implementation of the State health security pro-
gram in the State.
(B) ASSISTANCE.—Each State Health Se-
curity Advisory Council shall provide assistance
and technical support to community organiza-
tions and public and private non-profit agencies
submitting applications for funding under ap-
propriate State and Federal public health pro-
grams, with particular emphasis placed on as-
sisting those applicants with broad consumer
representation.
(d) STATE USE OF FISCAL AGENTS.—
(1) IN GENERAL.—Each State health security
program, using competitive bidding procedures, may
enter into such contracts with qualified entities, such
as voluntary associations, as the State determines to
be appropriate to process claims and to perform
other related functions of fiscal agents under the
State health security program.
(2) RESTRICTION.—Except as the Board may
provide for good cause shown, in no case may more
than one contract described in paragraph (1) be
entered into under a State health security program.
SEC. 
405. 
COMPLEMENTARY 
CONDUCT 
OF 
RELATED
HEALTH PROGRAMS.
In performing functions with respect to health per-
sonnel education and training, health research, environ-
mental health, disability insurance, vocational rehabilita-
tion, the regulation of food and drugs, and all other mat-
ters pertaining to health, the Secretary of Health and
Human Services shall direct all activities of the Depart-
ment of Health and Human Services toward contributions
to the health of the people complementary to this Act.
Subtitle B—Control Over Fraud
and Abuse
SEC. 411. APPLICATION OF FEDERAL SANCTIONS TO ALL
FRAUD 
AND 
ABUSE 
UNDER 
AMERICAN
HEALTH SECURITY PROGRAM.
The following sections of the Social Security Act shall
apply to State health security programs in the same man-
ner as they apply to State medical assistance plans under
title XIX of such Act (except that in applying such provi-
sions any reference to the Secretary is deemed a reference
to the Board):
(1) Section 1128 (relating to exclusion of indi-
viduals and entities).
(2) Section 1128A (civil monetary penalties).
(3) Section 1128B (criminal penalties).
(4) Section 1124 (relating to disclosure of own-
ership and related information).
(5) Section 1126 (relating to disclosure of cer-
tain owners).
SEC. 412. REQUIREMENTS FOR OPERATION OF STATE
HEALTH CARE FRAUD AND ABUSE CONTROL
UNITS.
(a) REQUIREMENT.—In order to meet the require-
ment of section 404(b)(1)(K), each State health security
program must establish and maintain a health care fraud
and abuse control unit (in this section referred to as a
‘‘fraud unit’’) that meets requirements of this section and
other requirements of the Board. Such a unit may be a
State medicaid fraud control unit (described in section
1903(q) of the Social Security Act).
(b) STRUCTURE OF UNIT.—The fraud unit must—
(1) be a single identifiable entity of the State
government;
(2) be separate and distinct from the State
agency with principal responsibility for the adminis-
tration of the State health security program; and
(3) meet 1 of the following requirements:
(A) It must be a unit of the office of the
State Attorney General or of another depart-
ment of State government which possesses
statewide authority to prosecute individuals for
criminal violations.
(B) If it is in a State the constitution of
which does not provide for the criminal prosecu-
tion of individuals by a statewide authority and
has formal procedures, approved by the Board,
that (i) assure its referral of suspected criminal
violations relating to the State health insurance
plan to the appropriate authority or authorities
in the States for prosecution, and (ii) assure its
assistance of, and coordination with, such au-
thority or authorities in such prosecutions.
(C) It must have a formal working rela-
tionship with the office of the State Attorney
General and have formal procedures (including
procedures for its referral of suspected criminal
violations to such office) which are approved by
the Board and which provide effective coordina-
tion of activities between the fraud unit and
such office with respect to the detection, inves-
tigation, and prosecution of suspected criminal
violations relating to the State health insurance
plan.
(c) FUNCTIONS.—The fraud unit must—
(1) have the function of conducting a statewide
program for the investigation and prosecution of vio-
lations of all applicable State laws regarding any
and all aspects of fraud in connection with any as-
pect of the provision of health care services and ac-
tivities of providers of such services under the State
health security program;
(2) have procedures for reviewing complaints of
the abuse and neglect of patients of providers and
facilities that receive payments under the State
health security program, and, where appropriate, for
acting upon such complaints under the criminal laws
of the State or for referring them to other State
agencies for action; and
(3) provide for the collection, or referral for col-
lection to a single State agency, of overpayments
that are made under the State health security pro-
gram to providers and that are discovered by the
fraud unit in carrying out its activities.
(d) RESOURCES.—The fraud unit must—
(1) employ such auditors, attorneys, investiga-
tors, and other necessary personnel,
(2) be organized in such a manner, and
(3) provide sufficient resources (as specified by
the Board), as is necessary to promote the effective
and efficient conduct of the unit’s activities.
(e) COOPERATIVE AGREEMENTS.—The fraud unit
must have cooperative agreements (as specified by the
Board) with—
(1) similar fraud units in other States,
(2) the Inspector General, and
(3) the Attorney General of the United States.
(f) REPORTS.—The fraud unit must submit to the
Inspector General an application and annual reports con-
taining such information as the Inspector General deter-
mines to be necessary to determine whether the unit meets
the previous requirements of this section.
TITLE V—QUALITY ASSESSMENT
SEC. 501. AMERICAN HEALTH SECURITY QUALITY COUNCIL.
(a) ESTABLISHMENT.—There is hereby established
an American Health Security Quality Council (in this title
referred to as the ‘‘Council’’).
(b) DUTIES OF THE COUNCIL.—The Council shall
perform the following duties:
(1) PRACTICE GUIDELINES.—The Council shall
review and evaluate each practice guideline devel-
oped under part B of title IX of the Public Health
Service Act. The Council shall determine whether
the guideline should be recognized as a national
practice guideline to be used under section 204(d)
for purposes of determining payments under a State
health security program.
(2) STANDARDS
OF
QUALITY, PERFORMANCE
MEASURES, AND MEDICAL REVIEW CRITERIA.—The
Council shall review and evaluate each standard of
quality, performance measure, and medical review
criterion developed under part B of title IX of the
Public Health Service Act. The Council shall deter-
mine whether the standard, measure, or criterion is
appropriate for use in assessing or reviewing the
quality of services provided by State health security
programs, health care institutions, or health care
professionals.
(3) CRITERIA
FOR
ENTITIES
CONDUCTING
QUALITY REVIEWS.—The Council shall develop min-
imum criteria for competence for entities that can
qualify to conduct ongoing and continuous external
quality review for State quality review programs
under section 503. Such criteria shall require such
an entity to be administratively independent of the
individual or board that administers the State health
security program and shall ensure that such entities
do not provide financial incentives to reviewers to
favor one pattern of practice over another. The
Council shall ensure coordination and reporting by
such entities to assure national consistency in qual-
ity standards.
(4) REPORTING.—The Council shall report to
the Board annually on the conduct of activities
under such title and shall report to the Board annu-
ally specifically on findings from outcomes research
and development of practice guidelines that may af-
fect the Board’s determination of coverage of serv-
ices under section 401(f)(1)(G).
(5) OTHER
FUNCTIONS.—The Council shall
perform the functions of the Council described in
section 502.
(c) APPOINTMENT AND TERMS OF MEMBERS.—
(1) IN GENERAL.—The Council shall be com-
posed of 10 members appointed by the President.
The President shall first appoint individuals on a
timely basis so as to provide for the operation of the
Council by not later than January 1, 2002.
(2) SELECTION OF MEMBERS.—Each member
of the Council shall be a member of a health profes-
sion. Five members of the Council shall be physi-
cians. Individuals shall be appointed to the Council
on the basis of national reputations for clinical and
academic excellence. To the greatest extent feasible,
the membership of the Council shall represent the
various geographic regions of the United States and
shall reflect the racial, ethnic, and gender composi-
tion of the population of the United States.
(3) TERMS
OF
MEMBERS.—Individuals ap-
pointed to the Council shall serve for a term of 5
years, except that the terms of 4 of the individuals
initially appointed shall be, as designated by the
President at the time of their appointment, for 1, 2,
3, and 4 years.
(d) VACANCIES.—
(1) IN GENERAL.—The President shall fill any
vacancy in the membership of the Council in the
same manner as the original appointment. The va-
cancy shall not affect the power of the remaining
members to execute the duties of the Council.
(2) VACANCY
APPOINTMENTS.—Any member
appointed to fill a vacancy shall serve for the re-
mainder of the term for which the predecessor of the
member was appointed.
(3) REAPPOINTMENT.—The President may re-
appoint a member of the Council for a second term
in the same manner as the original appointment. A
member who has served for two consecutive 5-year
terms shall not be eligible for reappointment until
two years after the member has ceased to serve.
(e) CHAIR.—The President shall designate one of the
members of the Council to serve at the will of the Presi-
dent as Chair of the Council.
(f) COMPENSATION.—Members of the Council who
are not employees of the Federal Government shall be en-
titled to compensation at a level equivalent to level II of
the Executive Schedule, in accordance with section 5313
of title 5, United States Code.
SEC. 502. DEVELOPMENT OF CERTAIN METHODOLOGIES,
GUIDELINES, AND STANDARDS.
(a) PROFILING OF PATTERNS OF PRACTICE; IDENTI-
FICATION OF OUTLIERS.—The Council shall adopt meth-
odologies for profiling the patterns of practice of health
care professionals and for identifying outliers (as defined
in subsection (e)).
(b) CENTERS OF EXCELLENCE.—The Council shall
develop guidelines for certain medical procedures des-
ignated by the Board to be performed only at tertiary care
centers which can meet standards for frequency of proce-
dure performance and intensity of support mechanisms
that are consistent with the high probability of desired pa-
tient outcome. Reimbursement under this Act for such a
designated procedure may only be provided if the proce-
dure was performed at a center that meets such stand-
ards.
(c) REMEDIAL ACTIONS.—The Council shall develop
standards for education and sanctions with respect to
outliers so as to assure the quality of health care services
provided under this Act. The Council shall develop criteria
for referral of providers to the State licensing board if edu-
cation proves ineffective in correcting provider practice be-
havior.
(d) DISSEMINATION.—The Council shall disseminate
to the State—
(1) the methodologies adopted under subsection
(a),
(2) the guidelines developed under subsection
(b), and
(3) the standards developed under subsection
(c),
for use by the States under section 503.
(e) OUTLIER DEFINED.—In this title, the term
‘‘outlier’’ means a health care provider whose pattern of
practice, relative to applicable practice guidelines, suggests
deficiencies in the quality of health care services being pro-
vided.
SEC. 503. STATE QUALITY REVIEW PROGRAMS.
(a) REQUIREMENT.—In order to meet the require-
ment of section 404(b)(1)(H), each State health security
program shall establish one or more qualified entities to
conduct quality reviews of persons providing covered serv-
ices under the program, in accordance with standards es-
tablished under subsection (b)(1) (except as provided in
subsection (b)(2)) and subsection (d).
(b) FEDERAL STANDARDS.—
(1) IN GENERAL.—The Council shall establish
standards with respect to—
(A) the adoption of practice guidelines
(whether developed by the Federal Government
or other entities),
(B) the identification of outliers (con-
sistent with methodologies adopted under sec-
tion 502(a)),
(C) the development of remedial programs
and monitoring for outliers, and
(D) the application of sanctions (consistent
with the standards developed under section
502(c)).
(2) STATE DISCRETION.—A State may apply
under subsection (a) standards other than those es-
tablished under paragraph (1) so long as the State
demonstrates to the satisfaction of the Council on an
annual basis that the standards applied have been as
efficacious in promoting and achieving improved
quality of care as the application of the standards
established under paragraph (1). Positive improve-
ments in quality shall be documented by reductions
in the variations of clinical care process and im-
provement in patient outcomes.
(c) QUALIFICATIONS.—An entity is not qualified to
conduct quality reviews under subsection (a) unless the
entity satisfies the criteria for competence for such entities
developed by the Council under section 501(b)(3).
(d) INTERNAL QUALITY REVIEW.—Nothing in this
section shall preclude an institutional provider from estab-
lishing its own internal quality review and enhancement
programs.
SEC. 504. ELIMINATION OF UTILIZATION REVIEW PRO-
GRAMS; TRANSITION.
(a) INTENT.—It is the intention of this title to re-
place by January 1, 2005, random utilization controls with
a systematic review of patterns of practice that com-
promise the quality of care.
(b) SUPERSEDING CASE REVIEWS.—
(1) IN
GENERAL.—Subject to the succeeding
provisions of this subsection, the program of quality
review provided under the previous sections of this
title supersede all existing Federal requirements for
utilization review programs, including requirements
for random case-by-case reviews and programs re-
quiring pre-certification of medical procedures on a
case-by-case basis.
(2) TRANSITION.—Before January 1, 2005, the
Board and the States may employ existing utiliza-
tion review standards and mechanisms as may be
necessary to effect the transition to pattern of prac-
tice-based reviews.
(3) CONSTRUCTION.—Nothing in this sub-
section shall be construed—
(A) as precluding the case-by-case review
of the provision of care—
(i) in individual incidents where the
quality of care has significantly deviated
from acceptable standards of practice, and
(ii) with respect to a provider who has
been determined to be an outlier; or
(B) as precluding the case management of
catastrophic, mental health, or substance abuse
cases or long-term care where such manage-
ment is necessary to achieve appropriate, cost-
effective, and beneficial comprehensive medical
care, as provided for in section 204.
TITLE 
VI—HEALTH 
SECURITY
BUDGET; 
PAYMENTS; 
COST
CONTAINMENT MEASURES
Subtitle A—Budgeting and
Payments to States
SEC. 601. NATIONAL HEALTH SECURITY BUDGET.
(a) NATIONAL HEALTH SECURITY BUDGET.—
(1) IN GENERAL.—By not later than September
1 before the beginning of each year (beginning with
2002), the Board shall establish a national health
security budget, which—
(A) specifies the total expenditures (includ-
ing expenditures for administrative costs) to be
made by the Federal Government and the
States for covered health care services under
this Act, and
(B) allocates those expenditures among the
States consistent with section 604.
Pursuant to subsection (b), such budget for a year
shall not exceed the budget for the preceding year
increased by the percentage increase in gross domes-
tic product.
(2) DIVISION OF BUDGET INTO COMPONENTS.—
The national health security budget shall consist of
at least 4 components:
(A) A component for quality assessment
activities (described in title V).
(B) A component for health professional
education expenditures.
(C) A component for administrative costs.
(D) A component (in this title referred to
as the ‘‘operating component’’) for operating
and other expenditures not described in sub-
paragraphs (A) through (C), consisting of
amounts not included in the other components.
A State may provide for the allocation of this
component between capital expenditures and
other expenditures.
(3) ALLOCATION AMONG COMPONENTS.—Tak-
ing into account the State health security budgets
established and submitted under section 603, the
Board shall allocate the national health security
budget among the components in a manner that—
(A) assures a fair allocation for quality as-
sessment activities (consistent with the national
health security spending growth limit); and
(B) assures that the health professional
education expenditure component is sufficient
to provide for the amount of health professional
education expenditures sufficient to meet the
need for covered health care services (consistent
with the national health security spending
growth limit under subsection (b)(2)).
(b) BASIS FOR TOTAL EXPENDITURES.—
(1) IN GENERAL.—The total expenditures speci-
fied in such budget shall be the sum of the capita-
tion amounts computed under section 602(a) and
the amount of Federal administrative expenditures
needed to carry out this Act.
(2) NATIONAL
HEALTH
SECURITY
SPENDING
GROWTH LIMIT.—For purposes of this subtitle, the
national health security spending growth limit de-
scribed in this paragraph for a year is (A) zero, or,
if greater, (B) the average annual percentage in-
crease in the gross domestic product (in current dol-
lars) during the 3-year period beginning with the
first quarter of the fourth previous year to the first
quarter of the previous year minus the percentage
increase (if any) in the number of eligible individuals
residing in any State the United States from the
first quarter of the second previous year to the first
quarter of the previous year.
(c) DEFINITIONS.—In this title:
(1) CAPITAL EXPENDITURES.—The term ‘‘cap-
ital expenditures’’ means expenses for the purchase,
lease, construction, or renovation of capital facilities
and for equipment and includes return on equity
capital.
(2) HEALTH
PROFESSIONAL
EDUCATION
EX-
PENDITURES.—The term ‘‘health professional edu-
cation expenditures’’ means expenditures in hospitals
and other health care facilities to cover costs associ-
ated with teaching and related research activities.
SEC. 602. COMPUTATION OF INDIVIDUAL AND STATE CAPI-
TATION AMOUNTS.
(a) CAPITATION AMOUNTS.—
(1) INDIVIDUAL CAPITATION AMOUNTS.—In es-
tablishing the national health security budget under
section 601(a) and in computing the national aver-
age per capita cost under subsection (b) for each
year, the Board shall establish a method for com-
puting the capitation amount for each eligible indi-
vidual residing in each State. The capitation amount
for an eligible individual in a State classified within
a risk group (established under subsection (d)(2)) is
the product of—
(A) a national average per capita cost for
all covered health care services (computed
under subsection (b)),
(B) the State adjustment factor (estab-
lished under subsection (c)) for the State, and
(C) the risk adjustment factor (established
under subsection (d)) for the risk group.
(2) STATE CAPITATION AMOUNT.—
(A) IN GENERAL.—For purposes of this
title, the term ‘‘State capitation amount’’
means, for a State for a year, the sum of the
capitation amounts computed under paragraph
(1) for all the residents of the State in the year,
as estimated by the Board before the beginning
of the year involved.
(B) USE
OF
STATISTICAL
MODEL.—The
Board may provide for the computation of
State capitation amounts based on statistical
models that fairly reflect the elements that com-
prise the State capitation amount described in
subparagraph (A).
(C) POPULATION INFORMATION.—The Bu-
reau of the Census shall assist the Board in de-
termining the number, place of residence, and
risk group classification of eligible individuals.
(b) COMPUTATION OF NATIONAL AVERAGE PER CAP-
ITA COST.—
(1) FOR 2002.—For 2002, the national average
per capita cost under this paragraph is equal to—
(A) the average per capita health care ex-
penditures in the United States in 2000 (as
estimated by the Board),
(B) increased to 2001 by the Board’s esti-
mate of the actual amount of such per capita
expenditures during 2001, and
(C) updated to 2002 by the national health
security spending growth limit specified in sec-
tion 601(b)(2) for 2002.
(2) FOR SUCCEEDING YEARS.—For each suc-
ceeding year, the national average per capita cost
under this subsection is equal to the national aver-
age per capita cost computed under this subsection
for the previous year increased by the national
health security spending growth limit (specified in
section 601(b)(2)) for the year involved.
(c) STATE ADJUSTMENT FACTORS.—
(1) IN
GENERAL.—Subject to the succeeding
paragraphs of this subsection, the Board shall de-
velop for each State a factor to adjust the national
average per capita costs to reflect differences
between the State and the United States in—
100
(A) average labor and nonlabor costs that
are necessary to provide covered health services;
(B) any social, environmental, or geo-
graphic condition affecting health status or the
need for health care services, to the extent such
a condition is not taken into account in the es-
tablishment of risk groups under subsection (d);
(C) the geographic distribution of the
State’s population, particularly the proportion
of the population residing in medically under-
served areas, to the extent such a condition is
not taken into account in the establishment of
risk groups under subsection (d); and
(D) any other factor relating to operating
costs required to assure equitable distribution
of funds among the States.
(2) MODIFICATION OF HEALTH PROFESSIONAL
EDUCATION COMPONENT.—With respect to the por-
tion of the national health security budget allocated
to expenditures for health professional education, the
Board shall modify the State adjustment factors so
as to take into account—
(A) differences among States in health
professional education programs in operation as
of the date of the enactment of this Act, and
101
(B) differences among States in their rel-
ative need for expenditures for health profes-
sional education, taking into account the health
professional education expenditures proposed in
State health security budgets under section
603(a).
(3) BUDGET NEUTRALITY.—The State adjust-
ment factors, as modified under paragraph (2), shall
be applied under this subsection in a manner that
results in neither an increase nor a decrease in the
total amount of the Federal contributions to all
State health security programs under subsection (b)
as a result of the application of such factors.
(4) PHASE-IN.—In applying State adjustment
factors under this subsection during the five-year pe-
riod beginning with 2002, the Board shall phase-in,
over such period, the use of factors described in
paragraph (1) in a manner so that the adjustment
factor for a State is based on a blend of such factors
and a factor that reflects the relative actual average
per capita costs of health services of the different
States as of the time of enactment of this Act.
(5) PERIODIC
ADJUSTMENT.—In establishing
the national health security budget before the begin-
ning of each year, the Board shall provide for appro-
102
priate adjustments in the State adjustment factors
under this subsection.
(d) ADJUSTMENTS FOR RISK GROUP CLASSIFICA-
TION.—
(1) IN GENERAL.—The Board shall develop an
adjustment factor to the national average per capita
costs computed under subsection (b) for individuals
classified in each risk group (as designated under
paragraph (2)) to reflect the difference between the
average national average per capita costs and the
national average per capita cost for individuals clas-
sified in the risk group.
(2) RISK GROUPS.—The Board shall designate
a series of risk groups, determined by age, health in-
dicators, and other factors that represent distinct
patterns of health care services utilization and costs.
(3) PERIODIC
ADJUSTMENT.—In establishing
the national health security budget before the begin-
ning of each year, the Board shall provide for appro-
priate adjustments in the risk adjustment factors
under this subsection.
SEC. 603. STATE HEALTH SECURITY BUDGETS.
(a) ESTABLISHMENT AND SUBMISSION OF BUDG-
ETS.—
103
(1) IN GENERAL.—Each State health security
program shall establish and submit to the Board for
each year a proposed and a final State health secu-
rity budget, which specifies the following:
(A) The total expenditures (including ex-
penditures for administrative costs) to be made
under the program in the State for covered
health care services under this Act, consistent
with subsection (b), broken down as follows:
(i) By the 4 components (described in
section 601(a)(2)), consistent with sub-
section (b).
(ii) Within the operating component—
(I) expenditures for operating
costs of hospitals and other facility-
based services in the State,
(II) expenditures for payment to
comprehensive health service organiza-
tions,
(III) expenditures for payment of
services provided by health care prac-
titioners, and
(IV) expenditures for other cov-
ered items and services.
104
Amounts included in the operating compo-
nent include amounts that may be used by
providers for capital expenditures.
(B) The total revenues required to meet
the State health security expenditures.
(2) PROPOSED BUDGET DEADLINE.—The pro-
posed budget for a year shall be submitted under
paragraph (1) not later than June 1 before the year.
(3) FINAL BUDGET.—The final budget for a
year shall—
(A) be established and submitted under
paragraph (1) not later than October 1 before
the year, and
(B) take into account the amounts estab-
lished under the national health security budget
under section 601 for the year.
(4) 
ADJUSTMENT
IN
ALLOCATIONS
PER-
MITTED.—
(A) IN
GENERAL.—Subject to subpara-
graphs (B) and (C), in the case of a final
budget, a State may change the allocation of
amounts among components.
(B) NOTICE.—No such change may be
made unless the State has provided prior notice
of the change to the Board.
105
(C) DENIAL.—Such a change may not be
made if the Board, within such time period as
the Board specifies, disapproves such change.
(b) EXPENDITURE LIMITS.—
(1) IN GENERAL.—The total expenditures speci-
fied in each State health security budget under sub-
section (a)(1) shall take into account Federal
contributions made under section 604.
(2) LIMIT ON CLAIMS PROCESSING AND BILL-
ING
EXPENDITURES.—Each State health security
budget shall provide that State administrative ex-
penditures, including expenditures for claims proc-
essing and billing, shall not exceed 3 percent of the
total expenditures under the State health security
program, unless the Board determines, on a case-by-
case basis, that additional administrative expendi-
tures would improve health care quality and cost
effectiveness.
(3) WORKER ASSISTANCE.—A State health se-
curity program may provide that, for budgets for
years before 2007, up to 1 percent of the budget
may be used for purposes of programs providing as-
sistance to workers who are currently performing
functions in the administration of the health insur-
ance system and who may experience economic dis-
106
location as a result of the implementation of the
program.
(c) APPROVAL PROCESS
FOR CAPITAL EXPENDI-
TURES PERMITTED.—Nothing in this title shall be con-
strued as preventing a State health security program from
providing for a process for the approval of capital expendi-
tures based on information derived from regional planning
agencies.
SEC. 604. FEDERAL PAYMENTS TO STATES.
(a) IN GENERAL.—Each State with an approved
State health security program is entitled to receive, from
amounts in the American Health Security Trust Fund, on
a monthly basis each year, of an amount equal to one-
twelfth of the product of—
(1) the State capitation amount (computed
under section 602(a)(2)) for the State for the year,
and
(2) the Federal contribution percentage (estab-
lished under subsection (b)).
(b) FEDERAL CONTRIBUTION PERCENTAGE.—The
Board shall establish a formula for the establishment of
a Federal contribution percentage for each State. Such
formula shall take into consideration a State’s per capita
income and revenue capacity and such other relevant eco-
nomic indicators as the Board determines to be appro-
107
priate. In addition, during the 5-year period beginning
with 2002, the Board may provide for a transition adjust-
ment to the formula in order to take into account current
expenditures by the State (and local governments thereof)
for health services covered under the State health security
program. The weighted-average Federal contribution per-
centage for all States shall equal 86 percent and in no
event shall such percentage be less than 81 percent nor
more than 91 percent.
(c) USE OF PAYMENTS.—All payments made under
this section may only be used to carry out the State health
security program.
(d) EFFECT OF SPENDING EXCESS OR SURPLUS.—
(1) SPENDING EXCESS.—If a State exceeds it’s
budget in a given year, the State shall continue to
fund covered health services from its own revenues.
(2) SURPLUS.—If a State provides all covered
health services for less than the budgeted amount
for a year, it may retain its Federal payment for
that year for uses consistent with this Act.
SEC. 605. ACCOUNT FOR HEALTH PROFESSIONAL EDU-
CATION EXPENDITURES.
(a) SEPARATE ACCOUNT.—Each State health secu-
rity program shall—
108
(1) include a separate account for health pro-
fessional education expenditures, and
(2) specify the general manner, consistent with
subsection (b), in which such expenditures are to be
distributed among different types of institutions and
the different areas of the State.
(b) DISTRIBUTION
RULES.—The distribution of
funds to hospitals and other health care facilities from the
account must conform to the following principles:
(1) The disbursement of funds must be con-
sistent with achievement of the national and pro-
gram goals (specified in section 701(b)) within the
State health security program and the distribution
of funds from the account must be conditioned upon
the receipt of such reports as the Board may require
in order to monitor compliance with such goals.
(2) The distribution of funds from the account
must take into account the potentially higher costs
of placing health professional students in clinical
education programs in health professional shortage
areas.
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Subtitle B—Payments by States to
Providers
SEC. 611. PAYMENTS TO HOSPITALS AND OTHER FACILITY-
BASED SERVICES FOR OPERATING EXPENSES
ON 
THE 
BASIS 
OF 
APPROVED 
GLOBAL
BUDGETS.
(a) DIRECT PAYMENT UNDER GLOBAL BUDGET.—
Payment for operating expenses for institutional and facil-
ity-based care, including hospital services and nursing fa-
cility services, under State health security programs shall
be made directly to each institution or facility by each
State health security program under an annual prospec-
tive global budget approved under the program. Such a
budget shall include payment for outpatient care and non-
facility-based care that is furnished by or through the fa-
cility. In the case of a hospital that is wholly owned (or
controlled) by a comprehensive health service organization
that is paid under section 614 on the basis of a global
budget, the global budget of the organization shall include
the budget for the hospital.
(b) ANNUAL NEGOTIATIONS; BUDGET APPROVAL.—
(1) IN GENERAL.—The prospective global budg-
et for an institution or facility shall—
(A) be developed through annual negotia-
tions between (i) a panel of individuals who are
110
appointed by the Governor of the State and who
represent consumers, labor, business, and the
State government, and (ii) the institution or fa-
cility, and
(B) be based on a nationally uniform sys-
tem of cost accounting established under stand-
ards of the Board.
(2) CONSIDERATIONS.—In developing a budget
through negotiations, there shall be taken into
account at least the following:
(A) With respect to inpatient hospital serv-
ices, the number, and classification by diag-
nosis-related group, of discharges.
(B) An institution’s or facility’s past ex-
penditures.
(C) The extent to which debt service for
capital expenditures has been included in the
proposed operating budget.
(D) The extent to which capital expendi-
tures are financed directly or indirectly through
reductions in direct care to patients, including
(but not limited to) reductions in registered
nursing staffing patterns or changes in emer-
gency room or primary care services or avail-
ability.
111
(E) Change in the consumer price index
and other price indices.
(F) The cost of reasonable compensation
to health care practitioners.
(G) The compensation level of the institu-
tion’s or facility’s work force.
(H) The extent to which the institution or
facility is providing health care services to meet
the needs of residents in the area served by the
institution or facility, including the institution’s
or facility’s occupancy level.
(I) The institution’s or facility’s previous
financial and clinical performance, based on uti-
lization and outcomes data provided under this
Act.
(J) The type of institution or facility, in-
cluding whether the institution or facility is
part of a clinical education program or serves
a health professional education, research or
other training purpose.
(K) Technological advances or changes.
(L) Costs of the institution or facility asso-
ciated with meeting Federal and State regula-
tions.
112
(M) The costs associated with necessary
public outreach activities.
(N) In the case of a for-profit facility, a
reasonable rate of return on equity capital,
independent of those operating expenses nec-
essary to fulfill the objectives of this Act.
(O) Incentives to facilities that maintain
costs below previous reasonable budgeted levels
without reducing the care provided.
(P) With respect to facilities that provide
mental health services and substance abuse
treatment services, any additional costs involved
in the treatment of dually diagnosed individ-
uals.
The portion of such a budget that relates to expendi-
tures for health professional education shall be con-
sistent with the State health security budget for
such expenditures.
(3) PROVISION OF REQUIRED INFORMATION; DI-
AGNOSIS-RELATED GROUP.—No budget for an insti-
tution or facility for a year may be approved unless
the institution or facility has submitted on a timely
basis to the State health security program such in-
formation as the program or the Board shall specify,
113
including in the case of hospitals information on dis-
charges classified by diagnosis-related group.
(c) ADJUSTMENTS IN APPROVED BUDGETS.—
(1) ADJUSTMENTS TO GLOBAL BUDGETS THAT
CONTRACT WITH COMPREHENSIVE HEALTH SERVICE
ORGANIZATIONS.—Each State health security pro-
gram shall develop an administrative mechanism for
reducing operating funds to institutions or facilities
in proportion to payments made to such institutions
or facilities for services contracted for by a com-
prehensive health service organization.
(2) AMENDMENTS.—In accordance with stand-
ards established by the Board, an operating and
capital budget approved under this section for a year
may be amended before, during, or after the year if
there is a substantial change in any of the factors
relevant to budget approval.
(d) DONATIONS PERMISSIBLE.—The States health
security programs may permit institutions and facilities
to raise funds from private sources to pay for newly con-
structed facilities, major renovations, and equipment. The
expenditure of such funds, whether for operating or cap-
ital expenditures, does not obligate the State health secu-
rity program to provide for continued support for such ex-
penditures unless included in an approved global budget.
114
SEC. 612. PAYMENTS TO HEALTH CARE PRACTITIONERS
BASED ON PROSPECTIVE FEE SCHEDULE.
(a) FEE FOR SERVICE.—
(1) IN
GENERAL.—Every independent health
care practitioner is entitled to be paid, for the provi-
sion of covered health services under the State
health security program, a fee for each billable cov-
ered service.
(2) GLOBAL FEE PAYMENT METHODOLOGIES.—
The Board shall establish models and encourage
State health security programs to implement alter-
native payment methodologies that incorporate glob-
al fees for related services (such as all outpatient
procedures for treatment of a condition) or for a
basic group of services (such as primary care serv-
ices) furnished to an individual over a period of
time, in order to encourage continuity and efficiency
in the provision of services. Such methodologies shall
be designed to ensure a high quality of care.
(3) BILLING
DEADLINES; ELECTRONIC
BILL-
ING.—A State health security program may deny
payment for any service of an independent health
care practitioner for which it did not receive a bill
and appropriate supporting documentation (which
had been previously specified) within 30 days after
the date the service was provided. Such a program