13726 Federal Register / Vol. 72, No. 56 / Friday, March 23, 2007 / Proposed Rules 

land areas located well within the 

boundaries of a nonattainment area, 

such as the three Indian reservations in 

the Phoenix nonattainment area and the 

four Indian reservations in the Owens 

Valley nonattainment area. Moreover, 

violations of the PM–10 standard, which 

are measured and modeled throughout 

each of the nonattainment areas, as well 

as shared meteorologic conditions, 

would dictate the same result. EPA 

does, however, recognize the 

significance of Indian country 

boundaries within the nonattainment 

areas and, as described below, will 

consult with the affected Tribes 

regarding this finding of failure to attain 

the NAAQS and their Indian country. 

III. Summary of Proposed Action 

EPA is proposing to find that the 

Phoenix and Owens Valley 

nonattainment areas did not attain the 

24-hour PM–10 NAAQS by the 

December 31, 2006 attainment deadline 

as discussed above in section II. 

Under section 189(d) of the Act, 

serious PM–10 nonattainment areas that 

fail to attain are required to submit 

within 12 months of the applicable 

attainment date, ‘‘plan revisions which 

provide for attainment of the PM–10 air 

quality standard and, from the date of 

such submission until attainment, for an 

annual reduction in PM–10 or PM–10 

precursor emissions within the area of 

not less than 5 percent of the amount of 

such emissions as reported in the most 

recent inventory prepared for such 

area.’’

In accordance with CAA section 

179(d)(3), the attainment deadline 

applicable to an area that misses the 

serious area attainment date is as soon 

as practicable, but no later than 5 years 

from the publication date of the 

nonattainment finding notice. EPA may, 

however, extend the attainment 

deadline to the extent it deems 

appropriate for a period no greater than 

10 years from the publication date, 

‘‘considering the severity of 

nonattainment and the availability and 

feasibility of pollution control 

measures.’’ In addition to the attainment 

demonstration and 5 percent 

requirements, the plans under section 

189(d) for the Phoenix and Owens 

Valley nonattainment areas must 

address all applicable requirements of 

the CAA, including sections 110(a), 

172(c), 176(c) and 189(c)(1). 

Because the applicable attainment 

date for both nonattainment areas was 

December 31, 2006, under section 

189(d), the submittal deadline for the 

plans will be December 31, 2007 if 

EPA’s proposed findings of failure to 

attain are finalized. 

IV. Statutory and Executive Order 

Reviews 

Under Executive Order 12866 (58 FR 

51735, October 4, 1993), this proposed 

action is not a ‘‘significant regulatory 

action’’ and therefore is not subject to 

review by the Office of Management and 

Budget. For this reason, this action is 

also not subject to Executive Order 

13211, ‘‘Actions Concerning Regulations 

That Significantly Affect Energy Supply, 

Distribution, or Use’’ (66 FR 28355, May 

22, 2001). This proposed action in and 

of itself establishes no new 

requirements, it merely notes that the 

air quality in the Phoenix 

nonattainment area and the Owens 

Valley nonattainment area did not meet 

the federal health standard for PM–10 

by the CAA deadline. Accordingly, the 

Administrator certifies that this 

proposed rule will not have a significant 

economic impact on a substantial 

number of small entities under the 

Regulatory Flexibility Act (5 U.S.C. 601 

et seq.). Because this proposed rule does 

not in and of itself establish new 

requirements, EPA believes that it is 

questionable whether a requirement to 

submit a SIP revision constitutes a 

federal mandate. The obligation for a 

State to revise its SIP arises out of 

sections 110(a), 179(d), and 189(d) of 

the CAA and is not legally enforceable 

by a court of law, and at most is a 

condition for continued receipt of 

highway funds. Therefore, it is possible 

to view an action requiring such a 

submittal as not creating any 

enforceable duty within the meaning of 

section 421(5)(9a)(I) of the Unfunded 

Mandates Reform Act (UMRA) (2 U.S.C. 

658(a)(I)). Even if it did, the duty could 

be viewed as falling within the 

exception for the condition of Federal 

assistance under section 421(5)(a)(i)(I) of 

UMRA (2 U.S.C. 658(5)(a)(i)(I)). 

Therefore, today’s proposed action does 

not contain any unfunded mandate or 

significantly or uniquely affect small 

governments, as described in the 

Unfunded Mandates Reform Act of 1995 

(Pub. L. 104–4). 

Several Indian tribes have 

reservations located within the 

boundaries of the Phoenix and Owens 

Valley nonattainment areas. EPA is 

responsible for the implementation of 

federal Clean Air Act programs in 

Indian country, including findings of 

failure to attain. EPA has notified the 

affected tribal officials and will be 

consulting with all interested tribes, as 

provided for by Executive Order 13175 

(65 FR 67249, November 9, 2000). EPA 

will ensure that each tribe is contacted 

and given the opportunity to enter into 

consultation on a government-togovernment basis. This proposed action 

also does not have Federalism 

implications because it does not have 

substantial direct effects on the States, 

on the relationship between the national 

government and the States, or on the 

distribution of power and 

responsibilities among the various 

levels of government, as specified in 

Executive Order 13132 (64 FR 43255, 

August 10, 1999). This proposed action 

does not in and of itself create any new 

requirements and does not alter the 

relationship or the distribution of power 

and responsibilities established in the 

Clean Air Act. This proposed rule also 

is not subject to Executive Order 13045, 

‘‘Protection of Children from 

Environmental Health Risks and Safety 

Risks’’ (62 FR 19885, April 23, 1997), 

because it is not economically 

significant. Because these proposed 

findings of failure to attain are factual 

determinations based on air quality 

considerations, the requirements of 

section 12(d) of the National 

Technology Transfer and Advancement 

Act of 1995 (15 U.S.C. 272 note) do not 

apply. This proposed rule does not 

impose an information collection 

burden under the provisions of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3501 et seq.). 

List of Subjects in 40 CFR Part 52 

Environmental protection, Air 

pollution control, Carbon monoxide, 

Intergovernmental relations, Nitrogen 

dioxide, Ozone, Particulate matter, 

Reporting and recordkeeping 

requirements, Volatile organic 

compounds. 

Authority: 42 U.S.C. 7401 et seq. 

Dated: March 15, 2007. 

Wayne Nastri, 

Regional Administrator, Region IX. 

[FR Doc. E7–5357 Filed 3–22–07; 8:45 am] 

BILLING CODE 6560–50–P 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 433 

[CMS 2275–P] 

RIN 0938–AO80 

Medicaid Program; Health CareRelated Taxes 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Proposed rule. 


sroberts on PROD1PC70 with PROPOSALS
Federal Register / Vol. 72, No. 56 / Friday, March 23, 2007 / Proposed Rules 13727 

SUMMARY: This proposed rule would 

revise the threshold under the indirect 

guarantee hold harmless arrangement 

test to reflect the provisions of the Tax 

Relief and Health Care Act of 2006, 

Public Law 109–432, by providing that, 

when determining whether there is an 

indirect guarantee under the 2-prong 

test for any part of a fiscal year on or 

after January 1, 2008 through September 

30, 2011, the allowable amount that can 

be collected from a health care-related 

tax is reduced from 6 to 5.5 percent of 

net patient revenues received by the 

taxpayers. This proposed rule would 

also clarify the standard for determining 

the existence of a hold harmless 

arrangement under the positive 

correlation test, Medicaid payment test, 

and the guarantee test (with conforming 

changes to parallel provisions 

concerning hold harmless arrangements 

with respect to provider-related 

donations); codify descriptions for two 

classes of health care services 

permissible under Federal statute for 

purposes of taxes on health care 

providers; and, remove obsolete 

transition period regulatory language. 

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on May 22, 2007. 

ADDRESSES: In commenting, please refer 

to file code CMS–2275–P. 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 to http:// 

www.cms.hhs.gov/regulations/ 

ecomments (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–2275–P, P.O. 

Box 8017, Baltimore, MD 21244–8017. 

Please allow sufficient time for mailed 

comments to be received before the 

close of the comment period. 

3. 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 FURTHER INFORMATION CONTACT: 

Charles Hines, (410) 786–0252 or Stuart 

Goldstein, (410) 786–0694. 

SUPPLEMENTARY INFORMATION: 

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this rule to assist us in fully 

considering issues and developing 

policies. You can assist us by 

referencing the file code CMS–2275–P 

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. After the close of the 

comment period, we post all electronic 

comments received before the close of 

the comment period on its public Web 

site. Comments received timely will 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. 

I. Background 

A. General 

Title XIX of the Social Security Act 

(the Act) authorizes Federal grants to 

the States for Medicaid programs to 

provide medical assistance to persons 

with limited income and resources. 

While Medicaid programs are 

administered by the States, they are 

jointly financed by the Federal and State 

governments. The Federal government 

pays its share of medical assistance 

expenditures to the State on a quarterly 

basis according to a formula described 

in sections 1903 and 1905(b) of the Act. 

The amount of the Federal share of 

medical assistance expenditures is 

called Federal financial participation 

(FFP). The State pays its share of 

medical expenditures in accordance 

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

The Medicaid Voluntary Contribution 

and Provider Specific Tax Amendments 

of 1991 (Pub. L. 102–234), enacted 

December 12, 1991, amended section 

1903 of the Act to specify limitations on 

the amount of FFP available for medical 

assistance expenditures in a fiscal year 

when States receive certain funds 

donated from providers and revenues 

generated by certain health care-related 

taxes. We issued regulations to 

implement the statutory provisions 

concerning provider donations and 

health care-related taxes in an interim 

final rule (with comment period) 

published on November 24, 1992 (57 FR 

55118). A final rule was issued on 

August 13, 1993 (58 FR 43156). The 

Federal statute and implementing 

regulations were designed to protect 

Medicaid providers from being unduly 

burdened by tax programs. Health care 

related tax programs that are compliant 

with the requirements set forth by the 

Congress create a significant tax burden 

for health care providers that do not 

participate in the Medicaid program or 

that provide limited services to 

Medicaid individuals. 

B. Health Care-Related Taxes 

Section 1903(w) of the Act requires 

that State health care-related taxes must 

be imposed on a permissible class of 

health care services; be broad based or 

apply to all providers within a class; be 

uniform, such that all providers within 

a class must be taxed at the same rate; 

and avoid hold harmless arrangements 

in which collected taxes are returned 

directly or indirectly to taxpayers. 

Section 1903(w)(3)(E) of the Act 

specifies that the Secretary shall 

approve broad based (and uniformity) 

waiver applications if the net impact of 

the health care-related tax is generally 

redistributive and that the amount of the 

tax is not directly correlated to 

Medicaid payments. The broad based 

and uniformity provisions are waivable 

through a statistical test that measures 

the degree to which the Medicaid 

program incurs a greater tax burden 

when a State tax program is otherwise 

not compliant with the broad based 

and/or uniformity requirement. The 

permissible class of health care services 

and hold harmless requirements cannot 

be waived. The statute and Federal 

regulation identify 19 permissible 

classes of health care items or services 


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that States can tax without triggering a 

penalty against Medicaid expenditures. 

The regulatory language at 42 CFR 

433.68(f) sets forth tests for determining 

the presence of a hold harmless 

arrangement that were directly based on 

the language contained in section 

1903(w)(4) of the Act. The preamble to 

that regulation provided guidance and 

some illustrative examples of the types 

of health care-related tax programs that 

we believed would violate the hold 

harmless prohibitions. In a June 29, 

2005 decision, however, the HHS 

Departmental Appeals Board (DAB), 

DAB No. 1981, found that these 

regulations did not clearly preclude 

certain types of arrangements that we 

believe to be within the scope of the 

statutory hold harmless prohibition and 

implementing regulations. The DAB 

consequently reversed disallowances 

issued by CMS to five States. In each of 

these reversed disallowances, the States 

had created programs that imposed a tax 

on nursing homes and simultaneously 

created programs that awarded grants or 

tax credits to private pay residents of 

those nursing homes. These grants and/ 

or tax credits were designed by the 

States to compensate private pay 

residents of nursing homes for the costs 

of the tax passed on to them by their 

nursing homes through increased 

charges. We concluded that the grants 

and tax credits amounted to hold 

harmless arrangements prohibited from 

FFP under the Medicaid statute and 

regulations. 

One of the hold harmless tests, set 

forth in current rules at § 433.68(f)(3)(i), 

defines arrangements that are 

considered to be prohibited indirect 

guarantees. Taxes imposed on health 

care-related providers may not exceed 6 

percent of total revenues received by the 

taxpayers unless the State makes a 

showing that, in the aggregate, 75 

percent of taxpayers do not receive 75 

percent or more of their total tax costs 

back in enhanced Medicaid payments or 

other State payments. States can tax 

individual classes of health care 

services and providers, including 

inpatient hospital services, outpatient 

hospital services, and nursing facility 

services up to 6 percent of the net 

revenues received by the taxpayers 

within the class of health care services 

without violating prohibitions on the 

indirect hold harmless arrangements. 

The 6 percent limit was established to 

maintain consistency with the average 

level of taxes applied to other goods and 

services in the State, as discussed in the 

November 24, 1992 preamble to the 

interim final rule implementing the 

statute. 

On December 20, 2006 the Tax Relief 

and Health Care Act of 2006 was signed 

into law as Public Law 109–432. Section 

403 of that law incorporated the existing 

regulatory test for an indirect guarantee 

into the Medicaid statute but provided 

for a temporary reduction in the 

allowable tax rate under the first prong 

of the test. Specifically, the indirect 

hold harmless threshold has been 

reduced from 6 percent to 5.5 percent 

effective in any portion of fiscal years 

beginning on or after January 1, 2008 

and through September 30, 2011. 

II. Provisions of the Proposed Rule 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘PROVISIONS OF THE 

PROPOSED RULE’’ at the beginning of 

your comments.] 

A. Permissible Class of Services—

Managed Care Organizations—

§ 433.56(a)(8) 

Section 6051 of the Deficit Reduction 

Act of 2005 (DRA) (Pub. L. 109–171), 

enacted on February 8, 2006, amends 

section 1903(w)(7)(viii) of the Act to 

expand the previous Medicaid managed 

care organization (MCO) provider class 

to include all MCOs. The effective date 

of section 6051 of the DRA is the date 

of enactment, that is, February 8, 2006. 

Therefore to qualify for Federal 

reimbursement, a State’s health carerelated tax would need to apply to both 

Medicaid participating and nonMedicaid participating MCOs. 

Previously, the statute recognized 

services of a Medicaid MCO with a 

contract under section 1903(m) of the 

Act as a permissible class of health care 

services. This particular class of health 

care services was unlike any other 

permissible class of health care services 

identified in statute and regulation, as it 

was the only listed class of health care 

services that permitted taxation of solely 

Medicaid providers of the service. In 

addition, MCOs that participated in 

Medicaid were beginning to use the 

statutory language to reorganize their 

corporate structure to protect their 

commercial lines of business from tax 

liability. The result of this corporate 

restructuring was that the tax was 

imposed on only the Medicaid 

subsidiary of the MCO. With this 

reorganization, States were able to 

impose a tax on only the Medicaid 

revenues of the MCO, effectively 

shifting the entire burden of the tax to 

the Medicaid program. 

We are proposing to implement the 

statutory amendment made in the 

section 6051 of the DRA with 

conforming changes to the regulatory 

provision in § 433.56(a)(8). We are 

proposing to revise the regulatory 

language to specify that all services of 

MCOs (including health maintenance 

organizations and preferred provider 

organizations) regardless of payer source 

will be considered a permissible class of 

health care items or services for 

purposes of health care-related taxes. 

We note that the DRA provides a 

transition period for those States with 

existing Medicaid MCO taxes. For those 

States with a Medicaid MCO only tax 

enacted as of December 8, 2005, this 

provision becomes effective October 1, 

2009. 

B. Tests To Determine Hold Harmless 

Arrangements—§ 433.68(f) 

Currently, the regulations at 

§ 433.68(f) set forth three broad tests to 

determine if there is a hold harmless 

arrangement with respect to a health 

care-related tax. If States enact a tax 

program that violates any of these tests, 

FFP will be reduced by the amount 

collected through that tax program. As 

mentioned above, the recent DAB 

decision has drawn into question how 

the current hold harmless provisions 

will be interpreted and applied. 

Therefore, it is necessary to clarify these 

provisions and ensure proper 

implementation of section 1903(w)(4) of 

the Act. We propose to continue using 

the same regulatory structure of 

§ 433.68(f), while clarifying certain 

terms in each of these hold harmless 

tests. 

Positive Correlation Test—§ 433.68(f)(1) 

We propose to modify and clarify the 

test set forth at § 433.68(f)(1), also 

known as the positive correlation test. A 

State or other unit of government will 

violate this test if they impose a health 

care-related tax and also provide for a 

direct or indirect non-Medicaid 

payment and the payment amount is 

positively correlated to the tax amount 

or to the difference between the 

Medicaid payment and tax amount. 

This proposed rule explains that both 

direct and indirect payments to 

providers, or others paying a health 

care-related tax, will be analyzed in 

determining compliance with this test. 

We propose to interpret the phrase 

‘‘direct and indirect non-Medicaid 

payment’’ broadly. These payments may 

take many forms, such as grants or tax 

credits, although there will undoubtedly 

be other types of payments that we have 

not yet anticipated. The provision of 

non-Medicaid payments may violate 

both the positive correlation test and the 

guarantee test, discussed further below. 

Our discussion of direct and indirect 

non-Medicaid payments is applicable to 

both tests. 


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Determining if a direct payment exists 

should be readily apparent. When a 

non-Medicaid payment is made directly 

to a provider, and it is positively 

correlated to the tax amount, then FFP 

will be denied for the health care related 

tax. 

Unlike a direct payment, an indirect 

payment to a provider may be more 

difficult to detect. Yet, even though an 

indirect payment may not be as obvious, 

indirect payments that are positively 

correlated to a tax will also violate this 

test. An indirect payment can take many 

forms. For example, if the State imposes 

a health care-related tax, such as a tax 

on nursing home beds, and a provider 

is allowed under State statutes or 

regulations (either expressly or 

implicitly) to pass the costs of its tax 

onto patients through rate increases, 

payments by the State to those nonMedicaid patients that demonstrate a 

linkage to the rate increase would be an 

indirect payment to that provider. 

Under this example, the revenue source 

for the payment is not relevant in 

determining that the payment is an 

indirect payment. Money is fungible, 

and, as long as the payment is from a 

source controlled or influenced by the 

State, it will be considered in 

determining whether it has been made 

available as compensation for the tax. In 

reviewing this issue, we would look at 

whether the payment would be made by 

the entity for documented charitable or 

business reasons even if the State were 

not involved. We endeavored to prohibit 

these indirect payments in the 1993 

rules, but the recent DAB decision 

evidences that the original rule may 

have been unclear. This proposed rule 

is intended to further clarify the 

Secretary’s policy. However, the 

purpose of this example is only to 

provide illustration of the broad scope 

of indirect payments. Due to the 

difficulty in predicting all possible 

types of indirect payments, this example 

does not limit our ability to detect other 

indirect payments in the future. 

We recognize that this test interjects 

some degree of subjectivity into this 

analysis. However, the Congress 

intended to prohibit hold harmless 

arrangements that directly or indirectly 

paid a taxpayer for the costs of a tax. 

Some degree of subjective analysis is 

inevitable in determining whether an 

indirect payment exists. We will look at 

all relevant circumstances surrounding 

a tax and payment program to determine 

whether a linkage exists to establish an 

indirect payment. 

The phrase ‘‘positively correlated’’

was defined in the 1993 final rule as 

having the ‘‘same meaning as the 

statistical term.’’ As is evidenced in the 

DAB decision, this definition has led to 

much confusion as to how ‘‘positively 

correlated’’ should be defined. 

Therefore, we would clarify that tax and 

payment amounts are positively 

correlated when they have a positive 

relationship with each other even when 

that relationship is not evidenced 

through a strict correlation in a 

mathematical sense. Two variables can 

be positively correlated even though the 

correlation may vary over time. For 

example, the rate of a tax and payment 

may be closely related, but, the next 

year, the tax rate might be increased 

while the payment might stay the same. 

Although the correlation between the 

two variables may have changed, it 

would still be positive since providers 

incurring the tax receive increased 

payments to offset the tax. For example, 

a State might impose a $4 a day 

occupied bed tax on nursing homes, 

which the homes are permitted to pass 

onto their residents in the form of rate 

increases. At or about the same time 

they impose the tax, the State issues a 

$3.75 grant (or tax credit) for nonMedicaid nursing home residents. A 

year later, the tax might be increased to 

$4.10, but the grant or tax credit might 

remain level. In such a case, a positive 

correlation would be found to exist 

between the grant and the tax because, 

in each year, there would be a positive 

correlation between the tax and grant 

amounts paid in relation to each 

individual service unit (bed-days) to 

non-Medicaid residents. The correlation 

would not be destroyed through the 

variation of one of the two variables (in 

tax or grant amounts). Moreover, as 

discussed above with respect to 

identifying indirect payments, we may 

look to extrinsic evidence, such as 

legislative history and circumstances 

surrounding the tax and grant programs, 

to establish the positive correlation. 

We want to make clear that a positive 

correlation can be discovered in various 

ways. First, a positive correlation can be 

found through a statistical, numerical 

test where a series of tax and payment 

amounts are analyzed to determine if 

there is a statistical relationship 

between both amounts. Second, a 

positive correlation could be found 

where the rate of a tax and the rate of 

a non-Medicaid payment are based on 

the same numeric factors (such as the 

amount of revenues, or bed days). Third, 

a positive correlation could be found 

based on a finding that the nonMedicaid payment is conditional on 

payment (direct or indirect) of the tax. 

In addition to these numerical tests, 

evidence of the intended effect of linked 

tax and payment programs may 

demonstrate that a positive correlation 

exists, especially when a State enacts 

the tax and/or payment programs in the 

same legislative session. Tax and 

payment amounts, as articulated in 

either statute or regulation, can be 

compared and if there is a positive 

relationship between those amounts, 

then the arrangement will be considered 

a hold harmless arrangement. Further, if 

the calculation of the payment amount 

is determined in whole or in part by the 

tax amount, we would also find that 

those amounts are positively correlated. 

The same would hold true if the tax 

amount was calculated based in whole 

or in part on the payment amount. 

There may be other ways that this 

positive relationship could be found, 

and we only provide these examples as 

a demonstration of the broad 

interpretation of the positive correlation 

test. It is simply impossible to anticipate 

all hold harmless plans that could be 

created. 

Defining Tax and Payment Amounts for 

Hold Harmless Analyses 

We propose to clarify the definition of 

tax amounts and payment amounts for 

purposes of hold harmless analyses. We 

propose to unify these definitions so 

that they will have identical meanings 

in all three hold harmless tests. In the 

current rule, we use terms such as 

‘‘amount of the payment,’’ ‘‘amount of 

such tax,’’ ‘‘total tax cost,’’ and ‘‘amount 

of total tax payment.’’ These slightly 

differing phrases have apparently lead 

to confusion as to what amounts should 

be examined in determining whether a 

hold harmless exists. We propose that in 

the positive correlation test, as well as 

the other two tests, to use the terms ‘‘tax 

amount’’ and ‘‘payment amount.’’

Although we are using standardized 

terminology, we intend for these terms 

to encompass all of the meanings that 

could previously have been attributed to 

each of the prior terms, to permit 

maximum flexibility in analyzing the 

relationships between tax and payment 

programs, depending on the particular 

circumstances presented by State tax 

programs. A relationship between a tax 

program and Medicaid or non-Medicaid 

payments, or a direct or indirect 

guarantee, could be found based either 

on the aggregate tax amount that the 

provider pays over a period of time, or 

on the unit tax rate that is applied for 

a particular service. Therefore, if a State 

statute articulates a tax rate applicable 

to each nursing home bed within a 

nursing home, then that tax rate could 

be used in this analysis as the tax 

amount. Likewise, an analysis could be 

based on aggregate payments to 

providers, on payments made on a perVerDate Aug<31>2005 18:37 Mar 22, 2007 Jkt 211001 PO 00000 Frm 00018 Fmt 4702 Sfmt 4702 E:\FR\FM\23MRP1.SGM 23MRP1

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service basis, or on payments to 

individual patients. As with other terms 

that we have clarified, it is impossible 

to anticipate all permutations of what 

would constitute a tax or payment 

amount. Our intention is to define these 

terms broadly to capture new hold 

harmless arrangements as they arise. 

We also believe that standardization 

of the term ‘‘tax amount’’ and ‘‘payment 

amount’’ in all three tests will 

demonstrate that money does not have 

to be expended before a hold harmless 

situation can be discovered. Therefore, 

we will look at the State legislation 

creating a tax and hold harmless 

payment program (for example, grant or 

tax credit program). If a hold harmless 

situation exists on the face of the 

legislation, FFP will be denied for the 

tax amount. It is not necessary for us to 

determine, for example, the amount of 

grant funds actually expended by a State 

in an effort to hold taxpayers harmless 

for the tax. It would be extremely costly 

and administratively burdensome for us 

to track individual monies actually paid 

by States in these payment programs. If 

the tax and pay back programs exist to 

allow for a hold harmless situation, 

such a hold harmless violation will be 

found. 

Medicaid Payment Test—§ 433.68(f)(2) 

Under the current second hold 

harmless test, a hold harmless 

arrangement exists if all or any portion 

of the Medicaid payment varies based 

only on the amount of the total tax 

payment. For the reasons discussed 

above, we are proposing to revise this 

rule to use the standardized terminology 

‘‘tax amount.’’ We are also adding a 

clarification that a Medicaid payment 

will be considered to vary based on the 

tax amount when the payment is 

conditional on the tax payment. In that 

circumstance, the variation between a 

payment of zero and a positive payment 

would be based only on the payment of 

the tax amount. 

We do not believe this clarification is 

inconsistent with the provision in 

section 1903(w)(4) of the Act that 

indicates that the restrictions on hold 

harmless arrangements does not prevent 

States from using taxes ‘‘to reimburse 

health care providers in a class for 

expenditures under this title.’’ Nor do 

we believe that this clarification would 

preclude States that use cost-based 

payment mechanisms from including 

provider tax costs as one of many 

provider costs that are considered in 

setting individualized provider rates. 

But this clarification would affect States 

that seek to use rates that are based 

solely on the receipt of provider taxes, 

rather than on overall provider costs 

(such as supplemental payments 

conditioned on receipt of taxes). Where 

Medicaid payment is conditioned on 

receipt of taxes, we would view the 

payment to be, in part or in full, to 

repay the taxes in a hold harmless 

arrangement rather than as a protected 

reimbursement for costs of Medicaid 

services. 

This clarification is thus necessary to 

ensure that Medicaid payments are not 

made simply to repay providers for the 

tax, but also to ensure the integrity of 

the development of sound payment 

rates in compliance with the 

requirements of section 1902(a)(30) of 

the Act. If Medicaid payments are 

conditional on receipt of particular tax 

amounts, it is an indication that the 

Medicaid payment rate would not 

otherwise be consistent with efficiency, 

economy, and quality of care, and is 

based solely on the return of funding 

received through the tax program. The 

proposed language would, however, 

limit the ability of States to expressly 

condition payment rates on tax receipts 

rather than on a process that determines 

rates that are consistent with efficiency, 

economy and quality of care in 

compliance with section 1902(a)(30)(A) 

of the Act. 

Guarantee Test—§ 433.68(f)(3) 

Under the current third hold harmless 

test, a hold harmless arrangement exists 

if there is a direct or indirect guarantee 

that holds taxpayers harmless for any 

portion of their tax cost. We propose to 

clarify this test to specify that a State 

can provide a direct or indirect 

guarantee through a direct or indirect 

payment. An indirect guarantee can be 

found based on the test as explained 

and modified below. A direct guarantee 

will be found when a State payment is 

made available to a taxpayer or a party 

related to the taxpayer (for example, as 

a nursing home resident is related to a 

nursing home), in the reasonable 

expectation that the payment would 

result in the taxpayer being held 

harmless for any part of the tax. A direct 

guarantee does not need to be an 

explicit promise or assurance of 

payment. Instead, the element necessary 

to constitute a direct guarantee is the 

provision for payment by State statute, 

regulation, or policy. 

An indirect payment to the taxpayer 

would also constitute a direct guarantee. 

One such example of this indirect 

payment providing a direct guarantee 

would be found where a State imposing 

a tax on nursing facilities provided 

grants or tax credits to private pay 

residents of those facilities that could be 

used to compensate those residents for 

any portion of the tax amount that the 

State has allowed to be passed down to 

them by their nursing homes. This 

represents a direct guarantee of an 

indirect payment to taxpayers. 

Additionally, we interpret the phrase 

‘‘all or any portion of the tax amount’’

to mean that a guarantee exists when a 

taxpayer is assured that money will be 

made available for repayment for any 

identifiable portion of the tax liability. 

An indirect guarantee is distinct from 

a direct guarantee in that the payment 

to the provider is through regular or 

enhanced payments for pre-existing 

Medicaid obligations. We discuss 

indirect guarantees separately below. 

C. Indirect Guarantee Hold Harmless 

Arrangements 

Currently, under § 433.68(f)(3)(i) an 

indirect hold harmless violation is 

determined using a two pronged test. If 

a health care-related tax or taxes are 

applied at a rate that produces revenues 

less than 6 percent of the revenues 

received by the taxpayers, the tax or 

taxes will not be in violation of the 

indirect hold harmless provision. If a 

health care-related tax or taxes exceed a 

6 percent rate, we would consider a 

hold harmless to exist if 75 percent or 

more of the taxpayers in the class 

receive 75 percent or more of their total 

tax back in enhanced Medicaid 

payments or other State payments. The 

second prong of this test applies the test 

in the aggregate to all health care-related 

taxes applicable to each class. Moreover, 

in applying this test, we may consider 

as ‘‘enhanced Medicaid payments’’ any 

amount that any branch of the State, 

including legislative and executive 

branches, has indicated could be subject 

to reduction in the absence of provider 

tax revenues. 

The Tax Relief and Health Care Act of 

2006 has lowered the maximum 

threshold under the indirect hold 

harmless provision from 6 percent of net 

patient service revenue to 5.5 percent 

effective in fiscal years beginning on or 

after January 1, 2008 through September 

30, 2011, prior to a State being required 

to demonstrate the second prong of the 

indirect hold harmless provision. 

D. Permissible Class of Services—

Intermediate Care Facilities for the 

Mentally Retarded—§ 433.56(a)(4) 

In the interim final rule with 

comment that implemented Medicaid 

Voluntary Contribution and Provider 

Specific Tax Amendments of 1991, the 

statutory class of health care items and 

services at section 1903(w)(7)(iv) of the 

Act for services of intermediate care 

facilities for the mentally retarded (ICF/ 

MR) was expanded to include similar 

services furnished by community-based 


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residences for the mentally retarded 

under a waiver under section 1915(c) of 

the Act, in a State in which, as of 

December 24, 1992, at least 85 percent 

of those facilities were classified as ICF/ 

MRs before the grant of the waiver. 

These services furnished by the 

residences were added because, ‘‘in 

some States, many former ICF/MRs were 

converted to group homes under the 

waivers. These facilities could easily be 

converted back to ICF/MRs.’’ This 

exception was very narrow and was 

only intended to capture those States 

that, before the issuance of the interim 

final rule December 24, 1992, were 

granted waivers that converted existing 

ICF/MRs to community-based 

residences. 

We no longer believe that it is 

appropriate to include community 

residences in the ICF/MR class even to 

the extent of this narrow exception. We 

are no longer concerned that States will 

convert group homes back to ICF/MRs 

because of the general success of the 

home and community based services 

program. As important, it is not 

equitable to accord different treatment 

to States that converted ICF/MRs before 

December 24, 1992 than to other States. 

Therefore, we are clarifying at 

§ 433.56(a)(4) the permissible class for 

purposes of health care-related taxes to 

those services of ICF/MRs. 

E. Hold Harmless Tests for Determining 

Bona Fide Provider Related Donations 

At § 433.54(c), the regulations contain 

tests for hold harmless arrangements 

with respect to provider-related 

donations that are similar to those with 

respect to provider taxes. For the 

reasons discussed above with respect to 

provider taxes, we are proposing 

parallel revisions to this section. We 

note that, similar to the provisions 

concerning provider taxes, we intend 

that a hold harmless arrangement would 

be found without regard to whether the 

transfers of funds that are the basis for 

the donation or the repayment are 

collected or distributed through third 

parties (such as patients, provider 

associations, or other entities). 

F. Miscellaneous 

Section 1903(w) of the Act, as added 

by the Medicaid Voluntary Contribution 

and Provider Specific Tax Amendments 

of 1991, became effective January 1, 

1992. However, section 1903(w)(1)(C)(ii) 

of the Act provided for transition 

periods during which, under certain 

circumstances, States could receive, 

without a reduction in FFP, revenues 

from provider-related donations and 

impermissible health care-related tax 

programs in effect before the enactment 

of the Medicaid Voluntary Contribution 

and Provider Specific Tax Amendments 

of 1991. The requirements related to 

these transition periods are currently 

located in various sections of the 

current regulation from § 433.58 through 

§ 433.68. The last transition period 

expired in 1993. 

We are proposing to remove from 

within the regulatory text all references 

to collection of provider-related 

donations and health care-related taxes 

during the transition periods since all 

transition periods have expired. We 

believe this would create a more 

streamlined regulation that is easier to 

read. 

III. Collection of Information 

Requirements 

This document does not impose 

information collection and 

recordkeeping requirements. 

Consequently, it need not be reviewed 

by the Office of Management and 

Budget under the authority of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 35). 

IV. Response to Comments 

Because of the large number of public 

comments we normally receive on 

Federal Register documents, we are not 

able to acknowledge or respond to them 

individually. We will consider all 

comments we receive by the date and 

time specified in the DATES section of 

this preamble, and, when we proceed 

with a subsequent document, we will 

respond to the comments in the 

preamble to that document. 

V. Regulatory Impact Analysis 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Regulatory Impact Analysis’’ at 

the beginning of your comments.] 

A. Overall Impact 

We have examined the impact of this 

rule 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). 

This rule would surpass the economic 

threshold and is considered a major 

rule. This rule is estimated to reduce 

Federal Medicaid outlays by $85 million 

in FY 2008 and by $115 million per year 

in FY 2009 through FY 2011. 

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 million to $29 million in any 1 

year. Individuals and States are not 

included in the definition of a small 

entity. We are not preparing an analysis 

for the RFA because the regulation will 

not have a direct impact on small 

entities. In this case the regulation 

directly affects payments the States 

receive from the Federal government 

and the impact on health care facilities 

is a secondary impact. 

While the impact on health care 

facilities is secondary, we nevertheless 

discuss the potential impact on small 

entities. First, the reduced tax limit 

proposed under this rule would help 

alleviate tax burdens on small health 

care facilities, to the extent they were 

subject to a health care-related tax. If 

States choose to maintain 

reimbursement rates, small health care 

facilities may receive higher net 

Medicaid reimbursement in light of the 

reduced tax burden. However, States 

may be unwilling to maintain 

reimbursement rates without the full 

revenue from the health care-related tax 

to contribute to the non-Federal share. 

If States choose to reduce Medicaid 

reimbursement rates to small health care 

facilities, this could result in lower net 

Medicaid reimbursement even after 

accounting for a reduction in the tax 

burden. 

Since we are uncertain how States 

will alter their Medicaid 

reimbursements in response to the 

reduced tax limit, we cannot provide an 

exact and quantifiable impact on such 

small entities. For this reason, we would 

like to specifically solicit public 

comment on the impact this rule would 

have on small health care facilities. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory 

impact analysis if a rule may have a 

direct impact on the operations of a 

substantial number of small rural 

hospitals. This analysis must conform to 

the provisions of section 603 of the 


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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. We are not 

preparing an analysis for section 1102(b) 

of the Act because we have determined 

that this rule would not have a direct 

impact on the operations of a substantial 

number of 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. This rule 

would not result in expenditure in any 

1 year by State, local, or tribal 

governments, in the aggregate, or by the 

private sector, of $120 million. 

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. 

While this regulation would reduce the 

threshold rate for allowable provider 

taxes from 6 percent to 5.5 percent, this 

change is required by section 403 of the 

Tax Relief and Health Care Act of 2006. 

This section of the statute was selfimplementing on December 20, 2006; 

however, this rulemaking is necessary to 

include the reduction in the regulatory 

text, therefore ensuring consistency 

with applicable law and thus 

minimizing any confusion. 

Furthermore, we do not believe the 

discretionary requirements put in place 

by this rulemaking would impose 

substantial direct requirements or costs 

on State and local governments. 

B. Anticipated Effects 

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

BEING IMPLEMENTED BY CMS–2275–P—ANNUAL EXPECTED SAVINGS

[Amounts in millions] 

Reduction in Federal Medicaid outlays in 

millions 

Fiscal year 

2008 2009 2010 2011 2012 

Provider Tax Reform .................................................................................................... 85 115 115 115 0 

3% discount rate .......................................................................................................... 83 108 105 102 0 

7% discount rate .......................................................................................................... 79 100 94 88 0 

Accounting Statement 

As required by OMB Circular A–4 

(available at 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 proposed rule. This 

table provides our best estimate of the 

reduction in Federal Medicaid outlays 

for the years 2008 through 2012 as a 

result of the changes presented in this 

proposed rule. This rule only affects 

transfer payments between the Federal 

government and State governments. 

OMB—STATEMENT OF ACCOUNTS

Annualized monetized 

transfers 

(in millions) 

3% ...................................... 87 per year. 

7% ...................................... 88 per year. 

Provider Tax Reform 

1. Effects on State Medicaid Programs 

Estimates of the impact of lowering 

the maximum allowable provider taxes, 

fees, and assessments were derived from 

Medicaid financial management reports 

on State receipts from these programs 

(form CMS–64.11). Since we do not 

believe that all States report completely 

their tax receipts from health carerelated taxes on the form CMS–64.11, 

we bolstered our estimates by also 

analyzing information reported by some 

States as part of their request for waiver 

of the broad-based and/or uniformity 

requirements. These requests include 

estimated total tax collections and total 

net revenues received by taxpayers 

applicable to a permissible class of 

health care services. From this available 

information, we identified 15 whose 

receipts as of the date of the reports 

were believed to equal the maximum 

threshold of 6 percent of net patient 

service revenue. In accordance with the 

new statutory language to reduce the 

maximum threshold from 6 to 5.5 

percent, FFP corresponding to these 

receipts would be reduced by 8.33 

percent [(1–0.55/6.0) × 100]. As 

described below, there are a number of 

avenues available for States to address 

these reductions. Accordingly, in 

estimating the potential Federal savings, 

we applied a behavioral offset of 50 

percent to the savings calculated from 

reported data as described above. In 

accordance with the statute, savings 

were estimated only for portions of 

fiscal years beginning January 1, 2008 

and ending September 30, 2011. 

States have a number of options open 

to them for addressing the reduction in 

FFP. In order to maintain existing 

reimbursement rates funded by a health 

care related tax in excess of the 5.5 

percent threshold, they can restructure 

State spending and shift funds between 

programs. This could result in loss of 

State funding for other programs. States 

may also be able to raise funds through 

increases in other forms of generally 

applicable tax revenue increases. This 

could raise tax costs for other taxpaying 

entities within States. Finally, States, as 

a last resort, can reduce reimbursement 

to the taxpaying health care providers. 

We are uncertain which options 

States may employ to address this 

change. 

2. Effects on Other Providers 

The reduced tax limit proposed under 

this rule would help alleviate tax 

burdens on health care providers for 

obligations to the Medicaid program 

that are otherwise the responsibility of 

the States. However, if States choose to 

reduce reimbursement rates to health 

care providers, this could result in 

lower net Medicaid reimbursement for 

the provider even after accounting for 

reduction in the tax burden. On the 

other hand, if States choose to maintain 

reimbursement rates by finding other 

non-Federal share sources to support 

the Medicaid reimbursement rates, 

providers may receive higher net 


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Medicaid reimbursement in light of the 

reduced tax burden. 

C. Alternatives Considered 

In developing this regulation the 

following alternatives were considered. 

First, the existing regulatory threshold 

percentage of 6 percent could be 

maintained. Second, we considered 

reducing the regulatory threshold to 3 

percent because we have noticed a 

recent trend in States’ efforts to 

maximize non-Federal share funding 

opportunities under current Medicaid 

law through taxation of health care 

providers. 

The result has been that the Federal 

government is providing matching 

funds on Medicaid rate increases that 

are funded without additional State 

dollars but instead, with revenues 

collected from taxes on health-care 

providers. This shift in fiscal 

responsibilities is typically 

accompanied by creative payment 

mechanisms that effectively place a 

disproportionate burden on the 

Medicaid program relative to other 

payers. In this way, States are avoiding 

their payment responsibilities to the 

Medicaid program by shifting their 

share of the increased Medicaid 

payment rate obligations to the same 

health care providers serving Medicaid 

beneficiaries. 

The current trend in States’ approach 

to taxing health care providers appears 

to start with a determination of the 

maximum amount of tax revenue that 

can be collected from health care 

providers. We have seen this 

particularly in State health care-related 

tax programs targeting high Medicaid 

utilized services solely as the basis for 

increasing Medicaid rates to those same 

providers. 

States appear to be exercising their 

ability under the law to request waivers 

of the broad based and/or uniformity 

requirements of the provider tax law in 

an effort to minimize the tax burden on 

facilities that furnish little to no services 

to Medicaid patients. Although we 

would only approve such a waiver 

request within the allowable regulatory 

standards, States requesting the waivers 

continue to propose taxes that collect 

the maximum 6 percent limit and vary 

the rate of tax to minimize the tax 

burden on non-Medicaid facilities 

within the slightest margin allowable 

under current regulations. Most waiver 

requests are initially submitted 

applicable to a tax structure that is 

inconsistent with the Federal statute 

and regulations. This requires CMS to 

provide ongoing feedback and 

assistance to States. States ultimately 

deviate from their initial tax structure 

until they are able to reach an optimal 

tax structure that enables them to gain 

approval while maximizing the nonMedicaid tax burden. 

Through our review of these practices, 

we have also noticed that many States 

are applying the current statutory and 

regulatory authority that permits the 

exclusion of Medicare revenue from a 

health care-related tax, which 

effectively raises the rate of tax on only 

the Medicaid revenues and commercial/ 

private pay revenues above the 

aggregate 6 percent limit (measured on 

all payers’ revenues). We have also seen 

an increase in the tax revenues collected 

through our examination of the 

revenues reported by States on the CMS 

64.11A. Based on a review of recent 

quarterly expenditures, States reported 

the collection of over $2.2 billion in tax 

revenues from health care providers. 

However, since the Tax Relief and 

Health Care Act of 2006 reduced the 

regulatory threshold to 5.5 percent, 

none of the above mentioned 

alternatives were taken. 

D. Conclusion 

For these reasons, we are not 

preparing analysis for either the RFA or 

section 1102 (b) of the Act because we 

have determined that this rule would 

not have a direct significant economic 

impact on a substantial number of small 

entities or a direct significant impact on 

the operations of a substantial number 

of small rural hospitals. 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

List of Subjects in 42 CFR Part 433 

Administrative practice and 

procedure, Child support, Claims, Grant 

programs-health, Medicaid, Reporting 

and recordkeeping requirements. 

For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services proposes to amend 

42 CFR chapter IV as follows: 

PART 433—STATE FISCAL 

ADMINISTRATION 

1. The authority citation for part 433 

continues to read as follows: 

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

1903(w) of the Social Security Act (42 U.S.C. 

1302). 

Subpart B—General Administrative 

Requirements State Financial 

Participation 

2. Section 433.54 is amended by 

revising paragraph (c) to read as follows: 

§ 433.54 Bona fide donations. 

* * * * * 

(c) A hold harmless practice exists if 

any of the following applies: 

(1) The State (or other unit of 

government) provides for a direct or 

indirect non-Medicaid payment to those 

providers or others making, or 

responsible for, the donation, and the 

payment amount is positively correlated 

to the donation. A positive correlation 

includes any positive relationship 

between these variables, even if not 

consistent over time. 

(2) All or any portion of the Medicaid 

payment to the donor, provider class, or 

related entity, varies based only on the 

amount of the donation, including 

where Medicaid payment is conditional 

on receipt of the donation. 

(3) The State (or other unit of 

government) receiving the donation 

provides for any direct or indirect 

payment, offset, or waiver such that the 

provision of that payment, offset, or 

waiver directly or indirectly guarantees 

to return any portion of the donation to 

the provider (or other parties 

responsible for the donation). 

* * * * * 

3. Section 433.56 is amended by—

A. Republishing the introductory text 

to paragraph (a). 

B. Revising paragraph (a)(4). 

C. Revising paragraph (a)(8). 

The revisions read as follow: 

§ 433.56 Classes of health care services 

and providers defined. 

(a) For purposes of this subpart, each 

of the following will be considered as a 

separate class of health care items or 

services: 

* * * * * 

(4) Intermediate care facility services 

for the mentally retarded; 

* * * * * 

(8) Services of managed care 

organizations (including health 

maintenance organizations, preferred 

provider organizations); 

* * * * * 

§ 433.57 [Amended] 

4. Section § 433.57 is amended by—

A. Removing paragraph (a). 

B. Redesignating existing paragraphs 

(b) and (c) as paragraphs (a) and (b), 

respectively. 

§ 433.58 [Removed and reserved] 

5. Section 433.58 is removed and 

reserved. 

§ 433.60 [Removed and reserved] 

6. Section 433.60 is removed and 

reserved. 

7. Section 433.66 is amended by—

A. Revising the section heading. 


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B. Revising paragraph (a). 

The revisions read as follows: 

§ 433.66 Permissible provider-related 

donations. 

(a) General rule. (1) Except as 

specified in paragraph (a)(2) of this 

section, a State may receive revenues 

from provider-related donations without 

a reduction in FFP, only in accordance 

with the requirements of this section. 

(2) The provisions of this section 

relating to provider-related donations 

for outstationed eligibility workers are 

effective on October 1, 1992. 

* * * * * 

8. Section 433.67 is amended by 

revising paragraph (a)(2) to read as 

follows: 

§ 433.67 Limitations on level of FFP for 

permissible provider-related donations. 

(a)(1) * * * 

(2) Limitations on donations for 

outstationed eligibility workers. 

Effective October 1, 1992, the maximum 

amount of provider-related donations 

for outstationed eligibility workers, as 

described in § 433.66(b)(2), that a State 

may receive without a reduction in FFP 

may not exceed 10 percent of a State’s 

medical assistance administrative costs 

(both the Federal and State share), 

excluding the costs of family planning 

activities. The 10 percent limit for 

provider-related donations for 

outstationed eligibility workers is not 

included in the limit in effect through 

September 30, 1995, for health carerelated taxes as described in § 433.70. 

* * * * * 

9. Section 433.68 is amended by—

A. Revising the section heading. 

B. Revising paragraph (a). 

C. Republishing paragraph (f) 

introductory text. 

D. Revising paragraphs (f)(1), (f)(2), 

(f)(3) introductory text, and (f)(3)(i). 

The revisions read as follows: 

§ 433.68 Permissible health care-related 

taxes. 

(a) General rule. A State may receive 

health care-related taxes, without a 

reduction in FFP, only in accordance 

with the requirements of this section. 

* * * * * 

(f) Hold harmless. A taxpayer will be 

considered to be held harmless under a 

tax program if any of the following 

conditions applies: 

(1) The State (or other unit of 

government) imposing the tax provides 

for a direct or indirect non-Medicaid 

payment to those providers or others 

paying the tax and the payment amount 

is positively correlated to either the tax 

amount or to the difference between the 

Medicaid payment and the tax amount. 

A positive correlation includes any 

positive relationship between these 

variables, even if not consistent over 

time. 

(2) All or any portion of the Medicaid 

payment to the taxpayer varies based 

only on the tax amount, including 

where Medicaid payment is conditional 

on receipt of the tax amount. 

(3) The State (or other unit of 

government) imposing the tax provides 

for any direct or indirect payment, 

offset, or waiver such that the provision 

of that payment, offset, or waiver 

directly or indirectly guarantees to hold 

taxpayers harmless for all or any portion 

of the tax amount. 

(i) An indirect guarantee will be 

determined to exist under a two prong 

‘‘guarantee’’ test. If the health carerelated tax or taxes on each health care 

class are applied at a rate that produces 

revenues less than or equal to 6 percent 

of the revenues received by the 

taxpayer, the tax or taxes are 

permissible under this test, except that, 

for any portion of a fiscal year beginning 

on or after January 1, 2008 through 

September 30, 2011, the applicable 

percentage of net operating revenues is 

5.5 percent. When the tax or taxes 

produce revenues in excess of the 

applicable percentage of the revenue 

received by the taxpayer, CMS will 

consider an indirect hold harmless 

provision to exist if 75 percent or more 

of the taxpayers in the class receive 75 

percent or more of their total tax costs 

back in enhanced Medicaid payments or 

other State payments. The second prong 

of the indirect hold harmless test is 

applied in the aggregate to all health 

care taxes applied to each class. If this 

standard is violated, the amount of tax 

revenue to be offset from medical 

assistance expenditures is the total 

amount of the taxpayers’ revenues 

received by the State. 

* * * * * 

§ 433.70 [Amended] 

10. Section 433.70 is amended by—

A. Revising the section heading. 

B. Removing paragraph (a)(1). 

C. Removing the paragraph 

designation for existing paragraph (a)(2). 

The revised heading reads as follows: 

§ 433.70 Limitation on level of FFP for 

revenues from health care-related taxes. 

* * * * * 

(Catalog of Federal Domestic Assistance 

Program No. 93.778, Medical Assistance 

Program.) 

Dated: September 8, 2006. 

Mark B. McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: January 24, 2007. 

Michael O. Leavitt, 

Secretary. 

[FR Doc. 07–1331 Filed 3–15–07; 4:00 pm] 

BILLING CODE 4120–01–P 


sroberts on PROD1PC70 with PROPOSALS