DEPARTMENT OF HEALTH AND HUMAN SERVICES 
Centers for Medicare & Medicaid Services 
7500 Security Boulevard, Mail Stop S2-26-12 
Baltimore, MD 21244-1850 
 
Center for Medicaid and CHIP Services 
 
CMCS Informational Bulletin 
  
 
DATE:  January 30, 2012 
 
FROM:  Cindy Mann, Director 
  Center for Medicaid and CHIP Services (CMCS) 
 
SUBJECT:   Medicaid and CHIP Updates 
 
This Informational Bulletin updates States and other interested parties on three items:   
  Publication of the Medicaid Covered Outpatient Drugs NPRM (CMS-2345-P) 
  OIGs Report on Medicaid Hospital Outlier Payment Follow-up for Fiscal Years 2004 
Through 2006 (A-07-10-04160) 
  Updated Information on the Implementation of Medicaid NCCI Methodologies 
 
 
Medicaid Covered Outpatient Drugs NPRM (CMS-2345-P) 
 
Thursday, February 2, 2012, a Notice of Proposed Rulemaking (NPRM) titled Covered 
Outpatient Drugs (CMS-2345-P) will be published in the Federal Register 
(www.federalregister.gov.)   The NPRM went on display Friday, January 27 and can be viewed 
at:  http://www.ofr.gov/OFRUpload/OFRData/2012-02014_PI.pdf. 
 
This NPRM implements Medicaid drug provisions of the Affordable Care Act and will increase 
transparency in drug pricing and save States and taxpayers money through a number of 
improvements, including: 
 
  Aligning reimbursement rates for all drugs closer to the actual price the pharmacy pays 
for the drug; 
  Increasing rebates paid by drug manufacturers that participate in Medicaid; 
  Providing rebates for drugs dispensed to individuals enrolled in a Medicaid managed care 
organization; and 
  Lowering reimbursement for certain generic drugs. 
 
The NPRM will be open for public comment through April 2, 2012, and CMS encourages all 
interested parties and stakeholders to submit comments.  Please refer to the Federal Register  CMCS Informational Bulletin  
January 30, 2012 
Page 2 
 
publication for instructions about how to submit comments and contact Wendy Tuttle at 
Wendy.Tuttle@cms.hhs.gov with any questions. 
 
OIG Report Medicaid Hospital Outlier Payment Follow-up for Fiscal Years 2004 
Through 2006 (A-07-10-04160) 
 
The Office of the Inspector General (OIG) issued a final report on July 21, 2011 that may be 
useful to States in determining effective ways to make Medicaid hospital outlier payments.  The 
report provides the results of their review of Medicaid hospital outlier payments for fiscal years 
(FY) 2004 through 2007, a follow-up to earlier audits on outlier payments in eight States.  The 
objective was to determine whether the eight State agencies calculated Medicaid inpatient 
hospital outlier payments to effectively limit the payments to extraordinarily high-cost cases.  
The full report can be found at:  http://oig.hhs.gov/oas/reports/region7/71004160.pdf 
 
The OIG found that the eight States did not calculate Medicaid outlier payments to effectively 
limit the payments to extraordinarily high-cost cases. For all hospitals in seven of the eight 
States, Medicaid outlier payments increased from approximately $913.0 million in FY 2004 to 
approximately $1.2 billion in FY 2006.  During this period, Medicaid outlier payments increased 
substantially faster than Medicaid diagnosis-related groups (DRG) base payments and Medicare 
outlier payments.   They found that this occurred because the eight State agencies (1) used 
outdated cost-to-charge ratios to convert charges to estimated costs and (2) did not reconcile 
Medicaid outlier payments upon cost report settlement.   
 
According to the OIG, if the eight States had used the most recent cost reports to calculate the 
cost-to-charge ratios for the hospitals reviewed, those State agencies could have, between 
FYs 2004 and 2006, more effectively limited the payments to extraordinarily high-cost cases, 
thereby reducing those Medicaid outlier payments by a total of $320.0 million.  
 
Based on the OIG findings, we encourage all States that make Medicaid outlier payments to 
adjust Medicaid reimbursement for outliers to (1) use the most recent cost-to-charge ratios to 
calculate Medicaid outlier payments, (2) reconcile Medicaid outlier payments upon cost report 
settlement or use an alternative method to ensure that outlier payments are more closely aligned 
with actual costs, and (3) amend their State plans accordingly. 
 
Questions regarding this information may be directed to Robert Weaver at 
Robert.Weaver@cms.hhs.gov. 
 
 
Implementation of Medicaid NCCI Methodologies 
 
The National Correct Coding Initiative (NCCI) is a program developed by CMS that uses 
methodologies to reduce overpayments to providers due to incorrect coding on claims. Section 
6507 of the Affordable Care Act directs State use of NCCI methodologies. On September 1, 
2010, CMS issued a letter to State Medicaid Directors regarding the implementation of the 
NCCI, which is available at: http://www.cms.gov/smdl/downloads/SMD10017.pdf.   CMCS Informational Bulletin  
January 30, 2012 
Page 3 
 
 
Updates and additional information addressing the following four topics are now available at: 
http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Data-and-
Systems/Downloads/NCCI_FactSheet_Methodologies01262012.pdf: 
  Change in the location of the Medicaid NCCI edit files for downloading by State 
Medicaid agencies; 
  Changes in Medically Unlikely Edits (MUEs) for bilateral surgical procedures; 
  The claim adjudication algorithms States are required to use in paying Medicaid claims; 
and 
  Reports on changes in the Medicaid NCCI edit files. 
For additional information please contact Paul Youket at Paul.Youket@cms.hhs.gov.