29748 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 433, 447, and 457 

[CMS–2258–FC] 

RIN 0938–A057 

Medicaid Program; Cost Limit for 

Providers Operated by Units of 

Government and Provisions To Ensure 

the Integrity of Federal-State Financial 

Partnership 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Final rule with comment period. 

SUMMARY: This regulation clarifies that 

entities involved in the financing of the 

non-Federal share of Medicaid 

payments must be a unit of government; 

clarifies the documentation required to 

support a Medicaid certified public 

expenditure; limits Medicaid 

reimbursement for health care providers 

that are operated by units of government 

to an amount that does not exceed the 

health care provider’s cost of providing 

services to Medicaid individuals; 

requires all health care providers to 

receive and retain the full amount of 

total computable payments for services 

furnished under the approved Medicaid 

State plan; and makes conforming 

changes to provisions governing the 

State Child Health Insurance Program 

(SCHIP) to make the same requirements 

applicable, with the exception of the 

cost limit on reimbursement. 

The Medicaid cost limit provision of 

this regulation does not apply to: Standalone SCHIP program payments made to 

governmentally-operated health care 

providers; Indian Health Service (IHS) 

facilities and tribal 638 facilities that are 

paid at the all-inclusive IHS rate; 

Medicaid Managed Care Organizations 

(MCOs), Prepaid Inpatient Health Plans 

(PIHPs), and Prepaid Ambulatory Health 

Plans (PAHPs); Federally Qualified 

Health Centers (FQHCs) and Rural 

Health Clinics (RHCs). Moreover, 

disproportionate share hospital (DSH) 

payments and payments authorized 

under Section 701(d) and Section 705 of 

the Benefits Improvement Protection 

Act of 2000 are not subject to the newly 

established Medicaid cost limit for 

governmentally-operated health care 

providers. 

Except as noted above, all Medicaid 

payments and SCHIP payments made 

under the authority of the State plan 

and under waiver and demonstration 

authorities, as well as associated State 

Medicaid and SCHIP financing 

arrangements, are subject to all 

provisions of this regulation. Finally, 

this regulation solicits comments from 

the public on issues related to the 

definition of the Unit of Government. 

DATES: Effective Dates: This regulation 

is effective on July 30, 2007. 

Comment Date: Comments only on 

issues related to Unit of Government 

Definition (§ 433.50) will be considered 

if we receive them at one of the 

addresses provided below, no later than 

5 p.m. on July 13, 2007. 

ADDRESSES: In commenting, please refer 

to file code CMS–2258–FC. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

You may submit comments in one of 

three ways (no duplicates, please): 

1. Electronically. You may submit 

electronic comments on specific issues 

in this regulation to http:// 

www.cms.hhs.gov/eRulemaking. Click 

on the link ‘‘Submit electronic 

comments on CMS regulations with an 

open comment period.’’ (Attachments 

should be in Microsoft Word, 

WordPerfect, or Excel; however, we 

prefer Microsoft Word.) 

2. By mail. You may mail written 

comments (one original and two copies) 

to the following address ONLY: Centers 

for Medicare & Medicaid Services, 

Department of Health and Human 

Services, Attention: CMS–2258–FC, P.O. 

Box 8014, Baltimore, MD 21244–8014. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. By express or overnight mail. You 

may send written comments (one 

original and two copies) to the following 

address ONLY: Centers for Medicare & 

Medicaid Services, Department of 

Health and Human Services, Attention: 

CMS–2258–FC, Mail Stop C4–26–05, 

7500 Security Boulevard, Baltimore, MD 

21244–1850. 

4. By hand or courier. If you prefer, 

you may deliver (by hand or courier) 

your written comments (one original 

and two copies) before the close of the 

comment period to one of the following 

addresses. If you intend to deliver your 

comments to the Baltimore address, 

please call telephone number (410) 786– 

7195 in advance to schedule your 

arrival with one of our staff members. 

Room 445–G, Hubert H. Humphrey 

Building, 200 Independence Avenue, 

SW., Washington, DC 20201; or 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

(Because access to the interior of the 

HHH Building is not readily available to 

persons without Federal Government 

identification, commenters are 

encouraged to leave their comments in 

the CMS drop slots located in the main 

lobby of the building. A stamp-in clock 

is available for persons wishing to retain 

a proof of filing by stamping in and 

retaining an extra copy of the comments 

being filed.) 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section. 

FOR FURTHER INFORMATION CONTACT: 

Aaron Blight, (410) 786–9560. 

SUPPLEMENTARY INFORMATION: 

Submitting Comments: We welcome 

comments from the public only on 

issues related to Unit of Government 

Definition (§ 433.50). You can assist us 

by referencing the file code CMS–2258– 

FC and the specific ‘‘issue identifier’’ 

that precedes the section on which you 

choose to comment. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. We post all comments 

received before the close of the 

comment period on the following Web 

site as soon as possible after they have 

been received: http://www.cms.hhs.gov/ 

eRulemaking. Click on the link 

‘‘Electronic Comments on CMS 

Regulations’’ on that Web site to view 

public comments. 

Comments received timely will also 

be available for public inspection as 

they are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 8:30 

a.m. to 4 p.m. To schedule an 

appointment to view public comments, 

phone 1–800–743–3951. 

This Federal Register document is 

also available from the Federal Register 

online database through Government 

Printing Office Access a service of the 

U.S. Government Printing Office. The 

Web site address is: http:// 

www.access.gpo.gov/nara/index.html. 

I. Background 

[If you choose to comment only on 

issues related to Unit of Government 

Definition (§ 433.50) in this section, 

please include the caption 

‘‘Background’’ at the beginning of your 

comments.] 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29749 

The Medicaid program is a 

cooperative Federal-State program 

established in 1965 for the purpose of 

providing Federal financial 

participation (FFP) to States that choose 

to reimburse certain costs of medical 

treatment for needy persons. It is 

authorized under title XIX of the Social 

Security Act (the Act), and is 

administered by each State in 

accordance with an approved Medicaid 

State plan. States have considerable 

flexibility in designing their programs, 

but must comply with Federal 

requirements specified in the Medicaid 

statute, regulations, and program 

guidance. 

FFP is available under section 

1903(a)(1) of the Act only when there is 

a corresponding State expenditure for a 

covered Medicaid service to a Medicaid 

recipient. Federal payment is based on 

statutorily-defined percentages of total 

computable State expenditures for 

medical assistance provided to 

recipients under the approved Medicaid 

State plan, and of State expenditures 

related to the cost of administering the 

Medicaid State plan. CMS has the 

responsibility to ensure that Medicaid 

payment and financing arrangements 

comply with statutory intent. 

Sections 1902(a)(2), 1903(a) and 

1905(b) of the Act require States to share 

in the cost of medical assistance and in 

the cost of administering the State plan. 

Under section 1905(b) of the Act, the 

Federal medical assistance percentage 

(FMAP) is defined as ‘‘100 per centum 

less the State percentage,’’ and section 

1903(a) of the Act requires Federal 

reimbursement to the State of the FMAP 

of expenditures for medical assistance 

under the plan (and 50 percent of 

expenditures necessary for the proper 

and efficient administration of the plan). 

Section 1902(a)(2) of the Act and 

implementing regulations at 42 CFR 

433.50(a)(1) require States to share in 

the cost of medical assistance 

expenditures but permit the State to 

delegate some responsibility for the 

non-Federal share of medical assistance 

expenditures to local sources under 

some circumstances. 

Under Pub. L. 102–234, which 

inserted significant restrictions on 

States’ use of provider related taxes and 

donations at section 1903(w) of the Act, 

the Congress made clear that 

participation by local sources was 

limited to: (1) Permissible taxes or 

donations and (2) intergovernmental 

transfers (IGTs) and certified public 

expenditures (CPEs) from units of 

government. Specifically, units of 

government were permitted to 

participate in the funding of the nonFederal share of Medicaid payments 

through an exemption from provider tax 

or donation restrictions at section 

1903(w)(6)(A) of the Act that reads: 

Notwithstanding the provisions of this 

subsection, the Secretary may not restrict 

States’ use of funds where such funds are 

derived from State or local taxes (or funds 

appropriated to State university teaching 

hospitals) transferred from or certified by 

units of government within a State as the 

non-Federal share of expenditures under this 

title, regardless of whether the unit of 

government is also a health care provider, 

except as provided in section 1902(a)(2), 

unless the transferred funds are derived by 

the unit of government from donations or 

taxes that would not otherwise be recognized 

as the non-Federal share under this section. 

Subsequent regulations implementing 

Pub. L. 102–234 give effect to this 

statutory language. Amendments made 

to the regulations at 42 CFR part 433, at 

47 FR 55119 (November 24, 1992) 

explained: 

Funds transferred from another unit of 

State or local government which are not 

restricted by the statute are not considered a 

provider-related donation or health carerelated tax. Consequently, until the Secretary 

adopts regulations changing the treatment of 

intergovernmental transfer, States may 

continue to use, as the State share of medical 

assistance expenditures, transferred or 

certified funds derived from any 

governmental source (other than 

impermissible taxes or donations derived at 

various parts of the State government or at 

the local level). 

The above statutory and regulatory 

authorities clearly specify that in order 

for an intergovernmental transfer (IGT) 

or certified public expenditure (CPE) 

from a health care provider or other 

entity to be exempt from analysis as a 

provider-related tax or donation, it must 

be from a unit of State or local 

government. Section 1903(w)(7)(G) of 

the Act identifies the four types of local 

entities that, in addition to the State, are 

considered a unit of government: A city, 

a county, a special purpose district, or 

other governmental units in the State. 

The provisions of this final regulation 

conform our regulations to the 

aforementioned statutory language and 

further define the characteristics of a 

unit of government for purposes of 

Medicaid financing. 

II. Provisions of the Proposed Rule 

In the January 18, 2007 proposed rule, 

we proposed to (1) clarify that only 

units of government are able to 

participate in the financing of the nonFederal share of Medicaid expenditures; 

(2) establish minimum requirements for 

documenting Medicaid cost when using 

a CPE; (3) limit health care providers 

operated by units of government to 

Medicaid reimbursement that does not 

exceed the cost of providing covered 

services to eligible Medicaid recipients; 

(4) explicitly require that all health care 

providers receive and retain the total 

computable amount of their Medicaid 

payments; and (5) make conforming 

changes to the SCHIP regulations to 

make the same requirements applicable, 

with the exception of the cost limit on 

reimbursement. 

We proposed that the Medicaid cost 

limit provision of this regulation would 

apply to Medicaid payments to all 

governmentally-operated health care 

providers of Medicaid services, except 

Medicaid payments to governmentallyoperated managed care organizations. 

We proposed that stand-alone SCHIP 

program payments made to 

governmentally-operated health care 

providers would not be subject to the 

Medicaid cost limit provision of this 

regulation. Except as noted above, we 

proposed that all Medicaid and SCHIP 

payments made to governmentallyoperated providers under the authority 

of the State plan and under waiver and 

demonstration authorities would be 

subject to all provisions of the proposed 

regulation. 

Specifically, under the proposed 

regulation, we provided the following 

changes to our existing regulations: 

• We proposed to add new language 

to § 433.50 to define a unit of 

government to conform to the 

provisions of section 1903(w)(7)(G) of 

the Act. 

• We proposed to amend the 

provisions of § 433.51 to conform the 

language to the provisions of sections 

1903(w)(6)(A) and 1903(w)(7)(G) of the 

Act and to clarify that the State share of 

Medicaid expenditures may be 

contributed only by units of 

government. 

• We proposed to include provisions 

requiring auditable documentation of 

CPEs that are used as part of the State 

share of claimed expenditures. 

• We proposed that the Secretary 

would issue a form (or forms) that 

would be required for governments 

using a CPE for certain types of 

Medicaid services where we have found 

improper claims. 

• We proposed to limit 

reimbursement for governmentallyoperated health care providers to 

amounts consistent with economy and 

efficiency by establishing a limit of 

reimbursement not to exceed cost. The 

proposed Medicaid cost limit in 

§ 447.206 specified that the Secretary 

will determine a reasonable method for 

identifying allowable Medicaid costs 

that incorporates not only OMB Circular 

A–87 cost principles but also Medicare 

cost principles, as appropriate, and the 


jlentini on PROD1PC65 with RULES3
29750 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

statutory requirements of sections 1902, 

1903, and 1905 of the Act. 

• We proposed a new regulatory 

provision at § 447.207 requiring that all 

health care providers receive and retain 

the full amount of the total computable 

payment provided to them for services 

furnished under the approved State plan 

(or the approved provisions of a waiver 

or demonstration, if applicable). 

• We proposed to eliminate 

§ 447.271(b), as this provision would no 

longer be relevant due to the proposed 

Medicaid cost limit for units of 

government. 

• We proposed a corresponding 

modification to the Medicaid upper 

payment limit (UPL) rules found at 

§ 447.272 for inpatient hospital, nursing 

facility and intermediate care facilities 

for the mentally retarded (ICFs/MR) 

services and § 447.321 for outpatient 

hospital and clinic services, to 

incorporate by reference the proposed 

cost limit for providers operated by 

units of government and to make the 

defined UPL facility groups consistent 

with proposed § 433.50. We proposed 

that formerly established UPL transition 

periods remain unchanged. 

• We proposed to make conforming 

changes to § 457.220 to mirror § 433.51. 

• We proposed to make conforming 

changes to § 457.628 to incorporate 

§ 433.50. 

• We proposed incorporating 

proposed § 447.207 requiring retention 

of payments in § 457.628 because this 

provision applies to SCHIP payments as 

well as Medicaid payments. 

• We developed a form questionnaire 

to collect information necessary to 

determine whether or not individual 

health care providers are units of 

government. 

III. Analysis of and Responses to Public 

Comments 

[If you choose to comment only on 

issues related to Unit of Government 

Definition (§ 433.50) in this section, 

please include the caption ‘‘Analysis of 

and Responses to Public Comments’’ at 

the beginning of your comments.] 

We received 422 items of timely 

public correspondence, containing over 

1,000 public comments that raised over 

260 individual issues, in response to the 

January 18, 2007 proposed rule (72 FR 

2236 through 2248). The comments 

came from a variety of correspondents, 

including professional associations, 

national and State organizations, 

physicians, hospitals, advocacy groups, 

State Medicaid programs, State and 

local government agencies, and 

members of the Congress. The majority 

of commenters urged us to reconsider 

the proposed criteria for defining a unit 

of government for purposes of Medicaid 

State financing and Medicaid 

reimbursement. The majority of 

commenters also expressed concern 

with the administrative burden and cost 

of properly documenting services to 

Medicaid individuals. The following is 

a summary of the comments received 

and our response to those comments. 

A. Unit of Government Definition 

(§ 433.50) 

1C. Comment: A number of 

commenters asserted that the proposed 

definition of a unit of government, when 

applied to specific health care 

providers, did not produce a definitive 

conclusion as to whether or not the 

health care provider qualifies as a unit 

of government. 

1R. Response: The regulation codifies 

existing statutory criteria for a unit of 

government that can participate in 

financing the non-federal share of 

Medicaid expenditures. This 

codification of existing Federal statutory 

requirements was set forth in an effort 

to assist States in identifying the 

universe of governmentally-operated 

health care providers for this purpose. 

In this final rule, we are providing 

that States must apply the statutory and 

regulatory criteria to each individual 

health care provider to make initial 

determinations of governmental status. 

As we indicated in the proposed rule, 

we have developed a ‘‘Tool to Evaluate 

the Governmental Status of Health Care 

Providers.’’ In response to comments on 

this rule, we have modified that form to 

allow States to indicate their initial 

determination of a health care 

provider’s governmental status. 

We recognize that there is 

considerable variation in organizational 

arrangements and financial 

relationships between health care 

providers and units of government, and 

their treatment under State law. 

Therefore, application of the statutory 

and regulatory criteria to specific health 

care providers will require careful 

evaluation of the circumstances and 

applicable State law. We believe the 

statutory and regulatory criteria provide 

a consistent framework and yet have 

sufficient flexibility to accommodate 

these differences. We see this flexibility 

as essential to ensuring accurate and 

consistent determinations within each 

State. 

Because we recognize that this is a 

complex determination that providers 

and States may rely upon, we agree that 

changes in the determination resulting 

either from a more careful evaluation, or 

from a change in circumstances, should 

be applied prospectively only (in the 

absence of fraud). Thus, to the extent 

that a State had previously applied the 

statutory and regulatory criteria to a 

health care provider’s governmental 

status, in the absence of fraud, CMS 

intends to consider changes to that 

status on a prospective basis and does 

not intend to require retrospective 

changes in treatment of a provider. 

States will be required to maintain 

these determinations on file and will be 

required to submit these forms to CMS 

upon request, in connection with CMS 

review of Medicaid institutional and 

non-institutional reimbursement State 

plan amendments involving 

governmental providers and with 

Medicaid or SCHIP financial 

management reviews. In addition, we 

intend to request, under our general 

authority to require supporting 

documentation for claimed 

expenditures, and the existing 

regulatory authority at 42 CFR § 431.16, 

that States submit a complete list of 

governmentally-operated health care 

providers to the Associate Regional 

Administrator for Medicaid of each 

State’s respective CMS Regional Office 

with the first quarterly expenditure 

report due after 90 days of the effective 

date of the regulation. 

If CMS disagrees with a State’s initial 

determination of governmental status, 

CMS intends to request a timely change 

in the State’s determination prior to 

pursuing any other measures including, 

but not limited to, denial of Medicaid 

reimbursement SPAs and/or 

disallowances of claims for Federal 

financial participation. States can 

appeal such actions through existing 

appeal processes. 

2C. Comment: A number of 

commenters asked CMS to clarify that 

the regulation does not affect the 

transfer of local governmental funding 

for non-provider specific Medicaid 

payments by the State and that the 

regulation allows local governmental 

entities to voluntarily transfer funds for 

the benefit of health care providers in 

their community. 

2R. Response: The Federal statute at 

section 1902(a)(2) of the Act allows 

States to share their fiscal obligation to 

the Medicaid program with local 

governments. Section 1903(w)(6)(A) of 

the Act specifically recognizes the use 

of local tax dollars as a permissible 

source of the non-Federal share of 

Medicaid payments. 

3C. Comment: One commenter 

expressed concern that CMS’s view of 

what a ‘‘unit of government’’ is may 

evolve over time, thus resulting in 

inconsistent application of the 

provisions of the regulation to different 

health care providers. The commenter 

argued that the criteria used to 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29751 

determine what is a ‘‘unit of 

government’’ should be standardized, 

impartial and result in consistent 

outcomes. 

3R. Response: The provisions of the 

regulation were designed to ensure a 

consistent framework to determine 

status as a unit of government. CMS 

recognizes that States play a major role 

in the administration of the Medicaid 

program and that legal and financial 

arrangements between health care 

providers and units of government vary 

on a case by case basis. Therefore, CMS 

has developed standardized regulatory 

criteria, based upon the provisions of 

Federal statute, that States must apply 

on a consistent basis to each health care 

provider within the State to determine 

whether or not the health care provider 

is a unit of government. 

A State’s determination of 

governmental status must be applied in 

two ways, to ensure consistent 

treatment. First, a health care provider, 

determined by a State to be 

governmentally-operated, would be 

eligible to participate in financing the 

non-Federal share of Medicaid 

payments (that is, IGTs and CPEs). 

Second, Medicaid payments to a health 

care provider, determined by a State to 

be governmentally-operated, would be 

limited to the cost of providing services 

to Medicaid individuals. States must 

apply the statutory and regulatory 

criteria regarding governmental status 

consistently to each health care provider 

and the initial State determination of 

governmental status must be consistent. 

In other words, States cannot consider 

a health care provider to be 

governmentally-operated for purposes of 

participation in IGTs or CPEs, but 

consider the health care provider nongovernmentally operated for purposes of 

the Medicaid cost limit. 

4C. Comment: One commenter 

suggested that the determination of 

governmental status of health care 

providers be made by States, not the 

Federal government, to identify which 

health care providers within the State 

may be involved in IGT and CPE and are 

subject to the cost limit. The commenter 

stated that such deference to the States 

would allow them to make these 

determinations up front and ensure the 

continued operation of their Medicaid 

programs without the threat of 

retroactive disallowances. 

4R. Response: We agree that States 

should make the initial determination of 

governmental status by applying the 

statutory and regulatory criteria to each 

individual health care provider. We 

have modified the ‘‘Tool to Evaluate the 

Governmental Status of Health Care 

Providers’’ to allow States to indicate 

their initial determination of a health 

care provider’s governmental status. 

CMS has responsibility to ensure that 

the determinations of governmental 

status made by States are consistent 

with the Federal statutory and 

regulatory criteria. To the extent that a 

State had previously applied the 

statutory and regulatory criteria to a 

health care provider’s governmental 

status, absent fraud, CMS intends to 

consider changes to that status on a 

prospective basis and does not intend to 

require retroactive changes in treatment 

of the provider. If CMS disagrees with 

a State’s initial determination of 

governmental status, CMS intends to 

request a timely change in the State’s 

determination prior to pursuing other 

measures including, but not limited to, 

denial of Medicaid reimbursement SPAs 

and/or disallowances of claims for 

Federal financial participation. States 

can appeal such actions through 

existing appeal processes. 

5C. Comment: Many commenters 

recommended that CMS change the 

proposed definition of unit of 

government to provide deference to 

applicable State or local law. 

5R. Response: Application of State 

law in the determination of a health care 

provider’s governmental status for 

Medicaid purposes must be consistent 

with the terms of the Federal statute and 

regulation. This rule would not limit 

State or local law from recognizing a 

health care provider as a governmental 

entity for other purposes. 

The provisions of the regulation were 

designed to ensure consistent 

application of the Federal statutory 

instructions regarding what constitutes 

a unit of government for purposes of 

Medicaid financing and payment. CMS 

recognizes that States play a major role 

in the administration of the Medicaid 

program and that legal and financial 

arrangements between health care 

providers and units of government vary 

on a case by case basis. Therefore, CMS 

has developed standardized and 

impartial regulatory criteria based upon 

the provisions of Federal statute that 

States must apply on a consistent basis 

to each health care provider within the 

State. 

6C. Comment: A number of 

commenters suggested that CMS allow 

health care providers currently involved 

in financing the non-Federal share via 

IGT or CPE to be grandfathered into the 

regulation’s definition of ‘‘unit of 

government,’’ thereby permitting these 

health care providers to continue to 

finance the non-Federal share after the 

effective date of the provisions of the 

regulation. 

6R. Response: CMS does not view 

grandfathering to be appropriate for 

several reasons. First, section 1903(w) 

contains clear statutory restrictions on 

States’ receipt of funds from nongovernmental health care providers to 

fund Medicaid payments. Indeed, there 

are severe penalties imposed for such 

practices. Second, There is nothing in 

the Medicaid statute that permits nongovernmental units to finance the nonfederal share of Medicaid payments, and 

severe statutory penalties. Second, we 

believe it is important to maintain 

consistent and equivalent treatment of 

all States and providers under a uniform 

regulatory framework. 

7C. Comment: Several commenters 

requested that CMS clarify that the 

definition of ‘‘unit of government’’ is for 

purposes outlined in the provisions of 

this regulation only and that CMS does 

not intend to place restrictions on 

public status elsewhere. This request 

was made because the use of the term 

‘‘public’’ appears in several different 

contexts throughout the Medicaid 

statute, and many states employ their 

own definitions of public status within 

their Medicaid state plans. For example, 

federal financial participation is 

available at the rate of 75 percent of the 

costs of skilled professional medical 

personnel of the state agency or ‘‘any 

other public agency.’’ A Medicaid 

managed care organization that is a 

‘‘public entity’’ is exempt from certain 

otherwise applicable solvency 

standards. ‘‘Public institutions’’ that 

provide inpatient hospital services for 

free or at nominal charges are not 

subject to the charge limit otherwise 

applicable to inpatient services. 

Moreover, many states adopt special 

reimbursement provisions in their state 

plans for ‘‘public hospitals,’’

‘‘governmental hospitals’’ or other types 

of public health care providers. 

7R. Response: This final regulation 

defines a unit of government for 

purposes of financing the non-Federal 

share of Medicaid payments and for the 

application of a new Medicaid upper 

payment limit on such governmental 

health care providers. 

The reference to ‘‘any other public 

agency’’ in § 432.50 and the exemption 

from solvency standards for public 

entities are unaffected by this 

regulation. As part of this final 

regulation, the reference to public 

institutions that provide inpatient 

hospital services for free or at nominal 

charges has been deleted in light of the 

new upper payment limit structure. It is 

our understanding that virtually every 

health care provider has a customary 

charge structure used to bill patients 

who have sufficient resources and third 


jlentini on PROD1PC65 with RULES3
29752 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

party payers, and so no exception to that 

limit is required. In the unlikely event 

that a health care provider does not 

customary charge either patients or 

liable third parties and thus does not 

have such a customary charge structure 

at all, then we would view the 

customary charge limit to be 

inapplicable. 

8C. Comment: One commenter asked 

if a health care provider that is operated 

by a local government which is required 

by ordinance to levy a tax to support its 

operations must actually use these tax 

revenues annually in order to meet the 

definition of a unit of government. 

8R. Response: We would not require 

that a health care provider use tax 

revenues in order to be considered a 

unit of government. Health care 

providers operated by a local 

government with taxing authority are 

always able to directly access tax 

revenue. This ability to directly access 

tax revenues through standard 

appropriation processes and without the 

need for a contractual arrangement to 

access such tax revenue is a 

characteristic that reflects a health care 

provider’s governmental status. 

9C. Comment: Several commenters 

requested that CMS revise the proposed 

regulatory definition for unit of 

government. One commenter suggested 

that the criteria used to define a ‘‘unit 

of government’’ be modified as follows: 

‘‘A provider will be recognized as a unit 

of government if (1) more than twentyfive (25) percent of its services are 

provided to individuals eligible for 

Medicaid, the uninsured, or the 

underinsured; and (2) the provider can 

reasonably be expected to receive direct 

government subsidies to maintain 

operations should the provider be at risk 

for discontinuing operations.’’

Another commenter suggested that 

the criteria at § 433.50(a)(1)(i) used to 

define a ‘‘unit of government’’ be 

modified as follows: ‘‘A unit of 

government is a State, a city, a county, 

a special district, a health authority, or 

other governmental unit in the State that 

has taxing authority, or is specifically 

established as a unit of government 

under the State’s constitution.’’

Finally, another commenter suggested 

a new subsection (C) to the proposed 

§ 433.50(a)(1)(ii) to read: ‘‘(C) The health 

care provider, although it does not meet 

the requirements of subparagraphs (A) 

or (B), is able to demonstrate to CMS 

that the sources of its funding are of a 

nature that would permit a finding that 

it is a unit of government for purposes 

of this section.’’

9R. Response: The suggested elements 

are not consistent with statutory criteria 

regarding the participation of a unit of 

government in financing the non-federal 

share of Medicaid expenditures. Section 

1903(w)(6) does not refer to entities that 

provide a particular level of Medicaid 

services, nor to the potential for general 

governmental subsidies. It uses the term 

‘‘unit of government’’ and refers to the 

use of ‘‘State or local tax revenues.’’

While the term ‘‘unit of government’’ is 

not specifically defined, in section 

1903(w)(7)(G), there is a definition of 

‘‘unit of local government’’ that contains 

a list of entities that generally share the 

common characteristic of possessing 

taxing authority. The statutory list 

includes ‘‘special purpose district’’ and 

‘‘other governmental unit’’ (which are 

not defined terms and are used to refer 

to a wide range of entities, some of 

which do not have taxing authority, 

direct access to tax revenues, or other 

indications of governmental status). We 

read these terms to permit flexibility to 

include such entities when they share 

the common characteristic of other 

listed governmental units of taxing 

authority (or direct access to tax 

revenues). We take this reading to 

ensure consistency with the required 

use of ‘‘State or local tax revenues’’

when a unit of government participates 

in financing the non-federal share of 

Medicaid expenditures. 

Moreover, we believe that it is 

essential to have a clear and uniform 

standard that can be consistently 

applied in every State and to every 

provider. Thus we do not see a 

justification to include open-ended 

language in the regulatory definition. 

We have, however, made clear in the 

final rule our intent to permit flexibility 

to accommodate entities that do not 

have independent taxing authority but 

have direct access to tax revenues. We 

discuss this further below. 

In sum, our reading of the Medicaid 

statute is that the type of services 

provided by a health care provider, its 

reasonable expectation to receive direct 

government subsidies when at-risk for 

discontinuing operations, its specific 

establishment under State constitution, 

or its funding sources are not 

characteristics contemplated under the 

statute as representative of a unit of 

government that can participate in 

financing the non-federal share of 

Medicaid expenditures. The criteria we 

have set forth are based on our reading 

of the Medicaid statute, and are 

intended to permit flexibility to 

recognize different characterizations of 

arrangements that fall within a uniform, 

consistent framework. 

10C. Comment: A number of 

commenters asked CMS to expressly 

state that the provisions of the 

regulation have no effect on regulations 

pertaining to provider taxes. 

10R. Response: The provisions of the 

regulation clarify the statutory 

exception to the requirements governing 

health care related taxes and provider 

related donations. Nothing in this 

regulation is intended to impact the 

requirements on health care related 

taxes and provider related donations. 

All statutory and regulatory 

requirements governing health care 

related taxes and provider related 

donations still apply. 

11C. Comment: One commenter asked 

CMS to clarify what is meant by the 

term ‘‘other governmental unit.’’

11R. Response: Section 1903(w)(7)(A) 

of the Act includes in the definition of 

the term ‘‘unit of local government’’

certain specified entities and ‘‘other 

governmental unit[s] in the State.’’ This 

term is undefined, and we are 

interpreting it to refer to entities that 

possess certain qualities that we believe 

are key to governmental status for 

purposes of Medicaid financing and 

payment. In the context of the list as a 

whole, CMS is interpreting this term to 

mean entities that are not cities, 

counties or special purpose districts, but 

have qualities that are generally shared 

by those specifically listed entities (and, 

as discussed below, CMS interprets the 

broad term ‘‘special purpose district’’ in 

a similar manner). In other words, 

entities may be considered as units of 

government for these Medicaid 

purposes even not specifically listed in 

the definition if the entities have the 

same basic qualities as those 

governmental units that are specifically 

listed in the statute. 

12C. Comment: One commenter 

observed that it appeared that CMS 

would determine whether or not a 

health care provider would be 

considered a unit of government under 

the provisions of the regulation. Due to 

the significant impact (positive or 

negative) such a determination may 

have on a health care provider, the 

commenter proposed that there should 

be a method of appeal. 

12R. Response: In the proposed rule, 

we anticipated that CMS would make 

final determinations of governmental 

status, but in this final rule, we are 

requiring that States apply the statutory 

and regulatory criteria to each 

individual health care provider to make 

initial determinations of governmental 

status. To the extent that governmental 

status affects Medicaid payment to a 

provider, the provider may have access 

to State appeal processes. 

With respect to the availability of 

federal financial participation, CMS is 

responsible to ensure that the 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29753 

determinations of governmental status 

made by States are consistent with the 

Federal statutory and regulatory criteria 

and may take appropriate action 

including, but not limited to, denial of 

Medicaid reimbursement State plan 

amendments and/or disallowances of 

claims for Federal financial 

participation, in the event of 

noncompliance with any provision of 

this regulation. States can appeal such 

actions through existing appeals 

processes. 

13C. Comment: One commenter 

pointed out that the regulation requires 

a demonstration that a health care 

provider is a unit of government in 

order to be involved in IGTs or CPEs. 

However, the commenter believes that 

the regulation exceeded this proposal by 

requiring a similar demonstration by all 

governmental health care providers, 

regardless of any use of IGTs or CPEs. 

13R. Response: Under the provisions 

of this regulation, Medicaid payments to 

all governmentally-operated health care 

providers are limited to the cost of 

providing services to Medicaid 

individuals. Therefore, all entities that 

meet the regulatory definition as 

governmentally-operated health care 

providers within the State must be 

identified. 

14C. Comment: One commenter asked 

what is the definition of a ‘‘component 

unit’’ on the consolidated annual 

financial report referenced in the 

regulation’s preamble, and whether or 

not an ‘‘enterprise fund’’ entry on the 

consolidated annual financial report 

would qualify an entity as being 

considered a unit of government. 

14R. Response: The purpose of CMS’

use of the term component unit was to 

assist States in identifying health care 

providers that are an integral part of a 

unit of government. A component unit 

that appears on the consolidated annual 

financial statement of a unit of 

government because the unit of 

government is responsible for the 

component unit’s expenses, liabilities 

and deficits would be indicative that the 

component unit may be considered a 

unit of government. It is our 

understanding that enterprise funding is 

an accounting method used to account 

for operations intended to be financed 

and operated like private busineses, 

with costs covered primarily through 

user fees or otherwise kept on a distinct 

basis. To the extent that this accounting 

method is applied to an entity that 

would otherwise be accounted for as a 

component unit on the consolidated 

financial statement, the use of enterprise 

accounting should not make a difference 

in that status. 

15C. Comment: One commenter noted 

the regulation’s language requiring that 

a unit of government must have a role 

in funding a health care provider’s 

expenses, liabilities, and deficits in 

order for the health care provider to be 

considered a unit of government. 

However, the commenter indicated that 

it was not clear whether the unit of 

government must have full 

responsibility for all three of these areas 

or whether partial responsibility for 

some of these areas would be sufficient. 

The commenter opines that regardless of 

the answer to that question, CMS would 

still find it necessary to conduct 

individualized investigation and 

analysis, regardless of information 

collection, making the form unnecessary 

and duplicative. Therefore, the 

commenter recommends withdrawal of 

the form. 

15R. Response: For a health care 

provider to be considered as a unit of 

government, the operating unit of 

government must have full 

responsibility for funding a health care 

provider’s expenses, liabilities, and 

deficits in order for the health care 

provider to be considered a unit of 

government. We do not intend this to 

preclude an enterprise funding 

accounting method, as discussed above, 

where the operation of the health care 

provider is intended to be primarily 

funded through user fees. But this 

definition would not include health care 

providers that are independent legal 

entities that contract with a unit of 

governnment, even if the contract 

includes partial funding among its 

terms. 

16C. Comment: A number of 

commenters argued that principles of 

federalism, rooted in the Tenth 

Amendment to the Constitution, 

support a State’s right to determine 

what constitutes a unit of government 

within the State and argued that the 

provisions of this regulation would 

intrude upon the State’s ability to 

organize itself as deemed necessary. 

16R. Response: The provisions of this 

regulation concern the question of 

whether, in determining the amount of 

federal funds to which a State is entitled 

under the Medicaid program, transfers 

of funds to the State government from 

a Medicaid health care provider that is 

an entity other than the State 

government will be exempt from 

consideration as a provider tax or 

donation, and when expenditures of 

such an entity can be certified as 

‘‘public expenditures’’ that constitute 

the non-Federal share of Medicaid 

expenditures. It also sets forth a 

consistent definition of entities that 

must be treated as governmental in 

determining the reasonableness of 

Medicaid payment rates. 

The Tenth Amendment to the U.S. 

Constitution does not accord any special 

privileges with respect to Medicaid 

funding, and the provisions of this 

regulation would not affect a State’s 

ability to organize itself for other 

purposes. 

Nevertheless, we have determined in 

response to comments to provide States 

with the primary role in identifying 

units of government using the criteria 

set forth under this regulation, as long 

as the identification is consistently 

applied. This responsibility falls within 

the overall duty to document claims for 

federal financial participation. 

17C. Comment: A number of 

commenters noted the distinction 

between the terms ‘‘unit of local 

government,’’ found at Section 

1903(w)(7)(G), and the term ‘‘units of 

government within a State,’’ found at 

Section 1903(w)(6)(A) of the Act. One 

such commenter identified a recent 

decision from the Departmental Appeals 

Board (Ga. Dept. of Comty. Health, DAB 

No. 1973 (2005)) in an effort to highlight 

the differences in these terms. These 

commenters assert that Congress 

deliberately left ‘‘units of government’’

undefined in order to afford States 

discretion in how they choose to finance 

their Medicaid programs. 

17R. Response: We have considered 

both statutory terms in developing 

criteria to determine if an entity is a unit 

of government for purposes of 

transferring funds or certifying 

expenditures under Medicaid; we have 

looked at what characteristics were 

generally shared by the entities 

specifically referenced in the statute, 

and we have also considered what the 

underlying intent appears to be. In 

section 1903(w)(6)(A) of the Social 

Security Act, Congress clearly expressed 

the intent that these entities must be 

able to use ‘‘funds derived from State or 

local taxes (or funds appropriated to 

State university teaching hospitals) 

***’’ Unlimited discretion is not 

consistent with the plain language of 

this provision. The cited DAB decision 

primarily rested on a different issue, not 

changed by this rule, the limitation on 

protected Medicaid financing by units 

of government to those ‘‘in the State.’’

18C. Comment: One commenter 

suggested that the proposed changes in 

the provisions of this regulation are 

beyond mere clarifications of existing 

policy and therefore could not be 

implemented on a retrospective basis 

without violating the notice and 

comment requirements of the 

Administrative Procedure Act. 


jlentini on PROD1PC65 with RULES3
29754 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

18R. Response: The provisions of the 

regulation will be effective 60 days after 

publication of the final regulation and 

therefore are not being implemented on 

a retrospective basis. Moreover, all 

requirements of the Administrative 

Procedure Act are being met. The 

publication as a notice of proposed 

rulemaking with a 60-day comment 

period afforded all interested parties the 

opportunity to provide input and 

comment. CMS has fully considered all 

public comments received during that 

60-day period in the development of the 

final provisions of the regulation. 

19C. Comment: One commenter 

suggested that provisions of the 

regulation may violate the Spending 

Clause of the U.S. Constitution. This 

commenter argues that the regulatory 

change in the definition of ‘‘unit of 

government’’ will dramatically and 

adversely affect a State’s level of 

funding for Medicaid, which would 

effectively ‘‘coerce’’ the States in a 

manner that contradicts the Spending 

Clause (see South Dakota v. Dole, 483 

U.S. 203, 207, 211 (1987)). 

19R. Response: The provisions of this 

regulation concern the question of 

whether, in determining the amount of 

federal funds to which a State is entitled 

under the Medicaid program, transfers 

of funds to the State government from 

a Medicaid health care provider that is 

an entity other than the State 

government will be entitled to 

exemption from consideration as a 

provider tax or donation, and when 

expenditures of such an entity can be 

certified as ‘‘public expenditures’’ that 

constitute the non-Federal share of 

Medicaid expenditures. 

This rule also sets forth a consistent 

definition of entities that must be 

treated as governmentally-operated in 

determining the reasonableness of 

Medicaid payment rates. It does not 

‘‘coerce’’ the State to take any action 

outside of the scope of the Medicaid 

program enacted under the Spending 

Clause. Nor do the provisions of this 

regulation affect rights of others outside 

of the operation of the Medicaid 

program. 

20C. Comment: A number of 

commenters expressed that section 

1903(w)(6)(A) was a provision that 

Congress included in the Act which was 

intended to limit CMS’ authority to 

regulate the financing sources for the 

non-Federal share of the Medicaid 

program. Commenters made this point 

to suggest that it is inappropriate for 

CMS to issue regulatory provisions 

governing sources of State or local funds 

used to satisfy the non-Federal share. 

20R. Response: Section 1903(w)(6)(A) 

of the Act carved out an exception to the 

financing restrictions that Congress 

itself enacted in section 1903(w). 

Section 1903(w)(6)(A) of the Act has 

very specific language and we believe 

that the provisions of this regulation 

give meaning to each of the terms used 

in that section. This regulation 

interprets and implements those terms. 

The language of section 1903(w)(6)(A) of 

the Act cannot reasonably be read as a 

general prohibition on CMS review to 

determine if the criteria of section 

1903(w)(6)(A) of the Act have been met. 

21C. Comment: A number of 

commenters noted that by Executive 

Order binding on CMS, federal agencies 

must ‘‘closely examine the 

constitutional and statutory authority 

supporting any action that would limit 

the policymaking discretion of the 

States and shall carefully assess the 

necessity for such action.’’ Executive 

Order 13132, 64 FR at 43256 (August 4, 

1999). Similarly, wherever feasible, 

agencies must ‘‘seek views of 

appropriate State, local and tribal 

officials before imposing regulatory 

requirements that might significantly or 

uniquely affect those governmental 

entities’’ and must ‘‘seek to minimize 

those burdens that uniquely or 

significantly affect such governmental 

entities, consistent with regulatory 

objectives.’’ Executive Order 12866, Sec. 

l(b)(9), as amended 58 FR 51735 

(February 26, 2002). The commenters 

assert that CMS has failed to respect 

those mandates here. 

21R. Response: We believe we have 

fully met the requirements of the cited 

Executive Orders. First, the provisions 

of this regulation have been the result of 

years of review and reflection on State 

submissions and financial reviews of 

State programs. Second, this regulation 

has been issued after advance notice of 

its general terms was issued in 

Presidential budget documents, and 

numerous discussions with State 

officials and other interested parties. 

Third, affected parties have had full 

opportunity for input through the 

informal rulemaking procedures under 

the Administrative Procedure Act. 

These processes have indeed 

significantly affected the proposed and 

final regulation. But these processes do 

not supersede CMS responsibilities to 

safeguard the integrity of the Medicaid 

program, and ensure that federal dollars 

are spent only when matched by actual, 

documented, expenditures from State or 

local non-federal funds that meet 

applicable criteria under the law. 

22C. Comment: Several commenters 

noted that many governments have 

organized or reorganized public 

hospitals into separate entities in order 

to provide them with the autonomy and 

flexibility to deliver more efficient and 

higher quality health care. It was 

asserted that because some of these 

hospitals would not be recognized as 

governmental under the regulation, they 

will not be as able to fulfill their 

mission of delivering accessible care in 

an efficient and effective manner, nor 

will they be permitted to finance the 

non-Federal share of Medicaid 

payments via IGT or CPE. Many 

commenters also expressed concern that 

existing financing arrangements 

involving IGTs or CPEs from certain 

health care providers would be undone 

because some of these health care 

providers may not be considered units 

of government under the regulation. To 

the extent such IGT or CPE 

arrangements need to change after the 

provisions of the regulation are 

effective, the funding for these health 

care providers will be at risk. This 

concern was particularly emphasized 

relative to any affected safety net health 

care providers because of their services 

to our nation’s most vulnerable 

populations. 

22R. Response: A health care provider 

that is not recognized as 

governmentally-operated under the 

Federal statutory and regulatory criteria 

will not be subject to the cost limitation 

on Medicaid payments. Therefore, such 

health care providers may receive 

Medicaid payments up to the applicable 

regulatory upper payment limit, to the 

extent States use permissible sources of 

non-federal share funding to make such 

payments. Furthermore, such health 

care providers would not be subject to 

obligations to fund the non-federal share 

of a State’s Medicaid program. To the 

extent that such a health care provider 

was previously obligated to fund certain 

Medicaid payments, total Medicaid 

revenues to that facility can be 

sustained through alternative 

permissible sources of non-federal share 

funding. These health care providers 

may realize significantly greater net 

Medicaid revenues if State or local 

government funding sources are utilized 

to fund the non-federal share 

historically financed by the health care 

providers. Therefore, such health care 

providers will not necessarily be 

affected in their mission to deliver 

accessible care in an efficient and 

effective manner. 

Indeed, the provisions of the 

regulation were actually designed to 

protect health care providers. Nongovernmentally operated health care 

providers, including many of the 

‘‘public’’ safety net providers, are not 

affected by the cost limit provision of 

the regulation and therefore, may 

continue to receive Medicaid payments 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29755 

in excess of the cost of providing 

services to Medicaid individuals within 

existing Federal requirements. 

Governmentally operated health care 

providers may receive the full cost of 

furnishing Medicaid services, which 

could mean rates that substantially 

exceed those available to other classes 

of facilities. 

Moreover, § 447.207 protects health 

care providers because it requires that 

health care providers be allowed to fully 

retain their Medicaid payments. This 

requirement assures that payments to 

providers are actual expenditures and 

are available to support the provision of 

services to Medicaid beneficiaries. 

These requirements demonstrate the 

Federal government’s intent to protect 

the nation’s public safety net providers 

and the ability of those providers to 

serve our nation’s most vulnerable 

populations. 

23C. Comment: Many commenters 

pointed out that there are public 

hospitals that have been involved in 

financing the non-Federal share via IGT 

or CPE for years without any objection 

from CMS. Under the provisions of the 

regulation, however, certain public 

hospitals would no longer be permitted 

to finance the non-Federal share via IGT 

or CPE because they would not qualify 

as units of government. These 

commenters found it unreasonable that 

CMS would eliminate long-standing 

funding arrangements for Medicaid 

services provided at these hospitals, 

saying that the elimination of Federal 

funding for such hospitals could be 

catastrophic. These commenters 

asserted that the loss of Federal funding 

could result in increased costs to State 

or local government, increased provider 

taxes, cuts in Medicaid eligibility, or 

reductions in Medicaid coverage or 

reimbursement. 

23R. Response: The numerous 

comments regarding particular health 

care provider’s inability to continue 

financing the non-Federal share of 

Medicaid payments through IGTs, or 

CPEs, indicates that States have been 

ignoring the statutory limitation to 

‘‘units of government’’ in the provision 

permitting IGTs or CPEs without regard 

to provider tax and donation rules. 

Instead, it appears many States relied on 

a health care provider’s ‘‘public’’

mission as sufficient evidence of 

eligibility to make IGTs or CPEs. By 

doing so, the States imposed an 

additional burden on these nongovernmental safety net providers to 

shoulder the fiscal responsibility of state 

and local units of government under the 

Medicaid statute. 

In other words, the provisions of the 

regulation were actually designed to 

protect health care providers, including 

the safety net providers. Under the 

provisions of the regulation, 

governmentally-operated health care 

providers are assured opportunity to 

receive full cost reimbursement for 

serving Medicaid individuals. Nongovernmentally-operated health care 

providers, including many of the 

‘‘public’’ safety net hospitals, are not 

affected by the Medicaid cost limit 

provision of the regulation and 

therefore, may continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. Moreover, the final rule 

provides that payments to these health 

care providers cannot be diverted, but 

must be retained by the providers and 

available to support provider services. 

24C. Comment: One hospital that 

would be considered a unit of 

government under the provisions of the 

regulation suggested that even though it 

qualifies as a unit of government, it 

would be adversely affected by the unit 

of government definition because the 

regulation would disqualify other 

hospitals in the State from participating 

in IGTs and CPEs. This disqualification, 

the commenter asserts, would 

jeopardize the fiscal health of the 

hospital that qualifies as a unit of 

government. 

24R. Response: This final rule would 

permit States to pay governmental 

providers the full cost of furnishing 

covered services to Medicaid 

beneficiaries, and thus a governmental 

hospital need not incur any loss from 

participation in the Medicaid program. 

To the extent certain health care 

providers are no longer eligible to 

participate in the IGT process, no loss 

of Federal funds will occur for such 

affected health care provider if State 

and/or local government satisfy the nonFederal share of the Medicaid payments 

historically funded by nongovernmentally-operated health care 

providers. Moreover, nothing in statute 

or regulation requires States to increase 

a governmentally-operated hospital’s 

fiscal obligation to Medicaid in order to 

supplant non-Federal obligations 

historically satisfied by nongovernmentally-operated hospitals. 

25C. Comment: One commenter noted 

that recently CMS has expanded 

financial controls over the CPE process 

by requiring reconciliations to a cost 

report and instruction on how a 

certified public expenditure is 

calculated. This commenter questioned 

how converting ownership status to 

private-owned for those health care 

providers who have been historically 

considered as public-owned by CMS 

under the regulation’s provisions would 

increase financial controls. 

25R. Response: CMS is not 

‘‘converting’’ ownership status of any 

facilities as a result of the provisions of 

this regulation but this final rule will 

ensure more accurate determinations of 

governmental status based on the 

underlying facts and the statutory and 

regulatory requirements. These 

determinations will identify the 

universe of governmentally-operated 

health care providers for purposes of the 

new upper payment limit and of 

participation in financing of the nonFederal share of Medicaid payments. 

The final rule will ensure that claims for 

federal expenditures are supported by 

actual state and local expenditures. 

26C. Comment: Some commenters 

suggested that the regulation’s 

definition of a unit of government will 

undermine marketplace incentives to 

operate public health care providers 

through independent entities. This 

argument postulates that public 

hospitals, which fill a unique role in 

serving the poor and uninsured, were 

historically operated as a department of 

the state or local government, with 

associated bureaucratic controls. Over 

time, however, many governments that 

had previously operated public 

hospitals as integrated governmental 

agencies began searching for new ways 

to organize and operate these entities to 

provide them more autonomy and equip 

them to better control costs and compete 

in a managed care environment. 

Acknowledging the wide variance in the 

structure of these public hospitals 

today, the commenters suggest that the 

provisions of the regulation would only 

permit health care providers following 

the most traditional model to be 

considered units of government, thus 

reversing incentives to make operating 

enhancements resulting from the 

devolution of provider control from a 

government to a non-governmental 

entity. 

26R. Response: The provisions of the 

regulation were not designed to 

undermine marketplace incentives to 

give ‘‘public’’ health care providers 

increased autonomy. We recognize, 

however, that some changes in 

organizational structure may require 

adjustment of arrangements to finance 

Medicaid expenditures. 

For example, a provider that is truly 

independent of any governmental unit 

(for example, a former county hospital 

leased by a private corporation) would 

not be permitted to contribute the nonfederal share of Medicaid expenditures. 

To the extent that such a provider had 

claims for covered services to Medicaid 

eligible individuals, a governmental 


jlentini on PROD1PC65 with RULES3
29756 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

unit such as the county) that pays for 

such care can certify a public 

expenditure (at rates under the 

approved State plan) to support a claim 

for federal financial participation. 

We believe the uniform regulatory 

definition of a unit of government in 

this final rule will guide States, 

localities and providers in arranging 

their relationships to comply with the 

Medicaid statute. At the same time, as 

discussed above, the uniform regulatory 

definition will protect the fiscal 

integrity of the program by ensuring that 

claims for federal financial participation 

are supported by actual non-federal 

expenditures that meet statutory 

requirements. And this rule will protect 

health care providers and ensure that 

Medicaid payments are available for 

covered care to eligible individuals. 

27C. Comment: Multiple commenters 

requested that CMS clarify the unit of 

government definition’s applicability to 

other areas of Medicaid. 

27R. Response: This regulation 

directly concerns only the treatment of 

financial transactions that involve 

entities that meet the definition of a unit 

of government. This rule attempts to set 

forth a consistent definition for that 

purpose. But this rule does not address 

the definition of a unit of government or 

public agency for other purposes. 

Whether we would interpret other 

requirements similarly may depend on 

the context and circumstances of those 

requirements. 

28C. Comment: Many commenters 

stated that specific entities within a 

State would not qualify as units of 

government under the provisions of the 

regulation. Other commenters requested 

that CMS affirmatively specify that 

certain named health care providers 

could continue to fund the non-federal 

share of Medicaid payments through 

IGTs and/or CPEs. To the extent such 

entities have been involved in financing 

the non-Federal share of Medicaid 

payments, such entities would be 

required to change financing 

arrangements and would be at risk of 

losing Medicaid funding for their 

services. 

One commenter observed that Local 

Education Agencies (LEAs) without 

taxing authority may be currently 

involved in certified public 

expenditures (CPEs) but may also be 

fiscally independent from county 

governments. The commenter is 

concerned that such a LEA would not 

qualify as a unit of government under 

the provisions of the regulation, 

eliminating existing CPE practices and 

placing school based services or schoolbased administrative claims at risk. 

Several commenters stated that the 

definition of ‘‘unit of government’’

would no longer permit many public 

health care providers that operate under 

public benefit corporations from helping 

States finance the non-Federal share of 

Medicaid funding. 

Several commenters stated that the 

definition of ‘‘unit of government’’

would no longer permit many State 

universities from helping States finance 

the non-Federal share of Medicaid 

funding. 

One commenter opined that under the 

regulation’s definition of governmental 

providers, Regional Councils of 

Governments would not be eligible to 

provide matching funds for the nonFederal share of Medicaid payments. 

The commenter states that the Federal 

government created Councils of 

Governments to assist in the 

implementation of programs such as 

Medicaid, that State and local 

governments should have the 

prerogative of decision making with 

respect to operational responsibility for 

Medicaid, and that the unit of 

government definition compromises 

such arrangements at the State and local 

levels. One commenter made a 

suggestion that CMS modify the 

provisions of the regulation to recognize 

the public status of public community 

hospitals organized and operated in the 

State of Mississippi under Miss. Code 

Ann §§ 41–13–10, et seq. (1972 and 

supplements) and include these 

hospitals under the unit of government 

definition. 

A number of commenters wrote 

concerning the impact the regulation’s 

definition of unit of government may 

have on ‘‘public entity’’ (PE) community 

health centers (CHCs), which may 

current certify public expenditures 

within a State. PE model CHCs are 

created by units of government but 

generally do not have taxing authority. 

However, they must adhere to 

governance rules established by the 

Health Resources and Services 

Administration (HRSA) that mandate a 

Board of Directors comprised of at least 

51 percent users of the CHC. Each of the 

PE models has a slight variation in 

governance structure. The commenters 

are concerned that some of these PE 

model CHCs would not be recognized 

under the provisions of the regulation as 

a unit of government and would 

therefore lose the federal funding based 

on expenditures they are currently 

certifying via the CPE process. 

One commenter wanted to know 

whether or not a State’s regional school 

districts, charter schools, and municipal 

school districts would qualify as units 

of government under the provisions of 

the regulation. 

28R. Response: As these comments 

point out, there is a wide variety in the 

organization of, and relationship 

between, governmental and nongovernmental entities. We cannot 

predetermine which entities have 

governmental status for purposes of 

participating in financing the nonfederal share of Medicaid expenditures, 

or application of the governmental 

upper payment limits. This regulation 

establishes criteria assist States in 

making those determinations in order to 

document claimed expenditures for 

purposes of obtaining federal financial 

participation. 

As discussed previously, some of the 

commenters appear to be confusing 

public mission with governmental 

status. Neither section 1903(w)(6)(A) 

nor section 1903(w)(7)(G) of the Act 

refer to a public mission; instead these 

sections refer to specific governmental 

entities, governmental status, and the 

use of State and local tax revenues. 

Moreover, while a provider determined 

to be non-governmental cannot 

participate in financing the non-federal 

share of Medicaid expenditures, units of 

government that fund covered services 

to Medicaid eligible individuals at the 

provider can certify a public 

expenditure (at rates under the 

approved State plan) to support a claim 

for federal financial participation. 

29C. Comment: A number of 

commenters questioned the proposed 

provision at § 433.50(a)(1)(ii)(B) 

allowing a health care provider without 

taxing authority to be considered a unit 

of government only if the government 

with taxing authority has a legal 

obligation to fund the health care 

provider’s expenses, liabilities, and 

deficits. These commenters argued that 

some providers were deliberately 

designed by the government to be 

autonomously funded yet also possess 

governmental attributes under 

applicable State or local laws. It was 

therefore asserted that the provisions of 

the regulation penalize providers that 

have reduced their reliance on taxpayer 

support and creates incentives to 

redesign provider structures into a less 

flexible, more inefficient governmental 

form that is more dependent on the 

taxpayer. 

29R. Response: The provisions of the 

regulation were not designed to penalize 

governmentally operated health care 

providers that have reduced their 

reliance on taxpayer support. Nor is the 

regulation intended to create incentives 

to redesign health care provider 

structures into a less flexible, more 

inefficient governmental form that is 

more dependent on the taxpayers. 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29757 

We have modified the regulation at 

§ 433.50 to address concerns regarding 

taxing authority as a requirement for an 

entity to be considered a unit of 

government. The regulation has been 

revised to indicate that a unit of 

government must have either taxing 

authority or direct access to tax 

revenues. We have added the phrase 

‘‘has direct access to tax revenues’’ to 

recognize as governmental those entities 

that do not have taxing authority, and 

may not have immediate needs for tax 

support, but do have direct access to tax 

revenues of a related unit of government 

because of the direct responsibility of 

that unit of government for the provider. 

30C. Comment: Two commenters 

raised questions about special purpose 

districts. One asked CMS to clarify what 

is meant by the term ‘‘special purpose 

district,’’ while another stated that the 

provisions of the regulation seemed to 

eliminate the ability of special purpose 

districts to participate in funding 

Medicaid. 

30R. Response: As noted previously, 

we interpret the broad statutory 

language to rely on the characteristics of 

the entity in question rather than on its 

label. We believe that the statutory 

reference to special purpose district has 

to be read in the statutory context to 

refer to an entity that resembles the 

other entities in the list. By grouping 

‘‘special purpose districts’’ with ‘‘cities’’

and ‘‘counties,’’ we read the statute to 

refer to special purpose districts that 

share qualities generally held by cities 

and counties. One of those qualities, for 

example, is authority to impose taxes or 

directly access tax revenues. While 

there may be some entities that a State 

calls special purpose districts that do 

not have such authority, in context we 

read the statute to refer only to those 

entities that have qualities similar to 

cities and counties. 

31C. Comment: One commenter 

discussed hospital authorities, which 

have been given certain governmental 

powers but not the authority to tax in 

a State. In fact, the State’s legislature 

specifically granted local governments 

the power to agree by contract with the 

hospital authorities to utilize tax 

revenues for their services. The 

commenter expresses concern that 

under the provisions of the regulation, 

all hospital authorities in the State 

would not qualify as a unit of 

government, per the proposed language 

about contracts at § 433.50(a)(1)(ii)(B). 

31R. Response: The regulatory text at 

§ 433.50(a)(1)(ii)(B) specifies that a 

contractual arrangement with the State 

or local government is not the ‘‘primary 

or sole basis for the health care provider 

to receive tax revenues.’’ This language 

suggests that the presence of a 

contractual arrangement does not 

automatically preclude a health care 

provider from being considered a unit of 

government. However, if the only way 

for a health care provider to access 

general tax revenue is under a contract 

for services with a unit of government, 

then the health care provider is likely 

not a unit of that government. States 

must apply all statutory and regulatory 

criteria to each individual health care 

provider to make initial determinations 

of governmental status. 

32C. Comment: One commenter wrote 

that the regulation’s preamble on 

certified public expenditures indicates 

that the ‘‘plain meaning of the Act’’

precludes not-for-profit entities from 

financing the non-Federal share. The 

commenter expresses that there is no 

support provided for this statement in 

this section of the regulation. Therefore, 

the commenter asks CMS to provide 

relevant statutory provisions supporting 

the conclusion. 

32R. Response: Medicaid is a shared 

responsibility between Federal and 

State government. State governments 

may share their fiscal obligation to the 

Medicaid program with local 

governments according to the 

instruction of Congress. Under Public 

Law 102–234, the Congress made clear 

that States may allow governmental 

health care providers to participate in a 

State’s fiscal obligation to the Medicaid 

program through the use of 

intergovernmental transfers and 

certified public expenditures. 

The provision of the regulation 

regarding certified public expenditures 

is a clarification to existing Federal 

statutory instruction at section 

1903(w)(6)(A) of the Act. Consistent 

with this explicit statutory instruction, 

a certified public expenditure (CPE) 

means that State or local tax dollars 

were used to satisfy the cost of serving 

Medicaid individuals (and the cost of 

providing inpatient and outpatient 

hospital services to the uninsured for 

purposes of Medicaid DSH payments). 

Under the provisions of the 

regulation, all health care providers 

maintain some level of ability to 

participate in the CPE process. 

Governmentally-operated health care 

providers are able to certify their costs 

without having to demonstrate that 

State or local tax dollars were used to 

provide Medicaid services. This policy 

is based on the fact that governmentallyoperated health care providers always 

have the ability to access State and/or 

local tax dollars as an integral 

component of State or local government. 

Governmentally-operated health care 

providers need only produce cost 

documentation via national, 

standardized cost reporting to receive 

Federal matching funds as a percentage 

of such allowable Medicaid (and DSH) 

costs. 

Non-governmentally-operated health 

care providers may also produce cost 

documentation to support the costs of 

providing services to Medicaid 

individuals (and certain uninsured costs 

for purposes of Medicaid DSH 

payments). However, in order to 

maintain consistency with the Federal 

statutory instruction governing CPEs, a 

State or local government must actually 

certify that tax dollars were provided to 

the non-governmentally-operated health 

care provider. Federal matching funds 

can be available, to the extent consistent 

with the approved State plan, for 

allowable Medicaid costs incurred by 

the non-governmentally-operated health 

care provider that are funded with such 

State and/or local tax support. 

33C. Comment: One commenter 

requested that if the proposed definition 

of unit of government is adopted, that 

CMS clarify its interpretation of 

nonpublic provider. 

33R. Response: The term ‘‘nonpublic 

provider’’ is referenced in section 

1903(w)(3)(B) of the Act for purposes of 

evaluating a broad-based health care 

related tax. This rule addresses only the 

governmental exception from provider 

tax and donation rules, and does not 

address the substance of the provider 

tax and donation rules. Changes to those 

rules are outside the scope of the 

proposed rule and would be more 

appropriately addressed in separate 

rulemaking. Therefore, we do not find it 

necessary to further clarify the term 

‘‘nonpublic provider’’ in this rule. 

34C. Comment: Multiple commenters 

described concerns regarding Medicaid 

Behavioral Health Plans that have been 

characterized as government entities by 

a county or group of counties to manage 

the risk-based contract. The commenters 

stated that under this arrangement, local 

dollars are paid to the health plan for 

Medicaid match and these funds are 

then submitted to the State to cover the 

match. The commenters are concerned 

that this IGT agreement does not meet 

the definition of a unit of government 

since the plans were not given taxing 

authority and the counties do not have 

the legal obligation of the plan’s debts. 

The commenters requested that the 

proposed regulation explicitly state that 

local dollars will be considered valid 

IGTs if they originated at a unit of 

government regardless of the entity that 

submits the payment to the State. 

34R. Response: Entities that are not 

units of government can not make IGTs 

or CPEs regardless of where the entity 


jlentini on PROD1PC65 with RULES3
29758 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

gets funding. Section 1903(w)(6)(A) 

specifically refers to funding transferred 

or certified from ‘‘units of government’’

and does not provide a basis for tracing 

the source of funding transferred or 

certified from other entities. Any 

transfer of funds from a nongovernmentally-operated health care 

provider to a State constitutes a 

provider-related donation, not an 

intergovernmental transfer. In the 

situation discussed by commenters, the 

parties may want to explore 

restructuring their relationship to 

provide that the local unit of 

government make an IGT to the State 

directly. 

35C. Comment: Many commenters 

disagreed with any suggestion that notfor-profit status in and of itself should 

disqualify an entity as a unit of 

government. The commenters noted that 

many traditional public health care 

providers are nonprofit corporations 

under Section 501(c)(3) of the Internal 

Revenue Code, and these health care 

providers not only have a publicoriented mission but are subject to 

public oversight and receive substantial 

financial support from the communities 

in which they operate. 

Further, they argued that the fact that 

an enterprise is organized in corporate 

form is not inconsistent with its being 

a public entity. The commenters cited 

examples of federal public entities that 

operate in corporate form, including the 

Federal Deposit Insurance Corporation, 

the Tennessee Valley Authority, and the 

Communications Satellite Corporation. 

Similarly, multiple commenters 

observed that frequently, State laws 

creating hospital districts allow the 

hospital to operate as a 501(c)(3) 

nonprofit corporation, while the 

authorizing legislation vests the hospital 

with governmental status. The 

commenters assert that hospitals 

operated under these hospital district 

laws have, until this rulemaking, been 

viewed as public hospitals. 

Many other commenters stated that 

nonprofit corporations have many 

attributes of public entities and should 

therefore be allowed to qualify for 

purposes of financing the non-Federal 

share of Medicaid. The commenters 

remarked that not for profit corporations 

are required to serve a ‘‘public interest,’’

26 CFR. § 1.501(c)(3)–l(d)(1)(ii). They 

note that unlike for-profit corporations, 

there are no shareholders, and no 

private persons can have any ownership 

interest in the nonprofit corporation. 

Nonprofit corporations can have 

‘‘members’’ (though this is not 

required), but members have no 

ownership interest in the assets or 

business of the nonprofit corporation. 

Further, the commenters observe that 

when a nonprofit corporation terminates 

its operations, its assets must 

(depending on the applicable State law) 

be contributed either to another 

nonprofit or to the federal, State, or 

local government for a public purpose. 

In other words, once assets are 

committed to a benevolent purpose 

being carded out through a nonprofit 

corporation, those assets must remain 

available for a benevolent purpose. The 

commenters also point out that 

localities or hospital districts frequently 

choose to organize a hospital as a 

501(c)(3) organization in order to ensure 

that the hospital will be able to accept 

private charitable donations, which 

would be permitted under Section 

1903(w) of the Act. These commenters 

essentially argue that the publicoriented nature of non-profit 

corporations should be sufficient to 

allow such corporations to be 

considered tantamount to units of 

government for purposes of Medicaid 

financing. 

35R. Response: While it may be that 

nonprofit corporations have some 

public service qualities that 

governmental units have, there is no 

question that they are not units of 

government. Section 1903(w) contains 

severe penalties on the use of donations 

from health care providers to finance 

the non-federal share of the Medicaid 

program, but includes an exception for 

funding transferred or expenditures 

certified by units of government. There 

is nothing in the Medicaid statute that 

would indicate non-governmental 

‘‘public’’ units could help a State 

finance its share of Medicaid payments. 

Medicaid is a shared responsibility 

between Federal and State government. 

State governments may share their fiscal 

obligation to the Medicaid program with 

local governments according to the 

instruction of Congress. Under Public 

Law 102–234, the Congress made clear 

that States may allow governmentallyoperated health care providers to 

participate in a State’s fiscal obligation 

to the Medicaid program through the 

use of intergovernmental transfers and 

certified public expenditures. However, 

the Congress was also clear that States 

may not receive funds from nongovernmentally-operated health care 

providers for purposes of financing 

Medicaid payments. 

This final rule will assist States in 

identifying the universe of 

governmentally-operated health care 

providers that could receive Medicaid 

revenues up to the full cost of providing 

services to Medicaid individuals and 

clarifies which types of health care 

providers can participate in financing of 

the non-Federal share of Medicaid 

payments. 

36C. Comment: A number of 

commenters noted that the Medicare 

regulation governing location 

requirments for determining whether a 

facility has provider-based status 

recognize that a unit of State or local 

government may ‘‘formally grant 

governmental powers’’ to a health care 

provider organized as a public or 

nonprofit corporation. See 42 CFR 

§ 413.65(e)(3)(ii)(B). The commenters 

offer this to suggest that there are 

instances in which a nonprofit 

corporation may be considered 

governmental. 

36R. Response: The provisions of the 

regulation are limited to the purposes of 

Medicaid payment and financing, and 

are based on the statutory provisions 

governing those issues. This regulation 

does not affect Medicare provider-based 

status location requirements. States will 

need to apply Medicaid statutory and 

regulatory criteria to each individual 

health care provider to make 

determinations of governmental status 

for purposes of the Medicaid program. 

37C. Comment: Many commenters 

questioned the rationale for including 

taxing authority, or the ability to access 

funding as an integral part of a 

government with taxing authority, as a 

requirement for a health care provider to 

qualify as a unit of government under 

the provisions of the regulation. 

37R. Response: As discussed 

previously, we read the statutory 

definition of governmental entities to 

require certain common qualities, such 

as taxing authority, or the ability to 

directly access tax funding. Moreover, 

we believe this requirement is 

consistent with the overall statutory 

rationale. The governmental exception 

from provider tax and donation 

restrictions at section 1903(w)(6)(A) of 

the Act is limited to the ‘‘use of funds 

where such funds are derived from State 

or local taxes’’ (with a special provision 

for State university teach hospitals that 

receive appropriated funds which we 

discuss in the following response). We 

read the exception to be intended to 

permit wide flexibility in the use of tax 

funds, whether State or local. The 

limitation of this exception to the use of 

tax funds supports our interpretation 

that the reference to ‘‘units of 

government’’ was intended only to 

include entities with access to such tax 

funds. 

As important, the purpose of the 

provider tax and donation restrictions in 

general was to prevent situations in 

which the health care provider 

contributed a non-federal share of 

claimed expenditures but was 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29759 

essentially repaid through Medicaid or 

other payments. The provision at 

section 1903(w)(6)(A) of the Act is based 

on the rationale that such repayment 

does not occur when the health care 

provider uses state or local tax funding 

for its contribution. To give that full 

effect, the health care provider needs to 

have either taxing authority or direct 

access to tax funding. 

38C. Comment: A number of 

commenters noted that the provisions of 

the regulation were silent on the explicit 

reference in section 1903(w)(6)(A) of the 

Act to ‘‘funds appropriated to State 

university teaching hospitals’’ as being 

permissible sources of the non-Federal 

share. These commenters argued that 

the provisions of the regulation violated 

Congressional intent with respect to 

funding arrangements involving such 

institutions. 

38R. Response: We agree with this 

comment and we revised § 433.50(a)(i) 

and (ii) to include appropriations to 

State university teaching hospitals, and 

to define ‘‘State university teaching 

hospital.’’ We believe the specific 

provision that State university teaching 

hospitals could transfer funds derived 

from State appropriations rather than 

State or local tax revenues is only 

necessary because the statutory 

provisions otherwise embody the 

general principle that units of 

government must have taxing authority 

or direct access to tax funds. The State 

university teaching hospital exception 

makes that general principle clear, and 

we are revising the provisions of the 

regulation to reflect that exception. 

39C. Comment: A number of 

commenters pointed out that State law 

typically looks beyond the presence of 

taxing authority to other indicia of 

governmental status. For example, 

courts may look to whether an entity 

enjoys sovereign immunity, whether its 

employees are public employees, 

whether it is governed by a publicly 

appointed board, whether it receives 

public funding, and whether its 

enabling statute declares it to be a 

political subdivision or a public entity. 

These examples were provided to 

suggest that CMS look beyond just 

taxing authority as the standard of 

determining whether or not an entity is 

a unit of government. 

39R. Response: This regulation 

addresses governmental status for a very 

limited purpose and therefore we look 

only to criteria that are related to that 

purpose. For purposes of Medicaid 

payment and financing, the relevant 

characteristics of a governmental entity 

are those that relate to its financial 

organization including the source of 

funding and liability for its debts. These 

characteristics relate specifically to 

issues raised by the Medicaid statute. 

The provision of the regulation 

requiring that a unit of government must 

have access to tax revenues is consistent 

with the Congressional instruction 

contained in section 1903(w) of the 

Social Security Act. 

As discussed previously, we read the 

statutory definition of governmental 

entities to require certain common 

qualities, such as taxing authority, or 

the ability to directly access tax funding. 

Moreover, we believe this requirement 

is consistent with the overall statutory 

rationale. The governmental exception 

from provider tax and donation 

restrictions at section 1903(w)(6)(A) of 

the Act is limited to the ‘‘use of funds 

where such funds are derived from State 

or local taxes’’ (with a special provision 

for State university teach hospitals that 

receive appropriated funds which we 

discuss in the following response). We 

read the exception to be intended to 

permit wide flexibility in the use of tax 

funds, whether State or local. The 

limitation of this exception to the use of 

tax funds supports our interpretation 

that the reference to ‘‘units of 

government’’ was intended only to 

include entities with access to such tax 

funds. 

40C. Comment: A number of 

commenters questioned CMS’ meaning 

with respect to a unit of government 

with ‘‘ taxing authority’’ because this 

term was not defined in the regulatory 

text or the preamble, leaving units of 

government vulnerable to arbitrary or 

inconsistent use of this term in applying 

the provisions of the regulation. 

40R. Response: We do not believe that 

this term is generally regarded as 

ambiguous, but we are clarifying in this 

response and in the regulation text at 

§ 433.50(a)(1)(ii)(B) that we meant to 

refer to ‘‘taxing authority or direct 

access to tax revenues.’’ We believe that, 

in general, States have clear legal 

parameters setting forth those entities 

that have authority under their law to 

levy taxes. In addition, tax levies have 

particular treatment for purposes of 

federal and state taxes, and the 

distinction between tax levies and user 

fees is generally clear. We intend to 

defer to determinations by the State and 

the applicable tax authorities as to 

whether an entity has authority to 

impose taxes. The added phrase ‘‘or 

direct access to tax revenues’’ permits 

flexibility for those entities which have 

direct access to taxes that are imposed 

by a parent or related entity. For 

example, when a tax is imposed and 

collected by the State itself but is 

dedicated to the use of a municipality 

or other entity, that entity would satisfy 

the criteria of direct access to tax funds. 

41C. Comment: A commenter asked if 

a legislatively created entity constitutes 

a ‘‘unit of government’’ if it does not 

have taxing authority but received 

government appropriations. Similarly, 

the commenter asked whether an entity 

that does not receive government 

appropriations, but has legislativelyestablished revenue raising authority or 

performs a legislatively-mandated 

function, would qualify as a unit of 

government. 

41R. Response: In response to 

comments such as this one, we have 

modified the regulation at § 433.50 to 

make clear that a unit of government has 

either taxing authority or direct access 

to tax revenues. We have added the 

phrase ‘‘has direct access to tax 

revenues’’ to recognize as governmental 

those entities that do not have taxing 

authority, but do have direct access to 

tax revenues that are imposed by a 

related unit of government. By direct 

access, we do not mean simply that the 

entity receives appropriated funds or 

enters into a contractual arrangement 

with a unit of government. The entity 

must have the ability to receive funding 

as an integral part of a unit of 

government with taxing authority which 

is legally obligated to fund the health 

care provider’s expenses, liabilities, and 

deficits. 

42C. Comment: A commenter asked if 

a legislatively created entity constitutes 

a ‘‘unit of government’’ if it does not 

have taxing authority but receives both 

a government appropriation and other 

revenues through its legislativelyestablished revenue raising authority. If 

the answer is yes, the inquirer asks if 

there are any limits on the amount or 

source of funds that such an entity may 

spend, transfer, or contribute as the nonFederal share of an expenditure eligible 

for FFP. 

42R. Response: The determination of 

governmental status is a fact-specific 

determination and may depend on the 

precise circumstances. States must 

apply the Federal statutory and 

regulatory criteria to each individual 

health care provider to make initial 

determinations of governmental status. 

In this instance, it is relevant whether 

the entity has direct access to tax 

revenues as an integral part of a unit of 

government with taxing authority which 

is legally obligated to fund the health 

care provider’s expenses, liabilities, and 

deficits. 

43C. Comment: A commenter asked if 

the proposed § 433.50(a)(1)(ii)(B), which 

speaks directly of health care providers, 

also includes governmental units 


jlentini on PROD1PC65 with RULES3
29760 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

without taxing authority that are not 

health care providers. 

43R. Response: This provision of the 

regulation is only applicable to health 

care providers. However, we have 

revised § 433.50(a)(1)(i) to address the 

situation of governmental units that do 

not have direct taxing authority, but are 

able to directly access funding as an 

integral part of a unit of government 

with taxing authority which is legally 

obligated to fund the health care 

provider’s expenses, liabilities, and 

deficits, so that a contractual 

arrangement with the State or local 

government is not the primary or sole 

basis for the health care provider to 

receive tax revenues. 

44C. Comment: A number of 

commenters inquired about whether or 

not appropriations made by a 

government for the benefit of a public or 

private university college of medicine, 

which operates a faculty practice plan, 

would be a permissible source of the 

non-Federal share of Medicaid 

expenditures. 

44R. Response: Governmentallyoperated health care providers may use 

appropriated tax revenues to fund the 

non-Federal share of Medicaid 

expenditures through IGTs or CPEs. 

Governmentally-operated health care 

providers are not required to 

demonstrate that the funds transferred 

or certified are, in fact, tax revenues. A 

governmentally-operated health care 

provider is always able to access tax 

revenue, a characteristic of which 

reflects a health care provider’s 

governmental status, and helps to define 

eligibility to participate in IGTs and/or 

CPEs. 

Under Public Law 102–234, Congress 

included an exception to a general 

prohibition on the receipt of voluntary 

contributions from health care providers 

by allowing units of government, 

including governmentally-operated 

health care providers, to participate in 

the intergovernmental transfer and 

certified public expenditure process. 

Specifically, section 1903(w)(6)(A) of 

the Social Security Act states: 

Notwithstanding the provisions of this 

subsection, the Secretary may not restrict 

States’ use of funds where such funds are 

derived from State or local taxes (or funds 

appropriated to State university teaching 

hospitals) transferred from or certified by 

units of government within a State as the 

non-Federal share of expenditures under this 

title, regardless of whether the unit of 

government is also a health care provider, 

except as provided in section 1902(a)(2), 

unless the transferred funds are derived by 

the unit of government from donations or 

taxes that would not otherwise be recognized 

as the no-Federal share under this section. 

This statutory language is very clear 

in its direction regarding eligibility to 

participate in financing the non-federal 

share of Medicaid payments. There is 

nothing in the Medicaid statute that 

would indicate non-governmental units 

could help a State finance its share of 

Medicaid payments, particularly in light 

of the significant statutory penalties 

States face for receiving provider-related 

donations as the non-Federal share of 

Medicaid payments (that is, non-bona 

fide provider-related donations). 

45C. Comment: One commenter asked 

CMS to modify the provisions of the 

regulation to recognize an entity as a 

unit of government even though the 

entity may not itself have taxing 

authority, so long as the entity’s owner 

has taxing authority and can transfer 

funds or lend its bonding authority to 

the entity. 

45R. Response: We have modified the 

regulation at § 433.50 to indicate that a 

unit of government has either taxing 

authority or direct access to tax 

revenues. We have added the phrase 

‘‘has direct access to tax revenues’’ to 

recognize as governmental those entities 

that do not have taxing authority, but do 

have direct access to tax revenues that 

are imposed by a parent or related unit 

of government. 

For example, when a tax is imposed 

and collected by a State but is dedicated 

for use by a municipality or other entity, 

that entity would satisfy the criteria of 

direct access to tax revenues. Similarly, 

a county-operated hospital that is 

recognized in the county’s budget to 

receive local tax subsidies via the 

county appropriation process, and 

without the need to contract for such tax 

revenues, would satisfy the criteria of 

direct access to tax revenues. 

46C. Comment: Multiple commenters 

noted that taxing authority is not a 

precondition for an entity to be a unit 

of government. These commenters 

observe that while no one would doubt 

that a municipality is a unit of 

government, States frequently restrict, 

and may (absent State constitutional 

considerations) entirely suspend, 

municipalities’ powers of taxation. 

Thus, these commenters contend that 

CMS’s requirement that a governmental 

entity must have ‘‘ taxing authority’’ in 

order to be considered a unit of 

government whose funds may be used 

as the state share of Medicaid 

expenditures is adding a requirement 

that fundamentally interferes with a 

State’s own internal governmental 

structure. Therefore, the commenters 

argue that CMS should omit taxing 

authority as a necessary precondition 

for unit of government status and defer 

to State decisions in this matter. 

46R. Response: The provisions of this 

regulation concerns the question of 

whether, in determining the amount of 

federal funds to which a State is entitled 

under the Medicaid program, transfers 

of funds to the State government from 

a Medicaid health care provider that is 

an entity other than the State 

government will be entitled to 

exemption from consideration as a 

provider tax or donation, and when 

expenditures of such an entity can be 

certified as ‘‘public expenditures’’ that 

constitute the non-Federal share of 

Medicaid expenditures. It also sets forth 

a consistent definition of entities that 

must be treated as governmental in 

determining the reasonableness of 

Medicaid payment rates. This regulation 

does not control how the State will 

organize itself. Moreover, the provisions 

of this regulation do not preclude 

entities that do not qualify as units of 

government from participating in the 

Medicaid program and contributing 

funds that are consistent with 

applicable provider tax and donation 

requirements. 

47C. Comment: Many commenters 

questioned CMS’s authority to define a 

‘‘unit of government’’ in the manner 

described in this regulation. Several 

commenters questioned the basis for the 

regulation’s requirement that a health 

care provider must have taxing 

authority or be an integral part of a unit 

of government with taxing authority. In 

this regard, commenters asserted their 

belief that Congress provided greater 

latitude in the statute for States and 

localities to determine which entities 

are units of government. 

47R. Response: As discussed 

previously, we read the statutory 

definition of governmental entities to 

require certain common qualities, such 

as taxing authority, or the ability to 

directly access tax funding. Moreover, 

we believe this requirement is 

consistent with the overall statutory 

rationale. The governmental exception 

from provider tax and donation 

restrictions at section 1903(w)(6)(A) of 

the Act is limited to the ‘‘use of funds 

where such funds are derived from State 

or local taxes’’ (with a special provision 

for State university teach hospitals that 

receive appropriated funds which we 

discuss in the following response). An 

entity that has no taxing authority or 

direct access to tax revenues would be 

unable to qualify for that exception. 

Thus limitation of this exception to the 

use of tax funds supports our 

interpretation that the reference to 

‘‘units of government’’ was intended 

only to include entities with access to 

such tax funds. 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29761 

We disagree that this definition 

removes flexibility to finance Medicaid 

programs with state or local tax funds. 

The accounting treatment for such 

financing, however, may need to change 

to ensure program integrity consistent 

with the requirements of the new 

regulatory definition. This definition 

means that, for permissible financing 

arrangements, the entity that has taxing 

authority or direct access to tax funds 

must be the entity that either transfers 

the funds to the control of the State 

Medicaid agency, or that certifies 

expenditures eligible for FFP. For 

example, if a hospital district does not 

have taxing authority or direct access to 

tax revenues, it would not meet the 

requirements as a unit of government. 

To the extent that a county government, 

which had taxing authority or direct 

access to tax revenues, was funding 

Medicaid services through payments to 

the hospital district, however, the 

county could use that funding to make 

intergovernmental transfers, or could 

(with supporting documentation from 

the hospital) certify public expenditures 

based on that funding. 

48C. Comment: A number of 

commenters noted statements in the 

provisions of the regulation that CMS is 

modifying provisions at § 433.50(a)(1) to 

make the definition of a unit of 

government consistent with section 

1903(w)(7)(G) of the Act, but observed 

that the inclusion of ‘‘ taxing authority’’

in the proposed regulatory provision is 

not found in section 1903(w)(7)(G) of 

the Act. Other commenters note that the 

term ‘‘ taxing authority’’ is not found at 

section 1902(a)(2) of the Act either. 

Therefore, these commenters assert that 

the provisions of the regulation are 

inconsistent with the Social Security 

Act. 

48R. Response: As discussed 

previously, the various statutory 

references to, and definitions of, 

governmental entities appear to reflect 

an understanding that such entities have 

common qualities, one of which is 

taxing authority or the ability to directly 

access tax funding. As noted above, we 

read the statutory language at section 

1903(w)(7)(G) of the Act to refer to 

entities that have the qualities generally 

associated with all of the listed terms. 

Section 1902(a)(2) of the Act is silent on 

what ‘‘local sources’’ may contribute the 

non-federal share of Medicaid 

expenditures and must be read in 

conjunction with section 1903(w) of the 

Act and the overall statutory rationale. 

The governmental exception from 

provider tax and donation restrictions at 

section 1903(w)(6)(A) of the Act is 

limited to the ‘‘use of funds where such 

funds are derived from State or local 

taxes’’ (with a special provision for State 

university teach hospitals that receive 

appropriated funds which we discuss in 

the following response). We read the 

exception to be intended to permit wide 

flexibility in the use of tax funds, 

whether State or local. The limitation of 

this exception to the use of tax funds 

supports our interpretation that the 

reference to ‘‘units of government’’ was 

intended only to include entities with 

taxing authority or direct access to such 

tax funds. 

As important, the purpose of the 

provider tax and donation restrictions in 

general was to prevent situations in 

which the State claimed that the health 

care provider contributed a non-federal 

share of claimed expenditures but the 

health care provider may have been 

actually discounting its rate or repaid 

through Medicaid or other payments. 

The provision at section 1903(w)(6)(A) 

of the Act was based on the rationale 

that this concern does not arise when 

the health care provider is a 

governmental entity using state or local 

tax funding for its contribution. To give 

that full effect, the health care provider 

needs to have either taxing authority or 

direct access to tax funding. 

49C. Comment: Many commenters 

who questioned the basis for the 

requirement that a health care provider 

must have taxing authority or be an 

integral part of a unit of government 

with taxing authority offered 

characteristics that they thought should 

be recognized as indicative of 

governmental status. These 

characteristics include: The delegation 

of select governmental powers by the 

unit of government to the entity; criteria 

of governmental status used by the 

Internal Revenue Service (IRS); an 

entity’s public mission; the power to 

issue bonds; exemption from income or 

property tax; governmental involvement 

in a health care provider’s Board of 

Directors; government ownership of the 

property on which the health care 

provider operates; level of public 

oversight; provider agreements with a 

government to provide indigent care; 

rights of a health care provider to 

receive specific local tax revenues; 

creating and enabling legislative 

provisions; government authority to 

terminate an agreement for 

nonperformance; and financing of the 

health care provider’s capital costs by 

the government. 

49R. Response: This regulation 

addresses governmental status for a very 

limited purpose and therefore we look 

only to criteria that are related to that 

purpose. For purposes of Medicaid 

payment and financing, the relevant 

characteristics of a governmental entity 

are those that relate to its financial 

organization including the source of 

funding and liability for its debts. These 

characteristics relate specifically to 

issues raised by the Medicaid statute. 

The provision of the regulation 

requiring that a unit of government must 

have access to tax revenues is consistent 

with the Congressional instruction 

contained in section 1903(w) of the 

Social Security Act. 

As discussed previously, we read the 

statutory definition of governmental 

entities to require certain common 

qualities, such as taxing authority, or 

the ability to directly access tax funding. 

Moreover, we believe this requirement 

is consistent with the overall statutory 

rationale. The governmental exception 

from provider tax and donation 

restrictions at section 1903(w)(6)(A) of 

the Act is limited to the ‘‘use of funds 

where such funds are derived from State 

or local taxes.’’ We read the exception 

to be intended to permit wide flexibility 

in the use of tax funds, whether State or 

local. The limitation of this exception to 

the use of tax funds supports our 

interpretation that the reference to 

‘‘units of government’’ was intended 

only to include entities with access to 

such tax funds. 

50C. Comment: Several commenters 

cited section 1903(d)(1) of the Act to 

argue Congressional intent with respect 

to the types of entities that may 

participate in the financing of the nonFederal share of Medicaid. This section 

of the statute requires States to submit 

quarterly reports for purposes of 

drawing down the Federal share, in 

which they must identify ‘‘the amount 

appropriated or made available by the 

State and its political subdivisions.’’

The commenters observed that this 

reference to political subdivisions does 

not include a requirement that the 

subdivisions have taxing authority, 

suggesting that the regulation’s linkage 

to taxing authority as a requirement for 

recognition as a unit of government 

belies Congressional intent. 

50R. Response: While the commenters 

did not cite to any definition of 

‘‘political subdivision’’ of a State, the 

definition and criteria that we proposed 

for a unit of government is broader than 

a ‘‘political subdivision’’ of the State 

itself. That definition includes entities 

that are substantially independent of the 

State, but have been accorded tax 

authority or direct access to tax funding. 

If we were to restrict the ability to 

contribute the non-federal share only to 

political subdivisions of the State, that 

would not be consistent with the other 

relevant statutory provisions. 

51C. Comment: Multiple commenters 

discussed preamble language which 


jlentini on PROD1PC65 with RULES3
29762 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

says that tax revenue that is 

contractually obligated between a 

governmental entity and a health care 

provider to provide indigent care is not 

considered a permissible source of the 

non-Federal share of funding for 

purposes of Medicaid payments, and 

argued that this restriction violates 

Section 1903(w)(6) of the Act, which 

states that the Secretary may not restrict 

any transfers or certifications ‘‘where 

such funds are derived from State or 

local taxes.’’ A number of commenters 

disagreed with this same language, 

claiming that CMS has no authority to 

limit how a health care provider and 

unit of government use tax revenue to 

best achieve the objective of providing 

indigent care. 

Other commenters recommended that 

CMS clarify that it will not view the 

transfer of taxpayer funding for a 

specific health care provider as an 

indirect provider donation and allow 

those appropriations to be considered 

IGTs. The commenters pointed to 

language in the preamble that stipulates 

that ‘‘health care providers that forego 

tax revenue that has been contractually 

obligated for the provision of health care 

services to the indigent * * * are 

making provider-related donations.’’ A 

commenter also questioned whether the 

following situation with respect to 

appropriated funds would be 

considered an indirect provider 

donation or an eligible IGT: a county 

that is statutorily required to provide a 

fixed appropriation to a private hospital, 

and the statute expressly allows that 

appropriation to be used as IGT. The 

commenter provided another scenario 

and questioned if this would quality as 

an appropriate IGT: a formerly public 

hospital received a State appropriation, 

which it currently uses as an IGT. 

51R. Response: Section 1903(w)(6)(A) 

of the Medicaid statute provides that 

only governmental units may transfer or 

certify funds based on governmental 

status, and separately indicates that the 

funds must be derived from state or 

local tax revenues. A non-governmental 

provider cannot transfer or certify funds 

(except consistent with provider 

donation rules) under any 

circumstances. If a non-governmental 

provider receives appropriated funds or 

other payments from a unit of 

government, that unit of government 

may certify any expenditures made to 

that non-governmental provider that 

would qualify for FFP as an expenditure 

under the State plan. Tax revenue that 

has been contractually or otherwise 

obligated to a non-governmentallyoperated health care provider for nonMedicaid services is not a permissible 

source of the non-Federal share of 

Medicaid payments under the statute. If 

a health care provider would forego 

revenues from that governmental unit, it 

would be a donation from that nongovernmental provider. A Medicaid 

payment that can be linked to a 

provider-related donation renders such 

donation non-bona-fide and thus an 

impermissible source of the non-Federal 

share. This is consistent with section 

1903(w)(6)(A) of the Act, which permits 

transferred funds from a local 

government to the State to be used for 

purposes of financing the non-Federal 

share of Medicaid payments, ‘‘unless 

the transferred funds are derived by the 

unit of government from donations or 

taxes that would not otherwise be 

recognized as the non-Federal share.’’

52C. Comment: A number of 

commenters noted the regulation’s 

preamble statement that in order for tax 

funding to be eligible as the non-Federal 

share, it cannot be committed or 

earmarked for non-Medicaid activities. 

One such commenter stated that State or 

local appropriations are not precisely 

related to Medicaid activities and that 

the applicable allotments of tax 

revenues are committed for defined 

purposes, such as public assistance 

programs that include ‘‘Medicaid and 

other activities’’ or ‘‘Medicaid and other 

needy individuals.’’ This commenter 

observed that the Departmental Appeals 

Board recognizes the difference between 

expenditures for these items and the 

accounting entries that determine 

Medicaid expenditures eligible for FFP. 

Governmental appropriations are 

routinely committed or earmarked for 

the former, while FFP is applicable only 

to the latter. Another commenter feared 

that this preamble language was 

ambiguous because government funding 

can be ‘‘earmarked’’ for a purpose other 

than Medicaid that is actually consistent 

with the use of funds for Medicaid. 

Therefore, these commenters believe 

that this provision of the regulation 

requires clarification and more 

explanation about how it would be 

applied. 

52R. Response: In response to this 

comment, we clarify that our intent was 

that we would not recognize as units of 

government qualified to contribute nonfederal share those entities with access 

to tax funds that were committed or 

earmarked solely for non-Medicaid 

activities (or to recognize contributions 

in excess of the amount of funding 

available for Medicaid activities). Our 

concern was to preclude arrangements 

where entities whose access to tax 

funding was limited to non-Medicaid 

activities ‘‘borrow’’ those funds to 

contribute the non-federal share of 

Medicaid expenditures and then 

‘‘repay’’ those funds from Medicaid 

reimbursements (with the result that the 

remaining Medicaid funding is federal 

only). We did not intend to suggest that 

it would be a problem if Medicaid was 

one of several permissible uses for the 

tax funding. 

53C. Comment: One commenter 

disagreed with the part of the regulation 

which says that tax revenue that is 

contractually obligated between a 

governmental entity and a health care 

provider to provide indigent care is not 

considered a permissible source of the 

non-Federal share of funding for 

purposes of Medicaid payments. The 

commenter indicated that CMS should 

permit funding under an indigent care 

contract to be transferred by the local 

government to the State to draw down 

Federal matching funds for Medicaid 

payments. 

53R. Response: Local government tax 

dollars that are not contractually 

committed for the purpose of indigent 

care services or any other non-Medicaid 

activity can be directly transferred by 

the local government to a State as the 

non-Federal share of Medicaid 

payments. But when a nongovernmental provider forgoes payment 

to which it is contractually entitled from 

a local government, it would be making 

a provider donation. 

54C. Comment: One commenter stated 

their understanding of section 

1903(w)(6)(A) of the Act to indicate that 

as long as the funds used by a 

governmental entity for the non-federal 

share of Medicaid payments issue from 

or originate from local taxes, they would 

fall under the type of funds that may not 

be restricted by CMS. The commenter 

disagreed with CMS’ position in the 

provision of the regulation that the nonfederal share of Medicaid payments 

must be funded by taxes. The 

commenter requested that CMS clarify 

that all of an entity’s revenues, whether 

received as direct appropriations from 

its local taxing authority or derived from 

such appropriations, which help to pay 

for capital improvements, employees 

and other costs, are public funds and 

can be used as the non-federal share of 

Medicaid payments. 

54R. Response: We disagree. Section 

1903(w)(6)(A) of the Act protects IGTs 

and CPEs only when ‘‘derived from 

State or local taxes (or funds 

appropriated to a State university 

teaching hospital).’’ This statutory 

clause would not be necessary if any 

governmental entity revenues could be 

used for protected transactions. When 

funds are received by a health care 

provider in the course of its normal 

operations, those funds are not ‘‘derived 

from State or local taxes’’ unless they 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29763 

are tax funds or are funds appropriated 

by a government entity from tax 

revenues and paid for Medicaid services 

at the health care provider. Funds 

appropriated from tax revenues and 

paid for non-Medicaid services at the 

health care provider lose their 

characteristic as ‘‘derived from State or 

local taxes’’ and, to the extent 

unexpended on the designated nonMedicaid services, would be profits 

derived from the provision of those 

services. 

Such funds could not be used to 

contribute the non-Federal share of 

Medicaid expenditures because they are 

derived from the operations of the 

health care provider, rather than from 

State or local tax revenues. We 

recognize that funds received for 

specific costs, such as capital 

improvements or employee costs, may 

in part fund the costs of Medicaid 

services. These funds could be used to 

fund the non-Federal share to the extent 

that those specific costs may be properly 

allocated to Medicaid services, in 

accordance with the governmentallyoperated health care provider’s 

approved cost allocation plan. We also 

recognize that funds from different 

sources can be commingled in health 

care provider accounts. As a result, in 

this regulation we are not requiring that 

governmentally-operated health care 

providers trace funding precisely. We 

are requiring that, to qualify as a unit of 

government, the entity must have taxing 

authority or direct access to State or 

local tax funds in at least the amount of 

the IGT or CPE; and we are requiring 

that a health care provider retain the full 

amount of the total computable payment 

claimed by the State under the Medicaid 

State plan. 

B. ‘‘Tool to Evaluate the Governmental 

Status of Providers’’ Form 

55C. Comment: Several commenters 

noted that the ‘‘Tool to Evaluate the 

Governmental Status of Providers’’ form 

does not include an indication of the 

final result on the form and 

recommended that the form include 

such a final determination. 

55R. Response: We agree and we have 

revised the form to include an 

indication of the State’s determination 

of a health care provider’s governmental 

status. * * * 

56C. Comment: A few commenters 

noted that the ‘‘Tool to Evaluate the 

Governmental Status of Providers’’ form 

would need to be completed and 

submitted by all purportedly 

governmental providers in America 

within three months of the effective date 

of the regulation and suggested that 

CMS will not have the resources to 

review all these submissions and 

determine whether or not each health 

care provider is a ‘‘unit of government’’

in a timely manner. Concern was 

expressed that delays by CMS in 

reaching a decision about whether or 

not entities are governmental may 

impede provider reimbursements. 

56R. Response: In this final rule, we 

are providing that States must apply the 

statutory and regulatory criteria to each 

individual health care provider to make 

initial determinations of governmental 

status. As we indicated in the proposed 

rule, we have developed a ‘‘Tool to 

Evaluate the Governmental Status of 

Health Care Providers.’’ In response to 

comments on this rule, we have 

modified that form to allow States to 

indicate their initial determination of a 

health care provider’s governmental 

status. 

States must apply the statutory and 

regulatory criteria to each individual 

health care provider to make initial 

determinations of governmental status. 

We have modified the ‘‘Tool to Evaluate 

the Governmental Status of Health Care 

Providers’’ to allow States to indicate 

their initial determination of a health 

care provider’s governmental status. 

States will be required to maintain 

these determinations on file and will be 

required to submit these forms to CMS 

upon request, in connection with CMS 

review of Medicaid institutional and 

non-institutional reimbursement State 

plan amendments involving 

governmental providers and with 

Medicaid or SCHIP financial 

management reviews. In addition, we 

intend to request, under our general 

authority to require supporting 

documentation for claimed 

expenditures, and the existing 

regulatory authority at 42 CFR § 431.16, 

that States submit a complete list of 

governmentally-operated health care 

providers to the Associate Regional 

Administrator for Medicaid of each 

State’s respective CMS Regional Office 

with the first quarterly expenditure 

report due after 90 days of the effective 

date of the regulation. 

CMS is not requiring States to 

complete the ‘‘Tool to Evaluate the 

Governmental Status of Health care 

Providers’’ form for each Indian tribe 

and tribal organization within the State, 

because the unique criteria for 

determining the governmental status of 

tribes and tribal organizations makes the 

tool inapplicable to these entities. 

However, CMS will require each State to 

identify the qualifying tribes and tribal 

organizations (per the criteria at 

§ 433.50) in any list of governmentallyoperated health care providers 

submitted to CMS. Although tribal 

facilities are exempt from the Medicaid 

cost limit, the inclusion of tribes and 

tribal organizations in this list will 

comprehensively identify the universe 

of entities that have been determined by 

the State as eligible to participate in 

financing the non-Federal share of 

Medicaid payments. 

57C. Comment: A number of 

commenters asked for more details 

concerning CMS actions upon receipt of 

the ‘‘Tool to Evaluate the Governmental 

Status of Providers’’ form. Specifically, 

the commenters wanted more 

information on the timeframes for CMS 

decisions; how CMS will notify States of 

a determination; means for amending 

information previously provided; and 

avenues for appeal when States, local 

governments, or health care providers 

disagree with the decision as to whether 

or not a health care provider is found to 

be a unit of government. 

57R. Response: As discussed above, in 

response to comments, we have 

provided in the final rule that States 

must apply the statutory and regulatory 

criteria to each individual health care 

provider to make initial determinations 

of governmental status. We have 

modified the ‘‘Tool to Evaluate the 

Governmental Status of Health Care 

Providers’’ to allow States to indicate 

their initial determination of a health 

care provider’s governmental status. 

States may develop reasonable 

determination, notice and appeal 

processes for health care providers 

affected by State determinations as they 

deem appropriate. If CMS disagrees 

with a State’s initial determination of 

governmental status, CMS intends to 

request a timely change in the State’s 

determination prior to pursuing any 

other measures including, but not 

limited to, denial of Medicaid 

reimbursement SPAs and/or 

disallowances of claims for Federal 

financial participation. States can 

appeal such actions through existing 

appeal processes. 

58C. Comment: Multiple commenters 

commented on the administrative 

burden associated with completion of 

the ‘‘Tool to Evaluate the Governmental 

Status of Providers’’ form. These 

commenters stated that for some health 

care providers, completion of the form 

may require extensive legal research and 

analysis because of the potential for 

complicated legal implications. These 

commenters contend that the burden 

associated with completing the form is 

disproportionate to the form’s utility, 

especially since it is not clear how CMS 

will ultimately use the form to 

determine governmental status. 

58R. Response: The ‘‘Tool to Evaluate 

the Governmental Status of Health Care 


jlentini on PROD1PC65 with RULES3
29764 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

Providers’’ is designed to guide State 

decision making in applying the 

statutory and regulatory criteria 

regarding the definition of a unit of 

government. The provisions of the 

regulation were designed to ensure 

consistent application of the Federal 

statutory instructions regarding the 

definition of a unit of government. CMS 

recognizes that for purposes of Medicaid 

State financing legal and financial 

arrangements between health care 

providers and units of government vary 

on a case by case basis. We have 

developed standardized and impartial 

regulatory criteria based upon the 

Federal statute, which States must apply 

on a consistent basis to each health care 

provider within the State. 

CMS does not believe the information 

required in the form requires the 

extensive, legal research and analysis as 

the commenters suggest. CMS has the 

responsibility to ensure that the State’s 

initial determinations are consistent 

with the Federal statutory and 

regulatory criteria and reserves the right 

to take any appropriate action 

including, but not limited to denial of 

Medicaid reimbursement State plan 

amendments and/or disallowances of 

claims for Federal financial 

participation, in the event of 

noncompliance with any provision of 

this regulation. States can appeal such 

actions through existing appeals 

processes. 

59C. Comment: One commenter 

recommended that instead of using the 

form, CMS require certifications and 

assurances from health care providers 

and State and local governments 

regarding their governmental status. 

59R. Response: We do not believe that 

certifications and assurances are 

adequate in determining compliance 

with Federal statutory and regulatory 

provisions regarding the unit of 

government definition. 

60C. Comment: One commenter 

argued that the Federal government 

should fund 100% of all costs 

associated with any mandate involving 

the completion of the questionnaire or 

submission of such information to CMS. 

60R. Response: Each State is 

responsible for the proper and efficient 

administration of its Medicaid program. 

Expenses incurred for administration of 

the Medicaid program are eligible for 

Federal matching funds at the regular 50 

percent administrative matching rate. 

61C. Comment: A number of 

commenters asserted that the ‘‘Tool to 

Evaluate the Governmental Status of 

Providers’’ form is unnecessary because 

CMS should defer to States and local 

governments to define which entities 

are units of government for purposes of 

Medicaid financing, based on arguments 

such as statutory authority, principles of 

federalism, and marketplace incentives. 

61R. Response: The ‘‘Tool to Evaluate 

the Governmental Status of Health Care 

Providers’’ is designed to guide State 

decision making in applying the 

statutory and regulatory criteria 

regarding the definition of a unit of 

government. The provisions of the 

regulation were designed to ensure 

consistent application of the Federal 

statutory instructions regarding the 

definition of a unit of government for 

purposes of Medicaid reimbursement 

and State financing. CMS recognizes 

that States play a major role in the 

administration of the Medicaid program 

and that legal and financial 

arrangements between health care 

providers and units of government vary 

on a case by case basis. We have 

developed standardized and impartial 

regulatory criteria based upon Federal 

statute that States must apply on a 

consistent basis to each health care 

provider within the State. 

We considered the possibility of 

deferring to State determinations but we 

concluded that it was important for 

effective oversight review to receive 

standardized information and establish 

a clear, uniform and enforceable 

standard. 

We believe the form will be useful to 

States which will have to apply the 

statutory and regulatory criteria to each 

individual health care provider to make 

initial determinations of governmental 

status. CMS has the responsibility to 

ensure that the State’s initial 

determinations are consistent with the 

Federal statutory and regulatory criteria 

and reserves the right to take any 

appropriate action including, but not 

limited to, denial of Medicaid 

reimbursement State plan amendments 

and/or disallowances of claims for 

Federal financial participation, in the 

event of noncompliance with any 

provision of this regulation. 

62C. Comment: One commenter asked 

CMS for more written guidance on the 

use of this form when the final 

regulation is published. Specifically, the 

commenter asked who is responsible for 

completing the form and what, if any, 

supporting documentation is required. 

Moreover, the commenter noticed that 

the form does not, in its current format, 

require an official signature. 

62R. Response: States must apply the 

statutory and regulatory criteria to each 

individual health care provider to make 

initial determinations of governmental 

status. We have modified the ‘‘Tool to 

Evaluate the Governmental Status of 

Health Care Providers’’ to require that 

an appropriate State official sign the 

State’s initial determination regarding 

the governmental status of a health care 

provider. The State official that will be 

responsible for signing the form will be 

a decision of the State. Further, the State 

will determine what supporting 

documentation may be necessary on a 

case-by-case basis in support of its 

initial determination of a health care 

provider’s governmental status. 

63C. Comment: A number of 

commenters noted that the provisions of 

the regulation suggest that a health care 

provider may be considered a unit of 

government if the health care provider 

appears on the unit of government’s 

consolidated annual financial report. 

Likewise, the commenters observed, the 

provisions of the regulation mention a 

unit of government’s liability for a 

health care provider’s expenses, 

liabilities, and deficits in order for the 

health care provider to be considered a 

unit of government. However, it is not 

clear that responses to questions 

presented on the tool will lead to a final 

determination as to whether or not a 

particular entity is considered a unit of 

government as per the provisions of the 

regulation. Therefore, the commenters 

find a ‘‘disconnect’’ between the 

provisions of the regulation and the 

‘‘Tool to Evaluate the Governmental 

Status of Providers’’ form. This 

disconnect was viewed as creating 

problems when States attempt to 

evaluate whether or not they can rely 

upon IGTs or CPEs from a particular 

health care provider in the future, and 

it may also contribute to unnecessary 

and protracted litigation of an 

apparently arbitrary determination by 

CMS about the governmental status of a 

health care provider. 

63R. Response: States must apply the 

statutory and regulatory criteria to each 

individual health care provider to make 

initial determinations of governmental 

status. We designed the ‘‘Tool to 

Evaluate the Governmental Status of 

Health Care Providers’’ to set up a 

process to collect and maintain 

information necessary for such 

determinations. We believe the form 

fully reflects the statutory and 

regulatory criteria necessary for States to 

make initial determinations of 

governmental status. 

We have modified the form to allow 

States to indicate their initial 

determination of a health care 

provider’s governmental status. We 

understand that there will be challenges 

in implementing the determination 

process. As States apply the statutory 

and regulatory criteria, CMS will 

exercise oversight review and will issue 

guidance on the implementation of the 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29765 

statutory and regulatory criteria if 

warranted. 

64C. Comment: One commenter asked 

CMS to provide instructions and/or 

direction for the preparation and 

submission of the form to assist the 

State in analyzing the complex financial 

and organizational relationships which 

exist in the varied governmental units 

within the State. The commenter 

suggests that CMS provide the criteria 

and direction for the States to determine 

that a health care provider is unit of 

government with the provision that 

CMS may review or audit the State’s 

determination. 

64R. Response: The ‘‘Tool to Evaluate 

the Governmental Status of Health Care 

Providers’’ is designed to guide State 

decision making in applying the 

statutory and regulatory criteria 

regarding the definition of a unit of 

government. The provisions of the 

regulation were designed to ensure 

consistent application of the Federal 

statutory instructions regarding the 

definition of a unit of government. CMS 

recognizes that for purposes of Medicaid 

State financing legal and financial 

arrangements between health care 

providers and units of government vary 

on a case by case basis. We have 

developed standardized and impartial 

regulatory criteria based upon the 

Federal statute, which States must apply 

on a consistent basis to each health care 

provider within the State. CMS believes 

the form fully reflects the statutory and 

regulatory criteria necessary for States to 

make initial determinations of 

governmental status. 

We understand that there will be 

challenges in implementing the 

determination process. As States apply 

the statutory and regulatory criteria, 

CMS will exercise oversight review and 

will issue guidance on the 

implementation of the statutory and 

regulatory criteria if warranted. 

65C. Comment: Multiple commenters 

inquired specifically about the State 

Medicaid agency’s responsibility for 

identifying a health care provider as 

governmentally operated. If the provider 

has not identified itself as a 

governmental health care provider, must 

the State Medicaid agency establish 

procedures to make such an 

identification? 

65R. Response: It is the State’s 

responsibility to make initial 

determinations regarding the 

governmental status of each health care 

provider. The ‘‘Tool to Evaluate the 

Governmental Status of Providers’’ form 

has been modified to reflect the State’s 

initial determination, and a signature 

line to be signed by an appropriate State 

official has been added. States may 

develop procedures to facilitate the 

identification of a governmentallyoperated health care provider and 

include appeals processes for health 

care providers affected by State 

determinations. 

66C. Comment: One commenter 

observed that CMS has collected 

information about the governmental 

status of health care providers in the 

past and stated that based on 

information previously obtained by 

CMS, the ‘‘Tool to Evaluate the 

Governmental Status of Providers’’ form 

is unnecessary and wasteful. 

66R. Response: It is unclear as to what 

information was previously provided to 

CMS regarding governmental status of 

health care providers. The ‘‘Tool to 

Evaluate the Governmental Status of 

Health Care Providers’’ is designed to 

guide State decision making in applying 

the statutory and regulatory criteria 

regarding the definition of a unit of 

government. The provisions of the 

regulation were designed to ensure 

consistent application of the Federal 

statutory instructions regarding the 

definition of a unit of government. We 

have developed standardized and 

impartial regulatory criteria based upon 

Federal statute that States must apply 

on a consistent basis to each health care 

provider within the State. 

CMS has the responsibility to ensure 

that the initial determinations are 

consistent with the Federal statutory 

and regulatory criteria and reserves the 

right to take any appropriate action 

including, but not limited to, denial of 

Medicaid reimbursement State plan 

amendments and/or disallowances of 

claims for Federal financial 

participation, in the event of 

noncompliance with any provision of 

this regulation. 

67C. Comment: One commenter noted 

that the questionnaire ‘‘Tool to Evaluate 

the Governmental Status of Providers’’

form would need to be completed and 

submitted by all school districts in 

America within three months of the 

effective date of the regulation and 

suggested that CMS will not have the 

resources to review all these 

submissions and determine whether or 

not each school district is a ‘‘unit of 

government’’ in a timely manner. The 

commenter believes it is obvious that 

school districts are governmental and 

should therefore be exempt from the 

requirement to complete the 

questionnaire. 

67R. Response: States must apply the 

statutory and regulatory criteria to each 

individual health care provider to make 

initial determinations of governmental 

status. We have modified the ‘‘Tool to 

Evaluate the Governmental Status of 

Health Care Providers’’ to allow States 

to indicate their initial determination of 

a health care provider’s governmental 

status. 

States will be required to maintain 

these determinations on file and will be 

required to submit these forms to CMS 

upon request, in connection with CMS 

review of Medicaid institutional and 

non-institutional reimbursement State 

plan amendments involving 

governmental providers and with 

Medicaid or SCHIP financial 

management reviews. 

C. Funds From Units of Government as 

the State Share of Financial 

Participation (§ 433.51) 

1. Intergovernmental Transfers (IGTs) 

68C. Comment: One commenter 

suggested that Congress intended that 

section 1903(w)(7)(G), which defines the 

term ‘‘unit of local government,’’ was 

only applicable to section 1903(w)(1)(A) 

of the Act, and was not applicable to 

section 1903(w)(6)(A) of the Act. The 

writer noted the absence of the word 

‘‘local’’ in section 1903(w)(6)(A) and 

suggested that such an omission was 

deliberate because Congress meant 

something different in this Section. 

Specifically, the commenter claimed 

that Congress used the narrower term 

‘‘unit of local government’’ to define 

those government entities subject to the 

prohibition on provider donations and 

taxes (1903(w)(1)(A)), but recognized 

that other government entities may 

permissibly make IGTs, and thus 

purposely used the broader and 

different term ‘‘unit of government’’ in 

the IGT section of the statute 

(1903(w)(6)(A)). Therefore, the writer 

suggests, CMS is misguided in applying 

the statute’s ‘‘unit of local government’’

reference to section 1903(w)(6)(A) of the 

Act. 

68R. Response: As discussed 

previously, we are attempting to 

interpret the statutory references and 

definitions of governmental entities to 

ensure uniformity and consistency. We 

agree that we could have adopted 

different operational definitions for 

different purposes, but we concluded 

that such an approach would be 

confusing and was unnecessary. Our 

reading requires certain common 

qualities, one of which is taxing 

authority, or the ability to directly 

access tax funding. As noted above, we 

read the statutory language at section 

1903(w)(7)(G) of the Act to refer to 

entities that have the qualities generally 

associated with the specifically 

identified listed terms. One of those 

qualities, which is referenced in the 

governmental exception at section 


jlentini on PROD1PC65 with RULES3
29766 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

1903(w)(6)(A) of the Act, is taxing 

authority or the ability to directly access 

tax funding. Even though sections 

1903(w)(6)(A) and 1903(w)(7)(G) of the 

Act are not directly binding for all 

statutory purposes, we sought a 

definition that would be consistent with 

readings of both statutory provisions. 

69C. Comment: One commenter 

quoted prior CMS statements from 

regulations published in 2001 and 2002, 

wherein CMS did not take regulatory 

action with respect to intergovernmental 

transfers, suggesting that CMS is now 

not only contradicting itself but also 

imposing restrictions on IGTs that 

Congress never intended. 

69R. Response: The provisions of this 

regulation continue to protect the use of 

IGTs; the regulation merely sets out in 

clear terms the circumstances in which 

the provisions of section 1903(w)(6)(A) 

of the Act provides that an IGT from a 

governmentally-operated health care 

provider would not trigger review as a 

provider tax or donation. This 

regulation supersedes prior CMS 

statements on the issue and would 

provide important clarity in an area that 

has been the subject of much confusion. 

Furthermore, we disagree with the 

commenters’ contention concerning 

congressional intent. In section 

1903(w)(6)(A) of the Act, the Medicaid 

statute clearly protects only IGTs or 

certified public expenditures that are 

‘‘derived from State or local taxes (or 

funds appropriated to State university 

teaching hospitals) transferred or 

certified by units of government within 

a state.’’ To the extent that the 

provisions of this regulation impose 

restrictions on IGTs, such restrictions 

are consistent with this statutory 

provision and serve to clarify and give 

meaning to the statutory language. 

70C. Comment: Many commenters 

stated that the provisions of the 

regulation require sources of all IGTs 

must be state or local taxes and that 

such a restriction on IGT funding is 

inconsistent with the Medicaid statute. 

These commenters noted that 

governments derive their funding from 

a variety of sources, not just tax 

proceeds, and such funds are no less 

governmental due to their source. Some 

of the non-tax sources of governmental 

revenue that were cited include patient 

care revenues from other third party 

payers, penalties, fees, grants, earned 

interest, library fines, restaurant 

inspection fees, vending machine sales, 

traffic fines, unreserved general fund 

balances, sale or lease of public 

resources, legal settlements and 

judgments, revenue from bond 

issuances, tobacco settlement funds, and 

gifts. These commenters suggested that 

CMS should allow all public funding, 

regardless of source, to be used as the 

non-Federal share of Medicaid 

expenditures. A number of commenters 

cited Section 1902(a)(2) of the Act, 

which permits up to 60 percent of the 

non-Federal share to come from ‘‘local 

sources,’’ without further restriction. 

This citation was given to counter a 

perceived CMS position that the 

provisions of the regulation require that 

the sources of all IGTs must be state or 

local taxes. Several other commenters 

suggested that CMS should allow all 

public funding, regardless of source, to 

be used as the non-Federal share of 

Medicaid expenditures, and that CMS 

has no statutory authority to limit the 

sources of transferred funds to tax 

revenue only. 

70R. Response: Provisions regarding 

non-federal share financing were 

established in recognition of the Federal 

Medicaid statute at section 1903(w), 

which places severe statutory restriction 

on States’ receipt of funds from health 

care providers to fund Medicaid 

payments. (see Public Law 102–234, 

section 2, Prohibition on Use of 

Voluntary Contributions, and Limitation 

on the Use of Provider-Specific Taxes to 

Obtain Financial Participation under 

Medicaid.’’). Under Public Law 102–

234, the Congress included an exception 

to a general prohibition on the receipt 

of voluntary contributions from health 

care providers by allowing units of 

government, including governmentallyoperated health care providers, to 

participate in financing of the nonFederal share via intergovernmental 

transfers and certified public 

expenditures. Specifically, section 

1903(w)(6)(A) of the Social Security Act 

states: 

Notwithstanding the provisions of this 

subsection, the Secretary may not restrict 

States’ use of funds where such funds are 

derived from State or local taxes (or funds 

appropriated to State university teaching 

hospitals) transferred from or certified by 

units of government within a State as the 

non-Federal share of expenditures under this 

title, regardless of whether the unit of 

government is also a health care provider, 

except as provided in section 1902(a)(2), 

unless the transferred funds are derived by 

the unit of government from donations or 

taxes that would not otherwise be recognized 

as the no-Federal share under this section. 

This statutory language allows funding 

derived from State or local taxes to be 

used for purposes of financing the nonFederal share of Medicaid payments. 

CMS recognizes that units of 

government that are not health care 

providers may collect revenue from a 

variety of sources (including fees, 

grants, earned interest, fines, sale or 

lease of public resources, legal 

settlements and judgments, revenue 

from bond issuances, tobacco settlement 

funds) that are ultimately deposited into 

the government’s general fund, which is 

used to finance the government’s 

operations. We find such general fund 

revenues to be acceptable sources of 

financing the non-Federal share of 

Medicaid payments, as long as the 

general fund does not derive any of its 

revenue from impermissible sources 

(such as, ‘‘recycled’’ Medicaid 

payments, Federal grants precluded 

from use as State match, impermissible 

taxes, non-bona fide provider-related 

donations). 

Governmentally-operated health care 

providers may maintain accounts 

separate from the general fund to 

finance the operations of the 

governmentally-operated health care 

provider. The governmentally-operated 

health care provider’s account may 

include patient care revenues from other 

third party payers and other revenues 

similar to those listed above. Such 

revenues would also be acceptable 

sources of financing the non-Federal 

share of Medicaid payments, as long as 

the governmentally-operated health care 

provider’s operating account does not 

derive any of its revenue from 

impermissible sources (such as, 

‘‘recycled’’ Medicaid payments, Federal 

grants precluded from use as State 

match, impermissible taxes, non-bona 

fide provider-related donations). 

As previously explained, 

governmentally-operated health care 

providers are not required to 

demonstrate that funds transferred are, 

in fact, tax revenues. A governmentallyoperated health care provider is always 

able to access tax revenue, a 

characteristic of which reflects a health 

care provider’s governmental status, and 

helps to define eligibility to participate 

in IGTs. 

71C. Comment: A number of 

commenters asked CMS to clarify that 

intragovernmental transfers (transfers 

within a unit of government, such as a 

transfer from the State’s mental health 

agency to the State Medicaid Agency) 

are not considered ‘‘intergovernmental 

transfers’’ for purposes of § 433.51. 

71R. Response: Neither the Medicaid 

statute nor Federal regulation uses the 

term ‘‘intragovernmental transfer.’’ For 

purposes of the Medicaid statute, a 

transfer of funding between any 

governmental entity within a State to 

the State Medicaid Agency is 

considered an intergovernmental 

transfer, irrespective of whether or not 

those entities are operated by the same 

unit of government (e.g., a State 

Department of Mental Health 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29767 

transferring funds to a State Medicaid 

agency). 

72C. Comment: One commenter 

recommended that CMS permit IGTs 

from units of government in other States 

(like governmentally operated border 

hospitals) to be considered permissible 

sources of financing the non-Federal 

share. The commenter argues that it is 

illogical that States are required to 

reimburse such out-of-state health care 

providers the same as in-state health 

care providers but cannot rely upon 

those out-of-state governmental health 

care providers for assistance with 

financing. 

72R. Response: A governmentallyoperated health care provider in one 

State is not under the governmental 

control of another State. Therefore, 

funds transferred by a governmentallyoperated health care provider to a State 

Medicaid Agency in another State are 

considered provider-related donations. 

See Georgia Department of Community 

Health, DAB No. 1973 (2005). 

73C. Comment: One commenter asked 

that the regulation explicitly state the 

local dollars will be considered valid 

IGTs if they originated at a unit of 

government, regardless of the entity that 

actually transfers the payment to the 

State. This commenter specifically 

mentions Medicaid Behavioral Health 

Plans, which receive payments from 

local governments and, in turn, forward 

those payments to the State Medicaid 

Agency as matching funds to pay for the 

non-Federal share. Another commenter 

requested that CMS allow any payments 

made to health care providers by 

governmental entities responsible for 

providing health care services to be 

used as IGTs. 

73R. Response: Any time state or local 

tax dollars are used to make ‘‘payments’’

for services to health care providers, 

such payments are considered revenues 

of the health care provider and are no 

longer considered State or local tax 

dollars. Governmentally-operated health 

care providers may participate in 

intergovernmental transfers (IGTs) and 

use operating revenues to make such 

transfers. Non-governmentally-operated 

health care providers cannot participate 

in IGTs, and contributions of their 

operating revenue constitutes a 

provider-related donation. A Medicaid 

payment that can be linked to a 

provider-related donation renders such 

donation non-bona fide and thus an 

impermissible source of the non-Federal 

share. 

74C. Comment: Several commenters 

noted past abuses involving 

intergovernmental transfers and 

expressed support for CMS efforts to 

end such abusive practices. However, 

the commenters contended that the 

provisions of the regulation reach too 

far, beyond the termination of abusive 

IGTs, and have the impact of drawing 

millions of Federal funds away from 

health care providers and States that 

were not ‘‘recycling’’ Federal funds 

through IGTs. 

74R. Response: The provision of the 

regulation that addresses a unit of 

government codifies the existing 

statutory criteria for a unit of 

government that can participate in 

financing the non-federal share of 

Medicaid expenditures. This 

codification of existing Federal statute 

was established in an effort to assist 

States in identifying the universe of 

governmentally-operated health care 

providers that could receive Medicaid 

revenues up to the full cost of providing 

services to Medicaid individuals and 

clarifies which types of health care 

providers can participate in financing of 

the non-Federal share of Medicaid 

payments. 

A health care provider that is not 

recognized as governmentally-operated 

under the Federal statutory and 

regulatory criteria would not be affected 

by the cost limitation on Medicaid 

payments. Therefore, such health care 

providers may receive Medicaid 

payments up to the applicable 

regulatory upper payment limit, to the 

extent States use permissible sources of 

non-federal share funding to make such 

payments. Furthermore, a health care 

provider that is not recognized as 

governmentally-operated by a State 

when applying the statutory criteria 

would not be subjected to non-federal 

share obligations under a State’s 

Medicaid program. For any health care 

provider previously obligated to fund 

certain Medicaid payments, total 

Medicaid revenues to that facility can be 

sustained through alternative 

permissible sources of non-federal share 

funding. Health care providers 

determined to be ineligible to 

participate in the State financing of 

Medicaid payments can actually realize 

greater net Medicaid revenues if State or 

local government funding sources are 

utilized to fund non-federal share 

obligations to Medicaid payments that 

may have been historically financed by 

non-governmentally-operated health 

care providers. 

75C. Comment: One commenter 

requested that CMS allow the use of 

IGTs to finance payments for categorical 

Medicaid payments. The commenter 

also requested that CMS confirm the use 

of IGTs to finance Medicaid payments 

approved in the State plan. 

75R. Response: Intergovernmental 

transfers, consistent with statutory and 

regulatory provisions, are an allowable 

source of Medicaid financing for any 

payment authorized under the Medicaid 

State plan. 

76C. Comment: One commenter noted 

that it will be administratively 

burdensome to have all school districts 

within the state demonstrate that their 

intergovernmental transfers are paid 

from tax revenues. In addition, the 

commenter states that the process of 

collecting the State match from each 

school district before the district’s 

claims are paid cannot be implemented 

without significant changes to the 

State’s MMIS, which would be a 

massive undertaking. 

76R. Response: CMS recognizes that 

units of government may collect 

revenue from a variety of sources 

(including fees, grants, earned interest, 

fines, sale or lease of public resources, 

legal settlements and judgments, 

revenue from bond issuances, tobacco 

settlement funds) that are ultimately 

deposited into the government’s general 

fund, which is used to finance the 

government’s operations. Generally, we 

find such revenues to be acceptable 

sources of financing the non-Federal 

share of Medicaid payments, as long as 

the unit of government does not attempt 

to finance Medicaid payments using 

revenue from impermissible sources 

(such as, ‘‘recycled’’ Medicaid 

payments, Federal grants precluded 

from use as State match, impermissible 

taxes, non-bona fide provider-related 

donations). 

Funds may be transferred by units of 

government that are not health care 

providers to the State Medicaid agency 

either before or after the payment to the 

provider is made, provided that the 

requirements of § 447.207 are satisfied. 

A principal concern in evaluating 

compliance with § 447.207 will be the 

determination as to whether or not the 

funding obligation to the non-Federal 

share of Medicaid payments has been 

fully satisfied by the State or local 

government. IGTs from a local or other 

State Agency unit of government’s 

general fund may be considered a 

permissible source of the non-Federal 

share of Medicaid payments when: (1) 

Monies from the general fund are 

transferred to the State Medicaid 

agency; (2) such monies are used to 

fund the non-Federal share of Medicaid 

payments to the governmentallyoperated health care provider; (3) the 

health care provider deposits such 

Medicaid payments into its operating 

account (a governmentally-operated 

health care provider will always 

maintain an operating account that is 

separate from the general fund managed 

by the corresponding unit of 


jlentini on PROD1PC65 with RULES3
29768 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

government); and (4) no portion of 

Medicaid payments deposited into the 

operating account is sent back to the 

general fund to replenish the loss of 

funds resulting from the IGT. These 

conditions would demonstrate that the 

burden of the non-Federal share of the 

Medicaid payment was satisfied by the 

local government or other State Agency. 

Governmentally-operated health care 

providers may only transfer prior to 

receiving a Medicaid payment to ensure 

funds were actually available to the 

governmentally-operated health care 

provider to satisfy the non-Federal share 

obligation to the Medicaid payment it 

receives. To permit non-Federal share 

transfer obligations made by a 

governmentally-operated health care 

provider after the Medicaid payment is 

received would allow a Medicaid 

Agency to ‘‘loan’’ the non-Federal share 

obligation to the governmentallyoperated health care provider. Upon 

receipt of the Medicaid payment, the 

governmentally-operated health care 

provider would be able to ‘‘return’’ the 

‘‘loan’’ to the Medicaid Agency via its 

non-Federal share transfer obligation. 

The end result of such a post-payment 

IGT would be that a State is able to 

direct Federal matching funds into a 

governmentally-operated health care 

provider without any unit of 

government satisfying the non-Federal 

share obligation. The State could then 

use the same funds to make additional 

Medicaid payments and attract new 

Federal matching funds. 

2. Certified Public Expenditures (CPE) 

77C. Comment: Two commenters 

expressed that ‘‘only hospitals that meet 

the new definition of public hospital 

and are reimbursed on a cost basis 

would be eligible to use CPEs to help 

states fund their programs,’’ claiming 

that this would result in fewer dollars 

available to pay for care for the nation’s 

most vulnerable people. 

77R. Response: There is no new 

definition of a public hospital under the 

provisions of this regulation. The 

Federal Medicaid statute does not 

include a term nor discussion that 

references a ‘‘public’’ health care 

provider for purposes of State Medicaid 

financing. The Federal Medicaid statute 

at section 1903(w) of the Act places 

severe statutory restriction on States’

receipt of funds from health care 

providers to fund Medicaid payments. 

This section of the statute includes an 

exception to the general prohibition on 

the receipt of voluntary contributions 

from health care providers by allowing 

units of government, including 

governmentally-operated health care 

providers, to participate in the certified 

public expenditure process. 

The provision of the regulation 

regarding certified public expenditures 

is a clarification to existing Federal 

statutory instruction at 1903(w)(6)(A). 

Consistent with this explicit statutory 

instruction, a certified public 

expenditure means that State or local 

tax dollars were used to satisfy the cost 

of serving Medicaid individuals (and 

the cost of providing inpatient and 

outpatient hospital services to the 

uninsured for purposes of Medicaid 

DSH payments). 

Under the provisions of the 

regulation, all health care providers 

maintain some level of ability to 

participate in the certified public 

expenditure (CPE) process. 

Governmentally-operated health care 

providers are able to certify their costs 

without having to demonstrate that 

State or local tax dollars were used to 

provide Medicaid services. This policy 

is based on the fact that governmentallyoperated health care providers always 

have the ability to directly access State 

and/or local tax dollars as an integral 

component of State or local government. 

Governmentally-operated health care 

providers need only produce cost 

documentation via national, 

standardized cost reporting to receive 

Federal matching funds as a percentage 

of such allowable Medicaid (and DSH) 

costs. 

Non-governmentally-operated health 

care providers may also produce cost 

documentation to support the costs of 

providing services to Medicaid 

individuals (and certain uninsured costs 

for purposes of Medicaid DSH 

payments). However, in order to 

maintain consistency with the Federal 

statutory instruction governing CPEs, a 

State or local government must actually 

certify that tax dollars were provided to 

the non-governmentally-operated health 

care provider. Federal matching funds 

will be available as a percentage of the 

allowable Medicaid costs incurred by 

the non-governmentally-operated health 

care provider up to the level of such 

State and/or local tax support. 

78C. Comment: A number of 

commenters opined that when a public 

entity is contractually obligated to 

reimburse private faculty physicians, 

which are in turn obligated to provide 

services to the public entity’s patients, 

those public payments should qualify as 

CPEs. However, the commenters stated 

a belief that it was unclear what, if any, 

expenditures by public entities qualify 

as CPEs, and that the required 

documentation and approval process for 

such CPEs appear arbitrary. The 

commenters thus recommended that 

CMS should defer to the services and 

payment methodologies approved in the 

Medicaid State Plan and that however 

the public entity pays the health care 

provider should qualify as a CPE. 

78R. Response: The Federal Medicaid 

statute does not include a term nor 

discussion that references a ‘‘public’’

health care provider for purposes of 

State Medicaid financing. The Federal 

Medicaid statute at section 1903(w) 

places severe statutory restriction on 

States’ receipt of funds from health care 

providers to fund Medicaid payments. 

This section of the statute includes an 

exception to the general prohibition on 

the receipt of voluntary contributions 

from health care providers by allowing 

units of government, including 

governmentally-operated health care 

providers, to participate in the certified 

public expenditure process. 

The options available to a unit of 

government for purposes of compliance 

with the CPE provisions of the 

regulation depend on whether or not the 

unit of government is the provider of the 

service. A governmental entity that is 

not a health care provider and that pays 

for a covered Medicaid service 

furnished by a health care provider 

(whether governmentally-operated or 

not) can certify its actual expenditure in 

an amount equal to the Medicaid State 

plan rate (or the approved provisions of 

a waiver or demonstration, if applicable) 

for the service. In this case, the CPE 

would represent the expenditure by the 

governmental unit to the service 

provider on behalf of the State Medicaid 

agency(and would not necessarily be 

related to the actual cost to the health 

care provider for providing the service). 

If the unit of government is the health 

care provider, then it may generate a 

CPE from its own costs if the Medicaid 

State plan (or the approved provisions 

of a waiver or demonstration, if 

applicable) contains cost reimbursement 

methodology. If this is the case, the 

governmentally-operated health care 

provider may certify the costs that it 

actually incurred that would be 

reimbursed under the Medicaid State 

plan. If the Medicaid State plan does not 

contain an actual cost reimbursement 

methodology, then the governmentallyoperated health care provider may not 

use a CPE because it would not be able 

to establish an expenditure under the 

authority of the Medicaid State plan. 

This is consistent with the requirements 

of 45 CFR 95.13, where there was no 

cost incurred that would be recognized 

under the Medicaid State plan. A 

governmentally-operated health care 

provider cannot establish an 

expenditure under the Medicaid State 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29769 

plan by asserting that it would pay itself 

the Medicaid State plan rate. 

79C. Comment: Several commenters 

stated that they thought the burden 

associated with documenting certified 

public expenditures under the proposed 

regulation is excessive. This view was 

emphasized for expenditures eligible for 

FFP which are not currently subject to 

cost reporting. 

79R. Response: The documentation 

requirements for CPEs are necessary and 

appropriate. We have examined CPE 

arrangements in many States that 

include various service categories 

within the Medicaid program. We note 

that currently there are a variety of 

practices used by State and local 

governments in submitting a CPE as the 

basis of matching FFP for the provision 

of Medicaid services with little to no 

State oversight. Different practices often 

make it difficult to (1) Align claimed 

expenditures with specific services 

covered under the State plan or 

identifiable administrative activities; (2) 

properly identify the actual cost to the 

governmental entity of providing 

services to Medicaid individuals or 

performing administrative activities; 

and (3) audit and review Medicaid 

claims to ensure that Medicaid 

payments are appropriately made. 

Further, we found that in many 

instances State Medicaid agencies do 

not currently review the CPE submitted 

by another unit of government to 

confirm that the CPE properly reflects 

the actual expenditure by the unit of 

government for providing Medicaid 

services or performing administrative 

activities. These circumstances do not 

serve to advance or promote the fiscal 

integrity of the Medicaid program. By 

establishing minimum standards for the 

documentation supporting CPEs, we 

anticipate that the provisions of this 

regulation would serve to enhance the 

fiscal integrity of CPE practices within 

the Medicaid program. 

The provision of the regulation 

regarding certified public expenditures 

is also a clarification to existing Federal 

statutory instruction at 1903(w)(6)(A). 

Consistent with this explicit statutory 

instruction, a certified public 

expenditure means that State or local 

tax dollars were used to satisfy the cost 

of serving Medicaid individuals (and 

the cost of providing inpatient and 

outpatient hospital services to the 

uninsured for purposes of Medicaid 

DSH payments). It is not clear what 

method other than identification of the 

cost of providing services to Medicaid 

individuals (and certain uninsured costs 

for purposes of Medicaid DSH 

payments) would be appropriate to 

make Federal matching funds available 

for purposes of health care providers 

certifying public expenditures. 

The cost documentation process is 

necessary to demonstrate the services 

that have been provided to Medicaid 

individuals. The burden associated with 

cost reporting for hospitals and nursing 

facilities should be minimal because 

nationally recognized cost reports are 

already utilized by these health care 

providers. For non-hospital and nonnursing facility services in Medicaid, we 

note that a nationally recognized, 

standard cost report does not exist. 

Because of this, we are publishing a 

standardized cost reporting form that 

can be used to document the costs of 

providing non-institutional services to 

Medicaid individuals. The purpose of 

this standardized form is to minimize 

the burden associated with the review of 

expenditures for non-institutional 

services provided to Medicaid 

individuals. 

CMS has developed a general 

Medicaid Cost Reporting Protocol 

available on the CMS Web site at 

http://www.cms.hhs.gov/ 

MedicaidGenInfo/Downloads/Cost 

Limits Regulation CMS–2258-FC.zip that 

specifically addresses methods under 

which institutional and noninstitutional Medicaid costs will be 

determined for purposes of CPEs. 

80C. Comment: One commenter asked 

if the State’s obligation to demonstrate 

that a certifying entity is a unit of 

government, is a one-time obligation, or 

must the State so certify to support each 

and every CPE. 

80R. Response: Section 433.51(b)(2) 

requires that ‘‘certified public 

expenditures must be * * * supported 

by auditable documentation * * * that 

explains whether the contributing unit 

of government is within the scope of the 

exception to limitations on providerrelated taxes and donations.’’ Therefore, 

the unit of government must attest to its 

governmental status and produce the 

necessary cost documentation for each 

CPE submitted to the Medicaid Agency, 

on which Federal matching funds 

would be claimed. States will have 

governmentally-operated health care 

provider determinations on file to verify 

the governmental status of the certifying 

health care provider. 

A governmental entity that is not a 

health care provider which pays for a 

covered Medicaid service furnished by 

a health care provider (whether 

governmentally-operated or not) can 

certify its actual expenditure, in an 

amount equal to the Medicaid State plan 

rate (or the approved provisions of a 

waiver or demonstration, if applicable) 

for the service. In this case, the CPE 

would represent the expenditure by the 

governmental unit to the service 

provider (and would not necessarily be 

related to the actual cost to the health 

care provider for providing the service) 

on behalf of the State Medicaid agency. 

The governmental entity that is not a 

health care provider must submit a 

certification statement to the State 

Medicaid agency attesting that the total 

computable amount of its claimed 

expenditures are eligible for FFP, in 

accordance with the Medicaid State 

plan and the revised provisions of 

§ 433.51. That certification must be 

submitted and used as the basis for a 

State claim for FFP within 2 years from 

the date of the expenditure. 

81C. Comment: One commenter 

expressed concern about a statement in 

the preamble that ‘‘certification must be 

submitted and used as the basis for a 

State claim for FFP within two years 

from the date of expenditure,’’ claiming 

that the Medicaid statute does not 

presently impose such a two-year limit. 

81R. Response: A CPE means that 

State or local tax dollars were used to 

satisfy the costs of providing services to 

Medicaid individuals. Federal matching 

funds are available as a percentage of 

such costs, incurred or rates paid under 

the authority of the Medicaid State plan, 

in recognition that a unit of government 

has satisfied the Medicaid payment in 

full (that is, both State and Federal 

share) for services provided to Medicaid 

individuals. 

The statement within the preamble of 

the regulation was included to ensure 

compliance with section 1132(a)(2) of 

the Act and 45 CFR 95.7 which require 

that any claim by a State for payment 

with respect to an expenditure made be 

filed within the 2 year period. 

CMS has developed a general 

Medicaid Cost Reporting Protocol 

available on the CMS website that 

specifically addresses methods under 

which institutional and noninstitutional Medicaid costs will be 

determined for purposes of CPEs. 

82C. Comment: A number of 

commenters stated that the 

administrative burden would be placed 

on the State if it is required to 

periodically audit and review certified 

public expenditures as stipulated in the 

proposed regulation. 

82R. Response: The provision of the 

regulation regarding certified public 

expenditures clarifies and implements 

the statutory instruction at 

1903(w)(6)(A). Consistent with this 

explicit statutory instruction, a certified 

public expenditure means that State or 

local tax dollars were used to satisfy the 

cost of serving Medicaid individuals 

(and the cost of providing inpatient and 

outpatient hospital services to the 


jlentini on PROD1PC65 with RULES3
29770 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

uninsured for purposes of Medicaid 

DSH payments). CMS believes States 

would support the establishment of 

periodic audit and review to ensure the 

fiscal integrity of CPE practices within 

their Medicaid programs. 

For hospital and nursing facility 

services, nationally recognized cost 

reports are already available and are 

already audited by the Medicare fiscal 

intermediary. Therefore, the State’s 

burden to review these cost reports 

should be minimal. For non-hospital 

and non-nursing facility services in 

Medicaid, we note that a nationally 

recognized, standard cost report does 

not exist. Because of this, we are 

publishing a standardized cost reporting 

form that can be used to document the 

costs of providing non-institutional 

services to Medicaid individuals. The 

purpose of this standardized form is to 

minimize the burden associated with 

the review of expenditures for noninstitutional services. 

CMS has developed a general 

Medicaid Cost Reporting Protocol 

available on the CMS website that 

specifically addresses the methods 

under which institutional and noninstitutional costs will be determined 

for purposes of CPEs. 

83C. Comment: One commenter noted 

the new mandates required of States and 

local governments with respect to CPEs 

and expressed the opinion that the 

Federal government should fund 100 

percent of all costs associated with these 

mandates. 

83R. Response: Each State is 

responsible for the proper and efficient 

administration of its Medicaid program. 

Expenses incurred for administration of 

the Medicaid program are eligible for 

Federal matching funds at the regular 50 

percent administrative matching rate. 

84C. Comment: Numerous 

commenters recommended that CMS 

permit the use of CPEs for health care 

providers regardless of the payment 

methodology provided under the State 

plan. These commenters indicated that 

health care providers will incur costs 

associated with providing care to 

Medicaid individuals whether they are 

paid on a cost basis or not. An example 

was provided. If a health care provider 

incurs $100 in cost in providing care to 

a Medicaid individual, but the payment 

methodology is a prospective one that 

results in a $90 payment, the health care 

provider could still certify that it 

incurred $100 in costs in connection 

with care for that individual. Because 

the payment is limited to $90, however, 

only $90 of the certification would be 

eligible for federal match. These 

commenters also argue that when 

payment is not based on a cost 

methodology, CMS should allow health 

care providers to certify costs associated 

with care to Medicaid individuals not to 

exceed the amount of payments 

provided under the State plan 

methodology. Other commenters 

stipulated that once CMS has approved 

a payment methodology in the State’s 

plan, demonstration of the expenditure, 

other than the usual claim for the 

Medicaid service provided, should not 

be necessary. 

84R. Response: Medicaid State plan 

rate methodologies are incompatible 

with a governmentally-operated health 

care provider’s use of certified public 

expenditures. The Medicaid State plan 

is the vehicle for determining 

expenditures that are eligible for Federal 

matching funds. Section 433.51 states 

that the CPE must, itself, be eligible for 

FFP. If the State plan does not contain 

an actual cost reimbursement 

methodology, then the governmentallyoperated health care provider may not 

use a CPE because it would not be able 

to establish an expenditure under the 

Medicaid State plan, consistent with the 

requirements of 45 CFR 95.13, where 

there was no cost incurred that would 

be recognized under the Medicaid State 

plan. A health care provider cannot 

establish an expenditure under the 

Medicaid State plan by asserting that it 

would pay itself the Medicaid State plan 

rate. A cost reimbursement methodology 

specified within the Medicaid State 

plan would allow for reimbursement as 

a percentage of the governmentallyoperated health care provider’s cost of 

services to Medicaid individuals. 

85C. Comment: One commenter is 

particularly concerned that the 

proposed regulation would require 

proof of actual Medicaid expenditures 

in order to CPE. The commenter 

stipulated that the Medicaid statute 

does not specifically limit the use of 

certifications of expenditures to 

Medicaid costs, but to expenditures 

under the Medicaid statute, which also 

include DSH payments. Therefore, CPEs 

could only be used to fund Medicaid 

expenditures that are stated on a cost 

report and would prevent governmental 

providers from using CPEs for DSH as 

well as for other costs of caring for 

Medicaid individuals not reflected in 

cost reporting methodologies. 

85R. Response: The provisions of the 

regulation do not prohibit a State from 

utilizing CPEs for purposes of DSH 

payments, nor for non-institutional 

services provided to Medicaid 

individuals. Only certain hospitals 

within a State are eligible to receive 

DSH payments. DSH payments are 

limited to each qualifying hospital’s 

uncompensated care costs associated 

with providing inpatient and outpatient 

hospital services to Medicaid 

individuals and to individuals with no 

source of third party coverage for the 

inpatient and outpatient hospital 

services they received. These costs 

would be derived from the Medicare 

2552–96 hospital cost report, a 

nationally recognized cost report which 

all hospitals utilize. To determine the 

costs eligible for purposes of CPE, States 

and governmentally-operated hospitals 

would utilize audited hospital financial 

statements and information from the 

Medicaid Management Information 

System (MMIS) to properly allocate the 

eligible Medicaid and uninsured costs 

from the hospital cost report. 

CMS has developed a general 

Medicaid Cost Reporting Protocol 

available on the CMS website that 

specifically addresses the methods 

under which institutional and noninstitutional costs will be determined 

for purposes of CPEs. 

86C. Comment: One commenter 

recommended that CMS modify the 

proposed regulation to allow a payment 

and corresponding CPE based on a 

current, inflated cost report without any 

reconciliation process and that any 

changes to costs will be captured in 

future cost reports. 

86R. Response: The CPE process 

inherently requires a reconciliation of 

the certifying unit of government’s 

actual costs of providing services to 

Medicaid individuals. Under a 

Medicaid cost reimbursement payment 

system funded by CPEs, States may 

utilize most recently filed cost reports to 

develop interim Medicaid payment rates 

and may trend these interim rates by an 

applicable health care-related index. 

Interim reconciliations must be 

performed by reconciling the interim 

Medicaid payment rates to the filed cost 

report for the spending year in which 

interim payment rates were made. Final 

reconciliation must also be performed 

by reconciling the interim payments and 

interim adjustments to the finalized cost 

report for the spending year in which 

interim payment rates were made. 

87C. Comment: One commenter noted 

that they currently offset Medicaid 

expenditures using CPEs through the 

UPL financing to outpatient hospitals, 

nursing facilities and home health 

agencies. The commenter specifically 

requested that this offset continue to be 

allowed, but only when applied to 

Medicaid expenditures. 

87R. Response: It is not clear what 

‘‘offsetting Medicaid expenditures using 

CPEs through UPL financing’’ means. A 

CPE means that State or local tax dollars 

were used to satisfy the cost of serving 

Medicaid individuals. Historically, 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29771 

Medicaid upper payment limits (UPLs) 

for governmentally health care 

providers were not limited to the cost of 

providing services to Medicaid 

individuals and often ‘‘UPL payments’’

were made in excess of Medicaid costs. 

However, UPL payments that were 

made in excess of Medicaid costs could 

not be funded through CPEs based on 

the statutory definition, which limits 

the CPE funding source to allowable 

Medicaid (and DSH) cost. 

Under the provisions of this 

regulation, the UPL for governmentallyoperated health care providers is 

Medicaid cost. Any revenues received 

by a governmentally-operated health 

care provider under the authority of the 

Medicaid State plan must be offset prior 

to determining if any uncompensated 

Medicaid costs exist that would be 

eligible under the CPE funding source. 

88C. Comment: One commenter asked 

what the CPE requirements are when a 

unit of government makes a payment to 

a health care provider not operated by 

a unit of government. 

88R. Response: A governmental entity 

that is not a health care provider which 

pays for a covered Medicaid service 

furnished by a health care provider 

(whether governmentally-operated or 

not) can certify its actual expenditure, 

in an amount equal to the Medicaid 

State plan rate (or the approved 

provisions of a waiver or demonstration, 

if applicable) for the service. In this 

case, the CPE would represent the 

expenditure by the governmental unit to 

the service provider (and would not 

necessarily be related to the actual cost 

to the health care provider for providing 

the service). The governmental entity 

that is not a health care provider must 

submit a certification statement to the 

State Medicaid agency attesting that the 

total computable amount of its claimed 

expenditures are eligible for FFP, in 

accordance with the Medicaid State 

plan and the revised provisions of 

§ 433.51. That certification must be 

submitted and used as the basis for a 

State claim for FFP within 2 years of the 

expenditure consistent with filing 

requirements at section 1132(a)(2) of the 

Act and 45 CFR 95.7. 

89C. Comment: A few commenters 

asked whether it would it be possible 

for a unit of government that pays a 

private university for physician services 

to certify those funds under Medicaid, 

if the services provided by those 

physicians are approved under the State 

plan amendment, and would it be 

possible for State universities to certify 

as an expenditure the portion of a 

faculty physicians’ salary spent treating 

Medicaid individuals. 

89R. Response: The first part of the 

question relates to a unit of government 

making payments to a private health 

care provider. A governmental entity 

that is not a health care provider which 

pays for a covered Medicaid service 

furnished by a health care provider 

(whether governmental or not) can 

certify its actual expenditure, in an 

amount equal to the Medicaid State plan 

rate (or the approved provisions of a 

waiver or demonstration, if applicable) 

for the service. In this case, the CPE 

would represent the expenditure by the 

governmental unit to the service 

provider (and would not necessarily be 

related to the actual cost to the health 

care provider for providing the service). 

The second part of the question raises 

the possibility of a State university 

certifying the expenditures for the 

portion of a faculty physician’s salary 

associated with the delivery of clinical 

services to Medicaid individuals. CMS 

notes that the relationships between a 

faculty physician’s clinical practice and 

the State university vary on a case by 

case basis. For example, some State 

universities require faculty physicians 

to provide clinical services in private 

faculty practice groups, while other 

State universities consider faculty 

physicians employees of the university 

when providing clinical care. In light of 

these arrangements, the response to the 

second part of this question can only be 

answered based on whether or not the 

State university is considered a unit of 

government (State university teaching 

hospitals are recognized as units of 

government in the statute and 

regulation) and whether or not the 

faculty physician is actually considered 

an integral part of that unit of 

government when delivering clinical 

care. If the State university is a unit of 

government and is the health care 

provider of the physician services, then 

the State university teaching hospital 

may generate a CPE from its own costs 

if the Medicaid State plan (or the 

approved provisions of a waiver or 

demonstration, if applicable) contains 

an actual cost reimbursement 

methodology. If this is the case, the 

State university may certify the costs 

that it actually incurred that would be 

paid under the Medicaid State plan. If 

the State plan does not contain an actual 

cost reimbursement methodology, then 

the State university may not use a CPE 

because it would not be able to establish 

an expenditure under the plan, 

consistent with the requirements of 45 

CFR 95.13. 

90C. Comment: One commenter noted 

that the preamble to the regulation 

indicated that a claimable expenditure 

must involve a shift of funds (either by 

an actual transfer or a debit in the 

accounting records of the contributing 

unit of government and a credit in the 

records of a provider of medical 

services) and cannot merely be a refund 

or reduction in accounts receivable. The 

commenter stated that this restriction is 

unclear and appears unnecessary. The 

commenter described that government 

health care providers are directly 

funded by legislative appropriations 

and/or recurring revenues, then these 

health care providers certify allowable 

Medicaid expenditures through the 

submission of claims for covered 

services. The commenter went on to 

state that these claims are valued at the 

Medicaid reimbursement rate in the 

approved State plan and support the 

State’s claim for FFP. Therefore, the 

commenter argued, there is no need for 

further accounting transactions by the 

health care provider or governmental 

entity. 

90R. Response: According to 45 CFR 

95.13(b), for expenditures for services 

under the Medicaid program, an 

expenditure is made ‘‘in the quarter in 

which any State agency made a payment 

to the service provider.’’ There is an 

alternate rule for administration or 

training expenditures at 45 CFR 

95.13(d), under which the expenditure 

is made in the quarter to which the costs 

were allocated or, for non-cash 

expenditures, in the quarter in which 

‘‘the expenditure was recorded in the 

accounting records of any State agency 

in accordance with generally accepted 

accounting principles.’’ The State 

Medicaid Manual, at section 

2560.4.G.1.a(1), indicates that ‘‘the 

expenditure is made when it is paid or 

recorded, whichever is earlier, by any 

State agency.’’ These authorities clearly 

indicate that there must be a record of 

an actual expenditure, either through 

cash or a transfer of funds in accounting 

records, in order for the expenditure to 

be considered eligible for Federal 

Financial Participation (FFP). 

Moreover, as defined at 45 CFR 

95.13(b), a Medicaid expenditure occurs 

when any State agency makes a 

payment to the service provider. 

Pursuant to § 433.10(a), the expenditure 

must be a total computable payment, 

including both Federal and State share, 

which forms the basis of the claim to 

draw down the corresponding FFP in 

accordance with the Federal Medical 

Assistance Percentage (FMAP) rate. 

These provisions clearly demonstrate 

that a unit of government cannot merely 

submit claims that would be considered 

somehow equivalent to certified public 

expenditures in order for the State to 

receive Federal matching funds. 


jlentini on PROD1PC65 with RULES3
29772 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

The options available to a unit of 

government for purposes of compliance 

with the CPE provisions of the 

regulation depend on whether or not the 

unit of government is the provider of the 

service. A governmental entity that is 

not a health care provider and that pays 

for a covered Medicaid service 

furnished by a health care provider 

(whether governmentally-operated or 

not) can certify its actual expenditure in 

an amount equal to the Medicaid State 

plan rate (or the approved provisions of 

a waiver or demonstration, if applicable) 

for the service. In this case, the CPE 

would represent the expenditure by the 

governmental unit to the service 

provider on behalf of the State Medicaid 

agency (and would not necessarily be 

related to the actual cost to the health 

care provider for providing the service). 

If the unit of government is the health 

care provider, then it may generate a 

CPE from its own costs if the Medicaid 

State plan (or the approved provisions 

of a waiver or demonstration, if 

applicable) contains a cost 

reimbursement methodology. If this is 

the case, the governmentally-operated 

health care provider may certify the 

costs that it actually incurred that 

would be reimbursed under the 

Medicaid State plan. If the Medicaid 

State plan does not contain an actual 

cost reimbursement methodology, then 

the governmentally-operated health care 

provider may not use a CPE because it 

would not be able to establish an 

expenditure under the authority of the 

Medicaid State plan. This is consistent 

with the requirements of 45 CFR 95.13, 

where there was no cost incurred that 

would be recognized under the 

Medicaid State plan. A governmentallyoperated health care provider cannot 

establish an expenditure under the 

Medicaid State plan by asserting that it 

would pay itself the Medicaid State plan 

rate. 

91C. Comment: A few commenters 

disagreed that a CPE equals 100 percent 

of a total computable Medicaid 

expenditure. The commenter stated that 

a certifying governmental unit may fund 

all or part of the cost within the health 

care provider. For example, the 

commenter noted that a governmental 

health care provider or entity may be 

responsible for funding the cost of 

prospective rate increases while the 

State Medicaid agency continues 

payments at the base period rate. 

91R. Response: Statutory and 

regulatory provisions require that an 

expenditure must be a total computable 

payment, including both Federal and 

State share, in order to form the basis of 

a State’s claim to draw down the 

corresponding FFP in accordance with 

the Federal Medical Assistance 

Percentage (FMAP) rate. It is possible 

that a State uses two different funding 

sources for two different payments 

under different reimbursement 

methodologies in the Medicaid State 

Plan. For instance, the State Medicaid 

agency may use general fund 

appropriations to finance the nonFederal share of base Medicaid 

payments to a governmentally-operated 

health care provider. Under a separate 

reimbursement methodology in the 

approved Medicaid State Plan, the 

governmentally-operated health care 

provider may be eligible to receive 

reimbursement for its Medicaid costs in 

excess of base Medicaid payments 

received. Under the latter 

reimbursement methodology, the 

governmentally-operated health care 

provider could certify the 

uncompensated portion of its Medicaid 

costs (that is, total Medicaid costs minus 

total Medicaid revenues) and Federal 

financial participation would be 

available as a percentage of its total 

computable costs less revenues received 

as a CPE eligible for additional FFP. 

The options available to a unit of 

government for purposes of compliance 

with the CPE provisions of the 

regulation depend on whether or not the 

unit of government is the provider of the 

service. A governmental entity that is 

not a health care provider and that pays 

for a covered Medicaid service 

furnished by a health care provider 

(whether governmentally-operated or 

not) can certify its actual expenditure in 

an amount equal to the Medicaid State 

plan rate (or the approved provisions of 

a waiver or demonstration, if applicable) 

for the service. In this case, the CPE 

would represent the expenditure by the 

governmental unit to the service 

provider on behalf of the State Medicaid 

agency (and would not necessarily be 

related to the actual cost to the health 

care provider for providing the service). 

If the unit of government is the health 

care provider, then it may generate a 

CPE from its own costs if the Medicaid 

State plan (or the approved provisions 

of a waiver or demonstration, if 

applicable) contains a cost 

reimbursement methodology. If this is 

the case, the governmentally-operated 

health care provider may certify the 

costs that it actually incurred that 

would be reimbursed under the 

Medicaid State plan. If the Medicaid 

State plan does not contain an actual 

cost reimbursement methodology, then 

the governmentally-operated health care 

provider may not use a CPE because it 

would not be able to establish an 

expenditure under the authority of the 

Medicaid State plan. This is consistent 

with the requirements of 45 CFR 95.13, 

where there was no cost incurred that 

would be recognized under the 

Medicaid State plan. A governmentallyoperated health care provider cannot 

establish an expenditure under the 

Medicaid State plan by asserting that it 

would pay itself the Medicaid State plan 

rate. 

92C. Comment: One commenter 

argued that the requirement of a CPE in 

the school setting is unnecessary 

because the majority of Medicaid costs 

in schools are funded ‘‘up front’’ using 

local tax dollars to cover the cost of 

services on a per child basis. Therefore, 

school districts are not making money 

on Medicaid reimbursements relative to 

the outlay of actual costs. 

92R. Response: The provision of the 

regulation regarding certified public 

expenditures is a clarification to 

existing Federal statutory instruction at 

1903(w)(6)(A). Consistent with this 

explicit statutory instruction, a certified 

public expenditure means that State or 

local tax dollars were used to satisfy the 

cost of serving Medicaid individuals 

(and the cost of providing inpatient and 

outpatient hospital services to the 

uninsured for purposes of Medicaid 

DSH payments). The cost 

documentation process is necessary to 

demonstrate that services have been 

provided to Medicaid individuals. 

Federal financial participation is 

available as a percentage of the total 

allowable costs. It is not clear what 

method other than identification of the 

cost of providing services to Medicaid 

individuals would be appropriate to 

make Federal matching funds available 

for purposes of health care providers 

certifying public expenditures. 

D. Cost Limit for Providers Operated by 

Units of Government (§ 447.206) 

93C. Comment: Numerous 

commenters argued strongly that CMS 

lacks the statutory authority to impose 

a provider specific cost limit. The 

commenters did not believe that CMS 

has the authority to change the existing 

upper payment limit (UPL) regulations 

in order to implement this new limit. 

These commenters believe that the 

NPRM represents a significant and 

unjustified departure from CMS’ earlier 

understandings and implementation of 

Congressional intent and in some cases 

direct Congressional direction. Further, 

the commenters stated that Congress 

itself has rejected cost-based 

reimbursement principles and has 

historically through passage of various 

amendments to the Social Security Act 

(including the Boren Amendment in 

1980 and its repeal in 1997) endorsed 

State flexibility in establishing 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29773 

reimbursement rates for Medicaid 

providers. 

Several commenters noted that the 

current Administration has repeatedly 

asked Congress to impose a cost limit on 

payments to public health care 

providers and Congress has refused to 

legislate this action. The commenters 

believe that because the 

Administration’s request and the 

Congress’ refusal to legislate only 

highlight the lack of authority for the 

proposed cost limit. Other commenters 

specified that State Medicaid programs 

feature a variety of targeted 

supplemental payments that enable 

States to tailor their Medicaid programs 

to meet the unique needs of their 

population. Eliminating the aggregate 

nature of the UPL restricts States’

flexibility to address local needs 

through reimbursement policies and 

runs counter to the Administration’s 

commitment and Congress’ efforts to 

enhance State flexibility in managing 

their Medicaid program. Other 

commenters mentioned that the 

proposed cost limit is contrary to 

section 1902(a)(13) of the Act, which 

has always been interpreted to support 

rate setting flexibility on the part of 

States. One commenter questioned why 

CMS wants to limit States’ flexibility in 

distributing supplemental payments. 

93R. Response: We disagree with this 

comment. Under section 1902(a)(30)(A) 

of the Act, the Secretary has broad 

authority to set upper payment limits to 

ensure that Medicaid payments are 

‘‘consistent with efficiency, 

effectiveness and quality of care.’’ While 

section 1902(a)(13) of the Act no longer 

contains any general requirements that 

States pay for Medicaid institutional 

services on a cost, or cost-related basis, 

the Secretary retains the authority and 

responsibility to ensure that Medicaid 

payments are reasonable. Under the 

principles of Office of Management and 

Budget Circular A–87, governmental 

grantees and subgrantees are generally 

limited to reasonable costs and, as that 

term is defined, there is no provision for 

profit or other amounts above cost. A 

provider-specific cost limit is consistent 

with those principles. 

Moreover, a provider-specific cost 

limit does not restrict State flexibility to 

use flexible rate systems for 

governmentally-operated health care 

providers that might, for example, 

encourage certain types of care or 

include performance incentives. All 

such a limit does is ensure that any such 

flexible rate system not result in 

payment in excess of actual documented 

costs. Such a limit is not designed to 

restrict the ability of the State to address 

local needs, since States may provide 

for payment of the full cost of Medicaid 

services. 

94C. Comment: Another commenter 

stated that States are in a better position 

to decide how best to use their Medicaid 

resources and this proposed regulation 

would increase Federal control over 

how States spend their Medicaid funds. 

Most commenters recommended that 

the proposed cost limit be eliminated 

for all types of health care providers and 

the current Medicare UPL for 

government providers be maintained. 

Other commenters pointed out that if a 

State employs a prospective payment 

system the prospective rate is an 

estimate and it will not correspond 

precisely to the actual costs incurred. 

(S.D. Dept. of Soc. Servs., DAB No. 934 

(1988)). According to the commenter, 

the DAB held that these rates were not 

subject to later adjustment based on 

actual costs and there was no unfound 

profit when payments exceeded costs. 

The commenters noted in other 

decisions the DAB has distinguished the 

costs incurred by providers from the 

rates charged by providers to the State, 

and it has held that the latter are what 

form the basis of the State’s claims for 

expenditures. 

Several other commenters cited 

specific Departmental Appeals Board 

(DAB) decisions that reviewed CMS’

authority to hold government health 

care providers to a different standard 

than applied to private health care 

providers, or to limit government health 

care providers to actual-cost 

reimbursement. The commenters cited 

one DAB decision (Ill. Dept. of Pub. Aid, 

DAB No. 467 (1983)) that stated ‘‘cost 

principles [do] not impose an actual 

cost ceiling on claims for 

reimbursement for medical assistance 

provided by state-owned [facilities],’’

and that a State does not impermissibly 

profit where its claim for FFP is based 

on the cost it incurs in reimbursing 

facilities according to a prospective 

class rate. 

94R. Response: The cited DAB 

decisions were issued in the absence of 

rulemaking under the authority of 

section 1902(a)(30)(A) to ensure that 

provider rates are consistent with 

efficiency, economy and quality of care. 

This final rule establishes CMS 

authority to implement an providerspecific upper payment limit based on 

documented costs of furnishing covered 

Medicaid services to eligible 

individuals. A provider-specific cost 

limit does not restrict State flexibility to 

use flexible rate systems for 

governmentally-operated health care 

providers that might, for example, 

encourage certain types of care or 

include performance incentives. All 

such a limit does is require that any 

such flexible rate system not result in 

payment in excess of actual documented 

costs. In this context, we anticipate that 

the provider-specific payment limits 

would only affect health care providers 

who are diverting Medicaid funds for 

other purposes, since that is the only 

circumstance in which Medicaid 

payments would not align with 

Medicaid costs. This circumstance 

necessarily results in a diminution of 

the resources available for care to 

Medicaid individuals. 

By requiring that Medicaid payments 

align with Medicaid costs, we are 

ensuring that governmentally-operated 

providers use resources available 

through Medicaid payment rates to 

serve the Medicaid individuals. In other 

words, because anticipated Medicaid 

payments are an element in setting 

budgets, we anticipate that limiting 

matchable Medicaid revenues to 

Medicaid costs will result in the 

expansion of resources available to 

serve Medicaid individuals. With 

respect to the comment regarding the 

use of prospective rate systems, several 

OIG audits have found that such 

prospective systems have not resulted in 

accurate determinations of 

uncompensated care costs related to the 

disproportionate share hospital 

hospital-specific limits. Thus, we have 

elected not to provide any special rule 

for prospective payment systems in the 

new upper payment provisions. 

The cited Departmental Appeals 

Board cases were decided under a 

different regulatory framework and do 

not limit our authority to issue new 

regulations to address the issue of 

governmentally-operated health care 

providers. Moreover, as States have 

evolved specialized payment systems to 

address the needs of governmentallyoperated health care providers, it has 

become necessary to ensure the 

reasonableness of such payment systems 

using a specialized upper payment limit 

measure. 

95C. Comment: Numerous comments 

disagreed with the change to the 

existing UPL regulations. The 

commenters argued that the new 

provider-specific limit for 

governmentally-operated providers will 

potentially create a system where 

Medicaid payments for private facilities 

could be higher than payments to 

governmentally-operated health care 

providers for the same services. These 

commenters urged CMS to reconsider 

these changes and that if health care 

providers must be held to an individual 

UPL test, the standard for determining 

the UPL for both private and 

government operated health care 


jlentini on PROD1PC65 with RULES3
29774 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

providers be at least the same standard 

that exists currently. Other commenters 

recommended that the current aggregate 

UPLs based on Medicare payment 

principles for all categories of health 

care providers be maintained. Another 

commenter recommended that CMS 

could achieve its goals by revising the 

institutional and acute care Medicaid 

UPL calculations to no more than 

allowable Medicare cost for each of the 

three classes cited in § 447.272. 

95R. Response: The provider-specific 

cost-based upper payment limit for 

governmentally-operated health care 

providers does not necessarily mean 

that governmentally-operated health 

care providers will receive lower rates 

than private health care providers. 

Governmentally-operated health care 

providers not receiving Medicaid 

payments in excess of costs, would not 

be adversely impacted by the Medicaid 

cost limit and would actually be eligible 

to receive greater Medicaid revenues, up 

to the cost limit. Non-governmentallyoperated health care providers are not 

affected by the cost limit provision of 

the regulation and may therefore 

continue to receive Medicaid payments 

in excess of the cost of providing 

services to Medicaid individuals within 

existing Federal requirements. While 

the provisions of the regulation do not 

impose a Medicaid cost limit on private 

health care providers, we have found 

during recent reviews of Medicaid 

reimbursement methodologies, States 

typically reimburse private health care 

providers at rates less than the cost of 

serving Medicaid eligible individuals. 

In other words, governmentallyoperated health care providers that need 

additional Medicaid funds to serve their 

Medicaid individuals will continue to 

have access to those funds. By requiring 

that Medicaid payments align with 

Medicaid costs, we are ensuring that 

governmentally-operated health 

providers use resources available 

through Medicaid payment rates to 

serve Medicaid individuals. It is true 

that the provider-specific payment 

limits would prevent health care 

providers from diverting Medicaid 

funds for other purposes since, in that 

circumstance, Medicaid payments 

would not align with Medicaid costs. 

Thus, the provider-specific limits 

protect Medicaid individuals by 

ensuring that Medicaid resources are 

available for their care. We anticipate 

that, because Medicaid revenues are an 

element in setting budgets, the providerspecific limit will actually result in the 

expansion of resources available to 

serve Medicaid individuals. 

96C. Comment: Other commenters 

pointed out that in the past CMS has 

expressly recognized the potential 

financial implications of limiting 

reimbursement to an individual health 

care provider’s cost and the importance 

of the aggregate UPL system for 

preserving access to Medicaid services, 

particularly with regard to safety-net 

providers. In fact, commenters noted 

that CMS, in response to comments 

within the 2002 final UPL rule, 

reasoned that a State could increase 

payments for particular hospitals and 

decrease payment levels at other county 

and local hospitals where the lowincome patient load was less heavy to 

ensure that funding to more intensively 

utilized public hospitals was not 

jeopardized. 

96R. Response: We do not believe that 

the new upper payment limit will 

jeopardize access to Medicaid services. 

Indeed, the new limit will ensure that 

Medicaid revenues are used to support 

Medicaid services and are not diverted 

for other purposes. Consistent with the 

new upper payment limit, States could 

increase payments for particular 

hospitals and decrease payment levels 

at other county and local hospitals 

where the low-income patient load was 

less heavy to ensure that funding to 

more intensively utilized public 

hospitals was not jeopardized. Medicaid 

payments can continue to effectively 

reimburse governmentally-operated 

health care providers that serve high 

low-income patient loads, both through 

payment of the full cost of Medicaid 

services, and through disproportionate 

share hospital payments for 

uncompensated care costs. Nongovernmentally-operated health care 

providers are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. While the provisions of 

the regulation do not impose a Medicaid 

cost limit on private health care 

providers, we have found during recent 

reviews of Medicaid reimbursement 

methodologies, States typically 

reimburse private health care providers 

at rates less than the cost of serving 

Medicaid eligible individuals. 

97C. Comment: Several commenters 

commented that CMS has failed to 

explain why it is changing its position 

regarding the flexibility afforded to 

states under the current UPL program. 

These commenters asserted that CMS, 

through court documents and its 2002 

UPL final rule reinforced this concept of 

State flexibility. They believe that is 

disregarding without explanation its 

prior approach to give States flexibility 

under the UPL system to address the 

special needs, including the financial 

distress, of health care providers 

through supplemental payments. The 

commenters also stated that while CMS 

says that it has examined State 

Medicaid financing arrangements and 

found that ‘‘many’’ States are making 

supplemental payments to governmentoperated health care providers in excess 

of cost and that this excess payment is 

then used to subsidize health care 

operations unrelated to Medicaid, or is 

returned to the State as a source of 

revenue, CMS provides no data or 

factual support. Commenters noted that 

the proposed regulation lacked 

information on how many States are 

making such ‘‘excess payments’’ or any 

specific information regarding how 

health care providers are using these 

excess payments. 

97R. Response: The preamble to the 

proposed regulation contained a 

detailed description of the concerns that 

led to this issuance. Specifically, we 

found that many States make 

supplemental payments to 

governmentally-operated health care 

providers that are in excess of cost. 

These health care providers, in turn, use 

that excess of Medicaid revenue over 

cost to subsidize health care (or other) 

operations that are unrelated to 

Medicaid, or they may return a portion 

of the supplemental payments in excess 

of cost to the States as a source of 

revenue. These practices effectively 

divert Medicaid funds to non-Medicaid 

purposes, or overstate the total 

computable expenditure that is being 

made. We do not think it is necessary 

to identify specific States which may 

have proposed or may have 

implemented such arrangements 

described in this regulation. We have 

worked with those States to eliminate 

such arrangements whenever we 

discover them. This process can be 

politically delicate. Listing States and 

questionable arrangements would not 

serve the public interest. The States 

themselves sought to protect their 

financing methodologies from scrutiny 

and kept these matters from the public 

eye. Since 2003, we have worked 

successfully with 30 States in a 

consistent manner to terminate certain 

payment arrangements that did not meet 

statutory requirements and worked with 

States to develop alternative methods of 

financing. 

98C. Comment: A few commenters 

asserted that the current practice of 

following Medicare payment principles 

would not result in excessive payments 

to providers. Their first point is that 

CMS is the agency that sets Medicare 

payment rates. Second, the commenters 

pointed to CMS’ 2002 final rule 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29775 

implementing UPL requirements and 

the position that at the time Medicare 

payment principles resulted in 

reasonable payment rates and that States 

should retain flexibility to make 

enhanced payments to selected public 

hospitals under the aggregate limit. 

They noted that CMS indicated in the 

2002 final rule that the UPL as 

implemented would assure that 

payments were consistent with 

efficiency, economy and quality of care. 

The commenters stated that CMS has 

offered no logical basis for changing 

these determinations or offered any 

explanation as to why Medicare 

payments are not reasonable for 

government health care providers. 

98R. Response: Medicare rates do not 

distinguish between governmentallyoperated and non-governmentallyoperated health care providers. 

Furthermore, because Medicare is not a 

federal-state program, but is federalonly, the incentive structure for 

governmentally-operated health care 

providers is different. The Medicaid 

program is jointly funded by Federal, 

State, and local governments. We do not 

find it appropriate that units of State or 

local government would ‘‘profit’’ from 

Federal taxpayer dollars that are 

intended to match a percentage of the 

cost of providing services to Medicaid 

individuals. 

The new upper payment limit for 

governmentally-operated health care 

providers will more accurately ensure 

efficient and effective payment levels 

for the full cost of Medicaid services, 

and will ensure that higher Medicaid 

payments result in improved quality of 

care for Medicaid individuals. 

Governmentally-operated health care 

providers would be able to receive full 

payment for Medicaid costs, and those 

with particularly high costs to provide 

Medicaid services would be able to 

receive Medicaid payments to support 

those costs. The provider-specific 

payment limits would limit health care 

providers from diverting excess 

Medicaid funds for other purposes 

since, in that circumstance, Medicaid 

payments would not align with 

Medicaid costs. In doing so, the 

provider-specific limits protect 

Medicaid individuals by ensuring that 

Medicaid resources are available for 

their care. We anticipate that, because 

Medicaid revenues are an element in 

setting budgets, the provider-specific 

limit will actually result in the 

expansion of resources available to 

serve Medicaid individuals. 

99C. Comment: Several commenters 

stated that the provisions of the 

regulation violates section 705(a) of the 

Medicare, Medicaid and SCHIP Benefits 

Improvement and Protection Act of 

2000 (BIPA). The commenters specify 

that through BIPA, Congress provided 

CMS explicit instruction to adopt an 

aggregate Medicare-related upper 

payment limit (UPL). The commenters 

argued that the proposed cost limit 

deviates significantly from Congress’

clear mandate that UPLs: (1) Be 

aggregate limits and (2) include a 

category of facilities that are ‘‘not Stateowned or operated.’’ Congress explicitly 

endorsed the establishment of a UPL 

based on Medicare payment principles, 

not costs. 

99R. Response: The conditions set 

forth in section 705(a) of BIPA, to 

publish a final regulation based on the 

proposed regulation announced on 

October 5, 2000, were met by the 

publication of a final regulation on 

January 12, 2001, at 66 FR 3148. Section 

705 of BIPA did not purport to remove 

the Secretary’s authority to revise such 

regulation as necessary to interpret and 

implement the underlying statutory 

authority. However payments 

specifically permitted by section 705 of 

BIPA are not subject to the upper 

payment limits provision of the 

regulation. 

100C. Comment: Numerous 

commenters disagreed with CMS’

assertion that Medicaid payment in 

excess of cost to governmentallyoperated health care providers is not 

consistent with the statutory principles 

of economy and efficiency as required 

by section 1902(a)(30)(A) of the Act. 

They asserted that if CMS’ goal is to 

assure that Medicaid payments are 

consistent with economy and efficiency 

there is no basis for imposing a costbased reimbursement system for 

government-operated health care 

providers. Other commenters stated that 

the provisions of the regulation will 

directly harm the ability of States to 

meet their statutory obligation to ensure 

access to care for Medicaid individuals. 

By prohibiting States from reimbursing 

a health care provider for more than 

costs, and restricting States from making 

enhanced payment to health care 

providers in financial need, CMS is 

imposing a funding restriction that will 

be passed on from the States to 

government health care providers. 

States, not CMS, as a result will be faced 

with the concerns from beneficiary 

advocates when access to care is 

compromised. 

100R. Response: We disagree with the 

premise that it could be consistent with 

efficiency and economy and quality of 

care to provide for payment to 

government providers in excess of cost 

for Medicaid services. Under the 

Medicaid program, the federal 

government shares with State and local 

governments in expenditures for 

medical assistance; it is not consistent 

with that relationship for the federal 

government to share in amounts in 

excess of the actual cost of medical 

assistance to State and local 

governments. Payment above the actual 

cost of medical assistance effectively 

diverts funding from the purposes 

authorized by the federal statute to be 

used for other, unauthorized purposes. 

We also disagree with the premise 

that the new upper payment limit will 

jeopardize access to Medicaid services. 

Payment to government providers may 

cover the full cost of Medicaid services. 

Indeed, the new limit will ensure that 

Medicaid revenues are used to support 

Medicaid services and are not diverted 

for other purposes. 

Under the new upper payment limit, 

States may continue to make increased 

Medicaid payments for particular 

governmentally-operated health care 

providers that have higher cost 

structures because of high low-income 

patient loads and decreased payment 

levels for other governmentally-operated 

health care providers with lower cost 

structures because they serve fewer lowincome patient loads. These payments 

may provide full payment for the costs 

of serving Medicaid individuals. 

Governmentally-operated health care 

providers not receiving Medicaid 

payments in excess of costs would not 

be adversely impacted by the cost limit 

and would actually be eligible to receive 

greater Medicaid revenues up to the cost 

limit. 

We recognize that some States have 

made excessive payments in an attempt 

to address burdens providers may face 

in furnishing non-Medicaid 

uncompensated care. While that goal is 

laudable, Medicaid funding is limited to 

authorized purposes. In general, those 

purposes are limited under section 

1905(a) of the Act to covering costs of 

covered services for eligible individuals. 

The Medicaid statute expressly permits 

States to make disproportionate share 

hospital payments up to specified 

limits, which can address certain nonMedicaid costs. If Congress had wished 

to provide other mechanisms to address 

non-Medicaid costs, it could have done 

so. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. 


jlentini on PROD1PC65 with RULES3
29776 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

101C. Comment: One commenter 

stated that creating a new payment 

system through the rule making process 

instead of the legislative process does 

not allow for provider or public 

assistance. The commenter further 

stated that the ability to only provide 

comment on the rule by its nature sets 

up antagonistic positions instead of 

collaborative and creative programs. 

101R. Response: The provisions of 

this regulation do not create a new 

payment system for governmentallyoperated health care providers. States 

still have flexibility to determine the 

appropriate payment system. This 

regulation is part of the Secretary’s 

Federal oversight responsibility to 

ensure that Medicaid payments are 

consistent with statutory requirements. 

The Secretary is exercising that 

authority through the rule making 

process, as required under the 

Administrative Procedure Act. We do 

not believe that process is antagonistic 

and we regret that the commenter sees 

it as such. We value the comments 

received and have considered them 

carefully. Moreover, the development of 

this regulation has been strongly 

influenced by ongoing Medicaid State 

plan processes, in which States have the 

opportunity to explain and justify their 

practices. In those processes, CMS tries 

to work collaboratively with States to 

develop the framework for State 

Medicaid programs that should embody 

the statutory goals of the Medicaid 

program. This regulation addresses 

payment practices that do not appear to 

embody the statutory goals of the 

program but are, instead, designed to 

divert Medicaid funding for use for 

other purposes, and that do not directly 

benefit Medicaid eligible individuals. 

102C. Comment: A few commenters 

questioned how the proposed cost limit 

interrelates with existing UPL transition 

provisions. Some commenters were 

confused since the UPLs as modified by 

the proposed regulation would be 

individual limits, as opposed to 

aggregate, yet the UPL transition 

amounts to be phased out are still an 

aggregate amount. They questioned 

whether the excess amount to be phased 

out supposed to be now an individual 

provider-specific amount. The 

commenters were particularly 

concerned since proposed § 447.206 

provides for no exception to reflect 

transition payments. Other commenters 

specifically requested that the proposed 

regulation incorporate these statutorilymandated transition provisions, similar 

to how they are handled in the current 

regulations at §§ 447.272 and 447.321. 

Another commenter expressed 

dissatisfaction that those States that are 

still out of compliance with the last 

round of changes to the UPL rules due 

to the transition period they received 

will also not have to conform to the new 

cost limit provisions by the September 

1, 2007 effective date. The commenter 

was upset that those that had previous 

occurrences of Medicaid financing 

abuses will be allowed to continue 

transitioning out of their abusive 

systems, while States who have not 

abused Medicaid financing will have to 

come into immediate compliance. The 

commenter implored CMS to develop a 

fair implementation process and 

standardized implementation date that 

does not continue to reward those that 

are not currently in compliance. 

102R. Response: The provisions of the 

regulation did not make any changes to 

existing UPL transition periods in the 

regulations at §§ 447.272 and 447.321, 

which means that any remaining UPL 

transition payments can continue to be 

made through the end of previously 

established transition periods. Only 

States that qualified for 8-year transition 

periods continue to make UPL transition 

payments. These UPL transition periods 

are experiencing a significant phasedown (that is, affected States have 

phased down to 10 percent of the excess 

in 2008) and all transition periods 

expire at the end of Federal fiscal year 

2008. 

States with remaining UPL transition 

periods will be permitted to make their 

UPL transition payments to health care 

providers as they deem appropriate. 

Such UPL transition payments, payment 

levels of which have been previously 

determined, should not be factored into 

a specific health care provider’s cost 

limit to demonstrate compliance with 

the new provisions at § 447.206. We 

have modified the regulation at 

§§ 447.272(c)(3) and 447.321(c)(3) to 

recognize that such transition payments, 

as expressly authorized by section 705 

of BIPA, are not subject to the Medicaid 

cost limit. 

103C. Comment: One commenter 

questioned whether the new hospitalspecific test is performed separately for 

outpatient and inpatient hospital 

services or in the aggregate. 

103R. Response: For purposes of 

compliance with the cost limit on 

Medicaid payments, each type of service 

reimbursed under the authority of the 

Medicaid State plan must be evaluated 

separately, irrespective of whether a 

governmentally-operated health care 

provider delivers more than one service 

eligible under the Medicaid State plan. 

Therefore, the inpatient and outpatient 

hospital-specific Medicaid cost limits 

must be calculated separately. 

104C. Comment: One commenter 

requested clarification of whether the 

cost limit applies solely to non-state 

government hospitals and not to private 

hospitals. 

104R. Response: The Medicaid cost 

limit provision of the regulation applies 

to all health care providers that are 

operated by a unit of government as 

defined in § 433.50, including hospitals. 

Private hospitals and other private 

health care providers are not subject to 

the cost limit provision at § 447.206. 

105C. Comment: Several commenters 

stated that the proposed regulation is in 

direct conflict with advances that many 

States have made in recent years related 

to health care provider reimbursements. 

For example, some commenters noted 

that many States have developed DRG 

reimbursement systems consistent with 

the Medicare so that hospitals are 

reimbursed by the same methodology. 

Because of the proposed regulation’s 

requirements for cost reconciliation and 

recoupment of any payments above cost, 

there is the potential that significant 

funds would have to be recouped 

annually if the DRG system is 

maintained. In fact, States will be forced 

to abandon the DRG system for 

government operated hospitals and 

return to the antiquated and inefficient 

cost-based system. Several other 

commenters stated that hospital 

reimbursement systems have evolved 

following the model of the Medicare 

program and its use of prospective 

payment systems. These reimbursement 

systems are intended to improve 

efficiency by rewarding hospitals that 

can keep costs below the amount paid. 

One commenter also noted that their 

PPS rates should not be equated to 

reasonable cost, due to the cumulative 

difference between medical inflation 

and the Medicare Economic Index. 

105R. Response: The Medicaid 

program is jointly funded by Federal, 

State, and local governments. We do not 

find it appropriate that units of State or 

local government would ‘‘profit’’ from 

Federal taxpayer dollars that are 

intended to match a percentage of the 

cost of providing services to Medicaid 

individuals. Nevertheless, as we have 

examined Medicaid financing 

arrangements across the country, we 

have found that many States make 

payments to governmentally-operated 

providers that are in excess of cost. 

These health care providers, in turn, use 

the excess of Medicaid revenue over 

cost to subsidize health care operations 

that are unrelated to Medicaid, or they 

may return a portion of such payments 

to the State as a source of revenue. In 

either case, we do not find that 

Medicaid payments in excess of cost to 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29777 

governmentally-operated health care 

providers are consistent with the 

statutory principles of economy and 

efficiency as required by section 

1902(a)(30)(A) of the Act, nor do we 

find such excessive payments to be 

consistent with the statutory structure 

requiring that the Federal government 

match a percentage of State or local 

government expenditures for the 

provision of services to Medicaid 

individuals. 

In addition, the proposed regulation 

does not require States to abandon 

existing DRG based payment systems or 

any other existing Medicaid 

reimbursement rate methodologies 

currently utilized to pay 

governmentally-operated health care 

providers. Under the Medicaid cost 

limit, States may continue to use 

existing Medicaid reimbursement rate 

methodologies, but will need to 

compare such rates to the actual cost of 

providing services to Medicaid 

individuals and make reconciling 

adjustments in the event of 

overpayments to a particular 

governmentally-operated health care 

provider. States may find such cost 

reconciliations to be useful inasmuch as 

they will permit States to better analyze 

the reasonableness of their Medicaid 

reimbursement rates. 

106C. Comment: Many commenters 

stated that Medicare rates and the 

ability to calculate payments in the 

aggregate are reasonable because 

Medicare rates are reasonable and are 

not excessive and afford States the 

flexibility necessary to target resources 

to needy areas. One commenter 

questioned why CMS believed Medicare 

rates to be excessive. Medicare’s 

prospective payment system recognizes 

that some health care providers will 

incur costs above Medicare rates and 

others will incur costs that are below 

payment rates and achieve a level of 

Medicare profit. It is the opportunity for 

this profit incentive that helps health 

care providers focus on costs and 

pursue efficiency. Prospective payment 

rates are set at a rate that in the 

aggregate ensure a savings to the 

Medicare program. States should be 

allowed to utilize payment rate 

differentials to incentivise desired 

provider behaviors. 

106R. Response: Current upper 

payment limits are based on aggregate 

estimates of Medicare payments and are 

therefore calculated on a hypothetical 

basis, since the services at issue are not 

actually Medicare services. Under the 

current UPL, many States provide 

supplemental UPL payments (up to the 

aggregate UPL, based on the aggregate 

estimate of Medicare payments) to fund 

the non-Medicaid costs of 

governmentally-operated health care 

providers. The current limit based on a 

hypothetical measure is difficult to 

administer because the actual services at 

issue are Medicaid services, and yet 

aggregate hypothetical estimates of 

payments by another program create the 

ceiling for Medicaid payments. The 

Medicaid cost limit at § 447.206 is 

directly based on Medicaid services 

provided by a specific governmentallyoperated health care provider; therefore, 

it is auditable and tangible, and it would 

substantially align Medicaid payments 

to the costs of serving Medicaid 

individuals. 

The Medicaid program is jointly 

funded by Federal, State, and local 

governments. We do not find it 

appropriate that units of State or local 

government would ‘‘profit’’ from 

Federal taxpayer dollars that are 

intended to match a percentage of the 

cost of providing services to Medicaid 

individuals. 

107C. Comment: Several commenters 

stated that the cost limit would prevent 

states from adopting payment 

methodologies that are economic and 

efficient and that promote quality and 

access. Therefore, the cost limit is in 

conflict with section 1902(a)(30)(A) of 

the Social Security Act. Under the 

proposed cost limit, States will no 

longer be able to meet the requirements 

of this statutory provision. 

107R. Response: We disagree with the 

premise that it could be consistent with 

efficiency and economy and quality of 

care to routinely provide for payment in 

excess of cost for Medicaid services. The 

new limit will ensure that Medicaid 

revenues are used to support Medicaid 

services and are not diverted for other 

purposes. Under the new upper 

payment limit, States may continue to 

have increased Medicaid payments for 

particular governmentally-operated 

health care providers with high lowincome patient loads and decreased 

payment levels at other governmentallyoperated health care providers where 

the low-income patient load is less. 

These payments may provide full 

payment for the costs of serving 

Medicaid individuals. Governmentallyoperated health care providers not 

receiving Medicaid payments in excess 

of costs would not be adversely 

impacted by the cost limit and would 

actually be eligible to receive greater 

Medicaid revenues up to the cost limit. 

The Medicaid cost limit provision 

should not force cuts to the Medicaid 

program, nor affect access to services. 

This will ensure that funding to 

governmentally-operated health care 

providers intensively used by Medicaid 

individuals is not jeopardized. In 

addition, to address the burden of nonMedicaid uncompensated care incurred 

by hospitals, Congress has specifically 

provided for States to make 

disproportionate share hospital 

payments. To the extent that more 

flexibility is desired, States are not 

precluded from developing 

demonstration projects to test new 

payment methodologies. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. It is unclear how a limit 

that does not apply to nongovernmentally-operated health care 

providers would reduce services or limit 

access to Medicaid individuals or to the 

uninsured. 

108C. Comment: Several commenters 

stated that the proposed cost limit defies 

simplicity of administration and ignores 

the best interest of Medicaid individuals 

as required by section 1902(a)(19) of the 

Act. The proposed cost limit would not 

enable States to meet the requirements 

of this statutory provision. 

108R. Response: We clearly 

understand that the provisions of this 

regulation will impose an 

administrative burden on 

governmentally-operated health care 

providers and States to document the 

allowability of Medicaid claims through 

cost reporting. This burden is 

reasonable, however, because most such 

health care providers are already 

reporting costs in other contexts. The 

relevant cost data would have been fully 

or partially developed for a Medicare 

hospital cost report, for a Single Audit 

Act financial statement, or for other 

audited financial statements. While 

some adjustment may be necessary for 

data developed for other purposes, this 

is not an unreasonable burden. 

Moreover, this regulation would protect 

the best interests of Medicaid 

individuals because it prevents States or 

health care providers from diverting 

Medicaid funds for other purposes than 

Medicaid, and ensures that Medicaid 

resources are available for care to 

Medicaid individuals. We anticipate 

that, because Medicaid revenues are an 

element in setting budgets, the providerspecific limit will actually result in the 

expansion of resources available to 

serve Medicaid individuals. 

109C. Comment: A few commenters 

specified that CMS cites the statutory 

restrictions on matching only Medicaid 


jlentini on PROD1PC65 with RULES3
29778 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

expenditures as the basis of limiting 

payments to cost for pubic providers. 

The commenters argued that the 

statutory restrictions only apply to 

States’ expenditures. Therefore when a 

State makes a payment for Medicaid 

covered services, it is that payment by 

the State which is recognized as the 

medical assistance expenditure for 

which Federal matching is made and 

not the provider’s expenditures in 

rendering the services. The commenters 

further stated that Congress has never 

attempted to legislate what a health care 

provider can do with its Medicaid 

payments once they have been earned 

for services rendered. Further, the 

commenters stated that Congress has 

never precluded health care providers 

from using Medicaid revenues to care 

for the uninsured and Congress did not 

intend there to be exclusive sources of 

funding that health care providers could 

use for covering services to the 

uninsured. 

109R. Response: We agree that 

allowable Medicaid payments made to a 

health care provider belong to the health 

care provider. Through this regulation, 

however, we intended to provide that a 

quality of an allowable Medicaid 

payment is that the health care provider 

receive and retain the payment for its 

own purposes, rather than returning it 

or diverting it for other purposes. 

Because this may not have been clear, 

we have revised § 447.207 to make that 

distinction clear. The provision at 

§ 447.207 was intended to address those 

instances in which States make claims 

that are based on health care provider 

payments that are never actually made, 

are based on amounts paid with such 

conditions that the health care provider 

never actually becomes the beneficial 

owner of the funding (for example, 

when the health care provider is 

required to return the funding to a State 

agency or State directed purpose), or are 

otherwise diverted from use for 

Medicaid services by operation of law, 

contract or other mechanism. When the 

health care provider is not permitted to 

receive and retain the funds, the 

regulation would reflect the fact that the 

provider is not the beneficial owner of 

the funds. It should be noted that the 

Federal Medicaid statute does not 

include a term nor discussion that 

references a ‘‘public’’ health care 

provider for purposes of State Medicaid 

financing. 

110C. Comment: A few commenters 

expressed concern that the cost limit 

could affect current DSH calculations 

and requested clarification. Several 

other commenters stated that the 

proposed cost limit would not appear to 

impact the manner in which several 

States currently calculate Medicaid DSH 

payments. Many States’ DSH payments 

are prospectively established using a 

prior year base period trended forward 

to the DSH payment period and 

represent the unreimbursed costs of the 

uninsured and Medicaid HMO 

enrollees. The commenters questioned 

whether the proposed cost limit will 

require States to annually review the 

actual unreimbursed costs of the 

uninsured and Medicaid HMO enrollees 

of DSH hospitals operated by units of 

government to ensure that the Medicaid 

DSH payments did not exceed the actual 

costs of providing inpatient and 

outpatient hospital services during the 

DSH payment period. If so, then the 

proposed regulation should be modified 

to allow for the consistent application of 

a prospective DSH payment 

methodology. 

110R. Response: The provisions of the 

regulation would require an 

examination of Medicaid HMO revenues 

to determine compliance with the 

Medicaid cost limit, but would not 

require an examination of the uninsured 

costs for purposes of the Medicaid cost 

limit. 

The Medicaid cost limit provision is 

consistent with the statutory 

establishment of the hospital specific 

DSH limit, enacted under the Omnibus 

Budget Reconciliation Act of 1993 

(OBRA ‘93). DSH payments are limited 

to each qualifying hospital’s 

uncompensated care costs of providing 

inpatient and outpatient hospital 

services to Medicaid individuals and to 

individuals with no source of third 

party coverage for the inpatient and 

outpatient hospital services they 

received. Under the Medicare 

Modernization Act of 2005 (MMA), 

Congress enacted DSH audit and 

reporting requirements to ensure 

compliance with the OBRA ‘93 hospitalspecific DSH limits. For purposes of 

DSH payments, States may utilize a 

prospective DSH payment methodology, 

but need to ensure actual DSH payments 

do not exceed actual eligible DSH costs 

under the hospital-specific limit 

consistent with OBRA ‘93 and the 

MMA. It should be noted that HMO 

revenues must be considered in the 

calculation of the hospital-specific DSH 

limit. 

111C. Comment: Several commenters 

requested that CMS clarify that the cost 

limit based on the ‘‘cost of providing 

covered Medicaid services to eligible 

Medicaid recipients’’ does not exclude 

costs for disproportionate share hospital 

payments. The commenters were 

concerned that proposed § 447.206(c)(1) 

specifies that ‘‘all health care providers 

that are operated by units of government 

are limited to reimbursement not in 

excess of the individual provider’s cost 

of providing covered Medicaid services 

to eligible Medicaid recipients.’’ The 

commenters believed this would 

preclude any Medicaid reimbursement 

to governmental providers for costs of 

care for patients who are not eligible 

Medicaid individuals. 

The commenters questioned whether 

it is CMS’ intent to either (1) apply the 

cost limit only to fee-for-service 

payments by the state agency for 

services provided to Medicaid 

individuals while relying on separate 

statutory or waiver-based authority to 

impose cost limits on DSH, or (2) to 

apply the cost limit more broadly than 

the language of the proposed regulation 

would suggest. If the limit is to apply 

only to fee-for-service rates, then DSH 

should be explicitly exempted. If the 

limit is to be more broadly applied, then 

costs for the uninsured or non-covered 

Medicaid services for purposes of DSH 

payments must be included. CMS 

should also clarify that the limitation to 

cost of Medicaid services for Medicaid 

individuals is not intended to limit 

Medicaid DSH payments. 

111R. Response: We have modified 

the regulation to clarify that the 

Medicaid cost limit provision does not 

directly apply to DSH payments. NonMedicaid costs should not be included 

in the calculation of the Medicaid cost 

limit. The Medicaid cost limit provision 

is consistent with the statutory 

establishment of the hospital specific 

DSH limit, enacted under the Omnibus 

Budget Reconciliation Act of 1993 

(OBRA ‘93). DSH payments are limited 

to each qualifying hospital’s 

uncompensated care costs of providing 

inpatient and outpatient hospital 

services to Medicaid individuals and to 

individuals with no source of third 

party coverage for the inpatient and 

outpatient hospital services they 

received. Under the Medicare 

Modernization Act of 2005 (MMA), 

Congress enacted DSH audit and 

reporting requirements to ensure 

compliance with the OBRA ‘93 hospitalspecific DSH limits. For purposes of 

DSH payments, States may utilize a 

prospective DSH payment methodology, 

but need to ensure actual DSH payments 

do not exceed actual eligible DSH costs 

under the hospital-specific limit 

consistent with OBRA ‘93 and MMA. 

112C. Comment: A few commenters 

stated that the cost limit would have a 

devastating effect on hospitals in low 

DSH States. The commenters indicated 

that the adequacy of DSH allotments is 

declining as costs climb and insurance 

coverage drops. As DSH has fallen 

behind, other types of supplemental 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29779 

payments have become an even more 

important source of support for these 

safety net hospitals in low DSH States. 

If these non-DSH supplemental 

payments are eliminated, the ability of 

governmental hospitals to continue to 

provide high volumes of care to the 

uninsured will be undermined. Still 

other commenters stated that the 

proposed cost limit would cause DSH 

funds to be distributed away from 

private hospitals to cover increased 

losses in public hospitals. 

112R. Response: Under the cost limit 

of the regulation, Medicaid will 

continue to be permitted to pay for its 

share of costs associated with a 

governmentally-operated health care 

provider’s services that benefit 

Medicaid individuals in accordance 

with applicable statutory and regulatory 

requirements. However, when Medicaid 

is viewed as a primary source of 

revenue for a government’s nonMedicaid activities, no matter how 

noble such activities may be, the 

statutory purpose of the Medicaid 

program has been undermined. 

We note that the Congress has 

expressly provided for certain kinds of 

limited Federal participation in the 

costs of providing services to nonMedicaid individuals and public health 

activities. Examples of limited 

Congressional authorization of Federal 

financing for non-Medicaid individuals 

and public health activities include the 

following. The Congress authorized 

disproportionate share hospital (DSH) 

payments to assist hospitals that serve a 

disproportionate share of low income 

individuals which may include 

hospitals that furnish significant 

amounts of inpatient hospital services 

and outpatient hospital services to 

individuals with no source of third 

party coverage (that is, the uninsured). 

Under section 4723 of the Balanced 

Budget Act of 1997, the Congress also 

provided direct funding to the States to 

offset expenditures on behalf of aliens. 

Additional funding for payments to 

eligible health care providers for 

emergency health services to 

undocumented aliens was also provided 

by Congress under Section 1011 of the 

Medicare Modernization Act. The 

Congress has periodically, and as 

recently as the Deficit Reduction Act of 

2005 (DRA, Pub. L. 109–171, enacted on 

February 8, 2006), adjusted FMAPs for 

certain States and certain activities such 

as an enhanced FMAP to create 

incentives for States to assist 

individuals in institutions return to 

their homes. These examples are 

provided to illustrate that the Congress 

has previously authorized limited 

Federal financing of non-Medicaid 

individuals and public health activities, 

but has not to date authorized wider use 

of Federal Medicaid funding for these 

purposes. Indeed, the Congress 

indicated that Medicaid funding was 

not to be used for non-Medicaid 

purposes when in the Balanced Budget 

Act of 1997 (BBA, Pub.L.105–33, 

enacted on August 5, 1997), it added 

section 1903(i)(17) to the Act to prohibit 

the use of FFP ‘‘with respect to any 

amount expended for roads, bridges, 

stadiums, or any other item or service 

not covered under a State plan under 

this title.’’ Non-Medicaid individuals 

and non-Medicaid services simply are 

not eligible for Federal reimbursements 

except where expressly provided for by 

the Congress. 

The Medicaid cost limit provision of 

the regulation will ensure that 

governmentally-operated health care 

providers may receive up to 100 percent 

of the cost of serving Medicaid 

individuals, while non-Medicaid costs 

to the governmentally-operated health 

care provider will be more appropriately 

borne by those who are obligated to 

finance non-Medicaid costs. 

113C. Comment: Several other 

commenters are concerned that since 

proposed § 447.206 is applicable to DSH 

payments, DSH payments could then 

not exceed the cost of services to 

Medicaid individuals. The commenters 

argued that then DSH payments could 

not reflect a hospital’s uncompensated 

costs of care rendered to uninsured 

individuals and this would be in direct 

conflict with sections 1902(a)(13)(A) 

and 1923(g) of the Act. The commenters 

requested that DSH payments be 

expressly excluded from the proposed 

cost limit. In addition, other 

commenters stated that any willing 

government entity should have the 

ability to pay for the non-federal share 

of DSH payments through either IGTs or 

CPEs. 

113R. Response: We have modified 

the regulation text to clarify that the 

Medicaid cost limit provision does not 

directly apply to DSH payments. The 

Medicaid cost limit provision is 

consistent with the statutory 

establishment of the hospital specific 

DSH limit, enacted under the Omnibus 

Budget Reconciliation Act of 1993 

(OBRA ‘93). DSH payments are limited 

to each qualifying hospital’s 

uncompensated care costs of providing 

inpatient and outpatient hospital 

services to Medicaid individuals and to 

individuals with no source of third 

party coverage for the inpatient and 

outpatient hospital services they 

received. Under the Medicare 

Modernization Act of 2005 (MMA), 

Congress enacted DSH audit and 

reporting requirements to ensure 

compliance with the OBRA ‘93 hospitalspecific DSH limits. Finally, 

governmentally-operated health care 

providers are eligible to participate in 

IGTs and/or CPEs consistent with 

section 1903(w)(6)(A) of the Act. 

Although there is already an 

exception for DSH payments in 

§ 447.272(c)(2), we have made other 

conforming changes. Sections 

447.206(c) and 447.321(c) have been 

modified to include express exceptions 

to exclude DSH payments from the 

determination of the individual health 

care provider’s cost of providing 

covered Medicaid services to eligible 

Medicaid individuals. 

114C. Comment: One commenter 

noted that if a governmentally operated 

health care provider is reimbursed its 

full Medicaid costs, only the 

unreimbursed costs associated with the 

uninsured will be used to calculate its 

allowable DSH payment. The 

commenter urged CMS to maintain the 

current method of determining DSH 

payments. 

114R. Response: The Medicaid cost 

limit provision is consistent with the 

statutory establishment of the hospital 

specific DSH limit, enacted under the 

Omnibus Budget Reconciliation Act of 

1993 (OBRA ‘93). DSH payments are 

limited to each qualifying hospital’s 

uncompensated care costs of providing 

inpatient and outpatient hospital 

services to Medicaid individuals and to 

individuals with no source of third 

party coverage for the inpatient and 

outpatient hospital services they 

received. Under the Medicare 

Modernization Act of 2005 (MMA), 

Congress enacted DSH audit and 

reporting requirements to ensure 

compliance with the OBRA ‘93 hospitalspecific DSH limits. 

115C. Comment: One commenter 

requested clarification on how this 

proposed cost limit impacts health care 

providers who provide services at no 

charge, but are allowed to bill Medicaid 

for such services. The commenter 

specifically asked whether the 

provisions of the regulation prevent a 

health care provider from billing 

Medicaid for those services the health 

care provider generally provides at no 

charge or generally provides to lowincome individuals at no charge. 

115R. Response: The provisions of 

this regulation do not impact those 

policies. 

116C. Comment: A few commenters 

expressed concern with the impact the 

proposed cost limit would have on 

payments to federally qualified health 

centers (FQHCs) and rural health clinics 

(RHCs). Section 1902(bb) of the Act 


jlentini on PROD1PC65 with RULES3
29780 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

requires States to pay for services 

provided by FQHCs and RHCs through 

rates that are prospectively determined 

(based on historical costs). 

Reimbursement to these types of entities 

has evolved over the years away from 

cost reimbursement and towards a 

prospective payment system that 

encourages efficiency. This was 

Congress’s explicit direction. The 

proposed cost limit is in direct conflict 

with section 1902(bb) of the Act. Other 

commenters requested clarification that 

FQHCs are entitled to receive 

reimbursement through their 

prospective payment rates in 

accordance with the statute. Other 

commenters recommended that the final 

regulation clarify that FQHCs and RHCs 

be exempt from the cost settlement 

requirements. 

116R. Response: The commenters 

correctly noted that section 1902(bb) of 

the Act requires States to pay for 

services provided by FQHCs and RHCs 

through rates that are prospectively 

determined, based on a base year 

trended forward according to the 

Medicare Economic Index. Most FQHCs 

and RHCs are not governmentally 

operated. However, based on the 

statutory provision cited above, in order 

to address limited instances where the 

FQHC or RHC may be governmentally 

operated, we are amending the 

‘‘exceptions’’ paragraph of the proposed 

Medicaid cost limit at § 447.206(b) to 

exempt FQHCs and RHCs from the cost 

limit. 

117C. Comment: Several commenters 

requested that the proposed cost limit 

only apply to institutional governmental 

health care providers and not 

professional health care providers that 

may be employed by or affiliated with 

governmental entities. The commenters 

state that while the proposed regulation 

is clear that the limit applies not just to 

hospital and nursing facility providers, 

but also to ‘‘non-hospital and nonnursing facility services’’, it is unclear 

beyond this the scope of the term 

‘‘provider.’’ The commenter asked 

whether the cost limit extends to 

professionals employed by 

governmental entities. These 

commenters request that the proposed 

regulation not be extended this far, as 

cost-based methodologies are 

particularly inappropriate for 

professional services. Another 

commenter stated that if the cost limit 

does apply to professional providers, it 

is unclear how to determine whether 

such providers are an ‘‘integral part’’ of 

a unit of government or are ‘‘operated 

by’’ a unit of government. A cost limit 

would be inappropriate for professional 

services, and the commenter urges CMS 

not to apply the cost limit provisions to 

professionals. One commenter requested 

additional clarification that CPEs can be 

made for physicians, which are not 

subject to cost based reimbursement 

methodologies. 

117R. Response: The proposed cost 

limit applies to all governmentallyoperated Medicaid health care 

providers, including governmentallyoperated entities that are paid by the 

State as health care providers for 

professional services. Whether or not a 

specific health care provider is subject 

to the Medicaid cost limit will depend 

on whether or not the health care 

provider is considered a unit of 

government under § 433.50. CMS 

recognizes that legal and financial 

arrangements between health care 

providers and units of government vary 

on a case by case basis. Therefore, CMS 

has developed standardized and 

impartial regulatory criteria based upon 

Federal statute that States must apply 

on a consistent basis to each health care 

provider within the State to make initial 

determinations of governmental status. 

Finally, we note that individual 

physicians can be involved in CPE 

practices only indirectly; if they are 

paid by a unit of government able to 

participate in Medicaid financing, that 

unit of government can claim a CPE for 

actual payments that are consistent with 

the payment methods under the 

approved Medicaid State plan. 

118C. Comment: One commenter 

stated that they have an approved 

Medicaid supplemental payment for 

ambulance services, and the commenter 

specifically requested that the cost limit 

should not be applied to ambulance 

services. The commenter stipulated that 

Medicare would not include ambulance 

services for purposes of cost-based 

reimbursement, as ambulance services 

are reimbursed by Medicare through a 

fee schedule. 

118R. Response: The proposed cost 

limit applies to all governmentallyoperated Medicaid health care 

providers, including ambulance 

providers. Whether or not a specific 

health care provider is subject to the 

Medicaid cost limit will depend on 

whether or not the health care provider 

is considered a unit of government 

under § 433.50. There is no statutory or 

regulatory basis to require Medicaid 

reimbursement policy for the provision 

of ambulance services to follow 

Medicare reimbursement policy for such 

services. 

119C. Comment: Several commenters 

were concerned that by limiting 

payments to providers, including 

physical therapists, trauma care, 

neonatal intensive care, emergency 

physicians and departments, burn units, 

many of these health care providers will 

be forced to significantly reduce the 

number of Medicaid individuals that 

they treat and may in fact choose to 

withdraw their enrollment from the 

Medicaid program completely. Other 

commenters stated that Medicaid 

reimbursement rates in a majority of the 

States are already very low in 

comparison to Medicare and private 

insurers. Another commenter stated that 

as fewer physicians accept Medicaid, 

more and more Medicaid individuals 

will end up in Emergency Room 

Departments, leading to what the recent 

Institute of Medicine report on the 

future of emergency care predicts is an 

over crossed emergency care system 

staggering under growing levels of 

uncompensated physician and hospital 

care. One commenter stated that such a 

policy would endanger the ability of 

public hospitals to ensure quality and 

patient safety and maintain vital and 

irreplaceable community services. Other 

commenters were concerned that the 

proposed cost limit will be harmful to 

the continuing viability of the range of 

services available to seriously mentally 

ill adults and children living in our 

communities. Another commenter noted 

that because States with public 

hospitals will likely favor their public 

hospitals in the distribution of available 

resources, the commenter believed that 

reducing the overall pool of resources 

available to States would end up hurting 

private, non-profit safety-net hospitals. 

Other commenters indicated that the 

proposed regulation will prohibit the 

ability of States to sufficiently fund their 

portion of Medicaid matching funds, 

effectively limiting the delivery of 

necessary healthcare services to lowincome Americans. Finally, one 

commenter recommended that the 

proposed regulation be modified to limit 

all Medicaid reimbursements to a 

hospital’s cost of care serving Medicaid 

and uninsured individuals, regardless of 

whether the facility is deemed to be a 

unit of government. 

119R. Response: CMS agrees that 

Medicaid is a vitally important program 

that serves very vulnerable individuals, 

and the Federal government remains 

committed to funding its share of the 

cost of providing Medicaid services to 

eligible individuals. Many of the 

expressed concerns about the potential 

impact of the cost limit are overstated. 

Under the provisions of the regulation, 

governmentally-operated health care 

providers will be permitted to receive 

up to 100 percent of the cost of serving 

Medicaid individuals. It does not appear 

that limiting Medicaid reimbursement 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29781 

to the full cost or providing services to 

Medicaid individuals would adversely 

affect a governmentally-operated health 

care provider, unless the health care 

provider had been historically receiving 

Medicaid payments above cost and 

using excess Medicaid revenues to 

subsidize other costs outside of the 

Medicaid program. In such a situation, 

the proposed cost limit could cause a 

net reduction in Medicaid revenue to 

the health care provider, but the amount 

of the reduction would directly 

correspond with the amount of 

Medicaid revenues that had been used 

for non-Medicaid purposes. 

Governmentally-operated health care 

providers not receiving Medicaid 

payments in excess of costs, would not 

be adversely impacted by the Medicaid 

cost limit and would actually be eligible 

to receive greater Medicaid revenues, up 

to the cost limit. In either case, the cost 

limit provision should not force health 

care providers to reduce the number of 

Medicaid individuals they treat or 

withdraw from the Medicaid program. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. It remains unclear how a 

limit that does not apply to public 

hospitals could adversely impact quality 

and patient safety and vital community 

services. 

Moreover, the provisions of the 

regulation reaffirms State Medicaid 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments, another 

provision of which clearly demonstrates 

the Federal government’s intent to 

protect the nation’s public safety net 

and its ability to continue delivering 

critical health care services to Medicaid 

individuals and the uninsured. Any 

health care providers that become 

ineligible to participate in the State 

financing of Medicaid payments 

following the effective date of the 

provisions of this regulation can realize 

greater net revenues if State or local 

government funding sources are utilized 

to fund non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentallyoperated ‘‘public’’ health care providers. 

120C. Comment: Numerous 

commenters argued that governmental 

health care providers, who 

disproportionately serve the uninsured, 

should not be subject to a more 

restrictive limit than private health care 

providers. Imposing such a limit would 

undermine important policy goals, 

including quality, patient safety, 

emergency preparedness, enhancing 

access to primary and preventive care, 

reducing costly and inappropriate use of 

hospital emergency rooms, adoption of 

electronic medical records and reducing 

health disparities, shared by the 

Administration and health care 

providers. Further, the commenters 

noted that in the heightened securityconscious post-9/11 world, public 

hospitals play a critical role in local 

emergency preparedness efforts, 

enhancing their readiness to combat 

both manmade and natural disasters and 

epidemics. The commenters do not 

believe that CMS considered the impact 

of the cost limit on shared policy 

initiatives that HHS itself has 

established as key goals of America’s 

complex health care system. 

120R. Response: We understand that 

governmentally-operated health care 

providers have numerous goals and 

objectives that extend beyond the 

Medicaid program and that Medicaid 

individuals may ultimately benefit from 

the governmentally-operated health care 

provider’s broader activities. Under the 

cost limit of the regulation, Medicaid 

will continue to be permitted to pay for 

its share of costs associated with a 

governmentally-operated health care 

provider’s services that benefit 

Medicaid individuals in accordance 

with applicable statutory and regulatory 

requirements. However, when Medicaid 

is viewed as a primary source of 

revenue for a government’s nonMedicaid activities, no matter how 

noble such activities may be, the 

statutory purpose of the Medicaid 

program has been undermined. 

We note that the Congress has 

expressly provided for certain kinds of 

limited Federal participation in the 

costs of providing services to nonMedicaid individuals and public health 

activities. Examples of limited 

Congressional authorization of Federal 

financing for non-Medicaid individuals 

and public health activities include the 

following. The Congress authorized 

disproportionate share hospital (DSH) 

payments to assist hospitals that serve a 

disproportionate share of low income 

individuals which may include 

hospitals that furnish significant 

amounts of inpatient hospital services 

and outpatient hospital services to 

individuals with no source of third 

party coverage (that is, the uninsured). 

Under section 4723 of the Balanced 

Budget Act of 1997, the Congress also 

provided direct funding to the States to 

offset expenditures on behalf of aliens. 

Additional funding for payments to 

eligible health care providers for 

emergency health services to 

undocumented aliens was also provided 

by Congress under Section 1011 of the 

Medicare Modernization Act. The 

Congress has periodically, and as 

recently as the Deficit Reduction Act of 

2005 (DRA, Pub. L. 109–171, enacted on 

February 8, 2006), adjusted FMAPs for 

certain States and certain activities such 

as an enhanced FMAP to create 

incentives for States to assist 

individuals in institutions return to 

their homes. These examples are 

provided to illustrate that the Congress 

has previously authorized limited 

Federal financing of non-Medicaid 

individuals and public health activities, 

but has not to date authorized wider use 

of Federal Medicaid funding for these 

purposes. Indeed, the Congress 

indicated that Medicaid funding was 

not to be used for non-Medicaid 

purposes when in the Balanced Budget 

Act of 1997 (BBA, Pub.L.105–33, 

enacted on August 5, 1997), it added 

section 1903(i)(17) to the Act to prohibit 

the use of FFP ‘‘with respect to any 

amount expended for roads, bridges, 

stadiums, or any other item or service 

not covered under a State plan under 

this title.’’ Non-Medicaid individuals 

and non-Medicaid services simply are 

not eligible for Federal reimbursements 

except where expressly provided for by 

the Congress. 

The Medicaid cost limit provision of 

the regulation will ensure that 

governmentally-operated health care 

providers may receive up to 100 percent 

of the cost of serving Medicaid 

individuals, while non-Medicaid costs 

to the governmentally-operated health 

care provider will be more appropriately 

borne by those who are obliged to 

finance non-Medicaid costs. 

121C. Comment: A few commenters 

stated their concern that the proposed 

regulation could adversely affect 

inpatient capacity and community 

access to vital services, such as trauma 

centers, at a time when the Nation is 

faced with significant threats to the 

public. One commenter stated that if 

this proposed regulation is allowed to 

be implemented many individuals, 

including children, the working poor, 

and the elderly will no longer be able 

to obtain needed health care services. 

Several commenters indicated that they 

will be forced to make cuts to the 

Medicaid program that would affect 

participant eligibility and a reduction in 

benefits and services provided. Another 

commenter was concerned that as 

health care providers cut back on the 

number of uninsured they can treat, 

these individuals will go to health 

centers, which have already realized a 


jlentini on PROD1PC65 with RULES3
29782 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

128 percent increase in number of 

uninsured treated over the past fifteen 

years, thus overwhelming their critical 

safety net. 

121R. Response: CMS agrees that 

Medicaid is a vitally important program 

that serves very vulnerable individuals, 

and the Federal government remains 

committed to funding its share of the 

cost of providing Medicaid services to 

eligible individuals. Many of the 

expressed concerns about the potential 

impact of the cost limit are overstated. 

Under the provisions of the regulation, 

governmentally-operated health care 

providers will be permitted to receive 

up to 100 percent of the cost of serving 

Medicaid individuals. It does not appear 

that limiting Medicaid reimbursement 

to the full cost of providing services to 

Medicaid individuals would adversely 

impact a governmentally-operated 

health care provider, unless the health 

care provider had been historically 

receiving Medicaid payments above cost 

and using excess Medicaid revenues to 

subsidize costs outside of the Medicaid 

program. In such a situation, the 

proposed cost limit could cause a net 

reduction in Medicaid revenue to the 

health care provider, but the amount of 

the reduction would directly correspond 

with the amount of Medicaid revenues 

that had been used for non-Medicaid 

purposes. Governmentally-operated 

health care providers not receiving 

Medicaid payments in excess of costs 

would not be adversely impacted by the 

cost limit and would actually be eligible 

to receive greater Medicaid revenues up 

to the cost limit. In either case, the cost 

limit provision should not force cuts to 

the Medicaid program, nor affect 

eligibility, benefits and services. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net hospitals, are not 

affected by the cost limit provision of 

the regulation and may therefore 

continue to receive Medicaid payments 

in excess of the cost of providing 

services to Medicaid individuals within 

existing Federal requirements. It is 

unclear how a limit that does not apply 

to public hospitals would reduce 

services or limit access to Medicaid 

individuals or to the uninsured. 

Moreover, the provision of the 

regulation that requires that health care 

providers be allowed to fully retain their 

Medicaid payments demonstrates the 

Federal government’s intent to protect 

the nation’s public safety net and its 

ability to continue delivering critical 

health care services to Medicaid 

individuals and the uninsured. This 

ensures that the full amount of 

Medicaid payment is available to 

support services to this vulnerable 

population. Moreover, health care 

providers that become ineligible to 

participate in financing of Medicaid 

payments following the effective date of 

the provisions of this regulation can 

realize greater net revenues if State or 

local government funding sources are 

utilized to fund non-Federal share 

obligations to Medicaid payments 

historically financed by nongovernmentally-operated ‘‘public’’

health care providers. 

122C. Comment: A couple of 

commenters were concerned that as the 

Medicaid program is streamlined to 

become more efficient and costeffective, optional services, such as 

physical therapy will be marginalized. 

The commenters stated that elimination 

of such services could lead to more 

institutionalized care and the 

development of more severe health 

conditions. 

122R. Response: Optional services, 

like physical therapy, which tend to 

reduce institutionalized care and 

prevent more severe health conditions, 

should not be at risk of being eliminated 

as the Medicaid program becomes more 

efficient and cost effective. On the 

contrary, optional services that are 

preventative in nature would be 

increasingly desirable in an efficient 

and cost-effective health care delivery 

system. Nevertheless, decisions about 

coverage of optional services are made 

by the States, and the Federal 

government will continue to match 

State expenditures for such services as 

long as they are an approved part of the 

State’s Medicaid program consistent 

with all applicable Federal statutory and 

regulatory requirements. 

123C. Comment: Numerous 

commenters pointed out that by 

prohibiting payments of costs other than 

the marginal expenses associated with 

treating Medicaid individuals, public 

providers will be uncompensated for the 

range of costs that underlie the delivery 

of healthcare to this vulnerable 

population. Other commenters 

stipulated that the Medicaid statue does 

not equate cost with efficiency, 

economy and quality of care and there 

are a number of points to indicate that 

payments in excess of an individual 

provider’s cost may still be appropriate 

for a State’s Medicaid program overall. 

Section 1902(a)(30)(A) of the Act 

requires that Medicaid payment be 

sufficient to enlist enough health care 

providers so that care and services are 

available to Medicaid individuals. The 

commenters specified that health care 

providers who rely most on Medicaid 

payments are typically those who also 

have high Medicare and charity care 

patient use. Therefore the proposed cost 

limit would severely limit their ability 

to generate the margins necessary to 

operate effectively, replace or add to 

capital assets, and plan for growth, thus 

resulting in a reduction in the amount 

of services offered. In addition, the 

commenters stated that DSH payments 

are inadequate in covering the cost of 

charity care and providing for any 

margin on Medicaid services. 

Other commenters stated that health 

care providers cannot survive without 

positive operating margins. Any wellrun business needs to achieve some 

margin in order to invest in the future, 

establish a prudent reserve fund, and 

achieve the stability which will allow it 

access to needed capital. Particularly in 

public hospitals, margins on Medicare 

and commercial insurance alone are not 

sufficient to keep public hospitals 

solvent. Various commenters stated 

examples of levels of Medicaid and 

uninsured in public health care 

providers. One commenter noted that 

Medicare and commercial insurance 

amount to less than 45 percent of public 

hospitals’ average net revenues, while 

self-pay individuals comprise 24 

percent of the population served in 

those hospitals. Therefore the 

commenters believed it is unfair to 

expect these health care providers, with 

their disproportionate share of 

uninsured populations to survive and 

thrive. 

Many commenters stated that States 

traditionally pay limited numbers of 

health care providers more than their 

Medicaid costs. Those health care 

providers that do receive payments 

above cost are located in areas where, in 

addition to caring for large numbers of 

Medicaid individuals, they also care for 

large numbers of uninsured individuals 

and without such payments the 

financial viability of these providers 

would be in jeopardy. These providers 

would be unable to serve all of their 

patients. These commenters believe it is 

entirely appropriate for Medicaid 

programs to pay some health care 

providers more than their costs. 

Hospitals that care for large numbers of 

Medicaid individuals inevitably care for 

larger numbers of uninsured individuals 

as well. Several health care providers 

also commented on the amount of 

supplemental Medicaid funding they 

receive and the fact that those payments 

are critical to their ability to serve as a 

health care safety net provider in their 

respective communities. 

Numerous other commenters pointed 

out all of the activities that health care 

providers use supplemental Medicaid 

payments to support are in fact 

integrally related to Medicaid. The 

commenters were disturbed that CMS 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29783 

made allegations that these payments 

were not in fact used for Medicaid 

purposes. For example, one health care 

provider indicated that ensuring a 

strong emergency response capability is 

critical to ensuring that Medicaid 

individuals can receive care when 

needed. Another commenter indicated 

that their Medicaid payments above cost 

help offset other uncompensated costs, 

including physician staffing, costs of 

serving indigent patients, bad debt, etc. 

All of these commenters stated that 

these payments are critical to ensure 

adequate access. Other commenters 

noted these supplemental Medicaid 

payments above cost were approved by 

CMS through State plan amendments. 

123R. Response: CMS agrees that 

Medicaid is a vitally important program 

that serves very vulnerable populations, 

and the Federal government remains 

committed to funding its share of the 

cost of providing Medicaid services to 

eligible individuals. By providing for 

the ability to pay government providers 

the full cost of Medicaid services, we 

are recognizing that States may 

contribute a fair share of all costs 

necessary to operate the provider, 

including the costs of capital assets, 

strategic planning for growth, and other 

necessary administrative activities. 

Further, we understand that 

governmentally-operated health care 

providers have numerous goals and 

objectives that extend beyond the 

Medicaid program and that Medicaid 

individuals may ultimately benefit from 

the governmentally-operated health care 

provider’s broader activities. Under the 

cost limit of the regulation, Medicaid 

will continue to be permitted to pay for 

its share of costs associated with a 

governmentally-operated health care 

provider’s services that benefit 

Medicaid individuals in accordance 

with applicable statutory and regulatory 

requirements. However, when Medicaid 

is viewed as a primary source of 

revenue for a government’s nonMedicaid activities, no matter how 

noble such activities may be, the 

statutory purpose of the Medicaid 

program has been undermined. We note 

that the Congress has expressly 

provided for certain kinds of limited 

Federal participation in the costs of 

providing services to non-Medicaid 

individuals and public health activities. 

Examples of limited Congressional 

authorization of Federal financing for 

non-Medicaid individuals and public 

health activities include the following. 

The Congress authorized 

disproportionate share hospital (DSH) 

payments to assist hospitals that serve a 

disproportionate share of low income 

individuals which may include 

hospitals that furnish significant 

amounts of inpatient hospital services 

and outpatient hospital services to 

individuals with no source of third 

party coverage (that is, the uninsured). 

Under section 4723 of the Balanced 

Budget Act of 1997, the Congress also 

provided direct funding to the States to 

offset expenditures on behalf of aliens. 

Additional funding for payments to 

eligible health care providers for 

emergency health services to 

undocumented aliens was also provided 

by Congress under Section 1011 of the 

Medicare Modernization Act. The 

Congress has periodically, and as 

recently as the Deficit Reduction Act of 

2005 (DRA, Pub. L. 109–171, enacted on 

February 8, 2006), adjusted FMAPs for 

certain States and certain activities such 

as an enhanced FMAP to create 

incentives for States to assist 

individuals in institutions return to 

their homes. These examples are 

provided to illustrate that the Congress 

has previously authorized limited 

Federal financing of non-Medicaid 

individuals and public health activities, 

but has not to date authorized wider use 

of Federal Medicaid funding for these 

purposes. Indeed, the Congress 

indicated that Medicaid funding was 

not to be used for non-Medicaid 

purposes when in the Balanced Budget 

Act of 1997 (BBA, Pub. L. 105–33, 

enacted on August 5, 1997), it added 

section 1903(i)(17) to the Act to prohibit 

the use of FFP ‘‘with respect to any 

amount expended for roads, bridges, 

stadiums, or any other item or service 

not covered under a State plan under 

this title.’’ Non-Medicaid individuals 

and non-Medicaid services simply are 

not eligible for Federal reimbursements 

except where expressly provided for by 

the Congress. 

Additionally, many of the expressed 

concerns about the potential impact of 

the cost limit are overstated. Under the 

provisions of the regulation, 

governmentally-operated health care 

providers will be permitted to receive 

up to 100 percent of the cost of serving 

Medicaid individuals. We do not agree 

that an allowance for payments up to 

cost would violate the provision of 

section 1902(a)(30)(A) of the Act which 

requires that Medicaid payment be 

sufficient to enlist enough health care 

providers so that care and services are 

available to Medicaid individuals 

because all of the health care provider’s 

Medicaid costs can be satisfied. We are 

unclear how limiting Medicaid 

reimbursement to the full cost of 

providing services to Medicaid 

individuals would adversely affect a 

governmentally-operated health care 

provider, unless as some commenters 

note, the health care provider had been 

historically receiving Medicaid 

payments above cost and using excess 

Medicaid revenues to subsidize costs 

outside of the Medicaid program. In 

such a situation, the proposed cost limit 

could cause a net reduction in Medicaid 

revenue to the health care provider, but 

the amount of the reduction would 

directly correspond with the amount of 

Medicaid revenues that had been used 

for non-Medicaid purposes. We do not 

believe Medicaid is responsible to the 

profit margins of governmentallyoperated health care providers and 

question the appropriateness of such a 

suggestion. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net hospitals referenced 

by the commenters, are not affected by 

the cost limit provision of the regulation 

and may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. It is unclear how a limit 

that does not apply to nongovernmentally-operated ‘‘public’’

health care providers could adversely 

impact the financial viability of safety 

net health care providers or access to 

care for Medicaid and uninsured 

individuals. 

Moreover, one provision of the 

regulation reaffirms State Medicaid 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments, another 

provision of which clearly demonstrates 

the Federal government’s intent to 

protect the nation’s public safety net 

and its ability to continue delivering 

critical health care services to Medicaid 

individuals and the uninsured. Any 

health care providers that become 

ineligible to participate in the State 

financing of Medicaid payments 

following the effective date of the 

provisions of this regulation can realize 

greater net revenues if State or local 

government funding sources are utilized 

to fund non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentallyoperated ‘‘public’’ health care providers. 

124C. Comment: Many commenters 

stated that cost-based payments and 

limits are inherently inefficient by 

rewarding providers with high costs. 

Commenters pointed out that 

prospective payment systems are 

structured to encourage health care 

providers to eliminate excess costs by 

allowing them to keep payments above 

costs as a reward for efficiency. A 

payment limit based on costs represents 

a sharp departure from CMS’ efforts to 


jlentini on PROD1PC65 with RULES3
29784 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

bring cost-effective market principles 

into federal health programs. Rather, 

this proposed cost limit would 

incentivize health care providers to 

increase costs and eschew efficiencies 

in order to preserve revenues. 

A few other commenters noted that a 

return to cost-based reimbursement for 

public providers will permit them to 

break even at best, while permitting 

costs to spiral upwards. These 

commenters urged CMS to proceed with 

the development of innovative ways to 

reimburse providers as opposed to 

reverting solely to cost based 

methodologies. 

124R. Response: This rule does not 

require cost based paymnt 

methodologies; States have flexibility to 

use any payment methodology that 

results in payment levels that do not 

exceed provider cost. To the extent that 

a State elects a cost based payment 

methodology, that method would be 

limited to government providers that, by 

their nature, are not seeking profit and 

have a high degree of public 

accountability. As a result, we do not 

believe the Medicaid cost limit will give 

incentives to health care providers to 

increase costs. Moreover, because we 

are strengthening the integrity of the 

funding of the non-federal share of 

expenditures, our State and local 

partners will play a role in controlling 

excessive costs at government providers. 

The Medicare cost allocation process 

utilized for institutional health care 

providers is considered a key 

component in determining Medicaid 

cost under the provisions of the 

regulation. Institutional governmentallyoperated health care providers (i.e., 

hospitals (encompassing both inpatient 

and outpatient hospital services, 

nursing facilities, and intermediate care 

facilities for the mentally retarded 

(ICFs/MR)) will be required to provide 

the State with data extracted from 

primary source documents as well as 

copies of the source documents. These 

documents would include the 

governmentally-operated health care 

provider’s Medicare cost report (or 

Medicaid cost report for intermediate 

nursing facility care and ICFs/MR 

consistent with Medicare cost reporting 

principles), and audited financial 

statements that will be used in 

conjunction with information provided 

by the States’ Medicaid Management 

Information Systems (MMIS). 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report does not currently 

exist. Because of this, we intend to 

publish a standardized cost reporting 

form to document the cost of such 

services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. The period of time to 

which this cost report applies will be 

the Medicaid State plan rate year. 

CMS has developed a general 

Medicaid Cost Reporting Protocol that 

will be on the CMS website that 

specifically addresses the methods 

under which institutional and noninstitutional Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with Federal requirements. 

Finally, it is important to note that 

non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers referenced by the 

commenters, are not affected by the 

Medicaid cost limit provision of the 

regulation and may, therefore, continue 

to receive Medicaid payments in excess 

of the cost of providing services to 

Medicaid individuals within existing 

Federal requirements. 

125C. Comment: Numerous 

commenters stated that the proposed 

cost limit would impose enormous new 

administrative burdens on States and 

health care providers, since cost 

reconciliation processes could last for 

years beyond when services are 

provided. These commenters argued 

since this will have no impact on the 

quality or effectiveness of care provided 

to individuals, these requirements 

should be eliminated. Further, the 

precision gained by reconciling 

payments to actual costs for the 

payment year as determined by a 

finalized cost report is not worth the 

massive diversion of resources. The 

commenters recommended that CMS 

revise the proposed regulation to allow 

States to calculate the cost limit on a 

prospective basis and allow States to 

invest the savings in services that will 

benefit patients. 

125R. Response: We do not believe 

the cost limit will impose significant 

administrative burden on States 

particularly since such limit applies 

only to governmentally-operated health 

care providers. 

For purposes of institutional 

governmentally-operated health care 

providers, the Medicaid cost limit 

determination will rely on existing 

reporting tools used by institutional 

health care providers. States will not be 

required to audit financial and cost 

information provided by individual 

institutional governmentally-operated 

health care providers as part of the 

Medicaid cost limit review. Each of the 

source documents is subject to reporting 

and auditing rules specific to the 

original purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render an determination on the 

cost limit methodology applied to the 

source documents but will not be 

required to validate the accuracy of the 

information and data within the source 

documents. 

For non-institutional services 

provided to Medicaid eligible 

individuals, we note that a nationally 

recognized, standard cost report does 

not exist. Because of this, we intend to 

publish a standardized cost reporting 

form to document the cost of such 

services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. The period of time to 

which this cost report applies will be 

the Medicaid State plan rate year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

CMS has developed a general 

Medicaid Cost Reporting Protocol that 

will be on the CMS website that 

specifically addresses the methods 

under which institutional and noninstitutional Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with Federal requirements. 

126C. Comment: A few commenters 

believe this will create little real benefit 

to health care providers and will result 

in substantial administrative burden. 

They are also concerned these new 

documentation standards will also 

subject Medicaid providers to 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29785 

unwarranted allegations of False Claims 

Act violations. These commenters take 

their obligations to report Medicaid 

expenditures properly and believe that 

because of this, CMS can ensure the 

accuracy of Medicaid claims without 

imposing burdensome certification 

requirement. Another commenter 

questioned how the administrative 

burden would be minimized. Another 

commenter stated that CMS is requiring 

States to implement interim rate 

methodologies with retrospective 

determination of whether the payments 

exceeded the provider’s cost to provide 

the services. Development and 

implementation of these processes for 

providers, States and units of 

government will result in significantly 

increased administrative and auditing 

workloads. 

126R. Response: We agree with the 

commenters that most Medicaid health 

care providers take seriously their 

obligations to report Medicaid 

expenditures properly. While we 

recognize that increased efforts in cost 

reporting will increase fiscal 

accountability among units of 

government involved in the delivery of 

Medicaid services, we do not believe 

that this will produce a disproportionate 

number of meritless claims alleging 

violations of the False Claims Act. 

Moreover, we do not believe the 

Medicaid cost limit will impose 

significant administrative burden on 

States particularly since such limit 

applies only to governmentally-operated 

health care providers. 

For purposes of institutional 

governmentally-operated health care 

providers, the Medicaid cost limit 

determination will rely on existing cost 

reporting tools used by institutional 

health care providers. States will not be 

required to audit financial and cost 

information provided by individual 

institutional governmentally-operated 

health care providers as part of the 

Medicaid cost limit review. Each of the 

source documents is subject to reporting 

and auditing rules specific to the 

original purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render an determination on the 

cost limit methodology applied to the 

source documents but will not be 

required to validate the accuracy of the 

information and data within the source 

documents. 

For non-institutional services 

provided to Medicaid eligible 

individuals, we note that a nationally 

recognized, standard cost report does 

not exist. Because of this, we are 

publishing a standardized cost reporting 

form to document the costs of such 

services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. The period of time to 

which this cost report applies will be 

the Medicaid State plan rate year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

CMS has developed a general 

Medicaid Cost Reporting Protocol that 

will be on the CMS website that 

specifically addresses the methods 

under which institutional and noninstitutional Medicaid costs will be 

determined. 

127C. Comment: One commenter 

indicated that cost reconciliation will be 

a ‘‘big win’’ for consulting companies 

that specialize in Medicaid and health 

care data. States short on resources will 

be forced to pay their high 

administrative fees to comply with these 

new requirements. 

127R. Response: CMS has developed 

a general Medicaid Cost Reporting 

Protocol that will be on the CMS 

website that specifically addresses the 

methods under which institutional and 

non-institutional Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with the Federal requirements and 

should not necessarily require the input 

from entities independent of the State 

and governmentally-operated health 

care providers. It is important to note 

that States must follow the instructional 

protocol and cannot deviate from such 

instructions. Determinations made by 

States that are inconsistent with the 

Federal requirements could result in 

disallowance action. 

128C. Comment: A few commenters 

stated that even when cost limits are 

applied, CMS should reconsider the 

requirement for interim and final 

payment rates for all public providers. 

The commenters indicated that 

prospective payment rates such as DRGbased payments or case-mix adjusted 

per diem rates are often below costs. 

Requiring States to use interim and 

settle-up payment methodologies adds a 

costly level of administrative burden 

and produces no cost savings at all. 

Further, the commenters noted that 

savings generated by subjecting costbased prospective payment rates that are 

periodically updated for inflation to 

retrospective reconciliation would not 

be sufficient to justify the added 

administrative costs of the 

reconciliation process. 

128R. Response: It is important to 

note that ‘‘public’’ providers are not 

subject to the Medicaid cost limit. Only 

governmentally-operated health care 

providers will be subject to the 

Medicaid cost limit. Nongovernmentally-operated health care 

providers, including many of the 

‘‘public’’ safety net hospitals, are not 

affected by the cost limit provision of 

the regulation and may therefore 

continue to receive Medicaid payments 

in excess of the cost of providing 

services to Medicaid individuals within 

existing Federal requirements. 

The Medicaid cost limit provision 

neither requires nor precludes interim 

and final Medicaid payment rates for 

governmentally-operated health care 

providers. The Medicaid cost limit 

provision also does not require States to 

abandon existing DRG based payment 

systems or any other existing Medicaid 

reimbursement rate methodologies 

currently utilized to pay 

governmentally-operated health care 

providers. Under the Medicaid cost 

limit, States may continue to use 

existing Medicaid reimbursement rate 

methodologies, but will need to 

compare such rates to the actual cost of 

providing services to Medicaid 

individuals and make reconciling 

adjustments in the event of 

overpayments to a governmentallyoperated health care provider. The 

Medicaid cost limit provision does not 

require Medicaid payments to be equal 

to a governmentally-operated health 

care provider’s cost of providing 

services to Medicaid individuals. The 

Medicaid cost limit provision instead 

stipulates that Medicaid payments must 

be no more than a governmentallyoperated health care provider’s cost of 

such services. 

129C. Comment: Many commenters 

stated that because the proposed cost 


jlentini on PROD1PC65 with RULES3
29786 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

limit makes all payments received by 

public providers interim and subject to 

retrospective reconciliation to costs, this 

will cause severe financial hardships for 

public providers. Finally, the 

commenters indicated that States do not 

have the necessary administrative 

procedures and mechanisms in place to 

conduct the audits and appeals 

necessary to implement the proposed 

cost limit. 

129R. Response: It is important to 

note that ‘‘public’’ providers are not 

subject to the Medicaid cost limit. Only 

governmentally-operated health care 

providers will be subject to the 

Medicaid cost limit. Nongovernmentally-operated health care 

providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. 

The Medicaid cost limit provision 

does not make all payments received by 

governmentally operated health 

providers ‘‘interim’’ in nature. The 

Medicaid cost limit provision also does 

not require States to replace existing 

Medicaid reimbursement rate 

methodologies currently utilized to pay 

governmentally-operated health care 

providers. Under the Medicaid cost 

limit, States may continue to use 

existing Medicaid reimbursement rate 

methodologies, but will need to 

compare such rates to the actual cost of 

providing services to Medicaid 

individuals and make reconciling 

adjustments in the event of 

overpayments to a governmentally 

operated provider. 

The Medicaid cost limit provision 

does not require Medicaid payments to 

be equal to a governmentally-operated 

health care provider’s cost of providing 

services to Medicaid individuals. The 

Medicaid cost limit provision instead 

stipulates that Medicaid payments must 

be no more than a governmentallyoperated health care provider’s cost for 

such services. 

We do not believe the cost limit will 

impose significant administrative 

burden on States particularly since such 

limit applies only to governmentallyoperated health care providers. These 

providers are governmental partners in 

providing health care and anticipate 

that there will be a degree of 

cooperation in complying with State 

implementation of these Medicaid 

requirements. 

For purposes of institutional 

governmentally-operated health care 

providers, the Medicaid cost limit 

determination will rely on existing cost 

reporting tools used by institutional 

health care providers. States will not be 

required to audit financial and cost 

information provided by individual 

institutional governmentally-operated 

health care providers as part of the 

Medicaid cost limit review. Each of the 

source documents is subject to reporting 

and auditing rules specific to the 

original purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render a determination on the cost 

limit methodology applied to the source 

documents but will not be required to 

validate the accuracy of the information 

and data within the source documents. 

130C. Comment: One commenter 

noted that the proposed requirement to 

develop a cost-based rate for each public 

provider with cost settlement after the 

fact is a tremendous financial and 

administrative burden. The commenter 

explained that CMS allows States to 

develop statewide reimbursement 

methodologies for specific services 

delivered by public providers and that 

States often do this through statewide 

time study methodologies. The 

commenter indicated that the proposed 

cost limit would require each provider 

to develop a cost-based rate for each 

service which would require individual 

time studies, necessitating much larger 

sample sizes and much more extensive 

data analysis. 

130R. Response: It is important to 

note that ‘‘public’’ providers are not 

subject to the Medicaid cost limit. Only 

governmentally-operated health care 

providers will be subject to the cost 

limit. Non-governmentally-operated 

health care providers, including many 

of the ‘‘public’’ safety net health care 

providers referenced by the 

commenters, are not affected by the 

Medicaid cost limit provision of the 

regulation and may therefore continue 

to receive Medicaid payments in excess 

of the cost of providing services to 

Medicaid individuals within existing 

Federal requirements. 

The Medicaid cost limit provision 

also does not require the development 

of a cost-based rate for governmentallyoperated health care providers, nor does 

it require States to abandon existing 

Medicaid reimbursement rate 

methodologies currently utilized to pay 

governmentally-operated health care 

providers. Under the Medicaid cost 

limit provision, States may continue to 

use existing Medicaid reimbursement 

rate methodologies, but will need to 

compare such rates to the individual 

health care provider’s actual cost of 

providing services to Medicaid 

individuals and make reconciling 

adjustments in the event of 

overpayments to a governmentally 

operated provider. 

As important, the cost upper payment 

limit is provider-specific but it does not 

require reconciliation of every 

individual service to cost. Moreover, 

this regulation would not require time 

studies or sampling. These methods are 

used to determine the cost of Medicaid 

when the provider does not have other 

methods of establishing the proportion 

of costs attributable to the Medicaid 

program. In some circumstances, these 

methods may be less expensive and 

more efficient than maintaining detailed 

records of individual service encounters 

and patient eligibility. 

131C. Comment: One commenter 

discussed the unique nature of frontier 

States and the need to purchase a broad 

range and volume of Medicaid services 

out-of-state and the increased new 

workload associated by the provisions 

of this regulation. This commenter 

noted that this will require the State to 

make the cost limit determination 

through an audit of the unit of 

government or governmental health 

provider or monitor and accept the 

servicing State’s cost limit 

determination and make the 

retrospectively calculated refund of any 

overpayment to CMS. 

131R. Response: We recognize that 

certain health care providers deliver 

services to Medicaid individuals that 

reside in another State and are 

reimbursed for those services from other 

States. Under the Medicaid cost limit 

provision of the regulation, a 

governmentally-operated health care 

provider will not be required to 

differentiate Medicaid payments 

received and the Medicaid costs 

incurred based upon Medicaid 

individuals’ State of residence. For 

purposes of the Medicaid cost limit, 

States must consider a governmentallyoperated health care provider’s total 

Medicaid revenues received and the 

total Medicaid costs incurred for 

providing services to Medicaid 

individuals, regardless of the State of 

residence of a specific Medicaid eligible 

individual. A State is only responsible 

to ensure compliance with the Medicaid 

cost limit for the governmentallyoperated health care providers located 

in the State, and not for governmentallyoperated health care providers in 

another State. This approach simplifies 

the implementation and demonstration 

of the Medicaid cost limit for States and 

governmentally-operated providers. 

132C. Comment: Many commenters 

asserted that the proposed cost limit 

will create an administrative burden on 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29787 

States and health care providers that 

will be inefficient, time consuming and 

redundant. The proposed changes 

impose onerous reporting and 

accounting processes to government 

systems, including schools, which 

would likely not be beneficial to the end 

result of a Medicaid payment for the 

effort required. These commenters urge 

CMS to eliminate the individual 

provider cost limit and consider a 

reasonable measurement to ensure a 

proper and efficient reimbursement 

limitation without the unnecessary 

administrative burden. 

132R. Response: We do not believe 

the Medicaid cost limit will imposes 

significant administrative burden on 

States particularly since such limit 

applies only to governmentally-operated 

health care providers. 

For purposes of institutional 

governmentally-operated health care 

providers, the Medicaid cost limit 

determination will rely on existing 

reporting tools used by institutional 

health care providers. States will not be 

required to audit financial and cost 

information provided by individual 

institutional governmentally-operated 

health care providers as part of the 

Medicaid cost limit review. Each of the 

source documents is subject to reporting 

and auditing rules specific to the 

original purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render a determination on the cost 

limit methodology applied to the source 

documents but will not be required to 

validate the accuracy of the information 

and data within the source documents. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report does not currently 

exist. Because of this, we are publishing 

a standardized cost reporting form to 

document the costs of such services. 

The purpose of this standardized form 

is to document in a uniform manner the 

cost of providing non-institutional 

services to Medicaid individuals. The 

period of time to which this cost report 

applies will be the Medicaid State plan 

rate year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

CMS has developed a general 

Medicaid Cost Reporting Protocol that 

will be on the CMS Web site that 

specifically addresses the methods 

under which institutional and noninstitutional Medicaid costs will be 

determined. 

133C. Comment: Many commenters 

believe that it is unreasonable to impose 

a lower limit on Medicaid 

reimbursements to governmental 

providers than private providers. Most 

commenters stated it was unclear why 

CMS believes that rates we would 

continue to allow states to pay private 

providers are excessive with respect to 

government providers. Another 

commenter mentioned that public 

hospitals do not have access to the kind 

of non-patient care revenues 

(investment income) that other private 

hospital systems do. 

Other commenters stated that if the 

proposed cost limit is consistent with 

section 1902(a)(30)(A) of the Act, then 

there is no rational basis for 

distinguishing between public and 

private providers. Requiring differential 

treatment of public and private 

Medicaid providers is inconsistent with 

the equal protection clause of the 

Constitution as well as CMS’ own 

repeated statements regarding the 

importance of payment equality for all 

categories of Medicaid providers. In 

fact, in its 2002 final UPL rule CMS 

agreed that ‘‘one group of providers 

should not have a financial benefit over 

another group of providers who provide 

the same type of services.’’ CMS went 

on to explain that its intent was ‘‘to treat 

all facilities equally, and apply the same 

aggregate UPL for each group of 

facilities, regardless of who owns or 

operates the facilities.’’

133R. Response: Although these 

commenters assume that this regulation 

would impose a lower limit on 

government providers than on private 

providers, this is not necessarily true. 

This rule would permit payment of the 

full cost of Medicaid services to 

government providers, which could 

exceed the payments available under 

limits based on Medicare payment 

methodologies (for example the 

Medicare inpatient prospective payment 

system). 

As we discussed in the preamble to 

the provisions of the regulation, there 

are different incentives at work in 

setting Medicaid payment rates to 

governmentally-operated health care 

providers that are not relevant for 

private health care providers. There is 

the potential for an inherent conflict of 

interest in setting Medicaid payment 

rates to governmentally-operated health 

care providers, arising from the ability 

of governmental providers to contribute 

the non-federal share of Medicaid 

expenditures and from the interrelated 

nature of governmental units within a 

State. Limits based on documented costs 

results in an objective basis to assess 

whether a rate is consistent with 

efficiency, economy and quality of care, 

because it provides for full payment for 

the costs of furnishing covered services 

to eligible individuals. 

The rational basis for distinguishing 

between governmentally-operated and 

private health care providers is shown 

by the preponderance of States that have 

separate payment methodologies for 

governmentally-operated and private 

health care providers. 

In our 2002 issuance, this was not an 

issue upon which we focused; this 

regulation reflects additional 

consideration and analysis obtained 

through oversight reviews of Medicaid 

State plans and programs. 

134C. Comment: One commenter 

stated that given the limited definition 

of ‘‘unit of government’’, there are 

providers who today receive payments 

in excess of cost. Since CMS does not 

limit payment to those providers to cost, 

it should not apply a cost limit to public 

providers either. 

Another commenter provided an 

example of how States design their 

reimbursement systems to differentiate 

payments between an acute care 

hospital and a psychiatric care facility. 

The commenter stated that public and 

private entities in the acute care 

hospital category would be paid the 

same rate based on the services they 

provide and the State would develop a 

separate rate for a psychiatric care 

facility and apply it to both the public 

and private entities. The commenter 

stated that the proposed cost limit 

would force States to dismantle this 

reasonable payment methodology. 

134R. Response: The Federal 

Medicaid statute does not reference 

‘‘public’’ health care providers for 

purposes of State Medicaid financing, 

but only health care providers operated 

by units of government. The regulation 

limits governmentally-operated health 


jlentini on PROD1PC65 with RULES3
29788 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

care providers to reimbursements that 

do not exceed the individual provider’s 

cost of serving Medicaid eligible 

individuals. This regulation does not 

preclude States from using the same 

payment methods for governmental and 

private providers, as long as 

governmental providers are not paid in 

excess of cost. To the extent that private 

providers are paid less than their full 

cost, this rule would give States 

flexibility to pay governmental 

providers at a higher rate than private 

providers. This rule allows 

governmentally-operated Medicaid 

providers to be reimbursed for their full 

cost of providing services to Medicaid 

individuals. While the regulation does 

not impose a Medicaid cost limit on 

private health care providers, our 

reviews of Medicaid reimbursement 

methodologies indicate that some States 

reimburse private health care providers 

at rates that are less than the cost of 

serving Medicaid eligible individuals. 

The limit on reimbursement not to 

exceed cost for individual health care 

providers operated by units of 

government is consistent with statutory 

construction that the Federal 

government pays only its proportional 

cost for the delivery of Medicaid 

services. Because the Medicaid program 

is jointly funded by Federal, State, and 

local governments, we do not find it 

appropriate that units of State or local 

government would ‘‘profit’’ from 

Federal taxpayer dollars that are 

intended to match a percentage of the 

cost of providing services to Medicaid 

individuals. 

In addition, the provisions of the 

regulation do not force States to 

dismantle any of the existing Medicaid 

reimbursement rate methodologies they 

are currently utilizing to reimburse 

health care providers. Under the 

Medicaid cost limit, States may 

continue to use Medicaid 

reimbursement rate methodologies, but 

will need to compare such rates to the 

actual cost of providing services to 

Medicaid individuals and make 

reconciling adjustments in the event of 

overpayments to a particular 

governmentally-operated health care 

provider. States may find such cost 

reconciliations to be useful inasmuch as 

they will permit States to better analyze 

the reasonableness of their Medicaid 

reimbursement rates. 

We considered imposing cost limits 

on Medicaid payments to 

governmentally-operated health care 

providers only when those health care 

providers were paid differently than 

private health care providers. This 

approach, however, would have 

required considerably more oversight 

resources and would be subject to 

abuse. We foresaw that States could 

evade the intended limits by segmenting 

generally applicable payment rates in 

ways that effectively distinguished 

between governmentally-operated and 

private health care providers (for 

example, by developing a generally 

applicable payment rate that included a 

special payment for providers operating 

in a city with a population between 

300,000 and 350,000 that has no less 

than 1350 beds and no more than 1360 

beds). This outcome would not be 

consistent with the overall principle to 

end excessive payments to 

governmental providers. 

135C. Comment: One commenter 

stated that since CMS has noted on 

numerous occasions that States have no 

incentive to overpay providers if the 

providers cannot transfer funds back to 

the State, CMS should consider limiting 

the application of provider specific cost 

limits to only those instances in which 

payment methodologies for government 

providers differ from the payment 

methodologies for non-government 

providers. If payments to government 

and non-government providers are the 

same, the expense of cost reporting is 

not offset by any savings. 

135R. Response: We considered 

imposing cost limits on Medicaid 

payments to governmentally-operated 

health care providers only when those 

health care providers were paid 

differently than private health care 

providers. This approach, however, 

would have required considerably more 

oversight resources and would be 

subject to abuse. We foresaw that States 

could evade the intended limits by 

segmenting generally applicable 

payment rates in ways that effectively 

distinguished between governmentallyoperated and private health care 

providers (for example, by developing a 

payment rate that included a special 

payment for health care providers 

operating in a city with a population 

between 300,000 and 350,000 that has 

no less than 1,350 beds and no more 

than 1,360 beds). This outcome would 

not be consistent with the overall 

principle to end excessive payments to 

governmentally-operated health care 

providers. 

An upper payment limit based on 

documented cost provides a clear, 

objective test of the reasonableness of a 

payment methodology for government 

providers regardless of whether the 

provider participates in financing the 

Medicaid program. The cost limit on 

Medicaid reimbursement is consistent 

with the overall Federal, State and local 

partnership under which the Federal 

government pays only its proportional 

cost for the delivery of Medicaid 

services. It is not appropriate that units 

of State or local government would 

‘‘profit’’ from Federal taxpayer dollars 

that are intended to match a percentage 

of the cost of providing services to 

Medicaid individuals. 

As important, a separate test for 

governmental providers that participate 

in financing the Medicaid program 

could be viewed as contrary to the 

statutory protection of such financing 

arrangements. State governments may 

share their fiscal obligation to the 

Medicaid program with local 

governments according to the 

instruction of Congress. Under Public 

Law 102–234, the Congress made clear 

that States may allow governmentallyoperated health care providers to 

participate in a State’s fiscal obligation 

to the Medicaid program through the 

use of intergovernmental transfers and 

certified public expenditures. 

Under this regulation, States may 

continue to pay governmentallyoperated and non-governmentallyoperated health care providers under 

the same Medicaid reimbursement rate, 

as long as the applicable upper payment 

limits are met for each category of 

provider. The provisions of the 

regulation do not require States to 

dismantle any of the existing Medicaid 

reimbursement rate methodologies they 

are currently utilizing to reimburse 

providers. Under the Medicaid cost 

limit, States may continue to use 

existing Medicaid reimbursement rate 

methodologies, but will need to 

compare such rates to the actual cost of 

providing services to Medicaid 

individuals and make reconciling 

adjustments in the event of 

overpayments to a particular 

governmentally-operated health care 

provider. 

136C. Comment: Several commenters 

specified how the proposed cost limit 

and other provisions of the regulation 

will create difficult financing situations 

for the hospitals operating within their 

State. For example, the commenters 

noted that either a hospital will be 

considered private and therefore unable 

to share in the funding of the nonfederal share of Medicaid payments or 

it will be considered governmental and 

able to fund the non-federal share, but 

subject to the cost limit. The 

commenters argued that either way, 

these facilities will be faced with 

significant financial losses; even in 

some States that CMS has indicated 

employ appropriate IGTs. 

136R. Response: This rule restores 

some measure of fiscal integrity to 

Medicaid financing and payment for 

governmental providers. We agree that 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29789 

governmental providers (or nongovernmental providers erroneously 

treated as such) that were paid in excess 

of their actual costs of providing 

Medicaid services may be adversely 

affected. Section 1901 of the Medicaid 

statue, however, makes clear that the 

intended beneficiaries of under the 

Medicaid statute are eligible 

individuals, not providers. By providing 

that Medicaid payments may be 

sufficient to cover the full cost of 

covered services at government 

providers, we are protecting the interest 

of those eligible individuals. Moreover, 

by providing that providers are entitled 

to retain Medicaid payments, we are 

ensuring that Medicaid payments are, in 

fact, available to pay for covered 

services and are not diverted for other 

purposes. 

The Medicaid program is jointly 

funded by Federal, State, and local 

governments. We do not find it 

appropriate that units of State or local 

government would ‘‘profit’’ from 

Federal taxpayer dollars that are 

intended to match a percentage of the 

cost of providing services to Medicaid 

individuals. As we have examined 

Medicaid financing arrangements across 

the country, we have found that many 

States make payments to 

governmentally operated providers that 

are in excess of cost. These providers, in 

turn, use the excess of Medicaid 

revenue over cost to subsidize health 

care operations that are unrelated to 

Medicaid, or they may return a portion 

of such payments to the State as a 

source of revenue. In either case, we do 

not find that Medicaid payments in 

excess of cost to governmentallyoperated health care providers are 

consistent with the statutory principles 

of economy and efficiency as required 

by section 1902(a)(30)(A) of the Act, nor 

do we find such excessive payments to 

be consistent with the statutory 

structure requiring that the Federal 

government match a percentage of State 

or local government expenditures for 

the provision of services to Medicaid 

individuals. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net hospitals, are not 

affected by the cost limit provision of 

the regulation and may therefore 

continue to receive Medicaid payments 

in excess of the cost of providing 

services to Medicaid individuals within 

existing Federal requirements. 

Moreover, one provision of the 

regulation reaffirms State Medicaid 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments, another 

provision of which clearly demonstrates 

the Federal government’s intent to 

protect the nation’s public safety net 

and its ability to continue delivering 

critical health care services to Medicaid 

individuals and the uninsured. Any 

health care providers that become 

ineligible to participate in the State 

financing of Medicaid payments 

following the effective date of the 

provisions of this regulation can realize 

greater net revenues if State or local 

government funding sources are utilized 

to fund non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentallyoperated ‘‘public’’ health care providers. 

137C. Comment: One commenter 

requested clarification of whether States 

that do not use CPEs to pay providers 

are required to review annual cost 

reports to verify that actual payments to 

each governmentally operated provider 

did not exceed the provider’s costs. The 

commenter questioned whether this 

provision applies to Medicaid payments 

that are not developed using IGTs or 

CPEs. 

137R. Response: Yes, the provisions 

of the regulation require States to review 

cost reports on an annual basis for all 

governmentally-operated health care 

providers to verify compliance with the 

Medicaid cost limit, even if the 

governmentally-operated health care 

provider was not involved in IGTs or 

CPEs. 

138C. Comment: A few commenters 

indicated that while proposed § 447.206 

requires the use of the applicable 

Medicare cost report to document the 

costs incurred by hospitals and nursing 

homes operated by units of government, 

many States have developed their own 

State specific cost reports. These 

commenters have found the Medicare 

cost report did not provide the detailed 

information needed for rate setting 

processes and that the State specific cost 

report provided much more detailed 

information by cost center. These 

commenters recommend that the 

proposed rule be modified to allow 

States to use their own cost report form 

if the form meets or exceeds the amount 

of information included in the Medicare 

cost report. Other commenters 

recommended that the final rule also be 

clarified to allow State cost reports to be 

used as the basis for the cost settlement 

of government providers in lieu of the 

Medicare cost report. In addition, the 

commenter recommended that State 

cost principles may be used in the 

settlement determination. Another 

commenter stated that is not clear that 

there is a consistent use, review or audit 

of the Medicare cost reports and that 

there is an increasing probability for 

these cost reports to contain errors and/ 

or omissions. This commenter 

recommended that CMS allow for other 

means to document provider costs in 

the event alternative sources prove more 

accurate and reliable. 

138R. Response: The Medicare cost 

allocation process utilized for 

institutional health care providers is 

considered a key component in 

determining Medicaid cost under the 

provisions of the regulation. Use of a 

nationally recognized, standardized cost 

report allows all States to document 

institutional Medicaid service costs in a 

nationally consistent manner. 

Institutional governmentally-operated 

health care providers (that is, hospitals 

(encompassing both inpatient and 

outpatient hospital services), nursing 

facilities, and intermediate care 

facilities for the mentally retarded 

(ICFs/MR)) will be required to provide 

the State with data extracted from 

primary source documents as well as 

copies of the source documents. These 

documents would include the 

governmentally-operated health care 

provider’s Medicare cost report (or 

Medicaid cost report for intermediate 

nursing facility care and ICFs/MR 

consistent with Medicare cost reporting 

principles), and audited financial 

statements that will be used in 

conjunction with information provided 

by the States’ Medicaid Management 

Information Systems (MMIS). 

States will not be required to audit 

financial and cost information provided 

by individual institutional 

governmentally-operated health care 

providers as part of the Medicaid cost 

limit review. Each of the source 

documents is subject to reporting and 

auditing rules specific to the original 

purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render an determination on the 

cost limit methodology applied to the 

source documents but will not be 

required to validate the accuracy of the 

information and data within the source 

documents. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report does not exist. 

Because of this, we intend to publish a 

standardized cost reporting form to 

document the costs of such services. 

The purpose of this standardized form 

is to document in a uniform manner the 

cost of providing non-institutional 

services to Medicaid individuals. The 

period of time to which this cost report 

applies will be the Medicaid State plan 

rate year. 

CMS has developed a general 

Medicaid Cost Reporting Protocol that 


jlentini on PROD1PC65 with RULES3
29790 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

will be available on the CMS Web site 

that specifically addresses the 

information utilized from each source 

document and the methods under 

which institutional (and noninstitutional) Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with the Federal requirements. 

139C. Comment: Several commenters 

questioned when the cost report form 

for non-hospital and non-nursing 

facility services that is mentioned, 

would be available. One commenter 

inquired as to whether the Secretary 

will prospectively provide the form or 

will States have to develop the form and 

hope that their form meets the 

Secretary’s retrospective approval. 

These commenters also questioned what 

happens in cases where rates have been 

established and approved by CMS, but 

do not potentially meet the cost test 

provided by the form. These 

commenters are particularly concerned 

since many of these providers (i.e., 

school-based service providers, health 

department clinics, community mental 

health clinics, physician services 

provided by State employees) have 

never been required to produce cost 

report information. 

Another commenter was concerned 

about the impact on home and 

community based waiver programs and 

the imposition of these requirements 

threatens to undermine the viability of 

these very important programs. The 

commenters stated that it is difficult to 

gauge the impact since cost data for 

non-institutional services has never 

been captured. But regardless, this will 

encompass many providers and will 

require great effort by States and 

providers to collect, report, analyze and 

reconcile these costs annually. Other 

commenters noted that many of these 

non-institutional providers are generally 

paid on a fee-based system, which is 

relatively inexpensive and easy to 

administer. These commenters believe 

that imposing cost reporting 

requirements on these providers will be 

difficult and in many cases impossible 

for them to manage. They further 

believe that these providers may then 

find it no longer worthwhile to continue 

providing Medicaid services. 

139R. Response: We do not believe 

the Medicaid cost limit will impose 

significant administrative burden on 

States particularly since such limit 

applies only to governmentally-operated 

health care providers. Moreover, the 

benefit of clear and transparent 

accounting for the costs of medical 

assistance furnished by governmental 

providers will be significant. Accurate 

data on Medicaid costs will be available 

to guide Medicaid payment 

determinations by the State. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report does not currently 

exist. Because of this, we intend to 

publish a standardized cost reporting 

form to document the costs of such 

services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. The period of time to 

which this cost report applies will be 

the Medicaid State plan rate year. 

140C. Comment: One commenter 

indicated that the requirement that 

providers of non-institutional/non-acute 

care Medicaid services operated by 

units of government must submit annual 

cost reports to ensure Medicaid 

reimbursements do not exceed the 

allowable Medicaid costs of the 

provider, is in direct conflict with the 

current direction provided by CMS’

Non-Institutional Payment Team (NIPT). 

The commenter stated that the NIPT has 

advised that if Medicaid rates are 

established using Medicare or 

commercial rates as the basis, cost 

reports would no longer be required 

from these providers unless certified 

public expenditures are used. This 

commenter recommends the use of 

market-based rates. By moving to 

market-based rates, States have the same 

incentive as private providers to control 

their costs to stay within the market 

based rates and that by allowing 

providers to be reimbursed up to cost, 

it is usually interpreted by providers as 

an entitlement for these providers to be 

able to recover their full cost. There is 

no incentive to control costs. With 

guidance from the NIPT, the commenter 

was advised to eliminate the cost report 

requirement as an incentive for State 

agencies to voluntarily move to marketbased rates. The commenter urges CMS 

to modify the proposed rule to remove 

the requirement for cost reports for noninstitutional services when a CMSapproved market based reimbursement 

methodology is used and the services 

are not funded through a CPE. 

Another commenter stated that 

Medicare rates used by States as 

payments for their Medicaid programs 

should be exempt from the cost 

settlement process. This commenter 

explained that if this proposed cost 

limit extends to programs that currently 

do not have a cost report, but some of 

these programs may use Medicare rates, 

the State may need to develop a new 

cost report that applies only to 

government providers solely to 

determine their cost for cost settlement. 

140R. Response: There are no 

Medicaid reimbursement rate 

methodologies for governmentallyoperated health care providers that 

would be ‘‘exempt’’ from the Medicaid 

cost limit provision of this regulation. 

The regulation does not require States to 

modify any of the existing Medicaid 

reimbursement rate methodologies they 

are currently utilizing to reimburse 

governmentally-operated health care 

providers. Under the Medicaid cost 

limit, States will be able to continue to 

use existing reimbursement rate 

methodologies, but will need to 

compare such rates to the actual cost of 

providing services to Medicaid 

individuals and make reconciling 

adjustments in the event of 

overpayments to a particular 

governmentally-operated health care 

provider. Prior agency guidance is 

superseded by this regulation. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report does not exist. 

Because of this, we intend to publish a 

standardized cost reporting form to 

document such services. The purpose of 

this standardized form is to document 

in a uniform manner the cost of 

providing non-institutional services to 

Medicaid individuals. The period of 

time to which this cost report applies 

will be the Medicaid State plan rate 

year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.). States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

CMS has developed a general 

Medicaid Cost Reporting Protocol that 

will be available on the CMS website 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29791 

that specifically addresses the methods 

under which non-institutional (and 

institutional) Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with the Federal requirements. 

141C. Comment: One commenter 

stated that they identified several 

providers which may be governmental 

providing other than hospital or nursing 

services in the less populated areas of 

the State. The commenter suggested that 

CMS should acknowledge the true 

impact on smaller units of government 

or governmentally-operated health care 

providers and provide some floor 

criteria below which the regulations 

would not apply. The commenter 

offered some examples of potential floor 

criteria: The number of facility beds; 

Medicaid eligible population in some 

mile radius; number of Medicaid 

individuals served by the unit of 

government or governmental health 

provider and population base in the unit 

of government’s area. Another 

commenter suggested other bases for 

exemption: The extent to which public 

providers are a significant percentage of 

the total providers using the same 

reimbursement methodology; a dollar 

reimbursement threshold; or a 

demonstration that reimbursement in 

the aggregate does not exceed cost. 

141R. Response: Although we note 

the unique circumstances of providers 

in less populated areas, the provisions 

of the regulation are intended to apply 

uniformly across the country, regardless 

of a provider’s particular size, location, 

or reimbursement characteristics unique 

to certain governmentally-operated 

health care providers. 

It is important to note that ‘‘public’’

providers are not subject to the 

Medicaid cost limit. Only 

governmentally-operated health care 

providers will be subject to the 

Medicaid cost limit. Nongovernmentally-operated health care 

providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. 

142C. Comment: One commenter was 

concerned about the impact of Medicare 

cost reports on physician services. The 

commenter stated that Medicare 

separates out the professional services 

component that is covered under Part B, 

leaving only the cost of physician 

services to the hospital on the hospital 

cost report. In this circumstance, there 

is no similar rationale under Medicaid 

for public hospitals since they directly 

employ or contract for physicians to 

serve their patients. Other commenters 

recommended that physician services be 

excluded from the cost limit. 

142R. Response: The Federal 

Medicaid statute does not include a 

term nor discussion that references a 

‘‘public’’ health care provider for 

purposes of State Medicaid financing. 

The regulation limits governmentallyoperated health care providers to 

reimbursements that do not exceed the 

individual provider’s cost of serving 

Medicaid eligible individuals. 

Governmentally-operated entities that 

are paid by the State as providers of 

physician services are subject to the 

Medicaid cost limit. Costs to 

governmentally-operated entities paid 

by the State as providers of physician 

services rendered outside the hospital 

will be documented using the 

standardized cost reporting form issued 

by CMS that will be used to document 

such services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. 

The Medicaid Cost Reporting Protocol 

that will be available on the CMS Web 

site addresses the methods under which 

institutional and non-institutional 

Medicaid costs will be determined. The 

protocol was designed to provide States 

with detailed instructions to determine 

compliance with the Federal 

requirements. 

143C. Comment: One commenter 

requested clarification regarding 

discrepancies between the preamble and 

proposed regulatory text at § 447.206. 

The commenter stated that the preamble 

suggests the use of Medicare cost reports 

for hospitals and nursing facility 

services with exceptions to be addressed 

on a case-by-case basis, but the 

regulation text states that costs for such 

services ‘‘must’’ be supported using 

Medicare cost report information. 

143R. Response: The Medicare cost 

allocation process utilized for 

institutional health care providers is 

considered a key component in 

determining Medicaid cost under the 

regulation. Institutional governmentallyoperated health care providers (i.e. 

hospitals (encompassing both inpatient 

and outpatient hospital services), 

nursing facilities, and intermediate care 

facilities for the mentally retarded 

(ICFs/MR)) will be required to provide 

the State with data extracted from 

primary source documents as well as 

copies of the source documents. These 

documents would include the 

governmentally-operated health care 

provider’s Medicare cost report (or 

Medicaid cost report for intermediate 

nursing facility care and ICFs/MR 

consistent with Medicare cost reporting 

principles), and audited financial 

statements that will be used in 

conjunction with information provided 

by the States’ Medicaid Management 

Information Systems (MMIS). 

For purposes of institutional 

governmentally-operated health care 

providers, the Medicaid cost limit 

determination will rely on existing 

reporting tools used by institutional 

health care providers. States will not be 

required to audit financial and cost 

information provided by individual 

institutional governmentally-operated 

health care providers as part of the 

Medicaid cost limit review. Each of the 

source documents is subject to reporting 

and auditing rules specific to the 

original purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render an determination on the 

cost limit methodology applied to the 

source documents but will not be 

required to validate the accuracy of the 

information and data within the source 

documents. 

144C. Comment: One commenter 

requested that CMS specify in the 

regulation text the process, timeframes, 

and appeal rights regarding CMS’ action 

on a State’s request to approve its cost 

reports for non-hospital/non-nursing 

facility providers, and for adjusted 

Medicare cost reports for hospitals/ 

nursing facilities. 

144R. Response: States will not be 

expected to develop their own cost 

reports for purposes of the Medicaid 

cost limit under the regulation. For noninstitutional services provided to 

Medicaid eligible individuals, a 

nationally recognized, standard cost 

report does not currently exist. Because 

of this, we intend to publish a 

standardized cost reporting form to 

document the costs of such services. 

The purpose of this standardized form 

is to document in a uniform manner the 

cost of providing non-institutional 

services to Medicaid individuals. The 

period of time to which this cost report 

applies will be the Medicaid State plan 

rate year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally-operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 


jlentini on PROD1PC65 with RULES3
29792 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

CMS has developed a general 

Medicaid Cost Reporting Protocol that 

will be on the CMS website that 

specifically addresses the methods 

under which non-institutional (and 

institutional) Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with the Federal requirements. 

145C. Comment: Many commenters 

were confused by the proposed language 

in §§ 447.206(d) through 447.206(e). The 

commenters stated that CMS alternated 

between mandatory and permissive 

language regarding the State obligations 

during CPE reconciliations. The 

commenters believed that CMS’ intent 

was to require the submission of cost 

reports whenever providers are paid 

using a cost reimbursement 

methodology funded by CPEs and to 

permissively allow States to provide 

interim payment rates based on the most 

recently filed prior year cost reports. 

They also believed States providing 

interim payment rates must undertake 

an interim reconciliation based on filed 

cost reports for the payment year in 

question and a final reconciliation based 

on finalized cost reports. The 

commenters also believed CMS’ intent 

was that for providers whose payments 

are not funded by CPEs, the providers 

are required to submit cost reports and 

the State is required to review the cost 

reports and verify that payments during 

the year did not exceed costs. The 

commenters requested CMS confirm 

this understanding of the regulatory 

language. 

145R. Response: Under the Medicaid 

cost limit provision of the regulation, 

States may continue to use existing 

Medicaid reimbursement rate 

methodologies, which are not funded by 

CPEs, but will need to compare such 

rates to the actual cost of providing 

services to Medicaid individuals and 

make reconciling adjustments in the 

event of overpayments to a 

governmentally-operated provider. The 

Medicaid cost limit provision does not 

require Medicaid payments to be equal 

to a governmentally-operated health 

care provider’s cost. The Medicaid cost 

limit provision instead stipulates that 

Medicaid payments must be no more 

than a governmentally-operated health 

care provider’s cost of providing 

services to Medicaid individuals. 

Section 447.206(e) specifically 

addresses situations where 

governmentally-operated health care 

providers are reimbursed using 

Medicaid reimbursement rate 

methodologies not funded by CPEs. 

States must utilize cost 

reimbursement methodologies for 

Medicaid payments that are funded by 

CPEs. Section 447.206(d)(2) indicates 

that States may utilize interim rates and 

may trend those interim rates by an 

applicable health care-related index. If 

interim rates are used, then interim 

reconciliations must be performed by 

reconciling the interim Medicaid 

payment rates to the ‘‘as filed’’ cost 

report for the spending year in which 

interim Medicaid payment rates were 

made. Paragraph (3) of this provision 

also establishes that final reconciliation 

must be performed annually by 

reconciling any Medicaid interim 

payments to the finalized cost report for 

the spending year in which all interim 

payments were made. As stated 

previously, these procedures related to 

interim and final reconciliations at 

§ 447.206(d) are applicable when States 

utilize cost reimbursement 

methodologies that are funded by CPEs. 

146C. Comment: A few commenters 

requested clarification regarding 

proposed § 447.206(d)(2). The 

commenters requested clarification that 

this section is applicable only in a 

retrospective cost reimbursement 

methodology and does not apply to a 

prospective cost reimbursement 

methodology. The commenters are 

concerned that health care providers 

could construe that States are required 

to pay full costs, rather than that 

payments are limited to cost, in a 

prospective cost reimbursement 

methodology. Where payments are less 

than cost, health care providers would 

argue an additional Medicaid payment 

would be due. 

146R. Response: Under the Medicaid 

cost limit provision of the regulation, 

States may continue to use existing 

Medicaid reimbursement rate 

methodologies, which are not funded by 

CPEs, but will need to compare such 

rates to the actual cost of providing 

services to Medicaid individuals and 

make reconciling adjustments in the 

event of overpayments to a 

governmentally-operated provider. The 

Medicaid cost limit provision does not 

require Medicaid payments to be equal 

to a governmentally-operated health 

care provider’s cost. The Medicaid cost 

limit provision instead stipulates that 

Medicaid payments must be no more 

than a governmentally-operated health 

care provider’s cost of providing 

services to Medicaid individuals. 

Section 447.206(e) specifically 

addresses situations where 

governmentally-operated health care 

providers are reimbursed using 

Medicaid reimbursement rate 

methodologies not funded by CPEs. 

States must utilize cost 

reimbursement methodologies for 

Medicaid payments that are funded by 

CPEs. Section 447.206(d)(2) indicates 

that States may utilize interim rates and 

may trend those interim rates by an 

applicable health care-related index. If 

interim rates are used, then interim 

reconciliations must be performed by 

reconciling the interim Medicaid 

payment rates to the ‘‘as filed’’ cost 

report for the spending year in which 

interim Medicaid payment rates were 

made. Paragraph (3) of this provision 

also establishes that final reconciliation 

must be performed annually by 

reconciling any Medicaid interim 

payments to the finalized cost report for 

the spending year in which all interim 

payments were made. As stated 

previously, these procedures related to 

interim and final reconciliations at 

§ 447.206(d) are applicable when States 

utilize cost reimbursement 

methodologies that are funded by CPEs. 

147C. Comment: A few commenters 

requested clarification regarding 

proposed § 447.206(d)(3). The 

commenters request clarification that 

the finalized cost report may be 

prepared by the Medicaid agency rather 

than requiring the Medicaid agency to 

wait for a Medicare intermediary to 

finalize the cost report. The Medicaid 

agency shouldn’t have to wait for the 

Intermediary’s generated final or accept 

the Medicare intermediary’s 

determination of Medicaid costs. 

147R. Response: The Medicare cost 

allocation process utilized for 

institutional health care providers is 

considered a key component in 

determining Medicaid cost under the 

provisions of the regulation. Use of a 

nationally recognized, standardized cost 

report allows all States to document 

institutional Medicaid service costs in a 

nationally consistent manner. 

Institutional governmentally-operated 

health care providers (that is, hospitals 

(encompassing both inpatient and 

outpatient hospital services), nursing 

facilities, and intermediate care 

facilities for the mentally retarded 

(ICFs/MR)) will be required to provide 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29793 

the State with data extracted from 

primary source documents as well as 

copies of the source documents. These 

documents would include the 

governmentally-operated health care 

provider’s Medicare cost report (or 

Medicaid cost report for intermediate 

nursing facility care and ICFs/MR 

consistent with Medicare cost reporting 

principles), and audited financial 

statements that will be used in 

conjunction with information provided 

by the States’ Medicaid Management 

Information Systems (MMIS). 

States will not be required to audit 

financial and cost information provided 

by individual institutional 

governmentally-operated health care 

providers as part of the Medicaid cost 

limit review. Each of the source 

documents is subject to reporting and 

auditing rules specific to the original 

purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render an determination on the 

cost limit methodology applied to the 

source documents but will not be 

required to validate the accuracy of the 

information and data within the source 

documents. 

We understand that there may be 

delays with the Medicare fiscal 

intermediary finalizing the Medicare 

cost report. To ensure compliance with 

the Medicaid cost limit, we have 

modified the final regulation to provide 

a generous but definite timeframe for a 

State’s review of Medicaid payments 

made to institutional governmentallyoperated health care providers. For any 

cost reports that are not finalized in that 

timeframe, the State should use the ‘‘as 

filed’’ report and indicate such in the 

summary report to CMS. The State 

should then submit a corrected 

summary report to CMS within 30 days 

of the finalization of the Medicare cost 

report. 

148C. Comment: A couple of 

commenters recommended that States 

be allowed the option of having a single 

settlement and forgo the interim 

settlement process when using CPEs. 

The commenters stated that currently 

only final settlements are conducted 

and this interim settlement would 

require an additional step. 

148R. Response: Provisions at 

§ 447.206(d)(2) address reconciliations 

of interim rates to ‘‘filed’’ cost reports, 

while provisions § 447.206(d)(3) address 

reconciliations of interim rates to 

‘‘finalized’’ cost reports. Such a 

distinction is historically relevant to 

institutional health care providers 

(hospitals and nursing homes) which 

‘‘file’’ cost reports with a Medicare fiscal 

intermediary, after which the cost report 

is ‘‘finalized’’ following fiscal 

intermediary review. The provisions at 

§§ 447.206(d)(2) and 447.206(d)(3) 

require that reconciliations be 

performed at both steps for purposes of 

documenting costs for the institutional 

health care provider’s services to 

Medicaid individuals. 

Non-institutional governmentallyoperated health care providers must use 

the standardized cost reporting form 

issued by CMS, which will be subject to 

a State established review and audit 

process that must also include interim 

and final reconciliations for purposes of 

CPE. 

149C. Comment: Several commenters 

requested that the proposed requirement 

to limit payments to health care 

providers not funded by CPEs be 

eliminated. 

149R. Response: The Medicaid cost 

limit provision applies to all health care 

providers operated by units of 

government within the State, regardless 

of how the non-Federal share of 

Medicaid payments made to the 

governmentally-operated health care 

provider are funded. 

150C. Comment: One commenter 

requested clarification in the regulation 

text on the timing requirements for 

reconciliation and for final payments. 

150R. Response: To ensure 

compliance with the Medicaid cost 

limit, CMS has modified the regulation 

to indicate that a State’s review of 

Medicaid payments made to 

institutional governmentally-operated 

health care providers during Medicaid 

State plan rate year 2008 must be 

completed no later than the last day of 

federal fiscal year 2010. The State must 

submit a summary report of the findings 

of this review by the last day of calendar 

year of 2010. The basis for these 

deadlines is the recognition that 

hospitals (for both inpatient and 

outpatient hospital services), nursing 

homes and ICFs/MR may have a cost 

reporting period that remains open after 

the Medicaid State Plan rate year under 

review has ended. The State review and 

reporting deadlines allow sufficient 

time for the cost report period that 

remains open at the end of a Medicaid 

State Plan rate year to close and for the 

cost report to be submitted to the fiscal 

intermediary. For any cost reports that 

are not finalized, the State should use 

the ‘‘as filed’’ report and indicate such 

in the summary report to CMS. The 

State should then submit a corrected 

summary report to CMS within 30 days 

of the finalization of the cost report. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally-operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

151C. Comment: Many commenters 

stated that the proposed cost limit 

would impose deep cuts in safety net 

support without addressing the 

inappropriate Medicaid financing 

abuses CMS has been working to 

address. The commenters acknowledged 

that according to CMS it has eliminated 

‘‘recycling’’ the cost limit is supposed to 

address. Yet the commenters argued that 

imposing the proposed cost limit will 

do nothing to address recycling, rather 

it will only result in limiting net 

funding to governmental providers. The 

commenters recommended that rather 

than imposing the new cost limit, CMS 

should continue to address issues on a 

case-by-case basis through State Plan 

amendment (SPA) review. 

Several commenters disagreed with 

CMS’ statements in the proposed rule 

that States operate inappropriate 

financing structures. The commenters 

stipulated the States have worked to 

ensure that their financing policies do 

not denigrate the integrity of the 

Medicaid program and have received 

approval by CMS for these systems. 

Further, States have been subject to 

significant State and federal audit 

reviews and the commenters argued that 

these audit reviews and oversight 

mechanisms are sufficient for 

identifying any future potential threats 

to the integrity of the Medicaid program 

rather than the burdensome provisions 

within this proposed rule. 

Similarly, one commenter discussed 

their example of working with CMS to 

approve a nursing facility 

reimbursement methodology that 

authorized payments to county-operated 

nursing facilities at 94 percent of the 

Medicare payment rate with the 

understanding that the counties would 

be contributing, through IGTs, to the 


jlentini on PROD1PC65 with RULES3
29794 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

State a portion of the payment in an 

amount not to exceed the non-federal 

share. The commenter stated that 

through the review of this SPA all of the 

issues raised by CMS were addressed. 

The commenter believed that this is a 

prime example of the federal-State 

partnership at work. The commenter 

noted that the ability of CMS to deal 

through the State plan process with 

what it perceived to be a financing 

problem and to work with the State to 

develop a solution demonstrates why 

there is no need for further regulation. 

Several other commenters noted that 

after working extensively with CMS by 

removing problematic IGTs, they are 

now characterized as using IGTs 

appropriately. 

151R. Response: We understand that 

many States utilize Medicaid financing 

methods that are consistent with the 

Medicaid statute and that existing 

Federal oversight mechanisms have 

been effective in addressing a number of 

State Medicaid financing abuses. An 

upper payment limit based on 

documented cost is nevertheless 

justified to prevent excessive payments 

to governmental providers. Such an 

upper payment provides a clear, 

objective test of the reasonableness of a 

payment methodology for government 

providers regardless of whether the 

provider participates in financing the 

Medicaid program. This limit is also 

consistent with statutory construction 

that the Federal government pays only 

its proportional cost for the delivery of 

Medicaid services. Because the 

Medicaid program is jointly funded by 

Federal, State, and local governments, 

we do not find it appropriate that units 

of State or local government would 

‘‘profit’’ from Federal taxpayer dollars 

that are intended to match a percentage 

of the cost of providing services to 

Medicaid individuals. 

Under the provisions of the 

regulation, governmentally-operated 

health care providers will be permitted 

to receive up to 100 percent of the cost 

of serving Medicaid individuals. It does 

not appear that limiting Medicaid 

reimbursement to full cost would hurt a 

governmentally-operated health care 

provider, unless the governmentallyoperated health care provider had been 

historically receiving Medicaid 

payments above cost and using excess 

Medicaid revenues to subsidize costs 

outside of the Medicaid program. In 

such a situation, the Medicaid cost limit 

could cause a net reduction in Medicaid 

revenue to the governmentally-operated 

health care provider, but the amount of 

the reduction would directly correspond 

with the amount of Medicaid revenues 

that had been used to satisfy nonMedicaid activities. 

152C. Comment: Many commenters 

were concerned that the proposed cost 

limit would not allow health care 

providers to include important elements 

in their cost calculation. One 

commenter questioned whether the 

Secretary would prospectively establish 

the reasonable methods to identify and 

allocate Medicaid costs. For example, 

several commenters cited costs for 

physician services, on-call availability 

costs, capital costs and health 

information technology costs. These 

commenters recommended that CMS 

allow the reasonable costs necessary for 

the continued operation of health care 

providers. Other commenters 

recommended that CMS provide 

guidance on how Medicaid costs would 

be determined and that at a minimum 

any determination of Medicaid costs 

would include all costs necessary to 

operate a governmental facility. These 

commenters cited many examples. 

A few commenters inquired as to 

what cost finding principles will be 

used to determine which costs are 

associated with the provision of the 

Medicaid service. One commenter 

further questioned whether the cost 

finding principles would be 

standardized, how will they differ from 

existing cost finding guidance and, why. 

This commenter stipulated that a more 

comprehensive definition of costs is 

needed since CMS has decided not to 

use Medicare’s cost principles or the 

principles of OMB Circular A–87. 

The commenters also noted that some 

costs on a hospital’s cost report are 

allocated to cost centers judged to be 

unreimbursable for purposes of 

Medicare, but are appropriately 

reimbursed under Medicaid or DSH. 

Such costs include costs for a clinic that 

exclusively serves Medicaid and 

uninsured individuals. 

152R. Response: Medicaid service 

costs must be documented for 

institutional providers through 

Medicare cost reporting methods. We 

agree some adjustments would be 

needed to reflect the costs of Medicaid 

services; for example, Medicaid only 

units that would be excluded from the 

calculation of Medicare patient care 

costs would be included in calculating 

Medicaid patient care costs (and nonMedicaid units would be excluded). But 

all the information necessary to 

calculate Medicaid cost should be found 

on the Medicare cost report. For noninstitutional services provided to 

Medicaid eligible individuals, a 

nationally recognized, standard cost 

report does not currently exist. Because 

of this, we intend to publish a 

standardized cost reporting form to 

document the costs of such services. 

The Medicare cost allocation process 

utilized for institutional health care 

providers is considered a key 

component in determining Medicaid 

cost under the regulation. Institutional 

governmentally-operated health care 

providers (that is, hospitals 

(encompassing both inpatient and 

outpatient hospital services), nursing 

facilities, and intermediate care 

facilities for the mentally retarded 

(ICFs/MR)) will be required to provide 

the State with data extracted from 

primary source documents as well as 

copies of the source documents. These 

documents would include the 

governmentally-operated health care 

provider’s Medicare cost report (or 

Medicaid cost report for intermediate 

nursing facility care and ICFs/MR 

consistent with Medicare cost reporting 

principles), and audited financial 

statements that will be used in 

conjunction with information provided 

by the States’ Medicaid Management 

Information Systems (MMIS). 

For non-institutional services 

provided to Medicaid eligible 

individuals, use of a standardized form 

will document in a uniform manner the 

cost of providing non-institutional 

services to Medicaid individuals. The 

period of time to which this cost report 

applies will be the Medicaid State plan 

rate year. 

CMS has developed a general 

Medicaid Cost Reporting Protocol that 

will be available on the CMS website 

that specifically addresses the 

information utilized from each source 

document and the methods under 

which institutional and noninstitutional Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with the Federal requirements. 

153C. Comment: One commenter 

questioned whether CMS would define 

which provider costs and what specific 

Medicare/Medicaid 2552–96 worksheets 

and lines may be included in 

developing this new cost limit. 

153R. Response: CMS has developed 

a general Medicaid Cost Reporting 

Protocol that will be on the CMS Web 

site that specifically addresses the 

information utilized from each source 

document, including the Medicare 

2552–96 hospital cost report, and the 

methods under which institutional and 

non-institutional Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with the Federal requirements. 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29795 

154C. Comment: One commenter 

questioned whether CMS intends to 

develop case mix indices for noninstitutional providers or require States 

to do so. 

154R. Response: States utilizing 

Medicaid cost reimbursement 

methodologies may develop interim 

payment rates based on prior period 

costs or case-mix and apply a related 

health inflation index. However, the 

Medicaid cost limit provision limits 

Medicaid payments to the actual costs 

of providing services to Medicaid 

individuals and the State must reconcile 

these interim payments to actual 

documented cost. 

155C. Comment: One commenter was 

concerned that costs for preventive and 

wellness care services would not be 

allowable. The commenter is also 

concerned that costs for physical 

therapists would not be allowed. The 

commenter states the importance of 

these services in helping individuals 

maintain their health by preventing 

further deterioration or future illness. 

155R. Response: CMS will continue to 

provide Federal matching funds for 

State expenditures under the authority 

of a State’s approved Medicaid State 

plan. Provided that preventive and 

wellness services and physical therapy 

services for Medicaid individuals are 

considered reimbursable costs under the 

approved State Plan, CMS will continue 

to provide Federal funds to match State 

expenditures for these services to the 

extent all such reimbursements and 

State financing are consistent with 

Federal requirements. 

156C. Comment: Many commenters 

requested that CMS confirm that 

graduate medical education (GME) costs 

would be considered allowable costs as 

part of the proposed cost limit. These 

commenters cited that as of 2005, 47 

States and the District of Columbia 

provided explicit GME payments to 

teaching hospitals and that numerous 

approved State plan provisions 

authorize such payments. These 

commenters stated that excluding these 

costs could seriously undermine the 

infrastructure for training new 

physicians across the country. 

156R. Response: The allowability of 

graduate medical education (GME) costs 

or payment is not affected by this 

regulation. This issue is the subject of a 

recently issued Notice of Proposed 

Rulemaking, which would make 

unallowable payment for direct GME 

costs, consistent with the concept 

included in the President’s Budget for 

Fiscal Year 2008. 

157C. Comment: One commenter 

requested clarification regarding how 

States should identify costs for 

providers operated by units of 

government that do not serve Medicare 

individuals and, therefore, do not use 

and have never used Medicare cost 

reports. 

157R. Response: Nursing homes that 

only provide intermediate care services 

and therefore do not file a Medicare cost 

report must use State cost reports 

generally consistent with the Medicare 

cost reporting principles utilized in the 

Medicare 2540 cost report form to 

determine costs associated with skilled 

care services. 

While Medicare does not have an 

equivalent cost report for the services 

provided in ICFs/MR, we recognize that 

States typically follow Medicare cost 

principles in determining Medicaid 

payment rates for ICFs/MR. We further 

note that the services provided in ICFs/ 

MR are predominately delivered to 

Medicaid eligible individuals. 

Therefore, cost data should be extracted 

from existing State cost reports for 

services provided in ICFs/MR. Such cost 

reports must be generally consistent 

with Medicare cost reporting principles. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report does not currently 

exist. Because of this, we are publishing 

a standardized cost reporting form to 

document the costs of such services. 

The purpose of this standardized form 

is to document in a uniform manner the 

cost of providing non-institutional 

services to Medicaid individuals. The 

period of time to which this cost report 

applies will be the Medicaid State plan 

rate year. 

158C. Comment: One commenter 

indicated that there are a broad array of 

indirect and unreimbursed costs 

associated with Medicaid individuals. 

The commenter argued that the 

uniqueness of Medicaid individuals’

socio-economic status make them much 

costlier. For example, the commenter 

detailed that Medicaid individuals have 

a higher rate of missed appointments 

than private pay or Medicare 

individuals, under utilize preventive 

care which then leads to more costly 

and complex care, increased severity of 

medical conditions, lack of followthrough or compliance with treatment 

plans, and use of hospital emergency 

rooms as a primary care source. The 

commenter urged CMS to ensure that 

the true costs associated with Medicaid 

individuals are captured and the cost 

limit not be based on strictly patient 

care costs. Another commenter 

indicated that limiting reimbursement 

to costs only would be devastating to 

facilities operating in States that do not 

adjust each year for the real costs to 

provide services to the frail and elderly. 

158R. Response: The cost reporting 

mechanisms that would be used have 

sufficient flexibility to ensure 

determination of the full cost of 

furnishing Medicaid services. At the 

same time, they will provide a 

standardized and uniform cost 

determination methodology. 

The Medicare cost allocation process 

utilized for institutional health care 

providers is considered a key 

component in determining Medicaid 

cost under the regulation. Institutional 

governmentally-operated health care 

providers (that is, hospitals, nursing 

facilities, and intermediate care 

facilities for the mentally retarded 

(ICFs/MR)) will be required to provide 

the State with data extracted from 

primary source documents as well as 

copies of the source documents. These 

documents would include the 

governmentally-operated health care 

provider’s Medicare cost report (or 

Medicaid cost report for intermediate 

nursing facility care and ICFs/MR 

consistent with Medicare cost reporting 

principles), and audited financial 

statements that will be used in 

conjunction with information provided 

by the States’ Medicaid Management 

Information Systems (MMIS). 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report does not currently 

exist. Because of this, we are publishing 

a standardized cost reporting form to 

document the costs of such services. 

The purpose of this standardized form 

is to document in a uniform manner the 

cost of providing non-institutional 

services to Medicaid individuals. The 

period of time to which this cost report 

applies will be the Medicaid State plan 

rate year. 

159C. Comment: One commenter 

stated that since their rates for Medicaid 

services have not been indexed for 

inflation over the past fourteen years, it 

shouldn’t be necessary for them to prove 

costs. 

159R. Response: There are no 

Medicaid reimbursement rate 

methodologies for governmentallyoperated health care providers that 

would be ‘‘exempt’’ from the Medicaid 

cost limit provision of the regulation. 

The regulation does not require States to 

modify existing Medicaid 

reimbursement rate methodologies they 

are currently utilizing to reimburse 

governmentally-operated health care 

providers. Under the Medicaid cost 

limit, States will be able to continue to 

use existing reimbursement rate 

methodologies, but will need to 


jlentini on PROD1PC65 with RULES3
29796 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

compare such rates to the actual cost of 

providing services to Medicaid 

individuals and make reconciling 

adjustments in the event of 

overpayments to a particular 

governmentally-operated health care 

provider. 

160C. Comment: One commenter 

suggested that CMS give consideration 

to those States that have approved cost 

based prospective reimbursement plans. 

The commenter added that by doing 

this, the proposed cost limit 

requirement could be met with the most 

recent historical costs used in 

establishing the prospective rates. 

160R. Response: The Medicaid cost 

limit provision of the regulation 

requires an examination of the actual 

costs incurred by governmentallyoperated health care providers for 

providing services to Medicaid 

individuals and the actual Medicaid 

payments received for such services in 

a given Medicaid State plan rate year. 

Under the Medicaid cost limit, States 

will be able to continue to use existing 

reimbursement rate methodologies, but 

will need to compare such rates to the 

actual cost of providing services to 

Medicaid individuals and make 

reconciling adjustments in the event of 

overpayments to a particular 

governmentally-operated health care 

provider. 

161C. Comment: Several commenters 

stated that they have no issue with the 

requirement to submit auditable 

documentation, but are concerned 

whether CMS considered that 

complicated approved methodologies 

exist today whereby both administrative 

and program costs, through cost 

allocation, are used to claim 

administrative costs by CPEs and are 

used to set rates for programs such as 

TCM. The commenters asked CMS to 

understand that while the requirements 

for reporting administrative costs and 

for reporting service costs are very 

different, they are also sometimes 

integrated in time studies. 

The commenters preferred that 

documentation requirements 

accommodate both administrative 

claiming and/or collection of the cost to 

provide a service, avoiding a duplicative 

reporting process. 

161R. Response: The standardized 

cost reporting form will be used to 

document non-institutional services has 

been designed to accommodate both 

administrative Medicaid costs as well as 

clinical Medicaid costs in a single 

template, thus avoiding a duplicative 

reporting process. CMS has developed a 

general Medicaid Cost Reporting 

Protocol that will be on the CMS Web 

site that specifically addresses the 

methods under which non-institutional 

(and institutional) Medicaid costs will 

be determined. The protocol was 

designed to provide States with detailed 

instructions to determine compliance 

with the Federal requirements. While 

the Medicaid cost limit provision does 

not necessarily require States to modify 

their existing Medicaid reimbursement 

rate methodologies for governmentallyoperated health care providers, any 

Medicaid overpayments that result from 

such reimbursement methodologies, 

must be offset against future claimed 

expenditures reported on the CMS–64 

as an overpayment in accordance with 

sections 1903(d)(2) and 1903(d)(3)(A) of 

the Act. 

162C. Comment: Several commenters 

inquired as to what extent CMS will 

define how administrative claiming is 

documented and how would these 

proposed regulations might alter that 

process. The commenters request that 

these requirements not go beyond 

activities defined in OMB A–87 or 

GAAP. The commenters also expect that 

the allowable costs be fully inclusive of 

costs as defined by OMB A–87. Another 

commenter questioned whether the 

proposed cost limit will be applied to 

Medicaid administrative costs. Another 

commenter questioned if the cost 

identification and reporting 

requirements apply to administrative 

expenditures, will all currently 

approved Cost Allocation Plans still be 

compliant under this proposed rule. 

162R. Response: OMB Circular A–87 

specifies cost principles for state and 

local government administration costs. 

Cost Allocation Plans are required and 

approved by the Federal government in 

accordance with 45 CFR Part 95, 

Subpart E. Cost identification and 

reporting requirements will continue 

under this existing process for purposes 

of administrative expenditures under 

Medicaid. 

163C. Comment: A few commenters 

expressed concern regarding the impact 

of the proposed cost limit on 

governmentally operated critical access 

hospitals (CAHs). The commenters 

stated that the cost limit would create a 

disconnect with other nongovernmentally operated CAHs who 

would still be reimbursed at 101 percent 

of cost consistent with Medicare. The 

commenters stated that limiting the 

governmentally operated CAHs to 100 

percent of cost would undermine their 

public safety net mission and could 

result in their inability to maintain their 

operations which serve a vital role in 

rural communities. 

163R. Response: All governmentallyoperated health care providers are 

subject to the Medicaid cost limit. 

Therefore, governmentally-operated 

critical access hospitals will be subject 

to the provisions of the regulation in a 

manner consistent with all other types 

of governmentally-operated health care 

providers. States must apply the Federal 

statutory and regulatory criteria to each 

individual health care provider within 

the State to make initial determinations 

of governmental status. 

It is important to note that nongovernmentally-operated health care 

providers, including many of the 

‘‘public’’ safety net health care 

providers referenced by the 

commenters, are not affected by the 

Medicaid cost limit provision of the 

regulation and may, therefore, continue 

to receive Medicaid payments in excess 

of the cost of providing services to 

Medicaid individuals within existing 

Federal requirements. 

164C. Comment: A number of 

commenters stated that this rule is 

administratively burdensome because 

school-based providers will be 

challenged to document costs in a cost 

report, which could drain school 

resources and may also result in 

medically necessary and allowable 

services not being reimbursed. Concern 

was also expressed that the regulation’s 

documentation requirements would 

strain relationships between schools 

and school-based providers. One 

commenter stated that the provisions of 

the regulation would cause significant 

hardship on school district accounting 

offices because they are subject to 

Federal, State, and local regulations for 

accounting that are different from 

procedures proposed in §§ 433, 447, and 

457. This commenter did not specify 

which Federal, State, or local 

accounting provisions are in conflict 

with the proposed provisions of the 

regulation. Another commenter 

expressed the view that a ‘‘one size fits 

all’’ approach to cost reporting for 

school based services would 

unnecessarily burden schools in a State 

where cost documentation is already 

accessible and verifiable. 

164R. Response: For school-based 

services in Medicaid, we recognize that 

a nationally recognized, standard cost 

report does not currently exist, leaving 

States and school districts to themselves 

to document costs however they deem 

appropriate. These different practices 

often make it difficult to (1) align 

claimed expenditures with specific 

services covered under the State plan or 

identifiable administrative activities; (2) 

properly identify the actual cost to the 

governmental entity of providing 

services to Medicaid individuals or 

performing administrative activities; 

and (3) audit and review Medicaid 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29797 

claims to ensure that Medicaid 

payments are appropriately made. 

School-based services have been cited 

by the Office of the Inspector General as 

an area within Medicaid cited for 

problematic claims. To ensure the fiscal 

integrity of the Medicaid program, we 

believe it is important for schools to be 

subject to the same requirements to 

document Medicaid costs as other 

governmental providers. 

We will be publishing a standardized 

non-institutional services cost reporting 

form that can be used for school-based 

services in order to have such services 

documented in a uniform manner across 

the country. This standardized form 

should minimize the burden associated 

with the review of expenditures for 

school-based services. We expect that 

States with currently accessible and 

verifiable cost documentation will find 

it easier to transition into use of the new 

school-based services cost report 

template. 

165C. Comment: A few commenters 

requested clarification regarding the 

inapplicability of the proposed cost 

limit to the State Children’s Health 

Insurance Program (SCHIP). The 

commenters stated that it was unclear 

whether CMS was creating a new 

definition for what will be considered 

an SCHIP provider. The commenters 

noted that for States that have designed 

their SCHIP program as a Medicaid 

expansion, there is no distinction made 

between those providers who provide 

services to the SCHIP population and 

those who provide services to Medicaid 

enrollees. Specifically the commenters 

questioned that if a State’s Medicaid 

providers are considered SCHIP 

providers, are they exempt from the 

proposed cost limit. The commenters 

also questioned whether if a State’s 

Medicaid providers are not considered 

to be SCHIP providers and have to meet 

the proposed cost limit, should the State 

for those providers exclude SCHIP costs 

and reimbursements when making the 

Medicaid cost limit and overpayment 

determination. The commenters stated 

that if the SCHIP costs and 

reimbursements are not excluded, then 

a cost shift has occurred to the States for 

the difference between the State’s 

regular FMAP rate and the enhanced 

SCHIP FMAP. 

Another commenter expressed 

concern that those States which opted to 

implement SCHIP as a Medicaid 

expansion are being retroactively 

penalized for not implementing SCHIP 

as a stand alone program. This 

commenter stated that given the SCHIP 

implementation options included in the 

statute, this proposed regulation must 

clearly define the criteria and 

characteristics of what is; and, what is 

not an SCHIP provider for application of 

the regulation’s provisions. For 

example, the commenter questioned 

whether providers are considered 

SCHIP providers when they provide the 

same service package to both Medicaid 

and SCHIP eligibles and are reimbursed 

at the same payment rates. 

165R. Response: We are not creating 

a new definition of what is considered 

an SCHIP provider. We are clarifying 

that the provisions of this regulation are 

applicable to health care providers that 

receive payments under a separate state 

SCHIP, with the exception of the 

provisions related to the Medicaid cost 

limit as described below. 

To the extent a State’s SCHIP program 

is established as a Medicaid expansion 

program, payments to governmentallyoperated health care providers for 

SCHIP individuals are Medicaid 

payments and are subject to the 

Medicaid cost limit. If a State operates 

its SCHIP program as an SCHIP standalone program, payments to 

governmentally-operated health care 

providers are not subject to the 

Medicaid cost limit. This distinction is 

consistent with the different nature of a 

separate State SCHIP and a Medicaid 

expansion. A Medicaid expansion is an 

integral part of the Medicaid program, 

subject to all Medicaid requirements, 

including beneficiary protections and 

payment limitations. A separate State 

SCHIP is not part of the Medicaid 

program and affords States greater 

flexibility, particularly in the area of 

provider payment and beneficiary 

protections. Only certain specified 

Medicaid requirements apply including, 

at section 2107(e)(1)(C), the Medicaid 

provider tax and donation restrictions of 

section 1903(w). CMS has interpreted 

this to include restrictions on nongovernmental providers participating in 

the financing of the program. As a 

result, this rule would make applicable 

to separate State SCHIPs all 

requirements other than the Medicaid 

cost limits. 

The regulation does not make a 

distinction between what is and is not 

an SCHIP provider. Rather the 

determining factor is the structure of the 

State’s SCHIP program and what type of 

payments (for example, Medicaid 

expansion or SCHIP stand-alone) are 

received by governmentally-operated 

health care providers for individuals 

covered under SCHIP. 

E. Retention of Payments (§ 447.207) 

166C. Comment: One commenter 

questioned whether it is allowable for 

the State to retain the federal share of a 

supplemental Medicaid payment when 

the Federal share is used to support the 

Medicaid reimbursement, thus 

eliminating the need for a reduction in 

the Medicaid reimbursement. 

166R. Response: No. Section 447.207 

requires that health care providers 

receive and retain the full amount of the 

total computable payment provided to 

them for services furnished under the 

approved Medicaid State plan. Federal 

financial participation (FFP) is provided 

only when there is a corresponding 

State expenditure for a covered 

Medicaid service provided to a 

Medicaid individual. FFP is based on 

statutorily-defined percentages of total 

computable State expenditures for 

medical assistance provided to 

individuals under the approved 

Medicaid State plan, and of State 

expenditures related to the cost of 

administering the Medicaid State plan. 

If the State expenditure is reduced, then 

the Federal share of that expenditure is 

also proportionately reduced. 

167C. Comment: A couple of 

commenters stated that the proposed 

retention of payment provisions violate 

section 1903(w)(6)(A) of the Act which 

specifically allows intergovernmental 

transfers and section 5 of Pub. L. 102–

234, which prohibits the Secretary from 

changing the treatment of public funds 

as a source of the State share of 

Medicaid expenditures. The 

commenters also noted that Congress 

prohibited the Secretary from 

promulgating interim regulations 

changing the treatment of IGTs. The 

commenters suggested that the term 

‘‘retain’’ is not defined, thus leaving the 

final determination of its meaning to the 

discretion of the Secretary. One 

commenter stated that this proposed 

provision has constitutional 

implications under the takings clause of 

the U.S. Constitution that would result 

if private health care providers could 

not freely transfer their payments from 

Medicaid (that is, use those payments to 

pay the health care provider’s own 

expenses). One of the commenters 

argued that there was no reason for 

Congress to have inserted the phrase 

‘‘regardless of whether the unit of 

government is also a health care 

provider’’ in section 1903(w)(6)(A) of 

the Act if it had not intended to 

continue to allow governmentallyoperated health care providers to refund 

Medicaid payments, which are derived 

from State taxes, to the State. The 

commenter acknowledged that such 

refunds have allowed some States to pay 

for costs that are outside the Medicaid 

program, the commenter believed this 

was expressly permitted by Congress. 

167R. Response: We have revised the 

language of 447.207 to make clear that 


jlentini on PROD1PC65 with RULES3
29798 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

the requirement applies to States and 

State payment methodologies for 

Medicaid services and precludes States 

from adopting payment methodologies 

that involve conditional or theoretical 

payments to providers. 

The provision at § 447.207 requiring 

that health care providers actually 

receive and retain the full amount of the 

total computable payment provided for 

services furnished under the approved 

State plan is consistent with section 

1903(w)(6)(A) of the Act because that 

provision protects only those IGTs that 

are ‘‘derived from State or local taxes (or 

funds appropriated to State university 

teaching hospitals).’’ Since this 

regulation addresses only the use of 

Medicaid revenues, not State or local 

taxes, there is no conflict. 

This provision specifically addresses 

those instances in which States make 

claims that are based on health care 

provider payments that are never 

actually made, are based on amounts 

paid with such conditions that the 

health care provider never actually 

becomes the beneficial owner of the 

funding (for example, when the health 

care provider is required to return the 

funding to a State agency or State 

directed purpose), or are otherwise 

diverted from use for Medicaid services 

by operation of law, contract or other 

mechanism. When the health care 

provider is not permitted to receive and 

retain the funds, the regulation would 

reflect the fact that the health care 

provider is acting simply as a conduit or 

agent rather than a recipient of a 

Medicaid payment. This means that 

there is no actual expenditure for 

Medicaid purposes. 

168C. Comment: One commenter 

detailed that funds from 

governmentally-operated health care 

providers have been essential to States 

for financing health care to indigent 

populations. The commenter further 

stipulated since section 1903(w)(6)(A) of 

the Act protects IGTs, it specifically 

allows governmentally-operated health 

care providers to return funds in order 

to provide access to health care for 

uninsured individuals. Prohibiting 

governmentally-operated health care 

providers from doing so would 

necessarily reduce funds available to 

provide health care services to these 

vulnerable individuals. 

168R. Response: Section 

1903(w)(6)(A) of the Act protects only 

those IGTs that are ‘‘derived from State 

or local taxes (or funds appropriated to 

State university teaching hospitals).’’

Since this regulation addresses only the 

use of Medicaid revenues, not State or 

local taxes, there is no conflict. This 

regulation would not affect the ability of 

governmentally-operated health care 

providers to make IGTs that are 

‘‘derived from State or local taxes.’’

169C. Comment: Numerous 

commenters stated that the proposed 

rule lacked the specificity necessary to 

make this provision enforceable and the 

commenters were unclear how a health 

care provider could retain the full 

amount of its total Medicaid payments. 

Most commenters questioned whether 

this required providers to place all 

Medicaid revenues in a separate account 

and never use Medicaid revenues to 

cover routine business operating 

expenses, such as employee salaries or 

purchase of supplies. These commenters 

felt the provision as written is 

unworkable and the commenters 

demanded clarification as to how a 

health care provider would comply. The 

commenters also stated that CMS is 

attempting to regulate providers’ use of 

the Medicaid revenues that they have 

earned for the Medicaid services already 

provided. The commenters further 

stated that the examination of the 

underlying Medicaid expenditures does 

not provide clarity as it fails to state the 

standards that will be applied in such 

an examination. Finally, the 

commenters argued that this provision 

is especially egregious when applied to 

public health care providers that are 

now limited to cost. These providers 

will have already spent the full amount 

on services and will have nothing left to 

be ‘‘retained’’. One commenter 

recommended that the regulation make 

clear that the requirement to retain a 

payment does not prohibit them from 

spending earned revenue and that CMS 

should more clearly specify in the 

regulation what activities are 

prohibited. 

In addition, these commenters 

specified that this requirement will not 

be an effective means of addressing 

State funding abuses. These commenters 

felt as though this provision is 

unnecessary and that if CMS is 

concerned that Medicaid expenditures 

are not consistent with legal 

requirements, then CMS should impose 

regulations on the calculation of those 

expenditures. Another commenter felt 

that this provision is also unnecessary 

since CMS has eliminated recycling and 

the purpose of the regulation is to 

formalize current practice, not to 

accomplish anything new. 

Numerous other commenters 

requested that the authority claimed by 

CMS to review ‘‘associated 

transactions’’ be deleted. The 

commenters stated that this proposed 

requirement would prohibit providers 

from making expenditures with 

Medicaid reimbursement funds and that 

any routine payments from providers to 

State or local governmental items for 

items or services unrelated to Medicaid 

payments would come under suspicion. 

The commenters pointed out that 

financial arrangements with State and 

local governments require money flows 

for a variety of reasons. These 

commenters strongly argued that CMS’

review and audit authority is limited to 

payments made under the Medicaid 

program and that it does not have 

authority over providers’ use of 

Medicaid payments received. A few 

commenters requested that CMS should 

clarify what it considers an associated 

transaction in the regulation text itself. 

Another commenter stated that CMS has 

overlooked the funding realities that 

face public health providers and that 

requiring providers to retain payments 

may have the unintended consequence 

of preventing the efficient and 

economical flow of funding streams 

within and between governmental 

entities. Most of these commenters 

specified that CMS has more effective 

mechanisms to limit the potential for 

abuse involving the re-direction of 

Medicaid payments by IGTs. Other 

commenters stated that they are also 

concerned that CMS may use its 

disallowance authority to pressure 

public providers to dismantle such 

arrangements. 

Another commenter stated that this 

requirement would be nearly impossible 

to track. Once funds are deposited into 

operating accounts, funds cannot be 

traced, segregated or separately 

identified. The commenter indicated 

that the proposed facility-specific cost 

limits would make any tracking 

unnecessary. The commenter argued 

that where a governmentally-operated 

health care provider is funded fully by 

a State or county agency, it is entirely 

appropriate for the provider to return to 

its funding agency any revenues 

received from payers, regardless of 

payer source. The commenter went on 

to further state that in Medicaid the 

governmental expenditure is always 

made prior to the receipt of the 

reimbursement and there is no valid 

argument that the governmental 

provider should not return to the 

original source of its expenditures the 

portion of the payment that was 

provided in the first place. 

169R. Response: The retention of 

payments provision was broadly written 

in an effort to encompass the wide 

variety of Medicaid financing abuses 

that CMS has discovered over the years. 

In examining Medicaid State financing 

arrangements across the country, we 

have identified numerous instances in 

which health care providers did not 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29799 

retain the full amount of their Medicaid 

payments, payments for which Federal 

matching funds were provided as a 

percentage of the total Medicaid 

payment. Instead, these health care 

providers returned or redirected all or a 

portion of the payments received, either 

directly or indirectly, as part of a prearranged agreement (contractual or 

otherwise) to draw additional Federal 

Medicaid funds that were then diverted 

for other purposes. 

Specifically, health care providers 

were required to return a significant 

portion of a particular Medicaid 

payment to State or local government 

either directly upon receipt of such 

payment or indirectly through a transfer 

of funds in an amount greater than the 

non-Federal share to generate such 

payment. States and local governments 

would then use these funds to draw 

additional Federal matching dollars for 

other Medicaid payments and/or satisfy 

other non-Medicaid activities. In 

addition, health care providers were 

required to redirect a particular 

Medicaid payment to other nonMedicaid health programs to satisfy 

certain non-Medicaid activities, which 

were otherwise State only or local 

government only obligations often 

involving health care services to a nonMedicaid individual. 

These arrangements are inconsistent 

with statutory construction that the 

Federal government pays its statutorily 

identified share of the payments for the 

provision of the delivery of Medicaid 

services. The retention of payments 

provision is intended to clarify the 

Federal government’s authority to 

identify and correct such abuses. 

The retention of payments provision 

was not designed to interfere with the 

normal operating expenses of 

conducting business, such as payments 

related to taxes, (including health-care 

provider-related taxes), fees, business 

relationships with governments 

unrelated to Medicaid in which there is 

no connection to Medicaid payment. 

Such normal operating expenses would 

not be considered ‘‘returning/ 

redirecting’’ a Medicaid payment, we 

have modified the regulation to clarify 

this point. However, when a 

governmentally-operated health care 

provider participates in a pre-arranged 

agreement with the State or local 

government to return or re-direct a 

particular Medicaid payment to which it 

is otherwise entitled, the expenditure 

claimed by a State is in excess of the 

actual payment ultimately retained by 

the governmentally-operated health care 

provider (that is, the net expenditure). 

The result of such an arrangement is 

that the Federal government provided 

matching funds in excess of the net 

expenditure made by the State to the 

health care provider. 

We have revised the regulation text to 

clarify that this requirement is not 

intended to burden providers, but 

instead is intended to be a condition for 

the allowability of Medicaid payment 

methodologies. In general, we intend to 

continue to focus our enforcement 

efforts on prospective review of 

proposed State payment methodologies. 

Indeed, this requirement should protect 

providers by ensuring that claimed 

Medicaid payments are actually 

available to support Medicaid services 

furnished by the providers. 

170C. Comment: One commenter 

specified that CMS has indicated that an 

expenditure must have occurred before 

a unit of government can certify an 

expenditure to the Medicaid agency. 

The commenter noted that CMS has 

indicated that once a unit of government 

certifies a valid expense, the health care 

provider has been paid. This commenter 

was concerned that the proposed 

retention requirements make it possible 

for a governmental health care provider 

to assert it is entitled to 100 percent FFP 

returned to the State on the basis of its 

expenditure and the State’s retention of 

any of the FFP constitutes a violation of 

this proposed rule. This commenter 

recommended that 447.207 be revised to 

clearly state: once a governmental 

health care provider certifies an 

expenditure, the retention of payments 

provisions have been satisfied; the 

distribution of FFP from the Medicaid 

agency to any certifying unit of 

government is not a relevant factor in 

measuring compliance; and the State 

may withhold a portion or the entire 

amount of FFP resulting from a CPE. 

170R. Response: A certified public 

expenditure (CPE) means that State or 

local tax dollars were used to satisfy the 

cost of providing services to Medicaid 

individuals. The expenditure that is 

claimed for Federal matching funds 

based on a CPE (that is, total 

computable expenditure) is inherently 

equal to the net expenditure. The 

Federal matching funds, therefore, are 

available as a percentage of this actual 

certified public expenditure. Under the 

CPE process, a unit of government 

(including a governmentally-operated 

health care provider) has expended 

funds to provide services to Medicaid 

individuals, which means that the unit 

of government has satisfied both the 

Federal and State share of these 

Medicaid costs. Therefore, Federal 

matching funds are effectively 

repayment of the Federal share of the 

total computable expenditure initially 

satisfied at a State or local government 

level. CMS would assume that as the 

entity authorized to draw Federal funds, 

Medicaid agencies would distribute the 

Federal matching funds in a manner 

that is proportionate to the total 

computable expenditure by the 

certifying unit of government. To the 

extent a State agency chooses to 

distribute those Federal funds in a 

manner that is not proportional to the 

costs incurred by other governmental 

units within the State, CMS does not 

plan to interfere with such decisions 

between States, local governments and/ 

or governmentally-operated health care 

providers. 

171C. Comment: One commenter 

noted that, while not opposed to the 

retention of payment provision, 

requiring health care providers to pay 

the non-federal share of the Medicaid 

payment prior to receiving 

reimbursement to the State Agency will 

be a change to current practice. They 

noted that this may cause conflict with 

the State’s prompt payment act, which 

requires interest to be paid to the health 

care provider of goods and/or services if 

requests for reimbursement are not paid 

within 45 days of receipt. The proposed 

rule would be an accounting burden for 

tracking which entities had paid and 

therefore appropriate to proceed with 

the reimbursement process. 

171R. Response: Funds may be 

transferred by units of government that 

are not health care providers to the State 

Medicaid agency either before or after 

the payment to the health care provider 

is made, provided that the requirements 

of § 447.207 are satisfied. A principal 

concern in evaluating compliance with 

§ 447.207 will be the determination as to 

whether or not the funding obligation to 

the non-Federal share of Medicaid 

payments has been fully satisfied by the 

State or local government. IGTs from a 

local or other State Agency unit of 

government’s general fund may be 

considered a permissible source of the 

non-Federal share of Medicaid 

payments when: (1) Monies from the 

general fund are transferred to the State 

Medicaid agency; (2) such monies are 

used to fund the non-Federal share of 

Medicaid payments to the 

governmentally-operated health care 

provider; (3) the health care provider 

deposits such Medicaid payments into 

its operating account (a governmentallyoperated health care provider will 

always maintain an operating account 

that is separate from the general fund 

managed by the corresponding unit of 

government); and (4) no portion of 

Medicaid payments deposited into the 

operating account is sent back to the 

general fund to replenish the loss of 

funds resulting from the IGT. These 


jlentini on PROD1PC65 with RULES3
29800 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

conditions would demonstrate that the 

burden of the non-Federal share of the 

Medicaid payment was satisfied by the 

local government or other State Agency. 

Governmentally-operated health care 

providers may only transfer funds prior 

to receiving a Medicaid payment. This 

ensures that funds were actually 

available to the governmentallyoperated health care provider to satisfy 

the non-Federal share obligation to the 

Medicaid payment it receives and were 

not derived from, and effectively a 

reduction in, the Medicaid payment 

received. To permit IGTs made by a 

governmentally-operated health care 

provider after the Medicaid payment is 

received would effectively allow a 

Medicaid Agency to ‘‘loan’’ the nonFederal share obligation to the 

governmentally-operated health care 

provider. (Upon receipt of the Medicaid 

payment, the governmentally-operated 

health care provider would ‘‘return’’ the 

‘‘loan’’ to the Medicaid Agency through 

an IGT.) The end result of a post 

payment IGT would be that a State is 

able to send Federal matching funds 

into a governmentally-operated health 

care provider without any unit of 

government satisfying the non-Federal 

share obligation. The State could then 

use the same funds to make additional 

Medicaid payments and attract new 

Federal matching funds. 

172C. Comment: Many commenters 

stated that this provision is an 

overreaction to a concern perceived by 

CMS, but which it has, by its own 

admission, been able to deal with 

through the State plan or waiver 

approval process. The commenters are 

concerned that the provision would cast 

doubt on, if not expressly prohibit, valid 

fund transfers that raise no issue of 

‘‘recycling’’ and involve no abuse of 

Medicaid funding. One commenter 

described how its county nursing homes 

are funded. The county nursing homes 

are financed by the county governments, 

which use appropriated funds to cover 

the nursing homes’ costs of operations. 

The commenter noted that similar to 

other States and local governments, 

State and county tax receipts are not 

received in even proportions throughout 

the year. In order to assure funding of 

the nursing homes’ operation during 

periods of slack revenues, the counties 

issue debt securities of which portions 

of the proceeds are transferred to the 

State to help fund Medicaid payments. 

Upon receipt of payments from payers, 

including Medicaid, the county nursing 

homes return funds to the counties to 

enable them to repay the tax 

anticipation notes. The commenter 

indicated that the counties are paying 

for the operations of the nursing homes 

with their tax dollars and the transfers 

from the nursing homes to the counties 

out of their revenues are part of a 

financing structure that assures a steady 

flow of county funds for all of the 

activities funded by the counties, 

including nursing homes. The 

commenter believed that as a result of 

the proposed rule, this appropriate 

financing method would be prohibited. 

The commenter strongly stated that this 

merely illustrates the damage that can 

be caused by overly broad federal 

regulations that impinge on State 

financial operations. Other commenters 

indicated that it is common practice for 

public providers to be funded by State 

and county appropriations which are 

returned to the State and counties after 

the public providers receive their 

federal reimbursements. The commenter 

strongly stated that CMS does not have 

the authority to declare funding 

arrangements between units of State 

government that are not prohibited by 

Congress to be illegitimate. 

Other commenters stated that it is 

common for States or local governments 

to provide full funding to their health 

care providers, in the expectation of 

receiving the federal portion back from 

the health care provider when it has 

been reimbursed for providing Medicaid 

services. These commenters pointed out 

discrepancy between the proposed 

regulatory provision and preamble 

justification. The commenters noted that 

the preamble only specifies that when a 

governmental operated health care 

provider transfers to the State an 

amount more than the non-Federal 

share is there a situation where the net 

Medicaid payment is ‘‘necessarily 

reduced.’’ However the provisions of the 

proposed rule itself would preclude any 

transfer to the State from the payment 

received by the health care provider. 

The commenters questioned whether 

the prohibition is meant to apply to any 

portion of the Medicaid payment or 

only to the federal portion and again 

noted that CMS lacks any statutory 

basis. 

Many of these commenters stated that 

it is more appropriate to continue to use 

the SPA process to deal with perceived 

impermissible financing arrangements 

and to separate the benign transfers that 

do not present issues of concern from 

those that CMS believes present 

problems. 

172R. Response: The retention of 

payments provision was broadly written 

in an effort to encompass the wide 

variety of Medicaid financing abuses 

that CMS has discovered over the years. 

In examining Medicaid State financing 

arrangements across the country, we 

have identified numerous instances in 

which health care providers did not 

retain the full amount of their Medicaid 

payments, payments for which Federal 

matching funds were provided as a 

percentage of the total Medicaid 

payment. Instead, these health care 

providers returned or redirected all or a 

portion of the payments received, either 

directly or indirectly, as part of a prearranged agreement (contractual or 

otherwise) to inappropriately draw 

additional Federal Medicaid funds that 

are then diverted for other purposes. 

Other health care providers were 

required to return a significant portion 

of a particular Medicaid payment to 

State or local government either directly 

upon receipt of such payment or 

indirectly through a transfer of funds in 

an amount greater than the non-Federal 

share to generate such payment. States 

and local governments would then use 

these funds to draw additional Federal 

matching dollars for other Medicaid 

payments and/or satisfy other nonMedicaid activities. In addition, health 

care providers were required to redirect 

a particular Medicaid payment to other 

non-Medicaid health programs to help 

satisfy an otherwise State or local 

government obligation to non-Medicaid 

activities, often involving health care 

services to a non-Medicaid individual. 

These arrangements are inconsistent 

with statutory construction that the 

Federal government pays its statutorily 

identified share of the payments for the 

provision of the delivery of Medicaid 

services. The retention of payments 

provision is intended to clarify the 

Federal government’s authority to 

identify and correct such abuses. 

The retention of payments provision 

was not designed to interfere with the 

normal operating expenses of 

conducting business, such as payments 

related to taxes, (including health-care 

provider-related taxes), fees, business 

relationships with governments 

unrelated to Medicaid in which there is 

no connection to Medicaid payment and 

we have modified the regulation to 

clarify this point. However, when a 

governmentally-operated health care 

provider participates in a pre-arranged 

agreement with the State or local 

government to return or re-direct a 

particular Medicaid payment to which it 

is otherwise entitled, the expenditure 

claimed by a State is in excess of the 

actual payment ultimately retained by 

the governmentally-operated health care 

provider (that is, the net expenditure). 

The result of such an arrangement is 

that the Federal government provided 

matching funds in excess of the net 

expenditure made by the State to the 

governmentally-operated health care 

provider. 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29801 

A principal concern in evaluating 

compliance with § 447.207 will be the 

determination as to whether or not the 

funding obligation to the non-Federal 

share of Medicaid payments has been 

fully satisfied by the State or local 

government. IGTs from a local or other 

State Agency unit of government’s 

general fund may be considered a 

permissible source of the non-Federal 

share of Medicaid payments when: (1) 

Monies from the general fund are 

transferred to the State Medicaid 

agency; (2) such monies are used to 

fund the non-Federal share of Medicaid 

payments to the governmentallyoperated health care provider; (3) the 

health care provider deposits such 

Medicaid payments into its operating 

account (a governmentally-operated 

health care provider will always 

maintain an operating account that is 

separate from the general fund managed 

by the corresponding unit of 

government); and (4) no portion of 

Medicaid payments deposited into the 

operating account is sent back to the 

general fund to replenish the loss of 

funds resulting from the IGT. These 

conditions would demonstrate that the 

burden of the non-Federal share of the 

Medicaid payment was satisfied by the 

local government or other State Agency. 

173C. Comment: Several commenters 

noted that § 447.207 is too broad. The 

commenters cited that the preamble to 

the proposed rule suggests that this 

retention of payments requirement only 

applies to IGT funded Medicaid 

payments, but the regulation text 

appears to apply to all Medicaid 

payments to all types of providers. The 

commenters requested clarification. 

Numerous commenters requested 

clarification as to whether the retention 

of payment provision applies to 

payments funded by CPEs. The 

commenters also stated that CMS 

should require States to pay all Federal 

funding associated with CPEs to the 

provider. The commenters presume that 

the requirement that providers ‘‘receive 

and retain the full amount of the total 

computable payment provided to them’’

applies to all payments, regardless of 

funding source. On the other hand, 

other commenters requested that CMS 

clarify in the regulation text that this 

proposed provision does not apply to 

services that are financed through CPEs. 

Another commenter requested that 

§ 447.207 be clarified to indicate that 

the provisions are only applicable to 

payments funded with an IGT. One 

other commenter expressed confusion 

that this proposed provision appears to 

preclude CPEs by a governmental 

provider. The commenter specifically 

mentioned that a governmentallyoperated health care provider that 

expends funds for salaries, utilities, 

food, etc. in the provision of medical 

services and certifies an expenditure 

eligible for FFP will not receive a 

payment. 

173R. Response: Section 447.207 

applies to all health care providers 

receiving Medicaid payments, whether 

such payments are funded by a State’s 

General Fund, or by local governments 

including governmentally-operated 

health care providers via IGTs. The 

retention of payments provision was 

written specifically to address abuses 

involving the misuse of 

intergovernmental transfers. CMS has 

noted many instances where, under the 

guise of the IGT process, providers 

refunded or returned a portion of the 

payments received, either directly or 

indirectly, as part of an intentional 

scheme to inappropriately draw 

additional Federal Medicaid funds that 

are then diverted for purposes unrelated 

to Medicaid. Such IGT abuses occur 

when the State’s claimed expenditure, 

which serves as the basis for FFP, is 

actually more than the State’s true net 

expenditure, resulting in an excessive 

draw of Federal matching funds. 

A certified public expenditure (CPE) 

means that State or local tax dollars 

were used to satisfy the cost of 

providing services to Medicaid 

individuals. The expenditure that is 

claimed for Federal matching funds 

based on a CPE (that is, total 

computable expenditure) is inherently 

equal to the net expenditure. The 

Federal matching funds, therefore, are 

available as a percentage of this actual 

certified public expenditure. Under the 

CPE process, a unit of government 

(including a governmentally-operated 

health care provider) has expended 

funds to provide services to Medicaid 

individuals, which means that the unit 

of government has satisfied both the 

Federal and State share of these 

Medicaid costs. Therefore, Federal 

matching funds are effectively 

repayment of the Federal share of the 

total computable expenditure initially 

satisfied at State or local government 

level. CMS would assume that as the 

entity authorized to draw Federal funds, 

Medicaid agencies would distribute the 

Federal matching funds in a manner 

that is proportionate to the total 

computable expenditure by the 

certifying unit of government. To the 

extent a State agency chooses to 

distribute those Federal funds in a 

manner that is not proportional to the 

costs incurred by other governmental 

units within the State, CMS does not 

plan to interfere with such decisions 

between States, local governments and/ 

or governmentally-operated health care 

providers. 

Under the provisions of the 

regulation, all health care providers 

maintain some level of ability to 

participate in the certified public 

expenditure (CPE) process. 

Governmentally-operated health care 

providers are able to certify their costs 

without having to demonstrate that 

State or local tax dollars were used to 

provide Medicaid services. This policy 

is based on the fact that governmentallyoperated health care providers always 

have the ability to access State and/or 

local tax dollars as an integral 

component of State or local government. 

Governmentally-operated health care 

providers need only produce cost 

documentation via national, 

standardized cost reporting to receive 

Federal matching funds as a percentage 

of such allowable Medicaid (and DSH) 

costs. 

Non-governmentally-operated health 

care providers may also produce cost 

documentation to support the costs of 

providing services to Medicaid 

individuals (and certain uninsured costs 

for purposes of Medicaid DSH 

payments). However, in order to 

maintain consistency with the Federal 

statutory instruction governing CPEs, a 

State or local government must actually 

certify that tax dollars were provided to 

the non-governmentally-operated health 

care provider. Federal matching funds 

will be available as a percentage of the 

allowable Medicaid costs incurred by 

the non-governmentally-operated health 

care provider up to the level of such 

State and/or local tax support. 

174C. Comment: One commenter 

noted that CMS suggests compliance 

with this proposed provision may be 

demonstrated by showing that the 

funding source of an IGT is clearly 

separated from the Medicaid payment 

received by the health care provider. 

The commenter stated that this is an 

example of CMS’ definition of IGT not 

being consistent with CMS’ current 

practice. The commenter stated that 

CMS previously considered funds 

transferred from a State agency to the 

State Medicaid agency as an IGT. The 

commenter believed that this in fact 

constitutes an intragovernmental 

transfer within the same unit of 

government and therefore CMS has no 

authority to evaluate these transfers 

with the same level of scrutiny as an 

intergovernmental transfer. The 

commenter requested that CMS clarify 

its intent that segregation of funds does 

not apply to intragovermental transfers. 

The commenter also stipulated that 

requiring a transfer within the same unit 


jlentini on PROD1PC65 with RULES3
29802 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

of government must take place prior to 

a Medicaid payment and that the nonfederal share must originate from taxes 

from an account that is separate from 

the account that receives the Medicaid 

payment is too restrictive. The 

commenter detailed that government 

accounting principles, established by 

GASB, encourage States to use the least 

number of funds that are necessary to 

comply with legal operating 

requirements. Another commenter 

noted that consolidated accounts 

facilitates good internal accounting 

controls, while also lowering overall 

banking costs and assisting with 

managing various automated 

transactions. The commenter also noted 

that any requirement to maintain 

separate banking accounts for tax and 

non-tax funds adds a burden and cost to 

providers without adding any benefit. 

The commenter suggested that a State’s 

compliance with GASB standards in 

accordance with generally accepted 

accounting principles and a State 

agency’s compliance with all applicable 

laws, rules and regulations with respect 

to fund accounting and budgeting 

should provide sufficient 

accountability. 

174R. Response: Neither the Medicaid 

statute nor Federal regulation uses the 

term ‘‘intragovernmental transfer.’’ For 

purposes of the Medicaid statute, a 

transfer of funding between any 

governmental entity within a State to 

the State Medicaid Agency is 

considered an intergovernmental 

transfer, regardless of whether or not 

those entities are operated by the same 

unit of government (for example, a State 

Department of Mental Health 

transferring funds to a State Medicaid 

agency). This interpretation is 

consistent with the interpretation that 

an expenditure can be made through 

payment for services furnished by such 

an entity. 

A principal concern in evaluating 

compliance with § 447.207 will be the 

determination as to whether or not the 

funding obligation to the non-Federal 

share of Medicaid payments has been 

fully satisfied by the State or local 

government. IGTs from a local or other 

State Agency unit of government’s 

general fund may be considered a 

permissible source of the non-Federal 

share of Medicaid payments when: (1) 

Monies from the general fund are 

transferred to the State Medicaid 

agency; (2) such monies are used to 

fund the non-Federal share of Medicaid 

payments to the governmentallyoperated health care provider; (3) the 

health care provider deposits such 

Medicaid payments into its operating 

account (a governmentally-operated 

health care provider will always 

maintain an operating account that is 

separate from the general fund managed 

by the corresponding unit of 

government); and (4) no portion of 

Medicaid payments deposited into the 

operating account is sent back to the 

general fund to replenish the loss of 

funds resulting from the IGT. These 

conditions would demonstrate that the 

burden of the non-Federal share of the 

Medicaid payment was satisfied by the 

local government or other State Agency. 

Governmentally-operated health care 

providers may only transfer prior to 

receiving a Medicaid payment to ensure 

funds were actually available to the 

governmentally-operated health care 

provider to satisfy the non-Federal share 

obligation to the Medicaid payment it 

receives. To permit non-Federal share 

transfer obligations made by a 

governmentally-operated health care 

provider after the Medicaid payment is 

received would allow a Medicaid 

Agency to ‘‘loan’’ the non-Federal share 

obligation to the governmentallyoperated health care provider (as 

described previously). 

175C. Comment: A couple of 

commenters requested that provisions of 

the proposed retention of payment 

provisions be clarified to explicitly state 

that an IGT from a single governmental 

entity can be the basis of the State 

match for multiple hospitals in the 

eligible payment group. Another 

commenter asked that CMS provide 

additional guidance on whether a group 

of governmental entities could provide 

the IGTs for other public hospitals. The 

commenter was concerned that this may 

not be allowed under the proposed 

rules. The commenter suggested that 

this clarification would be consistent 

with CMS’’ overall objective that IGTs 

are used to reimburse hospitals for the 

care of Medicaid individuals and are not 

‘‘retained’’ by local governments. One 

commenter was concerned that this 

proposed provision would require that 

all government providers provide their 

own IGT in return for the Medicaid 

payment. 

175R. Response: The provisions at 

§ 447.207 were not intended to suggest 

that a unit of government can only 

transfer funding to the State for specific 

use in State Medicaid payments made to 

the unit of government itself. In fact, a 

unit of government may permissibly 

transfer funds to be used for the nonFederal share of State Medicaid 

payments made to other health care 

providers within the State, regardless of 

whether or not such providers are 

related to the unit of government 

transferring the funds, assuming all 

other financing requirements are 

satisfied, including compliance with 

section 1902(a)(2) of the Act. 

Governmentally-operated health care 

providers may also transfer funding for 

other health care providers, but each 

transfer must be transacted on an 

individual basis per each Medicaid 

payment to each health care provider to 

ensure compliance with sections 

1902(a)(30)(A) and 1903(w)(6)(A) of the 

Act. Moreover, a governmentallyoperated health care provider that is 

subjected to more than one non-Federal 

share obligation must transact each IGT 

obligation on an individual basis per 

Medicaid payment to which it is 

entitled in order to maintain 

consistency with sections 1902(a)(30)(A) 

and 1903(w)(6)(A) of the Act. 

176C. Comment: One commenter 

stated that health care providers may be 

subject to taxation, licensing, and other 

fees that are generally applied to the 

private sector or to the health care 

industry at large. The commenter was 

concerned that the proposed rule would 

enable providers to assert that they 

should not be subject to normal 

operating expenses, which have no 

direct connection to Medicaid, in as 

much as they are required to retain the 

full amount of the total computable 

payment. The commenter specifically 

requested that proposed § 447.207 be 

clarified to clearly state that normal 

operating expenses are not affected by 

the retention requirements and are not 

included in the calculation of a State’s 

net expenditures. 

176R. Response: The retention of 

payments provision was written to 

address instances where health care 

providers did not retain the full amount 

of their Medicaid payments, payments 

for which Federal matching funds were 

provided as a percentage of the total 

Medicaid payment. Instead, these 

providers returned or redirected all or a 

portion of the payments received, either 

directly or indirectly, as part of a prearranged agreement (contractual or 

otherwise) to draw additional Federal 

Medicaid funds that were then diverted 

for other purposes. The retention of 

payments provision was not designed to 

interfere with the normal operating 

expenses of conducting business, such 

as payments related to taxes (including 

health-care provider-related taxes), fees, 

business relationships with 

governments unrelated to Medicaid in 

which there is no connection to 

Medicaid payment. Such normal 

operating business expenses would not 

be considered ‘‘returning/redirecting’’ a 

Medicaid payment and we have 

modified the regulation to clarify this 

point. 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29803 

177C. Comment: A few commenters 

stated the proposed requirement to 

retain full payments conflicts with 

section 1903(w) of the Act. The 

commenters noted that section 1903(w) 

of the Act clearly contemplates that 

providers can return certain portions of 

payments as bona fide donations and 

permits certain qualifying health care 

taxes. The commenters requested that 

proposed § 447.207 be modified to 

clearly allow donations and taxes as 

permitted by section 1903(w) even if a 

Medicaid payment is the source of those 

donations or tax payments. 

177R. Response: We concur with this 

comment in part and we are clarifying 

the provisions at § 447.207. We agree 

that governmentally-operated health 

care providers may make bona fide 

donations, and may be subject to 

qualifying health care taxes, from the 

amount of their total computable 

Medicaid payment. Qualifying health 

care taxes would be an allowable cost of 

services furnished under the approved 

State plan for purposes of this section 

and for the cost limits under § 447.206. 

Bona fide donations, on the other hand, 

would not be an allowable cost of 

Medicaid services under either section, 

but we would clarify that under 

§ 447.207, a provider could make a bona 

fide donation (which by definition 

could not be linked to the receipt of, or 

amount of a Medicaid payment). While 

we agree to make this clarification, there 

does not appear to be a practical effect 

to this clarification since, under 

§ 447.206, Medicaid payments to 

governmentally-operated health care 

providers must still be equal or less than 

the costs incurred by the 

governmentally-operated health care 

provider for covered Medicaid services. 

178C. Comment: One commenter 

stated that CMS assumes that any 

requirement that a governmentallyoperated health care provider transfer 

more than the non-federal share of a 

Medicaid payment means that Medicaid 

payments to that provider are not 

retained. The commenter indicated that 

CMS is linking two independent actions 

that should not be linked. The 

commenter specified that once a 

governmental unit transfers funds to the 

State, it is up to the State to do what it 

deems appropriate with the funds. The 

commenter argued that it is not within 

the authority of the governmental unit 

or CMS to dictate what the State can do 

with the funds. In fact, the commenter 

went on to state, once the State uses the 

funds to make allowable Medicaid 

payments, such use falls within section 

1902(a)(30)(A) of the Act and FFP is 

appropriate. The commenter believes 

that it does not matter what level of 

Medicaid payment the State is making 

or to which providers; FFP should apply 

in its normal proportion. The State’s net 

expenditure is determined by the 

amount paid under the terms of its 

approved State plan, not by the sources 

of funds used to finance that plan. 

178R. Response: The provision at 

§ 447.206 would require that health care 

providers retain the full Medicaid 

payment, including both Federal and 

non-Federal shares. As discussed above, 

protected IGTs are limited to those 

‘‘derived from State or local taxes (or 

funds appropriated to State university 

teaching hospitals).’’ There is no 

protection for IGTs derived from 

Medicaid payments to health care 

providers. But we are clarifying that 

§ 447.207 is not intended to dictate what 

the health care provider may do with its 

own funds; it concerns solely the 

circumstances in which CMS will 

recognize a payment to the provider as 

an allowable expenditure. This 

provision specifically addresses those 

instances in which States make claims 

that are based on health care provider 

payments that are never actually made, 

are based on amounts paid with such 

conditions that the health care provider 

never actually becomes the beneficial 

owner of the funding (for example, 

when the health care provider is 

required to return the funding to a State 

agency or State directed purpose), or are 

otherwise diverted from use for 

Medicaid services by operation of law, 

contract or other mechanism. When the 

health care provider is not permitted to 

receive and retain the funds, the 

regulation would reflect the fact that the 

provider is acting simply as a conduit or 

agent rather than a recipient of a 

Medicaid payment. This regulation 

ensures that payments are made for 

Medicaid purposes and not obligated for 

other purposes. This regulation also 

ensures that claimed payments are not 

sham transactions in which the State (or 

other payor) has never actually ceded 

control of the funds to the health care 

provider. 

179C. Comment: Several commenters 

stated that it is unclear how CMS will 

enforce proposed § 447.207. 

179R. Response: In general, CMS 

intends to continue to focus 

enforcement efforts on prospective 

review of proposed State payment 

methodologies. This regulation, 

however, would provide a basis to 

pursue other enforcement measures, 

such as disallowance of claimed 

expenditures, should prospective 

enforcement prove inadequate. States 

can appeal such enforcement actions 

through existing appeal processes. 

180C. Comment: One commenter 

noted language concerning IGTs in the 

preamble that was not included in the 

actual regulatory text. Specifically, the 

commenter observed the following 

preamble language: ‘‘* * * [C]laimed 

expenditures must be net of any 

redirection or assignment from a health 

care provider to any State or local 

governmental entity that makes IGTs to 

the Medicaid agency. Generally, for the 

State to receive Federal matching on a 

claimed Medicaid payment where a 

governmentally-operated health care 

provider has transferred the non-Federal 

share, the State must be able to 

demonstrate: (1) That the source of the 

transferred funds is State or local tax 

revenue (which must be supported by 

consistent treatment on the provider’s 

financial records); and (2) that the 

provider retains the full Medicaid 

payment and is not required to repay, or 

in fact does not repay, all or any portion 

of the Medicaid payment to the State or 

local tax revenue account.’’ Further, the 

commenter noted this language in the 

preamble: ‘‘Therefore, we have 

concluded that requirements that a 

governmentally-operated health care 

provider transfer to the State more than 

the non-Federal share of a Medicaid 

payment creates an arrangement in 

which the net payment to the provider 

is necessarily reduced; the provider 

cannot retain the full Medicaid payment 

claimed by the State.’’ The commenter 

opined that this preamble language 

should be specifically included in the 

appropriate sections of the regulations. 

180R. Response: We agree that the 

regulation should contain more specific 

language on prohibited arrangements, 

and we have modified the regulation as 

appropriate. 

181C. Comment: One commenter 

inquired as to how the proposed 

retention of payments provision impacts 

‘‘administrative fees’’ for operation of 

targeted case management programs 

which are offset against amounts paid 

for services. The commenter asked if 

such fees would be prohibited and, if 

not, whether an offset against Medicaid 

payments due would continue to be 

permissible. 

181R. Response: Administrative fees 

are sometimes deducted by the 

Medicaid agency, or other agency 

making Medicaid payments, from the 

Medicaid payment to a provider. These 

fees represent a reduction in the 

allowable Medicaid expenditure that 

can be claimed for purposes of FFP. 

Moreover, while FFP is available for 

actual administrative costs, FFP is not 

available for administrative fees. The 

Medicaid program’s share of actual 

administrative costs should be claimed 


jlentini on PROD1PC65 with RULES3
29804 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

pursuant to an approved cost allocation 

plan by the agency that incurs those 

actual administrative costs. 

Administrative costs and medical 

service costs are separately recognized 

in the Medicaid statute for purposes of 

Federal financial participation (FFP). 

Administrative costs and medical 

service costs must also be separately 

reported on the CMS 64 report for 

purposes of State expenditures eligible 

for FFP. 

An arrangement in which 

administrative costs are offset from a 

medical service payment has two major 

problems: (i) Administrative costs are 

effectively matched with Federal funds 

at the FMAP rate instead of the 50 

percent administrative matching rate; 

and, (ii) the governmentally-operated 

health care provider realizes a net 

reduction to its Medicaid medical 

service payment because it must 

redirect a portion of the Federal funding 

associated with the Medicaid medical 

service payment it receives to pay 

another agency for administrative costs. 

In some instances, a mandatory 

assessment or ‘‘fee’’ imposed on a health 

care provider could be viewed as a 

health care-related tax. All health carerelated taxes must meet the specified 

statutory criteria, including the broad 

based requirement to avoid penalties 

against a State’s Medicaid expenditures. 

The broad based provision of the statute 

requires that all health care providers of 

the service must be subject to the tax or 

‘‘fee.’’

F. Upper Limits Based on Customary 

Charges (§ 447.271) 

182C. Comment: Several commenters 

objected to the proposed modifications 

at § 447.271 to delete the exception for 

nominal charge hospitals. Paragraph (b) 

of this section allowed public providers 

that provide services ‘‘free or at a 

nominal charge’’ to be paid to the level 

that would be set ‘‘if the provider’s 

charges were equal to or greater than its 

costs.’’ The commenters noted that this 

existing exception recognizes that there 

are many hospitals that primarily serve 

the poor and uninsured. These hospitals 

have set their charges at low levels for 

the uninsured individuals to help 

alleviate these individuals from 

exorbitant hospital bills. The 

commenters argued that a hospital 

should not be disadvantaged with 

respect to Medicaid reimbursement just 

because it was willing to keep the cost 

of hospital care within reason for those 

who do not have coverage from 

insurance or public programs. The 

commenters urged CMS to maintain this 

exception. 

Another commenter disagreed that 

§ 447.271(b) becomes irrelevant due to 

the proposed cost limit. The commenter 

stated that the existing regulation at 

§ 447.271(b) is related to limitations 

based on provider charges not provider 

costs and allows Medicaid payments in 

excess of a provider’s charges if those 

charges are nominal or do not exist. The 

commenter argued that eliminating this 

regulatory provision would restrict 

Medicaid reimbursement to nominal 

charge providers or require them to 

implement unnecessary or artificial 

charge structures. 

Another commenter stated that with 

this elimination, nominal charge 

providers would be limited to charges as 

its total payment. The commenter 

argued the proposed cost limit does not 

affect the operation of the charge limit 

rule where charges are less than cost 

and should be maintained. 

182R. Response: We do not read the 

customary charge limitation at 

§ 447.271(a) to preclude a health care 

provider from offering services on a 

sliding scale or reduced rate basis (or 

even free) to poor and uninsured 

patients. All health care providers can 

or should have customary charge 

schedules that represent the 

undiscounted amount charged to third 

party payers and individuals with 

sufficient resources. We do not believe 

it would be consistent with efficiency or 

economy for Medicaid to pay more for 

services than other payers with 

sufficient resources. Thus we do not see 

a reason for an exception to the 

customary charge limit. In the unlikely 

event that a health care provider does 

not have a customary charge structure 

the health care provider can receive 

payments in an amount equal to the cost 

of providing services subject to 

applicable payment limits depending 

upon their governmental status. We 

further do not see any statutory basis to 

permit payment in excess of costs to 

support non-Medicaid uncompensated 

care activities. In the Medicaid statute, 

Congress has specifically provided for a 

mechanism to address uncompensated 

care costs for disproportionate share 

hospitals, but has imposed clear limits 

on that mechanism. It would be 

inconsistent with those statutory limits 

to continue to provide a different 

avenue to address the same types of 

costs without any statutory 

authorization to do so. 

183C. Comment: One commenter 

requested that in accordance with 

Medicare and other Federal regulations, 

CMS should make it clear that the 

customary charge limit and existing 

UPL requirements do not apply to 

critical access hospitals. The commenter 

stated that since the customary charge 

limit applies to hospitals and does not 

specify critical access hospitals, 

inpatient and outpatient payment limits 

should not be applicable to critical 

access hospitals. The commenter 

suggested that CMS make the 

distinction between hospitals and 

critical access hospitals by either 

including this statement as a 

clarification in § 447.271 or as an 

exemption within §§ 447.272 and 

447.321. The commenter also stated that 

critical access hospital regulations 

should be amended to prohibit States 

from imposing an upper limit on critical 

access hospital Medicaid payments. The 

commenter specified that while many 

States reimburse critical access 

hospitals using a cost-based 

reimbursement methodology, certain 

limitations are placed on the 

reimbursements. The commenters do 

not believe this is consistent with 

Medicare reimbursement 

methodologies. 

183R. Response: All governmentallyoperated health care providers are 

subject to the Medicaid cost limit and 

customary charge limit. Therefore, 

governmentally operated critical access 

hospitals will be subject to the 

provisions of the regulation in a manner 

consistent with all other types of 

governmentally-operated health care 

providers. States must apply the Federal 

statutory and regulatory criteria to each 

individual health care provider within 

the State to make initial determinations 

of governmental status. In addition, 

§§ 447.272 and 447.321 apply to all 

inpatient and outpatient hospital 

services, including those provided in 

critical access hospitals. 

G. Inpatient Services: Application of 

Upper Payment Limits (§ 447.272) and 

Outpatient Hospital and Clinic Services: 

Application of Upper Payment Limits 

(§ 447.321) 

184C. Comment: One commenter 

stated that § 447.272 includes an 

exception for DSH payments and Indian 

Health Services. The commenter noted 

that § 447.321 likewise includes an 

exception for Indian Health Services, 

but does not list DSH as an exception. 

The commenter requested that CMS 

include a similar exception for DSH in 

§ 447.321. The commenter is concerned 

that this omission could prohibit or 

restrict DSH payments for outpatient 

hospital services. 

184R. Response: We agree with the 

commenter, and we have modified 

section 447.321 to include the 

exemption of DSH payment adjustments 

from the application of outpatient 

hospital upper payment limits. It should 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29805 

be noted that clinic costs are not eligible 

under the hospital-specific DSH limit, 

so the DSH exemption is not applicable 

to clinic upper payment limits. 

185C. Comment: A few commenters 

recommended that the proposed 

corresponding changes to §§ 447.272 

and 447.321 to reflect the proposed cost 

limit to governmentally operated 

providers be withdrawn. 

185R. Response: The changes to 

§§ 447.272 and 447.321 are necessary to 

maintain consistency with the provision 

of the regulation limiting Medicaid 

payments to the full cost of providing 

services to Medicaid individuals. 

H. Conforming Changes to Other 

Applicable Federal Regulations 

(§§ 457.220 and 457.628) 

186C. Comment: A few commenters 

recommended that the conforming 

changes to §§ 457.220 and 457.628 be 

deleted. These commenters opined that 

since they believe the proposed rule is 

inappropriate for a variety of reasons, 

the conforming changes proposed 

would also be inappropriate. 

186R. Response: Title XXI and 

corresponding SCHIP regulations fully 

incorporate Medicaid statutory and 

regulatory provisions concerning the 

source of the non-Federal share. 

Therefore, the regulation makes changes 

to SCHIP rules at §§ 457.220 and 

457.628 to ensure that regulations 

governing the source of the non-Federal 

share and provider retention of 

payments are consistent between the 

Medicaid program and SCHIP. The 

Medicaid cost limit does not apply to 

governmentally-operated SCHIP health 

care providers. 

I. Collection of Information 

Requirements 

187C. Comment: A number of 

commenters communicated that they 

believe CMS estimates on the time 

needed for providers to complete cost 

report forms and States to review cost 

reports are understated. Commenters 

also observed that the proposed rule sets 

out only minimum documentation 

requirements, that actual forms have not 

yet been completed, and that it is 

therefore unlikely that CMS has fully 

assessed the extent of the paperwork 

burden associated with this 

requirement. One commenter argued 

that CMS estimates on time are too low 

by outlining the steps required to 

implement this provision. One 

commenter is familiar with the 

experience of public hospitals in 

California that are implementing cost 

reporting under a CMS-approved 1115 

demonstration and stated that hundreds 

of hours have been spent attempting to 

implement the new CPE and costfinding rules. Another commenter 

explained that providers currently 

spend hundreds of hours preparing and 

submitting Medicare cost reports. 

187R. Response: In light of comments 

received on the estimated time required 

for governmentally operated providers 

to complete the new cost report forms 

and States to review the cost reports, 

CMS has reviewed the initial estimates 

for these activities. The revised 

estimates will accompany the 

publication of the cost report template 

in the Federal Register. 

However, we do not believe the 

Medicaid cost limit will impose 

significant administrative burden on 

States particularly since the limit 

applies only to governmentally-operated 

health care providers. 

For purposes of institutional 

governmentally-operated health care 

providers, the Medicaid cost limit 

determination will rely on existing 

reporting tools used by institutional 

health care providers. States will not be 

required to audit financial and cost 

information provided by individual 

institutional governmentally-operated 

health care providers as part of the 

Medicaid cost limit review. Each of the 

source documents is subject to reporting 

and auditing rules specific to the 

original purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render an determination on the 

cost limit methodology applied to the 

source documents but will not be 

required to validate the accuracy of the 

information and data within the source 

documents. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report currently does not 

exist. Because of this, we will be 

publishing a standardized cost reporting 

form that should be used to document 

such services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. The period of time to 

which this cost report applies will be 

the Medicaid State plan rate year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

CMS has developed a general 

Medicaid Cost Reporting Protocol 

available on the CMS Web site that 

specifically addresses the methods 

under which institutional and noninstitutional Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with Federal requirements. 

188C. Comment: One commenter 

identified the ‘‘unfunded workloads’’

for State agencies resulting from the 

proposed rule. The increased workload 

was attributed to the rule’s requirements 

that State agencies collect, review, and 

audit cost reports from governmental 

providers; document their own costs to 

the extent they are providers 

themselves; and obtain and review 

information from purportedly 

governmental providers using the ‘‘Tool 

to Evaluate the Governmental Status of 

Providers’’ form. The commenter 

expressed concern that an unintended 

consequence of this additional workload 

could be that State and local 

governments have to reduce the delivery 

of services. 

188R. Response: We do not believe 

the cost limit will impose significant 

administrative burden on States 

particularly since such limit applies 

only to governmentally-operated health 

care providers. 

For purposes of institutional 

governmentally-operated health care 

providers, the Medicaid cost limit 

determination will rely on existing 

reporting tools used by institutional 

health care providers. States will not be 

required to audit financial and cost 

information provided by individual 

institutional governmentally-operated 

health care providers as part of the 

Medicaid cost limit review. Each of the 

source documents is subject to reporting 

and auditing rules specific to the 

original purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render a determination on the cost 

limit methodology applied to the source 

documents but will not be required to 


jlentini on PROD1PC65 with RULES3
29806 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

validate the accuracy of the information 

and data within the source documents. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report currently does not 

exist. Because of this, we will be 

publishing a standardized cost reporting 

form that should be used to document 

such services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. The period of time to 

which this cost report applies will be 

the Medicaid State plan rate year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

CMS has developed a general 

Medicaid Cost Reporting Protocol 

available on the CMS Web site that 

specifically addresses the methods 

under which institutional and noninstitutional Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with Federal requirements. 

189C. Comment: With respect to the 

‘‘Tool to Evaluate the Governmental 

Status of Providers’’ form, one 

commenter said that CMS failed to set 

out a satisfactory analysis of alternative 

approaches to obtaining the information 

that is necessary to determine 

compliance with the proposed 

regulations. The commenter raised this 

issue because in order to obtain OMB 

approval for a collection of information, 

CMS must show that its proposal is the 

least burdensome option necessary for 

the proper performance of the agency’s 

functions. Moreover, the commenter 

questioned the practical utility of this 

form because it ‘‘attempts to face a 

complex legal analysis into a Q&A 

format’’ and does not provide any 

explanation as to the consequences of 

answers. 

189R. Response: The ‘‘Tool to 

Evaluate the Governmental Status of 

Health Care Providers’’ is designed to 

guide State decision making in applying 

the statutory and regulatory criteria 

regarding units of government. The 

provisions of the regulation were 

designed to ensure consistent 

application of the Federal statutory 

instructions regarding the definition of 

a unit of government for purposes of 

Medicaid reimbursement and State 

financing. CMS recognizes that States 

play a major role in the administration 

of the Medicaid program and that legal 

and financial arrangements between 

health care providers and units of 

government vary on a case by case basis. 

We have developed standardized and 

impartial regulatory criteria based upon 

Federal statute that States must apply 

on a consistent basis to each health care 

provider within the State. 

We believe the tool is useful to States 

and actually reduces the State’s burden 

by putting complex statutory and 

regulatory standards into a practical and 

user friendly format. 

J. Regulatory Impact Analysis 

190C. Comment: Many commenters 

offered opinions about the estimated 

financial impact the proposed rule 

would have on a particular State. These 

monetary estimates varied widely from 

one State to another, but the 

commenters consistently expressed that 

the loss of Federal funding that would 

result from this rule would create large 

funding gaps that would have to be 

addressed by State and local 

governments. Commenters asserted that 

States and local governments would not 

necessarily have the revenues to fill 

these gaps, and as a result, they may 

choose to cut reimbursements to 

providers, eliminate Medicaid 

individuals from their programs, or 

reduce the scope of covered benefits. 

None of these alternatives was viewed 

favorably by the commenters. 

190R. Response: Medicaid is a shared 

responsibility between Federal and 

State government. State governments 

may share their fiscal obligation to the 

Medicaid program with local 

governments according to the 

instruction of Congress. Under Public 

Law 102–234, the Congress made clear 

that States may allow governmentallyoperated health care providers to 

participate in a State’s fiscal obligation 

to the Medicaid program through the 

use of intergovernmental transfers and 

certified public expenditures. However, 

the Congress was also clear that States 

may not receive funds from nongovernmentally-operated health care 

providers for purposes of financing 

Medicaid payments. 

The provision of the regulation that 

addresses a unit of government codifies 

the existing statutory definitions of a 

unit of government. This codification of 

existing Federal statute was established 

in an effort to assist States in identifying 

the universe of governmentally-operated 

health care providers that could receive 

Medicaid revenues up to the full cost of 

providing services to Medicaid 

individuals and clarifies which types of 

health care providers can participate in 

financing of the non-Federal share of 

Medicaid payments. 

Medicaid is a vitally important 

program that serves very vulnerable 

individuals, and the Federal 

government remains committed to 

funding its share of the cost of providing 

Medicaid services to eligible 

individuals. We also note that State 

decisions will be the major factor in the 

actual financial impact this regulation 

will have within each State. CMS 

recognizes that States play a major role 

in the administration of the Medicaid 

program and that legal and financial 

arrangements between health care 

providers and units of government vary 

on a case by case basis. Therefore, CMS 

has developed standardized and 

impartial regulatory criteria based upon 

Federal statue that States must apply on 

a consistent basis to each health care 

provider within the State to determine 

whether or not the health care provider 

is considered a unit of government 

under the regulation. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. 

Moreover, the regulation reaffirms 

State Medicaid financing policy 

requiring that health care providers be 

allowed to fully retain their Medicaid 

payments, another provision of which 

clearly demonstrates the Federal 

government’s intent to protect the 

nation’s public safety net and its ability 

to continue delivering critical health 

care services to Medicaid individuals 

and the uninsured. Any health care 

providers that become ineligible to 

participate in the State financing of 

Medicaid payments following the 

effective date of the provisions of this 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29807 

regulation can realize greater net 

revenues if State or local governments 

choose to utilize their funding sources 

to fund non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentallyoperated ‘‘public’’ health care providers. 

191C. Comment: A number of 

commenters thought that CMS estimates 

that the proposed rule would result in 

a $3.87 billion savings to the Federal 

government over the next five years was 

too low. The commenters asserted that 

the loss of Federal funds was expected 

to be at least $932 million in one State, 

$253 million in another State, $350 

million in another State, and $374 

million in yet another State. 

Commenters noted that an estimated 

impact over five years of $4.7 billion in 

one State specifically is higher than the 

national CMS calculation for the same 

period. Commenters asked CMS to 

reevaluate this estimate. 

191R. Response: We find many of the 

expressed concerns about the potential 

impact of the cost limit to be overstated 

based on a misunderstanding of certain 

provisions of the regulation, which have 

been clarified in this final regulation. 

We also note that State decisions will be 

the major factor in the actual financial 

impact this regulation will have within 

each State. 

The provision of the regulation that 

addresses a unit of government codifies 

the existing statutory definitions of a 

unit of government. This codification of 

existing Federal statute was established 

in an effort to assist States in identifying 

the universe of governmentally-operated 

health care providers that could receive 

Medicaid revenues up to the full cost of 

providing services to Medicaid 

individuals and clarifies which types of 

health care providers can participate in 

financing of the non-Federal share of 

Medicaid payments. CMS has 

developed standardized and impartial 

regulatory criteria based upon Federal 

statue that States must apply on a 

consistent basis to each health care 

provider within the State to determine 

whether or not the health care provider 

is considered a unit of government 

under the regulation. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. 

Moreover, one provision of the 

regulation reaffirms State Medicaid 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments, another 

provision of which clearly demonstrates 

the Federal government’s intent to 

protect the nation’s public safety net 

and its ability to continue delivering 

critical health care services to Medicaid 

individuals and the uninsured. Any 

health care providers that become 

ineligible to participate in the State 

financing of Medicaid payments 

following the effective date of the 

provisions of this regulation can realize 

greater net revenues if State or local 

governments choose to utilize their 

funding sources to fund non-Federal 

share obligations to Medicaid payments 

historically financed by nongovernmentally-operated ‘‘public’’

health care providers. 

192C. Comment: Several commenters 

opined that CMS failed to adequately 

explain how it reached its estimate that 

the proposed rule would result in a 

$3.87 billion savings to the Federal 

government over the next five years. 

Commenters noted that in the preamble 

CMS acknowledged uncertainty in the 

estimated impact of the rule. Some of 

the commenters pointed out that since 

publication of the proposed rule, CMS 

has been asked for State-specific 

estimates of the rule’s financial impact, 

but CMS refused to provide such 

estimates and stated that no such 

calculations had been performed. 

Requests for further information about 

how CMS produced this estimate were 

made, and several commenters 

expressed that CMS should not proceed 

with implementation of the rule without 

knowing more about the potential 

impact. 

192R. Response: The regulation’s 

preamble included a detailed 

description of the methodology utilized 

by CMS to develop the estimate that the 

regulation would result in a $3.87 

billion savings to the Federal 

government over the next 5 years. 

All States could be affected by the 

provisions of the regulation if the State 

currently: 

• Reimburses governmentallyoperated health care providers in excess 

of the cost to provide services to 

Medicaid individuals; 

• Accepts funds from nongovernmentally-operated health care 

providers to help fund the non-Federal 

share of Medicaid payments; and/or, 

• Requires the return of Medicaid 

payments. 

State-specific effects of the regulation 

can only be determined by the States as 

each State administers its own Medicaid 

program. We also note that State 

decisions will be the major factor in the 

actual financial impact this regulation 

will have within each State. 

The provision of the regulation that 

addresses a unit of government codifies 

the existing statutory definitions of a 

unit of government. This codification of 

existing Federal statute was established 

in an effort to assist States in identifying 

the universe of governmentally-operated 

health care providers that could receive 

Medicaid revenues up to the full cost of 

providing services to Medicaid 

individuals and clarifies which types of 

health care providers can participate in 

financing of the non-Federal share of 

Medicaid payments. CMS has 

developed standardized and impartial 

regulatory criteria based upon Federal 

statue that States must apply on a 

consistent basis to each health care 

provider within the State to determine 

whether or not the health care provider 

is considered a unit of government 

under the regulation. 

193C. Comment: A number of 

commenters suggested that CMS failed 

to account for the initial and ongoing 

costs of implementation and compliance 

with the proposed regulation to the 

federal government and to States. These 

commenters observed that the estimated 

impact to the Federal government does 

not appear to include offsets for new 

needs, including additional staff that 

States and the Federal government will 

hire, the information technology and 

infrastructure development and 

changes, and educational efforts among 

States, providers and other stakeholders 

that will be required of the Federal 

government. One commenter believes 

that the proposed regulation understates 

the administrative burden on providers 

and the indirect impact that additional 

provider mandates could have on States’

ability to develop adequate provider 

networks. Another commenter 

estimated that more than 20,000 man 

hours will be required to initially 

comply with the regulation. Thus, 

commenters requested that CMS explain 

how it accounted for these additional 

costs or withdraw the rule due to the 

unwarranted burden associated with 

implementation. 

193R. Response: We do not believe 

that compliance with the regulation will 

result in significant administrative costs 

for States. For institutional 

governmentally-operated health care 

providers, the Medicaid cost limit 

determination will rely on existing 

reporting tools used by institutional 

health care providers. States will not be 

required to audit financial and cost 

information provided by individual 

institutional governmentally-operated 

health care providers as part of the 

Medicaid cost limit review. Each of the 


jlentini on PROD1PC65 with RULES3
29808 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

source documents is subject to reporting 

and auditing rules specific to the 

original purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render an determination on the 

cost limit methodology applied to the 

source documents but will not be 

required to validate the accuracy of the 

information and data within the source 

documents. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report currently does not 

exist. Because of this, we will be 

publishing a standardized cost reporting 

form that should be used to document 

such services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. The period of time to 

which this cost report applies will be 

the Medicaid State plan rate year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

Each State is responsible for the 

proper and efficient administration of 

its Medicaid program. Expenses 

incurred for administration of the 

Medicaid program are eligible for 

Federal matching funds at the at the 

regular 50 percent administrative 

matching rate. 

194C. Comment: One commenter 

implied that based on Federal Medical 

Assistance Percentage (FMAP) rates, the 

loss of Federal funding from the rule 

would harm the poorest States the most, 

as they would have the largest funding 

gap to make up, dollar for dollar as a 

percentage of expenditures, when 

compared to wealthier States with lower 

FMAP rates. 

194R. Response: Federal Medical 

Assistance Percentage (FMAP) rates are 

calculated strictly based upon the 

formula required by the Medicaid 

statute. Such calculations are outside 

the scope of this regulation. 

Under the provisions of the 

regulation, governmentally-operated 

health care providers will be permitted 

to receive up to 100 percent of the cost 

of serving Medicaid individuals. We are 

unclear how limiting Medicaid 

reimbursement to the full cost or 

providing services to Medicaid 

individuals would adversely affect a 

governmentally-operated health care 

provider, unless the health care 

provider had been historically receiving 

Medicaid payments above cost and 

using excess Medicaid revenues to 

subsidize other costs outside of the 

Medicaid program. In such a situation, 

the proposed cost limit could cause a 

net reduction in Medicaid revenue to 

the health care provider, but the amount 

of the reduction would directly 

correspond with the amount of 

Medicaid revenues that had been used 

for non-Medicaid purposes. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. It remains unclear how a 

limit that does not apply to public 

hospitals could adversely impact quality 

and patient safety and vital community 

services. 

Moreover, the provisions of the 

regulation reaffirms State Medicaid 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments, another 

provision of which clearly demonstrates 

the Federal government’s intent to 

protect the nation’s public safety net 

and its ability to continue delivering 

critical health care services to Medicaid 

individuals and the uninsured. Any 

health care providers that become 

ineligible to participate in the State 

financing of Medicaid payments 

following the effective date of the 

provisions of this regulation can realize 

greater net revenues if State or local 

government funding sources are utilized 

to fund non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentallyoperated ‘‘public’’ health care providers. 

195C. Comment: A number of 

commenters noticed that in the 

preamble, CMS mentioned that it 

examined Medicaid financing 

arrangements across the country but did 

not provide information on which States 

or how many States are employing 

questionable financing practices. 

Therefore, the commenters believe that 

the public is unable to meaningfully 

review the changes proposed by this 

rule or the estimated impact. 

195R. Response: CMS has examined 

numerous financing arrangements 

across the country; however, CMS 

cannot be certain that it has examined 

all questionable Medicaid financing 

arrangements among all the States in the 

nation. Any attempt to publish a 

comprehensive list of questionable 

Medicaid financing arrangements 

among States would be misleading. 

196C. Comment: One commenter 

asked specifically for any economic and 

other assumptions that CMS used in 

arriving at its estimate that the proposed 

rule’s effect on actual patient services 

will be minimal. 

196R. Response: The statement 

referenced by the commenter was based 

on the fact that (1) the regulation 

presents no changes to coverage or 

eligibility requirements under Medicaid; 

(2) the regulation clarifies statutory 

financing requirements and allows 

governmentally operated providers to be 

reimbursed at levels up to cost; and (3) 

Federal matching funds will continue to 

be made available based on 

expenditures for appropriately covered 

and financed services delivered to 

Medicaid eligible individuals. 

Governmentally-operated health care 

providers can receive Medicaid 

revenues up to the full cost of providing 

services to Medicaid individuals and 

private health care providers may 

continue to receive Medicaid revenue in 

excess of Medicaid cost. Under these 

circumstances we do not anticipate that 

the actual services delivered by 

governmentally-operated health care 

providers or private health care 

providers will change. 

197C. Comment: One commenter 

expressed its intent to redistribute any 

funds that were paid to governmental 

providers in excess of cost to other 

providers that were paid less than cost, 

thereby negating any Federal savings 

that might be assumed from the cost 

limit provision of the regulation. In this 

regard, the commenter questioned the 

validity of any estimated Federal 

savings in the Regulatory Impact 

Analysis that is associated with the cost 

limit provision. 

197R. Response: This comment 

illustrates the significance of State 

decision-making in determining the 

actual financial impact this regulation. 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29809 

Under the provisions of the regulation, 

Federal matching funds will be made 

available to States for payments to 

governmentally-operated health care 

providers under the approved Medicaid 

State Plan, up to 100 percent of the cost 

of providing services to Medicaid 

individuals. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. Any health care providers 

that become ineligible to participate in 

the State financing of Medicaid 

payments following the effective date of 

the provisions of this regulation can 

realize greater net revenues if State or 

local governments choose to utilize their 

funding sources to fund non-Federal 

share obligations to Medicaid payments 

historically financed by nongovernmentally-operated ‘‘public’’

health care providers. 

198C. Comment: A number of 

commenters stated that the additional 

administrative workload associated with 

the cost limit and cost reporting for 

governmental providers will be 

excessive. One commenter believes that 

its State is not currently staffed to 

review or audit cost reports or forms of 

this magnitude, while another 

commenter stated that retrospective cost 

settlements of all providers considered 

units of government were not 

sufficiently accounted for in the impact 

analysis. One commenter, a State 

Medicaid agency, estimated that at least 

four FTEs will need to spend six months 

on the process of merely identifying 

governmental providers and making the 

relevant changes to the State’s MMIS 

system. To illustrate the point on the 

administrative workload, one 

commenter listed a number of tasks that 

may be required to implement this 

provision. 

198R. Response: We do not believe 

that compliance with the regulation will 

result in significant administrative costs 

for States. For institutional 

governmentally-operated health care 

providers, the Medicaid cost limit 

determination will rely on existing 

reporting tools used by institutional 

health care providers. States will not be 

required to audit financial and cost 

information provided by individual 

institutional governmentally-operated 

health care providers as part of the 

Medicaid cost limit review. Each of the 

source documents is subject to reporting 

and auditing rules specific to the 

original purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render an determination on the 

cost limit methodology applied to the 

source documents but will not be 

required to validate the accuracy of the 

information and data within the source 

documents. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report does not currently 

exist. Because of this, we will be 

publishing a standardized cost reporting 

form that should be used to document 

such services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. The period of time to 

which this cost report applies will be 

the Medicaid State plan rate year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

Each State is responsible for the 

proper and efficient administration of 

its Medicaid program. Expenses 

incurred for administration of the 

Medicaid program are eligible for 

Federal matching funds at the regular 50 

percent administrative matching rate. 

199C. Comment: One commenter 

noted the $3.87 billion savings estimate 

associated with the proposed rule and 

urged CMS and the Administration to 

reinvest all savings back into 

innovations to address the nation’s 

problem of the uninsured and to 

improve care for current Medicaid 

individuals. 

199R. Response: Spending authority 

related to any savings generated from 

the regulation primarily rests with the 

Congress. Furthermore, State decisions 

are also a major factor in the financial 

impact of the regulation and the use of 

funds. State or local governments may 

choose to use their funding sources to 

fund non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentallyoperated ‘‘public’’ health care providers 

and may also devote such resources to 

address the issues described by the 

commenter. 

200C. Comment: One commenter 

commented specifically on the impact 

this rule would have on States with 

large rural populations. In rural areas, 

the commenter notes, local governments 

often serve as the only provider to 

ensure access to needed care, including 

mental health services and long term 

care. The payment limits and cost 

documentation requirements of the rule 

were identified as particularly 

challenging for rural local government 

providers, due to the potential loss of 

reimbursement and the administrative 

burden associated with cost 

documentation. 

200R. Response: The Medicaid cost 

limit permits all governmentallyoperated health care providers the 

opportunity to receive Medicaid 

revenues up to the full cost of providing 

services to Medicaid individuals. 

Furthermore, we do not believe the 

Medicaid cost limit will impose a 

significant burden on States or 

governmentally-operated health care 

providers. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report currently does not 

exist. Because of this, we will be 

publishing a standardized cost reporting 

form that should be used to document 

such services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. The period of time to 

which this cost report applies will be 

the Medicaid State plan rate year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with nonVerDate Aug<31>2005 19:16 May 25, 2007 Jkt 211001 PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 E:\FR\FM\29MYR3.SGM 29MYR3

jlentini on PROD1PC65 with RULES3
29810 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

institutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

Each State is responsible for the 

proper and efficient administration of 

its Medicaid program. Expenses 

incurred for administration of the 

Medicaid program are eligible for 

Federal matching funds at the regular 50 

percent administrative matching rate. 

201C. Comment: One commenter took 

exception to the CMS statement in the 

preamble that it would be beneficial to 

distribute payments more evenly across 

all governmental providers because 

CMS did not provide any analysis or 

support showing that differential 

payments to select governmental 

providers do not serve a rational, 

favorable purpose, such as promoting 

the development and maintenance of 

programs key to the success of the State 

Medicaid program (even if such services 

may also be accessed by other 

individuals). 

201R. Response: The Medicaid cost 

limit permits all governmentallyoperated health care providers the 

opportunity to receive Medicaid 

revenues up to the full cost of providing 

services to Medicaid individuals. 

Because the Medicaid program is jointly 

funded by Federal, State, and local 

governments, we do not find it 

appropriate that units of State or local 

government would ‘‘profit’’ from 

Federal taxpayer dollars that are 

intended to match a percentage of the 

cost of providing services to Medicaid 

individuals. 

K. Effective Date of the Final Regulation 

202C. Comment: Many commenters 

stated that the rule does not have a 

transition period, arguing that an 

effective date of September 1, 2007 is 

too early. Many commenters offered 

specific suggestions as to the length of 

a transition period for compliance with 

the provisions of the proposed rule. The 

suggested length of transition ranged 

from a full state fiscal year, to two or 

three years, to a frequently identified 

length of ten years following the 

publication of the final rule. Other 

commenters suggested a specific date 

(such as January 1, 2008, September 1, 

2008, or January 2009) as an alternative 

for the rule to become effective. A 

number of commenters requested 

‘‘phase in’’ processes for States, local 

governments, and providers to come 

into compliance with the provisions of 

the proposed rule by the effective date. 

Different reasons were proffered to 

argue for transitional periods or phasein processes. Many commenters noted 

that the changes proposed in this rule 

would require action by State 

legislatures in order to assure 

compliance. However, these 

commenters contend that factoring the 

States’ established legislative cycles, 

there would not be enough time for 

State legislatures to act to ensure 

compliance with the rule by the 

currently proposed effective date of 

September 1, 2007. In fact, many States 

have nearly completed or already 

finalized the budget and all associated 

Medicaid funding for State fiscal year 

2008, but some of the existing funding 

arrangements or state statutes will need 

to be modified due to the rule. Some 

legislatures may not be in session prior 

to September 1, 2007. Therefore, these 

commenters have requested a transition 

period for States, local governments, 

and providers to adjust to the changes 

proposed by the rule. Other commenters 

stated that longstanding payment 

methodologies and financing 

arrangements, many of which were 

previously approved by CMS, would be 

disrupted by this rule. Based on the 

administrative and financial changes 

required, the commenters requested a 

transition period for States, local 

governments, and providers to adjust to 

the proposed rule. Several commenters 

noted that the proposed rule would 

require States to submit amendments to 

their Medicaid State Plan for approval 

by CMS before they can come into 

compliance, noting the length of time it 

takes to develop a State plan 

amendment, vet it with the public, and 

receive approval by CMS. 

A number of commenters pointed out 

that States are not obligated to modify 

their programs based on the provisions 

of a proposed regulation; therefore, 

States may not have done anything thus 

far to comply with the proposed rule. 

These commenters justified a lack of 

action based on the possibility that the 

rule may be altered following the public 

comment period. 

Some commenters opined that 

establishing appropriate cost reporting 

mechanisms, as envisioned in the 

proposed rule, will require months of 

work, based on the need to define how 

costs should be allocated and reported 

and implement any systems changes 

that will become necessary. 

Additionally, some of these commenters 

note that the nature and extent of 

documentation required to support costs 

by governmental providers has not been 

disclosed by CMS. In addition to the 

cost reporting and State plan changes 

cited, one commenter noted that 

government hospitals would need to be 

removed from the DRG methodology, 

after which DRG weights would have to 

be recalibrated and peer groupings 

excluding these facilities. Therefore, the 

commenters have asked for a transition 

period for compliance following the 

effective date of the rule. 

Some commenters observed that the 

cost limit provision proposed at 

§ 447.206 would become effective on 

September 1, 2007, while effective dates 

for other provisions were not specified 

in the rule. These commenters asked 

CMS to clarify when all provisions of 

the proposed rule would be effective. 

202R. Response: All provisions of the 

regulation will be effective 60 days after 

the publication of the final regulation. 

Moreover, CMS will require that the 

States report the universe of 

governmentally-operated health care 

providers in each State by submitting a 

complete list of such health care 

providers to the Associate Regional 

Administrator for Medicaid of each 

State’s respective CMS Regional Office 

within 90-days of the effective date of 

the regulation. CMS reserves the right to 

disagree with a State’s initial 

determination of governmental status if 

we believe the State has not consistently 

applied the statutory and regulatory 

criteria to determine the governmental 

status of a particular health care 

provider. 

With respect to the new cost limit for 

governmentally-operated health care 

providers established at § 447.206, a 

period of transition is warranted in 

order to ensure that governmentallyoperated health care providers 

document and report their Medicaid 

costs in a consistent manner. In order to 

assist States in their obligation to ensure 

that Medicaid reimbursements to 

governmentally-operated health care 

providers do not exceed the individual 

governmentally-operated health care 

provider’s costs, CMS has developed a 

general Medicaid cost reporting protocol 

available on the CMS Web site that 

specifically addresses the information 

utilized from each source document and 

the methods under which costs and 

revenues will be determined. These 

protocols have been developed in an 

effort to address concerns regarding 

requirements to properly document, 

audit, and review the costs associated 

with the provision of Medicaid services 

in both institutional and noninstitutional environments. Timelines 

for implementation of the cost limit are 

included in the protocols for both 

institutional and non-institutional 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29811 

providers. The timelines have been 

designed to allow governmentally 

operated providers and States Medicaid 

agencies sufficient time to transition 

into the new requirements of § 447.206. 

CMS has developed a general 

Medicaid Cost Reporting Protocol 

available on the CMS Web site that 

specifically addresses the methods 

under which institutional and noninstitutional Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with Federal requirements. 

For purposes of institutional 

governmentally-operated health care 

providers, the Medicaid cost limit 

determination will rely on existing 

reporting tools used by institutional 

health care providers. States will not be 

required to audit financial and cost 

information provided by individual 

institutional governmentally-operated 

health care providers as part of the 

Medicaid cost limit review. Each of the 

source documents is subject to reporting 

and auditing rules specific to the 

original purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render an determination on the 

cost limit methodology applied to the 

source documents but will not be 

required to validate the accuracy of the 

information and data within the source 

documents. The Medicaid State plan 

rate year 2008 will be the first time 

period subject to the Medicaid cost limit 

for institutional governmentallyoperated health care providers. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report currently does not 

exist. Because of this, we will be 

publishing a standardized cost reporting 

form that should be used to document 

such services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. The period of time to 

which this cost report applies will be 

the Medicaid State plan rate year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally-operated 

non-institutional health care providers 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

CMS has modified the regulation to 

address transitional periods where 

necessary and detailed cost 

documentation instructions are 

available to States as explained above. 

203C. Comment: Many commenters 

expressed concern about the timing of 

making the changes proposed by this 

rule in light of larger issues facing our 

health care system today. Such issues 

include the risk of terrorist attacks, the 

possible onslaught of avian flu, and the 

diversion of ambulances due to facility 

overcrowding. With these 

circumstances, the commenters 

questioned the wisdom in proposing a 

rule that would withdraw large amounts 

of Medicaid dollars from institutions 

that play a significant role in the health 

care systems of our nations cities. 

203R. Response: The Medicaid 

program is a cooperative Federal-State 

program established in 1965 for the 

purpose of providing Federal financial 

participation (FFP) to States that choose 

to reimburse certain costs of medical 

treatment for needy individuals. The 

provisions of the regulation are 

consistent with the Medicaid statute. 

Medicaid is a vitally important 

program that serves very vulnerable 

individuals, and the Federal 

government remains committed to 

funding its share of the cost of providing 

Medicaid services to eligible 

individuals. We also note that State 

decisions will be the major factor in the 

actual financial impact this regulation 

will have within each State. CMS 

recognizes that States play a major role 

in the administration of the Medicaid 

program and that legal and financial 

arrangements between health care 

providers and units of government vary 

on a case by case basis. Therefore, CMS 

has developed standardized and 

impartial regulatory criteria based upon 

Federal statue that States must apply on 

a consistent basis to each health care 

provider within the State to determine 

whether or not the health care provider 

is considered a unit of government 

under the regulation. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. 

Moreover, the regulation reaffirms 

State Medicaid financing policy 

requiring that health care providers be 

allowed to fully retain their Medicaid 

payments, another provision of which 

clearly demonstrates the Federal 

government’s intent to protect the 

nation’s public safety net and its ability 

to continue delivering critical health 

care services to Medicaid individuals 

and the uninsured. Any health care 

providers that become ineligible to 

participate in the State financing of 

Medicaid payments following the 

effective date of the provisions of this 

regulation can realize greater net 

revenues if State or local governments 

choose to utilize their funding sources 

to fund non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentallyoperated ‘‘public’’ health care providers. 

204C. Comment: Several commenters 

asked CMS to delay the proposed rule 

until the impact of the rule can be better 

identified on both State and national 

levels. 

204R. Response: The provision of the 

regulation that addresses a unit of 

government codifies the existing 

statutory definitions of a unit of 

government. This codification of 

existing Federal statute was established 

in an effort to assist States in identifying 

the universe of governmentally-operated 

health care providers that could receive 

Medicaid revenues up to the full cost of 

providing services to Medicaid 

individuals and clarifies which types of 

health care providers can participate in 

financing of the non-Federal share of 

Medicaid payments. CMS has 

developed standardized and impartial 

regulatory criteria based upon Federal 

statue that States must apply on a 

consistent basis to each health care 

provider within the State to determine 

whether or not the health care provider 

is considered a unit of government 

under the regulation. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. 

Moreover, one provision of the 

regulation reaffirms State Medicaid 


jlentini on PROD1PC65 with RULES3
29812 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments, another 

provision of which clearly demonstrates 

the Federal government’s intent to 

protect the nation’s public safety net 

and its ability to continue delivering 

critical health care services to Medicaid 

individuals and the uninsured. Any 

health care providers that become 

ineligible to participate in the State 

financing of Medicaid payments 

following the effective date of the 

provisions of this regulation can realize 

greater net revenues if State or local 

governments choose to utilize their 

funding sources to fund non-Federal 

share obligations to Medicaid payments 

historically financed by nongovernmentally-operated ‘‘public’’

health care providers. 

For the above reasons, we do not 

believe it is appropriate to delay the 

regulation. 

205C. Comment: Multiple 

commenters asked that if the proposed 

rule is to become effective, that it 

should only be effective prospectively, 

not retroactively. 

205R. Response: The provisions of 

this regulation will be effective 60 days 

after publication of the final regulation. 

While the provisions of the regulation 

will not be applied retroactively, total 

Medicaid revenues must be reconciled 

to actual Medicaid costs for purposes of 

compliance with the Medicaid cost 

limit. CMS has developed a general 

Medicaid Cost Reporting Protocol 

available on the CMS Web site that 

specifically addresses the methods 

under which institutional and noninstitutional Medicaid costs and 

revenues will be determined. The 

protocol was designed to provide States 

with detailed instructions to determine 

compliance with Federal requirements. 

206C. Comment: Multiple 

commenters expressed the belief that an 

effective date of September 1, 2007 

would be impossible to achieve when it 

is not known in advance who qualifies 

as a unit of government under the 

proposed rule. 

206R. Response: All provisions of the 

regulation will be effective 60 days after 

the publication of the final regulation. 

Moreover, CMS will require that the 

States report the universe of 

governmentally-operated health care 

providers in each State by submitting a 

complete list of such health care 

providers to the Associate Regional 

Administrator for Medicaid of each 

State’s respective CMS Regional Office 

within 90-days of the effective date of 

the regulation. 

207C. Comment: A number of 

commenters stated that to the extent 

that CMS contends that the current 

regulatory change is effective at any 

time prior to the finalization of the 

formal rulemaking process, it is in 

violation of not only the Administrative 

Procedures Act but also the Medicaid 

Voluntary Contribution and ProviderSpecific Tax Amendments of 1991, 

which contained an uncodified 

provision to prevent the Secretary from 

issuing any interim final regulation to 

change the treatment of public funds as 

a source of the non-Federal share (see 5 

U.S.C. 553). 

207R. Response: Section 5(c) of the 

Medicaid Voluntary Contribution and 

Provider-Specific Tax Amendments of 

1991, Public Law 102–234, required the 

Secretary to ‘‘consult with the State 

before issuing any regulations under 

this Act.’’ CMS interprets this provision 

as a check on the authorization to use 

interim final rulemaking procedures in 

section 5(a). We thus read the reference 

to ‘‘any regulations’’ to refer to the 

regulations specifically authorized 

under section 5(a) to be issued ‘‘on an 

interim final or other basis’’ to initially 

implement the Act. We do not read the 

condition as a permanent limitation on 

Secretarial rulemaking authority. We 

believe the condition was fully satisfied 

by the process the Secretary undertook 

when the regulations implementing that 

Act were issued in 1992 and 1993. Even 

if the condition were read to extend in 

perpetuity, however, we believe it has 

been met with respect to these 

regulations. Over the years, in the 

course of reviewing State plan 

amendments, CMS is in constant 

dialogue with States over issues relating 

to the financing of the Medicaid 

program. The general principles 

contained in this regulation have been 

explored with States over the years. 

Moreover, this Administration has 

announced its intentions with respect to 

this regulation in the President’s 

Budget, and we have undertaken full 

notice and comment rulemaking 

procedures. In this process, we have 

received and considered numerous 

comments from States and other 

interested parties. 

L. Miscellaneous Comments 

1. Tribal Comments 

208C. Comment: Several commenters 

observed that under the proposed rule, 

Indian Tribes would only be able to 

participate in the non-Federal share if it 

has ‘‘generally applicable taxing 

authority.’’ The commenters noted that 

the Indian tax law is complex, fraught 

with exceptions, and often the subject of 

litigation between Indian Tribes and 

States, but the proposed rule would 

require each State to analyze specific 

aspects of taxing structures of every 

tribe within the State. Therefore, it was 

noted that the taxing authority 

requirement to determine that a tribe is 

a unit of government will negatively 

affect the willingness of States to enter 

into cost sharing agreements with 

Indian Tribes, especially since an error 

in the determination could potentially 

have a negative financial consequence 

for the State. 

In a related comment, one commenter 

expressed an opinion that the criteria of 

the proposed rule to require Indian 

Tribes to have generally applicable 

taxing authority to be considered a unit 

of government or a governmental health 

provider contradicts over 100 years of 

treaties, statutes, executive orders, and 

court decisions recognizing and 

cementing the unique government-togovernment relationship the United 

States has with Tribal governments. The 

commenter noted that some tribal 

governments have taxing authority but 

do not exercise their taxing authority. 

The commenter indicated that since 

many tribal organizations do not have 

taxing authority, they would not qualify 

as a unit of government under the 

proposed rule. The commenter therefore 

believed that this criteria for purposes of 

the Medicaid program is both morally 

wrong and possibly illegal. 

In light of the above, commenters 

suggested amending proposed 

§ 433.50(a)(1)(i) to specifically address 

this issue. 

208R. Response: CMS has modified 

the regulation at § 433.50(a)(1)(i) to 

include Indian tribes as units of 

government without regard to taxing 

authority, in light of their unique status 

and government-to-government 

relationship to the Federal government.. 

209C. Comment: A number of 

commenters stated that the proposed 

rule appeared to reverse the policy 

provided in the October 18, 2005 and 

June 9, 2006 State Medicaid Director 

(SMD) letters. The commenters are 

concerned that the proposed rule 

appears to further restrict Tribes and 

tribal organizations from participation 

in financing the non-Federal share by 

requiring the entity to have general 

applicable taxing authority. 

209R. Response: The provisions of the 

regulation were not intended to reverse 

policies articulated in the October 18, 

2005 and June 9, 2006 SMD letters 

concerning the ability of tribes and 

tribal organizations to use certified 

public expenditures as a method of 

participating in the financing of the 

non-Federal share of Medicaid 

administrative expenses. 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29813 

CMS has modified the regulation at 

§ 433.50(a)(1)(i) to address Indian tribes 

as units of government irrespective of 

their taxing authority. 

In addition, CMS is not requiring 

States to complete the ‘‘Tool to Evaluate 

the Governmental Status of Health care 

Providers’’ form for each Indian tribe 

and tribal organization within the State, 

because the unique criteria for 

determining the governmental status of 

tribes and tribal organizations makes the 

tool inapplicable to these entities. 

However, CMS does require each State 

to specify the qualifying tribes and tribal 

organizations (per the criteria at 

§ 433.50) in the list of all 

governmentally-operated health care 

providers that will be submitted to the 

CMS Regional Office within 90-days of 

the effective date of this regulation. 

Although tribal facilities are exempt 

from the Medicaid cost limit, the 

inclusion of tribes and tribal 

organizations in this list will clarify 

which entities have been determined by 

the State as eligible to participate in 

financing the non-Federal share of 

Medicaid payments. 

210C. Comment: Several commenters 

asserted that the proposed rule should 

include language to indicate that other 

funds of the Indian Tribe, including 

funds transferred to the Tribe under a 

contract or compact pursuant to the 

Indian Self-Determination and 

Education Assistance Act, Public Law 

93–638, as amended, should be 

permissible sources of funding without 

regard to whether they were derived 

from general applicable taxing 

authority. In addition, the commenters 

requested the inclusion of language in 

the proposed rule to make clear that 

irrespective of the form of Medicaid 

reimbursement, the Tribe or Tribal 

organization will not be disqualified 

from participating in the non-Federal 

share. The commenters specifically 

suggested amending proposed 

§ 433.50(a)(1)(ii) by adding a new 

section (C) and provided suggested 

language. 

210R. Response: CMS has modified 

the regulation at § 433.50(a)(1)(i) to 

address Indian tribes as units of 

government regardless of their taxing 

authority. 

We note that currently § 433.51(c) 

already indicates that ‘‘Federal funds 

authorized by Federal law to be used to 

match other Federal funds’’ are 

permissible sources of financing the 

non-Federal share of Medicaid 

expenditures. We further recognize that 

Federally-granted ISDEAA funds 

continue to be permissible sources of 

funding for the non-Federal share of 

Medicaid expenses. 

211C. Comment: One commenter 

opined that CMS ‘‘purposefully and 

willfully misdirected the States and 

Indian Tribes’’ by consulting with tribes 

relative to the October 18, 2005 and the 

June 9, 2006 SMD letters while failing 

to consult with tribes with respect to 

provisions of the proposed rule that 

seem to contradict the two SMD letters. 

The commenter questioned the timing 

of the tribal consultation in relation to 

the development of these regulations, 

and the commenter requested the 

outcome of such consultations. Further, 

the commenter questioned if CMS 

violated its own tribal consultation 

policy by not consulting with the Tribe 

or the Tribal Technical Advisory Group 

(TTAG) until after a month after these 

proposed regulations were published. 

211R. Response: CMS has worked 

collaboratively with tribes and States to 

address unique tribal health care issues 

and will continue these efforts in the 

future. The provisions of the regulation 

were not intended to reverse policies 

articulated in the October 18, 2005 and 

June 9, 2006 SMD letters concerning the 

ability of tribes and tribal organizations 

to use certified public expenditures as a 

method of participating in the financing 

of the non-Federal share of Medicaid 

administrative expenses. CMS has 

modified the regulation at 

§ 433.50(a)(1)(i) to address Indian tribes 

as units of government irrespective of 

their taxing authority. 

212C. Comment: One observation was 

made that the proposed regulations 

would appear to negate some of the 

benefits that would be gained through 

the recently proposed bill (SB 578) 

protecting the Medicaid to Schools 

program. 

212R. Response: The requirements 

proposed in §§ 433, 447, and 457 are 

consistent with the Medicaid statute. 

2. Section 1115 Demonstrations/ 

Managed Care Comments 

213C. Comment: Numerous 

commenters were confused and 

requested further clarification regarding 

the applicability of the proposed 

provisions of the regulation to section 

1115 demonstration waivers. The 

commenters were particularly confused 

since the preamble to the proposed 

provisions specifically mentions that 

the regulations will apply to 

demonstration waivers, but on several 

occasions CMS has provided assurances 

to individual States that the proposed 

provisions of the regulation would not 

affect their current 1115 waiver 

program. The commenters also 

mentioned that not only are these 

assurances inconsistent with the 

preamble language, they are also 

inconsistent with the terms and 

conditions of the waivers, which specify 

that the waiver program will need to be 

modified to conform to changes in 

applicable law and regulations. 

213R. Response: All Medicaid 

payments made under Medicaid waiver 

and demonstration authorities are 

subject to all provisions of this 

regulation. The impact on individual 

waiver programs will have to be 

determined on a waiver by waiver basis 

to ascertain what, if any, changes will 

need to be made to address the final 

provisions of the regulation. Under 

recent 1115 waiver demonstration 

approvals and renewals, CMS provided 

States with guidance and parameters 

consistent with the provisions of the 

regulation. In fact, we have 

demonstrated through recent 1115 

demonstration approvals that we have 

been able to successfully work with 

States to design programs that meet both 

Federal Medicaid statutory financing 

requirements as well as the States’ need 

to develop programs to effectively 

deliver health care to safety net 

populations. 

214C. Comment: Multiple 

commenters stipulated that if the 

proposed provisions of the regulation 

are finalized as is, they would be 

extremely disruptive and harmful to 

existing waiver programs. These 

commenters cited specific concerns 

such as, use of CPEs by public entities 

that may not satisfy restrictive 

definitions of the proposed provisions 

of the regulation, utilization of payment 

methodologies that are not limited to 

cost and reliance on sources other than 

State or local taxes to provide the nonFederal share of expenditures. The 

commenters were also concerned that 

impacted waivers in States would not be 

able to obtain renewal of their program, 

without complying with the proposed 

provisions of the regulation, which 

could undermine the entire rationale for 

the waiver program. The commenters 

opined that these demonstration 

waivers are an important part of the 

Medicaid program and imposing these 

restrictive provisions would only stifle 

initiative, innovation and improvements 

to the delivery of health care. The 

commenters strongly recommended that 

if adopted, 1115 demonstration 

programs should be expressly exempted 

for as long as the program remains in 

effect, including through subsequent 

renewal periods. A few commenters 

stated that if their special funding pool 

under their 1115 waiver is exempt, then 

their DSH program and supplemental 

physician payments should be as well. 

Other commenters requested that 

CMS clarify that the provisions of the 


jlentini on PROD1PC65 with RULES3
29814 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

regulation would not result in reduced 

funding below the levels that were 

already agreed upon in the terms and 

conditions of waivers. The commenters 

also urged CMS to apply criteria used to 

approve waivers and establish their 

terms and conditions in a consistent and 

transparent manner across all States. 

214R. Response: We agree that 

demonstration programs are an 

important part of the Medicaid program, 

however, we disagree that the 

provisions of the regulation will stifle 

innovation and improvement in the 

delivery of health care. The provisions 

of the regulation reaffirm State Medicaid 

financing policy and clearly 

demonstrate the Federal government’s 

intent to protect the nation’s health care 

safety net to continue to delivery critical 

health care services to Medicaid 

individuals and the uninsured. The 

impact on individual waiver programs 

will have to be determined on a waiver 

by waiver basis to ascertain what, if any, 

changes will need to be made to address 

the provisions of the regulation once 

finalized. Our intent is not to prevent 

renewal of any demonstration program 

as long as it is consistent with Federal 

Medicaid statutory requirements 

governing the financing of the Medicaid 

program. In fact, we have demonstrated 

through recent 1115 demonstration 

approvals that we have been able to 

successfully work with States to design 

programs that meet both Federal 

Medicaid statutory financing 

requirements as well as the States’ need 

to develop programs to effectively 

deliver health care to safety net 

populations. Therefore, we disagree that 

1115 demonstration programs be 

exempted. There are also existing 

established waiver approval criteria that 

are used to promote consistency and 

transparency. 

215C. Comment: Numerous 

commenters requested CMS to explicitly 

state in the final provisions of the 

regulation that the funding for specific 

State 1115 waivers would not be 

reduced or eliminated as a result of the 

provisions within the regulation. 

Several commenters discussed Florida’s 

establishment, after complex and 

lengthy negotiations with CMS, of its 

Low Income Pool authorized through 

the authority under section 1115(a)(2) of 

the Act. Other commenters referenced 

California’s Hospital Waiver that 

includes a Safety Net Care Pool 

designed to provide Federal match to 

State, public hospitals and other public 

entities’ expenditures on services to the 

uninsured. These commenters 

mentioned that under the authority of 

section 1115(a)(2) of the Act, CMS 

allows these expenditures to be matched 

even though expenditures for the 

uninsured would not normally be 

eligible for Federal matching under 

Medicaid. The commenters are 

concerned that the provisions of the 

regulation would lower payments to 

hospitals under the Hospital waiver, 

resulting in reduced access to services 

for vulnerable populations, including 

children. At a minimum these 

commenters requested CMS specifically 

address their waiver programs, but 

overall recommend that the entire 

regulation be withdrawn. 

215R. Response: We have already 

articulated clearly to the cited States 

that based upon the premises and 

design of their demonstration programs, 

they should not be impacted by the final 

regulation’s provisions. For Florida, 

while we are still working with the State 

to define expenditures that can be made 

through the Low Income Pool, approved 

expenditures will be eligible for 

Medicaid matching consistent with the 

authority under section 1115(a)(2) of the 

Act for the Secretary to provide federal 

matching for costs not otherwise 

matchable under Medicaid. In the case 

of California, the new MediCal 

reimbursement system pays certain 

government providers 100 percent of 

costs incurred for services furnished to 

Medicaid individuals and up to 100 

percent of their DSH eligible costs 

(which would include costs of services 

provided to the uninsured) subject to 

allotment limitations. One of the 

fundamental tenets of the demonstration 

and their reimbursement and funding 

methodologies is the payment of 

providers up to their full cost of 

providing hospital services to Medicaid 

individuals and to uninsured 

individuals. Under the demonstration, 

the uninsured costs are considered 

eligible under Medicaid and would be 

part of each government hospital’s 

Medicaid cost base for purposes of the 

regulation. The Medicaid financing 

reforms adopted under California’s 1115 

demonstration are largely consistent 

with policies addressed in the 

provisions of the regulation therefore, to 

the extent these reforms continue to be 

met, it is unlikely that the 

demonstration’s budget neutrality 

agreement would be adversely affected 

by the regulation. We do not believe that 

any additional statements are needed in 

the final regulation. 

216C. Comment: One commenter 

specified that it was unfair to force them 

to eliminate payments above cost when 

other States have been afforded the 

opportunity to retain such payments 

and funds through the waiver process. 

The commenter referenced the fact that 

CMS has allowed several States to 

receive above cost payments for 

governmental providers and use those 

funds, through a demonstration waiver, 

for low-income or safety net care pools 

in order to facilitate payments to health 

care providers who serve uninsured or 

low-income individuals. 

216R. Response: Each State with the 

type of approved 1115 demonstration 

program referenced by the commenter 

has demonstrated permissible sources 

for the non-Federal share of Medicaid 

payments. One of the fundamental 

tenets of this type of demonstration and 

reimbursement and funding 

methodologies is the payment of 

providers up to their full cost of 

providing hospital services to Medicaid 

individuals and to uninsured 

individuals. Under such a 

demonstration, the uninsured costs are 

considered eligible under Medicaid and 

would be part of each government 

hospital’s Medicaid cost base for 

purposes of the regulation. 

217C. Comment: A few commenters 

asked that CMS specify that adjustments 

to any budget neutrality calculations 

will not be necessary as a result of the 

proposed rule’s provisions. A few 

commenters mentioned that the terms 

and conditions within 1115 

demonstration programs specifically 

require that CMS must adjust the budget 

neutrality cap to take into account 

reduced spending that would be 

anticipated under new regulations. The 

commenters asked if CMS would 

enforce this requirement and renegotiate 

budget neutrality agreements. Another 

commenter requested that CMS 

specifically explain how the proposed 

rule will affect States’ existing waiver 

budget neutrality calculations and if 

States have to recalculate, which States 

will be adversely affected. 

217R. Response: Budget neutrality, 

except for funds associated with DSH 

conversions, is based on payments for 

medical services provided to Medicaid 

eligible individuals. These payments, 

including supplemental payments, are 

paid to health care providers based on 

services delivered to Medicaid eligible 

individuals. The provisions of this 

regulation would affect spending under 

the State plan only to the extent that 

payments associated with individuals 

receiving services from governmentallyoperated health care providers are 

limited. The regulation would not limit 

the States’ ability to make Medicaid 

payments, including supplemental 

payments, but would limit the amount 

of FFP available to States making 

Medicaid payments to governmentallyoperated health care providers for any 

Medicaid payment that was above that 

provider’s cost. 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29815 

Adjustments to budget neutrality are 

made generally to address the effects on 

FFP of Federal Medicaid changes (limits 

or expansions) to benefits, coverage or 

eligibility under a Medicaid State Plan. 

For instance, if there was a change in 

federal law that required a new 

Medicaid service to be offered to all 

Medicaid eligible individuals, a State 

with a comprehensive section 1115 

demonstration may request to open their 

budget neutrality agreements to include 

the cost of this new service within the 

agreement because they are required to 

provide it under the demonstration. 

This regulation only affects FFP 

available for Medicaid payments to 

select providers and not the services 

and eligibility categories that defined 

the budget neutrality calculation. 

Therefore, CMS would not consider this 

regulation a change that would require 

the recalculation of existing budget 

neutrality agreements. 

218C. Comment: A few commenters 

stated that the current UPL policy 

discourages the expansion of Medicaid 

managed care. The commenters noted 

under current regulations, States may 

only count the services utilized by 

Medicaid individuals that are paid on a 

fee-for-service basis. Services provided 

to Medicaid individuals enrolled in 

managed care on a capitated contracting 

basis are not counted towards the 

calculation of the UPL. Therefore, as 

managed care enrollment increases, the 

UPL decreases and the opportunity to 

obtain supplemental payments for safety 

net providers is drastically reduced. The 

commenters argued that because of this 

flawed methodology, many types of 

providers and local governments oppose 

managed care expansions. The 

commenters expressed their belief that 

expanded Medicaid managed care can 

slow the growth of Medicaid costs, lead 

to more efficient service delivery and 

promote high quality integrated systems 

of care. One commenter stated this 

policy prevents States from moving 

from a costly, unmanaged system of care 

to a model that provides coordinated 

care for individuals. Another 

commenter cited a recent Lewin Group 

report that highlighted the difficulties 

States face and how the current UPL 

policy detracts from savings that could 

be achieved through more efficient and 

effective delivery systems. The 

commenters recommended that 

managed care days be included in the 

calculation of UPLs. The commenters 

opined that this will prevent large 

decreases in payments to safety net 

providers, while also resulting in 

significant savings to the Federal and 

State governments. They also indicated 

that this would be consistent with the 

treatment of managed care days in DSH, 

as the formula used to calculate the 

maximum allowable DSH payment to 

hospitals does not distinguish between 

fee-for-service and managed care days. 

218R. Response: We disagree with the 

commenters’ suggestions, since this 

regulation is actually designed to 

protect health care providers, including 

safety net providers. Under the 

provisions of the regulation, 

governmentally-operated health care 

providers are assured the opportunity to 

receive full cost reimbursement for 

serving Medicaid individuals. Nongovernmentally operated health care 

providers, including many of the 

‘‘public’’ safety net hospitals, are not 

affected by the cost limit provision of 

the regulation and therefore, may 

continue to receive Medicaid payments 

in excess of the cost of providing 

services to Medicaid individuals within 

existing Federal requirements. While we 

understand the circumstance raised by 

the commenters, as stated above, the 

provisions of this regulation would 

allow governmentally-operated health 

care providers to receive the full cost of 

providing services to Medicaid 

individuals and non-governmentallyoperated health care providers would 

still be able to receive Medicaid 

payments above cost that could help 

offset any managed care shortfalls 

perceived by providers. 

Governmentally-operated health care 

hospitals that realize a Medicaid 

managed care ‘‘shortfall’’ may continue 

to receive Medicaid DSH payments to 

satisfy such unreimbursed Medicaid 

costs. The ‘‘UPL’’ referenced by the 

commenters is a ceiling on Medicaid 

fee-for-service reimbursement systems 

and is calculated based on the Medicaid 

populations covered under such fee-forservice reimbursement system. The 

inclusion of managed care days in a feefor-service payment limit demonstration 

is inconsistent with the purpose of such 

a demonstration. 

The regulations governing payment 

under the fee for service program are 

separate from the authority located in 

§ 438 for rates paid under capitated 

arrangements. Federal regulation 

requires that rates established for 

services under capitation arrangements 

be considered as payment in full. 

Further, Medicaid capitation payments 

are rooted in actuarial principles and 

practices and are appropriate for the 

individuals covered, and the services to 

be furnished under the contract. All of 

these provisions taken together should 

ensure that every Medicaid provider is 

paid appropriately for the services they 

deliver and has the ability to ensure 

continued access to services delivered 

on either a fee-for-service or capitated 

basis. 

219C. Comment: A couple of 

commenters expressed concern 

regarding the proposed unit of 

government definition and its impact on 

local managed care organizations 

(MCOs). The commenters articulated 

that because many State and local 

governments were instrumental in the 

development, launch and operation of 

local MCOs, the local administrators of 

these plans are often considered public 

entities under State statute. The 

commenters are concerned that these 

MCOs will fall under the new unit of 

government definition which would 

create unequal treatment between 

commercial and public MCOs. The 

commenters argued that this may create 

incentives to qualify quasigovernmental MCOs as units of 

government in order to allow eligible 

IGTs or CPEs to flow from these entities, 

while commercial MCOs would be left 

to compete under inequitable rules of 

competition. The commenters requested 

that CMS strictly enforce the unit of 

government definition as they apply to 

MCOs and should clarify that States 

may not consider an MCO’s public 

status in procurement decisions and 

auto-assignment algorithms. 

219R. Response: The Federal 

Medicaid statute does not include a 

term or discussion that references a 

‘‘public’’ health care provider for 

purposes of State Medicaid financing. 

The Federal Medicaid statute at section 

1903(w) places severe statutory 

restriction on States’ receipt of funds 

from health care providers to fund 

Medicaid payments. This section of the 

statute includes an exception to the 

general prohibition on the receipt of 

voluntary contributions from health care 

providers by allowing units of 

government, including governmentallyoperated health care providers, to 

participate in the certified public 

expenditure process. The notion that 

quasi-governmental MCOs can ‘‘qualify’’

as a unit of government is misleading 

since any entity that can be determined 

to be a unit of government must meet 

the strict Federal statutory and 

regulatory criteria. 

If a managed care organization were 

determined to be governmental, we find 

it illogical that such an entity would 

utilize CPEs for the financing of its 

capitation payments. Such participation 

would not appear to create any benefit 

over private MCOs as suggested by the 

commenters. This seems to be counter 

intuitive to the very nature of managed 

care. First, a CPE would require 

reconciliation to actual costs of 


jlentini on PROD1PC65 with RULES3
29816 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

delivering health care services to 

Medicaid individuals and would 

remove any possibilities of profit. 

Second, it is not clear how an entity’s 

governmental status will create 

inequitable rules of competition 

considering the use of a CPE requires 

such governmental entity to expend 

funds to receive Federal matching funds 

and the MCO effectively would only 

receive the Federal share of the 

capitation payments. 

220C. Comment: One commenter 

stated that the proposed cost limit 

appeared to apply to payments made by 

Medicaid MCOs to public providers. 

The commenter stipulated that the 

application of a retrospective cost limit 

to managed care services will preclude 

providers from negotiating for and 

receiving capitation payments, and 

would contradict the principles of 

managed care. The commenter 

requested that CMS clarify that these 

payments are excluded from the 

proposed cost limit. 

A few commenters requested that 

CMS clarify the proposed rule’s 

applicability to MCOs. The commenters 

specifically inquired as to how the cost 

limit applies to government providers 

participating in an MCO network. Other 

commenters stated that the proposed 

rule be clarified to indicate that MCOs, 

including prepaid inpatient health 

plans, are not subject to the proposed 

rule’s cost limitation requirements with 

respect to both a State’s payment to a 

MCO and to a MCO’s payment to 

governmental providers. The 

commenters recommended that this be 

specifically articulated within the 

regulation text itself at §§ 447.206, 

447.272(b)(4) and 447.321(b)(4). 

One commenter stated that Pre-Paid 

Inpatient Health Plans (PIHPs) bear risk 

and must retain the ability to have risk 

reserves and carry forward funds for 

services and supports to Medicaid 

individuals that are specifically 

approved as part of reinvestment 

planning. Therefore, limiting these 

entities to actual cost will cause harm to 

the Medicaid individuals served. 

220R. Response: We partially agree 

with the commenters that additional 

clarity is necessary regarding the 

applicability of the Medicaid cost limit 

and have modified the regulation to 

include an exception in § 447.206(b) for 

MCOs, PIHPs and PAHPs. Ultimately, 

payments to MCOs, PIHPs and PAHPs 

are rooted in actuarial principles and 

practices and are appropriate for the 

individuals covered and the services 

furnished under the contract, under 

§ 438.6(c). An MCO, PIHP or PAHP’s 

Medicaid payments to a 

governmentally-operated health care 

provider would be subject to the 

Medicaid cost limit for that 

governmentally-operated health care 

provider. The Medicaid payment 

received by the governmentallyoperated health care provider from an 

MCO, PIHP or PAHP would be treated 

as a Medicaid revenue of the 

governmentally-operated health care 

provider and would have to be 

reconciled against the governmentallyoperated health care provider’s actual 

costs of delivering health care services 

to all Medicaid individuals. 

221C. Comment: A few commenters 

stated that if the proposed rule is not 

withdrawn States should be given 

ample time to make necessary changes. 

Further, CMS should clarify that the 

changes will be prospective and not 

retroactive. The commenters were most 

concerned about the timing as it relates 

to States operating CMS approved 

section 1115 waivers. The commenters 

noted that the terms and conditions of 

many of these waivers would have to be 

changed and, if applicable, the use of 

IGTs and/or CPEs and the overall 

amount of spending allowed under the 

waiver. Other commenters noted that 

changes to government physician rates 

would need to occur after cost report 

data has been established for such 

services, but actuaries would need time 

to reestablish payment ranges based on 

cost because these rates currently 

include a primary care case 

management capitation component. 

Finally, States would need time to 

amend 1115 demonstrations for certain 

payments provided to government 

operated providers that may be in 

excess of cost. 

221R. Response: The provisions 

within this regulation will not be 

applied retroactively. The regulation is 

effective 60 days after publication in the 

Federal Register. 

222C. Comment: A couple of 

commenters requested that CMS clarify 

whether it will allow other States to 

adopt similar waivers which may 

incorporate savings realized from the 

proposed rule’s cost limit into their own 

safety net care pools or coverage 

expansion initiatives. The commenters 

also requested that if CMS does not plan 

to allow other States to make sure of 

cost limit savings, what would be its 

legal basis for its decision. 

222R. Response: The opportunity for 

future demonstration programs is 

always available to States. Any such 

proposal must, in part, demonstrate 

permissible sources of the non-Federal 

share funding and compliance with all 

other Federal statutory and regulatory 

provisions governing Medicaid 

payments. Section 1115 demonstrations 

were only approved after each State 

documented an accountable and 

transparent financing and health care 

delivery system. Our legal basis for 

determining the allowability of any 

demonstration program is based in any 

such demonstration’s compliance with 

all applicable Federal statutory and 

regulatory provisions. 

223C. Comment: Numerous 

commenters requested that the proposed 

cost limit be revised to include, as an 

allowable cost, an actuarially sound 

provision for risk reserves when a unit 

of government has entered into a riskbased contract with an MCO or PIHP. 

The commenters stipulated that the 

proposed cost limit requirements would 

render all sub-capitation arrangements 

with counties financially unsustainable 

since there would be no mechanism for 

building a risk reserve and managing the 

mismatch of revenue and expense 

across fiscal years. The commenters 

noted that this would have particular 

impact for health plans operating in 

small rural areas. The commenters 

expressed their belief that the proposed 

rule restricts units of government from 

entering into Medicaid risk-based 

contracts and creating a disadvantage 

for local governments that would desire 

to provide services where the market is 

not likely to do so. 

223R. Response: We do not believe 

that the suggested changes are necessary 

since the cost limit provisions do not 

apply to MCOs, PIHPs or PAHPs. 

224C. Comment: Several commenters 

stated that CMS should allow States to 

make direct payments to governmental 

providers for unreimbursed costs of 

serving Medicaid managed care 

enrollees. Current Medicaid managed 

care regulations prohibit States from 

making direct payments to providers for 

services available under a contract with 

a managed care organization and 

Prepaid Inpatient Health Plan or a 

Prepaid Ambulatory Health Plan. There 

is an exception to this prohibition on 

direct provider payments for payments 

for graduate medical education, 

provided capitation rates have been 

adjusted accordingly. Since this 

proposed rule will result in extreme 

funding cuts, CMS should reconsider 

the scope of the exception to the direct 

payment provision. If reimbursement to 

governmental providers is going to be 

restricted to cost, it should include costs 

for all Medicaid individuals, not just 

those in the declining fee-for-service 

population. Other commenters stated 

that because these payments would now 

be based on costs, there would not be 

the danger of ‘‘excessive payments’’ that 

has concerned CMS in the past. The 

commenters specifically requested that 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29817 

CMS amend §§ 438.6(c)(5)(v) and 438.60 

to allow for direct payments to 

governmental providers for 

unreimbursed costs of Medicaid 

managed care patients. 

224R. Response: Under the 

regulations governing payments under 

risk contracts in § 438.6(c), States are 

expected to make actuarially sound 

payments to MCOs, PIPHs, and PAHPs 

that include amounts for all services 

covered under the contract. We do not 

believe there should be a need for 

payments directly from the States to 

providers who are delivering their 

services to Medicaid MCO enrollees. 

Sections 438.6(c)(5)(v) and 438.60 were 

designed to prevent duplicate and 

inappropriate supplemental payments 

for services for which the State had 

contracted with an MCO to provide. 

Under a managed care capitation 

payment systems, a State has in effect 

already paid for services that are 

included in an MCO’s contract, and 

does not have an obligation to pay for 

them a second time. 

225C. Comment: Several commenters 

requested that CMS clarify that the cost 

limit based on the ‘‘cost of providing 

covered Medicaid services to eligible 

Medicaid recipients’’ does not exclude 

costs for payments authorized under 

Section 1115 demonstration programs 

that expressly allow payment for 

individuals or services not covered 

under the State Medicaid plan. The 

commenters were concerned that 

proposed § 447.206(c)(1) specifies that 

‘‘all health care providers that are 

operated by units of government are 

limited to reimbursement not in excess 

of the individual provider’s cost of 

providing covered Medicaid services to 

eligible Medicaid recipients.’’ The 

commenters believed this would 

preclude any Medicaid reimbursement 

to governmental providers for costs of 

care for patients who are not eligible 

Medicaid individuals or for services that 

are not covered under the State 

Medicaid plan. 

The commenters questioned whether 

it is CMS’ intent to either (1) apply the 

cost limit only to fee-for-service 

payments by the state agency for 

services provided to Medicaid 

individuals while relying on separate 

statutory or waiver-based authority to 

impose cost limits or demonstration 

program expenditures, or (2) to apply 

the cost limit more broadly than the 

language of the proposed rule would 

suggest. The commenters stated that 

preamble guidance regarding the 

ongoing validity of expenditure 

authority granted through existing 

demonstration projects would help 

reduce confusion about the intended 

scope. CMS should also clarify that the 

limitation to cost of Medicaid services 

for Medicaid individuals is not intended 

to limit CMS approved payments under 

demonstration programs that expressly 

allow payment for individuals or 

services not covered under the State 

Medicaid plan. 

225R. Response: Costs and 

populations that are otherwise not 

considered eligible for Medicaid 

matching purposes can be determined 

allowable under a section 1115 

demonstration through the authority 

under section 1115(a)(2) of the Act 

which allows the Secretary to provide 

federal matching for costs not otherwise 

matchable under Medicaid. Such 

expenditures are eligible for Medicaid 

matching and would be recognized 

under the Medicaid cost limit 

provisions. 

3. Other Miscellaneous Comments 

226C. Comment: One commenter 

opined that the provisions of the 

regulation would be a barrier to the 

provision of federal Medicaid funding 

for Medicaid services delivered as part 

of an Individual Education Plan or 

Individualized Family Service Plan 

under IDEA. 

226R. Response: The Individuals with 

Disabilities Education Act (IDEA) is a 

law ensuring services to children with 

disabilities. IDEA governs how States 

and public agencies provide early 

intervention, special education and 

related services to eligible children with 

disabilities. Section 1903(c) of the Act 

permits Medicaid reimbursement for 

Medicaid covered services provided to 

Medicaid eligible children under IDEA. 

The regulation does not require States to 

dismantle any of the existing Medicaid 

reimbursement rate methodologies they 

are currently using to reimburse 

providers of IDEA services. 

The provision of the regulation that 

addresses a unit of government codifies 

the existing statutory definitions of a 

unit of government. This codification of 

existing Federal statute was established 

in an effort to assist States in identifying 

the universe of governmentally-operated 

health care providers that could receive 

Medicaid revenues up to the full cost of 

providing services to Medicaid 

individuals and clarifies which types of 

health care providers can participate in 

financing of the non-Federal share of 

Medicaid payments. 

227C. Comment: One commenter 

stated that the No Child Left Behind Act 

increased paperwork requirements for 

schools and that the provisions of the 

regulation would add to the extensive 

paperwork burden already in place. 

227R. Response: The paperwork 

requirements of the No Child Left 

Behind Act are outside of the purview 

of CMS and the Medicaid program. With 

respect to the burden of the provisions 

of this regulation, we have modified the 

regulation to include a transition period 

to allow States and governmentallyoperated non-institutional health care 

providers, such as schools, sufficient 

time to develop and implement 

Medicaid cost documentation and 

reporting processes. States will not be 

required to document and report cost 

information associated with noninstitutional services such as those 

provided in schools until the State’s 

Medicaid State plan rate year 2009. 

228C. Comment: Some commenters 

were severely disturbed that CMS is 

limiting the extent to which Medicaid 

funds can be used to pay for uninsured 

care. The commenters disagreed with 

CMS and stated that Congress has never 

precluded providers from using their 

Medicaid revenues to care for the 

uninsured. One commenter argued that 

Congress has expressly provided for this 

through the passage of laws, including 

the Medicaid disproportionate share 

program (DSH) and the Benefits 

Improvement Act of 2000 (BIPA). The 

commenter noted that section 701(d) of 

BIPA provided direct funds to a 

governmentally-operated hospital with a 

65 percent low income utilization rate 

that was not receiving DSH payments. 

Another commenter requested that 

CMS include specific language in the 

regulatory text at §§ 447.207 and 

447.272 to exempt payments authorized 

by sections 701(d) and 705 of BIPA. 

These payments allow the State to 

contribute to its entire safety net for 

needy individuals. 

228R. Response: The fact that 

Congress has specifically provided for 

funding to pay for uninsured care in 

certain specified circumstances 

supports the general rule that, absent 

such specific authorization, Medicaid 

payments should be limited to 

supporting covered services for eligible 

individuals. We agree that the 

regulation should reference the specific 

statutory exceptions, and we are 

revising the regulation accordingly. 

229C. Comment: A few commenters 

expressed concern that the new 

limitations on allowable services under 

the rehabilitation option would be 

harmful to persons with mental 

retardation and currently receiving 

health-related specialty services that 

allow them to participate meaningfully 

and in a more mainstreamed manner in 

the public education system. 

229R. Response: The commenters’

concerns are outside the scope of this 


jlentini on PROD1PC65 with RULES3
29818 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

regulation. The regulation does not 

contemplate limitations on services 

under the rehabilitation option. 

230C. Comment: A couple of 

commenters questioned how this 

proposed rule interacts and impacts Pay 

for Performance (P4P) models. The 

commenters indicated that States have 

been encouraged by CMS to consider 

innovative payment strategies to pay 

providers a higher rate for adhering to 

certain quality indicators to achieve 

better individual health outcomes. The 

commenters stated that a 

governmentally operated provider will 

not be incentivized to meet quality goals 

or performance standards if they will be 

reimbursed according to cost. 

Further, the commenters questioned 

how any State can move forward with 

reimbursement policies incorporating 

quality measures if they won’t apply to 

all providers of a service. 

230R. Response: We do not believe 

the provisions of this regulation will 

have any negative impact on Pay for 

Performance (P4P) models. This 

regulation does not preclude States from 

using innovative payment strategies to 

pay providers a higher rate for adhering 

to certain quality indicators to achieve 

better individual health outcomes. The 

method by which a State may choose to 

accomplish its quality-based purchasing 

program can vary greatly because of the 

variety of approaches available to a 

State to administer its Medicaid 

program. States maintain flexibility, 

within established Federal statute and 

regulations, to decide on medically 

necessary services that will be covered 

and rates that will be paid to providers. 

Under this regulation, 

governmentally-operated health care 

providers are assured the opportunity to 

receive full reimbursement for the cost 

of serving Medicaid individuals and 

except when a CPE is utilized as the 

non-Federal share of Medicaid 

payments, a cost reimbursement 

methodology within the Medicaid State 

plan is not required. States have the 

flexibility to pay the rate they choose as 

long as it does not result in Medicaid 

payments being greater than Medicaid 

costs in the governmentally-operated 

health care provider. Nongovernmentally-operated health care 

providers may continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. 

231C. Comment: A couple of 

commenters expressed their 

disappointment that CMS chose to issue 

this proposed rule so soon after passage 

and in the midst of implementation of 

the Deficit Reduction Act of 2005 

(DRA). The commenters stated that 

having to implement this rule on top of 

the burdens placed on States as a result 

of the DRA (that is, documenting 

citizenship and identity), imposes 

extreme financial burden. The 

commenters stipulated that such a cost 

shift to States will hamper efforts to 

expand access to care to all children 

qualifying for Medicaid and SCHIP and 

to reach those children not currently 

eligible. The commenters recommended 

that CMS allow States to implement the 

DRA changes before making such a 

drastic change to Medicaid financing 

policies and practices. 

231R. Response: We do not believe 

the burden associated with the 

provisions of the regulation will impede 

States’ ability to address any of the 

provisions within the DRA. Many of the 

provisions within this regulation codify 

existing Federal Medicaid law and do 

not represent policy change. Medicaid is 

a shared responsibility between Federal 

and State government. States are 

responsible for ensuring that their 

administration of their Medicaid 

program is in compliance with all 

Federal statutory and regulatory 

requirements. 

232C. Comment: One commenter 

noted that in response to the DRA, CMS 

outlined several new flexibilities 

available to States to help people served 

by Medicaid programs maintain access 

to affordable health care and allow 

States to use innovative approaches to 

providing health insurance and longterm care services. The commenter 

indicated that one such initiative is 

‘‘Roadmaps to Medicaid Reform’’. The 

commenter stated that the proposed rule 

would erode the intent of the DRA and 

CMS’’ on-going Medicaid reform efforts. 

The commenter strongly urged CMS to 

consider the effect this proposed rule 

will have on initiatives and the 

conflicting message sent to the States 

that have begun taking advantage of 

these reform measures. 

Another commenter stated that the 

proposed rule could derail their efforts 

to cover more uninsured through their 

State’s health care improvement act, 

which follows the President’s proposal 

of shifting Federal funding to help the 

uninsured buy private insurance and 

take ownership of their healthcare. 

232R. Response: We believe that 

nothing in this regulation prevents a 

State from implementing any 

flexibilities or innovations within their 

Medicaid programs. This regulation is 

merely designed to ensure the fiscal 

integrity of the Medicaid program. 

States maintain flexibility, within 

established Federal statute and 

regulations, to decide on medically 

necessary services that will be covered, 

populations that will be covered and 

rates that will be paid to health care 

providers. We will continue to work 

with States to determine the proper 

methods to implement such initiatives. 

There continue to be a variety of 

mechanisms States can use to achieve 

its specific goals for its Medicaid 

program including, but not limited to 

State plan changes, a Medicaid 1115 

demonstration project application or 

amendment, or through a section 

1915(b) or 1915(c) waiver. 

233C. Comment: Several commenters 

strongly opposed the President’s fiscal 

year 2008 budget proposal to eliminate 

Medicaid graduate medical education 

(GME) funding. The commenters first 

questioned whether the Administration 

could even implement such a proposal 

without explicit statutory direction and 

if so, they presume CMS would purse 

this change through the notice of 

proposed rulemaking process. Other 

commenters urged CMS not to move 

forward with any proposal that would 

implement the President’s budget 

proposal. 

233R. Response: Any changes related 

to Medicaid reimbursement for GME 

costs contained in the President’s fiscal 

year 2008 would be published in the 

Federal Register and afford interested 

parties the opportunity to provide 

comment. 

234C. Comment: One commenter 

requested that CMS instruct States that 

outpatient drugs provided by 

governmentally-operated health care 

providers are excluded from Medicaid 

rebates under section 1927(j)(2) of the 

Act. The commenter believes the 

proposed rule will exclude outpatient 

drug utilization by providers from the 

Medicaid rebate program because the 

government will get the full benefit of 

any price reductions these providers 

obtain. The commenter further 

stipulated that under current Medicaid 

rebate law, hospitals that bill Medicaid 

no more than the hospitals’ purchasing 

costs for covered outpatient drugs are 

not subject to the Medicaid rebate 

program. Because governmentally 

operated hospitals will receive no more 

than the purchasing costs for covered 

outpatient prescription drugs, they must 

be excluded from the Medicaid rebate 

program. The commenter reasoned that 

the Medicaid program will enjoy the 

benefit of whatever price reductions the 

hospitals negotiate with manufacturers. 

234R. Response: The treatment of 

outpatient drugs furnished by 

governmentally-operated health care 

providers for purposes of drug rebate is 

outside of the scope of this regulation. 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29819 

235C. Comment: One commenter 

suggested where fee-for-service 

payments to governmental providers 

constitutes a small percentage of a 

State’s total medical assistance (the 

commenter suggested less than 5 

percent) due to either widespread use of 

managed care or lack of governmental 

providers, the entire Medicaid program 

should be exempt from the proposed 

rule provisions. The commenter 

recommended including this exemption 

in the following proposed regulatory 

provisions §§ 433.51(b)(3), 447.206, 

447.272 and 447.321. 

235R. Response: The purpose of this 

regulation is to address a number of key 

Medicaid financing issues and 

strengthen accountability to ensure 

compliance with statutory requirements. 

A State with very few governmentallyoperated health care providers that 

otherwise finances its Medicaid 

program in a manner consistent with the 

Federal statute should realize minimal 

impact from the provisions of this 

regulation. 

236C. Comment: One commenter 

expressed their extreme dissatisfaction 

with their perceived disingenuous 

actions on the part of CMS. The 

commenter stipulated that they recently 

worked extensively with CMS to 

restructure their Medicaid financing and 

IGTs and were assured by CMS that as 

restructured they were in compliance 

with Federal law. However, the 

commenter pointed out, at the same 

time that CMS was assuring the 

commenter that it was in compliance 

with Federal law, CMS was developing 

proposed rules that, if applied as 

written, make CMS’ assurance false. The 

commenter stated that either CMS acted 

in good faith and it knows that its 

proposed rules do not accurately reflect 

Federal law or CMS acted in bad faith 

because it never intended to fulfill its 

promises when it restructured the 

commenters Medicaid financing. 

236R. Response: We disagree with 

this characterization. We have worked 

extensively with many States in a 

manner that ensures the financing of 

their Medicaid programs are consistent 

with Federal statutory and regulatory 

requirements. Since August 2003, we 

have been examining State Medicaid 

financing through the Medicaid 

reimbursement SPA review process. 

During that process, we have worked 

with several States to identify 

permissible sources of State Medicaid 

financing. Over the past few years, 

many States remained interested in 

utilizing IGTs (and CPEs) in an effort to 

help finance their Medicaid programs. 

During that cooperative review effort, 

CMS has consistently reminded States 

the Federal statutory instruction 

governing IGTs and CPEs. Also during 

the SPA review process, States informed 

CMS that they should be allowed to 

determine eligibility for participation in 

IGTs (or CPEs) and that, absent 

clarification in regulation, the States 

would deem the health care providers 

they believe to be eligible to IGT or CPE. 

CMS deferred to that approach and also 

accommodated States’ requests to create 

greater clarity though regulation to 

ensure compliance with Federal statute. 

With the issuance of this regulation, 

CMS has codified the existing statutory 

definitions of a unit of government. This 

codification of existing Federal statute 

was established in an effort to assist 

States in identifying the universe of 

governmentally-operated health care 

providers that could receive Medicaid 

revenues up to the full cost of providing 

services to Medicaid individuals and 

clarifies which types of health care 

providers can participate in financing of 

the non-Federal share of Medicaid 

payments. 

237C. Comment: One commenter took 

the opportunity to express their strong 

support for reauthorization of SCHIP 

and urged CMS to support funding 

levels that will allow States to maintain 

coverage for current enrollees, but also 

expand coverage to children who are 

eligible, but not yet enrolled. 

237R. Response: The reauthorization 

of SCHIP is outside the scope of this 

regulation. 

238C. Comment: One commenter 

recommended that CMS immediately 

consult with States on the proposed rule 

and modify or withdraw it based on 

State concerns. The commenter stated 

that section 5(c) of the Medicaid 

Voluntary Contribution and ProviderSpecific Tax Amendments of 1991 

requires the Secretary to ‘‘consult with 

States before issuing any regulations 

under this Act.’’ The commenter 

inquired as to whether CMS complied 

with this statutory mandate since there 

was no mention of consultation in the 

preamble to the proposed rule. The 

commenter was particularly concerned 

since the National Governors’

Association sent a letter to Congress 

strongly opposing the proposed rule. 

The commenter also requested 

information on whether the States’

concerns have been taken into 

consideration at all in the formulation of 

this proposed rule. 

238R. Response: As discussed above, 

we believe the conditions of section 5(c) 

of the Medicaid Voluntary Contribution 

and Provider-Specific Tax Amendments 

of 1991, Pub. L. 102–234, were fully 

satisfied by the process the Secretary 

undertook when the regulations 

implementing that Act were issued in 

1992 and 1993. Even if these conditions 

were read to extend in perpetuity, 

however, we believe they have been met 

with respect to these regulations by the 

longstanding dialogue with States over 

these issues, and the employment of 

notice and comment procedures. The 

National Governors’ Association letter is 

an example of receipt of State views in 

this consultation process. Consultation 

with States does not, however, obligate 

the federal government to agree with 

States or cede rulemaking authority to 

States. This preamble sets forth our 

consideration of State and other 

comments. 

239C. Comment: One commenter 

described their current problems 

involving county government practices 

related to reimbursement procedures 

under California Short/Doyle Medi-Cal 

program. While the issues raised were 

not directly related to the provisions of 

the proposed rule, the commenter felt it 

was important to point out that some 

counties within the State do not follow 

the reimbursement requirements within 

the existing approved Medicaid State 

plan. The commenter stated that if 

current practices continue, the proposed 

rule that providers are reimbursed on 

the approved Medicaid State plan will 

continue to be ignored. 

239R. Response: It is a State’s 

responsibility to ensure its Medicaid 

program is implemented in accordance 

with all Federal Medicaid statutory and 

regulatory provisions, including 

compliance with its approved Medicaid 

State plan. To the extent that any 

Medicaid payment is not consistent 

with the methodology in the approved 

Medicaid State plan, a State is at risk of 

penalty under the authority of section 

1903(a) of the Act and/or section 1904 

of the Act and § 430.35. 

240C. Comment: Several commenters 

wrote to express their general concerns 

about health care in America and the 

general impact the proposed rule may 

have on our society. Many of these 

commenters stated that the financial 

impact of the proposed rule would 

cause States, providers, and lowincome, elderly, and disabled people 

throughout the country to suffer, 

arguing that CMS should not implement 

any Medicaid rule that involves 

reductions in Federal Medicaid 

spending. The general impact of 

Medicaid cuts on children, in particular, 

was noted. Some of these commenters 

suggested that rather than proposing 

cuts in Medicaid spending, CMS should 

look for ways to increase Medicaid 

spending. A number of commenters 

identified health care for the uninsured, 

underinsured, and the indigent as a 


jlentini on PROD1PC65 with RULES3
29820 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

major issue in the United States today 

and advocated that everyone should 

have health coverage. Other commenters 

suggested that the Federal government 

should stop wasting taxpayer money in 

other areas (for example, Federal 

salaries and benefits, the war in Iraq, 

other grants to States, etc.) as a means 

of saving money that could be used to 

maintain current Medicaid spending. 

240R. Response: We agree with the 

commenters regarding the importance of 

the Medicaid program to the nation’s 

health care system and the vulnerable 

individuals that it serves. The 

provisions of the regulation did not 

propose the elimination of any funding 

for health care providers participating in 

the Medicaid program, or funding for 

health care services to vulnerable 

populations including children. We 

believe that overall this regulation can 

help strengthen the health care safety 

net by ensuring proper financing of the 

Medicaid program. 

The purpose of the regulation was to 

ensure proper State financing of their 

share of Medicaid program costs in 

accordance with Federal statutory and 

regulatory requirements. The regulation 

was actually designed to protect health 

care providers, including safety net 

providers. Under the provisions of the 

regulation, governmentally-operated 

health care providers are assured the 

opportunity to receive full cost 

reimbursement for serving Medicaid 

individuals. 

Non-governmentally-operated health 

care providers are not affected by the 

cost limit provision of the regulation 

and therefore may continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. Moreover, one provision 

of the regulation reaffirmed State 

Medicaid financing policy requiring that 

health care providers be allowed to fully 

retain their Medicaid payments, another 

provision which clearly demonstrates 

the Federal government’s intent to 

protect the nation’s safety net and its 

ability to continue delivering critical 

health care services to Medicaid 

individuals and the uninsured. In fact, 

with regard to participation in the State 

Medicaid financing, nongovernmentally-operated health care 

providers can realize greater net 

revenues if State or local government 

funding sources are utilized to fund 

non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentally 

operated ‘‘public’’ health care providers. 

241C. Comment: A number of 

commenters expressed concern that the 

proposed rule would have on the 

continuing viability of the range of 

services available to adults and children 

who have serious mental illness. One 

such commenter opined that 

individuals who are mentally ill are 

subjected to low quality health care 

because States do not pay enough to 

recruit employees who care about the 

well being of these individuals. 

241R. Response: The provisions of the 

regulation were not designed to reduce 

health care services to Medicaid 

individuals. Instead the Medicaid cost 

limit permits all governmentallyoperated health care providers the 

opportunity to receive Medicaid 

revenues up to the full cost of providing 

services to Medicaid individuals. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. 

Moreover, the regulation reaffirms 

State Medicaid financing policy 

requiring that health care providers be 

allowed to fully retain their Medicaid 

payments, another provision of which 

clearly demonstrates the Federal 

government’s intent to protect the 

nation’s public safety net and its ability 

to continue delivering critical health 

care services to Medicaid individuals 

and the uninsured. Any health care 

providers that become ineligible to 

participate in the State financing of 

Medicaid payments following the 

effective date of the provisions of this 

regulation can realize greater net 

revenues if State or local governments 

choose to utilize their funding sources 

to fund non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentallyoperated ‘‘public’’ health care providers. 

242C. Comment: A number of 

commenters wrote in to express 

displeasure with elected 

representatives. 

242R. Response: This regulation 

pertains to the financing and fiscal 

integrity of the Medicaid program. The 

comments are outside of the scope of 

the Medicaid program and this 

regulation. 

243C. Comment: A number of 

commenters expressed concerns about 

policy issues and other issues that are 

unrelated to the provisions of this 

regulation. These issues included 

immigration policy; inflation; 

homelessness; veteran’s benefits; 

taxation; personal circumstances; 

general standards of living; and the war 

in Iraq. 

243R. Response: This regulation 

pertains to the financing and fiscal 

integrity of the Medicaid program. The 

comments are outside of the scope of 

the Medicaid program and this 

regulation. 

244C. Comment: Some commenters 

singled out specific providers as being 

affected by the rule. One commenter 

opined that the only way that hospitals 

which treat the uninsured and 

underinsured can remain in business is 

from funding received through 

Disproportionate Share Hospital (DSH) 

payments and the Upper Payment Limit 

(UPL). If DSH and UPL programs are 

eliminated, the commenter asserts, 

many thousands of people will not 

receive needed care. Similarly, another 

commenter stated that many hospitals 

in a rural State have closed, and more 

will follow due to inadequate funding. 

A different commenter worried that 

nurses would be laid off, resulting in 

more trips to the emergency room by 

individuals who would otherwise be 

treated by nurses at home. 

244R. Response: The provisions of the 

regulation did not propose the 

elimination of any funding for health 

care providers participating in the 

Medicaid program, including DSH 

funding. Rather the purpose of the 

regulation is to ensure proper State 

financing of their share of Medicaid 

program costs in accordance with 

Federal statutory and regulatory 

requirements. The regulation was 

actually designed to protect health care 

providers, including safety net 

providers. 

Under the provisions of the 

regulation, governmentally-operated 

health care providers are assured the 

opportunity to receive full cost 

reimbursement for serving Medicaid 

individuals. Non-governmentallyoperated health care providers are not 

affected by the cost limit provision of 

the regulation and therefore may 

continue to receive Medicaid payments 

in excess of the cost of providing 

services to Medicaid individuals within 

existing Federal requirements. 

Moreover, one provision of the 

regulation reaffirms State Medicaid 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments, another 

provision which clearly demonstrates 

the Federal government’s intent to 

protect the nation’s safety net and its 

ability to continue delivering critical 

health care services to Medicaid 

individuals and the uninsured. In fact, 

with regard to participation in the State 

Medicaid financing, nonVerDate Aug<31>2005 19:16 May 25, 2007 Jkt 211001 PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 E:\FR\FM\29MYR3.SGM 29MYR3

jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29821 

governmentally-operated health care 

providers can realize greater net 

revenues if State or local government 

funding sources are utilized to fund 

non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentally 

operated ‘‘public’’ health care providers. 

245C. Comment: Many commenters 

strongly urged CMS to withdraw the 

proposed rule in its entirety. Most of 

these commenters believe that CMS 

should meet with impacted stakeholders 

to develop more meaningful and 

manageable rules and policy 

alternatives that would strengthen the 

nation’s health safety net. Other 

commenters stated that if CMS does not 

withdraw the proposed rules, States’

health care safety nets will unravel and 

health care services to the nation’s most 

vulnerable individuals will be 

jeopardized. 

245R. Response: The regulation was 

issued in the Federal Register on 

January 18, 2007 as a notice of proposed 

rulemaking. A 60-day public comment 

period was provided and all comments 

received by CMS have been taken into 

consideration. 

The provisions of the regulation did 

not propose the elimination of any 

funding for health care providers 

participating in the Medicaid program, 

including DSH funding. Rather the 

purpose of the regulation is to ensure 

proper State financing of their share of 

Medicaid program costs in accordance 

with Federal statutory and regulatory 

requirements. The regulation was 

actually designed to protect health care 

providers, including safety net 

providers. 

Under the provisions of the 

regulation, governmentally-operated 

health care providers are assured the 

opportunity to receive full cost 

reimbursement for serving Medicaid 

individuals. Non-governmentallyoperated health care providers are not 

affected by the cost limit provision of 

the regulation and therefore may 

continue to receive Medicaid payments 

in excess of the cost of providing 

services to Medicaid individuals within 

existing Federal requirements. 

Moreover, one provision of the 

regulation reaffirms State Medicaid 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments, another 

provision which clearly demonstrates 

the Federal government’s intent to 

protect the nation’s safety net and its 

ability to continue delivering critical 

health care services to Medicaid 

individuals and the uninsured. In fact, 

with regard to participation in the State 

Medicaid financing, nongovernmentally-operated health care 

providers can realize greater net 

revenues if State or local government 

funding sources are utilized to fund 

non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentally 

operated ‘‘public’’ health care providers. 

246C. Comment: Several commenters 

recommended that CMS meet with 

various stakeholders to discuss 

challenges to the proposed rule from 

both State and Federal funding 

perspectives, and draft a new regulation 

that phases in some of the policy 

proposals. 

246R. Response: The regulation was 

issued in the Federal Register on 

January 18, 2007 as a notice of proposed 

rulemaking. A 60-day public comment 

period was provided and all comments 

received by CMS have been taken into 

consideration. Further, many provisions 

of this regulation are mere codifications 

of Federal Medicaid statutory provisions 

that CMS has been applying under the 

examination State Medicaid financing 

through the Medicaid reimbursement 

SPA review process. During that 

process, CMS has worked with several 

States to identify permissible sources of 

State Medicaid financing. CMS has 

consistently reminded States of the 

Federal statutory instruction governing 

State financing of the Medicaid 

program. 

247C. Comment: A couple of 

commenters expressed concern that the 

proposed rule will have a very serious 

affect on the ability of rural safety net 

providers to serve Medicaid individuals 

and the uninsured while also providing 

many essential, community-wide 

services. Another commenter stated that 

rural counties appear to be 

disproportionately disadvantaged by the 

proposed rule, since there are few if any 

alternative providers not subject to the 

proposed cost limit which could 

substitute services previously operated 

by rural county-operated clinics and the 

proposed limitations on funding for 

Medicaid transportation could be 

disproportionately disadvantageous by 

isolating seriously mentally disable 

clients living in rural communities. 

Another commenter stated that their 

rural hospital is already reimbursed 

significantly less than the cost to 

provide health care services and that 

any additional cuts will be detrimental 

to their ability to remain open. One 

commenter stated that CMS should be 

able to work with the remaining States 

to reform their systems without the 

proposed rule which could have large 

negative effects on rural government 

providers. Multiple commenters 

suggested that the cost limit provision of 

the proposed rule would 

disproportionately disadvantage rural 

providers because many providers in 

rural communities are governmentally 

operated, lack medical infrastructure 

routinely available elsewhere, serve as 

the only provider in the area, and 

provide care to a large Medicaid 

population. 

Some commenters expressed concern 

regarding the impact the substantial cuts 

the proposed rule will cause on other 

types of health care providers, including 

emergency physicians, nurses and 

physical therapists. With respect to 

physicians, a commenter stated that as 

physician practice costs grow, fewer and 

fewer physicians will be willing to 

participate in Medicaid, resulting in 

more and more individuals utilizing 

emergency room departments and 

further straining the health care safety 

net. 

Other commenters expressed that the 

nation’s health safety net is fragile and 

warned against the cuts in Medicaid 

spending that would occur under the 

proposed rule, saying that harm to the 

safety net will ultimately harm the most 

vulnerable people in our communities. 

247R. Response: The provisions of the 

regulation were not designed to reduce 

health care services to Medicaid 

individuals. Instead the Medicaid cost 

limit permits all governmentallyoperated health care providers the 

opportunity to receive Medicaid 

revenues up to the full cost of providing 

services to Medicaid individuals. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net health care 

providers, are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. 

Moreover, the regulation reaffirms 

State Medicaid financing policy 

requiring that health care providers be 

allowed to fully retain their Medicaid 

payments, another provision of which 

clearly demonstrates the Federal 

government’s intent to protect the 

nation’s public safety net and its ability 

to continue delivering critical health 

care services to Medicaid individuals 

and the uninsured. Any health care 

providers that become ineligible to 

participate in the State financing of 

Medicaid payments following the 

effective date of the provisions of this 

regulation can realize greater net 

revenues if State or local governments 

choose to utilize their funding sources 

to fund non-Federal share obligations to 

Medicaid payments historically 


jlentini on PROD1PC65 with RULES3
29822 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

financed by non-governmentallyoperated ‘‘public’’ health care providers. 

248C. Comment: Several commenters 

urged CMS to reconsider the proposed 

rules as they will negatively impact 

delivery of health care services to 

children and children’s hospitals. The 

commenters stated that because 

children make up the majority of the 

Medicaid population, this proposed rule 

will have a disproportionate impact on 

them. Some of the commenters also 

mentioned that on average children’s 

hospitals devote more than 50 percent 

of their care to children on Medicaid 

and virtually all care for children with 

complex health care conditions and 

therefore they are reliant upon Medicaid 

(one commenter noted that over 80 

percent of their revenues come from 

Medicaid); such changes to the 

financing of the program will threaten 

their financial viability. Another 

commenter stated that medically 

disenfranchised children who receive 

care in community health centers, and 

at local, regional and State hospitals 

will face further impediments to access 

by implementation of this proposed 

rule. 

248R. Response: We do not believe 

the regulation will compromise the 

ability of health care providers 

participating in the Medicaid program 

from delivering critical health care 

services to children. Under the 

provisions of the regulation, 

governmentally-operated health care 

providers are assured opportunity to 

receive full cost reimbursement for 

serving Medicaid individuals. 

Non-governmentally-operated health 

care providers, including many of the 

‘‘public’’ safety net hospitals, are not 

affected by the cost limit provision of 

the regulation and therefore, may 

continue to receive Medicaid payments 

in excess of the cost of providing 

services to Medicaid individuals within 

existing Federal requirements. 

Moreover, one provision of the 

regulation reaffirms State Medicaid 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments, another 

provision of which clearly demonstrates 

the Federal government’s intent to 

protect the nation’s public safety net 

and its ability to continue delivering 

critical health care services to Medicaid 

individuals and the uninsured. 

249C. Comment: A few commenters 

stated that overall CMS has usurped 

Congress’ role with respect to Medicaid 

funding policy. The commenters noted 

that in the past, when there has been 

substantial change to Medicaid funding 

policy (that is, prohibiting providerrelated taxes and donations, modifying 

DSH allotments, or modifying 

application of UPLs), Congress has 

made or at least supported the changes. 

The commenters indicated that if such 

sweeping changes are to be made to 

Medicaid, they should be made first 

through legislation. Another commenter 

stated that CMS’’ response to concerns 

about lost funding for uninsured health 

care needs is that it is Congress’ job to 

determine whether such Federal 

support is needed for Medicaid and 

uninsured individuals. The commenter 

pointed out that Congress has expressed 

no concern with the development of 

supplemental Medicaid payment 

systems in which States have used the 

Medicaid program as the primary source 

of Federal support for safety net health 

care. Therefore, if Congress is in fact the 

only entity, according to CMS, that can 

authorize replacement funding for the 

uninsured, then it should also be the 

entity that considers the types of 

sweeping payment and financing 

changes proposed by CMS. In general, 

many other commenters stated that CMS 

exceeded its statutory authority with all 

of the provisions within the proposed 

rule. 

249R. Response: This regulation 

interprets and implements statutory 

provisions enacted by Congress. These 

provisions detail specifically the 

authority to pay a federal share of the 

cost of covered services furnished to 

eligible individuals. Congress has not, to 

date, provided general authority for 

Medicaid payment to cover the costs of 

uncompensated care furnished to the 

uninsured. Nor has Congress expressly 

authorized general subsidies for public 

or safety net providers. Instead, 

Congress has provided some very 

specific and limited authority, such as 

disproportionate share hospital 

payments, that can be used to cover 

such costs. The commenters have 

pointed to no statutory authority to 

support the general payment of 

Medicaid funds for non-statutorily 

authorized purposes. Nor have the 

commenters explained how it exceeds 

CMS’’ statutory authority to issue a 

regulation that ensures that Federal 

Medicaid funding is used for actual 

costs of covered Medicaid services 

furnished to eligible individuals. 

250C. Comment: Several commenters 

questioned if according to CMS data 

there are only three remaining States 

with questionable Medicaid financing 

arrangements, why is the proposed rule 

even necessary. The commenters noted 

that clearly the steps taken to date by 

Congress and CMS have addressed the 

concerns raised by CMS about State 

Medicaid financing mechanisms. 

Further the commenters stated that CMS 

has not explained how the proposed 

rules will further its stated goals. A few 

commenters supported CMS’’ efforts to 

address State financing abuses, but 

believe that this only demonstrates that 

CMS already has the legal tools and 

sufficient safeguards under its existing 

review system and SPA approval 

process to address these problems and 

protect the integrity and accountability 

of the Medicaid program without 

disturbing the delicate balance between 

Federal, State, local governments and 

public health care providers. The 

commenters urged CMS to continue its 

work on a State by State basis. Other 

commenters stated that the proposed 

rule destroys effective, efficient, and 

innovative programs previously 

approved by CMS. Likewise, another 

commenter stated that the provisions of 

the proposed rule would diminish longstanding, legitimate State funding 

mechanisms that CMS has previously 

approved. A couple of other 

commenters detailed that CMS and the 

Office of the Inspector General have 

aptly demonstrated instances of 

recycling of Federal funds and of IGTs 

by entities without public status or 

funds and the commenters agreed that 

these abuses should be remedied. 

However, the commenters do not 

believe that the proposed rule addresses 

these abuses and CMS should ensure 

fair and equitable Medicaid 

reimbursement to all providers 

regardless of their operating status. 

250R. Response: Although CMS has 

achieved considerable success in its 

ongoing compliance monitoring 

programs on a State-by-State basis, 

States and providers have repeatedly 

requested formal clarification of the 

rules. State-by-State reviews and 

monitoring are costly and intrusive. 

This regulation ensures that States will 

fully understand applicable rules, and 

will know that the same rules apply 

nationwide. By setting out clear tests 

that States can apply and monitor, this 

regulation will permit States to evaluate 

potential financing and payment 

methodologies in advance. Moreover, 

this regulation will give CMS new 

enforcement and monitoring tools to 

ensure compliance. 

251C. Comment: A number of 

commenters were concerned about the 

workload that will be required to 

comply with the requirement to update 

waivers and State plans. 

251R. Response: The Medicaid cost 

limit provision does not require States 

to necessarily modify existing Medicaid 

reimbursement systems utilized to make 

Medicaid payments to governmentallyoperated health care providers. Under 

the Medicaid cost limit States may 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29823 

continue to use existing Medicaid 

reimbursement rate methodologies, but 

will need to compare such rates to the 

actual cost providing services to 

Medicaid individuals. Changes to 

existing Medicaid reimbursement 

systems deemed necessary by a State are 

subject to applicable Federal statutory 

and regulatory requirements. 

252C. Comment: A couple of 

commenters expressed their support for 

some of the policy objectives associated 

with this rule. Commenters specifically 

supported CMS efforts to clarify the 

regulations governing the financing of 

the non-Federal share of Medicaid 

payments; eliminate abusive financing 

practices involving ‘‘recycling’’ of 

Federal funds; strengthen financial 

accountability; or limit Federal 

reimbursement to the reasonable costs 

of governmental providers for delivering 

Medicaid services. 

252R. Response: We appreciate the 

support of CMS’’ efforts to ensure the 

fiscal integrity of the Medicaid program. 

253C. Comment: Several commenters 

wrote about the impact the proposed 

rule could potentially have on teaching 

hospitals specifically. The commenters 

noted that teaching hospitals fill unique 

roles that extend beyond the normative 

patient care services rendered in other 

hospitals. For example, teaching 

hospitals may house level 1 trauma 

centers, burn centers, cancer centers, 

and neonatal intensive care units, or 

they may offer organ transplants, 

specialized orthopedic services, or high 

risk obstetrical services. Teaching 

hospitals are training sites for all types 

of health professional trainees and have 

a leading role in medical research, 

which leads to their care for the nation’s 

sickest and most complex patients. 

Teaching hospitals have the newest 

and most advanced treatments and 

technologies, and today they are also 

viewed as front-line responders in the 

event of a biological, chemical, or 

nuclear attack or a natural disaster. In 

many States, teaching hospitals are the 

only providers of specialized medical 

services for individuals with serious 

health conditions. Teaching hospitals 

also tend to be among the largest 

Medicaid providers in their States; in 

fact, one commenter observed that 

teaching hospitals represent only 6 

percent of all hospitals nationally, but 

about 25 percent of Medicaid discharges 

are from teaching hospitals. Significant 

financial investments are necessary for 

teaching hospitals to continue to fill 

their critical safety net role in our health 

care system. The commenters noted that 

Medicaid is a significant source of 

revenue for teaching hospitals, 

commenting that cuts in Medicaid 

spending and the provisions of the 

proposed rule could upset the delicate 

balance of resources that teaching 

hospitals rely upon to maintain their 

operations. These commenters 

suggested that the proposed rule may 

jeopardize the financial state of teaching 

hospitals, resulting in potential losses of 

critical services and reduced access to 

specialty care. 

Another commenter argued that 

teaching hospitals should not be subject 

to the proposed cost limit by noting that 

in prior court filings, CMS has explicitly 

recognized the value of allowing 

flexibility for States to direct higher 

payments to certain hospitals having 

special needs. The commenter also 

stated that private hospitals and other 

hospitals should have the same upper 

payment limit (UPL) and that a distinct 

UPL for governmental providers would 

be unequal and unwarranted. 

253R. Response: We agree that 

teaching hospitals are very important to 

our nation’s ability to deliver health 

care to all populations, including those 

with the most critical needs. The 

regulation reaffirms State Medicaid 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments, which clearly 

demonstrates the Federal government’s 

intent to protect the nation’s public 

safety net and its ability to continue 

delivering critical health care services to 

Medicaid individuals and the 

uninsured. The provisions of the 

regulation were not designed to reduce 

health care services to Medicaid 

individuals. Instead the Medicaid cost 

limit permits all governmentallyoperated health care providers the 

opportunity to receive Medicaid 

revenues up to the full cost of providing 

services to Medicaid individuals. 

Consistent with the Medicaid cost limit 

on all governmentally-operated health 

care providers, the applicable upper 

payment limit is Medicaid cost. We do 

not find it appropriate that units of State 

or local government would ‘‘profit’’

from Federal taxpayer dollars that are 

intended to match a percentage of the 

cost of providing services to Medicaid 

individuals. 

The DSH program is available to 

States to provide payments for 

uncompensated care costs associated 

with inpatient and outpatient hospital 

services provided to individuals with no 

source of third party coverage (that is, 

uninsured). 

254C. Comment: One commenter 

argued that Section 705(a) of the 

Medicare, Medicaid, and SCHIP 

Benefits Improvement and Protection 

Act of 2000 (BIPA) directed CMS to 

apply an ‘‘aggregate upper payment 

limit to payments made to government 

facilities that are not state-owned or 

operated facilities.’’ The commenter 

cited this provision in an effort to 

demonstrate that the proposed cost limit 

contradicts this mandate from Congress 

and asked that this provision be 

rescinded. 

254R. Response: Section 705(a) of 

BIPA set forth conditions for a specific 

final regulation. Those conditions were 

met. Section 705(a) did not preclude the 

Secretary from engaging in further 

rulemaking on the same subject, or 

otherwise amend the Social Security 

Act to require a particular method to 

implement the requirement at section 

1902(a)(30(A) of the Social Security Act 

to assure payment rates that were 

consistent with efficiency, economy and 

quality of care. 

255C. Comment: Several commenters 

were particularly concerned about the 

impact the proposed cost limit would 

have on State teaching hospitals. The 

commenters stated that these facilities 

typically serve the largest number of 

Medicaid individuals and provide vital 

services to the community. Limiting 

Medicaid payment will eliminate 

funding for trauma centers and the 

training of physicians. Another 

commenter stated the proposed cost 

limit would foreclose additional 

opportunities to use UPL supplemental 

payments to improve reimbursement 

rates for physicians affiliated with State 

medical schools. 

255R. Response: We agree that 

teaching hospitals are very important to 

our nation’s ability to deliver health 

care to all populations, including those 

with the most critical needs. The 

regulation reaffirms State Medicaid 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments, which clearly 

demonstrates the Federal government’s 

intent to protect the nation’s public 

safety net and its ability to continue 

delivering critical health care services to 

Medicaid individuals and the 

uninsured. The provisions of the 

regulation were not designed to reduce 

health care services to Medicaid 

individuals. Instead the Medicaid cost 

limit permits all governmentallyoperated health care providers the 

opportunity to receive Medicaid 

revenues up to the full cost of providing 

services to Medicaid individuals. 

Consistent with the Medicaid cost limit 

on all governmentally-operated health 

care providers, the applicable upper 

payment limit is Medicaid cost. We do 

not find it appropriate that units of State 

or local government would ‘‘profit’’

from Federal taxpayer dollars that are 

intended to match a percentage of the 


jlentini on PROD1PC65 with RULES3
29824 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

cost of providing services to Medicaid 

individuals. 

The DSH program is available to 

States to provide payments for 

uncompensated care costs associated 

with inpatient and outpatient hospital 

services provided to individuals with no 

source of third party coverage (that is, 

uninsured). 

256C. Comment: Many commenters 

argued that the proposed rule ultimately 

represents a cost shift from the Federal 

government to the States. Multiple 

commenters noted that financing 

arrangements and reimbursement 

methodologies which the States have 

been using for years would now become 

impermissible under the proposed rule, 

resulting in a necessary increase of State 

funds to cover Medicaid program costs. 

Some commenters opined that States are 

not equipped to single-handedly 

shoulder the burden of uncompensated 

health care costs associated with the 

rising levels of uninsured in this 

country. Concern was expressed that 

States and local governments would be 

unable to fill the gap created by the loss 

of Federal funds from this rule, which 

would stress health care delivery 

systems across America and result in 

greater numbers of uninsured and 

reduced access to care. Therefore, these 

commenters urged CMS to withdraw the 

proposed rule. 

Many other commenters expressed a 

belief that despite assertions by CMS, 

the proposed regulation is actually 

nothing more than an effort to cut 

Federal Medicaid spending. 

256R. Response: The Federal 

government remains committed to 

funding its share of the cost of providing 

Medicaid services to eligible 

individuals. Further, we understand 

that governmentally-operated health 

care providers have numerous goals and 

objectives that extend beyond the 

Medicaid program. Under the Medicaid 

cost limit of the regulation, Medicaid 

will continue to be permitted to pay for 

its share of costs associated with a 

provider’s services that benefit 

Medicaid individuals in accordance 

with applicable statutory and regulatory 

requirements. However, when Medicaid 

is viewed as a primary source of 

revenue for a government’s nonMedicaid activities, no matter how 

noble such activities may be, the 

statutory purpose of the Medicaid 

program has been undermined. 

Medicaid is a shared responsibility 

between Federal and State government. 

State governments may share their fiscal 

obligation to the Medicaid program with 

local governments according to the 

instruction of Congress. However, States 

are responsible for ensuring that their 

administration of their Medicaid 

program is in compliance with all 

Federal statutory and regulatory 

requirements. We do not find it 

appropriate that units of State or local 

government would ‘‘profit’’ from 

Federal taxpayer dollars that are 

intended to match a percentage of the 

cost of providing services to Medicaid 

individuals. 

The provisions of the regulation were 

not designed to reduce health care 

services to Medicaid individuals. 

Instead the Medicaid cost limit permits 

all governmentally-operated health care 

providers the opportunity to receive 

Medicaid revenues up to the full cost of 

providing services to Medicaid 

individuals. Non-governmentallyoperated health care providers, 

including many of the ‘‘public’’ health 

care providers, are not affected by the 

Medicaid cost limit provision and may 

therefore continue to receive Medicaid 

payments in excess of the cost of 

providing services to Medicaid 

individuals within existing Federal 

requirements. 

Moreover, the regulation reaffirms 

State Medicaid financing policy 

requiring that health care providers be 

allowed to fully retain their Medicaid 

payments, another provision of which 

clearly demonstrates the Federal 

government’s intent to protect the 

nation’s public safety net and its ability 

to continue delivering critical health 

care services to Medicaid individuals 

and the uninsured. Any health care 

providers that become ineligible to 

participate in the State financing of 

Medicaid payments following the 

effective date of this regulation can 

realize greater net revenues if State or 

local government funding sources are 

utilized to fund non-Federal share 

obligations to Medicaid payments 

historically financed by nongovernmentally-operated ‘‘public’’

health care providers. 

257C. Comment: Many commenters 

wrote about the impact that the 

proposed rule would have on specific 

States, communities, or providers 

throughout the country. Although it is 

not possible to cite every specific 

situation that was cited, a few examples 

are provided here. One commenter, a 

large city government, noted the high 

levels of Medicaid individuals within 

its jurisdiction but the 

disproportionately low level of dollars 

received for Medicaid services, arguing 

that the proposed rule will severely 

restrict the level and quality of care 

provided to city residents. A commenter 

estimated that within its State, 80 DSH 

hospitals, 65 UPL hospitals, 78 nursing 

homes, 12 ICF/MR facilities, 159 public 

health departments, and 27 community 

mental health centers would be 

impacted by the rule, concluding that 

the statewide health care safety net ‘‘is 

anticipated to collapse’’ due to the rule. 

A State medical association asserted 

that public hospitals in the State’s 

largest communities would lose $338 

million in Federal Medicaid funds as a 

result of this rule. Another commenter 

stated that the proposed rule would cut 

off existing Federal funding streams to 

its State, forcing hospitals to either raise 

their charges to insured individuals or 

reduce costs by eliminating costly but 

under-reimbursed services, neither of 

which was desirable. The commenter 

went on to say that the ultimate 

economic impact of the rule on the 

State, including the loss of Federal 

Medicaid funding and the associated 

loss of jobs and other economic impacts, 

has been estimated at over $600 million 

statewide. An additional commenter 

conveyed statistics about the services 

safety net providers offer and the 

populations they serve within the State, 

urging CMS to do nothing that could 

lower reimbursements to such 

providers. The comments cited are 

representative generally of the opinions 

expressed about the impact the 

proposed rule would have on specific 

States, localities, and providers. For the 

most part, commenters who wrote about 

such specific impacts opposed the rule 

and asked CMS to withdraw it. 

257R. Response: The Federal 

government remains committed to 

funding its share of the cost of providing 

Medicaid services to eligible 

individuals. Further, we understand 

that governmentally-operated health 

care providers have numerous goals and 

objectives that extend beyond the 

Medicaid program. Under the Medicaid 

cost limit of the regulation, Medicaid 

will continue to be permitted to pay for 

its share of costs associated with a 

provider’s services that benefit 

Medicaid individuals in accordance 

with applicable statutory and regulatory 

requirements. However, when Medicaid 

is viewed as a primary source of 

revenue for a government’s nonMedicaid activities, no matter how 

noble such activities may be, the 

statutory purpose of the Medicaid 

program has been undermined. 

Medicaid is a shared responsibility 

between Federal and State government. 

State governments may share their fiscal 

obligation to the Medicaid program with 

local governments according to the 

instruction of Congress. However, States 

are responsible for ensuring that their 

administration of their Medicaid 

program is in compliance with all 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29825 

Federal statutory and regulatory 

requirements. We do not find it 

appropriate that units of State or local 

government would ‘‘profit’’ from 

Federal taxpayer dollars that are 

intended to match a percentage of the 

cost of providing services to Medicaid 

individuals. 

The provisions of the regulation were 

not designed to reduce health care 

services to Medicaid individuals. 

Instead the Medicaid cost limit permits 

all governmentally-operated health care 

providers the opportunity to receive 

Medicaid revenues up to the full cost of 

providing services to Medicaid 

individuals. Non-governmentallyoperated health care providers, 

including many of the ‘‘public’’ health 

care providers, are not affected by the 

Medicaid cost limit provision and may 

therefore continue to receive Medicaid 

payments in excess of the cost of 

providing services to Medicaid 

individuals within existing Federal 

requirements. 

Moreover, the regulation reaffirms 

State Medicaid financing policy 

requiring that health care providers be 

allowed to fully retain their Medicaid 

payments, another provision of which 

clearly demonstrates the Federal 

government’s intent to protect the 

nation’s public safety net and its ability 

to continue delivering critical health 

care services to Medicaid individuals 

and the uninsured. Any health care 

providers that become ineligible to 

participate in the State financing of 

Medicaid payments following the 

effective date of this regulation can 

realize greater net revenues if State or 

local government funding sources are 

utilized to fund non-Federal share 

obligations to Medicaid payments 

historically financed by nongovernmentally-operated ‘‘public’’

health care providers. 

258C. Comment: A number of 

commenters recognized that some 

States, local governments, or providers 

have been involved in abusive Medicaid 

financing practices but asserted that the 

proposed rule, in its effort to address 

such abuses, actually penalizes those 

who did not engage in inappropriate 

financing practices. These commenters 

argued that it is unfair that States, local 

governments, or providers who have 

done nothing wrong are now paying for 

the misdeeds of others. Numerous other 

commenters argued that the proposed 

cost limit is overreaching and CMS is 

improperly imposing this restrictive 

limit in States that either removed or 

never relied on inappropriate financing 

arrangements. They believe the new cost 

limit would impose a deep cut to rectify 

a non-existent problem in most 

instances. 

258R. Response: The Federal 

government remains committed to 

funding its share of the cost of providing 

Medicaid services to eligible 

individuals. Further, we understand 

that governmentally-operated health 

care providers have numerous goals and 

objectives that extend beyond the 

Medicaid program. Under the Medicaid 

cost limit of the regulation, Medicaid 

will continue to be permitted to pay for 

its share of costs associated with a 

provider’s services that benefit 

Medicaid individuals in accordance 

with applicable statutory and regulatory 

requirements. However, when Medicaid 

is viewed as a primary source of 

revenue for a government’s nonMedicaid activities, no matter how 

noble such activities may be, the 

statutory purpose of the Medicaid 

program has been undermined. 

Medicaid is a shared responsibility 

between Federal and State government. 

State governments may share their fiscal 

obligation to the Medicaid program with 

local governments according to the 

instruction of Congress. However, States 

are responsible for ensuring that their 

administration of their Medicaid 

program is in compliance with all 

Federal statutory and regulatory 

requirements. We do not find it 

appropriate that units of State or local 

government would ‘‘profit’’ from 

Federal taxpayer dollars that are 

intended to match a percentage of the 

cost of providing services to Medicaid 

individuals. 

The provisions of the regulation were 

not designed to reduce health care 

services to Medicaid individuals. 

Instead the Medicaid cost limit permits 

all governmentally-operated health care 

providers the opportunity to receive 

Medicaid revenues up to the full cost of 

providing services to Medicaid 

individuals. Non-governmentallyoperated health care providers, 

including many of the ‘‘public’’ health 

care providers, are not affected by the 

Medicaid cost limit provision and may 

therefore continue to receive Medicaid 

payments in excess of the cost of 

providing services to Medicaid 

individuals within existing Federal 

requirements. 

Moreover, the regulation reaffirms 

State Medicaid financing policy 

requiring that health care providers be 

allowed to fully retain their Medicaid 

payments, another provision of which 

clearly demonstrates the Federal 

government’s intent to protect the 

nation’s public safety net and its ability 

to continue delivering critical health 

care services to Medicaid individuals 

and the uninsured. Any health care 

providers that become ineligible to 

participate in the State financing of 

Medicaid payments following the 

effective date of this regulation can 

realize greater net revenues if State or 

local government funding sources are 

utilized to fund non-Federal share 

obligations to Medicaid payments 

historically financed by nongovernmentally-operated ‘‘public’’

health care providers. 

259C. Comment: One commenter 

questioned why cost reporting is 

necessary for publicly-operated health 

care providers who do not participate in 

the non-federal share of Medicaid 

payments and who retain all of their 

Medicaid payments. 

259R. Response: The Federal 

Medicaid statute does not include a 

term nor discussion that references a 

‘‘public’’ health care provider for 

purposes of State Medicaid financing. 

We do not believe the cost limit will 

impose significant administrative 

burden on States particularly since such 

limit applies only to governmentallyoperated health care providers. 

For purposes of institutional 

governmentally-operated health care 

providers, the Medicaid cost limit 

determination will rely on existing 

reporting tools used by institutional 

health care providers. States will not be 

required to audit financial and cost 

information provided by individual 

institutional governmentally-operated 

health care providers as part of the 

Medicaid cost limit review. Each of the 

source documents is subject to reporting 

and auditing rules specific to the 

original purpose of that document and 

independent of the Medicaid cost limit 

and State review process. The State 

must render an determination on the 

cost limit methodology applied to the 

source documents but will not be 

required to validate the accuracy of the 

information and data within the source 

documents. 

For non-institutional services 

provided to Medicaid eligible 

individuals, a nationally recognized, 

standard cost report currently does not 

exist. Because of this, we will be 

publishing a standardized cost reporting 

form that should be used to document 

such services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. The period of time to 

which this cost report applies will be 

the Medicaid State plan rate year. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally operated 

non-institutional health care providers 


jlentini on PROD1PC65 with RULES3
29826 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

sufficient time to develop and 

implement Medicaid cost 

documentation and reporting processes 

consistent with the cost report template 

issued by CMS (including but not 

limited to changes in State/provider 

reporting systems, changes to the 

Medicaid State plan, changes to time 

studies, establish periodic review and 

audit processes, etc.), States will not be 

required to document and report cost 

information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to implement periodic 

review and audit processes for Medicaid 

non-institutional costs starting in 

Medicaid State plan rate year 2009. 

CMS has developed a general 

Medicaid Cost Reporting Protocol 

available on the CMS website that 

specifically addresses the methods 

under which institutional and noninstitutional Medicaid costs will be 

determined. The protocol was designed 

to provide States with detailed 

instructions to determine compliance 

with Federal requirements. 

IV. Provisions of the Final Regulations 

[If you choose to comment only on 

issues related to Unit of Government 

Definition (§ 433.50) in this section, 

please include the caption ‘‘Provisions 

of the Final Regulations’’ at the 

beginning of your comments.] 

As a result of our review of the 

comments we received during the 

public comment period, as discussed in 

section III of this preamble, we are 

making the following revisions to the 

regulation published on January 18, 

2007. 

Section 433.50—Definition of Unit of 

Government 

We have modified the regulation at 

§ 433.50 to address concerns regarding 

taxing authority as a requirement for an 

entity to be considered a unit of 

government. The regulation has been 

revised to indicate that a unit of 

government is a State, a city, a county, 

a special purpose district, or other 

governmental unit in the State that has 

taxing authority or direct access to tax 

revenues. We have added the phrase 

‘‘has direct access to tax revenues’’ to 

recognize as governmental those entities 

that do not have taxing authority, but do 

have direct access to tax revenues that 

are imposed by a parent or related unit 

of government. For example, when a tax 

is imposed and collected by a State but 

is dedicated for use by a municipality or 

other entity, that entity would satisfy 

the criteria of direct access to tax 

revenues. Similarly, a county-operated 

hospital that is recognized in the 

county’s budget to receive local tax 

subsidies via the county appropriation 

process, and without the need to 

contract for such tax revenues, would 

satisfy the criteria of direct access to tax 

revenues. We have deleted the phrase 

‘‘generally applicable’’ because we do 

not believe it is necessary since the 

provider tax rules already require that 

permissible taxes be broad based and 

uniform. But we interpret the term 

‘‘taxing authority’’ in this context to 

exclude authority to levy user fees in 

exchange for benefits specific to the 

payer, even though those fees would be 

considered a tax for other purposes. 

We have also modified the regulation 

to recognize the explicit reference to 

State university teaching hospitals in 

section 1903(w)(6)(A) of the Act. We 

have added § 433.50(a)(1)(ii)(C) to 

recognize State university teaching 

hospitals as a unit of government 

eligible to participate in the financing of 

the non-Federals hare of Medicaid 

payments. 

We have also modified the regulation 

at § 433.50 to address concerns raised 

about the unique governance 

arrangements of Indian tribes and tribal 

organizations. Specifically, paragraph 

§ 433.50(a)(1)(i) has been modified to 

consider as a unit of government ‘‘an 

Indian tribe as defined in section 4 of 

the Indian Self-Determination and 

Education Assistance Act, as amended.’’

Additionally, we have amended 

proposed language at § 433.50(a)(1)(ii) 

by adding a new section (D) to define 

the criteria under which a health care 

provider operated by a tribe or tribal 

organization may also be considered a 

unit of government under this section. 

This criteria is consistent with policy 

articulated in State Medicaid Director 

(SMD) letters previously issued on 

October 18, 2005 and June 9, 2006. 

Section 447.206—Cost Limit for 

Providers Operated by Units of 

Government 

In the summary section of the 

proposed regulation, we indicated that 

Medicaid managed care organizations 

(MCOs) are not subject to the Medicaid 

cost limit provision of this regulation, 

but this was not expressly identified in 

§ 447.206. In recognition of existing 

statutory and regulatory instruction 

applicable to Medicaid reimbursement 

to Medicaid MCOs, Prepaid Inpatient 

Health Plans (PIHPs) and Prepaid 

Ambulatory Health Plans (PAHPs) we 

have modified the regulation at 

§ 447.206(b) to specifically exempt 

MCOs, PIHPs and PAHPs from the 

Medicaid cost limit. 

In addition, in recognition of existing 

statutory instruction applicable to 

Medicaid reimbursement to Federally 

Qualified Health Centers (FQHCs) and 

Rural Health Clinics (RHCs), we have 

modified the regulation at § 447.206(b) 

to also specifically exempt FQHCs and 

RHCs from the Medicaid cost limit. 

In addition to the exceptions listed 

above, § 447.206(b) has also been 

modified to exclude disproportionate 

share hospital (DSH) payments from the 

Medicaid cost limit provision at 

§ 447.206. DSH payment adjustments 

are instead subject to limitations and 

requirements under section 1923 of the 

Act. 

A primary purpose of the regulation 

was to limit Medicaid payments to 

governmentally operated health care 

providers to the cost of providing 

services to Medicaid individuals. States 

will have an obligation to ensure that 

Medicaid reimbursements to 

governmentally operated health care 

providers do not exceed the individual 

governmentally operated health care 

provider’s costs of serving Medicaid 

individuals (the newly established a 

‘‘cost limit’’). CMS has modified the 

regulation and developed protocols in 

an effort to address concerns regarding 

requirements to properly document, 

audit, and review the costs associated 

with the provision of Medicaid services 

in both institutional and noninstitutional environments. 

1. Institutional Providers 

The Medicare cost allocation process 

utilized for institutional health care 

providers is considered a key 

component in determining Medicaid 

cost under the rule. Institutional 

governmentally-operated health care 

providers (i.e. hospitals, nursing 

facilities, and intermediate care 

facilities for the mentally retarded 

(ICFs/MR)) will be required to provide 

the State with data extracted from 

primary source documents as well as 

copies of the source documents. These 

documents would include the 

provider’s Medicare cost report (or 

Medicaid cost report for intermediate 

nursing facility care and ICFs/MR 

consistent with Medicare cost reporting 

principles), and audited financial 

statements that will be used in 

conjunction with information provided 

by the States’ Medicaid Management 

Information Systems (MMIS). 

CMS has modified the regulation to 

provide that the State’s review of 

Medicaid payments to institutional 

governmentally operated providers to 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29827 

ensure compliance with the cost limit 

during Medicaid State Plan rate year 

2008 must be completed no later than 

the last day of federal fiscal year 2010. 

The State must submit a summary 

report of the findings of this review by 

the last day of calendar year of 2010. 

The basis for these deadlines is the 

recognition that hospitals, nursing 

homes and ICFs/MR may have a cost 

reporting period that remains open after 

the Medicaid State Plan rate year under 

review has ended. The State review and 

reporting deadlines allow sufficient 

time for the cost report period that 

remains open at the end of a Medicaid 

State Plan rate year to close and for the 

cost report to be submitted to the fiscal 

intermediary. For any cost reports that 

are not finalized by the fiscal 

intermediary, the State should use the 

‘‘as filed’’ report and indicate such in 

the summary report to CMS. The State 

should then submit a corrected 

summary report to CMS within 30 days 

of the finalization of the cost report. 

2. Non-Institutional Providers 

For all non-institutional services 

provided to Medicaid eligible 

individuals, we note that a nationally 

recognized, standard cost report does 

not exist. Because of this, we are 

publishing a standardized cost reporting 

form that should be used to document 

such services. The purpose of this 

standardized form is to document in a 

uniform manner the cost of providing 

non-institutional services to Medicaid 

individuals. 

CMS has modified the regulation to 

include a transition period to allow 

States and governmentally operated 

non-institutional providers sufficient 

time to develop and implement 

Medicaid cost documentation and 

reporting processes consistent with the 

cost report template issued by CMS 

(including but not limited to changes in 

State/provider reporting systems, 

changes to the Medicaid State plan, 

changes to time studies, etc.), States will 

not be required to document and report 

cost information associated with noninstitutional Medicaid services until the 

State’s Medicaid State plan rate year 

2009. Actual submission of the State’s 

summary report on the Medicaid cost 

limit for non-institutional services will 

not be due to CMS until December 31, 

2011, which allows States an 

opportunity to establish periodic review 

and audit processes for Medicaid noninstitutional costs starting in Medicaid 

State plan rate year 2009. 

CMS has developed a general 

Medicaid Cost Reporting Protocol 

available on the CMS website that 

specifically addresses the information 

utilized from each source document and 

the methods under which institutional 

and non-institutional Medicaid costs 

will be determined. The protocol was 

designed to provide States with detailed 

instructions to determine compliance 

with the Federal requirements. 

Each subsequent State review of 

Medicaid payments to governmentally 

operated health care providers, after the 

Medicaid State plan rate years identified 

above, must be performed annually and 

completed by the last day of the federal 

fiscal year ending two years from the 

Medicaid State plan rate year under 

review. Each State must submit a 

summary report to CMS showing the 

results of the State’s review of payments 

to ensure compliance with the Medicaid 

cost limit for governmentally-operated 

health care providers by the last day of 

the calendar year ending two years from 

the Medicaid State plan rate year under 

review. 

Section 447.207—Retention of Payments 

We have revised some of the 

introductory wording of this provision 

to make clear that the requirements of 

this section are applicable to State 

Medicaid payment methodologies and 

do not impose a specific mandate on 

providers. We have also added a 

paragraph (b) to § 447.207 to note that 

payments authorized by Sections 701(d) 

and 705 of the Benefits Improvement 

Act of 2000 (BIPA), taxes that are 

permissible under Section 1903(w) of 

the Act, and normal operating expenses 

of conducting business shall not be 

questioned for purposes of compliance 

with the provision. 

Section 447.321—Outpatient Hospital 

and Clinic Services: Application of 

Upper Payment Limits 

To address concerns that § 447.321 

does not identify disproportionate share 

hospital payments (DSH) as an 

exception to the Medicaid cost limit and 

to maintain consistency with the 

purpose of the Medicaid cost limit and 

with the statutory provision governing 

DSH at section 1923 of the Act, 

§ 447.321(c) has been modified to 

include an exemption for DSH payment 

adjustments from the application of 

outpatient hospital upper payment 

limit. 

1. Payments authorized by the Benefits 

Improvement Act of 2000 (BIPA) 

To address concerns about the impact 

the proposed regulation might have on 

payments authorized by Sections 701(d) 

and 705 of the Benefits Improvement 

Act of 2000 (BIPA), we have modified 

the regulation at § 447.207, § 447.272, 

and § 447.321 to clarify that these 

unique and statutorily authorized 

payments are not subject to the upper 

payment limits or retention provisions 

of this regulation. 

2. ‘‘Tool to Evaluate the Governmental 

Status of Health Care Provider’

States will be required to apply the 

statutory and regulatory criteria to each 

individual health care provider to make 

initial determinations of governmental 

status. In connection with the proposed 

regulation, CMS published an 

instrument to collect information about 

the governmental nature of health care 

providers, referenced herein as the 

‘‘Tool to Evaluate the Governmental 

Status of Health Care Provider.’’ Based 

on comments received, this tool has 

been modified to guide States in 

applying the statutory and regulatory 

criteria to make the initial 

determination of a health care 

provider’s governmental status and to 

create a record supporting this 

determination relative to each 

governmentally operated health care 

provider in the State. 

States will be required to keep copies 

of each completed ‘‘Tool to Evaluate the 

Governmental Status of Health Care 

Provider’’ form on file in order to 

maintain a record of the official State 

determination regarding the 

governmentally operated status of 

individual health care providers. States 

must report the universe of 

governmental health care providers in 

each State by submitting a complete list 

of such providers to the Associate 

Regional Administrator for Medicaid of 

each State’s respective CMS Regional 

Office within 90 days of the effective 

date of the regulation. CMS reserves the 

right to disagree with a State’s initial 

determination of governmental status if 

we believe the State has not consistently 

applied the statutory and regulatory 

criteria. In addition, States will be 

required to submit these forms to CMS 

for any Medicaid institutional and noninstitutional reimbursement State plan 

amendments and as requested under 

Medicaid financial management reviews 

performed by CMS. 

V. Collection of Information 

Requirements 

[If you choose to comment only on 

issues related to Unit of Government 

Definition (§ 433.50) in this section, 

please include the caption ‘‘Collection 

of Information Requirements’’ at the 

beginning of your comments.] 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 30- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 


jlentini on PROD1PC65 with RULES3
29828 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

3506(c)(2)(A) of the Paperwork 

Reduction Act of 1995 requires that we 

solicit comment on the following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We are soliciting public comment on 

each of these issues for the following 

sections of this document that contain 

information collection requirements 

(ICRs): 

Section 433.51 Public Funds as the 

State Share of Financial Participation 

Section 433.51 requires that a 

certified public expenditure (CPE) be 

supported by auditable documentation 

in a form(s) approved by the Secretary 

that, at a minimum, identifies the 

relevant category of expenditures under 

the Medicaid State Plan, demonstrates 

the cost of providing services to 

Medicaid recipients, and is subject to 

periodic State audit and review. 

The burden associated with this 

requirement is the time and effort put 

forth by a provider to complete the 

approved form(s) to be submitted with 

a CPE. Depending upon provider size, 

we believe that it could take 

approximately 10–80 hours to fill out 

the form(s) that would be required for 

an annual certified public expenditure. 

We estimate that governmentallyoperated health care providers in 50 

States will be affected by this 

requirement. The total number of health 

care providers affected and the 

estimated total aggregate hours of 

paperwork burden for all health care 

providers (that is, both institutional and 

non-institutional government health 

care providers) will be a direct result of 

the number of health care providers that 

are determined to be governmentallyoperated. 

Section 447.206 Cost Limit for Providers 

Operated by Units of Government 

Section 447.206(e) states that each 

governmentally-operated health care 

provider must submit annually a cost 

report to the Medicaid agency which 

reflects the individual governmentallyoperated health care provider’s cost of 

serving Medicaid recipients during the 

year. The Medicaid Agency must review 

the cost report to determine that costs 

on the report were properly allocated to 

Medicaid and verify that Medicaid 

payments to the governmentallyoperated health care provider during the 

year did not exceed the governmentallyoperated health care provider’s cost. 

States will have an obligation to 

ensure that Medicaid reimbursements to 

governmentally operated health care 

providers do not exceed the individual 

governmentally operated health care 

provider’s costs of serving Medicaid 

individuals (the newly established ‘‘cost 

limit’’). CMS has modified the 

regulation and developed protocols in 

an effort to address concerns regarding 

requirements to properly document, 

audit, and review the costs associated 

with the provision of Medicaid services 

in both institutional and noninstitutional environments. 

The Medicare cost allocation process 

utilized for institutional health care 

providers is considered a key 

component in determining Medicaid 

cost under the rule. Institutional 

governmentally-operated health care 

providers (i.e. hospitals, nursing 

facilities, and intermediate care 

facilities for the mentally retarded 

(ICFs/MR)) will be required to provide 

the State with data extracted from 

primary source documents as well as 

copies of the source documents. These 

documents would include the 

provider’s Medicare cost report (or 

CMS-approved cost report for 

intermediate nursing facility care and 

ICFs/MR consistent with Medicare cost 

reporting principles), and audited 

financial statements that will be used in 

conjunction with information provided 

by the States’ Medicaid Management 

Information Systems (MMIS). The 

protocols provide guidance regarding 

the methodology States must utilize for 

determining Medicaid costs associated 

with these existing cost reporting 

documents. 

For all non-institutional services 

provided to Medicaid eligible 

individuals, we note that a nationally 

recognized, standard cost report does 

not exist. Because of this, we are 

establishing a standardized cost 

reporting form that should be used to 

document such services. The purpose of 

this standardized form is to document 

in a uniform manner the cost of 

providing non-institutional services to 

Medicaid individuals. We will submit 

this information collection for the noninstitutional cost documentation to 

OMB for its review and approval. This 

information collection is not effective 

until OMB approves it. 

The burden associated with this 

requirement is the time and effort for 

the institutional governmentallyoperated health care provider to report 

the cost information annually to the 

Medicaid Agency and the time and 

effort involved in the review and 

verification of the report by the 

Medicaid Agency. We estimate that it 

will take a governmentally-operated 

health care provider 1 hour to prepare 

and submit the report annually to the 

Medicaid Agency. We estimate it will 

take the Medicaid Agency 1 to 10 hours 

to review and verify the information 

provided. We are unable to identify the 

total number of governmentallyoperated health care providers affected 

or the estimated total aggregate hours of 

paperwork burden for all 

governmentally-operated health care 

providers, as such this information will 

be a direct result of the number of 

health care providers that are 

determined to be governmentally 

operated. 

The burden associated with this 

requirement is the time and effort for 

the governmentally-operated health care 

provider to report the cost information 

annually to the Medicaid Agency and 

the time and effort involved in the 

review and verification of the report by 

the Medicaid Agency. We estimate that 

it will take a governmentally-operated 

health care provider 2 to 90 hours to 

prepare and submit the report annually 

to the Medicaid Agency. We estimate it 

will take the Medicaid Agency 1 to 10 

hours to review and verify the 

information provided. We are unable to 

identify the total number of 

governmentally-operated health care 

providers affected or the estimated total 

aggregate hours of paperwork burden for 

all governmentally-operated health care 

providers, as such this information will 

be a direct result of the number of 

health care providers that are 

determined to be governmentally 

operated. 

In the preamble of this final 

regulation, under the section titled 

‘‘Tool to Evaluate Governmental Status 

of Providers’’, we discuss a form 

questionnaire that we have developed to 

assist us in making a determination as 

to whether or not the health care 

provider is a unit of government. We 

will submit this information collection 

to OMB for its review and approval. 

This information collection is not 

effective until OMB approves it. 

As required by section 3504(h) of the 

Paperwork Reduction Act of 1995, we 

have submitted a copy of this final 

regulation to OMB for its review of these 

information collection requirements 

described above. 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29829 

If you comment on these information 

collection and record keeping 

requirements, please mail copies 

directly to the following: 

Centers for Medicare & Medicaid 

Services, Office of Strategic 

Operations and Regulatory Affairs, 

Division of Regulations Development, 

Attn.: Melissa Musotto, CMS–2258–

FC, Room C5–14–03, 7500 Security 

Boulevard, Baltimore, MD 21244–

1850. 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 

20503, Attn: Katherine T. Astrich, 

CMS Desk Officer, CMS–2258–FC, 

Katherine_T._Astrich@omb.eop.gov. 

Fax (202) 395–6974. 

VI. Regulatory Impact Analysis 

[If you choose to comment only on 

issues related to Unit of Government 

Definition (§ 433.50) in this section, 

please include the caption ‘‘Regulatory 

Impact Analysis’’ at the beginning of 

your comments.] 

A. Introduction 

We have examined the impacts of this 

regulation as required by Executive 

Order 12866 (September 1993, 

Regulatory Planning and Review), the 

Regulatory Flexibility Act (RFA) 

(September 19, 1980, Pub. L. 96–354), 

section 1102(b) of the Social Security 

Act, the Unfunded Mandates Reform 

Act of 1995 (Pub. L. 104–4), and 

Executive Order 13132. 

Executive Order 12866 (as amended 

by Executive Order 13258, which 

merely reassigns responsibility of 

duties) directs agencies to assess all 

costs and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

(RIA) must be prepared for major rules 

with economically significant effects 

($100 million or more in any 1 year). 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses. For purposes of the RFA, 

small entities include small businesses, 

nonprofit organizations, and small 

governmental jurisdictions. Most 

hospitals and most other providers and 

suppliers are small entities, either by 

nonprofit status or by having revenues 

of $6.5 million to $31.5 million in any 

1 year. Individuals and States are not 

included in the definition of a small 

entity. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory 

impact analysis if a rule may have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. This analysis must conform to 

the provisions of section 603 of the 

RFA. For purposes of section 1102(b) of 

the Act, we define a small rural hospital 

as a hospital that is located outside of 

a Metropolitan Statistical Area and has 

fewer than 100 beds. For the reasons 

cited below, we have determined that 

this regulation may have a significant 

impact on small rural hospitals. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 also 

requires that agencies assess anticipated 

costs and benefits before issuing any 

rule whose mandates require spending 

in any 1 year of $100 million in 1995 

dollars, updated annually for inflation. 

That threshold level is currently 

approximately $120 million. We are not 

imposing any unfunded mandates on 

States that would rise to the $120 

million threshold level established by 

Section 202 of the Unfunded Mandates 

Reform Act of 1995. 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

The provisions of this regulation were 

designed to ensure consistent 

application of the Federal statutory 

instructions regarding the definition of 

a unit of government for purposes of 

Medicaid reimbursement and State 

financing. States continue to maintain 

flexibility, within Federal statute and 

regulation, to decide on medically 

necessary services that will be covered, 

populations that will be covered and 

rates that will be paid to health care 

providers. This regulation merely 

ensures the fiscal integrity of the 

Medicaid program. Consistent with this 

analysis, for purposes of Executive 

Order 13132, we do not find that this 

regulation will have a substantial effect 

on State or local governments. 

B. Costs and Benefits 

This rule is a major rule because it is 

estimated to result in $120 million in 

savings during the first year and $3.87 

billion in savings over five years. 

As CMS has examined Medicaid State 

financing arrangements across the 

country, we have identified numerous 

instances in which State financing 

practices do not comport with the 

Medicaid statute. Since the summer of 

2003, we have reviewed and processed 

over 1,400 State plan amendments 

related to State payments to health care 

providers. Through this examination we 

have developed a greater understanding 

of how to ensure that payment and 

financing arrangements comply with 

statutory intent. We found that many 

States make supplemental payments to 

governmentally-operated health care 

providers that are in excess of cost. 

These health care providers, in turn, use 

that excess of Medicaid revenue over 

cost to subsidize health care (or other) 

operations that are unrelated to 

Medicaid, or they may return a portion 

of the supplemental payments in excess 

of cost to the States and/or local 

government. This regulation strengthens 

accountability to ensure that statutory 

requirements within the Medicaid 

program are met in accordance with 

sections 1902, 1903, and 1905 of the 

Act. 

As explained in the background 

section of the preamble, section 1903(w) 

of the Act permits units of government 

to participate in the financing of the 

non-Federal share; however, in some 

instances States rely on funding from 

non-governmental entities for the nonFederal share. Because such practices 

are expressly prohibited by the 

donations and taxes amendments at 

section 1903(w) of the Act, we are 

issuing this regulation to clarify the 

requirements of entities and health care 

providers that are able to finance the 

non-Federal share. 

Arrangements in which health care 

providers did not retain the full amount 

of their Medicaid payments is 

inappropriate and inconsistent with 

statutory construction that the Federal 

government pays only its proportional 

cost for the delivery of Medicaid 

services. When a State claims Federal 

reimbursement in excess of net 

payments to health care providers, the 

FMAP rate has effectively been 

increased, and federal Medicaid funds 

are redirected toward non-Medicaid 

services. When a State chooses to 

recycle FFP in this manner, the Federal 

taxpayers in other States 

disproportionately finance the Medicaid 

program in the State that is recycling 

FFP. This regulation is designed to 

eliminate such practices. 

The regulation should also have a 

beneficial distributive impact on 

governmentally-operated health care 

providers because in many States there 

are a few selected governmentallyoperated health care providers receiving 

payments in excess of cost, while other 

governmentally-operated health care 

providers receive a lower rate of 

reimbursement. This regulation will 

reduce inflated payments to those few 


jlentini on PROD1PC65 with RULES3
29830 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

governmentally-operated health care 

providers and promote a more even 

distribution of funds among all 

governmentally-operated health care 

providers. This is because all 

governmentally-operated health 

providers will be limited to a level of 

reimbursement that does not exceed the 

individual governmentally-operated 

health care provider’s cost of providing 

services to Medicaid individuals. 

We have observed that there are a 

variety of practices used by State and 

local governments in identifying costs 

and submitting a CPE as the basis of 

matching FFP for the provision of 

Medicaid services. These different cost 

methods and CPE practices make it 

difficult to (1) align claimed 

expenditures with specific services 

covered under the State plan or 

identifiable administrative activities; (2) 

properly identify the actual cost to the 

governmental entity of providing 

services to Medicaid recipients or 

performing administrative activities; 

and (3) audit and review Medicaid 

claims to ensure that Medicaid 

payments are appropriately made. Such 

circumstances present risks of 

inflationary costs being certified and 

excessive claims of FFP. This regulation 

will facilitate a more consistent 

methodology in Medicaid cost 

identification and allocation across the 

country, thereby improving the fiscal 

integrity of the program. 

Because the RFA includes small 

governmental jurisdictions in its 

definition of small entities, we expect 

this regulation to have a significant 

economic impact on a substantial 

number of small entities, specifically 

health care providers that are operated 

by units of government, including 

governmentally-operated small rural 

hospitals, as they will be subject to the 

new Medicaid cost limit imposed by 

this regulation. We have previously 

reviewed CMS’’ Online Survey and 

Certification and Reporting System 

(OSCAR) data for information about 

select provider types that may be 

impacted by this rule. According to the 

OSCAR data, there are: 

• 1,153 hospitals that have identified 

themselves as operated by local 

governments or hospital districts/ 

authorities; 

• 822 nursing facilities that have 

identified themselves as operated by 

counties, cities, or governmental 

hospital districts; 

• 113 intermediate care facilities for 

the mentally retarded (ICF/MR) that 

have identified themselves as operated 

by cities, towns, or counties. 

We have not counted State operated 

facilities in the above numbers because 

for purposes of the RFA, States are not 

included in the definition of a small 

entity. Note further that OSCAR data is 

self-reported, so the figures provided 

above do not necessarily reflect the 

number of governmentally-operated 

health care providers according to the 

provisions of this regulation. 

Small governmental jurisdictions 

(population under 50,000) may be 

impacted by this regulation depending 

upon their responsibilities for 

participating in financing of the nonFederal share of Medicaid payments and 

other governmental obligations to 

uninsured individuals. If a 

governmentally-operated health care 

provider within the small governmental 

jurisdiction was receiving Medicaid 

payments in excess of its Medicaid costs 

of providing health care services to 

Medicaid individuals, the 

governmentally-operated health care 

provider will experience a reduction in 

Medicaid revenues. While this itself 

would not result in a direct impact on 

the small governmental jurisdiction 

there could be an indirect impact. If the 

small governmental jurisdiction was not 

responsible for financing the nonFederal share of such payments and 

those Medicaid payments above cost 

were being used to subsidize uninsured 

health care costs, the small 

governmental jurisdiction may now 

have to subsidize the uninsured health 

care costs out of its own revenues. 

On the other hand, if the small 

governmental jurisdiction was 

responsible for financing the nonFederal share of Medicaid payments 

above the individual governmentallyoperated health care provider’s 

Medicaid costs, it will no longer have to 

finance Medicaid payments above costs. 

The small governmental jurisdiction 

could then use these previously 

obligated revenues to satisfy other costs 

or obligations within its jurisdiction. 

This analysis is not unique to small 

governmental jurisdictions and would 

hold true for both States and larger local 

governmental jurisdictions. 

Under the provisions of the 

regulation, all governmentally-operated 

health care providers will be permitted 

to receive no more than 100 percent of 

the cost of serving Medicaid 

individuals. Some of the 

governmentally-operated health care 

providers identified as small entities for 

RFA purposes may have been receiving 

Medicaid payments in excess of cost. If 

a health care provider operated by a 

small unit of government has been 

historically receiving Medicaid 

payments above cost and using excess 

Medicaid revenues to subsidize other 

costs outside of the Medicaid program, 

this regulation would cause a net 

reduction in revenue to the health care 

provider. 

Governmentally-operated health care 

providers, including those operated by 

small units of local government, that are 

not receiving Medicaid payments in 

excess of costs would not be adversely 

impacted by the Medicaid cost limit and 

would be eligible to receive greater 

Medicaid revenues, up to the cost limit. 

There are health care providers that 

are considered under the RFA as small 

entities (including small rural hospitals) 

but are not governmentally operated; to 

the extent these providers have been 

involved in financing the non-Federal 

share of Medicaid payments, this 

regulation will clarify whether or not 

such practices may continue. Nongovernmentally-operated health care 

providers are not affected by the cost 

limit provision of the regulation and 

may therefore continue to receive 

Medicaid payments in excess of the cost 

of providing services to Medicaid 

individuals within existing Federal 

requirements. 

Moreover, the provisions of the 

regulation reaffirm State Medicaid 

financing policy requiring that health 

care providers be allowed to fully retain 

their Medicaid payments. Any health 

care providers that become ineligible to 

participate in the State financing of 

Medicaid payments following the 

effective date of the provisions of this 

regulation can realize greater net 

revenues if State or local government 

funding sources are utilized to fund 

non-Federal share obligations to 

Medicaid payments historically 

financed by non-governmentallyoperated ‘‘public’’ health care providers. 

On the other hand, if States reduce 

payment rates to such governmentally 

operated health care providers after this 

regulation is effective, such 

governmentally-operated health care 

providers may experience a decrease in 

net revenue. 

As stated earlier, for purposes of the 

RFA, the small entities principally 

affected by this regulation are 

governmentally-operated health care 

providers. In light of the specific 

universe of small entities impacted by 

the regulation, the fact that this 

regulation requires States to allow 

governmentally-operated health care 

providers to receive and retain their 

Medicaid payments, and the allowance 

for governmentally operated health care 

providers to receive a Medicaid rate up 

to cost, we have not identified a need 

for regulatory relief under the RFA. 

Ultimately, this regulation is designed 

to ensure that Medicaid payments to 

governmentally-operated health care 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29831 

providers are based on actual costs of 

providing services to Medicaid 

individuals and that the financing 

arrangements supporting those 

payments are consistent with the 

statute. While some health care 

providers may lose revenues in light of 

this rule, those revenues were likely in 

excess of Medicaid cost or may have 

been financed using methods that did 

not permit the health care provider to 

retain Medicaid payments received. 

Other health care providers that were 

adversely affected by questionable 

reimbursement and financing 

arrangements may now, under this 

regulation, benefit from a more 

equitable distribution of funds. Private 

health care providers are generally 

unaffected by this rule, except for 

limited situations where the 

clarification provided by the regulation 

may require a change to current 

financing arrangements. 

With respect to clinical care, we 

anticipate that this regulation’s effect on 

actual patient services to be minimal. 

The regulation presents no changes to 

coverage or eligibility requirements 

under Medicaid. The rule clarifies 

statutory financing requirements and 

allows governmentally-operated health 

care providers to be reimbursed at levels 

up to the full cost of providing services 

to Medicaid individuals. Federal 

matching funds will continue to be 

made available based on expenditures 

for appropriately covered and financed 

services. While States may need to 

change reimbursement or financing 

methods, we do not anticipate that 

services delivered by governmentallyoperated health care providers or 

private health care providers will 

change. 

C. Anticipated Effects 

The following chart summarizes our 

estimate of the anticipated effects of this 

regulation. 

ESTIMATED REDUCTION IN FEDERAL MEDICAID OUTLAYS RESULTING FROM THE PROVIDER PAYMENT REFORM PROPOSAL

BEING IMPLEMENTED BY CMS–2258–P 

[Amounts in millions] 

Fiscal year 

2007 2008 2009 2010 2011 

Payment Reform ...................................................................................... ¥120 ¥530 ¥840 ¥1,170 ¥1,210 

These estimates are based on recent 

reviews of state Medicaid spending. 

Payment reform addresses both 

spending through intergovernmental 

transfers (IGT) and limiting payments to 

governmentally-operated health care 

providers to the cost or providing 

services to Medicaid individuals. For 

IGT spending, recent reports on 

spending on Disproportionate Share 

Hospitals (DSH) and Upper Payment 

Limit (UPL) spending were reviewed. 

From these reports, an estimate of the 

total spending that would be subject to 

the net expenditure policy was 

developed and then projected forward 

using assumptions consistent with the 

most recent President’s Budget 

projections. The estimate of the savings 

in federal Medicaid spending as a result 

of this policy factors in the current 

authority and efforts of CMS and the 

impact of recent waivers; the estimate 

also accounts for the potential 

effectiveness of future efforts. There is 

uncertainty in this estimate to the extent 

that the projections of IGT spending 

may not match actual future spending 

and to the extent that the effectiveness 

of this policy is greater than or less than 

assumed. 

Reports on UPL spending following 

the most recent legislation concerning 

UPL were reviewed to develop a 

projection for total enhanced payments 

in Medicaid spending. The estimate of 

savings from this policy reflects both 

estimates of the amount of UPL 

spending that exceeds cost and the 

effectiveness of this policy in limiting 

payments to cost. The estimate also 

accounts for transitional UPL payments, 

which are unchanged under this policy, 

and for the impact of recent waivers. 

There is uncertainty in this estimate to 

the extent that the projections of UPL 

spending may not match actual future 

spending, to the extent that the amount 

of UPL spending above cost differs from 

the estimated amount, and to the extent 

that the effectiveness of this policy is 

greater than or less than assumed. 

D. Alternatives Considered 

In developing this regulation various 

options were considered. We considered 

seeking to implement policies requiring 

provider retention of payments, greater 

accountability for certified public 

expenditures, and clarification of the 

definition of a unit of government 

without any new regulation (using 

existing statutory and regulatory 

authority). We determined that the 

rulemaking process would be a more 

effective method of implementing these 

policies because the rulemaking process 

would better inform affected parties, 

allow for public input, and make clear 

that the standards set forth are uniform, 

fair and consistent with the underlying 

statutory intent. 

We considered deferring to States and 

local governments to define which 

entities are units of government for 

purposes of Medicaid financing. We 

considered this possibility of deferring 

to State determinations, but we 

concluded that it was important for 

effective oversight review to receive 

standardized information under a clear, 

uniform and enforceable standard. 

Similarly, we considered allowing 

governmentally-operated health care 

providers to be reimbursed at current 

rates and not be limited to the cost of 

serving Medicaid individuals. Given the 

information CMS has gathered regarding 

the use of Medicaid payments to 

governmentally-operated health care 

providers, we find that the provision to 

limit governmentally-operated health 

care providers to Medicaid cost offers a 

way to reasonably reimburse 

governmentally-operated health care 

providers while ensuring that Federal 

matching funds are used for their 

intended purpose, which is to pay for a 

covered Medicaid service to a Medicaid 

beneficiary and not non-Medicaid 

activities. 

Likewise, we considered the option of 

limitomg only those governmentallyoperated health care providers that 

participate in IGTs and CPEs to the cost 

of providing Medicaid services to 

Medicaid individuals. However, we 

believe it is not appropriate that units of 

State or local government would 

‘‘profit’’ from Federal taxpayer dollars 

that are intended to match a percentage 

of the cost of providing services to 

Medicaid individuals. We do not find 

that Medicaid payments in excess of 

cost to governmentally-operated health 

care providers are consistent with the 

statutory principles of economy and 

efficiency. 

With respect to the timeframe for 

implementation of the Medicaid cost 


jlentini on PROD1PC65 with RULES3
29832 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

limit to governmentally-operated health 

care providers of non-institutional 

services, we considered requiring 

compliance with the effective date of 

the regulation. However, a nationally 

recognized, standard cost report does 

not exist for non-institutional services, 

we allow States and governmentallyoperated health care providers sufficient 

time to develop and implement 

Medicaid cost documentation and 

reporting processes. Likewise, we 

considered providing a similar delay in 

implementation for governmentallyoperated institutional health care 

providers, but since there are existing 

standardized, nationally recognized cost 

reporting mechanisms we did not 

believe a delay was appropriate. 

E. Accounting Statement 

As required by OMB Circular A–4 

(available at MACROBUTTON 

HtmlResAnchor http://www.whitehouse

.gov/omb/circulars/a004/a-4.pdf), in the 

table below, we have prepared an 

accounting statement showing the 

classification of the expenditures 

associated with the provisions of this 

regulation. This table provides our best 

estimate of the decrease in Federal 

Medicaid outlays resulting from the 

provider payment reform requirements 

being implemented by CMS–2258–P 

(Cost Limit for Providers Operated by 

Units of Government and Provisions to 

Ensure the Integrity of Federal-State 

Financial Partnerships). The sum total 

of these expenditures is classified as 

savings in Federal Medicaid spending. 

ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM FISCAL YEAR 2007 TO FISCAL YEAR

2011 

[In millions] 

Category Transfers 

Annualized Monetized Transfers .............................................................. Negative Transfer-Estimated decrease in expenditures: $774. 

From Whom To Whom? ........................................................................... Federal Government to States. 

F. Conclusion 

We expect that this regulation will 

promote the fiscal integrity of the 

Medicaid program. The regulation will 

enhance accountability for States to 

properly finance the non-Federal share 

of Medicaid expenditures and allow 

them to pay reasonable rates to 

governmentally-operated health care 

providers. To the extent prior Medicaid 

payments to governmentally-operated 

health care providers were inflated, the 

regulation will reduce such payments to 

levels that more accurately reflect the 

actual cost of Medicaid services and 

ensure that the non-Federal share of 

Medicaid payments has been satisfied in 

a manner consistent with the statute. 

Private health care providers are 

predominately unaffected by the 

regulation, and the effect on actual 

patient services should be minimal. 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

List of Subjects 

42 CFR Part 433 

Administrative practice and 

procedure, Child support, Claims, Grant 

programs-health, Medicaid, Reporting 

and recordkeeping requirements. 

42 CFR Part 447 

Accounting, Administrative practice 

and procedure Drugs, Grant programshealth, Health facilities, Health 

professions, Medicaid Reporting and 

recordkeeping requirements, Rural 

areas. 

42 CFR Part 457 

Administrative practice and 

procedure, Grant programs-health, 

Health insurance, Reporting and 

recordkeeping requirements. 

■ For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services amends 42 CFR 

chapter IV as set forth below: 

PART 433—STATE FISCAL 

ADMINISTRATION 

■ 1. The authority citation for part 433 

continues to read as follows: 

Authority: Sec. 1102 of the Social Security 

Act (42 U.S.C. 1302). 

■ 2. Amend § 433.50 by revising 

paragraph (a)(1) to read as follows: 

§ 433.50 Basis, scope, and applicability. 

(a) * * * 

(1) Section 1902(a)(2) and section 

1903(w)(7)(G) of the Act, which require 

States to share in the cost of medical 

assistance expenditures and permit 

State and local units of government to 

participate in the financing of the nonFederal portion of medical assistance 

expenditures. 

(i) A unit of government is a State, a 

city, a county, a special purpose district, 

or other governmental unit in the State 

that: has taxing authority, has direct 

access to tax revenues, is a State 

university teaching hospital with direct 

appropriations from the State treasury, 

or is an Indian tribe as defined in 

Section 4 of the Indian SelfDetermination and Education 

Assistance Act, as amended [25 U.S.C. 

450b]. 

(ii) A health care provider may be 

considered a unit of government only 

when it is operated by a unit of 

government as demonstrated by a 

showing of the following: 

(A) The health care provider has 

generally applicable taxing authority; or 

(B) The health care provider has 

direct access to generally applicable tax 

revenues. This means the health care 

provider is able to directly access 

funding as an integral part of a unit of 

government with taxing authority which 

is legally obligated to fund the health 

care provider’s expenses, liabilities, and 

deficits, so that a contractual 

arrangement with the State or local 

government is not the primary or sole 

basis for the health care provider to 

receive tax revenues; 

(C) The health care provider receives 

appropriated funding as a State 

university teaching hospital providing 

supervised teaching experiences to 

graduate medical school interns and 

residents enrolled in a State university 

in the State; or 

(D) The health care provider is an 

Indian Tribe or Tribal organization (as 

those terms are defined in Section 4 of 

the Indian Self-Determination and 

Education Assistance Act (ISDEAA); 25 

U.S.C. 450b) and meets the following 

criteria: 

(1) If the entity is a Tribal 

organization, it is—

(a) Carrying out health programs of 

the IHS, including health services 

which are eligible for reimbursement by 

Medicaid, under a contract or compact 

entered into between the Tribal 

organization and the Indian Health 

Service pursuant to the Indian SelfDetermination and Education 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29833 

Assistance Act, Public Law 93–638, as 

amended, and 

(b) Either the recognized governing 

body of an Indian tribe, or an entity 

which is formed solely by, wholly 

owned or comprised of, and exclusively 

controlled by Indian tribes. 

* * * * * 

■ 3. Section 433.51 is revised to read as 

follows: 

§ 433.51 Funds from units of government 

as the State share of financial participation. 

(a) Funds from units of government 

may be considered as the State’s share 

in claiming FFP if they meet the 

conditions specified in paragraphs (b) 

and (c) of this section. 

(b) The funds from units of 

government are appropriated directly to 

the State or local Medicaid agency, or 

are transferred from other units of 

government (including Indian tribes) to 

the State or local agency and are under 

its administrative control, or are 

certified by the contributing unit of 

government as representing 

expenditures eligible for FFP under this 

section. Certified public expenditures 

must be expenditures within the 

meaning of 45 CFR 95.13 that are 

supported by auditable documentation 

in a form approved by the Secretary 

that, at a minimum—

(1) Identifies the relevant category of 

expenditures under the State plan; 

(2) Explains whether the contributing 

unit of government is within the scope 

of the exception to limitations on 

provider-related taxes and donations; 

(3) Demonstrates the actual 

expenditures incurred by the 

contributing unit of government in 

providing services to eligible 

individuals receiving medical assistance 

or in administration of the State plan; 

and 

(4) Is subject to periodic State audit 

and review. 

(c) The funds from units of 

government are not Federal funds, or are 

Federal funds authorized by Federal law 

to be used to match other Federal funds. 

PART 447—PAYMENTS FOR 

SERVICES 

■ 1. The authority citation for part 447 

continues to read as follows: 

Authority: Sec. 1102 of the Social Security 

Act (42 U.S.C. 1302). 

■ 2. Section 447.206 is added to read as 

follows: 

§ 447.206 Cost limit for providers operated 

by units of government. 

(a) Scope. This section applies to 

payments made to health care providers 

that are operated by units of government 

as defined in § 433.50(a)(1) of this 

chapter. 

(b) Exceptions. The limitation in 

paragraph (c) of this section does not 

apply to: 

(1) Indian Health Services facilities 

and tribal facilities that are funded 

through the Indian Self-Determination 

and Education Assistance Act (Pub. L. 

93–638); 

(2) Managed Care Organizations 

(MCOs), Prepaid Inpatient 

Health Plans (PIHPs), and Prepaid 

Ambulatory Health Plans (PAHPs) 

which are organized and operating in 

accordance with the provisions of 42 

CFR 438; 

(3) Federally Qualified Health Centers 

(FQHCs) and Rural 

Health Clinics (RHCs) reimbursed in 

accordance with Section 1902(bb) of the 

Act; and 

(4) Disproportionate share hospital 

payments. The limitation in paragraph 

(c) of this section does not apply to 

payment adjustments made under 

section 1923 of the Act that are made 

under a State plan to hospitals found to 

serve a disproportionate number of lowincome patients with special needs as 

provided in section 1902(a)(13)(A)(iv) of 

the Act. Disproportionate share hospital 

(DSH) payments are subject to the 

following limits: 

(i) The aggregate DSH limit using the 

Federal share of the DSH limit under 

section 1923(f) of the Act. 

(ii) The hospital-specific DSH limit in 

section 1923(g) of the Act. 

(iii) The aggregate DSH limit for 

institutions for mental disease (IMDs) 

under section 1923(h) of the Act. 

(a) General rules. (1) All health care 

providers that are operated by units of 

government are limited to 

reimbursement not in excess of the 

individual health care provider’s cost of 

providing covered Medicaid services to 

eligible Medicaid recipients. 

(2) Reasonable methods of identifying 

and allocating costs to Medicaid will be 

determined by the Secretary in 

accordance with sections 1902, 1903, 

and 1905 of the Act, as well as 45 CFR 

92.22 and Medicare cost principles 

when applicable. 

(3) Institutional governmentallyoperated health care providers (i.e., 

hospitals, nursing facilities, and ICFs/ 

MR) are required to provide the State 

with data extracted from primary source 

documents as well as copies of the 

source documents. These source 

documents would include the health 

care provider’s Medicare cost report (or 

Medicaid cost report for intermediate 

nursing facility care and ICFs/MR 

consistent with Medicare cost reporting 

principles, and audited financial 

statements that will be used in 

conjunction with information provided 

by the States’ Medicaid Management 

Information System (MMIS). 

(4) Medicaid costs for noninstitutional governmentally-operated 

health care providers must be supported 

by auditable documentation in a form 

approved by the Secretary that is 

consistent with § 433.51(b)(1) through 

(b)(4) of this chapter. 

(d) Use of certified public 

expenditures. This paragraph applies 

when States use a cost reimbursement 

methodology funded by certified public 

expenditures. 

(1) In accordance with paragraph (c) 

of this section, each provider must 

submit annually a cost report to the 

Medicaid agency that reflects the 

individual provider’s cost of serving 

Medicaid recipients during the year. 

(2) States may utilize most recently 

filed cost reports to develop interim 

rates and may trend those interim rates 

by an applicable health care-related 

index. Interim reconciliations must be 

performed by reconciling the interim 

Medicaid payment rates to the filed cost 

report for the spending year in which 

interim payment rates were made. 

(3) Final reconciliation must be 

performed annually by reconciling any 

interim payments to the finalized cost 

report for the spending year in which 

any interim payment rates were made. 

(4) Non-institutional governmentallyoperated health care providers must 

utilize a cost report, approved by the 

Secretary, beginning in their Medicaid 

State plan rate year 2009. Interim rates 

set by States for purposes of Medicaid 

payments funded by certified public 

expenditures in Medicaid State plan 

rate year 2009 must be calculated based 

on cost data from at least one quarter of 

their Medicaid State plan rate year 2008 

documented in accordance with the cost 

report approved by the Secretary. 

Existing certified public expenditure 

methodologies can be used to make 

Medicaid payments during Medicaid 

State plan rate year 2008. 

(e) Payments not funded by certified 

public expenditures. This paragraph 

applies to payments made to providers 

operated by units of government that are 

not funded by certified public 

expenditures. In accordance with 

paragraph (c) of this section, each 

provider must submit annually a cost 

report to the Medicaid agency that 

reflects the individual provider’s cost of 

serving Medicaid recipients during the 

year. The Medicaid agency must review 

the cost report to determine that costs 

on the report were properly allocated to 

Medicaid and verify that Medicaid 


jlentini on PROD1PC65 with RULES3
29834 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

payments to the provider during the 

year did not exceed the provider’s cost. 

(f) Overpayments. If, under paragraph 

(d) or (e) of this section, it is determined 

that a governmentally-operated health 

care provider received an overpayment, 

amounts related to the overpayment will 

be properly credited to the Federal 

government, in accordance with part 

433, subpart F of this chapter. 

(g) Compliance dates. Initial 

compliance dates have been separately 

established for institutional and noninstitutional Medicaid providers 

operated by units of government. 

Following initial compliance dates, 

ongoing compliance will be consistent 

for all providers operated by units of 

government. A State must comply with 

the Medicaid cost limit described in 

paragraph (c) of this section in 

accordance with the timeframes and 

requirements in paragraphs (g)(1) 

through (g)(3) of this section. 

(1) Initial Compliance for Institutional 

Govermentally-Operated Health Care 

Providers. For each State, compliance 

with the Medicaid cost limit described 

in paragraph (c) of this section 

applicable to institutional 

governmentally-operated health care 

providers begins with the Medicaid 

State plan rate year 2008. A State’s 

review of Medicaid payments made to 

institutional governmentally-operated 

health care providers to ensure 

compliance with the Medicaid cost limit 

during Medicaid State plan rate year 

2008 must be completed no later than 

the last day of federal fiscal year 2010 

(September 30, 2010). The State must 

submit to CMS a summary report of the 

findings of this review by the last day 

of calendar year of 2010 (December 31, 

2010). For any cost reports that are not 

finalized, the State should use the ‘‘as 

filed’’ cost report and indicate such in 

the summary report to CMS. The State 

should then submit a corrected 

summary report to CMS within 30 days 

of the finalization of the cost report. 

(2) Initial Compliance for NonInstitutional Governmentally-Operated 

Health Care Providers. For each State, 

compliance with the cost limit 

described in paragraph (c) of this 

section applicable to non-institutional 

governmentally-operated health care 

providers begins with the Medicaid 

State plan rate year 2009. A State’s 

review of Medicaid payments made to 

non-institutional governmentallyoperated health care providers to ensure 

compliance with the Medicaid cost limit 

during Medicaid State plan rate year 

2009 must be completed no later than 

the last day of federal fiscal year 2011 

(September 30, 2011). The State must 

submit to CMS a summary report of the 

findings of this review by the last day 

of calendar year of 2011 (December 31, 

2011). 

(3) Ongoing Compliance for 

Institutional and Non-Institutional 

Governmentally-Operated Health Care 

Providers. Each subsequent State review 

of Medicaid payments made to 

governmentally-operated health care 

providers, after the Medicaid State plan 

rate years identified in paragraphs (g)(1) 

and (g)(2) of this section, must be 

performed annually and completed by 

the last day of the federal fiscal year 

ending two years from the Medicaid 

State plan rate year under review. Each 

State must submit a summary report to 

CMS demonstrating the results of the 

State’s review of Medicaid payments to 

ensure compliance with the Medicaid 

cost limit applicable to governmentallyoperated health care providers by the 

last day of the calendar year ending two 

years from the Medicaid State Plan rate 

year under review. 

(i) For any cost reports that are not 

finalized at the time the State performs 

the review of Medicaid payments to 

institutional governmentally-operated 

health care providers, the State should 

use the ‘‘as filed’’ cost report and 

indicate such in the summary report to 

CMS. The State should then submit a 

corrected summary report to CMS 

within 30 days of the finalization of the 

cost report. 

■ 3. Section 447.207 is added to read as 

follows: 

§ 447.207 Retention of payments. 

(a) Payment methodologies must 

permit the provider to receive and retain 

the full amount of the total computable 

payment for services furnished under 

the approved State plan (or the 

approved provisions of a waiver or 

demonstration if applicable). The 

Secretary will determine compliance 

with this provision by examining any 

associated transactions that are related 

to the provider’s total computable 

payment to ensure that the State’s 

claimed expenditure, which serves as 

the basis for Federal Financial 

Participation, is equal to the State’s net 

expenditure, and that the full amount of 

the non-Federal share of the payment 

has been satisfied. 

(b) Exceptions. Provisions of 

paragraph (a) of this section specifically 

do not pertain to: 

(1) Use of Medicaid revenues to fund 

payments that are normal operating 

expenses of conducting business, such 

as payments related to taxes (including 

permissible health-care related taxes), 

fees, or business relationships with 

governments unrelated to Medicaid in 

which there is no connection to 

Medicaid payment. 

(2) Payments authorized by Sections 

701(d) and 705 of the Benefits 

Improvement Act of 2000 (BIPA). 

■ 4. Section § 447.271 is revised to read 

as follows: 

§ 447.271 Upper limits based on 

customary charges. 

(a) The agency may not pay a provider 

more for inpatient hospital services 

under Medicaid than the provider’s 

customary charges to the general public 

for the services. 

(b) [Reserved] 

■ 5. Section 447.272 is amended by 

revising paragraphs (a) through (d) to 

read as follows: 

§ 447.272 Inpatient services: Application 

of upper payment limits. 

(a) Scope. This section applies to rates 

set by the agency to pay for inpatient 

services furnished by hospitals, nursing 

facilities, and ICFs/MR within one of 

the following categories: 

(1) State government operated 

facilities (that is, all facilities that are 

operated by the State) as defined at 

§ 433.50(a) of this chapter. 

(2) Non-State government operated 

facilities (that is, all governmentally 

operated facilities that are not operated 

by the State) as defined at § 433.50(a) of 

this chapter. 

(3) Privately operated facilities, that 

is, all facilities that are not operated by 

a unit of government as defined at 

§ 433.50(a) of this chapter. 

(b) General rules. (1) For privately 

operated facilities, upper payment limit 

refers to a reasonable estimate of the 

amount that would be paid for the 

services furnished by the group of 

facilities under Medicare payment 

principles in subchapter B of this 

chapter. 

(2) For State government operated 

facilities and for non-State government 

operated facilities, upper payment limit 

refers to the individual health care 

provider’s Medicaid cost as defined at 

§ 447.206. 

(3) Except as provided in paragraph 

(c) of this section, aggregate Medicaid 

payments to the group of privately 

operated facilities described in 

paragraph (a) of this section may not 

exceed the upper payment limit 

described in paragraph (b)(1) of this 

section. 

(4) Except as provided in paragraph 

(c) of this section, Medicaid payments to 

State government operated facilities and 

non-State government operated facilities 

must not exceed the individual health 

care provider’s Medicaid cost as 

documented in accordance with 

§ 447.206. 


jlentini on PROD1PC65 with RULES3
Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 29835 

(c) Exceptions—(1) Indian Health 

Services and tribal facilities. The 

limitation in paragraph (b) of this 

section does not apply to Indian Health 

Services facilities and tribal facilities 

that are funded through the Indian SelfDetermination and Education 

Assistance Act (Pub. L. 93–638). 

(2) Disproportionate share hospitals. 

The limitation in paragraph (b) of this 

section does not apply to payment 

adjustments made under section 1923 of 

the Act that are made under a State plan 

to hospitals found to serve a 

disproportionate number of low-income 

patients with special needs as provided 

in section 1902(a)(13)(A)(iv) of the Act. 

Disproportionate share hospital (DSH) 

payments are subject to the following 

limits: 

(i) The aggregate DSH limit using the 

Federal share of the DSH limit under 

section 1923(f) of the Act. 

(ii) The hospital-specific DSH limit in 

section 1923(g) of the Act. 

(iii) The aggregate DSH limit for 

institutions for mental disease (IMDs) 

under section 1923(h) of the Act. 

(3) The limitation in paragraph (b) of 

this section does not apply to payments 

authorized by Sections 701(d) and 705 

of the Benefits Improvement Protection 

Act of 2000 (BIPA). 

(d) Compliance dates. Except as 

permitted under paragraph (e) of this 

section, a State must comply with the 

upper payment limit described in 

paragraph (b) of this section by one of 

the following dates: 

(1) For State government operated and 

non-State government operated 

hospitals, nursing facilities and ICFs/ 

MR ‘‘ Medicaid State plan rate year 

2008. 

(2) For all other facilities—March 13, 

2001. 

* * * * * 

■ 6. Section 447.321 is amended by 

revising paragraphs (a) through (d) to 

read as follows: 

§ 447.321 Outpatient hospital and clinic 

services: Application of upper payment 

limits. 

(a) Scope. This section applies to rates 

set by the agency to pay for outpatient 

services furnished by hospitals and 

clinics within one of the following 

categories: 

(1) State government operated 

facilities (that is, all facilities that are 

operated by the State) as defined at 

§ 433.50(a) of this chapter. 

(2) Non-State government operated 

facilities (that is, all governmentally 

operated facilities that are not operated 

by the State) as defined at § 433.50(a) of 

this chapter. 

(3) Privately operated facilities that is, 

all facilities that are not operated by a 

unit of government as defined at 

§ 433.50(a) of this chapter. 

(b) General rules. (1) For privately 

operated facilities, upper payment limit 

refers to a reasonable estimate of the 

amount that would be paid for the 

services furnished by the group of 

facilities under Medicare payment 

principles in subchapter B of this 

chapter. 

(2) For State government operated 

facilities and for non-State government 

operated facilities, upper payment limit 

refers to the individual health care 

provider’s Medicaid cost as defined at 

§ 447.206. 

(3) Except as provided in paragraph 

(c) of this section, aggregate Medicaid 

payments to the group of privately 

operated facilities within one of the 

categories described in paragraph (a) of 

this section may not exceed the upper 

payment limit described in paragraph 

(b)(1) of this section. 

(4) Except as provided in paragraph 

(c) of this section, Medicaid payments to 

State government operated facilities and 

non-State government operated facilities 

must not exceed the individual health 

care provider’s Medicaid cost as 

documented in accordance with 

§ 447.206. 

(c) Exceptions—(1) Indian Health 

Services and tribal facilities. The 

limitation in paragraph (b) of this 

section does not apply to Indian Health 

Services facilities and tribal facilities 

that are funded through the Indian SelfDetermination and Education 

Assistance Act (Pub. L. 93–638). 

(2) Disproportionate share hospitals. 

The limitation in paragraph (b) of this 

section does not apply to payment 

adjustments made under section 1923 of 

the Act that are made under a State plan 

to hospitals found to serve a 

disproportionate number of low-income 

patients with special needs as provided 

in section 1902(a)(13)(A)(iv) of the Act. 

Disproportionate share hospital (DSH) 

payments are subject to the following 

limits: 

(i) The aggregate DSH limit using the 

Federal share of the DSH limit under 

section 1923(f) of the Act. 

(ii) The hospital-specific DSH limit in 

section 1923(g) of the Act. 

(iii) The aggregate DSH limit for 

institutions for mental disease (IMDs) 

under section 1923(h) of the Act. 

(3) The limitation in paragraph (b) of 

this section does not apply to payments 

authorized by Sections 701(d) and 705 

of the Benefits Improvement Protection 

Act of 2000 (BIPA). 

(d) Compliance dates. Except as 

permitted under paragraph (e) of this 

section, a State must comply with the 

upper payment limit described in 

paragraph (b) of this section by one of 

the following dates: 

(1) For State government operated and 

non-State government operated 

hospitals—Medicaid State plan rate year 

2008. 

(2) For State government operated and 

non-State government operated 

clinics—Medicaid State plan rate year 

2009. 

(3) For all other facilities—March 13, 

2001. 

* * * * * 

PART 457—ALLOTMENTS AND 

GRANTS TO STATES 

■ 1. The authority for part 457 

continues to read as follows: 

Authority: Sec. 1102 of the Social Security 

Act (42 U.S.C. 1302). 

■ 2. Section 457.220 is revised to read 

as follows: 

§ 457.220 Funds from units of government 

as the State share of financial participation. 

(a) Funds from units of government 

may be considered as the State’s share 

in claiming FFP if they meet the 

conditions specified in paragraphs (b) 

and (c) of this section. 

(b) The funds from units of 

government are appropriated directly to 

the State or local Medicaid agency, or 

are transferred from other units of 

government (including Indian tribes) to 

the State or local agency and are under 

its administrative control, or are 

certified by the contributing unit of 

government as representing 

expenditures eligible for FFP under this 

section. Certified public expenditures 

must be expenditures within the 

meaning of 45 CFR 95.13 that are 

supported by auditable documentation 

in a form approved by the Secretary 

that, at a minimum—

(1) Identifies the relevant category of 

expenditures under the State plan; 

(2) Explains whether the contributing 

unit of government is within the scope 

of the exception to limitations on 

provider-related taxes and donations; 

(3) Demonstrates the actual 

expenditures incurred by the 

contributing unit of government in 

providing services to eligible 

individuals receiving medical assistance 

or in administration of the State plan; 

and 

(4) Is subject to periodic State audit 

and review. 

(c) The funds from units of 

government are not Federal funds, or are 

Federal funds authorized by Federal law 

to be used to match other Federal funds. 


jlentini on PROD1PC65 with RULES3
29836 Federal Register / Vol. 72, No. 102 / Tuesday, May 29, 2007 / Rules and Regulations 

■ 3. Amend § 457.628 by—

■ A. Republishing the introductory text 

to the section. 

■ B. Revising paragraph (a). 

The republication and revision read 

as follows: 

§ 457.628 Other applicable Federal 

regulations. 

Other regulations applicable to SCHIP 

programs include the following: 

(a) HHS regulations in § 433.50 

through § 433.74 of this chapter (sources 

of non-Federal share and Health CareRelated Taxes and Provider-Related 

Donations) and § 447.207 of this chapter 

(Retention of payments) apply to States’

SCHIP programs in the same manner as 

they apply to States’ Medicaid 

programs. 

* * * * * 

(Catalog of Federal Domestic Assistance 

Program No. 93.778, Medical Assistance 

Program) 

Dated: May 23, 2007. 

Leslie V. Norwalk, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: May 23, 2007. 

Michael O. Leavitt, 

Secretary. 

[FR Doc. 07–2657 Filed 5–25–07; 8:45 am] 

BILLING CODE 4120–01–P 


jlentini on PROD1PC65 with RULES3