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  
  
 June 16, 2006                   SMDL #06-015  
  
  
Dear State Medicaid Director:  
  
This letter is one of a series that provides guidance on the implementation of the Deficit Reduction Act 
of 2005 (DRA).  The DRA (Public Law 109-171) through sections 6041, 6042, and 6043, provides State 
Medicaid agencies with a new option to impose premiums and cost sharing upon certain Medicaid 
recipients.  These sections of the DRA inserted a new section 1916A in the Social Security Act (the 
Act) which sets forth options for alternative premiums and  cost sharing that are not subject to the 
limitations under section 1916 of the Act, including cost sharing for non-preferred prescription drugs, 
and cost sharing for non-emergency use of a hospital emergency room.  (Alternative cost sharing for 
non-emergency use of a hospital emergency room under section 6043 will be addressed in a subsequent 
State Medicaid Directors letter).  We plan to apply the limitation of section 1916 to beneficiaries at or 
below 100 percent of the Federal Poverty Level (FPL).  Further guidance will be provided through the 
rulemaking process.  
  
Rules for Premiums and Cost-Sharing under Section 1916A(a), (b) and (d) (Effective Date: March 
31, 2006)--(For Rules Governing Cost-Sharing for Prescription Drugs under Section 1916A(c)  
see information included on page 4)  
Under the new section 1916A, States have a new option to impose premiums upon any group of non-
exempt individuals (with family incomes over 150 percent of the FPL) as specified by the State in their 
State plans, and cost sharing upon any group of non-exempt individuals (with family income over 100 
percent of the FPL) and for any non-exempt services as specified by the State in its State plan.  A listing 
of exempt groups of individuals and exempt services for which no cost sharing is permitted is specified 
below.  For example, States may impose premiums upon all non-exempt childless adults (with family 
incomes over 150 percent of the FPL) or States may impose cost sharing for non-exempt items and 
services to individuals in the section 1931 eligibility group with family incomes between 100 and 200 
percent of the FPL.  States may vary the premiums and cost sharing among the groups of individuals or 
types of items and services they select in their State plan, subject to the limitations described below.  
  
Limitations on Premiums and Cost Sharing under Section 1916A   
  
  1. Non-Exempt Individuals with Family Income Above 100 Percent but At or Below 150 Percent 
of the FPL  
 
  
  A. Premium Rules  
 
States may not impose premiums under the State plan.  
  B. Cost Sharing Rules    
 
Cost sharing may not exceed 10 percent of the cost of the item or service.  
  
  C. Aggregate Cap  
 
Total cost sharing, including cost sharing for prescription drugs and non-emergency use of 
emergency rooms, may not exceed 5 percent of the family income, as applied on a monthly 
or quarterly basis, as specified by the State.  
  
2. Non-Exempt Individuals with Family Income Above 150 Percent of the FPL  
 
  A. Premium Rules  
States may impose premiums.  
  
B. Cost Sharing Rules  
Cost sharing may not exceed 20 percent of the cost of the item or service.   
  
C. Aggregate Cap  
Total premiums and cost sharing, including cost sharing for prescription drugs and non-
emergency use of emergency rooms, may not exceed 5 percent of the family income, as 
applied on a monthly or quarterly basis, as specified by the State.  
  
 
3. Exempt Populations - Premiums  
 No premiums shall be imposed for the following individuals:  
   Individuals under 18 years of age that are required to be provided medical assistance 
under section 1902(a)(10)(A)(i), and including individuals with respect to whom aid or 
assistance is made available under Part B of title IV to children in foster care and 
individuals with respect to whom adoption or foster care assistance is made available under 
Part E of such title, without regard to age;   
   Pregnant women;  
   Any terminally ill individual receiving hospice care, as defined in section 1905(o);  
   Any individual who is an inpatient in a hospital, nursing facility, intermediate care 
facility, or other medical institution, if such individual is required, as a condition of 
receiving services in such institution under the State plan, to spend for costs of medical 
care all but a minimal amount of the individuals income required for personal needs; and  
   Women who are receiving Medicaid on the basis of the breast or cervical cancer 
eligibility group under sections 1902(a)(10)(A)(ii)(XVIII) and 1902(aa) of the Act.  
 
  
4. Exempt Services  Cost Sharing  
 No cost sharing shall be imposed for the following services:  
   Services furnished to individuals under 18 years of age that are required to be provided 
Medicaid under section 1902(a)(10)(A)(i), and including services furnished to individuals 
with respect to whom aid and assistance is made available under Part B of title IV to 
children in foster care and individuals with respect to whom adoption or foster care 
assistance is made available under Part E of such title, without regard to age;      Preventive services (such as well baby and well child care and immunizations) provided 
to children under 18 years of age regardless of family income;    
   Services furnished to pregnant women, if such services relate to the pregnancy or to any 
other medical condition which may complicate the pregnancy;  
   Services furnished to a terminally ill individual who is receiving hospice care, (as defined 
in section 1905(o) of the Act);  
   Services furnished to any individual who is an inpatient in a hospital, nursing facility, 
intermediate care facility for the mentally retarded, or other medical institution, if such 
individual is required, as a condition of receiving services in such institution under the 
State plan, to spend for costs of medical care all but a minimal amount of the individuals 
income required for personal needs;  
   Emergency services as defined by the Secretary for the purposes of section 1916(a)(2)(D) 
of the Act;  
   Family planning services and supplies described in section 1905(a)(4)(C) of the Act; and  
   Services furnished to women who are receiving medical assistance by virtue of the 
application of sections 1902(a)(10)(A)(ii)(XVIII) and 1902(aa) of the Act (breast or 
cervical cancer provisions).  
 
  
5. Additional Exemptions   
States may exempt additional groups of individuals from premiums or additional items or 
services from cost sharing.  States also may further reduce the premiums and cost sharing below 
the limitations specified by the law.    
  
Determination of Family Income 
Family income shall be determined in a manner, and for such period, and at such periodicity as 
specified by the State.  For purposes of cost sharing determinations, States may use gross income.  
States do not need to use the same income methodology for the purposes of determining eligibility as 
they do for determining premiums and cost sharing.      
  
Ensuring that Premiums and Cost Sharing Do Not Exceed Aggregate Cap 
The State plan must describe how the State will ensure that the aggregate premium and/or cost sharing 
amounts do not exceed 5 percent of such familys income for the monthly or quarterly period.    
  
Enforceability of Premiums and Cost Sharing 
Section 1916A(d) allows States to enforce the payment of premiums (if applicable) and cost sharing for 
certain Medicaid beneficiaries.   
  
  1. Enforceability of Premiums  
For non-exempt individuals with family income above 150 percent of the FPL, States may 
condition Medicaid eligibility upon prepayment of the premium under section 1916A or States 
may terminate eligibility for Medicaid because of failure to pay such a premium; however, such 
termination cannot occur until the failure to pay such premium has continued for a period of 60 
days or more.  A State plan must specify the group or groups of individuals to which the 
prepayment or termination options apply.  A State may also waive payment of a premium in any 
case where it determines that requiring the payment would create an undue hardship.    
 
     2. Enforceability of Cost Sharing  
Under section 1916A, States may permit a provider participating under the State plan to require, 
as a condition for the provision of covered care, items, or services to a Medicaid-eligible 
individual, the individual to pay the cost sharing amount authorized under section 1916A.  A 
State electing this option must indicate so in its State plan.  The provider is not prohibited by this 
authority from choosing to reduce or waive cost sharing on a case-by-case basis.    
 
    
Waivers 
Sections 1916A(b)(6)(B) and 1916A(b)(6)(C) clarify that section 1916A does not affect any waiver 
granted before the enactment of the DRA, with regard to the implementation of premiums and cost 
sharing, and that nothing in the section affects the Secretarys waiver authority.    
  
Effective Date 
This provision became effective March 31, 2006.  States must submit a State plan amendment (SPA) to 
implement cost sharing.  We have attached a SPA template for your convenience.  SPA submissions 
should be submitted electronically in a pdf file format.  
  
Special Rules for Cost Sharing for Prescription Drugs under Section 1916A(c) (Effective March 
31, 2006) 
Section 6042 of the DRA adds a new section 1916A(c), Special Rules for Cost Sharing for Prescription 
Drugs, which provides States with additional options for establishing cost sharing requirements for 
drugs to encourage the use of preferred drugs.  Preferred drugs are those identified by the State as the 
least (or less) costly effective prescription drugs within a class of drugs (as defined by the State), with 
respect to one or more groups of beneficiaries specified by the State.  
  
Under this provision, States may require increased cost sharing for drugs that are not preferred drugs 
within a class and waive or reduce the cost sharing otherwise applicable for preferred drugs within such 
class.  States shall not apply any cost sharing for preferred drugs for  
individuals for whom cost sharing may not otherwise be imposed under the rules of section 
1916A(b)(3)(B).  (See page 2  Exempt Populations  Premiums for the list of affected groups.)   
States have the flexibility to include or exclude specified drugs or classes of drugs from this provision.   
   
Cost Sharing Limits  
   In the case of individuals whose family income does not exceed 150 percent of the FPL, the 
amount of cost sharing for non-preferred drugs may not exceed the amount of nominal cost sharing 
as defined in section 1916.  
 
  
   In the case of individuals whose family income exceeds 150 percent of the FPL, the amount of 
cost sharing for non-preferred drugs may not exceed 20 percent of the cost (Medicaid payment 
amount) of the drug.  
 
  
   In the case of an individual who is otherwise not subject to cost sharing as a result of section 
1916A(b)(3)(B), any cost sharing for non-preferred drugs may not exceed a nominal amount as 
defined in section 1916.  
    Any cost sharing applied to an individual for prescription drugs would be subject to the 5 percent 
aggregate cap (described on page 2) as applied on a monthly or quarterly basis.  
 
Physician Overrides   
Cost sharing must be limited to the levels applicable to a preferred drug when the prescribing physician 
determines that the preferred drug for treatment of the same condition either would not be as effective 
for the individual as a non-preferred drug, would have adverse effects for the individual, or both.  The 
State is responsible for developing and establishing the necessary process to implement this provision.  
These overrides must meet the State criteria for prior authorization and be approved through that 
process before preferred drug cost sharing can be applied to the non-preferred drug.  
  
Enforcement  
In accordance with section 1916A(d), States may permit pharmacy providers to require the receipt of 
the cost sharing payment from the beneficiary before filling a prescription.  
  
Effect on Providers  
State payments to providers must be reduced by the amount of the beneficiary cost-sharing obligations, 
regardless of whether the provider successfully collects the cost-sharing.  States have the ability to 
increase total State plan rates to providers to maintain the same level of State payments when cost 
sharing is introduced.    
  
Availability of Information  
States should make available to the public and to beneficiaries the schedule of the cost-sharing/premium 
amounts for specific items and the various eligibility groups, (including pharmacy, if the State elects to 
impose differential cost sharing for preferred and non-preferred drugs).  
  
Effective Date  
This provision became effective March 31, 2006.  States must submit a SPA to implement cost sharing.  
We have attached a SPA template for your convenience.  SPA submissions should be submitted 
electronically in a pdf file format.  
  
State Plan Preprints  
States may use the attached State plan preprint pages to adopt any of these provisions.  Please submit 
your SPA electronically in a pdf file format to your regional office to implement these provisions.  It 
should be noted that States using a prior authorization program for preferred drug lists without tiered 
cost sharing are not required to change their programs to comply with this provision.  
  
The Centers for Medicare & Medicaid Services contact for this new legislation is Jean Sheil, Director, 
Family and Childrens Health Program Group, who may be reached at  
410-786-5647.    
  
Sincerely,  
  
/s/  
  
Dennis G. Smith  
Director  
   Enclosures  
  
cc:  
  
CMS Regional Administrators  
  
CMS Associate Regional Administrators  
   for Medicaid and State Operations  
  
Martha Roherty  
Director, Health Policy Unit  
American Public Human Services Association  
  
Joy Wilson  
Director, Health Committee  
National Conference of State Legislatures  
  
Matt Salo  
Director of Health Legislation  
National Governors Association  
  
Jacalyn Bryan Carden  
Director of  Policy and Programs  
Association of State and Territorial Health Officials  
  
Christie Raniszweski Herrera  
Director, Health and Human Services Task Force  
American Legislative Exchange Council  
  
Lynne Flynn  
Director for Health Policy  
Council of State Governments