Medicaid Program; Cost Limit for Providers Operated by Units of Government and Provisions To Ensure the Integrity of Federal-State Financial Partnership, 2236-2248 [07-195]

Agencies

• Centers for Medicare & Medicaid Services
• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 72, Number 11 (Thursday, January 18, 2007)]
[Proposed Rules]
[Pages 2236-2248]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-195]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 433, 447, and 457

[CMS-2258-P]
RIN 0938-A057


Medicaid Program; Cost Limit for Providers Operated by Units of 
Government and Provisions To Ensure the Integrity of Federal-State 
Financial Partnership

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would: Clarify that entities involved in 
the financing of the non-Federal share of Medicaid payments must be a 
unit of government; clarify the documentation required to support a 
certified public expenditure; limit reimbursement for health care 
providers that are operated by units of government to an amount that 
does not exceed the provider's cost; require providers to receive and 
retain the full amount of total computable payments for services 
furnished under the approved State plan; and make conforming changes to 
provisions governing the State Child Health Insurance Program (SCHIP). 
The provisions of this regulation apply to all providers of Medicaid 
and SCHIP services, except that Medicaid managed care organizations and 
SCHIP providers are not subject to the cost limit provision of this 
regulation. Except as noted above, all Medicaid payments (including 
disproportionate share hospital payments) made under the authority of 
the State plan and under Medicaid waiver and demonstration authorities 
are subject to all provisions of this regulation.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on March 19, 2007.

ADDRESSES: In commenting, please refer to file code CMS-2258-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (no duplicates, 
please):
    1. Electronically. You may submit electronic comments on specific 
issues in this regulation to https://www.cms.hhs.gov/eRulemaking. Click 
on the link ``Submit electronic comments on CMS regulations with an 
open comment period.'' (Attachments

[[Page 2237]]

should be in Microsoft Word, WordPerfect, or Excel; however, we prefer 
Microsoft Word.)
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address ONLY: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-2258-P, P.O. Box 8017, Baltimore, MD 21244-8017.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-2258-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to one of the following addresses. If you 
intend to deliver your comments to the Baltimore address, please call 
telephone number (410) 786-7195 in advance to schedule your arrival 
with one of our staff members.
    Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, 
SW., Washington, DC 20201; or 7500 Security Boulevard, Baltimore, MD 
21244-1850.
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by mailing your 
comments to the addresses provided at the end of the ``Collection of 
Information Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Aaron Blight, (410) 786-9560.

SUPPLEMENTARY INFORMATION:
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this rule to assist us in fully considering issues 
and developing policies. You can assist us by referencing the file code 
CMS-2258-P and the specific ``issue identifier'' that precedes the 
section on which you choose to comment.
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: https://
www.cms.hhs.gov/eRulemaking. Click on the link ``Electronic Comments on 
CMS Regulations'' on that Web site to view public comments.
    Comments received timely will be also available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

I. Background

    The Medicaid program is a cooperative Federal-State program 
established in 1965 for the purpose of providing Federal financial 
participation (FFP) to States that choose to reimburse certain costs of 
medical treatment for needy persons. It is authorized under title XIX 
of the Social Security Act (the Act), and is administered by each State 
in accordance with an approved State plan. States have considerable 
flexibility in designing their programs, but must comply with Federal 
requirements specified in the Medicaid statute, regulations, and 
program guidance.
    FFP is provided only when there is a corresponding State 
expenditure for a covered Medicaid service to a Medicaid recipient. 
Federal payment is based on statutorily-defined percentages of total 
computable State expenditures for medical assistance provided to 
recipients under the approved State plan, and of State expenditures 
related to the cost of administering the State plan.
    Since the summer of 2003, we have reviewed and processed over 1,000 
State plan amendments related to State payments to providers. Of these, 
approximately 10 percent have been disapproved by the Centers for 
Medicare & Medicaid Services (CMS) or withdrawn by the States. Through 
examination of these State plan amendments and their associated funding 
arrangements, we have developed a greater understanding of how to 
ensure that payment and financing arrangements comply with statutory 
intent. As recently articulated by the U.S. Court of Appeals for the 
Ninth Circuit, ``[t]he statutory text makes clear that the Secretary 
has the authority--indeed, the obligation--to ensure that each of the 
statutory prerequisites is satisfied before approving a Medicaid State 
plan amendment.'' We believe that this proposed rule strengthens 
accountability to ensure that statutory requirements within the 
Medicaid program are met in accordance with sections 1902, 1903, and 
1905 of the Act.
    Sections 1902(a)(2), 1903(a) and 1905(b) of the Act require States 
to share in the cost of medical assistance and in the cost of 
administering the State plan. Under section 1905(b) of the Act, the 
Federal medical assistance percentage (FMAP) is defined as ``100 per 
centum less the State percentage,'' and section 1903(a) of the Act 
requires Federal reimbursement to the State of the FMAP of expenditures 
for medical assistance under the plan (and 50 percent of expenditures 
necessary for the proper and efficient administration of the plan). 
Section 1902(a)(2) of the Act and implementing regulations at 42 CFR 
433.50(a)(1) require States to share in the cost of medical assistance 
expenditures but permit the State to delegate some responsibility for 
the non-Federal share of medical assistance expenditures to units of 
local government under some circumstances.
    Under Pub. L. 102-234, which inserted significant restrictions on 
States' use of provider related taxes and donations at section 1903(w) 
of the Act, the Congress again recognized the ability of units of 
government to participate in the funding of the non-Federal share of 
Medicaid payments through an exemption at section 1903(w)(6)(A) of the 
Act that reads:

    Notwithstanding the provisions of this subsection, the Secretary 
may not restrict States' use of funds where such funds are derived 
from State or local taxes (or funds appropriated to State university 
teaching hospitals) transferred from or certified by units of 
government within a State as the non-Federal share of expenditures 
under this title, regardless of whether the unit of government is 
also a health care provider, except as provided in section 
1902(a)(2), unless the transferred funds are derived by the unit of 
government from donations or

[[Page 2238]]

taxes that would not otherwise be recognized as the non-Federal 
share under this section.

    Subsequent regulations implementing Pub. L. 102-234 give effect to 
this statutory language. Amendments made to the regulations at 42 CFR. 
part 433, at 47 FR 55119 (November 24, 1992) explained:

    Funds transferred from another unit of State or local government 
which are not restricted by the statute are not considered a 
provider-related donation or health care-related tax. Consequently, 
until the Secretary adopts regulations changing the treatment of 
intergovernmental transfer, States may continue to use, as the State 
share of medical assistance expenditures, transferred or certified 
funds derived from any governmental source (other than impermissible 
taxes or donations derived at various parts of the State government 
or at the local level).

    The above statutory and regulatory authorities clearly specify 
that in order for an intergovernmental transfer (IGT) or certified 
public expenditure (CPE) from a health care provider or other entity 
to be exempt from analysis as a provider-related tax or donation, it 
must be from a unit of State or local government. Section 
1903(w)(7)(G) of the Act identifies the four types of local entities 
that, in addition to the State itself, are considered a unit of 
government: A city, a county, a special purpose district, or other 
governmental units in the State. The provisions of this proposed 
rule conform our regulations to the aforementioned statutory 
language and further define the characteristics of a unit of 
government for purposes of Medicaid financing.

Intergovernmental Transfer (IGT)

    The Medicaid statute does not define an IGT, but the plain meaning 
in the Medicaid context is a transfer of funding from a local 
governmental entity to the State. As we discuss below, this meaning 
would not include a transaction that does not in fact transfer funding 
but simply refunds Medicaid payments. IGTs from units of government 
that meet the conditions for protection under section 1903(w)(6)(A) of 
the Act, as described above, are a permissible source of State funding 
of Medicaid costs. Section 1903(w)(6)(A) of the Act is an exception to 
the very restrictive requirements governing provider-related donations. 
The IGT provision was meant to continue to allow units of local 
government, including government health care providers, to share in the 
cost of the State Medicaid program.
    At section 1903(w)(6)(A) of the Act, the Medicaid statute provides 
that units of government within a State may transfer State and/or local 
tax revenue to the Medicaid agency for use as the non-Federal share of 
Medicaid payments. Because this provision does not override the 
definition of an expenditure as a net outlay, as discussed below, 
claimed expenditures must be net of any redirection or assignment from 
a health care provider to any State or local governmental entity that 
makes IGTs to the Medicaid agency. Generally, for the State to receive 
Federal matching on a claimed Medicaid payment where a governmentally 
operated health care provider has transferred the non-Federal share, 
the State must be able to demonstrate: (1) That the source of the 
transferred funds is State or local tax revenue (which must be 
supported by consistent treatment on the provider's financial records); 
and (2) that the provider retains the full Medicaid payment and is not 
required to repay, or in fact does not repay, all or any portion of the 
Medicaid payment to the State or local tax revenue account.
    Under section 1903(a)(1) of the Act, the Federal government pays a 
share of State expenditures for medical assistance. Consistent with 
Office of Management and Budget (OMB) Circular A-87, an expenditure 
must be net of all ``applicable credits'' which include discounts, 
rebates, and refunds. Since the summer of 2003, we have examined 
Medicaid State financing arrangements across the country, and we have 
identified numerous instances in which health care providers did not 
retain the full amount of their Medicaid payments but were required to 
refund or return a portion of the payments received, either directly or 
indirectly. Failure by the provider to retain the full amount of 
reimbursement is inappropriate and inconsistent with statutory 
construction that the Federal government pay only its proportional cost 
for the delivery of Medicaid services. When a State claims Federal 
reimbursement in excess of net payments to providers, the FMAP rate has 
effectively been increased. To the extent that these State practices 
have come to light through the State plan amendment process, we have 
systematically required the States to eliminate these financing 
arrangements.
    Therefore, we have concluded that requirements that a 
governmentally-operated health care provider transfer to the State more 
than the non-Federal share of a Medicaid payment creates an arrangement 
in which the net payment to the provider is necessarily reduced; the 
provider cannot retain the full Medicaid payment claimed by the State. 
This practice is not consistent with section 1902(a)(30)(A) of the Act.
    We have found instances in which the State or local government has 
used the funds returned by the health care provider for costs outside 
the Medicaid program or to help draw additional Federal dollars for 
other Medicaid program costs. The Government Accountability Office 
(GAO) and the Department of Health and Human Services Office of 
Inspector General (OIG) have reviewed these practices and shared our 
concerns that they are not consistent with Medicaid financing 
requirements. The net effect of this re-direction of Medicaid payments 
is that the Federal government incurs a greater level of Medicaid 
program costs, which is inconsistent with the FMAP. This is because the 
claimed expenditure, which is matched by the Federal government 
according to the FMAP rate, is actually greater than the net 
expenditure, effectively producing an increase in the FMAP rate.
    Some States and providers have defended the practices in question 
as means for financing the cost of providing services to non-Medicaid 
populations or financing public health activities or even justifying 
what they consider to be ``unfair'' FMAPs. Whether the Federal Medicaid 
program should participate in a general way in that financing, however, 
is an important decision that the Congress has not expressly addressed. 
As we discuss below, the Congress has expressly provided for certain 
kinds of limited Federal participation in the costs of providing 
services to non-Medicaid populations and public health activities.
    Examples of limited congressional authorization of Federal 
financing for non-Medicaid populations and public health activities 
include the following. The Congress authorized disproportionate share 
hospital (DSH) payments to assist hospitals that serve a 
disproportionate share of low income patients which may include 
hospitals that furnish significant amounts of inpatient hospital 
services and outpatient hospital services to individuals with no source 
of third party coverage (that is, the uninsured). Under section 4723 of 
the Balanced Budget Act of 1997, the Congress also provided direct 
funding to the States to offset expenditures on behalf of aliens. 
Additional funding for payments to eligible providers for emergency 
health services to undocumented aliens was also provided by Congress 
under section 1011 of the Medicare Modernization Act. The Congress has 
periodically, and as recently as the Deficit Reduction Act of 2005 
(DRA, Pub. L. 109-171, enacted on February 8, 2006), adjusted FMAPs for 
certain States and certain activities such as an enhanced FMAP to 
create incentives for States to assist individuals in institutions 
return to their homes. These examples are

[[Page 2239]]

provided to illustrate that the Congress has previously authorized 
limited Federal financing of non-Medicaid populations and public health 
activities, but has not to date authorized wider use of Federal 
Medicaid funding for these purposes.
    Indeed, the Congress indicated that Medicaid funding was not to be 
used for non-Medicaid purposes when in the Balanced Budget Act of 1997 
(BBA, Pub.L.105-33, enacted on August 5, 1997), it added section 
1903(i)(17) to the Act to prohibit the use of FFP ``with respect to any 
amount expended for roads, bridges, stadiums, or any other item or 
service not covered under a State plan under this title.'' Non-Medicaid 
populations and non-Medicaid services simply are not eligible for 
Federal reimbursements except where expressly provided for by the 
Congress.
    We believe the lack of transparency and accountability undermine 
public confidence in the integrity of the Medicaid program as it is 
extremely difficult to track the flow of taxpayer dollars. These 
arrangements, regardless of the merits, are hidden in archaic, nearly 
indecipherable language that may be further re-interpreted over time, 
placing Federal and State dollars at risk as well as creating tensions 
and conflicts among the States.

Certified Public Expenditure (CPE)

    As we have worked with States to promote appropriate Medicaid 
financing, it has become apparent that an increasing number of States 
are choosing to use CPEs as a method of financing the non-Federal 
share. Therefore, we are taking this opportunity to review key 
provisions governing the use of CPEs.
    A discussion about CPEs begins with the concept of an expenditure. 
The term ``expenditure'' is defined in timing rules at 45 CFR 95.13. 
According to 45 CFR 95.13(b), for expenditures for services under the 
Medicaid program, an expenditure is made ``in the quarter in which any 
State agency made a payment to the service provider.'' There is an 
alternate rule for administration or training expenditures at 45 CFR 
95.13(d), under which the expenditure is made in the quarter to which 
the costs were allocated or, for non-cash expenditures, in the quarter 
in which ``the expenditure was recorded in the accounting records of 
any State agency in accordance with generally accepted accounting 
principles.'' In the State Medicaid Manual, at section 2560.4.G.1.a(1), 
we indicated that ``the expenditure is made when it is paid or 
recorded, whichever is earlier, by any State agency.'' In either case, 
there must be a record of an actual expenditure, either through cash or 
a transfer of funds in accounting records. It is clear from these 
authorities that an expenditure must involve a shift of funds (either 
by an actual transfer or a debit in the accounting records of the 
contributing unit of government and a credit in the records of a 
provider of medical care and services) and cannot merely be a refund or 
reduction in accounts receivable.
    Furthermore, provisions at Sec.  433.51 clearly state that the CPE 
must, itself, be ``eligible for FFP.'' In keeping with this language, 
there must be a provision in the State plan that would authorize the 
State to make the expenditure itself if the certifying governmental 
unit had not done so. In other words, a CPE must be an expenditure by 
another unit of government on behalf of the single State Medicaid 
agency.
    A CPE equals 100 percent of a total computable Medicaid 
expenditure, and the Federal share of the expenditure is paid in 
accordance with the appropriate FMAP rate. In a State with a 60 percent 
FMAP rate, the CPE would be equal to $100 in order to draw down $60 in 
FFP.
    The approach a unit of government can permissibly take to a CPE 
depends on whether or not the unit of government is the provider of the 
service. A governmental non-provider that pays for a covered Medicaid 
service furnished by a provider (whether governmental or not) can 
certify its actual expenditure, in an amount equal to the State plan 
rate (or the approved provisions of a waiver or demonstration, if 
applicable) for the service. In this case, the CPE would represent the 
expenditure by the governmental unit to the service provider (and would 
not necessarily be related to the actual cost to the provider for 
providing the service).
    If the unit of government is the health care provider, then it may 
generate a CPE from its own costs if the State plan (or the approved 
provisions of a waiver or demonstration, if applicable) contains an 
actual cost reimbursement methodology. If this is the case, the 
governmental provider may certify the costs that it actually incurred 
that would be paid under the State plan. If the State plan does not 
contain an actual cost reimbursement methodology, then the governmental 
provider may not use a CPE because it would not be able to establish an 
expenditure under the plan, consistent with the requirements of 45 CFR 
95.13, where there was no cost incurred that would be recognized under 
the State plan. A provider cannot establish an expenditure under the 
plan by asserting that it would pay itself.
    As part of the review of proposed State plan amendments and focused 
financial reviews, we have examined CPE arrangements in many States 
that include various service categories within the Medicaid program. We 
note that currently there are a variety of practices used by State and 
local governments in submitting a CPE as the basis of matching FFP for 
the provision of Medicaid services. Different practices often make it 
difficult to (1) Align claimed expenditures with specific services 
covered under the State plan or identifiable administrative activities; 
(2) properly identify the actual cost to the governmental entity of 
providing services to Medicaid recipients or performing administrative 
activities; and (3) audit and review Medicaid claims to ensure that 
Medicaid payments are appropriately made. Further, we find that in many 
instances State Medicaid agencies do not currently review the CPE 
submitted by another unit of government to confirm that the CPE 
properly reflects the actual expenditure by the unit of government for 
providing Medicaid services or performing administrative activities. 
These circumstances do not serve to advance or promote the fiscal 
integrity of the Medicaid program. By establishing minimum standards 
for the documentation supporting CPEs, we anticipate that this proposed 
rule would serve to enhance the fiscal integrity of CPE practices 
within the Medicaid program.

State and Local Tax Revenue

    As explained previously, the Medicaid statute recognizes State and/
or local tax revenue as a permissible source of the non-Federal share 
of Medicaid expenditures. In order for State and/or local tax dollars 
to be eligible as the non-Federal share of Medicaid expenditures, that 
tax revenue cannot be committed or earmarked for non-Medicaid 
activities. Tax revenue that is contractually obligated between a unit 
of State or local government and health care providers to provide 
indigent care is not considered a permissible source of non-Federal 
share funding for purposes of Medicaid payments. Health care providers 
that forego generally applicable tax revenue that has been 
contractually obligated for the provision of health care services to 
the indigent or for any other non-Medicaid activity, which is then used 
by the State or local government as the non-Federal share of Medicaid 
payments, are making provider-related donations. Any Medicaid payment

[[Page 2240]]

linked to a provider-related donation renders that provider-related 
donation non-bona fide.

State Child Health Insurance Program (SCHIP)

    Section 2107(e)(1)(C) of the Act stipulates that section 1903(w) 
applies to the SCHIP program as well as Medicaid. Accordingly, SCHIP 
regulations at 42 CFR 457.628 incorporate by reference the provisions 
at 42 CFR 433.51 through 433.74 concerning the source of the non-
Federal share and donations and taxes. Moreover, SCHIP rules at 42 CFR 
457.220 mirror the language in 42 CFR 433.51.

II. Provisions of the Proposed Rule

    The background section conveys critical information about the 
statutory and regulatory context of this proposed rule. We are 
proposing this rule specifically to (1) Clarify that only units of 
government are able to participate in the financing of the non-Federal 
share; (2) establish minimum requirements for documenting cost when 
using a CPE; (3) limit providers operated by units of government to 
reimbursement that does not exceed the cost of providing covered 
services to eligible Medicaid recipients; (4) establish a new 
regulatory provision explicitly requiring that providers receive and 
retain the total computable amount of their Medicaid payments; and (5) 
make conforming changes to the SCHIP regulations.
    The provisions of this regulation apply to all providers of 
Medicaid and SCHIP services, except that Medicaid managed care 
organizations and SCHIP providers are not subject to the cost limit 
provision of this regulation. Except as noted above, all Medicaid 
payments (including disproportionate share hospital payments) made 
under the authority of the State plan and under Medicaid waiver and 
demonstration authorities are subject to all provisions of this 
regulation.

Defining a Unit of Government (Sec.  433.50)

    We are proposing to add new language to Sec.  433.50 to define a 
unit of government to conform to the provisions of section 
1903(w)(7)(G) of the Act. As discussed earlier, section 1903(w)(7)(G) 
of the Act identifies the five types of units of government that may 
participate in the non-Federal share of Medicaid payments: A State, a 
city, a county, a special purpose district, or other governmental units 
within the State. The proposed provisions at Sec.  433.50 are modified 
to be consistent with this statutory reference. The newly proposed 
regulatory definition of unit of government includes:
     Any State or local government entity (including Indian 
tribes) that can demonstrate it has generally applicable taxing 
authority, and
     Any State-operated, city-operated, county-operated, or 
tribally-operated health care provider.
    Under the proposed rule, health care providers that assert status 
to make IGTs or CPEs as a ``special purpose district'' or some form of 
``other'' local government must demonstrate they are operated by a unit 
of government by showing that:
     The health care provider has generally applicable taxing 
authority; or
     The health care provider is able to access funding as an 
integral part of a governmental unit with taxing authority (that is 
legally obligated to fund the governmental health care provider's 
expenses, liabilities, and deficits), so that
     A contractual arrangement with the State or local 
government is not the primary or sole basis for the health care 
provider to receive tax revenues.
    In some cases, evidence that a health care provider is operated by 
a unit of government must be assessed by examining the relationship of 
the unit of government to the health care provider. If the unit of 
government appropriates funding derived from taxes it collected to 
finance the health care providers general operating budget (which would 
not include special purpose grants, construction loans, or other 
similar funding arrangements), the provider would be considered 
governmentally operated. The inclusion of a health care provider as a 
component unit on the government's consolidated annual financial report 
indicates the governmentally operated status of the health care 
provider. If the unit of government merely uses its funds to reimburse 
the health care provider for the provision of Medicaid or other 
services, that alone is not sufficient to demonstrate that the entity 
is a unit of government. The unit of government must have a greater 
role in funding the entity's operations, including its expenses, 
liabilities, and deficits.
    In recent reviews, we have found that health care providers 
asserting status as a ``special purpose district'' or ``other'' local 
government unit often do not meet this definition. Although the special 
purpose district or a unit of government with taxing authority may be 
required, either by law or contract, to provide limited support to the 
health care provider, the health care provider is an independent entity 
and not an integral part of the unit of government. Typically, the 
independent entity will have liability for the operation of the health 
care provider and will not have access to the unit of government's tax 
revenue without the express permission of the unit of government. Some 
of these types of health care providers are organized and operated 
under a not-for-profit status. Under these circumstances, the 
independently operated health care provider cannot participate in the 
financing of the non-Federal share of Medicaid payments, whether by IGT 
or CPE, because such arrangements would be considered provider-related 
donations.
    The rule also includes language in Sec.  433.50 referencing that 
units of government may participate in the financing of the non-Federal 
share of Medicaid expenditures.

Sources of State Share and Documentation of Certified Public 
Expenditures. (Sec.  433.51(b))

    This rule proposes to amend the provisions of Sec.  433.51 to 
conform the language to the provisions of sections 1903(w)(6)(A) and 
1903(w)(7)(G) of the Act that are discussed above, and thus to clarify 
that the State share of Medicaid expenditures may be contributed only 
by units of government. This rule also proposes to include provisions 
requiring documentation of CPEs that are used as part of the State 
share of claimed expenditures.
    The regulatory provisions of Sec.  433.51 predate the statutory 
amendments found in section 1903(w) of the Act, which established a 
broad prohibition against provider-related donations and included 
provisions specifically identifying permissible IGTs and CPEs from 
units of government. Recently, some have expressed the view that the 
term ``public agency'' in Sec.  433.51(b) suggests that an entity which 
is not governmental in nature but has a public-oriented mission (such 
as a not-for-profit hospital, for example) may participate in the 
financing of the non-Federal share by CPEs. This view is inconsistent 
with the plain meaning of the Act; however, to avoid any further 
confusion, we are proposing to amend the regulation to conform the 
regulatory language to the current statutory language in section 
1903(w) of the Act. This amendment also makes clear that a broader 
reading would be inconsistent with section 1902(a)(2) of the Act and 
Sec.  433.50(a)(1), which have historically stipulated that State and 
local governments are the entities eligible to finance the non-Federal 
share.
    As discussed previously, the donations and taxes amendments

[[Page 2241]]

specifically allowed units of government to continue providing funding 
by IGT or CPE because of explicit statutory and regulatory provisions 
that allow units of government to share in the burden of financing the 
non-Federal share of Medicaid payments. To make regulatory language 
consistent with the statute and avoid confusion about whether there is 
a different regulatory standard, this rule proposes to modify Sec.  
433.51 by removing the terms ``public'' and ``public agency'' from 
Sec.  433.51 and replacing these with references to units of 
government.
    This rule also proposes to clarify that appropriate documentation 
is required whenever a CPE is used to fund the non-Federal share of 
expenditures in the Medicaid program. The governmental entity using a 
CPE must submit a certification statement to the State Medicaid agency 
attesting that the total computable amount of its claimed expenditures 
are eligible for FFP, in accordance with the Medicaid State plan and 
the revised provisions of Sec.  433.51. That certification must be 
submitted and used as the basis for a State claim for FFP within 2 
years from the date of the expenditure.
    In this regard, the rule proposes to modify Sec.  433.51(b) to 
require that a CPE must be supported by auditable documentation in a 
form approved by the Secretary that will minimally: (1) Identify the 
relevant category of expenditure under the State plan; (2) explain 
whether the contributing unit of government is within the scope of the 
exception to the statutory limitations on provider-related taxes and 
donations; (3) demonstrate the actual expenditures incurred by the 
contributing unit of government in providing services to Medicaid 
recipients or in administration of the State plan; and (4) be subject 
to periodic State audit and review.
    To implement this rule, the Secretary would issue a form (or forms) 
that would be required for governments using a CPE for certain types of 
Medicaid services where we have found improper claims (for example, 
school-based services). These forms will be published in the Federal 
Register using procedures consistent with the Paperwork Reduction Act 
requirements. In preparing the way for these forms, this rule would 
serve to enhance fiscal integrity and improve accountability with 
respect to CPE practices in the Medicaid program.
    Costs that are certified by units of government for purposes of CPE 
cannot include the costs of providing services to the non-Medicaid 
population or costs of services that are not covered by Medicaid, 
except that a hospital may certify costs for inpatient and outpatient 
hospital services that are not covered under the State plan but are the 
basis for a disproportionate share hospital payment consistent with the 
requirements of section 1923 of the Act.
    It is important to note that the following conditions do not 
constitute compliance with the Federal statute and regulation governing 
CPEs:
    1. A certification that funds are available at a State or local 
level. This certification is irrelevant to whether or not State or 
local dollars have actually been expended to provide health care 
services to Medicaid individuals.
    2. An estimate of Medicaid costs derived from surveys of health 
care providers.
    3. A certification that is higher than the actual cost or 
expenditure of the governmental unit that has generated the CPE based 
on its provision of services to Medicaid recipients.
    4. A certification that presents costs as anything less than 100 
percent of the total computable expenditure. Federal match is available 
only as a percentage of the total computable Medicaid expenditure 
documented through a CPE. A certification equal to the amount of the 
State share only is not acceptable.
    The above list is not all-inclusive of arrangements that do not 
constitute compliance.

Cost Limit for Providers Operated by Units of Government (Sec.  
447.206)

    As we have examined Medicaid financing arrangements across the 
country, we have found that many States make supplemental payments to 
governmentally operated providers that are in excess of cost. These 
providers, in turn, use the excess of Medicaid revenue over cost to 
subsidize health care operations that are unrelated to Medicaid, or 
they may return a portion of the supplemental payments to the State as 
a source of revenue. In either case, we do not find that Medicaid 
payments in excess of cost to governmentally operated health care 
providers are consistent with the statutory principles of economy and 
efficiency as required by section 1902(a)(30)(A) of the Act. 
Consequently, this rule proposes to limit reimbursement for 
governmentally operated providers to amounts consistent with economy 
and efficiency by establishing a limit of reimbursement not to exceed 
cost.
    The cost limit in Sec.  447.206 specifies that the Secretary will 
determine a reasonable method for identifying allowable Medicaid costs 
that incorporates not only OMB Circular A-87 cost principles but also 
Medicare cost principles, as appropriate, and the statutory 
requirements of sections 1902, 1903, and 1905 of the Act. While OMB 
Circular A-87 provides a framework for cost analysis, not all cost 
principles under OMB Circular A-87 are consistent with Medicare cost 
principles or requirements found in the Act for economy and efficiency 
and the proper and efficient administration of the Medicaid State plan. 
Developing cost finding methodologies more directly to the Medicaid 
program will provide for a more accurate allocation of allowable costs 
to the Medicaid program.
    For hospital and nursing facility services, we find that Medicaid 
costs are best documented when based upon a standard, auditable, 
nationally recognized cost report (for example, Medicare 2552-96 
hospital cost report). Any hospital and nursing facility services that 
are not documented based on a standardized, nationally recognized cost 
report are generally not reimbursable Medicaid costs. We will address 
any exceptions to this on a case-by-case basis.
    For non-hospital and non-nursing facility services in Medicaid, we 
note that a nationally recognized, standard cost report does not 
presently exist. Therefore, the proposed rule stipulates that Medicaid 
costs must be supported by auditable documentation in a form approved 
by the Secretary that, at a minimum, will: (1) Identify the relevant 
category of expenditure under the State plan; (2) explain whether the 
contributing unit of government is within the scope of the exception to 
the statutory limitations on provider-related taxes and donations; (3) 
demonstrate the actual expenditures incurred by the contributing unit 
of government in providing services to Medicaid recipients or in 
administration of the State plan; and (4) be subject to periodic State 
audit and review.
    Each governmentally operated health care provider that is subject 
to cost reimbursement and using CPEs must file a cost report with the 
State Medicaid agency annually and retain records in accordance with 42 
CFR 431.17 and 45 CFR 92.42.
    Under a Medicaid cost reimbursement payment system funded by CPEs, 
States may utilize most recently filed cost reports to develop interim 
Medicaid payment rates and may trend these interim rates by an 
applicable health care-related index. Interim reconciliations must be 
performed by reconciling the interim Medicaid payment rates to the 
filed cost report for the spending year in which interim payment rates 
were made. Final

[[Page 2242]]

reconciliation must also be performed by reconciling the interim 
payments and interim adjustments to the finalized cost report for the 
spending year in which interim payment rates were made.
    When States do not use CPEs to pay providers operated by units of 
government, the new provisions would require the State Medicaid agency 
to review annual cost reports to verify that actual payments to each 
governmentally operated provider did not exceed the provider's cost.
    Under this provision, if it is determined that a governmentally-
operated health care provider received an overpayment, amounts related 
to the overpayment would be properly credited to the Federal 
government, in accordance with part 433, subpart F.

Retention of Payments (Sec.  447.207)

    In order to strengthen efforts to remove any potential for abuse 
involving the re-direction of Medicaid payments by IGTs in the future, 
this rule proposes a new regulatory provision at Sec.  447.207 
requiring that providers receive and retain the full amount of the 
total computable payment provided to them for services furnished under 
the approved State plan (or the approved provisions of a waiver or 
demonstration, if applicable). Compliance with this provision will be 
determined by examining any transactions that are associated with the 
provider's Medicaid payments to ensure that expenditures have been 
appropriately claimed and the non-Federal share has been satisfied.
    Compliance may be demonstrated by showing that the funding source 
of an IGT is clearly separated from the Medicaid payment that a health 
care provider received. Generally, an IGT that takes place before the 
Medicaid payment, which originates from an account funded by taxes that 
is separate from the account in which the health care provider receives 
Medicaid payments, is usually acceptable.

Elimination of Payment Flexibility To Pay Public Providers in Excess of 
Cost (Sec.  447.271(b))

    We are proposing to eliminate Sec.  447.271(b), as this provision 
is no longer relevant due to the new cost limit for units of government 
proposed in this rule.

Conforming Changes To Reflect Upper Payment Limits for Governmental 
Providers (Sec.  447.272 and Sec.  447.321)

    We are proposing a corresponding modification to the Medicaid upper 
payment limit (UPL) rules found at Sec.  447.272 for inpatient hospital 
and nursing facility services, as well as the UPL rules at Sec.  
447.321 for outpatient hospital and clinic services, to incorporate by 
reference the new cost limit for providers operated by units of 
government and to make the defined UPL facility groups consistent with 
the new provisions of Sec.  433.50.
    With respect to the UPL regulations at Sec.  447.272 and Sec.  
447.321, this rule proposes to limit Medicaid reimbursement for State 
government operated and non-State government operated facilities to the 
individual provider's cost, whereas the current UPL regulations provide 
an aggregate limit based on the UPL facility group. Formerly 
established UPL transition periods remain unchanged; therefore, any 
States that are still in transition periods under Sec.  447.272(e) or 
Sec.  447.321(e) when this rule becomes effective will be permitted to 
make additional payments above the cost UPL to governmentally operated 
providers throughout the duration of their transition periods. The UPL 
rules at Sec.  447.272 and Sec.  447.321 for privately operated 
facilities and Indian Health Service and tribal facilities remain 
unchanged.
    It is important to note that the provisions of this proposed rule 
are consistent with the regulatory provisions concerning Medicaid DSH 
payments. Medicaid DSH payments are limited to the uncompensated care 
costs of providing inpatient hospital and outpatient hospital services 
to Medicaid beneficiaries and individuals with no source of third party 
coverage for the services they receive. To the extent any 
governmentally operated hospital is reimbursed by Medicaid at the level 
of cost, there will be no Medicaid shortfall factored into the 
facility's calculation of uncompensated care for purposes of DSH. This 
is true whether the Medicaid cost reimbursement is funded by CPEs or 
any other means.

Conforming Changes to Public Funds as the State Share of Financial 
Participation (Sec.  457.220)

    Current provisions on the financing of the SCHIP at Sec.  457.220 
mirror the provisions at Sec.  433.51. Because the changes we are 
making to Sec.  433.51 apply equally to SCHIP programs, we are 
proposing to make conforming changes to Sec.  457.220 so that this 
provision continues to mirror Sec.  433.51.

Conforming Changes to Other Applicable Federal Regulations (Sec.  
457.628)

    Current provisions on the financing of the SCHIP at Sec.  457.628 
incorporate by reference the provisions at Sec.  433.51 through Sec.  
433.74. Because the changes we are making to Sec.  433.50, which 
implement section 1903(w) of the Act, apply equally to SCHIP programs, 
we propose to make conforming changes to Sec.  457.628 to incorporate 
Sec.  433.50. In addition, the new provision at Sec.  447.207 requiring 
retention of payments is also incorporated by reference in Sec.  
457.628 because this provision applies to SCHIP providers as well as 
Medicaid providers.

Tool To Evaluate the Governmental Status of Providers

    With the issuance of this proposed rule, we recognize the need to 
evaluate individual health care providers to determine whether or not 
they are units of government as prescribed by the rule. States will 
need to identify each health care provider purportedly operated by a 
unit of government to CMS and provide information needed for CMS to 
make a determination as to whether or not the provider is a unit of 
government. We have developed a form questionnaire to collect 
information necessary to make that determination. The questionnaire 
will be published in connection with this proposed rule. For new State 
plan amendments that will reimburse governmentally operated providers 
or rely on the participation of health care providers for the financing 
of the non-Federal share, States will be required to complete this 
questionnaire regarding each provider that is said to be governmentally 
operated. For any existing arrangement that involves payment to 
governmentally operated providers or relies on the participation of 
health care providers for the non-Federal share, States will be 
required to provide the information requested on this form 
questionnaire relative to each applicable provider within three (3) 
months of the effective date of the final rule following this proposed 
rule.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.

[[Page 2243]]

     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs):

Public Funds as the State Share of Financial Participation (Sec.  
433.51)

    Section 433.51 requires that a certified public expenditure (CPE) 
be supported by auditable documentation in a form(s) approved by the 
Secretary that, at a minimum, identifies the relevant category of 
expenditures under the Medicaid State Plan, demonstrates the cost of 
providing services to Medicaid recipients, and is subject to periodic 
State audit and review.
    The burden associated with this requirement is the time and effort 
put forth by a provider to complete the approved form(s) to be 
submitted with a CPE. Depending upon provider size, we believe that it 
could take approximately 10-60 hours to fill out the form(s) that would 
be required for an annual certified public expenditure. We estimate 
that providers in 50 States will be affected by this requirement, but 
we are unable to identify the total number of providers affected or the 
estimated total aggregate hours of paperwork burden for all providers, 
as such figures will be a direct result of the number of providers that 
are determined to be governmentally operated.

Cost Limit for Providers Operated by Units of Government (Sec.  
447.206)

    Section 447.206(e) states that each provider must submit annually a 
cost report to the Medicaid agency which reflects the individual 
providers cost of serving Medicaid recipients during the year. The 
Medicaid Agency must review the cost report to determine that costs on 
the report were properly allocated to Medicaid and verify that Medicaid 
payments to the provider during the year did not exceed the providers 
cost.
    The burden associated with this requirement is the time and effort 
for the provider to report the cost information annually to the 
Medicaid Agency and the time and effort involved in the review and 
verification of the report by the Medicaid Agency. We estimate that it 
will take a provider 10 to 60 hours to prepare and submit the report 
annually to the Medicaid Agency. We estimate it will take the Medicaid 
Agency 1 to 10 hours to review and verify the information provided. We 
are unable to identify the total number of providers affected or the 
estimated total aggregate hours of paperwork burden for all providers, 
as such figures will be a direct result of the number of providers that 
are determined to be governmentally operated.
    In the preamble of this proposed regulation, under the section 
titled ``Tool to Evaluate Governmental Status of Providers'', we 
discuss a form questionnaire that we have developed to assist us in 
making a determination as to whether or not the provider is a unit of 
government. We have submitted this proposed information collection to 
OMB for its review and approval. To view the ``Governmental Status of 
Health Care Provider'' form and obtain additional supporting 
information, please access CMS' Web Site address at https://
www.cms.hhs.gov/PaperworkReductionActof1995 or e-mail your request and 
include CMS-10176 as the document identifier to Paperwork@cms.hhs.gov.
    As required by section 3504(h) of the Paperwork Reduction Act of 
1995, we have submitted a copy of this document to the Office of 
Management and Budget (OMB) for its review of these information 
collection requirements.
    If you comment on these information collection and record keeping 
requirements, please mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Division of Regulations Development, 
Attn.: Melissa Musotto, CMS-2258-P, Room C5-14-03, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: Katherine T. Astrich, CMS Desk Officer, CMS-2258-P, 
Katherine--T.--Astrich@omb.eop.gov. Fax (202) 395-6974.

IV. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the DATES section of this preamble, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.

V. Regulatory Impact Analysis

A. Introduction

    We have examined the impacts of this rule as required by Executive 
Order 12866 (September 1993, Regulatory Planning and Review), the 
Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-354), 
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, which 
merely reassigns responsibility of duties) directs agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any 1 year).
    The RFA requires agencies to analyze options for regulatory relief 
of small businesses. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$6 million to $29 million in any 1 year. Individuals and States are not 
included in the definition of a small entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 of the RFA. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. For the reasons cited 
below, we have determined that this rule may have a significant impact 
on 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 $120 million. We have determined that 
the rule will have an effect on State and local governments in an 
amount greater than $120 million. We have explained this assessment in

[[Page 2244]]

the section entitled ``Anticipated Effects'' below.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. For purposes of Executive Order 13132, we also find that 
this rule will have a substantial effect on State or local governments.

B. Costs and Benefits

    This rule is a major rule because it is estimated to result in $120 
million in savings during the first year and $3.87 billion in savings 
over five years.
    As CMS has examined Medicaid State financing arrangements across 
the country, we have identified numerous instances in which State 
financing practices do not comport with the Medicaid statute. As 
explained in the preamble, Section 1903(w) of the Act permits units of 
government to participate in the financing of the non-Federal share; 
however, in some instances States rely on funding from non-governmental 
entities for the non-Federal share. Because such practices are 
expressly prohibited by the donations and taxes amendments at Section 
1903(w), we are issuing this rule to clarify the requirements of 
entities and health care providers that are able to finance the non-
Federal share.
    Furthermore, CMS has found several arrangements in which providers 
did not retain the full amount of their Medicaid payments but were 
required to refund or return a portion of the payments received, either 
directly or indirectly. Failure by the provider to retain the full 
amount of reimbursement is inappropriate and inconsistent with 
statutory construction that the Federal government pays only its 
proportional cost for the delivery of Medicaid services. When a State 
claims Federal reimbursement in excess of net payments to providers, 
the FMAP rate has effectively been increased, and federal Medicaid 
funds are redirected toward non-Medicaid services. When a State chooses 
to recycle FFP in this manner, the Federal taxpayers in other States 
disproportionately finance the Medicaid program in the State that is 
recycling FFP. This rule is designed to eliminate such practices.
    The rule should also have a beneficial distributive impact on 
governmental providers because in many States there are a few selected 
governmental providers receiving payments in excess of cost, while 
other governmental providers receive a lower rate of reimbursement. 
This rule will reduce inflated payments to those few governmental 
providers and promote a more even distribution of funds among all 
governmental providers. This is because all governmental providers will 
be limited to a level of reimbursement that does not exceed the 
individual provider's cost.
    We have observed that there are a variety of practices used by 
State and local governments in identifying costs and submitting a CPE 
as the basis of matching FFP for the provision of Medicaid services. 
These different cost methods and CPE practices make it difficult to (1) 
Align claimed expenditures with specific services covered under the 
State plan or identifiable administrative activities; (2) properly 
identify the actual cost to the governmental entity of providing 
services to Medicaid recipients or performing administrative 
activities; and (3) audit and review Medicaid claims to ensure that 
Medicaid payments are appropriately made. Such circumstances present 
risks of inflationary costs being certified and excessive claims of 
FFP. This rule will facilitate a more consistent methodology in 
Medicaid cost identification and allocation across the country, thereby 
improving the fiscal integrity of the program.
    Because the RFA includes small governmental jurisdictions in its 
definition of small entities, we expect this rule to have a significant 
economic impact on a substantial number of small entities, specifically 
health care providers that are operated by units of government, 
including governmentally operated small rural hospitals, as they will 
be subject to the new cost limit imposed by this rule. We have reviewed 
CMS's Online Survey and Certification and Reporting System (OSCAR) data 
for information about select provider types that may be impacted by 
this rule. According to the OSCAR data, there are:
     1,153 hospitals that have identified themselves as 
operated by local governments or hospital districts/authorities;
     822 nursing facilities that have identified themselves as 
operated by counties, cities, or governmental hospital districts;
     113 intermediate care facilities for the mentally retarded 
(ICF/MR) that have identified themselves as operated by cities, towns, 
or counties.

We have not counted State operated facilities in the above numbers 
because for purposes of the RFA, States are not included in the 
definition of a small entity. Note further that OSCAR data is self-
reported, so the figures provided above do not necessarily reflect the 
number of providers CMS recognizes as governmentally operated according 
to the provisions of this rule.
    Some of the governmental providers identified as small entities for 
RFA purposes may have been receiving Medicaid payments in excess of 
cost, but as a result of this rule, payments will not be permitted to 
exceed cost. Governmentally operated providers will also be required 
under this rule to receive and retain the full amount of their Medicaid 
payments, which would result in a net increase in revenue to the extent 
such providers were returning a portion of their Medicaid payments to 
the State and payment rates remain the same following the effective 
date of this rule. On the other hand, if States reduce payment rates to 
such providers after this rule is effective, these providers may 
experience a decrease in net revenue. Finally, there are health care 
providers that are considered under the RFA as small entities 
(including small rural hospitals) but are not governmentally operated; 
to the extent these providers have been involved in financing the non-
Federal share of Medicaid payments, this rule will clarify whether or 
not such practices may continue. However, for the most part, private 
health care providers are not affected by this rule. As stated earlier, 
for purposes of the RFA, the small entities principally affected by 
this rule are governmentally operated health care providers. In light 
of the specific universe of small entities impacted by the rule, the 
fact that this rule requires States to allow governmentally operated 
health care providers to receive and retain their Medicaid payments, 
and the allowance for governmentally operated health care providers to 
receive a Medicaid rate up to cost, we have not identified a need for 
regulatory relief under the RFA.
    Ultimately, this rule is designed to ensure that Medicaid payments 
to governmentally operated health care providers are based on actual 
costs and that the financing arrangements supporting those payments are 
consistent with the statute. While some health care providers may lose 
revenues in light of this rule, those revenues were likely in excess of 
cost or may have been financed using methods that did not permit the 
provider to retain payments received. Other health care providers that 
were adversely affected by questionable reimbursement and financing 
arrangements may now, under this rule, benefit from a more equitable 
distribution of funds. Private providers

[[Page 2245]]

are generally unaffected by this rule, except for limited situations 
where the clarification provided by the rule may require a change to 
current financing arrangements.
    With respect to clinical care, we anticipate that this rule's 
effect on actual patient services to be minimal. The rule presents no 
changes to coverage or eligibility requirements under Medicaid. The 
rule clarifies statutory financing requirements and allows 
governmentally operated providers to be reimbursed at levels up to 
cost. Federal matching funds will continue to be made available based 
on expenditures for appropriately covered and financed services. While 
States may need to change reimbursement or financing methods, we do not 
anticipate that services delivered by governmentally operated providers 
or private providers will change.

C. Anticipated Effects

    The following chart summarizes our estimate of the anticipated 
effects of this rule.

    Estimated Reduction in Federal Medicaid Outlays Resulting From the Provider Payment Reform Proposal Being
                                            Implemented by CMS-2258-P
                                              [amounts in millions]
----------------------------------------------------------------------------------------------------------------
                                                                              Fiscal Year
                                                     -----------------------------------------------------------
                                                         2007        2008        2009        2010        2011
----------------------------------------------------------------------------------------------------------------
Payment Reform......................................       -120        -530        -840      -1,170      -1,210
----------------------------------------------------------------------------------------------------------------

    These estimates are based on recent reviews of state Medicaid 
spending. Payment reform addresses both spending through 
intergovernmental transfers (IGT) and limiting payments to government 
providers to cost. F