Medicaid Program; Health Care-Related Taxes, 9685-9699 [E8-3207]
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Federal Register / Vol. 73, No. 36 / Friday, February 22, 2008 / Rules and Regulations
§ 411.25 Primary payer’s notice of primary
payment responsibility.
(a) If it is demonstrated to a primary
payer that CMS has made a Medicare
primary payment for services for which
the primary payer has made or should
have made primary payment, it must
provide notice about primary payment
responsibility and information about the
underlying MSP situation to the entity
or entities designated by CMS to receive
and process that information.
*
*
*
*
*
(c) The primary payer must provide
additional information to the designated
entity or entities as the designated entity
or entities may require this information
to update CMS’ system of records.
§ 411.45
[Amended]
4. Section 411.45(a)(2) is amended by
removing the word ‘‘capacity’’ and
adding the word ‘‘incapacity’’ in its
place.
I
(Catalog of Federal Domestic Assistance
Program No. 93.773, Medicare—Hospital
Insurance; and Program No. 93.774,
Medicare—Supplementary Medical
Insurance Program)
Dated: September 4, 2007.
Herb B. Kuhn,
Acting Administrator, Centers for Medicare
& Medicaid Services.
Approved: October 19, 2007.
Michael O. Leavitt,
Secretary.
Charles Hines, (410) 786–0252 or Stuart
Goldstein, (410) 786–0694.
SUPPLEMENTARY INFORMATION:
I. Background
[FR Doc. E8–2938 Filed 2–21–08; 8:45 am]
BILLING CODE 4120–01–P
DEPARTMENT OF HEALTH AND
HUMAN SERVICES
Centers for Medicare & Medicaid
Services
42 CFR Part 433
[CMS 2275–F]
RIN 0938–AO80
Medicaid Program; Health CareRelated Taxes
Centers for Medicare &
Medicaid Services (CMS), HHS.
ACTION: Final rule.
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AGENCY:
SUMMARY: This final rule revises the
collection threshold under the
regulatory indirect guarantee hold
harmless arrangement test to reflect the
provisions of the Tax Relief and Health
Care Act of 2006. When determining
whether there is an indirect guarantee
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Effective date: This rule is
effective April 22, 2008.
Compliance date: CMS will not
consider a State to be out of compliance
with the revision to the definition of
permissible classes until October 1,
2009.
DATES:
FOR FURTHER INFORMATION CONTACT:
Editorial Note: This document was
received at the Office of the Federal Register
on February 12, 2008.
VerDate Aug<31>2005
under the 2-prong test for portions of
fiscal years beginning on or after
January 1, 2008 and before October 1,
2011, the allowable amount that can be
collected from a health care-related tax
is reduced from 6 to 5.5 percent of net
patient revenues received by the
taxpayers. This final rule also clarifies
the standard for determining the
existence of a hold harmless
arrangement under the positive
correlation test, Medicaid payment test,
and the guarantee test (with conforming
changes to parallel provisions
concerning hold harmless arrangements
with respect to provider-related
donations); codifies changes to
permissible class of health care items or
services related to managed care
organizations as enacted by the Deficit
Reduction Act of 2005; and, removes
obsolete transition period regulatory
language.
A. General
Title XIX of the Social Security Act
(the Act) authorizes Federal grants to
the States for Medicaid programs to
provide medical assistance to persons
with limited income and resources.
While Medicaid programs are
administered by the States, they are
jointly financed by the Federal and State
governments. The Federal government
pays its share of medical assistance
expenditures to the State on a quarterly
basis according to a formula described
in sections 1903 and 1905(b) of the Act.
The amount of the Federal share of
medical assistance expenditures is
called Federal financial participation
(FFP). The State pays its share of
medical expenditures in accordance
with section 1902(a)(2) of the Act.
The Medicaid Voluntary Contribution
and Provider Specific Tax Amendments
of 1991 (Pub. L. 102–234), enacted
December 12, 1991, amended section
1903 of the Act to specify limitations on
the amount of FFP available for medical
assistance expenditures in a fiscal year
when States receive certain funds
donated from providers and revenues
generated by certain health care-related
taxes. We issued regulations to
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implement the statutory provisions
concerning provider donations and
health care-related taxes in an interim
final rule (with comment period)
published on November 24, 1992 (57 FR
55118). A final rule was issued on
August 13, 1993 (58 FR 43156). The
Federal statute and implementing
regulations were designed to protect
Medicaid providers from being unduly
burdened by health care related tax
programs. Health care related tax
programs that are compliant with the
requirements set forth by the Congress
create a significant tax burden for health
care providers that do not participate in
the Medicaid program or that provide
limited services to Medicaid
individuals.
B. Health Care-Related Taxes
Section 1903(w) of the Act requires
that State health care-related taxes must
be imposed on a permissible class of
health care services; be broad based or
apply to all providers within a class; be
uniform, such that all providers within
a class must be taxed at the same rate;
and avoid hold harmless arrangements
in which collected taxes are returned
directly or indirectly to taxpayers.
Section 1903(w)(3)(E) of the Act
specifies that the Secretary shall
approve broad based (and uniformity)
waiver applications if the net impact of
the health care-related tax is generally
redistributive and the amount of the tax
is not directly correlated to Medicaid
payments. The broad based and
uniformity requirements are waivable
through a statistical test that measures
the degree to which the Medicaid
program incurs a greater tax burden
than if these requirements were met.
The permissible class of health care
services and hold harmless
requirements cannot be waived. The
statute and Federal regulation identify
19 permissible classes of health care
items or services that States can tax
without triggering a penalty against
Medicaid expenditures.
The regulatory language at 42 CFR
433.68(f) sets forth tests for determining
the presence of a hold harmless
arrangement that were directly based on
the language contained in section
1903(w)(4) of the Act. The preamble to
the 1993 regulation provided guidance
and some illustrative examples of the
types of health care-related tax programs
that we believed would violate the hold
harmless prohibitions. In a June 29,
2005 decision, however, the HHS
Departmental Appeals Board (DAB),
DAB No. 1981, found that these
regulations did not clearly preclude
certain types of arrangements that we
believe to be within the scope of the
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statutory hold harmless prohibition and
implementing regulations. The DAB
consequently reversed disallowances
issued by CMS to five States. In each of
these reversed disallowances, the States
had created programs that imposed a tax
on nursing homes and simultaneously
created programs that awarded grants or
tax credits to private pay residents of
those nursing homes. These grants and/
or tax credits were designed by the
States to compensate private pay
residents of nursing homes for the costs
of the tax passed on to them by their
nursing homes through increased
charges. The DAB, however found that
CMS regulations did not clearly identify
that such grants and tax payments
amounted to hold harmless
arrangements that would preclude FFP.
One of the hold harmless tests, set
forth in current rules at § 433.68(f)(3)(i),
defines arrangements that are
considered to be prohibited indirect
guarantees. Taxes imposed on health
care-related providers may not exceed 6
percent of the revenue received by the
taxpayer unless the State makes a
showing that, in the aggregate, 75
percent of taxpayers do not receive 75
percent or more of their total tax costs
back in enhanced Medicaid payments or
other State payments. Prior to the
enactment of the Tax Relief and Health
Care Act of 2006, States could tax
individual classes of health care
services and providers, including
inpatient hospital services, outpatient
hospital services, and nursing facility
services up to 6 percent of the net
patient revenue attributable to the
assessed permissible class of health care
items or services without violating
prohibitions on the indirect hold
harmless arrangements. The 6 percent
limit was established to maintain
consistency with the average level of
taxes applied to other goods and
services in the State, as discussed in the
November 24, 1992 preamble to the
interim final rule implementing the
statute.
On December 20, 2006 the Tax Relief
and Health Care Act of 2006 was signed
into law as Public Law 109–432. Section
403 of that law incorporated the existing
regulatory test for an indirect guarantee
into the Medicaid statute but provided
for a temporary reduction in the
allowable tax rate under the first prong
of the test. Specifically, the indirect
hold harmless threshold has been
reduced from 6 percent to 5.5 percent
effective January 1, 2008 and before
October 1, 2011. We want to remind
States that the collection threshold test
is an annual test and while the effective
date of this change does not coincide
with the beginning of any State’s fiscal
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year the test must still be performed on
an annual basis. Therefore, if a State
chooses to impose a health care related
tax at a rate in excess of 5.5 percent
prior to January 1, 2008, it will have to
appropriately adjust the tax rate after
January 1, 2008 so that health care
related tax collections will not exceed
5.5 percent on a per class basis going
forward. Compliance in State fiscal year
2008 will be evaluated from January 1,
2008 through the last day of State fiscal
year 2008. Beginning with State fiscal
year 2009 the 5.5 percent tax collection
will be measured on an annual State
fiscal year basis.
II. Provisions of the Proposed Rule
In the March 23, 2007 proposed
regulation we proposed to:
• Codify section 6051 of the Deficit
Reduction Act of 2005 (Pub. L. 109–171)
which amended section 1903(w)(7)(viii)
of the Act to expand the previous
Medicaid managed care organization
(MCO) class of health care items and
services to include all MCOs.
• Clarify the provisions of the hold
harmless tests found at § 433.68(f).
• Modify and clarify the positive
correlation test set forth at § 433.68(f)(1),
to specify that a State or other unit of
government will violate this test if they
impose a health care-related tax and
also provide for a direct or indirect nonMedicaid payment and the payment
amount is positively correlated to the
tax amount or to the difference between
the Medicaid payment and tax amount.
We proposed to interpret the phrase
‘‘direct and indirect non-Medicaid
payment’’ broadly. These payments may
take many forms, such as grants or tax
credits, although there will undoubtedly
be other types of payments that we have
not yet anticipated.
• Clarify the definition of tax
amounts and payment amounts for
purposes of hold harmless analyses. We
proposed to unify these definitions so
that they would have identical
meanings in all three hold harmless
tests under § 433.68(f).
• Clarify within § 433.68(f)(2) that a
Medicaid payment would be considered
to vary based on the tax amount when
the payment is conditional on the tax
payment.
• Clarify the guarantee test at
§ 433.68(f)(3) to specify that a State can
provide a direct guarantee through a
direct or indirect payment. A direct
guarantee would be found when a State
payment is made available to a taxpayer
or a party related to the taxpayer (for
example, as a nursing home resident is
related to a nursing home), in the
reasonable expectation that the payment
would result in the taxpayer being held
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harmless for any part of the tax. An
indirect payment to the taxpayer would
also constitute a direct guarantee. One
such example of this indirect payment
providing a direct guarantee would be
found where a State imposing a tax on
nursing facilities provided grants or tax
credits to private pay residents of those
facilities that could be used to
compensate those residents for any
portion of the tax amount that the State
has allowed to be passed down to them
by their nursing homes. This represents
a direct guarantee of an indirect
payment to taxpayers.
• Modify under § 433.68(f)(3)(i), the
indirect hold harmless threshold
percentage to be consistent with the Tax
Relief and Health Care Act of 2006,
which lowered the collection threshold
under the indirect hold harmless
provision from 6 percent of net patient
service revenue to 5.5 percent effective
for portions of fiscal years beginning on
or after January 1, 2008 through
September 30, 2011, prior to a State
being required to demonstrate the
second prong of the indirect hold
harmless provision.
• Clarify at § 433.56(a)(4) the
permissible class for purposes of health
care-related taxes to only those services
of ICF/MRs by removing narrow
exception for similar services of
community-based residences for the
mentally retarded if certain criteria are
met.
• Modify parallel hold harmless
provisions with respect to providerrelated donations at § 433.54(c).
• Remove transition periods related
to provider-related Donations and
health care related taxes provided under
section 1903(w)(1)(C)(ii) of the Act since
the last transition period expired in
1993.
III. Analysis of and Responses to Public
Comments
We received 21 items of timely public
comments which contained
approximately 190 public comments
that raised 47 individual issues, in
response to the March 23, 2007
proposed regulation (72 FR 13726
through 13734). The comments came
from a variety of correspondents,
including health care provider
associations, national and State
organizations and State Medicaid
agencies. The majority of commenters
urged us to reconsider proposed
changes to the hold harmless
provisions. The following is a summary
of the comments received and our
response to those comments.
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A. General Comments
Comment: One commenter expressed
support for the codification of the 6
percent maximum tax amount allowed
and agreed with CMS’ implementation
of section 403 of the Tax Relief and
Health Care Act of 2006. The
commenter indicated that while health
care provider taxes are not an optimal
approach to sustainable appropriate and
equitable Medicaid funding, but stated
that cutting the maximum tax rate
allowed substantially below 6 percent
would have resulted in Medicaid
payment reductions and thus harmed
low income populations needing care.
The commenter also suggested that such
taxes create a significant tax burden for
health care providers that provide
limited services to or no services to
Medicaid beneficiaries.
Response: We appreciate the support
for our implementation of section 403 of
the Tax Relief and Health Care Act
2006. We understand the concern about
the burden of health care related taxes
on providers that have little or no
Medicaid revenues. Medicaid limits on
health care related taxes protect those
providers at the same time as ensuring
that such health care related taxes do
not effectively shift a disproportionate
burden of the Medicaid program to the
federal government. We also recognize
that States use revenues received from
permissible health care related taxes to
support Medicaid payment rates, but
States have other sources of revenue
that can support Medicaid payments
and ensure that low income populations
receive needed care. This rule balances
all these concerns in clarifying the
definitions of permissible classes and
hold harmless arrangements.
Comment: A couple of commenters
asserted that the proposed rule violated
the Administrative Procedure Act
provision codified at 5 U.S.C. 553(b).
The commenters took issue with the
preamble clarifications regarding
interpretations of regulatory provisions
that were included in the proposed rule.
The commenters argued that CMS
should have included precise regulatory
language to implement such changes
and that CMS cannot implement the
proposed rule until it publishes
sufficient notice in the form of
substantive regulatory language. Other
commenters stated that CMS provided
no rational support for the proposed
rule.
Response: We disagree with the
suggestion of any procedural deficiency.
Through publication of the proposed
regulation, CMS adhered to all
requirements of the Administrative
Procedure Act. Proper notice was given
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of proposed changes and a public
comment period was provided. Those
comments were considered, and are
discussed in this final rule. The final
rule includes all necessary changes to
the regulatory framework and gives
States clear guidance on how that
regulatory framework will be applied to
health care related tax programs.
Comment: Numerous commenters
argued that the proposed regulatory
changes directly contradict provisions
of the Social Security Act and that CMS
exceeded its statutory authority. These
commenters cited section 5(c) of the
Medicaid Voluntary Contribution and
Provider-Specific Tax Amendments of
1991 (Pub.L. 102–234) which mandated
that the Secretary consult with States
before issuing any regulations under
this public law. The commenters
asserted that significant changes were
made through this proposed regulation
and that consultation with States was
required prior to the issuance of the
regulatory changes. For these reasons,
the commenters indicated that CMS
should not implement the new rule and
begin consultations with States.
Response: We believe the conditions
of section 5(c) of the Medicaid
Voluntary Contribution and ProviderSpecific Tax Amendments of 1191,
Public Law 102–234 were fully satisfied
by the process the Secretary undertook
when the regulations implementing that
Act were issued in 1992 and 1993. Even
if these conditions were read to extend
in perpetuity, however, they have been
met with respect to this final rule. The
notice and public comment procedures
used to issue this final rule have
provided a full and fair opportunity for
consultation with States. This
opportunity is in addition to the
ongoing dialogue between CMS and the
States over proposed State financing in
the review process for Medicaid State
plan amendments.
Comment: Several commenters
believe that CMS’ approach will harm
State Medicaid programs by decreasing
the resources necessary to support the
growing and changing nature of
Medicaid services. Another commenter
raised concern about the financial and
administrative burden for States of the
proposed rule. One commenter argued
that the changes proposed in the
regulation will compel States to
dismantle already approved financing.
One commenter asserted that the
negative effect of the proposed rule
could exceed approaches rejected by
Congress. One commenter was
concerned that CMS did not fully
consider the significant financial issues
confronting States and the continual
pressure to contain Medicaid spending
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in the face of State budgets. Another
commenter stated that the proposed
regulation will cause a shift in burden
of health care financing from the federal
government to the States.
Response: This final regulation
implements section 403 of the Tax
Relief and Health Care Act of 2006 and
clarifies existing Federal law related to
permissible classes of health care
services and the hold harmless
provisions. We do not agree that the
statutorily-mandated reduction in the
indirect guarantee threshold will result
in excessive financial and
administrative burdens or reductions in
program benefits. In any case, CMS is
bound by the law to make this change.
Moreover, the clarifications provided in
this regulation were not designed to
target particular existing health care
related tax programs for which States
have received waiver approval from
CMS of the broad based and/or
uniformity requirements. These
clarifications were instead to ensure a
consistent and uniform understanding
of the application of the hold harmless
provisions. We refer to them as
clarifications because they reflect CMS’s
understanding of how the hold harmless
provisions should be applied. These
clarifications are based on the need to
ensure that the regulations effectively
identify hold harmless arrangements in
which health care related taxes operate
to effectively shift a disproportionate
burden of the Medicaid program to the
federal government. Although the
clarifications are not targeted toward
any particular financing arrangements,
CMS reserves the right to perform
financial management reviews of any
tax structures to ensure compliance
with Federal statute, expressly approved
by CMS or otherwise.
Comment: Several commenters
requested that CMS affirm that the
proposed rule would not jeopardize
already approved State plan
amendments (SPAs) and provider tax
programs. The commenters also
requested that CMS confirm that it will
continue to approve SPAs and provider
tax submissions with similar features as
those already approved. In the absence
of such confirmations, the commenters
requested that CMS identify with
written explanations which specific
approved SPAs and provider tax
submissions would be problematic
under the proposed regulation. Another
commenter suggested that if these
provisions are adopted in final, they
should only apply to payments
contained in SPAs adopted after the
effective date of the final rule.
Response: With respect to the change
in the indirect guarantee test, Congress
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did not make any provision to exempt
or grandfather existing approved tax
provider programs. Under the direction
of the Congress, the final regulation is
effective January 1, 2008. With respect
to the other changes contained in this
final rule, we considered and rejected a
possible exception for already approved
provider tax programs. Such an
exception would not be uniform and
would not achieve the objective of
ensuring that provider taxes did not
shift the effectively shift a
disproportionate burden to the federal
government. As part of the routine CMS
review of Medicaid State plan
amendments (SPA) that affect Medicaid
payment to providers, CMS examines
the sources of the non-Federal share of
Medicaid payments, including the
revenues received by States from health
care-related taxes. Such SPAs are
reviewed and decided upon on a caseby-case basis under the consistent
application of Federal statute and
regulations. Because these clarifications
reflect current CMS practices regarding
ongoing reviews, CMS is not aware of
any approved tax programs that are not
in compliance with the final rule.
However, CMS always reserves the right
to ensure any State Medicaid financing
source and associated reimbursement
methodologies comply with Federal
requirements.
Comment: A few commenters were
concerned that the proposed rule would
ultimately decrease funding for the
Medicaid program and threaten access
to important long-term care services.
Another commenter was concerned that
the proposed rule will adversely affect
safety net providers by lowering
Medicaid payments and as a result
patients’ access to essential health care
services would be disrupted.
Response: This final regulation along
with the Federal Medicaid statute
governing health care related taxes was
designed in part to protect health care
providers. Specifically, the reduction to
the allowable collection threshold
serves to minimize the burden imposed
on health care providers by States
through taxation in order to support the
State’s Medicaid program. The effect of
this reduction is that health care
providers can realize a greater net
revenue base when they are no longer
obligated to fund a portion of their
Medicaid payments through a State
imposed tax. Further, those health care
providers that do not participate in the
Medicaid program would experience an
overall reduction in their tax rate. In
addition, States have the option to
replace any tax revenue lost as a result
of the reduction to the allowable
collection threshold with other sources
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of non-Federal share payment,
including additional State and local
general fund dollars. If such general
fund dollars are used health care
providers may experience no reduction
in the level of their Medicaid funding.
States still have many available
resources to ensure that necessary
services are available to the most
vulnerable populations. The purpose of
this regulation was not to reduce access
to any health care services but to
strengthen the fiscal integrity of the
Medicaid program.
Comment: One commenter stated that
addressing perceived problems with
Medicaid financing would be better
addressed through legislation. Another
commenter specified that CMS should
work with the Congress to clarify
existing statutory language.
Response: The final regulation
implements section 403 of the Tax
Relief and Health Care Act of 2006 and
clarifies existing Federal law related to
permissible classes of health care
services and the hold harmless
provisions. The clarifications are to
ensure that the regulatory framework
effectively implements existing
statutory provisions setting permissible
classes and prohibiting hold harmless
arrangements that shift a
disproportionate share of the cost of the
Medicaid program to the federal
government.
Comment: One commenter noted that,
given the most recently issued proposed
regulations restricting IGTs and CPEs,
CMS should not further limit States’
ability to fund the non-federal share of
Medicaid payments.
Response: This final regulation
implements and clarifies statutory
provisions that permit States to fund the
non-federal share of Medicaid payments
with permissible health care related
taxes. The statutory provisions, and
these regulations, are a response to
States that imposed health care related
taxes that had the effect of shifting
financial burdens from the States to the
federal government. This shift resulted
from hold harmless arrangements under
which providers were effectively repaid
some or all of the tax burden, and the
federal government was left with a
disproportionate share of the tax
burden. The changes made in this final
regulation should assist States in
determining the permissibility of tax
programs. While the temporary
reduction in the indirect guarantee
threshold test may reduce the amount of
permissible tax revenues, States have
the option to replace any tax revenue
lost as a result of the reduction to the
allowable collection threshold with
other sources of non-Federal share
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payment, including additional State and
local general fund dollars.
Comment: One commenter expressed
concern that the proposed rule
unnecessarily grants CMS authority to
delve into relationships between States
and local governments and does not
provide sufficient clarity on the criteria
for evaluation of these relationships.
The commenter believes that open
ended interpretations of tax and
reimbursement programs could result in
case by case inconsistencies and
confusion while States attempt to
structure a permissible provider tax
program.
Response: This final regulation
implements section 403 of the Tax
Relief and Health Care Act of 2006 and
clarifies existing Federal law related to
permissible classes of health care
services and the hold harmless
provisions. This rule does not
specifically require review of
relationships between States and local
governments. Under existing statutory
law, however, CMS must ensure that
State claims for federal funding are
supported by non-federal expenditures
and comply with all provisions of the
law. This includes review of health care
related taxes and associated payment or
grant arrangements, whether on a State
or local level. In other words, our
review is limited to tracing the flow of
funds to verify the non-federal share of
Medicaid expenditures. This final rule
makes changes to the regulatory
framework to ensure that this review is
consistent, uniform, and effectively
implements the statutory requirements.
Comment: A couple of commenters
specified that CMS did not have the
statutory authority to go beyond the
explicit direction provided in the Tax
Relief and Health Care Act of 2006 to
only temporarily reduce the maximum
allowable tax rate.
Response: CMS’ responsibility is to
ensure that the Federal statutory
requirements governing health care
related taxes are met. In addition to
codifying in regulation section 403 of
the Tax Relief and Health Care Act of
2006, the new regulation clarifies some
issues that have arisen since the
issuance of the 1993 rule. Therefore, we
believe it is necessary and appropriate
for the Secretary to issue new regulatory
provisions to address these issues so
that States will have clear guidance on
which health care related tax programs
will be entitled to FFP. Furthermore,
this final rule fully complies with the
requirements of the Administrative
Procedure Act.
Comment: One commenter noted that
changes to tax programs will further
exacerbate health care challenges in
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areas impacted by major natural
disasters.
Response: We do not agree that either
the statutorily mandated reduction in
the indirect guarantee test, or the
clarification of permissible classes or
hold harmless tests, will exacerbate
health care challenges in areas impacted
by major natural disaster. The reduction
to the allowable collection limit serves
in part to minimize the burden imposed
on health care providers through health
care related taxation. This result should
help to minimize the cost structure of
providers in areas impacted by major
natural disasters.
Comment: One commenter stated that
the proposed regulations reflect a
fundamental suspicion of States’
Medicaid financing practices. The
commenter encouraged CMS to address
any inappropriate financing
arrangements through enforcement of
current regulatory standards on a case
by case basis rather than regulatory
changes.
Response: Our responsibility is to
ensure that the Federal statutory
requirements governing health care
related taxes are met in a consistent and
uniform manner. Revision to the
regulatory framework ensures consistent
and effective implementation of the
statute.
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B. Implementation
Comment: Several commenters
recommended that CMS delay the
implementation of the new rule until
State legislatures can adequately assess
its implications and take the necessary
action to ensure proper funding of their
Medicaid programs. A few commenters
recommended that the proposed rule be
delayed until CMS works closely with
States to establish some optional
funding solutions for Medicaid services.
Another commenter suggested that, at a
minimum, States should be provided an
adequate transition period to implement
the new rule. Another commenter
recommended that the effective date of
the rule be delayed by at least 6 to 12
months.
Response: As required by section 403
of the Tax Relief and Health Care Act of
2006, the final regulation with respect to
the reduction in the indirect guarantee
threshold percentage is effective January
1, 2008. We have provided for a
transition period until October 1, 2009
for States to come into compliance with
the statutory revision to the permissible
class of health care services identified as
‘‘services of a managed care
organizations.’’ Since the other
provisions of the regulation are
clarifications that reflect CMS’s existing
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understanding of the law, further
transition is not warranted.
C. Permissible Classes of Health Care
Items and Services—ICF/MR
(§ 433.56(a)(4))
Comment: Several commenters,
including a commenter from a State that
the commenter believes was the
intended beneficiary of the provision,
expressed concern that CMS did not
explain why community based
residences included in the ICF/MR class
in 1993 would be excluded from the
class. One commenter stated that CMS
violated the APA by not providing a
reasoned analysis for the proposed
change. Another commenter stated that
this proposed change would adversely
affect the provision of home and
community based services.
Response: We proposed to delete this
exception because we believed it was no
longer applicable to any State. In
response to these comments, we have
determined that there is one State to
which the exception applies. Therefore,
we are no longer deleting the exception.
In the 1993 interim final rule
implementing Medicaid Voluntary
Contribution and Provider Specific Tax
Amendments of 1991, the statutory class
of health care items and services at
section 1903(w)(7)(iv) of the Act for
services of intermediate care facilities
for the mentally retarded (ICF/MR) was
defined to include similar services
furnished by community-based
residences for the mentally retarded,
under a waiver under section 1915(c) of
the Act, in a State in which, as of
December 24, 1992, at least 85 percent
of such facilities were classified as ICF/
MRs prior to the grant of the waiver.
This exception was very narrow and
was only intended to capture those
States that were granted section 1915(c)
waivers that converted most of their
ICF/MRs to community-based
residences prior to the effective date of
the interim final rule.
Over the past several years, a few
States have requested CMS approval to
expand their ICF/MR services tax
programs to include certain home and
community-based services. None of
those States were able to demonstrate
compliance with the parameters of this
permissible class of health care items or
services. Therefore, when CMS
proposed deleting the exception, CMS
did not believe there were any States
that did or could meet these specific
requirements.
In response to public comments, CMS
was able to identify one State that meets
the requirements for this class of health
care services. Rhode Island has a longstanding tax program that meets these
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requirements and as a result, the final
regulation retains the original regulatory
language.
Comment: Several commenters asked
for CMS to expand the inclusion of
home and community-based service
providers in the ICF/MR class for all
States, arguing that it is not equitable to
accord different treatment to States that
converted ICF/MRs into waiver facilities
before 1992 than to other States. These
commenters noted that this policy
would generally benefit home and
community-based service providers.
These commenters argued that, in order
for the class to be truly broad-based, all
types of home and community-based
residences for persons with mental
retardation and developmental
disabilities should be included. One
commenter specifically asserted that
this policy would allow States to
impose health care-related taxes to help
fund home and community-based
services, and would increase access and
availability of such services. Many
commenters cited the benefits of home
and community-based waiver services,
and mentioned Federal policies
supporting the expansion of such
services.
Response: The statutory provision at
section 1903(w)(7)(iv) of the Act refers
only to ICF/MR facilities as the
permissible class. As discussed above,
in 1993, we provided for a limited
exception to address the unique
situation of States with existing waivers
that converted most of their ICF/MRs to
community-based residences prior to
the effective date of the interim final
rule. We do not believe a broader
exception would be consistent with the
statutory language. Moreover, we were
not persuaded by the arguments that
higher taxes on home and communitybased services would actually encourage
and stimulate the provision of such
services. It appears counterintuitive that
taxes that make such services more
costly would stimulate broader use and
availability.
Comment: One commenter requested
that CMS more precisely define
intermediate care facilities for the
mentally retarded (ICF/MR) to include
all facilities licensed as ICFs/MR, no
matter the size of the facility.
Response: The regulation was not
intended to redefine ICF/MRs or any
other provider type. Instead, in part, the
rule proposed to clarify a permissible
class of health care services for purposes
of health care-related tax requirements.
For purposes of health care-related
taxes, if a State were to impose a tax on
ICF/MR services, in order to be
considered broad-based, all licensed
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ICF/MR providers within the State
would need to be subject to the tax.
Comment: One commenter suggested
that CMS exercise its statutory authority
to update the historical listing of
permissible classes by adopting
additional provider classes through
regulation. The commenter noted that
CMS has reminded States of this
opportunity. The commenter specified
that inviting proposals to add classes
helps update the Medicaid program by
recognizing change in providers,
acknowledging State environments are
different, supporting Congressional
intent and recognizing that individual
States and providers should be free to
collaborate and choose the best means
suited to address financing relationships
to meet their State’s needs.
Response: The preamble to the 1993
final rule stated that the Secretary
would consider adding additional
classes if States can demonstrate the
need for additional designation and that
any proposed class meet the following
criteria: (1) The revenue of the class is
not predominantly from Medicaid and
Medicare (not more than 50 percent
from Medicaid and not more than 80
percent from Medicaid, Medicare, and
other Federal programs combined; (2)
the class is clearly identifiable, for
example, by designation through State
licensing programs, recognition for
Federal statutory purposes, or inclusion
as a provider in State plans; and (3) the
class is nationally recognized rather
than unique to a State. At this time, we
do not see a reason to alter this policy
or to add new permissible classes of
health care items or services.
D. Permissible Classes of Health Care
Items and Services—Managed Care
(§ 433.56(a)(8))
Comment: One commenter
recommended that CMS consider a
definition for the term ‘‘preferred
provider organizations’’ so that States
will know what entities must be
included in a tax program on this class
of providers for it to comply with the
broad-based requirement of the statute
and associated regulations.
Response: Inclusion of the term
preferred provider organization (PPO) as
a type of managed care organization that
would be in the permissible class of
services for health care-related taxation
purposes mirrored the statutory
language enacted under section 6051 of
the Deficit Reduction Act which
amended section 1903(w)(7)(A)(viii) of
the Social Security Act. The statutory
language was designed to more broadly
encompass services provide by all
managed care organizations without
regard to their status as Medicaid or
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commercial health plan or the form of
such plans. The statutory language
included examples to clearly establish
that all types of managed care
businesses must be included in order for
a health care-related tax to be truly
broad based. For Medicare accreditation
purposes it is established that MCOs are
licensed as both HMOs or PPOs. The
intent is to fully encompass the types of
managed care products available to
individuals in commercial markets for
coordinated care plans. This is a
generally accepted term and type of
entity in the managed health care
market and we do not feel that a
definition is necessary for Medicaid
regulation purposes.
E. Hold Harmless § 433.68(f)—General
Comment: Some commenters
expressed concern that the new rule
appears to replace a purely objective test
for hold harmless arrangements with
one that is subjective. They argued that
the Secretary had rejected the
introduction of a subjective analysis
when he published the original hold
harmless prohibitions in 1993 and that
the new rule should continue along this
same course.
Response: We believe that the new
regulation continues to apply a largely
objective analysis in determining
whether state tax programs contain hold
harmless arrangements. This regulation
is intended to carry out the purposes
originally outlined in the Medicaid
Voluntary Contribution and Provider
Specific Tax Amendments of 1991 (Pub.
L. 102–234) and the implementing
regulations, by prohibiting FFP for
health care-related taxes where the state
has implemented a hold harmless
provision. One lesson we have learned
in the years since we first endeavored to
implement Congress’s prohibitions on
taxes with hold harmless arrangements
is that it is simply impossible to
anticipate every hold harmless
arrangement that may be implemented
by States. As a result, it would not be
true to Congressional intent to
implement a mathematical model to be
applied in detecting hold harmless
arrangements that violate the statutory
prohibitions. We do not believe the
Medicaid statute contemplates such a
formula, but anticipates that the
Secretary will carefully analyze all
circumstances relevant to the creation
and operation of a state health carerelated tax and attendant tax relief
programs in carrying out his mandate to
prohibit FFP where hold harmless
arrangements exist. The analysis of state
provider taxes remains an
overwhelmingly objective process, but
the unique and individual nature of
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State tax programs means that the
analysis is always on a case-by-case
basis. The individualized analysis
outlined in this rule is not the type of
subjective analysis that the Secretary
expressly rejected in the 1993 final rule.
In that rule, the Secretary rejected a
suggestion that CMS should assess the
egregiousness of a hold harmless
violation in determining whether to take
a disallowance.
Comment: One commenter opined
that Congress did not authorize the
Secretary to expand the tests for
determining when an impermissible
hold harmless arrangement exists,
arguing that the regulations should
mimic the statutory language. Other
commenters suggested that the existing
rules were appropriate and the new
rules could place existing tax programs
at risk.
Response: It is not our intent to
expand the test for determining when an
impermissible hold harmless
arrangement exists beyond the original
purposes authorized by Congress and
underlying the 1993 rules. As noted
above, we are not aware of any state tax
programs that would have been
permissible under the Secretary’s prior
interpretation of the rules, but are no
longer permissible under the new rules.
The new rule endeavors to address
issues that have arisen since the
issuance of the 1993 rule, which
effectively repeated the statutory
language but did little to elucidate that
language. That rule proved largely
successful in stopping impermissible
hold harmless arrangements, with the
overwhelming majority of States ending
such programs. A recent decision issued
by the HHS Departmental Appeals
Board, however, has indicated
confusion concerning the degree of
flexibility in the application of the
Secretary’s longstanding interpretation
of that rule in addressing new issues
that have arisen. (DAB No. 1981, June
29, 2005.) Therefore, we believe it is
necessary and appropriate for the
Secretary to issue new regulations so
that States will have clear guidance on
which health care-related tax programs
will be entitled to FFP.
Comment: Several commenters
requested that they be able to retain the
ability to use rates that are based on
receipt of provider taxes rather than
overall provider costs.
Response: The Social Security Act
clearly allows States to collect
permissible health care-related taxes to
be used as a source of non-federal share
funding for Medicaid payments to
health care providers. Further, States
can consider Medicaid’s portion of a
permissible health care-related tax as an
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allowable cost for purposes of
developing Medicaid reimbursement
rates. However, basing Medicaid
payment rates solely on the receipt of
health care-related taxes is a clear hold
harmless violation.
Comment: Several commenters noted
that broadening the definition of hold
harmless will penalize States that have
other non-Medicaid funding initiatives
for health care organizations. Under the
proposed rule, payments made to health
care providers as part of regular
business could become entangled in the
enforcement of the new rule.
Response: The hold harmless
clarifications in this regulation are
necessary to ensure compliance with the
statutory limitations on hold harmless
arrangements. In reviewing a health care
related tax program, CMS needs to
review the tax and associated financial
arrangements as a whole, including any
non-Medicaid payments. Taxes or fees
that are imposed in the ordinary course
of business and are not health care
related would not trigger such a review,
nor would non-Medicaid governmental
payments that occur in the regular
course of business, for example through
procurements.
Comment: One commenter stated that
the changes to the hold harmless
provisions could make their current
provider tax program non-approvable
because the fees for the most part are
used to pay back the cost to the fee
payer.
Response: We are not aware of any
State tax programs that would have been
permissible under the Secretary’s prior
interpretation of the rules, but are no
longer permissible under the new rules.
If, however a State increases Medicaid
reimbursement rates based solely on the
receipt of a health care related tax,
rather than on the costs incurred for
providing Medicaid services, such an
arrangement would be considered a
hold harmless violation. We believe this
result is consistent with the
requirements of the statute and existing
regulation and is unchanged by this
final rule.
Comment: One commenter requested
that CMS include in the rule itself the
language in the preamble to the
proposed rule indicating that States
using cost-based payment systems may
include provider tax costs as one of
many provider costs that are considered
in setting individualized provider rates.
The commenter argued that including
this language in the rule would prevent
any changes in CMS interpretation.
Response: We are not including this
language in the rule itself because the
rule is limited to the basic framework
and cannot address every specific
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circumstance and nuance. And this is
an example of a very complex issue. The
clarification to the Medicaid payment
hold harmless test states that a Medicaid
payment will be considered to vary
based on the tax amount when the
payment is conditional on the tax
payment. This provision does not
prevent States that use cost-based
reimbursement methodologies from
including Medicaid’s share of health
care related tax costs as one of many
health care provider costs that are
considered in setting individualized
Medicaid reimbursement rates.
However, where a Medicaid payment is
conditional on receipt of health care
related taxes, we would view the
Medicaid payment to be, in part or in
full, the repayment of the health care
related tax to repay the taxes in a hold
harmless arrangement rather than as a
protected reimbursement for cost of
Medicaid services.
Comment: A few commenters
addressed the DAB decision that CMS
acknowledged it was attempting to
respond to with this regulation,
suggesting that a more appropriate
response to that decision would have
been to simply clarify that the hold
harmless standard applies to situations
where the benefits accrue to private pay
patients rather than to the taxpaying
facilities directly.
Response: We do not believe that the
commenter’s suggestion would address
all of the confusion created by the
Board’s decision. We agree that
clarifying the rules to explain that the
hold harmless standard applies to
situations where the state payments are
made to third parties would help to
clarify the questions raised by the
Board’s decision and we have attempted
to do that in this rule. However, we do
not believe such a clarification alone
would be sufficient.
F. Hold Harmless—§ 433.68(f)(1)—
Positive Correlation
Comment: Several commenters stated
that by including any positive
correlation over any amount of time, the
proposed rule destroys any standard by
which a State may assess whether or not
a tax based Medicaid funding
arrangement will be determined by CMS
to be a hold harmless violation. Other
commenters disagreed with CMS’
statement that the current regulations
related to positive correlation led to
confusion. The commenters believe that
the subjective analysis proposed will
only lead to additional confusion.
Response: Our experience is that
States and providers are typically very
aware of the overall character of a tax
based Medicaid funding arrangement.
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Moreover, it is clear that to achieve the
statutory purpose of ending hold
harmless arrangements that result in
shifting a disproportionate burden to the
federal government, the test must be
applied flexibly. Otherwise, financing
arrangements will be structured to meet
the letter but not the underlying
purpose of the statutory limitations.
This regulation is intended to further
clarify the existing hold harmless
provisions and not to lead to additional
confusion.
Comment: Several commenters
asserted that the test for a ‘‘positive
correlation’’ under § 433.68(f)(1) is too
subjective, and should instead remain a
statistical test. They expressed concern
that under the proposed test, CMS could
find a positive correlation in almost any
situation.
Response: The 1993 rule does confine
the statutory term ‘‘positive correlation’’
to a test requiring mathematical
certainty. The insertion of the statistical
concept suggests that a positive
correlation contemplates a positive
relationship between two variables.
Such a correlation would exist, for
example, where a state passes a tax on
nursing home beds that a facility is
permitted to pass on to its residents in
the form of rate increases. If at or about
the same time, the state passes a grant
program that pays private pay residents
of the nursing home an amount similar
to the bed tax, the grant money would
be available for use to compensate the
nursing facility for the tax and a positive
correlation would be found to exist
between the tax and the grant. The
correlation would not be destroyed by
altering one variable over time and
would not necessarily need to be
measured in a statistical sense. This has
always been CMS’s position with
respect to the 1993 regulations, but
unfortunately the description of positive
correlation as a statistical concept in the
1993 rule created some confusion. In
retrospect, we now believe that
characterizing positive correlation as
having ‘‘the same meaning as the
statistical term’’ in the 1993 rule was
imprecise. The use of this language
caused some readers to view the test as
requiring a mathematical certainty with
specifically measurable statistical
significance over the life of the grant
and tax programs, or measured with
respect to specific amounts collected
and paid out under the specific
programs. Where we did impose a
mathematical test in evaluating a tax
program it was clearly spelled out in the
1993 rule, as it was with respect to the
‘‘indirect guarantee test’’ described at
page 43182 of the 1993 rule. The rule
was, however, never meant to bring
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mathematical certainty into the positive
correlation examination. We do not
consider the current rule to signal a
significant change in our analysis;
rather, it clarifies our interpretation of
the statutory term ‘‘positive
correlation.’’ We will continue to
evaluate health care related tax
programs to determine whether there is
a positive correlation with a state
payment program.
G. Hold Harmless § 433.68(f)(2)—
Medicaid Payment Test
Comment: Many commenters argued
that, by prohibiting States from
conditioning Medicaid payment on
receipt of the tax, the proposed rule
would prevent the State from using the
tax to reimburse providers. These
commenters stated that Congress clearly
intended provider taxes to be used for
purposes of Medicaid reimbursement
purposes. The commenters noted that
section 1903(w)(4) of the Social Security
Act specifies that the hold harmless
provisions ‘‘shall not prevent use of the
tax to reimburse health care providers in
a class for expenditures under this title
nor preclude States from relying on
such reimbursement to justify or explain
the tax in the legislative process.’’
Response: We agree States can use
permissible health care related tax
revenues to increase Medicaid
reimbursement rates. However, section
1903(w)(4) of the Act specifies three
conditions under which a State or local
government is determined to hold
taxpayers harmless for their tax costs. If
any of these conditions are met the tax
program would be determined to have a
hold harmless provision and the tax
would be impermissible. The final rule
does not change the conditions of the
hold harmless provisions under Federal
law. Consistent with these provisions,
where a Medicaid payment is
conditional on receipt of health care
related taxes, we would view the
Medicaid payment to be, in part or in
full, the repayment of the health care
related tax to repay the taxes in a hold
harmless arrangement rather than as a
protected reimbursement for cost of
Medicaid services.
Comment: Several commenters stated
that by expressly 37 conditioning
Medicaid payments on the tax amount,
States are explicitly explaining how the
tax is being used for Medicaid
reimbursement as part of the legislative
process. The commenters believe that it
is reasonable to condition payment on
the approval and receipt of the tax and
to not do so would be fiscally
irresponsible. The State would be
obligated to make payments without
having a funding source to finance them
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and without conditioning States would
not be able to adopt tax programs. Other
commenters noted that health care
providers are reluctant to support taxes
unless there is an explicit assurance that
the revenues from the taxes will be
dedicated to increasing Medicaid
payments and that State legislatures are
reluctant to increase Medicaid liabilities
with the ability to make them
contingent on the funding source.
Response: There is a distinction
between using health care related tax
revenues to support Medicaid payments
and specifically guaranteeing repayment
of some or all of the tax amount or
otherwise ensuring a direct correlation
between payments to taxpayers and the
amount of their taxes. States have and
continue to maintain the ability to
justify the imposition of a health care
related tax by indicating through the
State legislative process that proceeds
from the health care related tax will be
used to increase Medicaid
reimbursement and that such funding
must be approved by CMS. However,
the statute is very clear that health care
related taxes cannot contain hold
harmless arrangements and any failure
to comply with any of the three hold
harmless ‘‘tests’’ would render a health
care related tax impermissible. There is
a distinct difference between explaining
a health care related tax and its
purposes through the legislative process
and extending conditional guarantees to
provider taxpayers. States must ensure
that no payment is conditioned upon
receipt of a health care related tax
payment.
Comment: A few commenters
requested that CMS clarify preamble
language related to State use of tax
proceeds and federal match to increase
Medicaid rates in the form of Medicaid
supplemental payments. The
commenters believe that this should not
prohibit States from using tax proceeds
and federal match to increase Medicaid
rates in the form of Medicaid per diem
add-ons or rate supplements.
Response: Section 1903(w)(4)
expressly provides that States may use
permissible tax revenues to fund
provider payments for covered services
furnished to eligible individuals. This
provision does not authorize States to
use tax revenues for a hold harmless
arrangement that effectively repays
provider taxpayers. In other words, the
payment methodology related to such
increases to Medicaid reimbursement
rates must be designed in a manner that
recognizes the volume or nature of the
covered services provided to Medicaid
individuals, and cannot be related
simply to the amount of tax proceeds.
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Comment: Several commenters
disagreed with any suggestion that a
Medicaid payment increase funded by
tax revenue is necessarily
uneconomical, because the funding
source of the payment is irrelevant to
rate development. The commenters
stated that Congress rejected the
position that, because provider taxes
reduced actual expenditures made by
the State, the amount of the provider tax
should be deducted from total State
spending so that only ‘‘real’’ or ‘‘net’’
State expenditures would be matched.
One commenter stated that the proposed
rule would interfere with permissible
taxation by presupposing that rates
explicitly supported by tax revenue are
too high and therefore not economical.
Response: These commenters appear
to have misread the preamble of the
proposed rule. We agree that States may
collect permissible health care related
taxes, and may use those tax revenues
as a source of non-federal share funding
for Medicaid payments to health care
providers. Our specific concern is when
the Medicaid payments are conditional
on payment of the taxes. In that
instance, the Medicaid payment is not
linked to any rate-setting determination
based on the cost or volume of services.
Instead, the Medicaid payment is in the
nature of a hold harmless arrangement
to return all or part of the tax liability
to the taxpayer. We are clarifying the
Medicaid payment test to provide that a
Medicaid payment will be considered to
vary based on the tax amount when the
payment is conditional on the tax
payment. This clarification would only
affect States that seek to use rates that
are based on the receipt of provider
taxes rather than on overall provider
cost. In other words, the final regulation
rule would limit the ability of States to
expressly condition payment rates on
tax receipts rather than on a process that
determines rates that are consistent with
efficiency, economy and quality of care
in compliance with section
1902(a)(30)(A) of the Act.
Comment: A few commenters
disagreed with the definition of
enhanced Medicaid payment as a
payment for which any branch of
government has indicated that the
payment can be reduced or eliminated
if the provider tax is discontinued. The
commenters were concerned that CMS
is asserting that this would represent a
structural repayment of the tax and
violates hold harmless provisions. The
commenters disagreed with this
position.
Response: The phrase ‘‘enhanced
Medicaid payments’’ relates to the
second prong of the indirect hold
harmless test (‘‘75/75 test’’). This test
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stipulates that if a health care related tax
exceeds the regulatory percentage
threshold, CMS would consider a hold
harmless to exist if 75 percent or more
of the taxpayers in the class receive 75
percent or more of their total tax back
in enhanced Medicaid payments or
other State payments. We clarified that
if a State ever had to provide a
demonstration for purposes of the ‘‘75/
75 test’’ we may consider any amount
that any branch of the State, including
legislative and executive branch, has
indicated could be subject to reduction
in the absence of provider tax revenues
as an enhanced Medicaid payment. This
comparison is between Medicaid
payments and tax costs and we were not
asserting in this instance that this would
be a structural repayment. We were
clarifying that, for purposes of the ‘‘75/
75 test’’, payments which would no
longer be provided if the tax funding
source were eliminated, would be
considered enhanced Medicaid
payments, even if the State did not
characterize them as such.
Comment: Several commenters stated
that eliminating conditional Medicaid
payments would undermine provider
support for health care related taxes.
The commenters asserted that
assurances that provider tax revenue
will be used for a specific category of
Medicaid expenditures is not equivalent
to holding taxpayers harmless for the
cost of the tax.
Response: States have and continue to
maintain the ability to justify the
imposition of a health care related tax
by indicating through the State
legislative process that proceeds from
the health care related tax will be used
to increase Medicaid reimbursement
and that such funding must be approved
by CMS. However, the statute is very
clear that health care related taxes
cannot contain hold harmless
arrangements and any failure to comply
with any of the three hold harmless
‘‘tests’’ would render a health care
related tax impermissible. There is a
distinct difference between explaining a
health care related tax and its purposes
through the legislative process and
extending conditional guarantees to
repay provider taxpayers. We recognize
that high volume Medicaid providers
could benefit from a health care related
tax that funds a Medicaid rate increase,
however, States must ensure that no
payment is conditioned upon receipt of
a health care related tax payment.
Comment: Several commenters stated
that the definitions of ‘‘tax amount’’ and
‘‘payment amount’’ in the proposed rule
are too broad. One commenter argued
that the shift in terminology in
§ 433.68(f)(2) from ‘‘amount of the total
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tax payment’’ to ‘‘tax amount’’
represents a significant departure from
the statutory and prior regulatory
language.
Response: As explained in the
preamble to the proposed rule, the
change in terminology is not a
substantive change from what was
intended in the original 1993 rule. We
are using the terms ‘‘tax amount’’ and
‘‘payment amount’’ throughout the new
rule in an effort to be consistent. We
have found that the use of differing
terms in the various sections of the 1993
rule has led to some confusion.
Accordingly, we consolidated the terms
‘‘total tax cost,’’ ‘‘total tax payment,’’
‘‘amount of the payment,’’ ‘‘amount of
such tax’’ into the terms ‘‘tax amount’’
and ‘‘payment amount’’ to be used in
each section of the hold harmless rule.
We explained our reasoning at more
length in the proposed rule and believe
that reasoning remains valid (72 FR
13729, 13730). This does not represent
a significant departure from prior
statutory or regulatory language. It
clarifies that we are not looking at the
total amount of the tax payment
received by the state, but we will be
looking at the tax program as a whole,
including whether taxpayers are being
held harmless for increments of the tax.
With respect to subsection (f)(2) this
means that we will look at whether any
portion of the Medicaid payments made
by the state to providers, varies based
upon the health care related tax levied
upon the providers. The ‘‘tax amount’’
is the amount of the tax levied upon the
provider (either directly, or indirectly).
Comment: Several commenters stated
that the phrase ‘‘including where
Medicaid payment is conditional on
receipt of the tax amount’’ is
problematic. Some commenters noted
that the proposed language would
appear to have the effect of prohibiting
States from enforcing tax obligations on
delinquent providers through intercept
of Medicaid payments. Another
commenter expressed concern that this
would prohibit States from requiring
overdue taxes as a condition for
payments due to a taxpayer. Other
commenters stated that it may result in
situations where health provider taxes
that are statutorily established in a
manner that complies with the broad
based and uniformity requirements of
the statue cannot be enforced.
Response: This regulation does not
prevent State enforcement of the
collection of health care related taxes. It
is the State’s obligation to ensure that
any health care related tax program is
collected in a manner consistent with
legislation enacting the health care
related tax program and any approved
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waiver of the broad-based and/or
uniformity requirements. To suggest
that the phrase ‘‘including where
Medicaid payment is conditional on
receipt of the tax amount’’ would
prohibit States from enforcing tax
obligations on delinquent health care
providers is erroneous. If States do not
enforce the proper collection of the
health care related tax, the State is at
risk of violating statutory broad-based
and/or uniformity requirements which
could render the entire tax program and
its collections impermissible.
Comment: A few commenters
specified that the word ‘‘total’’ is critical
within the Medicaid payment test
because a Medicaid payment that varies
based on the Medicaid portion of the tax
is permissible. The commenters
stipulated that only a Medicaid payment
that varies based on the total provider
tax amounts constitutes a hold
harmless. Other commenters stated that
the portion of a provider’s health carerelated tax payment attributable to
Medicaid services is an allowable cost,
and Medicaid reimbursement may be
furnished for it. The commenters
recommended that the word ‘‘total’’ be
restored.
Response: The regulation specifies
that a hold harmless arrangement exists
if all or any portion of the Medicaid
payment varies based only on the
amount of the tax payment. The removal
of the word total does not represent a
significant departure from prior
statutory or regulatory language. As
explained in the preamble to the
proposed rule, the change in
terminology is not a substantive change
from what was intended in the original
1993 rule. We are using the terms ‘‘tax
amount’’ and ‘‘payment amount’’
throughout the new rule in an effort to
be consistent. We have found that the
use of differing terms in the various
sections of the 1993 rule has led to some
confusion. Accordingly, we
consolidated the terms ‘‘total tax cost,’’
‘‘total tax payment,’’ ‘‘amount of the
payment,’’ ‘‘amount of such tax’’ into
the terms ‘‘tax amount’’ and ‘‘payment
amount’’ to be used in each section of
the hold harmless rule. We explained
our reasoning at more length in the
proposed rule and believe that
reasoning remains valid (72 FR 13729,
13730). This was intended to clarify that
we are not looking simply at the total
amount of the tax payment received by
the state, but will be looking at the tax
program as a whole, including whether
tax payers are being held harmless for
increments of the tax.
Comment: One commenter suggested
that supplemental payments should be
permitted to be paid to those providers
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who are providing Medicaid services
based on receipt of provider taxes.
Response: Generally, States can
collect permissible taxes and use such
tax receipts as the non-federal share to
make supplemental payments for the
provision of Medicaid services.
However, a hold harmless arrangement
exists when States seek to use
reimbursement rates that are based
solely on the receipt of health care
related taxes and effectively repay the
taxpayer (such as supplemental
Medicaid payments conditioned on
receipt of a health care related tax
payment), rather than on overall health
care provider costs. The clarifications in
this rule are necessary to ensure that
Medicaid payments are not made
simply to repay providers for the cost of
the health care related tax beyond
Medicaid’s allowable share, but also to
ensure the integrity of the development
of sound Medicaid payment rates in
compliance with the requirements of
section 1902(a)(30) of the Act.
H. Hold Harmless 433.68(f)(3)—
Guarantee Test
Comment: Numerous commenters
asked for clarification of the proposed
interpretation of the phrase ‘‘direct and
indirect’’ in the guarantee test, and
should confirm that use of provider tax
receipts to increase Medicaid rates for or
to enhance the Medicaid rate
methodology applicable to the taxed
provider class is not prohibited.
Response: The clarification of the
guarantee test is meant to specify that a
State can provide a direct or indirect
guarantee through a direct or indirect
payment. A direct guarantee will be
found when a State payment is made
available to a taxpayer or a party related
to the taxpayer with the reasonable
expectation that the payment would
result in the taxpayer being held
harmless for any part of the tax (through
direct or indirect payments). A direct
guarantee does not need to be an
explicit promise or assurance of
payment. Instead, the element necessary
to constitute a direct guarantee is the
provision for payment by State statute,
regulation, or policy. An indirect
guarantee is distinct from a direct
guarantee in that such guarantee is
initially measured by a percentage
threshold that limits tax collections to
5.5 percent of net patient revenue
attributable to the assessed service.
States collecting a tax in excess of 5.5
percent of assessed patient service
revenue must perform the second prong
of the hold harmless test to demonstrate
permissibility.
Comment: A few commenters
expressed concern that CMS has taken
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too broad a view in stating that monies
‘‘controlled or influenced by the state’’
will be considered in applying the
guarantee test in § 433.68(f)(1).
Response: The language of concern to
these commenters appears in the
preamble to the proposed rule. In the
preamble we provided an illustration of
how a health care related tax and grant
program could be found to violate both
the positive correlation test and the
guarantee test. We believe that
discussion accurately reflects existing
statutory provisions governing health
care related taxes. The specific language
of concern to the commenters appears in
a discussion of problematic indirect
payments that States may make to
taxpayers. The preamble notes that
‘‘money is fungible and, as long as the
payment is from a source controlled or
influenced by the State, it will be
considered in determining whether it
has been made available for the tax.’’ In
evaluating whether the state has made
monies available to hold providers
harmless for any portion of a health care
related tax, it makes little difference
which part of the state treasury makes
the funds available to the taxpayer, or if
the state monies are funneled through
some other third party, because all State
monies are fungible. For example, it
would be impermissible for the state to
impose a nursing home bed tax to be
paid to the state Medicaid agency and
have the Governor’s office control a
separate grant payment designed to
reimburse private pay residents for the
amount of the tax passed on to them by
the nursing homes. Even though the
state may argue these are separate
funding sources, CMS would consider
all of the money state money and would
consider the positive correlation
between the two programs a violation of
the hold harmless provisions. Similarly,
States will not be permitted to recycle
monies through third parties, by making
payments to such third parties and
requiring that the money be used to
reimburse taxpayers for any portion of
their health care related tax. This is the
point the preamble was trying to
address when it embraced payments
‘‘influenced by the state.’’ However, we
agree with the commenters that
‘‘influenced by the state’’ is too broad a
term. We believe ‘‘controlled or directed
by the state’’ is a more accurate
description of the types of payments
that will be considered in evaluating
whether an impermissible hold
harmless arrangement exists.
Comment: Several commenters stated
that the term ‘‘reasonable expectation’’
under the guarantee test in § 433.68(f)(3)
is too broad and/or subjective.
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Response: In the preamble to the
proposed rule we stated that ‘‘A direct
guarantee will be found when a state
payment is made available to a taxpayer
or a party related to a taxpayer (for
example as a nursing home resident is
related to a nursing home), in the
reasonable expectation that the payment
would result in the taxpayer being held
harmless for any part of the tax’’ (72 FR
13730). We chose to use the term
reasonable expectation because we
recognized that state laws were rarely
overt in requiring that state payments be
used to hold taxpayers harmless. For
example, state laws providing grants to
nursing home residents who incur
increased rates as a result of bed taxes
on nursing homes, rarely required the
residents receiving the grants to actually
use the money to pay the increased
nursing home fees. Accordingly,
arguments have been made that such
grants do not actually guarantee to hold
the nursing homes harmless for the tax.
We disagree. Because the residents must
pay the increased rates passed on to
them as a result of the tax and because
the state has made money available to
those residents to pay those increased
rates, it is reasonable to expect that the
payments going to the nursing home
residents will promptly be sent to the
nursing home as resident fee payments.
This would result in a hold harmless for
the nursing home. The only way to
avoid this conclusion would be for the
resident to leave the facility and/or not
pay the rate increase. Therefore, we do
not believe the use of the term
reasonable expectation is overly broad
or vague.
Comment: Several commenters stated
that collection of unpaid provider taxes
by withholding amounts of Medicaid
payments due under the new rule
would constitute a hold harmless
because it would cause the Medicaid
payment to be contingent on the
payment of the tax.
Response: Withholding Medicaid
payments to health care providers who
have not paid their taxes would not
constitute a hold harmless arrangement.
This is a matter of State enforcement.
States are, by themselves, obligated to
ensure that any health care related tax
is collected in a manner consistent with
Federal law, authorizing State
legislation and if applicable any CMS
approved waiver of the broad-based
and/or uniformity requirements.
Typically, such enforcement provisions
are authorized through the health care
related tax’s enacting legislation and are
identified as enforcement collection
provisions and/or penalties.
Comment: A few commenters
disagreed with CMS’ assertion in the
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proposed rule that the direct and
indirect tests differ on the kind of
payment involved. The commenters
stated that there is no basis for this
distinction.
Response: A direct guarantee will be
found when a State payment is made
available to a taxpayer or a party related
to the taxpayer in the reasonable
expectation that the payment would
result in the taxpayer being held
harmless for any part of the tax. An
indirect guarantee is distinct from a
direct guarantee in that such guarantee
is initially measured by a percentage
threshold that limits tax collection to
5.5 percent of patient revenue
attributable to the assessed service.
States collecting a tax in excess of 5.5
percent of assessed patient service
revenue must perform the second prong
of the hold harmless test to demonstrate
permissibility.
Comment: A few commenters
indicated that they do not object to
CMS’ proposal to the direct guarantee
test to clarify that payment to a taxpayer
may be indirect. Nor do they disagree
with CMS that, under the amended
language, a grant or benefit to private
pay patients or residents could be
considered an indirect payment to the
taxpayer for purposes of the ‘‘direct
guarantee.’’
Response: We appreciate the support
to ensure the fiscal integrity of the
Medicaid program. Clarifying our
current regulations helps us achieve this
goal.
I. Hold Harmless 433.68(f)(3)(i)—
Indirect Guarantee
Comment: One commenter stated that,
in implementing the indirect percentage
threshold changes as mandated by
Congress, CMS went beyond the
legislative directive by further amending
the regulatory text to specify that the
percentage threshold applied to net
operating revenues. The commenter
argued CMS’ position that the safe
harbor percentages are restricted to net
revenue is not supported in the
legislative history. The commenter
believes that States should be permitted
to interpret the phrase ‘‘revenue
received by providers’’ as either gross or
net revenue.
Response: The phrase ‘‘revenues
received by the taxpayer,’’ has been
interpreted by CMS to be, the net
patient service revenue, received by the
health care provider. This would
include all revenues received from all
payers for providing the particular
service that is assessed by the State and
would not include revenues unrelated
to the service being assessed. In
addition, the safe harbor percentage
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originally created by the 1992 interim
rule was never addressed in the
statutory language and therefore would
not be addressed in any legislative
history. However, the legislative history
clearly demonstrates that Congress
requires CMS to evaluate the
permissibility of a health care related
tax on a per service basis, as the 1991
law separately identified permissible
classes of health care items or services.
Finally, we believe that the phrase ‘‘net
operating revenue’’ used in the
regulatory text may have caused
confusion. We have altered the final
regulation to refer to net patient service
revenue.
Comment: One commenter specified
that under the proposed broad
interpretation of the Medicaid payment
hold harmless provision, CMS can find
a violation in any situation where
provider tax revenues are used to make
Medicaid payments to taxed providers.
The commenter argued that the impact
of this results in the omission of the
‘‘indirect guarantee test’’, whose
importance was affirmed by Congress in
the Tax Relief and Health Care Act of
2006.
Response: As we have mentioned
earlier, this regulation carries out the
purposes originally outlined in the
Medicaid Voluntary Contribution and
Provider Specific Tax Amendments of
1991 (Pub. L. 102–234) and the
implementing regulations, by
prohibiting FFP for health care related
taxes where the State has implemented
a hold harmless provision. It has not
been our intent to expand the test for
determining when an impermissible
hold harmless arrangement exists
beyond the original purposes
underlying the 1993 rules. We are not
aware of any State health care related
tax programs that would have been
permissible under the Secretary’s prior
interpretation of the rules but are no
longer permissible under this
regulation. Therefore, we do not agree
that we have nullified the indirect
guarantee test that the commenter
argues was reaffirmed by Congress.
IV. Provisions of the Final Regulations
As a result of our review of the
comments we received during the
public comment period, as discussed in
section III of this preamble, we are
making the following revisions to the
proposed regulation published on
January 18, 2007.
Section 433.56 Classes of Health Care
Services and Providers Defined
We have modified the regulation at
§ 433.56(a)(4) to return to the original
regulatory language. The regulation has
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been revised to re-incorporate that
similar services furnished by
community-based residences for the
mentally retarded, under a waiver under
section 1915(c) of the Act, in a State in
which, as of December 24, 1992, at least
85 percent of such facilities were
classified as ICF/MRs prior to the grant
of the waiver can be included in the
permissible class of health care items or
services. CMS has modified the
regulation to recognize that one State
qualifies under this narrow exception.
Section 433.68 Permissible Health
Care-Related Taxes
We have modified the phrase ‘‘net
operating revenues’’ in § 433.68(f)(3)(i)
to more accurately reflect that the base
to which tax collections are applied for
purposes of the indirect hold harmless
threshold (i.e., net patient service
revenue). Further, in response to
comments we have clarified that
revenues received by the taxpayer refers
to the net patient revenue attributable to
the assessed permissible class of health
care items or services.
To increase clarity and ensure
implementation of the governing
statutory provision, we are also
removing § 433.68(f)(3)(ii) as a technical
conforming action. This section is
outdated and no longer has any
applicability.
V. Collection of Information
Requirements
This document does not impose
information collection and
recordkeeping requirements.
Consequently, it need not be reviewed
by the Office of Management and
Budget under the authority of the
Paperwork Reduction Act of 1995 (44
U.S.C. 35.)
VI. Regulatory Impact Analysis
A. Overall Impact
We have examined the impact of this
regulation 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), Executive
Order 13132 on Federalism, and the
Congressional Review Act (5 U.S.C.
804(2)).
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
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approaches that maximize net benefits
(including potential economic,
environmental, public health and safety
effects, distributive impacts, and
equity). A regulatory impact analysis
(RIA) must be prepared for major rules
with economically significant effects
($100 million or more in any 1 year).
This regulation will surpass the
economic threshold and is considered a
major rule. This rule is estimated to
reduce Federal Medicaid outlays by $85
million in FY 2008 and by $115 million
per year in FY 2009 through FY 2011.
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. We are not preparing an analysis
for the RFA because the regulation will
not have a direct impact on small
entities. In this case the regulation
directly affects payments the States
receive from the Federal government
and the impact on health care facilities
is categorized as secondary impact.
While the impact on health care
facilities is secondary, we proceed to
discuss the potential impact on small
entities. First, the reduced health care
related tax collection threshold under
this regulation will help alleviate tax
burdens on small health care facilities,
to the extent they were subject to a
health care-related tax. If States choose
to maintain reimbursement rates, small
health care facilities may receive higher
net Medicaid reimbursement in light of
the reduced tax burden. However, States
may be unwilling to maintain
reimbursement rates without the full
revenue from the health care-related tax
to contribute to the non-Federal share.
If States choose to reduce Medicaid
reimbursement rates to small health care
facilities, this could result in lower net
Medicaid reimbursement even after
accounting for a reduction in the tax
burden.
Since we are uncertain how States
will alter their Medicaid
reimbursements in response to the
reduced health care related tax
collection threshold, we cannot provide
an exact and quantifiable impact on
such small entities. We did not receive
any quantifiable information during the
public comment process to determine
any further detailed impact.
Commenters did not raise issue with the
collection threshold reduction. Nor did
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the commenters indicate how States
will act in response to such reduction in
available health care related tax
revenue. It is important to note that not
all health care related tax programs will
be impacted. Only those health care
related taxes that are currently being
imposed at a rate in excess of 5.5
percent of net patient service revenue
will be directly impacted.
In addition, section 1102(b) of the Act
requires us to prepare a regulatory
impact analysis if a regulation may have
a direct impact on the operations of a
substantial number of small rural
hospitals. This analysis must conform to
the provisions of section 604 of the
RFA. For purposes of section 1102(b) of
the Act, we define a small rural hospital
as a hospital that is located outside of
a Metropolitan Statistical Area and has
fewer than 100 beds. We are not
preparing an analysis for section 1102(b)
of the Act because we have determined
that this regulation will not have a
direct impact on the operations of a
substantial number of small rural
hospitals.
Section 202 of the Unfunded
Mandates Reform Act of 1995 also
requires that agencies assess anticipated
costs and benefits before issuing any
regulation 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.
This regulation will not result in
expenditure in any 1 year by State,
local, or tribal governments, in the
aggregate, or by the private sector, of
$120 million.
Executive Order 13132 establishes
certain requirements that an agency
must meet when it promulgates a final
regulation that imposes substantial
direct requirement costs on State and
local governments, preempts State law,
or otherwise has Federalism
implications. While this regulation
would reduce the collection threshold
for permissible health care related taxes
from 6 percent of the net patient service
revenue attributable to the assessed
permissible class of health care items or
services to 5.5 percent of the net patient
service revenue, this change is required
by section 403 of the Tax Relief and
Health Care Act of 2006. This section of
the statute was self-implementing on
December 20, 2006; however, this
rulemaking is necessary to include the
reduction in the regulatory text,
therefore ensuring consistency with
applicable law and thus minimizing any
confusion. Furthermore, we do not
believe the discretionary requirements
put in place by this rulemaking will
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impose substantial direct requirements
or costs on State and local governments.
B. Anticipated Effects
Provider Tax Reform
1. Effects on State Medicaid Programs
Estimates of the impact of lowering
the maximum collection threshold for
permissible health care related taxes,
fees, and assessments were derived from
Medicaid financial management reports
on State receipts from these programs
(form CMS–64.11). Since we do not
believe that all States report completely
their tax receipts from health carerelated taxes on the form CMS–64.11,
we bolstered our estimates by also
analyzing information reported by some
States as part of their request for waiver
of the broad-based and/or uniformity
requirements. These requests include
estimated total tax collections and total
net revenues received by taxpayers
applicable to a permissible class of
health care services. From this available
information, we identified 15 States
whose receipts as of the date of the
reports are believed to equal the
maximum threshold of 6 percent of net
patient service revenue. In accordance
with the new statutory language to
reduce the maximum threshold from 6
to 5.5 percent, FFP corresponding to
these receipts would be reduced by 8.33
percent [(1¥5.5/6.0) × 100]. As
described below, there are a number of
avenues available for States to address
these reductions. Accordingly, in
estimating the potential Federal savings,
we applied a behavioral offset of 50
percent to the savings calculated from
reported data as described above. In
accordance with the statute, savings
were estimated only for portions of
fiscal years beginning January 1, 2008
and ending September 30, 2011.
States have a number of options open
to them for addressing the reduction in
FFP. In order to maintain existing
reimbursement rates funded by a health
care related tax in excess of the 5.5
percent threshold, they can restructure
State spending and shift funds between
programs. This could result in loss of
State funding for other programs. States
may also be able to raise funds through
increases in other forms of generally
applicable tax revenue increases. This
could raise tax costs for other taxpaying
entities within States. Finally, States, as
a last resort, can reduce reimbursement
to the taxpaying health care providers.
We are uncertain which options
States may employ to address this
change. We did not receive any further
quantifiable information through the
public comment process that would
indicate which option States are likely
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to choose in response to such reduction
in available health care related tax
revenue.
2. Effects on Other Providers
The reduced tax limit in this rule will
help alleviate health care related tax
burdens on health care providers for
obligations to the Medicaid program
that are otherwise the responsibility of
the States. However, if States choose to
reduce reimbursement rates to health
care providers, this could result in
lower net Medicaid reimbursement for
the health care provider even after
accounting for reduction in the health
care related tax burden. On the other
hand, if States choose to maintain
reimbursement rates by finding other
non-Federal share sources to support
the Medicaid reimbursement rates,
health care providers may receive
higher net Medicaid reimbursement in
light of the reduced health care related
tax burden.
9697
The new statutory language reducing
the maximum threshold from 6 to 5.5
percent for the period of January 1, 2008
through September 30, 2011 is
estimated to reduce Federal Medicaid
outlays by $85 million in FY 2008 and
by $115 million per year in FY 2009
through FY 2011. These savings will not
be realized in 2012 because the
threshold reverts back to 6 percent after
September 30, 2011.
TABLE A.—ESTIMATED REDUCTION IN FEDERAL MEDICAID OUTLAYS RESULTING FROM THE PROVIDER TAX REFORM
PROPOSAL BEING IMPLEMENTED BY CMS–2275–F
Reduction in Federal Medicaid Outlays for fiscal years 2008–2012
(In $ million)
2008
Provider Tax Reform ................................
3% discount rate ......................................
7% discount rate ......................................
85
83
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C. Alternatives Considered
In developing this regulation the
following alternatives were considered.
We considered reducing the regulatory
collection threshold to 3 percent
because we have noticed a recent trend
in States’ efforts to maximize nonFederal share funding opportunities
under current Medicaid law through
taxation of health care providers.
The result has been that the Federal
government is providing matching
funds on Medicaid rate increases that
are funded without additional State
dollars but instead, with revenues
collected from taxes on health care
providers. This shift in fiscal
responsibilities is typically
accompanied by creative payment
mechanisms that effectively place a
disproportionate burden on the
Medicaid program relative to other
payers. In this way, some States are
avoiding their payment responsibilities
to the Medicaid program by shifting
their share of the increased Medicaid
payment rate obligations to the same
health care providers serving Medicaid
beneficiaries.
The current trend in States’ approach
to taxing health care providers appears
to start with a determination of the
maximum amount of health care-related
tax revenue that can be collected from
health care providers. We have seen this
particularly in State health care-related
tax programs targeting high Medicaid
utilized services solely as the basis for
increasing Medicaid rates to those same
providers. States appear to be exercising
their ability under the law to request
waivers of the broad based and/or
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2009
2010
115
108
100
2011
115
105
94
uniformity requirements of the health
care-related tax law in an effort to
minimize the tax burden on facilities
that furnish little to no services to
Medicaid patients. Although we would
only approve such a waiver request
within the allowable regulatory
standards, States requesting the waivers
continue to propose taxes that collect
the maximum 6 percent limit and vary
the rate of tax to minimize the tax
burden on non-Medicaid facilities
within the slightest margin allowable
under current regulations. Most waiver
requests are initially submitted
applicable to a tax structure that is
inconsistent with the Federal statute
and regulations. This requires CMS to
provide ongoing feedback and
assistance to States. States ultimately
deviate from their initial tax structure
until they are able to reach an optimal
tax structure that enables them to gain
approval while minimizing the nonMedicaid tax burden.
Through our review of these practices,
we have also noticed that many States
are applying the current statutory and
regulatory authority that permits the
exclusion of Medicare revenue from a
health care-related tax, which
effectively raises the rate of tax on only
the Medicaid revenues and commercial/
private pay revenues above the
aggregate 6 percent limit (measured on
all payers’ revenues). We have also seen
an increase in the tax revenues collected
through our examination of the
revenues reported by States on the CMS
64.11A. Based on a review of quarterly
expenditures, States reported the
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Fmt 4700
Sfmt 4700
2012
115
102
88
Total
0
0
0
430
398
361
collection of over $2.2 billion in tax
revenues from health care providers.
However, since the Tax Relief and
Health Care Act of 2006 reduced the
regulatory threshold to 5.5 percent,
none of the above mentioned
alternatives were taken.
With respect to the other changes
contained in this final rule, we
considered and rejected a possible
exception for already approved health
care-related tax programs. Such an
exception would not be uniform and
would not achieve the objective of
ensuring that health care-related taxes
did not effectively shift a
disproportionate burden to the Federal
government. Because these clarifications
reflect the understanding of permissible
classes and how the hold harmless
provisions should apply that CMS has
been applying in ongoing reviews, CMS
is not aware of any approved tax
programs that is not in compliance with
the final rule.
D. Accounting Statement and Table
As required by OMB Circular A–4
(available at https://
www.whitehouse.gov/omb/circulars/
a004/a-4.pdf), in the table below, we
have prepared an accounting statement
showing the classification of the
expenditures associated with the
provisions of this final regulation. This
table provides our best estimate of the
reduction in Federal Medicaid outlays
for the years 2008 through 2012 as a
result of the changes presented in this
final regulation. This regulation only
affects transfer payments between the
Federal government and State
governments.
E:\FR\FM\22FER1.SGM
22FER1
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Federal Register / Vol. 73, No. 36 / Friday, February 22, 2008 / Rules and Regulations
TABLE NUMBER B.—ACCOUNTING STATEMENT: CLASSIFICATION OF ESTIMATED REDUCTION IN MEDICAID OUTLAYS FROM
FY 2008 TO FY 2012
[In millions]
Category
Transfers
Annualized monetized transfers ......................................................................................
3% Units discount rate
$87.0
From whom to whom? .....................................................................................................
E. Conclusion
Due to the reduction in the statutory
language lowering the maximum
threshold from 6 to 5.5 percent this rule
is estimated to reduce Federal Medicaid
outlays by $85 million in FY 2008 and
by $115 million per year in FY 2009
through FY 2011.
For these reasons, we are not
preparing analysis for either the RFA or
section 1102(b) of the Act because we
have determined that this regulation
will not have a direct significant
economic impact on a substantial
number of small entities or a direct
significant impact on the operations of
a substantial number of small rural
hospitals.
In accordance with the provisions of
Executive Order 12866, this regulation
was reviewed by the Office of
Management and Budget.
List of Subjects in 42 CFR Part 433
Administrative practice and
procedure, Child support, Claims, Grant
programs-health, Medicaid, Reporting
and recordkeeping requirements.
I For the reasons set forth in the
preamble, the Centers for Medicare &
Medicaid Services amends 42 CFR
chapter IV as follows:
PART 433—STATE FISCAL
ADMINISTRATION
1. The authority citation for part 433
continues to read as follows:
I
Authority: Sections 1902(a)(2), 1903(a) and
1903(w) of the Social Security Act (42 U.S.C.
1302).
Subpart B—General Administrative
Requirements State Financial
Participation
2. Section 433.54 is amended by
revising paragraph (c) to read as follows:
I
§ 433.54
Bona fide donations.
rmajette on PROD1PC64 with RULES
*
*
*
*
*
(c) A hold harmless practice exists if
any of the following applies:
(1) The State (or other unit of
government) provides for a direct or
indirect non-Medicaid payment to those
providers or others making, or
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14:24 Feb 21, 2008
Jkt 214001
responsible for, the donation, and the
payment amount is positively correlated
to the donation. A positive correlation
includes any positive relationship
between these variables, even if not
consistent over time.
(2) All or any portion of the Medicaid
payment to the donor, provider class, or
related entity, varies based only on the
amount of the donation, including
where Medicaid payment is conditional
on receipt of the donation.
(3) The State (or other unit of
government) receiving the donation
provides for any direct or indirect
payment, offset, or waiver such that the
provision of that payment, offset, or
waiver directly or indirectly guarantees
to return any portion of the donation to
the provider (or other parties
responsible for the donation).
*
*
*
*
*
I 3. Section 433.56 is amended by—
A. Republishing the introductory text
to paragraph (a).
I B. Revising paragraph (a)(4).
I C. Revising paragraph (a)(8).
The revisions read as follow:
§ 433.56 Classes of health care services
and providers defined.
(a) For purposes of this subpart, each
of the following will be considered as a
separate class of health care items or
services:
*
*
*
*
*
(4) Intermediate care facility services
for the mentally retarded, and similar
services furnished by community-based
residences for the mentally retarded,
under a waiver under section 1915(c) of
the Act, in a State in which, as of
December 24, 1992, at least 85 percent
of such facilities were classified as ICF/
MRs prior to the grant of the waiver;
*
*
*
*
*
(8) Services of managed care
organizations (including health
maintenance organizations, preferred
provider organizations);
*
*
*
*
*
§ 433.57
I
I
[Amended]
4. Section § 433.57 is amended by—
A. Removing paragraph (a).
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7% Units discount rate
$88.0
States to Federal Government
B. Redesignating existing paragraphs
(b) and (c) as paragraphs (a) and (b),
respectively.
I
§ 433.58
[Removed and reserved]
5. Section 433.58 is removed and
reserved.
I
§ 433.60
[Removed and reserved]
6. Section 433.60 is removed and
reserved.
I 7. Section 433.66 is amended by—
I A. Revising the section heading.
I B. Revising paragraph (a).
The revisions read as follows:
I
§ 433.66 Permissible provider-related
donations.
(a) General rule. (1) Except as
specified in paragraph (a)(2) of this
section, a State may receive revenues
from provider-related donations without
a reduction in FFP, only in accordance
with the requirements of this section.
(2) The provisions of this section
relating to provider-related donations
for outstationed eligibility workers are
effective on October 1, 1992.
*
*
*
*
*
I 8. Section 433.67 is amended by
revising paragraph (a)(2) to read as
follows:
§ 433.67 Limitations on level of FFP for
permissible provider-related donations.
(a) * * *
(2) Limitations on donations for
outstationed eligibility workers.
Effective October 1, 1992, the maximum
amount of provider-related donations
for outstationed eligibility workers, as
described in § 433.66(b)(2), that a State
may receive without a reduction in FFP
may not exceed 10 percent of a State’s
medical assistance administrative costs
(both the Federal and State share),
excluding the costs of family planning
activities. The 10 percent limit for
provider-related donations for
outstationed eligibility workers is not
included in the limit in effect through
September 30, 1995, for health carerelated taxes as described in § 433.70.
*
*
*
*
*
I 9. Section 433.68 is amended by—
I A. Revising the section heading.
I B. Revising paragraph (a).
E:\FR\FM\22FER1.SGM
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Federal Register / Vol. 73, No. 36 / Friday, February 22, 2008 / Rules and Regulations
C. Republishing paragraph (f)
introductory text.
I D. Revising paragraphs (f)(1), (f)(2),
(f)(3) introductory text, and (f)(3)(i).
I E. Removing and reserving paragraph
(f)(3)(ii).
I The revisions read as follows:
I
rmajette on PROD1PC64 with RULES
§ 433.68
taxes.
Permissible health care-related
(a) General rule. A State may receive
health care-related taxes, without a
reduction in FFP, only in accordance
with the requirements of this section.
*
*
*
*
*
(f) Hold harmless. A taxpayer will be
considered to be held harmless under a
tax program if any of the following
conditions applies:
(1) The State (or other unit of
government) imposing the tax provides
for a direct or indirect non-Medicaid
payment to those providers or others
paying the tax and the payment amount
is positively correlated to either the tax
amount or to the difference between the
Medicaid payment and the tax amount.
A positive correlation includes any
positive relationship between these
variables, even if not consistent over
time.
(2) All or any portion of the Medicaid
payment to the taxpayer varies based
only on the tax amount, including
where Medicaid payment is conditional
on receipt of the tax amount.
(3) The State (or other unit of
government) imposing the tax provides
for any direct or indirect payment,
offset, or waiver such that the provision
of that payment, offset, or waiver
directly or indirectly guarantees to hold
taxpayers harmless for all or any portion
of the tax amount.
(i)(A) An indirect guarantee will be
determined to exist under a two prong
‘‘guarantee’’ test. If the health carerelated tax or taxes on each health care
class are applied at a rate that produces
revenues less than or equal to 6 percent
of the revenues received by the
taxpayer, the tax or taxes are
permissible under this test. The phrase
‘‘revenues received by the taxpayer’’
refers to the net patient revenue
attributable to the assessed permissible
class of health care items or services.
However, for the period of January 1,
2008 through September 30, 2011, the
applicable percentage of net patient
service revenue is 5.5 percent.
Compliance in State fiscal year 2008
will be evaluated from January 1, 2008
through the last day of State fiscal year
2008. Beginning with State fiscal year
2009 the 5.5 percent tax collection will
be measured on an annual State fiscal
year basis.
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14:24 Feb 21, 2008
Jkt 214001
(B) When the tax or taxes produce
revenues in excess of the applicable
percentage of the revenue received by
the taxpayer, CMS will consider an
indirect hold harmless provision to exist
if 75 percent or more of the taxpayers
in the class receive 75 percent or more
of their total tax costs back in enhanced
Medicaid payments or other State
payments. The second prong of the
indirect hold harmless test is applied in
the aggregate to all health care taxes
applied to each class. If this standard is
violated, the amount of tax revenue to
be offset from medical assistance
expenditures is the total amount of the
taxpayers’ revenues received by the
State.
(ii) [Reserved]
§ 433.70
[Amended]
10. Section 433.70 is amended by—
A. Revising the section heading.
B. Removing paragraph (a)(1).
C. Removing the paragraph
designation for existing paragraph (a)(2).
I The revised heading reads as follows:
I
I
I
I
§ 433.70 Limitation on level of FFP for
revenues from health care-related taxes.
*
*
*
*
*
(Catalog of Federal Domestic Assistance
Program No. 93.778, Medical Assistance
Program)
Dated: October 23, 2007.
Kerry Weems,
Acting Administrator, Centers for Medicare
& Medicaid Services.
Approved: December 3, 2007.
Michael O. Leavitt,
Secretary.
Editorial Note: This document was
received at the Office of the Federal Register
on February 15, 2008.
[FR Doc. E8–3207 Filed 2–21–08; 8:45 am]
BILLING CODE 4120–01–P
DEPARTMENT OF HOMELAND
SECURITY
Federal Emergency Management
Agency
44 CFR Part 67
Final Flood Elevation Determinations
Federal Emergency
Management Agency, DHS.
ACTION: Final rule.
AGENCY:
SUMMARY: Base (1% annual chance)
Flood Elevations (BFEs) and modified
BFEs are made final for the
communities listed below. The BFEs
and modified BFEs are the basis for the
floodplain management measures that
each community is required either to
PO 00000
Frm 00045
Fmt 4700
Sfmt 4700
9699
adopt or to show evidence of being
already in effect in order to qualify or
remain qualified for participation in the
National Flood Insurance Program
(NFIP).
The date of issuance of the Flood
Insurance Rate Map (FIRM) showing
BFEs and modified BFEs for each
community. This date may be obtained
by contacting the office where the maps
are available for inspection as indicated
on the table below.
ADDRESSES: The final BFEs for each
community are available for inspection
at the office of the Chief Executive
Officer of each community. The
respective addresses are listed in the
table below.
FOR FURTHER INFORMATION CONTACT:
William R. Blanton, Jr., Engineering
Management Branch, Mitigation
Directorate, Federal Emergency
Management Agency, 500 C Street, SW.,
Washington, DC 20472, (202) 646–3151.
SUPPLEMENTARY INFORMATION: The
Federal Emergency Management Agency
(FEMA) makes the final determinations
listed below for the modified BFEs for
each community listed. These modified
elevations have been published in
newspapers of local circulation and
ninety (90) days have elapsed since that
publication. The Assistant
Administrator of the Mitigation
Directorate has resolved any appeals
resulting from this notification.
This final rule is issued in accordance
with section 110 of the Flood Disaster
Protection Act of 1973, 42 U.S.C. 4104,
and 44 CFR part 67. FEMA has
developed criteria for floodplain
management in floodprone areas in
accordance with 44 CFR part 60.
Interested lessees and owners of real
property are encouraged to review the
proof Flood Insurance Study and FIRM
available at the address cited below for
each community. The BFEs and
modified BFEs are made final in the
communities listed below. Elevations at
selected locations in each community
are shown.
National Environmental Policy Act.
This final rule is categorically excluded
from the requirements of 44 CFR part
10, Environmental Consideration. An
environmental impact assessment has
not been prepared.
Regulatory Flexibility Act. As flood
elevation determinations are not within
the scope of the Regulatory Flexibility
Act, 5 U.S.C. 601–612, a regulatory
flexibility analysis is not required.
Regulatory Classification. This final
rule is not a significant regulatory action
under the criteria of section 3(f) of
Executive Order 12866 of September 30,
DATES:
E:\FR\FM\22FER1.SGM
22FER1
Agencies
[Federal Register Volume 73, Number 36 (Friday, February 22, 2008)]
[Rules and Regulations]
[Pages 9685-9699]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-3207]
-----------------------------------------------------------------------
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Centers for Medicare & Medicaid Services
42 CFR Part 433
[CMS 2275-F]
RIN 0938-AO80
Medicaid Program; Health Care-Related Taxes
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: This final rule revises the collection threshold under the
regulatory indirect guarantee hold harmless arrangement test to reflect
the provisions of the Tax Relief and Health Care Act of 2006. When
determining whether there is an indirect guarantee under the 2-prong
test for portions of fiscal years beginning on or after January 1, 2008
and before October 1, 2011, the allowable amount that can be collected
from a health care-related tax is reduced from 6 to 5.5 percent of net
patient revenues received by the taxpayers. This final rule also
clarifies the standard for determining the existence of a hold harmless
arrangement under the positive correlation test, Medicaid payment test,
and the guarantee test (with conforming changes to parallel provisions
concerning hold harmless arrangements with respect to provider-related
donations); codifies changes to permissible class of health care items
or services related to managed care organizations as enacted by the
Deficit Reduction Act of 2005; and, removes obsolete transition period
regulatory language.
DATES: Effective date: This rule is effective April 22, 2008.
Compliance date: CMS will not consider a State to be out of
compliance with the revision to the definition of permissible classes
until October 1, 2009.
FOR FURTHER INFORMATION CONTACT: Charles Hines, (410) 786-0252 or
Stuart Goldstein, (410) 786-0694.
SUPPLEMENTARY INFORMATION:
I. Background
A. General
Title XIX of the Social Security Act (the Act) authorizes Federal
grants to the States for Medicaid programs to provide medical
assistance to persons with limited income and resources. While Medicaid
programs are administered by the States, they are jointly financed by
the Federal and State governments. The Federal government pays its
share of medical assistance expenditures to the State on a quarterly
basis according to a formula described in sections 1903 and 1905(b) of
the Act. The amount of the Federal share of medical assistance
expenditures is called Federal financial participation (FFP). The State
pays its share of medical expenditures in accordance with section
1902(a)(2) of the Act.
The Medicaid Voluntary Contribution and Provider Specific Tax
Amendments of 1991 (Pub. L. 102-234), enacted December 12, 1991,
amended section 1903 of the Act to specify limitations on the amount of
FFP available for medical assistance expenditures in a fiscal year when
States receive certain funds donated from providers and revenues
generated by certain health care-related taxes. We issued regulations
to implement the statutory provisions concerning provider donations and
health care-related taxes in an interim final rule (with comment
period) published on November 24, 1992 (57 FR 55118). A final rule was
issued on August 13, 1993 (58 FR 43156). The Federal statute and
implementing regulations were designed to protect Medicaid providers
from being unduly burdened by health care related tax programs. Health
care related tax programs that are compliant with the requirements set
forth by the Congress create a significant tax burden for health care
providers that do not participate in the Medicaid program or that
provide limited services to Medicaid individuals.
B. Health Care-Related Taxes
Section 1903(w) of the Act requires that State health care-related
taxes must be imposed on a permissible class of health care services;
be broad based or apply to all providers within a class; be uniform,
such that all providers within a class must be taxed at the same rate;
and avoid hold harmless arrangements in which collected taxes are
returned directly or indirectly to taxpayers. Section 1903(w)(3)(E) of
the Act specifies that the Secretary shall approve broad based (and
uniformity) waiver applications if the net impact of the health care-
related tax is generally redistributive and the amount of the tax is
not directly correlated to Medicaid payments. The broad based and
uniformity requirements are waivable through a statistical test that
measures the degree to which the Medicaid program incurs a greater tax
burden than if these requirements were met. The permissible class of
health care services and hold harmless requirements cannot be waived.
The statute and Federal regulation identify 19 permissible classes of
health care items or services that States can tax without triggering a
penalty against Medicaid expenditures.
The regulatory language at 42 CFR 433.68(f) sets forth tests for
determining the presence of a hold harmless arrangement that were
directly based on the language contained in section 1903(w)(4) of the
Act. The preamble to the 1993 regulation provided guidance and some
illustrative examples of the types of health care-related tax programs
that we believed would violate the hold harmless prohibitions. In a
June 29, 2005 decision, however, the HHS Departmental Appeals Board
(DAB), DAB No. 1981, found that these regulations did not clearly
preclude certain types of arrangements that we believe to be within the
scope of the
[[Page 9686]]
statutory hold harmless prohibition and implementing regulations. The
DAB consequently reversed disallowances issued by CMS to five States.
In each of these reversed disallowances, the States had created
programs that imposed a tax on nursing homes and simultaneously created
programs that awarded grants or tax credits to private pay residents of
those nursing homes. These grants and/or tax credits were designed by
the States to compensate private pay residents of nursing homes for the
costs of the tax passed on to them by their nursing homes through
increased charges. The DAB, however found that CMS regulations did not
clearly identify that such grants and tax payments amounted to hold
harmless arrangements that would preclude FFP.
One of the hold harmless tests, set forth in current rules at Sec.
433.68(f)(3)(i), defines arrangements that are considered to be
prohibited indirect guarantees. Taxes imposed on health care-related
providers may not exceed 6 percent of the revenue received by the
taxpayer unless the State makes a showing that, in the aggregate, 75
percent of taxpayers do not receive 75 percent or more of their total
tax costs back in enhanced Medicaid payments or other State payments.
Prior to the enactment of the Tax Relief and Health Care Act of 2006,
States could tax individual classes of health care services and
providers, including inpatient hospital services, outpatient hospital
services, and nursing facility services up to 6 percent of the net
patient revenue attributable to the assessed permissible class of
health care items or services without violating prohibitions on the
indirect hold harmless arrangements. The 6 percent limit was
established to maintain consistency with the average level of taxes
applied to other goods and services in the State, as discussed in the
November 24, 1992 preamble to the interim final rule implementing the
statute.
On December 20, 2006 the Tax Relief and Health Care Act of 2006 was
signed into law as Public Law 109-432. Section 403 of that law
incorporated the existing regulatory test for an indirect guarantee
into the Medicaid statute but provided for a temporary reduction in the
allowable tax rate under the first prong of the test. Specifically, the
indirect hold harmless threshold has been reduced from 6 percent to 5.5
percent effective January 1, 2008 and before October 1, 2011. We want
to remind States that the collection threshold test is an annual test
and while the effective date of this change does not coincide with the
beginning of any State's fiscal year the test must still be performed
on an annual basis. Therefore, if a State chooses to impose a health
care related tax at a rate in excess of 5.5 percent prior to January 1,
2008, it will have to appropriately adjust the tax rate after January
1, 2008 so that health care related tax collections will not exceed 5.5
percent on a per class basis going forward. Compliance in State fiscal
year 2008 will be evaluated from January 1, 2008 through the last day
of State fiscal year 2008. Beginning with State fiscal year 2009 the
5.5 percent tax collection will be measured on an annual State fiscal
year basis.
II. Provisions of the Proposed Rule
In the March 23, 2007 proposed regulation we proposed to:
Codify section 6051 of the Deficit Reduction Act of 2005
(Pub. L. 109-171) which amended section 1903(w)(7)(viii) of the Act to
expand the previous Medicaid managed care organization (MCO) class of
health care items and services to include all MCOs.
Clarify the provisions of the hold harmless tests found at
Sec. 433.68(f).
Modify and clarify the positive correlation test set forth
at Sec. 433.68(f)(1), to specify that a State or other unit of
government will violate this test if they impose a health care-related
tax and also provide for a direct or indirect non-Medicaid payment and
the payment amount is positively correlated to the tax amount or to the
difference between the Medicaid payment and tax amount. We proposed to
interpret the phrase ``direct and indirect non-Medicaid payment''
broadly. These payments may take many forms, such as grants or tax
credits, although there will undoubtedly be other types of payments
that we have not yet anticipated.
Clarify the definition of tax amounts and payment amounts
for purposes of hold harmless analyses. We proposed to unify these
definitions so that they would have identical meanings in all three
hold harmless tests under Sec. 433.68(f).
Clarify within Sec. 433.68(f)(2) that a Medicaid payment
would be considered to vary based on the tax amount when the payment is
conditional on the tax payment.
Clarify the guarantee test at Sec. 433.68(f)(3) to
specify that a State can provide a direct guarantee through a direct or
indirect payment. A direct guarantee would be found when a State
payment is made available to a taxpayer or a party related to the
taxpayer (for example, as a nursing home resident is related to a
nursing home), in the reasonable expectation that the payment would
result in the taxpayer being held harmless for any part of the tax. An
indirect payment to the taxpayer would also constitute a direct
guarantee. One such example of this indirect payment providing a direct
guarantee would be found where a State imposing a tax on nursing
facilities provided grants or tax credits to private pay residents of
those facilities that could be used to compensate those residents for
any portion of the tax amount that the State has allowed to be passed
down to them by their nursing homes. This represents a direct guarantee
of an indirect payment to taxpayers.
Modify under Sec. 433.68(f)(3)(i), the indirect hold
harmless threshold percentage to be consistent with the Tax Relief and
Health Care Act of 2006, which lowered the collection threshold under
the indirect hold harmless provision from 6 percent of net patient
service revenue to 5.5 percent effective for portions of fiscal years
beginning on or after January 1, 2008 through September 30, 2011, prior
to a State being required to demonstrate the second prong of the
indirect hold harmless provision.
Clarify at Sec. 433.56(a)(4) the permissible class for
purposes of health care-related taxes to only those services of ICF/MRs
by removing narrow exception for similar services of community-based
residences for the mentally retarded if certain criteria are met.
Modify parallel hold harmless provisions with respect to
provider-related donations at Sec. 433.54(c).
Remove transition periods related to provider-related
Donations and health care related taxes provided under section
1903(w)(1)(C)(ii) of the Act since the last transition period expired
in 1993.
III. Analysis of and Responses to Public Comments
We received 21 items of timely public comments which contained
approximately 190 public comments that raised 47 individual issues, in
response to the March 23, 2007 proposed regulation (72 FR 13726 through
13734). The comments came from a variety of correspondents, including
health care provider associations, national and State organizations and
State Medicaid agencies. The majority of commenters urged us to
reconsider proposed changes to the hold harmless provisions. The
following is a summary of the comments received and our response to
those comments.
[[Page 9687]]
A. General Comments
Comment: One commenter expressed support for the codification of
the 6 percent maximum tax amount allowed and agreed with CMS'
implementation of section 403 of the Tax Relief and Health Care Act of
2006. The commenter indicated that while health care provider taxes are
not an optimal approach to sustainable appropriate and equitable
Medicaid funding, but stated that cutting the maximum tax rate allowed
substantially below 6 percent would have resulted in Medicaid payment
reductions and thus harmed low income populations needing care. The
commenter also suggested that such taxes create a significant tax
burden for health care providers that provide limited services to or no
services to Medicaid beneficiaries.
Response: We appreciate the support for our implementation of
section 403 of the Tax Relief and Health Care Act 2006. We understand
the concern about the burden of health care related taxes on providers
that have little or no Medicaid revenues. Medicaid limits on health
care related taxes protect those providers at the same time as ensuring
that such health care related taxes do not effectively shift a
disproportionate burden of the Medicaid program to the federal
government. We also recognize that States use revenues received from
permissible health care related taxes to support Medicaid payment
rates, but States have other sources of revenue that can support
Medicaid payments and ensure that low income populations receive needed
care. This rule balances all these concerns in clarifying the
definitions of permissible classes and hold harmless arrangements.
Comment: A couple of commenters asserted that the proposed rule
violated the Administrative Procedure Act provision codified at 5
U.S.C. 553(b). The commenters took issue with the preamble
clarifications regarding interpretations of regulatory provisions that
were included in the proposed rule. The commenters argued that CMS
should have included precise regulatory language to implement such
changes and that CMS cannot implement the proposed rule until it
publishes sufficient notice in the form of substantive regulatory
language. Other commenters stated that CMS provided no rational support
for the proposed rule.
Response: We disagree with the suggestion of any procedural
deficiency. Through publication of the proposed regulation, CMS adhered
to all requirements of the Administrative Procedure Act. Proper notice
was given of proposed changes and a public comment period was provided.
Those comments were considered, and are discussed in this final rule.
The final rule includes all necessary changes to the regulatory
framework and gives States clear guidance on how that regulatory
framework will be applied to health care related tax programs.
Comment: Numerous commenters argued that the proposed regulatory
changes directly contradict provisions of the Social Security Act and
that CMS exceeded its statutory authority. These commenters cited
section 5(c) of the Medicaid Voluntary Contribution and Provider-
Specific Tax Amendments of 1991 (Pub.L. 102-234) which mandated that
the Secretary consult with States before issuing any regulations under
this public law. The commenters asserted that significant changes were
made through this proposed regulation and that consultation with States
was required prior to the issuance of the regulatory changes. For these
reasons, the commenters indicated that CMS should not implement the new
rule and begin consultations with States.
Response: We believe the conditions of section 5(c) of the Medicaid
Voluntary Contribution and Provider-Specific Tax Amendments of 1191,
Public Law 102-234 were fully satisfied by the process the Secretary
undertook when the regulations implementing that Act were issued in
1992 and 1993. Even if these conditions were read to extend in
perpetuity, however, they have been met with respect to this final
rule. The notice and public comment procedures used to issue this final
rule have provided a full and fair opportunity for consultation with
States. This opportunity is in addition to the ongoing dialogue between
CMS and the States over proposed State financing in the review process
for Medicaid State plan amendments.
Comment: Several commenters believe that CMS' approach will harm
State Medicaid programs by decreasing the resources necessary to
support the growing and changing nature of Medicaid services. Another
commenter raised concern about the financial and administrative burden
for States of the proposed rule. One commenter argued that the changes
proposed in the regulation will compel States to dismantle already
approved financing. One commenter asserted that the negative effect of
the proposed rule could exceed approaches rejected by Congress. One
commenter was concerned that CMS did not fully consider the significant
financial issues confronting States and the continual pressure to
contain Medicaid spending in the face of State budgets. Another
commenter stated that the proposed regulation will cause a shift in
burden of health care financing from the federal government to the
States.
Response: This final regulation implements section 403 of the Tax
Relief and Health Care Act of 2006 and clarifies existing Federal law
related to permissible classes of health care services and the hold
harmless provisions. We do not agree that the statutorily-mandated
reduction in the indirect guarantee threshold will result in excessive
financial and administrative burdens or reductions in program benefits.
In any case, CMS is bound by the law to make this change. Moreover, the
clarifications provided in this regulation were not designed to target
particular existing health care related tax programs for which States
have received waiver approval from CMS of the broad based and/or
uniformity requirements. These clarifications were instead to ensure a
consistent and uniform understanding of the application of the hold
harmless provisions. We refer to them as clarifications because they
reflect CMS's understanding of how the hold harmless provisions should
be applied. These clarifications are based on the need to ensure that
the regulations effectively identify hold harmless arrangements in
which health care related taxes operate to effectively shift a
disproportionate burden of the Medicaid program to the federal
government. Although the clarifications are not targeted toward any
particular financing arrangements, CMS reserves the right to perform
financial management reviews of any tax structures to ensure compliance
with Federal statute, expressly approved by CMS or otherwise.
Comment: Several commenters requested that CMS affirm that the
proposed rule would not jeopardize already approved State plan
amendments (SPAs) and provider tax programs. The commenters also
requested that CMS confirm that it will continue to approve SPAs and
provider tax submissions with similar features as those already
approved. In the absence of such confirmations, the commenters
requested that CMS identify with written explanations which specific
approved SPAs and provider tax submissions would be problematic under
the proposed regulation. Another commenter suggested that if these
provisions are adopted in final, they should only apply to payments
contained in SPAs adopted after the effective date of the final rule.
Response: With respect to the change in the indirect guarantee
test, Congress
[[Page 9688]]
did not make any provision to exempt or grandfather existing approved
tax provider programs. Under the direction of the Congress, the final
regulation is effective January 1, 2008. With respect to the other
changes contained in this final rule, we considered and rejected a
possible exception for already approved provider tax programs. Such an
exception would not be uniform and would not achieve the objective of
ensuring that provider taxes did not shift the effectively shift a
disproportionate burden to the federal government. As part of the
routine CMS review of Medicaid State plan amendments (SPA) that affect
Medicaid payment to providers, CMS examines the sources of the non-
Federal share of Medicaid payments, including the revenues received by
States from health care-related taxes. Such SPAs are reviewed and
decided upon on a case-by-case basis under the consistent application
of Federal statute and regulations. Because these clarifications
reflect current CMS practices regarding ongoing reviews, CMS is not
aware of any approved tax programs that are not in compliance with the
final rule. However, CMS always reserves the right to ensure any State
Medicaid financing source and associated reimbursement methodologies
comply with Federal requirements.
Comment: A few commenters were concerned that the proposed rule
would ultimately decrease funding for the Medicaid program and threaten
access to important long-term care services. Another commenter was
concerned that the proposed rule will adversely affect safety net
providers by lowering Medicaid payments and as a result patients'
access to essential health care services would be disrupted.
Response: This final regulation along with the Federal Medicaid
statute governing health care related taxes was designed in part to
protect health care providers. Specifically, the reduction to the
allowable collection threshold serves to minimize the burden imposed on
health care providers by States through taxation in order to support
the State's Medicaid program. The effect of this reduction is that
health care providers can realize a greater net revenue base when they
are no longer obligated to fund a portion of their Medicaid payments
through a State imposed tax. Further, those health care providers that
do not participate in the Medicaid program would experience an overall
reduction in their tax rate. In addition, States have the option to
replace any tax revenue lost as a result of the reduction to the
allowable collection threshold with other sources of non-Federal share
payment, including additional State and local general fund dollars. If
such general fund dollars are used health care providers may experience
no reduction in the level of their Medicaid funding. States still have
many available resources to ensure that necessary services are
available to the most vulnerable populations. The purpose of this
regulation was not to reduce access to any health care services but to
strengthen the fiscal integrity of the Medicaid program.
Comment: One commenter stated that addressing perceived problems
with Medicaid financing would be better addressed through legislation.
Another commenter specified that CMS should work with the Congress to
clarify existing statutory language.
Response: The final regulation implements section 403 of the Tax
Relief and Health Care Act of 2006 and clarifies existing Federal law
related to permissible classes of health care services and the hold
harmless provisions. The clarifications are to ensure that the
regulatory framework effectively implements existing statutory
provisions setting permissible classes and prohibiting hold harmless
arrangements that shift a disproportionate share of the cost of the
Medicaid program to the federal government.
Comment: One commenter noted that, given the most recently issued
proposed regulations restricting IGTs and CPEs, CMS should not further
limit States' ability to fund the non-federal share of Medicaid
payments.
Response: This final regulation implements and clarifies statutory
provisions that permit States to fund the non-federal share of Medicaid
payments with permissible health care related taxes. The statutory
provisions, and these regulations, are a response to States that
imposed health care related taxes that had the effect of shifting
financial burdens from the States to the federal government. This shift
resulted from hold harmless arrangements under which providers were
effectively repaid some or all of the tax burden, and the federal
government was left with a disproportionate share of the tax burden.
The changes made in this final regulation should assist States in
determining the permissibility of tax programs. While the temporary
reduction in the indirect guarantee threshold test may reduce the
amount of permissible tax revenues, States have the option to replace
any tax revenue lost as a result of the reduction to the allowable
collection threshold with other sources of non-Federal share payment,
including additional State and local general fund dollars.
Comment: One commenter expressed concern that the proposed rule
unnecessarily grants CMS authority to delve into relationships between
States and local governments and does not provide sufficient clarity on
the criteria for evaluation of these relationships. The commenter
believes that open ended interpretations of tax and reimbursement
programs could result in case by case inconsistencies and confusion
while States attempt to structure a permissible provider tax program.
Response: This final regulation implements section 403 of the Tax
Relief and Health Care Act of 2006 and clarifies existing Federal law
related to permissible classes of health care services and the hold
harmless provisions. This rule does not specifically require review of
relationships between States and local governments. Under existing
statutory law, however, CMS must ensure that State claims for federal
funding are supported by non-federal expenditures and comply with all
provisions of the law. This includes review of health care related
taxes and associated payment or grant arrangements, whether on a State
or local level. In other words, our review is limited to tracing the
flow of funds to verify the non-federal share of Medicaid expenditures.
This final rule makes changes to the regulatory framework to ensure
that this review is consistent, uniform, and effectively implements the
statutory requirements.
Comment: A couple of commenters specified that CMS did not have the
statutory authority to go beyond the explicit direction provided in the
Tax Relief and Health Care Act of 2006 to only temporarily reduce the
maximum allowable tax rate.
Response: CMS' responsibility is to ensure that the Federal
statutory requirements governing health care related taxes are met. In
addition to codifying in regulation section 403 of the Tax Relief and
Health Care Act of 2006, the new regulation clarifies some issues that
have arisen since the issuance of the 1993 rule. Therefore, we believe
it is necessary and appropriate for the Secretary to issue new
regulatory provisions to address these issues so that States will have
clear guidance on which health care related tax programs will be
entitled to FFP. Furthermore, this final rule fully complies with the
requirements of the Administrative Procedure Act.
Comment: One commenter noted that changes to tax programs will
further exacerbate health care challenges in
[[Page 9689]]
areas impacted by major natural disasters.
Response: We do not agree that either the statutorily mandated
reduction in the indirect guarantee test, or the clarification of
permissible classes or hold harmless tests, will exacerbate health care
challenges in areas impacted by major natural disaster. The reduction
to the allowable collection limit serves in part to minimize the burden
imposed on health care providers through health care related taxation.
This result should help to minimize the cost structure of providers in
areas impacted by major natural disasters.
Comment: One commenter stated that the proposed regulations reflect
a fundamental suspicion of States' Medicaid financing practices. The
commenter encouraged CMS to address any inappropriate financing
arrangements through enforcement of current regulatory standards on a
case by case basis rather than regulatory changes.
Response: Our responsibility is to ensure that the Federal
statutory requirements governing health care related taxes are met in a
consistent and uniform manner. Revision to the regulatory framework
ensures consistent and effective implementation of the statute.
B. Implementation
Comment: Several commenters recommended that CMS delay the
implementation of the new rule until State legislatures can adequately
assess its implications and take the necessary action to ensure proper
funding of their Medicaid programs. A few commenters recommended that
the proposed rule be delayed until CMS works closely with States to
establish some optional funding solutions for Medicaid services.
Another commenter suggested that, at a minimum, States should be
provided an adequate transition period to implement the new rule.
Another commenter recommended that the effective date of the rule be
delayed by at least 6 to 12 months.
Response: As required by section 403 of the Tax Relief and Health
Care Act of 2006, the final regulation with respect to the reduction in
the indirect guarantee threshold percentage is effective January 1,
2008. We have provided for a transition period until October 1, 2009
for States to come into compliance with the statutory revision to the
permissible class of health care services identified as ``services of a
managed care organizations.'' Since the other provisions of the
regulation are clarifications that reflect CMS's existing understanding
of the law, further transition is not warranted.
C. Permissible Classes of Health Care Items and Services--ICF/MR (Sec.
433.56(a)(4))
Comment: Several commenters, including a commenter from a State
that the commenter believes was the intended beneficiary of the
provision, expressed concern that CMS did not explain why community
based residences included in the ICF/MR class in 1993 would be excluded
from the class. One commenter stated that CMS violated the APA by not
providing a reasoned analysis for the proposed change. Another
commenter stated that this proposed change would adversely affect the
provision of home and community based services.
Response: We proposed to delete this exception because we believed
it was no longer applicable to any State. In response to these
comments, we have determined that there is one State to which the
exception applies. Therefore, we are no longer deleting the exception.
In the 1993 interim final rule implementing Medicaid Voluntary
Contribution and Provider Specific Tax Amendments of 1991, the
statutory class of health care items and services at section
1903(w)(7)(iv) of the Act for services of intermediate care facilities
for the mentally retarded (ICF/MR) was defined to include similar
services furnished by community-based residences for the mentally
retarded, under a waiver under section 1915(c) of the Act, in a State
in which, as of December 24, 1992, at least 85 percent of such
facilities were classified as ICF/MRs prior to the grant of the waiver.
This exception was very narrow and was only intended to capture those
States that were granted section 1915(c) waivers that converted most of
their ICF/MRs to community-based residences prior to the effective date
of the interim final rule.
Over the past several years, a few States have requested CMS
approval to expand their ICF/MR services tax programs to include
certain home and community-based services. None of those States were
able to demonstrate compliance with the parameters of this permissible
class of health care items or services. Therefore, when CMS proposed
deleting the exception, CMS did not believe there were any States that
did or could meet these specific requirements.
In response to public comments, CMS was able to identify one State
that meets the requirements for this class of health care services.
Rhode Island has a long-standing tax program that meets these
requirements and as a result, the final regulation retains the original
regulatory language.
Comment: Several commenters asked for CMS to expand the inclusion
of home and community-based service providers in the ICF/MR class for
all States, arguing that it is not equitable to accord different
treatment to States that converted ICF/MRs into waiver facilities
before 1992 than to other States. These commenters noted that this
policy would generally benefit home and community-based service
providers. These commenters argued that, in order for the class to be
truly broad-based, all types of home and community-based residences for
persons with mental retardation and developmental disabilities should
be included. One commenter specifically asserted that this policy would
allow States to impose health care-related taxes to help fund home and
community-based services, and would increase access and availability of
such services. Many commenters cited the benefits of home and
community-based waiver services, and mentioned Federal policies
supporting the expansion of such services.
Response: The statutory provision at section 1903(w)(7)(iv) of the
Act refers only to ICF/MR facilities as the permissible class. As
discussed above, in 1993, we provided for a limited exception to
address the unique situation of States with existing waivers that
converted most of their ICF/MRs to community-based residences prior to
the effective date of the interim final rule. We do not believe a
broader exception would be consistent with the statutory language.
Moreover, we were not persuaded by the arguments that higher taxes on
home and community-based services would actually encourage and
stimulate the provision of such services. It appears counterintuitive
that taxes that make such services more costly would stimulate broader
use and availability.
Comment: One commenter requested that CMS more precisely define
intermediate care facilities for the mentally retarded (ICF/MR) to
include all facilities licensed as ICFs/MR, no matter the size of the
facility.
Response: The regulation was not intended to redefine ICF/MRs or
any other provider type. Instead, in part, the rule proposed to clarify
a permissible class of health care services for purposes of health
care-related tax requirements. For purposes of health care-related
taxes, if a State were to impose a tax on ICF/MR services, in order to
be considered broad-based, all licensed
[[Page 9690]]
ICF/MR providers within the State would need to be subject to the tax.
Comment: One commenter suggested that CMS exercise its statutory
authority to update the historical listing of permissible classes by
adopting additional provider classes through regulation. The commenter
noted that CMS has reminded States of this opportunity. The commenter
specified that inviting proposals to add classes helps update the
Medicaid program by recognizing change in providers, acknowledging
State environments are different, supporting Congressional intent and
recognizing that individual States and providers should be free to
collaborate and choose the best means suited to address financing
relationships to meet their State's needs.
Response: The preamble to the 1993 final rule stated that the
Secretary would consider adding additional classes if States can
demonstrate the need for additional designation and that any proposed
class meet the following criteria: (1) The revenue of the class is not
predominantly from Medicaid and Medicare (not more than 50 percent from
Medicaid and not more than 80 percent from Medicaid, Medicare, and
other Federal programs combined; (2) the class is clearly identifiable,
for example, by designation through State licensing programs,
recognition for Federal statutory purposes, or inclusion as a provider
in State plans; and (3) the class is nationally recognized rather than
unique to a State. At this time, we do not see a reason to alter this
policy or to add new permissible classes of health care items or
services.
D. Permissible Classes of Health Care Items and Services--Managed Care
(Sec. 433.56(a)(8))
Comment: One commenter recommended that CMS consider a definition
for the term ``preferred provider organizations'' so that States will
know what entities must be included in a tax program on this class of
providers for it to comply with the broad-based requirement of the
statute and associated regulations.
Response: Inclusion of the term preferred provider organization
(PPO) as a type of managed care organization that would be in the
permissible class of services for health care-related taxation purposes
mirrored the statutory language enacted under section 6051 of the
Deficit Reduction Act which amended section 1903(w)(7)(A)(viii) of the
Social Security Act. The statutory language was designed to more
broadly encompass services provide by all managed care organizations
without regard to their status as Medicaid or commercial health plan or
the form of such plans. The statutory language included examples to
clearly establish that all types of managed care businesses must be
included in order for a health care-related tax to be truly broad
based. For Medicare accreditation purposes it is established that MCOs
are licensed as both HMOs or PPOs. The intent is to fully encompass the
types of managed care products available to individuals in commercial
markets for coordinated care plans. This is a generally accepted term
and type of entity in the managed health care market and we do not feel
that a definition is necessary for Medicaid regulation purposes.
E. Hold Harmless Sec. 433.68(f)--General
Comment: Some commenters expressed concern that the new rule
appears to replace a purely objective test for hold harmless
arrangements with one that is subjective. They argued that the
Secretary had rejected the introduction of a subjective analysis when
he published the original hold harmless prohibitions in 1993 and that
the new rule should continue along this same course.
Response: We believe that the new regulation continues to apply a
largely objective analysis in determining whether state tax programs
contain hold harmless arrangements. This regulation is intended to
carry out the purposes originally outlined in the Medicaid Voluntary
Contribution and Provider Specific Tax Amendments of 1991 (Pub. L. 102-
234) and the implementing regulations, by prohibiting FFP for health
care-related taxes where the state has implemented a hold harmless
provision. One lesson we have learned in the years since we first
endeavored to implement Congress's prohibitions on taxes with hold
harmless arrangements is that it is simply impossible to anticipate
every hold harmless arrangement that may be implemented by States. As a
result, it would not be true to Congressional intent to implement a
mathematical model to be applied in detecting hold harmless
arrangements that violate the statutory prohibitions. We do not believe
the Medicaid statute contemplates such a formula, but anticipates that
the Secretary will carefully analyze all circumstances relevant to the
creation and operation of a state health care-related tax and attendant
tax relief programs in carrying out his mandate to prohibit FFP where
hold harmless arrangements exist. The analysis of state provider taxes
remains an overwhelmingly objective process, but the unique and
individual nature of State tax programs means that the analysis is
always on a case-by-case basis. The individualized analysis outlined in
this rule is not the type of subjective analysis that the Secretary
expressly rejected in the 1993 final rule. In that rule, the Secretary
rejected a suggestion that CMS should assess the egregiousness of a
hold harmless violation in determining whether to take a disallowance.
Comment: One commenter opined that Congress did not authorize the
Secretary to expand the tests for determining when an impermissible
hold harmless arrangement exists, arguing that the regulations should
mimic the statutory language. Other commenters suggested that the
existing rules were appropriate and the new rules could place existing
tax programs at risk.
Response: It is not our intent to expand the test for determining
when an impermissible hold harmless arrangement exists beyond the
original purposes authorized by Congress and underlying the 1993 rules.
As noted above, we are not aware of any state tax programs that would
have been permissible under the Secretary's prior interpretation of the
rules, but are no longer permissible under the new rules. The new rule
endeavors to address issues that have arisen since the issuance of the
1993 rule, which effectively repeated the statutory language but did
little to elucidate that language. That rule proved largely successful
in stopping impermissible hold harmless arrangements, with the
overwhelming majority of States ending such programs. A recent decision
issued by the HHS Departmental Appeals Board, however, has indicated
confusion concerning the degree of flexibility in the application of
the Secretary's longstanding interpretation of that rule in addressing
new issues that have arisen. (DAB No. 1981, June 29, 2005.) Therefore,
we believe it is necessary and appropriate for the Secretary to issue
new regulations so that States will have clear guidance on which health
care-related tax programs will be entitled to FFP.
Comment: Several commenters requested that they be able to retain
the ability to use rates that are based on receipt of provider taxes
rather than overall provider costs.
Response: The Social Security Act clearly allows States to collect
permissible health care-related taxes to be used as a source of non-
federal share funding for Medicaid payments to health care providers.
Further, States can consider Medicaid's portion of a permissible health
care-related tax as an
[[Page 9691]]
allowable cost for purposes of developing Medicaid reimbursement rates.
However, basing Medicaid payment rates solely on the receipt of health
care-related taxes is a clear hold harmless violation.
Comment: Several commenters noted that broadening the definition of
hold harmless will penalize States that have other non-Medicaid funding
initiatives for health care organizations. Under the proposed rule,
payments made to health care providers as part of regular business
could become entangled in the enforcement of the new rule.
Response: The hold harmless clarifications in this regulation are
necessary to ensure compliance with the statutory limitations on hold
harmless arrangements. In reviewing a health care related tax program,
CMS needs to review the tax and associated financial arrangements as a
whole, including any non-Medicaid payments. Taxes or fees that are
imposed in the ordinary course of business and are not health care
related would not trigger such a review, nor would non-Medicaid
governmental payments that occur in the regular course of business, for
example through procurements.
Comment: One commenter stated that the changes to the hold harmless
provisions could make their current provider tax program non-approvable
because the fees for the most part are used to pay back the cost to the
fee payer.
Response: We are not aware of any State tax programs that would
have been permissible under the Secretary's prior interpretation of the
rules, but are no longer permissible under the new rules. If, however a
State increases Medicaid reimbursement rates based solely on the
receipt of a health care related tax, rather than on the costs incurred
for providing Medicaid services, such an arrangement would be
considered a hold harmless violation. We believe this result is
consistent with the requirements of the statute and existing regulation
and is unchanged by this final rule.
Comment: One commenter requested that CMS include in the rule
itself the language in the preamble to the proposed rule indicating
that States using cost-based payment systems may include provider tax
costs as one of many provider costs that are considered in setting
individualized provider rates. The commenter argued that including this
language in the rule would prevent any changes in CMS interpretation.
Response: We are not including this language in the rule itself
because the rule is limited to the basic framework and cannot address
every specific circumstance and nuance. And this is an example of a
very complex issue. The clarification to the Medicaid payment hold
harmless test states that a Medicaid payment will be considered to vary
based on the tax amount when the payment is conditional on the tax
payment. This provision does not prevent States that use cost-based
reimbursement methodologies from including Medicaid's share of health
care related tax costs as one of many health care provider costs that
are considered in setting individualized Medicaid reimbursement rates.
However, where a Medicaid payment is conditional on receipt of health
care related taxes, we would view the Medicaid payment to be, in part
or in full, the repayment of the health care related tax to repay the
taxes in a hold harmless arrangement rather than as a protected
reimbursement for cost of Medicaid services.
Comment: A few commenters addressed the DAB decision that CMS
acknowledged it was attempting to respond to with this regulation,
suggesting that a more appropriate response to that decision would have
been to simply clarify that the hold harmless standard applies to
situations where the benefits accrue to private pay patients rather
than to the taxpaying facilities directly.
Response: We do not believe that the commenter's suggestion would
address all of the confusion created by the Board's decision. We agree
that clarifying the rules to explain that the hold harmless standard
applies to situations where the state payments are made to third
parties would help to clarify the questions raised by the Board's
decision and we have attempted to do that in this rule. However, we do
not believe such a clarification alone would be sufficient.
F. Hold Harmless--Sec. 433.68(f)(1)--Positive Correlation
Comment: Several commenters stated that by including any positive
correlation over any amount of time, the proposed rule destroys any
standard by which a State may assess whether or not a tax based
Medicaid funding arrangement will be determined by CMS to be a hold
harmless violation. Other commenters disagreed with CMS' statement that
the current regulations related to positive correlation led to
confusion. The commenters believe that the subjective analysis proposed
will only lead to additional confusion.
Response: Our experience is that States and providers are typically
very aware of the overall character of a tax based Medicaid funding
arrangement. Moreover, it is clear that to achieve the statutory
purpose of ending hold harmless arrangements that result in shifting a
disproportionate burden to the federal government, the test must be
applied flexibly. Otherwise, financing arrangements will be structured
to meet the letter but not the underlying purpose of the statutory
limitations. This regulation is intended to further clarify the
existing hold harmless provisions and not to lead to additional
confusion.
Comment: Several commenters asserted that the test for a ``positive
correlation'' under Sec. 433.68(f)(1) is too subjective, and should
instead remain a statistical test. They expressed concern that under
the proposed test, CMS could find a positive correlation in almost any
situation.
Response: The 1993 rule does confine the statutory term ``positive
correlation'' to a test requiring mathematical certainty. The insertion
of the statistical concept suggests that a positive correlation
contemplates a positive relationship between two variables. Such a
correlation would exist, for example, where a state passes a tax on
nursing home beds that a facility is permitted to pass on to its
residents in the form of rate increases. If at or about the same time,
the state passes a grant program that pays private pay residents of the
nursing home an amount similar to the bed tax, the grant money would be
available for use to compensate the nursing facility for the tax and a
positive correlation would be found to exist between the tax and the
grant. The correlation would not be destroyed by altering one variable
over time and would not necessarily need to be measured in a
statistical sense. This has always been CMS's position with respect to
the 1993 regulations, but unfortunately the description of positive
correlation as a statistical concept in the 1993 rule created some
confusion. In retrospect, we now believe that characterizing positive
correlation as having ``the same meaning as the statistical term'' in
the 1993 rule was imprecise. The use of this language caused some
readers to view the test as requiring a mathematical certainty with
specifically measurable statistical significance over the life of the
grant and tax programs, or measured with respect to specific amounts
collected and paid out under the specific programs. Where we did impose
a mathematical test in evaluating a tax program it was clearly spelled
out in the 1993 rule, as it was with respect to the ``indirect
guarantee test'' described at page 43182 of the 1993 rule. The rule
was, however, never meant to bring
[[Page 9692]]
mathematical certainty into the positive correlation examination. We do
not consider the current rule to signal a significant change in our
analysis; rather, it clarifies our interpretation of the statutory term
``positive correlation.'' We will continue to evaluate health care
related tax programs to determine whether there is a positive
correlation with a state payment program.
G. Hold Harmless Sec. 433.68(f)(2)--Medicaid Payment Test
Comment: Many commenters argued that, by prohibiting States from
conditioning Medicaid payment on receipt of the tax, the proposed rule
would prevent the State from using the tax to reimburse providers.
These commenters stated that Congress clearly intended provider taxes
to be used for purposes of Medicaid reimbursement purposes. The
commenters noted that section 1903(w)(4) of the Social Security Act
specifies that the hold harmless provisions ``shall not prevent use of
the tax to reimburse health care providers in a class for expenditures
under this title nor preclude States from relying on such reimbursement
to justify or explain the tax in the legislative process.''
Response: We agree States can use permissible health care related
tax revenues to increase Medicaid reimbursement rates. However, section
1903(w)(4) of the Act specifies three conditions under which a State or
local government is determined to hold taxpayers harmless for their tax
costs. If any of these conditions are met the tax program would be
determined to have a hold harmless provision and the tax would be
impermissible. The final rule does not change the conditions of the
hold harmless provisions under Federal law. Consistent with these
provisions, where a Medicaid payment is conditional on receipt of
health care related taxes, we would view the Medicaid payment to be, in
part or in full, the repayment of the health care related tax to repay
the taxes in a hold harmless arrangement rather than as a protected
reimbursement for cost of Medicaid services.
Comment: Several commenters stated that by expressly 37
conditioning Medicaid payments on the tax amount, States are explicitly
explaining how the tax is being used for Medicaid reimbursement as part
of the legislative process. The commenters believe that it is
reasonable to condition payment on the approval and receipt of the tax
and to not do so would be fiscally irresponsible. The State would be
obligated to make payments without having a funding source to finance
them and without conditioning States would not be able to adopt tax
programs. Other commenters noted that health care providers are
reluctant to support taxes unless there is an explicit assurance that
the revenues from the taxes will be dedicated to increasing Medicaid
payments and that State legislatures are reluctant to increase Medicaid
liabilities with the ability to make them contingent on the funding
source.
Response: There is a distinction between using health care related
tax revenues to support Medicaid payments and specifically guaranteeing
repayment of some or all of the tax amount or otherwise ensuring a
direct correlation between payments to taxpayers and the amount of
their taxes. States have and continue to maintain the ability to
justify the imposition of a health care related tax by indicating
through the State legislative process that proceeds from the health
care related tax will be used to increase Medicaid reimbursement and
that such funding must be approved by CMS. However, the statute is very
clear that health care related taxes cannot contain hold harmless
arrangements and any failure to comply with any of the three hold
harmless ``tests'' would render a health care related tax
impermissible. There is a distinct difference between explaining a
health care related tax and its purposes through the legislative
process and extending conditional guarantees to provider taxpayers.
States must ensure that no payment is conditioned upon receipt of a
health care related tax payment.
Comment: A few commenters requested that CMS clarify preamble
language related to State use of tax proceeds and federal match to
increase Medicaid rates in the form of Medicaid supplemental payments.
The commenters believe that this should not prohibit States from using
tax proceeds and federal match to increase Medicaid rates in the form
of Medicaid per diem add-ons or rate supplements.
Response: Section 1903(w)(4) expressly provides that States may use
permissible tax revenues to fund provider payments for covered services
furnished to eligible individuals. This provision does not authorize
States to use tax revenues for a hold harmless arrangement that
effectively repays provider taxpayers. In other words, the payment
methodology related to such increases to Medicaid reimbursement rates
must be designed in a manner that recognizes the volume or nature of
the covered services provided to Medicaid individuals, and cannot be
related simply to the amount of tax proceeds.
Comment: Several commenters disagreed with any suggestion that a
Medicaid payment increase funded by tax revenue is necessarily
uneconomical, because the funding source of the payment is irrelevant
to rate development. The commenters stated that Congress rejected the
position that, because provider taxes reduced actual expenditures made
by the State, the amount of the provider tax should be deducted from
total State spending so that only ``real'' or ``net'' State
expenditures would be matched. One commenter stated that the proposed
rule would interfere with permissible taxation by presupposing that
rates explicitly supported by tax revenue are too high and therefore
not economical.
Response: These commenters appear to have misread the preamble of
the proposed rule. We agree that States may collect permissible health
care related taxes, and may use those tax revenues as a source of non-
federal share funding for Medicaid payments to health care providers.
Our specific concern is when the Medicaid payments are conditional on
payment of the taxes. In that instance, the Medicaid payment is not
linked to any rate-setting determination based on the cost or volume of
services. Instead, the Medicaid payment is in the nature of a hold
harmless arrangement to return all or part of the tax liability to the
taxpayer. We are clarifying the Medicaid payment test to provide that a
Medicaid payment will be considered to vary based on the tax amount
when the payment is conditional on the tax payment. This clarification
would only affect States that seek to use rates that are based on the
receipt of provider taxes rather than on overall provider cost. In
other words, the final regulation rule would limit the ability of
States to expressly condition payment rates on tax receipts rather than
on a process that determines rates that are consistent with efficiency,
economy and quality of care in compliance with section 1902(a)(30)(A)
of the Act.
Comment: A few commenters disagreed with the definition of enhanced
Medicaid payment as a payment for which any branch of government has
indicated that the payment can be reduced or eliminated if the provider
tax is discontinued. The commenters were concerned that CMS is
asserting that this would represent a structural repayment of the tax
and violates hold harmless provisions. The commenters disagreed with
this position.
Response: The phrase ``enhanced Medicaid payments'' relates to the
second prong of the indirect hold harmless test (``75/75 test''). This
test
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stipulates that if a health care related tax exceeds the regulatory
percentage threshold, CMS would consider a hold harmless to exist if 75
percent or more of the taxpayers in the class receive 75 percent or
more of their total tax back in enhanced Medicaid payments or other
State payments. We clarified that if a State ever had to provide a
demonstration for purposes of the ``75/75 test'' we may consider any
amount that any branch of the State, including legislative and
executive branch, has indicated could be subject to reduction in the
absence of provider tax revenues as an enhanced Medicaid payment. This
comparison is between Medicaid payments and tax costs and we were not
asserting in this instance that this would be a structural repayment.
We were clarifying that, for purposes of the ``75/75 test'', payments
which would no longer be provided if the tax funding source were
eliminated, would be considered enhanced Medicaid payments, even if the
State did not characterize them as such.
Comment: Several commenters stated that eliminating conditional
Medicaid payments would undermine provider support for health care
related taxes. The commenters asserted that assurances that provider
tax revenue will be used for a specific category of Medicaid
expenditures is not equivalent to holding taxpayers harmless for the
cost of the tax.
Response: States have and continue to maintain the ability to
justify the imposition of a health care related tax by indicating
through the State legislative process that proceeds from the health
care related tax will be used to increase Medicaid reimbursement and
that such funding must be approved by CMS. However, the statute is very
clear that health care related taxes cannot contain hold harmless
arrangements and any failure to comply with any of the three hold
harmless ``tests'' would render a health care related tax
impermissible. There is a distinct difference between explaining a
health care related tax and its purposes through the legislative
process and extending conditional guarantees to repay provider
taxpayers. We recognize that high volume Medicaid providers could
benefit from a health care related tax that funds a Medicaid rate
increase, however, States must ensure that no payment is conditioned
upon receipt of a health care related tax payment.
Comment: Several commenters stated that the definitions of ``tax
amount'' and ``payment amount'' in the proposed rule are too broad. One
commenter argued that the shift in terminology in Sec. 433.68(f)(2)
from ``amount of the total tax payment'' to ``tax amount'' represents a
significant departure from the statutory and prior regulatory language.
Response: As explained in the preamble to the proposed rule, the
change in terminology is not a substantive change from what was
intended in the original 1993 rule. We are using the terms ``tax
amount'' and ``payment amount'' throughout the new rule in an effort to
be consistent. We have found that the use of differing terms in the
various sections of the 1993 rule has led to some confusion.
Accordingly, we consolidated the terms ``total tax cost,'' ``total tax
payment,'' ``amount of the payment,'' ``amount of such tax'' into the
terms ``tax amount'' and ``payment amount'' to be used in each section
of the hold harmless rule. We explained our reasoning at more length in
the proposed rule and believe that reasoning remains valid (72 FR
13729, 13730). This does not represent a significant departure from
prior statutory or regulatory language. It clarifies that we are not
looking at the total amount of the tax payment received by the state,
but we will be looking at the tax program as a whole, including whether
taxpayers are being held harmless for increments of the tax. With
respect to subsection (f)(2) this means that we will look at whether
any portion of the Medicaid payments made by the state to providers,
varies based upon the health care related tax levied upon the
providers. The ``tax amount'' is the amount of the tax levied upon the
provider (either directly, or indirectly).
Comment: Several commenters stated that the phrase ``including
where Medicaid payment is conditional on receipt of the tax amount'' is
problematic. Some commenters noted that the proposed language would
appear to have the effect of prohibiting States from enforcing tax
obligations on delinquent providers through intercept of Medicaid
payments. Another commenter expressed concern that this would prohibit
States from requiring overdue taxes as a condition for payments due to
a taxpayer. Other commenters stated that it may result in situations
where health provider taxes that are statutorily established in a
manner that complies with the broad based and uniformity requirements
of the statue cannot be enforced.
Response: This regulation does not prevent State enforcement of the
collection of health care related taxes. It is the State's obligation
to ensure that any health care related tax program is collected in a
manner consistent with legislation enacting the health care related tax
program and any approved waiver of the broad-based and/or uniformity
requirements. To suggest that the phrase ``including where Medicaid
payment is conditional on receipt of the tax amount'' would prohibit
States from enforcing tax obligations on delinquent health care
providers is erroneous. If States do not enforce the proper collection
of the health care related tax, the State is at risk of violating
statutory broad-based and/or uniformity requirements which could render
the entire tax program and its collections impermissible.
Comment: A few commenters specified that the word ``total'' is
critical within the Medicaid payment test because a Medicaid payment
that varies based on the Medicaid portion of the tax is permissible.
The commenters stipulated that only a Medicaid payment that varies
based on the total provider tax amounts constitutes a hold harmless.
Other commenters stated that the portion of a provider's health care-
related tax payment attributable to Medicaid services is an allowable
cost, and Medicaid reimbursement may be furnished for it. The
commenters recommended that the word ``total'' be restored.
Response: The regulation specifies that a hold harmless arrangement
exists if all or any portion of the Medicaid payment varies based only
on the amount of the tax payment. The removal of the word total does
not represent a significant departure from prior statutory or
regul