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[Federal Register Volume 72, Number 173 (Friday, September 7, 2007)]
[Proposed Rules]
[Pages 51397-51403]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-4356]

[[Page 51397]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431, 433, and 440

[CMS-2287-P]
RIN 0938-AP13

Medicaid Program; Elimination of Reimbursement Under Medicaid for 
School Administration Expenditures and Costs Related to Transportation 
of School-Age Children Between Home and School

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: Under the Medicaid program, Federal payment is available for 
the costs of administrative activities ``as found necessary by the 
Secretary for the proper and efficient administration of the State 
plan.'' The proposed rule would eliminate reimbursement under the 
Medicaid program for the costs of certain activities based on a 
Secretarial finding that these activities are not necessary for the 
proper and efficient administration of the State plan, nor do they meet 
the definition of an optional transportation benefit. Based on these 
determinations, under the proposed rule, Federal Medicaid payments 
would no longer be available for administrative activities performed by 
school employees or contractors, or anyone under the control of a 
public or private educational institution, and transportation from home 
to school and back for school-aged children with an Individualized 
Education Program (IEP) or an Individualized Family Services Plan 
(IFSP) established pursuant to the Individuals with Disabilities 
Education Act (IDEA).

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on November 6, 2007.

ADDRESSES: In commenting, please refer to file code CMS-2287-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four 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 regular 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-2287-P, Mail Stop S3-14-22, 7500 Security Boulevard, Baltimore, MD 
21244.
    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-2287-P, Mail Stop S3-14-22, 7500 Security Boulevard, 
Baltimore, MD 21244.
    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) 786-3256 or (410) 786-9215 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: Sharon J. Brown, (410) 786-0673, Judi 
Wallace, (410) 786-3197.
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this proposed rule to assist us in fully 
considering issues and developing policies. You can assist us by 
referencing the file code CMS-2287-P 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. E.S.T. To schedule an appointment to view public 
comments, phone 1-800-743-3951.

SUPPLEMENTARY INFORMATION:

I. Background

A. Medicaid Program

    Title XIX of the Social Security Act (the Act) authorizes Federal 
grants to States for Medicaid programs, operated by the State under an 
approved State plan, that provide medical assistance to needy 
individuals including low-income families, the elderly, and persons 
with disabilities. Federal payment is available to States for a 
proportion of expenditures for medical assistance under the approved 
State plan, and qualified expenditures for administration of the State 
plan. This joint Federal-state financing of expenditures is described 
in section 1903(a) of the Act, which sets forth the rates of Federal 
financing for different types of expenditures.
    Under section 1903(a)(7), of the Act, Federal payment is currently 
available at a rate of 50 percent of amounts expended by a State ``as 
found necessary by the Secretary for the proper and efficient 
administration of the State plan.'' In addition, OMB Circular A-87, 
which contains the cost principles for State, local and Indian tribal 
governments for the administration of Federal awards, states that, 
``Governmental units are responsible for the efficient and effective 
administration of Federal awards.'' Under these provisions, 
administrative expenditures must be reasonable and necessary for the 
operation of the governmental unit or the performance of the Federal 
award.
    Transportation to and from providers is not expressly mentioned in 
the Medicaid statute. Since the inception of the program, however, the 
Federal

[[Page 51398]]

government has recognized that transportation is essential to the 
administration of the State plan, to ensure that beneficiaries have 
access to covered services.
    Federal regulations at 42 Code of Federal Regulations (CFR) 431.53 
require that State plans ``specify that the Medicaid agency will ensure 
necessary transportation for recipients to and from providers'' and 
describe the methods for doing so. Alternatively, under 42 CFR 
440.170(a), the option of furnishing transportation as an optional 
covered service recognized under section 1905(a)(28) of the Act is 
defined and specified. Whether transportation is furnished as an 
administrative activity or as a covered service could affect the 
Federal Medicaid matching rate and the flexibility available to the 
State, but these issues are not relevant for purposes of this proposed 
regulation.

B. Medicaid and Schools

1. Medical Assistance Furnished in Schools
    A wide range of medical services are furnished to students in 
school settings. In particular, pursuant to requirements under the 
Individuals with Disabilities Education Act (IDEA), schools deliver a 
broad range of educational and related services (e.g., educational, 
social, and medical services) to students with disabilities to address 
their diverse needs.
    Section 411(k)(13) of the Medicare Catastrophic Coverage Act of 
1988 (MCCA) amended section 1903(c) of the Act to clarify that Federal 
Medicaid payment is available for otherwise covered services furnished 
to children in fulfillment of requirements under IDEA. Specifically, 
section 1903(c) of the Act, as amended by the MCCA, prohibits the 
Secretary from denying or restricting Federal Medicaid payment to 
States for covered services furnished to a child with a disability on 
the basis that the services are included in the child's Individualized 
Education Program (IEP) or Individualized Family Services Plan (IFSP) 
established pursuant to the IDEA.
    Some of the special education and related services required by the 
IDEA are within the scope of services provided under the Medicaid 
program. Medicaid covers direct medical services included in an IEP or 
IFSP under the following conditions:
     The direct medical services are medically necessary and 
included in a Medicaid covered category (speech therapy, physical 
therapy, etc.);
     All other Federal and State Medicaid regulations are 
followed, including those for provider qualifications, comparability of 
services and the amount, duration and scope provisions; and
     The direct medical services are included in the State's 
approved Medicaid plan and/or available under the Early and Periodic 
Screening, Diagnostic and Treatment (EPSDT) program.
    As discussed in more detail below, the proposed rule would not 
affect Federal reimbursement for direct medical service expenditures 
(other than certain transportation costs, discussed separately below).
2. Administrative Activities Performed by School Employees or 
Contractors (School-Based Administrative Activities)
    CMS has previously recognized that schools and school districts may 
perform activities that provide support for the Medicaid State plan. In 
1997, CMS issued a guidance document entitled, ``MEDICAID AND SCHOOL 
HEALTH: A TECHNICAL ASSISTANCE GUIDE,'' that interpreted existing law 
and regulations to permit States to claim Federal Medicaid matching 
funds for the costs of school-based administrative activities, 
specifically including Medicaid outreach, eligibility intake, 
information and referral, coordination and monitoring of health 
services, and interagency coordination. In that guidance, CMS 
emphasized that allowable activities must directly relate and support 
the Medicaid State plan or waiver services.
    In May 2003, CMS issued additional guidance on school-based 
claiming in the ``Medicaid School-Based Administrative Claiming Guide'' 
(the Guide). The Guide was intended to inform schools, State Medicaid 
agencies, and other interested parties on the appropriate methods for 
claiming Federal reimbursement for the costs of Medicaid administrative 
activities performed in the school setting. The Guide described 
allowable Medicaid school-based administrative activities as including 
the following:
     Medicaid Outreach
     Facilitating Medicaid Eligibility Determinations
     Transportation Related Activities in Support of Medicaid 
Covered Services
     Translation Related to Medicaid Services
     Program Planning, Policy Development, and Interagency 
Coordination Related to Medical Services
     Medical/Medicaid Related Training
     Referral, Coordination, and Monitoring of Medicaid 
Services
    As discussed further below, this proposed rule would supersede the 
prior guidance and would represent the Secretary's determination that 
Medicaid expenditures for such school-based administrative activities 
do not meet the statutory test under section 1903(a)(7) of being 
``necessary * * * for the proper and efficient administration of the 
State plan.'' However, the proposed rule does not bring into question 
the legitimacy of the types of Medicaid administrative activities 
provided in schools. Rather, it reflects the Secretary's determination 
that such activities are only necessary for the proper and efficient 
administration of the State plan when conducted by employees of the 
State or local Medicaid agency. Due to inconsistent application of 
Medicaid requirements by schools to the types of administrative 
activities conducted in the school setting, the Secretary has 
determined that such activities can only be properly conducted, 
overseen and appropriately allocated to Medicaid when conducted by 
employees of the State or local Medicaid agency.
    CMS recognizes that schools are valid settings for the delivery of 
Medicaid services. Under the proposed rule, CMS would continue to 
reimburse States for the costs of school-based direct medical services 
under the IDEA that are covered in their approved State Medicaid plan, 
and for transportation of school-age children from school to a non-
school-based provider that bills under the Medicaid program, among 
other types of expenditures that will remain eligible for Federal 
financial participation (FFP).
3. Transportation From Home to School and Back
    Ensuring transportation to and from providers is a required 
administrative activity under CMS regulations at 42 CFR 431.53 or, 
alternatively, transportation to and from providers can be furnished as 
a medical service recognized by the Secretary under section 1905(a)(28) 
of the Act, as indicated in 42 CFR 440.170(a).
    CMS previously addressed school-based transportation in the 
guidance document discussed in the prior section, and in guidance 
contained in a May 21, 1999, letter to State Medicaid Directors. In 
those documents, CMS expressed the policy that Medicaid payment for 
transporting Medicaid-eligible children to and from school was 
extremely limited, including only specialized transportation that is 
required under an IEP for children with disabilities, on a day when 
that child receives a covered medical service from a qualified provider 
at the school. In

[[Page 51399]]

this guidance, CMS indicated that the same interpretation was 
applicable to transportation claimed as a covered medical service.
    However, as discussed further below, the proposed rule would 
supersede the prior guidance and would represent the Secretary's 
determination that transportation from home to school and back does not 
meet the definition of an optional medical transportation service nor 
is it necessary for the proper and efficient administration of the 
State plan.

C. Medicaid Reimbursement

    In general, States submit claims for Federal funds with respect to 
expenditures under their Medicaid programs either as ``medical 
assistance'' or as ``State/local administration.''
i. Medical Assistance
    FFP for allowable medical assistance expenditures under the 
Medicaid program is determined by the applicable Federal medical 
assistance percentage (FMAP) rate for a given State. The FMAP rate is 
determined annually for each State by a formula based on the 
relationship of the State's average per capita income level with the 
national per capita income level.
    The State Medicaid Agency (SMA) reimburses participating Medicaid 
providers, including school providers, for allowable direct medical 
service expenditures. These reimbursement rates are set by the SMA and, 
therefore, any discussions regarding the appropriateness of such rates 
on the part of providers must be conducted at the State level. The 
reimbursement methodology is contained in the CMS approved Medicaid 
State Plan.
    The proposed rule would not affect Federal reimbursement for the 
costs of allowable direct medical service expenditures.
ii. Administration
    According to the Medicaid statute at section 1903(a)(7) of the Act 
and implementing regulations at 42 CFR 430.1 and 42 CFR 431.15, for the 
costs of any administrative activities to be allowable and reimbursable 
under Medicaid, the activities must be ``found necessary by the 
Secretary for the proper and efficient administration of the plan'' 
(referring to the Medicaid State plan).
    In addition, OMB Circular A-87, which contains the cost principles 
for State, local and Indian tribal governments for the administration 
of Federal awards, states that, ``Governmental units are responsible 
for the efficient and effective administration of Federal awards.'' 
Under these provisions, administrative expenditures must be reasonable 
and necessary for the operation of the governmental unit or the 
performance of the Federal award.
    FFP for allowable administrative expenditures in schools is 
available at a matching rate of 50 percent. The proposed rule would 
eliminate reimbursement for administrative expenditures conducted by 
school employees or contractors, or anyone under the control of a 
public or private educational agency, and certain transportation costs, 
as specified below. However, under the proposed rule, Federal funding 
would continue to be available for administrative overhead costs which 
are integral to, or an extension of, a specified direct medical service 
to the extent those costs are factored into the rate paid for such 
services and reimbursed at the applicable FMAP rate. These overhead 
costs include patient follow-up, assessment, counseling, education, 
parent consultations, and billing activities. Furthermore, school-based 
administrative activities, such as Medicaid outreach and eligibility 
intake, that are conducted by employees of the State or local Medicaid 
agency, will remain eligible for FFP.

D. Improper Billing

    CMS has had long-standing concerns about improper billing by school 
districts for administrative costs and transportation services. The 
U.S. Department of Health and Human Services' Office of the Inspector 
General and the Government Accountability Office have identified these 
categories of expenses as susceptible to widespread fraud and abuse. In 
addition, costs related to education mandates have been improperly 
allocated to Medicaid. Congress has also expressed concern about the 
dramatic increase in Medicaid claims for school-based costs, which were 
the subject of two U.S. Senate Finance Committee hearings, held in June 
1999 and April 2000. In fact, examining State-reported expenditure data 
related to schools reveals that, in certain years, a number of States' 
reported school-based administrative expenditures approached or even 
exceeded their reported school-based direct medical service 
expenditures, which is clearly evidence of improper claiming in this 
area. There may be certain States that do not submit claims for the 
costs of direct services provided in schools, thereby accounting for 
instances in which a State's school-based administrative expenditures 
exceed their direct service expenditures, but such instances are an 
exception to overall school-based expenditure reporting trends.

II. Provisions of the Proposed Regulations

    The proposed rule would establish a Secretarial finding that 
school-based administrative activities are not necessary for the proper 
and efficient administration of the State plan. Moreover, this proposed 
rule would establish a finding that transportation from home to school 
and back for school-age children is neither necessary for the proper 
and efficient administration of the State plan, nor within the scope of 
the optional medical transportation benefit. Based on these findings, 
the proposed rule would specify that FFP under the Medicaid program 
will not be available for school-based administrative and certain 
transportation costs unless conducted by employees of the State or 
local Medicaid agency.
    Under the proposed rule, the following changes would apply for the 
costs of the following activities or services:
     FFP would no longer be available for the costs of school-
based administrative activities under Medicaid. As discussed below, by 
administrative activities we refer to activities that are not properly 
included in the scope of a covered service. School-based administrative 
expenditures are expenditures under the administrative control of a 
public or private educational institution and that are conducted by 
school employees or contractors, or anyone under the control of a 
public or private educational agency.
     FFP would no longer be available for the costs of 
transportation from home to school and back for school-age children 
with an IEP or IFSP established pursuant to the IDEA.
    The rule would supersede all previous guidance, including guidance 
on school-based administrative claiming and school-based 
transportation.
    Under the proposed rule, CMS would continue to reimburse States for 
school-based direct Medicaid services in their approved State plans. 
That is, the proposed rule would not affect the treatment of 
expenditures for direct medical services that are included in the 
approved State Medicaid plan and provided in schools, nor would it 
affect transportation of school-aged children from school or home to a 
non-school-based direct medical service provider that bills under the 
Medicaid program, or from the non-school-based provider to school or 
home.

[[Page 51400]]

    Furthermore, under the proposed rule, CMS would continue to 
reimburse States for transportation costs related to children who are 
not yet school-age and are being transported from home to another 
location, including school, and back to receive direct medical 
services, as long as the visit does not include an educational 
component or any activity unrelated to the covered direct medical 
service.
    Federal funding would also continue to be available for 
administrative overhead costs that are integral to, or an extension of, 
a direct medical service and, as such, are claimed as medical 
assistance. These activities are properly reimbursed at the applicable 
FMAP rate for the related direct medical service, and include patient 
follow-up, assessment, counseling, education, parent consultations, and 
billing activities. Furthermore, school-based administrative 
activities, such as Medicaid outreach and eligibility intake, that are 
conducted by employees of the State or local Medicaid agency will 
remain eligible for FFP under the proposed rule.
    CMS has determined that administrative activities performed by 
schools, and transportation of school-age children from home to school 
and back, are not necessary for proper and efficient administration of 
the State Medicaid plan, and are not within the scope of the 
transportation services recognized by the Secretary under 42 CFR 
440.170(a), for the following reasons:
    (1) The activities or services support the educational program and 
do not specifically benefit the Medicaid program;
    (2) The activities or services are performed by school systems to 
further their educational mission and/or to meet requirements under the 
IDEA, even in the absence of any Medicaid payment;
    (3) The types of school-based administrative activities for which 
claims are submitted to Medicaid largely overlap with educational 
activities that do not directly benefit the Medicaid program; and
    (4) Transportation from home to school and back is not properly 
characterized as transportation to or from a medical provider.
    School-based administrative activities and transportation from home 
to school and back are performed primarily to support educational 
programs rather than administration of the State Medicaid Plan. One of 
the essential functions of schools is to ensure that students receive 
all required services necessary to obtain a free appropriate public 
education.
    Students receive transportation from home to school and back 
regardless of whether or not they are determined eligible for special 
education services. Transportation from home to school and back is an 
essential school function and is furnished by the school regardless of 
whether medical services are received at the school. School-age 
children, including children with an IEP or IFSP, are transported from 
home to school primarily to receive an education, not to receive direct 
medical services. Because transportation coincides with the school 
schedule and is not directly related to a visit to a medical provider, 
characterization of the transportation as medically necessary to gain 
access to providers is inaccurate.
    With respect to school-based administrative activities, section 
1903(c) of the Act provides specific authority under the Medicaid 
program only for reimbursement of medical assistance for specified 
covered services in schools; it contains no provision authorizing 
claiming for the costs of school-based Medicaid administration. CMS has 
determined that the costs of school-based administrative activities 
only meet the requirement of being proper and efficient for the 
administration of the State plan to the extent they are conducted by 
employees of the State or local Medicaid agency, rather than school 
employees or contractors, or anyone under the control of a public or 
private educational institution. In addition, the types of school-based 
administrative activities for which claims are submitted to Medicaid 
largely overlap with educational activities that do not directly 
benefit the Medicaid program. Furthermore, there is unclear and 
inconsistent application of Medicaid requirements by schools to the 
types of administrative activities conducted in the school setting. 
Therefore, under the proposed rule, the costs of school-based 
administrative activities would only be allocable to Medicaid when 
provided by employees of the State or local Medicaid agency.
    States receive Federal aid under IDEA to assist public schools in 
delivering mandated services in pursuit of a free appropriate public 
education. Section 1903(c) of the Act was intended to provide States 
with access to Medicaid funding for services provided under IDEA in 
addition to Federal funding provided through IDEA grants to States. 
Therefore, CMS has determined that the proper and efficient operation 
of the State Medicaid plan does not require payment for the cost of 
administration unrelated to the provision of a covered direct medical 
service or for transportation from home to school and back. Schools 
must perform these activities pursuant to education requirements, even 
in the absence of Medicaid payment. Activities performed by school 
employees are therefore not specifically authorized by the responsible 
State Medicaid agency.
    The proposed rule would eliminate FFP for State claims related to 
transporting school-age children from home to school and back. However, 
if a Medicaid eligible student is transported from school to an 
appointment for a covered service with a non-school-based direct 
medical service provider that bills under the Medicaid program, the 
costs of such transportation would remain eligible for FFP.
    Furthermore, under the proposed rule CMS would continue to 
reimburse States for transportation costs related to children who are 
not yet school-age and are being transported from home to another 
location, including school, and back to receive direct medical services 
as long as the visit does not include an educational component or any 
activity unrelated to the covered direct medical service.

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 Statement

A. Overall Impact

    We have examined the impact of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Flexibility Act (RFA) 
(September 19, 1980, Pub. L. 96-534), 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 and Executive

[[Page 51401]]

Order 13422) directs agencies to assess all costs and benefits of all 
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 proposed rule's savings would 
exceed this economic threshold and it is therefore considered a major 
rule. The proposed rule is estimated to reduce Federal Medicaid outlays 
by $635 million in FY 2009 and by $3.6 billion over the first five 
years (FY 2009-2013). The RFA requires agencies to analyze options for 
regulatory relief of small entities if proposed rules have a 
``significant economic impact on a substantial number of small 
entities.'' For purposes of the RFA, small entities include small 
businesses, nonprofit organizations, and small governmental 
jurisdictions, including school districts. ``Small'' governmental 
jurisdictions are defined as having a population of less than fifty 
thousand. Individuals and States are not included in the definition of 
a small entity. Although some school districts have populations below 
this threshold and are therefore considered small entities for purposes 
of the RFA, CMS has determined the impact on local school districts as 
a result of the proposed rule would not exceed the threshold of 
``significant'' economic impact under the RFA, as discussed below. 
However, we are specifically soliciting comments from the public 
regarding the potential impact on local schools.
    States have the option under the proposed rule to continue funding 
school-based administrative activities using State-only funds; this 
rule simply eliminates the availability of Federal Medicaid matching 
funds for these expenditures when they are performed by employees of 
the school or contractors, or anyone under the control of a public or 
private educational institution, rather than employees of the Medicaid 
agency. However, with respect to transportation specifically, States 
and/or schools will be required under the proposed rule to continue 
funding transportation of school-age children from home to school and 
back to the extent it is required by education statute(s). That is 
because schools provide transportation to and from school for all 
students, not just (or even primarily) special education or Medicaid 
eligible students.
    The Individuals with Disabilities Education Act (IDEA) requires 
public schools to provide a free appropriate public education to 
children with disabilities. The IDEA authorizes funding through the 
U.S. Department of Education (not Medicaid) for special education and 
related services for children with disabilities. While section 1903(c) 
of the Social Security Act authorized Medicaid funding for covered 
services included in an individualized education plan under the IDEA, 
section 1903(c) does not expressly authorize Medicaid funding for 
administrative activities that schools conduct in implementing their 
IDEA responsibilities.
    Medicaid matching funds provided as reimbursement for 
administrative activities are supplemental to the State and local 
funding localities already received. Furthermore, the estimated annual 
Federal savings under this proposed rule is only about one eighth of 
one percent of total annual spending on elementary and secondary 
schools (in 2004 total elementary and secondary spending was $453 
billion according to the Statistical Abstract of the United States, 
Table 245, at http://www.census.gov/compendia/statab/education). 
According to the ``Guidance on Proper Consideration of Small Entities 
in Rulemakings of the U.S. Department of Health and Human Services (May 
2003),'' if the average annual impact on small entities is 3 to 5 
percent or more, it is to be considered significant. Because we use a 
threshold of 3 to 5 percent of annual revenues or costs in determining 
whether a proposed or final rule has a ``significant'' economic impact 
on small entities, we have determined that this proposed rule will not 
have a significant economic impact on a substantial number of small 
entities. However, we welcome comments on both the stated threshold for 
determining what is or is not a significant economic impact and the 
conclusion we reached as a result of the chosen threshold. We are 
additionally requesting comments specific to the potential impact of 
the proposed rule on other programs, both Federal and State programs.
    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. We are not preparing an 
analysis for section 1102(b) of the Act because we have determined, and 
the Secretary certifies, 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 $130 million. This rule contains no mandates. 
The proposed rule anticipates Federal savings of approximately $635 
million in the first year following implementation, but does not 
require States to replace that Federal funding with State funding or 
take any other particular steps. Any mandates regarding school 
transportation spending arise under State constitutions, or other 
Federal or State laws. School-based Medicaid administrative activities 
and transportation from home to school and back are not required 
activities under the Medicaid statute.
    Executive Order 13132 on Federalism establishes certain 
requirements that an agency must meet when it promulgates a proposed 
rule (and subsequent final rule) that imposes substantial direct 
requirements on State and local governments, preempts State law, or 
otherwise has Federalism implications. EO 13132 focuses on the roles 
and responsibilities of different levels of government, and requires 
Federal deference to State policy making discretion when States make 
decisions about the uses of their own funds or otherwise make State-
level decisions. We find that this rule would not have a substantial 
effect on State or local government policy discretion. While the 
proposed rule would eliminate the ability of States to claim Federal 
Medicaid funding for school-based administrative and certain 
transportation costs, notably routine home-to-school and back bus 
transportation, it would not impose any requirement as to how States or 
localities administer or pay for such activities, or interfere in any 
way with the ability of States to determine school transportation 
policy. The rule would simply recognize that routine school 
transportation from home to school and back and related administrative 
activities are not authorized under the Medicaid statute as necessary 
for the proper and efficient administration of the State plan, nor do 
they meet the

[[Page 51402]]

definition of an optional transportation benefit under Medicaid.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

B. Anticipated Effects

    The proposed rule is a major rule because it is estimated to result 
in $635 million in savings during the first year and $3.6 billion in 
savings over the first five years. The following chart summarizes our 
estimate of the anticipated effects of this proposed rule.

  Table I.--Estimated Reduction in Federal Medicaid Outlays Resulting From the Elimination of Reimbursement for
                  School-Based Administration and Certain Transportation Costs in Proposed Rule
                                              [Amounts in millions]
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                                                   2009       2010       2011       2012       2013    2009-2013
----------------------------------------------------------------------------------------------------------------
School-Based Costs: Eliminate Reimbursement          -635       -675       -720       -770       -820      -3620
 for Administration/Transportation............
----------------------------------------------------------------------------------------------------------------

    These estimates assume implementation beginning in the 2008-09 
school year and are based on recent reviews of State reported school-
based administrative and direct medical service expenditures reported 
on the quarterly CMS expenditure forms (MBES/CBES Form 64.10I and Form 
64.10PI Information Forms for School-Based ADM and MAP claims). From 
these voluntary State claiming reports, an estimate of the total amount 
of claims under the Medicaid program that would be affected by the 
proposed rule was developed and then projected forward using 
assumptions consistent with the most recent President's Budget 
projections. There is uncertainty in this estimate to the extent that 
State-reported expenditures related to school-based administration and 
transportation may not match actual current spending and to the extent 
that the impact of the proposed rule is greater than or less than 
assumed. Furthermore, claims related to the costs of transportation 
from home to school and back as a direct service are included in the 
total amount claimed for all medical assistance. Therefore, it is 
difficult, if not impossible, to determine the impact of the proposed 
rule on the types of transportation costs that would be affected.

VI. Alternatives Considered

    In developing this regulation, various alternatives were 
considered. We considered the possibility of conducting stronger review 
of reimbursement methodologies for the costs of Medicaid administrative 
activities provided in schools and transportation from home to school 
and back. We also considered seeking to implement policies requiring 
greater accountability and oversight responsibility for school-based 
administrative and transportation expenditures, and clarification of 
Federal requirements without any new regulation (using existing 
statutory and regulatory authority). In addition, we considered 
developing standard parameters applicable to claiming for all school-
based Medicaid administration and transportation costs. However, CMS 
attempted, by issuing the May 2003 Medicaid School-Based Administrative 
Claiming Guide, to provide specific guidance on the requirements for 
claming costs related to school-based activities. In the end, we 
ultimately rejected these alternatives because the intervening years 
have proven that such activities cannot be adequately regulated or 
overseen.
    CMS has determined that the rulemaking process would be the most 
effective method of implementing these policies because the rulemaking 
process would better inform affected parties, allow for public input, 
and make clear that the requirements set forth are uniform, fair and 
consistent with the underlying statutory intent. We welcome comments on 
this regulatory impact analysis and any additional information that 
would be useful in assessing the potential impact of the proposed rule.

A. 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 decrease in Federal Medicaid 
outlays resulting from the elimination of reimbursement for school-
based administration and certain transportation costs that would be 
implemented by this proposed rule. The sum total of these expenditures 
is classified as savings in Federal Medicaid spending.

 Table II.--Accounting Statement: Classification of Estimated Expenditures, From Fiscal Year 2009 to Fiscal Year
                                                      2013
                                                  [In millions]
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Category                                                                           TRANSFERS
----------------------------------------------------------------------------------------------------------------
                                                                    Negative Transfer-estimated decrease in
                                                                                 expenditures:
----------------------------------------------------------------------------------------------------------------
Annualized Monetized Transfers                                 3% Units Discount Rate    7% Units Discount Rate
                                                             ---------------------------------------------------
                                                                                 $721                      $718
----------------------------------------------------------------------------------------------------------------
From Whom To Whom?                                                       Federal Government to States
----------------------------------------------------------------------------------------------------------------

[[Page 51403]]

List of Subjects

42 CFR Part 431

    Grant programs--health, Health facilities, Medicaid, Privacy, 
Reporting and recordkeeping requirements.

42 CFR Part 433

    Administrative practice and procedure, Child support, Claims, Grant 
programs--health, Medicaid, Reporting and recordkeeping requirements.

42 CFR Part 440

    Grant programs--health, Medicaid.

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services would amend 42 CFR chapter IV as set forth below:

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

    1. The authority citation for part 431 continues to read as 
follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).

    2. Section 431.53 is revised to read as follows:

Sec.  431.53  Assurance of Transportation.

    (a) A State plan must--
    (1) Specify that the Medicaid agency will ensure necessary 
transportation for recipients to and from providers; and
    (2) Describe the methods that the agency will use to meet this 
requirement.
    (b) For purposes of this assurance, necessary transportation does 
not include transportation of school-age children between home and 
school.

PART 433--STATE FISCAL ADMINISTRATION

    3. The authority citation for part 433 continues to read as 
follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).

    4. Part 433 is amended by adding new section 433.20 as follows:

Sec.  433.20  Rates of FFP for Administration: Reimbursement for 
School-Based Administrative Expenditures.

    Federal financial participation under Medicaid is not available for 
expenditures for administrative activities by school employees, school 
contractors, or anyone under the control of a public or private 
educational institution.

PART 440--SERVICES: GENERAL PROVISIONS

    5. The authority citation for part 440 continues to read as 
follows:

    Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 
1302).

    6. Section 440.170(a)(1) is revised to read as follows:

Sec.  440.170  Any other medical care or remedial care recognized under 
State law and specified by the Secretary.

    (a) Transportation. (1) ``Transportation'' includes expenses for 
transportation and other related travel expenses determined to be 
necessary by the agency to secure medical examinations and treatment 
for a recipient. Such transportation does not include transportation of 
school-age children from home to school and back.
* * * * *

(Authority: Catalog of Federal Domestic Assistance Program No. 
93.778, Medical Assistance Program)

    Dated: July 20, 2007.
Leslie V. Norwalk,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: August 10, 2007.
Michael O. Leavitt,
Secretary.
[FR Doc. 07-4356 Filed 8-31-07; 3:00 pm]
BILLING CODE 4120-01-P
```