§ 438.16 In lieu of services and settings (ILOS) requirements. ( a ) *Definitions.* As used in this part, the following terms have the indicated meanings: *Final ILOS cost percentage* is the annual amount calculated, in accordance with paragraph (c)(3) of this section, specific to each managed care program that includes ILOS.
*Projected ILOS cost percentage* is the annual amount calculated, in accordance with paragraph (c)(2) of this section, specific to each managed care program that includes ILOS.
*Summary report of actual MCO, PIHP, and PAHP ILOS costs* is the report calculated, in accordance with paragraph (c)(4) of this section, specific to each managed care program that includes ILOS.
( b ) *General rule.* An ILOS must be approvable as a service or setting through a waiver under section 1915(c) of the Act or a State plan amendment, including section 1905(a), 1915(i), or 1915(k) of the Act.
( c ) *ILOS Cost Percentage and summary report of actual MCO, PIHP, and PAHP ILOS costs.* ( 1 ) *General rule.* ( i ) The projected ILOS cost percentage calculated as required in paragraph (c)(2) of this section may not exceed 5 percent and the final ILOS cost percentage calculated as required in paragraph (c)(3) of this section may not exceed 5 percent.
( ii ) The projected ILOS cost percentage, the final ILOS cost percentage, and the summary report of actual MCO, PIHP, and PAHP ILOS costs must be calculated on an annual basis and recalculated annually.
( iii ) The projected ILOS cost percentage, the final ILOS cost percentage, and the summary report of actual MCO, PIHP, and PAHP ILOS costs must be certified by an actuary and developed in a reasonable and appropriate manner consistent with generally accepted actuarial principles and practices.
( 2 ) *Calculation of the projected ILOS cost percentage.* The projected ILOS cost percentage is the result of dividing the amount determined in paragraph (c)(2)(i) of this section by the amount determined in paragraph (c)(2)(ii) of this section. ( i ) The portion of the total capitation payments that is attributable to all ILOSs, excluding a short term stay in an IMD as specified in § 438.6(e), for each managed care program.
( ii ) The projected total capitation payments for each managed care program, all State directed payments in effect under § 438.6(c), and pass-through payments in effect under § 438.6(d).
( 3 ) *Calculation of the final ILOS cost percentage.* The final ILOS cost percentage is the result of dividing the amount determined in paragraph (c)(3)(i) of this section by the amount determined in paragraph (c)(3)(ii) of this section. ( i ) The portion of the total capitation payments that is attributable to all ILOSs, excluding a short term stay in an IMD as specified in § 438.6(e), for each managed care program.
( ii ) The actual total capitation payments, defined at § 438.2, for each managed care program, all State directed payments in effect under § 438.6(c), and pass-through payments in effect under § 438.6(d).
( 4 ) *Summary report of actual MCO, PIHP, and PAHP ILOS costs.* The State must submit to CMS a summary report of the actual MCO, PIHP, and PAHP costs for delivering ILOSs based on the claims and encounter data provided by the MCO(s), PIHP(s), and PAHP(s).
( 5 ) *CMS review of the projected ILOS cost percentage, the final ILOS cost percentage and the summary report of actual MCO, PIHP, and PAHP ILOS costs.* ( i ) The State must annually submit the projected ILOS cost percentage to CMS for review as part of the rate certification required in § 438.7(a).
( ii ) The State must submit the final ILOS cost percentage and the summary report of actual MCO, PIHP, and PAHP ILOS costs annually to CMS for review as a separate report concurrent with the rate certification submission required in § 438.7(a) for the rating period beginning 2 years after the completion of each 12-month rating period that includes an ILOS.
( d ) *Documentation requirements* — ( 1 ) *State requirements.* All States that include an ILOS in an MCO, PIHP, or PAHP contract are required to include, at minimum, the following: ( i ) The name and definition of each ILOS;
( ii ) The covered service or setting under the State plan for which each ILOS is a medically appropriate and cost effective substitute;
( iii ) The clinically defined target populations for which each ILOS is determined to be medically appropriate and cost effective substitute by the State;
( iv ) The process by which a licensed network or MCO, PIHP, or PAHP staff provider, determines and documents in the enrollee's records that each identified ILOS is medically appropriate for the specific enrollee;
( v ) The enrollee rights and protections, as defined in § 438.3(e)(2)(ii); and
( vi ) A requirement that the MCO, PIHP, or PAHP will utilize specific codes established by the State that identify each ILOS in encounter data, as required under § 438.242.
( 2 ) *Additional documentation requirements.* A State with a projected ILOS cost percentage that exceeds 1.5 percent is also required to provide the following documentation concurrent with the contract submission for review and approval by CMS under § 438.3(a). ( i ) A description of the process and supporting evidence the State used to determine that each ILOS is a medically appropriate service or setting for the clinically defined target population(s), consistent with paragraph (d)(1)(iii) of this section.
( ii ) A description of the process and supporting data the State used to determine that each ILOS is a cost effective substitute for the clinically defined target population(s), consistent with paragraph (d)(1)(iii) of this section.
( 3 ) *Provision of additional information.* At the request of CMS, the State must provide additional information, whether part of the MCO, PIHP, or PAHP contract, rate certification or supplemental materials, if CMS determines that the requested information is pertinent to the review and approval of a contract that includes ILOS.
( e ) *Monitoring, evaluation, and oversight.* ( 1 ) *Retrospective evaluation.* A State is required to submit at least one retrospective evaluation of all ILOSs to CMS when the final ILOS cost percentage exceeds 1.5 percent in any of the first 5 rating periods that each ILOS is authorized and identified in the MCO, PIHP, or PAHP contract as required under § 438.3(e)(2)(iii) following the applicability date in paragraph (f) of this section, or as required in paragraph (v) of this section. The retrospective evaluation must: ( i ) Be completed separately for each managed care program that includes an ILOS and include all ILOSs in that managed care program.
( ii ) Be completed using 5 years of accurate and validated data for the ILOS with the basis of the data being the first 5 rating periods that the ILOS is authorized and identified in the MCO, PIHP, or PAHP contract as required under § 438.3(e)(2)(iii). The State must utilize these data to at least evaluate cost, utilization, access, grievances and appeals, and quality of care for each ILOS.
( iii ) Evaluate at least: ( A ) The impact each ILOS had on utilization of State plan approved services or settings, including any associated cost savings;
( B ) Trends in MCO, PIHP, or PAHP and enrollee use of each ILOS;
( C ) Whether encounter data supports the State's determination that each ILOS is a medically appropriate and cost effective substitute for the identified covered service and setting under the State plan or a cost effective measure to reduce or prevent the future need to utilize the covered service and setting under the State plan;
( D ) The impact of each ILOS on quality of care;
( E ) The final ILOS cost percentage for each year consistent with the report in paragraph (c)(5)(ii) of this section with a declaration of compliance with the allowable threshold in paragraph (c)(1)(i) of this section;
( F ) Appeals, grievances, and State fair hearings data, reported separately, related to each ILOS, including volume, reason, resolution status, and trends; and
( G ) The impact each ILOS had on health equity efforts undertaken by the State to mitigate health disparities.
( iv ) The State must submit the retrospective evaluation to CMS no later than 2 years after the later of either the completion of the first 5 rating periods that the ILOS is authorized and identified in the MCO, PIHP, or PAHP contract as required under § 438.3(e)(2)(iii) or the rating period that has a final ILOS cost percentage that exceeds 1.5 percent.
( v ) CMS reserves the right to require the State to submit additional retrospective evaluations to CMS.
( 2 ) *Oversight.* Oversight for each ILOS must include the following: ( i ) *State notification requirement.* The State must notify CMS within 30 calendar days if: ( A ) The State determines that an ILOS is no longer a medically appropriate or cost effective substitute for the covered service or setting under the State plan identified in the contract as required in paragraph (d)(1)(ii) of this section; or
( B ) The State identifies noncompliance with requirements in this part.
( ii ) *CMS oversight process.* If CMS determines that a State is out of compliance with any requirement in this part or receives a State notification in paragraph (e)(2)(i) of this section, CMS may require the State to terminate the use of an ILOS.
( iii ) *Process for termination of ILOS.* Within 30 calendar days of receipt of a notice described in paragraph (e)(2)(iii)(A), (B), or (C) of this section, the State must submit an ILOS transition plan to CMS for review and approval. ( A ) The notice the State provides to an MCO, PIHP, or PAHP of its decision to terminate an ILOS.
( B ) The notice an MCO, PIHP, or PAHP provides to the State of its decision to cease offering an ILOS to its enrollees.
( C ) The notice CMS provides to the State of its decision to require the State to terminate an ILOS.
( iv ) *Requirements for an ILOS Transition Plan.* The transition plan must include at least the following: ( A ) A process to notify enrollees of the termination of an ILOS that they are currently receiving as expeditiously as the enrollee's health condition requires.
( B ) A transition of care policy, not to exceed 12 months, to arrange for State plan services and settings to be provided timely and with minimal disruption to care to any enrollee who is currently receiving the ILOS that will be terminated. The State must make the transition of care policy publicly available.
( C ) An assurance the State will submit the modification of the MCO, PIHP, or PAHP contract to remove the ILOS and submission of the modified contracts to CMS as required in § 438.3(a), and a reasonable timeline for submitting the contract amendment.
( D ) An assurance the State and its actuary will submit an adjustment to the actuarially sound capitation rate, as needed, to remove utilization and cost of the ILOS from capitation rates as required in §§ 438.4, 438.7(a) and 438.7(c)(2), and a reasonable timeline for submitting the revised rate certification.
( f ) *Applicability date.* Section 438.16 applies to the rating period for contracts with MCOs, PIHPs, and PAHPs beginning on or after 60 days following July 9, 2024.
[89 FR 41273, May 10, 2024, as amended at 89 FR 52391]