DEPARTMENT OF HEALTH & HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, Maryland 21244-1850 
 
Center for Medicaid and State Operations 
                    SMDL #08-004 
 
              July 31, 2008 
 
Dear State Medicaid Director: 
 
The Centers for Medicare & Medicaid Services (CMS) is issuing this State Medicaid Director 
Letter to provide guidance related to coordination of State Medicaid payment policies with 
policies recently adopted by the Medicare program.  This is needed when hospital providers bill 
for selected hospital-acquired conditions (HACs), including some conditions on the National 
Quality Forums (NQF) list of Serious Reportable Events (commonly referred to as Never 
Events).  This letter specifically: 
 
(1) Provides a brief overview of CMS Medicare payment policy for selected HACs;   
 
(2) Provides a brief overview of policy considerations for State Medicaid programs; and  
 
(3) Provides direction as to how States can implement policies that are aligned with 
Medicare to prevent payment liability as a secondary payer. 
 
Background 
 
According to a study by the Centers for Disease Control & Prevention (CDC), common medical 
errors total more than $4.5 billion in additional health spending a year.  Other studies have 
shown that hospitals only bear a small percentage of the total costs associated with preventable 
medical errors.  Prompted by the landmark study by the Institute of Medicine titled To Err is 
Human: Building a Safer Health System, the NQF created a list of 28 Never Events (Table A 
enclosed).   
 
The NQF defines Never Events as errors in medical care that are of concern to both the public 
and health care professionals and providers, clearly identifiable and measurable (and thus 
feasible to include in a reporting system), and of a nature such that the risk of occurrence is 
significantly influenced by the policies and procedures of the health care organization.  The 
Medicare HACs discussed below overlap to some extent with the 28 NQF Never Events, but not 
all HACs are included in the 28 NQF Never Events. 
 
For the Medicare HAC payment policy, certain conditions have been selected according to the 
criteria in section 5001(c) of the Deficit Reduction Act (DRA) of 2005.  This provision amended 
Medicare hospital payment provisions at section 1886(d)(4)(D) of the Social Security Act to 
require the Secretary to select at least two HACs that are:  (1) high cost, high volume, or both; 
(2) identified through ICD-9-CM coding as a complicating condition or major complicating 
condition that, when present as a secondary diagnosis at discharge, results in payment at a higher 
Medicare Severity-Diagnosis Related Group (MS-DRG); and (3) reasonably preventable through   Page 2  State Medicaid Director  
   
application of evidence-based guidelines.  CMS required hospitals to begin reporting on claims 
for discharges, beginning October 1, 2007, whether or not the selected conditions were present 
on admission.  When acquired in a hospital, these selected conditions will no longer lead to 
higher Medicare payment. 
 
The CMS exercised its authority under section 5001(c) of the DRA by announcing that Medicare 
will no longer pay the extra cost of treating the following categories of conditions that occur 
while the patient is in the hospital.  
 
  pressure ulcer stages III and IV; 
  falls and trauma;  
  surgical site infection after bariatric surgery for obesity, certain orthopedic procedures, 
and bypass surgery (mediastinitis);  
  vascular-catheter associated infection;  
  catheter-associated urinary tract infection; 
  administration of incompatible blood;  
  air embolism; and  
  foreign object unintentionally retained after surgery.   
 
Beginning October 1, 2008, Medicare will no longer pay the higher MS-DRG for these 
conditions.  In the 2009 Medicare Inpatient Prospective Payment System Update Regulation 
(CMS-1390-F), Medicare announced that certain categories of conditions would be covered 
under the HAC policy effective October 1, 2008.  Newly added conditions include deep vein 
thromboses and pulmonary emboli associated with knee and hip replacements, and certain 
manifestations of poor glycemic control.  In addition, Medicare is announcing it is initiating the 
National Coverage Determination process to review Medicare coverage of three Never Events 
(surgery on wrong body part, surgery on wrong patient, and performing the wrong surgery on a 
patient). 
 
Medicare will no longer pay the higher MS-DRGs arising from these selected conditions if they 
arose in the course of an admission.  Theoretically, for dual eligibles, the hospital could then 
attempt to bill Medicaid as a secondary payer, and the decision to balance bill would vary by 
State as to whether a coordinated denial by the State Medicaid program and the Medicare 
program would occur.   
 
Additional information on the Medicare Payment policy can be found at: 
www.cms.hhs.gov/HospitalAcqCond. 
 
Medicaid Policy Considerations 
 
Given the large number of dual eligibles, CMS wants to clearly articulate the payment policy for 
Medicaid as a secondary payer for Medicare non-payment.  The intention is to avoid Federal and State 
fiscal consequences from the providers improper patient care.  Therefore, States are encouraged to 
implement Medicaid payment policies to coordinate their payment policies with the existing Medicare 
HAC payment policy and prevent this unintended consequence. 
 
  Page 3  State Medicaid Director  
   
To date, States have adopted varying approaches to address these events in their efforts to align 
payment and quality.  According to responses to CMS queries, nearly 20 States already have, or 
are considering, methods to eliminate payment for some Never Events.  Most of these methods 
utilize all, or a subset of, the 28 Never Events published by the NQF in 2006.  Other States have 
attempted to use their medical necessity process to refuse to pay providers for some Never 
Events.  
 
A State wishing to avoid Medicaid payment liability for treatment for which Medicare will not 
pay (on a HAC as defined by Medicare) may do so by including a general statement in its section 
4.19A of the Medicaid State plan governing inpatient hospital reimbursement.  This section can 
be amended to indicate that approved inpatient hospital rates are not applicable for HACs that 
either:  (1) are specifically listed in the State Plan; (2) are identified as non-payable by Medicare; 
or (3) that meet criteria identified in the State Plan Amendment.  The State Plan Amendment 
should further indicate that such policy applies to all Medicaid reimbursement provisions 
contained in section 4.19A, including Medicaid supplemental or enhanced payments and 
Medicaid disproportionate share hospital payments.  The State would also have to ensure the 
proper Medicaid claims systems are established to limit payment of such events to prevent any 
attempt by providers to bill Medicaid as a secondary payer.  States that choose to submit such an 
amendment can avoid or limit additional costs by submitting the required Medicaid State plan 
amendment to CMS as soon as possible. 
 
States are neither required nor limited to devising Never Event policies that deal with the 
Medicare-Medicaid payment interaction created by the Medicare HAC Policy.  CMS encourages 
the States to consider the entire Medicaid population (not just dual eligibles) and all of the NQF 
Never Events in the creation of individual State policies.  The guiding principle should be that 
payment and performance need to be linked. 
 
Please join CMS in this effort to improve the care that Medicare and Medicaid beneficiaries 
receive.  This is an important part of the Secretarys and CMS Value Driven Health Care 
initiative to ensure prudent use of resources to enhance quality care. 
 
If you have questions or would like additional information on this guidance, please contact 
Mr. John M. Young, Division of Quality, Evaluations & Health Outcomes, at (410) 786-0505 or 
at john.young@cms.hhs.gov.  Thank you for your assistance in this important endeavor. 
 
Sincerely,  
 
/s/ 
 
Herb B. Kuhn  
Deputy Administrator 
Acting Director, Center for Medicaid and State Operations  
 
Enclosure 
 
 
  Page 4  State Medicaid Director  
   
cc: 
CMS Regional Administrators 
 
CMS Associate Regional Administrators 
Division of Medicaid and Childrens Health 
 
Ann C. Kohler 
Executive Director 
National Association of State Medicaid Directors 
 
Joy Wilson 
Director, Health Committee 
National Conference of State Legislatures 
 
Matt Salo 
Director of Health Legislation 
National Governors Association 
 
Debra Miller 
Director for Health Policy 
Council of State Governments 
 
Christie Raniszewski Herrera 
Director, Health and Human Services Task Force 
American Legislative Exchange Council 
 
Barbara Levine 
Director of Policy and Programs 
Association of State and Territorial Health Officials 
  Page 5  State Medicaid Director  
   
 
Table A 
Patient Safety:  CMS Initiatives Addressing Never Events 
 
   
Current NQF Serious Reportable Adverse Events  HHS/CMS Value Driven Health Care 
Efforts  
  
 
 
Surgical Events 
Surgery on wrong body part  National Coverage Determination 
Surgery on wrong patient  National Coverage Determination 
Wrong surgery on a patient  National Coverage Determination 
Foreign object left in patient after surgery  Hospital-Acquired Condition 
Post-operative death in normal health patient   
Implantation of wrong egg   
 
 
Product or Device Events 
Death/disability associated with use of contaminated drugs   
Death/disability associated with use of device other than as intended   
Death/disability associated with intravascular air embolism  Hospital-Acquired Condition 
 
 
Patient Protection Events 
Infant discharged to wrong person   
Death/disability due to patient elopement   
Patient suicide or attempted suicide resulting in disability   
 
 
Care Management Events 
Death/disability associated with medication error     
Death/disability associated with incompatible blood  Hospital-Acquired Condition 
Maternal death/disability with low risk delivery   
Death/disability associated with hypoglycemia  Hospital-Acquired Condition 
Death/disability associated with hyperbilirubinemia in neonates   
Stage 3 or 4 pressure ulcers after admission  Hospital-Acquired Condition 
Death/disability due to spinal manipulative therapy   
 
 
Environment Events 
Death/disability associated with electric shock  Hospital-Acquired Condition 
Incident due to wrong oxygen or other gas   
Death/disability associated with a burn incurred within facility  Hospital-Acquired Condition 
Death/disability associated with a fall within facility  Hospital-Acquired Condition 
Death/disability associated with use of restraints within facility   
 
 
Criminal Events 
Impersonating a heath care provider (i.e., physician, nurse)   
Abduction of a patient   
Sexual assault of a patient within or on facility grounds