We review the SPAs to 
ensure the methodologies meet all federal requirements and the proposed 
payments and sources of the non-federal share may be approved and serve 
as the basis for FFP. In making approval decisions, we ask for certain 
information from states to document the source of the non-federal share 
during our SPA review process.
    In response to our inquiries, states will typically describe 
whether the non-federal share is sourced through funds appropriated by 
the state legislature directly to the single state Medicaid agency, or 
whether the state relies on state or local government units to 
participate in funding the non-federal share through IGTs or CPEs. 
Additionally, states are asked to disclose whether the underlying 
financing involves a health care-related tax or a provider-related 
donation. When states rely on IGTs and CPEs as the source of the non-
federal share, we request details on the transferring or certifying 
entities that participate in funding expenditures, including assurances 
that the entities are units of government, and the source of a unit of 
government's IGT. Based on the information that we receive from states, 
we may also ask for additional documentation to ensure the source of 
non-federal share complies with all applicable federal laws, 
regulations, and requirements, particularly those describing 
permissible health care-related taxes and provider-related donations.
    Though our current SPA review processes allow us to ensure states 
identify a permissible source of non-federal share at the time that we 
approve an amendment, we have no reliable mechanism to track and 
understand whether the source of the non-federal share changes after a 
SPA has been approved. Based on studies conducted by the GAO (see for 
example, States' Increased Reliance on Funds from Health Care Providers 
and Local Governments Warrants Improved CMS Data Collection, GAO-14-
627, July 29, 2014), we are aware that states are increasingly reliant 
on non-state units of government to fund the non-federal share through 
IGTs, CPEs, and health care-related taxes. In fact, the GAO cites 
Medicaid supplemental payments and the associated non-federal share as 
a Medicaid High Risk Issue (GAO Report to Congressional Committees 
High-Risk Series Substantial Efforts Needed to Achieve Greater Progress 
on High-Risk Areas, GAO-19-157SP, March 6, 2019) and has called for CMS 
to implement improved oversight and data collection processes to track 
sources of non-federal share.
    It is important to acknowledge that section 1903(w)(6)(A) of the 
Act specifically permits state and local units of government to share 
in financing the Medicaid program through IGTs and CPEs. Such local 
participation is inherent in the Medicaid program and recognizes the 
shared role that state and local government units can play in 
delivering Medicaid services. Nothing in this proposed rule would 
result in limiting state and local government units from contributing 
to the Medicaid program through allowable IGT and CPE funding sources. 
However, as discussed in the GAO's studies, the increasing reliance on 
Medicaid funding derived from units of state and local government may 
serve to undermine the state and federal financing partnership, as 
where states establish payment methodologies that favor certain 
providers solely on the basis of whether a unit of state or local 
government can provide the non-federal share to support Medicaid 
supplemental payments. Notably, section 1902(a)(2) of the Act requires 
states to assure that a lack of funds from local sources will not 
result in lowering the amount, duration, scope, or quality of services 
or level of administration under the plan. We have concerns that, in 
certain circumstances, increased reliance on units of states or local 
government to fund the non-federal share may result in conflicts with 
section 1902(a)(30)(A) of the Act.
    For example, we have identified and worked to address various 
Medicaid financing arrangements that appear designed to increase the 
federal share of Medicaid funding without a commensurate state or local 
contribution as required by sections 1902(a), 1903(a), and 1905(b) of 
the Act, which require states to share in the cost of medical 
assistance and in the cost of administering the state plan. We have 
identified manipulations of Medicaid UPL demonstration calculations 
that would serve to increase a state's ability to make supplemental 
payments above a reasonable Medicare estimate in states that have used, 
or proposed to use, an unallowable IGT to fund the state share of a 
Medicaid supplemental payment. We have also identified the manipulation 
of cost identification data providers rely on to certify Medicaid 
expenditures through a CPE process that, whether intentional or not, 
results in the federal government paying for costs that are unallowable 
under the Medicaid program.
    Some of the more complicated, and unallowable, Medicaid financing 
arrangements we have reviewed resulted from public-private partnership 
arrangements between private entities and units of government. These 
arrangements attempt to mask non-bona fide provider-related donations 
as an allowable IGT and result in increased supplemental payments to 
the donating private entity or entities. Discussed in detail in State 
Medical Director Letter (SMDL) 14-004 and elsewhere in this preamble, 
partnership arrangements between a private provider and a government 
entity have involved the private provider providing cash, a service, or 
other in-kind donation to the government entity that is seemingly 
unrelated to the Medicaid program. In exchange for the private 
provider's contribution, the government entity will make an IGT to the 
Medicaid agency, which is then used as the non-federal share of 
supplemental Medicaid payments which are then returned to the private 
entity to repay them for the non-bona fide provider-related donation 
consistent with the underlying hold harmless agreement. The IGT is 
derived from funds that the government entity previously would have 
spent on the medical services (or other obligation) that are now being 
provided or paid for by the private entity. These funds would not be 
available to use as state share of Medicaid expenditures, if not for 
the public-private partnership arrangement, since the funds are derived 
from the non-bona fide provider-related donation (and not derived from 
state or local tax revenue or from funds appropriated to the state 
university teaching hospitals).\7\
---------------------------------------------------------------------------

    \7\ Dep't of Health & Human Servs., CMS, State Medicaid Director 
Letter 14-004, Accountability #2: Financing and Donations, 3, 
(2014), https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/SMD-14-004.pdf.
---------------------------------------------------------------------------

    The provisions of this proposed rule seek to address these and 
similar financing concerns through a number of strategies. Proposed 
improvements to state reporting associated with supplemental payments 
and sources of the non-federal share would allow CMS to monitor changes 
in non-federal share funding after a SPA is approved and any associated 
increases in federal expenditures for supplemental payments, relative 
to state expenditures. Additional specificity in definitions relevant 
to Medicaid financing arrangements and in requirements for information 
states must provide to support various funding mechanisms and 
supplemental payments would strengthen oversight of program 
expenditures by us and the states. Finally, we propose to address 
certain egregious funding schemes that mask

[[Page 63730]]

non-bona fide donations as allowable IGTs by clarifying where an 
indirect hold harmless arrangement may exist and by expressly 
prohibiting supplemental payments that support these schemes. Together, 
proposed new policies and the proposed codification of existing 
policies related to Medicaid financing aim to provide CMS and states 
with better information and guidance to identify existing and emerging 
financing issues, provide more clarity on allowable financing 
arrangements, promote state accountability, and strengthen the fiscal 
integrity of the Medicaid program.
4. Health Care-Related Taxes and Provider-Related Donations
a. Background
    States first began to use health care-related taxes and provider-
related donations in the mid-1980s as a way to finance the non-federal 
share of Medicaid payments (Congressional Research Service, ``Medicaid 
Provider Taxes'', August 5, 2016, p.2). Providers would agree to make a 
donation or would support (or not oppose) a tax upon their activities 
or revenues, and these mechanisms would generate funds that could then 
be used to raise Medicaid payment rates to the providers. Frequently, 
these programs were designed to hold Medicaid providers ``harmless'' 
for the cost of their donation or tax payment. As a result, federal 
expenditures rapidly increased without any corresponding increase in 
state expenditures, since the funds used to increase provider payments 
came from the providers themselves and were matched with federal funds. 
In 1991, the Congress passed the Medicaid Voluntary Contribution and 
Provider-Specific Tax Amendments (Pub. L. 102-234, enacted December 12, 
1991) to curb the use of provider-related donations and health care-
related taxes to finance the non-federal share of Medicaid 
expenditures. Section 1903(w)(1)(A) of the Act specifies that, for 
purposes of determining the federal matching funds to be paid to a 
state, the total amount of the state's Medicaid expenditures must be 
reduced by the amount of revenue the state collects from impermissible 
health care-related taxes and non-bona fide provider-related donations.
    The statute requires that taxes be imposed on a permissible class 
of health care items or services; and be broad based, meaning that all 
non-federal, nonpublic providers and all items and services within a 
class of health care items or services would be taxed, as well as 
uniform, meaning that the tax rate would be the same for all health 
care items or services in a class, as well as providers of such items 
or services. The statute prohibits hold harmless arrangements in which 
collected taxes are returned directly or indirectly to taxpayers. The 
Secretary is required by section 1903(w)(3)(E) of the Act to waive 
either the broad based and/or uniformity requirements as long as the 
state establishes, to the Secretary's satisfaction, that the net impact 
of the tax and associated expenditures is generally redistributive in 
nature, and the amount of the tax is not directly correlated to 
Medicaid payments for items and services with respect to which the tax 
is imposed.
    Section 1903(w)(2)(A) of the Act defines a provider-related 
donation as any donation or other voluntary payment (in-cash or in-
kind) made directly or indirectly to a state or unit of a local 
government by a health care provider, an entity related to a health 
care provider, or an entity providing goods or services under the state 
plan for which payment is made under section 1903(a)(2), (3), (4), (6), 
or (7) of the Act (generally, administrative goods and services). 
Section 1903(w)(2)(B) of the Act defines a bona fide provider-related 
donation as a provider-related donations that has no direct or indirect 
relationship (as determined by the Secretary) to payments made under 
title XIX to that provider, to providers furnishing the same class of 
items and services as the donating provider, or to any related entity, 
as established to the satisfaction of the Secretary. The statute gives 
the Secretary the authority to specify, by regulation, types of 
provider-related donations that will be considered to be ``bona fide.'' 
Regulations at part 433, subpart B describe the requirements necessary, 
irrespective of the Medicaid delivery system authority (for example, 
FFS, managed care, or demonstration authorities), for a donation to be 
considered bona fide.
    In response to the Medicaid Voluntary Contribution and Provider-
Specific Tax Amendments of 1991, we published the ``Medicaid Program; 
Limitations on Provider-Related Donations and Health Care-Related 
Taxes; Limitations on Payments to Disproportionate Share Hospitals'' 
interim final rule with comment period in the November 24, 1992 Federal 
Register (57 FR 55118) (November 1992 interim final rule) and the 
subsequent final rule published in the August 13, 1993 Federal Register 
(58 FR 43156) (August 1993 final rule) establishing when states may 
receive funds from provider-related donations and health care-related 
taxes without a reduction in medical assistance expenditures for the 
purposes of calculating FFP. These rules established the statistical 
tests used to judge requests for waivers of the broad-based and 
uniformity requirements and defined bona fide provider-related 
donations.
    After the publication of the August 1993 final rule, we revisited 
the issue of health care-related taxes and provider-related donations 
in the ``Medicaid Program; Health-Care Related Taxes'' final rule (73 
FR 9685) which published in the February 22, 2008 Federal Register 
(February 2008 final rule). The February 2008 final rule, in part, 
implemented section 1903(w)(7)(A)(viii) of the Act by expanding the 
Medicaid managed care organization (MCO) class of health care items and 
services (73 FR 9698) to include all MCOs specified in section 6051 of 
the Deficit Reduction Act of 2005 (DRA) (Pub. L. 109-171, enacted 
February 8, 2006). Specifically, it amended the class of health care 
services and providers specified in Sec.  433.56(a)(8) from services of 
Medicaid MCOs to services of MCOs including health maintenance 
organizations (HMOs) and preferred provider organizations (PPOs). As a 
result of this change, states could no longer impose a tax solely on 
MCOs providing services to only Medicaid beneficiaries.
    The regulation also made explicit that certain practices would 
constitute a hold harmless arrangement, in response to certain state 
tax programs that we believed contained hold harmless provisions. Five 
states had imposed a tax on nursing homes and simultaneously created 
programs that awarded grants or tax credits to private pay residents of 
nursing facilities that enabled these residents to pay increased 
charges imposed by the facilities, which thereby recouped their own tax 
costs. We believed that these payments held the taxpayers (the nursing 
facilities) harmless for the cost of the tax, as the tax program 
compensated the facilities indirectly, through the intermediary of the 
nursing facility residents. However, in 2005, the DAB (Decision No. 
1981) ruled that such an arrangement did not constitute a hold harmless 
arrangement under the regulations then in place. To clarify agency 
interpretation that this practice does constitute a hold harmless 
arrangement, the February 2008 final rule clarified the direct 
guarantee test found at Sec.  433.68(f) by specifying that a direct 
guarantee to hold the taxpayer harmless for the cost of the tax through 
a direct or indirect payment will be found when, ``a payment is made 
available to a taxpayer or party related

[[Page 63731]]

to a taxpayer'' so that a reasonable expectation exists that the 
taxpayer will be held harmless for all or part of the cost of the tax 
as a result of the payment (73 FR 9694). As an example of a party 
related to the taxpayer, the preamble cited the example of, ``as a 
nursing home resident is related to a nursing home (73 FR 9694). As a 
result, whenever there existed a ``reasonable expectation'' (73 FR 
9695) that the taxpayer would be held harmless for the cost of the tax, 
a hold harmless situation would exist and the tax would be 
impermissible.
b. Concerns Relating to Health Care-Related Tax Waivers
    States and their units of local government have the ability to 
impose broad-based and uniform health care-related taxes without 
explicit CMS approval. However, if the tax implemented by the state or 
unit of local government is not broad-based and/or uniform, the state 
must apply to CMS for a waiver of the applicable tax requirements. As 
part of these requirements, the state must demonstrate to the 
satisfaction of the Secretary that the tax passes a statistical test 
specified in regulation to waive either the broad-based requirement, or 
the uniformity requirement, or both, as specified in Sec.  433.68(e)(1) 
or (2). These tests were designed to evaluate whether or not a proposed 
tax would be ``generally redistributive,'' as required by section 
1903(w)(3)(E)(ii)(I) of the Act. The preamble to the November 1992 
interim final rule indicated that, in interpreting the statutory phrase 
``generally redistributive,'' we ``attempted to balance our desire to 
give states some degree of flexibility in designing tax programs with 
our need to preclude use of revenues derived from taxes imposed 
primarily on Medicaid providers and activities'' (57 FR 55128). In the 
preamble of August 1993 final rule, we interpreted ``generally 
redistributive'' to mean ``the tendency of a state's tax and payment 
program to derive revenues from taxes imposed on non-Medicaid services 
in a class and to use these revenues as the state's share of Medicaid 
payments'' (57 FR 55128).
    At the time of these rules, we anticipated the two mathematical 
tests in Sec.  433.68(e)(1) and (2) would be sufficient to ensure that 
a proposed tax would be ``generally redistributive,'' as we interpret 
that statutory language. Specifically, the first test known as the 
``P1/P2 test'' in Sec.  433.68(e)(1) is required for taxes that are 
uniform, but not broad based. At the time of these rules, we 
anticipated the two mathematical tests in Sec.  433.68(e)(1) and (2) 
would be sufficient to ensure that a proposed tax would be ``generally 
redistributive,'' as we interpret that statutory language. 
Specifically, the first test known as the ``P1/P2 test'' in Sec.  
433.68(e)(1) is required for taxes that are uniform, but not broad 
based. As described in the November 1992 interim final rule (57 FR 
55128), the test requires the State to calculate the proportion of the 
tax applicable to Medicaid under a broad-based tax (designated as P1), 
and the proportion applicable to Medicaid under the tax as imposed by 
the State (called P2). By dividing P1 by P2, the test was intended to 
measure whether or not the uniform, but non-broad based tax was 
redistributive. Resulting values higher than one indicated the tax was 
more redistributive than a broad-based and uniform tax, while values 
less than one would indicate it was less redistributive and placed a 
disproportionate share of the tax burden on the Medicaid program (57 FR 
55128).
    The November 1992 interim final rule (57 FR 55128) also described 
the second test known as the ``B1/B2 test,'' applying in situations 
when the state requests a waiver of the uniformity requirement whether 
or not the tax is broad-based. In this test, the State would calculate 
the slope of two linear regressions: One for the tax program for which 
waiver is requested, and one for the tax if it were applied uniformly 
and as a broad-based tax where the slope (that is, the X coefficient) 
of the linear regression applicable to the hypothetical broad-based 
uniform tax (called B1) is divided by the slope of the linear 
regression applicable to the tax for which a waiver is sought (called 
B2) (57 FR 55128). Similar to the P1/P2 test for uniform taxes that are 
not broad based, the B1/B2 test was designed to show that values higher 
than one indicate the non-uniform tax was more redistributive than a 
broad-based and uniform tax, while values less than one would indicate 
that it was less redistributive and disproportionately burdened the 
Medicaid program (57 FR 55128).
    However, subsequent experience has proven that the two mathematical 
tests do not ensure, in all cases, that proposed taxes that pass the 
applicable test are generally redistributive. Certain states have 
identified a loophole where taxes can pass the statistical test(s) 
despite their imposition of undue burden on the Medicaid program. For 
example, several states have imposed taxes on managed care entities 
that, by design, clearly impose a greater and undue tax burden on the 
Medicaid program than other payers. States have structured the taxes by 
dividing the universe of entities subject to taxation into smaller 
taxpayer groups based on various attributes, such as annual member-
months by payer. In this example, states have imposed significantly 
higher rates on some taxpayer groups defined by a relatively higher 
number of Medicaid member-months than on commercial payer member-
months, with some Medicaid activity (member-months in this example) 
subject to taxation at a rate more than 25 times higher than the rate 
for otherwise similar commercial activity. Counterintuitively, these 
taxes are able to pass the statistical tests designed to ensure that 
the tax is generally redistributive, despite the states' own 
information indicating, in one state, that plan revenue from Medicaid 
paid 88 percent of the assessed tax even though only 45 percent of the 
member months subject to the tax were attributable to Medicaid 
beneficiaries. Under these tax conditions, the proposed rule would give 
CMS the authority to determine that the tax is not generally 
redistributive, despite the fact that it could pass the applicable 
statistical test under current regulations, because it places an undue 
burden on the Medicaid program (as indicated in the example by the 
disproportionate share of the tax attributable to Medicaid relative to 
Medicaid's share of total member months). The August 1993 final rule 
noted that, ``to the extent a tax is imposed more heavily on low 
Medicaid utilization than high Medicaid providers, the tax would be 
considered redistributive,'' in that case, there would be a ``tendency 
of a state's tax and payment program to derive revenues from taxes 
imposed on non-Medicaid services in a class and to use these revenues 
as the state's share of Medicaid payments'' (57 FR 55128). However, in 
the situations involving the type of statistical manipulation described 
above, the exact opposite is the case. In these instances, states are 
imposing taxes that place a greater tax burden on Medicaid-reimbursed 
health care items and services, and providers of such items and 
services, than on comparable entities not reimbursed by Medicaid. Such 
a tax is not generally redistributive in nature.
    In an effort to more effectively prohibit tax arrangements that are 
not generally redistributive, for us to approve a waiver of the broad 
based and/or uniformity requirements, this proposed rule would require 
that a tax must not impose undue burden on health care items or 
services paid for by Medicaid or on providers of such items and 
services that are reimbursed by

[[Page 63732]]

Medicaid. Generally, as discussed in greater detail below, we would 
provide that the tax may not be structured in a way that places a 
greater tax burden on taxpayer groups that have a greater level of 
Medicaid activity, as proposed to be defined below, than those that 
have less or no Medicaid activity.
    Some states have designed non-broad based and/or non-uniform tax 
structures that exclude, or lower tax rates on, taxpayers grouped 
together on the basis of their lack of or low levels of Medicaid 
activity compared to other taxpayers in the class. We believe that such 
tax structures inherently impose undue burden on the Medicaid program, 
and therefore, do not meet the statutory generally redistributive 
requirement. Similarly, we are concerned that some states might provide 
tax relief to taxpayers grouped together ostensibly on a basis other 
than Medicaid activity, but that the specific basis for the grouping is 
designed to obscure a true purpose to define the group based on lack of 
or relatively low Medicaid activity. For example, a state could attempt 
to exclude from taxation or place a lower tax rate on all hospitals 
within a certain geographic area that has certain demographic 
characteristics, such as all counties with populations between 40,000 
and 85,000 residents. Under the particular conditions in the state, it 
could result that this commonality serves as a substitute for the 
included hospitals having low or no Medicaid activity. In this example, 
the commonality could be viewed as a substitute for Medicaid activity 
if only two counties in the state met this criteria, and the hospitals 
in these two counties had relatively low Medicaid activity compared to 
hospitals in the other counties in the state, as might occur in the 
case of a county with relatively low Medicaid enrollment in the county 
and surrounding counties. Such a tax program likely would result in the 
Medicaid program funding a disproportionate share of tax revenues, as 
counties containing hospitals with low levels of Medicaid activity 
would be excluded by the structure of the tax. In that case, the burden 
of the tax would fall upon hospitals with higher Medicaid activity. 
Therefore, as discussed below, we are proposing to consider tax 
structures not to be generally redistributive when taxpayers are 
grouped together in a manner that isolates taxpayers with relatively 
higher or lower levels of Medicaid activity and when taxpayers with 
relatively higher Medicaid activity are taxed relatively more heavily. 
We propose to consider the totality of the circumstances when deciding 
whether the tax program involves taxpayer groupings that, by proxy, 
have the effect of sorting taxpayers by relatively higher or lower 
levels of Medicaid activity. The proposed rule would retain the two 
statistical tests currently at Sec.  433.68 when determining whether or 
not the proposed tax waiver would be generally redistributive as 
required by statute. However, in determining whether or not a tax 
program is generally redistributive, consideration would also be given 
to examine the totality of the circumstances in addition to the 
applicable statistical test.
    We aim to balance preserving state flexibility in designing tax 
programs with ensuring health care-related taxes meet statutory 
generally redistributive requirements. We do not intend to interfere 
with states' ability to exclude from taxation or impose lower tax rates 
on health care items and services or on providers based on genuine 
commonalities that meet legitimate policy objectives. However, it is 
incumbent upon us to prevent tax structures designed to impose an undue 
burden on the Medicaid program, including on participating providers 
and/or health care items and services for which Medicaid pays, in 
contravention of federal statutory requirements.
c. Concerns Relating to the Definition of a Health Care-Related Tax
    Section 1903(w)(3)(A)(i) of the Act defines a health care-related 
tax using multiple tests that must be applied to tax proposals. Section 
1903(w)(3)(A)(i) of the Act stipulates health care-related taxes are 
related to: (1) Health care items or services; (2) the provision of, or 
the authority to provide, health care items or services; or (3) payment 
for health care items or services. Section 1903(w)(3)(A)(ii) of the Act 
further stipulates that a tax is a health care-related tax when it is 
not limited to health care-related items or services, but provides for 
treatment of individuals or entities that provide or pay for health 
care-related items or services that is different than treatment of 
``other individuals or entities.'' Any tax must be fully evaluated 
against all components of the statutory definition to determine whether 
it qualifies as a health care-related tax.
    In determining whether a tax is related to health care items or 
services, section 1903(w)(3)(A) of the Act also specifies that if at 
least 85 percent of the tax burden falls on health care providers, it 
is considered to be related to health care items or services. However, 
this provision does not establish a safe harbor for any tax on health 
care providers that falls below the threshold. Section 433.55(c) 
specifies that if less than 85 percent of the tax burden falls on 
health care items or services, the tax may still be considered to be 
health care-related if differential treatment exists for entities 
providing or paying for health care items or services relative to other 
entities. If less than 85 percent of the tax burden falls on health 
care items or services, the treatment of those entities must still be 
analyzed to determine if the tax treats them equally.
    Outside oversight bodies have raised concerns that states have 
attempted to subvert federal regulations regarding health care-related 
taxes by masking them as part of larger non-health care-related taxes. 
States may do so by including impermissible health care-related taxes 
inside larger tax programs that include non-health care-related taxes 
in such a way so as to avoid being considered a health care-related tax 
in accordance with Sec.  433.55. The OIG identified one such attempt in 
a May 2014 report (A-03-13-00201),\8\ in which the OIG described a 
state that appeared to be taxing only income from Medicaid MCO services 
by incorporating only Medicaid MCOs into larger (often existing) state 
and local taxes otherwise unrelated to Medicaid, despite the DRA 
provisions which prohibited taxation of only Medicaid MCOs. 
Specifically, section 6051 of the DRA amended section 1903(w)(7)(A) of 
the Act to change the relevant permissible class of health care items 
and services from ``[M]edicaid managed care organizations'' to MCOs 
generally. In its report, the OIG recommended that CMS issue 
clarification to states regarding its interpretation of statute and 
regulations regarding health care-related taxes as soon as possible and 
warned that failure to do so could result in a proliferation of similar 
Medicaid MCO taxes if states believed that it was permissible to 
incorporate otherwise impermissible health care-related taxes into pre-
existing, non-health care-related tax programs as long as less than 85 
percent of the tax burden fell on health care providers. Absent 
clarifying guidance, we were also concerned that states could 
mistakenly believe that selectively incorporating a tax on health care 
items or services for which Medicaid is a significant payer, like home 
and community-based services (HCBS), into a broader state tax program 
would result in the HCBS tax not being defined as health-care related.
---------------------------------------------------------------------------

    \8\ https://oig.hhs.gov/oas/reports/region3/31300201.pdf.

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

[[Page 63733]]

    In July 2014, we issued State Health Official (SHO) letter #14-001 
(SHO #14-001) on health care-related taxes. This guidance clarified 
that even in cases where less than 85 percent of a tax falls on health 
care items or services, the tax can be considered health care-related. 
If a tax treats health care items or services differently, the tax is 
still considered a health care-related tax. Specifically, SHO #14-001 
stated that taxing a subset of health care services or providers at the 
same rate as a statewide sales tax, for example, does not result in 
equal treatment if the tax is applied specifically to a subset of 
health care services or providers (such as only Medicaid MCOs), since 
the providers or users of those health care services are being treated 
differently than others who are not within the specified universe. 
Despite this guidance, some states have continued to selectively 
incorporate health care items or services into larger tax programs that 
also levy taxes on goods and services unrelated to health care in an 
apparent attempt to circumvent the statutory restrictions on health 
care-related taxes. These impermissible tax arrangements have not been 
limited to states incorporating only Medicaid MCOs into broader state 
or local taxes, but have included other health care items or services, 
such as private non-medical institution services.
    Often, the health care items and services (or providers) subject to 
such taxes are subsets of health care items and services (or providers) 
highly utilized by Medicaid beneficiaries and/or do not meet the 
permissible class definition in Sec.  433.56. For example, a state may 
try to impose a tax on a service that is mostly (if not entirely) 
reimbursed by Medicaid, which does not fall under an existing 
permissible class at Sec.  433.56, such as HCBS. A state may include a 
service like this among other goods and services that are taxed under a 
larger tax program that is not explicitly related to health care, such 
as a tax program principally concerned with natural resources or 
telecommunications. The proposed rule clarifies that by targeting a 
specific type of health care-related item or service and incorporating 
it into a larger tax (the HCBS portion of this tax to continue with the 
above example) would be considered health care-related--even if 85 
percent of the revenue from the tax overall did not come from health 
care-related items or services or providers of such items or services.
    The preamble to the November 1992 interim final rule with comment 
period discussed the circumstances in which health care items and 
services included within a larger non-health care related-tax would 
cause the tax to be considered health care-related in situations where 
they did not constitute 85 percent of the tax revenue. To illustrate 
when such taxes would or would not be considered health care-related, 
the preamble gave the hypothetical example of a 5 percent tax on the 
gross revenues of hospitals and gas stations that generated $100 
million dollars in tax revenue. The preamble stated that if the 
hospitals paid $90 million of the tax, then the tax would be considered 
to be health care-related because this would exceed the 85 percent 
threshold. However, if the hospitals paid only $60 million dollars, 
then the tax would not be considered health care-related because the 
tax rate is the same for health care items or services and non-health 
care items or services and the hospitals would be taxed at under the 85 
percent threshold established in regulation.
    We are aware that this example may not have been as clear as 
possible and could have led to confusion as to what different treatment 
for health care items and services means in the context of Sec.  
433.55(c). Specifically, we are concerned some parties misinterpreted 
this example as indicating approval of states selecting specific health 
care-related items and services for inclusion within a broader tax 
program without the tax being considered health care-related as long as 
less than 85 percent of the tax burden falls on such items and 
services. We believe this potential misinterpretation is inconsistent 
with section 1903(w)(3)(A)(ii) of the Act, Sec.  433.55(c), and the 
preamble to the August 1993 final rule, which stated in response to a 
commenter, ``We believe section 1903(w)(3)(A)(ii) [of the Act] prevents 
the state from implementing a tax that may be masked by an existing 
non-health care-related tax'' (58 FR 43160). In the aforementioned 
preamble example, a tax in which hospitals paid $60 million and gas 
stations paid $40 million under a flat 5 percent gross revenues tax was 
not necessarily considered health care-related because the burden on 
providers of health care items and services is less than 85 percent. 
While Sec.  433.55(c) states that in situations where less than 85 
percent of the tax burden falls on health care items or services the 
tax may still be considered health care-related if differential 
treatment exists for entities providing or paying for health care items 
or services. However, Sec.  433.55(c) does not specify the reference 
group against which one should measure differential treatment.
    While statute and regulation specify that differential treatment 
results in a tax being considered health care-related, existing law and 
regulations do not explicitly describe what constitutes differential 
treatment. Therefore, we are proposing to clarify what constitutes 
differential treatment to clarify when taxes are health care-related 
and when they are not. We believe this clarification would assist in 
prohibiting state or local units of government from incorporating an 
impermissible tax on health care items or services into a larger 
existing tax, such as a state-wide sales tax, or creating a new tax 
that treats health care items or services differently to avoid federal 
statutory and regulatory requirements related to health care-related 
taxes. Therefore, we are proposing to clarify that differential 
treatment occurs when a tax program treats some individuals or entities 
that are providing or paying for health care items or services 
differently than (1) individuals or entities that are providers or 
payers of any health care items or services that are not subject to the 
tax or (2) other individuals or entities that are subject to the tax.
    Due to the complexity of this issue, we are providing a few 
illustrative examples of when a tax program does or does not constitute 
differential treatment. First, we are providing examples relating to 
evaluating differential treatment of individuals or entities that are 
providing or paying for health care items or services that are subject 
to the tax compared to individuals or entities that are providers or 
payers of any health care items or services that are not subject to the 
tax. For example, if the state imposes a tax on telecommunication 
services, but also includes inpatient hospital services, this would 
constitute differential treatment. Given that inpatient hospital 
services are not reasonably related to the other services subject to 
taxation (that is, telecommunication services), as discussed below, we 
would consider the tax to be treating inpatient hospital services 
differently than other individuals or entities providing or paying for 
health care items or services, which are not included in the tax. While 
some might consider this example as being similar to the example 
involving a tax on gas stations and hospitals in the November 1992 
interim final rule, we are taking this opportunity to clarify our 
interpretation of section 1903(w)(3)(A)(ii) of the Act. We have never 
ruled out the extistence of differential treatment in all instances 
where health care items or services are included in a larger non-health 
care-related tax program, even where less than 85 percent of the tax 
burden falls on health care providers and all entities

[[Page 63734]]

and services are subject to the same tax rate. As we emphasized in the 
2014 SHO letter, taxes where less than 85 percent of the tax burden 
falls on health care items or services may still be considerd health 
care-related if only a subset of health care items or services are 
taxed, even if they are taxed at the same rate as items or services not 
related to health care that are also included in the tax. Prior to the 
issuance of the 2014 SHO letter, several states attempted to mask taxes 
on such subsets, including Medicaid-only MCOs, by including them within 
larger, non-exclusively health care-related tax programs. Notably, the 
taxes on Medicaid-only MCOs would not have been approvable on their 
own, if implemented by the state separately from the taxation of items 
and services unrelated to health care. States included taxes on 
Medicaid-only MCOs within larger, non-exclusively health care-related 
tax programs, such as sales taxes and gross receipts taxes, in an 
attempt to bypass federal statutory and regulatory prohibitions by 
effectively masking the health care-related component of the tax. We 
have worked with the OIG to ensure that these and similar practices 
that ran counter to the letter and spirit of federal statute and 
regulation were stopped. We view this proposed rule as a continuation 
of our efforts to ensure that health care-related taxes follow all 
applicable requirements.
    In instances where a state or other unit of government imposes a 
tax on reasonably related items or services that includes some non-
health care items or services and some health care items or services, 
we would not consider differential treatment to occur if all health 
care items or services that are reasonably related to the taxed 
universe are included in the tax and all health care items and services 
subject to the tax are taxed at the same rate as the non-health care 
items or services subject to the tax. We will consider items or 
services within the tax to be reasonably related if there exists a 
logical or thematic connection between the items or services or 
individuals or entities being taxed. Examples of such a connection 
could include, but would not be not limited to, industry, such as 
electronics; geographical area, such as city or county; net revenue 
volume; or number of employees. When determining whether or not 
individuals, entities, items, or services are reasonably related, we 
will examine the parameters of the given tax. In this context, the 
parameters of the tax means the grouping of individuals, entities, 
items or services, on which the tax is imposed. For example, if a state 
or unit of government imposed a one percent tax on all revenue from 
licensed professional services (for example, accounting services, legal 
services, etc.), including revenue from services provided by medical 
professionals, this would not constitute differential treatment, 
because all health care items or services reasonably related to the 
universe of items and services subject to the tax are themselves 
subject to the tax, and such services are taxed at the same rate as the 
included non-health care items or services. Provided that less than 85 
percent of the tax burden falls on health care providers, the tax in 
this example would not be considered a health care-related tax. 
However, if the state or unit of government imposing the tax structures 
the parameters of the tax in such a way to include items or services 
that are not reasonably related and only selected health care items or 
services are included in the tax while others are excluded, the tax 
would be considered health care-related, as in the above example of a 
tax on telecommunications services and inpatient hospital services.
    When determining whether or not differential treatment occurs, we 
evaluate the totality of the circumstances of the arrangement. For 
example, under some circumstances, it could be permissible for the 
state or unit of government to impose a tax on businesses employing 50 
to 500 full-time equivalent (FTE) employees; such that the tax likely 
would include a number of entities providing or paying for health care 
items and services, and a number of entities selling non-health care 
items and services, within its parameters. However, it could be that, 
within a certain geographical area of the state, most businesses 
employing 50 to 500 FTE employees are entities providing or paying for 
health care items and services. If the tax were geographically targeted 
to include this area but not other areas of the state or unit of 
government's jurisdiction with a more diverse mix of businesses 
employing 50 to 500 FTE employees, this targeting could be evidence 
that the state or unit of government is using the numeric FTE employee 
parameter as a proxy to concentrate the tax burden on certain entities 
providing or paying for health care items or services.
    While the examples given above illustrate hypothetical taxes we 
would consider to be health care-related where less than 85 percent of 
the tax falls on providers of health care items or services, they do 
not represent an exhaustive list of all possible forms of differential 
treatment, as we cannot foresee every possible arrangement. 
Differential treatment may still exist even in situations other than 
those described previously and identified in proposed Sec.  
433.55(c)(1) and (2). Therefore, we are also proposing to examine the 
parameters of the tax as defined by the state or other unit of 
government, as well as the totality of the circumstances relevant to 
which individuals, entities, items, or services are subject (and not 
subject) to the tax, and the tax rate applicable to each, in 
determining whether the tax program involves differential treatment as 
provided in section 1903(w)(3)(A)(ii) of the Act. The proposed rule 
aims to preserve appropriate state flexibility on tax and health care 
policy, while clarifying what constitutes differential treatment within 
the meaning of section 1903(w)(3)(A)(ii) of the Act and Sec.  433.55(c) 
and helping ensure that states do not design tax structures to 
circumvent statutory requirements.
d. Concerns About Hold Harmless and Health Care-Related Taxes
    We have become aware of impermissible arrangements that exist where 
a state or other unit of government imposes a health-care related tax, 
then uses the tax revenue to fund the non-federal share of Medicaid 
payments back to the taxpayers. The taxpayers enter into an agreement, 
which may or may not be written, to redistribute these Medicaid 
payments to ensure that taxpayers, when accounting for both the 
original Medicaid payment (from the state, unit of local government, or 
MCO) and any redistribution payment from another taxpayer or taxpayers, 
receive all or any portion of their tax amount back. The net effect of 
the arrangement is clear evidence that taxpayers have a reasonable 
expectation that their forthcoming Medicaid payment (including any 
redistribution), which results in participating taxpayers being held 
harmless for all or a portion of the tax amount. Regardless of whether 
the taxpayers participate voluntarily, whether the taxpayers receive 
the Medicaid payments from a MCO, or whether taxpayers themselves make 
redistribution payments from funds other than Medicaid to other 
taxpayers, the net effect of the arrangement is the same: The taxpayers 
have a reasonable expectation to be held harmless for all or a portion 
of their tax amount.
    Such arrangements undermine the fiscal integrity of the Medicaid 
program and are inconsistent with existing statutory and regulatory 
requirements prohibiting hold harmless arrangements. The February 2008 
final rule on health

[[Page 63735]]

care-related taxes and provider-related donations specified that hold 
harmless arrangements prohibited by Sec.  433.68(f)(3) exist ``. . . 
when a state payment is made available to a taxpayer or a party related 
to the taxpayer (for example, as a nursing home resident is related to 
a nursing home), in the reasonable expectation that the payment would 
result in the taxpayer being held harmless for any part of the tax'' 
(73 FR 9694). Despite the statutory and regulatory prohibitions, we are 
concerned that states, local units of government, and/or providers 
continue to design and execute hold harmless practices that are 
antithetical to federal law and regulation. To aid in preventing and 
ending such complex financing arrangements, the proposed rule would add 
clarifying language to the hold harmless definition in Sec.  
433.68(f)(3) to specify that CMS considers a ``net effect'' standard in 
determining whether or not a hold harmless arrangement exists.
    In the example cited above involving some taxpayers that received 
more in Medicaid reimbursement (from the state, unit of local 
government, or MCO) than the amount of tax paid which they then 
transfered to other taxpayers that did not, we would consider such an 
arrangement to include a hold harmless arrangement because the 
taxpayers had a reasonable expectation to be held harmless from all or 
a portion of the cost of their tax through either or both of the 
Medicaid payments from the state or other unit of government or from 
MCOs, and redistribution payments from other taxpayers participating in 
the arrangement whose payments from the state or other unit of 
government or from MCOs met or exceeded their own tax cost. The fact 
that a private entity makes the redistribution payment does not change 
the essential nature of the payment, which constitutes an indirect 
payment from the state or unit of government to the entity being taxed 
that holds it harmless for the cost of the tax. As noted in the 
February 2008 final rule, ``An indirect payment to the taxpayer would 
also constitute a direct guarantee'' (73 FR 9896). When looking for the 
presence or absence of a hold harmless arrangement in health care-
related taxes, conclusive evidence lies not in the presence or absence 
of individual elements, but the sum total of all the elements when 
viewed collectively. While the presence or absence of a single 
individual factor may not be sufficient to establish conclusively that 
such an arrangement exists, the cumulative effect of many such factors 
may be sufficient to make such a determination. Only after reviewing 
the totality of the circumstances and making a judgment about how the 
overall arrangement operates are we able to determine whether or not 
the state provides for a direct or indirect payment, offset, or waiver 
that holds the taxpayer harmless for any portion of the tax. This 
proposal does not reflect any change in policy or approach, but merely 
codifies currently prohibited practices, and would provide further 
clarification to states regarding how they may finance the non-federal 
share of Medicaid expenditures.
e. Concerns Regarding Permissible Tax Classes of Health Care Services 
and Providers
    Over the past several years, we have become aware that several 
states have instituted taxes on health insurers or health insurance 
premiums. In an effort to maintain consistent federal oversight of 
health care-related taxes, modernize the permissible class definitions, 
and permit states additional flexibility to implement health care-
related taxes, this rule proposes to add services of health insurers, 
other than MCOs listed in Sec.  433.56 (a)(8), as permissible classes 
of health care items or services under Sec.  433.56, under section 
1903(w)(7)(A)(ix) of the Act. In an effort to avoid being overly 
prescriptive, we have decided against proposing a narrow definition of 
the term ``health insurer.'' However, the definition of ``health 
insurance issuer'' at 45 CFR 144.103 provides a helpful point of 
reference. That regulation defines a health insurance issuer as an 
insurance company, insurance service, or insurance organization 
(including an HMO) that is required to be licensed to engage in the 
business of insurance in a state and that is subject to state law that 
regulates insurance (within the meaning of section 514(b)(2) of ERISA). 
However, the term health insurer in the proposed additional class at 
Sec.  433.56, explicitly excludes MCOs such as HMOs because these 
organizations are already included under section 1903(w)(7)(A)(viii) of 
the Act, unlike the term health insurance issuer at Sec.  144.103. The 
proposed class would include insurers that issue policies for the group 
market and/or the individual market, including such coverage with high-
deductible or ``catastrophic'' plans. The proposed class would also 
include issuers of short-term limited-duration policies as defined in 
Sec.  144.103, as well as issuers of coverage for ``excepted benefits'' 
defined in 45 CFR 146.145 in the group market and the individual market 
at 45 CFR 148.220, such as dental-only and vision-only policies. Such a 
health care-related tax could include, but need not be limited to, an 
assessment on health insurance premiums, covered lives, or revenue. The 
class may include cost sharing measures, including premiums, from 
Medicare, such as private FFS plans under Medicare Advantage offered as 
part of Medicare Part C or prescription drug insurance plans as part of 
Medicare Part D, as well as any premiums paid by individuals as part of 
a section 1115 waiver where Medicaid funding is used for premium 
assistance to help beneficiaries purchase commercial health insurance 
plans. Such a tax cannot include CMS or any state agencies involved in 
administering title XVIII, title XIX, or title XXI, including state 
Medicaid agencies. We are soliciting comments on the definition of this 
permissible class to ensure that the appropriate entities and services 
are included.
f. Concerns Regarding Non-Bona Fide Provider-Related Donations
    We are concerned that certain states, localities, and private 
health care providers have designed complex financing structures to 
mask non-bona fide, provider-related donations used to fund the non-
federal share of Medicaid payments. States, localities, and private 
providers appear to be utilizing these complex arrangements to 
obfuscate the source of non-federal share and avoid the statutorily-
required reduction to state medical assistance expenditures. They also 
appear to violate a variety of requirements in section 1903(w) of the 
Act and its implementing regulations, which mandate that the state's 
Medicaid expenditures for which FFP is provided shall be reduced by the 
sum of any revenues resulting from provider-related donations received 
by the state during the fiscal year other than bona fide provider-
related donations. Such practices may also run afoul of section 
1902(a)(30)(A) of the Act, which requires that payments be made 
consistent with efficiency, economy and quality of care. Additionally, 
they may result in payments that are inconsistent with the proper and 
efficient operation of the state plan (see section 1902(a)(4) of the 
Act) and its design for a cooperative state-federal partnership by 
generating increases in federal spending without a corresponding 
increase in state financial participation, with no direct link to 
additional services furnished, beneficiaries assisted, or other benefit 
to the Medicaid program.
    Often, these arrangements involve a transfer of value of some kind 
from a private provider to a governmental entity and the governmental 
entity does

[[Page 63736]]

not reimburse the private entity at fair market value. For example, the 
transfer may involve the private provider assuming an obligation 
previously performed by a governmental entity without being reimbursed 
fair market value, performing services previously performed by a 
governmental entity without being reimbursed at fair market value, or 
renting real property from a governmental entity at a price above fair 
market value. In such cases, the difference between the fair market 
value of the assumption of the obligation, performance of the services, 
or rental value of the property and the value actually transferred is 
in effect a donation by the private provider to the governmental 
entity. The governmental entity then executes an IGT, funded by the 
donation, to the state Medicaid agency, which is then used to fund the 
non-federal share of Medicaid expenditures. The Medicaid agency then 
makes a supplemental payment to the private donating provider, which 
effectively compensates it for the value it transferred to the 
governmental entity (the assumption of an obligation, performance of 
services, or excess rent paid). Often, this arrangement will not be 
executed as a contract or other formal business arrangement, or 
otherwise reduced to writing of which evidence is available to us. 
Instead, it will be based on a series of reciprocal actions performed 
by each party. As a result of such an arrangement, the private provider 
makes a direct or indirect donation, and the state returns all or a 
portion of the value of the donation to the private provider 
effectively using only federal dollars without a corresponding outlay 
in state expenditures, and such an arrangement constitutes a non-bona 
fide donation becase there is a pre-existing hold harmless agreement. 
The net effect of such an arrangement is to artificially inflate the 
state Medicaid expenditures eligible for FFP, sometimes up to 100 
percent, in a manner inconsistent with statute and regulation.
    Recently, we have identified and taken action to prevent or end 
impermissible financing practices in which states have attempted to 
mask non-bona fide provider-related donations. Some of these 
arrangements include instances where transfers of licenses occur 
without consideration of, or below, fair market value from a private 
provider to a unit of government to enable formerly private providers 
to receive certain supplemental payments available to governmental 
providers. In other situations, governmental entities have leased the 
same facilities back to private providers at rents above fair market 
value as a way of allowing the private facilities to make non-bona fide 
donations to the governmental entity, which then transfers the funds to 
the state Medicaid agency through IGTs. Ultimately, these schemes have 
the net effect of reducing the overall percentage of total computable 
Medicaid expenditures funded with state dollars, while at the same time 
causing a corresponding increase in federal funding.
    We have taken several steps to curtail public-private partnerships 
that lead to non-bona fide provider-related donations. In 2014, we 
issued SMDL #14-004, the second in a series of two SMDLs that discuss 
mutual obligations and accountability with respect to the Medicaid 
program for the federal government and states. SMDL #14-004 addressed 
the deleterious impact that public-private partnerships designed to 
skirt federal requirements concerning provider-related donations can 
have on fiscal integrity. In 2016, we issued a disallowance to recover 
FFP associated with impermissible provider-related donations where 
private providers assumed financial obligations of local governmental 
entities to free up government funds, and the freed up funds were then 
used as the state's share of supplemental payments to the donating 
provider. The CMS disallowance was upheld when the state appealed to 
the DAB (DAB No. 2886, Texas Health and Human Services Commission 
(2018)).
    This proposed rule would clarify the hold-harmless definition 
related to donations to account for the net effect of complex donation 
arrangements, including where the donation takes the form of the 
assumption of governmental responsibilities. In the provisions of Sec.  
433.54 addressing when a guarantee would exist to hold the provider 
harmless for value related to a donation to the governmental entity, 
this proposed rule would establish a net effect standard. Any exchange 
of value that constitutes a governmental entity reimbursing a private 
entity for value related to the private entity's donation need not 
arise to the level of a legally enforceable obligation, but must be 
considered in terms of its net effect, thus incorporating the language 
in DAB No. 2886, Texas Health and Human Services Commission (2018). In 
that case, the DAB held that ``the net effect of the arrangements under 
review amounted to impermissible provider donations'' and that as a 
result, the supplemental payments made by state Medicaid agency to the 
private provider were impermissible (p.25). The DAB also found that it 
is not necessary for a legally enforceable obligation to exist, such as 
under a statute or contract, for a donation to be found. In line with 
the Board's reasoning, we are proposing to establish a net effect 
standard to look at the overall arrangement in terms of the totality of 
the circumstances to judge if a non-bona fide donation of cash, 
services or other transfer of value to a unit of government has 
occurred. In Sec.  433.52, the proposed definition of ``provider-
related donation'' would clarify that the assumption by a private 
entity of an obligation formerly performed by a unit of government 
where the unit of government fails to compensate the private entity at 
fair market value would be considered an indirect donation made from 
the private entity to the unit of government. This proposed rule would 
also clarify that such an exchange need not arise to the level of a 
legally enforceable obligation.

C. Previous CMS Efforts To Understand and Monitor Medicaid Payments and 
Financing

    We have already taken action to strengthen our approach to 
authorizing, monitoring, and evaluating Medicaid payments and financing 
to ensure that statutory and regulatory requirements are satisfied. To 
monitor supplemental payments made under state plan authority, in 2010, 
we began requiring states to separately report through MBES amounts 
paid for the most common and largest supplemental payments in 
accordance with Sec.  430.30(c). States report statewide aggregate 
amounts for only some supplemental payments and do not include 
provider-level detail. In 2013, we issued SMDL #13-003, which discussed 
a submission process to comply with the UPL requirements in Sec. Sec.  
447.272 and 447.321. This SMDL discussed methods of complying with 
these two regulations through annual UPL submissions apart from the 
normal state plan process, as the regulations do not specify time 
frames for the submission of UPL demonstrations. The SMDL also provided 
further guidance regarding UPL calculation methodologies and requested 
that states identify the source of non-federal funding for the payments 
described in the UPL demonstration. This guidance improved our ability 
to analyze supplemental payments and validate that aggregate 
supplemental payments for each class of provider ownership group do not 
exceed what Medicare would have paid for the services or, in an 
alternative approach that may be selected by the states, do not exceed 
the cost of providing those services.

[[Page 63737]]

    We have also intensified our examination of SPAs proposing 
supplemental payments, and their associated funding arrangements, and 
have developed a greater understanding of how to ensure that payment 
and financing arrangements comply with statutory requirements. These 
reviews focus on ensuring more transparency for supplemental payments 
by requiring more comprehensive SPA language so that providers and 
other stakeholders can fully understand how providers will receive 
payment and any conditions on those payments. We are also asking more 
questions regarding states' assumptions about the value that proposed 
supplemental payments would bring to the Medicaid program, including in 
terms of improving access and quality of care outcomes, in our efforts 
to ensure that states' payment systems are consistent with section 
1902(a)(30)(A) of the Act.
    Although we made improvements to the parameters around aggregate 
payment levels as reflected in UPL demonstrations, there have been 
concerns from oversight entities, noted elsewhere in the preamble, 
regarding payments to individual providers, including concern that some 
governmental providers were being paid Medicaid payments far in excess 
of the costs incurred in providing the underlying services. In response 
to those concerns, we issued the ``Medicaid Program; Cost Limit for 
Providers Operated by Units of Government and Provisions to Ensure the 
Integrity of Federal-State Financial Partnership'' final rule with 
comment period in the May 29, 2007 Federal Register (72 FR 29748), 
which limited payments to any governmentally operated provider to the 
cost incurred for delivery of Medicaid services. The May 29, 2007 final 
rule with comment period was challenged by states and health care 
providers. After a series of Congressional moratoria against its 
implementation, Congress stated its sense that it should not be 
implemented. In 2010, the final rule was rescinded (75 FR 73972) and we 
have not moved forward with this or any similar approach.
    We have previously recognized the need in other instances to obtain 
provider-level payment reporting. Section 1923(j) of the Act and its 
implementing regulations delineate annual DSH audit and reporting 
requirements. To ensure that Medicaid DSH payments are in compliance 
with federal statutory requirements, we published the 2008 DSH audit 
rule, which requires that states report and account for certain 
provider-level information on the hospitals receiving these payments. 
The rule also requires states to have their DSH payment programs 
independently audited to verify that the payments comply with 
applicable hospital-specific DSH limits. Such information includes 
reporting of supplemental payments and ensuring that such payments are 
factored into the hospital-specific DSH limit. However, this data set 
is limited in that it only includes reporting for those hospitals that 
receive Medicaid DSH payments and are due to us more than 3 years after 
the completion of each state plan rate year. Therefore, in Sec.  
447.288 of this proposed rule, to help ensure timely and comprehensive 
reporting on the Medicaid financing for all payments to hospitals, we 
are proposing to require the annual amount of total Medicaid DSH 
payments made to any provider be reported in the annual provider-level 
payment data report for this regulation, along with all Medicaid 
supplemental payments.

II. Provisions of the Proposed Rule

A. Proposed Provisions

1. Disallowance of Claims for FFP (Sec.  430.42)
    Section 1116(d) and (e)(1) of the Act outline the disallowance 
reconsideration process and provide that a state may request 
administrative reconsideration of a disallowance if such a request is 
made within a 60-day period that begins on the date the state receives 
notice of the disallowance. However, the statute does not specify the 
format of the notice of disallowance or request for reconsiderations. 
We are proposing to amend Sec.  430.42 to alter the means of 
communication with regard to the disallowance reconsideration process 
from one based on registered or certified mail to one based on 
electronic mail or another electronic system as specified by the 
Secretary. When Sec.  430.42 as now in effect was finalized, certified 
mail was considered to be the optimal way to establish the dates on 
which a communication was sent and received, which is important to 
establish compliance with timeframes specified in regulation. However, 
email is a preferred form of communication today in the normal course 
of agency business and can be used to establish the time when a 
communication is sent and received, since email messages typically are 
transmitted near-instantaneously. Further, by eliminating mailing and 
paper costs, the use of email could slightly reduce the administrative 
burden associated with the disallowance process under Sec.  430.42. As 
a result, we are proposing to revise all of the references to 
registered or certified mail or to ``written requests'' to make clear 
that such requests need not be in a physical, as opposed to an 
electronic format in Sec.  430.42(b)(2)(i)(A) introductory text, 
(b)(2)(i)(B) and (C), (c)(3), (c)(4)(i), (c)(6), and (d)(1) to replace 
references to registered or certified mail with references to 
electronic mail (email) or another electronic system as specified by 
the Secretary. In addition, we propose to remove the word ``written'' 
from Sec.  430.42(b)(2)(i)(A) and (B) to avoid a possible 
misunderstanding that the request must be in the form of a physical 
writing, since we propose to adopt an electronic process. The date that 
the communication is successfully sent or received by electronic mail 
(email) or electronic system as specified by the Secretary would be 
substituted for current references to the date that the communication 
was sent or received by registered or certified mail.
2. State Share of Financial Participation (Sec.  433.51)
    We are proposing to amend Sec.  433.51 to more clearly define the 
allowable sources of the non-federal share to more closely align with 
the provisions in section 1903(w) of the Act. In Sec.  433.51(a) and 
(c), we are proposing to replace the current reference to ``public 
funds'' with ``state or local funds'' which is consistent with 
statutory language as in section 1903(w)(6)(A) of the Act. Public funds 
is not a phrase used in section 1903(w) of the Act, and the use of this 
phrase in regulation has caused confusion with respect to permissible 
sources of non-federal share. We are proposing to revise Sec.  
433.51(b) by similarly replacing the current reference to public funds 
and by specifying more precisely the funds that states may use as state 
share. Although we have applied the statutory language to our review 
and approval of state financing mechanisms, the term public funds in 
the regulatory text has created confusion among states, and has led to 
state requests to derive IGTs from sources other than state or local 
tax revenue (or funds appropriated to state university teaching 
hospitals), which is not permitted under the statute in section 
1903(w)(6)(A) of the Act. The proposed amendment to paragraph (b) would 
clearly limit permissible state or local funds that may be considered 
as the state share to state general fund dollars appropriated by the 
state legislature directly to the state or local Medicaid agency; IGTs 
from units of government (including Indian tribes), derived from state 
or local taxes (or funds appropriated to state university

[[Page 63738]]

teaching hospitals), and transferred to the state Medicaid Agency and 
under its administrative control, except as provided in proposed Sec.  
433.51(d); or CPEs, which are certified by the contributing unit of 
government as representing expenditures eligible for FFP and reported 
to the state as provided in proposed Sec.  447.206.
    We are proposing these revisions to specifically align the 
allowable sources of the non-federal share with the statute. The 
proposed provisions would make clear that allowable state general fund 
appropriations under Sec.  433.51(b)(1) are those made directly to the 
state or local Medicaid agency, and are differentiated from 
appropriations made to other units of government that otherwise may be 
tangentially involved in financing Medicaid payments through IGTs or 
CPEs. We would describe allowable IGTs and CPEs in proposed Sec.  
433.51(b)(2) and (3), respectively. The statute clearly differentiates 
between these sources of funds. Specifically, section 1903(w)(6)(A) of 
the Act provides that states generally may finance the state share 
using funds derived from state or local taxes (or funds appropriated to 
state university teaching hospitals) transferred from or certified by 
units of government within a state as the non-federal share of Medicaid 
expenditures. The phrase ``transferred from or certified by'' refers to 
the IGT and CPE, respectively, and the statute clearly indicates that 
those funding mechanisms must be derived from state or local taxes (or 
funds appropriated to state university teaching hospitals). The 
inclusion of the above reference to ``funds appropriated to state 
university teaching hospitals'' in Sec.  433.51(b)(2) is a direct 
reference to language in section 1903(w)(6)(A) of the Act to more 
precisely implement the Act in this regulatory provision.
    We are proposing to identify ``certified public expenditures'' 
specifically in regulation as an allowable source of state share in a 
manner consistent with section 1903 of the Act, and to describe the 
protocols states may use to identify allowable Medicaid expenditures 
associated with the use of a CPE as the source of non-federal share. 
Thus, we propose to include a reference in Sec.  433.51(b)(3) to 
proposed Sec.  447.206 to require that, for a state to use a CPE as a 
source of state share, the state must meet the requirements of proposed 
Sec.  447.206, discussed in detail below, with respect to payments 
funded by the CPE. In particular, in Sec.  447.206(b)(1), we propose 
that such payments, to a provider that is a unit of government, would 
be limited to the state or non-state government provider's actual, 
incurred cost of providing covered services to Medicaid beneficiaries 
using reasonable cost allocation methods.
    Lastly, we are proposing to add paragraph (d) to this section to 
clearly indicate that state funds provided as an IGT from a unit of 
government but that are contingent upon the receipt of funds by, or are 
actually replaced in the accounts of, the transferring unit of 
government from funds from unallowable sources, would be considered to 
be a provider-related donation that is non-bona fide under Sec. Sec.  
433.52 and 433.54. This language is intended to implement the 
preclusion under section 1903(w)(6)(A) of the Act on the use of IGTs 
where the IGT is derived from a non-bona fide provider-related donation 
by making it abundantly clear that, as indicated in the statute, the 
IGT must come from state or local tax revenue (or funds appropriated to 
state university teaching hospitals), and any IGTs that are derived 
from, or are related to, non-bona fide provider-related donations would 
be prohibited.
3. General Definitions (Sec.  433.52)
    The terms ``Medicaid activity'' and ``non-Medicaid activity'' are 
used in the proposed Sec.  433.68(e)(3), discussed in detail below, in 
determining whether a health care-related tax program is generally 
redistributive in nature in accordance with section 
1903(w)(3)(E)(ii)(I) of the Act. The definitions for ``Medicaid 
activity'' and ``non-Medicaid activity'' in this proposed rule would 
apply only to determining whether a state or other unit of government 
tax program is generally redistributive as required in section 
1903(w)(3)(E)(ii)(I) of the Act. We are proposing to define ``Medicaid 
activity'' to mean any measure of the degree or amount of health care 
items or services related to the Medicaid program or utilized by 
Medicaid beneficiaries, including, but not limited to, Medicaid patient 
bed days, the percentage of an entity's net patient revenue 
attributable to Medicaid, Medicaid utilization, units of medical 
equipment sold to individuals utilizing Medicaid to pay for or supply 
such equipment or Medicaid member months covered by a health plan.
    We are proposing to define ``non-Medicaid activity'' to mean any 
measure of the degree or amount of health care items or services not 
related to the Medicaid program or utilized by Medicaid beneficiaries. 
Such a measure could include, but would not necessarily be limited to, 
non-Medicaid patient bed days, percentage of an entity's net patient 
revenue not attributable to Medicaid, the percentage of patients not 
utilizing Medicaid to pay for health care items or services, units of 
medical equipment sold to individuals not utilizing Medicaid funds to 
pay for or supply such equipment, or non-Medicaid member months covered 
by a health plan.
    We are proposing to define the term ``net effect'' to mean the 
overall impact of an arrangement, considering the actions of all of the 
entities participating in the arrangement, including all relevant 
financial transactions or transfers of value, in cash or in kind, among 
participating entities. The net effect of an arrangement is determined 
in consideration of the totality of the circumstances, including the 
reasonable expectations of the participating entities, and may include 
consideration of reciprocal actions without regard to whether the 
arrangement or a component of the arrangement is reduced to writing or 
is legally enforceable by any entity.
    The term ``parameters of a tax'' is used in the proposed Sec.  
433.55(c), discussed in detail below, in determining whether a tax is 
health care-related as provided in section 1903(w)(3)(A) of the Act. We 
are proposing to define ``parameters of a tax'' to mean the grouping of 
individuals, entities, items or services, on which a state or unit of 
government imposes a tax.
    Currently, Sec.  433.52 specifies a definition of ``Provider-
related donation'' that includes an introductory paragraph and three 
numbered paragraphs. We propose to redesignate paragraphs (2) and (3) 
as paragraphs (3) and (4), respectively, and to add a new paragraph 
(2). Proposed paragraph (2) would specify that any transfer of value 
where a health care provider or provider-related entity assumes an 
obligation previously held by a governmental entity and the 
governmental entity does not compensate the private entity at fair 
market value would be considered a donation made indirectly to the 
governmental entity. We are proposing that such an assumption of 
obligation need not rise to the level of a legally enforceable 
obligation to be considered a donation, but would be considered by 
examining the totality of the circumstances and judging the 
arrangement's net effect. For example, if a private provider assumes 
any contractual obligation, such as staffing costs for accounting 
services, of a non-state governmental entity without a corresponding 
transfer of value at market value, we would consider that to

[[Page 63739]]

be a provider-related donation from the private provider to the unit of 
government.
    This proposal does not represent a new policy, but a clarification 
of current law designed to aid in preventing and, where they currently 
may exist, terminating impermissible financing practices involving 
provider-related donations. The current definition does not explicitly 
address circumstances involving the assumption of a governmental 
obligation, or our policy to determine the net effect of an arrangement 
in determining whether or not a donation has occurred.
    We are also proposing to revise newly redesignated paragraphs (3) 
and (4) by changing the term ``health care related'' to ``provider-
related'' to align with usage where provider-related donations are 
addressed throughout part 433, subpart B, and by changing the language 
in newly redesignated paragraph (4) from ``the percentage of donations 
the organization received from the providers during that period'' to 
``the percentage of the organization's revenue during that period that 
was received as donations from providers or provider-related 
entities.'' We are proposing this change because we believe that this 
language is clearer and more transparent for states.
    Some health care-related tax programs exclude certain items, 
services, or providers from taxation or impose variable rates. To do 
so, states or non-state units of government often divide the universe 
of entities subject to taxation into groups based on various 
attributes. We are proposing to define ``taxpayer group'' to mean one 
or more entities grouped together based on one or more common 
characteristics for purposes of imposing a tax on a class of items or 
services specified under Sec.  433.56. This term is used in proposed 
Sec.  433.56(e)(3), which is discussed in detail below, in determining 
whether or not a tax program is generally redistributive in nature, in 
accordance with section 1903(w)(3)(E)(ii)(I) of the Act.
4. Bona Fide Donations (Sec.  433.54)
    Section 1903(w)(2)(B) of the Act provides that the Secretary may by 
regulation specify types of provider-related donations described in 
that subparagraph that will be considered to be bona fide provider-
related donations. The statute requires that bona fide provider-related 
donations may have no direct or indirect relationship (as determined by 
the Secretary) to Medicaid payments to the provider, providers 
furnishing the same class of items and services as the provider, or to 
any related entity, as established by the state to the satisfaction of 
the Secretary. Accordingly, implementing regulations in Sec.  433.54(b) 
require that bona fide provider-related donations must not be returned 
to the individual provider, provider class, or related entity under a 
hold harmless provision or practice as described in Sec.  433.54(c). We 
are proposing to revise Sec.  433.54(c)(3) to clarify the standard used 
to determine whether the state (or other unit of government) receiving 
a donation provides for any direct or indirect payment, offset, or 
waiver, such that the provision of that payment, offset, or waiver 
directly or indirectly guarantees the return of any portion of the 
donation to the provider (or other party or parties responsible for the 
donation). The clarification would make express our current policy of 
examining the totality of the circumstances that determine the net 
effect of an arrangement between the state (or other unit of 
government) and the provider, provider class, or provider-related 
entity responsible for the donation. Specifically, we are proposing 
that a direct guarantee of the return of all or part of a donation 
would be found to exist where, considering the totality of the 
circumstances, the net effect of an arrangement between the state (or 
other unit of government) and the provider (or other party or parties 
responsible for the donation) results in a reasonable expectation that 
the provider, provider class, or related entity will receive a return 
of all or a portion of the donation either directly or indirectly. As 
noted in the 2008 final rule on Health Care-Related Taxes, ``An 
indirect payment to the taxpayer would also constitute a direct 
guarantee'' (73 FR 9698). Section 433.68 at paragraphs (f)(1), (2) and 
(3) describe the three situations that constitute a direct hold 
harmless arrangement. Paragraphs (f)(3)(i)(A) and (B) detail the two 
``prongs'' of the indirect hold-harmless guarantee test. These two 
``prongs'' constitute the ``safe harbor threshold'' of 6 percent and 
the ``75/75'' test. The safe harbor threshold states that taxes that 
are under 6 percent of net patient revenue attributable to an assessed 
permissible class pass the indirect hold harmless test. If a tax 
collection exceeds the 6 percent net patient revenue threshold, the 
second prong is applied. This prong is known as the ``75/75'' test and 
states that CMS will consider an indirect hold harmless arrangement to 
exist if 75 percent or more of the taxpayers receive 75 percent or more 
of their total tax costs back in enhanced Medicaid payments or other 
state payments. If the tax fails this prong, CMS considers an indirect 
hold harmless arrangement to exist. Direct and indirect payments are 
used in the proposed rule in the same way as they are used currently in 
Sec.  433.68(f). This clarification is designed to aid in preventing 
and, where they may currently exist, eliminating complex financing 
arrangements designed to obfuscate the fact that non-bona fide 
provider-related donations are the source of the non-federal share of 
certain Medicaid payments. This is consistent with our current policy, 
which we have applied in the past and discussed in SMDL 14-004 on 
impermissible provider-related donations. We are also proposing to 
revise paragraph (c)(3) to clarify that a singular party, not just 
multiple ``parties,'' could be responsible for a provider-related 
donation described in this paragraph.
5. Health Care-Related Taxes Defined (Sec.  433.55)
    Section 1903(w)(3)(A) of the Act defines a health care-related tax 
as a tax that is (1) related to health care items or services, or to 
the provision of, the authority to provide, or payment for, such items 
or services; or (2) is not limited to such items or services but 
provides for treatment of individuals or entities that are providing or 
paying for such items or services that is different from the treatment 
provided to other individuals or entities. In the case of (1), a tax is 
considered related to health care items or services if at least 85 
percent of the tax burden falls on health care providers. Implementing 
regulations are codified in Sec.  433.55(c). This proposed rule would 
amend Sec.  433.55(c) by clarifying that differential treatment occurs 
when a tax program treats some individuals or entities that are 
providing or paying for health care items or services differently than 
(1) individuals or entities that are providers or payers of any health 
care items or services not subject to the tax or (2) other individuals 
or entities subject to the tax. Additionally, we would amend Sec.  
433.55(c) to clarify that we examine the parameters of the tax as 
defined by the state or other unit of government, as well as the 
totality of the circumstances relevant to which individuals, entities, 
items, or services are subject (and not subject) to the tax and at 
which rate, in determining whether the tax program involves 
differential treatment as provided in section 1903(w)(3)(A)(ii) of the 
Act. Finally, the proposed rule would also add paragraphs (c)(1) and 
(2) to clarify when CMS would consider the treatment of individuals or 
entities providing or paying for health care

[[Page 63740]]

items or services to be different from the treatment provided to other 
individuals or entities.
    In the proposed Sec.  433.55(c)(1), we propose to clarify that 
differential treatment for providers of health care items or services 
would occur where the state or other unit of government imposing the 
tax makes some individuals or entities providing or paying for health 
care items or services subject to the tax, but excludes others. For 
example, a state imposing a tax on telecommunication services and 
inpatient hospital services would constitute differential treatment 
because some providers or payers of health care items or services 
subject to the tax are being treated differently than providers or 
payers of health care items or services not subject to the tax. States 
or local units of government imposing a tax cannot structure the 
parameters of the tax in such a way as to include items or services 
that are not reasonably related so that only selected health care items 
or services are included in the tax while others are excluded. 
Selective incorporation would also occur when the state or other unit 
of government imposing the tax structures the parameters of the tax in 
a way that has the effect of specifically excluding or including 
certain providers of health care items or services from the tax. This 
would constitute differential treatment because it would have the same 
effect as selecting certain health care items or services for inclusion 
in the tax when such items or services are not reasonably related to 
the other items being taxed.
    Additionally, we propose in Sec.  433.55(c)(2) to specify that 
differential treatment would result when entities providing or paying 
for health care items or services are treated differently than other 
entities also included in the tax. For example, if the state taxes all 
businesses in the state, but places a higher tax rate on hospitals and 
nursing facilities than on other businesses, this would result in 
differential treatment.
    We are concerned that taxes of the sort described in proposed Sec.  
433.55(c)(1) and (2) are not consistent with applicable statutory (and 
current regulatory) requirements because they may include individuals 
or entities providing or paying for health care items or services that 
receive high levels of reimbursement from Medicaid for such items or 
services, and that may receive a return of their tax costs in the form 
of increased Medicaid payments. In particular, we are concerned about 
tax programs that treat health care items or services that are mostly 
reimbursed by Medicaid differently than other health care items or 
services with low Medicaid reimbursement. For example, a statewide 
revenue tax of 5 percent of net revenue on all businesses in the state 
that includes only a subset of health care items or services that 
happens to be reimbursed heavily by Medicaid, such as HCBS, but which 
is designed to exclude other providers of health care items or services 
with lower rates of Medicaid reimbursement such as continuing care 
retirement facilities (CCRCs), would result in differential treatment. 
Any time a tax structure selectively incorporates a subset of health 
care items or services for inclusion in a tax and excludes others, we 
would consider this differential treatment, as reflected in proposed 
Sec.  433.55(c)(1). Selective incorporation generally occurs in two 
situations: First, when the state or unit of government includes some, 
but not all, health care-related items or services and those items or 
services are not reasonably related to the other items being taxed. 
Second, when the state or other unit of government structures the 
parameters of the tax in such a way that has the effect of such 
selective incorporation described above. Reasonably related means there 
exists a logical or thematic connection between the items or services 
being taxed. Examples of such a connection include, but are not limited 
to, industry, such as electronics; geographical area, such as city or 
county; net revenue volume; or number of employees.
    Additionally, any time the tax treats individuals or entities 
providing or paying for health care items or services differently than 
other entities also included in the tax, we would also consider this to 
be differential treatment, as reflected in proposed Sec.  433.55(c)(2). 
We note that the examples provided in these proposed paragraphs do not 
constitute an exhaustive list of all possible manifestations of 
differential treatment. Other circumstances constituting differential 
treatment for health care items or services, or entities providing or 
paying for health care items or services, would result in the tax being 
considered health care-related based on the differential treatment 
provisions in Sec.  433.55(c).
    The proposed language related to selective incorporation does not 
mean that the state or other unit of government must tax every provider 
of health care items or services within its jurisdiction to avoid its 
tax being considered health-care related in situations where less than 
85 percent of the tax burden falls on health care items or services. It 
does mean that the state or other unit of government cannot include in 
or exclude from the tax only certain providers, or a class or classes 
of providers, by its own specification of the parameters of the tax. In 
addition, the state cannot structure the parameters of the tax in such 
a way so as to have the same effect of carving out or in only certain 
providers, or a class or classes of provider.
6. Classes of Health Care Services and Providers Defined (Sec.  433.56)
    Section 1903(w)(7)(A)(ix) of the Act provides that the permissible 
classes of health care items and services include such other 
classifications consistent with section 1903(w)(7)(A) of the Act as the 
Secretary may establish by regulation. In addition to the specific 
classifications that Congress identified in statute, current 
regulations in Sec.  433.56(a) specify certain additional classes 
established by the Secretary. We are proposing to add a new class of 
health care items and services to the list of permissible classes at 
Sec.  433.56(a) by redesignating paragraph (a)(19) as paragraph 
(a)(20), revising paragraph (a)(18), and adding a new paragraph 
(a)(19). We propose to strike ``and'' from paragraph (a)(18), to 
accommodate the proposed paragraph (a)(20). In new proposed paragraph 
(a)(19), we would permit states and units of local government to impose 
taxes on services of health insurers beside those already identified in 
paragraph (a)(8) of the same section.
    We have become aware that a number of states may be imposing taxes 
on health insurers in the form of a tax on health insurance premiums or 
volume of services. Section 1903(w)(7)(A)(ix) of the Act delegates to 
the Secretary the power to specify such other classification of health 
care items and services consistent with the paragraph as the Secretary 
may establish by regulation. We are proposing to expand the permissible 
class list to provide states with additional flexibility, while 
maintaining the fiscal integrity of the Medicaid program by ensuring 
that the proposed new permissible class would not be limited to items 
or services that are primarily or exclusively provided or paid for by 
the Medicaid program. Taxes imposed on health care items or services or 
providers of such items or services financed primarily or exclusively 
by Medicaid would harm the fiscal integrity of the Medicaid program by 
imposing a higher tax burden on the program and would not be generally 
redistributive as required by section 1903(w)(3)(E)(ii)(I) of the Act. 
Specifically, we are proposing to establish services of health 
insurers,

[[Page 63741]]

besides services of MCOs (including HMOs and PPOs), as a new 
permissible class. Services of MCOs (including HMOs and PPOs) are 
already a permissible class of services identified in Sec.  
433.56(a)(8). Some examples of possible metrics that could be used to 
assess a tax on services of health insurers include health care 
premiums, covered lives, or revenue. The proposed class would include 
health insurers offering plans to Medicaid beneficiaries under a 
section 1115 demonstration for a premium assistance program to such 
beneficiaries to purchase qualified health plans through the Health 
Insurance Exchange. We are seeking comment on the exact scope of this 
permissible class to ensure all appropriate services of health insurers 
are included within this class. As with other permissible classes, 
taxes imposed on this proposed category of health care services would 
be subject to applicable legal requirements, including the broad-based 
requirements in Sec.  433.68(b)(1), the uniformity requirements in 
Sec.  433.68(b)(2), and the hold harmless provisions in Sec.  
433.68(f).
    The preamble of the August 1993 final rule listed criteria that 
should be met by any additional class of health care items and services 
under consideration to be added to the permissible classes under 
section 1903(w)(7)(A) of the Act. The preamble stated three criteria: 
The revenue of the class is not predominantly from Medicaid and 
Medicare (not more than 50 percent from Medicaid and not more than 80 
percent from Medicaid, Medicare, and other federal programs combined); 
the class must be clearly identifiable, such as through designation for 
state licensing purposes, recognition for federal statutory purposes, 
or being included as a provider in state plans; and the class must be 
nationally recognized and not be unique to a state (58 FR 43162). We 
believe that the class of providers of health care items or services 
which we are proposing to add to Sec.  433.56 meets all of these 
requirements. First, according to the most recent data available from 
the U.S. Census Bureau (See Health Insurance Coverage in the United 
States, September 12, 2018, Report Number P-60 264, Edward R. Berchick, 
Emily Hood, and Jessica C. Barnett, p. 1-2), 67.2 percent of 
individuals in the United States that are insured have private health 
insurance, whereas 37.7 percent have government coverage including 19.3 
percent that have Medicaid and 17.2 percent that have Medicare. In 
addition, not all Medicaid or Medicare beneficiaries must pay premiums 
or cost sharing, and the amounts that they do pay, when required, are 
generally limited by federal statute and regulation and typically are 
lower than premiums and cost sharing amounts paid by enrollees in 
private insurance coverage. As a result, we do not believe that revenue 
from the proposed class, services of health insurers besides services 
of MCOs (including HMOs and PPOs) is predominantly from Medicaid and 
Medicare. Specifically, we believe that such revenue is not more than 
50 percent from Medicaid and not more than 80 percent from Medicaid, 
Medicare, and other federal programs combined. Second, each state 
already defines and regulates health insurers in the state, through 
state law. As a result, the class is clearly identifiable. To the 
extent that state law specifically includes or excludes certain types 
of issuers of health insurance policies as health insurers, we propose 
deferring to the state in determining which such entities are included 
within the proposed class and which are not. For example, certain 
groups of businesses may band together to offer health insurance plans 
to their employees, a practice known as association health plans under 
section 3(5) of the Employee Retirement Income and Security Act (ERISA) 
(Pub. L. 93-406, enacted September 2, 1974). The degree to which an 
issuer of an association health plan is considered to be a health 
insurer depends on state law. Finally, health insurers exist 
nationwide, and are not particular to any individual state. Neither we 
(that is, CMS, either with respect to our administration of Medicare or 
Medicaid), the state Medicaid agency, or any agency involved in 
administering title XVIII, title XIX, or title XXI is considered to be 
a health insurer in terms of the proposed class to be added at Sec.  
433.56. As a result, the proposed class meets all of the criteria 
specified in the 1993 final rule and is appropriate to add to the 
classes of health care items and services upon which states may impose 
health care-related taxes without a reduction in FFP, subject to all 
applicable federal statutory and regulatory requirements.
7. Permissible Health Care-Related Taxes (Sec.  433.68(e) and (f))
    Section 1903(w)(3)(E)(ii)(I) of the Act provides that the Secretary 
shall approve a state's application for a waiver of the broad based 
and/or uniformity requirements for a health care-related tax, if the 
state demonstrates to the Secretary's satisfaction that the tax meets 
specified criteria, including that the net impact of the tax and 
associated Medicaid expenditures as proposed by the state is generally 
redistributive in nature. Implementing regulations in Sec.  433.68(e) 
specify a statistical test for evaluating whether a proposed tax is 
generally redistributive: If the state is seeking only a waiver of the 
broad based requirement, paragraph (e)(1) specifies a test referred to 
as ``P1/P2'' described above, while a state seeking a waiver of the 
uniformity requirement or both the broad-based and uniformity 
requirements must meet the test specified in paragraph (e)(2), referred 
to as ``B1/B2'', also described above. Although these tests were 
designed to ensure that a proposed tax is generally redistributive in 
accordance with section 1903(w)(3)(E)(ii)(I) of the Act, we have found 
that these tests alone have been insufficient in some circumstances as 
described above. As a result, we are proposing to add Sec.  
433.68(e)(3), to ensure that a proposed tax is truly generally 
redistributive.
    Specifically, we are proposing to amend Sec.  433.68(e) to provide 
that a proposed tax must satisfy both paragraph (e)(3) of this section, 
and, as applicable, paragraph (e)(1) or (2) of this section. At 
paragraph (e)(3), we propose that a tax must not impose undue burden on 
health care items or services paid for by Medicaid or on providers of 
such items and services that are reimbursed by Medicaid. We would 
consider a tax to impose undue burden under this paragraph if taxpayers 
are divided into taxpayer groups and any one or more of the following 
conditions apply: (1) The tax excludes or places a lower tax rate on 
any taxpayer group defined by its level of Medicaid activity than on 
any other taxpayer group defined by its relatively higher level of 
Medicaid activity; (2) within each taxpayer group, the tax rate varies 
based on the level of Medicaid activity, and the tax rate imposed on 
any Medicaid activity is higher than the tax rate imposed on any non-
Medicaid activity (except as a result of excluding from taxation 
Medicare revenue or payments as described in Sec.  433.68(d)); (3) the 
tax excludes or imposes a lower tax rate on a taxpayer group with no 
Medicaid activity than on any other taxpayer group, unless all entities 
in the taxpayer group with no Medicaid activity meet at least one of 
four specified exceptions; or (4) the tax excludes or imposes a lower 
tax rate on a taxpayer group defined based on any commonality that, 
considering the totality of the circumstances, CMS reasonably 
determines to be used as a proxy for the taxpayer group having no 
Medicaid

[[Page 63742]]

activity or relatively lower Medicaid activity than any other taxpayer 
group. These four conditions represent specific parameters of tax 
structures that, in addition to those identified through the P1/P2 and 
B1/B2 test, inherently result in undue burden on the Medicaid program. 
CMS considers taxes that pose an undue burden on the Medicaid program 
to be inherently not generally redistributive because they impose a 
higher tax burden on health care items or services, or providers of 
such items and services, that are financed by Medicaid than those not 
financed by Medicaid, as explained in the preamble to the August 1993 
final rule, discussed above.
    We are proposing to require states to ensure compliance with the 
proposed requirement at paragraph (e)(3) to avoid placing an undue 
burden on the Medicaid program beginning on the effective date of any 
final rule for tax waivers that have not yet been approved before the 
effective date of any final rule. For tax waivers approved before the 
effective date of any final rule, we are proposing that states must 
come into compliance with this requirement when submitting a new waiver 
request. As described below, in Sec.  433.72, we are proposing to add 
new paragraphs (c)(3) and (4) to specify the date on which a waiver 
approved under Sec.  433.72(b) will no longer be effective. We are 
proposing that an approved waiver would have a 3-year term; for a 
waiver approved before the effective date of the final rule the 3-year 
term would run from the effective date of the final rule. A state would 
be free to apply for renewal of an expired or expiring waiver, subject 
to the same approval criteria applicable to an initial waiver request 
under Sec.  433.72(b). As a result, for existing tax waivers, we are 
proposing to require states to come into compliance with proposed Sec.  
433.68(e)(3) when they submit a new tax waiver request, which we are 
proposing would be no later than 3 years after the effective date of 
any final rule, depending on whether the state makes any substantial 
changes to the health care-related tax as specified in proposed Sec.  
433.72(d). We believe that this time frame would ensure our goal of 
supporting the fiscal integrity of the Medicaid program while giving 
states the necessary time to comply with the proposed regulatory 
amendments.
    It is important to note that nothing in this proposed rule would 
interfere with states' permissible use of tax revenues to fund provider 
payments or reliance on such use of tax revenues to justify or explain 
the tax in the legislative process, as provided in section 1903(w)(4) 
of the Act. Tax structures that place an undue burden on Medicaid, 
however, would not be considered to be generally redistributive for the 
purposes of Sec.  433.68(e). We seek comment on our proposed amendments 
to Sec.  433.68(e), and on additional conditions that could result in a 
tax program imposing undue burden on the Medicaid program, and 
therefore, failing to be generally redistributive in nature that are 
not included in this proposed list.
    Section 1903(w)(1)(A)(iii) of the Act states that the total amount 
expended during the fiscal year as medical assistance under the state 
plan shall be reduced by the sum of any revenues received by the state 
during the fiscal year from a broad-based health care-related tax if 
there is in effect a hold harmless provision with respect to the tax. 
Section 1903(w)(4)(C) of the Act states that there is in effect a hold 
harmless provision with respect to a health care-related tax if the 
state or other unit of government imposing the tax provides directly or 
indirectly for any payment, offset, or waiver that guarantees to hold 
the taxpayer harmless for any portion of the costs of the tax. Section 
433.68(f)(3) echoes this language. The proposed rule would add a net 
effect standard to Sec.  433.68(f)(3). This proposed change represents 
a clarification of existing policy and would not impose any new 
obligations or place any new restrictions on states that do not 
currently exist. The language added by the proposed rule would specify 
that a direct or indirect hold harmless guarantee will be found to 
exist where, considering the totality of the circumstances, the net 
effect of an arrangement between the state (or other unit of 
government) and the taxpayer results in a reasonable expectation that 
the taxpayer will receive a return of all or any portion of the tax 
amount as discussed above. We propose that the net effect of such an 
arrangement may result in the return of all or any portion of the tax 
amount, regardless of whether the arrangement is reduced to writing or 
is legally enforceable by any party to the arrangement.
    Proposed Sec.  433.68(f)(3) aims to thwart efforts by states to 
skirt hold harmless provisions by paying supplemental payments to 
private entities, who then pass these funds on to other private 
entities that have lost gross revenue due to a health care-related tax. 
The use of an intermediary does not change the essential nature of the 
transaction: That it is a payment made by a state or unit of government 
to a provider that holds that provider harmless for the cost of the 
tax. While states are free to impose broad-based and uniform health 
care-related taxes, or generally redistributive health care-related 
taxes that meet applicable requirements for a waiver of either or both 
of these requirements, to fund the non-federal share of Medicaid 
expenditures, states may not do so in a way that guarantees to return 
all or part of the cost of the tax to the taxpayers. The proposed 
language adding the net effect standard to the direct hold harmless 
guarantee test at Sec.  433.68(f)(3) clarifies to states the range of 
permissible tax and reimbursement arrangements for health care-related 
taxes. Such clarifying language allows states and CMS to work more 
harmoniously together by solidifying a shared understanding regarding 
what constitutes a guarantee to hold taxpayers harmless for the cost of 
a health care-related tax and reduces the likelihood of disagreement 
concerning the interpretation of the regulation. As such, the proposed 
amendment would allow states to operate their Medicaid financing 
programs with greater clarity and consistency than before.
    We seek comment on our proposed amendments to Sec.  433.68(f)(3). 
Additionally, we are soliciting comments on other qualitative or 
quantitative measures that could further safeguard the fiscal health 
and integrity of the Medicaid program through modifications to the 
provisions of Sec.  433.68.
8. Waiver Provisions Applicable to Health Care-Related Taxes (Sec.  
433.72)
    In Sec.  433.72, we are proposing to add new paragraphs (c)(3) and 
(4) to specify the date on which a waiver approved under paragraph (b) 
of this section would no longer be effective. We are proposing that an 
approved waiver should have a 3-year term; for a waiver already 
approved before the effective date of the final rule, if this proposal 
is finalized, the 3-year term would run from the effective date of the 
final rule. A state would be free to apply for renewal of an expired or 
expiring waiver, subject to the same approval criteria applicable to an 
initial waiver request under Sec.  433.72(b). We are proposing a 3-year 
limit to ensure the tax program continues to meet all applicable 
requirements under part 433, subpart B, including whether or not the 
tax program continues to meet generally redistributive requirements at 
Sec.  433.68(e)(1) and (2) and proposed paragraph (e)(3).
    We are proposing to limit waiver approvals to 3 years because the 
provider data that states provide to CMS for use in the statistical 
tests at Sec.  433.68 and the providers in the class subject to the 
waiver change over time. As a result,

[[Page 63743]]

while a tax may be generally redistributive when the state first 
requests the waiver, it may cease to be so as the composition of the 
providers or payers, or the volume of items or services subject to the 
tax changes. In an effort to ensure consistent fiscal oversight of the 
non-federal share of Medicaid expenditures and to ensure that health 
care items and services, and providers of health care items or 
services, financed by Medicaid are not taxed more heavily than those 
not financed by Medicaid, we believe that this proposed time period 
would aid in ensuring state tax programs are and remain consistent with 
section 1903(w)(3)(E)(ii) of the Act. This provision establishes that 
the Secretary will approve waivers if the state establishes to the 
satisfaction of the Secretary that the net impact of the tax is 
generally redistributive in nature and the amount of the tax is not 
directly correlated to Medicaid payments. We believe it is necessary 
for the proper and efficient operation of the Medicaid program to 
establish that a tax for which a state seeks a waiver meets statutory 
requirements not just when the waiver is initially approved, but on an 
ongoing basis as well. We propose to allow states with already existing 
health care-related tax waivers 3 years from the effective date of the 
final rule, as stated in proposed Sec.  433.72(c)(4), to seek 
reapproval of their waivers, in an effort to provide states with 
sufficient time to evaluate and, as may be necessary, modify existing 
tax programs to comply with applicable requirements.
    We are proposing to add new Sec.  433.72(d), to ensure ongoing 
compliance of tax waivers with the original conditions of the waiver 
approval. In this proposed paragraph, we would specify that, for a 
state to continue to receive tax revenue (within specified limitations) 
under an approved waiver without a reduction in FFP as would otherwise 
be required under section 1903(w)(1)(A)(ii) of the Act and Sec.  
433.70, the state must: (1) Ensure that the tax program for which CMS 
approved the waiver continues to meet the waiver conditions identified 
in Sec.  433.72(b)(1) through (3) at all times during which the waiver 
is in effect; and (2) request a new waiver if the state or other unit 
of government imposing the tax modifies the tax program in specified 
ways. We propose that, if the state or other unit of government 
imposing the tax modifies the tax in a non-uniform manner, meaning the 
change in tax or tax rate does not apply in an equal dollar amount or 
percentage change to all taxpayers, the state would be required to 
request a new waiver subject to effective date requirements in Sec.  
433.72(c). If the state or other unit of government imposing the tax 
modifies the criteria for defining the taxpayer group or groups subject 
to the tax, the state would be required to request a new waiver subject 
to effective date requirements in Sec.  433.72(c). As with the 3-year 
waiver validity period at proposed Sec.  433.72(c)(3) and (4), the 
proposed new requirements at paragraph (d) would help ensure that the 
tax remains generally redistributive while the waiver is in effect, 
since these changes could affect the determination whether it meets 
applicable requirements. States would be permitted to make changes that 
would not affect the compliance of the tax with all applicable broad-
based and uniformity standards (including waiver standards) without 
receiving a new approval of a tax waiver from CMS. However, states 
wishing to make changes to their tax structures that modify any of the 
proposed, specified elements would be required to submit a new tax 
waiver request and obtain approval from us before beginning to collect 
such a tax. States may not make changes to the tax structure that 
result in taxpayers being held harmless for some or all of the cost of 
the tax without experiencing a reduction in their amount of medical 
assistance expenditures for purposes of claiming FFP as specified by 
section 1903(w)(1)(A) of the Act.
9. When Discovery of Overpayment Occurs and its Significance (Sec.  
433.316)
    Section 1903(d)(2)(C) of the Act provides that, when an overpayment 
by a state is discovered, the state has a 1-year period to recover or 
attempt to recover the overpayment before an adjustment is made to FFP 
to account for the overpayment. Currently, regulations in Sec.  433.316 
provide for determining the date of discovery of an overpayment, which 
is necessary to determine the statutory 1-year period, in three 
distinct cases: When the overpayment results from a situation other 
than fraud, under Sec.  433.316(c); when the overpayment results from 
fraud, under Sec.  433.316(d); and when the overpayment is identified 
through a federal review, under Sec.  433.316(e). It is not explicitly 
clear in the current regulations how the date of discovery is 
determined when an overpayment is discovered through the annual DSH 
independent certified audit required under Sec.  455.304. Therefore, we 
believe an amendment is appropriate to specify the date of discovery of 
overpayments as it relates to the annual DSH independent certified 
audit. Accordingly, we are proposing to redesignate paragraphs (f), 
(g), and (h) as paragraphs (g), (h), and (i), respectively, and to add 
new proposed paragraph (f). In new paragraph (f), we are proposing that 
in the case of an overpayment identified through the DSH independent 
certified audit required under part 455, subpart D, we will consider 
the overpayment as discovered on the earliest of the date that the 
state submits the DSH independent certified audit report required under 
Sec.  455.304(b) to CMS, or any of the dates specified in Sec.  
433.316: Paragraph (c)(1) (the date on which any Medicaid agency 
official or other state official first notifies a provider in writing 
of an overpayment and specifies a dollar amount that is subject to 
recovery); paragraph (c)(2) (the date on which a provider initially 
acknowledges a specific overpaid amount in writing to the Medicaid 
agency); and paragraph (c)(3) (the date on which any state official or 
fiscal agent of the state initiates a formal action to recoup a 
specific overpaid amount from a provider without having first notified 
the provider in writing).
10. State Plan Requirements (Sec.  447.201)
    We are proposing to add new Sec.  447.201(c) to specify that the 
state plan may not provide for variation in FFS payment for a Medicaid 
service on the basis of a beneficiary's Medicaid eligibility category, 
enrollment under a waiver or demonstration, or federal matching rate 
available for services provided to a beneficiary's eligibility category 
under the plan. As discussed below, this provision would implement 
sections 1902(a)(4) and (a)(30)(A) of the Act, and codify our current 
practice, by prohibiting variations in service payments on the basis of 
available FFP.
    States seeking to increase payments only on the basis of a higher 
available FFP for the relevant beneficiary population creates inequity 
in the Medicaid program. By approving Medicaid state plan payments, we 
are making an administrative decision that the payment rates are 
consistent with section 1902(a)(30)(A) of the Act; specifically, that 
such payments are consistent with efficiency, economy, and quality of 
care and are sufficient to enlist enough providers so that care and 
services are available under the plan at least to the extent that such 
care and services are available to the general population in the 
geographic area. In the absence of an access issue, it would not be 
consistent with efficiency and economy to pay providers more, only 
because the federal matching rate is increased with respect to certain 
categories of beneficiaries. In addition,

[[Page 63744]]

where payment rates under the state plan do result in insufficient 
access for Medicaid beneficiaries, the state must increase rates to 
rectify the access problem for all Medicaid beneficiaries, not only 
those for whom the statute provides for an increased FMAP.
    We have allowed states to set payment rates based on higher costs 
for the delivery of care (for example, difference in acuity or 
particular health needs); however, we have not allowed states to pay 
higher rates based on policies that are unrelated to actual increases 
in the cost of furnishing services to the relevant beneficiaries. For 
example, we have allowed states to pay higher rates to a provider based 
upon a higher provider qualifications, which may be equated with a 
higher cost of furnishing services, but that payment difference is for 
all Medicaid beneficiaries that receive services provided by that 
provider. Similarly, we have not allowed states to target higher 
payments based on eligibility status or enhanced matching rates, since 
those factors are not established to have any relationship to the cost 
of delivering care. Rates that are structured without regard to service 
costs and care delivery are not economic and efficient and are 
inconsistent with section 1902(a)(30)(A) of the Act. This proposed 
provision is intended to make clear that variation in payment rates 
solely on the basis of FFP is prohibited, as it would be inconsistent 
with efficiency and economy to allow states to pay providers more, only 
because such payments can be funded by drawing down additional federal 
dollars at a marginally increased cost to the state (and at net savings 
to the state, versus the costs the state would incur if the relevant 
beneficiary population qualified for standard FMAP). We believe that 
this proposed provision is necessary to ensure the proper and efficient 
operation of the Medicaid state plan, in a manner that complies with 
the requirements of section 1902(a)(4) and (a)(30)(A) of the Act.
    This proposed approach would be consistent across both FFS and 
managed care. Specifically, in the 2016 Medicaid managed care final 
rule, we articulated in Sec.  438.4(b)(1) that any differences among 
capitation rates according to covered populations must be based on 
valid rate development standards and not be based on the FFP associated 
with the covered populations (81 FR 27566).
    We also considered proposing a rule that would require states to 
pay the same rate to a facility for all beneficiaries, unless the state 
could demonstrate that different case mixes or health care needs, or 
other reasons consistent with economy, efficiency, quality of care, and 
access justified paying a different rate for a different group of 
beneficiaries. We decided instead to propose that the plan must provide 
for no variation in FFS payment for a Medicaid service on the basis of 
a beneficiary's Medicaid eligibility category, enrollment under a 
waiver or demonstration project, or FMAP rate available for services 
provided to an individual in the beneficiary's eligibility category, 
because, as stated above, where payment rates under the state plan do 
result in insufficient access for Medicaid beneficiaries, the state 
must increase rates to rectify the access problem for all Medicaid 
beneficiaries, not only those for whom the statute provides for an 
increased FMAP. We seek comment on proposed Sec.  447.201.
11. Payments Funded by Certified Public Expenditures Made to Providers 
That are Units of Government (Sec.  447.206)
    We are proposing to add Sec.  447.206 to codify longstanding 
policies implementing the following sections of the statute: Section 
1902(a)(4) for proper and efficient operation of the state plan; 
section 1902(a)(30)(A) requiring that payments be economic and 
efficient; and section 1903(w)(6)(A) permitting states to use CPEs, 
which are expenditures certified by units of government within a state, 
as a source of non-federal share. The specific standards for states to 
document Medicaid expenditures that units of government may certify 
through a CPE for a claim for FFP has not previously been defined in 
regulation. While CPEs are not necessarily ``payments'' in the usual 
sense of the term, instead they are transactions which take the place 
of regular FFS payment. However, we refer to payments generally to mean 
the total computable amount the provider receives for performing 
Medicaid services. We are proposing in Sec.  447.206(a) to specifiy 
that Sec.  447.206 applies only to payments made to providers that are 
state government providers or Non-state government providers, as 
defined in proposed Sec.  447.286, where such payments to such 
providers are funded by a CPE, as specified in Sec.  433.51(b)(3), as 
proposed by this rule. Further, we are proposing in Sec.  447.206(b)(1) 
that CPE-funded payments made to state government providers or non-
state government providers would be limited to reimbursement not in 
excess of the provider's actual, incurred cost of providing covered 
services to Medicaid beneficiaries using reasonable cost allocation 
methods as specified in 45 CFR part 75 and 2 CFR part 200, or, as 
applicable, to Medicare cost principles specified in 42 CFR part 413.
    In the case of CPEs, states allow providers that are state or local 
government entities to expend funds in order to provide services to 
Medicaid beneficiaries. These providers document that the monies were 
spent furnishing covered services to Medicaid beneficiaries and certify 
their expenditures to the state. Without any funds actually changing 
hands between the state or local government entity that is the 
provider, and the Medicaid agency (such as via an IGT), and without the 
state appropriating associated funds directly to the Medicaid agency, 
the state uses the amount of the CPE as non-federal share to claim FFP.
    To document the expenditure, we are proposing to add new Sec.  
447.206(b), which would define general rules for these CPE cost 
protocols. We are proposing to codify our practice of relying upon the 
cost allocation principles in federal regulations in 45 CFR part 75, 2 
CFR part 200, and, as applicable, Medicare cost principles specified in 
part 413, as the methods and principles to identify Medicaid program 
expenditures eligible to support a CPE. First, we propose that Medicaid 
payments funded by a CPE would be limited to reimbursement not in 
excess of the provider's actual, incurred cost of providing covered 
services to Medicaid beneficiaries using reasonable methods of 
identifying and allocating costs to Medicaid, as stated above. We 
recommend that states use the Medicare cost reports as the basis for 
determining Medicaid cost where available for an applicable service 
(for example, Medicare 2552-10 Hospital Cost Report or the Medicare 
2540-10 Skilled Nursing Facility Cost Report). However, since a number 
of states already have developed and currently use a state-developed 
cost report that is based on the Medicare cost report, meaning that the 
state cost report uses data taken from the calculations in the Medicare 
cost report, we are not requiring that states only use the Medicare 
cost report as we do not desire to increase state burden in this area.
    Section 447.206(b)(2), as proposed, would provide that the state 
must establish and implement documentation and audit protocols, which 
must include an annual cost report to be submitted by the state 
government provider or non-state government provider to the state 
agency that documents the provider's costs incurred in furnishing 
services to Medicaid beneficiaries during the provider's fiscal

[[Page 63745]]

year. Section 447.206(b)(3) would provide that only the certified 
amount of the expenditure may be claimed for FFP. The claimed amount is 
limited because the CPE must only represent amounts that were spent 
providing the Medicaid services, as authorized by sections 1903(a)(1) 
and (w)(6)(A) of the Act, which authorize federal matching funds for 
state Medicaid expenditures and allows funds certified by units of 
government within a state as the non-federal share of expenditures, 
respectively.
    Proposed Sec.  447.206(b)(4) would require the certifying entity of 
the CPE to receive and retain the full FFP associated with the Medicaid 
payment, consistent with the cost identification protocols in the 
Medicaid state plan and in accordance with proposed Sec.  447.207. We 
are proposing to require that certifying entities receive and retain 
the FFP a state claims from CMS to prevent inappropriate recycling of 
federal funds and any other potential redirection of federal funds that 
would be prohibited under the statute. In recent years, we have found 
that states have been drawing down FFP to match CPEs, retaining the 
federal share and using these federal funds as the non-federal share 
for other Medicaid payments. This practice is not consistent with the 
existing Sec.  433.51(c), which generally prohibits the use of federal 
funds to match other federal funds. When a state makes a claim for FFP 
on a medical assistance expenditure, that claim for the FFP is 
singularly for that medical assistance expenditure and a recognition of 
the state and federal partnership of the Medicaid program. To claim and 
receive FFP for an expenditure, and to reuse that FFP to claim 
additional federal matching funds or to otherwise redirect the FFP to 
pay costs unrelated to the expenditure for which the FFP was claimed 
results, in effect, in the federal government alone funding the full 
Medicaid payment to the provider that originally certified the CPE, or, 
viewed another way, covering costs ineligible for FFP. Such a result is 
not consistent with sections 1902(a)(2), 1902(a)(4), and 1903 of the 
Act.
    Proposed Sec.  447.206(c) would specify other criteria for states 
when a CPE is used to fund a Medicaid payment. Under paragraph (c)(1), 
the state would be required to implement processes by which all claims 
for medical assistance would be processed through the MMIS in a manner 
that identifies the specific Medicaid services provided to specific 
enrollees. Paragraph (c)(2) would provide that the state is required to 
utilize most recently filed cost reports as specified in proposed 
paragraph (b)(2) to develop interim payments rates, which may be 
trended by an applicable health care-related index. Interim rates are 
rates that reflect the provider's expected cost of providing services 
throughout the year. Requiring states to establish interim rates 
ensures that providers would receive payments throughout the year, 
calculated to closely reflect the provider's expenditures in furnishing 
services to Medicaid beneficiaries. This would provide cash flow to 
support the provider's ongoing operations, and, with the interim rates 
based on the provider's most recent filed cost reports (trended forward 
by an applicable health care-related index, at state option), would 
potentially minimize reconciliation payments to providers (in the case 
of underpayment) or collections from providers (in the case of 
overpayments) at the end the year during the reconciliation process. 
The term ``health care-related index'' means a trend factor which would 
project increases or decreases in expected costs, so as to minimize 
potential over- or under-payments to the provider certifying the CPE. 
One such index is the CMS Market Basket, which we publish for purposes 
related to the Medicare program. However, states could also propose to 
use an alternative health-care related index, provided the state 
demonstrates that the alternative is likely to reliably project 
increases or decreases in providers' costs of furnishing covered 
services to Medicaid beneficiaries in the upcoming year. In reviewing a 
state-proposed health-care related index, we would require the state to 
identify the index in the state plan and provide a justification for 
the use of this index rather than other national indices, such as the 
CMS Market Basket.
    We propose that reconciliations would be performed by reconciling 
payments made during the year based on the interim Medicaid payment 
rates, to the provider's filed cost report for the state plan rate year 
in which interim payments were made. Section 455.301 defines the state 
plan rate year as the 12-month period defined by a state's approved 
Medicaid state plan in which the state estimates eligible uncompensated 
care costs and determines corresponding DSH payments, as well as all 
other Medicaid payment rates. The period usually corresponds with the 
state's fiscal year or the federal fiscal year but can correspond to 
any 12-month period defined by the state as the Medicaid state plan 
rate year (73 FR 77951). Proposed paragraph (c)(3) would require that 
final settlement be performed annually by reconciling any interim 
payments to the finalized cost report for the state plan rate year in 
which any interim payment rates were made. Final settlement would be 
required to be made no more than 24 months from the relevant cost 
report year end, except under circumstances identified in 45 CFR 95.19. 
The 24-month period was chosen to comply with the generally applicable 
2-year time limit for claiming payment for expenditures in 45 CFR 95.7.
    During the reconciliation and final settlement process, we expect 
that the state would receive the provider's cost report and review the 
reported expenditures via a desk review process. As part of the desk 
review, the state would gather, organize, and analyze the provider's 
cost report, including by comparing current period expenditures to 
prior period expenditures to identify audit risks. During the desk 
review, we expect that the state may request explanations of or 
adjustments to the reported cost based upon generally accepted 
accounting principles (GAAP). Upon finalization of the desk review, the 
state would notify the provider of the final determination of total 
cost. Once the state has made a final determination of the provider's 
final cost, if the provider's actual total cost is not equal to the sum 
of its interim rate payments for the period, one of two actions may 
occur. If the provider has been underpaid, meaning the total interim 
rate payments were less than the total calculated cost amount, the 
state may draw down and pay to the provider FFP associated with the 
total computable expenditure certified by the provider as a prior 
period adjustment to the CMS 64, equal to the difference between the 
total interim payments and total cost. In the event the provider was 
overpaid, meaning the interim rate payments exceeded the provider's 
total cost, the state would calculate the overpayment, which would be 
equal to the difference between the total interim payments and the 
provider's total cost, and return the federal share of that amount to 
CMS as a prior period adjustment under part 433 subpart F. In the event 
of an overpayment, the state is obligated to return the FFP whether or 
not the state seeks a return of payment from the provider as 
articulated in Sec.  433.316. All of these steps would establish an 
auditable basis for the state's claims for FFP associated with the 
CPEs, as contemplated under section 1902(a)(42)(A) of the Act, which 
requires that the state plan must provide that the records of any 
entity participating in the plan and providing

[[Page 63746]]

services reimbursable on a cost-related basis will be audited as the 
Secretary determines to be necessary to insure that proper payments are 
made under the plan.
    Proposed Sec.  447.206(d) would specify requirements for the state 
plan when the state proposes to use a CPE to fund a Medicaid payment. 
We propose that, if CPEs are used as a source of non-federal share 
under the state plan, the state plan would be required to specify cost 
protocols in the service payment methodology applicable to the 
certifying provider, such protocols would be required to meet all of 
the following criteria: (1) Identify allowable cost using either a 
Medicare cost report, or a state-developed Medicaid cost report 
prepared in accordance with the cost principles in 45 CFR part 75 and 2 
CFR part 200; (2) define an interim rate methodology that would be used 
to pay a provider on an interim basis; (3) describe an attestation 
process by which the certifying entity would attest that the costs are 
accurate and consistent with 45 CFR part 75 and 2 CFR part 200; (4) 
include, as necessary, a list of the covered Medicaid services being 
furnished by each provider certifying a CPE; and (5) define a 
reconciliation and settlement process consistent with proposed Sec.  
447.206(c)(3) and (4). Regarding the inclusion in paragraph (d)(4) of a 
list of the covered Medicaid services being furnished by each provider, 
CMS is referring to instances where the services included in a cost 
report either extend across multiple Medicaid benefit categories or do 
not encompass all services within a benefit category. In such 
circumstances, we believe that this information is necessary to 
determine the services for which FFP is available. For example, in a 
setting where some but not all services within a Medicaid benefit 
category are furnished, such as a residential rehabilitation hospital 
that does not furnish all inpatient hospital services, the state would 
be required to document the services for which the state will be 
claiming FFP with respect to the provider. In most settings where the 
provider certifies a CPE, this step is not necessary, since the 
services furnished by the provider certifying the CPE will be 
coextensive with a Medicaid benefit category (for example, the 
``inpatient hospital services'' Medicaid benefit category typically is 
coextensive with the services furnished by an inpatient hospital that 
might certify a CPE).
    We are soliciting comment on our overall proposal, including the 
proposed cost reporting and process requirements, state plan 
requirements, and whether to require the use of the Medicare cost 
report where one exists for an applicable service for which the 
provider certifies a CPE. We believe requiring the use of a Medicare 
cost report where one exists for CPE protocols would allow for a 
consistent application of allowable cost principles, however, Medicare 
cost reports only exist for a relatively small number of services that 
states may cover in their Medicaid programs and requiring the use of 
Medicare cost reports would remove some state flexibility in 
determining the appropriate cost reporting mechanism for providers 
certifying CPEs in the state's Medicaid program.
12. Retention of Payments (Sec.  447.207)
    In Sec.  447.207, we propose to require that payment methodologies 
must permit the provider to receive and retain the full amount of the 
total computable payment for services furnished under the approved 
state plan (or the approved provisions of a waiver or demonstration, if 
applicable). This provision is intended to implement sections 
1902(a)(4) and (a)(32) of the Act. These provisions respectively 
require that the state plan for medical assistance provide such methods 
of administration as are found by the Secretary to be necessary for the 
proper and efficient operation of the plan, and generally provide that 
no payment under the plan for any care or service provided to an 
individual shall be made to anyone other than such individual or the 
person or institution providing such care or service, under an 
assignment or power of attorney or otherwise, unless certain enumerated 
exceptions apply as described in more detail below. Payment 
arrangements that comply with an exception in section 1902(a)(32) of 
the Act and the implementing regulation in Sec.  447.10 would not be 
deemed out of compliance with this proposed provision.
    The Secretary would determine compliance with this provision by 
examining any associated transactions that are related to the 
provider's total computable Medicaid payment to ensure that the state's 
claimed expenditure, which serves as the basis for FFP, is consistent 
with the state's net expenditure, and that the full amount of the non-
federal share of the payment has been satisfied. The term ``state's net 
expenditure'' in this section means a state's Medicaid expenditure, 
less any returned funds or contributions from the provider to the 
state, related to the Medicaid payment. This view of a return of any 
portion of a Medicaid payment is consistent with the treatment of 
provider-related donations in Sec.  433.54, particularly paragraph (e) 
of that section which states CMS will deduct the amount of an 
impermissible provider-related donation from a state's medical 
assistance expenditures before calculating FFP (73 FR 9698). 
Consideration for the state's net expenditure would include a review of 
potential ``hold harmless'' arrangements as described in Sec.  
433.54(c), which provides that an impermissible hold harmless practice 
exists if the Medicaid payment is positively correlated to a donation, 
varies based only on the amount of a donation (including if payment is 
conditioned upon the receipt of a donation), or directly or indirectly 
guarantees to return any portion of a donation to the donating provider 
(or other party responsible for the donation), which implements section 
1903(w)(2)(B) of the Act. We have noted circumstances in some states 
where participation in a Medicaid supplemental payment under the state 
plan is conditioned upon the state receiving a portion of that payment 
back, whether as a direct payment from the provider or netted from 
payments to the provider where the state retains a portion of the 
provider's payment before sending the remaining payment to the 
provider.
    We anticipate that ``associated transactions'' may include, but 
would not necessarily be limited to, the payment of an administrative 
fee to the state as a fee for processing provider payments or IGTs. For 
example, in some states, we have found that the Medicaid agency has 
charged a percentage administrative fee for each Medicaid claim that 
was processed. Essentially, the state was charging providers for 
submitting claims to the Medicaid program, and since the administrative 
charge was based on claims volume and amount of Medicaid payment, this 
practice amounted to a tax on Medicaid claims for services. States are 
already able to, and often do, claim administrative match for Medicaid 
claims processing costs; states should be using the appropriate 
mechanisms for claiming where authority exists and not unnecessarily 
shifting costs to the Medicaid providers. We propose that in no event 
could administrative fees be calculated based on the amount a provider 
receives through Medicaid payments or amounts a unit of government 
contributes through an IGT as funds for the state share of Medicaid 
payments. Structuring an administrative fee in this way would be 
tantamount to a Medicaid-only provider tax, which is not allowable 
under Sec.  433.55, and would be expressly prohibited under the 
proposed Sec.  447.207(a). Conversely, if

[[Page 63747]]

a state charged a flat fee for claims processing that did not vary 
based on the volume of claims or amount of Medicaid payments processed, 
the payment of such a fee would not be considered an associated 
transaction. Likewise, the use of Medicaid revenues to fund payments 
that are normal operating expenses of conducting business, such as 
payments related to taxes (including permissible health-care-related 
taxes), fees, or business relationships with governments unrelated to 
Medicaid in which there is no connection to Medicaid payment would not 
be considered an associated transaction.
    We are soliciting comment on all of Sec.  447.207, including 
comments on the types of transactions that we propose would and would 
not be considered ``associated transactions'' for the purpose of this 
section.
13. State Plan Requirements (Sec.  447.252)
    We are proposing to add paragraphs (d) and (e) to Sec.  447.252 
regarding state plan requirements for payments for inpatient hospital 
and long-term care facility services, to implement new approval 
requirements for state plans and any SPAs proposing to make 
supplemental payments to providers of these services and to define a 
transition period for currently authorized supplemental payments to 
begin to meet the proposed new requirements. In Sec.  447.302, we 
propose similar requirements for supplemental payments proposed for 
outpatient hospital services, as described in more detail below. We are 
proposing to limit approval for any Medicaid supplemental payments to a 
period of not more than 3 years, and to require states to monitor a 
supplemental payment program during the term of its approval to ensure 
that the supplemental payment remains consistent with section 
1902(a)(30)(A) of the Act. As discussed in this section and other 
sections of this preamble, the proposed revisions to Sec. Sec.  
447.252, 447.288(b), and 447.302 include considerable data reporting 
requirements which would implement section 1902(a)(6) of the Act which 
provide that the state agency will make such reports, in such form and 
containing such information, as the Secretary may from time to time 
require, and comply with such provisions as the Secretary may from time 
to time find necessary to assure the correctness and verification of 
such reports. We believe the robust payment data we propose to require 
is necessary to ensure the proper and efficient administration of the 
plan; to ensure that payments are consistent with efficiency, economy, 
and quality of care; and otherwise to assist us in appropriately 
overseeing the Medicaid program.
    Specifically, we propose in Sec.  447.252(d) that CMS may approve a 
supplemental payment, as defined in Sec.  447.286, provided for under 
the state plan or a SPA for a period not to exceed 3 years. A state 
whose supplemental payment approval period has expired or is expiring 
may request a SPA to renew the supplemental payment for a subsequent 
period not to exceed 3 years, consistent with the requirements of Sec.  
447.252. A time-limited supplemental payment allows CMS and the state 
an opportunity to revisit state plan supplemental payments to ensure 
that they remain consistent with efficiency, economy, and quality of 
care, as required under section 1902(a)(30)(A) of the Act. Over the 
years, CMS and various oversight bodies conducting financial management 
reviews and audits have identified areas where unchecked supplemental 
payments have resulted in payments that appeared to be excessive, and 
CMS had little recourse to take action. Such audits and financial 
reviews conducted by CMS or other oversight agencies could take years 
and require a large number of state and federal resources to complete, 
and ultimately resolve. As noted earlier in this preamble, in 2015, the 
GAO issued a report entitled, ``Medicaid: CMS Oversight of Provider 
Payments Is Hampered by Limited Data and Unclear Policy,'' in which it 
concluded that, ``[w]ithout good data on payments to individual 
providers, a policy and criteria for assessing whether the payments are 
economical and efficient, and a process for reviewing such payments, 
the federal government could be paying states hundreds of millions, or 
billions, more than what is appropriate.'' \9\ As a result, the GAO has 
recommended that, to better ensure the fiscal integrity of the program, 
we should establish financial reporting at a provider-specific level 
and clarify permissible methods for calculating Medicaid supplemental 
payment amounts. Based on this and other oversight entity 
recommendations, and CMS' experience administering the Medicaid program 
at the federal level, we believe that the time-limited approval of 
supplemental payments is necessary for the proper and efficient 
administration of state Medicaid plans to ensure the continuing 
consistency of supplemental payments with applicable statutory 
requirements and generally to ensure appropriate oversight.
---------------------------------------------------------------------------

    \9\ U.S. Gov't Accountability Office, GAO-15-322, Medicaid: CMS 
Oversight of Provider Payments Is Hampered by Limited Data and 
Unclear Policy, 46 (2015), https://www.gao.gov/assets/670/669561.pdf.
---------------------------------------------------------------------------

    We are not proposing to limit the number of times a state may 
request, and receive approval for renewal of, a supplemental payment 
program, provided that each request meets all applicable requirements. 
We propose that a state plan or SPA that would provide for a 
supplemental payment would be required to include: (1) An explanation 
of how the state plan or SPA will result in payments that are 
consistent with section 1902(a)(30)(A) of the Act, including that 
provision's standards with respect to efficiency, economy, quality of 
care, and access, along with the stated purpose and intended effects of 
the supplemental payment, for example, with respect to the Medicaid 
program, providers, and beneficiaries; (2) the criteria to determine 
which providers are eligible to receive the supplemental payment; (3) a 
comprehensive description of the methodology used to calculate the 
amount of, and distribute, the supplemental payment to each eligible 
provider, including specified content; (4) the duration of the 
supplemental payment authority (not to exceed 3 years); (5) a 
monitoring plan to ensure that the supplemental payment remains 
consistent with the requirements of section 1902(a)(30)(A) of the Act 
and to enable evaluation of the effects of the supplemental payment on 
the Medicaid program, for example, with respect to providers and 
beneficiaries; and (6) for a SPA proposing to renew a supplemental 
payment for a subsequent approval period, an evaluation of the impacts 
on the Medicaid program during the current or most recent prior 
approval period, for example, with respect to providers and 
beneficiaries, and including an analysis of the impact of the 
supplemental payment on compliance with section 1902(a)(30)(A) of the 
Act. For the state's comprehensive description of the methodology used 
to calculate the amount of, and distribute, the supplemental payment to 
each eligible provider as required under item (3), we would require the 
state to provide all of the following: (i) The amount of the 
supplemental payment made to each eligible provider, if known, or, if 
the total amount is distributed using a formula based on data from one 
or more fiscal years, the total amount of the supplemental payments for 
the fiscal year or years available to all providers eligible to receive 
a supplemental payment; (ii) if applicable, the specific criteria with 
respect to Medicaid

[[Page 63748]]

service, utilization, or cost data from the proposed state plan rate 
year to be used as the basis for calculations regarding the amount and/
or distribution of the supplemental payment; (iii) the timing of the 
supplemental payment to each eligible provider; (iv) an assurance that 
the total Medicaid payment to an inpatient hospital provider, including 
the supplemental payment, will not exceed the upper limits specified in 
Sec.  447.271; and (v) if not already submitted, an UPL demonstration 
as required by Sec.  447.272 and described in proposed Sec.  447.288.
    We already request the information specified in items (1) through 
(3), above, from states when a state makes a state plan submission that 
includes a supplemental payment. Currently, we request this information 
either informally, by seeking assurances from the state in connection 
with the request for a SPA, or more formally, by requesting changes to 
the language of the proposed SPA itself. These requirements also are 
consistent with Sec.  430.10, which requires a state plan to be a 
comprehensive written statement which serves as the basis for FFP; as 
such, we are proposing to specify in regulation the essential elements 
of a comprehensive written methodology for a Medicaid supplemental 
payment. Consistent with longstanding policy, for a state plan to be 
comprehensive, it must include the detailed methodologies by which the 
state makes payments, such that we and the state have the information 
necessary to determine which providers qualify for a payment, the 
amount of each provider's payment, and the manner in which payments are 
distributed to the qualifying providers.
    While items (1) through (3), above, would codify our current 
practice in the regulation, items (4) through (6) would be new 
requirements. Item (4) would require the state to identify an 
expiration date, or sunset date, for the supplemental payment, not to 
exceed a duration of 3 years. A 3-year approval period would also be 
consistent with our general approach with respect to demonstration 
projects under section 1115 of the Act, which often are approved for 3-
year periods to allow for adequate time for the implementation and 
testing, supported by ongoing monitoring, and which culminate in an 
evaluation of the effects of the demonstration. Each time a state 
submits a SPA to renew a supplemental payment, the state would be able 
to request a new approval period of up to 3 years. The state could 
submit a SPA for CMS consideration to renew a supplemental payment at 
any point during the 3-year approval period, according to the state's 
chosen timeframe, which the state should determine to allow sufficient 
time for our review and approval. We considered using a tiered approval 
time period, such as an initial approval period of up to 5 years 
followed by renewal periods of up to 3 years, but decided not to 
propose this policy due to the increased burden that it could cause.
    We have found that supplemental payments that are established under 
the state plan and not reviewed for a long period of time may result in 
issues of compliance with applicable statutory and regulatory 
requirements that do not promptly come to our, or the state's, 
attention. For example, as discussed elsewhere in this preamble, 
particularly with respect to proposed Sec.  447.288, the issue of 
fluidity of provider ownership can result in issues involving UPL 
supplemental payments, and where payments are made improperly, can 
require extensive federal and state resources to resolve. In the 
example discussed in connection with proposed Sec.  447.288, the 
qualifying criteria for providers made all ``non-state government owned 
or operated'' facilities eligible for supplemental payments up to the 
UPL for those providers. A few years after this supplemental payment 
structure was approved, the state was approached by providers who 
wanted to change their ownership or operational categorization to meet 
the ``non-state government'' criteria, apparently so that they could 
qualify for the UPL supplemental payments under the state plan. The 
state allowed the providers to make the change without prior CMS review 
or approval, and subsequently began making UPL supplemental payments to 
the newly recategorized providers. Upon review of the supplemental 
payment program in question, CMS found that none of the asserted 
changes in ownership or operations supported the providers' 
recategorization, and that the providers therefore were ineligible for 
the UPL supplemental payments the state had been making. In this 
example, the state was also using funds impermissibly transferred from 
private entities, which the state characterized as IGTs as a result of 
the asserted recategorization of the provider as non-state government-
owned or operated. To resolve the identified issue, CMS had to undergo 
a thorough financial management review, which involved numerous CMS 
staff reviewing financial statements, provider payments, provider 
records, and interviewing numerous state and provider staff members to 
determine the provider's eligibility for the payment under the approved 
state plan. CMS formally issued the financial management review in 
November 2015 for claims for services provided in state FYs 2010 and 
2011, and ultimately issued a disallowance in September 2018. If CMS 
had the ability routinely to re-review state supplemental payment 
programs, we would not have approved the expansion of this payment to 
non-qualifying providers under the plan because the private providers 
were also funding the non-federal share of a Medicaid payment, which is 
unallowable under the statute. Because of situations like this and 
related concerns, we believe it is necessary for the proper and 
efficient administration of state Medicaid plans to require that 
supplemental payment programs be submitted for CMS review and approval 
at least every 3 years, to ensure they are and remain consistent with 
the efficiency, economy, and quality requirements under section 
1902(a)(30)(A) of the Act and the parameters concerning permissible 
sources of non-federal share under section 1903(w) of the Act.
    In our experience, a number of states that seem to effectively use 
supplemental payments re-submit their supplemental payment programs to 
CMS on an annual basis, as the pools funded by the supplemental 
payments are annually re-authorized by the state legislature. Such 
supplemental payment programs would not be impacted by the proposed 3-
year limit. States submitting annual updates to supplemental payment 
programs, like other states with supplemental payment programs, would 
however newly be required to comply with the other proposed 
requirements, including items (5) and (6), discussed above. Proposed 
Sec.  447.252(d)(5) and (6) concern monitoring and evaluation 
requirements to assess the effects of the state's supplemental payment 
program. Specifically, paragraph (d)(5) would require the state to 
submit a monitoring plan to ensure the supplemental payment remains 
consistent with the requirements of section 1902(a)(30)(A) of the Act 
and to enable evaluation of the supplemental payment's effects on the 
Medicaid program, for example, with respect to providers and 
beneficiaries. For a SPA proposing to renew a supplemental payment for 
a subsequent approval period, paragraph (d)(6) would require the state 
to submit such an evaluation and to include an analysis of the impact 
of the supplemental payment on the state's compliance with section 
1902(a)(30)(A)

[[Page 63749]]

of the Act. For example, a state could seek a 3-year approval period 
for a supplemental payment to increase payments to rural hospitals, 
with the goal of increasing beneficiary access to services provided by 
rural hospitals. Over the next 3 years, the state would monitor the 
effects of the program, to determine whether the supplemental payment 
is meeting its goals and remains consistent with applicable 
requirements. At the end of the 3-year period, if the state wished to 
renew the supplemental payment, it would submit its evaluation and 
analysis with its renewal request to us, which would inform our 
determination of whether payments under a renewed supplemental payment 
program would be consistent with applicable requirements, including 
those in section 1902(a)(30)(A) of the Act. We anticipate that there 
may be cases in which the state's evaluation of a supplemental payment 
program's effectiveness in meeting its stated goals requires more time 
to evaluate; in such cases, provided we are able to determine that the 
supplemental payment meets all applicable statutory and regulatory 
requirements, we would anticipate approving the renewal. Notably, even 
for a state requesting to renew a supplemental payment program with no 
changes, we would require the state to submit the evaluation and 
analysis required under proposed Sec.  447.252(d)(6) as part of our 
review of the supplemental payment for consistency with applicable 
statutory and regulatory requirements.
    Finally, in considering the 3-year approval period for supplemental 
payments, we developed a transition plan to provide states with an 
adequate opportunity to come into compliance with the proposed 
requirements. To accomplish the policy objectives described above, we 
believe we must begin to apply the proposed policies to current state 
plan provisions that authorize supplemental payments that are approved 
as of the effective date of the final rule. It is no less necessary to 
ensure the proper and efficient administration of the state plan and 
ensure that applicable requirements continue to be met, to rigorously 
evaluate currently existing supplemental payment programs, as it is to 
do so for new supplemental payment programs that may be approved 
prospectively. Accordingly, in proposed Sec.  447.252(e), for state 
plan provisions approved 3 or more years prior to the effective date of 
the final rule, we propose that the state plan authority would expire 2 
calendar years following the effective date of the final rule. For 
state plan provisions approved less than 3 years prior to the effective 
date of the final rule, we propose that the state plan authority would 
expire 3 years following the effective date of the final rule. We 
believe this is a generous timeline for transitioning to the proposed 
3-year time limit for supplemental payments under the state plan. This 
timeline provides states with currently approved supplemental payment 
programs with at least 2 years, and as many as 3 years, before a state 
wishing to continue the supplemental payment program would need to seek 
renewal or a new approval.
    We are soliciting comment on this entire section, including the 
proposed state plan elements for supplemental payments and the proposed 
provisions that would place a limited approval timeframe on state's 
proposed supplemental payments. For the timeframes, we are seeking 
input on both the length of 3-year approval period and the length of 
the proposed transition period for currently approved supplemental 
payments. We considered proposing a 5-year compliance transition period 
instead of the proposed 3-year compliance transition period in Sec.  
447.252(e). This would have extended the amount of time states would 
have to bring existing, approved supplemental payment methodologies 
into compliance with the provisions of the proposed rule in Sec. Sec.  
447.252 and 447.302, but determined that the shortened timeframe would 
be easier to administer as many states already submit annual 
supplemental payment proposals. We decided to propose a 3-year 
transition period to account for states where changes may require 
legislative action as some legislatures meet on a biennial basis and 
such a timeframe would provide an opportunity for all legilslatures to 
address existing supplemental payment programs. We are requesting 
comment on whether or not to pursue this or a lengthier transition and 
approval/renewal timeline for supplemental payments.
14. Inpatient Services: Application of UPLs (Sec.  447.272)
    To promote improved oversight of Medicaid program FFS expenditures 
for services subject to the UPL, we are proposing changes to Sec.  
447.272. Many of the proposed changes to Sec.  447.272 would formally 
codify our current policy in regulation text, while others are newly 
proposed standards. We have long relied upon the UPL requirements in 
Sec.  447.272, and the related review of total inpatient hospital 
Medicaid payments in relation to a provider's cost or a reasonable 
estimate of what Medicare payment amounts would have been, as 
implementing section 1902(a)(30)(A) of the Act, which requires that 
states assure that payments are consistent with efficiency, economy, 
and quality of care. As stated earlier in the preamble, the aggregate 
application of these UPLs has preserved state flexibility for setting 
provider-specific payments while creating an overall payment ceiling as 
a mechanism for determining economy and efficiency of payment for 
services, consistent with section 1902(a)(30)(A) of the Act.
    We are proposing to amend paragraph (a) to revise the current 
ownership groups (state government-owned or operated, non-state 
government owned or operated, and privately-owned and operated 
facilities) used to establish the UPL. We propose to replace these 
provider designations with ``state government providers,'' ``non-state 
government providers,'' and ``private providers.'' We propose to codify 
the substantive definitions of these provider designations in proposed 
Sec.  447.286. As discussed below, we would define ``state government 
provider'' to refer to a health care provider as defined in Sec.  
433.52, including those defined in Sec.  447.251, that is a unit of 
state government or state university teaching hospital. In determining 
whether a provider is a unit of state government, we would consider the 
totality of the circumstances, including but not limited to specific 
considerations identified in proposed Sec.  447.286. Similarly, we 
would define ``non-state government provider'' to refer to a health 
care provider as defined in Sec.  433.52, including those defined in 
Sec.  447.251, that is a unit of local government in a state, including 
a city, county, special purpose district, or other governmental unit in 
the state that is not the state, which has access to and exercises 
administrative control over state funds appropriated to it by the 
legislature and/or local tax revenue, including the ability to expend 
such appropriated or tax revenue funds. In determining whether a 
provider is non-state government provider, we would consider the 
totality of the circumstances, including but not limited to specific 
considerations identified in proposed Sec.  447.286. We would define a 
``private provider'' to mean a health care provider as defined in Sec.  
433.52, including those defined in Sec.  447.251, that is not a state 
government provider or a non-state government provider.
    The proposed changes in provider designations would reinforce the

[[Page 63750]]

relationship between a provider's designation and its ability (or 
inability) to provide the source of non-federal share for Medicaid 
payments. Under the current system of categorization by ownership or 
operational interests, there can be ambiguity with respect to the 
appropriate category for a provider when certain responsibilities of 
ownership or operation are divided between more than one entity. For 
example, there is currently the possibility that a private nursing 
facility could transfer the deed to its real property to the county 
government, but the private entity would continue to administer all 
functions of the provider as though it were the actual owner, leaving 
the county government as the owner only in name but not any function. 
For the provider to make an IGT, the private entity would give funds to 
the county government, such as through a lease payment for the real 
property, to be used as the source of the non-federal share of Medicaid 
payments that the state could then make back to the provider in the 
form of supplemental payments. This effective self-funding of the non-
federal share of the supplemental payments by the provider would not 
have been possible if the provider were categorized as privately owned 
and operated, since it would have been unable to make the IGT to 
support the supplemental payments back to it. In this situation, we 
view this transferred amount (for example, the lease payment) as an 
impermissible source of the non-federal share, since the funds used to 
support the IGT are not obtained from state or local tax revenue and, 
as discussed elsewhere in this preamble, would constitute a non-bona 
fide provider-related donation.
    Through the state plan review process and our review of UPL 
demonstrations, we have observed that some states have re-categorized a 
number of providers from privately-owned or operated facilities to a 
governmentally owned or operated designation, either state government-
owned or operated facilities or non-state government-owned or operated 
facilities. In some instances, the change in ownership category appears 
to be only a device to permit the state to make supplemental payments 
to a provider and demonstrate compliance with the UPL, rather than 
reflective of an actual change in the provider's true ownership or 
operational interests, in view of the apparent continuity of the 
provider's business structure and activities. We believe this shift in 
designation has facilitated higher supplemental payments to certain 
providers, without the state incurring additional cost to fund the non-
federal share of payment where the private operator passes funds to the 
new governmental owner and those funds are either used: (1) To make an 
IGT or (2) supplant funds that are otherwise used to make an IGT to the 
state in order to make a supplemental payment targeted toward the 
private entity. We are concerned that this type of arrangement is not 
consistent with the basic construct of the Medicaid program as a 
cooperative federal-state partnership where each party shares in the 
cost of providing medical assistance to beneficiaries.
    We propose to amend Sec.  447.272(b) by clarifying that the UPL 
refers to a reasonable estimate of the amount that would be paid for 
the services furnished by the group of facilities under Medicare 
payment principles in 42 CFR, chapter IV, subchapter B; or allowed 
costs established in accordance with Medicaid cost principles as 
specified in 45 CFR part 75 and 2 CFR part 200, or, as applicable, 
Medicare cost principles specified in part 413. The specific data 
sources, methodology parameters, and acceptable UPL demonstration 
methodologies are specified in proposed Sec.  447.288(b).
    The existing regulations simply state that the UPL refers to a 
reasonable estimate of the amount that would be paid for the services 
furnished by the group of facilities under Medicare payment principles 
in subchapter B of this chapter, pursuant to which we have defined UPLs 
as a payment limit set at the aggregate amount that Medicare would have 
paid for the same Medicaid services, using either a Medicare payment 
methodology or Medicare cost principles. These two methods are employed 
because these are the two methods that Medicare has historically used 
to pay for services as authorized in chapter 42, subchapter B. In 
establishing these UPL methodologies, we have required that states set 
the UPL using the Medicare equivalent payment or cost amount, then 
compare the aggregate Medicaid payments for the defined period to the 
UPL. For purposes of this proposed rule and to be consistent with prior 
regulatory action, the term ``Medicare equivalent'' means the Medicare 
equivalent to the Medicaid payment, data, or services. For example, the 
Medicare equivalent payment means the amount that would be paid for 
Medicaid services furnished by the group of providers if those services 
were provided to Medicare beneficiaries and paid under Medicare payment 
principles. We are proposing to codify our existing policy related to 
the use of the two methods of demonstrating the Medicaid UPL, by using 
the Medicare equivalent payment amount or cost amount, and the process 
for establishing and demonstrating compliance with the UPL in Sec.  
477.288(b) of this proposed rule.
    We considered proposing to define specific methods by which states 
would be required to demonstrate compliance with the UPL in each of 
Sec. Sec.  447.272 and 447.321, but determined that the proposed Sec.  
447.288 would allow us to define necessary data elements, parameters, 
and methodologies for demonstrating compliance with UPLs in one 
location, for purposes of both the inpatient and outpatient UPLs under 
Sec. Sec.  447.272 and 447.321, respectively. To summarize briefly, 
proposed Sec.  447.288 describes the data sources, data parameters, and 
methodologies that must be considered and used in demonstrating 
compliance with the UPL. It describes the appropriate Medicare data and 
the creation of ratios using either cost or payment data calculations, 
the Medicaid charge data to be multiplied by a ratio either of Medicare 
costs-to-charges or of Medicare payments-to-charges to calculate the 
UPL amount, any associated considerations (such as inflation 
adjustments, utilization adjustments, or other cost adjustments), and 
the Medicaid payment data. For a detailed discussion of these proposed 
UPL requirements, please refer to the discussion below related to Sec.  
447.288.
    We invite comment on all proposed new provisions and proposed 
amendments in this section.
15. Basis and Purpose (Sec.  447.284)
    We are proposing to add subpart D to part 447 to implement sections 
1902(a)(6) and (a)(30)(A) of the Act, which require, respectively, that 
a state plan for medical assistance must provide that the state agency 
will make such reports, in such form and containing such information, 
as the Secretary may from time to time require, and comply with such 
provisions as the Secretary may from time to time find necessary to 
assure the correctness and verification of such reports, and to assure 
that payments are consistent with efficiency, economy, and quality of 
care. As discussed in detail above and in subsequent sections below, 
this information would improve the transparency of Medicaid payments 
and provide us with more information to understand the basis of 
Medicaid supplemental payments at the individual provider level in a 
manner consistent with the recommendations of the oversight bodies as 
mentioned

[[Page 63751]]

elsewhere in this preamble. Moreover, this information would be used in 
concert with annual UPL demonstrations and state expenditure data to 
improve our oversight of state expenditures and FFP. Accordingly, we 
are proposing to require states to submit quarterly and annual reports 
which detail the total provider payments, including base and 
supplemental payments, authorized under the state plan and 
demonstration authority. We are also proposing that the states submit 
an additional annual report disclosing the amount of provider 
contributions provided to the state to support the non-federal share of 
the Medicaid payments along with the total payments received by the 
contributing providers. The provider contributions include all provider 
taxes, IGTs, CPEs, and any provider-related donations as described in 
part 433, subpart B. This new subpart would provide definitions for 
terms critical to the requirements for supplemental payment programs, 
including with respect to UPL demonstrations (Sec.  447.286), establish 
new data submission requirements for supplemental payments under the 
state plan (Sec.  447.288), and specify the consequences that would 
apply when a state fails to report required information (Sec.  
447.290). We believe these proposed provisions are necessary to ensure 
the proper and efficient administration of state Medicaid plans with 
respect to supplemental payment programs, and generally to better 
enable us to perform our oversight function with respect to the 
Medicaid program.
    We have a long history of establishing data reporting requirements 
for states. For financial data reports such as the UPL data 
demonstrations, we have long relied upon the current language in 
Sec. Sec.  447.272 and 447.321, which we have discussed in 
subregulatory guidance in the form of SMDLs, particularly SMDL 13-003, 
to provide additional information regarding required data and the 
timeline and manner in which such data is to be reported. We have also 
defined reporting requirements regarding the Medicaid DSH program 
through regulations in Sec.  447.299. Since codifying the DSH reporting 
requirements in regulation, we have found that data reporting by states 
has become far more consistent, and as a result, we have been able to 
quickly identify areas where DSH payments have been made 
inappropriately or when the state has made a payment outside of the 
state plan methodology, and thus we have been able to more efficiently 
focus our resources to those problematic areas. We have also been able 
to work with states to update state plan language so that the 
distribution methodology for their DSH payments is comprehensively 
described in the state plan, in accordance with federal requirements. 
Based in part on this experience with the usefulness of comprehensive 
data reporting about state payments to providers, we are proposing 
uniform reporting requirements for additional state Medicaid payments, 
including supplemental payments made under the UPL. Our expectation is 
that such reporting would allow CMS to focus our resources to areas 
where there appear to be issues, either in the payment methodology or 
the underlying financing, and provide states with technical assistance 
to the extent that the issues identified may be resolved through 
strengthening the state plan language so that it accurately and 
comprehensively describes the state's payment rates and methodologies.
    In proposed Sec.  447.284(a), we would specify that proposed new 
subpart D would set forth additional requirements for supplemental 
payments made under the state plan, and implement section 1902(a)(6) 
and (a)(30) of the Act. Section 447.284(b) would provide that the 
reporting requirements in subpart D are applicable to supplemental 
payments to which a UPL applies under Sec. Sec.  447.272 or 447.321.
    We are soliciting comments on the statement of basis and purpose as 
proposed in Sec.  447.284.
16. Definitions (Sec.  447.286)
    We are proposing to add Sec.  447.286 to define the following 
terms, as they are used in proposed part 447, subpart D: Base payment, 
Non-state government provider, Private provider, state government 
provider, and Supplemental payment. Clear definitions of these terms 
are needed so that states and other stakeholders can have a clear 
understanding of what is required with respect to the proposed 
reporting requirements for supplemental payments and UPL 
demonstrations, and to allow us to clearly track supplemental payments 
and ensure a consistent reporting and UPL demonstration process.
    Specifically, we propose to define the term ``base payment'' to 
mean a payment, other than a supplemental payment, made to a provider 
in accordance with the payment methodology authorized in the state plan 
or is paid to the provider through its participation with a Medicaid 
MCO entity under the authority in part 438. Base payments are 
documented at the beneficiary level in MSIS or T-MSIS and include all 
payments made to a provider for specific Medicaid services rendered to 
individual Medicaid beneficiaries, including any payment adjustments, 
add-ons, or other additional payments received by the provider that can 
be attributed to a particular service provided to the beneficiary, such 
as payment adjustments made to account for a higher level of care or 
complexity of services provided to the beneficiary. We believe that, in 
defining a base payment to a provider, it is appropriate to start with 
the most fundamental component of the payment that reimburses the 
provider for furnishing a specific service to a particular beneficiary. 
In some cases, the base payment may be the only payment the provider 
receives. We considered not including payment adjustments, which are 
payments made to providers based on certain provider-specific criteria, 
add-on payments, and other per service payments apart from the most 
basic payment, but we determined that it would be more appropriate to 
include all payments made to a provider for specific Medicaid services 
rendered to individual Medicaid beneficiaries in the proposed 
definition. When states pay providers based on patient acuity, 
complexity of services, characteristics of the provider, or add-on 
payments, including but not limited to add-on payments for quality of 
services, such payments can be directly tied to the provision of a 
service to an individual Medicaid beneficiary and are available to all 
providers within the Medicaid benefit category. The base payment, 
including add-on amounts, includes all payment amounts intended to 
fully reimburse the provider for furnishing a specific service to a 
particular beneficiary, whereas supplemental payments are made as a 
lump sum intended to reimburse for Medicaid services generally, rather 
than particular services furnished to an individual beneficiary. We are 
soliciting comment on this proposed definition and on the alternative 
we considered of not including payment adjustments such as incentive 
payments and other add-on payments that are paid on a per claim basis.
    We propose to define non-state government provider to mean a health 
care provider, as defined in Sec.  433.52, including those defined in 
Sec.  447.251, that is a unit of local government in a state, including 
a city, county, special purpose district, or other governmental unit in 
the state that is not the state, which has access to and exercises 
administrative control over state-appropriated funds from the 
legislature

[[Page 63752]]

or local tax revenue, including the ability to dispense such funds. We 
propose to consider the entity's access to and administrative control 
over state-appropriated funds from the legislature or local tax revenue 
in this definition to link the provider category to the ability of the 
provider to supply the non-federal share funds in a manner consistent 
with section 1903(w)(6)(A) of the Act. We anticipate that questions may 
arise about whether a provider is a governmental or a private entity, 
for purposes of this definition. To resolve such questions, we propose 
that we would consider the totality of the circumstances, including, 
but not limited to, the identity and character of any entity or 
entities other than the provider that share responsibilities of 
ownership or operation of the provider, and including the nature of any 
relationship among such entities and the relationship between such 
entity or entities and the provider. In determining whether an entity 
shares responsibilities of ownership or operation of the provider, our 
consideration would include, but would not be limited to, whether the 
entity: (1) Has immediate authority to make decisions regarding the 
operation of the provider; (2) bears the legal responsibility for risk 
from losses from operations of the provider; (3) has immediate 
authority over the disposition of revenue from operations of the 
provider; (4) has immediate authority with regard to hiring, retention, 
payment, and dismissal of personnel performing functions related to the 
operation of the provider; (5) bears legal responsibility for payment 
of taxes on provider revenues and real property, if any are assessed; 
or (6) bears the responsibility of paying any medical malpractice 
premiums or other premiums to insure the real property or other 
operations, activities, or assets of the provider.
    In determining whether a relevant entity (that is, the provider and 
any entity or entities other than the provider that share 
responsibilities of ownership or operation of the provider) is a unit 
of a non-state government, we would consider the character of the 
entity which would include, but would not be limited to, whether the 
entity: (1) Is described in its communications to other entities as a 
unit of non-state government, or otherwise; (2) is characterized as a 
unit of non-state government by the state solely for the purposes of 
Medicaid financing and payments, and not for other purposes (for 
example, taxation); and (3) has access to and exercises administrative 
control over state funds appropriated to it by the legislature and/or 
local tax revenue, including the ability to expend such appropriated or 
tax revenue funds, based on its characterization as a governmental 
entity.
    In recent years, states have proposed a number of SPAs which sought 
to re-designate the UPL ownership category of a provider and to allow 
that provider to make an IGT, up to the applicable UPL, to fund the 
non-federal portion of a new Medicaid supplemental payment. Oftentimes, 
a hallmark of these proposals has been the sale of some asset of the 
provider (such as the provider's license or the facility's 
certification) for some nominal fee, with the private entity (the 
``seller'') otherwise retaining critical responsibilities of ownership, 
and with the IGT, in practical reality, coming from the private 
entity's funds. This approach is inconsistent with the statute and 
regulations, particularly sections 1902(a)(30)(A) and 1903(w)(6)(A) of 
the Act and implementing regulations at Sec. Sec.  433.51, 447.272 and 
447.321.
    Based on our experience with such SPAs, it appears that some states 
have sought to manipulate the characterization of providers' ownership 
to achieve problematic Medicaid financing arrangements. In arrangements 
we have observed, the operator essentially functioned as the owner and 
the operator of the facility. Accordingly, we believe a more effective 
approach to appropriately categorizing providers for purposes of the 
UPL would be to consider the totality of the circumstances relevant to 
the character of the provider, rather than attempting to parse more 
narrowly whether features of particular entities purported to be the 
provider's owner and/or operator mean that the provider is properly 
categorized as a unit of non-state government, which our experience has 
borne out may be more susceptible to manipulation. We understand that 
the business models of health care providers and their facilities are 
layered and complex. However, as discussed above, we are troubled by 
instances we have observed in which some states have attempted to re-
characterize facilities as non-state government owned or operated, 
where such characterization was not supported by the actual structure 
and operation of the facility, in an ultimate effort to generate more 
federal Medicaid revenue without corresponding financial participation 
from the state. We believe such arrangements violate applicable 
statutes and regulations, are inconsistent with the fiscal integrity of 
the Medicaid program, and are generally abusive of the federal-state 
partnership that Congress has prescribed for the Medicaid program.
    We propose to define private provider to mean a health care 
provider as defined in Sec.  433.52, including those defined in Sec.  
447.251, that is not a state government provider or a non-state 
government provider. This is intended to be a catch-all for remaining 
health care providers in the state, that are not state government 
providers or non-state government providers, for purposes of this 
section. We are soliciting comments on this proposed definition of 
private provider.
    We propose to define state government provider to mean a health 
care provider, as defined in Sec.  433.52, including those defined in 
Sec.  447.251, that is a unit of state government or a state university 
teaching hospital. Similar to the proposed definition of non-state 
government provider, we propose that, in determining whether a provider 
is a state government provider, we would consider the totality of the 
circumstances, including, but not limited to, the identity and 
character of any entity or entities other than the provider that share 
responsibilities of ownership or operation of the provider, and 
including the nature of any relationship among such entities and the 
relationship between such entity or entities and the provider. The 
factors that we propose to consider, without limitation, include those 
discussed above regarding the proposed definition of non-state 
government provider. And similar to that proposed definition, in 
determining whether a relevant entity is a state government or state 
university teaching hospital, we propose that our consideration would 
include, without limitation, the factors discussed above in connection 
with the proposed definition of non-state government provider.
    Regarding the proposed definitions of non-state government 
provider, private provider, and state government provider, we 
understand that health care facilities often enter into business 
relationships with other entities to perform various functions, 
including, but not limited to, the care of beneficiaries. We recognize, 
and do not wish to interfere with, legitimate business relationships 
between providers and other entities, or among such other entities in 
relation to the provider. In fact, we believe that the current 
definitions of non-state government-owned or operated, state 
government-owned or operated, and privately-owned and operated may have 
inadvertently distorted such relationships by encouraging new or

[[Page 63753]]

different business relationships between providers and other entities, 
or among such other entities in relation to a provider, with no useful 
purpose other than to manipulate Medicaid financing in problematic 
ways. As such, we are proposing to identify a provider as a non-state 
government provider or state government provider in consideration of 
the totality of the circumstances, including, but not limited to, the 
identity and character of any entity or entities other than the 
provider that share responsibilities of ownership or operation of the 
provider, and including the nature of any relationship among such 
entities and the relationship between such entity or entities and the 
provider. These proposed definitions are intended to work together with 
the UPL rules and the provisions governing non-federal share financing 
and provider-related donations to safeguard the fiscal integrity of the 
Medicaid program.
    We propose to define ``supplemental payment'' to mean a Medicaid 
payment to a provider that is in addition to the base payments to the 
provider, other than DSH payments under part 447, subpart E, made under 
state plan authority or demonstration authority. Supplemental payments 
cannot be attributed to a particular provider claim for specific 
services provided to an individual recipient and are often made to the 
provider in a lump sum on a monthly, quarterly, or annual basis apart 
from payments for a provider claim, and therefore, cannot be directly 
linked to a provider claim for specific services provided to an 
individual Medicaid beneficiary. In short, supplemental payments are 
any payments to a provider other than Base payments or DSH payments 
under part 447, subpart E. Supplemental payments are lump sum payments 
made to the provider at various intervals depending on the state 
program, including supplemental payments made through section 1115 
demonstrations such as uncompensated care pools and delivery system 
reform incentive payments (DSRIP). We are not making determinations 
about those particular intervals at which payments are distributed to 
providers other than to require that states specify such information as 
proposed in Sec.  447.252(d) of this proposed rule. We have 
historically considered DSH payments under part 447, subpart E as being 
distinct payments authorized separately in the statute in section 1923 
of the Act which are separate from Medicaid supplemental payments. The 
DSH payments serve the specific purpose of taking into account the 
situation of hospitals that serve a disproportionate number of low-
income patients with special needs, including Medicaid beneficiaries 
and the uninsured. Serving these patients may cause hospitals to incur 
higher costs, including significant uncompensated care costs for 
serving low income populations. Supplemental payments and DSH payments 
are paid under separate authorities in the Act. Supplemental payments 
are authorized in section 1902(a)(30)(A) of the Act, which requires 
that the state plan provide methods and procedures to assure that 
payments are consistent with efficiency, economy, and quality of care 
and DSH payments are authorized in section 1923 of the Act. Therefore, 
supplemental payments and DSH payments are not required to be tied to 
the same statutory purpose.
    We are requesting comment on the revisions to Sec.  447.272, 
including each of the revised provider category definitions included in 
this section.
17. Reporting Requirements for UPL Demonstrations and Supplemental 
Payments (Sec.  447.288)
    We are proposing to add Sec.  447.288 to define documentation 
requirements for UPL demonstrations and for states that make 
supplemental payments. As noted several times elsewhere in this 
preamble, the GAO has frequently cited the lack of adequate Medicaid 
provider payment data as a deficiency that compromises CMS oversight 
and recommended we take concrete steps to ensure the timely submission 
of accurate state payment data. In 2015, one GAO report concluded that 
``[w]ithout good data on payments to individual providers, a policy and 
criteria for assessing whether the payments are economical and 
efficient, and a process for reviewing such payments, the federal 
government could be paying states hundreds of millions, or billions, 
more than what is appropriate'' (U.S. Gov't Accountability Office, GAO-
15-322, Medicaid: CMS Oversight of Provider Payments Is Hampered by 
Limited Data and Unclear Policy, 46 (2015)). Accordingly, this 
proposals represents an effort to address the concerns raised by GAO 
and to create a more robust audit trail for state payments to providers 
to allow for better CMS oversight. We believe that this proposed 
provision is necessary to ensure the proper and efficient operation of 
the Medicaid state plan, in a manner that complies with the 
requirements of sections 1902(a)(4), (a)(6) and (a)(30)(A) of the Act. 
In new Sec.  447.288(a), we propose that, beginning October 1, of the 
first year following the year in which the final rule may take effect, 
and annually thereafter, by October 1 of each year, in accordance with 
the requirements of Sec.  447.288 and in the manner and format 
specified by the Secretary, each state would be required to submit a 
demonstration of compliance with the applicable UPL for each of the 
following services for which the state makes payment: Inpatient 
hospital, as specified in Sec.  447.272; outpatient hospital, as 
specified in Sec.  447.321; nursing facility, as specified in Sec.  
447.272; ICF/IID, as specified in Sec.  447.272; and institution for 
mental diseases (IMD), as specified in Sec.  447.272. The submission of 
UPLs for these facilities and services is consistent with existing CMS 
regulations in Sec. Sec.  447.272 and 447.321, as well as CMS guidance 
document SMDL #13-003. Under these regulations and policy guidance, 
states are already providing UPL demonstrations for the above 
referenced services to demonstrate that payments are consistent with 
economy, efficiency, and quality of care as required in section 
1902(a)(30)(A) of the Act. These demonstrations are submitted annually, 
or any time a state submits a SPA that proposes to amend the payment 
rate or methodology for one of the aforementioned facilities or service 
categories. Of note, as discussed in greater detail below, we are 
proposing to remove the psychiatric residential treatment facilities 
(PRTF) and clinic UPLs, which would not be included in the annual 
reporting requirements.
    We are proposing to add Sec.  447.288(b) to define UPL 
demonstration standards. When demonstrating the UPL, states would be 
required to use the data sources and adhere to the data standards, and 
acceptable UPL methodologies specified in this section. We believe that 
these proposed requirements would assist CMS and states in determining 
the Medicaid inpatient and outpatient facility payment rates are 
consistent with economy, efficiency and quality of care under section 
1902(a)(30)(A) of the Act.
    Over time, we have received numerous requests for feedback on the 
use of specific data elements and on acceptable UPL methodologies. We 
are hopeful these proposed provisions, which, except as noted below, 
would codify current policy, would enhance states' understanding of 
acceptable UPL demonstration standards, as well as improve the quality 
of UPL submissions.
    We are proposing no longer to require states to submit UPL 
demonstrations for PRTFs and clinics. PRTFs are facilities subject to 
the payment limits defined in

[[Page 63754]]

Sec.  447.325, which states that the state Medicaid agency may pay the 
customary charges of the provider but must not pay more than the 
prevailing charges in the locality for comparable services under 
comparable circumstances. The reason for this proposed change is two-
fold. First, the payment limit in Sec.  447.325 limits the state's 
payment to a provider to the provider's customary charges or, if less, 
the prevailing charges in the locality for comparable services under 
comparable circumstances. Providers determine what they will charge for 
items and services furnished. To pay a provider's charge under the 
state plan, a state plan could simply provide that its payments will 
not exceed the provider's customary charge, provided the state plan 
also describes a comprehensive methodology for ensuring that payments 
do not exceed the prevailing charges in the locality for comparable 
services under comparable circumstances. Second, in our experience, 
states do not make supplemental payments to these facilities, and such 
provider's base payments are generally equal to the provider's charge. 
As such, the UPL is less of a calculation, as with other inpatient-type 
services, and more of a confirmation the state pays no more than the 
provider's charge under the state plan, which can be accomplished 
through a review of the state plan. We will continue to review 
compliance with the Sec.  447.325 through a review of the SPA 
submissions as has been our historical practice. The removal of the 
clinic UPL is discussed in more detail below under Sec.  447.321 of 
this preamble.
    In proposed Sec.  447.288(b), we propose to specify detailed UPL 
demonstration standards for demonstrating that Medicaid FFS payments 
are made in aggregate amounts that are less than or equal to the 
aggregate cost or Medicare payment amounts. The purpose of the proposed 
provisions is to ensure uniform reporting of UPL data and a full 
picture of Medicaid payments within each provider category for each 
category of services subject to a UPL in a given year. The proposed 
provisions are intended to specify that states may not pick-and-choose 
the most beneficial data for each provider within a provider category, 
but instead to select a UPL methodology and apply a single methodology 
to all providers within a UPL provider category and service type.
    In proposed paragraph (b)(1), we propose defining the data sources 
for the UPL calculations, which is the Medicare-equivalent cost and 
charge data and Medicare-equivalent payment and charge data for 
purposes of the UPL as our primary data sources for the UPL. As noted 
elsewhere in this proposed rule, the term ``Medicare equivalent'' means 
the Medicare equivalent to the Medicaid data, payment, or services. 
Therefore, the term Medicare equivalent payment means the amount that 
would be paid for Medicaid services furnished by the group of providers 
if those services were provided to Medicare beneficiaries and paid 
under Medicare payment principles. Likewise, a reference to Medicare 
equivalent charges in reference to a UPL calculation means the Medicare 
charges for the same Medicaid services subject to the UPL.
    In proposed paragraph (b)(1)(i), we would require that cost and 
charge data for all providers must be from either Medicare cost 
reports, or state-developed cost reports using either Medicare cost 
reporting principles specified in part 413 or the cost allocation 
requirements specified in 45 CFR part 75, which implements requirements 
in 2 CFR part 200, as specified in 2 CFR 200.106. Cost and charge data 
must: Include only data with dates of service that are no more than 2 
years prior to the dates of service covered by the UPL demonstration; 
and represent costs and charges specifically related to the service 
subject to the UPL demonstration. As such, each UPL must use costs and 
charges related to the relevant category of Medicaid services listed in 
paragraph (a) of Sec.  447.288; and include either Medicare costs and 
Medicare charges, or total provider costs and total charges, in order 
to develop a cost-to-charge ratio as described in paragraph (b)(3)(i). 
The selection must be consistently applied for all providers within the 
provider category subject to the UPL so that all costs and charges for 
all providers within a provider category are uniform in the UPL 
demonstration to ensure uniformity in reporting as discussed above. 
These requirements are consistent with historical practices related to 
the collection of information for UPLs and were part of the CMS UPL 
templates submitted to OMB for approval under control number 0938-1148 
(CMS-10398 #13 and #24).
    At paragraph (b)(1)(ii), we propose to define Medicare payment 
demonstrations as using Medicare payment and charge data for all 
providers from either Medicare cost reports, Medicare payment systems 
for the specific provider type specified in title 42, chapter IV, 
subchapter B of the CFR, as applicable, or imputed per diem rates based 
on Medicare provider payments. ``Imputed'' per diem rates, as discussed 
in more detail in paragraph (b)(3)(ii)(C), are payments that are 
calculated by dividing total Medicare payments by Medicare days from 
the provider census data to calculate an estimated Medicare price per 
day. The state then is able to multiply this Medicare price per day for 
each provider by the provider's Medicaid days (also from the provider 
census), and then sum these products within a service class and 
provider category to calculate a Medicaid UPL.
    The proposed provision goes on to specify that when using Medicare 
payment and charge data, the data must: Include only data with dates of 
service that are no more than 2 years prior to the dates of service 
covered by the UPL demonstration; include only Medicare payments and 
charges, or Medicare payment and the provider's Medicare census data, 
specifically related to the service subject to the UPL demonstration; 
and use either gross Medicare payments and Medicare charges, which 
includes deductibles and co-insurance but excludes reimbursable bad 
debt from the Medicare payment, or net Medicare payments and Medicare 
charges, which excludes deductibles and coinsurance and includes 
reimbursable bad debt, as reported on a Medicare cost report. The 
selection of gross or net Medicare payment must be consistent within 
the ratio for each provider category subject to the UPL. These 
requirements are consistent with historical practices related to the 
collection of information for UPLs and were part of the CMS UPL 
templates submitted to OMB for approval under control number 0938-1148 
(CMS-10398 #13 and #24).
    For the Medicare payment systems for the specific provider type, we 
are referring to the prospective payment systems (PPS) in effect for 
the Medicare program such as the inpatient prospective payment system 
(IPPS), outpatient prospective payment system (OPPS), skilled nursing 
facility (SNF) PPS, and any future applicable Medicare PPSs such as the 
patient driven payment model (PDPM) for SNFs. The requirement that the 
payment data use data with dates of service that are no more than 2 
years prior to the dates of service covered by the UPL demonstration 
would allow states to use Medicare payment data from a prior period to 
demonstrate the UPL, particularly in years where Medicare is 
transitioning to a new payment system. Because states have the 
flexibility to use data that is no more than 2 years old, states using 
Medicare payment-based demonstrations would not be required to 
immediately switch over to using data from a newly implemented Medicare 
payment system, such as PDPM, to demonstrate

[[Page 63755]]

compliance with the UPL if the state is not in a position to do so, but 
would be able to transition to using that system over a 2-year period. 
There is no requirement in statute or regulations that mandates states 
use specific Medicare payment systems in Medicaid for provider 
payments. Since the UPL is an estimate of the amount that Medicare 
would have paid for the service, we have always offered states some 
flexibility to determine UPLs using recent data that is no more than 2 
years old, which, in years where Medicare has transitioned to a new 
payment system, means that states could use data from the prior payment 
system for up to 2 years after the Medicare transition for purposes of 
the Medicaid UPL compliance demonstration.
    In paragraph (b)(1)(iii), we propose to require that the Medicaid 
charge data used in calculating the UPL must be derived from the 
state's Medicaid billing system for services provided during the same 
dates of service as the Medicare cost or Medicare payment data, as 
defined above. The Medicare cost and charge or payment and charge data, 
as applicable, is used to create a ratio with the Medicare cost or 
payment being the numerator and the Medicare charges are the 
denominator. Once that ratio is created, the Medicaid charges are 
multiplied by that ratio. This is discussed in more detail below, but 
the requirement that the time period of the Medicaid charge data be 
from the same time period of the Medicare-equivalent data, as defined 
above, is due to the fact that providers determine what they will 
charge for items and services furnished to patients, which may change 
from time to time. If the charges are the same for all payers, then a 
reasonable estimate of the amount that Medicare would pay for the 
service would require the use of the Medicaid charge data from the same 
time period as the Medicare data to calculate the UPL. As discussed in 
connection with paragraph (b)(3)(i), we propose that a cost-based 
methodology could only be used for services where a provider applies 
uniform charges to all payers.
    At paragraph (b)(1)(iv), we propose to require Medicaid payment 
data from a state's Medicaid billing system for services provided 
during the same dates of service as the Medicare cost or Medicare 
payment data, as specified in paragraph (b)(1)(i) or (ii) of this 
section, as applicable, or from the most recent state plan rate year 
for which a full 12 months of data are available. As with the data 
requirements in paragraphs (b)(1)(i) and (ii), Medicaid payment data 
must: Include only data with dates of service that are no more than 2 
years prior to the dates of service covered by the UPL; include all 
actual payments, as well as all projected base and supplemental 
payments, excluding any payments made for services for which Medicaid 
is not the primary payer, expected to be made during the time period 
covered by the UPL demonstration to the providers within the provider 
category, as applicable; and only be trended by an amount equal to the 
changes in the Medicaid state plan payment for the applicable service. 
Using either the most recent Medicaid payment data for the time period 
subject to the UPL or the payment data from the same time period as the 
Medicaid charge data (meaning also from the same time period as the 
Medicare data) is up to the state. Under all circumstances, the 
Medicaid payment data must include all payments made to the providers, 
including any proposed payments or projected payments that have not yet 
been made. This way, the UPL will reflect an accurate depiction of the 
state's Medicaid payments during the period of the UPL demonstration.
    In paragraph (b)(2), we propose to require states to apply certain 
UPL methodology parameters in calculating the UPL. Specifically, the 
proposed UPL methodology parameters include the following 
considerations. First, projected changes in utilization must be 
accounted for and reflected in the demonstration. If no service-
specific utilization projections are available, then projections for 
enrollment must reflect programmatic changes such as reasonable 
utilization changes due to managed care enrollment projections. For 
example, a state may be aware that in the upcoming state-fiscal year, 
there will be a shift to increase beneficiary enrollment in managed 
care plans. Projected utilization changes to account for such large 
programmatic shifts may be used instead of individually determined, 
service-specific utilization changes, such as inpatient hospital 
utilization, which may result in a percentage increase or decrease in 
expected utilization for the relevant services undergoing a shift to 
managed care. Medicare data may also be projected using Medicare trend 
factors appropriate to the service and demonstration methodology, which 
are Medicare payment- or cost-based, with such trend factors being 
uniformly applied to all providers within a provider category. In this 
way, states can anticipate and project program changes or changes in 
expected costs or payments in the UPL that may either increase or 
decrease the UPL or expected Medicaid payments. For example, an 
appropriate trend factor with respect to inpatient hospital services, 
outpatient hospital services, and SNFservices could be the CMS Market 
Basket rate. This proposed change, which represents a departure from 
current policy, is proposed in paragraph (b)(2)(ii), which would 
require uniform application of the trending factor within the provider 
category. Prior to this proposed rule, we had not formally articulated 
an expectation of uniform trending of data within a provider category 
and had accepted UPL demonstrations that did not apply trend factors in 
a uniform manner. CMS could not determine whether the applied inflation 
adjustments in those UPLs were always appropriate based on our review. 
This proposed provision is intended to establish the requirements in 
regulation for uniform inflation adjustments to the UPLs.
    Additionally, we propose that when calculating the aggregate UPL 
using a cost-based demonstration as described in paragraph (b)(3)(i), 
the state may include the cost of provider assessments (such as health 
care-related taxes) paid by each provider in the provider category that 
is reasonably allocated to Medicaid as an adjustment to the UPL, to the 
extent that such costs were not already included in the cost-based UPL. 
For example, many states calculate their provider taxes on inpatient 
services as a per day payment amount or a per discharge payment amount. 
The state would calculate the portion of such a tax allocable to 
Medicaid by multiplying the per day or per discharge tax amount by 
Medicaid days or Medicaid discharges, as applicable, and include the 
product of that amount in the UPL for each provider in the provider 
category. When calculating the aggregate UPL using a cost-based 
demonstration, states may include the Medicaid-allocated cost of health 
care related taxes as an adjustment to the UPL amount on a per provider 
basis. The Medicare cost report does not require states to account for 
expenses related to health care related taxes as an allowable cost, as 
this reporting is optional. In the Medicaid program, such expenditures 
may be included as an allowable cost provided that the portion of the 
cost allocated to Medicaid can be isolated from the aggregate health 
care related tax payment.
    For example, if a provider has 100 total bed days of which 85 were 
Medicaid bed days and the provider paid $100 in health care related 
taxes, the provider could account for $85 of the total tax payment. Our 
current policy permits states to include the cost

[[Page 63756]]

of Medicaid's portion of health care related taxes as an allowed cost 
for cost based demonstrations, but not payment based demonstrations; we 
are proposing to codify that existing policy in regulation because, 
historically, the Medicaid taxes have not been specifically included in 
the Medicare cost report calculations. The Medicare 2552 (Hospital Cost 
Report) now includes an option to include provider taxes paid under the 
authority in section 1903(w) of the Act. To the extent that such taxes 
are not included in the cost calculation in the Medicare cost report, 
those costs should be included in the UPL. If the provider taxes are 
included in the Medicare cost report, the state should not add these 
costs back into the UPL calculation, which would result in double-
counting the tax payments. Our goal in allowing Medicaid provider tax 
costs to be added back into the cost-based UPL calculations is to 
ensure that allowable costs incurred by the providers when furnishing 
services to Medicaid beneficiaries are applied to the UPL calculations 
to the extent that they were not already captured in the Medicare cost 
report data, but we do not want such costs to be duplicated through the 
UPL and the Medicare cost report. This provision only applies to cost-
based UPL demonstrations because cost-based demonstration are 
reflections of the provider's expenses related to the provision of 
medical services and such amounts may vary based upon factors including 
health care related-taxes in the state or other relevant jurisdiction, 
while payment-based UPL demonstrations reflect only the Medicare 
payment for services under the specific Medicare payment system, and 
therefore, only adjustments which affect the overall payment under the 
Medicare payment system can be factored into the UPL demonstration.
    Finally, we propose codifying the current policy that the Medicaid 
payments, in paragraph (b)(1)(iv), included in the UPL calculation must 
only include payments made for Medicaid services under the specific 
Medicaid service type at issue in the UPL. For example, the state must 
not include payments for services other than inpatient hospital 
services in the inpatient hospital UPL calculation.
    In paragraph (b)(3), we propose acceptable methods of demonstrating 
the UPL. First, we propose that to make a cost-based demonstration in 
compliance with an applicable UPL, Medicaid covered charges are 
multiplied by a cost-to-charge ratio developed for the period covered 
by the UPL demonstration. The state may use a ratio of Medicare costs 
to Medicare charges, or total provider costs to total provider charges 
in developing the cost-to-charge ratio, but the selection must be 
applied consistently to each provider within a provider type, which 
references the listing of provider types in paragraph (a) of the 
section. The product of Medicaid covered charges and the cost-to-charge 
ratio for each provider is summed to determine the aggregate UPL. The 
demonstration must show that Medicaid payments will not exceed this 
aggregate UPL for the demonstration period. As explained in more detail 
below, this methodology may only be used for services where a provider 
applies uniform charges to all payers. Reported cost must be 
appropriately allocated between payers so that only costs properly 
allocated to Medicaid services are included in the demonstration.
    In paragraph (b)(3)(i)(A), we propose that states may make a 
retrospective, cost-based demonstration showing that aggregate Medicaid 
payments paid to the providers within the provider category during the 
prior state plan rate year did not exceed the costs incurred by the 
providers furnishing Medicaid services within the prior state plan rate 
year period. The term ``retrospective'' simply refers to Medicaid 
payments that have already been paid for the prior state plan rate year 
that has already ended, and for which the state does not anticate 
making any new Medicaid payments. Most often these demonstrations come 
from states where providers are paid using a reconciled cost 
methodology under the approved Medicaid state plan, in which case the 
Medicaid provider payments would be equal to those providers' cost of 
Medicaid services, and the UPL would demonstrate that payments to 
providers did not exceed their costs.
    In paragraph (b)(3)(i)(B), we propose that states may make a 
prospective, cost-based demonstration showing that prospective Medicaid 
payments would not exceed the estimated, prospective cost of furnishing 
the services for the upcoming state plan rate year period. As explained 
in more detail below, this methodology may only be used for services 
where a provider applies uniform charges to all payers. The prospective 
cost demonstration is a common UPL methodology reviewed by CMS and is 
often used by states to demonstrate that proposed or projected Medicaid 
payments are less than a provider cost trended forward from a prior 
period.
    In addition to these cost-based demonstrations, we also propose 
that states could use payment-based demonstrations to show compliance 
with an applicable UPL, including retrospective and prospective 
methodologies and including flexibility for the state to determine an 
imputed Medicare payment rate to apply in either a retrospective or 
prospective payment-based demonstration. We propose that the payment-
based demonstration data sources would be those identified in 
paragraphs (b)(1)(ii), (iii), and (iv), and the data standards defined 
in paragraph (b)(2) would apply. States could make a retrospective 
payment-to-charge UPL demonstration, where Medicaid covered charges are 
multiplied by a ratio of Medicare payments to Medicare charges 
developed for the period covered by the UPL demonstration. The product 
of Medicaid covered charges and the Medicare payment-to-charge ratio 
for each provider would be summed to determine the aggregate UPL, and 
the demonstration must show that Medicaid payments did not exceed this 
aggregate UPL. Alternatively, we propose that states could make a 
prospective payment-to-charge UPL demonstration, where Medicaid covered 
charges are multiplied by a ratio of Medicare payments to Medicare 
charges developed for the period covered by the UPL demonstration. The 
product of Medicaid covered charges and the Medicare payment-to-charge 
ratio for each provider would be summed to determine the aggregate UPL. 
The demonstration must show that proposed Medicaid payments would not 
exceed this aggregate UPL within the next state plan rate year 
immediately following the demonstration period. Regardless of whether a 
state is using a retrospective or prospecftive payment-to-charge 
demonstration methodology, we propose that states could use an imputed 
Medicare per diem payment rate determined by dividing total Medicare 
prospective payments paid to the provider by the provider's total 
Medicare patient days, which are derived from the provider's Medicare 
census data. Each provider's imputed Medicare per diem payment rate 
would be multiplied by the total number of Medicaid patient days for 
the provider for the period. The products of this operation for each 
provider are summed to determine the aggregate UPL. The demonstration 
must show that Medicaid payments are not in excess of the aggregate 
UPL, calculated on either a retrospective or prospective basis, 
consistent with the applicable proposed methodology. This imputed 
Medicare payment rate methodology is commonly used by long-term care 
facilities in Medicaid, such as SNFs and IMDs, or in

[[Page 63757]]

states whose Medicaid payments are based upon existing Medicare payment 
systems. For example, a state which uses the Medicare SNF PPS to 
demonstrate a SNF UPL would divide total Medicare payments by total 
Medicare SNF bed days. That product, per facility, would be multiplied 
by the Medicaid bed days, the aggregate of which would be the aggregate 
UPL. The Medicaid payments for the same time period must not exceed the 
aggregate UPL.
    It is important to note that any UPL methodology that requires the 
use of a provider's charges to calculate the UPL may only be used to 
the extent that the provider applies uniform charges to all payers. 
This is because when developing a cost to charge ratio or a payment to 
charge ratio, the initial ratio is multiplied by Medicaid charges to 
determine the UPL amount. ``Charges'' are the amount a hospital or 
provider bills for medical services, and should be the same for all 
patients regardless of payer. If the charges used in the cost to charge 
or Medicare payment to charge ratio are not the same as the Medicaid 
charges, the calculation of the UPL would be either over- or under-
stated. We intend the UPL demonstrations to accurately depict the 
Medicare cost, or what Medicare would have paid, for the same services, 
and that is diminished when the underlying data is not accurate.
    In new Sec.  447.288(c)(1), we propose that, at the time the state 
submits its quarterly CMS-64 under Sec.  430.30(c), the state would be 
required to report certain information for each supplemental payment 
included on the CMS-64. The proposed reporting elements would not be 
reported on the CMS-64 itself, but would accompany that submission on a 
separate, supplemental report. We propose to require states to report 
information sufficient to identify which providers receive which 
supplemental payments under the state plan and any demonstration 
authority, and to enable us to ensure that such payments to the 
providers are consistent with economy, efficiency, and quality of care, 
as required under section 1902(a)(30)(A) of the Act. These data 
submission requirements would include provider-level data on base and 
supplemental payments made under state plan and demonstration authority 
by service type. This data would also be required to include the 
following: The SPA transaction number or demonstration authority number 
which authorizes the supplemental payment; a listing of each provider 
that received a supplemental payment under state plan and/or 
demonstration authority, and, for each: The provider's legal name; the 
primary physical address of the location or facility where services are 
provided, including street address, city, state, and ZIP code; the 
National Provider Identifier (NPI); the Medicaid identification number; 
the employer identification number (EIN); the service type for which 
the reported payment was made; the provider specialty type (if 
applicable, for example, critical access hospital (CAH), pediatric 
hospital, or teaching hospital); the provider category (that is, state 
government provider, non-state government provider, or private 
provider); and the specific amount of the supplemental payment paid to 
each provider, including the total supplemental payment made to the 
provider authorized under the specified state plan and the total 
Medicaid supplemental payment made to the provider under the specified 
demonstration authority, as applicable.
    The specific data elements described above are intended to identify 
the individual providers receiving payments, the authority for the 
payments, and the sum of all payments received by the individual 
providers. Information such as the provider's legal name, primary 
physical location or facility location where services were provided, 
NPI, Medicaid identification number, and EIN are needed to identify the 
specific provider accurately. When the regulation refers to the 
``legal'' name, it means the business name of the facility which 
appears on the provider's license and other legal documentation 
authorizing the health care operations of the provider. The NPI is 
required for providers, and EINs are assigned to all businesses by the 
Internal Revenue Service, and must be on all Health Insurance 
Portability and Accountability Act (HIPAA) electronic transactions. An 
NPI is a unique 10-digit number used to identify health care providers. 
The Medicaid identification number is assigned by the state and is a 
unique identifier for providers participating in the Medicaid program.
    In addition to the provider-identifying information, proposed Sec.  
447.288(c)(1) would require the state to report the service type, 
provider specialty type, and provider category. These data elements are 
intended to be linked to the payment methodology in the state plan. 
This information follows how states must describe supplemental payments 
in the state plan, which is, first, organized by service type, then by 
provider-specific information, such as specialty type and provider 
category. If a state establishes a specific methodology or proposes to 
make a supplemental payment to a specific ``type'' of hospital using 
specified criteria, such as a non-state government teaching hospital or 
CAH, such information must appear in the state plan. As the proposed 
data elements are aligned with how analogous information is recorded in 
the state plan, we anticipate that this information will help us ensure 
that supplemental payments are being made to providers in accordance 
with the qualifying criteria as established in the state plan. Finally, 
we propose to require the state to report the specific amount of the 
supplemental payment made to the provider, including the total 
supplemental payment amount authorized under the specified state plan, 
as applicable, and the total supplemental payment amount authorized 
under the demonstration authority, as applicable.
    In Sec.  447.288(c)(2), we propose that not later than 60 days 
after the end of the state fiscal year, each state must annually report 
aggregate expenditure data for all data elements included in Sec.  
447.288(c)(1) plus the following: The state reporting period (state 
fiscal year start and end dates); the specific amount of Medicaid 
payments made to each provider, including, as applicable: The total FFS 
base payments made to the provider authorized under the state plan, the 
total Medicaid payments made to the provider under demonstration 
authority, the total amount received from Medicaid beneficiary cost-
sharing requirements, donations, and any other funds received from 
third parties to support the provision of Medicaid services, the total 
supplemental payment made to the provider authorized under the 
specified state plan, the total Medicaid supplemental payment made to 
the provider under the specified demonstration authority, and an 
aggregate total of Medicaid payments listed above made to the provider.
    Section 447.288(c)(2)(iii) would also require the aggregate 
reporting of the total DSH payments made to the provider, and the 
Medicaid units of care furnished by the provider (for example, on a 
provider-specific basis, total Medicaid discharges, days of care, or 
any other unit of measurement as specified by the Secretary). This 
proposed data collection effort is designed to allow us to conduct 
efficient oversight of all payments made to providers on an annual 
aggregate basis. The data, as reported, would be used to conduct 
quarterly and annual reviews of state payments as related to payments 
reported under UPL demonstrations and under the Medicaid state plan.

[[Page 63758]]

    In Sec.  447.288(c)(3), we propose that, not later than 60 days 
after the end of the state fiscal year, each state must annually report 
aggregate and provider-level information on each provider contributing 
to the state or any unit of local government any funds that are used as 
a source of non-federal share for any Medicaid supplemental payment. 
This proposed data submission requirement would include all of the data 
elements listed in Sec.  447.288(c)(1) and (2), but would also require 
information related to financial contributions to the state Medicaid 
program, specifically including: The total of each health care-related 
tax collected from the provider by any state authority or unit of local 
government; the total of any costs certified as a CPE by the provider; 
the total amount contributed by the provider to the state or a unit of 
local government in the form of an IGT; the total of provider-related 
donations made by the provider or entity related to a health care 
provider, as defined in Sec.  433.52, including in-cash and in-kind 
donations, to the state or a unit of local government, including state 
university teaching hospitals; and the total funds contributed by the 
provider (that is, health care-related taxes, CPEs, IGTs, provider-
related donations, and any other funds contributed to the state as the 
non-federal share of a Medicaid payment). When a provider-related 
entity is related to more than one entity, the state should report the 
total amount of the related entity's donation for each associated 
provider. These proposed data elements are intended to be itemized 
based on all the various payments to a provider and contributions from 
the provider, as applicable. For example, if a provider receives base 
and multiple supplemental payments under various SPA authorities and 
makes a provider tax contribution and an IGT as a means of funding the 
non-federal share, the state must list each payment and each provider 
contribution among the proposed required data reporting elements. If 
there is more than one payment or more than one type of provider 
contribution (for example, more than one tax or more than one IGT), the 
state would be required to itemize each payment and each contribution, 
as applicable. The purpose of such information from states is to 
determine the totality of provider payments under the Medicaid program 
and the extent of provider contributions to the non-federal share of 
such Medicaid payments under the approved state plan.
    We are seeking comment on all aspects of the proposals in this 
section. We are soliciting comment on the proposed reporting 
requirements in Sec.  447.288(c), including the specific proposed data 
elements in Sec.  447.288(c)(1) through (3). In particular, we invite 
comment on whether any of the proposed data elements are duplicative, 
and on ways we might be able to obtain this necessary information in a 
manner that appropriately balances administrative burden on states and 
on us while generating the most accurate data possible.
18. Failure To Report Required Information (Sec.  447.290)
    To effectively ensure that states comply with applicable federal 
statutory and regulatory requirements, we must have adequate 
enforcement mechanisms in place. The remedy for issues related to state 
compliance with regulations is often the withholding of federal funds 
to compel compliance with applicable federal requirements. We are 
proposing to add Sec.  447.290 to specify an appropriate avenue of 
enforcement in the event that a state does not comply with the proposed 
data reporting requirements in Sec.  447.288. As discussed above, we 
believe the proposed information reporting requirement under Sec.  
447.288 is necessary for the proper and efficient administration of the 
state Medicaid plan, especially with respect to the plan's compliance 
with section 1902(a)(30)(A) of the Act, and would be properly required 
under section 1902(a)(6) of the Act. Therefore, in proposed Sec.  
447.290(a), we propose that the state must maintain the underlying 
information supporting base and supplemental payments, including the 
information required to be reported under proposed Sec.  447.288, 
consistent with the requirements of Sec.  433.32, and must provide such 
information for federal review upon request to facilitate program 
reviews or OIG audits conducted under Sec. Sec.  430.32 and 430.33. In 
proposed Sec.  447.290(b), we propose that if a state fails to timely, 
completely and accurately report information required under Sec.  
447.288 of this chapter, we may reduce future grant awards through 
deferral in accordance with Sec.  430.40, by the amount of FFP we 
estimate is attributable to payments made to the provider or providers 
as to which the state has not reported properly, until such time as the 
state complies with the reporting requirements. We propose that we may 
defer FFP if a state submits the required report but the report fails 
to comply with applicable requirements. Otherwise allowable FFP for 
expenditures deferred in accordance with this proposed section would be 
released when we determine that the state has complied with all 
reporting requirements under proposed Sec.  447.288. The enforcement 
mechanism proposed in Sec.  447.290 is similar in structure to the 
mechanism that applies with respect to the DSH reporting requirements, 
in Sec.  447.299(e). We are soliciting comments on the enforcement 
mechanism proposed in Sec.  447.290.
19. Limitations on Aggregate Payments for DSHs Beginning October 1, 
1992 (Sec.  447.297)
    Current regulations require CMS to publish the annual DSH 
allotments in a Federal Register. This process is not only 
administratively burdensome, but is unnecessary as we routinely notify 
states directly regarding annual allotment amounts and make such 
information publicly available. Therefore, we are proposing to 
eliminate the Sec.  447.297(c) requirement to publish annual DSH 
allotments in a Federal Register notice and to provide that the 
Secretary will post preliminary and final national expenditure targets 
and state DSH allotments in the MBES and at Medicaid.gov (or similar 
successor system or website). Additionally, we are proposing to remove 
the date in which final national target and allotments are published 
from April 1st to as soon as practicable. We are also proposing to 
remove Sec.  447.297(e), which consists of redundant publication 
requirements already identified in Sec.  447.297(b), (c), and (d), in 
its entirety to align with our proposed changes Sec.  447.297(c). We 
are soliciting comments related to these proposed changes.
20. Reporting Requirements (Sec.  447.299)
    To improve the accuracy of identification of provider overpayments 
discovered through the DSH audit process, we are proposing in Sec.  
447.299 to add an additional reporting requirement for annual DSH audit 
reporting required by Sec.  447.299 and to provide clarifying guidance 
on the reporting of overpayments identified by the annual DSH audits 
required under part 455 subpart D. We are proposing to redesignate 
Sec.  447.299(c)(21) as paragraph (c)(22) of that section, and to add a 
proposed new Sec.  447.299(c)(21) to require an additional data element 
for the required annual DSH audit reporting. This new data element 
would require auditors to quantify the financial impact of any finding 
which may affect whether each hospital has received DSH payments for 
which it is eligible within its hospital-specific DSH limit. If it is 
not practicable to determine the actual

[[Page 63759]]

financial impact amount, we propose to require a statement of the 
estimated financial impact for each audit finding identified in the 
independent certified audit that is not reflected in the data elements 
identified in Sec.  447.299(c)(6) through (15). For purposes of this 
paragraph, audit finding means an issue identified in the independent 
certified audit required under Sec.  455.304 concerning the methodology 
for computing the hospital specific DSH limit and/or the DSH payments 
made to the hospital, including, but not limited to, compliance with 
the hospital-specific DSH limit as defined in Sec.  447.299(c)(16). 
Audit findings may be related to missing or improper data, lack of 
documentation, non-compliance with federal statutes and/or regulations, 
or other deficiencies identified in the independent certified audit. 
Actual financial impact means the total amount associated with audit 
findings calculated using the documentation sources identified in Sec.  
455.304(c) of this chapter. Estimated financial impact means the total 
amount associated with audit findings calculated on the basis of the 
most reliable available information to quantify the amount of an audit 
finding in circumstances where complete and accurate information 
necessary to determine the actual financial impact is not available 
from the documentation sources identified in Sec.  455.304(c) of this 
chapter. We understand that due to the complexity of issues that may 
arise, the actual financial impact may not always be calculable; 
therefore, we propose that, in the expectedly rare event that the 
actual financial impact cannot be calculated, an estimated financial 
impact would be required. The estimated financial impact would use the 
most reliable available information (for example, related source 
documentation such as data from state systems, hospitals' audited 
financial statements, and Medicare cost reports) to quantify an audit 
finding. We believe this additional data reporting element is necessary 
to better enable our oversight of the Medicaid DSH program to better 
ensure compliance with the hospital specific DSH limit in section 
1923(g) of the Act. Moreover, we believe this requirement would limit 
the burden on both states and CMS of performing follow-up reviews or 
audits and will help ensure appropriate recovery and redistribution, as 
applicable, of all DSH overpayments.
    The addition of Sec.  447.299(f) would clarify reporting 
requirements of DSH overpayments identified in the audit process in 
accordance with part 433 subpart F, including specifying that states 
must return DSH payments in excess of hospital-specific cost limits to 
the federal government identified through annual DSH audits through 
quarterly reporting on the Form CMS-64 as a decreasing adjustment, or 
redistributed by the state to other qualifying hospitals, if 
redistribution is provided for under the approved state plan. Section 
447.299(g) would require states to report overpayment redistribution 
amounts corresponding with the fiscal year DSH allotment, as applicable 
and consistent with other federal requirements, on the Form CMS-64 
within 2 years from the date of discovery and report such 
redistributions through quarterly reporting on the Form CMS-64 as an 
increasing adjustment. We solicit comments on the proposed rule.
21. State Plan Requirements (Sec.  447.302)
    We are proposing to revise Sec.  447.302 by adding proposed new 
paragraphs (a) through (d), which would establish state plan 
requirements for payments for outpatient hospital services, to 
implement new approval requirements for state plans and any SPAs 
proposing to make supplemental payments to providers of these services 
and to define a transition period for currently authorized supplemental 
payments to begin to meet the proposed new requirements. These 
proposals are similar to those we are making in Sec.  447.252(d) with 
respect to supplemental payments for inpatient hospital, nursing 
facility, and ICF/IID services. We are proposing to limit approval for 
state plan supplemental payments for outpatient hospital services to a 
period of not more than 3 years, and to require states to monitor a 
supplemental payment program during the term of its approval to ensure 
that the supplemental payment remains consistent with section 
1902(a)(30)(A) of the Act. As discussed in this section and other 
sections of this preamble, the proposed revisions to Sec. Sec.  
447.252, 447.288(b) and 447.302 include considerable data reporting 
requirements which would implement section 1902(a)(6) of the Act, 
requiring the state agency to make such reports, in such form and 
containing such information, as the Secretary may from time to time 
require, and comply with such provisions as the Secretary may from time 
to time find necessary to assure the correctness and verification of 
such reports. The submission of more robust payment data would assist 
us in providing proper oversight of the Medicaid program in determining 
that state Medicaid payments are made in a manner consistent with 
federal statute and regulations, including section 1902(a)(30)(A) of 
the Act and applicable UPL requirements.
    Specifically, we are proposing in Sec.  447.302(a) and (b) to 
codify existing state plan requirements that the plan must provide that 
the requirements of subpart F are met and that the plan must specify 
comprehensively the methods and standards used by the agency to set 
payment rates. We propose in Sec.  447.302(c) that CMS may approve a 
supplemental payment, as defined in Sec.  447.286, provided for under 
the state plan or a SPA for a period not to exceed 3 years. A state 
whose supplemental payment approval period has expired or is expiring 
may request a SPA to renew the supplemental payment for a subsequent 
period not to exceed 3 years, consistent with the requirements of Sec.  
447.302. A time limited supplemental payment allows CMS and the state 
an opportunity to revisit state plan supplemental payments to ensure 
that they remain consistent with efficiency, economy, and quality of 
care, as required under section 1902(a)(30)(A) of the Act. Over the 
years, CMS and various oversight bodies conducting financial management 
reviews and audits have identified areas where unchecked supplemental 
payments have resulted in payments that appeared to be excessive, and 
CMS had little recourse to take action. Such audits and financial 
reviews conducted by CMS or other oversight agencies can take years and 
require a large number of state and federal resources to complete, and 
ultimately resolve. As noted earlier in this preamble, in 2015, the GAO 
issued a report entitled, ``Medicaid: CMS Oversight of Provider 
Payments Is Hampered by Limited Data and Unclear Policy,'' in which it 
concluded that, ``[w]ithout good data on payments to individual 
providers, a policy and criteria for assessing whether the payments are 
economical and efficient, and a process for reviewing such payments, 
the federal government could be paying states hundreds of millions, or 
billions, more than what is appropriate.'' \10\ As a result, the GAO 
has recommended that, to better ensure the fiscal integrity of the 
program, we should establish financial reporting at a provider-specific 
level and clarify permissible methods for calculating Medicaid 
supplemental payment amounts. Based on this and other oversight entity 
recommendations, and

[[Page 63760]]

CMS' experience administering the Medicaid program at the federal 
level, we believe that the time-limited approval of supplemental 
payments is necessary for the proper and efficient operation of state 
Medicaid plans to ensure the continuing consistency of supplemental 
payments with applicable statutory requirements and generally to ensure 
appropriate oversight.
---------------------------------------------------------------------------

    \10\ U.S. Gov't Accountability Office, GAO-15-322, Medicaid: CMS 
Oversight of Provider Payments Is Hampered by Limited Data and 
Unclear Policy, 46 (2015), https://www.gao.gov/assets/670/669561.pdf.
---------------------------------------------------------------------------

    We are not proposing to limit the number of times a state may 
request, and receive approval for renewal of a supplemental payment 
program, provided that each request meets all applicable requirements. 
We propose that a state plan or SPA that would provide for a 
supplemental payment would be required to include: (1) An explanation 
of how the state plan or SPA will result in payments that are 
consistent with section 1902(a)(30)(A) of the Act, including that 
provision's standards with respect to efficiency, economy, quality of 
care, and access along with the stated purpose and intended effects of 
the supplemental payment, for example, with respect to the Medicaid 
program, providers, and beneficiaries; (2) the criteria to determine 
which providers are eligible to receive the supplemental payment; (3) a 
comprehensive description of the methodology used to calculate the 
amount of, and distribute, the supplemental payment to each eligible 
provider, including specified content; (4) the duration of the 
supplemental payment authority (not to exceed 3 years); (5) a 
monitoring plan to ensure that the supplemental payment remains 
consistent with the requirements of section 1902(a)(30)(A) of the Act 
and to enable evaluation of the effects of the supplemental payment on 
the Medicaid program, for example, with respect to providers and 
beneficiaries; and (6) for a SPA proposing to renew a supplemental 
payment for a subsequent approval period, an evaluation of the impacts 
on the Medicaid program during the current or most recent prior 
approval period, for example, with respect to providers and 
beneficiaries, and including an analysis of the impact of the 
supplemental payment on compliance with section 1902(a)(30)(A) of the 
Act. For the state's comprehensive description of the methodology used 
to calculate the amount, and distribution, of the supplemental payment 
to each eligible provider as required under item (3), we would require 
the state to provide all of the following: (1) The amount of the 
supplemental payment made to each eligible provider, if known, or, if 
the total amount is distributed using a formula based on data from one 
or more fiscal years, the total amount of the supplemental payments for 
the fiscal year or years available to all providers eligible to receive 
a supplemental payment; (2) if applicable, the specific criteria with 
respect to Medicaid service, utilization, or cost data from the 
proposed state plan rate year to be used as the basis for calculations 
regarding the amount and/or distribution of the supplemental payment; 
(3) the timing of the supplemental payment to each eligible provider; 
(4) an assurance that the total Medicaid payment to other inpatient and 
outpatient facilities, including the supplemental payment, will not 
exceed the upper limits specified in Sec.  447.325; and (5) if not 
already submitted, an UPL demonstration as required by Sec.  447.321 
and described in proposed Sec.  447.288.
    The justification for including the state plan requirements in 
Sec.  447.302 are the same as those justifications and explanations 
included in the discussion with regard to Sec.  447.252. We are 
proposing to require states to provide information necessary to 
determine that the supplemental payments proposed in the state plan 
are, and remain, consistent with the efficiency, economy, and quality 
requirements under section 1902(a)(30)(A) of the Act and the parameters 
concerning permissible sources of non-federal share under section 
1903(w) of the Act.
    Finally, in considering the 3-year approval period for supplemental 
payments, we developed a transition plan to provide states with an 
adequate opportunity to come into compliance with the proposed 
requirements. To accomplish the policy objectives described above, we 
believe we must begin to apply the proposed policies, if they are 
finalized, to current state plan provisions that authorize supplemental 
payments that are approved as of the effective date of the final rule. 
It is no less necessary to ensure the proper and efficient operation of 
the state plan and ensure that applicable requirements continue to be 
met, to rigorously evaluate currently existing supplemental payment 
programs, as it is to do so for new supplemental payment programs 
approved prospectively. Accordingly, in proposed Sec.  447.302(d), for 
state plan provisions approved 3 or more years prior to the effective 
date of the final rule, we propose that the state plan authority would 
expire 2 calendar years following the effective date of the final rule. 
For state plan provisions approved less than 3 years prior to the 
effective date of the final rule, we propose that the state plan 
authority would expire 3 years following the effective date of the 
final rule. We believe this is a generous timeline for transitioning to 
the proposed 3-year time limit for supplemental payments under the 
state plan. This timeline provides states with currently approved 
supplemental payment programs with at least 2, and as many as 3 years 
before a state wishing to continue the supplemental payment program 
would need to seek renewal or a new approval.
    We are soliciting comment on this entire section, including the 
proposed state plan elements for supplemental payments, and the 
proposed approval timeframe for a state's proposed supplemental 
payments. For the timeframes, we are seeking input on both the 3-year 
approval period and the proposed transition period for currently 
approved supplemental payments. We considered proposing a 5-year 
compliance transition period instead of the proposed 3-year compliance 
transition period in Sec.  447.302(d). This would have increased the 
amount of time states would have to bring existing, approved 
supplemental payment methodologies into compliance with the provisions 
of the proposed rule in Sec. Sec.  447.252 and 447.302. We decided to 
propose a 3-year transition period to account for states where changes 
may require legislative action as some legislatures meet on a biennial 
basis and such a timeframe would provide an opportunity for all 
legilslatures to address existing supplemental payment programs. We are 
requesting comment on whether or not to pursue this or a lengthier 
transition and approval timeline for supplemental payments.
22. Outpatient Hospital Services: Application of UPLs (Sec.  447.321)
    To promote improved oversight of Medicaid program FFS expenditures 
for services subject to the UPL, we are proposing changes to Sec.  
447.321. Some of the proposed changes to Sec.  447.321 would formally 
codify current policy, while others are newly proposed. We solicit 
comment on all proposed provisions.
    CMS has long regarded the UPL requirements in Sec.  447.321 and the 
review of total outpatient hospital Medicaid payments in relation to a 
provider's cost or the Medicare payment amounts as implementing section 
1902(a)(30)(A) of the Act, which requires that states assure that 
payments are consistent with efficiency, economy, and quality of care. 
As stated earlier in the preamble, the aggregate application of these 
UPLs has preserved state flexibility for setting provider-specific 
payments while creating an overall payment ceiling as a mechanism for

[[Page 63761]]

determining economy and efficiency of payment for the services 
described above, consistent with section 1902(a)(30)(A) of the Act.
    We are proposing to change the title of this section to 
``Outpatient Hospital Services: Application of upper payment limits'' 
to remove clinic services from the UPL requirements in Sec.  447.321. 
The absence of benefit category in the Medicare program similar to 
Medicaid ``clinic services'' has made establishing and verifying 
compliance with a UPL for clinic services an overly burdensome task. 
Without equivalent comparison data from Medicare, it is difficult or 
impossible to establish a reasonable estimate of what Medicare would 
pay for Medicaid clinic services, which otherwise would supply the UPL 
for such services under Sec.  447.321. Additionally, most often, 
clinics are reimbursed according to the practitioner fee schedule in 
the same manner as other practitioners under the Medicaid state plan. 
In these circumstances, we have determined that such payments are not 
subject to the clinic UPL in any event, because these provider payments 
are made under the relevant practitioner benefit in the Medicaid 
program, such as physician services or dental services under sections 
1905(a)(5) and (a)(10) of the Act, respectively, rather than clinic 
services under section 1905(a)(9) of the Act. As with all other 
inpatient and outpatient facility services, state agencies must 
continue to apply Sec.  447.325 under which the agency may pay the 
customary charges of the provider but must not pay more than the 
prevailing charges in the locality for comparable services under 
comparable circumstances.
    We have proposed to revise this regulation in the past through 
other proposed rules, but were unable to finalize those proposals. 
Particularly, in 2007 with the proposed rule Medicaid Program; 
Clarification of Outpatient Clinic and Hospital Facility Services 
Definition and Upper Payment Limit (72 FR 55166), we proposed several 
practical options for states to comply with clinic UPL requirements. 
Namely, these options included paying at the Medicare non-facility 
Resource-Based Relative Value Units System (RBRVS) FFS rate for 
practitioner services in a clinic setting, or setting the rates for 
services provided in the clinic at the Medicaid state plan rate for the 
same services when provided by a practitioner under the state plan 
where there was no Medicare comparable rate. The difficulty in applying 
the proposals in that particular proposed rule, and difficulties 
setting and establishing compliance with clinic UPLs since, has been 
related to the subjectivity of establishing appropriate comparison 
prices for services where there is no Medicare equivalent, or limiting 
Medicaid providers to cost when Medicare does not collect or mandate 
clinic cost reports for free-standing clinics, as is done with other 
inpatient and outpatient facilities. For these reasons, we are 
proposing to remove clinic services from Sec.  447.321 so the 
requirements of the outpatient UPL will no longer apply to these 
providers and we are requesting comment on this proposed change.
    Importantly, this proposal does not mean that the requirements of 
section 1902(a)(30)(A) of the Act do not continue to apply to clinic 
payments--emphatically, they do. We simply are proposing to no longer 
use the clinic UPL as the formal metric of compliance with the 
efficiency, economy, and quality of care requirements under the 
statute. We will continue to compare the Medicare RBRVS to Medicaid 
clinic reimbursement rates, where applicable, to inform administrative 
decisions about the state's payment rates under section 1902(a)(30)(A) 
of the Act, much like we do with physician reimbursement under the 
Medicaid state plan. We are soliciting comment on this particular 
change in the proposed rule.
    We are proposing to amend paragraph (a) to revise the current 
ownership groups (state government-owned or operated, non-state 
government owned or operated, and privately-owned and operated 
facilities) used to establish the UPL. We propose to replace these 
provider designations with ``state government providers,'' ``non-state 
government providers,'' and ``private providers.'' We propose to codify 
the substantive definitions of these provider designations in proposed 
Sec.  447.286. As discussed below, we would define ``state government 
provider'' to refer to a health care provider as defined in Sec.  
433.52, including those defined in Sec.  447.251, that is a unit of 
state government or state university teaching hospital; in determining 
whether a provider is a unit of state government, we would consider the 
totality of the circumstances, including but not limited to specific 
considerations identified in proposed Sec.  447.286. Similarly, we 
would define ``non-state government provider'' to refer to a health 
care provider as defined in Sec.  433.52, including those defined in 
Sec.  447.251, that is a unit of local government in a state, including 
a city, county, special purpose district, or other governmental unit in 
the state that is not the state, which has access to and exercises 
administrative control over state funds appropriated to it by the 
legislature and/or local tax revenue, including the ability to expend 
such appropriated or tax revenue funds; in determining whether a 
provider is non-state government provider, we would consider the 
totality of the circumstances, including but not limited to specific 
considerations identified in proposed Sec.  447.286. We would define a 
``private provider'' to mean a health care provider as defined in Sec.  
433.52, including those defined in Sec.  447.251, that is not a state 
government provider or a non-state government provider.
    The proposed changes in provider designations would reinforce the 
relationship between a provider's designation and its ability (or 
inability) to provide the source of non-federal share for Medicaid 
payments. Under the current system of categorization by ownership or 
operational interests, there can be ambiguity with respect to the 
appropriate category for a provider when certain responsibilities of 
ownership or operation are divided between more than one entity. For 
example, there is currently the possibility that a private nursing 
facility could transfer the deed to its real property to the county 
government, but the private entity would continue to administer all 
functions of the provider as though it were the actual owner, leaving 
the county government as the owner only in name but not any function. 
For the provider to make an IGT, the private entity would give funds to 
the county government, such as through a lease payment for the facility 
real property, to be used as the source of the non-federal share of 
Medicaid payments that the state could then make back to the provider 
in the form of supplemental payments. This effective self-funding of 
the non-federal share of the supplemental payments by the provider 
would not have been possible if the provider were categorized as 
privately owned and operated, since it would have been unable to make 
the IGT to support the supplemental payments back to it. In this 
situation, we view this transferred amount as an impermissible source 
of the non-federal share, since the funds used to support the IGT are 
not obtained from state or local tax revenue and, as discussed 
elsewhere in this preamble, would constitute a non-bona fide provider-
related donation.
    Through the state plan review process and our review of UPL 
demonstrations, we have observed that some states have re-categorized a 
number of providers from privately-owned or operated facilities to a 
governmentally owned or

[[Page 63762]]

operated designation, either state government-owned or operated 
facilities or non-state government-owned or operated facilities. In 
some instances, the change in ownership category appears to be both a 
non-bona fide provider-related donation, as well as a device to permit 
the state to make supplemental payments to a provider and demonstrate 
compliance with the UPL, rather than reflective of an actual change in 
the provider's true ownership or operational interests, in view of the 
apparent continuity of the provider's business structure and 
activities. We believe this shift in designation has facilitated higher 
supplemental payments to certain providers, without the state incurring 
additional cost to fund the non-federal share of payment where the 
private operator passes funds to the new governmental owner, which 
constitutes a non-bona fide provider-related donation, and those funds 
are either used to make an IGT or supplant funds that are otherwise 
used to make an IGT to the state to make a supplemental payment 
targeted toward the private entity. We are concerned that this type of 
arrangement is not consistent with the basic construct of the Medicaid 
program as a cooperative federal-state partnership where each party 
shares in the cost of providing medical assistance to beneficiaries.
    Similar to our proposal in Sec.  447.272, we propose to amend Sec.  
447.321(b) to clarify that the UPL refers to a reasonable estimate of 
the amount that would be paid for the services furnished by the group 
of facilities under Medicare payment principles in 42 CFR chapter IV, 
subchapter B, or allowed costs established in accordance with the cost 
principles as specified in 45 CFR part 75 and 2 CFR part 200, or, as 
applicable, Medicare cost principles specified in 42 CFR part 413. The 
specific data elements, methodology parameters, and acceptable UPL 
demonstration methodologies are specified in proposed Sec.  447.288(b).
    The existing regulations simply state that the UPL refers to a 
reasonable estimate of the amount that would be paid for the services 
furnished by the group of facilities under Medicare payment principles 
in subchapter B of title 42, chapter IV, of the CFR, which provided CMS 
with the ability to define UPLs as a payment limit set at the aggregate 
amount that Medicare would have paid for the same Medicaid services 
using either a Medicare payment methodology or Medicare cost 
principles. These two methods are employed because these are the two 
methods that Medicare has historically used to pay for services as 
authorized under title 42, chapter IV, subchapter B, of the CFR. In 
establishing this limit, we have required that states set the UPL using 
these principles, then compare the aggregate Medicaid payments for the 
defined period to the UPL, which is the Medicare equivalent payment or 
cost amount. We are proposing to codify our existing policy related to 
the use of the two methods of demonstrating the Medicaid UPL, by using 
the Medicare equivalent payment amount or cost amount, and the process 
for establishing and demonstrating compliance with the UPL in Sec.  
477.288(b) of this proposed rule. As noted elsewhere in this proposed 
rule, the term ``Medicare equivalent'' means the Medicare equivalent to 
the Medicaid data, payment, or services. Therefore, the term Medicare 
equivalent payment means the amount that would be paid for Medicaid 
services furnished by the group of providers if those services were 
provided to Medicare beneficiaries and paid under Medicare payment 
principles. Likewise, a reference to Medicare equivalent charges in 
reference to a UPL calculation means the Medicare charges for the same 
Medicaid services subject to the UPL.
    We considered proposing to define specific methods by which states 
would be required to demonstrate compliance with the UPL in each of 
Sec. Sec.  447.272 and 447.321, but determined that the proposed Sec.  
447.288 would allow us to define necessary data elements, parameters, 
and methodologies for demonstrating compliance with UPLs in one 
location, for purposes of both the inpatient and outpatient UPLs under 
Sec. Sec.  447.272 and 447.321, respectively. To summarize briefly, 
proposed Sec.  447.288 describes the data sources, data parameters, and 
methodologies that must be considered and used in demonstrating 
compliance with the UPL. It describes the appropriate Medicare data and 
the creation of ratios using either cost or payment data calculations, 
the Medicaid charge data which multiplied by the either a ratio of 
cost-to-charge (total cost or Medicare cost) or the ratio of Medicare 
payment-to-charge to calculate the UPL amount and any associated 
considerations (inflation adjustments, utilization adjustments, or 
other cost adjustments), and the Medicaid payment data. For a detailed 
discussion of these proposed UPL requirements, please refer to the 
discussion above related to Sec.  447.288.
    We invite comment on all proposed new and revised provisions in 
this section.
23. Medicaid Practitioner Supplemental Payments (Sec.  447.406)
    For a number of years, states have been making supplemental 
payments that are targeted to certain practitioners, such as physicians 
and other licensed professionals, under the Medicaid state plan. Most 
commonly, states have targeted supplemental payments to practitioners 
affiliated with and furnishing services in academic medical centers and 
safety net hospitals. These payments have used what is commonly 
described as an ACR calculation. The ACR is a method of calculating an 
average rate paid by commercial third party payers for specific medical 
service codes (usually Current Procedural Terminology (CPT) codes) to 
providers and multiplying that average rate by the Medicaid claims for 
each code to establish an upper limit for these practitioner 
supplemental payments.
    Predominantly, such ACR payments are funded by IGTs from local 
government sources or state university teaching hospitals and are 
generally made without consideration of improvements in access to or 
quality of care. When payment is made up to the ACR, states submit data 
to CMS from the top (generally five) commercial payers and provide an 
explanation of the data that was extracted from providers' accounts 
receivable systems. The state compares payment by Medicaid for each 
billing code to the average payment amount allowed by commercial payers 
for the same services. Data from each of the practitioners, group 
practices, or hospital-based practitioner groups eligible to receive 
the supplement payment is included in the submitted ACR calculation. 
These calculations are usually completed by the provider(s) and sent to 
CMS by the states through the submission of SPAs. We are proposing to 
end the practically unrestricted use of ACR supplemental payments based 
on concerns that the payments are not economic and efficient, 
consistent with section 1902(a)(30)(A) of the Act, and that they 
present a clear oversight risk because they are based on proprietary 
commercial payment data and thus not verifiable or auditable. As 
discussed in detail below, we are proposing to limit Medicaid 
practitioner supplemental payments to 50 percent of FFS base payments 
to the eligible provider for practitioner services, or 75 percent of 
such payments for services provided within HHS' Health Resources and 
Services Administration (HRSA)-designated geographic health 
professional shortage areas (HPSAs) or

[[Page 63763]]

Medicare-defined rural areas, as specified in 42 CFR 412.64(b), as 
discussed below.
    When ACR-based payments were first approved in 2000, we found that 
state ACR amounts were between 150 percent and 165 percent of the 
Medicare rates for the same services. In recent years, however, states 
have sought to make Medicaid practitioner supplemental payments based 
on calculations reflecting amounts of approximately 300 percent to 400 
percent of the Medicare rate. While these percentage are outliers among 
states making ACR payments, those amounts were considerably larger than 
we had otherwise seen. In federal FY 2018, the most recent full fiscal 
year for which data was reported, states claimed approximately $1.32 
billion in (total computable) expenditures for supplemental payments 
made to physicians and other licensed practitioners. As states and 
practitioners realized that Medicaid payments could be increased 
through the use of ACR-based supplemental payment methodologies and 
with funding from IGTs, states began to explore expanding the ACR-based 
supplemental payments to other Medicaid participating practitioners.
    Although we questioned whether making Medicaid payments at up to 
400 percent of Medicare rates was consistent with economy and 
efficiency as required under section 1902(a)(30)(A) of the Act, we 
continued to approve ACR methodologies submitted by states consistent 
with our historic view that such methodologies that relied on 
commercial data were permissible under the relevant statutory 
standards, and because we had not established an upper bound for 
practitioner supplemental payments through rulemaking.
    In this rule, except as discussed below, we are proposing to apply 
the definitions applicable to base and supplemental payments defined 
under newly proposed Sec.  447.286--Definitions and the proposed new 
requirements in Sec.  447.302--State plan requirements. By aligning 
these definitions and requirements, we are ensuring that the 
terminology for base and supplemental payments for practitioner 
services is consistent with other service types and that states apply 
the same comprehensive descriptions and time limits to practitioner 
supplemental payments as would be applied to other Medicaid service 
supplemental payments. Further, we are proposing, within Sec.  
447.406(c), to limit Medicaid practitioner supplemental payments 
relative to base payments set under the Medicaid state plan. Notably, 
lump sum provider quality incentive supplemental payments that are 
targeted to a subset of providers within the state as part of a state's 
delivery system reform initiative and paid based on improvements to 
reported quality measures are included in the definition of 
``Supplemental payment'' under proposed Sec.  447.286, for purposes of 
newly proposed Sec.  447.406, and therefore, would be subject to the 
limit proposed in Sec.  447.406. To the extent that value-based payment 
methodologies that are part of a state's delivery system reform 
initiative and that are available to all providers under a Medicaid 
benefit category, including as an alternative to FFS payment rates (for 
example, bundled payment methodologies, payments for episodes of care, 
Medicaid shared savings methodologies), and otherwise align with the 
definition of base payments in Sec.  447.286 (for example, the payment 
can be attributed to a particular service provided to a Medicaid 
beneficiary), we propose such payments to be base payments as defined 
in Sec.  447.286. This consideration is consistent with the proposed 
definitions of base and supplemental payments and will allow states 
sufficient flexibility to promote quality improvement which may result 
in better care and reduced program cost over time.
    The proposed new limits would allow states to target supplemental 
payments to practitioners: (1) Up to 50 percent of the FFS base 
payments authorized under the state plan for the practitioner services 
paid to the eligible provider during the period covered by the 
supplemental payment, or (2) for services provided within HRSA-
designated geographic HPSA or Medicare-defined rural areas as defined 
in Sec.  412.64(b), Medicaid practitioner supplemental payments could 
be made up to 75 percent of the FFS base payments authorized under the 
state plan for the practitioner services paid to the eligible provider 
during the period covered by the supplemental payment. We are proposing 
to permit additional payment for practitioner services in geopgraphic 
HPSAs to allow states flexibility to increase payment rates and address 
professional shortages and access to care concerns in areas where HHS 
has determined such shortages exist. Likewise, we are proposing to 
include Medicare-defined rural areas as defined in Sec.  412.64(b) 
because states have frequently identified rural areas, some of which 
may not be included in the geographic HPSAs, as having issues related 
to access to care and we want to provide states with the flexibility to 
make increased practitioner supplemental payments if the state 
determines that such increases are needed in those areas as well.
    We believe these percentages are appropriate because the ACR data 
from 2016 and 2017 show that, nationally, among providers receiving an 
ACR supplemental payment, total supplemental payments equaled 
approximately 75 percent of the base payment rates in 2016 to 
approximately 93 percent of the base payment rates in 2017 (total 
supplemental payment divided by total base payments to qualifying 
provider) based on data received through the state UPL demonstration 
submissions. By limiting the total practitioner payment, base and 
supplemental payment, to 150 percent of the base Medicaid practitioner 
payment, or 175 percent of the base Medicaid practitioner payment for 
services provided in a HRSA-designated geographic HPSA or a Medicare-
defined rural area, we believe that the proposed policy would not 
diverge excessively from ACR supplemental payments that we historically 
have approved. However, under the prior structure, the supplemental 
payment was not related to the base Medicaid payment and could only be 
increased based on changes to the commercial payer rates. Therefore, an 
increase in the base Medicaid payment could not result in an increase 
in a supplemental payment to eligible providers, as would be possible 
under our proposal. If a state wants to increase a provider's 
supplemental payment beyond the maximum amount that would be 
permissible under the proposed provision, the state could increase 
Medicaid base payment rates, which could enable the state to pay a 
further 50 percent (or 75 percent) of the increase in FFS base payments 
to eligible providers. We believe this approach is, first, consistent 
with section 1902(a)(30)(A) of the Act, and, second, is sufficiently 
consistent with the previously approved Medicaid ACRs amounts not to 
excessively disturb total provider payments being made today under 
previously approved ACR supplemental payment arrangements.
    To provide an example of the application of the proposed Medicaid 
practitioner supplemental payment limit, assume the state has proposed 
to make a supplemental payment to a group of practitioners within an 
area of the state that is not a HRSA-designated geographic HPSA or 
Medicare-defined rural area. One of the qualifying providers received 
total Medicaid FFS base payments for practitioner services of $100,000 
and the state wishes to make a supplemental payment to that provider. 
The proposed ceiling

[[Page 63764]]

methodology results in the following calculation: $100,000 total 
Medicaid base payments x 0.50 = $50,000, which could allow the state to 
make a Medicaid practitioner supplemental payment to the provider of up 
to $50,000, in addition to the Medicaid FFS base payment of $100,000, 
for a total payment to the provider of up to $150,000. However, if the 
Medicaid practitioner supplemental payment were made to a provider for 
services furnished in one of the HRSA-designated geographic HPSAs or a 
Medicare-defined rural area, the supplemental payment ceiling would be 
75 percent of the total base payment amount of $100,000, which would 
result in the following ceiling calculation: $100,000 total Medicaid 
base payment x 0.75 = $75,000, which could allow the state to make a 
Medicaid practitioner supplemental payment of up to $75,000, in 
addition to the Medicaid FFS base payment of $100,000, for a total 
payment to the provider of up to $175,000.
    In this proposed rule, we propose definitions of the terms ``base 
payment'' and ``supplemental payment'' in Sec.  447.286. Per those 
proposed definitions, we consider Medicaid practitioner supplemental 
payments as ``supplemental'' payments under the proposed definitions. 
The reason is that the base payments are payments made to a provider 
for specific services provided to an individual beneficiary. While 
Medicaid practitioner supplemental payments could be tied to individual 
services, the calculation of the final payment amount is not dependent 
upon specific services furnished to any individual beneficiary, or any 
beneficiary's acuity or complexity of care received, nor is the 
practitioner supplemental payment made only for complex cases. Base 
payments for all practitioner services furnished by the eligible 
provider are supplemented by the supplemental payment, regardless of 
the level of beneficiary acuity or complexity (as typically would be 
relevant to payment adjustments or add-ons that would be considered 
part of the base payment). The eligible provider qualifies for these 
payments based on state-developed criteria that target certain 
providers, and the supplemental payments are often paid as lump sum at 
the end of a quarter or at the end of year.
    In proposing these requirements, we are seeking to establish an 
appropriate and auditable upper bound to better ensure that 
practitioner payments are consistent with economy and efficiency by 
ensuring the supplemental payments have a reasonable relationship to 
the base rate methodologies that have been approved by CMS on the basis 
of our determination that such base rate methodologies are consistent 
with statutory requirements. The ACR supplemental payments historically 
have been established based on the negotiating power of various actors 
in the private market and without regard to the unique circumstances of 
the Medicaid program, including statutory requirements to ensure 
efficiency and economy. That is, higher reported commercial payment 
rates are a function of practitioners' ability to negotiate higher 
rates from certain commercial payers, rather than a result of 
prevailing rates generally paid to practitioners by all commercial 
payers, or all payers generally, and without any necessary analysis of 
economy and efficiency.
    In contrast, the proposed provisions intend to tie the highest 
practitioner payments in the state to the lowest (that is, payments to 
practitioners that are limited to the state plan FFS base payment). 
States have already determined and declared as part of their rate-
setting processes that base payments are consistent with economy and 
efficiency, quality of care, and access to care requirements, as 
required under section 1902(a)(30)(A) of the Act. Therefore, we believe 
that setting the upper limit for targeted practitioner supplemental 
payments at 50 percent or 75 percent more than the base amounts is 
reasonably sufficient to allow states with flexibility, when needed, to 
target payment increases while providing a basis to gauge that payments 
are consistent with efficiency, economy, and quality of care and are 
sufficient to enlist enough providers so that care and services are 
available under the plan at least to the extent that such care and 
services are available to the general population in the geographic 
area. State payments must meet both tests of section 1902(a)(30)(A) of 
the Act in that a base payment may be economic and efficient, but if it 
is not sufficient to enlist sufficient providers in a particular area 
of the state, then an increase in payments may be needed to ensure that 
the rates are sufficient to enlist adequate numbers of providers in the 
Medicaid program. Further, this proposed policy may encourage states to 
evaluate whether Medicaid payment rates are generally consistent with 
section 1902(a)(30)(A) of the Act across all practitioners within a 
geographic region and evaluate whether rate increases for all 
practitioners may be necessary to improve access or quality, rather 
than targeting payments to certain practitioners that may be in a 
position to provide the non-federal share in exchange for supplemental 
payments.
    Our concerns over the growing scope of practitioner supplemental 
payments relate to both the payment amounts relative to Medicare rates 
and the practitioners to which the states are providing the payments, 
which appears to be largely driven by the source of non-federal share 
used to fund the payments. As states typically rely on the providers 
that receive the supplemental payments to fund the non-federal share 
through IGTs, there is less incentive for the states to properly 
oversee the payments and ensure that the amounts are economic and 
efficient. Typically when states use appropriated funds as the source 
of non-federal share there is a meaningful state interest in ensuring 
value to maintain state budgets; however, when the non-federal share is 
provided by the service provider (and returned with matched federal 
funds through the supplemental payments) there is an inherent incentive 
to maximize the amount of the payments to providers in the state. In 
almost all instances, the providers were supplying the state with the 
non-federal share of the Medicaid physician supplemental payments. 
Without the supplemental payments, it is likely that the arrangements 
through which the providers have been transferring the state share to 
the state Medicaid agency to support current high levels of Medicaid 
practitioner supplemental payments would cease, and therefore, the net 
impact on the providers would be far less than the projected amount of 
decrease in practitioner supplemental payments.
    The incentive to maximize federal funds to providers and lack of 
oversight interest from states is particularly problematic in the case 
of practitioner supplemental payments because of the data sources used 
for ACR demonstrations. The data currently used to determine 
supplemental payment amounts is based entirely on proprietary 
commercial payment data supplied by the practitioners who themselves 
stand to benefit from the supplemental payment. In our reviews, we have 
not been able to verify that the commercial payment data is correct or 
genuinely representative of rates that the commercial market will bear. 
We have also found, in several instances, that the data has been 
manipulated to increase the potential supplemental payments by, for 
instance, using comparisons to Medicaid rates paid for services within 
facilities (which are generally lower than office settings) compared to 
non-facility commercial rates, or by

[[Page 63765]]

foregoing appropriate adjustments to ensure that the time and 
associated payments for procedures are equivalent for Medicaid and 
commercial data. Since the data within the ACR demonstrations are 
produced by providers (and masked to protect proprietary information), 
the demonstrations are impossible to validate, difficult to interpret 
and ultimately may not be auditable in accordance with Sec.  430.33. By 
setting a limit based on Medicaid-based rates, as proposed under this 
rule, data is readily available within state and CMS claims systems to 
validate and audit the supplemental payment amounts.
    We recognize that states that are already making ACR-based 
supplemental payments may need time to come into compliance with the 
proposed new limits, if they are finalized. For states whose state 
plans currently provide for Medicaid practitioner supplemental 
payments, we are proposing in Sec.  447.406(d) to provide a transition 
period consistent with the one defined in Sec.  447.302(d) for the 
state to submit a SPA to bring its currently approved Medicaid 
supplemental practitioner payment program into compliance with the 
requirements proposed in this section, including the cross-referenced 
requirements in Sec.  447.302. Specifically, we propose that, for 
Medicaid practitioner supplemental payments that were approved on or 
before the effective date of any final rule, the state would be 
required to submit and obtain CMS approval for a SPA to comply with the 
requirements of this section in order to continue making such 
supplemental payments. Otherwise, the authority for state plan 
provisions that authorize the Medicaid practitioner supplemental 
payments that are approved as of the effective date of any final rule 
would be limited according to the timeframe described in Sec.  
447.302(d). By the end of the transition period, a state without an 
approved SPA bringing the Medicaid practitioner supplemental payment 
program into compliance with the requirements of this section (and, as 
incorporated by cross reference, of Sec.  447.302) would not be 
authorized to continue making the supplemental payments. We believe 
this approach to a transition period would help minimize burden on 
states, as states with Medicaid practitioner supplemental payment 
programs would have a generous period of time to bring their state 
plans into compliance with the proposed new requirements. Additionally, 
we propose that states would no longer be required to submit annual ACR 
demonstrations for the annual UPL submission requirements outlined in 
the SMDL 13-003 for states that make targeted physician supplemental 
payments for physician services, further reducing the associated state 
burden. Instead, CMS expects that the state plan would include a 
comprehensive written statement of the Medicaid FFS base payment and 
Medicaid practitioner supplemental payment methodologies, in a manner 
consistent with Sec. Sec.  447.302, 447.406, and all other applicable 
requirements.
    We are seeking comment on all elements of this proposal, including 
the level of the proposed ceiling percentages (and whether they should 
be higher or lower), the option of using the Medicare rural areas and/
or HRSA-designated geographic HPSA to target eligible providers for 
supplemental payments, the language regarding value-based payment 
methodologies, and whether there would be other appropriate means to 
give states flexibility to offer special consideration for providers in 
underserved areas.
24. Definitions (Sec.  455.301)
    We are proposing to revise the definition of the ``independent 
certified audit'' to include the requirement for auditors to quantify 
the financial impact of each audit finding, or caveat, on an individual 
basis, for each hospital, per the reporting requirement in Sec.  
447.299(c)(21) and under section 1923(j)(1)(B) of the Act. 
Additionally, we propose to include in the definition how a 
certification of the audit would include a determination of whether or 
not the state made DSH payments that exceeded any hospital's specific 
DSH limit in the Medicaid state plan rate year under audit. 
Specifically, we are proposing to add to annual DSH reporting a 
requirement for auditors to quantify the financial impact of any 
finding, including those resulting from incomplete or missing data, 
which may affect whether each hospital has received DSH payments for 
which it is eligible within its hospital-specific DSH limit. As 
previously discussed, based on the audit results we are often unable to 
determine whether a DSH overpayment to a provider has occurred, the 
underlying causes of the overpayments, and the amount of the 
overpayments associated with each cause. This is the result of an 
auditor including an audit finding indicating that the missing 
information may have an impact on the calculation of total eligible 
uncompensated care costs while not making a determination of the actual 
financial impact of the identified issue. As a result of this lack of 
quantification of the financial impact of this finding, we are unable 
to determine whether an overpayment, if any, has resulted from this 
audit finding. As such, revising the definition is necessary in 
promoting oversight and integrity of the DSH program and ensuring the 
audit and report results allow us to calculate accurate hospital-
specific limits. We are soliciting comments related to this proposed 
change.
25. Process and Calculation of State Allotments for Fiscal Year After 
FY 2008 (Sec.  457.609)
    We are using the opportunity within this regulation to revise the 
method for notifying states and the public of national CHIP allotments. 
Section 2104 of the Act provides appropriations for fiscal year CHIP 
allotments for FYs 1998-2027 as determined under the methodologies 
provided in sections 2104(b), 2104(c), and 2104(m) of the Act as 
applicable for payments to states as described in section 2105 of the 
Act. Section 457.609 describes the process and calculation of state 
allotments for a fiscal year after FY 2008. Section 457.609(h) provides 
that CHIP Allotments for a fiscal year may be published as preliminary 
or final allotments in the Federal Register as determined by the 
Secretary. We have not published CHIP allotments in the Federal 
Register since the FY 2013 CHIP allotments. Each year following FY 
2013, states have been notified of their CHIP allotments through either 
email notifications and/or through MBES/CBES. We propose to remove from 
Sec.  457.609 the reference to our discretionary option to publish in 
the Federal Register the national CHIP allotment amounts as determined 
on an annual basis for the fiscal years specified in statute. Instead, 
we are proposing to post CHIP allotments in the Medicaid and CHIP 
Budget and Expenditure System (MBES/CBES) and at Medicaid.gov (or 
similar successor systems or websites) annually. We believe that 
posting the CHIP allotment amounts at Medicaid.gov and in the MBES/CBES 
is an efficient way to make the information more easily accessible to 
interested stakeholders and would be less administratively burdensome 
for CMS. We are soliciting any comments related to these proposed 
changes.

III. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We would consider all comments we receive 
by the date and time specified in the DATES section of

[[Page 63766]]

this preamble, and, when we proceed with a subsequent document, we 
would respond to the comments in the preamble to that document.

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et 
seq.), we are required to publish a 60-day notice in the Federal 
Register and solicit public comment before a ``collection of 
information'' requirement is submitted to the Office of Management and 
Budget (OMB) for review and approval. For the purposes of the PRA and 
this section of the preamble, collection of information is defined 
under 5 CFR 1320.3(c) of the PRA's implementing regulations.
    To fairly evaluate whether an information collection should be 
approved by OMB, PRA section 3506(c)(2)(A) requires that we solicit 
comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our burden estimates.
     The quality, utility, and clarity of the information to be 
collected.
     Our effort to minimize the information collection burden 
on the affected public, including the use of automated collection 
techniques.
    We are soliciting public comment on each of the section 
3506(c)(2)(A)-required issues for the following information collection 
requirements (ICRs).

A. Wage Estimates

    To derive average costs, we used data from the U.S. Bureau of Labor 
Statistics' May 2018 National Occupational Employment and Wage 
Estimates for all salary estimates (http://www.bls.gov/oes/current/oes_nat.htm). In this regard, Table 1 presents the mean hourly wage, 
the cost of fringe benefits and overhead (calculated at 100 percent of 
salary), and the adjusted hourly wage.

                          Table 1--National Occupational Employment and Wage Estimates
----------------------------------------------------------------------------------------------------------------
                                                                                      Fringe
                                                    Occupation      Mean hourly    benefits and      Adjusted
                Occupation title                       code         wage ($/hr)    overhead ($/   hourly wage ($/
                                                                                        hr)             hr)
----------------------------------------------------------------------------------------------------------------
Accountants and auditors........................         13-2011           37.89           37.89           75.78
Data Entry Keyers...............................         43-9021           16.22           16.22           32.44
Financial Specialist all other..................         13-2099           37.30           37.30           74.60
General and Operations Managers.................         11-1021           59.56           59.56          119.12
Healthcare Support Workers all other............         31-9099           18.80           18.80           37.60
Managers all other..............................         11-9199           55.57           55.57          111.14
Social Science Research Assistants..............         19-4061           24.24           24.24           48.48
----------------------------------------------------------------------------------------------------------------

    As indicated, we are adjusting our employee hourly wage estimates 
by a factor of 100 percent. This is necessarily a rough adjustment, 
both because fringe benefits and overhead costs vary significantly from 
employer to employer, and because methods of estimating these costs 
vary widely from study to study. Nonetheless, we believe that doubling 
the hourly wage to estimate total cost is a reasonably accurate 
estimation method.

B. Proposed Information Collection Requirements (ICRs)

    The following regulatory sections of this rule contain proposed 
collection of information requirements (or ``ICRs'') that are subject 
to OMB approval under the authority of the PRA: Sec. Sec.  433.72 
(Waiver provision applicable to health care related taxes), 447.252 and 
447.302 (State plan requirements), 447.288 (Reporting requirements for 
UPL demonstrations and supplemental payments), and 447.299 (DSH 
reporting requirements). Our analysis of the proposed requirements and 
burden follow.
1. ICRs Regarding Tax Waiver Requirements (Sec.  443.72)
    The following proposed changes will be submitted to OMB for 
approval under control number 0938-0618 (CMS-R-148). Subject to 
renewal, the control number is currently set to expire on February 28, 
2021. It was last approved on February 9, 2018, and remains active.
    Section 433.72 of this rule proposes to add a period of validity 
for tax waivers of the broad-based and/or uniformity requirements, 
which states that waivers will cease to be effective 3 years from CMS' 
approval in the case of tax programs commencing on or after the rule's 
effective date or 3 years from the rule's effective date in the case of 
waivers approved before the rule's effective date. This change is 
necessary because the provider data submitted by states to CMS, for use 
in the statistical tests described at Sec.  433.68, may change over 
time. As a result, the tax may be generally redistributive as required 
by statute and regulation when the state requests the waiver, but may 
subsequently cease to be so. Currently there are approximately 35 
states that have broad based or uniformity waivers. We propose to allow 
states with existing health care-related tax waivers up to 3-years from 
the effective date of the final rule before they must seek re-approval. 
This will provide states sufficient time to evaluate and, if necessary, 
modify existing tax programs.
    The ongoing burden associated with the proposed requirements 
consists of the time it would take each state that has an existing tax 
waiver to submit an updated version within 3-years after the effective 
date of the final rule and to update the waiver every 3 years. Of the 
35 states with tax waivers, we estimate that there are approximately 60 
tax waivers that will have to be renewed every 3 years, or about 20 tax 
waivers renewed per year by various states (0.4 tax waiver renewals per 
year per state). Please note that the proposed waiver requirements are 
minimal, as states are already required to monitor and update their tax 
waivers to ensure compliance with federal requirements.
    We estimate it would take 2 hours at $37.60/hr for a healthcare 
support worker to prepare and submit an updated tax waiver. In 
aggregate we estimate an ongoing annual burden of 40 hours (20 tax 
waiver renewals per year x 2 hr/renewal) at a cost of $1,504 (40 hr x 
$37.60/hr) or $30 per state ($1,504/51).
2. ICRs Regarding State Plan Requirements (Sec. Sec.  447.252 and 
447.302)
    The following proposed changes will be submitted to OMB for 
approval under control number 0938-0193 (CMS-179). Subject to renewal, 
the control number is currently set to expire on April 30, 2022. It was 
last approved on April 9, 2019, and remains active.

[[Page 63767]]

    The proposed changes to Sec. Sec.  447.252 and 447.302 would 
require that states provide additional descriptors for any proposed 
supplemental payments and would put a 3-year limit on the duration of 
all prospectively approved supplemental payments, with a transition 
period for states to seek renewal of currently approved supplemental 
payments in accordance with the proposed requirements, if the state 
desires to continue the supplemental payment. States would need to 
provide the additional descriptors to receive state plan authority to 
disburse their proposed supplemental payments. Consequently, currently 
approved supplemental payment-related SPAs would have to be updated by 
adding the descriptors, as outlined in section II.A.13. of this 
proposed rule, state plan requirements (Sec.  447.252), and in Sec.  
447.252(d) of the regulatory text. Supplemental payments are presently 
authorized through the SPA process with CMS.
    The ongoing burden associated with the proposed requirements 
consists of the time it would take each of the 50 state Medicaid 
programs, the District of Columbia, and the territories Puerto Rico, US 
Virgin Islands, and Guam (hereinafter, ``states'') to specify six (6) 
descriptors for all applicable SPAs that provide or would provide for a 
supplemental payment. The territories the Commonwealth of the Northern 
Mariana Islands (CNMI) and American Samoa have been excluded to the 
extent that Medicaid services are provided under section 1902(j) 
waiver. The additional SPA descriptors include: (1) An explanation of 
how the state plan or SPA will result in payments that are consistent 
with section 1902(a)(30)(A) of the Act; (2) the criteria to determine 
which providers are eligible to receive the supplemental payment; (3) a 
comprehensive description of the methodology used to calculate the 
amount of, and distribute, the supplemental payment to each eligible 
provider, including all of the following: The amount of the 
supplemental payment made to each eligible provider, if known, or, if 
the total amount is distributed using a formula based on data from one 
or more fiscal years, the total amount of the supplemental payments for 
the fiscal year or years available to all providers eligible to receive 
a supplemental payment, if applicable, the specific criteria with 
respect to Medicaid service, utilization, or cost data from the 
proposed SPA year to be used as the basis for calculations regarding 
the amount and/or distribution of the supplemental payment, the timing 
of the supplemental payment to each eligible provider, an assurance 
that the total Medicaid payment to an inpatient hospital provider, 
including the supplemental payment, will not exceed the upper limits 
specified in Sec.  447.271, and if not already submitted, a UPL 
demonstration as required by Sec.  447.272 and described in Sec.  
447.288; (4) the duration of the supplemental payment authority (not to 
exceed 3 years); (5) a monitoring plan to ensure that the supplemental 
payment remains consistent with the requirements of section 
1902(a)(30)(A) of the Act and to enable evaluation of the effects of 
the supplemental payment on the Medicaid program, for example, with 
respect to providers and beneficiaries; and (6) for a SPA proposing to 
renew a supplemental payment for a subsequent approval period, an 
evaluation of the impacts on the Medicaid program during the current or 
most recent prior approval period, for example, with respect to 
providers and beneficiaries, and including an analysis of the impact of 
the supplemental payment on compliance with section 1902(a)(30)(A) of 
the Act.
    We have attempted to mitigate any new burden by identifying the 
essential descriptors that are necessary during a SPA review of 
proposed state supplemental payments. The more information and 
transparency provided with the SPA to implement new, or renew existing, 
supplemental payments will reduce the number of questions and requests 
for additional information from CMS, and therefore, could result in 
more expedited approval along with increased economy and efficiency of 
the Medicaid program.
    To estimate the overall burden of adding the descriptors to all 
supplemental payment-related SPAs we considered the total nationwide 
number of active supplemental payments by states reporting for the 
current 8 UPL demonstration service types for the period 2015-2017 (3 
years) in the proposed 6 UPL service types (see Table 2, line A): (1) 
Nursing facility; (2) outpatient hospital; (3) inpatient hospital; (4) 
ICF/IID; (5) IMD; and (6) physician services excluding PRTF and clinic.
    As indicated, the total number of states reporting supplemental 
payment methodologies in the UPL demonstrations in the Medicaid program 
for the following service types are: 37 for inpatient hospital services 
(IP); 29 for outpatient facility services (OP); 49 for nursing facility 
services (NF); 8 for ICF/IIDs (ICF); 0 for IMDs (IMD); and 17 for 
physician services (Phys). We recognize that there are often more than 
one supplemental payment SPA per state for each service type, 
especially for states with more providers and service types like 
inpatient hospitals and nursing facilities, while IMDs have no 
supplemental payments, and therefore, no SPAs to renew or submit. To 
account for this we multiplied the number of states reporting each 
service type by 2 (approximately 2 SPAs per year for each service type) 
to estimate the total number of SPAs submitted by the states.
    In this regard, the total number of SPAs is estimated to be 280 
(Table 2, line B) or 5.19 (line C) per state (280 SPAs/54 states and 
territories). We estimate that each SPA is renewed every 2.5 years 
(half of the time required in this proposed rule), for 2.08 (5.19 SPAs 
per state/1 SPA renewal every 2.5 years) SPA renewals per state per 
year.

                                Table 2--State Reporting of Supplemental Payment Methodologies in the UPL Demonstrations
--------------------------------------------------------------------------------------------------------------------------------------------------------
                   UPL demonstration types                          IP           OP           NF          ICF          IMD          Phys        Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
A. Supplemental Payment Methodologies reported by States.....           37           29           49            8            0           17          140
B. SPA multiplier x 2........................................           74           58           98           16            0           34          280
C. SPAs needed to be renewed per year per state (B/54 states)         1.37         1.07         1.81         0.30         0.00         0.67         5.19
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We estimate it would take 30 additional minutes (0.5 hr) at $48.48/
hr for a social science research assistant (technical staff) to add all 
6 supplemental payment SPA components from Sec. Sec.  447.252 and 
447.302 for each SPA submission, noting that a comprehensive payment 
methodology is currently required for all SPA submissions. In 
aggregate, we estimate an annual burden of 56.2 hours (2.08 SPA 
renewals per state per year x 0.5 hr for additional descriptors x 54 
states and territories) at a cost of $2,725 (56.2 hr x $48.48/hr). This 
estimate

[[Page 63768]]

factors in the burden associated with supplemental payment SPAs for the 
6 service types mentioned above and summarized in Table 2. Per state, 
we estimate an average annual burden of 1.0 hours (56.2 hr/54 states 
and territories) at a cost of $50 ($2,725/54 states and territories).
3. ICRs Regarding Reporting for UPL Demonstrations and Supplemental 
Payments (Sec.  447.288)
    The following proposed changes will be submitted to OMB for 
approval under control number 0938-1148 (CMS-10398 #13 and #24). 
Subject to renewal, the control number is currently set to expire on 
March 31, 2021. It was last approved on March 1, 2018, and remains 
active.
    Section 447.288 of this rule proposes to codify our current policy 
of requiring states and territories to submit annual UPL 
demonstrations.
    While the territories Puerto Rico, US Virgin Islands, and Guam are 
included in this estimate, the Commonwealth of the Northern Mariana 
Islands (CNMI) and American Samoa have been excluded from this estimate 
because they provide Medicaid services under section 1902(j) waivers. 
The proposed rule would also add quarterly reporting requirements 
(Sec.  447.288(c)(1)) that would provide data on each provider 
receiving a supplemental payment, the amount of payment(s), and the 
state plan/demonstration authority authorizing the payment. The 
proposed rule would also require an aggregate report (Sec.  
447.288(c)(2)) of all providers receiving supplemental payments that 
totals all of the supplemental payments providers receive during the 
year plus all Medicaid payments, and Medicaid utilization data. Lastly, 
the rule would also require a report (Sec.  447.288(c)(3)) of all of 
those providers contributing to the state's non-federal share for any 
supplemental payment, the state plan/demonstration authority 
authorizing the payment, and the amount of the payment(s).
(1) UPL Demonstrations
    The currently approved burden associated with the requirements we 
are revising and putting into regulation in this proposed rule, 
consists of the time it would take each of the 56 Medicaid programs (50 
states, 5 territories, and the District of Columbia) to submit annual 
UPL demonstrations and report supplemental payments for: Inpatient 
hospital; outpatient hospital; nursing facilities; PRTF; clinic 
services; other inpatient & outpatient facility providers (commonly 
known as physician services); ICF/IID; and institutions for mental 
disease (IMD) on the currently approved (hereinafter, ``active'') UPL 
templates that are set out under CMS-10398 #13 and #24.
    This proposed rule would reduce burden by eliminating the UPL 
demonstrations for three service types PRTF, clinic services, and other 
inpatient & outpatient facility providers (physician services) and by 
eliminating 2 territories from reporting any of the items required 
under Sec.  447.288. It also proposes to codify the requirements for 
states to annually report UPL demonstrations as discussed in SMDL #13-
003 (March 18, 2013),\11\ which was associated with OMB approved 
templates (OMB Control Number 0938-1148) and collection of information 
requirements approved by OMB under control number 0938-1148 (CMS-10398 
#13 and 24).
---------------------------------------------------------------------------

    \11\ Center for Medicaid and CHIP Services, RE: Federal and 
State Oversight of Medicaid Expenditures, State Medicaid Director's 
letter SMD #13-003, accessed 4/9/2019: https://www.medicaid.gov/Federal-Policy-Guidance/Downloads/SMD-13-003-02.pdf.
---------------------------------------------------------------------------

    For CMS-10398 #13 (Medicaid Accountability--Nursing Facility, 
Outpatient Hospital and Inpatient Hospital Upper Payment Limits) 
eliminating 2 territories from this reporting would reduce our active 
burden estimates by -80 hours (40 hr/response x -2 responses) for a 
burden reduction of $3,057 ([30 hr x -2 responses x $32.44/hr for a 
data entry keyer] + [9 hr x -2 responses x $48.48/hr for a social 
science research assistant] + [1 hr x -2 responses x $119.12/hr for a 
general and operations manager]).
    For CMS-10398 #24 (Medicaid Accountability--Upper Payment Limits 
ICF/IID, Clinic Services, Medicaid Qualified Practitioner Services and 
Other Inpatient & Outpatient Facility Providers) this would reduce our 
active burden by -80 hours (40 hr/response x -2 responses) at a cost of 
-$3,057 ([30 hr x -2 responses x $32.44/hr for a data entry keyer] + [9 
hr x -2 responses x $48.48/hr for a social science research assistant] 
+ [1 hr x -2 responses x $119.12/hr for a general and operations 
manager]).
    For CMS-10398 #24 this rule would also reduce our active burden by 
eliminating 3 of the 5 UPL demonstrations for the service types PRTF, 
Clinic Services, and Medicaid Qualified Practitioner Services and Other 
Inpatient & Outpatient Facility Providers (commonly referred to as the 
physician ACR). This would reduce our active burden estimates by -1,296 
hours (8 hr/response x 3 service types x 54 states) for a savings of 
$49,528 ([18 hr x -54 states x $32.44/hr for a data entry keyer] + [5.4 
hr x -54 states x $48.48/hr for a social science research assistant] + 
[0.6 hr x -54 states x $119.12/hr for a general and operations 
manager]). This proposed action would thereby eliminate the PRTF, 
Clinic Services, and Medicaid Qualified Practitioner Services and Other 
Inpatient & Outpatient Facility Providers (commonly referred to as 
physician ACR) templates along with the guidance and instruction 
documents that are associated with the templates.
    As indicated, the proposed burden changes will be submitted to OMB 
for approval under control number 0938-1148 (CMS-10398 #13 and #24). 
Since the proposed requirements impact two information collection 
requests (#13 and #24), we estimate a total burden reduction of -1,456 
hours (-80 hr -80 hr -1,296 hr) for a savings of $55,642 (-$3,057 -
$3,057 -$49,528).
(2) Quarterly Reporting of Expenditures Claimed for Each Supplemental 
Payment (Sec.  447.288(c)(1))
    In addition to the data already collected in the aggregate for all 
supplemental payments and required annually for UPL demonstrations 
under the CMS-10398 #13 and #24, this proposed rule would require that 
states report information quarterly on expenditures claimed for each 
supplemental payment made under state plan or demonstration authority 
including: (1) The SPA transaction number or demonstration authority 
number which authorizes the payment; (2) a listing of each provider 
that received a payment under each authority by the specialty type (if 
applicable, for example, CAH, pediatric hospital, or teaching 
hospital); (3) the specific amount of the supplemental payment paid to 
each provider including the total payment made to the provider 
authorized under the specified state plan; and (4) the total Medicaid 
payment made to the provider under the specified demonstration 
authority.
    This rule would add quarterly data reported to CMS in the form of 5 
new templates mirroring the UPL demonstrations reporting by service 
type of the provider. For CMS-10398 #13, this would consist of 
quarterly report templates for: Nursing facilities, outpatient 
hospitals, and inpatient hospitals. For CMS-10398 #24, quarterly report 
templates would be added for: ICF/IID and IMD.
    The quarterly reports would be required at the time the state 
submits its quarterly CMS-64 (OMB control number 0938-1265) pursuant to 
Sec.  430.30(c), consisting of provider level information on all 
providers receiving supplemental payments, including 11

[[Page 63769]]

data elements consisting of 8 demographic elements and 3 elements 
specific to supplemental payments (see (Sec.  447.288(c)(1))). The 8 
demographic elements of each provider that received a supplemental 
payment under each authority consist of: (1) The provider's legal name; 
(2) the physical address of the location or facility where services are 
provided, including street address, city, state, and ZIP code; (3) the 
NPI; (4) the Medicaid identification number; (5) the EIN; (6) the 
service type for which the reported payment was made;(7) the provider 
specialty type (if applicable, for example, CAH, pediatric hospital, or 
teaching hospital); and (8) the provider category (that is, state 
government, non-state government, or private). The 3 supplemental 
payment elements for payments paid to each provider consist of the 
specific amount of the supplemental payment made to the provider, 
including: (1) SPA transaction number or demonstration authority number 
which authorizes the supplemental payment; (2) the total supplemental 
payment made to the provider authorized under the specified state plan; 
(3) the total Medicaid supplemental payment made to the provider under 
the specified demonstration authority, as applicable.
    For the supplemental payment quarterly reports, annually we 
estimate it will take 20 seconds at $32.44/hr for a data entry keyer to 
query states' MMIS system and/or copy and paste each data element into 
the required format for reporting. The initial quarterly report would 
require the full set of 11 data elements for each provider receiving a 
supplemental payment with a burden of 449 hours (7,341 providers with 
supplemental payments x 11 data elements x 1 report/year x 20 seconds/
3,600 seconds in an hour) and a cost of $14,566 (449 hr x $32.44/hr).
    The three (3) subsequent quarterly reports would only require 
reporting of the three (3) supplemental payment data elements since the 
eight (8) demographic data elements would have already been reported in 
the initial quarterly report. The burden associated with the subsequent 
reports consists of 367 hours (7,341 providers with supplemental 
payment x 3 data elements x 3 reports/year x 20 seconds/3,600) at a 
cost of $11,906 (367 hr x $32.44/hr).
    In aggregate, we estimate a burden of 816 hours (449 hr + 367 hr) 
at a cost of $26,472 ($14,566 + $11,906).
    We also expect oversight by social science research assistants and 
general operations managers for each of the supplemental payment 
quarterly reports. We estimate it would take 1 hour at $48.48/hr for a 
social science research assistant and 30 minutes (0.5 hr) for a general 
operations manager at $119.12/hr to review each of the reports. In this 
regard we estimate an annual burden of 306 hours ([1 hr x 4 reports x 
51 states] + [0.5 hr x 4 reports x 51 states]) at a cost of $22,040 ([1 
hr x 4 reports x 51 states x $48.48/hr] + [0.5 hr x 4 reports x 51 
states x $119.12/hr]).
    Given the aforementioned burden estimates, we estimate a total of 
1,140 hours (816 hr + 324 hr) at a cost of $49,797 ($26,460 + $23,337) 
for all of the information collection requests with quarterly 
reporting, including all 5 new templates. Per state we estimate 21.1 
hours (1,140 hrs/54 states) and $922 (49,797/54 states) for all 
quarterly reporting.
    As indicated, the proposed requirements and burden will be 
submitted to OMB for approval under control number 0938-1148 (CMS-10398 
#13 and #24). Since the proposed requirements would impact two 
information collection requests (CMS-10398 #13 and #24), the annual 
quarterly reporting burden for each is broken down here: For CMS-10398 
#13 (new quarterly report templates for inpatient hospitals, outpatient 
hospitals, and nursing facilities) it is 1,108 hours (1,122 hr x 0.97 
\12\) at a cost of $48,433 ($49,797 x 0.97); for CMS-10398 #24 (new 
quarterly report templates for ICF/IID and IMD) the burden is 31.2 
hours (1,122 hr x 0.027 \13\) at a cost of $1,363 ($49,797 x 0.027).
---------------------------------------------------------------------------

    \12\ 97% of UPL providers receiving supplemental payments are 
IP, OP, and NF provider types.
    \13\ 2.7% of UPL providers receiving supplemental payments are 
ICF and IMD provider types.
---------------------------------------------------------------------------

(3) Utilization Reporting Template and Guidance Documents (Sec.  
447.288(b)(2))
    Annually, the proposed reporting of the specific amount of Medicaid 
payments made to each provider would include: (1) The total FFS base 
payments made to the provider authorized under the state plan; (2) the 
total Medicaid payments made to the provider under demonstration 
authority; (3) the total payment or funds received from Medicaid 
beneficiary cost-sharing requirements, donations, and any other funds 
received from third parties to support the provision of Medicaid 
services; (4) the total supplemental payment made to the provider 
authorized under the specified state plan; (5) the total Medicaid 
supplemental payment made to the provider under the specified 
demonstration authority, and the total Medicaid payments made to the 
provider as reported in the above areas; (6) the total DSH payments 
made to the provider; and (7) the Medicaid units of care (for example, 
on a provider-specific basis, total Medicaid discharges, days of care, 
or any other measures as specified by the Secretary).
    A utilization report by provider service type would be required 
annually by states in this proposed rule, which includes all of the 
providers reported in the Supplemental Payments Reporting Templates 
(that is, all providers receiving supplemental payments), and reports 
all base payments, DSH payments, and additional utilization data from 
those providers. This Utilization Report includes all base payments 
made to each provider in the state, with the addition of DSH and 
Medicaid utilization data (23 data elements consisting of 9 demographic 
elements previously reported in the quarterly reports, 10 new elements 
specific to supplemental and other payments, and 4 new utilization 
elements).
    The 9 demographic elements, linked to the same 8 elements in the 
quarterly reports plus 1 element stating the dates of the supplemental 
payment period, all covering the same providers in each service type, 
that received a supplemental payment under each authority listed in 
Sec.  447.288(c)(1) including: (1) The provider's legal name; (2) the 
physical address of the location or facility where services are 
provided, including street address, city, state, and ZIP code; (3) the 
NPI; (4) the Medicaid identification number; (5) the EIN; (6) the 
service type for which the reported payment was made; (7) the provider 
specialty type (if applicable, for example, CAH, pediatric hospital, or 
teaching hospital); (8) the provider category (that is, state 
government, non-state government, or private); and (9) the state 
reporting period (state fiscal year start and end dates).
    The 14 supplemental payment elements for Medicaid payments made to 
each provider consist of the following, as applicable: (1) The SPA 
transaction number or demonstration authority number which authorizes 
the supplemental payment; The specific amount of Medicaid payments made 
to each provider, including, as applicable; (2) the total FFS base 
payments made to the provider authorized under the state plan; (3) the 
total Medicaid payments made to the provider under demonstration 
authority; (4) the total payment or funds received from Medicaid 
beneficiary cost-sharing requirements; (5) the total payment or funds 
received from Medicaid donations; (6) the total of any other funds 
received from third parties to

[[Page 63770]]

support the provision of Medicaid services; (7) the total supplemental 
payment made to the provider authorized under the specified state plan; 
(8) the total Medicaid supplemental payment made to the provider under 
the specified demonstration authority; (9) the total Medicaid payments 
made to the provider as reported above (summation of 2-8 above); and 
(10) the total DSH payments made to the provider. The 4 utilization 
elements are comprised of: Up to four (11. through 14.) Medicaid unit 
of care metrics (for example, on a provider-specific basis, total 
Medicaid discharges, days of care, or any other measures as specified 
by the Secretary).
    There are a total of 14 new data elements. The eight demographic 
elements and the SPA transaction number or demonstration authority 
number which authorizes the supplemental payment were reported during 
the previous quarterly CMS-64 reports submitted during the year, and 
therefore, are not counted in the collection of information here.
    For the annual utilization report we estimate it would take 20 
seconds at $32.44/hr for a data entry keyer to query states' MMIS 
system and/or copy and paste each data element into the required format 
for reporting. The burden associated with preparing and submitting the 
annual report consists of 571 hours (7,341 providers reported with 
supplemental payments in the UPL demonstration x 14 new data elements x 
1 report/year x 20 seconds/3,600 seconds per hour) at a cost of $18,523 
(571 hr x $32.44/hr).
    Additionally, we estimate oversight by social science research 
assistants and general operations managers for the utilization annual 
report. We estimate it would take 1.5 hours at $48.48/hr for a social 
science research assistant and 1 hour at $119.12/hr for a general 
operations manager to review the report. In this regard we estimate an 
annual burden of 135 hours ([1.5 hr x 1 report x 54 states] + [1 hr x 1 
report x 54 states]) at a cost of $10,359 ([1.5 hr x 1 report x 54 
states x $48.48/hr] + [1 hr x 1 report x 54 states x $119.12/hr]).
    Given the aforementioned burden estimates, we estimate a total of 
706 hours (571 hr + 135 hr) at a cost of $28,882 ($18,522 + $10,359) 
for all information collection for the utilization report. Per state, 
this amounts to 13.1 hours (706 hrs/54 states) at a cost of $535 
($28,882/54 states).
    Since the proposed requirements impact two information collection 
requests (CMS-10398 #13 and #24), we break down the cost to each, as 
above. The burden for CMS-10398 #13 is 687 hours (706 hr x 0.97) at a 
cost of $28,091 ($28,882 x 0.97). For CMS-10398 #24 the burden is 19.3 
hours (706 hr x 0.027) at a cost of $791 ($28,882 x 0.027).
(4) Annual Non-Federal Share Reporting (Sec.  447.288(c)(3))
    Section 447.288(c)(3), proposes to require that each state submit 
an annual report of the aggregate and provider-level information on 
each provider contributing to the state or any local unit of government 
any funds that are used as a source of the non-federal share for any 
Medicaid supplemental payment, including 17 data elements consisting 
of: 8 new demographic elements; 8 new supplemental and other payment 
elements; and 1 new summation element.
    The 8 demographic elements of each provider that received a non-
federal share for any Medicaid supplemental payment under each 
authority listed in Sec.  447.288(a) include: (1) The service type for 
which the reported payment was made; (2) the provider specialty type 
(if applicable, for example, CAH, pediatric hospital, or teaching 
hospital) (3) the provider's legal name; (4) the physical address of 
the location or facility where services are provided, including street 
address, city, state, and ZIP code; (5) the NPI; (6) the Medicaid 
identification number; (7) the EIN; and (8) the provider category (that 
is, state government, non-state government, or private).
    The 8 supplemental and other payment elements are comprised of: (1) 
The total FFS base payments made to the provider authorized under the 
state plan; (2) the total FFS supplemental payments made to the 
provider authorized under the state plan; (3) the total Medicaid 
payments made to the provider under demonstration authority; (4) the 
total DSH payments made to the provider; (5) the total of each health 
care-related tax collected from the provider by any state authority or 
local unit of government; (6) the total of any costs certified as a CPE 
by the provider; (7) the total amount contributed by the provider to 
the state or a unit of local government entity in the form of an IGT; 
and (8) the total of provider-related donations made by the provideror 
by entities related to a health care provider, including in-cash and 
in-kind donations, to the state or unit of local government, including 
state university teaching hospitals.
    The summation element would require: (1) The total funds 
contributed by the provider (that is, CPEs, IGTs, provider taxes, 
donations, and any other funds contributed) as reported under the 
supplemental and other payment elements.
    For the annual non-federal share report we estimate that all 
providers will contribute to the non-federal share. We believe this to 
be an overestimate, but this is the only estimate we have at this time 
using the UPL demonstration data that we have available. We also 
estimate that it would take 20 seconds at $32.44/hr for a data entry 
keyer to query states' MMIS system and/or copy and paste each of the 17 
data elements into the required format for reporting. The burden 
associated with preparing and submitting the annual report consists of 
2,666 hours (28,232 total providers x 17 data elements x 1 report/year 
x 20 seconds/3,600 seconds per hour) at a cost of $86,485 (2,666 hr x 
$32.44/hr).
    Additionally, we estimate oversight by social science research 
assistants and general operations managers for the non-federal share 
annual report. We estimate it would take 4 hours at $48.48/hr for a 
social science research assistant and 2 hours at $119.12/hr for a 
general operations manager to review the report. In this regard we 
estimate an annual burden of 324 hours ([4 hr x 1 report x 54 states] + 
[2 hr x 1 report x 54 states]) at a cost of $23,337 ([4 hr x 1 report x 
54 states x $48.48/hr] + [2 hr x 1 report x 54 states x $119.12/hr]).
    Given the aforementioned burden estimates, we estimate a total of 
2,990 hours (2,666 hr + 324 hr) at a cost of $109,833 ($86,497 + 
$23,337) for all information collection requests for the non-federal 
share report. Per state, this amounts to 55.4 hours (2,990 hr/54 
states) at a cost of $2,034 ($109,833/54 states).
    Since the proposed requirements impact two information collection 
requests (CMS-10398 #13 and #24), the burden for CMS-10398 #13 is 2,617 
hours (2,990 hr x 0.875 \14\) at a cost of $94,427 ($109,833 x 0.875). 
For CMS-10398 #24 the burden is 373.5 hours (2,990 hr x 0.125 \15\) at 
a cost of $13,717 ($109,833 x 0.13).
---------------------------------------------------------------------------

    \14\ 87.5% of all UPL providers reported are IP, OP, and NF 
provider types.
    \15\ 12.5% of all UPL providers reported are ICF & IMD.
---------------------------------------------------------------------------

4. ICRs Regarding DSH Reporting Requirements (Sec.  447.299)
    The following proposed changes will be submitted to OMB for 
approval under control number 0938-0746 (CMS-R-266). Subject to 
renewal, the control number is currently set to expire on April 30, 
2022. It was last approved on April 9, 2019, and remains active.
    Under Sec.  447.299 this proposed rule would require states to 
provide an

[[Page 63771]]

additional data element as part of its annual DSH audit report. This 
additional element would require a state auditor to quantify the 
financial impact of any audit finding not captured within any other 
data element under Sec.  447.299(c), which may affect whether each 
hospital has received DSH payments for which it is eligible within its 
hospital-specific DSH limit.
    If the auditor is unable to determine the actual financial impact 
amount of an audit finding, the auditor would be required to provide a 
statement of the estimated financial impact for each audit finding 
identified in the independent certified audit.
    The proposed additional data element requires auditors to indicate 
the financial impact of all findings rather than indicating that the 
financial impact of any finding is unknown. We believe the additional 
burden associated with the new data element would be minimal given that 
auditors are already engaged in a focused review of available 
documentation to quantify the aggregate amounts that comprise each of 
the existing data elements required under Sec.  447.299(c).
    The burden consists of the time it would take each of the states to 
quantify any audit finding identified during the independent certified 
audit required under section 1923(j)(2) of the Act. The territories 
have been excluded from this proposed requirement since they do not 
receive a DSH allotment under section 1923(f) of the Act.
    To estimate the overall burden of adding this new data element to 
the reporting requirement, we considered the number of annual 
independent certified audits received by CMS in addition to the number 
of unquantified audit findings.
    This rule would require the submission of data in an electronic 
spreadsheet format that would take approximately 2 hours, consisting 
of: 1 hour at $111.14/hr for management and professional staff to 
review the report and 1 hour at $74.60/hr for a financial specialist to 
prepare the report. In aggregate we estimate an ongoing annual burden 
of 102 hours (51 states x 2 hr/response x 1 response/year) at a cost of 
$9,473 ((51 states x [(1 hr $111.14/hr) + (1 hr x $74.60/hr)] or $186 
per state ($9,473/51 states). Additionaly we anticipate that a state 
auditor would have to spend an additional hour quantifying the 
financial impact of DSH findings that are classified as unknown. The 
estimated annual burden would be 1 hour per state (51 states x 1 hour) 
51 hours x 75.78/hr for auditors to complete the audit at a cost of 
$3,865 per year (51 states x 1 hour x $75.78 per hour). The total cost 
of this proposed rule would be $13,338 ($9,473 + $3,865) and 153 hours 
or $262 per state and 3 hours per state.

C. Summary of Annual Burden Estimates for Proposed Requirements

    Table 3 summarizes the burden for the aforementioned proposed 
provisions

                                            Table 3--Proposed Annual Recordkeeping and Reporting Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                Total
   Regulation section(s) under      OMB control No.                    Responses      Total      Burden per     annual    Labor costs
       title 42 of the CFR           (CMS ID No.)       Respondents   (per state)   responses     response      burden         of       Total cost  ($)
                                                                                                  (hours)      (hours)     reporting
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   443.72 tax waiver........  0938-0618 (CMS-R-               51          0.4           20            2           40        37.60              1,504
                                   148).
Sec.  Sec.   447.252 and 447.302  0938-0193 (CMS-                 54          1.9          126          0.5         63.2        48.48              3,064
                                   179).
Sec.   447.288 UPL demo. (IP,     0938-1148 (CMS-                  5           -5          -10            8          -80       varies             -3,057
 OP, NF).                          10398 #13).
Sec.   447.288 UPL demo. (ICF,    0938-1148 (CMS-               5/51        -5/-3     -10/-162          8/8    -80/-1296       varies     -3,057/-49,528
 IMD).                             10398 #24).
Sec.   447.288 SP quarterly       0938-1148 (CMS-                 54           20        1,080       varies         1108       varies             48,433
 reports (IP, OP, NF).             10398 #13).
Sec.   447.288 SP quarterly       0938-1148 (CMS-                 54           20        1,080       varies           31       varies              1,363
 reports (ICF, IMD).               10398 #24).
Sec.   447.288 Utilization        0938-1148 (CMS-                 54           14          756       varies          687       varies             28,091
 annual report (IP, OP, NF).       10398 #13).
Sec.   447.288 Utilization        0938-1148 (CMS-                 54           14          756       varies           19       varies                791
 annual report (ICF, IMD).         10398 #24).
Sec.   447.288 Non-federal share  0938-1148 (CMS-                 54           17          918       varies        2,617       varies             94,427
 annual report (IP, OP, NF).       10398 #13).
Sec.   447.288 Non-federal share  0938-1148 (CMS-                 54           17          918       varies          374       varies             13,717
 annual report (ICF, IMD).         10398 #24).
Sec.   447.299 DSH audit........  0938-0746 (CMS-R-               51            1           51            3          153       varies             13,338
                                   266).
                                                     ---------------------------------------------------------------------------------------------------
    Total.......................  ..................          varies           95        5,787       varies        3,637       varies            145,221
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For all parts of this proposed rule, we estimate there would be a 
total nationwide burden of 3,637 hours at a cost of $145,221 and an 
average of 67 hours (3,637 hr/54 states) at a cost of $2,847 per state 
Medicaid agency per year ($145,221/54 states).

D. Requirements Not Subject to the PRA

    The following regulatory sections propose changes to definitions, 
policy guidance, and clarifications of existing statutes or regulatory 
provisions. The changes do not have any collection of information 
implications, and therefore, are not subject to the requirements of the 
PRA: Sec. Sec.  430.42 (Disallowance of claims for FFP), 433.51 (State 
share of financial participation), 433.52 (General definitions), 433.54 
(Bona fide donations), 433.55 (Health care-related taxes defined), 
433.56 (Classes of health care services and providers defined), 433.68 
(Permissible health care-related taxes), 433.72 (Waiver provisions 
applicable to health care-related taxes), 433.316 (When Discovery of 
Overpayment occurs and its Significance), 447.201 (State plan 
requirements), 447.207 (Retention of payments), 447.272 (Inpatient 
services: Application of UPLs), 447.284 (Basis and purpose), 447.286 
(Definitions), 447.290 (Failure to Report Required Information), 
447.297 (Limitations on aggregate payments for DSHs beginning October 
1, 1992), 447.321 (Outpatient hospital services: Application of UPLs), 
455.301 (Definitions), 455.304 (Condition for FFP), and 457.609

[[Page 63772]]

(Process and calculation of state allotments for a fiscal year after FY 
2008).

E. Submission of PRA-Related Comments

    We have submitted a copy of this proposed rule to OMB for its 
review of the rule's ICRs. The requirements are not effective until 
they have been approved by OMB.
    To obtain copies of the supporting statement and any related forms 
for the proposed collections discussed above, please visit the CMS 
website at www.cms.hhs.gov/PaperworkReductionActof1995, or call the 
Reports Clearance Office at 410-786-1326.
    We invite public comments on these potential ICRs. If you wish to 
comment, please submit your comments electronically as specified in the 
DATES and ADDRESSES section of this proposed rule and identify the rule 
(CMS-2393-P) the ICR's CFR citation, and OMB control number.

V. Regulatory Impact Analysis

A. Statement of Need

    This proposed rule would impact states' reporting on payment 
methods and procedures to assure consistency with efficiency, economy, 
and quality of care as required by section 1902(a)(30)(A) of the Act. 
CMS, and other federal oversight entities, have found that current 
regulations and guidance do not adequately assure that states are 
complying with the efficiency, economy and quality of care requirements 
of section 1902(a)(30)(A) of the Act, and this rule is intended to 
address those deficiencies. We view this proposed rule as one approach 
to add additional accountability and transparency for Medicaid 
payments, and to provide CMS with certain information on supplemental 
payments to Medicaid providers, including supplemental payments 
approved under either Medicaid state plan or demonstration authority, 
establish new state plan requirements for amendments proposing 
supplemental payments, and otherwise ensure the proper and efficient 
operation of the Medicaid state plan. This proposed rule would address 
the funding of these supplemental and other Medicaid payments through 
states' uses of health care-related taxes and bona fide provider-
related donations.
    Medicaid DSH payments and requirements are addressed in this 
proposed rule. We propose to add additional specificity to the 
reporting requirements of the annual DSH audit conducted by an 
independent auditor to enhance federal oversight of the Medicaid DSH 
program. Additionally, we seek to improve the accurate identification 
of and collection efforts related to overpayments identified through 
the annual DSH independent certified audits by specifying the date of 
discovery and standards for redistribution of DSH payments made to 
providers in excess of the hospital-specific limit.
    The proposed rule also seeks to alleviate the administrative burden 
of publishing the annual DSH and CHIP allotments in the Federal 
Register, of which we simultaneously notify states directly by 
providing notification through other, more practical means. Finally, we 
propose changes to the disallowance reconsideration procedures in order 
to modernize the process by relying on an electronic, rather than a 
hard-copy paper process.

B. Overall Impact

    We have examined the impacts of this proposed 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 Executive Order 13771 on Reducing Regulation and Controlling 
Regulatory Costs (January 30, 2017).
    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 beneficiaries 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.
    We estimate these provisions to meet the criteria for economic 
significance based upon the analysis of certain provisions in the 
proposed rule, as discussed in more detail below. The proposed 
reporting requirements largely contain data already available to states 
in their own fiscal management and claims processing systems, and 
merely requires states to report the data to us. Additional information 
on setting goals for supplemental payments and evaluating the positive 
and negative aspects of these goals over time, while these requirements 
are consistent and necessary to ensure compliance with section 
1902(a)(30)(A) of the Act, which requires payments be consistent with 
efficiency, economy, and quality of care, they will require state 
Medicaid programs to develop and consider various compliance options. 
Moreover, the reporting requirements and supplemental payment 
evaluations are generally consistent with current state oversight and 
review activities of each state's Medicaid program, and states have the 
flexibility within their reviews to use their existing data or build 
upon that data when reviewing supplemental payments to providers, in 
order to formulate goals and evaluate the effectiveness of these 
payments. In fact, the policies in this proposed rule are intended to 
focus on state efforts in monitoring and overseeing data and 
methodologies concerning supplemental and other payments as well as 
sources of non-federal share to enhance states' ability to comply with 
section 1902(a)(30)(A) of the Act and our ability to ensure such 
compliance.

C. Anticipated Effects

1. Effects of Reporting Requirements on State Medicaid Programs
    For all parts of this proposed rule we estimate there would be a 
total nationwide burden of 3,637 hours at a cost of $145,221 and an 
average of 67 hours (3,637 hr/54 states) at a cost of $2,847 per state 
Medicaid agency per year ($145,221/54 states) per state and District of 
Columbia Medicaid agency per year (see section IV. of this proposed 
rule, Collection of Information Requirements, for details on this cost 
assessment and a breakdown of the burden from the various parts of this 
proposed rule).
    The proposed rule adds several reporting requirements, including:

[[Page 63773]]

Sec. Sec.  447.252 and 447.302, which would add goals, evaluations, and 
3-year renewable authorizations on any supplemental payment 
methodology, providing a transition schedule for SPAs to be updated. 
Section 447.288, would add 4 quarterly reports with data on 
expenditures claimed for each supplemental payment made under state 
plan or demonstration authority by provider, and an annual report with 
2 sections--one section with a roll up of the quarterly data with added 
Medicaid utilization measures and one section with information on all 
providers contributing to the state or any other governmental entity 
any portion of the non-federal share of the supplemental payment and 
the total of their contributions.
    This regulation codifies states reporting annual UPL demonstrations 
that CMS discussed in an SMDL issued on March 18, 2013 (SMDL #13-003) 
regarding annual submission of Medicaid UPLs. In this proposed rule, 
Sec.  447.288(a) would decrease burden by eliminating the UPL 
demonstrations for three service types--PRTF, clinic services, and 
other inpatient & outpatient facility providers (physician services), 
note that the UPL demonstrations for the territories the Commonwealth 
of the Northern Mariana Islands (CNMI) and American Samoa are excluded 
from this estimate because they provide Medicaid services under section 
1902(j) waivers. This OMB approved UPL demonstration (OMB Control 
Number: 0938-1148, CMS-10398 (#13) (#24)) will be updated accordingly.
    For Sec.  447.206 on Payments funded by CPEs made to providers that 
are units of government, states would be required to develop processes 
that are already used by CMS and routinely asked of states to comply 
with section 1902(a)(30)(A) of the Act that requires Medicaid state 
plan methods and procedures relating to the payment for services that 
are consistent with efficiency, economy, and quality of care. These 
collections of information are already routinely asked of states under 
existing OMB control numbers, so no additional burden or economic 
impact is anticipated.
2. Effects on Small Businesses and Other Providers
    This rule establishes requirements that are solely the 
responsibility of state Medicaid agencies, which are not small 
entities. Therefore, the Secretary certifies this proposed rule would 
not, if promulgated, have a significant economic impact on a 
substantial number of small entities.
3. Effects on the Medicaid Program
    The fiscal impact on the Medicaid program from the implementation 
of the policies in the proposed rule is unknown. The provision that 
would have the most direct impact on current provider payments is the 
Medicaid practitioner supplemental payment requirements proposed in 
Sec.  447.406. To summarize, this provision would limit Medicaid 
practitioner base plus supplemental payments to 150 percent of the FFS 
base payments authorized under the state plan for the practitioner 
services within a defined geographic area that would otherwise be paid 
to the targeted practitioners, or for services provided within HRSA-
designated geographic HPSA or Medicare-defined rural geographical 
areas, Medicaid practitioner base plus supplemental payments may not 
exceed 175 percent of the FFS base payments authorized under the state 
plan for the practitioner services within a defined geographic area 
that would otherwise be paid to the targeted practitioners.
    To analyze the impact of this proposed change, CMS reviewed the 
2017 Medicaid physician UPL demonstrations which were submitted by 
states that make supplemental payments to physicians and other 
practitioners. In 2017, 21 states made approximately $478 million in 
physician supplemental payments compared with $512 million in Medicaid 
FFS base payments to the practitioners eligible to receive the 
supplemental payments, which equals $990 million in total payments for 
the qualifying providers that received a supplemental payment. To 
measure the impact, we would multiply the total Medicaid FFS base 
payments ($512 million) by 150 percent which would equal $768 million 
in total Medicaid FFS payments with the net Medicaid physician 
supplemental payment amount of $256 million. The estimated impact of 
this proposed provision is a reduction in payments of $222 million in 
total computable Medicaid reimbursement ($478 million minus $256 
million equals $222 million). However, this potential decrease in 
Medicaid reimbursements could be mitigated if states take action to 
increase Medicaid provider base payments, which would thereby increase 
the amount that could be paid out in Medicaid practitioner supplemental 
payments. Depending on state action in response to this provision, we 
estimate that the impact on Medicaid reimbursements could range from $0 
to $222 million. Similarly, we do not have sufficient data to predict 
or quantify the impact of the proposed provisions on health-care 
related taxes, although we would expect that states may modify existing 
state tax policy or arrangements where those taxes or arrangements 
would be newly be considered health-care related under the proposed 
provisions. We invite comments from states, providers, and other 
stakeholders on the estimates and potential state responses to these 
provisions. There are some considerations that limit the effect of the 
proposed change. First, the proposed rule phases out these supplemental 
payments over a 5 to 7-year period based on when the supplemental 
payment was last approved. The supplemental payments, as currently 
approved in the plan, would begin to be incrementally removed from the 
state plan after the provision is finalized. Second, Medicaid 
practitioner supplemental payments would only be limited by the amount 
of the Medicaid FFS base payments. If a state wanted to increase the 
amount of the supplemental payment, the state would have the option 
under the proposed rule to increase the base payment that is paid to 
all providers within a geographic area of the state and thereby also 
increase what the state could pay in supplemental payments to targeted 
providers under the state plan. Third, in almost all instances, the 
providers were supplying the state with the non-federal share of the 
Medicaid practitioner supplemental payments. Without the supplemental 
payments, it is likely that the arrangements through which the 
providers have been transferring the state share to the state Medicaid 
agency to support current high levels of Medicaid practitioner 
supplemental payments would cease, and therefore, the net impact on the 
providers would be far less than the projected amount of decrease in 
practitioner supplemental payments. Finally, the projected impact does 
not include any consideration for Medicaid physician base plus 
supplemental payments that could be paid under the proposal in HRSA-
designated geographic HPSA or in Medicare's rural geographic areas up 
to 175 percent of the Medicaid FFS base payment rate. If any of the 
providers included in the state's physician UPL demonstrations are in 
those areas, the net impact of the proposed change would be reduced.
    We would also point out that the data obtained from the quarterly 
and annual reports would support the evaluation of varying payment 
streams impacting providers' services and quality and would allow for 
greater oversight on supplemental payments, including

[[Page 63774]]

payments that could exceed the UPL; DSH payments; and generally provide 
better fiduciary oversight of the Medicaid program.

D. Alternatives Considered

    In developing this proposed rule, the following alternatives were 
considered:
1. Not Proposing the Rule
    We considered not proposing this rule and maintaining the status 
quo. However, we believe this proposed rule would lead to better 
accountability and transparency for supplemental payments. We do not 
currently have the necessary data at the state and provider level to 
perform adequate analysis and oversight of supplemental payments, and 
this proposed rule would allow us to do so.
2. Eliminating Supplemental Payments
    We considered proposing a rule that would eliminate supplemental 
payments. However, this option could have been a huge burden on states 
to revise payment methodologies, cost reports, and fee schedules. Also, 
this option would have eliminated an important avenue for states 
potentially to reward providers that show improvement in performance or 
quality metrics, and to address urgent access problems that may arise. 
At this time, we believe our concerns about accountability and 
transparency around supplemental payments may be addressed through the 
proposed policies and do not require the draconian step of eliminating 
state flexibility by prohibiting such payments altogether.
3. Requiring Equal Distribution of Supplemental Payments
    We considered proposing to require equal distribution of 
supplemental payments to all providers of the relevant class of 
services. This option would have eliminated states' ability to target 
supplemental payments to one or a small number of providers, and thus 
could have more closely linked supplemental payments to services 
provided. However, we opted to not propose this provision at this time 
as this proposal would have increased burden on state Medicaid agencies 
by requiring revision of payment methodologies and tracking 
supplemental payments for all providers of services within the relevant 
class.
4. Requiring DSH-Like Audits of Supplemental Payments
    We considered proposing to require independent certified audits of 
all Medicaid supplemental payments, similar to the audit requirement 
for all DSH payments. Under this alternative, for states to receive FFP 
for supplemental payments, an independent certified audit would be 
required to verify that all supplemental payments were appropriate. 
However, we decided not to propose this alternative at this time, due 
to the need for more and better data to understand the complex nature 
of supplemental payments so that we may better understand the 
particular audit structure and requirements needed to effectively 
monitor supplemental payment programs.
5. Mandating a Provider-Specific UPL
    We considered proposing a provider-specific UPL for certain 
services. However, imposing such a provision at this time could have 
disrupted current public financing methods and would also have imposed 
a burden on states to revise longstanding payment methodologies.
6. Setting 5-Year Renewable Authorizations for Supplemental Payments 
and a 5-Year Compliance Transition Period
    Another alternative we considered was to propose 5-year renewable 
authorizations for supplemental payments, instead of the proposed 3-
year renewable authorizations. The 5-year renewal period for 
supplemental payments would have decreased administrative burden on 
both the states and federal government, as opposed to the 3-year 
renewal period, as we would expect to see less frequent SPA re-
submissions and CMS SPA reviews, respectively; in our judgment, the 
effort spent on reviewing, evaluating, and working with states to 
improve supplemental payment SPAs is a worthwhile effort toward the end 
of more fiscal accountability in the Medicaid program. Also, the 3-year 
renewal period is consistent with the 3-year approval period for 
health-care related tax waivers proposed in Sec.  433.72 of this 
proposed rule.
    We also considered proposing a 5-year compliance transition period 
instead of the proposed 3-year compliance transition period in 
Sec. Sec.  447.252(e) and 447.302(d). This would have increased the 
amount of time states would have to bring existing, approved 
supplemental payment methodologies into compliance with the provisions 
of the proposed rule in these two sections. We decided to propose a 3-
year transition period to account for states where changes may require 
legislative action as some legislatures meet on a biennial basis, and 
therefore, would make compliance with a 3-year transition period 
compatible. We are requesting comment on whether or not to pursue an 
expanded transition period of 5 years instead of the proposed 3-year 
transition period.
7. Setting 5-Year or 1-Year Deadline for Tax Waiver Renewals
    We considered proposing 5 years, or 1 year, as the length of the 
approval period for tax waivers before states would need to submit 
another request. However, we settled on 3 years because we believe that 
it would help ensure fiscal accountability and the fiscal integrity of 
the Medicaid program by ensuring that provider data for the classes to 
be taxed is up to date, while at the same time avoiding undue 
regulatory burden on states.
8. Requiring Both the P1/P2 and the B1/B2 Tests for Non-Uniform Health 
Care-Related Taxes
    In evaluating how to eliminate tax structures that are problematic 
because they place an undue burden on the Medicaid program, we 
considered requiring the P1/P2 statistical test in Sec.  433.68(e)(1) 
in addition to the B1/B2 statistical test in Sec.  433.68(e)(2), for 
states requesting a waiver of the uniformity requirement (whether or 
not the state is also requesting a waiver of the broad-based 
requirement). Under this alternative, a state that requests a waiver of 
the uniformity requirement would need to have its tax pass both the P1/
P2 test in addition to the B1/B2 test currently required. We believe 
that this statistical test could serve as a broad tool to prohibit tax 
structures that would inappropriately burden the Medicaid program in 
ways not explicitly prohibited in current regulation. However, we 
decided against this approach to balance preserving an appropriate 
degree of flexibility for states in designing tax programs with 
ensuring that state taxes are not imposed primarily on Medicaid 
providers and services. We believe that the categorical prohibitions 
against tax structures that unduly burden Medicaid which we are 
proposing to add in Sec.  433.68(e)(3) offer sufficient protection to 
the financial health of the title XIX program.
    In addition, we considered proposing a list of acceptable 
commonalities that states could permissibly use to define taxpayer 
groups. However, we believe that this could be overly restrictive to 
states and impede their flexibility to structure their tax programs in 
ways that suit local circumstances while still complying with all 
applicable federal requirements. We are soliciting comment on 
additional prohibitions

[[Page 63775]]

against unduly burdening the Medicaid program that might also be added 
to this section to avoid such arrangements.
9. Audit Requirement To Quantify Financial Impact of Audit Findings
    We considered proposing to require auditors to clarify the impact 
of audit findings and caveats within the existing data element report 
by incorporating finding amounts into existing data elements (for 
example, Total Medicaid Uncompensated Care). However, this option may 
not enable auditors to effectively capture financial impacts of 
specific issues and such finding might not be readily transparent to 
states, CMS, and hospitals; therefore, we opted to include this as an 
additional data element on the DSH report.
10. Clarifying the Discovery Date for DSH Overpayments and 
Redistribution Requirements
    We considered proposing to use the date that the auditor submits 
the independent certified audit to the state as the date of discovery 
for DSH overpayments identified through the independent certified 
audit, but ultimately decided to consider the date that a state submits 
the independent certified audit to CMS as the discovery date. The 
earlier date would start the clock for state repayment of FFP without 
regard to possible work that may need to occur between states and 
auditors to finalize the audit and associated reporting prior to 
submission to CMS.
11. Technical Changes to Publishing DSH and CHIP Allotments
    We considered continuing the requirement to publish the DSH and 
CHIP allotments in the Federal Register. However, we believe this is 
unnecessary as states are already informed regarding their annual DSH 
and CHIP allotments prior to the publication of the Federal Register 
notice that we now provide and, in our experience, we have not received 
public comment regarding the notice.
12. Accounting Statement
    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars_a004_a-4), we have prepared an 
accounting statement in Table 1 showing the classifaction of the 
transfers associated with the provisions of this proposed rule.

                      Table 1--Accounting Statement: Classification of Estimated Transfers
                                                 [$ In millions]
----------------------------------------------------------------------------------------------------------------
                                                                                       Units
                                                                 -----------------------------------------------
            Category                Lower bound     Upper bound                    Discount rate      Period
                                                                   Year dollars         (%)           covered
----------------------------------------------------------------------------------------------------------------
Transfers.......................
                                 -------------------------------------------------------------------------------
Annualized Monetized reductions                0            -222            2017               7            2020
 in Costs.......................
                                               0            -222            2017               3            2020
rrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrrr
From Whom to Whom...............                          Medicaid to Medicaid Providers.
----------------------------------------------------------------------------------------------------------------

    The RFA requires agencies to analyze options for regulatory relief 
of small entities, if a rule has a significant impact on a substantial 
number of small entities. The great majority of hospitals and most 
other health care providers and suppliers are small entities, either by 
being nonprofit organizations or by meeting the SBA definition of a 
small business (having revenues of less than $8.0 million to $41.5 
million in any one year). Individuals and states are not included in 
the definition of a small entity. As its measure of significant 
economic impact on a substantial number of small entities, HHS uses a 
change in revenue of more than 3 to 5 percent. We do not believe that 
this threshold will be reached by the provisions in this proposed rule.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a metropolitan 
statistical area and has fewer than 100 beds. This rule will not have a 
significant impact on the operations of a substantial number of small 
rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (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 2018, that 
threshold is approximately $150 million. This rule does not contain 
mandates that will impose spending costs on state, local, or tribal 
governments in the aggregate, or by the private sector, in excess of 
the threshold.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it issues a proposed rule that imposes 
substantial direct requirement costs on state and local governments, 
preempts state law, or otherwise has Federalism implications. This rule 
does not impose substantial direct costs on state or local governments 
or preempt state law.
    Executive Order 13771, titled Reducing Regulation and Controlling 
Regulatory Costs, was issued on January 30, 2017, requires that the 
costs associated with significant new regulations ``to the extent 
permitted by law, be offset by the elimination of existing costs 
associated with at least two prior regulations.'' This rule, if 
promulgated, is not expected to be subject to the requirements of E.O. 
13771 because it is expected to result in no more than de minimis 
costs.

E. Conclusion

    If the policies in this proposed rule are finalized, states would 
be required to send us more detailed data on payments, including 
supplemental and DSH payments, Medicaid utilization data, provider 
taxes and donations, and CPEs and IGTs; implement new reviews of 
supplemental payment methodologies and tax waivers and periodically 
seek authorization for their renewal (if desired by the state); and 
provide a narrative to be sent in along

[[Page 63776]]

with supplemental payment SPA submissions on the goals and evaluation 
of the payments.
    In addition, states would also be allowed to tax services of health 
insurers excluding services of MCOs, as a permitted class without 
experiencing a reduction in medical assistance expenditures, be 
prohibited from unduly burdening Medicaid with taxes that are not 
generally redistributive, and be required to renew tax waivers every 3 
years, with updated provider data, or sooner if the state changes the 
definitions of taxpayer groups or tax rates in a non-uniform manner.
    The analysis above, together with the remainder of this preamble, 
provides a regulatory impact analysis. In accordance with the 
provisions of Executive Order 12866, this proposed rule was reviewed by 
the Office of Management and Budget.

List of Subjects

42 CFR Part 430

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

42 CFR Part 433

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

42 CFR Part 447

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

42 CFR Part 455

    Fraud, Grant programs--health, Health facilities, Health 
professions, Investigations, Medicaid, Reporting and recordkeeping 
requirements.

42 CFR Part 457

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

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

PART 430--GRANTS TO STATES FOR MEDICAL ASSISTANCE PROGRAMS

0
1. The authority citation for part 430 is revised to read as follows:

    Authority:  42 U.S.C. 1302.

0
2. Section 430.42 is amended by revising paragraphs (b)(2)(i)(A) 
introductory text, (b)(2)(i)(B) and (C), (c)(3), (c)(4)(i), (c)(6), and 
(d)(1) to read as follows:


Sec.  430.42   Disallowance of claims for FFP.

* * * * *
    (b) * * *
    (2) * * *
    (i) * * *
    (A) A request to the Administrator that includes the following:
* * * * *
    (B) A copy of the request to the Regional Office.
    (C) Send all requests for reconsideration via electronic mail 
(email) or electronic system specified by the Administrator. 
Submissions are considered made on the date they are received by the 
Administrator via email or electronic system specified by the 
Administrator.
* * * * *
    (c) * * *
    (3) At the Administrator's option, CMS may request from the State 
any additional information or documents necessary to make a decision. 
The request for additional information must be sent via email or 
electronic system specified by the Administrator. Submissions are 
considered made on the date they are received by the Administrator via 
email or electronic system specified by the Administrator.
    (4) * * *
    (i) If the Administrator finds that the materials are not in 
readily reviewable form or that additional information is needed, he or 
she must notify the State via email or electronic system specified by 
the Administrator that it has 15 business days from the date of receipt 
of the notice to submit the readily reviewable or additional materials. 
Notifications are considered made and received on the date they are 
sent by the Administrator via email or electronic system specified by 
the Administrator.
* * * * *
    (6) The final written decision shall constitute final CMS 
administrative action on the reconsideration and shall be (within 15 
business days of the decision) sent to the State agency via email or 
electronic system specified by the Secretary. Notification is 
considered made on the date it is sent by the Administrator via email 
or electronic system specified by the Administrator.
* * * * *
    (d) * * *
    (1) A State may withdraw the request for reconsideration at any 
time before the notice of the reconsideration decision is made without 
affecting its right to submit a notice of appeal to the Board. The 
request for withdrawal must be in writing and sent to the 
Administrator, with a copy to the Regional Office, via email or 
electronic system specified by the Administrator. Notification of the 
State's withdrawal of its request for reconsideration is considered 
made on the date it is received by the Administrator via email or 
electronic system specified by the Administrator.
* * * * *

PART 433--STATE FISCAL ADMINISTRATION

0
3. The authority citation for part 433 is revised to read as follows:

    Authority: 42 U.S.C. 1302.

0
4. Section 433.51 is revised to read as follows:


Sec.  433.51   State share of financial participation.

    (a) State or local funds may be considered as the State's share in 
claiming Federal financial participation (FFP) if they meet the 
conditions specified in paragraphs (b) and (c) of this section.
    (b) State or local funds that may be considered as the State's 
share are any of the following:
    (1) State General Fund dollars appropriated by the State 
legislature directly to the State or local Medicaid agency.
    (2) Intergovernmental transfer of funds from units of government 
within a State (including Indian tribes), derived from State or local 
taxes (or funds appropriated to State university teaching hospitals), 
to the State Medicaid Agency and under its administrative control, 
except as provided in paragraph (d) of this section.
    (3) Certified Public Expenditures, which are certified by a unit of 
government within a State as representing expenditures eligible for FFP 
under this section, and which meet the requirements of Sec.  447.206 of 
this chapter.
    (c) The State or local funds are not Federal funds, or are Federal 
funds authorized by Federal law to be used to match other Federal 
funds.
    (d) State funds that are provided as an intergovernmental transfer 
from a unit of government within a State that are contingent upon the 
receipt of funds by, or are actually replaced in the accounts of, the 
transferring unit of government from funds from unallowable sources, 
would be considered to be a provider-related donation that is non-bona 
fide under Sec. Sec.  433.52 and 433.54.
0
5. Section 433.52 is amended--

[[Page 63777]]

0
a. By adding the definitions of ``Medicaid activity'', ``Net effect'', 
``Non-Medicaid activity'', and ``Parameters of a tax'' in alphabetical 
order;
0
b. In the definition of ``Provider-related donation'' by revising 
paragraphs (2) and (3) and adding paragraph (4); and
0
c. By adding the definition of ``Taxpayer group'' in alphabetical 
order.
    The additions and revision read as follows:


Sec.  433.52   General definitions.

* * * * *
    Medicaid activity means any measure of the degree or amount of 
health care items or services related to the Medicaid program or 
utilized by Medicaid beneficiaries. Such a measure could include, but 
would not necessarily be limited to, Medicaid patient bed days, the 
percentage of an entity's net patient revenue attributable to Medicaid, 
Medicaid utilization, units of medical equipment sold to individuals 
utilizing Medicaid to pay for or supply such equipment or Medicaid 
member months covered by a health plan.
    Net effect means the overall impact of an arrangement, considering 
the actions of all of the entities participating in the arrangement, 
including all relevant financial transactions or transfers of value, in 
cash or in kind, among participating entities. The net effect of an 
arrangement is determined in consideration of the totality of the 
circumstances, including the reasonable expectations of the 
participating entities, and may include consideration of reciprocal 
actions without regard to whether the arrangement or a component of the 
arrangement is reduced to writing or is legally enforceable by any 
entity.
    Non-Medicaid activity means the degree or amount of health care 
items or services not related to the Medicaid program or utilized by 
Medicaid beneficiaries. Such a measure could include, but would not 
necessarily be limited to, non-Medicaid patient bed days, percentage of 
an entity's net patient revenue not attributable to Medicaid, the 
percentage of patients not utilizing Medicaid to pay for health care 
items or services, units of medical equipment sold to individuals not 
utilizing Medicaid funds to pay for or supply such equipment, or non-
Medicaid member months covered by a health plan.
    Parameters of a tax means the grouping of individuals, entities, 
items or services, on which the State or unit of government imposes a 
tax.
    Provider-related donation * * *
    (2) Any transfer of value where a health care provider or provider-
related entity assumes an obligation previously held by a governmental 
entity and the governmental entity does not compensate the private 
entity at fair market value will be considered a donation made 
indirectly to the governmental entity. Such an assumption of obligation 
need not rise to the level of a legally enforceable obligation to be 
considered a donation, but will be considered by examining the totality 
of the circumstances and judging the arrangement's net effect.
    (3) When an organization receives less than 25 percent of its 
revenues from providers and/or provider-related entities, its donations 
will not generally be presumed to be provider-related donations. Under 
these circumstances, a provider-related donation to an organization 
will not be considered a donation made indirectly to the State. 
However, if the donations from a provider or entities related to a 
provider to an organization are subsequently determined to be indirect 
donations to the State or unit of local government for administration 
of the State's Medicaid program, then such donations will be considered 
to be provider-related donations.
    (4) When the organization receives more than 25 percent of its 
revenue from donations from providers or provider-related entities, the 
organization always will be considered as acting on behalf of health 
care providers if it makes a donation to the State. The amount of the 
organization's donation to the State, in a State fiscal year, that will 
be considered to be a provider-related donation will be based on the 
percentage of the organization's revenue during that period that was 
received as donations from providers or provider-related entities.
    Taxpayer group means one or more entities grouped together based on 
one or more common characteristics for purposes of imposing a tax on a 
class of items or services specified under Sec.  433.56.
0
6. Section 433.54 is amended by revising paragraph (c)(3) to read as 
follows:


Sec.  433.54   Bona fide donations.

* * * * *
    (c) * * *
    (3) The State (or other unit of government) receiving the donation 
provides for any direct or indirect payment, offset, or waiver, such 
that the provision of that payment, offset, or waiver directly or 
indirectly guarantees to return any portion of the donation to the 
provider (or other party or parties responsible for the donation). Such 
a guarantee will be found to exist where, considering the totality of 
the circumstances, the net effect of an arrangement between the State 
(or other unit of government) and the provider (or other party or 
parties responsible for the donation) results in a reasonable 
expectation that the provider, provider class, or a related entity will 
receive a return of all or a portion of the donation. The net effect of 
such an arrangement may result in the return of all or a portion of the 
donation, regardless of whether the arrangement is reduced to writing 
or is legally enforceable by any party to the arrangement.
* * * * *
0
7. Section 433.55 is amended by revising paragraph (c) to read as 
follows:


Sec.  433.55   Health care-related taxes defined.

* * * * *
    (c) A tax is considered to be health care-related if the tax is not 
limited to health care items or services, but the treatment of 
individuals or entities providing or paying for those health care items 
or services is different than the tax treatment provided to individuals 
or entities that are providers or payers of any health care items or 
services that are not subject to the tax, or other individuals or 
entities that are subject to the tax. In determining whether 
differential treatment exists, consideration will be given to the 
parameters of the tax, as well as the totality of the circumstances 
relevant to which individuals, entities, items, or services are subject 
and not subject to the tax, and the tax rate applicable to each. 
Differential treatment includes, but is not limited to:
    (1) Tax programs in which some individuals or entities providing or 
paying for health care items or services are selectively incorporated, 
but others are excluded. Selective incorporation means that the State 
or other unit of government includes some, but not all, health care-
related items or services and these items or services are not 
reasonably related to the other items or services being taxed. 
Reasonably related means that there exists a logical or thematic 
connection between the items or services being taxed. Examples of such 
a connection include, but are not limited to, industry, such as 
electronics; geographical area, such as city or county; net revenue 
volume; or number of employees. For example, if the State imposes a tax 
on all telecommunication services and inpatient hospital services, this 
would constitute differential treatment as inpatient hospital services 
are selectively incorporated. However, if the State imposes a tax on 
revenue from

[[Page 63778]]

all professional services, which includes medical professional service 
revenue, this alone would not constitute differential treatment.
    (2) Differential treatment of individuals or entities providing or 
paying for health care items or services included in the tax, and other 
entities also included in the tax. For example, if the State taxes all 
businesses in the State, but places a higher tax rate on hospitals and 
nursing facilities than on other businesses, this would result in 
differential treatment.
* * * * *
0
8. Section 433.56 is amended--
0
a. In paragraph (a)(18), removing the phrase ``services; and'' and 
adding in its place the phrase ``services;'';
0
b. Redesignating paragraph (a)(19) as paragraph (a)(20); and
0
c. Adding a new paragraph (a)(19).
    The addition reads as follows:


Sec.  433.56  Classes of health care services and providers defined.

    (a) * * *
    (19) Services of health insurers (other than services of managed 
care organizations as specified in paragraph (a)(8) of this section); 
and
* * * * *
0
9. Section 433.68 is amended by--
0
a. Revising paragraph (e) introductory text;
0
b. Adding paragraph (e)(3); and
0
c. Revising paragraph (f)(3).
    The revisions and addition read as follows:


Sec.  433.68  Permissible health care-related taxes.

* * * * *
    (e) Generally redistributive. A tax will be considered to be 
generally redistributive if it meets the requirements of this paragraph 
(e). If the State requests waiver of only the broad-based tax 
requirement, it must demonstrate compliance with paragraphs (e)(1) and 
(3) of this section. If the State requests waiver of the uniform tax 
requirement, whether or not the tax is broad-based, it must demonstrate 
compliance with paragraphs (e)(2) and (3) of this section.
* * * * *
    (3) Requirement to avoid imposing undue burden on health care items 
or services reimbursed by Medicaid, as well as providers of such items 
or services. This paragraph (e)(3) applies on a per class basis. A tax 
must not impose undue burden on health care items or services paid for 
by Medicaid or on providers of such items and services that are 
reimbursed by Medicaid. A tax is considered to impose undue burden 
under this paragraph if taxpayers are divided into taxpayer groups and 
any one or more of the following conditions apply:
    (i) The tax excludes or places a lower tax rate on any taxpayer 
group defined by its level of Medicaid activity than on any other 
taxpayer group defined by its relatively higher level of Medicaid 
activity.
    (ii) Within each taxpayer group, the tax rate imposed on any 
Medicaid activity is higher than the tax rate imposed on any non-
Medicaid activity (except as a result of excluding from taxation 
Medicare or Medicaid revenue or payments as described in paragraph (d) 
of this section).
    (iii) The tax excludes or imposes a lower tax rate on a taxpayer 
group with no Medicaid activity than on any other taxpayer group, 
unless all entities in the taxpayer group with no Medicaid activity 
meet at least one of the following:
    (A) Furnish no services within the class in the State.
    (B) Do not charge any payer for services within the class.
    (C) Are Federal provider of services within the meaning of Sec.  
411.6 of this chapter.
    (D) Are a unit of government.
    (iv) The tax excludes or imposes a lower tax rate on a taxpayer 
group defined based on any commonality that, considering the totality 
of the circumstances, CMS reasonably determines to be used as a proxy 
for the taxpayer group having no Medicaid activity or relatively lower 
Medicaid activity than any other taxpayer group.
    (f) * * *
    (3) The State (or other unit of government) imposing the tax 
provides for any direct or indirect payment, offset, or waiver such 
that the provision of that payment, offset, or waiver directly or 
indirectly guarantees to hold taxpayers harmless for all or any portion 
of the tax amount. A direct guarantee will be found to exist where, 
considering the totality of the circumstances, the net effect of an 
arrangement between the State (or other unit of government) and the 
taxpayer results in a reasonable expectation that the taxpayer will 
receive a return of all or any portion of the tax amount. The net 
effect of such an arrangement may result in the return of all or any 
portion of the tax amount, regardless of whether the arrangement is 
reduced to writing or is legally enforceable by any party to the 
arrangement.
0
10. Section 433.72 is amended by adding paragraphs (c)(3) and (4) and 
(d) to read as follows:


Sec.  433.72  Waiver provisions applicable to health care-related 
taxes.

* * * * *
    (c) * * *
    (3) For waivers approved on or after [final rule effective date] a 
waiver will cease being effective 3 years from the date that the waiver 
was approved by CMS.
    (4) For waivers approved before [final rule effective date] a 
waiver will cease to be effective [3 years from final rule effective 
date].
    (d) Ongoing compliance with waiver conditions. For a State to 
continue to receive tax revenue (within specified limitations) without 
a reduction in FFP under a waiver approved under paragraph (b) of this 
section, the State must meet all of the following requirements:
    (1) Ensure that the tax program for which CMS approved the waiver 
under paragraph (b) of this section continues to meet the waiver 
conditions identified in paragraphs (b)(1) through (3) of this section 
at all times during which the waiver is in effect.
    (2) Request and receive approval for a new waiver, subject to 
effective date requirements in paragraph (c) of this section, if either 
of the following tax program modifications occurs:
    (i) The State or other unit of government imposing the tax modifies 
the tax in a non-uniform manner, meaning the change in tax or tax rate 
does not apply in an equal dollar amount or percentage change to all 
taxpayers.
    (ii) The State or other unit of government imposing the tax 
modifies the criteria for defining the taxpayer group or groups subject 
to the tax.
0
11. Section 433.316 is amended by--
0
a. Redesignating paragraphs (f) through (h) as paragraphs (g) through 
(i), respectively; and
0
b. Adding a new paragraph (f).
    The addition reads as follows:


Sec.  433.316   When discovery of overpayment occurs and its 
significance.

* * * * *
    (f) Overpayments identified through the disproportionate share 
hospital (DSH) independent certified audit. In the case of an 
overpayment identified through the independent certified audit required 
under part 455, subpart D, of this chapter, CMS will consider the 
overpayment as discovered on the earliest of the following:
    (1) The date that the State submits the independent certified audit 
report required under Sec.  455.304(b) of this chapter to CMS.

[[Page 63779]]

    (2) Any of the dates specified in paragraphs (c)(1) through (3) of 
this section.
* * * * *

PART 447--PAYMENTS FOR SERVICES

0
12. The authority citation for part 447 is revised to read as follows:

    Authority: 42 U.S.C. 1302 and 1396r-8.

0
13. Section 447.201 is amended by adding paragraph (c) to read as 
follows:


Sec.  447.201  State plan requirements.

* * * * *
    (c) The plan must provide for no variation in fee-for-service 
payment for a Medicaid service on the basis of a beneficiary's Medicaid 
eligibility category, enrollment under a waiver or demonstration 
project, or FMAP rate available for services provided to an individual 
in the beneficiary's eligibility category.
0
14. Section 447.206 is added to subpart B to read as follows:


Sec.  447.206   Payments funded by certified public expenditures made 
to providers that are units of government.

    (a) Scope. This section applies only to payments made to providers 
that are State government providers or non-State government providers, 
as defined in Sec.  447.286, where such payments to such providers are 
funded by a certified public expenditure, as specified in Sec.  
433.51(b)(3) of this chapter.
    (b) General rules. (1) Payments are limited to reimbursement not in 
excess of the provider's actual, incurred cost of providing covered 
services to Medicaid beneficiaries using reasonable cost allocation 
methods as specified in 45 CFR part 75 and 2 CFR part 200, or, as 
applicable, to Medicare cost principles specified in part 413 of this 
chapter.
    (2) The State must establish and implement documentation and audit 
protocols, which must include an annual cost report to be submitted by 
the State government provider or non-State government provider to the 
State agency that documents the provider's costs incurred in furnishing 
services to beneficiaries during the provider's fiscal year.
    (3) Only the certified amount of the expenditure may be claimed for 
Federal financial participation.
    (4) The certifying entity of the certified public expenditure must 
receive and retain the full amount of Federal financial participation 
associated with the payment, consistent with the cost identification 
protocols in the Medicaid State plan and in accordance with Sec.  
447.207.
    (c) Other criteria for the use of certified public expenditures. 
(1) A State must implement processes by which all claims for medical 
assistance are processed through Medicaid management information 
systems in a manner that identifies the specific Medicaid services 
provided to specific enrollees.
    (2) The most recently filed cost reports as specified in paragraph 
(b)(2) of this section must be used to develop interim payments rates, 
which may be trended by an applicable health care-related index.
    (3) Final settlement must be performed annually by reconciling any 
interim payments to the finalized cost report for the State plan rate 
year in which any interim payment rates were made, and final settlement 
must be made no more than 24 months from the cost report year end, 
except under circumstances identified in 45 CFR 95.19.
    (4) If the final settlement establishes that the provider received 
an overpayment, the Federal share in recovered overpayment amounts must 
be credited to the Federal Government, in accordance with part 433, 
subpart F, of this chapter.
    (d) State plan requirements. If certified public expenditures are 
used as a source of non-Federal share under the State plan, the State 
plan must specify cost protocols in the service payment methodology 
applicable to the certifying provider that meet all of the following:
    (1) Identify allowable cost, using either of the following:
    (i) A Medicare cost report, as described in part 413 of this 
chapter.
    (ii) A State-developed Medicaid cost report prepared in accordance 
with the cost principles in 45 CFR part 75 and 2 CFR part 200.
    (2) Define an interim rate methodology for interim payments to 
providers for services furnished.
    (3) Describe an attestation process by which the certifying entity 
will attest that the costs are accurate and consistent with 45 CFR part 
75 and 2 CFR part 200.
    (4) Include, as necessary, a list of the covered Medicaid services 
being furnished by each provider certifying a certified public 
expenditure.
    (5) Define a reconciliation and final settlement process consistent 
with paragraphs (c)(3) and (4) of this section.
0
15. Section 447.207 is added to subpart B to read as follows:


Sec.  447.207  Retention of payments.

    (a) Payments. Payment methodologies must permit the provider to 
receive and retain the full amount of the total computable payment for 
services furnished under the approved State plan (or the approved 
provisions of a waiver or demonstration, if applicable). The Secretary 
will determine compliance with this paragraph (a) by examining any 
associated transactions that are related to the provider's total 
computable Medicaid payment to ensure that the State's claimed 
expenditure, which serves as the basis for Federal financial 
participation, is consistent with the State's net expenditure, and that 
the full amount of the non-Federal share of the payment has been 
satisfied. Associated transactions may include, but are not necessarily 
limited to, the payment of an administrative fee to the State for 
processing provider payments or, in the case of a non-State government 
provider, for processing intergovernmental transfers. In no event may 
such administrative fees be calculated based on the amount a provider 
receives through Medicaid payments or amounts a unit of government 
contributes through an intergovernmental transfer as funds for the 
State share of Medicaid service payments.
    (b) [Reserved]
0
16. Section 447.252 is amended by adding paragraphs (d) and (e) to read 
as follows:


Sec.  447.252   State plan requirements.

* * * * *
    (d) CMS may approve a supplemental payment, as defined in Sec.  
447.286, provided for under the State plan or a State plan amendment 
(SPA) for a period not to exceed 3 years. A State whose supplemental 
payment approval period has expired or is expiring may request a SPA to 
renew the supplemental payment for a subsequent period not to exceed 3 
years, consistent the requirements of this section. For any State plan 
or SPA that provides or would provide for a supplemental payment, the 
plan or plan amendment must specify all of the following:
    (1) An explanation of how the State plan or SPA will result in 
payments that are consistent with section 1902(a)(30)(A) of the Act, 
including that provision's standards with respect to efficiency, 
economy, quality of care, and access, along with the stated purpose and 
intended effects of the supplemental payment, for example, with respect 
to the Medicaid program, providers, and beneficiaries.
    (2) The criteria to determine which providers are eligible to 
receive the supplemental payment.
    (3) A comprehensive description of the methodology used to 
calculate the

[[Page 63780]]

amount of, and distribute, the supplemental payment to each eligible 
provider, including all of the following:
    (i) The amount of the supplemental payment made to each eligible 
provider, if known, or, if the total amount is distributed using a 
formula based on data from one or more fiscal years, the total amount 
of the supplemental payments for the fiscal year or years available to 
all providers eligible to receive a supplemental payment.
    (ii) If applicable, the specific criteria with respect to Medicaid 
service, utilization, or cost data from the proposed State plan rate 
year to be used as the basis for calculations regarding the amount and/
or distribution of the supplemental payment.
    (iii) The timing of the supplemental payment to each eligible 
provider.
    (iv) An assurance that the total Medicaid payment to an inpatient 
hospital provider, including the supplemental payment, will not exceed 
the upper limits specified in Sec.  447.271.
    (v) If not already submitted, an upper payment limit demonstration 
as required by Sec.  447.272 and described in Sec.  447.288.
    (4) The duration of the supplemental payment authority (not to 
exceed 3 years).
    (5) A monitoring plan to ensure that the supplemental payment 
remains consistent with the requirements of section 1902(a)(30)(A) of 
the Act and to enable evaluation of the effects of the supplemental 
payment on the Medicaid program, for example, with respect to providers 
and beneficiaries.
    (6) For a SPA proposing to renew a supplemental payment for a 
subsequent approval period, an evaluation of the impacts on the 
Medicaid program during the current or most recent prior approval 
period, for example, with respect to providers and beneficiaries, and 
including an analysis of the impact of the supplemental payment on 
compliance with section 1902(a)(30)(A) of the Act.
    (e) The authority for State plan provisions that authorize 
supplemental payments that are approved as of [effective date of the 
final rule], are limited as follows--
    (1) For State plan provisions approved 3 or more years prior to 
[effective date of the final rule], the State plan authority will 
expire [date that is 2 calendar years following the effective date of 
the final rule].
    (2) For State plan provisions approved less than 3 years prior to 
[effective date of the final rule], the State plan authority will 
expire [date that is 3 calendar years following the effective date of 
the final rule].
* * * * *
0
17. Section 447.272 is amended by revising paragraphs (a)(1) through 
(3) and (b)(1) to read as follows:


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

    (a) * * *
    (1) State government provider as defined using the criteria set 
forth in Sec.  447.286.
    (2) Non-State government provider as defined using the criteria set 
forth at Sec.  447.286.
    (3) Private provider as defined in Sec.  447.286.
    (b) * * *
    (1) Upper payment limit refers to a reasonable estimate of the 
amount that would be paid for the services furnished by the group of 
facilities under Medicare payment principles in subchapter B of this 
chapter, or allowed costs established in accordance with the cost 
principles as specified in 45 CFR part 75 and 2 CFR part 200, or, as 
applicable, Medicare cost principles specified in part 413 of this 
chapter. Data elements, methodology parameters, and acceptable upper 
payment limit demonstration methodologies are specified in Sec.  
447.288(b).
* * * * *
0
18. Subpart D is added to read as follows:

Subpart D--Payments for Services

Sec.
447.284 Basis and purpose.
447.286 Definitions.
447.288 Reporting requirements for upper payment limit 
demonstrations and supplemental payments.
447.290 Failure to report required information.

Subpart D--Payments for Services


Sec.  447.284   Basis and purpose.

    (a) This subpart sets forth additional requirements for 
supplemental payments made under the State plan and implements sections 
1902(a)(6) and (a)(30) of the Act.
    (b) The reporting requirements in this subpart are applicable to 
supplemental payments to which an upper payment limit applies under 
Sec.  447.272 or Sec.  447.321.


Sec.  447.286   Definitions.

    For purposes of this subpart--
    Base payment means a payment, other than a supplemental payment, 
made to a provider in accordance with the payment methodology 
authorized in the State plan or that is paid to the provider through 
its participation with a Medicaid managed care organization. Base 
payments are documented at the beneficiary level in MSIS or T-MSIS and 
include all payments made to a provider for specific Medicaid services 
rendered to individual Medicaid beneficiaries, including any payment 
adjustments, add-ons, or other additional payments received by the 
provider that can be attributed to a particular service provided to the 
beneficiary, such as payment adjustments made to account for a higher 
level of care or complexity of services provided to the beneficiary.
    Non-State government provider means a health care provider, as 
defined in Sec.  433.52 of this chapter, including those defined in 
Sec.  447.251, that is a unit of local government in a State, including 
a city, county, special purpose district, or other governmental unit in 
the State that is not the State, which has access to and exercises 
administrative control over State funds appropriated to it by the 
legislature or local tax revenue, including the ability to dispense 
such funds. In determining whether an entity is a non-State government 
provider, CMS will consider the totality of the circumstances, 
including, but not limited to, the following:
    (1) The identity and character of any entity or entities other than 
the provider that share responsibilities of ownership or operation of 
the provider, and including the nature of any relationship among such 
entities and the relationship between such entity or entities and the 
provider. In determining whether an entity shares responsibilities of 
ownership or operation of the provider, our consideration would 
include, but would not be limited to, whether the entity:
    (i) Has the immediate authority for making decisions regarding the 
operation of the provider;
    (ii) Bears the legal responsibility for risk from losses from 
operations of the provider;
    (iii) Has immediate authority for the disposition of revenue from 
operations of the provider;
    (iv) Has immediate authority with regard to hiring, retention, 
payment, and dismissal of personnel performing functions related to the 
operation of the provider;
    (v) Bears legal responsibility for payment of taxes on provider 
revenues and real property, if any are assessed; or
    (vi) Bears the responsibility of paying any medical malpractice 
premiums or other premiums to insure the real property or operations, 
activities, or assets of the provider.

[[Page 63781]]

    (2) In determining whether a relevant entity is a unit of a non-
State government, we would consider the character of the entity which 
would include, but would not be limited to, whether the entity:
    (i) Is described in its communications to other entities as a unit 
of non-State government, or otherwise.
    (ii) Is characterized as a unit of non-State government by the 
State solely for the purposes of Medicaid financing and payments, and 
not for other purposes (for example, taxation).
    (iii) Has access to and exercises administrative control over State 
funds appropriated to it by the legislature and/or local tax revenue, 
including the ability to expend such appropriated or tax revenue funds, 
based on its characterization as a governmental entity.
    Private provider means a health care provider, as defined in Sec.  
433.52 of this chapter, including those defined in Sec.  447.251 of 
this chapter, that is not a State government provider or a non-State 
government provider.
    State government provider means a health care provider, as defined 
in Sec.  433.52 of this chapter, including those defined in Sec.  
447.251 of this chapter, that is a unit of State government or a State 
university teaching hospital, which has access to and exercises 
administrative control over State-appropriated funds from the 
legislature or State tax revenue, including the ability to dispense 
such funds. In determining whether a provider is a State government 
provider, CMS will consider the totality of the circumstances, 
including, but not limited to, the following:
    (1) The identity and character of any entity or entities other than 
the provider that share responsibilities of ownership or operation of 
the provider, and including the nature of any relationship among such 
entities and the relationship between such entity or entities and the 
provider. In determining whether an entity shares responsibilities of 
ownership or operation of the provider, our consideration would 
include, but would not be limited to, whether the entity:
    (i) Has the immediate authority for making decisions regarding the 
operation of the provider;
    (ii) Bears the legal responsibility for risk from losses and 
litigation from operations of the provider;
    (iii) Has immediate authority for the disposition of revenue and 
profit from operations of the provider;
    (iv) Has immediate authority with regard to acquisition, retention, 
payment, and dismissal of personnel performing functions related to the 
operation of the provider;
    (v) Bears legal responsibility for payment of taxes on provider 
revenues and real property, if any are assessed; or
    (vi) Bears the responsibility of paying any medical malpractice 
premiums or other premiums to insure the real property or operations, 
activities, or assets of the provider;
    (2) In determining whether a relevant entity is a unit of a State 
government, we would consider the character of the entity which would 
include, but would not be limited to, whether the entity:
    (i) Is described in its communications to other entities as a unit 
of State government, or otherwise;
    (ii) Is characterized as a unit of State government by the State 
solely for the purposes of Medicaid financing and payments, and not for 
other purposes (for example, taxation); and
    (iii) Has access to and exercises administrative control over State 
funds appropriated to it by the legislature and/or local tax revenue, 
including the ability to expend such appropriated or tax revenue funds, 
based on its characterization as a governmental entity.
    Supplemental payment means a Medicaid payment to a provider that is 
in addition to the base payments to the provider, other than 
disproportionate share hospital (DSH) payments under subpart E of this 
part, made under State plan authority or demonstration authority. 
Supplemental payments cannot be attributed to a particular provider 
claim for specific services provided to an individual beneficiary and 
are often made to the provider in a lump sum.


Sec.  447.288  Reporting requirements for upper payment limit 
demonstrations and supplemental payments.

    (a) Upper payment limit demonstration reporting requirements. 
Beginning October 1, [first year following the year the final rule 
takes effect] and annually thereafter, by October 1 of each year, in 
accordance with the requirements of this section and in the manner and 
format specified by the Secretary, each State must submit a 
demonstration of compliance with the applicable upper payment limit for 
each of the following services for which the State makes payment:
    (1) Inpatient hospital, as specified in Sec.  447.272.
    (2) Outpatient hospital, as specified in Sec.  447.321.
    (3) Nursing facility, as specified in Sec.  447.272.
    (4) Intermediate care facility for individuals with intellectual 
disabilities (ICF/IID), as specified in Sec.  447.272.
    (5) Institution for mental diseases (IMD), as specified in Sec.  
447.272.
    (b) Upper payment limit demonstration standards. When demonstrating 
the upper payment limit (UPL), States must use the data sources 
identified in paragraph (b)(1) of this section, adhere to the data 
standards specified in paragraph (b)(2) of this section, and use the 
acceptable methods of demonstrating the UPL specified in paragraph 
(b)(3) of this section.
    (1) UPL methodology data sources. The data sources identified in 
this paragraph (b)(1) are as follows:
    (i) Medicare cost demonstrations. Medicare cost demonstrations use 
cost and charge data for all providers, from either a Medicare cost 
report or a State-developed cost report which uses either Medicare cost 
reporting principles specified in part 413 of this chapter or the cost 
allocation requirements specified in 45 CFR part 75. Cost and charge 
data must:
    (A) Include only data with dates of service that are no more than 2 
years prior to the dates of service covered by the upper payment limit 
demonstration;
    (B) Represent costs and charges specifically related to the service 
subject to the UPL demonstration; and
    (C) Include either Medicare costs and Medicare charges, or total 
provider costs and total provider charges, to develop a cost-to-charge 
ratio as described in paragraph (b)(3)(i) of this section. The 
selection must be consistently applied for all providers within the 
provider category subject to the upper payment limit.
    (ii) Medicare payment demonstrations. Medicare payment 
demonstrations use Medicare payment and charge data for all providers 
from Medicare cost reports; Medicare payment systems for the specific 
provider type specified in subchapter B of this chapter, as applicable; 
or imputed provider payments, specified in paragraph (b)(3)(ii)(C) of 
this section. When using Medicare payment and charge data, the data 
must:
    (A) Include only data with dates of service that are no more than 2 
years prior to the dates of service covered by the upper payment limit 
demonstration;
    (B) Include only Medicare payment and charges, or Medicare payment 
and Medicare census data, specifically related to the service subject 
to the UPL demonstration; and
    (C) Use either gross Medicare payments and Medicare charges, which 
includes deductibles and co-insurance in but excludes reimbursable bad 
debt from the Medicare payment, or net Medicare payments and Medicare 
charges, which excludes deductibles

[[Page 63782]]

and coinsurance from and includes reimbursable bad debt in the Medicare 
payment, as reported on a Medicare cost report. The selection must be 
consistently applied for all providers within the provider category 
subject to the upper payment limit.
    (iii) Medicaid charge data and Medicaid census data from a State's 
Medicaid billing system for services provided during the same dates of 
service as the Medicare cost or Medicare payment data, as specified in 
paragraph (b)(1)(i) or (ii) of this section, as applicable.
    (iv) Medicaid payment data from a State's Medicaid billing system 
for services provided during the same dates of service as the Medicare 
cost or Medicare payment data, as specified in paragraph (b)(1)(i) or 
(ii) of this section, as applicable, or from the most recent State plan 
rate year for which a full 12 months of data are available. Such 
Medicaid payment data must:
    (A) Include only data with dates of service that are no more than 2 
years prior to the dates of service covered by the upper payment limit 
demonstration;
    (B) Include all actual payments and all projected base and 
supplemental payments, excluding any payments made for services for 
which Medicaid is not the primary payer, expected to made during the 
time period covered by the upper payment limit demonstration to the 
providers within the provider category, as applicable, during the State 
plan rate year; and
    (C) Only be trended to account for changes in relevant Medicaid 
State plan payments, except as provided in paragraph (b)(2)(i) of this 
section.
    (2) UPL methodology data standards. The data standards specified in 
this paragraph (b)(2) are as follows:
    (i) Projected changes in Medicaid enrollment and utilization must 
be reflected in the demonstration. At a minimum, the demonstration must 
be adjusted to account for projected changes in Medicaid enrollment and 
utilization to reflect programmatic changes, such as reasonable 
utilization changes due to managed care enrollment projections.
    (ii) Medicare cost or payment data may be projected using Medicare 
trend factors appropriate to the service and demonstration methodology, 
with such trend factors being uniformly applied to all providers within 
a provider category.
    (iii) When calculating the aggregate upper payment limit using a 
cost-based demonstration as described in paragraph (b)(3)(i) of this 
section, the State may include the cost of health care-related taxes 
paid by each provider in the provider category that is reasonably 
allocated to Medicaid as an adjustment to the upper payment limit, to 
the extent that such costs were not already included in the cost-based 
UPL.
    (iv) Medicaid payment data described in paragraph (b)(1)(iv) of 
this section that is included in the upper payment limit demonstration 
must only include payments made for the applicable Medicaid services 
under the specific Medicaid service type at issue in the upper payment 
limit.
    (3) Acceptable UPL demonstration methods. The State must 
demonstration compliance with an applicable UPL using a method 
described in this paragraph (b)(3).
    (i) Cost-based demonstrations. Cost-based demonstration data 
sources are identified in paragraphs (b)(1)(i), (iii), and (iv) of this 
section and data standards defined in paragraph (b)(2) of this section. 
To make a cost-based demonstration of compliance with an applicable 
upper payment limit, Medicaid covered charges are multiplied by a cost-
to-charge ratio developed for the period covered by the upper payment 
limit demonstration. The State may use a ratio of Medicare costs to 
Medicare charges, or total provider costs to total provider charges in 
developing the cost-to-charge ratio, but the selection must be applied 
consistently to each provider within a provider type identified in 
paragraph (a) of this section. The product of Medicaid covered charges 
and the cost-to-charge ratio for each provider is summed to determine 
the aggregate upper payment limit. The demonstration must show that 
Medicaid payments will not exceed this aggregate upper payment limit 
for the demonstration period. This methodology may only be used for 
services where a provider applies uniform charges to all payers. This 
demonstration may use one of the following demonstration types:
    (A) A retrospective demonstration showing that aggregate Medicaid 
payments paid to the providers within the provider category during the 
prior State plan rate year did not exceed the costs incurred by the 
providers furnishing Medicaid services within the prior State plan rate 
year period.
    (B) A prospective demonstration showing that prospective Medicaid 
payments would not exceed the estimated cost of furnishing the services 
for the upcoming State plan rate year period.
    (ii) Payment-based demonstrations. Payment-based demonstration data 
sources are identified in paragraphs (b)(1)(ii), (iii), and (iv) of 
this section and data standards defined in paragraph (b)(2) of this 
section. To make a payment-based demonstration of compliance with an 
applicable UPL, the State may use one of the following demonstration 
types:
    (A) A retrospective payment-to-charge UPL demonstration where 
Medicaid covered charges are multiplied by a ratio of Medicare payments 
to Medicare charges developed for the period covered by the UPL 
demonstration. The product of Medicaid covered charges and the Medicare 
payment-to-charge ratio for each provider is summed to determine the 
aggregate UPL. The demonstration must show that Medicaid payments did 
not exceed this aggregate UPL;
    (B) A prospective payment-to-charge UPL demonstration where 
Medicaid covered charges are multiplied by a ratio of Medicare payments 
to Medicare charges developed for the period covered by the UPL 
demonstration. The product of Medicaid covered charges and the Medicare 
payment-to-charge ratio for each provider is summed to determine the 
aggregate UPL. The demonstration must show that proposed Medicaid 
payments would not exceed this aggregate UPL within the next State plan 
rate year immediately following the demonstration period; or
    (C) A payment-based UPL demonstration using an imputed Medicare per 
diem payment rate determined by dividing total Medicare prospective 
payments paid to the provider by the provider's total Medicare patient 
days, which are derived from the provider's Medicare census data. Each 
provider's imputed Medicare per diem payment rate is multiplied by the 
total number of Medicaid patient days for the provider for the period. 
The products of this operation for each provider are summed to 
determine the aggregate UPL. The demonstration must show that Medicaid 
payments are not excess of the aggregate UPL, calculated on either a 
retrospective or prospective basis, consistent with the methodology 
described in paragraph (b)(3)(ii)(A) or (B) of this section, as 
applicable.
    (c) Supplemental payment reporting requirements. (1) At the time 
the State submits its quarterly CMS-64 under Sec.  430.30(c) of this 
chapter, the State must report all of the following information for 
each supplemental payment included on the CMS-64 on a supplemental 
report to accompany the CMS-64:
    (i) The State plan amendment transaction number or demonstration 
authority number which authorizes the supplemental payment.
    (ii) A listing of each provider that received a supplemental 
payment under

[[Page 63783]]

the SPA or demonstration authority, and for each provider, under each 
authority listed in paragraph (a) of this section:
    (A) The provider's legal name.
    (B) The physical address of the location or facility where services 
are provided, including street address, city, State, and ZIP code.
    (C) The National Provider Identifier (NPI).
    (D) The Medicaid identification number.
    (E) The employer identification number (EIN).
    (F) The service type for which the reported payment was made.
    (G) The provider specialty type (if applicable, for example, 
critical access hospital (CAH), pediatric hospital, or teaching 
hospital).
    (H) The provider category (that is, State government provider, Non-
state government provider, or Private provider).
    (iii) The specific amount of the supplemental payment made to the 
provider, including:
    (A) The total supplemental payment made to the provider authorized 
under the specified State plan, as applicable.
    (B) The total Medicaid supplemental payment made to the provider 
under the specified demonstration authority, as applicable.
    (2) Not later than 60 days after the end of the State fiscal year, 
each State must annually report aggregate and provider-level 
information on base and supplemental payments made under State plan and 
demonstration authority, as applicable, by service type. This reporting 
must include all of the following:
    (i) The SPA transaction number or demonstration authority number 
which authorizes the supplemental payment, as applicable.
    (ii) A listing of each provider that received a supplemental 
payment under each authority listed in paragraph (a) of this section 
by:
    (A) The provider's legal name.
    (B) The physical address of the location or facility where services 
are provided, including street address, city, State, and ZIP code.
    (C) The NPI.
    (D) The Medicaid identification number.
    (E) The EIN.
    (F) The service type for which the reported payment was made.
    (G) The provider specialty type (if applicable, for example, CAH, 
pediatric hospital, or teaching hospital).
    (H) The provider category (that is, State government provider, non-
State government provider, or Private provider).
    (I) The State reporting period (State fiscal year start and end 
dates).
    (iii) The specific amount of Medicaid payments made to each 
provider, including, as applicable:
    (A) The total fee-for-service base payments made to the provider 
authorized under the State plan.
    (B) The total Medicaid payments made to the provider under 
demonstration authority.
    (C) The total amount received from Medicaid beneficiary cost-
sharing requirements, donations, and any other funds received from 
third parties to support the provision of Medicaid services.
    (D) The total supplemental payment made to the provider authorized 
under the specified State plan.
    (E) The total Medicaid supplemental payment made to the provider 
under the specified demonstration authority.
    (F) The total Medicaid payments made to the provider as reported 
under paragraphs (c)(2)(iii)(A) through (E) of this section.
    (G) The total disproportionate share hospital (DSH) payments made 
to the provider.
    (H) The Medicaid units of care furnished by the provider, as 
specified by the Secretary (for example, on a provider-specific basis, 
total Medicaid discharges, days of care, or any other unit of 
measurement as specified by the Secretary).
    (3) Not later than 60 days after the end of the State fiscal year, 
each State must annually report aggregate and provider-level 
information on each provider contributing to the State or any unit of 
local government any funds that are used as a source of non-Federal 
share for any Medicaid supplemental payment, by:
    (i) The service type for which the reported payment was made.
    (ii) The provider specialty type (if applicable, for example, CAH, 
pediatric hospital, or teaching hospital).
    (iii) The provider's legal name.
    (iv) The physical address of the location or facility where 
services are provided, including street address, city, State, and ZIP 
code.
    (v) The NPI.
    (vi) The Medicaid identification number.
    (vii) The EIN.
    (viii) The provider category (that is, State government, non-State 
government, or private).
    (ix) The total fee-for-service base payments made to the provider 
authorized under the State plan.
    (x) The total fee-for-service supplemental payments made to the 
provider authorized under the State plan.
    (xi) The total Medicaid payments made to the provider under 
demonstration authority.
    (xii) The total DSH payments made to the provider.
    (xiii) The total of each health care-related tax collected from the 
provider by any State authority or unit of local government.
    (xiv) The total of any costs certified as a certified public 
expenditures (CPE) by the provider.
    (xv) The total amount contributed by the provider to the State or a 
unit of local government in the form of an intergovernmental transfers 
(IGT).
    (xvi) The total of provider-related donations made by the provider 
or by entities related to a health care provider, including in-cash and 
in-kind donations, to the State or a unit of local government, 
including State university teaching hospitals.
    (xvii) The total funds contributed by the provider reported in 
paragraphs (c)(3)(xiii) through (xvi) of this section.


Sec.  447.290  Failure to report required information.

    (a) The State must maintain the underlying information supporting 
base and supplemental payments, including the information required to 
be reported under Sec.  447.288, consistent with the requirements of 
Sec.  433.32 of this chapter, and must provide such information for 
Federal review upon request to facilitate program reviews or Department 
of Health and Human Services' Office of Inspector General (OIG) audits 
conducted under Sec. Sec.  430.32 and 430.33 of this chapter.
    (b) If a State fails to timely, completely and accurately report 
information required under Sec.  447.288, CMS may reduce future grant 
awards through deferral in accordance with Sec.  430.40 of this 
chapter, by the amount of Federal financial participation (FFP) CMS 
estimates is attributable to payments made to the provider or providers 
as to which the State has not reported properly, until such time as the 
State complies with the reporting requirements. CMS may defer FFP if a 
State submits the required report but the report fails to comply with 
applicable requirements. Otherwise allowable FFP for expenditures 
deferred in accordance with this section will be released when CMS 
determines that the State has complied with all reporting requirements 
under Sec.  447.288.


Sec.  447.297   [Amended]

0
19. Section 447.297 is amended--
0
a. In paragraph (b) by removing the phrase ``published by April 1 of 
each Federal fiscal year,'' and adding in its

[[Page 63784]]

place the phrase ``posted as soon as practicable''
0
b. In paragraph (c) by removing the phrase ``publish in the Federal 
Register'' and adding in its place the phrase ``post in the Medicaid 
Budget and Expenditure System and at Medicaid.gov (or similar successor 
system or website)'' and by removing the phrase ``publish final State 
DSH allotments by April 1 of each Federal fiscal year,'' and adding in 
its place the phrase ``post final State DSH allotments as soon as 
practicable in each Federal fiscal year,''
0
c. In paragraph (d)(1) by removing the phrase ``by April 1 of each 
Federal fiscal year'' and adding in its place the phrase ``as soon as 
practicable for each Federal fiscal year'' and by removing the phrase 
``prior to the April 1 publication date'' and adding in its place the 
phrase ``prior to the posting date''
0
20. Section 447.299 is amended by--
0
a. Redesignating paragraph (c)(21) as paragraph (c)(22)
0
b. Adding new paragraph (c)(21) and paragraphs (f) and (g).
    The additions read as follows:


Sec.  447.299   Reporting requirements.

* * * * *
    (c) * * *
    (21) Financial impact of audit findings. The total annual amount 
associated with each audit finding. If it is not practicable to 
determine the actual financial impact amount, state the estimated 
financial impact for each audit finding identified in the independent 
certified audit that is not reflected in data elements described in 
paragraphs (c)(6) through (15) of this section. For purposes of this 
paragraph (c)(21), audit finding means an issue identified in the 
independent certified audit required under Sec.  455.304 of this 
chapter concerning the methodology for computing the hospital specific 
DSH limit and/or the DSH payments made to the hospital, including, but 
not limited to, compliance with the hospital-specific DSH limit as 
defined in paragraph (c)(16) of this section. Audit findings may be 
related to missing or improper data, lack of documentation, non-
compliance with Federal statutes and/or regulations, or other 
deficiencies identified in the independent certified audit. Actual 
financial impact means the total amount associated with audit findings 
calculated using the documentation sources identified in Sec.  
455.304(c) of this chapter. Estimated financial impact means the total 
amount associated with audit findings calculated on the basis of the 
most reliable available information to quantify the amount of an audit 
finding in circumstances where complete and accurate information 
necessary to determine the actual financial impact is not available 
from the documentation sources identified in Sec.  455.304(c) of this 
chapter.
* * * * *
    (f) DSH payments found in the independent certified audit process 
under part 455, subpart D, of this chapter to exceed hospital-specific 
cost limits are provider overpayments which must be returned to the 
Federal Government in accordance with the requirements in part 433, 
subpart F, of this chapter or redistributed by the State to other 
qualifying hospitals, if redistribution is provided for under the 
approved State plan. Overpayment amounts returned to the Federal 
Government must be separately reported on the Form CMS-64 as a 
decreasing adjustment which corresponds to the fiscal year DSH 
allotment and Medicaid State plan rate year of the original DSH 
expenditure claimed by the State.
    (g) As applicable, States must report any overpayment 
redistribution amounts on the Form CMS-64 within 2 years from the date 
of discovery that a hospital-specific limit has been exceeded, as 
determined under Sec.  433.316(f) of this chapter in accordance with a 
redistribution methodology in the approved Medicaid State plan. The 
State must report redistribution of DSH overpayments on the Form CMS-64 
as separately identifiable decreasing adjustments reflecting the return 
of the overpayment as specified in paragraph (f) of this section and 
increasing adjustments representing the redistribution by the State. 
Both adjustments should correspond to the fiscal year DSH allotment and 
Medicaid State plan rate year of the related original DSH expenditure 
claimed by the State.
0
21. Section 447.302 is revised to read as follows:


Sec.  447.302  State plan requirements.

    (a) The plan must provide that the requirements of this subpart are 
met.
    (b) The plan must specify comprehensively the methods and standards 
used by the agency to set payment rates.
    (c) CMS may approve a supplemental payment, as defined in Sec.  
447.286, provided for under the State plan or a State plan amendment 
for a period not to exceed 3 years. A State whose supplemental payment 
approval period has expired or is expiring may request a State plan 
amendment to renew the supplemental payment for a subsequent period not 
to exceed 3 years, consistent the requirements of this section. For any 
State plan or State plan amendment that provides or would provide for a 
supplemental payment, the plan or plan amendment must specify all of 
the following:
    (1) An explanation of how the State plan or State plan amendment 
will result in payments that are consistent with section 1902(a)(30)(A) 
of the Act, including that provision's standards with respect to 
efficiency, economy, quality of care, and access along with the stated 
purpose and intended effects of the supplemental payment, for example, 
with respect to the Medicaid program, providers and beneficiaries.
    (2) The criteria to determine which providers are eligible to 
receive the supplemental payment.
    (3) A comprehensive description of the methodology used to 
calculate the amount of, and distribute, the supplemental payment to 
each eligible provider, including all of the following:
    (i) The amount of the supplemental payment made to each eligible 
provider, if known, or, if the total amount is distributed using a 
formula based on data from one or more fiscal years, the total amount 
of the supplemental payments for the fiscal year or years available to 
all providers eligible to receive a supplemental payment.
    (ii) If applicable, the specific criteria with respect to Medicaid 
service, utilization, or cost data from the proposed State plan payment 
year to be used as the basis for calculations regarding the amount and/
or distribution of the supplemental payment.
    (iii) The timing of the supplemental payment to each eligible 
provider.
    (iv) An assurance that the total Medicaid payment to other 
inpatient and outpatient facilities, including the supplemental 
payment, will not exceed the upper limits specified in Sec.  447.325.
    (v) If not already submitted, an upper payment limit demonstration 
as required by Sec.  447.321 and described in Sec.  447.288.
    (4) The duration of the supplemental payment authority (not to 
exceed 3 years).
    (5) A monitoring plan to ensure that the supplemental payment 
remains consistent with the requirements of section 1902(a)(30)(A) of 
the Act and to enable evaluation of the effects of the supplemental 
payment on the Medicaid program, for example, with respect to providers 
and beneficiaries.
    (6) For a SPA proposing to amend or renew a supplemental payment 
for a subsequent approval period, an evaluation of the impacts on the 
Medicaid program during the current or most recent prior approval 
period, for

[[Page 63785]]

example, with respect to providers and beneficiaries, and including an 
analysis of the impact of the supplemental payment on compliance with 
section 1902(a)(30)(A) of the Act.
    (d) The authority for State plan provisions that authorize 
supplemental payments that are approved as of [effective date of the 
final rule], is limited as follows--
    (1) For State plan provisions approved 3 or more years prior to 
[effective date of the final rule], the State plan authority will 
expire [date that is 2 calendar years following the effective date of 
the final rule].
    (2) For State plan provisions approved less than 3 years prior to 
[effective date of the final rule], the State plan authority will 
expire [date that is 3 calendar years following the effective date of 
the final rule].
0
22. Section 447.321 is amended by revising the section heading and 
paragraphs (a) and (b)(1) to read as follows:


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

    (a) Scope. This section applies to rates set by the agency to pay 
for outpatient services furnished by hospitals within one of the 
following categories:
    (1) State government provider, as defined using the criteria set 
forth at Sec.  447.286.
    (2) Non-State government provider, as defined using the criteria 
set forth at Sec.  447.286.
    (3) Private provider, as defined using the criteria set forth at 
Sec.  447.286.
    (b) * * *
    (1) Upper payment limit refers to a reasonable estimate of the 
amount that would be paid for the services furnished by the group of 
facilities under Medicare payment principles in subchapter B of this 
chapter, or allowed costs established in accordance with the cost 
principles as specified in 45 CFR part 75 and 2 CFR part 200, or, as 
applicable, Medicare cost principles specified at 42 CFR part 413. Data 
elements, methodology parameters, and acceptable upper payment limit 
demonstration methodologies are defined in Sec.  447.288(b).
* * * * *
0
23. Section 447.406 is added to read as follows:


Sec.  447.406  Medicaid practitioner supplemental payment.

    (a) General. This section applies to Medicaid practitioner 
supplemental payments, which, for purposes of this section, are 
supplemental payments as defined in Sec.  447.286 that are authorized 
under the State plan for practitioner services and targeted to specific 
practitioners under a methodology specified in the State plan. This 
section does not apply to value-based payment methodologies that are 
part of a State's delivery system reform initiative, are attributed to 
a particular service provided to a Medicaid beneficiary, and that are 
available to all providers, including as an alternative to fee-for-
service payment rates.
    (b) Medicaid practitioner supplemental payment standards. A 
Medicaid practitioner supplemental payment must meet the requirements 
specified in Sec.  447.302, including the transition period 
requirements in paragraph (d) of that section, as well as the 
requirements specified in this section.
    (c) Medicaid practitioner supplemental payment limit. Medicaid 
practitioner supplemental payments may not exceed--
    (1) 50 percent of the total fee-for-service base payments 
authorized under the State plan paid to an eligible provider for the 
practitioner services during the relevant period; or
    (2) For services provided within HRSA-designated geographic health 
professional shortage areas (HPSA) or Medicare-defined rural areas as 
specified in 42 CFR 412.64(b), 75 percent of the total fee-for-service 
base payments authorized under the State plan paid to the eligible 
provider for the practitioner services during the relevant period.

PART 455--PROGRAM INTEGRITY: MEDICAID

0
24. The authority citation for part 455 continues to read as follows:

    Authority: 42 U.S.C 1302.

0
25. Section 455.301 is amended by revising the definition of 
``Independent certified audit'' to read as follows:


Sec.  455.301  Definitions.

* * * * *
    Independent certified audit means an audit that is conducted by an 
auditor that operates independently from the Medicaid agency or subject 
hospitals and is eligible to perform the disproportionate share 
hospital (DSH) audit. Certification means that the independent auditor 
engaged by the State reviews the criteria of the Federal audit 
regulation and completes the verification, calculations and report 
under the professional rules and generally accepted standards of audit 
practice. This certification includes a review of the State's audit 
protocol to ensure that the Federal regulation is satisfied, an opinion 
for each verification detailed in the regulation, a determination of 
whether or not the State made DSH payments that exceeded any hospital's 
hospital-specific DSH limit in the Medicaid State plan rate year under 
audit, and the financial impact of each audit finding on a hospital-
specific basis. The certification also identifies any data issues or 
other caveats or deficiencies that the auditor identified as impacting 
the results of the audit.
* * * * *

PART 457--ALLOTMENTS AND GRANTS TO STATES

0
26. The authority for part 457 continues to read as follows:

    Authority: 42 U.S.C. 1302.

0
27. Section 457.609 is amended by revising paragraph (h) to read as 
follows:


Sec.  457.609  Process and calculation of State allotments for a fiscal 
year after FY 2008.

* * * * *
    (h) CHIP fiscal year allotment process. The national CHIP allotment 
and State CHIP allotments will be posted in the Medicaid Budget and 
Expenditure System and at Medicaid.gov (or similar successor system or 
website) as soon as practicable after the allotments have been 
determined for each Federal fiscal year.

    Dated: September 12, 2019.
Seema Verma,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: November 7, 2019.
Alex M. Azar II,
Secretary, Department of Health and Human Services.
[FR Doc. 2019-24763 Filed 11-12-19; 4:15 pm]
 BILLING CODE 4120-01-P