DEPARTMENT OF HEALTH AND HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, MD 21244-1850 
 
 
 
                SMD# 18-001 
 
RE: Corrected - Limit on Federal 
Financial Participation for 
Durable Medical Equipment in 
Medicaid 
 
January 4, 2018   
 
Dear State Medicaid Director: 
 
This letter is a technical correction to the State Medicaid Director Letter (SMDL) that was 
published on December 27, 2017. 
 
Through passage of section 503 of the Consolidated Appropriations Act, 2016 and section 5002 
of the 21st Century Cures Act of 2016, Congress added section 1903(i)(27) to the Social Security 
Act (the Act) which prohibits federal Medicaid reimbursement to states for certain durable 
medical equipment (DME) expenditures that are, in the aggregate, in excess of what Medicare 
would have paid for such items. The requirement takes effect January 1, 2018. 
 
This new statutory provision does not necessitate that CMS promulgate new regulations because 
it can be implemented under existing authorities applicable to state reporting requirements set 
forth in section 1902(a)(6) of the Act and regulations at 42 C.F.R.  431.16. This letter presents 
general information on the new provision, describes the options available to states to demonstrate 
compliance, and provides technical information to facilitate the states calculation of the 
expenditures subject to the limit on federal financial participation (FFP). 
 
Requirements of Section 1903(i)(27) of the Act  
 
In general, section 1903(i)(27) of the Act provides that federal Medicaid reimbursement to states 
shall not be made with respect to any amounts expended by a state on the basis of a fee schedule 
for DME items under Medicare detailed in section 1861(n) of the Act and furnished on or after 
January 1, 2018, that exceeds certain aggregate limits. A states Medicaid expenditures for DME 
items that are subject to this provision will be determined in the aggregate and expenditures in 
excess of what Medicare would have paid for such items in the aggregate, either on a fee 
schedule basis or under its competitive bidding process, are not eligible for FFP.1 The statute 
                                                            
1 Section 503(a)(1) of the Consolidated Appropriations Act, 2016, Pub. L. No. 114-113 (2015), added language to 
the Medicaid Act that prohibits payment of Federal matching funds. Specifically, the statute provides: 
[Payment under the preceding provisions of this section shall not be made] 
(27) with respect to any amounts expended by the state on the basis of a fee schedule for items 
described in section 1861(n) and furnished on or after January 1, 2019, as determined in the 
  Page 2  State Medicaid Director 
 
goes on to state that the new provision does not in any way prohibit a state Medicaid program 
from providing DME items for which payment is denied or not available under the Medicare 
program. 
 
DME items not subject to the limitation 
 
Not all Medicaid expenditures for DME are subject to this provision. The FFP limitation 
imposed by section 1903(i)(27) of the Act applies only with respect to those items of DME 
covered by a states Medicaid program that are also covered by Medicare. Items covered as 
DME by only one of the programs are not included. Therefore, this limit does not apply to 
prosthetics, orthotics, or medical supplies, which are not included in the definition of DME under 
the Act. Likewise, section 1903(i)(27) of the Act does not limit federal matching payments for 
items of DME that are covered under the state Medicaid plan but for which payment is not 
allowed under the Medicare program. This statutory limitation also does not apply to items for 
which Medicaid is not the primary payer.  
 
Also, only those items provided in the Medicaid program on a fee-for-service basis are to be 
included in the aggregate expenditure calculation. DME reimbursed under a Medicaid managed 
care arrangement or a Medicaid competitive bidding contract are not subject to the FFP 
limitation. Medical equipment and appliances that are provided in an institutional setting such as 
a hospital or nursing home and paid as a component of the institutional payment, are not subject 
to this FFP limitation. However, any DME items that are provided to a Medicaid beneficiary in 
an institutional setting but paid on a fee-for-service basis separate from the institutional payment 
will be subject to the FFP limit requirements. 
 
DME under Medicare and Medicaid 
 
Coverage and payment rules for DME under Medicare differ from those implemented by states 
under Medicaid. In order to understand how states will calculate and apply the FFP limit 
mandated by the statute, it is important to understand some basic differences in the DME rules 
under the two programs. 
 
Medicare DME is a Part B benefit category.2 The term durable medical equipment includes 
iron lungs, oxygen tents, hospital beds, and wheelchairs used in the patients home whether 
furnished on a rental basis or purchased. Medicare regulation at 42 C.F.R.  414.202 further 
defines DME as equipment furnished by a supplier or a home health agency that can withstand 
                                                            
aggregate with respect to each class of such items as defined by the Secretary, in excess of the 
aggregate amount, if any, that would be paid for such items within such class on a fee-for-service 
basis under the program under part B of title XVIII, including, as applicable, under a competitive 
acquisition program under section 1847 in an area of the state. 
Subsequently, in section 5002 of the 21st Century Cures Act, Pub. L. No. 114-255 (2016), Congress altered the 
effective date to make this provision effective on January 1, 2018.  
 
2 DME is covered by Medicare based, in part, upon section 1832(a) of the Act, which describes the scope of benefits 
under the supplementary medical insurance program (Medicare Part B), to include medical and other health 
services, which is further defined under section 1861(s)(6) of the Act to include DME. In addition, section 
1861(m)(5) of the Act specifically includes DME in the definition of the term home health services.  
  Page 3  State Medicaid Director 
 
repeated use, effective with respect to items classified as DME after January 1, 2012, has an 
expected life of at least 3 years, is primarily and customarily used to serve a medical purpose, 
generally is not useful to an individual in the absence of an illness or injury, and is appropriate 
for use in the home.  
 
For purposes of this letter, the rates for Medicare DME under the Part B benefit are set using two 
separate methods. First, the payment amount for an item may be based on the Durable Medical 
Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) fee schedule rates for rural and non-
rural areas in each state, published on the CMS website.3 Alternatively, the payment amount for 
an item may be based on the competitively bid rate for certain items established under 
Medicares competitive acquisition program if the item is furnished in one of the competitive 
bidding areas (CBAs) that have been established in certain metropolitan services areas (MSAs).4 
 
In Medicaid, medical supplies, equipment and appliances are a mandatory benefit authorized by 
section 1905(a)(7) of the Act under home health services and implemented by 42 C.F.R. 
440.70(b)(3). Section 1905(a)(11) of the Act and 42 C.F.R. 440.110 authorize coverage and 
payment also for certain supplies and equipment used during physical, occupational, and 
speech/language therapy. The Act does not specify a list of medical equipment and appliances 
that are allowable in the Medicaid program. Medicaid equipment and appliances covered under 
the home health services or physical, occupational, and speech/language therapy encompass the 
Medicaid items that we consider to be analogous to the items of Medicare DME and subject to 
this limit.  
 
Further, federal regulations at 42 C.F.R. 440.70(b)(3) provide that state Medicaid coverage of 
equipment and appliances is provided on a case-by-case basis. This coverage is not restricted to 
the items covered as DME in the Medicare program. Moreover, federal regulations at 42 C.F.R. 
440.70(b)(3)(v) indicate that states can have a list of preapproved medical equipment supplies 
and appliances for administrative ease but states are prohibited from having absolute exclusions 
of coverage on medical equipment, supplies, or appliances.  
 
Medicaid payment for DME items is usually made on either a fee schedule basis, through a 
managed care contract for enrolled individuals, or under a competitive bidding arrangement of 
the states design.  
  
State options to demonstrate compliance with the FFP limit 
 
                                                            
3 https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/DMEPOSFeeSched/DMEPOS-Fee-
Schedule.html  
4 Under the program, suppliers submit a bid to furnish a competitive bid item in a competitive bidding area (CBA). 
There have been two rounds of the phase in of competitive bidding areas thus far, plus implementation of a national 
mail order program for diabetic supplies, which have been recompeted. In round one, there are nine MSAs and in 
round two, there are over 90 MSAs selected to participate in the CBP. The MSAs were selected based on the volume 
of DME items, the number of suppliers, the number of beneficiaries within the defined areas, or as specifically 
mandated by section 1847(a)(1)(D)(ii)(II) of the Act. The three largest MSAs for New York, Los Angeles and 
Chicago were subdivided into 12 competitive bidding areas. In addition, multi-state MSAs were divided into state-
specific competitive bidding areas.  Page 4  State Medicaid Director 
 
There are two basic options available to states to demonstrate that their expenditures for DME 
items subject to this provision do not exceed the amount for which FFP is available. The simplest 
way is for the state to base its Medicaid DME payment rates on Medicares fee schedule or 
competitive bid rates or on a lesser percentage thereof. Another option is for the state to conduct 
a robust comparison using both rate and unit utilization data to calculate what would have been 
the aggregate reimbursement under Medicare for those same items in order to demonstrate that 
the state payments are less than the allowable amount described in the statute. We would also 
consider alternative approaches that will meet a states specific needs provided that such 
approaches are sufficient to ensure compliance with section 1903(i)(27) of the Act.  
 
State Plan rates established at or below Medicare rates 
 
There are a number of states that currently use the Medicare payment rates, or some percentage 
of those payment rates, for Medicaid reimbursement of some or all Medicaid DME. Where a 
state can ensure that all items of DME subject to the FFP limitation are reimbursed at or below 
Medicares prevailing payment rates as described on the DMEPOS fee schedule or under the 
Medicare CBP the aggregate, Medicaid expenditures cannot exceed what Medicare would have 
paid for the same items.  
 
If the state does not currently use Medicares payment rates (or a lesser percentage thereof) to 
reimburse providers for DME, the state may submit a state plan amendment to alter its DME 
reimbursement methodology to set rates at or below the applicable Medicare rates. If there are 
CBAs in the state as defined by Medicare, it may choose to either pay the competitive bidding 
single payment amount for DME in the applicable CBA of the state under the Medicare program, 
or could set the statewide plan rate at the lesser of the DMEPOS fee schedule rate, including 
rural and non-rural areas as defined by Medicare, or the competitive bid single payment amount 
under the Medicare CBA for the item. Examples of model state plan language are included in the 
technical appendices that accompany this letter. 
 
Because this is an annual aggregate limit of FFP as relative to the Medicare payment amounts, 
any state payment methodology which sets rates at or some percentage below the Medicare 
payment amounts to demonstrate compliance with the statute must also account for changes to 
the Medicare payment amounts under the Part B benefit and under the CBP in order to continue 
to remain compliant with the statute from year-to-year. This may include changes to the number 
of CBAs under the Medicare CBP, as well as changes in the Medicare payment rates. This would 
require a state to review Medicare payments as they are published and be aware of any changes 
to the CBAs which affect the state.  
 
Medicare DME aggregate payment comparison 
 
If the state does not use Medicares rates for DME reimbursement under the approved state plan 
for the DME items subject to this provision using payment amounts that are at or below the 
Medicare rates, the state will need to conduct a comparison of the aggregate amounts expended 
by the state Medicaid program for DME furnished after January 1, 2018 to the aggregate amount 
which would be paid for such items on a fee-for-service basis under Medicare Part B, including, 
as applicable, under a competitive acquisition program under section 1847 of the Act in an area 
of the state.   Page 5  State Medicaid Director 
 
 
To determine the aggregate limit, states will first identify the DME items that are covered under 
its program and are subject to the limit. Typically, this will include DME items that are identified 
by Healthcare Common Procedure Codes (HCPCS) E series and K series of codes. The 
calculation will also include items within the A series of HCPCS codes that meet the Medicare 
definition of DME. The applicable Medicare payment amount for each item of DME would then 
be multiplied by the units reimbursed by the state Medicaid program and totaled in order to 
establish the limit on available Medicaid FFP. The statute is specific in its inclusion of both the 
Medicare fee-for-service rates (the DMEPOS fee schedule) and the single payment amounts that 
are set under a competitive acquisition program in designated MSAs within the state.  
 
Information related to CBAs, MSAs, Medicare rates and other source data required for this 
method of comparative calculation is included in the appendices to this letter. 
 
State actions required 
 
States are advised to work with CMS to determine their method of ensuring compliance with the 
statute. Any communication related to the policy outlined in this letter should be sent to the CMS 
regional office and MedicaidDME@cms.hhs.gov. 
 
If the state is ensuring that the FFP limit cannot be exceeded because the state uses Medicares 
rates (or a lesser percentage thereof), the state will be required to communicate that to CMS and 
supply the approved Medicaid state plan page which authorizes those payment amounts. Upon 
review of this information, CMS may request a state to amend their state plan to mirror the 
language outlined in the appendices of this letter to ensure that the state plan language is 
consistent with the statute. 
 
If the state chooses to comply with section 1903(i)(27) of the Act by changing their Medicaid 
state plan DME payment methodology to pay at or a lesser percentage of the Medicare rates for 
applicable DME items or by amending its state-developed fee schedule, the state must submit a 
state plan amendment no later than March 31, 2018. The effective date must be no later than 
January 1, 2018, in accordance with the new statutory requirement.  
 
States electing to submit an aggregate payment comparison, or an alternative approach to 
compliance as mentioned earlier in this letter, will work with CMS to determine the best 
approach to calculate the FFP limit for their state using expenditures for the period of January 1, 
2018 through December 31, 2018. CMS is in the process of obtaining the required Office of 
Management and Budget (OMB) approval for these payment comparisons via the Paperwork 
Reduction Act (PRA) process5. Only after CMS obtains a valid OMB control number will States 
be required to submit this information. Assuming PRA approval, the first comparative analysis 
must be submitted to CMS by March 31, 2019. States electing to use alternative approaches will 
be asked to provide descriptions of the proposed methodology for review by CMS. For 
subsequent years, CMS will request that states notify CMS of any changes to their method of 
compliance by December 31st and the submitted demonstrations would be completed for the 
January 1 through December 31 period of the following year, and submitted by March 31. 
                                                            
5 November 28, 2017 (82 FR 56242)  Page 6  State Medicaid Director 
 
 
If the state should discover that its payments for DME items subject to statute exceed the FFP 
limit, the overpayment must be returned to CMS. If the overpayment is not returned, CMS will 
initiate disallowance proceedings. See 42 C.F.R.  430.42. States are encouraged to review 
aggregate DME expenditures each quarter to ensure that the calculation method is accurate and 
that state expenditures are consistent with the statute in order to limit any liability related to this 
new statutory provision.  
 
We look forward to working with you and are available to answer any questions you may have 
or to provide additional technical assistance to you. For additional information, please direct 
your request to MedicaidDME@cms.hhs.gov.  
 
          Sincerely, 
 
              /s/ 
 
 
          Brian Neale 
          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 
Academy Health