[Federal Register Volume 72, Number 248 (Friday, December 28, 2007)]
[Rules and Regulations]
[Pages 73635-73651]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-6220]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431, 433, and 440

[CMS-2287-F]
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: Final 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.'' This final rule eliminates Federal Medicaid payment for the 
costs of certain school-based administrative and transportation 
activities because the Secretary has found that these activities are 
not necessary for the proper and efficient administration of the 
Medicaid State plan and are not within the definition of the optional 
transportation benefit. Based on these determinations, under this final 
rule, Federal Medicaid payments will 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 for transportation from home to school. In addition, 
this final rule responds to public comments received on the September 
7, 2007 proposed rule.

EFFECTIVE DATE: These regulations are effective on February 26, 2008.

FOR FURTHER INFORMATION CONTACT: Sharon J. Brown, (410) 786-0673, Judi 
Wallace, (410) 786-3197.

SUPPLEMENTARY INFORMATION: We published a proposed rule in the Federal 
Register on September 7, 2007, at 72 FR 51397 that would eliminate 
Federal Medicaid payment for school-based administrative activities, 
based on a Secretarial finding that such activities are not necessary 
for the proper and efficient administration of the Medicaid State plan. 
Moreover, the proposed rule would also eliminate Federal Medicaid 
payment based on 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 Medicaid State

[[Page 73636]]

plan, nor within the scope of the optional medical transportation 
benefit. We received 1,240 timely public comments on the proposed rule. 
After careful consideration of these comments, we are adopting the rule 
as proposed without change. We discuss later in this preamble our 
response to comments and our reasons for going forward with the 
proposed rule. Below, we first summarize the background and provisions 
of the proposed rule.

I. Background

A. Administrative Activities and Transportation Services Under the 
Medicaid Program

    Title XIX of the Social Security Act (the Act) authorizes Federal 
grants to States for Medicaid programs, operated by each State under an 
approved Medicaid State plan that provide medical assistance to needy 
individuals including low-income families, the elderly, and persons 
with disabilities. Federal payment is available to a State for a 
proportion of expenditures for medical assistance under the approved 
Medicaid State plan, and of expenditures necessary 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 either of these provisions, 
administrative expenditures must be reasonable and necessary for the 
performance of functions funded by the Federal award.
    Transportation to and from providers is not expressly mentioned in 
the Medicaid statute, but States can claim Federal matching dollars for 
such transportation in one of two ways. Since the inception of the 
program the Federal government has recognized that transportation is 
essential to the administration of the Medicaid State plan, to ensure 
that beneficiaries have access to covered services. Federal regulations 
at 42 Code of Federal Regulations (CFR) 431.53 require that Medicaid 
State plans ``specify that the Medicaid agency will ensure necessary 
transportation for recipients to and from providers'' and describe the 
methods for doing so. Under 42 CFR 440.170(a), States are afforded the 
option of furnishing transportation as an optional covered medical 
service recognized under section 1905(a)(28) of the Act as defined and 
specified. Under this section, transportation is defined as ``expenses 
for transportation and other related travel expenses determined 
necessary by the agency to secure medical examination and treatment 
(emphasis added) for a recipient.'' Travel expense is defined to 
include the cost of the actual transportation necessary to the medical 
service, meals and lodging en route to medical care and the cost of 
attendees to the beneficiary if necessary.
    Whether transportation is furnished as an administrative activity 
under 42 CFR 431.53 or as an optional covered medical 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 
final regulation.

B. Medicaid and Schools

    A wide range of medical services may be 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 1903(c) of the Act 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 may be within the scope of medical assistance services covered 
under the Medicaid program. Medicaid covers medically necessary direct 
medical services included in an IEP or IFSP that are in a Medicaid 
covered category under the approved State Medicaid plan (such as speech 
therapy or physical therapy, but also including Early and Periodic 
Screening Diagnosis and Treatment), and that meet all other Federal and 
State Medicaid regulations (including provider qualifications and any 
amount, duration and scope limitations).
    Schools and school districts perform a myriad of administrative 
activities that arise directly from the educational mission of the 
schools. Though these activities may include coordinating the delivery 
of Medicaid services with educational services, they are primarily 
associated with educational program requirements including IDEA 
requirements. Transportation to and from the school for most students 
is also part of the schools' educational responsibility.

C. Prior Agency Experience With School-Based Administration and 
Transportation

    As detailed in the proposed rule, CMS had previously issued several 
guidance documents on school-based administration and transportation. 
In those interpretive guidance documents, CMS set forth a complex set 
of principles permitting State claims for school-based administration 
and transportation. The claims that resulted from this guidance were 
the subject of several audits by the Office of the Inspector General 
finding widespread fraud and abuse as well as improper claiming of 
costs to the Medicaid program that were incurred to meet mandates under 
educational programs.

II. Provisions of the Proposed Regulations

    We published a proposed rule on September 7, 2007, at 72 FR 51397, 
that would eliminate Federal Medicaid payment for school-based 
administrative activities, based on a Secretarial finding that such 
activities are not necessary for the proper and efficient 
administration of the State plan. Moreover, the proposed rule would 
also eliminate Federal Medicaid payment based on a Secretarial 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 specified that Federal financial participation (FFP) under the 
Medicaid program will not be available for school-based administrative 
and certain transportation costs, with the exception of administrative 
activities conducted by employees of the State or local Medicaid 
agency.
    Under the proposed rule, the following changes would apply to the 
costs of the following activities or services:
    <bullet> FFP would no longer be available for the costs of school-
based administrative activities under

[[Page 73637]]

Medicaid. By administrative activities, we referred 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.
    <bullet> 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 proposed 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 did 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.
    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 a 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 
Federal medical assistance percentage (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 would remain eligible for FFP under the 
proposed rule.
    The proposed rule was based on a determination 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.

III. Analysis of and Responses to Public Comments

    We received approximately 1,240 timely comments from State 
officials, school districts and consortia, educational organizations, 
child advocacy groups, health care organizations, school nurses, 
parents, teachers, school officials, providers, and other interested 
individuals. The largest group of comments came through a write-in 
campaign initiated by an organization titled the Council for 
Exceptional Children (CEC). The State with which the largest number of 
commenters identified themselves was California. All comments were 
reviewed and analyzed. After associating like comments, we placed them 
in categories based on subject matter. Summaries of the public comments 
received and our responses to those comments are set forth below.

General

    Most commenters opposed the proposed regulation, for the reasons 
specified below. Of the commenters supporting the proposed rule, they 
either concurred that Medicaid funds should not be used to fulfill 
educational requirements or appreciated the potential for savings in 
Federal expenditures. The categorized comments and our responses are 
listed below.

Funding Issues

    Comment: The largest number of comments focused on funding issues, 
arguing that any loss of funding would potentially ``* * * reduce the 
funds available to our already strained special education budgets,'' 
according to one commenter. Another commenter argued that ``* * * if 
States cannot take up the slack, and most of them are struggling to 
provide non-medical transportation to get children to school, as well 
as to satisfy other Federal requirements, this funding cut will be yet 
another unfunded * * * mandate.'' Many commenters noted that in their 
districts, schools are already strapped with tight budgets, some even 
specifying the exact amount of revenue they believed would be lost 
under the proposed regulation. One commenter noted that ``Should 
administrative claiming be eliminated, we would have to shift funds 
from other areas in our budgets to cover the cost or raise taxes if 
this proposal should become a reality.'' And: ``Our school division 
struggles daily with dwindling local resources and increasing demand * 
* *. Loss of these funds * * * would unfairly exacerbate a dire 
situation.'' It is unrealistic, many commenters argued, to assume that 
any State or school would be able to replace the loss of Federal 
Medicaid reimbursement that would result from finalization of the 
proposed rule.
    Response: Such comments appear to support our view and concern that 
Title XIX funds are being used as a funding source without specific 
benefit to the Medicaid program. Constrained local and State funding 
for education is not the basis for determining whether a cost is 
properly claimed under Medicaid. Specifically, administrative 
expenditures must be deemed necessary for the proper and efficient 
administration of the Medicaid State plan in order for reimbursement to 
be available. The need for schools to obtain additional funding in 
itself does not justify continued Federal Medicaid reimbursement. 
Limitation of Medicaid claims to administrative and transportation 
activities that are directly related to the furtherance of the Medicaid 
State plan is necessary to maintain the financial integrity of the 
Medicaid program. None of these commenters provided any factual basis 
to conclude that the activities in question were, indeed, necessary for 
the proper and efficient administration of the Medicaid State plan (or 
transportation necessary to ensure that individuals obtain access to 
Medicaid providers).

[[Page 73638]]

    Comment: Some commenters focused on the fact that Medicaid 
reimbursement is used to meet other educational needs and augment 
underfunded budgets. Commenters noted that reimbursement for school-
based administrative activities is used for a wide variety of 
unrelated, but important, purposes, such as instructional materials and 
equipment, or to fund staff positions, and that schools rely on this 
funding for such purposes. According to one commenter, Medicaid 
reimbursement is used to allow service staff to attend workshops and to 
purchase ``* * * needed technology and materials to better educate our 
children.'' Some asked how States and schools would make up for any 
funding shortfalls that result from finalization of the proposed rule. 
As one commenter noted: ``* * * this * * * action by the Federal 
government would force us to make cuts in other essential educational 
programs to ensure that federally required services can continue, 
despite the lack of funding,'' such as electives, after-school 
activities, or arts and music programs. The loss of Medicaid payments 
could also result in schools having to lay off staff or curtail 
referral services, according to some commenters.
    Response: Federal matching funds under Medicaid are only available 
for Medicaid services provided to Medicaid eligible individuals as 
described in the Medicaid State plan. The commenters expressly 
identified non-Medicaid costs that are clearly educational in nature. 
Constrained local and State funding for education is not the basis for 
determining whether a cost is properly claimed under Medicaid. We 
believe the final rule is necessary to maintain the financial integrity 
of the Medicaid program and there is nothing in this final rule which 
would eliminate funding for necessary direct medical services eligible 
for Medicaid funding.
    Comment: Some commenters noted the fact that Congress has never 
fully funded the IDEA, and in lieu of such funding, Medicaid 
reimbursement must be used. One commenter stated the following: ``At a 
time when the Federal government is funding barely 18 percent of the 
national average per-pupil expenditures for each child in special 
education instead of the 40 percent that Congress promised to pay when 
IDEA was first enacted, major cutbacks in Medicaid reimbursements will 
severely restrict the ability of State and local school districts to 
provide much-needed health care services to disabled children.'' 
Without a commensurate increase in funding for IDEA-related 
requirements to offset cuts resulting from the proposed rule, they 
argue, critical services may be cut. The proposed rule makes no attempt 
to explain how States and school districts might compensate for the 
reduction in funding under Medicaid and the inadequate funding of IDEA-
related mandates, they noted.
    Response: The desire for supplemental funds to augment IDEA funding 
does not justify Medicaid payments that are not authorized by the 
Medicaid statute, regulations and applicable cost accounting 
principles. Under Office of Management and Budget Circular A-87, 
``governmental units are responsible for the efficient and effective 
administration of Federal awards.'' It is not consistent with efficient 
and effective administration of the Medicaid program to pay for 
administrative activities (including transportation from home to school 
and back) that are performed as part of a school's educational mission, 
do not specifically benefit the Medicaid program, are neither 
controlled nor supervised by the Medicaid program, and would be 
performed by the schools even in the absence of the Medicaid program. 
As stated earlier, we believe the final rule is necessary to maintain 
the financial integrity of the Medicaid program. Such comments appear 
to support our view and concern that Title XIX funds are being used for 
non-Medicaid purposes and that the request for additional funding for 
educational activities should be more appropriately directed to other 
Federal, State, and local funding sources.

Provision of Services

    Comment: Some commenters worried that the proposed rule would 
adversely impact the provision of needed services to school-age 
children. One commenter noted that ``* * * schools are providing 
necessary medical/psychological services and/or referrals that others 
are able to be reimbursed for, so this should not be cut.'' Some argued 
that any changes to the Medicaid program would have a detrimental 
effect on the medical care provided to students.
    Response: The provision of, and reimbursement for, school-based 
medical services are not affected by the changes specified in the final 
rule. CMS will continue to recognize schools as valid settings for the 
delivery of direct medical services recognized in the Medicaid State 
plan. Medicaid reimbursement would remain available for covered 
services provided to children pursuant to an IEP or IFSP, whether they 
are provided in school or in the community. That is, CMS will continue 
to reimburse States for school-based Medicaid service costs authorized 
in their approved Medicaid State plans, including transportation of 
school-aged children from school or home to a non-school-based direct 
medical service provider that bills under the Medicaid program, and 
from the non-school-based provider to school or home. CMS will also 
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 a school, and back to receive direct 
medical services, as long as the transportation is not primarily for 
purposes other than gaining access to a Medicaid provider for covered 
services (such as when it is regularly scheduled transportation to a 
day care program).
    We do not believe the final rule will impact children eligible for 
Medicaid. IDEA mandates that services prescribed by a child's IEP or 
IFSP be provided to children. Section 1903(c) of the Act provides 
clearly that Medicaid reimbursement be made available for such 
services, when provided to Medicaid-eligible children, covered under 
the State plan, and provided by qualified providers that properly bill 
the Medicaid program. These requirements will not change as a result of 
the final rule. As a result, these services will continue to be 
provided to children pursuant to their IEP or IFSP, and will continue 
to be paid by Medicaid.
    Comment: One commenter noted that ``* * * while the proposed 
regulation does not directly affect reimbursement for these services, a 
school district's inability to be reimbursed for administrative 
services related to the provision of the medically necessary services 
will in fact have a chilling effect on a school district's ability to 
deliver these services.'' To deny Federal Medicaid matching for 
administrative activities provided by school employees or its 
contractors would, in the words of one commenter, ``* * * improperly 
shift the cost of allowable Medicaid services entirely to State and 
localities, without regard for the reduction in service that would 
result.''
    Response: Federal funding would 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 can include 
administrative activities under the direction of the medical service 
provider, such as patient follow-up, parent consultations, and billing 
activities, when included in the

[[Page 73639]]

negotiated rate paid for direct medical services.
    Comment: In certain comments, it was noted that Medicaid funding 
helps school pay for other types of services, such as mental health 
services, which would not otherwise be available to students. One 
commenter argued that if the proposed rule is promulgated, school-based 
services will be less effective and more costly for CMS, State Medicaid 
agencies, and schools. Another commenter noted that while the proposed 
rule does not explicitly restrict access to services in schools, it 
would make it less desirable for Medicaid programs to use school 
settings to provide services, and could inadvertently make it more 
difficult to meet Medicaid's original intent to fund necessary medical 
assistance ``* * * to promote growth and development and prevent or 
ameliorate disabilities and conditions.''
    Response: Medicaid payment remains available for all covered 
services furnished in a school setting and for children. These covered 
services include the broadest possible range of services under the 
mandatory Medicaid covered benefit for early and periodic screening, 
diagnostic and treatment (EPSDT) services. As Medicaid will still 
provide funding for such services that qualify under the Medicaid State 
plan, this will likely mean that the availability of such services in a 
school setting will not diminish as a result of this rule.
    Comment: A few commenters pointed to past and ongoing litigation 
over the failure to provide mandated services to children with 
disabilities and suggested that the likely consequences of the proposed 
rule would be a reduction in funding for necessary services they have 
fought in court to secure for these children. Specifically, some 
commenters cited the ruling in the Bowen v. Massachusetts case (487 
U.S. 879 (1988) No. 87-712), in which an appellate court ruled that ``* 
* * it is the nature of the services, not what the services are called 
or who provided them'' that determines whether the services qualify for 
Medicaid reimbursement. By eliminating Federal Medicaid reimbursement 
for administrative activities engaged in by school employees, the 
proposed rule goes against Federal court interpretations of the 
Medicaid statute, they argue. Others interpret that ruling to mean that 
any attempt to eliminate Medicaid reimbursement for transportation as a 
covered service in a State plan based solely on the child's 
participation in an educational program would be in violation of the 
court's ruling in Bowen. The court ruling, they contend, nullifies 
CMS's attempts to justify elimination of reimbursement for school-based 
administrative and transportation service expenditures by labeling such 
expenditures as ``educational'' in nature.
    Response: The final rule clarifies that Federal Medicaid funding is 
available for direct medical services provided by schools. To the 
extent that a State elects to reimburse transportation as an optional 
medical service, Federal reimbursement will still be available to the 
extent that the primary purpose of that transportation is access to a 
medical service. That is, CMS will continue to reimburse States for 
transportation of school-aged children from school or home to a non-
school-based direct medical service provider that bills under the 
Medicaid program, and from the non-school-based provider to school or 
home. Furthermore, CMS will 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 a 
school, and back to receive direct medical services, as long as the 
transportation is not primarily for purposes other than gaining access 
to a Medicaid provider (such as when it is regularly scheduled 
transportation to a day care program). However, routine transportation 
from home to school and back for school age children is primarily 
educational in nature and will not be eligible for Medicaid 
reimbursement as part of a medical service.

Potential Impact on EPSDT

    Comment: Some commenters argued that the proposed rule will make it 
difficult for States to fulfill requirements under the Early and 
Periodic Screening, Diagnostic and Treatment (EPSDT) benefit specified 
in section 1905(a) of the Act. This mandate, they note, requires States 
to inform families about the availability of EPSDT services and assist 
them in accessing services. Many school systems have contracted with 
States so that school nurses and staff inform families about EPSDT. As 
currently written, the proposed rule would limit reimbursement for 
these activities to employees of the State Medicaid agency. This 
potential conflict between the EPSDT mandate and the proposed rule, 
they argue, would severely restrict the ability for States to meet 
their responsibility under ESPDT and hamper access to necessary 
services for children. Under EPSDT requirements, one commenter noted, 
States are urged to make use of other public, health, mental health and 
educational programs in order to ensure an effective child health 
program. They cited the State Medicaid Manual as not only encouraging 
State Medicaid agencies to coordinate EPSDT administrative activities 
with ``school health programs of State and local health agencies,'' but 
also offering FFP to cover the costs to public agencies of providing 
direct support to the Medicaid agency in administering the EPSDT 
program.
    Response: Under the final rule, States will still be required to 
meet EPSDT requirements and are afforded flexibility in meeting these 
requirements. We do not believe it is consistent with proper and 
efficient administration of the Medicaid State plan, however, to 
commingle EPSDT outreach functions with other school administrative or 
direct service activities. We continue to encourage States to 
coordinate Medicaid EPSDT programs with school health programs and 
State, local and other Federal health care or social welfare programs. 
Schools employ health care providers and other educational staff as 
information points for a variety of medical and social services far 
beyond simply the Medicaid program. This function is specific to the 
nature of a school-based provider and is not directly related to the 
administration of the Medicaid State plan. Coordination and information 
dissemination efforts that are not under the control and supervision of 
the State agency and are performed by schools, however, are 
fundamentally functions that further the mission of the schools to 
ensure that students receive necessary services using available 
Medicaid resources. Such activities are not directly for administration 
of the State Medicaid plan.

Support for School-Based Administration

    Comment: A substantial number of commenters urged CMS to continue 
its support for school-based Medicaid administrative activities 
because, they argued, it can be an effective way to reach children in 
need of services and to ensure adequate medical care for disabled 
students and their families, who are often low-income and uninsured. 
One commenter noted that: ``Families are familiar and comfortable with 
the people and the school, which makes schools a logical place to 
families to access health care. The unique role played by schools as a 
health service portal is irreplaceable.'' Some thought the proposed 
regulation would decrease the opportunities for children and families 
to learn about the availability of Medicaid, and the services provided 
to those eligible for coverage. As a result,

[[Page 73640]]

the proposed rule could result in increased health care costs through 
missed opportunities to enroll eligible children in Medicaid and 
connect them to needed services before they become catastrophic. A 
recurring theme was that the proposed rule fails to recognize that 
certain administrative activities performed by school-based staff are 
instrumental to ensuring access to covered Medicaid services for 
eligible low-income children.
    Response: We acknowledge the importance of outreach and referral 
activities, and in no way preclude State or local Medicaid agencies 
from engaging in such activities. Nor do we preclude school employees 
from conducting activities that inform individuals of the availability 
of Medicaid services. But we disagree that such school employee 
activities are properly considered administration of the State plan. 
Such activities are performed as part of the normal operation of the 
school to ensure that students receive educational and related 
services, and to coordinate with other payers for those services. These 
activities are not performed for the purpose of State Medicaid plan 
administration. Moreover, this rule protects the financial integrity of 
the Medicaid program from the improper claiming and cost shifting found 
in Inspector General audits.
    Comment: Other commenters cited the success of their school-based 
Medicaid programs and provided specific examples of such successes, 
noting the number of children enrolled in Medicaid as a result of their 
efforts and the ability to connect such children to needed services. 
One commenter stated that ``* * * the proposed rule goes beyond 
reducing waste and abuse among the few by eliminating for all schools 
the positive benefits the program was designed to achieve.'' Another 
noted that the proposed rule does not take into account the 
appropriateness of schools providing administrative activities, 
especially to students with disabilities.
    Response: CMS applauds the numerous examples of successful school-
based Medicaid outreach and referral programs submitted by commenters. 
The success of these programs, however, does not compel a finding that 
school-based administration activities are a proper and efficient 
method for administration of a Medicaid State plan. In determining that 
these activities are not a proper and efficient method for 
administration of a State Medicaid program, we considered the extent to 
which such activities are conducted as a normal part of the operation 
of school education programs. We further considered the costs of 
improper Medicaid claiming because these activities are commingled with 
other school administrative activities and cannot be accurately 
allocated to Medicaid. Because these activities should occur in schools 
regardless of the availability of Medicaid funding and because the 
primary purpose of these activities is not the administration of the 
Medicaid program, we believe Medicaid should not provide funding for 
them.
    Comment: Some commenters pointed to the May 2003 CMS Medicaid 
School-Based Administrative Claiming Guide, which states that ``* * * 
the school setting provides a unique opportunity to enroll * * * and to 
assist'' Medicaid eligible children ``access the benefits available to 
them'' as evidence that school-based Medicaid administrative claims 
should remain eligible for FFP. Another quote cited by commenters can 
be found in the 1997 CMS Medicaid and School Health: A Technical 
Assistance Guide, which stated:

     ``Because of the proximity of schools to the target population, 
HCFA (now CMS) has always encouraged the participation of schools in 
the Medicaid program * * * [s]chool-based health services can 
represent an effective tool which can be used to bring more 
Medicaid-eligible children into preventive and appropriate follow-up 
care. In addition, schools present a wonderful opportunity for 
Medicaid outreach. That is, because schools are by definition ``in 
the business of serving children,'' they can be a catalyst for 
encouraging otherwise eligible Medicaid children to obtain primary 
and preventive services as well as other necessary treatment 
services * * * we encourage efforts to inform potential eligibles 
about the Medicaid program and the EPSDT benefit.''

The proposed rule, they believe, will force many States to curtail 
successful school-based initiatives to identify and enroll eligible 
low-income children in Medicaid that were encouraged by CMS itself, 
which is now promulgating a regulation to discontinue funding. Some 
commenters argued the proposed rule is a misguided approach and that it 
contradicts CMS' position that States should enroll eligible children.
    Response: Schools remain a gateway for the delivery of health 
services for many children. As our response to the prior comment 
indicated, the issue is whether school-based administrative activities 
are a proper and efficient methodology for administration of the 
Medicaid State plan. We expect the central role of schools to continue, 
and we expect that many of these school-based administrative activities 
will continue as a normal part of the operation of a school program. We 
also expect that State or local Medicaid agencies will continue 
outreach efforts under their direction and control. This rule simply 
sets forth a clear test for the administrative activities that are 
appropriately claimed as necessary for the proper and efficient 
administration of the Medicaid State plan, and distinguishes those 
activities from the administration of a school program.

Better Guidance Needed

    Comment: Some commenters argued that the solution to evidence of 
improper claiming for costs related to school-based Medicaid 
administration and transportation from home to school and back should 
be increased oversight, enforcement, and/or additional guidance, rather 
than elimination of reimbursement for such costs. They encouraged CMS 
to review the program and identify strategies for eliminating improper 
claiming practices without eliminating reimbursement for administrative 
costs. One commenter stated that ``* * * Numerous alternative solutions 
exist, the most obvious of which is to install safeguards and auditing 
procedures that would eliminate the possibility of such fraudulent 
activity taking place in the future, thereby solving the problem while 
keeping the services intact.'' Many believe that clarifying guidance 
and controls on claiming are better alternatives to promulgating the 
proposed regulation, which was seen as draconian and dismissive of 
medical necessity. They believe the proposed rule is ``* * * an 
overreaction to perceived problems in the past.'' CMS should focus its 
efforts on working with States to ensure proper claiming rather than 
promulgating new regulations. One commenter stated the following: ``If 
CMS eliminates funding for every type of service, activity, or delivery 
system where it identifies inappropriate or even abusive claiming 
practices by some providers, funds would no longer be available for any 
benefits under the Medicaid program today.''
    Response: As described in Section VII of the responses, titled 
Alternatives Considered, we ultimately rejected the types of 
alternatives suggested by many of the commenters because the 
intervening years have proven that administrative activities cannot be 
adequately regulated or overseen within the resource limits available 
to CMS and the States. Plainly stated, we have concluded that it is not 
an effective approach to administration of the Medicaid State plan to 
rely on audits and monitoring to ensure that all claims are allowable.
    Comment: One commenter recommended that ``* * * CMS use its

[[Page 73641]]

rulemaking authority in a more constructive manner by defining clear 
guidance, criteria and limitations'' and suggested applying the results 
of OIG's previous audits of States' school-based Medicaid claiming 
programs to develop better guidance and more effective oversight. That, 
they argue, would preserve the original intent of the program to 
reimburse States for legitimate activities performed by schools in 
support of Medicaid. As an alternative to the proposed rule, some 
suggested that CMS revisit past guidance and improve reporting 
requirements for school and States. One commenter suggested that ``* * 
* Congress and the Administration * * * work together to achieve 
consensus on the appropriate policies and procedures.'' According to 
one commenter, CMS should work with representatives from State Medicaid 
agencies, schools systems, and other interested parties to ``* * 
*resolve questions and areas of confusion'' stemming from the 2003 
Guide, develop clear claiming protocols, and reach consensus on related 
issues. According to some commenters, many of the claiming problems, 
stemmed from differing interpretations of Federal guidelines for 
claiming administrative and transportation costs based on inconsistent 
guidance from CMS Central and Regional Offices, and a lack of detailed 
guidelines on how to implement the programs. Commenters also 
recommended that CMS identify claiming issues in particular States and 
work with the appropriate State agencies to improve those programs 
rather than eliminating reimbursement for programs that are compliant 
with Federal requirements.
    Response: Schools repeatedly complained that CMS guidance and 
oversight was burdensome and added substantially to the cost of 
activities that the schools were undertaking to fulfill their 
educational mission. More fundamentally, however, we disagree with the 
commenters' assumption that the problem is related to Federal 
oversight. Instead, we believe there is an inherent structural conflict 
of interest in commingling school administrative activities with 
Medicaid administrative activities.

Better Data Needed

    Comment: Some commenters believe there needs to be clear set of 
data demonstrating the need to eliminate such reimbursement before the 
proposed regulation takes effect. They asked for data supporting the 
Secretary's finding that school-based administrative activities are not 
necessary for the proper and efficient administration of the State 
plan. One commenter stated: ``[The proposed rule] does not provide 
evidence * * * in the form of an estimated dollar amount of fraudulent 
claims that have continued to occur after 2003.'' These commenters 
requested specific examples of the noted fraud and abuse, and suggested 
a clear, chronological accounting of improper billing is required 
before promulgating new regulations. One commenter urged CMS to ``* * * 
examine thoroughly and report on the current effects of policies 
implementation through'' its 2003 Guide before promulgating new 
regulations. There is no evidence, they note, to suggest that the 2003 
Guide was inadequate.
    Other commenters pointed to the fact that the Senate Finance 
Committee hearings cited in the preamble were held more than five years 
ago, and preceded the issuance of new guidance by CMS in 2003, which 
was intended to improve compliance with claiming requirements. CMS 
should carefully scrutinize current claims for school-based 
administrative expenditures, they argue, which would put the agency in 
a better position to establish regulations to ensure proper claiming.
    Response: Detailed data on school-based Medicaid claiming is not 
available to CMS, due to limitations with respect to reporting 
requirements. Reporting for school-based Medicaid expenditures is 
voluntary; therefore, the data CMS used in calculating the projected 
cost savings may not match actual current spending. The proposed rule 
specifically requested public comment on potential fiscal impact. 
Commenters did not provide any clear data that were at variance with 
CMS assumptions. The limited data of which CMS is aware support the 
findings underlying the final rule.
    Comment: Many commenters found it disingenuous for CMS to use as 
the rationale for the proposed rule OIG and GAO reports regarding 
alleged abuses that occurred in the early 1990s, prior to the issuance 
of any directives or guidelines on school-based Medicaid claiming. 
Furthermore, some commenters argued, these audits only took into 
account an insignificant number of schools, and the findings should not 
be extrapolated to all schools and claiming programs nationwide. Some 
commenters were troubled by ``* * * dubious enforcement actions and 
audits'' that have appeared ``* * * more focused on limiting Federal 
expenditures than improving the appropriateness or effective 
administration'' of the Medicaid State plan. Moreover, one commenter 
contended, the instances of inappropriate billing fall within the low 
to moderate range of similar billing problems elsewhere in overall 
Medicaid claiming. Another commenter noted that the proposed rule does 
not highlight the fact that their have been OIG audits of school-based 
Medicaid administrative claiming programs that did not identify any 
significant claiming errors.
    Commenters highlighted the fact that the proposed rule refers to 
negative audit findings from a few States without indicating the 
prevalence CMS has found such practices among all States. Nor does the 
proposed rule describe the efforts CMS and the offending States have 
taken since those audit to remediate noncompliance. One commenter 
suggested that CMS conduct compliance audits on school-based 
administrative activities that have been conducted pursuant to the 2003 
Guide before promulgating new regulations. As one commenter stated: 
``CMS has not yet fulfilled its own responsibility to conduct 
appropriate, consistent, and complete oversight and to provide reliable 
localized guidance.'' Overall, these commenters believe the negative 
audit findings referred to in the proposed rule do not establish an 
appropriate basis to eliminate a nationwide program.
    Some focused on references in the proposed rule to OIG and GAO 
findings and Congressional concern over the dramatic increase in 
Medicaid claims for school-based costs. They argued that Congress 
expressed more concern for how CMS was administering the program, 
rather than how they were being operated, with the overall conclusion 
from the Senate Finance Committee hearings held in June 1999 and April 
2000 being that there was a need for greater Federal oversight.
    Response: The final rule is not based on any particular audit 
findings; but rather, the overall claiming trends and improper billing 
practices. We disagree with the premise that more Federal oversight 
could address the basic structural conflict of interest in commingling 
school administration with Medicaid administration; there is a strong 
incentive to shift costs to Medicaid for activities that would have 
been performed by schools in the normal course of their operation. As 
important, the activities are not under the supervision or control of 
the State or local Medicaid agency, and are not undertaken for the 
purpose of administration of the Medicaid State plan.
    Comment: One commenter suggested that as an alternative to the 
proposed

[[Page 73642]]

regulation, CMS should consider investing resources from the Medicaid 
Integrity Program (MIP), established in the Deficit Reduction Act of 
2005 (Pub. L. 109-432), to address school-based policy and 
reimbursement concerns and strengthen the integrity of the Medicaid 
program rather than impose a general prohibition on such reimbursement. 
They believe MIP resources could assist State agencies in determining 
when it is reasonable to bill Medicaid and develop cost-effectiveness 
guidelines related to school-based administration and transportation 
services.
    Response: CMS may in the future utilize MIP funding to address 
school-based Medicaid issues. But this approach alone would not be 
sufficient to address the underlying problems with school-based 
administrative claiming and transportation. There is an inherent 
structural conflict of interest in commingling school administrative 
activities with Medicaid administrative activities and, as a result, we 
do not believe an audit approach would be adequate or the most 
efficient use of limited Federal resources in addressing these issues.

Statutory Intent

    Comment: Some commenters argued that the proposed rule contradicts 
the intent of the Medicaid statute and other Federal regulations by 
reversing a policy that made Federal matching funds available for 
transportation provided to children with special health care needs who 
receive health care services while they are at school. Others argue 
that the policy determination underlying the provisions of the proposed 
rule contradicts the Medicaid statute insofar as it allows States 
flexibility in administering their Medicaid plans and collaborating 
with other State agencies. One commenter stated that ``* * * singling 
out children and school districts is an arbitrary application of the 
``efficiency and economy'' tenets central to Medicaid law and the 
administration of the State plan within it.'' Another commenter 
suggested the proposed rule would contradict existing law and 
circumvent Congressional intent were CMS to promulgate the regulations 
without specific legislative guidance.
    A number of commenters focused on the intent of the Medicare 
Catastrophic Coverage Act of 1988 (Pub. L. 100-360), which amended the 
Medicaid statute to allow States to begin receiving Medicaid 
reimbursement for services delivered to Medicaid-eligible children in 
schools pursuant to the IDEA. Therefore, they argue, Congressional 
intent is clear that Medicaid reimbursement should not be refused for 
activities performed in school settings. According to one commenter, 
the proposed rule ``* * * obstruct[s] the Congressional directive 
establishing Medicaid funds to share in the cost of providing health 
care services to children in conjunction with their educational 
program.'' These commenters believe there to be firm legal standing for 
the allowable use of Medicaid claiming for the costs of transportation 
and administration, and that the proposed rule contradicts current law, 
citing section 1903(c) of the Act, which prohibits payment for covered 
services provided pursuant to the IDEA. Historically, they note, 
Congress and the Federal government have encouraged Medicaid to share 
in schools'' costs for meeting the medical needs of students with 
disabilities.
    Some commenters argued that the proposed rule would arbitrarily and 
capriciously reverse legal and historical precedents. They note that 
the underlying statutory basis for such activities has not changed in 
any way, and, as a result, CMS should not seek to reinterpret statutory 
basis to enforce new definitions for necessity and proper and efficient 
administration of the Medicaid State plan.
    Response: Section 1903(c) of the Social Security Act authorized 
Medicaid funding for covered medical services included in an 
individualized education program (IEP) under the IDEA and covered in 
the Medicaid State plan, it does not, however authorize Medicaid 
funding for administrative activities that schools conduct in 
implementing their IDEA responsibilities. As a result, the final rule 
does not contradict the Medicaid statute.
    Nor does the Medicaid statute specifically authorize payment for 
transportation to and from school. Transportation from home to school 
and back is central to the operation of a school program and, as such, 
Federal Medicaid payment will not be available for the transportation 
services to and from school. However, Medicaid payment will remain 
available for direct medical services that might be required under an 
IEP or IFSP in the course of such transportation. For example, if a 
student with a disability needs to be accompanied by a personal care 
attendant or a home health aide during transportation from home to 
school and back, Federal Medicaid payment would be available to the 
extent that the service was covered under the approved Medicaid State 
plan.
    Comment: Some commenters suggested that with the proposed rule, CMS 
is attempting to base policy determination on how a State subdivides 
its functions, which is contrary to the Medicaid statute. The 
distinction in the proposed rule between education and Medicaid 
personnel is in conflict with the Medicaid statute because funding 
cannot be denied based on what arm of the State conducts the Medicaid 
activity, they argue.
    Response: This rule is not based on the way the State subdivides 
its functions, but on the inherent structural problems in commingling 
administrative functions of the Medicaid program with school 
administration.

Secretarial Authority

    Comment: Some commenters believe the Secretary is without authority 
under section 1903(a)(7) of the Act to find that amounts expended for 
administrative activities are not necessary for the proper and 
efficient administration of the Medicaid State plan solely because they 
are carried out by school personnel or staff under the control of a 
school rather by State or local Medicaid agency staff. One commenter 
argued that States are accorded the administrative flexibility in 
operating their Medicaid programs to have reimbursable activities 
performed by school personnel and that the Secretary may not limit that 
flexibility with an unsupported findings that conditions FFP by finding 
certain activities necessary only when carried out by certain 
employees. Furthermore, they argue, CMS cites no authority for 
eliminating FFP completely for all providers in response to adverse 
audit findings related to a few States. The Secretarial finding that 
school-based administrative and transportation are not necessary for 
the proper and efficient administration of the Medicaid State plan ``* 
* * fails to include any analysis of fixed criteria or standards for 
which the Secretary would typically apply to reach that ``not 
necessary'' conclusion,'' according to one commenter.
    Response: Under section 1903(a)(7), of the Act, it is the 
Secretary, not the State, that determines whether amounts expended are 
necessary for the proper and efficient administration of the Medicaid 
State plan. Therefore, it is within the Secretary's discretion to make 
a determination that certain administrative activities (including 
transportation from home to school and back) are not eligible for 
reimbursement. Specifically, section 1903(a)(7) states that Federal 
Medicaid funding is available for administrative expenditures ``as 
found necessary by the Secretary for the proper and efficient 
administration of the State plan.'' In this

[[Page 73643]]

section, the statute explicitly imbues the Secretary with the ultimate 
authority and ability to make such determinations. As a result, we do 
not believe the provisions of the final rule exceed Secretarial 
authority.
    Comment: Some commenters suggested that the activities targeted by 
the proposed rule are specifically authorized by the approved Medicaid 
State plan and that it is the State that should determine whether 
activities are proper and efficient within the approved plan. The 
proposed rule, they argue, would needlessly hinder the ability of 
States to provide essential services in a manner in which it deems most 
effective.
    Response: As a matter of practice, States generally do not include 
reimbursement for administrative services as part of their approved 
Medicaid State plan. The relevant portions of the Medicaid State plan 
as mentioned in the comment describes covered services eligible for 
Medicaid payments and the reimbursement methodologies for those 
services. The rule will not affect medical services as defined in the 
Medicaid State plan nor the States'' ability to offer those services in 
schools.
    Comment: Some commenters questioned CMS' assertion that section 
1903(c) of the Act contains no provision authorizing claiming for the 
costs of school-based Medicaid administration. They argue that because 
section 1903(c) does not specifically prohibit administrative claiming, 
the general practice is (and should be) to allow it to continue under 
current practice unless explicitly forbidden. Because the Medicaid 
statute specifically provides that the Secretary cannot prohibit or 
restrict coverage of Medicaid services simply because those services 
are included in an IEP or IFSP, the Secretary should not be allowed to 
impinge on States' abilities to claim for related costs.
    Response: The rule does not prohibit States from claiming Federal 
matching funds for covered medical services pursuant to a child's IEP 
or IFSP. States may also claim for administrative costs directly 
related to the provision of a medical service, such as billing costs as 
part of the medical service reimbursement. Section 1903(c) specifically 
discusses medical services and does not address claiming for the 
administrative costs associated with the administration of the State's 
Medicaid program. The statute provides the Secretary with considerable 
discretion to determine allowable administrative activities. Under 
section 1903(a)(7), of the Act, it is the Secretary, not the State, 
that determines whether amounts expended are necessary for the proper 
and efficient administration of the Medicaid State plan. Therefore, it 
is within the Secretary's discretion to make a determination that 
certain administrative activities (including transportation from home 
to school and back) are not eligible for Federal Medicaid 
reimbursement.

Reversal of Policy

    Comment: Some commenters argued that the proposed rule represents a 
significant reversal of long-standing policy and a revision of long-
standing Medicaid regulations, policies, and guidance, noting that CMS 
first developed detailed guidance in 1997 regarding school-based 
Medicaid program. Three years later, a report issued by HHS in 
collaboration with the U.S. Department of Agriculture and the U.S. 
Department of Education and cited by many commenters stated that 
schools are a ``natural setting'' for conducting children's health 
insurance program outreach, and that ``State Medicaid and SCHIP 
agencies seeking the best return on outreach investments often find 
that working with schools simplifies targeting audiences, distributing 
information, reaching families, and enrolling children.'' (Report to 
the President on School-Based Outreach for Children's Health Insurance, 
July 2000).
    The proposed rule, they argue, would directly contradict this July 
2000 report, which sought to encourage agreements between States 
Medicaid agencies and schools so that the latter could receive 
financial assistance for administrative activities to enroll eligible 
children. The proposed rule, they argue, would be ``* * * regressive 
and a departure from acknowledged best practices in identifying and 
serving Medicaid beneficiaries.''
    Several commenters cited the 1999 and 2000 Senate Finance Committee 
hearings on school-based Medicaid claiming as a evidence of CMS' 
recognition that schools play an important role in ensuring that 
children receive needed health care services.
    Response: The statute provides the Secretary with considerable 
discretion to determine allowable administrative activities and the 
scope of covered transportation services. Consistent with the 
Administrative Procedure Act, this final rule supersedes prior 
statements and issuances to establish a new policy concerning school 
based administration activities and covered transportation services. 
This final rule reflects careful consideration of years of experience, 
and of the public input provided in the rulemaking process. CMS 
believes this final rule is necessary to maintain the financial 
integrity of the Medicaid program.

Differential Treatment of Schools

    Comment: Many commenters opposed the rule in its entirety because, 
they argued, it reflects a differential, more restrictive treatment of 
schools in comparison to other settings in which the same Medicaid-
related activities are provided and for which funding would continue. 
There is no way to justify the inference in the proposed rule that 
school employees are deemed capable and necessary for the delivery of 
covered services, but are somehow incapable and unnecessary to conduct 
associated administrative activities, according to one commenter. If 
the proposed rule is promulgated, they argue, schools alone would be 
designated as ineligible for reimbursement as a provider of Medicaid 
administrative functions while other entities would remain eligible to 
receive reimbursement as the State Medicaid agency's designee. School 
employees would still be eligible for reimbursement for covered medical 
services, so it is inconsistent to deem them ineligible to conduct 
Medicaid administrative activities, they argue.
    Certain commenters argued that allowable activities should be 
deemed necessary for the proper and efficient administration of the 
Medicaid State plan regardless of who employs the individuals 
performing the activities. The proposed rule, they argue, unfairly and 
incorrectly suggested that a State agency employee public health nurse 
can conduct Medicaid administrative activities, but a school nurse, who 
has the same qualifications, cannot. The proposed rule, they note, 
contains no recognition of the comparable professional qualifications 
of both school and employees and State Medicaid agency employees 
conducting these activities. One commenter noted that it is unfair to 
infer, as the proposed rule does, that only the school-based claiming 
methodology is invalid, while CMS will continue to permit similar 
claiming procedures in various other contexts.
    Response: Under the rule, CMS will continue to recognize schools as 
valid settings for the delivery of Medicaid services. As a result, CMS 
will continue to reimburse States for covered school-based Medicaid 
service costs pursuant to a child's IEP or IFSP. The final rule 
reflects a determination that schools are unique settings, and that 
there is an inherent structural conflict when school administrative 
responsibilities and Medicaid administrative activities are

[[Page 73644]]

commingled that precludes accurate claims. As a result, the final rule 
reflects a conclusion that school-based administrative activities are 
only necessary for the proper and efficient administration of the 
Medicaid 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 claimed under Medicaid 
when conducted by employees of the State or local Medicaid agency. 
School staff may continue to perform these types of administrative 
activities. The final rule will merely limit the availability of 
Federal matching funds based on the finding that it is not necessary 
for the proper and efficient administration of the Medicaid State plan 
for school staff to do so. We believe the final rule is necessary to 
maintain the financial integrity of the Medicaid program. The final 
rule does not question the importance of these types of administrative 
activities when performed by employees of the State Medicaid agency and 
still recognizes schools as valid settings for the delivery of Medicaid 
services.
    Comment: One commenter argued that Office of Management and Budget 
Circular A-87 (OMB A-87) contradicts the proposed rule by including 
school districts in its definition of local governments eligible to 
participate in Federal awards. Insofar as school districts are defined 
as units of government, they should not be excluded from Medicaid 
participation in any way. Furthermore, it represents a reversal of 
recent Federal guidance on school participation in Medicaid claiming 
and contradictions of Federal definitions of ``governmental units'' and 
``local governments'' that may participate in Medicaid claiming.
    Response: This rule in no way addresses the status of schools and 
school districts as units of government. OMB Circular A-87 describes 
cost allocation requirements for units of government that receive 
Federal grants and must account for costs associated with those grants. 
OMB Circular A-87 does not, however, supplant the determination of the 
program agency as to the administrative activities necessary for the 
proper and efficient administration of the Medicaid program.
    Comment: Some commenters pointed to Section 5230 of the State 
Medicaid Manual, which requires Medicaid agencies to coordinate 
services with local education agencies, title VI grantees, providers, 
and other public and private agencies, as support for the role of 
schools in helping the State administer the Medicaid program. The 
statute is replete with examples of the extent to which State agencies 
are expected to rely on other public agency staff to carry out Medicaid 
State plan obligations, one commenter noted. As another stated: 
``Collaboration with other public agencies is a consistent statutory 
theme; indeed, the statute both contemplates the involvement of other 
public agencies and give[s] States broad discretion over plan 
administration.'' The proposed rule would, in the words of one 
commenter, ``* * * establish an operational barrier to using schools as 
a venue for performing administrative activities that support the 
Medicaid program.'' Singling out schools, school contractors, and 
school districts and eliminating their ability to receive reimbursement 
for Medicaid administrative activities will result in a less effective, 
less efficient Medicaid outreach and referral system.
    A number of commenters took issue with the statement in the 
proposed rule that administrative activities provided in schools ``* * 
* largely overlap with educational activities that do not directly 
benefit the Medicaid program.'' In reality, they argue, such activities 
do directly benefit the Medicaid program insofar as they help Medicaid 
eligible children to access covered services. One commenter stated the 
following: ``The Secretary is * * * remiss in failing to consider that 
compulsory school attendance laws provide schools with a captive 
audience of underserved Medicaid eligible school-based children, thus 
providing an optimal setting for addressing their * * * needs.'' From a 
public policy perspective, they note, providing Medicaid activities in 
schools should be encouraged, rather than restricted, yet the proposed 
rule singles out schools settings for disparate restrictions and 
prohibitions that are not imposed on other eligible providers.
    Response: The final rule clarifies that Medicaid is not the 
appropriate funding source for school-based administrative activities 
or for transportation from home to school and back. These activities or 
services are fundamentally undertaken for the educational mission of 
the school, rather than for administration of the Medicaid State plan. 
Based on our experience, we do not believe it is possible to develop 
and implement claiming methodologies that accurately allocate costs to 
Medicaid. The costs of such accounting exceed any incremental benefits 
to the Medicaid program from these activities and services, and we have 
concluded that it would be more efficient for States not to commingle 
Medicaid and school administration and transportation.

Potential for Outstationed State Medicaid Agency Employees

    Comment: Some commenters argued that State Medicaid agencies are 
unlikely to send their own employees into schools to conduct 
administrative activities, and that to do so would be inefficient. 
These commenters believe that school-based outreach and enrollment 
efforts are successful precisely because of the involvement of school 
staff who are trusted by families and already in contact with children 
and their families. These commenters believe State and local Medicaid 
agencies can more efficiently carry out Medicaid administrative 
activities through relationships with other public entities, including 
schools. One commenter believes that States would have to hire 
thousands of eligibility workers to do the work currently carried out 
by school employees, at a far greater cost. To the extent State agency 
employees were outstationed in schools, they argue, this would 
establish a duplicative bureaucracy at State and Federal levels for 
activities that are more efficiently performed by school staff. They 
argue that this scenario would be financially and operationally 
inefficient compared to the current system.
    Response: CMS cannot direct State or local Medicaid agencies to 
utilize their own staff to provide Medicaid administrative activities 
in schools, as each State Medicaid program differs, and States have 
flexibility in administering their programs. However, there is 
precedent to use agency outstation workers in alternative service 
delivery venues to administer the Medicaid State plan. Furthermore, 
outstationing eligibility workers is likely to result in enrolling 
eligible children more rapidly as they can make the actual eligibility 
determination, while school employees cannot.
    While we agree that school employees often enjoy a special trust 
relationship with the families of students, this special relationship 
is more likely based on an employees'' broad knowledge of a variety of 
health, education and social service programs. Because of the 
difficulty in determining specific administrative activities that are 
for the purpose of administration of the Medicaid State plan, we have 
determined that it is not proper and efficient to use school 
employees'' for the administration of the State Medicaid program.

[[Page 73645]]

    Comment: One commenter cited the Family Educational Rights and 
Privacy Act (FERPA), 20 U.S.C. Section 1232(g), under which schools 
must keep student records confidential, as a serious impediment to 
having non-school employees (i.e., State Medicaid agency employees) 
engage in Medicaid outreach, enrollment, and other administrative 
functions.
    Response: CMS does not believe the final rule will, in any way, 
impact education mandates under FERPA, with which schools must continue 
to comply. Furthermore, we believe non-school employees can conduct 
effective Medicaid outreach and enrollment for students without access 
to individual student school records.

Transportation-Specific Issues

    Comment: Some commenters focused on the impact of the proposed rule 
on Medicaid reimbursement for costs related to transportation from home 
to school and back. These commenters asserted that specialized 
transportation to school is necessary for a special needs student and 
is necessary for the proper and efficient administration of the 
Medicaid State plan, as required by 1903(a)(7) of the Act. One 
commenter argued that CMS should preserve authority for States to 
submit claims in limited situations, specifically for transporting 
Medicaid eligible children from home to school and back if the child's 
health status requires monitoring or medical related services during 
transport.
    These commenters argued that the proposed rule ignores the needs of 
many students with disabilities who require specialized transportation 
between home and school to facilitate frequent contact with school-
based Medicaid services providers to treat chronic health conditions 
that are most cost-effectively treated during the course of the school 
day.
    Response: Medical services provided in schools or as part of 
transportation to school are eligible for Medicaid reimbursement. 
However, Medicaid will not reimburse the school for actual 
transportation to school. Some comments seem to suggest that children 
with disabilities are in school systems primarily to receive medical 
services rather than to receive an education. Schools are educational 
institutions, and children are transported to schools to receive an 
education. Schools are required to provide access to medical care to 
allow children with medical needs to participate as fully in the 
educational system as children without special medical needs. Children 
are already in the school for the purpose of receiving their education 
when medical services are received and no additional transportation is 
medically necessary. Characterizing transportation from home to school 
as being for the purpose of obtaining medical services overlooks the 
fundamental purpose of the transportation.
    Comment: Some commenters pointed to CMS' assertion that schools are 
required to provide transportation from home to school and back. On the 
contrary, they argue that there is no State or Federal requirement for 
schools to provide transportation from home to school and back for all 
in students in every State. For example, one commenter noted, some 
schools do not provide bus transportation for students who live within 
walking distance. Some commenters argue that the proposed rule 
incorrectly compares specialized transportation services for children 
with significant health problems and traditional school bus 
transportation. They argue that States set forth conditions that must 
be met in order for a student to qualify for the transportation 
benefit. For these reasons, they note, schools throughout the country 
have utilized Federal funding through Medicaid to transport children to 
school for medical appointments and provide bus aides when deemed 
necessary. The proposed rule, however, would prohibit Medicaid funding 
for these expenditures.
    Response: Schools are educational institutions that may be 
required, under an Individualized Education Program to provide 
transportation to and from school for any individual child that may 
require transport to participate in the public education system even if 
that school does not provide transportation to other children in the 
community. Medicaid will not reimburse school districts for 
transportation requirements to and from school that the school must 
meet as part of the IEP. Once at the school, a student may obtain 
medical services but no additional transportation is required at that 
point.
    With respect to transportation to and from school, however, 
Medicaid payment will remain available for direct medical services that 
might be required under an IEP or IFSP in the course of such 
transportation. For example, if a disabled individual needs to be 
accompanied by a personal care attendant or a home health aide, Federal 
Medicaid payment would be available to the extent that the service was 
covered under the approved Medicaid State plan.
    Comment: Others argued that there was no basis to change previous 
CMS guidance, such as a May 2003 Guide and a 1997 technical assistance 
guide, that supported and offered guidelines for claiming costs related 
to transportation. These commenters pointed to section 1903(c) of the 
Social Security Act, which requires Medicaid to be primary to the U.S. 
Department of Education for payment of covered health-related services 
that are included in an IEP or IFSP, as support for reimbursing costs 
related to transportation from home to school and back. They noted that 
transportation is often prescribed in a child's IEP or IFSP.
    Response: This regulation is not inconsistent with section 1903(c) 
of the Social Security Act because it addresses whether transportation 
between home and school is a covered Medicaid service, and does not 
affect the general obligation of the Medicaid program to pay for 
covered Medicaid services that are prescribed in an IEP or IFSP primary 
to education programs. This regulation departs from previous guidance 
because it properly acknowledges that the purpose of the transportation 
between home and school is for education rather than medical services. 
Such transportation is for the purpose of securing attendance at the 
school for educational reasons, and not for the purpose of obtaining 
access to medical providers. As such, we do not believe that such 
transportation is within the scope of covered Medicaid transportation, 
either as an administrative activity or as a covered medical assistance 
benefit in the approved Medicaid State plan.
    Comment: Some commenters asserted that, in exempting from the 
proposed rule the costs of transportation from home to school and back 
for children who are not yet school age, that CMS is acknowledging the 
potential for schools to provide Medicaid services and perform Medicaid 
activities not solely to serve an educational purpose, which undercuts 
this provision of the proposed rule. Additionally, some commenters 
noted, Federal Medicaid funding remains available for the 
transportation of all other groups of Medicaid-covered individuals to 
medical services providers; it is only school-age children receiving 
medical services at school whose transportation will not be 
reimbursable. They argue that this funding exception violates Federal 
regulations that require comparability in the amount, duration, and 
scope of services for all those who qualify for Medicaid services 42 
CFR Section 440.240. As one commenter noted, Medicaid policy regarding 
medical transportation does not restrict the beneficiary from 
participating in any other activity before returning home

[[Page 73646]]

from the place of treatment, as is the case in schools. And still 
another commenter argued that the proposed regulatory text is 
contradictory by continuing to make Federal Medicaid reimbursement 
available ``for recipients to and from providers,'' while ignoring the 
fact that a school district can be a qualified Medicaid provider.
    Response: For school-aged children, transportation between home and 
school is for the purpose of attending an educational institution, and 
not for the purpose of obtaining access to medical providers. This 
reasoning does not apply for individuals who are not yet school-aged, 
and thus we did not include this population in the rule's prohibition. 
The commenters err in assuming that transportation obtained for 
purposes other than to obtain access to medical providers is within the 
scope of covered Medicaid transportation. For instance, when an 
individual needs transportation for the purpose of attending a medical 
appointment in a nearby city, transportation to that provider would be 
covered even if the individual also shopped or engaged in other 
incidental activities on the trip. But when an individual is employed 
in that nearby city and commutes on a daily basis for the purpose of 
engaging in employment, the daily commute would not become covered 
Medicaid transportation when the individual attends a medical 
appointment at work. While this distinction is not always clear, it is 
clear in the instance of transportation between home and school for 
school-aged children.
    Comment: Some commenters suggested that the proposed regulation may 
create new, unanticipated transportation costs if children begin to 
receive more services with a community-based provider, rather than in 
school, because many school districts will not be able to absorb 
transportation costs that were once matched with Medicaid funds. Other 
commenters asserted that the cost of providing specialized 
transportation is significantly more expensive than transportation 
provided to regular students, and should be reimbursable for that 
reason.
    Response: This final rule will not interfere in any way with the 
ability of States to determine school transportation policy, but simply 
recognizes 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 Medicaid State plan, nor do they meet the 
definition of an optional transportation benefit under Medicaid. 
Children are transported to school primarily to receive an education, 
not to receive medical services. The final rule will merely eliminate 
Medicaid as a funding source; it will not affect the provision of such 
transportation. Moreover, this rule will not affect the status of 
covered medical services furnished in the course of transportation such 
as services of a personal care attendant or a home health aide.
    Comment: One commenter suggested that CMS may have overlooked the 
fact that, in some cases, a child's disability is so severe that he or 
she is unable to attend a mainstream district school, or even a special 
day class within the district. In those cases, the child must attend an 
out-of-district public school, a non-public school placement, or a 
residential facility, to-and-from which districts are not automatically 
providing transportation. In cases where children would receive covered 
medical services at one of these sites, and the district must send the 
child to these placements because of their particular medical needs, 
the proposed regulations would preclude billing for the costs of such 
transportation, they note.
    Response: We do not believe a school district's election to educate 
students in one location or another affects the basic purpose of the 
transportation to ensure attendance at an educational institution. Even 
in these circumstances, the transportation to and from school is for 
educational purposes.
    We agree, however, that when an individual is transported for the 
provision of medical services to a location that is not a school, such 
as a community provider, the transportation would be covered because 
that transportation was necessary to access a medical service that is 
not available at the school.
    Comment: Another commenter pointed to Executive Order 13330, issued 
February 24, 2004, which directs the Secretary of the U.S. Department 
of Health and Human Services to promote interagency cooperation in the 
provision of transportation services and argued that the proposed rule 
contradicts this Executive Order. The commenter stated: ``To determine 
that transportation is only necessary when performed by employees of 
the State or local Medicaid agency fails to recognize the efficiencies 
available when transportation is a coordinated effort.''
    Response: The quoted language reflects confusion about this rule. 
This rule reflects a determination that transportation to and from 
school is not for the purpose of administration of the Medicaid State 
plan, nor is such transportation necessary to ensure beneficiary access 
to medical providers. We encourage the coordination of covered Medicaid 
transportation with other programs, but Medicaid reimbursement of 
transportation services is limited to ensuring beneficiary access to 
medical providers in the community. It does not include transportation 
routinely provided for other purposes.
    Comment: Some commenters noted that school districts often rely on 
Medicaid reimbursements for the costs of outfitting buses with 
specialized equipment. These commenters urged that such funding remain 
available.
    Response: Medicaid payment will continue to be available to pay for 
medical equipment, appliances and supplies that are covered under the 
home health benefit, to the extent medically necessary for a particular 
individual and, when furnished by schools, included in an IEP or IFSP. 
Medical necessity is determined under State-established medical 
necessity criteria. Nothing in the final rule will affect claiming 
under Medicaid for these types of expenditures. Medicaid reimbursement 
will not be available, however, for costs of permanently outfitting 
buses with equipment for general use in accommodating individuals with 
disabilities or other medical issues. Such costs are not within the 
scope of a covered Medicaid benefit. Instead such costs are integral to 
the uncovered transportation between home and school.

Impact Analysis

    Comment: Some commenters argued that the estimated savings 
represents a cost shifting, rather than a cost savings, from the 
Federal government to State and local school districts that are 
obligated to provide these services. As a result, they believe the 
projected cost savings specified in the proposed rule are misleading. 
Another commenter argued that it is disingenuous to state that the 
proposed rule would not have a ``significant economic impact on local 
school districts.'' Schools may lose up to $600 million in the first 
year of the proposed rule's implementation, one commenter noted in 
referencing the projected cost savings. While this may be a very small 
component of the overall Medicaid budget, they contend, it is not 
insignificant to the school districts and States that rely on this 
funding to maintain the quality of services provided to students with 
disabilities.
    Still other commenters question the projected savings resulting to 
the proposed rule, suggesting that these savings could be primarily 
attributable

[[Page 73647]]

to one of the two issues addressed in the proposed rule; specifically, 
transportation for school-age children. As a result, they argue the two 
parts of the proposed rule should be considered separately and their 
potential impact separately calculated. There is also no estimate in 
the impact analysis of the number of children who would not be 
identified and enrolled in Medicaid if States cannot maintain school-
based outreach programs without Federal support, one commenter was 
disappointed to find.
    Response: The final 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.
    As stated in the proposed and final versions of the rule, there is 
admitted uncertainty in the projected cost savings 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. The cost savings are based upon State voluntary reporting of 
quarterly expenditures to CMS. Since this reporting for school-based 
activities is voluntary, these estimates may not match actual current 
spending. 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 final rule 
on the types of transportation costs that would be affected.
    Comment: One commenter believed the rationale for the estimated 
cost savings is flawed because not all school districts currently claim 
or receive FFP for administrative and transportation services, and that 
Federal funding is spread unevenly among States, districts, and 
schools. Therefore, they suggest, comparing the costs of the proposed 
rule to overall nationwide spending for elementary and secondary 
education minimizes its financial impact. Instead, one commenter argued 
that a more realistic financial analysis is necessary, one which would:
    1. Examine the financial impact of the proposed cuts only on 
districts that actually claim for reimbursements;
    2. Take into consideration the unique aspects (such as fixed costs) 
of school district budgets; and
    3. Include the likely loss of State Medicaid funding that would 
result from schools no longer being able to sustain these programs.
    Response: The proposed and final rules reference total elementary 
and secondary spending in 2004, as defined by the Bureau of the Census, 
in determining the projected impact on expenditures. It is difficult, 
if not impossible, to reach consensus on a single expenditure total to 
be used as the basis for calculating the potential impact of the 
proposed rule. We determined the Census data to be the most reliable 
and accurate data available. As stated in Section VI., the estimated 
annual Federal savings under this final 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).
    Comment: Other commenters disagreed with the assessment in the 
proposed rule that it would not have a significant impact on a 
substantial number of small entities, either disagreeing with the 
threshold definition of significant impact or that of small 
governmental jurisdictions. This was an issue for which CMS 
specifically solicited public comment. Under the definition of small 
governmental jurisdiction used by CMS, that is, those with a population 
of less than fifty thousand, nearly every school district in certain 
States would qualify as small entities, according to one commenter. 
This commenter went on to note that these smaller districts are often 
rural with a high percentage of students receiving free or reduced 
priced lunches. As a result, schools that are poor, rural, isolated and 
small will be disproportionately impacted due to existing budget 
constraints and extremely limited resources.
    Certain commenters believe the cost benefit analysis to be flawed. 
One commenter stated that the analysis presumes that most school 
districts are uniform in size, which is not the case. Another argued 
that the proposed rule aggregates all Federal spending on elementary 
and secondary education ``* * * as a means to minimize the rule's 
financial impact on school districts.'' Some stated that the proposed 
rule inaccurately minimizes the fiscal impact the proposed rulemaking 
would have on school districts, stating that it is ``* * * misleading 
and inaccurate for CMS to compare the cost of school-based health care 
to the entire budgets for K-12 education.'' Rather than ``one eighth of 
one percent of total annual spending, the proposed rule, they argue, 
would impose a 50 percent impact insofar as the matching rate for 
allowable administrative expenditures is 50 percent FFP.
    Response: As noted in Section VI., for purposes of the Regulatory 
Flexibility Act, 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. Admittedly, 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. We 
nevertheless believe, as indicated in our calculations and in the 
absence of reliable data to the contrary, that the impact of this rule 
will be only a small percentage of administrative and transportation 
expenditures by such entities. Furthermore, the input we received in 
response to the solicitation for public comments on the potential 
impact on small entities offered only speculation and did not provide 
sufficient quantitative data to argue for a reassessment of the 
potential impact.
    Comment: One commenter believes the discussion in the Impact 
Analysis of Executive Order 13132 is flawed by a failure to accurately 
assess the impact on State and local governments and by the factual 
error inherent in characterizing as ``routine'' the transportation 
needs of school-based children receiving Medicaid services in a school 
setting pursuant to an IEP.
    Response: As stated in Section VI., with respect to transportation 
specifically, States and/or schools will be required under the final 
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.

Regulatory Text

    Comment: One commenter asked for clarification of what is meant in 
the

[[Page 73648]]

proposed Section 433.20 by ``under the control of'' a public or private 
educational institution. This commenter also asked for clarification in 
the regulatory text that activities required to support the provision 
of medical services are eligible for FFP if they are included in the 
rate paid for direct medical services, and requested a definition for 
``administrative overhead costs'' to appear in the regulatory text.
    Response: The reference in Section 433.20 to anyone ``under the 
control of'' a public or private educational institution is meant to 
incorporate any and all subcontracting arrangements that schools or 
other educational institutions may enter into for the provision of 
services or administrative activities in schools. The definition of 
administrative overhead costs cannot be specified in the regulatory 
text because it is dependent upon the types of costs that are included 
in the rate paid for direct medical services, which is negotiated by 
each State and specified in the approved Medicaid State plan. These 
reimbursement rates are set by the State Medicaid agency and, 
therefore, any discussions regarding the appropriateness of such rates 
on the part of providers must be conducted at the State level.
    Furthermore, CMS does not believe it is necessary to specify in the 
regulatory text that administrative activities that are integral to, or 
an extension of, a direct medical service remain eligible for FFP 
insofar as they are reimbursed through the rate paid for the service. 
This is because the regulatory text only limits the availability of FFP 
for Medicaid administration, not services (except insofar as 
transportation from home to school and back is defined as a service). 
That is, the final rule does not affect Federal reimbursement for the 
costs of allowable direct medical service expenditures.
    Comment: One commenter requested that the regulatory text 
explicitly note the continued availability of FFP for the costs of 
transporting school-age 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. 
Another commenter asked for language to be included in the regulatory 
text specifying that FFP is available for transportation services 
provided to children who are ``not yet school-age'' to and from 
providers, even if the site of service is a school.
    Response: CMS does not believe it is necessary to specify in the 
regulatory text that Federal Medicaid reimbursement remains available 
for transportation provided to children who are not yet school-age to 
and from providers, even if the site of service is a school, because 
the regulatory text lists only those costs for which reimbursement will 
not be available. Similarly, it is not necessary to note in the 
regulatory text the continued availability of FFP for the costs of 
transporting school-age 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. Any 
such costs not included in the regulatory text are thereby exempt from 
the general prohibition on reimbursement.
    Comment: One commenter requested a definition of ``school-age'' and 
``not yet school-age.''
    Response: The regulatory text purposely does not provide a 
definition for ``school-age'' and ``not yet school-age'' because such 
definitions may differ by State and no such distinction exists in the 
Medicaid statute; rather, such determinations are based on education 
requirements. We do intend the term ``school-age children'' to be 
defined by age. It is specifically worded as such to differentiate 
between children who are of the age to attend school for education and 
children who are not yet school-age.
    Comment: One commenter asked for clarification in proposed Section 
431.53 of whether transportation is only available to and from services 
that are included in a child's IEP or whether transportation is also 
available to and from other Medicaid services that are not included in 
a child's IEP.
    Response: Federal Medicaid reimbursement for school-based services 
is generally available only for covered services provided pursuant to 
an IEP or IFSP, because non-IEP services are typically subject to 
Medicaid third party liability rules and ``free care'' policies, which 
limit the ability of schools to bill Medicaid for some of these health 
services and associated administrative costs. Third party liability 
requirements preclude Medicaid from paying for Medicaid coverable 
services provided to Medicaid beneficiaries if another third party 
(e.g., other third party health insurer or other Federal or state 
program) is legally liable and responsible for providing and paying for 
the services. The ``free care'' principle precludes Medicaid programs 
from recognizing as a cost of Medicaid-coverable services and 
activities any amount for services and activities which are available 
without charge or liability, and for which no other sources for 
reimbursement are pursued.

IV. Provisions of the Final Regulations

    This final rule incorporates the provisions of the proposed rule in 
its entirety and does not in any way differ from the proposed rule.

V. 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).

VI. 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 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). 
This final rule's savings will exceed this economic threshold and it is 
therefore considered a major rule. The final rule is estimated to 
reduce Federal Medicaid outlays by $635 million in FY 2009 and by a 
total of $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 final 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 many school districts have 
populations below this threshold and are therefore considered small 
entities for purposes of the RFA, we have determined the impact on 
local school districts as a result of the final rule will not exceed 
the threshold of

[[Page 73649]]

``significant'' economic impact under the RFA, as discussed below.
    States have the option under the final 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 continue transporting 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 Program (IEP) under 
the IDEA, section 1903(c) does not expressly authorize Medicaid funding 
for administrative activities that schools conduct in implementing 
their IDEA responsibilities.
    The estimated annual Federal savings under this final rule are 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 used 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 final rule will not have a significant economic impact on a 
substantial number of small entities.
    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 604 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 $127 million. This final rule contains 
no mandates that will impose spending costs on State, local, or tribal 
governments in the aggregate, or by the private sector, of $127 
million. The final 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 will not have a substantial 
effect on State or local government policy discretion. While this final 
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 
will 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 
will 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 Medicaid State plan, nor do they meet 
the definition of an optional transportation benefit under Medicaid.

B. Anticipated Effects

    The final 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 final 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 per Federal fiscal year]
----------------------------------------------------------------------------------------------------------------
                                  2009          2010          2011          2012          2013        2009-2013
----------------------------------------------------------------------------------------------------------------
School-Based Costs:                 -$635         -$675         -$720         -$770         -$820        -$3620
 Eliminate Reimbursement for
 Administration/
 Transportation.............
----------------------------------------------------------------------------------------------------------------

Conclusion

    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

[[Page 73650]]

these voluntary State claiming reports, an estimate of the total amount 
of claims under the Medicaid program that would be affected by the 
final rule was developed and then projected forward using the most 
recent assumptions available. 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 final rule on the types of transportation costs that would be 
affected.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

VII. 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, we 
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.
    We determined that the rulemaking process was the most effective 
method of implementing these policies because the rulemaking process 
was the best way to 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.

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 final 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 will be 
implemented by this final rule. The sum total of these expenditures is 
classified as savings in Federal Medicaid spending.

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

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.


0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR Chapter IV as set forth below:

PART 431--STATE ORGANIZATION AND GENERAL ADMINISTRATION

0
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).


0
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

0
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).

0
4. Part 433 is amended by adding a new Sec.  433.20 to read 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.

[[Page 73651]]

PART 440--SERVICES: GENERAL PROVISIONS

0
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).

0
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.
* * * * *

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

    Dated: December 13, 2007.
Kerry Weems,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: December 14, 2007.
Michael O. Leavitt,
Secretary.
[FR Doc. 07-6220 Filed 12-21-07; 10:00 am]
BILLING CODE 4120-01-P