DEPARTMENT OF HEALTH & HUMAN SERVICES      
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland   21244-1850 
 
 
SHO # 16-006 
RE: FQHC and RHC Supplemental Payment 
Requirements and FQHC, RHC, and FBC 
Network Sufficiency under Medicaid and CHIP 
Managed Care 
 
April 26, 2016 
Dear State Health Official: 
The purpose of this letter is to provide guidance on federally-qualified health center (FQHC) 
and rural health clinic (RHC) payment methodologies under both Medicaid and Childrens 
Health Insurance Program (CHIP) managed care delivery systems.  This letter also provides 
guidance on FQHC, RHC, and freestanding birth center (FBC) network sufficiency standards 
applicable to a Medicaid managed care delivery system.  The guidance set forth in this State 
Health Official (SHO) letter applies to all Medicaid and CHIP managed care arrangements that 
provide capitated payment for outpatient services, including comprehensive plans offered by 
managed care organizations (MCOs) and prepaid ambulatory health plans (PAHPs), and with 
respect to FBCs, applies to prepaid inpatient health plans (PIHPs).  This guidance does not 
apply to programs authorized under section 1115A of the Social Security Act (the Act). 
For Medicaid, previous guidance on FQHC and RHC payment requirements was issued in 1998 
and 2000 (available at: http://www.medicaid.gov/Federal-Policy-
Guidance/downloads/SMD042098.pdf, http://www.medicaid.gov/Federal-Policy-
Guidance/downloads/SMD102398.pdf, and http://www.medicaid.gov/Federal-Policy-
Guidance/downloads/smd092700.pdf).  Previous guidance for CHIP was provided in a February 
4, 2010 State Health Official letter (SHO #10-004, available at: 
http://www.medicaid.gov/Federal-Policy-Guidance/downloads/SHO10004.pdf).  These letters 
are still valid regarding FQHC and RHC cost-based reimbursement; however, the Medicaid 
guidance was published before the enactment of the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (BIPA), which changed the required payment 
methodology for FQHC and RHC services.  In addition, there have been continuing state 
delivery system changes as more states have moved to managed care options.  As a result, the 
Centers for Medicare & Medicaid Services (CMS) believes further guidance is needed.   
 
  Page 2  State Health Official and State Medicaid Director 
 
FQHC and RHC supplemental payment requirements under Medicaid managed care  
Consistent with BIPA and section 1902(bb) of the Act, FQHCs and RHCs are entitled to receive 
payment for providing covered services to Medicaid-eligible individuals under a Prospective 
Payment System (PPS) methodology.  The basic requirements for this methodology are set forth 
at sections 1902(bb)(2) through (4) of the Act, and as discussed below, at section 1902(bb)(6) of 
the Act, which includes an option for a state and an FQHC or RHC to agree to an alternative 
payment methodology (APM) that provides for payment of at least the same amount as would 
otherwise be required under the PPS.   
Section 1902(bb)(5) of the Act, which applies to payments for FQHC and RHC services 
furnished through Medicaid managed care programs, requires that state plans provide for 
supplemental payments from states to FQHCs and RHCs equal to the amount or difference 
between the payment under the PPS methodology and the payment provided under the managed 
care contract.  The purpose of this provision is to ensure that FQHCs and RHCs continue to 
receive their full PPS reimbursement rate regardless of the Medicaid delivery system, in light of 
the traditional flexibility for capitated managed care plans to set provider payment rates.   
Consistent with section 1903(m)(2)(A)(ix) of the Act, managed care organizations that enter into 
contracts with FQHCs and RHCs must provide payments for services that are not less than the 
amount of payments that would be provided if those services were furnished by a provider that is 
not an FQHC or RHC.  This statute does not prohibit managed care plans from paying higher 
rates to FQHCs and RHCs than would be paid to other providers.  Read together, sections 
1902(bb)(5) and 1903(m)(2)(A)(ix) of the Act provide the requirements for FQHC and RHC 
reimbursement when outpatient services are furnished under a Medicaid managed care delivery 
system.   
Alternative payment methodology to simplify supplemental payments to FQHCs and 
RHCs 
States, FQHCs, and RHCs have long stated that the supplemental payment requirements under 
section 1902(bb)(5) of the Act, as described above, have created many complex issues under 
Medicaid managed care programs, including reconciliation disputes and complaints regarding 
the timeliness of supplemental payments.  States have expressed an interest in alleviating these 
issues and the complexity of supplemental payments to FQHCs and RHCs by requiring that 
managed care contracts provide FQHCs and RHCs the full PPS reimbursement rate for covered 
services.   
To accomplish this goal, a state could amend its state plan to implement an APM, which is an 
optional alternative to the PPS requirements, including the supplemental payment requirements 
described above, as authorized under section 1902(bb)(6) of the Act.  In order to use an APM to 
accomplish this goal, two conditions must be met: (1) the state and FQHC or RHC agree to use 
the APM; and (2) the APM results in FQHCs or RHCs receiving at least their full PPS 
 
  Page 3  State Health Official and State Medicaid Director 
 
reimbursement rate from the managed care organization.  If a state chooses to implement the 
APM, the state would have to include in its managed care contracts a requirement that managed 
care plans pay contracted FQHCs and RHCs at least the full PPS payment rate for covered 
services.  In turn, the state would include the full PPS payment rate in calculating the actuarially 
sound capitation rates paid to managed care plans.  This could simplify the process of paying 
FQHCs and RHCs for services furnished under the managed care contract overall and eliminate 
the general need for states to provide supplemental payments to FQHCs and RHCs for such 
services as required in section 1902(bb)(5) of the Act.  Further, states would remain responsible 
for ensuring that FQHCs and RHCs receive at least the full PPS reimbursement rate.  States must 
continue their reconciliation and oversight processes to ensure that the managed care payments 
comply with the statutory requirements of the APM.   
States interested in pursuing an APM for FQHCs and RHCs under Medicaid managed care 
programs must describe the payment methodology in their Medicaid state plan.  States should be 
prepared to demonstrate that each affected FQHC and RHC has agreed to the APM.   
CMS understands that some states may already be exercising an APM through Medicaid 
managed care plan contracts without the approved state plan amendment (SPA) pages described 
in this guidance.  CMS urges such states to submit the appropriate SPA pages and come into 
compliance with section 1902(bb)(6) of the Act as soon as possible.  After July 1, 2017, CMS 
will not approve a states managed care contract in which FQHCs or RHCs are provided at least 
their full PPS reimbursement rate by managed care plans, unless the corresponding SPA pages 
have been approved by CMS, and the state has demonstrated that each affected FQHC and RHC 
has agreed to the APM.  The state could also use a combination of both approaches, including 
state supplemental payments for some FQHCs and RHCs consistent with section 1902(bb)(5) of 
the Act, and the APM for other FQHCs and RHCs consistent with section 1902(bb)(6) of the 
Act.      
Application to CHIP 
The February 4, 2010 State Health Official letter (SHO #10-004) provides guidance on 
implementation of section 503 of the Childrens Health Insurance Program Reauthorization Act 
of 2009 (CHIPRA).  Section 503 of CHIPRA amended section 2107(e)(1)(G) of the Act to 
require that separate CHIP programs use the Medicaid payment methodologies set forth in 
section 1902(bb) of the Act for all FQHC and RHC services provided on or after October 1, 
2009, using one of three methods as described in SHO #10-004.  The three methodologies for 
states to come into compliance with section 503 of CHIPRA were to (1) adopt the Medicaid 
PPS rates, (2) construct separate CHIP PPS rates, or (3) use an APM.  For states that provide 
CHIP benefits through managed care contractors, and for which the contractor includes one or 
more FQHCs or RHCs in its network, the requirements for supplemental payments apply in the 
same manner as they do in Medicaid.  States electing to contract with FQHCs and/or RHCs to 
provide CHIP-covered services, or in which a CHIP plan includes one or more FQHCs or RHCs 
 
  Page 4  State Health Official and State Medicaid Director 
 
in its network, may use the APM for Medicaid described above to require FQHCs and RHCs to 
receive the full PPS payment through the managed care organization, and must submit a SPA to 
reflect this change.  We expect that states will submit the appropriate SPA pages for their 
separate CHIPs and come into compliance with section 1902(bb)(6) of the Act under the same 
time frame as for their Medicaid programs  i.e., by July 1, 2017.  CMS staff will be available 
to provide states that operate separate CHIPs with technical assistance regarding the 
requirements of developing an APM for FQHCs and RHCs which complies with section 
1902(bb)(6) of the Act.  We also will provide additional guidance regarding CMS review of 
managed care contracts for separate CHIPs. 
The policies described in SHO #10-004 remain intact and continue to apply to separate CHIP 
programs.  We note that the Medicaid requirements under section 1903(m)(2)(A)(ix) of the Act 
(which requires Medicaid MCOs to reimburse FQHCs and RHCs at a rate no less than other 
providers) do not apply to separate CHIP programs.  However, states operating a separate CHIP 
program may want to consider including such a requirement in their MCO contracts for 
administrative simplicity and to strengthen the public safety net. 
FQHC, RHC, and FBC network sufficiency under Medicaid managed care 
States, managed care plans, and provider organizations have asked CMS to clarify the 
contracting requirements related to FQHCs, RHCs, and FBCs, as these benefit categories are 
considered both a service and a setting for services under section 1905(a) of the Act.  
Specifically, under sections 1905(a)(2)(B) and (C) and 1905(a)(28) of the Act, as well as 
sections 1905(l)(1) through (3) of the Act, FQHC, RHC, and FBC services are mandatory 
Medicaid benefits (including other ambulatory services offered by such facilities and otherwise 
included in the plan; RHC and FBC services are only mandatory to the extent the state licenses 
or otherwise recognizes such providers under state law).  Additionally, section 1903(m)(1)(A)(i) 
of the Act requires a managed care organization to make the services it provides, within the area 
served by the managed care organization, accessible to the same extent as such services are 
made accessible under the Medicaid state plan to beneficiaries who are not enrolled in the 
managed care plan.   
While CMS has encouraged the inclusion of FQHCs, RHCs, and FBCs in the networks of 
Medicaid managed care plans, in the past we have generally found provider networks to be 
sufficient as long as both states and managed care plans have assured adequate capacity and 
access to services for Medicaid managed care enrollees in at least one appropriate setting 
(which might not include FQHCs, RHCs, and FBCs for a particular managed care plan), and 
have required that at least one Medicaid managed care option available to enrollees includes 
FQHCs, RHCs, and FBCs.  This policy was applied to ensure that, at a minimum, the individual 
services offered by FQHCs, RHCs, and FBCs were made available to all Medicaid managed 
care enrollees as a mandatory service under section 1905(a) of the Act.    
 
  Page 5  State Health Official and State Medicaid Director 
CMS continues to focus on strategies to improve access to health care services for Medicaid 
beneficiaries and recognizes the increasingly important role of FQHCs, RHCs, and FBCs in 
ensuring access to needed care.  To better ensure this access and to be consistent with the intent 
of sections 1905(a)(2)(B) and (C) and 1905(a)(28) of the Act, CMS has determined that, in 
order for a Medicaid managed care plans provider network to be sufficient, the managed care 
plan must include access to FQHC, RHC, and FBC services, if available, from FQHCs, RHCs, 
and FBCs.  Therefore, for managed care contracts starting on or after July 1, 2017 that include 
FQHC, RHC, or FBC services, CMS will not approve the contracts unless each managed care 
plan includes at least one FQHC, one RHC, and one FBC (to the extent the state licenses or 
otherwise recognizes RHC and FBC providers under state law) in the provider network, where 
available, for the managed care plans contracted service area.  When FQHC, RHC, and FBC 
services are not included under a states managed care contracts, the services must be provided 
or arranged by the state directly.  States retain the flexibility to require managed care plans to 
contract beyond this minimum standard.  CMS believes this position appropriately balances the 
federal requirement to include FQHC, RHC, and FBC services as a mandatory Medicaid 
benefit and the flexibilities for states and managed care plans under Medicaid managed care in 
establishing provider networks.  Furthermore, we believe that this position will promote access 
to needed care for Medicaid managed care enrollees. 
Medicaid related questions regarding this guidance should be directed to John Giles, Health 
Insurance Specialist, at 410-786-1255 or via e-mail at John.Giles@cms.hhs.gov.  CHIP related 
questions should be directed to Melissa Williams, Technical Director, via e-mail at 
Melissa.Williams3@cms.hhs.gov.  We look forward to continuing our work together to 
strengthen Medicaid and CHIP managed care. 
Sincerely, 
      /s/ 
Vikki Wachino 
Director 
cc: 
National Association of Medicaid Directors 
National Academy for State Health Policy 
National Governors Association 
American Public Human Services Association 
Association of State Territorial Health Officials 
Council of State Governments 
National Conference of State Legislatures