Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules 60151

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Health Care Financing Administration

42 CFR Part 447

[HCFA–2071–P]

RIN 0938–AK12

Medicaid Program; Revision to

Medicaid Upper Payment Limit

Requirements for Hospital Services,

Nursing Facility Services, Intermediate

Care Facility Services for the Mentally

Retarded, and Clinic Services

AGENCY: Health Care Financing

Administration (HCFA), HHS.

ACTION: Proposed rule.

SUMMARY: This proposed rule would

modify Medicaid upper payment limits

for inpatient hospital services,

outpatient hospital services, nursing

facility services, intermediate care

facility services for the mentally

retarded, and clinic services. For each

type of Medicaid inpatient service,

current regulations place an upper limit

on overall aggregate payments to all

facilities and a separate aggregate upper

limit on payments made to Stateoperated facilities. This proposed rule

would establish a third aggregate upper

limit that would apply to payments

made to all other types of government

facilities that are not State-owned or

operated facilities.

With respect to outpatient hospital

and clinic services, current regulations

place a single upper limit on aggregate

payments made to all facilities. For

these services, this proposed rule would

establish a separate aggregate upper

limit on payments made to State-owned

or operated facilities and an aggregate

upper limit on payments made to all

other government-owned or operated

facilities.

These proposed upper limits are

necessary to ensure State Medicaid

payment systems promote economy and

efficiency, while recognizing the higher

cost of inpatient and outpatient services

in public hospitals. In addition, to

ensure continued access to care and the

ability to adjust to proposed changes,

the proposed rule includes a transition

for States with approved State plan

amendments.

DATES: We will consider comments if

we receive them at the appropriate

address, as provided below, no later

than 5 p.m. on November 9, 2000.

ADDRESSES: Mail written comments (1

original and 3 copies) to the following

address ONLY: Health Care Financing

Administration, Department of Health

and Human Services, Attention: HCFA–

2071–P, P.O. Box 8010, Baltimore, MD

21244–8010.

Because comments must be received

by the date specified above, please

allow sufficient time for mailed

comments to be timely received in the

event of delivery delays.

If you prefer, you may deliver your

written comments (1 original and 3

copies) to one of the following

addresses: Room 443–G, Hubert H.

Humphrey Building, 200 Independence

Avenue, SW., Washington, DC 20201, or

Room C5–14–03, 7500 Security

Boulevard, Baltimore, MD 21244–1850.

Comments mailed to the two above

addresses may be delayed and received

too late to be considered.

FOR FURTHER INFORMATION CONTACT:

Robert Weaver, (410) 786–5914—

Nursing facility services and

intermediate care facility services for

the mentally retarded.

Larry Reed, (410) 786–3325—

Inpatient and outpatient hospital

services and clinic services.

SUPPLEMENTARY INFORMATION: Because of

staff and resource limitations, we cannot

accept comments by facsimile (FAX)

transmission. In commenting, please

refer to file code HCFA–2071–P.

Comments received timely will be

available for public inspection as they

are received, generally beginning

approximately 3 weeks after publication

of a document, in Room 443–G of the

Department’s office at 200

Independence Avenue, SW.,

Washington, DC, on Monday through

Friday of each week from 8:30 to 5 p.m.

(phone: (202) 690–7890).

This Federal Register document is

also available from the Federal Register

online database through GPO Access, a

service of the U.S. Government Printing

Office. The Website address is: http://

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

I. Statutory and Regulatory Framework

Title XIX of the Social Security Act

(the Act) authorizes Federal grants to

States for Medicaid programs that

provide medical assistance to lowincome families, elderly and persons

with disabilities. Each State Medicaid

program is administered by the State in

accordance with an approved State

plan. While the State has considerable

flexibility in designing its State plan

and operating its Medicaid program, it

must comply with Federal requirements

specified in the Medicaid statute,

regulation and program guidance.

Additionally, the plan must be

approved by the Secretary, who has

delegated this authority to HCFA.

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

a State plan to meet certain

requirements in setting payment

amounts to obtain Medicaid care and

services. One of these requirements is

that payment for care and services

under an approved State Medicaid plan

be consistent with efficiency, economy,

and quality of care. This provision

provides authority for specific upper

payment limits (UPL) set forth in

Federal regulations in 42 CFR part 447

relating to different types of Medicaid

covered services. With respect to

inpatient hospital services, nursing

facility (NF) services and intermediate

care facility services for the mentally

retarded (ICF/MR), upper payment

limits are set forth in regulations at

§ 447.272, ‘‘Application of upper

payment limits.’’ This provision limits

overall aggregate State payments and

aggregate payments to State-operated

providers. With respect to outpatient

hospital services and clinic services,

upper payment limits are set forth in

regulations at § 447.321, ‘‘Outpatient

hospital services and clinic services:

Upper limits of payment.’’

These regulations stipulate that

aggregate State payments for services

provided by each group of health care

facilities, that is, inpatient hospital and

outpatient hospital services, NF

services, ICF/MR services, and clinic

services may not exceed a reasonable

estimate of the amount the State would

have paid under Medicare payment

principles. Under §§ 447.257, ‘‘FFP:

Conditions relating to institutional

reimbursement,’’ and 447.304,

‘‘Adherence to upper limits; FFP,

paragraph (c),’’ FFP is not available for

State expenditures that exceed the

applicable upper payment limit.

The statute also permits States some

flexibility to use local government

resources. Under section 1902(a)(2) of

the Act, States may fund up to 60

percent of the non-Federal share of

Medicaid expenditures with local

government funds. Section 1903(w)(6)

of the Act specifically limits the

Secretary’s ability to place restrictions

on a State’s use of certain funds

transferred to it from a local unit of

government subject to the requirements

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

II. Background

Before 1981, States were required to

pay rates for hospital and long term care

services that were directly related to

cost reimbursement. To obtain approval

from HCFA, many States set rates using

Medicare reasonable cost payment

principles.

In 1980 and 1981, the Congress

enacted legislation, at section 962 of the

Omnibus Reconciliation Act of 1980

(OBRA ‘80), Pub. L. 96–499 and section

60152 Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules

2173 of the Omnibus Budget

Reconciliation Act of 1981 (OBRA ‘81),

Pub. L. 97–35, collectively known as the

‘‘Boren Amendment’’ that amended

section 1902(a)(13) of the Act to give

States flexibility to deviate from

Medicare’s cost payment principles in

setting payment rates for hospital and

long term care services.

The Boren Amendment was primarily

considered a floor on State spending

because it required States to set rates

that would meet the costs incurred by

efficiently and economically operated

facilities. However, the Boren

Amendment also supported upper

payment limits on overall rates. In

legislative history, the Congress directed

the Secretary to maintain ceiling

requirements that limited State

payments in the aggregate from

exceeding Medicare payment levels.

The Senate Finance Committee report

on the legislation states that ‘‘the

Secretary would be expected to

continue to apply current regulations

that require that payments made under

State plans do not exceed amounts that

would be determined under Medicare

principles of reimbursement.’’ S. Rep.

No. 96–471, 96 Cong., 1st Sess. 1979.

In 1986, the Congress affirmed the use

of upper limits on payments for

inpatient hospital services, NF services

and intermediate care facility (ICF) (now

ICF/MR) services. Section 9433 of the

Omnibus Budget Reconciliation Act of

1986 (Pub. L. 99–509) titled ‘‘A

Clarification of State Flexibility for State

Medicaid Payment Systems for Inpatient

Services’’ precluded the Secretary from

placing limits on State disproportionate

share hospital (DSH) payments but

maintained the application of limits on

regular inpatient payment rates.

The current upper limits were last

changed in a final rule in the Federal

Register (52 FR 28141) on July 28, 1987

that addressed the application of the

upper payment limit to States that had

multiple payment rates for the same

class of services. This rule addressed the

differential rate issue in the context of

State-operated facilities because several

audits had revealed that the

circumstances of State-operated

facilities resulted in a lack of incentives

to curb excessive payments. A high

volume of uninsured patients will

increase the costs of providing services

in State-owned or operated facilities.

These costs, in turn, are passed on to the

State. To offset those higher costs, States

established payment methodologies

which paid State-owned or operated

facilities at a higher rate than privatelyoperated facilities. Higher Medicaid

payments to State-owned or operated

facilities allowed States to obtain

additional Federal Medicaid dollars to

cover costs formerly met entirely by

State dollars. To ensure payments to

State-operated facilities would be

consistent with efficiency and economy,

the final rule applied the Medicare

upper limit test to State-operated

facilities separate from other facilities.

However, the final rule did not create a

separate upper payment limit for other

government facilities, allowing their

payments to count toward the same

aggregate upper payment limit as

private facilities.

Section 4711 of the Balanced Budget

Act of 1997 (BBA)(Pub. L. 105–33)

amended section 1902(a)(13) of the Act

to increase State flexibility in rate

setting by replacing the substantive

requirements of the Boren amendment

with a new public process. Under

section 4711 of the BBA, States have

flexibility to target rate increases to

particular types of facilities so long as

the rates are established in accordance

with the new public process

requirements.

III. Provisions of the Proposed

Regulations

A. Description of the Problem

It has become apparent that the

current regulation creates a financial

incentive for States to overpay nonState-operated government facilities

because States, counties, cities and/or

public providers can, through this

practice, lower current State or local

spending and/or gain extra Federal

matching payments. This practice is not

consistent with Medicaid statute and

has contributed to rapidly growing

Medicaid spending.

The incentive and ability for States to

pay excessive rates to non-State

government-owned or operated

Medicaid providers can be explained as

follows. As stated previously, the

current aggregate upper payment limit is

applied to both private and non-State

government-owned or operated

facilities. By developing a payment

methodology that sets rates for

proprietary and nonprofit facilities at

lower levels, States can set rates for

county or city facilities at substantially

higher levels and still comply with the

current aggregate upper payment limit.

The Federal government matches these

higher payment rates to public facilities.

Because these facilities are public

entities, funds to cover the State share

may be transferred from those facilities

(or the local government units that

operate them) to the State, thus

generating increased Federal funding

with no net increase in State

expenditures. This is not consistent

with the intent of statutory requirements

that Medicaid payments be economical

and efficient.

On July 26, 2000, the Director of the

Center for Medicaid and State

Operations sent a letter to all State

Medicaid Directors notifying them that

‘‘the Administration is developing a

proposal to ensure that Medicaid

payments meet the statutory definition

of efficiency and economy’’ and that we

would issue a proposed rule to address

this problem. The Office of the Inspector

General (OIG) and the General

Accounting Office (GAO) have begun to

monitor States with State plans that

permit these types of payments. Both

the GAO and OIG testified on the scope

of the financing practices, their impact

on State and Federal spending, and on

the resultant uses of increased Federal

funds. Preliminary results of OIG’s work

to date are described below.

To date, the OIG has substantially

completed reviews in three States and is

continuing reviews in three additional

States. Although the specifics of the

enhanced payment programs and

associated financing mechanisms

differed somewhat in the three States

they have reviewed thus far, they have

found that the payment programs share

some common characteristics. These

similarities are included below:

• The States did not base the

enhanced payments on the actual cost of

providing services or increasing the

quality of care to the Medicaid residents

of the targeted nursing facilities.

• The counties involved in the

enhanced payment process used little or

none of the enhanced payments to

provide services to Medicaid residents.

Instead, the counties returned these

funds to their original source. That is,

the funds were returned to the State’s

general funds or used to repay loans that

were made to initiate the transaction, or

both.

• The States were clear winners in

that they were able to reduce their share

of Medicaid costs and cause the Federal

government to pay significantly more

than it should for the same volume and

level of Medicaid services. The Federal

share of the enhanced funding went into

State accounts and, in some cases, could

be used for any purpose.

• Some States effectively recycled the

Federal funds received from these

enhanced payments to generate

additional Federal matching funds.

Similarly, the GAO testified that

current arrangements violate the basic

integrity of Medicaid as a joint Federal/

State program. By taking advantage of a

technicality, these financing schemes

allow States, in effect, to replace State

Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules 60153

Medicaid dollars with Federal Medicaid

dollars.

B. Application of the Upper Payment

Limit

To address these problems, we are

proposing to revise the regulations at

§§ 447.272, ‘‘Application of upper

payment limits,’’ and 447.321,

‘‘Outpatient hospital services and clinic

services: Upper limits of payment,’’ to

establish separate upper payment limits

for non-State government-owned or

operated facilities. This approach is

consistent with the last regulatory

change which created separate upper

payment limits for State-operated

facilities. While the proposal would still

allow for flexibility in payment

methodologies, it prevents States from

setting rates to public facilities well in

excess of the average upper payment

limit and the actual cost of providing

Medicaid covered services to eligible

individuals. This change is necessary to

ensure that the Medicaid regulations

conform to Medicaid statutory

requirements that promote efficiency

and economy.

The upper payment limit

requirements for Medicaid inpatient

hospital services, NF services and ICF/

MR services are set forth in regulations

at § 447.272. Paragraph (a) of this

section provides that aggregate

payments by an agency to each group of

health care facilities (that is, hospitals,

nursing facilities and ICFs for the

mentally retarded (ICFs/MR)), may not

exceed a reasonable estimate of what

would have been paid for those services

under Medicare payment principles.

Paragraph (a) provides an exception to

specify that disproportionate share

hospital payments are not counted

toward the general limit. We would

amend paragraph (a) to specify that an

exception also applies for payments

made to non-State-owned or operated

public hospitals under paragraph (b)(2)

of this section.

Paragraph (b) of this section currently

limits aggregate payment to Stateoperated facilities in each class of

service. We would revise § 447.272(b) to

establish an additional upper payment

limit that would apply to payments

made to all other types of government

facilities. To establish this new upper

payment limit, we propose to make the

following changes to § 447.272(b).

Specifically, we propose to revise

paragraph (b) of this section to specify

that payments made to each type of

government-owned or operated health

care facility (that is, inpatient hospital,

NF, ICF/MR) may not exceed the

specified allowable limits. Proposed

paragraph (b)(1) would continue the

limitation on aggregate payments made

to State-owned or operated facilities

from exceeding a reasonable estimate of

what would have been paid using

Medicare payment principles. In

addition, we propose to add a new

paragraph (b)(2) that would impose an

aggregate upper limit restriction on

payments for services furnished by all

other government-owned or operated

facilities (other than Indian Health

Service (IHS) facilities and tribal

facilities funded through Pub. L. 93–

638) that are not State-owned or

operated. (Although we invite specific

comments, we excluded IHS facilities

because we believe there is little

incentive for States to pay enhanced

rates to these facilities. Rates to these

facilities are generally set by the State in

accordance with rates published by the

Federal government.) Under paragraph

(b)(2), we would specify that aggregate

payments to NFs IFCs/MR may not

exceed a reasonable estimate of what

would have been paid for those services

under Medicare payment principles. We

would also specify that aggregate

payment to non-State-owned or

operated public hospitals may not

exceed 150 percent of a reasonable

estimate of what would have been paid

for those services under Medicare

payment principles.

We are proposing a higher upper

payment limit for services in non-Stateowned or operated public hospitals

operated by governmental entities other

than the State itself because we believe

that allowing higher Medicaid payments

will fully reflect the value of public

hospitals’ services to Medicaid and the

populations it serves. Public hospitals

are established to ensure access to

needed care in underserved areas, and

often provide a range of care not readily

available in the community, including

expensive specialized services, such as

trauma and burn care and outpatient

tuberculosis services. They also provide

a significant proportion of the

uncompensated care in the nation.

The size and scale of public hospitals

create extreme stresses and

uncertainties, especially given their

dependence on public funding sources.

We are concerned that these stresses

may threaten the ability of these public

hospitals to fulfill their mission and

fully serve the Medicaid population. As

such, we are proposing a higher UPL for

these facilities. Specifically, this higher

aggregate UPL would allow States to pay

non-State-owned or operated public

hospitals up to 150 percent of the

amount that would have been paid for

inpatient and outpatient services using

Medicare payment principles.

We also recognize that, in some

instances, these public hospitals may be

required by State or local governments

to transfer back a portion of payments

that they receive under Medicaid. This

practice raises serious concerns about

whether the purposes of the higher

payment limits being proposed for

public hospitals will be met. To ensure

that higher payment levels will assist in

ensuring the stability of public hospitals

as a vital link in the resources available

for care to Medicaid beneficiaries, we

intend to require in our final rule that

payments made to public hospitals

under this provision be separately

identified and reported to HCFA. We

request comment on the most suitable

ways of reporting and accounting for

these payments. In addition, we are

soliciting comments on whether the 150

percent limit is appropriate.

For outpatient hospital services and

clinic services, the current upper

payment limit is in regulations at

§ 447.321. This limit precludes FFP on

aggregate payments for outpatient

hospital services and clinic services that

exceed the amount that would be

payable to all providers (State-owned or

operated, other government-owned or

operated, and private) under

comparable circumstances under

Medicare. Unlike other classes of

services subject to the upper payment

limit, there is no separate limit for Stateowned or operated facilities. We

propose to amend § 447.321 to establish

additional upper payment limits that

would apply to aggregate payments for

Medicaid services furnished by Stateowned or operated and all other

government-owned or operated

facilities.

We propose to move the current

provisions under paragraph (a) of this

section, as discussed below, to § 447.304

and add a new paragraph (a) to conform

the language in this section to the

language in § 447.272, for purposes of

consistency within the Medicaid

regulations. We would provide in

§ 447.321(a) that aggregate payments by

an agency to each group of health care

facilities (that is, outpatient hospitals

and clinics) may not exceed a

reasonable estimate of what would have

been paid for each of those services

under Medicare payment principles. We

would also specify that an exception

applies for payments made to non-Stateowned or operated public hospitals

under paragraph (b)(2) of this section.

Consistent with the changes to

§ 447.272, we propose to establish

separate upper payment limits for

Medicaid services furnished by—(1)

State-owned or operated facilities; and

(2) all other government-owned or

60154 Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules

operated facilities that are not Stateowned or operated. In § 447.321,

proposed paragraph (b)(1) would

establish the upper payment limit for

Medicaid services furnished by Stateowned or operated facilities. Like the

current UPL for inpatient hospital

services, aggregate Medicaid payments

for outpatient services or clinic services

furnished by State facilities would be

limited to a reasonable estimate of what

would have been paid under Medicare

reimbursement principles.

Proposed paragraph (b)(2) would

establish a similar aggregate upper limit

restriction for Medicaid services

furnished by all other government

providers that are not State-owned or

operated except that the payment

maximum for outpatient services would

be set at 150 percent of what would

have been paid using Medicare payment

principles. See the earlier discussion of

our rationale for the higher limit to

these public hospitals. Under the

proposed limits in §§ 447.272 and

447.321, States would have flexibility to

consider either Medicare principles of

reasonable cost reimbursement or a

Medicare prospective payment system if

available, to estimate the Medicare

payment amount for Medicaid services.

In addition, we are moving the

language regarding prohibition for FFP

currently found in § 447.321(a) to

§ 447.304, ‘‘Adherence to upper limits;

FFP,’’ paragraph (c). The provision in

§ 447.304(c) currently specifies that FFP

is available for State expenditures that

do not exceed upper limits. We propose

to revise this section to specify that FFP

is not available for payment that

exceeds the upper limits specified in

subpart F. This revision would conform

to our approach in § 447.257.

C. Transition Periods for States That

Have Approved Rate Enhancement

Payment Arrangements

We recognize that the new upper

payment limits we are proposing may

disrupt State budget arrangements for

States with approved enhanced plan

amendments. Therefore, we are

proposing a transition policy for States

with approved rate enhancement

amendments that would be affected by

the proposed UPLs. We refer to these

amendments as noncompliant because

they result in payments that exceed the

maximum amount allowable under the

new UPLs. We are proposing two

transition periods and are soliciting

comments on the material elements of

these transition periods, including the

starting point for the phase-out, the

percentage reduction each year, and

whether a longer or shorter period

would be appropriate.

1. Transition period for noncompliant

approved State plan amendments

effective on or after October 1, 1999.

For noncompliant approved State

plan amendments with an effective date

on or after October 1,1999, we are

proposing a transition period that would

end on September 30, 2002. Because

these programs are relatively new (in

fact, some may be deemed approved

during the comment period for this

proposed rule), States are not likely to

have developed the same level of

reliance on the enhanced payments

addressed in this proposed rule as

States with older programs.

Additionally, during the review period

for these amendments, we have been

informing States of our intent to curtail

this practice and advising them not to

rely on the continuation of this funding.

For these reasons, we believe a short

transition period is appropriate.

2. Transition period for noncompliant

approved State plan amendments

effective before October 1, 1999.

For noncompliant approved State

plan amendments with an effective date

before October 1, 1999, we are

proposing a 3-year transition period

beginning in the State FY that begins

calendar year 2002.

We propose to implement the

reductions on a State Fiscal Year (FY)

basis starting with the first full State FY

that begins in calendar year 2002.

Specifically, the transition generally

consists of reducing aggregate payments

with the proposed classes to the

proposed UPLs in increments, with the

proposed UPL becoming fully effective

in the first State FY beginning in

Calendar Year 2005. In the first year of

implementation, States would have to

reduce the aggregate payments above

the new UPL by 25 percent. In the

second year, the amount of excess

aggregate payments must be reduced by

50 percent and in the third year by 75

percent. By the first day of the fourth

year, State payments would have to be

in compliance with the new UPL policy.

We are proposing to use State FY

2000 as the base period to determine the

excess payment that must be phased

down. To compute the dollar amount of

the excess, States would be required to

compare State FY 2000 payments paid

to the current class of providers to the

maximum aggregate payments for its

new class of providers (that is, Stateowned or operated and other

government-owned or operated) under

the proposed UPL for State FY 2000.

The difference is considered the excess

payment that must be phased out over

the transition period.

The table below illustrates the

transition policy. In this example, State

FY 2000 payments for nursing facility

services provided by other governmentowned or operated providers are $300

million and new UPL is $100 million.

The amount in excess of the upper

payment limit, $200 million, must be

reduced in successive State FYs by 25

percent, 50 percent and 75 percent

respectively. The steps to calculate the

maximum allowable payment during

this transition period are as follows:

• Subtract the amount that would

have been allowed under the new UPL

for State FY 2000 services from the State

FY 2000 payment.

• Multiply that difference by the

phase down rate.

• Add to that result, the new UPL for

Medicaid services furnished on or after

State FY 2000.

At the end of the transition period,

State payments would have to be in full

compliance with the new upper

payment limit.

Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules 60155

TABLE—ILLUSTRATIVE EXAMPLE OF TRANSITION 1 OTHER GOVERNMENT-OWNED OR OPERATED NURSING HOME

PROVIDERS

[Dollars in millions]

SFY 2003* SFY 2004 SFY 2005 SFY 2006

Excess Payment in SFY 2000 2 ....................................................................................... 200 200 200 200

Phase-out rate (in percent) .............................................................................................. 25% 50% 75% 100%

Maximum allowable excess ............................................................................................. 150 100 50 0

New UPL 3 ....................................................................................................................... 105 110 115 120

Transition UPL ................................................................................................................. 255 210 165 120

* Assumes that the SFY 2003 begins on July 1, 2002.

1State FY 2001 and State FY 2002 payments would not be subject to this proposed rule because it assumes that the transition period begins

in State FY 2003. 2The $200 million excess payment is derived by subtracting the new aggregate UPL for State FY 2000 services provided by other government-owned or operated providers from the actual FY 2000 payment made to these providers. 3Assumes $5 million annual growth in the program.

To implement these provisions, we

propose to make further revisions to

§§ 447.272 and 447.321 to include

regulations that establish transition

periods for States that will be affected

by the new upper payment limits that

we are proposing.

Specifically, § 447.272 sets forth the

rules regarding the application of the

upper payment limit requirements for

Medicaid inpatient hospital services, NF

services and ICF/MR services. We

propose to revise § 447.272(b) to

establish a shorter-term transition

period and a 3-year transition period.

Specifically, proposed paragraph

(b)(2)(i) of this section would specify

that noncompliant State plan

amendments effective on or after

October 1, 1999 and approved before the

effective date of the final rule have until

September 30, 2002 to come into

compliance with the requirements of the

new upper payment limits. Proposed

paragraph (b)(2)(ii) of this section would

specify that noncompliant approved

State plan amendments effective before

October 1, 1999 are allowed a 3-year

transition period beginning in the State

FY that begins in calendar year 2002.

Paragraph (b)(2) of this section refers to

payments made to those other

government-owned or operated facilities

that are not State-owned or operated.

Section 447.321 sets forth rules

regarding the application of the upper

payment limit requirements for

Medicaid outpatient hospital services

and clinic services. We are proposing

similar revisions to § 447.321(b) to

include our proposed transition periods.

We apply these transition periods to

States for payments made to Stateowned or operated facilities and other

government-owned or operated facilities

described in proposed paragraphs (b)(1)

and (b)(2) of this section. Specifically,

proposed paragraphs (b)(1)(i) and

(b)(1)(ii) of this section would specify

the requirements for the short-term and

the 3-year transition periods for Stateowned or operated facilities. Proposed

paragraphs (b)(2)(i) and (b)(2)(ii) of this

section would set forth the short-term

and the 3-year transition periods for all

other government-owned or operated

facilities.

To the extent this regulation alters

allowable Medicaid expenditures in a

State with a section 1115 title XIX

waiver, the estimates of the expected

cost to the Federal government without

the waiver will be adjusted (upward or

downward) to accurately reflect these

changes in allowable Medicaid

expenditures. These adjustments are

consistent with current section 1115

waiver budget neutrality policy.

IV. Response to Comments

Because of the large number of items

of correspondence we normally receive

on Federal Register documents

published for comment, 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, if we proceed with

a subsequent document, we will

respond to the major comments in the

preamble to that document.

V. Regulatory Impact Analysis

A. Introduction

We have examined the impact of this

rule as required by Executive Order (EO)

12866, the Unfunded Mandates Act of

1995, and the Regulatory Flexibility Act

(RFA) (Pub. L. 96–354). Executive Order

12866 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 one year).

B. Overall Impact

We are unable to provide a specific

dollar estimate of the economic impact

this proposed regulation will have on

State and local governments and

Medicaid participating health care

facilities due to data limitations and

State behavioral responses. This

proposed regulation does not reduce the

overall aggregate amount States can

spend on Medicaid services or place a

fixed ceiling on the amount of State

spending that will be eligible for Federal

matching dollars. Under the proposed

limitations, States will be able to set

reasonable rates as determined under

Medicare payment principles for

Medicaid services furnished by public

providers to eligible individuals. The

amount of spending permitted under the

proposed limits will vary directly with

the amount of Medicaid services

furnished by public providers to eligible

individuals. While the proposed

regulation does not affect the overall

aggregate amount States can spend, by

setting an upper payment limit for

government providers, it may impact

how States distribute available funding

to participating health care facilities.

We have identified 28 States with

approved and/or pending rate proposals

that target enhanced Medicaid payments

to hospital and nursing service

providers that are owned or operated by

county or local governments. There are

17 States with approved State plan

amendments or waivers and 7 States

with pending plan amendments. In

addition, there are 4 States that have

both approved and pending plan

amendments. We estimate that these

proposals currently account for

approximately $3.7 billion in Federal

spending annually. This estimate is

based on State reported Federal fiscal

information submitted with State plan

amendments and State expenditure

60156 Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules

information where available. It may be

understated or overstated to the degree

that actual State expenditures would

vary from the estimates included with

State plan submissions. For example, a

State could include a provision in its

State Medicaid plan that would enable

it to spend up to allowable amounts by

making additional payments to

designated providers. Under this

scenario, if the upper payment

limitation permitted the State to spend

an additional $200 million, the actual

annual expenditure could vary from

zero to $200 million depending upon

the State’s willingness to finance its

share of the payment. In the final rule,

we may revise our estimate of $3.7

billion in Federal spending to reflect

findings reported by the OIG and the

GAO.

Of this $3.7 billion in spending, we

do not have sufficient information to

permit us to quantify accurately the

amount of payments to State and local

government providers that may exceed

the proposed upper payment limits. In

addition, because some States may be

using the Federal share of enhanced

payments in a manner that allows some

funds to be re-invested in Medicaid (and

thereby drawing down additional FFP),

the potential impact may extend to

other Medicaid services not reflected in

the above spending. Because we believe

that the potential impact will exceed

$100 million, we consider this proposed

rule to be a major rule.

We are seeking information to help us

quantify the impact of this proposed

rule. We invite comments on how the

proposed rule may affect State Medicaid

programs and other State programs. In

particular, we seek information to help

us quantify the fiscal impact of this

proposed rule (also taking into account

the proposed transition periods and

higher UPLs for non-State-owned or

operated public hospitals) on State

Medicaid programs and other State

programs.

C. Impact on Small Entities and Rural

Hospitals

The Regulatory Flexibility Act

requires agencies to analyze options for

regulatory relief of small entities. For

purposes of the RFA, small entities

include small businesses, nonprofit

organizations and government agencies.

Most hospitals and most other providers

and suppliers are small entities, either

by nonprofit status or by having

revenues of $5 million or less annually.

For purposes of the RFA, all hospitals,

nursing facilities, intermediate care

facilities for the mentally retarded, and

clinics are considered to be small

entities. Individuals and States are not

included in the definition of a small

entity.

In addition, section 1102(b) of the Act

requires us to prepare a regulatory

impact analysis if a rule may have a

significant impact on the operations of

a substantial number of small rural

hospitals. This analysis must conform to

the provisions of section 603 of the

RFA. For purposes of section 1102(b) of

the Act, we define a small rural hospital

as a hospital that is located outside of

a Metropolitan Statistical Area and has

fewer than 50 beds.

The chart below indicates the type

and number of providers potentially

affected by this regulation in all 50

States and the District of Columbia. We

included facilities in all 50 States

because although every State is not

currently making enhanced payments to

government non-State-owned or

operated facilities, this rule will prevent

new proposals from all States in the

future. We do not believe any States

have payment arrangements with

providers of ICF/MR services or clinic

services that will be affected by this

regulation and therefore we did not

include those providers in the chart

below.

POTENTIALLY AFFECTED PROVIDERS BY NUMBER AND TYPE

Provider type

Government stateowned or

operated

Government nonstate-owned or

operated

Total

Nursing Facilities ................................................................................................................. 1 N/A 892 892

Hospitals .............................................................................................................................. 254 1,275 1,529

1These facilities are already subject to a separate aggregate UPL and will not be affected by the final rule.

As explained earlier in the preamble,

it is very difficult to predict how States

will respond to the proposed rule and

consequently how State decisions will

impact Medicaid providers. Each State

makes its own budgetary and rate

setting decisions. Since we do not

collect information about the specific

services that providers use Medicaid

payments to support, we cannot

determine how potential payment rate

adjustments will affect providers or the

patients they serve. Under the proposed

UPLs, States would continue to be able

to set rates that provide fair

compensation for Medicaid services

furnished to Medicaid patients.

Hospitals that are owned or operated by

local governments may benefit from the

higher UPLs we are proposing for

inpatient and outpatient services.

Additionally, if these hospitals furnish

services to indigent patients, they may

qualify as a DSH and qualify for funding

under a State’s program. With respect to

small entities that are not governmentowned or operated, the proposed UPLs

do not apply to them and therefore, they

should not be impacted.

With respect to the impact on small

rural hospitals, we do not believe the

proposed rule will have a significant

overall impact on rural hospitals. With

respect to Medicaid services furnished

by rural hospitals, the proposed upper

payment limits do not interfere with

States setting rates that result in fair

compensation. Additionally, rural

hospitals that are owned or operated by

local governments should be able to

benefit from the higher UPLs we are

proposing for inpatient and outpatient

hospital services. Finally, if a rural

hospital provides services to indigent

patients, they may qualify as a DSH and

qualify for funding under a State’s DSH

payment program.

We invite public comment on the

possible effects this proposed rule may

have on small entities in general and on

small rural hospitals in particular.

D. Alternatives Considered

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

in part that Medicaid service payments

be consistent with efficiency and

economy. In addition to the

interpretation we are proposing in this

proposed rule, we considered several

other alternatives to ensure Medicaid

service payments are consistent with

economy and efficiency. In this section,

we will explain these other alternatives

and why we did not select them.

1. Facility-Specific Upper Payment

Limit. Under this option, Medicaid

spending would be limited on a

provider-specific application of

Medicare payment principles. FFP

Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules 60157

would not be available on the amount

of Medicaid service payment in excess

of what a provider would have been

paid using Medicare payment

principles.

These limits would be applied to all

institutions, or just to public institutions

where the incentives for over-payment

are significant. While a facility-specific

limitation may be the most effective

method to ensure State service

payments are consistent with economy

and efficiency, when balanced against

the additional administrative

requirements on States and the

congressional intent for States to have

flexibility in rate setting, we are not sure

that the increased amount of cost

efficiency, if any, justifies this approach

as a viable option.

2. Government-owned or Operated

Upper Payment Limit. This proposal

would limit, in the aggregate, the

amount of payment States can make to

public providers. Under this proposal,

State and local government providers

would be grouped together and

payments to them as a group could not

exceed an aggregate limit. The aggregate

limit would continue to be based on

Medicare payment principles. This

option, relative to upper payment

limitations we are proposing, would

have allowed States to exercise more

flexibility granted to them in the rate

setting process. While this option

permits more flexibility, we believe the

aggregation of Medicaid service

payments by all types of government

providers would have the unintended

consequence of reopening differential

rate issues between State facilities and

other types of government facilities.

3. Intergovernmental Transfers (IGTs).

Because in many cases we believe there

is a connection between excessive

payments and IGTs, we gave

consideration to formulating policy with

respect to them. Generally, States have

genuine incentive to set Medicaid

service rates at levels consistent with

economy and efficiency since they share

the financial burden with the Federal

government. As explained in section III

of the preamble, the use of IGTs to move

funds between government entities

makes it possible to generate enhanced

Federal matching payment. However,

we did not pursue this alternative

because we recognize that States,

counties, and cities have developed

their own unique arrangements for

sharing in Medicaid costs. Furthermore,

there are statutory limitations placed on

the Secretary which limit the authority

to place restrictions on IGTs.

4. ‘‘Grandfathering’’ existing

arrangement. Under this proposal, we

would not approve any new plan

amendments after the effective date of

the final rule. This would permit States

that are currently making excessive

payments to local government facilities

to continue making such payments

indefinitely. Allowing some States to

permanently continue making excessive

payments solely because they were

approved before this rule is published

and effective appears to be arbitrary,

capricious, and inconsistent with our

administrative authority.

We invite comment on these

alternatives we considered and on other

possible approaches for achieving our

objective to ensure Medicaid service

payments are consistent with efficiency

and economy. We specifically invite

comment on alternative means of setting

the maximum amount that may be paid

to public hospitals that have

traditionally provided ‘‘safety-net’’ care

and services to underserved

communities and individuals who are

uninsured. We request information

regarding the mechanisms used to

finance these hospitals under current

regulations, as well as proposals for a

means of curbing excessive payments

while allowing States the flexibility to

recognize higher costs faced by these

hospitals.

E. The Unfunded Mandates Act

The Unfunded Mandates Reform Act

of 1995 also requires (in section 202)

that agencies perform an assessment of

anticipated costs and benefits before

proposing any rule that may result in a

mandated expenditure in any one year

by State, local, or Tribal governments, in

the aggregate, or by the private sector, of

$100 million. Absent FFP, we do not

believe States will continue to set

excessive payment rates for Medicaid

services furnished by government

providers. Generally, discontinuing an

expenditure should not result in new

costs, unless the State has to fund the

portion of the expenditure that is no

longer Federally funded with all State

and local dollars. There are no Federal

requirements under the Medicaid

statute that mandate States to make

these type of payments to Medicaid

public providers and therefore we do

not believe the proposed limits have any

unfunded mandate implications.

F. Federalism

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

compliance costs on State and local

governments, preempts State law, or

otherwise has Federalism implications.

In developing the interpretative

policies set forth in this proposed rule,

we met with interested parties and

listened to their ideas and concerns.

These discussions were held with

members of Congress and their staff. We

also met with various associations

representing State and local

governments including the National

Governors’ Association, the National

Conference of State Legislatures, and the

National Association of State Medicaid

Directors. In addition, we met with

many hospital associations, advocacy

groups, labor organizations, and

numerous other interested parties. We

do not believe this proposed rule in any

way imposes substantial direct

compliance costs on State and local

governments or preempts or supersedes

State or local law.

The financial implications of this

proposed rule are highly uncertain for

the reasons we have previously

indicated. We anticipate that many State

Medicaid programs will be unaffected

by the upper payment limits we are

proposing. With respect to affected

States, to some degree we will be

limiting flexibility in the management of

their Medicaid programs. If these States

wish to continue to make payments in

excess of the proposed limits, they will

have to fund the amount in excess with

only State and local resources. In the

absence of FFP, we anticipate States

will reinvest these resources to support

other Medicaid activities to take

advantage of and maintain Federal

resources. Should States realign their

payment systems or divert State

matching dollars to support other

Medicaid activities, the total amount of

available Federal funds should remain

unchanged.

G. Executive Order 12866

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 447

Accounting, Administrative practice

and procedure, Drugs, Grant programs—

health, Health facilities, Health

professions, Medicaid, Reporting and

recordkeeping requirements, Rural

areas.

For the reasons set forth in the

preamble, 42 CFR part 447 is proposed

to be amended as follows:

PART 447—PAYMENTS FOR

SERVICES

1. The authority citation for part 447

continues to read as follows:

60158 Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules

Authority: Sec. 1102 of the Social Security

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

2. In § 447.272 revise paragraphs (a)

and (b) to read as follows:

§ 447.272 Application of upper payment

limits.

(a) General rule. Except as provided in

paragraphs (b)(2) and (c) of this section,

aggregate payments by an agency to

each group of health care facilities (that

is, hospitals, nursing facilities and ICFs

for the mentally retarded (ICFs/MR)),

may not exceed a reasonable estimate of

what would have been paid for those

services under Medicare payment

principles.

(b) Government-owned or operated

facilities. In addition to being subject to

the requirements in paragraph (a) of this

section, payments by an agency to each

group of government-owned or operated

health care facilities (that is, hospitals,

nursing facilities and ICFs for the

mentally retarded (ICFs/MR)), may not

exceed the limits specified in paragraph

(b)(1) or (b)(2) of this section.

(1) State-owned or operated facilities.

Aggregate payments to State-owned or

operated facilities may not exceed a

reasonable estimate of what would have

been paid for those services under

Medicare payment principles.

(2) Other government-owned or

operated facilities. Except for public

hospitals, aggregate payments to all

other government-owned or operated

facilities (other than Indian Health

Services facilities (IHS) and tribal

facilities funded through Pub. L. 93–

638) may not exceed a reasonable

estimate of what would have been paid

for those services under Medicare

payment principles. Payment to nonState-owned or operated public

hospitals may not exceed 150 percent of

a reasonable estimate of what would

have been paid for those services under

Medicare payment principles, except as

provided below.

(i) Transition period for noncompliant

State plan amendments effective on or

after October 1, 1999 and approved

before the effective date of the final rule.

Enhanced payment arrangements with

an effective date on or after October 1,

1999 and approved before the effective

date of the final rule must come into

compliance by September 30, 2002.

(ii) Transition period for

noncompliant approved State plan

amendments effective before October 1,

1999. A 3-year transition period applies

to approved State payment

arrangements with an effective date

before October 1, 1999. During the 3

successive State fiscal years beginning

in State FY 2003, State payments must

comply with the excessive payment

phase down payment reduction

schedule.

(iii) State payments may not exceed

the lower of the base State FY 2000

payments or the following limits:

State FY 2003 UPL + .75x

State FY 2004 UPL + .50x

State FY 2005 UPL + .25x

UPL = Upper Payment Limit.

X = Payments to local government providers

less the UPL described in § 447.272(b)(2)

for services furnished in State FY 2000.

3. In § 447.304, revise paragraph (c)

and remove the note to read as follows:

§ 447.304 Adherence to upper limits; FFP.

* * * * *

(c) FFP is not available for a State’s

expenditures for services that are in

excess of the amounts allowable under

this subpart.

4. Section 447.321 is revised to read

as follows:

§ 447.321 Outpatient hospital services or

clinic services: Application of upper

payment limits.

(a) General rule. Except as provided in

paragraph (b)(2) of this section,

aggregate payments by an agency to

each group of health care facilities, (that

is, outpatient hospitals or clinics) may

not exceed a reasonable estimate of

what would have been paid for each of

those services under Medicare payment

principles.

(b) Government-owned or operated

facilities. In addition to being subject to

the requirements in paragraph (a) of this

section, payments by an agency to each

group of government-owned or operated

health care facilities, (that is, outpatient

hospitals or clinics) may not exceed the

limits specified in paragraph (b)(1) or

(b)(2) of this section.

(1) State-owned or operated facilities.

Aggregate payments to State-owned or

operated facilities may not exceed a

reasonable estimate of what would have

been paid for those services under

Medicare payment principles, except as

provided below.

(i) Transition period for noncompliant

State plan amendments effective on or

after October 1, 1999 and approved

before the effective date of the final rule.

Enhanced payment arrangements with

an effective date on or after October 1,

1999 and approved before the effective

date of the final rule must come into

compliance by September 30, 2002.

(ii) Three-year phase down transition

period for noncompliant approved State

plan amendments effective before

October 1, 1999. A 3-year transition

period applies to approved State

payment arrangements with an effective

date before October 1, 1999. During the

3 successive State fiscal years beginning

in State FY 2003, State payments must

comply with the excessive payment

phase down payment reduction

schedule.

(iii) State payments may not exceed

the lower of the base State FY 2000

payments or the following limits:

State FY 2003 UPL + .75X

State FY 2004 UPL + .50x

State FY 2005 UPL + .25x

State FY 2006 UPL

UPL = Upper Payment Limit

X = Payments to local government providers

and State-owned or operated providers

less the applicable UPL described in

§ 447.321(b) for services furnished in

State FY 2000.

(2) Other government-owned or

operated facilities. Except for public

hospitals, aggregate payments to all

other government-owned or operated

facilities (other than Indian Health

Services facilities (IHS) and tribal

facilities funded through Pub. L. 93–

638) may not exceed a reasonable

estimate of what would have been paid

for those services under Medicare

payment principles. Payment to nonState-owned or operated public

hospitals may not exceed 150 percent of

a reasonable estimate of what would

have been paid for those services under

Medicare payment principles, except as

provided below.

(i) Transition period for noncompliant

State plan amendments effective on or

after October 1, 1999 and approved

before the effective date of the final rule.

Enhanced payment arrangements with

an effective date on or after October 1,

1999 and approved before the effective

date of the final rule must come into

compliance by September 30, 2002.

(ii) Three-year phase down transition

period for noncompliant approved State

plan amendments effective before

October 1, 1999. A 3-year transition

period applies to approved State

payment arrangements with an effective

date before October 1, 1999. During the

3 successive State fiscal years beginning

in State FY 2003, State payments must

comply with the excessive payment

phase down payment reduction

schedule.

(iii) State payments may not exceed

the lower of the base State FY 2000

payments or the following limits:

State FY 2003 UPL + .75X

State FY 2004 UPL + .50x

State FY 2005 UPL + .25x

State FY 2006 UPL

UPL = Upper Payment Limit

X = Payments to local government providers

and State-owned or operated providers

less the UPL described in § 447.321(b)(1)

for services furnished in State FY 2000.

(Catalog of Federal Domestic Assistance

Program No. 93.778, Medical Assistance

Program)

Federal Register / Vol. 65, No. 196 / Tuesday, October 10, 2000 / Proposed Rules 60159

Dated: October 3, 2000.

Michael M. Hash,

Acting, Administrator, Health Care Financing

Administration.

Approved: October 4, 2000.

Donna E. Shalala,

Secretary.

[FR Doc. 00–25935 Filed 10–5–00; 1:00 pm]

BILLING CODE 4120–01–P

FEDERAL EMERGENCY

MANAGEMENT AGENCY

44 CFR Part 65

RIN 3067–AD13

National Flood Insurance Program

(NFIP); Letter of Map Revision Based

on Fill Requests

AGENCY: Federal Emergency

Management Agency (FEMA).

ACTION: Proposed rule.

SUMMARY: We, FEMA, propose to amend

our procedures for issuing Letters of

Map Revision Based on Fill (also

referred to as LOMR–F) under the

criteria of 44 CFR 65. We use the criteria

established in § 65.5 to determine

whether we can issue a LOMR–F to

remove unimproved land or land with

structures from the Special Flood

Hazard Area (SFHA) by raising ground

elevations using engineered earthen fill.

DATES: We invite your comments on this

proposed rule. Please send any

comments on or before November 9,

2000.

ADDRESSES: Please send written

comments to the Rules Docket Clerk,

Office of the General Counsel, Federal

Emergency Management Agency, 500 C

Street, SW., room 840, Washington, DC

20472, (facsimile) 202–646–4536, or

(email) rules@fema.gov.

FOR FURTHER INFORMATION CONTACT:

Matthew B. Miller, P.E., Chief, Hazards

Study Branch, Technical Services

Division, Mitigation Directorate, at (202)

646–3461, or (email)

matt.miller@fema.gov.

SUPPLEMENTARY INFORMATION:

Background

Congress created the National Flood

Insurance Program (NFIP) in 1968 to

provide federally supported flood

insurance coverage, which generally

had not been available through private

insurance companies. The program is

based on an agreement between the

Federal Government and each

community that chooses to participate

in the program. We make flood

insurance available to property owners

within a community provided that the

community adopts and enforces

floodplain management regulations that

meet or exceed the minimum

requirements of the NFIP set forth in

part 60 of the NFIP Floodplain

Management Regulations (44 CFR 60).

Identifying and mapping flood

hazards. FEMA identifies and maps

flood hazard areas by conducting flood

hazard studies and publishing Flood

Insurance Rate Maps (FIRMs). These

flood hazard areas, referred to as Special

Flood Hazard Areas (SFHAs), are based

on a flood that would have a 1-percent

chance of being equaled or exceeded in

any given year (the 100-year flood or

base flood). We determine the 1-percent

annual chance flood, shown on the

FIRMs as A Zones or V Zones, from

information that we obtain through

consultation with the community,

floodplain topographic surveys, and

detailed hydrologic and hydraulic

analyses.

Floodplain management

requirements. The NFIP minimum

building and development regulations

require that new or substantially

improved buildings in A Zones have

their lowest floor (including basement)

elevated to or above the Base Flood

Elevation (BFE) (the elevation of the 1-

percent annual chance flood). Nonresidential buildings in A Zones can

either be dry floodproofed or elevated to

the BFE. In V Zones, the bottom of the

lowest horizontal structural member of

the lowest floor of all new or

substantially improved buildings must

be elevated to or above the BFE. We

have designed the NFIP floodplain

management requirements at 44 CFR

60.3 to protect buildings constructed in

floodplains from flood damages.

Freeboard and Floodplain Storage.

Freeboard, generally expressed in terms

of feet above a flood level for purposes

of floodplain management, proves to be

a successful method for reducing

damage due to flooding and acts to

compensate for the many uncertain

factors that contribute to flood heights

greater than the base flood. We

recognize communities that incorporate

the concept of freeboard in their

permitting and planning processes

through the Community Rating System,

Project Impact, and insurance rating in

general.

Local officials, developers, and the

public at large should understand that

the placement of fill in the SFHA could

result in an increase in the base flood

elevation by reducing the ability of the

floodplain to convey and store

floodwaters. Communities may want to

consider prohibiting or limiting fill in

floodplains, or requiring compensatory

storage, and zero rise floodways as extra

protection. Furthermore, development

outside the SFHA but within the

watershed can further increase the flood

hazard by aggravating downstream

flooding conditions. Therefore, FEMA

will continue to encourage local

officials, planners, design professionals,

and developers to consider the long

term benefits of elevating above the

published base flood elevation when

constructing projects in and near the

SFHA.

Local responsibility. When a

community joins the NFIP, it must

initially adopt a resolution or ordinance

that expresses a commitment to

recognize and evaluate flood hazards in

all official actions and to take such other

official action as reasonably necessary to

carry out the objectives of the program

[44 CFR 59.22(a)(8)]. This is in addition

to the general requirement that the

community take into account flood

hazards to the extent that they are

known in all official actions relating to

land management and use [44 CFR

60.1(c)]. Furthermore, all communities

participating in the NFIP must

‘‘determine whether proposed building

sites will be reasonably safe from

flooding’’ [44 CFR 60.3(a)(3)]. This

proposed rule emphasizes the role and

responsibility of the community in

permitting development and ensuring

that areas within their jurisdiction are

reasonably safe from flood hazards.

Flood insurance. The National Flood

Insurance Act of 1968 requires that we

charge full actuarial rates reflecting the

complete flood risk to buildings built or

substantially improved on or after the

effective date of the initial FIRM for the

community or after December 31, 1974,

whichever is later, so that the risks

associated with buildings in flood prone

areas are borne by those located in such

areas and not by the taxpayers at large.

We refer to these buildings as PostFIRM. The NFIP bases flood insurance

rates for new construction on the degree

of the flood risk reflected by the flood

risk zone on the FIRM. Flood insurance

rates also take into account a number of

other factors including the elevation of

the lowest floor above or below the BFE,

type of building, and the existence of a

basement or an enclosure.

Mandatory purchase of insurance.

The Flood Disaster Protection Act of

1973 and the National Flood Insurance

Reform Act of 1994 mandate the

purchase of flood insurance as a

condition of Federal or federally-related

financial assistance for acquisition or

construction of buildings in SFHAs of

any community. The two Acts prohibit

Federal agency lenders, such as the

Small Business Administration, United