# Medicaid Program; Revision to Medicaid Upper Payment Limit Requirements for Hospital Services, Nursing Facility Services, Intermediate Care Facility Services for the Mentally Retarded, and Clinic Services

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URL: https://www.frixlaw.com/law-library/documents/fr%3A01-635

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** January 12, 2001
- **Citation:** 66 FR 3148

## Text

DEPARTMENT OF HEALTH AND HUMAN SERVICES
Health Care Financing Administration
42 CFR Part 447
[HCFA-2071-F]
RIN 0938-AK12
Medicaid Program; Revision to Medicaid Upper Payment Limit Requirements for Hospital Services, Nursing Facility Services, Intermediate Care Facility Services for the Mentally Retarded, and Clinic Services

AGENCY:

Health Care Financing Administration (HCFA), HHS.

ACTION:

Final rule.

SUMMARY:

This final rule modifies the Medicaid upper payment limits for inpatient hospital services, outpatient hospital services, nursing facility services, intermediate care facility services for the mentally retarded, and clinic services. For each type of Medicaid inpatient service, existing regulations place an upper limit on overall aggregate payments to all facilities and a separate aggregate upper limit on payments made to State-operated facilities. This final rule establishes an aggregate upper limit that applies to payments made to government facilities that are not State government-owned or operated, and a separate aggregate upper limit on payments made to privately-owned and operated facilities. This rule also eliminates the overall aggregate upper limit that had applied to these services.

With respect to outpatient hospital and clinic services, this final rule establishes an aggregate upper limit on payments made to State government-owned or operated facilities, an aggregate upper limit on payments made to government facilities that are not State government-owned or operated, and an aggregate upper limit on payments made to privately-owned and operated facilities.

These separate upper limits are necessary to ensure State Medicaid payment systems promote economy and efficiency. We are allowing a higher upper limit for payment to non-State public hospitals to recognize the higher costs of inpatient and outpatient services in public hospitals. In addition, to ensure continued beneficiary access to care and the ability of States to adjust to the changes in the upper payment limits, the final rule includes a transition period for States with approved rate enhancement State plan amendments.

EFFECTIVE DATE:

The provisions of this final rule are effective March 13, 2001.

FOR FURTHER INFORMATION CONTACT:

Robert Weaver, (410) 786-5914, Nursing facility services and intermediate care facility services for the mentally retarded.

Larry Reed, (410) 786-3325, Inpatient and outpatient hospital services and clinic services.

SUPPLEMENTARY INFORMATION:

Availability of Copies and Electronic Access

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I. Statutory and Regulatory Framework

Title XIX of the Social Security Act (the Act) authorizes Federal grants to States for Medicaid programs that provide medical assistance to low-income families, elderly individuals, and persons with disabilities. Each State Medicaid program is administered by the State in accordance with an approved State plan. While the State has considerable flexibility in designing its State plan and operating its Medicaid program, it must comply with Federal requirements specified in the Medicaid statute, regulations, and program guidance. Additionally, the plan must be approved by the Secretary, who has delegated this authority to HCFA.

Section 1903(a)(1)(A) of the Act provides for payments to States, through Federal financial participation (FFP), in expenditures for services covered under an approved State plan. Section 1902(a)(30)(A) of the Act requires a State plan to meet certain requirements in setting payment amounts for covered Medicaid care and services. One of these requirements is that payment for care and services under an approved State Medicaid plan be consistent with efficiency, economy, and quality of care. This provision provides authority for specific upper payment limits set forth in Federal regulations in 42 CFR part 447 relating to different types of Medicaid covered services. With respect to inpatient hospital services, nursing facility (NF) services, and intermediate care facility services for the mentally retarded (ICF/MR), upper payment limits are set forth in regulations at § 447.272, “Application of upper payment limits.” This provision limits overall aggregate State payments and aggregate payments to State-operated providers. With respect to outpatient hospital services and clinic services, similar upper payment limits on aggregate State payments are set forth in regulations at § 447.321, “Outpatient hospital services and clinic services: Upper limits of payments.”

Existing regulations stipulate that aggregate State payments for each type of services, that is, inpatient hospital and outpatient hospital services, NF services, ICF/MR services, and clinic services may not exceed a reasonable estimate of the amount the State would have paid under Medicare payment principles. Under §§ 447.257, “FFP: Conditions relating to institutional reimbursement,” and 447.304, “Adherence to upper limits; FFP, paragraph (c),” FFP is not available for State expenditures that exceed the applicable upper payment limit.

The statute also permits States some flexibility to use local government funds for the non-Federal share of Medicaid expenditures. Under section 1902(a)(2) of the Act, States may fund up to 60 percent of the non-Federal share of Medicaid expenditures with local government funds. Section 1903(w)(6) of the Act specifically limits the Secretary's ability to place restrictions on a State's use of certain funds transferred to it from a local unit of government subject to the requirements in section 1902(a)(2) of the Act.

Before 1981, under section 1902(a)(13) of the Act, States were required to pay rates for hospital and long-term care services that were directly related to cost reimbursement. To obtain approval from HCFA, many States set rates using Medicare reasonable cost payment principles.

In 1980 and 1981, the Congress enacted legislation (section 962 of the Omnibus Reconciliation Act of 1980 (ORA 1980), Public Law 96-499, and section 2173 of the Omnibus Budget Reconciliation Act of 1981 (OBRA 1981), Public Law 97-35, collectively known as the “Boren Amendment”) that amended section 1902(a)(13) of the Act to give States flexibility to deviate from Medicare's reasonable cost payment principles in setting payment rates for hospital and long-term care services.

The Boren Amendment was primarily considered a floor on State spending because it required States to set rates that would meet the costs incurred by efficiently and economically operated facilities. However, the Boren Amendment also supported upper payment limits on overall rates. In legislative history, the Congress directed the Secretary to maintain ceiling requirements that limited State payments in the aggregate from exceeding Medicare payment levels. The Senate Finance Committee stated that “the Secretary would be expected to continue to apply current regulations that require that payments made under State plans do not exceed amounts that would be determined under Medicare principles of reimbursement” (S. Rep. No. 471, 96th Cong., 1st sess. (1979).

In 1986, the Congress implicitly affirmed the use of upper limits on payments for inpatient hospital services, NF services, and intermediate care facility (ICF) (now ICF/MR) services. Section 9433 of the Omnibus Budget Reconciliation Act of 1986, Public Law 99-509, precluded the Secretary from placing limits on State payments to hospitals that serve a disproportionate number of low-income patients with special needs (disproportionate share hospital (DSH) payments) but maintained the application of limits on regular inpatient payment rates.

The existing regulations on upper limits were last changed in a final rule published in the
Federal Register
on July 28, 1987 (52 FR 28141) that addressed the application of the upper payment limit to States that had multiple payment rates for the same class of services. The July 28, 1987 final rule also addressed the differential rate issue in the context of State-operated facilities. Several audits had revealed that the circumstances of State-operated facilities created incentives for States to overpay these facilities. A high volume of uninsured patients had increased the costs of providing services in State government-owned or operated facilities. These costs, in turn, were passed on to the State. To offset those higher costs, States established payment methodologies that paid State government-owned or operated facilities at a higher rate than privately operated facilities. Higher Medicaid payments to State government-owned or operated facilities allowed States to obtain additional Federal Medicaid dollars to cover costs formerly met entirely by State dollars. To ensure payments to State-operated facilities would be consistent with efficiency and economy, the July 28, 1987 final rule applied the Medicare upper limit test to State-operated facilities separate from other facilities. However, it did not create a separate upper payment limit for other government facilities, which allowed their payments to count toward the same aggregate upper payment limit as private facilities.

Section 4711 of the Balanced Budget Act of 1997 (BBA), Public Law 105-33, amended section 1902(a)(13) of the Act to increase State flexibility in rate setting by replacing the substantive requirements of the Boren amendment with a new public process. The new public process requires the State agency to have in place, and use, a public process that determines the rates of payment under the plan for inpatient services furnished by hospitals, nursing facilities, and intermediate care facilities for the mentally retarded. As part of the new public process requirements, States must publish proposed and final rates, the methodologies underlying the establishment of the rates, and the justifications for the rates. The public process must give providers, beneficiaries and their representatives, and other concerned State residents an opportunity to review and comment on the proposed rates, methodologies, and justifications, before they become final. In addition, in the case of hospitals, the rates must take into account (in a manner consistent with section 1923 of the Act) the situation of hospitals that serve a disproportionate number of low-income patients with special needs. Under section 4711 of Public Law 105-33, States have flexibility to target rate increases to particular types of facilities so long as the rates are established in accordance with the new public process requirements.

The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) amends titles XVIII, XIX, and XXI of the Social Security Act to provide benefits improvements and beneficiary protections in the Medicare and Medicaid Programs and the State child health insurance program (SCHIP), as revised by the Balanced Budget Act of 1997 and the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, and for other purposes. Section 705 of BIPA imposes additional requirements upon Medicaid UPL.

The BIPA addressed publication of this final rule at Section 705, “Deadline for Issuance of Final Regulation Relating to Medicaid Upper Payment Limits.” In section 705(a), it requires that we publish these final regulations not later than December 31, 2000. It further requires that, while this final rule must be based on the proposed rule announced October 5, 2000, that this final regulation shall be published “* * * notwithstanding any requirement in the Administrative Procedures Act (APA) under chapter 5 of title 5, United States Code, or any other provision of law”* * * Section 705(b) of the BIPA provides for a longer transition period for States that had an approved State plan provision or methodology in effect on October 1, 1992. Section 701 of BIPA also changes a State's DSH allotments and provides for an increase in DSH allotment for extremely low DSH States based on the publication date of this rule.

We further note that waiver of the APA did not require that we review all comments received on the proposed rule and respond to them in the final rule. Under section 705(b), we considered replacing the transition periods in the proposed rule with that provided in this section of the law. Instead, we have decided to add a third transition period for those States with approved State plans or methodologies in effect on or before October 1, 1992.

II. Basis for the Proposed Changes

It had become apparent that the existing regulations created a financial incentive for States to overpay non-State government-owned or operated facilities because, through this practice, States, counties, and cities were able to effectively lower net State or local expenditures for covered services and gain extra Federal matching payments. This practice is not consistent with the Medicaid statute and has contributed to rapidly growing Medicaid spending.

The incentive for, and ability of, States to pay excessive rates to non-State government-owned or operated Medicaid providers can be explained as follows. As stated previously, the existing aggregate upper payment limit is applied to both private and non-State

government-owned or operated facilities. By developing a payment methodology that set rates for proprietary and nonprofit facilities at lower levels, States were able to set rates for county or city facilities at substantially higher levels and still comply with the existing aggregate upper payment limit. The Federal government matched these higher payment rates to public facilities. Because these facilities are public entities, funds to cover the State share were transferred from those facilities (or the local government units that operate them) to the State, thus generating increased Federal funding with no net increase in State expenditures. This is not consistent with the statutory requirements that Medicaid payments be economical and efficient.

On July 26, 2000, the Director of the Center for Medicaid and State Operations sent a letter to all State Medicaid Directors notifying them of the Administration's concern that “Medicaid payments meet the statutory definition of efficiency and economy” and that we would be issuing a proposed rule to address this problem. Additionally, States were informed that the Office of the Inspector General (OIG) and the General Accounting Office (GAO) had begun to monitor States with State plans that permitted these types of payments. Both the GAO and OIG have testified before Congress on the scope of these financing practices, their impact on State and Federal spending, and on the resultant uses of increased Federal funds. Preliminary results of OIG's work to date are described below.

As of December 22, 2000, the OIG had completed six substantial reviews in five States. Although the specifics of the enhanced payment programs and associated financing mechanisms differed somewhat in each State reviewed, the OIG found that payment programs share some common characteristics. These similarities are included below.

• In general, enhanced payments to city and county government owned providers were not based on the actual cost of providing services to Medicaid beneficiaries, or directly related to increasing the quality of care provided by the public facilities that received the enhanced payments.

• Enhanced payments to public nursing facilities were not being retained by the facilities to provide services to Medicaid beneficiaries. Instead, the majority of the enhanced payment was returned by the providers to the States through intergovernmental transfers (IGT). The States then used the funds for other purposes, some of which were unrelated to the Medicaid program.

• Unlike the nursing facilities, public hospital providers retained the majority of the Medicaid enhanced payments. However, the portion of the funds that hospitals returned to the States through IGTs resulted in millions of dollars available to the States for other uses.

• While the public hospital providers served a large number of Medicaid beneficiaries and uninsured patients, the hospitals either (1) did not receive Medicaid disproportionate share hospital (DSH) payments from the States, or (2) returned the majority of the Medicaid DSH payments to the States through IGTs. It appears, for these providers, that States used enhanced payments in the place of DSH payments, although Medicaid DSH payments are designed to help hospitals that provide care to a large number of Medicaid beneficiaries and uninsured patients.

Similarly, the GAO testified before the Congress that existing arrangements violate the basic integrity of Medicaid as a joint Federal/State program. GAO asserted that, by taking advantage of a technicality, States had used these financing schemes, in effect, to replace State Medicaid dollars with Federal Medicaid dollars.

III. Summary of the Provisions of the October 10, 2000 Proposed Rule

On October 10, 2000, we published a proposed rule in the
Federal Register
(65 FR 60151) that set forth proposed changes in the Medicaid upper payment limits for hospital services, NF services, ICF/MR services, and clinic services. A detailed description of the specific provisions of the proposed rule can be found beginning at 65 FR 60152. In the October 10, 2000 proposed rule, we proposed to establish:

• An aggregate upper payment limit for inpatient hospital, NF, and ICR/MR services furnished by other government-owned or operated facilities.

• An aggregate upper payment limit for outpatient hospital and clinic services provided by State government-owned or operated facilities and a separate aggregate upper payment limit for outpatient hospital and clinic services provided by all other government-owned or operated facilities.

• Two transition periods for States with approved rate enhancement State plan amendments to comply with the proposed payment limits. (The length of the transition period would depend on the effective date of the State's plan amendment, which is discussed in section III.C. of this preamble.)

IV. Analysis of and Responses to Public Comment

We received approximately 562 timely items of correspondence containing comments on the proposed rule from State Government officials, members of Congress, provider organizations, the Office of the Inspector General, county government officials, individual providers and private citizens. A discussion of the specific provisions of the proposed rule and summaries of the public comments received, and our responses to the comments are set forth below under the appropriate section heading:

Calculation of the UPL

Calculation/Technical Clarifications of UPL (§ 447.272(a) & (b), § 447.321(a) & (b))

We received many comments requesting clarification regarding the calculation of the proposed UPLs. In the proposed rule, we did not propose any changes to the methodology States may use to calculate the UPLs but proposed to redefine the groups of providers that would be subject to the UPLs.

Comment:
One commenter noted that § 447.272(a) was introduced with the clause: “Except as provided in paragraphs (b)(2) and (c) of this section, * * *” The commenter added, however, that paragraph § 447.272(b), which included (b)(2), began with the language: “In addition to being subject to the requirements of paragraph (a) of this section, * * *” The commenter noted that these two clauses can be interpreted to be directly contradictory.

Response:
In this final rule, we have eliminated the two clauses that were contradictory in our proposed rule. We revised paragraph (a) of §§ 447.272 and 447.321 to identify the different categories of facilities that furnish inpatient and outpatient services, respectively. Under the proposed rule, these categories included State government'owned or operated and other government-owned or operated. In this final rule, we renamed the “other government-owned or operated” category as “non-State government-owned or operated” and added a third category for privately-owned and operated facilities.

We revised paragraph (b) of sections §§ 447.272 and 447.321 to provide the general rule for aggregate payment that applies to each category of facilities described in paragraph (a).

Comment:
One commenter recommended that we clarify our use of the terms “facilities” and “services” in §§ 447.272 and 447.321 to consistently use the phrase “services in a facility”

rather than the term “services” by itself. The commenter added that the word “those” should also be eliminated when it has no reference.

Response:
We have revised §§ 447.272 and 447.321 to clarify the types of services furnished by each group of facilities that are included in the UPLs.

Comment:
One commenter recommended that we provide clarification for the term “outpatient hospital” in § 447.321(a) because it is not commonly understood and suggested that we instead make a reference to hospital outpatient services.

Response:
We removed the term “outpatient hospitals” from paragraphs (a) and (b) of § 447.321. In revised § 447.321(a), we use the phrase “outpatient services furnished by hospitals”. In addition, at § 447.272(a), we use the language “inpatient services furnished by hospitals” rather than the term “inpatient hospitals”.

Comment:
One commenter recommended that in paragraph (b) of §§ 447.272 and 447.321 that HCFA find a more neutral word for “non-compliant” to describe State plan amendments.

Response:
We have revised §§ 447.272 and 447.321 to eliminate the term “con-compliant.”

Comment
: One commenter suggested that we clarify in the regulation that, in determining the UPL, coinsurance and deductible payments paid or payable to hospitals by Medicare beneficiaries must be included in determining what would have been paid under Medicare. The commenter notes that § 447.321(b), which includes this concept, was eliminated without explanation.

Response
: Under current UPL regulations at § 447.321, the coinsurance and deductible payments, which a Medicare beneficiary would be liable to pay, are included in the Medicare approved payment amount that can be used in UPL calculations. In this final rule, we will continue to allow States to use the Medicare approved payment amounts as a factor in their UPL computations.

Comment
: One commenter recommended that States should be able to calculate the UPL based on date of service rather than date of payment or Federal claiming. The commenter stated that this is consistent with how hospital audits are performed. This eliminates other variances caused by billing patterns or timeliness of State payments.

Response
: This final rule continues to permit States to compute the UPL based on date of service.

Comment
: We received various comments seeking clarification of the criteria for hospitals to be considered a public facility subject to the new proposed governmental UPL and transition rules. One commenter suggested that hospitals should be classified as public if they exhibit the same characteristics as safety-net hospitals. A commenter recommended that some hospitals should qualify as public even if they are not receiving local tax dollars. Some hospitals are located in counties that have formed a hospital district which permits the levying of special ad valorem taxes to support operation of the hospital.

Response
: Within the context of this regulation, we consider a facility to be subject to the new governmental UPL if it can make an IGT payment to the State (either directly or indirectly through a governmental owner or operator, or other arrangement). We have created three aggregate groups based on whether the facility is privately-owned and operated, State government-owned or operated or non-State government-owned or operated. Facilities fall into the categories of non-State government-owned or operated and State government-owned or operated based upon their ability to make intergovernmental transfer payments back to the State and based upon the governance structure of the facility and who retains ultimate liability for the operations of the facility. However, all facilities that are prohibited from transferring funds back to the State will fall into the privately-owned and operated category.

Comment
: Several commenters recommended that we continue the current UPL regulations. In addition, commenters suggested that we not establish a third aggregate UPL to apply to non-State government-owned or operated facilities. Another commenter stated that HCFA is already able to ensure economy and efficiency through the State plan approval process, so that no additional safeguards are necessary. A commenter pointed out that the current limits provide the public with assurances that States will not overspend the Medicaid budget.

Response
: We disagree with the commenters. We do not believe that the current UPL regulations are sufficient to ensure that State Medicaid payments meet the statutory definition of efficiency and economy. Because the former UPL regulations permit States to pool provider payments, States could set rates to certain providers a multiple above the rate they would pay other providers for the same service. The OIG has completed substantial reviews of the financial mechanisms of five States with approved State plan amendments. As described in the preamble of the proposed and final rule, some general findings showed that enhanced payments to providers were not based on the actual cost of providing services nor were they used to improve the quality of Medicaid services provided by the facilities receiving the enhanced payments. States used this mechanism to shift their share of Medicaid costs and inappropriately increase the Federal Government share. States were also able to recycle Federal funds received from these enhanced payments to generate additional Federal matching funds that may or may not have been used for Medicaid services for Medicaid eligible individuals. In addition, we believe the current UPL regulations are contributing to increases in Medicaid program costs that are out of proportion to the number of services provided and patients served. These findings demonstrate that additional safeguards are needed to ensure economy and efficiency of Medicaid payments.

Comment
: One commenter stated that although the proposed rule on its face only adds a new aggregate limit, as it would be implemented, it would effectively modify the current aggregate limits by removing non-State governmental facilities from the calculations of the overall aggregate limit, and results in three different categories of calculation of the aggregate limits (private, State operated and other government operated).

Response
: We agree that the practical effect of the proposed UPLs would be to create three classes of providers. In considering this consequence, in this final rule, we have restructured the proposed regulations at §§ 447.272 and 447.321 to separate the providers into three distinct groups that are based on facility ownership and operation. States may aggregate payments up to the UPL that is applicable to each group. Specifically, in paragraph (b) of §§ 447.272 and 447.321, we have eliminated the aggregate group for all providers by facility type and created three separate aggregate groups, which include State government-owned or operated, non-State government-owned or operated, and privately-owned and operated facilities.

Comment
: One commenter recommended that we provide clarification on whether the 150 percent aggregate limit for non-State-owned or operated public hospitals is an exception to, and not included in, an aggregate limit for all hospitals of 100 percent of the Medicare payment principles.

Response
: In proposed §§ 447.272(b) and 447.321(b), we eliminated the overall aggregate limit that had applied

to all classes of facilities and replaced it with three separate aggregate groups, based on facility ownership and operation, which are independent of each other. Non-State government-owned or operated of hospitals comprise one group, and we permit States to make aggregate payments to this group not to exceed 150 percent of a reasonable estimate of what Medicare would have paid for the same services. Because we have eliminated the overall aggregate group for all providers by facility type, payments to these facilities are not subject to an overall aggregate limit of 100 percent of what Medicare would have paid for services in all hospitals. The final rule clarifies that the limit for non-State-owned or operated public hospitals is an exception to the otherwise applicable limits, and these facilities would not be aggregated with other facilities of different types. We believe our new format presents the aggregate groups in a manner that makes it clear that the UPLs function independent of each other.

Comment
: Commenters recommended that HCFA clarify the limits for inpatient and outpatient services for the same non-State government owned hospital. The two limits describe “payments to hospitals” not payments for inpatient hospital services and outpatient hospital services.

Response
: The limits for inpatient and outpatient services are calculated separately for each service even though they may be provided by the same hospital. The current regulations governing inpatient and outpatient UPLs require that these UPLs be calculated separately and we have not changed these provisions in §§ 447.272 and 447.321. The limits apply to payments for services that in turn would be paid to the provider that furnished them to Medicaid eligible individuals.

Comment
: Several commenters recommended that we expand the limits to include different Medicaid services. Some commenters suggested we aggregate inpatient and outpatient hospital services together and others recommended that we also include clinic services with hospital services. One commenter suggested that we include clinics in the calculations of a non-State-government-owned or operated hospital if the clinic refers patients to that hospital or the hospital refers patients to a clinic. Similarly, some commenters believed that we should apply UPLs on a facility-specific basis but also include both inpatient and outpatient services if offered by the facility. These commenters felt that the application of the limit on a service basis could lead to unanticipated funding shifts based solely on the availability of Federal dollars.

Response
: We are not accepting these recommendations. Including more than one Medicaid service under the same UPL would create incentives that may lead to abuses similar to those we are now trying to address since the number of providers across which payments may be aggregated would be increased. We considered facility-specific limitations as a possible remedy to the problem of excessive payments, but elected instead to refine our aggregate UPLs. We believe our approach provides an appropriate balance between the needs of States to have flexibility in rate setting and our objective to protect the integrity of the Medicaid program.

Comment
: One commenter recommended extremely low DSH States be exempted from the outpatient UPL requirement for State hospitals.

Response
: We are not accepting this comment, and have clarified in the final regulations that States must calculate an outpatient UPL separately for State-operated facilities. This will create a uniform procedure for calculating the UPL for inpatient and outpatient services. We believe the commenter's recommendation could result in perpetuating the very abuses this rule is designed to address. As noted in the preamble to the proposed rule, the UPLs were originally modified to include a separate limit for State operated facilities for NF's, ICF/MRs and hospitals for inpatient services so that these facilities were not paid at a higher rate than private facilities. Without creating a similar aggregate group for facilities that furnish outpatient services, States could continue to overpay State facilities while under paying the private facilities.

Comment
: One commenter stated that fair and adequate payment for all providers is necessary.

Response
: We agree. Under the UPLs, States will be able to set rates that fairly compensate Medicaid providers for Medicaid covered healthcare services.

Comment
: One commenter recommended that the UPLs be coordinated such that if a State's payment to a particular group of facilities does not fully use the UPL amount, the “unused amount” should be made available to increase other UPLs that may be exceeded in another group. The commenter believes that this method should be allowed because the total limit on a State's claim for Federal financial participation would not be increased.

Response
: Allowing States to distribute the any unused amounts under the UPL from one aggregate group to another aggregate group that may be over its UPL would perpetuate the practices that this action is designed to stem and would not be consistent with the statutory requirements that Medicaid payments promote economy and efficiency. States would still have an incentive to under-pay proprietary and nonprofit facilities and over-pay the State operated and non-State government operated facilities. Although the total limit of Federal financial participation would not be increased, States would still be able to obtain extra Federal funds with less of a State match by manipulating which facilities receive extra Medicaid payments.

Comment
: Some commenters suggested that small providers, including sole community and critical access hospitals, be given special treatment and not be included in the UPL calculation.

Response:
All providers, with the exception of Indian Health Services facilities are subject to the UPLs. We do not believe there is any justification for exempting any group of institutional providers from these regulations. Therefore, we are not removing facilities, such as sole community hospitals and critical access hospitals. These facilities have always been subject UPL regulations and will continue to be.

Comment:
One commenter recommended that non-profit nursing homes be included with the county owned or operated nursing homes for determining the UPL for these facilities.

Response:
Allowing non-profit nursing homes to be in the same aggregate group as county owned or operated nursing homes would still enable a State to set an excessively high payment rate for the county operated facilities, while paying the nonprofit facilities at a lower rate. This is not consistent with the statutory requirements that Medicaid payments promote economy and efficiency.

Comment:
One commenter asked for clarification on whether residential treatment facilities (psychiatric services to those under 21, but not in a hospital) are subject to the UPLs since hospitals, NFs and ICF/MRs are. If residential treatment facilities are not included in these UPLs, the commenter asked us to specify the test for residential treatment centers. The commenter also asked if State and local government-owned residential treatment facilities would be subject to a separate upper limit test as a group.

Response:
The UPL regulations at § 447.272 govern payments to inpatient “hospitals and long term care facilities,” which includes hospitals, nursing facilities, and intermediate care facilities for the mentally retarded. Residential treatment facilities are a separate type of institutional provider, which may furnish inpatient psychiatric services to individuals under age 21. Therefore, payments to these residential treatment facilities are governed by regulations at § 447.325, “Other inpatient and outpatient facility services: Upper Limits of Payment.” This regulation permits a State to pay the customary charge of the provider, but not pay more than the prevailing charges in the locality for comparable services under comparable circumstances.

Comment:
One commenter recommended that HCFA provide clarification on the similarity of the terms “a reasonable estimate of “ and “amount that can reasonably be estimated.”

Response:
These phrases are used interchangeably to describe the States' obligation to make a reasonable estimate under the UPL regulations and require no change in policy.

Comment:
Several commenters were concerned about State flexibility in calculating the UPL. Some commenters recommended that States have the ability to determine how UPLs will be applied on a State by State basis to take into account variations in the payment practices among State Medicaid programs. Commenters recommended giving States the flexibility to apply Medicare payment principles to make a reasonable estimate of what Medicare would pay for similar Medicaid services. These commenters believe that States should have the flexibility to consider either Medicare principles of reasonable cost or prospective payment principles in calculating the UPLs or any reasonable methodology for comparing payment under Medicare or Medicaid.

Response:
The new UPL regulations afford States some flexibility in calculating a reasonable estimate of what Medicare would have paid for Medicaid services. In formulating their own approach to computing the UPL, States have flexibility to use either Medicare principles of cost reimbursement or prospective payment systems as the foundation of their estimates. In this regulation, we are not changing the standards that we apply to the review of State estimates. While we generally provide guidance to States under the State plan review process, we intend to issue policy that will clarify approaches we have determined to be reasonable, and we will provide additional guidance to States on how to compute the UPLs.

Comment:
One commenter notes that the UPL could be calculated based on cost data, if available.

Response:
The current regulations at §§ 447.272 and 447.321 allow States to use Medicare payment principles to determine what Medicare would have paid for Medicaid services. States are allowed to continue to use cost data to determine what Medicare would have paid for services.

Comment:
Commenters suggested that the same elements of cost for Medicare and Medicaid should be included in both the actual payment and in the calculation of the UPL. States should have the flexibility to determine the content and method of those elements.

Response:
The Medicare payment principles used to calculate the UPL are not subject to change through this regulation. We intend to publish subsequent implementing policy documents that will clarify the calculation of the UPL.

Comment:
Commenters recommended that States should also have the flexibility to continue to reach a reasonable estimate based on the Medicare payment principles that reasonably relate to similar Medicaid services provided under comparable circumstances.

Response:
The UPL requires States to make a reasonable estimate based on Medicare payment principles. There are many factors and elements that States may consider to support their estimates. Using Medicare payment principles for services similar to Medicaid service is a permissible approach.

Comment:
One commenter recommended that payment shortfalls to hospitals and nursing facilities should be a factor in setting the UPL.

Response:
“Shortfall” generally refers to the difference between the cost of a service and the payment for the services. Shortfalls should not be a factor in setting or calculating the UPL because this limit is based on a reasonable estimate of what Medicare would have paid for the same services, and therefore, is unaffected by actual payments for services. However, because the UPL would allow States to set rates that fully cover the cost of Medicaid services, payments to cover Medicaid shortfalls would be allowable under the UPLs.

Comment:
One commenter recommended that the UPL should be revised when payments are on average, below reasonable economic and efficient standards. These added payments should then be utilized to underwrite programs that serve low-income individuals.

Response:
Section 1902(a)(30)(A) of the Act requires that payments for care and services under an approved State Medicaid plan be consistent with efficiency, economy, and quality of care. The new UPLs permit States to set facility-specific Medicaid rates that are based on costs determined reasonable under Medicare payment principles. Therefore, payments should not be below economic and efficiency standards.

Comment:
Several commenters recommended that HCFA clarify the definition of “other government owned or operated” facilities. Commenters recommended that the other government-owned or operated group should include hospitals that contract with local governments or have a high level of medical assistance or indigent care but are not owned or operated by the local government. One commenter recommended the following qualifying factors for other government owned or operated facilities: Local government may own assets, control a majority of the hospital's board or must sign off on any major changes in services, including expansions into another county. Another commenter recommended that States should have maximum flexibility in determining the applicability of 150 percent to other government owned or operated hospitals because hospitals may have a relationship with their local government that may fall outside of the current definition of owned or operated. Another commenter questioned if a State can own a facility and have a local government operate it and still receive the enhanced FFP. The commenter continued to question whether a local government can own and have a private contractor operate a facility and still receive the enhanced FFP.

Response:
We restructured § 447.272(a) and 447.321(a) and included at paragraph (a)(2) of these sections, the category, “non-State government owned or operated facilities” formerly “other government-owned or operated facilities”. We specify that this category is limited to “all government facilities that are neither owned nor operated by the State.” Specifically, for purposes of this regulation, non-State government owned or operated facilities are government facilities, as defined by their ability to make direct or indirect intergovernmental transfer payments to the State, and for which the State does not assume primary ownership or legal liability for the operations of the facilities. Examples of the kinds of

facilities that fall into this category are county or city owned and operated facilities, quasi-independent hospital districts, and hospitals that are owned by local governments but operated by private companies through contractual arrangements with those local governments as long as the hospital retains the ability to make an IGT to the State.

Comment:
We received numerous comments on the language used to determine the State-operated facilities. Some commenters recommend that the rule be revised to read “State owned and operated.” One commenter wanted this language if the 150 percent limit was not extended to the State operated hospitals. One commenter further explains that if a hospital is State owned and county operated, the State could inflate the other government group by including the hospital in that group, yet not allow the hospital to receive more than 100 percent for the current State-owned or operated group. However, another commenter supported our rationale for keeping the categories of State and non-State owned hospitals separate and distinct. Some commenters recommended that we change the language to State owned, but not State operated because university hospitals that are State owned, but privately operated, may be put into a more restricted group.

Response:
We restructured the regulations at §§ 447.272(a) and 447.321(a) and added language to clarify that “State government-owned or operated facilities” are all facilities that are either owned or operated by the State. In making this revision, we intend to capture within this group, facilities that are owned by the State, but managed or operated by a local government or private company. We further intend to distinguish between State-owned or operated facilities and those owned or operated by non-State governments. The categories of State government operated and non-State government operated are mutually exclusive, and consequently facilities cannot be considered as part of more than one group when considering the calculation of the UPLs. In addition, as we stated earlier, facilities that qualify for both the State-government and non-State government categories must be put into the State government category.

The 150 Percent Upper Payment Limit for Non-State-Operated Public Hospitals—§§ 447.272(b)(2) and 447.321(b)(2)

In §§ 447.272(b)(2) and 447.321(b)(2) of the proposed rule, we set forth provisions for a UPL of 150 percent of the reasonable estimate of what would have been paid under Medicare payment principles for inpatient and for outpatient hospital services provided in non-State government hospitals. We explained that we were doing this so that the new limits being applied to these providers assured that they would remain in operation and continue to provide services to the Medicaid population. We solicited specific comment on whether the 150 percent limit is appropriate. We received a significant number of comments in response to this proposal.

Support for 150 Percent UPL for Public Hospitals

Comment:
One commenter supports the separation of the other government providers from the overall aggregate cap and the 150 percent limit for these facilities. Other commenters indicated that the 150 percent UPL in proposed paragraph (b)(2) of §§ 447.272 and 447.321 (now paragraph (c)(1) of §§ 447.272 and 447.321) generally reflected a reasonable balance and response to the problem identified.

Response:
We appreciate the commenters' support for our provisions relating to the 150 percent UPL. Therefore, we will retain the 150 percent provision in paragraph (c)(1) of §§ 447.272 and 447.321.

Comment:
Some commenters support the 150 percent limit, but only if it does not cause a decrease in the aggregate limit for private facilities.

Response:
It was our intent in the proposed rule that these categories and UPL limits be separate. In this final rule, we have clarified that the 150 percent UPL for non-State government-operated hospitals is separate from the private hospital category and limit. We have restructured paragraph (a) of §§ 447.272 and 447.321 to identify the different categories of facilities that furnish inpatient and outpatient services, respectively. Under the proposed rule, these categories included State government-owned or -operated and non-State government-owned or -operated facilities. In §§ 447.272(a)(3) and 447.321(a)(3) of this final rule, we added a third category for privately-owned and operated facilities.

Support for a Lower UPL Than 150 Percent for Public Hospitals

Comment:
Some commenters indicated that the 150 percent limit is not needed and that the limit should remain 100 percent for all groups. These commenters noted that hospitals would receive adequate reimbursement if they (1) retained 100 percent of the State and Federal shares of Medicaid payments up to this UPL and (2) received and retained 100 percent of the State and Federal shares of allowable DSH payments. Other commenters noted that there was no evidence that hospitals or patients benefited from the increased Federal funds that would be obtained from increasing the non-State government-owned or operated limit to 150 percent.

Response:
While we agree that there is no clear standard as to what UPL would suffice to assure that hospitals and patients benefit, we believe the 150 percent standard is reasonable. Given the special mission of these public hospitals and their important role in serving the Medicaid population, we think that the 150 percent UPL is justified.

We also agree that hospitals should retain the entire amount of the State and federal payments they receive to cover the cost of providing services to Medicaid and indigent patients. While we have instituted reporting requirements as part of this final rule, it is not our intent to regulate intergovernmental transfers. Likewise, we have not changed the rules related to DSH funds. However, we have made every reasonable effort to assure that we pay these facilities only what is necessary to meet the demand for service for Medicaid individuals. We intend to monitor payments to these providers closely and may propose further refinements as we gain experience with the new UPLs. Should we find that the payments made under the higher limit are not being retained by hospitals to support Medicaid services, we would be open to making further revisions in subsequent rulemaking.

Comment:
One commenter noted that DSH funds should be used to fund non-State government-owned or operated hospitals rather than increase their UPL to 150 percent.

Response:
One of the primary functions of DSH payments is to help hospitals cover the costs of providing care to indigent patients. In establishing the 150 percent UPL for non-State-owned or operated public hospitals, we were careful to list those reasons that we believe entitled these facilities to receive higher payments than would otherwise be allowed. Although we realize there is an ancillary benefit that may cover the costs of providing uncompensated care in these facilities, that was not the reason for our decision to set a higher UPL for these providers. We were more concerned with assuring the continued existence and stability of these core providers who serve the Medicaid population.

Under current law, States have broad discretion to allocate DSH funds among eligible providers and may redirect DSH funds to these facilities. However, some States that have replaced DSH funds that could have gone to public hospitals with UPL funds may not choose or be able to do so under existing DSH allotments. We have not proposed to change the rules related to DSH funds in this rule. We have made every reasonable effort to assure that we pay only those funds that are necessary to these facilities to meet the demand for service for Medicaid individuals.

Support for a Higher UPL for Public Hospitals

Comment:
A number of commenters recommended that the final regulation increase the 150 percent UPL to 175, 200, 250 percent or higher for non-State government-owned or operated facilities. While many of the commenters simply stated that the 150 percent limit is arbitrary and did not provide additional rationale for changing the limit, others did cite various reasons in support of increasing the UPL percentage. The reasons cited included the significant reductions in funding these providers will face as a result of the new limits, the amount of uncompensated care provided by these facilities, and the fact that the 150 percent limit does not adequately account for the amount of funds that these institutions will have to transfer back to State treasuries.

Response:
We are not persuaded that a UPL above 150 percent has been justified. We were aware in publishing the proposed rule that proper payment data were difficult to obtain and that those who could provide such data were reluctant to do so because it would disclose the transfer of the excessive payment amounts received by providers back to the State. Given that, our discussion with a wide range of groups led us to believe that the only group of providers that would suffer harm that would hinder their ability to serve the Medicaid population were non-State government-owned or -operated hospitals, even when they retain the full payment. Even then, it was not absolutely clear what level of funding would be needed to both meet these needs and, at the same time, curtail the practice of transferring enhanced payments back to State treasuries. Given limited data, we proposed a UPL for these facilities of 150 percent of a reasonable estimate of Medicare payment principles.

In establishing this 150 percent UPL for non-State-owned or -operated public hospitals, we were careful to list those reasons that we believe entitled these facilities to receive higher payments than would otherwise be allowed. Since public entities may be allowed to transfer payment back to States, we still have concerns as to whether these higher payments would, in fact, be retained by these hospitals to allow them to provide needed services to the Medicaid population. We are instituting reporting requirements in paragraph (d) of §§ 447.272 and 447.321 that will allow us to monitor and track the distribution of these funds.

Comment:
Other commenters noted that a limit of 175 percent of the UPL would be consistent with the hospital specific cap of 175 percent of the hospitals uncompensated costs for the disproportionate share hospitals (DSH) limit allowed by the Congress for the State of California and that the Administration has expressed support for applying this DSH limit to other States.

Response:
The Administration has separately expressed its support for legislation raising the hospital specific cap to 175 percent of uncompensated costs for public hospitals. The Administration took this position to provide more flexibility in the States administration of DSH payments, but the 175 percent hospital specific cap for uncompensated costs for DSH was not our basis for establishing the 150 percent UPL described in the proposed rule. While uncompensated care costs did not form the basis for establishing the 150 percent limit, we recognize that these UPL payments will offset both the Medicaid payment shortfall and the uninsured costs included in DSH payments. DSH and UPL continue to be separate payment policies. Therefore, in this final rule, we see no basis for applying the same percentages that the Administration supports for a different part of the Medicaid program.

Comment:
One commenter noted that the UPL should be set at 175 percent and should not be lowered until a detailed analysis of the consequence of the higher threshold on the availability and access to health care services.

Response:
We do not agree. We were aware in publishing the proposed rule that proper payment data were difficult to obtain and that those who could provide such data were reluctant to do so because it would disclose the transfer of the excessive payment amounts received by providers back to the State. It was not clear what level of funding would be needed to both meet these needs and, at the same time, curtail the practice of transferring enhanced payments back to State treasuries. Given limited data, we proposed a UPL for these facilities of 150 percent of a reasonable estimate of Medicare payment principles. We are instituting reporting requirements in paragraph (d) of §§ 447.272 and 447.321 that will allow us to monitor and track the distribution of these funds.

Non-Support: Discriminatory

Comment:
Many commenters indicated that application of the 150 percent limit only to non-State government-owned or -operated hospitals is discriminatory. They note that HCFA has no basis for distinguishing between private, State, and non-State government-operated hospitals or between non-State government-owned or -operated hospitals and other non-State government-owned or operated providers such as nursing facilities and clinics or other providers that serve the same safety-net provider role or serve the same patient populations as public hospitals, such as FQHCs and RHCs. Many commenters recommended that the eligibility criteria for the 150 percent limit should be broadened to include facilities that serve the same role or the same populations as public hospitals. Some of these commenters recommended specific criteria such as a Medicaid utilization rate that is equal to that of non-State government-operated hospitals in each State or the 11.75 percent Medicaid utilization rate that is used by the 340B drug discount program of the Public Health Service Act.

Response:
We do not agree. Our discussions with a wide range of groups led us to believe that the only group of providers that both retained this money and would suffer harm that would hinder their ability to serve the Medicaid population were non-State government-operated hospitals. In establishing this 150 percent UPL for non-State-operated public hospitals, we were careful to list those reasons that we believe entitled these facilities to receive higher payments than would otherwise be allowed.

Non-State government-operated hospitals serve a unique role that we do not believe would continue to be adequately funded if it were not reflected in Medicaid rates. State-operated hospitals generally have a larger tax base from which to fund uncompensated care and services. Moreover, State operated hospitals that provide inpatient hospital services have been operating under a 100 percent UPL for these services since 1987.

We do not support the inclusion of public clinics, FQHCs or RHCs in the 150 percent category. Since these facilities are or can be paid at full cost,

we see no benefit to further inflating these payments. We believe their inclusion would only compound the problem of drawing down an inflated Federal payment in order to then transfer this overpayment back to the State. Moreover, Medicaid payments to FQHCs and RHCs are established in statute.

While we agree that some private providers may also fulfill a safety-net health care need similar in circumstance to those we described for the non-State government operated hospitals, we do not believe that, as a general class, these private hospitals currently receive Medicaid payments that are at the 100 percent UPL level and see no basis for further raising that level to 150 percent.

We appreciate the role that other non-State government operated facilities such as nursing facilities serve in the provision of health care. However, we do not believe that the circumstances described for NFs justify receiving the 150 percent UPL. Generally, indigent NF patients are Medicaid eligible or become Medicaid eligible and therefore the NF qualifies for Medicaid payment. In addition, NFs do not as a rule provide the kinds of high cost Medicaid support services that non-State government-owned or -operated hospitals provide. Thus, the financial factors affecting non-State government-owned or -operated hospitals do not equally affect NFs.

We do not see the benefit of applying definitions of safety-net hospitals that are used for other purposes. We believe that while there may have been other reasonable alternatives to applying the 150 percent UPL to non-State government-operated hospitals, given the structure of the current regulations, the problem is most directly addressed by the application of the 150 percent UPL to these hospitals.

Comment:
Some commenters indicated that it is unfair to narrow the 150 percent UPL to exclude NFs based on the prior performance of other State programs in returning this money to the State to serve other purposes.

Response:
As previously indicated, our criteria for excluding NFs from the 150 percent UPL is based on reasons other than the performance of other State programs.

Comment:
Some commenters indicated that we should ensure that all hospitals are appropriately compensated to higher payment limits for non-Medicaid, indigent care, regardless of their type.

Response:
We appreciate the commenters' concerns. However, as indicated previously, the financial burden of providing uncompensated care did not form the basis for our decision to set a higher UPL for non-State government-operated hospitals. Our discussion with a wide range of groups led us to believe that the only group of providers that both retained this money and would suffer harm that would hinder their ability to serve the Medicaid population were non-State government-operated hospitals. Therefore, we believe that the DSH programs under Medicare and Medicaid, which are intended to help defray the costs of uncompensated care, are better suited to serve this purpose than a higher UPL for Medicaid payments.

Comment:
Commenters noted that the proposed rule was drafted so that access to the 150 percent UPL for hospital payments appeared to be tied to the phase out of existing excessive payment State plan amendment for hospitals. They assumed this to be in error noting that 150 percent of the aggregate UPL would be available for non-State government-owned or -operated hospital services on the effective date of the rule.

Response:
The 150 percent UPL is not contingent upon the transition period. Given the proper supporting State plan methodologies, States will be able to pay these facilities up to the 150 percent UPL as of the effective date of this final rule.

Comment:
Commenters asked for confirmation that the 150 percent UPL would be available to all States upon submission of a State plan amendment (SPA) after the effective date of the final rule.

Response:
Federal financial participation will be available for all approved SPAs up to the 150 percent UPL for non-State government-owned or -operated hospital services with the effective date of this final rule.

Comment:
Some commenters noted that payment under the 150 percent UPL limit may exceed the provider's customary charges, as provided in § 447.271 and that this was an additional limitation. The commenter proposed that we modify or abolish § 447.271 so that charges do not limit payments under the 150 percent UPL.

Response:
Since this final rule would allow charges consistent with payment at the 150 percent UPL standard, we would interpret § 447.271(b) regarding agency payment at a rate greater than its costs to be consistent with these final rules. Therefore, we do not believe that a change to this section of the regulations is necessary.

Comment:
One commenter noted that contrary to the statement on pages 60156 and 60157 of the proposed rule that suggested the 150 percent UPL for non-State government-owned or operated facilities would prevent new proposals, in fact it would require a new SPA if the current State plan did not provide for payment up to that level.

Response:
To the extent that a State did not have a State plan authority to make payments at this level, a SPA would be needed to claim FFP at this level. However, the State could also continue payment at their current State plan approved rates that were otherwise in conformance with this final rule with no change in its State plan.

Comment:
One commenter indicated that States can not continue to fund private safety-net providers such as children's hospitals.

Response:
This final regulation does not make any changes that affect payments to children's hospitals or to non-public safety-net providers. States can continue to pay these providers rates necessary to cover the costs of care up to the aggregate limit for privately owned and operated providers. This regulation does assure that the Federal Government and the States each contribute their proper share of funding to these payments.

Comment:
One commenter stated that the preamble of the proposed rule does not distinguish between inpatient and outpatient hospital services when noting the role of safety-net hospitals.

Response:
Public safety-net hospitals provide both inpatient and outpatient services to large numbers of Medicaid, uninsured and other low-income populations. Additionally, these hospitals provide high cost community support services in both inpatient and outpatient settings. Because these higher cost services, as well as the uncompensated care burden these hospitals bear, are not confined to either inpatient or outpatient services, we believe it is appropriate for the higher rate (of 150 percent of what Medicare would have paid) to be applied to payments in both settings.

Managed Care

The upper payment limits we proposed relate to fee-for-service Medicaid payments. However, we did receive many comments requesting clarification on how they might affect managed care arrangements.

Comment:
A number of commenters suggested that HCFA clarify the policy on how the proposed UPL will affect budget neutrality for section 1115 demonstration programs. One commenter recommended we further clarify the preamble language to the proposed rule that indicates that section 1115 expenditure ceilings would be adjusted to account for the effect of the

regulation. Others noted that the final rule should specify that the amount of any increased payments made for hospital services under the rule would be added to section 1115 expenditure ceilings. Another commenter stated that HCFA should reward States that voluntarily reduce their UPL program expenditures below the regulatory limits before the deadline by crediting the Federal savings toward the expenditure ceilings for section 1115 demonstration projects.

Response:
As we indicated in the preamble to the proposed rule, we will make adjustments to the budget ceilings for section 1115 demonstration programs. These adjustments will be made in accordance with the terms and conditions governing each program. In general, these terms and conditions provide for adjustments whenever a change in law or regulation would affect State spending in the absence of the demonstration. To the extent that any State with a section 1115 demonstration will experience a change in its spending under this final rule, we will adjust that State's budget ceiling accordingly. According to the terms and conditions governing most demonstrations, the change in the budget ceiling is effective upon the effective date of the new law or regulations. In order to determine whether they will be affected, States should examine their institutional payment provisions to determine how their spending will change under the final rule. If section 1115 States choose to comply with the new UPL before the end of the transition period, the funds that would have otherwise been paid to institutions during the transition period remain as savings under the waiver, and can be used in accordance with the terms and conditions of the waiver. Finally, because each section 1115 program has terms and conditions specifying how adjustments will be made, we do not agree with the commenters that these procedures need to be specified in regulation.

Comment:
Several commenters asked us to clarify whether the transition period specified in §§ 447.272(b)(2) and 447.321(b)(1) of the proposed rule applies to States whose UPLs are set via a waiver program instead of a State plan amendment.

Response:
As indicated in our previous response, our general policy is to make adjustments whenever a change in law or regulations would affect State spending in the absence of the waiver. To determine when a waiver program would be affected, we would necessarily follow the same rules that apply to provider payments made under an approved State plan. Since those rules provide for a transition period subject to certain conditions, we would apply those same conditions to waiver programs to determine when they would be affected. For example, if excessive payments are currently being made and had been made before October 1, 1999 under a waiver program, then the earliest point the new UPLs would affect State spending would be the beginning of State FY 2002.

Comment:
One commenter urged us to allow flexibility in how the UPLs for various types of providers will be calculated under waiver programs. In cases where a waiver changes the distribution of Medicaid payments among different types of facilities, this commenter recommended that the State be allowed to measure compliance with the new UPL according to how the payments would have been made in the absence of the waiver program.

Response:
We agree that there may be instances when States have used waiver programs to make system changes that result in shifting payments among different types of facilities, for example, from inpatient settings to ambulatory care settings. However, we do not agree that waiver programs should be exempted from compliance with these UPLs. When States shift patterns of care from inpatient settings to ambulatory care settings, the payment follows the service provision. The UPL for each set of institutions is calculated according to the services provided within those institutions. We believe that the Medicare cost principles allow States sufficient flexibility to pay each set of providers appropriately without a change in the regulation.

Comment:
Two commenters suggested that HCFA count managed care payments and services in the UPL. One of these commenters stated that implementation of the regulation should take into consideration the extent to which public hospitals participate in managed care. This commenter noted that public hospitals with a relatively high managed care line of business will receive little relief from this rule if managed care payments are excluded from the higher UPL, since the special rule would then apply to only a small portion of their caseload.

Response:
The UPL for institutional payments specified in this rule applies to fee-for-service payments. Managed care payments are subject to separate limits contained in § 447.361. In considering the question of whether a single limit should apply to both fee for service and managed care payments, as the commenter suggests, we had to consider two separate issues. The first issue is whether having two limits inappropriately places providers at a disadvantage. As the commenter correctly points out, some providers have a great deal of managed care business and little or no fee for service business. However, we believe that providers have the ability and the incentive to negotiate appropriate rates with managed care organizations. The limit in § 447.361 provides adequate flexibility for managed care organizations to pay appropriate rates. In addition, in the case of DSH, States will be required as of January 1, 2001 to consider managed care payment shortfalls when making disproportionate share payments. So, to the extent there may be shortfalls, the DSH payments should provide relief.

The second issue we considered is whether having two separate limits may create situations where States may, either inadvertently or by design, make excessive payments to providers, both directly and through managed care organizations. We believe that as long as States cannot make separate or supplemental payments directly to providers for services that are included in managed care contracts, except as provided for in statute for disproportionate share hospitals and federally qualified health centers, this situation cannot occur. The prohibition against making direct payments to providers for services for which a State is already paying a managed care organization is contained in § 434.57.

Comment:
Two commenters noted that the notice of proposed rulemaking appears to affect the ability of a State to claim all funds anticipated under Section 1115 Medicaid Demonstration Waiver. These commenters urged that the State be allowed to claim all funds, despite the new UPL regulation.

Response:
As noted above, we will make adjustments to the budget ceilings for Section 1115 demonstration programs in cases where State spending will be affected by the new UPLs. We do expect that in some cases, the new limits will prevent States from claiming all funding anticipated under their Section 1115 demonstration program. We encourage all Section 1115 States to review their payment methodologies to determine whether they will be affected. We will make every effort to work with States to ensure that services are not jeopardized as the appropriate adjustments are made.

Comment:
A number of commenters encouraged us to exclude payments made under Section 1115 or Section 1915(b) programs from the UPL calculation. One of these commenters noted that the UPL is not necessary as

a cost control measure, because waiver programs already have requirements (budget neutrality for Section 1115 programs and cost effectiveness for section 1915(b) programs designed to limit Federal exposure.

Response:
In many cases, waiver programs primarily involve managed care payments. As stated above, these managed care payments are not included in the UPL calculations. However, we realize that in some cases, waiver programs involve other types of payments to institutional providers, and these payments will be affected by this regulation. This regulation is intended to have the same effect whether the payments in question are contained in a State plan amendment or in a waiver. We do not agree with the commenter that payments made under waiver programs, other than managed care payments, should be excluded from the UPL calculation.

Comment:
One commenter noted that some States operate under waivers in which they receive lower disproportionate share hospital (DSH) payments in exchange for receiving higher non-DSH Medicaid payments. In these cases, the commenter recommended that the State be allowed to count the payments in question as DSH payments, thus exempting them from the UPL.

Response:
Although we are aware that some States have re-directed part of their DSH program to support Medicaid eligibility expansions, we do not believe it is necessary to exempt portions of institutional payments from the UPL to reflect this. To the extent the eligibility expansions increase institutions' medical utilization, the increased utilization should create a higher UPL according to the methodology contained within this rule. Since many eligibility expansions are done in the context of managed care, and managed care payments are exempt from the UPL, we do not believe that States will be disadvantaged in any way by this regulation.

Reporting Requirements

As a condition for establishing a policy of higher UPLs for non-State government-owned or operated hospitals, we announced in the preamble of the proposed rule, our intention to require payments to these hospitals be separately identified and reported to HCFA. The purpose of this requirement was to ensure the higher payments are appropriate and are being fully retained by hospitals. We believe the separate identification of these payments will be a necessary administrative tool to ensure the proper administration of the Medicaid program. We specifically solicited comments on the most suitable methods of reporting and accounting for these payments.

Comment:
We received comments suggesting that we expand on the reporting requirements. One commenter recommended that HCFA require the reporting of both intergovernmental transfer revenues (including certified public expenditures if they are used) and supplemental payments. This commenter believes this information is necessary to understand the extent to which funds are actually going to the health care providers or are being retained by health care providers. Other commenters noted that a requirement to report payments alone does not ensure local public hospitals retain Medicaid payments. All or portions of the payments could still be transferred back to the State treasury. Since all the new UPLs still permit pooling, albeit to a smaller degree, the commenters noted that within each class of providers, payments can still be transferred back to the State or diverted directly to non-Medicaid purposes. To remedy the deficiencies they mention, the commenters recommend that the final rule stipulate that payments to public providers, whether State or locally owned or operated, will be considered to breach the applicable UPLs unless they are retained by the public hospitals, or nursing homes to which they are paid and are used by those facilities to meet the costs of delivering services to Medicaid (and uninsured) patients. To implement this approach, one commenter recommended a certification process by which the State Medicaid director or the head of the single State agency certifies that the payments represent an expenditure for the cost of services furnished to Medicaid patients, which could be verified through audits.

Response:
We appreciate the input we received on the development of a reporting requirement. Our intent is to develop and enforce a reporting requirement that is not overly administratively burdensome on States or providers, yet sufficient to help us assess what payments are made to facilities in comparison to their UPL and, to the extent possible, ensure Medicaid payments are retained by providers to offset the costs they incur in furnishing covered services to Medicaid patients. After giving consideration to the above comments, we have decided not to require reporting of these data at this time. However, we reserve the right to require reporting of IGT data in the future. However, we do agree that a reporting process to identify facility specific payment as well as that facility's individual UPL would be appropriate. Therefore, we are adding new §§ 447.272(f) and 447.321(f) “Reporting requirements” to reflect the addition of a reporting process for Medicaid payments to non-State public providers and providers within the group of providers that exceed the UPL during the transition period on a facility specific basis. We believe this will help improve Federal oversight in this area. We will continue to give further consideration to additional reporting requirements suggestions in further policy guidance and may consult with States, providers, and other interested parties in developing them.

Comment:
Several commenters expressed opposition to any additional reporting requirements. While some commenters appreciated the intent behind this requirement, they believed it is neither practical nor appropriate for the Federal government to play such an involved role in determining how the State general revenues are appropriated and spent. These commenters believe that the current reporting requirements are sufficient. Other commenters indicated that this requirement was unnecessary and would be a costly burden on States and providers and asserted States should receive 90 percent enhanced Federal matching for compliance costs.

Response:
We disagree with the commenters that current reporting requirements are adequate. The Medicaid program is not a general revenue sharing program, but rather an individual entitlement program under which States make direct payments to health care providers or contracts with prepaid entities. Our interest is not in tracking general revenues, but Medicaid payments paid to Medicaid providers on behalf of Medicaid eligible individuals for Medicaid eligible services. Not only do we feel it is appropriate for us to collect information on provider payments, but we believe that it is necessary to ensure Federal matching dollars are appropriately expended. Further, we do not believe reporting the payments in the manner suggested would be overly burdensome as it will be generated either from claims payment data or UPL calculation data the State would have already performed as the basis of these payments. On the issue of the enhanced 90 percent Federal matching rate, the final rule makes no change to policy in that area. However, we do not believe that this reporting will generally require those activities that qualify for this enhanced match.

Comment:
We received several comments relating to the nature and substance of the reporting requirements. One commenter suggested the reporting requirement should be with respect to Medicaid expenditures at the State level. This commenter thought it would be reasonable for States to report expenditures based on the provider categories in the regulation. Another commenter recommended the reporting of enhanced payments to public hospitals on an annual basis similar to the reporting requirements for DSH payments.

Response:
We agree. Our intent is to develop and enforce a reporting requirement that is not administratively burdensome on States or providers, yet sufficient to help ensure Medicaid payments are retained by providers to offset the costs they incur in furnishing covered services to Medicaid patients. We believe that information at a provider specific level is needed to ensure the integrity of Medicaid payments. With respect to the timing, we think an annual basis is sufficient.

Comment:
Several commenters suggested that HCFA establish some type of monitoring program. Certain commenters wanted to ensure Federal funding is being used for Medicaid purposes and that funds are directed to the maintenance of the nation's safety-net hospitals, including children's hospitals. One commenter recommended setting up a task force to monitor the health care needs of populations in those States that have not used IGT funding to determine if Medicaid and other funding sources are adequate for States to meet the health care needs of their citizens.

Response:
We are always interested in developing more efficient and effective ways to administer the Medicaid program. As we indicated in our previous response, we intend to give consideration to any additional steps that may be necessary to ensure the Medicaid program fulfills its statutory purposes and solicit input from States, providers, and Medicaid patients. While we do not intend to go beyond a certification requirement at this time, we may issue additional policy guidance under our general authority to ensure the proper administration of the Medicaid program.

Comment:
One commenter stated HCFA must issue proposed rules without any specific reporting requirements and that reporting requirements ultimately adopted must have appropriate additional notice and comment rulemaking as required under the Administrative Procedures Act. The commenter stated that HCFA should issue a separate proposed rule for the reporting requirement.

Response:
We believe the commenter is referring to the Paperwork Reduction Act. We will publish a separate notice in the
Federal Register
and provide a 30-day comment period. Further details regarding this process are found in section VI of the preamble, “Collection of information—reporting requirements'.

Comment:
Several commenters felt that the transition period should be more stringent unless the excess payments permitted during the period are linked to the provision of health care service.

Response:
We agree that payments above the new UPLs that are permissible during the transition period should be subject to a reporting requirement. We, therefore, will extend the reporting requirements to States as a condition of receiving the transition period.

Indian Health Service

We proposed in § 447.272(b)(2) that Indian Health Service (IHS) and tribal hospitals funded under the Indian Self-Determination and Education Assistance Act (Pub. L. 93-638) would not be subject to the UPLs. We received comments regarding the impact of this regulation on these entities. A number of these commenters recommend that these IHS and tribal hospitals be considered public for the purpose of applying the 150 percent UPL. A few commenters indicated concern regarding how the shift in funding will affect rates paid to these facilities. In response to these comments, we have revised the regulation to clarify that these facilities will not be subject to these aggregated UPLs. Instead, these facilities are subject to payment limits in § 447.325.

Comment:
One commenter recommended that non-State owned public nursing facilities located in close proximity to Indian reservations should be included in the 150 percent category.

Response:
We do not believe that the circumstances described for NFs justify receiving the 150 percent UPL. Generally, indigent NF patients are Medicaid eligible or become Medicaid eligible and therefore the NF qualifies for Medicaid payment. Thus, the financial factors affecting non-State government-operated hospitals do not equally affect NFs.

Comment:
One commenter indicated that it is not clear what, if any, UPL would apply to Pub. L. 93-638 tribal hospitals. Another suggested that we expand the exclusion at § 447.272(b)(2) to include all facilities owned or operated by American Indian tribes.

Response:
We generally agree with this comment. We have restructured paragraph (c) of §§ 447.272 and 447.321 to exclude IHS and tribal facilities that are funded under Pub. L. 93-638 from the UPLs. Instead, these facilities will be subject to the payment limits at § 447.325.

Comment:
One commenter indicated that Pub. L. 93-638 tribal hospitals should be included as public hospitals.

Response:
We disagree with this comment. The Federal Government maintains a government to government relationship with the tribes. Accordingly, we do not believe these hospitals should be included in either the State government or non-State government pools. Including them as public facilities within the UPLs may enable States to set lower payments for the IHS and tribal facilities, and set payments for government operated providers at higher levels and still comply with the aggregate UPLs. Therefore, to avoid these types of incentives, we have excluded IHS facilities from the UPLs.

Comment:
One commenter indicated that tribal hospitals serve all residents of their region and, in most regions, are the sole health care providers. The commenter stated that not only are tribal hospitals funded at an amount too low to fulfill their mandate, but the OMB-negotiated rates are less than rates paid to other public hospitals. This commenter also indicated that authorization to make additional payments to Pub. L. 93-638 hospitals as public facilities is in the best interest of improving access to health care for the rural Medicaid population.

Response:
We recognize that tribal facilities, especially hospitals, may serve as sole providers in rural communities throughout the country. We do not agree that the inpatient per diem and outpatient per visit rates are necessarily insufficient. These rates are calculated at the full cost of providing Medicaid services under Medicare payment principles. While other public hospitals may be paid more than IHS hospitals in some instances, this issue may be appropriately addressed in public procedures for State ratesetting required by section 1902(a)(13) of the Act.

Also, as noted earlier, it would not be beneficial to the tribal facility to be identified as a public provider (government-operated). Including tribal facilities as a public provider may cause a reduction in payments to the tribal providers so States can shift these amounts to their own government facilities within the aggregate UPL.

Disproportionate Share Hospitals

Section 1902(a)(13)(A) of the Act requires that, in the case of hospitals, payment rates take into account (in a manner consistent with the disproportionate share hospital requirements in section 1923 of the Act), the situation of hospitals which serve a disproportionate number of low-income patients with special needs. We have received comments regarding the disproportionate share hospital (DSH) program and its relationship to the application of the revised UPLs.

Comment:
Several commenters recommended that the regulation be delayed, coordinated with, or made contingent upon, the enactment of legislation that will increase the Statewide DSH caps and increase the facility-specific DSH caps. Some commenters suggested that the regulation be made contingent upon enactment of legislation that will increase the facility-specific DSH caps, as long as the legislation requires that DSH payments be used for hospitals and IGTs. Another commenter recommended that the implementation of the regulation be delayed until Congress has the opportunity for careful consideration of modification of the DSH legislation.

Response:
The BIPA requires that we publish this final rule by December 31, 2000. This same law provides for increases to the State DSH allotments (including for extremely low DSH States) and an increase in the hospital-specific DSH limits for public hospitals for a 2-year period. The effective date of the increase in DSH allotments coincides with the date that this final regulation is published in the
Federal Register
. The increase in hospital-specific DSH limits for public hospitals for a 2-year period that begins with the State fiscal year beginning after September 30, 2002.

Comment:
One commenter suggested that all payments to DSHs be exempt from the UPL regulations.

Response:
We disagree with this comment. While Medicaid DSH payments to these hospitals have been and remain exempt from UPLs, Medicaid services payments to these same hospitals have always been subject to the UPLs. Medicaid services payments are made only on behalf of Medicaid eligible individuals, and are subject to the efficiency and economy requirements in section 1902(a)(30) of the Act. Since the upper limits permit States to set reasonable rates for Medicaid services, we do believe it is necessary to exempt payments made to a DSH facility on behalf of a Medicaid eligible individual.

Comment:
Two commenters indicated that the rule should be modified to reflect the special needs of low-DSH allotment States.

Response:
The UPLs established in this regulation are caps placed on the amount of Medicaid payments States can make to groups of providers for services obtained by Medicaid eligible individuals. The limits do not impact the availability of Federal funds States may use for the payment of Medicaid DSH expenditures.

The BIPA provides extremely low DSH States with increases to their DSH allotments.

Comment:
One commenter noted that DSH funding should be increased by statutory revisions instead of by the 150 percent UPL since DSH expenditures are for uncompensated care.

Response:
As noted, recently passed legislation increased individual public hospital-specific (uncompensated care cost) limits under the DSH program. However, we realize some States and public hospitals have come to rely on the funds generated through the enhanced program payments. While we agree with this comment to a degree, we believe the 150 percent UPL provides an appropriate balance between our objective to reduce excessive payments and to allow States flexibility to target payments to under-funded hospitals.

Comment:
One commenter indicated that we should amend the proposed rule to include an exception to allow “proportionate share” payments of FFP up to the DSH cap if funds are dedicated or restricted to medical services coverage for low-income uninsured individuals in those States where the total of all disproportionate share payments does not exceed the State's DSH limit.

Response:
A link between the DSH payments and services would require a statutory change that would mandate that DSH payments be paid for specific services. The disproportionate share hospital program was created by Congress to allow States to make provider-specific payments to Medicaid providers that treat a disproportionately high number of Medicaid and low-income patients. DSH payments are not linked to specific patient claims or services. Therefore, we do not have authority to link DSH payments to specific services without a statutory change.

Comment:
One commenter indicated that the preamble of the proposed rule fails to explain why the DSH program, which provides funds for hospitals that serve low income patients with special needs, is inadequate to this task, thus justifying the 150 percent limit to make room for an additional funding stream.

Response:
Our intent in establishing these new limits is to reduce excessive payments that some States make to certain government operated health care facilities. In light of financial pressures facing government-operated hospitals, we believe a higher limit is appropriate to ensure Medicaid eligible individuals will continue to have adequate access to the health care services they provide.

Transition Periods for States That Have Approved Rate Enhancement State Plan Amendments §§ 447.272(b)(2)(i), (ii) and 447.321(b)(1)(i), (ii)

We recognize that immediate implementation of these new upper payment limits could disrupt State budget arrangements for States that have relied on funding obtained from approved rate enhancement State plan amendments (SPAs). Therefore, in the October 10, 2000 proposed rule, we included a transition policy for States with approved rate enhancement methodologies that would be affected by the proposed upper payment limits (65 FR 60151).

We had proposed two transition periods, which States may qualify for based on the effective date of the State plan amendment that provided for excessive payments. For approved amendments with an effective date on or after October 1, 1999, we proposed a transition period that would end on September 30, 2002. At the end of this period, Medicaid payments to governmental providers would have to stay within the new UPLs. We proposed a longer transition period for States with approved amendments that were effective prior to October 1, 1999. For these States, we proposed a 3-year phase down to the new UPLs beginning in the first full State fiscal year (FY) that begins calendar year 2002. During the 3-year phase down, States would be required to determine the amount of payment in excess of the proposed UPLs and gradually reduce this amount in 25 percent increments. We solicited comments on the material elements of these transition periods, including the starting point for the phase-out, the percentage reduction each year, and the appropriate transition period.

Congress passed the BIPA, which requires that we publish this final rule by December 31, 2000. Section 705(b) of BIPA provides for a transition period for States with a State Medicaid payment provision or methodology that meets both of the following criteria:

1. It was approved, deemed to have been approved, or was in effect on or

before October 1, 1992 (including any subsequent amendments or successor provisions or methodologies and whether or not a State plan amendment was made to carry out such provision or methodology after such date) or under which claims for Federal financial participation were filed and paid on or before such date.

2. It provides for payments that are in excess of the upper payment limit test established under this final rule (or which would be noncompliant with this final rule if the actual dollar payment levels made under the payment provision or methodology in the State fiscal year that begins during 1999 were continued).

Comment:
Many commenters expressed support for any transition period to re-adjust State budget plans impacted by the new UPLs. Other commenters indicated that the two tiered approach in §§ 447.272(a) and 447.321(a) seemed reasonable and should allow ample time for non-compliant States to bring their plans into compliance.

Response:
We appreciate the commenters' support. We agree that the amount of time permitted under the transition period is sufficient for States to come into compliance with the UPLs.

Comment:
Several commenters opposed providing a longer transition period to States that have amendments in effect prior to October 1, 1999. These commenters felt that the 2-year or shorter period was sufficient time for all States to bring their spending into compliance with the proposed regulations. Two commenters argued that avoiding disruption of States budget arrangements is not the purpose of Federal Medicaid matching payments nor the Secretary's duty under Federal Medicaid law. The 5-year transition simply rewards States that drew down more Federal funds than those States that followed statutory rules. These commenters were also critical of the 5-year transition period because it would be granted to every qualifying State regardless of financial circumstances. In support of this position, the commenters cited information indicating the financial health of most States is good and combined State balances totaled $21.2 billion in FY 2000.

Response:
While we agree with these comments in principle, we believe it is appropriate to phase-in the new UPLs over the timeframes described in the proposed rule. As addressed elsewhere in the preamble, States, providers, and beneficiaries expressed concern over how the application of the upper limits would impact Medicaid access and quality of care. We believe that the time permitted in the proposed rule is reasonable and balances the need to protect the fiscal integrity of the Medicaid program with State budget issues.

Comment:
We received many comments that recommended a longer transition period ranging from 6 to 10 years instead of our proposal for the 2 and 5 year transition period specified in the proposed rule. Some of the comments were State specific and others suggested that the 8-year transition period in HR 2614 (later enacted as BIPA), legislation pending in the House should form the basis for an extended transition period. Others suggested the length of the transition period should be proportional to the length of time the payment arrangement had been in effect or extended if economic conditions worsen.

Response:
We believe that the time permitted by our transition periods is sufficient and balances the need to protect the integrity of the Medicaid program and addresses State budget issues. Our paramount interest in issuing these regulations is to preserve the integrity of the Medicaid program. Under section 1903(a) of the Social Security Act, States are required to fund their share (in accordance with a statutory formula) of Medicaid covered health care services furnished to eligible individuals. In recognition that States may have diverted Federal matching funds for other purposes, whether health-related or not, we provided a transition period which would allow all States who qualify for a transition period to have at least one legislative session before SPAs would have to comply with the new upper limits. We also note that in passing section 705 of BIPA, Congress provided a longer transition period for States only with excessive payment methodologies in effect or approved on or before October 1, 1992. We believe that if Congress wanted all States to have an 8-year transition period as provided for in BIPA, they would have done so.

Comment:
Many commenters expressed opposition to having different transition periods based on the effective date of an SPA. In addition, commenters recommended that all affected States have the 5-year transition period. One commenter suggested that our basis of “reasonable reliance” on the funds is flawed. This commenter indicated that the length of time that these revenues have been available to a State is not an indication of the importance of these dollars. This commenter also did not believe a distinction could be made between affirmatively approved amendments and deemed approved amendments. Other commenters criticized the distinction because in their view the only difference is the timing of when States choose to submit amendments under current regulations.

Response:
We do not agree. We note that all amendments with an effective date of October 1, 1999 or later were “deemed approved” rather than affirmatively approved. The decision to let these SPAs lapse into approval was intended to avoid any appearance of ratification of these SPAs, and in response to an increase in the number and dollar magnitude of new plan submissions. This decision was consistent with our goal to address the loophole in existing UPL regulations. Depending on State response times to requests for additional information, the time between initial submission and eventual “approval” could take as long as 9 months. We made it clear to States whose SPAs were deemed approved after October 1, 1999, that we intended to change the regulation, and therefore, put them on notice that they could not permanently rely on the additional Federal dollars generated through these mechanisms. However, States with SPAs approved prior to October 1, 1999 were not aware of our intention to change the regulations related to UPL. The reliance concept is applicable because these funds have been built into State and provider budgets for longer periods of time. We note also that in enacting a third transition period for States with excessive payment methodologies in place on or before October 1, 1992, the Congress has ratified our approach to establish transition periods based on a “reliance concept.”

Comment:
Some commenters expressed concern that the 2-year phase-in period is too rapid and does not provide adequate time for State legislatures and Medicaid programs to prepare for the immediate and long range budgetary consequences they will confront as a result of the rule. One commenter felt that logistical barriers should compel us to reexamine the reasonableness of the timeframes it has presented for States to come into compliance with the rule. The commenter pointed out that 23 States have biennial budgets that have already been established, 13 States have legislatures that meet for short periods of time, and some States do not have full time legislatures who could timely respond within the proposed transition periods.

Response:
We did not find these comments to be persuasive. States with biennial budgets would be able to amend their budgets in the interim

legislative session. We also note that all amendments with an effective date of October 1, 1999 or later were “deemed approved” rather than affirmatively approved. The decision to let these SPAs lapse into approval was intentional and in response to an increase in the number and dollar magnitude of new plan submissions. This decision was consistent with our goal to address the loophole in existing UPL regulations. As indicated in the proposed rule, during the review of these amendments, we informed States of our intent to curtail excessive payments and advised the States not to rely on the continuation of this funding. Therefore, these States should have made contingency financing plans for important programs funded with these enhanced payments, knowing that we intended to curtail them as soon as possible. We again note that the Congress recently considered our transition periods in passing section 705 of BIPA. By requiring us to add a third transition period for States with methodologies approved or effective before October 1, 1992, Congress has affirmed our transition periods for other States.

Comment:
One commenter suggested it would be more appropriate to change the scope of the 2-year transition period to make it applicable to State plan amendments effective on or after October, 1999, and submitted before the effective date of the final regulation. The commenter indicated that the date of State plan approval by HCFA is not within the control of States and suggests the possibility of two States submitting equally acceptable amendments on the same date and having them approved by HCFA on different dates.

Response:
We do not agree with this comment. Once the final regulations are issued, we will rely on them to review State plan amendments and will disapprove amendments that do not comply with them. We also note that we have followed a uniform practice that treats all States equally in reviewing these amendments. Thus, we do not believe there is a possibility of different approval dates for two States with equally acceptable amendments submitted on the same date.

Comment:
Several commenters requested that this transition policy be revised to clarify that approved amendments with an effective date prior to October 1, 1999, but later amended or renewed after October 1, 1999, qualify for the extended transition period.

Response:
We agree that the transition policy as stated in the proposed rule is unclear with respect to States that annually renew or amend their rate methodologies that direct excessive payments to public non-State government providers. If a State had an approved amendment in effect prior to October 1, 1999 and amended or renewed that authority after October 1, 1999, the State would appear to qualify for two transition periods. In these cases where a State meets the requirements to qualify for more than one transition period, our policy is to give that State flexibility to decide which transition period to select. Because we have clarified this in the preamble, we do not believe we need to amend the regulation text.

Technical Clarifications on Transition and Base Year Issues

Comment:
Several commenters felt the base year amount should be adjusted to reflect annual changes in the Nursing Facility Market Basket Inflation Index and to recognize Balanced Budget Act (BBA) “give back” dollars currently under consideration by the Congress.

Response:
We disagree. These types of adjustments would not impact the base year, but instead would be taken into account when making the UPL calculation in the year it occurs. For instance, if the excessive payment to be phased down is $100 million, that number stays constant, and a different percentage (that is, 75, 50, 25) is applied to it each year. Over this period of time, the cost of services furnished by providers may increase, or the amount Medicare may pay may increase for the reasons cited by the commenter. The effect of these increases would be to raise the UPL for services in the year they are furnished.

Comment:
A commenter recommended that each State should be able to properly reflect any increases that occur in Medicare Skilled Nursing Facility Prospective Payment System rates during the course of the State FY 2000 in its UPL base period calculations. The commenter further recommended that States should be given additional time to utilize patient assessments and other data from FY 2000 to more precisely re-estimate their FY 2000 UPL for nursing facility services, even if these data are not available until after State FY 2000.

Response:
In computing UPLs, we require State estimates to be reasonable. With respect to the changing nature of Medicare payment systems, in previous refinements to UPL regulations, we issued guidance to States indicating that they must use Medicare payment principles in effect during the same period the services were furnished. We have also advised that States must take into account program differences, such as non-covered services or acuity levels that might overstate the estimate. These policies permit States flexibility to make refinements to Medicare payment systems that were in effect during State FY 2000.

Comment:
The same commenter was also concerned that each State's UPL estimate for State FY 2000, which determines the “excess” payments that will be phased-out, may not reflect any further change to the SNF PPS methodology that occur after State FY 2000. The commenter asked how a State using SNF PPS to compute its estimate will be able to receive a credit for increases in Medicare rates and a commensurate reduction in the excessive payments. The commenter suggests that an equitable approach would permit the State to factor any change in Medicare rates into the calculation of excess payments on an ongoing basis.

Response:
Our current policy permits and, in some cases, requires States to factor Medicare payment changes into their UPL estimates on an ongoing basis. However, these types of changes would not impact the base period “excessive payment” computation. Instead, they would affect the UPL calculations in the year services were furnished. If the affect of Medicare payment changes were to increase the UPL for services furnished in State FY 2003, then once the UPL amount was determined for that year, 75 percent of the base period excessive payment would be added to that amount.

Comment:
A commenter noted that the proposed rule differentiates between State and non-State government facilities and felt that to be consistent, the calculation of the base period and subsequent transition period payments should also exclude State owned and operated facilities.

Response:
The base calculation is derived by comparing actual Medicaid payments paid to all providers to the maximum amount allowed under the applicable new UPL for services furnished during State FY 2000.

Comment:
One commenter asked for clarification of “State fiscal year” with respect to the base period. The commenter believes the proposed rule is ambiguous because the phase-out period is described to begin in the State FY that begins in calendar year (CY) 2002. The commenter requested that we confirm that the “State fiscal year 2000” is the State FY year that begins in CY 2000. Another commenter urged that base year excessive payment computation be based on the State FY between 2000 and 2003 in which the highest amount of payment was made.

Response:
We did not intend any ambiguity nor do we believe the proposed rule is ambiguous with respect to the base period. In the discussion of the base period calculation, the proposed rule clearly indicates the services and payments for such services in State FY year 2000 shall be used to compute the excessive payment. In this instance, we are referring to the State FY that ends in calendar year 2000 since this year would commonly be understood and referred to as State FY 2000. We are maintaining State FY 2000 as the base period for the purpose of computing the phase down amount. This year was selected because it represents the last complete State FY prior to this rule change.

Comment:
Several commenters indicated that the text of § 447.272(b)(2)(iii) as proposed, limits payments to the lower of the base State FY 2000 payments or the limit based on the reduction schedule. Commenters stated that this restriction could result in a lower transition payment than that which would be available in the absence of the transition provisions. This requirement also appears in § 447.321(b)(1)(iii) and (b)(2)(iii). Commenters recommended that the reference to “base State FY 2000 payments” be deleted from each regulation.

Response:
While we have included generous transition periods, we do not think it is appropriate to permit States to make payments that would further increase the amount of payment that is in excess of the new UPLs. We have revised the text of the transition provisions in §§ 447.272(e) and 447.321(e) to make this clarification. We have also extended this policy to all transition periods.

Comment:
Many commenters suggested alternative starting points for this transition period. Several commenters recommended that the start point of the 3-year “phase down” period begin with the start of Federal FY 2003 rather than in the State FY that begins in CY 2002. These commenters pointed out that this change would ensure all States that qualify for this transition period receive the same amount of time to come into full compliance with the new UPLs. They also noted that this change would extend the same “hold harmless” protection afforded States in the shorter transition period.

Response:
Because the additional time permitted under the longer transition period is based on State fiscal years, we realize that some long transition States may have to begin to comply with the 25 percent reduction schedule before the expiration of the shorter transition period. However, we would not expect this result to create any hardships since the longer transition period will permit, at a minimum, 30 extra months to make payments at higher levels that would have been permitted under the shorter transition period. We note that the use of State fiscal years is consistent with the Congressional implementation of facility specific disproportionate share hospital payment limits, except that we have provided States with considerably more time to come into full compliance.

General Comments

Comment:
Several commenters asked that we clarify that payments for clinic services will receive the same transition period as public hospital services.

Response:
The same transition periods apply equally to each of the five Medicaid services that are subject to the new UPLs. Should Medicaid payments for nursing facility or clinic services exceed the maximum permitted under the new UPLs, the State would be afforded the applicable “transition periods” set forth in §§ 447.272(e) or 447.321(e).

Comment:
One commenter indicated that a transition protection should be available in any transition year in which a State would otherwise exceed the applicable limit. While the proposed rule extends the transition periods to States with rate enhancements that would be impacted by the new UPLs, the commenter believed that the proposed rule was ambiguous with respect to when the rate enhancement arrangement is to be determined non-compliant for the purpose of receiving the benefit of a transition period. The commenter asserts that the preamble to the proposed rule suggests that the relevant period for determining non-compliance is State FY 1999-2000. Assuming this is the case, the commenter believes that freezing the determination of non-compliance to a particular year inappropriately denies transition assistance to States that have not taken full advantage of UPL flexibility. The transition rules were apparently designed to phase-down those States that would substantially exceed the new UPL. The commenter feels that the transition provisions fail to provide protection to States that may exceed the new UPL during the transition because of factors beyond their control, even though they were compliant during the base year. Because payment levels in such a State can vary due to a number of factors, such as increase in Medicaid enrollment, the commenter recommends that the determination of eligibility for a transition rule should be made on a current period basis.

Response:
A transition period is available to States that have approved methodologies that result in provider payments that exceed the new UPLs at the time of this rule change. If the payments result from an approved State plan methodology that was effective on or after October 1, 1999, the State would be eligible for the abbreviated transition period. If the payments result from an approved State plan methodology that was in effect prior to October 1, 1999, the State would qualify for one of the extended transition periods, depending on when the State plan methodology was effective or approved. The commenter is correct in that State FY 2000 is the relevant period for determining the excessive payment amount that will be factored into a longer transition period.

Comment:
In phasing out a payment methodology during a particular transition period, a commenter asked if we will require new State plan amendments to effect reductions in payment, or will we consider compliance with the regulation, such as applying the percentage in the regulation to the last approved State plan amendment sufficient without a new State plan amendment.

Response:
Given the diverse nature of UPL State plan amendments, it is difficult to describe a single action that would be appropriate in all cases. States are required under 42 CFR 430.12(c) to reflect changes in Federal law, regulations, policy interpretations or court decisions. We anticipate States, in many cases, will need to change their payment methodologies in order to reduce payments to levels that comply with the new UPLs and ceilings during the transition period. Under § 447.257 and § 447.304, we provide disallowance authority to the extent that States do not submit conforming State plan amendments. We encourage affected States to contact their HCFA Regional Office for guidance specific to their situation.

Comment:
The proposed UPL rule suggests that the transition period for States are applicable only to the new category: other government-owned or operated hospitals. The preamble, however, describes these transition periods as applicable to the entire State program. The commenter recommends clarification of the transition periods' applicability consistent with the preamble.

Response:
The transition provisions apply to approved amendments and/or waivers that result in rate enhancements that exceed the new UPLs in a particular

State. In addition, in the case of outpatient hospital services and clinic services, a new UPL applies to State government-owned or operated and non-State-government owned or operated facilities. Although States make payments to all provider types such as inpatient hospital, nursing facilities, and clinics, the transition provision would only apply to those payment arrangements that result in payments that exceed the new UPLs. Under a State's Medicaid program, for example, should State payments only to State NFs exceed the new UPLs, the State would be eligible only for the transition period relating to NF services, and not the other service categories that are subject to new UPLs.

Comment:
We received numerous comments recommending that we grandfather existing UPL enhanced payment proposals. These comments suggested various bases for selection, for example, on approval as of a specific point in time, length of time a program had been operating, or other qualifying factors such as compliance with a maintenance of effort provision or extremely low DSH spending.

Response:
Our intent in issuing these new UPLs is to ensure States set provider payments rates that are consistent with efficiency and economy and made in accordance with section 1903(a) of the Social Security Act. We believe this is necessary to preserve the integrity of the Medicaid program. Any type of grandfather solution would effectively result in the permanent continuation of the payment arrangements that necessitated the issuance of these new payment limits and therefore would not be an effective policy in preserving the integrity of the Medicaid program. We also believe that a grandfather policy would be arbitrary and capricious and would not withstand legal challenge. Such targeted relief to specific States or groups of States would need to be addressed legislatively.

Comment:
Some commenters suggested that the final regulation include a list of States affected by the regulation and which transition the State qualifies for.

Response:
On an individual basis, we plan to work with those States affected by the new UPLs.

Comment:
A few commenters requested clarif

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A01-635. Public record. Not legal advice.