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 
SHO # 10-004 
CHIPRA # 15 
 
February 4, 2010 
 
RE: Prospective Payment System for FQHCs and RHCs 
Dear State Health Official: 
 
This letter is part of a series of guidance to States regarding implementation of the Childrens 
Health Insurance Program Reauthorization Act of 2009 (CHIPRA).  CHIPRA ensures that States 
are able to continue their existing CHIP programs and provides funding to expand health 
insurance coverage to additional low-income, uninsured children.  The purpose of this letter is to 
provide general guidance on the implementation of section 503 of CHIPRA, which amends 
section 2107(e)(1) of the Act to make section 1902(bb) of the Act applicable to CHIP in the 
same manner as it applies to Medicaid.  Section 1902(bb) governs payment for federally 
qualified health centers (FQHCs) and rural health clinics (RHCs).  In addition to the general 
guidance, we have also included a set of questions and answers to provide further information 
about this provision in CHIP.  Section 503 of CHIPRA also authorizes $5 million in transition 
grants to assist States in meeting the requirements of this provision. 
 
Background 
 
Prior to 2001, Federal law required State Medicaid programs to reimburse FQHCs and RHCs 
based on reasonable costs.  States used Medicare regulations and cost reports to identify the 
types of allowable costs that would be reimbursed, and established their own definition of what 
constituted reasonable costs.  However, the Medicare, Medicaid, and SCHIP Benefits 
Improvement and Protection Act of 2000 (BIPA) changed the payment requirements for FQHCs 
and RHCs.  Section 702 of BIPA (New Prospective Payment System For Federally-Qualified 
Health Centers and Rural Health Clinics) created a new section 1902(bb) in the Act.  This 
section requires Medicaid programs to make payments for FQHC/RHC services in an amount 
calculated on a per-visit basis that is equal to the reasonable cost of such services documented for 
a baseline period, with certain adjustments, or to use an alternative payment methodology to pay 
for FQHC and RHC services. 
 
BIPA (and now CHIPRA) refers to the payment methodology under section 1902(bb) as a 
prospective payment system (PPS).  Likewise, we are using the term Medicaid PPS throughout 
this guidance to capture the language used in BIPA and CHIPRA, and in acknowledgement that 
PPS is the term of art used by the Medicaid program, FQHCs, and RHCs to describe such  Page 2  State Health Official 
 
payment. Nothing in this guidance conveys a change in prior Centers for Medicare & Medicaid 
Services (CMS) guidance pertaining to Medicaid payment for FQHC and RHC services.  
 
Unlike a cost-based reimbursement system, a PPS establishes a providers payment rate for a 
service before the service is delivered; the rate is not dependent on the providers actual costs or 
the amount charged for the service.  CMS uses PPSs throughout the Medicare program.  Most 
Medicare PPSs are based on the average costs incurred in furnishing the services by all 
participating providers of that type (e.g., skilled nursing facilities) and generally include multiple 
rate adjustment factors.  However, the Medicaid PPS specified in section 1902(bb)(3) is 
determined separately for each individual FQHC or RHC (calculated on a per-visit basis), and 
does not include any adjustment factors other than a growth rate to account for inflation and a 
change in the scope of services furnished during that fiscal year.  Therefore, we note that the 
methodology described under 1902(bb)(3) of the Act is significantly different from the PPS 
methodologies used by the Medicare program. 
 
Application of Medicaid FQHC/RHC Payment Requirements to CHIP 
 
Medicaid programs, including CHIP programs that were implemented as Medicaid expansions, 
were required to use the methodologies set forth in section 1902(bb) for all FQHC and RHC 
services provided on or after January 1, 2001.  As a result of section 503, separate CHIP 
programs are now required to use these methodologies for all FQHC and RHC services provided 
on or after October 1, 2009, and can come into compliance using one of three methods.   
 
(A) Adopting Medicaid PPS Rates 
 
First, a separate CHIP program can adopt the payment amounts for each FQHC and RHC 
currently in place for Medicaid.  This approach could minimize implementation burdens.  
However, for this approach to work effectively, each FQHC and RHC would need to provide the 
same or a similar range of services in both the CHIP program and the State Medicaid program. 
 
(B) Constructing Separate CHIP PPS Rates 
 
Second, a separate CHIP program can develop a CHIP-specific PPS rate for existing FQHCs and 
RHCs.  In doing so, the State should calculate the average reasonable costs on a per-visit basis 
for each FQHC and RHC in providing CHIP-covered services during two base years.  This 
process may be accomplished by: 
 
1.  Identifying the total costs incurred by each FQHC and RHC in furnishing covered CHIP 
services under the program during the base years.  Costs of non-covered services and 
costs of State plan administration (outreach, for example) are excluded.  The State may 
require FQHCs and RHCs to complete Medicare cost reporting forms for the period in 
question in order to determine these amounts. 
2.  Dividing this amount by the total number of CHIP-covered visits in the base years to 
establish a cost per visit amount.  Page 3  State Health Official 
 
3.  For succeeding years, increasing the per-visit rate to reflect the percentage change in the 
Medicare Economic Index applicable to primary care services, and adjust the per-visit 
rate to take into account any increase (or decrease) in the scope of services furnished by 
the FQHCs and RHCs between the beginning of the first State fiscal year from which the 
cost data is drawn and the current year. 
 
Newly designated FQHCs and RHCs, as well as existing FQHCs and RHCs that are new to 
CHIP will have initial payment amounts established either by reference to payments made to 
other FQHCs and RHCs in the same or adjacent areas with similar caseloads, or in the absence of 
such other clinics, through cost reporting methods.  After the initial year, payment shall be set 
using the same Medicare Economic Index method used for established FQHCs and RHCs.  
 
(C) Using an Alternative Payment Methodology (APM) 
 
Finally, a separate State CHIP program may use a methodology other than the PPS in paying 
FQHCs and RHCs for CHIP-covered services, if the following statutory requirements are met: 
 
  The APM should be agreed upon by the State and by each individual FQHC or RHC to 
which the State wishes to apply the methodology; 
  The APM must result in a payment to the FQHC or RHC that is at least equal to the 
amount to which it is entitled under the PPS; and  
  The APM should be described in the approved CHIP State plan. 
 
A State may accept an FQHCs or RHCs written assertion that the amount paid under the APM 
results in payment that at least equals the amount to which the FQHC or RHC is entitled under 
the PPS.  
 
Supplemental Payments to FQHC and RHC Managed Care Subcontractors 
 
In a separate State CHIP program where FQHCs and RHCs are subcontractors of managed care 
organizations (MCOs) in furnishing covered services to CHIP managed care enrollees, the State 
is required to make supplemental payments to these providers in the amount of the difference, if 
any, between the payment received by the FQHC or RHC from the MCO and the amount to 
which the FQHC or RHC would otherwise be entitled for these visits under the States PPS or 
APM.  The State should make this determination at least every 4 months and must pay the 
difference to the FQHC or RHC.  The CHIP State plan should be amended to include a 
description of the supplemental payment methodology. 
 
However, the provisions in section 1903(m)(2)(A)(ix) of the Act (which require Medicaid MCO 
contracts to specify that an MCO pay FQHC and RHC subcontractors no less than it would pay 
other similar non-FQHC and RHC subcontractors) that apply to Medicaid-expansion CHIP 
programs do not apply to separate CHIP programs.  However, States operating a separate CHIP 
program may want to consider including such a provision in their MCO contracts to prevent an 
FQHC or RHC from being underpaid by an MCO, in which case the State would be required to 
make up the difference with a supplemental payment to the FQHC or RHC.  Page 4  State Health Official 
 
Effective Date 
 
This payment provision was effective as of October 1, 2009.  Although it may take States time to 
develop payment rates under these requirements, the statute thus provides that the State make 
payments based on a PPS system as of October 1, 2009.  In order to be in compliance with the 
statutory  requirement, each State should submit a CHIP State plan amendment describing how 
the State will comply with this payment provision within the time limits established under 
Federal regulations at 42 CFR 457.65(a)(3).  To be in compliance, such an amendment should 
provide for the PPS payment to be made for all FQHC and RHC services furnished to CHIP 
enrollees on or after October 1, 2009.   
Transition Grants 
Section 503 of CHIPRA also includes $5 million to help separate and/or combination CHIP 
programs transition to a PPS (or an alternative payment methodology agreed to by the FQHCs 
and RHCs) for FQHCs or RHCs providing CHIP benefits.  CMS intends to post an 
announcement for these grants on www.grants.gov very soon, as well as notify State CHIP 
programs when the announcement is posted.  The announcement will provide details on grant 
eligibility criteria, the minimum and maximum grant awards, application requirements, grant 
award criteria, and the deadline for applications. 
 
Implementation 
 
This guidance is offered in order to assist States in applying these provisions, which became effective 
October 1, 2009, to CHIP payments to FQHCs and RHCs.  We plan to issue additional policy 
guidance on this issue as needed, and CMS will work with States to help them implement this 
provision consistent with the statute. 
 
Section 3(b) of CHIPRA addresses the situation in which States need to pass legislation in order 
to bring their CHIP plans into compliance.  This section provides that the Secretary of the 
Department of Health and Human Services may extend the date by which a State must 
implement any provision, if the Secretary determines that State legislation is required in order for 
a States CHIP plan to comply with the provision.  For States with annual legislative sessions, 
this date must be no later than the first day of the first calendar quarter beginning after the close 
of the first regular session of the State legislature that begins after February 4, 2009 (the date 
CHIPRA was enacted).  For States that have a 2-year legislative session, each year of the session 
is considered a separate regular session for this purpose. 
 
If your State requires such legislation, please submit a letter indicating this to the CMS Center 
for Medicaid and State Operations as soon as possible.  The letter should include the provision in 
question, the reason that State legislation is required for compliance, and the date the State will 
begin implementing the provision.  Notwithstanding such a delay in implementation, separate 
CHIP programs should make payments to FQHCs and RHCs consistent with section 2107(e)(1) 
retroactive to October 1, 2009. 
  Page 5  State Health Official 
 
We encourage any State that operates a separate CHIP program with FQHCs or RHCs in its delivery 
system to begin a dialogue with its Medicaid agency and with its CMS Regional Office to assess 
potential coordination between the two programs in order to maximize administrative efficiencies and 
facilitate more rapid compliance with these requirements. 
 
If you have questions regarding this guidance please send an e-mail to 
CMSOCHIPRAQuestions@cms.hhs.gov or contact Ms. Victoria Wachino, Director, Family and 
Childrens Health Programs Group, who may be reached at (410) 786-5647. 
 
Sincerely,  
 
/s/ 
 
Cindy Mann 
Director 
Enclosure 
cc: 
CMS Regional Administrators 
 
CMS Associate Regional Administrators 
Division of Medicaid and Childrens Health 
 
Ann C. Kohler  
NASMD Executive Director 
American Public Human Services Association 
 
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 
 
Christine Evans, M.P.H. 
Director, Government Relations 
Association of State and Territorial Health Officials 
 
Alan R. Weil, J.D., M.P.P. 
Executive Director 
National Academy for State Health Policy  Page 6  State Health Official 
 
Enclosure 
Questions & Answers 
Application of Medicaid FQHC and RHC Prospective Payment System to CHIP 
 
 
Question 1:  Does this provision apply to all federally qualified health centers (FQHCs), 
and rural health clinics (RHCs) as well as FQHC look-alikes providing CHIP benefits? 
 
Answer:  Yes.  This provision applies to all FQHCs and RHCs, including FQHCs that are 
qualified because they are outpatient health programs or facilities operated by an Indian tribe or 
an urban Indian health program, or because they have been determined to meet the requirements 
for a grant that would accord FQHC status. 
 
Question 2:  Do Medicaid prospective payment system (PPS) requirements under section 
1902(bb) of the Social Security Act (the Act) apply only to independent RHCs, and not to 
provider-based RHCs? 
Answer:  Medicaid PPS requirements under section 1902(bb) of the Act apply to all RHCs. 
 
Question 3:  Does section 503 of the Childrens Health Insurance Program Reauthorization 
Act of 2009 (CHIPRA) require that States cover FQHC and RHC services under a separate 
CHIP program? 
 
Answer:  States operating a separate CHIP program are not required to cover FQHC and RHC 
services (except to the extent that the coverage is needed for the State to meet the benchmark or 
benchmark-equivalent coverage requirements of section 2103 of the Act). 
 
Question 4: Can States define FQHC and RHC services differently for purposes of CHIP 
than for Medicaid? 
 
Answer:  FQHC and RHC services for Medicaid are defined in section 1861(aa) of the Act, and 
Medicaid programs must use these definitions.  However, States are not required to use these 
definitions for CHIP. 
 
Question 4:  Does the process for making prospective payments to FQHCs and RHCs have 
to be the same for a States CHIP program as it is for a States Medicaid program? 
 
Answer:  No.  As long as the requirements for payment in section 1902(bb) are met, the process 
by which such requirements are met is up to the State CHIP program. 
 
Question 5:  Does this provision require application of all Medicaid FQHC and RHC 
policies to CHIP programs? 
 
Answer:  No.  Where applicable, States may adopt policies from the Medicaid program (i.e., 
requiring out-of-network access in circumstances where FQHC or RHC services are not  Page 7  State Health Official 
 
available in an MCO service area); however, these will not be required.  Only the payment 
provisions described in section 1902(bb) of the Act are required. 
 
Question 6:  Are CHIP programs required to have FQHC or RHC contracts? 
 
Answer:  No. 
 
Question 7:  Are CHIP programs required to ensure that their contracted managed care 
entities have FQHCs and RHCs in their provider networks? 
 
Answer:  No. 
 
Question 8:  Does the title XIX requirement to use "Medicare reasonable cost 
principles" for the prospective payment system apply to CHIP? 
 
Answer:  Yes.  Medicare reasonable cost principles apply to CHIP and are a part of the process 
in developing PPS rates, if the State chooses this approach to establishing payment rates for 
FQHCs and RHCs.  
 
Question 9:  Section 1902(bb) of the Act states that the PPS rate must be adjusted to take 
into account any increase or decrease in the scope of such services furnished by the center 
or clinic during the fiscal year.  What is meant by any increase or decrease in the scope 
of such services? 
 
Answer:  A change in the scope of FQHC and RHC services should normally occur if:  (1) the 
center/clinic has added or has dropped any service that meets the definition of FQHC and RHC 
services (i.e., that the FQHC or RHC is qualified to provide in the State); and, (2) the service is 
included as a covered CHIP service under the CHIP State plan.  Additionally, a change in the 
scope of services could also occur when a service is added or dropped as a covered CHIP 
service. A change in the scope of such services is defined as a change in the type, intensity, 
duration and/or amount of services.  A change in the cost of a service is not considered in and of 
itself a change in the scope of services. The State must develop a process for determining a 
change in the scope of services. 
 
Question 10:  Does the delayed implementation date exception described in section 3(b) of 
CHIPRA (when the State requires legislation to implement) apply to section 503 of 
CHIPRA? 
 
Answer:  Yes.  However, it is important to note that this exception applies only if the Secretary 
determines that State legislation is required to implement the provision.  If this exception 
applies, States should follow the process outlined in this guidance to provide notice to CMS.  
However, the exception would not be triggered by a need for administrative action, including 
administrative rulemaking.  Nor would the exception be triggered by estimates that increased 
spending might exceed State appropriations. 
  Page 8  State Health Official 
 
Question 11:  Can CMS advise States that FQHC and RHC providers do not need to 
receive the PPS rate until the provision is effective for a particular State? 
 
Answer:  No.  The exception at section 3(b) of CHIPRA does not change the effective date of 
this provision.  It simply provides that, if the conditions for the exception were met, the State 
would not be regarded as failing to comply with the new requirement until the State has 
implemented the provision.  Regardless of when implementation occurs, the State should make 
PPS payments to FQHCs and RHCs as required under section 2107(e)(1) of the Act retroactive 
to October 1, 2009. 
 
Question 12:  Do States need to submit a CHIP State plan amendment (SPA) to implement 
this change?  If so, what is the timeline for that? 
 
Answer:  Yes.  A SPA is required any time there is a change in Federal law that affects a States 
CHIP plan.  The timeline for SPA submissions has not changed.  However, due to the high 
volume of SPAs expected to be generated from this legislation, CMS encourages States to 
submit all SPAs as quickly as administratively feasible. 
 
Question 13:  Will CMS be sending out a preprint for the State plan regarding compliance 
with FQHC and RHC payment requirements? 
 
Answer:  Yes.  CMS will work with States to implement the requirements of section 1902(bb) of 
the Act.  Operational aspects regarding the documentation of those requirements will be included 
in future CMS guidance, including but not limited to, the State plan preprint.