Medicaid and Children's Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered in Managed Care, Medicaid and CHIP Comprehensive Quality Strategies, and Revisions Related to Third Party Liability

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 431, 433, 438, 440, 457 and 495

[CMS-2390-P]

RIN 0938-AS25

Medicaid and Children's Health Insurance Program (CHIP) Programs; Medicaid Managed Care, CHIP Delivered in Managed Care, Medicaid and CHIP Comprehensive Quality Strategies, and Revisions Related to Third Party Liability

AGENCY:

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

ACTION:

Proposed rule.

SUMMARY:

This proposed rule would modernize the Medicaid managed care regulations to reflect changes in the usage of managed care delivery systems. The proposed rule would align the rules governing Medicaid managed care with those of other major sources of coverage, including coverage through Qualified Health Plans and Medicare Advantage plans; implement statutory provisions; strengthen actuarial soundness payment provisions to promote the accountability of Medicaid managed care program rates; and promote the quality of care and strengthen efforts to reform delivery systems that serve Medicaid and CHIP beneficiaries. It would also ensure appropriate beneficiary protections and enhance policies related to program integrity. This proposed rule would also require states to establish comprehensive quality strategies for their Medicaid and CHIP programs regardless of how services are provided to beneficiaries. This proposed rule would also implement provisions of the Children's Health Insurance Program Reauthorization Act of 2009 (CHIPRA) and addresses third party liability for trauma codes.

DATES:

To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on July 27, 2015.

ADDRESSES:

In commenting, please refer to file code CMS-2390-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of four ways (please choose only one of the ways listed):

1.

Electronically.

You may submit electronic comments on this regulation to

http://www.regulations.gov

. Follow the “Submit a comment” instructions.

2.

By regular mail.

You may mail written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-2390-P, P.O. Box 8016, Baltimore, MD 21244-8016.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3.

By express or overnight mail.

You may send written comments to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-2390-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.

4.

By hand or courier.

Alternatively, you may deliver (by hand or courier) your written comments ONLY to the following addresses prior to the close of the comment period:

a. For delivery in Washington, DC—Centers for Medicare & Medicaid Services, Department of Health and Human Services, Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue SW., Washington, DC 20201.

(Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without federal government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.)

b. For delivery in Baltimore, MD—Centers for Medicare & Medicaid Services, Department of Health and Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.

If you intend to deliver your comments to the Baltimore address, call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members.

Comments erroneously mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

For information on viewing public comments, see the beginning of the

SUPPLEMENTARY INFORMATION

section.

FOR FURTHER INFORMATION CONTACT:

Nicole Kaufman, (410) 786-6604, Medicaid Managed Care Operations.

Kristin Younger, (410) 786-3869, Medicaid Managed Care Quality.

Meg Barry, (410) 786-1536, CHIP.

Nancy Dieter, (410) 786-7219, Third Party Liability.

SUPPLEMENTARY INFORMATION:

Inspection of Public Comments:

All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received:

http://www.regulations.gov

. Follow the search instructions on that Web site to view public comments.

Comments received timely would also be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951.

Table of Contents

I. Medicaid Managed Care

A. Background

B. Provisions of the Proposed Regulations

1. Alignment With Other Health Coverage Programs

a. Marketing

b. Appeals and Grievances

c. Medical Loss Ratio

2. Standard Contract Provisions

3. Setting Actuarially Sound Capitation Rates for Medicaid Managed Care Programs

a. Definitions

b. Actuarial Soundness Standards

c. Rate Development Standards

d. Special Contract Provisions Related to Payment

e. Rate Certification Submission

4. Other Payment and Accountability Improvements

a. Prohibition of Additional Payments for Services Covered Under MCO, PIHP, or PAHP Contracts

b Subcontractual Relationships and Delegation

c. Program Integrity

d. Sanctions

e. Deferral and/or Disallowance of FFP for Non-Compliance With Federal Standards

f. Exclusion of Entities

5. Beneficiary Protections

a. Enrollment

b. Disenrollment Standards and Limitations

c. Beneficiary Support System

d. Coverage and Authorization of Services and Continuation of Benefits While the MCO, PIHP, or PAHP Appeal and the State Fair Hearing Are Pending

e. Continued Services to Beneficiaries and Coordination and Continuity of Care

f. Advancing Health Information Exchange

g. Managed Long-Term Services and Supports

h. Stakeholder Engagement for MLTSS

6. Modernize Regulatory Requirements

a. Availability of Services, Assurances of Adequate Capacity and Services, and Network Adequacy Standards

b. Quality of Care

c. State Monitoring Standards

d. Information Standards

e. Primary Care Case Management

f. Choice of MCOs, PIHPs, PAHPs, PCCMs and PCCM Entities

g. Non-Emergency Medicaid Transportation PAHPs

h. State Plan Standards

7. Implementing Statutory Provisions

a. Encounter Data and Health Information Systems

b. Standards for Contracts Involving Indians, Indian Health Care Providers and Indian Managed Care Entities

c. Emergency and Post-Stabilization Services

8. Definitions and Technical Corrections

a. Definitions

b. Technical Corrections

II. CHIP Requirements

A. Background

B. Provisions of the Proposed Regulations

1. Definitions

2. Federal Financial Participation

3. Basis, Scope, and Applicability

4. Contracting Requirements

5. Rate Development Standards and Medical Loss Ratio

6. Non-Emergency Medical Transportation PAHPs

7. Information Requirements

8. Requirement Related to Indians, Indian Health Care Providers, and Indian Managed Care Entities

9. Managed Care Enrollment, Disenrollment, and Continued Services to Beneficiaries

10. Conflict of Interest Safeguards

11. Network Adequacy Standards

12. Enrollee Rights

13. Provider-Enrollee Communication

14. Marketing Activities

15. Liability for Payment

16. Emergency and Poststabilization Services

17. Access Standards

18. Structure and Operation Standards

19. Quality Measurement and Improvement

20. External Quality Review

21. Grievances

22. Sanctions

23. Program Integrity—Conditions Necessary to Contract as an MCO, PAHP, or PIHP

III. Third Party Liability

A. Background

B. Provisions of the Proposed Regulations

IV. Collection of Information Requirements

V. Response to Comments

VI. Regulatory Impact Analysis

Acronyms

Because of the many organizations and terms to which we refer by acronym in this proposed rule, we are listing these acronyms and their corresponding terms in alphabetical order below:

[the] Act Social Security Act

Affordable Care Act The Affordable Care Act of 2010 (which is the collective term for the Patient Protection and Affordable Care Act (Pub. L. 111-148) and the Health Care Education Reconciliation Act (Pub. L. 111-152))

ARRA American Recovery and Reinvestment Act of 2009

BBA Balanced Budget Act of 1997

BIA Bureau of Indian Affairs

CDIB Certificate of Degree of Indian Blood

CPE Certified Public Expenditure

CFR Code of Federal Regulations

CBE Community Benefit Expenditures

CHIP Children's Health Insurance Program

CHIPRA Children's Health Insurance Program Reauthorization Act of 2009

CMS Centers for Medicare & Medicaid Services

DUR Drug Utilization Review [program]

EQR External Quality Review

EQRO External Quality Review Organization

FFM Federally-Facilitated Marketplaces

FFP Federal Financial Participation

FFS Fee-For-Service

FMAP Federal Medical Assistance Percentage

FQHC Federally Qualified Health Center

FY Fiscal Year

HHS [U.S. Department of] Health and Human Services

HIO Health Insuring Organization

HIPAA Health Insurance Portability and Accountability Act of 1996

ICD International Classification of Diseases

IGT Intergovernmental Transfer

IHCP Indian Health Care Provider

LEP Limited English Proficiency

LTSS Long-Term Services and Supports

MA Medicare Advantage

MACPAC Medicaid and CHIP Payment and Access Commission

MCO Managed Care Organization

MFCU Medicaid Fraud Control Unit

MHPA Mental Health Parity Act of 1996

MHPAEA Mental Health Parity and Addiction Equity Act MHPAEA

MLTSS Managed Long-Term Services and Supports

MLR Medical Loss Ratio

MSIS Medicaid Statistical Information System

MH/SUD Mental Health/Substance Use Disorder Services

NAMD National Association of Medicaid Directors

NCQA National Committee for Quality Assurance

NEMT Non-Emergency Medical Transportation

OMB Office of Management and Budget

PCCM Primary Care Case Manager

PHS Public Health Service Act

PIP Performance Improvement Project

PMPM Per-member Per-month

PAHP Pre-paid Ambulatory Health Plan

PIHP Pre-paid Inpatient Health Plan

QHP Qualified Health Plans

SHO State Health Official Letter

SBC Summary of Benefits and Coverage

SFH State Fair Hearing

SBM State-Based Marketplaces

SIU Special Investigation Unit

SMDL  State Medicaid Director Letter

T-MSIS Transformed Medicaid Statistical Information System

TPL Third Party Liability

I. Medicaid Managed Care

A. Background

In 1965, amendments to the Social Security Act (the Act) established the Medicaid program as a joint federal and state program to provide medical assistance to individuals with low incomes. Under the Medicaid program, each state that chooses to participate in the program and receive federal financial participation for program expenditures establishes eligibility standards, benefits packages, and payment rates, and undertakes program administration in accordance with federal statutory and regulatory standards. The provisions of each state's Medicaid program are described in the state's Medicaid “state plan.” Among other responsibilities, we approve state plans and monitor activities and expenditures for compliance with federal Medicaid laws to ensure that beneficiaries receive access to quality health care. (Throughout this preamble, we use the term “beneficiaries” to mean “individuals eligible for and receiving Medicaid benefits.”)

Until the early 1990s, most Medicaid beneficiaries received Medicaid coverage through fee-for-service (FFS) arrangements. However, over time that practice has shifted and states are increasingly utilizing managed care arrangements to provide Medicaid coverage to beneficiaries. Under managed care, beneficiaries receive part or all of their Medicaid services from health care providers who are paid by an organization that is under contract with the state; the organization receives a monthly capitated payment for a specified benefit package. In 1992, 2.4 million Medicaid beneficiaries (or 8 percent of all Medicaid beneficiaries) accessed part or all of their Medicaid benefits through capitated health plans; by 1998, that number had increased fivefold to 12.6 million (or 41 percent of all Medicaid beneficiaries). In fiscal year (FY) 2011, at least 39 million (or 58 percent of all Medicaid beneficiaries) in 39 states and the District of Columbia accessed part or all of their Medicaid benefits through such capitated health plans.

1

1

MACPAC,

Report to Congress on Medicaid and CHIP

(June 2014), tables 11 and 14 at pgs. 106 and 120, available at

https://www.macpac.gov/wp-content/uploads/2015/01/2014-06-13_MACPAC_Report.pdf

.

In a Medicaid managed care delivery system, through contracts with health plans, states require that the plan provide or arrange for a specified package of Medicaid services for

enrolled beneficiaries. Under these contracts, the organization offering the health plan is paid a fixed, prospective, monthly payment for each enrolled beneficiary. This payment approach is referred to as “capitation.” Beneficiaries enrolled in capitated managed care organizations (MCOs) must access the Medicaid services covered under the state plan through the health plan. States may contract with managed care entities that offer comprehensive benefits, referred to as MCOs. Alternatively, managed care plans can receive a capitated payment for a limited array of services, such as behavioral health or dental services. Such entities that receive a capitated payment for a limited array of services are referred to as “prepaid inpatient health plans” (PIHPs) or “prepaid ambulatory health plans” (PAHPs) depending on the scope of services the health plan provides. Finally, applicable federal statute recognizes primary care case management as a type of managed care entity subject to some of the same standards as MCOs. States that do not pursue capitated arrangements but want to promote coordination and care management may contract with primary care providers or care management entities to support better health outcomes and increase the quality of care delivered to beneficiaries, but continue to pay for covered benefits on a FFS basis directly to the health care provider.

As Medicaid managed care grew in the 1990's, the Congress enacted specific standards for Medicaid managed care programs in sections 4701 through 4709 of the Balanced Budget Act of 1997 (BBA) (Pub. L. 105-33, enacted on August 5, 1997). The BBA represented the first comprehensive revision to federal statutes governing Medicaid managed care since the early 1980s. In general, the BBA modified the federal statute to: (1) Allow states to mandate the enrollment of certain Medicaid beneficiaries into MCOs without having to first seek a waiver of federal statutory standards; (2) eliminate standards on the composition of enrollment in MCOs that had not proven to be effective (the 75/25 rule limiting Medicare and Medicaid enrollment to 75 percent of total enrollment); (3) apply consumer protections that were becoming widespread in the private sector and Medicare markets to Medicaid beneficiaries (for example, consumer information standards and standards for access to services); and (4) apply certain advances and developments in health care quality improvement that were then widely used in the private sector to Medicaid managed care programs. These standards are codified in sections 1903 and 1932 of the Act and implemented in regulations at 42 CFR part 438 published June 14, 2002 (67 FR 40989), with an effective date of August 13, 2002.

Since the publication of the Medicaid managed care regulations in 2002, the landscape for health care delivery has continued to change, both within the Medicaid program and outside (in Medicare and the private sector market). States have continued to expand the use of managed care over the past decade, serving both new geographic areas and broader groups of Medicaid beneficiaries. In particular, states have expanded managed care delivery systems to include seniors and persons with disabilities, as well as those who need long-term services and supports (LTSS). In 2004, eight states (AZ, FL, MA, MI, MN, NY, TX, and WI) had implemented Medicaid managed long-term services and supports (MLTSS) programs. By January 2014, 12 additional states had implemented MLTSS programs (CA, DE, IL, KS, NC, NM, OH, PA, RI, TN, VA, WA).

The predominant form of managed care in Medicaid is capitated risk-based arrangements—virtually identical in structure and payment to arrangements in the commercial marketplace. Notably, in FY 2011, at least 58 percent of all Medicaid beneficiaries (about 39 million individuals) in 39 states and the District of Columbia accessed part or all of their Medicaid benefits through such capitated health plans, accounting for approximately 24 percent of all Medicaid spending. These figures are based on the Medicaid and CHIP Payment and Access Commission (MACPAC) Report to Congress on Medicaid and CHIP (June 2014).

2

Some states carve out behavioral health or dental services from the comprehensive acute care MCO and manage such services under a risk-based PIHP or PAHP. Additional states have added or expanded managed care programs since 2012.

2

MACPAC,

Report to Congress on Medicaid and CHIP

(June 2014) at pgs. 106, 119, and 120, available at

https://www.macpac.gov/wp-content/uploads/2015/01/2014-06-13_MACPAC_Report.pdf

.

States may implement a managed care delivery system using four types of federal authorities. Under the authority of section 1915(a) of the Act, states can implement a voluntary managed care program by executing a contract with organizations that the state has procured using a competitive procurement process. To require beneficiaries to enroll in managed care to receive services, a state must obtain approval from CMS under two primary authorities:

(1) Through a state plan amendment that meets standards set forth in section 1932 of the Act, states can implement a mandatory managed care delivery system. This authority does not allow states to require beneficiaries who are dually eligible for Medicare and Medicaid (dually eligible), American Indians/Alaska Natives, or children with special health care needs to enroll in a managed care program. State plans, once approved, remain in effect until modified by the state.

(2) CMS may grant a waiver under section 1915(b) of the Act, permitting a state to require all Medicaid beneficiaries to enroll in a managed care delivery system, including dually eligible beneficiaries, American Indians/Alaska Natives, or children with special health care needs. After approval, a state may operate a section 1915(b) waiver for a 2-year period (certain waivers can be operated for up to 5 years if they include dually eligible beneficiaries) before requesting a renewal for an additional 2 (or 5) year period.

CMS may also authorize managed care programs as part of demonstration projects under section 1115(a) of the Act that includes waivers permitting the state to require all Medicaid beneficiaries to enroll in a managed care delivery system, including dually eligible beneficiaries, American Indians/Alaska Natives, and children with special health care needs. Under this authority, states may seek additional flexibility to demonstrate and evaluate innovative policy approaches for delivering Medicaid benefits, as well as the option to provide services not typically covered by Medicaid. Such flexibility is approvable only if the objectives of the Medicaid statute are likely to be met, and is subject to evaluation.

These authorities may permit states to operate their programs without complying with the following standards of Medicaid law outlined in section of 1902 of the Act:

• Statewideness [section 1902(a)(1) of the Act]: States may implement a managed care delivery system in specific areas of the State (generally counties/parishes) rather than the whole state;

• Comparability of Services [section 1902(a)(10) of the Act]: States may provide different benefits to people enrolled in a managed care delivery system; and

• Freedom of Choice [section 1902(a)(23)(A) of the Act]: States may

require people to receive their Medicaid services only from a managed care plan or primary care provider.

Laws passed since the Medicaid managed care regulations were promulgated in 2002 have altered the Medicaid program to such a degree that we believe our current regulatory framework for managed care is no longer the most appropriate. Such legislation includes the Medicare Improvement for Patients and Providers Act (MIPPA) (Pub. L. 110-275, enacted on July 15, 2008), the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (sections 511 and 512 of the Tax Extenders and Alternative Minimum Tax Relief Act of 2008) (MHPAEA) (Division C of Pub. L. 110-343, enacted on October 3, 2008), the Children's Health Insurance Program Reauthorization Act (CHIPRA) (Pub. L. 111-3, enacted on February 4, 2009), and the Patient Protection and Affordable Care Act of 2010 (Affordable Care Act) (Pub. L. 111-148, enacted March 23, 2010). We note, in particular, that the Affordable Care Act provided states the option to expand Medicaid eligibility to most low-income adults, bringing millions of new beneficiaries into the Medicaid program, most of whom are likely to receive coverage through capitated managed care. In addition, the coverage provided under the Affordable Care Act has also made issues of coordination and alignment with the private insurance market increasingly important to improve operational efficiencies for health plans that operate in both public and private markets, and improve the experience of care for individuals moving between sources of health care coverage. Specifically, Medicaid beneficiaries who experience increases in income may move to receiving health insurance coverage through qualified health plans in the Marketplace. Greater alignment between Medicaid managed care plans and qualified health plans will help these individuals transition between sources of coverage.

Because the health care delivery landscape has changed substantially, both within the Medicaid program and outside of it, and reflecting the significant role that managed care plays in the Medicaid program, this rule proposes to modernize the Medicaid managed care regulatory structure to facilitate and support delivery system reform initiatives to improve health care outcomes and the beneficiary experience while effectively managing costs. To that end, the proposed rule includes provisions that would strengthen the ability of states to use managed care to promote innovative and cost effective methods of delivering care to Medicaid and CHIP beneficiaries, to incent managed care plans to engage in state activities that promote certain performance targets, and to identify strategies for value-based purchasing models for provider reimbursement. The rule also includes provisions that strengthen the quality of care provided to Medicaid beneficiaries, including measuring and managing quality and improving coordination of care. The rule also promotes more effective use of data in overseeing managed care and promotes advances in health information exchange.

This proposed rule would revise the Medicaid managed care regulations to align with other statutory and regulatory provisions that pertain to other sources of coverage, strengthen actuarial soundness and other payment regulations to improve accountability of rates paid in the Medicaid managed care program, ensure beneficiary protections, and incorporate statutory provisions affecting Medicaid managed care passed since 2002. In addition, the rule promotes beneficiary access to care by strengthening provider networks. This proposed rule also recognizes that through managed care plans, state and federal taxpayer dollars are used to purchase covered services from providers on behalf of Medicaid enrollees, thus ensuring accountability and strengthening program integrity safeguards are necessary to ensure the appropriate stewardship of those funds.

We recognize that in addition to the changes the Affordable Care Act brought to the Medicaid program, it also included significant changes for private insurance and group health plans. Among the reforms of the private health care coverage market are the creation of minimum standards for the treatment of appeals by covered individuals, minimum medical loss ratios for health insurance, and certain minimum coverage standards for essential health benefits and preventive services. The Affordable Care Act created the Marketplaces (also known as “Exchanges”) and qualified health plans (QHPs), which are private health plans that are certified as meeting minimum standards.

See

45 CFR 155.20. Only QHPs can be offered through Marketplaces and they are the only plans for which federal premium tax credits and cost-sharing reductions are available to assist many consumers with the cost of health care coverage. In developing these Medicaid managed care proposed regulations, we considered the market reforms, the standards established for QHPs, and our Medicare Advantage (MA) experience, which is the managed care component of the Medicare program that has also grown significantly since 2002.

Therefore, this proposed rule seeks to align Medicaid managed care rules with Marketplace or MA standards, where appropriate and feasible, to support administrative simplicity for states and health plans to manage health care delivery across different product lines, as well as to enhance beneficiary protections. In general, we believe that adopting standards for Medicaid managed care that parallel or align with those in the private health care and MA context where appropriate will benefit Medicaid programs and enrollees, both because those minimum standards would provide an appropriate level of protection for enrollees and because alignment would ease the administrative burden on issuers and regulators that work in all of those contexts and markets. By aligning Medicaid managed care with other programs when possible, we believe enrollees will experience smoother transitions and have fewer disruptions to care when they transition among sources of health care coverage. Improving beneficiary experience and alignment are important goals of this proposed rule, and the proposed changes would enable states and health plans to more successfully achieve these goals.

B. Provisions of the Proposed Regulations

We have restated the entirety of part 438 and incorporated our proposed changes into the regulation text due to the extensive nature of our proposal. However, for many sections within part 438, we are not proposing substantive changes. This preamble discusses our proposed changes with discussion of the current law where appropriate.

Throughout this document, the term “PAHP” is used to mean a prepaid ambulatory health plan that does not exclusively provide non-emergency medical transportation services. Whenever this document is referencing a PAHP that exclusively provides non-emergency medical transportation services, it will be specifically addressed as a “Non-Emergency Medical Transportation (NEMT) PAHP.” In addition, many of our proposals incorporate “PCCM entities” into existing regulatory provisions and the proposed amendments. Our proposal on this topic is discussed in section I.B.6.e. of this proposed rule.

In general, we have organized the subjects in this proposed rule according to one of the goals described above, but

many of the subjects could be attributed to more than one goal.

1. Alignment With Other Health Coverage Programs

a. Marketing (§ 438.104)

Current regulation at § 438.104 imposes certain limits on MCOs, PIHPs, PAHPs, and PCCMs in connection with marketing activities; our 2002 final rule based these limits on those set forth in section 1932(d)(2) of the Act for MCOs and PCCMs and extended them to PIHPs and PAHPs based on our authority at section 1902(a)(4) of the Act. The creation of qualified health plans (QHPs) by the Affordable Care Act and changes in managed care delivery systems since the adoption of the 2002 rule are the principle reasons behind our proposal to revise the marketing standards applicable to Medicaid managed care programs. QHPs are defined in 45 CFR 155.20.

We propose to revise § 438.104(a) as follows: To (1) to amend the definition of “marketing” in § 438.104 to specifically exclude communications from a QHP to Medicaid beneficiaries even if the issuer of the QHP is also the entity providing Medicaid managed care; (2) to amend the definition of “marketing materials;” and (3) to add a definition for “private insurance” to clarify that QHPs certified for participation in the FFM or an SBM are excluded from the term “private insurance” as it is used in this regulation. In recognition of the wide array of services PCCM entities provide in some markets, we also propose to include PCCM entities in § 438.104 as we believe it is important to extend the beneficiary protections afforded by this section to enrollees of PCCM entity enrollees by proposing to revise paragraphs (a) and (b) to include “or PCCM entity” wherever the phrase “MCO, PIHP, PAHP or PCCM” appears. We are not proposing changes to paragraph (b), except for one clarifying change to (b)(1)(v) as noted below.

We have received several questions from Medicaid managed care plans about the implications of current Medicaid marketing rules in § 438.104 for their operation of QHPs. Specifically, stakeholders have asked whether the provisions of § 438.104(b)(1)(iv) would prohibit a carrier that offers both a qualified health plan (QHP) and a managed care organization (MCO) from marketing both products. The provision in the regulations implements section 1932(d)(2)(C) of the Act, titled “Prohibition of Tie-Ins.” In issuing regulations implementing this provision in 2002, we clarified that we interpreted it as intended to preclude tying enrollment in the Medicaid plan to purchasing other types of private insurance (67 FR 41027). Therefore, it would not apply to the issue of a possible alternative to the Medicaid plan, which a QHP could be if the consumer is determined as not Medicaid eligible or loses Medicaid eligibility. Section 438.104(b)(1)(iv) only prohibits insurance policies that would be sold “in conjunction with” enrollment in the Medicaid plan.

We recognize that a single legal entity could be operating separate lines of business, that is, a Medicaid MCO (or PIHP or PAHP) and a QHP. Issuers of QHPs may also contract with states to provide Medicaid managed care plans; in some cases the issuer might be the MCO, PIHP, or PAHP, or the entity offering the Medicaid managed care plan, thus providing coverage to Medicaid beneficiaries. Many Medicaid health plan contracts with states executed prior to 2014 did not anticipate this situation and may contain broad language that could unintentionally result in the application of Medicaid standards to the non-Medicaid lines of business offered by the single legal entity. For example, if a state defines the entity subject to the contract through reference to something shared across lines of business, such as licensure as an insurer, both the Medicaid MCO and QHP could be subject to the terms of the contract with the state. To prevent ambiguity and overly broad restrictions, contracts should contain specific language to clearly define the state's intent that the contract is specific to the Medicaid plan being offered by the entity. This becomes critically important in the case of a single legal entity operating Medicaid and non-Medicaid lines of business. We strongly recommend that states and Medicaid health plans review their contracts to ensure that it clearly defines each party's rights and responsibilities.

As consumers may experience periodic transitions between Medicaid and QHP eligibility, and families may have members who are divided between Medicaid and QHP coverage, selecting a carrier that offers both types of products may be the most effective way for some consumers to manage their health care needs. Improving coordination of care and minimizing disruption to care is best achieved when the consumer has sufficient information about coverage options when making a plan selection. We believe that our proposed regulatory revisions would enable more complete and effective information sharing and consumer education while still upholding the intent of the Medicaid beneficiary protections detailed in the Act. Section 438.104 alone does not prohibit a managed care plan from providing information on a qualified health plan (QHP) to enrollees who could potentially enroll in a QHP as an alternative to the Medicaid plan due to a loss of eligibility or to potential enrollees who may consider the benefits of selecting an MCO, PIHP, PAHP, or PCCM that has a related QHP in the event of future eligibility changes. Our proposal would set minimum marketing standards that a state may build on as part of its contracts with entities providing Medicaid managed care.

Finally, we have also received inquiries about the use of social media outlets for dissemination of marketing information about Medicaid managed care. The definition of “marketing” in § 438.104 includes “any communication from” an entity that provides Medicaid managed care (including MCOs, PIHPs, PAHPs, etc.) and “marketing materials” include “materials that . . . are produced in any medium.” These definitions are sufficiently broad to include social media and we intend to interpret and apply § 438.104 as applicable to communication via social media and electronic means. To address these inquiries and to make this interpretation clear, we also propose to clarify the regulation text by adding unsolicited contact by email and texting as prohibited cold-call marketing activities in paragraph (b)(1)(v).

We believe these proposed revisions would clarify, for states and issuers, the scope of the marketing provisions in § 438.104, which generally are more detailed and restrictive than those imposed on QHPs under 45 CFR 156.225. While we continue to believe that the Medicaid managed care regulation correctly provides significant protections for Medicaid beneficiaries, we recognize that the increased prevalence in some markets of carriers offering both QHP and Medicaid products and seek to provide clearer and more targeted Medicaid managed care standards with our proposed changes.

b. Appeals and Grievances (§ 438.400, § 438.402, § 438,404, § 438.406, § 438.408, § 438.410, § 438.414, § 438.416, § 438.424, § 431.200, § 431.220 and § 431.244)

We propose several modifications to the current regulations governing the grievance and appeals system for Medicaid managed care to further align and increase uniformity between rules for Medicaid managed care and rules for

MA managed care plans and rules applicable to private health insurance and group health plans. The existing differences between the rules applicable to Medicaid managed care and those applicable to the MA and private insurance and group health plans concerning grievance and appeals processes inhibit the efficiencies that could be gained with a streamlined grievance and appeals process that applies across the market. A streamlined process would make navigating the appeals system more manageable for consumers in an increasingly fluid health care market. Our proposed changes in subpart F of part 438 would adopt new definitions, update appeal timeframes, and align certain processes for appeals and grievances. We also propose modifying §§ 431.200, 431.220 and 431.244 to effectuate the changes proposed to subpart F of part 438.

We are concerned that the different appeal and grievance processes for the respective programs and health coverage causes: (1) Confusion for beneficiaries who are transitioning between private health care coverage, MA coverage, and Medicaid managed care; and (2) inefficiencies for health insurance issuers that participate in both the public and commercial sectors. Aligning appeal and grievance procedures across these areas will provide consumers with a more manageable and consumer friendly appeals process and allow health insurers to adopt more consistent protocols across product lines.

The grievance, organization determination, and appeal regulations in 42 CFR part 422, subpart M, govern grievance, organization determinations, and appeals procedures for MA members. The internal claims and appeals, and external review processes for private insurance and group health plans are found in 45 CFR 147.136. We referred to both sets of standards in reviewing current Medicaid managed care regulations regarding appeals and grievances.

(1) Subpart F, Part 438

Two of our proposals concerning the grievance and appeals system for Medicaid managed care affect the entire subpart. First, we propose to add PAHPs to the types of entities subject to the standards of subpart F and propose to revise text throughout this subpart accordingly. Currently, subpart F only applies to MCOs and PIHPs. Unlike MCOs which provide comprehensive benefits, PIHPs and PAHPs provide a narrower benefit package. While PIHPs were included in the standards for a grievance system, PAHPs were excluded. In 2002 most PAHPs were, in actuality, capitated PCCM programs managed by individual physicians or small group practices and, therefore, should not be expected to have the administrative structure to support a grievance process. However, since then, PAHPs have evolved into arrangements under which entities—private companies or government subdivisions—manage a smaller subset of Medicaid covered services such as dental, behavioral health, and home and community-based services. Because some PAHPs may provide those medical services which typically are subject to medical management techniques such as prior authorization, we believe PAHPs should be expected to manage a grievance process, and therefore, propose that they be subject to the grievance and appeals standards of this subpart. In adding PAHPs to subpart F, our proposal would also change the current process under which enrollees in a PAHP may seek a State Fair Hearing (SFH) immediately following an action to deny, terminate, suspend, or reduce Medicaid covered services in favor of having the PAHP conduct the first level of review of such actions. We rely on our authority at sections 1902(a)(3) and 1902(a)(4) of the Act to propose extending these appeal and grievance provisions to PAHPs.

We note that some PAHPs receive a capitated payment to provide non-emergency medical transportation (NEMT) services to Medicaid beneficiaries; for these NEMT PAHPs, an internal grievance and appeal system does not seem appropriate. The reasons for requiring PAHPs that cover medical services to adhere to the grievance and appeals processes in this subpart are not present for a PAHP solely responsible for NEMT. We propose to distinguish NEMT PAHPs from PAHPs providing medical services covered under the state plan. Consequently, NEMT PAHPs will not be subject to these internal grievance and appeal standards. Beneficiaries receiving services from NEMT PAHPs will continue to have direct access to the SFH process to appeal adverse benefit determinations, as outlined in § 431.220. We request comment on this approach.

As a result of our proposal to have PAHPs generally follow the provisions of subpart F of part 438, we also propose corresponding amendments to §§ 431.220 and 431.244 regarding SFH, and changes to § 431.244 regarding hearing decisions. In § 431.220(a)(5), we propose to add PAHP enrollees to the list of enrollees that have access to a SFH after an appeal has been decided in a manner adverse to the enrollee; and in § 431.220(a)(6), we propose that beneficiaries receiving services from NEMT PAHPs will continue to have direct access to the SFH process. We propose no additional changes to § 431.220. In § 431.244, as in part 438 subpart F generally, in each instance where MCO or PIHP is referenced, we propose to add a reference to PAHPs.

Second, throughout subpart F, we propose to insert “calendar” before any reference to “day” to remove any ambiguity as to the duration of timeframes. This approach is consistent with the timeframes specified in regulations for the MA program at 42 CFR part 422, subpart M.

(2) Statutory Basis and Definitions (§ 438.400)

In general, the proposed changes for § 438.400 are to revise the definitions to provide greater clarity and to achieve alignment and uniformity for health care coverage offered through Medicaid managed care, private insurance and group health plans, and MA plans. We are not proposing to change the substance of the description of the authority and applicable statutes in § 438.400(a) but propose a more concise statement of the statutory authority.

In § 438.400(b), we propose a few changes to the defined terms. First, we propose to replace the term “action” with “adverse benefit determination.” The proposed definition for “adverse benefit determination” would include the existing definition of “action” and revisions to include determinations based on medical necessity, appropriateness, health care setting, or effectiveness of a covered benefit in revised paragraph (b)(1). We believe this would conform to the term used for private insurance and group health plans and lays the foundation for MCOs, PIHPs, or PAHPs to consolidate processes across Medicaid and private health care coverage sectors. We considered the term “adverse determination” but that is already used in § 431.202 to describe a nursing home level of care determination. Further, the term “adverse benefit determination” is used in 45 CFR 147.136 and 29 CFR. 2560.503-1, which are provisions governing internal grievance and appeals processes for private insurance (the group and individual insurance markets) and group health plans (fully-insured and self-insured plans). By adopting a uniform term for MCO, PIHP, or PAHP enrollees and enrollees in private insurance and group health plans, we hope consumers will be able to identify similar processes between lines of business, and be better able to navigate different health care coverage options more easily. Our proposal

would also update cross-references to other regulations affected by this proposed rule, delete the term “Medicaid” before the word “enrollee,” and consistently replace the term “action” in the current regulations in subpart F with the term “adverse benefit determination” throughout this subpart.

In addition to using the new term “adverse benefit determination,” we propose to revise the definition of “appeal” to add accuracy by stating that an appeal is a review by the MCO, PIHP, or PAHP, as opposed to the current definition which defines it as a request for a review. In the definition of “grievance,” we propose a conforming change to delete the reference to “action,” to delete the part of the existing definition that references the term being used to mean an overall system, and to add text to clarify the scope of grievances.

For clarity, we propose to separately define “grievance system” as the processes the MCO, PIHP, or PAHP implements to handle appeals and grievances and collect and track information about them. By proposing a definition for “grievance system,” we intend to clarify that a MCO, PIHP, or PAHP must have a formal structure of policies and procedures to appropriately address both appeals and grievances. We also propose to remove the reference to the state's fair hearing process from this definition as it is addressed in part 431, subpart E. This continued to be a significant source of confusion, even after the changes were made in the 2002 final rule, and we hope these proposed changes add clarity.

(3) General Requirements (§ 438.402)

We propose in paragraph (a) to add “grievance” in front of “system” and to delete existing language that defines a system in deference to the proposed new definition added in § 438.400. We also propose to add text to clarify that subpart F does not apply to NEMT PAHPs.

In paragraph (b), we propose to revise the paragraph heading to “Level of appeals” and limit MCOs, PIHP, and PAHPs to only one level of appeal for enrollees before beneficiaries exhaust the managed care plan's internal appeal process. Once this single level appeal process is exhausted, the enrollee would be able to request a SFH under subpart E of part 431. In conjunction with this proposal, we are also proposing to amend § 438.402(c)(1)(i) and § 438.408(f) with corresponding text that would have enrollees exhaust their MCO, PIHP, or PAHP appeal rights before seeking a SFH. Our proposal is designed to ensure that the MCO, PIHP, or PAHP process would not be unnecessarily extended by having more than one level of internal review. This proposal is consistent with the limit imposed on issuers of individual market insurance under 45 CFR 147.136(b)(3)(ii)(G) and MA organizations at § 422.578, although we acknowledge that issuers of group market insurance and group health plans are not similarly limited under 45 CFR 147.136(b)(2) and 29 CFR 2560.503-1(c)(3). We believe that this proposal would not impair the administrative alignment we seek in this context and ensures that enrollees can reach the SFH process within an appropriate time. We request comment on this proposal.

In paragraph (c)(1)(i), we propose to revise this section to permit an enrollee to request a SFH after receiving notice from the MCO, PIHP, or PAHP upholding the adverse benefit determination. We propose in paragraph (c)(1)(ii) to remove the standard for the enrollee's written consent for the provider to file an appeal on an enrollee's behalf. The current standard is not specified in section 1932(b)(4) of the Act and is inconsistent with similar MA standards for who may request an organization determination or a reconsideration at § 422.566(c)(1)(ii) and § 422.578, so we believe it is not necessary.

We propose in paragraph (c)(2) to delete the state's option to select a timeframe between 20 and 90 days for enrollees to file an appeal and propose to revise paragraphs (c)(2)(i) and (ii) to set the timing standards for filing grievances (at any time) and appeals (60 calendar days), respectively. For grievances, we do not believe that grievances need a filing limit as they do not progress to a SFH and thus do not need to be constrained by the coordination of timeframes. For appeals, proposed paragraph (c)(2)(ii) would permit an enrollee or provider to file an appeal within 60 calendar days of receipt of the notice of an adverse benefit determination. Medicare beneficiaries in a MA plan and enrollees in private health care coverage each have 60 calendar days to request an appeal under regulations governing MA plans (§ 422.582) and private insurance and group health plans (45 CFR 147.136(b)(2) and (b)(3) and 29 CFR 2560.503-1(h)(2)). By adjusting the timeframe for MCO, PIHP, or PAHP enrollees to file appeals to 60 calendar days from the date of notice of the adverse decision, our proposal would achieve alignment and uniformity across Medicaid managed care plans, MA organizations, and private insurance and group health plans, while ensuring adequate opportunity for beneficiaries to appeal. We note that the existing provisions of § 438.402 (b)(2)(i) are subsumed into the proposed paragraph (c)(1)(i) and (ii) while the existing provisions of paragraph (b)(2)(ii) would be deleted consistent with our proposal in § 438.408(f)(1) concerning exhaustion of the MCO's, PIHP's, or PAHP's appeal process.

In paragraph (c)(3), we propose to add headings to paragraphs (c)(3)(i) and (c)(3)(ii) and to make non-substantive changes to the text setting forth the procedures by which grievances or appeals are filed. Under our proposal, as under current law, a standard grievance or appeal may be requested orally or in writing (which includes online), and standard appeal requests made orally must be followed up in writing. Expedited appeal requests may be requested either way, and if done orally, the consumer does not need to follow up in writing.

We request comment on the extent to which states and managed care plans are currently using or plan to implement an online system that can be accessed by enrollees for filing and/or status updates of grievances and appeals. If such systems are not in use or in development, we request comment on the issues influencing the decision not to implement such a system and whether an online system for tracking the status of grievances and appeals should be required at the managed care plan level.

(4) Timely and Adequate Notice of Adverse Benefit Determination (§ 438.404)

In § 438.404, we propose to revise the section heading to a more accurate and descriptive title, “Timely and adequate notice of adverse benefit determination.” In paragraph (a), we propose a non-substantive wording revision to more accurately reflect the intent that notices must be timely and meet the information standards detailed in proposed § 438.10.

In paragraph (b), describing the minimum content of the notice, we propose to delete paragraph (b)(4) (about the state option for exhaustion) to correspond to our proposal in § 438.408(f) and redesignate the remaining paragraphs accordingly. In paragraph (b)(2), we propose to clarify that the reason for the adverse benefit determination includes the right of the enrollee to be provided upon request and free of charge, reasonable access to and copies of all documents, records, and other information relevant to the enrollee's claim for benefits. This

additional documentation would include information regarding medical necessity criteria, and any processes, strategies, or evidentiary standards used in setting coverage limits. In new paragraph (b)(5), we propose to replace expedited “resolution” with expedited “appeal process” to add consistency with wording throughout this subpart. We further propose to add the phrase “consistent with State policy” in paragraph (b)(6) to be consistent with a proposed change in § 438.420(d) regarding the MCO's, PIHP's, or PAHP's ability to recoup from the enrollee under a final adverse decision be addressed in the contract and that such practices be consistent across both FFS and managed care delivery systems within the state. While notice of the possibility of recoupment under a final adverse decision is an important beneficiary protection, we recognize that such notice may deter an enrollee from exercising the right to appeal. We would issue guidance following publication of the rule regarding the model language and content of such notice to avoid dissuading enrollees from pursuing appeals.

In paragraph (c), we propose to revise paragraph (c)(4) to replace “extends the timeframe in accordance with . . .” with “meets the criteria set forth . . .” to more clearly state that MCOs, PIHPs, and PAHPs cannot extend the timeframes without meeting the specific standards of § 438.210(d)(1)(ii). Lastly, in paragraph (c)(6), we propose to update the cross reference from § 438.210(d) to § 438.210(d)(2).

(5) Handling of Grievances and Appeals (§ 438.406)

In addition to language consistent with our overall proposal to make PAHPs subject to the grievance and appeals standards for MCOs and PIHPs, we are proposing to reorganize § 438.406 to be simpler and easier to follow and to revise certain procedural standards for appeals. Existing paragraph (a) is revised by adding the existing provision in paragraph (a)(1) to paragraph (a), which specifies that each MCO, PIHP, and PAHP must give enrollees any reasonable assistance, including auxiliary aids and services upon request, in completing forms and taking other procedural steps.

In paragraph (b), we propose to revise the paragraph heading and redesignate existing provisions in paragraphs (a)(2) and (a)(3) as (b)(1) and (b)(2), respectively; we also propose to add grievances to the provisions of both. MCOs, PIHPs, or PAHPs would have to send an acknowledgment receipt for each appeal and grievance and follow the limitations on individuals making decisions on grievances and appeals in paragraphs (b)(2)(i) and (ii). In new (b)(2)(i), we propose to add that individuals who are subordinates of individuals involved in any previous level of review are, like the individuals who were involved in any previous level of review, excluded from making decisions on the grievance or appeal. This proposed revision adds another level of beneficiary protection that we believe is appropriate and is consistent with standards under the commercial rules in 45 CFR 147.136 that incorporate 29 CFR 2560.503-1(h)(3)(ii). Redesignated paragraph (b)(2)(ii) remains unchanged from its current form. Consistent with the standards under the commercial rules in 45 CFR 147.136 that incorporate 29 CFR 2560.503-1(h)(2)(iv), we propose to add a new paragraph (b)(2)(iii) to specify that individuals that make decisions on appeals and grievances take all comments, documents, records, and other information submitted by the enrollee into account regardless of whether the information had been considered in the initial review. We propose to redesignate current paragraph (b)(2) as (b)(4) and add “testimony” in addition to evidence and legal and factual arguments. We also propose to use the phrase “legal and factual arguments” to replace the phrase “allegations of fact or law” in the current text for greater clarity.

We note that, currently, in paragraph (b)(3) the enrollee must have the opportunity before and during the appeal process to examine the case file, medical record and any documents or records considered during the appeal process. We propose to redesignate this paragraph as paragraph (b)(5) and to replace “before and during” with “sufficiently in advance” of resolution, to add specificity. We also propose to add “new or additional evidence” to the list including case file, medical records, and any other documents or records that must be available to the enrollee. This language in paragraph (b)(5) would align with the disclosure standards applicable to private insurance and group health plans in 45 CFR 147.136(b)(2)(ii)(C)(1). Existing paragraph (b)(4) would be redesignated as paragraph (b)(6) without change.

(6) Resolution and Notification: Grievances and Appeals (§ 438.408 and § 431.244(f))

We propose to make significant modifications to § 438.408 to further align Medicaid managed care standards with MA and private insurance and group health plan standards. We are proposing several significant modifications as explained in more detail below: (1) Changes in the timeframes to decide appeals and expedited appeals, (2) strengthen notice standards for extensions, and (3) change the processes for receiving a SFH for enrollees of MCOs, PIHPs, and PAHPs. In addition, we propose to reorganize the regulation for greater clarity and to add the phrase “consistent with state policy” to paragraph (e)(2)(iii) to be consistent with our proposal in § 438.420(d).

In § 438.408(b)(2), we propose to adjust the timeframes in which MCOs, PIHPs, and PAHPs would have to make a decision about an enrollee appeal to align with the standards applicable to a MA organization. Currently, MCOs and PIHPs may have up to 45 days to make a decision about a standard (non-expedited) appeal. In § 422.564(e), MA plans must make a decision about first level appeals in 30 days, while Part D plans must provide a decision in 7 days under § 423.590(a)(1). Federal regulations on the commercial insurance market permit up to 60 days for a standard decision on an internal appeal (see § 147.136(b)(2)(i) and (b)(3), incorporating 29 CFR 2560.503-1(b)(1) for individual health insurance issuers and group health insurance issuers and plans). We are proposing to shorten the timeframe for MCO, PIHP, and PAHP appeal decisions from 45 days to 30 calendar days, which would achieve alignment with MA standards while still allowing adequate time for decision-making and response.

In paragraph (b)(3), we propose to adjust the Medicaid managed care timeframes for expedited appeals to align with standards applicable to MA and the commercial insurance market. Currently under subpart F, MCOs and PIHPs have 3 working days from receipt of a request to make a decision in an expedited review. The MA (§ 422.572(a)) and commercial insurance regulations (29 CFR 2590.715-2719(c)(2)(xiii)) stipulate that a health plan must make a decision within 72 hours of receiving a request for expedited review. We propose to modify our expedited appeal decision timeframes from 3 working days to 72 hours. The change would improve the speed with which enrollees would receive a MCO, PIHP, or PAHP decision on critical issues, and align Medicaid managed care with Medicare and private insurance and group health plans. Again, this change would enable insurance companies that operate multiple product lines to have consistent regulatory standards governing its operations.

We also propose to strengthen the notification responsibilities on the MCO, PIHP, or PAHP following an extension of the timeframe for resolution of a grievance or appeal, when the extension is not requested by the enrollee. In addition, we propose to add existing text from paragraph (c)(2)(i) regarding timeframe extensions that are not requested by the enrollee to paragraph (c)(2). We also propose to add a standard for the MCO, PIHP, or PAHP to make reasonable efforts to give the enrollee prompt oral notice of the delay in paragraph (c)(2)(i). We propose to add the current standards in § 438.404(c)(4)(i) and (ii) to § 438.408(c)(ii) and (iii), which describe the standards on the MCO, PIHP, or PAHP for an extension of the timeframe for standard or expedited appeals for clarity and consistency.

In § 438.408(d)(1) and (2), we propose to add a provision requiring that grievance notices (as established by the state) and appeal notices (as directed in the regulation) from a MCO, PIHP, or PAHP ensure meaningful access for people with disabilities and people with limited English proficiency by, at a minimum, meeting the standards described at § 438.10.

In § 438.408(e), we propose to add “consistent with state policy” in paragraph (e)(2)(iii). This is added here to be consistent with a proposed change in § 438.420(d) which stipulates that the MCO's, PIHP's, or PAHP's ability to recoup from the enrollee under a final adverse decision must be addressed in the contract and that such practices be consistent across both FFS and managed care delivery systems within the state. For example, if the state does not exercise the authority for recoupment under § 431.230(b) for FFS, the same practice must be followed by the state's contracted MCOs, PIHPs, and PAHPs.

In § 438.408(f), we are proposing to modify the Medicaid managed care appeals process such that an enrollee must exhaust the MCO, PIHP, or PAHP appeal process prior to requesting a SFH. This would eliminate a bifurcated appeals process while aligning with Medicare and the private market regulations. Under current Medicaid rules, states have the discretion to decide if enrollees must complete the MCO, PIHP, or PAHP appeal process before requesting a SFH or whether they can request a SFH while the MCO, PIHP, or PAHP appeal process is still underway. Depending on the state's decision in this regard, this discretion has led to duplicate efforts by the MCO, PIHP, or PAHP and the state to address an enrollee's appeal. Both MA rules and regulations governing private insurance and group health plans have a member complete the health plan's internal appeal process before seeking a second—that is, external—level review. Our proposed change would be consistent with both those processes.

Specifically, under the proposed change in paragraph (f)(1), a MCO, PIHP, or PAHP enrollee would have to complete the MCO, PIHP, or PAHP appeal process before requesting a SFH. Maintaining two processes at the same time can be confusing and cumbersome to all parties involved. With the proposed change, consumers would still be able to take advantage of the SFH process, but in a consecutive manner which would lead to less confusion and effort on the enrollee's part. Moreover, our proposed reduction in the timeframes that a MCO, PIHP, or PAHP would have to take action on an appeal (from 45 to 30 calendar days) in § 438.408(b)(2) would permit enrollees to reach the SFH process more quickly. Further, a federal standard would eliminate variations across the country and lead to administrative efficiencies at the MCO, PIHP, and PAHP level. We believe that our proposal achieves the appropriate balance between alignment, beneficiary protections, and administrative simplicity. For consistency, this change is also reflected in proposed revisions to § 438.402(b) and § 438.404(b)(4) as noted previously.

We propose in new paragraph (f)(2) to revise the timeframe enrollees have to request a SFH to align with filing timeframes applicable to group health plans and private insurance. Currently in § 438.408(f)(1), a state may set the timeframe for an enrollee to request a SFH within the range of 20 to 90 days from the date of notice of the MCO's, PIHP's, or PAHP's resolution. By adjusting the timeframe for enrollees to file SFH requests to 120 calendar days, we give enrollees more time to gather the necessary information, seek assistance for the SFH process and make the request for a SFH.

We also propose a number of changes to § 431.244, Hearing Decisions, that correspond to these proposed amendments to § 438.408. In § 431.244, we propose to remove paragraph (f)(1)(ii) which references direct access to a SFH when permitted by the state. As that option is proposed to be deleted in § 438.408(f)(1), it should also be deleted in § 431.244(f)(1). In § 431.244(f)(2), we considered whether to modify the 3 working day timeframe on the State to conduct an expedited SFH. In the interest of alignment, we examined the independent and external review timeframes in both MA and QHPs and found no analogous standard or consistency for final administrative action regarding expedited hearings. We believe that SFHs are different than a review by an Independent Review Organization (IRO) or Independent Review Entity (IRE). We have therefore decided to keep the SFH expedited timeframe at 3 working days. We propose to delete current paragraph (f)(3) as it is no longer relevant given the deletion of direct access to SFH proposed revision to § 438.408(f)(1). We propose no additional changes to § 431.244.

(7) Expedited Resolution of Appeals (§ 438.410)

In addition to the revisions to add PAHPs to the scope of this regulation, we propose to revise § 438.410(c)(2) to replace the current general language on oral and written notification with a cross reference to § 438.408(c)(2), which as proposed, provides more specificity on the responsibilities of the MCO, PIHP, or PAHP when extending timeframes for resolution. We also propose a grammatical correction to paragraph (b) to replace the word “neither” with “not.” We propose no other changes to this section.

(8) Information About the Grievance System to Providers and Subcontractors (§ 438.414)

In addition to the change proposed throughout this subpart in connection with PAHPs, we propose to update the cross reference from § 438.10(g)(1) to § 438.10(g)(2)(xi) to be consistent with our proposed revisions to § 438.10, discussed in more detail below in section I.B.6.d.

(9) Recordkeeping Requirements (§ 438.416)

In § 438.416, we propose to modify the recordkeeping standards under subpart F to achieve consistency across states by specifying the recordkeeping elements. The current recordkeeping provisions do not set standards for the type of appeals and grievance information to be collected, and only stipulate that states must review that information as part of an overall quality strategy. The proposed recordkeeping language here would set minimum standards for the types of information that must be collected to create consistency across states. Under the proposed updates to the recordkeeping section, states would have to review information about appeals and grievances as part of its ongoing monitoring, which would allow for better tracking of issues and promote faster interventions.

Specifically, we propose to redesignate the existing provisions of § 438.416 as a new paragraph (a), adding that the state must review the information as part of its monitoring of managed care programs and to update and revise its comprehensive quality strategy. We are proposing to add a new paragraph (b) to specifically list the information that must be contained in the record of each grievance and appeal: A description of the reason for the appeal or grievance, the date received, the date of each review or review meeting if applicable, the resolution at each level, the date of resolution, and the name of the enrollee involved. Finally, we are proposing to add a new paragraph (c) to stipulate that the record be accurately maintained and made accessible to the state and available to CMS upon request.

(10) Effectuation of Reversed Appeal Resolutions (§ 438.424)

In addition to adding PAHPs to § 438.424 as discussed earlier in this preamble, we propose to revise the current rule in paragraph (a) so that the MCO, PIHP, or PAHP must effectuate a reversal of an adverse benefit determination and authorize or provide such services no later than 72 hours from the date it receives notice of the adverse benefit determination being overturned. This is consistent with the timeframes for reversals by MA organizations and independent review entities in the MA program, as specified in § 422.619 for expedited reconsidered determinations, when the reversal is by the MA organization or the independent review entity. In addition to providing consistency across these different managed care programs, and the increases in efficiency that we predict as a result of this alignment, we believe that 72 hours is sufficient time for an MCO, PIHP, or PAHP to authorize or provide services that an enrollee has successfully demonstrated are covered services. We solicit comment on this proposal and on our assumptions as to the amount of time that is necessary for an MCO, PIHP, or PAHP to authorize or provide services.

c. Medical Loss Ratio (§ 438.4, § 438.5, § 438.8, and § 438.74)

The Affordable Care Act includes standards for a minimum medical loss ratio (MLR) in the private health insurance and MA markets. A standardized MLR calculation allows regulators the ability to conduct a retrospective analysis of premiums paid compared to overall expenditures to ensure a fair and equitable arrangement is maintained; additionally, the outcomes of the MLR calculation may be considered by issuers and managed care plans in future rate development or decision making. We believe that MLR calculation and reporting are important tools to ensure that capitation rates set for Medicaid managed care programs are actuarially sound and adequately based on reasonable expenditures on covered medical services for enrollees.

As of 2015, Medicaid and CHIP are the only health benefit coverage programs to not utilize a minimum MLR for managed care plans. We understand some states require a minimum MLR or some similar calculation, but these standards vary widely depending on state defined characteristics and have differing levels of enforcement. In keeping with our goals of alignment with the health insurance market whenever reasonable and appropriate and to ensure that capitation rates are actuarially sound, we propose that the MLR for MCOs, PIHPs, and PAHPs be calculated, reported, and used in the development of actuarially sound capitation rates. Under sections 1903(m)(2) and regulations based on our authority under section 1902(a)(4) of the Act, actuarially sound capitation rates must be utilized for MCOs, PIHPs, and PAHPs; actuarial soundness requires that capitation payments cover reasonable, appropriate and attainable costs in providing covered services to enrollees in Medicaid managed care programs. Medical loss ratios are one tool that could be used to assess whether capitation rates are appropriately set by generally illustrating how those funds are spent on claims and quality improvement activities as compared to administrative expenses, demonstrating that adequate amounts under the capitation payments are spent on services for enrollees. In addition, MLR calculation and reporting would result in responsible fiscal stewardship of total Medicaid expenditures by ensuring that states have sufficient information to understand how the capitation payments made for enrollees in managed care programs are expended.

A national standard for Medicaid managed care plans that aligns with the methodologies for health insurance issuers found in 45 CFR 158

et seq.

and the rules for MA and Part D plans found in § 422.2400

et seq.

and § 423.2400

et seq.

would provide the most consistent approach to calculating and reporting MLR. A consistent methodology across multiple markets (private, Medicare, and Medicaid) would allow for administrative efficiency for the states in their roles regulating insurance and Medicaid and for issuers and managed care entities to collect and measure data necessary to calculate an MLR and provide reports. In addition, a consistent standard would allow comparison of MLR outcomes consistently from state to state and among commercial, Medicare, and Medicaid managed care plans.

To establish the standard that MLR be calculated, reported and used in the Medicaid managed care rate setting context, we propose to incorporate these standards in the actuarial soundness standards proposed in § 438.4 and § 438.5, and to add new § 438.8 and § 438.74, which would establish, respectively, the substantive standards for how MLR is calculated and reported by MCOs, PIHPs, and PAHPs and state responsibilities in oversight of the MLR standards.

(1) Medical Loss Ratio as a Component of Actuarial Soundness (§ 438.4 and § 438.5)

First, we propose standards for how MLR calculations and reporting must be considered in both a prospective and retrospective manner in the rate setting process to ensure that capitation rates are actuarially sound.

In § 438.4(b)(8), we propose that rates for MCOs, PIHPs, and PAHPs must be set such that, using the projected revenues and costs for the rate year, the MCO, PIHP, or PAHP would achieve an MLR of at least 85 percent, but not exceed a reasonable maximum threshold that would account for reasonable administrative costs. We believe that 85 percent is the appropriate minimum threshold and is the industry standard for MA and large employers in the private health insurance market. We believe that considering the MLR as part of the rate setting process would be an effective mechanism to ensure that program dollars are being spent on health care services, covered benefits, and quality improvement efforts rather than on potentially unnecessary administrative activities. Additionally, our proposed use of the MLR and 85 percent threshold is very similar to the use of the MLR in the proposed and final rules entitled “Rate Increase Disclosure and Review” (75 FR 81012 and 76 FR 29973) that implemented 45 CFR 154.205 for that provision considers whether a rate increase that would be subject to CMS' Center for Consumer Information and Insurance Oversight's (CCIIO) review would result in a projected MLR below the 85 percent MLR standard. In addition, as issuers may participate in multiple product lines, we believe that there would be administrative efficiencies from using consistent

standards and methods for calculating MLR. We also believe that issuers, states, and CMS would benefit from an MLR that can be compared to other similar measures.

We also believe that it is appropriate to consider the MLR in rate setting to protect against the potential for an extremely high MLR (for example, an MLR greater than 100 percent). When an MLR is too high, it means there is a possibility that the capitation rates were set too low. Capitation rates that are too low raise concerns about enrollees' access to services, the quality of care, provider participation, and the continued viability of the Medicaid managed care plans in that market. Additionally, extremely high MLRs may indicate that the capitation rates do not account for reasonable administrative costs, which could result in poor client and provider experiences. We are hesitant to set a specific upper bound for the MLR that represents a maximum upper threshold that is analogous to 85 percent as a minimum threshold. States are better positioned to establish and justify a maximum MLR threshold, which accounts for the type of services being delivered, the state's administrative requirements, the maturity of the program and the managed care plans. Nonetheless, states should consider an appropriate maximum threshold to ensure that the capitation rates are adequate for necessary and reasonable administrative costs and we have proposed such a standard, rather than a specific percentage, for an upper bound on MLR experience.

In § 438.5(b)(5), we propose that states must use the annual MLR calculation and reporting from MCOs, PIHPs, or PAHPs as part of developing rates for future years. While the projected MLR measurement proposed in § 438.4(b)(8) appears to be most closely tied to the actuarial soundness of the rates, we believe that knowing the actual MLR experienced by an MCO, PIHP, or PAHP each year will provide important information necessary for rate setting for future years. We propose that states must take the information about past MLR experience into account as part of the rate setting process. If an MCO, PIHP, or PAHP has not met the 85 percent MLR in prior years, the state would use that information in the development of future capitation rates. If the MCO's, PIHP's, or PAHP's reported MLR calculation continues to reflect that the actual experience varies from those projections used in the rate development process, the state, and its actuary, would use that information during the development of the capitation rates for future rating periods. The information and process, in turn, assist in setting a rate where the MCO, PIHP, or PAHP would reasonably be expected to achieve at least an 85 percent MLR in future contract years.

(2) Standards for Calculating and Reporting Medical Loss Ratio (§ 438.8)

Second, we propose minimum standards for how the MLR must be calculated and the associated reports submitted to the state so that the MLR information used in the rate setting process is available and consistent. Our goal in developing the MLR standards is to be as consistent as possible with the NAIC model and the regulations on health insurers in the private market and MA, while taking into consideration the unique aspects of delivering services through Medicaid managed care. While we considered both the commercial market and MA standards when developing this proposed rule, we more closely aligned with the commercial rules as we believe the need for consistency is greater between plans on the Marketplace and in Medicaid. We did incorporate MA standards for the calculation of the MLR when we believed the needs of incorporating standards of a public program outweighed our desire to create efficiency between the calculations from the Marketplace to Medicaid.

In paragraph (a), we propose that states ensure through their contracts with any risk based MCO, PIHP, or PAHP that starts on or after January 1, 2017, the MCO, PIHP, or PAHP would meet the standards proposed in § 438.8. Non-risk PIHP or PAHP contracts by their nature do not need to calculate a MLR standard since contractors are paid an amount equal to their incurred service costs plus an amount for administrative activities. Through this proposed paragraph, we propose that MLR reporting years would start with contracts beginning on or after January 1, 2017. We believe that most states use 1 year contract periods with MCOs, PIHPs, and PAHPs, but for those states that do not, we propose that the state have its MCOs, PIHPs, and PAHPs calculate and report the MLR for the rating period beginning in 2017. This means if a state has a contract running from October 2017 through September 2018 and the state wishes to align their MLR reporting year with the contract year, the first MLR reporting year would be October 2017 through September 2018. We believe that starting the MLR calculation and reporting standards with contract years starting in 2017 will allow enough time for states, MCOs, PIHPs, and PAHPs to take any necessary measures to prepare for application of the MLR after this proposed rule is finalized. We request comment on this timeframe and whether we should consider a start date that is some specific time after the final rule becomes effective.

Paragraph (b) proposes to define terms used in this proposed section, including the terms MLR reporting year and non-claims cost; several terms that are relevant for purposes of credibility adjustments are also proposed but are discussed with proposed § 438.8(h). We discuss the definition of non-claims cost below in connection with the proposal at § 438.5(d)(2)(v)(A) and how such costs are excluded from incurred claims. The private market and MA both calculate the MLR on a calendar year basis. While we expect some states to use a calendar year as the basis for the calculation of the MLR, other states may choose to use a different time period. States vary their contract years and we propose to give states the option of aligning their MLR reporting year with the contract year if they so choose so long as the MLR reporting year is the same as the rating period, although states will not be permitted to have a MLR reporting year that is more than 12 months. We considered allowing an MLR calculation consistent with any rating period even if the rating period was more than 12 months, but were concerned that allowing varying lengths of time in the MLR reporting year could create inconsistencies with how the credibility factors are applied to the MLR calculation. In addition, the 12 month period is consistent with how the commercial and MA MLR is calculated. In the event the state changes the time period, for example, transitions from paying capitation rates on a state fiscal year to a calendar year, the state could choose if the MLR calculation would be done for two 12 month periods with some period of overlap. Whichever methodology the state elects, the state will need to clarify the decision in the actuarial certification and take this overlap into account when determining the penalties or remittances (if any) on the MCO, PIHP, or PAHP for not meeting the standards developed by the state.

Proposed paragraph (c) addresses certain minimum standards for the use of an MLR if a state elects to mandate a minimum MLR for an MCO, PIHP, or PAHP. We know that some states have imposed MLR percentages on certain plans that equal or exceed 85 percent and we do not want to prevent states from continuing those practices if they believe a higher MLR percentage is appropriate. Therefore, our proposed

regulation permits each state, through its law, regulation, or contract with the MCO, PIHP, or PAHP to establish a minimum MLR that may be higher than 85 percent, although the method of calculating the MLR would still be consistent with the standards in proposed § 438.8. The parameters on state flexibility, to set an MLR requirement that is no lower than 85 percent but that is calculated consistent with the requirements in proposed § 438.8, are based on our authority under section 1902(a)(4) of the Act and recognizes that for some managed care programs, for example, MLTSS programs, states may find it appropriate to establish an MLR standard that is higher than 85 percent. If a state were to set an MLR standard below 85 percent that was calculated in a different manner than the proposals in § 438.8, it would be inconsistent with our approach of assuming an MLR of at least 85 percent in the development of actuarially sound capitation rates, as described in § 438.4(b)(7). We understand that some states use their existing MLR standard as a general rule or guidepost for health plan evaluation as opposed to recouping funds from the MCO, PIHP, or PAHP if its MLR falls below the state-define threshold. While states would not have to collect remittances from the MCOs, PIHPs, or PAHPs through this proposed rule (see discussion of § 438.8(j)), we strongly encourage states to implement the types of financial contract provisions that would drive MCO, PIHP, and PAHP performance in accordance with the MLR standard. In section I.B.1.c.(3) of this proposed rule, we address the treatment of any federal share of potential remittances.

Proposed paragraphs (d), (e) and (f) propose the basic methodology and components that make up the calculation of the MLR. The calculation of the MLR proposed for Medicaid managed care is the sum of the MCO's, PIHP's, or PAHP's incurred claims, expenditures on activities that improve health care quality, and activities specified under proposed § 438.608(a)(1) through (5), (7), (8) and (b) (subject to the cap in § 438.8(e)(4)), divided by the adjusted premium revenue collected, taking into consideration any adjustments for MCO, PIHP, or PAHP enrollment (known as a credibility adjustment). Our proposal uses the same general calculation as the one established in 45 CFR 158.221 (private plan MLR) with proposed differences as to what is included in the numerator and the denominator to account for differences in the Medicaid program. The proposal also calculates the MLR over a 12-month period rather than a 3-year period.

The total amount of the numerator is proposed in paragraph (e) which, as noted above, is equal to the sum of the incurred claims, expenditures on activities that improve health care quality, and, subject to the cap in paragraph (e)(4), activities related to proposed standards in § 438.608(a)(1) through (5), (7), (8) and (b) of this proposed rule. As proposed, there are certain amounts that would need to be included or deducted from incurred claims for this MLR calculation. Generally, the proposed definition of incurred claims comports with the private market and MA standards, with Medicaid differing in several ways, such as:

• We propose that amounts the MCO, PIHP, or PAHP receives from the state for purposes of stop-loss payments, risk-corridor payments, or retrospective risk adjustment are deducted from incurred claims. MCOs, PIHPs, and PAHPs should not include those payments as incurred claims (proposed § 438.8(e)(2)(ii)(C) and (e)(2)(iv)(A)).

• Likewise, if a MCO, PIHP, or PAHP must make payments to the state because of a risk-corridor or risk adjustment calculation, this proposed rule would include those amounts in incurred claims (proposed § 438.8(e)(2)(iv)(A)).

• A state may operate Medicaid-specific solvency funds for its managed care program. If MCOs, PIHPs, or PAHPs must pay into those funds, this proposed rule would consider those payments incurred claims (proposed § 438.8(e)(2)(iii)(A)).

• Due to proposed changes in subpart H, we believe there is a possibility that the adjustment to claims in the MLR numerator of Medicaid MCOs, PIHPs, or PAHPs could have fewer recoveries from fraudulent or excluded providers because of enhanced fraud prevention and monitoring measures. We want to encourage Medicaid MCOs, PIHPs, and PAHPs to build and sustain a program integrity infrastructure that has strong prevention activities as well as robust processes for the detection, referral and recovery of improper payments, including potential fraud, waste and abuse. Therefore, we propose that expenditures related to fraud prevention activities, as set forth in § 438.608(a)(1) through (5), (7), (8) and (b), may be attributed to the numerator but would be limited to 0.5 percent of MCO's, PIHP's, or PAHP's premium revenues. Section I.B.4.c.(4) of this proposed rule provides a discussion of the proposed revisions to § 438.608. We also propose to make clear in the regulatory text that the expenses for fraud prevention activities described in § 438.8(e)(4) would not duplicate expenses for fraud reduction efforts for purposes of accounting for recoveries in the numerator pursuant to § 438.8(e)(2)(iii)(C), and the same would be true in the converse. While many employees of a managed care plan may conduct activities that support fraud, waste, and abuse prevention through the normal course of duties, the expenditures related to the proposed fraud, waste, and abuse activities attributable to the numerator, as proposed in § 438.8(e)(4), are associated with the work of employees that directly carry out those functions and associated data analytics and technological infrastructure to conduct these ongoing fraud prevention activities. Successful technology and analytics to conduct fraud, waste, and abuse prevention and detection will have some of the following characteristics: A process for incorporating field intelligence, policy knowledge and clinical expertise (or other expertise relevant to the industry) into the development of the predictive or other sophisticated algorithms to ensure that the results are actionable; a method for tracking, measuring, and evaluating the actions taken based on the information produced, and the presence of an analytical environment for data exploration that includes the historic information necessary for predictive modeling and an operational environment that quickly displays results and visualization (graphics, maps) that assists the end user in taking action.

We believe that this proposed limit on expenditures for fraud prevention is a reasonable amount to encourage MCOs, PIHPs, and PAHPs to build and maintain robust and dynamic fraud prevention programs. In addition, we assert that the 0.5 percent figure is appropriate as a limitation because fraud prevention and monitoring costs should not yield a one-to-one ratio relative to recoveries due to fraud, waste, or abuse. In other words, one dollar spent on fraud prevention and monitoring activities should render more than one dollar in recoveries. We request comment on the approach to incorporating fraud prevention activities and the proportion of such expenditures in the numerator for the MLR calculation, as this proposal is unique to Medicaid managed care. We also request general comments on the proposal, as well as other methodologies. Specifically, we request comment on alternative options that only account for

increased investments in fraud prevention activities relative to prior-year levels, so as to prevent incorporation in the numerator of fraud prevention activities plans currently undertake.

Non-claims costs would be considered the same in Medicaid as they are in the commercial market and MA rules. We propose in § 438.8(e)(2)(v)(A)(3) that certain amounts paid to a health care professional are not included as incurred claims; we intend to use the illustrative list in the similar provisions at § 422.2420(b)(4)(i)(C) and § 158.140(b)(3)(iii) to interpret and administer this aspect of our proposal. Incurred claims would not include non-claims costs and remittances paid to the state from a previous year's MLR experience. In paragraph (e)(2)(iii)(A), we propose that payments made by an MCO, PIHP, or PAHP to mandated solvency funds must be included as incurred claims, which is consistent with the commercial market regulations on market stabilization funds at 45 CFR 158.140(b)(2)(i). Paragraph (e)(2)(iv) would take a consistent approach with the commercial rules at 45 CFR 158.140(b)(4)(ii) that amounts that must either be included in or deducted from incurred claims are net payments related to risk adjustment and risk corridor programs. We propose in paragraph (e)(2)(v) that the following non-claims costs are excluded from incurred claims: Amounts paid to third party vendors for secondary network savings, network development, administrative fees, claims processing, and utilization management; and amounts paid for professional or administrative services. This approach is consistent with the expenditures that must be excluded from incurred claims under the commercial rules at 45 CFR 158.140(b)(3). Proposed paragraph (e)(2)(vi) would incorporate the provision in MA regulations at 42 CFR 422.2420(b)(5) for the reporting of incurred claims for a MCO, PIHP, or PAHP that is later assumed by another entity to avoid duplicative reporting in instances where one MCO, PIHP, or PAHP is assumed by another.

Through these proposed rules in § 438.8(e)(3), an activity that improves health care quality can be included in the numerator as long as it meets one of three standards: (1) It meets the definition in 45 CFR 158.150(b) (the private insurance market MLR rule) of an activity that improves health care quality and is not excluded under 45 CFR 158.150(c); (2) it is an activity specific to Medicaid managed care External Quality Review activities (described in subpart E); or (3) it is an activity related to Health Information Technology and meaningful use, as defined in 45 CFR 158.151 and excluding any costs that are deducted or excluded from incurred claims under paragraph (e)(2). Regarding activities related to Health Information Technology and meaningful use, we encourage states to support the adoption of certified technology that enables interoperability across providers and supports seamless care coordination for enrollees. In addition, we refer MCOs, PIHPs, and PAHPs to the Office of the National Coordinator for Health Information Technology's draft of the “2015 Interoperability Standards Advisory” published for public comment (available at

http://www.healthit.gov/standards-advisory

), which proposes a set of best available standards and implementation specifications enabling priority health information exchange use cases.

We understand that some managed care plans cover more complex populations in their Medicaid line of business than in their commercial line of business; therefore, the case management/care coordination standards are more intensive and costly for Medicaid health plans than in a typical private market group health plan. Consistent with the use of the term in the private market, we believe the definition of activities that improve health care quality in 45 CFR 158.150 is broad enough to encompass MCO, PIHP, and PAHP activities related to service coordination, case management, and activities supporting state goals for community integration of individuals with more complex needs such as individuals using LTSS. For that reason, we are not specifically identifying these activities separately in this rule, but expect MCOs, PIHPs, and PAHPs would include the cost of appropriate outreach, engagement, and service coordination in this category. We request comment on this approach.

Paragraph (f) proposes what would be included in the denominator for calculation of the MLR. Generally, the denominator is the MCO's, PIHP's, or PAHP's premium revenue less any expenditure for federal or state taxes and licensing or regulatory fees. In proposed § 438.8(f)(2), we specify what must be included in premium revenue. We expect that a state will have adjusted capitation payments appropriately for every population enrolled in the MCO, PIHP, or PAHP so that the capitated payment reasonably reflects the costs of providing the services covered under the contract for those populations and meets the actuarial soundness standards in § 438.4 through § 438.7. Additionally, because many states make payments to MCOs, PIHPs, or PAHPs for one-time, specific life events of enrollees—events that do not receive separate payments in the private market or MA—these payments need to be included as premium revenue in the denominator. Typical examples of these are maternity “kick-payments” where a payment to the MCO is made at the time of delivery for to offset the costs of prenatal, postnatal and labor and delivery costs for an enrollee.

As proposed in paragraph (f)(3), we would treat taxes, licensing and regulatory fees in the same way as they are treated in the private market and MA; they would be deducted from premium revenue. Similar to the private market in 45 CFR 158.161(b), fines or penalties imposed on the MCO, PIHP, or PAHP would not be deducted from premium revenue and must be considered non-claims costs (proposed § 438.8(e)(2)(v)(A)(

4

)). Consistent with MA, we propose in paragraph (f)(3)(v) to allow Community Benefit Expenditures (CBEs), as defined in 45 CFR 158.162(c) (which is analogous to the definition in § 422.2420(c)(2)(iv)(A)), to be deducted up to the greater of 3 percent of earned premiums or the highest premium tax rate in the applicable state multiplied by the earned premium for the MCO, PIHP, or PAHP. We request comment on this proposal. Paragraph (f)(4) incorporates the provision for MLR under MA regulations at § 422.2420(c)(4) for the reporting of the denominator for a MCO, PIHP, or PAHP that is later assumed by another entity to avoid duplicative reporting in instances where one MCO, PIHP, or PAHP is assumed by another.

Paragraph (g) proposes our standards for allocation of expenses. MCOs, PIHPs, and PAHPs would use a generally accepted accounting method to allocate expenses to only one category, or if they are associated with multiple categories, pro-rate the amounts so the expenses are only counted once.

Section 2718(c) of the Public Health Service Act charges the National Association of Insurance Commissioners (NAIC) with developing uniform methodologies for calculating measures of the expenditures that make up the MLR calculation, and provides that “such methodologies must be designed to take into account the special circumstances of small plans, different types of plans, and newer plans.” To address the special circumstances of smaller plans, the NAIC model regulation allows smaller plans to adjust their MLR calculations by applying a

“credibility adjustment.” In paragraph (h), we propose to adopt this method of credibility adjustment for MCOs, PIHPs, and PAHPs. To the extent possible, we propose to follow the approach used in both the private market (45 CFR 158.230) and MA and Medicare Part D MLR rules (§§ 422.2440, 423.2440).

A credibility adjustment is a method to address the impact of claims variability on the experience of smaller plans due to random statistical variation and we propose to define a credibility adjustment in this manner in § 438.8(b). All issuers experience some random claims variability, where actual claims experience deviates from expected claims experience. In a health plan with a large number of enrollees the impact of such random deviations is less than in plans with fewer enrollees. One source of variability is the impact of large claims, which are infrequent but have a greater impact on financial experience than average or typical claims. Large claims have a disproportionate impact on small plans because the higher claim cost is spread across a smaller premium base. These random variations in the claims experience for enrollees in a smaller plan may cause an issuer's reported MLR to be below or above a particular standard in any particular year, even though the state or the issuer estimated in good faith that the combination of the projected premiums and claims would produce an MLR that meets the specific standard. It is important to emphasize that health insurance rates are the product of assumptions, estimates, and projections. For example, when an actuary projects that the rate he or she has calculated will produce an 85 percent MLR, whether in fact it will produce an 85 percent MLR, depends on whether the assumptions the actuary has made—such as those concerning the characteristics and health status of the enrollees covered by the plan, the intensity and frequency with which its enrollees will use health care services, and unit costs—turn out to be correct. All things being equal, it is more likely that those assumptions will turn out to be correct when an issuer insures a large number of enrollees rather than a small number, and differences between the assumptions and actual experience would likewise be smaller when an issuer covers a larger number of enrollees.

After extensive analysis and public discussion, the NAIC adopted a credibility adjustment table designed to result in an issuer that charges premiums intended to produce an 80 percent MLR to pay a rebate less than 25 percent of the time. We propose to adopt this approach of less than 25 percent in paragraph (h)(4)(ii). Toward the conclusion of its public proceedings on these issues, the NAIC gave some consideration to setting the base credibility factors so that such an issuer would have to pay a rebate less than 10 percent of the time. The credibility factors in that case would have been roughly twice as large as the factors the NAIC adopted. The case made in favor of making this change is that it would reduce the likelihood of requiring a plan to pay a rebate simply because of chance variation in claims experience. However, it would also have increased the likelihood that a plan setting premiums to achieve an MLR that is less than the applicable MLR standard would avoid paying a rebate, and it would have reduced the size of the rebates that plans pricing below the MLR standard would have to pay. The NAIC concluded that the credibility factors it adopted more equitably balance the consumers' interest in requiring plans that should pay rebates to pay rebates against the issuers' interest in minimizing the risk of paying rebates as a result of chance variations.

We propose to adopt a credibility adjustment methodology in paragraph (h)(4). The NAIC recommends that the credibility factors be monitored and reevaluated in light of developing experience as the Affordable Care Act reforms are implemented over the next several years. We concur with this recommendation and we intend both to monitor the effects of the credibility adjustment and, as appropriate, to update the credibility adjustment method within the parameters of the methodology proposed in this rule.

The NAIC developed a standard for the minimum number of life-years for the plan's MLR to be determined at least partially credible. The NAIC selected the standard in part to avoid having credibility adjustments that would exceed 10 percent (credibility adjustments are described later in this section). The standards for the private market and MA and Part D were selected using similar criteria. We propose in paragraph (h)(4)(iii) setting the minimum number of member months (that is, the sum of the number of months that each individual was enrolled in the plan over the period that the MLR is measured) to determine at least partial credibility such that the maximum credibility adjustment is equal to or less than 10 percent. Using member months would be consistent with the approach taken for MA and Part D, and we believe the use of member months is more consistent with Medicaid data and reports. We would also recommend that states that collect remittances from plans based on the MLR, would not collect remittances from any plan that is determined to be non-credible on the basis of the number of member months of enrollment in the plan.

In paragraph (h)(4)(iv), we propose to follow the NAIC's assumption that variations of less than approximately 1 percent are reasonably to be expected based on ordinary variation in claims experience of very large plans. We propose to consider the experience of such plans to be fully credible, and would recommend that such a plan should have to pay a remittance based on its reported MLR, to the extent that a state chooses to collect a remittance as described in paragraph (j) of this section.

The NAIC designated a minimum number of life-years that would be needed to assign full credibility to a plan's MLR and a minimum number of life-years that would be needed to assign at least partial credibility to a plan's MLR. For the MLR of plans that are assigned partial but not full credibility, the NAIC developed a credibility adjustment to apply to the MLR. We propose to adopt a similar approach based on the variability of Medicaid expenditures in paragraph (h)(4)(v). For purposes of the credibility adjustment for Medicaid MCOs, PIHPs, and PAHPs we use the term “member months”, and propose to define the term in § 438.8(b) as the “number of months an enrollee or group of enrollees is covered by an MCO, PIHP, or PAHP over a specified time period, such as a year.”

The Office of the Actuary modeled the distribution of the MLR using the following statistical formula by applying the Central Limit Theorem:

EP01JN15.000

Where:

X

i

is the annual claim amount with mean (

μ

) and variance (

σ

2

) for an individual.

X

i

is assumed to be independently and identically distributed for each individual.

n

is the number of individuals in the group; and

EP01JN15.001

The numerator of the formula represents the aggregate claims (a variable), and the denominator represents the aggregate premium. The denominator is modeled as a single point equal to the expected premium because we are not evaluating the variability in the denominator.

The credibility adjustment equals the expected value of the MLR less the 25th percentile (25 percent target failure rate). This difference can be calculated by multiplying the

z

-score for the standard normal distribution by the standard deviation for the MLR. The credibility adjustment equals:

EP01JN15.002

Where -0.6745 is the

z

-score for the 25th percentile of the standard normal distribution.

We propose that, in addition to calculating the number of member-months needed to determine the minimum number of member-months for a MLR to be partially credible and for a MLR to be fully credible, the credibility adjustment would also be determined at several other numbers of member-months in between those levels and published. For a MLR that is determined to be partially credible, the credibility adjustment would be calculated by interpolating between the credibility adjustments at the nearest member-month levels published. For example, if a MLR for a plan with 5,000 member-months would receive a credibility adjustment of 2.0 percent and a plan with 10,000 member-months would receive a credibility adjustment of 1.0 percent, then we would determine that a plan with 6,000 member-months would receive a credibility adjustment of 1.8 percent using linear interpolation, as demonstrated in the equation below:

1% + [(10,000−6,000)/(10,000−5,000)] × (2%−1%) = 1.8%

More generally:

EP01JN15.003

Where

MM

is the number of member-months for a specific plan for which the MLR is measured;

CA

a

and

CA

b

are the credibility adjustments for the published member-month levels below and above the number of member-months

MM

for a specific plan; and

MM

a

and

MM

b

are the member-month levels below and above the number of member-months

MM

for a specific plan (for which the credibility adjustments would be

CA

a

and

CA

b

).

As proposed in § 438.8(h)(4)(vi), the number of member-months required for full and partial credibility for the MLR may be rounded for the purposes of administrative simplicity. We believe the standards would be clearer and easier to implement if they were rounded rather than unrounded. We intend that, under our proposal, we would round the member-month standards to the nearest 1,000, but depending on the results of the calculations of the number of member-months we may choose a different degree of rounding to ensure that the credibility thresholds are consistent with the objectives of this regulation.

In paragraph (i)(1), the minimum MLR would be calculated and reported for the entire population enrolled in the MCO, PIHP, or PAHP under the contract with the state unless the state directs otherwise. We expect that most states would have the MCO, PIHP, or PAHP calculate the MLR on a contract-wide basis, but we propose to permit flexibility for states that may choose to separate the MLR calculation by Medicaid eligibility group based on differences driven by the federal medical assistance percentage (FMAP) (to simplify accounting with the federal government), by capitation rates, or for legislative tracking purposes. However, while states could divide eligibility groups for MLR calculation purposes, states may not apply different standards of review or different MLR minimums to different eligibility groups. The state may choose any aggregation method described, but proposed paragraph (k)(1)(xii) stipulates that the MCO, PIHP, and PAHP must clearly show in their report to the state which method it used.

Paragraph (j) proposes that an MCO, PIHP, or PAHP pay a remittance to the state if the state elects to impose a remittance standard on a MCO, PIHP,or PAHP that does not meet the minimum MLR standard set by the state as described in proposed in § 438.8(c). We strongly encourage states to incent MCO, PIHP, and PAHP performance consistent with their authority under state law.

We propose that MCOs, PIHPs, and PAHPs would submit a report meeting specific content standards and in the time and manner established by the state (so long as the deadline is within 12 months of the end of the MLR reporting year). We believe this will be

enough time after the end of the MLR reporting year for the state to reconcile any incentive or withhold arrangements they have with the MCOs, PIHPs, and PAHPs and for the managed care plans to calculate the MLR accurately. The specified contents of the report in paragraph (k) are considered the minimum information necessary for the state to monitor and confirm compliance with the standards for the calculation of the MLR as specified in this section. We request comment on whether this is an appropriate timeframe.

Because there is always some uncertainty when health plans enter a new market, we propose in paragraph (l) that MCOs, PIHPs, and PAHPs need not calculate or report their MLR in the first year they contract with the state to provide Medicaid services if the state chooses to exclude that MCO, PIHP, or PAHP from the MLR calculation in that year. If the state chose that option, the first MLR reporting year the MCO, PIHP, or PAHP would be the next MLR reporting year and only the experience of the MCO, PIHP, or PAHP for that MLR reporting year would be included. We considered whether to provide similar flexibility for situations where a Medicaid MCO, PIHP, or PAHP covers a new population (that is, the state decides to cover a new population of Medicaid beneficiaries in managed care). While we agree it is possible that there may be unknown risk to the plans for new populations, we do not believe any additional considerations need to be factored in for these cases because capitation payments and any risk mitigation strategy employed by the state would already be considered in the numerator and denominator. Moreover, if we were to allow those newly added populations to be carved out of the MLR calculation, we would create an unnecessary misalignment between Medicaid and the rules governing the private market and MA MLR. We request comment on this proposal and whether we should further define when a health plan newly contracts with the state.

We anticipate that states may make retroactive changes to capitation rates that could affect the MLR calculation for a given MLR reporting year. Permissible retroactive adjustments to the final capitation rate are discussed in section I.B.3.e. of this proposed rule. We propose in paragraph (m) that in any case where a state makes a retroactive adjustment to the rates that affect a MLR calculation for a reporting year, the MCO, PIHP, or PAHP would need to recalculate the MLR and provide a new report with the updated figures.

In paragraph (n) we propose that the MCO, PIHP, or PAHP provide an attestation when submitting the report specified under proposed paragraph (k) that gives an assurance that the MLR was calculated in accordance with the standards in this proposed section.

(3) State Requirements (§ 438.74)

We propose minimum standards for state oversight of the MLR standards in § 438.74. Specifically, we propose two key standards related to oversight for states when implementing the MLR for contracted MCOs, PIHPs, and PAHPs: (1) Report to CMS a summary description of the outcomes of the MLR calculations for each MLR reporting year; and (2) re-pay the federal share of any remittances the state chooses to collect from the MCOs, PIHPs, or PAHPs. The proposed report in paragraph (a) is a summary description of the MLR calculations for each of the MCOs, PIHPs, and PAHPs in the state, and must be included with the rate certification that would be submitted under § 438.7 of this proposed rule. In proposed paragraph (b), if the state chooses to collect any remittances from the MCOs, PIHPs, or PAHPs for not meeting the minimum MLR standard, then the state would also need to determine a methodology for how the state will return the federal share of that remittance. With much of the Medicaid expansion population included in managed care and the possibility of the FMAP changing within the MLR reporting year, a MLR calculated on a contract basis may have varying levels of federal match within the MLR remittance. If a state has decided not to segregate MLR reporting by population, the state will need to submit to CMS the methodology of how the federal share of the remittance was calculated that would be reviewed and approved in the normal CMS-64 claiming protocol.

2. Standard Contract Provisions (§ 438.3, § 438.6)

Our existing regulations at § 438.6 stipulate that MCO, PIHP, and PAHP capitation rates must be set on an actuarially sound basis, based on section 1903(m)(2)(A)(iii) of the Act (for MCOs) and section 1902(a)(4) of the Act (for PIHPs and PAHPs). Section 438.6 currently also includes standards related to contracting and contract terms for MCOs, PIHPs, and PAHPs. Based on our experience with the changing Medicaid managed care environment, we are proposing several updates to these standards for contract terms and actuarial soundness. In addition, the current language also includes provisions that are better organized by specific topic. To that end, we propose to restructure the standards currently codified in § 438.6 at the same time as we propose several substantive changes in these areas. Our proposal would divide the content into the following five new sections, four of which specifically address setting actuarially sound capitation rates.

• § 438.3—Standard Contract Provisions

• § 438.4—Actuarial Soundness

• § 438.5—Rate Development Standards

• § 438.6—Special Contract Provisions Related to Payment

• § 438.7—Rate Certification Submission

We discuss in section I.B.3., the substance of our proposal concerning setting actuarially sound capitation rates, and focus in this section I.B.2. on our proposal for the standard contract provisions for MCO, PIHP, and PAHP contracts. Where we propose to reorganize or recodify existing provisions into new sections, they are so noted in this preamble discussion. Likewise, where we have proposed additional specificity, those are clearly delineated. We welcome comments on both the approach and content of this portion of the proposed rule.

We propose to add a new § 438.3 to contain the standard provisions for MCO, PIHP, and PAHP contracts that are distinguishable from the rate setting process. As proposed, these provisions generally set forth specific elements that states must include as performance standards in their managed care contracts. As published in 2002, § 438.6 contained contract standards from part 434 that were carried over from that section and updated as necessary when part 438 was created to contain all standards for Medicaid managed care programs, including the standards for actuarially sound capitation payments and for risk-sharing and related payment mechanisms. To improve the clarity and readability of part 438, we propose that § 438.3 would include the standard contract provisions from current § 438.6 that are unrelated to payment. We recognize that additional contract standards that direct aspects of the MCO's, PIHP's, or PAHP's operations appear elsewhere in this part; however, to preserve the continuity of and familiarity with part 438 over the past decade, we do not believe it is necessary or appropriate to completely consolidate all contract standards into one section.

We are proposing that the provisions currently codified in § 438.6 as paragraphs (a) through (m) be redesignated respectively as § 438.3(a)

through (l), (p) and (q), with some revisions as described below. These proposed paragraphs address standards for our review and approval of contracts, entities eligible for comprehensive risk contracts, payment, prohibition of enrollment discrimination, services covered under the contract, compliance with applicable laws and conflict of interest safeguards, provider-preventable conditions, inspection and audit of financial records, physician incentive plans, advance directives, subcontracts, choice of health care professional, additional rules for contracts with PCCMs, and special rules for certain HIOs.

First, in § 438.3(a) related to our review and approval of contracts, we propose to add the regulatory flexibility for us to set forth procedural rules—namely timeframes and detailed processes for the submission of contracts for review and approval—in sub-regulatory materials, and add a new standard for states seeking contract approval prior to a specific effective date that proposed final contracts must be submitted to us for review no later than 90 days before the planned effective date of the contract. Under our proposal, the same timeframe standard would also apply to rate certifications, as proposed § 438.7(a) incorporates the review and approval process of § 438.3(a). To the extent that the final contract submission is complete and satisfactory responses to questions are exchanged in a timely manner, we believe that 90 days is a reasonable and appropriate timeframe for us to conduct the necessary level of review of these documents to verify compliance with federal standards and thereby authorize FFP concurrent with the health plan's initiation of performance under the contract. We acknowledge a state's interest in receiving approval prior to the planned effective date and propose that states provide us with adequate time to conduct our review to ensure compliance with applicable rules. In addition, for purposes of consistency throughout part 438, we are removing specific references to the CMS Regional Offices and replacing it with a general reference to CMS. This proposed change does not represent a modification in the role of the Regional Offices.

We propose for § 438.3(b) and (d) to merely redesignate the existing provisions at § 438.6(b) and (d), with the addition of PCCM entities to paragraph (d) consistent with our proposal discussed in section I.B.6.e. of this proposed rule about PCCM entities. Wherever there is a reference to PCCM in existing regulatory text being moved or amended as part of our proposal for § 438.3, we propose to add PCCM entities.

In proposed § 438.3(c), we propose to restate our longstanding standard currently in § 438.6(c)(2)(ii) that the final capitation rates for each MCO, PIHP, or PAHP must be specifically identified in the applicable contract submitted for our review and approval. We also propose to clarify in this paragraph that the final capitation rates must be based only upon services covered under the state plan and that the capitation rates represent a payment amount that is adequate to allow the MCO, PIHP, or PAHP to efficiently deliver covered services in a manner compliant with contractual standards.

3

3

We note that in “Medicaid and Children's Health Insurance Programs; Mental Health Parity and Addiction Equity Act of 2008; the Application of Mental Health Parity Requirements to Coverage Offered by Medicaid Managed Care,” published April 10, 2015 [CMS-2333-P], we proposed that certain additional costs could also be used to develop capitation rates. We anticipate that if that proposal is finalized, that provision would be codified as part of § 438.6(e) and redesignated through this proposed rule as § 438.3(e)).

We propose to redesignate the provisions prohibiting enrollment discrimination currently at § 438.6(d) as new § 438.3(d) and propose to replace the reference to the Regional Administrator with CMS for consistency with other proposals to refer uniformly to CMS in the regulation text. We also propose to add sex as a protected category as discussed in the proposed changes in § 438.3(f) below.

The current regulation at § 438.6(e) addresses the services that may be covered by the MCO, PIHP, or PAHP contract. We propose to move that provision to § 438.3(e). The existing provision also prohibits services that are in addition to those in the Medicaid state plan from being included in the capitation rate and we have proposed to address that standard in proposed § 438.3(c) above.

We also propose to redesignate the existing standard for compliance with applicable laws and conflict of interest standards from existing § 438.6(f) to § 438.3(f)(1) with the addition of a reference to section 1557 of the Affordable Care Act, which prohibits discrimination in health programs that receive federal financial assistance. Similarly, we propose to add sex as a protected category for purposes of MCO, PIHP, PAHP, or PCCM enrollment practices in the enrollment provisions proposed to be moved to § 438.3(d)(4). We also propose a new standard, at proposed § 438.3(f)(2), to state more clearly the existing standard that all contracts comply with conflict of interest safeguards (described in § 438.58) and section 1902(a)(4)(C) of the Act.

We propose to redesignate the standards related to provider reporting of provider-preventable conditions currently codified in § 438.6(f)(2)(i) to the new § 438.3(g). With this redesignation, we propose to limit these standards to MCOs, PIHPs, and PAHPs, because those are the entities for which these standards are applicable.

We propose to move the inspection and audit rights for the state and federal government from § 438.6(g) to new § 438.3(h) and to expand the existing standard to include access to the premises, physical facilities and equipment of contractors and subcontractors where Medicaid-related activities or work is conducted. In addition, we propose to clarify that the State, CMS, and the Office of the Inspector General may conduct such inspections or audits at any time.

As part of our proposal to redesignate the provisions related to physician incentive plans from § 438.6(h) to new § 438.3(i), we propose to correct the outdated references to Medicare+Choice organizations to MA organizations. We propose to redesignate the provisions for advance directives currently in § 438.6(i) as § 438.3(j). We propose to redesignate the provisions for subcontracts currently at § 438.6(l) as § 438.3(k) and also propose to add a cross-reference to § 438.230 that specifies standards for subcontractors and delegation. We propose to redesignate the standards for choice of health care professional currently at § 438.6(m) at § 438.3(l).

In proposed § 438.3(m), we propose to add a new standard that MCOs, PIHPs, and PAHPs submit audited financial reports annually. We believe this standard is appropriate and necessary for these managed care plans because such information is a source of base data that must be used for rate setting purposes in proposed § 438.5(c). We propose that the audits are conducted in accordance with generally accepted accounting principles and generally accepted auditing standards. We propose to reserve § 438.3(n).

In proposed § 438.3(o), we propose that contracts covering long-term services and supports provide that services that could be authorized through a waiver under section 1915(c) of the Act or a state plan amendment through section 1915(i) or 1915(k) be delivered consistent with the settings standards in § 441.301(c)(4).

We propose to redesignate existing § 438.6(j) (special rules for certain HIOs) and (k) (additional rules for contracts

with PCCMs) as § 438.3(p) and (q). As part of our proposed redesignation of the HIO-specific provisions from existing § 438.6(j) to new § 438.3(p), we also propose to correct a cross-reference in that paragraph. The existing language cross-references § 438.6(a) to determine whether certain HIOs may enter into risk contracts. This cross-reference first appeared in the 1998 proposed rule when § 438.6(a) contained the contract review standards for risk-bearing entities. In the final rule for part 438, those standards were moved to § 438.6(b) and the reference in § 438.6(j) was not updated. We propose to correct that oversight by using a cross reference to paragraph (a) of this proposed section, where we have proposed to designate the contract review standard. We propose to redesignate the additional contract standards specific to PCCM contracts from existing § 438.6(k) to new § 438.3(q) so that all contract standards for MCOs, PIHPs, and PAHPs are separated from any special rules for PCCMs. We believe this restructuring adds clarity to our rules.

In proposed § 438.3(r), we propose to set standards for contracts with PCCM entities, in addition to those standards specified for PCCM contracts in proposed § 438.3(q), including the submission of such contracts for our review and approval to ensure compliance with § 438.10 (information standards). If the PCCM entity contract provides for shared savings, incentive payments or other financial reward for improved quality outcomes, § 438.330 (performance measurement), §§ 438.340 (managed care elements of comprehensive quality strategy), and 438.350 (external quality review) would be applicable.

In proposed § 438.3(s), we propose to add standards for contracts with MCOs, PIHPs, or PAHPs that are contractually obligated to provide coverage of covered outpatient drugs. The proposed MCO standards are based primarily on section 1903(m)(2)(A)(xiii) of the Act and we rely on our authority under section 1902(a)(4) to extend them to PIHPs and PAHPs that are contractually obligated to provide covered outpatient drugs. In addition, we rely on section 1902(a)(4) of the Act to address, for all managed care plans within the scope of this proposal, requirements that are outside the scope of section 1903(m)(2)(A)(xiii) of the Act, namely the proposal at § 438.3(s)(1), (4) and (6).

Section 2501(c)(1)(C) of the Affordable Care Act amended section 1903(m)(2)(A) of the Act to add clause (xiii) to add certain standards applicable to contracts with MCOs. In the February 2, 2012

Federal Register

, we published the “Medicaid Program; Covered Outpatient Drugs” proposed rule that included the addition of a definition for covered outpatient drugs in § 447.502 (77 FR 5318). We propose here to incorporate appropriate definitions related to covered outpatient drugs in part 438 should such definitions be implemented and have used the phrase “as defined in section 1927(k)” in our proposed regulation text as a placeholder for that in § 438.3(s).

In paragraph (s)(1), we propose that the MCO, PIHP, or PAHP must provide coverage of covered outpatient drugs (as defined in section 1927(k)(2) of the Act) as specified in the contract and in a manner that meets the standards for coverage of such drugs imposed by section 1927 of the Act as if such standards applied directly to the MCO, PIHP, or PAHP. This is intended to clarify that when the MCO, PIHP, or PAHP provides prescription drug coverage, the coverage of such drugs must meet the standards set forth in the definition of covered outpatient drugs at section 1927(k)(2) of the Act. The MCO, PIHP, or PAHP may be permitted to maintain its own formularies for covered outpatient drugs that are under the contract, but when there is a medical need for a covered outpatient drug that is not included in their formulary but that is within the scope of the contract, the MCO, PIHP, or PAHP must cover the covered outpatient drug under a prior authorization process. This proposal is based on our authority under section 1902(a)(4) of the Act to mandate methods of administration that are necessary for the efficient operation of the state plan. Furthermore, if an MCO, PIHP, or PAHP is not contractually obligated to provide coverage of a particular covered outpatient drug, or class of drugs, the state is required to provide the covered outpatient drug through FFS in a manner that is consistent with the standards set forth in its state plan and the requirements in section 1927 of the Act.

In paragraph (s)(2), we propose to implement section 1903(m)(2)(A)(xiii)(III), specifically, we propose that MCOs, PIHPs, and PAHPs report drug utilization data necessary for the state to bill for rebates under section 1927(b)(1)(A) to the state within 45 calendar days after the end of each quarterly rebate period to ensure that MCO, PIHP, or PAHP data is included with the FFS invoicing of manufacturers for rebates for the state in the same rebate period. Such utilization information must include, at a minimum, information on the total number of units of each dosage form and strength and package size by National Drug Code of each covered outpatient drug dispensed or covered by the MCO, PIHP, or PAHP.

As amended, section 1927(b)(1)(A) of the Act provides in part that states must bill manufacturers for rebates for drugs dispensed to enrollees with a Medicaid managed care plan and the proposed standard in paragraph (s)(2) will help facilitate state compliance with the statutory directive. In paragraph (s)(3), we propose that the MCO, PIHP, or PAHP must have procedures in place to exclude utilization data for drugs subject to discounts under the 340B Drug Pricing Program from the utilization reports submitted under proposed paragraph (s)(2). Section 2501(c) of the Affordable Care Act modified section 1927(j)(1) of the Act to specify that covered outpatient drugs are not subject to the rebate standards if such drugs are both subject to discounts under section 340B of the PHS Act and dispensed by MCOs. Section 340B of the PHS Act prohibits covered entities from billing Medicaid for covered outpatient drugs purchased at discounted 340B prices if the drugs are subject to a Medicaid rebate. Section 1903(m)(2)(A)(xiii)(III) of the Act provides that the reporting standard for MCOs does not include information about drugs that are not subject to the rebates under section 1927 of the Act. As we propose in paragraph (s)(2), that MCOs, PIHPs, and PAHPs must report utilization data, it would follow that covered outpatient drugs purchased at 340B prices need to be excluded from the utilization reports to the state to avoid duplicate discounts for rebates paid by manufacturers. To ensure that drug manufacturers will not be billed for rebates for drugs purchased and dispensed under the 340B Drug Pricing Program, MCOs, PIHPs, or PAHPs must have mechanisms in place to identify these drugs and exclude the reporting of this utilization data to the state as to avoid the manufacturer from incurring a duplicate discount on these products.

In paragraph (s)(4), we propose that MCOs, PIHPs, or PAHPs that provide coverage of covered outpatient drugs also operate a drug utilization review (DUR) program that is consistent with the standards in section 1927(g) of the Act; this standard means that the DUR program operated by the MCO, PIHP, or PAHP would be compliant with section 1927(g) of the Act if it were operated by the state in fulfilling its obligations under section 1927 of the Act. This does not mean that the DUR program operated by the MCO, PIHP, or PAHP must be the same as that operated by the state, but that the MCO's, PIHP's, or

PAHP's DUR program meets the requirements in section 1927(g) of the Act. This proposal is based on our authority under section 1902(a)(4) of the Act. We recognize that MCOs, PIHPs, and PAHPs that are contractually responsible for covered outpatient drugs generally conduct utilization review activities as these activities promote the delivery of quality care in a cost effective and programmatically responsible manner. We believe that because the MCO, PIHP, or PAHP is providing coverage for covered outpatient drugs as part of the state plan instead of the state providing that coverage through FFS, it is appropriate to extend the DUR responsibilities associated with such coverage to the MCO, PIHP, or PAHP. Section 1927(g)(1)(A) of the Act provides, in part, that states must provide a DUR program for covered outpatient drugs to assure that prescriptions: (1) Are appropriate; (2) are medically necessary; and (3) are not likely to result in adverse medical results. We intend that our proposal in paragraph (s)(4) be met when the DUR program operated by an MCO, PIHP, or PAHP meets these standards. We recommend that the state's DUR Board coordinate with the MCOs, PIHPs, and PAHPs to coordinate review activities. In paragraph (s)(5), we propose that the MCO, PIHP, or PAHP would have to provide a detailed description of its DUR program activities to the state on an annual basis. The purpose of the report is to ensure that the parameters of section 1927(g) of the Act are being met by the MCO's, PIHP's, or PAHP's DUR program, as proposed under paragraph (s)(4).

Finally, in paragraph (s)(6), we propose that the state stipulate that the MCO, PIHP, or PAHP conduct the prior authorization process for covered outpatient drugs in accordance with section 1927(d)(5); we rely again on our authority under section 1902(a)(4) of the Act for this proposal. We believe that because the MCO, PIHP, or PAHP is providing coverage for covered outpatient drugs as part of the state plan instead of the state providing that coverage through FFS, it is appropriate to extend the prior authorization standards associated with such coverage to the MCO, PIHP, or PAHP. Therefore, we propose that the MCO, PIHP, or PAHP would provide a response to a request for prior authorization for a covered outpatient drug by telephone or other telecommunication device within 24 hours of the request and dispense a 72 hour supply of a covered outpatient drug in an emergency situation. We request comment on the proposals for MCO, PIHP, or PAHP coverage of covered outpatient drugs.

In proposed § 438.3(t), we propose a new contract provision for MCO, PIHP, or PAHP contracts that cover Medicare-Medicaid dually eligible enrollees and delegate the state's responsibility for coordination of benefits to the health plan. Under our proposal, in states that use the automated crossover process for FFS claims, the contract would need to provide that the MCO, PIHP, or PAHP sign a Coordination of Benefits Agreement and participate in the automated crossover process administered by Medicare. In FFS, states are responsible for dually eligible beneficiaries' Medicare cost-sharing and use Medicare's automated crossover process to reduce burden on providers. Under this crossover process, a Medicare provider—who may not be part of the managed care plan's network—submits a claim to Medicare and there is an automatic crossover to the state for whatever Medicaid payment would be due. As more MCOs, PIHPs, or PAHPs plans are contractually responsible for Medicare deductibles and co-insurance, providers face a much more complex set of processes. If an MCO, PIHP, or PAHP does not enter into a Coordination of Benefits Agreement with Medicare, providers may have to submit separate bills in electronic or paper format. Each health plan has its own process, and often, a single provider may have patients in two or three different health plans. Contract provisions requiring an MCO, PIHP, or PAHP serving dually eligible enrollees to enter into a Coordination of Benefits Agreement with Medicare and participate in automated crossover would encourage providers to serve dually eligible beneficiaries. Further, such a standard would also reduce administrative burden for the relevant entities, ensuring more efficient provision of benefits to enrollees.

We propose to add a new paragraph (u) to permit MCOs and PIHPs to receive a capitation payment from the state for an enrollee aged 21 to 64 that spends a portion of the month for which the capitation is made as a patient in an institution for mental disease (IMD) so long as the facility is a hospital providing psychiatric or substance use disorder (SUD) inpatient care or sub-acute facility providing psychiatric or SUD crisis residential services and the stay in the IMD is for less than 15 days in that month. As background, paragraph (B) following section 1905(a)(29) provides that federal financial participation is not available for any medical assistance under title XIX for services provided to an individual ages 21 to 64 who is a patient in an IMD facility. Under this broad exclusion, no FFP is available for the cost of services provided either inside or outside the IMD while the individual is a patient in the facility. In light of the flexibility that managed care plans have had historically to furnish care in alternate settings that meet an enrollee's needs, we propose to clarify that managed care plans have had flexibility under risk contracts to provide alternative services or services in alternative settings in lieu of covered services or settings if cost-effective, on an optional basis, and to the extent the managed care plan and the enrollee agree that such setting or service would provide medically appropriate care.

We aim to propose rules on substitute providers under Medicaid managed care programs for CMS's “in lieu of” policy in particular. For reasons set forth later in this section, we believe that addressing managed care plan flexibility in the context of short inpatient or sub-acute IMD stays is necessary because of what we believe are access issues for short-term inpatient psychiatric and SUD treatment. We propose to include sub-acute facilities in our proposal as an option to address access issues for inpatient services. Our proposed clarification of policy aims to ensure that the use of IMD settings in lieu of covered settings for this care is sufficiently limited so as to not contravene the Medicaid coverage exclusion in section 1905(a)(29)(B) of the Act. Our proposal recognizes that managed care plans have flexibility in ensuring access and availability of covered services while ensuring that use of an appropriate alternate setting does not endanger beneficiaries' overall access to Medicaid benefits for the entire month during which a brief stay occurs. We welcome comment on these proposals, as well as other recommendations for addressing the IMD payment exclusion in managed care delivery systems.

Managed care programs may achieve efficiency and economic savings compared to Medicaid FFS programs by managing care through numerous means, including networks of providers, care coordination and case management. We have previously acknowledged such increased efficiencies and savings,

see

67 FR 41005, and current § 438.6(e) (proposed to be redesignated as § 438.3(e)) permit managed care plans to provide additional services not covered in the state plan, but such services cannot be included when determining payment rates. We believe that to implement the IMD exclusion in the managed care plan context by

prohibiting or limiting the payment through the capitation rate for services when an enrollee is a patient in an IMD is contrary to the flexibilities managed care plans have had in the delivery of services. We could take a narrow view of section 1905(a)(29)(B) of the Act and prohibit the payment, either entirely or in part, of the capitation rate for any month during which a beneficiary is a patient in any IMD for any part of the month, or to require mid-month changes in capitation payments and enrollment status. Either of these alternatives would have the potential to disrupt the coordination and management of care for such beneficiaries that managed care plans otherwise use. We also acknowledge that inherent in transferring the risk for Medicaid coverage during a period means that capitation payments may be made for months during which no Medicaid services are used by a particular beneficiary who is enrolled with the plan. Thus, we believe that it is appropriate to permit states to make a monthly capitation payment that covers the risk of services that are eligible for FFP rendered during that month when the enrollee is not a patient in an IMD, even though the enrollee may also be a patient in an IMD during a portion of that same period. A corollary of our proposal is that capitation payments may not be made if the specified conditions outlined in this section are not met and that a state would have to ensure that covered Medicaid services are provided on a FFS basis or make other arrangements to assure compliance. We seek comment on our proposed approach to providing this flexibility under managed care and alternative permissible options under the statute.

We clarify here that services rendered to a patient in an IMD may be considered “in lieu of services” covered under the state plan, as described in this proposed rule. “In lieu of services” are alternative services or services in a setting that are not included in the state plan or otherwise covered by the contract but are medically appropriate, cost effective substitutes for state plan services included within the contract (for example, a service provided in an ambulatory surgical center or sub-acute care facilities, rather than an inpatient hospital). However, an MCO, PIHP or PAHP may not require an enrollee to use an “in lieu of” arrangement as a substitute for a state plan covered service or setting, but may offer and cover such services or settings as a means of ensuring that appropriate care is provided in a cost efficient manner. Accordingly, the contract may not explicitly require the MCO or PIHP to use IMD facilities, and must make clear that the managed care plan may not make the enrollee receive services at an IMD facility versus the setting covered under state plan. However, the contract could include, in its list of Medicaid-covered services to be provided under the contract, services such as inpatient psychiatric hospital services. The MCO or PIHP could then purchase these services from an IMD rather than an inpatient hospital if it so chooses in order to make the covered services available. This is consistent with the ability of managed care plans to select providers for their network to provide covered services.

We propose to limit payment of capitation rates for enrollees that are provided services while in an IMD (to stays of less than 15 days per month and so long as the IMD is a certain type of facility) for two reasons. First, our proposal seeks to address the specific concerns about ensuring access to and availability of inpatient psychiatric and SUD services that are covered by Medicaid; these concerns have focused on short-term stays. The expansion of the Medicaid program coupled with the overall increase in health care coverage in managed care plans in the Marketplace leads us to expect greater demand on the limited inpatient resources available to provide mental health and SUD services. An estimated 7.1 percent of those aged 18-64 currently meet the criteria for a serious mental illness

4

and an estimated 14.9 percent are currently experiencing serious psychological distress.

5

Further, an estimated 13.6 percent of uninsured individuals aged 18-64 within the Medicaid expansion population currently have a substance use disorder.

6

Similarly, within the Marketplace eligible population, 6.1 percent currently have a serious mental illness, 13.5 percent are experiencing serious psychological distress, and 14.3 percent have a substance use disorder.

7

However, over the past several years the number of beds in freestanding inpatient psychiatric facilities declined by 5 percent with freestanding inpatient psychiatric facilities in urban areas accounting for the majority of the decrease (5.7 percent). In addition, psychiatric beds have decreased significantly over the past 25 years

8

in urban hospitals and distinct part psychiatric units have declined by 9 percent from 2010 to 2013. In addition, newer diversionary services such as crisis residential services have been effective in diverting individuals with psychiatric and substance use disorders experiencing a crisis from emergency departments or inpatient services. We have heard concerns from states and other stakeholders that access to and availability of short-term inpatient psychiatric and SUD services has been compromised and that delays in the provision of care may occur. Managed care plans have an obligation to ensure access to and availability of services under Medicaid regulations for services not prohibited by statute and covered under the contract. To meet that obligation, managed care plans have used alternate settings, including short term crisis residential services, to provide appropriate medical services in lieu of Medicaid-covered settings, they are also dealing with the gap between the need for and the capacity to provide

inpatient and sub-acute psychiatric services.

4

Serious Mental Illness: Respondents to the NSDUH meet the criteria for SMI in the past year if they have had a diagnosable mental, behavioral, or emotional disorder (excluding developmental and substance use disorders) of sufficient duration to meet diagnostic criteria specified within the 4th edition of the

Diagnostic and Statistical Manual of Mental Disorders

(DSM-IV) that has resulted in serious functional impairment that substantially interferes with or limits one or more major life activities. Adult NSDUH respondents' mental illness is determined based on modeling their responses to questions on distress (Kessler-6 [K6] scale) and impairment (truncated version of the World Health Organization Disability Assessment Schedule [WHODAS]).

5

Serious Psychological Distress (SPD): Respondents are determined to have SPD if they have a score of 13 or higher on the Kessler-6 (K6) scale. The Kessler-6 (K6) scale consists of six questions that gather information on how frequently adult respondents experienced symptoms of psychological distress during the past month or during the one month in the past year when they were at their worst emotionally. These questions ask about the frequency of feeling (1) nervous, (2) hopeless, (3) restless or fidgety, (4) sad or depressed, (5) that everything was an effort, and (6) no good or worthless. The NSDUH measure of serious psychological distress results in larger prevalence estimates than the SMI.

6

Substance Use Disorder (SUD): An adult is defined as having a SUD if they meet the criteria for abuse or dependence for illicit drugs or alcohol. Abuse of illicit drugs or alcohol is defined as meeting one or more of the four criteria for abuse included in the DSM-IV. Dependence on illicit drugs or alcohol is defined as meeting three out of seven dependence criteria (for substances that included questions to measure a withdrawal criterion) or three out of six dependence criteria (for substances that did not include withdrawal questions) for that substance, based on criteria included in DSM-IV. Additional criteria for alcohol and marijuana dependence since 2000 included the use of these substances on 6 or more days in the past 12 months.

7

Substance Abuse and Mental Health Services Administration (SAMHSA

), Behavioral Health Treatment Needs Assessment Toolkit for States,

available at

http://store.samhsa.gov/shin/content//SMA13-4757/SMA13-4757.pdf

.

8

New Freedom Commission on Mental Health,

Subcommittee on Acute Care: Background Paper.

DHHS Pub. No. SMA-04-3876. Rockville, MD: 2004.

The second reason we are limiting the payment of capitation rates for enrollees that are provided services while in an IMD is that we believe that section 1905(a)(29)(B) of the Act is applicable to the managed care context. Managed care plans should not be used to provide Medicaid coverage for services not authorized in statute, such as services provided to individuals in an IMD that are not furnished in lieu of a covered service authorized in statute. If an enrollee were a patient in an IMD for an extended period of time, the likelihood that the enrollee would otherwise be incurring authorized Medicaid-covered expenses—and with it, the risk compensated by the capitation payment—decreases. We believe that permitting capitation payments when an enrollee has a short-term stay in an IMD is a means of securing compliance with the statute by delineating parameters for these payments, which we would otherwise exclude or prohibit to achieve compliance with the statute.

Therefore, we propose that capitation payments may be made for a month in which an enrollee receives inpatient services in an IMD for a period of 15 days or less. This 15-day parameter is based on evidence of lengths of stay in an IMD based on data from the Medicaid Emergency Psychiatric Demonstration. This evidence suggests that the average length of stay is 8.2 days.

9

We propose to define a short-term stay as 15 days or less to account for the variability in the length of stay often experienced by individuals who need acute inpatient psychiatric or SUD services. We would expect practice patterns for the same services, whether delivered in an inpatient hospital or an IMD facility would be similar and that such patterns would be monitored by the state. Note that under this proposal, an enrollee could have a length of stay longer than 15 days that covers two consecutive months where the length of stay within each month is less than 15 days, and the MCO or PIHP would be eligible to receive a capitation payment for that enrollee for both months. We considered other alternatives to this approach, including whether to remain silent on a numerical definition associated with a short-term acute stay, or utilizing a number associated with an average length of stay, such as data available under the Medicaid Emergency Psychiatric Demonstration. We request comment on this provision, general approach and methodology, or any other comments. We also request comment on the proposed definition of a short-term acute stay in this context, including the cost of IMD services in FFS or managed care, the wisdom of reflecting a number as either a hard cap on the amount of time for which FFP would be available via the capitation payment, or as an articulation of the average length of stay across a managed care plan's enrollees that would legitimize FFP. We also request comment on ways to operationalize use of an average length of stay in terms of capitation payment development and oversight. In addition, we request comment on the percentage of enrollees that have a length of stay of less than 15 days for inpatient or sub-acute psychiatric services.

9

http://innovation.cms.gov/Files/reports/MEPD_RTC.pdf

, page 12.

For purposes of rate setting, the state and its actuaries may use the utilization of services provided to an enrollee while they have a short term stay as a patient in an IMD to determine an estimate of the utilization of state plan services, that is, inpatient psychiatric services, covered for the enrolled population in future rate setting periods. However, the costs associated with the services to patients in an IMD may not be used when pricing covered inpatient psychiatric services. The IMD utilization must be priced consistent with the cost of the same services through providers included under the state plan. We note that this guidance for accounting for service utilization to patients in an IMD differs from rate setting guidance issued in December 2009 for in lieu of services in the context of home and community based services,

see

CMS,

Providing Long-Term Services and Supports in a Managed Care Delivery System: Enrollment Authorities and Rate Setting Techniques

(December 2009), at page 15, available at

http://www.pasrrassist.org/sites/default/files/attachments/10-07-23/ManagedLTSS.pdf

. In that guidance, we provided that the state may modify the rate-setting process to account for the expected cost as well as utilization of in lieu of services as a proxy for the cost of approved state plan services in a contract. In the context of services rendered to patients in an IMD, we believe such proxy pricing is not consistent with the statutory prohibition of FFP referenced above. As noted earlier, we welcome comment on this proposal.

In proposed paragraph (v), we establish minimum recordkeeping requirements for MCOs, PIHPs, PAHPs, and subcontractors, as applicable, of at least 6 years for data, documentation and information specified in this part. Specifically, we propose that MCOs, PIHPs, PAHPs, and subcontractors retain enrollee grievance and appeal records as specified in § 438.416, base data as specified in § 438.5(c), MLR reports as specified in § 438.8(k), and the documentation specified in § 438.604, § 438.606, § 438.608, and § 438.610. We make this proposal under our authority under section 1902(a)(4) of the Act to mandate methods of administration that are necessary for the efficient operation of the state plan. The retention of these records will aid in monitoring, oversight, and audit activities at the state and federal levels. We request comment on the proposed length of record retention; specifically, whether 6 years is consistent with existing state requirements on managed care plans for record retention and whether we should adopt a different timeframe. We note that MA requires MA organizations to retain records for a period of 10 years at § 422.504(d).

3. Setting Actuarially Sound Capitation Rates for Medicaid Managed Care Programs (§ 438.2, § 438.4, § 438.5, § 438.6, and § 438.7)

Building on a decade of experience with states, we are proposing to improve the effectiveness of the regulatory structure to better assure the fiscal integrity, transparency and beneficiary access to care under the Medicaid program and to promote innovation and improvement in the delivery of services through a comprehensive review of Medicaid managed care capitation rates. The existing regulatory framework is process-based, rather than focused on a substantive review and assessment of the actuarial assumptions and methodologies underlying the development of the rates. Our proposal would strengthen that approach. The overarching goal behind our proposed revisions to the rate-setting framework (proposed in § 438.4 through § 438.7) is to reach the appropriate balance of regulation and transparency that accommodates the federal interests as payer and regulator, the state interests as payer and contracting entity, the actuary's interest in preserving professional judgment and autonomy, and the overarching programmatic goals—shared by states and the federal government—of promoting beneficiary access to quality care, efficient expenditure of funds and innovation in the delivery of care. In addition, we believe that requiring more consistent and transparent documentation of the rate setting process will allow us to conduct more efficient reviews of the rate certification submissions, which is a benefit to all parties.

Section 1903(m)(2)(A)(iii) of the Act permits federal matching dollars for state expenditures to a risk bearing entity for Medicaid services when “such services are provided for the benefit of individuals eligible for benefits under this title in accordance with a contract between the state and the entity under which the prepaid payments to the entity are made on an actuarially sound basis and under which the Secretary must provide prior approval for contracts [meeting certain value thresholds].” Existing § 438.6(c)(i) elaborates upon the statutory standard to define actuarially sound rates as rates that: (1) Have been developed in accordance with generally accepted actuarial principles and practices; (2) are appropriate for the populations to be covered and the services to be furnished under the contract; and (3) have been certified by an actuary who meets the qualification standards established by the American Academy of Actuaries and follows the practice standards established by the Actuarial Standards Board. In its Actuarial Standard of Practice No. 49, “Medicaid Managed Care Capitation Rate Development and Certification” issued in March 2015, the American Academy of Actuaries states that Medicaid capitation rates are “actuarially sound” if, for business for which the certification is being prepared and for the period covered by the certification, projected capitation rates and other revenue sources provide for all reasonable, appropriate, and attainable costs. Other revenue sources include, but are not limited to, expected reinsurance and governmental stop-loss cash flows, governmental risk adjustment cash flows, and investment income. Costs include, but are not limited to, expected health benefits, health benefit settlement expenses, administrative expenses, the cost of capital, and government-mandated assessments, fees, and taxes.

See

Actuarial Standard of Practice No. 49 (March 2015), available at

http://www.actuarialstandardsboard.org/wp-content/uploads/2015/03/asop049_179.pdf

. Our proposal to revise the Medicaid managed care rate setting framework expands upon these basic and generally accepted definitions of actuarial soundness to ensure that Medicaid rates are developed in a transparent and consistent manner across Medicaid managed care programs.

We relied on the following principles of actuarial soundness to inform the modernized rate setting framework in this proposed rule. First, capitation rates should be sufficient and appropriate for the anticipated service utilization of the populations and services covered under the contract and provide appropriate compensation to the health plans for reasonable non-benefit costs. Built into that principle is the concept that an actuarially sound rate should result in appropriate payments for both payers (the state and the federal government) and that the rate should promote program goals such as quality of care, improved health, community integration of enrollees and cost containment, where feasible. Second, an actuarial rate certification underlying the capitation rates should provide sufficient detail, documentation, and transparency of the rate setting components set forth in this regulation to enable another actuary to assess the reasonableness of the methodology and the assumptions supporting the development of the final capitation rate. Third, a transparent and uniformly applied rate review and approval process based on actuarial practices should ensure that both the state and the federal government act effectively as fiscal stewards and in the interests of beneficiary access to care.

a. Definitions (§ 438.2)

We propose to define “actuary” to incorporate standards for an actuary who is able to provide the certification under current law at § 438.6(c); that is, that the individual meets the qualification standards set by the American Academy of Actuaries as an actuary and follows the practice standards established by the Actuarial Standards Board. We also propose that where the regulation text refers to the development and certification of the capitation rates, and not the review or approval of those rates by CMS, the term actuary refers to the qualified individual acting on behalf of the state. We intend that an actuary who is either a member of the state's staff or a contractor of the state could fulfill this role so long as the qualification and practice standards are also met.

We propose to modify the existing definition of “capitation payment” by removing references to “medical” services in recognition of the fact that states are contracting with MCOs, PIHPs, and PAHPs for LTSS, which are not adequately captured in the existing definition of capitation payments that refers only to medical services.

We propose to define a “material adjustment” as one that, in the objective exercise of an actuary's judgment, has a significant impact on the development of the capitation rate. We note that material adjustments may be large in magnitude, or be developed or applied in a complex manner. The actuary developing the rates should use reasonable actuarial judgment based on generally accepted actuarial principles when assessing the materiality of an adjustment. Further discussion of material adjustments is provided in the discussion on documentation of adjustments in § 438.7 and section I.B.3.c. of this proposed rule.

We also propose to add a definition for “rate cells.” The use of rate cells is intended to group people with more similar characteristics and expected health care costs together to set capitation rates more accurately. The rate cells should be developed in a manner to ensure that an enrollee is assigned to one and only one rate cell. That is, each enrollee should be categorized in one of the rate cells and no enrollee should be categorized in more than one rate cell.

b. Actuarial Soundness Standards (§ 438.4)

Consistent with the principles of actuarial soundness described herein, we propose to add a new § 438.4 that builds upon the definition of actuarially sound capitation rates currently at § 438.6(c)(i) and establishes standards for states and their actuaries. In § 438.4(a), we propose to define actuarially sound capitation rates as rates that are projected to provide for all reasonable, appropriate, and attainable costs under the terms of the contract and for the time period and population covered under the contract. Further, we state that the rate development process should be conducted and rates developed in accordance with the proposed standards for approval of rates in § 438.4(b).

Under this provision, costs that a

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