[Federal Register Volume 74, Number 124 (Tuesday, June 30, 2009)]
[Rules and Regulations]
[Pages 31196-31199]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-15347]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 433

[CMS-2275-F2]
RIN 0938-AP74


Medicaid Program; Health Care-Related Taxes

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

ACTION: Final rule.

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SUMMARY: This rule finalizes our proposal to delay enforcement of 
certain clarifications regarding standards for determining hold 
harmless arrangements in the final rule entitled, ``Medicaid Program; 
Health Care-Related Taxes'' from the expiration of a Congressional 
moratorium on enforcement from July 1, 2009 to June 30, 2010.

DATES: Effective Date: These regulations are effective on July 1, 2009.

FOR FURTHER INFORMATION CONTACT: Stuart Goldstein, (410) 786-0694.

SUPPLEMENTARY INFORMATION:

I. Background

    Section 1903(w) of the Social Security Act (the Act) provides for a 
reduction of Federal Medicaid funding based on State health care-
related taxes unless those taxes are imposed on a permissible class of 
health care services; broad based, applying to all providers within a 
class; uniform, such that all providers within a class must be taxed at 
the same rate; and are not part of hold harmless arrangements in which 
collected taxes are returned, whether directly or indirectly. A similar 
hold harmless restriction applies to provider-related donations. 
Section 1903(w)(3)(E) of the Act specifies that the Secretary shall 
approve broad based (and uniform) waiver applications if the net impact 
of the health care-related tax is generally redistributive and the 
amount of the tax is not directly correlated to Medicaid payments. The 
broad based and uniformity requirements are waivable through a 
statistical test that measures the degree to which the Medicaid program 
incurs a greater tax burden than if these requirements were met. The 
permissible class of health care services and hold harmless 
requirements cannot be waived. The statute and Federal regulation 
identify 19 permissible classes of health care items or services that 
States can tax without triggering a penalty against Medicaid 
expenditures.
    On February 22, 2008, we published a final rule entitled, 
``Medicaid Program; Health Care-Related Taxes'' (73 FR 9685). This 
final rule amended provisions governing the determination of whether 
health care provider taxes or donations constitute ``hold harmless'' 
arrangements, codified statutory changes to the indirect guarantee 
threshold test and the definition of the class of managed care 
organization services, and deleted certain obsolete transition period 
regulatory provisions. The rule codified the reduction in the indirect 
guarantee threshold test in order to reduce the allowable amount that 
can be collected from a health care-related tax for the period of 
January 1, 2008, through September 30, 2011, as required by the Tax 
Relief and Health Care Act of 2006 (Pub. L. 109-432). The rule also 
codified changes to the permissible class of health care items or 
services related to managed care organizations as enacted by the 
Deficit Reduction Act of 2005 (Pub. L. 109-171).
    The February 22, 2008 final rule became effective on April 22, 
2008. However, section 7001(a)(3)(C) of the Supplemental Appropriations 
Act of 2008, Pub. L. No. 110-252, imposed a partial moratorium until 
April 1, 2009, prohibiting CMS from taking any action to implement any 
provisions of the final rule that are more restrictive than the 
provisions in effect on February 21, 2008, with the exception of the 
change in the statutory definition of the class of services of a 
managed care organization and the statutorily-required change to the 
indirect guarantee threshold test. This moratorium was extended by

[[Page 31197]]

section 5003(a) of the American Recovery and Reinvestment Act of 2009 
(the Recovery Act), Public Law 111-5, until July 1, 2009. Although not 
subject to the moratorium, a statutorily established transition period 
was established until October 1, 2009, for those States with previously 
enacted health care-related taxes under the previous definition of 
Medicaid managed care organization services.
    On May 6, 2009, we published a proposed rule (74 FR 21230) that 
delayed the enforcement of the changes made in the February 22, 2008 
final rule to the hold harmless tests under Sec.  433.54(c) and Sec.  
433.68(f), other than the statutorily-required change to the indirect 
guarantee threshold level, until June 30, 2010. This portion of the 
regulation has been the subject of the Congressional moratoria and has 
not yet been implemented by CMS. We explained that the delay was 
necessary in order to determine whether additional clarification or 
guidance is necessary or helpful to our State partners. In addition, we 
explained that certain States were concerned that the regulatory 
language is broad or unclear. Furthermore, we indicated that the delay 
would allow more time to obtain information about the potential impact 
of the rule and alternative approaches, and to ensure appropriate 
implementation of the statutory restrictions on provider taxes and 
donations.

II. Provisions of the Proposed Rule and Response to Comments

    In the May 6, 2009 proposed rule (74 FR 21230), we proposed to 
delay enforcement of certain provisions concerning hold harmless 
arrangements, for 1 year. We received a total of 11 timely comments 
from national hospital associations, State Medicaid Agencies, and the 
National Association of State Medicaid Directors. The comments 
supported our decision to delay enforcement of certain clarifications 
regarding standards for determining hold harmless arrangements in the 
final rule entitled, ``Medicaid Program; Health Care-Related Taxes'' 
from the expiration of a Congressional moratorium on enforcement on 
July 1, 2009 to June 30, 2010. We appreciate these comments and agree 
that the delay in enforcement of these specific provisions is merited. 
A summary of the public comments we received, and our responses to 
comments, are set forth below.
    Comment: Several commenters expressed support for CMS in delaying 
enforcement of clarifications regarding standards for determining hold 
harmless arrangements. Commenters indicated that this delay would 
enable the Agency to further examine the impact of changes on States 
and providers. The commenters felt that any change to current policy 
should be carefully considered to ensure that it would not negatively 
affect the ability of State Medicaid programs to maintain coverage and 
payment levels. Some commenters believe that the provisions of the rule 
relating to the hold harmless provision overstepped the authority and 
guidelines provided by Congress. Commenters encouraged CMS to work with 
States to develop objective standards by which the hold harmless 
provisions for health care-related taxes can be measured.
    Response: We appreciate the commenters' support for the delay in 
enforcement of the clarifications regarding standards for determining 
hold harmless arrangements. We will continue to work with States to 
ensure that Federal statutory requirements are met. We are committed 
not only to applying objective analysis in determining whether State 
tax programs contain hold harmless arrangements but also to working 
with each State on a case-by-case basis, given the unique nature of the 
programs, to ensure implementation of permissible tax programs.
    As indicated by the commenters, the delay will provide us with time 
to determine whether further clarification or guidance is needed and 
would be of assistance to States. The delay will also allow more time 
to obtain information about the potential impacts of the rule and 
alternative approaches as well as to assure the appropriate 
implementation of the statutory restrictions.
    Comment: Several commenters stated that the current provisions of 
the hold harmless test specified in the March 23, 2007 (72 FR 13726) 
proposed rule do not represent a reasonable interpretation of Federal 
statutory guidelines. Commenters believe that the hold harmless 
clarifications should be rescinded in their entirety and returned to 
the original regulatory language from the August 13, 1993 (58 FR 43156) 
final rule. These commenters stated that the 1993 regulatory language 
represented clearly understood and easily interpreted standards.
    Response: Our responsibility is to ensure that the Federal 
statutory requirements governing health care-related taxes are met. 
Therefore, we believe it is necessary and appropriate for the Secretary 
to issue regulatory provisions to provide States with clear guidance on 
which health care-related tax programs are permissible and therefore 
eligible for Federal Financial Participation (FFP). We understand that 
certain States are concerned that the current regulatory language may 
be overly broad or unclear. During the delay in enforcement, we will 
work with States to learn more about the potential impact of the 
current regulatory language and to explore other alternatives in order 
to assure the appropriate implementation of the statutory restrictions.
    Comment: One commenter resubmitted their original comments to the 
March 23, 2007 proposed rule.
    Response: Comments on the March 23, 2007 proposed rule were 
previously considered and responded to in the February 22, 2008 final 
rule; therefore, we are not responding to them in this rule.

III. Provisions of the Final Regulations

    In this final rule, we are adopting the provisions as set forth in 
the May 6, 2009 proposed rule (74 FR 21232) as final, with no changes.

IV. Waiver of Delay in Effective Date

    We ordinarily provide a 30-day delay in the effective date of the 
provisions of a notice in accordance with section 553(d) of the 
Administrative Procedures Act (APA), at 5 U.S.C. 553(d). We can waive 
the 30-day delay in effective date, however, if the Secretary finds, 
for good cause, that it is impracticable, unnecessary, or contrary to 
the public interest, and incorporates a statement of the finding and 
the reasons in the notice.
    We find there is good cause to waive the delay in the effective 
date of this issuance because we find that, since the hold harmless 
provisions of the rule for which enforcement will be delayed have been 
subject to Congressional moratoria and are not currently being 
implemented, it would be contrary to the public interest to implement 
them briefly and then change them back. Such sudden, short-term changes 
would result in public confusion and administrative chaos. Therefore, 
under 5 U.S.C. 553(b)(3)(B), for good cause, we waive notice and 
comment procedures.

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.

[[Page 31198]]

VI. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impact of this final rule as required by 
Executive Order 12866 on Regulatory Planning and Review (September 30, 
1993, as further amended), the Regulatory Flexibility Act (RFA) 
(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social 
Security Act, section 202 of the Unfunded Mandates Reform Act of 1995 
(Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 1999), 
and the Congressional Review Act (5 U.S.C. 804(2)).
    Executive Order 12866 (as amended by Executive Order 13258) directs 
agencies to assess all costs and benefits of all available regulatory 
alternatives and, if regulation is necessary, to select regulatory 
approaches that maximize net benefits (including potential economic, 
environmental, public health and safety effects, distributive impacts, 
and equity). A regulatory impact analysis (RIA) must be prepared for 
major rules with economically significant effects ($100 million or more 
in any 1 year).
    The final rule on health care-related taxes was estimated to result 
in savings to the Federal government, by reducing its financial 
participation in the Medicaid program for amounts in excess of the tax-
related threshold, with corresponding responses by States that would 
partially offset these savings. Specifically, the RIA for the final 
rule estimated that Federal Medicaid outlays would be reduced by $85 
million in FY 2008, and $115 million per year in FY 2009 through FY 
2011. These savings resulted directly from applying the language in the 
Tax Relief and Health Care Act of 2006 to reduce the maximum threshold 
on exclusion of health care-related taxes from 6 percent to 5.5 percent 
of net patient revenue. This final rule does not delay application of 
this reduced threshold, which is already in effect. This final rule 
delays the provisions governing the determination of whether health 
care provider taxes or donations constitute ``hold harmless'' 
arrangements. Accordingly, we believe that the delay would not have any 
substantial economic effect, and that this final rule is not 
``economically significant'' under E.O. 12866 or ``major'' under the 
Congressional Review Act.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities if proposed or 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. In the final rule on 
health care-related taxes, we analyzed potential impacts on small 
entities that might result from the change in the exclusion threshold. 
Some effects (such as reduced tax burden) were likely to be positive, 
and some (such as reductions in State reimbursement rates) could be 
either positive or negative. All of these effects would depend on 
future State decisions on taxation and reimbursement that could not be 
predicted and would in any event be indirect effects rather than the 
direct result of that rule. Regardless, this rule does not propose to 
delay the change in the exclusion threshold. As a result, the Secretary 
has determined that this final rule would not have a significant effect 
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. Our analysis of the final 
rule concluded that it would have had no significant direct effect on a 
substantial number of these hospitals. This final rule does not impose 
any new requirements. Accordingly, we are not preparing an analysis for 
section 1102(b) of the Act because the Secretary has determined that 
this final 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 one year of 
$100 million in 1995 dollars, updated annually for inflation. In 2009, 
that threshold level is currently approximately $133 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 $133 million.
    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. The original final rule, while limiting Federal 
funding, did not circumscribe the States' authority to make policy 
decisions regarding taxes and reimbursement. This final rule will 
likewise not have a substantial effect on State or local government 
policy discretion.

B. Anticipated Effects

    As discussed in the February 22, 2008 final rule, States had a 
number of options open to them in addressing any reduction in Federal 
Financial Participation (FFP). They could restructure State spending 
and shift funds among programs, raise funds through increases in other 
forms of generally applicable tax revenue increases, or reduce 
reimbursement to the tax-paying health care providers. Presumably, most 
of those States have already made those decisions. The delay in this 
final rule will not affect the tax threshold; it will provide some 
relief to States in making other adjustments.

C. Alternatives Considered

    In the May 6, 2009 proposed rule, we welcomed comments not only on 
the delay in enforcement, but also on alternatives that may more 
constructively address the underlying problems and their likely impacts 
on States and other stakeholders. Some commenters recommended that CMS 
rescind rather than delay the enforcement of the hold harmless 
provisions. There were no other specific alternatives offered by 
commenters. Commenters reiterated that we should work with States to 
develop objective standards by which compliance with the hold harmless 
provisions can be measured. CMS will take these comments into 
consideration throughout the enforcement delay period to assure the 
most appropriate implementation of the statutory provisions.
    The only other option considered was to not finalize this delay in 
enforcement. However, as discussed in the preamble to this final rule 
and the response to comments, we believe that this is not the best 
alternative at this time.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.


[[Page 31199]]


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

    Dated: June 5, 2009.
Charlene Frizzera,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: June 17, 2009.
Kathleen Sebelius,
Secretary.
[FR Doc. E9-15347 Filed 6-29-09; 8:45 am]
BILLING CODE 4120-01-P