DEPARTMENT OF HEALTH & HUMAN SERVICES                                     Health Care Financing Administration 
 
Washington, D.C.  20201 
DEC 26 1996 
 
Dear State Medicaid Director: 
 
In response to State inquiries, I am issuing this letter which provides information on the 
allowability as a Medicaid administrative cost, of State expenditures for bus passes (for example, 
with respect to fixed route transportation services) used to assure transportation for Medicaid 
eligible individuals to providers of covered services. 
 
States also asked whether the recipients would be able to use the bus passes for non-Medicaid 
purposes in addition to using the bus passes to obtain medical services.  Finally, States expressed 
concerns about the practicality of applying cost-allocation provisions required by the Office of 
Management and Budget (OMB) Circular A-87 dated May 17, 1995, which governs the 
allowability of costs under Medicaid. 
 
The following provides information regarding funding under the Medicaid program for the use 
of bus passes.  These provisions would also be applicable for funding of other similar fixed-route 
modes of transportation such as subway passes. 
 
Subject to the following conditions, States may claim Federal Financial participation (FFP), as 
an administrative cost, in State expenditures for monthly bus passes as part of their Medicaid 
non-emergency transportation program, if set forth as a method to assure non-emergency 
transportation to providers which are described in the approved State plan.  This guidance does 
not apply to bus passes, or other transportation services, furnished as medical assistance, which 
are not the subject of this letter. 
 
Proper and Efficient Administration
Section 1902(a)(4) of the Social Security Act (the Act) requires Medicaid State plans to provide 
for such methods of administration ... as are found by the Secretary to be necessary for the 
proper and efficient operation of the plan.  Section C.1.a of Attachment A of OMB Circular A-
87 requires that costs be necessary and reasonable for proper and efficient performance and 
administration of Federal awards in order for costs to be allowable.  This principle applies to the 
Medicaid program with respect to purchase of bus passes.  Under this requirement States should 
establish some process or test for determining whether a bus pass is reasonable for particular 
individuals. 
 
(cid:127) Cost Effectiveness Under the provision of proper and efficient administration, an 
essential requirement is cost-effectiveness.  In purchasing bus passes for purposes of 
transportation of recipients under the Medicaid program, a State must determine whether 
the purchase is cost-effective.  The cost-effectiveness determination should include 
consideration of the following: 
 
(cid:127) Comparison of Payment Methods and Modes of Transportation Cost-effectiveness 
requires that the costs of the bus pass for the individual be no more than costs of other  Page 2  State Medicaid Director 
 
payment methods for the bus trips.  Therefore, the costs of the bus pass (whether on a 
monthly or other bases) must be compared to the cost of single (bus) trips a beneficiary 
would make to Medicaid providers to obtain Medicaid services.  The cost of the monthly 
bus pass should not exceed the cost of the individual bus trips.  In this regard, the cost-
effectiveness of different methods of payment for a specific mode of transportation are 
compared.  Thus in general, in determining cost-effectiveness it would not be appropriate 
to compare the costs of a bus pass to the cost of single trips under modes of transportation 
other than a bus, for example, taxi cabs. 
 
However, the provision of transportation by taxi cabs or other modes of transportation is 
also a cost-effectiveness issue.  Therefore, in addition to determining the most cost-
effective method for paying for bus transportation, the costs associated with trips to a 
Medicaid provider (whether paid on the basis of single trips or by bus passes) should be 
compared with those of other modes of transportation such as taxes.  In that situation the 
issue is whether the costs associated with transportation by bus is more cost-effective 
than paying for the other mode of transportation (taxis).  We expect that transportation by 
bus would almost always be less costly than transportation by taxi.  Therefore, in general, 
the State would determine that the taxi is not a cost-effective mode of transportation.  
Again, in determining whether bus passes are cost effective, a State should first 
determine the most cost-effective method for paying for bus transportation.  Second, as a 
appropriate, the State would determine whether another mode or transportation is even 
more cost effective. 
 
Payment for bus trips may be made on a basis other than monthly.  But tickets/tokens 
might be purchased through discount for a set number of individuals trips.  For example, 
a bus pass for 10 individual trips might be sold for a discount from the cost of 10 
individual trips.  The State agency might also negotiate a bulk purchase of individual bus 
tokens for a discounted amount. 
 
(cid:127) Appropriate to the Individuals Needs and Personal Situation Purchase of a bus pass 
must be appropriate to the needs and personal situation of the individual.  In determining 
cost-effectiveness under this condition, States should include consideration of the 
following related to the needs and personal situation of the individual: 
 
. Medical condition 
 
. Transportation factors 
 
. Direct route availability 
 
. Distance/length of transportation 
 
. Scheduling of medical appointments 
  Page 3  State Medicaid Director 
 
. Availability of other resources for providing and reimbursing for 
transportation 
 
Allocation Requirements of OMB Circular A-87 .
Under the provisions of OMB Circular A-87, cost allocation may be required in purchasing bus 
passes under certain circumstances.  Section C.3. of Attachment A of OMB Circular A-87 
provides that costs be allocated to programs based on the relative benefits received, that is, by the 
benefiting program(s).  In general, if other Federal, State or local programs could be used as a 
resource for the cost of a monthly bus pass, a determination of whether cost allocation is 
applicable must be made.  A State should ascertain whether other programs or funding sources 
are available before assuming the entire cost of the bus pass under the Medicaid program. 
 
Cost allocation for the cost of a bus pass used for Medicaid transportation would not be required 
if other uses (such as personal use) for the bus pass were not substantial.  If the sole or primary 
anticipated use of the bus pass was for transportation to Medicaid providers, no cost allocation 
plan would be necessary as long as there are no other programs or funding sources which 
benefited from the activity.  That is, if no substantial benefit is available to another program the 
only (or main) effective recipient of (transportation) benefits is the Medicaid program.  If the 
primary use of the bus pass is for transportation to Medicaid providers and the only other use 
was personal use which did not affect the cost of the pas pass, no cost allocation would be 
required. 
 
Thus, if the only or primary need of the individual is to obtain transportation to Medicaid 
providers, and there are no other, or very minimal, uses of the bus pass (regardless of personal 
use of the bus pass), no cost allocation for the costs of the bus pass would be necessary.  The 
State should ascertain that no other programs or funding sources are involved and that there was 
no other substantial uses anticipated for the bus pass before assuming the entire cost of the bus 
pass under the Medicaid program. 
 
Freedom of Choice
If the State elects to cover transportation as an administrative cost, than freedom of choice 
requirements do not apply and the State can contract exclusively with a public transit service. 
 
Freedom of choice requirements to not apply to administrative transportation activities (but 
would apply, absent a waiver, to transportation furnished as a medical service).  If bus services 
are available only in selected areas, the State must assure equivalent transportation by other 
means in other areas, or must obtain a waiver of the Statewideness requirements.  To preclude 
the need for a waiver, States could establish a hierarchy for determining the necessity of 
particular modes of transportation.  For example, a State could have requirements under which 
free transportation must be used if available; if not, municipal bus services must be used if 
available and appropriate; and finally, taxi services may be used only if neither free 
transportation nor bus services are available.   
  Page 4  State Medicaid Director 
 
Procurement Requirements
Funding for the costs of bus pass transportation under Medicaid must be consistent with the 
general procurement requirements of State law and Federal regulations at 45 CFR Part 45, which 
require competitive bidding to the maximum extent practical. 
 
We hope this information is useful to you.  If you have any questions or require further 
information, please contact the CMS Regional Office serving your State. 
 
Sincerely, 
 
/s/ 
 
Judith D. Moore 
  Acting Director 
  Medicaid Bureau 
 
cc: 
All HCFA Regional Offices 
 
Ms. Lee Partridge 
Director Health Policy Unit 
American Public Welfare Association 
Suite 500 
810 First Street, NE 
Washington, D.C.  20002-4205 
 
Ms. Jennifer Baxendell 
Senior Policy Analyst 
Human Resources Group 
National Governors Association 
Suite 250 
444 North Capitol Street, NW 
Washington, D.C.  20001 
 
Ms. Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures 
Suite 500 
444 North Capitol Street, NW 
Washington, D.C.  20001