DEPARTMENT OF HEALTH & HUMAN SERVICES 
Health Care Financing Administration  
 Center for Medicaid and State Operations 
7500 Security Boulevard 
Baltimore, MD 21244-1850 
December 17, 1997  
Dear State Medicaid Director:  
This letter is one of a series that provides guidance on the implementation of the Balanced Budget Act of 1997 (BBA). Its 
purpose is to provide guidance on section 4751 of the BBA, which eliminated the requirement for periodic inspections of 
care (IoC) for each Medicaid beneficiary receiving services in an intermediate care facility for the mentally retarded 
(ICF/MR) or in a Mental Hospital (MH).  
Prior to the enactment of the BBA, the Medicaid law contained minimum standards for medical review of care and 
services provided in ICFs/MR and MHs. To ensure compliance with these standards, section 1903(g) of the Social 
Security Act provides for a reduction in Federal Medicaid funds for extended inpatient hospital stays, unless a State could 
document that it has an effective program of medical review in ICFs/MR and MHs. The purpose of this penalty, as 
originally enacted, was to provide an incentive to discourage unnecessary admissions, reduce excessive lengths of stay 
and ensure that Medicaid beneficiaries are placed in appropriate institutional settings and furnished adequate health 
services.  
As part of the State's compliance, the Medicaid law further required each State to perform annual inspections of the care 
of Medicaid beneficiaries in participating ICFs/MR and MH's and to document those reviews quarterly. The Health Care 
Financing Administration (HCFA) was required to impose penalties on noncompliant States.  
The BBA became law on August 5, 1997. Specifically, section 4751 of the BBA repeals the requirements formerly 
contained in Title XIX of the Social Security Act. It provides that States are no longer required to conduct IoC reviews in 
ICFs/MR and MH's. Since the BBA failed, however, to eliminate the penalty provision in section 1903(g), the literal 
interpretation of the statute would mean that States and HCFA must follow the current law of 1903(g) and continue to 
conduct IoC reviews until section 1903(g) was amended or repealed. Nevertheless, consistent with its legislative history, 
and because not to do so would render the passage of section 4751 meaningless, HCFA has interpreted the amendment 
made by section 4751 to mean that the penalty section 1903(g) no longer requires IoC reviews. Therefore, HCFA will no 
longer enforce the sanctions contained in section 1903(g) beginning with the enactment of the BBA. Since section 4751 is 
self-implementing, effective August 5, 1997, States are no longer required to submit quarterly documentation or comply 
with any other Utilization Control requirement provided in section 1903(g).  
Any questions regarding this provision or the contents of this letter should be directed to Pamelia Butler of my staff at 
(410) 786-6776.  
Sincerely,  
/s/   
Sally K. Richardson   
Director   
Center for Medicaid and State Operations  
 
cc:  All HCFA Regional Administrators  
All HCFA Associate Regional Administrators For Medicaid and State Operations  
Jennifer Baxendell, National Governors Association  
Joy Wilson, National Conference of State Legislatures  
Lee Partridge, American Public Welfare Association