Frequently Asked Questions: Federal and State Oversight of Medicaid Expenditures 
June 4, 2013 
Background: 
On March 18, 2013, the Centers for Medicare and Medicaid Services (CMS) issued a State 
Medicaid Directors letter (SMDL #13-003) describing the mutual federal and state obligations 
and accountability on the part of the state and federal governments for the integrity of the 
Medicaid program. That letter stipulates that states are now required to submit UPL 
demonstrations on an annual basis.  Previously this information was collected or updated only 
when a state was proposing an amendment to a reimbursement methodology in its Medicaid state 
plan.  Beginning in 2013, states must submit UPL demonstrations for inpatient hospital services, 
outpatient hospital services, and nursing facilities.  In 2014 and annually thereafter, states will be 
required to submit annual UPL demonstrations for the services listed above and clinics, 
physician services (for states that reimburse targeted physician supplemental payments), 
intermediate care facilities for the developmentally disabled (ICF/DD), psychiatric residential 
treatment facilities and institutes for mental disease (IMDs).  This information is due to CMS 
prior to the start of a states fiscal year, which for most states is July 1st. 
Questions and Answers: 
1.  To whom and how should states submit the annual upper payment limit (UPL) 
demonstrations that are due prior to the start of a states fiscal year?    
Response:  The annual upper payment limit demonstrations should be submitted to the 
CMS Regional Office and addressed to the Associate Regional Administrator.  States 
may submit through an email from the State Medicaid Director (or designated state 
official) or through a hardcopy letter that is postmarked before the start of the states 
fiscal year.   All supporting UPL data should be sent to CMS in electronic format 
regardless of whether the official submittal letter is sent as a mailed hardcopy.  
2.  Can a contractor that acts of behalf of the Medicaid agency submit the UPL 
demonstrations to CMS?  
Response:   No.  The information must be submitted by the State Medicaid Director (or 
designated state official). 
3.  What are the consequences if a state refuses to comply with the SMDL requirements?  
Response:   We expect that all states will submit the information required to demonstrate 
compliance with the UPL requirements in accordance with the federal regulations and the 
SMDL.  Absent a current UPL demonstration, the state will have failed to document that its 
payment rate methodology is consistent with statutory requirements.  CMS may either initiate a  compliance action, or may disallow claimed expenditures which the state has not appropriately 
documented as within the UPL.  
 
4.  What Medicaid services require a UPL demonstration?   
 
Response:   The regulatory upper payment limits are described at 42 CFR Part 447  
Payment for Services.  Services with applicable regulatory payment limits include:  
 
  clinic,  
  ICFs/DD,  
  inpatient hospital,  
  nursing facility, 
  outpatient hospital, 
  psychiatric residential treatment facilities,  
  and institutes for mental disease.    
 
In 2013, states must submit UPL demonstrations for: 
 
  inpatient hospital services,  
  outpatient hospital services, and  
  nursing facility services.   
In 2014 and annually thereafter, states will be required to submit annual UPL 
demonstrations for the services listed above and:  
  clinic services,  
  ICFs/DD services,  
  psychiatric residential treatment facilities,  
  institutes for mental disease, and 
  other state plan services that have a limit related to a specific rate methodology 
(such as physician services limited to the average commercial rate).    
 
5.  Are states only required to conduct UPL demonstrations for services with approved state 
plan supplemental payment methodologies?   
 
Response:   An upper payment limit demonstration considers all Medicaid payments 
(base and supplemental).   States must conduct UPL demonstrations for the applicable 
services described in the SMDL regardless of whether a state makes supplemental 
payments under the Medicaid state plan for the services.    
6.  Should the UPL demonstration show that Medicaid payments are below a reasonable 
estimate of what Medicare would pay for the prior fiscal year or on a prospective basis?   
For example, should the UPL for state fiscal year 2013-14 be submitted prior to June 30, 
2013?   
 
Response:   State submissions should demonstrate UPL compliance within the fiscal year 
in which the demonstration is submitted, which is prior to the beginning of each fiscal 
year.  For example, for states with a fiscal year starting July 1, 2013, the first UPL 
submissions should be submitted prior to that date, and demonstrate a reasonable estimate 
of Medicare payment for Medicaid payments made for the prior fiscal period July 1, 2012 
 June 30, 2013 (or a payment period within the fiscal year that adheres to the state plan 
service payment methodology  see response #3 below).   For purposes of SPA reviews, 
CMS will continue to expect that states demonstrate that proposed increases in provider 
payments comply with the UPL requirements.  
 
7.  Must UPL demonstrations be submitted by any particular date?  
 
Response:   No. The SMDL does not mandate a specific date for submittal, but requires 
that states submit the demonstrations each year, prior to the start of the fiscal year.  
 
8.  Should the period of time covered by the UPL demonstration be tied to the states fiscal 
year? 
 
Response:   No.  The SMDL does not require any particular starting point within the 
fiscal year for the demonstrations.  This allows states the flexibility to develop UPL 
demonstrations that are tied to the provider payment periods described in state plan 
payment methodologies for each service.   For instance, if a state submits a state plan 
amendment to update provider payments as of October 1 of each year, the state would 
document that the SPA changes comply with the UPL for the period 10/1-9/30 of that 
payment year.  The UPL must represent the entire payment year.  Since UPL 
demonstrations usually rely on historic data that is projected into a payment year, this is 
consistent with past practices.   
 
9.  Can a state use a UPL demonstration that was submitted within the fiscal year for 
purposes of demonstrating that a SPA change complies with the regulations in order to 
meet the SMDL requirements?  
  
Response:   Yes.  A demonstration submitted within the fiscal year that is used to 
document that SPA methodology changes comply with the UPL requirements may be  used to satisfy the SMDL requirements as long as no subsequent changes are made to the 
states provider payment methodology prior to the states SMDL submission and CMS 
has reviewed and accepted the demonstration. 
   
10. Will the state be required to submit a UPL for a service where the state pays at or less 
than the Medicare rates for the service?   
Response:   If the states payment methodology for one of the services governed by the 
UPL regulations clearly describes payment at the Medicare payment rates that are in 
effect for each rate year and the state follows Medicare updates and adjustments to the 
rates, then no additional UPL data demonstration is necessary.  The state simply needs to 
indicate this in the UPL narrative and reference the state plan payment methodology.  
11. The UPL forms were labeled as guidance.  Are states required to submit the forms in 
response to the requirements of the March 18, 2013 SMDL?  Will CMS issue guidance 
for the format of the submission of the UPL data demonstrations? 
Response:   The guidance materials are not a mandated submission format.  However, the 
information included in the guidance materials is based on years of CMS experience in 
reviewing state UPL submissions and represents the policies and details that CMS 
expects states to address in their submissions.  All states should submit a narrative 
description of the demonstration methodology that includes all of the relevant factors 
used to calculate the UPL and the supporting data sheets which are used in the 
calculation.  The data should be presented by individual provider and in the aggregate for 
state government owned and operated, non-state government owned and operated and 
privately owned facilities.  States that are unsure of how to present the narrative and data 
should contact the Regional Office for demonstration samples.  It is our understanding 
that all states have experience in conducting UPL demonstrations for at least one of the 
services listed in the SMDL; however, we will consider issuing data templates as part of 
future guidance materials.    
12. The SMDL indicates that the UPL demonstrations will be for CMS review.  What is 
the purpose of the review?   If CMS has questions or concerns about the UPL 
demonstrations will those issues be addressed prospectively? 
 
Response:   The purpose of the review is to ensure that states payment methodologies 
are in compliance with the statutory and regulatory UPL requirements on an annual basis.  
CMS intends to review the methodologies and supporting data based on the regulatory 
and policy requirements applicable to each service category that will be submitted by 
states.   CMS has conducted the same review process are part of SPA reviews, however, 
it has come to light that states may not be reviewing payment methodologies for all of the 
services covered by the regulations on an annual basis.   We have issued guidance  materials for states that need assistance in developing UPL calculations that comport with 
the regulations.   Depending on the nature of the issue, CMS may work prospectively 
with states to address concerns.   However, the regulatory requirements have been in 
place for many years and states will need to immediately address state plan payment 
methodologies that pay in excess of the UPL. 
 
13. When will CMS issue reporting guidance for clinics, physician services, intermediate 
care facilities for the developmentally disabled, and psychiatric residential treatment 
facilities and institutes for mental disease?  
Response:   We are currently developing those guidance materials with the goal of 
issuing them in July 2013.   We will also issue an information bulletin at the time that the 
documents are published so that states are aware that they are available. 
14. The SMD letter indicated that states will identify the source of non-federal funding for 
the payment described in the UPL.  However, there is no place on the provided guidance 
forms to report this information.  Please advise.  
Response:   The purpose of the guidance materials is to help states understand the 
policies, information and level of detail expected for consideration in the UPL 
demonstration methodology.  Most states are familiar with the funding questions that 
CMS has requested as part of SPA reviews.  We will post the funding questions to the 
website in addition to the UPL guidance documents.  Responses to those questions may 
be used to identify the source of non-federal funding for service payments described in 
the UPL. 
15. Our state covered institutes for mental disease under the inpatient hospital and nursing 
facility benefit.  Should we conduct a separate UPL for these facilities?  
Response:   No.   Facilities that are licensed, covered and paid under the Medicaid state 
plan as inpatient hospital or nursing facilities should be included in the UPL calculation 
for the applicable facility definition.   There is no regulatory requirement to conduct 
separate calculations for designated facility types within each of the applicable service 
categories.  
16. The SMDL refers to private residential treatment facilities.  Did the SMDL intend to refer 
to psychiatric residential treatment facilities?  
Response:   Yes.  This was a drafting error in the SMDL text.  The correct Medicaid 
service category is psychiatric residential treatment facilities.     
17. Can CMS provide a list of the revenue codes that are approved to be included in the 
outpatient hospital UPL or conversely the revenue codes that can NOT be included?    Response:   The definition of Medicaid outpatient hospital services is defined at 42 CFR 
440.20 and includes preventive, diagnostic, therapeutic, rehabilitative, or palliative 
services.   To date, CMS has not published a list of revenue codes that must be included 
or excluded from the service category under Medicaid.  States generally define the 
services limitations for outpatient hospital services in the Medicaid state plan and issue 
guidance to providers on billable codes and associated payments through provider 
manuals and other Medicaid resources.  Generally, the outpatient hospital benefit pays for 
services and costs associated with the licensed outpatient hospital facility in which an 
individual receives care and our understanding is that the overall scope of services may 
vary by state depending on the standards and criteria developed by state licensing boards. 
18.  For states that use a payment methodology that is based on Medicares outpatient 
prospective payment system bundling guidelines, some claim lines for covered items and 
services are not individually paid, but will be included in the covered charge total.   In 
these instance, can CMS verify that the outpatient hospital UPL may include all other 
hospital outpatient services that are: 
 
A.  Claimed as outpatient services on the 837 Institutional claim format or UB04 
form; 
B.  Generated by outpatient departments of the hospital or provider-based entities; 
and 
C.  Derived from paid claims reported through the MMIS.     
Response:  CMS confirms that the conditions described in this question are generally 
consistent with the UPL demonstration policies.  We note that the Medicaid state plan 
should comprehensively describe the coverage and payment policies that a state uses to 
pay outpatient hospital providers and that billing policies and provider definitions should 
be universal for all qualified providers.