DEPARTMENT OF HEALTH & HUMAN SERVICES  
Centers for Medicare & Medicaid Services  
7500 Security Boulevard, Mail Stop S2-26-12  
Baltimore, Maryland 21244-1850  
  
 
Centers for Medicaid and State Operations  
July 25, 2006                  SMDL #06-017  
  
Dear State Medicaid Director:  
  
The purpose of this letter is to provide you with information regarding the availability of grant 
funds for the adoption of innovative methods to improve effectiveness and efficiency in 
providing medical assistance under Medicaid.  Specifically, section 6081 of the Deficit 
Reduction Act of 2005 (DRA) provides funding for Medicaid Transformation Grants.    
  
Medicaid spending growth has declined in recent years, likely reflecting many factors, including 
State reforms to deliver needed benefits more efficiently and effectively.  The implementation of 
the DRA provides new opportunities for States to work with the Federal Government to build on 
the effective reforms to slow spending growth while providing needed coverage, and doing more 
to help people get the kind of care they prefer.  Through the use of the Transformation Grants, 
States can work with Centers for Medicare and Medicaid Services (CMS) to create programs that 
are more aligned with today's Medicaid populations and the health care environment.     
  
A new subsection (z) is added to section 1903 of the Social Security Act (the Act)Medicaid 
Transformation Paymentsspecifying the criteria for the grants and listing examples of the 
permissible uses of the funds.  Examples of the permissible uses of funds include, but are not 
limited to, the following:  
  
   Methods for reducing patient error rates through the implementation and use of 
electronic health records, electronic clinical decision support tools, or e-prescribing 
programs;  
 
   Methods for improving rates of collection from estates of amounts owed under 
Medicaid;  
 
  Methods for reducing waste, fraud, and abuse under Medicaid, such as reducing improper 
payment rates, as measured by annual error rate measurement (PERM) projects;  
 
  Implementation of a medication risk-management program as part of a drug use review 
program under section 1927(g) of the Act  (See enclosure A for a description of what a 
medication risk-management program means for purposes of this grant program);  
  
   Methods in reducing, in clinically appropriate ways, Medicaid expenditures for covered 
outpatient drugs, particularly in the categories of greatest drug utilization, by increasing 
the utilization of generic drugs through the use of education programs and other 
incentives to promote greater use of generic drugs; and   Page 2  State Medicaid Director  
  
   Methods for improving access to primary and specialty physician care for the uninsured 
using integrated university based hospital and clinic systems.  
 
Subsection (z) appropriates $75,000,000 for grants for Federal fiscal year (FY) 2007 and 
$75,000,000 for FY 2008.  The Secretary will be specifying a method for allocating the funds 
available under this subsection among the States.  The method will provide preference for States 
which design programs that target health providers who treat significant numbers of Medicaid 
beneficiaries.  The method must provide that not less than 25 percent of the funds shall be 
allocated among States, the population of which (as determined according to data collected by   
the United States Census Bureau) as of July 1, 2004, was more than 105 percent of the 
population of the respective State (as so determined) as of April 1, 2000.1 Grants under this 
   
provision will be made in the same manner as will other payments under section 1903(a) of the 
Act.  There is no requirement for State matching funds for a State to receive payments under this 
subsection.   
  
A State wishing to be considered for a grant under this subsection must submit an application to 
CMS by September 15, 2006.  All State Medicaid agencies are eligible to apply.  CMS is doing 
one grant solicitation for the two-year grant period of FYs 2007 and 2008.  Awards for FY07 
will be made for bona fide needs of FY07, and awards for FY08 will be made for bona fide 
needs of FY08.  A State may submit only one application for both years.  More than one 
program concept proposal and budget may be included in the application.  Grant applications 
requesting funds to be used for State share or supplemental disproportionate share hospital 
payments will not be considered.  (See enclosure B for instructions on how to submit a State 
grant application.)   
  
Grant awards will be funded for the full two-year period of FYs 2007 and 2008 and awards will 
be announced in the form of an approval letter by October 31, 2006.  Grant determinations are 
not subject to appeal.  Grant awards and allocations2 will be based on the number of States that 
apply and that meet the grant criteria.  Payments will be subject to the terms and conditions 
included in the grant awards and will be further subject to the submission of an annual report on 
the programs supported by the payment to the State.   
  
The required annual report must include information on the following (as required by the new 
section 1903(z)(3)(C) of the Act):   
  
   The specific uses of the payment;  
 
                                                 
1 States with 5 percent growth, 2000-2004:  Arizona, California, Colorado, Delaware, Florida, Georgia, Idaho, 
Maryland, Nevada, New Hampshire, North Carolina, Texas, Utah, Virginia, Washington.   Source:  Annual 
Estimates of the Population for the United States, States, and for Puerto Rico: April 1, 2000, to July 1, 2005 (NST-
EST 2005-01), Population Division U.S. Census Bureau; Release Date:  December 22, 2005. 
2 The amounts given to each State are variable, based on the number of States applying, their funding requests, and 
the constraints of the allocation methodology.  States that are awarded grants may not receive the full funding 
amount requested.  Thus, a State may modify its program in size and scope based on its funding allotment.  The 
State must reflect any change to the proposed program to CMS within 30 days after the grant is awarded  Page 3  State Medicaid Director  
  
   An assessment of quality improvements and clinical outcomes under the programs; and   
  
   Estimates of cost savings resulting from the programs.  
 
We strongly encourage you to consider these grant opportunities to develop proposals to enhance 
your Medicaid program.  The CMS contact for this legislation is Jean Sheil, Director, Family and 
Childrens Health Programs Group.  She may be reached at 410-786-5647.  Please do not 
hesitate to contact us if you have any additional questions.  
  
Sincerely,  
  
/s/  
  
Dennis G. Smith  
Director  
  
Enclosures  
  
cc:  
  
CMS Regional Administrators  
  
CMS Associate Regional Administrators  
     for Medicaid and State Operations  
  
HHS Regional Directors  
  
Martha Roherty  
Director, Health Policy Unit  
American Public Human Services Association  
  
Joy Wilson  
Director, Health Committee  
National Conference of State Legislatures  
  
Matt Salo  
Director of Health Legislation  
National Governors Association  
  
Jacalyn Bryan Carden  
Director of Policy and Programs  
Association of State and Territorial Health Officials  
   Page 4  State Medicaid Director  
 
 
Christie Raniszewski Herrera  
Director, Health and Human Services Task Force  
American Legislative Exchange Council  
  
 
Lynne Flynn  
Director for Health Policy  
Council of State Governments