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, CHIP and Survey & Certification 
                   
SMDL# 11-004 
                   ARRA# 9   
 
 
May 18, 2011 
Re: Use of administrative funds to support 
health information exchange as part of the 
Medicaid EHR Incentive Program  
 
Dear State Medicaid Director:  
 
This letter provides further guidance to State Medicaid agencies regarding the implementation of 
section 4201 of the American Recovery and Reinvestment Act of 2009 (the Recovery Act), Pub. 
L. 111-5 and regulations at 42 Code of Federal Regulations (CFR) Part 495, Subpart D.  Division 
B, Title IV, Subtitles A and B of the Recovery Act established the Medicare and Medicaid 
Electronic Health Record (EHR) Incentive Programs, as one component of the Health 
Information Technology for Economic and Clinical Health (HITECH) Act. HITECH, as well as 
our final regulation, governs incentive payments to eligible professionals (EPs) and eligible 
hospitals to promote the adoption and meaningful use of certified EHR technology.   
 
The Recovery Act provides 100 percent Federal financial participation (FFP) to States for 
incentive payments to eligible Medicaid providers to adopt, implement, upgrade, and 
meaningfully use certified EHR technology through 2021, and 90 percent FFP for State 
administrative expenses related to the program.  These administrative matching funds must be 
for activities that are proper and efficient (as defined by OMB Circular A-87) for the 
administration of the Medicaid EHR Incentive Program.  
 
The Centers for Medicare & Medicaid Services (CMS) issued a State Medicaid Director (SMD) 
letter on August 17, 2010 that provided guidance to States on allowable expenses for activities 
supporting the administration of the Medicaid EHR Incentive Program.  The letter outlined CMS 
expectations of activities and potential eligible costs for the 90 percent FFP for administration 
and oversight of the EHR incentive payments.  In addition, that letter provided initial direction 
regarding State Medicaid agencies role in promoting EHR adoption and health information 
exchanges (HIE). This letter provides more detailed guidance on the State expenditures related to 
the development and sustaining of HIE(s) that may be eligible for the 90 percent FFP.   
 
Background 
As defined in our July 28, 2010 final regulations, Stage 1 of meaningful use includes several 
objectives related to the electronic exchange of health information. Anticipating that State 
Medicaid agencies would have a role in promoting EHR adoption and HIE, CMS identified ten  Page 2  State Medicaid Directors Letter 
 
Guiding Principles for the 90 percent FFP funds for those activities in the August 2010 SMD 
letter. Please refer to that letter and Enclosure C of that letter for more detail, as this SMD letter 
focuses on a subset of those principles. States are reminded that the first core principle applied to 
use of the 90 percent HITECH FFP is that the activities can be directly correlated to the 
Medicaid EHR Incentive Program.  
 
Specifically, this SMD letter provides further detail on our criteria that health information 
exchange promotion activities: 1) have costs that are divided equitably across other payers (e.g., 
private/commercial) based on the fair share principle (defined in OMB Circular A-87 as in 
accordance with benefits received) and are appropriately allocated, 2) leverage efficiencies with 
other Federal HIE funding, and 3) are developmental and time-limited in nature. This letter also 
reiterates the principle that the 90 percent FFP would not be available for on-going HIE costs 
where these services are fully operational. 
 
As we have stated previously, HIEs are a necessary ingredient to meaningful use of EHRs and to 
the success of delivery system reform efforts.  This letter outlines the circumstances in which we 
believe States can use enhanced administrative FFP to join or spearhead efforts to build this 
needed infrastructure.   
 
Other Payer Participation/Fair Share Principle 
 
The August 2010 SMD letter noted that States should consider Medicaids contribution to HIE in 
view of contributions by other payers.  Funding from Medicaid should be part of an overall 
financial plan that leverages multiple funding sources to develop and maintain HIEs between 
hospitals, health systems and individual practices.  
 
Various Federal and State funding, as well as contributions by commercial payers, large 
employers, integrated delivery networks, associated entities such as laboratories, registries and 
provider user fees may be necessary to share the costs of building and maintaining HIEs. There 
are several rationales for entering into HIE infrastructure development activities via 
public/private partnerships. First, the efficiencies and quality improvements associated with 
electronic health information exchange accrue to all participants; e.g., other payers, integrated 
delivery networks, Accountable Care Organizations, medical and health home networks, hospital 
systems, etc. Likewise, the governance and risks associated with developing HIE infrastructure, 
such as seeking provider buy-in and determining effective pricing strategies, should not be borne 
solely (or predominately) by a single payer. Lastly, each States HIE assets and challenges are 
different, and HIE strategies need to be developed with broad stakeholder involvement to ensure 
that the marketplace is balanced to support both the public and private health systems business 
cases. 
 
States should leverage their Medicaid investment with investments by a sufficient number of 
other payers and stakeholders to establish a sustainable business model. States have asked CMS 
to determine the degree of other payer contribution that is needed to meet this principle for 
approval of administrative funding. While Medicaid may serve as a catalyst to establish an HIE 
infrastructure, additional partners must be drawn into the marketplace based upon their share of 
the allocated costs. Medicaid funding cannot be the sole funding source for building,  Page 3  State Medicaid Directors Letter 
 
implementing or operating HIE entities and/or HIE services. CMS will consult with the Office of 
the National Coordinator (ONC) for Health Information Technology, which has awarded HIE 
grants in all States and Territories to determine, on a case-by-case basis, the soundness of the 
Medicaid agencys HIE funding proposal. States should focus on obtaining proportional 
investments based upon market share and expected volume of transactions, as described in the 
Cost Allocation section of this letter. Medicaid funding must leverage and support the ONC 
grant funding; therefore CMS expects proposals to reflect aligned benchmarks, approaches and 
performance goals. CMS will examine HIT Implementation Advanced Planning Documents 
(HIT IAPDs) to ensure that States adopt HIE approaches that maximize return on investment and 
minimize project risk, including review of States benchmarks, approaches, and performance 
measures related to State IT systems and meaningful use progress. This approach is consistent 
with the process by which CMS will work with States to ensure they meet the seven standards 
and conditions for receiving enhanced FFP for Medicaid technology investments.  
 
CMS reminds States that the Medical Loss Ratio interim final rule published on  
December 1, 2010, makes references, at 45 CFR 158.151, to health information technology 
expenses that a private health insurance issuer may include in the share of the premium that must 
be devoted to health care services and quality improvement, such as those that provide the 
technological infrastructure to enhance current quality improvement or make new quality 
improvement initiatives possible, ...and that are designed for use by health plans, health care 
providers, or enrollees for the electronic creation, maintenance, access, or exchange of health 
information, as well as those consistent with the Medicare and/or Medicaid meaningful use 
requirements.... States may find it helpful when meeting with health plan stakeholders to 
emphasize that if they provide funding for health information exchange activities, such expense 
may be considered an allowable quality improving activity that may be reported as part of the 
80-85% of premium revenue that must be devoted to clinical services and quality improvement if 
such expenses satisfy the criteria set forth in the Medical Loss Ratio interim final rule. 
 
In order to confirm that other payers and providers will contribute an appropriate share of costs, 
States will be required to seek legal agreements (i.e., Memoranda of Understanding) with their 
HIE partners. These agreements should clearly outline the terms (scope, budget and timing) of 
each partys contributions in the near- and long-term functioning of the HIE. States should 
anticipate scenarios where additional payers and providers invest as the HIE(s) mature. 
Therefore, States should describe to CMS how early investor benefits will be handled, e.g., 
offering lower costs once others join and costs are allocated among a greater number of 
participants. The agreements between State Medicaid Agencies and other payers and providers 
must be submitted to CMS for review along with the States HIT IAPD. While this degree of 
planning and business modeling may require intensive public/private negotiations within each 
State, CMS believes it is necessary and will not approve 90/10 funding for HIE infrastructure 
costs (such as those cited in the August 2010 SMD letter) without assurances that other payers 
and providers will bear an appropriate share of the costs, risks and governance. These 
agreements are just one indicator of other payers commitment to HIE and as such, changes to 
these agreements will be reviewed by CMS along with the other performance metrics referenced 
above on an annual basis.  
  Page 4  State Medicaid Directors Letter 
 
States may fund the non-federal share consistent with federal rules and regulations at section 
1903(w)(6)(A)  and 42 CFR 433.51.  CMS will review the non-federal share funding sources on 
an individual basis using information provided by the State and gathered by CMS staff.  Please 
be mindful that all sources of the non-Federal share and any fees, taxes, or donations must meet 
the requirements of section 1903(w) of the Social Security Act, implementing regulations, CMS 
guidance, and other applicable laws, rules, and regulations.  
 
Cost Allocation 
 
Cost allocation principles, as defined by OMB Circular A-87, should be utilized where entities 
other than the Medicaid agency stand to benefit in the results of the activity. In determining 
Medicaids share of the costs towards building HIE, CMS will consider different allocation 
approaches depending upon whether the State is requesting Medicaid Management Information 
System (MMIS) or HITECH administrative funding, as follows:  
 
  When the HIE functions directly relate to MITA business services and are necessary to 
enable them, and/or there are interfaces to the MMIS from external HIE entities, States 
may seek MMIS matching funds for the interfaces or connections between the MMIS and 
the HIE. These States should calculate the Medicaid-eligible percentage of their total 
covered population; or the percentage of total healthcare expenditures within the State 
that are Medicaid expenditures. That percentage will be Medicaids allocated share.  
  If the State Medicaid agency is seeking HITECH funds directly tied to the Medicaid EHR 
Incentive Program, States may calculate the percentage of all providers the State projects 
will receive Medicaid EHR incentives over the next five years from the onset of proposed 
HIE activities to the States total number of providers. For example, if there are 10,000 
providers in the State, and the State projects that 500 of them will receive Medicaid EHR 
incentives within five years, then Medicaids allocated share would be five percent. 
States environmental scans (As-Is HIT assessments) should support these projections. 
  If the activity to be funded does not meet the criteria of this letter, or the August 2010 
letter, then States wishing to request the 50 percent match for general program 
administration must provide justification as to how the HIE activity supports the 
Medicaid enterprise, and if approved, should calculate the Medicaid allocation using one 
of the MMIS cost allocation formulas described above.  
 
Statewide Efficiencies 
 
CMS recognizes that there are several types of HIE models emerging in the U.S. and that not all 
involve statewide services or governance, and will review each proposal individually. However, 
CMS encourages a States HIE model to include the following characteristics:   
  Deploys a statewide layer of HIE services or orchestrate existing sub-state nodes; 
  Plays a significant role in the collection of Medicaid providers meaningful use 
attestations and clinical quality measure data;  
  Is directly focused on enabling providers to meet meaningful use requirements, such as 
lab results and clinical summary exchange; 
  Provides immediate value to providers through affordable services that help them meet 
meaningful use requirements and coordinate and improve patient care;  Page 5  State Medicaid Directors Letter 
 
  Is governed by state-level policies, accreditation processes and exchange standards that 
are aligned with Federal policy; and 
  Is actively engaged with State government.  
 
State Medicaid HIT Plans (SMHPs) and IAPDs should clearly describe the rationale for the HIE 
model selected from the perspective of benefits and risks to the Medicaid agency. If a proposed 
model does not include the characteristics above, the State should provide justification of why an 
alternate model is more appropriate given unique circumstances in that State. ONC will be a full 
partner with CMS in the evaluation of State Medicaid agencies HIE funding proposals for 
consistency and alignment with the ONC funded cooperative agreements, and Nationwide Health 
Information Network (NwHIN) initiatives including Direct and Exchange. The funding proposal 
should also detail how the costs will transition from infrastructure build to operations and 
maintenance.  
 
Sustaining Operational HIE 
 
One of the Guiding Principles in the August 2010 letter was that HITECH funds are meant to 
support time-limited activities. In the context of HIE, examples include the development or 
expansion of provider directories, master patient indexes and laboratory interfaces. Once 
established and functional- and based upon the degree of provider enrollment and transaction 
volume, the funding perspective should shift from design and development to supporting 
ongoing operations and maintenance costs. There are some States where operational HIEs 
already exists; these States may seek Federal matching funds to sustain ongoing operational 
costs. Per our August 2010 SMD letter, under that scenario, CMS believes that the most 
appropriate means to support HIE is through adjustments to provider reimbursement 
methodologies, which are matched at a States Federal medical assistance percentage (FMAP), 
and/or through the 50 percent match rate for general program administration if the HIE is related 
to administering Medicaid. States wishing to pursue HIE maintenance through provider 
reimbursement are encouraged to submit a State Plan amendment to their CMS regional office.  
 
States are encouraged to consult with CMS in advance of formal SMHP and IAPD updated 
submissions to obtain technical assistance regarding the funding options and boundaries outlined 
in this SMD letter. States should reach out to their CMS regional offices Medicaid HIT staff 
lead as the initial point of contact. We believe that by taking a collaborative and informed 
approach, Federal and State investments can be carefully and measurably directed to develop and 
support HIE. Whether HIE  is employed as part of meaningful use of EHRs, for enhancing care 
coordination and medical home strategies, or as enablers of new provider payment models, HIE 
is an essential tool in improving individual and population health and reducing unnecessary 
costs.  
 
This letter provides three additional parameters to an existing collection of information that had 
been approved by OMB under control number 0938-1088 (CMS-10292). CMS is seeking OMB 
approval of those parameters which include the voluntary submission of information concerning 
the HIE business and sustainability model, HIE-specific performance metrics, and other payer 
contributions to HIE infrastructure build. To initiate the approval process, the 60-day notice  Page 6  State Medicaid Directors Letter 
 
seeking public comment will be placed on public display on May 17, 2011 and will publish in 
the Federal Register on May 18, 2011. 
 
For further information or clarification on this State Medicaid Director letter, please contact 
Mr. Rick Friedman at 410-786-4451, or Richard.Friedman@cms.hhs.gov. 
 
          Sincerely, 
 
          /s/ 
 
          Cindy Mann 
          Director 
 
 
 
cc:  
CMS Regional Administrators  
 
CMS Associate Regional Administrators  
Division of Medicaid and Childrens Health  
 
Matt Salo 
Executive Director 
National Association of Medicaid Directors  
 
Director of Health Legislation  
National Governors Association  
 
Rick Fenton  
Acting Director  
Health Services Division  
American Public Human Services Association  
 
Debra Miller  
Director for Health Policy  
Council of State Governments  
 
Joy Wilson  
Director, Health Committee  
National Conference of State Legislatures 
 
Christine Evans, M.P.H.  
Director, Government Relations  
Association of State and Territorial Health Officials  
 
 
  Page 7  State Medicaid Directors Letter 
 
Alan R. Weil, J.D., M.P.P.  
Executive Director  
National Academy for State Health Policy 
 
Farzad Mostashari, M.D. 
National Coordinator for Health IT 
Office of the National Coordinator for Health IT