Medicaid Program; Requirements for Certain Health Insuring Organizations and OBRA '90 Technical Amendments

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 434 and 435

[MB-044-P]

RIN 0938-AF15

Medicaid Program; Requirements for Certain Health Insuring

Organizations and OBRA '90 Technical Amendments

AGENCY: Health Care Financing Administration (HCFA), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would amend the Medicaid regulations to:

make those health insuring organizations (HIOs) that provide or arrange

for health care services to Medicaid recipients, but are not subject to

the requirements for health maintenance organizations (HMOs) set forth

in section 1903(m)(2)(A) of the Social Security Act, subject to the

regulations governing prepaid health plans (PHPs); and

Incorporate technical amendments relating to HMO enrollment,

disenrollments, guaranteed eligibility and provisional status made by

1990 legislation.

DATES: Written comments will be considered if we receive them at the

appropriate address, as provided below, no later than 5 p.m. on July 8,

1994.

ADDRESSES: Mail written comments (original and 3 copies) to the

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: MB-044-P, P.O. Box 7518,

Baltimore, MD 21207.

If you prefer, you may deliver your written comments (original and

3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,

Washington, DC 20201; or

Room 132, East High Rise Building, 6325 Security Boulevard, Baltimore,

Maryland 21207

Because of staffing and resource limitations, we cannot accept

comments by facsimile (FAX) transmission. In commenting, please refer

to file code MB-044-P. Written comments received timely will be

available for public inspection as they are received, generally

beginning approximately 3 weeks after publication of a document, in

room 309-G of the Department's offices at 200 Independence Avenue, SW.,

Washington, DC, on Monday through Friday of each week from 8:30 a.m. to

5 p.m. phone: (202) 690-7890.

FOR FURTHER INFORMATION CONTACT: Mike Fiore, (410) 966-4460.

SUPPLEMENTARY INFORMATION:

I. Health Insuring Organizations

A. Background

Under the Medicaid program, States may arrange for the provision of

services to Medicaid recipients through contracts with managed care

entities such as health maintenance organizations (HMOs), health

insuring organizations (HIOs), and prepaid health plans (PHPs).

An HIO is an entity that receives a premium or subscription charge

from the State, typically based on the number of persons enrolled in

the HIO, and assumes some risk of loss if the cost of the actual

services exceeds the monthly capitation amount. Unlike HMOs or PHPs,

the original HIOs did not themselves provide or arrange for health care

services for their enrollees, but merely paid for the cost of services

furnished to their members by independent providers. These original

HIOs were essentially risk-bearing fiscal agents.

In recent years, certain entities that contracted with providers

and required their enrolled members to obtain all of their medical care

exclusively from these providers have either retained or adopted the

label ``HIO'' in order to avail themselves of the less burdensome

regulatory requirements applicable to HIOs, compared to the

requirements applicable to HMOs or CMPs. This practice has had the

effect of subjecting enrollees to the same membership restrictions that

are characteristic of HMOs and PHPs, without the regulatory safeguards

afforded the HMO and PHP enrollees.

Contracts between State agencies and HIOs that act as risk-bearing

fiscal agents are made under the broad authority of section

1902(a)(4)(A) of the Social Security Act (the Act), which provides for

``such methods of administration * * * as are found by the Secretary to

be necessary for the proper and efficient operation of the plan'', and

are subject to the regulatory requirements of 42 CFR 434.40. Section

434.40 provides that HIO contracts must meet certain capitation,

underwriting risk, and reinsurance requirements, but it is silent with

regard to emergency services, grievance procedures, marketing

practices, inspection of financial records, and other important

regulatory issues that apply to HMOs and PHPs. Section 434.40 also

specifies that HIO contracts must conform to Sec. 434.6, that is, the

general requirements for all contracts and subcontracts entered into

between State agencies and providers as set forth in part 434.

Contracts with HMOs (and, as a result of legislation discussed

below, some HIOs) that provide or arrange for ``comprehensive

services'' on a risk basis are subject to the requirements of section

1903(m)(2) of the Act and implementing regulations under Secs. 434.20

through 434.36. ``Comprehensive services'' are defined under

Sec. 434.21(b) as inpatient hospital services and any of the following

services, or any three or more of the following services or groups of

services: (1) Outpatient hospital services and rural health clinic

services; (2) other laboratory and x-ray services; (3) skilled nursing

facility (SNF) (now referred to as nursing facility (NF)) services and

early and periodic screening, diagnosis, and treatment (EPSDT), and

family planning; (4) physicians' services; and (5) home health

services.

Those HIOs which provided or arranged for the delivery of

comprehensive services (and assumed financial risk for those services)

were made subject to these HMO requirements by section 9517(c) of the

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA '85) with

some exceptions. The provisions of section 9517(c) of COBRA '85 were

not made applicable to HIOs that became operational before January 1,

1986. Also, HIOs that became operational after that date but which

operate under a waiver approved under section 1915(b) of the Act before

that date, were exempted by section 9517(c) from HMO requirements

related to composition of enrollment and the right of enrollees to

disenroll without cause, under sections 1903(m)(2)(A)(ii) and

1903(m)(2)(A)(vi) of the Act, respectively. (Note: Section

9517(c)(2)(b) of COBRA erroneously identified the exception clauses as

(ii) and (iv). Section 1895(c)(4) of the Tax Reform Act of 1986, Public

Law 99-514, corrected this error.)

Section 9517(c) of COBRA '85 was silent on the requirements

applicable to HIOs which it did not subject to HMO requirements. This

would include those HIOs within the explicit exceptions discussed

above, as well as HIOs with risk contracts providing less than

comprehensive services.

We believe that it would be inappropriate to permit an HIO that

provides or arranges for services, yet is not subject to HMO rules, to

remain subject to the HIO rules at Sec. 417.40 governing those HIOs

that only function as risk-bearing fiscal agents. We did not, however,

include such a provision in proposed regulations published on August

25, 1988 (53 FR 32406). Those proposed regulations, which were designed

to implement the statutory amendment subjecting some HIOs to section

1903(m) of the Act, thus would permit HIOs that provide or arrange for

less than comprehensive services on a risk basis to be subject only to

the rules governing HIOs that perform the original basic HIO services

of paying for and assuming risk for health care services. In the final

rule published on December 13, 1990 (55 FR 51292), we recognized the

omission and declared our intent to publish, in a separate proposed

rule, revisions to the regulations that would make all HIOs that

provide or arrange for services subject to the same regulations as PHPs

if they are exempt from section 1903(m)(2)(A). However, we did not

provide for a comment period on this policy. This document provides

that comment period. Regulations that apply to PHPs are contained in

Secs. 434.20 through 434.36 and are derived from the authority granted

to the Secretary under section 1902(a)(4)(A) of the Act, not section

1903(m)(2)(A) as discussed above. These are the same regulations that

apply to Medicaid-contracting HMOs.

B. Provisions of the Proposed Rule

This proposed rule would subject all HIOs that assume risk and

provide or arrange for services, but are exempt from section

1903(m)(2)(A) of the Act, to the same requirements that apply to PHPs

as set forth in Secs. 434.20 (d) and (e), 434.21 through 434.36, and

434.50 through 434.65. It would affect (1) HIOs that provide or arrange

for comprehensive services and either were operational before January

1, 1986 or are otherwise exempted from section 1903(m)(2)(A) of the Act

by statute, and (2) HIOs that provide or arrange for less than

comprehensive services. We propose to amend Sec. 434.44 by adding a new

paragraph (c) to incorporate this provision.

This proposed rule also would expressly limit the applicability of

the existing HIO requirements at Sec. 434.40 to HIOs that only process

claims and underwrite risk and do not provide or arrange for the

delivery of health care services.

In addition, we propose revising the definition of ``prepaid health

plan'' at Sec. 434.2 to include HIOs that provide or arrange for health

care services.

II. Technical Revisions--Omnibus Budget Reconciliation Act of 1990

Section 4732 of the Omnibus Budget Reconciliation Act of 1990 (OBRA

'90) made several changes to the Social Security Act which affected

HMOs and Medicare-contracting competitive medical plans (CMPs) (defined

in Sec. 417.407(c)) which participate in the Medicaid program.

A. Waiver of Enrollment Requirements

Before the enactment of OBRA '90, an HMO that was a public entity

could receive a waiver of the composition of enrollment requirement

that Medicare and Medicaid recipients constitute less than 75 percent

of the entity's total enrollment only if HCFA determined that the

entity had special circumstances and the entity continued efforts to

enroll individuals who were not eligible for Medicare or Medicaid.

Section 4732(a) of OBRA '90 eliminated the requirement that special

circumstances must exist as the basis for granting the waiver.

We propose to revise our regulations at Sec. 434.26 (b)(2) and

(b)(3) to eliminate the requirement for the existence of special

circumstances in order for HCFA to grant a waiver of the composition of

enrollment requirements.

B. Guaranteed Eligibility in CMPs

Section 4732(b)(1) of OBRA '90 amended section 1902(e)(2)(A) of the

Act (which allows for a minimum guaranteed enrollment period of up to 6

months) to add CMPs that contract with Medicare under section 1876 to

the list of entities that, at a State's option, may deem individuals

who lose eligibility before the end of the minimum enrollment period,

to continue to be eligible until the end of the period.

We propose to amend Secs. 435.212 and 435.326 to identify CMPs that

contract with Medicare as one of the entities with which States may

guarantee Medicaid eligibility.

C. Disenrollments in CMPs

Section 4732(b)(2) of OBRA '90 amended section 1903(m)(2)(F) of the

Act, which, for purposes of Federal financial participation (FFP)

imposes disenrollment restrictions on certain prepaid health plans, to

add CMPs that contract with Medicare to the list of entities that may,

at a State's option, restrict disenrollment without cause for Medicaid

enrollees for up to 6 months. Disenrollment without cause would be

permitted only in the first month of each period of enrollment.

We propose to amend Sec. 434.27(d)(1) to add a new paragraph (vi)

to identify CMPs that contract with Medicare as one of the

organizations, with which States may contract, that may restrict

disenrollment rights of Medicaid enrollees.

D. Reenrollment in HMOs

Section 4732(c) of OBRA '90 amended section 1903(m)(2) of the Act

to provide that if a Medicaid-eligible individual is enrolled in an HMO

in a given month and loses eligibility in the next month (or in the

next 2 months) but in the succeeding month is again eligible for

Medicaid benefits, the State agency may enroll that individual in the

same HMO in which he or she was enrolled at the time of loss of

eligibility.

We propose to add a new Sec. 434.25(c) to incorporate this

provision. We also propose to add a new paragraph (h) to Sec. 434.27 to

explain that a new restricted period of disenrollment begins following

each period of ineligibility as outlined by Sec. 434.25(c).

E. Elimination of Provisional Qualification of HMOs

Section 4732(d) of OBRA '90 amended section 1903(m) of the Act to

eliminate a provision under which a State Medicaid agency could

determine that a Federally qualified HMO was in provisional status

because more than 90 days had elapsed since the HMO applied to the

Public Health Service (PHS) for Federal qualification and the PHS had

not made a final determination. This status continued until the PHS

made the final determination or the contract with the Medicaid agency

was terminated, whichever occurred first.

Section 434.20 of the Medicaid regulations contained the provision

that allowed State agencies to contract with provisional status HMOs

and Sec. 434.72 provided for FFP in expenditures for payments to these

provisional status HMOs. We propose to revise Sec. 434.2 to delete the

definition of a provisional status HMO, revise Sec. 434.20(a)(l) to

remove all references to provisional status HMOs, and delete

Sec. 434.72 in its entirety.

III. Regulatory Impact Statement

We generally prepare a regulatory flexibility analysis that is

consistent with the Regulatory Flexibility Act (RFA) (5 U.S.C. 601

through 612), unless the Secretary certifies that a proposed rule would

not have a significant economic impact on a substantial number of small

entities.

The RFA defines ``small entity'' as a small business, a nonprofit

enterprise, or a governmental jurisdiction (such as a county, city, or

township) with a population of less than 50,000. We do not consider

States to be small entities. However, we do consider HMOs, PHPs, and

HIOs to be small entities.

The provision that would subject HIOs that provide or arrange for

services to the requirements governing PHPs would affect HIOs in at

least three States. HIOs in two of these States that are currently

fully operational serve a 3 combined Medicaid enrollment of

approximately 43,800 individuals. These HIOs currently operate under

section 1915(b) freedom of choice waivers which require adequate access

to quality services. They are also regulated by their respective States

in a manner similar to HMOs and PHPs. There is no anticipated change in

operation other than they would be required to afford HIO Medicaid

enrollees the same protections as those Medicaid enrollees enrolled in

other prepaid plans that arrange for or provide services.

The technical provisions in this proposed rule are necessary to

conform the Medicaid regulations to provisions of OBRA '90. We

anticipate that these provisions would have a negligible impact.

We have not prepared a regulatory flexibility analysis because we

have determined, and the Secretary certifies, that this proposed rule

would not have a significant economic impact on a substantial number of

small entities.

Also, section 1102(b) of the Social Security Act requires the

Secretary to prepare a regulatory impact analysis for any proposed rule

that may have a significant impact on the operations of a substantial

number of small rural hospitals. Such an analysis must conform to the

provisions of section 603 of the RFA. For purposes of section l102(b)

of the Act, we define a small rural hospital as a hospital with fewer

than 50 beds located outside a metropolitan statistical area. We have

determined, and the Secretary certifies that this proposed rule would

not have a significant impact on the operations of a substantial number

of small rural hospitals.

In accordance with the provisions of Executive Order 12866, this

regulation was reviewed by the Office of Management and Budget.

IV. Paperwork Reduction Act

This proposed rule does not contain any information collection

requirements that are subject to review by the Executive Office of

Management and Budget (OMB) under the authority of the Paperwork

Reduction Act of 1980 (44 U.S.C. 3501 et seq.).

V. Response to Public Comments

Because of the large number of items of correspondence we normally

receive on a proposed rule, we are not able to acknowledge or respond

to them individually. However, we will consider all comments that we

receive by the date and time specified in the ``Dates'' section of this

preamble, and we will respond to the comments in the preamble of the

final rule that is issued.

List of Subjects

42 CFR Part 434

Grant programs-health, Health maintenance organizations (HMO),

Medicaid, Reporting and recordkeeping requirements.

42 CFR Part 435

Aid to Families with Dependent Children, Grant programs-health,

Medicaid, Reporting and recordkeeping requirements, Supplemental

Security Income (SSI), Wages. 42 CFR Chapter IV would be amended as

follows:

A. Part 434 would be amended as set forth below:

PART 434--CONTRACTS

1. The authority citation for part 434 continues to read as

follows:

Authority: Sec. 1102 of the Social Security Act (42 U.S.C.

1302).

2. In Sec. 434.2, the introductory text is republished, the

definition of ``Prepaid health plan'' is revised and the definition of

``Provisional status HMO'' is removed, to read as follows:

Sec. 434.2 Definitions.

As used in this part, unless the context indicates otherwise--

* * * * *

Prepaid health plan (PHP) means an entity, including an HIO, that

provides or arranges for the provision of medical services to enrolled

recipients, under contract with the Medicaid agency and on the basis of

prepaid capitation fees, but is not subject to the requirements in

section 1903(m)(2)(A) of the Act.

* * * * *

3. In Sec. 434.20, the introductory text of paragraph (a) is

republished and paragraph (a)(1) is revised to read as follows:

Sec. 434.20 Basic rules.

(a) Entities eligible for risk contracts for services specified in

Sec. 434.21. A Medicaid agency may enter into a risk contract for the

scope of services specified in Sec. 434.21 only with an entity that--

(1) Is a Federally-qualified HMO;

* * * * *

4. In Sec. 434.25, a new paragraph (c) is added to read as follows:

Sec. 434.25 Coverage and enrollment.

* * * * *

(c) If a Medicaid eligible individual is enrolled in an HMO in a

given month and loses eligibility in the next month (or in the next 2

months) but in the succeeding month is again eligible for Medicaid

benefits, the State agency may enroll that individual in the same HMO

that he or she was enrolled in at the time of loss of eligibility.

5. In Sec. 434.26, paragraphs (b)(2) and (3) are revised to read as

follows:

Sec. 434.26 Composition of enrollment.

* * * * *

(b) Exceptions--

* * * * *

(2) Waiver for public HMOs with risk comprehensive contracts. The

Regional Administrator may approve waiver or modification of the

requirement of paragraph (a) of this section, for an HMO that is owned

or operated by a State, county, or municipal health department or

hospital if the HMO has made and continues to make reasonable efforts

to enroll individuals who are not eligible for Medicare or Medicaid.

(3) Waiver for certain nonprofit HMOs with risk comprehensive

contracts. The Regional Administrator may approve waiver or

modification of the requirement of paragraph (a) of this section, for a

nonprofit HMO which has a minimum of 25,000 members; is and has been

federally qualified for a period of at least 4 yrs; provides basic

health services through members of its staff; is located in an area

designated as medically underserved under section 1302(7) of the Public

Health Service Act; and has previously received a waiver under section

1115 of the Act of the requirement described in paragraph (a) of this

section, if the HMO has made and continues to make reasonable efforts

to enroll individuals who are not eligible for Medicare or Medicaid.

* * * * *

6. In Sec. 434.27, (d) introductory text and (d)(1) introductory

text are republished, paragraph (d)(1)(v) is revised, and new

paragraphs (d)(1)(vi) and (h) are added, to read as follows:

Sec. 434.27 Termination of enrollment.

* * * * *

(d) A State plan may provide for contracts with certain

organizations which restrict disenrollment rights of Medicaid enrollees

under paragraph (b)(2) of this section if the following conditions are

met:

(1) The organization is--

* * * * *

(v) An entity described in Sec. 434.26(b)(3); or

(vi) A competitive medical plan as defined in Sec. 417.407(c) of

this chapter that has a valid contract with HCFA under section 1876 of

the Act; and

* * * * *

(h) When an agency has elected to restrict disenrollment, the

restricted disenrollment period commences with each enrollment,

including reenrollments permitted under Sec. 434.25(c). Disenrollment

without cause will be permitted during the first month of each new

restricted disenrollment period.

7. In Sec. 434.40, paragraphs (a) introductory text is revised to

read as follows:

Sec. 434.40 Contract requirements.

(a) Contracts with health insuring organizations that are not

subject either to the requirements in section 1903(m)(2)(A) of the Act

or to Secs. 434.21 through 434.36 must:

* * * * *

8. In Sec. 434.44, a new paragraph (c) is added to read as follows:

Sec. 434.44 Special rules for certain health insuring organizations.

* * * * *

(c) A health insuring organization that provides or arranges for

the provision of services, and meets the definition of a PHP in

Sec. 434.2, must meet the requirements in Secs. 434.20(d) and (e),

Secs. 434.21 through 434.36 and in Secs. 434.50 through 434.65 that

apply to PHPs.

Sec. 434.72 [Removed]

9. Sec. 434.72 is removed.

B. Part 435 would be amended as set forth below:

PART 435--ELIGIBILITY IN THE STATES, DISTRICT OF COLUMBIA, THE

NORTHERN MARIANA ISLANDS, AND AMERICAN SAMOA

1. The authority citation for part 435 continues to read as

follows:

Authority: Sec. 1102 of the Social Security Act (42 U.S.C.

1302).

2. In Sec. 435.212, the introductory text is revised to read as

follows:

Sec. 435.212 Individuals who would be ineligible if they were not

enrolled in an HMO.

The agency may provide that a recipient who is enrolled in a

federally qualified HMO (under a risk contract as specified in

Sec. 434.20(a)(1) of this chapter) or a competitive medical plan with a

current Medicare contract under section 1876 of the Act and who becomes

ineligible for Medicaid is considered to continue to be eligible--

* * * * *

3. Section 435.326 is revised to read as follows:

Sec. 435.326 Individuals who would be ineligible if they were not

enrolled in an HMO.

If the agency provides Medicaid to the categorically needy under

Sec. 435.212, it may provide Medicaid under the same rules to medically

needy recipients who are enrolled in a federally qualified HMO or in an

entity specified in Sec. 417.407(c) of this chapter with a current

contract with Medicare under section 1876 of the Act; Sec. 434.20(a)(3)

and (a)(4), Sec. 434.26(b)(3), or Sec. 434.26(b)(5)(ii) of this

chapter, or section 1903(m)(6) of the Act which provides services as

described in Sec. 434.21(b) of this chapter.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical

Assistance Program)

Dated: November 3, 1993.

Bruce C. Vladeck

Administrator, Health Care Financing Administration.

Dated: February 20, 1994.

Donna E. Shalala

Secretary.

Editorial Note: This Document was received at the Office of the

Federal Register on May 4, 1994.

[FR Doc. 94-11097 Filed 5-6-94; 8:45 am]

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