DEPARTMENT OF HEALTH & HUMAN SERVICES 
Health Care Financing Administration  
 Center for Medicaid and State Operations 
7500 Security Boulevard 
Baltimore, MD 21244-1 
January 20, 1998  
Dear State Medicaid Director:  
This letter is one in a series of letters that provides guidance on the implementation of the Balanced Budget Act of 1997 
(BBA). The BBA contains numerous provisions relating specifically to managed care. In order to provide guidance on 
these as quickly as possible, we are issuing a number of managed care State letters (list of those already issued is 
attached.) This letter is the sixth in this managed care series.  
The purpose of this letter is to provide initial guidance to States on changes regarding external independent review of 
managed care activities required as a result of the BBA, specifically the higher Federal Financial Participation (FFP) rate 
for external quality review. This guidance is associated with sections 4705(a) and (b) of the BBA.  
Prior to the effective date of the external quality review provisions in the BBA, States were required to contract with an 
external independent entity to perform an annual review of the quality of services furnished by each contracting health 
maintenance organization (HMO) and health insuring organization (HIO). The law specified the types of entities which 
were allowed to perform the review: a Peer Review Organization (PRO), a PRO-like entity, or a private accreditation 
body; however, it did not prescribe specific processes either for identifying qualified review entities or for conducting 
quality reviews. Pre-BBA law also specified that the FFP was 75 percent for States contracting for HMO/HIO quality 
reviews with PROs or PRO-like entities, and 50 percent FFP for any other reviews performed by PRO-like entities, or 
reviews performed by private accreditation bodies.  
The external quality review provisions in section 4705 of the BBA now require HCFA, in consultation with States, to 
determine what constitutes an external independent review under the BBA and who can perform it. Additionally, working 
with the National Governors' Association, HCFA must develop the protocols to be used in these reviews. Finally, HCFA 
must provide 75 percent FFP to all qualified review entities that perform these reviews.  
Before States can receive FFP matching at the higher rate for all qualified review entities, HCFA must establish a method 
to identify which entities are qualified to perform the quality reviews required under the BBA. This methodology must be 
developed in consultation with States, and will be promulgated in regulations.  
Until the method for identifying qualified review entities is established, States should continue to operate their external 
independent review activities as required prior to the BBA. States will continue to receive 75% FFP for external quality 
reviews performed by PROs and PRO-like entities, and 50% FFP for quality reviews performed by accreditation bodies. 
You will be notified when the higher FFP rate will be available for external quality reviews performed by all qualified 
review entities.  
If members of your staff have any questions regarding the information in this letter or the BBA provisions described, 
please have them contact Kathy Headen of my staff on (410) 786-6865, or by e-mail at kheaden@hcfa.gov.  
Sincerely,  
/s/  
Sally K. Richardson   
Director   
Center for Medicaid and State Operations  
Attachments  
cc:  All HCFA Regional Administrators  All HCFA Associate Regional Administrators for Medicaid and State Operations  
HCFA Press Office  Lee Partridge - American Public Welfare Association  Jennifer Baxendell - National Governors' 
Association  Joy Wilson - National Conference of State Legislatures     
Summary of Medicaid External Review Provisions in the Balanced Budget Act (BBA) of 1997    
External Independent Review of Managed Care Activities (BBA 4705(a) and (b) - SSA 1932(c)(2) and 
1903(a)(3)(C)) 
Section 4705(a) of the BBA created section 1932(c)(2)(A) of the Social Security Act (Act). This new law requires States 
that contract with Medicaid managed care organizations (MCOs) under section 1903(m) of the Act to do the following:  
   (i) provide for an annual external independent review conducted by a qualified independent entity of the quality 
outcomes and timeliness of, and access to, the items and services covered under the MCO's contract;   
   (ii) in consultation with the States, establish a method for identifying qualified review entities; and   
   (iii) coordinate with the National Governors' Association to contract with an independent quality review 
organization to develop protocols to be used in external independent reviews conducted on and after January l, 
1999.   
The above provisions apply to contracts entered into or renewed on October 1, 1997 or later, unless otherwise noted.  
Section 4705(b) of the BBA amended section 1903(a)(3)(C) of the Act to permit HCFA to pay 75 percent of the costs 
incurred that are attributable to the performance of the independent external reviews conducted under section 1932(c)(2) 
of the Act.  
The provision relating to increased FFP will be effective after the Secretary establishes a method to identify qualified 
review entities. See SSA 1932(c)(2)(A).  
BBA MANAGED CARE STATE LETTERS  
Sections Subject Date Issued  
4701(a) SPA Option for Managed Care 12/17/97  
4704(a) Specification of Benefits 12/17/97  
4707(a) Marketing Restrictions 12/30/97  
4704 Miscellaneous Managed Care Provisions 12/30/97  
4706  4707(a)  4707(c)  4708(b)  4708(c)  4708(d)  
4701 Choice, MCE Definition, Repeal of 75:25, and Approval Threshold 1/14/98  
4703  
4708(a)