Medicare Managed Care Manual 
Chapter 10 - MA Organization Compliance with State Law 
and Preemption by Federal Law 
 
 
Table of Contents 
(Rev. 103, 11-04-11) 
 
 
Transmittals for Chapter 10 
 
10  Introduction 
20  State Licensure Requirement 
20.1  General 
20.2  State Licensure of Marketing Representatives 
30  Federal Preemption of State Law 
30.1  General 
30.2  Extent of Federal Preemption with Respect to State Regulation of MA 
Plans 
40 - Medicare Secondary Payer (MSP) Rules 
50 - State Premium Taxes or Other Fees Imposed on Federal Payment to MA 
Organizations 
60 - Examples of Federal Preemption Scenarios  10 - Introduction 
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11) 
 
The contents of this chapter are governed by 1856(b)(3) of the Social Security Act (the 
Act) as amended by the Medicare Modernization Act of 2003 (MMA) and by regulations 
set forth in 42 CFR 422, Subpart I.  This chapter reflects CMS' current interpretation of 
the provisions pertaining to Federal preemption of State law and is subject to change. 
 
20 - State Licensure Requirement 
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11) 
 
42 CFR 422.400 
 
20.1 - General 
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11) 
 
Each Medicare Advantage (MA) organization must be licensed under State law as a risk-
bearing entity.  As provided in section 20 of chapter 1 of this manual, this means the 
entity is licensed or otherwise authorized by the State to assume risk for offering health 
insurance or health benefits coverage, such that the entity is authorized to accept prepaid 
capitation for providing, arranging, or paying for comprehensive health services under an 
MA contract. 
 
For further discussion of MA State licensure requirements, refer to section 20.1 of 
Chapter 11 of this manual (MA Application Procedures and Contract Requirements). 
 
20.2 - State Licensure of Marketing Representatives 
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11) 
 
As described in section 120.1 of chapter 3 of this manual (Medicare Marketing 
Guidelines), if there are State certification/licensure requirements for marketing 
representatives, MA organizations must limit their employment of marketing 
representatives to only those who meet such requirements. 
 
30 - Federal Preemption of State Law 
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11) 
 
42 CFR 422.402 
 
30.1 - General 
(Rev. 103, Issued: 11-04-11, Effective: 11-04-11, Implementation, 11-04-11) 
 
The scope of Federal preemption is broad. MA standards set forth in 42 CFR 422 
supersede any State laws, regulations, contract requirements, or other standards that 
would otherwise apply to MA plans, with the exception of licensing laws and regulations  and laws and regulations relating to plan solvency.  In other words, unless they pertain to 
licensure and/or solvency, State laws and regulations that regulate health plans do not 
apply to MA plans offered by MA organizations. 
 
State laws and regulations that are not pre-empted because they relate to State 
licensing are limited to State requirements for becoming State licensed, and do not 
extend to any requirement that the State might impose on licensed health plans that, in the 
absence of Federal preemption, must be met as a condition for maintaining a State 
license. Examples of State licensing requirements include filing articles of incorporation 
with the appropriate State Agency, having a particular organizational structure or 
governance (e.g., in some states, being non-profit). 
 
State licensing laws do not extend to rules that govern the activities of health plans on an 
ongoing basis even if compliance with such requirements is a condition for retaining a 
State license. In other words, States may not purport to exempt a law from preemption on 
the grounds that it is a licensure law by imposing requirements not generally associated 
with obtaining a license as a condition of retaining a license. For example, a State 
licensing law may not be written so as to set forth ongoing marketing, quality assurance, 
or network adequacy requirements for MA plans by making such requirements a 
condition of retaining a State license. 
 
30.2 - Extent of Federal Preemption with Respect to State Regulation of 
MA Plans 
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11) 
 
All State standards, including those established through case law, are preempted to the 
extent that they would specifically regulate health plans (including MA plans), with the 
exceptions of State licensing and solvency laws.  Other State health and safety standards, 
or generally applicable standards, that are not specific to health plans are not preempted. 
 
CMS defers to the States on whether an entity meets the requirements to become State 
licensed or whether an entity has adequate financial solvency to be risk bearing. 
However, State licensure requirements cannot impose any condition that CMS does not 
determine to be a licensure requirement.  For example, a State licensure requirement that 
governs whether an organization is fit to serve as a health insurer is acceptable, but a 
requirement that governs how an entity operates its insurance upon receipt of a health 
insurance license is improper. 
 
In general, a valid State licensure requirement is one that determines whether an entity is 
capable of offering health insurance in the State at the time of application.  We 
differentiate between requirements that govern the fitness of an organization to serve as a 
health insurer or risk bearing entity and the requirements that govern the ongoing 
operation of how, where, and to whom it provides benefits. 
 
We have not in the regulations or this chapter set forth specific parameters of what would 
be considered, as there may be legitimate aspects of State licensure that we have not  encountered and could not necessarily anticipate.  We recognize that there still may be 
questions about the extent of allowable State regulations.  We address these specific 
preemption questions in cooperation with States on a case-by-case basis. 
 
40 - Medicare Secondary Payer (MSP) Rules 
(Rev. 103, Issued: 11-04-11, Effective: 11-04-11, Implementation, 11-04-11) 
 
A State cannot take away an MA organizations right under Federal law and the MSP 
regulations to bill, or to authorize providers and suppliers to bill, for the services for 
which Medicare is not the primary payer. The MA organization may exercise the same 
rights to recover from a primary plan, entity, or individual that the Secretary exercises 
under the MSP regulations at 42 CFR Part 411, Subparts B through D. For more 
information on the MSP regulations, refer to section 130 of Chapter 4 of this manual. 
 
50 - State Premium Taxes or Other Fees Imposed on Federal Payment 
to MA Organizations 
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11) 
 
42 CFR 422.404 
 
Our regulations at 42 CFR 422.404 prohibit States from imposing a premium tax, fee, or 
any other charge on: 1) the payment CMS makes to MA organizations (on behalf of MA 
enrollees), 2) payments made by MA enrollees to MA plans, or 3) payments made by a 
third party to a MA plan on a beneficiarys behalf. 
 
60 - Examples of Federal Preemption Scenarios 
(Rev. 101, Issued: 08-19-11, Effective: 08-19-11, Implementation: 08-19-11) 
 
The following table presents example scenarios in which a question of Federal 
preemption is present and answers whether or not Federal law would preempt State law 
in each. 
 
Example Scenario   Preemption by Federal Law? 
An MA organization applies to a State to  No  Federal law does not preempt State 
offer a new MA PPO plan in the State.  The  solvency requirements.  States may decline 
organization offering the proposed PPO  to license an MA plan to operate in a State 
plan indicates that it will offer its plan to  if the State determines that the organization 
Medicare beneficiaries in the entire State.   offering the MA plan does not meet State 
The State denies the license on the basis  solvency requirements.  The State may also 
that the organization lacks the financial  elect to limit the service area for which the 
solvency to serve the entire state.  plan is licensed based on the financial 
resources (i.e., solvency) of the MA 
organization proposing to offer the MA 
plan. 
An MA HMO plan currently being offered  Yes  In this case, Federal law preempts 
in a State seeks to expand its service area  State law. The State has already licensed  from 6 counties to all counties in the State.   the MA organization as a risk-bearing 
The MA organization requests that the  entity, and CMS has comprehensive 
State certify that the scope of its license  network and organizational capacity 
allows it to be offered in the entire State.   standards. An MA plan is only required to 
The State denies the service area expansion  meet Federal standards. States may not 
request on the basis that the plan has not  review or impose State standards for 
demonstrated to the State that it has  network or organizational capacity. 
adequate network and organizational 
systems capacity to serve the entire State. 
An MA organization that is currently  No  A State may require that an MA plan 
offering an MA HMO plan requests  offered in the State operate within the 
certification from a State to offer an MA  scope of its license. In this case the MA 
private fee-for-service (PFFS) plan to serve  organization seeking to offer an MA PFFS 
Medicare beneficiaries in the entire State  plan in the State must meet the licensure 
under its existing State license.  The State  requirements for an indemnity insurance 
denies the request on the basis that the  product. 
PFFS product must be licensed as an   
indemnity insurance product and cannot be  NOTE:  The scope of State licensure 
offered by the MA organization under a  requirements is restricted by Federal 
State HMO license.  preemption authority as described in 
section 30 of this chapter. 
An MA HMO plan currently being offered  No and Yes  The States solvency 
in a State is out of compliance with the  standards are applied to determine 
States licensure solvency standards, has a  licensure by a State.  CMS has a 
negative net worth (liabilities exceed  requirement, separate from State licensure 
assets), and the State is allowing the plan to  requirements, that plans must demonstrate 
continue to operate under its license and a  that the MA organization has a fiscally 
corrective action plan.  sound operation which, at the very least, 
maintains a positive net worth (total assets 
exceed total liabilities).  In this example, 
any CMS action would be based on 
contract compliance and would not be 
licensure related. 
  Transmittals Issued for this Chapter 
 
Rev #  Issue Date  Subject  Impl Date  CR# 
R103MCM 11/04/2011  Medicare Managed Care Manual Chapter 10,  11/04/2011 N/A 
MA Organization Compliance with State 
Law and Preemption by Federal Law 
R101MCM 08/19/2011  Chapter 10, MA Organization Compliance  08/19/2011 N/A 
with State Law and Preemption by Federal 
Law 
R76MCM  10/28/2005  Initial Publication of Chapter 10 - MA  N/A  N/A 
Organization Compliance with State Law and 
Preemption by Federal law 
R55MCM  05/21/2004  Retirement of Chapter 10  N/A  N/A 
R07MCM  03/20/2002  Initial Issuance of Chapter  N/A  N/A 
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